Financially Fab Enjoying Life And Working Your Money

Top 5 Financially Fab Essentials

1. Know your credit score—the bank does, you should too!
2. Track down your cash
3. Knock Out Fees, Kapow!
4. Save!
5. KISS – Keep It Simple, Stupid

This is the 4^th in a 5-post series on the Top 5 Financially Fab Essentials, the foundation for a financially savvy lifestyle.  In the last post, I wrote about how you can Knock Out Fees on bank accounts and credit cards, keeping $100s in your pocket.  This week is about saving for what matters.

What’s worth saving for?

• Your old age: Unless you plan to live under a bridge, work into your 90s, or saddle your kids with your expenses; you will need cash in the bank to retire.  Being financially prepared allows you to retire earlier and live more comfortably once the paychecks stop coming.
• To avoid debt: There are 2 ways to pay for things, cash and debt. That’s it. No other options.  Most Americans go into debt paying for emergencies and expensive purchases.  
  • Emergencies: These are inevitable: cars need repairs, tires blow out, and family emergencies arise.  Having ready cash is the only way to address emergencies without begging other people for money or going into debt.
  • Large purchases: We all have things we enjoy spending money on. Whether it’s sexy stilettos, a new iPhone, vacations, or anything else, it’s perfectly fine to spend money on what you value.   The problem is that most Americans don’t plan for major purchases.  Instead, they charge their credit cards and pay 15% to 30%  in interest for years after making the purchase.  When you’re Financially Fab, you plan ahead and have ready cash.

Where to save? – Which accounts?

1.   Emergency Fund – This is the most important savings account because EVERYONE has emergencies.   Let me repeat that message again, This-is-the-most-important-savings-account, and it’s absolutely required for everyone. Without an emergency fund, you’re always one step away from falling into debt via credit cards or loans.
 

2.   Retirement Account –  Congress created accounts with tax benefits–401Ks and IRAs being the most popular–to motivate us to save for retirement.

• No capital gains tax: When you invest money in America, you pay a 15% capital gains tax on the profits. But if the cash is in a retirement account, guess what, you can keep that 15%.  I like keeping my profits. Do you?
• Lower income tax rates: You choose whether to pay income tax before cash is deposited into the account or when it’s withdrawn.  By paying income taxes when you have less income, your tax rate is lower.

• Traditional version: Pay income taxes at withdrawal.  This version is best if you’ll be living off less money during retirement than you do now.
• Roth version: You pay income tax now, before funding the account.  Choose this version if you’ll have a higher income during retirement than now.  I recommend this for most people in the early part of their careers.

3.   Accounts for Fun Purchases – Life should be lived, fabulously.  Most people spend their cash without knowing where it’s goes. People who are Financially Fab save for the purchases they value most.  For example, I enjoy traveling and shopping. I take go abroad each summer, take weekend trips every few months, and love shopping in NYC.  I have a savings account for traveling and expensive purchases.

How much to save?

1. Emergency Fund: I recommend having enough cash to cover your current lifestyle for 3-8 months.  If you’re recently out of college and your parents can provide support (without putting themselves over the financial edge), you can get by with 2-3 months of savings.  If you keep $300- 500 in your checking account and stash the remaining emergency fund in an online savings account, you’ll get some interest income.
2. Retirement: Most employers match your contribution to your 401K. You should always try to get the maximum in employer matching.  For example, my friend Brandon’s job gives him a free 50 cents for every 1 dollar he contributes up to 6% of his salary.  That’s a guaranteed 50% return. Apart from asking mommy and daddy, I can’t think of another legal, low risk way to make 50% guaranteed return.  Yet, most Americans leave money on the table by not maxing out the employer matching.  Check out how much free money my friends Brandon and Katie can get each year.
   

   Name	Salary	Contribution	Company Matching, Free Money	Total in 401K
   Brandon	$60,000	$3,600	$1,800	$5,400
   Katie	$35,000	$2,100	$1,260	$3,360

    

3. Fun Purchases – Figure out the total costs for purchases that matter to you.  I’ve tailed up how much I typically spend on trips and shopping. I divide that number by 12 to identify how much to save in my travel and large purchases accounts. When I make large purchases, I spend only what I have in cash. After booking flights, hotels, etc. with my credit card, I immediately initiate an online banking bill pay from my savings account for the exact amount of the purchase.

Get Started Now

Focus on the emergency fund first.  Just one unplanned emergency can force you to use credit cards.   Avoid that by having ready cash!  After saving 2+ months of expenses (you’ll need more if your parent’s aren’t backing you), you can start contributing to your 401K and saving for large expenses.

Let me know how it goes for you!