Baby Step #1 The Emergency Fund

So, you've made the decision to get out of debt. Congratulations, it's one of the best moves you'll ever make. Just be warned, people will now think you're weird. Going into debt has become the standard in our society. I remember my friends always telling me "if you're ever going to have anything in life, you have to go in debt". But, the thing is, if you're in debt, the stuff isn't even really yours. You're still paying someone for it, plus interest. Ok, on to the first step.

Save $1,000 to start an emergency fund

What's an emergency fund? It's money you have set aside for those unexpected expenses that come up in life. It could be the heat/air going out in your house. It could be repairs to your car. An unexpected hospital visit or job loss. This is money to get you through those hard times in life.

You may be asking, couldn't I just use my credit card. The answer is a loud NO! Didn't we cut these up in my last post. Turning to credit cards when you have an emergency means more debt at a high interest rate. You're $800 car repair can easily turn into $1,200 or more when using a credit card. Having an emergency fund allows you to pay for these expenses without paying someone else interest.

Will $1,000 be enough? It's a good place to start. Whether it will be enough is really up to you. You could save $1,500 or $2,000, if it makes you feel more comfortable. Right now, I have a $2,000 emergency fund. The bigger your family, probably the more you want to have set aside.

Also, remember to keep your emergency fund readily available. I would suggest putting it in a high yield savings account. This way your money is drawing a little bit of interest, but you can still get it whenever you need it. Just remember, this is not a fund to go out and buy a new tv because football season is around the corner. It is for legit emergencies.

Have you ever had to use your emergency fund? Did you have enough money to cover the expense?

Back to the Dave Ramsey Basics

I'm a fan of Dave Ramsey. Do I worship the guy? No. Do I think he's a bit overrated? Yes.

But, he's done a great job of talking about finances in a common sense way that everyone can understand. And I believe his 7 steps to financial freedom is a great plan to go by. I've talked about this plan before, but over the next couple of weeks I'm going to share my thoughts and experiences on each step in a way I've never done before.

The first step is actually step 0. Apparently, 8 steps to financial freedom doesn't sound as good as 7. And admit it, if you saw two books on the shelf and both offered financial freedom, wouldn't you take the one with less steps. So, Dave pulls a fast one on us right off the bat, we're all excited to get started on step 1, and here he's thrown us a curve ball with step 0. Step 0 doesn't even sound important, doesn't it sound like you could just skip it. But in actuality, step 0, is the most important step.

Step 0 - Make A Decision to Change

If you're going to be successful at anything, you have to be able to make a decision and stick to it. You can't lose weight, if you continue to cheat on your diet. However, you can lose your spouse, by cheating on them. Funny how life works, isn't it. So, in order to experience financial freedom, you need to talk to the man in the mirror, take a look at yourself, and make a change (First, and hopefully not the last, Michael Jackson reference in this series).

It's really easy, to say we want change. It's a whole notha thing, to actually do something about it. Kinda like the Obama administration, lol, j/k my democratic readers. You have to make the decision that you're willing to do whatever it takes to fix your finances. If that means you have to sell your motorcycle, you're willing to do it. If it means, eating out less, you're willing to do it. If it means, getting a second job, you're willing to do it. Still want to make that change?

Anything worthwhile in life comes with sacrifice. You don't lose weight by eating a box of twinkies a day. If you really want this, know that it's not going to be easy. If you're married, sit down with your spouse and discuss this, because it's going to take both parties working together. It's not going to be easy, but in the end it's going to be worth it.

Getting Started (a tip to help you take step 0) - Cut up your credit cards. You can't get out of debt, if you keep getting into debt. If you need to keep one for emergencies, keep the one with the lowest interest rate. Cut up the rest. And emergencies aren't, there's a sale at JC Penny's. You have to learn how to save for your purchases, not just pull out a card. Good Luck.

Money Hacks Carnival

Just a quick post to say Suburban Dollar is hosting the Money Hacks Carnival this week, and my article on retirement was included. Give it a read if you haven't got a chance yet, and also check out the many other helpful articles that were submitted. Have a good weekend everybody.

