TOP IT OFF

      This step is a big one, but you should know that it is equally rewarding as it is challenging. Do you remember reading “Without a Paddle”? This was where we needed to save our first $1,000 into a savings account for problems we would have while we were attacking our debt. Well, now it’s time to Top it off.

But first, let’s recap what we should have completed at this point.

1. Current on all bills
2. We have a budget 
3. $1,000 for a rainy day
4. Paid off all consumer debt (excluding mortgage)
5. Have life insurance policy
6. Contributing to retirement 
7. College funds (optional)

          We naturally associate saving, and budgeting with sacrifice or giving something up. I want you to think about this, instead of seeing it as a negative, view it as a positive. I will tell you that the small things you sacrifice now (latest cell phone, your 7th pair of new shoes or maybe a new fridge, just because the old one doesn’t match the kitchen) are so temporary compared to the benefits of completing this step. I am going to list just 3 benefits that this step can provide, review them and really think about them because they’re going to make those “things” we gave up seem very unimportant.

What are those 3 benefits that this step can provide?

1. Increase (family) stability
2. Reduced pressure at work
3. Improved marriage (relationship)
   1.     

     Weird... none of these benefits have anything to do with money, or buying things but instead reducing stress and improving relationships. So, after reading just those 3 things, maybe we can start skipping the wants so we can start meeting the needs. Stop buying stuff you want at the moment to change your day, and start taking steps to change your life. This won’t make life more predictable, but it will make it more manageable.

What do we do?

     We need to get 3-6 months of expenses into a savings account. This can easily be combined with the initial $1,000 fund to create a good start. Remember, this account works just the same as our $1,000 fund because it is for emergencies ONLY. The purpose is to be able to sustain our household in the event of a major unexpected expense or a substantial loss of income. I would recommend a set-it and forget-it system. Determine your amount (simply look at your budget and multiply the “total expenses” by 3, or 6), establish reoccurring deposits to that account and top it off! When you determine your number, that 6-month amount is going to seem like a lot at first. But, what you will find is that as you approach the 3-month amount, 6 months won’t seem like a big deal.

Steps:
1. Determine the number (3-6 months of expenses)
2. Set-it and forget-it (reoccurring deposits)
3. Top It Off… change your life

How would you feel with $6,000 or $12,000 in an account just in case something goes wrong? It will give you peace and freedom to live and enjoy life. The reason many of us are stressed in our day-to-day is that everyone else has control over our security.

Make it or break it mentality:
“If I lose my job, we will lose the house and have nothing… how are we going to tell the kids?”

Fat & Broke mentality:
“If I lose my job, nothing changes… We keep our home, we can pay all our bills, our children will be secure and I will find another job”

So let’s Top it off, and take back the power of our own lives.

Scholarship of Mom & Dad

          When I started attending my local community college to continue my education, my parent didn’t have much money to help. I can remember working a part-time at Autozone to make some money to pay for my books each semester and borrowing student loans to cover my tuition. It was tough, but it taught me how to work hard and pay my own way. I do have a desire now that I have children of my own to help pay for their education. I don’t think we will have enough to fully fund everything they need, but it will be a decent amount to help. I’m actually thinking that maybe a balance between the parents and the child paying for college may be the best way. I know that most of us want to be able to give our kids some money for school. Well, if they were starting today would you be able to give them $30,000 to get started? Do you think you will have that money lying around in 10, 15, or 18 years to give to them when they start school? It’s not likely that we will if we keep doing things as we usually do.

At this point, if you have been following the previous posts, you are working on getting rid of debt, starting retirement etc. I want you to know that before starting this step, you need to make sure that you have completed all the steps before this one. We absolutely need to be financially stable before we start setting up college funds for our kids. We want to set them up for success so they can enjoy life, not to pay for our lives because we are broke during retirement. Let’s make sure we establish our financial future so our college graduates can enjoy theirs.

So, what options do we have for funding our children’s college? Well, there are several, I personally use the college advantage 529 plan for my boys.

So I have compiled a very simple list of a few options we have, and their key points.

The college fund operates much like a 401k or Roth in regards to opening an account, selecting investments an allowing time to make us some money. Investing as little as $25 per week, earning 8% annually until they reach 18 can become $48,000 towards college.

