Emergency Fund: 3 Things to Consider

I have a secured job and I am in my thirties, why do I need an emergency fund? Well, an emergency fund is not only helpful for people who are approaching retirement age or for people who do not have stable income, it is essential for just about everyone. An emergency fund allows you to prepare for a rainy day and  save some portion of  income regularly, so that you can meet unexpected expenses, which usually come in as an unpleasant surprise. Life throws surprises and so does the Mother Nature. Natural disasters do not see whether you are in your thirties or fifties. So, it makes perfect sense to start an emergency fund early in your life and it does not harm to keep extra savings. There are 3 things to look at before starting an emergency fund.

Numbers vs. Value

Now, the question arises how much should you save for an emergency fund. Well, you don’t know what sort of emergencies may arise, then how can you prepare. The best thing is to see what experts have to say. Some experts advise you to save an amount equivalent to 3 to 6 months of expenses, while others suggest saving 10% of your income every month. Whether you are choosing to set aside 3-6 months of expenses or you are choosing to save a certain percentage of your income, the goal is to regularly save so that at the end of the year, you have enough money to meet the extra expenses, if any.

Beginning of the month vs. End of the month

Now, many of us have this tendency to push things and some of us wait until the end of the month to put a certain amount in savings account. Experts like Suze Orman advise to save in the beginning of the month. In the words of Suze Orman,“If you wait to see how much money you have left at the end of the month to put toward savings, the answer may be zero. So, set up an automated monthly transfer from your checking to savings account. Once you lock into that commitment, you’ll be forced to scale back spending to make ends meet.” Now, this is a great way to start. However, if you are disciplined and your idea is to clear off all the expenses before you save, it will not hurt you either, as long as you are consistent.

Love it or Upgrade It

When it comes to your needs, it is important to think strategically. Whether you want to upgrade your car or want to buy a bigger home, it is important to look at the numbers and how much this upgradation is going to cost you every month. It is equally important to see, if the additional expenses are going to hurt your emergency fund.  In the words of Dave Ramsey, “You don’t want to have so much money going toward your mortgage every month that you can’t enjoy life or take care of your other financial responsibilities.” At the end of the day, you want to attain financial freedom and peace and if by scaling up you lose some of your savings as well as the mental peace, it is better to defer the upgradation till the time you increase your income or reduce your expenses to attain that balance.

Spend your Time Wisely

“Time is what we want most, but what we use worst.”–William Penn.

Now, you must be wondering why I am bringing up the topic of time management. Someone has said that time is money. I personally believe that an individual’s financial success largely depends on how she chooses to spend her time. If you spend time on activities which can make you wiser and improve your job and career related skills, you are definitely going to get higher ROI (return on your investment). After all, your time is also an investment. On the other hand, if you are going to spend time going for a window shopping or watching TV, you will not gain anything but lose your precious time and add on to your stress because you might run against the time for other activities. If you are true to yourself, you will definitely get a way out to end all your financial worries. You have to be conscious and be aware of what is happening around you. Try to find out what are the basic skillsets required for you job and what gives you a winning edge. It is not a bad idea to get a certification from your local community college or join an online community like (Coursera.org and Edx). If your colleague has recently got a raise because she knew a foreign language, why not sign up for a language course in your local library. It is free and it can give you a general idea whether you want to spend more time and resources on acquiring that language. Even, reading some financial planning books can help you manage your money and grow your investments effectively, which is truly rewarding. The possibilities of raising your income or building wealth are endless, provided you spend your time judiciously and pick your activities wisely. If you have trouble choosing the right activity, here is an easy way out. Ask yourself these 3 questions before you spend your next hour on any activity.

1. Is this activity going to enhance my current knowledge about any subject whether it is finance or marketing?
2. Is this activity going to make me richer one day, if I do it over and over again?
3. Is this activity going to give me a competitive advantage over my colleagues/competitors (if you own a business) if I do it over and over again?

