Month: November 2017

A financial plan’s foundation includes:

• handling your living expenses comfortably,
• keeping adequate emergency reserves,
• protecting yourself and your family with insurance and
• making investments to help reach future goals.

Financial planners recommend saving at least 10% of your take-home pay. (And that’s if you start saving for your retirement in your 30s; the longer you wait to get started, the more you’ll have to save.) You should put this money aside first thing each month so that you won’t be tempted to spend it. Budget your expenses around what’s left.

Create your own emergency fund to cover unexpected expenses, such as sudden illness, or major car or house repairs. A reserve of two to six months’ of living expenses can prevent the need to dip into your savings. Set aside a small amount each month and keep it in a bank savings account, money market fund with check writing privileges, or other readily available place.

Insurance is designed to protect you from major financial losses such as death, disability, large medical expenses, or loss or destruction of your property. Choose the type(s) and amount of insurance that provide(s) the most security for you and your family.

In short, before you begin investing you should:

• make sure your income exceeds your expenses
• set up an emergency fund
• secure adequate insurance
• consider owning a house (mortgage interest is tax-deductible)
• consider buying a tax-deferred Individual Retirement Account (IRA)
• bring your debt repayment under control

Getting Started

The first step toward a sound financial plan is to determine where you are financially and how you got there. Look at your net worth – the difference between your assets and liabilities – and cash flow – the money flowing in and out of your wallet and checking account. Also take account of:

• your personal assets and liabilities,
• your health and happiness,
• how you spend your time, and
• who you can turn to in the event of a crisis.

Your plan should enable you to do what is important to you.

Net Worth = Assets – Liabilities

To calculate your net worth, list all of your assets, including:

• cash on hand,
• investments,
• the market value of possessions like your house, car and furnishings,
• Social Security and other government benefits, and
• employer-provided benefits, such as group life insurance or profit-sharing programs.

Your liabilities are the amounts you still owe lenders for mortgages, car and student loans, and any credit card debts. Subtract your liabilities from your assets and you have your net worth.

Next figure your cash flow, or budget. Use a budget sheet to list everything that contributes to your monthly income and expenses. Any income above your outgoing expenses can go toward building your financial future. If your expenses are greater than your income, however, you would be wise to eliminate some unnecessary spending or increase your income. Financial planners recommend looking at net worth and cash flow at least once a year so you can quickly adapt to changes in your financial situation.

Where does this leave you? To evaluate your overall financial situation you must first Identify short-, medium- and long-term goals. Short-term goals could include buying a home computer, taking a vacation, or continuing an education. Buying a home or sending your kids to college could be medium-term goals. Achieving financial independence, planning your retirement or starting a business could be long-term goals.

You do not have to commit money to your goals all at once, but you do need to prioritize them. By saving for long-term goals early, your money has more time to grow and compound and you will end up with much more in the long run.

Not to get into a political debate or anything, but I thought this would be a great example of the need to have an emergency fund saved up.

I was never very hasty about saving money in case disaster struck, but I started the habit because everybody recommended it. Truthfully, I didn’t really need the emergency fund during my college years and you probably feel that you don’t need it now either.

But guess what? Get that emergency fund habit started because eventually you will need emergency money! You never know when. You never know how. You never know what for. But, you will need a stash of cash one day and you’ll be happier if you started now with small bits of money.

My habit of regularly saving a set amount of money for my emergency fund is really paying off now.

My teacher union (You did know that I’m a teacher right? Five years of college plus two years for my masters degree and a teaching credential. Whew, I’m all educated out!) is getting ready for a strike in the next few months. Nobody knows how long the strike will last. It might be a day. It might be for 17 days. It might be for months. During the strike, I will be walking that line and not receiving my regular paycheck.

Instead of freaking out, I am mildly worried. My rather casual attitude toward my emergency fund means that I only have $4,000 in there instead of $10,000, which is my goal. However, even my small emergency fund will allow me to strike without being anxious about my lack of income. The same cannot be said for some of my colleagues.

Trust me, I will be putting all my extra money into my emergency, or strike, fund in the next few weeks. Just in case.

What about you? Even though you feel that you won’t need that emergency fund now, get it started with a small montly deposit of $20 or $50 now. You’ll save up a small bit of cash and, more importantly, get into the habit of saving money.

Where can you save this money? Well, I have to entice you to come back to read frugal101 some how, don’t I?