Life Lessons 101

Everything you needed to know, but was never taught in school.

Millionaires spend 25% less on this…

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I’m going to put a link below, because I couldn’t believe it, until I saw it. Now a lot of this is “averages” so a family of 2 spends less than a family of 5, etc, but the basic idea holds true.

Millionaires spend an average of 25% less… on food. This is combined groceries and going out to eat.

Now I’ve always been interested in what do millionaires do. Is there things I could do to be like them. This started way back when I was in college when I read the Millionaire Next Door. (This is a link to the most recent version, it’s been updated a few times since I first read it.)

A lot of people wish they were them, but few know how to be like them. There are a lot of interesting insights into Millionaires, but this one was interesting. It actually came out of research for a similar book, Everyday Millionaires by Chris Hogan.

The idea is simple, a lot of money tends to “slip through fingers” because people don’t know what they are spending. It’s easy to go out to eat because “there’s nothing in the fridge”, but eating out is always more expensive. It’s also easy to go to the grocery store and grab a little of this and a little of that.

But when you “grab a little of this and a little of that” you probably aren’t buying what’s on sale, unless that’s why you grabbed it, and you may not need it. Food goes bad, and in America, we throw out an estimated 30% of our food. That’s not only bad for our environment, but it’s bad for our wallet.

Since food generally is our second biggest expense (only after housing), we should be mindful of controlling that spending so we can be as efficient as possible with it.

https://www.youtube.com/watch?v=PZq1WP3G_O8
The promised video from Chris Hogan

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Opening a Bank Account

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So you’ve got that first paycheck. Many jobs now prefer, or even require, you to have direct deposit for your paycheck. You’ll need to open a bank account to deposit your paycheck. But even if your job doesn’t require it, you still might want one. Here’s a couple of reason’s why real quick.

  • Going to a check cashing store will cost you – 3-5% of your check will go right to them. Money that should go in your pocket.
  • A bank account is a good place to put money “out of sight” so you’re not tempted to spend it, and thus have it if a need arises.
  • Getting access means having access to ATMs and Tellers, so you can get cash in case some place doesn’t take credit cards, or their credit machine is down. (Went into one place, and a person had knocked over a telephone pole – no credit card processing for two days for them until it was fixed. Cash let me buy things right then.)
  • Most banks will perform notary services for free for their customers.

Not all banks or bank accounts are equal. There are several things you need to consider when opening a bank account, and the first is actually the bank itself.

First you need to consider the location of the bank branches. How many do they have? Are they near places you go? What are their hours? 

Most things can be done on-line, and that’s great, but having a bank where you can simply walk in is a huge deal. When we moved, we initially weren’t going to change banks because our old bank didn’t have any offices in our state. But boy did we change our tune fast when we needed to talk to someone.

Once you’ve ruled out the banks that don’t work for you, there should still be several left to choose from. Now you’ll want to decide what kind of account do you want. Do you want just a checking account or do you want a savings account as well?

All banks will have both types of accounts, but there are several things that will be different at each bank. Generally speaking, a checking account won’t give you any interest on your money – however, savings accounts don’t hardly any more either.

I usually recommend going with a checking account because of a couple of simple reasons. First, some places require a check, at least initially to set up accounts such as utilities, first month rent, etc (unless you want to pay an additional fee for using a credit card – no thank you), thus it’s nice to have a checking account. Also, you will probably need a canceled check to set up direct deposit at your work.

The next thing to consider is if there is a minimum balance. If the bank requires a minimum balance, if the amount of money in your account dips below this amount you will get charged a fee. Make sure you pick an account that you know you can keep the minimum balance or that doesn’t have a minimum balance. Most banks have a “no-frills” account which only requires $100 to $500 – also check to see if the minimum amount is a daily minimum balance, or and average. The daily balance means if on any one day you drop below the amount you will be charged a fee. The average means you can go below for a few days with out penalty, but you overall want to stay above.

Some bank accounts require an initial deposit, a certain amount of money be placed into the account to open it. Usually this is around $100, but could be more. Fancier accounts with additional features may require more. The most I’ve personally seen at a standard retail bank is $10,000 – but that is rare.

Do you want a debit card or ATM card? Not all accounts include a debit card (checking) or ATM (savings) or may charge a fee to have one or a fee if you use your debit card more than a designated amount of times.

Do you want access to an ATM? Some accounts charge a fee for this convenience or a fee if you use the ATM machines more than a designated time each month. Some banks only have ATM machines available at their bank, while others have ATM machines at their banks and also in other locations. Knowing which is which is important, as you will probably not be charged for using the ATM that belongs to your bank, but if you use one from a 3rd party service, you may be charged a fee by them and/or your bank.

Some accounts have a service charge every month. Many times there is a way to waive this service charge by doing something – keeping a certain amount of money in the account, have multiple accounts at the same bank, having direct deposit, etc. Find out if there is a way you can waive it that works for you. Not every checking account at every bank has a service charge, so look into that too.

