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Financial Life Advisor
Financial Direction Needed
I'm currently 42 years old with a wife and 1 kid and, regrettably, have not seriously started saving for retirement. I've got a little in a savings account, a couple thousand in credit cards, and I put 3% of my paycheck into the company 401k for the last several years. It always seems like my paycheck is spent before I have anything left to save. I know I should be able to save more and there is no way that I am purposely spending everything I make. What is the best way to figure out where all my money is going? What amount should I be saving or should I be paying off my credit cards?
M.E. from Austin, TX M, your situation is quite normal. Most of us were required to take a health class in high school, but for some reason personal finance is not included as required curriculum. It is rather unfortunate because personal finances are much easier to manage if you start planning when you are young. The good news is that at age 42, it is not too late to start, and you have plenty of time to get your financial house in order.
It sounds like you suffer from the most common financial affliction in the United States. I am going out on a limb here, but I suspect that you do not live on a budget. The reason I say that is you are unsure of where your money is going every month. Someone who plans out their monthly expenditures usually knows where their money is going. In my experience, when you go through the monthly exercise of doing a written budget, you end up spending less money because you are planning purchases on purpose instead of letting them happen to you.
Very few people I know enjoy balancing their checkbook and planning out monthly expenses, but the alternative is that people who do not budget usually overspend because they are not aware of what they can afford. If you simply make the decision, “I like it, I want it, I buy it,” usually you’re not making an informed decision as to whether you can afford the expense or not.
If you sit down and ask yourself what is more important: buying new clothes; getting a cup of Starbucks each morning and going out to eat three nights week, or having sufficient money to retire, most people would say retirement. The reality is that many people make the decision to purchase things without thinking of what that purchase really means in the long run. When you put your budget down on paper, it forces you to make conscious and informed decisions about what is most important to you. You have the perspective of your whole financial life right in front of you. When you drive past Starbucks, you are only thinking, “Hmm, a Venti Latte would be awesome right now,” not thinking of how quickly small Starbucks-like purchases can add up.
I am not making a judgement call on what is most important in life— for some, I am sure drinking Starbucks coffee is more important than being able to pay the light bill in retirement, but I think most people would agree that retirement is more important. So in order to get control of your finances, you should sit down with your wife each month and review your monthly budget. If you have a large expense coming up or one popped up last month, you should talk about how to deal with that financially.
To make budgeting easier, there is some new technology available which is makes keeping track of your finances easier. This new technology advertises that it can aggregate your information from multiple locations and keep track of it in one simple place. These financial aggregators can log into your bank accounts, investments, credit cards, and other financial websites. Then you can go to one place and see information for everything at once. The most popular of these companies are Mint, Thrive, Quicken and Wesabe. Some of these companies tout the ability to be proactive in analyzing you budget and can be set up to send reminders to your email or cell phone when you are approaching credit card limits or could be late on a payment. Many of the free websites will mine your data to send you targeted advertising for products you may be interested in.
Many people do not know what normal budget numbers look like. Generally, the largest expenditure each month is housing. It is very difficult to be able to save and pay for regular living expenses when your housing costs are more than 1/3 of your take-home pay. So if you and your spouse bring home $4,000 a month, your mortgage, property tax, insurance, and utilities should be no more than about $1,350 per month. If you are spending too much of your paycheck on housing, you may want to consider downsizing houses.
Credit cards are a dangerous financial instrument. A credit card changes the whole psychology of a purchase. Retailers have found that consumers spend significantly more when they are paying with plastic. Often, people do not realize how much money they have spent until they get the bill at the end of the month. By that time, the damage is done. If you have spent too much and are unable to pay off the balance completely, the credit card company is happy to charge high interest on the balance, which further erodes the money you will have left over for the stuff you actually need to buy every month. I advise staying away from credit cards at all times. They can create a dangerous debt trap.
Credit cards have such high interest rates that it is very difficult to find an investment which could outperform what you are paying in interest. I always think it is better to pay down credit card debt before investing. Investing while maintaining credit card debt is like trying to swim while holding a brick in your hand.
Once you have the credit cards paid off and you know where you money is going, you should try to bump up your retirement savings to 15% of your income. You need to make up for some lost time by saving a little more than someone whose saved all along might have to.
Ultimately, the best thing you can do is get on a written budget. The communication and teamwork between you and your wife will be beneficial in not only in your personal finances but also in your relationship. When you communicate your goals, you are discussing your dreams and helping build you life together. This generally will only strengthen your relationship, an added bonus of budgeting.
Posted by Ben Gurwitz on 21st October, 2009 | Comments | Trackbacks
Tags: Financial Planning, Retirement Planning, Debt Management, Oct 09
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