Time For A Real Education

financial education The following is a guest post by Ivan Serrano. Ivan is a personal finance, business, and social media journalist living in the Bay Area in California. Enjoy! 

It turns out the goal of your college career was just getting to the starting line.

Most college graduates agree; the real education starts when you graduate. That might be why it’s called commencement.

Now that you are at the starting line, where do you start? It’s a big crazy world out there, and it’s nothing like college. In fact, it’s more like high school in some ways. But, in other ways, it is like an alien world from a post-apocalyptic fantasy novel with dragons on every roof-top. Maybe that was a bit of an exaggeration…

The game has changed, and yet it hasn’t changed at all. You’ve always had to prioritize, and that’s still the name of the game. Focus on what matters most. If you’re paying your own way now, budgeting is as good a place to start as any and is better than most.

So, let’s begin with your first post-graduate course; A Survey of Budgeting Best Practices.

The big riddle you need to solve with your budget exercise is how to stretch those limited dollars and still be comfortable. Will there be compromises? Absolutely! Will it be easy? Well, it depends.

Here are some guidelines to help you develop a budget that works. The first two priorities may have to be juggled for your particular needs, but they are still the top two priorities that will have long-term impact on your quality of life. Let’s look at the top two and then take a closer look at the adjustments in priority you may have to do for your situation.

 

Save

Top priority. Saving. This is like paying yourself, and it’s something just about everyone, in business or employees, ignore to their detriment.

Do not think of saving as saving; think of it as paying yourself. Everyone else is going to get a piece of the pie you carve up every month, and unless you pay yourself first, you are going to wind up with none of it. Only you can make you a priority. No one else is going to do it. Who do you think their priority is? You got it. If you don’t prioritize yourself, you’ve already started losing.

Make yourself a priority, put that money away in an investment vehicle of some kind, and forget about it. You may want to leave a portion of it accessible for emergencies, but the bottom line is make sure a portion of your wages every month is accessible by you alone and that it is not spent.

If your employer offers a 401K plan with some kind of matching incentive, contribute the maximum.

Finally, don’t tinker with your savings. Put it away and do your best to forget about it unless you have an emergency.

That leads me to priority two.

 

Get out of debt

Stop digging the debt hole deeper. Because of the nature of compound interest, just having debt is digging the hole deeper. The minimum you should be paying every month should make sure that the total you see owed next month is less that it was in the current month.

One strategy for getting out of debt is to get it all into one place so you can work on it all at once. Another strategy is to pay off the largest debt first. Yet another strategy is to pay off the loan with the highest interest rate.

All these strategies have worked for people, and you will have to do some calculations to figure out which will be the best option for you.

However, one long-term approach you should adopt, regardless of which of the above strategies you select, is called the Snowball Strategy. This means to keep paying the same amount on your debt every month until it is all paid off. Pay one credit card off and then, use the amount you were paying on the retired debt to accelerate paying off other debts.

In general, pay off revolving debt first because it usually has higher interest rates and can negatively impact your credit score to a greater degree.

 

Juggling Debt and Savings

Here’s where the analysis gets a little tricky. If your debt has really high interest rates; rates that make the cost of the borrowed money much higher than the rate of accrual on your savings or investments, it may make more sense in the long run to focus on retiring the debt first.

Another bit of juggling you may want to consider, too, is how much do you need for emergencies like a potential job loss. If you lose your job, for example, you still have to pay rent and pay your credit card bills. So, you may want to target contributions to a reasonable rainy day fund while still paying off as much debt as possible every month.

 

Living the good life

Those are the really tough decisions and the ones you want to get out of the way first. How much you can allocated to paying off debt is often dictated by how much you have to spend every month for essentials like rent, food, utilities, clothing, insurance and other required spending.

Balancing a serious approach to your future with a reasonably comfortable quality of life today is why budgeting is an art and not a science; a series of judgment calls and not a formula.

