The Importance of a Buffer

age of money
YNAB ages your dollars, basically it is rate of spending vs. rate of deposit. Read more here.

Are you living paycheck to paycheck? I’d say many people do in an American society of debt overload and over indulgence do. We just weren’t raised to be savers. We look at our grandparents and great grandparents who still cut the bruised parts of fruit out and finish eating the rest and shake our heads. We think, “I will buy you a whole basket of peaches if you’ll just NOT EAT THAT!” We throw out vacuums when the belt breaks, think buying a brand new car on loan is cheaper than fixing the one that’s paid for and go pick up a burger at the local fast food joint when we just don’t want to cook. But saving is important, and over indulgence has entire generations in financial ruin. That’s why it’s important to create a buffer.

A buffer is a category you create in your budget; it’s rule four for my favorite budgeting software, YNAB. It’s different than saving for rainy day expenses, those expenses that only come up annually, or on an as-needed basis, like doctor visits and vet bills (which you should be planning for them as well!) It’s the one to six month’s salary you save so you are no longer living paycheck to paycheck, and you add to it each and every paycheck. It can be a small amount, or it can be large, It’s totally possible and most people can raise a one month’s salary buffer within 6-9 months of budgeting.

The question is, why is it so important? There are many reasons why you want to have a buffer, number one being a little thing called Murphy’s Law, which the financial guru Dave Ramsey suggests always happens where money is concerned. Murphy’s Law is an old adage, “Anything that can go wrong will go wrong”.  What if you get fired, hurt, sick, there’s a death in the family, you have to have hip replacement, your car catches fire, your house catches fire, you hit someone with your car, and so on and so on. There are so many reasons to have that extra money handy, just in case those paychecks stop rolling in.

How much do you want to save in your buffer? Start with one and keep adding to it, you can never have too much “just in case” money. When I started using YNAB, I usually had about $30 on payday, debt, no savings, no investments, nothing. Now, three years later, we are debt free (minus our mortgage), we have an ever-growing, fully funded buffer , a separate emergency fund of $1000 and still manage to save for our 52 week savings plan. We did remove all but about $200 of our investments from Lending Club and Betterment and just put it in to savings and CD ladders. We still have the $200 because they were notes that wouldn’t sell on Lending Club so they’ll just sit there til they pay out, (one of my issues with Lending Club).

Where do you want to keep your buffer? You can keep it right in your checking account, along with your rainy day funds and your every day expenses funds.You can also consider moving it to a savings account, simply to earn a higher interest rate off of it. Either way, you want to have it tangible if you need it. YNABers aren’t usually fans of lots of accounts, it can get messy and confusing, but I am also not a fan of putting all my eggs into one basket, especially in this day with identity theft and debit card thieves out there. Basically, it’s your money, put it where you want it.

BONUS THOUGHT: You know those people who say you shouldn’t save while you still have debt? Well, I think they are wrong, especially in this particular circumstance. You may have a problem come up way before you will be out of debt, and if you need to choose between adding an extra $10 to your credit card payment and adding an extra $10 to your buffer, until it’s funded with at least a month’s worth of wages, I would choose the buffer.

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CD Ladders, Do They Still Work?

CD ladders use to be a good way of saving funds and gaining more interest on those funds than you would with just a simple savings account. CD ladders combine the best of both long term earnings and more frequent access to a portion of your money. If you’ve never heard of a CD ladder, I’ll give you the basic run-down. Say your bank offers CD’s of up to five years and you have $20,000 total to invest. Instead of purchasing one CD for $20,000, you will split your money up.  $4,000 per each year. At the end of year one when your CD has matured, you can either use your money or renew into your longest term CD, or in this case a 5 year. Reinvesting into the longer term will give you a better return on your money and the next year you can still access the same amount.

This use to be a great way to get a higher rate of return on your money and still have access to it. Many people, otherwise, don’t usually choose the longer-term CD’s because they don’t want to tie up their money for so many years and if they do have to close them early suffer large penalty fees. But is it really worth it now with interest rates so low? Do CD’s ladders still offer a greater “best of both worlds” approach?

Let’s consider the highest rate banks of today. If we use Ally bank’s rates there are several options to choose from, let’s pretend you have $5,000 you won’t need for at least 5 years, maybe longer, You could make a ladder like this:

  • Rung 1: $1,000 in an 11 month No Penalty CD at .87% APR
  • Rung 2: $1,000 in a 2 year Raise your Rate CD (with 1 opportunities to raise the rate over the next 2 years if the APR changes) at 1.30% APR
  • Rung 3: $1,000 in a 3 year High Yield CD at 1.50%
  • Rung 4: $1,000 in a 4 year Raise your Rate CD (with 2 opportunities to raise the rate over the next 4 years if the APR changes) at 1.40%
  • Rung 5: $1,000 in a 5 year High Yield CD at 2.00%

With the ladder approach, your total earned interest after 5 years is $435

Now say you just took that $5000 and put it into a regular savings account for 5 years at the current 1.00%: total earned interest is $251.25.

