Money Management

Top 7 Financial Mistakes to Avoid in Retirement

winter-a woman-financial mistakes in retirement

Most of us looking forward to retirement. We imagine doing lots of things we have not had enough time to do while still working. My dreams about retirement are all about traveling the world and spending more time with the family.

But dreaming about happy retirement is not enough. To have a pleasant and secure retirement depends on how well we prepare for it. Also, it depends on how few financial retirement mistakes we make before start living the life of our dreams.

Preparing for retirement could be complicated. You have to understand your life expectancy, when is the best time to collect Social Security, when and how to withdraw money, and how to pay for big expenses such as long-term care.

Many people prefer to wing it and go to retirement without any kind of planning. They think that if you have a Social Security paycheck and a little savings everything will be fine. Unfortunately, this kind of conclusion might be a costly mistake.

Several financial mistakes can harm your financial security in retirement. But you can avoid it by planning so you can retire with confidence.

Here are the top 7 financial mistakes to avoid in retirement.

1. Mismanaging when to start collecting Social Security benefits.

railway - road to retirement-financial mistakes

When you’re planning for retirement one of the most important decision is when to start claiming Social Security benefits. This decision is personal and depends on your life expectancy and how much you need the money.

In general, waiting until your full retirement age or even 70, is the smart move. Social Security paycheck is a guaranteed income and it will keep coming in as long as you live.

Many people have their financial plan based on the assumption that they will work well into their 70’s and receive continuous income. But the reality can be somewhat different.

According to statistics about half of the retirees stopped working before they thought they would because they lost their jobs, couldn’t find a new one, tired of old jobs, or have health issues. Early retirement before you can afford it can be damaging for your financial security. When you retire too early you might face a risk of running out of money or have to go back to work.

Avoid this mistake and don’t just start collecting your Social Security at any time. Learn more about it first so you can maximize your paycheck for life. You can increase or decrease your benefits. If you start collecting the benefits early at age 62, the paycheck will be reduced to up to 30 percent.

The full benefits will be paid at your full retirement age which is 66 or 67 for most of us these days. But If you can delay collecting benefits until age 70, your monthly payments will be increased by 8 percent for each year between full retirement age and 70. Waiting until age 70 is a great benefit because you’ll receive the highest Social Security paycheck for the rest of your life.

If you’re married, the smart move would be to coordinate your time of claiming benefits as a couple. The spouse with the lower expected benefits can collect early. The other spouse can delay collecting the benefits allowing the future paycheck to grow bigger.

When one spouse dies, one of the couple’s Social Security paychecks will go away. That is why it’s important to have a higher earner to delay claiming Social Security as long as possible. So, the survivor will have to get by on the larger of two checks.

Remember to find out what you can expect from Social Security and incorporate it into your retirement plans.

2. Underestimating how long your retirement will be.

coffee pot-flowers-happiness in retirement

People are living longer and longer. For many of us, it would be desirable to retire as early as we can. But then it could be dangerous for our finances if we end up living an exceptionally long life. There is a big chance of running out of money in our late years.

According to the Social Security Administration, “About one out of every four 65-year-olds today will live past age 90, and one out of ten will live past age 95.” If you retire at age 62 and live to 90, you’re looking at 28 years of retirement. You need to have enough retirement money to support you for that long.

If you’re fortunate to spend many years in retirement your nest egg should survive withdrawals over a long time. To avoid running out of the money you need to plan well. Look at your retirement accounts and estimate if you have saved enough money to retire. If not, save more, work longer, and/or delay your retirement.

3. Withdrawing from retirement funds when the market is down.

euro coins and banknotes-house- retirement portfolio

The recent years market crashes and recessions wiped out millions of people’s retirement savings. The 2008 financial crisis sent everyone’s investments down significantly. Though, the market has recovered since then many people lost their money if they sold everything at the bottom of the market.

The 2020 market crash due to coronavirus pandemic affected millions of baby boomer’s investment portfolios. And probably many of us will never recover from these losses. The recent market crash changed many baby boomer’s retirement plans. If you were planning to retire this year or even next year, you may need to change this decision and give your portfolio extra time to recover.

There is a lot of uncertainty and terrifying news in the world today. It could be very stressful if you’re getting closer to retirement.

However, the best thing you can do is to stay calm and don’t panic. You’ll only lock in losses if you start selling your stocks and withdraw money from retirement accounts when the market is down. It may be nerve-wracking to see money evaporating from your retirement portfolio.

But don’t make any rash decisions and sell your assets, because you’ll regret it later. Remember that these bad times shall pass, the stock market will recover, and you’ll be in a strong position to retire once it does.

You can avoid the risk of pulling money out of retirement accounts during the market downturn by having multiple sources of income to draw from. Plan on having assets that are not dependent on market fluctuation such as cash reserves, emergency funds, annuity. The more options you have the better you’ll be positioned to minimize the impact of market losses.

4. Maintaining the same level of investment risk in retirement portfolio.

When you were younger you had no problem investing in risky investments because you had time to recover losses. But when you get closer to retirement you don’t want to gamble your savings. If the market goes down, you will have little time to rebuild them.

