Archives For Budgeting

What Are Your Financial Priorities?

Michelle —  September 17, 2012 — 1 Comment

Everyone has some sort of financial priority in their life.  Setting priorities can be very good for a person or a family. If you know what you are striving for, then you most likely will try a little harder and put more effort towards it.

Without priorities, then everything would be all over the place. How would a person even know where to start, where to end, when things are going run, etc.? How will individuals know when to celebrate completing a goal as well?

Maybe you want to eliminate all of your debt, give a higher percentage of your income to charity, go to school, pay off your house, retire early or just have financial freedom. Each person is different in how they value different things in their life, and their different financial priorities. One thing to keep in mind that even if financial priorities are similar, you shouldn’t always compare yourself to others. Different people complete their goals differently of course.

How to set financial priorities for yourself:

1. Decide what you value the most.

Make a list of what’s important to you. You probably have a very long list of things that you want to accomplish. What honestly cannot wait another second? Try to determine what should be done first and what can wait a little while.  You can sort through the rest of the financial things you need to do as well, and maybe you can contribute to the rest equally but put most of your might to your top priorities.

Think about your future and think about where you want to be and what you want to have done. This is the first step!

2. Let people join you.

If there are others, such as family and friends, who might have similar priorities as you, then let them join you. You and them can most likely push each other to achieve your similar goals. Talking about things out loud can also be helpful.

Also, sit down with your family to make sure that everyone is on the same page. If everyone agrees on the financial priority, it will make it much easier, and of course, much less arguments.

3. Make sure your goal or goals are possible and realistic.

Creating a goal of paying off all your debt in one year when you know it’s absolutely not possible, then it’s probably not a SMART goal. A smart goal is specific, measurable, achievable, rewarding and track-able.

If your goal is not possible, then you are most likely spending way too much time (and wasting time) on something that will not work out in the end. And then you are also sidetracking other goals that you should be working on as well.

4. Keep track and always adjust.

You should constantly be keeping track of your goals. Try to set maybe a certain time for when you will track how you are doing. Maybe daily (if you want to be very on track), weekly, monthly or some other amount of time.

This way, if something does happen to be OFF track, then you can try to adjust it. It’s of course much better than waiting to see how you’re doing a year later and figuring out that you are way off track what you wanted to be.

5. Be prepared for things that will throw you off track.

In the end, something will most likely come up. If something sidetracks your goal or priority for a little bit, don’t let it ruin everything. Realize that things will come up and not everything can be scheduled perfectly.

What are your priorities?

What’s on the back-burner for you now?

I am a Handy Man.

This statement is a huge exaggeration. Not only do I know very little about cars or maintaining a car, but I know even less about home repairs. My wife and I have been considering buying a home in the next few years and we are currently saving up a down payment. Part of me wants to ignore the inherent responsibilities that come with owning a house. Sure, this may be a great way to build wealth and minimize future expenses. But it comes with responsibilities. The other part of me knows that I need to learn more about basic home repairs.

Basic Home Repairs / Responsibilities

Again, I am no expert, but as I have been doing some research, there are a number of roles that a home owner must take on if he/she wants to save some money:

Carpenter - One of the fundamentals of home maintenance is doing some basic home renovations. While big projects, like repairing a roof, may be too much work to take on yourself, there are some projects that you can do. Nailing loose boards or replacing trim around a door frame are some great examples.

Painter - Every home needs to be painted occasionally. While some houses have siding that does not require painting, there is still the inside. How long can you live with those off-white walls? You can pay thousands of dollars just to have the exterior of your house painted. Painting your own house is a great way to save money and it can be relaxing.

Electrician - This is one area that people will probably question. You have to be careful when playing with electricity, but there are still some basic functions of an electrician that you can do yourself – like changing a light switch or outlet.

Plumber - Again, if there is a huge emergency, you may want to call an experienced plumber. But, why not learn the basics. It could save you lots of water damage if you know how to shut something off or direct water flow elsewhere.

How to Get Started

There are many ways that you can get started in doing some basic home repairs.

Research - The first thing that you need to do is to research. With the internet, there are tons of sources for how to do basic home repairs. I have been researching how to do some of the basic stuff like replacing light switches, flooring, plumbing, etc. After learning the basics, I will probably look into bigger projects like kitchen remodels, diy conservatory, and adding on another room.

