Roadmap To A Better Financial Health
May 9, 2008 :: Money :: 4 Comments
In the past few years, Americans average savings rate has declined precipitously — in fact the current savings rate is practically zero. This means that as a society, we are not saving any money. Worse, we have a habit of borrowing to fuel our consumption. We are spending more than we earn, and that’s a recipe for financial disaster.
In this article I’d like to present a potential road map to restore your financial health.
Recognizing the problem and having the determination to fix it
I believe self-awareness is an important first step in any endeavor. Personal finance is no different. Here are some signs that you may be in financial trouble:
- You only pay the minimum amount due on your credit cards
- You are not saving money toward major financial goals, such as down payment for a house, retirement, college education, etc.
- You are borrowing to meet end needs
Does any of this describe you? Now that you recognize the problem, it’s time to put your foot down and make the commitment to fix it. It’s time to establish financial goals for yourself.
Understanding the Basics of Wealth Building
Before you act, the next step is to understand the mechanics of wealth building. Wealth consists of four components: income, expenses, assets, and debt. In short, to build wealth you have to:
- Reduce your expenses
- Reduce and eliminate your debt
- Increase your income
- Increase your assets and their return rates
Basically, you want to earn more than you spend so that you have enough left over to pay off your debt. Then save and invest your money so that it works for you.
Reduce Your Expenses (Frugality)
Building wealth is like trying to fill a bucket with water - you can’t fill it up if the bucket is full of holes. Your expenses are these little holes. Your first priority is to make these holes smaller, or plug them up entirely. The key objective is to spend less than you earn — or earn more than you spend — so that you have enough left over to pay down your debt and invest in your future.
A good way to start is to enter all your information into an online expense tracking tool like Mint.com. For example, Mint.com will provide you with a categorized list of expenses. Once you have this list, start from the biggest category and work your way down, because saving 10% off a $5,000 category is a $500 saving versus 10% off a $500 category is only a $50 saving.
Some of the questions you want to ask as you go through this exercise are:
- Do I need this?
- Is there a less expensive alternative?
- Where can I cut costs?
Mint.com built-in “Ways to Save” feature is a great place to start. However, don’t stop there and think outside of the box. For inspiration, do web searches for “ways to save money” and “frugal ideas” (or start right here with our 50+ Frugal Tips, Ideas, and Resources).
Pay Down Your Debt
At this point, you should begin to see left over money from each paycheck. The best way to use this money is to pay down your debt. There are many ways to approach this, but a good place to start is to pay down debt with the highest interest rate first.
Before you seek out debt consolidation services, you should do some research to find out what you can do on your own. One of the most respected debt elimination guru today is Dave Ramsey. You could start by doing a web search for “Dave Ramsey” and read up on his methodology.
Perhaps with exception of your home mortgage, you should consider eliminating all your debt as soon as possible.
Start An Emergency Fund
While you are paying down your debt, don’t worry about putting cash aside for emergencies. You can always whip out your credit cards for that. This is not a very popular view, but which one would you rather do: pay off credit card debt to save money on interest…guaranteed, or put money aside in case of emergency? I think Suze Orman also said the same thing in her book: The Money Book for the Young, Fabulous & Broke
However, once your debt has been eliminated, you should immediately start an emergency fund.
Again, there are a lot of opinions on how big the emergency fund should be. For our purpose, saving enough to cover three months worth of expenses would be a great start.
The Next Steps
At this point, you are no longer in debt and you have a sizable emergency fund - congratulation! Now you have the financial flexibility to do many things without worrying about how you’ll put food on the table, or how to overcome the next emergency.
To complete our journey, here are three things to do (in any order or simultaneously):
- Increase your income potential - This includes improving your skills to position yourself for a better job or a promotion, taking on a second job, and finding other ways to supplement your primary income.
- Save for short-term goals - Instead of borrowing to buy things that you want, at this point you should think about saving for them. High-yield online saving account and certificate of deposits are some of the best way to grow your money and preserve your capital to meet short-term goals. Some of these goals include saving money for your first home, your college tuition, and business start-up fund.
- Invest for long-term goals - Money meant for longer-term goals such as savings for your retirement and college savings for your children, should be invested. It would be difficult to address this complex topic here, but a great strategy is to invest in a globally diversified investment portfolio consists of low cost passively managed funds that reflect your risk tolerance level and investment time horizon.
Have a great weekend!
Photo by Doug Greenberg via Flickr
Frugal Or Cheap? Here’s A Test
May 7, 2008 :: Frugal Living :: 26 Comments
Here’s some mid-week fun for Moolanomy’s readers. Have you ever wondered if you are frugal or cheap? I do. I always consider myself frugal, but my wife calls me cheap — go figure!