You cannot predict the market and eliminate the risk of losing money entirely. But you can take steps to help decrease your exposure to risk by adjusting and diversifying your portfolio. To avoid having to sell stocks at loss you can adjust your asset allocation before you start spending your retirement savings.

When you get closer to retirement, you should re-evaluate your investment strategy. For many years you’ve saved and invested money with one goal in mind is to grow your assets. Now, as you’re about to retire, you have to focus on another goal – make sure your assets will last.

Take time to re-evaluate your overall investment strategy and decide what is the best way to invest your money. With age, we think about preserving capital rather than making big profits in the stock market. It’s recommended to have a 60/40 portfolio for people who are close to retirement. The invested money should provide income and growth of your portfolio during retirement years.

Many people make a mistake of getting too conservative by investing more than 50 percent of their portfolio in bonds. Bonds are good for preserving the capital, but they don’t give enough growth to beat inflation. That’s why you still need to have money invested in stocks/ mutual funds so it will grow over time.

Your portfolio should be balanced for your age and risk tolerance between individual stocks, mutual funds, bonds, and cash. If your portfolio not properly diversified and concentrated mostly on stocks, that kind of risk factor could hurt you in the future.

Some retirees go too conservative with their investment portfolios and invest everything in CDs and other cash-like investments. This is one of the biggest mistakes because inflation erodes the purchasing power of the dollar. To avoid this mistake add stocks (equities) to your portfolio to provide growth potential. If you retire at 65 and spend 20 years in retirement, you need to have enough growth to make your money last that long.

5. Draining retirement savings and not tracking your spending.

books-sunglasses-beach-spending plan in retirement

When you stop working it can be easy to get carried away and start spending money on travels, hobbies, grand kids, or anything else you were dreaming about. It’s important to have a budget in retirement. With no plan for tracking your spending, you can drain your retirement savings fast. It will be easy to have budgeted $4,000 a month but to realize you’re spending $6,000 a month.

Your living expenses will change after you stop working. You will spend less on eating out, lunches, business clothes, commute, etc. But you will spend more money on new hobbies, activities, and travels. You might decide to buy a vacation home, a new car, a boat, or spend money on remodeling your home.

Some new retirees celebrate their new life in retirement by going on a spending spree. If you’re a new retiree, you need to know exactly how much money you have to live on.

Your goal should be to have a spending plan that includes the cost of “need to have” and “want to have” expenses. Once you calculated your essential or “need to have” expenses, make sure it can be covered by guaranteed income from Social Security, a pension, or an annuity. Then you can see how much money you can spend on your bucket list.

Having a monthly budget and tracking your spending helps to make sure your money will last.

6. Carrying debt into retirement.

street-lights-debt-financial mistakes in retirement

Avoid this big mistake by carrying debt into retirement because it could increase your chances of running out of money fast. When you start living on a fixed income it’s hard to pay off debt if you need to pull big chunks of money from your savings. Although, big withdrawals from retirement funds could push you into a higher tax bracket.

If you have plenty of income sources having debt may not be a big deal for you. Otherwise, plan to pay off debt before you retire so you’ll sleep better at night knowing you’ll have the freedom to spend money on yourself.

7. Underestimating healthcare expenses and long-term care cost.

hospital-scanning equipment-healthcare expenses in retirement

We all know that health care is very costly, but many of us forget to include it in our retirement planning. Underestimating health care expenses or how to pay for long-term care can be a big mistake. Yes, Medicare provides health insurance, but it doesn’t pay for all medical bills and it doesn’t pay for long-term care at all.

There is no way to know how much it will cost. But according to Fidelity Investments, a healthy couple can expect to spend on average, a total of $275,000 out of pocket on healthcare expenses in retirement. And long-term care cost is not included in this number. A sudden medical emergency or serious illness can wipe out your retirement savings.

To avoid this financial mistake plan for medical expenses and be smart about Medicare by choosing the plan that will serve you best. Make the most of all the Medicare program offers and be good about all required screenings and preventive care. Don’t forget to visit your doctor and get regular check-ups, so that if any problems get caught early you can do something about them.

Think about how to reorganize your life so you can stay healthy. What you eat and how often you exercise will impact who you are in 20 years. You might reduce your overall healthcare costs by staying healthy.

Long-term care insurance might be a solution for many future retirees. There is a big chance for many of us that one day we will need help with daily living tasks like dressing, bathing, cooking, or even eating. Not everyone can rely on family or friends for long-term care help.

Health Savings Account (HSA) can help to save more money. Also, you can set up a separate bank savings account or put money in a certificate of deposit (CDs) for future medical expenses.

Putting It All Together

The financial mistakes can increase your chances of running out of money in retirement. These mistakes can ruin even the most carefully planned retirement. If you dedicate a little bit of your time learning about retirement and planning for smart moves, you can end up with tens of thousands of dollars more than you’ve expected. That can make a huge difference when you retire and start living on a fixed income.

What do you think are the big financial mistakes in retirement? Have you made some yourself? Please share your thoughts and ideas with us in the comments below.

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Disclosure: This information is only educational. The intent if this post is to provide a simple guideline for an extremely complicated matter. I am not providing any specific financial advice or recommendations to any of my readers.

