Gather Little by Little

Author: Mike

When we talk about personal finance, there are several rules of thumb that can help you build a solid financial plan. Here are a few numbers to remember when you want to improve your personal financial situation.

Aim for a Credit Score of 750

A credit score may vary from 300 to 900 but most people have a score between 600 and 800. A great credit score will open the doors to get better rates on:

- credit cards,

- insurance (car, home, life, etc),

- personal loans including car loans,

- lines of credit and

- mortgages.

In order to benefit from the best rates available due to a stellar credit rating, you must aim for a credit score over 750. How can you do that? Well, there is no magical ways to improve your credit score. Here are the 5 major things that impact your credit score:

- Credit history,

- Current level of indebtedness,

- Amount of time credit has been in use,

- Credit inquiries,

- Type of credit experience (i.e. number of loans, credit cards, lines of credit and mortgages; the more diversified the better).

100 minus your age to determine your asset allocation

This is a classic in financial planning circles. While this financial rule of thumbs won’t fit for every case, the basic principle remains: The older you are, the less money should be invested in equities.

Fixed income (like bonds, certificates of deposit) will provide stability in your investment portfolio. At retirement, the last thing you want is to see your nest egg losing a quarter of its value in a single year. Those who are retired and didn’t follow this rule of thumb suffered tremendously in 2008.

8,6%: Dow Jones Yield since 1930 (including the 2008 crash!)

As a financial planner, I usually tell my clients the stock market average return is about 9%. It is important to have a realistic yield expectation. This will allow you to build a stronger (and more reliable) retirement plan and will also avoid belief in the Maddoffs of this world who promise double digit annualized returns at all times. The truth is: there are no free lunches in finance!

Another word of caution; 8.6% over the past 78 years doesn’t include management fees. Therefore, if you buy mutual funds, you will have to pay, what we call, MERs (management fees). Make sure to ask your financial advisor what are the fees and how they impact your investments.

70% of you gross income should become your revenue at retirement

This is another great rule of thumb in financial planning used in creating a retirement plan. Most people carry several expenses related to working (transportation, specific clothing, eating out, etc.). Once  retired, you should not have these expenses anymore. You should also be close to paying off your mortgage (we all hope!). Accordingly, 70% of what you earn before you retire should be enough to support your new lifestyle.

Don’t make the mistake of decreasing this amount when you reach 70-75 thinking you will do less activities and be traveling less often. It is true that you won’t spend in activities but chances that your health expenses will increase. Keep the same level of income (adjusted to inflation) in your retirement plan.

10% of your income should be saved for your retirement

In order to respect your financial plan and meet 70% of your income at retirement, one should save 10% of his gross income and invest it. This should be enough to support your lifestyle at retirement while putting 10% aside won’t kill you once you have done a budget.

This financial rule of thumb will vary depending on your age (and the age you want to retire) and your risk tolerance (that will influence your investment yield). These topics will be covered later on.

The Rule of 72

This is a quick mathematical rule to calculate how many years it will take for your investment to double depending on its yield. For example, if you invest $10,000 at a steady yield of 6%, your initial investment will worth $20,000 in 12 years. You simply divide the number 72 by your expected yield, it tells you how many years it will take to double your investment. So when you get a CD at 3%, you will need… 24 years to double your investment!

25% of your gross income should be allocated to your mortgage/rent payment

This should be used as guidance for your budget when you are looking to buy a house or change apartments. Considering that you already have to save 10% of your income for retirement and pay taxes, taking an additional 25% of your revenue should be enough to provide shelter without jeopardizing your financial situation.

You still need money for food, transportation, utilities and don’t forget to put money aside for your children’s education! You can always exceed 25% for your house payment but be aware that you will have to sacrifice something else in order to pay for the house of your dreams.

I hope these financial rules of thumb will help! I am curious to know if you use any of them or if you use other personal finance rules of thumb?

Image source: Austin ampersand Zak

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I personally believe that Cash for Clunkers was a mistake . . . you might disagree  and you are welcome to your opinion – it’s a free country! (at the moment) If you do happen to believe that incentivizing consumer deficit spending through the use of government debt is a good idea, you will be happy to know that the next big thing is on the way this fall: Cash for Refrigerators. The government has set aside about $300 million for states to use to give out rebates to buyers of energy-efficient appliances like freezers, refrigerators, furnaces and central air conditioners.

The details of the program are still taking shape, but the hope is that the program will jumpstart the sale of energy efficient appliances.  Sales for household appliances are at their lowest level ever and there seems to be no signs of recovery. The stock prices for appliance companies like General Electric, Electrolux and Whirlpool have seen a small jump as news of the program has started to trickle out, however, I believe it is unlikely that there will be any sustained growth in this sector. (FYI: I am not an investment advisor and anyone who would make a a stock purchase because of something I write on this blog needs their head examined.)

