Naked Money

In our house, the bills don’t get hidden. I’ve never tried to hide our finances from our children. I believe doing that is part of the reason I reached adulthood with no brakes. Growing up, finances were almost entirely invisible.  Now, I believe is financial transparency.

Now, as a father, I balance the checkbook and pay bills on the laptop in the living room where my children can see me. They see the stack of bills and they watch me balance the checkbook. We discuss how much things cost and how we can cut expenses while the bills are being paid.  Even the toddlers know Daddy is doing something important.

My ten-year-old son knows what sales tax is and where to find it on a receipt. He knows what property taxes are and how much they are in our neighborhood. He knows roughly what percentage of a paycheck gets withheld. I work to make my son financially aware. My girls are too young to understand the concept of money, but they will be receiving a thorough financial education as soon as they are able to grasp the concepts.

The hard part is explaining to my son how we screwed up our finances. I’ve shown him my paycheck and discussed our debt. I have explained to him that we were making much less money when we accumulated our doom debt, while maintaining a higher standard of living.  Now, when we go to the store, he doesn’t even ask if he can borrow money until we get to his bank account.  He has learned to dislike debt in almost all forms.  I’m fairly proud that my kid voluntarily practices delayed gratification.

What he doesn’t quite grasp is the idea of living within your means, even if your means are limited.   “But, Dad, what if you don’t have much money?  Then you have to borrow money for nice things, right?”  I’m not sure how to break him of that.  Delayed gratification is an understandable concept for him, but the difference between wants and needs seems to be missing.   Any ideas?

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Don’t Screw Future-You

A conversation between me and my temporally displaced self.
Future Me: Excuse me, Jason?
Me: Yes?
FMe:
Me: May I ask what that was for?
FMe: Of course.
Me: What was that for, jerk?
FMe: That was payback for all of the hell you have put me through.
Me: What?!?  I’ve never even met you, before.
FMe: Of course you have.  I am future-you, and I’m sick of getting screwed by past-me, that is, you.
Me: Huh?
FMe: Listen close.  You’re not  the sharpest brick in the box and I don’t want to explain this twice.
Me: ???
FMe: A long time ago, when you first met our wife, you were dumb.
Me: I don’t appreciate….
FMe: Shut up.  I was dumb then, too.  Remember?  You…err…we bought a new truck, built an addition on our…err…your…err…whomever’s house, got married in the same year.  On top of many other expensive decisions.  Do your recall?
Me: Yes, I do.  So what?
FMe: If that wasn’t enough, you and your smoking-hot bride are still shopping like you’re rich. You drive a new car.  Your kids wear new clothes.  You’ve got a house full of new furniture.  How did you pay for all of that?
Me: Naturally, I charged it.  Zero payments, zero interest for a year!  Pretty smart, huh?
FMe: What happens in a year?
Me: I don’t know.  I’ve got a full year to figure that out.
FMe:  I’ll tell you what happens!  Future-you, that’s me, gets screwed!   Your raise didn’t come through.  You had a baby. The truck broke down.  Your wife took maternity leave.  A roommate moved out.  You took a loss in the stock market.  You didn’t plan!  You had no savings to cover any of those problems because you were too busy servicing debt to pay for your current life.
Me: How was I to know?
FMe:  Life happens!  You never know what is coming next.  You need to plan and save for what might happen.  Otherwise, you’ll just accumulate more debt to be serviced by yours-truly.  That is not acceptable.
Me:  So?  What are you going to do about it?
FMe:
Me: Really?  Again?
FMe:  I’m struggling to pay your debt. Your son starts college next year, but you’ve left me completely unable to help.  Your daughter wants to get married in a couple of years, but the Father-of-the-Bride can’t afford a tux.  My wife, your beatiful bride, wants a vacation that I can’t afford.   You’ve screwed me, dude.
Me: I’m sorry.  What can I do to fix it?
FMe: Buy me dinner, first.
Me: Huh?!?!?
FMe: Stop the excess spending. Spend less than you make, for a change.  No credit.
Me: None?
FMe: None.  Nada.  Zip.  Zilch.  Only spend what you can afford. Budget.  Pay off those nasty bills.  Don’t leave me hanging.
Me: So, what you’re saying is that, if I don’t have the money, I shouldn’t buy it?
FMe: Exactly.  That’s the path to wealth, freedom, and financial independence.  Live in the real world.
Me: Gee, thanks, Future-Me!  Now I know.
FMe: And knowing is half the battle.

What would your future-you have to say to you?

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My Financial Plan – How I Improve on Ramsey

In April, my wife and I decided that debt was done. We have hopefully closed that chapter in our lives. I borrowed, then purchased, The Total Money Makeover by Dave Ramsey. <a href=budget” width=”300″ height=”213″ />We are almost following his baby steps. Our credit has always been spectacular, but we used it a lot. Our financial plan is Dave Ramsey’s The Total Money Makeover, with some adjustments.

Step 1. Budget:

The budget was painful, and for the first couple of months, impossible.  We had no idea what bills were coming due. There were quarterly payments for the garbage bill and annual payments for the auto club.  It was all a surprise.  Surprises are setbacks in a budget.

