Archive for the ‘Personal Finance’ Tag

Taking the First Step Into Savings

Last week, a friend and I began talking about saving for the future.  I told him about my current plans and how I’m saving about 20% of my income annually for retirement.  He told me he really has not saved anything.  Personal circumstances had put him in a situation where he thinks he can’t save for himself right now.  As the conversation progressed, he asked me for some advice.  What should I invest on?  Where do I do it?  How do I start?  His focus was more on the investing side of the equation.  I told him that right now, that is not as important as taking action.  The last question was what I thought was the most important one-How do I start?

If you ever wanted to loose weight, change jobs, or any type of situation that might require some deep thinking, the most important thing you can do is to take action.  Taking that first step is what will help lay the road for the future.  This concept is no different when talking about personal finance.  Don’t worry about the schematics of investing.  Worry about doing something to get you started.

The first step you should take should be taking a closer look into what you spend your money on.  I had asked my friend if he new what his income was after expenses.  He didn’t know.  I told him to just take a look at where his money is actually going.  Then, he will notice  that either A) He needs to find a way to increase his income B) Decrease his expenses C) Both.

It does not matter how large or how small the amount of savings you put aside is.  The important thing is to do it.  When I first started saving for retirement, I could only save about 50 dollars a month, sometimes even less.  But that didn’t discourage me.  In fact, it motivated me into saving even more.  When you start to see your savings grow, you want to keep feeding it more and more.  You start to notice that you can maybe save a little bit more this month.  As the next month rolls around, you noticed that you can save a little bit more.  Soon, saving will become a habit.

As the saying goes “the journey of a thousand miles starts with the first step”.  So open a high yield savings accountlive more frugally, read about personal finance, do whatever it takes to get the ball rolling in savings. 

 

How To Write a Budget

Knowing where you are spending your money is a key in controlling your finances.  Most financial experts and amateur bloggers (like myself) suggest doing a monthly budget.  A budget is the best way to help you keep on track your income, expenses, and savings.  Whether you use a computer program or do it the old fashion way with a pencil and a piece of paper, the important thing is that you see where your money is going.

Every month, I sit down and plan the budget for the month and take a quick glance at the yearly budget.  I have a notebook that it is dedicated to this which I keep on my office desk.  At the top of the paper I write the month.  At one end I write my income and in the other the expenses.  Then, you simply subtract your income from the expenses, and you have your savings.  That’s it.  It doesn’t take more than 10 minutes to do.  Here is a simple explanation to the different parts of a basic budget:

Expenses.  When writing down your expenses, make sure to write down everything that is a necessary expense, such as bills, food, and maintenance.  I would also suggest adding a category for entertainment, and a category called buffer money.  The goal is to only spend exactly what you wrote down or less.  The category called buffer money will be used in case you underestimate a category.

Income.  This is simply the amount of money you get monthly after taxes.  If you are using automatic deposits (which I suggest) for your 401k and/or another type of long term investment, do not count it as part of your income.  Remember to always pay yourself first.  That way, you will have an automatic way to save for your retirement and future financial goals without worrying about budgeting for it.

The word budgeting has always had a negative connotation.  When my fiancee and I first started discussing it, she really irked at the sound of the word.  Now, after seeing her money grow, learning where her money is going, and gaining control of her finances, she looks forward to sitting down monthly and planning her budget.  Most people who have control of their finances have some sort of system to keep track of their spending.

I have given you a very basic starting point into how to write a budget.  Here are some useful links that can help you further with this subject:

These links are brought to you by JD at Get Rich Slowly. 

Careful When Lending Money

Most of us have been in the position where we where have been asked if we could lend some money to a friend or relative.  Many of us have also been in the situation where we might of had to be the ones asking for the money.  Did it change the relationship between the two of you? How did you come to an agreement of paying it back?  Personally, lending money to friends and family are just something I don’t do. 

When I am talking about lending money, we are talking about $100 or more (To me that is a lot of money to loan, but I understand that to some that is not a large amount).If you where the potential lender, think back to that awkward feeling you had while trying to make the decision whether to lend the money or not.  If you did loan the money, think about how the relationship changed afterwards.  Maybe he didn’t pay you back, maybe you had to hassle him for the money.  Whatever the case may be, it is an experience we all hate to have.

