Fabulous Financials

The first step to maintain Fabulous Financials is to increase income.

Like the old folk used to say, “you can’t squeeze blood from a turnip.”  Well you can’t squeeze much from a tiny paycheck either.  You might be able to save a little bit here, reduce a little debt there, but the results will be minimal or long suffering.  So if you’re living paycheck to paycheck, can’t reduce your living expenses anymore, or just don’t want to reduce your expenses, you must figure out a way to increase your income.  A few conventional ideas to increase income are:

• part time job
• sell unwanted items
• capitalize on your talents

I prefer to focus on the latter because it gives me personal satisfaction and the greatest return with the least amount of effort.  I increase my income by:

• freelance writing
• monetizing my blog
• assertively managing my career

The first two are my play money.  They fund vacations and support my shoe addiction (when I’m not on a shopping strike LOL).  On the other hand, I take the latter very seriously.  It is the source that allows me to take care of important things and not worry about tomorrow.  It pays the bills, provides cash flow for necessities and emergencies, allows me to avoid consumer debt and donate to my favorite charities, contributes to my daughter’s future college education, funds my retirement and long term goals, and leaves a surplus to experience things I could only dream of years ago.  None of this would have be possible had I not increased my income.

By focusing on all of the above, I consistently increase my income by 15% or more each year.

Do you “assertively” manage your career to increase income?

What other things do you do to increase your income?

Based on the number of people struggling with their finances, you would think there are secrets to obtaining fabulous financials, but there aren’t any secrets at all - just practical steps that are simple, but not always easy.  So if you are just beginning your journey to financial freedom, please check out my post on 5 Secrets to Fabulous Financials.  Play on words of course.

In the next few days, I’m going to share five things I do regularly to maintain my Fabulous Financials.  So stay tuned!

Five Steps Revealed…

Step 1: Increase Income

Step 2: Reduce Expenses

Step 3: Save for Emergencies

Step 4: Invest Long Term

Step 5: Live a Fabulous Life

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I’ve always loved the topic of personal finance, but I haven’t always been responsible with money. When I look back, I began at rock bottom and continued through a progressive phase. I’ve grown so much, especially in my (nearly 3) years of PF blogging, FROM a low $60k salary, $25k debt, and a negative net worth TO a low $100k salary, zero debt, and a six figure net worth. Finally, I am on my way to building wealth and establishing financial freedom, but it hasn’t been easy.

I imagine most people go through a similar growth process, so I wanted to share what I think are 10 phases on the journey to financial freedom:

1. Digging the Hole: The general rules of personal finance, “live beneath your means” and “pay yourself first,” are stupid because “means” are menial so being able to “pay yourself” first is a pipe dream.  You work and pay bills, then it’s gone.  Occasionally, you buy something for yourself, but money is so tight, any slight deviation will throw your finances into a tailspin.  In an attempt to make things right, you rob Peter to pay Paul, write checks you can’t honor, pursue credit you can’t afford, and borrow from family and friends.  Frustrated with it all, you live for the moment, and the cycle continues.

2. Desire to Improve: At some point, you realize it is possible to change.  Either you have an “aha!” moment or you meet someone who inspires you.  Whatever the driver, you decide to make a change for the better.  You try to figure out where to begin, and out of desperation, take advice from any and everyone who will give it.  You also begin to read and research (a little), speak with and mimic the behavior of others who appear to be doing well financially.

3. Debt Reduction: You finally get the courage to figure things out, so you pull your credit to see just how much you owe.  Ack!  You’re surprised, but not really surprised.  You do more research, learn a few tips, put together a battle plan, then get started.

4. Lose Motivation: After one or two months of chipping away at your debt, you feel deprived and overworked.  Borderline depressed.  After all of those extra hours at work to earn more money, all of those weeks of “doing the right thing,” and all of the things you could have been doing, your total debt has only decreased by a few hundred dollars. *sigh*  You think to yourself “man, this is bullshit!”  So you start doing things to make you feel better.  You buy that new ____ to feel better.  You avoid your responsible friends to feel better.  In fact, you start calling them names like “boring, miser, scrooge, cheap, know-it-all, they have no life, etc.” to feel better.  You begin to spend more time with the friends who you think are living the good life - all to make you feel better.  After a few months of this, you don’t feel any better.  In fact, you feel worse.  By the time you realize this, you are right back where you started.

