January. That month where we all set lots of goals, resolutions, intentions, plans, whatever you want to call it, then a majority of us fail at some or all of them. However, when it comes to financial goals, it literally pays to make every effort to stick to them.
You know … “save X (amount) for X (reason) by X (date).” Sounds easy, but putting into play and it being successful is the difficult part.
1) Determine what financial priorities you have — short term and long term. Get SMART with them — Specific, Measurable, Attainable, Relevant, and Time Bound.
Whether its saving more or for a specific reason or paying off debt, list it out …
I need to save $700 before the end of June for a new set of tires.
I want to max out my retirement/IRA plan contributions in 2015. (its $18,000 on IRAs btw)
I want to pay off my student loan balance X (amount of time) earlier than its due to be paid off.
I want to be able to quit my job and work for myself with six months/a year’s current income set back / travel abroad for X amount of time with enough to cover travels + X amount set back to get restarted upon return.
I want to be debt free before my __ birthday.
I want to fund a rainy day fund of X amount within the next year.
2) Now … take that budget you’ve created and determine as of RIGHT NOW how much you are able to set aside in to short-term savings, debt payoff, retirement accounts, etc.
Let’s hypothetically say that your take home income (after taxes and all other deductions are taken out) is $30,000, which comes out to paychecks totaling $2,500 a month. Factor in recurring bills (i.e. rent, utilities, base student loan payment, groceries, car payment (if you have one), gasoline, insurance, medical expenses (if you have them), & minimum balances on credit cards — although you should be paying more than that if not the entire balance each month!).
Whatever’s left over, determine the % you need to save towards each priority. Perhaps funding a short-term need (i.e. tires, dental work you need done, a car repair) ranks higher at the moment than saving to leave your job or funding a trip. Once that need is met, you can shift that % to something that needs to be funded next, like maxing out the retirement contribution for the year or increasing your rainy day fund balance.
Now, applying that info to the sample priorities above:
Saving $700 for a new set of tires is an easily achievable short term need priority even if you’re living paycheck to paycheck because you can make adjustments to your budget to eliminate splurge/excess spending or recalculate where you tend to go over budget in order to get the tires in the amount of time you have (in this case, six months).
To make it easier, set up an autodraft with your payroll department to set a set amount into a special savings account you’ve set up for this purposes each pay period. That way you won’t see the money or have to worry about transferring it yourself before you forget and spend it on something else first. Once the tires are fully funded, you can leave the autodraft in place to create a savings for auto repairs, a down payment on a future vehicle, or you can repurpose the savings to fund another short term need.
Maxing out a retirement contribution for the year might be a little harder to accomplish with the sample income (think the pre-tax salary amount that leaves you with $30k) unless you’re debt free and have minimal bills/share expenses with someone. If your employer automatically withholds your retirement contribution for a pension plan, that’s great — its money you never ‘see’ or ‘touch’. Check with HR to see if you can feasibly increase the contribution amount each pay period without adversely affecting your ability to pay your bills with your take home pay.
Student loans. Let’s say that you’re aiming to pay them off in 5 years verses 10 years. Can you afford to double your payment every month? For me, it was easier to do than for others since I only borrowed for two years in undergrad (sophomore and junior year) + the first semester of grad school — just over $10,000 total — and had a repayment of $75 a month. I started out paying the accumulated interest each quarter while still in undergrad and grad school so it wouldn’t be capitalized on top of the loan amount when it went into repayment. I then consolidated all three individual loans when I was eligible a year prior to graduation from grad school to lock in the interest rate at 2.87%.
After getting a better paying job once I graduated, when I could, I doubled or tripled the payment. When I couldn’t due to other bills or unexpected expenses (i.e. car repairs, dental bills), I paid the required amount that month. With my current job, I have two ‘extra paycheck’ months where I usually paid upwards of four to five times that minimum payment amount.
On top of that, one of my credit card rewards programs linked in with Sallie Mae and I managed to earn nearly $500 over a three year period that was applied to my loan payoff each quarter. That was 5% of my loan balance paid with rewards**, not income from my paycheck! Clicking the confirm button on that final payment to Sallie Mae was a huge sigh of relief!
