Sticking to Some Basic Financial Rules

There are some basic financial rules that you should follow if you want to regain solid financial footing. At first, these may seem very difficult but once you are able to prioritize your expenses and your future goals, you will find the discipline to follow these rules to the letter.

First, see to it that your debt payments make no more than 20 percent of your take home pay. Debt here includes your credit card, car, and other personal loans. It does not cover mortgage or rent—they will be tackled later. Thus, if your monthly take home pay is $3000, you should be paying no more than $600 per month for all the types of debts mentioned.

Note, however, that calculating your debt on a monthly basis can hide a huge amount of debt because you can just pay the minimums and still your monthly payments can be way less than 20 percent. So to make sure that you get a good grasp of how bad in debt you really are, get the total unpaid balance of all your consumer debts. If this is more than 20 percent of your take home pay for one year, then you are drowning in debt. Let’s say your annual take home is $35,000 and you have a $15,000 credit card debt. Since 20 percent of $35,000 is only $7,000, you are in too deep with your financial obligations and you have to do something about it fast.

The second rule is to spend no more than 30 percent of your monthly take home pay for rent or monthly mortgage. We hear of too many Americans being “house poor”—that is, they get a house which is way too expensive for them. So if bring in $3000 a month after taxes, you should pay no more than $900 a month for your roof over your head.

Finally, make it a point to save at least 10 percent of your earnings every month. This is the absolute minimum that you should try to stash away for the rainy days. So that you don’t get tempted to spend this, automatically have this amount transferred to your savings account from your paycheck. Of course, the more you can save, the better it will be for you.

Ways to Track your Money

If you have been less than judicious with how you spent your money, you might have experienced wondering just where exactly your cash went. In worst case scenarios, shock probably overtook you when you realized that the money you had earmarked for the electric bill has already been partly spent or has gone completely “missing” from your wallet. The prospect of having your electricity cut off is scary and actually spending unwanted candlelit dinners is not at all fun or romantic.

Thankfully, it’s easier to keep track of where our money goes these days. Technology has certainly evolved to a point that it has made it more convenient for us to ensure that our dollar goes where we want it to go.

• Online Bill Pay

In this method, you simply add merchants that you want to pay to your bank account. This is usually available in most banks that give clients the ability to conduct online transactions. Write how much you have to pay to the merchant and the date when you want to pay them. You can choose to schedule the payments once a month or at recurring dates each month. If you choose the latter, do make sure that your account has money by that time. Your online statement will reflect the payment.

Online bill payments ensure that you don’t forget your monthly obligations since it is automatically deducted from your account as soon as you schedule it. This is especially important for ongoing monthly bills like your utilities and rent.

• Merchant Automatically Deducts

Instead of you having to put the merchants on your account and arranging for the deductions, you can instead have the merchant automatically deduct their charges direct from your account on a certain date each month. For example, you can arrange with your cellphone company to directly deduct your bill from your checking account each month and they will do that for you. Just make sure that you are dealing with a reputable merchant. You should also still do the necessary checks that the merchant has only deducted the exact amount from your account. Reports of some merchants directly levying additional charges have made a lot of individuals wary of this mode of payment.

• Trusted Envelope System

If you would rather pay for things in cash, then the time-trusted envelope system works best. Put all the expenses and amounts in appropriately-labeled envelopes. When the “dinners out” envelope starts getting low, you know it’s time to do more home-cooking.

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Your Finances: The Reality Check (Part 2)

Tracing your Spending

In Part I of this report, we covered your financial goals and set the amount you need to save to be able to accomplish them within a certain time period. We also covered how you can trace where your money went. Knowing exactly where you are spending every dollar by writing down all your purchases is vital to getting an honest reality check of your finances. By doing this for at least a month—you can do it for two months to get a more comprehensive picture—you will be able to figure out just how much money you are spending for the unnecessary things. Once you know this, it is easier to determine the areas where you need to trim down on your expenses or cut them off entirely so you can put more money towards your priorities.

Once you have the figures for your expenses for one month, it’s time for you to organize your expenditures. There are many financial worksheets online that you can fill out. You may also use your own. Basically, a worksheet is composed of two areas: Your income and outflows. The income, obviously, refers to the money you make each month like your salary and bonuses and money earned from second or third jobs you may be holding. This part also includes any interest earned on savings accounts, alimony (if you are receiving any), and scholarships (if you are a recipient). Make sure that you record your gross income or the money you make before tax.