Here’s a little test. Just answer the 10 questions below and write down your answers on a sheet of paper.
Are You Frugal Or Cheap?
1. Do you eat out (not counting lunches at work)?
- All the time
- 2-3 times a week
- 2-3 times a month
- Never
2. When you eat out, do you?
- I order whatever I crave
- Order an entree for each person and take leftover to go
- Share our meals to save some money
- I don’t eat out!
3. What do you drive?
- The latest and greatest 2 years lease can buy
- I buy new car every few years
- I always buy used car
- I don’t own a car
4. What kind of TV do you have?
- 1080 HDTV, of course!
- A flat screen TV, but not the latest and greatest
- I still have the one I bought 10 years ago
- I don’t have a TV
5. What cable/satellite package do you have?
- Premium channel with everything under the sun
- Just the basic channels so I can watch the news
- Whatever I get with the rabbit ears
- I don’t have a TV
6. You have some old clothes, do you?
- What are you talking about, I don’t have old clothes.
- I donate them when they get a little older
- I turn them into rags
- I am still wearing them
7. When you buy something, do you?
- I buy what I want, whenever I want
- I occasionally splurge on what I want
- I only buy what I need, clip coupons, use discount cards, etc.
- I avoid making any kind of purchases
8. When you receive gifts, do you?
- I take them back to the store to trade up
- I keep all my gifts
- I may return or re-gift some
- I sell them on eBay for cash
9. When you buy clothes, do you?
- I always shop brand names
- I usually buy when they are on sale
- I usually shop at goodwill and thrift stores
- I ask my friends and family for hand me downs
10. Regarding your lunches, do you?
- I always go out to the local restaurants
- I mostly eat low cost take out lunches
- I occasionally pack my own lunch
- I always pack my own lunch
Rate Yourself
For each question, give yourself: 1 point for any #1 answer, 2 points for #2, 3 points for #3, and 4 points for #4. Add up the points and rate yourself:
- 35+ = You’re definitely cheap
- 25-34 = You’re frugal. Good job!
- 16-24 = You’re not frugal, but you appear to be reasonable with your spending habits
- 10-15 = There are a lot of opportunities for you to save money
I scored 20 points. Look like there are some opportunities for me to be a little more frugal.
Here are a couple of frugal versus cheap to wrap up the article:
- Crossing the Line: When does frugal become cheap? at Being Frugal
- Frugal vs. Cheap at Blunt Money
- Frugal vs. Cheap: Where Do You Draw the Line? at Five Cent Nickel
- Thrifty vs. Frugal vs. Cheap at AskDong
- Frugal versus Cheap at I Will Teach You To Be Rich
- Frugal vs. Cheap at Money Walks
Photo by Bright Star via Flickr
Mint.com Money Management Software Review
May 6, 2008 :: Financial Planning :: 3 Comments
Money management is a tedious endeavor for many of us. It takes a significant amount of time and energy to keep track of expenses, come up with a balanced budget, and figure out ways to save money. Personally, I put my finances on autopilot and don’t worry about these things. However, I have been enjoying the greater level of financial clarity ever since I started using Mint.com.
Put Your Expense Tracking On Autopilot
It’s surprisingly easy to get started with Mint. The first major step is to add my financial accounts to the system –- i.e., banking, credit card, brokerage, etc. When this is done, Mint.com downloads all the information, categorizes everything, and provides me with an up-to-date overview of my finances in one location.
The auto-categorize works well, but it occasionally needs some manual adjustments. This first step is a great way to understand my financial behavior. This is a good place to work on my largest expenses and see if anything could be reduced or eliminated.
By the way, I am still trying to figure out why my utilities won’t show up in Mint. I should probably post in their support forums, but haven’t got around to it yet.
Never Pay Another Late And Overdraft Fees Again
The second neat feature is the alerts function. I can set a variety of alerts to notify me via email or mobile when certain conditions are met. Some of the alerts include:
- Low Balance –- This is a great way to avoid bouncing a check, which could result in numerous other fees -– i.e., bounced check fee, late payment fee, finance charge, etc.
- Credit Card Bills –- Send me warning ahead of payment due dates.
- Large Purchases –- This is a great way to monitor my credit cards, especially for banks that don’t provide this feature for free.
- Over Budget –- Send me reminders to keep my budget on track.
Find Better Deals To Save More And Earn More Money
Another great feature of Mint.com is the “Ways to Save” feature -– although, ways to make the most of your money might be more accurate. Some of the “ways to save” include:
- Identify bank that offers higher interest rate
- Identify credit cards that offers lower interest rate and better credit card reward
- Identify lower cost service providers
Even if you are an expert at budgeting, Mint.com can still save you tons of time and offer ideas on how to save and make more money. If you haven’t try it already, just head over to Mint.com -– it’s free.
