This is a reprint of an article I wrote for Being Frugal a few days ago…
When I was about 14 years old, my uncle suddenly and unexpectedly went home to be with the Lord. He had meticulously taken care of the finances for their family and left my aunt on a very solid financial foundation. Obviously, this didn’t take away the pain of him being gone, but his preparation eliminated additional stress that would have been present without it.
It’s one of those things we all prefer not to think about, but it is always better to be prepared. My aunt is still reaping from what my uncle sowed by having his things in order.
My FLOP
Being impacted by my uncle’s premature death and wanting to do everything I can do to help my wife, I decided to create a system for keeping things organized.
It has been a work in progress over the last few years, but has evolved into a very helpful tool. Simply put, it is a single file or location for all your financial account details. I call it a FLOP (Financial Life on One Page). FLOP sounds a little cooler than FLOOP, but not much 
In adding to it over the last few years it has come to have three main purposes. The first being that it is a:
1. Balance Sheet
One of the best pieces of advice I received about 5 years ago, when I started my journey to clean up my finances was to keep a balance sheet. I didn’t really understand why at the time, but I did it anyway. I have updated it twice a year since I started it and it has been a great source of encouragement as I have fought to get out of debt.
The reason it has been such a source of encouragement is because a balance sheet not only takes into account the debt you have been paying off, but all of your good financial decisions. So increasing your savings, paying down debt, making wise purchases all will affect your balance sheet in a positive way.
Also, looking at the size of your debts or assets does not necessarily give an accurate report of your financial condition. To get a accurate picture of your financial situation you need a balance sheet to calculate your net worth. It is very easy to do and is just a big subtraction problem:
Assets - Liabilities = Net Worth
If you have never started a balance sheet, I recommend doing it. It is a simple way to track your financial progress as you move towards your goals. For most people it shouldn’t take more than an hour to gather up all your account balances and asset values.
And as with most things, you are either moving forward, or you are going backwards. If you are increasing your assets or minimizing debts your net worth should be growing. If your net worth is getting smaller, then it is an indication that you should re-evaluate how you are spending your money. And even if your situation is not very encouraging, it will force you to see the financial truth so you can make adjustments as needed.
How to create a balance sheet
- Use Excel, Google docs, or some other spreadsheet software.
- List every Asset you can possibly think of from cars to stocks to jewelry for the amount that you could quickly sell it for. (To save time, you can lump together smaller assets like “misc. household items”) Total these items up to get a subtotal of your assets.
- Below the Assets total, list every debt or liability that you have. Mortgages, credit cards, student loans, they all apply. Total your debts to get your liability total.
- Subtract your liability total from your asset total to get your Net Worth.
2. Organize all my login information
Another piece of good advice I got a few years back was to create an extremely unique login ID and use it for every website that I had an ID for. I followed the advice and it has helped, but it is not a fail-proof system. Some sites require your email address, some want more than 8 characters, some want less, etc. And in this day in age, where you just about need to login to open your refrigerator, it can be difficult keeping track of all your login information.
After adding all your accounts in the balance sheet section above, you should have all your account information listed already and you can just add a column to add your login for that company. If you use various passwords you could list them in another column as well, but consider using a password hint rather than the actual password. I still come back to my FLOP at least once a week to figure out a login that I forgot about.
3. Financial roadmap for my wife
The third and most important reason for my FLOP is for my wife. In most families, one person manages the finances and has a better understanding of the overall financial picture. I am that person in my family. Are you that person in yours?
If so, would your spouse (or other beneficiaries) know where to find your financial information? Insurance policies, bank accounts, investment accounts, safe deposit boxes?
I know for my personal situation I know a bit more about our financial details than my wife does. I use my FLOP to layout all of the pertinent details for my wife, if she ever needed them. It contains the name, phone number or web address of each institution, our account numbers for those institutions and any other pertinent info that may be needed.
I then burned the file to a CD and kept it in our safe. Every year or so I put a copy of the updated FLOP in there.
Losing a loved one is a terribly difficult process. Having a “roadmap” prepared in advance for your loved ones is a great way to help eliminate unnecessary stress.
If you are interested, you can download a copy of my template for my FLOP.
