Online Money Management

Author Karin Price Mueller Pages 320 Disk N/A Level All Levels Published 01/03/2001 ISBN 9780735611115 ISBN-10 0-7356-1111-4 Price(USD) $19.99 To see this book's discounted price, select a reseller below.	More Information About the Book Table of Contents Sample Chapter Index Related Series Related Books About the Author Support: Book & CD Rate this book

Chapter 3: Getting Started

• Knowing Where You Are
• Calculating Net Worth
• Determining Your Cash Flow
• Getting Where You Want to Go
• What’s Your Money Style?
• Why Bother Budgeting?
• Emergency Funds

Getting Started

Knowing Where You Are

Net worth is basically a combination of everything you own and everything you owe—your assets and liabilities, respectively. Your assets include everything—your investments, your house, your jewelry, and other personal property. Liabilities include your mortgage, student loans, credit card debt, and that old $100 you still owe to your brother-in-law. If you own more than you owe, you have a positive net worth. If you owe more than you own, you have a negative net worth.

Your net worth is important for many reasons. As I’ve said before, taking a look at where you stand financially will help you plan your future money maneuvers and your investments. But you’re not the only one who will look at your net worth.

If you apply for a mortgage or a car loan, the institution you’re working with will ask you to fill out an application with much of the same information that makes up your net worth. If you have too many liabilities, you might get turned down for more credit. When your children apply for financial aid at college, the financial aid office will want to know all about your net worth before handing over a dime.

Your cash flow is exactly what it sounds like. It’s a detailed snapshot of how much money you have coming in and where you’re spending it at any given time. Too many visits to the ATM, or perhaps an extra-large take-out breakfast every morning, could be eating up a lot of your extra cash. If you want to save more and spend less, you need to take a close look at where it all goes.

Calculating Net Worth

Using Personal Finance Software

Net worth calculations, and any other bookkeeping tasks, are made easy with personal finance software. As I said earlier, before personal finance software can help you manage your money, you need to get the software set up with all of your financial information.

Let’s start with Microsoft Money 2001. When you first run the program after installation, it will ask you the details of all of your accounts. If you don’t already have them handy, refer to the list in Chapter 1 so you have all the necessary paperwork. When it comes time to enter data about each of your accounts, you tell the program how many checking, savings, retirement, credit card, and other accounts you have. The process is really easy; a Setup Assistant will talk you through each screen. There are blanks for you to fill in with the name of the institution with which you have the account, the way you’d like to refer to the account, and your starting balance. (The starting balance is the balance you have when you start tracking the account, not the balance you had when you first opened the account.) Figure 3-1 shows what the screen looked like when I entered some fictional account information.

Next, Money will ask you to enter your income, your monthly bill payment schedule, and other information. When you’ve finished, you’re ready to use Money’s tools, including those to calculate net worth.

Figure 3-1. Here’s what you’ll see when you enter your accounts into Microsoft Money 2001.

Calculating your net worth is quick and easy when you use Money 2001. Simply follow these steps:

1. Click the Reports menu, and click Reports Gallery.

You’ll be brought to a screen that shows a bunch of helpful reports that show you how your money management is faring. The list of reports changes with the category selected on the Reports category menu to the left.

2. Click What I Have from the Reports category menu.
3. Double-click the Net Worth report.

Money’s Net Worth tool will compute everything you own and everything you owe, giving you a detailed report similar to the one shown in Figure 3-2 on the next page.

As you can see, this is a simplified version of what your net worth will probably look like. This example doesn’t include a mortgage, life insurance policies, or some of the other items you might have—or that you might acquire as you get your money matters in order. This example also doesn’t include liabilities such as overdue tax bills or student loans.

Figure 3-2. Microsoft Money 2001 calculates your net worth with one click of the mouse.

Using Online Tools

If you’re not using personal finance software, don’t despair. There are plenty of net worth calculators on the Internet. You can find one that I like very much on the Web site for American Express Financial Advisors, the financial planning arm of American Express.

The Hidden Virtues of Determining Your Net Worth Using Personal Finance Software

Though you can prepare a net worth statement in a few minutes on a piece of paper, you’ll accomplish something else by using a software program. Before you can even think about net worth, you have to go through all your finances and enter all your data into your computer. Being aware of your complete money picture is half the battle when it comes to gaining control of your finances. This information will save you many steps in later chapters—when we get down to investing, paying your bills, and just about every other money matter we’ll tackle. Plus, if you want to check on your net worth as it grows, you won’t have to do the math each time. Instead, turn to your software program; as long as you’ve been updating your information, you’ll have a new net worth statement right at your fingertips.

