HubMob Weekly Topic:Tips for Managing Your Money, Finances, Taxes and Investments

The key components you need to supervise in you financial life are:

• Monthly Budget and Cash Flow Management
• Liquid Savings - Money For Now
• Insurance - Protect Your Assets
• Investments - Money For Later
• Taxes
• Credit Report

Managing your personal finances effectively should always start with a (realistic) budget. A budget starts with your income, not your expenses. You want to build as much "cushion" (flexibility) into your budget as possible. A helpful way to do this when creating your plan is by discounting your net monthly income by 2 - 5%. That way, you're starting your budget using an income assumption that is lower than actual.

Then list your monthly expenses (preferably on a spreadsheet). Divide that list into 3 categories:

1. Fixed monthly expenses: Items with a constant monthly payment, like car loans and mortgage notes. Should also include 10% of your income for monthly savings (first into liquid savings, then into long-term investments for future goals and retirement).
2. Variable monthly expenses: Recurring monthly expenses that vary each month, such as utilities, food, and entertainment. Estimate (or use actual numbers if you have kept records) the high and low range of these expenses over a year. Use the high amount in the range for your budget numbers so that you build more cushion into your plan.
3. Non-recurring expenses: Things that you intend to purchase during the year, like summer lawn care, tires, vacations, and school supplies, that do not occur every month. Estimate the annual cost of each item and divide by 12. Treat the resulting figure as part of your monthly expenses and save that money into liquid savings (or make sure you have money for these items available through an advanced line of credit...more on that later).

In the end, using the above guidelines, as long as your expenses don't exceed your income, you now have a budget that will work.

More on Cash Flow Management

Debt is the enemy of wealth-building. Generally, we either earn interest or we pay interest on our money. It's been said that compound interest is the eighth wonder of the world, and that, those who understand it, earn it; those who don't understand it, pay it (to those who understand it). There is a lot to be said about ways to pay off debt, but to keep it simple and straightforward, ask someone who is qualified for help, create a plan, and get out of debt as fast as you can.

That said, it's no revelation that you should pay off your credit cards each month. But if you want to optimize your cash flow, you should pay as many monthly expenses as you can with a credit card or an open line of credit. That way, you use or "float" the banks money for a month while your money earns interest in savings. Instead of writing several checks to pay expenses, you write one check to your credit card company to pay all your bills, but pay no interest on the credit card since you have no balance carried forward on its billing cycle.

It is generally accepted by financial advisors that everyone should have 3 - 12 months of income in a liquid savings vehicle. These are savings accounts, money markets, and short-term CDs. Cash value in life insurance falls into this category as well. Define "savings" as any place you store money that can easily be converted into cash in case of emergencies.

If you are want help locating good places to save money, you may want to read another hub I recently authored, The Best Places To Put Your Savings Dollars. In it, I point out some of the best places to save money right now to earn well-above-average interest yields.

This savings component of your plan needs to be established before you start contributing to a 401k or any other long-term investment account. Take care of today first, then tomorrow.

Although I could write a book on insurance, I'm going to assume you know that you should insure your home and carry at least some liability on your car. If you follow my advice and get your liquid savings where it needs to be, you can and should increase your deductibles, lower your premiums, and invest the difference into your long-term strategy.

I also don't have to tell you that health insurance is a good thing to have. The main thing I have to offer you about health insurance is this: if you are not on an employer paid plan and you have to pay for your own insurance, you should consider an HSA. There are many benefits, including tax advantages, premium flexibility, and lower overall costs compared to a standard health policy.

If you have a family, life insurance is a must.

This is the one that too many people overlook: protect your income. When you think about it, your most important asset is not your home, or your retirement account. It is your ability to earn income. Without income, the rest is just conversation. You protect your income with a disability income policy. That way if you ever become disabled (temporarily, partially, or permanently) and can't work, the insurer sends you a monthly check to live on.

A Final Thought on Insurance

Don't be insurance poor. Don't buy too much insurance, but don't buy too little. Shop smart and buy the right amount because you want to have plenty of money left for the next part.

Diversification, asset allocation, stocks, bonds, mutual funds, REIT's, annuities, tax-qualified plans. You will need to get at least some education on each of these terms (and many more) before deciding on an investment strategy.

I will stick to one issue here, because I think most people have, or will have, money in this type of plan, and many people have all of their retirement money in them. I'm referring to tax-qualified plans: IRA's, 401k's, SEP's, and any other type of retirement account that defers taxes until retirement (at least until age 59 1/2). Be careful, and give this some real thought before putting money there in an effort to save taxes.

Personally, I don't have any money in one of those places. Until someone can convince me that I will be in a lower tax bracket when I retire, I will stay out of that option, thank you very much. You cannot tell me that, at age 55, 60, or 65, I will be in a lower tax bracket than I am at 38. It's not going to happen. It does not make sense to contribute to an IRA to save 25% on taxes today, only to pay what could be 40% or more in taxes in retirement...when I'll really need my money to live on. Also, I don't like the idea of tying up my money under fear of paying penalties if I happen to need it before I'm 59 1/2. I'd rather pay the taxes now at a lower rate, and let my broker/dealer draft a fixed amount of money out of my checking account each month to invest in a non-qualified investment account for retirement. At least then I can get my hands on my money any time without penalties.

You might be thinking, "But I get a match on my 401k!" Good job. Keep your match (but consider contributing to your 401k only up to the level needed to get it). Listen, if your match stops at 3%, you need only contribute 3%, not 10%.

If you use an accountant, a CPA, or a do-it-yourself program like TurboTax, chances are, you are attempting to maximize your tax deductions. If you are a business owner, you probably know about many money-saving tax deductions available to you. but if you are a W-2 employee, you basically give away those potential deductions to your employer (that's fine, your employer deserves them).

If you want to start getting tax breaks on things like medical expenses, gas, mileage, repairs, cell phone, internet, food, travel, and a long list of other expenses, you should start you own part-time, home-based business. The money you save on taxes in the first year should well surpass the $100 - $200 cost to get started with most home-based businesses. Not to mention, you might actually produce more income for you and your family along the way.

Obviously, you should pay your bills on time and don't let your debt-to-income ratio get too far skewed to the debt side. We all know credit is harder to get than just a year ago. Lenders are requiring higher scores before approving loans. Take your credit score seriously. That said, keep in mind that your FICO score is the one that really matters to lenders, rather than generic scoring methods, so watch your FICO.

Further, it is more important today than ever to monitor and protect your credit report, your credit score, and your identity. Identity theft is by far the single largest white-collar crime. Your bank, credit card company, or an online resource has probably offered you a credit monitoring service. I use a unique monitoring service that not only watches my credit report, but they will also restore my credit score and identity (at no extra charge) to where it was before (heaven forbid) it was stolen for about $12 per month. I prefer it because most other credit watch services are limited to monitoring only, but still cost about the same or more.

If you pay attention to, and develop, these areas of your financial life, you will be ahead of about 95% of the rest of the world in terms of financial health. Research the areas where you may have weaknesses, ask for qualified help, create a plan, stick to it. I wish you exceptional success with your financial plan.