Things I’ve Learned About Money

When I started writing this blog and spreading knowledge about debt and personal finance, I was (and still am) far from an expert. My plan was always to learn as I went and share what I learned along the way. Over the past few months I have stuck to that, and I have learned a ton! I can only hope that some of you have gained some new knowledge along with me.

One of the most critical lessons I have learned is simply to pay attention. To start out with figuring out and improving finances, it makes a big difference to look back and see how much you spend in your daily life. This is likely to be an eye opener, and it will probably lead to action (and maybe a little panic or concern). By figuring out what you spend, you can figure out what you should actually be spending in relation to your income and lifestyle. Suddenly, you are on your way to creating a budget.

The biggest obstacle standing in most of our way is our debt. This is the cause for much of our stress, and also the reason paychecks don’t go very far. Our income is our most powerful tool, but that power is restricted by the combined monthly payments and interest paid for items we have financed. Debt can also lead us to spend more than we should. If we get used to basing purchases off of the monthly payment rather than the actual cost, it is easier to justify that cost. It is much more difficult to pay off those items later with an accumulation of debt rather than saving up to purchase each item with cash.

While eliminating debt is one of the main focuses of financial improvement, retirement is something to put a great deal of consideration into as well. The earlier we begin contributing to retirement, the better. Many investment accounts offer compound interest, which is something to take advantage of early in order to maximize the growth of our investments. It is important to figure out how much we need to maintain our lifestyle, and set up our finances appropriately to ensure we have enough money to do what we want to do after so many years of hard work.

Once debt and retirement are taken care of, there isn’t a whole lot to worry about. At that point we will just be saving additional income and living the good life! At this point I can only imagine all of the things our family could do if all of our income (aside from our retirement contributions and regular living expenses) was going into the bank or being put towards our next adventure/large purchase.

I hope that I have been able to add some value and clarity into your lives about personal finance. Many of us need the help or insight, but may not even realize it until it is presented to us. I have enjoyed learning and sharing with you, and now it is time to focus on maintaining the focus and working toward our financial goals!

Tomorrow

I was watching SportsCenter today, and Nick Saban (the head football coach at the University of Alabama) made a statement that stuck in my mind. He said “too many of us are addicted to tomorrow”. He was talking about the improvement and overall effectiveness of his team. The point he was making was that we all wait until tomorrow to take important steps towards improvement. We say tomorrow we will start working harder, tomorrow we will start eating better, or tomorrow we will start making some necessary change in our life to obtain the outcomes we desire.

When I heard him talking about this, I immediately thought about it in a financial sense. We all want to retire someday and have enough financial stability to maintain our lifestyle. We also want to be able to leave behind something significant for our children. The problem is, many of us say that we are going to begin preparing for our retirement tomorrow (or soon). Unfortunately, “tomorrow” usually turns into someday in the distant future. Out of all the things we put off with our “addiction to tomorrow”, financial planning should not be one of them.

It is interesting to me that we can lead such different lives, with very different priorities, but this concept can relate to every one of us. Not only that, but most of us can relate the concept to this topic in particular. I for one always knew that planning for retirement and putting my family in a good financial position was important, but I never really felt any sense of urgency. Now that I have gained much more knowledge about the topic, I know that I should have started a long time ago.

It is a great feeling when you make the decision to start now, and begin taking action on that decision. It obviously doesn’t happen overnight, and there will be many times when you don’t see the progress you wish you did. It is just like training for a football season. It isn’t the actions the team takes during the game that ultimately wins or loses it for them. It is the actions they took in preparation of the game and the season that will lead to the victories.

Whether it is your finances or some other aspect of your life that you keep putting off until tomorrow, pick one and just get started. Take a simple action to get it in motion, and you will begin seeing some sort of results. Do not get discouraged that things are not happening quick enough. Know the pace you need to be on, and maintain that pace until you reach the goal.

In Case Of An Emergency

Most of the concepts out there for managing finances and reducing debt will include some sort of “emergency fund”. This can range from a small amount to cover a typical emergency to a significant amount in the event you were to lose your job or get into a serious financial pickle. Whichever you decide to maintain depends on your personal situation, but it is important that you do have one.

When you are trying to pay off a significant amount of debt quickly, it is OK to have a small fund (but I wouldn’t suggest anything less than $1,000). This is to remain available to you only for emergencies, not because you came across something you think you need or a typical expense that you forgot to budget for.

If you have an unstable income, or you don’t feel comfortable with only $1,000 immediately available, there is nothing wrong with building a larger emergency fund. It will obviously slow down your progress of reducing your debt if you decide to add more to your emergency fund, but if it means you are more comfortable then I say go for it.

I have been trying something a little different lately, which is sort of a combination of these two options. Not because I don’t have a steady income, but I just feel more comfortable with a nice chunk of money in the bank in case a disaster occurs. While I am working on paying off one specific debt (currently my car for example), I am building up the entire owed amount in my savings account. What others teach is to pay as much as possible each month toward that debt until it is paid off. By building up the payoff amount in my emergency fund, I feel like I have a safety blanket, but I also know that I am getting close to paying off a debt in full. Once I do pay off that debt in full, my emergency fund will be low again for a month or two until it starts building up for the next debt. I can even wait to pay it off in full until I already have a cushion on top of that payoff amount so I don’t drain down the account to such a low amount.

