In case you missed it, last week I confessed to the world that my husband and I are personal finance nerds. The advice from that post is a great place to start if you’re trying to get your family’s finances under control. As promised, here’s the second installment with more tips based on what I’ve absorbed from books, articles, and TV and radio shows that I enjoy as a money nerd. *Note: I’m NOT a financial professional.* These are just things I’ve learned that have worked well for my family. So you know, consult your own personal financial advisor, blah blah blah, before actually doing any of this stuff I suggest.
1. What goes out must come in – this sounds so obvious that it should barely be worth mentioning: don’t spend more than you earn. So why am I mentioning it? We can’t actually follow that simple principle if we don’t know exactly how much goes in and how much goes out. On the show Til Debt Do Us Part, which is kind of intervention meets makeover for people who are struggling financially, one of the first things the host does is show the couple the sum of all their monthly expenses compared to their monthly income. Despite having spent months or years slipping more and more into debt, the couples always seem SHOCKED when the numbers are staring them in the face. Credit cards and loans make it possible to continue spending money we don’t actually have, enabling us to avoid facing reality if we’re living a lifestyle we can’t afford. Deep down a lot of us are scared to actually see those numbers. But just like the Farmers Insurance commercials say, what you don’t know can hurt you.
If you took my advice from last week and set up a system to track your expenses, you should be able to calculate fairly easily the total amount of all your monthly expenditures. Track this figure for a few consecutive months (again, mint.com makes this super easy!), and compare it to the income that you actually bring home after taxes, retirement, health insurance, etc. If there’s a monthly deficit, something has to give; you have to cut your expenses and/or figure out a way to bring in more income (also good advice if the numbers are roughly equal). If you have a surplus, be thoughtful about what to do with it so that the excess doesn’t get frittered away. If you set up automatic deductions to a savings account as I discussed last week, you can choose the amount of the transfer based on your monthly surplus. Capital One 360 allows you to create and name sub-accounts to earmark savings for a kitchen remodel, vacation, car down payment, etc. Knowing exactly how much you have to work with makes it easier to plan and work toward your short- and long-term goals.
2. Don’t pass up free money – If I offered to give you $50 if you’d put $50 of your own money in the bank, would you do it? It’s hard for me to imagine anyone saying no, but that’s basically what people do when they fail to fund their retirement up to their employer’s match. I realize it’s not a perfect metaphor, because money you put away for retirement isn’t money you can access in the short-term (and it could technically lose value, depending on how it’s invested). That being said, an employer match is basically free money, and it just doesn’t make any sense not to take advantage of it. We all need to accept that the world has changed. We’re not getting the pensions that our grandparents probably did. It sucks, but we’re responsible for funding our own retirements. We can’t just ignore the future and hope it will all work itself out! If your employer doesn’t offer a match, or if you already contribute up to the match but want to do even more, you may want to….
3. Open a Roth IRA. All the different investment vehicles out there can seem overwhelming, so let’s cut right to the chase – a Roth IRA works great for almost anyone. If you’re not familiar, here’s the deal. With normal retirement accounts (401K, 403b), the money goes in pre-taxed. This means that when you hit retirement and start withdrawing, a big old chunk will come out to pay the taxes. With a Roth IRA, you put in money that’s already been taxed (ie regular spending money). So as the value grows and grows over time, you get to keep all of it. Pretty sweet. And the other great thing is that unlike a 401K, you can withdraw any of your contributions (with limited exceptions) prior to retirement without taxes or penalties (*just your contributions, not any earnings *). So you can use a Roth as a vehicle for long-term/retirement savings, but if something unexpected happens, such as a job loss, you can dip into the money without taking a financial hit. Win win! Clark Howard offers great advice on finding Roth options with the lowest fees, which is critical since fees can significantly cut into the growth potential of your investments. Also make sure to read up on other income and contribution limits.
4. Automate it – Turn your finances into a well-oiled machine. Doing the initial legwork of setting up automatic transfers and bill pay will then allow you to sit back and put your feet up. Putting your finances on autopilot can look something like this: retirement contributions are deducted by your employer, your paycheck goes to your bank account through direct deposit, your bills get paid through recurring online bill payment, and money for your savings account/Roth IRA travels to those accounts through automatic monthly transfers. Everything flows where it’s supposed to with minimal effort from you!
5. Live below your means – This is basically the key to everything, the principle that underlies my entire financial philosophy. When my husband and I were house-hunting and got our mortgage pre-approval, I think my jaw literally dropped when I found out the amount we were approved for. If we’d actually bought a house up to that amount, our mortgage payments would have been well over my entire monthly income. Just because the bank will approve the mortgage doesn’t mean it’s a good idea! My husband and I bought a substantially less expensive house, based on our own calculations of the mortgage we could comfortably afford. That decision has given me the freedom to work part-time instead of full-time, so I can have more time with my son. I wouldn’t trade that for anything in the world! If having a more modest house, driving an older car, and eschewing designer shoes and purses means more money in the bank month after month, life is way less stressful… and that’s priceless.
But living below your means can be an uphill battle in the world of social media. It feels like the world is constantly telling you to spend outrageous amounts of money to keep up with the Joneses – instead of cake and ice cream at your house for your kid’s birthday, the internet seems to be telling you to rent out a chateau and throw a shabby-chic Parisian themed party with artisanal cupcakes and coordinating table-scapes, centerpieces, and favors. You have to be willing to ignore it all, swim upstream, and forgo the showy and expensive in favor of the frugal and practical. It might not be as Pinterest-worthy, but your bank account will thank you!
Ok, now it’s your turn! Share the best financial advice that has worked for you.
One thought on “Advice from a Personal Finance Nerd: Part 2”
Jennifer and I are huge financial/retirement planners. OK… let’s be honest, I’m the planner. A couple words of wisdom. Diversify Diversify Diversify….never put all your eggs in one basket. Spread your money around. Put some money away pre-tax and post-tax. The key for pre-tax savings outside your 401k is that you are likely in a higher tax bracket now then what you will be at retirement. So you will be taxed on your money when you need it at a lower tax rate. Also take a look at Whole Life Insurance plans. They are and excellent way to save money for retirement while being protected from current market trends.