Sunday, August 15, 2010

Personal Finance 101

Has anyone seen or taken such a class? I'm guessing the majority of my peers haven't. So how do we learn to handle our own finances? Not all of us have financial advisers or are independently wealthy. In my paranoid or angry at The Man moods, I start thinking that the rich don't want the middle class to know how to handle money because then we wouldn't mess up and make the rich richer. Isn't that the reason why the US is in this financial mess? Us little folk had no idea how to handle our money. I am not rich by any means but over the years I have developed strategies and techniques that have helped me live on very little. I know it's gauche to talk numbers but I'll give you a rough idea. I have never earned over $50,000 and I have been able to live on my own for 7 years - 2 of those when I was unemployed (2008 and 2010).

First off, let's talk about our checkbook/checking account. I have always had direct deposit - it takes a lot of guesswork out of check clearing times. Plus, some banks give you a bonus/extra for using direct deposit. I put 100% of my pay in checking. If I want to move stuff around, that's what the internet is for. I also have set up an Excel spreadsheet that tracks my expenses and income as a back up to my check register and online reports. If something is off, I can immediately see where the problem is through that method. I also keep track of everything on my check register by saving every receipt. After a round of shopping, I just empty my purse, sit down at my desk and enter everything into Excel and the register.

Most of our major expenses go to rent/mortgage payments. Here is how I am a landlords dream. Let's say my rent is 1000. I divide that by 4 (or 5 depending on the month) so that's $250. I know my weekly paycheck is let's say $500 so I tell myself that I only have $250 to spend that week in fact, I write that in my check register so I know what amount I can work with that week. That $250 each week has to pay for bills, groceries, and, if you're lucky, some fun extras. For sanity's sake, I try to pay my bills as early as possible so I know later in the month I have some fun money to play with.

Savings are important too. I know in theory we are supposed to have 3 month's living expenses saved up for emergencies. I'm sure by now in 2010, we've tapped that emergency fund over and over. I have a small savings account by now but whenever I can, I transfer over whatever I can from checking. The way I work my finances is that if I finish out a week with over $1,000 and all my bills have been paid and cleared, I know I don't need all that in checking so I transfer $500 to savings. Or if I get a gift of money, I split it in half between checking and savings.

I am not perfect financially in any way. My credit card debt isn't pretty but it's much better than it was last year when I had to use some of my 401K to get it down. Another trick I use is that I know how much is in my checking account within $10 so I don't have to worry about overdraft.

While we are on this topic, I will share a story that helped me develop this system. Back when I was 23 and just out of college, I was talking to a friend of mine who was complaining about how poor she was even though she lives at home. She had an awesome job and in theory should be able to buy a new car and/or live on her own. I volunteered to come over some night and sit down with a calculator to help her. That night arrived and I set myself up at her parents dining room table with a calculator and a tablet of paper. She brought down all her receipts, financial papers and her checkbook. I started sorting through the papers so I could figure out how to tackle the job. Lo and behold, I found an un-deposited paycheck in the pile that was a couple months old. No big deal, it was just misplaced, right? Well, upon further sorting I found 5 more! Concerned I turned to my friend and asked her if she had any more of the paychecks. "Oh I have a bunch crumpled in my pockets. One sec." she replied all blasé as she went to her bedroom. She came back down and tossed me a wad of paychecks. All told, she had $10,000 worth of paychecks!!! So, I sat her down and explained her cash flow problem her response, "So that's why HR is bugging me about direct deposit!" My head did not explode but it came very close. My friend wound up buying a car within a couple months.

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