How to Afford Your Social Life

 

Hi, readers!

I spent my leanest years in some pretty rockin cities, and I didn’t let a shortage of cash get in the way of my social life. There are lots of ways to have a really good time without spending too much money- you just have to be clever about it. Here are my best tips about having an amazing social life while not going broke.

Keeping food/alcohol bills low

  • look at the menu before you agree on the restaurant. If you can’t afford it, suggest an alternative
  • sign up for Open Table and then make reservations for the group. You can earn dining points which add up to a free dining check when you have enough points.
  • pay attention to food costs- soups, salads, appetizers, sandwiches, hamburgers and pizzas are usually cheaper and can be as filling as an entrée. I can’t even remember the last time I could finish a whole restaurant hamburger, so there is lunch for tomorrow, too!
  • don’t drink to excess- learn to nurse your drinks. Alternating alcoholic drinks with nonalcoholic drinks will cut your bill in half, and you will feel better the next day.
  • cocktails are (almost always) more expensive than wine, wine is usually pricier than beer, and craft/imported beer is usually more expensive than domestic beer. Think about how much you plan to drink, and order accordingly
  • look for happy hour/appetizer specials
  • try to get separate checks when in a large group- no one intends to short the bill, but even though you would like to believe your friends all know how to add….evidence has shown time and time again that they can’t. Avoid the stress when possible.
  • avoid the extras- skipping an appetizer, dessert and beverage can cut your bill in half
  • eat before you meet your friends and then order something small or just a drink
  • look for Groupons or livingsocial deals for the restaurant you are eating at

Instead of going out, host at home

  • potluck dinner parties are an inexpensive way to enjoy meals with friends
  • having a barbeque and asking everyone to bring their own item to grill is another alternative
  • learning to make fancy cocktails at home is much more affordable than ordering them at bars
  • soups, tacos, vegetarian dishes and egg-based brunch dishes are inexpensive ways to feed crowds
  • ask guests to BYOB for dinners or house parties to keep your alcohol costs low
  • host a movie night with frozen pizzas, beer and popcorn to save on theater costs
  • game nights are a great way to spend time with your friends without spending a lot of cash. I especially like winter game nights because I never feel like getting dressed up for cold weather and then navigating bars with a coat.
  • if your house isn’t available for hosting, consider hosting picnics in public parks (check local laws before bringing alcohol)

Check out what is happening on weeknights

  • There is usually great local music available with no cover when you go mid-week.
  • Sometimes clubs/bars will have midweek theme nights (ie, Tuesday Funk Night, Thursday Line Dancing) that you don’t have to pay a cover for. They can be more fun than weekends!
  • If you have clever friends, check out trivia nights. Trivia is fun, and the prize for winning is usually money off of your bill. Less popular trivia nights= more chances of winning for you!

Getting around

*Don’t ever compromise your safety or the safety of others to save money. DUIs are expensive, hospital bills are expensive, car repairs are expensive, increased insurance is expensive, getting your car from the impound lot is expensive…and there is a lot more at stake than just money. Spend the tiny amount of money for a cab, choose a trusted designated driver before you leave home, or don’t drink. That is what adults do.

  • being the designated driver will save you cab fare and a bar tab. Often bartenders won’t charge for nonalcoholic drinks if you tell them you are the designated driver (don’t forget to tip)
  • if you know you will need a cab, consider taking public transportation there and then a cab home
  • sharing a cab will keep costs low
  • if your city has Lyft or Uber  you can usually get less expensive rides than a typical cab, and they often offer promotions.

General tips

  • If you take charge of planning events, you will have more control over how much you (and the rest of the group) spends
  • Keep an eye out for free community events- concerts, outdoor movie screenings, festivals

The point of having a social life is to enjoy time with your friends, and it should never make you go broke. Follow these tips, stay safe, and have fun!

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Paying for a Gym Membership

I am a yoga addict. The benefits are plentiful- increased flexibility, lower stress levels, great strength training, better body awareness…I’m obsessed! (Just ask my poor boyfriend: every time he has an ailment I tell him that yoga will fix it).

