6 financial resolutions you can live with

by @PaulFiarkoski

Here we are in a new year again. If you are a resolution maker and want to do a better job at managing your finances, consider one or more of the resolutions below.

1. Make a budget (or spending plan)
Budget – it’s a scary word, I know. Almost as bad as the word “diet.” If you don’t like the word budget, try calling it a spending plan. Whatever you call it, without putting more thought into what you spend, you are more likely to spend money recklessly.

Keep it simple. You don’t need any fancy software or apps; a simple spreadsheet is what I use. Plot out what income you expect to receive on a monthly basis and how much you expect to spend.

I have found that predicting expenses is a lot easier if you download transaction history from your bank or credit union for recent months or the same month a year ago. Although it takes a little more work, I like to plot out every day of the month so I can project how my account balance will likely change from day to day. This is a good way to help prevent unnecessary transfer and overdraft fees.

2. Spend less
Sounds painful, but this is actually the one of the easiest things to do. A simple way to find ways to save is to look at your bank statements. What always stands out to me are purchases like coffee or fast food places. You don’t need to give them up completely, but you can cut back on the number of times you go there or on what you buy. Try this: small-size rather than super-size. Or bring your lunch to work one more day per week. Taking these little steps can add up to big savings.

poll results top financial new year's resolutions
Top financial resolutions people make according to creditcards.com.

3. Pay down debt
This one is a real challenge and offers perhaps the greatest feeling of satisfaction. My wife and I paid off three loans that had been weighing us down in 2012 and we aim to get rid of our last two in 2013. Take if from me, there is no better feeling than calling to ask for the payoff amount for a loan then telling the service rep, “Thank you – now help me make my final payment and close this account for good.”

Opinions differ among experts as to which debts should be paid down first. We’ve been following the debt snowball method made famous by Dave Ramsey. You pay off your smallest loan first by getting aggressive with extra payments. As soon as that debt is gone, add the minimum payment that you would have been paying on that loan to the payment you’re required to make on your next biggest loan until it’s paid off. Repeat that sequence until your debts are paid off.

With interest rates as low as they are currently, now is also a good time to see if you can renegotiate lower rates with your lenders. Be careful about consolidating debt. By bundling all your debt into one large loan, it’s possible to become overwhelmed and feel like you’re getting nowhere.

4. Save more
Don’t confuse this with spending less. What I mean by saving more is actually putting money away for you to use later on. The best way to get and stay motivated on this goal is to think of it as paying yourself. Ideally, you should be the one you pay first always. Anyone just starting out in the working world should make this a high priority. However, it can be really tough to do if you haven’t gotten serious about spending less or paying off some debt.

5. Get in touch with your investments
When friends or family members ask me for advice with their investments, I’m always amazed to find out how little they know about what they currently have. How much do you have? Where is your money invested? What sort of return are you getting? If you can’t answer those basic questions, getting answers should be a high priority.

Once you have a better idea of what you have and how it’s invested, do some digging to find out if it’s appropriate for your goals. Learn about investing in stocks, bonds and mutual funds and get intentional about how your money is invested. You can only work so many hours per week to earn money for yourself. If you’re investing wisely, your portfolio can become like a silent partner for you – earning money for you even on your day off. Trust me, if you ever plan to retire you cannot grow your investment portfolio too large.

Don’t have investments? Make it a goal. It’s easier than ever to invest your money and have it go to work for you. The most convenient way to get started investing is with your retirement plan at work. If you don’t have access to one, look into setting up an IRA (individual retirement account) or mutual fund account.

6. Educate yourself
Learning more about what you currently have is an important step, but don’t stop there. Learn about the stock market and what impact the decisions made by the numbskulls in Washington have on the market. Find a few blogs or websites to follow, starting with mine. I learned a lot about financial matters in college and my formal training but the real valuable lessons I learned by reaching, watching and doing. Expanding your knowledge about finances is a responsibility you owe to yourself.

Some resources to get you started:

How I reduced my debt burden with an auto equity loan

by @PaulFiarkoski

In December 2012 I called my credit union to ask about consolidating a loan we have elsewhere with a loan I already have at the credit union. The solution they offered surprised me: A cash out auto loan, whereby I send them the title for the truck I recently paid off and they loan me up to the blue book value at a very low interest rate.

autopawn image
Image property of autopawnamerica.com

Making a move like this is counter to the general advice offered by Dave Ramsey, whose wisdom my wife and I have been relying on in our pursuit of financial peace by eliminating all our debt. What I would tell Dave is that I’m not taking on more debt; I’m just changing the interest rate and to whom I’m repaying the loan. Besides, by having the loan with my credit union I can be “gazelle intense” in paying it off since I’m reminded of the debt every time I sign in to online banking and I can make extra payments with a couple mouse clicks. Truthfully, this is my real intent.