Obviously, keeping your required monthly spending as low as possible is going to give you the greatest flexibility in discretionary spending.

Here are some approaches to keeping those pesky monthly bills as low as possible.

Sharing rent and utilities-Roommates may be part of your life a little longer, so don’t burn any bridges just yet. There are plenty of advantages and disadvantages to having a roommate, and you probably know them all by now. Just hang in there for a little longer.

Cooking at home-Sure you have to eat, but eating at home is definitely a lot cheaper than eating out, especially if you like to have a beer or a glass of wine with your dinner. Learn to cook.

Brown-bag lunches-Going out with the gang to grab a sandwich or soup at lunch may seem like the thing to do until you add up how much it is costing your every month. There are some great apps (check out mint.com for example) for smartphones that will help you keep track of expenses. How much you are spending for lunches is one you will want to keep close tabs on.

Movies at home-Entertainment should be part of your spending. Recharging, reenergizing and refreshing your perspective are essential to pacing yourself and maximizing your productivity at work. However, you can keep these costs down though by reading more and watching movies at home.

Mix-and-match clothing-Clothing is not a luxury item. You have to look your best. When you look better, you feel better, and this, too, affects your productivity and overall attitudes. One way to maximize your clothing budget is to make sure every purchase can be worn in more than one way or with more than one outfit.

While budgeting is an art, it is also a skill, and skills can be improved with practice. The more you think about and practice your budgeting skills, the better at it you will become… and the better you quality of life will be. Embrace budgeting and get good at it. It’s a skill you can use for the rest of your life. Go ahead and get good at it now. It just takes practice.

How about you all? What sort of financial trouble do you run into the most? What financial tips do you find most useful?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/gtalan/5304315230/in

Can Buying a House Make You More Financially Responsible?

saving money investing home loans home insurance home buying financial planning financial goals The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

My husband and I have been married nearly 14 years, and throughout our entire marriage, we always rented.  We lived in the suburbs of Chicago and simply couldn’t afford to buy a house or pay the property tax, which could range in price from $10,000 to $20,000 a year depending on the home and neighborhood.  Mind you, I’m not talking about fancy homes but rather homes that were 1,500 to 2,000 square feet homes 75 to 100 years old.

When we moved to Arizona this summer, we were finally able to afford to buy a home.  We debated whether or not we should purchase a home because we weren’t in perfect soon-to-be-homeowners shape.  We didn’t have a nine month emergency fund.  We still have student loan debt to pay off.

In the end, though, we decided to buy a house.  We’re both happy with the decision, even though we both feel a bit like tight rope walkers since we don’t have a large emergency fund yet.

However, one surprising result of home ownership is that it has made us more financially responsible.

Let me clarify that we weren’t financially irresponsible before.  We always pay our bills on time and have a great credit score.  However, we’re not savers by nature.

I have to admit, when we rented, always in the back of my mind was the thought, if my husband lost his job and we got desperate, we could always break the lease and move somewhere cheaper.  Sure, breaking a lease does have some financial penalties, but they’re finite.  When we made the decision to own a home, well, we also lost the possibility of an easy out.

 

Perils of Earning a Variable Income

My husband is a post-doc researcher, and I’m a freelance writer.  As you know with freelancing, some months are great, and others, well, others are painful because not enough cash is coming in.  In Chicago we used all of our money–my husband’s income and mine–to meet our bills and responsibilities.  During the months where my income was small, our budget was insanely tight.  I hated the wild swings in income and the budgeting difficulties that go with it.

When we moved to Arizona and bought a house, we decided to do things differently.

 

Making the Decision to Live on One Income

Since my income varies so wildly, we decided once we bought the house to try to live on my husband’s income alone.  We slashed expenses and are now living on the tightest budget we’ve had since we were newlyweds.  We still couldn’t make it work to live entirely on my husband’s income, but now my income is only making up 12% of our monthly budget versus the 25% it used to.

