Category: Budgeting / Saving

With most people now receiving their paychecks via direct deposit, many often ignore their paystubs. I admit I used to be guilty of this until I started getting serious about budgeting and my finances in general.

Earlier this year I decided to take a detailed look and found out that I was paying for something that I didn’t need. Not only that I had been paying it for over 3 years!

Although it’s easy to focus on your gross and net pay and ignore all the other “stuff” on your paystub, it’s important to make sure that you have your deductions optimized and that you aren’t paying for anything that’s unnecessary.

If you’re working hard to get out of debt, you want to be sure you are bringing home as much money as possible to accelerate your progress.

Here are some easy changes to your paycheck you can make that could potentially increase your take home pay:

Set Your Federal Withholdings to Break Even

Federal income tax is taken out of your check according to your your filing status (single, married, head of household) and the number of withholdings. When you first started your job you would have designated this on your W-4 form. This will stay the same unless you make a change.

This is really important because it determines whether you will owe money on your tax return, receive a refund, or break even. I’m a strong believer in breaking even so I don’t give the government an interest free loan aka a refund.

Although you may like getting a refund every year, keep in mind this is money that you could have in your pocket every month. Also, some people actually treat the money from a refund differently than they would if it was in their paycheck every month. Instead of using the money to pay down debt, you may see it as a Las Vegas vacation or a shopping opportunity.

Therefore, setting your withholdings so you don’t owe or receive money can really help maximize your monthly take home pay to reach your financial goals. To see if you are on track, you can check out the IRS withholding calculator. If your taxes are complicated or need a second look, check with an accountant.

Eliminate Unnecessary Deductions

Besides federal income tax you may also have state and local income tax. In addition, if you are a W-2 employee, your employer will be required to take out FICA taxes (Medicare and Social Security aka OASDI). While you can’t get rid of these deductions, there are some you can.

You likely have some benefits through your employer such as health, vision, and dental. You may also have life, disability, or other insurance. Many of these benefits are automatically initiated when you start working and therefore you have to opt out if you don’t want them.

This is exactly what happened to me. I was paying for life insurance through work even though I had adequate coverage privately. I was automatically enrolled in this and for awhile didn’t know what it was. It was listed as the abbreviation FEGLI (which I later realized stood for Federal Employees Group Life Insurance) and for years never questioned it.

Make sure you know what every deduction is, whether or not it’s required, and whether it’s something you need.

If you are married and your spouse works, check to see if you have any duplicate or unnecessary healthcare deductions. Also, if you have private life and disability insurance, make sure you are not paying for any extra coverage through work.

Reduce Retirement Contribution…Temporarily

Ok this one was tough to write as it pains me to even suggest anyone cut down their retirement contributions. As you probably know, Americans don’t do very well in this area. In fact only ⅓ of people are actually contributing to an employer sponsored plan. So if you are contributing something toward retirement then congratulations!

However, if you have still have credit card debt and students loans, it’s possible that you could be contributing too much to your retirement. When you’re saving for retirement in this situation, you’re basically saying that you can get a better return in the stock, bond, or other market than the interest rate on your debt. While that’s possible, there is certainly some risk and the return is not guaranteed.

Like insurance or other deduction, you may be automatically enrolled in a retirement plan at a default percentage. If you’re getting an employer match then consider contributing up to that point so you can take advantage of the “free money.” However, if you still have non-mortgage debt and are contributing beyond the match, then you may want to scale back temporarily so you can increase your take home pay. Remember, the faster you get rid of your debt, the faster you can maximize all retirement accounts.

What change can you make on your paycheck to increase your net pay?

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Approximately 5 years ago, just before my first son Samuel was born, Jess and I took the plunge into minivan land. Yes, we did it.

 

In those moments when the kids are screaming, crushed Cheerios are all over the floor, the dog is whining and we feel like we have lost every ounce of cool we once had, I like to imagine that I am the dad in the Toyota Swagger Wagon video. I know I’m not, but please, don’t burst my bubble.

 

“It’s the Swagger Wagon. I got the pride in my ride.”

