Be A Mensch

Tip #170 – Be A Mensch. For those of my readers who are not Jewish, a Mensch means “person of integrity” in Yiddish. It is a common saying among Jews to call someone a mensch if that person is a good, kind person. If you know your neighbor has nothing to do on his birthday and you invite him over for lunch, you are a mensch. If you visit your grandmother once a week because you know she is lonely, then you are a mensch. While being a mensch is all well and good, what does that have to do with financial success? Well I believe what comes around goes around. That’s not why I think people should act as a Mensch, but it is a nice bonus.

For example, when you go out to dinner with a group of friends, and one member of the party eats for significantly less than the rest of the group and everyone wants to split the bill evenly, a mensch might stand up for this person suggesting that he pay less since he ate for less. And then maybe next time when you are the person who eats for less than everyone else, someone will remember what you did and will stand up for you so you only have to pay your fair share as well, saving you some unnecessary expenses.

If the next time a friend or neighbor gets ill, has a baby, or breaks a leg, a mensch might offer to cook a meal for her because it is the right thing to do. And then perhaps the next time you are in need, she will do the same for you, saving you spending high costs for convenience food.

Being a mensch makes the world a better place one person at a time. Sometimes it makes the world a better place three-fold because someone sees you helping a person and then they help someone in return, and so on until it comes full circle and someone down the road is helping you. It’s the idea of paying it forward. Even if it doesn’t come back to you or even if it doesn’t save you money, you can be happy in the knowledge that you have made someone else’s day or saved someone else time or trouble. And sometimes that’s even better than saving yourself money. But I wouldn’t be surprised if it helps bring you financial success, too

In Real Life – I started out this post thinking about something else entirely, but I got sidetracked yesterday and stayed up until 3 AM reading the book Three Cups of Tea by Greg Mortenson and David Oliver Relin. Now this person, Greg Mortenson is a real mensch. Delving himself into what seemed like a doomed project, not to mention risking his life, to help build a school for a group of children in Pakistan could only be done by a mensch. At first it didn’t seem like he would succeed, but he was a real mensch and worked tirelessly until he fulfilled his promise to a village in Pakistan. It seems his good works were indeed catching. Because once he got his first goal fulfilled, he started working on building more schools and caught the attention of others to support him both in efforts and monetarily. Years later it seems like the humanitarian efforts of Greg Mortenson has made him into a success with a best-selling book, a good reputation, and I assume some financial success, too. All of this happened because he was a mensch.

There is certainly more to life than making money. Making a difference in people’s lives even by small acts is certainly more important than making a buck. So while the tip in this post might not make you a millionaire or even necessarily become a money maker for you, it may change the life of someone else for the better even with a simple act of being friendly. And who knows it may even lead to financial security, as well. At the very least, you can say you learned a Yiddish word. :-)

Create An Emergency Fund

Saving Money Tip #169 - Create An Emergency Fund. In every budget there should be line items for repairs and doctor’s visits. These are regular occurrences that should not be considered emergencies. If you own a house, or a car, or any type of appliance., they will break down. There will be a need for repairs or replacements. If you have children, you should expect to take them to the doctor’s office every so often for illness. It is an inevitable part of childhood. So when making a budget, the items included on it need to be realistic to reflect your lifestyle. Of course there are always emergencies above and beyond what we budget for or expect. An appendicitis isn’t an expected event, while an ear infection in a child should be. Getting your car totaled a week after you bought it probably wouldn’t be in the budget, but repairs from dings and fender benders might be.

So where do we get the money for life’s real emergencies if they are not in our budget? They should be part of our emergency fund. An emergency fund is a set amount of money put aside to handle large, unexpected expenses. Financial experts recommend that people hold 3-6 months’ worth of expenses in an emergency fund. In tough times like today, some recommend having a year’s worth of expenses set aside.

How does one go about setting up an emergency fund? Well, an emergency fund is simply a use for a part of your savings – savings that are dedicated to emergencies. Once you are out of debt and are living within your means, you need to start thinking about saving money for other uses – buying a new for when yours doesn’t work anymore, for retirement when you are not working anymore, for buying a house down the road, if you plan to, or for saving for your child’s college, if you are hoping to help pay for it. Well, an emergency fund is another event you should be saving for. And once its built up you can forget about it. It is money set aside not for a rainy day, necessarily, but for a thundering, lightening, stormy kind of day. You don’t dig into it unless you absolutely have to, and you don’t need to add to it unless you use some of it or if your monthly expenses go up.

For example, suppose you spend $4,000 on a monthly basis for your home, food, clothes, and all of your other expenses. You should try to have a savings account of about $12,000 set aside to pay for your expenses if an emergency comes up or to pay for the emergency itself. If you get suddenly ill and can’t work for a month, then you can dig into your emergency fund to cover your rent and other typical expenses. If you suddenly have to replace a car that wasn’t fully covered by insurance, you can use your emergency fund. By establishing an emergency fund, you are helping yourself stay out of debt by not relying on money that you don’t have to pay for these sudden, unexpected expenses.

If you don’t currently have an emergency fund established, then put it in your budget as a line item so that it gets built up. Once you have the funds set aside (3 months or more) then you can stop savings toward it and put the money in savings for something else. Saving for an emergency fund isn’t fun or sexy, but it will help you stay on your feet when life hands you little surprises.

In Real Life (IRL) – I never really cognizantly saved for an emergency fund. But when I was in my 20s and single, I began putting money away in savings because that’s what I was told I was supposed to do – save for the future. So each month I put money away in either a savings accounts, a money market accounts, CDs, government bonds or mutual funds. About 10 years after college I had saved $90,000 (some of that included gifts from relatives from my childhood and other gifts – I was good at saving but not that good!). Anyway, when I got married and bought a house we used $70,000 as a downpayment on a home in the DC area. I kept the other $20,000 in savings in case we needed to replace things on our old 1950’s house.

That $20,000 has since become our emergency fund. We don’t touch it, but keep it aside for big emergencies that might crop up. For smaller unexpected events, we usually have a buffer in our checking account that we use for things such as a new unexpected air conditioner last year to the tune of $1,900 or a $1,000 repair we had on our car last month. We will dig into the $20,000 if my husband suddenly loses his job and we need to keep up with our mortgage and other expenses or another big life-changing event happens. But for now, we forget about it. In the back of my mind I know it’s there and I’m glad it’s there. So if you don’t have an emergency fund, start saving for one. And then once you have one built up, you can forget about it until an emergency happens. And then you’ll be glad you have it.

