How Does Your Spending Compare to The Average American?

We're eating away our hard-earned money!

We're eating away our hard-earned money!

How Does Your Spending Compare to The Average American?

Below you’ll find an intriguing infographic, provided by the Bureau of Labor Statistics, showing us how the average American household spends their hard earned money.

We could spend endless hours discussing this great visual, but instead, let’s look at the following three categories: mortgage/rent plus utilities, restaurant spending, and savings.  These three numbers reveal a very troubling trend: we buy more home than we can afford, we eat our earnings away, and we completely ignore savings.

According to the Bureau of Labor Statistics, on average American household spends 36.9% of their gross annual income on rent/mortgage and utilities!

So let’s do the math…

If your annual household income is $50,000, you’ll spend $18,450 on rent and utilities and will have $31,550 to cover all of your other remaining expenses.

How about this one: average American household spends 5.7% of their annual income on restaurants – not counting regular grocery items. That’s $2850 a year, or $237.50 per month, based on the $50,000 annual income.

Now, let’s compare this to a whopping 2.6% savings rate (for the first quarter of 2013) among average American households – that’s $1300 annually or $108 per month!

Bottom line, we prefer to invest more of our resources in restaurant food alone (not counting money spent on pets and other entertainment items like concert tickets, etc.)  than in our personal financial well-being.

So what if we simply reversed those two categories and decided to save what we consume at our local restaurants and consume what we currently save?  Can you imagine how this one small change could help our families eliminate debt and build the financial foundation needed to weather life’s unexpected turns?

Planning your budget out before you spend your money each month with budgeting software or budgeting tools can help as you try to change your spending habits.

Overspending and saving too little has become the norm. We look for instant gratification today, while ignoring the fact that tomorrow will be here before we know it. Our families are unprepared to face even small financial emergencies, hence plunging deeper into debt every time the car breaks or the roof leaks.

So here is a great personal challenge to all of us…After all, each of us can do something to start changing our current direction.

“I am only one, but still I am one. I cannot do everything, but still I can do something; and because I cannot do everything, I will not refuse to do something that I can do.” – Helen Keller

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Get Rich Quick vs Steady Saving

Is winning the lottery worth it?Get Rich Quick vs Steady Saving

And the winner is….

by Megan Pacheco

Have you ever found yourself daydreaming about winning the lottery? I know I have!

Oh, the thought of being able to pay off the house, take much needed, extended vacation and of course become crazy generous with family and friends and other worthwhile causes! Yes that’s the ultimate life scenario…

The only problem with it is that the statistics prove otherwise.

According to research, winning a mega jackpot could make you more likely to go bankrupt. Or how about this one: 70% of the lotto winners will squander their winnings in just few years! There is also an emotional toll that lottery winners often face and it includes being taken advantage of by friends and family, becoming a target of scams and lawsuits and relational breakdown.

In light of just those few stats, I say there is a better way to build wealth. It’s the steady plodding principles and it’s captured beautifully by these few proverbs:

“Dishonest money dwindles away, but whoever gathers money little by little makes it grow.” Proverb

“Steady plodding brings prosperity; hasty speculation brings poverty” – Proverb

Steady plodding and gathering little by little is a much safer strategy for both growing wealth and making sure that those resources will provide for our financial needs long-term.

So here are few tips for those of us who get caught up in that “just a little bit more” trap, to hopefully turn us into patient steady plodders…which in laymen’s terms simply means long-term savers!

1. Talk to your bank and ask to automatically transfer, twice a month, a certain amount of money into a savings account that has restrictions put on it. Pay yourself first, then use the remainder to live on. This is how you will slowly build financial reserves. If you don’t have much disposable income, start with $10-$20 twice a month.

2. Find your spending waste. Every one of us wastes money. Some of us waste more than others so the key is to track your spending close enough to find out where your waster areas are. Is it eating out too often? Is it sodas or lattes? Clothing? Whatever IT is, by carefully examining your spending you’ll surely find extra $25-$50 each month that could be reassigned from waste to savings. Many of our Mvelopes users find that they can recover up to 10% of their income just by finding waster areas.

3. Less expensive services. How long has it been since you re-quoted your cable, cell phone, home insurance, car insurance, etc…? I bet you that as if you do a little bit of asking around you can find a less expensive substitute for at least one of those services. If you do, commit to set the difference aside as savings (instead of course consuming it on monthly basis)

4. Stop using debt as an excuse not to save. Unless you start building saving reserves you will have a very hard time with breaking your debt cycle. Using budgeting software like Mvelopes can help you find ways to save even while paying off debt. Start small, just start and keep at it.

We could go on and on but you get the point. So build wealth slowly…after all many of those who became financially independent used this very technique.