Whether or not you have an account or credit card with American Express, its Web site, www.americanexpress.com, is free. You can find the expected credit card and travel services, and the site offers helpful financial planning advice covering many money management areas. If you look at the home page, you’ll also find a section with additional financial products and services. In this section, click the Tools & Planning tab, and you’ll see a list of tools, including a net worth calculator, shown in Figure 3-3.

Figure 3-3. American Express offers free financial calculators, including one to determine net worth.

Just as with Money 2001, you simply enter all your assets and your liabilities, and the site computes your net worth. However, unlike personal finance software, online net worth calculators won’t keep track of your information over time. If you want to check your net worth again in six months, you’ll have to start from the beginning, tracking down your paperwork and retyping all your data.

Determining Your Cash Flow

Again, personal finance software, used regularly to record the bills you pay, will keep track of where all of your money is going. You can also use online tools for determining cash flow, but, as with your net worth statement, you’ll have to enter your information each time you want a new report online.

Using Personal Finance Software

For this example, let’s return to Money 2001 personal finance software. If you’ve been keeping up with your software by adding all of your financial transactions, you can get a cash flow statement at the click of a button. In the Reports Gallery, there are a number of cash flow statements you can request. The Monthly Cash Flow report will show you where you’ve spent your money over a time period in the past, such as the past month or the past three months. Figure 3-4 shows a cash flow statement for 30 days’ bills.

Figure 3-4. Microsoft Money 2001 gives you a cash flow statement for any time period you want.

Money will also project your cash flow for future time periods, such as next month or the next few months. You can also get specific reports on your expenses by category. For example, if you want to know your overall utility costs per month, or your total leisure costs each month, simply tell the program what you want, and it will create a specialized cash flow report for you.

Using Online Tools

If you’re not using personal finance software, you can still run the numbers online. On iVillage.com (www.ivillage.com), you’ll find a wide variety of topics, or "channels" as the site calls them, including one called "MoneyLife." (You men out there, don’t get turned off by this site because it’s geared toward women. It has many helpful tools and articles for male or female investors.) I like the site because it offers advice in plain English, not jargon, and it’s realistic about an average person’s money. It doesn’t expect us all to be rich or all-knowing about money matters, but it’s not condescending either. The site offers financial advice articles, calculators, and other tools (including another net worth calculator), and message boards where readers offer their own advice. One tool worth checking out is the cash flow tool. In the MoneyLife section, click the More Tools link (in the column of links on the left side of the screen). Choosing the Cash Flow Calculator link in the center of the screen will take you to the calculator. Simply plug in your data and see where you stand.

Though the iVillage cash flow calculator offers a report similar to the one produced by Money, using Money or some other personal finance program will be better for you in the long run. With personal finance software, you can run different scenarios and get more detailed cash flow scenarios. You can also make projections based on information you’ve already entered. If you want to produce similar reports with most Web sites, you’ll waste way too much time on data entry.

Getting Where You Want to Go

Looking at the net worth and cash flow statements you just created will give you a good starting point. But thinking about how you handle your money is more than just compiling the numbers. You also need to analyze your spending and saving habits. Are you a religious mattress-stuffer, or do you spend every penny that makes it into your wallet? Are you an impulse shopper? And why do you manage money the way you do? Are you willing to take high risks with your investments, or does the stock market’s gyrations make your stomach turn? All of these behaviors are part of your money style; everyone has different money styles, and you need to understand yours so that it doesn’t sabotage your efforts to reach your goals.

Once you know your money style, it’ll be time to set a budget. Even if you’ve tried to set and keep a budget in the past, let’s start fresh. This time you’re going to write it all down. A mental budget won’t help much toward reaching your goals. You spend money on different things throughout the day, and then you sit down to write a bunch of checks each week. That’s too much information to memorize—much less to process—in a productive manner.