 

Anyways, I have to admit that minivans are pretty awesome. Lots of cargo space, easy in and easy out and yes, very comfy indeed. In fact, Episode 356 of the Radical Personal Finance podcast dedicated a whole episode to why everyone should consider a minivan, regardless of having kids. You should check it out. His analysis is very detailed and entertaining.

 

If you have been following this blog, you know by now that the sliding door on my 2005 Honda Odyssey fell off this summer. I wrote about this in an article talking about whether or not you should save an emergency fund within a Roth IRA. My friend Jonny helped save the day, but nonetheless, it was time for Jess and I to look for a new Swagger Wagon.

 

After much searching, we landed on a 2009 Honda Odyssey EX-L. It is pretty sweet. The DVD player has surround sound that will make any kid hush for an hour or two if you keep them happy with some snacks along the way. The leather seating is smooth, the rear lift gate is clutch when you are trying to hold a kid and get groceries out of the back and the seats are extra comfy. It has some Swagger. For real.

 

As I reflect back on this purchase, there are 5 lessons about buying and owning a car that were reinforced for me throughout this buying process. Here they are.

 

Lesson #1 – Cash is king.

 

If you have ever paid cash for a car, you will know what I am talking about here. It is a rush. I don’t know what the rush of smoking cigarettes feels like, but I’m sure that those same dopamine reward pathways were activated for me when I bought that car. Walking away from a car dealership without a car payment is an amazing feeling. There are two main reasons I think cash is king when it comes to buying a used car. First, Jess and I have done this three times now and it certainly has given us a leg up in the negotiation process with the dealer. Second, while interest rates on new cars continue to be historically low, those low interest rates don’t carry over to a used car. According to current rates listed by Bankrate, used car interest rates can be upwards of 5% with good credit.

 

Lesson #2 – Patience pays off (literally).

 

Jess and I had been talking about buying a new minivan for over a year after we had a couple issues here and there with our old 2005 Odyssey. Despite some well-intended heckling from our family about the old minivan, the issues were not mechanical and were not urgent. Therefore, we kept piling away the cash so we could wait to find the best value instead of having to prematurely react in the moment when it would became urgent. The result was searching for months and finally finding the van with the best deal for the mileage and amenities.

 

When you are not in an urgent situation to buy, it is easy to say no when the dealer is not willing to negotiate down to the price you want. You are in the driver’s seat. By not rushing, I estimate we saved at least $1,000 – $2,000.

 

Lesson #3 – An educated offer makes the negotiation easy.

 

Negotiating with a used car dealer is about as painful as it gets. There is no doubt that it is a game you have to play if you want a good price on a used car.

 

When I bought our newest minivan, Jess and I had looked at every Honda Odyssey in our price range within a 100-mile radius of where we live. In addition, we had the Kelley Blue Book values ready and had purchased the Car Fax report. Based on this information, we had completed our own analysis of what we thought the car was worth and what we were willing to pay.

 

I started the negotiation with that in mind and after clearly communicating that price and how I arrived to that number, it took almost all of the back and forth negotiations out of the game. They tried to counter and I said ‘no thanks’ based on the price we had in mind. I let them know we weren’t in a rush to buy and if it worked out, great, if not, that was okay too.

 

I got a call back the next day accepting our original offer.

 

Lesson #4 – A used car is superior.

 

We all know that new cars are a bad investment that depreciate in value the second you drive them off the lot. It is wise to be putting money in assets that grow in value (investments, real estate, etc.) rather than those that lose value (e.g., cars). On the other hand, it is so hard to say no to a new car. There are few things like the smell and feel of a new car.

 

If you can have the discipline to say no to the new car, it will pay off.

 

Carfax estimates that a car loses approximately 10% of its value the minute you drive it off the lot. Within the first 5 years, that car will lose approximately 60% of its value. Why not let someone else do the driving that loses the value and you can pick up from there?

