If you're like me, you have at least one friend who has a perfect budget. This person is probably about 25 years old, but they already have $17,000 in savings, are maxing out their 401(k), and can tell you where every dollar that left their wallet in the last six months were spent. If you're like me, you also know that you will never be that person. In fact, you're lucky if you have cash left over in the last couple days of the month before your next paycheck rolls in. Sound like you? Today, I'm going to talk about how you can actually get your act together and take advantage of technology to get your (financial) life under control.
Okay. Yesterday, I talked about setting yourself up with an emergency fund. Hopefully, you now have some cash earmarked for any bad news you may get down the road. Today, let's talk about what you should do with the rest of your money.
It's surprising to me how few of my friends actually have a plan for their money. I'm not talking about a budget. I'm talking about a plan. At the end of the day, if you really want to be successful managing your cash, you need at least one dream for yourself and your money and you need a budget. So pick a dream, right now. It doesn't matter if you choose "downpayment for a house" or "dream trip around the world," it just matters that you have at least one goal for your future. (Remember, you're just saving cash for this dream - cash that you can always use for a different dream if you change your mind in the future.)
Now that you've picked your dream, we can start talking about how to set up your cash flow to get you there. Richard Jenkins, editor-in-chief over at MSN Money, suggests using the "60% Budget." According to Mr. Jenkins, all you need to do is limit living expenses (rent, groceries, utilities, etc.) to 60% of your total income. The remaining 40% is split into four simple categories: 10% to long term savings (retirement), 10% to short term savings (emergency fund), 10% to lump sum purchases (a new sofa, a vacation), and the last 10% is for fun (beer!). For example, if you are making $50,000 a year, you have a net monthly income of around $2916.67. (This assumes you are losing 25% of your income to federal taxes - click here for a complete listing of tax brackets - and another 5% or so to state taxes. Damn you, Uncle Sam!)
For easy numbers, let's round that number down to $2900 in income every month. If you're limiting your living expenses to 60% of that number, you have $1740 to spend on your rent, your groceries, your gym membership, your cell phone, and whatever other expenses you designate as "fixed." You're also saving $290 for retirement, $290 for your emergency fund, $290 for the transmission on your car (which is guaranteed to go sooner or later), and you have $290 dollars left to spend on hot wings, new kicks, the iPhone, or Elton John's new album.
Sounds easy, right? It is pretty simple - and it's a great alternative to carrying around a tiny spiral bound notebook and recording every purchase to figure out where your cash is going. To make this even easier, arrange for the contribution to your retirement savings and the contribution to your emergency fund to be withdrawn from your paycheck before you ever see them. (Side note: if you don't know yet, you MUST find out if your employer offers an employee match, meaning your employer will put a dollar in for contributions to your retirement fund. If they do, try your best to contribute at least the amount that will get dollars matched by your work.)
Look, people. The bottom line is that you must have a plan for your money. Picking a goal will help you get organized and let you acknowledge your responsibilities (retirement and emergency fund), take care of the bills (that 60%), and leave yourself room for making big purchases. And of course, you get to blow some cash on fun. So pick your goals, arrange your finances, and make 2009 the year of the plan.
Tuesday, January 13, 2009
Monday, January 12, 2009
2009's Must-Have #1: The Emergency Fund
It's high time that I stopped procrastinating and started getting this blog in shape. It's 2009, a whole new year, and it's time for the harsh reality that I am dealing with to act as a kick in the pants for the rest of you. So let's get to it.
January 5, 2009. D-Day. Or maybe L-O Day. One week ago today, I was laid off from my job with no notice. Yep. One day I was employed, the next day my life was sweatpants and free time. So for now, the job search is in full swing, but in the meantime, my mind has turned to financial security in an unstable world.
You see, to a certain extent, I was caught with my pants down. Although I was making a fair amount of money, I neglected to turn my attention to saving for a rainy day until three or four months ago, meaning that in my time of turmoil, I do not have that mythical beast, the Emergency Fund, on my side. Luckily for me, a sizeable tax return and a few other things will play out in my favor and I should be okay, provided a job turns up in the reasonably near future.
