7 Ways to Maximize Your Income Tax Refund

You take a few hours one weekend between February and April to pop numbers into your online tax prep software or prepare documents for your accountant. You don’t know whether you’re going to owe more to the government or get money back in the form of a tax refund.  

Quick side note: Getting a large tax refund may sound like a huge win, it can often mean that you had too much taken out of your paycheck. In other words, you gave an interest-free loan to Uncle Sam. So while it may be tempting to cheer when you get a big refund check, you may want to take another look at your W-4 exemptions to make sure the right amount is taken from your paycheck. Imagine if you overpaid your rent monthly and received your surplus payments back in April of the following year. Not a cause for celebration, in fact, you might be upset and you would figure out what the correct amount was so you didn’t overpay.

So let’s say that you are “fortunate” enough to receive a large tax refund. The question is, what do you do with that money? Well here are seven ways to maximize your refund so you don’t regret a single dollar you spend.

1. Make a donation  

The size of the donation is not important, it’s the act of giving first that’s important and giving to something (or someone) that’s meaningful to you. Giving is one of the most important aspects of my Spending Formula to Win with Money. That spending formula applies to any money you receive, whether it’s a tax refund, paycheck, inheritance or a gift. Giving counterbalances our naturally selfish instincts to spend on ourselves first and also makes us happier.

2. Emergency Fund

An emergency fund, separate from your checking account (preferably at a different bank), is one of the most important financial decisions you’ll make. You should have a minimum $1000 cash in savings at all times. This is to help keep you out of credit card debt in case of emergencies. This is not an account that you’re looking to make a ton of interest on, it’s an account that you put money into and forget about until your car breaks down, you get a bill from an ER trip, or you have to travel unexpectedly for a funeral. Online savings accounts work perfectly for this.

3. Pay Down High-Interest Debt

If you have revolving credit card debt (you carry a balance from month-to-month), check out the annual interest rate on your card(s), It’s likely 15%+. Giving credit card companies and banks interest payments on items you’ve likely already consumed is like lighting money on fire. Credit card companies are NOT charities! Let’s not donate our hard earned money to them. You cannot find a bank that will pay you guaranteed 15%-25% annual interest, but VISA, AMEX, and Discover are making that off of you. Let’s not.


4. Resignation Fund (Emergency Fund with Flair)

If you have at least $1000 in your emergency fund and you have no credit card debt, consider increasing your Emergency fund to 3-6 months of essential expenses. That is different from 3-6 months of income. Essential expenses are your housing, food, healthcare and transportation costs. If you lost your job tomorrow, how much would you absolutely need monthly to get by without credit cards? (FYI – cable and  smartphones are not absolute needs) When you have a fully funded Resignation Fund, it changes the way you look at your job and how you value your time. Remember, 76% of Americans live paycheck-to-paycheck, meaning they don’t have enough cash savings to cover basic expenses if they missed 1 or 2 paychecks. They would have to borrow money. That’s living on the edge! Have you ever noticed wealthy people use different language when they quit? They resign. It’s a polite way to tell your employer, “I’m just not that into you anymore.” Don’t let your employer control your life! A Resignation Fund gives you the flexibility to walk away if you need to and the security to maintain your expenses if you are unexpectedly laid off.


5. Roth IRA

If you have a fully funded Emergency/Resignation fund and no credit card debt, you should consider long-term investing. We discussed before What a Roth IRA Is and Why You Should Care, but it’s a great option for investing outside of your 401k/403b if you have one. There is an annual contribution limit of $5500, and you have until tax day the following year to contribute, so at the time of this writing, you can still contribute for the 2017 tax year until tax day 2018.


6. Personal Saving and Debt Payoff Goals

Now that we’ve got your emergency and retirement savings out of the way, you can stash funds for a vacation, a home, a car, wedding, kids college fund, etc. You can also put extra money down to pay off debts like student loans or auto loans.


7. Splurge

Often with money, particularly when we receive a lump sum, we spend first and if there’s any left over, we may save and donate. This is a broke mindset and broke behavior! Remember 76% of Americans are living paycheck-to-paycheck, so if you want to be different you have to do different! I want you to do the exact opposite. Give first, save second and spend third. Once you’ve taken care of your important giving and saving priorities, you can spend guilt free!

