What are your Areas of Hidden Spending?

What are your Areexpenses1as of Hidden Spending?

Every household has areas of hidden spending. You know those areas where you spend more than you think you do?  Perhaps it’s a hobby such as golf or gardening?  Or maybe it’s that you eat out more often than you originally thought?  Whatever the area of spending is, you most likely were caught a bit off guard when you first started tracking your expenditures.

As a Money for Life Coach, I have the opportunity to assist many families with their budgets.  While most everyone seems to underestimate their grocery and eating out spending habits in the beginning, the other areas of hidden spending cover a wide range.  I have seen everything from gardening to skiing, to scrapbooking, to clothes, and even home repairs.

The area of hidden spending, however, isn’t as important as what you are doing to increase your awareness of the problem and change your spending behaviors.   If you are consistently raiding your other envelopes to find money for eating out, golfing, etc, then perhaps you still have some work to do on either your spending plan, or more likely your spending habits.

If you are new to Mvelopes, you’ll probably want to make some adjustments to your spending plan every month for the first few months at least until you get all of your allocations to the right levels.  Use the Spending by Month report, or the Monthly Funding and Spending report, to compare your actual spending with your spending plan and make the necessary adjustments.  While working on these adjustments, watch for areas where you are consistently spending more than you have allocated within your plan.  These are your areas of hidden spending.   Work with your partner or family, if applicable, to find ways to reduce this spending.

-Jennifer Streiff, Money for Life Coach

Photo courtesy of : http://www.theoctopussolution.com/tag/expenses/

Beware of the “Miscellaneous” Envelope

misc-file-cabinetDoes your spending plan have a Miscellaneous envelope?  If so, you may be missing out on valuable data about where your money is really going.  Very few expenses that we have over the course of the year are truly “one-time expenses” that really should be considered miscellaneous.

I had one client a while back that put a few overdue library book fees into the miscellaneous envelope. When we started talking about the expense she realized that throughout the year she often had overdue library fees because her kids sometimes misplaced the books.   Library fees are not usually a large expense thankfully, but why not build a Library Fees envelope into your spending plan and track those expenses?   This also created a teaching opportunity for her with her children to teach them about the costs of not returning the books on time.

A Cash envelope can also be another way of avoiding tracking all your expenses.  Don’t fall into the trap of categorizing all cash withdrawals into one envelope.  Instead create an offline cash account and track all the purchases you make with cash.  This way you have a better idea of where your cash is going and a better chance of staying on track with your Spending Plan.

Having a “catch-all” envelope can keep you from really understanding where your money is going and potentially from reducing unnecessary spending.  Don’t let your Miscellaneous envelope keep you from finding your areas of hidden spending or from making progress towards your financial goals.

Jennifer Streiff, Money for Life Coach

Photo Courtesy of: cdfhs.org.au

3 Financial Resolutions You Can’t Afford Not to Make This Year

money_down_drainAnd how to actually keep them

By Steven B. Smith

Every January, millions of Americans determine to shed a few pounds and to finally get their finances in order.  Unfortunately, most estimates indicate that less than 30 percent of those well-intentioned resolutions make it through the year.  The reason most resolutions fail is because a plan is never laid out to help achieve the goal.  If you are serious about finally getting your finances in order this year, here are the three resolutions you need to make, along with easy steps to help you actually keep them.

1.  Automate your finances.

Why it’s important: If it’s not easy, most of us will quit before the New Year is a month old.  The key to effectively managing your money is tracking where it’s going, and how much money you have allocated for specific categories.  Paper and pen will do the trick, but be honest with yourself, do you plan on keeping that paper and pen with you for the next year, logging each and every purchase no matter how large or small?  The Internet allows you to track all your accounts with no manual effort, and will even do all the math for you.  If it’s automatic, you won’t get lazy, and you won’t forget to do it either.

Managing your finances online may also help keep your money safe.  According to a 2005 study on identity theft by the Better Business Bureau and Javelin Strategy and Research, “electronic monitoring provides greater safety by sharply reducing time to detection, and potentially eliminates the paper records and mail that are possible avenues to many identity theft cases.”

How to keep your resolution: Set up a secure online budgeting system like Mvelopes® (www.mvelopes.com).  Mvelopes will automatically track your expenses from multiple accounts and credit cards as well as provide you with balances for various savings and spending categories.  Seeing where you are spending your money will let you know where you can cut back.  Seeing your net worth rise in the net worth tracking feature will keep you motivated.

