Category Archives: Finances

Invest in Yourself in 2017


Invest in yourself in 2017



How to Pay Off Your Mortgage in 3 years



ANALYSIS: Sean Cooper’s story has gone viral. At the age of 30, he paid off his $255,000 mortgage in 3 years and 2 months. I spoke with Sean a few years back and trust me he has always been financially savvy and very frugal. But it was more than that. He was driven by a deep desire to free himself from the stress and risk of carrying huge amounts of debt. Kraft Dinner became his meal of choice, he worked three jobs, there was literally no travelling, he brown bagged it for lunch and actually lived in his basement apartment while renting out the balance of the house. We are all in awe of him and yet there were sacrifices he made that many say they simply couldn’t or wouldn’t consider doing.

People are looking for a little more balance in their life, but can they afford that luxury? In a recent report from the Canadian Centre for Policy Alternatives, 1 in 10 homeowners younger than 40 would be under water on their mortgages if real estate prices crashed. It is estimated that 260,000 Canadians would see their net-worth wiped out if home prices dropped 20%. Canadians in debt in their 30s carry an average of four times their incomes, with those living in Toronto, Vancouver and Calgary the most vulnerable.

It doesn’t have to be all or nothing. There might be a balance to accelerating the mortgage burning party.

Here are a few tips to retire your mortgage faster –

1) Accelerate to bi-weekly payments – every 2 weeks for 26 payments per year. A $300,000 mortgage at 3% over 25 years will cost $125,920.44 in interest. Increase your payments to bi-weekly, and you will shave nearly 3 years off your amortization schedule and save just over $16,000.00 in interest.

2) Make a lump sum payment once a year. An annual lump sum payment of $250.00 on a $400,000 at 3.5% over 25 years combined with bi-weekly payments results in decreasing 3.5 years off your amortization.

3) Put “found” money, and that includes gifted money on the mortgage. Little amounts chip away and could save you years. Use RSP refunds to pay down principle.

4) Consider rounding up your mortgage payments – if you pay $457.00 a month, round it to $500.00 and combine it with bi-weekly payments. You won’t really notice the difference and the savings are huge.

The following few tips came from Sean himself:

5) Shorten your amortization period. By shortening your amortization from the standard 25 years to say 20 years, your mortgage payments will be slightly higher, but you’ll save a boatload of interest.

6) Pay your mortgage as if mortgage rates are higher. By upping your mortgage payments as if rates are 3 percent higher, you’ll be prepared if interest rates increase when your mortgage comes up for renewal.

7) Do shop with a mortgage broker. Your local bank branch may not give you the lowest mortgage rate. By shopping with a mortgage broker, you’re more likely to get the lowest rate. A mortgage broker is compensated directly by the lender, so you won’t pay anything out of pocket.

8) Do consider other factors besides just the interest rate. The lowest interest rate isn’t always the best mortgage. A slightly higher interest rate may offer you perks, like more generous prepayment privileges.

9) Do understand mortgage penalties. Chances are when you sign up for a mortgage you don’t intend to break it. But sometimes life happens – you get sick, lose your job or get divorced. If you decide to sell your home, you could face a hefty mortgage penalty. Ask about mortgage penalties before signing up for your mortgage. Find out whether your mortgage is portable.

10) Bottom line: if you picture yourself mortgage free, then arm yourself with the right tools and strategies, to transition to being debt free and enjoy the freedom Sean Cooper is experiencing that much sooner.

6 Reasons Not to Be Ashamed of Your Frugal Ways


Our society does a great job of labeling people that are different. Take a look at this great article from Yahoo that discusses the importance of FRUGALITY.

6 Reasons Not to Be Ashamed of Your Frugal Ways

A lot of people cry broke and whine about never having enough cash to get by, yet they’re not always willing to do what it takes to free up cash and save money. Being a frugal person is hard work. And if frugality doesn’t come naturally for you, resisting impulse buys can be a daily struggle, and you may go back-and-forth with whether to spend money on an item.

