I had a money wake-up call this week. Wednesday morning, I got a text from my bank, USAA, saying that I had a low balance. Actually, it said my checking account balance was “$0.00.” WTF? I logged in to check on this right away. It was true: I over-drafted my checking account, and my balance was zero.

Luckily, USAA offers free overdraft protection, so the money was transferred automatically from my savings to cover my deficit. Ironically, I over-drafted my account by paying off the last of my credit card bills after vowing not to use credit anymore. Turns out I also got a little too excited about paying off my loan debt and saving for my “quitting” fund, too.

Not Rich…Yet

This whole overdraft situation is almost comical because before I even got my first paycheck after getting my first real job, I was joking with my girlfriend about how I’m rich now. I didn’t made any stupid purchases, but I did notice a bit of a psychological change and feeling that I really did have much more money. I was making a lot less before my job when I was serving as a VISTA, but I obviously haven’t hit rock star status here, either.

But this over-draft (which had never happened before in my life) made me realize something: even though I’m earning a decent salary now, I’m far from being “rich” and comfortable. I’m glad this realization came now and only a couple months after getting my first job, and I imagine that everyone learns it at one point or another like I did.

We’re Not Entitled

This led to me think about what many people feel they’re “entitled” to once they have a job, and that’s mostly because everyone else spends on these things. But just because everyone else is doing it doesn’t make it okay, and this is a large reason why people are in such bad financial shape in this country, old and young. Here are some of the things I’m talking about (and have been guilty of myself from time to time):

• Expensive apartments in popular neighborhoods
• iPhones, HDTVs, and other gadgets
• A new car
• Eating out multiple times a week
• Expensive nights out with friends

I’m not saying you can’t have these things, but I am saying that there are still consequences to wanting to have it all.

For me, reality has already set in. I’m putting 30-40% of every paycheck towards either my debt or towards my savings goal. I even have my loan payments automated to pay $560 on each payday for the rest of the year so I can be debt free by December 31. My $400 rent plus utilities is only about 17% of my net pay every month, which I’m happy with. I don’t own a car, which makes me and my wallet happy. I’m not saying these things because I think I’m better or smarter than others out there that haven’t realized this yet. I’m saying this because I feel like I’m cutting back, but I still don’t feel “well-off” despite doing that.

It’s really easy to fall into spending traps when you’re a recent graduate with a new job and all of a sudden have extra income to play around with. But this is where there’s great opportunity for those that seize it. Perhaps never again will you have the opportunity to save so much money to spend on something great. This could be for a year of travel or to take on a new business venture or to just save for retirement and start taking advantage of compound interest. I find it sad to see so much opportunity squandered on new Honda Accords, Kindles, and gourmet restaurants.

Don’t Get Comfortable

I don’t feel financially comfortable with where I’m at, and I think that’s good thing. I’m not a cheap or extremely frugal person, but I don’t feel like it’s okay to just go on shopping sprees without having to consider what the consequences on my life may be.  If I had extra money just lying around, I’d say that means I’m not managing my money and saving to meet my goals as I should be.

I’m by no means comfortable with my salary, either. It’s pretty hard to meet any ambitious savings goals now, even though my expenses are pretty low. I’m going to want to move to a larger apartment at some point (my bedroom is sorta like a closet now), and, if I end up with a kids and house someday, this kind of salary isn’t going to cut it.

Bottom line: we all need to strive to do better.  I don’t want to feel resigned to the typically American life, and I know a lot of others aren’t happy with that either. Money is a part of that. If you’re one of those people, what are you doing to change that?

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photo by: f_shields

This may or may not be a surprise to you, but here it goes: I’m about to start my first REAL job with a real salary!

That’s right, I’ve never before had a permanent, full-time job where I earned a real wage. Right now I do work full time, but I live on a small stipend each month. Previously, I’ve been a graduate teaching/research assistant and held numerous other paid internships as well as summer and part-time jobs. I’ve actually been working and getting a real paycheck since I was 14.

Despite all my experiences and preparation, I’m a little scared. Not that I’m traumatized, but I am afraid that I won’t manage my money the “right” way.

I’ve always prided myself on preparing for when this would time in my life would arrive. I’ve been good with budgeting, and I even would consider it to be a skill to live on the low income I have while volunteering . I’ve always told myself that I’m fine with living below my means. But, even with all this preparation, I’m a little bit scared for the real thing. Never having had the money before, I don’t know exactly how it will work out. I can picture myself saving and investing a certain amount of each paycheck, but, at the same time, I feel like I’ll always be wondering “Should I be saving more?”

I’ve seen lots of twenty-somethings crash and burn at this transition stage of life. I’ve seen the typical new car purchase right after finishing college. I’ve watched others buy iPhones and other gadgets before even starting a new job. Then there are fancy downtown apartments and eating out multiple nights a week. I know spending on these things aren’t “me,” but the temptations are always there.