5 Topics All Couples Should Agree On Financially

Let’s be honest, money is emotional and complex! It impacts nearly every aspect of our lives and most certainly impacts our relationships with our significant other. Since money is still such a taboo topic in our culture, miscommunications can create small cracks in the bonds of our relationships. Like a small crack in a windshield, it can expand over time and damage the entire windshield. However, it’s also true that small cracks can be repaired simply if they are identified and corrected early.
When thinking about finances as a couple, we must understand that we’re partnering two people with different backgrounds, experiences, goals, and values when it comes to money. A couple partnering their finances is essentially entering into a business partnership, with the exception that businesses typically have a formal written contract which stipulates the rules each partner must abide by, most couples don’t have a written contract. In absence of a written contract, we need to come together to have a common understanding of some fundamental questions.
Before we get into those fundamental questions, let’s be cautious about how we set up these conversations. Personal finance is just that, personal. When we’re having conversations about money, they can be extremely intimate and bring up emotions of shame, defensiveness, guilt, and even anger. Do NOT corner your partner in an interrogation room Law & Order-style with a bright light asking intimate financial questions. You want to create an environment that is safe, positive, private, honest, and free of judgment. This is also not just one conversation but should be several and ongoing. Make it a finance date! We’ve created a checklist of items to discuss to make sure you can cover all your bases.
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So let’s get to the questions! The following are 5 topics couples should agree upon financially.

1. What are our financial values and priorities when it comes to money?

As we mentioned before, we have different priorities and values when it comes to money. One partner may view money through the lens of power and control. For example, they may be a meticulous planner and want to maximize every penny. The other partner may believe money enhances their experiences and relationships. They may see money as a means to see more and do more. In this situation, one partner views their partner’s financial behavior as controlling/limiting and the other partner views their behavior as undisciplined and wasteful. If we only view our partner’s behaviors through our own frame, it can create a purely biased and unbalanced view that can create many small cracks in the bond. It’s important to discuss these views openly and come to terms with what your joint values and priorities are.

2. What are our individual and joint financial goals?

After discussing your values and priorities, then you can discuss financial goals. Goal setting is important individually, but it’s even more important as a team to ensure you’re both rowing in the same direction. Your goals have to be specific, written and shared.  An unwritten goal is called a wish. Can you think of any successful teams, businesses or organizations that don’t have specific written goals? Come up with your financial goals individually and then bring them together to set joint financial short, medium and long-term goals.

3. What is our plan for managing debt?

Misuse of credit is one of the largest contributors preventing people from building wealth. Debt is essentially present borrowing against future income. Unfortunately, too often people find themselves in a situation where their future catches up with them, and their new present is unbearable. Living paycheck to paycheck can create ever-present stress because financially they are just treading above water, knowing that one uncontrollable change could cause them to start drowning. Working hard just to pay off debt from the past and not being able to take advantage of opportunities in the present or save for the future can put a serious strain on both the individual and the relationship. Discussing current debts, and being on the same page in terms debt that you may incur in the future (mortgage, business loan, student loan) is vital.

4. What is our plan for handling emergencies/loss?

You know the saying, $%*? happens! The question is not whether it will happen, but rather are you prepared for it when it does. Having an emergency fund is vital for anyone to have, but that’s just a first step. Once you’re in a committed relationship and are partnering your finances, you need to discuss how to handle a situation in which one or both of you are disabled or passed on. If you think those are difficult conversations now, think about how much more difficult it would be in the absence of these conversations afterward. Don’t add financial stress to grief.
Life insuranceDisability Insurance, Living Will, Healthcare Power of Attorney, and organizing confidential paperwork and passwords. These are examples of items you can take care of relatively inexpensively which go to piece of mind.

5. What is our plan to build wealth?

So you’ve sorted your values, set goals, managed debt and planned for contingencies, now let’s talk about wealth building. Most people who work simply exchange their time and skills for money. At some point, they may no longer want to continue that exchange. Some people call it retirement or financial independence, the goal for most people is to amass enough financial resources to have independent control over the use their time and talent. The best way to do that effectively is to plan, save and invest as early as possible. There are a zillion routes to get there; combinations of employment, entrepreneurship, equity investing, real estate investing, inheritance just to name a few, but you and your partner want to be on the same page in terms of what is the end game, how much do we need, and approximately how long will it take?
We created a checklist of items for your finance date and we are also developing an online course with live coaching to help couples dig deeper into some of these topics to get on the same page financially.
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Discussing finances as a couple can be a very tough road to travel. There can be potholes, detours, roadblocks, speed bumps, accidents, and traffic. However, if you and your partner can agree upon where you’re going, how to manage challenges and which routes to take, it’s much more likely that both you will get there, together.
 