 

Here are some examples of price differences between new (base MSRP price) and good (reliable and safe) used cars at the time of writing this article:

 

Example 1 (Honda Odyssey)

New 2016 Honda Odyssey EX-L = $36,200

Used 2014 Honda Odyssey EX-L with 38,000 miles = $19,995

Price difference = $16,205 for 2 years and 38,000 miles (44% savings)

 

Example 2 (Nissan Altima)

New 2017 Nissan Altima 2.5 S = $22,900

Used 2014 Nissan Altima 2.5 S with 35,000 miles = $12,300

Price difference = $10,600 for 3 years and 35,000 miles (46% savings)

 

Example 3 (Ford Fusion)

New 2017 Ford Fusion SE = $23,365

Used 2014 Ford Fusion SE with 47,000 miles = $10,900

Price difference = $12,465 for 3 years and 47,000 miles (53% savings)

 

Lesson #5 – Do the math (leasing vs. owning).

 

Lease deals can seem very attractive if you are only looking at the monthly payment. With few exceptions, I would argue a good used car is a better deal in the long run. If you are willing to drive something used, give up a little bit of style and swag, hold onto it for the long run, deal with some repairs here and there and have an emergency fund in place to cover those repairs, the used car generally wins.

 

So, how do you know which is better? Purchasing a used car or leasing a new car?

 

Do the math on what you will pay for a leased car per month plus the initial down payment and compare that to your total purchase price for a used car. For the leased new car, it probably isn’t a bad idea to include a little bit extra for those fees you may have to pay when turning in the car for some dings or overage on miles. For the used car, it probably isn’t a bad idea to include some extra money for a few repairs you may have to take care of along the way.

 

Let’s look at a lease example for a Honda Odyssey based on their current offers. They are offering a 2016 Honda Odyssey LX for $259/month for 36 months with $3,199 due at signing. This rate is for those that qualify based on a good credit score. Others may have a higher rate without good credit. Total payments at the end of 36 months would equal $12,523 ($3,199 due at signing plus 36 months of payments at $259/month). This of course assumes no additional money due when turning the car in for dings and no overage on the 12,000 miles allowed per year.

 

Instead of this lease, a quick search on www.cars.com reveals that you could buy a 2011 Honda Odyssey EX (a model up from the LX) with 60,000 miles for approximately $12,000. So, yes, you are giving up the features and feeling of a new car but for the same total investment, you own the vehicle when it all said and done. After 36 months, it might appear to be a financial wash but it is far from it because you own the car and could turn around and sell it or hold onto it without making any monthly car payments. This is where the savings comes in! Every month that goes by after 36 months without a car payment is winning! Even after factoring in some cash for repairs here and there, it is a better deal.

 

Your Financial Homework

 

So, there it is. My lessons learned from purchasing my second Swagger Wagon. According to Experian, the average car payment on a new vehicle in the US is $493 per month for those that own and $412 per month for those that lease. If you are trying to make progress on saving for retirement, paying off debt, saving for an emergency fund or buying a house, a big car payment can be a significant barrier in the way of you making progress on one or more of those goals.

 

Is it time to make a switch to a good, reliable used car? If so, start a monthly savings plan within your current budget to save up enough to pay cash for that car. Once you go used with cash, you won’t go back.

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Finding ways to cut monthly expenses is never a fun discussion. With that being said, cutting here and there certainly adds up.

When Jess and I were zeroed in on getting out of debt, we were looking for all kinds of areas where we could cut our expenses. Besides the obvious (and very important) step of setting a budget to control your day-to-day purchases, here are 5 easy ways to cut your monthly expenses. I recognize these aren’t for everyone. These are what worked for us. Please comment at the end to share some others that have worked for you.

Cutting the cord

Not a fun one to embrace but certainly something that can make a noticeable difference. This is easier than ever with high definition antennas, streaming services such as Netflix and Hulu, and now even live TV options that are independent of the cable and dish companies.

Prior to making the cut, our cable, Internet and Netflix bills added up to approximately $148/month. When we cut the cable, we decided to add a high definition antenna (one time purchase of $30 from Amazon) and Sling TV (monthly fee of $20). The high definition antenna gives us access to the major networks (e.g., NBC, CBS, etc.) and several PBS stations. Using the following link, you can check the reception you are likely to get with a HD antenna before you make the purchase. The Sling TV provides access to many popular TV channels (e.g., ESPN, HGTV, Food Network, CNN, etc.) via an Internet connection.

