I’m twenty-five and learning how to create better rules for money and what the implementation of those rules can do for a gal. The ones that I have had in the past lacked intention and planning, so the amount of money I was saving and spending was not in line with the goals that I had for myself and my future finances. So here’s to financial bliss! I hope you’ll raise a glass and come to this (fiscally responsible and aptly budgeted) party!
2017 Resolutions That Will Make Your Finances Happy
If you’re like me and the rest of America, 2016 probably made you say “I can’t even right now…” more times than you’d like to count.
But a new year is here and ’tis the season for making resolutions. Whether they are financial ones, a newly spun effort to lose weight, or maybe just plans to be the person your dog thinks you are, they usually start with an “I will” or “I will not”. And for good reason…a new year feels like a new start, so why not give ourselves some new rules to break out of whatever rut we might be in!
I want to make the case for some financial resolutions that can help you make 2017 your best year yet. Whatever your personal finance situation or level of financial knowledge might be, examining your strategies at least once a year, especially at the onset of it, is always a good idea.
Financial resolution #1 – Get debt-free
This is perhaps the most important resolution that you make this year if you have debt. Here we are talking credit card debt, student loans, personal loans, auto loans, and medical debt. The reason why this is number one is that the cost of this debt has the potential to cost you way more than the initial loan because of the interest that goes along with it.
For credit card and other debts with high interest rates, take an inventory of the dollar amounts you owe and then the interest rates that go along with each. There are several tactics to paying down credit card and other personal debt, but the one I think makes the most sense is to choose the ones with the highest interest rates and pay them down first. For medical bills, check them thoroughly for error and consider a call to your insurance company that walks you through all the charges. When all else fails, you can always try to negotiate.
Financial resolution #2 – Take an inventory
Most bills are paid monthly, so it makes sense to get a snapshot of what your income and expenses are on a monthly basis. I wrote another post that walks you through how to take this inventory in greater detail and walks through ideas for increasing your discretionary income. Taking an inventory creates awareness by getting to a level of detail where you see what you actually earn and spend versus what you think you earn and spend. Since some months have unexpected expenses, it might be a good idea to do the math for a time-frame of three to six months and then take an average.
For some us under the age of 40 our data gathering will likely all be done online, but for the rest of us this means getting out bank statements and bills. Not a fun task, but one that can shed light on what your other financial “resolutions” might need to be for 2017 and beyond.
My final point on the financial inventory – I think it’s so important to do it because a lot can change in a year on both the income and expense fronts. As far as income goes, most businesses adjust salaries based on CPI metrics and give raises to their employees, so accounting for the money you’re making now that you weren’t a year ago is important. It’s easy to spend more money when you’ve got more money in your bank account (at least I believe this much is true, from personal experience), so acknowledging this aspect of your finances is crucial if you want to direct more money toward savings. On the expense front – maybe you bought a car, joined a gym, sold your house, bought a house, or just made a lifestyle change…all of these have an impact on your monthly expenses and your cash flow that you need to take into account. Make sure that these changes are all still ones that you can afford given your current income and savings goals.
Financial resolution #3 – Talk it over
After you’ve done the income-expense inventory, it’s important to discuss the results of it with your spouse or significant other. Like a therapy session for your finances, devote time to talking about it in a non-critical, constructive way. This will help you figure out if changes need to be made and make you feel like you’re on the same team.
Many times overspending where finances are intertwined is the result of a lack of awareness. Discussing goals and how your earning and spending habits fit into them overall is a good way to ensure you’re on your way to achieving them. If you can’t seem to agree on changes that you think need to be made or just feel in over your head, consider jointly consulting a therapist or counselor to help mediate the discussion.
Financial resolution #4 – Set goals
Based on the outcome of the previous three resolutions, you probably start to get an idea of where you can do better financially and where you don’t need to make changes. After you’ve figured out what changes need to be made, start setting realistic spending and saving resolutions.
A word of advice here would be not to focus on extreme, all-or-nothing changes. For example, I know many people who take an inventory realize that they spend a lot of money eating out. Some know they have the time and ability to cook for themselves but don’t, others simply enjoy the experience of eating out. Instead of saying “I’m going to quit eating out”, it seems to work better if they make resolutions to instead only eat out once or twice a week and try to arm themselves for foodie bliss inside their own kitchen. If you are questioning whether you eat out too much, this website came up with a calculator to look at how your dining out habits compare to the rest of America.
Another example that I think applies to nearly the entire population of females (myself included): clothes-shopping. Be it retail, vintage, thrift store, or a local favorite, shopping is undeniably fun. It’s hard to just quit buying clothes, though, so putting in a place a “shopping ban” for a period of a few months or a year can work better than quitting cold-turkey. From those I know who have done something like this, it also serves as an eye-opening experience that may leave you with a different opinion of the word “need” that benefits your wallet beyond the time-frame your shopping ban.
Financial resolution #5 – Check-in
Many businesses use status reports and meetings to stay up-to-date on what’s happening with projects in their organization. I would suggest something similar. Set aside time on your calendar for check-ins for your financial goals and initiatives and use it to revisit whether you’re achieving what you resolved to do or whether you need to realign your spending and saving in the future to get back on track to achieving your goal. Don’t underestimate the power of 15 minutes spent with your finances on the overall success of your goals. Checking-in allows you to make small changes when necessary instead of distancing yourself from your goals which requires bigger changes later on.
Apps have come a long way in the last five or ten years. I love them because they provide more automated tracking of your income and expenses but can also help you set goals and alert you when you’re not on track to get to those goals. Personal Capital focuses a lot on investing while Mint focuses more on budgeting. CountAbout and Moneydance make it easy to see all of your transactions in one place while PowerWallet goes a step further in providing expense analysis that can help you build a budget if you decide that’s what works for you.
Go forth and achieve!
New year’s resolutions are a great time to stop and think about what we want to achieve. A new year sometimes allows us to see that better version of ourselves (and our finances!) that we know are possible. Rather than just create a vague resolution to do something, I hope that my five little resolutions provide you with a clearer path toward your financial goals. You know you can do it!
Hi friends. I want to take a break from talking about the “buying a home” financial advice and turn toward something that I know is on everyone’s mind: holiday finances!
The holidays take the cake when it comes to being the most difficult time of year to juggle it all. Wrapped up in all the excitement that comes with sharing gifts, time, and making memories with loved ones is a dollar amount. It’s also a tricky time because unlike other types of spending, that dollar amount is not something anyone should forego to “save money”.
We feel compelled to share our time and make investments in reminding others how much we love and appreciate them…and that’s a good thing. But the part that makes it tricky, as I was saying, is that so much emotion and noise is brought into decisions about spending that can cloud our ability to spend wisely and keep our finances in check.
Look no further for “noise” than holiday flyers and commercials telling you that the deals “won’t last long”, crowded department stores, holiday decorations that really get you in the mood to shop, conversations about gift giving and receiving, and maybe even your current level of #hangry. All of these things contribute to variability of judgment, which can be bad for your wallet.
Aside from just noise, there’s an emotional and relational effect on our spending as well. The urge to want to make people happy (small h) who make us Happy (big H) is one of the biggest reason we purchase things during the holidays. We want to invest in a tangible expression of our Happiness with something that reminds them of it and makes them happy. Big H-Happiness causes us to bring an emotional aspect into our decision-making, which can tip the scales so they are not in line with our bigger-picture financial goals because they just come in and hijack the decision in favor of whatever we’re feeling at the moment. I’m backing Harvard up on this one, guys.
All this got you feeling like you “can’t even right now…”?
Here’s where New Money Rules would like to offer some helpful advice. Part one is about the plan (budget), part deux is some advice on how to stick to the plan. So whether you’re looking to be the hostess who’s the mostess in control of her finances or just a party-crasher on a budget, this holiday advice is for you.
Part 1: Le budget
You can help yourself avoid some of the emotional and noise factors automatically by getting yourself a plan. By plan I mean budget. Now normally, I’m not one to push budgets on people because I don’t know that they work for everyone to manage all aspects of their finances. But when it comes to spending for the holidays, a budget can be your happy place in the midst of an otherwise overwhelming holiday season.
Without a plan (a budget), you’re setting yourself up for sub-optimal financial results. It’s easy to spend too much money by making purchases here and there, slowly checking people off your list, realizing you need to buy gifts for more people, going out and buying more gifts, not really sure of how much you’ve already spent in relationship to how much you can or should spend. Now I realize I probably just won the prize for ‘worst run-on sentence’ right there, but now you see how ‘lack of a holiday plan’ spirals downward in the same way that run-on sentence did.
The budget you create needs to be both complete and flexible. Complete means that you’ve accounted for all of the people and transactions that you’ll need to incur during the holiday season. Flexible refers to you being willing to adjust your budget as necessary; not in the sense that you agree with yourself to spend a little more, but that if you need to reallocate certain things within your budget, you will.
Many people travel outside of any gift-giving they might be doing so it’s a good place to start your budget, especially if you’re flying or driving a significant distance. Next include lodging if that’s applicable to you and any meals en route that you need to purchase.
Estimate the amount you’ll be spending on any food/groceries if you are hosting or contributing food or drink, as well as what on things like bottles of wine as host/hostess gifts. Since this is the “food” section, also include what you think you might spend eating out with your family and friends.
It’s go time. Figure out who’s exchanging what, and with whom, at each stop you’ll make this holiday season. Many people attend more than one Christmas, so it’s important to have a complete list of names. This maybe isn’t something you’ll put together in five minutes, either. I like to create a draft email or note and add people as I think of them over the course of a couple of weeks.
Pick an amount to spend on each person and stick to it. This is not putting a dollar amount on a relationship, it’s simply being realistic about your limited time, money and capacity to buy a holiday gift for someone. Going out and wandering around until you’ve found ‘the perfect gift’ only to realize it’s more than you can afford to spend is not a good feeling. Go in with a plan, and you’ll likely stick to your budget.
Maybe it’s been year since you’ve had to dig up a last-minute gift for a few people that it’s easy to overlook when you create your initial list:
friends’ gift exchange
If you’re one of those people who wraps things in newspaper (or not at all), you can probably skip this one. But for everyone else, this is a gentle nudge reminding you the obscene amount of money that one can spend on wrapping paper, boxes, bows, and stickers, without really trying. Make sure to add in any shipping costs that you might incur here too.