Downward dog is wonderful, but paying $20 per drop in class is not. I find that paying for a month up front isn’t a better deal either- I just feel stressed about not going enough and wasting my money, and more stress is not what yoga is for! But I do believe that physical fitness is an area that it is worth spending money on, if it makes you more likely to stick to healthy habits. I sometimes do free yoga podcasts at home….but by “sometimes” I mean it’s happened twice in the past year. Evidence shows the free version is not going to work for me, so it is worth it to spend a little money to help me keep up with yoga.

Compounding the conundrum is the fact that getting to the nearest yoga studio would add an hour to my workout every time I go (car free living has a few downsides). I usually don’t have a spare hour in addition to my yoga time, so the chances of me going to that studio are slim….what to do?

Luckily, there is a gym on my block that has a few yoga classes each week. The gym itself isn’t especially appealing to me (rows of machines to help you exercise….I’d rather be outside!) but the unlimited yoga for a relatively low monthly rate is just what I’m looking for.

So I stopped into the gym and asked about their rates. This gym’s claim to fame is that if you pay an up front fee, you don’t have to sign a contract. You pay a month-to-month rate, but you can quit at any time. This sounded pretty reasonable to me, because I do know that unused gym memberships are a major way that Americans waste money. I also found out that there is a plan where I could pay a slightly lower monthly rate, but I would have to commit to a year. Here are the options:

  • Pay $99 up front and then pay $35 a month for as long as you want to be a member. No commitments here!
  • Pay $360 for the year (which comes to $30 per month)

Because I am me, I decided to crunch some numbers. I have already decided that I miss going to yoga, and I am going to spend some money to bring yoga back into my workout routine. Drop-in classes at the near-ish yoga studio are $20 each (and not as convenient). Do I want to keep it flexible (yuk yuk) and not commit? Or should I spend $360 up front?

Check it out:

Months Gym with no contract Gym with year commitment
1 $134 $30
2 $169 $60
3 $204 $90
4 $239 $120
5 $274 $150
6 $309 $180
7 $344 $210
8 $379 $240
9 $414 $270
10 $449 $300
11 $484 $330
12 $519 $360

At no point is joining the gym without a contract cheaper on a per-month basis. The first month alone costs $134!!! (6.5 drop in classes!!!) If you quit the gym any time before 7 months of membership, you will have paid less than the $360 needed for a year’s membership….so technically you would be saving money, but you also would have been paying a much higher rate for those 7 months ($50 a month!). After 7 months of membership, you are just plain overpaying! What might seem like a good deal at first (no commitments! How appealing!) is actually just a scheme to keep you from realizing that paying for 7 months of “no commitments” will cost you the same as 12 months on a contract…and signing a contract is like getting 5 months of gym time free!

I decided that the $360 up front is the best deal for me. $360 is the equivalent of 18 drop-in classes at the near-ish studio- so if I go to 1.5 classes a month (3 classes every two months) I will be breaking even. I try to go to yoga more than 3 classes every two months, so I think this will be the best choice. Now, off to get my downward dog on!

 

Spring Break WHOOOOO!

Pollen’s out, snow has melted, I spy a tulip…must be spring break season!

Everyone loves spring break. Warm weather (finally!), fruity mixed drinks, beaches, bikinis….offers from your friends to go in on an “everything’s included resort for just $1000 per person plus airfare”…which, if you are like I was in college and grad school, you could never afford. How all those undergrads could pay for their jaunts to Europe and Thailand still puzzles me (they must have been trust fund babies and their peers who didn’t understand that credit card debt is not worth a week in Cabo).

Despite (still) never having been to Cabo, I managed to have a wonderful time on all of my post-legal-drinking-age spring breaks, and I never broke the bank. Here are some of the things that I did instead- much more affordable and still loads of fun.