5. Back on the Wagon: Feeling silly and bamboozled, you decide to jump back on the wagon to take control of your finances once more.  You’re frustrated again, but this time, you’re frustrated with yourself, not your circumstances.  You know you can do better and you want to do better, but you don’t really know how.  Slowly, you begin to implement some of the things you learned from your previous reading and research.  Then you read and research some more.  You start tracking your spending and applying every extra dollar you earn towards your debt.

6. Learn to Save:  After spending a little time paying off debt, you realize, you don’t have a savings account - or if you do, there’s hardly anything in it.  So you try to follow conventional wisdom and “save 10% of your earnings” but that doesn’t work for long because you apply so much money towards your debt reduction that you find yourself dipping into savings just to make ends meet.  Eventually, you decide to stay focused on debt reduction and only save when there’s money left.  This doesn’t work either because there’s hardly ever anything left.  So you commit to saving $5 per week, that’s pretty easy and reasonable.  Then $5 becomes $10, and $10 becomes $20, and so on.  You like the comfort of knowing you have money in the bank, so you begin saving some of your tax refund and annual bonus money too.  Before you know it, you’ve saved a few thousand dollars and you’re excited.

7. Build Momentum: You never thought saving money and reducing debt could be habit forming.  Finally, a good habit!  So you begin doing things you never thought you would do before.  You’ve been tracking your spending for a few months now, so you start “evaluating” your expenses.  You identify ways to save money just so you can save more and pay off your debt faster.  You start grocery shopping with a list.  You turn off lights and disconnect appliances when they’re not in use.  You start packing your lunch during the week.  You start reading fabulous personal finance blogs. :-)  And good gawd, you disconnect your cable, remove all the fancy features from your cell phone, and stop shopping with your friends as a form of “entertainment.”  In fact, you rarely go shopping at all, but when you do, you head straight to the clearance racks.  Name brand clothes and designer handbags & shoes don’t appeal to you anymore because something else has caught your attention - saving and debt reduction.  Applying money to both has become a little game now and you like it.  The more debt you pay off, the more money you can use to “pay yourself first.”  With each dollar you save, you start feeling even better.  And the game continues.

8. Debt Freedom:  After months (or even years) of sacrifice, you begin to see the light at the end of the tunnel.  You’re down to the last credit card, the last few thousand on your car loan, or the last few payments on your student loan - and YOU CAN’T WAIT.  Debt freedom is so close, you can taste it.  You begin to make HUGE strides to pay off the last of your debt.  You pack lunch EVERYDAY.  You REFUSE to buy a new ____ even though you need it.  You begin recycling and reusing things to avoid buying new ones.  You sacrifice almost ALL non-necessities for MONTHS just so you can make HUGE lump sum payments.  And then, you make that LAST payment and it’s over.  You wait for that final payoff letter, that final statement, or you stalk your bank’s online service.  Then you see it.  Your balance is $0.  And you exhale.

9. Increase Savings: Proud of your debt reduction efforts, you begin to focus on saving.  First, you increase your emergency fund, then you consider a vacation fund, and a ____ fund for all the other things you’ve wanted but couldn’t afford.  Saving before you buy is important to you now because you don’t ever want to be in debt again - EVER.  So you take all the money you were using to pay off debt and apply it to your emergency fund.  Once your emergency fund is where you want it to be, you start having a little fun with your extra money, but you never stop saving.  After all, it’s a habit now.

10. Learn to Invest: Debt free, emergency fund, extra savings, and money to spare.  The only thing left to do is invest so you can stay ahead of that evil little witch called inflation.  You research, read, study, and speak with experienced investors.  You ignore the “get rich quick” schemes and even part of “conventional wisdom.”  You’ve worked hard for your money, and you want it to grow, but you don’t want to lose it by blindly following someone else’s “advice” either.  Based on your research, you decide on an investment strategy that balances the “conventional wisdom” of diversification, the “recommendations” you understand from people you trust, AND your personal risk tolerance.  It’s the perfect equation!  Everything else is noise so you tune it out.  During the learning process, you make some good investment decisions and some bad investment decisions.  Although the good outweighs the bad, you quickly learn that you shouldn’t invest what you can’t afford to lose.  Then you rinse and repeat.