This article was included in the Carnival of Personal Finance
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The effects of inflation on my money
In the May 2008 Money magazine they had an article titled, “Life in the time of inflation.” They mentioned how the price of milk is up 13% over the last year, hospital costs 8%, and of course gas up 33% . Overall inflation being up about 4%.
There are lots of effects that inflation has on the world, our economy, and our personal lives, but I think one of the most important ones for us to be aware of is how it affects our cash.
Cash sitting in our wallets, under the mattress and even in many savings accounts is becoming less valuable because of inflation.
At 3% inflation (which I think has been the average over the last decade in the U.S.) we are essentially losing money when our cash is not earning at least that amount in interest. So, if you have a savings account that pays 1.5% interest and inflation is at 3%, you are losing spending power.
Even though your total balance in your savings account may have gone up, you will be able to purchase less with that money because of inflation.
How to best handle inflation
By having a savings interest rate that is higher than the inflation rate, you can take comfort in knowing that your money is growing in dollars as well as spending power. In times of high levels of inflation, this most likely will not be possible.
Bank CD’s often offer higher rates of return than savings and money market accounts, in exchange for promising to keep your money there for a fixed time frame.
Stocks, index funds, and mutual funds all generally offer good protection against inflation.
How to benefit from inflation
Fixed-rate debt - your mortgage, car loans, or any other loans you have at a fixed rate will be beneficial to you as the borrower. For instance, if you have a 30 year mortgage, every year further into the loan you go, you are actually using less of your spending power to pay the bills.
In theory, if inflation goes up in the U.S. by 4%, our living expenses will rise by 4%. Then (in theory) our incomes rise by 4%. But, your fixed rate debt doesn’t rise. Therefore, with all other things being equal (and assuming that we have a constant rate of inflation) your mortgage payment should be easier to pay each year as you get further into it.
This cycle is amplified and you see much greater benefits from it in periods of high inflation. The bank who made the loan pays the price because even though they are getting the same payment each month, it become less and less valuable as the loan progresses.
Bottom line: Inflation is likely to always be around, we might as well learn how to make the best of it.
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What is the best way to start a budget?
The first thing that anyone who wants to make a budget must do is to compare their income versus their expenses. The good thing is that it is quite easy to do.
To get started you can download this free Excel budgeting spreadsheet which will help you calculate how much you spend each month and compare it to your current income.
It’s too bad most of us never learned this in school and had to figure it out on our own - so here is the lesson that we should have learned in 5th grade:
Expenses > Income = Bad Expenses < Income = Good
And honestly, as simple as it sounds, that is the key to wealth. Anyone, and I mean anyone, who IS wealthy (I emphasize IS because I am not talking about people who appear to be wealthy, but who are actually in debt up to their eyeballs) spends LESS money than they earn. AKA - their expenses are less than their income.
The great news about this is that anyone can do this - no matter what their income level. If you can do it on a small income, then you can do it on a large income. If you can’t do it on a small income, then you won’t be able to do it on a large one either. Trust me!
If you don’t believe me, just ask all of the lottery winners who went bankrupt within years of winning millions of dollars.
Back to making our budget…
Regardless of how your expenses and income compare right now - get excited, because you can easily change it!! If it is bad you can make it so much better!! If it is good, you can still make it even better!! I will show you how later, but for now…
Let’s make a budget!
Did you calculate what your monthly expenses and income were? Were your expenses less than your income? If so, you are a rare breed who is in great shape, so just sit tight for a minute.
For everyone else, whose expenses exceeded your income - you are not alone. You actually have a lot of company. The problem is that it isn’t good company! Most of our debt-ridden society is in the same boat, but you are one of the bold ones who is jumping out of the debt boat!!
So, if your income is $1000 and your expenses are $1200, that means you spend an extra $200 each month that YOU DON’T HAVE!! What your job is now is to find out what you can get rid of or quit buying each month to save that $200. If you have no idea where to start you can check out these money saving tips or browse other money saving ideas.
I know, I know - this is the part that hurts. Just like pruning a bush - cutting back hurts, but ultimately you are going to yield so MUCH more fruit because of it!!
The goal here is to get your expenses and income to AT LEAST be equal. Once that is accomplished we can work on eliminating wasteful spending or cut other costs to bring the expenses below the income.