While it’s easy to go crazy at Target and Home Goods when every decorative pillow and matching salt-and-pepper shaker set has a reindeer outline or cute polar bear, try to factor in as much as possible any decor purchases you usually make. While holiday decor is pointless to some, to you it might be a travesty not to have hire a crew of guys to put up your light display so big that it will also light up your electric bill. No judgment here.
Part 2: Keep it in check
Now that you’ve got a your very own holiday budget, it’s time to talk about what you can do to ensure you stay within it, no matter what this holiday season throws at you. The most important thing is to remember that any point, you can adjust. Think of your budget like a two-sided scale; if you need to add a little more to one expense, make sure you lessen your projected expense for something else so that your scale stays in balance. The idea is to always adjust *within* your budget, not above it.
Here are some areas within your budget where you could potentially move money around, should the need arise.
Travel & Lodging
This one is hard to get around because we generally all search for the lowest price for airfare and gas. Making plans early is the most surefire way to ensure a reasonable ticket price. If you didn’t buy your tickets ahead of time, or maybe your plans just changed, there are sites that cater to you! Priceline, Expedia and Orbitz all offer last-minute flight deals. Another option to ensure you get the best price is to opt-in to receiving alerts for airline fares daily so that you can know when they go up and down and plan your buying around that.
Lodging might offer some relief if you’re looking to cut your costs. Though it’s not always ideal to stay in a crowded relative’s house at Christmas, if you can endure it a night or two and avoid paying for a hotel, there’s a potential savings there. Or, instead of a hotel, maybe you opt to use AirBnB which might end up being cheaper and feel more like a home-away-from-home.
For the holiday dinner/party This is one area that nobody likes to skimp during the holidays, and you shouldn’t have to! The largest burden usually falls on the host to spend money on food and drink, which can be very costly. I’m here to tell you that even if the turkey is being carved at your house, you can still stay within your budget.
One way is to make it a group affair. One person shouldn’t be expected to whip everything up on Christmas day, ask those who you are hosting to bring one simple thing to help you out. People like to feel like they’re contributing to the festivities, so take them up on their offer when they ask if they can do anything to help out.
Another note: sticking to a simple menu and a signature cocktail is a good way to keep the creeping cost of hosting an event at bay. This way you can have your bubbly and drink it too! There are tons of ideas online; here are a few to help you get started:
By examining the “who”, “what”, and “why” of gift-buying, you can find ways to be flexible and still stay within what’s likely the biggest category of your budget. Keep sites like PriceGrabber in mind when comparing prices for the best items. Also for internet shopping, Honey is a browser extension that goes and finds coupons for the site you’re shopping on.
The “who” — The goal here is not to see how many people you can trim from your list, instead it’s to get an accurate picture of what you actually need to spend in the scheme of your holiday budget. Obvi nobody likes to be left off the list, especially if you have a tradition of exchanging gifts.
But for real, maybe there’s someone who, this year, helped you get through a tough time and you want to send them something to say “thank-you”; there’s no reason you can’t work that into your spending, just figure out where you can spend a little less.
Or maybe you need to work in gift-buying to your budget for a new set of in-laws…that’s doable if you are flexible in other areas of your budget like holding off exchanging gifts with your own significant other until a later date. Nothin’ wrong with that!
The “what” — When it comes down to it, something small and thoughtful is always much more appreciated than something generic and extravagent (chocolate storybook, anyone?).
Defining the rules of the “swap” has its advantages, too. Maybe you start a tradition of exchanging something small like a coffee mug or a pair of earrings (sorry, boys) with a friend. It makes shopping a breeze and eases the pressure to spend a lot of money. For more ideas for holiday shopping on a budget, check out this article with some unique online retailers that I’d certainly never heard of before a little research.
Last tip: homemade can be just as meaningful as store-bought. Taking time to bake or create something for someone is as much a symbol of how much you care as anything else.
The “why” — We spend loads of time shopping for gifts, returning gifts, and wrapping them. Time is as much an investment as money can be, so make sure you have an accurate estimate of how many hours your gift-giving will require.
Alright, now hopefully you won’t roll your eyes on account of my sappiness and skip to the next section…”why” we give should be more important than “what” we give. The holidays are like an annual reminder that gratitude is good for us. Giving gifts is fun and makes people feel special, but taking time to be mindful of the “why” behind it is straight-up good for your soul. Just expressing gratitude doesn’t require any gift-wrap, so keep that in mind, too as you make your “list”. Plus, gratitude is good for your health.
In my humble opinion, spending loads of money on stuff that just gets thrown away is crazy, but if you insist on making the effort…try wrapping things yourself and if at all possible, shop for next year’s wrapping paper at the end of the season. Also, do not underestimate the power of Amazon Prime when it comes to saving on shipping costs. Ship to your recipient’s address and make good use of the e-message function.
You’ve already heard my thoughts on the subject, so if you must spend money on decorations, like packaging, it will always be cheaper at the end of the season. Target can’t get those Rudolph inflatable displays off its’ shelves fast enough, so I kid you not that you can save 50-90% simply by waiting until January to do your decor shopping. Little late for that advice now, I realize, so if you must spend, just make sure it’s within your budget.
Tis the season
It can be hard to navigate your personal finances during the holidays, but I hope you find some of this advice relateable and/or helpful. One of the best money-saving tips for any time of the year is to HAVE A PLAN. To recap: I think having a budget is the best way to have a plan because it forces you to get more detailed than you normally would, exposing areas where you could potentially overspend if you are not careful. The second piece of advice I leave you with is once you have a plan, to get creative and get flexible. Leave your spending the same, but rebalance your spending forecasts accordingly. That way, nothing can interfere with you staying financially sound during this holiday season!
If you have other ideas for how to save or keep your budget financially fit during this eggnog and almond bark season, I would love to hear them. Leave a comment or email me at email@example.com.
Cheers to the season,
This was a very gif-y post. One more for the road.
Hi friends, I hope you all had a fantastic few weeks. I’m back with part 2 of “What to know when buying a home”, and this week I want to tackle assessed value and property taxes. The two are interrelated, so it makes sense to talk about them together.
What are property taxes?
Property tax is a tax on real estate by your local government. It is assessed at the municipal or county level, and is typically between 0-4% of the value of the real estate. In other words, the government is using your house as a basis to tax you so that they can have revenue to keep operating (and thus, keep taxing you).
Depending on where you live, property taxes can be anywhere from a few thousand dollars a year or, if live in a state where housing prices are higher, then maybe closer to 7-10 grand.
Who’s doing the taxing?
The government is the proverbial “that guy”, always finding a way to tax you, but its recognition of the value of your property leads to good things like the ability to back up your efforts build equity in your home and maintain a stable housing market. Not to mention property taxes are the main tax supporting education, police and fire protection, and other miscellaneous things you didn’t know the government took care of for you.
Wherever you are, you can thank your local treasurer the next time you see him or her for this lovely once-a-year expensive tax for residing in their jurisdiction.
Hopefully I’ve done my social due diligence in explaining what property taxes are and why they’re necessary, so we’ll get to the real point of this post: know what the property taxes are on a home before buying a home. Knowing how much you’re paying to live in a specific house or neighborhood is good for your overall financial well-being.
Learning the Lingo
To best understand property taxes, it’s helpful to discuss a few different terms: fair market value, assessed value, caps, and taxable value. They are all related, but differ slightly in how they relate to property taxes. What follows is a summary of an excellent post by thenest.com.
Fair market value – the price your home would sell for with a willing buyer and seller under normal market conditions. Fair market value can be determined by a real estate appraiser, but more informally, think of it as “what the place is worth” on the free market.
Assessed value – the government employs real estate appraisers to approximate value for an area and increase or decrease the assessed value by an across-the-board percentage. Known in the industry as a blanket or mass appraisal, it’s different than a fair market value appraisal. Your taxing district uses assessed value to calculate taxable value (which you pay property taxes on).
Caps – States typically limit the amount that property taxes can increase each year; this is known as a “cap”. If your taxing district calculates an assessed value that would cause your property taxes to go above that cap, a restriction comes into play that limits your taxes to that capped assessment/property tax amount. They can, however, carry forward that increase in assessed value in future years until you’re paying the new rate. The bad news is that caps don’t usually apply when the property changes hands, giving the taxing authority the power to increase property taxes.
Taxable value – Certain states have laws that give you a break when it comes to property taxes. In Iowa, where I live, you can get taxed on up to 100% of assessed value. Other states have much lower percentages. Taxable value starts by taking assessed value and adjusts (downward) that assessed value according to tax laws and exemptions. Exemptions are available for veterans, seniors, taxpayers on low-income government assistance programs, to name a few. Each state and even each taxing district can have their own laws and limitations when it comes to property taxes, so it’s best if you do a little research on what those are. A simple google search with your county + state + property taxes can yield a lot of information! After subtracting everything from taxable value, the tax office compares it with any limitations or aforementioned caps. In Iowa, the limit for taxable value growth is 3% for residential property.
Credits – Most states offer some type of credit for people who own and occupy their home for a certain portion of the year. In Iowa, it’s called the homestead credit, and gets subtracted from your gross tax amount due to the state. Other credits are available, so be sure to check with your state. The full list for Iowa credits can be found here.
How are property taxes calculated?
When it’s all said and done, the format of your statement might look something like the one below. Basically you’re starting with the assessed value, then deducting any exemptions to get to taxable value, and finishing it off by factoring in any caps to arrive at gross tax. Once you get there, subtract any credit amounts to end up with your net property taxes.
An example using some easy, round numbers follows (levy=tax rate, is set at 1.6%, an average for my county):
Multiply Taxable Value by Levy
Equals Gross Tax
If the lender for your loan set up an escrow account for your mortgage, each month you’ll make an additional payment to cover property taxes. The amount you’re paying is the monthly share of an annual estimate done by your lender, but it’s just that–an estimate–so remember that at the end of the year you may get a refund or have to pay extra to cover the shortfall.Your city isn’t leaving the math to you on this one, they’ll send you the statement with your net taxable amount and a payment stub to remind you when to pay your taxes.
Why does assessed value change?
The second thing to note is that even though there is a nice formula for property taxes, changes in assessed values are continually being made for a number of reasons. I can’t speak for every state, but I’m going to guess the process for adjusting property taxes is largely the same: property is assessed every two years and a process called “equalization” is applied to try and ensure that property values are comparable among jurisdictions.
The strategy for determining property taxes seems rather straightforward in theory, but as hard as the gov might try to equalize and ensure comparability, in reality property taxes can still become random and inconsistent from home to home.