At the end of the day, a frugal mindset benefits your bottom line. So, while others may make you the butt of their money jokes, here’s why you’ll eventually have the last laugh.

1. This is who you are

We all have different money personalities. Some people are big spenders, whereas others hold onto a dime as if they won’t earn another. To each his own.
Just know that there’s a difference between frugal and cheap. Cheapness can affect the quality of your life, but frugality lets you enjoy the same qualify of life for less. Those who like to spend money might pressure you to loosen the purse strings. But if you’re not bothered by your spending habits, you don’t have to change your ways.

2. You don’t care about keeping up

If you’re committed to being frugal, chances are you don’t feel pressure to keep up with the Joneses or anyone else for that matter. We live in the age of financial peer pressure. This is a big problem in some social circles. If one friend buys a house, then the others are ready to upgrade. If someone wears designer clothes or buys expensive gadgets, then the others have to follow suit. It’s an exhausting cycle that not only reveals an impressionable mind, it keeps people broke.

3. It’s a financial necessity

Others might pressure you to spend money or make comments about your frugal ways. But if you’re frugal out of necessity, there’s no reason to be embarrassed or ashamed, especially since you’re willing to sacrifice more than a lot of people.
When dealing with money problems, some people want to save face, so they don’t make adjustments to their lifestyle. They continue with old habits, even if it further complicates their situation. A frugal person, on the other hand, does whatever it takes to save money so they can keep a roof over their head, food on the table and clothes on their back.

4. You might have a bigger bank account

This isn’t a guarantee, but if you choose not to spend your extra income, you’ll probably have a bigger bank account than those who poke fun at you. So, the next time you feel ashamed or pressure to adjust your frugal mindset, look at your savings account and consider how most Americans don’t have enough in their savings to handle a small emergency.

5. You can reach your goals sooner

You might have a long list of financial goals, but without a lot of extra money, it can take years to fulfill these goals. Being frugal speeds up your progress. If you reduce spending and free up cash in your budget, you’ll have income to pay off debt, save for vacation or prepare for retirement.

6. You’re teaching your kids good money habits

Kids often mimic the money habits of their parents. Remember this the next time you start feeling embarrassed about your frugality. If you’re an irresponsible spender, your children could imitate this behavior in adulthood with long-term financial consequences.

10 Ways That Too Many People Throw Money Away by Ed Clark


Take a look at the list and see where you can FIND some money!!! I must admit that I am guilty of doing some of the things on the list.

There are all sorts of ways to cut spending and boost your savings, and there are just as many ways to sabotage your own finances. In addition to missing out on money-saving discounts, making unwise shopping decisions, and purchasing unnecessary items, you might also be throwing your money down the drain for no real reason at all. Often, all it takes is a little effort and organization to fix the problem. But first, you need to be aware of all the ways your money is being wasted. The list could go on and on, of course, but here are 10 ways consumers repeatedly throw their money away.

1. Never redeeming gift cards

Even if you don’t want your gift card, at least give it to someone who will use it. American households also average $300 in unused gift cards, and nearly half of recipients do not use the full value of the card. Don’t be the person letting these dollars go down the drain.

2. Letting Groupons expire

According to Yipit, roughly 15% of Groupons go unredeemed by the time the expiration date rolls around. Make a note of your daily deal coupon’s expiration date to ensure this doesn’t happen to you. And if your Groupon does expire, you can still get some value from it. The digital coupon should retain its face value at the organization for at least five years.

3. Buying tickets and not showing up

4. Paying late fees

Even small late fees add up quickly. This can include everything from overdue library books to Redbox DVD rentals to late payments on utilities or credit cards. To avoid incurring late fees on your credit card, suggests paying far ahead of your due date, changing your payment due date if possible to coincide with your payday schedule, scheduling automatic payment, or setting a reminder for yourself. If you are hit with a late fee after all, call customer service and ask to have the charge waived. On your first offense many companies are willing to let the late fee go.

