Step Two: Begin To Reward Yourself!

Make Your Emergency Fund Work

Greetings again! It appears that things continue to look up for me as I continue to fund my own emergency fund and should reach the pivotal $10,000 mark by December 30, 2006 if I save conservatively and plan to spend money on health, entertainment, and food. The benefit of the spending plan will show you if you’re doing a good job of plugging the holes in your monthly expenses drains while identifying areas to improve spending.

Living in New York is expensive especially on my entry-level engineering income, but that simply means that I will have to plan my spending a bit more conservatively than most. Soon, I’ll no longer be here. It’s almost been a year, but I’m hanging on OK. I don’t see what’s so hard about this living below my means stuff. Perhaps in the future I will have my Financial Tower threatened. We’ll see.

But to today’s topic—what to do with that emergency fund money?! Hopefully it’s not sitting in your checking account. If it is, you’re punishing yourself. If you’ve decided to delay gratification and are committed to saving for emergencies, why not make that money gain some interest—and I mean REAL interest! Or maybe you have your money in high-interest savings already. If so, you can stop reading now! I’ve put some of the well-known savings account brick-and-mortar guys to the others:

Bank Name	Savings Account APY%	Money gained per $1000 saved*
Wachovia	0.35%*	$3.50
Washington Mutual	0.75%*	$5.50
Bank of America	0.55%*	$5.50
ING Direct	4.00%	$40.00
Emigrant Direct	4.50%	$45.00
HSBC Direct	4.80%	$48.00

*Up to 2,500. After that, there are marginal increases. This is fine print. Some assembly required.

Well, where do you stand? Look at the return rates. Keep in mind that this is the money you get for saving per thousand, per year. So if you save 5,000, multiply the interest dollar amount by 5. (This does not count reinvestment interest, where you money can really take off). But what if you don't HAVE $1000? Not a problem. The online banks have no minimum and no fees. So you can start with $1.00 or $100. Not too shabby for the Online Banks, eh?

Now, which one would you opt for? For simply letting your money sit there and accumulate interest, you can get a fairly decent rate that’s FDIC-insured. (This means that your returns are guaranteed.) This is the amount in cash you would have after letting it sit for one year—and it should sit—remember this is your emergency fund. Emergencies as in “the car broke down and I cannot pay for repairs out of my checking account without using the credit card,” but not “John Legend is performing and I cannot pay cash/debit for it without going into credit card debt.”

Always seek to maximize your returns—let your money do it for you. I suggest you start with the bottom three, and each has its own strengths/weaknesses. ING Direct is most user friendly. Emigrant Direct has usability concerns, and HSBC Direct has the highest rate, but they will make you jump through hoops to get started. Remember. This is your money. You worked hard for it. Now make it work hard for you.

Step One: The Budget Spending Plan

Step One: The Budget Spending Plan

By this time you should have $1000 set aside for hard times. Plus you should be working diligently towards your 3-6 month expense account for long-term well being. Click Here to get started on this step if you haven’t already.

I’ve tried to avoid using the word budget when it comes to planning your future, but sometimes when you change the terminology you change the behavior. A spending plan is designed to, well, plan your expenses. No matter how much planning of your spending you do “in your head,” you never know how much spending that slips through your hands as “little purchases.” It’s good to track them. Consider the words of Arkad of Babylon from our Millionaires’ Bookshelf reading list classic The Richest Man in Babylon:

Budget thy expenses that thou mayest have coins to pay for thy necessities, to pay for thy enjoyments and gratify thy worthwhile desires without spending more than nine-tenths of thy earnings

(Emphasis Mine).

This stresses a very good point. In a spending plan, you include all spending you plan to do, including entertainment, eating out, etc. If you are not sure how much you plan to spend, estimate—including taxes. However, you should ensure that you do not exceed 90% of your income. (You’re saving 10% anyway, remember?) And for those of you who tithe regularly, this should be included as an “expense.” Saving 10% of your earnings doesn’t absolve you of giving 10% as a Christian to a place of worship of charitable organization. When building your wealth, never forget the importance of charity.

