Personal financial management is a subject that is not taught in many
schools, but is something that nearly everyone has to deal with in their lives
later on. Here are some statistics: Some 58% of Americans do not have a
retirement plan in place for how they'll manage their finances when they get
old. While people generally believe they'll need about
$300,000 to support themselves in retirement, the average American has only
about $25,000 saved at the time of retirement. Average household credit card debt among Americans
now stands at a distressing $15,204. If these facts are alarming to you, and you
want to reverse the trend, read on for specific, targeted advice geared towards
giving you a better future.
For one month, keep track of all your expenses
You don't have to limit yourself; just get an idea of
what you spend money on during any given month. Save all your receipts, make
note of how much cash you need versus how much you expense to credit cards, and
figure out how much money you have left over when the calendar turns.
After the first
month, take stock of what you spent. Don't write down what youwished you had spent; write down what you actually spent.
Categorize your purchases in a way that makes sense to you. A simple list of
your monthly expenses might look something like this:
Monthly income: $3,000
Expenses:
Rent/mortgage: $800
Household bills (utilities/electric/cable): $125
Groceries: $300
Dining out: $125
Gas: $100
Emergency medical: $200
Discretionary: $400
Savings: $900
Now, write down
your actual budget
Based
on the month of actual expenses — and your own knowledge of your spending
history — budget out how much of your income you want to allocate to each
category every month. If desired, use an online budgeting platform, such as
Mint.com, to help you manage your budget.
In your budget, make separate columns for projected budget
and actual budget. Your projected budget is how much you
intend to spend on a category; this should stay the same from month to month
and be calculated at the beginning of the month. Your actual budget is how much
you end up spending; it fluctuates from month to month and is calculated at the
end of the month.
Many people leave significant room in their budget for
savings. You don't have to structure your budget to include savings, but it's
generally thought of as a smart idea. Professional financial planners advise
their clients to set aside at least 10% to 15% of their total earnings for
savings.
Be honest with
yourself about your budget
It's your money — there's really no sense in lying to yourself about how
much you're going to spend when making a budget. The only person you hurt when
doing this is yourself. On the other hand, if you have no idea how you spend
your money, your budget may take a few months to solidify. In the meantime,
don't put down any hard numbers until you can get realistic with yourself.
For example, if you have $500 dollars allocated to savings
every month, but know that it'll consistently be a stretch in order to meet
that goal, don't put it down. Put down a number that's realistic. Then, go back
to your budget and see if you can't tweak it to loosen up cash somewhere else,
and then funnel it into your savings.
Keep track of your
budget over time
The
hard part of a budget is that your expenses may change from month to month. The
great part of a budget is that you'll have kept track of those changes, giving
you an accurate idea of where your money went during the year.
Setting a budget will open your eyes to how much money you
spend, if they haven't been opened already. Many people, after setting a
budget, realize that they spend money on pretty petty things. This knowledge
allows them to adjust their spending habits and put the money towards more
meaningful areas.
Plan for the unexpected. Setting a budget will also teach
you that you never know when you'll have to pay for something unexpected — but
that the unexpected will come to be expected. You obviously don't plan on
your car breaking down, or your child needing medical attention, but it pays to
expect these contingencies to happen, and to be prepared for them financially
when they come.
When you can
borrow/rent, don't buy
How often have you bought a DVD only to have let it collect dust for
years, without using it? Books, magazines, DVDs, tools, party supplies, and
athletic equipment can all be rented for smaller amounts of money. Renting
often saves you the hassle of upkeep, keeps room in your storage, and generally
causes you to treat items better.
Don't just rent blindly. If you use an item for long enough,
it may be best to buy. Perform a simple cost analysis to
see whether renting or buying is in your best interests.
If you have the
money, pay a high down payment on your mortgage. For many people, buying a home is the most costly and
significant payment they'll ever make in their lives. For this reason, it helps
to be in the know how to spend your mortgage money wisely. Your goal in paying
off your mortgage should be to minimize interest payments and fees while
balancing out the rest of your budget.
Prepay early up front. The first five to seven years of a
mortgage are generally when your interest payments are going to be the highest. If
you can, take your tax returnand funnel a portion of it back into
your mortgage. Paying off early will help increase your equity fast by lowering
your interest payments.