5. Paying banking fees

It seems like every year banks come up with new ways to nickel and dime their members. Between minimum balances, fees for checking accounts, and ATM fees, these charges can add up. No one should have to pay for basic banking services. Many are having better luck avoiding these unnecessary fees after joining a local credit union. Credit unions typically offer free checking accounts and savings accounts with better interest rates. If you find yourself frequently out of cash and paying charge after charge from ATMs, instead get into the habit of getting cash back from debit purchases when you are out grocery shopping.

6. Not returning unwanted goods

It’s easy to let unwanted items or gifts just sit there in the closet, but with a little effort, you could be getting money back in your pocket. Even if you are past the return date, give it a try anyway. You may be able to at least get store credit. For online purchases, many retailers even cover the cost of shipping for returns. CBS News compiled a list of stores with generous return policies, such as Walmart, Target, Costco, and Kohl’s. Some retailers will even take returns without a receipt.

7. Failing to ask for a refund

Consumers who are dissatisfied with their service often don’t take the time to voice their concerns. Those people that do, however, could end up with a full refund or at least a discount. If you have a bad experience with a hotel, auto mechanic, cell phone carriers, or hairdresser, to name a few, don’t be shy about speaking up.

8. Never disputing mistakes on a bill

If you think your bill may be incorrect, it’s worth disputing the charges with the company. At most respectable businesses, the error will quickly be corrected.

9. Forgetting to follow up on a rebate

The sneaky thing about mail-in rebates is they are designed to be so complicated that consumers either forget to mail them in or do so incorrectly.

10. Not claiming money that’s yours

Every year, unclaimed money is reported by the government, and rightful owners are encouraged to step forward and claim their funds. Find more information about unclaimed money from the government

42 Ways to Radically Simplify Your Financial Life


If you are looking for ways to start your 2016 off the right way here’s an article by Adam Baker with Man vs. Debt to get you started on the right track:

The heart of simplicity is in exploring, finding what works for you, and purging the rest.  With that in mind, here are 42 ideas to help push you down the rabbit hole:

