How do you fund your retirement account?

Question How do you fund your retirement account?

Answer  Use your PYF Savings account for retirement.

Complete Answer  Although retirement planning is beyond the scope of this blog, the following guidelines will point you in the right direction. If you save 10% of your take-home pay each month, your PYF Savings Account, the following things will happen:

  1. You will have enough money in your checking account to pay all of your monthly bills on time (post of post of October 10, 2016),
  2. You will have money for unexpected financial emergencies (post of October 17, 2016),
  3. You will have money to leverage your buying power for big-ticket goods and/or services (post of October 24, 2016), and
  4. You will have money to fund your retirement.

Retirement Guidelines

  • Start NOW! If you are putting 10% of your monthly take-home pay into your PYF Savings Account for your working life, you will have a substantial amount of money for your retirement. Will that be enough to fund your retirement? Only you can answer that question. A good place to start is to look at your monthly Spending Plan. How much money do you need each month to maintain your current life style?
  • Diversify your retirement funds.
  • Take full advantage of your employer’s retirement and/or pension programs.
  • Only withdraw money from your retirement account(s) as a last resort, then make paying yourself back a priority.
  • Because each of us have unique financial situations, you should seek the help from a trusted, licensed financial adviser.

Financial Literacy Knowledge/Skill

How to fund your retirement account.

Comments or Questions

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How do you leverage your buying power to pay for big-ticket goods or services?

Question  How do you leverage your buying power to pay for big-ticket goods or services?

Answer  Use your PYF Savings account to leverage10 your buying power to pay for big-ticket goods or services, then pay it back.

Complete Answer  Although “leveraging your buying power” may sound like a complicated financial concept, it is really quite simple. An example is a gas station offering a gallon of gas a few cents cheaper if you pay with cash instead of using a credit card.

The term “big-ticket” is normally used to describe expensive purchases. For the purpose of this blog, I will use the term “big-ticket” to describe things that cost $1,000 or more and cannot be paid for from a typical monthly Spending Plan.

Example My car insurance for two cars, a pickup, and a scooter all come due the same month each year. The total bill is more than I can pay for from my Auto Expense account in my Spending Plan. I use money from my PYF Savings account to pay the total bill all at once. By paying the auto insurance bill for one year, I take advantage of available discounts. I then amortize the discounted cost of one year of auto insurance over the next year.

Using rounded numbers as an example: The discounted cost of car insurance is $1,200.00. It is more than I can afford in one month from my Spending Plan for Auto Expense. I borrow the $1,200.00 from my PYF Savings account, then divide the $1,200.00 by 12 months and pay back $100.00 a month. This expense is part of my monthly Auto Expense. Please note; my monthly Auto Expense including the amortized auto insurance of $100.00 does not exceed the total recommended amount, 15%, for Auto Expense.

Financial Literacy Knowledge/Skill

How to use a PYF Savings Account to leverage your buying power to pay for big-ticket goods or services.

Comments or Questions

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Next week’s topic: How do you fund your retirement account?

 

How do you pay for unexpected emergencies?

Question  How do you pay for unexpected emergencies?

Answer  Borrow the money from your PYF savings account, then pay it back.

Complete Answer  Unless you are an extremely lucky person, you will have unexpected financial emergencies in your lifetime. Use the money from your PYF savings account to pay for the financial emergency, then pay yourself back. The nice things about borrowing money from yourself (being your own bank) are you will always be approved, no paper work to complete, it is an interest-free loan and you get to decide the terms (amount and frequency of payments) of the loan.

Borrowing money from your PYF Savings Account. You should borrow money from your PYF Savings Account if the emergency expense is more than can be paid for from your monthly Spending Plan. For example: I could pay a $250.00 repair expense for the washing machine from my monthly Spending Plan’s Housing Expense. On the other hand, when my furnace had to be replaced at a cost of $3,600.00, it was more than I could afford in one month, so I borrowed the money for the new furnace from my PYF Savings Account. I amortized the $3,600.00 expense over three years. I paid back my PYF Savings Account $100.00 a month for the next three years.

Helpful Hint  Through no fault of your own, you could be the victim of identity theft and or bank fraud – unexpected financial emergencies. Because of the threats of identity theft and bank fraud, use two completely different banks (not affiliated with one another) for your checking account and your PYF Savings Account. If an account is compromised, you will still have access to some money from the second bank until the problem is resolved.

Financial Literacy Knowledge/Skill

  1. Paying for unexpected financial emergencies.
  2. Amortizing a loan to yourself.
  3. Using two separate banks to help protect yourself from identify theft/bank fraud.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you leverage your buying power to pay for big-ticket goods or services?

How should you be using your savings?

Question  How should you be using your savings?

