Joe's Money

For Average Joe’s Automatic Investing is the Only Way to Go

When it comes to money and saving, us averages Joe’s tend to procrastinate more than with anything else.  The “I’ll start saving tomorrow” idea isn’t going to work.  Unless you are one of the fortunate ones that manages to do this without thinking about it, automatic investing is the way to go.

You can setup automatic investing for almost any type of account.  401K accounts are among the easiest, IRA accounts, regular savingss accounts, education 529 accounts, and so one.

401K accounts are the easiest.  You set them up with your employer and the money comes right out of your check.  If you start doing this immediately when you start your new job, its almost like the money wasn’t there to begin with so you don’t miss it or even realize it was ever there to begin with.

Roth IRAs, traditional IRAs, and brokerage accounts can be setup online with any major discount brokerage firm like Fidelity or eTrade.  You can set how often the money is transferred, it could be weekly, bi-weekly, or monthly.

Standard savings accounts, including online accounts (which typically have better rates than local branches) can also be setup for automatic saving.  You can have either the bank setup the automatic transfers from your checking to your savings accounts and in many cases you can even setup your direct deposit with your employer to automatically transfer a portion of your check to your new savings accounts.

Education 529 savings plans also usually offer a automatic investment option.  These work very similar to the IRAs and brokerage accounts.

Keep things simple.  Setup your automatic investing and savings.  Its one less thing to think about for your financial well being.

The simple answer is yes.  I don’t recommend doing this until all other debts are paid off because the rates on other loans, credit accounts, etc, are likely much higher than the interest rate on your mortgage.  However, once you have those paid off, any little bit extra you can pay towards your mortgage will save you a ton of money in the long run.  Since mortgages are front loaded in interest, the first third of your mortgage payments are almost all principal so you barely pay down the balance.  The bank doesn’t want you to know, but you can save a ton of money over the long run without spending a ton of extra money.

Lets take a look at my mortgage.  I ended up financing $125,600 after closing costs, everything said and done.  I locked in a fixed 30 year mortgage at 4.875%, this rate will be unheard of shortly.  I locked on almost to the day for this rate.

If I pay only the minimum on my mortgage, the payment is $665 per month.  This does not include taxes and insurance.  It will take me the full 30 year term to pay this off entirely and I will have paid over $113,600 on interest only.  Total payments would be about $239,200 over the life of the loan, or about twice what I paid for the house.

If I paid only an extra $50 per month on top of the minimum payment, I would have only paid $95,000 in interest and I would have paid the full loan off in 26 years instead of 30.

If I paid an extra $100 per month on top of the minimum payment, I would have only paid $81,900 in interest and I would have paid the full loan off in 23 years instead of 30.

If I paid an extra $200 per month on top of the minimum payment, I would have only paid $64,000 in interest and I would have paid the full loan off in 18 years instead of 30.

I don’t know about you, but saving 12 years of payments and $49,600 on interest payments sounds pretty good to me.

Check out the calculator here to input your data and see how much interest you are paying and how long it will take you to pay off your home loan.

One of the top reasons for divorce is financial disagreements.  When you tie the knot, you are also tying in your partners financial habits as well as debt.

Before you wed, it should be a top priority to discuss your financial goals, among other things.  Many times, one partner will spend much more frivolously than the other.  This can lead to long term problems when it comes to financial planning.  One partner may have long term goals such as when they want to retire, how they will finance their children’s education, and so on while the other partner can barely finance next week.

Merging your finances

When it comes to merging your finances after you wed, the thought should be whats mine is yours and whats yours is mine.  Keep in mind this can include both debt and savings.  Put yourself in the situation before you tie the knot.  Get a joint checking account for starters.  See if you can both manage to stay on track and keep the account in good standing.  Also, you should both be able to agree on where the money goes.  How much you should spend on things like entertainment and dining out as well as the usual bills should all be discussed.

What to about debt?

Whether you like it or not, once you’re married, your spouse’s debt can become your debt.  Once again, both of you, together, should figure out a way to tackle the problem and make a decision before getting married.  Many times, couples will not see eye to eye on this.  The debt free partner will say, I have accumulated any debt so I’m not paying yours off.  If you are planning to be together for the rest of your life, this is an issue that needs addressing.  The debt doesn’t go away when you marry.  When you discuss this, don’t take the position “Your debt will ruin us.”  If that is the approach you take, it most certainly will.