  1. Focus on one financial goal at a time. The average person seems to always be juggling paying down debt, building an emergency fund, saving for retirement, coming up with a down-payment, college, weddings, kids…  ugh.  Instead, try passionate focusing your intensity on one goal at a time.  If you’re attacking debt, attack debt.  If you’re saving for a down-payment, start stockpiling.  Simplify, focus, and prioritize.  Build on your momentum.  Once you knock out one, plow through the next.
  2. Consolidate accounts. I seriously doubt you need 2 savings, 4 checking, and 3 separate retirement accounts.  It’s no wonder people get lost tracking their finances.  Shoot for 1 of each.
  3. Combine finances if married. This battle has already been publicly fought here and on other blogs.  My preference is clear.  Invest the time upfront to create 1 account of each type, 1 set of goals, and 1 financial life.
  4. Cancel your credit cards. Yeah, I said cancel.  While you’re at it burn the evidence (in the most environmentally friendly way, of course).  Lower risk of identity theft, less financial accounts, less miscellaneous and erroneous fees, and cleaner reviews of credit reports.
  5. Freeze your credit reports. For those committed to a life without credit (or those who won’t need it for awhile), freezing your credit report can save a lot of headaches.  A freeze limits access to your report, making it much more difficult for anyone to compromise your identity.  Most states charge a fee, although a couple offer it for free.  You can even do it all online.  It doesn’t get any simpler than that.
  6. Budget using pen & paper. I’ve recently adopted this practice and I absolutely love it.  My new theory is if you can’t generate a simple budget with pen & paper…  your budget is too complex.  This forces you to use broad categories and encourages you to lower your spending/monthly commitments.  Also, physically writing out your budget is a much better demonstration of comprehension than staring at fancy computer software.
  7. Budget using last month’s income. This popular budgeting hack is effective for three reasons.  First, it implies that you’re a month ahead of you bills, meaning you have a least a small cushion.  Secondly, it solves the problem of budgeting for irregular income.  Third, because it can’t change, it lends itself easily to zero-sum budgeting or the process of allocating each dollar to a specific category at the beginning of the month.
  8. Use cash.  Try adopting cash for your discretionary spending.  The key to cash is to make the process as intimate as possible.  Using physical envelopes that represent your spending categories is a fantastic way to make your budget tangible.  It doesn’t get more simple than looking down to find $4 left in the “Entertainment” envelope.  Don’t mistake convenience for simplicity.  They aren’t always the same thing.
  9. Batch bill paying. The goal of this idea is to pay all the scheduled bills for the month on the same day.  I do this with our student loans.  It can be hard to do with some bills as due dates can be spread out.  However, the far majority of vendors are more than happy to take your payment a couple weeks early.  This is especially easy if you are budgeting based on last month’s income.
  10. Leverage calenders. If batching your bills doesn’t work well for you, set up a bill calender for a simple visualization of the month.  Most calenders can send auto-reminders to ensure you don’t miss a regular payment.
  11. Track your spending at the point-of-sale.  Carry a notebook.  Tap it into your iPhone.  Use whatever strategy you want, but do it at the point-of-sale.  There’s a big difference between auto-syncing your spending into budgeting software and physically logging your spending.  Tracking in this way enforces your positive spending patterns and causes you to think twice about your impulses.  With limited practice this habit becomes second nature.
  12. Experiment with spending hacks. Implement “No Spend” days. Try fasting from different common purchases (no television for a month, no daily Starbucks for a week, etc…).   Give yourself time to adjust and test whether those reoccurring expenses are really worth it.  Add any of your “must-have-it-now” purchases to a 30-day list.  Only purchase those that are still “must-have” after a month.
  13. Stop thinking monthly.  When purchasing big ticket items, stop thinking about the monthly payment.  Think, negotiate, and buy based on total or lifetime cost.  This goes for contracts as well.  What’s the total price?  Once again this will lead to less impulse spending, less useless clutter, and, of course, less monthly payments.
  14. Automate the flow. Take advantage of online bill paying services. Direct deposit your paycheck.  Ensure your accounts are properly linked.  That being said, I’m not a huge fan of automatically paying your bills.  Streamline it so you can pay with the click of a button, but I choose to maintain control of authorizing the payments each month.  This allows me to scrutinize bills and notice erroneous fees or changes in service.  There is such a thing as too much automation.
