Main Budgeting 101: From Getting Out of Debt and Tracking Expenses to Setting Financial Goals and...
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TALLY YOUR INCOME Rake It Up When you’re figuring out how much money you have to work with, look at all of the money you receive regularly, no matter the source. Even if it doesn’t count as income for tax purposes (like child support), it still counts as income on your budget because it’s money coming in. Your budget will be based mainly on the income you can rely on: you know exactly how much you’re receiving and when it will come. So if, for example, your sister owes you $2,500 and she’s promised to pay you $100 a month, don’t include that money as income in your budget unless she’s already started making payments. If you budget up to expected income rather than actual income, you could end up in a budget hole where you run out of money before all of your expenses are covered. NET NOT GROSS When you’re adding up your income, you’ll need to know whether the money you receive is after-tax or pre-tax, meaning whether income taxes have been withheld. To budget accurately, you’ll include only after-tax income, also called net pay. It’s easy to figure out the net pay from your job: it’s the amount of your paycheck that’s left after taxes, retirement plan contributions, and other deductions are subtracted from your gross pay. But income from other sources probably will be a gross amount, so you’ll have to do a little math to take out the related tax bite, transforming it into net. If you earn freelance income, for example, there won’t be any income or other taxes (like Social Security and Medicare) taken out of the checks you receive, but you’ll still have to pay all the regular payroll taxes. When you get a check from a client, you have to withhold taxes for yourself (30 percent to 50 percent, depending on your tax bracket and your state income tax situation) for budgeting purposes, basically giving yourself take-home pay to work with. The same idea works on taxable (non-retirement) investment income. If you’re earning a lot of money on your investments, you’ll need to account for taxes so you don’t ; budget that money for something else. Unlike earned income (which only includes money you worked to bring in), you won’t pay any Social Security or Medicare taxes on that money. Instead, the type and amount of tax you’ll pay depends on things like the type of investment income you receive and how long you’ve held on to the underlying investment. Here’s a quick overview of how this breaks out: • Interest gets taxed at your regular income tax rate unless the source is a municipal or state bond (those are almost always exempt from federal—and often state—income tax). • Stock dividends (which can come from individual stocks, mutual funds, or ETFs) get taxed based on how long you’ve had the investment: if it’s sixty days or less, they’re taxed at your regular rate; if it’s more than sixty days, they’re taxed at a special lower rate based on your income level. • Capital gains (money you earn when you sell an investment for a profit) get taxed based on how long you held the investment: if it was one year or less, you get taxed at your regular rate; if it was more than one year, you pay a special, lower long-term capital gains tax rate. If you have a lot of non-retirement investment income, especially if it’s coming in from a lot of different sources, you may want to work with an experienced tax accountant to help you figure out how much tax you’ll owe so you can budget for it effectively. Should You Make Estimated Tax Payments? If your non-job income (income without taxes taken out) will leave you with a year-end tax bill of $1,000 or more, you need to make quarterly estimated tax payments to the IRS. Skip those, and you could be on the hook for penalties and interest. You can learn more about estimated tax payments at www.irs.gov. ACCOUNT FOR OCCASIONAL INCOME You may have some irregular but predictable (or at least easy-to-estimate) sources of income that you can include here, the same way you’ll include occasional expenses in your budget. For example, if you have an annual garage sale that usually brings in $400 to $500, you can include the lower end of that into your total budget income. Other examples of occasional income may include: • Birthday or holiday money • Tax refunds • Insurance reimbursements Don’t include occasional income that’s more like a one-time thing, such as a prize or a special performance bonus, in your budget. Instead, treat that like found money and put it toward your highest-priority goal. Dealing with Unpredictable Income Some people don’t have steady, predictable income, and that can make budgeting a little trickier. If your paycheck fluctuates wildly (due to things like changing hours, overtime, or commissions) or most of your income comes from running your own business (which includes freelancing), base your budget on the least amount you can realistically count on bringing home in one month. Look back at your monthly income over the past two or three years (or as long as you’ve been freelancing if it’s less than that). Pinpoint your lowest income month and set that as your standard expected budget income. Then tally up your monthly expenses and figure out whether you can cover all of them with your standard income number. If you come up short, prioritize your expenses in order of necessity until you run out of income. As long as all of your needs are covered, this will be your backbone budget—a budget that fits your income. Because you’ve budgeted based on your lowest income, you’ll likely have money left over most of the time. Decide what you would like to do with that “extra” money. Smart choices include: • Creating a safety net account (different than your emergency fund) to fill in any income gaps if you have a month that brings in less than the standard • Making extra debt payments, which will eventually reduce your expenses • Adding it to your retirement savings • Putting it toward one of your financial goals Remember to use a portion of your extra money (at least once in a while) to treat yourself—a night out, new boots, a weekend away, whatever makes you happy—as long as you have enough of a cash cushion to cover your expenses if your income drops. SAVING IS YOUR NUMBER ONE EXPENSE The Path to Wealth Financial comfort starts with savings. Once you have some money put aside, and you aren’t desperately waiting for your next paycheck to pay bills, a whole new financial world will open up to you. You’ll have more freedom and more choices, and those will only grow along with your savings. This is the true path to wealth: holding on to your money instead of spending it. That’s why your highest-priority expense is stashing money in some form of savings account. It doesn’t matter if you save $10 or $200 at a time; what matters is getting into the habit of keeping some of your money for yourself. Once you start a savings habit, you’ll be amazed at how fast your money accumulates, and that may inspire you to put even more money away. TAP INTO THE POWER OF COMPOUNDING When it comes to building a sizeable nest egg, you need as much time on your side as possible. The more time you have, the bigger your savings will grow—even if you stop adding to the account—thanks to a powerful wealth-growing trick known as compounding. Here’s how compounding works. You put $100 into a savings account, and it earns $2 in interest (that’s a 2 percent interest rate). Now you have $102, which earns $2.04 in interest, bumping your new account balance up to $104.04, even though you haven’t added any more money to your savings. (You’ll find the highest interest rates for savings accounts through credit unions or online banks.) With the magic of compounding, you can let your money do all the work for you. Over time, your money starts to grow faster and faster because you’re earning interest on a higher balance all the time. That’s the secret key to building wealth: time. When it comes to your savings goals, more time means more money. There is no second chance to capture the power of compounding. Time makes all the difference, so use all of the time you have and start saving right now. SAVINGS PRIORITY 1: GET YOUR FREE MONEY If you have a 401(k) plan through work and your employer offers a match, take it. That means contributing enough of your own money to get the maximum match amount. If you don’t, you are leaving free money on the table. An employer match is extra money that your employer contributes to your retirement account based on the amount you contribute. For example, your employer could offer to match up to 3 percent of your salary in 401(k) contributions. If you earn $50,000, your employer would contribute a maximum of $1,500 (3 percent of $50,000). To get the full $1,500 match, you would have to contribute $1,500 of your money into the account. If you only contributed $500, the match would be $500, and you’d be losing out on $1,000 of free money. SAVINGS PRIORITY 2: TAKE ADVANTAGE OF COMPOUNDING Your retirement account contributions don’t need to stop at the match. You can contribute up to the legal maximum, supercharging your future nest egg. Not only will your contributions lower your current tax bill—unless you contribute to a Roth IRA or Roth 401(k) account—but the earnings will grow tax-deferred. That means you won’t pay a penny in taxes until you start taking the money out, which helps your money grow faster through compounding. The more money you stash in retirement accounts early on, the bigger your nest egg will grow—even if you contribute less overall than someone who started ten years later. You can’t go back in time to take advantage of compounding, so put away as much as you can as soon as you can to let your money grow as much as it can. SAVINGS PRIORITY 3: EMERGENCY FUND Your car breaks down. Your dog chews up your smartphone. You lose your job. Unexpected expenses or income shortfalls crop up, and paying for them can put a serious crimp in your budget unless you’re prepared with some emergency funds to cover them. People with even modest emergency savings take on less debt and have more financial flexibility than people with no emergency fund, giving them an edge when it comes to building wealth. How big a safety net do you need in your emergency fund? Three months of living expenses (necessities) will give you enough breathing room to handle most emergencies while you work to get your finances back on track. To make sure you don’t dip into this fund for regular expenses, keep it in an interest-bearing savings account that is not linked to your regular checking account. In fact, keeping it in a different bank adds an extra step to using that money, helping ensure you won’t touch it unless you really need to. That’s Not an Emergency Periodic or large expected expenses (such as a property tax bill or scheduled car maintenance) are not emergencies, so don’t pull from your emergency fund to cover them. You know these costs are coming and at least approximately when, so you can plan to put money aside to cover them. Leave your emergency fund for things that are truly unexpected. SAVINGS PRIORITY 4: SAVINGS GOALS When you set your SMART goals, some of them were probably linked to savings. Each goal you set came with a dollar amount and a time frame, making it easy to figure out how much you’d need to contribute every month to stay on track. For example, if a two-week tour of Scottish castles costs $3,500 and you want to get there in two years, you’d need to save $146 a month. After you’ve figured that out for all of your goals, add them up to figure out how much you’d need to save each month in total. Chances are, you won’t be able to meet all of your goals by their deadlines (especially because they come after retirement and emergency savings on the priority scale). Even if you intend to start saving for only your top-ranked goals, they still may call for more funding than you have available. That calls for a little goal editing, which usually involves extended timelines. Maybe you won’t be able to replace your car in five years without taking on debt and get to Scotland in two years, but moving the trip out another year or two makes both goals possible. Now that you know how much you’ll devote to each goal, you need a place to house that savings. To meet multiple goals, it’s helpful to have a different space for each—but dealing with several savings accounts can be a big savings turn-off. Many online banks offer the option of “sub-savings,” which lets you allocate your money among different goals all inside a single