Nickeled and Dimed

I’ve always hated when people called successful individuals “lucky”.  Luck has nothing to do with it, I’d argue.  Success is about hard work, talent and intelligence.  After reading Malcolm Gladwells book, Outliers, this weekend I was forced to back off that stance.  At least a little bit.

In his book, Gladwell argues (and essentially proves) that while hard work and talent are certainly a huge part of success, circumstances beyond our control often play an equally big role in our successes and failures.  One example he gives is Bill Gates.  Gates talent and work ethic are well known, but what’s not well known is the fact that he was one of the only high school students in the world to have regular access to a computer in 1968.  Would Microsoft exist today if Bill Gates wouldn’t have been able to combine his talent/work ethic with the extremely rare opportunity to work with computers in the late 1960’s?  Gladwell says no (and Gates agrees).

One of the areas of the book I found most interesting was Gladwells claim that certain generations are more set up to produce “outliers” than other generations.  For example, of the 75 richest people in the history of the world 14 of them (almost 20 percent) were born within nine years of each other (1831-1840) in the same country (USA).  Gladwell says this statistic is no coincidence.  It is a result of a generation entering the workforce during the emergence of the railroad, wallstreet and industrial manufacturing.  Had John Rockefeller and Andrew Carnegie been born a decade later or earlier, they likely would have missed the incredible opportunities presented to them in the early stages of their working careers.  

On the other side of that spectrum are those who began their working careers amidst the Great Depression.  With jobs scarce and economic opportunities rare, even the brightest minds and most talented individuals of that time were forced into poverty.

So if the generation you are born in ultimately helps determine how successful you will be, where does Gen Y fall on this spectrum?  Call me an optimist, but I believe we have an opportunity to be a generation of “outliers”. 

Here’s why:

• The economic rules are being rewritten- Like those born in the 1830’s, we are entering an economy that is going through a massive overhaul.  Energy, healthcare and Wallstreet are all embarking on huge face lifts, and in theory this will create unlimited opportunities for our generation.  While those before us will be too old to take advantage and those after us will be too young to capitalize, we are entering the work force just in time to reap the benefits of the coming changes.
• We are beginning our investing careers in a historically low market- According to Carl Richards, you set yourself up for well above average returns by beginning your investing in a down market.  While this market is a disaster for those nearing retirement, it could be a huge blessing for those of us just beginning to invest.  Assuming we don’t see an economic downturn this bad again for the next 50 or so years (which is a pretty safe assumption if history is any indication) we will come out well ahead as a result of the market we are entering.
• We had “helicopter parents”- What is seen as bad thing by many, Gladwell considers our parents extraordinary involvements in our lives growing up a huge advantage to our future.  The largest difference between the poor and the rich growing up, he argues, is the involvment of parents.  Gladwells studies show that the more involved a parent was in a childs life, the better off he fares as an adult.  If that is the case, most of us are in great shape.
• New technology is at an all-time high- With social media exploding and businesses figuring out different ways to benefit from it everyday, our generation will be called upon to both integrate these technologies into their business and continue coming up with new and better technology.

I still believe success is mostly dependant on your talent and work ethic.  But after reading outliers I’m more convinced of the role factors outside our control play in it.  I believe our generation is being put in a position of enormous opportunity.  Our talents and willingness to work will ultimately determine whether or not we take advantage of those opportunities.

What do you think?  Is our generation set up for success or failure?  Or do you not believe Gladwells assertion that our generation will ultimately help dictate how successful we will be?

Get good grades, participate in as many activities as possible and land a great internship.  We all know the blueprint of college success.  And this certainly won’t be an article telling you that blueprint is wrong.  There is absolutely no doubt that getting good grades and landing internships will put you in a great position for finding a good career after graduation.  But what happens if by the time you buy into that plan it’s too late?  What if you finish your college career with average grades, no internships and the closest thing you have to campus involvement is joining a fraternity?  Are you forced to accept a life of mediocrity and dead end careers?  If my experience is any indication, the answer is absolutey not.

For as long as I can remember, I have not been good at school.  Despite scoring in the top ten percent nationally on my ACT and every other standardized test taken in school, I received average grades from Kindergarten through college.  I wish I could give you some great reason why I severely underachieved grade wise in school (my parents sure wanted me to give them one!), but I can’t.  School just simply wasn’t for me.  If it was a class I enjoyed, like my accounting classes, I did very well.  Nearly every other class ended up falling into the C or B range.