  15. Go paperless. Authorize vendors to issue online billing as much as possible.  Scan and keep digital copies of any important paperwork.  Reduce your junk mail.  Good for the environment, even better for your sanity.
  16. Insure adequately. Invest the time upfront to understand your insurance coverage.  Know at least the very basics of your policy and how it works.  Stop making excuses and buy health insurance.  Life, home, auto, long-term disability, make sure you cover your bases.  When the time comes to use it, you’ll life with my 1000 times more simple.  By the way, this include having a basic will.
  17. Package services. Speaking of insurance, package all your insurance needs with one company.  This means less contacts, less confusion, and usually will save you money anyway.  Look for ways to do this with other services like communication.  At the same time, don’t ever get an add-on you don’t explicitly need.  Package your needs before you start shopping.
  18. Pay for regular services in advance. For any service you pay monthly, check to see if you are able to pay in advance.  Often times you can pay for 3, 6, or 12 months.  This not only is simpler in terms of paying less often, but almost always results in a discount.
  19. Cancel all subscriptions. Subscriptions, especially the small ones, can really sneak up on you.  Rather than pick and choose, cancel any of them you can and start from scratch.  Be ruthless.  Don’t re-subscribe easily, even if it’s free.
  20. Quit signing contracts. Cell phone contracts, gym memberships, and even long term leases are common examples.  Stop signing this crap.  Negotiate, pay in advance, or explore alternatives.  I’ve adapted this principle with great success in the last year.  Only sign contracts on the most essential needs in your life.  Almost everything else has several other option.
  21. Fund an emergency fund. This is most important for peace of mind.  If you don’t have one of these, you have no idea what sort of stress release it is to have this in your back pocket.  It’s changed our complete mental approach to our finances.  We treat our fund as another form of insurance.  We don’t fret about interest rate or optimization.  It’s just there to help spread the risk of something unexpected.
  22. Become 100% debt-free. Including the mortgage.  It is so liberating.  I know how much more simple my financial life is now without my consumer debt.
  23. Consolidate high-interest debt. Be careful.  Normally, I vehemently oppose consolidation.  9 times out of 10, people use this as an excuse to transfer responsibility.  They consolidate and then fall right back into the same trap.  However Matt Jabs recently consolidated his high interest debt using Lending Club.  He’s proven there are exceptions to the rule as he’s now more passionate than ever.  In his case, he’s simplified it into one source and is saving a lot of interest in the process.
  24. Create artificial scarcity. This is more commonly referred to as “pay yourself first.”  The theory is to automatically transfer a portion of your income to savings and budget on the rest.  Basically, it is prioritizing your goals.  The theory is great, as long as you actually spend less than your earn.  There’s no reason to pay yourself first, if you’re going to overspend and continue to plunge into debt.  When done correctly, though, this ensures you’re accomplishing even your “boring” financial goals.
  25. Simplify your investments. My theory when it comes to investing is that if you can’t provide a quick summary of what your investing in and how it works…  you shouldn’t be investing in it.  You don’t have to become a financial planner to know the basics of what your money is doing.  And, yes, you can simplify, while still maintaining diversification.  The two aren’t mutually exclusive.
  26. Buy and hold. Stop trying to time the markets.  There are very few exceptions and you aren’t one of them.  Neither is your cousin’s new inside “opportunity.”  This game is an emotional roller coaster and the stress it causes is the exact opposite of everything that is simple.
  27. Do it yourself. Simplicity isn’t just doing whatever takes less time.  There is simple virtue found in embracing sustainability, creating your own products from scratch, cooking at home, and learning the skills to repair instead of replace.  At the same time, don’t be afraid to…
  28. Outsource tasks.  The truth is learning the skills it takes to be self-sufficient takes time and practice.  Some people are better off focusing their attention on tasks that offer more value.  More importantly, there are some things best left to trained professionals.  Outsourcing makes sense when it will increase the quality, while saving time, stress, and money.