401k Review

I've been talking a lot about retirement lately, and it just so happened that I got my 401k statement in the mail this week. Imagine my surprise when it showed my rate of return in the positive. For those of us who are new to this type stuff, rate of return is basically the percentage your money is earning. Not only was mine positive, but it grew at a 16% rate over the last 3 months. This means the $5,550 I had, grew to $6,400. That's a gain of $850 in 3 months, and I didn't have to do anything.

Now, while the last 3 months have surprised me, let me say it hasn't all been good. Overall, in the 3 years I've had my account I've actually lost about $1,300. But, my employer has put in over $3,000, so really I've gained $1,700 that I otherwise wouldn't have had. My rate of return for this year is 8%, which is consistent with past years, prior to the recession. If it continues at this rate I'll be a millionaire or close to it by the time I'm 65. I can't say enough about how important it is to save and invest. And the age you start, makes a huge difference. So don't put it off.

I realize when investing, there's no guarantees. I realize that. like so many people last year, I could see my entire savings wiped out right before I retire. But that's the risk you take. For me, right now it's worth the risk. When I get closer to retirement I'm sure I'll adjust what I'm investing in to some more stable alternatives. But where else can you gain $850 in 3 months for doing nothing.

Has your mind changed about investing since the stock market took a tumble? Do you have any investment tips?

The Recession Rocks

The recession rocks...if you're young. If you're in your 20's or 30's consider yourself young and able to take advantage of the current economic situation. I know it's hard to see anything good in it, but being young gives you plenty of time to recover from our nation's financial meltdown, and it may even give you some advantages.

1. Invest on the cheap - Yes, the stock market has tanked, dropping almost 40% since its all time high in 2007. But, because you're young that's a good thing. You get to buy stocks on sale, and who doesn't like a sale. Then you have 20 or 30 years to wait for your investments to grow, and its historically grown an average of 10% a year. Even if you had invested in 1928, right before the Great Depression, you would have still gained an average of 8.5% a year over the next 30 years.

2. Home Buying - We bought our home at the very beginning of the housing decline. I kick myself all the time for not waiting another year or two. It would've saved me a lot of money. Since we bought our house in 2006, median home prices have dropped 25%, and some metro areas have dropped more than 50%. Yes, I'm talking about you Detroit. Plus the government has now sweetened the pot with the $8,000 first time home buyers credit.

3. Your career options are open - This may be a bit of a stretch, but hear me out. Yes, the unemployment rate is close to 10%. Yes, hiring for graduates has dropped off significantly. But, imagine how much worse it would be if you had a mortgage and kids. Imagine working for a company for 15-20 plus years and then being laid off. What would you do then? Being young means you can still explore various careers. Some you may have never even considered had we not been in a recession.

4. Debt is no longer in - One of the best things to come out of the recession. Debt is out, and frugality is in. Before our current mess, Americans were saving 0% or less. How do you save less than 0, easy you spend more than you earn. Which is what a lot of people did. But now the savings rate is up close to 7%, the most since the 80's. Now, credit is harder to come by, lenders aren't throwing it out like candy at a parade. If we can't get as much credit, perhaps we don't dig ourselves into debt at such an early age.

Hopefully we've all learned from the recession. Living within your means and saving money is now in, and that rocks.

Retirement Costs Less Than You Think

So, you know you should be saving for retirement, but what if you don't have the money to save? Here's the good news, you have help. The IRS and many employers will throw in some money, so you can set aside a large sum of money without taking such a large hit on your paycheck.

Let's say your employer matches 50% of your 401k contributions up to 6% of your salary and you're earning $40,000 a year. If you contribute 6% of your salary you'll be putting away $2,400 a year, and you're employer will be contributing another $1,200 a year, bringing your total contribution up to $3,600 every year. This number should mean something to you if you read my last post. This is how much money you'd need to contribute to reach that one million dollar mark at 65, if you started when you were 25 and earn an 8% return.

Also since the money you're investing is pretax, it doesn't lower your paycheck dollar for dollar. This means if you're in that 25% tax bracket, investing $2,400 would only reduce your take home pay by $1,800. That's just $150 a month. If you start saving at 30, you'd have around $670,000 by age 65. Not too bad. Also let's say you get a raise that gives you an extra $100 a month. Instead of spending it, you can put this into a Roth IRA for the next 35 years. At an 8% return, you'll have $220,000 tax free. Don't you just love compound interest.