See if you can't make bi-weekly payments instead of monthly
payments. Instead of making 12 payments on your mortgage in a year, see if you
can't make 26 payments on your mortgage instead. This will allow you to save
thousands of dollars, provided there aren't any fees associated with it. Some
lenders charge significant fees ($300 to $400) in order to give you the
privilege, and even then only apply the payment once a month.
Talk with your lender about refinancing. If you can
refinance your loan down from 6.7% to 5.7%, for example, while still making the
same payments, go for it. You could knock off years on
your mortgage.
Understand that
owning a credit card may be very important for establishing credit. A credit score of 750 or above may unlock significantly lower
interest rates and opportunities for new loans — nothing to sneeze at. Even if
you rarely use the credit card, it's important to have one. If you don't trust
yourself, just lock it in a drawer.
Treat your credit card like cash — that's what it is. Some
people treat their credit cards like unlimited spending devices, running up
balances they know they can't pay off and only making the minimum monthly
payment. If you're going to do this, be prepared to spend significant amounts
of your money on interest payments and fees.
Shoot for a low credit utilization. A low credit utilization
means that the debt you put on your credit card is proportionally low to your
overall limit. In plain English, that means that if you have an average monthly
balance of $200 on your credit card but your limit is $2,000, the ratio of your
debt to your limit is very low, about 1:10. If you have an average monthly
balance of $200 on your credit card but your limit is $400, your credit
utilization is going to shoot through the roof, about 1:2.
Spend what you have, not what you hope to make
You may think of yourself as a high earner, but if your
money doesn't back up that statement, you're shooting yourself in the foot
acting like you are. The first and greatest rule of spending money is this: Unless it's an
emergency, only spend money that you have, not money that you expect to make.
This should keep you out of debt and planning well for the future.
Familiarize yourself with different investment options.
As we grow up, we realize that the financial world out
there is so much more complicated than we envisioned as children. There are
literally options to trade imaginary items; there are futures to bet on things that have not
yet happened; there are sophisticated bundles of stock. The more you know about
financial instruments and possibilities, the better off you'll be when it comes
to investing your money, even if that wisdom consists only of knowing when to
back away.
Take advantage of
any retirement plans that your employers offer.
Often, employees can opt into a retirement 401(k)
plan. In this plan, a portion of your paycheck is automatically transferred to
a savings plan. This is a great way of saving, because payments come out of
their paycheck before it's cut; most people never even notice the payments.
Talk with your company's HR representative about employer
matching. Some larger companies with robust benefit plans will actually match
the amount of money you put into your 401(k), effectively doubling your
investment. So if you choose to put in $1,000 each paycheck, your company may
pay an additional $1,000, making it a $2,000 investment each paycheck.
If you're going to
put money into the stock market, don't gamble with it. Many people try to day trade in the stock market, betting on small gains and losses
in individual stocks every day. While this can be an effective way of making
money for the seasoned individual, it's extremely risky, and more like gambling
than investing. If you want to
make a safe investment in the stock market, invest for the long term. That means leaving your money invested for 10, 20, 30
years or more.
Look at company fundamentals (how much cash they have on
hand, what their product history is, how they value their employees, and what
their strategic alliances are) when choosing which stocks to invest in. You're
essentially making a bet that the current stock price is undervalued and will
rise in the future.
For safer bets, look at mutual funds when buying stocks. Mutual
funds are bundles of stocks collected together to minimize risk. Think about it
like this: if you've invested all of your money in a single stock and the stock
price plummets, you're screwed; if you've invested all your money equally in
100 different stocks, many stocks can completely fail without affecting your
bottom line. This is basically how mutual funds mitigate risk.
Have good insurance
coverage
They say that smart
people expect the unexpected, and have a plan for what they'll do just in case.
You never know when you'll need a large sum of money during an emergency.
Having good insurance coverage can really help tide you over through a crisis.
Talk with your family about different kinds of insurance that you can purchase
to help you in the event of an emergency:
Life insurance (if you or a spouse unexpectedly dies)
Health insurance (if you have to pay for unexpected hospital
and/or doctor bills)
Homeowner's insurance (if something unexpected harms or
destroys your home)
Disaster insurance (for tornadoes, earthquakes, floods,
fires, etc.)
