Organize Your Financial Life With This Money Road Map

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.

Are your finances in the shape you’d like them to be?  Or, are they a disaster that you’d like to clean up as soon as possible?

If they’re a disaster, first know that you’re not alone.  Many, many people find themselves in a financial mess at some point in their lives.  There are a number of steps that you can take to strengthen your financial life and make yourself and your family more secure.  Here are the steps that I recommend you take in this order:

 

Put two to three months’ expenses in an emergency fund

If you’re a fan of Dave Ramsey, you know that he advocates a $1,000 emergency fund and then attacking debt.  My husband and I used to follow this approach, but then we ended up with emergencies bigger than $1,000, and we’d have to go back into debt to pay them.

I’d recommend instead that you first save two to three months’ of expenses, and then start paying down your debt.  That way, if you run into unexpected expenses, you can tackle them without going further into debt and erasing the progress you’ve made on paying down the debt.  (Seriously, nothing is more depressing than working hard for months to pay down your debt just to watch all of your progress disappear with one car repair or home repair.)

 

Pay down all of your debt except your mortgage

Once you have the two to three-month emergency fund, it’s time to pay down your debt.  I’d recommend paying off credit cards first, then car loans, then student loans.

While Dave Ramsey recommends using the debt snowball and paying off the lowest debt first, others have good luck paying down the highest interest debt first.  Which option is better depends on what motivates you.  Are you motivated by seeing the debts disappear one by one, or are you motivated by knowing that less money is being paid to interest each month?  Ultimately, your motivation will be what helps you through the sometimes long, painful process of paying down debt, so pick the method that works best for you.

 

If you use your credit card, pay it off each month

Credit cards can be a great tool if you use them responsibly.  If you have a cash back or airline points feature, you can even earn money for using your credit card.  The key is to pay it off each month.  If you can’t do so, it’s time to retrain yourself and start using cash or a debit card.  Once you get better control of your spending, you can start using the credit card again and reaping the rewards.

Credit cards can be a great tool if you use them responsibly.  If you have a cash back or airline points feature, you can even earn money for using your credit card.  The key is to pay it off each month.  If you can’t do so, it’s time to retrain yourself and start using cash or a debit card.  Once you get better control of your spending, you can start using the credit card again and reaping the rewards.

 

Contribute 10% of your income to your retirement fund

When you’re in the midst of financial difficulties, it’s hard to plan for the future, but if you want to be secure in the future, you must take steps now.  Ideally, you’ll want to save at least 10% of your income in a retirement fund with the eventual goal of getting that number up to 15%.  However, don’t feel intimidated by that amount.  Start slowly if you need to, and contribute just 1% of your income to your retirement fund for six months.  Then, slowly bump it up to 2 or 3% for six months.  Continue adding more every few months.  It takes

When you’re in the midst of financial difficulties, it’s hard to plan for the future, but if you want to be secure in the future, you must take steps now.  Ideally, you’ll want to save at least 10% of your income in a retirement fund with the eventual goal of getting that number up to 15%.  However, don’t feel intimidated by that amount.  Start slowly if you need to, and contribute just 1% of your income to your retirement fund for six months.  Then, slowly bump it up to 2 or 3% for six months.  Continue adding more every few months.  It takes time to get used to making retirement savings a priority.  As you develop the habit, you’ll be able to add more to your retirement savings until you get up to 10%.

 

Buy term life insurance

(Bump this step up if you have a family before you get to this point in your financial life.)  I was talking to a mom of four young kids recently.  She is a stay-at-home mom, and her husband is older than her; he’s in his fifties.  She was excitedly telling me about their new financial plan.  Each month, they set aside $100 in an emergency fund in case something happens to her husband.  That was their only plan if something happened to the sole breadwinner of the family.

I wanted to cry.  They have four young kids, she doesn’t work, and her husband is in his fifties, yet they have no life insurance!  While the money they’re setting aside is great, if her husband unexpectedly passed away, that money would quickly be consumed.