Note: Direct deposit is usually the easiest way to avoid a service charge – so if your work offers it, make sure you set it up.

There may also be a limit to the number of deposits or withdrawals per month. If you may need to do either of these, be sure to check and make sure there is no limit before incurring fees.

Most checking accounts will not give you interest and if they do, they usually have many requirements that you must maintain. So if you want an account that will give you interest, you may want to consider opening a savings account or, more likely, a money-market account. Ask your bank about them. In the “old days” savings accounts would give you 3-5% interest on the money in the account, you’d literally earn money on your existing money. Today, a good account will give you 0.1% – which is only slightly better than nothing.

Once again, make sure you check about service charges, minimum balances and fees. Interest rates will vary based upon what bank and what type of savings account you choose. Be sure to look at interest rates and how often do you get paid the interest (monthly or quarterly).

Many people select a bank account based upon recommendations, or the one that is closest to their house/work or simply chose the one that their parents go to without looking at the account details. What works for one person may not be the best account for you. So go to several banks, ask questions about their accounts, get information to take home with you about the accounts and pick the best account for you.

Creating a Budget Part II – The Envelope Method

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So spreadsheets aren’t your cup of tea… That’s okay! Not every method works for everyone.

The good news is that you don’t have to have a fancy computer, or fancy software to make a budget and track your spending. Some things you can do real old school.

Sure, you’ll still need to do a basic spreadsheet to calculate your spending. If you haven’t read Creating a Budget Part I, go back and read it and then return here as you’ll need that information for this method. 

Go ahead and compile a list of your needs, wants and work/business expenses (see Creating a Budget Part I to see the breakdown on these). Now determine what you spend each month on these categories. Now put them into order of importance. First rank your needs, then rank your work/business (you can skip this if it doesn’t apply to you) and finally rank your wants.

Each month, after you pay the bills for your needs, including your credit cards. The remaining money gets divided into your envelopes. Now look at your spending spreadsheet and divide out the remaining money into cash and put it into your envelopes.

If the money doesn’t match that means you’re spending more than what you are bringing in and you’ll need to revise your budget to match. That may mean getting rid of or reducing spending on some of your wants.

If you separate the money out into the envelopes and still have money left over, you may want to consider an emergency fund for those months where you need to overspend because something out of your control happens – you have to spend more on gas because the prices went dramatically up, your car needs new brakes, your microwave broke, etc.

This method can be great for those just starting out and wanting to get their finances in order as it keeps you from overspending. Some months you’ll have extra money left in an envelope(s). These will be for things you don’t spend money on each month.

As tempting as it may be, don’t remove the money from this envelope as you will need it later down the line. This allows you to spend more the next month if you want, or you can save the money for a rainy day, or pay down some debts to get out from under your creditors once and for all.

So no matter which method you decide to do, just stick to it. The longer you use the budget, the easier it becomes to continue using it. Remember to update it as you go, as things can change or you forgot to add something that you need. Your budget can help you get your spending in order and hopefully put more money back in your pocket. Happy budgeting!

Creating Your First Budget – Part I

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Creating a budget can be a really important first step when moving out on your own. When you graduate from high school and/or college, most people can’t wait to get out on their own and start living their own life.

However, what most people fail to realize, until it is too late, is if you’re not careful you’ll spend all your money too fast and won’t have enough left to make it to your next paycheck. A friend of mine used to call that problem – “Too much month at the end of the money.”

Many times when you live at home with your parents you won’t have a lot of expenses that you’ll have to pay when you’re on your own. For instance, you probably won’t be paying things like rent, utilities, internet, cable, etc. Some of those are obvious, others, not so much – like insurance, or realizing that your water bill is not included with your electric bill.

People get accustomed to spending a certain way in their youth and are used to much more disposable income. When living on your own, things tend to reverse. You have less disposable income since you now have more bills to pay.

So how do you keep more money in your pocket? All you have to do is learn how and where you money is going, so you can control it, instead of your money controlling you. The easiest way is to create a budget.

Now a lot of people think that a budget is something that restricts you – limiting what you can spend. I like to think of it as a tool to help you. A budget is something that lets you define what you want to spend your money on, to make sure there is money to spend on it, rather than other things that distract us.

Budgets help you track where your money goes, how much you have left and if there is a place you can cut your spending to save money.

The first step to creating a budget is to create a spreadsheet. Everyone’s lifestyle is different, so not all things will apply to everyone. Make your spreadsheet match your lifestyle. 

Break your Spending into Sections

I recommend breaking your spreadsheet down into two to three sections.

The first section should be your needs section. This includes things like rent/mortgage, car payments, gas for your car, utilities (water and electricity), food, phone, internet, tuition and insurance. Depending upon where you are in life, some of these may or may not be needed.

Your second section should be your wants (things that you want, but don’t necessarily have to have). These would include things like dining out, cable/streaming services, travel/vacations, entertainment (movies, amusement parks, concerts, conventions that aren’t business related), hobbies and replacement of items (clothes, shoes, new car, house renovations,etc.).