The easiest way to develop your spending plan is to simply list all of your incoming funds (wages, bonus money, etc.) and subtract the outgoing funds. The number should be as close to zero as possible, but never less. (It could be more). You have to make every dollar holla—in other words, every incoming dollar you get should be diverted somewhere—to savings, investments, movies, food, utilities, car payments(if any), credit card payments, snacks, clothes, health care, transportation, etc. Set a weekly target for your spending and WRITE THEM DOWN. This is extremely important because if left to your own devices (its all in your head) you will cheat yourself. State at the beginning of each week how much you plan to spend on food, entertainment, etc. Include all bills

You then work to stay within your spending targets. Because of the debit-card well problem (I'll explain in a later article), I suggest you use the cash-envelop method for your day-to-day purchases. The reason is because you don’t see your money going away (you’re not as conscious of it as if you’re seeing cash leave your hands). For safety (and simplicity) you should probably use the debit card when on trips/vacations, and making electronic payments (cable/internet, utilities, etc.)

This will take a little time to adjust to. But I have faith you can do it. Not only will your eyes be opened to your actual spending, but you’ll feel in control of your money and where it is going. Mastery of your current expenses is among the first steps to building your tower. It makes no sense to carry a bucket around with a hole in it demanding that you need more water to keep it full. Your spending plan helps you find where to plug the holes.

Coming Soon: I’m perfecting an excel file where you can customize to your needs.

Millionaires' Bookshelf

Required Reading!

So if it’s your desire to become a millionaire? Great! But becoming a millionaire isn’t easy. It’s simple though. What does it take? An advanced degree? Education? Access to the world’s well-kept secrets? Actually, the most legit millionaires have the worst-kept secrets because they spill all their beans of their paths to wealth. Whether you start a business, pinch pennies, systematically save, or a combinations of them all--consider the thoughts, writings, and practice of some of the millionaires in our society. Click here to see the quotes of some of America’s least known millionaires, courtesy of the It’s Your Money blog. Oh yeah—you gotta read too! The current books I recommend:

Millionaires I’ve Studying/Have Studied:

- The Richest Man in Babylon, George S. Clason (My Grade: A-)

- The Total Money Makeover, Dave Ramsey (My Grade: A)

- Think and Grow Rich, Napoleon Hill (My Grade: B+)

Millionaires in my Reading Queue

- Rich Dad, Poor Dad, Robert Kilosaki

- The Millionaire Next Door, T.J. Stanley and W.D. Danko

I add books as I hear and read more. If you have additional suggestions, let me know (in the Comments section) and if the philosophy of the book is cool, I’ll credit you with nominating another book to the Millionaires Bookshelf!

Step Zero: The Emergency Fund

Your Protective Wall Against Life's Little Challenges
by Charles J.

Pertinent in the path to financial freedom and success is the establishment of your preliminary emergency fund. I suggest about $1000 in liquid capital (cash) in the bank. Once you have set aside this small amount, you should begin your spending plan, keeping in mind that you should spend 90% of it and save 10% for yourself—at the least. Every 10% should go into a high-interest account and reinvested over and over—this is an emergency fund after all. Consider the words of George Cason’s character, Arkad of Babylon, who spoke this law of saving and paying yourself first in The Richest Man in Babylon:

"I too carried a lean purse and cursed it because there was naught within to satisfy my desires. But when I began to take out form my purse but nine times [for every] ten I put in, it began to fatten. So will thine."

Besides, when building your Financial Tower, isn’t it a good idea to build a wall around your progress so that unforeseen plunderers will be discouraged to disrupt your progress? In other words, when troubles arise like this, this, this or even this, would you feel more secure if you have some "just in case" cash to fall back on rather than falling into credit card debt--or worse yet--filing for bankruptcy?

So create a small emergency fund, and then work towards establishing 3-6 months worth of expenses, depending on your comfort level (how long could you survive if you lost your job or house tomorrow?) Well, how much exactly should you save? The best estimate is to find out how much you spend in a month and multiply it by 3, 4, 5, or 6, depending again on your comfort level. Next, you'll see one idea of how to do that.

Let's Chat with the Mafia

America is the richest country in the world.
America has the highest percentage of people living paycheck-to-paycheck.

Maybe that shocks you. Maybe it doesn’t. That’s why I think it’s time to have a talk. Meet the Credit Card mafia, aka the Credit Card Companies, aka the Brain Trust. I know what you’re saying in your head:

You: I'm good with numbers. I know I won’t live paycheck-to-paycheck. I’ll get my financial plan together once I (start work/get a better job/get a raise).

Credit Card Mafia: “While you wait, have we got a card for you! We know you have plenty of time to get your act together. And don’t bother reading those pesky quotes down there...”

