The Envelope System

Now that you've made your budget, you'll want to make sure you stick to it and don't overspend. A great way to do this is to go on the envelope system. Basically, you'll be labeling a bunch of envelopes with different categories, putting in the budgeted money, and spending only that amount of money. There is something psychological about having all your cash out in front of you that makes you not want to let it go. In today's card-swiping culture, people don't really register the amounts of money they're paying. But on a cash system, paying for things hurts a lot worse. On average, people who switch to a cash system spend one-third less each year. Here it is in steps:

1. Budget each paycheck – I went over budgeting in my last post, so for more specific budgeting information, please refer to that.
   
2. Sort your expenses – There will be bills that you can't make envelopes for, like bills paid by check or automatic withdrawal. You can create categories for food, gas, clothes, and entertainment. Be sure to only create categories that it makes sense to pay cash for.
   
3. Put in the money – Now it's time to actually take all your cash and divide it up in your envelopes according to your budgeted amounts. For example, if you budgeted $250 for food, put $250 cash is the envelope marked "Food".
   
4. Once it's gone, it's gone – Once you've spent all the money you allotted for one category, you can't spend any more money in that area. If you go out and blow all your clothes money in one day, that's it. You won't allowed to spend any more on clothes for the month. That means no trips to the ATM to get more money.
   
5. Resist urges – While paying with debit cards doesn't usually land you in a pile of debt, they can make you overspend. Like I said earlier, paying cash hurts more than swiping a little plastic card. When you spend cash only, spending less and resisting impulse buys becomes a habit.
   
6. Give it time – It will take a few months for you to perfect your envelope system. Don't give up after a month or two if it's not clicking. You'll get the hang of it and see how beneficial the envelope system is as you dump debt, build wealth, and achieve financial peace! See ... simple!
   

Certainly, some bills may come in at different times of the month, so you'll need to adjust your written game plan to take it one step further. You need to plan the budget based upon your pay periods. Say that you get paid twice a month. If you can write down which bills you plan on paying from each paycheck, you will not be left with a surprise bill. Spend each month's income and each individual paycheck on paper before it comes in.

If you can afford it, and you and your spouse can agree on it, make an envelope just for money to have fun with! This fun money can be anything you want to be, and there are no rules on how you spend it.

Alright, so after you've got your envelopes and you've been using them for a little while, you discover you're spending less money in almost all categories. So what do you do with the leftover money? One option, probably the best one, is to take all the extra money at the end of the month and deposit it into an interest-bearing account, whether it be a standard savings account, a CD, a money market, or even an IRA. Also, if you need to you can take the extra money and add it to categories that need a little extra cash, but you should still be saving as much as possible!

Much of this article was written with information from Dave Ramsey's website. The envelope system is a key component of his Total Money Makeover system, which is worth a look.

The Total Money Makeover: A Proven Plan for Financial Fitness


 

The Importance of Budgeting

A budget is necessary for successful financial planning. The common financial problems of overusing credit, lacking a regular savings program, and failing to ensure future financial security can be minimized through budgeting. The main purposes of a budget are to help you:

• Live within your income.
  
• Spend your money wisely.
  
• Reach your financial goals.
  
• Prepare for financial emergencies.
  
• Develop wise financial management habits
  

The Budgeting Process

In order to make and keep a budget, you'll have to put in some time and effort, but in the long run it will be worth it. The most common budgeting mistakes people make are failing to save, never making a budget, underestimating expenses, and not planning for large costs (vacations, auto repairs, etc.). The cause of these problems is people believe creating a budget is just too difficult or they don't have enough time. To make it easier, you can break it down into steps:

1. Set Financial Goals
   

   I've said this before, and I'll say it again because it's important. You must set financial goals for yourself. Goals can help you build long-term wealth, and not having any can lead to financial disaster. Your goals should be specific, realistic, and have a definite time frame.
   

2. Estimate Your Income
   

   This one should be easy. Just add up all the income you get in an average month, and use that to start planning your finances. Be sure not to include any income that isn't guaranteed, like gifts, bonuses, and overtime pay. Budgeting income may be difficult if your earnings vary by season or are irregular. In these cases, try to estimate your income based on last year and on your expectations for the current year. Estimating your income on the low side will he;p you avoid overspending and other financial difficulties.
   

