With step-by-step plans, readers’ top six financial concerns get cut down to size.
Worry 1: I Spend Too Much
Why is this such a pervasive problem? Credit cards are partly to blame (have plastic, will spend), but it turns out you really were born to shop. Scientists have learned that when you anticipate buying something tantalizing, like a chic cashmere cardigan, your brain releases dopamine, a chemical that helps produce feelings of well-being. "It's the same stuff that floods your brain when you have sex or eat a big, gooey slice of chocolate cake," says Jason Zweig, author of Your Money and Your Brain (Simon & Schuster, $26, amazon.com). Saving money doesn't trigger the same rush, at least not for most of us. Overspending can also result from poor planning or sheer lack of time―which may be why the average American family spends almost as much eating out ($225 a month) as eating at home ($285). Whether you overspend for fun or convenience, you can break the habit.
Do Right Now:
Make shopping harder. First, delete bookmarked shopping sites from your computer. Next, gather the pile of catalogs by your bed, call the toll-free number for each, and ask to be removed from the firm's mailing list. Or go to catalogchoice.org, a free service that helps you unsubscribe from hundreds of catalogs.
Open your wallet and remove all but one credit card. Put the rest away in a drawer―or cancel them. When you don't see those department-store cards looking back at you in your wallet, there's less temptation to spend.
Change some of your everyday habits. Plot out the most risk-free routes to and from work and on your daily errands. If lattes are your weakness, that means giving a wide berth to expensive coffee shops. If clothes are your passion, steer clear of trendy boutiques.
Cut out convenience foods. Walk to your refrigerator, open it, and take out some baby carrots. Put a handful into five small plastic bags. Toss some almonds or other nuts in five more plastic bags. Presto―your snacks for the workweek, none of which involve expensive (not to mention often unhealthy) packaged foods. Want to save even more? Start bringing your lunch to work and planning (and shopping) for the entire week on Sunday.
Try cash. You've heard this before, but it bears repeating: If you don't put purchases on a credit card, it's impossible to spend more than you earn. Next Monday embark upon a week in which you use only cash or a debit card. Then try another week and another, until this behavior becomes second nature.
Make sure everything you buy is returnable―from bags to boots to bookcases―and always keep the tags for at least two weeks. That's plenty of time for the thrill of the purchase to wear off. You can then assess with a clear eye whether you truly need that snakeskin clutch.
Find new ways to get a dopamine rush. Sign up for a class you've always wanted to take, like salsa dancing or Pilates. And the next time you get the urge to shop, log on to YouTube and watch some silly videos: more entertaining and much cheaper.
Read freemoneyfinance.com . This blog has an active group of readers who post their own suggestions on everything from overlooked tax deductions to saving money on hotel rooms. Another great source on saving: the book Your Money or Your Life, by Joe Dominguez and Vicki Robin (Penguin, $15, amazon.com), which shows how living simply can be the path to financial independence.
Worry 2: I Save Too Little
You and everyone else. The average American household saves a paltry 0.4 percent of its disposable income, down from 2.4 percent in 1999, according to the U.S. Department of Commerce. One culprit may be low interest rates. When you're making very little money from your savings account, you have less incentive to save and more incentive to spend (and borrow).
One way to get yourself to save more is to have a clear goal. Another is to have money automatically deducted from your paycheck or bank account.
Do Right Now:
Make your savings goals feel intensely real. What do you want or need? A remodeled kitchen? A one-year sabbatical in Italy? To retire to a condo in Waikiki at the age of 55? Having appealing goals will make putting aside part of your paycheck palatable. "You can even try subliminally seducing yourself," says author Jason Zweig. "Change your computer passwords to reminders like 'gleamingkitchen' and 'retiretohawaii.' The more often you type those phrases, the more likely you are to internalize the goals and to feel that the future is now."
Open a 401(k) retirement account, if you haven't already (and your employer offers one). You've heard it a million times, but this really is the easiest and smartest way to save long-term. The money comes directly out of your paycheck, you don't pay taxes on it until you retire, and employers often match part of your contribution. In addition, the contributions will reduce your overall taxable income. Don't worry about making an investment selection right away. For now, just pick a safe cash equivalent, such as a money-market fund. If you don't know how to start contributing to a 401(k), call your employer's benefits department for help.
Start a savings fund for immediate needs, like your next vacation or that kitchen project. Ask your bank to move a specific amount each month (say, $100) from your checking account into a savings account. Or set up the transfer yourself at the bank's website.
