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Stay the Course (or Not Freaking Out when the Stock Market Goes Down)

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First off, Happy Belated Thanksgiving! I hope your Turkey Day was full of good food and loving family. Now back to the money stuff.

If you’ve been watching the financial news lately you’ve heard that the stock market has been going down, erasing all the gains it made earlier in the year. If you’re already in the market you may be wondering about your 401(k). If you’ve been skittish about entering the market, this news probably reinforces your fears. But you know what I’m doing? Keep on keepin’ on.

Wait, what? That’s right. I’m continuing to invest in my retirement accounts at work and my Roth IRA. I’m not pulling out my money and stuffing it under a mattress. But Nneka, aren’t you scared of losing it all? Of course, it’s scary to see my accounts at the same level they were a few months ago. But it helps me to remember a few things.

The market bounces back (eventually)

Though not as certain as death and taxes, historically the US stock market tends to go up. Is there a risk that I can lose my shirt? Sure. But if the markets are doing so poorly that all my money is gone, there are probably larger situations at play. Like a zombie apocalypse. Nuclear war. The closing of all Targets in North America. In those instances, the stock market will be the least of my worries.

When the market dropped in 2008, I panicked. I didn’t pull my money out, but I stopped contributing to my Roth IRA, the only retirement account I had at the time. However, after playing around with the Portfolio Visualizer Backtest Portfolio I realized that I could have had thousands, if not tens of thousands, more in my retirement account today if I kept contributing.

I have a diverse portfolio

We’ve all heard the adage “Don’t put all your eggs in one basket.” A scriptural equivalent is Ecclesiastes 11:6 (NIV) “Sow your seed in the morning, and at evening let your hands not be idle, for you do not know which will succeed, whether this or that, or whether both will do equally well.” When I was a teenager, I worked at a well-known clothing store (let’s just say I sold a lot of khakis). I heard a fellow co-worker complaining that she put her entire 401(k) in company stock, which wasn’t doing well at the time. I could help but think, why would you put all your money into one stock?

Now, full disclosure, I’m not a financial planner, but for my peace of mind I’ve found a mix of stock (both US and international) and bond mutual funds help to ride out market ups and downs. I encourage you to check out the The Bogleheads’ Guide to Investing and The Bogleheads’ Guide to Retirement Planning to give you an overview of investing in the stock market. They’ve given me a wealth of knowledge about the different aspects of financial planning and to help me create my own investment plan. Speaking of which…

Remember your plan

Why are you investing your money to begin with? For me, I put money in these accounts for my retirement, which is about a couple of decades away. I’m investing for the long haul and won’t need to touch it for many years. Therefore, I can ride out this downturn and wait for the market to rebound. You need you have your own investment goals to guide you when the market takes a tumble. For example, if you’re closer to retirement than I am, perhaps your plan is to move your investments to bonds and bond mutual funds to protect your remaining gains. Bottom line, whatever you decide to do shouldn’t be a knee-jerk reaction. Rather, it should be in line with your original plan and goals for this money.

How have you been reacting to the latest financial news? Leave a comment below.

Why Do You Want to Budget?

So, I started to make grand plans to create a multi-part series on how to budget, tricks and tips… but then I realized I didn’t address the why or the mindset behind budgeting.

The Why

At the risk of sounding like a bad acting coach, what is your motivation? Budgets are a lot like flossing. You know it’s a good thing to do, but you have a be motivated by something to be consistent day in, day out.

One way to help stay motivated us to think about what goal(s) do you hope to accomplish by having a budget. Do you want to get out of debt? Save for a house or your child’s education? Build an emergency fund? These things won’t happen with magic pixie dust. Hoping that Jesus comes back before AMEX is due is also not a viable plan. And those who marry for money usually end up paying for it.

