One of my "resolutions" for this year was to get a better grip on my personal finances. And I have to admit, that's one of the ones I've done pretty poorly at thus far. At the beginning of the month, we had a special two week series on personal finances at church, which I thought was very good. It was taught by the man who has been our pastor's "coach" as we've launched this new congregation at McBIC that we call CrossWalk. He's not a professional financial guru, he's just a guy who has had his finances get the best of him, and then worked his way out of it through discipline and dedication. He mainly talked a lot of common sense, which is often very lacking in how Americans handle their money.
Anyhow, in a lot of ways, I was not someone who was a key target audience for much of his message. Much of it centered around getting out from under debt and the like, and really, that's never been an issue for me. I don't pretend to be a financial expert, but one thing I've always prioritized is living within my means and not spending more than I have. That's left me in excellent relative to the average American. I have zero credit card debt, and in fact no consumer debt of any kind. I have my school loans, which thanks to record low interest rates when I graduated and consolidated, and the rate cut I got as a result of making my first 4 years of payments in time, are now at 2% interest. I also have my mortgage, and thanks to the amount of sweat I put into the house on the front end, I have a fair amount of equity in the home, given that I'm only 3 years into the mortgage. So, all told, I have a positive net worth, which is nice.
Where I have faltered on the financial front is in savings. I'm in a very good place now, but if I found myself out of work for more than a few weeks, or had an extended health issue, I'd likely be left with little choice but to run into a good bit of debt. And so that has been my motivation to really work on my finances. That work has jumped even higher on the priority list in the last several weeks, as I'm facing the possibility of going from 2 roommates to 0 roommates, at least for a period of time, in July. Additionally, I work on contract and don't have any guarantees regarding my job past mid-October.
So, I made a few immediate resolutions. I just got a raise at work. Now, this isn't anything massive, just your standard annual inflationary type raise. However, if I can couple that raise with a few meaningful reductions in my spending, I could develop some very meaningful margin in the budget. So, the first thing I did was look at things I could easily cut and barely notice. Surprisingly, there was at least 100 dollars a month available right there, although some of them I can't do right away due to contracts and so forth. I was very fortunate to be just finishing up my cell phone contract last month, so I used that opportunity to change providers and move onto my family's share plan, where I'll just be paying for the extra line and a little bit to cover my share of the minutes. So right there, I got a savings of 40 dollars a month that I won't miss at all. Other things on the docket include a reduction in my TV package (appropriate since I'm watching less TV anyhow), and a cut back in some online sports games I play.
In addition to reduction in those "fixed" monthly costs, I wanted to cut back on some of my unnecessary day to day spending. First up on the docket was fast food and other kinds of non-grocery food expenses. I've been saying I want to cut back on that stuff for quite a while, but it's really hard to do anything concrete about that since it's cash spending, especially it's just me and I don't really have anyone else looking at my spending. So, I resolved to do something that I'd heard about many times but said "Nah, I don't need to do that." I determined how much I was going to allow myself to spend on that sort of thing in a month, and I put that much cash in an envelope in my wallet. When the envelope is empty, I'm done for the month. I was even really good about this, because I started about 4 into the month, and I deducted the 22 bucks I had spent on this sort of stuff over the week before. Anyhow, like I said, I'd spent about 22 dollars on this sort of stuff in first several days of the month. From over the next 19 days, I spent 8 dollars. It's absolutely incredible how easy it is to do without that sort of stuff when you give yourself a reason to think about it. There were probably weeks prior to this month where I would have spent 8 bucks in the week just on snacks and drinks while at the office. Anyhow, last night's get together cleaned me out with a week to go in the month, but I'm okay with that because a) last night was a special occasion, b) I know I wouldn't have spent the original 22 dollars if I had been doing this all month, and c) it gives me a good and immediate test to see how I'll handle being in this situation.
My goal is to eventually increase the amount of cash in the envelope and use it to cover all incidentals, recreation, leisure and such for the month, leaving the credit card only for "essentials" like gas and groceries. However, I started small because I know me, and if I go too aggressive too quickly, I'll give it up and be back to square one. Better a successful baby step than a failed leap, I say!
2 months ago
8 comments:
Good for you, Scott! :D
Now that we're living on support (and only getting paid monthly), budgeting is something we really must do, and do do.
I've found Dave Ramsey to be helpful in the finance area, and he's a Believer, too.
Yeah, I've heard a good bit about Dave Ramsey, haven't actually looked at his stuff, though I'm pretty sure he advocates the cash envelope sort of thing, and that I first heard it from a devotee of his system.
I think part of the reason I never looked into it further was that the guy who was pushing it to me at first was kind of nutty, and was all anti-credit and anti-debt of any kind. Clearly a lot of people are dumb with their use of credit, but I think it's a valuable tool when used wisely.
