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

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

 

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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My 5 Quick Tips to Get Financially Fit in 2012

Heading into the New Year everyone wants to know, what they can do to get financially fit–fast! Well, here are my five pieces of financial advice for 2012 …drum roll!

1) PAY YOURSELF FIRST. That means the moment you earn a dollar, you direct at least the first hour of income in the day to a retirement account (like a 401k plan, IRA, Roth IRA or SEP IRA).

2) SAVE MONEY AUTOMATICALLY. That means that everything you save for yourself, make the money move automatically. You have your earnings deposited automatically for you, and it’s moved automatically at your bank into the various savings accounts you set up for retirement, emergency, college savings, home etc.

3) PAY DOWN YOUR DEBT. If you have credit card debt, rather than worry about investing right now focusing on paying the credit card debt down. Go to http://finishrich.com/dolp/ and download my tool to help you pay down your debt or go to Debt Wise which is a site I promote with Equifax that helps you pay down your debt -automatically, saving you time and money (in interest) in the process! Debt reduction is the key to financial security and freedom…so get serious about paying it down in 2012.

4) REFINANCE YOUR MORTGAGE FROM 30 YEAR TO 15 YEAR. If you can afford to make extra payments on your mortgage – do it! If you are really ready to get serious about being debt free, refinance from a 30 year to a 15 year mortgage. The rates on mortgages are the lowest that we have practically ever seen, and now is a great time to do this.

5) GET SMART FINANCIALLY. To me the best investment you can make financially in 2012 will be in your own financial education. Learn more, read books, take classes,  and make sure to tune in to NBC’s TODAY show – Money 911 each week, visit the section of today.com … make learning about money a priority,  learning everything you can about YOUR MONEY, what you own and what you can to invest. Financial education is a MUST in 2012!

Live Rich!

David Bach

 

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What Are We Even Fighting About?

Have you ever walked away from a fight with your spouse or significant other?  You’re absolutely fuming and your head is spinning. Finally, you calm down and realize you have no idea what you were actually fighting about? The fact is that couples fight an average of 4 times a month and oftentimes, they’re fighting about money and they don’t even know it!

One of the top mistakes a couple can make when it comes to love and money is to fight over “stuff” instead of the real money problem. Let me give you an example from my personal life to explain better.

The Fight:

The biggest fight I ever had with my wife over money started with nothing more than a new pair of shoes.  She came home, showed me the new black shoes she bought on sale—and I proceeded to lose it. 

“New shoes?  How could you need new shoes?” I exclaimed. I then proceeded to pull out all of her black shoes and count them, one-by-one. 

My wife in turn dashed over to my “tech toy drawer” and pulled out three old cells phones, three old Palm Pilots, and various other gadgets that were collecting dust.

“Who needs all this stuff?” she argued. “You are ridiculous, wasting all of our money on the latest, greatest gadget.”

Before I knew it, our fight was over items in the house, our purchases, and “stuff” that had nothing to do with the real problem….we were not saving enough money. We both knew it,  but we continued to spend our money on completely unnecessary purchases, when we could have been saving more for our future.

The Solution:

Fortunately, I was able to pull back from this argument and ask my wife if we could sit down and calmly discuss my real money concern with her.

I explained to her how important it is that we “pay ourselves first”—and we agreed to a goal together. Our goal was large (to pay ourselves first 20% of our gross income),  but we agreed that if we could achieve that goal we wouldn’t fight about the little ways we were spending money.

The result of our discussion was that we put our savings and finances on auto pilot—having our paychecks automatically deposited first into our savings account from our 401k plans, then into our emergency account and our dream account. We also set it up so all of our monthly bills were paid automatically. After this—the fights stopped!  Most importantly we built real wealth, together as a team.Talking about your goals and automating your finances can have a life changing effect on your relationship and on your financial security. Remember, a couple who plan their finances together stay together.

Live Rich,
David Bach

P.S. Make sure to share you thoughts and comments below, I love to hear your feedback and stories!

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