Practice - There is no better way to learn than to start doing! Practice what you are learning, while remembering that you aren’t going to be perfect the first time. You can always correct your mistake, so don’t be afraid to implement the skills you have learned.

Readers, do you perform your own repairs? Or do you always hire it out?

Are you overwhelmed by how difficult it seems to plan for your future? Do you find yourself wishing it were easier to get ahead? For those of us who don’t make a lot of money, it may be hard to save up an emergency fund or a cushion for the expenses in life that sneak up on us. People preach about having money in reserve for these unexpected expenses, but in reality, it’s much harder to do.

Yet, that doesn’t mean it is impossible nor important. Putting money aside for these type of expenses is very important because it keeps you from digging a whole. While not all debt is evil, it is important to avoid the cyclical nature of it.

Limited Options Without an Emergency Fund

People without an emergency fund saved up are left with fewer options. For those who don’t already know this, fewer options is usually a bad thing. It forces you to make decisions that you may regret later. The more options you have, the more possibilities of selecting a “good” option and not just one that is the best of bad decisions.

Borrowing Money: If we are honest, most people, when faced with an unexpected expenses, are forced to borrow money. The people who are smart enough to limit their negative impact will often reach out to friends and family first. Friends and family are there for these type of emergencies and should be considered before things like payday loans online, but they won’t solve all of your problems. In fact, asking family members for money too often will often ruin the relationship.

Bad Credit / Collections: The only other option available is to let the expense go unpaid. This will often result in it going to collections and this can ruin your credit for a long time. While you may be left with little or no options, you want to do everything you can to avoid this option.

Be Pro-active!

The best thing you can do is to be pro-active. It sounds like every other advice out there, but it so true. Don’t wait for an emergency to pop up. This means starting with spending less than you make. If you spend every dollar of your paycheck, how are you going to afford the future expenses that are bigger than the paychecks? Not to mention, continuing to pay for the ongoing expenses like rent or insurance.

Start by saving just a little bit at a time. I think if you can see yourself saving a little, you will not only feel more comfortable in yourself, but you will realize how much MORE you need to save.

Stop giving yourself limited options in life. Take control of your finances and act today.

Building an Emergency Fund

Michelle —  August 28, 2012 — 4 Comments

An emergency fund can be very handy at times. An emergency fund can cover all different types of potential “emergencies.” It all of course depends on the person or family.

An emergency can be job related. Maybe you lost your job, will be taking a pay cut, taking reduced hours or so on. Maybe your car broke down and that is the only form of possible transportation for you. Your emergency fund could then also cover buying a new-to-you car as well. Of course, an emergency fund can also cover all types of other events: medical, house repairs, and so on.

However, it can also be very hard to build up your fund. Determining the amount you need, building up that amount, determining what will constitute a financial “emergency,” and so on can be difficult.

The first step is to decide how much you want/need in your emergency fund. Different financial advisers recommend different amounts. If your job is steady, then 6 months might possibly be either too much or just perfect. If you are self-employed, then it is possible that you might want a higher amount in your emergency fund because the likelihood of you having to dip into it might be a tad higher.

If you’re paying off debt, the recommended amount is around $1,000 by some advisers so that you can focus more on debt. I’m different though, I have debt, but I prefer to keep my emergency fund full at around $15,000.

For us, we prefer to have a fully funded emergency fund. We are more comfortable with it being fully funded, so that we are fully prepared. Our emergency fund is designated towards any potential job losses or any potential repairs that may be needed around our house.

We have a friend who did not a have theirs fully funded, and they had to pay $6,000 for a whole new air conditioning and furnace system in their house. In the end, I believe that had to just put it all on a credit card, and it would be hard to pay off a $6,000 credit card bill within one month so that it does not accrue.  This is something that we definitely do not want to happen to us. And we also don’t want any extra stress added on to us financially if it did happen. And this is what makes having an emergency fund worthwhile.

The $15,000 in our emergency fund would pay our basic expenses for around 6 months if something were to happen, or if we needed something to be fixed, then we won’t have to accrue more debt to get something fixed around the house.

Another question to ask yourself is where and how your emergency fund money will be stored. Do you prefer to keep it all close and store it in your house (this is not something I recommend)? We keep our emergency easily accessible in a savings account. Yes, it accrues very little interest, but it is readily available for us in case there is some sort of financial emergency where we need quick cash. Some also invest their emergency funds in the stock markets or put it into money market accounts.