But you’ve already done your cash flow statement, you say. Why bother with a budget? Your cash flow statement shows you where your money is going. It’s similar to a budget in that both cash flow statements and budgets track your income and spending. The difference is that the cash flow report is just a moment in time, whereas you can, and should, use the budget as an ongoing tool. You can change your budget, allotting different amounts of money to different areas of spending, until you get your money going where you want it to go. A budget will help you allocate funds for savings plans and make sure you’re not overspending and wasting your discretionary cash. With the cash flow statement, you’re just getting a glimpse at your money habits.

What’s Your Money Style?

Your money style encompasses how you handle all of your financial matters. Your money style determines how you treat your money every day and for long-term planning. If you drop a quarter on the pavement when you’re paying for your meal at the drive-through window of a fast-food restaurant, whether you pick up the quarter or leave it to be found by the nighttime cleaning crew also shows a lot about your money style. Now you might say that one quarter does not a millionaire make. If it were a $20 bill, though, you’d chase it as it floated in the wind toward traffic. Why not a quarter?

The choices you make with your spare change shape your money style, and your style carries over to the big-ticket items. If you’re disciplined, you’re likely to make the most of all the money available to you. If you’re a little reckless with the credit cards even once, you’re likely to do it again, and your financial security can be at risk.

If you’re not sure what kind of money style you have, there’s a great online quiz to help you. Head back to iVillage.com’s MoneyLife section. The interactive tool kit section contains a money-style quiz.

The quiz will tally up your answers and give you your money-style profile. The quiz will then offer some tips to help you align your money style with your goals. Like the other quizzes, this one will just give you a starting point and prepare you to think about how your style will affect your overall money picture.

If you’re married, your own money style is only part of the picture. You must also consider the money style of your partner. If you and your spouse disagree about everything from the credit card debt to the amount you need to save for retirement, you have a lot of talking to do.

You both need to be honest about your money styles, about the goals that matter most to each of you, and about your financial strengths and weaknesses. And, as with everything else in marriage, you both need to be willing to compromise.

The Women’s Institute for Financial Education, or WIFE (www.wife.org), is a helpful Web site aimed at women who want to come to terms with their personal finances—and with the men they partner with. (Once again, guys, financial advice knows no gender, so check this one out.) The site, run by a financial planner and an investment advisor, offers a money-style checklist, shown in Figure 3-5 on the next page, that will help you determine what kind of behavior best describes your money habits.

In addition to helping you determine your money style, this site offers a host of articles on investing and other money matters. And again, though it’s geared toward women, the information on the site is helpful to anyone who wants to learn more about managing money.

Another site you should visit is About.com (www.about.com). About.com is a site where you can find information on almost anything. The site is divided into different topics, with each topic including information, advice, and related links. To get really specific about money styles, visit About.com and on the home page, choose Parenting/Family and then the Frugal Living section, shown in Figure 3-6 (also on the next page). In the menu on the left side of the screen, click the Tools And Tests link. Then, in the center of the screen, click the Tests And Quizzes link to see nearly two dozen money-style quizzes.

Figure 3-5. WIFE offers a checklist to help you recognize your money habits.

Figure 3-6. About.com’s Frugal Living section has almost two dozen money-style quizzes.

Even if you already know you’re a saver or a spender, a cheapskate or a spendthrift, these quizzes are worth a look because they might give you some insights about your personal finances that you hadn’t thought of before, such as which psychological needs your money behaviors might be fulfilling.

Whatever your money style, the best way to beat your weaknesses is to start with a budget.

Why Bother Budgeting?

I know, I know, budgets are boring. Who wants to keep tabs on every little receipt we come across all day, every day? How much will a few bucks here or there really matter, anyway?

They matter a lot. All your little expenses add up. Say you stop at a convenience store every day before work for a cup of coffee, a donut, and a newspaper. This probably costs about three dollars per day. That adds up to $15 per week, or $780 per year. Over 10 years, that coffee, donut, and newspaper could equal $13,315 if it earned 10 percent interest each year in a stock mutual fund.

Pretty sexy, huh? Especially when you turn that found cash into a second honeymoon or a shiny new car.

A budget, no matter how much of a pain it might be to start, is the foundation for a solid financial plan. Your cash flow statement will show you where your money is going, but a budget will show you what you can do to improve your cash flow. That will lead to more free cash for investing and for reaching your long-term savings goals.

