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Money Problems – Day 2: What’s Going Out?

Finance

Today, I continuing the  series, Money Problems: 30 Days to Perfect Finances.   The series will consist of 30 things you can do in one setting to perfect your finances.  It’s not a system to magically make your debt disappear.  Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.

I’m not running the series in 30 consecutive days.  That’s not my schedule.  Also, I think that talking about the same thing for 30 days straight will bore both of us.   Instead, it will run roughly once a week.  To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.

On this, day 2 of the series, you need to gather all of your bills: your electric bill, your mortgage, the rent for your storage unit, everything.  Don’t miss any.

Go ahead, grab them now.  I’ll wait.

Did you remember that thing that comes in the plain brown wrapper every month?  You know, that thing you always hope your neighbors won’t notice?

Now, you’re going to sort all of the bills into 5 piles.

Pile #1: These are your monthly bills.  This will probably be your biggest pile, since most bills are organized to get paid monthly.  this will include your credit cards, mortgage(do you rent or buy?), most utilities and your cellphone.

Pile #2: Weekly expenses.  When I look at my actual weekly bills, it’s a small stack.  Just daycare.  However, there are a lot of other expenses to consider.  This stack should include your grocery bill, gas for your car, and anything else you spend money on each week.

Pile #3:  Quarterly and semiannual bills.  I’ve combined these because there generally aren’t enough bills to warrant two piles.  My only semi-annual bill is my property tax payment.  Quarterly bills could include water & sewer, maybe a life insurance policy and some memberships.

Pile #4:  Annual bills.  This probably won’t be a large pile.  It will usually include just some memberships and subscriptions.

Pile #5:  Irregular bills.   The are some things that just don’t come due regularly.  In our house, school lunches and car repairs fall into this category.   We don’t have car problems often, but we set money aside each month so our budget doesn’t get flushed down the drain if something does come up.

Now that you have all of your expenses together, you know what your are on the hook for.  Next time, we’ll address income.

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Money Problems – Day 1: Setting Goals

Finance

Today, I am starting a series, Money Problems: 30 Days to Perfect Finances.   The series will consist of 30 things you can do in one setting to perfect your finances.  It’s not a system to magically make your debt disappear.  Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.

I’m not going to run the series in 30 consecutive days.  That’s not my schedule.  Also, I think that talking about the same thing for 30 days straight will bore both of us.   Instead, it will run roughly once a week.  To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.

In this, the first installment, we’re going to talk about goals.

First, we’re going to ask 3 questions.

  1. What is your financial goal?
  2. Why?
  3. How can you get there?

The first question is “What is your goal?” Of course, in this series, on this site, we’re only going to be addressing your financial goals.  Losing 300 pounds, growing wings, and flying to the moon may be an admirable goal, but it’s considerably outside of the scope of this project.

So, what is your financial goal?  Do you want to retire a millionaire, or become financially independent?  Do you want to pay off your debt, or save enough money to see the world?  Do you want to learn how to retire by 40?

Your goal does not matter…to anyone but you.  To you, though, it is terribly important.  Without a goal, how can you measure you progress and see what you have accomplished?  It’s easy to get frustrated and give up when you can’t look back and see what successes you have actually accumulated.

Whatever your goal, you have to do two things:

  1. Don’t let anyone tell you it is stupid or impossible.    There is a quote that I can’t find attribution for, other than as an old Chinese proverb: “Those that say it can’t be done should get out of the way of those doing it.”
  2. Write it down and hang it up.  This lets you see your goal every day.  It will be impossible to forget and difficult to ignore.  I have Dave Ramsey‘s Baby Steps hanging on my refrigerator where I see it a dozen times per day.

The second major question to ask yourself is “Why?”  Why is this goal important to you?  Why do you care?

If you can’t answer that, it’s time to sit back and think about it for a while.  Without a solid reason to succeed, you’ll lose motivation and fail.   Are you getting out of debt to give yourself a secure retirement?  Do you want to save to travel the world because you’ve been dreaming about it since you were in diapers?  Do you simply want to provide a secure future for your family?   Whatever your reason, it is–and should be–uniquely yours.

The third and final question is “How can you make it happen?”  That question has an extremely simple answer: read the rest of the series.