529 Plan (Recommended)

• All contributions & earnings can be used tax-free (if used towards education)
• Contributions are tax deductible (up to a certain amount per your state)
• What if my kid doesn’t go to college, what happens to all that money??
• Can be moved to another sibling, or parent continuing their education
• Unqualified withdraw - earnings will be subject to taxes, incur a 10% penalty and account holder must return tax deductions
• Limited investment options (preset funds only, NO individual stocks, bonds etc.)
• Fund election changes must wait 12 months 

Prepaid Plans

• Pay for schooling in advance
• Similar advantages of the 529 Plan
• Because you are paying ahead, the tuition is more expensive than it would be if you were attending at the time you set up the account. 
• Must be purchased several years prior to enrollment
• Can be transferred or refunded if child elects to attend a different school

Coverdells

• All contributions & earnings can be used tax-free (if used towards education)
• Unqualified withdraw - earnings will be subject to taxes and incur a 10% penalty 
• Limited contributions (Max contribution $2,000 per child, per year)
• Beneficiary must be under 18 years of age

Roth IRA

• $5,500 per year max (under 50 years old)
• Earnings grow tax-free (post-tax contributions)
• Doubles as a retirement asset, if the child does not use for college
• No penalty for withdraws for qualified educational expenses
• Not treated as income for dependent (more financial aid)

Custodial Account

• Money is in a trust for minor
• Manage account until the child is 18, or 21 years old
• Child receives money for anything (not just educational expenses)
• Earnings are taxed annually 
• Can’t be transferred to another beneficiary 

Life Insurance 

• (cash value as college savings) I have heard this mentioned before…NO.
• I don’t think this one is even worth considering

           I have had several people ask about college savings, so I wanted to compile a simple list of account types. I hope this helps provide a brief overview of what is available. I did not cover every detail about all the options, but this should help point you in the direction of the option that best meets your needs. Now let’s get proactive and start saving a little now, to help give our kids a big head start towards their education.

Butterfly Effect

          What would you like to do when you retire? Travel, own a vacation home, or maybe spending your new found free time volunteering for a cause you’re passionate about. Most of us don’t have a desire to work until we are 75 years old just so we can afford to keep paying our bills. I have always felt that the priority of retirement becomes important at the worst time. In a perfect world, everyone would be starting an employer retirement plan at 21 years old and not stop contributing to it until they are ready to retire. The reality is, at 21 most of us are not making much money, spending what we have on going out on the weekends, paying our rent, or maybe going back to school. We typically have little to no savings, and because retirement is 45 years away our mentality is “we don’t need to worry about it right now”.

The truth is that starting as soon as possible is the best money making strategy for retirement. Saving for retirement doesn’t have to be this intimidating task that we don’t have money for. You have to change your thinking from “I can’t afford to do that right now”, to the truth… “I can’t afford NOT to do this Right Now!” This won’t be as hard as it seems, just takes a little discipline. Saving for retirement is a perfect example of less now, more later.

The butterfly effect is defined as the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state.

Starting with a small change can make a huge impact over time. There is no get-rich-quick system for the average person. For the majority of us, there probably isn’t some major inheritance that we’re going to receive. So, that leaves us with one option. We have to start saving money now and allow time to create wealth. There are several different options for starting a retirement account, I will be just covering the employer offered 401k retirement account. It’s like a magic trick, we can turn $15/day into $1,000,000 in 35 years with 8% annual interest.

401K

The 401K is simply an option to defer a percentage of your income into an investment account. The amount of money you choose to elect for contribution is removed prior to taxation. This is a good thing because if the employee chooses to contribute 5%, then it’s a true 5% of the income. This allows for the principle to grow faster and sooner than if we were contributing that same 5% with taxes taken out. Typical 401K accounts have a limited selection of mutual funds (an investment with a variety of stocks in its portfolio).

WHATS MY NUMBER?

Many of us have seen the commercials for the investment companies talking about “your number”. I want to bring up the most important thing to decide your number. That thing is expenses and debts that you may have at retirement. The plan is for most of us to be debt free by that point. There are several different suggestions out there about 70%, 80% of your income for retirement. These are great for those of us that will have minimal expenses, or be debt-free, but not so much if we are still carrying as many expenses or more at retirement. So using those 70-80% ranges will be fine, but maintain that debt-free mentality.