The family I’m referring to isn’t alone.  According to Fox Business, “Currently, 95 million Americans live without life insurance and only one-third of consumers are covered by individually-owned life policies.”

Term life insurance is relatively inexpensive, especially if you’re young and healthy.  While experts recommend you take out a policy for 10x your income, you can use an online calculator and talk to an expert to help you determine how much you actually need based on your life circumstances.

If you have dependents who rely on your income, you must make buying term life insurance a priority.  I would move this to the first step in this plan, even before creating a two to three-month emergency fund, if you have dependents.  Life insurance and the financial security it can bring your loved ones is that important.

 

Build an eight-month emergency fund

For ultimate security, you’ll want to bulk up your emergency fund once your debt is paid off, you’re adding to your retirement regularly, and you have term life insurance.   Some experts recommend an eight to twelve-month emergency fund, but start with an eight-month emergency fund first.  This money will be essential if you unexpectedly lose your job or suffer an injury.

Remember, when you’re measuring a month’s worth of expenses, you want to consider the essentials.  If you were suddenly laid off, you’d probably cut non-essentials like eating out and buying new clothes.  Base a month’s worth of savings on how much money you’d need to pay the essentials.  While your current monthly expenses may be $5,000 a month, you may find if you cut non-essential line items, your expenses drop down to $3,800 a month.  The latter amount should be the amount that you consider a month’s worth of expenses.

 

Pay off your house

When all the steps above have been achieved, it’s time for the biggie—pay off your house.  While some people prefer to pay off their house right on schedule thanks to low mortgage interest rates, why not pay it off if you’re otherwise financially secure?  Think what you could do with that extra money in your budget each month if you didn’t have to pay your mortgage payment?  You could invest it, give to charity, travel the world.  Once the house is paid off and you’ve completed all of the steps above, you’re truly financially free.

The best way to become financially secure is to create a map for yourself with financial goals that you want to achieve.  While the steps above may take as little as 10 years to complete (depending on your current financial situation), or as long as thirty years or more, the point is that you have a plan that you’re following.  It’s imperative that you’re continually making financial progress throughout the years rather than squandering money and going through life without a plan to guide you on your journey.

What do you think?  Do you agree with these financial steps, or would you rearrange them?  If so, what order would you put them in?

***Photo courtesy of http://www.idpinthat.com/edit/4335

How to Help Your Kids Develop Respect for Money

The following post is by MPFJ staff writer, Laurie Blank.  Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.

The debt train is gaining speed in America, as shown by this article on Bloomberg’s website. It seems as if consumers’ love affair with living beyond their means is far from over. Part of the problem – in my humble opinion – is the lack of personal finance education in the lives of children, whether by their parents or their education system. How can we as parents help our kids to understand and value money so that they don’t head the way of so many who are deep in debt?

 

How to Teach Kids to Value and Respect Money

There are many different facets involved with teaching kids respect for money. Teaching them how to budget is one of them, but that doesn’t begin to touch the tip of the iceberg in today’s instant gratification world. Here are some ways you can help your kids understand and respect the role of money in life.

 

Teach Them about Emotions and Money

So much of overspending is rooted in the training we receive from media. Commercials show us that if we wear these shoes, drink this beer, drive this car or vacation at this exotic place we’ll be living the good life. They show happy, smiling people with perfect bodies and perfect tans, and seemingly with no troubles in life. The goal they have is to get us to spend money on their products.

We get the same messages in real life. We’re encouraged by our family, our friends, our fellow employees and our community to keep up with the Joneses. People question us when we drive older cars or live in a smaller house.

These messages tempt people to want to spend in order to impress others or make themselves happy, but most people know that the joy that comes with getting new and shiny stuff never lasts for very long. If we can teach our kids this truth, we can help them understand that true happiness comes from the inside out and not from the outside in, and help them avoid using money as a path to acceptance or happiness via ownership of “stuff”.