bank account. SmartyPig (an online savings bank, www.smartypig.com), for example, lets you set up different savings goals, complete with target balances and end dates. Every transfer into the primary savings account gets split up according to the goals you’ve set, and they automatically stop when any goal has been reached. KEEP YOURSELF FROM DIPPING IN One of the biggest barriers to savings is withdrawals. If you tend to dip into your savings for any reason other than their purpose (for example, tapping into emergency savings to pay for a party you hosted with your credit card), you’ll need to find ways to stop that negative financial habit. When sheer willpower isn’t doing the trick, try these tricks to safeguard your savings: • Name your savings. Put a label on every savings account you have (emergency, house down payment, fun money, whatever it’s for). That makes you less likely to withdraw the money for any other reason. • Lock it up. Put the money for longer-term savings goals into time-locked CDs. You’ll earn a little more interest and have less (but not no) access to that cash until the CD comes due. • Hide it from yourself. Set up automatic deposits into the account, and include those in a different budget category. Don’t connect the account to any apps or other bank accounts, and you just might forget you have it. • Nix the debit card. If you don’t have easy access to the cash, you won’t be as quick to withdraw it. Set it up so you actually have to go into the bank to take out money. Use whatever strategies you can to keep yourself from raiding savings, and you’ll see your money stack up much more quickly. KEEP YOUR BUDGET FLEXIBLE Yoga for Money Your life isn’t the same every day or every month, and your income and expenses won’t be either. Some kinds of income, such as birthday cash and tax refunds, are more unpredictable than a regular paycheck. Some expenses (such as groceries) normally fluctuate, and others (such as tax bills) crop up only once in a while. Plus, there will just be times when you spend more than you planned to. When you build your budget with wiggle room, you won’t have to start from scratch every time your actual numbers don’t match your plans. That wiggle room comes from spending less than your income and putting as much money as you can into savings. When you need or want something that’s not in your regular budget you’ll have the cash on hand to fund it. Flexibility also comes in handy for people who cringe at the thought of detailed spending categories. In those cases, strict spending rules can lead to budget rebellion. To avoid that budget meltdown, you can build flexibility into your everyday budget, making it easier for you to stick to. The downside: It’s tougher to track your spending, so you may not see potential budget busters that are keeping you from meeting your goals. Still, it’s better to follow a loose, flexible budget than none at all. ADD IN A FLEX-SPENDING CATEGORY If you don’t want to feel pinned down by rigid spending categories, you can create your budget with a catchall flexible spending category. To do that, you need to have other top-level categories to make sure your crucial costs and SMART goals get covered first. After that, spend the rest as you will. Here’s how to set this up. Make a list of the expenses that absolutely must be covered every month: housing, cell phone, loan payments, minimum credit card payments, and child care, for example. Make sure you include all the bills you have to pay, and don’t forget the ones that pop up only once in a while (like renewing your driver’s license or getting an oil change). The costs in this category take the first piece of your income. Next, list the monthly contribution for each of your SMART goals. The total here gets the second slice of your income pie. The Seven Most Common Unexpected Expenses What kind of expenses will take you by surprise? Here are the seven most common: 1. Emergency room visit 2. Broken-down car 3. Emergency pet care 4. Last-minute travel 5. Cracked tooth 6. Burst pipe 7. Job loss Once your necessities and goals are covered, all the rest of your income goes into that flex-spending category. This covers all of your day-to-day spending, from your breakfast burrito to new wireless earbuds—whatever you decide to buy. It’s still a good idea to know what you’re spending money on, but you don’t have to go into superdetailed tracking as long as you’re not overspending here. PLAN FOR THE UNEXPECTED Unexpected costs can crop up at any time, and it’s important to be as prepared as possible for surprise expenses. Though you can’t predict when these high-cost emergencies will happen, you can put a financial readiness plan in place for when they do. That plan will protect you from turning to budget-busting debt when you’re hit with an unexpected expense. A healthy emergency fund is your first line of defense for keeping these unpredictable costs from devastating your budget. When you have enough available cash to pay for an occasional emergency expense, you won’t have to rely on credit cards or other borrowing to cover these bills, making them even more costly. The second part of this financial defense: having enough and the right kinds of insurance to protect against those emergencies that might hit. Make sure there’s room in your budget for crucial insurance premiums so your coverage doesn’t lapse when you need it most. Health insurance, for example, helps shield your finances against catastrophic medical expenses. Homeowners or renters insurance covers both your living space and your personal belongings. Auto insurance takes care of fixing or replacing your car after an accident. And while virtually all insurance policies include deductibles (the amount you have to pay before insurance kicks in), they often pick up the lion’s share of costs in the face of an emergency. LEAVE SPACE FOR SLIPUPS There will be times when you blow your budget—it happens to virtually everyone. The trick is to accept the slipup and move on. If you want to make sure that occasional slipups don’t blow your whole plan or make you want to ditch budgeting altogether, set up a separate savings pool that can cover the excess. Sometimes slipups are just expenses you forgot to account for, like haircuts and holiday shopping. After you’ve been on a budget for a full year, you’ll come across all of the expenses that you inadvertently overlooked. You can either add in line items to catch these occasional costs or make a better estimate for the “extras” savings pool you created. If slipups happen frequently, you’ll need to rework your budget because it doesn’t reflect the way you’re really using your money. For example, say your plan allows $200 for entertainment and eating out but you consistently blow past that. Instead of throwing out your whole budget or just ignoring it, find a way to increase the allotment for that category, either by reducing a different expense or covering it with extra income. FIGURE OUT YOUR NET WORTH Calculators Permitted Your net worth is an important measure of your overall financial health, and it can help you track your progress toward accumulating wealth. Basically, your net worth is the amount of cash you’d have or owe today if you sold everything you owned and paid off all of your debt. There’s no magic net worth number to aim for, but generally positive and growing is better than negative or shrinking. The equation to help you calculate your net worth is simple: Assets – Liabilities = Net Worth. That’s it—well, at least that’s the math part of it. What it means to your overall financial picture depends more on how it changes than on where it stands. Don’t freak out if your net worth is negative, especially if you’re under age forty. It’s not unusual for younger people to have negative net worth because they’re paying off student loan debt and haven’t had a lot of time to start accumulating assets. The fact that it’s negative doesn’t matter. What does matter is where it goes from there. Along those lines, if you’re retired, your net worth will probably start to decline. That’s because after retirement, you move from an accumulation phase into a “using up your assets” phase, which naturally decreases your net worth. Once you know your current net worth, you can measure your progress to see whether your wealth is increasing or decreasing. If your finances are getting off track and your net worth is dropping, you’ll know to look into where and why so you can take the right steps moving forward. How Does Your Net Worth Stack Up? If you want to know how your net worth measures up, look to the median (not the average) for your age range (as reported by the United States Census Bureau). Here’s how median net worth falls out by age: AGE BRACKET MEDIAN NET WORTH Under 35 $6,676 35–44 $35,000 45–54 $84,542 55–64 $143,964 65–69 $194,226 70–74 $181,078 75 and older $155,714 Remember, this includes everyone in the US, from struggling students to billionaires, and people in every state (state statistics vary widely). SMART MONEY MOVES PUMP UP YOUR NET WORTH Good financial choices, like saving for retirement and paying down your mortgage, build up your net worth. Any time you increase your assets or decrease your liabilities, you increase your net worth at the same time. And when you consistently spend less than your income, you’re making the smartest money move of all. Other smart moves you can make to boost your net worth include: • Investing in growth and income stocks • Investing in rental real estate • Paying off debt (especially toxic debt) • Increasing your savings • Building a business These actions have a cumulative effect, and as you make additional smart money moves, you’ll see bigger, faster changes in your net worth. For example, paying off your debt has a double benefit of getting a liability off your books and ending outgoing interest payments, freeing up more money to snap up appreciating assets. In turn, those assets increase in value and increase your income, adding another double bonus to your net worth. BAD MONEY HABITS UNDERMINE NET WORTH Overspending is an obvious bad money habit that can take a toll on your financial well-being, but it’s not the only way to tank your financial health. In fact, some bad money habits may seem like good money habits, and those can be much harder to spot. • “Saving” on sale items if you didn’t need them • Earning points on your credit card by buying more than you need • Snagging free delivery by adding more items to your shopping cart • Cutting expenses by canceling or not getting necessary insurance • Putting all of your savings into risk-free accounts instead of investing All of those habits chip away at your net worth, some more directly than others (such as those cloaked bad spending habits). Not having the right kinds and amount of insurance won’t affect you until disaster strikes, like a tree branch landing on your car or your basement flooding, but then the lack of coverage can decimate your finances. While keeping your money somewhere safe seems like a smart plan, the ultra-low interest you’ll earn in savings accounts can’t keep pace with inflation—and that means your money will actually lose purchasing power over time, something that prudent investing helps you avoid. Very bad money moves include things like high-risk investing, day trading, and cosigning for someone who can’t get a loan on his or her own. Those moves have the potential to put your net worth in jeopardy, so protect your financial future by steering clear. Using Credit Cards Can Deflate Your Net Worth It’s hard to believe that paying for your lunch with a credit card can have an impact on your net worth, but anything (even something small) that increases your debt has that effect. In fact, the biggest threat to your net worth is high-interest debt, and that includes credit card debt. When Using Credit Cards Makes Sense There are people who use credit cards to their advantage, and they do it by following three simple guidelines. Only charge what you can afford to pay for immediately. Never exceed 30 percent of your credit limit. And earn rewards toward things you would normally buy. Consider this: You have a credit card that charges around 17 percent interest, and you buy a $2,000 sofa. If you don’t buy anything else with that card and make an on-time minimum payment of $80 every month, it will take you almost eight years to pay for your sofa and cost you a total of $3,160 (including interest). That means you paid more than $1,000 extra for that sofa, and your net worth dropped by $1,160! Now multiply that idea by three or four credit cards, ongoing purchases, and growing balances to see how damaging this debt is to your financial health. Chapter 3 How to Create a Livable Budget There’s no point in creating a budget you can’t live with. That’s why your budget has to reflect your needs, your finances, and your plans. There are dozens of different ways to budget and thousands of financial gurus bombarding you with advice. Go with whatever feels right for you and ignore everything else. Your first budget won’t be perfect. It may not even work. If that happens, don’t give up on making a plan for your money; just scrap that budget and make a different one. It may take a little time to get this right, and when you do, you’ll get a rush that comes from being in control of your money instead of worrying how you’ll get through the month. ELIMINATE TOXIC DEBT AS FAST AS YOU CAN The Debt-Detox Diet Super-high interest debt, with rates topping 36 percent (and sometimes more than 100 percent), can sabotage your finances and block you from reaching your financial goals. It’s extremely difficult to pay off these loans, even if you make regular on-time monthly payments because those payments go almost entirely toward interest. These debts are considered toxic because they do serious harm to your financial position. Even though paying off these toxic debts feels next to impossible, it can be done. It will take some extreme budget moves, including deep expense cuts and income boosts, but those temporary pains are worth it. Make getting rid of this damaging debt a priority, and watch your budget and net worth benefit. THE DANGER OF PAYDAY LOAN CYCLES When you’re in an immediate financial fix, a payday loan can seem like a lifeline, but that financial “rescue” comes at a very steep cost. These loans come with extremely high interest rates—the annual percentage rates (APRs) can come close to 400 percent!