Why are financial goals important?

Everyone has dreams, right? I dream of hiking Mount Everest and swimming 10 miles across the ocean. I said I dream. It will never happen. Why? There are two reasons. One, I am terrified of heights. Second, although I am a good swimmer, I am scared of the deep ocean. So, those dreams won’t happen.

I also have goals for our future. I want to be financially independent and not have to worry of not receiving a check or how we will pay for X or Y. This is our main financial goal. The difference between this goal and my dreams? I can work toward reaching my goal. And I am.

You need to sit down and decide what are your financial dreams.

  • Do you want to be debt free?
  • Do you want to have a new car every year?
  • Do you want to pay for your kids’s college?
  • Do you expect them to pay for college themselves?
  • Do you want to retire early?
  • Do you plan to work until you are in your 90’s?
  • Do you want to travel the world?
  • Do you want to give to others?

These are some of the questions you should ask yourself when you are setting up your financial goals. Once you determine what your goals, you will be able to set up a plan to reach them. An important step is setting up time frames for yourself.

Is your goal getting out of debt? Start deciding which debt are you paying off first and set up a realistic date on when should that happen. Then get onto the next one on the list. And just keep going.

Do you want to retire early? Start investing as much as you can in Roth IRA’s and your Roth 401K’s. If you maximize both tools, keep investing in mutual fund accounts.

Do you want to pay for your kids’s college? Set up 529 college savings plans as soon as you can for each kid. Discuss your plans with them. Are you planning to pay for all the school expenses? Are expecting them to

Working on these goals will represent sacrifices now but remember that most of these goals are long term and you need to stay focused on the goal. Making changes in your lifestyle now will have rewards when you are able to achieve those goals.

What are your financial goals? Have you set up a plan?

Why do we have 17 banking accounts?

In my post The Half Payment Method, I explained why this method saved our finances and changed our lives forever. Basically, you add all your fixed expenses and split the money equally between your paycheck periods and then, you always have the money availalble when you need to make those payments.

When we started this method, we were using cash envelopes. I will explain more about them in another post really soon. The cash envelopes were good but we were always worried about either losing the envelopes or leaving them at home when we needed. So, we decided to start depositing the money in different banking accounts. It is the best thing we ever did!!!

Why do we have 17 banking

We named all the banking accounts with their purpose and the money that we must deposit on each paycheck. For example, in our current budget, we have $600 per month for groceries (we live in Hawaii so everything is more expensive). That account is named “Groceries $300”. When my check hits the banking account, we transfer $300 to that account. When we go to the grocery store, we log into the bank app, know how much we have to shop and we pay with our debit card.

Since it would be crazy to have card for each account, we only have 2 debit cards. One for the grocery account and one for the main checking account where we receive our direct deposits. If we need to buy anything or pay any bill, we transfer the money to that checkings account before making the payment and voila!

Ok, so now you know how it works but you may ask why do we have so many accounts? For us, it is easier to have several accounts with specific names. So, I will share what we name our accounts.

  1. Our Checking Account- In this account, we receive the EFT deposit from our employers. It is the only account that we have debit cards from (in addition to the groceries account).
  2. Clothing and Odd Expenses- We don’t buy a lots of clothes but we like to have a fund to have money available when we do need to buy them.
  3. Internet, cellphones and insurance- All our fixed expenses go into this account.
  4. Groceries
  5. Mortgage- This our only debt at the time. We deposit our monthly payment plus anything extra that we receive to apply to the principal.
  6. Donations and gifts
  7. Going and Dining Out
  8. Spending Money
  9. Miss A’s Swimming, Girl Scouts and Supplies- We split her dues for the year into monthly deposits. When it is time to pay them, we just withdraw the money.
  10. Gas and Auto Maintenance
  11. Christmas Club
  12. Our Next Vacation
  13. Our Dream Home- Since Mr. B is serving Active Duty right now, we don’t plan to buy another property for now so we are saving for a nice deposit once we retire and settle.
  14. Our Future- This is how we name our Roth IRA’s.
  15. Miss A’s 529- College Education Account
  16. Our Next Car- Instead of making monthly payments to a bank on an auto loan, we pay ourselves a fixed amount to have money available is something happens or when we want to upgrade. I will explain more in a post soon.
  17. Our Emergency Fund

What do you think about our method? Do you have any recommendations for accounts that you think we should add?

What is the half payment method?

Are you living check by check? Do you ever feel like you have more money at one pay period than the other? Are there any paychecks that you have no money left at all?