And I've been there on the monthly pay thing, my first job out of college was monthly.
Ramsey is way too fanatical on debt and credit, in my opinion. It's not bad advice for people with a proven inability to handle credit, though. I'm a happy medium sort of guy myself. I use my credit card to pay for virtually everything, for example, and then pay it off every month, but I would never take out a home equity loan to invest in the stock market, even if I expected the stock market to return a better percentage than I was paying on the home equity loan.
There are lots of good resources available on where and how to save and invest your money once you've gotten yourself a significant amount of savings, which is what you might want rather than Ramsey. I found that this was what really interested me and I didn't become a hardcore budget hawk until I had fun goals to work toward. Other people collect DVDs and music CDs; I collect savings accounts and mutual funds in our IRAs, 401(k)s, and taxable accounts. But then I am interested in such things as asset allocation and this probably makes me certifiable in some jurisdictions.
I will say that if you're not maxing out a Roth IRA every year (assuming you qualify by making less than $100,000 AGI), then you're not saving enough money.
I'm the same way with my credit card, and pretty much have been since I got my first one back in college. I think I've probably paid about $30 dollars in interest on my credit cards over 10 years, and gotten hundreds in cash back rewards, in addition to the convenience of not having to carry a bunch of case and constantly hit up the ATM.
I am finding using cash for the incidentals to be a much easier way to stay disciplined on them, however, and am liking that tool.
And suffice to say, no, I'm not maxing out a Roth IRA, nor will I likely be coming anywhere near that anytime soon, but I am definitely looking to make significant moves in the right direction on savings. First up is to get a decent emergency fund together.
Most important is to get the full match on your 401(k) if that is offered by your employer. (However, it sounds like you might not get that given that you're a contract employee, making a Roth even more critical.)
An emergency fund is crucial and, ideally, you should have both an emergency fund and max your Roth every year. However, should you reach April 15th of next year and have only $5000 in your emergency fund, I recommend draining it and contributing to your Roth and then aiming for both restocking the emergency fund and maxing your Roth over the next year. One of the nice things about Roths is that your own contributions (not earnings) can always be withdrawn tax-free and penalty-free at any time since you've already paid taxes on that money so the money is yours free and clear. You want to avoid doing this, because they don't let you put the money back in so you've squandered that year's contribution (which can no longer earn tax-free money for you), but you're in no worse a position than if you never put it in in the first place. If you're worried about losing the money, by all means put it in a Roth and invest it in a money market fund, which is essentially risk-free (but more or less reward-free as well - they generally pay very low interest rates). You can even keep the money in cash, though I think that's going way too far.
I never expect to withdraw any of my Roth funds, but I always have a nice sense of security that my Roth IRAs over the years act as a sort of "super-duper emergency fund." If some critical medical emergency came about which made it impossible for me to work, I could always pay living expenses for a few years off of my Roth contributions (though hopefully my disability insurance would kick in).
I mention this only because a lot of people shy away from contributing to retirement funds because they're worried about the liquidity of their money. This is a mistake, in my opinion. Such accounts are set up with incentives to keep the money in (you're always better off leaving the money in than you are taking it out), but they're also set up so that you're better off putting it in and withdrawing it early, if you have to, than not putting it in at all. (Of course, don't do anything completely counter-productive like putting in money you know you're going to need shortly.)
Good luck with your saving and budgeting. It's a hugely important step just for peace of mind and security. It's terrific that you've already been living within your means, which most young people don't do. I guarantee you that the next step of living below your means has absolutely huge psychic rewards, far greater than the fairly trivial sacrifices you might have to make to do it (like eating out less frequently). There is nothing quite like the feeling of having plenty of money in the bank and knowing that you can cope (financially) with anything life can throw at you.
I greatly appreciate your insight.
Do you have any recommendations as far as places to go to set up a Roth IRA? This conversation has got me thinking - I have an investment in a regional bank (the result of years of Christmas presents from my grandfather that I thought ridiculously boring at the time) that I've always kind of looked at as my retirement base (and also my excuse for not doing much savings in that regards) There were a couple years right around when I graduated college where it grew at about 25-30% a year. But that's really proven the exception, and it's gone back to being relatively flat/stable for the last 4-5 years, and it seems to me that it might make sense to pull a chunk of that over to an IRA and start doing some more aggressive investing, while still having the bulk of it as a stable foundation.
I don't fear a reasonable amount of risk in investing. I understand that at my age, I should be more aggressive, because I have the time to weather the ups and downs.
I loved the comment about the "ridiculously boring" presents from your grandfather. I assume any grandkids of mine won't really appreciate me until after I'm dead and they're wise enough to get it.
