Dollar$ & Sense

First off, my apologies for the unreasonably long break between the first article in this series and the second one. I’ll try to make sure subsequent articles appear more regularly.

If you need to, go back and reread the first article. Basically the point was that you have to make enough money to not only cover your expenses but also to have some left over to save. Save. That’s right, save. You MUST be able to save money if you plan to live a successful financial life. Why is saving so important? Well, because you need savings for a lot of reasons. You need savings to cover you in case there are dips in your income. You need savings to cover you in case you or your partner, if you have one, or both of you lose your jobs or your source(s) of income. You need savings to buy that car or house you want. And then when you get them, you will need savings to pay for needed and unexpected repairs. You need savings to cover your deductibles because insurance won’t cover everything. So, you need savings – money – so that when life takes unexpected twists and turns, you won’t be caught off guard.

So, now that you understand how important savings are, the next questions are how to save and how much to save. If you are an employee who receives a paycheck on a regular basis, the best way to save is to have your paycheck automatically deposited into your checking account, then transfer part of that amount to your savings account. Easy-peasy-lemon-squeezy! If, however, your income is sporadic or fluctuates, it will be a little harder to save because you will have to be more disciplined. That is, you may have to deposit your income into your account yourself. And it could be very tempting to take some of it before you save. Well, tough noogies, because oftentimes you gotta do whatcha gotta do, and this is one of those times.

Before moving on, I mentioned checking and savings accounts. Please, please, open these accounts at a financial institution, and don’t use check cashing places or services that will cost you money just to get to your hard-earned money. There are credit unions that you can join. Most require only a $5 deposit to open a savings account and don’t require a minimum balance to be held in a checking account. How great is that!

OK, so now, how much should you save whenever you get paid or receive some income? The amount depends on your circumstances, but generally speaking you should save the greater of $20 to $100 every time you get paid if you receive a paycheck on a regular basis and 10% of your take-home pay. The key is to save the same amount each time you receive income, either a fixed dollar amount or a percentage of what you save. If you save that amount on a regular basis, soon you won’t even notice the missing money. But you will notice that your savings account is growing. Whoo-hoo! Look at you doing the right thing.

I mentioned that savings have a lot of purposes, the main is to create a cash cushion so that you will be able to weather the financial storms that will come up in your life. But at times you will also be saving to spend, like when you’re saving up for a down payment on a car or a house. And this is also an appropriate reason to save and a good use of your savings.

So, overall, what is the total amount you should have in savings? Again, that’s very dependent on your financial circumstances, but a rule of thumb is that your savings should equal the sum of at least six months of living expenses, any deductibles on homeowner and vehicle insurance policies, some reasonable amount for unanticipated repairs (because stuff always breaks when you can least afford to fix it), and the equivalent of six months of premiums that you pay for homeowner, vehicle, and life insurance policies.

After doing the math, you will see that you probably need savings in the thousands of dollars. If you have a partner, children, a house, and one or more vehicles, your savings cushion may be $20,000 or more. A pretty tall order, but don’t worry. You are going to build up to that amount over time. The most important thing is to just get started.

Savings done! Next up, insurance, that thing we love to hate but love to have when we need it.

Asking whether you, a person, are profitable may seem like a strange question, but give me a chance to explain. Whether you realize it or not, you, as an adult person, are a walking, talking business, whether you’ve actually formed a company or not. If you work a job, your take-home pay is your revenue. If you’re an independent contractor – e.g., maybe you’re a graphic artist, writer, actor, or Uber driver – you earn income. That income – after deducting your business expenses – is your revenue. Next up are your personal expenses: How much does it cost each month to pay your mortgage or rent, pay your light and gas bill, pay for heat and water, buy food and clothing, and pay for your transportation costs, entertainment, etc.? Add up your personal expenses then deduct them from your revenue. (Note:  if you have a job and are an independent contractor, you have two sources of revenue, so add them together). If your expenses are lower than your revenue, congratulations! you’re profitable. You’re doing something right.

