Personal Finance 
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The 7 Deadly Sins of Personal Finance Wrapup

7 Deadly Sins of Personal FinanceI hope you enjoyed reading this series as much as I enjoyed writing it. While there are certainly more than seven horrible personal finance “things” you can do, the seven I outlined jumped out at me as things you shouldn’t miss if you could avoid it.

The 7 Deadly Sins of Personal Finance

  1. Skipping Emergency Funds
  2. Raiding Retirement
  3. Don’t Budget
  4. Don’t Plan For The Future
  5. Don’t Get Adequate Insurance
  6. Being Penny Wise, Pound Foolish
  7. Don’t Enjoy Life

There were a few others that I thought about but passed on, many of which became fodder for the Devil’s Advocate posts, but if there is one you think really trumps one of the seven above… please tell me in the comments.


 Personal Finance 
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7 Deadly Sins of Personal Finance: Don’t Enjoy Life

7 Deadly Sins of Personal Finance We’ve reached the last of the deadly sins of personal finance and this one probably caught you off guard, right? All the others were your standard bits of personal finance advice: be sure to budget, have an emergency fund, ensure you’re adequately insured; this deadly sin is of the softer variety. It’s important that, while you’re following the standard personal finance advice, you remember to enjoy life while you’re living it. That’s why the seventh and final deadly sin of personal finance is…

Don’t Enjoy Life

Life, especially the personal finance aspects of your life, is all about balance. Don’t spend more than you earn, but don’t starve yourself of life’s pleasures. You don’t have to spend a lot to enjoy life but you don’t have to starve yourself of all fun in order to save more for a new house or your retirement. While all those goals are important, it’s also important that you enjoy life now so that you don’t burn yourself out.

I had a friend who was extremely diligent about saving money during the week. He’d bring in his lunches, he’d skip out on happy hours after work, and would otherwise live a pretty austere and frugal lifestyle. There’s absolutely nothing wrong with that. However, whenever he would go on vacations with his girlfriends, he’d go all out. As you probably know, anytime you visit a vacation destination, there will be ample opportunities for you to spend a lot of money. If you ask him, he’d tell you that he was saving his money during the week so that he could go crazy on vacations without worrying about how much he spent. If you ask me, I thought his pendulum was just swinging the other way from austere to lavish. I never judge how other people spend their money, that’s their own business, but a small part of me wondered if his “average spend” would be lower if he just enjoyed life a little more on a daily basis (you can go out with friends without spending a lot).

Let’s be honest, you don’t need me to tell you to enjoy life, right? :)

Finally and hopefully fittingly, as you work those long hours at the office or the shop or while you’re hitting the books at the library, remember also to spend time with your loved ones doing the things that make you happy. Be sure that you’re working to live, rather than living to work. Promotions and more pay are great, but there’s more to life than money and those things are free.


 Personal Finance 
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7 Deadly Sins of Personal Finance: Being Penny Wise, Pound Foolish

7 Deadly Sins of Personal FinanceIt’s fitting that the sixth deadly sin of personal finance would be this one, after making a case for adequate insurance in the 5th deadly sin. Sometimes, in the quest to be frugal, we make decisions that can be short-sighted. These decisions, which may be beneficial in the short run, end up costing us big dollars in the long run because of unintended consequences or unforeseen circumstances. This is why the sixth sin of personal finance is …

Being Penny Wise, Pound Foolish

The simplest and most relatable example I can think of is buying 12-packs of Diet Coke at the super market. At normal prices, a 12-pack costs about four bucks a piece, for a unit price of thirty-three cents each. When it’s on sale, you can get a 12-pack for only $2 a piece (5 for $10 deals in the summer happen about once a month). I would only buy packs when they were at the $2 price… and then find myself spending $1.39 for 16 oz. bottles whenever I had an urge for Diet Coke. Penny wise… pound foolish.

That was a simple example, how about a more realistic one? Let’s say you’re a young professional looking to buy a car and trying to find easy ways to some extra money. You stumble onto my post about credit card offers and think about signing up for a few cards for their bonuses. Bad idea. In the short term, you might get a few hundred bucks signing up for cards and spending the required amount but in the long term, you lower your credit score. That lower credit score will result in a car loan with a high interest rate. If you’re planning on buying a house in the next year, avoid these types of things!

