Maybe today’s society rewards the hares, or perhaps, it encourages or even forces us to be hares or be left in the dust. When I was younger I could run and get everything done and then collapse at night. When I bought my first car, I had a car payment and then the rent went up and wow, car insurance! I had to get a part-time job — I went to work at…
…Pizza Hut as a waitress so I could afford to eat. Literally, I would get a free personal pan pizza whenever I worked. Usually, I at least made enough in tip money to put gas in my car. Normally, I made a lot more if I got to work on Saturday night.
All my life I have tried to become a turtle (slow and steady), but, somehow my spirit is the hare. I will say that as a single mom I often felt like the hare. It seemed like never enough time or money. Always in a hurry to get my kid to school and me to work and then back again. Weekends were housework and errands. So by the time I was worrying about saving money for retirement, I was already behind. And then there was saving for college!
I am sure many folks are familiar with the scenario. How do we catch up? What do we prioritize? Some experts have these strict “cash in the envelope” strategies for budgeting and say cut out your morning coffee or breakfast stop. Others are like go cold turkey and sell things, go bare bones, etc. to cut expenses. If you have credit card debt, things are even more dire.
The reality is that the best solution is something that you can and will do. Maybe you need to be the hare for a little while and look at how to do something quick to stop the money leaks — can you stop eating out and cook at home. Maybe buy a Keurig and make coffee at home before you run out the door. Eating out and buying expensive drinks are the common money thieves. However much this saves you, does it really help you catch up. It’s more like the hare starting to get a head but not actually winning the race. How long can you cut back — eventually, you will get tired and stop.
If you have credit card debt, due to the compound interest2, you may still be losing ground. Well, of course the first step after stopping the money thieves, is to figure out how to get compound interest working in your favor.
If you haven’t heard of the “snowball” method. How it works, is a bit counter intuitive. You pay more on the card with the smallest balance while paying the minimums on the other cards. The goal is that you pay off the smallest card and then you can put that payment amount on the next card that has the next lowest balance and so on. I used that after my divorce to pay off my credit cards. If you do this while cutting back your spending -this works!
That said, if you need to — you may need a side-hustle (aka second job). Do you have a hobby that you can make some money? It could be as simple as baking cakes (folks at work may pay for a nice cake for a special occasion) or even just making hair bows (yes, someone I knew did this at night while she watched TV). The side hustle may only bring in a small amount of money but it almost counts as double – yes!! It’s money that doesn’t come out of your budget AND if it’s under a $400, you don’t have to claim as income. While $400 may not seem like much, it might cover a new coat or feed your holiday shopping fund.
You get the picture, the hare gets busy fast to make a dent. Next is the where the turtle wins the race. Many folks work at a job where there is a retirement savings plan (e.g. 401(k) or similar). Most companies will put money in if you do– they will match your contributions up to say 5% for example. If you do not contribute enough to get the match, then you are missing the best gift! I have coworkers who have told me they can’t afford to — actually you can’t afford not too! It may be hard at first but it’s literally free money. And you get a tax break on your contributions. Maybe you have to start after you get your credit cards paid or the easiest time to start is when you get a raise. If you get a 3% raise, put in 3% – it’s not the full match but it will be easier – and it’s as if you put in 6%!!. Next year do the same. Here is why even a little makes a difference — compound interest! Really the longer you have money in there to grow, the better. So it’s really best even if it’s only 3% to get started and then just let it grow.
Next you have to decide how to invest. Easiest is to pick a good “Target Date” fund. These are funds that are usually named with a date: Investment A 2050 or Investment B 2065. So which one to choose. Hopefully, your company has several in the fund offerings. Think about how long you plan to work and calculate the date you plan to retire — the earliest date. So if you are 30 and plan to retire at 67 then select one that is 35 years from now. You can change your strategy later if you need. The goal is to get started. The more time you have funds saved — the more time it has to grow. The target date funds will start more aggressive and then slowly move more conservative as it comes time to use the funds. So, as you get older you may want to start contributing to a fund with a later date (10 years or so) to cover your lengthy retirement.