6 Steps Guide to Organizing Finances for Retirement

by Maggie Leave a Comment

women planning tasks w/ sticky notes-organize finances for retirement

When I think about retirement I think about financial security in my golden years. It’s not about the size of your nest egg, but about how to manage your finances.

You need to get a clear financial picture before you quit your job. You need to figure out everything about how many accounts you have, how to manage them, in what order to withdraw money, tax liabilities, how your investments will generate income.

Organizing your finances for retirement will help you to feel more comfortable with your retirement decision. Instead of giving up on the retirement bucket list, you want to match your lifestyle to your available resources.

Moreover, organizing your finances for retirement will give a sense of control over your life. It will make the transition to retirement much easier to manage.

In this post, I want to go over 6 steps required if you want to get your finances in order before retirement.

1. List all your retirement accounts.

laptop, notepad and coffee -organize finances

In retirement you’ll be paying yourself from the savings you have accumulated over the years. Thus, the first step to organizing your finances should be listing out all your retirement accounts.

Over the years Roman and I accumulated several 401(k) accounts from different employers. We managed to roll over them to our individual retirement accounts – IRAs and even Roth IRAs.

So far, we have multiple retirement accounts – (1) 401(k), (1) 401(k) Roth, (3) IRAs, (2) Roth IRAs and (1) investment account. I want to simplify our finances before we retire and combine them into one account.

When I roll over these accounts to a consolidated investment account it will be much easier to work with available funds. It will be easier to manage money withdrawals and decide on an investment approach with only one account.

Listing out all your retirement accounts will give you a better idea of the available money you have to manage.

2. Write down your assets and liabilities and calculate your net worth.

white graphing paper with numbers - organize finances for retirement

You next step is to organize your assets and liabilities/debt. This step should help you to get a general overview of your finances and estimate your net worth.

You can do it on a simple piece of paper or create a spreadsheet in Excel, Word, or Google.

How to Make a Spreadsheet in Excel, Word, and Google

Assets

List everything you own. Start with your major assets like home, cars, boat, vacation home, rental properties, collectibles, gold coins, and anything else that has tangible value.

When you list these items try to come up with their real value and not the price you want to sell those things. Your major assets gained a lot of value over the years and can be sold if you’re ready to liquidate them or in a bad financial situation.

In addition to gathering information about the value of your major assets, you need to add information about other savings outside of your retirement accounts. List all your bank checking and savings accounts, investment accounts, stocks or bonds, CDs, and money market accounts.

Liabilities/ debt

List everything you owe. This should include mortgage balances, car loans, student loans, credit card debt, and any other debt or loan you may have.

Your net worth

Calculating your net worth is quite a simple task. Calculate the total of your assets and subtract the total liabilities/debt from that number.

Total Assets – Total Liabilities = Net Worth

You might have a negative net worth, which means you have too much debt. In this case, you need to work your way out of it as soon as possible. It will be a big mistake to start your retirement with too much debt on your hands while living on a fixed income.

3. Social Security as a retirement income

long pier on the lake - retirement security

In 2020, the average Social Security benefit for a person who retires at 66 is $18,036 per year or $1,503 per month. If you’re married the combined income will be higher.

Many Americans will rely on that paycheck as a basis of their retirement income. Social Security is called a guaranteed income. And the best part of it that it will keep coming in as long as we live.

When you start organizing your finances for retirement, it’s important to know how much your Social Security paycheck is. Look at your statement from the Social Security Administration.

Social Security

When you open the link to the website, sign in, or create an account if you don’t have one. Your Social Security statement will show how much you could expect to receive at a different age.

Depending on your birth date and year, you’ll see several numbers of expected income. The lowest income will be If you decide to claim your benefits at age 62, and the highest at age 70.

Whatever age you decide to retire, be careful of claiming your benefit right away and look at the numbers first. I always like the idea to retire early at age 62, but delay claiming the benefits until full retirement age, so I’ll get higher income for life.

4. Calculate your income, expenses, and cash flow.

bulletin board with sticky notes - organize your finances for retirement

It’s important to calculate your retirement income and expenses so you would know how to manage your spending.

Income

List all the retirement income you expect to receive. This includes your Social Security paycheck, pension, estimated income from retirement accounts, investment accounts, rental properties, business (if you own), and a part-time job.

By gathering all information will help you to have a clear picture of what income will come from which account. Also, you should remember about a required minimum distributions (RMDs) which start at age 72 in 2020 (before it was at 70 ½).

Expenses

To find out how much money you’ll spend in retirement answer a few questions:

Where do you want to live in retirement?
How do you want to live in retirement? What is your lifestyle?

If you know where and how you want to live it will be easier to understand your retirement expenses.

All expenses can be divided between essential and non-essential living expenses. I like to call them “need to have” and “want to have” expenses.

Essential or “need to have” expenses:

Mortgage or rent
Utilities
Transportation
Food
Medical and other insurance

Non-essential or “want to have” expenses:

Travel and vacations
Hobbies and activities
Entertainment

You can add to this list donation to charity, gifts, or other contributions you‘re planning to have during your retirement years.

Calculate your cash flow

Calculate the total of your retirement income and subtract your estimated retirement expenses from that number.

Retirement Income – Retirement Expenses = Cash Flow

I like to calculate our cash flow because it helps to get a clear picture of our income and expenses. It’s not about how much money we’ve accumulated over the years, but how we manage our spending.

