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!