 

What We’re Doing with the Extra Money

Depending on the month, this type of budget can leave us with quite a bit of surplus or just a small amount.  Since we’ve bought the house, I’ve been very busy with work, so we’re careful to manage the surplus wisely.

Created a $1,000 emergency fund.  Our first order of business was to create a liquid, $1,000 emergency fund.  We did this within the first month of owning our house.  (Moving cross country and paying for the down payment for the house nearly wiped out our meager savings.)

Grow a 9 month emergency fund.  We put the bulk of the extra money in a savings account.  This is where we are growing our emergency fund until we reach nine months of living expenses.

Put aside money for home repairs.  I’ve heard horror stories about big home repair bills that people just didn’t have money to pay.  My husband and I planned, once we bought a house, to set aside money every month for home repairs.  We’re doing that now.

Our first week in the home, our water heater went out and flooded part of our pantry.  (Welcome to home ownership!)  Luckily, we had a home warranty, and our realtor hired her contractor to handle the water damage pro bono.  Still, we had to pay nearly $400 out of pocket.  I know this is small change compared to some home repairs, so we’re diligently setting aside money every month for the unexpected.  This is money outside of our emergency fund.

Put aside money for home improvements.  Our house was built 18 years ago, and while it’s fine on a functional level, there is definitely room for improvement cosmetically.  Our realtor mentioned some fairly inexpensive updates we could make such as painting the kitchen cabinets white (the cabinets have never been updated, and in some places the coating has completely worn away leaving the wood exposed), replacing the outdated light fixtures, and painting the living room (which is sponge painted in shades of brown a la the 1990s).  These repairs won’t cost more than a few thousand dollars, if that, but we’re setting aside the money every month so we can pay out of pocket rather than using credit.  Of course, having had all the changes made before we moved in would have been easier, but I’d rather be patient and financially responsible.

Save for annual expenses monthly.  Another strategy we’re using is to save for annual expenses monthly.  For instance, our HOA dues are $300 a year.  Each month, we set aside $25, so when we get the bill, we simply clean out the designated savings fund and pay the HOA fees with no impact to our budget that month.

Contributing to our retirement fund.  My husband and I have always benefitted from employer matches.  When I was the primary breadwinner for 10 years, I set aside 8% of my salary for my retirement fund, and my employer matched it, giving me 16% of my salary per year saved for retirement.

Now my husband is the primary bread winner.  He’s contributing 7% of his salary, and his employer is matching it.  Even better, his new employer immediately vested him, so even if he leaves the job in less than five years, he’ll be able to walk away with his employer’s contributions.

We have never contributed more than 7 to 8% to our retirement (not including the employer’s match), but now that we’ve tightened the budget so much, we’re starting to invest a small amount in our Roth IRAs.  Though the amount is small, the important thing is that we’re taking the step to invest in a Roth.  As my husband’s salary increases, we’ll contribute more.

Since we finally took the leap to buy a home, we’ve become even more financially responsible.  Unlike renting, there is no easy out from home ownership.  Buying a house has caused us to seriously tighten our budget and set aside more for savings than we ever have before.

This first year, while we’re growing our savings will be financially tight, but the rewards are worthwhile.

How about you all? What do you think?  Do you think home ownership can make people more financially responsible?  Or do you think owning a home can more often lead to financial ruin, especially if the new homeowner does not have his finances in order and a large emergency fund?  What is the minimum emergency fund you’d recommend someone have before they buy a home?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/jwthompson2/139445633/in/

Budget Breakdown: What Do You Really Buy With Your Grocery Budget?

saving money grocery stores frugal living food and groceries financial planning The following post is by MPFJ staff writer Travis, who also blogs at Enemy of Debt .  Travis candidly shares his personal journey to pay off $109,000 of credit card debt and the tips he’s learned along the way. As a father and husband he provides a unique perspective on balancing debt, finances, and family.

You can’t change what you don’t track.