My why is simple – I don’t want to be broke. While I definitely had enough to eat, growing up there was no room for extras like ballet classes or summer camps. I didn’t want to live paycheck to paycheck, but I certainly didn’t want to blow my hard earned money on meaningless stuff. I wanted to pay off my school loans and have a emergency fund big enough to carry me through a rainy day. And the occasional trip wouldn’t hurt. Having these goals help me to stay focused on where I want my money to go instead of looking up at the end of the month and wondering where all my money went.

What about you? What are your 2-3 goals you hope to accomplish with a budget? Write them down. Put them in your wallet by your credit card if needed so that you can remain vigilant in sticking to your goals.

The Mindset

Now that you have your why, you need to have to right mindset to carry them through. For example, you may have a good reason for saving, but if you don’t believe that you can accomplish your goals it will become a self-fulfilling prophecy. There are some mindsets we have to get rid of in order to accomplish our financial goals:

False Mindset #1: Budgets aren’t fun

Repeat after me: budgets lead to freedom, not deprivation. On the surface, budgets can feel restricting. You’re not “free” to spend your money on anything your heart desires. However, all of that “free” spending ended up costing you something, didn’t it? That freedom really led you to become a slave to your debt.

Budgets put you back into control. Instead of your money being spoken for, you tell your dollars where to go. Yes, as you work to pull yourself out of debt, you might not be able to buy what you want right now. But having a budget doesn’t mean that you can’t have any fun. In fact, I encourage you to have a category for fun/entertainment/hobbies or the like. You just have to allocate funds to your fun.

False Mindset #2: I can’t afford to budget

Frankly, most of us can’t afford not having a budget. I know things seems tight now, but having a budget can relieve some of that stress. By taking a hard look at the numbers you might find wiggle room you didn’t realized existed.

Again, budgets put you back into control. You go from reacting to situations to being proactive. For example, instead of freaking out if your car needs new break pads, because you’ve set aside some money in your emergency fund you can pay for it without setting your finances back.

Finally, remember that something is better than nothing. For some of us, saving $5 or 10 a week all you can do. That’s better than $0. Get encouragement from Theodore Roosevelt: “Do what you can, with what you have, where you are.” Allow the progress to build upon itself and you see your savings grow bit by bit.

Instead of these false mindsets, arm yourself with positive, yet realistic ones. If you have debt, you didn’t acquire it overnight. Therefore it will take some time to get out of it. If you want to save for a goal, it will also take time. But one of my favorite scriptures regarding finances is Proverbs 14:23 (NIV) “All hard work brings a profit, but mere talk leads only to poverty.” Don’t just talk about getting your finances in order, do something about it. It may be a long journey and there may be set backs, but keep at it. It will yield a profit.

What about you? What mindsets help you stick to your budget? Leave a comment below.

How I Paid Off $50K in Student Loans (or How Much Can Two Pieces of Paper Cost?)

Photo by Vasily Koloda on Unsplash

I must confess, the only debt I’ve had so far is student loans. While generally considered “good” debt because a degree generally leads to higher lifetime earnings, you still own somebody some money. Sometimes a lot of money.

I went to a small, private liberal arts (read: expensive) college. Total loans: about $20,000. I also went to back to get my master’s degree in Public Health at a larger private school (read: crazy expensive). Total: about $30,000. However, I was able to pay both off in about five years. (Sorry, this isn’t a “I paid of $100K in 2 weeks” article.) There was no magic bullet, but slowly and steady progress. I don’t have any regrets about attending either school, however there are some things I did might have done different if I had a time machine.

Side note: Mr. H&H had to good sense to attend state school (read: mad cheap). When we got married and he told me how much he owed, I laughed. We put that one away relatively quickly. Now back to my story.

What I Did Right

I took out a reasonable amount

While no loans would have been ideal, I was conscience that I needed to keep my borrowing at a minimum. I often read author Liz Weston’s work on the used-to-be-awesome MSM Money site. She advised not taking out more than two-thirds of your starting salary in loans. At the time the starting salary for my field was around $30,000 so having $20,000 in loans was right at the cap.

