A thought-provoking question

When you see a man cruise by in his $65,000 BMW 550i, what do you assume about him?

Kiplinger’s Magazine editor Knight Kiplinger posed this question to a group of high school students. Their answer? “He’s rich.”

And a man who drives by in a ten-year-old Chevy? “He’s struggling.”

The BMW, however, is probably leased (perhaps for three years, no money down), so we can infer only that the driver earns enough to handle a $1,131 monthly lease payment. We know nothing about his net worth, which may be great … or may be almost nonexistent.

And the man in the old Impala? Maybe he is struggling financially, but there’s another possibility: His income is just as great as that of the dude in the Bimmer, but he’s not saddled with a lease payment — and he’s investing the money in mutual funds that are growing at 10% a year.

The message in all this: The biggest barrier to becoming rich is living like you’re rich before you are. Why? Because all that discretionary spending — the chic apartment, frequent travel and restaurant meals, consumer electronics, fancy clothes and cars — crowds out the saving that will enable you to be rich someday.”

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Wondering where your paycheck goes each month?

…then take a look at this telling graph from Visual Economics. The data is derived from the 2006 U.S. Bureau of Labor Statistics — so it shows pre-recession spending. Still, notice how housing ($16,920) and transportation: ($8,758) make up more than 50 percent of the  average American’s $49,638 in annual expenses. One way to cut expenses is to stop depriving yourself of the occasional ice cream or coffee and instead lower your housing and transportation costs. Of course, in cities like New York, that’s often difficult.

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Financial advice newlyweds need

Money. That’s the topic that leads to most arguments among couples, marriage counselors and financial advisors agree. So before you say “I do” (or break the glass), set up some ground rules. Kiplinger’s Erin Burt offers some good tips:

1. Don’t keep money secrets. Share with your partner any student loan or credit card debt you’re currently carrying.
2. Sit down and create a budget. Sure, it’s not the most exciting way to spend the evening, but it’s crucially important. Figure out how much you make after taxes. Then, calculate all of your expenses. Your income should exceed your costs.
3. Once a month, have a “money date.” Check your expenses against your budget using a tool like Mint.com.
4. Start a “rainy day” savings account. Aim to stash enough money away to cover at least six months of expenses.

If you’re a hoarder and your husband is a saver, or vice versa, talk about it together. Often the way we spend our money has a lot to do with our emotional, not rational, selves.

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The “kosher” budget

The first step to learning how to live within your means is to calculate, well, your means. We’re always surprised here at Pazit by the numbers of people who have no clue how much money they make each month after-tax. This is especially true for freelancers and project-based workers who receive 1099s.

Pazit encourages its friends to sign up for free online personal finance tools like Mint.com, Thrive (justthrive.com), or Quicken Online. These tools allow you to upload all of your student loans, credit cards, checking, and savings accounts and organize them in one place. It’s an easy way to figure out just how much you’re spending each month.

Once you have a good idea of your monthly bills, sit down (with your partner, if you have one) and fill out Pazit’s budget. This budget was created especially for religious Jews who keep kashrut, since many expenses involved in maintaining a religious lifestyle are not included in other such budgets.

So set aside a few hours, sit down, and fill out this budget. It won’ be fun, but you’ll come out of the experience feeling much more empowered to improve your finances.

Download the budget here.

Email info@pazit.org if you think of any expenses we haven’t mentioned.

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Want to improve your finances? Top 10 action tips to take right NOW.

Here’s a handout Pazit distributed at the “Jewish Economic Survey” event tonight. We hope you find it helpful. Feel free to add comments with additional tips.

BUDGETING
1. Sign up at Mint.com or Thrive (justthrive.com) to gain a better picture of your finances. Add all your bank accounts, credit cards, and loans (student, car, etc.).  Sign up for automated reminder emails to make sure you pay your bills on time. (Late fee$ add up!)
2. Know what your after-tax income is. Guessing won’t work.
3. Use the after-tax figure to calculate your monthly expenses – rent, utilities, food, transportation. Be sure to take into consideration tzedakah you plan to give. Also, include expenses such as shabbos meals, lulav & esrog, mikvah payments, etc. Then, subtract your expenses from your income. You should have money left over for savings and investment. (Confused? See the Pazit Budget).

SAVINGS
4. If your savings account is earning you only pennies in interest, switch to a higher-yield online account like EmigrantDirect or DollarSavings. Right now, the rate is only 2%…but that’s better than 0.5%!
5. Take a good, hard look at your checking and savings accounts. Many banks charge fees or fines if you don’t maintain a minimum balance.
6. Ditto for ATM withdrawals. Try to visit your own bank’s ATM to minimize fees.

DEBT
7. If you have credit card debt, call up your credit card company and negotiate a lower interest rate. If that doesn’t work, find a new credit card with no transfer fees and a low interest rate (under 10 percent). That will save you hundreds of dollars in interest. Then, resolve to pay it all off!
8. Sign up to receive your FREE credit report at annualcreditreport.com. Choose only one of the three credit bureaus; that way, you can check your credit for free every four months. Make sure there aren’t any mistakes that are lowering your credit. A lower credit score means you’ll pay more for a mortgage or car loan down the road. Make a note on your calendar to do this again in four months.

RETIREMENT PLANNING
9. If your company still offers to match your 401(k) contributions, do it. It’s free money!
10. Have $100 (or more, if you can handle it – up to $5,000 a year) deducted automatically from each paycheck and deposited into a Roth or Traditional IRA. (The Roth allows you to invest after-tax dollars, which then grow tax-free). If your IRA is made up of at least 70% stocks (which it should be if you’re in your 20s), you’ll reap the benefits of dollar cost averaging (a fancy term that means that you buy steadily, month after month, rather than waiting for particular highs or lows).

The key to gaining a handle on your finances is being comfortable talking about money. Gain that comfort level by reading the business section of a daily newspaper (The Wall Street Journal’s Personal Finance section is great!) as well as magazines like Money. If you have any questions, email Pazit at info@pazit.org.

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