Check Your Spending

So your soon to be wife is constantly nagging about your wild spending and then comes home with a $400 purse.

If this sounds familiar, your right.  This is the second most common reasons couples fight.  Most of the time, one of the partners get labeled the spender and the other the saver even though they actually spend about the same, they just spend differently.  The amount of small purchases by one partner may seem negligible, since they carry a low dollar amount while the other partner may spend much left often but on larger items like TVs or computers.  At the end of the day, they usually spend about the same.  Perception needs to be put aside.  Check the reality, the bank statements.  Most purchases should be budgeted for and agreed on by both partners.  Make sure you keep it fair though, one partner shouldn’t always decline what the other wants.  The fellas out there are never going to want a $400 purse and the ladies are never going to want a 65 inch TV to watch the football game.  Well, at least most of the time.

Hidden Money

Couples should not keep financial secrets.  They can come back to bite you in the backside.  Again, this goes for both sides of the equation.  No one wants to find out you have been racking up a credit card bill without the other partner knowing.  The other side of the coin, no one wants to find out you have $50,000 in savings the other didn’t know about.  While an extra $50,000 sure is nice to find out about, but what was the reason for concealing it?

An emergency fund is a very important tool in your quest to be debt free, staying debt free, and your overall financial fitness.  It shows that you CAN find money to save and it also prevents you from going back into, or further into, debt.

Start small, save one months expenses before making any more than the minimum payments on all bills.

The emergency fund should only be used for true emergencies.  Examples would be furnace needs repair, car needs repair, etc.  This should not be used for new toys for yourself or even for gifts for others when you come up short.  Those types of items should be budgeted for in your monthly budget.

The best thing that saving a months pay will do for you is protect you from either going back into debt, or putting you further into debt when trying to get out.  This will give you some protection to help aid in your quest to becoming debt free.

Ideally, your emergency fund should eventually be at least 6 months pay.  After saving your first months pay, pay off all other debt besides your mortgage and then start building you emergency fun.  The monthly expenses to calculate the 6 months expenses should include everything from your mortgage to your cable TV bill.  Anything that you are not willing to cut should be included.  Obviously if times do get tough enough, canceling cable TV would be a wise idea!  Basically take a look at your budget.  Everything listed there should be included in calculating your emergency fund.

Lets take a look at how I think the average Joe’s budget should look like.  Budgets are only useful if you have enough discipline to stick with them.  You will hear me repeat the following constantly throughout my blogging.  99% of success is taking action.  Hold yourself accountable for sticking to your plans.  The old saying goes, if you fail to plan, you plan to fail.

Every payday, every dollar I have coming, is budgeted before the cash even hits my account.  I have found it much easier to pay bills, etc. when all (well, lets be realistic, most) expense are budgeted for.  Here is a sample budget (Which is actually mine to the dollar) to get the juices flowing on what items should be planned for.  Almost all expense fall into this category.  Seriously, when is the last time you didn’t get an electric bill?  So why isn’t it in your budget?  Ask yourself the same question for all categories listed below.

All dollar amounts are per pay period (Every two weeks).

Mortgage – $500
Car Payment – $180
Insurance – $100
Savings – $253
Cell Phone – $53
Comcast Cable/Internet – $29
Electric/Gas – $100
Grocery – $100
Trash Service – $15
Car Maintenance – $25
Home Maintenance – $45
Vacation Fund – $25
Water/Sewer – $30
Clothing – $35
Gifts – $50
Long term entertainment purchases – $40
529 Plan – $13

Cash withdrawn every pay period for other expenses/fun $400.  This includes gas expenses for driving to work, etc.

Most of these are pretty self explanatory.  However, some are not.  I’m an eletronics junky.  I like computers and giant TVs so I have budgeted a small amount of my total pay to the “Long term entertainment” account.  The 529 plan is a educational savings plan for if and when I have kids and they opt to go to college.  Yes, you read that right, I save for college expenses for non-existent children.

You may be looking at these numbers thinking “This is impossible.  I don’t have that kind of money.”  I didn’t always have this money either.  The truth is, if you are living within your means, you should be able to budget for any of these things.  If you are stretched to the max between rent and groceries, you may need to consider getting a smaller place or looking for ways to increase cash flow.  We’ll get to that later.

Think your situation is impossible?  Shoot me an email with your example.  I will create a budget for you and post for all to see.