Sunday, March 24, 2013

Lesson 4: 3-6 Months in Expenses

Financial Planning for the Recent Graduate

 


When applying for a job, no one ever expects to be laid off or fired one day.  The reality is, it happens more often than not.  Plus, you’re young.  Do you plan on staying employed at your job for 40 years?  You’ll probably move to another city, state, or country in your lifetime, change careers at least once, maybe you’re planning on having kids one day, or heaven forbid, you have an life-altering medical situation.  One day, you’re going to have a period of unemployment.  During this time, you’re going to need money to keep afloat. 



I recommend saving at least 3 months, preferably 6 months of expenses in a separate savings account.  You can use the same account as your emergency fund.  This account is your safety net for when the unexpected happens.  Set aside money every month for this account.  As it builds up in value, you may have a friend, family member, or someone call you from your bank and recommend putting it in a brokerage account or investing in stocks.  DON’T DO IT.  This is your personal insurance, not an investment.  I'll say it again.  This is NOT an investment.  Yes, you could make lots of money on this account by investing it into something more financially efficient.  However, all investments have the risk of falling to $0, and it doesn’t matter how much you have invested.  

The purpose of this account is to be a liquid (easily converted to cash), accessible savings account.  There’s a huge difference in your mind and your spirit when you’re laid off with 6 months of cash protecting you and your expenses vs. having nothing.  It’s an incredibly important part of your financial plan.  It’s your financial foundation.  Before building a house, you have to pour the foundation.  The 3-6 months in expenses is the base, the foundation of your finances.   Without it, your finances will crumble one day.  You’ve got to pour, so one day you’re not poor




Once you’re out of debt, this should be a much easier step to accomplish.  Instead of paying the loan company every month, you’ll realize the incredible feeling of paying yourself first.  Don’t delay this step, and again, before you start investing, get your  3-6 months of expenses in place.  The Bible says, “Four things on earth are small, yet they are extremely wise: Ants are creatures of little strength, yet they store up their food in the summer” (Proverbs 30:24-25).  Like the ants in the summer, you’re at a season in your life when you’re employed and healthy.  Use this time to save for the seasons of your life when income is scarce, like when you are unemployed or unable to work.  

Tip 1: Find a savings/checking account that pays high interest.  That way, while you’re saving, you’ll at least earn something.  Again, make sure you’re able to transfer the money easily, in case of an emergency (usually 2-3 business days is the standard). 

Tip 2: How much do you have to save?  Calculate how much you need to save, and how long it’ll take you to get there.  This Google Doc will help with that.  Are you really allocating enough money to this savings account?  Choose to save.  How long will it take you?

Tip 3: Don’t get discouraged.  This is the longest step to complete, but it’s more than worth it.   

Tip 4: Remember the steps, and do them in order!  
#1: Get on a budget.  
#2: Save $1,000 for an emergency fund.  
#3: Pay off your debt with intensity, and then 
#4: 3-6 Months in expenses.  

Have you ever seen someone eating while driving, sipping a soda, and texting/talking on the phone?  You probably saw that same car a few miles down wrecked on the side of the road (or pulled over).  Don't try to do too much at once.  It's the same way with your finances.  Stick to the plan.  Focus on one step at a time, or else you won't get anywhere.  

Questions?  Leave a comment below or email me at finance4therecentgrad@gmail.com.


Images Courtesy of freedigitalphotos.net bStuart Miles, published on 11 April 2012 Stock illustration - image ID: 10079600, bBoaz Yiftach, published on 08 September 2010 Stock photo - image ID: 10020252, and bSweetCrisis, published on 11 May 2012 Stock photo - image ID: 10082748

Sunday, March 10, 2013

Lesson 3: Student Loans

Financial Planning for the Recent Graduate




I remember sitting alone in my dorm room late one night, during the last semester of my senior year when I decided to grow up and face the reality of how much I borrowed to finance my education.  I remember the sinking feeling in my gut when I saw my computer screen show me all of my student loans together for the first time, and when I realized how deep in debt I was.  This is a tough lesson to learn.  It's time to face reality and talk about your student loans.  The average college graduate today has more than $27,000 in student loan debt. In December 2012, outstanding student loans amounted to $956 billion. In 2012, student loans officially surpassed credit card debt in the United States.  This is an increasingly unsustainable problem that needs to be solved.  How is this happening?  Well, the cost of higher education is rising, but the ease of going to your financial aid office and getting a new loan to add to your debt is another part of the problem.  The bigger problem is, you kept going back every semester, signing your name, promising you’d pay it later, and then forgetting about it.  Now it’s time to pay back all of that debt.  The first step is to figure out where in the world it all went.  Student loans are sold to other loan providers every day, whether they are private companies, publicly traded companies, or the government.  Here’s where you need to go to track all of them down: http://www.nslds.ed.gov/nslds_SA/

Go to Financial aid review -> Accept -> Accept -> fill out all of your information, and click Submit.  If you forgot your pin, follow the instructions on this website to get your pin back. 