In August of 2007, as I approached my final year of college, I went to see an academic advisor about my upcoming graduation and subsequent job search.  Given the fact that recruiting in my field, accounting, typically relied heavily on both good grades and experience, of which I had neither, it should have come as no surprise when the advisor looked my transcripts, shook his head, and suggested I start thinking about options outside of accounting.  He explained to me how most of the people I would be competing with had 3.5 GPA’s or higher and at least one accounting internship.  A meeting I thought would simply verify I was on track to graduate the following spring had turned my universe upside down.  Suddenly my entire future was in doubt.  I walked away with two choices, either do as my advisor had suggested and start thinking of other career options, or figure out a way to overcome my self inflicted handicaps and land an accounting job over much more qualified candidates.  After giving serious thought to the former, I decided on the latter.

After a few days of sulking, I became more commited than ever and formulated a plan for overcoming my shortcomings.  I researched networking, interviewing, resumes and everything else that would be relevant in my upcoming job hunt.  As a result of this hard work and research, I graduated college with two excellent job offers at great companies, including the one I eventually took as an accountant at a Fortune 500 company.

Here are my tips on how you can do the same:

Learn to turn your weaknesses into strengths

When you have sub par grades, especially in a field that emphasises getting good grades, potential employers are going to want an explanation.  You need to answer these questions in a way that takes the conversation from your weaknesses back to your strengths.

In my case, when potential employers asked about my grades, I would always talk about how my overall GPA was heavily weighed down by my first two years of college.  I explained how I worked my butt off to recover from my early years and that it was amazing my GPA ended up as high as it did.  I took full responsibility for those bad years, blaming it on immaturity and irresponsibility, but I also made sure to point out I had overcome these traits.  By the end of the conversation I was explaining how my mediocre GPA actually showed my ability to overcome adversity.

Be willing to take responsibility for your lackluster grades, but find positives in them to take the conversation back to your strengths.

Get creative

Most employers are going to want you to have some kind of relevant experience.  If, like me, you did not have a field specific internship, you are going to have to get creative.

In my case, I took my summers of working for my dads real estate company and turned it into accounting experience.  The times I had to go to peoples houses to collect rent turned into experience in accounts receivable.  Going to the city to pay the water bills turned into experience in accounts payable.  The spreadsheets I had to make assessing the rental units occupied vs. the units available became experience creating financial statements.

This is not an excuse to lie.  It is simply getting creative to turn your experiences into experiences that sound more appealing to employers.

Another great example of creativity is Jamie Varons website created for the sole purpose of landing her a job at Twitter.

Be relentless

If the credentials on your resume are less than stellar, you are going to receive a lot of rejections or just be flat out ignored.  This simply means you will have to increase the number of places you apply to.  I had a rule with myself that for every rejection I received I sent out three more applications.  By the time I finally landed a job offer, I had sent out my resume to 127 different employers!

You are going to experience a lot of “failures”.  You need to learn to get over them quickly and move on to the next opportunity.  You are also going to have to be very proactive and apply for jobs that aren’t being advertised.  Email every potential employer in the area you want to work, whether they say they are hiring or not.

Become a flawless interviewer

When you have average grades and no experience, the applications you send out that result in interviews will be few and far between.  As a result, you have to be able to nail the interviews you do get.

Out of the 127 applications I sent out, I received two interviews!  I knew if I blew these interviews there was no guarantee other opportunities would come.  I had no choice but to knock both interviews out of the park.  By googling every interview tip available, making a list of likely questions I would be asked during interviews and then practicing interviewing countless times, I was able to make the most out of the few opportunities I got.  I walked out of both interviews with job offers.

Make your interviews count.  Get on Penelope Trunk’s website and read all 29 posts in her interviewing category.  Then google more interviewing tips.  Then look up common questions asked at interviews in your field.  Then practice interviewing, over and over and over again.  If you take one tip from this article, let this be it, you cannot afford to screw up your interviews.

Network, network, network

I’m sure you have heard the importance of networking countless times already, so I won’t go into too much detail here.  But I will say the less “qualified” for a job you are the more important networking is.  The easiest way to make a potential employer forget about your average grades or lack of experience is to have someone they trust recommend you for the job.

This is something I wish I would have done more of in my job search.  I was not a good “networker” in college.  But both of the interviews I did get came from networking.