Now that you have calculated what your monthly income and expenses are we can start designing our budget. We will first discuss the less effective, but easier method for budgeting…
The world’s easiest budget
There are 2 simple rules to do a simple budget:
- You can’t spend more than you earn - carrying a balance on a credit card is not allowed.
- Money must go to the budget categories as soon you get paid.
The way it works:
Rather than having 10-20 different categories of items to be budgeted for you only focus on the 1-3 most important ones and let the rest of the chips fall where they will.
So, to do this you take your paycheck of say $1000 and right off the top you put the money to your main priorities. For many people this is tithing to their church, retirement savings, college savings for children, etc…
A sample of this would be:
$1000 (paycheck)
-$100 (tithe)
-$100 (retirement savings)
= $800 (for the rest of the bills and everything else)
It is absolutely critical that the money gets taken out FIRST for these few budgeted items. If not, I can almost guarantee that the full amount will not make it as intended.
I highly recommend making this process automatic by using direct deposit or some other form of automatic withdrawal. There is just something about human nature that has a hard time staying consistent with things like this.
Why do you think the U.S. government takes our taxes directly out of our paycheck, rather than coming to collect the full sum at the end of the year? It is the same principle - use it to your advantage.
Easy budget, but not very efficient
I think this budget is perfect for people who don’t want to budget. It is simple, doesn’t take up much time, and will help you reach some savings goals. That said, it is still inefficient and leaves the door wide open for inefficient and foolish spending.
I think it should be considered the “lazy man’s budget” - and you are not LAZY, you are willing to work to get your finances in order!! I know this because you are still reading. So, since you are NOT lazy and are hungry for more of a challenge, let’s look at how the pros budget.
The money saving budgeting method
Yes, this method takes a little bit more time and energy, but it also will provide you will long-term financial benefits if followed.
To do this we are just going to expand on the lazy man’s budget mentioned above. Rather than having just 1-3 categories of items budgeted for, we are going to create as many as we need to put a limit on our spending in all areas.
You can use the mentioned budget spreadsheet as a guide for tracking your progress. Try to account for every possible expense that you could run into. You will never be able to budget for every possible scenario, but the goal is to minimize surprise expenses. Inevitably, there will still be surprises from time to time - so I suggest creating a category for these surprises (or you can just use your emergency fund).
How to stick with your budget
The almost sure-fire way to make a budget that fails is to NOT budget for any fun stuff. I wrote about how budgeting should be fun and it is a necessary ingredient for success. You need to budget for clothing, entertainment, going out to dinner, or whatever else it is you love to do! The key is to do it in moderation and to set limits and abide by them.
The amazing thing is that by budgeting for fun stuff, it actually liberates you to spend money on these items. When you have money budgeted each month to buy clothes, the money is now sitting there waiting to be used for that assigned purpose. Suddenly you can go clothes shopping without feeling guilty!!
This is how budgeting truly becomes fun. When you have money sitting in the bank waiting to be spent. Or, even better: if you start budgeting for vacation and after a little while you have hundreds of dollars begging to be spent on a vacation!! You go on your trip and come back home and don’t owe any money to a credit card company - now that is how a budget becomes fun and what helps you stick with it!!
Other budget options
There are many ways to make a budget work. The key is to finding a system that works for you and sticking with it. This article has gone over a basic method of budgeting, but I also suggest you check out the envelope budgeting method, or the method that I use to budget with ING.
As far as paying for budget software I think it depends on the user. It is not a necessity by any means, but most software programs will make your life easier and save you time. It just depends on personal preference really.
That said, my favorite budgeting software tool that I have found is called Mvelopes Personal. They are basically like a virtual envelope system for budgeting. They have a very simple and intuitive method for budgeting that is one of the best out there. If you want more information you can Take a tour of Mvelopes Personal.
Another budgeting tool I found is called YNAB and you can find out more about it at YouNeedABudget.com. It is a very basic tool that will help keep your budget organized. I don’t like it as much as Mvelopes, but I think it is a little bit cheaper.
