Tag Archives: Early Retirement

So, What IS “The Plan” For Personal Finance?

The plan will be different for everybody, and the problem with many “personal” finance gurus is that they deal in “general” finance rather than personal finance. While the advice is generally pretty good, it often overwhelms people, much like drinking from the fire hose.  The general advice you’ll hear is (in this order):

  1. Build a small emergency fund (~$1000 or 1 month’s expenses).
  2. Fund your retirement plan to your employer’s match.
  3. Pay off your debt
  4. Fund an emergency fund with 6+ months of expenses.
  5. Fund a Roth IRA to the annual Max
  6. Bump up your retirement plan savings to the annual maximum.
  7. Save into any tax-advantaged plans you have available
  8. Open a taxable investment account and invest in Exchange Traded Funds (ETFs) that track the market as a whole.

Most people have trouble with step 1, and will be lucky to get through step 3. Step 4 is a pipe dream for quite a few people, and the idea of maxing out not just one, but TWO retirement accounts sounds like grounds for an intervention because there is a lot of crack being smoked.

Let’s look at the near worst case scenario

So, what are you to do in this situation? How can you get through all of this when you’re only bringing home around $600 every two weeks? The answer a lot of people will get when they are honest with themselves is that sacrifices will have to be made. Whether it’s cable TV, the new iPhone, or your free time, if you are in this situation where you have this little cash coming in AND you have debt, you probably are either deluding yourself that if you keep on the treadmill things will get better, but the fact is that interest every month when you don’t pay off your cards is speeding that treadmill up, and eventually you’ll fall off.  An overdraft or two, and suddenly you’re eyeing a payday loan place just to solve the problem. Stop. Now. If you’re in this situation, let’s back up the cardiac arrest, take a few deep breaths and give you a rational plan to deal with this:

  1. Gather up all your monthly bills and pay stubs, pull up your online banking, too.
  2. Look at what you spend your money on, and decide what you want to cut.
  3. Keep cutting until your bills and expenses are less than your pay.
  4. Next, make calls to all of your credit card companies, and ask for lower interest rates.
  5. Add up all of your minimum monthly payments and monthly recurring bills.
  6. Open a new checking account, preferably without a debit card.
  7. Set up your direct deposit to go to two accounts: one for half the amount you got in step 5, and one for the remainder.
  8. You’ve now built a self-funding small emergency fund.
  9. The remaining money should cover your expenses (groceries, gas, etc).
  10. At the end of every two weeks, the night before payday, take any remaining money, and pay it on your highest interest account. You’ll pay down your debt a little faster and start to see some progress.
  11. If you’ve made it this far, and you’re still having some trouble making ends meet, go back to step two, and be honest with yourself.  Cutting cable TV alone will save you between 600 and 1200 a year.

“My situation isn’t THAT bad…”

If you just read the last section and didn’t cringe a bit because it hit a bit close to home, then you likely grew up with some good financial habits, or have had the income to mask some problems. So, let’s ask you a few questions:

  • Are you carrying any interest-charging credit card debt? How Much?
  • Do you have a car (or any other type that isn’t student) loan over 5%?
  • How much are you saving each month?

If you have more credit card debt than what you could pay off in your next two pay checks, after expenses, and you’re saving (rather than investing) money above a small emergency fund, congratulations, you’re throwing money away. Anything with an interest rate is considered to be “toxic” debt, and you should eliminate it quickly. 5% is used, because it’s generally accepted that returns on investment will be over 5%, so you would miss out on returns by paying off debts with interest rates under 5% faster than necessary if you were to use investments to do so.

I know you thought you were getting off easy, but you’re still in close to the same boat as the near worst-case folks, but likely without the constant fear of overdrawing your bank account.  Knowing this, you still need to budget, and get rid of the debt you’re throwing money away on. Your plan of attack should be to get organized (see above), and pay off the highest interest accounts first, working your way to the lowest accounts. If you can work without separate accounts feel free, but it will likely be easier to set things on auto pilot.

“Hah! Look at those suckers! I’ve got stuff together, straight cash for me!”

Oh?  You’ve eliminated all your toxic debt and are saving now? Have you optimized your spending habits to make it so credit card companies are providing you with interest free loans AND paying you for the privilege of having you use their card?  If not, you’re still leaving money on the table, just like those “suckers.” We’ll cover this more in the near future, but for now, if you’re at this point, life’s pretty good. Go check on your retirement accounts, and see if you can contribute a bit more in there for now, and we’ll get to the rest soon.

