Live Below Your Means and Beef Up Your Checking Account

I just had the chance to read two interesting articles in a recent edition of the Wall Street Journal.  The first article was an opinion piece written by Ashleigh Brooker.  Ms. Brooker made the argument that it’s always smart to live below your means, or essentially to only spend up to 80% of your income and save the remaining 20% no matter what your income level is.  This way, you provide a cushion for times when you may lose your job and have to live on one income or no income, or for times when an emergency arises such as an illness, or disability.  She provided a couple of examples of situations where individuals either had to move and needed extra time to find a new job (thus living off one income for a short while) or when a grandparent moved to be closer to his grandkids, but had to accept a lower paying long-term position.  By living below your means, you provide yourself with greater flexibility.

The second article I read was a summary of recent research conducted by Joe Gladstone, a research associate at the University of Cambridge.  He had the chance to look at how happiness levels change in correlation with levels of wealth.  His interesting finding was that there was a significant correlation between a person having more money in his/her checking account and the person’s happiness level.  This correlation existed regardless of the overall wealth level of the individual.  Thus, in reading these two articles, I immediately thought—if you live below your means and save 20% of your income, you can put that 20% of your income (or some portion of it) into your checking account and that may boost your happiness level.  Not a bad plan!

-Allison G.

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How to Create a Budget & Stick With It

Creating a budget for your household is very important but can feel like an overwhelming task. Here are some steps to help you get started.

1. Calculate your total income and expenses for a month. Start by looking at your paystubs and add up the net amount from each paystub for a month (your total income). Then write down all of your regular monthly expenses (i.e., rent, car payment, groceries, gas, entertainment, etc.) and add up how much you are spending. You will also want to include irregular expenses (i.e., insurance, property taxes, gifts, tuition, etc.). To determine the monthly cost of your irregular expenses, add up all of the irregular expenses for the year then divide that total by 12.

2. Now that you have calculated your total income and total expenses, you have to figure out if you are spending more money that you are earning or if you are saving money each month. Simply subtract the total of your regular and irregular expenses from your total income. If your expenses are more than your income, then you are accumulating debt each month and need to cut back on your expenses. If your income is more than your expenses, you are saving money each month.

3. If you need to cut back on your expenses or would like to save more money each month, then you should examine all of your expenses and figure out where you can save money. A good way to start is to separate your expenses into essential and non-essential groups. For the essential expenses (i.e., rent, electricity, food, etc.) are there ways you can save on those bills? Using coupons or shutting off lights and unplugging appliances when not in use can start to save you money. For the non-essential items (i.e., eating out, entertainment, etc.) are there items that you can live without? And what are ways that you can still do the activities that you enjoy but not continue accruing debt? Stopping your Starbucks visits, committing to eat out only once a month, or attending matinees instead of evening shows are great ways to start to save money.

If you start with these three steps, you will be well on your way to creating a household budget and having a more secure financial future. Just remember that sticking to a budget is difficult and it may take a few months before you are able to do it, but don’t give up! There are also apps like Mint and GoodBudget that can help you stick to your budget.

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Payday Loans Are Not the Answer to Financial Problems

When it is still two weeks until your payday and an unexpected problem arises (i.e., you need to fix a flat tire or visit the hospital), it may be tempting to take out a payday loan to make ends meet. Although it may seem like an answer to your immediate problems, it will probably end up costing you more money in the long run.

Payday loan companies charge extremely high interest rates. Some companies also charge maintenance fees and origination fees for a loan even if you borrow as little as $100. Additionally,these companies will generally let you rollover your debt if you pay the fee. This may seem like a nice feature but you could quickly end up paying more in fees than the original amount borrowed. For example, if you borrow $300 and pay $45 in fees and roll over the loan for another two weeks, you will end up paying $390. If you are unable to pay the loan for two months, you will end up paying $360 in fees – more than the original loan amount.

So, how do you avoid needing to take out a payday loan? The best plan is to save each month to prepare for unexpected emergencies. Even if you are only able to invest $20 into a savings account each payday, that money will start to accumulate and could help you make ends meet when money gets tight.

-Kathryn M.

