Monthly Archives: May 2017

Budgeting Based on Your Values

Are you finding yourself struggling to stick to a budget? Many clients and Millennials that I talk to are always excited once we are done talking about how to budget. I’ve realized that, like myself, we missed out on not just financial literacy but how to view our money. I have four ways that will help you start to think of your money as a tool to create a better life where you spend your money according to what you value. Here are my four steps to start.

1. What Are Your Values?

Often I’ve found myself in the past spending money on items that I didn’t use for very long or were poor quality. I’ve learned over time that if we develop an understanding of our values we can learn to spend money with a wiser purpose. When we spend wisely, our budgets become easier to manage and we start to control our finances without them controlling us. (For more from this author, see: 5 Ways to Improve Your Finances Throughout Life.)

2. From Values to Goals

Our values will lead to our goals in life. If you value family, I am guessing you may have a goal of starting a family or spending more time with your family. If you value travel, you may have a dream travel goal. Aligning our spending according to our values will help us reach our goals because we’ll be spending according to the values that help us reach our goals.

3. Work on Filtering Out Distractions

Every minute we are being advertised to – whether online, in Starbucks, on our drive or even during the podcast we are listening to. Ads are everywhere trying to get us to buy something that we probably don’t value and won’t help us reach our goals. Learn to look past these ads and stay focused on items that bring long-term value and move you closer to your goals.

4. Give Time to Major Purchases

Most goals are large purchases or expenditures of some sort. I encourage you to think through the purchase. Purchasing plane tickets because they are cheap for a trip that wasn’t even on your radar may be filled with regret. Just because an item is on sale doesn’t mean it is the right time. Save for what you expect but you can be ready to take advantage of discounted items if it’s the right time and you’ve been planning on the purchase. Impulse buying is what gets most people into trouble, even myself.

Our everyday decisions cause ripple effects. Make smart purchases that are aligned with your values and you’ll be on your way to achieving your goals in no time. My favorite budgeting tool, YNAB, is based on a budgeting philosophy that most people can resonate with.

 

Grow Your Savings Account Balances

One of the common top concerns that I hear from individuals is how they’re not able to save. A consistent savings plan helps you build a solid financial foundation.

But where do you begin? Here are seven ways to help you grow your account balances. Your strategy starts with your spending plan.

1. Create a budget (or spending plan)

Living beneath your means is the first step to building wealth. In addition to living beneath your means, it is equally important to identify where your money is being spent. By tracking your spending you can identify areas where you can potentially redirect money to fund your goals. Your spending plan should include goals for savings including your 401(k) and/or IRA contributions.

2. Set up a savings plan

Setting up a savings plan is key to building a solid financial foundation. You should keep at least three to six months living expenses in a liquid account such as an FDIC-insured savings account or money market for emergencies. Set a monthly amount to have transferred to your savings account.

You can also boost your savings by opening either a CD or an online FDIC-insured savings account.

3. Consider opening a CD

You may have goals where you want to fund but have a one- to five-year time horizon, such as saving for a car or down payment on a home. One of the best ways to increase your yield over a money market or savings account is to open an FDIC-insured CD. You can still keep funds fairly liquid. However, in order to get a higher yield, the account minimums on a CD are fairly high.

4. Consider opening an online FDIC-insured savings account

Typically, rates on online savings accounts are higher than traditional banks. It is a good idea to compare rates and terms. You can compare rates on websites such as www.nerdwallet.com or www.bankrate.com. (For related reading, see: 5 Emotional Mistakes That Hurt Your Financial Plans.)

Here are three ways to increase your 401(k) or IRA savings:

5. Maximize your contributions

Take advantage of your employer’s 401(k) or other employer-sponsored retirement plan by contributing the maximum you can to the plan. If you cannot contribute the maximum, just start with what you can afford and build from there. A good strategy is to increase your contribution each time you receive a raise until you reach the maximum contribution. If you receive bonuses, use part of them to contribute to an IRA.

6. Consolidate your retirement accounts

You should consider consolidating multiple IRAs and rolling over 401(k)s from previous employers. If you are no longer with the company, your money shouldn’t be there either. By consolidating into an IRA, it gives you more flexibility in terms of investment options and gives you a better picture of your portfolio.

7. Invest early and often

The younger you are when you start contributing to your retirement plans, the less you need to save. The key is to just start with what you can afford and contribute on a regular basis by setting up an automatic transfer from your account or paycheck to fund your IRA or 401(k).

You are in control of your financial future. Careful planning and a savings strategy can go a long way towards building a solid financial foundation and helping you achieve your long-term goals.