3. Budget for an Emergency Saving Fund
   

   Dave Ramsey says this a lot, and it's good advice. Everyone should have at least $1,000 in an emergency fund in case something completely random happens (your car breaking down, surprise hospital bills, your roof collapsing). Obviously, the bigger the emergency fund, the better. The size of your fund will be largely determined by your lifestyle and employment stability. The ideal emergency fund will be large enough to support you for about 3 to 6 months of no income.
   

4. Budget Fixed Expenses
   

   Pretty self-explanatory, but theses should be listed first because they rarely change. Things like a mortgage, auto loan, insurance payments are fixed expenses. Unfortunately, they're the hardest to bring down.
   

5. Budget Variable Expenses
   

   Another self-explanatory one. These expenses are harder to budget for because they fluctuate, or vary (see the correlation there?), often. Budgeting high for these costs is often a good idea. If you don't spend as much as predicted, you'll have money left over to put into other areas of the budget.
   

6. Record Spending Amounts
   

   Make sure you keep track of how much you spend on certain items so you can compare your actual spending to the amount in your budget. If you overspend, don't sweat it. When people overspend, they feel like they failed and end up stopping making budgets altogether. Just accept that you spent over your expectations, and try to do better next month.
   

7. Review Spending and Saving Patterns
   

   Budgeting is a circular, on-going process. You will need to review you budget periodically and perhaps revise it if your spending habits have changed.
   

Microsoft Excel (or Numbers on a Mac) is an invaluable tool for budgeting and financial planning. It can simplify the process, and make analysis a breeze.

Microlending: Support a Cause and Earn Interest Doing It

When people ask a bank for a loan, they usually have to provide collateral, prove steady employment, and have a fairly good credit history. But what about the people in developing countries who don't have any of those things? That's where microloans, very small loans designed to spur entrepreneurship, come into play.

Microlending was designed to help poor people in developing countries get access to capital to start small businesses, and is becoming increasingly popular. The site that got ball rolling, kiva.org, allows you to make very small loans to poor entrepreneurs in developing countries. With Kiva, you're allowed to pick the person you want to make a loan to, send the money ($25 minimum), get your money back, and repeat. But since Kiva is not a registered broker and is a non-profit organization, you'll get no interest on your principal. Even if you didn't make money off of your donation, you can feel good knowing that you helped some poor person in a far-away country make something of himself.

If you want to help people but make a little interest (1-3%) doing it, you'll want to take a look at microplace.com. Unlike Kiva, Microplace is a registered broker and you'll make interest off of your donation, which with this site is technically an investment. The minimum investment amount is $20 and you can increase that number to whatever you want to give. As stated earlier, the current interest rates range from 1 to 3 percent, beating many investments today. With Microplace, you won't be able to pick and choose from different entrepreneurs, but instead you'll pick different organizations to invest money with. I would suggest going for the highest interest rate, but as always with greater reward, there is greater risk. The repayment rate for both Kiva and Microplace are in the high-nineties, 97% and 96%, respectively. 

There is some debate, however, about whether or not microloans are actually helping the poor. You can read it about it here and here.

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Roth IRA vs. Traditional: Which is Better?

This is essential information to have for your future financial planning. So what's the difference between a Roth IRA and a traditional IRA? Both are great ways to save for retirement and offer different advantages, but both come with differnet financial consequences. And in case you didn't know, IRA stands for Individual Retirement Account.

Roth IRA:

Contributions are not tax deductible
No Mandatory Distribution Age
All earnings and principal are 100% tax free if rules and regulations are followed
Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
Available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually.
Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).

Traditional IRA:

Tax deductible contributions (depending on income level)
Withdraws begin at age 59 1/2 and are mandatory by 70 1/2.
Taxes are paid on earnings when withdrawn from the IRA
Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
Available to everyone; no income restrictions
All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception).