With the cuts, our current monthly expenses are approximately $75 for a savings of $73/month. Does the high definition antenna and Sling TV serve as a perfect replacement to cable? No, but it is certainly adequate. There are times when the signal will go in and out depending on the placement of the antenna or the weather outside. With the Sling TV, just like you may have streaming issues from time to time with services such as Netflix, the same applies here.

Auto insurance re-quote

Ok, full transparency here. I felt dumb on this one. A few years back I called our auto insurance broker and asked for an updated quote since I felt like our auto insurance was higher than it should be. We still had two cars and nothing changed except we were a few years older. That updated quote led to a new policy with the same coverage.

In 2009, we were paying $146/month. We are now paying $85/month. A savings of $61/month.

While I haven’t explored this yet with our auto insurance broker, I have heard others mention that paying a lump sum once or twice a year rather than monthly payments is a way to save some additional dollars on car insurance.

Refinancing the home loan

When we bought our house in 2009 at a 5% interest rate, we were told how good rates were at the time. As rates continued to dip for the next few years down to 3.75% (and even lower of 15-year fixed mortgages), we asked our bank about refinancing. So how do you know if refinancing is worth it? Let’s look at an example assuming you bought a house in 2010 for $200,000 at a 30-year fixed mortgage at 5%.

Today, you could finance a 30-year fixed mortgage near 3.7%. Not too bad. Seems like a pretty simple decision but two major factors to consider are (1) how much are the closing fees to refinance and (2) how long do you project to be in that home. If you can answer those two questions with confidence, you can figure out whether or not it is worth your time and savings. For our example, let’s assume you still owe $190,000 on the principal since a mortgage is front loaded with interest.

If we run this scenario through using a refinance calculator assuming closing fees of $6,000, this refinance would result in a payment that is $199 less per month. Since the closing fees were $6,000, if we save $199/month it will take 31 months until the amount we saved from lower monthly payments equals the amount we paid in refinance fees (aka breakeven). After 31 months, you would then be saving $199/month.

That is where the “how long do you project to be in that home” question comes into play. If you may be moving in a short period of time (or that is unknown) it may not be the best decision. The smaller the difference in the interest rate and/or the higher the closing fees, the longer it will take you to breakeven. For Jess and I, we were able to cut down our monthly payment by approximately $150/month through refinancing.

Budgeting gifts for family and friends

Whether it is for birthdays or holidays, this was one area we felt like we didn’t have a good handle on and was fluctuating significantly. Not too long ago, Jess and I wrote out every gift we could think of for the year, set a budget for each gift and then divided that number by 12. That became the amount we saved each month and when the gift expense came up, we were ready. Tip: If you celebrate Christmas and if that is typically a big expense for you, start this sometime in the early New Year so you can have the majority of the year for that to build up. It goes without saying that planning for these expenses (after all, they shouldn’t be a surprise!) will minimize stress and keep the spending within control. I estimate this has saved us a few hundred dollars a year or $25/month.

So there it is, an estimated savings of approximately $309 / month by making a change here and there. That adds up over the course of a year. More importantly, if you are trying to pay off debt, this has a significant psychological momentum that can expedite your ability to get out of debt or achieve whatever financial goal you are trying to achieve. You make a cut here or there and it is a small win that gives you some serious momentum towards achieving that goal. You will find yourself looking for more cuts.

Remember, this ~$300/month doesn’t include the savings that occurred from budgeting the discretionary expenses that happen every day (e.g., going out to eat, clothing, coffee, etc.) Those are the ones that add up the fastest.

Financial Homework: Are any of the above areas you might be able to take advantage of? If so, take a first step in exploring one and make it a reality by the end of this month. Share your progress by leaving a comment at the end of this post or by sending us an e-mail me at [email protected]

 

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At the time of writing this article, I was sitting in a Honda dealership getting some service done on my 2005 Honda Odyssey that has just over 150,000 miles on it. Jess (my wife) and I bought this used car back in 2011 right before my oldest son, Samuel, was born. It had just under 70,000 miles logged and we have beat it up pretty good with our many trips to Toledo and New York to see family. Lots of good memories in this car.

The license plate lights were out and the water guards underneath the van were falling off. I also asked them to take a look at the brakes as Jess noticed they seemed a bit shaky. I had come in that day hoping to leave with a bill for $100 or less.

