Hi! My name is Magdalena “Maggie” Johndrow and I am a financial advisor with Johndrow Wealth (a division of Farmington River Financial Group®). I was lucky enough to meet Meg as I was naturally drawn to her affinity with stripes (something I also share) but also because I realized our lives were somewhat parallel: both grew up in Connecticut, started our careers in New York City, and moved back to Connecticut to marry our college sweethearts.
Read more We both have a passion for our careers—Meg is a branding and marketing genius—and I was drawn to her blog as I was looking to start my own (TBD…). I’ve been lucky enough to be featured in national publications like U.S. News, Forbes, and Brit & Co. but haven’t taken a stab at writing myself. Thanks, Meg, for supporting your fellow strong women by giving me a shout-out on my recent award, which led to some great questions from all of you. We received so many important questions that we decided to name the next few Fridays, “Finance Friday.” So check back two weeks from now for Part II: Retirement So… here it goes! My first attempt at blogging! Disclaimer: this is general financial advice and it’s important you look at your own situation individually. I am available for additional questions: mjohndrow@farmingtonriverfg.com Budgeting: What is some practical advice to set a budget and stick with it? I think of budgeting as dieting—stick with me here! If you decide to go on a diet but track what you ate at the end of the day, you’ll likely over-eat and not lose weight because you’re backward looking. Instead, you may be familiar with “meal prep Sundays” where you plan your meals for the week and can count the calories each day before you eat them. This way you can ensure you have a calorie deficit and lose weight. Similarly, if you want to create a budget and stick with it, you need to be forward looking, not backwards looking. This is why some budgeting apps make it hard to stick to your budget. They’re great for tracking your spending and understanding your spending habits, but not great to helping you cut back on your spending. I suggest you stick with the “60/40 rule” (sounds a lot like diet’s 80/20 rule, right?). What this means, is you should try to keep your gross fixed expenses around 60-percent. Gross means before taxes. A fixed expense in this instance is anything you know you’ll have to pay to live on. Categories include: Housing costs: rent/ mortgage, cable/ WiFi, NetFlix, Hulu, electric, gas, house cleaning/ maintenance, natural gas/oil, phones, supplies, waste removal/ recycle, water/ sewer Personal Care: Clothing, Dry Cleaning, Hair/Nails, Health Club, Medical Transportation: car payments and maintenance, Uber/taxi, public transportation Insurance premiums Taxes Student Loan payments Groceries (excluding dining out; that’s a “fun” expense) Pet care The remaining 40-percent goes towards savings—10 percent into each: Retirement (not to be used until you retire with a 10 years+ time horizon) Long-term savings (investment account; purchases with a 5 year+ time horizon) Short-term savings (purchases in next 1-3 years) Fun-money (monthly spending account) Once you’ve figured out this budget, you need to pay yourself first. This means having an automatic withdrawal from your paychecks into these four accounts. This way you don’t even have a opportunity to spend the money because it’s not sitting in your checking account! If your fixed expenses are over 60-percent you have a few options: decrease your expenses or increase your income. Income = savings + expenses Increasing your income is tougher – sure we can ask for a raise or start a side hustle, but not all of us have a special calligraphy talent. Decreasing your expenses is easier. Some questions to ask yourself: Can you find cheaper rent? Can you find a roommate? Do you need all of those subscriptions? Can you share your Hulu or Netflix accounts with someone? Paint your own nails, or better yet, let your nails go naked! I hear it’s good for you. Refinance your student loans for a lower interest rate and monthly payment (*this isn’t right for everyone; it depends on your person situation more on that in my 3rd Finance Friday post) Find a cheaper gym Refinance your car loan for a lower monthly payment Negotiate lower rates with your providers, including WiFi, cable, and credit cards – chances are if you’ve been a good long-standing client, they’ll work with you With competitive price and timely delivery, SUNUA sincerely hope to be your supplier and partner. Once you have your budget under control, this raises the next popular question: what type of accounts should I be using to save my money? To answer this question, I first we need to start with my favorite personal finance topic: Compound Interest. Think of compounding interest as a snowball: if you roll a snowball down a snowy hill, what happens to it? It accumulates more snow and grows bigger, right? You are not actually adding snow, but rather you’ve given it the momentum to grow as it goes down the hill. Similarly to the snowball, if you invest money and let it grow over many years it too may accumulate exponentially. The money that grows every year is reinvested and that new, larger sum, grows. You are not actually adding money (though you certainly can) but by putting it into an investment account, you’ve given your money momentum. To provide a real-life example: I had a client who was 25 years old and added a one-time payment of $5,000 into an Individual Retirement Account (IRA) (more on retirement accounts in the next post). He “forgot” about it (I know, must be nice!) and when he was 55 years old, he opened the account and saw that $5,000 grew to $250,000 without adding a single extra dollar himself! That’s the power of compounding! If you’re interested in playing around with the numbers and seeing how this could work for you, click here for a compound interest calculator! So, to answer what type of account you should be using to save your money: I would encourage any purchases with a medium to long-term time horizon to be invested so that you can take advantage of compound