Saving – Page 4 – My Investing Discoveries

The Carrie Finances: Building a Budget That Doesn’t Leave You Broke

OK Anine, it’s been six days. Are you going to keep thinking about that guy who called you corazón and then said he didn’t want to date anyone? No, you’re going to build yourself a budget because he wants to “get his life together” and you already have!

In Sex and the City, Carrie Bradshaw was notorious for relying on the men in her life for money and housing, to the point that it made me a bit sick to watch. She goes to Big when she needs money and she lets her ex-fiancé Aidan buy her apartment (which, unsurprisingly, doesn’t turn out well). When things backfire and she’s nearly homeless, she has no backup funds to bail herself out.

Ever since I was told at age 15 that to be a writer in any capacity I’d have to “get myself a rich boyfriend,” I’ve loathed the idea of relying on a man (or anyone) for anything. It also helped that I listened to Deap Vally’s song “Gonna Make My Own Money” hundreds of times!

Like investing, in dating past performance is not indicative of future returns. For now, I’ve given up on a future reduction in rent were I to move in with someone. (As Whoopi Goldberg said, “I don’t want somebody in my house!”) Instead, I’ve made a life for myself on my own terms.

This also means that I’m a one-income-stream household, and that me, myself and I have to cover the entire rent payment, utilities and other monthly expenses. I live in a one-bedroom apartment in Chicago, and I pay for electricity and internet, but I don’t have to pay for water or gas/heat. I’ve cut back on my monthly subscriptions, so those only cost about $13. My monthly fixed expenses are $1,188. So, what do I do with the rest of my monthly income to ensure my financial stability?

Remember when I read “Broke Millennial” and Erin Lowry introduced me to the percentage budget? It’s time for that budget to shine. First things first: Let’s spreadsheet it!

The percentage budget outlined in “Broke Millennial” designates 50% of monthly income for fixed expenses, 20% for savings or financial goals and 30% for wants or flexible spending. The first thing I wanted to see was the true percentage of my monthly fixed expenses. I was pleasantly surprised to see that it was under 50%. This gives me even more flexibility in this budget, especially if some months I want to save more than 20% of my income, or I need to spend a little more on dental costs—or fancy cheese!

I tried out this budget for the month of February this year and it worked out well for me, even when it came to paying off my credit card! I haven’t set a specific food budget yet, but for now I’m including it in my 30% for flexible spending and will determine it in future months. I’ll also be looking into some other budgeting methods, including trying out a budgeting app or two, so stay tuned for more of the Carrie Finances series!

Have you tried a budgeting method? Did it work, or did you have to create your own?

I read this so you don’t have to! Broke Millennial by Erin Lowry

Why are millennials the most educated and underpaid group of people? Is it because the workforce doubled when women entered it? Is it because wages stayed roughly the same for 40 years compared to inflation and supply overwhelmed demand? Is it the rise in student loan debt? Is it because our superiors’ families are able to live on one income and have been since the beginning of their careers? Is it because the world consistently asks more of us than it can offer in return?

These were the questions running through my head as I read Erin Lowry’s “Broke Millennial: Stop Scraping By and Get Your Financial Life Together.” Rife with hashtags and helpful action lists, “Broke Millennial” is the most in-depth finance book I’ve read so far. Lowry emphasizes getting out of debt and building your credit while lifting the anxious veil from money that has plagued so many young people. She covers how to overcome psychological blocks when it comes to money, the basics of budgeting, picking the right place to put your money, credit reports and scores, how to ditch debt and student loans, finances and friends, getting financially naked with your partner, living at home after college, negotiating salary, decoding investing, retirement basics, financial planners and buying a house.

Her lessons on credit and budgeting were the most helpful to me. She says, “Think of a strong credit score as an insurance policy for your financial life. A strong credit score proves to a lender that you’re reliable, which directly correlates to favorable loan terms.”

Lowry emphasizes credit throughout the book, but her chapter on credit cards specifically pushes for millennials to not carry a balance on their credit cards month to month, “‘It’s been a rough month. Can’t I just charge this to my card even if I can’t afford it?’ The short answer to this question is no, you can’t. Okay, that’s not entirely true because, yes, you are capable of charging unexpected expenses to your card, but you probably shouldn’t. Credit cards can be, and often are, a fallback for unexpected expenses except that this option comes with a hefty price tag. Having an emergency fund even when you’re in debt is incredibly important for this reason.” This is why I put off getting a credit card for so long—credit freaks me out! But her breakdown helped me understand how vital it is to only use a credit card for what you can afford.