The outflow portion represents your expenses each month. Include in this portion your taxes, mortgage or rent amount, retirement contributions, food and groceries, utilities (gas, electricity and water), communications (landline, mobile phone, and Internet), clothing, laundry, eating out, nightlife, gasoline and car repair/maintenance, fare for public transportation, insurances (health, life, long-term care, homeowners, disability, and auto insurance), debts (student loans, car loan, and personal loan), childcare, tuition and other school expenses, copays and deductibles, home maintenance/repairs, subscriptions (cable, gyms, newspaper/magazine, etc.), hobbies, pets/pet care expenses, vacations, and hobbies. Be as specific as much as possible. If there are other expenses that don’t fit in with the other categories, put them under miscellaneous.

For expenses which don’t really happen each month, like car repairs, get previous receipts and try to come up with a monthly average. Use your ATMs, credit card bills, and other receipts for other stuff so you can get an idea as to how much you need to allocate to these expenses per month.

The next step is where you’ll find out if you’ve been overspending or not. From your total income, subtract the total outflow or expenses. You are clearly spending more than you should if you arrive at a negative number. Now that you know this, what can you do about it?

Perhaps the category for eating out and nightlife is glaring at you accusingly. If you constantly have your lunches out, perhaps you can save more if you brown bag them.

Instead of going out with friends on weekends, perhaps you can scale back and just have these dates once or twice a month. Are you really using your gym membership to the fullest? If not, you can just exercise at home. What about your other subscriptions? If you barely use them, unsubscribe. How much money do you spend (cash or charged to your credit card) for shopping for items that you barely even remember afterwards? Are you constantly updated on the latest fashion trends? Well, you don’t really need to be for as long as you have the so-called staples in your wardrobe like the little black dress, black pants, jeans, jacket, and white shirt. You don’t also have to shop for designer shoes and clothing all the time. There are good finds in department stores for as long as you don’t care about labels.

Once you have already determined where you can cut back, go back to your worksheet and redo it, this time putting in the new figures of the areas where you intend to scale back. Then subtract the total expenses again from your total income again. By this time, you should already have a positive figure. You can now see the money you have to save for your financial goals. Depending on how much you can put into your savings, you will have to do some adjustments, either in the amount of the goals you want to attain or the number of years you want to accomplish them.

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Your Finances: The Reality Check (Part 1)

One of the most important things you can do now so you can find yourself in solid financial footing in the future is to start figuring out your financial goals. Money and budget issues are often very difficult to tackle because there seems to always be less than enough. Most of the time, there are more days than money left which add to the feeling of helplessness as far as our budgets are concerned.

Here are some common financial goals and how to go about putting a figure on them:

Purchasing a home.

Most, if not all, Americans yearn to live in a home of their own. Not only is it a good investment, it also allows you to do what you want with it without having to ask permission from your landlord. Try to do some research on what the median price of a home is nowadays. Let’s say you plan to get a $200,000 home. To be able to get that, you need to have 10 percent to 20 percent saved for the downpayment plus anywhere from 1 percent to 5 percent for the closing costs. So the lowest that you need to save for a $200,000 home, is $22,000 and the highest is $50,000. Of course, the more you save, the better it is going to be as you’ll end up paying less on the monthly amortization.

Another smart way of going about a home acquisition is to really strive to pay for it in cold hard cash while living in the cheapest but decent home you can find for the meantime. Yes, this is possible but it is going to take a lot of discipline and effort on your part. Of course, you will have to be patient as accumulating this kind of money is going to take a few years.

Buying a new car.

Everyone dreams of getting their own car. And this is another acquisition that is going to cost you money. If you want to get a brand new set of wheels, you also need to save anywhere from 10 percent to 20 percent for the downpayment. That means if the car costs $30,000, you have to save anywhere from $3,000 to $6,000 to be able to drive it home. But it would even be smarter if you pay for your vehicle in cash as it depreciates in value the moment you drive it out of the dealership.

Saving for emergencies.

You know just how unstable the world has become these days. One day you have a job and the next you are given the pink slip because the company needs to downsize to survive. You need to guard yourself against these and other emergencies which will potentially drain your resources and cause you to go in debt. Experts recommend having financial emergency savings of anywhere from three to six months of your living expenses so that you will still remain afloat when something bad rocks your world.

To arrive at this computation, you need to sit down and figure out your budget so that you know how much you need to set aside for your living expenses (this amount is lower than your monthly income). The more unstable your jobs is or if you are the sole breadwinner in the family or have a sickness that could put you out of commission anytime, the more months you should put into your emergency fund. But if you are in government service for many years now and have no intentions of quitting or have established yourself well in a relatively stable company then a minimum of three month’s emergency savings is enough.

Erasing your debts.

