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($10,112.01)

That’s a large number.  A much larger number than I thought it would be.  That number right there is how much we have paid on our primary Visa credit card this year.  I should explain something.  We don’t carry credit card balances on a month to month basis.  When I get a credit card bill I do everything I can to pay it off.  So far I have been successful.  Right now my success is just about to run out of steam.  In order to pay off this card we have to use a sizable chunk of our “short-term” savings.  Granted the bill this time around is not so bad.  Only about $1,700 dollars.  It’s all basically my Mexico trip right there.  Studying abroad does not come cheaply and it especially does not come free.  It was all worth it though.

The point to this whole post is that the wife and I are worried about draining our savings account.  We are hoping to buy a house in about a year and that savings account is going to be our down payment.  Naturally we’d like to keep a sizeable chunk of money in there due to this being the case.  With that being said we have decided to put ourselves on a strict no-spend diet.  In order to keep ourselves sane this will not apply to the small amount of mad money we get on a monthly basis, but other than that cash we will not be spending any money on any unnecessary items.

Enter the Wealth Tracking Tools

I’d like to make sure that I’m actually building wealth over time.  As I already mentioned we’re looking to purchase a home in about a year and we’d like to be prepared for such.  With that being said I’ve decided that after months of procrastination it’s about time that I start using some tools to track our progress (or lack thereof) with our financial goals.  Starting later this week I’ll be posting on a regular (monthly) basis updates to our net worth and other relevant financial tracking numbers.  Of course I’ll be using Excel to create these spreadsheet tools.  Hopefully with our increased vigilance of following our budget we will be able to accelerate the wealth building process.  One can only hope.

In my 33% savings plan post I mentioned that I would cover at a later time my money funneling techniques (e.g. my financial account structure) for y’all. I figure now is as good a time as any to cover this, so here you are…

I work primarily with two financial institutions, USAA and Desert Schools Federal Credit Union.

USAA

• Checking Account: I have all of my money deposited into this account and from here I divvy out my allocated percentages to different accounts. I also pay all of my bills, with the exception of my auto loan, from this checking account.

• Savings Account: This is a mid-term savings that I have established for my short-term goals, e.g. new car purchase, house down payment, etc. This account is for anything that I plan to purchase within the next 1-5 years.

• Brokerage: This is where I send a portion of my money to be invested in stocks, index funds, mutual funds and - when I get one - a Roth IRA. Included in this is a money market fund which I have set up as my emergency fund.

Desert Schools FCU

• Checking: I use this account to pay for gas, groceries, eating out, etc. I also use it to pay on my auto loan since I received a quarter percent discount on my loan rate to set up automatic payments from checking.

As I discussed earlier in my 33% savings plan I prefer to divvy my money up by percentages. To figure out the percentages that I would use I first researched how much my monthly expenditures were by creating a budget, then I figured out my average monthly net income (net meaning after taxes… e.g. take home pay) and then I figured out how much I would like to save a month. I ran a few numbers and came up with a list that looks something like this:

Percentage-Based Budget

• 47% - Expenditures
• 33% - Savings
• 20% - Mad Money

That’s not exact, but I think that gives you a pretty good idea of how I work my percentage-based budget. It’s really quite simple and having different accounts with different purposes really simplifies the process. I have been managing my finances this way for about a year now and it’s really helped me to manage my spending and saving more efficiently.

A few quick notes

Please do take a few hours (or even better a day) to get your finances in order. It’s important (at least if you want to gain financial freedom) to always have your money flowing INTO your long-term accounts: e.g. IRA, Stocks, Mutual Funds. Another thing which I think is extremely important is to have an emergency fund built up for - well - emergencies. It’s always stressful and terrible when bad things happen to you or your family, but not having an emergency fund built up to handle sudden deaths or transportation problems or anything else that you can imagine makes it doubly hard. “That’s what she said.” Ok that was uncalled for and I apologize; I’m just a big fan of The Office. Seriously though it’s just smart financial management to save up 3 to 6 months worth of your cost of living. If you have any questions please comment or you can always e-mail me.

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I like to think that maybe I’ve learned something from all of the different mistakes I’ve made and also the things that I’ve done right. I haven’t done everything right, but I feel sincerely that for someone my age I’m doing pretty well. I have a high credit score and I have relatively little debt, all things considered. I am planning and contributing towards my retirement, and even towards shorter term things such as a down payment on a house. I feel like I’ve got a pretty good edge on things, although there’s still plenty that I could be doing better. Of course this got me to thinking about what I believe are the most important things that one can do in their “financial infancy” so to speak. Basically what follows is a quick list of some things that I believe someone just beginning adulthood and financial literacy should follow… a few rules of thumb, if you will.