-One year I volunteered with a group to do post-Katrina construction work. The Gulf Coast is beautiful in the spring, I got to meet some great people at my university outside of my normal crowd, and we helped out people who really needed it. I have always enjoyed building/construction work, and putting on shingles in the sunshine with new friends was a welcome break from studying. Also, we were staying next to Brett Favre’s bar right on the beach, so we still had some traditional spring break fun!

-Nothing like a friend from Miami. One year my girlfriends and I drove down to Florida together, stayed at her mom’s house, and took a side trip to the Keys. Her dad got us amazing tickets to a music festival and we had a great time. Lovely weather, live bands, home cooked food and only paying for two days of hotels= excellent vacation.

-I went to grad school in California, but during school I didn’t have much time to explore parts of the West Coast that were father than a few hours away. One year my sister flew out to visit me and we explored southern California together on a road trip- Disneyland was our biggest splurge, but we also got a student deal on the San Diego zoo. We stayed in hostels (which I am now officially too old to enjoy), used coupons for road trip fast food (I love McDonald’s oatmeal, I don’t care what anyone says), ate out of roadside stands and loaded up the car with snacks. We got to see a part of the country we otherwise wouldn’t have had time to explore and we had a great time.

-My last spring break (sniff) I was still in California, and two of my girlfriends who were working across the country came out to visit me. We mainly stayed in my (charming) California city, where there was plenty to do- I got to play tour guide and we did the things that I never had time to do when I was busy with school. We got groupons for whale watching and went wine tasting in the middle of the day. We took a side trip out to the desert for a few days and stayed at a kitschy, dated spa….aka, a really cheap, fun place. We paid for two nights at the spa hotel and the rest of the time we were able to cook and stay in my comfortable apartment. Even though I was still at home it felt like a vacation because I had friends visiting who I never get to see.

Some more general tips about vacationing on the cheap:

-Driving (your own car) instead of flying is usually cheaper. Especially with more than two people. Road trips are great!

Airbnb is a relatively new thing, but I have had amazing luck with them. Staying in an apartment means that you can cook your own food, not stay in hostel dorms, and spend your money supporting an individual rather than a chain hotel.

-Any time where you can avoid eating three meals out will save you a ton of money. Eating out for a whole week sounds nice, but I find that it is expensive, I don’t feel great after, I feel badly about wasting the leftovers and I get tired of trying to find new places that are the right price and have interesting food. Try to get a hotel with a kitchenette (or free breakfast), if possible. Even if you just pack granola bars and fruit instead of paying for breakfast, you will save a lot of cash.

-I have a friend whose roommates saved all of their cans and bottles for the whole year then cashed them in. They made about $400, which made their road trip extra affordable. Other people save all of their change as their vacation fund- whatever works for you.

-Often times simple activities with friends (hiking, a day trip to a nearby town, bike rides, a picnic in the park, local camping) is more fun than an expensive trip. You can relax and enjoy their company without that nagging guilt about how much you are spending. Spring break is timed so that being outside is appealing again- take advantage!

The point is- there are lots of ways to have a wonderful time on spring break without breaking the bank. If all your friends are going somewhere that you just can’t afford- be honest with them. It might be that a few of them are in your same boat, and a lower cost vacation might be a better choice for them and you. Spring break is also a wonderful time to see friends who live in other parts of the country- think outside the box a little, and you will have a great time!

Whooooooooo spring break! Have fun!

A Freelancer’s Money Management Techniques

Guest post by my talented friend Becky, who very bravely started her own business a few years ago. Becky is even more knowledgeable about personal finance than I am (can you believe it?!) and she knows about managing a small business- something I know nothing about. Thanks, Becks!

You can follow Becky at @thebeckyhamm, if you love her advice already!

A Freelancer’s Money Management Techniques

I’ve owned my web design business for 2 years now. Going from a well-paying salaried position to freelance was a huge shift in the way I thought about money, but the basic principles remained the same. Here’s my general process.