Here are some of the details that I have uncovered in my research:

• States are responsible for deciding how to specifically spend the money.
• The amount of funding is roughly equal to $1 per person, so more populous states will get more funding.
• Refunds will range from $50 per appliance up to $200 per appliance.
• Most sources estimate that the rebates will begin to become available in late October or November.
• You can get more information from the Department of Energy website.

If you are already considering the purchase of an energy efficient appliance in the near future, you might want to wait until the details of the plan become available for your state in October or November.

So what I do I really think about this program? Well, I do not want to upset anyone who reads this blog, but here are a few questions/statements that I think are relevant:

• This is money that the government does not have, but it will have to take from us (or our children) at a later date. It must be repayed with interest.
• What happens when the $300 million runs out? Appliance sales will probably drop even further than they have over the last year.
• What happens when people who have a perfectly good refrigerator, but decide to go out and put a new fridge on the credit card because of a government rebate? Is the addition of more debt to their household a good idea right now?
• Remember that there are administrative costs to any program like this. How much money is the government spending in order to send all of us $300 million that belongs to us in the first place?
• When will our government give us incentives to save money?

The Smiths have an older washing machine and could save up to $80 in yearly energy costs by purchasing a new Energy Star model. So they go to Sears and find a new washer for around $700. The state rebate on this machine is $100, so they finance the rest with an in-store credit card at 10% APR. The Smiths will take three years to pay off the remaining balance. The total cost of the new machine for that family will be approximately $650. Over the three years, they will save about $80 in energy costs. So they spend $650 to save $240. If the machine lasts eight years, they will have broken even.

But that is not the whole story.

Our government is now another $100 in the red and it cost them another five bucks (estimated) to process the paperwork and reimburse the retail outlet. This money adds to our debt and the interest rate on our national debt is around 5%. Eventually, Congress will have to raise taxes on the Smiths in order to finance the $105 and since our government never pays down principle, the Smith’s, their children, their children’s children and on into perpetuity will have to pay a extra $5.25 in taxes every year. Of course, this does not take into account the inevitable rise in inflation due to the devaluation of the dollar.

Now I am not an economist any more than I am an investment advisor. I am just trying to do the math. If you understand this scenario in a different way, feel free to nicely explain where I went wrong! And if you can get a new appliance for $50 or $100 or $200 less than the asking price, I do not fault you for taking advantage, but make sure you understand what you are doing.

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I get many emails each month from people asking for financial help and advice.  A very common theme in these emails is something along the lines of: “I am very frugal and spend little to nothing, but still don’t have enough money to make ends meet“.  My reply?  You don’t have a spending problem, you have an income crisis. At some point you can only reduce expenses so far.  Once there you are faced with only one option: increasing your income.  Surprisingly, that may not be as hard as you think.

If you’re having an income crisis, here are just a few ideas to stir those creative juices for ways you can earn extra income:

Get a second job

Proverbs 10:4 says: “Lazy hands make a man poor, but diligent hands bring wealth.”   One of the best ways to get extra income is to get second job.  While it might make for long days, its a guaranteed way to increase your income.  With our current recession, part-time and second jobs can be a bit hard to find.  If you stay persistent there are people and companies hiring.  Look for companies that are doing well as a result of the recession: Discount stores, food industry, security, house and car repairs, personal care (Barbers, hairdressers, beauticians and cosmetologists).  These are just some of the job areas you can focus on.

Make sure that your second job won’t conflict with your primary job though, or you might be putting your primary job at risk.  Also, make sure you read through your primary jobs ethics or employment guidelines to insure they allow you to work a second job.  Some companies don’t or at least frown on it heavily.

Both parents work

While not an option I like, the bottom line is that if you are struggling to pay the bills and put food on the table the stay at home parent might just need to become a working parent.  Consider this option very carefully though and do so only if absolutely necessary.  I believe that having a stay at home parent makes a huge difference in your children.  Now, that isn’t to say children of working parents have issues, I just think having a stay at home parent is better for your children.

Also carefully consider the financial implications, as it may not be worth it either depending on the addition income.  A few things to consider and factor in are:

• Will you need another car?  Don’t forget to factor in the additional maintenance and gas expenses too.
• Cost of daycare and summer camps
• Will the new job require uniforms or nice clothing?

Side work

One of my favorite ways to earn extra income is by doing side work.  That’s exactly what I do with Gather Little by Little, my other blogs and Empty Cabin Media.  I’ve taken some things I really enjoy doing and turned them into side income.  I work my day job (and always give it number one priority) and then in the early mornings, evenings and weekends I work on writing and side jobs.

