Financial Newbie » Personal finance

How to make a spending plan

admin — Fri, 07 Nov 2008 01:20:03 +0000

The Wall Street Journal has an article related to creating a budget. I feel that the article is worth a read, as it goes over how to budget in fairly good detail for a newbie. While they don’t explicitly use the term, you should see the basics of creating an emergency fund and how to start budgeting in general. While it may not be as step-by-step as some may prefer, there are a lot of good points that can be taken from the article. I find that the hardest part is always getting started, and there are a lot of good ideas out there on how to do such.

The key to financial independence

admin — Mon, 03 Nov 2008 23:49:55 +0000

It’s not really a secret, but it all comes down to the following: spend less than you earn. Big surprise, no? It does seem quite simple, but with the U.S. being a culture of consumerism and spending beyond your means, I wonder how many people actually know that simple part of the equation. It’s a lesson I’m learning as well, and I honestly don’t see that key point spelled out very often. Perhaps it’s because it seems like it should be obvious, although too many of us didn’t get the memo.

Breaking it down ever so slightly, in order to spend less than I earn, I have two options:

1) Decrease my expenses or
2) Increase my income

Decrease my expenses. Budgeting and frugality is what I would mostly tie into this part of the equation, but I can brainstorm some other factors that could play into this as well. For example, if you take a greater interest in your health by eating right and exercising, you may reduce future medical expenses and perhaps increase your earning power by reducing sick days, for example. If you’re just getting started on this road, find out what you’re spending and cut out some of the fat in your budget from there.

Increase my income. This will include ways to increase passive income (stock investing, interest, etc.) but investment in myself applies as well. Education and self-development are especially relevant here, as investing in yourself will usually pay off with increased earning power. Finishing your degree, developing job skills, or even *ahem* developing a blog as a source of passive income are some examples of ways that you can increase your earning power.

Most of the things I discuss on this site will relate to the these two options, but with an additional emphasis on the self-development that I believe pays off in the long run in the financial game and life in general.

I’ve run a little longer than I intended to, but if you take nothing else from this post, just remember:

Spend less than you earn.

Changing my relationship with money

admin — Fri, 31 Oct 2008 20:50:13 +0000

I think that in order for me to improve my financial situation, I need an honest assessment of what my relationship with money is and a larger assessment of what my goals in life are.

What are my goals? I realize more and more that what I want in life doesn’t involve owning stuff. Health, family, and experiences are really where it’s at for me. Money can help me spend time on those goals. Buying non-essential stuff takes me away from those goals. Specifically, I’d like to finish my degree, travel, and sport a six-pack (hey, at least I’m specific and honest!).

What do I do with money now? Do I buy things to comfort me when I’m down or out of sorts? It feels like someone who eats a tub of ice cream when they get dumped, and I’m sure that they are related emotional comforts. With me, a lot of it feeds into competition, to be the first with the best new thing on the block like the fastest computer or the newest game system.

The key, as always, is to figure out your goals and find out where you’re starting from. Now that I’ve done this, I can start planning my steps to achieve those goals.

Financial independence – what is it?

admin — Tue, 28 Oct 2008 21:10:38 +0000

I’ve started this blog on financial independence, but I have yet to define it for myself. Goal-setting is kind of an essential first step in this (or any) endeavor, so I should set my definition of what the goal is when I speak of achieving financial independence. People may have a general idea of their own definition, but it’s best to make it concrete rather than dealing with generalizations in their head.

So, what is my definition? I think it’s similar to what others have in mind, which is to have enough passive income to cover my needs/expenses without having to actively work. Now, the passive income is likely not 100% passive but more of a sliding scale between active and passive. If you invest, you still need to do research and make the purchases. If you have rental income, you might have to do upkeep or deal with properties or tenants. If you blog, you might have to, uh, blog. However, each of these likely requires less time than holding a full-time job and allows you to pursue what interests you rather than working for someone else.

Now that I’ve defined what financial independence means to me, it will be easier to start defining steps to achieve that goal. So, what’s your definition?