This can be attributed to several reasons outside of the property formula, but the gist of what I’m getting to is that property taxes on a home are the result of several factors, most of which you have no influence on because they’re just past transactions.
Property taxes on a home go up or down largely as a result economic conditions, normal buying and selling, and changes made that impact the value of the home. Some factors and events that can affect your property taxes are as follows:
the initial assessed value of the home when it was built
prices at which it has been sold from the time of its construction
number of times it has been listed and/or sold
economic condition of the housing market at its sale dates
assessed value of homes in its proximity
sale price of homes in its proximity
Basically, all of these factors provide the city with a basis to adjust your property taxes according to what they might imply about the home’s value. As you can imagine, these factors are highly variable and difficult to predict which make property taxes that way, too. You can’t tell just by looking at a house what transactions have happened, you’ll have to check the county or municipal assessor’s page. Be sure to do this before buying a home!
Alright, time for some examples…
Let’s say there are two identical family homes. One home gets sold 6 times over the course of 20 years, another only twice. They may have different property taxes because each time the houses get sold, the city likely adjusted the assessed value of the property, thus increasing the taxes.
Another scenario…it’s 2009, just after the housing market crash and a house gets foreclosed upon, but only after its’ occupants have beaten it up a bit. Someone buys it on the cheap, the assessed value stays low and so do the property taxes. There have been several periods in time where housing prices have gone up or down significantly, which likely had some effect on assessed value and property taxes thereafter.
The city might also increase assessed value if there have been sales of houses in proximity that make the case for the value being higher than what it’s currently assessed at.
Or let’s say you buy a piece of land in a part of town that’s not yet been developed and build a house…your property taxes probably start out very low. Your property taxes will likely go up modestly over a decade or two, making it an affordable place to reside. Fast forward twenty years and you’re in that same house, but you’ve got lots and lots of neighbors as the part of town you’re in has now become one of the best ‘burbs in the area. There are good schools and other desirable qualities for people wanting to start a family. As more homes get built, initial assessed value and property taxes grow, leaving you with
New Money does some research
Last weekend, I took a look at Zillow and conducted a home search for what I think the average “family home” might be for people in my metro area of Des Moines, Iowa. You may not live here, but you know the type of home I’m talking about. Good schools in the vicinity, a decent commute, room for Rover to play and a few extra bedrooms to fill with offspring. Here in Des Moines, I used an estimated home price that’s quite a bit higher than what I could currently afford, but one that I think two adults with well-paying jobs could muster up a payment for each month.
For the sake of the example, I used homes that were recently listed in the price range of $200,000 to $250,000. I tried to find ten or so homes in each city that seemed reasonably comparable were. Keep in mind, these numbers are rounded and the property taxes available are estimates; I’m not trying to win a scholarship for my mathematical accuracy, only trying to show how disparate property taxes can be. The listings are detailed below (if you’d like the actual addresses of the homes I selected, send me an email). They’re sorted by city, then by price so that you can see the fluctuation of property taxes.
Price (Rounded $)
% Priced Above
$ Above (Below)
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
West Des Moines
*Above and below $ this was done by subtracting the home’s property taxes from the average of property taxes of homes I selected in that city. Nothing statistical here.
Naturally, there are TONS of limitations with the very elementary method I selected to compile this list, but I just wanted an idea of what I would be paying for property taxes, in the home price range of $200-250k, in and around Des Moines. The verdict: probably somewhere between $3,000-$4,000.
The biggest point I want to make with this post is that you should be aware of an expense that’s potentially thousands of dollars a year, for the rest of your life (or as long as you own a home). It pays to look and buy accordingly. There’s nothing wrong with paying a lot in property taxes…there’s a good chance you’ll live in a highly desirable neighborhood, just know what you’re paying to live there.
Many people overlook property taxes in their home-buying process, and while it’s not the most important factor, it should still be at least a data point you bring into your decision-making process. Having a little bit of extra cash each month that’s not going out the door to pay a tax is a very good thing. It’s money we can all use elsewhere, and can ease, if only slightly, the burden of a mortgage. Oh the joys of home-ownership.
Keep calm and house-hunt on my friends, just make sure to look at those property taxes!
X’s and O’s
#personalfinance #buyingahome #money #propertytaxes #assessed value #newmoneyrules
Here it is…the series you’ve been waiting for (or the one you didn’t know you needed)! For all you out there who want to know what’s all involved in buying a home, I’m starting a series of posts on home-buying tips and advice related to the financial aspect of it all. Topics we will cover in the coming weeks include the following:
-saving for a down payment
-interest rates and terms of a mortgage
Today I want to tackle PMI because I think it’s an opportunity to lighten the load of your monthly mortgage burden by understanding how it can be avoided.
So what exactly is Private Mortgage Insurance, or PMI? According to the gov, PMI is a type of mortgage insurance used with conventional loans. Like other kinds of insurance, it seeks to protect the person lending you the money if you stop making payments on your loan.
PMI is usually required if you’re making a down payment of less than twenty percent of the price of the home. The most common way to pay for PMI is a monthly premium. If you’re not familiar with how insurance works, premium is just the amount of money you pay for an insurance policy. Typically your PMI premium just gets added to your monthly mortgage payment.
What are the upsides of PMI?
PMI can help you qualify for a loan you might not otherwise get. If you don’t have the magic number of 20% of the purchase price saved up, PMI can help you get a loan.
What are the downsides of PMI?
PMI can help you qualify for a loan, but it increases the cost of your loan. It also doesn’t offer you any protection in the event that you run into problems down the line and are unable to pay your mortgage. In the scheme of things, it’s a fee on top of the fee the bank is charging you to use their money because there is a greater likelihood that you won’t be able to pay them back for the full amount of the loan.
Now I know I’m harping on PMI a bit, that’s intentional, because ultimately not having to use PMI means you are saving money each month. I understand PMI is not “avoidable” for everyone for various financial reasons. There’s nothing wrong with having that money go out the door, you may not miss it, but that’s not exactly what the point of this blog is about, is it?!
How much does PMI really cost (i.e. how much more could you be saving)?
The amount of your monthly PMI payment (or potential savings) is dependent on a few different things:
term of the loan (in months)
interest rate (expressed as a percentage)
loan purpose (purchase vs. refinance)
type of rate (fixed vs. adjustable)
estimate value of property you’re purchasing
your credit rating
Ok, that was more than a few. Getting a loan is a bit like cooking…there are ingredients involved and if you follow the recipe, it will generally turn out the same way, but some of the nuances might mean the end result varies. The combination of all these factors we can plug into an equation and get a general idea of what your mortgage payment be, and it will generally be similar among different lenders, but it might not be exactly the same.
HSH.com has a great tool for getting an idea for what your mortgage payment might be. It even cranks out the amortization tables for you. Amortization tables are just a breakout of the components of your mortgage payment and include the payment amount, interest amount, principal reduction, any PMI payment, and the balance due for each month for the entire term of your mortgage.
The other thing to note about PMI is that once you have actually made payments equal to 20% of the home price (your principal amount), the PMY payment drops off of your total mortgage payment. Seeya PMI!
When that happens depends on the mortgage payment you ultimately agree on with your lender and the amount of time you’re taking to pay off the loan.
Next, we will walk through an example of how much PMI would be for a hypothetical loan.Let’s say you want to buy a $200,000 house using a 30-year fixed rate of 3.61% (that’s the current average rate according to http://www.hsh.com/hshtoday-sx.html) and you have good credit. Our friends at Nerd Wallet have a great article about what is considered “good” and “bad” credit scores here.
The last variable that we have to specify in the calculator is estimated home value; let’s say we are super confident in the price we got for the home is low, and that we think it’s actually worth $215,000, about 7.5% more than what we’re buying it for.
Here’s how the payment for this hypothetical loan breaks down with your first payment:
Of this $1,078 payment, $602 is interest, $373 goes toward principal reduction, and $103 goes to PMI. With each payment, the amount of the payment attributable to interest will shrink and the amount attributable to principal (the amount of your loan) will grow. After 78 payments, you will have paid down enough principal that the PMI payment will no longer be necessary because you’ve paid 20% of the home price.
If you want to see the full amortization schedule, I will be happy to send it to you, but just so you have a visual of what we’re talking about in this post, here is the schedule for the first year of payments looks like.
Balance of Loan Due
Potential Savings (and the point of this post!)
The money saved had you not had a PMI payment? About $8,034 over a span of 6.5 years. That’s a lot of money!
For me, it’s more about the principal of the thing: I could have an extra 1,230 or so dollars a year to direct as I see fit (bulk up my savings, take a vacation, contribute to an IRA) or I can give that money to an insurance company. This is where the small choices one can make when making larger overall financial decisions like buying a house really pay off. Do yourself a favor and save that 20% principal payment and skip the PMI. Those three little letters can be costlier than they seem in the scheme of things.
Just like your momma maybe said, “just because everyone’s doing it, doesn’t mean you should do it”. She didn’t say it at the time, but her advice probably included PMI.
Keep calm and loan-hunt on, my friends. I hope this post helps you at some point in your home-buying experience. Join me in the coming weeks for more discussion on other home-buying topics like down payments and real estate taxes, or as I like to call them, PMI’s sexier home financing cousins.
You need an IRA. To be clear, this is not Ira, the aunt you see at your dad’s side of the family’s Christmas. Having an IRA (the non-aunt kind) is much cooler than the socks and fudge you might be getting once a year that you hope to re-gift.
IRA stands for individual retirement account (sexy, right?), and there are two primary types of IRAs: a traditional and a Roth IRA. They are pretty similar in some areas, but differ in others. You can be smart by making your decision between the two based on factors like your age, income, and tax consequences now and later in life.
We are going to discuss both the Roth and the Traditional IRA in detail, but I’d like to do the blogging equivalent of buying you a drink first and go into why IRAs are important and how they can help you in both the short and long runs.
Why do you need an IRA?
An IRA is an investment that can make you the cool-kid in retirement. If you choose to contribute to a Roth IRA, you won’t get taxed in retirement when it comes time to take money out of the account. If you pick the traditional IRA, you’ll get a tax benefit now because you can deduct your contribution from your taxable income, whoop whoop!
I love IRAs because just about anyone can benefit from them both now and in the future. It doesn’t matter whether you have a retirement plan with your employer or even whether you have an employer or not, you can have an IRA. The tax effects work a little bit differently, but you can still ensure your 65-year-old Boca-loving-self will have a bigger chunk of change than if you didn’t have one.