Saving, or “paying yourself first,” is also something Lowry thinks is extremely important: “Saving money prevents you from sinking deeper into debt by providing a buffer when you hit a streak of bad luck and everything you own suddenly breaks. The other option is to finance your emergencies on a credit card and begin or continue the downward spiral of high interest and a principal balance that refuses to decrease.”

Lowry suggests this behavioral finance hack: “Put your savings in an account you don’t see when you log into your main checking account. This probably means using a different bank entirely. The out of sight, out of mind principle will apply when you feel a bit strapped for cash. This way your savings isn’t sitting right in front of you saying ‘Hey, you can skim some off the top here!’ and it’s easier to let it continue to accumulate.” I’m already planning on opening a high-yield savings account with a different bank than my current one, so I’ll soon have this covered!

A few different budgeting methods are discussed, but the one that stood out to me was percentage budgeting: “One of the more effective and less stringent budgeting methods—the percentage budget—often outlines three main categories for your cash: fixed costs (50 percent), financial goals (20 percent), and wants or flexible spending (30 percent).” Lowry also notes that the financial goals (or savings) percentage doesn’t include retirement savings since the percentage budget should be performed using your aftertax income and retirement contributions will come from pretax income. I like the idea of this budgeting process, so I’ll be trying it out and I’ll report back on how it goes.

The chapter on student loans was quite detailed, and I’ll be returning to it when I cover student loans in the future. Life looks different for millennials and the generations to come than it did for our parents and elders, and “Broke Millennial” does a great job of educating and demystifying money without overwhelming me with existential dread!

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What Is the Purpose of a Savings Account?

In previous blog posts I described myself as a big saver, but I wasn’t much of one before I got my savings account. I opened my savings account back in 2016 after I graduated from college. I was working consistently and paying off my student loans, but my parents encouraged me to put money into my savings account because if I kept it in my checking account I was just going to spend it!

Savings accounts are basically your bank paying you to keep your money with it. I think of my savings account as a place to hold money before its intended use. The average savings account today has a 0.06% interest rate, meaning the money in your savings account will appreciate by that percentage over one year. It’s definitely not a place for my money to grow—I’m making $0.14 per month at most on my savings. Rather, it’s a place to accumulate money until it’s time for it to shine and fulfill one of my goals.

I learned from Bola Sokunbi in her book “Clever Girl Finance” that psychologically it’s better to separate savings for different goals into their own savings accounts to not only avoid confusion but to not feel that you’re being set back on your other goals when you need something for one specific goal. Right now I have money to be invested and my emergency savings in the same account, but they should really be in separate places so I can see my goals clearer. Thankfully they soon will be, but I also want to look into a high-yield savings account, which I learned about while dissecting Carrie Bradshaw’s financial situation.

First, it’s important to make sure that any bank you’re putting your money in is insured by the Federal Deposit Insurance Corp. (FDIC). This means that your money will be safe should the bank go under. You can check if a bank is FDIC insured here.

After some researching and reading reviews, I found a few candidates for my future high-yield savings account: Sallie Mae’s SmartyPig, Axos Bank, LendingClub and Discover. SmartyPig offers a 0.70% annual percentage yield (APY) or interest rate on my savings, but the caveat for this higher yield is that it only applies to amounts under $10,000. Once you have more than $10,000 in your SmartyPig account, the APY falls to 0.45%. Axos Bank can give you 0.61% per year up to $24,999, but after you hit $25,000 the APY is much lower at 0.25% and goes down to 0.15% on more than $100,000. LendingClub offers 0.60% APY for balances of $2,500 or more. Through AAII’s partnership with Discover, you can get 0.55% APY without any restrictions or minimums (this is higher than what you can get through Discover without being an AAII member). These are all high yields with good options—I would just have to decide which option fits each goal. Maybe I’ll end up having more than one high-yield savings account to maximize the interest rates for the amount of money I want to save.

On the topic of how much you should have in a savings account, I recall many years ago when someone told me that they couldn’t believe a person they knew had more than $100,000 in their savings account. I knew that having too much in a savings account was as bad as not having enough—the opportunity cost of not growing all of that money in investments outweighed having all of that money stowed away, and in a manner akin to stuffing cash under your mattress!

I will be revisiting this high-yield savings account research when I open one in the near future, so stick around for more of my investing discoveries!