There are so many things that I haven’t dealt with before, and I’m not sure how they’ll impact my income. I’ve never had a substantial amount of my paycheck taken for income taxes (actually, I’m not even sure what my after-tax income will be). I’ve also never had to deal with healthcare costs either. I’m sure it’ll be a learning process, and I hope to figure it out quickly.

Here are my general plans so far:

1. Try to stick as close to the same budget as I am now. This is going to be a challenge, and I’m clearly going to have to increase spending a little bit. But I know that I don’t need to start buying all sorts of stuff that I don’t need. The best strategy is to try my best to stay where I’m at now and slowly increase spending to a comfortable level.

2. Allocate a percentage of each paycheck to certain areas, including savings and investments. I’ve always liked T. Harv Eker’s 6 investment jars. The simplicity makes the chances of succeeding better, and I think everything there is adequate. This plan also allocates some money towards spending however I wish, which is essential. If you don’t budget for fun, you’re destined for budget failure. I’m also a fan of Dave Ramsey, and I’ll use his strategy as a general guideline (although I don’t agree with all of his advice).

3. I want to pay off my college debt immediately. I’m not going to mess around with this. I have only about $3,500 in loan debt left to be paid. My goal is to have this paid off by the end of 2011.

4. I’m going to adequately fund a Roth IRA for the first time. Unfortunately I won’t have access to any retirement benefits from my job, so it’s up to me to make the most I can out of retirement savings. I have a Roth IRA set up already, but it’s not getting much action. I’m gonna change that.

5. I’m going to emphasize saving for the short term. While I want to fund a Roth IRA, I’m not going to go too crazy saving for retirement. I have more short term financial concerns that I’d like to think about. First off, I’d really like to travel extensively next summer. I’m going to need several thousand $$ to do that. Secondly, I’m not sure what my future holds in terms of careers, work, and self employment. I’m really working towards taking a run at working for myself, freelancing, and improving my skills, and doing that will require some savings as backup while I make the transition. Much of my savings will be allocated towards accomplishing my working goals for now.

Considering everything, I think life will be better with a larger paycheck, but I know not all my problems will be solved by simply making more.

What do you think of my plan so far? Do you have any advice or lessons you learned?

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photo by: *_Abhi_*

In the previous post, I wrote about frugal ideas I hate and that I think are a waste of time. Today, I’m concentrating on the “big wins,” as Ramit calls them. This is the stuff I’d file under “too valuable to ignore.” These big wins can save you hundreds of dollars right away and thousands in the long run.  They’re not simply about saving a buck or two here and there, and they’re fairly practical rather than quirky or unconventional.

Here’s my list of powerful tactics that lead to big money wins.

1. Negotiate your salary. If you don’t even try to negotiate, you’re losing out. It’s easier than you think and just a little bit of effort can make a thousands of dollars in difference over your career. Plus, there’s very little at risk when you negotiate (the worst case is you get a “no”). Remember that negotiating your starting salary is most important.  This is the number you’ll be working off of from then on, so don’t sacrifice when you’re hired and expect a big jump in salary later.

2. Investing early and adequately. You simply can’t replace the value compounding returns if you wait to invest until later.  It’s extremely important to get your money invested as soon as you can.  At age 25, I don’t worry about timing the markets since returns tend to average out nicely over the long term.  When I reach retirement age, I expect I’ll have earned about 12% per year over 40 years based on the history of the stock market.

3. Tracking spending and budgeting. This one makes both lists! Even if you think you’re cutting back by being frugal, you’ll never know for sure if you don’t do some level of tracking.  Budgeting is important, too, so you can make sure you’re hitting your financial goals by saving and investing consistently and effectively (and following #2 on the list).

4. Earn more outside your job. This is another example where time spent on earning more is much more valuable than clipping coupons and pinching pennies.  Undoubtedly, you have at least some free time to devote earning money on the side.  It can involve as little as five hours a week. Take some time to brainstorm some ideas of how you can earn money.  It could be odd jobs, selling things, or providing your services to others.  If you can’t get a job, there are other ways to make money, too.  It’s really about finding a combination of using your skills and being resourceful and creative.  Remember: you don’t need to be an expert. I’m a freelance writer on Adaptu, but I don’t have a Ph. D. in writing.

5. Cut the recurring bills.  Ramit shows one reader’s 2-week savings from canceling his gym membership, switching banks, and moving to the best cell phone plans to saved $1,400 a year. This is about the same as giving up 250 lattes for the 12 months. Which is easier to you? Cable TV is also an easy one to cut out. With free programming available, it makes no sense to shell out close to $100 a month on cable. If you concentrate on things you don’t consistently use that cost $10+ a month but get billed automatically, you’ll come up with some great savings with very little effort or change in your life.