Once you’re logged in, you’ll probably see lots of student loans, some of which may surprise you.  They certainly didn't forget about the loan you took out way back in your freshman year, did they?  I had some of my loans sold to two different companies and was never even notified.  Next step is making online accounts for all of the different loan providers that service your loan.  Nelnet, Sallie Mae, Great Lakes, CitiBank, and on and on.  Every day, these companies are making money off of you, on your unsubsidized loans, and they have been ever since you signed that document.  6.8% for an unsubsidized loan, as a matter of fact (which is likely to be higher in the future).  If you took out a $10,000 loan, they make $680 off of you every year, almost $2 every day that you’re handing over to them, and that compounds (gets worse and worse every year if you don’t pay the interest).  It’s a snowball effect that catches and rolls over current students and recent graduates every day.

Hopefully I’ve opened your eyes a little bit.  I know I’ve made you mad.  You may have a “fair bone” in your body like I do, and you’re sitting there thinking “That’s not fair!” and want to get rid of this debt as fast as possible.  That’s what I did.  I was able to pay off my $20,000+ student loan debt in 14 months.  How’d I do it?  Don't miss this next paragraph.



Get angry at your student loans.  They’re officially your enemy.  Attack your student loans with a passion.  They’re keeping you from becoming wealthy, and you’re not going to get out of paying these loans unless you are fierce in your intentions.  Proverbs 22:7 says, “the borrower is slave to the lender”.  As long as you are in debt, you are forced to pay money out of your pocket every month until you have satisfied your loan.  When you owe someone a debt, that creditor has complete power and leverage over the money that you owe to them.  Don’t believe me?  Watch what happens if you ever miss a payment.  Those collection calls start pouring in and they push every emotional button they can push to get you to pay your debt.  

It's time to start paying your loans off.   I’m sure you have both unsubsidized loans and subsidized loans.  Unsubsidized loans run you 6.8% since the date the loan was released, and subsidized loans haven’t been accruing any interest…yet.  From the date of graduation, you have 6 months to keep your subsidized loans at bay, but after 6 months, they will begin earning interest.  My recommendation?  Start with the lowest balance unsubsidized loan first.  They are killing you with interest.  So how are we going to start paying these loans off?  We’re going to start a snowball in your favor this time.  Let me illustrate:




Remember when it snowed you were a kid and you couldn't wait to make a snowman?  How'd you do it?  You started gathering a little bit of snow and packing it down, rolling that and packing it, and rolling some more.  The more you rolled the snowball across the snow, the bigger it got, the easier it was to pick up snow, the faster it grew.  You’re required to pay a certain amount from each loan you have every month.  When you pay off your first loan, take the monthly payment you’d normally pay on that 1st  loan and add it to the payment on your next loan.  Once you pay off that next loan, take both of those loan payments and add it to the amount you are paying on your third loan.  You’re getting it!  Pretty soon, you’ll be sitting there with no payments.  What can you do with your money when you don’t have payments every month?  Whatever you want.  It’s an incredible feeling.  Here’s a Google Doc to help you with your student loan repayment, and I've included a tutorial below on how to fill it out.  



Have a question?  Want to leave a tip for how you're going to pay off your loans?  Leave a comment below or email me at finance4therecentgrad@gmail.com.





Tip 1: Host a graduation party.  Ask if your mom or dad would mind hosting, and send out some letters to your family and friends and invite them to your party.  In the letter, mention your student loan amount and that 100% of contributions will go to your loan.  Tip 1a – make good food for your guests.  Tip 1b – be true to your word and actually apply the funds to your debt.  Personally, I ended up with close to $2,000 from family and friends, which paid off one of my loans almost entirely. 

Tip 2: Get going.  You’ve waited long enough, so start paying your loans off now, even if they’re not in “repayment” yet.  At first, it may feel like you’re getting nowhere, but how do you eat an elephant?  One bite at a time.  Don’t just pay the interest, pay off some of the principal too.  Always pay more than the minimum payment so you can start to get some traction. 


Tip 3: Stop taking out more loans.  Don’t reconsolidate, don’t take out a personal loan to help you pay these off, and don’t you dare put it on a credit card.  You can’t get out of debt by getting deeper into it.  You can’t get out of this ocean of debt by swimming further down.  Start swimming up, one stroke, one payment at a time until you're debt free and back above water.

Tip 4: Be weird with your money.  Try to live on less and less every month.  Say no to going out with your friends a few more times.  Oh and when your broke friends start making fun of you for being frugal (and they will), you’re right on track.  

Images courtesy of freedigitalphotos.net by Stuart Miles, stock illustration - image ID: 10069388 and image ID: 10096038, bworradmu,stock photo - image ID: 10032599, bTina Phillips, stock photo - image ID: 10072039, brenjith krishnan, stock illustration - image ID: 10034353 and bkoratmember, stock photo - image ID: 10062848


Sunday, March 3, 2013

Lesson 2: Emergency Fund


Financial Planning for the Recent Graduate





Has anything unexpected ever happened to you?  Has your car ever broken down and you didn’t have any money to fix it? What did you do?  Put it on a credit card, where you get charged 20-25% if you don’t pay it off at the end of the month?  I’m here to tell you that those days are over.  Credit cards aren’t for emergencies any more.  In the last lesson, we talked about putting money away into a savings account. Now we’re going to define it.  This savings account is called your emergency fund.   This is going to be your first savings account that is not linked to your primary spending account.  What do I mean by that?  For the first time, we’re going to put space between you and your money.  You're a graduate now, a mature adult in the real world, so it's time to start making mature decisions with your finances.  

