Now till Retirement

Do you have an emergency fund set up? What the hell do I mean by emergency fund you ask? I am talking about money set aside for the unexpected(hopefully in an high interest bearing savings account). Most people sadly will answer no to this question when it most definitely needs to be a resounding yes. Without at least a couple months worth of expenses put away, you are tempting fate to lash out at you and bring in some sort of high cost mandatory bill. You never know what may happen… your car might call it quits, you might be injured, you may be laid off, etc. What are you going to do when you need money in these instances without an emergency fund?

Most people turn to credit cards, and treat them as their emergency fund. This is also bad… very very bad. Credit cards have their uses, but never if you can not afford to pay them off. The reason credit card companies make as much as they do is because people get themselves trapped be it stupidity in use or sheer desperation when crisis(what we are discussing here). If you take out high interest debt when in a bad situation, it is probably only going to make things worse, so rather then do that… we are going to plan ahead to make sure that isn’t ever necessary.

How much do you need to spend a month? Mandatory expenses only(shelter, food, utilities, transportation) anything that can be cut without a second thought(cable tv, going out, coffee shops) in a crisis doesn’t really matter. Once you figure out that number you want to have that amount times four to eight months… wherever you feel comfortable. This number may be high, but it will be much much higher to use credit to deal with problems so we are going to work towards reaching this number as a goal.

Figure out how you can fund your account(anything will do cut back expenses, do online surveys, work overtime, part time job, whatever) and begin adding as much as you can a month until you reach your goal, there may be setbacks(those crisis’s we were talking about), but with money in the fund you will be able to handle them better and bounce back much quicker then if you had used debt.

    Lets say you find five dollars in the street, what are you going to do with it? How about when someone gives you twenty dollars in a birthday card? Small amount of money earned from an online survey? Like most people it probably will be frittered away on some small junk item. I know many people who just throw away pocket change like it is garbage, then complain about how high their debt is or how they are not saving enough for their future. Instead of wastign these tiny windfalls lets instead do something useful with them.

Treat the money as if it never existed! What do I mean? That five dollars could buy me a pack of gum and a soda Philip! Well yes, but is the kind of purchase akin to just throwing away money. Instead lets apply that seventy eight cents, or that ten dollars to your debt… or maybe if that problem has already been dealt with lets put it towards, oh I don’t know, maybe your future? It may seem small and insignificant, but adding small bits here and there on a frequent basis really adds up quickly.

You should already have a budget in place anyhow and be used to living within it, do not treat any new monies as throw away lest you have obtained every financial goal you are trying to achieve. So go on now, use that pocket change towards some good for yourself and pay down those bills or add to that ROTH IRA you have yet to reach your maximum for the year on.

Do you track your income and expenses? Do you set aside money for specific goals or purposes? Do you even manage your finances? If you are like the old me, the answer is nope. This is bad, very bad. The first step before any other in taking control of your financial life is to track and budget your incoming and outgoing money. You cannot get a grasp or make any significant changes, if you don’t have a firm idea of how things are working.

You must be able to accurately track your income and expenditures so that you may allocate accordingly with you financial goals in mind. A plan must be made what to allocate money for(bills, savings, emergency fund, discretionary fund, investments, etc.) with the income that comes in… What do you have to spend out of necessity? What are your goals, long and short term? Without a plan you may as well not bother budgeting, or even sticking your money in the bank… because the option of sticking it in the mattress makes just as much sense. I cannot make your plan for you, as it revolves around your needs and wants, but I will say make sure you allow for some fun in your budget. If you fail to give yourself some discretionary funds to be wasted if you so choose, odds are you will be very unhappy with trying to live with a budget

What can we do to track whats coming in and going out? There are many options out there which range from good to bad, but anything is better then nothing. I personally suggest some variant of Quicken to help you keep track of your finances, but a spreadsheet in OpenOffice (free open source word suite), or even a notepad would do…. so long as you are actually keeping track. Once you have decided how you are to track the income and the expenditures, its time to actually go collect that information and input it. Make sure to include information on your assets and debt as well(may as well track everything while making the effort). When all is said and done and you have entered all the data necessary (Hopefully your income exceeds your expenses), you can move on to actually making your budget plan and sticking to it via some automation.

A lot of times a plan for a budget will fail, besides over ambitious spending cuts, because there is easy access to your money to spend at will. We are going to set up some hurdles to that with the use of online banking and multiple accounts. The money will still be readily accessible but when it is not in one pool it is easier for most people to leave it alone and a feeling of guilt can be associated with taking something away from its expressed purpose. We want to use a banking service that has high interest rates, no fees, and easy access…. I suggest using ING DIRECT to open multiple savings accounts(One to receive your income and the rest to allocate to your various needs and goals: bills, savings, retirement, emergency fund). We also need to open two Electric Orange Checking Accounts(one for your “allowance” a.k.a. your discretionary fund and another for all outgoing monies from the various funds). The reason we want to do everything at ING DIRECT besides the consistent great rates is immediate transfer of funds between accounts.

Once you have all your accounts up and running the basic idea is to deposit your income into your main account automatically and to have all of the other savings accounts use the automated savings plan feature to withdraw the amounts you came up with for each need and goal every month when planning the budget. The other account that should be set up to withdraw automatically from the primary account is your allowance checking account(this is the debit card you will carry with you for random purchases that are not planned… that are hopefully within what you budgeted for yourself).With all the funds separated into their respective goals and needs, we now transfer the money from those accounts to the other checking account when a bill comes due, you have reached a goal, or you need to move the money to an investment account. These are the accounts we pretend do not exist on a day to day basis so we can keep on track. Do not even think of taking money from these accounts except for their purposes, until the end of the month if there is an overage. That overage should immediately be applied to savings or retirement and just not even be considered as still existing to be used in any other fashion.Hopefully with this system, you can implement whatever your budget may be and stick to it easily.