Finance 104 – Self assessment and strategy development

Take your monthly income and breakout your monthly expenses as a percentage of that income (pie chart).  You should know what percent of you income goes to:

Rent/Mortgage

Transpiration

Utilities

Revolving debt (credit cards)

Installment loans (student loans, etc.)

Entertainment

Insurances

Emergency savings

Vacation/Holiday savings

Retirement savings

Any other ancillary accounts

 

 

Once you know all that categories and the percentages you can start to devise a plan of action that will represent a better percentage mix.  For example, If you spend too much on entertainment like most of us do, you may want to hold two checking accounts and at least one savings account.  The first checking account will hold all of your funds for automatic bill payment.  The second account will hold your entertainment money for the month.  So you may have your employer direct deposit, say $300 per month into the second account.  Once that money is gone, its hamburger helper and brown paper bag lunch for you for the rest of the month.  A goal may be to reduce your monthly entertainment expense by $25 per month until you hit a reasonable amount.  You can brainstorm on less expensive forms of entertainment and hobbies to usher in a more responsible lifestyle that gels with your long term goals.

 

With a realistic forecast of your income growth (4 to 7% on average) you can develop an annual pie chart that incorporates your goals.  For example, you may find that between your company sponsored 401(k) and your Individual Retirement Account (IRA), you save 3% of your income for retirement.  One of your retirement saving goals may be to increase your percentage savings by 1% annually, or increase it by 2% annually until you are saving 10%. 

 

If your goal is to purchase a home within the next 5 years, you may want to start a down payment fund which should be at the very least the difference between your current rent and the projected mortgage payment of your ideal home (plus taxes, insurance, maintenance cost).  If you can’t afford to save for a home, you will not be able to maintain a home once you purchase it.  That is vital information to have prior to getting in over your head.

 

If you currently own a home or have substantial installment loans with compound interest, you may want to pay 52% to 56% of the bill every payday.  If you get paid every two weeks as opposed to on the 1^st and 15^th, you actually will make the equivalent of 13 payments per month by sending half a payment on every pay day.  Once you get a month or more ahead of your mortgage note, that could be viewed as an emergency fund if you really need to forego a payment in the future.  Ask your mortgage lender if they accept early partial payments. 

 

I pay all of my other interest baring installment loans, such as student loans every two weeks.  Not only do I pay 53% every pay period, but I also save on accruing interest.  By sending funds early there is less outstanding principal for them to charge me interest on. So in essence I end up only paying much less interest then the bank expected over the course of the loan.  The object of the leverage game is to pay as little in interest over the course of your lifetime.

 

Why save $3,000 in a savings account at 2% interest, while being charged 7% interest on an outstanding debt?  With the exception of liquid accessible cash, there is little benefit to not getting ahead of those interest baring debts.

 

This is where the sacrifice comes into play for those who build financial security.  This sacrifice is what makes them due the benefits.  The people who lack financial self-discipline are not safe.