The third section does not apply to everyone – work/business expenses. Some people don’t have any extra work expenses, however some people have extra work expenses that are not covered by their employer or they are self employed. These could include things like special clothes required, office supplies if you work hours at home, tools, etc. If you are self employed then everything you need to run your business would fall under this category including things like insurance, inventory, licenses, advertising and travel for the business.

By separating these items into sections you pay off your needs first and then once those bills have been paid, then move on to the wants section. This also allows you to see just how much you are spending on items.

Those Starbucks coffees that you love really add up! Most people don’t realize just how much they spend on many things that they purchase, thinking it’s just $2-5. However, when you add them all up, you see just how much you are spending. A budget lets you see a month view and from there you can determine if that’s what you want to spend your money on. If it is, great, spend you money on Starbucks. Just don’t do it, at the expense of a need – like your rent.

Now you can see things you can cut or reduce spending on to keep more money in your pocket.

In the column next to each item, put what you anticipate spending on this category each month. Some of these are fixed costs, others will variable costs. The variable costs items you might want to look at a few months so you can determine an average.

For example, your car payment or rent will be the same price each month. We’ll say you pay $300 for your car payment each month, so you would put $300 in the second column. Now things like utilities can vary. Many times your utility bill will show a graph on it for what you have paid for the past six months to a year. You can use this to determine your average payment. Just enter the average in the second column.

Some things you’ll just have to guess on like your groceries. Later down the line you’ll have a better idea of what this costs you and you can change the amount in column two to match what you typically spend.

When we set up our first budget, we were surprised by how much we spent in some areas. After our first month we started adjusting ourselves and our spending habits. We’ve been doing this for about twenty years and its become automatic for us, but we still periodically review to make sure we’re keeping on track.

Then create columns for each month. You’ll want a new budget for each year. As you spend your money each month, be sure to enter it under that month’s column for each category. If you don’t spend any money on that category that month, just leave it blank.

Once you complete that first year’s budget, you can use that budget to determine the next year’s budget. Just take your averages in each row and use them to set up column two for each category. Sometimes we find that we need to add some to one of our expenses, like gas which went up in price, so we take out of something some where else, or we use that new raise to help us cover the cost.

Sticking to your budget isn’t always easy, but with hard work and determination it can help your get your finances in order and allow you to control where your money goes.

If setting up a spreadsheet seems too difficult or just something you know you won’t stick to, you can always use the envelope method. To learn about the envelope method, check out “Creating a Budget Part II” and I’ll walk you through it.

Changes to FICO and what that means to you.

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FICO affects almost everyone, whether you know it or not. If you have had any outstanding debt in the last few years, you have a FICO score, even if you don’t know it.

That score is used by lenders (credit card companies, apartment complexes, and even insurance companies) to determine how likely you are to repay the money you borrow.

If you score over a 750, you are considered a low risk, and therefore will receive better offers and lower interest rates. Below 550, well, you may not get the loan you want, or if you do, you’ll have to pay more in interest through a higher interest rate. Currently, the average score is a 709.

FICO announced this week that they are tweaking their scoring algorithm, and its estimated that 80 Million people will see their score change by 20 or more points because of it. Another 100+ Million could have a minor change in their score. That means almost everyone will be affected.

Your score may go up

Your score may go up, if you have a low percentage of personal debt. This is usually things like credit cards. Credit cards, because they are considered unsecured debt are more likely to be defaulted on. However, if you have a low amount of debt, people assume that you are working to pay your bills, and your score will increase because of it.

Your score may go down…

Your score may go down, if you have a few late payments, and/or a high amount of credit card debt. This could cause your interest rates to change (for the worse) and/or it be harder to rent an apartment, get a car loan, etc.

What to do if your score isn’t great?

The good news is, your score is not permanent. It can, and does, change on a regular basis. I check my score approximately once a month, and can see if move a few points one way or the other just because of normal fluctuations like if I had paid my credit card bill already or not.

Even with this change, the basics of getting a good score hold true.

First, pay down your debt. The snowball method, where you pay all of your bills at the minimum and then put everything you can into your smallest debt works well. Once the smallest is paid off, you can work on your next smallest, until they are all done.

This is a tried and true method, and works for both financial reasons as well as psychological – you feel good watching your bills disappear.

I’ve known people who’ve held garage sales, or worked a second job for a few months to get that extra money to start the process. Once the first debt or two is paid off, and you can use that money toward larger debts, you are well on your way.

Second, pay your bills on time. I know people who just forget to send in the check/pay online. They get busy with everything else going on, and forget. It has nothing to do with how much money they have.

For them, and maybe you if you are in this situation, consider auto-bill pay. Scheduling your payments, as long as you have the money to pay them, means no more late fees, and helping, not hurting your FICO score.

Finally, don’t spend more than you make. It’s easy to do, but its the most important step to get out of living paycheck to paycheck.

https://www.cnn.com/2020/01/24/success/fico-score-changes/index.html