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Money Problems – Day 8: Insurance

Finance

insurance
Image by alancleaver_2000 via Flickr

Today, I am continuing the  series, Money Problems: 30 Days to Perfect Finances.   The series will consist of 30 things you can do in one setting to perfect your finances.  It’s not a system to magically make your debt disappear.  Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.

I’m not running the series in 30 consecutive days.  That’s not my schedule.  Also, I think that talking about the same thing for 30 days straight will bore both of us.   Instead, it will run roughly once a week.  To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.

On this, Day 8, we’re going to talk about insurance.

What is insurance?  Insurance is, quite simply a bet with your insurance company.   You give them money on the assumption that something bad is going to happen to whatever you are insuring.  After all, if you pay $10,000 for a life insurance policy and fail to die, the insurance company wins.

A more traditional definition would be something along the line of giving money to your insurance company so they will pay for any bad things that happen to your stuff.   How do they make money paying to fix or replace anything that breaks, dies, or spontaneously combusts?  Actuary tables.  Huh?  The insurance company sets a price for to insure—for example—your car.  That price is based on the statistical likelihood of you mucking it up, based on your age, your gender, your driving history, and even the type of car you are insuring.  What happens if a meteor falls on your car?  That would shoot the actuary table to bits, but it doesn’t matter.   They spread the risk across all of their customers and—statistically—the price is right.

What kinds of insurance should you get?

Homeowner’s Insurance

For most people, their home is, by far, the largest single purchase they will ever make.  If your home is destroyed, by fire, tornado, or angry leprechauns, it’s gone, unless you have it insured.   Without insurance, that $100, or  200, or 500 thousand dollars will be lost, and that’s not even counting the contents of your home.

Homeowner’s insurance can be expensive.  One way to keep the cost down is to raise your deductible.  If you’ve got a $1500 emergency fund, you can afford to have a $1000 deductible.  That’s the part of your claim that the insurance company won’t cover.  It also means that if you have less than $1000 worth of damage, the insurance company won’t pay anything.

You can get optional riders on your homeowner’s insurance, if you have special circumstances.  You can get additional coverage for jewelry, firearms, computer equipment, furs, among other things.  You base policy will cover some of this, but if you have a lot of any of that, you should look into the extra coverage.

Auto Insurance

Car insurance is required in most states.  That’s because the kind caretakers in our governments, don’t want anyone able to hit you car without being able to pay for the damage they caused.  To my mind, I think it would be more effective to just make whacking someone’s car without paying for it a felony.  If someone is a careful driver or has the money to self-insure, more power to them.

Auto insurance comes with options like separate glass coverage, collision, total coverage (comprehensive), or just liability.  Liability insurance is what you put on cheap, crappy cars.   It will only pay for the damage you do to someone else.

Rental

I’ve never had rental insurance.  The last time I rented, I could fit everything I owned in the back of a pickup truck with a small trailer, and it could all be replaced for $100.   Heck, I had the couch I was conceived on.  Err.  Ignore that bit.

Almost everything you can get homeowner’s insurance to cover will also cover renter’s insurance, except for the building.  It’s not your building, so it’s not your job to replace it.

Life Insurance

If you care about your family, you need life insurance.   This is the money that will be used to replace your income if you die.   I am insured to about 5 times my annual salary.   If that money gets used to pay off the last of the debt, it will be enough to supplement my wife’s income and support my family  almost until the kids are in college. You should be sure to have enough to cover any family debt, and bridge the gap between your surviving family’s income and their expenses.  At a minimum.  Better, you’ll have enough to pay for college and a comfortable living.

Life insurance comes in two varieties: whole and term.  Whole life…sucks.  It’s expensive and overrated.     The sales-weasels pushing it will tell you that it builds value over time, but it’s usually only about 2%.  It’s a lousy investment.  You’re far better off to get a term life policy and sock the price difference in a mutual fund that’s earning a 5-6% return.

Term life is insurance that is only good for 5, 10, or 20 years, then the policy evaporates.  If you live, the money was wasted at the end of the term.  The fact that it’s a bad bet makes it far more affordable than whole life.  It doesn’t pretend to be an investment; it’s just insurance.  Pure and simple

Personal Liability Umbrella

An umbrella policy is lawsuit insurance.  If someone trips and hurts themselves in your yard, and decides to sue, this will pay your legal bills.  If you get sued for almost anything that was not deliberate(by you!) or business related, this policy can be used to cover the bill.