Debt is a burden that many people now wish they never got into. From student loans to credit card debt to personal loans, your financial obligations can weigh you down and prevent you from making the most productive use of your money. Instead of using it to prepare for your retirement or save for your kids’ college education, you lose the opportunity because you have to keep paying your debts each month.

So calculate how much you owe right now and make a determined effort to pay back every cent. There are two ways to pay your debts. The most common method suggested by financial experts is to tackle the high-interest debts first. The rationale behind this is that you avoid accumulating interest and prevent your debt from getting larger. The other one is called the debt snowball, popularized by Dave Ramsey in the Total Money Makeover. He advocates paying the smallest debts first so that you get the feeling of winning small victories and are thus motivated to keep on paying your obligations. Choose the method that you are most comfortable with and will most likely stick with until you are able to erase your debts completely.

Of course, you may have other goals, too, like funding for retirement or saving for your children’s college expenses. Be sure to put a price tag on these so you know how much you are going to be putting away each month to achieve them.

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8 Ways to Getting on Solid Financial Footing: The Cheat Sheet

This report gives you a quick lowdown on how to get on solid financial footing. It’s a cheat sheet so that means that we won’t be doing a detailed itemization of each step. Rather, this part is for those who are in a hurry and just want basic information on what to do now. Getting an idea on how to manage your finances way will get you started towards a much better future and a comfortable retirement. These 8 ways are not necessarily written in any order of importance so you can choose where to begin depending on what your situation calls for and what your priorities are.

If you’re ready, here’s the quick rundown on how you can get into solid financial footing fast:

1. Get health insurance.

One of the things that put people in financial ruin is illness. If you’re unprepared, one serious and debilitating disease can get you up to your neck in debt and yes, even bankrupt you and your family’s coffers. You want to protect yourself against this possibility by getting health insurance coverage. Those working with employers who offer healthcare insurance are fortunate as any contributions you make are bound to be less costly than if you were to buy coverage on your own.

Now if you are one of those who have to get health insurance yourself, be sure to compare plans first. Inquire about the illnesses that are covered and if you are limited in seeing doctors or specialists that are members of the plan. Do they charge extra if you go to a non-plan doctor? How much are the deductibles and copayments? If you are still on the hunt for a job, perhaps you can get temporary insurance that will shield you for a few months from very expensive medical issues. If you’re young, perhaps you can still be covered by mom and dad’s coverage so check this option out as well. Going without health insurance is a sure way to invite bankruptcy and financial ruin in so no matter how limited a coverage you can afford, make it a point to take care of healthcare insurance first.

2. Take care of your debts.

Who doesn’t have debt? It seems that this is a common thread that runs among majority of American families and is one of the reasons why it’s very difficult for many to manage their monies. Well, if you are not yet in debt, don’t go into it. But if you already have financial obligations to take care of, start freeing yourself from them right away. Begin by paying off those high-interest loans. If you have other debts, ask for a time extension or maybe even lowering your interest rate. Some debtors may not be as kind but some will give you consideration so it never hurts to ask.

Now you may be tempted to invest your money or put it in a savings account. But if you are still burdened with high-interest rate debts, you stand to “earn” much more if you paid off your 18 percent interest credit card loan first than put your money in an investment that pays only 5 percent interest.

3. Save for retirement.

Retirement may seem so far off into the future when you’re young and healthy but the best time to prepare for it is now. Most employers offer a 401k plan to their employees which give a matching contribution to what the latter puts in. So if your employer matches your contribution 100 percent then every dollar you put will also mean receiving another dollar for your retirement fund. That’s free lunch money that comes at no extra effort from you except, perhaps, to see to it that you have that extra money to contribute. There are also tax benefits for putting money into a retirement fund. One is that it grows tax-free—that is, you only get taxed when you withdraw that money later on. You can also borrow from your 401k although it is best at all not to so that your money grows undisturbed.

If you are self-employed or working for a company that does not offer a retirement plan, you can still prepare for retirement by opening an individual retirement account or IRA. There are maximum contributions to an IRA adjusted each year by the Internal Revenue Service. For 2013, it’s $5,500 ($6,500 for those aged 50 or older). Try to give the maximum contributions as much as possible.

4. Save money for emergencies.

You must make it a point to save three to six months of living expenses in case life catches you unawares and throws you those unexpected blows, like the loss of a job or the death of a spouse. If you want to be “forced” to save money, you can have a certain amount of your paycheck each month sent automatically to your savings account. This way, you don’t have to worry about spending it. You may also opt to put your savings in a money market fund which offers higher interest rates than traditional bank accounts. The more unstable your job is, the more you should beef up your savings. If you’re the only breadwinner in the family, you should also strive for a fatter emergency fund.