Finally, here’s one that I grappled with while I was in school: working during college. My dad and I often discussed whether I should work while I was in college. His reasoning was that I was going to school to get a degree, not to work a part-time job that would distract me from the primary goal. I understood my Dad’s position, why work for $10/hr when I was paying $30,000 a year for tuition?

But I was impetuous and eager to earn my own way in the world, so I took some odd jobs and did some things on the side. Fortunately none of the jobs ever detracted from my study time (while my grades weren’t stellar, I could claim graduating early which saved a good chunk of change) but it could have. While I’m not saying you shouldn’t work in school, make sure you’re working for the right reasons. Working at a research assistant in your field of study is a smart move, working anywhere because you need the money to pay for school is a smart move, working at the local coffeehouse so you have some beer money is probably not the best.

To make sure you’re not committing this deadly sin of personal finance, weigh both the long term and short term impacts of the decisions you’re making. You don’t want to be too heavily emphasized in either direction.


 Insurance 
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7 Deadly Sins of Personal Finance: Get Adequate Insurance

7 Deadly Sins of Personal FinanceWe’ve made it through four of the seven deadly sins of personal finance and touched on many good topics so far. The first few were easy – have an emergency fund, don’t raid your retirement, budget, and plan and project for the future. We’re starting to get into a bit of the hazier areas of personal finance, where the answers are quite so clear cut and where much of it depends on you and your specific situation. You could argue that failing to budget isn’t so bad a sin, the reality is that math will do the budgeting for you if you decide you don’t want to. When you run out of money, you’ve hit your budget. :)

I doubt anyone can argue against today’s deadly sin…

Being Improperly Insured

The reality is that insurance is a very difficult subject to tackle because it provides you protection against the unknown. Since you’re protecting against the unknown, it’s difficult to know how much protection you’ll actually need. Insurance is also very temporal. When you pay the premium for the month or the year, that protection is gone once the insured period passes. I’ve been driving for nearly five years and never once made a claim. That’s five years of auto insurance premiums gone. (I’m not complaining, I consider myself very lucky!)

But you can’t look at insurance that way and many people do. Insurance is a hedge against unknown events that could potentially bankrupt you and it’s a way for you to purchase peace of mind. So, how do you ensure you have the right amount of insurance? How do you avoid getting too much coverage or too little? Sadly, it’s mostly a judgment call but here’s how I approach it.

My approach towards insurance is that it should protect against catastrophic events. Not everyone is like that and that’s certainly not the “right” or “best” way to approach it, I don’t know what the “right” or “best” way is (or if there even is one). My tolerance of risk is such that I’m comfortable with assuming some self-insurance (high deductibles) in order to pay lower premiums.

How should you approach it? I can’t answer that other than to say that you have several factors that will affect how you adjust your coverages and deductibles:

  • Assess your financial situation. If you have a fully funded emergency fund, consider increasing it and self-insuring through higher deductibles. If your current automobile insurance has a deductible of $500, increase it to $1000 and put the premium savings into your emergency fund. If you work in a volatile industry or have irregular income, consider adjusting your insurance so that any negative events don’t cause extreme financial distress.
  • Known your own “riskiness.” If you’re a bad driver who is prone to accidents or mishaps, lower your deductible. There’s no sense in being prideful and making the wrong financial decision by increasing deductibles or removing certain coverages. If you live in a dangerous neighborhood, lower your homeowners deductible so that you’re better covered in the event of a break-in or fire.
  • Know the statistics. Some cars are burglarized more than others, some neighborhoods are rougher than others, and some ethnicities are more prone to some medical problems. Be aware of these statistics, many of which can be found online, and use them to adjust your coverages.
  • Your tolerance towards risk. If peace of mind is priceless to you, adjust your insurances so that you obtain that. You can’t quantify stress and all we know about its effects are that it’s bad on the body. Paying a few extra dollars so you can sleep better at night and prevent a few gray hairs is money well spent. Frugality is important but your health is more important.

I’m sure there are actuaries who know insurance backwards and forwards who would disagree with me, if you are such an actuary I invite you to let us know what you think.


 Personal Finance 
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7 Deadly Sins of Personal Finance: Don’t Plan For the Future

7 Deadly Sins of Personal FinanceHot on the heels of a pretty bad sin yesterday, Failing to Budget, comes its brother in arms – failing to plan for the future.