I would love to hear what has worked for you and what hasn’t. Let me know in the comments below…
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I think mutual fund investing is a good way to get started investing. I own two mutual funds currently and there are a few good ones out there, but most mutual fund managers still don’t beat the average market returns. It is for this reason that I recommend Index funds. Actually anyone who looks at the numbers and isn’t trying to sell you something will tell you the same thing.
Index funds give you the market returns
To put it simply, investing in Index funds is like buying a tiny share of each company in the market. So, for example, if you bought an Index fund that tracks the S&P 500 (which is a good choice) you would own a tiny amount of each company listed in the S&P 500.
The S&P 500 index includes 500 large companies that do a good job of representing the US economy as a whole. So, by investing in the S&P 500 index, you are essentially betting that US stocks will go up.
History can never be a tool for perfectly predicting the future, but it is about the best tool we have to work with. Historically over the last 100 years US stocks have gone up about an average of 11% a year. Some years have been down 25% and some up 40%, but averaged together they come out to about 11% a year.
What is the difference between a mutual fund and an index fund?
With mutual funds you pay a manager to pick a bunch of stocks that you (the shareholder) will be invested in. If there were more great managers out there this would be a great idea, but since the great majority of them fail to beat the market returns, index funds are a good choice.
So, by owning all of the stocks in the market rather than just the ones that most money managers suggest - you win. I know it seems crazy that most money managers with all of their education and experience still can’t beat the market, but it is the sad truth and the secret that they don’t want you to know.
The mutual fund industry secret
Mutual fund companies don’t want you to know that an Index fund will outperform most of their funds. They spend millions of dollars in advertising and number crunching to show you a chart that shows how their fund returned 13% on cloudy Tuesdays of every month except January over the last 2.4 years. I am exaggerating. A little bit, but not much.
Many work very hard and advertise a lot to convince people to buy their products, even though they are not as good as having an index fund.
Oh, and guess who pays for that advertising and the money manager’s yacht who failed to beat the market returns. Yep, you the shareholder. Which is yet another reason why index funds are so great. They don’t need a money manager since the stock-picking has already been pre-determined. Because of this, index funds generally charge much lower fees than managed mutual funds.
Can it really be that most money managers fail to beat the market?
Have you ever been stuck in traffic and realized that the lane next to you was moving faster than yours? You quickly dart into that lane, only to come to a stop while the cars in your old lane start moving faster. Then you go back to the original lane only to have the same thing happen again.
Just like staying in your original lane during a traffic jam often yields the best results, so too with investing. Many investors do the “grass is greener over there” approach. They are always chasing last year’s biggest returns. Well, many money managers in the mutual fund industry follow the same pattern. To add to it, they have to pay fees each times they “switch lanes.” Every time they buy or sell out of a security, they have to pay commissions. This ultimately comes out of the shareholder’s pocket.
Should you never buy mutual funds?
Don’t get me wrong there are some good mutual funds out there that frequently beat the market, but they are few and far between.
Oh, and be warned, most brokers you talk to about index funds will tell you why mutual funds are so much better. Examine the points of their argument very carefully. Keep in mind that most brokers make a lot more money off of mutual funds than index funds (if they even offer them) and I will let you decide.
Technorati Tags: index funds, mutual funds
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The Advantages of Mutual Fund Investing
The goal of this post is to go over the basics of mutual fund investing. To start, a mutual fund is a company whose main objective is to professionally invest a pool of money in securities and earn a positive return for shareholders. By doing this, these companies allow you to share the rewards and risks of investing.
So when you buy shares in a mutual fund you are essentially buying stock or bond holdings in various companies, based on the underlying investments. Your shares are pooled together with the other investors’ shares, which allows for a high level of diversification.
Mutual fund investing has a few advantages:
- The funds are managed by full-time money managers. They research market and economic trends, and then use this information to make decisions about buying, holding or even selling securities to enhance returns.
- Diversification is one of the first things that anyone learns about investing. “Don’t put all of your eggs in the same basket, just in case you drop it you won’t lose them all.” The folks at Enron learned this the hard way as many of them who were fully invested in the company stock lost all their 401k savings when the company folded. Mutual funds help minimize this risk by spreading your money over a number of investments. By doing this the impact of one poor performer on your entire portfolio is greatly reduced.