—that can pull you into a dangerous cycle of needing to borrow more just to get by. Here’s how it works. In exchange for a postdated personal check or an authorization to directly pull money from your checking account, a payday lender essentially gives you an advance on your next paycheck that has to be paid back right away (usually no longer than two weeks). For this convenience, the lender charges you a fee for every $100 borrowed. The way they word it looks as if you’re not paying a crazy amount, just $10 or $15 per $100. But it really takes a much bigger toll on your finances. If the lender charges you $15 for every $100 you borrow, that seems like a 15 percent interest rate. But because the loan has to be paid back in two weeks, the APR is really 390 percent (15 percent divided by 2 weeks times 52 weeks). In comparison, even the highest-rate credit cards don’t have triple-digit APRs—and that’s part of what makes payday loans so toxic to your finances. Since you have to pay the lender back when you get your paycheck, you won’t be able to use that paycheck to cover your expenses, which forces you into taking another payday loan (and the lender will be very happy to “help you out”). If you can’t pay it back, the lender can get a judgment against you and garnish your wages. Breaking the cycle can be very hard, and the only way to get out is to stop borrowing money this way. You’ll need to find other ways to get your hands on cash (see Chapter 5 for ideas), even if it means borrowing from family. AVOID NO-CREDIT-CHECK PERSONAL LOANS Like payday loans, easy-access personal loans can seem like the way out of an immediate financial problem (like a stack of medical bills). Rather than fixing your finances, though, these instant loans can destroy them, pulling you deeper into debt and making it harder to get ahead. These personal loans are available all over the Internet, and unscrupulous lenders specifically target people with bad credit who are desperate to find a quick cash infusion. Like payday loans, no-credit-check loans can come with APRs as high as 400 percent. Unlike payday loans, you can pay these loans back over a long period, but that can be impossibly expensive. For example, if you borrowed $1,500 for two years with a 400 percent APR, your monthly payments would be $501, and you’d pay back a total of $12,024—over $10,000 more than you borrowed. Not All Personal Loans Are Toxic There are nontoxic personal loans out there, especially for people with good credit who just need a small loan to bridge a temporary financial gap. Make sure you fully understand all of the loan terms, especially the APR and loan period, before you agree to anything. If you feel confused, pressured, or uncertain, walk away. If you absolutely need to take out a personal loan, do a lot of research to find a reputable lender. You won’t get access to the money instantly, but usually in no longer than one week. Start with your own bank or credit union; your institution may be willing to work with you, even when your credit isn’t perfect, if you’re a longtime customer. Otherwise, look online for more reasonable loan terms, including interest rates not higher than 36 percent. Check out multiple lenders to find the best deal you can get. You can find information about reliable lenders at websites like www.nerdwallet.com or look into peer-to-peer lending at www.lendingclub.com or www.prosper.com. KNOW THE RULES OF PENALTY RATES Credit card penalty interest rates can trash your budget indefinitely, turning already troubling debt toxic. This ultra-high rate, usually 29.99 percent, kicks in as a sort of financial punishment when you’re more than sixty days late—meaning you skipped two payments—and it lasts for at least six months. Technically, credit card companies are supposed to reset your rate to the pre-penalty charge after you make six on-time payments and none of them are returned (for example, your check bounces). But there’s a catch: they’re only required to lower the rate on the balance from before the penalty kicked in. There’s nothing to stop them from using the penalty rate for any transactions that took place after it was imposed—and most credit card companies do just that. Read the Fine Penalty Print You can find the exact terms about penalty rates right on your credit card issuer’s website. The credit card company has to spell out what the rates are, what can trigger them, and whether you’ll pay them indefinitely. The fine print will also spell out if a penalty rate on one card can trigger it on other cards you hold from the same issuer. That means everything you buy going forward is subject to the penalty interest rate forever. In turn, that prompts higher minimum payments (they have to be enough to at least cover the new interest charges). If you’ve already been having trouble making payments, this will make it worse. The financial strain on your budget will be increased, maybe permanently, and it will be even harder to get out of debt. INCREASE CASH WITHOUT WORKING MORE Money for (Almost) Nothing Working a second job or taking the time to create passive income streams aren’t the only ways to bring in extra cash. There are several ways you can make money with minimal effort after devoting some time to setup (and sometimes not even that). Some of these require you to pony up money to get started, while others require no up-front investment. You’ll see cash coming in pretty quickly from many of these options (such as selling your stuff). Others may take a little time to kick in but then will continue to supply reliable cash over the long haul (such as building up a portfolio of income investments). SELL YOUR STUFF There’s no limit to the types of items you can sell, as long as they’re in good to excellent condition. There are a few different ways you can accomplish this, and most depend on the value of the things you’re trying to sell. Go straight to a specialty dealer for higher-value items such as antiques, jewelry, art, coins, or stamps. You can find them online or by referral from people you know who’ve sold similar assets. Visit a few reputable dealers who specialize in the specific item, get a firm price from each, and take the best offer. Auctioning items online is another good choice for selling your things. Use a site like www.ebay.com for less expensive items or www.etsy.com for handmade or vintage items. Check out seller fees, shipping rules, and payment options before listing your items. For things you want to get rid of quickly, consider listing them in the classified ads on www.craigslist.org. You probably won’t get as much money here as you would through an online auction site, but you will get quick cash and you won’t have to deal with shipping. Tax-Free “Income” Selling your stuff brings in what feels like income, but it’s not. Unless you have items (like rare collectibles) that have skyrocketed in value, your stuff will sell for less than you originally paid. That doesn’t count as income for tax purposes, so you get to keep every cent your stuff brings in. If you have a lot of small, low-value household items, go with a yard sale. You’ll be able to get rid of a lot of things in a short amount of time and pick up a few hundred dollars in the process. This is the most labor-intensive option, but it works best for items (like single dishes or old Pokémon cards) that someone might want but that aren’t really worth shipping. INCREASE CASH WITH THESE APPS Apps offer a lot of opportunities to earn rewards—including cash—without expending a lot of effort. In most cases, you’re selling marketing information to the app creators and their customers (usually major retailers and marketing firms), a service they’re happy to pay you for. Other apps require you to perform services, such as taking surveys or doing simple tasks. Whichever apps you choose to use, you’ll have a little extra cash on hand for doing practically nothing. Here’s the lowdown on some apps you can cash in on. Shopping You can earn money as an undercover shopper with Mobee. This app shows you stores near you that will pay you to shop and comment. You’ll be assigned brief shopping missions, answer a quick questionnaire, then earn points that you can trade for gift cards, prizes, or cash. If you don’t want to use credit cards but still want to earn rewards points, use Drop. This app offers points for debit card spending, so you don’t have to rack up debt to score points. For every five thousand points you earn, you’ll get $5 worth of rewards, reaping benefits from spending within your budget. Eating Apps like Fetch Rewards give you cash back on items you buy at the grocery store, and all you have to do is scan your receipt to score gift cards for Sephora, Starbucks, Amazon, and many more retailers. Healthy eaters can get cash-back rewards for buying organic, vegan, non-GMO, and other specialty foods with the BerryCart app. Wallaby helps responsible credit card users get the most out of their spending. This app tracks all of your credit card rewards programs and lets you know which offers the biggest bonus for any purchase to help you maximize card benefits. Walking If you’ve sworn off shopping, you can earn rewards for walking with Sweatcoin. This app tracks the steps you walk outside (treadmill miles don’t count) and turns those steps into “sweatcoins” that you can use to buy things like PayPal gift cards, fitness gear, and even cash. INVEST IN INCOME STOCKS Income investing can boost your income with minimal effort on your part. All it takes is a little bit of time and research and some money to invest, and dividends will start pouring in. What Is a Dividend? When corporations earn money, they often share those profits with their stockholders (people who own shares of stock in the company) in the form of dividends. Many established corporations regularly pay out cash dividends, making them a reliable form of extra income. To get started, you’ll need to open a regular (as opposed to retirement) investment account. The easiest way to do this is through an online broker (such as E-Trade or Charles Schwab). It takes about fifteen minutes to set up the account and a few days to fund it. While you’re waiting for the account funding to come through, do a little research to choose your dividend stocks. Remember to take your overall financial plans and existing portfolio into account as you begin choosing investments. Look for solid, mature companies with a long history of paying dividends and increasing them regularly (that’s called dividend growth). You can find a ton of information online to help you choose the companies you want to invest in. Some of the best free resources to research dividend growth stocks include: • Kiplinger.com • Morningstar.com • SeekingAlpha.com • Dividend.com • DividendDetective.com