I don't have any particular recommendations. I have mine with Sharebuilder (now owned by ING Direct). At the beginning of the year, I put $5000 each into my fund and my wife's fund and then buy my funds (ETFs at Sharebuilder) all at once, in order to minimize brokerage fees. On the basic pricing plan, it costs $25 per year to maintain the account and $4 per fund to invest for a scheduled transaction (which always goes into effect on the Tuesday you choose - not a market order which is pricier). I'm typically only buying into 3 funds or so per Roth per year so my total brokerage fees for the year usually range from $37-$49/$5000.
I am considering moving my Roths to Vanguard, where I believe Mrs. Tillman opened her Roth (you can confirm with her). I believe Vanguard has a $3000 minimum per fund and charges $10 per year for any fund with less than $5000 invested, but otherwise has no fees and, since it offers the usual range of low-expense Vanguard index funds, it should be a great place to grow your money. That $3000 minimum per fund is something I would balk at if I were you, but perhaps Mrs. Tillman could mention how she's handling it, since I believe she didn't even put $3000 in. I believe most people manage it by investing in Vanguard's "target fund" which takes care of asset allocation for you. I prefer not to use target funds myself since I find their asset allocation is conservative even for the longest range funds (not very much international exposure - I'm about 40% international currently while the target funds are usually at 20%), but that might be quite right for you. It's also got too much in bonds, while I tend to prefer to hold conservative investments like bonds outside of my tax-free or tax-deferred accounts. I'm considering moving my Roths to Vanguard because even the smallest fund in mine or my wife's Roth has more than $3000 in it, but we've been saving for a long time.
I might also recommend looking into Fidelity and T. Rowe Price. I'm not too familiar with their offerings since I haven't gotten serious about possibly moving away from Sharebuilder yet.
While where you go is important since it can save you money on fees, it's not nearly so important as doing it. Keep in mind that you've already missed the 2007 funding deadline so you can take until April 15th, 2009 for the 2008 funding deadline, so there's no rush at all. You have plenty of time to research, get other people's opinions, etc., and pick a place which is right for your intended investment style. (My method with Sharebuilder works fine because I invest all of my money in one lump sum every year and I have never sold a single share since I opened the account. If you want to actively invest or put in a little bit of money throughout the year, a different brokerage would probably be better.)
Just so I'm clear on the pros and cons of Roth IRAs.
Pros:
If you've held the account at least 5 years, you're at least 59 1/2 or dead or disabled or using the money for a first-time home purchase, all withdrawals are tax-free. (If you're dead, the money is tax-free to your beneficiary.) Also, you are not required to withdraw money no matter what your age is, contrary to traditional IRAs which require withdrawals at 70 1/2.
Contributions (the money you put in) can always be withdrawn without taxes or penalties, and you are always allowed to withdraw all of your contributions before they start counting it as earnings where taxes and penalties apply (if you don't meet the conditions above).
Cons:
Unlike a traditional IRA, which doesn't tax you now, but taxes you at withdrawal, a Roth does not allow you to defer taxes now, so you can't deduct the contribution on your tax return.
It's always possible that Congress will change the laws and Roth IRA investors will never enjoy the tax-free earnings. I find this very, very unlikely, particularly since there are income limits on who can contribute to a Roth (people with an AGI over $116,000 a year or $160,000 for a married couple cannot contribute), but it should be said that if the Fair Tax ever gets off the ground, traditional IRA and 401(k) holders will get a huge tax windfall which will not be enjoyed by Roth IRA holders. Since I think the chances of the Fair Tax passing in my lifetime are pretty much slim to none, this doesn't concern me too much.
If you do withdraw earnings and not just contributions and don't meet the guidelines (59 1/2, dead, disabled, etc.), you will A) pay taxes on the money as if it's normal income tax and B) have to pay an additional 10% penalty on the money. I recommend never withdrawing earnings until you're qualified to do so. However, since one exception is disability, even the earnings constitute emergency funds of sorts, though only for a particular type of emergency.
Obviously, I strongly recommend not touching the Roth IRA at all, since it should be getting bigger not smaller, but since I do recommend draining the emergency fund in order to fund it, I thought it was important that you're quite clear on how it works if you do need to tap it. I would always hold out about $1000 as a mini-emergency fund, an amount sufficient to cover "run-of-the-mill" emergencies, such as a car accident or something like that.
Wow, thanks for all of that. I'll definitely be looking into this in the next few weeks.
To follow up my "ridiculously boring" gifts from my grandfather, about the time I was 12 years old, he stopped purchasing stock for the grandkids and just started giving us like $20 cash. At the time I was pumped, now I wish he had kept up with the stock :-)
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