3 BASKET APPROACH TO FINANCIAL SECURITY

My grandmother used to say that you should never put all your eggs in one basket. She was right. As I see it there are three baskets into which you should put your eggs. I call them the security basket, the retirement basket, and the dream basket. The security basket protects you and your family against the unexpected (such as a medical emergency, the death of a loved one, or the loss of a job), the retirement basket safeguards your future, and the dream basket enables you to fulfill those deeply held desires that make life worthwhile.

This three-basket approach may sound simple, but don’t let that fool you. If you fill the baskets properly, you can create for yourself a financial life filled with abundance and, most important, security. In today’s blog post I’m going to give you a breakdown of the 3 baskets- how much you should be putting aside, where the money should be going and how to make it automatic!

SECURITY BASKET:
The goal with your security basket here is to put away “rainy-day money” to cover expenses in case you lose your income. Exactly how much money you need to put away depends on what you spend each month.  I generally recommend to my students and clients that they put away somewhere between 3 and 24 months’ worth of expense money.

Now this 3- to 24-month range covers a lot of ground. What’s right for you depends in large part on your particular emotional makeup. Some of my students simply do not feel safe if they have anything less than two years’ worth of cash sitting in a money-market account. I happen to think that’s a bit excessive, but if that’s what it takes to make you feel comfortable, then by all means make it your goal.

Whatever amount you decide it’s important to put this money an FDIC-insured bank account (not your regular checking account but a separate one set up specially for this purpose). Until this emergency account is fully funded, you should have at least 5% of your paycheck directly deposited into it. If your employer doesn’t offer payroll deduction, arrange to have your bank automatically transfer the money from your checking account the day after your paycheck clears. To learn more check out my appearance on NBC’s Today show where I share my 6 tips for setting up an emergency account.

DREAM BASKET:
What’s a dream account? This is where you save the money that is going to pay for your home, car, wedding, trip to Hawaii, new boat, guitar, ski lessons, cooking school—whatever your dream happens to be. Most dreams require CASH, and because most people don’t have the cash, they either borrow to pay for their dream (whether by putting it on their credit cards or taking out an actual loan), or they never make the dream a reality. In some ways, your dream account is the most important account you will have because living your dreams is where the excitement of life really is. The best way to start filling this basket is to decide upon a fixed percentage of your income that you will automatically contribute every month. I usually recommend people start by investing 3%-5% of their after-tax income. As with your emergency fund, use either payroll deduction or your bank’s online bill-pay service to have a percentage of your paycheck automatically transferred into an FDIC-insured account set up just for this purpose. If your dream is at least three years away from fulfillment, start investing the money more aggressively once your dream savings total $10,000.

RETIREMENT BASKET:
In my earlier blog post I explained the critical importance of paying yourself first—having at least 10% of what you earn deducted from your paycheck and deposited directly into a 401k, IRA, or similar qualified retirement account before the government takes its bite of withholding tax. Ideally, this deduction should total 12.5% of your income (the equivalent of one hour’s worth of work each day). But whatever you can manage, you must make the process automatic. The good news is that payroll deduction is a standard feature of most 401k plans, so as long as you’re signed up, your contributions will be automatically deducted from your paycheck.

If you’re not eligible for a 401k or similar plan and as a result use an IRA for your retirement saving, you’ll have to create your own automatic “pay yourself first” program. Tell the bank or brokerage where you have your IRA that you want to set up a systematic investment plan. This is a plan under which money is automatically transferred on a regular basis into your IRA from some other source (such as a payroll deduction). Most banks and brokerage firms will handle all the arrangements for you, contacting your employer’s payroll department on your behalf and dealing with all the paperwork. (If your employer doesn’t offer payroll deduction, you can have your retirement-plan contribution automatically moved from your checking account to your IRA—ideally, the day after your paycheck clears. Most banks have free online bill-paying services that allow you to schedule regular automatic payments of specified amounts to anyone you want).

I hope this blog post helped you gain a better understanding of the 3 basket approach to financial security and has motivated you to start funding all 3 – AUTOMATICALLY! Please leave a comment below or on my facebook page. I love hearing from all of you!

Live Rich!
David Bach

NBC’S TODAY SHOW – MONEY 911 – SEPTEMBER 19, 2012

If you missed me this morning on NBC’s TODAY show Money 911 segment- be sure to check it out now!  Today on the panel we answered viewer questions about dealing with a low home appraisal and how to stop the process on a short sale. Enjoy! 

Live Rich,
David Bach

DAVID BACH INTERVIEW WITH AUTHOR AND ENTREPRENEUR BRANDON STEINER

Hey everyone.  Happy September!

I just did an amazing interview with remarkable man and entrepreneur named Brandon Steiner.