5 Steps to Financially Prepare to Be Laid Off

It’s very possible, and some would argue very likely, that you could experience being laid off from your job at least once in your career. There really is no such thing as job security these days. Experiencing a layoff unexpectedly can trigger a range of emotions. The company you have devoted thousands of hours of your life to, away from your family and friends, abruptly informs that you and your services are no longer needed. Betrayal, frustration, anger, sadness, anxiety, and embarrassment are just a few of those emotions. It doesn’t have to be that way though! If you are financially and emotionally prepared for a layoff, it can be an empowering experience.

1.    Your Employer is Just Not That Into You

Unless you’re in a union, have a written employment contract or live in Montana, employees of private companies are likely subject to at-will employment. Three-quarters of American workers are subject to at-will employment. Let’s understand what that means:
At-will means that an employer can terminate an employee at any time for any reason, except an illegal one, or for no reason without incurring legal liability.
Again, there is no such thing as job security! With a few protected exceptions, (e.g. based on race, sex, gender, national origin, age, disability), a company can terminate your employment at any time for any reason, or for no reason at all. Many of us don’t realize this simple fact and base our livelihoods around our employer. Where we live, what time we wake up, what time we sleep, when and where we vacation. Most of our lives are centered around our employer and that connection can be ripped away for any reason or no reason at all.
This is not to bash corporations, but rather simply to put into context that many of us are centering our lives around a relationship that has little to no contractual stability. In other words, you are not married to your employer, you’re just dating.
Corporations, especially publicly traded companies, have one primary goal – Increase shareholder profit. Regardless of what it says on your employers’ ‘About Us’ page, everything your company does centers upon that one primary goal. Corporations are like animals in the wild. That animal may look cute and cuddly, but the second it even perceives a threat to its survival, it is deadly. If company leadership decides that it needs to remove 10% of its workforce to be more competitive, it is their fiduciary duty to do so. It’s not even about you. They are just not that into you.

2. You are the CEO of [YOU], Inc.

Once you understand that you are not wed to your employer, the next step is to understand that you yourself are a corporation. The employment contract has changed dramatically from the days of our parents and grandparents, pensions have all but vanished, unions have diminished. You are solely responsible for your financial well-being, that includes preparing for layoffs and managing your own retirement. Once you begin to see yourself as a business, ask yourself a simple question: Can you think of any successful businesses that only have one client/product? Probably not, because if that one client leaves or the product stops selling, they would be out of business. Well, if you are an employee and your employer is your sole source of income, that’s exactly what you are doing.

3. Build an Emergency Fund

Once you get your head around the fact that you are not wed to your employer and you are actually a business, a world of opportunities can open up to you. By no means are we advocating quitting your job, but once you see your employer as one client and one revenue stream, you can start to focus on other things.
You have to build an emergency fund. No excuses, it’s vital. Three to six months of your essential monthly expenses (in cash in a separate bank account) is a great goal and gives you the peace of mind that you can pay your bills if your employer breaks up with you suddenly.

4. Evaluate Your Skills In the Marketplace

If your employer is your primary client, can you use that same skill set for other clients? If you do social media marketing for your employer, can you do social media marketing for other companies in other industries? You may also have skills that are completely outside of what you do from 9-5 that you can think about monetizing. One way to evaluate this is to ask yourself three questions:

  1. What do people come to me for advice for personally and professionally?
  2. What problems do I want to solve?
  3. What value do I bring to the marketplace that people are willing to pay for?

Since you are a business, you must think about solving problems for others and providing value to the most amount of people. Once you start thinking this way, the gears will start to turn and you can develop side hustles and other sources of income outside of your employer.

5. Let Your Employer Help You

Finally, utilize your employers’ resources. You may just be dating your employer, but there are advantages to dating wealthy. Here are a few suggestions on how to make sure you’re getting the most from your relationship with your employer.