  29. Create a list of everything you own. I’ll be honest.  Creating the list, itself, isn’t simple.  Actually, it’s pretty hard.  But the process of creating this list is sure to stimulate a quest for simplicity.  It’ll be a wake-up call to consume less, spend less, and own less.
  30. Sell half of the list within the next two weeks. Here’s where things get interesting.  Making a commitment like this will spark a wave a simplicity in multiple areas of your life.  Not only will you generate some cash, but you’ll be saving maintenance, upkeep, and potentially storage costs for all your unused junk.  This also increases productivity as it spills into other areas of your life.
  31. Get rid of 2 items for every 1 you buy. Once you’ve simplified your consumption habits, it’s important to take measures to maintain them.  Adopting this policy will help control your spending, encourage you to borrow before you buy, and shift your focus from possessions onto experiences.
  32. Embrace alternative transportation. Ditch the cars.  Research public transportation.  Try the buses, trains, or subways.  Move closer to work, so you can bike.  Walk if at all possible.  In addition to the potential health benefits, you get to bypass car payments, repairs, registration, plates, gas, insurance, etc…
  33. Become a one-car family. Alright so you have to be able to drive.  Whatever.  More and more families these days are making the jump to a one car.  Whatever you do, you’re going to be hard pressed to explain how having 3, 4, or more vehicles is necessary (not all that uncommon).  Go ahead and try, I’m all ears.
  34. Buy a smaller car. Less upkeep and usually more efficient anyway.  Don’t read this incorrectly, though.  This doesn’t say “buy a new car.”  You can find dependable, late model, compact cars.  In fact, they are all over the freakin’ place.  You might have to look at more than just one website, though.
  35. Rent. Avoid the number one killer of financial simplicity… a house.  Two years ago, I would have been shot on sight for this suggestion.  These days, examples of buying too soon, too much, or too many are all around us.  I’m a fan of home ownership, but you’ve got to be 100% ready for it.  It’s adds an enormous amount of complexity to your financial life.
  36. Consider a condo. A condo could be an option if you’re just dying from house fever, but are looking to stay as simple as possible.  Obviously, buying a condo is just as dangerous (if not more so) than buying a house.  It still requires 100% commitment and offers a different set of challenges.  However, it’s often easier to budget for “association fees” than it is to account for all the ups and down of maintaining a single-family home.
  37. Buy less house. Finally, if a house is a must, consider buying less.  One of the biggest problems with leveraging credit to purchase a home is the temptation to buy so much more than we need.  Remember, bigger home means higher maintenance, insurance, and mortgage.  Don’t forget you’ll need more crap to fill it up.
  38. Simplify your income sources. Multiple streams of income sound great, but pursuing too many options at one time can stifle them all.  I suggest having one primary and one secondary source at any one time.  If you’re working a full-time job, trying to buy and sell on e-bay, launching your blog, and delivering pizzas on the weekend…  stop.  Choose one of these side pursuits and focus your energy.  You’ll simplify your life and most likely have more success anyway.
  39. Discover what you do well… and do it more. If you’re an employee, search for whatever delivers the most value for your employer.  Once you find out, replicate it as much as possible.  Playing to your strengths will fast track your progress, as well as your satisfaction.  As an entrepreneur, you’re goal is to find out what unique value you provide that your competitors don’t.  Whatever extra value you offer, focus on that.  Stop trying to be everything to everyone and just be something to someone.
  40. Learn to negotiate. Many of the tips above will be much easier to implement when you become comfortable with a certain level of negotiating.  We all negotiate in one form or another.  It pays to learn some basic strategies to help you understand and deal with other people’s wants.
  41. Filter your financial advice. Experiment with different forms of inspiration.  Find what sources click with you and which don’t.  Hone in on those that offer value and throw away the sources that don’t speak to a part of you.  Take the best parts of all the guru-system out there and craft your own.  Once you find a system that works, cut down the noise and focus on it.
  42. Simplify other areas of your life. Eat Less. Passionately pursue only one hobby at a time.  Remove clutter work environment or office.  Simplicity is viral.  Come drink the kool-aid.

