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

Feel like a millionaire starting today

The one incredible universal truth that has stood the test of time is that the more you give the more you receive.

This notion—that the more we give back to others, the more comes back to us—is not simply a religious doctrine; it is virtually a law of nature. If you are looking to attract more wealth and happiness into your life, the fastest way I know how is to give more.

HAVING IT ALL…THROUGH TITHING
What exactly is tithing?
Tithing is the proactive practice of giving back. It is a spiritual principle common to many traditions that says you should give back a portion of what you receive, that those blessed with abundance have a duty to help others through gifts of kindness, time, ideas, and money. What is amazing about tithing is that when you tithe you get a feeling we often associate with acquiring material things. You simply feel great.

HOW TO TITHE
Should you tithe? Ultimately, it’s a personal decision. Still, I’d like to suggest that if you are not doing it now, you give it a try. Take a percentage of your income and start donating it to some worthy cause. You could donate the 10% traditionally associated with tithing, you could donate more, or you could donate less. As I said, tithing is personal; it’s not about percentages but about the love of giving. What’s important is simply that you get started.

YOUR 5 STEP PLAN FOR TITHING:

STEP #1: COMMIT TO TITHING. For tithing to work, it needs to be a consistent commitment. It’s just the same as Pay Yourself First. If you donate a set percentage of your income every time you get paid, you will compile an impressive record of contributions. If you wait until the end of the year to see what is “left over,” then you will wind up donating less—maybe even nothing. Select a percentage that feels right to you and that you know you can manage.  Once you’ve done that, make a commitment in writing to donating this amount on an ongoing basis.

GIVING BACK A PERCENTAGE OF YOUR TIME
People ask me, “What about giving my time to charities? Does donating my time count?”  Of course it does.  In fact, donating your time can often be more useful than donating your money. There are tons of charities that need helping hands far more desperately than they need additional dollars. And from your point of view, donating your time can be incredibly meaningful.

STEP #2: AUTOMATE IT. Whatever amount you decide to tithe, arrange to have it automatically transferred out of your checking account on a regular basis. Doing this is easier than ever. Most organized charities will be happy to help you arrange an automatic transfer schedule (where they automatically debit your checking account on a regular basis), and many are set up to do it online in just a few minutes.  If you are not comfortable having your bank account debited by a charity, you can probably set up an automatic transfer through your bank’s online bill payment system.

STEP #3: RESEARCH THE CHARITY BEFORE YOU GIVE. Where you donate your money is entirely up to you. The most important advice I can offer is to make sure that the charity to which you are giving your hard-earned dollars really uses the funds it collects to help the people or causes it is supposed to be helping. Here is a list of organizations that can help you learn more about potential recipients.

STEP #4: KEEP TRACK OF YOUR DEDUCTIBLE CONTRIBUTIONS. The U.S. government has long allowed taxpayers to deduct contributions to qualified charities.  Depending on how much you give, you can offset as much as 50% of your income in this way. In order for a donation to be deductible, the organization must formally apply for and be granted tax-exempt status under section 501(c)(3) of the tax code. You can verify this for any particular organization by visiting the IRS website. For contributions of less than $250, the IRS requires you to keep some sort of written record, such as a cancelled check, a letter or receipt from the recipient, or a bank or credit card statement that verifies the where and when of the donation. If you give more than $250, the IRS wants your proof of donation filed with your tax returns. 

STEP #5: FIND OUT ABOUT DONOR ADVISED MUTUAL FUNDS. Donor Advised or Charity Funds allow people to invest their money for a charity’s benefit later but get a tax deduction now. Benefits of these funds …

  1. Instant Tax Deduction.
  2. More Money for Charities.
  3. Less Pressure. These funds are great for people who know they want to give (and would like the resulting tax deduction now) but don’t yet know who they want to give to. You simply put whatever amount you want in the fund, take the deduction, and then make up your mind at your leisure about what the right charity is for you.
  4. Create a Legacy. As your wealth you will increasingly be in a position to make a lasting difference in the world.  Donor funds allow you to build a real charitable base for your family, since more than one person can contribute to the fund.

Here are some established donor funds worth considering – the minimum initial investment in each is $5,000 (except Vanguard, with a minimum $25,000 contribution).

  1. Fidelity The Giving Account
  2. Schwab Charitable Fund
  3. The T. Rowe Price Program For Charitable Giving
  4. Vanguard Charitable’s donor-advised fund

WHY THE ‘HAVE MORES’ HAVE MORE

Over the years, I’ve seen firsthand that the “Have Mores” give more.  I’ve also seen that the fastest way to feel rich is to give more—and that those who give more become rich faster.  I don’t think it’s a coincidence. Research shows definitively that people who give of their time and money to help others live longer, happier, and wealthier lives. What more could you ask for?

Live Rich,
David Bach

Are You Making the #1 Financial Mistake?

After ranking top 3 in GoBankingRates’s Favorite Financial Expert of 2011 Poll (by the way, thank you again to all that voted!) they asked me to answer the question: “What’s the number one mistake people make with their money?”

