Wednesday, April 28, 2010

Be Prepared To Make Financial Mistakes

Tip #253 - Be Prepared To Make Financial Mistakes. In our quest to save money, many of us are reading all that we can about finances. We hear of others successes and try to imitate them. We start to invest in products that months earlier we may not have heard of. We may even become bold with our newfound knowledge. And then our mutual fund takes a nosedive, our house loses some of its value, and we realize that we missed the deadline to invest in last year's IRA.

It's so easy to get discouraged when things like these happen. It often clouds our outlook on other aspects of our financial life or even other aspects of our non-financial life. But these failures are to be expected. Learning about finances takes a lot of time, energy, and devotion. But taking part in managing your finances is a whole new ballgame. No one can expect to get everything right the first time they do things. There will be failures along the way - some may even be big failures. But don't let that discourage you. Each failure is a learning opportunity for the next financial decision.

One way to deal with financial mistakes is to look at the overall picture. Sure you forgot to put in $5000 for 2009's IRA, but overall you may have saved much more than you ever have in the past. Learn from it; don't miss another IRA deadline, and move on. Or perhaps you locked into a CD for an okay rate, only to find out a month later the rates have climbed. Forget about it. That CD is only one part of your overall financial picture. Expect that you won't always get the best CD rate or that you will buy mutual funds that will drop in value. Or that your house's property taxes may go up more than predicted.

Crossing the threshold from learning all that you can about finances to actually taking an active role in your finances is a big jump. And like everything else, learning and doing are two differnt things. Each financial decision you make will not be the right one, but that is okay. As long as you are making better ones than you did in the past, and your good decisions outweigh some bad ones, you will only improve.

In Real Life (IRL) - I studied finance in college, worked for a life insurance company for 9 years, belonged to an investment club for 4 or 5 years, and have always been a saver of money. So I should have known better. After testing the waters of stock investing as a member of my investment club, I decided to dive in on my own and I bought a few stocks - most of them were ones that my club invested in that appealed to me. We researched them, discussed them, and invested in them. And then I watched them, so I felt comfortable making the leap into my own investing with stocks I was familiar with.

Then one day I heard my boss talking about a stock that he was investing in. My boss was a very smart mathematician - the kind who can calculate compound interest in his head. He was also older than I and more experienced in investing. So when he mentioned this stock tip, I decided to buy some myself - no research, no discussion, no analysis. You can guess what happened next. The stock when down and down and down. Until finally, I couldn't stand it any more and I sold it. What was I thinking? I had READ all of the financial advice that says not to buy stocks on tips, to only buy after you have thoroughly researched it, and to see if it fits in with your financial goals. I did none of this. I bought on a "hot" tip. I did no research on it. And I have no idea if the nature of this stock even fit into my financial plan. This was a definite financial mistake. I sold it and moved on.

That's not to say that I wouldn't have bought some bad stocks on my own. I would and I have. But at least they would have been mistakes based on my research. Regardless, I have made this and many other financial mistakes. People more financially savvy than I have made financial mistakes. Heck, even Peter Lynch and Warren Buffett have made financial mistakes, I'm sure. It should be expected that a novice to investing and saving will make mistakes, too. But just keep on going. The most important thing to know is that you will do more things right than wrong, in the financial world if you keep on reading and keep on saving and investing. And that's what matters - not the financial mistakes you make along the way.

Monday, April 26, 2010

Evaluate Opportunity Cost - Rent or Buy?

Tip # 252 – Evaluate Opportunity Cost. Rent or Buy? Should we go with Door Number 1 or Door Number 2? Opportunity Cost is a term that many business majors are introduced to in Economics 101. Others may or may not be aware of the term. Basically, opportunity cost is what you give up when you make the decision to do something else. For example, suppose you have one free hour each evening. And suppose that you are a personal trainer who can make $50 an hour in the evening training a client on exercise, but instead you decide to watch an hour of television one night. Your opportunity cost for that evening is $50 because you lost out on making $50. In other words, you chose to watch t.v. and relax so you lost out on making $50. If instead you choose to train your client and earn $50, then your opportunity cost is an hour of relaxation, which is what you lose out on.

