Flexibility

Setting financial goals is the best way to achieve what you want in your financial life, however, you must also be flexible.

Recently, I had to raid my emergency fund for a non-emergency purpose: advanced rent of 6 months. However, because I was willing to raid my emergency fund, I believe I received a better deal from my landlord.

Also recently, I made the mathematical calculation to see if it was better to pay off my private loan aggressively or to take it slow now because I am still paying capitalized interest which counts principal and interest as interest payments for tax deduction purposes. My goal was to pay the loan down aggressively, however, after doing the math, it did not make sense until the capitalized interest was paid off.

Therefore, it is always best to be flexible if it benefits you in the long run.

My financial goals are now the following:

1. Continue to contribute up to the match to my 401(k) (4% of gross salary)
2. Make my emergency fund what it was before
3. Contribute 11% of my gross salary to my Roth IRA
4. Then think about saving extra for increased student loan payments in the future

Financial Clean-Up

If you haven't done so already, now is a great time to get your finances in order. Taxes are done; it's a fresh financial year. Now is a good time to start making folders for 2011 taxes: one for receipts, one for paycheck stubs, one for interest payments you make on your mortgage or student loans, etc.

If you start organizing now, taxes will be a breeze in April, or maybe you will be so organized that you can do your taxes in January and get it over with.

Now is also a good time to make some long and short term financial goals.

Here are mine:

1. Continue to contribute 15% towards retirement through 401(k) and IRA
2. Pay extra on my student loans, but just enough extra that I only pay $2,500 in interest in 2011
3. Have an emergency fund of 6 months that I don't have to touch because I have enough in checking as well (recently I pulled some money out because I had a family medical emergency, a car accident, and I want to prepay some rent to negotiate the rent down)
4. Start saving money on the side to pay off my private student loan in 2013 (as discussed in a previous post, my whole payment is currently interest because I am only paying capitalized interest and after doing some math, it works out better if I only pay $2,500/per year in interest for the tax deduction and then pay off my loan in full in 2013, when I won't be able to rack up the $2,500 in student interest payments for the tax deduction) - I would like to see $3,000 in this account by Dec 31st, 2011
5. Get a raise of around 13% from my current salary by April 2012 - currently supposed to get a raise at the end of May and then again in April
6. And of course, be able to take all my vacation days by going somewhere, buy Christmas presents for the family, and spoil my nephew-to-be

New IRA Brokerage

A couple of days ago, I opened a new IRA Brokerage account. I picked Charles Schwab out of all the discount online brokerages because of the following factors:

1. Great website (TD Ameritrade was a contender, but I heard that sometimes the website is unavailable and that's not acceptable even as a rumor, especially if you want to do some trading on the spot)
2. Easy search for mutual funds
3. Largest amount of no-load funds available (I like no-load mutual funds for the IRA account as overall they are less risky than individual stocks)
4. Funds available from multiple families (important as I want the greatest diversity to find a fund that is highly ranked)
5. Great customer service (I received a welcome call, unlike when I opened ShareBuilder)
6. Low start-up costs (Fidelity and Vanguard are great companies, however, they require initial deposits of $2,500 and $3,000 respectively)
7. Overall highly ranked and reviewed online

Retirement vs. Emergency Fund

If you do not have a full (whatever that means according to you) emergency fund saved up, you might want to dedicate all of your funds towards the emergency fund and not save anything for retirement. However, I think there is another option that most people do not realize. Your Roth IRA can serve as a temporary emergency fund while you do not have the emergency fund build up all the way.

Most people do not say that all Roth IRA contributions are available for withdrawal anytime without taxes or penalties. Only the earnings on those contributions will incur penalties if withdrawn early. However, this is true.

Therefore, If you have an excess of $500 a month after fulfilling all your expenses and the 401(k) contribution (if it has a match). You have no emergency fund and you require an additional $300/month in retirement savings to be able to save the suggested 15% of your gross income. Instead of putting the entire $500 towards the emergency fund, put $300 in a Roth IRA and $200 in the emergency fund.

If you have a serious emergency such as a job loss or a medical accident you cannot cover, remember that you can withdraw the $300/month you have been putting in to the Roth IRA. The danger in this is that your holdings can go down. Therefore, you can hold all of your Roth IRA investments in cash until you have build up your emergency fund. The more real danger is that you will now always see your Roth IRA as an emergency fund and will empty it if an "emergency," such as a friend's wedding, arises. Don't ever take money out unless it's a real emergency. Remember that you can never replace it.

The main reason for this maneuver would be that if your emergency fund needs 8 months of expenses, then you will need a year or two to build this up. You can only contribute $5K in a Roth IRA per year and if you do not contribute one year, you miss out on that amount.