ELECTIONS

The first step is setting the percentage of pay that you want to defer to your 401K. I recommend that the absolute minimum is no less than the employer match. The end game for percentage saved towards retirement in total is 15% but for now no less than the percentage you employer matches, this is FREE MONEY. Most employers will match retirement contributions up to a certain amount. Once you have set up a 401K you will need to select the investments that you want your contributions to purchase. The simplest one to choose as a set-it and forget-it option is a target date fund. The fund typically is listed as “2040-Fund, 2045-Fund, 2050-Fund” etc. These are great for someone with no investing experience because they are self-adjusting. The target date fund will start with more aggressive investments when you are farther from the date, and as you approach retirement then the fund will begin shifting towards more conservative options to protect your principle.

FOCUS

 

Don’t think too much about savings hundreds of dollars out of each check, this isn’t a race, it’s a marathon. All you’re focused on is getting started. Get in contact with your Human resources department to get the paperwork and contribute what you can. This is a small adjustment now that will take a couple pay-cycles to get used to. The impact on your future is so much bigger than the few percent a week that you sacrifice now. The amazing thing about investing is the difference

between the amount we actually contribute and the amount, we have in the end. Compound interest is the secret because over the years we are earning interest, then that interest begins earning interest. In the example shown, the actual contributions we make only add up to $190,000. Notice the interest earned is actually 4 times that of the contributed amount at $800,000. This is why it’s so important to start now because each day we wait is costing us money. 

You don’t need all the answers, you just need to start investing towards a stable financial future.

Paycheck Insurance

         Okay, so you are paying off your debt or maybe you’re done. This next step doesn’t apply to everyone and it’s not a fun one to think about, but it’s critical if you have people that depend on you. Most of us either have a spouse, children or others that are counting on us to be a provider. It’s likely that you have insurance on your home, car, and sometimes people will even purchase that 2-year plan of additional coverage for a new cell phone. That’s great to have, but how about your paycheck? If you crash your car, replace it. House burns down, replace it, but if you are gone… so is the income that your family needs and depends on. We need to have life insurance to protect those that we care about most. It doesn’t change the difficulty in losing a loved one for them, but it means that even though we are gone we can still provide as if we’re still around.
          Life insurance is as simple as it sounds. It is an insurance policy that pays out a benefit in the event that the policyholder has passed away. There are several types of life insurance including term, whole, and universal. Below I will explain each one, and provide my recommendation.

Whole Life

This is a “permanent” life insurance policy that offers protection for life with no expiration. Because whole life has no expiration, the payout is guaranteed to the beneficiary of the Policy Holder. Whole life also builds cash value that can be borrowed against, as long as all Premiums are paid on time. Premiums are typically the same amount for the duration of the policy. This is an expensive option because each policy pays its Benefit amount, and has the “cash value” option.

Universal Life

Universal operates very similarly to whole life as a “permanent” life insurance option. This policy also builds cash value, the payout is guaranteed, and has no expiration. The main difference is that universal life offers flexibility in premiums, and coverage as the policyholder's circumstances change.

Term Life (Recommended)

This policy type is typically the most affordable, and simplest to understand. Term life insurance works by selecting a preset amount of coverage time (term). These are often offered in 10, 20, and 30-year terms and the policy terminates at maturity. The premiums are affordable because these are designed to protect an unexpected early death.

          Everyone's circumstances are different so choose the policy that best fits your individual needs. My recommendation for most of us is a lower cost term life policy. The reason I suggest term life is because we are on a better financial path, making good decisions that position us to save money. We are not going to carry debt, we will have money in savings, and investments that will build as the years go by. Our children will grow and eventually have jobs of their own, and their own income. So I don’t think that we need to pay an expensive premium until we are 80 years old. Depending on your situation, get a term policy that will cover things for 20, 30 years. The premium will be affordable, and if you die after the policy expires you will have enough money in savings and retirement by that point to help your loved ones. This is more than a policy for a car or boat, so make sure you have the most important insurance policy you will ever buy, Life insurance.

Snowball

       This is the time to stay focused, trust the system, and celebrate the victories. There is a pot of gold at the end of this rainbow. I remember ours was around $1,100 per month. This $1,100 was now ours to save, invest, and give every month. You want to give yourself the biggest pay raise you have ever received? Pay off your consumer debts. It is somewhat of an all or nothing system because you don’t get the raise until the entire step is completed. So, let’s get excited about what we’re going to talk about this time. I want you to write down all the debt payments that you have each month, this includes college loans, credit cards, car payments, and anything that has a balance to be paid. Now, simply add up all the monthly payment amounts, write that total number down BIG somewhere. That number is your raise! That is all take home money that you get to spend, or save.. not to pay back to some finance company.

