Root's Words of Wisdom: Money

It's been a while since I talked about money and, now that I've had time to live through having a kid and a mortgage, it's about time for another (updated) post on this pesky but unavoidable topic.

While I'm no financial expert by any means, I've found that the below guidelines is sound advice. If you can follow them, you'll thank yourself later down the road.

Reality

Find out what your monthly post-tax income is (aka your take-home income). If you have an hourly job, I'd figure out what you make in 4 weeks (i.e. low ball yourself here). This is going to be what you have to work with--or,as I like to call it, "reality".

Savings

Pay your self first is a term you've probably heard before. Set aside, minimum, 10% of your monthly income and put it into savings BEFORE any bills are paid. Consider this money already spent. If you can afford it, do 15% or even 20%. If you're just starting to save, your goal should be 6 months of your monthly expenses. Some people say 3 months, others go so far as 12 months, but I like 6 months. This is  your emergency fund (example: "Oh c**p, I lost my job"). This shouldn't be used towards a "want" (example: "60 inch OLED TV FTW!"). Once you've established this fund, direct this % towards high interest rated loans. After those are paid off, start investing this money as well as paying off any other remaining debts. Assuming you're living within your means, I'd highly suggest moving any raises towards this pay-yourself-first %.

Investing

Really I just have a couple of things to say here as this is a very big topic with hundreds of ideas/rules of thumbs. Be diverse in your portfolio. Common sense dictates that you don't want to put everything in one basket. If you do want to invest in stocks, a good rule of thumb to determine how much (%) of your portfolio should be invested in stocks is to take 100 and subtract your age (example: 40 year old should invest no more than 60% of their portfolio in stocks). Personally I have short term (6-12 months), medium (1-5 year), and long term (6+ years) investments. My risks are skewed appropriately. 

Home Ownership / Renting

If you're renting today, you should make sure it's no more than 30% of your monthly income. If it isn't, you'll be hard pressed to save for a down payment for a house. And yes, I firmly believe in owning a home (it just makes sense financially). As to figuring out how much home you can afford, a good rule of thumb is to make sure that your mortgage balance is no more than 2x your (and your family's) yearly income. Don't do a variable rate loan (do fixed) and if you're debating about refinancing, they say if the delta is 1% or more do it.

Automobiles

Buy used or buy new and drive it for ten years... or ideally both. You can save a lot of money this way. Don't lease and ideally don't have a car payment. If you don't have the luxury and must have a car payment, I like/follow the 20/4/10 rule. I put 20% down as a down payment, I do no more than 4 year loans, and I make sure that the monthly payment isn't greater than 10% of my monthly income. You want to avoid paying interest on anything that loses value (which believe me car's lose their value very quickly). And let's face it, the car is meant to get you from point A to point B. Who needs a butt massager anyways? Try to keep your transportation expenses (including tolls, gas, car payments, insurance, etc) under 15% of your monthly income. Typically repairing your vehicle makes more sense than buying a new one. Also, a good exercise to do is take the car's price tag, double it, and divide by 60. This will show you the total cost of the car, for 5 years, in monthly terms.

Retirement

Always try and max out your company's 401K matching (you're getting 100% free money here). You're never too early to start saving for retirement. Compound interest does wonders. You're goal should be that you're able to withdraw 110% of your monthly expenses for as long as you're alive. A good rule of thumb around this is if you plan on withdrawing from your retirement fund for 40 years, you can safely withdraw 4% of it every year. Don't EVER touch your retirement fund---except for when you retire of course. And this I think should be in addition to the pay-yourself-first %.

Closing Thoughts

-If you're debating on whether to repair or purchase a new appliance, a good rule is to buy new if: the old appliance is older than 8 years or repair costs are more than half the appliance.

-If you suddenly come upon a lot of money (bonus check, inheritance, etc), use 1% of it to treat yourself and then set the rest of it aside into a safe/stable account for 6 months and don't touch it until then. This will give you time to think about how to spend it. As unsexy as it sounds, I'd recommend paying off all your debts first.

-Never co-sign on a loan

-Don't try to cheat the IRS. Pay what you owe and claim what you're due.

-Try and keep your living expenses (Shopping, Food, etc) at no more than a quarter of your monthly income 

-Try to spend no more than 30% of your income towards debts (including mortgage, student loans, rolling credit, etc)

-If you can spare the money, especially if you're supporting a family, get life insurance policy that's 5-10 times your salary.

-If you don't have the cash to pay for it, chances are you shouldn't be putting it on a credit card.

-If you can pay off the balance of a credit card each month, find one with good rewards but don't pay for the annual fee. If you can't seem to pay off the balance each month, I wouldn't recommend you having a credit card--they can be dangerous. Use the cash in an envelope method (set aside X amount of cash that you know you can afford each month into envelops, an envelop per week, and only spend what's in the week's envelope).

Hope that helps you as it helps me,

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