According to 2003 MetLife Study of Employee Benefits Trends, 52% of Americans live paycheck-to-paycheck. Nearly 50% of all Americans could not cover their expenses if they lost their income tomorrow. Among highly-compensated employees ($75,000+), 34% fall into this trap.
- via mdmproofing.com

This is a serious concern. Americans are saving less and using more credit. 25% of all Americans say they have no spare cash at all, and even fewer. Not even the high-earners are resistant to this phenomenon. So don't think that $80,000 starting salary will save you from yourself. If you have no financial education and a sharp eye, you will be swimmin' with the fishes and not even realize it.

You: “I can start planning how to save when I start my career/better job.”

Credit Card Mafia: “You probably won’t. Probably because you won’t think you can afford to ‘save.’ With an increase in salary comes an increase in costs—meaning insurance, social security, taxes, etc. You’ll want a new car. Credit card costs generally increase with income because you’ll feel as if you have more money to spend.”

Indeed. To note:

Approximately 60 percent of Americans revolve balances. The average revolving balance, among individuals with at least one credit card, is now $3,815. Households in the $75,000-to-$100,000 income bracket carry the heaviest debt loads, shouldering nearly $8,000 per person.

- CardTrack, April 2004

Unless urged, I won't say too much more about credit card companies. Just realize you're up against the smartest minds on the planet. They've sat down and calculated every human tendency, finance behavior, and studied every demographic spending trend. They know students tend to wait until the last minute to pay. They know you wait until you're done with class to pay your bills online, so they have in the past made the payment deadline at 10AM (becuase most students are in a class at this time.) Trust me, they know how average people tend towards the "mean." If you think you're "beating the system," remember who the multibillionaires are. The Laws of Averages are against you.

But alas, there have been plenty of people who are out there to help. My next article will get you on the path assuming we start from square one. With a little encouragement, I think you, I, and our Allies will have a great relationship in the future. Next time, we talk about Spending Plans! As always comments, criticisms, and differences of opinion (because I'm always respectful of another viewpoint) are encouraged at the Comments section!

Credit Cards and Kool Aid

Credit on Trial, Day 1: By Charles J. Norwood

How many of you still drink Kool-Aid, or any of its variants (Flavor-Aid, Drink-Aid, Publix Powdered Drink Mix, etc.)? I do. It’s cheap, it’s sweet, and it’s good! It even has Vitamin C, so I could assert that it’s “good for you”! Then there’s the flip side—sugar. Very few folks actually follow the required instructions and instead make the syrupy stuff that you get from church picnics. It’s killing you slowly, but hey once you get a sip, it’s hard to stop.

However, the credit card companies have some special Kool-Aid they want you to drink. They want you to believe one thing—you need them to survive. They say you shouldn’t have to save up to buy things when you can have it now. They don’t want you paying with cash. So they put in everything they can to hook you—sending you cards that tell you how special and unique your needs are and how this Platinum Card or that Capital One card was designed for “you” or “your needs.” They’ll tell you that without them, you won’t be able to buy a new car or get a nice home mortgage and with their help, they’ll show you a ‘smart’ or ‘responsible,’ way to get credit. Like a said, it’s a special Kool-Aid.

Don’t drink it. It tastes good going down. But you’re destined for failure. I didn’t get my card until senior year, and I’m still climbing out of debt that at one point reached $2500 last July. (It’s down to $825 now). But I bet you think you’re doing well—making the minimum payments at a good introductory rate. Well, let’s go to the Tote Board for some of those elegant 6 month cards that you’re bombarded with in your mailbox every day:

NOTE: ALL THESE CARDS HAVE 0% INTRO APR:

Student Card Offer:	6 – 9 mos. later APR (after intro rate of zero pct):	Default (Late) on just one Payment - APR :
Discover 5% Cash Back!	16.99%	21.99%
US Bank Visa Card	13.49% + $20 fee	28.49%
Citi Dividend Card for Students	14.56% + fees	31.56%
Chase Platinum for Students	17.49%	31.49%

Sources: DiscoverCard.com, Visa.com, and MasterCard.com national websites.

This is what we call the carrot and the stick. The carrot is the Intro APR rate and benefits that get you hooked. I need not tell you what the stick is for or where they plan to use it on you. I encourage you to look these up, and read “the fine print”—that is if you can find it! The websites themselves go through great lengths to hide the after 6 month APR from you, and many fail to even mention the “finance charges” and fees. Websites make the good stuff appear in LARGE, bolded, colored, text. Look at how the fine print is presented—and tell me how much they “care” about your “responsible credit use.”