Alright, now we’re going to get to the skinny on Traditional v. Roth so that you can get to figuring out which one is best for you!
The Traditional IRA
An IRA is like a side-hustle, but for your retirement saving. Essentially, Uncle Sam lets you put $5,500 into an a savings (retirement savings) account and use that contribution as a tax-deduction. That’s right, you get to write off up to $5,500 of your taxable income and reap the benefit of lower taxes now while setting aside that money for later.
During the 2015 taxable year, for me, this amounted to saving almost $1,500 in taxes by contributing $5,500 to a Traditional IRA. So while I have $5,500 less in my checking/savings account, by putting it in an IRA I got $1,500 back. It is just too much money for me to pass up!
Also, your earnings on the money that you put into a Traditional IRA get to grow tax-deferred. This means your money goes to work for you and gets bigger, each year, until you retire and actually draw money out of the account.
Lastly, your ability to contribute to an IRA is not limited by your income. No matter how much you make, you’ve always got your $5,500 contribution that you can make. This is super good news if you’re like me and plan to be making boatloads more money in the future (a girl can dream, right?)
The finer, slightly less rosy print:
The $5,500 (or however much you contribute, up to $5,500) tax deduction starts to get phased out once you make a certain amount of money–between $61,000 and $71,000 if you’re single, $98,000 to $118,000 if you’re married and filing jointly and participate in an employer-sponsored plan (lookin’ at you, 401k). But there are definitely still benefits to contributing to an IRA, so don’t get your panties in too much of a bunch.
Like wine, a Traditional IRA is best left to age without you dipping into it…If you take money out of your IRA before age 59 and 1/2, you will have to face the tax music (i.e. pay ordinary income tax) and on top of that, get hit with a 10% penalty on that money. This is no bueno, so try to just let it sit for your slightly older self to enjoy, penalty-free, a little later on.
On to the next: the Roth IRA
A Roth IRA is similar to a traditional IRA. You still get to stash away up to $5,500 per year and the great thing is that you won’t be taxed on the withdrawal of contributions, or qualified distributions from that account no matter what age you are.
The other major benefit is that when it does come time to take money from your Roth IRA, you don’t have to pay taxes on the earnings (dividends and returns on your investments), provided you aren’t withdrawing them before age 59 and 1/2. So if you can hold off until then, you can avoid paying any penalties or taxes.
Basically, a Roth IRA is a great option if you want to reduce your taxes in retirement. Retired you will be so happy with current you that you set aside that $5,500 year in and year out and allow it to grow, tax-free, so I would give this investment option some serious thought.
The tradeoffs (because there always will be some):
You don’t get to deduct the money that you put into this account from your taxable income. That’s really the biggest tradeoff, because it feels like you earned $5,500 less after putting it into a Roth IRA, but the IRS is all like, “idc, you’ve still got to pony up the money like you spent it on a vacation to Europe and glamour pics for your dog”.
The other difference between a Roth IRA and a Traditional IRA is that eligibility and contribution amounts can be limited by how much you make. If you’d like to know in detail what those limitations are, check out this helpful page by everyone’s favorite 3-letter government agency, the IRS. The short story is that if you make $184,000 to $194,000 and above, you will get phased out of the amount of money you’re able to contribute to a Roth IRA. I know this is not a concern for most of us, but for all you six-figure people out there, you might need to look to a Traditional IRA instead.
Beyond what we’ve already discussed, there are a few exceptions to early withdrawals like it’s your first-time buying a home and you want to use the money for that or you have medical costs you need to cover, but for the most part you can kind of assume that early withdrawal of earnings will be taxed.
Alright, now that you know about Traditional and Roth IRAs, you can go shopping!
There are tons of great, low-cost investment options out there for both Roth and Traditional IRAs. I’ve got a traditional one with TD Ameritrade, but you aren’t going to go wrong if you pick anyone on this list to be on your IRA team:
E*TRADE – They’ve got a $0 account minimum and access to every investment resource you could ever need. Voted best overall by The Simple Dollar.
Scottrade – Great for beginners, great customer service no matter the amount of money in your account ($0 minimum as well). Voted best overall for Roth IRAs by Good Financial Cents.
Charles Schwab – They have many no-transaction-fee mutual fund options, making your investment choices low-cost and easy to change. They have a $1,000 minimum account balance, but are a long-trusted invesment mangager actual brick-and-mortar branches if that’s your thing. Nerd Wallet gives them “Best Overall” citing “large fund selection, high-quality customer service, and reasonable account minimums and fees”.
Betterment – They’ve made a big spash in the investment community lately. They make it very easy to open up a retirement account (5 minutes, that’s all!) and let you be a hands-off investor while they grow your money for you. Investor Junkie gives it 5 stars and have heard firsthand from people who use it how great they think it is.
Wealthfront – The best of modern investment technology gives you a sophisticated, diversified, and low-cost investment. They charge no fee to manage your money up to $15,000, and after that it’s a flat 0.25% fee per year. Cash Cow Couple speak very highly of Wealthfront calling it “automated, low-cost investing”.
We established today that there are two primary types of IRAs (individual retirement accounts). The one you choose depends largely on 3 factors that you want to consider so that you can optimize your retirement saving:
Tax consequences now and in retirement
contributions may be tax deductible
earnings grow tax-deferred
your eligibility to contribute is not limited by income
withdrawals of contributions and earnings are taxed at your rate in reti
no age limit to open a Roth IRA or contribute to it
eligibility and contribution amounts can be limited by your income
contributions are not tax-deductible
*As long as you’ve held the account 5 years, you’re age 59 and 1/2 or older, or an exception applies
One last note to tie the whole thing together: the IRS says you can contribute $5,500 total to your Roth/Traditional IRAs. So, between the two of them you are limited to $5,500 in contributions, not $5,500 to each.
That’s all I’ve got! I hope this information helps you understand why it’s important to save for retirement and how having an IRA can give your saving an extra boost. Depending on the IRA you choose, it can also ease your tax burden in retirement or your tax burden each year, so that knowledge alone is worth a lot, too.
If you’ve got any questions…please comment below or email me at firstname.lastname@example.org. I look forward to hearing from you!
I was once told that “you cannot achieve something that you do not measure”. Meaning, you can’t achieve a goal without first defining it as one and quantifying your progress toward it.
I think that saying is generally pretty true when it comes to financial goals. “Saving more money (tomorrow)” and “changing our lifestyle (when we feel like it)” are not strategies for achieving financial goals. I guarantee without goals and a plan, you will approach some major life event like–getting married, having a child, buying a bigger house, buying a house, improving your house, going to college, sending your kid to college, going on vacation, retiring–and not have the means to pay for it. For clarification purposes, putting it on your credit card is not paying for it.
So many people pursue these milestones at what seems like the right time, but sometimes find that they aren’t, in their current situation, able to pay for them. Had they taken everything into account earlier, they might have a done things differently, they often say. They would have had specific goals and done things to achieve those goals.
We need goals for a lot of reasons. But the most compelling reason is that it is difficult to simultaneously manage the present and the future. We all know that having only a short-term, present-biased view of life is not going to lead to the best outcome. Having financial goals and sticking to a plan to achieve them optimizes your decision-making, over and over again. You owe it to your future self to create goals and get on the path to those goals. Money does not ultimately bring happiness, but having a lack of it when you want to pursue a major life event can create a great deal of unhappiness.
I’m making the argument that everyone needs financial goals because I’ve realized upon adulthood that major life events are not givens. Just because you want to do things like get married, have children, go on vacation, etc. does not mean that you have the money to afford them. It takes careful planning and adherence to financial rules for yourself to be able to do these things.
Why don’t people reach their financial goals?
1. Having vague goals – this might be one of the biggest roadblocks. Goals that are too general let you procrastinate, make excuses, and don’t hold you accountable to what you say you want to do.
2. Not taking time to think about goals – you are not too busy to think about the longer-term. It makes a lot of people anxious to think about money and the future, so instead of dwelling on the temporary stress it might cause, focus on the peace of mind you will have after you figure out where you want to be and how you’re going to get there.
3. Procrastination – what is today but yesterday’s tomorrow? That quote might be old, but the wisdom it carries is not. If you never start in on your goals, you can be certain you’ll never reach them.
4. Think about your financial goals in the larger scheme of what that means for your life – knowing the “why” behind your decisions will help you after initial motivation and excitement wears off.
5. Lack of financial discipline – it’s hard to make sacrifices in the near term for things that don’t pay off until later on. Focus on making right choices instead of the wrong ones you may have made in the past.
6. Lack of financial literacy – this is especially important for long-term goals. Knowing how money grows is of the utmost importance.
7. Being negative – one of the worst things people can do is have a negative attitude when it comes to money and saving. If you stay positive, you are much more likely to continue on toward your goal.
8. Not writing down goals and looking at them consistently – The very practice of writing things down so that you can revisit them in an organized format means you’re more likely to stay on track to reach your goal.
Any of these sound familiar? They do to me…I’m guilty of having committed every one on the list. Woof. There was a time when I didn’t have financial goals because it intimidated me to think about them.
It made me anxious to think about simultaneously having to manage future expectations. I thought it was easier not to have them, but found out that that’s just not true. Any extra money I could have been saving was the cost of not having to care about goals and trust that I would figure it out when the time came. It turns out that I actually felt more anxiety when I didn’t sit down and be honest with myself and my significant other and ask “what do I want?”. When I did sit down and write out my goals, it was a huge breath of relief to have a plan. Which is why I want you to have one too! It really isn’t that bad.
I thought I would take some time to share with you my financial goals, and then help you strategize because I think most of us have many of them in common.
As a clarifying point of data, my significant other and I have very intertwined finances. We take turns buying things like groceries and the finest kibble in town. So to get an accurate picture of our money-in, money-out, we are looking at both of our monthly expenses.
Let’s start with short-term and then we can jump to longer-term. It’s actually very important to have both of these. Short-term financial goals are goals that you want to accomplish anywhere from 3 or 6 months to about 5 years from now.
Short-term goals: 1.Have 6 months of emergency savings (we’ve accomplished this goal)
Should either of us be left with an ominous-sounding note when we return from lunch one day that tells us to “stop into the boss’ office at your earliest convenience…and bring your things”, we will be able to keep a roof over our heads.