Today, I want to talk about the half payment method. This is the best thing we ever did for ourselves. This method changed everything for us and I want to share it with everyone else.

What is the half payment method

I will start explaining with an example first. Suppose that your net pay after taxes is $1500 each paycheck. Your pay dates are the 1st and 15th on of the month. You have several obligations that are listed with their due dates of each month:

Car and renters insurance – $100 -Due on the 1st
Rent – $850- Due on the 5th
Utilities- $250 -Due on the 7th
Credit Card -$100 -Due on the 15th
Car Loan – $450- Due on the 18th

If you use your first check to pay for the obligations due in that period, you would pay the insurance, rent and utilities for a total of $1150. It means that you only have $350 left of your paycheck to pay for groceries, supplies, kids classes, pet expenses, eating out and anything else. It is simply not enough.

On the second pay period, you pay your car loan and credit card for a total of $550. Now, you have left $950 so you feel rich and you spend everything. Does this sounds familiar?
This was definitely the situation for our family for a very long time. Then, we learned about the half payment method.

Instead of paying everything on the corresponding pay period, you write down your obligations and take out the same amount of money for each paycheck and set it apart.

In the prior example, the total amount of fixed expenses is $1850. That means that you will need to set apart $925 per paycheck. This way you will have $575 left in every paycheck. You can save the money in envelopes and take it out to male the payments or you can several banking accounts that you can transfer from when you need to make the payment. When you need to make the payment, take out of the envelopes or the separate banking account. Simple, right?
What do you think about this idea? Do you use this payment method too?

A simple budget…

A simple budget

Ahhh! A simple budget. What? A simple budget? That doesn’t exist. Does it? Budgeting is complicated and it is not important. Right? Well, I want to tell you that budgeting is the most important tool that you have in your life. A budget is your guide on your path to financial freedom. It is the map of where your money is going and it helps you decide when and how you are going to spend it.

Most people think that preparing your budget is hard and that it takes so long to do. I will tell you that it isn’t and it is crucial for your future so you need to start one right now. So, let’s start.

Step 1: Calculate your income.

Make a list all of your income for the month. Include any side jobs or rental income. Remember to include all sources of income in your home.

Step 2: Financial Goals

Most people will decide what and how much they are saving for after they see how much money they have left. I will ask you to stop now and decide what are you working for. What are your financial dreams? Do you want to become debt free? Are you saving for a new car or a deposit for your next home? Do you want to pay cash your next vacation? Do you want to pay for your kids college?

Now, decide which goals you want to accomplish in the short- and long-term. Short-term goals should take no longer than a year to achieve, two years at the most. Long-term goals, such as saving for retirement or paying for your kids’ education, may take a lot longer to reach. These goals might change during time but identifying them will help complete your budget.

Step 3: List all your expenses.

Fixed expenses are all your obligations that are due every month. Some of these expenses are your mortgage or rent, utilities, insurance, car loans, credit cards, gym membership and so on. Then, write all of your variable expenses that change every month, like groceries, utilities, gas and others. It is important to include going out, your coffee trips, vet visits, gifts or anything else that know you will need money during that month. Look at your credit card or bank account statements. They will give you an idea on how much you actually spend on each category each month. This will be the scariest part of the process the first time that you write your budget but you need to be honest with yourself. The more accurate the numbers are, the better planning you can do.

Step 4: Make the budget

Now that you have all the info available, you will add up all of your income sources and then subtract up all of your expenses. If you have money available after paying your expenses, congrats! Now you can focus on that financial goals you set up earlier. If you don’t have money left, then you need to review what adjustments do you need to make in order to meet ends and achieve your goals. Can you need to change your cell phone carrier or change your plan? Can you cancel cable TV? Can you start bringing your lunch to work instead of spending $10 per day at lunch? These things might look simple but they will make a huge difference on how your budget looks.

It is really important that you set up a portion of the income to put into savings. If you’re not saving a portion already and you think it is difficult right now, I suggest putting a small portion into a savings account (with no access via a debit card). Start with 1% of your income but make a commitment to yourself to slowly increase this amount until you have at least 15% of your paychecks going into savings.

Step 5: Review and make adjustments

Now that you have successfully implemented your budget, it’s important that you review it on a regular basis. We have budget meetings at the end of every month but we take a few minutes whenever we need to if there is an unexpected expense that we need to review. So, do you have any expenses that need to be reviewed this month? Did you have money left on an area that you can apply to debt or savings? Can you change movie night to a stay at home Netflix night?

What other steps do you take while preparing your budget? How often do you review it?