Spending Plan & Emergency Fund 101

LightsLast time we touched on spending plan surprises, those expenses that aren’t fixed and routine. Things like unexpected car repairs or special anniversary gifts that can derail your cash flow. This seems to be a great time to talk about building an emergency fund. Back before the economic meltdown, financial advisors recommended a reserve at least six months and optimally up to 18 months. For those of us who live in the Bay Area, we scoff at this seemingly insurmountable figure. Realistically, in light of layoffs and other employment challenges, many of us need this safety net when looking for a new position or transitioning into a new career.

Spending Plan Surprises: Managing Varying Expenses

Now that you’re fresh off the 7-Day Challenge, you’ve got a better handle on your spending. Last time we talked about creating an accurate spending plan, one that incorporates a realistic accounting of your income as well as costs. Fixed and routine expenses (like rent or mortgage payment) are easy to manage, but I find that my clients have a much harder time remembering and dealing with those expenses that vary or are sporadic. Spending plan surprises can derail your efforts toward living a financially organized life.

Spending Plan Fundamentals

In a quest for a peace of mind as it relates to one’s finances, inevitably the subject of budget planning comes up. Personally I like to call it a spending plan because the term “budget” has such negative connotations. The last several months we’ve covered a lot of ground as it relates to getting organized. Freeing up your paper clutter is an important step. By now, everything should be filed in a place where you can easily retrieve it.

Securing Your Golden Years: Advice from a Daily Money Manager

As a Daily Money Manager, I help seniors stay independent and manage their financial lives. The senior population continues to grow in numbers. According to the American Medical Association, 78 million Americans turned 65 in 2010. That number is expected to rise by 3 to 4 million each year. Coupled with the largest recession in decades, some Boomers have had to delay retirement. The good news is that Americans are doing a better job paying down debt. Forbes reported that we’ve reduced our average credit card debt from $16,383 (March 2010) to $14,517 (March 2012).

3 Key Financial Organization Questions

Last time we discussed how to begin a quest for financial organization. So let’s get started. The first step, assessing your current situation, will help you create a realistic plan. Acknowledging where you are will impact how you move forward. It also creates the  practices you need to put in place to create that financial organization.

Before changing anything… and I mean anything… you need to take stock. Let’s begin with your starting point. Take out your blank financial notebook, and let’s dig in.

3 Financial Organization Questions

As you write your answers down, take several minutes to reflect. Remember, you’re building the foundation of a financially organized life. What you put in is what you’ll get out of this journey. I suggest giving yourself at least 20 minutes for this exercise, giving yourself the time necessary to contemplate honest and complete answers. 

  1. What are your 3 biggest financial challenges?
  2. What are your top 3 goals for this year?
  3. What are your top 3 financial strengths?

Last year when I helped a couple get more financially organized, they had problems with 1) overwhelming credit card debt with minimum payments they couldn’t handle anymore, 2) a hefty mortgage payment and 3) a income deficit due to the husband being laid off and unable replace his six-figure income.

Sadly, this situation isn’t uncommon; many families were affected by the economic downturn. While this couple’s situation was a combination of forces out of their control, some of the issues were a direct result of how they (mis)managed their money.

In completing this first exercise, they decided their one year goals were: 1) to create a workable plan to regarding the credit card debt and change their habits in managing it, 2) seek a home loan modification, and 3) find alternative income so they could keep their home. Fast forward twelve months. They received a loan modification and rented out spare rooms. While they are still working on improving their financial situation, they have stopped their reliance on credit cards to make up the monthly income shortfall. In essence, they succeeded in creating and maintaining a workable financial plan.

So, how did it go in answering these three questions? Next time we’ll examine your past and uncover your money beliefs.

A Quest for Financial Organization

Now that tax season is firmly behind most of my clients, I’m reflecting upon the whirlwind of getting documents in order, Quicken reports run, and generally putting tax year 2011 to bed. Every year my clients declare “next year will be different!” They promise to keep track of their mileage, reconcile their bank accounts monthly, and vow to keep their financial world in order. Yup, I’ve heard it all.

In the coming months, I’ll share my best financial organization tips. My hope is that these tidbits will help you gain order and control over your financial life. Taking a piece at a time, next year’s tax season could be a breeze. Or for some, it will reduce what feels like an F5 hurricane to a windy tropical storm.

First Step to Financial Organization

First, I’d like to preface this discussion about financial organization. Money is neither good or bad. It just is. How much you have in your bank accounts is simply feedback. By examining your financial situation and organizing it, it’s a way to bring clarity and simplicity into your life. Someone described money as “stored energy,” meaning you spent time and effort earning dollars. By saving money, you’ve stored that energy to tap into later. I think of money as a tool, one that you control.

As you embark on this journey, I suggest pondering these questions:

  • Do you have a financial plan? If so, why? If not, why not?
  • What’s your relationship with money?
  • Do you have a tendency to save it, spending it miserly? Or, do you spend it freely without regard to long-term consequences? Not sure? Check out this money personality quiz.
  • What do you think is your biggest financial organization hurdle to overcome?

The answers to these questions aren’t right or wrong. It’s feedback on your relationship to money. That’s the first step, understanding how to feel about having (or not having) money, to creating a workable financial plan.

Next time we’ll talk about a notebook as part of creating a financially organized life. So, your homework is to dig around and find an empty notebook or three ring binder.

Creating a Realistic Spending Plan: Take the 7-Day Challenge

Many of my clients are looking for ways to stretch their dollars. Yet many times they aren’t sure where their money goes each month. If you’re ready to develop a spending plan or workable budget that works for you, join me in this 7-day challenge as we kick off 2011.

Bankrate.com is one of my favorite sites to visit for money-saving and budget saving tips. Adding a twist to their 7-day challenge here are my 4 easy steps to creating a spending plan that fits your lifestyle.

Step 1: One Week’s Expenses. Figure out how much cash you need to cover seven day’s worth of expenses. Include gas, groceries, entertainment, gifts, everything! The point here is to figure out what and where you’re spending your hard-earned money.

Step 2: Be Honest. Don’t deliberately overestimate. The purpose of the challenge is to calculate what you really need. Include your partner in the challenge so you can work together as a team. Then, withdraw the amount of cash based upon your honest estimate of what you’ll need during the next 7 days.

Step 3: Put Cards Away. Now that you have the money needed for the week, put your debit and credit cards away. Yes, take them out of your wallet! It will help keep you honest throughout the challenge. As you make purchases, keep the receipts to help jog your memory at the end of the day. These receipts will come in handy when you’re ready to create a spending plan or budget that is based in your reality.

Step 4: Tell Me How You Did. It’s not about winning, but learning about your money style and spending habits. What did you notice during the week? Did you run out of cash, and need to withdraw more? Let me know how you did and the observations you made. As a reward, I’ll send you some info about the various styles relating to the psychology of money.

When you know where your money is going, then you can find ways to save money that fit with your spending habits and ultimately lead to more money in your savings account. Armed with strategies that fit your lifestyle, you can develop habits that support your short- and long-term financial goals.

To get a free template to track your 7-day challenge expenses, email me at Alison@fiscallyfit.us or call (650) 965-4090.