This is one of the boxes that we get to check! From the day that both of us started working, we have been setting aside money for our employers’ 401Ks (more on that in a bit), and tried to keep our spending low so that we can set aside this money into an online bank account so that neither of us can touch it. We used Ally Bank so that the money isn’t in our everyday checking accounts and we have an inflated sense of how much is really available. Ally is great for emergency funds because you can set the money away in a high-interest savings account and forget about it. You get 6 transactions a month and there are no monthly maintenance fees. Take into consideration how much it would cost you just to live for six months if you didn’t eat out or have unnecessary expenses:
auto and health insurance premiums (payment)
utilities (electric, water, internet, phone)
gas/cost of transportation
x6 = emergency savings minimum
2. Pay off student debt
High school may never end, but college does. And after that 6-month grace period, the interest on federal loans starts to kick in. The longer you wait to start paying off those loans, the more interest accrues. Interest is like the fee that lenders charge you for borrowing their money. The slower you pay off your loans and the smaller the loan payment, the greater the “fee” that you are charged.
We may may not be done paying off student debt in the 1-5 year range of short term goals, but I like to think of it as a short-term goal because it impacts us now, every month, and should stay in our near-term horizon. The entire amount of student debt we have is not a small amount of money. It will take years of monthly payments, but we want to begin paying it down aggressively while still contributing to important things like our employers’ 401K plans. To do this, we have a mini-goal of paying the minimum payment + at least $200 each month. Additionally, we’ve made the commitment that when our income goes up or when we get bonuses, we will increase the amount of money going toward that payment. As your income goes up during the first decade of your life, make it a goal to keep your expenses flat-lined; this way you can chip away at your student debt faster.
3. Travel/Cost of Living Fund
I think everyone should have a travel fund! When it comes to saving, one of the easier ways to win the argument with yourself to when debating whether to forego some purchase/expense today is to keep in mind the amazing experiences that you can have in the future while traveling. Having something to look forward to can be a great motivator.
We are young, without children (the two-legged kind at least) and have the desire to travel or possibly live somewhere other than Iowa in the coming 5-10 years. The cost of living in Iowa is below the U.S. average. To be able to afford a vacation or a move to a more expensive city (overall cost of living is about 25%–40% less than larger cities), we need to put money away regularly in order to not disrupt ourselves, financially.
Direct deposit can help you achieve this financial goal; find the form you need from your employer to direct $50-100 or however much you can afford each month to a separate savings account so that when the right time comes or an opportunity arises to move elsewhere, you’ve got a starting point for how you are going to pay for it.
How d0 we do it?
I use Ally bank for my travel fund and over the last year it has grown to about $1,100. Simply by foregoing a couple meals at a restaurant or shopping around, you can find the money to direct into your travel fund and not feel like you’re missing out. For example, this last month, simply by shopping around I save $20 off the price of an oil change and instead of going out for pizza two Fridays in a row, we saved around $50. That’s already $70 into our “Asia” fund! Wherever it is you want to go, by cutting small amounts from your expenses each month, you can make small investments into the trip of your dreams.
4. Get Married
This is not one most people typically save for, but I would encourage you to consider it. It’s pretty mainstream knowledge that weddings are not cheap. The average cost of a wedding in the U.S. is around $26,000. That’s not how much we are planning to spend and in fact, that source does cite $10,000 and under being the more common pricetag of a two-people-one-name shindig.
It is increasingly common that the onus is on the couple and not “the bride’s parents” to pay for a wedding. Or if the parents are paying for it, they are contributing an amount of money and rest is up to the couple. Either way, a wedding is likely going to be a major financial undertaking for one party or another, so whether it’s you or your kid you’re saving for, making small monthly deposits to a savings account can help give you peace of mind for where some of the money is coming from. Just as I mentioned in the “travel fund” example, having a savings account with direct deposit of $50-100 can add up fast. If the money is immediately siphened out, it’s not in your checking account to pay for emotions like “I’m too lazy to make dinner” or “buying this dress as a weight-loss motivator”.
Babe and I are pretty open about our desire to someday hitch our wagons to one another, but know that the cost of the “Mr. and Mrs.” title is not cheap. Between the two of us, little monthly savings opportunities, and (cross-our-fingers) the bank of mom and dad, we hope to pay for a wedding without a “honeymoon period” credit card bill to follow us around for a year after the big day.
If short-term goals are like 5Ks, consider long-term goals more like marathons. Long-term goals are long-term investments in your future self; they are some of the most important goals to have. And if we’re likening them to marathons, consider the effects of not saving for your long-term goals like trying to run that marathon at 65 without any training.
However you want to phrase it, “clocking out at 65”, not “working for the man”, “working on your bucket list”, I think we all want to work toward the goal of not working at some point in our lives. Naturally it will be different for all of us, but it’s inevitable that physiologically (hopefully that word makes sense here) we cannot work all of our lives.
And there is no such thing as waiting for the right time to save for things happening 20, 30, 40 50+ years in the future such as retirement. It is detrimental to wait to save money because of two little words: compound interest. I wrote a previous post on concept because I thought it was so important to understand.
Simply put, retirement is achieved by devout contributions into an investment fund of some sort and compound interest. No matter how much money you think you’re going to make someday, you must must must start saving for retirement today, which is why it’s universally #1 on the list.
Most employers will match your contribution up to a certain percentage of your income, which is why you should make sure you are enrolled and contributing to a retirement plan if it is offered by your employer. You are walking, neigh sprinting away from free money if you don’t. And if saving for retirement is like a marathon, then allowing your employer to match a portion of your contribution is like getting them to run part of the race for you.
I would encourage you to “back into” the amount of money you can be putting away each month to your 401k. Take your income, after taxes, and deduct all of your monthly expenses (rent/mortgage payment, auto and health insurance premiums, utilities–electric, water, internet and phone, gas/cost of transportation, and food).
What you’re left with is a starting point for what you should be contributing to your 401k (or saving another way, if that’s not an option). I emphasize that this is a starting point because sometimes we have a tendency to over or under-pad this equation. We also haven’t taken saving for short-term goals into effect yet.
So you’re left with your “starting point”. The next thing I’d encourage you to do in order to correct for the over or under-estimating that might be happening is to go out and actually look at how much you spent* over the last 30 days on these expenses. Need to adjust? Do it now. If you want to get what might be a more accurate spending figure, I would suggest looking at an average 30-day spend over the last 3 months.
*If you’re spending too much and have unnecessary expenses, that’s another conversation and I want to continue helping you with that on this blog; but it’s a topic for another post.
Now: saving for short term goals. Here’s where things get a little less clear-cut on how much you should contribute from your paycheck to your retirement plan. You want to achieve a balance in your short and long-term goals; things like travel and marriage are great things to save for, but ultimately they are taking away from what you save for your long-term goals. I think the trick is to find the balance of contributing to each of these that gives you peace about things.
I would recommend starting out with one ratio of short to long-term savings and then tweak it as you need to from there. If you feel like you have a tendency to be more present-focused, maybe see how it feels to start contributing more to your long-term ones and whether it’s something you can handle. If you’re like me and have the tendency to have an “all or nothing” approach to saving, try to see how somewhere in the middle suits you, contributing to specific short-term goals that you know will bring you joy a couple years down the line.
How does New Money Rules save for retirement?
At my current employer, they offer the ability to contribute money to a retirement plan managed by Prudential, a very large, professional asset manager and Fortune 500 company. I’m not saying they do it better than someone else does, it is simply the best option for me at my current job to save for retirement. I have a percentage of my income after taxes and health insurance automatically deducted and put into this plan with Prudential. I’ve experimented with what percentage works best for me, and stuck to it. Every 6 months or so I’ll take a harder look at my spending and saving and adjust if needed.
2. Buying a house
We have not yet begun saving for our first house, but plan to do so in the coming years. We are renting a tiny little house on the cheap from my dad, who owns it and allowed us to move into it and fix it up in turn for discounted rent. Sometimes, it’s all about who ya know (or who you meet?).
Since we are not homeowners and have never purchased a house, we are starting to do our research on the best way to finance this large purchase. I will admit over the last two years we’ve had these points where we think it’s the right time to buy a house, but looking back, I realize it would have been the wrong time financially for us, all things considered. When the right time comes to buy, I am hoping we will be ready because we have a financial plan in place. Two basic tenets of our plan include the following:
20% payment – A down payment of at least 20% of the price of the house means that you will not have to pay for mortgage insurance which. Depending on the price of the house, your monthly mortgage insurance could be anywhere from around $40 bucks a month for a $100,000 house with a 3.48% (the average right now), 3o-year mortgage to around $370 a month for that same 3.48%, 30-year mortgage on a $400,000 house. It all depends on the price of the house and the rate you’re able to find.
Good credit – You should work to establish good credit before you get a loan. It will pay off in the longer run in the form of a more attractive interest rate. That three digit number is one of the biggest indicators as to how risky you are to a lender. A credit score for a baseline, conventional loan is around 620, but get your score up to the 700s and you may find you qualify for more attractive interest rates. By establishing good financial habits like simply paying your bills on time each month and having a low credit usage to credit limit ratio, you can boost your score. You are also entitled to a free credit report every twelve months which can allow you to fix errors that might wrongly be affecting your credit.
When you feel you’ve got these two things in check, you can go into the home-buying process with the best possible status that can result in savings for years to come. All that adulting can finally payoff.
There they are, my short and long-term financial goals. I truly hope that you take the time to write yours down and come up with a plan to achieve them. The first step is sitting down and thinking about what you want, which can be scary, but worth it. One of the most important things to remember in the process is to make sure you are specific. Otherwise it’s easy for things like procrastination or talking yourself out of things to creep in and take over. You might find that you like this new goal-oriented life of yours and feel encouraged in knowing that good things are coming! You just need to plan for them.
A new survey from the Transamerica Center for Retirement Studies indicates that for both part and full-time workers, more than half of the people surveyed believe they need at least $1 million saved by retirement. But more than half of them say that they “guessed” when asked how they estimated the amount of money needed for retirement. Only 27% say saving for retirement is their greatest financial priority, with 21% saying “just getting by” and 20% saying that “paying off debt” are their greatest financial priorities.
So how are we going to retire?
Pensions are now a thing of past generations, social security is likely going to look different for most millennials, and stock market returns experienced in past years are not a guarantee of future ones, if the first decade of 2000 was not enough an example. For so many people, the recession during the last 8-10 years has deteriorated retirement savings, stifled the skilled job market, and discouraged growth for businesses. Due to only tepid improvements in the economy, it is possible we will see more of the same for years to come.
