Posts Tagged ‘Money’

Too Small to Fail

Sunday, January 17th, 2010

 

Photo: RLEVANS

You’ve heard of Too Big to Fail, right? Well, this week I want to introduce you to a simple personal budgeting tactic I call Too Small to Fail. Around my house, this dumb little idea helps my family keep our savings on track and, if you want to be hyperbolic about it, prevent financial collapse. (See, it’s the opposite of Too Big to Fail in more ways than one.) Before I explain how it works, let’s look at what’s wrong with a traditional budget.

Budgets ask you to look into the future. People are not good at looking into the future. Just watch a World of Tomorrow filmstrip. Where are my helpful robots? (Zhu Zhu hamsters are not helpful!)

Predictions about money are even less accurate. How much am I going to spend on dining over the next month? Beats the heck out of me. Will we be invited out to dinner? How much money is left after buying groceries? Trying to sit down and write a line item each for groceries, dining, entertainment, and so on is silly. You’ll get the numbers wrong and then feel guilty about it later.

Some people renegotiate their budget over the course of the month. “Okay, we overspent on dining already, so we’ll take some money out of entertainment and skip the movies.” If it’s so negotiable, why write it down in the first place?

I remember my parents making this kind of budget when I was a kid. Once a month, they’d sit at the dining room table and argue. You could see the DON’T COME IN HERE waves from several rooms away. When I grew up and got married, my wife and I adopted the same system, because we didn’t know any better.

Well, not anymore. Too Small to Fail relies on two insights:

1. Budgets make you worry most about small expenses, because those are the negotiable ones. As Michael Rubin put it in a MintLife article last August, budgeting can lead to “relentless focus on minor expenses.” So in our budget, we throw all the small-ticket items into the same category: groceries, dining, entertainment, it’s all the same. If we spend more on dining one week, we spend less on groceries. The total amount in the bucket is important, but the amount spent on each little category isn’t.

To illustrate, our monthly budget (with made-up numbers) looks something like this:

Rent:$100
Phone:$50
Retirement:$25
Vacation fund:$12
Small-ticket items:$30

The numbers are all basically the same from month to month, and as long as it all adds up to less than our monthly income, we’re good.

2. You don’t have to let your boss decide how often you get paid. Have you ever had a job where you were paid monthly? My wife gets a monthly paycheck. I don’t know about you, but I am incapable of making any sum of money last a whole month. Remember Brewster’s Millions? I could have blown the $30 mil in two weeks.

Instead, why not pay yourself weekly? That’s how we do it. We pay ourselves a lump sum every Friday to be used for our daily expenses. (Monthly, nonnegotiable items like rent and utilities come out of a separate account.) Because the money only has to last a week, it’s hard for us to get into much trouble. Sure enough, every week, we spend most of our allowance in the first three days. But then there are only four days left. If we run out of cash on Wednesday and have to raid the pasta drawer for a couple of days, big deal.

I know, this sounds anal and artificial. It is. It’s also effective. Ramit Sethi, author of I Will Teach You to Be Rich, advises you to use barriers to prevent yourself from spending. The classic example is freezing your credit card in a block of ice. This is the same idea: I’m not really out of money when the weekly allowance is spent. But to get more money, I’d have to dip into another account. That’s enough of a barrier to make me slap my own hand and say, “Don’t do that.”

You could even pay yourself twice a week. Or you could use this system to give a separate allowance to yourself and your partner.

If you want to give this a try, start right after you deposit your next paycheck. How much should you pay yourself? It’ll probably take several weeks to figure it out. You’re not trying to put yourself on an austerity program—though if you’re in need of an austerity program, this is a good way to implement it. You want an amount that will cover all of your expenses for the week, but not so much that you’re outspending your income or failing to leave yourself enough to pay your monthly bills.

What about big-ticket items like a new computer or holiday gifts? We save for those, a few dollars a week, over the course of the year.

Too Small to Fail lets you have fun by spending all your money every week. Only you and your helpful robot have to know that you’re being fiscally responsible at the same time.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.

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How to Set Up a College Fund

Thursday, January 14th, 2010

Check out this easy steps found on ModernMom.com

If you have kids these steps might be a great guide. Another great way of getting info on these different college plans is to call us and we would be more than glad to walk you thru your options! It’s that easy!