Creating a collection of solid dividend stocks as part of your overall financial plan can add easy income—and a little more breathing room—to your budget. Make sure to budget a little extra for taxes because dividends count as taxable income. ALTERNATIVE INCOME INVESTMENTS You can tap into other types of investments to round out your passive income portfolio. Like stocks, all of these investments have an element of risk, meaning you could lose your money. By including different kinds of investments (a strategy known as asset allocation), you minimize the risk that you’ll lose all of your money because, chances are, they won’t all tank at the same time. Do your homework, make informed choices, and don’t put too much of your money into any single investment vehicle. Follow these basic guidelines, and you’ll be able to build reliable passive income streams. REITs REITs (real estate investment trusts) work sort of like real estate mutual funds and allow you to invest a little money in a large portfolio of income-producing real estate, mainly residential and commercial rental properties. While many REITs have high initial investment hurdles, Fundrise (www.fundrise.com) lets you invest in a starter portfolio for just $500 and minimal annual fees. You can take your earnings as cash payments every quarter or reinvest to grow your holdings. Peer-to-Peer Lending Peer-to-peer lending is a relatively new way to connect borrowers and lenders outside traditional banks. Lenders and investors make money when borrowers pay back their loans with interest, a lot more interest (in the neighborhood of 7 percent to 10 percent) than you’d get if you stashed your cash in a savings account instead. That higher rate also comes with higher risk because some borrowers will default on their loans. You can mitigate that risk somewhat by making several small loans instead of one big loan (for example, four $2,000 loans instead of one $8,000 loan). If you have a high risk tolerance (and you can afford to lose some money) and relish the potential high returns, look into LendingClub (www.lendingclub.com) and Prosper (www.prosper.com). SPEND LESS THAN YOU MAKE Bring Back Some Change It’s the number one most important thing you can do to take control of your money and build lasting wealth, but it’s also one of the hardest things for most people to do: spend less money than you make. There’s constant pressure, both external and internal, to buy more, and it can be very hard to resist. In fact, the only way to thwart that pressure is to be aware of it and turn away. Spending more money than you make does more than blow your budget. It puts your financial future at risk, forcing you to keep paying for the past instead of saving for the future. Overspending means that you are in debt, usually high-interest credit card debt, which shrinks your budget and traps you in a debt cycle. By putting an immediate stop to overspending, and committing to spending less than you earn, you’re taking the most critical step toward getting your finances under control. CREDIT CARDS ENABLE OVERSPENDING You can’t overspend money—actual money—because once you part with it, it’s gone. Credit cards let you overspend without a thought. Consider this scene: You bring $60 (your budgeted amount) to the grocery store. When the cashier rings you up, the total comes to $68. You have only $60 on you, so you have to put something back. But if the same situation happened when you were carrying a credit card, you’d just buy the extra stuff, whether it ran $8 or $38 over your grocery budget. Debit Cards Do It Too Debit cards also make it easier to overspend, but with a set stopping point. Once you’ve drained your bank account, you can’t spend any more. But until that point, using your debit card can push you over budget and even lead to expensive overdraft fees. Until you can stick to your budget even when you’re carrying credit cards—meaning you’d still put things back until your total came down to $60 in our example—don’t take credit cards with you when you go shopping. TRY A SPENDING FREEZE One way to knock down spending is with a temporary spending freeze. Here’s how it works: for a preplanned period of time, usually no more than a month or two, you spend money only on absolute necessities. A move like this will bring your budget into sharp focus, which can help you weed out excess spending and jump-start progress toward your goals. It can be hard to stick to a spending freeze, especially in the beginning, but it does get easier over time. In fact, many people who try a temporary freeze get so used to living without wants that they end up reducing their spending permanently. What expenses would be allowable during a freeze? Just the bare necessities, including: • Housing (rent or mortgage payments, gas, electric, and water, for example) • Groceries (avoid prepared foods and snack foods) • Transportation (to and from work or school, avoid unnecessary travel) • Medical costs (such as prescriptions and doctor visits) For your best chance of success, avoid shopping in real life and online. When you grocery shop, work from and stick to a list, and limit trips to the store to one per week. A Family Freeze Challenge If you have a couple’s or family budget, you all have to agree to the spending freeze, or it won’t work as well. To get other family members more excited (or at least less resistant) about these temporary extreme cutbacks, you can turn it into a contest, with a splurge prize for the winner once the freeze is lifted. Your temporary sacrifices offer the perfect opportunity for an extreme budget reset. The freeze will clarify what you really need and what you can do without on your journey to more solid financial footing. SET UP CONSCIOUS SPENDING RULES If it’s hard for you to pass up great deals and impulse buys, set up conscious spending rules to rein in those habits. These rules force you to think more about the money you’re spending so you have to make a deliberate choice to make a purchase. Here are three examples of impulse-thwarting spending rules. 1. The “wait for it” rule. If you want to buy something that costs more than $100 (or $200 or $50, depending on your situation), wait a week before you do it. Use that wait time to figure out if you still want the something. If you do, look for a way that you can get it for less money. 2. The “indecision decision” rule. If you can’t decide between two things you want to buy, don’t get either. When you really want something, the choice will be clear. 3. The “something in, something out” rule. Any time you buy an item you don’t need, something you already have (something comparable) has to be given away, donated, or sold. If you’re trying to downsize, make it a “two-out for one-in” rule. Putting these types of rules in place will slow things down and get you used to thinking twice before you buy anything you don’t need. WORK PLANNED SPLURGES INTO YOUR BUDGET When you deny everything you want, your brain will start to rebel and you’ll be tempted to go on an all-out spree. To counteract that urge, build some room for occasional splurges into your budget. The best way to do this is with a special savings account that you can use sort of like a backward credit card: the balance will go up when you pay in and down when you pay out and earn interest in between. Don’t put any restrictions on this account except a minimum balance that will keep it open. Because you have to actively decide to pull money out of this account, you’re more likely to use it purposefully, buying something you absolutely love or have been thinking about for a while rather than something that catches your eye in the moment that you may not still want tomorrow. When you figure out how you want to treat yourself before you start spending, you’ll be sure to enjoy your splurge rather than regretting it the next day. Geography Sets Prices Where you live drives your costs for just about everything, from housing to gas to groceries. According to the Economic Policy Institute, the basic annual budget for a two-parent, two-child family in Brownsville, Texas, is $38,203, but in San Francisco it comes to $148,439. Before you make a move, think about how local costs will impact your budget. KNOW YOUR PRIORITIES Would You Rather . . . You know what’s most important to you, and you can create your budget to reflect your financial priorities. For example, if buying your dream house is more important to you than saving for retirement, saving up a down payment will take a higher priority in your plans than 401(k) contributions. That doesn’t mean you can’t do both but rather that you’ll budget for money going into the “house account” before you budget extra money for retirement savings. Keep in mind that some financial goals can help pave the way for others. For example, paying off high-interest debt will make it easier to save up for a down payment. Not only will the payoff free up space in your budget, it will also reduce the amount of interest you would have had to pay, which means even more money toward your house goal. Plus, debt repayment has the added effect of improving your credit score, which can get you a better interest rate when you get a mortgage. If you’ve never really thought about things like this before, using prompts can help. Websites like www.smartaboutmoney.org offer all sorts of worksheets, tools, and quizzes to get you started and help clarify your financial priorities. RANK YOUR GOALS Now that your SMART goals are set, you’ll decide which are the most important to you and to your financial future. Those will be the highest-ranked goals, taking top priority in your budget. Try to think financially rather than emotionally as you rank your goals. It’s natural to prefer working on fun things (like vacations) to burdens (like credit card debt). But paying down your credit card debt as the first priority will help you get to your vacation without the shadow of even more debt hanging over your fun. How Do Your Goals Stack Up? According to a 2017 survey by NerdWallet, 89 percent of Americans have financial goals. Paying down debt scored the top rank (58 percent), followed by general savings (53 percent), avoiding new debt (42 percent), saving for vacation (31 percent), and starting or increasing retirement savings contributions (28 percent). To keep yourself motivated through chore-type goals (like paying off student loans) until you make it to more pleasurable goals (like spending a year in Paris), use the fun goals as your incentive. For example, tell yourself that “After my student loans are paid off, I can start saving for my year in Paris.” By connecting the two goals (also called stacking goals), the higher priority chore-type goal will start to feel less like a burden and more like a gateway to what you really want. SET THE TIMELINE Now that you’ve prioritized your goals, sort them into time-based categories: short-term, mid-term, and long-term. Short-term priorities take place within two to three years. These might include things like saving up for a new laptop so you can start freelance writing or going on a family vacation over the holidays. Mid-term priorities are three to five years out from now and could include things like replacing the car you’re driving now or remodeling your kitchen. Anything further off than five years fits in the long-term category. That’s for priorities like paying off your mortgage or enjoying your dream retirement. Putting your priorities on a timeline lets you save for all three categories at once, but in different ways. For short-term priorities, you need risk-free, easy-access cash. That means putting the money you’re saving toward those priorities in regular savings accounts or money market accounts that are insured by the Federal Deposit Insurance Corporation (FDIC). You won’t earn much interest, but your money will be safe and there won’t be any penalties when you take it out. For your mid-term priorities, you still want to stick with risk-free or very low-risk places to park your money, but you have a little more time to play with. You can earn a little more interest with certificates of deposit (CDs) that lock in your money for a while (you choose the term to match your time frame) or low-risk investments like high-quality bonds or stocks (but be aware that those holdings could lose value). For your long-term goals, you can sit back and let your money work for you. With plenty of compounding time on your side, you could end up with more money even though you’re putting away less. Here, you can go with riskier choices, like stock-based ETFs that have the potential for a lot of growth over