Now this is just a strategy I’m trying, but so far I like it! It may impact the timeline slightly since I am only making minimum payments until I have the full payoff amount saved, but it keeps me feeling protected and reduces my financial stress. I’m willing to sacrifice a little for that peace of mind.

Now that you are debt free (hypothetically), it is time to have a strong emergency fund worth 3-6 months of expenses. Again, I would prefer 6 months because I feel better with a bigger cushion. Build this up as quick as you can, and then just let it sit there until you need it. At this point you aren’t making any loan payments, so all of your income will be going toward investing, saving, and covering your typical living expenses. Again, your emergency fund is not part of your regular savings account. It is a fund that is there for emergencies only!

Either way you decide to go with the amount in your fund, know that it is always a good idea to have less debt as opposed to a huge savings account. Maybe you will find a happy medium between the two while you work toward paying down your debt, or maybe you will dump the majority of your savings into your debt to get in a much better financial position. Draining your savings account is a very tough move to make, but in the long run it will likely be very well worth it. It will allow you to invest and re-build your savings quickly without all of the loan + interest payments. Now decide how you will set it up and start contributing!

Starting Off On The Right Foot

It is always difficult to recover when we start down a new path stumbling. We have a plan or idea, and we build up all kinds of excitement and motivation. This is the way I see moving on from high school or college into the real world of adult life and responsibility. It is an exciting time, but we can get thrown off track real quick.

We will see the highest rates of success if we hit the ground running and are able to build on our momentum. There are several instances in which this would be the case, but the one in particular I am getting at is.. any guesses? Personal finance! When we are talking about finances for teenagers and young adults, we can put the responsibility on them at some point, however the parents carry much of the responsibility as well.

If a young adult starts out on their own in a good financial position, they are much more likely to continue down that path considering they learn what it takes to maintain it. By good financial position, this will most often mean debt free or with very limited debt. The latter is preferred. These days this is extremely unlikely.

If he/she doesn’t start out in a good position, it is going to be more difficult to change behaviors and get on the right track financially later on. Not only that, but they may not realize there is any need or benefit to change the way they view their finances. They will probably go on living like the majority of Americans paycheck to paycheck with a bunch of debt they gauge by the monthly payment. Typically, if a teenager or young adult is in debt early on, it will involve a car loan, credit card, student loans, or all of the above.

We all want what is best for our children, and that continues once they move on to the next stages in life. In order to set them up for the best chance at success, we need to do our best to teach good financial behaviors and avoid letting them get into debt early in life (or hopefully ever!). Unfortunately, many parents won’t teach their children these strategies simply because they don’t know how to apply them.

If you aren’t educated in money or personal finance, learn about it for your kids if nothing else. You may think it is too late for it to make much difference for you (which isn’t true!), but it is definitely early enough to shape their entire lives. For the teenagers and young adults, you have the ability and resources available to learn about this on your own. Don’t let it be something you avoid!

529 College Savings Account

Trust me when I tell you that college is expensive. I’m sure many of you already know that because, like me, you are still paying on your dreaded student loans. Now that I am a father, one of my highest goals in life is for my daughters to graduate from college debt free (that is if they decide to go to college). I am big on education, so as of now I am planning for them to go that route as well.

Photo Credit: McBrearty Capital Management

Once you start looking at your options, you will find that one of the more common tools these days for college tuition planning is a 529 College Savings Account. There are a few different variations of a 529, but essentially this is an investment account that will grow tax free. The earlier you start one of these accounts, the easier it will be to accumulate enough funds to cover college. We have had a 529 account for my 5 year old daughter since she was about 2 years old, and we have had one for my 3 year old daughter since she was born. They are currently averaging around a 10% annual growth rate in addition to our contributions!

A very nice feature of the 529 account is that anyone can contribute to it. Our family often utilizes this feature to put money into our accounts for birthday or Christmas gifts. It obviously lacks the thrill of giving the girls a fun toy to play with, but they will certainly appreciate it later on! I believe the current contribution limit without penalty is $14,000 annually. It is unlikely you would hit this amount unless you got started late in the game and are trying to max out contributions during the last few years of high school.

Another perk to this program is that the funds are not limited to college. The money in your 529 account may be used for elementary, middle school, or high school as well, including related expenses. The maximum amount on this without incurring tax penalties is $10,000 annually which can go toward tuition, books, or other expenses necessary while enrolled in school. Unfortunately, there is a downfall that comes along with the 529 as well. If the funds are not used for school or educational expenses, they will be heavily taxed when pulled out from the account. Fortunately, if one child does not end up going to college, you are able to transfer the beneficiary to another child if you choose to do so. They can then use it towards their schooling.