Listen—nobody with intelligence runs up a credit card in a month, a day or even a week. It’s a month-to-month buildup. It’s $20 here, $15 there, $100 here, $17 on gas there. Then you make the minimum payment of $15, which, after deducting finance charges, usually builds up your balance secretly.

It’s like borrowing $100 from a friend and they charge you interest of 20%, but they take installments from you of $5/month. (You owe them $120). From that $5, there is an “I’m a Great Lender and Friend” fee of $1 each month. Thus, instead of $5, you pay a net of $4. So it takes 30 months, not 15. So in a sense, you’ve paid your “buddy” $150 for borrowing $100. Not too mention what happens if you borrow more while you’re paying back, which is what most credit users do.

You may even think you’re “beating the system” by getting all those nice rewards—that Kool-Aid does that to your mind. But the American Bank Association cites that people spend 14-18% more income using credit and debit cards than cash—many consciously spend more so they can build up their points balance. Why do we do it? Because it doesn’t “hurt” to see plastic slide through a slit, but you’d think about it more if you took cash into Best Buy or Kroger for your next purchase. So any benefits you get are usually offset—imagine if you had 18% more cash in your bank.

Credit card companies hire the smartest people on the planet. They know how people react psychologically with their finances. They compile statistics and trick you. They also have the sweetest, tastiest Kool-Aid this side of . Mark this down: the day you find that you can’t pay your balance in full for the month—that day is the day you’re overextended.

You never have to wait for that day to come though. There are solutions. Follow The Three. Pay Cash. If you want to know how, or if you have a different opinion from what I’ve said here (I’m all about being fair and balanced) drop a line. In the Comments section.

A Hard Look at You, Your Company, and the Government: Part II

So last time we talked about some of the real financial decisions you have to make in the next few years to set up your future. Chances are you’ll wait until you’re mid-thirties, which isn’t terribly late, but most people by then we just about be wrapping up all the investing they’ll need for a successful retirement at a relative young age (55-60). We covered in Part I about why the Government is not the best way to go as well as why retiring early may be infeasible, depending on the life you want to live. We pick up there.

3. Lifestyle Isn’t All That
Personally, I want to make money in a way where I could have time to enjoy Life, enjoy a family, and contribute to the world. It may sound like my head is in the clouds. Maybe. But something in me compels me to help people—hence, I work on this website in my free time, I work with engineering majors at Columbia University, and I try to teach computer skills to my fellow Harlem residents. Mankind has defined itself on its contributions to improving his surroundings, but it has been in a sense clouded by pursuit of money for money’s sake. That’s not wrong at all, but it seems to bring on unneeded stress in my opinion. If your goal is to get that money, you better do it. Just don’t make it the only thing.

4. The Lottery is for Fun, and is NOT a True Investment Strategy.
You guys have heard me joke about my financial plan starting off with “Well, as soon as my numbers hit…” I say it in jest, but many simply do not. And that’s frightening. It’s also a trait of human behavior when people want a quick way out of their present condition. Seeing this doesn’t help either. If you’re looking to win, don’t count on it. If you’re working hard, continue to do so. Better planning will allow you to pursue the life you want, but it takes a disciplined approach. You can’t throw $30 at the club and a movie every weekend and wonder where the money is going.

Above all, the lottery is the largest wealth redistribution systems that works in reverse. You may hear about how people raise taxes on the rich so that the lower two classes can use it for essential services. Lottery funds are generally used for education, especially college. Lottery players are usually those in the lower class, who are looking for a quick step out of their "mess." (Studies have determined this by using ZIP Codes.) But think about it: who goes to college? Yep--the middle and upper class are the largest benefactors of college. So it's a "poor tax;" they're the ones who are funding the upper two classes' educational pursuits. Middle classers move up on the backs of those who play the lotter the most.

5. Know The Truth
Truth be told, true wealth is a long way and takes a certain mindset of optimism and graciousness. Listen to the testimonials of folks who say what they’d do if they won the lottery. You’ll hear “I’ll pay off my bills, give to charity, help my community,” etc. But why can’t they move to be in the position to do that now? Those most successful with money are those who know the value of it and how to not let it control them. Take it from the Oracle of Omaha: “The Market, like the Lord, helps those who help themselves. But unlike the Lord, it will not forgive those who know not what they do.”