My father was a small business owner back when we lived in Mexico.  His business was in all kinds of financial troubles so he started to look into other ways to make ends meet as well.  To pursue these other business interests he need it some money to make it happen so he went to his brothers and cousins for some money that they could “invest” with the promise of payment in full in the future.  As you can guess, my father never payed the money back and his relationship with them has never been the same.  Money became such a divider between them that my father has very little contact with his brothers and cousins.

Due to prior experiences with lending money and hearing so many other people have negative experiences as well with the subject, I have come to the decision to not loan money to friends and/or family.  If somebody I care for finds themselves in a situation that they need help financially and ask me for me money, depending on the circumstance, either I will help them some other other way (educating them on personal finance-If they are receptive to the info) or I will gift them the money with no expectations of getting the money back.

Lending money is a personal issue that can strain and even break relationships.  Some point in time we are all asked and will probably be asked again if we can loan somebody money.  Don’t just think of the amount they are asking for-think about the other effects that it can cause between you and the other party involved. 

Top Money Pitfalls

Back in 2007, I started my crusade on becoming better informed in the world of personal financing.  As I began to read personal finance books, I started to notice that many of this authors had different ideas and solutions for retirement, savings, spending etc.  At the same time though, you can still find many similarities.  Here are some of the four most common mistakes people can make financially:

  • Car payments.  In my opinion, this is one of the biggest money pitfalls people can fall into.  Usually, this becomes the largest monthly expense an individual has other than their house payment.  Imagine what you could invest your money in if you didn’t have to give $300 a month($3600 a year) to a car that is depreciating every time you drive it.  Instead of spending money on a new car, your best bet is to save cash and buy a reliable used car.
  • Rent/House payments.  Many people make the mistake of getting”too much house”.  What I mean by that is that they buy a house that they really can’t afford (Hmm sounds like mortgage crisis).  Basic rule of thumb is that your house payment shouldn’t be any more than 1/4 of your take home pay.
  • Not Saving Long Term.  Start saving now!  It is never too early or too late to start investing in your future.  The power of compound interest is in our sides, especially for those starting off early.  If you don’t have any car payments, you have a reasonable house payment, and you are watching your spending, there should be no reason why you are not saving a little a very month for your future.
  • Not Budgeting.  Having an understanding and a plan of where your money is going is considered one of the simplest, yet most important things you can do with your finances.  It doesn’t matter if you do it monthly or yearly, with software or by pen and paper, the important thing is that you do it.

Knowing what mistakes to avoid financially is very important when trying to gain your financial freedom.  Many times we are told what we need to do to reach our goals, just remember to watch out for those pitfalls that might occur around the way.

I’m curious of finding out what do you consider to be money pitfalls?  Do you agree with the ones I’ve chosen?  How can you avoid them? 

Self-Discipline and Your Money

Personal finance is much more than just numbers.  A commitment has to be made if whether you want to pay off debt, increase your savings, or become more frugal.  One of the key components to being successful with your finances is self-discipline.

Simply stated, self discipline is the ability to get yourself to do something and to follow completely through with it.

A great example of self discipline is starting a diet to loose weight and sticking with it till you get to your ultimate goal.  But if you have ever been on a diet, you know how important it is to plan for it.  You inform yourself and try to figure out what diet you are going to do.  Nutritionists stress the importance of writing down everything about your diet starting with your goals.  Then, they suggest tracking what you eat for a week before the diet.  The reason is twofold.  They want you to see how much you actually eat and make you conscious about it and to see what kind of changes are needed to be made.  Then a plan is made according to your needs and goals.

First, you start the diet in a slow pace, you cut down on certain high calorie foods and start to work out slowly.  Slowly, but surely you start increasing your work out regimen, your diet becomes better and better and the pounds begin to shed.  In the mean time, you are recording the process and keeping track of it.

