Do you have identity theft protection?

Do you know 11 million people were affected by identity theft last year? It continues to be the number one crime in the US. An identity is stolen every 3 seconds, and you could be next.

You may be thinking – this would never happen to me. However, with the growing cyberworld, it’s becoming an increasing problem. You wouldn’t believe the things people do with others’ identities. Here are a few instances and how it can play out:

Andrea Harris-Frazier – Margot Somerville lost her wallet on a trolley. Two years later she was arrested. Andrea Harris-Frazier had defrauded several banks—using Somerville’s identity—out of tens of thousands of dollars. The real crook was caught.

Lara Love and David Jackson – This California couple one day began tapping into a neighbor’s wireless Internet router. This led to them raiding the neighbors’ personal data. Thirty victims were affected ultimately by the time this pair was busted.

Abraham Abdallah – A busboy named Abraham Abdallah got into the bank accounts of Steven Spielberg and other famous people after tricking his victims via computer, getting sufficient data to fake being their financial advisors—then calling their banks…and you know the rest.

Phillip Cummings – This man worked for a software company and sold customers’ credit card reports to a Nigerian ID theft ring for $30 each—30,000 times.

Do you have identity theft protection?

Phishing Schemes
The big thing recently have been phishing e-mails, mainly people pretending to be your bank. If you don’t know what phishing is, it’s the attempt to acquire sensitive information such as usernames, passwords, and credit card details (and sometimes, indirectly, money), often for malicious reasons, by masquerading as a trustworthy entity in an electronic communication.

It’s not always easy to detect when someone is pretending to be your bank especially if they’re using the bank’s exact logo and e-mail scheme. However, you should know that your bank would never ask you to provide identifying information via e-mail. To be safe, you should never give personal information electronically or over the phone.

Tax-Refund Fraud
Phishing is not the only big identity theft scheme. As a matter of fact, tax-refund fraud is expected to soar again this tax season and will hit a whopping $21 billion by end of 2016, from just $6.5 billion two years ago.

Here are the aggregated numbers from 2014:

Average number of U.S. identity fraud victims annually: 12,157,400

Total financial loss attributed to identity theft in 2014: $26,350,000,000

Percent of Reported Identity Thefts by Type of Fraud Percent Reported:
Misuse of Existing Credit Card 64.1%
Misuse of Other Existing Bank Account 35%
Misuse of Personal Information 14.2%

Get protected – it’s worth it!

If you don’t have identity theft protection, I’d highly recommend it. It’s worth the small cost – and I don’t say this for many things. 😜

My husband and I use IdentityForce. It’s rated in the top three out of hundreds of identity theft protection companies.

IdentityForce excels in the following areas and even has Lost Wallet Assistance:

• Price: Monthly prices range between $12.95 – $19.95
• Comprehensive Identity Protection: Credit Monitoring, Internet Scanning, Legal Protection, and Analytical System
• Complete Identity Recovery Services: Financial, Medical, Tax, and Criminal
• Valuable Insurance Quality: $1 Million amount through AIG (if case is reported within 90 days)
• Credit Monitoring: Available through Equifax, Experian, and TransUnion
• Better Business Bureau Rating: A+

It offers its services as a government-approved General Services Administration (GSA) Provider, meaning its products and services have been approved by the United States Government. IdentityForce contracts with various government agencies to respond to data breaches including the Army, Navy, FBI and the U.S. Department of Homeland Security.

I like this company for its reputation but it’s also one of the most competitively priced for what they offer. 👍🏻

Click this link to get a 14 day free trial plus a 17% discount. Don’t leave yourself or your family unprotected.

Granted, this wasn’t exactly a money saving tip but it is risk reduction which in the end is the same thing. 😊

{Please note that the above links are affiliate links. However, I would never recommend a product that I don’t personally use and like. I have done the research and like it best for my own reasons but feel free to do your own research. The whole point of this post is to encourage you to protect yourself by getting identity theft protection.}

Are You Car Poor?

I warn you this is going to be another post with numbers 🤓.   However, I like to use numbers because it helps demonstrate why my financial advice is solid. Here are my rules on car ownership:

1) The value of your car(s) and all motorized vehicles should be less than 50% of your gross income. This includes boats and motorcycles as well. It’s a good rule of thumb to use since motorized vehicles are depreciating assets. This means they always lose value especially in the first five years unlike a home which typically gains value, building equity. Plus the 50% rule of thumb gives you practical limitations on what you can truly afford.

2) Save up and pay cash for your car. Don’t get yourself trapped in years of car payments. Many people look at me like I’m crazy when I say this but guess what, it’s time to be an adult and plan accordingly. If you’re driving a 20 year old car and know it’s on its last wheel, start putting money aside as part of your monthly budget for your “car fund.”

3) Don’t buy a brand new car. You lose a ton of money as soon as you drive it off the lot (depreciation/loss of value). Ideally you should get a car at least a few years old as long as you can pay cash for it and stay under 50% of your gross income. If not, you need to get one even older. Here are average depreciation rates: 11% after driving it off the lot, 25% after one year, 46% after three years and 63% after five years.  What this means is that your car will lose 63% of its value after five years.  Of course these are averages and it really depends on the year, make and model. There are numerous car depreciation calculators online if you want to take a look at your car’s expected depreciation.

Emergency Plan:  This is the ONLY time you should get a loan for a car. If your current car is dead, you don’t have money saved up and you need a car to get to your job, make sure you get an older car with a value less than 25% of your gross income. Plus you should shop around for the best interest rate. ABSOLUTELY DO NOT LEASE A CAR!  This is a waste of money and you become a slave to the car dealership.

Plan on buying a new car?

Now let’s talk about the nitty gritty. I’ve made car buying mistakes in the past. I’ve bought a brand new car and I’ve leased. I was in my early twenties so didn’t know any better even though I should have since I’ve always been a financial person. I was young and still in the stage of doing “stupid things” and apparently didn’t want to think my way through the transaction because my immaturity didn’t allow it.  However, I’ve become wiser as I’ve gotten older.