When you go in with a recommendation from a trusted source, you greatly increase the odds your shortcomings will be overlooked.  Turn every situation into a networking opportunity.  I met one of the guys who eventually landed me an interview on a sports message board!

Summing up

This article is not meant to diminish the importance of good grades and quality job experiences in college.  There is no doubt you will have more opportunities and things will be much easier for you if you follow that path.  Instead, this article is meant to give hope to those who, for whatever reason, followed a different path in college.

If you are just starting college, make good grades and relevant work experience your top priority and combine it with the tips above to make yourself a can’t miss job candidate.  If it’s too late for you to get good grades and land a great internship, implement these strategies to overcome those obstacles.

I was willing to be held accountable for my lackluster college career and accept the fact certain doors were closed to me because of it.  I was not willing to let it hold me back from achieving my dreams.  You shouldn’t be either.

Throughout high school and college, athletic ability can get you a long ways.  From grades to dating to general popularity, being a prominent member of an athletic team significantly enhances your quality of life while in school.  The advantages athletes receive aren’t fair, but those who are not athletes are comforted by the idea that when school is over and they enter the “real world”, how well you can shoot a basketball or how far you can throw a football will no longer matter.  But after my experiences this past month, I’m convinced athletic ability is just as beneficial in the corporate world as it is in high school and college.

Every March in Columbus, Ohio, the city hosts a basketball tournament called “The Corporate Challenge”.  Every company in the surrounding area is invited to join in this giant tournament, and teams are placed in divisions based on the size of their companies.  When I was invited to join my companies team, I was both surprised and excited.  I’m a decent enough athlete, but our company is gigantic and I have been there less than a year, so I didn’t know if the people in charge of choosing the team would know who I was, let alone deem me good enough to play on their team.  I gladly accepted the invite and prayed I wouldn’t make them regret choosing me.

When I met my team for our first game, it was extremely intimidating.  Not because they were great athletes, but because they were huge names in our company.  Our center was the Vice President of my department.  Our backup PG was the head of the auditing department.  All in all I would be running up and down the court with guys who could determine my future in the company.  Fortunately, I played pretty well and so did the team.  We narrowly lost in the semi finals to the eventual champs and finished in third place.  I managed to not embarrass myself and even make a few big plays of my own.  Good times were had all around.  But what I gained from the experience went way beyond the basketball court.

As usually happens on any kind of athletic team, bonds were formed during our five day tournament.  Suddenly these company big wigs who didn’t know my name a week ago were including me in daily emails and stopping me in the hall to say hi.  When I saw them in the gym or at lunch they were asking if I saw the Cavs game the night before and talking to me about whatever recent horrible decision the Browns had made.  I was even asked to play in a weekly basketball league with several of them.  It was unbelievable.

As I’ve talked about on here before, the company I work for is being hit hard by the recession.  Layoffs are rampant and no ones job is 100 percent safe right now.  In times like this, any advantage you can get could mean the difference between keeping your job or being laid off.  I believe the new relationships I have formed as a result of playing in a basketball tournament have given me a huge advantage.  If a new round of layoffs comes up, and the higher ups are deciding between me and ten guys they have never met, suddenly the odds have swung heavily in my favor.  Chances are they know very little about any of our job performances, but they now know me personally.  They know I’m a team player, competitive and a pretty fun guy to spend time with outside of work.  How could this not work in my favor? 

This isn’t an article to tell you that you need to participate in your companies athletic events to advance (or survive) in your career.  In fact, if you aren’t athletic, I’d tell you not to participate in any serious work related athletic events as it could have the reverse effect.  But if you are reasonably athletic and could contribute to your companies team, you should do anything you can to be a part of the team consisting of the most higher ups in your company.

Athletic ability is a tool that can be used strategically to advance your career, just like any other work related skill.

If this is your first time visiting Nickeled and Dimed you may want to see what we are about , read about me, or read our introductory post.

In Cleveland, Ohio, 133 homes sold for $1 in 2008.  In Detroit, Michigan banks have resorted to paying investors to take foreclosed houses off their hands.  Combine that with interest rates being five percent or lower and the $8,000 homebuyers credit and there has never been a better time to purchase a home.

The deals don’t end with real estate.  The auto industry is also being forced to offer incredible deals in an attempt to move inventory.  Toyota is offering zero percent financing on 11 different models. Hyundai is offering to make your payments for three months if you lose your job.  No matter where you look, you will find good deals right now.  Restaurants, grocery stores, air lines, hotels, amusement parks, sporting events and nearly anything else you can think of are all offering incredible specials right now in an attempt to keep sales up during the recession.

But if all these great deals are out there, why are people still not buying?  Because very few people were financially prepared to take advantage of the recession forced yard sale.  Instead, they are finally getting around to paying off their debt and building emergency funds.  It’s great that our savings rates are finally rising, but had we had our finances in order before the crisis we would be able to take advantage of one of the biggest buyers markets of all time.

Here are a few ways we can make sure we are prepared to take advantage of the next economic downturn:

Pay off debt

Debt is never good, but it is an even bigger killer during a recession.  Not only does it suck up cash flow that could be used to take advantage of the great deals, it also puts you at risk of having your credit lines decreased or taken away all together.

Being free of all consumer debt during a recession will both limit your risk of being effected by it and increase your chances of profiting from it.

Build as big of an emergency fund as possible

While most personal finance experts will tell you a three to six month emergency fund is adequate, if you want to be in a position to take advantage during a recession you should aim higher.  Most people run a much greater risk of losing their jobs during economic downturns and will likely take much longer to find a new job if they are laid off.  Thus, a larger than normal emergency fund will be needed to protect you from extended unemployment.

By saving a year or longer emergency fund you can protect yourself from job loss and put yourself in a position to spend money guilt free.

Raise your FICO score

During recessions banks and other lending institutions become much more stingier with their money.  Instead of lending money to anyone who walks through the door, only the most credit worthy applicants are approved for loans.  Your FICO score will almost single handedly determine your credit worthiness.

Your FICO score will determine whether or not you get to participate in the next yard sale.  Improve yours and protect it at all costs.

Make yourself indespensible at work

Job loss, or the threat of job loss, is the biggest reason for not spending money during a recession.  Make yourself indespensible at your job and you will remove this barrier.  Whether it is switching jobs to a recession proof field (healthcare, etc.) or simply increasing your importance at your current job, you have the ability to significantly decrease your chances of losing your job during recessions.

If you are secure in your job you are free to spend more money during an economic downturn.

For most of us, survival is our goal during this financial crisis.  Just being able to put food on the table is the top concern for many.  But by preparing our finances before the bad times hit, recessions can be used to boost our lives instead of inconveniencing them.

Survive this recession.  Use the strategies above to prosper during the next one.

Please continue sending me any personal finance related questions, suggestions and story tips to josh@nickeledanddimed.com.

If this is your first time visiting Nickeled and Dimed you may want to see what we are about , read about me, or read our introductory post.

If you are like most people, you are probably wondering what the point of contributing to your 401 (k) is right n0w.  Your investments are almost certainly down at least 30 percent over the past six months and probably more.  You are literally watching every new dollar you put in vanish before your eyes.  I’m sure the last thing you want to hear right now is someone else telling you to not worry about the short-term results and just keep on contributing.  But at the risk of having stones thrown at me, that’s exactly what I’m going to do, and I’m going to take it a step further.  Not only should you still be contributing to your retirement accounts, you should be glad the market is doing what it is doing and should increase your contributions if you can afford it.

To clarify, what I’m going to say only pertains to those who are relatively new to the workforce and thus have a small sum accumulated in their retirement account.  If you have been contributing to your 401 (k) for ten or more years, the opposite of what I say could be true for you and you have every right to be freaked out about the market right now.  For the rest of us, the current market is providing an excellent opportunity for our retirement accounts and any other long-term investment accounts.  Here’s why:

Last month, Carl Richards at Behavior Gap wrote an article titled “Investing 101: Average is NOT Norma”l.  The article was so good it landed guest post gigs on two of the top personal finance sites, Get Rich Slowly and I Will Teach You to Be Rich.  In the article, Richards explains the difference between average investment returns over a long period of time, and average returns during each year of that period.  For example, while it is safe to assume that over a 30 year period you will receive at least a seven percent return in a properly diversified retirement account, that does not mean each of those thirty years will have a seven percent return.  You may have years of 40 percent return and years of -30 percent return.