  1. Maximize Your Employment Benefits – don’t leave money on the table because you haven’t looked at the HR Portal in a while
  2. Take Employee Development seriously – You must continuously learn and grow to make yourself (and your business) more marketable. If your employer (primary client) is willing to pay for you to develop new skills, that can be valuable in your current role, future roles and for other clients.
  3. Build Your Clientele – Now that you know that you’re just dating, give yourself permission to see other people. Network within your company, your company’s business partners, and competitors. There are people within all three of those groups that can be future employers and/or future clients.
  4. Check Your Value in the Marketplace – Employers have a financial incentive to pay you less than market value, especially over time. Remember, their #1 goal is to increase shareholder value and your salary may be in direct conflict with that goal. You are solely responsible for ensuring you are getting paid market value, no one else. Every 3-5 years, you should be testing that value in the marketplace by applying for jobs. Not only is applying for jobs good for networking and building clientele, but it also helps keep you from being severely underpaid, costing you tens of thousands of dollars in the long run.

Thirty-year employees are increasingly rare each day. You most likely will not work for the same employer for your entire career. Understanding the true nature of your relationship with your employer and your responsibility to your own financial well-being is vital. If you understand your value in the economic marketplace and maximize that value not just for your current employer, but also for [YOU], Inc., getting laid off can be an opportunity, not a catastrophe.

4 Money Lessons from the 2016 U.S. Presidential Election

The 2016 Presidential Election was historic on multiple fronts. Two of the most unpopular candidates battled in one of the most contentious, divisive and unconventional campaigns in modern history. For some, the result was a deeply shocking and painful event, for others it was redemption for voices long ignored. In all, nearly 120 Million Americans voted and the popular vote was separated by less than 200,000 votes, which is about the population of Little Rock, Arkansas. Regardless of your politics or preference of candidate, there’s no question that the country is divided politically. Whether you’re extremely disappointed or excited by the result there are lessons to be learned from the election and how it can affect our wallets and thus our livelihoods. How can the lessons from this election make us better managers of our finances?

1. Conventional Wisdom Isn’t Always Wise

Nearly every political expert and reputable polling firm who had been polling voters on a weekly basis for 18 months were completely wrong about the actual results of the election. Polling models that were used for the electorate in 2008 and 2012, became obsolete in 2016. Conventional wisdom can often be generalized and not specific to our individual situation.

There are certain standards of conventional wisdom in our finances that are also outdated or need to be challenged based on our individual situations. For example, conventional wisdom often stresses going to the best college one can get into (regardless of cost), pursuing a degree in a field of interest (regardless of expected future salary). This is not to say that people shouldn’t go to college or pursue a major solely based on expected future salary. It is to say that mode of thinking was developed at a time when people could pay their full student tuition by working part-time. That’s a 1970’s/80’s model, which needs to be challenged and may not take into account the realities of increased tuition costs and the impact of student loan debt on your future livelihood.

Our motto is Reject the Status Quo. In order to manage your finances well, there are times when you’ll make decisions that are not popular. The status quo embraces consumerism culture in which many people equate spending with projecting wealth or building relationships. It may be tough to navigate being the odd one out if you don’t subscribe to that mode of thinking. You may find that unnecessary spending actually doesn’t project wealth or make you happier, but rather delays and extends the time it takes for you to reach your personal and financial goals.

2. Prepare for the Unexpected

To say that Donald Trump becoming the 45th President of the United States was unexpected is a dramatic understatement, but life can often be very unpredictable. It was the Greek Philosopher Heraclitus who said, “Change is the only constant in life.” Sometimes change is good and sometimes it isn’t, but regardless, we have to plan for the unexpected. [bctt tweet=”Being unorganized with your finances is like playing Russian Roulette. ” username=”moneyspeakeasy”]

One of the lessons learned from the 2008 Great Recession was the people that were impacted the most were folks who carried high levels of debt and lived above their means. That’s not a judgment on them personally, but we need to ask ourselves if we have recession-proofed our finances. The following questions can help you assess your readiness:

Do you have 3-6 months living expenses in an emergency fund?

Do you have more than one source of income?

Do you have a written budget and track your spending?

Do you have life and disability insurance?

Do you have revolving credit card debt?

3. Depending on Government is a Losing Strategy

One of the truly negative impacts of having a divided country and a divided government is that even topics of general consensus may not get accomplished. There are serious financial issues, such as the cost of higher education, the cost of healthcare, student loan debt, social security, increasing wages and tax reform that can have dramatic effects on our finances, both positive and negative.

We believe the best plan of action is to treat your finances as if you will not get any assistance from the government and if you do, it will be a bonus. If you are under the age of 50, you should have no expectation that you’ll receive any social security benefits in retirement. If you have student loans, you should have no expectation that the government will help reduce the cost or forgive any portion of it, unless you are in a loan forgiveness program, have it in writing and understand the nuances.