 

Teach Them the True Value of Money

The true value of money is rooted in freedom. When your debt load is non-existent – or at least super manageable – and you’ve got money in the bank, you have the freedom to make decisions based on other factors and not on whether or not you can afford it.

This means that you can take the lower paying job that you’ll like better, move to a different state or country, give to those in need when you feel like it or take a sabbatical from work in order to focus on yourself and/or your family.

If we can teach our kids that a healthy bank account balance and a lack of bondage to debtors equals true freedom and happiness, we can help them put potential purchases into perspective.

 

Teach Them How to Analyze Purchases

This goes along with emotions and money. It helps to teach kids to be able to analyze purchases before they make them. There are two main questions we can teach them to ask themselves before buying:

  1. What value will this purchase add to my life?
  2. Are there other things I want more than this purchase?

If the answer to either of these questions is more important that the purchase itself, that may be a sign that their money is better spent (or saved) somewhere else. Helping kids to work through the “whys” of a potential purchase will help them learn to avoid spontaneous spending that they’ll later regret.

 

Don’t Hand Them Money “Just Because”

Many parents these days give their kids money whenever they ask or buy them whatever they ask for at the store. When there’s no limit to money in a kid’s world, they’ll have a tough time developing respect for money – or for work.

In our house, the general rule is that we don’t buy them non-necessities unless it’s for birthday or Christmas presents. We also don’t give them money just because they ask or because they want to do something.

Instead, we help them figure out ways to earn money for the things they want. For instance, we have assigned chores that are done by each of our four children just because they’re a part of our family. We also have a separate list of chores they can do to earn money.

Just yesterday our second oldest asked how she could earn money to see a movie with a friend. I offered to pay her $2 for cleaning out the fridge and $5 for organizing my bedroom closet – both are jobs I’m not a big fan of doing. I got some needed tasks off my plate, and she earned $7 toward her movie excursion.

We’ve found that when our kids have to earn the money they get, they tend to be more cautious about how they spend it, and they also value more highly the items and experiences they get when they spend it.

 

Teach Them the Value of Spending, Saving and Giving

We basically have three choices with our money. We can spend it, save it or give it. All three choices have intrinsic value. Spending money on things that are important to us brings a sense of accomplishment as we fulfill our own needs and wants. Saving money teaches us discipline and helps us prepare a more secure future for ourselves. Giving helps us become detached from money and also helps us to realize the importance of helping others.

If we can teach our kids to balance the three choices they have with their own money, we can help them to develop a healthy respect for money.

Teaching kids to understand how to have a proper respect for money without idolizing it will help them prepare for a secure financial future that isn’t overshadowed by heavy debt payments.

How about you all? How do you teach your kids to respect money?

Share your experiences by commenting below! 

***Photo courtesy of https://www.flickr.com/photos/62030038@N02/8402437512/sizes/l

Smart Money Management vs. Cheapness: The Eternal War

The following is a guest post by CM at Infinite Transcendence. Enjoy! 

Which Side Are You On?

People are often big on saving money since budgeting is a major part of life in your personal life and in business.  With poor money management, even the richest person can become poor very quickly.  There are countless stories of people with money going broke, and our country is a debtor nation.  Clearly, we need to spend and utilize our resources wisely.  The average person has student loans, car loans, mortgages, and a manner of other expenses.  Controlling these wisely is essential to living a life of freedom.

The difference comes down to how people choose to manage their money.  A few people manage their money from an overall cost evaluation while others simply cut down costs as much as possible no matter the expense.  Today, I’d like talk about the major difference between effective money management and being cheap.  This is something, when done properly, will make a major difference in how you live your life.  You will essentially increase your productivity while reducing costs.  That’s why smart money management is important.

 

What Is Cheapness?