Because of all of this, the only way it seems to ever have enough money to retire is to work longer and save as much as we can. Beyond economic and external hurdles, there are mental ones. Another study, done by the NBER Retirement Research Center (thank goodness we have people who do this for a living!) found that 90% of Americans face two major mental blocks: “present-biased preferences” and “exponential-growth bias”. The first one relates to procrastination and not being able to exhibit patience when contemplating present and future tradeoffs, the second refers to the tendency to underestimate the exponential growth of an asset’s value over time due to neglecting compound interest. The study found that a majority of Americans believe that savings grow in a straight line; only 22% of the population who were surveyed understand that savings growth is exponential.
So today we are going to focus on just that: compound interest. If you understand it and apply it, has the power to determine whether you have enough money to retire someday or not.
The most simplified way I can describe it is that it means to earn interest on interest, creating the exponential effect of compounding interest. This allows your investment to grow faster and faster as time goes by.
This is hard for most people to grasp because not many things in life work in a linear fashion, not an exponential one. Things like bacteria and the decay of uranium have exponential relationships. Most growth in life happens in a linear fashion…your age, the number of dogs you’ll have in a lifetime, your cab fare, quadrupling your cookie recipe, and how many slices of pizza you can afford based on the money in your bank account.
To illustrate the importance of understanding the concept let’s use an example: I start to invest money each month from now until I retire in 40 years at age 65. Let’s say I use one of the biggest asset managers in America today, Vanguard’s Retirement Income Fund (VTINX) which has an average annual return of 4.38% and is known for having extremely low investment fees (what they charge you to manage the money).
How much money will I have in 40 years with a simple $100 per month investment? How about a $1,000 investment?
With a recurring investment and compound interest going to work, my $100 a month investment turns into $119,325 which is about 2.5 times more money than I would have had had I put just put $100 in a bank account.
A $1,000 per month investment turns into $1,300,756 which is about 2.6 times more money than I would have had had I put $1,000 in a shoe box every month for 40 years and Lord knows how much more if I would have left it in my checking account, ripe for spending.
P=payment (amount of money you’re going to invest each month)
r=rate of interest, expressed as a decimal; take your annual interest rate and divide by the frequency of payments; in our example, it would by 0.0438/12
n=number of periods you’re going to make the investment for; in our example it is 12 months x 40 years, so 480
Still need a visual? I found this one very helpful when trying to visualize exponential growth.
There it is. Like it or not, compound interest is likely to change your life more than the iPhone, Spanx, and Diet Coke combined. It can allow you to retire and live the kind of lifestyle you work for 40+ years for or, if you ignore its effects, it can put you years behind your retirement and savings dreams. There’s a reason Einstein called compound interest the eighth wonder of the world. Adhere to the math and reap the benefits; ignore it and suffer the downfalls of its’ absence.
It’s time to talk about the “Target” phenomenon. You know the one…you go into a Target store to pickup mouthwash, cereal and a birthday card, but leave having unintentionally spent much more than those pantry purchases cost. You take a deep breath when the cashier tells you how much you’ve spent. The euphoria you experienced when you placed those things into your cart is only slightly more than enough to outweigh the regret that also seeps in.
You win mini arguments with yourself, justifying each unplanned purchase on your way out to the car. You tell yourself you’ll do better next time. That those little items you forgot you needed suddenly rushed back to you as you perused those beautifully lit red aisles. Then, days, weeks, or months later, you drive back to Target and you do it all again.
I’m part of the madness
I am not purporting to know the sequence of your own Target experience, but am chronicling mine. Two weekends ago I walked into Target to buy, you guessed it–mouthwash, cereal and a birthday card. I left having spent $87 and wrestling with myself. It’s not that those $87 are going to do me in. It was that I am pretty sure I do that EVERY SINGLE TIME I go to Target to buy things. What is with this? Can I truly not control myself? I don’t make unplanned purchases when I go to Lowe’s or even at the slippery slope that is Lululemon. Is Target some type of Kryptonite, at which I am a reckless version of myself?
The answer, I knew quickly: sort of. I am a controlled person. I can intentionally choose to spend money or not spend money. We all can. But when I go to Target, my grocery list, clothing budget, what I wish my home looked like, and other necessary household items like cleaning products all intersect. I do not make good decisions when trying to take all these budgets into account.
Backed by SCIENCE
Places like Target force us to make simultaneous tradeoffs with limited mental capacity. There are several terms that scholars have coined over the years like the “paradox of choice” and “decision fatigue”. The former seems to have taken on more water in the last decade than the latter, but still, useful to examine. The idea is that that having too many choices is actually debilitating and that making a series of decisions may cause good decision-making ability further along in time to decline.
I am pretty sure people would need to look no further than the aisles of a Target store to hold that these are at least somewhat true.
Think about it like this, how much did those items really cost if you didn’t need the rest of the stuff you bought? Isn’t the whole point of going to somewhere like Target who touts “value” as their brand, to not spend $87 unnecessary dollars on a couple of pantry items. Where are the savings there?
What your therapist might tell you
When it comes down to it, Target offers us the chance to indulge our dreams and aspirations for our homes, our health and that general feeling like we’ve got our lives together. Target neatly packages those aspirations and stocks them on shelves. We know that change comes from a place that’s deeper than matching dishes and patio furniture, but we buy it anyway. Life does not change because of a purchase, it doesn’t even change with resolve or planning; it takes work and follow-through of the things we say we want to do to create the life we want to live.
What I’m trying to tell you…
Let’s stop getting robbed at Target and start to establish rules for our purchases. We can adhere a plan and make rational decisions not to shop mindlessly. Now, I’m not saying you can’t shop at Target, but I am saying you might need to keep yourself in check in some new ways when there.
I’ve talked about mindful spending in a previous post. I hear people throw around the phrase”things they never even know they needed” too often when talking about Target. I want to turn that around and instead think of it as “things you know you don’t need but talk yourself into buying”, often at Target. I would hate for people to keep busting their savings goals or their budgets (if you have one!) because of a Target run every week. Think about it, if $200-$300 is the amount you go over a budget or intend to save, but don’t each month, it could be attributed to a couple of ‘Target-run’ unintended purchases. That can add up to a lot of money over the years.
Spending mindfully is much better for yourself and your wallet, but it might require a little education. That’s what I want to talk about next!
Take on the big red bullseye:
Here are some ways that you can quit getting robbed at Target. Breaking the journey down section by section.
The walk in…
First off, this lady’s got a hilarious Target post, so I know this is not a new struggle. I am pretty sure that she is right in the observation that they pump Target with the same oxygen as they do in casinos. Anyway, you walk in and the first thing you see is neat little rows with brightly lit cosmetics. Then you smell popcorn and Pizza Hut and hot soft pretzels and Starbucks. Then you see the carts…think back to your intent. Why did you come here? How many things are you planning to buy? Then determine large cart, basket, or no cart.
The clothing section…
Stop buying clothes at Target. Here are a few reasons:
If you came in to buy mouthwash, cereal, and birthday cards, you should not also be purchasing clothing just because you decided to browse the 50% off clothing section in that same store. If, however, you say “but I planned to look at everything in the store!”, read on.
Clothes are not really “cheaper” than actual clothing stores despite the fact that you’re shopping at a “value” model store where things like furniture, dishes and bedding might be cheaper than going to a traditional furniture or home goods store.
In my experience, clothing usually don’t wash or wear well. I’m not sure what it is exactly, but the quality of fabric that’s used for most of their lines is not the greatest.
If you buy business/dress clothing at Target, despite not being your typical cheap pair of sandals, you will likely be shopping again for business/dress clothes 6 months later due to them loosing their shape or an unraveled seam.
The tailoring and cut of most of their clothes are loosely based off of popular cuts in fashion right now, but in an effort to be able to produce 900,000 skirts instead of 600,000, some quality sewing/tailoring labor has been sacrificed. And now it doesn’t fit quite right.
The sad leftover jewelry party…
Don’t let that 70% off sign make you go home with jewelry you don’t LOVE. It’s not a bargain if you don’t wear it. For some reason the “clearance jewelry” at the end of the aisle used to be a big draw for me. Over time, though, I noticed that those pieces turned out to be the ones that I wore the least and they ended up in a donation box. After buying slightly more expensive and better quality jewelry, I realized that when you carefully choose the pieces you buy instead of letting a sale sign choose you, they’re more fun to wear.
They really do have some adorable stuff here, but is it stuff you really want to come to? They’ve got mass-produced quirk on point, but the charm that comes with finding quirky things yourself in a memorable place means those things might not appeal to you a year or two from now.
I’m not sure who thinks ram-lamps and aluminum bar stools are practical for soon-to-be college kids’ dorms, but Target takes us to a new level of style here. I kid you not, this had a “dorm 2016” sign beside it.
Another temptation many of us face at Target is the ability to get a better version of something we already have. I’ll hear my significant other, let’s call him “Babe” (yes, like the pig!), say to me “don’t you already have one of those?”. To which I’ll snark back, but not one that is ____ or does ______. First blank was a makeup bag with a place for brushes, second one was a phone case that doubles as a wallet. Yes, yes, we already have one of these items in our possession, but look how much better this one will work? We kid ourselves on how much utility can be gained from only marginally-increased convenience and just end up with multiple items that all function about the same. Food will still taste the same even if its served on beautiful minimalist matching white plates. And despite what you think, you can resist that adorable french-bulldog cookie jar (when was the last time you baked cookies anyway?!).
Technology is continuously on an upward slope, and so are all the nuances of the products that Target sells. Coffee cups used to all be pretty ugly, BPA-ridden plastic and you can get one today that insulates, is leak-free, and balances your checkbook for you. An opportunity to buy something like this will come around again, so I’d suggest not making an impulse purchase. If you find that you leave the store and can return a week or two later, still believing you need something, then fine. But otherwise, you don’t have the budget that Yonce has.
When did office supplies get so shiny? Apparently the interior design business is slow because Nate Berkus has a line for Target. Who doesn’t need a pair of gold scissors and matching jax/bulldog paperweights in their home office?
Okay, I admit, they’re gorgeous. But you don’t want to be spending half your take-home pay on this stuff. You’ll be no more organized than you were before. I know people who spend a small fortune on this type of stuff and people who keep their crap in 10 cent paper folders who are equally organized. A trendy, fun-to-look-at, gorgeous as it may be line of things that hold paper do not an organized home-make.