The concept of tracking your spending is one that I’ve both read and written about many times, but I just heard the above phrase for the first time recently.  The premise behind tracking your spending is fairly simple; write down everything you spend, then use that information to build a realistic budget.  If the number for a particular expense seems too high, you need to put some effort into determining how you bring your spending down for that category.    This is where my opening statement comes into play.  If you don’t know how much you’re spending, or what you’re spending it on, there’s no possible way you can make any kind of educated decision as to whether your spending is in line with your expectations.

I’ve been thinking a lot about the above statement as I haven’t been very happy with the results of my grocery shopping lately.  When we finished our debt management plan paying off over $109,000 in credit card debt one area that we immediately increased in our budget was the weekly grocery amount.  Adding some extra special items to our meal planning each week was something we determined was a good use of some of the extra funds we had available after that final payment was made.

The problem was, as I looked at my grocery cart waiting for the cashier, I saw a lot of things in the cart that had nothing to do with making actual meals.  I will admit that when I say the term grocery budget, I really mean pretty much anything I’d by at the grocery store including food, snacks, toiletries, and pet supplies.  I started wondering what percentage of my grocery budget each of those categories represented.    That opening phrase popped into my head again.

You can’t change what you don’t track.

It was time to go to work on my grocery spending.  Even though I was staying on budget with my overall grocery spending, I wanted to ensure I was getting what I wanted out of my trips to the grocery store.  I decided that I was going to shop as normal for three weeks, and save my receipts.  After that third trip to the grocery store I would sit down and analyze what I was purchasing and see what revelations I could find.

 

The Ground Rules

  1. Grocery shopping is to be done normally, not altering my process or current shopping habits
  2. This experiment will run for three weeks, after which I will analyze the products purchased from the three saved receipts.
  3. Products will be split into the following defined categories;
  • Food: items used directly for meals
  • Snacks: items that are eaten between meals, or during the evening. Example: chips, snack crackers, ice cream.
  • Drinks: Non-essential drinks such as bottled water, soda, Gatorade, or lemonade
  • Pets: Items for our two cats such as cat food and cat litter.
  • Household: Nonfood items such as laundry detergent, dish detergent, toiletries, paper towels

The Results

Week 1:

• Food: 58.8% ($95.37)
• Drinks: 7.7% ($12.60)
• Pets: 4.8% ($7.84)
• Household: 15.9% ($25.89)
• Snacks: 12.8% (20.74)

Total: $162.44

 

Week 2:

• Food: 51.7% ($71.38)
• Drinks: 10.1% ($13.98)
• Pets: 0% ($0)
• Household: 11.6% ($15.94)
• Snacks: 26.6% ($36.74)

Total: $138.02

 

Week 3:

• Food: 58.8% ($92.57)
• Drinks: 14.0% ($22.02)
• Pets: 9% ($14.12)
• Household: 4.5% ($7.11)
• Snacks: 13.7% ($21.64)

Total: $157.46

 

Three Week Average:

• Food: 56.6% ($86.44)
• Drinks: 10.6% ($16.20)
• Pets: 4.8% ($7.32)
• Household: 10.7% ( $16.31)
• Snacks: 17.3% ($26.37)

Total: $152.64

 

Analysis

I was fairly happy with the breakdown of my grocery spending with the exception of the Snacks category.   The percentage, and the raw dollar amount spent, surprised me.  We do not need to spend close to 20% of our budget on snacks, so I’ll be looking to reallocate some of that spending into the main Food category.  Ideally, I’d like to see Food at about 65%, and Snacks closer to 10% of our grocery spending breakdown.  The other categories are right where I would expect, and want them to be.

 

Action Plan

In preparation to go grocery shopping, my wife and I make a meal plan for the week, then I write a list of the items we need to execute that meal plan.  I then add in any additional wants or needs from the family and estimate the price.  In the past, as long as the bottom line was within our $150 weekly grocery budget (give or take a few dollars) I was ready to roll.