Cheapness and effective money management are two different things.  Some prefer to use the word frugal to describe wiser money management.  I prefer the term smart money management because it looks at other factors outside of simple dollar and cents costs.  An individual who is cheap is someone who values monetary cost above all others.  They’ll waste immense amounts of time, comfort, energy, and sanity just to come ahead a few pennies.  They’ll drive clear shot across town to save a few pennies on gasoline.  Nothing is ever irrational if it’ll save them a few dollars, even if the cost is countless hours of frustration afterwards.

Have you ever:

  1. Bought food that was expired just to save a few dollars?
  2. Spent lots of time arguing over a minor price difference just to save a few dollars even if it meant burning a few bridges?
  3. Sacrificed quality to an extreme level to get minor savings?
  4. Massively inconvenienced yourself for a good deal: i.e. sleeping in front of a store for a weekend just to save on some item?
  5. Gone without something you really need for a long time because you simply didn’t feel like paying the price?
  6. Given up a lot of time, convenience, and quality in any other way in a disproportionate way compared to the cost?

These types of activities will only ensure that you end up further behind when it comes to building wealth and intelligent financial management.  People who want to succeed at not only managing money effectively but also in terms of building wealth will avoid this behavior like the plague because it only ensures that you’ll expend more time than what your money is worth.  Time is far more limited than money and people who want wealth are cheap with time.  Treat your time and your energy sacred.  You’ve already traded it once to make the money.  Don’t trade it again being cheap.  You’re then spending a multitude of time for a minor savings benefit.

 

The True Cost of Cheapness

People don’t look at the true overall cost of being cheap.  I have known many people who will indeed drive across town to save gas, or go through other extreme lengths to save a dollar.  One situation I remember with my own family was when we were moving.  Instead of paying for a larger U-Haul truck and hiring some extra help, they wanted to do it without help on a smaller truck.  It took around 7 trips and 4 trips on two smaller trucks to get it done.  What should have been a day or two job ended up taking several days.  This time could have been spent putting the items in the house or relaxing and using the time on something more fulfilling.

I had another friend who just used their cars instead of U-Haul and it took them an entire week!  They would have been better off hiring the help.  These things often come up in business where the time it would take to do something would be better off spent being subcontracted so that you can focus on the things that will generate you the most business.  It’s the principle of working “on” your business and not in it”.

Another negative is using cheap or inadequate tools.  This can easily run you in the red because you’ll have poorly done work or you’ll end up with sub-par equipment or machines that can fall apart on you.  This can even put you in risk in certain situations.  Many people have been harmed or killed due to machine malfunctions.  In most cases you’ll end up spending a lot of money fixing problems that could have been fixed the first time.  A $1000 job ends up costing $5000 because you tried to cheap out and spend $500.  Compounded with the time cost this is just not an effective way to manage your resources.

 

Avoiding Cheapness In The Future

Here are some ways to avoid cheap behavior in the future:

  1. When making a purchase decision whether its’ a product or a service, analyze the true cost of everything. Time, money, frustration, and time spent fixing problems again should all be analyzed.
  2. Think buying time instead of strictly saving money.
  3. Hire people when you can. That time could be used to increase your productivity elsewhere. If you can hire someone for a job that’s $50 that takes them 7 hours, is it worth it to do it yourself when you make $20 an hour?  You’re paying yourself a low wage to do the work in this instance.
  4. Use quality tools whenever you can. It saves time and you don’t have to replace them as often.
  5. Use quality parts when doing repairs. Nothing is worse than nickel and diming yourself over cheapness.
  6. Look at freeing yourself up. This means having the time to do the things you enjoy in life.

Following these tips should launch you ahead in managing your money and time resources adequately.  Simply remember with wealth management that time is a major factor as well as money.  Don’t squander your time for meager financial savings.  You’ll find that you end up digging yourself deeper into the hole.  Go out and start budgeting wisely today!

***Photo courtesy of https://www.flickr.com/photos/76657755@N04/7408506410/sizes/l

How Our Spending Patterns Have Changed Over the Last 100 Years

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.

