2009 Wrap Up; Looking Forward to 2010

This past year has been full of financial progress for us. First, as a couple, my boyfriend and I finally decided to combine our incomes and create a combined budget. Second, after many years of thinking about it, I finally opened a Roth IRA. Third, after 2 years of graduate school, I have started a full time position on a salary with benefits including a 401K. And fourth, as a couple, my boyfriend and I have set combined financial goals that we are achieving this year and plan to achieve next year.
Speaking strictly numbers though, here's how we did in 2009:

    - By the end of this year my boyfriend and I will each have 6 months worth of expenses in savings
    - I paid around $2,000 in interest on my student loans while they have been on deferment
    - We reduced our monthly grocery bill in half (translate into saving at least $200 per month)
    - We came to our senses and moved to a more affordable side of town and reduced our rent by $800 a month
    - We have both been investing 20% of our income 

As you can see our accomplishments this year included being smart with our money, paying down debt and increasing our savings and investments. Now that we have saved 6 months worth of expenses in case of an emergency, we are ready to focus on attacking our debt. This debt consists of a timeshare my boyfriend purchased a few years ago and my student loans.
So these are our financial goals for 2010:

    - Pay off the timeshare (roughly $6,000)
    - Pay off 90% of my student loans (you can tell that's a lot by looking at how much I've paid in interest this year)
    - Continue investing 20% of our income in both 401Ks and Roth IRAs
    - Keep all of our spending down to 55% of our income




Photo credit: jin.thai, flickr; a2zindianews, flickr

Know Your Numbers!

Many of us go through our daily routine completely oblivious to the numbers in our financial lives. Many people don't know their numbers either because they just don't care or they don't know just how important it is. Although it doesn't sound like much fun, knowing your numbers can be extremely empowering. From my experience, these are the all-important numbers in your life to know:

1) Income: Do you know how much you bring home every month? Every year? I'm sure everyone knows how much they make an hour or a year, but this figure is usually your gross income. This is the number your employer gives you when you're hired, or the figure you see when you get a raise. But this is not the same as your net income: how much you bring home after taxes, after 401K contributions. You may be surprised to learn your $50,000 income is probably more like $36,000 but it's important to know because you don't want to live a $50,000 life style when you don't really bring home that much.

2) Expenses: Do you know how much you spend every month or every year? How much do you spend on groceries every month/year? How about on gifts (birthdays, Christmas, Anniversaries,...), gas, vacations, or cable? Keeping track of your spending every month and then seeing how much you spend in these categories every year will help you view your spending from a very different perspective. After seeing just how much of you hard-earned $36,000 is used up on groceries every year, you may be inspired to take a second look at your grocery shopping habits.

3) Net worth: Keeping a budget or a spending plan is not enough to understanding where you are financially! Calculating your net worth can admittedly be very depressing (as it was for me) but it's also a great way to track your progress (although very slowly) and give you a motivational boost to pay off debt and accrue more assets.

4) Savings: How much do you have in savings? How much do you need in savings? It's easy to get around ever building up a good nest egg for a rainy day but like insurance, if you don't do it, you'll be sorry when you need it. So how much do you need? We've been working hard on building 6 months worth of essential expenses. If one of us loses our job, we will definitely be paying our rent, utilities and other essentials, but we won't be paying for cable or going out for dinner. Six months of essential spending is a good amount to save.

5) Debt: How much do you have in debt? How long could it take you to pay it off? Becoming aware of how much debt you have out there is not much fun, but like calculating your net worth, it can be a real motivational exercise. After you know how much you have in debt, you can start playing with the numbers to see how much faster you can pay it off.

6) Goal money: What are your financial goals and how much will you need to accomplish them? Are you looking to retire ever? Do you know your car will be useless in a few years and will require you to buy another one? It would be smart to save up for these events so if you know what your financial goals are: save for a replacement car, then you can start on achieving this goal by deciding how much you want to spend and when you want to purchase it. Eventually you will need another car and eventually you will want to retire, so you might as well start thinking about it and figure out the numbers.

The point in all this is that knowledge is power. You can go through life not having a clue how much you spend on groceries or not knowing if you have enough in savings in case you lose your job, but ignorance does not protect you against financial hardship. Just the opposite happens: ignorance promotes financial hardship. Don't be ignorant, know your numbers!

Photo credit: Pink Sherbet Photography, Flickr

Action is Key

There are many tips, advice, formulas, and rules of thumb when it comes to personal finance, but none of it matters without action. It is human nature to procrastinate and put things on the back burner if they're not a pressing issue at this moment in time, but doing this could be costly in the long run.It takes real motivation to act on something but sometimes the things that should be motivating enough, just aren't.

