What are Your Personal Finance Boundaries?

Research indicates that one of the best ways to stick with goals (e.g., New Year’s resolutions) is to set boundaries. In other words, draw a “line in the sand” and develop personal policies to help say “no,” resist temptation, and stay on course.

How can people set boundaries?  Consider this analogy from the world of NASCAR Motor Sports. Ever since a car wreck nearly killed hundreds of spectators in the grandstands at Talladega in 1987, when a speeding car went airborne, races at Daytona International Speedway in Florida and Talladega Super Speedway in Alabama have required drivers to use “restrictor plates.”  According to the official definition on www.nascar.com, a restrictor plate is “A flat device with holes drilled into it designed to limit the amount of air that enters the engine.  This effectively limits the horsepower of the engine and slows the cars down.” 

 

Like Talladega race cars, people also need “restrictors” to slow them down so they can stick to their financial goals.  In other words, cues to limit spending because they’ve “had enough.”  Individuals need to develop, and enforce, their own restrictors.  If someone tries to restrict another person, they will usually resent it and rebel. 

Looking for some specific ideas?  Consider the following examples of financial restrictions:

§  Spending no more than $500 on holiday gifts and parties.

§  Charging no more than $300 per month on a credit card for new purchases.

§  Spending no more than $100 a week at the supermarket.

§  Buying a “new used” car, instead of a new car, to reduce the cost.

§  Depositing 5% of gross income in a 401(k) or 403(b) plan via payroll deduction (to “restrict” income)

 

Six More Successful Ways to Save Money

Last week’s post described six ways to save money: pay yourself first, collect coins, complete a savings challenge, continue to pay a loan or bill, break costly habits, and bank a windfall. Below are six more successful saving strategies to “find” money to save to reach your financial goals:

 

¨     Crash Save- Decide that, for a month or two, you’ll buy only absolute necessities and save any money that remains after paying bills. At the end of the crash savings time period, treat yourself and buy the item(s) that you were saving for. Then resume your “normal” spending habits or set a new crash savings goal.

 

¨     Start a “Club” Savings Plan- Start a structured savings plan to save money over the course of a year for holiday or vacation expenses. Some banks and many credit unions still offer them. Unlike the “coupon books” of years ago, weekly savings deposits are often transferred electronically from a checking or savings account.

 

¨     Save Your “Extra” Paychecks- Mark all your paydays for 2019 on a calendar. If you are paid bi-weekly, in two months of the year, you will receive three paychecks. If you are paid weekly, there will be four months with five paychecks. Anticipate these months in advance and plan to save part of the “extra” paycheck.

 

¨     Save Excess Expense Reimbursement Money- Review your employer’s reimbursement policy. If you get a fixed sum for business travel expenses, instead of having to collect receipts, and spend less than the per diem amount, save the difference. Ditto for mileage reimbursement for using a personal car for business.

 

¨     Reinvest Interest and Dividends Automatically-Arrange to have dividends and capital gains on mutual funds reinvested to purchase additional shares rather than receiving a check for a small amount and spending it. This is a painless way to increase personal savings and, over the long term, the results can be spectacular.

 

¨     Participate in a Tax-Deferred Retirement Plan- Reduce your salary via payroll deduction to save for retirement and aim to take maximum advantage of employer matching. Money contributed to a 401(k), 403(b), or similar retirement savings plan and earnings on these funds grow tax-deferred until withdrawn in later life.

Six Successful Ways to Save Money

The last week in February every year is designated as America Saves Week. Like weight loss (dieting), saving money is hard to start, even harder to maintain, and requires patience and discipline. When you achieve your financial goals, however, the results are so worth it. Below are six time-tested ways to stash more cash:

 

¨     Pay Yourself First- Treat savings like an important household bill (e.g., loan payment or rent). Set aside a part of each paycheck, even if it is only a small amount, and leave it there. If possible, arrange to have money transferred to savings and investment accounts automatically.

 

¨     Collect Coins- Put loose change into a can or jar. When the container is full, deposit the money into a savings account. Set aside $1 a day, plus loose change, and you should have about $50 a month, or $600 a year, saved. Save $2 a day, plus loose change, and you should have about $1,000.