- Many mutual fund companies offer convenient features, like automatic reinvestment, systematic payments and no-cost exchanges of funds. If you choose to, you can automatically reinvest any dividends and capital gains (profits) to purchase more mutual fund shares .
- Many mutual funds can be purchased with a low minimum investment. After an initial payment of $250, most mutual funds require as little as $25 or $50 at a time for additional investments.
- Liquidity is another nice benefit of mutual funds. Most funds offer you the ability to sell any or all of your fund shares on any business day the markets are open.
I think mutual funds are a great way for beginners to get started investing, (but even better would be index funds) Generally the risks are lower than investing in stocks, but of course the reward is more limited as well.
Anyone have any suggestions for beginners purchasing a mutual fund?
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Debt Snowball: Dave Ramsey’s method for getting out of debt
Creating a debt snowball is Dave Ramsey’s preferred method of getting out of debt. The strength of using this method is that it focuses on the behavioral side of finance rather than the mathematical. Since we are not robots that always do exactly what we know we should, I recommend this method for most people.
These are the simple steps to snowball your debt…
- Create a list of all of your debts: credit cards, car loans, student loans, mortgages, etc…
- Next to each one write down the total balance owed.
- Re-order these from smallest to largest debts (use Excel or Google Docs to make this simpler.)
- Pay the minimum payment on all of the debts - except the smallest one.
- Put every extra dollar you can find towards paying off that smallest debt.
- Celebrate like crazy when you get that first debt paid off.
- Take the amount you were paying towards the first debt and put towards the next smallest debt. Do this until this one is paid off.
- Celebrate again!
- Continue this process until each one is paid off.
What you will find is that each time you pay off a debt, the “snowball” gets larger. Since you are taking the amount you used to pay off the first debt and putting it all + the minimum payment that you were already paying to the second together, you are making more of an impact towards that debt. Each time you pay off a debt, the snowball gets larger and more powerful - which is great, because it just increases the speed that each debt gets paid off.
The numbers don’t lie
If you are like most logical people out there (like me 
) you are probably saying, “you could save more money by paying the highest interest rate cards off first.” You are right - calculators do not lie and they will give you the correct logical answer. Paying your credits cards off starting with the highest interest rate to the lowest is “mathematically” the best idea. But, let’s look it at from another angle:
If we DID what we knew we SHOULD do 100% of the time, using the mathematical approach would be best. But, we are emotional beings and even the most disciplined among us still have emotions and are affected by them.
Computers use logic 100% of the time. Humans do not. We were not created to. We make decisions based on our emotions. We get let down, we get encouraged, we feel motivated, we get scared, we feel hopeful, we feel like quitting. These are all emotional states that each one of us could feel on any given day!!
Knowing that we are emotional beings, the key is to use our emotions to our advantage. Just like jogging with the wind at your back, it is a nice little boost to use our emotions to give us a little edge. So, rather than tackling the debt like a math problem, we can tackle it in a way that will give us emotional boosts! After all, isn’t it better to get out of debt and spend an extra $100 in interest than to give up half way to our goal because we were discouraged?
Status Bars and Debt
Ever wonder why there are status bars showing you the progress of the item you are loading on your computer? It is to keep us from going crazy while waiting 10 minutes for the computer to do what we told it!! Even though that little bar moves slowly sometimes, it is encouraging because we know how much longer we have to endure the torture of waiting.
It is extremely DE-motivating when there is no end in sight. Without that “light at the end of the tunnel” it can be hard to keep going. That little bar that shows us the progress that we have made gives us hope. What if there were no status bars? Or what if you saw no progress on the bar until you got to the 70% loaded point? Would you keep waiting or would you reboot assuming it there was a problem?
When on the phone, have you ever been waiting on hold for 15 minutes wondering, “Did they forget about me? Should I wait it out? What if the never remember that I am on hold?” Do you cut your losses or wait it out having no idea when they will pick up, or if they ever will?
This is the advantage of using the snowball approach to paying down debt. If you focus on the highest interest rate, it could be months or even years before you reach that first milestone. Would you have the endurance to keep going that long without reaching that first milestone?