If we want to have a secure retirement and not to run out of money fast, we need to control our expenses. I want to make sure that our cash flow is positive which means we live within our means and don’t overspend.

If your cash flow is negative it means you live beyond your means and need to cut on spending. Negative cash flow can be altered by increasing your income or decreasing your expenses. I think it’s always easier to adjust your spending habits than your income.

Understanding your cash flow situation is important because it helps you to see what kind of life you can afford.

5. Re-evaluate your retirement investment strategies

person holding glass ball -investment options

While organizing your finances for retirement, it will be a good time to re-evaluate your overall investment strategies. You need to decide what is the best way to invest your money. The invested money should provide income and growth of your portfolio during retirement years.

With age, we tend to get more conservative with our investments. When we are getting closer to retirement, we start thinking about preserving capital rather than making big profits in the stock market.

It’s recommended to have a 60/40 portfolio when you’re close to retirement. But you still need to have money invested in stocks so it will grow over time. Many people make the mistake of getting too conservative by investing too much of their portfolio in bonds. But we still need to have growth in our retirement portfolio so we can beat the inflation.

On the other hand, it will be a mistake to invest all your money in the markets. When you retire and stop receiving a steady paycheck, you need to have enough cash to pay for expenses and emergencies.

I like the idea to have one or two years of money available to provide immediate income. You can use a mix of cash and other safe investments like high quality, short-term bonds or money market accounts for quick access to funds.

6. Review all insurance policies

I try to review our insurance policies every year. But when you’re ready to retire you need to look at them more closely. Depending on your policy the home insurance could cover less or more than you need right now. The same applies to car insurance. It’s a good idea to check that your car policy isn’t covering a child who moved out of the house and not using your vehicle anymore. Make sure that your insurance policies have the cost and coverage to match your current needs.

Health insurance will come at a big cost in retirement. Our health is likely to decline with age and we will need more help from the medical professionals.

health-illness-graphic - long term care insurance

Long-term care insurance is an extremely popular topic that is discussed among financial advisors. You can spend almost $10,000 a month for full-time long-term care assistance or even more if medical care is needed.

On many occasions, Roman and I discussed if we need to buy long-term care insurance. So far, we didn’t come to any conclusions. It’s insurance and it’s expensive. You may pay a premium for years and after all, never use the coverage.

But what if one of us breaks a hip later in life. Who would help with cooking, cleaning, and bathing when the other partner is old as well? And how would you pay for someone’s help? Without long-term care insurance, you will have to spend down your funds before you see whether you qualify for Medicaid.

On the other hand, we need to look at it as we look at any kind of insurance. We have been paying for a homeowner’s insurance for years and never feel sorry that we never used it. The same was with our rental property. We had landlord insurance for a 3-family rental property we owned for years. The policy we paid for was around $1 million in liability coverage. But I feel happy that the property never burned down or being damaged so we would have to use the insurance.

It doesn’t matter if we either will need care, or we will not. What matters the long-term care insurance will allow us to afford quality care when we need it. Also, it helps to reduce the financial and emotional stress that long-term care situation can impose on the family.

Article by AARP: 5 Facts You Should Know About Long-Term Care Insurance

Putting It All Together

I’m sure that we all struggle to keep our finances in order. My biggest problem is that we have too many accounts. Lately, I have noticed that it’s getting harder to manage them. Before we retire, I wanted to make sure that we have a firm grasp of our financial situation.

My goal is to organize and simplify our finances the way we can enjoy our retirement instead of worrying about the financial unknowns. I want to have peace of mind knowing that we can manage our retirement savings wisely.

I believe that organizing your finances for retirement will help to be confident in the comfort of your next phase of life.

Have you thought about organizing your finances for retirement? Share with us your thoughts and ideas in the comments below.

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6 Smart Ways to Make a Holiday Budget & Stick to It

by Maggie 4 Comments

a child in red dress decorates Christmas tree - holiday budget

The holiday season already started with Halloween festivities and shopping for home decorations, costume parties and bags of candies. But the big money spending holidays like Thanksgiving and Christmas are coming close.

If we don’t want to accumulate new debt during the holidays, we need to allocate some money for decorations, gifts, parties, and maybe travels. The best way to do that is to make a holiday budget and then stick to it.

In this post I want to share the smart ways to create a holiday budget, save money on holiday shopping and avoid getting into debt:

1. Set a holiday budget and know your limits

If you don’t want to accumulate new debt during the holidays, you need to make a holiday budget. Before you decide what you should spend money on, you need to figure out how much money you can spend. The smart way to prepare for holiday spending is to look at your basic budget spreadsheet.

First, look at your monthly take-home pay and then subtract your monthly expenses, and calculate what is left. The number on your spreadsheet or calculator is how much you can afford to spend for the holiday season without getting into new debt.

Now you know how much you can comfortably spend on things like clothes, gifts, parties or travels. Don’t forget to add all your other holiday expenses like:

Decorations
Food
Postage and shipping
Charitable donations
End of year tipping

2. Make a list of people

table decorated for Christmas dinner -holiday shopping

After setting up a budget for your holiday spending, the next step is to make a list of your friends, family members, co-workers, neighbors and assign a gift budget to each name. In addition to that, you can put on your list a few gift ideas for each person within your budget. Keep the assigned dollar amount within your budget. But leave a little extra wiggle room if numbers are not working.