There are several ways to build up your emergency fund quickly:

  1. Pay yourself first. This will help you to save quickly. Designate a set amount of money form each paycheck to go towards your emergency fund.
  2. Save as much as you can. This can include eating at home as much as you can, stopping your clothing spending for some time, watching your utility usage, eliminating or reducing your cable or cell phone bills and so on.
  3. Find ways to increase your income. Maybe trying finding a part-time job. This can include working maybe at a retail store, waitressing or finding a side gig. Side gigs can include online income, babysitting, walking dogs, and so on. Even if the pay is small, they will add up quickly and help you reach your emergency fund number quickly.

How did you choose how much to put in your emergency fund?

Starting a Budget

Michelle —  August 20, 2012 — 5 Comments

When someone says budget, there’s always someone out there who lets out a huge groan. But let me tell you, budgets are not always boring! If you have an end goal in mind, maybe it could even be fun to beat your goals.

A budget can help you save for different things in your life: a house, car, college, and so many other things. You can save more now, in order to have what you want later. Or you can track your budget in order to make sure that you are on the right track.

Now, I don’t specifically track each category in my budget (even though I probably should), but I do make sure that I’m spending the amount that I want/need to.

We don’t spend more than we bring in each month, and whenever we make a purchase, we think about how it’s going to affect our cash flow, money situation and so on. As long as we stay within our budgeted amount, I am happy.

When budgeting, there are many things to keep in mind, but after a while, it’ll all come very easily to you. Try not to feel too intimidated at first, as that is how it will probably feel to you if you have not budgeted before.

Steps:

Know your full income. Many people who receive their first check from their first job are shocked by the amount that they pay in taxes. Make sure that the budget you are calculating is after-tax, or you might have a big problem. Taxes eat up a big part of your income. I’ve always heard of stories of people who would buy a house, car, etc. without knowing exactly what their after-tax monthly income would be. They would just take their annual salary amount, divide it by 12 (which is another mistake because paychecks don’t easily divide like that) and buy everything off that salary.

Determine how much you want to spend. What’s your goal? Do you want to save the complete other half of your after-tax income, put 30% towards debt, or something else? Also determine how much you want to spend in each category. I’ve always heard to not spend more than 35% of your income on housing, but of course in some areas where cost of living is more expensive, this is not always possible. Right now, our housing (mortgage, property taxes, insurance, etc.) is around 15% of our after-tax income, it used to be much more though.

Be realistic. If you’re always spending 50% of your income (or some other amount) on restaurants, clothes or something else that can be considered a “want”, then do not allocate an unrealistic number such as 20% to your “fun money” budget. Be realistic about where you are spending, and then use each budget month as a way to improve your budget :)

Include entertainment in your budget. Having no “fun” money in your budget. Making a budget and saying that you will never do anything that will require money is most likely not very realistic. Include at least a little bit if you have room for it.

Check your budget once a month. See if anything needs to be adjusted (or maybe even lowered!). This is a big step when it comes to budgeting! You need to see and make sure if your budget is actually working for you. There will most likely always be something that needs to be adjusted, and maybe you can even find areas that you can decrease, or allocate to other areas.

 Why I budget:

  1. To feel financially secure. I make sure that I spend less than I bring in, and this is so that I feel in full control of my financial life and so that I feel less stressed. I want to be able to pay off my debt and retire early.
  2. Not to sound selfish, but I also budget so that I can buy what I want and feel a little less guilty when I buy things that I do want.
  3. To travel. I love to travel and by having a budget, I am able to do more of the fun things that I want to do.

  Why do you budget?

If you are trying to get your finances in order, you may be reading a lot of advice on what you should do. Everyone is quick to say that you should do this or that, or offering advice to you (even though they don’t know you) on how you should invest. The list goes on and on, but perhaps the first step is to identify what you should NOT do.

Often times the things that keep us from financial security are not the tasks that we forget to do (or didn’t know about), but the unhealthy things that we failed to recognize. Here are several indications that your finances are not in order, despite what you may or may not think.

Carrying a Credit Card Balance – Even if you are doing all other things right, carrying a credit balance is an easy sign that you are throwing money out the window. Most credit cards have high interest rates and it will cost you big time to carry a balance. But that’s not the worst of it – carrying a credit balance is often a sign of consumer debt. If you carry a balance on these pieces of plastic, it may be time to honestly ask yourself if you are buying stuff that you don’t need and can’t afford.