The difference between tax deferred and tax-free

The biggest difference between the Traditional and Roth IRA is the way the U.S. Government treats the taxes. If you earn $50,000 a year and put $2,000 in a traditional IRA, you will be able to deduct the contribution from your income taxes (meaning you will only have to pay tax on $48,000 in income to the IRS). At 59 1/2, you may begin withdrawing funds but will be forced to pay taxes on all of the capital gains, interest, dividends, etc., that were earned over the past years.
On the other hand, if you put the same $2,000 in a Roth IRA, you would not receive the income tax deduction. If you needed the money in the account, you could withdraw the principal at any time (although you will pay penalties if you withdraw any of the earnings your money has made). When you reached retirement age, you would be able to withdraw all of the money 100% tax free. The Roth IRA is going to make more sense in most situations. Unfortunately, not everyone qualifies for a Roth. A person filing their taxes as single can not make over $95,000. Married couples are better off, with a maximum income of $150,000 yearly.

You can open an IRA at a bank or a brokerage house. If you plan on holding stock or bonds in your IRA, it may make more sense to open one at a brokerage house.

401(k) Plans: The Basics

How much have you put away for retirement? Most people have not put away nearly as much as they need to retire comfortably. According to a recent study by the Employee Benefit Research Institute, less than half of employees have done even rudimentary retirement planning. So how do you get started, you ask? Your company's 401(k) plan is a great way to get the ball rolling.

So What is a 401(k)?
A 401(k) plan is a long-term savings vehicle that allow investors to defer income taxes until the money is withdrawn at retirement. Investors under age 50 can contribute up to $16,500 annually and investors age 50 or over can contribute $22,000 annually. Because 401(k)s are usually provided through employers, some of whom provide a match, workers are typically given a list of investment options they can choose from. But they generally can't buy individual stocks or bonds.

Growth and Withdrawals
Since 401(k) plans are usually invested in the market, they rise and fall like other investments. The average 401(k) grew, on average, 8.7 percent per year between 1999 and 2006, according to a 2007 study by the Employee Benefit Research Institute. But that was before the stock market collapse of 2008, which presaged a deep recession.
Despite the market's ups and downs, you can boost your retirement savings by simply leaving the money alone until you can start taking penalty-free distributions at age 59½ or later. Withdrawing before then will involve a 10 percent penalty on top of income taxes (which are generally due regardless of your age). Investors can take out a penalty-free loan against their 401(k), but they'll have to pay it back with interest.

Getting Funds Out
The simplest way to avoid penalties is to hold off on withdrawals until you reach age 59½ or later. You must start taking distributions by age 70½ unless you're still working. Consult IRS Publication 590 to determine the distribution amount. You can track Track your 401(k) progress with Bankrate.com's 401(k) savings calculator.

The Situation in Japan

Last Friday, northern Japan was hit by a massive 9.0 magnitude earthquake, from which it will be recovering for years to come. This quake was ranked as the fourth strongest in the world, and devastated the entire country. Nearly 2,500 people are dead and over 3,000 are missing as a result of the catastrophe. An estimated 2.5 million homes are left without electricity. Minimum estimate of losses of the quake, tsunami and fires total $100 billion, including $20 billion in damage to residences and $40 billion in damage to infrastructure such as roads, rail and port facilities. As a result of the earthquake, Japan's Nikkei 225 index plummeted 634 points Monday, the first full day of trading since the tragedy occurred. The threat of nuclear meltdown also looms; 3 of Japan's 54 nuclear reactors were critically affected by the quake, and the likelihood of a radiation leak caused a massive evacuation of the areas surrounding the plants.
On a happier note, 91 countries and regions have offered post-quake assistance to Japan as of Monday, in addition to six international organizations, according to the Japanese Foreign Affairs Ministry. $23 million has been donated to help fund the relief effort so far.
What can you do to help? You can donate through globalgiving.org, or text JAPAN to 50555 to have $10 automatically added to your phone bill and sent directly to the relief fund.

Which Bank is Right for You? Factors to Consider When Choosing a Bank

Your money is important. Without it you probably couldn't live, and that's why choosing the right bank is such a key issue when planning your finances. Several factors come in to play when deciding on where to keep your money.

Account types - some banks may offer only personal accounts, while others cater to both individuals and businesses.