I lived cheaply

I was still living at home once I got a full-time job (with dental!). Like a good daughter, I wrote a check for my mom for a portion of the rent, but she refused to accept it. (Hey, I tried). But instead of spending it I socked it away and continue to save. When I moved out several months later, I shared an apartment with a couple of women from church instead of looking for my own place, just because I was “grown.” You can’t be grown and broke at the same time. Amen. Because I kept my housing costs low I was able to send more back to my overlords student loans.

I wrote checks (i.e. I paid down the principal)

A good friend of my told me that she would send large checks of $500 and $1,000 to pay down her loans faster. Being the broke, newly minted graduate that I was, I initially just paid the minimums. However I remembered the wisdom of my girlfriend. After creating my budget and setting aside money in an emergency fund, I threw whatever extra money I had at the principal.

What I Would Have Done Differently

Not taking a private loan with a variable interest rate

The summer before my senior year in college I did a summer study aboard program in Paris (Je ne regrette rien). To do so I need to take a $4,000 loan with an institution that I’ll affectionately refer to as “EvilBank” that needed a co-signer for. So I reluctantly asked the closest relative with the best credit and off I went. The loan was deferred until graduation, but had a variable interest rate that seemed to go up every month. In addition, since it was a private loan I couldn’t consolidate it. Ugh. Needless to say I threw any extra pennies at EvilBank first before my government loans so that I would be done with them and their ever-changing interest rates. Good riddance.

Not continuing to pay off my undergrad loans while in grad school

When I started grad school my government loans went into automatic deferment. What I didn’t realize is that the interest continued to accrue during the three years (hey, I went part-time!) I was in school. I could have avoided paying the interest of I had only continued to send in payments. Alas.

The main point I hope you takeaway is that it can be done. The most important thing is the set up a reasonable budget so that you can find any extra money to pay down the loans.

How about you? Any other tips that helped you pay off your loans? Leave a comment below.

Why I Don’t Own a Car (or How to Figure Out If You Really Can Afford Something)

Some weekends, I miss having a car. In college, I had a 15 year old Camry that I named Renee. A few years ago it seemed like every one of our couple friends had a car. I felt bad always asking for a ride, but at least I had gas money. In New York City, car ownership can be very expensive in terms of money and time. In addition to regular maintenance, you can spend a ton of money parking your car in a lot (read: $$$) or spend literally an hour or more looking for a parking spot. Some of my deepest prayers have come from looking for parking in my neighborhood after 8pm. My ears because extra sensitive as I listen for any hint of an engine revving up. My boldness has increased as I’ve asked complete strangers, “Are you coming out?”

But back to my story. Mr. H&H and I are a rarity among friends in that we’re a couple where both of us know how to drive (#relationshipgoals?). Family members were asking if we were going to buy a car. To be honest, I was jealous of the easy of being up to get up, go, and escape the city/do grocery shopping/get home without dealing with fellow New Yorkers on the train like my friends with wheels did. So we talked about it. Should we get a car?

Eventually we decided against it, but these are the steps that I went through to figure out whether or not we should get some wheels. However, these steps can be applicable for any big purchase.

Do the Math

I wanted a car. I could have talked myself into needing a car. I could have even spiritualized the decision: We could help so many people! Give rides after church! Teach others how to drive! But first and foremost, I had to run the numbers without emotion.

To calculate whether or not it made sense to get a car, I got a lot of data points. The cost of parking in my building. I asked friends how much they spent on car insurance. I looked at the price of used cars (‘cause new cars are generally foolishness) with the make, model, and features I was interested in. I considered gas prices, which at the time was around $4 a gallon. Result? (Drum roll please.) I figured out it was cheaper to take a cab from every place we would potentially drive to and fro then it was to own a car. Math doesn’t lie.