The ultimate GOAL - FINANCIAL FREEDOM: The day when you don’t have to operate on a schedule, yet earn thousands of dollars every month without lifting a finger.  That time will come, but it could be years away.  For now, financial freedom could mean working a 9 to 5 that you enjoy, earning decent money, and always paying yourself FIRST.  Eating and living healthy.  Not worrying about bills.  Buying whatever you want or need (within reason) without incurring debt.  Making ALL decisions based on their impact to your quality of life, not financial constraints.

Hmm…do I see an outline for my book? Y’all are getting a sneak peak.  LOL just kidding!

Based on this list, what phase are you in right now?

Readers frequently ask “where did you start?” so I’d like to share MY personal transition through each phase.  I’m going to present it in a series of posts over the next few weeks months (what? you know I’m the Queen of Procrastination! Hmph! LOL).  Putting my experience into words will take some time to write, but I’m excited about sharing it with all of you.

By sharing my financial journey to date, I hope it will show you that I understand what it’s like to have been a struggling single mom with nothing.  If you haven’t already, I hope it will convince you to begin clawing your way out of the financial hole.  If you have already, I hope it will inspire you to move past whatever phase you are in right now.  And most importantly, I hope that by writing this blog and sharing the rest of my financial journey, you can learn from my mistakes and exceed all of YOUR financial goals.

Stay tuned for more!

This year has been an interesting year for me with many ups and downs. You can read my archives and probably guess when it was a good month or when it was a bad month. Some months, my income was high and expenses were low. Some months, my income was average and expenses were equal. There were even one or two months when my expenses exceeded my income. I try to avoid that situation, but yes, it happens.

As I was reviewing the numbers in my spreadsheet, I thought to myself, “I’m content. I’m comfortable with my income and my expenses are under control. There isn’t anything I want, need, or would like to do but can’t.” It is these times, everything is kosher, when you should plan for the rough patches. And what better time than the present! So I’ve decided to re-evaluate my budget spend plan and tighten the bootstraps. If I ever have a real emergency or decide to buy/do something really expensive, I’ll be ready.

Here’s my new plan:

Income

I took a conservative approach when recalculating my income. I included net income from the CSS, rental income, and online income earned from contractual agreements only – all rounded down to the next $10 increment (ex: $156 is $150). I did not include any fluctuating income; such as child support, bonuses, random freelance gigs, sponsor ads, etc. If/when I receive any of these, they will be considered “found money.”

Savings

Before ANY bills are paid, I will continue to save, but now I’m going to commit to saving or investing a minimum 25% of my estimated net income. This 25% will include after tax IRA and 529 contributions, as well as regular savings and non-retirement investments. Depending on how my variable expenses fall, a portion of any “found money” may be added to savings, above and beyond this minimum 25%.

Bills

My rent is fixed until May ’09 so that one is easy. As for utilities and other regular bills (electric, gas, water, cell, and car insurance), I have tracked them for 1.5 years and calculated a monthly average – all rounded up to the next $10 increment (ex: $156 is $160). Whenever necessary, I will make adjustments to expenses labeled “bills” to ensure that their combined total is never more than 35% of my estimated net income.

Business Expenses

This category includes anything related to my rental property or any expense incurred under Fabulous Financials. I don’t have enough data to estimate these expenses with accuracy, but for now, the only guaranteed expenses are mortgage and website maintenance.

Variable Expenses

This category includes everything but the kitchen sink – medical, groceries, household essentials, gas, car maintenance, personal maintenance, BabyGirl, my pooch, dining out, entertainment, shopping, gifts, donations, travel, and other miscellaneous. Of all categories, this one will be affected the most.

While some of my variable expenses are easy to estimate, many are not. So I’ve decided to limit the combined total of all variable expenses to $1,000 per month.  This may seem excessive, but on average, my variable expenses have run more than $2,000 per month. Which means I will have to make a concerted effort to plan and prioritize my expenses. I will not restrict the expenses individually, but if I overspend in one area, I’ll have to cut back in another.  If, and only if, there is any “found money” to use, this category should not exceed the $1,000 estimate.