Now I’m going to face reality and think my way through my “brand new” car transaction. I was so happy driving it home. It had 20 miles on the odometer and smelled “new car” fresh. This fancy new car was all mine. It wasn’t really that fancy but in my mind it was. I threw away approximately 11% of the purchase price immediately (depreciation). I can’t remember exactly how much this car cost me but let’s just say it was $35,000 which is also the average price of a new car nowadays. So that means the drive home cost me $3,850. Ugh! I now think about what I could have done with $3,850.

Now fast forward a year. The new car smell has worn off and I’m not as excited about my “not so new” car as when I first drove it off the lot.  Plus I’ve thrown another 14% out the window. This is an additional $4,900 for a total of $8,750 (25% loss in value after one year). If I had bought a car that was at least one year old and invested that $8,750 instead, twenty years later (now) I would have over $35,000, using a conservative 7% interest rate.

Now let’s think about the car payments. Assuming the $35,000 loan cost me 2.98% with a 60 month term, the payments would be $629 per month. Again, I can’t remember my interest rate but we’ll go with average numbers from the present day. That means over five years I spent $37,740. Why couldn’t I have saved $629 per month for a year and bought a used car for $7,548? After all, I was committing to the fact that I could afford $629 per month. Or maybe I could have held out for something even nicer and saved for a couple years to pay cash for a $15,000 car. Why did I pay the bank $2,740 in interest and take the hit on depreciation which would now be worth 35K?

Let’s say I went with scenario two instead where I saved for a couple years and paid $15,000 cash for a used car, didn’t pay the bank a dime and depreciation on that used car is much lower. Then I invest $629 per month for the next three years. Again, I committed to the fact that I could spend $629 per month for five years. To be consistent, assuming a conservative 7% interest rate, by the end of the three years I would have contributed $22,644 and earned $2600.  If I hadn’t contributed another dime but left the money alone ($25,244), 15 years later (now) I would have $71,919. I would have over $71K for making a different decision for one car! Was that brand new car worth it? I think not!

Imagine if you’re one of those people who always have a $400 car lease for most of your adult life. If you had invested this money starting at age 25 through age 65, you would have $1,056,050 (using a 7% interest rate). This means you invested $192,000 and earned interest of $864K instead of making a monthly car payment. I would much rather earn interest and be a millionaire than thow my money away.

By the way, once you hit millionaire status, go ahead and buy a new car! When you’re a millionaire, buying a brand new car is not as big of a deal because it’s a small portion of your net worth. Plus you’re using money that made money (compound interest), not money you worked hard to make, if that makes sense. Of course, be smart about it and pay cash. Don’t pay the bank a dime!  If you’re not sure what being a millionaire means, read my post: You CAN become a millionaire on an average income.

Think about your current motorized vehicle situation. If all your motorized vehicles are valued at more than 50% of your income, you should consider selling some to get under that number.  You can then use that money to pay off other debt or invest in an index mutual fund.

You should also consider your future car ownership plans. Do you have a car savings fund and are you saving enough to pay cash for your next car? I have found the biggest way to build wealth is to have a plan for your money rather than having your money control you.

Are you saving for retirement?

Benjamin Franklin said “If you fail to plan, you’re planning to fail.”  I am very much a planner in all aspects of my life but have learned that not everyone is.  However, when it comes to money, YOU MUST PLAN.  You should have a monthly budget plan, a long-term financial plan AND a retirement plan.

If you’re not saving for retirement, ask yourself why.  Here are some excuses I’ve heard:

1) I’m too young to think about retirement.  Wake up!  Have you heard of compound interest?  This is the BEST time to save for retirement!  Why work hard for your money if you’re not going to invest in your future?  Start early and let your money make more money.  It’s that simple.

2) I don’t make enough money to save for retirement.  I understand you may be trying to get back on your feet due to a life emergency such as a job loss or unexpected medical event and can’t invest 15% of your pay towards retirement.  However, you need to start somewhere.  If you have a budget and FOLLOW it, you should be able to work your way up to 15%.  Read my article on how you don’t have to earn a high income to become a millionaire.  Maybe once you realize it’s possible, you’ll be more motivated to get started.

3) I don’t think I’ll want to retire.  You may be one of those people who can’t imagine NOT going to work everyday.  I understand that because I always feel like I have to be doing something.  However, you may change your mind at some point in your life.  Maybe you’ll get a hobby you enjoy so much that you’d prefer to do that instead of working all the time?  Or you may lose your job and have a hard time finding another one or finding one you enjoy as much as the last one.  You may become disabled and unable to work.  Call me Negative Nellie but life happens and some of these things are out of your control.  What if you didn’t plan for retirement but you’re more or less forced into it?

4) Isn’t that what Social Security is for?  Based on the most recent Social Security Administration’s report, “the trust is on track to be depleted in 2034, at which point the system will be able to pay 79% of benefits from ongoing tax revenue.”  Not to mention even 100% of social security would not be enough to live on.  If you use this excuse, look at your expected social security benefits and see how that would work out for your current lifestyle.  What would you have to change and are you willing to do that?

Are you saving for retirement?

If you’re NOT one of those people who want to work forever, what DO you plan to do when you retire?  Most people don’t think through the qualitative piece of their retirement.  They’re focused on careers and family life while they’re working, which is normal and expected.  However, I’d encourage you to start thinking about the answer to that question right now.

For example, if you plan to travel extensively, you may need to save significantly more money.  Family vacations and cruises are common for retirees. This could cost an additional $10K to $30K per year, depending on the amount of travel and lifestyle.

Should you start thinking about developing some hobbies and interests so you’re not bored in retirement?  Maybe you want to drive a bus in the morning or volunteer your time for a cause that you’re passionate about. Maybe you’d like to spend time helping your children with their kids.

The key is to make the answer of what retirement looks like for you an integral part of your planning so you can understand how this may impact you financially.

HOW MUCH SHOULD YOU SAVE?