But enough about me - time for you to learn from my mistakes. Without further ado, I give you Step One of Susan B. Anthony's "5 steps to a healthier fiscal year in 2009." (Bad title, good steps.) People, these are easy. Not Suze Orman "give me 7 days of your life and I'll guarantee you $3000 ten years from now" easy. Real, honest-to-God, quick and dirty things that will change your life. Period.
(1) Emergency Fund.
Okay. Most of us have heard about this one. You're supposed to have three, four, even six months of living expenses squirreled away for a rainy day - or, in my case, January 5, 2009. This is not hard. It's simple, it's easy, and it's important. So get started.
Right now, while this blog is open in one window, open a new page and log onto ING Direct's webpage (www.ingdirect.com) or HSBC Direct's webpage (www.hsbcdirect.com) or go to any other online bank and sign up for a free savings account. Or, alternatively, use the one that's probably offered by your bank in connection with your savings account, although my advice is to use a different bank for your emergency fund than you do for your normal banking. Trust me on this one. Sometime in the future, you will have blown through your paycheck a bit faster than planned and it will feel like an "emergency" when your friends want to go to the bar and you don't have the cash. If it's linked to your checking account, it's a little too easy just to transfer $50 over to your checking account and head for Ye Olde Pub. Do that a few times and you risk making a serious dent in your rainy day fund.
So set up the account. It should take you about 15 minutes. Type in your information and voila! You now have a savings account. You have just completed the hardest part of the process.
Next up, funding the account. If you search on the web, people will say that you should save 10% of your income for emergencies. I say if you are capable of doing that, great. Personally, I think that at age 20-something, with a job that probably nets you just enough to pay the rent, your student loans, buy groceries, and pay that pesky cell phone bill, it might not be realistic to pull off a number as high as 10%. So pick your number. 5%. 3%. If you don't like thinking in percentages, just pick a dollar amount that you can deal with dropping from every paycheck. Once you think of a number, increase it ever so slightly. For example, you're thinking $40 per paycheck. So make it $50. You're thinking 5%. Make it 7%. Generally, people think they can't afford to save as much as they are able to. So push yourself a little bit - even if you feel a little pinch, it will be worth it.
Next up is how to get the cash from you to the savings account. Personally, I am a big fan of calling your payroll department and having the money deducted directly from your paycheck. If your company offers direct deposit, it's likely that you can request that your paycheck be split between two or even three accounts by filling out a simple form with payroll. So instead of getting a paycheck for $1500, you'll now get one for $1350 while $150 heads off to join your Emergency Fund.
The second option is to use an automatic savings plan to get the money to your savings account. Most online accounts offer this function. You can tell your Emergency Fund how often to deduct money from your checking account and how much it should take. Obviously, you probably want this to match up to the days you get paid, but it does allow you a bit of flexibility. My only qualm on this front is that you may have too much temptation to mess with your saving plan if your above-mentioned friends head to the bar and your savings deduction is scheduled to take away your beer money.
And that's it. You officially have started your Emergency Fund and you didn't even break a sweat! It's a cheesy refrain but it's true enough that after a few pay cycles have passed, you won't even miss the cash you're sending to your savings account. Honestly. You learn to live without it and you'll sleep a little better knowing that when your personal D-Day comes, you will be able to walk out of your supervisor's office a little freaked out, but confident that you can weather the ensuing financial storm. And that changes the lay-off from a setback into an opportunity.
Emergency Fund 2009. Now that's sexy.
January 5, 2009. D-Day. Or maybe L-O Day. One week ago today, I was laid off from my job with no notice. Yep. One day I was employed, the next day my life was sweatpants and free time. So for now, the job search is in full swing, but in the meantime, my mind has turned to financial security in an unstable world.
You see, to a certain extent, I was caught with my pants down. Although I was making a fair amount of money, I neglected to turn my attention to saving for a rainy day until three or four months ago, meaning that in my time of turmoil, I do not have that mythical beast, the Emergency Fund, on my side. Luckily for me, a sizeable tax return and a few other things will play out in my favor and I should be okay, provided a job turns up in the reasonably near future.
But enough about me - time for you to learn from my mistakes. Without further ado, I give you Step One of Susan B. Anthony's "5 steps to a healthier fiscal year in 2009." (Bad title, good steps.) People, these are easy. Not Suze Orman "give me 7 days of your life and I'll guarantee you $3000 ten years from now" easy. Real, honest-to-God, quick and dirty things that will change your life. Period.