You can use an Excel spreadsheet or a small notebook for a detailed list of your holiday spending, including names, gift ideas, the amount of money you can spend and even the ideas where to find the gift. Once you have these estimates and brainstormed the gift ideas it will be easier to see your limits and not deplete your wallet during the holiday season.

3. Do your research and find the best deals

One of the keys to smart holiday shopping is research. Doing research on the best deals is important. We are bombarded with sales promotions, special purchases, buy-one-get-one-free deals and more. You want to know when and where the best deals will be offered.

During the holiday season, retail stores are offering great deals. Before making any purchases, check prices at multiple stores. To save money, search and compare prices online before setting foot in a store. When you come shopping in a retail store, use your research information and take advantage of the deal if you see one.

Many people prefer to shop online these days and that number grows with every year. So, if you want to skip the store and shop online check out a few deal-oriented websites:

Retail Me Not

Deal Hunting

Hot Lowest Price Deals w/ Free Shipping

The benefits of shopping online are not limited to saving on gas and parking fees. Let’s face it: very few of us enjoy holiday shopping. Sometimes it’s very hard to find pleasure in heading out to find gifts for our loved ones and dealing with crowded malls, long lines, and pushy shoppers. I found it easier to shop online in the comfort of my home day or night. And don’t forget to look for free shipping offers, if you plan to order online.

If you travel, many online websites offer great gift selection, and your items can be sent to your travel destination. That means you won’t have to worry about traveling with bulky presents.

4. Start shopping

table with women hands working on computer w/ holiday decorations - holiday budget

You set up a holiday budget, you made a list and have done your research. Now it’s time to start shopping with your list in hand. It’s a good idea to start shopping early so you can get the best prices. If you do last- minute holiday shopping, very often you will risk paying much higher prices.

Make sure that you keep a track of your spending and stay within your budget. Use the same excel spreadsheet or a notebook with names, gifts and price ideas for tracking.

I would recommend adding a column to your spreadsheet and name it “planned spending” and “actual spending.” Total up “planned spending” to see how much you can afford to spend over the holidays. Then keep adding the cost of gifts to your “actual spending” column. This way you will keep track of your spending. You should cut back or limit gift items when you see spending more and getting out of your budget limit.

Another smart way to save money during the holiday season is to search your home for the ribbons, wrapping paper, holiday cards, decorations or even gifts you bought on sale last year.

You may even find the gifts if you bought them after the holidays, stashed away and forgot to retrieve. It happened to me several years ago, when I found a few gifts and left it forgotten in a storage closet. After that, I have bought a big plastic bin where I keep all holiday decorations and last year’s gifts and created a designated space for holiday items, so I don’t lose track of them again.

5. Cash or credit cards

Recently I have read that “cash makes it easier to stick to your budget”. The idea behind that statement was to label envelopes with the name of the gift recipients and other spending categories. Then put the cash in each envelope, matching the amount with your planned budget.

This method sounds like an old fashioned to me, but it will be practical for anyone with careless shopping habits. With only limited cash available and no credit card to use, you cannot get out of hand with your spending. It’s easier to stick to your budget by paying cash.

So, pay cash if you want to avoid overspending. But I must admit that I never shop with cash and prefer to use credit cards. However, Roman and I are responsible credit card users. We always pay off our balance in full to avoid getting charged high interest. Besides, most of our credit cards offer cash-back rewards, so I feel that I still make money while shopping.

If you are planning to use credit cards, it’s recommended to shop with no more than 2 credit cards. You will be better off with low-interest credit cards, not the expensive department store cards. The more cards you use, the harder it is to keep a track of your spending.

6. Alternative gifts

table with eggs, baking dough and cookies - holiday budget

The winter holidays are the most expensive time of the year for many people. On average the shoppers will spend around 730 billion of hard-earned money between November and December.

What to do if you want to enjoy your holiday season without overspending or getting into new credit card debt?

What other options if you don’t have enough savings or extra cash available to cover your holiday expenses?

There some ideas of alternative gifts that will come handy. Instead of buying individual gifts, set up a Yankee Gift Swap or Secret Santa. Gift swaps and exchanges at holiday parties help to trim down the cost of holiday spending for every guest.

Other ideas – potluck dinner with friends and handmade gifts. Homemade or handmade gifts are great for any occasion. I have a friend who gives us beautifully decorated glass jars with homemade cookies for Christmas and New Year. She has a big box of saved holiday decorations and likes to make and decorate her gifts for each occasion.

Or you can give actions instead of physical gifts by babysitting for a stressed mom, cooking dinner with a friend, baking fresh out of the oven cookies with your kids or grandkids or simply buying and decorating a Christmas tree together with your family.

After all most of us cannot remember the gifts we received last year or year before. But we all have sweet memories of family’s favorite holiday traditions.

100 Free Gift Ideas Your Friends Will Actually Want to Receive by Nicole Dieker

Final Thoughts

The holiday season is here. It feels that holiday shopping starts earlier every year. Retail stores have barely put away their Halloween decorations before they fill the shelves with Christmas gifts. Festive holiday ads on TV, brightly decorated streets and shops would make you believe that this season is the best time for shopping. It’s easy to get overboard on holiday spending unless you know your limits.