time. REBUILD SAVINGS Fill Up Your Piggy Bank Restoring your savings, especially any retirement funds you had to dip into, is priority one once you’ve finally gotten through the rough patch. You’ll need to replenish your financial safety nets before you can begin taking strides toward the goals you had to deprioritize during the crisis. This doesn’t mean just repaying yourself the money you took from savings. It also includes making up for skipped contributions (this may not be possible for certain retirement accounts). To bring your savings up to where they would have been if you hadn’t experienced the emergency situation, and not just bring them back to where they were pre-crisis, add a reasonable amount for lost growth on to your makeup contributions. For example, if you skipped ten $100 deposits into savings, your account would be short $1,000 plus the interest that money would have earned. To catch up all the way, figure out how much interest you missed out on and include that in your makeup funds (the easiest way to do this is using an online savings calculator, which you can find at www.bankrate.com or www.investor.gov). PAY BACK YOUR RETIREMENT ACCOUNT If you borrowed from your retirement savings, it’s critical to pay that money back as fast as you can. You’ve already lost out on some compounding (the earnings probably would have outpaced the interest you’re paying yourself), but you don’t want to lose even more growth opportunities. Time is your biggest advantage when it comes to long-term savings, so don’t wait to refill your retirement nest egg. If you borrowed money from your 401(k) and you’re still working for the employer that holds your account, you’ve probably been paying that loan back through payroll deductions. Ask your employer to increase the payback amount so you can restore your savings faster. Plus, since many plans will not let you make contributions until your loan is paid in full, the sooner that’s done, the sooner you can get back to building your retirement nest egg. You Can’t Borrow from an IRA While you can take a loan from your 401(k) account, you can’t borrow from an IRA. In fact, you can’t even pledge your IRA as collateral on loan applications. Money you take out of a traditional IRA pre-retirement counts as a taxable early distribution. Once you’ve paid yourself back, budget for the maximum allowable contributions going forward. That may include doubling up: if you have an employer-sponsored plan such as a 401(k), in most cases you can also open and contribute to an IRA (individual retirement account). Saving more aggressively might keep things a little tight right now, but you’ll be very thankful when you’re ready to retire and you have a substantial nest egg to rely on. TACKLE NEW HIGH-INTEREST DEBT It may seem counterintuitive to include debt paydown as part of a savings rebuild plan, but getting rid of debt with a high interest rate will do more for your overall financial picture than earning 2 percent on your emergency fund. Chances are, you relied on credit cards and other expensive options (like payday or personal loans) during your financial crisis. Focus your budget on paying them off to avoid rapidly growing compound interest charges. (Chapter 6 tackles debt paydown strategies in more detail.) Once this new debt is paid off, you’ll be able to quickly refill your savings accounts by shifting those debt payments directly into savings. And without the shadow of debt hanging over your finances, your money will have more room to grow. REPLENISH YOUR EMERGENCY FUND After you’ve refunded your retirement savings and gotten rid of high-interest debt, it’s time to turn to rebuilding your emergency fund and making it bigger than it was before. Having that emergency savings buffer in place again will restore financial security and help you weather the next surprise more easily. This is one of those times when turning over couch cushions to hunt for change (literally and figuratively speaking) will move you more quickly toward your goal. Whatever your emergency savings goal was before, consider doubling it. Look back on how quickly you ran through it when the last disaster struck. If you expected it to cover three months of expenses, did it? If your prior savings didn’t stretch as far as you needed it to, you may have underestimated your crisis needs. Now you know how much it takes to get through a financial disaster, and you can make a better backup plan. Take every opportunity to add to your emergency savings. Putting your change into a jar and then depositing the lot every week or two will start to add up faster than you’d expect. Programs such as Bank of America’s Keep the Change round up debit card purchases to the nearest dollar and automatically transfer that “change” from your checking account into savings. Apps such as Digit (the app that randomly swipes little bits of money out of your checking account and into savings) can also help your savings move forward painlessly. REVISIT YOUR SAVINGS GOALS Now that you’ve gotten through the financial emergency, it’s time to revisit your savings goals. You may find that some of the goals you set pre-crisis don’t suit you anymore or have a different place among your priorities. Many people who’ve survived a sharp financial jolt like the one you’ve just lived through find that the things that matter to them now are very different than what seemed important before. Revised goals may include supersizing emergency savings, doubling up on retirement goals, and doing everything possible to avoid debt—but that can leave no room at all for fun goals (like vacations) that give you something to look forward to. Take some time to think about your financial priorities. Review your SMART goals, and keep the ones that still fit. Create new goals that mesh with your new financial outlook. When you’re ready, restart your goal-savings habit. And remember to strive for some fun. [image: Image] It’s usually easier to increase your income than cut expenditures. One way to raise some fast cash is having a yard sale, getting rid of old or little-used household objects. Photo Credit © Getty Images/David Sachs [image: Image] Creating and maintaining a home budget doesn’t have to be a burden, but it’s a serious undertaking. Use a spreadsheet, software, or apps to create your budget and update it on a regular basis. Photo Credit © Getty Images/mapodile [image: Image] Eating out is fun and makes a nice break from routine. But it can also break your budget if you do it too often. Think about your eating habits and decide how big a part of your budget dining out is going to be. Photo Credit © Getty Images/EmirMemedovski [image: Image] College tuition for you or your children can be an enormous expense—one that gets larger every year. Start your budgetary planning early. To save big, consider attending a local community college for two years before switching to a four-year institution. Photo Credit © Getty Images/SteveDebenport [image: Image] Travel can often be a big expense, but it doesn’t have to wreck your finances. Plan your travel budget systematically, including the cost of transportation, food, housing, and sightseeing. If the expense is more than your budget can bear, wait a while until you’ve saved the amount of money you need. Photo Credit © Getty Images/seb_ra [image: Image] Pets make our lives richer and more fun. They also impact our budgets. Your pet will need food and other supplies, as well as pet insurance and regular visits to the vet. Build all that into your household expenses. Photo Credit © Getty Images/Anchiy [image: Image] Many people living paycheck to paycheck are tempted to take out payday loans. This isn’t a good idea, since such lenders often charge exorbitant interest rates that can make it nearly impossible to get out of debt. Photo Credit © Getty Images/EHStock [image: Image] Selling your home is a big undertaking from a budgetary standpoint. Many people find it easier to make ends meet by downsizing to a smaller home with a lower mortgage payment and lower property taxes. Photo Credit © Getty Images/RichLegg [image: Image] When two people decide to get married, they should review their finances—especially if they’ll be merging their bank accounts. Many people also create a separate budget for the wedding itself. Photo Credit © Getty Images/Neustockimages [image: Image] A new baby is a huge event in your life. It also calls for a big budgetary overhaul. Examine the costs of housing, baby supplies, clothing, food, healthcare, and child care—preferably before the little one shows up in the delivery room. Photo Credit © Getty Images/Peopleimages [image: Image] As you enter retirement, your finances become dependent on savings, Social Security, and other income streams. Start planning early and create a budget plan that will support the retirement lifestyle you want. Photo Credit © Getty Images/PeopleImages [image: Image] Healthcare becomes a significant element in budgets as we age. Not all medical expenses are covered by Medicare, and there are likely to be unexpected medical events. A realistic budget can ease the pain of these expenses. Photo Credit © Getty Images/Ridofranz [image: Image] One of the biggest purchases you may make in your lifetime is a car. When budgeting for a car purchase, remember to build in gas and regular maintenance. That way, your budget is less likely to encounter surprises down the road. Photo Credit © Getty Images/andresr [image: Image] Good credit makes it easier to keep your finances on track. When you get your credit report, be sure to check it carefully, since up to 20 percent of reports contain errors. Photo Credit © Getty Images/scyther5 SOFTWARE MAKES IT SIMPLE Click, Click, Enter, Click, and Done Budgeting software has been around for decades, and it’s had plenty of time to work out all of the kinks. You’ll spend a lot less time with setup than you would for a spreadsheet, but you may be more limited in your category and expense grouping options. Also, all of the budgeting software offers the option of linking your bank and credit card accounts so you can import information rather than having to type everything in yourself. Whether you prefer budgeting on your hard drive or in the cloud, there’s a software solution for you. THE BEST PROGRAMS FOR YOU All of the budgeting programs included here also offer apps so you can stay connected to your budget all the time. You Need a Budget (YNAB) “Give every dollar a job” is the first rule in the YNAB method. This program works on a principle called zero-sum budgeting, where every single dollar gets accounted for, zeroing out your budget every month. YNAB is a subscription service that works through your computer to help you get control of your money. The program links with your bank and credit card accounts to import transactions and offers an app that will sync up with your computer so everything stays up to date. Focused solely on budgeting, YNAB doesn’t bring in other aspects of personal financial planning like investment tracking. You can try YNAB out for free for thirty-four days, and after that it costs $83.99 a year ($6.99 a month but you pay the full fee annually). You can learn more about this program at www.ynab.com. Mvelopes If you like the envelope method but not the idea of carrying all that cash around, look into Mvelopes. This software works the same basic way, offering digital envelopes for splitting up your money every month. It links to your bank and credit card accounts, lets you assign money to whatever envelopes you want, and lets you see what you’ve spent in the past. It also has an app that syncs up with your computer so you can manage your money on the go. Mvelopes has different subscription service levels, starting with the Basic version that costs $4 a month or $40 a year. You can take advantage of the thirty-day free trial at www.mvelopes.com to see if this budgeting method works for you. Quicken Quicken offers the soup-to-nuts version of personal finance software. The Quicken brand starts with a basic program and offers a ton of add-ons and upgrades as your needs get more sophisticated. Along with budget building, transaction importing, and expense tracking, you can use the basic Quicken software to do things like manage your bills and track your spending. The bare-bones version is Quicken Starter, which costs $34.99 a year. Quicken Deluxe adds in debt tracking and investment monitoring services for $49.99 a year. Quicken Premier offers even more tools, like personal financial forecasting, portfolio management, and even tax advice, for $74.99 a year. Both the Deluxe and Premier versions offer the