If you call your insurance company to get an umbrella policy, they will force you to raise the limits on your homeowner’s and auto insurance.  Generally, those limits will be raised to $500,000, and the umbrella coverage will be there to pick up any costs beyond the new limit.

A little-known secret about umbrella policies:  They set the practical limit of a lawsuit against you.  Most ambulance chasers know better than to sue you for 10 million dollars if you only have a policy to cover 1 million.   They will never see the other 9 million, so why bother?  They’ll go for what they know they can get.

The flipside to that is that you should not talk about your umbrella policy.   Having a million dollars in insurance is a sign of “deep pockets”.  It’s a sign that it’s worthwhile to sue you.  You don’t want to look extra sue-able, so keep it quiet.

Insurance is a great way to protect yourself if something bad happens.   Today, you should take a look at your policies and see where you may have gaps in coverage, or where you may be paying too much.

 

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Experience the Live Real Magic

Misc

As some of you have noticed, the link to subscribe by email has changed.   While you do still have the option to subscribe to the rss feed through Feedburner, I’m no longer providing the link or recommending it.   What I have in its place is an actual email list.

Yes, you can now subscribe to Live Real, Now by email, without having to go through Feedburner. That means you can get all of the updates in your email, for free! This is magic.  This magic gives me another option to offer contests and free stuff.

There are two lists to choose from.

  1. The Magic option will have occasional deals, giveaways, contests, and opportunities not available to anyone else.
  2. The Posts and Magic option will send make sure you never miss a post from LRN by landing them in your email inbox. All the Magic from the first list is included here.

Your email will never be shared, with anyone, for any reason whatsoever. Ever. I hate spammers with a passion fueled by the fiery pits of hell to which spammers should be cast. I won’t be that guy.

Please, take this chance to subscribe to the magic.

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Money Problems – Day 7: Paying Off Debt

Finance

Scottsturgis unicorn
Image via Wikipedia

Today, I am continuing the  series, Money Problems: 30 Days to Perfect Finances.   The series will consist of 30 things you can do in one setting to perfect your finances.  It’s not a system to magically make your debt disappear.  Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.

I’m not running the series in 30 consecutive days.  That’s not my schedule.  Also, I think that talking about the same thing for 30 days straight will bore both of us.   Instead, it will run roughly once a week.  To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.

On this, Day 7, we’re going to talk about paying off debt.

Until you pay off your debts, you are living with an anchor around your neck, keeping you from doing the things you love.  Take a look at the amount you are paying to your debt-holders each month.   How could you better use that money, now?  A vacation, private school for your kids, a reliable car?

If you’ve got a ton of debt, the real cost is in missed opportunities.   For example, with my son’s vision therapy being poorly covered by our insurance plan, we are planning a much smaller vacation this summer–a “staycation”–instead of a trip to the Black Hills.  If we didn’t have a debt payment to worry about, we’d have a much larger savings and would have been able to absorb the cost without canceling other plans.  The way it is, our poor planning and reliance on debt over the last 10 years have cost us the opportunity to go somewhere new.

The only way to regain the ability to take advantage of future opportunities is to get out of debt, which tends to be an intimidating thought.   When we started on our journey out of debt, we were buried 6 figures deep, with a credit card balance that matched our mortgage.    It looked like an impossible obstacle, but we’ve been making it happen.   The secret is to make a plan and stick with it.   Pick some kind of plan, and follow it until you are done.  Don’t give up and don’t get discouraged.

What kind of plan should you pick?  That’s a personal choice.  What motivates you? Do you want to see quick progress or do you like seeing the effects of efficient, long-term planning?   These are the most common options:

Debt Snowball

Popularized by Dave Ramsey, this is the plan with the greatest emotional effect.   It’s bad math, but that doesn’t matter, if the people using it are motivated to keep at it long enough to get out of debt.