Living on less than we make and saving and investing the rest is what will help us get and stay in the place of financial freedom.

Are you financially ready for retirement?

Are you financially ready to retire?

How to be prepared without being preoccupied

By Megan Pacheco

Hope is not a good retirement strategy. Unfortunately, for so many Americans, hope is the only thing they’ve got to hold on to as they face their retirement years.

According to the Employee Benefit Research Institute, 46% of all American workers have less than $10,000 saved for retirement and 29% of all American workers have less than $1,000 saved for retirement.

How can you look at these numbers and not be preoccupied or even paranoid?

Being in our mid 30’s and having two young children, my husband and I often talk about the future, and retirement is definitely on the forefront of our minds.

As we watch so many elderly men and women having to work indefinitely we wonder, what financial decisions can we make, starting “TODAY”, to help us be prepared for the “TOMORROW’s”?

Here are few practical ideas to get you on the road to more secure retirement days. These practical steps are meant to help you be proactive and better prepare yourself and your family for the years to come.

DEBT-FREE, including mortgage

Eliminate all of your consumer debt, as well as your mortgage. This will make it much easier for you to retire, even if your retirement years aren’t fully funded.

Here are few quick “to do’s” to help you ditch your consumer debt:

Stop using plastic until you learn responsible use of credit. Anyone using credit cards should aim at paying each monthly balance in full so no interest accrues. There are free cash management tools available to help you do this, following an envelope budgeting system is a great way to help make sure you always have enough cash to pay the bill in full.

Eliminate your car debt. Once you pay the car loan off, keep driving the car while making those car payments to yourself. This way, when it’s time to replace your vehicle you’ll have enough cash set aside to purchase one out right. Owning your car out right will also bring your insurance premium down – which is a small additional monthly bonus!

Use the “debt snowball” approach to eliminating your consumer debt. Once you pay one card off, roll that money over to the next debt, which will greatly accelerate your payoff. Keep doing this until all of your debts are eliminated.

Now that we’ve dealt with your consumer debt, let’s help you pay that mortgage off!

Did you know that adding $25 or $50 to your mortgage payment (make sure the extra funds are assigned to the PRINCIPAL) can shave off 2-4 years and save thousands of dollars worth in interest?  Even if you can’t pay hundreds of dollars extra each month, every little bit will help in getting you closer to owning your home outright.

Are you an empty nester or single? Consider renting out rooms, or a basement if you have one, to generate extra income. Apply that income to your mortgage payments and watch your loan melt away!

Are you thinking of reverse mortgage? If so, keep these few things in mind:

It should be considered only out of necessity and not as a way to increase your standard of living.

The younger you are, the higher relative cost you’ll pay for a reverse mortgage. Avoid taking out a reverse mortgage in your 60’s.

Finally, beware of scams that charge thousands of dollars for information you

can get free from the Department of Housing and Urban Development (HUD).

Do the math

Do you know how much you’ll need to retire? Understanding your future financial needs can give you clarity on what you can start doing today.

Project your retirement monthly budget. If you know you’ll be debt free, including your mortgage, how much do you think you’ll need to cover your monthly living expenses?

Go on line and search for retirement calculators. Simply plug in few pieces of information and Voila! You’ll have your estimated retirement amount. Divide that amount by the years you have left in the working world and you should get your estimated yearly goal for setting money aside. Don’t be overwhelmed if the number seems larger than life! Use it as a motivator to simply do your best. Something is always better than nothing!

Know your options

There are few different options for setting retirement funds aside. 401K or 403b are your typical, before tax contributions, and will be taxed on the back end when you are ready to start drawing on your retirement funds. Roth IRA is also an option for those who prefer to contribute after tax money, to avoid paying taxes during the retirement years. Whichever option you choose, here are few ideas to help you start contributing:

Check if your employer has a matching plan. If they do, consider contributing at least the percentage your employer offers. That way you’ll get double your money.

Do you think you can’t afford to set aside few dollars a week for retirement? Think twice. Track your spending for 30-60 days and you’ll be surprised what you’ll find. Many of us spend money on lunches, coffee, and other entertainment categories. Simply limiting few of those expenses will free up some cash you can put toward retirement.  Remember this proverb: “In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.” Proverbs 21:20

How about those tax returns? If you receive a refund each year, consider setting aside a portion of your refund for retirement.

Retirement, as we know it today, is a very recent phenomenon. Before 1900’s most people worked until they were physically unable to continue. Family also played a big role in taking care of the elderly or those unable to work due to health factors. There were no national programs, no employer sponsored plans. None.

So consider all of your options. Do what you can. There is really no magic solution. What it takes is knowing where you are today, where you need to be when you reach retirement age, and having a realistic, doable plan broken down into yearly and monthly goals. The rest is execution.