The point is that our government is not a nimble organization, even when there is a consensus. Big changes can often take years, if not decades. Therefore government assistance should not be an important part of any financial planning.

4. Your Money, Your Values

Finally, if you want to know what someone truly values, you may listen to their words, you may even look into their actions, but one of the most revealing aspects of a person’s values is their spending. As they say, follow the money! We may vote for a Presidential candidate every four years, but we vote daily with our financial resources. [bctt tweet=”The more we control of our finances, the more resources we can direct toward causes we value.” username=”moneyspeakeasy”] For example, if a company decided to move a factory overseas or company funded organizations that were contrary to your values, an organized voter base could decide they were no longer willing to purchase products from that company and impact that decision. Just as many Americans believe that every vote counts, your dollars and purchase decisions count. Make sure your bank statement reflects what you value most.

5 Tips to Financially Prepare for the Holidays

Fall is upon us, football season has begun, and school is back in session. NOW is the ideal time to prepare financially for the holidays. Do yourself a favor and commit to not extending holiday debt into the new year! #noholidaydebt We’ll give you a start with 5 tips to financially prepare for the holidays.

1. Make Your Budget and Gift List Now

The holidays are a great time of year, but from a financial standpoint, the holidays can be really expensive. We are not just talking about gifts, but also food, travel, clothing, decorations, holiday cards, activities, and donations. If you’re not careful, you may end up purchasing random items for yourself while out shopping for others. November and December are likely two of the most expensive months of the year spending-wise. Planning in advance gives you some structure and discipline, just like having a shopping list for grocery shopping. It also allows you the benefit of time to take advantage of discounts. Flights, for example, typically get much more expensive a month before the travel date. Try to purchase flights months in advance to get the best pricing. Make a gift list with all people you plan on purchasing gifts for (don’t forget those unfortunate folks with late December/early January birthdays). Set a budget amount for each on of them and brainstorm possible gifts. Then list all of the additional expenses (travel, food, decorations, cards, donations) that you will incur during the holidays and set a budget for them.

 

2. Set aside money now and automate it

Many banks, especially online banks, allow customers to open additional savings accounts with no charge or additional paperwork. You can name your accounts and separate your emergency fund from your holiday savings.

Reminder: The holidays do not qualify as an emergency. Do not co-mingle or withdraw from your emergency fund for holiday expenses you could have planned for in September and October.

Set up a separate holiday savings account. Based on your regular monthly budget and your holiday budget from above, create scheduled deposits go into this account (weekly, bi-weekly, or monthly). The most effective way to save is setting up automatic deposits on payday.

3. Communicate with your family and friends

It’s important that you communicate early with your family and friends about expectations for the holidays. If you are struggling financially and are trying to get back on track. There’s no shame in that. If you were sick or injured, would your family have the same daily expectations of you? No! They would do whatever they could to support you getting well. The holidays should be about spending quality time and creating lasting memories with the ones you love, not spending money you don’t have buying trinkets your family and friends don’t need! If your family member told you, “Hey, one of my goals for next year is to get my finances under control, so I’m not going to be spending much on Christmas gifts, can we do <insert activity> together instead?” Would that make you feel underappreciated? Of course not. Communicate expectations early, you may be surprised that they are likely in the same boat and just didn’t want to say it.

4. Black Friday is a Scam. Period. Full Stop.

Let’s be clear. Spending all day Thursday giving thanks for who and what we already have to then sit outside of a retail store at the crack of dawn the VERY NEXT DAY to buy stuff we don’t need defies all common sense. The truth is many retailers steadily raise their prices from October through December only to reduce them temporarily to make consumers feel like they are getting a deal. Even the items that do have deep discounts often have very limited quantity. So if you really want discounts, start looking in September and October before the prices go up so you don’t need to trample people to save $50 of an espresso machine.

5. Be Creative

Last, but certainly not least, don’t forget the reason for the season. If you think about some of the best gifts you’ve been given, they likely weren’t very expensive and if you’re really honest with yourself, the time you spent with your family and friends was much more valuable and memorable than the gifts. With that said, creativity is often lost during the holidays because of the time crunch at the end of the year. We often end up with a bevy of gift cards. Starting early and getting creative can take many forms. Secret Santas, homemade gifts, family movie night, volunteering activities are just a few examples.