Loans - not only do banks have account options, but many banks offer loan options as well. If you plan on buying a home or starting a business or going to college, many banks offer these loans in addition to other account services. If you're the type who likes to do all their financial business in one place, this can be quite convenient.

Credit card programs - some banks will offer different reward or benefit programs through credit cards unique to their institution.

Location - while all the factors are important in deciding on a bank, perhaps the most important issue is location. What good is a great bank if you cant get to it? Smaller banks have fewer locations, while the larger banks have many branches, as well as many ATM locations. However, in this digital age many people are turning to online banking services, so location is virtually unimportant since the bank's location is technically anywhere you can get an internet connection.

Bank type - there are two basic types of banks: commercial banks and credit unions. How do you decide between the two? Credit unions have fewer branches, but generally offer more services and better rates on savings and loans. They can also provide helpful investment ideas for you to get the most out of your money. The larger commercial banks can sometimes beat the credit unions in terms of rates, and they offer more locations. They also offer more business oriented services than the credit unions do. Banks are designed to make money for investors, while credit unions serve a particular area or community. You can find a more detailed explanation of differences here.

Obviously you'll want to go with the bank that can offer you the best interest rates, customer service, and best loan offers, but its tough to find that all in one place. Personally I bank with Regions, and have only had one negative experience to date. On the other hand, I have heard horror stories about their customer service.

Choosing the right bank doesn't have to be an impossible task, it just takes a little research. There are tons of sites like banktruth.org, gotalkmoney.com, and bankaholic.com that you can use to find the bank that caters to your needs.

Saving Money

Before you can start reworking your finances, you'll most likely have to start saving money to fund investments or to place in an interest-bearing account. Saving money is something everyone wants to do, and fortunately it’s something everyone can do. There are all kinds of sites dedicated to saving money and thousands of tips floating around. What follows is a list of tips from other sites I found to be most helpful to the average person.

1. Eliminate your debt first

Through the power of compounding interest, credit cards and other high interest debts can kill you financially. Perhaps the most important thing you want to do is get rid of all that debt that’s eating you alive. If you have a lot of debt spread out on several different cards and loans, you’ll want to tackle the lower amounts first. This will help you clear out the debt from the bottom up and will provide you with enough inspiration to handle the rest of it.

2. Stop using credit cards

Once you get rid of your debt you’ll want it to stay gone and not using credit cards anymore is a great way to do it. Start using debit cards and cash only. When you can actually see your cash being spent, it becomes a lot harder to let it go. If you need to use credit cards, exercise some self-control. It’s easy to let spending get away from you if you know you don’t have to pay the money right away. If you have trouble avoiding the temptation to use credit cards, leave a note in your wallet reminding you of your savings goals. Or freeze your card in a block of ice. It’s up to you.

3. Master the thirty day rule

Whenever you’re considering making an unnecessary purchase, wait thirty days and then ask yourself if you still want that item. Quite often, you’ll find that the urge to buy has passed and you’ll have saved yourself some money by simply waiting. If you want, you can even keep a “thirty day list” where you write down the item and the day you’ll reconsider it, but I prefer just to keep this one in my head – that way, I often just forget about the unimportant things.

4. Give up expensive habits, like cigarettes, alcohol, and drugs.

Those habits cause money to flow away from you with nothing in return. Call up your fortitude and work hard to kick the habits and you’ll find that money staying in your pocket instead of burning up and floating away. In addition to the financial benefits, you’ll find some great health benefits thrown in at no extra charge. Like being able to run a mile and waking up not feeling like your head is about explode.

 5. Be diligent about turning off lights before you leave

If you spend one minute turning off lights before a two hour trip, that’s the equivalent of earning $50 an hour. That’s some impressive savings, particularly if you do it before longer trips. The key is to use less energy, particularly when you’re not using the device.

6. Plan your meals around your grocery store’s flyer.

Instead of just planning your meals based on a cookbook or whatever you can dream up, plan all your meals around what’s on sale in your grocery store’s flyer. Look at the biggest sales, then plan meals based on those ingredients and what you have on hand, and you’ll find yourself with a much smaller food bill than you’re used to.

7. Get rid of your home telephone

This is a great way to save money. Many don’t do it because of the 911 service, and that’s understandable. But if you’re comfortable relying on a cell phone, there’s no reason to keep a land line. If you do, consider reducing your service to the minimum and only use the phone in an emergency.