Suze Orman Expense Sheet - Budget and Emergency Fund Planner

Another great budgeting tool is on the Suze Orman's website, Suze Orman's Expense Sheet. You enter your emergency fund amount and break down how much you spend each month by category. Then, Suze lets you know what your essential expenses are and based on that how large your 8 months emergency fund should be.

If a budgeting category is off from the national average, the cell will highlight yellow and by hovering over the cell, you can see what the national average is. If you are spending less, that's great. However, if you are spending more than the national average on a category, you should reconsider that expense even if you have an above average income.

At the end of the process that takes 2 minutes, Suze will tell you to beef up your emergency fund if you do not have 8 months of essential expenses. If your emergency fund fits the bill, she'll say that you should aggressively pay down any debt.

NetWorth IQ

There are several ways to track your net worth. The most convenient for me, has thus far been Mint.com because it does everything automatically. However, another way to track your net worth is through NetWorth IQ. Here are it's advantages and disadvantages.

Disadvantages:

1. You must manually enter all your data
2. All other people's data is manually entered as well and might not be accurate for comparison
3. You must enter your data every month to see the progress

Advantages:

1. You can track your net worth with a graph
2. You can see the percentage change in each category
3. You can make your net worth public so other people can comment on your progress
4. Making your net worth public might motivate you to get that number up
5. You do not need to give out personal login information
6. You can compare your net worth to others your age, or in your occupation, for example
7. You can also compare each category such as student loan debt, credit card debt, or retirement assets to others in your demographic groups

MorningStar X-Ray of Your Portfolio

If you hold several stocks or mutual funds, chances are you are not aware of the percentage of your portfolio that is in US stocks or in utilities. A great way to know the exact breakdown of what you hold by percentage is to do the MorningStar X-Ray. You can also do this before you buy an additional stock or mutual fund to make sure that you are saturating your portfolio in one type of area (unless that's what you are looking for). It's always best though - to go for diversification.

When to Start Saving for Retirement

So, you've heard people say that the sooner you start saving for retirement, the better. If you are till not saving for retirement or are not saving enough, you probably were not shown the numbers. Use this CALCXML - Savings Calculator to see how much you would loose for every year that you delay savings.

Money in your 20's

Money management skills should be learned as early as possible and the 20's is a great place to start. Here are 10 financial projects you should take on in your 20's:

1. Learn to live on less than you make. Many people who find their first job, go all out with a new wardrobe, a new car, decorations for the new apartment, etc. Control your spending and only spend what you can afford with the money you have. See the Cash Flow blog post to see how you can see your cash flow with ease.
2. Start saving. Use the budget worksheet to see where you are overspending if you are unable to spend 15% of your take home pay. If you have large student loan payments, try to cut down in all areas to free up some space for savings, even if it's $5/month.
3. If your company offers a 401(k) match, start putting in the minimum amount you have to put in to get the full match.
4. Build an emergency fund in a high interest savings account.
5. Maintain a good credit score. Make sure you are never late. Automating your bills is an easy way to make sure of this.
6. Pay down on your student loan or any other debt with any extra funds that you have. If you receive a gift, a tax refund, or a bonus, try to apply it directly to your debt. See the Debt Pay Off Methods to see how you want to tackle your debt. See how even $5 per month extra will make a difference in your debt by using the Bankrate Amortization Calculator.
7. Save for retirement. Starting early is one of the best things you can do. Use a retirement calculator to see how much you should save. Start small if you can't contribute the full amount you are advised and increase your contributions yearly.
8. Designate separate savings accounts for various goals. Retirement should be saved in a 401(k) and an IRA. You should also have separate savings accounts for an emergency fund, grad school, vacation, car, down payment, etc. You can save in each account simultaneously or take it one step at a time and once your emergency fund is full, save for a vacation, once you have enough in that account, you can save for grad school and a car, etc.
9. Get health insurance. One accident can ruin all of your plans. 
10. Earn more money. Ask for a raise at the annual review or find a job that will pay you 15%-20% more and present the offer to the current employer. Be ready to leave for the new job if the offer isn't matched.

Pay Yourself First First, No Really

Every personal finance adviser out there says to pay yourself first. There are websites dedicated to the concept. However, many of us still don't do this simplest thing. For the longest time, I figured I was disciplined enough not to have to do this. However, since I've started a couple of month ago, it has done wonders.

Paying yourself first is as simple as setting up a new savings account (if you don't have one yet) and setting up automatic transfers of at least 15% of your take home pay. It sounds so simple, but paying yourself first lets you see the money that you have left over.

Since I am saving for a couple of things right now, I have one slush fund for the 15% savings and then I distribute from there to other savings accounts based on what I feel I want to accomplish first.