So how do we apply this to our own lives? Well, there is opportunity cost in most everything we do. And it’s not always related to money, but since this is blog on how to save money, that is what we will discuss. Opportunity cost is helpful in making financial decisions. One particular decision that comes up in most households is "is it better for us to buy or rent?"

Let's look at an example. Suppose you have $50,000 saved for a down payment on a house. You also know that you have $2,000 available per month to put toward housing costs (rent or a mortgage payment). You can rent a 3-bedroom home in town for exactly $2,000 and keep your $50,000 in a money market account earning 5% interest. On the other hand, you can put the $50,000 toward a down payment on a $250,000 home leaving you with a $200,000 mortgage that over 15 years with principal and interest and taxes costs you $2,000 per month. The local economists predict that houses will increase in value at 1% per year in your neighborhood for the next 15 years.

If you rent the house for $2,000 per month, after 15 years, your $50,000 is worth about $105,000. On the other hand, if you buy the house, after 15 years, your home will be worth $290,000. If you decide to rent, you are giving up the opportunity cost of owning a home free and clear in 15 years that has a worth of $290,000 (and also living in a house you own and can do what you want with). If you buy the home, you lose the opportunity cost of having a very liquid $50,000 in your bank account for emergencies or other expenses plus earning $55,000 in interest during that time period (as well as the ease of picking up and moving whenever you want).

Clearly, in some cases, we don’t fully know the opportunity costs since some financials are based on estimations. Do we put our money in a CD earning a sure 3% and miss the opportunity to possibly make much more if we invest in stocks. Or do we invest in stocks and miss the opportunity to have a guaranteed rate of return. Only you can make these decisions, but make sure you evaluate not only what you will get if you choose A but also what you will lose if you don’t choose B.

In Real Life (IRL) – I’ve read many discussions online regarding whether it’s better to rent or own. Clearly, we can never 100% accurately predict whether we’ll have to up and move in the future or whether the housing market will bomb or skyrocket in the future. Unfortunately, when we make decisions, we have to work with only information we have at the time as well as our best predictions fro the future.

So, is it better to rent or own? Clearly, as my example above shows, waiting to buy is not always the best case scenario. Of course, that may not be a realistic example. Perhaps homes selling for $250,000 would not rent for $2000 per month. And maybe housing prices end up dropping by 1% every year rather than increasing by 1%. On the other hand, I have a real life example that shows why putting a down payment on a home at the right time has been better for us than to keep on renting. And I'm anxious to share it since many people are down on home-ownership today.

We bought our home in November 2000 for $290,000. We put $70,000 down, which is a fairly hefty down payment (24%). According to tax records our home was only worth $231,000 in 2000 (so it appears as if we overpaid!). Even taking that into consideration, we got a good deal. The value of our home steadily increased over the next 6 years according to tax records:

2001: $240,000
2002: $310,000
2003: $381,000
2004: $406,000
2005: $490,000
2006: $595,000

When the economy started a downturn, housing values dropped across much of the nation. But in the DC area, while prices did fall, they didn’t drop by as much as in other places.

2007: $593,000
2008: $593,000
2009: $550,000
2010: $535,000

(Note that the 2009 and 2010 values reflect a $12,000 addition we did on the house, so to be fair, the value would be lower without it). Even taking the addition into consideration, our house would still be worth over $500,000 today. And houses in our neighborhood still consistently sell for above tax assessments.

So had we rented for a couple more years we would have lost the opportunity to buy a “low priced home.” We would have never gotten our foot in the door. The difference between the rent we were paying (on a smaller place in not as nice of a neighborhood) and our home mortgage was $600 per month. Over 4 years, we would have only saved about $30,000 more had we kept renting. But in 4 years our home was worth over $100,000 more than we paid for it. Clearly, renting for longer would not have been a good decision on our part.

Our opportunity cost by buying was loss of flexibility to move fairly quickly and savings of $600 per month plus interest as well as interest on our initial $70,000 down payment which totals about $125,000 (if I'm earning 5% interest and our rent didn't go up at all in 9 years, which it has dramatically). Had we continued renting our opportunity cost would have been about $300,000 in net worth (the amount the house is currently worth minus the amount we owe on our loan minus the down payment of $70,000 which we would have had in either case).