(Click to continue reading…)


 Personal Finance 
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7 Deadly Sins of Personal Finance: Don’t Budget

7 Deadly Sins of Personal FinanceBudgeting is one of the cornerstones of a solid financial plan because its essentially the planning, tracking, and managing of your short-term finances. When it comes to budgeting, there are many ways to do it but the purpose is the same – knowing how much you are spending on what.

While I contend that all the deadly sins are equally deadly, I think that failing to budget is primus inter pares, or first among equals. If you were to commit all others but avoid one, this would be the one to avoid.

And with that, our third deadly sin of personal finance is…

Failing To Budget

Failing to budget can be one of the most damaging things you can do to your personal finances. Without a clear picture of how much you’re spending and on what, you’re basically wandering the forest at night without a flashlight. You might know that you want to buy a house in five years, but without an accurate figure of how much you’re spending or saving, you really have no idea whether that goal is even feasible. If it is feasible, you have no idea how much you should saving towards that goal. A budget gives you that accurate snapshot and it’s one of the reasons why an income statement, which lists expenses, is a crucial financial statement for a company.

You can’t improve what you aren’t tracking. You should always be trying to lower your expenses while maintaining the same standard of living. If you frequently shop at a particular store, it’s smart to try to find coupons so you get the same for less. If you like a particular food or drink, it pays to test out cheaper alternatives to see if you can tell the difference. Where you save in one area, you can then splurge in another. With a budget, you can tell where you stand the greatest chance of improvement. You may discover patterns you didn’t know beforehand.

You will automatically improve just by tracking. When I started working full-time, I had a budget where I tracked every expense to the penny. By virtue of doing that, my actions were affected by even recording the expense. I knew of times when I packed a lunch because my dining out expenses were nearing artificial milestones like $50 that month or $100. There was one time I thought about buying a new pair of jeans but stopped myself because I hadn’t spent money on clothes that month. Since I was nearing the end of the month, I figured I’d buy it next month (I never did until much later).

Budgets help you make informed decisions. With a budget and an accurate picture of your spending, you can make an informed decision. If you know you have slack in the budget, you can enjoy yourself more knowing that you’re safe. Friends planning a vacation next month? You can happily agree to go without guilt or concern if you know your budget can handle it. How long will it take for you to build up your emergency fund? With a budget, you now know.

After a few months of budgeting, it’s okay to slack off and not track as diligently. Once you have an accurate picture, you simply need to adjust it to changes in your life. But every once and a while, track expenses for a week or two just to see that there haven’t been any big changes.


 Retirement 
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7 Deadly Sins of Personal Finance: Raiding Retirement

7 Deadly Sins of Personal FinanceThis is the second deadly sin of personal finance (the first deadly sin was failing to have an emergency fund) and one that some of our friends have been thinking about “committing.” We’re all in our late twenties and buying our first homes. Despite what the experts say, home prices are still very high in the Baltimore and Washington D.C. areas, barely within affordable reach for many people our age. So, our friends are looking for places they can tap to help with a down-payment.

Inevitably, they learn about how they can borrow (or worse, withdraw and be penalized) from their 401(k) to help with the purchase of their first home. This leads right into the second deadly sin of personal finance:

Don’t Raid Your Retirement Funds

Remember when you were a kid and your parents planned a vacation? Part of the fun of the entire vacation was the anticipation of going on a trip. The excitement the night before as you couldn’t sleep, the energy you had packing for the journey, and the planning of events beforehand. In talking to colleagues, retirement is very much like that. You plan new hobbies to try, new events to attend, and new places to see. When you raid your retirement fund, you put all that in jeopardy. You have to slide back the day you hope to retire. It’s devastating and demoralizing.

Sometimes you can’t help it. A lot of people who hoped to retire last fall are continuing to work because their retirement investments fell. I’ve chatted with at least one person who thinks they’ll have to work a few more years just to get back because they were over-exposed to equities. In his case, he was too aggressive and he came up craps on the roll of the dice. With so many other potential problems, why make things harder for yourself by stealing early from the cookie jar.