One way to fund your child’s college education is to contribute to a 529 savings plan. While each state now operates at least one of these education savings plans, students can usually attend a college anywhere in the U.S. Although a 529 savings plan is designed similar to a 401(k) or IRA, the specific features and benefits vary among states. To get the most out of your investment and gain the maximum benefit these plans offer, it is important to understand how they work.

  1. Step 1

    Estimate your child’s probable college costs. Inquire about the current annual costs for tuition and fees at several state and private colleges (see Resources below). Factors to consider include what percentage of these costs you want your investment savings to cover, as well as whether you want to reach your savings goal by the time your child enters or graduates from college. How much you need to save also will be based on how much costs are expected to rise annually. Statistical data compiled by the College Board following a 2003-2004 survey show that tuition at four-year colleges has been rising at about a rate of about 6% each year (see Reference 3).

  2. Step 2

    Assess how much investment risk you can afford to take. This will help you set your savings goals and find the right plan. Unless you are in a financial position to take more risk to earn higher returns, you might want to invest your child’s savings more conservatively. If you do invest in riskier options, the time to do it is while your child is younger so that you still have time to recoup any losses.

  3. Step 3

    Enroll in a 529 plan in either your home state or another (see Resources below). While you are given the choice of investing in different options, compare the plans offered by different states. You can enroll directly through the state’s plan manager or hire a financial adviser. Whether you hire a financial planner, broker, finance attorney or CPA to help you create and manage a diversified investment portfolio, choose someone who will provide the financial guidance you need. The person’s education, training and number of years experience are important factors to consider.

  4. Step 4

    Decide what percentage of your assets to invest in each of the fund options you choose for your investment portfolio. If your child will be going off to college within the next two or three years, you might not want to invest in the stock market in the event that you lose money and do not have the time to make it up. A wiser option would be to keep the assets in cash so that you can liquidate them quickly. On the other hand, if your child is still very young, consider investing in the stock market in an effort to earn higher returns.

  5. Step 5

    Invest primarily in bonds if your child will be of college age sometime between the next three to eight years. But no matter what type of investment options you choose, be sure to diversify your portfolio. Never put all your money in a single investment option.

  6. Step 6

    Review the performance of your investment portfolio annually. As your child gets closer to college age, be sure that your investments are yielding enough returns to meet your financial goals. Take a careful look at the quarterly reports. If an investment is not performing the way you expected, consider making some changes. Keep in mind that with a 529 plan you can change investments just once each year.

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Starting a Profitable Home Based Business!

Friday, January 8th, 2010

Nice post by a Work at Home Mom that is profitable! http://thebizbuzzofalatinamom.blogspot.com

Now days, it’s getting extremely hard to make ends meet with just one income. Therefore, more and more people are looking into the possibilities of starting their own home based businesses to generate that extra income. However, you will have to evaluate for yourself whether a home-based business is the ideal situation for your needs, because working from home is not for everyone. There are many advantages to working from home, the main ones being:

* Low overhead

* Home-office tax deductions

* Flexibility of hours

* Safety in inclement weather

* Security, peace and quiet

A home-based office eliminates much of the overhead expense of a business. Your home office incurs expensive operating costs just like any business. The beauty of a home-based office is that a portion of these costs can be claimed on your income taxes. The flexibility gained in a home-based business makes them very attractive to parents of young children. If you are too ill to work, you rely on your voice mail or take the portable phone to bed and rest. You can burn the midnight oil if you lose time during the day. You can continue working through rough weather conditions outside without having to take one step into the danger zone. The important thing is that people are doing something to make it happen.

There are many opportunities you need to be careful about. Start by doing the following:

Research – Find out for yourself, first-hand, just how many people their are in your area who are interested in your proposed product or service, and would be “willing to stand in line and pay money for it.” Also, find out if what you want to base your business on has any competitors. This is known as defining your market and pinpointing your customers. This will also allow you to find out what others are charging for their products/services.

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Financial New Years Resolutions You Can Keep

Sunday, January 3rd, 2010

This is a great post from Mint.com It highlights 10 financial tips for 2010….I don’t think you can go wrong with these tips! I am going to try them out myself!

 

 

 

 

 

 

 

 

 

 

Have you ever put an old chestnut like “save more” or “spend less” on your list of New Year’s resolutions? I’ve done it, too, with results undetectable by the most precise financial calculator.