Invest wisely. Move your retirement money into a target-date fund, which most large 401(k) plans offer. These funds automatically adjust the mix of stocks, bonds, and cash they hold over time to maximize your return and minimize your risk, and they're perfect for people who want to invest wisely but don't quite know how. To choose a target date, all you need to figure out is the year you'll start withdrawing the money. For example, if you are 40 and want to retire when you're 65, put your retirement savings into a target-date fund with the year 2033.
If your 401(k) plan doesn't offer a target-date fund, go to your plan provider's website for information on how to pick the best mix for your portfolio. For more help, read Andrew Tobias's terrific book The Only Investment Guide You'll Ever Need (Harvest Books, $14, amazon.com).
Move your savings into a mutual fund. Once your savings account hits $1,000 or so, transfer the money into an account at one of these three established mutual-fund families (most funds require a minimum investment): Vanguard (877-662-7447), Fidelity (800-343-3548), or T. Rowe Price (800-541-6066). You will earn a higher interest rate and have a variety of funds to choose from. Call the toll-free number and a representative will walk you through the process. The fund company can deduct the money directly from your checking account after your paychecks are deposited.
Worry 3: I am Frustrated by High Gas Prices
Energy prices, in general, are on the rise, but the most dramatic spike has been for gasoline. If commuting to work by bike is unrealistic, consider these options. (For excellent tips on how to reduce all your home-energy costs, read the advice at realsimple.com/cutcosts.)
Do Right Now:
Go to gasbuddy.com and enter your ZIP code. You'll be connected to a network of websites that pinpoints which gas stations near you charge the lowest and highest prices. Plan your next fill-up accordingly.
Clean out the junk in your trunk. Hauling around unneeded poundage―a case of water, tools, a spare stroller―forces your car to work harder. A hundred extra pounds in the trunk reduces fuel economy by up to 2 percent, according to the U.S. Department of Energy (DOE). If you spend $200 a month on gas, shedding that weight can save you $48 a year.
Check your oil, air filter, and tire pressure. Keeping your car well tuned can increase fuel efficiency by up to 17 percent, according to the DOE.
Treat your car like your skin. Keep it out of the sun whenever possible. That's because gasoline can evaporate right out of the tank (especially when the cap isn't screwed on tight), and it evaporates faster when the car is hotter. So always drive straight into the garage, rather than parking in the driveway. When doing errands, park in the shade or in a parking garage.
Buy a fuel-efficient car. When it's time to replace the car you have, go to the DOE-run website fueleconomy.gov. There you can compare the fuel efficiency of various models. You'll find, for example, that driving a small hybrid car (average purchase cost: $22,000) for 25 miles costs $1.60 in gas, compared with about $5 for a basic four-wheel-drive SUV (average cost: $31,000). If you drive 10,000 miles a year, your savings would be nearly $1,400.
Worry 4: I Don’t Know How Much to Save for Retirement
In an ideal world, you would be saving 15 percent of your income each year in a retirement account, says Peggy Cabaniss, a financial planner in Lafayette, California: "Doing so would ensure you'd have plenty for a comfortable retirement." In the real world, few people come close to this goal. Because each person's financial picture is a little different and there are lots of variables to factor in, you need to run the numbers. Thanks to handy online calculators, though, you don't need to do any of the tiresome math yourself.
Do Right Now:
If you have not opened a 401(k), do so now. Already have one? Great, now check to make sure you're putting in the maximum allowed. That amount varies from company to company. If your employer doesn't offer a 401(k), open an individual retirement account (IRA) at your bank or with a mutual-fund company. If you are self-employed or have self-employment income, consider opening a SEP-IRA. You can contribute as much as 20 percent of your self-employment income, up to $46,000 a year. And just like a 401(k), the money you're contributing is pretax dollars.
Dig up the following documents (for both you and your spouse, if you have one) and stick them together in a folder. You will need to refer to them when you start plugging in your numbers.
- The most recent statement for your employer-provided retirement savings plan, such as a 401(k). If you can't find it, call the toll-free number (or go to the website) of the investment company (such as Fidelity or Schwab) that handles the plan and ask for a copy. Most of these companies also let you view your accounts online.
- The latest statements for any other retirement accounts you may have, including IRAs, 401(k)s from previous employers, and SEP-IRAs.
- The Social Security statement that the government sends you each year. If you threw it away or never got one, request a copy at ssa.gov/mystatement.
- Paperwork about your pension plan, if any. According to the Employee Benefit Research Institute, only 18 percent of nongovernment workers will receive a traditional pension, which the employer pays for in full rather than requiring the employee to kick in money. If you're lucky enough to be one of them, you'll want to factor those numbers in. If you're not sure of your status, call your employer's benefits coordinator and ask.
