Thursday, March 24, 2011

Emergency Fund

An emergency fund is a necessity for everyone, whether you're trying to work your way out of debt or you've never had any debt.

In putting my financial situation into perspective when I first became interested (and aware) in my personal finances, and after reading Dave Ramsey's The Total Money Makeover: A Proven Plan for Financial Fitness, I knew that an emergency fund was something that I needed to have if I wanted to get my finances under control. However, I didn't create one right away; instead, I put mounds of money toward my high interest debt. Was this my best choice? It worked for me (as I didn't have any unexpected expenses during that time period), but it was certainly a gamble, and not something I would necessarily recommend to others.

For me, I couldn't stand to see the interest on my credit card debt continually and quickly larger. So I started attacking it. However, if I had had unexpected expenses, I would have put myself into even deeper credit card debt, because the only way I would have been able to pay for these unexpected expenses was with a credit card. Very luckily for me, I didn't.

How might you go about starting an emergency fund? Well, after you've created your budget and have all expenses accounted for (including minimums on loan and credit card payments), you take the remaining income and put it into a savings account, where the money is liquid. I recommend SmartyPig (, as this yields the highest interest rate that I've been able to find for a savings account.

Each pay period, or with any additional income you receive, put it into the emergency fund until you've reached $1,000. This is a very good starting point for your emergency fund, and this will allow you to pay off most emergencies without putting yourself into further debt. Once you've accomplished funding your initial emergency fund, you can begin to aggressively pay off your debt. This is a very good step toward getting yourself out of debt and into a good financial position. The road ahead may be longer than you'd like it to be, but by making responsible financial decisions like having an emergency fund, it's a road that will be shorter than you think.

Wednesday, March 23, 2011

Creating a Budget

Creating and maintaining a budget is crucial to the well-being of your finances. 

After reading up on personal finance and deciding that I was going to get serious and become responsible with my finances, the first thing I did after getting my job was to create a budget. I knew how much money I had available, and I knew what expenses I was going to have. I also knew that I needed to start an emergency fund. With these things in mind, I created a budget that I would be able to stick with and that had me feeling optimistic about my finances for the first time.

For the first time, instead of buying something when I felt like it, I consulted my partner in personal finance crime (corny, yes): my budget. Everything was laid out for me, so I as long as I didn't go over the amounts I had budgeted, I couldn't mess it up. It really made handling my money much simpler. And aside from knowing how much money I had for each category, I knew where every dollar went, because I recorded each transaction. By doing this, I was really able to determine my spending habits and further cut down on unnecessary expenses. 

In creating my budget, I tried to funnel as much money as I could toward my debt, which included credit cards with 12.99% and 15.99% interest, among many student loans. I budgeted what I needed, and no more, into the other categories, and then put the remaining money toward all of my debt. At this point I didn't have an emergency fund. I couldn't stand to think that I would be accruing very significant interest while I saved $1,000 in an account that yielded 1% interest. I was lucky that I didn't have any immediate emergencies. Would I recommend this for others? No, probably not. It just happened to work out for me.

My budget really got me on track to being disciplined with my finances. It was a starting point that opened my eyes to what being financially responsible meant. I finally felt like I had control. I was moving in a very positive direction. And I was lucky to figure this out at a relatively young age. I wish that I had done some things different related to money in my college years, but starting a budget and tracking expenses has gotten me on a track that I am very happy with. I am well on my way toward financial freedom. 

Tuesday, March 22, 2011

An introduction

A little bit about me:

I am 25 years old, live in upstate New York, and very, very interested in personal finance. Period. I went to college outside of New York City, spent a lot of time in New York City, and, needless to say, spent a lot of money in New York City. Money I didn't have. Maybe I should say I spent a lot of credit. 

Either way, throughout most of my college years, I didn't think twice about how much I spent to have a good time with friends, or have a nice time in the city. And I definitely didn't think about how much student loan debt I was putting myself into, or what the consequences would be when I graduated. After all, I knew I would get a great paying right out of college and quickly pay any debt I had with plenty of money left to enjoy my new, more adult, life. Right? 

It turns out that getting a job out of college is difficult enough, let alone a good paying job. After doing a number of interviews at different companies in the industry I was interested in, it turns out that the starting pay is a little lower than you might think as an optimistic, hard-working college student eagerly awaiting to put all of his newly formed knowledge to use.

Anyway, I was introduced to Dave Ramsey's The Total Money Makeover: A Proven Plan for Financial Fitness during the second half of my junior year. I was hooked. I couldn't put it down. I'd read it on the train to and from my internship in the city, and I'd  read it at night or in the morning when I found myself with any extra time. It was enlightening. It was exciting. It was exactly the kick I needed to start looking at my financial situation. I started thinking about the purchases I was making and whether or not they were necessary. Do I really need it? Is it worth the extra debt?

This was my introduction to personal finance. And it was my start to becoming financially responsible. The only problem with learning all this when I did was that I still had another year of college. Which meant another year of putting myself into debt, even if I was responsible. College is expensive. Very. Expensive. I was getting very restless to start putting into practice the teachings of Dave Ramsey. I was ready to start the debt snowball. The only problem was, I was still paying out for college, and I didn't have any real income (Yes, I had jobs both on and off campus throughout my 4 years, but mostly at minimum wage and part time).

Once I graduated, landed a job, and started making an income, I could start working on my debt snowball. Finally. Was I excited! It's been two and a half years since I've started, and I've gained a lot of ground. I've been frugal (not cheap) and have paid a considerable amount of debt off, built an emergency fund, saved for a very special purchase, contributed to retirement accounts, and, of course, lived below my means (very important if you want to be financially stable). I've made a lot of progress, and have a lot more to go.