17 different women, 36 crazy children, 0 babies in utero
Adventures, Advice and Questions from a group of Mormon women who met in Queens, NY and have now scattered all over the place.
 

Wednesday, February 07, 2007

Part II, Managing Your Finances

I love this time of year!

The anticipation of W2s in my mailbox, new tax software to download, receipts to organize, quarterly brokerage statements to analyze.....

It's officially tax season BA-BY and time for the oh-so eagerly anticipated Part II of my financial management series (click here if you missed Part I).


It's not so much the PAYING of the taxes that I enjoy, but rather the chance to reevaluate our family's finances, and recommit to better saving and investing habits. All in the hopes that we keep more of our hard-earned money and give less of it away to THE MAN or THE OTHER MAN.

Some quick disclosures: I am definitely not a financial expert, but I do a lot of reading and I have a business background. There are much better financial management resources on the web, but maybe this will be a starting point for some of you....

So here goes my 10 Best Financial Management Tips:

1. Track Your Spending for Two Months. Sort receipts into categories to see what you are spending on food, clothing, utilities, entertainment, etc. This is such an eye-opening exercise and will allow you to understand your spending habits, prioritize your expenses and find areas to save. For example, maybe you don't want to give up your monthly pedicure, but the cable tv just isn't being watched..BAM...That's $70 or so a month you can redirect towards savings!

2. Find A Budget You can Live By. There are basically two types of budgeting: A formal budget, written by hand or by way of a computer software program such as Quicken, or the "Pay Yourself First" method. A formal budget is really helpful in tracking your expenses and maintaining financial discipline... if you can stick to it. I can't.

"Pay Yourself First" means putting your monthly savings in the bank BEFORE paying the rest of your bills. The good thing about this method is that it forces you to meet your savings goals but the downside is that if these goals are too lofty, you may not have electricity or water at your house. But seriously, I like this method because it forces discipline without having to constantly manage a formal budget.

3. Eliminate Bad Debt and Minimize Good Debt. Bad debt is any debt that does not go towards an investment (ie) credit card debt, car loans. Good debt helps finance an investment (ie) a mortgage, student loans. The rule of thumb is to pay off bad debt with the highest interest rate first, and then work down from there.

You also may be able to negotiate a lower interest rate on your credit card debt if you think your rate is excessively high. Remember, YOU are the consumer and THEY want your business. You can call them and threaten to switch credit card companies unless they give you a lower rate. They can say no, but, hey...it's worth a try. Do this quickly as interest rates are probably on their way up!

4. Make an emergency fund (3-6 months of living expenses). Put the money in a savings or money market account where you can easily access it if needed.

5. Open a Roth IRA (especially if you are a SAHM). Unfortunately, staying home with your kids doesn't come with retirement benefits. In fact, not having an income will lower your social security payments when you reach retirement age.

A Roth IRA, however, is a tax-free retirement vehicle available to you now. You can open an account through just about any brokerage company (i.e. Vanguard, T. Rowe Price) and contribute up to $4000 for 2006 tax year (there are some income limits, however). A relatively painless way to contribute is to throw your tax refund into your IRA every year. The money you contribute will be available to you tax-free come retirement. Also, if you can afford to do so, encourage your spouse to maximize their 401(k) contributions. Make sure your retirement is your biggest savings priority!

6. Understand the Basics of Investing: Diversification and the Power of Compounding Interest. Diversify your wealth between a mix of real estate, stocks, bonds and cash. In other words, avoid putting all of your savings in one stock a la Enron. The Power of Compounding Interest says that the earlier you start saving, the more time your money will have to accrue interest, and the more wealth you can accumulate.

7. Follow the Prophet's Words....Buy a Modest Home and Make it Beautiful. Wow...there are a lot of church members who mistake "Modest" for "McMansion." Anyways, the general rule is that you shouldn't spend more than 3X your annual income on a home. I'm not sure how well this rule holds up in today's real estate market...especially in areas like SoCal, Bay Area, and NYC. We somehow barely managed to stay within these perameters when we recently bought a home in the DC area (thank you slumping housing market), and I do have to say that although I would have loved an extra bedroom or more updates, I love my affordable monthly payment more.

8. Consider a 529 College Savings Plan. You can save money for your children's education in a 529 without it counting against your child's chances for financial aid. This is a new rule and has made me a 529 believer after initial skepticism. Many experts recommend you try and save 1/3 of your kid's college bill before they are ready to go. Or you can just make them go to BYU. Also, if your kid chooses not to attend college, you get your money back and it is surely to have appreciated tax-free nicely.