However, the total earned interest putting $5,000 in a 5 year CD is $525.84, which is obviously more than making a CD ladder.  If you had to early access your money, you will pay a penalty of about 150 days of interest in a 5 year term.

So what is the answer? Are CD ladders worth the fuss of re-upping every year or should you just “Set it and forget it” as some say. If you are positive you won’t need that money for the next five years, I would suggest just putting all your eggs into one basket; but then on the other hand, who can ever be sure they won’t need money? Murphy is not anyone’s friend, you never know when your house catches fire and you need that money (or some other horrible scenario) so I guess it just comes down to situations and choices, you decide.

 

 

 

 

 

The 52 Week Savings Plan

As I mentioned in my post Can I Make My Kid a Millionaire? I started a 52 week savings plan to save my son $2000 a year. I am also using a similar 52 week savings plan to save $5500 this year. I have actually already surpassed my goal with some extra savings I save now that I’m debt free, but I’m continuing with the savings plan because I want to save as much as I can this year. I actually even saw someone who had a similar plan to save over $14,000 in a year, which is feasible, but can be overwhelming if you are new to saving so I suggest a smaller goal, like the $2,000 or $5500. Most savings plan start with a low amount like $10 and move their way up so much a week until you’ve saved your goal; however I suggest you start with the highest amount (week 52) and work your way down (week 1). You will see progress quicker and you will can make up some difference later if you see that the larger amount is too much for you to save all at once, plus by the end of the year when you are feeling a money crunch because of the holidays, saving $10 won’t hurt as bad as saving $208.

I get paid twice a month, so I have actually been saving for two weeks at the beginning of my check just because it simplifies things for me. I save week 52 and week 1, then week 51 and week 2 etc. You will see that it averages out actually to saving the same amount each paycheck if you do it this way instead of depositing weekly, but there is something oddly satisfying about marking through those weeks instead of just setting an automatic deposit for the same amount every paycheck.  I have inserted the $2002 52 week savings plan so you can see what a savings plan looks like. I like to print mine out very small and I keep it in my desk drawer, then each week, I add up my two weeks worth of savings and transfer that amount into savings. There are many savings plans like this one you can print off on Pinterest. I will like my “finance and frugality” board here so you can find some of them on my board.

Happy Savings!

Can I Make My Kid a Millionaire?

Like every woman, I am a fan of Pinterest. Cute little pins, especially financial ones have increased my savings by about 90%. One of those little pins says “How to Save $5000 for your Disney Trip by next year” It has a weekly deposit amount for a year and at the end of the year, you should have $5,512.00 added up. Another similar pin is from Dave Ramsey. It shows how two people can invest at different times in their lives, one from 18-24 and one from 24-65. The one at 18 invests $2000 for eight years and then leaves that money to accrue until he is ready to retire, then he will have so many millions for his retirement. The other has to scramble to catch up when he starts investing at age 24. So I put these two ideas together.

If I take my little Disney chart and change it to just $2000 a year, I will put into savings every week $64, then $63, then $62, all the way down to $13 in the 52nd week, I will save him $2002 a year. Each year, if I invest that $2002 until he is 18, he will never have to invest a dime of his own money. If he doesn’t touch it until he’s ready to retire, he’ll have somewhere along 5.9 million, assuming Dave’s rate of 12% returns (he invests in mutual funds almost solely). As discussed before, it’s hard to get that 12% rate, but not impossible. Either way, I’m spending very little of my own money to help my son. Now when discussing this with him, he informed me by the time he’s 65, he won’t need 5.9 million dollars, but stated he could, instead, add to my investment his own $2002 a year until he’s 24, then just retire in his late 30’s. I say that’s quite a genius idea!

So I wondered though, what if the market doesn’t ever recuperate from it’s poor rate of returns, what then will his money do? Is it worth it?  Well, it depends on your idea of worth, but it wouldn’t make him a millionaire. But from what I read, 12% is still a completely doable number in the world of mutual funds, and even Lending Club and Prosper apparently, so I’m going to give it a shot.

My bigger concern is when he turns 18, will he be financially responsible enough not to withdraw it all and go buy a motorcycle with it? Or when he’s 28 and his wife wants to take it out for something stupid, will I have taught him enough financially that he tells her no? I guess the real investment is in him, not any market; and teaching fiscal responsibility, well, isn’t that worth a million bucks in and of itself?

Southern Savers has a great idea!

Southern Savers, one of my favorite coupon sites for the Southeastern US is doing a savings challenge so I thought I would share it here and see what kind of ideas I could add to save. Now, I don’t make enough money to quite save $1000, but I might be able to save 10%.

Cutting out eating out, which means crock pot meals since it’s football season. This should save a couple hundred for sure.

Unnecessary expenses, my hubby is really bad about stopping at the convenience store for cokes, so hopefully I can talk him out of that.

No unnecessary out of town trips. We don’t usually go out of town but once a month, but that can run our gas budget up an extra $100.