5 warning signs you’re living beyond your means

Living beyond your means?

Living beyond your means?

Are you keeping up with the Joneses?

A budget tells us what we can’t afford, but it doesn’t keep us from buying it.” – William Feather

Have you ever been to a restaurant and while deciding on what you’ll eat, you take a look one table over and see someone devouring a scrumptious looking meal? You know that you should have something healthier, with less calories, and a slightly lower price tag, yet as soon as the waitress asks for your choice you hear yourself say: “I’ll have whatever he is having.”

Sadly, so many of us approach our financial decision making the same way, and before we realize it, we have dug ourselves into a deep financial hole wondering how we get here in the first place.

Living beyond our means has become the norm. Financing our lifestyles with easily available credit is almost expected, and anyone who is living on “cash only” basis is rare species about to go extinct.  Social pressures to meet certain living standards are contributing greatly to the financial instability of our families.

If you suspect that you may be living beyond your means, here is a quick checklist of five common warning signs combined with practical tips on overcoming those challenges.

1. You are constantly discontent.

Do you find yourself constantly wishing for more?  Is it hard for you to watch others upgrade to nicer cars, bigger homes, better furniture or even pricier, more prestigious private schools for children? If you’re quietly saying yes, then your discontentment may be driving you to impulse financial decision-making.  Reflect on your spending habits and evaluate whether many of your purchases are done out of true need or out of a need to fill in an internal void or social pressures. Decide today that you will no longer live to impress others by spending money you don’t have on the things you don’t really need.

2.  You can’t afford to lose your income, at least for a while.

If today you, or you and your spouse, lost your income, would you be able to survive for the next 6 months only on what you have set aside in your savings? If the answer is a definite NO, you may be overspending on today’s wants while sacrificing tomorrow’s needs. If that’s the case, take a hard look at your current spending. Do you have a spending plan or a budget? Make one. Are you fully aware of how every dollar you earn is spent? Get to the bottom of this and make sure that you assign every penny to a specific budget category. Track your spending for the next 30 days to reveal all potential “waste” areas.

Your goal should be to eventually have 6 months of your living expenses set aside and available in case you experience a complete income loss.

3. Credit is your best friend – or so you think.

Credit has become so accessible that any college student who does not have a steady income is bombarded with offers of easy money.  Do you have a revolving balance on your credit cards? Are you using one credit card to pay off another one? Is your monthly credit card balance growing instead of declining? If the answer is yes, then you are most likely financing a “beyond your means” lifestyle.

Take the next few days, look over your credit card purchases and see exactly what you are buying. Is it expensive clothing? Maybe its time to move to a cheaper clothing line or to live out this famous great depression motto: Use it Up, Wear it Out, Make it Do, or Do Without. Have you fallen for the buy now and don’t make any payments until who knows when offers? Now that the payment time has come, are you struggling?

Whatever “it” is that you are using credit for, first make a decision to stop using plastic. Create a realistic debt repayment plan and do not pick up a credit card until you have paid your balances off and are ready to be a responsible consumer.

4. You aren’t saving a minimum of 10% of your gross pay.

Saving is truly the foundation of healthy finances, yet so few of us actually save.  One of the most common excuse for not saving is “I have too much debt.”  What people don’t realize is that, unless saving is prioritized, debt will always be an issue.

Our goal should be to set aside at least 10% of gross annual income. Portion of it may go into a retirement fund while the rest to a regular savings account.

While setting saving goals, focus on both short-term as well as your long-term goals.  Short-term should include having an emergency fund, 6 months of living expenses, a vacation fund, a Christmas fund, etc. Your long-term goals should focus on retirement, car replacement fund, and college funds for your children, etc. Find a free online budgeting software that will help you set, track and measure those goals.

5. You spend more than 25-30% of your gross pay on your mortgage.

Buying more home than you can afford has been a common phenomenon in the last decade. Long gone are the days when 20% down payment was the minimum in order to purchase a home. No down payment and borrowing more than can be afforded, combined with a stagnant job market, has plunged too many families into foreclosures and short sales.  Are you counting on two incomes in order to make your mortgage payment? Are you spending more than 35% of your gross income just to pay your monthly note? Would you be in deep trouble if you experienced a reduction in income? (going from two to one incomes due to job loss, having hours cut, having pay reduced, etc.) If the answer is yes, you may be paying for more home than you can afford. Here are two rules of thumb to follow in regards to mortgage payments:

Stay within 25-30% of your gross income

Are you a two-income family? Buy as if you had just one income. This way you are creating margin in case of a job loss

Living beyond your means can be overcome. It isn’t an issue of not earning enough, but an issue of reconciling your spending habits with your income. Understanding your spending and correcting waste will lead you to financial freedom!