How to start your 2013 off the right way with a financial plan!


Financial independence is a slippery idea.

It is hard to define. A simple Google search yields a fantastic amount of, sometimes contradictory, definitions. The best one, in my opinion, tells us that financial independence is when you have sufficient personal wealth to live indefinitely without having to work actively for basic necessities. Financial independence is even harder to put into practice; but it is not impossible.  It is much easier when you realize that becoming financially independent and amassing wealth is a slow process that takes time, self-discipline and most importantly a plan.  You must be consistent, create good habits to cut your everyday expenses, generate extra income, and put money into some of the following standard investments (i.e., stocks, mutual funds, bond, real estate, etc.) that can be beneficial to you now and in the future. With your time and effort what you are doing is developing a strategic plan that will begin to look like something. So now 2013 is here and you are wondering what steps you are going to take to start your 2013 off the right way to become financially independent with a plan, here we go: Create a plan and make sure you stick to it with. NO EXCUSES!  Before you create a plan make sure you understand the difference between Gross Income and Net Income. Gross income is your salary- the total dollar amount your employer agrees to pay you over a given time period. Net income is what you take home- the amount you earn after your employer makes deductions for taxes and benefits.  People make a huge mistake of budgeting from their gross income when they should be budgeting off of the net income. You must create your financial plan from your net income.  Having a financial road map that is generated from your net income will help you prepare your plan with numbers that will keep you out of trouble and make sure you are not unrealistically assuming you have money that you don’t have.  A financial plan based on your net income will also help you figure out how much you’ll need to retire and then help you determine how you’ll hit that goal on a weekly, monthly, and yearly basis. The goal of your financial plan is to look at where you are today and where you want to go. Then it sets out all the steps you need to take to get there: helping you create a budget, track where your money is going and reevaluate if your money is being spent strategically to help you attain your financial goals (being knowledgeable about how every dollar is spent, saved, or invested is crucial for staying on track). You will also need to make sure you understand how much you will need to retire. You can do this by talking with professionals or, if you are like me and pinch every penny, you can use free websites and calculators. You can type “How much do I need to retire” into Google. I believe that when looking to create an effective, efficient and compelling financial plan you need to identify and be specific with your financial goals.  Financial goals need to be created using the SMART system (Specific, Measurable, Attainable, Realistic, and Timely).  It’s not enough to say that you want to create an emergency fund you need to use SMART and say I want to create an emergency fund and have $7,500 in it by the end of the year by saving $150 out of each paycheck.  Being as specific as possible will make your financial plan realistic by putting measurable goals into the forefront of your plan. Not having a financial plan is not acceptable. Remember it is not about getting rich it is about becoming wealthy (on your own financial terms) and doing more with what you have. If you have no plan you have no progress. Not having a plan will create stress in your life. You’ll likely have more worries about money, you may not know where you are today or how to plan ahead, you could even lose control of your spending and fall behind on your bills, etc. So remember you would not take a long road trip without a map. In the same way, you need a road map for your financial future. A financial plan looks at where you are today and where you want to go. Then it sets out all the steps you need to take to get there. I hope the content above helps you start your 2013 off the right way with a financial plan.

The best way to start saving


People think that there is some magic bullet to start saving but I’m here to let you know that there is no magic bullet when it comes to saving.  Saving money is not easy, but it is essential to achieving financial well-being and securing your future. Honestly it’s about setting realistic goals, prioritizing how you’ll manage your money and sticking with it. Below are some ideas to get you started with saving without feeling pressured.  It’s important to understand the difference between Gross Income vs. Net Income, creating goals: short and long term goals, creating a simple budget, saving (ER fund, 401K, IRA, etc), paying off debt, and enjoying life.

 1. Gross Income vs. Net Income:  People really need to understand the difference between Gross Income vs. Net Income before   they start creating a budget, saving and paying off debt. Gross income is your salary, the total dollar amount your employer agrees to pay you over a given time period. Net income is what you take home: the amount you earn after your employer makes deductions for taxes, benefits, etc.  People make a huge mistake of budgeting from their gross income when they should be budgeting off of the net income.

2.  Create Saving Goals:This is important to understand why and what you are saving for and how much you will need to achieve your goals.  Creating short and long-term goals will get you pumped and motivated about saving.  Short-term goals (1-5 years) may be: family vacation, buying a new car, buying a video game system, paying off small debt amounts.  Long-term goals (5 years-longer) are saving for retirement, buying a house, having a baby, paying off large debt amounts, becoming financially independent.

Your circumstances do not matter. It is important to realize  your goals and start saving for those goals.  Once your goals are identified you can begin making your dreams a reality. When your goals are clearly defined on paper you are more likely to make those goals come true.  Remember to start small and build up from there.  With goals outlined and attainable it will make it easier than you thought to save and achieve those goals.

3.  Simple Budget: It is crucial to create a simple budget to track your income and expenses.  My budget consist of no more than two columns in an excel spreadsheet:

                                            a)      Income

                                            b)      Expenses

Your budget may change throughout the year due to circumstances outside of your control.. I really enjoyed the following website about simple budgets:

4.  Make saving automatic and effortless:  You should start out by saving a minimum of 5% of your income and make it automatic; the more you can save the better.  My savings are automatically taken from my paycheck so I don’t have to think about it.  Paying myself before I pay anyone else is an important concept to understand. The benefit of making your savings automatic is that you don’t see it; therefore you don’t miss it.  I have been using IngDirect to do this since 2002. Remember it’s not how much you save. It can be $5, $10 or $15 every time you get paid. It’s about making it automatic and effortless so it becomes a habit.

