More Money - The Basics

Image via WikipediaTo get you started, there are 3 basic things you need to remember about money management.

1. SAVE, SAVE, SAVE.

No matter what, you HAVE to save; you MUST save. Saving is not - I repeat not - investing. This is saving - take money and deposit it with a regulated financial institution where your deposits are insured (by the FDIC in the US or the JDIC in Jamaica) up to a limit, and where that regulated financial institution will provide interest at a pre-defined interest rate on that deposit over a period of time.

Why is saving the foundation, the key?

• When you save, your money earns interest for you. Now, other than working to earn more or receiving a gift, how else do you get "new money"?
  
• Save more, earn more interest.
  
• Save longer, earn more interest.
  
• Save your interest and your interest earns interest.

Saving is the absolute basic minimum you must do!

What is the best way to save?

Heard of the "Pay yourself first" principle? Before you do anything else, as you get a paycheck or a payment for services rendered, take a portion and save it - don't invest it, save it. It would be best if you could get into a habit and decide on an amount and do it by salary deduction. That way you don't agonize over "should I' or "shouldn't I". Trust me, after a while you won't even miss it and you'll be happy to watch those savings grow every month. Remember this if you remember nothing else.

2. SPEND LESS.

Easier said than done, right? If you are in Jamaica, this sounds impossible given the cost of basic necessities. Well, here are some suggestions:

• Exercise discipline in consumption. Buy what you need, not what you want. Yesterday's post gave you an idea of how that can work.

• Find out all benefits and discounts available to you and use them. Trust me in 5 minutes what you save by using these discounts and benefits can exceed one year of after-tax interest, dollar for dollar. Come back tomorrow for some specific tips on this one because I discovered big savings and small savings here. Regardless, they all add up.

• Take on reducing spending in your utilities as a special project - phone, electricity and water. I've done experiments with those and I'll share them later in the week.

What's the one thing to remember with spending less: When you spend less, you have more money to save which earns interest.

3. MANAGE YOUR DEBT.

This needs some clarity. Not all debt is bad. Debt that is unsustainable is bad. Debt that you cannot afford to service is bad. If the price you pay for being completely debt free is depleting your savings, I would say that is too high a price. So let's think of debt as something you manage.

• First, dollar for dollar interest charges will exceed the after tax interest earned on savings. This means that you are paying out in interest more than you earn in interest. So, if you have debt, the experts advise you to rank them starting with the highest rate and aggressively pay down that one, then the next highest rate etc. Now important: always service all your debts because not only is it the responsible thing to do, if you don't, then you pay penalties and fees, and it's bad for your credit rating. So, when I say "aggressively" pay down debt, it means pay more than the minimum to eliminate it faster.

• Second, really try to minimize using credit cards. Use cash and ABM cards (fee free preferably). If you can wait, save towards the goal to purchase the item. If you can't wait, remember that you are paying more for the item in finance charges. Would you want that item if it were $150 instead of $100? You may have paid $100, but if the charge sits on your card, then you may end up paying more like $150 (depending on interest rate, time to pay etc.).

What's to remember with managing debt: Less debt, lower rates, shorter time periods means less in interest charges which you could have saved to earn interest. Oh, and pay your debt on time to avoid late fees because those add up!

Those are the absolute basics.

For each category - savings, expenditure and debt - there is much more we can discuss. But we'll get into that later.

Now to get you started on your journey, you need to make an assessment of your current financial picture. What do you earn? What do you save? What do you invest? Did you remember saving and investing are different and do you treat them as such? What are your expenses? Can you track every cent you spend every month? If not, start a log and write it down. How much debt do you have? What interest rates are you paying?

Want to know what I did? I have had an Excel workbook for years, and I have different tabs for different categories and its color coded and everything. I know every single dollar that comes in goes out, and have different scenarios for debt, saving and investing.

• That means I track my accumulation of savings and make conscious decisions about when and where to put my money.
• That means that I have an extremely detailed budget and I know all my regular expenses, and make a provision for contingencies
  
• That means before I even use a credit card I know what it is likely to cost me even for one month in interest.
  
• That means before I decide if I should invest, I know the expected return, I evaluate the risk in terms of the market environment and my own personal finance goals. I know where the funds will come from, and I do not sacrifice my savings goals.
  

My model is very straightforward and I know where to find everything, and change parameters for scenario planning. I have projected at least 5 years into the future. And it's very conservative. It works for me. Some people prefer to use software. Find what works for you.

Now assess the picture, do you like what you see? Are you saving? Are you saving enough? Do you know what enough is? Have you figured that out? Are you meeting your expenses? Do you see anywhere you could cut expenses? Have you looked at your monthly interest charges on debt? Did you realize that if you paid even a little more in debt payments you could reduce your interest charges, and therefore the total cost of the debt?

Now, don't worry. If this is all new to you, we can walk though all of this to make it manageable. But the very first place to start is with that picture. If you don't know what is broken, you cannot fix it.

As I said, come back tomorrow for some big and small savings I've discovered through benefits and discounts.