Until next time,  go  hunt down some debt!

Getting Started

Personal finance is quite a jungle. Everywhere we look, there are pitfalls, unexpected emergencies,  interesting opportunities, and predators that, if given the chance, will eat you (and your money) alive.  The important thing to remember about personal finance is that it’s exactly that — personal.  Two people aren’t going to get along with the same advice, and the situations that people find themselves in aren’t always ideal.  Personally, I’ve seen the worst of things happen. Losing a job, defaulting on credit cards and student loans,  resorting to payday loans and getting caught in their trap are all things I both grew up with and saw myself on the path to before I worked my way out of the mess.  At one point, I was in a situation with a car loan for 23% because it was the only thing I could get credit on.  All of this led to quite a sobering epiphany for me: the more you try to hide from your money problems instead of confronting them, the worse they will get.

This blog is brand new, but the ability to talk about finances in a rational manner is what will make everybody involved better off. The fact is, sometimes NOT borrowing money is worse for a person than borrowing too much.  With a background in economics, I want to help people understand where they are going wrong, and move them in the right direction. Some of the information here can be labeled as controversial, but I’ll do my best to provide a heads up when I talk about something that goes off the beaten path from what most personal finance “experts” spoon feed to their audiences. For reference, I’ve put together a quick list of my own “ten commandments” for personal finance, which should  provide some insight.

  1. Be Honest with yourself and your loved ones about finances.  – Lying will only make things bad in the short run at best, and horrible in the long run at worst.
  2. Learn to understand cash flow, and how it impacts your life. –  People don’t get in financial trouble from debt, they get in financial trouble by using debt to augment their cash flow.
  3.  There are two fundamental components to getting out of debt faster: spending less and earning more. – If you are serious about getting out of any debt you have, these are your options.
  4. If you have any question about being able to afford something, you can’t afford it. – Sure, a 70″ LED TV would look great in your living room, but the $1400 it would cost at 26.99% interest that that store card will charge you is not worth it.  Would you rather work 200 hours or 253 hours for something?
  5. If you don’t have a plan, you’re falling behind. – The old saying, “Failing to plan is planning to fail” is  very true with your finances. If you want to get the most out of them, you need to have a plan. Whether you want to systematically eliminate your debts, buy a house, or retire, you’ll need a plan to get there. Living paycheck to paycheck and hoping for things to “just work out” is a recipe for disaster.
  6. Good or bad, own your financial decisions. – Whether you went and bought a boat, or you decided not to take that trip to Mexico with all of your friends, the decisions we make can go beyond our bank accounts, so the important thing to know is that you never want to deprive yourself of experiences, or be unable to make ends meet because of your decision to either save or borrow too much. As with all things, moderation is the key.
  7.  Never be afraid to ask. – When I was young and dumb, I was always afraid to talk to my creditors, so I didn’t.  As a result, I likely missed out on the chance to fix a lot of things, and pay lower interest rate. Just about everything in life is negotiable. Ask for lower interest rates for everything you have to finance.
  8. Don’t become a slave to your credit score. – A single number will not define your value as a human being.  Check your credit report every 3-6 months to make sure it’s up to date, and pay down your balances to under 10% of your utilization (with the optional step of closing your newest credit line) 2 months prior to a major purchase (Home, Car, Boat, etc.)
  9. Pay your bills on time, not early, not late. – If you have an interest checking account, paying early will lower your average daily balance for the monthly interest, and paying late will result in a late fee.  Getting in the habit of paying on the due date will make your life much easier and have a (marginal) financial benefit for you.
  10. If you can’t keep your finances straight, use multiple bank accounts or the envelope method.  – This will help you avoid overdrafts, especially if you have multiple accounts, but only one of them linked to a debit card. Personally, I use a cash back rewards card that gets my spending money transferred to it bi-weekly to pay off the balance.

If you follow these, your financial situation should improve at every turn.  The harshest truth is that the odds are highly unlikely that you will win the lottery and become an instant multi-millionaire.  As a result, it’s going to be better to do the little things right so that you can live the best life possible.

That’s all for now. Until next time, go snack on some debt!