If your expenses are higher than your revenue, you’re not profitable, i.e., you get a negative number. So what do you do if you’re not profitable? Well, you have three options: 1. Increase your revenue. 2. Decrease your personal expenses, or 3. Do both. To increase your revenue, you will need to either get another job or get work as an independent contractor. It’s really that simple. You’d be surprised at how quickly you can increase your revenue and become profitable. You just need to find the extra time and energy, which I know can be harder for the older folks.  But if you’re willing to grind it out, you may be able to put almost $9,000 in your bank just by working an additional 16 hours per week for 48 weeks out of the year. Here’s how: Find a job or an independent contractor gig that will pay you $15 an hour, the new minimum wage in many areas. (Note: An IC gig will have to pay $16.25 an hour to equal the $15 an hour you would make as an employee because as an independent contractor, you have to pay both sides of the payroll tax, i.e., 15.3% instead of 7.65% as an employee). OK, so, $15 an hour for 16 hours a week is $240, multiplied by 48 weeks, that’s $11,520. Then deduct 20% for payroll and income taxes and you get $9,216! (Note: your actual taxes may vary; twenty percent is just an estimate). That’s quite a nice sum for some extra grind. If you do this for five years, you’ll have $46,080 plus interest. After 10 years you’ll have more than $90,000! Now  that’s some real dough for just working an entry level  job for a few extra hours per week and SAVING YOUR MONEY. The trick is you have to do it, which is where many of us fall short.

The other thing you can do if you’re not profitable is pare your expenses. Start keeping track of what you spend your money on apart from the things you must pay for, like rent, LOL. You will probably find that you’re spending too much money on little things, like buying lunch every day at work. So start bringing leftovers to nosh on instead. That will not only save you money but probably make you healthier as well. Other things that could be putting a hole in your budget are your cell phone and cable bills. I cut the cable cord awhile back and now pay only for Internet service. I’m not completely happy with getting only broadcast channels through an antenna, but I was also tired of paying almost $200 a month for my bundled service. That $200 a month adds up to $2,400 a year, $12,000 after  five years and $24,000 after ten years.  That’s money I could have been and should have been putting toward my retirement.

And this point leads me to another way to start thinking about expenses. Don’t just look at how much they cost you each time or per month. Think about how much they cost in a year, then five years or longer. E.g., that $30 mani-pedi  you get every week is  costing you over $1,500 a year,  almost $8,000 in five years! But wait, that’s not even the true cost of those mani-pedis. If you make $15 an hour, you know you don’t bring home all of that money. If your payroll and income taxes are 20% of your pay, you need to make $37.50 to pay for and work two and a half hours for that mani-pedi. On a yearly basis, that’s almost $2,000, almost $10,000 over five years!  Who knew toenails and fingernails could be so expensive, LOL. But what’s a girl to do, right? After all she still has to look good even if her finances are a little wobbly. Well, a couple of things. First, you’ve probably noticed that your pedicure lasts much longer than your manicure. So, instead of getting another manicure, just take off the polish and put on a coat of clear, high gloss polish. The other thing you could do — and this is my go-to – is get yourself a few pairs of dress gloves to wear when your manicure isn’t as fresh as you want it to be (during the summer, you can wear the lacy ones). That’s right, start channeling some Jackie O. Folks won’t know what hit ‘em.  J That example is just one of many in how to shave your expenses.

For many of us, the real obstacle to being profitable is credit card debt. If you’re in this situation, then you’ll just have to use your grind money to pay it off. It’s really that simple. It’ll take time, but you’ll get there. Be careful with consolidation loans though become some of us take out the loans to consolidate our credit card debts, then get another credit card anyway and go into debt all over again. That move won’t help you. So if you think you might be tempted, just pay off each card one at a time. You could focus on the one that has the lowest balance because it will be take the least time to pay. Or, you can focus on the one that has the highest interest rate because doing so will mean you will spend less money on interest expense over time. Either option is good.  Just make sure you are still making at the least the minimum payments on your other cards, OK? Otherwise, you will ruin your credit as you’re making the right moves to improve it. Your ultimate goal is to pay off then close your  credit card accounts – maybe keeping  just one with a low credit limit for emergencies (because  ish does happen) — never to reopen them again. After you’ve paid off each account, ask the card company to send you a letter acknowledging that the account is paid-in-full and that the account was closed at your request. And, keep each and every letter just in case you need it to straighten out your credit report. The third option for becoming profitable — increasing your revenue AND decreasing  your expenses – will have you in the black in no time. You can do it. The next article in this series will explain why you HAVE to be profitable. ‘til then!