(I can also give you an example where renting would have been better for us than buying but I’ll save that for another day.) How do you evaluate opportunity cost? Has renting or buying been better for you? Did you make the right decision?

***I used Bankrate to do some of my interest calculations.

Thursday, April 22, 2010

Don't Wait For Your "Big Break" To Strike It Rich

Saving Money Tip #251 - Don't Wait For Your "Big Break" To Strike It Rich. I know many people who put off savings or do not save enough because they may have low or average income. Instead, they are waiting for that "big promotion" or when they will invent the next "big thing" or start the next greatest business venture or win the lottery or or or.

Instead, they should be putting away a little bit at a time week after week, month after month, year after year. And then one day, maybe 20 to 30 years later, they will be millionaires. While other people who are still waiting for their "big break" in life will have nothing in their bank account. Most will die waiting to become rich. Very few will win the lottery, start the next Microsoft, become the next company president, etc. Most people have the opportunity, however, to skim a bit off their income on a regular basis and put it in to savings.

That's not to say you shouldn't have goals for yourself for job promotions, expanding your business, or starting a profitable venture. You absolutely should. But you shouldn't be waiting until you become very successful in money-making to start saving. Because there's a good chance you won't ever become "very successful" in money making. And then you will have no savings to show for it. Instead, save gradually. When you are earning $25,000 per year, try to put away $2,000. As your earnings grow, put away more. And if you do strike it rich one day 20 years down the road, you can spend some of that money luxuriously. And if you don't, then you will have savings that you worked hard for.

In Real Life (IRL) - I've always written how I am a saver. In the 21 years since I've been out of college, I've managed to put away quite a bit of money, even when I was making as little as $19,5000. And even though I am doing better financially than many people my age, I often don't give myself credit for saving so much because I had a good start in my financial life that others didn't have. My parents paid for my college - the full ride - tuition, books, and room and board. Many people I know have student loans. I got a car for my college graduation. Most people have to buy their own. My parents are generous with financial gifts - such as taking us on a cruise last year. Many friends' parents give them nothing.

But you know what? Many people in similar circumstances as mine still would have nothing to show for it. One of my relatives who got the same start in life that I did, as well as the same types of benefits - college tuition paid for, a car, financial gifts - has managed to spend most of what he has earned. He often talks about what he will do if he wins the lottery or when his next invention will bring his family a windfall or when he gets promoted in his job how he will buy a luxury home. I cringe each time he says those things because the likelihood of any of them happening are not very high. Instead, he could be saving a little along the way and amass a fortune by the end of his life. And it has nothing to do with his start in life. Nearly anyone can do this, no matter how much you earn as long as they are not waiting for that "one day" when they will get a big break and all of their financial problems will be solved. For other ideas on saving money, check out Frugal Fridays.

Monday, April 19, 2010

Get Ready For Next Year's Taxes

Tip #250 - Get Ready For Next Year's Taxes. April 15 has come and gone, and I'm sure many of us are not sad to see it go because it means we have 365 days to worry about next year's taxes. Or do we? Well, technically we do. We can put the tax forms away, not worry about withholdings or charitable contributions or deductions or anything until nexzt year. But if we are smart and want to minimize the amount of taxes we pay, we should start planning for next year's tax return. That means getting out the tax return that we just completed and reviewing it.

Did you overpay by a lot this year each pay period and get a huge refund? Or did you underpay and owe a penalty? Then go back to your human resources department and fill out a form to change your withholding. Did you keep lousy records of your charitable contributions and therefore not take full advanatage of this deduction? Then set up a file or some kind of recording system to keep track of your charitable giving. Did you pay January's mortgage bill on December 31 to take advantage of an advance tax deduction? Make a note on your planning calendar to do so in 2010.

These are just some examples of some tax preparations that you can start to do now in advance of next year's tax return. Now is the best time to do it as your return is fresh in your mind. Write down the items that you want to change or keep better records of. Look at what areas of your tax return you think needs more research (for example, IRA deductions). Some changes can be made immediately such as adjusting your withholdings. Others may need to take place throughout the year such as paying quarterly taxes on time with more accurate estimates so you don't owe penalties. Others may involve keeping better records. Take an hour or two this week to look through your return. Take some notes or write reminders on your calendar and then you can forget about your taxes until next year - maybe not until April 15 but at least until January 15.

