Sunday, August 26, 2007

Do Better With Your Time

Recently, I've been extremely busy with some work commitments. The
interesting thing for me is that this increased work activity has
really helped crystallize some of my feelings with regard to time. And
these ideas are a critical part about my view on personal finance. I'm
curious to know if others feel similarly.

Time is money. That is, Time, in some way, contains energy. Money, is
also energy. In the act of working, I am able to compound and increase
the amount of money that I have. I am exchanging my time and effort
and thought which are components of my work, for the productivity that
I produce. And this production gets me money from my employer.

However, the first dollars that I make each day, week, or month are
the most valuable. Then the ones that I make at the end are the most
valuable. (Forget about taxes for a minute.)

The reason is, the first ones help me have a place to live and food to
eat. And the last ones are the ones that I can use to really improve
my life long term by saving, investing, and planning for the future
(both short and long term).

Obviously, you want to earn those first dollars first so you can
survive. But its the dollars you make at the end which make you
"happy" in the sense that they secure not just your todays, but your
tomorrows as well.

All of this is important because I realize that lately, I have given a
tremendous amount of my time (which is energy) to my work
committments. And although I go through this from time to time, it is
easy to start to wonder why it is worth doing. And the simple answer
is this:

I don't know how long I will live, but I think it will be a long time.
And I don't know how long I'll be able to really work, but I'm sure it
will be less than I'd like.
So why not make myself as comfortable as possible, by saving more than
I need right now while I can, so that later, when I do need it, it
will be there?

I challenge everyone to do better with their time. Time should be
spent doing something of value; something that makes you really happy.
Or if not that, then it should be spent so that you have the things
you need to live. And if not that, at the very least, it should be
spent accumulating so that at some point in the future you can do more
of what makes you happy, while doing less work.

Thursday, August 02, 2007

Emergency Fund Strategy

In terms of building an emergency fund, I've found that the "freedom
fund" strategy seems to work best for me. Although I keep almost all
of the savings in the same high-yield savings account, I allocate it
to different buckets.

Each year, I consider what the "big" and "unexpected" expenses will
be. This could be weddings and holidays, vacations, tax bills, etc
that will have to be paid throughout the year. If I am unsure, I look
at last years bills and inflate the total by a few percent. Then I
round up a little bit.

So, if I ended up with a total of 189/month would be needed, I'd make
my goal 200/month saved for these kinds of expenses. Then when they
come up, if they are less than that month's 200 dollar deposit, I just
take it out of that month's deposit. If it is more, I withdraw the
difference from the account. And if it is less, I deposit the
difference into the account. The whole time, this money is sitting in
an account that makes a nice interest rate.

The nice thing is the interest I'm making. Since these bills happen
fairly regularly (every month or two), the money is somewhat short
term. But for the short term, I make interest on the money that is
then applied to my "emergency fund". All of the interest from the
high-rate account funds my emergency fund.

This is a sum of money that I keep aside, never to be touched except
in a real emergency like a job loss, medical emergency, natural
disaster, fire etc. Currently, my goal for this fund is to have 3
months of expenses in this risk-free savings account. That, combined
with other savings and "freedom fund" money (also in that account) and
curbed spending in the face of an emergency could easily get me
through 4-6 months and I'm comfortable with that.

Once all the goals are met and debts are paid down, the goal will be
to create a fund for investing. Debt reduction will be a major
component of what happens with my finances for the next several years,
however, since I still carry a large student loan debt load. It was
money well spent, but I intend to continue to seriously attack the
balance so as to reduce interest payments over the life of the loans.

In addition to my "freedom fund" deposit, I also deposit a small token
of money into the account that I apply only to my emergency fund
target so that I always can be sure that this goal is being worked
toward. Here is a percentage breakdown of how I manage.

Emergency Fund:
1% of monthly income (deposited)
.05% of monthly income (interest)

Freedom Fund:
3% of monthly income (deposited)

The nice thing is that by having both a "freedom fund" and an
"emergency fund", you don't have to worry as much about the emergency
fund because you've already handled most of your major "emergencies"
in your freedom fund.

Categories in my freedom fund include:

Car Expenses
Excise Taxes/Water Bill
Home Repair
New Car Down Payment

Wednesday, August 01, 2007

Homestead Insurance

For those of us who own homes and or condos, some extra protection is almost always welcome. For me, this came recently when I went and *finally* got an item crossed off my todo list of financial planning: Homestead Insurance.

Without going into excruciating detail as to where the idea came from and all of that (You can read about that stuff <a href="">here</a>. Since I live in Massachusetts and I have this available, I finally took advantage of it. Clearly if you live in a different state, the laws are going to be different, but it might be worth checking to see if you have something similar.

As for me, now that this is taken care of, I can rest a little easier. Of course, depending on your situation, the way you handle this is different. I would be certain that you understand your situation quite well before making any kinds of decisions about doing this; and when in doubt always consult a lawyer. But for me, I found the process quite simple and the staff were quite helpful.

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