Budget Archives - Page 2 of 8

Dave Ramsey’s 7 Baby Steps: Step 1 – $1000 To Start A Baby Emergency Fund

In one of my first posts on this site I gave a brief overview of Dave Ramsey's 7 Baby Steps, and gave links to a few other sites who talked about them.

Today I want to begin my series on the 7 Baby Steps by talking about Baby Step 1, saving up $1000 for a baby emergency fund.

Before You Start The 7 Baby Steps

The 7 Baby Steps can be a life changing paradigm shift for many people, but like any program to help you get out of debt and prosper, you need to be ready to change your lifestyle, and make some drastic changes to the way you're living. You have to be ready to commit to no more consumer debt, and know that people are going to think you're off your rocker. You're going to stand out from the crowd and be different – but that's OK! To prosper and get ahead, you have to be different! As Ramsey says:

You have to live like no one else, so that later on you can live like no one else!

You'll need to make some short term sacrifices so that later on you can prosper and give more and live more!

Dave Ramsey’s 7 Baby Steps

So here's a quick look at the 7 baby steps. Today we'll cover step 1.

Step 1 – $1,000 to start an Emergency Fund
Step 2 – Pay off all debt using the Debt Snowball
Step 3 – 3 to 6 months of expenses in savings
Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Step 5 – College funding for children
Step 6 – Pay off home early
Step 7 – Build wealth and give!

Baby Step 1: $1,000 To Start An Emergency Fund

The first thing you need to do when you're on the Baby Steps plan is make sure your necessities and minimum payments on your bills are taken care of. Then, you proceed to baby step 1 where you save a $1000 emergency fund. What’s an emergency fund? An emergency fund is your backup plan for when things go wrong. What kinds of things could go wrong? Here's just a start:

Auto needs repair
Unplanned emergency room visits
Lost job
Family funeral or wedding to attend
An occasional bill you forgot about (like your property taxes for example)

Unplanned Expenses Happen To Everyone

There's an adage, known as Murphy's Law, that says, “Anything that can go wrong, will go wrong“. Dave Ramsey likes to say that an emergency fund will help keep those “little murphies” at bay and keep you from having a small emergency turn into a bigger one.

The problem is that we all have major negative events in our lives, but not very many of us actually plan for those occurrences.

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

78% of us will have a major negative event. Those numbers alone should startle you into realizing your need for an emergency fund. And those numbers are only for the MAJOR events – we all have a ton of smaller expenses that pop up every year.

Is A $1,000 Emergency Fund Enough?

A lot of people see this first step in the baby steps plan and immediately bring up the point that $1000 just doesn't seem like enough money to save up for your baby emergency fund. Ramsey suggests that for most people it IS enough to cover most emergencies. All of them? Maybe not, but that's what Baby Step 3 is for, to save up a larger emergency fund to cover just about any major occurrence that could happen.

My wife and I ended up saving $2000 for our baby emergency fund – so we did increase the amount just a bit. I think the key is to look at your situation, see what is reasonable to save up fast – in 1-2 months, and go with that. Depending upon your situation a little less than $1000 might even work.

Where To Keep Your Emergency Fund?

When you save for an emergency fund a question often comes up, “Where should I keep my money?”. People want to know if they should keep the money in a CD, a online savings account or some other type of account. Ramsey suggests that you keep this money accessible, preferably in a bank with a local branch nearby, where you can get to the money quickly in an emergency.

Personally my wife and I keep our money at our l0cal bank in a money market savings account. It doesn't earn much interest, but that's not really the point of the baby emergency fund. The point is to insure against those unplanned events. When you save up your larger emergency fund later on, you'll have more options on where you want to save that money.

Where do you not want to keep your $1000 emergency fund? Keep them out of CDs, stocks, real estate, or other investments. Keep it somewhere you can get to it in a short period of time.

Do Your First Budget

After you have decided to save up your $1000 emergency fund, the next step you'll want to take is to do your first “quickie budget” as Dave Ramsey calls it. The reason? If you're going to save the money and get out of debt, you have to know where your money is going, where you can cut, and where the money will come from to pay off your debts. Download Dave Ramsey's “quickie budget” .pdf here:

Dave Ramsey Quickie Budget

Beyond doing a quickie budget, it would be a good idea to do a more in depth budget if you can using a free budget software like the one from mint.com.

A budget is telling your money where to go, instead of wondering where it went.

After you pay the minimums on all your debts, save as much money as you can towards your $1000 emergency fund. If you need to sell some things on Craigslist, get a part time job, or sell your sacred baseball card collection, just do it! Do what you have to and get that $1000 saved!

Next Time: Baby Step 2 – Pay Off All Debt Using The Debt Snowball

After saving up your $1000 emergency fund, the next baby step is to pay off all your debts using the debt snowball. Stay tuned for that next time!