In Real Life (IRL) - I just finished my taxes tonight. No, I wasn't tardy in doing them. I actually did our federal taxes in late March. But in Virginia our state taxes aren't due until April 30 (which I actually think is awfully nice of them to give us two weeks after the federal is due to do them), so I just did them today. After going through the process of completing them, I came up with a list I need to change for next year.

1. We got way too much back in tax refunds. While the money is always a nice "gift" each spring, it would be much better to have this money to use throughout the year - invested and earning interest. I need to have my husband change his witholdings at work.
2. Keep better track of school expenses. Every year around tax time I need to call the school and ask them for the amount I have paid to them. If I kept better records, I wouldn't have to do that.
3. Get eBay reports throughout the year rather than just at year end. If I run them after each month ends, then it saves a lot of time at the year-end.
4. Keep track of ALL charitable contributions. I know I missed a few of them this year because I did not have receipts for them.

Those are just a few things that I need to change in the coming year as far as taxes go. Have you reviewed your taxes and vowed to make changes or improvements? If not, now is a good time to do so.

Thursday, April 15, 2010

Dissect Your Budget - Part 12 - Miscellaneous, Savings, and Wrap-up

Tip #249 - Dissect Your Budget - Part 12 - Miscellaneous, Savings, & Wrap-up. I"m going to wrap up this series today by talking about miscellaneous items and savings. Remember that you need to write up a budget that works for you. If you want to cover eating peanuts at a baseball game under entertainment, consider that cost when deciding on the budget amount for entertainment. If you want to consider it under the food item, then do so. Or it may happen so infrequently that you cover it under miscellaneous. If you are in schoool, you would have a line-item for tuition and books - broken out separately or combined, it doesn't matter. As long as everything is covered.

The miscellaneous category is often a catch-all for things you don't think about - like postage stamps or library fines. Bus as you use your budget more and more, the miscellaneous category should get smaller and smaller as you see a trend in items you spend. Parking meters costs can get wrapped into the transportation/auto line item. Postage stamps can get wrapped into entertainment or gifts if they are a regular occurance. Any non-regular, "surprise" expense can go in miscellaneous.

Lastly, let's talk about savings. To me, savings is one of the most important categories to have on your budget. Most people don't think to budget for savings. And because of that, people have very little saved. But if you budget $400 to spend on food and $200 for entertainment, why not have a budget for savings. Then each month you take that amount and put it away somewhere - into a savings account, money market fund, mutual fund or wherever you see fit. This savings category should cover your 401(k) savings, too as well as any IRA, education savings or other big ticket item savings you are doing.

And really my whole point of doing this dissect your budget series was to increase the amount of money that goes into your savings (or toward debt if you have any). So go through your budget with a fine-tooth comb. See where you can reduce your expenses and put more in your pocket.

In Real Life (IRL). My budget looks like this for 2010. Please note that thw two biggest categories in terms of amount after our mortgage is our IRA or retirement savings and our college education savings for our children.

Mortgage $2,300
Phone $45
Cable $45
Computer $45
Electricity $125
Water $25
Gas $200
Cell phones $35
Gasoline $240
Travel $200
Car Insurance $125
Food $400
Preschool $300
Activities $50
Religious School $50
Summer Camp $150
Entertainment $80
Vacation $200
Clothes $100
Gifts $150
Auto/Maintenance $100
Condo Loan $415
IRA $834
Education IRA $500
Misc/Giving $133

To me, making sure that all of your expenses have a place on your budget is one of the most important rules of budgeting. That's why having a miscellaneous category is important to catch all those expenses you don't expect or forgot about. And secondly, having a budget allows you to set an amount that you are putting away for savings for retirement, for a home, for college, or for the future in some other way. Without having a line item for savings, you won't save! So dissect your budget, try to cut down on non-necessities or think of creative ways to make them cost less so you can increase the amount that goes towards savings. For other ideas on how to save money, check out Frugal Fridays.

Tuesday, April 13, 2010

Dissect Your Budget - Part 11 - Gifts

Tip #248 - Dissect Your Budget - Part 11 - Gifts. I am winding down with this "Dissect Your Budget Series" as we start getting into categories that not everyone has. The next post will be the final one in this series.