Needless to say, if you get the affirmative answer for even one question, you are making productive use of your time. On the other hand, if you get  negative answers for all the questions, you know that you are going to waste your time on some unproductive activity.

“Rich people have small TVs and big libraries, and poor people have small libraries and big TVs.”– Zig Ziglar.

10 Best Quotes to get you into Financial Discipline

In my previous posts, I have stressed that your financial freedom depends a lot on getting into a financial discipline. When we talk about discipline, it is something that we do over and over again. Taking few steps once in a while or reading a lot of financial literature alone will not help you. All you have to do is take repeated actions. So, to get into a financial discipline, you need to get into a habit of spending money wisely, saving regularly and recording each and every expense. It is easier in theory, but in practice it is little hard, but not impossible. If you keep saving regularly, you will definitely achieve your financial goals. So, here are some of the best quotes to motivate you.

 

1. “In reading the lives of great men, I found that the first victory they won was over themselves. Self-discipline with all of them came first.”–Harry S Truman.
2. “Discipline is the soul of an army. It makes small numbers formidable.”–George Washington
3. “We all have dreams. But in order to make dreams come into reality, it takes an awful lot of determination, dedication, self-discipline, and effort.”–Jesse Owens
4. “Discipline is the bridge between goals and accomplishment.”–Jim Rohn
5. “To enjoy good health, to bring true happiness to one’s family, to bring peace to all, one must first discipline and control one’s own mind.”–Buddha
6. “Discipline is remembering what you want.”–David Campbell
7. “I think self-discipline is something, it’s like a muscle. The more you exercise it, the stronger it gets.”–Daniel Goldstein
8. “Talent without discipline is like an octopus on roller skates. There’s plenty of movement, but you never know if it’s going to be forward, backwards, or sideways.”–H. Jackson Brown, Jr.
9. “It was character that got us out of bed, commitment that moved us into action, and discipline that enabled us to follow through.”–Zig Ziglar.
10. “Discipline must be a habit so ingrained that it is stronger than the excitement of the goal or the fear of failure.”–Gary Ryan Blair

Remember, to pick the best advice and stick to it for a long time before you see results.

What Money has Got to Do with your Brain?

“The brain is a wonderful organ; it starts working the moment you get up in the morning and does not stop until you get into the office.”–Robert Frost

 Have you ever thought why it is difficult for you to achieve your financial goals? You always think that you will be smart with your credit card or organize your finances, but you are never able to get into a financial discipline. The reason is that you are controlled by your emotions. You may also think at the time of making a financial decision, your brain stops working. In fact, your brain can guide you in your financial decisions and help you choose the right options. A little knowledge about neuroeconomics can help you get better returns on your investments. It is time to understand how neuroeconomics guides your behavior as far as investing is concerned. In fact, neuroeconomics suggest how we think and take economic decisions in different settings and how we can change the way we think and observe things. For those, who are new to investing, the book titled “Your Money & Your Brain: How the New Science of Neuroeconomics can Help Make you Rich” by Jason Zweig, the Intelligent Investor, has many answers. The book will change the way you see how your brain impacts your monetary decisions. I have read the book recently. Here are some great quotes from the book.

1. “When the market was going up, you said you had a high tolerance for risk. When it went down, you became intolerant in hurry”
2. “People who keep up with the news about their stocks earn lower returns than those who pay almost no attention”
3. “Professional investors, on average do not outperform amateurs.”
4. “Everyone knows that beating the market is nearly impossible-but just about everyone thinks he can do it.”
5. “Everyone knows that Wall Street strategists can’t predict what the market is about to do-but investors still hang on every word from the financial pundits who prognosticate on TV.”
6. Stocks have prices-Businesses have values.”

For those who need more investing tips, this book has many great lessons for newbie investors.

“Experiences shape the brain, but the brain shapes the way we view experiences, too.”–Helen Fisher.