Have you used Dave Ramsey's baby steps? Were you able to get your $1000 saved up quickly when you started? What did you have to do to get it done? Tell us your thoughts on the Baby Steps in the comments.

Personal Finance Basics: Pay Cash For Everything You Buy

By Mr. Money 9 Comments

My wife and I are going on 3 years debt free except our mortgage, and I have to tell you, it's a great feeling.

I still remember sending in that last student loan payment, just having a feeling of a weight lifting off of my shoulders, and not having to worry about that obligation any longer.

There was a new found sense of freedom we found by paying off our last debt. We would now be more free to save, invest and give!

In our 3 years of debt freedom we've started to get back to the personal finance basics, doing things like living below our means, paying ourselves first, and planning for unplanned emergencies. We've started keeping a family budget, and making sure we know where our money is going. We've made a lot of big changes!

One of the major changes that we've implemented is that we're now starting to forgo the use of credit cards and finance plans, even on the biggest of purchases. We're not longer financing our cars, or our furniture. Instead we're saving up and paying cash. If the money ain't in the bank and we can’t pay cash, we don’t buy it.

Paying Cash Can Be Done For Most Purchases

Saving cash to purchase most things isn't that hard if you plan ahead. Last year we were finding that our old 5-6 year old desktop computer that we'd been using for years was starting to get slower, and our ability to upgrade the old machine was just about maxed out. It was time for the old computer to move on, and time for us to upgrade.

In the past, as soon as we had decided to replace something, we would have gone out and purchased it on one of our credit cards, or signed up for a financing plan, so that we could get the item right away. Things are different now because we only pay cash. So instead of having instant gratification we saved up for a month or two and got together enough cash to buy a nice refurbished Dell computer. We upgraded the desktop, but kept our old monitor. No need to upgrade everything if we don't have to! In the end we researched and found the best deal, and only spent $300 or so to replace our old machine. Much less than we might have spent in the past!

Paying Cash For A Used Car

We also bought a used car about two years ago. Now you might think that paying cash for a car wouldn't be do-able, after all a new or used car costs thousands of dollars! But our last two cars have been paid for in cash. It just requires that you have some discipline. We used a plan similar to the “Drive Free Cars And Retire Rich” plan espoused by Dave Ramsey. Basically you start out by buying a relatively cheap $1500 or so car with cash. Then, over the ensuing years you drive that car and you pay yourself a car payment. When the time is right to buy a new car, you have enough cash to pay for it outright! We've done it twice now, and we're starting to search a for a mini-van or SUV since we just had our first child. We'll pay cash for this car as well!

Plan Ahead And Save For Bigger Expenses

If you want to do the same as we have and start paying cash, just start a budget, and include high ticket items (and smaller items) as a savings goal! When you plan ahead for big expenses, both emergency expenses and planned expenses like a new car, you'll be much further ahead when the time comes to pay for those expenses.

I will grant that some bigger expenses, like buying a house are much more difficult to do, and not everyone will choose to save up and pay cash for those. We didn't. But if you're really motivated, that can be done as well.

Benefits Of Paying Cash

There are tons of benefits to paying cash for the things you buy. Among them:

No need to worry about missed payments or raised rates: If you don't have any payments to make, you don't have to worry about whether or not you made a payment on time or not. You also don't have to worry about whether or not your bank will raise your rates on your credit card arbitrarily. That means less bill paying stress at the end of the month!
You can build wealth faster with no debt: When you have debt, it's much harder to save and build wealth. Shun debt and you'll be better off!
Paying cash means you spend less: Studies have shown that people who spend cash just end up spending less money. Using plastic means you'll spend 12-18% more according to a Dunn and Bradstreet study. It hurts more to pay with cash that you have now, than it does to pay slowly over time with money you hope to have in the future.
You can get a cash discount: Some retailers will give you a discount if you pay cash. The reason? You're saving them the interchange and processing fees charged to them when you use a credit card. Don't forget to ask if there is a cash only discount!
Having less debt means less risk in a down economy: When you have less debt you don't have as much risk when it comes to a job loss or other unplanned negative event. When you have no debts, you don't have payments to make at the end of the month!

For me and my family the benefits of saving up and paying cash far outweigh the negatives, and we'll continue doing it for the foreseeable future.

Have you tried paying cash for the things you want, instead of using a credit card or financing plan? Did you end up spending less, and did you feel more free by paying cash? Tell us your thoughts in the comments!

9 Common Ways You Could Be Wasting Your Money

By Miranda Marquit 18 Comments

Most of us scoff at the idea of just throwing money away. However, you might actually be doing just that — every day. There are a number of practices, seemingly commonplace, that result in wasted money each month.