Timing is everything

This is not new news for anyone who has been paying attention the last six months.  It is pretty obvious to us all at this point that seven percent returns are not guaranteed every year.  But what’s not so obvious to most of us is that when you experience the worst returns has a signficant effect on the overall return your account will provide.  Experience a market crash near the beginning of your investing  life (as most of our generation is), and you could be set up for above average long-term returns.  Experience a market crash in the middle or end of your investing life, and you will likely face below average long-term returns.  Here is Richards explanation of why experiencing the crash early will boost your overall results:

You start with a small initial investment and then do the right thing by adding money each month. You feel like you are throwing good money after bad because each month your statement arrives and it is lower. But you continue to accumulate shares of the investment. After years of “bad” performance you have built up a sizable portfolio and the market turns, and you have years of “above” average returns. In this case the “good” returns came at the time when you had the most money to benefit from them.

So by accumulating your market shares while the prices are down, you set yourself up to have the most amount of shares when the market goes back up. 

Dollar cost averaging is the key to profiting from market crash

Dollar cost averaging is the act of investing a set amount of money in regular intervals, such as monthly or yearly.  The idea behind this strategy is that you will automatically purchase more shares when a stock is at its lowest and less shares when it is at its highest (optimizing the idea of “buying low and selling high”).  When you contribute to a 401 (k) or other retirement account, dollar cost averaging is done automatically.  Here is an over simplified example of how dollar cost averaging works:

Let’s say you invest $100 monthly into your retirement account.  This is what your account would like look if the following price changes occurred:

• First month- Fund is selling for $25 a share, allowing you to purchase four shares.
• Second month- Fund falls to $20 a share, allowing you to purchase five shares.
• Third month- Fund falls to $10 a share, allowing you to purchase ten shares.
• Fourth month- Fund falls to $5 a share, allowing you to purchase 20 shares.
• Fifth month- Fund falls to $4 a share, allowing you to purchase 25 shares.
• Sixth month- Fund climbs back to $10 a share, allowing you to purchase 10 shares.

At the end of this sixth month experiment, you have invested $600 into this fund at an average cost of $8.11 per share.  If you sold all your shares at the current market value of $10 a share, you would make $139.86, good for a 23.31 percent return on investment.  That is a phenomenal return under any circumstance.  When you consider you achieved that return in a market that saw the price drop from $25  a share to $10 a share from the time you started investing, it is a mind blowing return.

Had you invested all $600 during the first month, instead of dollar cost averaging, you would own 24 shares at an average price of $25 dollars a share, giving you a net loss of $360 or -60 percent.

The power of dollar cost averaging is remarkable.

What this all means

Summing up this long post, this market crash that we are all complaining about could prove to be a benefit to your retirement account.  By continuing your annual contributions, (or even increasing them if you have the extra money) you will set yourself up for well above average returns in the long-run. 

So rip up your monthly statements if you have to, stop worrying about the doom and gloom you are hearing on TV and be comforted in the fact that if this is the worst market we face in our working lives (as it very well should be if history is any indication) it could not have happened at a better time.

Please send any questions, concerns and story tips to josh@nickeledanddimed.com.

I have some fairly big changes in mind for this website coming in the next few weeks.

First of all, the general theme of the site is going to change a little bit.  Instead of simply being a personal finance website, it will now be more of a young professionals website for Gen Y.  A lot of the content will remain unchanged.  Most articles will in some ways be related to personal finance.  But the advice will be geared to Generation Y young professionals.  Why am I making this change?  Well, most importantly, it gives me more things to talk about.  I enjoy talking about job hunting and interviewing and career changes.  With more of this broad scope I can do this topics.  Another reason is that most of the readers of this site seem to be in the 20-30 year range.  I will be catering more to my audience.

Secondly, the name of the site is going to change.  I need your help here.  I would like it to involve something with “Generation Y” in it, or some abbreviation of it.  But I’m willing to listen to other offers.  Any ideas?  If so email them to centsabilitytowealth@gmail.com (this will remain the email address until the websites name is changed).

And lastly, I’m thinking of changing the layout of the site.  I’m going to look at options and maybe try a few out.  If I have one up that you absolutely hate, PLEASE email me and tell me.

So as you can see, I have a lot of changes in front of me.  As a result, my posts the next week or so may be a bit shorter and there may be a few weekdays that don’t have a post.  I apologize for that.

And if you are one of my readers who are not a Gen Y’er, have no fear, most of the stuff we talk about will in some way apply to everyone.  I hope to have you stick around.

This weeks Open Mic question comes from Kyle Franklin in Columbus, Ohio.

