Financial Challenge – Day 7

This challenge will mark the end of our “simple investing” plan. Just to reiterate, the reason we’re going for the “simple investing” plan is that saving money is the best investment that you can make when you’re just starting off. Once you reach $100,000 you can begin to spend more time researching different investing options, but until then you will be better off concentrating on saving money and putting the savings your receive into your “simple investing” plan. Here is a summary of the simple investing plan we’ve talked about thus far:

stocks: pick an index fund

1. The first place to invest the money we will save is toward paying down credit card and other high interest debt.

2. Once your debt has been erased, you will invest the money you save into your company’s 401(k) plan for as much as the company will give you matching funds.

3. Once you reach the point where your company doesn’t match your contributions, your company doesn’t match any contributions at all or you don’t have a 401(k) plan, you want to invest the money you save into a Roth IRA.

I’ve alluded to this in some of the previous challenges, but feel it’s important to re-emphasize here. When you invest your money in the stock market, you want to invest in an index fund. Index Funds basically try and mimic the same stock allocation that is present in the index that it’s following. Since there isn’t a need for active research from people trying to pick the best stocks, the fees for index funds tend to be much lower than mutual funds that have a management team. This means more money in your pocket. Now of course if you can find a mutual fund that consistently beats the S&P 500 (they are very rare) it would be best, but that would take as much time as researching stocks and as I have said time and again, the purpose of the simple investing is to free up time to concentrate on ways to save money.

simple investing: pick an index fund

There are a wide variety of index funds that you can choose from, but the S&P 500 is by far the most popular and the one I would recommend beginning with. As your investment money increases, you can look at some of the other index funds. As mentioned before, if you are nearing retirement, you will want to place the money you save into a more balanced investments since stocks are volatile over the short term.

Your simple investment plan is now set. You are going to place money into one of the above options and forget about it for 10+ years. You aren’t going to worry about it, think a whole lot about it or obsess about it. You’re going to let is sit and let the magic of compound interest work while adding in all the money you’re able to save from these financial challenges.

The one area that we have neglected up to this point is an emergency fund. Once you get yourself out of debt, you will want to create an emergency fund. This will give you a cushion when unexpected expenses arise so that they don’t have to go on a credit card and you find yourself paying high interest rates again.

While many financial experts tout 3 to 6 months of living expenses as your emergency fund (and that will be our ultimate goal), having that much money on hand before you begin your simple investing doesn’t make much sense. While we don’t want to ever touch the retirement savings, in an extreme emergency this money can usually be tapped (likely with some penalties). What your emergency fund should consist of is enough money to cover a large, unexpected expense such as the car breaking down so it doesn’t have to go on the credit card. My guess is this would be somewhere between $1000 and $3000.

This emergency fund should be held in a completely separate account from your regular checking or saving account (mixing your emergency fund with money you use on a daily basis will make it much more likely that it will be spent on something). The perfect place to keep this money is in one of the high interest online bank accounts we have already set up.

In the time that you have set aside for today, you should do the following:

1. Make sure that your simple investing plan is set and in place
2. Decide how much you need for your emergency fund and what account you’re going to place it in.

We’re set! We now know what we’re going to do with the money we save — so beginning with the next challenge, we’re going to go through a long list of places in our personal finances where we can likely find savings that can be placed into your new “simple investing” plan.

NOTE: The entire challenge series is what I would do with my money and is merely my opinion. You should do thorough research and seek professional advice and decide to do what is best for you. My Disclaimer

This entry was posted in Investing, Personal Finance. Bookmark the permalink.

9 Responses to Financial Challenge – Day 7

  1. Marissa says:

    Wow! I feel like I’m on the right track… right now, my emergency fund would be my CETIA (company coop) account, because I have been contributing to it since Oct 2003 and, I cannot touch that money unless I leave the company or resign from the coop (and then would have to wait 3 months to be eligible to sign up again)…my goal is to NOT touch this money unless I leave the company and, depending on the circumstances and my financial picture at the time, I would choose which use to give it …Other than that money, I have tried to cut back our spending as much as possible and, every stray penny goes towards debt repayment! While my financial situation is not good, it isn’t half as bad as it was when I first signed up for SavingAdvice!

  2. Gloria says:

    All these ideas are great. I would live to invest and so on, but even though my husband has a better paying job we are still having trouble making ends meet. So how do people like us save. We are getting our credit card debt down but we still have student loans. Between loans and bills we have no money left over. How do we save? There is no luxury we can cut out. We already don’t have cable. We already dont go out to eat. We already pinch pennies. My husband and I are both working our butts off to bring in money but the cost of living is so much. What is your advice?

  3. Cathy says:

    Great post, Jeffrey. The only thing I would disagree with a little bit is the emergency savings, since I think the peace of mind of having that money in the bank is worth a lot. :)

  4. pfadvice says:

    While I understand a lot of people like to have a savings account for “peace of mind” this is why I disagree: I feel it’s a false sense of security that costs you money.

  5. Pattie says:

    I agree with the emergency fund. Living paycheck to paycheck and winging it is poor planning. Many people take this further by using sales to add extra dry foods, canned goods, paper goods and other household supplies to their pantries. It’s just plain smart as you never know what is going to happen tomorrow!

  6. Big Mike says:

    The problem with this plan is that it’s boring, and if it’s too boring people would rather spend their money on a new car than the investment plan, and they’ll never get to that $100,000.

    I’m in favor of people who know what they are doing (which is only 1% of the people) to invest in indivudual stocks, and not even worry about diversification.

  7. Wilson says:

    Gloria wrote:
    All these ideas are great. I would live to invest and so on, but even though my husband has a better paying job we are still having trouble making ends meet. So how do people like us save. We are getting our credit card debt down but we still have student loans. Between loans and bills we have no money left over. How do we save? There is no luxury we can cut out. We already don’t have cable. We already dont go out to eat. We already pinch pennies. My husband and I are both working our butts off to bring in money but the cost of living is so much. What is your advice?

    Gloria, what I would suggest you do is set up a monthly budget. Write down all of your expenses for a typical month, including rent, car or mortage payments, credit card payments, phone bills, utilities, food, entertainment, etc. Using excel for this helps. Then, like Jeffrey alluded to in the first stages of this challenge, at the TOP of the budget, put ‘Savings’ or ‘Emergency funds.’ You are going to BILL YOURSELF every month a savings expense. And you are going to pay that bill first, before the credit cards and before the other stuff. The idea is that you pay yourself first. The amount you bill yourself should be realistic, and allow for you to still pay all of your other bills as well. While from a firmly mathematical point of view, paying all of your high interest debts off before you save would be an ideal (and quicker) way of going about it, that stance does not account for unexpected emergencies, which your savings should help cover. The result is two fold: (1) you feel a sense of accomplishment because even though you are in debt, you have savings! and (2) you have a budget, so you know exactly where your money is going every month. Now you can extrapolate how long it will take to pay off your debts. Bankrate has a really good calculator if you’re looking to do this.

    Big Mike wrote:
    The problem with this plan is that it’s boring, and if it’s too boring people would rather spend their money on a new car than the investment plan, and they’ll never get to that $100,000.

    I’m in favor of people who know what they are doing (which is only 1% of the people) to invest in indivudual stocks, and not even worry about diversification.
    Sorry to break it to you, Big Mike. But budgeting and saving aren’t exactly the most exciting things in the world. Good thing is, it’s not the hardest, either. A weekend a month or less to maintain your finances is a small price to pay for financial security. But the reward you get out of it is a solid sense of achievement, knowing you’re on the right track. As far as investing goes, I would agree with Jeffrey here in the sense that many people want to get started right away in their investing. I tend to agree that you should have 3-6 months of living expenses (remember that budget?) in savings for emergencies, but you don’t necessarily have to save all of that up first before investing. As long as you split your saving/investing money toward the 3-6 months worth of savings and investing, you can have your cake and eat it too.

  8. Linda says:

    I am very interested in your financial challenges and would like to respond to the “boring” e-mail.

    We earn a very modest living and have become multi-millionaires using the methods you recommend. It has taken less than 10 years. They are boring but they also help you sleep at night. The worst part about them is that you no longer have dramatic stories to tell so you will need to spend more of your time listening to others than you will telling your own stories.

    We began by paying off all debt including our home and our investment properties. We do not purchase any investment stocks, etc. on margin. We use our main home to mortgage periodically (we get the cheapest interest that way) and then pay it off before even considering another investment of any type.

    We talk about and dream of the “big one” which entertains us to no end and keeps us from getting bored, but we never implement it unless it falls into the above criteria.

    One of the biggest factors that have helped us is to begin focusing on our values and the way we CHOOSE to live – rather than setting the goals we think we should. We love our lives now.

    Also, we were told once to get 5 bids on any large purchase. We consistently do this and try to get the best value, which isn’t always the lowest price.

    And we keep a price book for all types of things.

    Further proof it works? We have a 30 year old who will pay her home off sometime in the next year. Another child has started on this path and won’t be far behind her.

    I encourage everyone reading these challenges to live a “boring” life and reach for the gold ring. These methods will put it within reach.

  9. Pingback: Credit Card Debt vs Emergency Fund - SavingAdvice.com Blog

Leave a Reply

Your email address will not be published. Required fields are marked *

*