Brandon, has a new book coming out called You Gotta Have Balls: How a Kid from Brooklyn Started From Scratch, Bought Yankee Stadium, and Created a Sports Empire

Brandon Steiner – David Bach Interview by David Bach- FinishRich

The book is fantastic.  I read it cover to cover in about three hours and loved it.  While the title sounds funny, it’s not what you may be thinking.  It’s actually about how to pursue your dreams, recover from adversity—and raise children with strong values that will benefit them for life!  It really moved me as a parent.

Brandon, owns a company called Steiner Sports Marketing & Memorabilia, Inc., one of the largest sports memorabilia companies in the world.

Last year, he made my dream come true—when he took my son Jack on a tour of Yankee Stadium, and had “second base” hand delivered to his seat at the seventh inning of the game!  This was Jack’s first time at Yankee Stadium, needless to say—not your normal first experience at a baseball game.  He’s one lucky kid, and I am one lucky daddy!

This interview is one of the best I think I have done in a year—and it’s my gift to you for being a member of the FinishRich Community!  Enjoy and please share your comments on how you liked it.

Oh…and if you haven’t “liked” me yet on Facebook—come join me (we just went over 25,000 “likes”—would love to see you there)!

Live Rich!
David Bach

 

HOW TO HIRE A GREAT REAL ESTATE AGENT

With all the real-estate websites available on the Internet these days, it’s possible for anyone with a computer to do a lot of the stuff that only a real estate agent used to be able to do. Certainly, you don’t need a professional in order to locate homes for sale in a particular area or get a good sense of where prices are in the category that interests you. But this kind of research may be the least important thing a great real estate agent can do for you.

I’ve been a real estate agent myself (specializing in commercial properties) and I’ve worked with real estate agents on all of my own real estate transactions. I know from personal experience how much they can help you. But I also know that not all real estate agents are created equal.

So how do you find the one who can guide you through the process intelligently and help you close a great deal? Here’s a list of things you should look for.

  • A great real estate agent will listen to you carefully. Great agents are great listeners. They have to be in order to really help you. When a great agent meets you for the first time, he or she will pepper you with questions to find out what you’re looking for, what you really want, why you want it, and most important, what you think you can afford.
  • A great real estate agent will help you figure out what you really can afford. The first thing a top-notch agent will do is run your numbers and give you a ballpark estimate of what your price range should be. A great agent will also provide you with referrals to lenders who can help you get pre-approved for a mortgage.
  • A great real estate agent will save you time by narrowing your search. A great agent won’t run you ragged (and waste your time) by dragging you around to countless properties. Rather, the agent will help you figure out what you are looking for, show you a selection online, and allow you to narrow your choices before you actually hit the streets. He or she will then “tour you” to ones you’ve chosen—and keep track of what you like.
  • A great real estate agent will educate you about the market. Great real estate agents know more than simply what’s for sale in a particular neighborhood. They know the neighborhood. They can tell you all about an area’s history, what makes it special, and where they see the market there going. If you’re looking at a new development, the agent will know the developer’s track record and plans for the future.
  • A great real estate agent will show you ways to get more value from the property. From the moment a great real estate agent first sees a house, he or she is thinking about what could be done to increase its value. Install new kitchen cabinets, redo the floors, knock out the back bedroom and add a master bath—great agents will look at houses and immediately begin suggesting ways you could make it more valuable.
  • A great real estate agent will hold your hand at closing. The closing of a home purchase at the title office can be a scary few hours. Great agents will go over the paperwork with you and your attorney, checking it for errors. They will also work closely with you and your mortgage banker or broker to make sure everything is as it should be.

HOW TO FIND A GREAT AGENT Finding an agent who is ready, willing, and able to do all these things is not as hard as you might think. You should start by asking trusted friends and colleagues for recommendations. If one name keeps cropping up, that’s a good sign. Make a note if you see a particular agent’s name repeatedly on for-sale signs in the neighborhood where you want to buy. You can also collect business cards from agents you meet at open houses.

As your list of prospective agents begins to take shape, do an Internet search on all the candidates you’re considering. Look for articles, chat room or blog posts, and personal websites to get a feel for their work, their style, their values, and how they market themselves.

DON’T BE AFRAID TO ASK TOUGH QUESTIONS When you’ve narrowed your list to three to five prospects, schedule a meeting with each—and treat your meeting like an actual interview. I recommend that you ask the following questions:

  • How long have you been in business?
  • How long have you worked in this particular market?
  • How many listings (properties for sale where you represent the seller) do you have?
  • How many clients are you currently working with?
  • How many deals did you do last year in the area I’m interested in?
  • Why should I work with you rather than one of your competitors?
  • What makes you a good real estate agent?
  • What is your process—how do you work with your clients?
  • Do you have a team or an assistant? Will I be working with them or you?
  • Can you give me the names of three clients you’ve worked with whose situation was similar to mine?