For example, it took me years to open an IRA. Yes, years. I'm 27 years old and I just opened an IRA 11 months ago although it had been on my to-do list at least 2 or 3 years.  Obviously the motivator was tax-free growth for my investments, but this wasn't real motivation. You see, thanks to my parents, I already had an investment account in a mutual fund so there wasn't any urgency to get started on an IRA. It wasn't until I read a few books that explained expense ratios and loads that I realized how much it was literally costing me to keep my money in that mutual fund.

Another example is my home owner's insurance. I have owned a condo for 5 years and I am literally just this week buying insurance for the it.  The thing is that it's a condo, so the structure is already insured and paid through my maintenance fee but everything inside isn't. Luckily nothing's happened to my place that would require insurance but 5 years of procrastination! I know, it's crazy. I've been rolling the dice. The only reason I'm finally purchasing it this week is because I was talking to my dad about not having it and he gave me the name and number of his insurance broker. It wasn't until I had a name and number that I pciked up the phone to get finally insurance.

The point in all this is that I get that procrastination is normal, but that's not an excuse for it. I never calculated how much money I wasted in high expense ratios at my old mutual fund but I know I lost money. And luckily nothing catastrophic has happened to my condo but luck only goes so far and it was just dumb not to have it. So when it comes to procrastinating on the things you know you should do, you need to find your own good reason to do them. Obviously the possibility of financial ruin from a fire burning down my condo wasn't a motivating enough reason for me. I just needed to overcome the burden of searching for insurance which as it turns out was easily done by me talking to my dad who then lead me to a broker that did all the searching for me. Easy as cake- after I took the necessary steps.

I Got the Net Worth Blues

According to the "experts", calculating your net worth is supposed to be a good exercise in order to take a snapshot of where you stand financially.Calculating your net worth is pretty easy. You add up all of your assets (the value of your house, car, investments, jewelry,...) and then you add up your liabilities (what's left on the mortgage on your house and other debts). You then you subtract your liabilities from your assets to get your net worth.

I really don't like looking at my net worth because it doesn't look good. I actually have a negative net worth. It's not fun admitting that especially because I'm usually really confident about my finances, but my net worth is part of my financial package so I must face it. My situation is that I owe almost as much as my house is worth and I have many thousands of dollars in student loans. Normally I would say my net worth isn't that dyer because it's only about a thousand in the negatives, but who am I kidding? I ran across a formula in the book The Millionaire Next Door that helps determine what your net worth should be. Here's the formula:

Net worth = your age times your income, divided by 10

After plugging in my numbers I felt sick to my stomach because the number was well above $100,000! I knew my net worth wasn't that good but I didn't know it was that bad! Ugh. Now, I'll try not to dwell on the disappointment of being so far behind because I know the purpose of this exercise isn't to make me feel bad, it's to put things in perspective. It's another motivator to GET OUT OF STUDENT LOAN DEBT AND PAY DOWN THE MORTGAGE. So next time I start to get sloppy about paying down my debt and keeping my spending under control, all I'll need to do is take one glance at my pathetic net worth to slap me into shape.

Photo: stevendepolo, flickr

Budgets: Why We Need Them and Why We Don't (anymore)

Why we need budgets: In my mind, a budget is a tool used to categorize spending and limit how much spending occurs in those categories. I believe a budget is a useful tool for those who overspend or for those who have no idea where their money goes. I do not consider myself an over-spender, but before I started keeping a budget, I had no idea where my money was going.
I needed a budget because I was completely clueless about my personal financial life. It wasn't until I started my budget that I became knowledgeable about where my money goes. It's true that knowledge is power because the only way I've been able to bring my expenses down is knowing where my baseline is. For example, it was only after I saw how much we used to spend on groceries that I realized we could do much better.

Why we don't need a budget anymore: We already now know exactly where our money goes. As a couple, we have been keeping a budget for 7 months and personally, I have been keeping one for almost 2 years. After keeping a budget this long, we know exactly how much we spend in any given category every month and we generally stay within that range. Therefore, keeping a monthly budget at this point would be a waste of our time.

So what now? Do we never look at our expenses again? Nope. We need to figure out a new way of tracking our expenses that's less cumbersome than a traditional budget but just as valuable. It's going to take a little brain-storming and discussing with the boyfriend to figure out how, but tracking personal finances doesn't have to end with the budget.

How I Reduced My Phone Costs To Less Than $200 per Year

Yes it is possible to pay less than $200 a year for phone usage- and it's completely legal and practical. Notice I didn't write "cell" phone usage. That's because I use a combination of my cell phone and Skype to make this work.