9. Educate yourself. If I can understand this stuff, trust me, anyone can. Here are a few easy resources to get you started:

Personal Finance for Dummies, by Eric Tyson. Really great resource on a wide range of financial topics. Make sure you buy the latest edition. I gave it to my little sis and her new husband last year...sorry Kelli....I know you were really hoping for the George Foreman grill!

The Millionaire Next Door, Stanley and Danko. Do you have what it takes to be a millionaire? Interesting read about what most millionaires are really like....take away the images in your head of champagne and limos.

9 Steps to Financial Freedom, Suze Orman. This woman seriously annoys me, but her advice is sound.

I also read CNNmoney.com and use bankrate.com to compare interest rates.

10. Give Generously to Worthy Causes. This will make you feel wealthy and powerful in far more important ways!

Don't worry about doing everything at once....take it a little bit at a time (start with eliminating bad debt and building an emergency fund) and pretty soon you will start seeing big differences in your bottom line! Good luck!




16 Comments:

  • Jen...a few questions.

    1. I have heard the advice for SAHM's to open roth iras. If they are SAHM mom's...where is the money coming from?

    2. House price...not more than 3 X income? I think maybe I had heard that somewhere along the lines, but I really don't see how that is possible in the housing markets you mentioned. incredible. Ok, that wasn't really a question.

    3. We are buying our first condo...closing in a few weeks, and I feel that even though we saved all this money and are buying this condo (making an investment), that we are on the edge a bit (a lot) with the whole 3 to 6 months of savings thing...if we did have an emergency, what would you suggest for us as far as a money resource. Credit cards? Cash out a 401K or something? I think we should borrow against an insurance policy that I have....but wanted to know your opinion.

    4. We have 529's for both kids...I think they are a great idea.

    Taxes: My husband is going nuts right now b/c I have so many W2s that come through. His favorite game is to tell me how many taxes we owe at various points in the process. Before he has everything entered it's alwayst an astronomical number, and then a week or 2 later, as he adds the expenses and the this and thats, it's more reasonable....but he thinks he's so funny when he shouts from the computer: "We owe 50,000 dollars...? what?"

    And I have a heart attack of course.
    posted by Blogger Kage at 2/07/2007 10:46:00 AM  



  • ps. I like listening to Jean Chatzky on Oprah and Friends XM radio...she is a much easier pill to swallow than Suzy Orman.
    posted by Blogger Kage at 2/07/2007 10:48:00 AM  



  • Thanks, Kage... I wanted to get some questions...I never know if people are like...what is she talking about? or who cares?

    1. I agree about the SAHM and IRA thing. One idea was to use your tax refund... I think most people at most income levels get some sort of refund. Another reason why it has almost become a luxury to be a SAHM. It's quite sad.

    2. I also agree, it's not possible...but IMO if I were settling down in NYC or LA for a long period of time...I wouldn't worry too much about the rule...you'll surely get a good return on your investment and in most cases it's just better to suck it up and buy.

    3. I was going to put this in my orig post, but forgot. If I had put down a decent down payment, I would take out a line of credit on my house/condo. This would allow me to borrow against the equity in my house in an emergency. IMO it is better than borrowing from retirement funds, which should be sacred money (but my dad worked in retirement funds, so this has been drilled into my head from my days in diapers). Definitely no on the credit cards. I'm not sure what the implications of borrowing from an insurance policy would be. Check the interest rate, borrowing penalties, etc. It may not be a bad option.

    And I will have to check out Jean Chatzky on Oprah....thanks.
    posted by Blogger Jen at 2/07/2007 11:28:00 AM  



  • Thanks Jen for putting all this together. I feel so stupid when it comes to money and finances (DH is not that much better). Neither of us have any business background so we always feel a little in the dark. I mentioned to him last week that we need to find a financial advisor to talk to (we probably should have done it a long time ago).