The only caution I’ll throw up on this option is be careful to not burn yourself out.  This is something I’ve struggled with a great deal recently as the workload at Empty Cabin Media has really increased.  I’ve found myself working way too much.  The trick is the pace and schedule the work.  I’ve also set dedicated times for doing side work, and I’m working diligently to avoid working weekends and dedicating them to my family. For example, by dedicated times are 5 – 7am, and 8 – 10pm Monday-Friday.  Of course sometimes that varies a little.

Find something that you enjoy doing, are good at, and is marketable and start promoting yourself.  For Empty Cabin Media, I just mentioned it in an article I wrote here on Gather Little by Little and began participating in a few web development forums and the next thing I knew I was getting 3-4 jobs a week!  The work has grown enough now to where I am actually subcontracting some of the work to keep up with the demand.

I know lots of people with very successful side businesses doing: website development, software development, handyman work, baking, catering, power washing, landscaping, lawn care…well you get the idea.  The opportunities are endless.

Passive income

Passive income is everyone’s dream.  Passive income is basically “Making money while you sleep”.  Passive income is income earned while you are doing nothing for the business.  Now, with that said finding true 100% passive income is next to impossible, as everything requires some level of investment to sustain it and grow it, but it is possible.  For me, Gather Little by Little is some level of passive income.  Even if I stopped writing today, I would continue to earn money through advertisements for a good while.  But, without new content and promotion, the traffic would slowly die off, as would the revenue.

There are lots of opportunities for passive income on the internet: Blogging, affiliate stores, eBay stores, product sales…the list goes on.  Do some research on passive income and you’ll be amazed at the opportunities available.

Readers, how do you earn extra money?  What creative ideas can you share with others who might be in an “income crisis”?  Add a comment!
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Do you save all your credit card reciepts and then enter them in a spreadsheet at the end of the month?

Do you enter the spending from a particular day every day?

Do you use You Need a Budget?

Are you a cash and envelope user? Once the envelope is empty, your spending stops.

Do you have a particular time set aside to update your budget?

Do you use an Excel spreadsheet to record your spending?

Are you careful to write down every penny?

Are you a Quicken user?

Do you round to the nearest dollar?

Do you just purchase what you need and hope it all comes out okay?

Do you record both income and spending or just spending?

Is your budget a rule that was made to be broken or the “law of the Medes and Persians”?

Is your budget set up to balance weekly, monthly, yearly or not at all?

Are you a member at Mint.com?

If your spouse breaks the budget, do you cover their mistake and hope they don’t do it again?

Is there any portion of your spending that you do not record?

Does your spouse ever see your budget?

How do you handle a surplus in any one area?

Do you record withholding taxes on your budget or do you just keep track of take-home pay?

Are investments and retirement savings a part of your monthly budget or do you just ignore that part of your financial life?

Do you check your budget every day?

How often do you check your  bank balance online?

Do you lie awake at night wondering if your budget will balance that month?

Do you just hope your spending is “in the ballpark” of your projected budget?

How long do you keep the previous year’s budget?

Do you discuss your budget with your spouse?

Do you use your credit card statement to balance your budget?

Do you budget for gifts or do those come out of emergency spending?

Do you have good budget habits or bad budget habits?

Do you even keep a budget?

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I don’t even care that he is playing for the Vikings, I love watching that guy play.

Clever Dude had an interesting post about the high mark up of disposable razor cartridges. I have a couple of comments. First, companies will charge what the market will bear. If consumers quit purchasing a particular item because it is overpriced, the price will come down. They are under no obligation to reduce the price simply because their mark up is ridiculous. Second: I have used a straight razor on occasion, but I have found that the convenience of the electric razor is beyond compare. I have a reasonably thick beard that I shave every day. Why do men still even use straight razors?

Flexo posted yet another article about the shortcomings of the “Cash for Clunkers” program. This thing is a big mess. I would like to add a small editorial comment, hopefully without without generating too much heat – if our government cannot properly administer a $3 billion entitlement, how in the world can we trust that they can handle a $1.3 trillion dollar entitlement (healthcare)?

A while ago, I posted about my “resolution” regarding my daily lunches. Gen X finance has posted the results from his brown bag lunch experiment. Yet another reason to just make yourself a sandwich!

We have a Costco membership, but it is not saving us very much money. Primarily because the store is quite a bit out of our way . . . We did not consider that when we purchased the card. However, a Costco membership has been a good deal for Green Panda Treehouse.

Tough Money Love is also not a fan of more congretional spending. He even calls it “hypocrisy”. Sigh, wouldn’t it be great if government had to apply the same rules of personal finance by which the rest of us live?

Have a great weekend! Don’t just spend money, spend time with family.

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