This was one of the best examples I could come up because self discipline is something that needs to be build up.  Back to the diet analogy, if you eat nothing but junk food and all of the sudden the next day you are eating nothing but fruits and vegetables and lean protein, you are probably going to regress back to the junk food.  Similarly, if you try going to the gym and lifting 200 pounds on the bench press for the first time, you are most likely going to hurt yourself.  On the other hand, if you take your time, slowly start improving your diet and increasing little by little your workouts, the chances of success and self discipline vastly increase.

Enough talk about diets.  Lets instead use self-discipline in personal finance terms:

Make a commitment.  You have to decide that it is time for a change and that you are going to do something about it. Say it, write it, do whatever you need to do to remind yourself about your commitment.

Track your current spending.  Write down everything, and I mean everything you spend your money on.  You will be surprised at where your money goes and will realize that you need to change.  Maybe you are eating out too much, or that morning coffee you are buying is costing you more than what you think.  By actually adding the total you are spending daily, weekly, and even in a monthly basis, you will have a better understanding of how much money you could be saving.

Make a plan.  I suggest start reading personal finance books, blogs and magazines to educate yourself on the subject.  Ask other people that you might know that are doing well financially.  Get some advice and figure out what works and what doesn’t.  Remember, that most often than not, personal finance is quite simple and boring.  There is no quick way into changing your financial future.  It takes self-discipline and a good solid plan.

Start slow and track your progress.  You have to crawl before you walk.  Make small reachable goals.  Remember that you are committed to change your finances so take it slow and don’t let small hurdles affect your overall goal.

In all, self-discipline is more than what I mentioned above.  for a more in depth look I suggest reading Steve Pavlina post on Self-Discipline.  He breaks it down into five pillars which address the subject in a thorough matter.  By addressing and understanding what self-discipline is, we can use it not only with our finances, but with other facets of our lives as well.   

 

Credit Cards…No Thanks

I’ll be honest. I am not a big fan of credit cards. Everything I purchase is always with cash. If there is a high priced items such as high-end electronics, vacations, or even a car, I simply save up the cash for them and then buy them. The only thing that I plan on not paying in full will be my future home.

Before I start this rant, let me say that I am okay with the use of credit cards responsibly. This is just a personal view on the overexposure of the importance credit and the credit card companies who are trying to suck every penny out of our pockets.

We are always told the importance of our credit score. They tell us how this can affect everything we do from purchasing certain goods, getting loans, and even getting a job. This is true…To a certain extent. A higher credit score can get you better interest with a bank. A higher credit score can also make it easier to rent an apartment. That’s great! But what they don’t want you to know is that you can still do fine without credit. As I mentioned earlier, if I want something, I save the money for it. When I look for an apartment, I just use my work history, and I pay a larger deposit to get the place I like. When I do decide to get a house, cash will always be king. A large down payment (40% of the value of the house) and manual underwriting is all it takes for me to find my dream home. As for getting a job, I certainly don’t want to work for anybody who solely will hire me due to my credit score.

On an earlier post on marriage and money, I had mentioned about my fiancee paying of her credit card in full and cancelling the account. My fiancee fell into the trap set out by the credit card companies. This particular card gave her all types of discounts in places she shopped at. She believed that by using this credit card she was actually saving money. Wouldn’t you know it that this wonderful card put her $1000 in debt. That doesn’t not sound like a deal I would like to do.

I do understand that if you pay of your card in full monthly, you can actually reap benefits such as a higher credit score (funny how nobody really knows the math into how they come up with this score), and rewards such as:gas, cash, airline miles etc. Again, for all of you that are financially stable and understand the use of credit cards, this is not meant for you. This is for those individuals who need to stop spending money they don’t have, and thinking that a good credit rating is the only thing that will help them in the future. Remember that the credit card companies are a multi-billion dollar business who yearn for you to miss just one payment and start paying the minimum amount. Odds are stacked in their favor that sooner or later you will start falling behind on payments and that is when they win. Those are odds I don’t want to play with it.

If you are interested in learning about some of the horrible business practices that the credit card companies do I suggest going to your local library and renting the movie Maxed Out. You can also watch it here: