Personal Finance Advice

Things sometimes happen that have the potential to turn an otherwise thriving personal financial status into financial ruin.  Most people know to save for a rainy day, whether that rainy day is car repairs or medical problems.  What about the situations that have the potential to really turn your personal finances upside down? Are you really ready for these situations…and do you actually see them coming?

Examples of these types of situations can include a number of scenarios, some of which people simply ignore until  everything comes to fruition.  If you have aging parents - especially if these parents have made little or no financial preparation for their rapidly approaching retirements - have you thought about what you will do when they show up at your front door with their luggage, asking for a place to stay? What about your adult child who is on the precipice of a divorce; what happens when he or she needs a new home, and needs to bring along a couple of kids? Most of these situations you can see coming, or at least you can have some sort of inkling that they may eventually occur.  The worst thing you can do is ignore them, especially if you have a pretty good idea that something like this is going to happen.

The same goes for employment scenarios.  If there are rumors within your workplace that some people are going to be laid off, what should you do? You have a couple of choices:

1.  Ignore the rumor and keep spending like you always do.  After all, you’re pretty sure you won’t be on the list of people losing their jobs.

2.  Prepare for the layoff just in case.  You update your resume and cut back on your spending just in case you find yourself without an income for a period of time. 

You should go ahead and prepare for a layoff just in case it actually does happen.  After all, how will you feel if you get fired after knowing for a few months that it may happen, yet you didn’t do a single thing to prepare? 

Don’t ignore potential financial setbacks.  If you know you’ll have a huge tax bill, don’t wait to start saving for it.  If you know your furnace is coming up on its twentieth year, start saving for a new one even if the one you have right now is running fine.  If your car is starting to fall apart then don’t wait to start saving for another car until you can’t get your current car running.  If you’re prepared and nothing happens - your furnace hums contentedly for another five years and your car chugs along for a couple more years - then you can use the extra money you saved for whatever other unexpected financial problem pops up.    

Plenty of parents open savings account for their kids, especially when relatives send checks instead of wrapped gifts whenever a holiday rolls around.  After all, unless you’re going to cash the check and have your kids pick out some toys, why not plop the money into an account and let the money build up some interest? This is especially true for parents who have very young children.  A three month old baby who receives a check in the mail from Grandma could probably care less about how it is spent.

There is nothing wrong with opening a savings account for your young children as long as you keep a few things in mind:

1.  This isn’t a college fund.  Don’t put money that you intend to use to fund your child’s education into a regular savings account.  You won’t be able to enjoy some of the tax benefits of an actual college savings account, and you probably won’t get as good an interest rate.

2.  Don’t open an account with fees.  Don’t watch the monetary gifts your relatives send wither away into nothing because of monthly fees.  Most banks and credit unions have savings accounts designed for kids that don’t require a very large minimum balance at all in order to stay feeless.  Be sure you know what that minimum balance is and stay above it.

3.  Use the account to teach your child about saving.  Don’t just covertly deposit checks into the account without ever telling your child what you’re doing.  Once your child becomes old enough to have a basic understanding of money, go ahead and explain the process.  Have her help you fill out deposit slips, or at least hand the check over the counter to the teller.  Some financial institutions give stickers or lollipops to kids making deposits, so it’s easy to make a trip to the bank or credit union a fun experience.

4.  Don’t use it for your own savings.  Keep your own savings separate from your child’s savings account.  There are too many tax implications if you start dumping piles of your own money in an account designated for your child.  You will want to make sure that your name is on the account so you can access it, but that doesn’t mean you should use it for your own purposes.

5.  You don’t have to have a savings account for your child.  There is no rule that says you have to have a savings account for your child in order to be a good parent.  As long as you are making an effort to save for your child’s education then there really is no huge need for a savings account when your child is really young and doesn’t really know the difference.  Unless the person sending the check specifies that the money is to go into a savings account you can cash it and buy your child something nice, like a toy or maybe even some diapers.

It would certainly be great for your child to turn 16 and have enough money in a savings account to go buy a car, but on the other hand you want to teach your child about earning money and systematic saving.  It’s up to you whether you save vigorously in a savings account for your child or not, but leave some room for your children to earn and save some money on their own. 

You’ve heard it a million times: Put 10% of what you earn into the bank.  People who consistently save 10% of their income and stick it in an interest-bearing savings account usually manage to build up a nice nest egg, even if they aren’t huge earners throughout the years.  You may have heard stories about life-long waiters or seamstresses who retire quite comfortably despite having earned a salary that was considered very low.  How did they manage to get so much money in the bank even though they had low incomes? It’s because they saved money and allowed compound interest to do its magic.

If you don’t actively save your money for a rainy day then it’s likely that there are two reasons for this:

1.  You don’t think you can afford to put 10% of your income into a savings account.  Most people, however, actually can afford to put more than 10% into a savings account without much belt-tightening at all if they actually take a look at how they spend their money.

2.  You don’t think that 10% can amount to much, so why bother? Although it depends largely on when you start putting 10% away - whether it’s in your early twenties or late fifties, for example - a small percentage of your income can make a big impact later down the road.  Put this thought into your mind: It’s far better to save a small percentage than nothing at all.

Even if you can’t save a full 10% of your income right now, start saving something.  Save regularly and make it a habit.  It’s great if you can set up an automatic withdrawal from your paycheck or checking account so that you don’t even have to put much thought into it.  In fact, for many people, it’s better when they don’t even notice the money moving from one place to another.  It just happens automatically and before they know it they have a respectable savings account built up.

Should you put away 10% of your income before or after taxes? If you’re in the financial position to comfortably afford putting 10% of your pre-tax income into savings then by all means do…but if you can only afford a 10% savings after taxes then don’t let that stop you from doing so. 

Just save something.