So, instead of just giving a plain, vanilla, written answer, I rolled up my sleeves and shot a video so I could show you what I believe is the #1 financial mistake out there and how you can avoid or fix it in less than an hour!  In this video I walk you through how you can set up a system that guarantees you won’t have spent all your money on other things before you get around to putting your hard-earned dollars where they are supposed to go—to ensuring a richer future.

If you follow the action steps in this video and use the diagram that I show you, you will truly have a foolproof, no brainer, “set it and forget it” financial plan that, I promise you, will work! The plan to avoid this #1 money mistake is based on my New York Times Bestseller, The Automatic Millionaire and is updated for 2012. So, as I said watch the video, follow the diagram, it’s easy and, YES YOU REALLY CAN DO IT – so GET STARTED!

Hope this video helps you all and remember to let me know how great you feel once you “MAKE IT AUTOMATIC” by commenting below or on my Facebook.

Live Rich,
David Bach
 

TAM DIAGRAM PICTURE

Your Financial Action Plan for 2012

New Year’s Eve has always been a time to reflect on the past and more importantly, set goals for the upcoming year. There is nothing that I want more this year, than for you to take action to live and finish rich in 2012. That’s why I am giving you an easy to use financial action plan for the New Year—so let’s get started!

1) PAY YOURSELF FIRST 
According to a new Fidelity Research Report, the number one goal of American’s is to double their savings in 2012. What I want you to do is take out your 401k statement and either increase the dollar amount or increase the percentage of your contribution.  If you just change it by 1% this year, you will make a positive impact on your financial life and savings. Making this increase to your savings is the single easiest thing you can do right off the bat for 2012.

2) MAKE YOUR FINANCES “AUTOMATIC”
2012 is the time to use technology to your advantage when it comes to your finances. The best part about automating your financial life is that it can be done in less than an hour and it will save you time and money for years to come! You need to start by making sure your paycheck is directly deposited into your checking account. Then by using online banking and bill pay you will distribute your money automatically into the following key accounts:

1) Retirement Savings
2) Emergency Savings
3) College Savings
4) Dream Account (i.e. vacations, holidays savings)
5) Mortgage Payment 
6) Credit Card Bills (minimum payment, so you will never miss a payment again) 
7) Recurring bills (utilities, phone, cable, etc.)

3)  GET A WILL  
It’s reported that over 50% of American’s do not have a will.  The reality is, everyone needs a will, even if you are not married or don’t have kids.  Think of your family and friends that you would want to receive your life’s work. Many people do not realize that making a will can actually be quick and relatively cheap. You can create a will yourself for as less $50, using a program such as Quicken Will Maker or you can hire an attorney to help you.

Critical things that you will need in your will are:
- Health care directive
- Financial power of attorney
- Executor documents
- Final arrangements

4)  TRACK WHERE THE MONEY GOES “AKA FIND YOUR LATTE FACTOR®”
The best way to improve your financial life that I know of, other paying yourself first, is to track where your money is actually going.  I would use a site like Mint.com , or Yodlee Money Center.  They have the best programs online to track your expenses and they use the same encryption system the banks do, so your information will be safe.  If you don’t want your expenses tracked online then you can go get an old school “budget tracker” workbook and keep track of where your money goes each month. Then review your finances to see what you are wasting money on or spending too much on and then stop that specific spending!

5) CLEAN IT OUT AND SELL IT
January is a great time of the year to clean out everything in your house that you don’t need and then sell it or give it away—especially if you have a storage facility.  If you are paying to store things you don’t really use and realistically will probably never use now is the time to get rid of everything! Doing this one act could save you over $1,000 a year. What you can do to help yourself, is to look up companies in your area that will come photograph and sell your unwanted items for you, saving you time and making you money.

I would like to say, that this is my personal, number one, New Year’s resolution to help me save in 2012. In fact, you can mark my words that I will get rid of my storage facility this year!

6)  GIVE SOMETHING UP
One of the fastest ways to cut your expenses in 2012 is to pick ONE thing and give it up. We all hate to do it at first, but once we make the change, we usually find out it’s not the end of the world and can be completely worth the savings.  For example, you can give up a car. For many families this can cut expenses by $5,000 to $10,000 a year! If you don’t think you can give up your car, really think about it, what can give you up?  What are you paying for each year that you truly could try and live without?  Is it your storage facility?  Is it premium cable?  Is it a cell phone?  Is it a second home?  A vacation you ALWAYS take?  Sometimes just deciding to give up “one thing” can completely change your financial life. Then these savings could be used to pay down your debt, OR save for retirement, emergency purposes, college OR all of the above!

What I want you to remember is that you don’t need to have a doctorate in math to get these things done; you just need the motivation to make a positive financial change in your life. Trust me—it will be worth it! To connect with like-minded people and get support on your journey to live and finish rich join my community on Facebook or follow me on Twitter.

Finally, for all of you that voted for me as your favorite expert of 2011, THANK YOU! Your votes have pushed me to 2nd place in the poll and now I need your help getting me to 1st. To vote now, click HERE.

Live Rich,

David Bach

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