first year for a discounted price. All versions of Quicken have to be installed on your computer to get you started. Quicken also offers a free mobile app that will sync up with the software. Find out which Quicken software might be right for you at www.quicken.com. Family Ties As of 2016 Quicken and TurboTax are no longer owned by the same company, but at tax time you can still easily transfer your Quicken data right into TurboTax to make creating your return easier and less stressful. KEEP YOUR DATA SAFE Whether you’re using desktop or online software, it’s critical to make sure your personal financial information is secure. These programs link to your bank and credit card accounts, and that means they have your passwords stored along with all the other sensitive information. Plus, software crashes and freezes can make your information inaccessible. So before you enter any information or set up links, take steps to protect your data. • Make sure the data is encrypted and password protected • Run updated antivirus software on your computer • Never use public Wi-Fi to update personal financial software • Back up your data regularly (especially if you’re not using online software) • Use the most updated software version As long as you’re vigilant with these strategies, your personal financial information should remain secure. SIDESTEP FINANCIAL QUICKSAND Danger Ahead! The quickest ways to tank your finances are overspending and using consumer credit (which includes credit cards and personal loans). Those two wealth-drainers usually go hand in hand, teaming up to trash your budget. When you get stuck in the overspending/overusing debt cycle, you’ll get caught in financial quicksand. Then you’ll need to turn to debt for necessary spending because your minimum debt payments are taking up more and more of your budget, dragging you down into an increasingly deeper debt hole. You can avoid that financially deadly trap, but success calls for a habit overhaul. You’ll have to change your approach to money and budgeting and fight the overwhelming impulses to spend. DON’T BUY INTO SOCIAL PRESSURES The social pressure to spend money can be overpowering. You see other people’s Instagram lives or coworkers driving up in shiny new cars, and it’s natural to want the same—or better—things. You face constant pressure to upgrade your phone and other tech, post vacation pictures that your “friends” will envy, and sign your kids up for every activity available. It’s hard to ignore all of that social pressure, but falling for it will drain your budget and keep you from building wealth. The part you don’t see on Facebook and Instagram is the growing mountain of debt or anxiety when bills pour in and there’s just not enough money to pay them. Next time you see one of your friends drive up in a new Lexus, look beyond the car to the payments that suck up a too-big chunk of his or her take-home pay. Look further and see the stress of needing to put the electric bill on a credit card because there’s not enough left in the checking account to pay it. Remember that more expensive cars also come with more expensive parts, repairs, and maintenance that will chip away at his or her wealth. Don’t buy into the social pressure of “keeping up with the Joneses” and focus instead on increasing your net worth. DON’T LIVE UP TO YOUR INCOME It’s natural to go bigger as you start making more money: bigger house, better car, more exotic vacations. Even if you keep your expenses less than your income as you upsize (which most people don’t do), they may not stay that way. Expenses go up almost always faster than income. When you’ve upsized, your expenses will automatically be bigger and will almost always increase faster. On top of that, life changes add expenses. Buying a house costs more than renting, for example, and having kids increases costs by a lot more than most people expect (more on that in Chapter 7). Between these extra costs and rising prices, even high earners are struggling to make ends meet and often turn to credit cards to fill the gap—adding the extra expense of interest along with everything else. There are a lot of ways that your expenses can change even if you don’t buy more stuff, squeezing your budget to the limit. Leaving a decent-sized cushion between your income and your needs-based expenses acts like an inflation/extra-cost shock absorber. So, even when your income increases, think twice before you upsize your life. BE CAUTIOUS WITH CREDIT CARDS Using credit cards can trap you in a financial hole that seems impossible to dig out of. The more you use them, the more you’ll need them to cover even basic necessities. Credit card companies love this and respond by raising your limit so you can spend even more. Before you know it, you owe thousands of dollars on your credit cards, and that balance will only grow larger even if you stop using your cards entirely. Credit card (and other consumer credit, like personal and payday loans) interest is the biggest wealth drainer. The only way to keep it from drowning you in financial quicksand is to stop using consumer credit right away. (For tips on how to do that and pay off your consumer debt, see Chapter 6.) DON’T FALL BEHIND BEFORE YOU GET STARTED Student loan debt traps more people than ever before in negative financial territory. More than 44 million graduates owe around $1.48 trillion in student loans, according to Student Loan Hero (2018). The average college senior graduates owing $39,400 in student loan debt alone. That translates to a budget-busting average $351 monthly payment as soon as you’re done with school, whether or not your first job pays enough to cover that along with your other living expenses. Now add credit card debt on top of that. Credit card companies absolutely love college students and actively court them on campus with promises of building a credit history and coupons for free stuff, like food at local restaurants (the companies are not allowed to give out tangible gifts like T-shirts anymore while they’re on campus). Around 56 percent of college students have and regularly use at least one credit card, according to a 2016 survey by Sallie Mae. Among that group, about 25 percent leave school with more than $5,000 in credit card debt. Owing that much before you even get started on your financial future can be crippling. Make sure you fully understand the consequences of borrowing before you do it. Consider going to a less expensive school, taking some courses at a community college to reduce your overall costs, or getting a job to cover your living expenses so you don’t end up with a pile of high-interest credit card debt on top of your student loans. SAVINGS THWART FUTURE DEBT Getting rid of the need to use credit cards prevents their drain on your finances. When you have savings to draw from, you won’t have to rely on credit cards to pay your bills or make large purchases. Borrowing from yourself (a.k.a. making savings withdrawals) can save you thousands of dollars in interest, and paying yourself back is much better than gritting your teeth and sending money to the credit card company every month. Plus, savings lead to money growth, whether you’re earning 2 percent in a savings account or 8 percent in your retirement account. That’s why savings is the main budget priority and the key to prosperity—not to mention a great way to easily skirt financial quicksand. Millennials Are Superstar Savers According to a survey by NerdWallet, millennials—especially millennial parents—are outsaving other generations by far. In fact, 38 percent contribute at least 15 percent of their income to retirement savings, compared to only 24 percent of Gen Xers and 23 percent of baby boomers. GETTING DIVORCED Stability after Separation During a split from a spouse or significant other, your finances are especially vulnerable, even when you’re parting on good terms. Sorting out combined finances can be tricky, both logistically and emotionally. You’ll have to make some tough decisions, including things like how you’ll split joint assets, where you’ll live, and how your children will be supported financially. All of these factors will play a part in creating a breakup budget that will help keep your financial situation in the best possible state. As soon as you split, you’ll figure out a temporary living budget to cover your most immediate and critical expenses. Once the financial dust has settled and you know how things (including retirement accounts, investments, and debt) have been split, it will be time to create SMART goals and a more permanent budget to reflect your new single life. PLAN FOR LEGAL FEES The biggest budget buster during a split-up is the legal fees. Even for a simple divorce, the average legal fees run up to $5,000 for each person. A more complicated divorce (with contested finances, custody issues, etc.) can end up costing $20,000 or more (again, for each of you). Nearly all of those costs are paid directly to lawyers. Actual court costs for filing a divorce run only a few hundred dollars in most states. If your divorce is uncontested and straightforward, consider filing without using lawyers. That doesn’t mean you have to go it alone: divorce mediators can help resolve any sticky issues at a fraction of the cost of attorneys. A messy divorce, on the other hand, usually requires lawyers to sort things out. You can still minimize your legal bills here by doing as much of the legwork on your own as possible. Keep meetings short by coming prepared with copies of any documents they ask for (such as bank statements). Try to stay focused and unemotional when you’re with the lawyer to keep the meeting on track. FOR A STAY-AT-HOME PARENT Some of the biggest fears in financial separation involve parents who haven’t been working outside the home because they’ve stayed at home to raise children. If this is your situation, creating a budget can help calm those fears. Not knowing how you’ll be able to handle the finances in the months and years ahead can be paralyzing; taking charge of every aspect you can is empowering. Start by making a new pared-down family budget so you’ll know approximately how much money you need to get by each month. Be ready to live on substantially less money than you’re used to, as now the single family income will have to pay for two households. Then, if possible, sit down with your spouse (and possibly a mediator) to determine what funds will be available to cover your household expenses until you’re able to bring in enough income to live on. And start figuring out ways you can earn money from home to minimize the initial changes. Trustworthy websites like www.flexjobs.com specialize in legitimate work-from-home opportunities and offer work for a wide variety of skills and skill levels. You can also find some money-making ideas in Chapter 5. CHILD SUPPORT FIGURES INTO YOUR BUDGET When one parent will have primary physical custody of the children—meaning they’ll live with that parent for more than 50 percent of the time—the “live out” parent normally pays child support as his or her contribution toward the children’s living expenses. If you are the parent who will be paying child support, add it to your budget as a high-priority ongoing expense to make sure that your children won’t be deprived of any essentials. A Word about Alimony Alimony, or spousal support, is sometimes used where one spouse hasn’t worked (usually to care for children) by agreement. Alimony is typically granted only with long-term marriages and for a specific time. If you’re ordered to pay alimony, it’s a legal obligation like any debt and belongs in your expense budget. If you are the parent receiving child support, don’t rely on it as your main source of income. Remember, just because something is written into your divorce agreement doesn’t mean it will actually happen. And even in friendly divorces, circumstances can change: the paying spouse can lose his or her job, become disabled, or die. Accept the support when it comes, but budget as if it won’t. WATCH OUT FOR DEBT TRAPS The mechanics of splitting joint debt aren’t as simple as they appear. Even when you’ve agreed on who will be responsible for which debts and put that into a written agreement, creditors aren’t bound by that. To be clear: if your ex stops making payments and defaults on debts that were taken on while you were together, creditors can hold you responsible for those payments. You can protect yourself against this possibility by adding a “debt cushion” savings account into your budget. Other things you can do to protect your budget and your credit score include: • Close all joint