I am 31 years old and trying to figure out what to do with my 401 (k).  I am all for saving money for retirement, and had over $10,000 saved up on a modest salary before the market crash.  Since then, I have watched my money disappear before my eyes and it is now under $6,000.  I have stopped contributing to the account as I don’t like giving my money away.  My question is how do I know when the market has bottomed out so  I can start contributing to my 401 (k) again and not miss out on the rebound (if it ever comes!)?

While Centsability to Wealth is a personal finance site, I love talking about the economy, too.  And since Kyle’s question is one a lot of people seem to be asking these days, I figured we should tackle it here.

If you are a regular reader of CTW, you have seen me say before that I don’t think the economy should change your personal finances.  When you have the right strategies in place, your micro economy is safe from the macro economy.  Paying off debt, building an emergency fund and saving for retirement are things that should be done no matter how good or bad the stock market is doing.  But I understand that it’s not that easy.  I realize we see the market dropping to ten year lows and even the thought of investing in it makes us cringe.  I know you are looking at your account statements and seeing 40 percent losses, just like Kyle.  Here’s my advice: Ignore it.

Doom and gloom is every where.  You can’t turn on the TV with hearing how this is the biggest financial disaster since the Great Depression.  But if you can ignore the talking heads on TV and some of the so called experts, you may find that this is one of the best times in history to be funding your retirement accounts.  Stocks are being sold at once in a lifetime discounts, and unless you are within ten years of retirement, you really don’t care how much lower they go.

In Kyles case, especially, stopping your retirement contributions and waiting for the market to “bottom” is the absolute worst thing you can possibly do.  Unless the market drops all the way to zero (and I can confidently tell you that isn’t happening), by dollar-cost averaging your investments (this is done automatically with regular 401 (k) contributions) you will come out ahead in the long-run.  You have over 30 years until retirement, Kyle, you should be seeing this economy as a huge opportunity, not a detriment.

I can’t tell you when or where the bottom is.  What I can tell you is that if you wait for it, you will likely miss out on some of the biggest gains the market will have during your lifetime.  Trying to time the market is a fools game and studies show that by missing out on even a few days of the top rallies you can significantly reduce your long-term gains.  With time on your side, there is no reason not to be contributing as much as you possibly can to your retirement accounts right now.

So, Kyle, not only do I think you should immediately pick back up your 401 (k) contributions, I think you should raise them.  We are programmed to take advantage of sales in nearly every other area of our lives.  Stocks should be treated the same way.  Don’t try to time the market.  Stick with the age old strategies that have made people wealthy for hundreds of years.  Continue to fund your retirement and throw out the monthly statements if it is too hard to look at your short-term losses.

It’s like Warren Buffet always says, “when everyone’s being greedy, be fearful.  When everyone’s being fearful, be greedy”.  Now’s the time to be greedy, Kyle.

If you would like to be featured in a future addition of Open Mic, send your personal finance related question to centsabilitytowealth@gmail.com.

Technorati Tags: personal finance, economy, retirement, 401 (k), dollar-cost averaging, great depression, warren buffet, money, financial crisis

 If this is your first time visiting Centsability to Wealth you may want to see what we are about , read about me, or read our introductory post.

The last few days we have talked about budgets.  First I shared ten thoughts on budgets from CNN Money, and then I laid out how my own personal budget worked.  In a continuation of the budget theme, I want to talk about the “adult allowance“.

The adult allowance is the concept of taking a certain amount of money out of your account at the beginning of each month and designating the money to go towards your “wants” each month.  The idea behind it is that by setting yourself a certain amount of money each month to spend on whatever you want, you can stay within your budget while still having some fun without feeling guilty about it.  As an example, I could give myself a $200 adult allowance each month.  Any time I bought fast food, or a new book, or went out for drinks, the payment would come out of this fund.

Let’s take a look at what, in my opinion, are the pros and cons of the adult allowance:

Pros of the adult allowance

• It allows you to spend money on things you want guilt free- By giving yourself a designated amount of money each month to spend on whatever you want, you are more likely to stick to your budget.  If you constantly have to be worried about ever penny you are spending, your budget will eventually be more stressful than it’s worth.  The adult allowance cures that by giving you a set amount of money to spend on your wants.
• Taking the cash out at the beginning of each month allows you to always know exactly how much you have spent and how much you have left to spend- If you normally keep your discretionary spending money in the same account as all your other spending money, it can be difficult to know how much money you have to spend at any given time.  By implementing a cash system for this portion of your budget, you can make sure you always know exactly how much you can spend.
• It improves your budgeting skills- The adult allowance is basically a budget within a budget.  And like all budgets, it is all about prioritizing.  Want to buy $75 tickets to the Kenny Chesney concert in two weeks?  Check how much is left in your monthly allowance and decide want you want to sacrifice to buy those tickets.  By properly handling your adult allowance every month, you will improve your overall budgeting skills and in turn eventually improve your finances.