Note: Since very small businesses is what I know best, this article is geared towards them. If you have a brick-and-mortar type location, your cost structure will be quite different.

Setting Things Up

As a freelancer, there are a few things you need to take care of before you get to the “making millions of dollars” portion of the job.

One warning: starting a business isn’t going to be as cheap as you think it will be. I’ll try to outline my costs for you so you can get a more realistic idea.

1. Register Your Business

If you are doing more that just babysitting on the side, I recommend you register for either an LLC or a corporation. This is best discussed with a tax accountant or an attorney (or very knowledgeable parents/friends/relatives). Incorporating your business limits your liability if something goes wrong down the road. Most states have an online portal these days where you can officially register. In Florida, it costs about $140/year to be registered in the state.

2. Get Your EIN

Get your EIN (employer identification number). This number is used for tax purposes for your business, and sometimes clients will ask for it. This is free! Yay!

3. Hire an Accountant

Hire an accountant. This can’t be said enough. You will not be able to fill out a 1040-EZ anymore as a small business owner, and taxes will turn into a giant headache. Yes they are more expensive than the DIY approach, but I can tell you from experience that they are DEFINITELY worth it. I saved over $5000 this year because I used an accountant. Depending on how much money you make, your accountant will help you file either a personal return or as an S-Corp. The difference can mean thousands of dollars for you.

Getting your tax return done by a professional can cost between $200 and $1500/year depending on how you file. Yep $1500 sounds like a lot, but you’ll save more in time and money by going with an accountant.

4. Separate Your Business $$ from your Personal $$

Open a business checking and savings account. I am a self-professed hater of Big Banks and their ridiculous fees, so make sure you check out your local banks and credit unions for good accounts with no minimum balances or weird rules. At credit unions, opening an account is usually free!

5. Track Your Expenses

For my first couple of years, I tracked expenses in Excel. I kept all of my receipts in one place and matched them up against my business checking account to make sure everything was gravy. However, I just started using Quickbooks Online, and holy crap my life is so much easier now. Since it connects to my business account, all I have to do is enter mileage. Awesome! It’s worth the $11/mo for me.

Income

There’s one main rule with your income: deposit all of your hard earned money into your business checking account. I highly recommend NOT putting it straight into your personal bank account. It’s much easier to keep business expenses separate from personal expenses this way.

Taxes

You may be scraping the bottom of the barrel your first 6 months (or year…or two years) as a new business owner, so it is very tempting to just “think about taxes later”. Unfortunately, Uncle Sam doesn’t agree.

It sucks, but you need to take out a good chunk of that payment you received and keep it for taxes. Here’s what I do:

  1. Once your see your deposit show up in your business checking account (because you did open a business account, didn’t you?), immediately transfer 25-35% of it into your business savings account. That savings account is for Uncle Sam.
  2. If you want to keep things more separate, open 2 business savings accounts – one for true business-related “savings”, and one for ol’ Sammy.
  3. Consider how much “spending money” you want to keep in your business checking account for expenses like software programs, notepads, conferences (airfare, hotels, food, etc.), and any other regular expense. I leave a minimum in my account for that purpose. Depending on a lot of different factors, my business expenses range from $2000-$5000/year.
  4. After you’ve transfered away much of your hard earned cash or determined to leave some for expenses, then feel free to move the remaining money over to your personal accounts. You can do this by setting up a transfer between your accounts, or just write yourself a check.

Every quarter, I pay the IRS my quarterly estimated taxes. Edit: I used to do that. Now I talk to my accountant to figure out whether I need to submit estimated taxes, “payroll” taxes, or pay at at the end of the year. If you do submit quarterly taxes you can send Sam a check via snail mail, or send it online through EFTPS (the Electronic Federal Tax Payment System).

Saving and Investing

As Kate has so thoroughly described on her blog, saving is massively important. What will you do when your transmission fails? Or your dog swallows a rock and needs surgery? Or your computer implodes? Your first line of defense should be your emergency fund, followed by your regular checking account, followed by your credit card (because I sure don’t know anyone who enjoys paying interest).