However this week I’m going to break down the items on the list according to these 5 categories, and then ensure that each category adheres to the following target percentages:

  • Food: 65%
  • Drinks: 10%
  • Pets: 5%
  • Household: 10%
  • Snacks: 10%

The hope is that by purchasing more of, and better quality food for meals that we will need less snacks, leaving myself (and the whole family) much more satisfied with the food we have in our home.

How about you all? Have you ever broken down your grocery shopping purchases to get a glimpse as to what you’re really getting for your money?  Give it a try, you may be surprised!

***Image courtesy of Vichaya Kiatying-Angsule at FreeDigitalPhotos.net

Your Retirement or Your Stuff?

retirement planning retirement accounts retirement financial planning The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.

I think about retirement all the time. I ask myself questions such as:

  • When will I be able to retire?
  • How much money will I need to have stashed away before I quit my job?
  • What if I work to develop a passive income to retire instead of a big nest egg?
  • What about medical insurance? Will I have to keep working just to have insurance?

With all of these questions swirling around in my mind, I tend to talk about retirement a lot. But guess what happens when I publish these articles?

Crickets.

Nobody really cares about retirement, that is, unless they are 60 years old and are finally starting to think about it. When young adults see an article with the word, “retirement” in the title, they breeze over it and think, “I’ve got so many years before retirement. I don’t need to think about that now.” That might seem logical to many, but this way of thinking is dead wrong!

 

Two Decisions: Your Retirement or Your Stuff

Every single financial decision you make in life impacts your retirement years. Since we will all make a finite number of dollars in our lifetime, that dress purchase, surround sound buy, and that car loan will impact whether you live well in retirement or whether you live on TV dinners in a 600 square foot condo.

If you work with somebody that has a similar job as you and therefore earns $45,000 a year (or whatever it is that you make for a salary), but they somehow live in a house that is bigger than yours, drive cars that are newer, and go on more exotic vacations than you, then they will most likely be flat broke in retirement. Do not envy them.

When we all talk about how keeping up with the Jones’s can be detrimental to one’s retirement fund, it only makes sense, but yet people are still begging the bank for money and are spending well beyond their means. Somehow people are not understanding the translation that their constant purchases are impacting their future retirement. If you purchase more stuff in your lifetime, then your retirement is going to be worse. If, however, you live on less, then your retirement years might actually be golden as they should be.

 

So, What is the Happy Medium?

I tend to be a saver, so I am content with saving almost every single penny I earn. But, this also means that I typically don’t have any fun. I don’t dine out, I don’t go see live concerts, and I typically don’t go on vacation. By many people’s standards, my life is boring and would be a prison sentence for them.

Others tend to be spenders. They spend money everywhere they go. They go out to lunch every day, they buy things for their friends at the mall, and they always drive the newest model luxury car. They are living high on the horse today, but their debt will soon catch up to them. Not only this, but by contributing very little into their retirement fund, they will have to dramatically change their lifestyle when they are older.

I, as a saver, will have a ton of money when I retire, but I likely won’t spend it since I am prone to never spend money on anything. The spender will get rid of all their money early in life and will need to live on breadcrumbs when they are older. Neither situation is ideal, so it is best to find a balance between the two lifestyles. We must intentionally save, but must also allow ourselves to splurge once in a while (within reason that is).

If you want to retire well, but also want to have fun today, don’t focus on buying big houses and fancy cars. Instead, put a large amount of money away into your retirement fund each year, and at the same time put some money aside for some kick-butt trips as well. You will be happy because you are experiencing life today and will have the means to do so in the future as well. Just never forget that there is a trade-off with every decision you make. It’s either your retirement or your stuff.

How about you all? How is your retirement shaping up? Do you think you’ll have enough to live well in your retirement years?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/120360673@N04/13856204644/in/

Preparing Your Portfolio for Greater Volatility

portfolio investing financial planning asset allocation The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

If the recent volatility in the stock market has you concerned, that’s probably not a bad thing. After all, equity investments are not fixed investments, which means they can go down as well as up. Every now and again, we need to be reminded of exactly that. But the proper response is not to panic, but rather to prepare your portfolio for greater volatility.