Don't Dig Yourself Deeper Into Debt - Part 3

Tip #168 - Don’t Dig Yourself Deeper Into Debt – Part 3. In Parts 1 and 2 of this series we discussed how to get out of consumer debt. In this last part of the series we will discuss how to stay out of debt.

After you have come up with an amount you need to pay off each month and have adjusted your expenses so that you can meet that payment (or increased your income to make that payment), then the final step is staying out of debt. By making a budget that lists all of your income and all of your outgo, you can stop spending more than you earn. But you need to strictly follow the budget to stay within your means. If your income is $5000 per month, then your expenses need to stay under that amount to stay out of debt. Simple in theory, but harder in practice. So let’s look at specific methods of staying out of debt.

The first step to staying out of debt is to not spend money before you earn it. Some people spend money before they get it because they know it’s going to come in their paycheck next week or next month. Well, let’s try to get out of that habit. Scrimp and save for a week or two or a month until you are all caught up with your paychecks, so that you are not spending in advance of earning the money. Once you are caught up, stick to your budget and don’t spend the money unless you already have it. It will take many sacrifices but once you are on the right spending cycle with your income, it will be much easier to live within your means.

The other step to staying out of debt is to not spend more than you have by not using your credit cards. Using credit cards allows you to spend money that you don’t have. If you just stick to money that you have in the bank and in your pocket, then you cannot go into debt. All of this sounds ridiculously simple, and while the concept of it is, the reality isn’t always so. A car breaks down and there is no money to pay to fix it, so you put it on your credit card. Or a special occasion comes up and you decide to front the money until you get paid the following week. As I said, it’s not easy. It takes a lot of discipline, hard work, and a realistic budget. That includes a line item in your budget for car repairs and a line item for special occasions. If you have an old clunker car, then you need a line item in your budget for repairs. Otherwise the budget isn’t realistic. If you have no money left in your budget for this line item, then you need to cut out a luxury in your life – the cable t.v. or the new clothes you like to buy. Again, it sounds simple on paper, but is harder to do in real life. However, in order to keep your outgo less than your income, you need to be prepared for things that come up and include them in your budget. This way you are not putting things on your credit card that you haven’t budgeted for.

In summary, to get out of debt, address your problem, figure out a payment plan to pay the debts back by increasing your income or adjusting your budget. If you don’t have a budget, make one, and make sure it’s realistic to meet your needs. Once you are following these steps and have gotten out of debt, you need to stay out of debt. Don’t spend money before you earn it and don’t ever spend money that you don’t have. Once you follow these steps, you will get used to your new way of life and you will wonder how you ever lived in debt before. You will feel freer and happier, and will probably sleep better at night, too.

In Real Life (IRL) – As with every thing else, once you address your problem that you are in debt, you are halfway there to solving the problem. I always read about people who follow Dave Ramsey to get out of debt. Out of curiosity I read his book and understand his appeal. He outlines about 7 steps to getting out of debt. It’s not a magic cure or anything truly out of the ordinary. It takes hard work, budgeting, and being committed to paying off your debt on a schedule.

While reading finance blogs and forums, I have read about many people who have paid off their debt using Dave Ramsey or similar plans, and I’m talking thousands and thousands of dollars’ worth of debt. That takes incredible discipline and a change of spending habits. Anyone who can do that has my admiration. It’s hard work to be sure. But the results are so worth it. Once you are out of debt and are living within your income, you can really start to live. You can go to sleep well at night knowing how your bills will be paid on time. Also, you can spend your money contentedly knowing that you can afford what you are paying for. It's not easy and I wish everyone who is in debt or whose spending is out of control the best of luck in taking the first step to taking care of it.

Don't Dig Yourself Deeper Into Debt - Part 2

Tip #167 - Don’t Dig Yourself Deeper Into Debt – Part 2. In Part 1 of this series we discussed how to start getting out of consumer debt. In this part of the series we will discuss how to completely get out of debt.

After you have come up with an amount you need to pay off each month (in our example we came up with $333 per month), you must figure out where this $333 is going to come from. This is the harder part. Again, if this debt you are paying back is from a time when you were spending more than you earned (but you aren’t spending more than you earn any more) or from a one-time event in your life then you are in a better position than someone who is currently living above their means. If the debt is from one of the first scenarios, you have two choices – cut down your current expenses or earn more money. If you can get a second job paying $333 per month, then great. Your work towards paying back your debt is pretty much done. (Although there is still more work to do to stay out of debt.)

If you can’t bring in any more income, then you need to cut down on your expenses. Cutting down your expenses means writing up a realistic budget (or a list of your current expenses/spending habits) to see where your money is going. And then you must evaluate what you can cut to make up the $333 per month to pay back. Hopefully, you can find easy ways to cut back to save up that money. Cutting back on cable and trips to the beach for a few years might be enough to cover your debt. Or maybe you need to do something more drastic like finding an apartment with lower rent.

Many people at this point might say that they cannot cut their expenses any more than they already have. I don’t believe this. There is room in almost anyone’s budget to cut expenses. Cut it down to basic needs only if you have to. Getting out of debt should be your top priority. Drink only water; don’t buy new clothes; cut your own hair: or carpool to work. All of these types of things cut expenses out of your budget. And if you truly have no other expenses to cut then go back to the first option, which is to bring in more income. Those are your only choices or you will never be able to pay back your debt.

Now, if your debt was not a one-time occurrence or the result of frivolous spending when you were younger, then you are on your way to being debt free and building up financial security. But if the debt you are paying back is still accumulating because your expenses (or outgo) are greater than your income, then you are still accumulating debt even as you are paying back your old debt. And if that is your case, then you will never pull yourself out of the hole you are digging.

This is why a making a monthly budget is vitally important. You must list out all of your expenses in all of your categories of spending. If the total amount of monthly expenses is greater than your monthly income, then you need to cut down your expense until they are equal or less than your income. And that means including a category for your monthly debt repayment. Again, you figured out back in the goals section of this exercise the amount of debt you needed to pay back on a monthly basis (in our example $333). Figure it out so that it is a reasonable amount that you can afford to pay. And try to do it in the shortest timeline possible so that the goal is attainable (about 5 years or less). Any longer, and the goal starts to seem out of reach, and you will lose interest. Once the full debt is paid back, that money can become your savings. In the last part of this series we will discuss staying out of debt.