[bctt tweet=”Let’s resolve not to bring holiday debt into the new year! #noholidaydebt” username=”moneyspeakeasy”]

If we plan in advance, automate savings, communicate with loved ones, avoid scams and get creative we can leave our holiday spending behind us, enjoy and give ourselves the gift of no additional debt next year.

4 Reasons You Need to Start Investing

Let’s face it, for many investing is a difficult topic. The financial services industry has done an excellent job creating lingo and products that seem overly complex. Part of it is to justify their services; ‘If this investing stuff is too complex, give me your money and I’ll handle it for you!’ Technology is changing that dynamic and people are starting to realize that investing, particularly retirement investing, doesn’t require a Ph.D. in Math or Finance. The first step is to understand why investing is important and then to develop an openness to learning over time. This is not a forum for specific investing advice, but rather to discuss why investing is essential to reach our long-term financial goals.
Before we get into the reasons to invest, let’s make sure we are all on the same page what we mean by investing.

  1. Prior to investing funds in the stock market, make sure you have at least a base level emergency fund in place (in a separate savings account). Many people make the mistake of saving for retirement without building the foundation to prepare for the present. If you have enough money to build both at the same time, by all means, do so, but top priority should be to build an emergency savings foundation to avoid using credit cards or tapping into long-term investments.
  2. For our purposes, when we discuss investing, we are talking about long-term investing. We would not invest funds in the market needed for short-term or medium-term goals (i.e. less than five years). We’re discussing investing for goals such as building a nest egg for financial freedom or retirement.
  3. We are also not referring to the purchase of individual stocks or day trading. While that may be of interest to some, it is not advisable for the vast majority of the public. Investing has different levels and complexities. The majority of adults can develop the skills to drive an automobile safely on the roads, but we can all agree that most people shouldn’t try to become NASCAR drivers.

Now that we’re all on the same page, let’s talk about why you need to be investing!

1. You Can’t Build Wealth by Spending

Money is a resource, and like fire, it can both build and destroy. In order to be financially successful, we have to learn how to use our financial resources to build. There are really only three things you can do with money and how much of each you do can make all the difference in the world.
Spend – We do it every single day. We use our money to acquire products or services that we believe are of equal or greater value. The problem with spending is that most things decrease in value over time, so after we part with our hard-earned money, we’re left with a product or service that is immediately less valuable. If you use too many of your financial resources to purchase items that decrease in value, you cannot build wealth. This is why keeping up with the Joneses is so poisonous; it’s a race to the bottom.
Give – Interestingly enough, studies have shown that giving actually brings more and longer-lasting happiness than spending. You likely still remember the feeling of joy when you gave someone a great gift they really appreciated or truly helping someone in need. Giving also forces discipline with our finances, when you give money away, you become keener on how you manage the remaining funds. Giving is a very important aspect of personal finance and is a driving force for many to build wealth.
Save – There are different types of saving, but the idea is that you are using your financial resources with an expectation or goal of increasing its value in the future. That can take the form of a savings account, investing in the stock market, buying real estate, or even lending. This is the primary way to build assets and thus build wealth.

2. We’re On Our Own

If you are under the age of 50, it’s likely you do not have a pension and the future of Social Security is very uncertain, it may not even exist by the time we would be eligible for it. We also know that advances in health and technology that we are likely to live longer lives. We will need funds to provide for ourselves for a longer period of time without the financial assistance from business or government. If that’s not scary enough, let’s say you want to retire at 65. You work from age 25-65 (40 years), during that time you need to save enough money to live without new income for potentially 25 years (ages 65-90). People are having enough trouble building 6 months of expenses for an emergency fund. How about building for 25 years (300 months) of expenses or more? Putting a few dollars in a savings account here and there isn’t going to get the job done. You need a plan and you need to start as early as possible.

3. Inflation Can Drown Your Savings

When planning for the long-term future, people often forget to account for inflation. This can be a big mistake and can have serious consequences. Inflation is the increase of prices or the decrease in purchasing power over time. For example, 20 years ago one could go to a gas station and purchase gas for less than $1/gallon. As of this writing, it’s about $2.30/gallon, so a $20 bill that was more than sufficient in 1996 would not fill the gas tank today. Inflation (typically 2-3% per year) is like an ocean tide that is continuously raising the financial sea level. If the sea level is ankle-deep today and you stand still (don’t invest or grow the value of your assets), the tide of inflation will continue to rise and eventually you will be completely submerged. Like quicksand, standing still financially is actually sinking because inflation decreases the value of yesterday’s dollar. The only way to counteract inflation is to make sure your long-term savings are earning more than inflation.