When you take the time to figure out the qualitative piece, the quantitative piece is easier.  Chris Hogan has a great online tool called the R:IQ.  You only need to enter four numbers: your current income (including your spouse), how much money you’ll need each month which includes necessities plus your “wants” or “dreams”, how much you currently have saved and how many years until you would like to retire.  Give this tool a try and see if this will motivate you to start saving or save even more.  I also encourage you to read Chris Hogan’s book Retire Inspired: It’s Not an Age, It’s a Financial Number.

The key with the quantitative piece is understanding that we’re always dealing with some level of uncertainty, whether it’s unknown future portfolio returns, rising health care costs, or the possibility of changes to income taxes or government programs such as Social Security. Having a plan and monitoring changing variables is critical so that you can make adjustments to your plan to ensure a successful retirement. But as long as you keep your eye on the qualitative parts of your retirement plan, what you want to do with your time, you can stay focused on saving what you need.

You often hear the saying, “It’s about the journey, not the destination.” Well, that may be true, but if you don’t have a destination, you’ll never get to where you want to go.

Know your Debt to Income Ratio

I’m a big fan of “knowing your financial numbers.”  It’s natural to assume financial success based on income.  However, financial success is not based on income alone.  It’s a fact that high income doesn’t always mean you’re financially stable.  Many high income earners are broke.  This means net worth is negative.  Your net worth is the value of what you own minus the amount you owe.  You can read more about this in my blog post You CAN Become a Millionaire on an Average Income.

Debt to Income Ratio (DTI)

Another number that’s extremely important is your Debt to Income Ratio or DTI.  It’s especially important if you plan on obtaining a mortgage for a home.  You can’t get a loan if your DTI is too high.

In addition, DTI provides a snapshot of your spending habits and buying power.  Once you complete the calculation you may realize why you feel like you’re living paycheck to paycheck (because you are!).  You may realize why you can’t get your budget to work (because you’re spending more than you make!).  You may realize you’re house poor or car poor or in other words, spending too much of your income on your house or cars.

Here’s how to calculate your Debt to Income Ratio (bank method):

First total your monthly debt payments which includes car loans, student loans, credit card payments, secondary housing debt or any other amounts you’re obligated to pay.  This number should not include non-debt payments such as groceries, utilities, car insurance or entertainment.  It should not include current rent payment or mortgage payment as it’s assumed you will be replacing these with a revised mortgage payment.

Then you divide the above number by your gross monthly income and this gives you your DTI ratio.

Make sure you use your gross income and NOT net take home pay.

Example:

Mr and Mrs Smith have a combined gross monthly income of $6,000.

They have the following monthly payments obligated by contractual debt: car payment 1 of $250; car payment 2 of $500; student loan of $200; credit card minimum payments of $400; personal loan payment of $150 making their total monthly debt payments $1,500.

Therefore, their DTI ratio is $1500/$6000 = 25%.

What does this mean?

Traditional lenders generally prefer a 36% DTI ratio, with no more than 28% of that debt dedicated to your mortgage payment (including taxes and insurance).

Prior to the credit crisis of 2008, the banks were getting loose and were allowing as high as 55% total debt to income ratio.  The subprime mortgage crisis produced a market correction that revised these limits back down to 36%.

What does this mean for Mr and Mrs Smith from my example above?  Regardless of their good credit score, they’ll not be able to get a conventional loan mortgage of more than $660 per month ($6000 gross monthly income X 36% = $2,160 minus current debt obligations of $1,500 =$660).

The bank’s DTI formula says that the couple could ultimately afford a mortgage payment of 1,680 (28% of $6,000).  However, due to their current debt obligations, that won’t be possible because it would bring their DTI to 53%.  If Mr and Mrs Smith would like a house with a mortgage payment of more than $660, they need to get rid of their expensive car and replace it with a used one.  They should focus on revising their budget to get rid of their high credit card and personal loan debt.  Ultimately and ideally, they’ll need to bring their current debt obligations down to 8% of their gross income which is $480 per month thus allowing them to get a mortgage for $1,680.

You can easily calculate your debt to income ratio through Zillow’s online calculator.

Kaz’s Advice (my improved DTI calculation)

I know I’m just another person but I can tell you why you should take my advice: 1) I’m not a bank trying to squeeze every bit of money out of you. 2) I’m a CPA and have worked in the finance field for nearly 25 years. 3) I’m 42 years old and have some life experience under my belt.  I have made many money mistakes that I have learned from 😉.

It’s good to know the banks are being (forced to be) a little more stringent than they were in the early 2000’s.  However, I think the 28% DTI for a mortgage is still too high for two reasons.

First of all, everyone’s in a different tax bracket so I believe it’s a bit unrealistic to say everyone can afford a mortgage at 28% DTI, especially people in higher tax brackets.

Debt to Income Ratio is especially important to know if you plan to buy a house.

Secondly and most critically, it enforces a trend Americans have gotten into over the past 40 years: low savings rate or none at all.  When a bank says you can afford 28% of your gross pay in a house payment, it limits the amount of money you could be saving and then 15 to 30 years go by and you haven’t saved a dime towards your retirement or your kids’ college funds.

This is the crucial time to save for these two major life events.  Your kids need college money at 18.  It’s really unfortunate if your mortgage has you strapped and you can’t save for your kids’ college during that time,  Don’t let your kids start their life in debt!

In addition, the earlier you contribute to retirement, the better, due to the compound interest of money.  TIME is the best money-maker!  Don’t think about retirement AFTER you’ve paid off your mortgage.  By then, it’s too late.

With these two factors in mind, my rule is that your house payment should be no more than 25% of your take home pay.  I’m a big believer in paying yourself FIRST.  Take advantage of your employer’s retirement plan and put away 15% for your retirement.  The benefit of this is that it’s pre-tax money and therefore lowers your taxable income.  You can read more about this in my post on What You Need to Know About Your 401(k) or 403(b).