In Real Life (IRL) – I mentioned in my first post that I was recently thinking about debt repayment because some people I know who I believe are in debt seem to continue on their wild spending spree. Impromptu vacations, costly clothes, and dinners out seem to be the norm in their everyday expenses. I cringe when I hear them talk about all of the things they are doing, because I am fairly certain they don’t have the money for it, let alone that they already owe money to credit card companies. I think it’s so easy to spin out of control in this regard. Once people already owe a few thousand dollars, what’s a few more dollars for Chinese takeout or a couple hundred dollars for a hotel?

The problem is besides that they are adding to their debt, they are not facing their problem, which is a continual cycle of spending more than they are bringing in. Over time the debts get larger until there is no end in sight to pay it back. Facing reality and suddenly living on less isn’t appealing. But at some point they either need to address the problem or they may need to declare bankruptcy, which should really be the last resort. They really need to figure out a debt repayment plan and then cut back on their expenses or they will never dig their way out of the debt they have created.

Don't Dig Yourself Deeper Into Debt - Part 1

Tip #166 - Don’t Dig Yourself Deeper Into Debt – Part 1. Getting out of debt is not a forte of mine for, fortunately, good reason. I have never been in debt. Well, I have a mortgage on my home that we’ve always been able to handle, and if push came to shove, I could pay it off if I had to. What I mean though is that I’ve never been in credit card debt, student loan debt, or any type of consumer debt. So I have no 5-point plan or 7-point plan for people to get out of debt. But I do have friends and family members who I believe are in debt and I wish I could offer help or advice to those in that situation. But talking about money to people I know in real life is a bit of a challenge. Most people who are in debt don’t advertise it, and many who are in debt don’t really want to hear what others think they should do about it. But I’ve been thinking about it a lot lately, so I figured I would at least write my thoughts here and maybe help someone I don’t know.

Once you are in debt, don’t dig yourself deeper into it because you don’t think you can pull your way out of it. If you are $50,000 in debt, don’t run out and spend another $10,000 because it’s just a bit more debt. That’s like a person who is 50 pounds overweight thinking it’s okay to eat more, because what’s a few more pounds? Well, truly, it’s a few more pounds you need to get rid of when you decide you are too fat. Just like $10,000 is extra money you need to pay back when you decide you need to take control of your finances.

Before you do anything, take a realistic look at your spending habits and figure out why you are in debt. If the debt is being carried over from a foolish point in your life when you were spending more than you earned, but you are not anymore or if it was from a single event in your past like paying for college or a big medical bill, then you are not in too bad of shape. But if you are still spending more than you earn, then there is a lot more work to be done.

In either case, write out a plan of attack to pay back your debt. Paying back $20,000 or $50,000 isn’t going to be easy. That’s for sure. But it’s not impossible. Either of those amounts sounds overwhelming. So break down the amount into smaller amounts so that your goal is attainable. Paying back $20,000 can be done easily in about five years by packing back $4,000 (plus any interest accruals) per year. Does paying back $4,000 seem attainable to you? If not, break it down even further. How much does that work out to per month? About $333. Now that sounds like a manageable amount. Now you have a plan of attack. You plan to pay off your debt of about $20,000 by paying it off in about five years by paying back $333 per month. In the second part of this series, we’ll talk about how to get that $333 and how to stay out of debt.

In Real Life (IRL) – The reason I’ve been thinking about debt a lot lately is because I have my suspicions that someone I know is deeply in debt because of some expensive spending habits and some bad times with the current economy. And I suspect these people aren’t alone in this situation. What gives me great pain, however, is to see these people continually spend money as if they are in no financial trouble at all.

My family who is in decent financial shape doesn’t spend money on such luxuries that these people allow themselves. And that bothers me. Not because I am not living the good life (I am quite happy with my expenses), but because people I care about are living beyond their means. Whatever debt they may have already been in, they are continually adding to it as if just a little bit more won’t matter. I’d love to sit them down and ask them to write up a plan to pay back their debt and then ask them to write up a reasonable budget to live on. But I can’t, because it’s not my business. They are grown adults who make their own choices. I try to be a good example to them but it seems not to make a difference. So I struggle with my choice not to say anything to people who I think are figuratively drowning in debt. I’ll talk more about it in the second part of this series when we discuss how to come up with the money to pay back your debt.

Consider Ancillary Costs

Saving Money Tip #165 - Consider Ancillary Costs. I have always advised to use a budget and to do your research when making a decision to buy a relatively expensive product. For example, when you want to buy a computer, a gaming system, or a new cell phone, I suggest making sure that there is room in your budget to buy it. Then I advise to do your research to find the best product for you at the best price. But what I didn’t warn anyone about is ancillary costs. Ancillaries are the “other” costs that go along with a product. For example, when you buy a digital camera, you need to buy the battery that goes with it, a battery charger, a memory card for it, and maybe a case. Those are all ancillary costs that we may not have factored into our purchase price. But they are very important costs because they often add up pretty quickly and can sometimes exceed the cost of the original product itself.

In fact, the marketing of some products is based on selling the main item cheap and then making the money in the ancillaries. Think about computer printers. You often see ridiculously low prices on printers. But then the ink cartridges are very expensive to replace. Or think about cell phones. How many times can you get a cell phone very cheap, but then the calling plan you have to take is expensive?

Sometimes there may not be ancillaries with the product, but other related extra costs on your end. You buy a new television, but it doesn’t fit on your t.v. stand, so you have to buy a new t.v. stand. Or you buy a new comforter but the dust ruffle you own doesn’t match it so you need to buy a new dust ruffle. Or you buy a new, bigger desk for your office, so now your old bookcase doesn’t fit, therefore you have to buy a new bookcase.

When you are doing your research to buy a new product, make sure you take into consideration the ancillary costs - the cost of the games for the gaming system, the add-ons for the digital equipment, and the extra costs that you didn’t take into consideration. Then reevaluate the purchase to see if it really is a good deal at that price or if instead another product that includes the ancillaries or doesn’t require you to buy something else new because what you already own won’t work with what you are buying would be a better purchase. Make sure you are aware of all of the extra costs with your new purchase so that the whole purchase fits into your budget.