Fixed vs. Variable Expenses

When you begin to list all of your expenses, you should categorize the way you look at your costs. You’ll find that some expenses are fixed, while others are variable. For example, your monthly car and home insurance costs might be fixed, while your utility bills and grocery bills might vary from month to month. Many fixed and variable expenses are necessities. You need to spend this money to live, so there’s not much you can do to eliminate them.

Fixed expenses plug easily into your budget because you know exactly what you’ll have to spend each month. You have to pay rent or a mortgage, and you must pay taxes (unless you’d like to cut back on housing costs by getting thrown in the slammer for ripping off Uncle Sam). But if you need to cut back, you can try to trim some fixed expenses. Your cable television bill might be the same each month, but do you really need 80 channels? You can cut back that fixed expense.

Your variable expenses are a little more challenging to plan for because they will change each month. You might be anticipating a certain bill from the grocery store, for example, but each month you might come in above or below your expectations. You might say you won’t spend more than $75 each time you visit the grocery store, but if the baby needs diapers, you’re not going to stop at that $75 and put the diapers back on the shelf. At the same time, if you choose not to buy the name-brand paper towels or pre-made dinners, your bill might come in lower than you had planned.

Because variable expenses change, you should try to have some wiggle room in your budget. For example, if you have an adjustable-rate mortgage, your monthly housing costs can change. If rates rise, you have to make sure you’ll have enough money to cover the higher monthly payment. Where do you find that wiggle room? In your discretionary expenses.

Discretionary expenses include entertainment costs, such as going to the movies and eating out. You can cut a lot of fat from your budget if you trim your discretionary costs. If you do decide to cut back here, don’t forget that you’re allowed to spend some money on fun stuff. You work hard, and you deserve to enjoy your money. But before you toss money toward discretionary expenses, ask yourself if the money wouldn’t be better off in your savings account.

Wants vs. Needs

Once you’ve classified your expenses into fixed, variable, and discretionary, you should further break down your costs into wants and needs. This breakdown will help you see where you might want to start cutting back on spending.

Determine which of your costs are wants and which are needs. Wants are those things you can live without but don’t want to, such as new patio furniture or a wide-screen television. Needs are those things you must pay, such as your mortgage, your taxes, and your electricity bill.

Unfortunately, wants and needs aren’t always that cut and dried. Take a cell phone, for example. Some people use a cell phone because they want the convenience, and others need a cell phone for business or for emergencies, such as the mini-van breaking down with a couple of young children in the back seat. Or, for another example, consider a new car. Maybe you want a new car because your old two-door isn’t as comfortable as it was when you drove it out of the showroom eight years and twenty-five pounds ago, or maybe you need a new car to make sure you have reliable transportation to get to work every day. Even that triple mocha latté you have each morning—you want it for the flavor but you need it for the caffeine.

And, of course, your wants and needs change over time. When I was in college, having $150 high-heeled leather boots and money to spend at the corner bar on every Thursday night were needs, but today I’m not even sure those costs would make the want column in my budget. Because your lifestyle changes, reevaluate your wants and needs on an annual basis to see if you can reclassify any of your expenses.

But for today, you have to consider carefully which of your current expenses are wants and which are needs. If we’re going to find extra dollars in your budget, something might have to give. And it won’t be the mortgage payment, for sure. Knowing the differences between your wants and your needs will help you save extra money. When you’re about to pay for that CD attachment for your car stereo, ask yourself if it’s a want or a need. If you decide it’s a want, ask yourself if you’d rather have that CD player or instead have another chunk of money saved toward reaching a financial goal or at least taking a bite out of that credit card debt. Which do you want more?

Setting a Budget

The next step in setting a workable and realistic budget is seeing how you’re really spending your money. Take a look at your cash flow report and see if you’ve included everything. Did you write down that $2.50 you spent for coffee and a newspaper yesterday? Did you include the $1.50 ATM transaction fee? And what about the dollar you gave to the Salvation Army volunteer stationed in front of the supermarket?

To make sure you’re working with the most accurate data possible, spend a full month saving the receipts for every single penny you spend. At the end of each day or week, record your expenses either on paper or on your computer, using one of the Web sites or using personal finance software, which I’ll discuss in more detail later in this chapter. The more precise your record-keeping during this one month, the more effective and honest your budget will be.

If you’re tempted to skip the month of record-keeping, keep in mind that guessing where you spent your money last month will mean that the budget you set will be faulty. You need accuracy to get a clear picture of your spending habits.