No rental movies. We are really bad about renting movies from Amazon because we think it’s cheaper than going to the movies, but this month, if it’s not on Netflix or Amazon prime (which we have subscriptions to), we just won’t watch them.

Those are the main ones I can think of right now to begin slimming down. We already run a pretty tight budget, but there’s always a little wiggle room.

Dear Self: Things I wish I Could Tell My Younger Self About Money

How many times have you thought, “If I could only go back in time”? What were some of the things you would have done differently? (Well, besides dating the guy/gal your parents warned you about) I think about it and I think if I had to write myself a letter about my financial future, it would go something like this:

Dear Self,

I am writing you today to make sure you don’t make the same financial mistakes I made. First, In 2000, when standing on the concourse, do not sign up for a credit card just to get a free t-shirt.

Second, learn to balance a check book and cut up the first debit card you get. It’s a gateway card to credit cards, which can be just as detrimental to your life. Online banking is great, but don’t count on the balance telling you how much money you have, that’s what your check book balance is for!

When you close your first checking account to go to another bank, remember to actually close your first checking account. They charge you $5 a month. When you leave that bank, you have $200 in that account. When it shows up as a charge-off on your credit report, you have negative $70. Remember to cash checks when you get them so they don’t expire in 90 days and you lose out on unclaimed money!

When you get your first “big-girl” job and you are holding your pay checks for a month before you cash them, don’t. Cash those suckers and start saving some interest on that unused money while the interest rate at the bank is still above 5%, it won’t be that way two years from then. In 2002, when you see that shiny new Dodge Ram sitting in the parking lot, don’t buy it. Your salary that year is going to be $19,800. The truck costs you $19,000. When you get those $379 a month payments, you’ll only have $32 a month after bills to live off of, including your gas and food. Drive the paid-for explorer your parents bought you until the wheels fall off, then go buy a used car with cash!

When you get back that HUGE tax refund check, save it. Don’t go out to eat three meals a day and blow it. You’re throwing away really great money!

Remember the store credit card you got about that time with the $250 limit that you charged up and then paid $50 a month on for the next  six and a half months before you did it again? Don’t do that! The APR was almost 30%, you could have saved the $50 cash for 5 months, made some interest off of it, then went and bought yourself new clothes, instead you paid someone else an extra $75.

Let me save some time, don’t use a credit card, not a single credit card. I don’t care if you need tires or diapers, don’t charge a single penny to a credit card. Don’t charge a single penny to start a business on a credit card either! PS, while they are good for some people, you can’t do a part time business and a full time job, it just doesn’t work, just don’t even do it. If a bank thinks the business is worthy, they will loan you the money at a much lower interest rate.

In 2003, you’re going to tell your husband you want to buy some land in the county and he’s not going to want to. Buy the land anyway! In five years, the land is going to be work quadruple what you’ll pay for it.

You’re also fixing to have a baby and you’re going to quit working for a year. Do NOT remove your retirement! You’ll go back to the same job and have to work there another five years to make it up.

In 2004 when you want to go back to school for another degree, don’t. Wait until your son is older, you just can’t juggle a full time job, a baby and school, also, if you decide later to go back to school, choose business, not accounting, you don’t like the morals, or lack there-of of a lot of people you’ll come into contact with. PS, that’s another $3200 your going to throw down the drain, instead, take that $3,200 and pay for a new used car, the explorer you’re still driving (I hope) is probably on its last wheel by now.

This same year your grandmother is going to offer to put a down-payment on a nice brick home on the same street you live on now without her help. Take it! Take her up on the offer, she won’t be here to help you if you wait. When she sends you a large monetary gift a year later, take half of it and save it, use the other half to go see her every chance you get. PS, call her every day and get every piece of investing advice you can from her, the woman is a monetary genius! When she sends you coupons, use them and the $25 for groceries she sends too. Now take that same money you just saved and put it with the other money from her you are saving.

When you want to invest in any money-making schemes and warehouse shoppers clubs, don’t. That will save you thousands over the years. You’re a sucker for anything that might make or save your family some money, simple is best and high risk investments fail. When in doubt, investment wise, don’t.

In 2009, the economy is going to really tank, do not try to start a business during this time, it’s just not going to work. Just stick to simple saving and your full-time jobs. PS, your husband will have a second job that’s just frosting money. Save every penny of it!

Stop eating out so much! Learn to dumb down that sophisticated pallet. It’s killing your pocket book! Use coupons every time you shop. This could save you hundreds of dollars at the store. Stop robbing your savings account to keep your checking account afloat. Just account for every dollar and you won’t ever have to worry about your account going in the negative.

When YNAB comes out, get it! Don’t waste your money on any other finance software, they’re overly expensive and you won’t stick with them because they are complicated and take up too much of your time.

If you will do all the things I have warned you against, you will have saved yourself on the low end, drum roll, $262,050 without interest and that’s on the low end. A house and two cars, paid for, debt free, plus another $125K towards retirement. I also will have saved you countless hours worrying about every dime and more free and happy time with your family and time to do things you enjoy to do.

Sincerely,

 

You 15 years older

 

What would your letter say?