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Posts Tagged ‘pay yourself first’

The other day I was contacted by Evan Lips, a reporter from the Lowell Sun who was doing a timely article on financial planning tips for the new year.

He had spoken to other financial planners and investment representatives and he had a wide range of opinions provided by them.  These included ways to manage credit to savings to kinds of investments to use for a retirement account.

Because everyone is at a different place in his or her life, some of these tips may not really help now. For instance, how you take money out of retirement accounts when retired is a tip that is less important to someone recently graduated looking to pay off student loan debt.

But there is something common that really can help anyone of any age.

Number One Tip for 2011 and Beyond

So my Number One tip for any consumer of any age:  Control What You Can and Leave the Rest.

What do I mean?

Consumers are usually their own worst enemy.  Too distracted by daily affairs, it’s easy to become overly focused on the news of the moment.  And this can lead to an emotional reaction that can otherwise sabotage long-term financial health.

Things You Can Control

1.      Investors have control over certain things: Their emotions (and reactions to the crisis of the day), investment expenses, asset allocation and amounts they save.

2.       Investing is long-term but the financial media is fixed on short-term crises of the moment.  Be mindful of that and try to tune out the noise.

3.       Your mom was right: Live beneath your means and you’ll have extra cash to save; build up your emergency reserves (minimum 3 months of fixed expenses for married couples working; 6 months for couples with one-earner and nearer 12 months for someone with variable income).

4.       Pay yourself first.  Make it automatic. Have a portion of your paycheck directly sent to a high-yielding savings account.

5.       You can lower your investing expenses and improve your diversification by using Exchange Traded Funds.  ETFs are investments that can trade like stocks but represent a broad basket of investments.  (Sort of like an index mutual fund but with even less expense). If you have less than $100,000 to invest and are looking for efficient core holding for global stock diversification, consider something like the OneFund® ETF from US One at www.usone.com (ticker symbol: ONEF) which is composed of 5 other ETFs from Vanguard and costs less than 0.35% per year while providing 95% exposure to 5,000 large, small and medium-sized companies throughout the world.

6.       Develop good money habits: Reconsider that fancy coffee or fast-food lunch and pocket the savings for a more meaningful goal (i.e. vacation, paying off debt, down payment for a house).

7.       Pay off your debt by snowballing payments.  This technique will help you see progress toward paying off debts.  Start with the ones with the lowest balances and pay above the minimum.  Then when this debt is paid in full apply the amount you were paying toward the next debt.  Eventually, like a snowball rolling down hill, you’ll be applying all these payments in large lumps toward the highest balance debt.  And this will help accelerate paying the debts off and lower your interest expenses.  Then when everything is paid off you can direct this toward your emergency reserves or investing goals.

8.       Position yourself to qualify for more student financial aid: Skip the allowance and put your kid to work.  See my post on this here.

Want Some Low-Cost Globally Efficient Ways to Invest?

What is an ETF?  Go to https://moneylinkpro.wordpress.com/?s=exchange+traded+fund or http://www.investopedia.com/terms/e/etf.asp

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“Sometimes all it takes to change your life massively for the better is a small action and a small success, “ says David Bach, a noted author on money matters. 

  1. Consolidate Your Accounts:  Don’t wait for spring cleaning to roll around.  Make it easier on yourself by combining old 401(k) or IRA balances from your various old jobs.  This can help cut down on the amount of paper you receive and improve the chances you’ll have a coordinated investment plan. And it’s just one more way to have a more ‘green’ holiday.
  2. Pay Yourself First: While there always seems like there’s more month at the end of your paycheck, you can only get ahead by making a point of putting aside money in savings.  It doesn’t matter if it’s just $5 or 5% of each paycheck as long as it’s consistent.  Start somewhere and try to build up to your target of at least 5% of your net cash flow. Direct the money into a separate money market account that you can’t access easily from an ATM or debit card.
  3. Get to Know Where Your Money Goes:  For most people cash flow is not the problem. It’s cash retention that is a challenge. There always seems to be too much flow away from you.  Set up a system to keep track of where your money is spent.  Whether you decide to use a notebook or financial accounting software like Quicken or an online service like Mint.com, this is a first step to getting the information you need to decide what your spending priorities should be. 
  4. Cut Expenses:  Armed with the information from your tracking, now consider ways to lower expenses.  Do you really need a daily Mucho Grande from your favorite coffee place?  At $5 a day, your habit could help pay for your annual vacation or pay down your credit card or mortgage debt. Do you really use all those movie channels?  Can you wear a sweater and lower the thermostat?  Do you really need to be in the mall? Cut down on impulse shopping by creating and sticking to a master list of groceries and household goods.
  5. Reduce Temptation: Consider saving the bulk of any bonus checks or raises.  By automatically diverting this money, you’ll be able to add to your emergency stash, have cash to pay down debt or even invest. See #2 above.
  6. Reevaluate Your Risk Tolerance:  One of the most useful services that financial planners can offer is helping you really articulate your goals and establish your tolerance for investing risk.  After the bumpy ride of the past 18 months, most folks realize that they may not have had a handle on this.
  7. Avoid the Casino Mentality: It is an understatement that investing in the market can be risky but now is not the time to try to play catch up by “doubling down” or chasing the hottest investments ideas.  Remember the story of the tortoise and hare.  Sometimes the race doesn’t go to the swiftest but the most consistent.  So diversify your eggs into different baskets and watch those baskets.  For help in choosing the right mix of investments and a style that will help you sleep better at night, consider meeting with a CERTIFIED FINANCIAL PLANNER ™ professional.
  8. Rebalance Your Investments:  Over time, accounts that have been consistently rebalanced tend to have higher balances.  So plan to rebalance at least annually or even quarterly.  But first you need to have targets in mind so that you can unemotionally prune back your winners while adding to the laggards.
  9. Add to Your Retirement:  If you haven’t taken advantage of your employer’s sponsored retirement plan, start now.  If your employer doesn’t offer a plan or you’re self-employed, start your own.  Resolve to set aside at least the amount that will get you the maximum company match.   Ideally, you should know your “NUMBER” for living in retirement the way you want.  Consulting with a CERTIFIED FINANCIAL PLANNER ™ professional can help you here.
  10. Get Planning Advice to Map Your Route to Your Goals:  Maybe you’ve winged it and thought your home and 401(k) were your tickets to a secure retirement.  Odds are that your planning is not filling the bill.  Sit down with a CERTIFIED FINANCIAL PLANNER ™ professional to discuss your whole picture and map out the action steps that will help keep you on track for financial success.