Emergency Fund

As a freelancer, there will be times when you have just enough money to pay your rent and you have NOTHING EXTRA for savings. Yep, it happens to everybody. It’s ok. There will be other months when you are rollin’ in the dough, a la Scrooge McDuck (though perhaps on a smaller scale), and you can use that extra income to plan for your leaner months. For example, in my business I’ve learned that my 4th quarter is slow. So this year I’m saving more to compensate.

Accounting for these ups and downs take a little more effort than if you were getting a steady paycheck, but it is still relatively simple in the grand scheme of things. I have a few general rules that I follow when determining when and how to save.

  1. Look at your checking account. Does the amount in there add up to at least a month and a half of your expenses? This is the point where I take out 30% of the amount I pay myself and transfer it to my personal savings. Yep, 30%. Yes it hurts, but not so much if you do it right away and just pretend it wasn’t in your checking account to begin with. Even better, you can transfer money DIRECTLY from your business checking into your savings. Ta da! You’ve tricked yourself and helped your future self all the same time.
  2. I have some semi-regular contract gigs that I receive checks for each month, and one or two side gigs that are irregular. Sometimes I put the entire side gig check (sans tax) straight into savings. I don’t miss it from my “regular” income pool, and I’m preparing for any emergencies.
  3. By the way, the bank I use for my personal accounts is Charles Schwab. Guys, they are seriously the best. I turned Kate on to them. If you’re going to be putting your hard earned money somewhere, make sure it’s somewhere that isn’t charging you any dumb “maintenance” fees, minimum balance fees, foreign transaction fees, ATM fees, check fees, etc. Schwab charges nothing, you get all ATM fees refunded to you each month (you can use any ATM in the world), and their customer service is stellar. If they had business checking accounts, I’d be on it like white on rice.

Investing

When I worked at my old company, I had a 401(k) and a Roth IRA. As Kate says, a 401(k) is essentially the closest thing you’ll ever get to free money, so if you still have access to one, TAKE ADVANTAGE OF IT.

Now that I work for myself, I do not have the option for a regular 401(k) but there are other options like Individual 401(k)s or SEP-IRAs (Self-Employed IRAs). Do your due diligence: if you don’t already invest, talk to some of the more reputable (note I said reputable, not famous) investment firms and see what they have to offer. Personally I use Vanguard, but I hear good things about T Rowe Price and Fidelity.

If you can swing a 401(k) with matching by paying yourself and then matching yourself (another good reason to talk to an accountant), then start there. If you “max out” your pre-tax investing, then add anything else you want to invest to your Roth IRA.

Now you’re ready to manage your money as a freelancer! I told you it was easy. The hard part comes next – you have to make money in order to manage it. Best of luck!

Things I just Learned about Taxes

Hi readers!

As you might guess, I filed my taxes this weekend. I also have had some big life changes. I am no longer funemployed! My job was supposed to start today but we are having a good old fashioned snow day instead! Kind of a bummer, but now I get to tell you about some of the things that I just learned about taxes.

Along with my new job comes some new benefits. I had to decide on my benefits this weekend, too, so I now have many more thoughts about that.

The first thing I learned was a little bit about how to work the tax system (thanks, Mom!). You know how I told you all that 401k’s are tax deferred? Meaning, you pay taxes on them when you are ready to retire, but you don’t pay taxes on the money now? Here are a few new things that I just learned.