 

¨     Complete a Savings Challenge- Pick a Challenge that matches your time frame and savings goal such as the 30 Day $100 Savings Challenge or the 50 Week $2,500 Savings Challenge. Savings challenges gradually ramp up savings deposits over time and provide motivation and structure.

 

¨     Continue to Pay a Loan or Bill- Make payments to savings or investment accounts with money that is freed up when loan payments end or an expense, such as child care, ends. The rationale behind this savings method is that you are already accustomed to the monthly payment so “redirecting” it will not pinch your cash flow.

 

¨     Break Costly Habits- Track your spending for a month or two and pick a few places where spending can be cut back or cut out to “find” money to save. For example, brown-bagging lunch two or three days per week could save hundreds of dollars over the course of a year.

 

¨     Bank a Windfall- Save all or part of large, infrequent expected or unexpected sums of money. Examples of common financial windfalls include tax refunds, inheritances, settlements, awards and prizes, retroactive pay increases, and year-end bonuses at work.

Smart Uses for Your Tax Refund

Are you expecting an income tax refund? You are not alone. In 2016, the average tax refund amount was $2,782 and the IRS issued over $302 billion in refunds. Use your refund wisely! Consider the following ideas:

¨     Save for Emergencies- Aim to set aside at least 3 to 6 months expenses in a money market fund or bank account.  This is your “fall back fund” in the event of unemployment or unanticipated expenses.

 

¨     Pay Down Debt- The more debt you repay, the less interest you will owe.  Paying down an 18% credit card balance is like earning 18% on an investment- plus it is a guaranteed return and tax-free!

 

¨     Start an IRA- A one-time $3,000 tax refund invested in an IRA containing a stock index mutual fund with an average 8% return will be worth almost $31,000 in 30 years.  A $3,000 tax refund invested every year for 30 years will be worth over $370,000.

 

¨     Invest in Mutual Funds- Most mutual funds allow investors to open an account with $3,000 or less.  Choose a fund with good historical performance, low expenses, and an objective that matches your investment goals.

 

¨     Improve Your Skills- Use your refund to take courses or attend conferences that will make you a more skilled and valuable employee. Economists refer to this as “building your human capital.”

 

¨     Review Your Tax Withholding- A large refund indicates that your tax withholding is incorrect (over-withholding).  Hire an accountant or financial planner to review your finances or use the online IRS Withholding Calculator.

 

Tips to Buy a Home

A home is the largest purchase that most people ever make. Many decisions have to be made during the home-buying process in unfamiliar areas (e.g., mortgages and home sale contracts). Below are five tips for homebuyers:

• Shop Around for Financing- Take the time to shop for the best terms on a mortgage. It could save tens of thousands of dollars over time. Follow the “Rule of Three” and compare at least three different lenders as well as providers of every required service (e.g., realtor, mortgage lender, home inspector, and attorney).

 

• Know Your Borrowing Limits- Consider the guideline that homeowners should spend no more than 2 to 2.5 times their annual income for a home. Most lenders also use some variation of the “28/36 Rule.” This means that PITI (principal, interest, taxes, and insurance) cannot exceed 28% of gross monthly income and PITI, plus outstanding consumer debt (e.g., credit card payments), cannot exceed 36% of gross income.

Example: A couple earning $60,000 annually, or $5,000 a month, would qualify for a mortgage with a $1,400 monthly PITI payment ($5,000 x .28) if they had no other debt and a $1,200 monthly payment if they had $600 of monthly consumer debt payments (5,000 x .36 = $1,800 - $600 = $1,200).

• Get Help- Inquire about loan programs for first time buyers and no- or low- down payment VA mortgages that are available to active duty service members and military veterans.

 

• Be Patient- It may take a year or more to accumulate enough cash to qualify for a mortgage on a starter home. Do not expect to purchase a large house with upscale features the first time around. You’ll also need to save for closing costs, which can amount to several thousand dollars.

 

• Get Pre-Approved- Before shopping for a house, get pre-approved. This means that a lender has verified your income, checked your credit, and agreed in writing to provide a mortgage up to a certain amount.