Now that I’ve put my thoughts on paper, they seem reasonable in theory, but I’ll let you know how easy or difficult they will be in practice.

Fabulous Financial Tip

For those who have sent me emails about where to begin to improve your finances, this may be a good exercise for you too. Follow my lead…

• Track your spending for a few months to see where your money is going.
• Calculate all of your guaranteed income.
• Determine how much you want to save and always save FIRST.
• Make sure your regular bills are not more than ___% of your income.  My maximum limit is 35%, but the % may vary for you.  However, if your total bills are more than 50% of your income, find ways to reduce those fixed expenses.
• Limit your total variable expenses (non bills) to a predetermined amount.  Stick to it.

If you put your plan on paper AND follow through, your finances will be on the road to recovery.

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This is one of the busiest times of the year in my office and I’m being pulled in a million directions:

• Single Ma, I need you to review this.
• Single Ma, I need you to sign off on this.
• Single Ma, why isn’t the unimportant, low budget project done yet?
• Single Ma, what you’re requesting will cost ~$50M.  I know you’re working under a time constraint and I’m going to use that to my advantage during negotiations.
• Single Ma, I need a status brief in 1 hour on the project you knew nothing about until 10 minutes ago.
• Single Ma, I have to leave early on Tuesday and come in late on Thursday, but I promise the most important project will be complete by noon on Friday per your request.

In addition, this is the second week of school and BabyGirl is getting into the groove of her schedule and activities:

• Cheerleading everyday until 5pm.
• Band every Tues/Thurs until 7pm.
• Band tag day fundraiser - all day.
• Cheerleading competition - all weekend.
• PTSA meeting.
• College night.
• Back to School night.
• Mom, can I spend the night at ‘chic you’ve never met before’’s house?  No?  Well can ‘chic you don’t like’ come over?

*sigh* Where’s the Calgon????

With the hustle and bustle of real life, managing my personal finances is the last thing on my mind.  So here are 3 ways I keep my finances in check when my time is limited:

1 - Payroll Allotment: My salary is direct deposit, as well as my 401k (of course), IRA, rental property and Vanguard saving funds.  The 401k and IRA get a fixed amount every pay period to ensure that I contribute the IRS max by the end of the year.  The rental prop and Vanguard saving funds get a fixed amount that is adjusted periodically, depending on projected income.  These four accounts are my financial priorities and they each get a deposit before ANY bills are paid.  When life is crazy, payroll allotments are heaven sent.  I work, I get paid, my payroll office sends my money where I tell them.  Love it.

2 - Make a Date With Bills: During the weekday, I am no good because when I get home, I rarely have time to check the mail.  Sometimes, BabyGirl checks it and throws everything on the counter.  Monday through Friday, I watch the pile grow.  Unless I’m expecting something, Saturday morning is my day to sort through the rubbish and create three piles: trash, shred, and read.  BabyGirl handles the first two and I sort through the last one.  If there is a bill, I immediately schedule the payment via online bill pay for the exact day it is due.  If the date falls on Sat or Sun, I schedule the payment for one business day in advance.  Although the money sits in my account until the payment is made, I deduct the amount from my spreadsheet and highlight the text in blue.  Each Saturday, I rinse and repeat.  When the bill is paid/money is deducted, I remove the blue color from the text.  All of this requires about one hour of undivided attention.

3 - Create Lists: As crazy as this may sound, lists help me to avoid frivolous/impulse spending because they remind me of my priorities and limit idle time.  When I plan my day by a list, I don’t have an opportunity to browse or think about things I’d like to buy.  Instead, my focus is to get in and get out - or get it done - as quickly as possible.  In fact, when I’m really busy, I become a list junky.  I need a list for everything!  Grocery list, personal to do list, work to do list, BabyGirl activity list, appointment list, financial goals list, etc.  I make a list and stick to it as if my life depended on it!  If it isn’t on the list, it doesn’t get purchased.  If it isn’t on the list, it doesn’t get done.  Unfortunately, blogging didn’t make the list this week. LOL

These strategies are simple and easy to apply.  If you’re like me, a busy mom with a demanding career, anything that helps to keep your affairs in order is worth a shot.  I just gave you three.  Try ‘em out and tell me if they work for you.