          This process is going to take time and we must be diligent and stay the course. We were able to pay off $25,000 of debt in 2 years. There are a couple ways to approach the debt snowball method, one involves organizing debts by highest interest, and the other by smallest balance. Because there are two different methods, there are also different benefits to each one. I would recommend that for most of us, the smallest balance method is the one to use. The reason we may not want to use the highest interest method is that the debt with the highest interest may also be our largest balance. This first debt payoff could take a very long time and the process may feel discouraging, and we may lose focus.

Methods:

Highest Interest – This method financially is the best, because you are eliminating each debt by the amount of interest. Because you are paying off the highest interest first, you will pay it off faster thus paying less interest.

Smallest Balance – This works more on the reward system, because you will experience victory quicker this way, and this should generate momentum to keep knocking them out. (recommended)

Process:

1. The foundation, this is us being current on all our bills, and the $1,000 “What-if” stash of cash. At this point, we should all have these in place to provide support while we attack our debts.

2. Write a list of each debt, interest, (minimum) monthly payment and balance. As we talked about earlier, the “raise” in this example is $408/month.
                             
3. Organize the debts in the snowball format, there are several websites available to generate this payoff chart. I used - http://www.whatsthecost.com/snowball.aspx We are going to use $50 dollars of money we have extra from our budget to service our debts. So this $50 will get added to the first debt’s minimum monthly payment. That’s why you will notice the credit card payment at $89, instead of $39.


4. Build up that payment, each time a debt is paid off that debts payment is applied to the next debt. So in the payoff chart above, we notice the “car loan” even at its monthly minimum payment is actually paid off first, so that payment is then applied to the first debt (credit card). Then once the “credit card” is paid off, that entire amount goes to finish off the “student debt”.

This process will allow you to pay off all your debts at a fraction of the interest, and will greatly reduce the time in which it would take pay them off. It only took 12 months and cost $221 in interest to pay off all $5,220 of debt, that’s amazing!

Now, you’re wondering how bad could it be to pay the minimum payment? Well, if you paid the minimum payment on the credit card alone as your plan to pay it off. Assuming you didn’t add any more charges it would take you 47 months, and cost you $497 in interest!!! That’s just the credit card…

You have what it takes to do this, attack the debts, get control of your money and change your future!

Without A Paddle

          Okay, so hopefully at this point, we are building some momentum to tackle our finances. We are in the boat rowing our way to financial freedom. We will experience obstacles that we will need to deal with and get around. So to make sure that we can steer and keep the boat moving, we need to make sure we have a paddle. I personally feel that this is the most important part of this process because it’s the tool that enables us to stay the course. While we attempt to pay off debt, refine our budget and continue to improve our finances, we will still have the same problems as we did. The water heater will stop working, you’re going to get a flat tire, or need some unexpected medical visit. The issues that we will face during this journey may seem small and manageable but we need to keep our guard up. As we face these problems we may find ourselves using more credit to pay for them. This will make our situation worse, and could potentially derail us from the plan.
          So, what is our “paddle”? Our paddle is our “What-if” stash of cash. This stash is going to be $1,000 and will need to be maintained at $1,000 as we proceed through the following steps. Notice that I referred it as the stash of cash, not the credit card balance, or the allowable loan at the bank for an emergency. This “paddle” needs to be made of cash, and I recommend that we keep it accessible but safe. When I say “safe”, that simply means that you can get to it when you need it, but not when you want it… the key word here is NEED. Don’t remove money from your stash because you want a new pair of shoes, or to buy that purse because it was “on sale”. Prepare yourself for the issues before they arrive, because they will come and it may even seem like more often than normal. Make sure that each time you have to use money from this account, that your first priority is to refill it to the original $1,000.
          There is a great book called The Total Money Makeover by Dave Ramsey, it’s a must-read for financial freedom. In this book, Dave uses “baby steps” to create his plan. I read this book and applied the methods, and attribute much of my financial improvement to this book. This $1,000 cushion is the first step Dave gives us, and for good reason. The money works as a safety net to catch us when we fall, so we can easily get back up and keep going.

Where am I going to get $1,000?