6. For recurring bills you can’t eliminate, shop around.  In about 20 minutes, you can research and switch to cheaper car insurance. There are tons of options out there, so don’t assume that your current plan is the best. If you save $400 in that 20 minutes, that’s an incredible hourly rate for your effort.  This works for just about any industry that has multiple carriers: cable, cell phones, internet.  Consider the alternatives when you have options, and this step becomes just as effective #5.

7. Pay off debt quickly. I’m sure this is something we all want to do but not everyone pays as much attention to it as they should. If you leave college with about $23,000 in student loans, like the average student, you’ll pay almost $9,000 in interest if you pay the minimum over 10 years. If you want to save big on interest, always pay more than the minimum payment on your loans. In the same scenario with $23,000 of debt, you’d cut your interest down to about $3,500 if you doubled your monthly payments.  Paying off loans allows you to start investing sooner, giving you the ability to grow wealth instead of merely paying down your debt.

The bottom line: if you don’t focus on these things, you’ll easily wipe out your frugal savings you’ve made by concentrating on the small stuff. The best part about focusing on the “big wins” is that you don’t need to pick dozens of them to work on.  Pick a few and you’re on your way to saving big.

Do you have any “big wins” that you’re going after?

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photo by: Sue Peacock

I’m in for a pretty nice tax return this year.  Of course, the first thing I think of: how to spend it.  In the past, I’m sure I would’ve rolled it into right into a new laptop or another gadget.  But this year I’m taking a different approach for my tax return and other relatively small sums of money I’ve earned or received.  I’ve come up with a new plan for all “small cash windfalls.”

For this post, let’s consider a “small cash windfall” any lump cash income as little as a few hundred dollars but less than $3,000, as the average tax refund for 2009 was $3,036.  It’s a decent chunk of change, but it’s probably not going to change your life on the spot.  There’s a variety of small cash windfalls that fall into the same category: a cash gift, inheritance, income from selling something on eBay, repayment of an old debt that you’ve forgotten about.  I typically don’t count on these incomes (hence the “windfall”), so I haven’t had a plan for what to do when I do unexpectedly receive them.  But I have reallized some trends that I’ve struggled with:

1) I may spend my gains many times over.  I’ll think about purchasing that pair of shoes and justify my purchase by saying “I did just get $600 from my tax return, so it’s totally okay if I spend a little more.” I’ll then do this for my next few purchases on books, dinners, courses, or other extra expenses.  Soon enough, I’ve spent more than whatever the amount I received actually was.  Total waste.

2) I don’t treat it as normal income.  I don’t take out any savings or put anything aside for bills, rent, utilities or other monthly expenses.  This is especially silly for tax refunds, because a tax refund really is income I’ve have earned!

3) I don’t consider alternative uses.  I’ll often think about what I can spend it on right now, rather than saving for more rewarding use later.  My natural inclination is “it’s my lucky day, so I’m going to enjoy it however I please.”  I spend enough money as is; I don’t need to find other things to spend it on.  If there’s an expense I could use the refund to cover, great.  If not, saving seems like a better option.

I’m sure you can relate to at least something from the list (I’ve definitely seen other with these mentalities before!)  This year, I’ve already planned ahead for my tax refund.  Here’s how I’ll (easily) remedy the above issues:

1) This is simple: I’ll track the spending that’s I’ve directly attributed to my tax return.  Every time I buy something “extra,” I’ll keep a special entry in my budget and spending spreadsheet.  Once’s I’ve allocated all of my tax return, that’s it; I can’t spend any more against that account.  This time around, I’ll actually know when I’ve reached that point by quantitatively tracking the refund instead of trying to figure it out based on memory.

2) I’m going to immediately replenish some of my savings and pay credit card bills.  I’ve been working on establishing a small emergency fund, so I’m going to put 10% of my tax return into my ING Direct account. I’ve been on a bit of a “fun” streak the past few weeks, which has involved a little more spending due to weekend getaways.  Then, for the grand finale, I’m going on vacation to Spain in March.  I’m immediately going to apply my tax return to cover as much of my travel expenses as possible.  This will coincide with #1, as I will itemize each of these expenses.

3) This year, I won’t be buying any things with my tax refund.  There’s just not anything I really need right now.  Instead, I’m going to spend my refund on a vacation (which is definitely needed).  While I was originally going to pay for the recent getaways and the trip to Spain using my savings, it makes much more sense to apply my tax return towards it.  If I have any refund left after that, I’ll bank it for when I may need it in the future.

The advice here is intuitive and basic.  In fact, I’m a little disappointed I didn’t consider this sooner.  I think it’s most important to realize that these refunds and bonuses we’re coming across maybe small in the grand scheme, but they can have a big impact on your personal finances when spent wisely.

Do you have a plan for this type of income? Please share in the comments below.

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photo by: Refracted Moments™