Here's how it works: For $2.95 a month you can call anyone in the US (both cell phones and land lines) and talk as much as you want. There is a limit on the minutes but it's something like thousands of minutes- no way I could ever talk that much. For a small additional fee they give you a permanent phone number with the area code of your choice and you get voicemail just like a normal phone. The calls go through your computer so the computer must be on and your internet must be on too. If you miss a call while the computer was off or you were away, it lets you know when you get back online. I bought a headset and I call and accept calls like a regular phone when I'm home. I jumped on this opportunity because $2.95 a month is super cheap for practically unlimited phone use. And if I'm home, my computer and internet is always on so it's not like I have to take any extra steps to use the phone.
The second part of my plan was to significantly drop my cell phone minutes. Because I've always done the majority of my talking and long phone conversations at home, I could now just use Skype for most of the minutes I use. But I still needed a cell phone for the convenience of calling someone if I needed to while I was on the road, or if someone needed to call or text me about something, Plus I wanted a cell phone for the security aspect of having 911 available at my fingertips anywhere I am. After looking at all my options with T-mobile, I found the perfect plan. It's the prepaid minutes plan. I purchased 1000 minutes for $100 and got an extra 15% because I spent $100 and I have an entire year to use up those minutes. 1000 minutes divided by 12 months is 83 minutes every month. Of course I don't have to use 83 minutes every month and I won't get charged extra for going over that amount but that's the calculation I do to give myself an idea of how many minutes I should be using monthly. 83 minutes every month doesn't sound like much but remember, I do most of my talking at home anyway. When I'm not home is when I do most of my texting (which isn't much) and quick calls to verify addresses of places I'm meeting people or stuff like that.

If used the way I intend, my phone use will cost $135.40 a year (this doesn't include the small start-up fee for my Skype phone number and voicemail, it was something like $30). I've been using more than 83 minutes per month but not by much. Even if I have to renew my cell phone minutes a few months earlier than the year mark, I'll still be spending under $200 a year for phone use. I know this plan isn't right for everyone. Obviously, if you are addicted to texting or your friends are addicted to texting you (like some of mine are), then you will run through your cell minutes quickly. And if you have a smart phone and use it to go online, then this won't work either. But for those who don't need the internet on the go and don't need to text all day every day, this plan works great and can help you save tons.

(photo: david.nikonvscanon, flickr) 

Grocery Shopping Woes and Wins

I went grocery shopping at 2 stores today and although I didn't have to go in the rain this time, it was very time consuming. I actually spend about  3 hours from the time I left my apartment to the time I got home. Grocery shopping has been an issue for us since we moved to DC because we haven't been fortunate enough to have a grocery store near us. And because we do not have a car in the city, it's been hard to find a system that works.

Initially we used a service that delivered our groceries right to our kitchen. I absolutely loved it. I thought it was one of the best parts about living in a city. But having groceries delivered to your house means you pay slightly more for some of the items you buy and it means you pay a fee of around $8.00 plus tip for the delivery person. The other method we used initially was to rent a car. We joined a local car sharing program called Zipcar which charges to use one of their cars by the hour. You can usually rent a car for around $8 an hour so it was even cheaper to rent a car than to have groceries delivered. Still, paying $8 just to get groceries is kind of ridiculous so we started walking the mile to the nearest grocer store and sort of making a day out of it every other weekend. We would hit up about 2 or 3 grocery stores that were within a few blocks from each other to make the trip worth our while.
Since we moved about 2 months ago to a new neighborhood I've been taking the metro or bus to that same area with the 3 stores and then metro-ing back home. This entire trip takes way more time than I want to spend grocery shopping. I could just go to one store and come home in about an hour but I figure if I'm going to be going out there already, I might as well make the most out of my trip. I've started going grocery shopping every week just so I can catch the best deals offered every week. Maybe I'll go back getting groceries every other week, or since I'm going every week anyway, maybe I'll just choose one store each week to visit. Either way I can't keep spending 3 hours grocery shopping every week. Ugh, I'm exhausted just thinking about it.

Anyway, I did continue on my stock piling mission today. Safeway had a special on peanut butter: $0.99 for a jar. I bought 4 (the limit you could buy) so I think we should be good on peanut butter for the next 6 months at least. I was also extremely proud of myself because I scored 6 cans of Progresso soup for $0.63 each. Giant had them on sale for $1.00 and I had printed a coupon that took off $1.10 if you buy 3. I did really great at Giant actually. My total before the sales and coupons was $25.47, and after the savings, I walked out paying $12.01. That;s more than 50% off!!!!!! :)

(photo: Dan4th, flickr)