Now is the best time to put your holiday budget together, make a list of gifts, check the prices and start shopping.

Have you planned out your holiday budget? Share in comments your ways to save money on holiday shopping.

7 Easy Steps to Help You Set Up a Budget

by Maggie 2 Comments

a roll of money growing out of earth next to bamboo shoots

Are you looking to take control of your finances?

If the answer is yes, a simple but effective budgeting system can help you reach this goal. In the beginning, the budgeting may seem overwhelming and taking too much time. But if you create a good money management system it will help you to see where your money is going and how much you have left to save and spend.

Why do you need a budget?

Budgeting means managing money. Are you trying to pay off the debt, save money for retirement or increase your emergency fund? Setting up financial goals helps you to stay focused.

Take the time to set up your personal financial goals and make sure that they are realistic. You don’t want to get discouraged if for example, you want to save $70,000 for a down payment on a house in just a year when you only make $50,000.

I like to put my financial goals on a piece of paper and look at them from time to time. It reminds me that there is a purpose for why I’m doing this.

Once you finished setting up your financial goals, just follow these 7 easy steps and set up a budget.

Step 1. Collect all your financial information

The goal for creating a budget is to see a monthly average. So, the more financial information you can gather the better.

Put together in the folder (paper or electronic) your pay stubs, bank statements, recent utility bills, credit card statements, medical bills and any information regarding a source of your income and expense.

Step 2. Calculate your income

After you put together all your personal financial information, start with calculating how much money you have each month.

This step is simple if your only income comes from a stable job.

Typically, an income comes in the form of a regular paycheck where taxes are automatically deducted. So, use your payroll stabs or direct deposits to calculate how much money you bring home each month. This is your net income or take-home pay amount. Put it in your spreadsheet as a monthly income.

If you’re self-employed, combine your take-home pay from the past year and divide it by 12.

If you have an additional monthly income from your rental properties, child support or freelance job, add the amount to your monthly income.

Your main goal is to calculate the total income you receive on a regular basis.

It is important to know how much money you have coming in so that you know how much is left to save and spend.

Step 3. Calculate your fixed expenses

Most of the time budget is all about tracking your expenses.

If you don’t track your spending, you need to start. Your monthly spending should be divided into two groups – fixed expenses and variable expenses.

Fixed expenses are the ones where the amount to be paid remains the same most of the time. It’s an easy category which includes necessary expenses you must pay each month.

Start with a list of your fixed expenses:

Rent or mortgage
Car insurance
Car loan payments
Medical Insurance
Student loan payments (if you have any)
Utility bills
Cable bills
Cell phone bills
Internet bills

Step 4. Calculate your variable expenses

Variable expenses are a category that changes from month to month.

Groceries
House maintenance or repairs
Car fuel and maintenance
Clothing
Dining out
Movie or concert tickets
Gym membership

I know it’s hard to group these expenses together since they are not the same amount each month. But to make sure that you have a realistic budget, you’ll need to calculate every single expense.

Step 5. Determine your irregular expenses

I have a separate category in my budget for irregular expenses:

Property taxes
Car registration
Medical Co-pays
Christmas/ Gifts
Vacations/ Travel

This category is for annual expenses. At the beginning of the year, I combine all these expenses and add them up to my budget. I try to project the number based on previous years and typically add $1,000 to the total for anything forgotten.

I use separate savings account for this fund and call it “Vacation Fund” I don’t want it mixed in with my regular savings account. We spend a lot of money on travels, so I like to save money for this fund each month.

Step 6. Compare your expenses to your income

woman is balancing on the short stool while trying to reach for the book on the upper shelf

Now it is time to compare your total expenses to your income.

Add up your monthly expenses (step 3, 4 and 5) and subtract this amount from your total monthly income (Step 2).

After subtracting your expenses from your income, you should have zero as your balance.

Zero as your balance means your income is equal to your expenses.

But you might end up with two other options in your balance.

Budget with negative balance:

You are spending more money than you make. It’s never good and your goal is to reduce some expenses.

The cost of discretionary expenses should be the first and easiest to cut.

Look at your variable expense’s category (Step 4) and list your discretionary expenses. Discretionary expenses is the money you spend on restaurants, entertainment, vacations, gifts, various membership, spa, and massages. This category of spending takes up a large chunk of your monthly budget.

When you really need to cut discretionary expenses, this is where you should start.

Make your own lunch instead of buying it every day
Stream a movie at home instead of going to the theater
Visit the local library instead of buying books
Use public transportation instead of driving a car to work
Cancel gym membership and go hiking, biking, swimming or just walking
Trim down on special treats: brew your own coffee and pack a healthy snack

Fixed expenses are harder to cut. But you can save a lot of money by doing so. Look at your big items or necessary living expenses and see where you can cut or negotiate a lower cost.

Reduce your electrical bill by cutting down on energy consumption
Cancel a cable and sign up for Netflix or ask for a special on your cable/internet package
Cancel landline phone and use cell phones instead
Ask for a re-assessment of your home value, if your property taxes are too high
Negotiate a lower insurance rate for your house and car insurance policies
Negotiate a lower rate for your student loan or consolidate your student loans

Budget with positive balance:

You are making more money than you spend each month. Congratulations!