Now, you are like “Hey, wait! What about the kid’s college?! Let’s get into that. Well by now you have your debt eliminated — at least the credit cards are paid. You are saving for retirement. What about a car or house payment? Have you saved money for a house? With the cost of buying house, let’s discuss college funds. Seriously, the earlier you start a college fund the better. A 529 plan can be your best bet. Each state offers one and you don’t even have to pick the one in your state. That said, if you can put some money into one to start the ‘snowball’ growing that is a huge help.
Maybe feeding the college fund is hard. Even $50 here and there will make a difference. Grandparents may even wish to contribute a yearly gift. Your goal of saving the possible $100-200k for each kid may not be practical. That said, if you can save enough for the first year for each kid — that can help them get started. Then help them pay while in school. And, if you can have them only borrow the last year or two of school and then you can pay the interest. This sentence looks simple but it’s not. The biggest issue with student loans is the interest and even though the payments don’t start until they graduate, the interest starts compounding.
If you can get your child the student loan that is the equivalent to a home equity line of credit then it will often allow for interest payments. This is critical to keep the snowball at bay. Let’s say your child borrows $20k a semester for the last 2 years at 7%. The interest is going to really start adding up. However, if while the kid is in school — you may not be able to pay the tuition but you can pay the interest. Therefore, your child’s loan may still be a serious chunk but not nearly as much since you paid the interest.
Rather than feel like you need to save/pay all of your kid’s college costs upfront, please remember your son or daughter can live with you after college. If you can let them live rent free or help with groceries, etc., they can work to pay off loans and save money. That is a huge help. Additionally, many companies offer tuition assistance to repay student loans. Please don’t sacrifice your retirement savings when your child has more options to get ahead. With the real estate market the way it is, saving and buying a home will be a different post!
In the end, your child will be most happy if you can fund a your own happy retirement without having to live with them! And this is a very comfortable place to be.
1Aesop’s fables are a collection of ancient Greek stories, credited to the storyteller Aesop (c. 620–560 BCE) that teaches moral lessons. They often feature animals with human characteristics and are designed to convey a moral, such as “don’t judge a book by its cover” from The Lion and the Mouse or “slow and steady wins the race” from The Hare and the Tortoise.
2Compound interest is the interest calculated on the initial principal amount plus any accumulated interest from previous periods. It is interest on interest, causing money to grow at an accelerating rate over time. This can be beneficial for savings and investments but costly for debts, as interest can grow quickly on both the original amount and the accrued interest. This is why it is compared to a snowball that grows as it rolls downhill.
I am not being paid or sponsored for the mention of any companies or products. These comments are from personal experiences and I am providing links to either my blog or others for reference.
With school graduations happening everywhere, it’s not hard to reminisce about my own graduation. While some kids knew what they wanted to be when they grew up, many of us were still trying to sort things out. I remember thinking, how am I supposed to decide what I want to be when I grow up and select a college major and career trajectory for the rest of my life? I had barely been anywhere that didn’t involve visiting family or the place with the Big Mouse and his friends.
Unfortunately, just getting a college degree doesn’t guarantee a happily ever after, especially if that degree comes at a very high price in the form of student loans. So many people talk about living paycheck to paycheck and usually this is good in the sense that it means they have a job. However, it is not good as this also means the cash flowing in is usually already going out to pay bills, if there is even enough to cover the bills.
Cash flow is very important as it can be the difference in families keeping the lights on, feeding their children, and even keeping a roof over their heads.