Think about getting
a Roth IRA for retirement
In addition to, or perhaps instead of, your traditional 401(k) plan —
which is usually an employee retirement plan and a little different from
employer to employer— talk with a financial advisor about getting a Roth IRA.
Roth IRAs are retirement plans that let you invest a certain amount of money,
and extract it, tax-free, after you turn 60. (Well, technically, 59 ½.)
Roth IRAs are sometimes invested in securities, stocks and
bonds, mutual funds, and annuities, giving them the opportunity to grow
significantly over the course of many years. If you invest in an IRA early on,
any compound interest you earn (interest on top of interest) can create
significant increases in your investment over time.
Consult with an insurance advisor about guaranteed income
products. This type of planning allows you to receive a guaranteed amount in
retirement that recurs each year without stopping as long as you shall live.
This protects you from running out of money in retirement. Sometimes these
payments continue for your spouse after your passing.
Start by putting
away as much of your expendable (excess) income as possible.Make savings a priority in your life. Even if your budget is
small, tweak your finances so that you save greater than 10% of your total
earnings.
Think of it like this: If you manage to save $10,000 per
year — which is less than $1,000 per month — in 15 years, you'll have $150,000
plus interest. That's enough money to put a kid through college today, but not
tomorrow if that child has just been born. So, start saving and you may have a
significant down payment for that child or for a wonderful house.
Start saving young. Even if you're still in school, saving
is still important. People who save well treat it more as an ethic than
necessity. If you save early, and then invest that savings wisely, a small
initial contribution can snowball (compound) into a significant sum. It
literally pays to be forward-thinking.
Start an emergency
fund
Saving is all about
frittering away expendable income. Having expendable income means not having
debt. Not having debt means being prepared for emergencies. Therefore, a
rainy-day fund can really help you out when it comes to saving money.
Think about it like this: your car breaks down and you
suddenly have $2,000 in extra payments. You didn't plan on this happening, so
you have to take out a loan. Credit is tightening up, so your interest rates
might be pretty high. Pretty soon, you're paying 6 or 7 percent interest on a
loan, which cuts into your ability to save for the next half-year.
If you had an emergency fund, you could have avoided
bringing on the debt, and the associated interest rates, in the first place.
Being prepared really pays.
When you've started saving for retirement and put money in
your emergency fund, put away three to six months' worth of expenses. Again, saving is all about being prepared for the
uncertainty of it all. If you're unexpectedly laid off work, or your company
reduces your commission, you don't want to take on debt in order to finance
your life. Setting aside three, six, or even nine months' worth of expenses
will help ensure that you're in the clear, even if disaster strikes.
Begin paying off your debt once you're established.
Whether it's credit card debt or debt left on your
mortgage, having debt can seriously cut into your ability to save. Start with
debt that has the highest interest rate. (If it's your mortgage, try paying off
larger chunks of it, but focus on non-mortgage payments first.) Then, move onto
your second-highest rate loan, and begin paying that off. Move down the line,
in decreasing order, until you've paid off your entire debt load.
Begin really
ramping up for retirement
If you're getting to be that age (45 or 50), and you haven't started
saving for retirement, it's really important to start ramping up right away.
Make your maximum contributions to your IRA ($5,000) and your 401(k) ($16,500)
every year; if you're older than 50, you can even make so-called catch-up
contributions if you want to pad your retirement savings.
Put a high priority on saving money for retirement — even
higher priority than saving for your children's college education. Whereas you
can always borrow money to help pay for college, you can't borrow money to help
fund retirement.
If you're totally in the dark about how much money you
should be saving, use an online retirement-savings calculator — Kiplinger's has
a good one here —
to aid you.
Consult a financial planner or advisor. If you want to
maximize your retirement savings because you have no clue how to start, talk
with a licensed professional planner. Planners are trained to invest your money
wisely, and usually have a track record of return on investment (ROI). On the
one hand, you'll have to pay for their services; on the other hand, you're paying
them to make you money. Not a bad deal.
No comments:
Post a Comment