Answer  Use your savings to:

  1. Pay all of your monthly expenses on time.
  2. Pay for unexpected emergencies.
  3. Leverage your buying power to pay for big-ticket goods and/or services.
  4. Fund your retirement.

Complete Answer  Assuming that you have a Spending Plan which includes spending less money than you take home (living at or below your means) and you are saving at least 10% (Pay Yourself First Savings Account) of your take-home pay each month.

1.Pay all of your monthly expenses on time. You will need a checking account that allows you to deposit money (checks and cash), write checks, both electronically and manually and access to your account using an ATM for both deposits and withdrawals. Deposit all monies received into this account. During the month, you will have money coming into this account (income) and money going out (expenses). The important thing to remember and do is you should have 10% of that month’s income left in that account at the end of the month. Do the same thing the next month and the month after and the month after that until you have enough money in that checking account to pay all monthly expenses for one month.

This concept, having enough money to pay all monthly expenses on time, is called operating capital. All successful business do it. It is similar to having money in the cash register at the beginning of the the day. Money comes in, money goes out. At the end of the day you should have more money in the cash register than you started with at the beginning of the day.

Financial Literacy Knowledge/Skills

  1. Have a checking account.
  2. Use savings to help pay for all monthly expenses on time.

Comments or Questions

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Next week’s topic: How do you pay for unexpected emergencies?

 

 

How much money should you be saving?

Question How much money should you be saving?

Answer  Ten percent of your take-home pay.

Complete Answer  At the very minimum, you should be saving 10% of your take-home pay.

The 10% Affect  Saving 10% of your take-home pay may seem like an impossible task. It is if you try to do it all at once. If you do it one pay check/one purchase at a time, it’s not that difficult. I like to think of it as, “Small change equals big bucks.” For example, If you have $10 to spend on lunch, how different would your lunch be if you only spent $9? Instead of spending $100 for clothes, you only spent $90. Could you really notice the difference? That’s “small change”. If you do that for a year, you will have saved 10% of your take-home pay, that’s “big bucks”.

Financial Literacy Knowledge/Skill

Save 10% of your take-home pay.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How should you be using your savings?

How do you save money?

Question  How do you save money?

Answer  If you spend less money than you take home, live below your means, you will have money to save.

Complete Answer  There are many ways to save money, every thing from putting your spare change in a piggy bank each day to money automatically deducted from your pay and put into diversified investments. Do what ever works for you. The important things to remember are:

  1. Start right now! Albert Einstein said, “Compound interest (earning interest on interest) is the eighth wonder of the world. He who understands it, earns it . . . he who doesn’t . . . pays it”9. For example Adam and Alice agree to save $10,000.00 each for retirement which is 30 years away. Alice started right now by investing her $10,000.00. It took Adam ten years to save the $10,000.00 to invest in his retirement. Even though both invested $10,000.00 for retirement, in 30 years, Alice will have $24,568.42. Adam, because he waited ten years to invest his money, will have $18,207.55. They both saved $10,000.00 for retirement. But because Alice was earning interest on interest (compounding) she will have $6,360.87 more than Adam. For this example the interest rate is 3% compounded monthly.
  2. Make savings a priority. The first thing in my Spending Plan is savings. Each month I begin by saving 10% of my take-home pay. That financial literacy concept is called “Paying Yourself First”.
  3. Make it easy. If a task is inconvenient or cumbersome, it’s easy to put off or skip it altogether. Have part of your pay directly deposited to a savings account, have money automatically transferred from checking to savings each month, round up purchases to the next even dollar and then leave that amount in your checking account, or putting your spare change in a piggy bank at the end of each day are just a few ways to save money.

Misconception  A common misconception about saving is some people believe or are led to believe that buying something on sale is saving money. Some people go so far as to believe that buying something on sale is actually investing money. Both concepts are incorrect. When you buy something on sale, you are simply spending less money.

Financial Literacy Knowledge/Skill

Saving money begins with living below your means, make it a priority, make it easy to do, and begin saving now.

Comments or Questions

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Next week’s topic: How much money should you be saving?

Is saving money important?

Question  Is saving money important?

Answer  YES!

Complete Answer  Without savings;

  • You are living paycheck to paycheck. Any interruption in your regular paycheck, such as a sudden illness, a cut in your work schedule, a temporary layoff,  will cause your finances to quickly spiral downward.
  • You don’t have money for a financial emergency expense.
  • You cannot afford big ticket items (down payment on a house or a car, purchase of a washer/dryer, furniture, et ectera).
  • There is no possibility of a comfortable retirement in your future.
  • Most disheartening of all, at the end of another year,  you have nothing to show for a year’s worth of work.

Financial Literacy Knowledge/Skill

Understand that savings is an important element of your financial literacy.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you save money?

Can you afford that?

Question Can you afford that?