Literally, a positive cash flow can mean someone does not end up moving in with family, sofa surfing, or worse, homeless. Ironically, this term – Cash Flow – is usually only discussed in the business realm even though it applies to personal finance as well. Lately, you may hear the term “income streams.” This refers to the various forms of cash flow. It’s trendy to discuss part-time jobs as ‘gigs’ and you can have several “side hustles” for income streams. This is another way to say having several jobs part-time, or otherwise, to keep the cash flowing in.
That all said, even having several income streams may not be enough to keep a positive cash flow. There are people who make six figures and still may be living paycheck to paycheck. If making a high salary or having several jobs is not enough to keep a positive cash flow, what else is needed?
Good Habits! Plenty of articles provide tons of financial advice so sorting out what is best or where do you start can be overwhelming. I have had friends tell me “I am not good with money!” Not being good with money is not a life sentence. It does require a change to live differently which is easier said than done. However, it CAN be done – baby steps! One of the first steps is to look at all of your bills and your income. Do you have any cash left after paying the bills? This is the hardest part: identifying where the problem lies, be it too many bills/not enough cash, shopping too much, or just not saving money!
Usually, it is a combination of multiple factors. And it can be ‘all or nothing’ thinking – meaning, if you can’t save a lot of money, it’s not worth trying. Step one is setting up an emergency/savings account – even if means saving only $5 per paycheck. Even $5 per paycheck is starting a good habit! Yes, even if you don’t think you can do this – you can!!
Next is to identify: are you spending too much on things that you could cut back on or change? Yes, most will say, cut out that “fancy” coffee and you know, if you have a daily Café Mocha habit – making coffee at home could help give you the $5 to start your automatic savings for your emergency fund. If things are not that easy for you, it may be time to look at what larger bills can be cut and/or do you need to find another income stream. Shoot, even if you are covering your bills – did you know (if you have Verizon), you can go to their website and it will review your usage and recommend the best (cheapest) plan! I have done this several times.
When I was in my early 20’s and first working, sharing an apartment with roommates and still trying to finish a degree, I was super busy. Buying lunch out every day was expensive, yet I also didn’t have a lot of time either. I admit for a few months, I made and ate peanut butter and jelly sandwiches. Yes, on the days that I had evening classes, I made 3 peanut butter sandwiches (PB&Js) – one for each meal! I only had to purchase a drink. Before you feel too sorry for me, I like peanut butter and jelly sandwiches. I only had to do this for a few months until I got a raise at work!
I bring this up to say that while it may sound painful, you need a short-term and a long-term plan to improve your finances. As much as I like PB&Js, even I couldn’t keep up that habit more than a semester or two. When my old car “left” me, I bought my new car and then, one of the roommates moved out! Instead of only paying 1/3 of the rent and utilities, I was paying half. Eek! I realized I had only enough money to cover some bills and none left for the car insurance, gas, and food money! Not even the PB&Js! Thank God for waitressing jobs – I was able to work a few nights per week. One of the great things about waitressing is – TIPS! I usually made enough to put gas in my car for the week, provide cash for lunch and some groceries, and while the paychecks were small, I was able to start a savings account and use that money to cover the car insurance. Also, guess what I love more than a PB&J – pizza! Working at a pizza place also provided a free meal on the nights I worked. Again, I only had to work the extra job until the next raise at my day job.
Depending on where you are in your financial situation, it may be harder than a few PB&Js along with an ‘extra gig’ here or there. However, a problem once identified is a problem that can be solved! Looking at your finances, you may need to put multiple strategies into action like the Debt Snowball method. It may take changing jobs to get that ‘raise’ at work to get the income stream positive. That said, starting – even with only saving $5 – can be the first step! And while it may feel impossible, dream about your future and where you would like to be financially. Keeping that vision can help you start and keep those good habits and that will lead you to a more comfortable life.
*Kaela’s Cookies – Falls Church, VA (@Kaelas.Cookies)
What does that mean? When you borrow money there is always a cost – even if funds are borrowed from family, where the cost may be emotional capital. The primary cost is the interest charged on the loan. It can also be the cost of your time in earning the money, e.g. how many hours did you have to work to pay for the item. Let’s look at interest rate costs and how you may use borrowing money to your best advantage.