Lastly, the end-caps
I am pretty sure Target did some mad research on how to get people to buy things they don’t need, and then invented the “end-cap”. The end-caps are catch-alls for items that don’t fit any other section in the store, are things they can’t sell so they put on clearance and hope you fall into the “it’s so cheap it’s practically free” mentality and add it to your bill, or just clever little ways to group many things you don’t need into things you don’t need that kind of go together.
Do not give in to the pressure that is the end-cap! Another illusion to make you think this “togetherness” of things will look good in your home or a last-ditch effort to get you to buy something for 15% off the original price. Buying things BECAUSE they are on sale is never a good idea. You can talk yourself into buying it much more easily than if you were paying full price for everything. Fight the urge!
Someone obviously knew the trouble these things and called them for what they are:
So there it is. From the mouth of an ex-Target over-spender. Life is big and beautiful without the things that Target may make you think you need. Let’s quick letting the big red bullseye trip-up our financial goals and start saving that money for great things to come. If Target runs are the difference between you successfully and unsuccessfully staying within the amount of money you want to be spending each month, kick them in the butt with the strategies I detailed in this post!
Take care and let me know if you can relate to this 🙂 at email@example.com
All the Best,
#personalfinance #money #millennial #capital #target
This post is going to be a little different. Instead of making a new money rule, I’m going to attempt to help my sister understand her money sitch. She is interning in New York City for a very classy magazine for 10 weeks. The internship is paid, she is living in the dorms of NYU due to the short duration of the internship and works approximately 32 hours a week. New York is not where I’m blogging for New Money Rules, if you haven’t already guessed.
From my conversations from her, she has told me multiple times that paying for meals, transportation and other expenses is hitting her bank account harder than she imagined when she accepted the internship. Of course, thousands of 18 to twentysomethings have a similar plight across the country this summer, with internships being almost a prerequisite to any even entry-level jobs, so I’d imagine tiny violins are getting played to tunes about money woes to parents and siblings across the country as we speak. Don’t get me wrong, I didn’t exactly take the road less paved that is designing spreads for an industry that is notoriously critical and fast-paced.I did do data entry and bent out the window for clients on chores that were non-coffee-related, so still somewhat mundane and subject to much criticism.
So here it is. What she earns, what she must spend and then what’s leftover as discretionary income.
$9/hour. Which comes out to more like $6.06/hour, after taxes, or $194 dollars a week.
Meal plan–NYU dorms require that you have a meal plan in order to live there during the summer. So an inevitable expense of $140 dollars a week. This gets her 8 meals and $30 dining dollars that can be used at CVS, among a few places.
Rent: $320 per week. The parents are funding this one for the summer. Thx M&D. So really, $0.
Transportation: $29 dollars per week (at 30-day rate, because that’s what she bought). This is the subway.
In her case, discretionary income now also includes the meals she has to pay for outside of her meal plan. So approximately 13, give or take a few snacks. To further limit what she can spend, she is only there for 10 weeks and flew from wayy out of state, so she did not buy a fridge or microwave-two staples that most college kids have the luxury (and the savings!) of having. Because of that, she has to either buy or make in a communal microwave, and she can’t refrigerate any leftovers. This also means that lunch four days out of the week is purchased at a cafeteria or nearby shop.
I know that not everybody, and in fact most people, are not upper-middle-class-sorority-white girls, so I completely understand the “pffft” sounds that might be getting made right now by you who are reading. But the intent of the post is not to criticize the amount of “aid” or privilege some might have, it is to simply look at a financial situation and find out how to make better sense of it so that saving/spending decisions can be better than they were yesterday. Money can be empowering in good way. Not in the way that Kanye West might rap about it, because apparently even he isn’t good at managing it…but only in the way that being an intern in a big city makes you feel. The money you spend or don’t spend is part of a larger purpose of achieving your goals, finding out what you want to do in life. Adulthood is an arm’s length away but you’ve already got a foot in the door. Embrace it.
Back to the expenses…with $25 dollars needing to cover approximately 13 meals and no way to store fresh groceries, she’s going to need to get creative. And probably dip into her savings. But that’s why we are here! Let’s see how she can maximize her small budget. Eating the same thing everyday can be boring, so I’m going to try to come up with a few options. Here’s where I’d like to introduce a theme that might help her balance her mealtime expenses: “Save, Spend, and Invest”. ‘Saving’ is eating food that is as cheap as it gets, mostly microwave, as you might guess. “Spending” is buying the $7 two-scoop Haagen-Daz when you want to treat yourself. ‘Investing’ is making a health-motivated decision in what to make or buy at snack or mealtime. Center it around protein so that it keeps you going and able to make the rest of your balanced (Save vs. Spend) eating decisions.
The goal with this theme is that you make all three of those decisions each day to balance out your spending. That’s one ‘save’, one ‘spend’, one ‘invest’.
“Save” options: breakfast is likely the cheapest meal of the day, and a big opportunity to save. She has access (limited) to a microwave in her dorm in the common area. A great option for brekky if you need to eat on the cheap is oatmeal. And she can use her dining dollars to buy it at CVS or alternatively, buy it on Amazon. Sounds a little funny to do, but with the Prime service, which she can borrow from me or our parents, stuff gets shipped to her building. Buying a 40-count box of quick-cooking oatmeal means the cost is 25 cents per packet. Two packets of oatmeal can usually tide one over even on the hungriest of mornings. She could also pick up one of the canister Quaker rolled-oats and purchase fruit, sugar and/or nuts to go in it at CVS, which would probably not run her more than $12-$15 dollars and could potentially last for several weeks.
“Spend” options: A cheaper “spend” option would be something like a bagel + cream cheese. Dunkin’ donuts sells bagels for approximately $2.10, and other bagel houses might run you around $2.50. Add on your schmear and there’s about a $1 premium. Though this guy might come after you. Coffee tends to be relatively cheap at bagel shops, too, so this might be a nice pair for your “spend”. You’ll probably weigh in at around $3.50, which isn’t bad. I am a carb-addicted female, so I could eat bagels at any hour of the day, for any meal. While “grabbing a bagel with the gals” isn’t sexy, it sure as heck is cheap.
“Invest” options: Picking up something from a cold-shelf will be the theme here. If you don’t have to have people prepare your food for you, it tends to be much cheaper. I am pretty sure NYC has approximately 9 CVS/Walgreens/Duane Reade/Rite Aid/Safeways per square block. And they all have food. This makes it easy, with a little planning, to duck in on your way to work and grab something. What you grab is key here, and here is my recommended list for investing in your future hungry self:
-sausage sticks-hummus + chips
It may seem funny to eat crackers and cheese for breakfast, but the fat/protein makeup can make a great meal or get you through to the next one. Nuts aren’t always cheap, but if you buy a big bag from somewhere where the price isn’t marked way up and some ziploc bags, your snacks are on point for what, a week? two?
This brings me to snacktime. Snacks are a beautiful thing. They can be great for your budget because they allow you to 1) make more budget and health conscious mealtime decisions because you aren’t starving, and 2) they are typically inexpensive because you aren’t paying for labor, taxes and the freshiest of fresh ingredients that go into dining a la cafe for breakfast. By incorporating snacks into your day (if it works for you–some people are just born and bred meat + potatoes people), you will likely decrease your overall food spending. If you don’t have to pay for a steak and fish meal because you’re absolutely famished, you can typically go for cheaper, sometimes more fun options at restaurants. By eating something ahead of time, these decisions become easier and you’re full at the end of the day. CNN says so.
He was probably hangry…http://giphy.com/gifs/wOkyANLix6yQ0
Onward, ho, Lunch!
“Save” options: I don’t know about you, but I am not above a good old PB&something. A PB and something is peanut butter, bread, and something (hopefully non-perishable so that you can keep it in your fridgeless room). Examples of these sandwich-related somethings:
-Spreadable cheeses (like laughing cow). Surprisingly, PB goes well with this kind of thing. It’s blog-approved, so we’re good on that one. Packs of 8 run at about $3.49 normally, so tops maybe you’ll spend $6-7.
-Jelly/jam. When you’re at the diner on the weekend, who’s to say you can’t snag a few from the trays on your table. Else, you can buy on several different sites. The most delicious option I found was straight from the Beyonce of the jam/jelly world: Smuckers. You can buy 200 for $26.00. That’s 13 cents per container of jam.
-Nuts and/or dried fruit. Just try it. May run you a little higher, but a great option if you chose to work that into your overall snack and grocery budget. Biggest upside here is that can be stored in your room!
-Sliced fresh fruit. PB+strawberry? Thinly-sliced apples are always a hit. PB+banana? You’d be advised to check out Epicurious’ Elvis-themed recipe here. Apples, pears and bananas are going to be relatively cheaper than strawberries. Top pricetag I’ve seen is about $1.70. That’s not bad.
-Honey=so.freaking.good. And non-perishable! If you buy generic you can pick it up on the cheap–typically less than $5
-Nutella, the snack world’s darling of this decade. Also non-perishable. A jar of this shouldn’t run you more than $5-7 dollars.
The possibilities are endless.
Make in the AM before you leave for work or pick up what you need on your way. Store PB or nonperishable items at your desk, if possible. If that’s not possible, CVS and Walgreens can be your new best friend. Keep a set of silverware in your purse (or desk as well) and you’re ready to assemble whenever you have time.
“Spend” options: A great option for using your “spend” for the day is when you’re really pushed for time. Whether you just didn’t get out of the house that morning or had no time to pick up the ingredients for your lunch sammy on the way to work to make your “save” lunch, “spend” lunches are a great way to get in both a 15-20 minute walk, and get a meal in the process. If you work somewhere where there is a cafeteria, the food there is not usually uber-cheap, but still is not as expensive as fast-casual choices like Chipotle, Panera, or Noodles and Company (etc.). So cafeteria’s are not a terrible option. From my experience, dishes that you don’t have to wait in line to get served up are often cheaper. Soup is typically a very economical cafeteria option. Grab as many packets of crackers as you can and hold your head high while going to pay. If you do eat out, here are a few tips that can help to reduce the price at the register:
-Drink water. It’s as simple as that. You’ll save anywhere from $2 to $5 per meal if you eliminate specialty drinks and soda
-Watchout for “up-charges”. Lots of places charge-up for things like “gluten-free bread”, adding cheese or bacon to your “whatever”, and choosing premium protein options (like fish or beef for chicken, adding or doubling meat) can save you a few dollars every meal. Premium sides to meals are another place where they can get you–example: I know of approximately 2 establishments in my lifetime where they don’t charge for sweet-potato fries
-Skip the ‘swaps’. Swapping one item in a dish for another is not always the same price. Make sure before you pay that you are not going to get charged for it.