Come to find out, the rear brakes were shot and needed replaced and the front ones weren’t too far off. The total charges were going to be over $700. It was time to dip into the emergency fund.

Why does having an emergency fund matter? Peace of mind. Peace of mind in knowing that the emergency isn’t going to blow up and derail our monthly budget and peace of mind knowing we can keep moving forward with our plan to achieve our short and long-term financial goals.

Am I annoyed that I have to fork over more than $700 to repair the minivan? Of course I am! Who wouldn’t be? Is it going to ruin my day? No, with the exception that I can’t help think what that $700 would be worth in 25 years if I were able to invest it rather than hand it over to the Honda dealer. I’ll get over that (eventually). Is it going to derail Jess and I from achieving our long-term goals? Absolutely not. Is it going to cause a big fight between Jess and I? Nope. We prepared for moments like this so we can write the check, work to build back up the emergency fund and move on.

I am confident that achieving long-term financial goals requires having some barriers between you and life’s emergencies to allow you to continue to pursue those goals when life creeps up on you.

Let’s face it. An unexpected expense is likely to happen so why not plan for it? According a recent Bankrate survey conducted, 4 of 10 respondents or their immediate family member experienced one or more major unexpected expense in the last year. Who knows what it could be? An unexpected root canal, emergency surgery for your pet, transmission gone bad, or a health care bill from a high deductible plan. The list could go on and on. The point is we can’t predict the unexpected event but we can plan to be ready financially when it does happen.

What should an emergency fund look like? A good rule of thumb is saving up 3-6 months of expenses (not income) in a place that is readily accessible (and separate from your other account where expenses are made) such as a simple savings account or money market savings account. If your monthly income and expenses are the same, it is time to get serious about that budget!

Don’t get too excited about the annual percentage yield (aka how much interest you will earn per year) on a simple savings or money market account. A quick search online at the time of this post showed savings accounts having rates hovering around 1% and money market savings accounts around 0.75-1%. If you are looking for an account, you can go to Bankrate to search for the best rates. You should also check with the bank you are already using to see if their rates are competitive. Save any excitement for returns to your retirement savings. The goal here is just security and protecting your financial plan.

Three tips to consider when building your emergency fund

1. Determine if you want to have 3 months of expenses, 6 months of expenses or somewhere in-between. Two main factors that impact this decision include your money personality and your ability to get extra cash if needed. First, and most importantly, what is your personality when it comes to money? Can you sleep better at night knowing you have an extra cushion in the event of an emergency? Where applicable, make sure to take your spouse’s personality into account when making this decision. I always suggest that if one partner wants to be more conservative (6 months of savings) and the other more aggressive (only 3 months), it is best to err on the side of 6 months. The second major factor has to do with your ability to get extra cash quickly in the event of an emergency. For example, in the event of a major health crisis or a job loss, can you or your spouse pick up some extra money through working extra shifts to avoid having to borrow to cover the expense? If yes, maybe you err towards the 3-month end of savings. Thankfully, pharmacists are currently in a good spot to pick up some extra work or a new job.
2. If you are not yet at your desired amount for an emergency fund, make this a budget item to pay yourself first rather than trying to scrape up what is left afterwards. Obviously you want to build this up as fast as you possibly can but if you are several thousand dollars off, determine what that difference is and divide it by 12 to make a plan to save that much per month over the next year to catch-up. For example, if you have $8,000 saved and determine that you need closer to $12,000, take the difference and divide it by 12. The result would be saving $333 per month for 1 year to have a fully funded emergency fund. If you find yourself struggling with how to make that amount a part of your monthly budget, you can extend that past 12 months or better yet, look for other areas to cut so it can fit.
3. Re-evaluate the amount needed in your emergency fund every year for significant changes that may alter how much you want to have saved. For example, if you purchase a home, have a baby or move from residency into your first job, your 3 or 6-month amount needs to be adjusted.

 

Here’s the fun part. As you tighten up your budget and your expenses go down, the amount needed in your emergency fund is less and you can get on to focusing on other financial goals (retirement, giving, travel, etc.) faster. That is good motivation to get your monthly expenses down.

Financial Homework (your first one!): Determine if you have a fully funded emergency fund and if not, outline a plan to get there.

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