**Note: I recently retweeted a Dave Ramsey tweet that said you can’t get rich from credit card rewards programs. I disagree — when a credit card is used the right way and you pay off your balance monthly, you’ll benefit greatly with the right rewards program(s), whether on a student loan balance, for travel expenses, or to use to buy holiday gifts. I’ll share more in detail in a future post.
Working for yourself or traveling for awhile. Its always a good idea to set aside at least six months or more income when going into self employment, especially if its a field you’re not already established in as side hustle or have been building up a business clientele in already. Having that much income set back guarantees you have money to cover your personal bills if you have a slow month. Additionally, being debt free (or having as little of debt as possible) before making the leap into self employment will reduce some financial stress when its a slow income month and you’re stressing just covering the bare minimum of rent, utilities, food, and transportation.
As for travel — if you’re paying as you go — price out transportation and accommodations, then allow up to 10% more for inflation (especially as fuel prices tend to fluctuate as well all sadly know!). Budget food + entertainment in + extra for emergencies (medical treatment being one major thing). Then add at least 1-3 months income to that total so you’ll have some fall back money to live on upon your return home while you’re seeking employment. If you can work abroad while you travel, it will alleviate financial stresses at least!
Becoming debt free by a particular birthday. Let’s use 30 as the birthday in question & say that you’re 27 now. That gives you up to 3 years (depending on where in your 27th year you are) to get debt paid off. Sit down, make a list of all the debt in your name (student loans, credit cards balances, auto loans, etc). You can take a few different approaches to payoff — doubling payments like I did with my student loans or applying every spare penny you have each month split up across the board. Or you can apply Dave Ramsey’s Snowball Method to your strategy.
Rainy day fund. This really should be a top priority if you don’t already have one. Our sometimes friend Dave Ramsey recommends starting with $1,000 even if you have a mountain of debt to pay off so that you have something to fall back on in the event of a true emergency (those shoes on sale at Macy’s or Nordstrom’s don’t count as a true emergency!). Once you’ve made headway on your debt repayments, start socking back whatever you can spare each month to continue funding this account.
With those examples, here’s how I’m putting my tips into play for 2015:
1) Saving $700 for a new set of tires by the end of June 2015. Yup, that example above really is a financial priority on my list this year. Having had two cars and a small truck with 15″ and less rugged 16″ tires didn’t prepare me for how daggum expensive tires on an SUV would be. And I don’t even get brand snobby on tires! I’m just thankful that these have a 55k guarantee unlike the shorter mileage guarantee tires for my smaller vehicles had. My wallet winces as it says “ouch ouch ouch!”
2) Determine how much I can spare to set into a deferred compensation plan at work each month and get it set up. I’ve meant to do this for the last 14 months since I attended an info meeting at work about it, especially after a coworker that has since retired showed me how well his deferred comp account has done over the years. BTW, this separate of my retirement pension through my employer — I already contribute to it each pay period and am on track to being vested into the retirement system my employer is part of in the near future, which means when I walk away (retirement or another job), I’ll get the matching funds my employer pays in addition to my contributions.
3) Save up for my portion for this year’s roadtrip this summer. I’m paying for a portion of the gas (we haven’t determined if my vehicle or another travel companion’s will be the one we’ll use, in which case an oil change will need to be factored in if its my vehicle), a set number of nights’ accommodations, at least one (maybe two) one-way airline tickets (one to meet up with two of them who’ll head out a few days earlier & possibly a second if I have to head home sooner if my time off request is altered), a portion of the food & costs of attractions, souvenir money, and possibly pay someone to care for my dog if a relative isn’t able to. I’m still crunching the numbers on this one, but I’m guesstimating $3,000 to be on the safe side for the moment.
4) Continue funding my rainy day savings account. I want to double its current balance by year’s end. This might be a bit more difficult to do between now and August with saving up for a trip and new tires, but I will be able to make up for it somewhat from September through December.
I have some other financial priorities, but I don’t particularly like sharing all of my financial planning / details on the interwebs 😉
What financial priorities do you have for 2015? I’d love to hear about them — they might inspire a few more for myself!