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 and Retirement Planning Live Chat – May 9, 2012

If you missed NBC’s Today Show –  Money 911 this morning make sure to watch the segment now! Today we answered questions on whether or not to take your Social Security, whether someone is paying too high of a fee for their investments,  and where to find grants and scholarships if you are an active duty military spouse trying to go back to school.

After Money 911, I stuck around for a Live Web Chat on Today.com, where I answered your Retirement Questions – check out the archive HERE . Lots of great questions and answers you won’t want to miss this info!

Live Rich,

David Bach

 

 

NBC’s Today Show – Money 911 and Live Chat – January 11, 2012

Visit msnbc.com for breaking news, world news, and news about the economy

If you missed me on NBC’s Today Show –  Money 911 make sure to watch the segment above! We answered questions about what to do with store credit cards, how to juggle school loans and medical bills, and much more.

Plus, I had the chance to stick around after Money 911 to do a Live Web Chat on Today.com where 17,000 people joined me! I answered tons of AMAZING questions that I really think could help you. I answered questions from how I feel about the Market in 2012 to how to protect your family with life insurance. So, if you missed it, don’t worry you can read the whole thing HERE. Also,  make sure to watch the behind the scenes video I did below!


 

        Click HERE to get access to the Live Chat from Today.com!

Live Rich,
David Bach

Live Chat

Me at the Live Chat for Today.com

NBC’s Today Show – Money 911 – January 4, 2012 – Plus My Tip to Earn 3% in 2012

Visit msnbc.com for breaking news, world news, and news about the economy

Can you believe it? Today was my 100th segment on NBC’s Today Show! If you missed me this morning on Money 911 make sure to check it out now! We answered questions about investing, emergncy funds, credit scores and using your 401k plan for home improvements. 

Plus dont’ miss the special video I did below, where I share how YOU can earn 3% on your money in 2012! 



 

Enjoy!

Live Rich,
David Bach

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NBC’s Today Show – Money 911 and LIVE Chat – September 21, 2011

Visit msnbc.com for breaking news, world news, and news about the economy

We had a great segment of Money 911 today where we got to answer your money questions from Twitter!

If you missed me during the Live Chat on TODAY.com click HERE to check it out! I answered so many awesome questions, so you owe it to yourself to check it out!

Me typing away during the Live Chat - answering your questions!

Me typing away during the Live Chat - answering your questions!

NBC’s Today Show- Money 911 – September 14, 2011

Visit msnbc.com for breaking news, world news, and news about the economy

Today on NBC’s TODAY show – Money 911 we answered viewer’s questions ranging from what financially supported college students can do to help alleviate their parent’s retirement concerns to what happens when you own three different properties and decide to stop paying the mortgage on one. It was a great segment and you owe it to yourself to check it out!

 

Jean Chatsky, myself, and Sharon Epperson on Money 911!

Jean Chatsky, myself, and Sharon Epperson on Money 911!

 

 

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NBC’s Today Show – Money 911 – September 7, 2011

Visit msnbc.com for breaking news, world news, and news about the economy

It’s been over a month since I’ve been on NBC’s Today Show since I was on vacation with my family in Del Mar, CA. But now I’m back in NYC and had my first show back on Money 911 and it felt great!

I hope that you all tuned in to watch, but in case you missed it you can watch the segment above. Today, we discussed everything from what to do when you have income but no retirement or savings to how much longer all these interest rates will remain so low. Hope you all enjoy!

Live Rich!
David Bach

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Oprah.com – 6 New Money Mistakes – and How to Avoid Making Them

To Read this article on Oprah.com click HERE!

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As seen on Oprah.com

Mistake #1: Putting Your Faith in the Traditional Definition of “Good Debt” vs. “Bad Debt”
Most of us grew up thinking that if you borrow to purchase things that go up in value—like a home—or to invest in things that will improve your future earning power—like a college education—the result is “good” debt. “Bad” debts were credit card balances, evidence that you borrowed money to buy stuff that would go down in value (clothes, cars, vacations—you name it). The conventional wisdom might be okay for good times, but we aren’t in good times. Not only does the average American household carry about $15,000 in credit card debt, even now, several years after the        Great Recession started, people continue to lose their homes to foreclosure.

The Fix: Here’s the truth: Debt is debt. Probably the most important lesson of the recession is that the only difference between good debts and bad debts is that the bad variety can destroy your financial life more quickly. Now don’t get me wrong; without a lending industry, we could not function as a society, and borrowing to build assets can make sense—if you have a real plan to repay your debt. But I believe that in today’s economy, getting out of debt fast is the most important financial move you and your family can make. The faster you are debt free, the faster you are really free.

Mistake #2: Giving Up Instead of Getting Going!
For many of us, our biggest problem isn’t the economy or even the state of our finances. It’s fear. Fear of the unknown. Fear of what might happen next. Given the grim news about the economy—job losses, homes still worth less than the mortgages on them—people are letting themselves believe that they have no control over their financial situation and no hope for a richer future.

The Fix: Today’s economy presents an amazing opportunity to hit the reset button on your life, both personally and financially. It doesn’t matter what kind of a beating you’ve taken. What you do now will determine the kind of life you will have for years to come.