8. Pass on extended warranties

A $129 two year extension on a $300 product is just not worth it. Warranties are insurance, and we rarely need to insure such a small amount.

9. Buy energy efficient appliances

Look for the Energy Star on appliances and consider the annual energy cost before buying. More efficient appliances cost more, but you make up the extra cost and then some over the life of the product.

10. Buy store brands

When you go grocery shopping, you can save a lot of extra money by simply buying the store brand instead of the national brand. In most cases the difference in quality is negligible, while the difference in price is dramatic.

There is a ton of more ways to save money; all you have to do to find them is google “saving money” and you’ll find a treasure trove of tips and ideas. To close, here are some not so ordinary ways to save money, courtesy of www.cracked.com.

10. Sleep in the airport

9. Separate two-ply toilet paper into one-ply

8.  Make your own cat food

7. Don’t eat on Monday

6. Don’t wash your clothes

5. Use your dryer lint as toy stuffing, insulation, etc.

4.  Make dog hair sweaters

3. Visit Mexican dentists

2. Make reusable panty liners

1. Skip on the embalming when a loved one passes away

You can find the full (profane, but hilarious) article here.

Steps to Success

Sometimes people’s spending can get away from them. They make purchases they’re sure they can afford or are talked into buying things they don’t need. Then, one day they wake up, they’re in debt, and they can’t see any way out. It’s around this time that most people admit they have a serious issue and need to make serious changes. The biggest problem most people face is not knowing where or how to get started. Outlined in this article are some general steps you can take to start reshaping your finances.

Step 1: Analyze your current financial situation

Looking at your current situation will allow you to determine just how much you’re spending, how much you’re making, and how much you’re saving. Knowing these cash inflows and outflows will help you build a foundation for your future planning. A good way to do this is to write down everything you spend and earn for a solid month. A daily spending diary will help you keep better control of your money and  will provide a list of your current expenditures, which will come in handy for budgeting.

Step 2: Set Goals

The key to setting goals is to make them realistic and attainable. One of the main reasons people quit on themselves when striving towards goals is that they often strive for too much, too fast. There are some general goals that anyone can have, such as “I want to save X amount of money by this time next year”, but you will have to set specific goals that you want to follow. For example, maybe you want to save up for a new car, or start saving for retirement, or pull yourself out from under a load of debt. Whatever your own personal goals, keep them realistic and stick to them. If some of your goals seem downright daunting, make them long-term goals and allow yourself a few years to reach that point. Financial success takes time, and rarely happens overnight.

Step 3: Identify your course of action

Now that you know where your money is going, you need to take a step back and see how you can make changes to start working towards your goals. You may consider taking on a second job to rake in more income to pay off loans faster, or maybe you need to go back to school to become more valuable in the job market. Sometimes it can be as simple as finding a higher yielding savings account so your money can grow 

faster.

Step 4: Budget

Perhaps the most important thing you can do when changing the way you spend is budgeting. If you have an idea of how much you spend on certain things, or wrote down a month’s worth of spending, you can start to limit how much you want to spend and start to increase the amount you can save each month. Budgets are not set in stone, and it’s okay if you spend a little more, and great if you spend a little less!. So if you don’t stick the budget exactly, don’t beat yourself up about it, but do make efforts to bring your spending back down. There are a number of sites that can help you make and stick to a budget. A great free site is www.budgetsimple.com.

Step 5: Take Action

Now that you have a path to follow and the tools to get there, it’s time to get to work. This step involves developing an action plan that identifies ways to achieve your goals. For example, you can decrease your spending to increase your savings, generate extra income by spending extra time on the job or by picking up a second one. If you’re concerned about year-end tax payments, you may increase the amount withheld from each paycheck, file quarterly tax payments, shelter current income in a tax-deferred retirement program, or buy municipal bonds. Implementing your plan takes time, and you may need to enlist the help of a professional. For example, you may use the services of an insurance agent to buy property insurance, or the services of a broker if you decide to purchase stocks, bonds, or mutual funds.  Whatever plan you choose, stick to it!