 

Know More About Economic Concepts Consumers

An understanding of economics isn’t seen as being as vital as balancing a household budget or learning how to drive a car. However, economics has an impact on every moment of our lives because, at its heart, it is a study of choices and why and how we make them. In this article, we’ll look at some basic economic concepts that everyone should understand.

Scarcity

You implicitly understand scarcity, whether you are aware of it or not. It is the most basic concept in economics, and is more of a solid fact than any abstraction. Simply put, the world has limited means to meet unlimited wants, so there is always a choice to be made. For example, there is only so much wheat grown every year. Some people want bread; some people want cereal; some people want beer, and so on. Only so much of any one product can be made because of the scarcity of wheat. How do we decide how much flour should be made for bread? Or cereal? Or beer? One answer is a market system.

Supply and Demand

The market system is driven by supply and demand. Take beer again. Let’s say people want more beer, meaning the demand for beer is high. This demand means you can charge more for beer, so you can make more money on average by changing wheat into beer than grounding that same wheat into flour. More people start making beer and, after a few production cycles, there is so much beer on the market that prices plummet. Meanwhile, the price of flour has been increasing as the supply shrinks, so more producers buy up wheat for the purpose of making flour – and on, and on.

This extreme and simplified example does encapsulate the wonderful balancing act that is supply and demand. The market is generally much more responsive in real life, and true supply shocks are rare – at least ones caused by the market are rare. On a basic level, supply and demand helps explain why last year’s hit product is half the price the following year.

Costs and Benefit

The concept of costs and benefits encompass a large area of economics that has to do with rational expectations and rational choices. In any situation, people are likely to make the choice that has the most benefit to them, with the least cost, or, put another way, the choice that provides more in benefits than in costs. Going back to beer, the breweries of the world will hire more employees to make more beer, only if the price of beer and the sales volume justifies the additional costs to the payroll and the materials needed to brew more. Similarly, the consumer will buy the best beer he or she can afford, not, perhaps, the best tasting beer in the store.

This extends far beyond financial transactions. University students perform cost benefit analysis on a daily basis, by focusing on certain courses that they believe will be more important for them, while cutting the time spent studying or even attending courses that they see as less necessary.

Of course, everyone knows someone who has seemingly made a poor life choice. Although people are generally rational, there are many, many factors that can throw our internal accountant out the window. Advertising is one that everyone is familiar with. Commercials tweak emotional centers of our brain and do other clever tricks to fool us into overestimating the benefits of a given item. Some of these same techniques are used quite adeptly by the lottery, showing a couple sailing a yacht and enjoying a carefree life. This image and its emotional message (“this could be you”) overwhelm the rational part of your brain that can run the very, very long odds of actually winning. Cost and benefits may not rule your mind all the time, but they are in charge more than you think – especially when it comes to the next concept.

Incentives are part of costs and benefits and rational expectations, but they are so important that they are worth further examination. Incentives make the world go round, and sometimes go wrong. If you are a parent, a boss, a teacher or anyone with the responsibility of oversight, and things are going horribly awry, the chances are very good that your incentives are out of alignment with what you want to achieve.

We’ll take a safe example, however, of – you guessed it – a brewery. This particular brewery has two sizes of bottle: one 500 ml bottle and a 1L bottle for couples. The owner wants to increase production, so he offers a bonus to the shift that produces the most bottles of beer in a day. Within a couple days, he sees production numbers shoot up from 10,000 bottles a day to 15,000. However, he is soon deluged with calls from suppliers wondering when orders of the 1L bottles are going to come. The problem, of course, is that his incentive focused on the wrong thing – the number of the bottles rather than the volume of beer – and made it “beneficial” for the competing shifts to cheat by only using the smaller bottles.

When incentives are aligned with organizational goals, however, the benefits can be exceptional. Some incentives have been proven so effective that they are common practice at many firms, such as profit sharing, performance bonuses and employee shareholding. However, even these incentives can turn disastrous if the criteria for the incentives falls out of alignment with the original goal. Poorly structured performance bonuses, for example, have driven many a CEO to take temporary measures to juice the financial results enough to get the bonus – measures that often turn out to be detrimental in the longer term.

Putting It All Together

Scarcity is the overarching theme of all economics. It sounds negative, and it is one of the reasons economics is referred to as the dismal science, but it simply means that choices have to be made. These choices are decided by the costs and benefits that impact the choice, leading to a dynamic market system where choices are played out through supply and demand. On a personal level, scarcity means that we have to make choices based on the incentives we are given and the cost and benefits of different courses of action. This is a very broad look at what is, believe it or not, a very compelling subject. These concepts feed into others, like comparative advantage, entrepreneurial spirit, marginal benefitand so on. The world is wide with choices, so the field of economics is wide with theories, laws and concepts that explore those choices.