  1. You pay taxes on the amount in your retirement not based on the amount of money you made the last year you worked (ideally, this will be a gazillion dollars) but on the amount of money you take out of your retirement each year when you are retired (ideally, this will not be a gazillion dollars). Therefore, you will pay taxes during retirement based on the tax bracket of someone with your “retirement income.” Which may or may not be lower than your income is now, but you have control over how much you take out, and therefore you can control which tax bracket you are in when you retire.
  2.  You can LOOK UP tax brackets and do the calculations yourself. This may sound like the most obvious thing in the world to some of you, but taxes have always been a big mystery to me and I didn’t realize it can be simple to estimate your taxes. I’m really smart, I swear! I just don’t like taxes.
  3. Because you don’t pay income tax on tax-deferred savings, you are able to put more money into your investments at the start (and you can look up how much more, depending on your tax bracket). This means more money (like, 25-30% more…not insignificant) will be subjected to compound interest from the get-go. So your end result will be much higher than if you had paid taxes on the same amount at the beginning (like for a Roth IRA). Don’t forget that you have to pay taxes when you withdraw your funds, though. There is no escaping Uncle Sam, but you can decide how and when you want to pay those taxes.
  4. When you put money into tax deferred accounts, you can actually calculate the amount of money you will be saving in taxes, so it is a little easier to choose how much to save. For example:

Say I make $80,000 per year. I am able to invest up to 5% into my 401k ($4000). Not only am I getting compound interest (like a boss), but I also am spending less on taxes! Here is the math (based on the 2014 tax schedule):

Taxable income Amount invested Amount owed in taxes Difference from no investment Summary
Without investing in 401k  $80,000  $-  $15,856  n/a $0 invested, $0 tax savings
Investing 2.5% in 401k  $78,000  $2,000  $15,356  $500 $2k invested, $500 tax savings
Investing 5% in 401k  $76,000  $4,000  $14,856  $1,000 $4k invested, $1k tax savings

It is a bit of a balancing act: if you put more into your 401k, you have less cash to spend today, but you also save on taxes (which you can spend before you retire). If you can afford to contribute the maximum into your 401k, you get compound interest, but you also pay less in taxes.

Hopefully this was obvious to all of you, but I had not thought of tax deferred investments as a tool to decrease your tax load (probably because I have never had benefits before….), but there you are- an added benefit to saving for retirement!

Outsmarting your student loans

Woohooo you graduated! Things are great! You have that coveted degree (or two) and you never have to take an exam again! Yeah!

Just one thing though…you still have to pay for that degree. For new graduates (regardless of your field) this can be daunting. When I first calculated my loan repayment amounts I had to pour myself a stiff drink for the shock…yikes. The number was pretty high- almost as much as my rent! That is with scholarships, working multiple jobs, eating lots of beans and living a very slenderized lifestyle! It’s not easy being edumacated, that’s for sure.

Luckily, things aren’t as bad as they seemed. First of all, there are a number of repayment plans that are a little more forgiving than the evenly-spaced-repayment-over-ten-years plan. These alternative plans have encouraging titles, such as “Pay as You Earn,” and “Income Based Repayment,” and they will make paying back your loans a lot more tolerable (at least at first, while you are still working internships while waiting tables on the side). By signing up for one (the paperwork takes a few months, so be prepared) I expect to reduce my required payments by about 75% each month. Some service jobs (government work, teaching etc. etc.) allow forgiveness of the remainder of your loans after 10 years of steady payments (but don’t bet on this! It is still better to pay loans off more aggressively than to assume you will have them forgiven 10 years from now).

Now, that doesn’t mean I shouldn’t be paying more than the minimum, if I can afford it. Paying any more than the minimum (even if it’s just $50 more each month) will save you quite a bit in interest in the long run. The more aggressively you pay back your loans, the less you will pay in interest and the sooner you can move on with your life.

Speaking of interest- if you can afford to pay more than the minimum, all of your extra payments should go towards the loans with the highest interest rates.

Here are a few tricks that will lessen the total cost of your loans and that will not burden you one bit:

  • Loan servicers often offer a slight (.25%) discount on interest if you sign up to have your loans taken directly from your bank account. It is automated (yay! No worries and no late payments!) and a .25% reduction in interest on a 10 year, $50,000 loan comes out to be nearly $1000. I’d like a spare $1000, would you?
  • Consider making your loan payments biweekly instead of monthly (this is especially good if you get paid every two weeks). This way you sneak in an extra month’s worth of payments without even noticing the difference in your paycheck. Suppose you pay $500 each month. $500 x 12 monthly payments= $6000…versus $250 x 26 biweekly payments = $6500. On a 10 year $50,000 loan at 7% you will pay your loans off in 9 years and save $2100 in interest. You never even noticed the difference.