If you need to decide whether or not to make a big spending decision, step back for a minute and run the numbers to see if it makes sense for your family. Too often we can make a decision based on fear (if I don’t send my children to private school, they’ll never be successful), jealousy (I want a house like she has), or without considering the full costs (I can afford the monthly payments, so I’m good).

Determine Your Financial Priorities

That being said, we still could have afford to get a car but we had to consider what we would have to give up in return. For example, most friends who had a car didn’t have cable. Mr H&H and I love to travel, but looking at the budget we could not do both. So we decided to pump the breaks on car talk.

When deciding whether to add a new expense into your budget, you have to determine whether it’s in alignment with your financial goals and priorities. If your goal is to get out of debt but you’ve never met a sale you didn’t like, you are not in alignment. If you want to take a dream trip, yet you eat out all the time, you aren’t living your priorities. Unless you are Warren Buffet reading this, we all have limited resources and need to prioritize what’s most important in our current life stage

Plan for the Future

Of course, our thoughts on car ownership may change if we ever get around to having kids. Likewise, you might have a purchase that might not be needed now, but may come up in the near future. This is where sinking funds come in. We could create a Car Fund to save a little each month for the eventually purchase. If you’re dating someone and it’s looking serious, why not start a Wedding Fund?

In the meantime, I’ll set aside some gas money.

What about you? Any other thoughts about how to make a big purchase? Leave a comment below.

How to use sinking funds (or how to stop busting your budget)

Budgets. Hardly anyone like them, but they are necessary in order to get your finances under control. However, they have a problem. They are great for tracking regular monthly expenses, but what happens when you have a bill that occurs quarterly or annually? Usually a mad scramble to gather as much cash to pay it. But what if you didn’t have to look under couch cushions to pay your renter’s insurance? Sinking funds are the answer.

But what are sinking funds? Basically they are separate savings accounts earmarked for a particular purpose. They are useful for what I call regular irregular expenses and irregular irregular expenses.

Regular irregular expenses: expenses that you know are coming, but don’t happen on a monthly basis. Examples include summer camp fees, taxes you pay quarterly, and of course the holidays, such as Christmas.
Irregular irregular expenses: inevitable expenses that don’t happen on a schedule. If you own a car, it eventually will need a repair. Clothes wear out. One month you’ll have two baby showers and your best friend’s birthday, the next month is as quiet as a church pew on Saturday night.

Here are some examples of my sinking funds:

Christmas – includes what we’ll spend on presents, tree and other decorations
Clothing – it use to be a regular category in our budget, but there was too much fluctuation. One month we would spend nothing. The next, a new pair of socks. The following month, my husband needed a new suit.
Gifts – non-Christmas gifts. Think birthdays, baby and wedding showers.
Missions – we give an annual missions contribution through our church, so we set aside an amount monthly for this purpose.
Renters Insurance – it’s cheaper to pay it annually, so we set aside a certain amount each month in this account.
Vacation – in addition to our annual vacation we set aside money for any church retreats.

Sounds great? How do I set it up?

I suggest an online bank such as Capital One or Ally which allow multiple savings accounts and have a higher interest rates than your local brick and mortar bank. An online bank also helps keeps the temptation to impulse spend at bay since it takes about two business days to transfer money to your checking account.

Next, determine your categories. Look at your bank and credit card statements over the past year for any irregular expenses that would be well served by a sinking fund. While you’re looking at your statements calculate how much you spend over the last year. Let’s say you spent $600 on clothing last year. That means you can set aside $50 a month your clothing sinking fund.

Cool. So how does it work?

Let’s say it’s January. You have $50 automatically deposited in your Clothing Sinking Fund. You make no clothing purchases that month so your balance at the end of the month is $50. In February another $50 is added to your fund, but you needed new socks costing $10. At the end of the month you move $10 from your sinking fund to your checking account to reimburse yourself. You have $90 left in your account.

Do you use sinking funds? If so, what other categories do you have. Leave a comment below.