Look at your financial goals and decide what do you want to do with extra cash in your budget. You can put more money into retirement savings or pay off your debt faster.

The ultimate goal is to have your income and expense categories equal in the amount of money you spend in both areas. This means all of your income is accounted for and budgeted for a specific goal.

There is a simple to use budget worksheet from Kiplinger.com. If you want to give it a try, open the link below, download the worksheet to your computer and open it in Ms Excel program. The worksheet is very easy to modify and use for your own household budget.

Household Budget Worksheet from Kiplinger

Step 7. Keep track of your budget

After creating your budget, you need to make sure that it is working.

You need to monitor and adjust it on a regular basis. It might sound boring and tedious, but this is your money managing system and you need to keep it under control.

Graphic image on the white table - less is more

Find a way to track your spending. It could be done electronically using Excel spreadsheets and software programs like Quicken, Mint or Personal Capital. But plenty of people still use an old school method and stick to a paper budget.

Money management programs: Quicken, Mint, Personal Capital

I like to use Personal capital and love how easy it makes to organize and categorize my personal finances.

Whatever system you use, you need to look and asses your budget once a week or once a month. Tracking your budget should give you a general idea if you are on the right path to your financial goals.

A budget won’t work unless all parties of your household are involved and fully on board. It will be a big mistake for not having agreements with your husband and your family. There will be no point in trying to cut on cable or electricity unless everyone agrees on it.

My husband and I are both involved in managing our family finances. Roman takes care of budgeting, paying off bills and credit cards. I am mostly involved in managing our investments. But we talk and go over our budget and finances regularly. It helps to know that everyone stays on track and we work together on achieving the same financial goals.

Putting it all together

Your budget is the foundation of your financial life.

Anyone can set up an amazing money management system on a paper. Making it work is quite another thing. This requires commitment and technique. Budgeting can be hard in the beginning, but if you stick to it, all your efforts will pay off. In the end, you’ll learn how to take control of your finances and to achieve your financial goals.

Do you have a budget? Share with us your budgeting tips!

Why Everyone Needs an Emergency Fund?

by Maggie Leave a Comment

woman sitting at the round table with flowers and a cup of coffee and looking at her mobile phone

I am sure you’ve heard a million times before that you need to have an emergency fund. Life happens, and bad times comes unexpectedly bringing chaos to our finances.

Unfortunately, most people are not prepared financially and couldn’t afford to pay for unexpected. So, they go into debt by using credit cards, taking a personal loan or even taken money from their 401(k)s or IRA to cover the bill.

Life is full of unexpected surprises, many of which cost money.

Bad stuff always seems to happen at the worst time in life. If you have money to take care of these things, then you’ll have a lower risk of going into debt.

But if you don’t have any savings for emergencies, then more than likely, you’re going to have a hard time. That’s why we need to put money aside for these financial emergencies.

What is an emergency fund?

An emergency fund is a chunk of money set aside specifically for the unexpected things life throws your way.

An emergency fund is a cushion of protection against the unknown – job loss, the death of a loved one, unexpected medical bill or even home repair.

An emergency fund brings stability and calms to your financial life. Instead of panicking at every little unexpected expense, you’ have a small pot of money at hand, ready for use.

How much to save in an emergency fund?

Decide how much you would like to save for unexpected emergencies.

There are a lot of opinions out there how much money you should put into an emergency fund. I’ve seen people recommend saving anywhere from $1,000 to three to six months of living expenses. Some recommendations are up to two years of living expenses.

Honestly, I don’t think there is a magic number. Everybody’s income and financial situation are so different. The only opinion it matters is yours.

Ask yourself how much you would need to have tucked away to feel secure and try to save that money in your emergency fund.

If you can afford to have six months’ worth of living expenses saved in your emergency fund, then go for it.

If you cannot, then you’ll need to start with smaller money and build it up over time. If you don’t have an emergency fund at all, then why not start with a goal of $100 or $1,000? Then keep going until you have an emergency fund to a number that you feel comfortable with.

There is nothing wrong with taking baby steps to reach your financial goal. Everyone needs to start somewhere.

For many years Roman and I never had a designated “emergency fund”. We had savings and used it for any occasion including as an emergency fund. We tried to keep in our savings/ emergency fund account around six months of living expenses. It varied from $20,000 to $30,000. Once we draw down this account below $10,000 and had to re-built it again to the comfort level.

After staring this blog, I decided that we need to have a separate emergency fund, just for emergencies like medical bills, car and house repairs.

I have to tell you, it feels great! Our goal is to build it up to $40,000 in 2019. We will keep it untouched unless there is an emergency.

I like the idea of separating savings from emergencies for better control over our finances. With no separate account for emergencies, we were dipping into our savings for every crisis. I have noticed that our savings were not actually growing.

When you have a separate emergency fund to handle unexpected expenses, then you will no longer need to dip into your savings to cover these bills.

How to start an emergency fund?

pregnant woman and a man putting money in to piggy bank

To build your emergency fund, you need to start stashing away portion of your paycheck.

Decide how much cash you want to save in the fund.