Let’s use Mr and Mrs Smith as an example.  They make $72,000 a year which puts them in the 15% tax bracket with an effective tax rate of 14%.  Let’s assume they have 18% deducted in medicare, social security, state and local taxes and benefits.  If we use the bank method of 28% DTI for their mortgage and assume they have gotten their total monthly debts down to $480, it leaves them with $443 per week for groceries, utilities, entertainment, car insurance and savings.  Of course we know groceries, car insurance and utilities should come first.  Using weekly averages: groceries $160, utilities $115 and car insurance $20 therefore leaving $148 for entertainment, incidentals, retirement savings and kids’ college savings.  Incidentals and entertainment happen next especially when you have kids and a house to maintain.  Now they have no money left for savings.

If Mr and Mrs Smith take my advice, they would first put away 12% into their pre-tax retirement plan.  Both of their employers match 3% so they would be taking advantage of the match and would be saving $10,800 annually (total of 15%).

We would use the same percentages in taxes and benefits with a slight decrease in fed tax due to the deferred retirement income.  This brings their take home pay down to $42,000 or $3,500 per month.  However, I would not include the 12% retirement deferral in the 25% calculation which means they should have a house payment of $1,055 or less ($3,500 true take home pay plus $720 for the 12% deferral = $4,220 times 25%).

I would assume they still have 8% in other debts plus the same amount in groceries, utilities and insurance.  Therefore, they would have $158 each week to use for incidentals, entertainment, kids’ college savings and other savings goals.  They’re able to live within their means while paying themselves first because they didn’t get a mortgage more than they could afford.

Summary

In summary, the bank says they can afford $1,680 for a mortgage (28% of gross pay) with $148 left per week and most likely no savings.

I’m saying they can afford $1,055 for a mortgage (25% of take home pay) with $158 left per week AFTER saving for retirement.

If they started putting away $10,800 annually at age 25, they would have over a million dollars at the age of 55 (assuming no annual increases and a conservative 7% interest rate).

I digress to prove my point that listening to the bank is not always in your best interest (no pun intended)😜.  They are out to take your money as the additional interest paid is going to them.  I’m saying you should pay yourself first and budget less for your home.  This interest then goes in your pocket, not the bank’s.

Maybe you would rather have a larger home and no retirement savings?  You should ask yourself why you want a larger home.  Is it worth not paying yourself first?  Right now it may seem so but when you get closer to retirement age, your perspective on life changes.  You may regret not saving enough for retirement.  Social security will NOT be enough to comfortably live on.  Maybe you plan on working until you die?

I challenge you to calculate your DTI regardless of whether you want to get a mortgage or if you already have one.  Ideally your DTI (including housing) should be less than 37%.  If your DTI is higher than that you should read Dave Ramsey’s book, The Total Money Makeover to help you get your finances on track.

Six Tricks to Ensure Your Savings Goals are Achieved

We all know what savings are but are we good at meeting our savings goals?  Or, are you like anyone else and life gets in the way and somehow your savings don’t accumulate like they should?  Here are ways you can alter your savings plan so you can achieve your goals:

Re-evaluate your budget

Do you have a budget?  If not, make one and follow it to a tee!  A budget will tell you if you need to adjust your lifestyle.  In other words, are you spending less than you make and allocating money towards the important things such as paying off debt, a house fund, college for the kids, etc…  Remember, “beware of little expenses; a small leak will sink a great ship” (Benjamin Franklin was a smart guy).

Refer to my post on four of the top reasons you can’t stick to your budget to give you some key budgeting tips.  I prefer to use an online budgeting software to limit the time I put into it.  I use Everydollar Plus because it’s only $8/month and all my checking account transactions are automatically loaded into my budget.  The only thing you have to do on Plus is to move them to the correct expense category.  If you don’t want to pay, you can get the free version of Everydollar and you would have to key in your expenses that hit your checking account.  Comparing your actual expenses against your budget is extremely important!  This is how you hold yourself accountable and alter your spending behavior (and thus savings behavior). 🙂

Pay yourself first

After all, you’ve worked hard for this money.  Do your best to get your retirement savings up to 15% even if it means you have to adjust your lifestyle.  Most employers offer a pre-tax retirement plan such as a 401(k), 403(b) or a 457 that incur penalties if you withdraw the money before age 59 1/2.  This is a GOOD thing so you’re not tempted to withdraw it before then!  If your company doesn’t offer a plan, you need to open a Roth IRA as soon as possible.  The key to retirement saving is to have your money automatically withdrawn from your paycheck into your investment accounts before you even see it.  Thus, the money you bring home (net pay) is the amount you should include as “income” in your budget.

Make sure you have a financial plan that ties to your budget

If your budget is realistic, you should be able to follow it.  If you can follow your budget then your financial plan is achievable as well.  If you keep your dreams in mind, such as a dream vacation or new house, it helps you stick to your budget/financial plan.  One of the biggest problems in saving and budgeting is discipline.  Our financial destiny is determined by our spending and saving behavior.

How to create a financial plan:

Decide what your goals are and the amount of money needed for each.  Your financial plan should include paying off debt, having an emergency fund and, if you have kids, investing for college.  You can set as many goals as you’d like.

Then you set a schedule by dividing the total goal amount by the amount you’re able to put aside each pay period.  This will tell you how many pay periods it’ll take to reach that goal.  It helps you stick to your savings plan when you have an end date in mind.  You can then tweak the plan based on priority of what goals you would like to achieve first.  Be vigilant by treating your savings contributions just like any other expense.

Excel has an easy tool called the Savings Estimator if you’re not the best with spreadsheets.  You plug in the start and end dates and dollar amount and it’ll tell you how much to save each pay period (weekly, bi-weekly, monthly).  You can then change the end date to get within your budgeted savings amount for that particular goal.

Are you having trouble saving money? Here are 6 tricks that can help!