At first I was uncomfortable with giving my truck title back to the credit union since I had never heard of a loan like this. I wondered how it’s any different than an auto pawn business. In retrospect, it’s probably no different; however, the interest rate is much better than I could get with a pawn broker and I do have a lot more trust in my credit union.

Why is it that we always think the worst? “If I miss a payment, they can repossess my truck,” that voice in my head told me.

“You haven’t missed a payment on any loan for over ten years dummy; your truck won’t be repossessed,” the glass half-full voice responded.

I followed the voice of reason. As a result, I was able to borrow the same amount of money I owed on my other loan but at a much lower interest rate. The other loan was 18% interest and would have taken me another four years to pay off. The rate on my new loan is only 2.5%. The monthly payment is about five dollars more per month and if I make only the minimum payments each month, the loan will be paid off a year earlier. However, my wife and I are committed is to making double payments and paying the loan off completely by the end of 2013.

Provided we continue to be blessed with steady income and no big unforeseen expenses, I’ll have the title for my truck back in a year and we’ll be that much closer to our goal of being debt-free. Works for me!

Three reasons to say no to cell phone insurance

When I bought my daughter a new phone at Verizon recently, I was asked if I wanted insurance on the phone. The insurance would offer a replacement phone in the event it was damaged beyond repair.

As I began to do the quick math in my head, that little voice of reason that I’ve been hearing from a lot more lately promptly gave me three reasons to say no.

Say 'no' to cell phone insurance
Image courtesy of insuranceinfonews.com

1. Monthly Cost
The upfront cost for the insurance is $7 per month, or $84 a year. If the need arises, we can likely replace the phone with a used model from an Ebay seller for under $100. So unless she destroys the phone in the first two months, the insurance math just doesn’t add up.

2. Deductible
In addition to the monthly premium, if we need to use the insurance, there is a $100 deductible to get a new phone.

3. Obsolescence
The model of your phone will likely be obsolete by the time you need to use the insurance. Earlier this summer my daughter’s other phone gave out. Verizon didn’t have a “comparable replacement” so we ended up buying the exact model on eBay for about $60. We took it in to get the contacts transferred over and she was back in business.

There was a time when we felt it was worthwhile to pay for insurance cell phones. That was when the whole cell phone craze began and we had this fear of forking out a bunch of money just to maintain the ability to use our service. Now that cell phones are plentiful and we have been using them for a long time with no issues, I just can’t justify the cost of insuring them.

Tips for a productive household budget meeting

by @PaulFiarkoski

After seventeen years of marriage and countless arguments over money, my wife and I recently got serious about getting out of debt. We’ve been following the Dave Ramsey Total Money Makeover program where you take a series of steps with the ultimate goal of becoming completely debt free. First you cut out all frivolous spending and set aside $1,000 in savings. Then you start attacking all your debt from smallest loan to largest. After all your unsecured (no collateral) debt is paid off, you get aggressive with investing.

Pen and paper
For best results, take time to prepare for your household budget meeting.

One of the keys to cutting out frivolous spending is to hold a monthly budget meeting, presumably with your spouse. It’s a good idea for domestic partners and single people too. We’re prepping for our third monthly budget meeting and are really starting to see some results – mainly in the way of fewer arguments over money.

Below are some tips that we have found help us have successful budget meetings and outcomes. If you have questions, post them in the comments and I’ll respond the best I can.

Set some ground rules
Create some simple ground rules to review at the beginning of each meeting. You should read them out loud before getting into the money discussion. We have found it’s also good to pray before starting the money talk to get our heads and hearts in the right place.

Here are the ground rules we abide by:

  1. We’re a team and we’re doing this activity for a mutually beneficial outcome.
  2. It’s not about judging or finding fault; it’s about being responsible stewards with the gifts God blesses us with.
  3. Each will listen and respect the other’s feelings and opinions.
  4. We are not perfect and we won’t do it perfectly but we must get better over time.

Have an agenda
Make the best use of your time by sitting down with specific talking points and outcomes in mind. We use the same agenda from month to month. Below I have outlined the key things we talk about.

Track progress with net worth
Having been a registered financial consultant for over a decade, I learned that the best way to measure financial progress is net worth. Net worth is a pretty simple calculation; although gathering up the numbers can be a chore.

