Sometimes you hear a story that grabs you — someone does something heroic and it inspires you to try something heroic too. That’s what...
In December 2016, Amanda Jacobs posted a video to her personal Facebook page of her daughter counting out $100 bills onto a desk. Jacobs, vice president and asset manager at Jacobs Property Management, was purchasing an $8,600 car in cash, so her daughter was helping her.
Jacobs, a certified Dave Ramsey Financial Peace University instructor for the last five years, wanted to live out an example of the advice she gives to Columbia families struggling with finances: live a debt-free life to the best of your ability.
“Who buys a car with cash?” Jacobs asks. “I did. Because I believe that I don’t have to have a car payment. So I own this car that I’m driving free and clear.” Every month, instead of making a payment on a loan, she makes a car payment to herself — so when it’s time to purchase the next car, it’ll be with cash too.
Of course, not everyone needs to purchase a car with cash. But Jacobs and other financial experts always tell people to have a plan and start the plan today. Making a monthly loan payment for her car was not part of Jacobs’ plan.
“It really doesn’t matter where anybody is on their life’s journey,” she says. “There’s never a wrong time to get on the path to financial peace, and it’s never too late to do it.”
It’s honesty time. You know what a budget is, but are you using one?
John Howe, chair of the department of finance at MU, says a budget is critical for everyone, whether you’re just starting out on your own, buying a house, or planning for retirement. It doesn’t have to be anything fancy, and you don’t necessarily need a financial planner.
Often, when it comes to the idea of a budget, people are hesitant. But the actual steps it takes to create and stick to a budget are easier than you might think. “Most people have the self-discipline to make small changes that can make a huge difference,” Jacobs says.
And no, a budget isn’t just a list of monthly expenses. It’s a system to identify the things that matter in your life — the things that are really worth your money. Try assigning your income to your recurring and one-time expenses by category: rent, insurance, food, entertainment, etc. Looking at these numbers for the first time can be tough for some people.
“They’re scared when they sit down and actually write it out with pencil and paper,” Jacobs says. “They’re scared of what it’s going to look like.”
Once you’ve taken an honest look at your expenditures, identify the danger zones and make small changes that will help you spend more judiciously. For example, if you’ve got a Starbucks habit you just can’t quit, having a budget doesn’t mean eliminating your caffeine buzz. If you’re spending $150 on Starbucks a month, get $100 in cash, put it in an envelope in your wallet, and label it “StarBUCKS.” (Get it? You can dial back the cheesiness if you want.)
“When I run out of it, I’m out of Starbucks drinks for the month,” Jacobs explains. You tell your budget what you want to do with your money, not the other way around.
Howe tells people to have three to six months’ worth of expenses in an emergency fund, no matter what stage of life or financial health you’re at. And the emergency fund shouldn’t be a credit card, Jacobs advises: “The last thing you need to do when you are in an emergency is go into debt.”
Three to six months of emergency savings, or “Murphy insurance,” as Jacobs calls it, referring to Murphy’s Law, should cover loss of income or a layoff until things return to normal. It’s a goal that could take years for some people, but . . .
“It’s going to rain,” Jacobs says. “You’re going to have the alternator go out in the car, you’re going to have unexpected things come up.”
Budgets and emergency funds should be utilized in every stage of life. But there are considerations to make for the big moments in life too. Like these.
You or your child gets their first full-time job.
Before this point, Howe advises avoiding any possible college debt, whether it’s through scholarships, two years of community college, or significant lifestyle changes. The average Missouri college graduate amasses $27,480 in student debt, according to the Institute for College Access and Success.
Once you or your adult child has achieved that full-time job, work on managing what for some people is their first budget. Particularly focus on paying down the debt in a timely manner.
How fast you pay down that debt depends on your interest rates and the psychological weight debt plays on you, Howe says. Although you can find the occasional online article about people getting out of student debt in a year, those circumstances are rare; still, the sooner the better.
Put aside money for retirement in some form, and jump on any chance to participate in your company’s 401(k) program, if it’s available.
It’s also time to think about what would happen to your assets should something happen to you, says Nathan Jones, an estate planner and owner of Nathan Jones Law. A full-blown estate plan won’t be needed yet, but a simple plan with named beneficiaries to any of your checking, savings, or retirement accounts will help your loved ones know what your assets are.