Cons of the adult allowance

• Difficult to track spending- As you know by now, I’m in favor of an all plastic finance system due to the ease of tracking your spending.  By switching to the cash system for your adult allowance, you are forced to either use a pen and paper to track your spending, or simply give a generic label to that portion of your money and not worry about where each penny within the allowance went.  I like seeing exactly where my money went, so this part is hard for me.
• Could encourage careless spending- In the wrong hands, the adult allowance could encourage people to be careless with their spending.  If you went from being awful with finances to improving them with a budget, the adult allowance runs the risk of getting you back into your free spending ways.  It should only be used by the financially responsible who won’t get caught up in the limited free spending and will continue to be strict with the rest of their budget.

As you can probably tell by my list of pros and cons, I’m becoming a fan of the adult allowance.  Though I haven’t yet tried it myself, it seems like a good way to allow yourself some guilt free spending every month (something I struggle with at times), while also keeping a strict budget and potentially improving your budgeting skills.

One thing I would like to do is figure out a way to keep this in my plastic system.  Perhaps I could open an online account that offers a debit card and simply transfer my monthly allowance to it at the beginning of each month?  That way I still get all the benefits of the adult allowance, while not having to use cash.  I may have to give that one a try.

As for the important question, how much should your monthly adult allowance be, that is something you will have to figure out yourself.  Sit down with three months worth of your spending and budgets.  How much do you typically spend each month on your wants?  More importantly, how much can you afford to spend on them each month?  Be honest with yourself.  Obviously giving yourself too much discretionary spending each month will ruin your budget, but so can not giving yourself enough.  Make sure it is an amount that you can reasonably afford and that will reasonably last you through the month.

What about you guys?  Do you use an adult allowance or something similar?  Do you like it?

Please continue sending any personal finance related questions, suggestions and story tips to centsabilitytowealth@gmail.com.

 If this is your first time visiting Centsability to Wealth you may want to see what we are about , read about me, or read our introductory post.

As I mentioned in yesterdays post about budgets, many of you have been very interested in the topic.  A few of you have wanted to know what I use for my personal budget.  So today I am going to walk you through exactly how my budget works.

First let me say that the budget I use is not anything special.  It’s actually pretty plain and boring.  But it works for me and that is the biggest key to a budget or any other personal finance concept.  It has to work for you.  Warren Buffet himself could come to your house and build you a budget in front of your face, but if it is not something you will follow, it’s worthless.  So as you read about my budget, keep in mind it is not necessarily the budget I recommend for you.

Here is a look at my budget, followed by my keys to following it:

- Monthly income (After 401 (k) and benefits deductions): $2,300

- Fixed monthly expenses: $1,300

     - Rent (including cable, internet, electric, water etc.): $250

     - Car: $300

     - Student loans: $250

     - Debt repayment (was my credit card, now it is a personal loan being repaid): $500

Fixed amount of money going towards monthly savings: $500

     - Emergency fund savings: $300

     - Moving expenses savings (what we are saving for our upcoming move): $200

Monthly discretionary money: $500

   - Discretionary money is the money that can be used on anything I choose.  It should be noted that some necessary expenses are paid for out of the discretionary money, such as groceries and gas.  But basically I have $500 to do with what I please each month.  If I spend too much on going out to eat or going to the movies, etc, I won’t be able to buy groceries.

How do I make sure I stick with this budget?

1. Automate it as much as possible.

Wherever I can automate an expense or savings amount, I do.  My student loan payments are automated.  My savings account contributions are automated.  When I was paying off my credit card that was automated.

By keeping these things automated I ensure that they are both getting paid on time and are getting priority over discretionary spending.  That money is being taken out of my account whether I want it to be or not, so I better make sure I have enough in there.

2. It allows me guilt free spending.

When I first started getting control of my finances, I would freak out about every penny I spent.  Did I really need that one dollar candy bar?  It was driving me crazy.

Now that I have a set amount of money devoted to my discretionary spending, I can spend on the things I want guilt free.  You still have to set priorities, as the fund is certainly not limitless, but I no longer have to sweat the little stuff I want to buy.