If you are trying to figure out what has happened to your budget, and trying to pinpoint where your money is leaking away to, here are 9 common ways that you could be wasting your money:

Credit card balances: Anytime you carry a balance on your credit card, you are paying the price in interest charges. Interest is money you pay for the privilege of borrowing. Stop carrying a balance, and you will find that you have more money in your pocket.
Interest rates and fees: Call your credit card company and ask for a lower rate on your credit card. In some cases, especially if you are a good customer, you can get a reduction of 2% to 3%. You can also call your bank to ask for fees to be waived. My bank waives one overdraft fee each calendar year — just for the asking. It never hurts to ask if you can have fees waived if you are late once or twice on a payment.
FSA mismanagement: Your Flexible Spending Account (unlike the HSA) is a use it or lose it situation. If you aren't paying attention, and if you don't use all the money in your FSA each year, you leave that money on the table, and it's wasted.
Cell phone: Rather than pay for a plan that you rarely use, consider your cell phone usage and your true needs. I have a prepaid cell phone service, and my husband uses an inexpensive pay as you go plan. Our phones aren't fancy, but they fit our needs and they cost a lot less than the smart phone and $100 a month plan my brother has — and rarely uses. Consider things like Virgin Mobile prepaid phone options as a way to save considerably on your monthly bill. Resource: Save Hundreds On Your Cell Phone Bill.
Car maintenance: The rules are changing with car maintenance. First of all, check the manufacturer's recommendations for the octane level of your fuel. There's no need to spring for the premium 93 grade when 89 will do just fine. Check the requirements, and don't pay extra. You should also look at other maintenance recommendations for your car. Some cars can go 5,000 or more without an oil change now. Don't pay extra for maintenance you don't need.
Interest free loan to the government: Instead of using your tax refund as a sort of savings account, adjust your withholding so that you aren't getting so much back. Instead, watch for a bigger paycheck and use that money to invest or improve your life another way.
Late payments: Get organized and be sure that you pay on time. Late payment fees and missed payment fees do more than just impact your wallet; the impact on your credit score can result in paying more in higher interest on auto and home loans.
Subscriptions you don't use: From superfluous cable channels to a magazine you don't read, subscriptions can cost you. Evaluate your regular subscriptions, and get rid of those you aren't using. From Gamefly to Netflix to that investment newsletter, cancel unnecessary subscriptions and save.
Failure to shop around: If you aren't shopping around for the best deal, you are wasting money. Regularly shop around for insurance rates, major purchases and more. Do a little research online, and see if you can get better prices on things you buy regularly as well as occasionally.

What are some common ways that you or people you know are wasting money?

Is It Time to Dip Into Your Emergency Fund?

By Miranda Marquit Leave a Comment

One of the most important things you can do for your financial security is to build an emergency fund. Unfortunately, many Americans aren't prepared with a fund that they can tap in the event of a financial emergency.

The Americans that do have an emergency fund, though, might not know when to tap into it. It's easy to feel as though any setback is an emergency. Another temptation is the fact that you have a large amount of money sitting there, and it seems like you could do something better with it, like buy a new TV or go on a vacation.

Before you dip into your emergency fund, you need to take a step back and ask yourself whether or not it's truly necessary. Here are some ideas for using your emergency fund appropriately:

Maintenance and Repairs

One of the best things you can do is make sure that your home and your cars are properly maintained. First of all, it can make more sense to have a separate maintenance fund, designed specifically to take care of routine maintenance and repairs. You know that your car's oil will need to be changed and that eventually you will need to buy tires. It's also clear that at some point your roof will need to be replaced, and that there are things you should do each month to keep up your property.

Creating a separate fund for expected maintenance and repairs can be a good way to plan ahead without the need to deplete your emergency fund when you have a maintenance or repair cost that amounts to less than $2,000. Consider using a small emergency fund for these types of costs.

Major Setbacks

Your main emergency fund should be built up to handle major setbacks. These are items like medical emergencies, natural disasters that damage your home, or job loss. You don't want to be depleting your major emergency fund over time if it means that you will be less able to handle your setbacks.

At the very least, you want to be able to pay the deductible on insurance claims. Another consideration is what other resources are available to you. When my dad had a heart attack and a hospital stay, his portion, even though he had insurance, was still quite large. The hospital offered a no-interest payment plan for six months, so rather than deplete the emergency fund in the name paying it all at once, my parents took advantage of this payment plan. It allowed them to take a smaller amount from their emergency fund, so there was less to do to build it back up later.

What About Paying Off Debt?

Be careful about how you use your emergency fund to pay off debt. If you have a high-interest credit card you want to get rid of, it can make sense. However, you don't want to deplete your emergency fund to the point where it is ineffective if you run into trouble. In these cases, you could easily then run up debt again. Find the balance between paying down debt and making sure you are covered in an emergency.

