Starting with a Blank Slate

A few weeks ago, I put out a call on Twitter and on Facebook for detailed posts that people would like to see. I got enough great responses that I’m going to fill the entire month of July – one post per day – addressing these ideas.

Lois on Facebook wants to know about starting from scratch. “After two years of living just on basic needs in order to get rid of 60k in credit card debt – yea! we did it! But what is the best strategy for starting over (we have do have 1k emerg. fund).”

Congratulations on your positive financial changes! It feels really good to be free from the burden of debt.

You’re facing a problem that many people face when they reach debt freedom. They’ve been in debt for so long and burdened by constant debt payments for so long that they’re unsure what to do when they’ve been freed from those shackles.

For people in your situation, I would recommend a three phase plan for continuing forward in your financial journey.

Phase 1: Retirement planning
This is absolutely the next thing you need to focus on. By retirement planning, I mean having money available to you when you reach the point in your life where you want to step away from work and enjoy the years you have remaining in your life.

My usual advice to anyone is that they should shoot to have 25 times their annual living expenses in retirement savings on the day they retire. That seems like a huge number, but it’s an achievable one.

The key is to start now. A good rule of thumb to use is, if you haven’t started contributing to your retirement, start contributing a percentage of your income to retirement that’s your age minus fifteen. If you’re 30, contribute 15% per year. If you’re 40, contribute 25% per year. If you’re 50, contribute 35%. This isn’t a perfect solution, but it’s one that’s going to get you as close as possible to a path to be able to retire at a reasonable age. In truth, if you’re approaching fifty and haven’t started saving anything for retirement, you’re either going to need a pension or you’re going to be working until at least seventy to maintain your standard of living.

Phase 2: Protecting yourself from falling back into debt
Once you’ve got retirement savings lined out, you need to use your remaining extra money to prevent yourself from falling back into debt. This comes in a few big pieces.

First, build up a bigger emergency fund. Try to save two months of living expenses for each dependent in the household. This will help you deal with almost any crisis that crosses your path.

Second, start saving for any known large expense that’s coming. For example, you’re going to have to eventually replace your car. Start making car payments now, except put those payments into a savings account. This way, instead of having to pay interest to the bank on a car loan, you’ll collect interest that you earn yourself on the savings account.

Finally, make sure you and your partner have adequate life insurance. I usually suggest getting a term life insurance policy so that you’re not left destitute if your partner dies. Shop around and look for the best deal you can find. Try to get one with a benefit equal to at least five times that person’s salary – and preferably more.

Phase 3: Establishing long term goals
If the above things are well in hand, you’re building a strong financial backbone for yourself. You should start thinking about your long-term goals at this point.

Is your goal to retire as early as possible? If so, ramp up your retirement savings as high as you possibly can.

Is your goal to go back to school? If so, open up a college savings plan (also known as a 529) and start socking money into that.

There are lots of goals that people have – and many of them require some significant savings in advance. Now is the time to start doing that.

Good luck.

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8 Tips for Improving or Starting a Budget

Budgeting is boring and takes precious time out of our busy schedules. But let me tell you something — having a solid budget works incredibly well for your finances. When done properly, budgeting can help you save, keep you motivated, and increase the chances that your finances are headed in the right direction so eventually, you have time to do what you want to do. And who wouldn't want that? If the whole budgeting process is just not cooperating, check out these eight pointers that will make your budget work for you.

Some people like to setup their dream budget instead of one for their current situation. Remember that a budget needs to be tracking what you are actually spending so you can make changes.

This again goes back to being realistic. Can you actually live without having fun for years and years? Allocate a portion of your monthly budget so you can spend it however you want. After all, the whole point of saving money is to use it.

In order to grow, you need to continuously improve on your system. This includes changing limits on your budget and adding/subtracting categories of expenses as you see fit to make life easier for yourself. You don't have to start off with the perfect budget, but the goal should be to always try to make it a little better.

How would you handle the months when you have no choice but to go over the allotted limits you set on your expenses? You have to plan for that so it doesn't throw your finances upside down. You need to have an emergency fund set up, and another way is to actually have the exceeded amount "spill over" to future months, so you don't forget about it. For example, if you spent $500 over your budgeted amount on entertainment, the $500 would be added to the following month, which reminds you to spend less in the future to make up for it.

There is no perfect tool. There, I said it. The key is you — the data you put in, and your commitment to follow what you have set up. Some people use a plain spreadsheet while others buy software like Quicken. Do whatever works for you, but don't obsess over which way is best.

Unless you love tracking your budget and can spend hours every week on this task alone, please don't have too many categories, and try to simplify the process of logging your expenses. The simpler you can make your budget, the better! The key is to really think about your categories and whether separating them makes sense for you. Some people may consistently buy skin care products, so it makes sense for them to separate them into their own category so they can monitor how much they are spending on those products. Others may find that it makes little sense to have a category even for beauty products because they almost never spend anything in that area. Make it personal, but keep it simple!

Very rarely do you see people executing their budgeting process to perfection right out of the gate, so those who expect everything to work out perfectly are setting themselves up for failure. As with anything, it takes constant monitoring to improve, and eventually, it will work well for you.

Whether it's lowering your spending or increasing your income, make progress! Having better finances will be the number one motivator to keep doing your budget. Always think how you can do things better, and you will be financially free in no time. Let me repeat — budgeting is boring, but it's an easy way to improve your finances. Here are seven more reasons why you need to start budget tracking.

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