In Real Life (IRL) – I mentioned a few weeks ago that our computer crashed. My husband, who likes to get things done right away without doing proper research went the next day to a computer guy who does work for his office. The guy sold him a refurbished computer, much faster than our old one, but which allowed us to use our same memory. My husband brought it home, spent a couple of hours setting it up and loading on it what we needed. He then attempted to hook up the printer. Unfortunately, the printer cable was an older type and did not match up with the computer. So he called the computer guy who said we needed a special cable for a cost of about $50. The whole computer was only $300, so this was a significant percentage of our new purchase and one he hadn’t taken into consideration. At that point he went ahead and bought it and now the computer and printer work fine. Could he have gotten a better deal with a computer that did not require a new printer cable adapter? Perhaps. But the point is, we didn’t take into consideration the total cost of the new computer and once we got sucked into it and devoted hours of time to set it up, we were reluctant to not go ahead and pay the extra ancillary costs.

Now I am not busting on my husband. So I will give an example of some ancillary costs that I often encounter. My daughters and I all like American Girl dolls. While I realize they are expensive, I prefer this type of play over video games or more mature games. Plus we almost always buy our dolls on the secondary market. For a long time my daughter wanted a “Kit” doll. We read the stories and saw the movie. When I found one on Craigslist for $65 right before my daughter’s birthday, I bought it. My daughter loves this doll and loves to imitate Kit. So the next thing my daughter wanted was a typewriter like Kit has. Fortunately, typewriters aren’t in great demand and I was able to buy one for $10. We also like to dress Kit in period clothing (she’s from the depression-era) and with period accessories. So I have now bought Kit a vintage camera set, a depression-era work lamp, and some period clothing. So while the cost of the doll wasn’t too bad (and even new she would have been “only” $95), it’s the price of the extra clothing and accessories, where the costs really add up.

So next time you are making a purchase or comparing two items to buy, take into consideration the ancillary costs that go with the product. You might be surprised at how much you will really be spending.

Look Out For Yourself

Saving Money Tip #164 - Look Out For Yourself. Very few people out in the real world have your best interests at heart. They may not be out to get you, but most are not out to help you either. And as it pertains to finances, they probably don’t care if you spend more than you can afford, if you get the best deal, or if you get what you want. That’s why you need to look out for yourself. Used car salesmen have a notorious reputation for being slimy. No one expects them to have your best interests at heart. But what about a realtor? Most people who buy houses love their realtors. And if you are in the market to buy a house, a realtor can be a great asset. But remember, that person has a job, and that job is to sell you a house. He or she may not care whether it is in the best neighborhood for you or if you can really afford it or whether you can get a better price for it. She may care, but she may not. That’s why you need to look out for yourself. Research as much information as you can about prices in your target neighborhood. Be realistic about what you can afford; don’t just go by an industry standard. Don’t settle for less than you want just because someone told you to do so. You have your own best interests at heart, so figure out things for yourself.

Buying a house isn’t the only area where you need to look out for yourself, but it is the biggest one-time cost most people incur in their lifetimes. Another area to be careful in is in investments. Suppose you want to start investing some money in places more sophisticated than the bank. Someone gives you the name of a financial advisor and you meet with him or her. He gives you some places to invest that he thinks will be good for you and you follow his advice. Did you know that he may be making money off your investments? Did you know that certain companies might be paying him a commission from what you bought? Some financial advisors or planners work on a commission basis. Company A might pay him 1 percent of your investment if you invest your money with Company A. But Company B might pay the advisor 2 percent of your investment if you invest it with their firm. Which firm do you think he’ll advise you to invest in if he doesn’t have your best interests at heart? There might not be anything legal wrong with what this person is doing. But if you the person is looking out for you and your investments, and he is not, you may get screwed.

And it’s not just the big purchases or the major events where you need to look out for yourself. The little things matter, too. The salesman selling you the television on the showroom floor cares about his store’s bottom line or his commission; he may not really care whether the Panasonic or the Sony is a better model for you. The bookseller up the street is not going to suggest that you can get a cheaper price for the same book on Amazon. Nor is the sporting goods store salesman going to tell you to check out Wal-Mart for a tennis racket.

And it’s not just salespeople who aren’t necessarily looking out for you. You need to keep on top of your doctor, your dentist, your activities, your vacations, your utilities, and just about everything you buy. Again, I am not saying that people are out to get you nor am I saying that there aren’t caring, dedicated realtors, investment advisors, or store salespeople. What I am saying is that you cannot assume that the person helping you is looking out for you. Some will and some won’t. And unless you know for sure which type the person is who is helping you, you need to look out for yourself.

In Real Life (IRL) – We stayed in a hotel this past weekend when we went up to my parents’ 50th anniversary party. I did my research and compared similar hotels’ prices online. I called the one that I thought was the lowest. I was quoted a rate on the phone, however, which was higher than I wanted to pay. When I told her I’d call back, I was suddenly offered a lower rate. Obviously, the hotel wants to rent their rooms for the highest rate possible. The goal of the hotel person on the line was to get me to reserve a room at the highest rate she could. And when that didn’t work she lowered the rate to one that she and I found acceptable. She was looking out for herself (and her job) and I was looking out for mine.

At one time I was seeing a highly recommended, highly regarded fertility doctor because I had had two miscarriages. While seeing him, I had a third miscarriage, and I told the doctor I was done trying to get pregnant. I mentioned that it was causing too much emotional turmoil and stress in my life. And that I couldn’t go through getting pregnant again only to have it not last. I proceeded to tell him how I had always dreamed of adopting, and now I was going to go that route instead. Do you know what he said to me? “There are so many complications with adoptions. And I’ve heard so many bad stories. Why don’t you try this fertility procedure instead?” Seriously. This is supposed to be a caring, compassionate doctor who is looking out for a hurting, vulnerable woman, and that was his answer? Was he hoping to eek a few more dollars out of another treatment for me? Based on what others have since told me about him, I think so.

The bottom line is, nobody will look out for you like you (and maybe your mother) will. There are caring, compassionate people out there, for sure. But unless you know without a doubt that you are dealing with one of them, make sure that you are looking out for yourself. You may save a lot of money and heartache in the long run. For other ideas on saving money, check out Frugal Fridays.