3 Things to Know about Time Value of Money

“Time flies over us, but leaves its shadow behind.”—Nathaniel Hawthorne

Well, it is true that time flies and indeed it does very fast. Sometimes, you feel that a year passes by and you did not take a look into your finances and you get surprised that you have fallen into a debt trap.   In the same manner, your investment also grows very fast, if you are open to stocks and bonds. Well, if you don’t get positive feelings from the stock market, CD (Certificate of Deposit) rates are not bad either considering they pose minimal risk. In any case, the value of your money increases with time. This is time value for money. It is clearly a zero sum game where the person who saves and invests stand to benefit from it and the person who borrows hurt his or her financial position badly. Whether you are borrowing or you are investing, the time value of money plays a key role in your finance. So, why not understand a little more about time value of money.  Here is how time value of money can be useful.

Future Value of Money

If you invest your money in stocks or bonds or even CD rather than spending on your current consumption, you have not only saved your money from depreciating but also increased the future value of your money. Of course, you need to choose the best option by taking opportunity cost into account. For instance, you have ten thousand dollars and instead of starting an online business, you invested in stocks of an established business. The opportunity cost here is too high, because investing in your own business can multiply your income and offer more return in future than investing in an already established business. Regardless of the choice of investment, the returns are always higher than not investing.

Decrease in Value of Money

Well, if you think that keeping your money at home and letting the time work its magic will make you rich, you are wrong. Money sitting in your safe does not grow because a dollar today will not be worth a dollar a year from now and clearly whatever you are able to afford today is going to be very expensive. Of course, you need to account for inflation because with inflation increasing, your purchasing power decreases. Let your money work for you instead of making it idle.

Borrowing Money Hurts

While time value of money works in your favor as far as investments are concerned. When it comes to borrowing money, the time value works against you. Well, if you borrow a dollar today for your personal consumption, you will have to definitely pay more than a dollar. So, the bank is enjoying the fruits of time value of money. So, why let others take advantage of this important financial secret. Start controlling your borrowings by making a list of absolutely essential items and striking out what is not needed. This way, you can boost your financial health.

“How did it get so late so soon? Its night before its afternoon. December is here before its June. My goodness how the time has flown. How did it get so late so soon?”—Dr. Seuss

10 Interesting Quotes on Money Management

Personal finance and money management is a topic which never goes out of date and each day I get to learn something new about finance and money management.  Each day some quote or article grabs my attention and I reflect upon those words later in the day and try to implement in my life. Here are some of the new quotes that I couldn’t stop thinking about. So, here I am sharing with you these words of wisdom.

• “The speed of your success is limited only by your dedication and what you’re willing to sacrifice” ― Nathan W. Morris

• Money, like emotions, is something you must control to keep your life on the right track.” ― Natasha Munson

• “If money management isn’t something you enjoy, consider my perspective. I look at managing my money as if it were a part-time job. The time you spend monitoring your finances will pay off. You can make real money by cutting expenses and earning more interest on savings and investments. I’d challenge you to find a part-time job where you could potentially earn as much money for just an hour or two of your time.”—Laura D. Adams

•  “When money realizes that it is in good hands, it wants to stay and multiply in those hands.” ― Idowu  Koyenikan

• Budgeting has only one rule: Do not go over budget.” ― Leslie Tayne

• “You are only as rich as your will power.” ― Wayne Chirisa

• “When it comes to money, ignorance is NOT bliss. What you don’t know CAN hurt you.” ― Sandra S. Simmons

• “You don’t have to be a miser, just be wiser with your money.” ― Dorethia Conner Kelly

• If you wish to get rich, save what you get. A fool can earn money; but it takes a wise man to save and dispose of it to his own advantage.” ― Brigham Young

• “At the end of the day, taking 50% off a $250 dress still means walking out of the store $125 poorer.” ― Ian Lamont

 

 

3 Tips to Maximize your Returns on 529 Savings Plan

It is that time of the year again, when your children are going back to school and you are busy dreaming about their bright future. Well, when it comes to a bright future, college education plays an extremely important role. Now, that college education has become expensive, it is about time for every parent to invest in a 529 savings plan. For more information on 529 savins plan, read my previous post “Benefits of Investing in a 529 College Savings Plan”. To get the maximum returns out of your 529 savings plan, follow these tips