Even with all the benefits I realize many people can't afford to put 10% - 15% of their money away for retirement. And you shouldn't be setting that much money aside before you have a substantial emergency fund. I recommend having at least 3 - 6 months worth of living expenses put aside, so you'll never have to raid your retirement account and pay steep penalties. Right now, my wife and I have around 2 months set aside, but some of that will be used when the new baby comes along. It takes time to build up a large emergency fund, so don't get discouraged. You should also pay off credit card debt, so you don't have to waste your money paying monthly interest charges. If you need help getting your finances in order I highly recommend following Dave Ramsey's baby steps.

It pays to start saving early. At what age did you start investing in your retirement? If you haven't yet, what's holding you back?

One Million Dollars

Retirement is something I haven't really talked about on my blog, but it's something that I think about a great deal. Most of my thinking revolves around the idea that I don't want to wait till I'm in my sixties to retire. This may come as a surprise to some, but I'm not a big fan of work. Or maybe I should say I'm not a big fan of working for the man. But the man matches part of my 401k contributions so I put up with him for now.

I believe most of us dream of the day when we can finally retire. When we can wake up in the morning and not have to worry about clocking in. But what does it take to retire these days? How much should you be saving now in order to live comfortably later on in life? It all depends on how many years you have to save. The younger you start saving, the better. It would be great if you started saving as a baby. I plan on teaching my son/daughter(we don't find out for another 8 weeks) the importance of saving for retirement as soon as possible. When other kids at school are talking about the new toys they picked up at Walmart, my child will be talking about how their portfolio is doing(just kidding, kind of).

For most people, the magic number to retire is one million dollars. This number will vary greatly depending on lifestyle, where you live, and various other factors. But to keep it simple that's the number we'll be working with. If you started started saving at the age of 25 like I did, you would need to invest $3,600 a year to end up with one million dollars by the age of 65. This is if you're investment is seeing an 8% return. I don't know about you, but my portfolio has been seeing negative returns for about the past 18 months, so there's no guarantees. If you wait till you're 30 to start saving you would need $5,400 a year to accomplish the one million. At 40, it would require $12,700 a year invested. And at 50 that number goes up to $34,000 per year, but if you've waited that long, why start now.

You can see pretty clearly with these numbers, why it's so important to start saving at an early age. Even if you don't think you have the extra money to spare, find a way to save. What's more important, your retirement or your satellite tv? What are you doing to make sure you have enough money to retire?

Accumulate Experiences

Mark Batterson, pastor of National Community Church in Washington, DC, wrote a post this week that sums up how I feel about life. In it he says the Holy Spirit spoke to him this truth: don't accumulate possessions, accumulate experiences. This is how I've always felt, I just never knew how to express it. Yes, you need to be smart with your money. But, if you have the chance to experience something great, do it. The Bible says Jesus came to not just give life, but give it to the fullest (John 10:10). Now, this isn't a free invitation to spend stupidly. You should not go into debt to experience life. You'll wind up just experiencing the pains of debt. This is why becoming debt free is so important. It opens up opportunities that you never had before. Here are some of the experiences I've accumulated over my life.

- When I was 10 or 11 my dad came home from work and told us we were going to Hawaii. We had never flown anywhere. We didn't have a lot of money. Our vacations usually were spent someplace close to home. Talk about exciting. As an added bonus I almost drowned there.

- When I was 15, I went with a group of kids from school on a 15 day trip across Europe. This is still the best experience I've ever had. Hanging out in Salzburg, Austria. Taking a gondola boat down the canals in Venice, Italy. Going to a topless beach in Nice, France (Major experience for a 15 year old). Going up in the Eiffel Tower. Taking a train from Paris to London.

- At 21 I talked a friend into driving me to Washington, DC to see my favorite band. Also checked out the Smithsonian and the National Zoo. For my 22nd birthday I flew to Chicago with a friend to see that same band. Went to the top of the Sears Tower. Rode in a cab for the first time. The next year I saw the band in Boone, NC in the Appalachian Mountians. It snowed all the way home.

- For our honeymoon we went on a cruise. My wife had never seen the ocean. Went to Paradise Beach in Cozumel, Mexico. Went on a river boat in Guatemala. Went cave tubing in Belize. It was an amazing experience. The following year we went on another cruise with my parents. This time we snorkeled in the Virgin Islands. Went into the rainforest in San Juan, Puerto Rico. Spent time at the Atlantis Resort in Nassau, Bahamas.