Make sure those named beneficiaries know who they are, Jones suggests — financial institutions have no requirement to reach out to those individuals. He also suggests creating a short document that lists what your accounts are and where they’re housed, especially if you are set up for online statements instead of mailed statements. “Otherwise what people are left with is a wild goose chase,” Jones says.
You’re getting married.
We’ve all heard the theory that differences over money is one of the leading causes of divorce. Howe advises people to iron out agreements about finances well before the wedding. What’s the schedule for paying down student loans? What’s the rate of savings you want? How much do you want to spend on rent or a mortgage per month? It’s important to have these conversations early and often.
Jones says marriage is often a trigger for couples to create a more comprehensive estate plan. Make sure to update your beneficiary information to your spouse, as that will not automatically change.
It’s also time to appoint power of attorney — the legal right to make decisions on your behalf — to a loved one (your new spouse, for example) and create a simple will, which lays out who will receive or manage your estate, who will be a contingent beneficiary, and who will make health care decisions if you’re incapacitated.
You’re buying a house.
Put a minimum of 20 percent down, Howe says. It clears you from purchasing mortgage insurance and it cushions you against a decline in real estate prices. And go back to the basics. Make sure your budget accounts for not only the down payment, but also for mortgage payments, repairs, property taxes, and emergencies.
Jones says that, if it’s possible, spouses should take title to the house jointly. It provides for additional creditor protection, and should something happen to one spouse, the other automatically owns the home. If one spouse already owns the home when you get married, make sure the other has rights of survivorship in the title.
You’re ready to have children.
It’s the biggest trigger that brings young couples to estate planning, Jones says. Update your will to appoint a guardian. Though it’s not legally required, Jones suggests letting the individual or couple know you’ve chosen them to take custody. It sounds obvious, but make sure they’re willing to do it and in a position to do it.
“In my experience, a lot of couples have strong opinions about who they would want to raise their kids and sometimes even stronger opinions about who they wouldn’t want to raise their kids,” Jones says.
Some couples also choose to appoint a second person or a corporate trustee to manage any inherited estate for the child until adulthood.
You’re planning for retirement.
This is a great time to update your estate plan, which may have outdated information. Perhaps you have grandchildren you want to provide for as well.
Howe says a financial planner isn’t needed until you’re investing in the stock market or real estate. Once you’re investing, hold a diversified, concentrated portfolio that’s inexpensive to maintain.
Howe suggests finding a financial planner whose compensation is fee-only, meaning they’re paid by the hour, not by a commission they get by recommending you invest in certain mutual funds.
“A minimum of 10 percent of your gross pay, once you get over the student debt hurdle, should be dedicated to retirement,” Howe says. “One can make a case for 15 percent.”
And plan what your insurance will be post-retirement. Long-term care insurance will pay for things like assisted living or skilled nursing.
You’re caring for aging parents or facing a life-threatening diagnosis.
Discussing you or your loved one’s health wishes isn’t necessarily dinner conversation, but it’s an important topic. If you’re unable to make medical decisions, who will make them for you?
It’s important to craft a health care directive stating your wishes and appointing medical power of attorney to someone. That document also takes the pressure off of a loved one. “They feel like they’re putting your wishes into effect, which has an emotional difference,” Jones says.
There are tons of free apps that can sync to bank accounts and track expenses. Here are a few options:
Wally: Wally Lite is a simple and quick way to track your expenses and income. You can also set a savings target in the app and scan receipts for easy maintenance. This is a good option for headache-free spending tracking.
PocketGuard: PocketGuard keeps all of your financial accounts in one place, which can give you a more complete picture of your finances and help you make informed decisions.
Wela: Wela’s personal finance app provides instant feedback on how to save and budget more effectively by analyzing your daily spending habits. If you’re looking for a little more guidance in your budgeting, Wela can help with that.
Goodbudget: Goodbudget is a simple personal finance app for budget planning. The cool part about it is that you can sync across multiple phones, so your whole family can use it.
Mvelopes: Remember the “StarBUCKS” envelope of cash we talked about earlier? This is like that, but on your phone. Set off specific amounts of money for specific spending.
EveryDollar: EveryDollar is the app for following along with the Dave Ramsey program that Amanda Jacobs (and lots of others) vouch for. Keep track of spending and educate yourself on how to spend and save your money more wisely.