The key is to stay motivated. To keep positive momentum, I suggest you surround yourself with like-minded people who want to take back their lives. One of my favorite success stories is from a woman by the name of Genevieve, who created a support team at work that used my DOLP™ (Done on Last Payment) system to help pay down their debts. They worked together to keep each other motivated. Genevieve repaid over $70,000 with the support of her team. She’s proof that no matter where you are and no matter where the world is, you can take control of your finances with the right mind-set, influences and tools.

Mistake #3: Having a 30-Year Mortgage
After the recent disasters we’ve seen with the adjustable-rate deals that have gotten so many people in trouble, many homeowners and new buyers are turning to 30-year fixed mortgages. But take a look at the closing paperwork for your mortgage. (If you don’t already own a home, ask a good friend or family member for theirs.) Near the top you’ll find two numbers: the amount of the loan and the amount to be paid to the lender at the end of three decades. For example, you buy a home for $250,000 with a 30-year mortgage at 8 percent, and you’ll wind up paying about $660,000. Where did the extra $410,000 in interest go? It went right into your lender’s pocket.

The Fix: First thing, if you plan to be in your home for more than five years and you have an adjustable-rate loan, then you should refinance now. Rates are at historic lows as I write this in July 2011—but they won’t last forever. Second, if you can manage the higher monthly payments, signing up for a 15-year fixed mortgage is the way to go—no question. Not only will you be free of your mortgage debt sooner, but you will save a lot of money in the process.

If a 15-year mortgage is just too expensive, I recommend you change the way you tackle your 30-year fixed-rate mortgage. Instead of making one payment per month, send half your monthly payment every two weeks. In a 52-week year, you’ll end up making 26 half payments—essentially one extra mortgage payment a year. It may not seem like a lot, but the impact of that one change is awesome: Depending on your interest rate, you could pay off your mortgage 5 to 10 years early and save more than $100,000!

Mistake #4: Letting Existing Lines of Credit Close or Closing Them Yourself
Most of us have figured out that credit card debt can be a slippery slope. You may have even made the decision to stop using one or more of your cards and stowed them away. That may have worked in prior years, but in the aftermath of the credit crunch, the credit card industry has gotten much stricter about inactive accounts—and they can decide to close them. This can hurt your credit score, since it reduces the average age of your credit accounts. If you close old accounts yourself, you’re shortening your credit history and reducing your total credit—neither of which is good for your score. Also, closing an old account will not remove a bad payment record from your report. Closed accounts are listed right along with active ones.

The Fix: For now, hang on to your old accounts and start putting at least one charge on each of them every month. But please note: This strategy depends on being vigilant with your credit cards, paying the full balance and not missing any payments. This will keep your account open, which in turn will keep your credit history nice and long—and ultimately raise your credit score. (If you have to close an account, close a relatively new one.)

Mistake #5: Giving Up on Your Retirement Plan
Of all the terrible ways that the Wall Street meltdown affected our lives, one of the most painful involves our retirement savings. Although more than 50 million Americans are putting aside money for retirement in one way or another, most people’s 401(k) accounts and individual retirement arrangements took a major hit over the last few years—some investors lost close to a third of the value of their retirement plan.

Nearly four out of 10 workers who responded to a 2009 AARP survey said that they’d cut back the amount of contributions to their accounts. Even worse, one in five workers over the age of 45 said they had cut out their retirement contributions entirely.

The Fix: Given the economic surge that usually follows a deep recession, you couldn’t pick a better time than today to recommit to a wealthy future by saving and investing for retirement. If your employer offers a 401(k) or similar retirement plan, make sure that you’re signed up and contributing. If you don’t have a 401(k) at work, then you should open your own IRA. You can use websites like Morningstar.com to compare your investments’ performance to others in the same asset class. If you do not feel comfortable making these decisions yourself, get some help from a qualified financial professional. (Start with your employer; they might offer a free or fee-based advisory service.) I also suggest you try increasing your retirement contributions today; if you don’t feel the pinch, raise them some more. A great strategy is to start by saving a minimum of 5 percent—or the amount up to which your employer will match—and then gradually increase it to at least 10 percent. Your goal is to reach the maximum contribution allowed each year and to make sure you’re paying yourself first!

Mistake #6: Not Taking Advantage of Automating EVERYTHING
I have preached the importance of “making it automatic” for years, but I still see so many people paying bills the old-fashioned way. (Okay so this isn’t a new mistake, but it’s an even bigger mistake now that we have so many electronic options for managing our money.) When you don’t automate your finances, you may forget to pay your bills on time, which, as I’ve mentioned, will not only negatively affect your future interest rates and credit score but will also cost you a fortune. If you miss a payment on an account with a $500 balance, the late fee could be as much as $50. If you exceed your credit limit at the same time, the fee could be $100. In my experience, many people who haven’t automated their finances tend to have underfunded savings accounts, leaving them financially unprepared for an emergency, retirement or helping with their children’s future.

The Fix: Bottom line: The one way to create lasting financial change that will help you build real wealth over time is to…make your financial plan automatic!! Set up direct deposit for your paycheck so that you don’t have to waste any time going to the bank; also set up an automatic payroll deduction to fund your retirement account, ensuring that you remember to pay yourself first. Finally, use your bank’s online bill-paying service to automatically take care of your monthly minimum credit card payments and other bills. Follow the steps listed in the Automatic Millionaire 2.0 diagram —and you will truly have a foolproof, no-brainer “set it and forget it” financial plan that, I promise you, will work.

Originally Posted on Oprah.com – July 14th, 2011

Content by David Bach