Based on their responses, ask yourself how you think it would be to work closely with each of them. Does your gut say this person is trustworthy? The only correct answer is whether the agent feels right for you. It’s all about chemistry.

Finally, before you commit to a particular agent, check them out with your state’s real-estate commission or licensing board. You want to verify that your choice is not only licensed but also that his or her license is in “good standing,” meaning the agent has kept current with all educational requirements. You also want to find out whether he or she has any record of complaints or disciplinary actions.

Hope this blog post helps you find the great agent you deserve. Be sure to leave a comment below!

Live Rich,
David Bach

The Foundation to Building Wealth

When it comes down to it, finishing rich is simple. All you have to do is make a decision to do something that most people don’t do—to Pay Yourself First. And if you’re starting late, you have to Pay Yourself First…Faster!

It really is that simple.  It’s just not easy. The catch is that you have to know what Pay Yourself First means and then you have to do it. And if you’re not where you’d like to be financially at this point in your life, chances are you don’t.

WHAT “PAY YOURSELF FIRST” MEANS

“Pay yourself first” means just what it says.  The next time you earn a dollar, before you pay anyone else any money they may have coming to them—before you pay the government its federal or state tax, before you pay your landlord the rent or your bank the monthly mortgage—you must pay yourself first.

The fact is that most of us pay everyone else before we pay ourselves. The first person we pay is the government through our withholding taxes. Then we usually pay the rent or our mortgage and the rest of our bills.  If anything is left at the end of the month, then maybe we pay ourselves by putting a few dollars into a savings or retirement account.

Unfortunately , this approach simply doesn’t work. For one thing, by letting the government take its portion first, there’s often not enough left over to pay yourself much of anything.

WHERE DO I PUT IT?

Fortunately, there is a way to pay yourself before you pay the government, a way where you don’t lose a third of your paycheck to taxes. And best of all, it’s legal.  It involves opening a PRETAX retirement account and putting a portion of your salary into it. Every dollar of your income that you deposit (up to certain limits), as long as it stays in the account, is not subject to any taxes. And neither is any of the interest (or capital gains) that you earn on it.

HOW MUCH?

My suggestion is simple. Starting today, you should work at least one hour a day for yourself. This means you should Pay Yourself First for your future by putting a minimum of 10%-12.5% of your gross income or 1 hour a day of your income into what we call a pretax retirement account.  For Business owners this would be 10% of your gross income or 1 deal a year (or 2, 3 etc.. depending on your specific situation).

MAX IT OUT

The single most important investment decision you ever make may well be how much to automatically Pay Yourself First into your retirement account.

If you are already enrolled in your company’s retirement plan or have set up an IRA plan, SEP IRA etc…, congratulations. But that doesn’t mean you’re done yet.  Now you need to find out how much you are using it.  Are you saving 4%?  That’s about what most people do.  Unfortunately, most people retire poor, dependent on Social Security or family to survive. You are not most people.

In a perfect world, the fastest way to become rich is to MAX OUT THE PLAN. Here’s the maximum allowable based on current tax law:

  • IRA/Spousal IRA – $5,000
  • 401k/403b Plan – $17,000
  • SEP IRA – $50,000
  • Solo 401k – $50,000
  • Defined Benefit Plan – $200,000

Now, it’s okay to start off slowly, saving a smaller percentage of your income at first, and gently working your way up to where you need to be. Even if you think the best you can do is to save just 1%, don’t let that stop you. Anything is better than nothing.

At the same time, try to be ambitious. After all, this is your future we’re talking about. However much you think you can afford to Pay Yourself First for your future—do more. If you think you can save 4%, save 6%. If you think you can save 10%, save 12%.  Most of us tend to underestimate how much we think we can manage. As a result, we wind up low-balling ourselves … and our futures.

IS THAT ALL THERE IS?

To be honest, not everyone is as enthralled by the idea of Pay Yourself First as they should be. In fact, it makes a lot of people angry. You may be one of them.  Please trust me on this.  Nothing will help you achieve wealth until you decide to Pay Yourself First.  Nothing.  You can read every book, listen to every tape program, order every motivational product, subscribe to every newsletter there is, and none of it will get you anywhere if you let the government and everyone else have first crack at your paycheck before you get to it. The foundation of wealth building is Pay Yourself First. So what are your next steps?

  • Decide to Pay Yourself First for your future.
  • Open a retirement account
  • Fund it with at least 10% of your gross income (1 hour a day of your income)

I hope that you found this information helpful and that you will make the decision to start paying yourself first TODAY!

Live Rich,
David Bach