There are various ways to do that, but it’s important that you take steps while things are relatively calm. Should the market decline in a major way, there won’t be time to react once it does.

Here are five ways that you can prepare your portfolio for greater volatility.

 

You Don’t Need to Sell Everything

Unless you are concerned about a complete market collapse (something along the lines of 1929), you don’t need to do a complete liquidation of your stock portfolio. A better approach may be to simply reduce your exposure to the market.

There are several ways to do this, short of selling off everything that you have:

  • Stop putting fresh investment capital into stocks, at least until the market settles down
  • Sell off positions that are making you especially nervous – if an investment has not reaped rewards in one of the biggest bull markets in history, you could be in for a rough ride in a bear market
  • Move some of the capital from your sales into stocks and funds that you believe will better weather a decline
  • Don’t make a complete exit out of stocks – you never know exactly when a new bull market will begin

You don’t need to exit stocks entirely, but you may need to lower the temperature a bit.

 

Accumulate Cash

Rather than selling off stocks, you could simply accumulate cash from any new investment proceeds that you put your portfolio. This will not only prevent you from increasing your exposure to stocks, but it will also allow you to build up a cash reserves so that you can begin buying stocks when the market bottoms out.

This will be a critical component of your overall investment strategy should a volatile market turn into a certified bear market. The best time to buy stocks is usually after a major sell off. That’s when stocks “go on sale”, and can be purchased for a fraction of what you would’ve paid at the top of the market.

Eventually, all bear markets turn into bull markets, and when that happens the stocks that you bought at the bottom are likely to be your best performers.

You can’t know when the market will bottom out, but if you have sufficient cash reserves, you’ll be prepared for when the moment does come. In a real way, accumulating cash is a way of preparing for the next bull market.

 

Invest for Income

This is a tough maneuver in an environment where it’s difficult to get much more than 1% on your money, especially in short-term investments. But there are certain stocks, mutual funds, and exchange traded funds that do provide above average dividend income. Since dividend stocks tend to weather market volatility better than pure growth stocks, you could favor these among your new stock purchases, or shift some of your money out of growth and into income.

The safe play of course is fixed income securities. Even though the rate of return on money market funds, certificates of deposit, and US Treasury bills is pathetically low, the principal values are fixed. That’s the best kind of protection in a volatile market environment.

When equity markets become volatile, the emphasis should shift from making money to preserving capital. Not only will that minimize the amount of losses you will sustain in a down market, but it will also provide you with the investment capital that you will need to invest in stocks later on.

 

Look Into Alternative Investments

You might also take a look at alternative investments. This can include real estate (particularly real estate investment trusts), commodities, and even precious metals.

The factors that cause stocks to fall could have the opposite effect on alternative investments. This is particularly true if market volatility is caused by or creates economic or financial disruption.

You don’t necessarily want to load up on alternative investments, but a small position could offset declines elsewhere in your investment portfolio.

 

Stay On Top of Your Career!

I just touched on how stock market volatility could result in economic or financial instability. This often happens because market volatility makes it difficult for public companies to raise capital, which can either end expansion plans or cause them to scale back operations.

This will have a material effect on the job market. For that reason, market volatility is an excellent time to sharpen your career skills and get more involved in your job than you’ve ever been. The idea is to increase your value at a time of increased competition for fewer jobs.

Though few people think of it this way, your occupation is actually one of your biggest investment diversification’s. It will provide you with income and capital at a time when your portfolio doesn’t. Market volatility should be viewed as a wake up call to refocus on your career.

How about you all? In this suddenly more volatile market, are you making any changes to prepare yourself and your portfolio for a less predictable environment?

Share your experiences by commenting below! 

***PHOTO: https://www.flickr.com/photos/psycho-pics/2952050268/sizes/n/