accounts, including bank accounts and (especially) credit cards • Remove your ex as an “authorized user” from any accounts in your name • Remove your name from joint financial agreements, including leases and utility bills • Refinance any joint loans (such as a mortgage or car loan) in just one of your names • Check your credit report for any joint obligations you may have missed, forgotten (like unpaid medical bills), or didn’t know about Make on-time payments every month for the debts you’ve agreed to take on. This is crucial to building up your new solo credit history. THE SINGLE-AGAIN BUDGET Now that you’re on your own, your income and expenses are dramatically different than they were as part of a couple. If you weren’t in charge of the finances before, taking control can feel unnerving at first. The key is to start with building a basic budget that takes your new cash flow into account. Add up all of your reliable income sources, which may include child support and alimony if you’re already receiving them. List your fixed expenses (like rent and loan payments). For your variable expenses (such as groceries), you’ll have to estimate for the first few months, but soon you’ll have a spending history to track and look back on so you can better account for those expenses. Creating this game plan will help you gain financial confidence and set you up to thrive. It will also give you a sense of control over your money at a time other parts of your life may feel unsettled. Once you have a handle on the day-to-day money management, you’ll be able to set reasonable SMART goals to move you toward financial freedom. WATCH OUT FOR BUDGET BUSTERS Plugging Up the Leaks Budget busters typically involve money you spend without realizing it, like autopilot expenses or hidden fees. These costs sneak up on you, draining your checking account and stealing budget space from your goals. They’re often small enough that you don’t really notice them or consider them when you’re looking to make cuts—but these budget busters should be the first expenses you ditch. Put on your detective hat and find those leaks so you can eliminate them from your budget. You’ll find them all over the place, from maintenance fees on your checking account to late fees for overdue library books. With a little bit of effort, you can get rid of these tiny leaks that pad your expenses and open up some room in your budget. CHECK ON YOUR CHECKING ACCOUNT Bank fees can eat away at your money, especially when you don’t pay attention to them. Most banks charge a long menu of fees for consumer checking accounts, and those fees can add up very quickly. What’s worse, when you aren’t expecting them, bank fees can even end up triggering more bank fees. You can eliminate a lot of these budget-busting fees by taking simple actions. • Monthly maintenance fees. Many banks charge maintenance fees of $10 to $12 per month if your balance dips below a preset minimum. You can avoid those fees by making sure you keep that minimum cushion in your account at all times, having the bank waive the fee by setting up direct deposits for your paychecks, or switching to a no-monthly-fee checking account. • Overdraft fees. When your checking account goes into a negative balance, you’ll be charged overdraft fees, and these can run more than $30 each. Make sure you account for everything that drains your account, including automatic payments, checks you’ve written, ATM withdrawals, debit card transactions, and bank fees. • ATM fees. Find out if your bank charges for “foreign” ATM transactions (meaning you used a different institution’s ATM, like at another bank or a convenience store). Those fees range from $2 to $10 every time you use that foreign ATM. If your bank charges for this, make it a point to only use your bank’s ATM, and take out enough cash to last until the next time you swing by. • Returned-item fees. If you deposit a check that bounces (meaning the person who paid you didn’t have enough money in his or her account to cover the payment), your bank will probably charge you a fee, sometimes as much as $15. Not only will that deposit not be in your account, you’ll also be out the amount of the fee. • Paper statement fees. Some banks now charge fees—up to $2 a month!—for mailing out paper statements. Switching to online statements will kill that fee and save some trees. Bottom line: banks charge fees for pretty much everything. Go to your bank’s website and take a look at the schedule of fees (these are sometimes hard to find) so you know exactly what the institution is charging you for. Check Out the Credit Union Unlike banks (which answer to stockholders), credit unions answer to their owners—the people who deposit money there. Because of that, they almost always pay higher interest on savings and lower (or no) fees on checking. They also offer their members better loan terms and other benefits. EXTRA AVOIDABLE COSTS ADD UP Some costs don’t really register; you just pay them and keep going. Sometimes these are expenses that have been on autopilot; others are small fees that crop up now and then. But even small extra costs can end up making a medium-sized dent in your budget when you incur them regularly, so it pays to take steps to avoid them—and that goes double for bigger overlooked expenses. Examples of extra avoidable costs include: • Library fines • “Free trial” subscriptions you forget to cancel • Memberships you don’t use (like the gym) The worst avoidable cost: late payment fees. Paying these fees is like throwing your money in the trash. If you find yourself consistently missing due dates, make a point of paying bills as soon as they come in or automating payment for bills that are the same every month. You can also set up multiple reminders to help you meet payment deadlines, at least until you’re in the habit of making on-time payments all the time. SET UP SPENDING BARRIERS Apps and websites make it supereasy to spend money without it even registering. Paying with your phone doesn’t really feel like spending money, and neither does one-click online ordering. These “conveniences” rank among the biggest budget busters, and disarming them by setting up spending barriers can make it much easier for you to keep impulse spending in check. Examples of spending barriers include: • Deleting stored credit card information on websites • Removing easy-pay apps from your phone • Making it physically difficult to pull out your credit card • Ditching your e-tail memberships (such as Amazon Prime) • Turning off one-click checkout • Disabling in-app purchases Putting up any or all of these barriers will make it harder to mindlessly spend money. When you have to think—even for a few seconds—about what you’re buying, you’re more likely to nix the purchase and save your money for something you’re working toward. THE PRICE OF PETS Most people vastly underestimate the cost of having a pet, and that can lead to budget headaches. If this is your first pet (or your first pet of this species), you’ll have a lot of basics to buy. On top of those one-time pet setup expenses, you’ll have ongoing costs for the life of your pet. Because they’re by far the most common, we’ll stick with dogs and cats here. According to the ASPCA (American Society for the Prevention of Cruelty to Animals), these are the average first-year costs: • Small dog: $1,471 • Medium dog: $1,779 • Large dog: $2,008 • Cat: $1,174 Those first-year costs include things like food bowls, crates and carriers, beds, and adoption fees. Routine ongoing costs include food, vaccines, flea and tick control, and toys. Those ongoing costs—for a healthy pet—can run more than $1,500 a year for a big dog for just the basics. If you need to add in pet sitting or boarding, you’ll need to budget even more. And if your pet has a health emergency, expenses can top $2,500 in a single weekend. If you have pets or are thinking about getting a pet, make sure to work regular and potential emergency costs into your budget. You might even want to set up a separate emergency fund so you never have to think twice about taking your pet to the hospital. HOLIDAYS TRIGGER OVERSPENDING Millions of people overspend by hundreds of dollars on holidays, even if they have a special holiday budget in place. The main reasons for this are spending more than expected on gifts, buying extra gifts, and buying snacks while shopping. To make sure the next holiday doesn’t bust your budget, try some of these strategies: • Create a holiday budget. Yes, many people with holiday budgets still end up overspending, but there’s a better chance that you won’t if you plan your purchases in advance. • Use cash. You can’t overspend if you’re shopping with cash instead of debit or credit cards. • Make gifts. Handmade presents can be more meaningful to the people you care about (and easier on your budget); you can find dozens of easy-to-make gifts, even if you’re not very crafty, at The Spruce Crafts website (www.thesprucecrafts.com) or The 36th Avenue (www.the36thavenue.com). • Don’t buy cards. Greeting cards are shockingly expensive, $5 each on average; go with inexpensive blank cards and pen a more personal message. • Don’t shop hungry. You should never shop hungry, but it’s even more expensive when you’re holiday shopping, so fill up before you set foot in the mall. Taking these steps can help keep your holiday shopping in check so you don’t end up blowing your budget and adding to your credit card debt. Chapter 8 Don’t Let Emergencies Derail Your Plans If you’re experiencing a severe financial setback, you’re not alone and your finances will recover. No matter what caused the disaster—a market crash, medical bills, job loss—there are specific steps you can take to restore your financial security and begin moving toward prosperity. The most important step is the first one: accept your situation (without judgment) for what it is. Looking backward, assigning blame, and beating yourself up won’t change anything. Moving forward will. Now you’re ready to start taking curative actions. You’ll need to figure out exactly where your finances stand and what your cash flow situation looks like. With that information, you can begin to build your financial recovery plan. It will take time for your finances to bounce back, so be patient. As long as you keep taking action and moving forward, you will regain solid financial footing. REPAIR DAMAGED CREDIT Get Your Cred Back Bad credit can cost you money—and grief—in several ways, making it even harder to get your finances back on track. When your credit score comes back as fair or poor, you’ll pay higher interest on any credit card or loan that you can get, making every dollar you borrow more expensive. On top of that, poor credit can keep you from getting a job, an apartment, utility hookup, and even life insurance. Luckily, there’s a lot you can do to quickly boost your credit score and continue to strengthen it over time. The most important thing to do going forward is to make every payment on time or risk seeing your credit score plummet again. What’s a Good Credit Score? Credit scores can range from 300 to 850. Different lenders have slightly different guidelines when it comes to credit scores, but they generally consider scores above 700 to be good and scores over 750 to be excellent (according to Credit Karma). VERIFY YOUR CREDIT REPORT IS CORRECT You’d be surprised by how common it is to find mistakes on your credit report, and those mistakes can mess with your score. Getting errors off of your report takes minimal effort but gives you maximum returns by increasing your score quickly. Start by ordering a copy of your credit report from each of the three major reporting agencies: Equifax, Experian, and TransUnion. You can get a free credit report every year at www.annualcreditreport.com or from each of the reporting agencies individually on their websites (www.equifax.com, www.experian.com, and www.transunion.com). Read through the full report carefully and highlight anything that’s incorrect, which could include a charge that’s not yours, a bill that’s been paid, or ongoing activity in an account that you closed. If you do find mistakes—and there’s a good chance you will because at least 20 percent of all credit reports contain errors, according to the Federal Trade Commission (FTC)—notify one of the credit reporting agencies right away by certified mail (there’s a good sample dispute letter along with a list of all the information you should provide on the Federal Trade Commission website at www.consumer.ftc.gov or at myFICO at www.myfico.com). Once you’ve reported the mistake, the credit reporting company has to