Boom. I just saved you $3100 (and a year’s worth of making payments!) You can thank me in your Oscar acceptance speech.

  • Have a relative with some spare cash? If you are responsible, have a steady income and have a good relationship with this family member, consider offering them the following: they pay your loans off up front and you pay them off to the family member at a slightly lower interest rate. If you were paying 8% on your loans before, offer your relative 5% interest. Set up a formal agreement with a payment plan (loan calculators are just a google away!) If you have proven yourself to be responsible, this could be a win-win: you get a lower interest rate on your loan, your family member gets a guaranteed 5% return on their investment. This won’t work for everyone, but it is an option to think about.

Just remember- even the president had crippling student loans. It happens to everyone (well, not those lucky trust fund babies…) but hopefully these tricks will make repayment a little easier on you.

How to decide what you can afford

If you are in your twenties, you are probably making some big life choices. When you move, switch jobs, go to school, get married, have kids…you have to readjust your budget.

No big deal- you already know how to do that! But what if you are about to make a big commitment (signing a lease, buying a car) and you aren’t sure if you can afford it?

Let’s rewind in my life, exactly 13 months ago. I was moving to a new (expensive) city. I had a new income. I had sold my car but I wasn’t sure how much I would be spending on public transportation or cabs (because how was I supposed to know, I hadn’t been there yet!) How much would food be? (turned out my closest grocery by about a half hour was Whole Foods…it’s not called Whole Paycheck for nothing, kids!) Word on the street was that everything is pricier in this city, and I no longer had the luxury of a car to drive to farther, cheaper stores.

When I was house hunting, there was a huge range of rent prices in the areas I could reasonably commute from. Places that looked like dumps to me were $700 (with roommates), while nice one bedrooms were about $1900 (although there seems to be no cap on the maximum amount you can spend on an apartment). But what could I afford? I didn’t want to sign a lease and then have trouble paying rent, but I also had more income coming in than I had in the past and I felt like I could move a step or two up from double wide trailer I lived in when I was 24.

The first thing I did was estimate my take home pay. I knew what my total salary was, but it is always a surprise when you see the amount on your first paystub (oh Uncle Sam, you get me every time). If you forget to calculate in taxes, you can be really up a creek. I used this calculator, and then I subtracted $200 just to be safe.

Then (I really did this because I had no idea) I googled how much of your paycheck should be going to rent. This is an example of a wisely written article that helped guide my choices. The standard response is that you should be paying no more than 30% of your take home income in rent. Sounded good to me, and I could move a step or two up from the dump apartments! Yes!

Spending 30% of my income on rent meant that I ended up in a lovely house with two roommates. Definitely not a dump, but not a luxury one bedroom apartment in the middle of all the action, either. It suited my commuting needs, I was in a safe neighborhood, and I made friends with my roommates. I never had trouble paying the rent.

Even though it turned out that many parts of my new city were more expensive than I had planned, I knew that my fixed costs (rent) were within my budget. Because I am pretty savvy about reducing my variable costs if I must (food, transportation- even utilities) I am mainly concerned with making sure I can afford my fixed costs.

However, some people swear by the 50/20/30 rule for budget planning.

50% of your budget should go to housing, food, utilities and transportation.

20% of your budget should go to your financial goals (savings, emergency fund, retirement).

30% of your budget should go to lifestyle (clothes, gym fees, bars, vacations).

I personally don’t follow the 50/20/30 rule, but it can be a good rule of thumb when you are trying to decide what you can afford when you are going through big life changes. Again, these rules (all budget rules) are just guidelines for yourself. The entire point is to make things easier for you, so that you never have to struggle to pay rent that you can’t afford.