Figure Out What You Are Saving For

Tip # 163 - Figure Out What You Are Saving For. I have written recently about having financial goals. And I am going to discuss them again because I think they are very important. Many people I talk to or read about discuss how much they save on various items and events. “I saved 20% on my grocery bill!” “I cut my cable bill in half!” “I can feed my family for only $50 per week.” All of these steps are great. But why are they doing it? Saving in and of itself does not accomplish anything unless you are actually benefiting from the savings.

If you normally have a $500 monthly grocery bill and can cut it down to $400, that is a great way to accumulate money. But it is what you do with that savings that is important. Are you going to put that $100 towards a debt that you owe? Are you going to put it in a retirement account? Your children’s education fund? Or are you saving money in one place and spending it in another?

As you start down the path to financial security, having goals are the most important step. Write them down and then work toward them. They may need to be revised as circumstances change or they may need to be tweaked when you realize how realistic or unrealistic they were. But writing down your goals will at least lead you in the right direction. Then you can take the steps to save money. As you save money you can put it towards your goals. This way you are not saving just for the sake of saving but instead you now have a clear direction for the money that you have saved.

It’s a very simple step toward financial security, but one that many people don’t take. They gleam about the deal they got on their new car or the cute suede jacked, but good deals only get you so far. Taking advantage of the money you saved from the good deal is the next step to get you where you want to be financially.

In Real Life (IRL) – As I mentioned in many of my posts, I have several financial goals written down for our family. One goal is to put $2,000 toward each of my children’s college education. Another goal is to put $5000 into a Roth IRA for my husband and me (total $10,000). In order to save that $16,000 per year, I need to be careful with my spending. One area I often spend money on is books. I love to read. I can go down to the nearest bookstore and buy a new book once per month that I like to read at a cost of $15 per month. That would cost $180 per year on books. Or I can go to the used bookstore in another town and spend $5 per month on a new book and spend $60. Then I can marvel at my ingenuity and savings. I can write about it on my blog that I saved $10 this month on books. Hooray!

But what do I do with that $10? I may treat myself and my children to lunch at a local sandwich shop or I buy some ice cream on the way home. Whoops! So what good did that savings do for me if I didn’t actually put that $10 that I saved toward my goal? It did absolutely nothing. Yes, I got a good deal on a book but it did not lead me toward financial security nor do anything for any of my financial goals.

Instead, if I take that $10 and deposit it in my daughter’s college account I am now contributing toward our bottom line. I saved our family some money and then I took the next step and put it towards savings. Taking that next step after saving money is a big step that many people don’t do. Getting good deals isn’t good enough. You then have to act on the money you saved from the good deals you get and that will lead you to more financial security.

Have A Fun Summer With Children On A Budget

Tip #162 - Have A Fun Summer With Children On A Budget – Since we are in the midst of summer, I have been evaluating the choices I have made so far for activities for my children. Some were expensive and some were cheap or free. However, the most important thing I did to keep our summer costs down was to set a summer budget. Cost for activities in the summer can skyrocket if you don’t pay attention. Choices for summer activities include camps, pool memberships, concerts, movies, day trips, water parks, and many other things. Costs can be as high as $4,000 per child for an 8-week summer camp or as low as free if you get very creative with community events, playgrounds, and stay-at-home activities.

Working parents don’t usually have much of a choice – they are limited to either summer camps or some other type of full-time care for their children. But stay-at-home parents have many more options and can occupy every minute of their child’s time or do very little, and it can span the range of prices.

If you haven’t already put summer activities on your budget, why not take a minute to estimate the costs associated with entertaining your children while they are out of school? Vacation is usually a separate budget line item, so that can remain separate. But estimate what it will cost to sign your children up for classes, pool memberships, camps, and miscellaneous activities for the rest of the summer (or for the whole summer and prorate it). You might find that you need to work more free activities into your schedule to keep costs down for the rest of the summer. Or maybe you have been taking advantage of several cheap community activities, and you have extra money to send your child to a camp for a week at the end of the summer. Whatever it is that you determine, make sure you make summer activities a part of your budget. It will give you freedom to know that you can afford the extra swim lessons or whether you need to save money and teach your child to swim yourself.

In Real Life (IRL) – When I made up my yearly budget, I included a line item on there for summer camps. I also included classes that we would be taking in the summer. My goal for this summer was to spend $1,000 for all three of my children’s activities excluding two vacations we have planned. $1,000 may not sound like a lot to occupy three children all summer long, but with some creative planning it can be done. One option was to join the local swim club for $600 for the summer. For that price, it doesn’t sound like a bad deal, and it’s not if you take advantage of it. Since I am not a huge fan of swimming or hanging out at the pool all summer, I chose to seek other activities. Putting all three kids in camp for the summer would have been cost prohibitive. Also, my youngest who is barely 2 doesn’t really need it. My 4-year old doesn’t really like it, which leaves me with my 7-year old who was the only one dying to go to camp.

Armed with that information, I decided to take advantage of the a-la-carte menu of summer activities. Again, my goal was to keep in under $1,000. We basically had 11 weeks total to occupy. Two of those weeks will be taken up with vacations, leaving us with 9 weeks. I tried to scatter our structured activities in with our free time so were not “bored” for too long of periods at a time. Here is how our costs played out:

--I enrolled my oldest in the camp she was “dying” to go to. She is doing a two-week session for a cost of about $325.
--She is going to two weeks of Girl Scout Camp for a cost of $145.
--She is taking one month of piano lessons for $60.
--My middle child is doing one week of “camp” at the local community center for $125.
--She is also doing two mini-weeks at the same place for $75.
--She is taking 6 weeks of gymnastics lessons at the same community center for $30.
--My 2-year old is doing 8 weeks of a “run around and get your energy out” class for $50.

The total cost of our structured activities is $810. That leaves us with $190 to play around with for water parks, ice cream or eating out, and other activities with a fee. These will be alternated into the roation of camps and classes.

In between we have been walking to the library for many story times, puppet shows, and presentations. We have ridden our bikes around town and visited playgrounds. And we have had play dates with friends. I have found that my interweaving the costly structured activities with the less-costly (or free) ones, we can keep our summer costs to a minimum and still have a lot of fun all summer long.