          Okay, we get it.. we need to save $1,000 for a rainy day. This isn’t as difficult as it sounds, but most of us have already talked ourselves out of trying. “I barely can pay the bills I have”, “I’m already using credit cards to pay my expenses”, telling yourself “I can’t do this”. I’m here to tell you that it is possible, but you have to be willing to get creative and make some sacrifices. This is a simple task so don’t make it some big life-changing goal, get $1,000 into a separate account and you’re done. Take some time a review your budget and evaluate if there is anything you can cancel, or cut back on. Clean out the garage and sell some stuff, work a part-time job, or any other means of generating more income. There was a financial survey that I read about, and the #1 thing people did to save the most money was to stop going out to eat. If you just reduced going out by two times in a month could be $100 that could go towards this stash of cash. This is a required step that we must do prior to moving on to the next step.
          This step has more to it than its intended purpose. For some people saving a thousand dollars is going to be very challenging, but you can do this. This step offers training in saving, provides money for setbacks and will create a true sense of success. The initial victory of this small battle will inspire you to keep pushing forward and show you that you have what it takes to win the war. The transformation can begin to take place once we realize that money problems are less related to our money, and more to our behavior. 

Let's Talk About The "B" Word

         The word “Budget” is not a bad word; instead, it should be used in everyone’s vocabulary. It’s interesting to consider though, that we as adults will exclude this word from our vocabulary the same way we teach our children to exclude the first word that popped into your head. Creating a budget is crucial to improving your finances. A budget will allow you to stop missing payments, damaging credit, and paying late or overdraft fees. Simply by creating a budget, you have now started to delegate where your money goes. Every dollar has a place, including savings, bills, and spending money. Having a budget can also help that person that claims not to have any money find some extra cash each month. Maintaining a budget is crucial to improving your finances. I process things well when someone breaks it down for me. So let’s take it one thing at a time.

1. Know Your Net (Income)

We need to know how much we are working with before assigning it a destination. Just like the other parts of this process we need to remember to be honest with ourselves. When we write down how much income we are taking in, this number must come from a paycheck stub or checking account statement that includes all sources of income. The important number to use is the net income, not gross. This is why a checking statement will work because it will provide us with the actual deposited amount that you get to spend. The gross income figure is our total pay before any and all deductions (taxes, 401k, and insurance). We are looking for a monthly amount here, so whether you are paid weekly, bi-weekly, or hourly try to figure a total amount for one month.

2. Cover the constants

Now that we know how much income we are working with, we can start looking at where it needs to go. We need to cover the constants, or the bills and expenses we know are the same or nearly the same each month. The constants include expenses such as a rent payment, car payment and insurance. These are easy to track and pay because they do not fluctuate month to month. There is a way to help make bills more constant that do have minor monthly variance in them (gas $45.23, $56.43, $41.54). When they are similar in amount as shown, we can simply create an average. This can be done for a few months, or over the year, if we were doing these 3 months just add them together and divide by 3. Write these all down below the total income from step one.

3. The unknown$

These are the expenses that no one talks about in terms of actual amount. The categories that include groceries, gas for our vehicles, and that little “fun” money. Can you tell me what you spend per month on groceries or your morning coffee?? This is where you will need to get that checking account statement again, and maybe those credit card statements we don’t look at. This will take some work because you need to summarize all those line items. Then create categories for the money spent on those things. Create expense categories like, “fun spending”, Vehicle gas”, “clothes”, and “date night”. We will again want to get averages of these amounts, so gather a few of each statement. Be consistent with the items and amounts that you add to each category. This should now allow you to generate a consistent monthly amount that you can deduct from that total income each month. Write these all down under the expenses from step two.

4. Excellent Budget

Now that you have all your known income and expenses listed we need to combine this information onto one sheet. I personally use Microsoft Excel to manage my budget, but it works the same to write it down as well. At the top you will write the total monthly net income, below that you will list the constant expenses, then the unknowns... that you now know. Once this is completed simply subtract all expenses from the income at the top of your form. This will generate only two outcomes. The final figure will be negative, or positive. In the event of a negative number, don’t panic, you will need to start cutting expenses or working another job etc. The thing to remember is that now you know, and can begin to improve your situation. If your number is positive, then you get to decide where you want that money to go. This can be a savings account, date night, or vacation fund. Now if you have debt, however; I would recommend putting it towards paying that off.

The budget is a dynamic document that changes, and grows, and needs to be revisited on a regular basis. So make sure you are intentional about reviewing this regularly and more often if this is a new concept to you. This tool just gave you control over your money, now it can only go where you decide it does. Once you start telling your money what to do, you can regain financial control and begin to enjoy using the “B” word!

Some of these expenses can be removed permanently as we pay off those debts (car loan, credit card, student loans) and we’re going to use a snowball to do it!