While you may think this is “too financial,” as in “I am not good with money,” it is a very important concept to understand. You may already understand the concept but think “it doesn’t apply to me.” When thinking about money and looking at budgets and finances, the “cost” of money now becomes very important. Especially, when you are looking at big purchases or have started accumulating credit card debt.
The “cost” of money is the interest rate and the total amount you will have paid at the end of a loan. How do you know what that cost is? How much more per month do you need to pay off the 30 year mortgage early? Why does it feel like you can’t make progress paying off your credit cards?! How many years will you have to work to pay off these student loans? Using an amortization chart or table can help you calculate the total costs for your loans. There are many calculators out there (yay!) to walk you through the process.
The answers to these questions depends on your credit rating and your needs. If you are trying to decide if you should buy a new car or a used car or if you have a older car should you trade it in to lower the payments. Usually the interest rate on a new car is lower than the rate on a used car. And, a new car usually comes with a good warranty so the maintenance should be less costly.
The real advantage if you owe money on your credit cards and you have an older car to replace, then borrowing the funds for the new car and selling your old car outright could be a better financial decision. If you can pay off your credit card with proceeds from selling the older car, it may be a better financial decision. A new car loan may be at 4% and the credit cards could be at 16%. It may make sense to pay off the credit card and purchase the new car. Or, use the older car proceeds to start an emergency savings account to ensure you don’t have to borrow more money on your credit cards. Or use the funds to help pay for college for your son or daughter.
The main goal is to have your money work for you. Perhaps, you want that new designer purse and the sale price is only $300! So, you think $300 is not too much so you charge it. However, if you are only making minimum payments (like $50), now that $300 gets added to a continually growing balance. In the long run, that purse will cost a lot more than $300 and that is not a bargain.
What if you have more than one credit card with a balance — eek! The Debt Snowball Method is needed! I have used this method when I was younger and it does work. Looking at your options can save you money in the long run. It can be tricky getting out of debt and trying to save for an emergency fund. The emergency fund is going to be critical to eliminate debt. So start saving even $10 per pay period into a savings account — usually credit unions are more favorable for not charging fees on small balances. Once you get a raise, you can up the amount even if it’s only $5. Use direct deposit to automate the savings, even if you think you can’t afford it. You can’t afford not too. You can withdraw the funds if you need to but surprisingly you will get used to it and not miss that $10.
If you are working and have the option to have a 401(k) or similar plan, please take advantage of it. I know it may sound like, how can I save for retirement when I owe on my credit cards? Two reasons! 1) your company match is “free” money and it is actually part of your salary compensation package. 2) Tax benefit! You don’t pay taxes on the contributions to the fund. If you can, contribute the minimum to get the match. If you can’t at first, do the minimum to participate and increase your contributions at the next raise (or once you pay off your credit cards).
Once you have your credit cards paid off, have an emergency fund, and are contributing to your retirement fund at work, you may want to buy a home. Most realtors and mortgage companies will try to sell you a house saying you can afford the payments for the 30-year loan.
However, looking at the amortization tables, BankRate.com, has a nice one, you may find that a 20-year loan at the same interest rate is not that much more and will save you 10 years of payments!! Most lenders are not suggesting the 15-year mortgages and try to steer you to a 30-year loan. And, if you ask about the 15-year loan they will often say, “you can still make double payments and still pay off your loan in half the time.” The issue is that most people won’t make the extra payments. And, some banks will only credit you the real savings if you pay the double payments on the exact due date.