Open a savings account at a Credit Union (THIS ONE IS CRUCIAL)

Do NOT get an ATM card for this account.  In addition, it’s best to go to a credit union that’s not in your neighborhood (as far away as possible).  This may sound silly but when you get the urge to blow your savings with an impulse buy, you won’t be able to easily access this money and it’ll give you more time to think about it.  A credit union is preferable because hours at a credit union are even more limited than a bank.  If you don’t have an ATM card, you can’t withdraw money unless you drive to the credit union during open hours.

How does a credit union differ from a bank?
A credit union acts just like a bank, providing all of the same services: checking, savings, mortgage lending, auto loans and business loans. The one distinguishing factor is that credit unions are nonprofit institutions.
“The big difference is that they are not beholden to shareholders, so when they make a profit, they don’t give that to shareholders. Instead, credit unions return that profit to members in the form of lower fees and better service.

Source: FoolProofMe.com

Make your savings automatic (also CRUCIAL)

This is a similar concept to paying yourself first for retirement savings.  However, this is taking a portion of your after tax money from your paycheck and having it directly deposited into your credit union savings account.  This way you’re not responsible for making sure the money gets to the right account and thus your savings accumulates without a lot of work and before you can spend it!  This also makes budgeting even easier because now take-home pay income is used 100% for household expenses since your savings have all been taken care of.  You’ve already paid yourself and set aside money for your savings goals on your financial plan.

Squeeze the balloon

Know your savings “personality.”  Do you tend to save a lot or are you hesitant to save too much?  Do you have good intentions but then end up using your savings for other things?  I’m a natural saver and have a few different accounts for various goals.  Honestly, some of those accounts are at banks but it works for me.  I do have a credit union account which is used for non-recurring extraneous items such as vacation spending money and car purchases.

I recently started using a new service called Digit for what I call “squeezing the balloon.”  Digit is a service that checks your spending habits and removes a few dollars from your checking account every few days, if you can afford it.  There are no hidden fees and it has bank level security (there are no fees because Digit is earning interest off your money).  I don’t necessarily believe in saving money without intention as it should be done with your financial plan via automatic and planned deposits.  However, Digit saves more money for me above and beyond my normal savings plan and I have found it to be more fun than anything.  Plus, I wanted to test this new financial tool out as any financial nerd would! 🙂  It’s amazing how much little bits of saving can add up!  Same goes for expenses, right 🙁

All in all, consider looking at your savings habits and determine if you’re achieving your goals.  If you’re like most people, you don’t save as much as you’d like.  Or you don’t save at all.  Americans spend more than we earn and are continuing to accumulate debt.  Consider that the national personal savings rate has dipped to the lowest point since the Great Depression!  Let’s change this behavior and take control of our financial future.  It’s amazing the load lifted off your shoulders when you’re not worried about how you’re going to pay for your kids college or enjoy retirement.

Why Are You Trying to Keep Up With the Joneses?

The Joneses Live an Awesome Life:

The Joneses drive a fancy car and live in a big house.  They belong to their local country club and take a couple expensive vacations every year.  They go to most of the local concerts and sporting events.  They go on many three-day weekend adventures.  They shop most weekends and sign their kids up for a lot of expensive and time-consuming activities.

The Joneses seem like they live THE LIFE – how fun!  However, the Joneses are broke.  They live paycheck to paycheck and can barely pay their bills.  Their credit card debt continues to climb and they’re house poor and car poor.  Their net worth continues to go down when it should be going up.  They often fight about money and time. They’re miserable!  So why are you trying to keep up the Joneses?

It’s similar to the social media phenomenon.  You’re only going to see the good things about people’s lives.  They’re not going to share the big fight they had with their spouse about money.  They’re not going to share that they paid for their expensive vacation with a credit card. What you see on social media is only a small part of a person’s life and appearances can often be deceiving.

By no means am I saying you shouldn’t have a nice car or a dream house or go on a vacation.  I’m saying you need to live within your means to make it happen.  It should be planned and part of your budget.  If you can’t afford to buy a big house, then don’t do it.  If you can’t afford the vacation your family has asked you to go on, then don’t go.  You need to live YOUR life, not theirs. You’ll be much happier living the life you deserve without getting in over your head.  Not living within your means is stressful and destroys the happy moments such as time with your family.

Why are you trying to keep up with the Joneses?

Here are some financial guidelines to follow to live YOUR life and not theirs:

  • Pay yourself first.  I recommend 15% of your pay deducted from your paycheck towards your retirement account before you even see it.  If you decide 15% is too much based on your income and/or current lifestyle, make sure you still save something and have a plan to work up to the 15%.
  • Make a budget and stick to it.  This means comparing actual to budget at least monthly and if something isn’t part of your budget, then don’t buy it.  If you have to use your credit card, it shouldn’t be part of your spending plan. There are many free tools out there to create a budget such as Everydollar or Mint.  You can also reference my post on four of the top reasons you can’t stick to your budget.
  • Have a financial plan that ties to your budget.  This is more of a long-term plan such as saving for an emergency fund, saving for a down payment on a house, paying off credit cards, paying off student loans, saving for kids’ college, saving for medical costs of having a child, buying a new car, going on a dream vacation, etc… Your budget should include putting money aside for these various life goals and derived by what’s do-able and the timeframe in which you can carry out those goals (financial plan).
  • Pay off credit card debt or any debt with an interest rate of more than 5% before going on vacation or buying anything new (house or car).
  • Part of your financial plan should be saving for your kids college as soon as they’re born.  This may mean cutting back on a couple of their activities but sometimes kids need a break to explore their own interests.  Don’t let your kids start their adult life in debt!  I recommend saving $200 per month per child and have it automatically taken from your bank account and deposited into a reputable 529 plan. Do NOT invest in an age-based fund. Be aggressive and let compound interest work for you.  You have 18 years!
  • Use CASH for grocery shopping, restaurants and entertainment.  Only bring the amount allocated from the budget for that activity.  This will keep you from overspending while you’re grocery shopping or having a night out.  These are the categories we tend to overspend.
  • Your house payment should be 25% or less of your take home pay.  NEVER get advice from the bank on how much you can afford as you will end up in over your head.
  • You shouldn’t buy a house until you have a 20% down payment to avoid the cost of private mortgage insurance.  PMI is expensive so don’t waste your money.  Be patient in saving up for the 20% and then you can use that money to buy new furniture instead.
  • Your cars or motorized vehicles should not total more than 50% of your annual income.  Never buy a brand new car and never lease.  Plus you shouldn’t buy another car as long as you have a reliable one to get you around until you can pay cash for it.
  • Have an emergency fund of at least 3-6 months of your expenses.  This can easily be figured out once you create a budget and should be one of the first items in your financial plan.  Think of it as a safety net should you lose your job.