On the next page is a table where you can fill in all the things you need to account for when setting your budget. Remember that for quarterly expenses, such as trash collection or your home’s water and sewer bills, you have to divide the total bill by 3 to get a monthly figure. For annual expenses, divide the total bill by 12.

Monthly Income

Salary

Bonuses

Overtime

Alimony

Child support

Social Security

Disability

Retirement plan distributions, including pensions

Rental income

Investment income

Gifts

Other

Monthly Expenses

Housing

Mortgage or rent

Property taxes

Home insurance

Home maintenance

Utilities

Gas

Oil

Electricity

Water

Sewer

Garbage collection

Cable TV

Telephone service

Cellular phone service

Internet service

Food

Groceries

Snacks

Restaurants

Transportation

Car loans or leases

Car insurance

Repair and maintenance

Gas

Tolls

Parking

Personal Care

Clothing

Toiletries

Haircuts, manicures, massages

Gym or health club membership

Dry cleaning

Child Care

Day care

Babysitting

Kiddie classes

Education

Tuition

Student loans

Room and board

Textbooks and other supplies

Tutors

Personal Insurance

Health insurance premiums, co-payments, and deductibles

Dental care

Eye care

Life insurance

Disability insurance

Investments

401(k) plan

Mutual funds

Stocks

Cash savings

Income Taxes

Federal

State

Local

Social Security

Medicare

Estimated taxes

Other

Banking and Credit

Credit card balances

Bank fees

Entertainment

Reading (newspapers, magazines, books)

Movies/videos (don’t forget the popcorn)

Music recordings and concerts

Hobbies

Sports

Other events

Vacations

Food

Pet care

Medical care

Licenses and tags

Gifts

Other

Add here anything else you spend

Budgeting with Software  Using Money 2001, for example, you can plan your budget step-by-step and change your budget as needed. Using a personal finance program has a couple advantages: you don’t have to enter your information more than once, and unlike online tools, the program keeps track of your budget over time.

If you’ve already added your information to Money 2001 as I explained earlier in this chapter, you can use the Planner menu to take advantage of Money’s planning tools. You’re given a choice of planning tasks, such as reducing debt, creating a budget, and planning for long-term goals such as retirement. Choose the Budget option to go to the Budget Planner. If you want to be talked through the budgeting process, you can choose to watch a step-by-step video on budgeting. Or you can get started with organizing your accounts. For the most precise budget, you should specify which accounts are used for day-to-day bill paying, investing, and so on, detailing how they will be included in your budgeting plans. Figure 3-7 on the next page shows how you enter your account information, and how you can classify the account so it’s later used for budgeting and savings planning.

After you’ve determined how your accounts should be classified for budgeting purposes, it’s time to set your actual budget. First, it’s time to enter the income side of your budget. Based on all the information you’ve previously given to the program, Money will display a screen that shows all of your income plus a few additional income categories, as shown in Figure 3-8 (also on the next page).

If you have additional income sources that you neglected to add previously, now’s a good time to add them. In addition to salary and overtime, don’t forget about bonuses, gifts, alimony and child support, Social Security, pensions, and other retirement income. You can also remove any income categories that you don’t use.

Figure 3-7. Money 2001 helps you organize your accounts before you set your budget.

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Figure 3-8. Money 2001 lists all of your income sources for budgeting purposes.

The next information Money looks for is your list of monthly expenses. Depending on how detailed your information was when you first started entering data, you might already have everything you need. If your spending details are incomplete, this list is where you’ll enter any additional regular payments you make. As Figure 3-9 shows, the expense categories are very detailed and thorough.

Figure 3-9. Money’s Budget Planner gives a detailed look at your expenses.

Next it’s time to add occasional expenses, such as investments you make sporadically rather than on a weekly or monthly basis. Money will automatically add any previous expenses you’ve entered. Next you can detail what kind of debt you have so that it’s added to your budget. You can use Money’s Debt Reduction Planner, a tool that shows you how long it will take to reduce your debt and how to create a plan that will make you debt-free over time. I’ll discuss the advantages of both tools more in later chapters. For now, let’s continue with your budget.

