SubscribeWed 19 Sep 2007
Now that Mary Ann has plan on tacking her credit card debt, she can start thinking about what she should be doing next. Personal finances is not about saving money, nor should it be about depriving one from the pleasures in life. If all someone does is save money i.e. Silas Marner, that person hasn’t done a very good job with regard to his or her finances.
Her priorities in terms of spending are as follows:
- Travel
- Going out to eat
- Going out/Entertainment (drinks, concerts, etc.)
- Groceries
- Shopping
That priority list looks a lot like mine. The question now is given that those are her priorities, does she live by her priorities? I’m going to ask her to track her expenses for one month in a notebook (old school), or just to purchase everything on her debit card, which will list her expenses. At the end of the month she should categorize her expenses and see if the total spent each category matches us with her priorities.
Her assets are limited currently to her checking account at Bank of America. She primarily uses her debit card for spending. She doesn’t have an IRA or a 401(k) established. Given her situation her next priorities after or concurrent with paying debt should be:
- Establishing an Emergency Fund
- Establishing a Roth IRA
- Opening a 401(k)/403(b)
I’m not going to prioritize each of those, as some people want to maximize tax benefits, and others feel like they can’t live without the safety of a real emergency fund. Though, I would say if Mary Ann’s company matches, she should at least contribute to get the company match - no reason to throw money away. In any case, she should retain her account with Bank of America for the ATMs. In the Boston area, it’s not even funny how Bank of America ATMs dominate the competition. If she’s currently being charged any fees, she should open an online a My Access Checking account which has no fees, and no minimum balance. If she’s already avoiding fees by direct deposit, then she may not have to open a new account. There’s no reason ever to pay bank fees. Once Mary Ann has locked down her bank account, she can go ahead and enroll in the Keep the Change program if she hasn’t done so already. Bank of America will match the “Keep the Change” contributions in the first 9 months. Of course, they force the money into a lousy savings account that only pays .2% and has a minimum balance of $300. She can avoid the minimum balance and the monthly fee by transferring at least $25 a month from her checking account.
The next step is then opening a REAL savings account. I suggest ING Direct or HSBC Direct. HSBC has the higher rate at 5.05% vs ING’s 4.5%, but the ING account is easier to set up. Though given the Federal Reserve lowered the Fed Fund rate .5%, rates on savings account are likely to drop by corresponding amount in the near future. There are of course banks that offer even better rates, but are generally promotional rates. ING and HSBC are good safe bets. If anybody wants a referral code for ING, please email me at dong at this domain name, and you can receive an extra $25 if opening an account larger than $250. Once that savings account has been opened I would then establish a recurring schedule to draw funds from the Bank of America savings account (ideally, on her payday, so that she won’t even miss the money taken out). In some ways, it doesn’t matter how much it is ($50, $100, $200, or whatever she can afford), but rather starting the process of saving money. Once she starts accumulating savings, she can think about accelerating her debt payments, opening a Roth IRA or a 401(k). She can even start saving for a trip. The point of saving money is not to live an acetic lifestyle, but rather to have a plan towards funding the things that are really important.
Funding retirement and establishing an emergency fund are really just starting points - they are the foundation, and roof on which the rest of the house of Mary Ann should be built upon. The emergency fund is the roof that she needs for rainy day. The foundation is the base, all her goals need to constructed upon. Without laying out the ground work of the foundation, the other parts of the house would become unstable. This is not to say Mary Ann should be savings everything extra for retirement - that would be no fun. She just needs to have a basic plan for either and ideally both a 401(k) and Roth IRA. She doesn’t have to max out each account account which are annually limited to $14,500, and $4000 respectively.
Mary Ann should have long term goals, medium term goals, and short term goals. Long term goals are generally tied to retirement. Short term and intermediate financial goals are more dependent on what Mary Ann wants. Mary Ann says she likes traveling, she should set herself a short term goal of picking up amount she wants to set aside for trip. An intermediate goal might be saving up enough money for a car, or down payment for a house. The important part is defining a purpose. The less important part is defining an amount. However having a number allows a measurement of progress, and measuring progress is important.
If you enjoyed this post, please subscribe to the RSS feed
September 19th, 2007 at 8:41 am
[…] Once Mary Ann has figured out how much of her credit card debt she can transfer to a 0% APR offer or prosper.com, we should look at the bigger picture of both how much more she should be directing towards paying down her debt, and how she can do it if she can. Compared to many other Americans, she’s in pretty good shape. Her fixed costs, rent and utilities, is on the low side, averaging about $650 a month or so. She has no other debt other than credit card, though beginning next year she will have about $27,000 in graduate school loans to repay. Tomorrow we will look at next steps. […]
September 19th, 2007 at 6:57 pm
I think I’d recommend contributing to the 401(k) before the Roth for this reason: most companies (99%, probably) offer the option to set a monthly contribution percentage to your 401k. That money goes out before you ever even see it, so it really becomes more of an automatic saving habit than a Roth. I know you could set up automatic transfers, etc. - but still the option would be there to easily cancel. I know it might be with the 401k, too, but the 401k - as you said - probably has at least a tiny match.
That’s really an excellent rundown of the basic steps anyone would need to turn their financial situation around. Emergency fund, retirement savings. After the debt’s paid off, that’s pretty much it - we tinker around with how the emergency fund and the retirement savings are structured, but that’s really what’s being built.
Finally, I would probably recommend ING over HSBC - and I have an HSBC account. The rates are higher but the interface is horrific, and even checking your balance is a terrible chore. I’m always surprised, but then again my Citibank interface was awful for years, too, and that’s not a small concern, either. Some of these big institutions just can’t get it together.
September 20th, 2007 at 9:02 am
I agree with Brip Blap about starting a 401(k) contribution first. I finally started saving for retirement when I took my current job because the company match was too good to pass up. I contributed 5% of my pay…also, since I wasn’t given a chance to touch the money, I never missed it. I did set up a Roth a few months later, but I will admit that I have skipped a few months of contributions (even though I have a automatic withdrawl set-up).
September 20th, 2007 at 12:04 pm
As someone who is in a very similar situation as her, I agree with Saving Diva and Brip Blap. It’s hard to say no to free money so she should start contributing to her 401(k) up to the match level.
On a somewhat unrelated note, I think that it’s easy to get overwhelmed when you’re trying to achieve too many goals at once (reducing debt, getting an EF, starting a 401(k), etc). I think it may be best for her to wait on the internet savings account. She’s already trying to get to the minimum $300 at BoA while trying to meet all her other goals. Unless she has a really high salary or some easily accessible cash, it’s going to be hard to do everything at once and it can start to feel insurmountable.
September 20th, 2007 at 6:11 pm
A lot of consensus over the 401k. Certainly a sound choice. I personally actually favor the Roth over the 401k (assuming no match from the company) when you’re young. You’re usually not in high tax bracket, so the current the tax deduction from the 401k is less meaningful. If you’re paid on a regular schedule I would automatically schedule the Roth contributions to coincide with getting paid then it’s almost like a straight paycheck deduction
I really do think it’s a matter of personal preference. Either way by contributing to a 401k or the Roth, you’re doing pretty well.
September 22nd, 2007 at 9:12 am
[…] week one of the next steps I had for Mary Ann in her MoneyMakover was to establish an Emergency fund. Most experts including personal finance bloggers think […]