Living Paycheck to Paycheck – I have trouble understanding why people would want to live this way. I imagine that they don’t want to do it, but see no way out. I understand that if you are in a tight situation, you would consider all sorts of loans to provide temporary relief (including parrot loans), but at some point you have to get back on track. If you are waiting for your next paycheck in order to pay off some of your bills, it might be time to consider saving up money over the next few months to get yourself out of this horrible financial place. It is possible, regardless of how much money you are making, to live with some cushion and (even more importantly) peace of mind.

“Can’t Afford” to Save for Retirement – If you find your saying that you “can’t afford to save for retirement,” it might be time to re-prioritize your finances. Almost everyone can afford to save for retirement. It’s just a matter making it important to you. To find out if you can really afford it, ask yourself these questions:

  • Am I eating out more than once a month?
  • Do I go out to the movies frequently?
  • Do I buy my lunch?
  • Do I own clothes that I don’t wear?

While this is just a few of the many questions that you could ask, if you answered “yes” to any of them, then you have money to save for retirement. Retirement planning is all about prioritizing the long-term goal of financial security when you are old over things that you want now. It’s that simple.

If you can identify with any one of these 3 signs of dysfunction, it might be time to re-evaluate your approach to your finances. Maybe it’s time to set things straight and live a better life. You have the power to take charge of your finances. What are you waiting for!

What are other signs of dysfunctional finances?

Top 5 Mortgage Mistakes

Jon —  April 19, 2012 — 5 Comments

As someone who is looking forward to purchasing a condo next year, I have been doing a crazy amount of research on mortgages.  Honestly, I keep stumbling upon mistakes that people have made with mortgages.  Since I don’t want to be someone who makes a mistake with their mortgage, I’m planning on soaking in all useful advice and attempting to make the wisest decisions I can going forward!

So, what are the worst mortgage mistakes one can make?  Well, I’ve compiled the top five mortgage mistakes and hopefully you can learn from what other people have done wrong and not make the same mistake!

1- Taking out an adjustable rate mortgage

Can someone say 2008?!  This is what caused our most recent recession among some other things.  An adjustable rate mortgage plays into the greedy side of Americans and allows you to buy a bigger house than you can afford.  The first few years, you’ll have a really low interest rate but then this rate ends up shooting up over time.  The problem with this is that you’ll end up drowning in interest payments and more than likely lose your home!  Talk about humiliating…

2- Settling for a reverse mortgage

For the crowd of age 62 and older, a reverse mortgage may seem inviting but it’s designed to bite you in the butt.  What a reverse mortgage does is provides a stream of income by pulling out funds from your home equity.  This can be paid out through an annuity or monthly payments.  It’s up to you what poison you pick because either way, you’ll be faced with hefty fees and you will slowly lose ownership over your home and have to hand it all over back to the bank.  Does not sound like fun to me!

3- Skipping the down payment

If there is one thing you need to remember from this article, it’s that you NEED to put down a down payment!  Why you ask?  It’s not unusual to find yourself upside down with your mortgage if you don’t.  You can end up owing more money than your home is worth.  At this point, it’s flat out painful.  You want to avoid this situation.

4- Can anyone say exotic mortgages?

I bet you’ve never heard of these bad boys.  Exotic mortgages may sound enticing but they are dangerous financial vehicles!  Instead of building up your equity, exotic mortgages produce negative equity.  Yes, you’re naming your payment price, but at some point, all the debt you took out for your mortgage is going to come due.  As the years go on, you are increasing the amount you owe.  It’s counter-intuitive and I advise that you avoid this at all costs.  Owning a home is not worth this risk!

5- Liar, liar, pants on fire: liar loans

Liar loans make me sick just thinking about them.  Not only are they irresponsible to take out but they can ruin your financial life.  At the core of a liar loan is that you don’t need to produce any verifiable documentation in terms of income and job stability.  In theory, people can lie on these loans and the bank will just assume you’re telling the truth.  Because you lied on your income statement, you will soon find yourself not being able to make the monthly payments.

Don’t fall for these mistakes!

In conclusion, don’t fall for these bad decisions.  While they may seem cool and unique, they are designed for your failure.  There is something to be said about ethical mortgages and choosing responsibility over showing off a big house.  At the end of the day, you should only be buying enough house for your needs.  It’s anti-American to do that but times are changing!