This 15% is the starting point for my savings. I also contribute 4% of gross pay to a 401K and I always end up transferring more out of my checking and into my savings. However, keeping the funds separate and having the automatic savings plan of at least 15% going into my slush fund, helps keep me on track.

Dave Ramsey's Baby Steps

Dave Ramsey is a hugely popular financial adviser. I like listening to his radio show just to see what his opinions are, even though a lot of the times, I do not agree with what he says. Here is the just of what he advises through his 7 baby steps:

1. Save $1,000
2. Pay off all debt, but the mortgage (this includes student loans)
3. Save 3-6 months in an emergency fund
4. Invest 15% of your income in retirement
5. Fund college education for children
6. Pay off your home
7. Build wealth and donate

 I think having a step process works for most people. However, not every household has the same factors in their financial life. I do have to credit him with saying that cheating baby steps in some circumstances might be okay, however, he does not seem to endorse it. I've heard his say, for example, that if you have an unstable job, you should increase the savings that you do in baby step one. However, he is never clear with how much.

I still believe in Suze Orman's idea of saving an 8 month emergency fund and then paying down the debt like student loans. Of course, if you have credit card debt at high interests and you feel pretty safe at your job, you could get by on a smaller emergency fund until your credit card debt is paid off.

I also think that Liz Weston has a point when she says that you can never catch up on your contributions for retirement. Therefore, I think that getting the employer's match in a 401(k) is a priority over paying for debt.

See my blog post on Prioritizing Savings to see what my personal 8 steps are.

The Math of Retirement

There are all sorts of numbers that you can calculate to see how much you will have in retirement. The truth is no one can predict how long you will live or what your medical costs will be, for example. However, there are some numbers that you could use as estimates without having to use complicated calculators.

• Always save at least 10% of your salary for retirement
• Have at least 10 years of your final pay in retirement before you do retire
• Never withdraw more than 4% of the principle of your total holdings in retirement to make sure you don't deplete your retirement fund (this means that you should be okay with living on 4% of the total amount you have as well)

Just remember 10, 10, 4 and you should be set. 

Prioritizing Savings

If you have limited resources, you need to prioritize your savings. As discussed in the previous post, there are lots of goals you can make, but how to choose which one is more important? Here is my list:

1. build $1,000 or 3 month emergency fund (based on your gut feeling)
2. maximize your 401(k) up to the company match
3. pay off toxic debt such as credit cards or anything higher than an 8% interest rate (car, private student loans)
4. build an 8 months emergency fund
5. max out your Roth IRA
6. pay down any other debt
7. build an emergency fund of 1 year of expenses
8. invest/save for a down payment/wedding/etc.

I'm on step 4. I raided my emergency fund to put $2,000 in a Roth IRA to get the IRS credit, so I am back down to 4 months of expenses, which I can bring back up to 6 in April. Once I have 6 months, I think I will split my extra money between building an 8 month emergency fund and paying down a private student loan currently at 6.25% until I have full 8 months of an emergency fund. After my emergency savings account is fully funded, then I will pay off the student loan fully while still contributing to the IRA account so that my retirement contributions are at least $2K per year while I qualify for the retirement savings credit.

Financial Goals

The whole point of learning and keeping up with your finances is to attain our financial goals. What are your financial goals.

Here are some examples of goals:

1. Save X amount in an emergency fund
2. Save X amount of months of expenses/salary in an emergency fund
3. Save X amount for retirement this year
4. Save X% of each paycheck for retirement this year
5. Max out your IRA
6. Pay down my student loan in X amount of years
7. Pay double the minimum on my debt
8. Save for a vacation
9. Save for graduate school
10. Save for a down payment
11. Buy a car with cash

What are you saving/hoping for?  Whatever it is, my favorite tool to keep an easy track of your savings and goals is to open up a high yielding savings account (see my earlier post where to find one), and set up a goal in Mint (see an earlier post about this website as well). You can set up multiple goals as long as you have a different account for each goal and keep track of your progress. Mint will tell you if you are on track, behind, or ahead on your goals and the amount of time it will take you to reach them.

Retirement

How much should you save for retirement?

IRA maximum is $5,000 per year until you are 50 years old. Is that enough or too much? The 401(k) limit until age 50 is $14,500. You can find out what amount  you need to save by using some calculators online. There are a variety out there that will tell you what you need to save per year or what you need in total to attain your goal.

Here are some of my favorite ones:

AARP Calculator - Tells you what percentage of your income you should contribute to retire by a certain age. Also tells you the age you will retire if you keep contributing the percentage that you are currently contributing

FINRA Calculator - Shows you a schedule of exactly how much you should contribute each year. Every year, the contribution grows so that you are not overwhelmed by a large amount from the start.