Do you go out to eat several nights a week?  Do you feel like you’re just getting by financially even though you have a decent income?  Do your kids have so many clothes that they can’t close their closet doors?  Do you have three cars in your driveway?

Think back in time 100 years ago to 1917.  Our finances and conveniences have changed drastically since then, yet many of us still feel dissatisfied and that we don’t have “enough.”  Why is this?  Why are we unfulfilled when we have so much more than our ancestors who lived 100 years ago?

Our spending habits have changed dramatically since then, but we’re still not satisfied.

 

Spending Habits in the Year 1900

The Atlantic put together an eye opening article about how drastically our lives have changed since the year 1900.  Back in 1900, “A quarter of households have running water.  Even fewer own the home they lived in.  Fewer still have flush toilets.  One-twelfth of households have gas or electric lights, one-twentieth have telephones, one-in-ninety own a car, and nobody owns a television.”

Just stop for a minute and imagine being without these things.  If a 1900 household didn’t have to pay utilities, make care payments, or purchase a television, cable, Netflix, etc., how did they spend their money?

According to The Atlantic, “Families [in 1900] spend a whopping 80% of [their money] on food, clothes, and homes.”  Eighty percent!   More precisely, this breaks down to approximately 43% for food, 14% for clothing, and 23% for housing.

Undoubtedly, life in 1900 was simpler in some ways, but a family needed to be diligent with their money just to take care of the necessities of life.  There was very little leftover for extras and “fun money.”

 

Spending Habits Now

Thanks to outsourcing our textile industries to foreign countries, our annual apparel cost is only 4% per year, and yes, that includes those big spenders who have many, many more clothes in their closet than they will ever be able to wear.  Thanks to big company farms, our food costs are now only 13% of our annual income (The Atlantic).

While it cost 57% of an annual income to pay for food and clothing in 1900, now those same categories only require 17% of our annual income.  That’s a lot of extra money left over.

In 1900, housing costs were 23% annually, while they are now 33%.  That accounts for some of the difference.  Health care is now 6% of our annual spending; it was 5% in 1900.  Another category that is now costing us more is transportation.

However, there can be no denying that our interpretation of “necessities” has changed.  We now consider many luxuries necessities, and that mindset is squeezing our budgets.

 

How Americans’ Attitudes Toward Spending Have Changed

My husband and I like nice stuff as much as the next person, but for the 16 years of our marriage, money has always been tight.  We’ve always been a one-income family.  First, I worked full-time while my husband attended graduate school full-time.  Then, when he graduated, I stayed home with the kids while he worked full-time.

Thanks to student loan payments and a fairly average income while living in a high cost of living area (Chicago), we’ve always had to live on a fairly tight budget.  That means we were a one car family until this last fall.  For 15 years of marriage, we made do with one car.  That car is now 12 years old and has nearly 180,000 miles on it.

We rented until we finally bought our first house 2.5 years ago.  In many ways we were more like a 1950s family than a family living in the 21st century.

In the book, The Overspent American, Jennifer Lawson, who participated in a focus group on spending said:

“In the fifties, growing up in upstate New York, my parents were considered middle-class pillars of the community. My father was an accountant. It’s a fairly poor rural area, and most people worked in a factory or waitressed or something. My dad was actually a professional person with a sign out in front. [My parents] had one car, and they drove it until it fell apart, and then they bought a new one, usually a station wagon. They had a fairly modest house. We took a vacation as a family for two weeks and rented a little cabin in Maine. And drove–nobody flew anywhere. I can’t remember anyone who had a second car. Everyone walked everywhere; children certainly didn’t have $100 sneakers. It amazes me now that my younger brother, who still lives there and who has a job that’s roughly equal to the job my dad had when I was growing up … he has three teenage daughters. And since they were about nine, they’ve each had their own color TV, and they have their own CD players, they all have their own telephone lines, because they complain about calls not being able to get through” (The New York Times).