5. Invest in stocks, bonds, and mutual funds.

With your savings account firmly in place for emergencies, you can choose to be savvy by building your wealth portfolio. Investing in stocks, bonds, and mutual funds has always been the traditional way of building your nest egg and growing your wealth. These three investment vehicles are considered risky (well, all investment is) but the riskiest of all are stocks. However, it is also the one that gives the fastest growth over the long-term so it would be unwise to avoid it because you are afraid of losing money.

To diversify your portfolio and balance the volatility of stocks, you can invest in bonds. Here, the government or company borrows your money in exchange for interest and the promise of paying it at a certain time in the future. The safest bonds are those guaranteed by the federal government as it is highly unlikely that the government will go out of business. However, bonds issued by companies may also be safe provided that you check out the ratings from independent companies which give you an idea of the stability of the bond issuer.

Mutual funds are the best way to invest if you only have limited funds and cannot possibly put on a diversified investment mix by buying individual stocks and bonds. In mutual funds, your money together with thousands of other investors are gathered and the mutual fund manager invests it in a variety of stocks, bonds, and money market accounts. For only a fraction of what you would spend for individual stocks and bonds, you get a diversified portfolio in a mutual fund. Moreover, you also enjoy the benefit of having a professional manager who has years of training manage your portfolio. Do look for no-load mutual funds so that you can maximize the return of your investments.

6. Improve your credit score.

Your credit score is based on your credit report, which details whether you are a good debtor or not. Your credit history matters a lot because it affects almost all aspects of your life. Of course, an unblemished history of on-time payments and good credit will give you a good score and enable you to take advantage of competitive interest rates when acquiring any type of loan. On the other hand, a marred credit history and low credit score will be detrimental, not only in your chances of getting approved for a loan. It will also lessen your chances of getting a job or renting an apartment.

You are entitled to a free copy of your credit report once a year at www.annualcreditreport.com. You may also contact any of the three credit bureaus—Experian, Equifax, and TransUnion—to get a copy of your credit report. Review your credit report carefully and see if there are any errors on it. If you spot anything that is erroneous, be sure to communicate with the credit bureau right away so it can be corrected.

7. Get your own crib.

We’re talking about buying your own home, if you don’t have one already. Getting your own crib is a good investment because real estate values always go up, no matter how unpromising the housing sector has been in the past years. It’s a good idea to pay up for your home in cash but since this is not really very possible for a lot of people, strive to save more for the downpayment. Commercial mortgage lenders require at least 10 percent for the downpayment but if you can give more then you are much better off financially because that would mean lower monthly payments. As much as possible, avoid adjusted rate mortgages and balloon mortgages.

8. Figure out ways to legally lower the taxes you pay.

We need to pay our taxes to keep the government working. But if you’re not smart about handling it, you can end up paying more than you should. Find out ways that you can legally lower the taxes you pay to Uncle Sam. Putting money in retirement accounts and in college savings funds yield tax advantages so be sure to acquaint yourself with them. Some expenses are tax-deductible too, so learn what these are. The website of the Internal Revenue Service gives the most comprehensive source of information. You can also ask a financial adviser on ways to lower your income tax.

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The Cost of Divorce

Marriage does indeed offer a host of pleasantly surprising monetary benefits. While these might be good reasons to really work on your marriage, divorce is even costlier and should give you both more incentives to avoid it as much as possible. If money issues are disintegrating your union, you should try to really work things out because divorce is certainly going to make your finances take a turn for the worse. How come?

Divorce results in exorbitant legal fees. When you and your spouse decide that it’s time to call it quits, you should be ready to pay each of your attorneys to handle the legal proceedings. Even if you both decide not to contest the divorce, you can still expect to shell out $1,500 in legal fees. On the average, contested divorce can cost $15,000 and more complex divorces can cost anywhere from $50,000 to $100,000 according to estimates. If your relationship is beyond repair that you are only talking with your ex-spouse through your attorneys, the cost can go up significantly. Even if you do decide not to hire an attorney to keep costs low, you still have to spend money to end the relationship legally.

Divorce can result to higher taxes. When a couple decides to split and they have investments in a joint account, they usually end up liquidating and splitting the assets. This might seem like a good idea at this point, especially since one or both would need the funds to start over, but the capital gains tax bill later on can hit you in the face. It becomes worse if the funds were taken from a traditional IRA and both are below 59 ½ years old. The 10 percent penalty for early withdrawals also increases the burden you have to pay to the IRS.