CNN Money Calculator - Tells you the likelihood that you will attain your goal for retirement with a percentage. For example, "We believe there is an 80% chance, you will attain your retirement goal."


Also, you might find it helpful to see how much social security you will be getting in the future by plugging in your social security number and other info on the official SS website: Social Security Online Services. You have to have enough working credits to get the personal estimates at this website, which means that you have to have 10 years of working experience.

If you can't get your personal estimates through the website, you can estimate your future social security through the Social Security Online Services - Quick Calculator.

Budgets

How to Build One and How to Stick to One

As discussed in my Cash Flow Blog Post, you could use Mint.com to set up your budget as it automatically tracks the amounts you spend in each category for you. However, another important part of building a budget is seeing if you are spending too much in one category or another.

Gail Vaz-Oxlade's Budget Worksheet will help you see if you are overspending in one area or another. Go to the site and at the bottom of the page, there is an option to download it as Excel as well. She says that housing should be 35%, which I believe is a little high. I think around 30% is more reasonable. Also, there is only room for 10% savings and I think that 15% is better. She is Canadian and they have a better retirement plan, therefore, their savings do not have to be as high. I think if you cut back 5% from the housing and add it to the savings, you'll be doing great if  you are able to spend within that budget. Transfer whatever numbers you come up with to the Mint.com budget, which will help you stick to it, and you'll be set!

Always remember that the more you can save the better. If you are earning $30K after taxes, for example, you are only saving $4.5K if you are saving 15%. This means that you are not even maxing out your Roth IRA, which you should. This also does not allow any room for saving for emergencies, a down-payment, grad school, or a vacation. Therefore, always remember that the more you can save, the better you will be off in the future.

Mutual Funds

I am starting a Roth IRA this year partly because I'd like a nice retirement, but also partly due to the available IRS Retirement Credit.

Since I am new to investing, I'm going to start with mutual funds. I strongly believe in the freedom to buy and sell if I needed to without considering the commission, therefore, I am choosing NTF or no load funds only. You do not pay a commission to buy or sell these funds.

However, after signing up for the Roth IRA on ShareBuilder (where I already have a brokerage account due to a $50 incentive), I was a little lost about choosing the actual mutual funds. I looked at Standard & Poor's, The Street, MorningStar, etc. ShareBuilder advised I look at Lipper's detailed ratings. Choosing from 200 NTF funds from various fund families was no easy task until I bumped into US News Mutual Funds website.

The website easily compares MorningStar, Zack's, Lipper's, Standard & Poor's, and The Street ratings. Also, there is a lot information on each fund including the history of the returns, management, MaxFunds.com scores, etc. Searching for each stock (and remembering to select the right stock from the family in the drop down menu) left me with only 3 funds that I feel are rated the highest by all. I also wanted a semi-consistent return of at least 5%.

I'm not sure about all the details that the websites base their scores on, yet I feel that if several popular websites recommend a fund, it must be doing well. There is no way that even an experienced financial adviser can know everything about the management, the return, the risk, the average return, etc of each of the 200 funds I was considering. Therefore, now I need to choose 2 from IDROX (Real Estate should go up soon, the inconsistent return history is due to the inconsistent real estate market), ACMVX (I wanted to invest in the Republic Services stock, but finding it as the top stock in a highly ranked fund is even better), and PTTDX (great looking fund with mortgage backed securities).

Update: Went with ACMVX and IDROX. PTTDX is government based and invest a lot in low paying US Treasury Bonds as well as Fannie Mae, just didn't feel right.

Emergency Fund

Everyone needs to have an emergency fund. The amount of the fund varies. Most experts will agree that you need at least 3 months of your expenses. Suze Orman, on the other hand, believes that everyone needs to have 8 months of pay in their emergency fund. What is comfortable for you, depends on how stable your job is, what your expenses are, how much debt you have, and what type of personality you have.

What is important is that you set an amount for yourself and try to achieve that goal. You should save at least 10% of your salary, however, 25% would be something to strive for. You could start with 10% and every paycheck, month, or year up it by 1%. You would not notice the 1% decrease in the take-home pay, however, your savings, over time, would.

Personally, 6 months of expenses is enough while I pay down a private student loan and put some away in a Roth IRA. I do not have dependents and my job is pretty stable, however, I sleep better at night when I have a larger financial cushion.

An interesting way to determine your financial fund would be to align it to the current unemployment rate. Therefore, since the US currently has 9% unemployment, it would be wise to save 9 months of expenses as it would take longer to find a job.


Use these calculators to see other methods of calculating your emergency fund:

Money Zine Emergency Fund Calculator

Bankrate Emergency Savings Calculator