If you stick with these guidelines, it means you’re living within your means.  You may not own an expensive car and big house but your kids’ college will be paid for and you’ll be able to live a comfortable retirement.  You won’t be stressed about money or losing your job because you’ll have a safety net.  You’ll have a strong financial plan and you won’t even care about the Joneses!  After all, they’re broke!

What You Need to Know About Your 401(k) or 403(b)

What is a 401(k) or 403(b)?

A 401(k) plan is an easy way to save for retirement and offered as a benefit through your employer.  It’s called a 401(k) because it’s named after the section of the tax code that governs it.  403(b) plans are similar except they’re offered by nonprofits, educational institutions, governmental or other tax-exempt organizations.  These plans originated in the 1980’s after pension plans became too costly for employers to maintain.  Your employer uses a third-party administrator to oversee the plan such as Vanguard, Charles Schwab, Fidelity, etc…

Important facts about your 401k or 403b plan

Two great benefits of 401(k) or 403(b) plans:

1) They allow you to save and invest a portion of your paycheck before taxes are taken out thus reducing your taxable income.👍🏻  Taxes are not paid until the money is withdrawn.

2) They allow you to decide how you want to invest your money allowing for higher returns, compound interest, etc…

How much of your paycheck should you invest in the plan?

The financial rule of thumb is 15% of your income.

Some people have told me they can’t afford 15%.  My answer to this is two-fold:

1) Take a look at your spending behavior.  Are you house poor or car poor (too much of your disposable income is used towards your house or car)?  Are you spending too much money eating out or entertainment?  Only YOU can decide how you want to spend your money but make sure you have a budget and financial plan in place to make a good decision.  You should invest in yourself first (future retirement/savings).

You also need to know that Social Security will not be enough to live on comfortably once you retire.  Social Security’s cash flow has been negative since 2010 and will likely be cut by 2035.  You need to put money into your 401(k) as your main source of income when you retire.

2) If you decide you can’t afford 15% and/or don’t want to change your budget and financial plan, make sure to invest at least the amount of your employer’s match since this is FREE money!  FIND A WAY TO MAKE IT HAPPEN!  Many employers will match up to the amount you’re investing and typically range from 2% to 7% (average is around 3.5%).  For example, if your employer’s plan offers a match of 7% and you invest at least 7% of your paycheck, they will match the same amount of money for a total of 14% going into your account.  If you invest 5%, they will only match 5%.  Why not take advantage of 100% of the free money?  Remember all the compound interest you’ll be earning on this free money!

By the way, if your employer only matches 2%, this doesn’t make them a bad employer. Regardless, it’s free money.  Some employers offer a profit-sharing plan meaning there’s no match but they’ll contribute to your account on a yearly basis depending on the profitability of the company.  I want you aware of any matches available and make sure you’re taking advantage of ALL free money.

Another tip is to squeeze as much as possible out of your budget and then increase your contribution every year by the amount of your pay raise until you reach 15%.

How much will you need for retirement?

Obviously this varies by person. Chris Hogan offers a great tool called the retirement IQ. Click on this link to learn more.

Chris Hogan’s R:IQ

 

How should your money be invested?

The good news is that these plans typically give you a variety of mutual funds comprised of stocks, bonds and money market investments.  Only you can decide how much risk you want in your portfolio. However, I wouldn’t worry about the market ups and downs.  Keep in mind that the market will almost always feel like a roller coaster and you wouldn’t jump off a roller coaster, right?  You only realize the market losses if you move your money out.  Leave your money be and don’t let your peers or media put you in a panic.  My preference is to invest in nearly 100% stock mutual funds.  Over time your money can grow to three to four times the amount than if you were to leave it in a bond fund or money market fund.

Here are my recommendations:

1) Stay away from “target-date funds” also called lifecycle or age-based funds.  Here lately there’s been an influx of target based funds being offered in an employer’s retirement plan.  These types of funds are designed to provide an investment mix whose asset allocation becomes more conservative as the target date approaches (typically your retirement date).  I do NOT invest in target date funds because it’s an extremely conservative approach to investing.  You typically make about half of what you could in a regular mutual fund (although largely dependent on the fund).

2) Invest in index funds.  What’s an index fund?  It’s a type of mutual fund that mimics the market index such as the S & P 500.  It’s broadly diversified capturing the returns of a large segment of the market in one fund.  There are typically hundreds or thousands of holdings and is a form of passive investing so the manager of the fund is not trying to “beat the market” and thus risk a loss.  The expenses of a passively-managed fund are much lower because there’s not a lot of time put into researching the stocks to buy and sell for the portfolio.  The cost savings of the passively managed index fund is passed onto you, the investor.

Chris Hogan’s book Retire Inspired: It’s Not an Age – It’s a Financial Number will give you more information on the above as well as other retirement options:

 

What happens to your money if you leave your employer?

The money you invest is yours to keep along with the vested amount of any employer or profit-sharing contributions.  Don’t cash it out.  If you do, you’ll have to pay taxes on the entire amount and you’ll owe a 10% penalty if you’re under the age of 59 1/2.  In addition, you don’t want to throw away your savings just because you’re changing jobs (or have lost your job).  Don’t panic and cash it out!