Take One Step At A Time

Saving Money Tip #161 - Take One Step At A Time. Recently I saw a question posed online about how a young person can buy a house in the expensive DC area if he/she is not the product of a wealthy family or a doctor/lawyer/highly paid professional. I know it sounds cliché, but my answer to that person is to do it “one step at a time.” Put a few hundred dollars into an account each month and over time your money will grow until you have enough to put down on a house. Really, it’s that simple. It’s easy to squander a couple hundred dollars per month. And if you don’t think you are, then reevaluate your expenses. This particular person who asked the question lives on his own, paying a fair amount in rent. For young people (in their 20s), it’s pretty widely practiced in this area to live in a group home or have a roommate or two. If you are serious about buying a house some day in the not-too-distant future, then live with roommates for a few years. It’s an easy way to pocket several hundred dollars per month so you can buy they house that you dream of. A recent graduate from college who starts putting away $300 per year should have about $50,000 to put toward a house in 10 years if he earns 5% interest per year. No, it’s not a get-rich quick scheme. Nor is it exciting, sexy, or fun to get your money that way. But the important thing is that it works.

“Taking one step at a time” works in most areas of finance. If you are in debt and want to get out, it’s wishful thinking to do it overnight unless you suddenly come into money, which is unrealistic. Instead, putting a little bit towards it on a regular basis will cut down or eliminate your debt. Again, it’s not exciting to do it that way, but it’s achievable – and more realistic than waiting to win the lottery or for Great-Aunt Sophie to pass on and receive an inheritance from her.

Want to learn about finances and investments? Don’t do it all at once. The meaning of bonds, interest rates, IRAs, 529s, and mutual funds will get all mixed up if you try to learn it all at once. No one becomes a financial expert overnight. Pick a topic that you are interested in such as saving for retirement, and read up on it. Learn the terms and talk to people about it (or read this blog!). Once you are comfortable, move on to the next topic. As you put into practice what you learn, step-by-step, you will become knowledgeable about finance.

Very few people get rich quickly. Even those that make huge salaries often spend all they make. But those who are successful financially are mostly the ones who took things one step at a time. They saved one dollar at a time, chipped away at their debt little by little, learned about investing slowly, until they woke up one day 20 years later to realize they had gotten rid of their debt, accumulated hundreds of thousands of dollars, and knew a bit about what they were doing. If you want to build up your savings, pay off debt, or just learn about finance, then it will take time. Reading books, talking to people, and saving a little bit at a time will get you where you want to be financially. In other words, slow and steady wins the race, folks.

In Real Life (IRL) – I started thinking about this post when I saw this question posed on a forum I frequent. While I was 32 when I bought my first house, I had saved quite a bit of money by the time I was 30 and was ready to buy one earlier. As I’ve mentioned in the past, I had a good start in life, but I did not inherit thousands of dollars or have a super, high-paying job. In fact, my first job out of college, I was making under $20,000 exactly 20 years ago. But until I was about 30 years old, I saved on rent by living with friends. This allowed me to put away a few hundred dollars per month that I wouldn’t have had if I lived on my own. Yes, after a while it got old, and I was ready to branch out on my own. But by sacrificing privacy for a few years, I was able to build up a large deposit to put toward a house for the long-term.

Even as a finance major in college, I didn’t learn a lot about personal finance in school. I knew what a bond was and how interest rates are calculated, but I was never taught by any teacher about how to build up savings for myself or how to invest my own money. But I learned from family and friends in baby steps. After being comfortable with money in savings accounts and CDs, I took the baby step of investing in a mutual fund – where I could potentially lose the principal (the money I put in). Did I put all of my money in there? No. Did I just pick one out of the thousands out there? No. I talked to friends and family. I read up on a few different ones, and then I slowly made my way into real investments with a small dollar amount. As I became comfortable month after month putting a small dollar amount in there, I gradually started putting more into the fund and expanding into other funds. I did it slowly and methodically until the point where I am very comfortable with this type of investing.

Similarly when I was ready to invest in individual stocks, I joined an investment club, where people pool small sums of money together to create a bigger pot and buy more stocks in order to diversify or not have all of our eggs in one basket, or stock. By entering the stock world with others who were more knowledgeable than I, I was able to ease into this world with my hand held. Once I became comfortable, I started buying stocks on my own. It was a slow process that took me about 3 years before I got to that point. And yes, I made some mistakes but not as many as I would have made if I started buying stocks hastily. Again, slow and steady wins the race. Time goes by fast and before you know it, your money has built up and you have learned a few things about finance and investing over the years just by taking it one step at a time. For posts about frugal living so you can help reach your financial goals, check out Frugal Friday.

Update on Plan, Plan, Plan

After I posted yesterday about planning and shared my lack of planning for my parents' 50th anniversary gift, I decided I really didn't think I got such a good deal on the digital photo frame that I bought at Target for them, and that it really wasn't exactly what I wanted (too small, wrong color, etc). So I went online again and checked the local stores' websites a second time. I saw a frame at Wal-Mart's website that looked promising and got good reviews, and I saw a couple of nice ones at Microcenter. So I had my husband return the original one to a Target near his office, and then he stopped at Wal-Mart to check out what they had. He said there was nothing good in the store. So, on the way to dropping my daughter off at camp, I stopped at Microcenter and saw one of the ones that I liked online. And, to sweeten the deal, it was on clearance because the box was beat up. I ended up spending only $10 more for a frame that was much bigger than the one I originally bought at Target. I am much happier with my purchase, and will take my own advice next time and plan ahead for my gifts and other big expenses. Now I'm off to find a dress.

Plan, Plan, Plan

Tip #160 - Plan, Plan, Plan. The more I think about personal finance and the best way to build up savings and investments, the more I realize the importance of planning. The simple act of writing out a budget, even a general one, gives you a good idea of how much you can spend in different categories. Sure, we know that budgets aren’t perfect, but they go a long way in giving you an idea on how much you really have available to spend, and ultimately saves you money.

Besides using budgets as an overall planning tool, everyday planning is important, too. Planning your big purchases in advance by doing research will ensure a good price for a product you really want. Buying something at whim will usually result in overpaying and not necessarily getting the best product for you. Think about needing a television set. If your t.v. broke today and you went to the nearest store, you would pick out a new television from the store’s selection, pay the asking price and leave. Even if the store is known for its good prices, do you know if you go the right television for you? On the other hand, if you can put up with no t.v. for a few days, it will give you time to research televisions online, read customer reviews, and then find a good price (if not the best) for the one you choose. The second behavior will result in a television more in line with your needs and at a better price, all because of a little planning.