Choose the Direct sold plan

Well, you may be tempted to choose an advisor sold plan because you feel that you will receive an expert advice and your investments will be safe.  Here is the caveat. You are paying a hefty fee for the advisor sold plan. Direct sold plan is less expensive and in exchange you need to do a little bit of research on whether your state plan is a good option or not.  Websites like savingforcollege.com, nerdwallet.com, collegesavings.org offer side by side comparison of 529 plans of different state. So, you don’t have to really reinvent the wheel. Take some cues from these sites and go with the best plan.

Review your Financial Goals

It is always advisable to review your financial goals and see if you have saved enough for your child’s education. The best time to do is twice a year and that is why many direct sold plans allow you to change the allocation and the amount of savings twice a year. So, you can set a calendar and review the returns on investments in 529 Plan and again it is a good idea to compare the plans of other states as well. If by the end of the year, you feel that your state is not offering enough returns, you may opt for a different state and transfer the savings to a new state plan (you may have to lose the state tax exemption though). On the other hand, if your state plan is doing really well and you think that you have saved enough money to cover the educational cost, you can either scale down or continue to save more so that you have sufficient balance which can later be used by your children.

Involve your Children

Well, it is always good to talk to your children about their education and their plans related to higher education. You might want to send your child to MIT or Stanford Business School, but your child is somewhat interested in liberal arts and your state university offers wonderful opportunities for liberal arts. So, it is a waste to make an investment in out of state plan, when you can buy your own state’s 529 plans and may get tax exemption as well. It is always good to be realistic about your child’s education and let her choose the career she wants.

“Every child is gifted, some just open their packages sooner than others.”—Michael Carr.

3 Tips to Manage your Credit Card

Well, using credit card may sound like entering into a debt trap, but if you are smart with your money, you can actually use your credit card to your own advantage. In fact, your credit card can be an important tool to establish your credit worthiness over a period of time, which in turn may help you to get loan for your business or for your home or for that matter any time you need to borrow a large sum of money. However, it is important to manage your credit card wisely; otherwise you may find yourself in a debt trap. Here are 3 tips that can help you get the most out of your credit card.

Borrow Wisely

When it comes to choosing a credit card, it is always good to shop around for the best credit card that offers lower APR (Annual Percentage Rate). Remember, interest rate and APR is not the same. In fact, they are two different terms. The application might mention the interest rate of 3%, which looks attractive but you need to read the fine print to get the APR which includes the interest rate and the annual fee. While banks may charge you anything from 12% to 20% in APR, credit unions are consumer-friendly and offer credit cards with an APR from 9.9% to 18%. Credit-unions are non-profit and are committed to help their members. However, if your credit score is not so good, you may be turned down by the credit union. So, you may need to shop around different banks and weigh in your options and choose the card with lowest APR. If you already have a credit card with a higher APR, it is never too late to negotiate with your bank for a lower APR.

Plan your Budget

Ok, you have got a credit card and you can easily swipe the card for your grocery shopping or for buying new clothes. Why do you need to budget? Well, for starters credit card debt is a debt after all and it is not free money. So, it is important that you shop responsibly. In order to do so, you need to have a plan in the form of a budget. Secondly, it is advisable not to use credit card for small purchases such as grocery, utility bills or any other recurring purchases. Use the credit card for making big ticket purchases like a MacBook or purchasing airline tickets (if you have to travel), which you cannot pay upfront . In fact, this way you can make that big purchase without hurting monthly budget and you can make a small monthly payment as well.

Pay your Balance on time

If you are a good customer who pays the credit card balance on time and in full, you get rewarded with a good credit score. This good credit score may come in handy when you are buying your first home or may be a second one. So, for big life events or for big loans, you need to maintain your credit worthiness and therefore, you need to pay your credit card balance on time. Getting a lower interest rate for your first home is like freeing up extra cash and adding another stream of income. So, a little bit of discipline now, gets you free cash in future.