Here are better options:

1) You can leave it in the plan though you won’t be able to contribute more money.  However, this money should continue to grow until you decide what to do with it.  Some employer plans won’t allow you to leave it there if you have under a certain dollar amount (such as $5000).  Otherwise, if you like how it’s invested, just leave it be.

2) If you don’t like the investment options, you can choose to move it to an IRA which would open up many more investment options.

3) You can roll it over into your new employer’s 401(k) plan.  This keeps  all your money in one place and makes it easier to manage.

What if your employer doesn’t offer a 401k or 403b?

This is another blog post I’ll be writing about soon.😊

Sign up for my Money Saving Tips newsletter if you want to learn more.

You CAN become a millionaire on an average income

After talking with my daughter as well as many other people over the years, I realized most don’t understand what a “millionaire” is.  My daughter thought a millionaire meant you’re “rich” so you have a yacht, live in a mansion and wear only fancy clothes due to a prestigious job with a high income (granted, she’s only 10).  However, being a millionaire has little to do with your income and I’m willing to bet most millionaires don’t own a yacht or live in a mansion.

Becoming a millionaire has little to do with your income!

A “millionaire” is a person whose net worth is at least a million dollars.  In simple terms, net worth is what you own minus what you owe.

For example:

A couple owns a home valued at $200K, cars valued at $15K, has $15K in a savings account plus $400K in retirement accounts, a total of $630K.

The couple owes $50K on their home, $5K on their cars and $2K in credit card debt, a total of $57K.

Therefore, the couple’s net worth is $573K ($630K – $57K) or over half a million dollars :-).

This couple is not quite to millionaire status but could be one day if they put a financial plan in place.  When I say “financial plan” I don’t mean budget.  A budget is how you allocate your income on a monthly basis which ties into your financial plan.  Your PLAN involves the “how” and “when” of your financial goals (the “what”).

Here are some examples of financial goals that can be included in your PLAN:

1) How and when you’ll pay off your credit card debt (hopefully at a fast pace so you’re not paying a ton of interest and then never use your credit card again!)

2) How and when you’ll pay off your student loans (if you have any but unfortunately it’s a common debt these days)

3) What amount should be in your emergency savings account and how and when you’ll reach that goal (should be 3-6 months of expenses)

4) How and when you’ll pay off your mortgage (and it shouldn’t be in 30 years – why not aim for “as fast as possible”)

5) If you don’t have a mortgage, how and what you’ll save to get at least a 20% deposit (to avoid private mortgage insurance and to get a head start on paying off that mortgage quickly).

This list can go on and on depending on your own goals (think vacations, costs of having a baby, new cars, etc…)

I digress for a reason. With a solid financial plan that ties to your budget, you can become a millionaire at any income.  However, this means you have to follow the budget and financial plan.

The standard financial rule is to save 15% of your income for retirement and is one of the primary ways you reach millionaire status and financial freedom.  It doesn’t happen overnight.  It takes consistency and time.  Compound interest is a wonderful thing!  You should start by paying yourself first and then the rest of your money is allocated to standard bills and goals.  In other words, your take home pay is what you use to create your budget and financial plan.  You’ve already paid yourself by contributing 15% to your retirement account.  Most employers offer a retirement plan such as a 401(k), 403(b) or a 457.  Make sure you contribute 15% of your pay to the employer plan and invest it in an index mutual fund (mimics a market index so provides broad market exposure and low operating expenses).  Contact a financial advisor if you need help with this.  Your money will grow at a decent pace even though there’ll always be ups and downs in the market (remember to ride the roller coaster – would you jump off a roller coaster?).

Here are two examples of how income doesn’t matter:

Scenario #1:

The US Census Bureau of 2014 reported the median household income as $51,939.  If a household making this amount of money were to invest 15% of its income starting at age 30, they would reach millionaire status by age 60 with the following assumptions:

  • $650 (15%) into retirement account every month with no pay increases (of course pay increases typically happen)
  • 7% compound interest (the market average from 1926 to 2011 was 11.69%).  I use 7% to account for inflation and dividends
  • No debt and a paid off house with a $200K value (what you could get for it if you were to sell)

Scenario #2:

Here’s another scenario using 7% interest with a goal of having $1,000,000 cash (retirement account) by age 65.  Below are the ages you need to start investing and the amount saved each month:

  • Age 25 – $417/month
  • Age 30 – $602/month
  • Age 35 – $882/month
  • Age 40 – $1,317/month
  • Age 45 – $2,032/month
  • Age 50 – $3,316/month
  • Age 55 – $6,031/month

Remember in this scenario though that you are not a millionaire if you owe on anything at the age of 65 (credit card, cars, house) UNLESS the value of what you own (house and cars) exceeds the amount you owe.

This second scenario demonstrates one of my original comments that becoming a millionaire takes consistency and time.  I read a great book called The Minimum Wage Millionaire by Bill Edgar.  I plan to have my kids read this while they’re in high school.  Having financial problems creates a huge life imbalance so I want them to learn at a young age how important it is to have and follow a budget and financial plan as well as saving, regardless of their income.  I want my kids to do what they love for their career plus I don’t want them to think they have to make a high income to live a happy and fulfilling life.  On the contrary, if they make a high income, I want them to handle their money properly.  It’s amazing to me how many high income earners are BROKE (negative net worth).  I want my kids to know they CAN have financial freedom if they follow Mom’s advice. 😉

Sign up for my Money Saving Tips Newsletter

One of My Biggest Life Regrets!

Note:  I am NOT getting paid by Aldi or any affiliate marketing company for this blog post.  Aldi sells itself!

I regret to say I just recently started shopping at Aldi.  I had seen the advertisements claiming you could save 40-50% but thought there’s no way a business would sell groceries for that much lower than the average supermarket.  I’m a cynic so thought it was too good to be true.  After talking to my sister-in-law about it, I googled Aldi to see if there were any stores near me.  I’m not a shopper so don’t typically pay attention to stores in my area.  There happened to be two locations, one about 15 minutes from my house and another a little further but on my way home from work so quite convenient. I gave it a try and have been a convert ever since.