What is your approach to using the money in your emergency fund?

Is A Zero Based Budget Right For You?

By Miranda Marquit 6 Comments

One of the budgeting techniques that has gained some popularity in recent years is the zero based budget. In this budget, you make sure that every dollar is accounted for at the beginning of the month. You look at what you expect to get in terms of a paycheck, and then use every penny to pay bills, or accomplish your goals. As part of your budget, you decide what will go to debt reduction, or to building an emergency fund, or to your retirement account. You can also put money toward a vacation or some other goal, on top of making sure your groceries, gas, insurance premiums and other expenses are covered. Every dollar of income is assigned to a spending, saving or giving category. No dollar remains un-assigned.

A zero based budget is also expected to help you manage your cash flow. You match up expenses with your paychecks so that you can see when to pay your bills, dividing expenses into first of the month costs and end of the month costs. You can make the process a little easier with the help of bill scheduling so that your credit card payments, utility bills and other expenses are paid automatically — on a day that works best for you.

Is A Zero Based Budget For Everyone?

While I know people who swear by the zero based budget, I admit that it kind of makes me nervous. This type of budget doesn't really account for leaving a cushion (although I suppose you could budget in a cushion one month, and then it would be there for the future). I like to have extra money in my checking account at the end of the month, even after I've contributed to retirement and short term savings. It doesn't need to be a lot of money in the checking account, but I like to have a little something in there.

Another issue with the zero based budget, at least for me, is that I don't have a regular income. My income is variable. Trying to figure out exactly what I will make each month, and then matching it up with expenses, doesn't work for me, since my exact income depends on which projects I am doing, and whether I have extra money that month — or less coming in. Of course there is the option of faking a regular paycheck when you have an irregular income.

Instead of using a zero based budget, I prefer to create a more general spending plan. I figure out how much I need each month for regular expenses that are important spending priorities. Fixed expenses, like insurance premiums, the mortgage payment, car payment, IRA contributions and utilities, are all taken care of first, via automatic withdrawal or by using bill scheduling. Then I spend on other things that I want or need for the month. I track my income and spending, so that I don't exceed what I make, but I don't create a budget to limit what I can spend on entertainment, dining out, charity or other variable expenses.

In the end, how you decide to spend your money is up to you. But it does help to have a plan. Think about what sort of plan would work best for you, whether it's a zero based budget, or some other type of spending plan. As long as my most important expenses are covered, and my future provided for, I don't worry too much about where I spend my other money, as long as it reflects my priorities.

What about you? Do you have a preferred budgeting technique?

What Do You Do With Your Savings?

By Miranda Marquit 3 Comments

One of the basic pieces of advice that we are often given about money is to save more.

But where do you put that money? And what should you do with it?

Create Goals for Your Savings

While saving money just to save money does make sense in some ways, the reality is that few of us are willing to keep doing something “just because.” As a result, it makes sense to carefully consider your desired outcomes and figure out what you hope to accomplish with the money you are saving.

First off, really think about what you hope to have happen with your money.

what-to-do-with-savings

Do you want some of it to go toward creating a comfortable retirement? Do you hope to save up enough money for an emergency fund? Are there other goals, such as putting a down payment on a house or going on a family vacation that you are interested in reaching?

Understanding these goals can motivate you to keep setting aside money, and keep saving, as you plan your finances. It's too easy to lose sight of what you are trying to accomplish when you don't have clear goals for your money. Take the time to really stop and think about why you are saving, and then go from there. Once you have the proper motivation, you will be better able to to keep moving forward.

Where Should You Keep the Money?

Many savers are disappointed with the current low-rate environment. It means that they won't receive much of a return on their money. Part of feeling better about the situation, however, is understanding that the primary goal of some of your savings isn't to earn interest.

If you are saving up money for a down payment, or if you are looking for the liquidity and safety that comes with an emergency fund, it doesn't make sense to become fixated on interest rate. While it's depressing to earn so little on your money, the reality is that you have to keep the purpose in mind.

On the other hand, there are some goals that warrant keeping your money in an account with greater potential. If you are planning to build a significant retirement nest egg, you don't want to rely on a low-rate savings account. Instead, you should consider using an investment account. There are ways to limit your exposure to risk when investing. Using index mutual funds or index ETFs can help you take advantage of the potential for higher growth so that your retirement goals can be met.

I also like to keep some of my extra savings in an investment account. While I keep about three weeks' worth of expenses in a low-rate account, where it's accessible if I need it, the bulk of my emergency fund is earning in an account with an index ETF and dividend paying investments. That way, it has the potential to earn more, and I can access it if I really need it.

Combining my savings strategies helps me maximize my money, while still keep some of it safe and accessible.

What do you do with your savings?

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