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Financial Advice for the Next Generation

The best way to avoid repeating history is to learn from your own and others’ mistakes. This is especially true when it comes to money management. Online, there is a lot of financial advice available to the next generation. Here are six tips that everyone should follow, especially those just starting out.

1. Plan for the future. Deposit money into a Roth IRA or a workplace retirement account as soon as you start working and have the funds to do so.  Ensure you get your company to match your contributions if they offer this perk.

2. Pay yourself first. Save a certain amount of every paycheck by depositing it into a savings account.

3. Live within your means. How well you manage what you make is key.

4. Know the difference between bad debt and good debt. Any debt that has a lower interest rate than what the money would gain if saved may be good debt. If the debt has a high interest rate, like with credit cards, it is bad debt. Be sure to pay off credit cards and use them sparingly.

5. Keep an eye on your credit score and credit report.  It helps to check in at least once a year with each credit bureau to view your report to ensure there are no errors on it.

6. Be prepared for the unexpected. Set up a rainy day fund with savings you never touch unless an emergency occurs.

-Kathryn M.

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What To Do if a Little Money Comes Your Way

Sometimes a little extra spending money comes our way from either earning a pay raise, paying off a debt, getting a tax refund, receiving an inheritance or gift, etc.  When this happens, it helps to think about how that money can help you create a secure financial future.

If you are in debt (i.e, you have loans, credit card payments, etc.), consider putting that extra money towards paying off the principal of that debt.

If you don’t have any debts to pay off, consider investing the extra money. Depositing the extra funds into a savings account, retirement account, or rainy day fund are all great ways to plan for the future.

Or, if you have a big trip planned or know you will be needing to make a large purchase in the near future, set aside the extra funds for that purpose so that you don’t have to use your credit card to pay for the upcoming expense.

 

 

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Having More Fun with Budgeting

Making a budget and sticking to it isn’t usually too fun but there are a few ways that you can make it a little more interesting.

1. Use a budgeting app. You can search online for apps or check out news web sites like the New York Times which reviews different apps.

2. Create a game to play with your spouse or friends who have similar budgeting goals. For example, award three points for the person who goes a day (or the longest) without spending any money or two points for eating in instead of dining out, etc. At the end of the month, the person with the most points wins a prize (maybe a home cooked meal prepared by the ‘loser’ or a week without having to take out the trash).

3. Join an online community where you can discuss your budgeting goals and receive support and tips on how to stick to your budget.

4. Set milestones for yourself. This is especially important if you are working towards long term goals.

5. Reward yourself (responsibly) when you have been able to stick to your budget for a month.

6. See how much money you can make by selling stuff at a garage sale or on eBay that you no longer need. You could incorporate this into your budgeting game- the person who makes the most money in a month earns four points!

-Kathryn M.

 

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Money Management No-Nos

There is always lots of talk about how you should manage your money and what you should be doing.  But what about the things that you should not be doing?  Let’s discuss some of these here…

  1. Carrying too many credits cards with balances. Credits cards can come in handy for emergencies and for earning rewards but having many cards that are maxed out is a sign of a problem. Credit cards have extremely high interest rates which makes it difficult to pay down your debt.
  2. Taking out too many large loans. Just as having credits cards with large balances can damage your financial well-being, so can having too many loans or loans that are too large. Before signing a loan for a house or car, be sure that you can afford the monthly payment. Most financial institutions will help you figure out how much you can borrow based on what monthly payment you can afford and what your interest rate will be.
  3. Keeping up with the Joneses. Seeing your neighbor who makes less money than you buy a new car or new furniture can entice you to do the same. Don’t let yourself get sucked in, your neighbor may have more debt than you know!
  4. Taking advice from others who are broke. We all need a little help now and then but it is important to choose carefully who you seek out for advice.
  5. Buying expensive gifts. Instead of buying a new computer or iPad for your family members, consider giving your time or a less expensive gift that they will enjoy. Also, talk with your family about drawing names for gifts. That way everyone only has to buy one gift.
  6. Ignoring your debt or lack of savings. Debt is not a problem that will go away on its own so it is helpful to develop and stick with a plan for paying it off.

-Kathryn M.

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