Gifts are something that most people do have as part of their expenses. Obviously it's not a need and could be slashed if desperate. But even if you are not desperate, this is a category that could probably be cut down dramatically. Gifts can be a very expensive expense if you shop at retail stores a week before an event - a birthday, wedding, anniversary, new baby, etc. But if you plan for these regular life cycle occurances, you can keep the costs down dramatically.

1. Shop thrift stores and yard sales. Now more than ever, there are dozens and dozens of products that are being sold at these venues that are new in the package or new with tags. Some of them would make great birthday gifts for your child's friends. Many are generic enough that they can be brought as a hostess gift or put into a grab bag at the office at Christmas time. Plenty are sweet, cute, practical, and perfect for a new baby. Just because it doesn't come from a retail store does not mean it cannot be given away as a gift.

2. Make something. This does not mean you need to be crafty. You don't have to know how to sew or build to make something nice and useful to someone. A batch of homemade cookies can be nice surprise for the teen boy who helped you shovel your snow. A basic, homemade lasagna would be very welcome to new parents. A handmade card to someone in pain can turn her day around. My favorite is gift baskets filled with practical items such as food or household supplies.

3. Do something. If you cannot make something then do something. Call the mom with the new baby and ask if you can pick up her child from preschool. Offer to shop at the grocery store for someone who is sick. Invite a friend's child over for a playdate. Plant someone's garden for them Or paint your mom's laundry room. Or organize your niece's closet. Don't just offer to do something, but actually do it.

4. Re-gift. I did a post on this a while back. And I'm not embarrassed by it. We get way too many gifts nowadays. If I didn't give some of them away, I would need to buy a bigger house. This is especially perfect for children's birthday parties when gifts are sometimes duplicated or don't really meet your child's interests. It's okay to pass them along as a gift to another child who likes what your child received. Once it's given to you, you own it. You can do whatever you please with it.

5. Stock up. When you find great deals, by extras to give away as gifts. Ninety percent off sales are those times when you want to buy more than one. Chances are you will find an occasion to use what you buy. And if you don't, charities are always willing to accept them with very little expense wasted on your part.

I'm not suggesting that all of your gifts should come from the steps above. A parents' 50th anniversary or a best friend's wedding warrants a special gift whether you can find it on sale or not. But even then, sometimes it's what you do that is a bigger gift than some extra stuff that they don't need.

Consider carefully what events you have coming up for the rest of the year - one wedding, a baby shower, about 5 birthday parties for your child, your anniversary, and your family's birthdays. Then as you shop and see inexpensive things that might fit these events, buy them so you are not waiting until the last-minute to purchase.

In Real Life (IRL) - This year I have a $150 per month budget for gifts which sounds like quite a lot. And it actually is, considering that I do most of the above suggestions. But last year our budget was $100 per month and we found that we were short when many unexpected events came up such as relative's weddings and Bar-Mitzvahs. It is custom here on the east coast, at least where I'm from, to give money for these events, especially if you are family. If we really didn't have the money, we could have given less or bought a cheaper gift. But we do, and I don't like to be cheap when it comes to special events for family. And with a family of 5, we give big cash gifts. This year, we have several more that we are aware of, so I upped our budget to account for it.

Having said that, I have no problem buying 10 games at the store at Christmas time when they are half-price to give away to my daughter's classmates for their birthday parties. On cyber Monday (Monday after Thanksgiving), American Girl has excellent deals on doll clothes and other accessories. I spent about $100 that day but should be able to get about 10 gifts out of them. $10 is about my target price for birthday parties, unless it's a special friend.

Lately I've been shopping at a thrift store about once per week while I have an hour to kill between a class with my son and picking up my daughter from preschool. Over the past two months I have found new, sealed Cranium games for about $2 each at this store! These are excellent games that cost abut $15 new. Whenver I see sealed items like that, I pick them up. My daughter used two of the games last week for a classmate's birthday party that she went to. We also found a cute new-in-box soft photo album for a baby that we have put away. My husband often has co-workers who have babies, and they usually make up a big package of toys, clothes, and diapers for the new parents.