interest. Typically, I suggest: Retirement: IRA, ROTH IRA, 401K, ROTH 401K, 403B, 457, etc. Long-term savings: non-qualified investment account Short-term savings: high-yielding money market savings account Fun-money: personal checking account One important note: I suggest that you maintain 3-6 months’ worth of living expenses saved in a short-term savings account. If you lose your job in normal economic conditions, it typically takes 3-6 months to find a new job, so you know you’ll have enough savings to get you through that time period. Remember: small savings can go a long way, especially when compounding interest is involved! For instance: Tell yourself you’re going to bring lunch to work every day and only will eat out on the weekends. You’ll save roughly $10 a day on eating lunch out, or $2,600 a year. If you invest $2,600 a year for 10 years and it grows at a hypothetic rate of 7-percent per year…. You’ll have $ 43,552 in just 10 years, simply for not buying lunch out and saving that money instead*. That’s compounding! Why not put all of your savings into your personal checking/savings account? Interest rates are very low right now. This is why individuals can get such low interest rates on their mortgages! While low interest rates are helpful when buying a house, they’re not helpful in your savings accounts. A high-yielding savings account typically returns 1% per year on your savings. Your personal savings account typically returns 0.01%. So using the same example above: In a high-yielding savings account your money would only grow $$30,346 in 10 years. In a personal savings/ checking account it would grow, $28,617 in 10 years. Look at that difference: $13,000 - $15,000 LESS! Of course, there is always a risk of loss when investing – nothing is guaranteed—but we find that over a long period of time, investment accounts average out to have better returns than personal savings accounts. This is why I suggest short-term savings go into a high-yield savings account and long-term savings are put into investment accounts! I hope this post gives you a good starting point to think about budgeting and savings. Come back for the next Finance Friday where I’ll be writing about retirement accounts! Xx Maggie Disclaimers: Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. *This is a hypothetical example, does not take into consideration the fees, expenses, and charges with investing, and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.
One of my biggest financial vices has simply been not paying enough attention to where my money goes and not worrying too much about frugality. I have a decent salary, and my attitude has always been skewed toward thinking that I work hard so that I *don't* have to worry about money and can splurge from time to time. It is only after starting a budget and spending some time on this board that it has occurred to me how much money I have likely thrown away over the years - and how I did not start saving for retirement early enough.
This past week, one of my challenges to myself has been finding ways to trim down my budget or bring in extra money without negatively impacting my lifestyle. (That may come next...figuring out things I can cut out.) But it's been kind of fun and somewhat enlightening how much you can carve out if you put in the effort. I started by comparing quotes for services I've had for years, like cable, internet, etc., then calling my companies armed with information to seek discounts and reductions to my current rates. With only one exception, I was about to trim down my monthly payments substantially just by asking and bundling a few services. Next, I took all my set payments that I could (things like utility and electric bills, car insurance, etc.) that have always just come out of my checking account, and set them up so they are charged to my Chase Freedom credit card where I get 1% cash back. I pay my credit cards off every month, so I'm not worried about interest, and I figured that I might as well bring in a bit more cash from the payments I'll be making regardless. I'm also moving out of my small storage unit this weekend (for which I'm embarrassed to say I've made automatic payments for several years). I sold a few books that I've already read for cash online and have looked into a refinance that is likely to save me at least $300 a month. Finally, I have a UPromise credit card that filters bonuses to my kids' 529 accounts, so I'm trying to make bulk purchases online (things that I'd buy ordinarily anyway, like diapers for my little one) through their deals to get 10% cash back or more, and I've opened a Sallie Mae savings account linked to the UPromise where I'll get an extra percentage of my card spending in a bonus every year. It's not large, but it's something - and it cost me nothing.
I'm curious if people have other ideas, although I realize that many people here have probably already maximized their ability to save and have been less careless than I have! I've always thought of these types of things as nickel and dime-ing, and didn't want to go to the trouble, but now that I'm viewing it in actual dollars and cents, I feel much more motivated. I decided that every little bit I save in this manner (other than the amounts linked to the 529 plans) will be extra that I will put into my taxable investment account, as I've maxed out the tax-free ones. I can't wait to see what I can scrape together this way and watch it grow over time!
At any rate, I just wanted to say thank you to all of you here who have helped to inspire me in this process, as well as to solicit any additional tips you may have. I do have to say that actually putting together a budget and tracking it carefully - something I always thought would be unduly restrictive - has been incredibly motivating, as I love to ways that I can find extra money and make it work for me and my family, rather than just pilfering it away. I've made a lot of financial mistakes. I owe it largely to this board that I'm starting to get on track.
For more FR cable Compoundinformation, please contact us. We will provide professional answers.