3 Tips to Save More on Back to School Shopping

Well, I was busy lately for packing back to school supplies for my children. I have always been frugal with my shopping and I love to make lists and cross-check every single item and scrutinize last year’s supplies to strike some items off the list. However, there are three important lessons I learnt this year and I want to share with everyone.

Take Advantage of Tax-Free Days

Last week, I visited JCPenney for clothes shopping (I had accumulated coupons). I was surprised when I read about tax-free days. Indeed, I saved a lot on top of the coupon discounts. So, always be aware of  tax free days in your area and take advantage of tax-free shopping. You may check with your local stores about tax-free days in your state and also it is not just for one day but for the entire weekend. So, it is a great idea to spend some time to research about this great money saver.

Don’t Forget Wholesale Clubs

If you thought that only Walmart and Target has the best shopping deals, think twice. Wholesale clubs like Costco offer the best deals on stuff like Kleenex, Art and Craft kits, Composition books etc. It pays to buy even the pens, erasers and binders if you have more than 2 school age children, because you can share the bulk pack among your children. You may also want to split the items with your friends who have children same age as yours. Wholesale clubs are also great for buying printer cartridges, paper and even printers. If you or your spouse is using printer regularly, this is the best time to stock up paper and cartridges or you may want to change your printer as well.

Never Stick to One Store

There is a golden rule of investing, never put all your eggs in one basket. For shopping, there is a golden rule, never buy from the same store. You can be loyal to your brand, but try switching the stores. Of course, many stores claim that they do have price match guarantee, but it is wise to compare before rather than calling customer service and resolving issues. The best thing is to install price comparison apps like “The Find.” It is available for iPad and Android devices. So, you can look up the prices of the products not only in stores near you, but also the online prices as well. So, if you want to order Texas Instrument Graphing Calculator, which is by the way over $100 in Walmart and Amazon is available in Staples at a discounted price.  So, it saves a lot of money to do a little bit of research.

 

Time Diversification: Key to success in Investing

Diversification has been considered a key to success in investing world. “Don’t put all your eggs in one basket” is the brilliant advice which has been used as a thumb rule by many successful investors. Rightly so, one can reduce the risk by expanding the portfolio and by adding more financial instruments rather than sticking to one type. The most successful investors recommend diversifying the stock portfolio and the main reason behind this advice is the volatility of the stocks, which increases the risk for many investors. By diversifying, one can protect the investments against volatilities. However, most of us have never heard of time diversification, which is equally important when it comes to success in investing. Here is how an investor can use time diversification.

Stay Longer in the Game

Time diversification refers to keeping your portfolio for a little longer and thinking a broader time horizon than the short term vision. Many investors are not able to make gains because of their short-sightedness and their tendency to act quickly. Any news related to a particular stock going southwards prompts these impatient investors to sell their stocks and look for a better one.  When it comes to investing in mutual funds, most of the people tend to be enamored by the latest performance of a mutual fund. Rather than looking at the consistency, most of the newbie investors rely on the recent news and information and the result is entering or exiting a fund at the wrong time. Now, this is not the way you can win the game. In his book, Behavioral Finance and Wealth Management: How to Build Optimal Portfolios, Michael M. Pompian suggests “holding on the volatile investments such as stocks and long term bonds for a longer period of time can soften the effects of such fluctuations” and “if an investor cannot remain in a volatile investment for a longer period of time, he or she should avoid that investment.”

Do not switch between Different Stocks

Many investors keep switching between mutual funds in order to earn higher returns and this reduces the overall return because the fees for switching are too high. The main advantage of time diversification is that your investments are spread across various time cycles that are needed to earn an optimum return on your investments. Rather than acting quickly on the basis of latest news, it is important to wait and see the investment cycle and get maximum returns. In other words, you need to stick to a set of stocks for longer period in order to increase the odds of winning.

“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant”—Warren Buffett