How to Rock Your Personal Finances

I am excited to share that last night my good friend Jenny Ferry interviewed me as a guest expert for her Year2Shine teleseminar series! (There is still room to sign-up if you are interested). The topic was “How to ROCK Your Personal Finances” – I definitely had a blast sharing tips and stories and Jenny did a great job facilitating. As promised, I’m posting the audio from the call with my notes below.

The call was 60 minutes (right-click to download and open in iTunes); if you are anything like me when it comes to learning by audio or video you will appreciate the following call outline.

How to Rock Your Personal Finances – Call Outline (60 minutes):

• 3:15 – Introduction & My Bio
• 6:30 – The story behind life after college
• 7:55 – My experience at the start-up, my philosophy that money is a FUN (yes, you heard me, FUN) challenge
• 9:18 – My money-related quirks (from the List of 100 Things About Me) – the fact that my brother and I plan to be millionaires, on me buying my condo at age 24 (11:30), Money as a Means Not an End (13:50), never staying in a relationship because I can’t afford to leave (14:50), Personal finance as a learning game – it’s fun! On being forgiving with yourself (15:40), On HATING credit card debt (16:40)
• 18:26 – Statistics on Personal Finance (Jenny Ferry)
• 21:26 – Question 1: What is the single biggest mistake people make around money management?
• 23:21 – Question 2: Where’s the best place to start when it comes to personal finance?
• 26:25 – Question 3: What if you are already in the hole? (My story on debt, channeling Eric Schmidt, the List of 100 exercise, and many other tips)
• 37:08 – Question 4: The “latte factor”: How can you make room for things you enjoy?
• 39:40 – Question 5: Any resources you recommend? (Some notes on building credit and how I use Google Spreadsheets for finances – I heart the cloud!)
• 43:48 – Question 5b: Do you recommend automatic bill pay? (Short answer: yes, but only for companies you trust, and if you consistently have enough in your checking account).
• 47:00 – RECAP: 3 most important personal finance tips.
• 51:50 – Q&A: How to align money with your values

Click here to listen to the call

Q: What is the single biggest mistake people make when it comes to managing their money?

The biggest mistake I see young people make is having an all or nothing mindset when it comes to money. It goes something like this: “If I can’t save a certain amount per month, I’ll save nothing.” Or, “If I don’t know everything about investing, stocks and bonds, I shouldn’t bother with any of it.” Start small! Start by putting $10 a month into an Emergency Fund – it will help you get all the systems in place so that when you’re ready to save more it’s as easy as a click of a button.

Q: Personal finance can be really overwhelming. Where’s the best place to start?

Know the lay-of-the-land, or state of the union, as I like to call it. I break this down into three simple categories:

1. Income (how much do you have coming in)
   
2. Essential Expenses (recurring things like rent and bills that you HAVE to pay every month)
3. Nice to Have Expenses (things that you spend money on every month, like newspaper subscriptions, manicure/pedicure, etc). These are things you consistently spend on, but could cut one day if necessary. People often forget to factor these into their monthly “allowance” – then are surprised at the end of the month when they consistently fall short of being able to pay their bills.

Subtract the expenses from your income, and your left with your discretionary spending allowance – keep a close eye on that, and adjust mid-month as necessary.

Q: What is you’re already in the hole? What then?

About six months after I bought my condo, I found myself in debt for first time in my life…I was MORTIFIED. So what happened? I chalked it up to six things (you can read the longer version of this in Credit Card Confessions Part One):

6 things that got me into debt:

• Failed to adjust to higher monthly expenses
• Went into denial instead of reacting and adjusting: There’s no such thing as being resourceful and in denial at the same time – I essentially procrastinated figuring out how to pay my bills until I had gone way overboard.
• Spent the same $400 about five times: I had a chunk of “shopping money” budgeted – and I spent it about five times. I just kept saying, “Oh – this will come out of my shopping money” over and over and over again, without actually keeping track of how much I had left.
• Didn’t properly stock my Emergency/Car funds: My 14-year-old car needed about $1,000 of work. I have a savings account for car-related expenses, but it only had $300 in it. I should have accounted and planned for the fact that every year I spend at least $1K-$2K on car-related bills (registration, repairs, insurance) and budgeted for it.
• Counted my chickens before they hatched: I planned on selling some of my Google stock, then the market dropped.
• Some miscellaneous reasons: Ate WAY too many expensive meals with friends; spent money on gas and travel that while I couldn’t really avoid, I also didn’t compensate for; and spent small amounts of money that seemed harmless at the time on a really frequent basis (David Bach calls this “the latte factor,” I call it “the Safeway factor”).

7 Steps to Get out of Debt (longer version at Credit Card Confessions, Part Two):

1. Face the Facts: Look at your finances line-by-line and figure out exactly how much you owe. Figure out exactly how much money you have coming in (income, reimbursements from work, IOUs, side jobs). Finally, calculate the difference. That’s the debt amount – the part you will need to get creative with.
2. Prioritize your debt - credit card debt is by far the worst, whereas student loans can wait.
3. Cut Back to Only Essential Expenses
4. Generate Additional Sources of Income. Tutoring in something you are good at is a great way to get some extra income. Less flexible but more reliable would be actually getting a second job. Can include asking for help from family if that is available and it means not spiraling into further debt because of exorbitant interest rates.
5. Figure Out How to Pay Yourself Back – Getting out of credit card debt will feel great – and that should be your first priority. But it is every bit as important to strategize and take action toward restocking your Emergency fund and other savings accounts. Aim to save 3-6 months’ worth of living and car expenses.
6. Reset Your Financial Goals, Plan for the Future – Make sure you aren’t just playing defense when it comes to personal finance. Reset your goals (and readjust as necessary depending on what is realistic). Make a plan for saving up for things you will remember buying and doing – like traveling – that are aligned with your values.
7. Reflect on What You’ve Learned – Arguably the most important step: look at what got you into debt and take action so it doesn’t happen again.

Q: Let’s talk about the “Latte Factor.” How do you manage your finances and still make room for things you enjoy?

Anecdote – I spent $300 on Starbucks in December. $300!!! (Thank you Mint.com for so clearly bringing this shocking realization to light). While that’s definitely overboard, I’m not willing to completely forgo my coffee habit.

This is all about prioritization. Smart financial management is about making choices, and about sticking to your commitment to those choices. Do you love lattes? Or going out to nice dinners with friends? That’s fine – you just have to factor it into your budget and make room by cutting back on something else. Oftentimes people INTEND to cut back but they don’t actually change their behavior – that’s the key. Also, if you have the automatic saving structures and bill paying systems in place, you’ll feel less guilty about the discretionary spending.

Q: Are there any resources that you found particularly helpful?

• Mint.com – monitoring spending, easy access (emails, texts, iphone app) to all account information.
• CreditKarma.com - allows you to view your credit score as often as you’d like, with explanations about what factors are affecting your score.
• Google Spreadsheets – tracking major monthly expenses and income “in the cloud” – online so you can access it from anywhere, share with friends or family if you want to.
• Ramit Sethi’s new book - I Will Teach You to be Rich and his accompanying website

More at my previous post, 7 Great Money Management Tools

Q: Let’s summarize: what are the three most important personal finance tips you have?

1. Know exactly what is coming in and out every month – have a system that is easy to manage and access (doesn’t need to be quicken or anything complicated – I use Google Spreadsheets)
2. Emergency Fund – A MUST HAVE!! Aim for three months’ worth of expenses. Be disciplined, don’t dip into it unless you HAVE to.
3. System for automatic savings – have a separate account that automatically gets a cut of your paycheck through direct deposit. Start saving for retirement. NOW.

Click here to listen to the call

Check-out the Money section of this blog for more tips! Big thanks again to everyone who listened in on the call last night. For those of you who listen to the recording via this post, I’d love to hear your feedback! Right-click to download the call as an MP3.

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