When something came up, we’d start budgeting for it, but stuff kept coming up. We’re not on top of all of it, yet, but we are so much closer. We’ve got a virtual envelope system for groceries, auto maintenance, baby needs(we have two in diapers) and some discretionary money. We set aside money for everything that isn’t a monthly expense, and have a line item for everything that is. My wife is eligible for overtime and monthly bonuses. That money does not get budgeted. It’s all extra and goes straight on to debt, or to play catch-up with the bills we had previously missed.  I figure it will take a full year to get all of the non-monthly expenses in the budget and caught up.

Step 2. The initial emergency fund:

Ramsey recommends $1000, adjusted for your situation. I decided $1000 wasn’t enough. That isn’t even a month’s worth of expenses. We settled on $1800, plus $25/month. It’s still not enough, but it’s better. Hopefully, we’ll be able to ignore it long enough that the $25/month accrues to something worthwhile.

Step 3. The Debt Snowball:

This is the controversial bad math. Pay off the lowest balance accounts first, then take those payments and apply them to the higher balance accounts. Emotionally, it’s been wonderful. We paid off the first credit card in a couple of weeks, followed 6 weeks later by my student loan. Since April, we’ve dropped nearly $10,000 and we haven’t made huge cuts to our standard of living.    At least monthly, we re-examine our expenses to see what else can be cut.

Step 4. Three to six months of expenses in savings:

We aren’t on this step yet. In step 2, we are consistently depositing more, making us more secure every month.

Step 5. Invest 15% of household income into Roth IRAs and pre-tax retirement:

I have not stopped my auto-deposited contribution. It’s stupid to pass up an employer match. My wife’s company does not match, so she is currently not contributing.

Step 6. College funding for children:

We have started a $10 College fund.

Step 7. Pay off home early:

I don’t see the point in handling this one separately. Our mortgage is  debt, and when the other debts are paid, we will be less than a year from owning our house, free and clear. This is rolled in with step three. All debt is going away, immediately.

Step 8. Build wealth and give!

We have cut off most of our charitable giving. Every other year, it has been a significant percent of our income, and in a few more years, will be so again. The only exception to this is children knocking on the door for fundraisers. I have no problems with saying no to a parent fundraising for their kid, but when the kids is doing the work, door-to-door, especially in the winter, I buy something. My son’s school, on the other hand, gets fundraisers ignored. When they come home, I send a check to the school, ignoring the program. I bypass the overhead and make a direct donation.

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Get Age on your Side

Albert Einstein.

Albert Einstein. (Photo credit: Wikipedia)

One of the best ways in the early years of your career to provide for your long term future is to have a 401K for your retirement where your employer will match your own contributions up to a certain figure. Your contribution is pre-tax incidentally. Albert Einstein once said that compound interest was the ‘eighth wonder of the world’ and it is compound interest that will help even small amounts to grow into a substantial figure on retirement if savings begin in your 20s.

It is worth illustrating this with real figures. A figure of $4,000 a year saved between the ages of 25 and 35 with no further contributions after that will produce a larger final figure at 65 than someone starting at 35 and contributing $4,000 per annum for 30 years. The latter has invested three times as much as well. The factors that decide this are time and compound interest. The whole total of former is working for him or her for 30 years. A fair amount of the second example is only ‘working’ positively for a limited time. Start early!

An Illustration

It is worth looking at examples to see what size of fund is realistic. 8% is not an unreasonable sum to put away on a salary of $40,000 a year, a salary that grows at 2% per annum for 20 years. If the employer pays 3% in addition and growth is a modest 7%, the fund at the end of 20 years would be around $210,000. If you can put 10% in instead, or if you extend the saving period to 30 years the fund rockets to over $500,000! It’s time and compound interest again because in the example over 20 years you will have only put in just under $80,000 yourself to have a fund two and a half times bigger.

A Couple of Observations

Can there be a bigger argument for saving from an early age than that? Surely not! The question is how to manage your money well enough so that you can start to save in the early years of your career. You may well have a student loan to begin to pay off. Probably two of the most important things to do with realisticloans.com, or not to do depending how you look at it are:

  • Credit Cards. Avoid building up debts by buying things you cannot afford. The interest charged on outstanding balances is penal. If you have a balance, perhaps as a legacy of subsidizing your student life, take out a personal loan to clear it. It is much cheaper in terms of interest rate and repayable in monthly instalments over a fixed term
  • Resist the temptation of trying to impress with material things. Impress people by who you are and not a new car or the latest fashions.

Expenditure

There is no doubt that you may well have monthly expenditure you did not face before, especially if you have relocated to start work. Such expenditure is unavoidable but you should spend some time on researching whether you are getting the best deals. That applies to a number of significant things such as utilities, insurance and telephone. There are comparison websites that do a good deal of research for you and at least will provide you with a short list to look at further.

The aim is to create a regular surplus that can be transferred out of your checking account when your monthly pay comes in to work positively for you and your future. You will need to apply self-discipline to your finances but you can see from the example of ‘time and compound interest’ what they benefits are for being in control. It really is not much to sacrifice.

There will be times in the years to come when you have big financial decisions to make. Real estate comes to mind immediately and a long term mortgage can reasonably be regarded as positive debt because it should produce good growth over the term you have committed yourself to. With real estate often comes marriage and a family; and all the expense that involves. Yet that responsibility is yet another reason to start young in saving for the future, and your possible dependents.

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