It is a wonderful feeling to be able to celebrate your first milestone - paying off the first credit card is a blast! Speaking from experience, I was fueled with motivation after reaching that first milestone. The fact is that most people are strengthened by seeing even a small goal accomplished. I love the snowball method because it focuses on reaching these small goals first and using them as motivation to keep going. Let me know how it works for you!
If you are having trouble organizing your debt snowball, you may want to consider Debt Snowball software.
Technorati Tags: Debt snowball, Dave Ramsey
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As promised, the rest of the M-Network and I are posting our best and worst financial decisions. I suspect that we all have more to say about our failures, than our successes. I guess that is why we are interested in helping others avoid some of the challenges that we have faced.
My worst financial decision
I decided that I was going to narrow this down to the single worst decision. If I was to make a list, there would be quite a few, and I am sure I will touch on them over time. But, for now my worst decision or group of decisions was:
The way I paid for college
At the time I had just about no concept of money or debt. I would have cared no more about having $80,000 or $10,000 of student loan debt. They were merely meaningless numbers to me that I didn’t face up to, because I figured I would take care of it later, when I was making the “big bucks” as a 22 year old college grad. Well, 22 came and my first “job” actually paid “small bucks” (about half of what I had assumed I should be making). Over the next couple years, I slowly began to get a grasp of the $30,000 student loan debt that I owed. The numbers were finally starting to sink in.
I was like many college kids, switching majors a few times, and finally settling on a business degree, because, “you can do anything with a business degree.” Or so I thought. The lesson I learned is that MORE doors will be opened with a basic degree, but since it is so unspecialized the job will most likely pay LESS.
Because I didn’t have a concept of what debt was, I didn’t care how much I was accumulating. Rather than going to a community college to get my general education classes out of the way, I preferred to have my ego stroked by saying that I was attending a 4 year college. What I was not realizing was:
- I was wasting a lot of money on a 4 year college as I was still trying to figure out what I wanted to do.
- When you graduate, your resume doesn’t show what college you started at. It lists where you graduate from.
- From the few classes I did take at the community college I was surprised to find that they actually required some work. In fact, some of them were more difficult than some of my 4 year college classes.
What I finally figured out is that I could have gotten the same degree, with an equivalent (if not better) education for a fraction of the cost.
My little sister took a smarter approach and began at a community college as she was searching for a major. She then settled on a specialized business degree and took as many classes at the local community college as she could, before transferring her credit hours to the 4 year college. She also chose to go the local state school (this was considerably cheaper than the private college that I attended) that had a reputable business program.
Two years later she graduated with a fraction of my $30,000 debt, a solid education, and a similar degree to mine from a better business school.
My Best Financial Decision
The challenge with the good financial decisions is that often times you will not see the fruit of it until years later. But, I think there is one financial principle that is foundation for just about all good financial decisions. It is repeated incessantly in the personal finance world, but that only increases its validity.
It is cliche, but needs to be repeated. It is simple, but not easy. It is what everyone who has money does, and what everyone who doesn’t have money wishes they could do. The best financial decision I have made was to:
Spend less than I earn
It doesn’t matter if you make $10,000 or $1,000,000 a year, if you spend more than you make you are in debt. Many people who are spending more than they earn will say that, “if I could just make a little more money, I would be fine.” Rarely, if ever, is this true. Overspending is not a money problem, it is a behavior problem.
I had a behavior problem in this area. I think I was no different than most Americans. I spent my money and wondered where it went. I was frustrated that I was falling deeper and deeper into debt. I wanted to be able to save and invest money, but I always said, “someday when I have more money I will do that.”
I finally decided that I needed to take action and work towards my goal of spending less than I made. I started a budget and learned how to quit spending too much money because, I knew it was not going to happen automatically.
It took me a couple of years to go from spending 115% of what I made to 85%, but only a few years later, I have already seen many benefits because of it. The good thing is that I know the best rewards from making this decision are still to come.
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Well, I think everyone KNOWS what to do with a raise, but the challenge is DOING it (My definition of personal finance is DOING what you KNOW you should DO). Personal finance is 80% doing and 20% knowing. Just incase you don’t know what to do with a raise, here are a few ideas…
Don’t spend your raise…
until you get it. I can’t even count how many times I have received the news of getting a raise and started spending the extra money before I saw it on a paycheck. Inevitably I would spend more than I actually was getting and when it showed up on my paycheck I would be upset because I spent more than the raise was. By waiting until I actually saw the money in my paycheck, I could enjoy the raise, rather than just watching it go out the door to cover my purchases I made the 2 prior weeks.