Here’s what I’ve come up with:

1. Establish and maintain a positive credit rating
2. Learn to budget, and then to LIVE ON that budget
3. Learn to save(and not to immediately spend your savings)
4. Establish a 401(k) account, or if not offered establish an IRA or a Roth IRA

Joseph, you say, how can I do all of these things? A list doesn’t exactly tell me anything! Well my friends, let me dive just a little further into those points…

Establish a positive credit rating

Establishing (and maintaining of course) a positive credit rating will more than likely be one of the most important things that you will ever do when it comes to your finances. Truthfully it’s not difficult to establish and keep your credit rating (e.g. credit score) at an above-average level. The average FICO score is in the mid 600’s, something which can be achieved with just a little dedication. What sort of dedication? Not much. Truly. Pay your bills on time (this can be easily achieved with recurring online bill pay). Don’t max out your credit cards. Get credit cards if you don’t have any; use them monthly and then pay off the bill every month (on time of course). Be smart about your credit. Don’t open up a charge account at every store you shop at just because they are offering you 10% off today’s purchase. Don’t use your credit card to pay for something unless you have the cash to pay it off (or if you insist on using it still, make sure you’ll have the cash within a month to pay it off). Doing these simple things will help you to establish a squeaky clean credit rating, which will lead to lower loan rates and a much easier time qualifying for loans… not to mention potential auto insurance savings, etc.

For a little more detail on how a FICO credit score is calculated, and how it can be used, check out this post I previously wrote.

Learn to budget

Budgeting is an important part of your financial health. Budgeting means, in a nutshell, living within your means. It doesn’t necessarily mean tracking every single purchase you ever make and not allowing yourself to spend more than “x” amount of dollars on entertainment in a given month. Instead I have learned that it means to know how much you earn in a month and to not let your expenses exceed your income. Sure it sounds like a silly thing to say, but many people have yet to grasp this concept. Another thing I’ve learned that must be a part of ones budget is to budget a portion of your money away into some form of a savings or investing account. Go ahead, enjoy your life and spend your money while you still can, but make sure that you save just enough to cover emergency expenses and larger more expensive purchases, such as a down payment on a house or that new 52″ HDTV you have been lusting after. For a detailed look at a budgeting method I use, check out this post.

Learn to save

This one is pretty self-explanatory. Save a bit of every single paycheck and you’ll find yourself living much more comfortably than those around you. This principle is important for a few reasons. First it’s a good idea to have an emergency fund of about 3 to 6 months worth of your income saved up… for emergencies of course. Having this fund will erase untold amounts of stress from your life. Finally learning to save will eventually lead you to financial independence, and isn’t that what we’re all really after? Chances are you won’t be winning the lottery in this lifetime, so you’ve got to provide riches to yourself rather than expecting others to provide them to you.

Establish a 401(k)

For those who might not be informed on what a 401(k) is, please check out this post I wrote about it. I believe most of you probably have a pretty good idea of what a 401(k) is and what they can mean to your financial health at retirement. Contributing regularly to your 401(k) starting at a young age can mean all the difference in the world to the lifestyle you will be able to enjoy at retirement. If a 401(k) is not something that is offered by your employer (if you don’t know if it’s offered ask your manager - there’s a pretty decent chance that it is) then you will want to spring for an IRA or a Roth IRA. These are retirement accounts similar to the 401(k) in that they are tax-advantaged, but instead of being managed by your employer they are managed either by yourself or by a financial services company such as Vanguard. If you are in a low income tax bracket then a Roth IRA might be a better choice for you, because they are only taxable before the money is deposited into them. In other words when you go to withdraw from your Roth IRA at retirement you will not owe taxes on ANY of the monies that you pull out of your Roth IRA. Fantastic eh?

I defininitely believe that the above listed principles are very important to maintaining a strong financial health, and I also believe that only by being prepared and informed will you be able to become financially independent and probably even rich.

Do any of you have any other suggestions on things that you have found to be important when starting out your financial life? Or maybe something you wish you would have known - or done - when you were younger? Please leave your comments, and if you like this post feel free to share it with others.