Did you ever have a blanket when you were little?  When I was a toddler, I had a blanket that I called my “white mine”.  It had boogers, snot, drool, tears, dirt and dust all over it.  It started as a white blanket, but turned a different color very quickly.  It was mine, and I wouldn’t give it up.  I never switched to a new, clean blanket.  Fast forward 20 years and we’re doing the same thing with our finances.  We don’t want to change our behavior because it’s ours, and the worst part is, we defend it!  I need a new car with a car payment…I deserve to go out because it was a hard week…I have to live in this nice place that I can’t afford. This is the lesson that we start to change your behavior, and what you’re used to doing with your money.  Step 1 was getting you on a budget.  Step 2 before you do anything else is to save $1,000 for your emergency fund. 



There are tons of great options for a savings account for your emergency fund.  Make sure there is no minimum balance requirement and no annual fees on the bank account that you open.  You don’t want the bank to eat away the hard earned cash you’ve saved.  There are great no-fee online banks that pay up to .9% interest just to save your money with them, and there are also great local community banks that won’t pay as high of interest, so it depends on your preferences.  I personally use Ally Bank for my emergency fund, and they are my #1 choice for an online bank.  

Now I’ll tell you what an emergency fund is NOT.  An emergency fund is not rescuing your butt at the end of the month if you didn’t budget enough money for food.  It is not  money you use for an occasion you forgot to save up for, like Christmas, or an anniversary.  If you have a savings account linked to your checking account, and you overspend on your checking account, your bank probably moves your money from your savings account to your checking account to make up the difference.  That is NOT a savings account.  That’s just an extension of your primary spending account.  An emergency fund is NOT money for that cute dress at Banana Republic, or that nice suit you have to have.  Your emergency fund is for emergencies.  If it's not an emergency, don't touch it!

I recommend attaching a checking account to your new savings account, because if you’re really in a pinch (you’re out of money in your main checking account) and you have an emergency, you don’t want to wait 2-3 business days for your money to transfer to your main checking account.  When you open your checking account, they’ll usually give you free checks, so just put those in a safe place until something unexpected happens and you need the cash.



The most important thing to understand is that emergencies do happen, all the time.  Grandma and grandpa had it right all along with their rainy day fund.  Unexpected things will happen to you, and when you have an emergency fund in place, it puts a big buffer between you and life’s curveballs.  Murphy’s Law takes a whole new meaning when you have the money saved up.  When you have an emergency fund in place, it’s your Murphy repellant, and you can stop worrying and stressing out when your car won’t start, because you can fix it.  Don’t let life happen to you.  Let you happen to life.



Tip 1: GO!  Start now.  Don’t wait.  This is the easiest step to complete, but it’s also the hardest one.  If you commit to the emergency fund, you’ve committed to turning your life around.  Get it done quickly!  Squeeze your budget, and whatever’s left at the end of the month, roll it right into your emergency fund.

Tip 2: Get a part-time job to add to your income.  Do some contract work.  Start monetizing your skills.  If you craft, set up an Etsy.  You’ll get some serious momentum if you’ll take a few hours per week working part-time somewhere.  You can’t save money if you don’t have any coming in, or if it’s all going out the door.



Tip 3: Sell stuff you don’t need!  I know you have some stuff around that you never use that someone else may want.  Amazon, eBay, Craigslist, get to it. 

Tip 4: If you have room in the budget, set up an auto draft into your emergency fund at the beginning of the month.  You might miss it the first month, but you’ll get used to it soon!  If you haven't made yours yet, here's the monthly paycheck budget, bi-monthly paycheck budget, and weekly paycheck budget.

Tip 5: Start a mini-emergency fund.  Discipline yourself by starting a checking account buffer in your primary spending account.  Set an amount that you refuse to go below, and increase that amount every month.  This way, you won't have to pay overdraft fees if your account hits $0 (when I was first starting out, I overdrafted all the time, and it's an easy way for that Wendy's double cheeseburger to cost $37, instead of $2.)  According to Dailyfinance.com, banks make over $30 billion a year off of our overdraft fees.  Make yourself believe that $500 in your account is actually $0, and don't go below it!

Check out this week's supplemental YouTube video:
http://youtu.be/J_R1wmPdNNE

What are you going to do to save up $1,000 for your emergency fund?  Leave a comment below.  Your tips may give someone else a great idea on how to save.



Images courtesy of freedigitalphotos.net

By Naypongimage ID: 10077125, by Stuart Miles, image ID: 100142024 and image 10055016, by m_bartoschimage ID: 10012082, and by Ambro, image ID: 1066149