Expenses rise to meet income, and naturally we find a way fill the gap between expenses and income. This is why you need to make a plan in advance on how you will…
Allocate your raise…
in a way that works for your financial situation. Personally, my allocation plan is:
- 10% Tithe
- 20% Pay down debt
- 20% Retirement savings
- 50% Spend!!
These percentages frequently change based on the needs of the family (i.e. if we are in desperate need of a vacation or if we are planning a large purchase). The point is to have some sort of plan for the increase, before it comes. I have tried it both ways, and I much prefer allocating the raise over spending it in advance. If you can resist the urge to SPEND immediately, allocate your raise wisely, and follow through, you will be nicely rewarded with the comfort of seeing your financial situation improve.
Just following this allocation over the course of a working life would yield a huge retirement nest egg and house that would be paid off many years earlier than scheduled.
Enjoy your raise…
after all, you earned it. Don’t be such a good saver that you can’t enjoy spending money. If you received a raise, you most likely earned it. As you can see with my 50% going to spending money that I am very generous with myself. I love rewarding myself for all the hard work I have put into organizing my financial life.
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Budgeting with ING Direct
ING Direct has played a critical role in helping me get my financial life organized. They don’t advertise themselves as a great budgeting tool, but they really are. You could probably use this same budgeting technique at other banks, but I will show you why it is more beneficial at ING Direct.
1. Open multiple ING savings accounts
The first step is to open up multiple savings accounts at ING Direct (Yes, ING does allow you to open multiple accounts). At most other banks, this is discouraged, if not by the bank itself, by the amount of paperwork required for each. However, at ING once you have opened up your first account, any additional accounts can be opened with about three mouse clicks.
Each one of the accounts that you open will be something that you are saving (budgeting) for. For example, I have my emergency, vacation, car maintenance, entertainment, clothing, and any other savings funds at ING. I put a fixed amount into each account every pay period (ING can automate this if you would like).
2. Open up a ING Electric Orange Checking account
It is really this checking account at ING that makes this budget system possible. You could still use the ING savings accounts to budget without the ING checking account, but it will be much easier if you have the ING checking as well. And to be honest, I don’t think there is a better checking account out there that is better than ING’s.
ING’s Electric Orange checking is unique in a few ways:
- They do NOT offer checkbooks. It is a debit card based account
- You can send E-Checks to someone elses bank account for free
- It has a 3.93%(at the time of this writing) interest rate even with a $10 balance (try to find that at your local bank)
- Free ATM access at 32,000 locations across the country
- There are no overdraft fees. Instead of charging you $30 when you bounce a check, they just lend you the money until you bring the balance back up to $0. So instead of having a $30 NSF fee, you might have a $.50 interest charge. This alone is reason enough to switch. ING has saved me a lot of money with this feature.
3. Use the ING debit card to pay for items budgeted for
Once you have the first two steps taken care of and have saved up money in the accounts you are ready to go. Now is the fun part: SPENDING!! You have to do some work on the car? Just transfer the money from you car maintenance fund (this is a real-time transfer) to your ING Checking and head to the dealer or if you are like me and like to do car maintenance yourself, head to Autozone and swipe the debit card.
How is that for a simple budgeting tool?
I just get a lot of pleasure in simplifying my life. If you have ever used the envelope system for budgeting, you should be able to notice the advantages of this system. Like I mentioned earlier, you can probably do this at variety of banks, but I think it would be difficult to find a bank that offered all of the conveniences of ING as well as the great rates.
The negatives of using ING as a budget tool
The two things I would warn anyone trying the ING budget:
- Stay on top of your transfers from your ING savings accounts to your checking. If you do a lot of budgeted spending for a couple weeks and forget to do the transfers, it can be difficult to backtrack. Like most things in life, it works better with regular maintenance.
- You can only transfer FROM the savings accounts 6 times per month. This really hasn’t been an issue for me but maybe once or twice in the few years that I have been using the ING budgeting method. (But, I figured out a simple hack to getting around this restriction.)