To calculate net worth, add up all your assets (what you own) and subtract your debt (what you owe). Include everything – home, cars, timeshares, retirement accounts, etc. On the credit side include all your debt, even credit cards and no short term furniture loans, etc.

Here is what we include in our net worth calculation:

Net Worth = Assets – Liabilties
Health Savings
Retirement account

Overdraft line of credit
Medical bills

Pulling together the net worth data takes some time, but talking about it takes only about a minute. What I do is gather up the data and have it all set to go in a one page report prior to the monthly meeting with my wife. Websites like mint.com simplify this monthly task by aggregating multiple financial accounts into one application. Many banks and credit unions now offer these online aggregation services too.

The idea is to look at your net worth on a regular basis to see if it’s increasing or decreasing. It’s sort of like using a scale to keep track of weight loss.

Wins and losses
Next, talk about what you did well last month from a budget standpoint. This can be a great opportunity to score brownie points with your partner if you approach it right. Focus on things each other did well, rather than spotlight ways where the other blew it. This doesn’t mean you should ignore obvious “withdrawals” of fiscal trust; just be careful in how you approach shortcomings on the part of each other.

Talk about things that pulled you off course.  If talking about who spent how much on coffee, nails, hair, etc. is likely to start an argument, consider making the decision that each of you get a set amount of cash each month to spend as you wish. Then take that cash out at the ATM and don’t hold each other accountable to it.

What’s coming up
Once you have made it through what will likely be the most emotionally charged part of the meeting, talk about what the next month looks like in terms of money coming in and money you need to pay out. I have found it helpful to use spreadsheet and plot out every day of  the coming month and what money we expect to receive or to pay out. It’s time consuming and sometimes painful, but it’s what you will do if you want to break out of a financial rut.

Agreed goals
Finally, close the meeting by reminding yourselves of the financial goals you have in common and discuss how you’re tracking to meet them. If you haven’t established any goals, consider starting with the baby steps that millions of debt-free Dave Ramsey followers have based their success on.

How often to meet
My suggestion is to have the budget meeting once a month for starters. Sit down in a distraction free environment at least an hour and talk it out. We get together on the back patio. Stay in constant communication with each other about the budget, especially when one of you is about to spend money that wasn’t part of the last budget discussion.

Don’t put it off
The only way to fail is to not try it. Feel free to use some of the ideas that have worked for us or create your own approach. I have also found some great resources on Dave Ramsey’s website.

How to save over $6,000 a year with your dishwasher

Photo courtesy of lifehacker.com
Not just a dishwasher.
Think of it as a money saving machine.
Photo courtesy of lifehacker.com

Nobody in my family of four likes washing dishes. Especially not me. But we still take turns getting them done. Our system for determining whose turn it is works a little like the game of “Not it!”

As with any modern family, washing the dishes at our house means getting the scraps into the trash or disposal then placing them into the dishwasher. Not that hard, but we still despise it.

Inevitably my turn comes up at least once a week. I’ve been on this ‘Financial Peace’ kick inspired by Dave Ramsey, so I’ve adopted a little mind game to make doing the dishes a little more bearable.

I tell myself that for every load of dishes we wash we’re saving about $30. It’s not a precise calculation, but here’s the rationale: Typically we drop around $50 every time we go out to eat as a family. I guesstimate that we spend about $10 to $15 on groceries when we cook a meal at home. Add to that another $3 to $5 for water, electricity and dishwasher detergent. If you’re an accountant, you can factor in depreciation of the plates, silverware and dishwasher itself, but I prefer to keep things simple. So basically, we spend $20 for a meal at home instead of $50 at a restaurant. Voila – $30 savings.

Consider how this example can play out over a year’s time.  We run the dishwasher four to five times per week. Cha-ching! I estimate: we’re saving $120 a week by washing dishes at home. Multiply that by 52 weeks in a year. That’s a savings of $6,240 over the course of year. Now that’s something I can get excited about.

Economics of running the dishwasher:

$30 savings per load versus not dining out
$120 saved per week at 4 loads per week
x 52  weeks
$6,240 potential savings per year

Okay sure, nobody eats out 100% of the time; I get that. The point here is for me to find reasons to overcome my dislike for doing the dishes. And I’m telling you that the belief that I’m saving $6,240 a year does it for me.

The takeaway: If your family hates doing dishes as much as ours, calculate the cost of the alternative – dining out – or use my numbers. Once you have convinced yourself that washing dishes at home more often is better than dining out, it will give you the will to step up and wash dishes a little more frequently. That goes a long way in boosting your credibility when you assign the task to others in the household.