Instead, here’s a top ten list (in traditional David Letterman order) of concrete resolutions you can actually accomplish. I’m not saying they’ll be easy, but all of these are either on my list for 2010 or are resolutions I’ve successfully completed in years past. Pick a couple of favorites and go to town on them. Happy new year.

10. Make or update your will. The number one reason people don’t do this is that they believe they will never die. If you are, in fact, immortal, go ahead and skip this one. Otherwise, if you have a simple estate, you can make a will on the cheap: get Nolo’s Simple Will Book or use their Online Tool for $70 (and it’s on sale for $50 until January 7). If you have a complex estate (do you employ a chauffeur with a name like Worthington?), get a lawyer and remember the first rule of estate planning: don’t forget a little something for your personal finance columnist.

9. Set up an automatic savings plan, if you don’t already have one. Even $5 a week is a fine place to start. SmartyPig works well for this. Pick a specific goal, check your progress periodically, and don’t mess with it—except to increase the weekly allotment.

8. Get rid of useless crap. No time like the present

7. Start a business. Hmm, that sounds too ambitious. Instead, start a side project that happens to be tax-advantaged. And start small. It could be selling crafts on Etsy, any kind of shop or repair work (I sharpen knives, for example), or even freelance writing. Go legit—get your city business license and file Schedule C. Why? Even if you don’t itemize, business expenses are tax-deductible. It’s fun to get paid (even a little) for something you enjoy. And if you become un- or underemployed, having an existing side business gives you something to focus on. Which brings us to…

6. Simulate bad news. Armies and city governments run disaster simulations. You can play the home game, the financial equivalent of testing your smoke alarm. Are you doing enough to prevent an emergency or life change from becoming a financial disaster? (Oh my God, I totally sound like an insurance salesman.) This year, evaluate your insurance, your emergency fund, and your family’s plans in the event of job loss, natural disaster, death or illness, and other bad things. This will not be fun, but you know what would be less fun? Doing it during the actual emergency.

5. Plan for financial good news. Now, this is more like it! Here’s hoping you get a raise, bonus, or inheritance this year. It’s about damn time, right? (I mean, not that I’m actively hoping you get an inheritance. Unless it’s from a rich uncle you never met.) Furthermore, here’s hoping you spend some of it on fun and some of it on long-term goals. Decide now. It’ll take you five minutes. What percent of any unexpected income will you set aside for retirement or the emergency fund this year?

4. Talk to your relatives about a gift moratorium. I know, sounds like negotiating with North Korea. But if you do raise the idea, do it in the summer—far from winter holidays and not too close to anyone’s birthday—and make the terms clear (maybe children and handmade gifts are excluded from the cease-fire, say). Explain that it’s not because you don’t love getting presents, but because you’re taking charge of your financial situation and find it hard not to spend on your wonderful siblings and cousins and uncles without making a pact. Oh, if my parents are reading this, next year I’d like a stocking full of candy and a donation to my favorite charity. And a chauffeur. Kidding!

3. Look into Roth IRA conversion. As of 2010, there’s no longer an income limit for converting a traditional IRA to a Roth IRA. (If you couldn’t convert to a Roth in the past because you made over $100,000, congratulations.) Converting your traditional IRA (or an old 401k or 403b) to a Roth may or may not be the right move for you—talk to your financial adviser—but if you’re even considering it, you’ll need to think about where the money will come from to pay the tax on the conversion. Good news: you can pay the taxes over the course of two years.

2. Take a nice vacation. You’ve earned it. Just one rule: you have to pay cash, and you have to save up the cash with the vacation in mind. This year we’re taking a family vacation to Japan; we’ve been planning and saving for it since 2007. If you follow through on this resolution, do me two favors: have a great time and don’t invite me over to watch your slide show.

1. Don’t buy a house. Okay, maybe this one is just for me. Have you ever saved up for something and then realized you didn’t want it anymore? For years, my wife and I have been socking away money every month into our down payment fund. And it’s getting awfully close to our goal. Due in part to the housing collapse, however, we have completely lost interest in buying a house. So one of our resolutions for this year is to determine how to reallocate that money—probably to beef up our retirement savings and emergency fund. Although, come on, how much can a chauffeur cost? Seriously, that much? Never mind.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.

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