Answer By answering these two question you will know the answer; 1. What is your take-home pay for the month? and 2. Is the expense equal to or less than the recommended category amount in your spending plan?

Complete Answer Ironically, as a kid you knew the answer. When your parents gave you $10 to buy your school lunch, you knew you only had $10 to spend on lunch and you spent it accordingly. The same principle applies as an adult. Unfortunately as adults, at times we have to buy things that we cannot pay cash for at the time of the purchase. Most of us could not pay cash for a house or a new car. For those purchases that have to be financed, the same principle applies. What is your take-home pay for the month and what is the monthly cost of the item you are buying.

For Example: Can you afford an apartment? The total expenses (rent, utilities, insurance, et cetera) should not be more than 30% of your monthly take-home pay. Can you afford a new car? Again, the monthly expenses of that new car (payment, insurance, scheduled maintenance, gas, et cetera) should not be more than 15% of your monthly take-home pay. You get to set up the categories and the amounts (percentages) for your spending plan. The important thing to remember is that your total expenses should never be more that 100% of your take-home pay.

Financial Literacy Knowledge/Skill

Know what you can afford.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Is saving money important?

What’s the difference between needs and wants?

Question  What’s the difference between needs and wants?

Answer  Needs are those things that are required for you to live, thrive and survive. Wants, on the other hand, are those things that enrich our lives, things that we enjoy, things that are nice to have, things that are important to us.

Complete Answer  Needs would include things such as shelter, food, clothing, health care, transportation, education and a marketable skill. In the example of Adam the imaginary person (post of August 29, 2016), he was spending 33% of his take-home pay for housing (shelter) and 16% for car expenses (transportation). Both expenses are considered needs and were within the guidelines of an effective spending plan.

Dining out, a new car, a vacation, going to a ball game with friends are examples of wants. In a recommended spending plan, wants fall into the category of Lifestyle. An evaluation of Adam’s spending plan showed that he was spending more than he as taking-home, and specifically, the excess spending was for wants; Adam’s spending was 42%, the recommended amount is 25%.

In summary, Adam needs to spend less than he is taking home, specifically, he needs to cut down on his Lifestyle spending. This may take a little temperance8, but with a little forethought and practice, he will be able to bring his spending down and spend less money than he brings home each month.

Helpful Hint  Cutting down on Lifestyle Expenses is the easiest way to spend less. Not going out for dinner, not buying those new shoes, making coffee at home, and checking out a movies from the library (free) are just a few examples of decreasing Lifestyle Expenses.

Financial Literacy Knowledge/Skill

Understand the difference between needs and wants.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Can you afford that?

Where are you spending too much money?

Question Where are you spending too much money?

Answer  Only you can answer that question.

ExampleFor one month, Adam’s (imaginary person) income was $3,600. Tracking his expenses revealed the following; housing $1,170, car $590, credit cards $525 and lifestyle $1,500.

Income Expenses
Amt. % Amt. %
Take-Home Pay  $3,600  100
 Housing Expense  $1,170  33
 Car Expense  $590 16
 Credit Card Expense  $525  15
 Lifestyle Expense  $1,500  42
 TOTALS  $3,600  100  $3,785  106

Can you identify where Adam is spending too much money?

Complete Answer  You have all the information needed to answer that question.

  1. You know how to calculate income for the month. (Post of July 18, 2016)
  2. You can track spending. (Post of August 15, 2016)
  3. You know what a typical spending plan (budget) should look like. (Post of Jul,y 25, 2016)

In the above example, Adam’s total expenses ($3,785) are greater than his total income ($3,600). Adam will eventually go bankrupt if he continues spending more than his income.

To identify where Adam is spending too much money let’s examine his spending.

  • Housing Expenses which include mortgage/rent, utilities, cable/satellite/Internet  service, cell phone, insurance, et cetera. Adam is spending 33% of his income. The recommended amount is 30% and may vary between 25% and 35%. Adam’s amount spent for housing is a little on the high side, but within the recommended amount.
  •  Car Expenses which includes car payments, gas and oil, maintenance and repairs, license plates, insurance, et cetera. Adam is spending 16% of his income. A little over the recommended amount, but close enough.
  • Credit Card Expenses are in reality debt. Credit card debt will be address in a future post. For this example, we will assume it is debt pay down. Fifteen percent is within the recommended amount.
  • Lifestyle Expenses could be classified as discretionary spending, which would include such things as dining out, clothing, entertainment, hobbies, vacations; all those things that that you enjoy and like. Adam is spending 42% of his income on lifestyle things. The recommended amount for lifestyle is 25%. Adam is spending too much money on lifestyle things.

Financial Literacy Knowledge/Skill

Identify where you are spending too much money.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: What’s the difference between needs and wants?