  1. Emergency fund: This is where you should first start. I recommend saving enough money to cover your basic living expenses for three to six months. The money in your emergency fund should be kept in an easily accessible savings or money market account so it is easily accessible if an emergency was to occur.  It is important to only use the money set aside in your emergency fund in the event of an emergency, such as your car breaking down, receiving unexpected medical bills, losing your job etc.
  2. 40lK or 403b Plan: If your employer offers a retirement savings plan, such as a 401(k) or 403b plan, sign up and contribute all you can. Your taxes will be lower, your company may kick in more, and automatic deductions make it easy. Over time, compound interest and tax deferrals make a big difference in the amount you will accumulate. Find out about your plan. For example, how much would you need to contribute to get the full employer contribution and how long would you need to stay in the plan to get that money.
  3. Roth/Traditional IRA: You can put up to $5,000 a year into an Individual Retirement Account (IRA) and you are allowed to contribute more if you are 50 or older. IRAs provide tax advantages. When you open an IRA there are two options:  a traditional IRA or a Roth IRA (you should talk to your financial advisor or research which  one is best for you based on your income). The tax treatment of your contributions and withdrawals will depend on the IRA you select. IRAs can provide an easy way to save, you can set it up so that it can be  automatically deducted from your checking/savings account and deposited into your IRA.
  4. Investing: If you are thinking about investing I believe you need to think about  how to buy rather than what to buy. You should understand that investing is risky and you can’t eliminate that risk but you can become an educated investor who makes informed decisions. Being educated about the market allows you a margin of safety and a cushion in case events go against you. Once you start thinking about investing in stocks, bond mutual funds, your first steps should be to talk to a financial advisor. You need to understand what type of investor you are and what risk you are willing to take.

5.  Paying off Debt:  Paying off debt is definitely going to mean making sacrifices and going without sometimes. It’s the sacrifice you make to live debt free. As a debt-free individual I can’t tell you how much pleasure I get from having no consumer credit card debt or student loan debt. It creates so much happiness and freedoms that you don’t get to experience with having credit card debt.  It is important to pay more than the minimum payment each month. Paying the minimum of the outstanding balance only prolongs the torture of paying the debt off.  The longer you keep your credit card debt the more you become best friends with the banks that you owe and of course the more you will owe them. The system that I used to eliminate my debt was simple I used the snowball elimination:

  1.   I listed my debts from lowest balance to highest balance and I created a timeline of when I wanted to have the debt paid off;
  2. I called my credit card companies on a monthly basis to have them lower my interest rate (most of my cards had an interest rate of 6.99% or lower);
  3.  I designate a certain amount of money to pay toward debts each month;
  4.  I paid the minimum payment on all debts except for the one with the lowest balance;
  5.  I threw every other penny I possibly could at the debt with the lowest balance;
  6. When I eliminated that debt, I did not alter the monthly amount used to pay debts, but what I did was threw all I could at the debt with the next-lowest balance;
  7. This method allowed me to become DEBT-FREE.

*While trying to become debt-free remember to try and live as frugal as possible AND to increase your income (yard sales, selling items on craigslist, get a weekend or second job, babysit, etc), if possible.  The combination of living frugal and increasing your income will make it easier to pay off your debt quicker. Also do not use your credit cards while paying them off (don’t close your accounts just don’t use them).

6.  Living Life: It is important to remember to live your life while putting all of these steps into place.  It is a lot to think about, but you have to make sacrifices in order to become independent and wealthy. You also do not need to sacrifice so much that you are taking the happiness out of your life.  The point of all this to make your life easier now and in the future– so just remember to make sure to enjoy putting these steps into place so you can enjoy life in the future.