Divorce means you have to maintain two households. We have mentioned how you can save on certain expenses when you live together. When you head for Splitsville, you both have to find separate houses and pay your bills and expenses on your own. If you have already bought a house or other properties during your marriage, the property laws in your state will determine how these will be divided. The challenge lies in the fact that your income will still be the same but you will be paying all your bills yourself compared to when two incomes were sharing the expenses.

Divorce means dealing with alimony and child support obligations. If one party—usually the disadvantaged spouse— requests for alimony and the judge grants it, this will mean more expenses on that spouse. If there are children, child support will have to be added to that list of ever-expanding financial obligations as well. Now let’s say that you do decide to marry again after the divorce: You will not only have to continue giving your former spouse alimony and child support, you also have to work to provide for your current family.

Divorce can lead to poverty. This is one of the lesser-known facts about divorce: That dissolution of the marriage can be detrimental to one or both spouses in the long-term. Studies show that the poverty rate of children living in married couple homes is about 8 percent while those in single-parent households have a poverty rate of 35 percent. When a divorced parent is unable to provide for the needs of his or her children and the spouse becomes remiss in his or her child support obligations, the financial impact on the child can be very devastating.

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The Financial Benefits of Staying Married

Many individuals avoid discussing marriage and money in the same breath but in reality, the discussion— or lack thereof—of finances is one of the primary reasons why couples decide to call it quits. What a lot of individuals who tie the knot often do not understand until too late in the marriage is the fact that it is often money matters that lead to a lot of arguments. When not handled properly or left unresolved, financial issues often lead to divorce.

Yes, we do not go into marriage thinking that it will end in the big D word. We all want it to last forever. But we also have to face the reality that the specter of divorce looms in many unions. The best thing to do would be to learn from those who have gone before and try not to go that same path if it can be helped. For many marriages, the breakdown is often precipitated by a lack of communication about money and debt. If you are open with each other about things like the family budget, savings, debts, and the little luxuries that you want to buy for yourself, you set the stage for an honest relationship.

Aside from love, marriage offers a host of financial benefits that make a great incentive for couples to stay together through thick and thin. So before we discuss how divorce impacts your finances in more detail, let’s examine the financial advantages that come with tying the knot. These make a practical case for staying together and working through the rough spots that inevitably come with it.

Better financial stability. The most obvious benefit that comes with marriage is that there are already two of you working instead of one. Your earning power is increased. Even if one of you decides to stay home when the kids come later on, the other is still available to earn for the family and you get to save on major expenses like childcare. Moreover, having a partner to work for the family means that you still have a little leeway in case you suffer a daunting setback, like getting fired from your job.

When you treat two incomes as one, you have the leeway to allocate funds for certain financial goals that you both share. You have money to save for that house downpayment, that vacation, or your future plan to go back to college or pursue graduate studies.

The opportunity to combine—and lessen— expenses. When you are married, you naturally share one roof, the same cable, phone, and Internet subscriptions, and utility bills. Food expenses may likely be the same as you will still most probably be eating the same when you were still living separately. But for the other expenses mentioned, there is that opportunity to lessen your expenses. This will mean savings for you—money which you could invest or put in a nest egg for your retirement.

Better loan offers. When there are two incomes, lenders are more likely to grant favorable loan offers because you are naturally in a better position to pay off your debts than if there was only one breadwinner applying for a loan. If your spouse has a stellar credit score and yours is just so-so, you could both benefit by getting more competitive interest rates.

On the not-so-bright-side of things, your credit rating could get affected if spouse has a very bad credit history and low credit score. This is why you should always ask to see each other’s credit records before you tie the knot and have candid discussions about these issues so that you are both not caught off guard when applying for loans as a married couple.

Savings on car insurance. If you and your spouse are responsible drivers, you get to save on car insurance. Inform your insurance agent that you are getting hitched and you will benefit from lower rates. Moreover, you can consolidate policies and even insure your car and your home with the same insurance company to get discounts.

A word of caution, however: If your spouse is an irresponsible driver, you could end up with higher premiums if you put him or her on your policy. Be sure to read the terms and conditions carefully and weigh the pros and cons together if consolidating policies is going to result in savings or if you’re better off keeping separate insurances.

Access to your spouse’s employer-sponsored health plans. Employers often give generous benefit plans to their employees. Most plans include coverage to spouses and kids as well. Marriage is one of the events that will allow you to gain access to your spouse’s health plans. This is considered a major financial plus to those who are currently purchasing their own health insurance policy which can really be expensive. If you are also covered by a health plan from your own employer, you should decide if it is more financially-beneficial for you to be covered under your spouse’s employer-sponsored plan or to keep your own.

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