When you’re done with income and expenses, it’s time to budget your long-term savings contributions. Adding a long-term savings plan to your budget will not only remind you to save, but it will also help you think of saving as a necessary expense, just like your mortgage or rent. Money talks you through the process, asking how often you’ll make contributions, how much your contribution will be each week or month, and other account details, such as the account number and the current balance. In this example, I added an IRA, a 401(k) retirement plan, and a college fund. When you enter the details, the screen will look something like this, as shown in Figure 3-10.

Figure 3-10. Money will help you add your long-term savings plan to your budget.

After you’ve given the most complete information you can to the program, it’s time to get a report card on how you’re doing. Click the Next button to see an overview of your budget. Click the Finish button to see the status of the current budget. Here’s a look at a budget status for the current month, as shown in Figure 3-11.

As you can see in the figure, you can change the budget period to review. If you’re lucky enough to have extra cash left over, you’ll have a lot of fun with Chapter 6, which will help you figure out where you should be investing your money.

If your budget doesn’t have any money left over, see the bulleted list on budget-cutting tips at the end of this chapter for ways to cut back without jeopardizing your lifestyle or your long-term investment plans. If you need more help with your budget, Chapter 5 offers ways to lower your credit card debt and to enlist the help of a credit counselor.

Whether you have extra money at the end of the month or you run over budget too often, you have to plan for budget busters. That’s why everyone needs an emergency fund, which will be discussed more later in this chapter.

Figure 3-11. Money’s budget status page shows how your overall budget plan is faring.

Budgeting Online  If you’re not using personal finance software, there are some helpful online tools you can use to get your budget in order.

Let’s start at FinanCenter.com (www.financenter.com). FinanCenter.com is one of the most comprehensive sites on the Internet when it comes to financial tools and calculators. It’s a must-visit site as you go through all steps of your financial planning process. You can find a tool or calculator for just about every money matter, as shown in Figure 3-12 on the next page.

Adding Savings to Your Budget

When you’re busy finding money to pay your monthly bills, it can be easy to let your long-term savings plans fall by the wayside. To make sure you don’t neglect your savings and investments, make them a part of your monthly budget. Just as paying taxes and the mortgage is necessary, make saving necessary, too. Even if it’s just $25 per month, your money will grow over time. That $25 per month invested in a mutual fund earning an average of 10 percent a year will be worth nearly $2,000 in five years. You can certainly find room in your budget for that!

Click to view graphic

Figure 3-12. FinanCenter.com’s home page offers tools for every area of personal finance.

In the middle of the home page, click the Calculate link. You’ll be brought to a long list of calculators and tools. FinanCenter.com offers a budgeting calculator named How Much Am I Spending? that allows you to enter your income and your expenses.

Unlike other tools, which only do the math for you, this one gives you a few tools in one. In addition to putting in your actual expenses, you can use a second column to enter how much you’d rather be spending. The column allows you to see how changes in your spending will affect your overall budget. After you put in your data, this tool displays a graph, based on your actual expenses and your desired expenses, to show you how a change in your spending will affect your overall financial picture over time, as shown in Figure 3-13.

Another good budget worksheet can be found on the Women.com Web site (www.women.com). (Again, guys, budgeting knows no gender.) Go to the Women.com home page and choose the Money channel. You can then go to a subsection about budgeting. You can learn the basics of budgeting and then use a checklist for budget planning, as shown in Figure 3-14.

This tool offers more than just budget math. After you plug in your numbers, you can find information on your biggest budget problems, such as staying on track with your budget and finding ways to cut back if you’re over budget. At the precise time you’re learning about the particulars of your budget, you can start to figure out how to meet those challenges.

Figure 3-13. FinanCenter.com illustrates how changes in your spending will affect your savings plans.

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Figure 3-14. Women.com’s budget planner helps you remember to include every expense.

Remember, with online tools like these, you’ll have to enter your numbers each time you want to use the tools.

Budget-Cutting Tips  Discretionary expenses are the easiest places to cut your budget, but you can cut back some of your necessary expenses, too:

• Refinance your mortgage to a lower rate.
• Look around for low introductory credit card rates, and transfer your balances. You could save hundreds of dollars a year.
• Examine your banking fees. If you’re paying too much, check out Chapter 4 for cheaper banking alternatives.
• Cut back on dry cleaning, and iron your shirts yourself. A $10-per-week dry-cleaning bill equals $520 a year. Wouldn’t that money be better suited in your pocket instead of your local dry cleaner’s?
• Instead of going out to the movies, rent a flick. The popcorn at home is less expensive, too.
• Invest in a thermos and bring coffee from home instead of stopping at a store on the way to work.
• Eat breakfast at home, too.
• Brown-bag your lunch instead of spending five dollars or more each day on take-out.
• Cook dinner instead of ordering out. If you don’t have time or you’re too tired when you get home from work, cook a bunch of meals on the weekend and freeze them. When you get home from work, toss one in the microwave oven and it’ll be ready in no time.
• Call your long-distance company and investigate cheaper calling plans.

