The Liz Weston Budget

Budgeting is always in question. I've written a post on budgeting earlier, please see Budgets. However, it's always great to see other opinions as well. Liz Weston is a supporter of the 50/30/20 budget.

This means that 50% of the budget should go to your needs such as shelter, food, transportation, minimums on debts, and utilities. I think 50% for needs is great because in case of a job loss, you can easily survive on half of your income by working part time.

30% of your income should go on wants like clothing, entertainment, and dining out. This is perfect, however, for those who are saddled in debt or are behind on retirement savings, this is a little too much. I would spend half of this on debt repayment or catch up contributions, if I had excessive debt or were behind on saving. If, for example, someone does not have an emergency fund, they should not go out and spend 30% of their money on things they want, but do not need.

20% of your money should go to savings and debt repayment. I think you should be saving a minimum of 15% for retirement per year, therefore, leaving you with 5% for debt repayment. 5% is unrealistic if you have a lot of debt.

Therefore, this is a great budget to follow when you have a fully funded emergency fund, you are on track for retirement, and you have a low debt ratio. I would consider a low debt ration to be below 10% of your take home pay or even lower.

Kiplinger - Archives

Yesterday, I was looking through the Kiplinger magazine archives on Google Books. They have full online issues of magazines starting from 1947. Personal advise has obviously changed since then, especially since now we have more complicated products such as IRAs and ARM mortgages.

Here are some things that I found interesting.

Mortgages:

• Feb 1957 - When you borrow for a mortgage, make sure that you borrow reasonable amounts. A safe amount for a monthly payment on a mortgage is no more than 25.6% of your take home pay. You are probably okay with 28.8% of your take home pay. If the mortgage is over 33.2% of your income, you are going into the risky territory. The higher your income, the less mortgage that you should take out as it will be harder to maintain in time of a job loss.
• Feb 1957 - If your rent is 15% of your take home pay, you are either economizing or getting a break. If your rent is 25% or more of your take home pay, you are stretching it. Mortgages can be a higher percentage of your income as you will keep the home after it is paid off.
• Sept 1961 - The government approved 40 year mortgages. The article strongly advises against them as it would take you 29 years on a $12,000 mortgage at 5.5% to reach the tipping point, which the article describes as your loan being worth as much as the house. This example does not include a down payment. Graphs that were used clearly demonstrated that 15 year mortgages were the way to go as it saves a ton in interest costs. In fact, the magazine was trying to show that, due to interest, your monthly payments would only be slightly lower in a 40 year mortgage than in a 15 year mortgage. I did the math and the payments were $98.05 for a 15 year mortgage and $61.89 was for a 40 year mortgage. Doesn't seem like a large difference to us now, but the 15 year mortgage payment is more than a 1/3 higher. However, the magazine showed the difference per dollar borrowed, emphasizing that the difference is not that great.
• Mar 1964 - The average down payment declined from 28.4% to 24.5% in a year. The average mortgage term went from 19.7 years to 24.5 years in the same year. Please note that the average down payment was more than 20% in either case.

Student loans:

• Jul 1958 - First student loans are discussed. The loans have a 36 months term at 4.5%. Students are borrowing a few hundred dollars a year.
• Apr 1964 - 72 month terms for school are discussed.

There is much more information in those magazines. It is also interesting to see how, through the history, the down payments became smaller, the loan terms became longer, more types of loans became available such as personal loans and credit cards, and those other types of loans became more popular.

Cut Your Bills - Insurance

Insurance is something unavoidable, if you own a car that is. However, many people overpay simply because they stick with the insurance agency that gave them their first quote or they never compared rates. A great company for comparing rates is Insurance.com. This site allows you to fill in the forms once and get quotes from several companies.

However, it does not hurt to get quotes from other companies that you do not see on the Insurance.com list, or even those that show up, just to make sure.

Upromise.com will offer $5 if you request a quote from Liberty Mutual, even if you do not sign up for their insurance.

Make sure to compare insurance rates every time your insurance expires as you might be able to get a better deal elsewhere. Also, make sure to pay your premium in full for the 6 months. Usually, it will lead to great savings.

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.

Kelley Blue Book

Just like you need to know the value of your house to calculate your net worth (See Blogpost Zillow), you need to know the value of your car.

To estimate the value of your car, you can go to Kelley Blue Book (KBB) and enter your car's information. KBB is also useful if you would like to sell your car. Once you are ready to sell, enter your car's information and use the private party value as the basis of your listing. The buyer will probably want to bargain with you and bring the value of the car down, but at least you have a place to start.

Ebates - $5 for Signing Up

Like Upromise, Ebates pays you to shop online. Upromise can be directly linked to your Sallie Mae account and you can involve your relatives to participate and gift all their money to your loan account. For Ebates, you receive cash, yet you usually receive a larger percentage.

Just for signing up, you'll earn $5 in cash. If you keep shopping, you could earn a percentage of all your purchases on your Ebates account. Your money is automatically transferred from Ebates to Paypal in $5 increments.

Some examples of merchants and their cash back offers:

1. Groupon - 3%
2. Mint.com - $1.50
3. Entertainment.com (Entertainmnet Book) - 17.5%
4. Snapfish - 6.5%
5. ATT - $50
6. Netflix - $10
7. AMEX Gift Cards - 1%
8. Walmart - 2%
9. eBay - 1%-4%

Pretty much anything you buy online can be bought through Ebates and, therefore, you could earn cash back. It ads up quickly.