    Mostly I feel like when we have some extra money (that we've saved or from a bonus, or a freelance job) I have no idea where the best place to put it. There are so many choices (student loans, car loan, 401K, IRA's, 529's, emergency fund, etc, etc). I get overwhelmed so the money just sits in our bank account and slowly gets spent on nothing. I feel like we have financial goals, but don't know the smart way to reach them.
    posted by Blogger TftCarrie at 2/07/2007 11:41:00 AM  



  • Jen - this is awesome. Thank you. And it is inspiring me to get motivated about our financial goals. We recently met with a financial advisor and he told us all the stuff that you just wrote out - so yes, I think you are an expert :)
    posted by Blogger Beth at 2/07/2007 12:44:00 PM  



  • Yes thanks for the tips- I have the millionaire book, and it is good. But I also felt like it's saying if you live like a church mouse every second of your entire life and drive a beater car, in the end you will die with a million dollars. And what good will that do me? So maybe I took the wrong message.

    Sorry, I just had to say that.

    But seriously, I know we are behind the ball because DH is starting his own dental practice and we are going to have to live off nothing for a couple of months... and well, we are really living off nothing because we have not saved much, thanks to both of us not being "savers". Credit cards, here we come.

    I was wondering if you knew if Roth IRA's are always available, or do they cap off with an income requirement?

    Also, have you ever heard of financial e-newsletters? I get one called "Dailywealth" by an investor named Dr. Steve Sjuggerud- I read it just out of interest, really. But I always wonder how effective it would be to ACTUALLY follow the reccomendations.
    posted by Blogger Rachel H at 2/07/2007 01:19:00 PM  



  • I am a little wary of Roths becuase my hubby and I both put 4K in one when our second was born. She just turned six, and we have yet to BREAK EVEN, much less earn anything on it.

    Of course, we entered the market in 2001 right before it crashed, so it was really bad timing. But now I am scared of investing in the stock market, since we each have about 3500 in there. After SIX years. (At one point it was down to about $1800, so it's come back up, but I was hoping for some kind of ROI after this amount of time).

    Do you have any advice for people like me who are scared of stocks? I mean, we still do the 401k thing, but for extra investment income? Bonds? CD's? Something else entirely.
    posted by Blogger The Wiz at 2/07/2007 05:14:00 PM  



  • The Wiz,

    A Roth IRA is really just a container for investments (a container with some tax advantages). You don't have to invest in equity mutual funds (stocks). For example, You could allocate the money to a money market mutual fund or inflation-adjusted bonds funds if you are fairly risk averse.
    posted by Anonymous pelagius at 2/07/2007 05:37:00 PM  



  • Thanks for the comments and dialogue everyone...I'm not sure why I am so obsessed with this stuff...does anyone want to psychoanalyze me?

    Carrie - if you don't know a financial planner you trust, I would recommend finding a fee-only
    planner. (you pay by the hour rather than a percent of your assets). This is a growing field and if I ever decided to do this professionally, I would do fee-only because there is no conflict of interest between cliente and advisor.

    My advice is to start with one savings goal at a time. That is what we do...right now I am working to build up our emergency fund after our house downpayment put a serious hole in our savings. Next, I will work on funding the boys' 529. This is a long process, esp if you are living on one income!

    Rachel H., I had the same reaction to the Millionaire book...I no longer had a desire to be one if that is how I had to live. I think it was important for me to see the discipline involved and realize it wasn't that important to me to have that much money... I would rather live a little more in the "now." I think the book does provide some great perspective on accumulating wealth that everyone should know, however.

    Also, try not to worry too much about your finances...(easy for me to say)...you are INVESTING in a business that will likely provide high returns in the future. Short term sacrifices for long term gain.

    Roth IRA income caps are $160,000 if you file jointly and $110,000 for singles...not really fair IMO. There is a big difference between a NYC $160,000 income and a Boise $160,000 income.

    I'm not a fan of newsletters. There are different theories about how to make money in the stock market. I personally believe that it's really hard for one person to beat the market...so I invest in the market itself with index funds. Index funds mirror the performance of the market and take the guesswork out of picking stocks. If the market is up, my index funds are up....if it is down, my funds are down. Historically speaking, the market's returns do better than most "expert's" stock picks.

    Wiz, I would be very interested to know what is in your Roth. It should have recovered by now. You may have some high risk stocks and not be diversified enough between stocks and safer bonds.

