Don’t worry, I don’t need to borrow any money. I’m just curious to see how many people have started to use an envelope system to manage their budget categories. An objection that is often raised when discussing the envelope system is that people don’t want to carry around a ton of cash, I assume out of a fear of robbery. I guess I could understand this if I were asking you to carry around thousands of dollars in cash, though to a would-be robber, a purse with $42 in it and a purse with $4,000 in it look largely the same.
Right now, I have about $42 in my wallet, which is kind of low, but this is the last week of the month. Ordinarily, I carry around a little more than this, depending upon the time of the month and where I’m headed: when I go to the grocery store, I pay in cash, so I would be carrying around a little bit more. The main reason I don’t understand an aversion to cash is that you don’t have to bring it everywhere you go–I don’t carry around ALL of the cash in the budget, just what I might need that day. Most of the money stays at home.
But the biggest reason I like to use cash is I don’t have to think about it. It’s got the budgeting built in–when it’s gone, there’s no more left in the budget. With debit cards, you always have to go, “Well, how much have I spent on groceries so far? How much should I limit this trip to? etc.” Cash is so easy.
So how about you? How much cash do you carry around?
While you are on the path to financial sanity, you will need to do lots of saving and hopefully some investing as well. There is a difference between the two, and though it may seem overly simplistic, it’s worth the time to differentiate the two here. Savings should be happening all the time–right now! It is the most important thing to start doing, right up there with the zero-based budget and the debt snowball. Savings is what keeps you sane, and keeps your money sane. It helps you sleep at night, it makes you feel less tense, it makes you feel like you are accomplishing something as you watch it grow.
A good savings plan is not exciting. It is kept in regular, low-yielding savings accounts, ideally a money market account. You probably won’t earn more than the rate of inflation on your savings account. In fact, these days, you might not even earn that. That’s OK. What you have the savings there for is piece of mind. It is not going to make you rich. It is going to make you feel safe and comfortable enough so that you have the freedom to become financially independent. Your savings is not meant to stay in a money market account (or other low yield account) for long, it is only meant to be the money you plan to use in the next five years. You cannot afford to risk the money you need in the next five years, it needs to be there even if the stock market takes a dive (as has been the case lately), or if it soars.
Since savings is for the near future, you would use it for the following kinds of accounts:
Next year’s Christmas funds
Saving for a new car
Saving for a new computer
The easiest way to organize your various savings funds IMO is to get an account with ING Direct. At ING, you can open as many different sub accounts as you want, even for short-term things like “Christmas savings,” etc. If you don’t already have an account I highly recommend them–they even give you a $25 bonus just for signing up.
So, in short, savings should be happening now–today! And always. In my next post, I will explain the difference between this kind of short-term savings and long-term (over five years) investing. Stay tuned.
Well, it’s Monday again, so it’s time for a list, and I had a little trouble coming up with an idea this week. I felt like I needed to talk about insurance again, but an in-depth discussion of insurance doesn’t lend itself nicely to a list. So then I thought, hey, when I was getting out of debt and trying to get my financial life in order, I felt like I needed a checklist of things to get done/taken care of so that I could officially move into the grown up category. You know, like the stuff responsible people just automatically already know, but somehow I missed? So yeah, I thought maybe that could be our list this week.
Renter’s Insurance/Homeowner’s Insurance. If you own a home, you probably already have this since I don’t think you can have a mortgage these days without a homeowner’s policy. But I know there are a bunch of you renters out there who do not have renter’s insurance, and this is just to let you know that you need to look into it–it is generally not very expensive, and even if you live in a place where there aren’t hurricanes, there are probably fires and earthquakes nearby or, say, airplanes that randomly crash into houses. You need to insure the contents of your apartment so that replacing everything will not totally max out your emergency fund in the event of a disaster. Now, you may be thinking, “None of my stuff is valuable!” and that may be the case, but just think about having to buy a new bed, TV, clothes, etc.–these things are going to add up fast. So go get a policy now, kid.
“Gap” Insurance for People Who Have Homeowner’s Policies Through an HOA. If you have a Homeowner’s Association, you might pay for the bulk of your homeowner’s policy through your HOA fees. That’s fine, but you need to check the numbers and details on these policies just to make sure you understand your coverage. For example, some HOA homeowner’s policies cover the rebuilding of the structure, but everything on the inside of the home/condo/apartment is not covered–including things like faucets, toilets, lights–so that if you don’t have another policy, you’ll find yourself with a rebuilt home that’s totally uninhabitable. You can get additional coverage by talking to your own insurance agent–they will call it earthquake insurance or contents insurance, or something similar–just make sure to explain the situation to them so that they can recommend the best policy to meet your needs.
Advance Directive for Health Crises Everyone remember Terry Schivo? You need to make sure you have instructions on what to do if you have a major health catastrophe and someone else has to decide what to do with you. There are a couple of ways to do this: 1) go to a lawyer, or 2) ask your insurance company for a form. I have not looked into this, but I believe you could do this kind of thing with one of those legal forms place like Legal Zoom or We the People. Personally, I would opt for the checking with your insurance company first, though, since there is no reason to pay for this.
Burial Instructions and Life Insurance to Cover Burial Costs. I discussed this in my article on life insurance, but provided you do not have kids yet (or other dependents), you only need enough life insurance to cover your own burial. Along with this, you will want to have instructions and a will, if you have sufficient assets to require instructions for their disbursement.
Emergency fund. I’ve already discussed this, but as a grown up you should aim for always having an emergency fund of 3-6 months of expenses in place. If you lose your job or have some kind of crisis, this will help you avoid going into debt. If you’re in the middle of doing your debt snowball, then you can have a smaller emergency fund, but it should always be in place, regardless of your other financial circumstances.
OK, how about you people? Anything to add to the grown up list?
New here? Not sure what one of the references I made is about? It might be time to check the ABDPBT Glossary. To translate, you might want to check out the ABDPBT Glossary page, or just look for links within the text with folders next to them to see what various terms mean.
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