(1) Emergency Fund.
Okay. Most of us have heard about this one. You're supposed to have three, four, even six months of living expenses squirreled away for a rainy day - or, in my case, January 5, 2009. This is not hard. It's simple, it's easy, and it's important. So get started.
Right now, while this blog is open in one window, open a new page and log onto ING Direct's webpage (www.ingdirect.com) or HSBC Direct's webpage (www.hsbcdirect.com) or go to any other online bank and sign up for a free savings account. Or, alternatively, use the one that's probably offered by your bank in connection with your savings account, although my advice is to use a different bank for your emergency fund than you do for your normal banking. Trust me on this one. Sometime in the future, you will have blown through your paycheck a bit faster than planned and it will feel like an "emergency" when your friends want to go to the bar and you don't have the cash. If it's linked to your checking account, it's a little too easy just to transfer $50 over to your checking account and head for Ye Olde Pub. Do that a few times and you risk making a serious dent in your rainy day fund.
So set up the account. It should take you about 15 minutes. Type in your information and voila! You now have a savings account. You have just completed the hardest part of the process.
Next up, funding the account. If you search on the web, people will say that you should save 10% of your income for emergencies. I say if you are capable of doing that, great. Personally, I think that at age 20-something, with a job that probably nets you just enough to pay the rent, your student loans, buy groceries, and pay that pesky cell phone bill, it might not be realistic to pull off a number as high as 10%. So pick your number. 5%. 3%. If you don't like thinking in percentages, just pick a dollar amount that you can deal with dropping from every paycheck. Once you think of a number, increase it ever so slightly. For example, you're thinking $40 per paycheck. So make it $50. You're thinking 5%. Make it 7%. Generally, people think they can't afford to save as much as they are able to. So push yourself a little bit - even if you feel a little pinch, it will be worth it.
Next up is how to get the cash from you to the savings account. Personally, I am a big fan of calling your payroll department and having the money deducted directly from your paycheck. If your company offers direct deposit, it's likely that you can request that your paycheck be split between two or even three accounts by filling out a simple form with payroll. So instead of getting a paycheck for $1500, you'll now get one for $1350 while $150 heads off to join your Emergency Fund.
The second option is to use an automatic savings plan to get the money to your savings account. Most online accounts offer this function. You can tell your Emergency Fund how often to deduct money from your checking account and how much it should take. Obviously, you probably want this to match up to the days you get paid, but it does allow you a bit of flexibility. My only qualm on this front is that you may have too much temptation to mess with your saving plan if your above-mentioned friends head to the bar and your savings deduction is scheduled to take away your beer money.
And that's it. You officially have started your Emergency Fund and you didn't even break a sweat! It's a cheesy refrain but it's true enough that after a few pay cycles have passed, you won't even miss the cash you're sending to your savings account. Honestly. You learn to live without it and you'll sleep a little better knowing that when your personal D-Day comes, you will be able to walk out of your supervisor's office a little freaked out, but confident that you can weather the ensuing financial storm. And that changes the lay-off from a setback into an opportunity.
Emergency Fund 2009. Now that's sexy.
Tuesday, December 16, 2008
Welcome to Cash Allowance!
This blog is for anyone who has ever called their parents when confronted with a student loan application, a credit card bill, a 401(k) application, or a flat tire. I don't know it all - heck, I don't even know most of it - but I promise to do my best to learn what you need to know and to blog about it here in the most basic terms I can.
My goal is to tackle the financial topics that confront those of us in our 20's and 30's - whether you have lots of cash or lots of debt, whether you can tell me why you picked the stocks you picked for your 401(k), or whether you know your tax bracket.
This blog isn't about judgment - it's about getting us some answers. And, hopefully, making some cash along the way.
My goal is to tackle the financial topics that confront those of us in our 20's and 30's - whether you have lots of cash or lots of debt, whether you can tell me why you picked the stocks you picked for your 401(k), or whether you know your tax bracket.
This blog isn't about judgment - it's about getting us some answers. And, hopefully, making some cash along the way.
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