I had also educated myself while searching for locations as to why Aldi can sell items lower than the average supermarket and it all made sense:

  • They keep their overhead low by limiting hours (sorry – you won’t be able to shop there at 2 in the morning)
  • They carry only the most commonly purchased items and these items are not displayed in fancy display cases. They’re displayed in their shipping boxes which also limits the amount of time employees have to stock shelves
  • They offer mostly private labels eliminating the middleman
  • They offer fewer bar codes (about 1500 versus a standard grocery of about 50,000)
  • They use local farmers for produce which is sometimes organic
  • Their stores are small taking up less of a footprint plus they use energy-efficient lighting and refrigeration (I love this – can get in and out quickly).
  • Their quarter cart system puts the customer to work rather than using employees to corral the carts out of the parking lot
  • The customer is also responsible for bagging their own groceries
  • They employ few associates per store and they’re trained to multi-task

I still shop at my local grocery store and wholesale club for certain items.  For instance, I buy deli meat for my daughter and my son’s favorite brand of protein bars at another big name grocery store.  However, here are some staples I buy from Aldi on a routine basis:

  • Organic Milk – $3 cheaper
  • Eggs – about $2 to $3 cheaper for one dozen
  • Almond Milk – $1 to $2 cheaper
  • Ground Turkey – $1.50 to $2 cheaper per pound
  • Gluten free spaghetti pasta – $1 to $2 cheaper
  • Liquid fabric softener – $2 cheaper (plus cheaper than my wholesale club)
  • Organic baby spinach – $1 cheaper
  • Organic salsa – $.50 – $1 cheaper
  • Hamburger buns – $1 to $1.50 cheaper
  • Sour cream – $.50 – $1 cheaper
  • Ibuprofen – $1 to $2 cheaper
  • Granola bars – $.50 to $1 cheaper
  • Taco shells – $.50 cheaper
  • Shredded Parmesan cheese – $1 cheaper
  • Wine – I can get a decent bottle of red wine for $6 to $7
  • Specialty cheese – $3 cheaper for a block and they’re really good
  • Fruit and Veggies are cheaper but hit and miss on freshness

The snacks at Aldi are cheap even though I rarely buy them.  However, if we’re having a party or cookout, this is where I’ll get snacks plus I feel better knowing I can buy junk food without spending a ton of money.

Now my family of four saves about $100 a week on groceries.  Of course the frugal person in me regrets not discovering this 20 years ago when my adult life began.  That’s $5,200 wasted every year!  If I started shopping at Aldi 20 years ago, I’d have $104,000 more to use on life goals or savings.  If I were to have invested the $5,200 into a mutual fund using a conservative interest rate of 7%, I’d have $220,000!  This may sound odd to you but this is how my frugal mind works.

One of my biggest adult life regrets!

This post is not to convince you to shop at Aldi.  It makes me feel better writing about it and sharing this well kept secret.  It’s your decision whether you want to save money or not 🙂

Four of the Top Reasons You Can’t Stick to Your Budget

How often do you wonder where all your money went?  Are you living paycheck to paycheck but don’t understand why?  Here are the top reasons so many people find themselves in this predicament:

1) You don’t know WHY you have a budget

Some people think the only goal of budgeting is to know where your money’s going.  However, does that really matter if your spending behavior doesn’t follow the budget plan?  The true goal of budgeting is to make sure you’re spending less than you make.  I’ve found that once you categorize your expenses into needs, wants and debts, it’s an eye opener to where the spending issues exist.  With a formal budget in place you should go through it every month and compare real spending against budgeted spending.  This then sets you up to make sure you’re able to achieve big life goals such as buying a home, going on a dream vacation or planning for a stress free retirement.

2) You’re being unrealistic

Before you formalize a budget you should gather your previous 12 months’ spending activity using your checking account and credit card statements.  Then you need to add up your spending by expense categories such as mortgage/rent, utilities, groceries, insurance, entertainment, etc…  This exercise can take a while but is critical to understanding what you’re spending on WANTS such as clothing and entertainment.  All the little/non-fixed expenses can add up to A LOT OF MONEY!  After you do this exercise you can then proceed with a realistic budget which includes cutting back on frivolous spending.

3) You’re not using CASH for WANTS

This goes hand in hand with #2.  It may sound old-fashioned but if you’re being realistic you should always use cash for non recurring expense items such as entertainment, restaurants and yes, even groceries!  Groceries are considered a NEED to a certain extent.  However, you’d be surprised how much money is wasted at the grocery store especially if you go to one that also sells general items.  Only bring the cash you allotted for food and add up your grocery cart items along the way.  This will prevent you from adding unnecessary items to your cart.

All fixed and necessary bills such as car payment, mortgage/rent, utilities, insurance, debt can be paid via bill pay or checks and budgeted first.  The expense categories that fall under WANTS are the ones we tend to overspend on and should be paid for with CASH.  When you’re using debit cards or credit cards you end up spending more than you budgeted and therefore, more than you can afford.  This usually happens before you even realize it.  When you’re out of cash, you’re out of cash!  When you’re getting low on cash you’ll make sure you have enough for groceries until the next paycheck which then means you’ll have to say NO to going out to eat or movies with friends.

4) Your spouse or significant other is not on board with a budget

Your significant other should understand your budget EVEN if you don’t share bank accounts.  They need to know you have a plan for your money and therefore can’t go on a spontaneous weekend getaway or a shopping spree.  The expectation has to be there ahead of time so they won’t ask you to do silly things with your money.

If it’s a spouse, they need to be fully on board with the budget.  You both need to decide how you’ll spend the extra money after covering the necessities (needs and debts).  If your spouse or significant other is not on board, there will be too many surprises along the way and you will spend more than you can afford or miss saving on your dream items such as a new house or a kitchen remodel.

Critical for budgeting

Overall, budgets are necessary if you want to make sure the money you’re working hard for is used properly.  You’d be surprised how much you can do if you have a plan for your money.