    As far as where to put your money...if you are stock adverse, you could put it in a high yield money market account. You can open an account through a brokerage like Vanguard, Fidelity, etc. I think some traditional banks offer them too. If you aren't planning on touching that money for a long time, I would try and get over my fear of stocks if I were you. You will get way better returns in the stock market (8-10% historically, versus 4-6% in a money market). Invest in an index fund (see explanation above), which are relatively safe...and then don't obsess over your statements...it will go up!
    posted by Blogger Jen at 2/07/2007 06:45:00 PM  



  • Jen,

    You are a wealth of information. You should do this professionally...and then I would hire you. ANd believe me you would make much more money from us taking a fee than a percent of our assets right now!
    posted by Blogger TftCarrie at 2/07/2007 07:42:00 PM  



  • "Another reason why it has almost become a luxury to be a SAHM. It's quite sad." What did you mean by this?

    another question came to mind. Sometimes when we have extra money, my DH wants to put it in the 529 funds....and I look at him and say...um hi....NO....can we please put it in the house fund?

    Both girls have a 5K 529 that their great grandparents opened for them, and through their little jobs they have second 529's opened...one has about 2K and the other has about 8K. So....I just think that at age 2 and 5 they are doing pretty good with that....do you agree?

    I just don't think their 529's should be a priority when:
    A. they can always get out student loans if they need to
    B. Our retirement seems more important than their free ride through college.
    C. They still have time on their side.
    D. In theory we will be making more money in 13 years, so we might be able to afford a payment plan for their college (b/c DH and I would like to pay for their college since our parents paid for ours and that was a good financial start for us).

    Thoughts?
    Sorry to get into specifics about numbers, but since it is 529's and most of their money was gifted or earned themselves, I thought it was ok....
    posted by Blogger Kage at 2/08/2007 04:05:00 AM  



  • Kage,

    I just meant that it is sad that fewer women, it seems, have the choice whether or not to stay home with their kids....my own little commentary....just ignore.

    I totally agree with you about kids and college. IMO, funding retirement is much more important. I don't think we should be afraid to have our kids shoulder the burden of their college education. It's tricky because it's really hard to know how much college is going to cost when they are of age....and thus really difficult to know how much to save. It's not always recommended, but you can use money from your IRA to help fund your kids' college with little penalty....this is another reason to build up a good retirement savings.

    I think your kids have a really good start...but as I said before...it's really hard to judge what costs will be like...

    As far as your DH...he is pretty financially saavy...so he probably had a strategy (not that you shouldn't question)...if you had maxed out your 401k and IRA contributions for the year, sticking the money in a 529 is probably the next best way to protect it from taxes. Just a thought...
    posted by Blogger Jen at 2/08/2007 08:01:00 AM  



  • Great advice. I agree 100%. While, I am abreast of the financial going ons here, I realize that I should make sure I know the usernames and passwords for everything too.
    posted by Anonymous shimmerbeetle at 2/08/2007 10:38:00 AM  



  • Jen,

    What would we do without you here? Seriously...

    Can I hire you to fix some Spongy Feet issues? Just send you my many shoeboxes of receipts, invoices, random slips of paper and you could just tell me what to do????

    That's OK, I'll just keep reading your finance posts!
    posted by Blogger chloe at 2/08/2007 12:59:00 PM  



  • This is such important information Jen, thanks for sharing.
    I have a question about 529's - if you have 50K in their fund by the time your kids are college age and they end up going to a school like BYU or getting a scholarship, what happens to the money?

    I love the millionaire book - while I don't think you need to live like a church mouse I do think it's good to live modestly and you won't die with a million dollars you will die providing some financial security for your children. Pretty comforting.
    posted by Blogger Melissa at 2/12/2007 09:14:00 AM  



  • Melissa,

    Really great question...I had fun looking up the answer (I know, I am such a nerd!)

    You have a few options if there is money left over in a 529 after college:

    1. You can transfer the money to another sibling to use for their education...no penalties.

    2. You can keep the money in the account and later give it to a grandchild or even great-grandchild to use...no penalties. Basically, you can always transfer beneficiaries without penalty, as long as the money goes towards "qualified educational expenses."

    3. You can use the money to help fund your retirement. This will make it subject to income taxes and a 10% penalty, but if the money has been accumulating for a lot of years (all tax free), it is likely still a decent investment.

    4. You can gift the money to your child for a non-educational expense (like money for a first home). This is also subject to the 10% penalty and income tax (at the child's income level), but I don't think you would be responsible for a gift tax.

    Lots o options...makes me love the 529 even more!

    I think you are absolutely correct about finding a balance between excessive frugality and excessive spending...I see my parents in that book over and over and wish they would have used some of their savings to take some really memorable trips .... the ones they planned but always put off .... and then it was too late.
    posted by Blogger Jen at 2/12/2007 03:47:00 PM  



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