The same is true for other aspects of your everyday life, too – not just big purchases. Having an idea in your head (or written down) about what you are going to make for dinner will lead to a less expensive, more complete dinner than deciding at the last minute what you can whip up quickly or having to do take-out and spending more money because you weren’t prepared. When you go out for the day, bringing little snacks or drinks will save you from buying overpriced snacks at fast food or convenience stores. Again, just with a little planning.

With most things, the more you plan, the more you will save. Anytime you are in a rush to get something, you will most likely overpay because the cost of convenience is high. Of course, it is not possible to plan for everything! When the air conditioning breaks in July, you may not be able to wait a few days to call around and compare prices. Fortunately, in this Internet age, we can still sometimes do a “quick and dirty” research to at least help lower our convenience costs.

So, if you have events coming up, start planning what you will wear, what present you will buy, and what you will need to get there. If you have a major purchase in mind, start doing your research. If you don’t do meal planning, attempt to at least come up with dinner ideas for the next few days. And if you are going out for the day or away for a week, think about what needs your family will have during that time so you don’t have to buy last-minute, convenience items because you didn’t bring them with you. A little planning in your life will go a long way in keeping your expenses low, so you can spend money on things you really want to buy or do or at least put some away in the bank.

In Real Life (IRL) – A lot of things that are good in theory are good in practice, too. As long as you actually do them.. Planning is one of those things. I am generally a planner. I am good about bringing drinks for my kids when we go out for the day so I don’t waste money on drinks from fast food restaurants. And I often bring snacks with us, too for the same reason. and I usually research our big purchases or even our small ones. I truly believe planning saves people a lot of money.

But we really do need to practice what we preach. I realized this yesterday when it occurred to me that I haven’t bought my parents a 50th anniversary present. We are having a party for them this weekend, and while I had been busy making party favors, writing out the invitations, and coming up with a trivia game to play, I plumb forgot about buying them a present. Actually, I had a couple ideas in my head from a long time ago, but never acted on them, and now it's too late to do so. Then my sister gave me a good idea of buying them a digital picture frame and pre-loading it with pictures of our family through the years. I loved the idea and went right to the Internet to look at different brand frames, their reviews, and prices. Of course there were dozens. Unfortunately, the majority of them had to be bought online and I didn’t have time for that. So I started looking at local stores’ websites, but many of them are only available online, too.

At this point, I figured I just needed to buy one at a store in person. With Circuit City closed, that left me with Best Buy, Microcenter, Target, Wal-Mart, and K-Mart to look at. And if I had all kinds of time on my hand, I probably would have looked at at least a few of those stores. But because I failed to plan out this gift and didn't have much time, I decided to choose just one store to go to. After all, I have a 2-year old home with me all day. I’m happy if he’ll last through shopping at one store, let alone several.

So I chose to go to Target yesterday in a 3-hour window while my both of my other kids were at camp. I walked into the store, looked around at what they had and chose one out of about 10 based on looks and price. Was I the best purchase I ever made? No. Could I have gotten it for a better price? Yes. When I got home, I looked at reviews of the frame – which were fair, but not great. And I saw lower online prices than what I paid. Because I didn’t do proper planning, I didn’t get the best product or the best price. I could probably check out another store today, and return this one if I find something better, but guess what else I didn’t think about? A dress! I need to find something to wear before Saturday, too. Ugh!

And now you know why I have been thinking about planning in terms of personal finance lately. Mostly because I haven’t been doing it, and I realize how much it’s going to cost me. So take my advice and try to plan out your purchases, as well as your activities, it will save you money (and lots of running around) in the end.

Figure Out Your Net Worth

Saving Money Tip #159 - Figure Out Your Net Worth. In this post, I suggested doing a mid-year review of your finances. As part of that review I mentioned reviewing your budget, and your financial goals as well as creating a net worth spreadsheet. What is net worth? Net worth is almost exactly what it sounds like. It is what you are worth. In accounting terms it is assets minus liabilities. In layman’s terms, it is what you own (your assets) minus what you owe (your liabilities). Another way of looking at it is Liabilities (what you owe) + Net Worth = Assets (what you own).

So what is the point of figuring out your net worth? It figures out what you are worth at a given point in time. You don’t need to calculate your net worth frequently. That’s like someone who likes to sit there and count his money. Instead, it can be useful to compare your net worth from one period of time to another period of time to see how much it has grown (or lost). It can help you keep track of your long-term goals. You can figure out your net worth once per year, twice per year, or 4 times per year. More than that, it is probably not necessary. If you decide to do it once per year, then try to do it around the same time of the year. End of year or mid-year is a good time. This way you can have consistent comparison across years to give you a good idea of your progress. For example, you might have a Net Worth Statement from December 31, 2007 that shows assets of $30,000, liabilities of $20,000 and a net worth of $10,000. Then on December 31, 2008 your net worth statement might show assets of $35,000, liabilities of $18,000 and net worth of $17,000. This way you can see a yearly progression of what you own, what you owe and what you are worth.

So, let’s set up a net worth statement. Using an Excel spreadsheet or the equivalent is the easiest. But you can also do it on a piece of paper if you’d rather. I usually just do it in one column but the accounting way that I was taught was to put assets on the left column, and liabilities and net worth on the right column. Then the left column and right column were to be equal. First make sure you put a date on the Net Worth Statement. So on the top of the column put a heading “Assets.” Under the assets column list your savings and investment accounts and big assets such as your house, car, expensive jewelry, etc. – one per line. So your list might look like this:

June 30, 2009

Assets:

Savings account: $1,200
CD: $1,050
Money Market Account: $2,600
401 (k): $16,000
Roth IRA: $5,300
House: $350,000 (estimated worth)
Car: $8,000 (blue book value)
Diamond ring: $3,000
Other assets: $2,000

Total Assets: $389,150

Next you will list your liabilities. This is what you owe. You would include any credit card debt, student loans, your mortgage, car loan, and any other money you owe. It will look like this:

Liabilities:

Mortgage: $240,000
Car Loan: $2,000
Credit Card: $600
Loan from Dad: $800

Total Liabilities: $243,400

Next you calculate your net worth which is Total Assets ($389,150) – Total Liabilities ($243,400) = $145,750

Net Worth:

$145,750

Now you have your net worth for a certain date in time. Plan to calculate it again in 6 months or a year to see your financial progress. Notes: some people don’t put their material assets on their net worth sheets. I like to because if an item has worth and I can sell it, then I think it belongs on there. Second, you can break down your net worth statements by account. For example, your 401(k) account might include money in Stock Fund ABC and money in Bond Fund XYZ. You can list each account separately for more detail. (This is what I do.)