Visit a free online calculator. Try the version offered by Money Magazine (which, like Real Simple, is owned by Time Inc.) at cgi.money.cnn.com. After you plug in the numbers from the documents you've collected, enter some other facts (like your tax rate), and choose how aggressively your nest egg is invested, the calculator will tell you how much money you will need to live comfortably when you say sayonara to your salary.
The cool part is that you can play around with the numbers. What if I retire two years later? What if Social Security goes kerflooey? What if I change the way my money is invested? Then you can come up with several different game plans to choose from. For example, you may learn that if you move your 401(k) stash from mostly bonds to mostly stocks, you'll be able to save $200 less a month starting now and still reach your retirement goal.
If calculators leave you cold, or just plain bored, consider making an appointment with a financial planner for a personalized assessment of your savings situation.
Worry 5: I Need a Budget
If you find yourself consistently short of money or you never seem to have enough funds for a vacation, a budget can help. A budget is simply a plan for how to spend your money. It doesn't have to be fancy. In fact, the key to sticking to one is to make sure it's both realistic and simple, says Jeffrey Pritchard, a financial planner in Beaumont, Texas, who writes the blog allfinancialmatters.com.
Do Right Now:
Grab a blank notebook. Write down everything you spent money on today, from the utility bill you paid by check to the bus ride you paid for with cash. Do the same thing tomorrow, and so on, for a full month. "That's the only way you'll know where your money is going," says Pritchard.
Take stock. At the end of the month, create basic categories―like food, clothing, shelter, and savings―then allocate your expenses accordingly. (If you're computer-savvy, putting them into a simple Excel spreadsheet can make the math easy.) If you know you have certain areas of weakness, like eating out, break those out in more detail (restaurant meals, breakfast at a coffee shop, etc.).
Play with the numbers. Now that you know how much money you spend each month, you can divide it in ways that are more satisfying. For example, if you want to have more to spend on cultural events (like plays and concerts), maybe you are willing to forgo hair coloring at the salon. You should end up with a list of all your expenses and how much you would like to spend on them each month. Use this as a guideline for future spending.
Sign up for an online money-tracking program, like wesabe.com or mint.com. If you do your banking online, you simply link one of the programs to your bank and credit-card accounts and the program automatically grabs your spending activity from those sources and categorizes it for you. For example, if you put $125 worth of groceries from Whole Foods on a credit card, mint.com or wesabe.com records that in the food category. Then you can check your actual spending against your budgeted spending whenever you want, without having to save scraps of paper and enter the information by hand. However, you do have to remember to enter cash transactions. These programs can see that you made an ATM withdrawal, but not what you spent the money on, making them best for people who use debit or credit cards more frequently than cash.
Worry 6: I Need to Develop a Financial Plan
A financial plan will help you achieve the things that are most important to you, whether that means paying for your child's college education or creating a fund for a vacation home. It's broader than a budget, encompassing savings, investments, and even insurance. Who needs a plan? Anyone who feels anxious or confused about her financial situation.
Do Right Now:
Write down the names of three people you know and admire who are diligent about money―say, your father-in-law, your next-door neighbor, and a former boss. Call each of them and ask a simple question: How do you plan your finances? You'll come away with a wealth of practical recommendations, as well as the realization that none of this is rocket science.
Do some reading. Try browsing around the site getrichslowly.org, a great all-around personal-finance website by blogger J.D. Roth, who writes entertainingly and knowledgeably about digging out of debt and investing for the future. A good basic book is Get a Financial Life, by Beth Kobliner (Fireside Press, $15, amazon.com). Although it's aimed at people in their 20s and 30s, it's a fine introduction to financial planning for people of any age.
Find a planner. If you want some hand-holding (and who doesn't?), hire help. Look for a fee-only financial planner―the kind who charges a set price, averaging $200 to $250 an hour. Because she's not making money from commissions on investments she sells you, you know her advice will be objective. To find an adviser, start by asking friends for recommendations. You can also go to the site run by the National Association of Personal Financial Advisors (napfa.org) and click on "Find an Advisor." Also try the Garrett Planning Network (garrettplanningnetwork.com), another network of fee-only planners, and click on "Locate an Advisor." Look for the letters CFP (certified financial planner) after the adviser's name. That designation means the adviser had appropriate training and passed a rigorous test.
Before you make an appointment, ask the planner if she is willing to have a short initial meeting with you at no charge, so you can make sure you feel comfortable with her before moving forward. (The Garrett Planning Network's site has a comprehensive list of questions to ask at the first meeting.) A planner will help you create a solid game plan that takes into account your financial needs and priorities. And because you've paid for the advice, you'll be more likely to follow it. "Once you pay for something, to not follow through feels like a waste, like throwing food away," says author Jason Zweig. That's just one more way to trick your brain into doing the right thing.