I have given gifts of dinners, muffins, cookies and other homemade goodies to friends who have passed on their baby clothes to me or have driven my daughter to and from activities. They probably weren't doing it in order to get a gift but I wanted to show I was thankful for their help. These gifts were cheap to make, but they showed I was thankful.

And because I'm practical, I love giving gift baskets. Baskets are very cheap at thrift stores or I reuse ones that we receive. Then I fill with "gourmet" items from Trader Joe's, homemade goodies, or other special foods that people enjoy but probably wouldn't spend the extra money to buy. For new babies, I fill with diapers, baby wash, wipes, and other necessities. For the new house, I fill with household cleaners, paper goods, and other necessities. These can be very cheap to make if you use items you have purchased inexpensively when on sale and with coupons. And it prevents the recipient from having to run out at the last-minute and pay full price to buy things she forgot in the excitement of the event.

There are many ways to keep your gift budget down. It takes some forethought and planning but it can be done. Think of all of the events you have coming up this year and think of ideas you can use for gifts for them. You can even write them down on a piece of paper and put it in your purse so when you are out and about you can keep track of what you need and buy them inexpensively when you see them.

Wednesday, April 7, 2010

Dissect Your Budget - Part 10 - Medical Expenses And Health Insurance

Tip #247 - Dissect Your Budget - Part 10 - Medical Expenses and Health Insurance. Okay, here comes another collective groan from my readers. And to be honest, I have put off writing this post because there are so many factors that come into play with healthcare costs; it's not the most interesting subject; and obviously things are changing in the US. Having said all that, it's a big expense in most people's budget, and it should be considered carefully.

Healthcare insurance costs are one of those expenses that you'd rather not have, but when you need it, you wish you had the best. Only individuals can evaluate the best healthcare insurance for themselves, taking into account age, risk factors, general health, and cost of premiums. The best place to look for insurance is at your place of employment. Usually, but not always, you will get the best deal from your company because they get discounts for group insurance. Often the company will pay a part of your premiums, too.

Some employers will offer a few different levels of health insurance or even health insurance from different insurance companies. When open season comes around, make sure you evaluate your choices carefully. You don't want to save a few dollars in premiums each month only to find that you are playing a lot out of pocket at the doctor's office or jumping through hoops to get to see a specialist. On the other hand, you don't want to pay for the best insurance and never use it.

In addition to offering health insurance, many companies will also offer a flexible spending account or FLEX plan. For most people, this is a great deal. The FLEX plan basically allows you to set aside money pre-tax to use for medical costs that you will incur for the year. Then when you pay for co-pays, prescriptions, any specialist visits that aren't covered or other qualified medical expense, you use this set-aside money. If you pay about 20 percent in taxes, that means that a $50 co-pay will only cost you $40.

If your company doesn't offer health insurance or other medical benefits, then you should look into a plan on your own. Sometimes organizations you belong to will offer group insurance that might be cheaper than what you can get on your own. Or, you can open a high deductible health plan on your own (or through some companies) by investing in a Health Savings Account or HSA. An HSA operates like an IRA account, in that you can contribute a set amount each year towards the account. You don't pay federal taxes on the money, and the money can stay in it year after year if you don't spend it. The money is only to be used for qualified medical expenses.

If you are lower-income, it would be wise to look into any health insurance or benefits that are offered from your state or other government sources. Health insurance and medical expenses are a topic that could have pages and pages devoted to it and never be exhausted. I am not an expert or even very knowledgeable about it other than to skim the surface. But the point of bringing up this topic is that health insurance and medical costs are expensive and often a significant part of one's budget or sometimes the cause of one's downfall into debt. It is not a topic to be ignored, but studied for your personal best interests. Where healthcare will be in the future in this country is anybody's guess, so by staying on top of your situation and what is available to you will be the best way to keep your costs down in this area.

In Real Life (IRL) - I dreaded writing this topic because I only have experience with employee-sponsored health insurance. I've never gone out and bought insurance on my own nor have I used government available insurance, but I know it's out there. Our family has been blessed to have good health insurance available to us by my husband's company. When my husband accepted his job as a branch manager of a small office for his company, one benefit we got was fully-paid for health insurance! That is almost unheard of except maybe among top executives. We were so fortunate not to have to fork over hundreds of dollars each month to health insurance.

