Financial Planning Basics

Swallow your pride and put aside any embarrassment you may feel

It is extremely hard to look in the mirror and say to yourself, “I’m in financial trouble.”  If you’ve admitted to yourself that you are in financial trouble, you may be apprehensive about asking for help.  Overcoming the stigma that goes along with being in financial trouble can be overwhelming.  However, what would be more painful?  Drowning in debt and the stress it causes or the admission that you are in trouble and taking the first step towards financial health? Perhaps the following quote might help:

“We must all suffer from one of two pains: the pain of discipline or the pain of regret. The difference is discipline weighs ounces while regret weighs tons”.  –Jim Rohn

Take the first step, become disciplined.  

If you need more help, read Dave Ramsey's book, "The Total Money Makeover".  This book is very inspiring and informative and his "Baby Steps" are mirrored here.  

Stop incurring new debt and start to live more frugally

Stop incurring new debt.  You will never be able to get ahead financially unless you get rid of your credit cards. 

There are many things you can do to begin to live more frugally.  The first is to develop a budget and live by it.  However, living by a budget doesn’t mean filling in the vacation category first, or padding the eating out category. It means prioritizing your needs; allocating the money you earn before you spend it.

When Andrea and I decided to get out of debt and live on a budget we had no clue where to start.  How much DO I spend on gas a month?  How much DO we spend on groceries? How much DO we spend on entertainment?  How much SHOULD we be spending?  To answer these questions, we decided to continue doing what we were doing but to get a receipt for every purchase!  We put each receipt into a huge envelope. At our first budget meeting, we sat down at our kitchen table and went through each and every single receipt and categorized each purchase.  We figured out that we spent $250 a month on gas, $400 dollars a month on groceries, $300 a month on entertainment and that we were “leaking” over $500 a month (meaning we had no clue where that money was going). 

The budget fixed everything!  We knew where each red cent was going.  We were able to find money, to start paying down our incredible debt load and to save quite a bit of money for our first son’s arrival. 

The first budget is always the hardest.  The second is a little easier and by the third month you’ll be getting a hang of what expenses you’ll have coming that month and how to allocate money appropriately.

To help make sure we weren’t spending the utilities money on entertainment or mortgage money on groceries I did something my family found rather ridiculous.  I set up savings accounts for all major categories (Utilities, Insurance, Christmas Savings, Transportation, Medical, Housing Projects, Clothing, and Dog). 

Example:

Every pay period I transfer half of the cable bill, gas/electric bill and cell phone bill to the Utilities account; half of the mortgage to the Mortgage account; half of the clothing budget to the Clothing account; etc.

After years of budgeting this way, I felt validated when I came across a well-respected financial guru who also budgeted this way. I was glad to see I wasn’t the only nut job...I mean... person who felt this was a great way to budget.  As long as you are disciplined, you are guaranteed to always have money for your bills at the end of the month.

Living more frugally doesn’t mean living without.  It means finding little things to do differently that can make a big difference in saving you money. 

Things you can do to start living more frugally:

§  Stop buying coffee and make your own

§  Brown bag your lunch

§  Do not use ATM’s outside of your bank’s network

§  Couponing

§  Drive cars until they die, When the car does die, buy a used car instead of a new car

§  Create a weekly menu and shop to it

§  Borrow books from the library instead of buying

§  If you carry credit cards, do not carry a balance

§  Increase the deductibles on your insurance policies

Save a small emergency fund

When an emergency happens you have need a reserve to go to.  Having a reserve will help prevent you from going into more debt.  How much this emergency fund should be varies among whom you ask.  Some experts believe $1000 is enough; others believe $2000 is appropriate.  I tend to lean toward $2000 because it creates a little more comfort room.  We actually had our washer, dryer and dishwasher go in a 6 week period.  Having more than $1000 in our emergency fund was huge.  Yes, it takes longer to save $2000 but some, like us, need the security this provides.  As you become more comfortable and you feel the $1000 is security enough, you can apply the extra $1000 to the debt you are currently working on.  

You will have an emergency and you will need cash to pay for it. 

Payoff debt

• Snowball (See Get Out of Debt Page)

    

Emergency fund part 2

After you have paid off all of your debt, except the house, you'll start saving a true emergency fund.  If you were to lose your job, you’d want 3-6 months of living expenses to help you pay the bills until you find a new job. Should you save 3 months or 6 months of expenses?  If your position is fairly stable (government or unionized employee) then you can lean towards the 3 month level.  Otherwise, I suggest saving as close to 6 months of expenses as you can. 

Fund retirement

15% of your gross salary should be going towards your retirement.  If your company matches that match would go on top of the 15% you contribute.

Example:

If your annual gross salary is $45,000 a year, you should be saving $6,750 a year towards your retirement.  If your company matches up to 3% ($1,350), you should be saving $6,750 + $1,350, or $8,100 a year.  

Fund College Education

Once you are able to save 15% of your annual income for retirement it's time to start thinking about saving for your children's college education.  Fidelity recommends the following percentages of income as a guideline (per child) for investment into your children's college savings accounts:

Household income     Public Education     Private Education
$55,000                                3.5%                        9%
$75,000                                3%                           6.5%

$100,000                              3%                           5.5%
> $150,000                           2%                           4%

Payoff house

Whatever you can afford after contributing to retirement and funding the kid’s college, throw everything you can to pay off the house. 

Save

Now you can build wealth!