Look at your budget and see where you can cut back. You’re sure to find fat somewhere. If you need more help with your budget, learn about credit counseling services in Chapter 5.

Emergency Funds

What’s a budget buster? A budget buster is any unexpected expense that throws your budget out of whack for a month or more. It could be costly repairs when your roof starts to leak, a new transmission for your car because the old one died, or a sudden illness that leaves you with medical expenses not covered by insurance—anything that’s not part of your regular budget.

Because budget busters are surprises, however unpleasant, they can be hard to plan for. The only way to be prepared is to have an emergency fund.

An emergency fund is saved money that just sits in the bank or another safe account, waiting to come to the rescue in the event of a flooded basement or other calamity. You should try to build an emergency fund worth three to six months of your total monthly expenses. That amount will cover you in case you ever lose your job, for example, and will give you a cushion of time to find a new position without having your creditors banging down your door. That same money will be your safety net in case you incur a sudden large expense. Emergency funds will stop you from running up credit card debt for emergencies, and they can save you from raiding money that’s earmarked for retirement and other long-term goals.

Few people have a few extra thousand dollars lying around. So how do you build an emergency fund? Slowly and surely. Make building an emergency fund one of your top money goals. Even if it’s just a few dollars a month, those funds will be there for you if you ever need them. Arranging an automatic investment plan, in which a bank or other institution automatically transfers a certain amount of money out of your account each week, is usually the best way to get started. Such plans allow you to concentrate on other things while the saving happens automatically.

There are many places where you can stash away your emergency fund. The first that comes to mind is a regular bank savings account, but these accounts pay paltry interest—generally less than two percent—on your money. Instead, you can use a money-market mutual fund, which will earn as much as 5 percent or more. (See Chapter 6 for more information on the mechanics of money-market mutual funds.) Most money-market mutual funds allow you to access your money at any time without penalty, and many even offer checkbooks or ATM cards for your convenience.

Though checkbooks and ATM cards give you easy access to your emergency fund, you don’t want access to be too easy. As you watch your emergency fund grow, resist the temptation to borrow from it for anything other than true emergencies. Needing a new CD player doesn’t qualify for an emergency. Instead, use some discipline and save a little extra on the side if you want to buy a luxury item. It might take more time before you’re able to afford something that you want, but at least if the boiler breaks or the dog needs emergency surgery to remove the sock from her stomach, you’ll be able to pay cash and avoid debt.

Emergency Borrowing

If you’re ever in a bind because you have no emergency fund, or because your emergency fund won’t cover an unexpected expense, you can still find some cash. These options aren’t ideal, but if you have no other choice, they’re worth considering:

• Credit Cards.  Credit cards generally charge some of the highest interest rates of any loans, so you’ll want to use them sparingly. In an emergency, you can even call your credit card company and request that it raise your credit limit to cover the amount you need. But remember, any charges you make will eventually have to be paid back, and the interest charges could really add up.
• Home Equity Lines of Credit.  Lines of credit tap into the equity you’ve already accrued in your home, and they have much more favorable interest rates than most credit cards. (See Chapter 5 for more details.) These credit lines are usually used when a homeowner needs cash for home improvements, but banks allow you to use the money for anything you need. Don’t forget that when you take a line of credit, you’re borrowing against your home. If you can’t repay, you could lose your home to the bank.
• Retirement Plans.  Most corporate retirement plans, such as 401(k)s, allow you to borrow from your own account. (See Chapter 7 for more information.) The interest rate is usually very favorable, and when you repay, the interest goes back into your own account instead of to a bank. But if you borrow from your retirement fund, you’ll have less money earning profits for you, and if you fail to repay, your retirement savings plan could be in trouble. Also, if you leave your job, most retirement plan loans must be repaid in a short period of time, so use these loans with caution.