open an investigation and notify the company that provided the inaccurate information. If that company agrees that the disputed data is inaccurate, the company has to notify all three credit reporting agencies so they can fix the mistake in your file. GET CURRENT AND STAY CURRENT To keep your credit score moving in the right direction, it’s critical to fix any late payments you can and make all of your current payments on time. Late payments don’t disappear from your credit report even when you close accounts—they linger for up to seven years—so do your best to avoid missing due dates. The most important thing here is to be proactive by contacting creditors before your account becomes seriously delinquent and sent to collections. If you’re struggling to pay all of your bills, there are ways to get help, including: • HARP, the Home Affordable Refinance Program (www.harp.gov), for example, can help you refinance your mortgage to lower your monthly payment. • American Water (www.amwater.com) is available in several states to provide financial assistance to people who need help paying their water bills. • The Lifeline Program (www.usac.org/li/) can reduce phone or Internet costs (but not both). Reducing payments anywhere you can, even temporarily, can help you avoid late payments and keep your credit score from tanking. Ask for Forgiveness If you’ve made only one or two late payments, ask your creditors to forgive them. They’re more likely to say yes if you contacted them ahead of time to let them know you were undergoing a financial setback, but they may agree even if you didn’t. Credit card companies especially are willing to forgive late payments for customers who had a good history of on-time payments before the problem appeared. LOWER YOUR UTILIZATION Another quick way to boost your credit score is by reducing your credit utilization, the amount of credit you’re using compared to your total available credit. As long as your utilization is under 30 percent, it won’t have a negative effect on your credit score; if it’s over 30 percent, your score will drop. Here’s how it is calculated: if you have $15,000 in credit card debt and $25,000 in available credit, your credit utilization would equal 60 percent. The best way to reduce that ratio is to pay down your debt without racking up any new charges. You can also reduce it by increasing your available credit, but that can backfire if you end up charging more or if it requires another credit check. When you’re trying to increase your credit score, do not close any credit accounts once you pay them off. If it’s a credit card payoff, stop using the card and strongly consider destroying it altogether—but don’t cancel it. That will have the effect of increasing your utilization by reducing your available credit, the opposite of what you’re trying to accomplish. DON’T APPLY FOR ANY NEW LOANS While you’re working to improve your credit score, don’t apply for any new loans, financing, or credit cards. Any time you do, the prospective lender will do a “hard pull,” a credit check that indicates you’ve asked to borrow money. Every hard pull lowers your credit score, and those pulls stay on your credit report for about two years. Multiple hard pulls in a short time period can send up red flags to the credit reporting agencies. They look at that as a sign you’re planning to run up a lot of new debt, a bad idea when you’re trying to increase your credit score. FINALLY DEBT-FREE Pop the Champagne! (But Don’t Run a Tab) The day you make your last debt payment feels amazing: no more worrying about minimum payments and late fees, no more stressing about how you’ll ever get out from under it. But it can also be a dangerous time, budget-wise. The cash that used to go toward debt has to go somewhere else now, and those feelings of freedom can lead to impulsive spending, which can quickly turn into overspending that lands you back in debt. A better choice: redesign your budget to capture wealth-building goals and to make sure you stay out of debt for good. STAYING OUT OF DEBT DOESN’T HAVE TO MEAN NEVER USING CREDIT Everyone tells you how to budget for paying off debt, leaving you on your own once you’ve done that. Creating a post-debt budget helps make sure you don’t ever build up that level of debt again, even if you decide to continue using credit. Now that you fully understand the emotional and financial costs of being in debt, you can make a plan to use credit responsibly, as a financial tool that benefits you rather than the lenders. Take these steps to make sure using credit doesn’t send you back into a stressful debt situation: • Keep your credit utilization under 15 percent (which means use only 15 percent of your available credit) • Only use credit for things you can afford to buy right now with cash, and save that cash to pay your credit card bill when it comes • Know how much you owe all the time (especially important if you’re sharing finances with a significant other) • Keep room in your budget to pay credit card bills in full every month (if you can’t, stop using credit cards) • Avoid falling into spending traps by staying aware of your spending triggers Good spending and budgeting habits got you out of debt, and now they will help keep you out of debt as long as you keep following them. STAY ON TOP OF YOUR CREDIT SCORE Most people are shocked to find that paying off debt makes their credit score lower, at least at first. One reason that can happen is because of the change in your credit mix as you pay off specific debts. Other things that can cause your score to drop include: • Not using any credit • Mistakes on your credit report • Canceling credit cards that you paid off • Lowering credit card available credit Those last two have the effect of increasing your credit utilization ratio, a measure based on your total available credit (you can find details on credit utilization in Chapter 8). When you decrease your available credit, this ratio automatically increases, which can ding your credit score. Even if you don’t plan to borrow money again (ever), it’s a good idea to maintain a good credit score because it can affect other things like getting a job and buying life insurance. If you do borrow again, having an excellent credit score will make you eligible for the best possible terms. You can maintain a healthy credit score without going into debt by regularly charging a small amount on a credit card, then paying the balance in full every month. USE YOUR BUDGET TO PRE-FUND YOUR GOALS The best way to not run up debt is to pay for things with cash—and you can pay for anything with cash if you plan ahead. It’s the exact opposite of borrowing money to buy something, with one huge additional benefit: you won’t lose any money to interest payments. Another potential benefit is that paying cash can often result in discounts, saving you even more money. By pre-planning your big purchases, you’ll eliminate the urge to spend more than you intend. It’s very easy to overspend when you’re signing a loan agreement or swiping a credit card, but not when you have cash in hand. Instead of making your next big purchase with credit and then making years of monthly payments, you make the payments to yourself before you buy and then pay cash for your purchase. The setup here is simple: 1. Create a SMART goal for whatever you want to buy that includes a specific dollar amount and a time frame. (I want to buy a used car for $10,000 in two years.) 2. Figure out how much you need to save monthly to meet that goal ($10,000/24 months = $417 per month). 3. Open a dedicated savings account and name it. Studies show that naming an account makes it less likely you’ll withdraw money for something else. 4. Set up automatic monthly transfers into the dedicated savings account. At the end of your preset time frame, you’ll have the cash you need to get what you want without taking on any debt. If you have multiple goals that overlap time-wise, set a plan to pre-fund all of them so you don’t have to miss out on anything you want. SWITCH FROM DEBT PAYDOWN TO WEALTH BUILDUP To supercharge your wealth-building goals, take the money that would have gone toward debt payments and instead put it into saving and investing. You’re already used to living without that money in your budget, making it even easier to redirect it into savings and investment accounts. This is the time to create passive income platforms and build a portfolio of investments that will provide income streams with growth potential (you can find dozens of suggestions in Chapter 5). Not only will this secure your financial independence and security, it will steadily add to your net worth and fund your future. KNOW YOUR CASH FLOW Where Does All the Money Go? The way money moves in and out of your household impacts your financial health. Managing that cash flow the right way is one of the key secrets of getting ahead, and handling it the wrong way can lock you in a dangerous financial cycle. And if your cash flow is unpredictable, it’s even more important to nail down the movement patterns. Timing can make or break your budget. If the money you have coming in doesn’t sync up with the bills you have to pay, you could end up in a budget desert, where you don’t have enough cash on hand to cover your expenses even though you’re bringing in enough income on paper. When you know your cash flow situation, you can avoid those temporary budget deserts and make sure your checking account doesn’t get overdrawn simply because of bad timing. PAY ATTENTION TO TIMING Even a predictable income can leave you short if your money-receiving and bill-paying schedules don’t match up: you can’t pay a bill on the tenth of the month with a paycheck you won’t get until the fifteenth. That situation is even tougher for people living paycheck to paycheck, who don’t have bridge savings to cover that timing gap. It can also be tricky for small business owners and freelancers who don’t have predictable income. There are a few things you can do to deal with this: • Ask your employer to shift your paycheck schedule. • Give customers incentives to pay you quickly. • Reschedule some or all of your bill payments. • Build up a bridge savings account. The quickest, easiest of these is rescheduling bill payments. Many creditors (from credit card companies to utilities) will let you choose a pay date and change it online. You’ll have less control over money coming in than money going out, so tackle that first. Next, figure out how much you can expect to be short based on which bills are often paid late. Start to build a bridge savings fund (keep this completely separate from your emergency fund) to cover any lingering gaps. That can feel impossible if you’re living paycheck to paycheck, but it can be done—it will just take a little longer. Start with microsavings apps like Qapital or Tip Yourself that let you save very small amounts, and watch those tiny savings turn into a thriving bridge fund over time. Keep replenishing that fund until you can better synchronize your cash inflow and outflow. THE DEPOSIT MATERIAL MATTERS How money flows into your checking account matters almost as much as when. Knowing more about how your bank processes different kinds of deposits and payments can keep you from getting zapped by an unfortunate time lag. When you’re putting money into your account, banks seem like they’re acting in slow motion. That’s because they can place “deposit holds,” delaying access to money you’ve put in. Some deposits show up the next business day, others on the second business day. When that clock starts may also depend on the time of day you make the deposit. As long as you get the deposit in by 2:00 p.m. (banks can make the cutoff later than that but not earlier), it counts as being deposited that day; if you miss the cutoff, it will take an extra day for your funds to be available. Depositing cash or receiving direct deposits gives you the quickest access, while depositing physical checks can delay your cash receipt by days. In some cases, deposits can take much longer—even a whole week—to become available in your account. Here are the most common reasons for these extra-long delays: • Your account is new • You’ve been overdrawn several times before • You deposit more than $5,000 at once • You make your deposit at a “foreign” ATM, meaning one that isn’t part of your bank’s network • You’re redepositing a check that originally bounced When you know how long it will take for the money to actually appear in your account, you know to wait before trying to use it. Account for that deposit lag in your budget to make sure you don’t come up short when yo