3. It’s not too strict.

Some people need and thrive with an extremely strict budget that decides where every penny will go every month.  I am not one of those people.  Having a little bit of freedom with my money, while also sticking to a general schedule with it, is what works best for me.

4. I constantly adjust it as needed.

A lot of my expenses and savings goals are changing frequently.  When I recently paid off my credit card, I had to decide what to do with the $500 a month that was going towards that debt.  I decided to use it to pay off my personal loan.  In a few months that will be paid off and I will again have to decide where to put that money.

Keeping it updated like this not only keeps it realistic, but also keeps it interesting for me.  Deciding where to put $500 extra is exciting.  And when you make it fun, it is much easier to follow your budget.

There is a quick look at my monthly budget.  It is what works best for me (at least at this point in time), but as I have said many times already, it may not be what works for you.  You may very well want a more organized budget that sets a certain amount of money for gas and groceries each month.  You may want less structure or less automation.  It is completely up to you and my best advice would be to experiment with different approaches and see for yourself which style you like best.

Budgets are an excellent (and probably necessary) tool for improving your finances.  Whether you want to give my style a try or go with a completely different approach, the important thing is that you get started.

Please continue sending any questions, suggestions and story tips to centsabilitytowealth@gmail.com.

 If this is your first time visiting Centsability to Wealth you may want to see what we are about , read about me, or read our introductory post.

In the past week I have gotten four different questions on budgets.  Budgets are a very important tool for improving your finances.  There are several different types of budgets out there, ranging from super strict budgets that control your spending to the penny, to more loose budgets that divide your spending into more broad categories.  Which one works best for you depends entirely on your situation.

With all the recent interest in them, we will spend the next few days discussing budgets.  Today we will highlight an article from CNN Money on the top ten things to know about budgeting.  The ten points are theirs, the recaps underneath are mine.

1. Budgets are a necessary evil.

In order to get control of your finances and spending, you need to make some form of budget.

2. Creating a budget generally requires three steps.

- Identify your current spending.

- Make goals to determine your future spending.

- Track your spending to make sure you are following through on your plans.

3. Use software to save grief.

Use software like Quicken, Microsoft Money, or even free internet software like Mint to track your spending and build budgets electronically.  This can actually make budgeting fun.  At least for dorks like me.

4. Don’t drive yourself nuts.

Don’t monitor your spending so closely that you are beating yourself up over every penny spent.  Make you budget, decide where to cut your expenses, but don’t forget to allow yourself a little bit of money for “free” spending.

5. Watch out for cash leakage.

This one rings particularly true for me.  On the rare occasions I carry cash, I am much more likely to spend it loosely.  I figure it is already out of my account, and therefore already money spent.

Treat the cash you carry around the same way you would treat money in your account.  Constant trips to the ATM are the fastest way to kill your budget.

6. Spending beyond your limits is dangerous.

If after tracking your expenses you realize you are bringing home less money than you spend most months, big changes need to be made.  I have said it countless times and will say it countless more times in the future, the biggest concept to master in order to build any form of wealth is spending less than you earn.  The wider the gap between your earnings and your spending, the better.

7. Beware of luxuries dressed up as necessities.

A lot of the things we try to tell ourselves are necessities are actually luxuries.  Do you really need more than basic cable?  Do you really need those three magazine subscriptions?  Be honest with yourself and determine what you can’t live without.

8. Tithe yourself.

Build your budget around 90 percent of your income.  You can use the other 10 percent as charity to yourself that can be used to buy your luxury items.

9. Don’t count on windfalls.

Don’t count anything as income that you have not yet received.  Tax refunds, year-end bonuses and investment gains are common causes of this.  Until you receive that bonus, or cash out that investment, it is not part of your income.

Counting on a windfall of money that you don’t end up receiving is an easy way to massively destroy your budget.

10. Beware of spending creep.

Also known as lifestyle inflation.  People have a tendency to increase their spending at the same rate their pay increases.

When you receive a raise or promotion at work, use the extra income to fund your savings or retirement before increasing your spending.

If you are new to budgeting, these ten thoughts are a good starting point on what to expect.  It’s important to figure out which budget will work for you.  Experiment from month to month, making tweaks along the way, until you find the style that works best for you.  Tomorrow I will go over the budget that I use.

Please continue sending any questions, suggestions and story tips to centsabilitytowealth@gmail.com.