Monday, March 25

Being that my job is helping people manage their finances, I felt it was time to sit down and write a post about how we do it in our house. I've gotten a couple of questions recently from friends about the complicated world of investments and budgeting so in writing this I hope that at least a few of you will take away information to help on your finance front. So with that, here are some things that I think about...

  • It is really important. I could go into facts about the power of compounding here but that will get boring pretty quickly. Let's just all agree on the fact that the earlier in life you start saving the better. If you can agree with this, then I think we can all agree that we need to make this a high priority in our young twenty-something lives. 
  • Let's start with an easy one - retirement savings. If your company is offering it, then you should be enrolled. Period. I don't care if you can only save 1% of your salary each paycheck - it's better than nothing and small dollar amounts add up. Hopefully over time you can increase this amount to get you to a more substantial figure (your goal should be about 6%). It's even better if you can save enough to get matched by your company - it's free money and you should take advantage. One of my favorite things about our retirement plan is it comes directly out of your paycheck so you don't see it. As a result, I've learned to survive without the extra money each month because I never saw it in the first place. If you don't see it - you can't spend it. And on that spending point, the most important key to our retirement account is that once you put the money in...you don't touch it! Forget about it and let it grow.
    • If your company doesn't offer a retirement savings option (and many don't these days), you can enroll in an individual IRA account with your bank. Please note: there are limits on how much you can contribute each year - and someone at your local institution can help you with that.
    • And if you want to know more about a roth IRA vs. a regular IRA leave a comment and I will do my best to explain this to you.
  • Setting your goal - Once you have set up your retirement savings, let's move on to another form of savings...your taxable, liquid savings. Technically, the experts say you should hat at least enough to live without a paycheck for 3-6 months (our next exercise will help you figure out that number). In addition to our necessary living expenses though, I think it is important to plan ahead for life's big events. Eventually, you will need a down payment for a house or you will have a baby or you will move to a new city. Saving in advance can help us to meet these life events head on. So, take some time and think about what you are comfortable having in your savings account for life's exciting decisions. Once you have a number in mind, you need to figure out how much you ned to save per month to get to that number. Now on to the fun hard stuff... 
  • Spending - We start by writing down the following expenses (online systems like Mint.com can help here):
    • Fixed Expenses: These are the necessities that you need to maintain your current lifestyle. Important things like rent, utilities, cable, cell phone, gym memberships, auto insurance, health insurance, gas/transportation, groceries, etc. that you can't cut out. Add all these up and multiply by 6...this is what you should have in your taxable savings account today.
    • Variable Expenses: These are items that we can wiggle around to meet our savings goals and include things like dry cleaners, restaurants, entertainment (concerts, movies, happy hours), shopping for yourself, shopping for your household (like CVS runs), haircuts, etc. We took a closer look at this section when we figured out how to cut back.
    • Things we want to splurge on: These are the things we want to splurge on and save for over the year. You should account for these things in your monthly budget so when these items pop up you have enough liquidity in your checking accounts. Our include: travel, christmas gifts and wedding presents, parties at our house and wine clubs. 
  • Cutting back: In order to save more you have to spend less. Pretty common sense stuff here but in my banking experience this is the hardest things for people to grasp. Look back through your variable expenses and all those splurge expenses to figure out where you can trim the fat. This is a personal activity and one that I can't really help y'all on. For us, we noticed that we were spending too much on eating out at restaurants and on those daily Starbucks lattes. I also cut back on my monthly shopping budget. Yes, it can be painful...but it also feels really good to make my monthly transfer into my savings account.
  • Check back every month: Now that you've identified ares where you can but back - just do it! I use an excel spreadsheet to keep track at the end of every month. There are online tools (like Mint.com) that can do that for you too. It will take some time to adjust to your new slimmer lifestyle so don't get frustrated with yourself! You can do it!
Good luck and please leave any questions in the comments! Hope I haven't bored you to death...

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