4. Compound Interest Can Save You

So far we have given you some pretty dire news, spending won’t help, you’re all alone and the winter of inflation is coming for your assets! The good news is that you have a force of nature available that can fight the good fight and help you win and reach your financial goals, her name is compound interest. However, there are two sides of compound interest coin and you have to be on the right side to win.
If you have ever paid the minimum payment on a credit card, paid student loans, car loans or a mortgage, you have experienced being on the wrong side of compound interest. When you borrow, the investment the lender made earns interest that compounds and you pay them more in the future. This is why debt can kill wealth; your financial past is stealing from your financial future.
The right side of compound interest is much more appealing. When you invest, the earnings on your investments compound such that your future earnings also earn interest for you in the future.
Let’s use a simplified example.  You save $500/month every month for 30 years. After 30 years you would have saved $180,000 cash. Now let’s say you invested the same $500/month every month for 30 years and it received 9% interest annually, it would total over $850,000.
The difference between the $180,000 and $850,000 is the power of compound interest. Compound interest is the sunlight that provides the energy to your investment seed to grow and harvest. The two major ingredients for compound interest to be effective are regular payments and time.
While saving is important, especially building the foundation of an emergency fund or short-term goals, investing is a necessity to build real wealth. Imagine a 15-year-old family member after watching a NASCAR race said to you they don’t want to learn how to drive. They explain that “It’s too technical, too dangerous and I’m not a car person!” You would probably explain to them how not learning to drive can negatively impact their quality of life. You would also likely explain to them there’s a huge difference between daily recreational driving and professional racing. The same applies to investing, excuses like, ‘I’m not good at math’, ‘it’s too complicated’, or ‘it’s too risky’ no longer hold. There is a huge difference between day-trading and retirement investing, technology has made investing accessible to many more people and because of headwinds like inflation and government uncertainty, in our opinion, it is riskier not to invest.

EMERGENCY: Stop What You’re Doing If You Don’t Have an Emergency Fund!

Imagine this: You spend an entire year trying to pay off your credit card debt, just to have your car break down. You don’t have the cash to cover it, so the $2000 repair goes right back on the credit card. You right back where you started, or possibly even worse.
 
One of the biggest personal finance pitfalls is a lack of solid emergency fund. Emergency funds are critical because they can be the difference between an inconvenient bad day and a financial catastrophe that can take years to escape.
Let’s start some facts to get us on the same page.

  • A recent study showed that over 60% of Americans do not have enough cash saved to pay for unexpected emergencies such as a $1000 ER visit or a $500 car repair.1

That means that the majority of us are living so close to the edge of the cliff that even the slightest nudge can tip us over.

  • The average American household has over $15K in credit card debt, over $26K in auto loans, and over $47K in student loans. The average household is paying over $6K per year in interest on their household debt.2

Let me rephrase that last sentence, the average household is paying financial institutions $6,658 just in interest per year. If we don’t financially prepare for emergencies, we end up working harder to pay more in interest to financial institutions. No thanks!

Paying off debt without emergency savings is like running a long distance race in flip flops, you may be able to get to the finish line, but your chances of falling and hurting yourself are pretty high.

Most experts recommend 3-6 months of living expenses in cash savings. The only problem with that recommendation is that can be more than most people have ever saved, so it can be overwhelming. If that’s true for you, start small. Start with a goal of at least $1000 so that if you have an emergency while paying off debt, you don’t run to credit cards and add to the debt pile. However, if you have a house, car and children, $1000 may not go very far in an emergency. Set a goal that’s appropriate for your situation and build upon that.
We’ll discuss specific saving strategies in detail in later posts, but for emergency funds, some people like to use larger sums they receive to put it away quickly. Birthday money, income tax refunds, bonuses are just a few examples of how people can stash away savings quickly.
One of the most important aspects of building savings is your perspective. Many people view saving money as a chore and painful. There’s a common belief that saving money gives us less to spend when we should view saving as giving you more financial control and independence. Change your perspective and view saving as splurging on yourself and investing in your financial goals. Focus on how much better you’ll feel when you reach your savings goal and have confidence that you can tackle debt even harder.