Production vs. consumption

admin — Mon, 27 Oct 2008 02:22:55 +0000

I read an interesting article at Business Week discussing renovating rather than rebuilding our economy. The article goes into detail about how our economy was (and still is) based on consumption, and how such a model is not sustainable in the long run. China and Japan are given as prime examples of producer-driven economies and as nations full of savers, which certainly matches the preconceptions I have. The example is given for Europe is that they have traded their productivity for leisure. These are in contrast to the U.S., where productivity is traded for, well, stuff.

Most of us have no idea what will happen on the macroeconomic level. However, we can make changes on a personal level. Saving for goals and focusing on leisure is a better way to spend your money than owning more possessions, especially if you’re looking to achieve financial independence. Life isn’t experienced through the latest purse or the newest gadget, but rather through what we do and achieve. I could get way too preachy on the subject, so instead I leave you with Tyler Durden’s words:

“The things you own end up owning you.”

Consider that if you’re battling credit card debt paying off…stuff.

Renting vs buying a home

admin — Wed, 22 Oct 2008 21:50:08 +0000

I see the discussion being particularly relevant as buying decisions become more difficult in the U.S. However, most of the material I read when discussing the matter falls in favor of owning a home for the “pride of home ownership” and that renting is like throwing money down the drain. I thought it was nice to see an argument in favor of renting over buying:

Renting Makes More Financial Sense Than Homeownership

I will admit that the article may be reinforcing the confirmation bias I have favoring renting over buying. Additionally, I am a ways away from being able to purchase a home at the moment. Nonetheless, the points made a lot of sense to me, especially since I don’t want to be tied to a location for a long time in order to recoup my investment. Check the math yourself:

Is It Better to Buy or Rent?

Advice for weathering the economic crisis

admin — Wed, 22 Oct 2008 16:45:36 +0000

With the news being dominated by doom-and-gloom about our economy and the words “recession” and even “depression” being bandied about, I’ve put down some thoughts on things we can do to calm our nerves and make it through. These apply more to those in my end of the earning spectrum, which is decidedly in the middle class and young area, but as always take what you need and apply it as appropriate to your situation.

Don’t panic. Doing a search on “surviving the economic crisis” will pull up any number of sites with this listed as the first tip. Maybe this will all blow over and you’ll hardly notice a change to the economy aside from a million news stories. Stressing over it will merely shorten your life. However, if things do get worse you’ll need to be acting rationally to follow the rest of the advice listed.

Budget. You’ll probably see this in any number of articles by me or anyone else. Find out what you’re spending and trim the fat if necessary. I’ll have a future post about trimming said fat. Now, if you think you’ll be doing fine in the current economic climate and have some extra cash…

Invest. What? Invest? Isn’t the market crashing? If you’re a younger investor looking to buy and hold assets for awhile, there is a lot of value to be had right now. While I’m no financial advisor, I’d be willing to bet that the vast majority of companies out there will weather this crisis and continue to increase in value over the next few decades. However, if you don’t think you’ll have enough to go around…

Be proactive. Specifically, if you expect to fall behind on bills, contact the creditor and make arrangements ahead of time. They will likely be happy to accommodate you, since the other option is possibly not being paid for awhile (or at all). You should probably start with your landlord or whoever holds your mortgage and then go down the list of essentials as far as who you need to contact first. Keeping them in the loop can protect your credit, and if you make arrangements ahead of time you can probably avoid catastrophes like being homeless or having your power shut off depending on how bad things get.

Brush up those job skills. You should always keep your resume up-to-date and learn continuously so that you are always employable. Consider courses at your local community college to shore up specific skills or even finishing your degree. At the very least, catalog your work achievements (and other relevant ones) in your resume so that you know your strengths and can demonstrate them to an employer for a promotion or new job.

These tips apply in an economic slowdown, recession, or whatever you want to call it, but you should consider all of the advice even if you don’t think those terms apply to the current economic climate.

Alternatively, if you think the words “apocalypse” and “collapse of the system as we know it” apply, consider stocking up on guns, ammo, and canned goods and learning sewing in your wilderness cabin/commune. I doubt I’ll have a follow-up post for that situation.