Set up automatic transfers with your bank to pay your mortgage and other fixed payments to avoid missing a payment or incurring late fees.  Use online bill pay to save on envelopes, stamps, and time. Set up an automatic transfer to a savings or money market account once a month.  Find a high interest bearing account to maximize your savings.

2. Stop paying interest and start earning it.

Why it’s important: According to Bankrate.com, if you charge $1,000 on your credit card, and pay only the minimum payment (assuming an interest rate of 15 percent and a 2.5 percent minimum payment), it will take over 10 years to pay off and cost an additional $757.98 in interest.  Conversely, if you were to take only the amount you would be paying in interest each month on that loan and invest it in an account earning ten percent, it would grow to $1,594.92 over that 10 years.

Even if you’ve gotten deep into credit card debt and can’t pay it off quickly, you can save a bundle by lowering your rate, and paying more than the minimum.  By dropping the interest rate on your credit card in the example above to 11 percent and paying only $30 a month, you could pay off that $1,000 in just over three years with only $198.85 in interest.

How to keep your resolution: Always pay at least the minimum payment on time, and if at all possible, pay your credit card balance in full each month.  Mvelopes Personal has a credit card tracking feature that automatically sets aside the exact purchase amount each time a purchase is made on your credit card to help you pay off the balance in full each month.

If you are carrying a balance from month to month, cut your spending to a minimum and allocate all the extra money you can to paying off your debt.  Use the debt roll down principle to quickly reduce your debt.  Make a list of all your consumer debts and prioritize them in order of interest (highest to lowest).  Pay the minimum on all your debts and pay as much as you can on the one with the highest rate.  Once your first debt is paid off, roll that payment amount into the next debt on your list.

Call your credit card issuer and try to negotiate a lower rate.  If they decline, let them know you plan to roll your balance to another card and cancel the card with the higher rate.  If your credit history is clean, you should be able to find a card with a 0 percent introductory APR.  Don’t make any purchases on the new card as often the introductory period ends as soon as you make your first purchase.  Be careful the interest rate doesn’t skyrocket after the introductory period, and make sure you cancel the card with the higher rate to avoid simply running up a larger debt load.  Check www.creditcards.com to compare credit card offers.

Check your credit reports to make sure they’re accurate.  The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. You can order your reports online at www.annualcreditreports.com or by calling 1-877-322-8228.

3.  Stop procrastinating saving for your retirement.

Why it’s important: Time can be your biggest ally when investing for retirement.  For example, if you begin at age 25 and invest $4,000 annually in a portfolio that provides a 10 percent average annual return, then stop contributing after 10 years, your investment will grow to $1,365,818.31 by the time you retire at 65.  However, if you procrastinate investing until you are 35, then contribute $4,000 annually in a portfolio with the same 10 percent average annual return, and continue to contribute every year for 30 years until retiring at 65, your investment will only grow to $759,775.11.  Even though you contributed $80,000 more over the life of the investment in the second scenario, you still ended up with $600,000 less.

How to keep your resolution: Contribute at least enough to your 401(k) to get the maximum company match.  Talk to your HR department to find out the details of your company’s plan.  If your employer offers a company match and you are not contributing to your plan, you are essentially turning down a bonus every year.  And since your contributions are taken out on a pre-tax basis, as you increase your contribution, your taxable income decreases, meaning you pay less in taxes.

Open a Roth IRA.  Your money grows tax-deferred, and just so long as the IRA has been open 5 years or more and you are at least 59 ½ when you start to withdraw, there are no tax penalties for withdrawal.

Make sure that no more than five percent of your portfolio for either your 401(k) or your Roth IRA is in a single stock.  Diversifying is the best way to ensure maximum growth over time while minimizing the risk and volatility of the market.  Select an index fund or target fund for an easy option that requires little oversight.

From start to finish. Regardless of where you stand financially, the New Year provides an excellent opportunity to review your finances and make improvements.  Make sure that this year you don’t just start fresh, but that you also finish strong.

Steven B. Smith is the President and CEO of Finicity, the developers of Mvelopes and author of Money for Life: Successful Money Management and Financial Fitness in Just 12 Weeks!

Image Courtesy of: save-money.ca