-Join their rewards programs, signup for newsletters, and download apps. Many places will give you freebies every nth time you visit, give free meals for signing up, and provide exclusive deals for app-users. If you are curious as to whether they have a program and how to signup, just google the place and try to find their website. There’s usually a huge push there for visitors (to their site) to give an email or download an app.
-Look for lunch specials. Lunch is where restaurants can make lots of money, fast. They can serve smaller portions at lower prices, appealing to more people. Don’t avoid a restaurant because you know their dinner is pricey and assume lunch is, too.
“Invest” options: Again with the protein. Here would be where you go grab something like egg/chicken/tuna salad from a deli on your way to work (and store safely in the fridge) and use some of your (bodega-bought) crackers to dip yourself some lovely protein-rich meat. You could mirror what I suggested for the “invest” options for breakfast, at lunch. That lovely Chobani and granola will still be there at noon. Run down the street and grab it so that it fuels your afternoon much better than this.
Dinner. The sexiest and (can be) spendiest meal of the day.
“Save” options: Dinner is the most expensive meal if you are eating out. That’s just how things are. If you want to save money, eat dinner at home. If my sister eats dinner at home, it will need to be something she can make in a microwave, assemble in her room and even then, it must not need lots of utensils if it’s going to be feasible for her.
So here we are with our “save” options:
-Canned tuna/canned chicken. Grab yourself a fistful of mayo packets next time you’re at a deli and you can eat this stuff right out of the can, but it’s arguably better with buttery crackers. For less than $2 you’ve got a high-protein meal that you don’t need a bowl to eat it with.
-The microwave family of foods is not limited to mac and cheese: Follow my pick 2 below and eat dirt cheap food that does not in fact taste that way.
Pick one of these:
Now add one of these combinations that don’t need to be refrigerated:
olive oil+ balsamic vinegar+salt+pepper
olive oil+red pepper flakes+balsamic vinegar
The hope here is that you can buy a bottle of olive oil, butter, soy, and/or sriracha and then have shakers of salt and pepper on hand. Let me know if you think of others!
“Spend” options: Maybe 7:30 PM has arrived and you’re having a stare-down with the sriracha bottle for who is going to cook dinner…some insults are exchanged…and you find yourself out on the street walking to your favorite, oh, I don’t know, specialty grilled cheese place? Basically the same tenets apply here as I described in the lunch section…the point is to cut out extras that you might not be aware of. I could go on about this, but the point is to make good choices on your spending all throughout the day so you have zero guilt when you do choose to “spend”…for whichever meal you decide.
“Invest” options: You still want to save money by eating in, but can’t do potato with pepperoni and fake cheese another night? A few ideas for you:
-Plan to cook (perhaps regularly) or order food with a friend. My sister has the option to reserve ahead of time a small, functional kitchen for a set amount of time. Since you don’t want to have leftovers and nowhere to store them, buy ingredients for a meal that specifically can be cooked in a kitchen that’s not restaurant-grade. I’d suggest one-pot or sheet pan-type dinners that you can just dump and cook. No broiling or mixing required. go for the fast or one-pot meals that don’t require any prep beforehand or a ton of cleanup after. Everyone needs their Blair/Serena time.
Alright folks, we are going to talk about something elementary today: pluses and minuses. Specifically where it relates to your income (pluses) and expenses (minuses). The result of netting these two is the money you have left over to either save or spend, also known as discretionary income. Since this is an important term here, we are going to give it its own symbol to help you remember it: ツ. Every time we talk discretionary income, think of this guy ツ.
Knowing what your discretionary income ツ is and using it to create spending habits is one of those things I talked about in the last post that a college spending mentality does not play well with. The reason I like to use the “plus and minus model” is because as far as say, seashells are concerned, most people can tell me how many are left over if
“each month Shelly earns 20 seashells. She has to give 6 away for rent for her beach bungalow, 4 for utilities, 3 for groceries, 2 for surfboard cleaning and another 1 for those delicious margaritas they make at the shack on the corner. How many does she have left to save or spend on a new dress? You got it, 4!”
But when it comes to our own expenses, we all seem to have a sneaking suspicion that we really spend less than we do. That somehow, since we were responsible and paid over our 13 seashells for rent, utilities and groceries, we’ve suddenly got 7 seashells left for a trip with the rest of our shell-sisters when they want to go on a bachelorette trip to Las Vegas because Becky who sells beads is getting married. And then we go and the whole time we’re like:
Why does this matter?
We can all do simple math, but get confused why we have less money in our bank accounts at the end of the month. I’ve got a system that I hope is foolproof and that can get us away from the idea that calculating what we need to spend (and withhold from spending on) is difficult. You can do this in your head, but I would highly recommend writing it out on paper because then you can refer to it.
I like this system more than a budget; budgets make me anxious because they seem to make me feel constrained to either spend money arbitrarily because I’ve allocated money toward something or by the same token, not spend money on unplanned things that bring me joy.
Budget’s got us like:
Knowing our discretionary income ツ, it’s got us like :
Here’s how your pluses and minuses look in as an equation. I’ve simplified it to work for everyone so that the things that might differ on when they come out of your paycheck can still be accounted for.
Above the line:
– If you have a loan payment, especially if it is credit card debt, this payment needs some serious priority
– Retirement savings contribution
– Health and auto insurance premiums
– Utilities (your electric bill, your water bill, that pesky internet bill, your cell phone bill)*
– Savings (any amount you want to set aside IN A SAVINGS ACCOUNT for a specific purpose)
– Gas or cost of transportation
– Food/groceries/household supplies (glamorous stuff like TP, toothpaste, detergent, etc. and don’t forget food for your four-legged friends)
Below the line: Discretionary Income ツ
I’d like to talk about things that are “below-the-line” versus “above the line” of your discretionary spending. It’s important for you to distinguish which expenditures are necessary, or above the line, and which ones are not necessary or below the line. I think if we start seeing our money as above the line versus below the line, it takes away much of the anxiety around where all of our money is going. We do not need to feel guilty seeing those above the line expenses coming out of our bank account because they are just necessary parts of life. Personally, I think it’s easier to keep track of $300 of discretionary income ツ than $3000 of income a month.
Making changes to your spending and saving:
In order to have more money on either side of the line, you have to add or subtract an equal amount from the other side (provided your income stays the same). This concept is very flexible and helps you to see how you would afford just about anything by adjusting how much money falls to different items above and below the line. A few practical examples come to mind:
you want to start saving more money for retirement or put more away in a savings account
you want to aggressively pay down student loans or consumer loans (yay for you!)
you want to move and the rent is more than you’re paying now
you want to start affording different below the line luxuries or find a new hobby that brings you joy and wonder if you can afford it
your health insurance premiums are going up…where is this money going to come out of?
mom and dad are kicking you off their cell phone plan…where does that put your below the line leftover money?
your car breaks down and you need to start factoring payments into your above the line spending
you need to care for a sibling or loved one and need to factor it into your above the line expenses
you just want more below the line money for fun stuff!
The list above only mentions a few possibilities but the general idea is the same. Just keep in mind that for any increase to any one side, you’ll have to look how you can equally 1) cut back on above the line expenses, 2) cut back on below the line ones or 3) earn more money. I can tell you from personal experience that #1 is usually harder because the expenses are so limited to “needs” and that by cutting costs these one does not often find enjoyment. It’s hard to justify never turning your air conditioning on in the summer because it would cut your above the line spending, leaving you more below the line, “fun” money. Which leads me to my next point about cutting above the line spending…the expenses you’ll cut out that are typically small sums of money; you can quit using your air conditioning but that’s only saving you, tops, $100, $125 in a house and even less in an apartment.
Cutting spending from #2 gets a little easier and we will discuss how to do this in future posts in greater detail, I promise. The first step to cutting these expenses is actually knowing what your discretionary income ツ is and staying within that number each month.
A few words on earning mo’ money…
#3 is an interesting one…how do you make more money? This one is daunting and the answer is unique for everyone. I have something cool to tell you, though, everyone has the opportunity to make more money whether it’s at their current job, at a new one, by getting another job similar to the current one, by buying and selling things, and by having a side hustle (that isn’t related to their current job). A few notes on each of those:
Your current job or a new job:
One of the best places to make more money is at the employer you are with now–is it time to negotiate a raise or perhaps time for a promotion? Check your employer’s internal job postings, there are often jobs that are not posted externally in the hope that they can promote or rotate and cross-train existing employees. It’s expensive to hire new people, so they can save money in the long-term by hiring you even if they have to pay you more.
If your current job is like mine, your skills are likely transferable between employers. When you change jobs, the bargaining process should have you talking about money. They will likely offer you more money, they may offer you better hours or work-life balance and you may be doing a job similar to the one you had at your current employer. I’m not encouraging you to work for whoever pays you the most, but it’s important to be aware of your options if you need to make more money, need a change of environment, or just need to know what you’re worth. There’s nothing wrong with putting your feelers out there to gauge what your job is paying elsewhere.
Buying and selling things:
This one gets trickier. I don’t have a skill set for this because I really don’t enjoy the hassle of dealing with buyers and sellers online. If you are going to foray into the buying and selling of used goods or just goods in general on sites like eBay, Amazon or Craigslist, it helps to be knowledgeable in the product. I can tell you from experience that I know not the rules of selling designer purses nor iPhones well enough to buy and sell them with success. Also, since we are talking about selling stuff, consider whether there is still a strong market for the type of good you decide to sell.
Having a side hustle:
This one has become increasingly popular as the “sharing economy” has dominated much of the last decade; it allows you to be part of this economy where and when you have time to work because there is dynamic demand for the service and it is usually cheaper than more traditional options. Jobs like driving for Uber, selling your handmade or vintage stuff on Etsy, completing tasks for others on TaskRabbit or even renting out your pad on Airbnb.
Blogging or freelance writing–these guys have some excellent tips on how to turn writing into a full-time, money-making job or just how to make money on the side. Plus they’re pretty fun to read about, even if you are not considering freelancing or a blog as a source of income
I know this post was a long one, but I wanted to set up a very simple system for how you might come up with your own framework that can help you decide the money rules that work for you as they relate to saving and spending both above and below the line. I truly hope this system can help you in sorting out your financial situation each month. While I want to continue to talk about new ways to save and make more money in the future, I would particularly love hearing about some rules that have worked for you or maybe your thoughts on the above and below the line business I presented in this post. Send me an email: firstname.lastname@example.org.