If you are interested in signing up with ING make sure you contact me so I can get you a $25 bonus for signing up.
How to budget with other tools
If the ING budge method doesn’t interest you, then you could try the envelope system of budgeting. If you are looking for budgeting software to help you budget you can check out YNAB’s personal budget
del.icio.us Tags: How to budget , ING Direct
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I previously wrote a post called What is an IRA?, but I have had some inquiries about IRA’s, so I will try to keep it simple and explain Individiual Retirement Accounts a bit further for the beginners.
What is an IRA anyway?
- Well, an Individual Retirement Account (IRA) is basically an account that provides huge tax benefits when used to save money for retirement.
- It is an ACCOUNT that HOLDS investments IN it. I find that some people get this part confused, so remember IRAs are NOT investments themselves, they are only the ACCOUNT that holds the investments. Within the account you can invest in stocks, mutual funds, CDs, money market funds, and many others.
- IRAs can be opened at brokerage firms (Merrill Lynch, Edward Jones, etc.), online brokers (Zecco, Scottrade, ETrade), mutual fund companies (TRowe Price, Vanguard), and most banking institutions.
- You get to choose which investments go in the account. Keeping that in mind, many banks will not give you the freedom to invest in stocks and mutual funds, because they do not offer brokerage services (I know the larger ones do, so if you bank with them, go for it). But YOU are the one who decides what investments go in your account.
- You CAN open multiple IRA accounts at different places - keep in mind that there is a maximum amount that you are allowed to put in to your IRA each year ($4000 for 2007). I don’t recommend it; it gets messy. I know from experience. You have to keep track of how much you put in each one each year and make sure the combined amount doesn’t exceed the IRS limit. Another reason for not having multiple IRAs opened up is that…
- There is an annual fee of $30-40 charged by the brokerage firm or bank that you have your IRA with. Some are more, and some are less, but this is a good ballpark figure.
Roth IRA or Traditional IRA?
Of the two most common and basic IRAs, there are two types; ROTH and Traditional. The main advantage of the Roth IRA is that you use after-tax money to fund it, so when you reach retirement age you will not pay ANY taxes on the withdrawals.
The Traditional IRA, on the other hand, offers an up-front tax deduction, but commands taxes to be paid in retirement.
It is generally a safe assumption that the ROTH is usually is the better choice for most people. However, there are major differences between the two, so in order to get the best advice for your particular situation talk to a financial advisor.
There is a whole lot more to learn about ROTH IRAs and Traditional IRAs, but if you can honestly admit that you do not want to spend the time or energy to figure out which one will work better for your situation, then just pick one and start saving. It is far better to start saving, than do nothing while you try to figure out what to do.
Where can I open a Roth IRA?
So, you have learned the basics about IRA’s and you know that now is as good of a time as ever to start one, but where do you go to open one?
Really, you can open them just about anywhere: banks, brokerage firms, discount brokers, some mutual fund companies etc.
Just be aware that WHERE you open it may impact what investments are available to you. For instance, some banks only offer CDs in their IRA’s. www.TradeKing.com is a discount broker that I like (that is just about one of the cheapest places you can go). They allow you to buy mutual funds, stocks, bonds and more.
Questions to ask
No matter where you open your IRA, you should find out the answers to a few questions…
- Is there a minimum initial investment? How about minimum contributions?
- What types of fees are charged?
- Does the company offer automatic contributions?
- What investment options are available? Stocks? Bonds? Mutual funds? CDs?
If you open the account online, you should be able to find the answers to these and any other questions you may have on the company’s website. If not, feel free to call them. Most of them are so excited to have new customers that they will make the process as painless as possible.
(added 04/21/08) Zecco is another option for opening an IRA. They actually offer free stock trades. I haven’t opened an account with them yet, but I am going to be opening one soon. I will write more about it when I do…
Just find some place that you feel comfortable with to open your IRA. As I mentioned the options are endless, but even if you decide you want to move your IRA - you can without much hassle. I will have to go over IRA rollovers later.
Just remember, the hardest part is just taking the first step. It may take you an hour or two to open an account, but it will be well worth it when you look back in 20 years.
del.icio.us Tags: What is an IRA account?
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