You need that money if you ever want to stop working. As Gary Bonner, a contributor of BFP, once wrote in Making a Living? Or, Making a Life?: “no one has ever laid on their death bed saying ‘I wish I had spent more time at the office.’” We want to stop working as much as we want to have a new television, or a new pair of shoes, or a bigger house. However, every single time you take money from your retirement fund, you’re extending the time you have to spend at the office.

$1 today is ~$22 in forty years. At a conservative 8% annual appreciation, every dollar you take out now is worth $21.72 in forty years. Twenty-two bucks may not seem like a lot but you have to think of it as a multiple of twenty-two. $100 is $2,200. $1,000 is $22,000. Is the sacrifice worth it? In most instances, no. There is no clear cut answer in the rent. vs. buy question. With so many different situations and scenarios, you can’t clearly say that one is vastly superior to the other. But I can say, without a shadow of a doubt, you will need your retirement funds in retirement and every dollar you take today will steal $21.72 from you in forty years. That’s just math.

Like everything else, it’s not black and white. If you have a major medical emergency and it’s exhausted your insurance and your emergency fund, you won’t have any choice. You will have to raid your retirement fund. My opinion is that it better come to that and I will have to be in very desperate shape before the retirement fund comes into play.


 Personal Finance 
14
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7 Deadly Sins of Personal Finance: Skipping Emergency Funds

7 Deadly Sins of Personal FinanceThis is the first of a series of seven posts titled the 7 Deadly Sins of Personal Finance. In the next week, I’ll discuss seven mistakes I think we must avoid if we’re going to be successful managing our money. They’re things I’ve learned the last few years as both a personal finance blogger and manager of my own money in our ever changing world. Hopefully you can both take something away from these and give me your own take on the points I bring up.

Without further ado, the first deadly sin of personal finance is…

Not Having An Emergency Fund

An emergency fund is a fund that you set aside specifically to handle the unforeseen emergencies in your life. Some save as little as three months of expenses, others save as many as a year’s worth of expenses, we are going with six months plus adjustments for extenuating or mitigating circumstances. Currently our emergency fund is at six months with no adjustments because we have two incomes and that mitigates the risks brought on by a slowing economy. If we were single income, I might adjust that upward to seven or eight months. If we had kids, I’d adjust it to a full twelve. It’s better to be safe than sorry, you won’t lose much, especially in this economy, by having too much in your emergency fund.

Why is an emergency fund important? When you have a pot of money set aside for emergencies, you don’t need to rely on loans or credits to pay for the emergency. A prime example is a simple flat tire in your car. A flat tire can happen any day and, while not catastrophic, can cost you anywhere from a hundred to two hundred dollars. If you have an emergency fund, you can pay for the service without worrying about adding to your existing debt. With an emergency fund backing you up, you don’t have ride on your donut spare tire (very dangerous!) until your next paycheck.

A flat tire is easy, what about something bigger? Sticking with the car theme, let’s say a rock cracks your windshield when you’re driving to work. Windshield replacement is a little more expensive. With an emergency fund, you can quickly pay for a repair or replacement that can prevent further emergencies down the road. Driving with a cracked windshield is extremely dangerous and with an emergency fund you can take care of those problems quickly and before they develop into bigger problems.

How should you save? This is the easy part. The first step is to budget and figure out how much your monthly expenses are. If you don’t have any empirical data, here’s what I’d do. First, get a ballpark estimate of expenses by calculating what 75% of your pre-tax income is. Use that as your expenses numbers for the first month while you collect data, then replace it with the actuals once you have them.

The best place to save is to open a high yield savings account at an online bank and set up an automatic transfers each month from your checking account. Don’t put it in the stock market, don’t put it in any other investments, and don’t leave it in your checking account where it won’t accrue interest.

That’s it! And like that, you have an emergency fund. If you didn’t have one before and you’re now worried your fund is small, don’t worry. You have a plan in place now and it’s just a matter of time before the savings accumulate. In the event that you do experience an emergency before the fund can handle it, you’re no worse off now than you were before you started the fund. Handle it as you would’ve but keep following the plan.

One last bit of advice: Don’t spend that fund unless it’s on a true emergency. I’ve heard of stories where people have stumbled on a “great investment tip” and raid that fund (you should set up an opportunity fund for that). Don’t. The purpose of that fund is to make sure you don’t fall down a deep deep hole because of one simple financially focused event.

Thoughts?


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