As I mentioned before, there is no perfect number for how much you should stash away. A good benchmark is about three to six month’s of your living expenses

An easy way to calculate this amount is to make a list of all your basic monthly expenses:

mortgage or rent
utilities
transportation
insurance
groceries

Then, total your monthly expenses, and multiply by the number of months.

For example, if you need $4,000 a month to cover your basic needs, then you’ll need to have $12,000 in your emergency fund.

$4,000 x 3 = $12,000

$4,000 x 6 = $24,000

The money saved in an emergency fund will give you a breathing room if you suddenly lose a job while trying to pay for unexpected doctor bill, car or house repairs.

As you get better at saving, probably you will start working toward accumulating 12 months of living expenses in a savings account.

$4,000 x 12 = $48,000

If you work in a career that has high turnover, or afraid of the potential downside of your company, it’s a good idea to double the money saved in your emergency fund.

How to build an emergency fund?

There is a challenge for most of us to build an emergency fund. Very often there is no money left at the end of the month. Saving money is a hard task no matter how much you make. There is always one more payment to make or unexpected bill to cover.

As women, we are very protective of our families.

By creating a financial cushion in the shape of the emergency fund will help you to fill save and comfortable when bad times come to your life.

Here are 8 simple steps to help you get started:

Step 1. To build an emergency fund you need to set mini-goals and work towards them. it takes time to accumulate enough funds in your account.

Step 2. Pay yourself first. Try to set aside 10 percent of your paycheck to go towards savings.

Step 3. Set an automatic deposit to an emergency fund account. It will be paid out of your paycheck and you will not even notice it.

Step 4. Set up a plan to pay off your debt. Add the extra money to the minimum payments every month.

Step 5. After all debt is paid off, add more money to your emergency fund.

Step 6. Control spending and leave your credit card at home. Its always easier to pay for everything with credit card. Bring only cash if you go shopping. Once the cash is gone, you can go home knowing that you didn’t go over the budget.

Step 7. Once your emergency fund starts growing, don’t over-use or deplete it to the point when you need to start all over again.

Step 8. Change your mindset. Think about savings as a financial cushion or smart gift to yourself.

How to Start and Build an Emergency Fund

Where to keep your emergency cash fund?

graphical image of woman head surrounded by social media icons

Where should you keep your emergency cash reserves?

You want your emergency money to be easily available. Most experts recommend keeping it in safe and accessible accounts, like:

Bank savings account
Money market account
Short-term Certificates of Deposit (CDs)
Roth IRA account

1. Bank savings account

In my opinion, it is one of the easiest places to keep your emergency fund.

The deposits held in this account are FDIC protected against the bank failure. You can get quick access to your money whenever you need it.

Most online savings accounts allow you to transfer the money you need within minutes.

If you want to earn some interest on your money, try to open a high-yield savings account.

2. Money market account

You can open money market account online or at a local bank and manage it through web-based account management. Your funds can be withdrawn at any time and you earn some interest on it.

However, remember about money market account’s fees that could chip away at your returns.

3. Certificates of Deposit (CD’s)

A Certificate of Deposit usually pays more in interest than an ordinary bank savings account.

CD’s offer a fixed rate of return (or gain on your money) for a specific time frame. Since your rate of return is guaranteed, opening a CD could be a good idea to earn extra interest on your emergency fund money.

On the other hand, you will have to pay a penalty if you want to close your CD early. It ties your money up for a certain period, so it’s a good idea to open a short-term CD account.

When you put money into a CD, you’re agreeing to leave it there typically from three months to five years. Decide for yourself what works the best for your financial situation.

4. Roth IRA account

I have heard many times that people advocate for using a Roth IRA money as an emergency fund. It might work for many people.

But I want to highlight the number of reasons why using your Roth IRA as an emergency fund is a bad idea:

There are penalties on early withdrawals. The topic on penalties is complicated and it’s better to consult a tax professional or do research on IRS rules.
Roth IRA account is set up mostly for retirement savings. It’s funded with limited contributions of $5,500 and $6,500 if you are 50 years or older – in 2018. In 2019 and 2020 is $6,000 (people age 50 or older can add $1,000). The money grows and accumulates slowly to provide an income in retirement.
If you want to use it as an emergency fund it will be hard to sell your investments within 24-hours. And if it’s a recession you might sell your investments at a loss.

Where you keep your emergency money as important as building it.

The first part of a good emergency fund is liquidity. You need to get access to your fund within a few hours.

The second part is safety. It can’t be tied up in an investment that goes up and down in the short run (like stocks).

We keep our emergency fund in an online account Capital One 360 (formerly ING). It’s very easy to withdraw money in case of an emergency. And we earn more interest than the bank savings account.

Final thoughts

We all know that emergencies do happen. And being prepared for it can make all the difference between weathering the storm or being overwhelmed.

Building an emergency fund is possible at any income level. If you don’t have an emergency fund yet, start building it today. Everybody needs one.

Before spending or moving money around, start by setting up an emergency fund. In the case of job loss, medical emergency or any other personal crisis, you’ll want to know that you have a protection from a small disaster.

You’ll want to know that you have enough money to carry your family through to safety.

How are you saving for emergencies? Do you have a separate emergency fund?

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