In Real Life (IRL) – Currently, I like to calculate our family’s net worth 4 times per year. Maybe it’s because I started out as an accounting major in college before I switched to finance. Or maybe it’s because I am such a numbers geek. Or maybe it’s because I have too much time on my hands. In any case, I like to see our progress during the year. I really don’t think it’s necessary to calculate your net worth more than twice per year, though, unless you really like to do so.

I have been calculating my yearly net worth for probably 15 years now or maybe more. There were many periods in my life that I just did an end of year net worth. Unfortunately some of those spreadsheets are probably stuck on a 3 ½ inch floppy disk somewhere, so I don’t have access to them. But I do have my net worth on our current computer as far back as the year 2000, so it’s neat to see the financial progress our family has made since that time (even when our net worth went down last year in the poor financial and real estate markets).

Remember, net worth just shows what your financial worth is at a given point in time. Tomorrow, the stock market could collapse, you can lose your diamond ring, or you might need to dig into your savings account. It does not predict or show what you will be worth at a future date. But it is still a useful tool to show where you are today financially.

Let Freedom Ring

Happy Independence Day to all Americans! Hope everyone is celebrating in style. We are having a fun and frugal weekend. Yesterday we picked 10 pounds of blueberries at a nearby pick-your-own farm. In addition to my family devouering about 2 pounds of them yesterday, today I made homemade blueberry pancakes (they were just okay) and delicious blueberry muffins. My family walked into town to a festival that my town holds every year. And this evening we will ride our bikes to our town's fireworks. The weather has been phenomenal. I don't ever remember a July 4th this cool! Tomorrow we are going to do some work around the house. Hope everyone else is enjoying a fun and frugal weekend!

Do A Mid-Year Financial Check-Up

Saving Money Tip #158 - Do a Mid-Year Financial Check-Up. Just after the clock strikes midnight on January 1, millions of people around the world start working on their New Year’s resolutions. And if you are like many of those millions of people, one of those resolutions is to get out of debt, start saving more, or get a better handle on your finances. But we all know how resolutions often go. After the first few weeks, we often lose interest in them, change them, or plain forget about them. That’s why a mid-year check-up on your finances is imperative. It can help us get back on track, aid us in redefining our goals, or simply give us an update at where we are at financially.

At the end of last year, I urged everyone to set some financial goals and write-out a budget. If you are new to budgeting, it does not have to be an overly detailed form showing you where each dollar will go, but it at least should have the basic categories of your living expenses covered as well as an estimated dollar amount you expect to spend for each category. The budget is the means to reach your financial goals - where you want to spend/save your money and how much money you have to do so.

If you have made a financial plan and written a budget at the beginning of the year but haven’t done anything since then, then now is the time to do a review of them. Are your goals still the same? Do you still generally have the same spending ideas that you had 6 months ago? If your goals have changed or if your situation has changed, take a few minutes to update your goals and your budget. Perhaps you got a mid-year raise or you moved your child to a more expensive preschool that you hadn’t budgeted for. Make your necessary changes and then take a look at your overall financial picture. Are your current finances showing that you are meeting your goals? Or are you falling short? If you set out to put away $5,000 toward retirement, are you halfway there? Are you consistently putting $100 per month toward a mutual fund like you said you wanted to do at the beginning of the year? If you have money invested, are your investments performing the way you had hoped?

You generally shouldn’t need to make major changes to your budget or goals unless things have changed drastically in your life. If you have money in a mutual fund and it’s not performing well, it could be a result of market fluctuations rather than a poor mutual fund choice. Six months is too short of a horizon to make major changes. But it’s still a good idea to take a look at your investment choices at least once during the year. Tweak any budget changes, reevaluate your goals and get yourself back on track to where you want to be financially.

In Real Life (IRL) – I like to check on my finances 4 times per year – once per quarter. But not everyone needs to do that. Minimally, I think everyone should evaluate his or her finances at year-end and sometime in the middle of the year. It doesn’t have to be exactly on June 30, but that date often triggers financial statements from investment firms, making it a good time to check on your progress. At mid-year, I like to reevaluate the financial goals that I set for myself at the beginning of the year as well as our budget.

Our goals this year were to put away the maximum allowed by law into my husband’s 401(k). It is a little bit of a stretch for us, but since the money is taken out pre-tax, it makes it a bit easier. In addition, we set a goal of putting $2000 into each of our three children’s education accounts and $5000 each into my husband and my Roth IRA. With all of the rest of our income, we hope to just keep up with our expenses. To that end, we planned a budget that we thought was reasonable, detailing our expected expenses and the amount we wish to save. To date, we have kept up with our 401(k) contributions and have put away $6,000 of the $16,000 that we hope to do by the end of the year. Since it is mid-year, we are a bit behind, as we should be at the $8,000 mark. However, because my husband’s company got bought out, there are a few screwy things with his 401(k) contributions, so we expect his last few paychecks to be bigger than the ones at the beginning. Therefore, we still hope to make up the rest of our retirement contributions by year-end.

In addition to reviewing our budget and financial goals, I also complete a net worth spreadsheet at the end of each quarter. In it, I list all of our assets as well as our liabilities to show our net worth at four points during the year. Because of wildly fluctuating housing prices and stock prices, this net worth spreadsheet is only accurate for a given point in time. But in general, I like to see an increase in net worth from one quarter to the next, especially taking into account our investment contributions and payments towards our liabilities each month even if all of our investments are going down. I don’t have specific goals such as “I want to have a new worth of a million dollars by the time I am 50, but I do like to see how our net worth has climbed over the years. I will detail how to write up a net worth spreadsheet in my next post. Until then, take some time tonight or over the next few days to review your financial goals, tweak your budget if necessary and get back on track towards saving for a financially secure future.