It’s kind of like the Game of Life, except it’s actually real life. And you actually have to live in the house you pick!

What to do when you win the lottery

…or get your tax refund.

Suddenly you have a ton of money! Yeah! But what do you do with it? You are my wise and clever reader, so you know it is not smart financial planning to blow it all on a sports car. But this new money isn’t in your budget, so how do you fit it into your spending and your goals?

First, you celebrate! It’s exciting, you have a little spare cash! Go buy that jacket you have been dying for. Try that new restaurant. Replace your ratty old gym clothes with something that makes you excited to exercise. Make the celebration reasonable- it should be about 10-20% of your new ca$h money. Spending $500 on a new tv when you got a $1000 tax refund might be going overboard, but maybe getting HBO might be a nice splurge.

Next- look at your debts and your savings goals.

  • Can you pay off a credit card with this cash? Won’t that feel awesome, to not pay interest anymore?
  • Is it enough to make yourself an emergency fund? Then you won’t have to worry about unexpected expenses, and the amount you were saving already towards your emergency fund can go to feed the general pot.
  • Can you invest it in your 401k or your Roth IRA? Earn some crazy compound interest on this free money to make even more free money?!!
  • Should you use it to pay off some student loan debt?

If I were you, I would do a mix of the things above with my newfound cash- but you have to be wise about it (consider your interest rates, my friend). If you can pay all of your debt off- do it! But paying just some of your debt off all in one big chunk may not actually be the best choice.

What if the cash you just received is big for you, but it is just a fraction of your overall debt?

Suppose you are the newly graduated Dr. John Doe. Medical school sure was fun, but the average cost of med school is $170,000. Your monthly payments are almost $2,000. Yikes.

But wait! An unknown- yet extremely wealthy- elderly relative just died peacefully in his sleep. He was so proud of his great-great-nephew the doctor that he left Dr. Doe $20,000.

If Dr. Doe immediately puts that $20,000 into the balance of his student loans, he will now owe $150,000. His monthly payments will be a little over $1,700. Is that much better for Dr. Doe, who may be struggling to make his rent while working those crazy shifts as a resident at his new hospital?

Depending on Dr. Doe’s income, it might be better to save the $20,000 and to use it to make the monthly payments. He can make 10 months worth of payments with the $20,000. The total interest he will pay will be slightly more than if he had paid a lump sum off at once- but not by much (an $8,000 difference). I suspect that early in his career, Dr. Doe would value 10 months of being able to pay his bills worry free more than he will value $8,000 after he is an established doctor.

 

Moral of the story: when you suddenly come into some money, think about your overall financial picture. Paying off part of your debts all at once might not make sense if you are struggling to make monthly payments- but if it lowers them enough to ease some of the burden, then go for it! Look at the parts of your budget that are difficult for you (maybe you just can’t quite squeeze enough cash into your emergency fund) and use the newfound money to help with those areas that are challenging.

Congrats on that lottery win, by the way!

New Year’s Resolution Reminder!

Today is the (self imposed, entirely made up) deadline for setting up a budget tracking system! This doesn’t mean you have to decide on your whole budget today, this means you are taking the next few months to track where your money goes. Once you have a good idea about how much you spend each month in each category, then it will be a breeze to set up some budget guidelines for yourself.

There are a few ways you can do this. You can set up an account with Mint (my personal favorite. It takes a while to set up, but after that it is basically zero maintenance and they all of your long term tracking for you).

You can make your own spreadsheet (minimal effort to set up, the amount of maintenance depends on how detailed you want to get).

You can even experiment with the cash-only system just by using your best guess and seeing how the money works out. Don’t forget to write down your adjustments so that you can figure out what your trends are.

Pick a tracking system that is easy for you. This is the first step to setting up a budget, and the budget is for you and you alone (or I guess, for you and your partner if you have joint finances). So make it a system that works for you! If setting up a Mint account makes you want to vom, then try another system. Baby steps, I promise it will be worth it in the end!

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