Our lifestyles have changed dramatically since the 1950s, even more so since the 1900s.  What we now consider necessities—two cars per family (at least), exotic vacations, designer clothes, Internet access and cable tv, college education, just to name a few—were not priorities, or even available, in earlier times.

 

Another phenomenon of spending is that the U.S consumer is quickly bored by what he has.

We can see this phenomenon whenever new electronic devices are released.  Even though their current smartphones, iPads, etc. are working just fine, people are eager to get the newest release.  Never mind that it may cost hundreds of dollars that they really don’t need to spend.

The same mindset is present when people choose to lease a car rather than buy it so that they can continually have a “new” car to drive every few years.  Never mind that leasing costs them much more than buying a car, especially if they buy a used car.

People also frequently redecorate their homes, even though what they have is working just fine.  When they redecorate, they often buy all new towels, couches, etc., depending on what room that they’re “updating.”  Now, we tend to replace long before an item is worn out.

This is a luxury that people in the 1900s didn’t have.  My grandmother, who lived through the Great Depression, regularly washed out plastic baggies over and over again.  Rather than throwing them away, she would get 5 to 10 uses from each bag.  If something like a kitchen towel got a hole, she didn’t throw it away; she mended it.  We’ve lost that bit of frugality that earlier generations developed out of necessity.

Undoubtedly, many in the middle class are feeling a financial strain.  While some of that is due to modern day high costs (such as earning less money because our employers have to take so much out for taxes and insurance costs), much of it is also due to our increased expectations and standards.

The next time your budget feels unbelievable tight, look around your house and see how much you have compared to what your ancestors had 100 years ago.

How about you all? Is there a “necessity” you can do without to find more room in the budget?  Can you be content without the latest new electronic upgrade?

***Photo courtesy of http://www.idpinthat.com/edit/5340

How Hard it is to Hang Onto Your Money?

The following is a guest post. Enjoy! 

One of the main reasons that we use banks is security. Sure there are other benefits – organization, centralization of different accounts, cards, benefit programs, lending, etc. But central to a bank’s identity is the fact that they keep your money safe. The concept simply doesn’t work without that aspect.

That’s why the ongoing PPI scandal from the past several years has been so alarming. Bank customers, without their knowledge or consent, were issued policies for Payment Protection Insurance (PPI for short). PPI isn’t a bad form of insurance on its own, but when it is sold fraudulently, as it was to thousands of consumers across Europe by banks and insurers, then there is a major problem.

PPI claims have poured forth by the thousand since the scandal emerged several years ago. Multiple class action and individual lawsuits are pending, and many individuals have already received restitution. If you find PPI payments drafting from your account, it’s important that you read a PPI claims guide soon, and get in touch with PPI claims handlers.

PPI as Emblematic of a Deeper Banking Problem

Even if you do not personally have PPI auto-drafting from your bank account, there are a number of other ways that large banks have been recently caught in defrauding their own customers. We only have to look back at Barclays Bank as an example.

The results, in some cases, were harmless. In other cases, the bank mis-sold ppi insurance to many of its customers. Customers were confused when they had no received annual letters in the mail updating them to how much they were spending on protection and their rights to cancel.

Other large banks have had large-scale theft of customer data. These have included the loss of sensitive information, such as account and social security numbers. Wells Fargo is one of the banks that have had such breaches, but in this case, the bank responded well, by issuing free identity theft protection services for the affected customers.

In the end, banks are businesses just like any other. Just because they are large doesn’t mean that fraud and mistakes will not occur. For people with money stored in these institutions, it is important to demand that they do their due diligence in protecting the customer’s wealth and preserving the customer’s interests.

Don’t take it for granted that your money is safe in a major bank. Keep an eye on the balances of your accounts, and take action immediately if something seems amiss. Fast action will allow you to achieve quick resolution of any problem that you encounter. The sooner you bring problems to your bank’s attention, the more likely they will be to make the issue right.