You may ask why does this matter so much? For example, a house with a mortgage of $330,000 for 30 years at an interest rate of 5.27% may not look that bad at a base payment of $1,826 (before taxes and insurance) but over 30 years, that loan/house will cost $657,490. That is literally, almost the same as if you bought “two” houses!! Or the cost of the house and putting a child through a private college. A loan of 15 years will cost $2,656 (before taxes and insurance) is only about $800 more per month and the total cost is $478,128. Yes, this loan will cost about $150,000 more but it’s less than half of the extra $330,000 with a 30-loan. So, when calculating if you can afford a new home, consider a 15- or 20- year loan over a 30-year loan. Of course, there are other factors to consider when buying a home than just the cost of the loan. Making educated money decisions can make for a more comfortable life.
References: https://www.bankrate.com/mortgages/amortization-calculator/
It has been a while since I sat down to write an article and I didn’t realize it had been so long! It feels like some days there is so much to do. I went to visit my family and saw my niece graduate from high school. She has done so well and it was nice to see the family. Interestingly, even though it has been years since I graduated, in many ways, they are the same: exuberant graduates, relieved and happy parents, supportive and happy friends. Speeches and pomp and circumstance but now with big screen TVs — this grad ceremony was held in the Toyota Center!
So … after the speeches and celebrations, it’s up the graduate to decide the next steps: college, trade school, working, or maybe a gap-year full of travel? Big decisions that can be literally life changing!
College costs have risen so high, it can exclude many students. However, there can be ways to make college more attainable besides just expensive loans.
The College-Level Examination Program® (CLEP) can help students achieve college credits for a fraction of the costs. This can be a good option if someone is good at reading and taking exams. Many students are very smart and a regular classroom moves too slow. CLEP exams allow you flexibility to study and take the exams at your pace.
Tuition Reimbursement Programs at private companies can help as well. Usually, you have to get the class (and/or degree program) approved. Pay for the first class up front and if you don’t have the funds, this is a good use for your credit card. Pay the minimum payment until you pass the class with a B or better and then file for reimbursement and use that payment to pay off the first class.
Both of these options together can help a student pursue a degree. Maybe not as fast as the full-time path but it can be a jump start and you can earn valuable work experience with health insurance!
While it is great to pursue a vocation in an area you love, it may not make a lot of sense to pursue a degree that may leave you with a lifetime of debt. This is not an endorsement to suffer through college to get a job that is boring and/or you are otherwise unsuited for. Rather, most colleges have as part of their orientation classes, tests for aptitude, interests and personality to aid in career planning. Often there may be several occupations or career paths for which you are well-suited. Therefore, how do you choose?!
Well, one way is to look at the free Government resource: The Bureau of Labor and Statistics (BLS), Occupational Outlook Handbook. They even provide a helpful video to help you in your career search. I am so surprised that most high schools never mention this free resource. Well, that said, many adults have no idea that it exists. Why is this important. College is one of the most important investments you can make besides buying a house and saving for retirement. Well, there may be a few more things, but college may be the foundation of your earnings for the rest of your life!
So…when deciding to invest time, money and hard work towards a future occupation, there are things to consider such as:
- Job Opportunities and Locations
- Salaries
- Future growth and/or decline in Occupations and Areas
These are important factors since most students take an average of 4-5 years to complete a Bachelor’s Degree. If you desire to be a Lawyer or a Chiropractor where are the new job openings? What is the cost of living in the area? The job may pay more in NY City but the cost of living may mean your actual money after your bills may be less than if you took a lower paying job in Alabama. Often cities have higher rent costs than small towns.
When you first go the BLS site, it may be overwhelming. Another awesome and free resource is your neighborhood Librarian at the Public Library or the College Counselors. All of this information can also be useful for someone going to college, looking to make a career change or to move to a new location. The key takeaway is that investing wisely in you and your future can help you build a very comfortable and rewarding life! Best Wishes to all of the new graduates!
References:
https://clep.collegeboard.org/clep-benefits-for-everyone
https://www.nerdwallet.com/cost-of-living-calculator
https://myscholly.com/50-companies-with-amazing-tuition-reimbursement-programs/