But all good things much come to an end, they say. And when my husband's company got bought out a year ago, he lost this nice perk. Our insurance costs now total about $500 per month, which is still fairly reasonable. Luckily, his new company offers a FLEX plan which his old company did not offer. So all co-pays, prescription costs, and uncovered medical costs come out of this tax-free money that we set aside at the beginning of the year. While not perfect, since it's hard to predict how much we'll use, it does help to have this benefit.

Because we have the funds and since we have a family of five, with three young children, we do opt for the best insurance my husband's company offers. We might be wasting money each month for benefits that we won't use, but it gives us peace of mind that if something big should come up, we will be covered. Having said all that, we don't pay for some extra riders that are offered by his firm. At some point, we just have to play the numbers game and hope it works in our favor.

One last thought, I had a friend who's husband's firm offered health insurance but they company didn't kick in much help on the premiums, so they were fairly expensive. They chose to buy private insurance with a large deductible instead. And while they were living near me, it still ended up to be cheaper for them by doing that than going the company's route.

So look carefully at all of your options. If your company offers good insurance, you are good to go. If not, investigate all of your options. Talk to people who carry the insurance that you are considering. Ask friends or family who are more knowledgeable about healthcare than I, and then decide what works best for you.

Saturday, April 3, 2010

Review Your Quarterly Finances

Tip #246 - Review Your Quarterly Finances. We're going to take a little break from the budget series to discuss reviewing your quarterly finances. Since it is the beginning of April, the first quarter of the year has already ended. Hard to believe! It is a good idea to review your finances on a regular basis - but not too often, or you may get caught up in moving investments around too much or not seeing any progress. Too infrequently and then you cannot make appropriate adjustments in a timely manner. Checking them about four times per year is a good amount.

What you should do four times per year:

-Review your budget - find line items that you allowed too much money and areas that you allowed too little and make any necessary adjustments.

-Check your savings accounts - are you meeting your goals for how much money you want in each of these accounts, such as your car savings, retirement savings, college savings, etc.

-Do a net worth statement - figure out your net worth by writing down your assets, liabilities, and calculating your net worth. Have you seen an increase in overall net worth since the last quarter?

-Look at your investment rates of return - check out the rates of return that you are earning on your various investments. Are you getting the most you can for the amount of risk you are willing to undertake.

After reviewing your finances for the quarter, make any changes that you feel are necessary. Perhaps you realize you aren't saving as quickly as you would like and want to increase your income. Or maybe you see that your bank is offering a special on CDs that is better than the current rate you are getting. Or you may be right on track and give yourself a pat on the back for following your goals from the beginning of the year. It makes sense to take a look at your finances and make adjustments if necessary. It can get you back on course before you fall too far away from your goals or at least give you confidence that you are doing things correctly. For four times per year, it's worth it to check out how you are doing financially.

In Real Life (IRL) - I have to admit that I look forward to the end of each quarter. I enjoy seeing how much progress we have made financially. (Although it wasn't as much fun a year ago when the stock market was plummeting.) In years past, checking our quarterly finances has allowed us to make adjustments to our newly-formed budget that wasn't refined. It has enabled us to fix some budget categories to better reflect how much we were spending or to adjust our spending to meet our budget. I was able to analyze some investment returns and reallocated some of our money.

Now that we have been doing this for quite awhile, I find that we aren't making as many adjustments. Our budget is pretty set in stone based on earlier experiences. And our goals have remained fairly steady. However, I did make an adjustment in a 401(k) investment when I reviewed our investments yesterday. I'm not sure why this one investment fell under my radar for the past year, but it did. And yesterday when I reviewed it, I realized that I had $8,000 in one account that basically earned $0 in the past year. I was able to exchange it for another stable account earning at least a couple of percentage points.

In addition to that I was able to share with my husband how much our investments and savings have grown. Sometimes my husband gets discouraged when I limit our dinners out per week or tell him that it's not in our budget to do a certain activity. But when I share with him how much our savings have increased, he becomes encouraged that we are on the right track. Try reviewing your finances once per quarter, and you will find that you can better manage where you are and where you are going, financially.