- This year we went to Paoli Peaks. I had my first experience snowboarding. Took our first road trip together. Hung out with tigers and monkeys at a tiger preserve. Went on a ghost tour in Savannah. Had the best steak I've ever ate at the Boar's Head Tavern (Sorry, Dad). And the biggest experience, found out I was going to be a father.

What experiences have you accumulated over your life? Is there anything you haven't done, that you want to do before you die?

Best of Money Carnival Feature

Pete, over at BibleMoneyMatters is hosting the Best of Money Carnival this week. This carnival is different from most, because unlike most carnivals that feature every article submitted, this carnival picks the 10 best articles submitted and features them. This means you only get the best of the best, and you don't have to spend all week sifting through a hundred articles. I was lucky enough to be chosen this week for my article on Money Tips from the Most High. Thanks, Pete. Also, if you haven't subscribed to BibleMoneyMatters you're really missing out, Pete is consistently putting out great content that you can use every day. Also, if you haven't subscribed to my blog, what are you waiting for? This is my 100th post, and I'm just going to keep getting better.

Mid Year Goal Review

It's hard to believe but 2009 is already half way over. It's true what they say, as you get older the years pass faster and faster. This year has had its share of stress and anxiety. For awhile I wasn't sure if I was going to keep my job, as they had company wide lay offs. I ended up having to get my commercial driver's license, which I wasn't too thrilled about. My wife's job as an ophthalmic technician has held up really good, but what she really wants to be is a stay at home mom. We managed to take a vacation, although it didn't quite live up to our expectations. The biggest surprise of the year came at the end of our vacation when we discovered we were going to be parents.

Having a baby was one of our goals for 2009. Even though the baby won't be here till 2010, I still count it as a success. Let's look at the other goals and see how I've fared.

1. Pay off my wife's student loan - We've done nothing more than make the minimum payment on this each month. We have the money to pay it off, but that money is now allocated to all the costs associated with having a baby. The interest rate is low, so it's not something we're stressing over.

2. Paint/Furnish the house - We did paint a large part of the house in March. As far as new furniture, it's looking more and more like we will have to wait until after the baby gets here. I don't think babies and new furniture mix together well anyways.

3. Pay down the new car - We were doing a good job at this until we got news of the baby. Before we got the baby news we had paid an additional $2,500 toward the principal of the car. We're hoping to maybe pay off the car by the end of the year.

4. Start a family - We've checked this one off the list. In seven short months we'll be bringing a new baby into our lives. This is going to be the most amazing and scariest moment of my life to date.

How are your goals coming? What's holding you back from accomplishing them this year?

Cutting Back and Other Measures

In my last post I shared how you can create a very simple budget. There's a chance after you start living on a budget you'll realize you're actually spending more than you earn. Most people's reaction is either go in debt or cut out saving. Both of these are bad ideas. Let's look at a few different ways you can either cut back or earn more.

1. Say goodbye to Starbucks - If you're spending more than you earn and you're still buying that morning coffee, it needs to stop. Get your coffee fix before you leave home, and stop throwing away your precious cash.

2. Take your lunch to work - Eating out will cost you at least $5 a day. That's $25 a week, $100 a month, and $1200 a year. Let me tell you that bologna sandwich taste really good with an extra $1200 in your pocket.

3. Limit dining out - You and I both know those people who eat out 80% of the time. Then they wonder why they don't have any money. Cut your dining out in half. If your used to eating out 4 times a week, cut it to 2 or even 1.

4. Work overtime or get a part-time job - In this economy overtime may not be an option, but if it is, take advantage of it. If you're working 40 hours or less, consider getting a part-time job. My brother mows yards on the weekend to supplement his income. What can you do to make extra money?

5. Sell something - Do you have an extra car you don't really need? Maybe a boat or ATV. Consider selling it to get rid of the debt. If it's already paid off, sell it and pay on other debts. Have a yard sale. Do anything you can to raise money to pay off your debts.

If you're needing more ideas to save money, check out some of my other posts. You can learn how to save $50 a week, 10 tips to save on groceries, or how to make a side income with Ehow. Also consider a free subscription to my blog in which you'll receive my posts directly to your email. You can sign up on the right side of this page.