To prepare your debt snowball, take all of your debts–no matter how small–and arrange them in order of balance.   Ignore the interest rate.  You’re going to pay the minimum payment on each of your debts, except for the smallest balance.  That one will get every spare cent you can throw at it.   When the smallest debt is paid off, that payment and every spare cent you were throwing at it(your “snowball”) will go to the next smallest debt.   As the smallest debts are paid off, your snowball will grow and each subsequent debt will be paid off faster that you will initially think possible.    You will build up a momentum that will shrink your debts quickly.

This is the plan I am using.

Debt Avalanche

A debt avalanche is the most efficient repayment plan.  It is the plan that will, in the long-term, involve paying the least amount of interest.  It’s a good thing.   The downside is that it may not come with the “easy wins” that you get with the debt snowball.   It is the best math; you’ll get out of debt fastest using this plan, but it’s not the most emotionally motivating.

To set this one up, you’ll take all of your bills–again–and line them up, but this time, you’ll do it strictly by interest rate.  You’re going to make every minimum payment, then you’ll focus on paying the bill with the highest interest rate, first, with every available penny.

DOLP

This is the plan promoted by David Bach.  It stands for Done On Last Payment.   With this plan, you’ll pay the minimum payment on each debt, except for bill that is scheduled to be paid off first.   You calculate this by dividing the balance of each debt by the minimum payment.   This gives you an estimate of the number of months it will take to pay off each debt.

This system is less efficient than the debt avalanche–by strict math–but is better than the snowball.  It give you “quick wins” faster than the snowball, but will cost a bit more than the avalanche.   It’s a compromise between the two, blending the emotional satisfaction of the snowball with the better math of the avalanche.

Snowflaking

For each of these plans, you can give them a little steroid injection by snowflaking.  Snowflaking is the art of making some extra cash, and throwing it straight at your debt.   If you hold a yard sale, use the proceeds to make an extra debt payment.   Sell some movies at the pawn shop?  Make an extra car payment.  Every little payment you make means fewer dollars wasted on interest.

Paying interest means you are paying for everything you buy…again.  Do whatever it takes to make debt go away, and you will find yourself able to take advantage of more opportunities and spend more time doing the things you want to do.  Life will be less stressful and rainbows will follow you through your day.  Unicorns will guard your home and leprechauns will chase away evil-doers.   The sun will always shine and stoplights will never show red.   Getting out of debt is powerful stuff.

Your task today is to pick a debt plan, and get on it.   Whichever plan works best for you is the right one.    Organize your bills, pick one to focus on, and go to it.

Assuming you are in debt, how are you paying it off?

 

 

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Carnival of Personal Finance #270, the Elvis is Dead Edition

Misc

Elvis mugshot2
Image via Wikipedia

Today is the 33rd anniversary of the death of Elvis, so I’m bringing you the “Elvis is Dead” edition of the Carnival of Personal Finance.

What can the King teach us about finance?  The immediate lesson is, of course, to not let success destroy you or your life.  Always remember what is important.

“Adversity is sometimes hard upon a man; but for one man who can stand prosperity, there are a hundred that will stand adversity.” -Elvis Presley

Before we get into the carnival, please take a moment to subscribe, either by rss or by email.  If you are on twitter, please follow me at @LiveRealNow.

Editor’s Picks

“When I was a child, ladies and gentlemen, I was a dreamer. I read comic books, and I was the hero of the comic book. I saw movies, and I was the hero in the movie. So every dream I ever dreamed has come true a hundred times…I learned very early in life that: ‘Without a song, the day would never end; without a song, a man ain’t got a friend; without a song, the road would never bend – without a song.’ So I keep singing a song. Goodnight. Thank you.”
-From his acceptance speech for the 1970 Ten Outstanding Young Men of the Nation Award. Given at a ceremony on January 16, 1971

Craig Ford from Money Help For Christians presents How to Buy Cars With Cash. This is great advice.   My car will be paid off in the next few months and I will be doing exactly this.

FMF from Free Money Finance presents Are Tattoos at Work Really That Acceptable? Do tattoos limit your career? I reference this graphic when thinking about a tattoo.

Pop from Pop Economics presents Getting a raise: The negotiation.   It’s always best to raise your top line as high as possible.  Bringing in more money is far more effective that simply reducing your expenses.

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