Finally, it is important to limit the funds in your 529 account to only what is needed for schooling. Like I mentioned previously, any funds that are not used toward school will be penalized. That includes additional funding that was not needed for school. Before accumulating a significant balance in your account, be sure to evaluate the amount needed to pay for you or your child’s education. Consider tuition cost (be sure to include inflation), living expenses, books, etc. It would be a good idea to re-evaluate this annually. While you’re at it, you can take a look at your growth rate to determine if there needs to be some adjustments made regarding the investment funds.

Depending on the plan you follow, saving for college might not be the top item on your financial to-do list. However, I can tell you that it is incredibly important if you are hoping that your children will someday earn a college degree. It is never too early to open an account, even if you are only going to use it for small contributions on occasion or have family contribute rather than buying gifts on occasion.

Personal vs Business Finance

I have been in the business world for several years now, and I am currently wrapping up the final semester of my MBA program (Woo!). Since I began studying personal finance while in business school, I have noticed that there are many more similarities than differences between personal and business finances. {Side note} I have also noticed that often times our student loan debt did not contribute to a degree related to our current profession, mine included!

I hear it all the time.. “I wish someone would have taught me about money in school”. Well, me too. It used to be a thing. When I talk to the previous generation, many of them can recall learning how to write checks and keep track of their register. Luckily most of us did learn this skill one way or another, but the basics will only get you so far in this world and economy. To be honest, I think personal finance is a more important subject than most of the courses you took throughout high school, your undergrad, graduate, or post-graduate degree. Of course it’s great to be a leader in your field earning a 6 figure income, but if you can’t manage it what is it worth? Someone bringing in half of your income could easily achieve a higher net worth.

Learning to manage and operate a business seems all too similar to managing and operating life in my opinion. Now that I know the things I know and realize these similarities, I wonder how I have gotten by for so long without applying this to my life. Sure, I could have learned it on my own as I am doing now by studying personal finance. If that’s your stance on this though, we should all know how to do everything because the material is out there somewhere! At some point before spreading our wings as an adult, personal finance should be a requirement whether the individual plans to run a billion dollar company or stay at home and raise the family.

When we look at personal finance, what is it that we are evaluating and managing? Income, expenses, debt, interest rates, savings, assets, retirement plans, etc. When we look at a business, what do we evaluate and manage? Revenue (Income), costs (expenses), liabilities (debt), interest rates, capital (savings and operating funds), assets, succession plans, etc. Sounds a little repetitive, doesn’t it? That’s because it is. Sure, there are typically many more aspects to a business than to personal finances, but the fundamentals of profits and losses are nearly identical.

If you haven’t realized it yet, you are operating a small organization within your own household. The kicker is you might even be doing it without a business degree or experience of any kind. Congratulations! It is possible that you have done this successfully despite the odds. Unfortunately the studies show that most of us have not been very successful in managing our small personal organizations. That isn’t because we intentionally did something wrong. It is because we just didn’t know how to do it right.

Now take a long hard look at your current situation. Even if you don’t have business experience or the education, try to approach it with a business mindset. The goal is to maximize profits, savings and assets by minimizing liabilities and expenses. Take control over your organization that is your personal and family finances. There is material out there to learn more about it, and I can direct you to several of those sources. The important thing is to really pay attention and start to consider where you stand financially vs where you want to be.

Creating Memories, Not Interest Payments

Summer time is when many of us are planning vacations or wishing we were able to take our families to a new fun destination. There are several reasons why this may not be possible for some of us, but one of the top reasons is money. Either not having enough extra, or having other expenses come up that take precedence over a getaway.

Of those who are able to make a family trip happen, few will do it the right way.. paid for in cash! This doesn’t necessarily mean they are “rich” or even earn a huge income. It can also mean that they were intentional and strategic when planning for the vacation. Traveling is extremely costly, especially when you have a family like mine or even larger. A quick trip to visit relatives can cost us over $1,000 easily!

We go on vacation to reduce stress and enjoy the money we have worked so hard for (among other reasons). The mistake many make is bringing home credit card bills that they racked up on their trip. I’m sure it was a blast while it lasted, but is having to pay it off for the next year or so worth it? Wouldn’t it be great if all that you brought back from your incredible experience were memories and maybe a few cool souvenirs?

A good way to do this is by creating a “sinking fund”. The concept is not as complicated as it sounds. It simply involves setting aside funds for a specified period of time to be utilized for a specific purpose. In this case that would be a vacation. You can do this by determining the total cost of your planned trip, and then figure out how many months until you will need to book or pay for it. Then you will know how much you need to contribute to the fund monthly in order to have what you need when the time comes.

I have done this for several different things that included both large and small expenses. It is a huge relief and can also make it fun as you begin building the fund. It doesn’t need to be in a separate bank account as long as it is being tracked somehow (preferably in a budget). I realize this sounds a lot like a savings account, but it is one you are allowing yourself access to and assigning with a specific purpose.. Vacation!

It is almost time to start planning for the next big adventure. Work out the details now and start contributing so you can enjoy your friends and/or family with as little worry as possible!