Five Financial Resolutions

Time to clean your financial house. Time for me to give financial advice because it's one of the things I do.

 

1. Get Debt Free

Don't tell me your debt is "good debt." Don't tell me you have no debt, other than your student loan. Debt is debt is debt. I don't care if it's on a really low rate. You need to pay it off. You should prioritize this above buying a NEW car, or buying a home. Why? First, paying off debt is like giving yourself that money at a guaranteed rate of return, where that rate of return is your interest rate. Even relatively low interest rates are still paying better than most CDs or money market funds today. So what's the safest way you can earn interest off your money? Pay off your debt. Second, keeping a debt payment is what's keeping you from not reaching your other goals. Whether that goal is to buy a home, buy a car, feel financially secure, start a retirement fund, or just to spend $200 a month on THINGS YOU WANT not some scummy bank's interest rate.

 

2. Have Some Savings

How much should I save? Well this all depends. I like Michelle Singeltary's advice that you should have both a "life happens fund" and an "emergency fund." Life happens fund is like, your furnace needs to be repaired or your car's water pump goes out. Maybe $1000ish give or take some for how expensive your lifestyle is in general. Then an emergency fund, to be X months of your expenses. As in, you and your spouse lose your jobs tomorrow, how much money do you NEED to keep paying the rent/mortgage, utility bills, etc. It won't necessarily be a one-for-one of your expenditures, because hopefully you'd cut back a little in dire circumstances, but overestimating savings never hurt anyone. How many months? Depends on your job security and responsibilities. If you have an apartment you can leave any time and Mom&Dad have any extra bedroom, you probably needn't be as careful. If you are both government employees, you probably don't need to be as careful. But if your jobs are less secure, more is better. If you have nothing? Start with one month's emergency fund and work your way up to anywhere from 3 months to 6 months to 12 months as fits your situation. 3 months is a good average for most people.

 

And where should you keep this? Life happens can be in your bank's savings account, you will want to access this quickly. Emergency fund should not be touched unless, duh, an emergency has occurred. So put this somewhere safe, separate, but still accessible. Do not invest in stocks. In fact, do not invest in bonds either, with either of these funds. If your bank offers money market funds, or you can open a set of revolving CDs (i.e., open 3 3-month CD's each with 1/3 of your emergency fund, one month at a time, so every month a single month's emergency fund "matures.") Or online savings accounts such as ING or HSBC are great.

 

3. Start Saving For Retirement

If your employer has a 401k or 403b or TSP, that's where you start. Sign up to get X% withdrawn from your pre-tax income. What %? Well conventional wisdom is, if your employer offers any kind of a match, you should contribute the minimum to get that match. If you get some kind of pension, if it's especially generous, you may be able to save less. But really, most people don't save enough. And if you find out in your 50s you've saved too much, you can always cut back THEN rather than cut back now. Beyond your company's plan, you might consider an IRA. If you have a household income of something less than $150k (or thereabouts, might be different now) you should consider opening a Roth IRA. This means you put post-tax money in it now, and when you withdraw in retirement you pay no taxes (versus your 401k withdrawals you WILL pay taxes on). I know you're thinking, "Gee FrauTech, I'm not made of money, how am I going to start this?" Well let me recommend the Schwab Roth IRA. If you open an account with Schwab they'll give a free initial consultation if you're unfamiliar with what you might want to invest in. But let me recommend something like their Total Stock Market Index Fund. With an expense ratio or 0.09%, you're talking one of the lowest expense ratios on the market period. You can open with an initial investment of $100. I'll talk about what to invest in in more detail some other day though.

 

4. Start Saving for College

Okay some of you will never have kids and both have your PhDs so nobody's ever going to college (again). But if you're married, and planning on having a baby, open a 529. Especially if you've been through the higher education system, you know how ridiculously expensive it is. If you don't even have a kid yet, that means 18+ years of compounding interest on your hypothetical child's college savings. So even if it's just $50 a month (the minimum to open a 529 with say, Schwab, though there are lots of good options out there) your kid will thank you. The people who don't save because they think their special snowflake child will get aid or scholarships are deluding themselves. If your state offers tax incentives to open a 529 through your state's plan, that's who you should open a 529 with. Especially if your state offers a match.

 

5. Spend Money

...on what's important to you. Don't spend a ton of money on a mortgage because everyone's telling you "It's a great time to buy!" or because 'Real estate is always a good investment!" or because you think this is the only way you'll feel like an adult. Mortgages are almost always more expensive than rent in the first 5-10 years. And if owning your own place doesn't come with some particular advantage to you that you couldn't get some other way and cheaper, don't do it. Yes I do think it's a good idea to try to own your own home outright by the time you retire so that you don't have that fixed expense every month, it still isn't for everyone. Even if you have 20% for your downpayment saved, it might be worth it to save even more before you take the plunge. So spend the money on things that are important to you. If a new car is important, make that the goal of your money. If you want to travel, make sure your money goes towards that. Don't spend money on fast food, flat screen TVs, new carpets, or furniture if these things aren't important to you. Find what gives you joy, and make sure beyond #1-4, that that is your spending goal.