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Here are some suggestions for saving money.  While “cash is king” now with the high level of consumer anxiety, these tips can and should be used any time.

 

1.) Pay Yourself First:  This is the best advice that any consumer can take to heart. It works through any and all environments.  Set aside a certain dollar amount each pay period to savings and investment.  When you receive a pay raise, increase the amount going to savings, investment or your 401k to include a good portion of the raise.  Money is like water.  It fills up the space provided and the more available cash someone has, then the more likely it will be spent.  By directing it to savings (or an auto investment like a 401k) the less temptation there is for someone to use it on “wants” versus “needs.”

 

2.) Start an auto-investment savings and investment plan:  This is related to the first step.  Direct a portion of your savings into a separate savings account for your emergency fund.  Direct a portion into your company-sponsored retirement plan. 

 

3.) Bring Your Own:  Whether it’s bagging your own lunch or brewing your own cup of java, this will add up.  Eliminating just one cup of special mocha grande latte (or whatever they call it), you can save nearly $5 per cup.  Add that up:  Over the course of a year, eliminating just one cup per day on your way to work can save at least $1,200.  Over the course of five years, that money put in a FDIC-insured account might be worth $5,000 to $6,000 – a tidy sum for some other more worthwhile endeavor (maybe a vacation, maybe a home improvement, maybe college savings).

 

4.) Use Cash:  When buying gifts or even a night on the town, use cash instead of credit cards.  Cash seems more real.  It is more immediate.  When the amount in your wallet drops by the cost of four movie tickets and jumbo drinks, it stings a little more than putting it on plastic. 

 

5.) Avoid Unneeded Insurance:  Don’t skip needed coverage on your auto, home, income or life.  And review these types of policies at least annually (or when there is a life-changing event like a birth) to make sure that adequate coverage is in place.  But skip the extended warranty coverages on small ticket items.  For instance, a cordless phone that costs $20 at Radio Shack may offer a 2-year extended warranty for replacement at $5 but that’s just increased your cost now by 25%. And it is more than likely that if and when the phone gets fried, you’ll be able to simply replace it at the same current cost with even more fancy features anyway.

For big ticket items, it may make sense to have some type of insurance in place:  a computer used for work, an expensive plasma TV.

 

Speaking of insurance.  Deal with a reputable Property & Casualty insurance agent who has access to many carriers.  Be sure to call and review your coverage.  Going for the lowest premium is not a way to save money.  Example:  Owning a home with a replacement cost of $400,000 and having outdated coverage up to only $300,000 exposes you to all sorts of risks and out of pocket costs if there is a damage claim since you’ll only get a proportion of the loss covered by the insurance.  Why?  Because you did not have full replacement cost coverage.

And it’s a good idea to insure only that portion of the risk that you are not willing or able to bear.  So consider increasing your deductibles on things like your auto and home insurance policies.  A policy with a $1,000 deductible will cost less per year overall than one with a $250 deductible.  And with the savings you’ve established from Step 1 above, you’ll have the deductible covered.

 

Example of being penny wise (i.e. annual premium) but pound foolish (i.e. larger out-of-pocket outlay).

 

6.) Save the Planet – Reduce, Reuse, Recyle: There is a bumber sticker out there that says “Think Globally, Act Locally.”  Here you can do your part to make the world a little more green while putting some green in your pocket as well.   There are a host of ways that one can cut back without too much impact on lifestyle.  Your mom’s advice here works: Shut off the lights when not in a room, don’t keep the refrigerator door open so long that you could paint a picture, wash your clothes in cold water instead of hot, unplug battery charges when not in use.   To reduce water consumption consider shorter showers (a challenge with teenagers, I’m sure) and don’t let the water run constantly while shaving or brushing teeth. And consider reusing plastic packages for other storage instead of simply tossing them.  And if your community has a recycling program, use it.  The more your community recycles, the lower the garbage collection tipping fees.  And that may mean one less excuse to raise your property taxes.

 

Hope that this helps.

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