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The Dumb With Money Plan
What Do You Do With Your Money
For years I have been trying all kinds of things to make my money work for me and it never really did anything for me. That is until I sat down and thought about what to do with it.
The time tested thing that I have found is to look at your money in four ways:
1. Money I Need To Live Off Of (Income and Debt)
2. Short Term Savings
3. Mid Range Savings
4. Long Range Savings
Phase 1: Money I Need To Live Off Of:
This includes all the monthly bills. That includes basic credit card bills too. Anything you can expect to pay every month. This tells you how much money you need to live. Also don't forget debt in here. In reality this is checking account money.
When Do I Have Money To Put Into Phase 2?
Once your debt is manageable. When you have 1 month living expenses in a savings account, it is time to move on to phase 2.
Phase 2: Short Term Savings
Short-term savings is basically your emergency fund. What happens if you lose a job, your car breaks down and needs repairs, a emergency medical treatment is needed?
The common thought is that you should have immediate access to 3 months expenses and access within 60 days to another 3 months of expenses.
What are expenses? On the 1st of the month start counting exactly how much money you spend. At the end of the month add it up. Even your lose change!
How do I do it?- I usually achieve this by taking 50% of my short term savings and putting it into 3 month CDs. These days setting up a CD takes less than five minutes. Since I usually use the same banks for CDs it can take a one minute phone in most cases.
I stash the rest of my cash in my online savings account. This money usually grows at less than half the rate of long-term savings, but it is there when I need it.
How should you do it?
1. Establish a baseline for the amount that you need.
2. Create a savings plan to help you meet this amount while preparing for any other major purchases such as a car or house.
3. I would recommend 50% in 3-month CDs and the remainder in online savings accounts. Do the research on these guys.
When Do I Have Money To Put Into Phase 3?
When you have access to 3 months expenses within 60 days.
Phase 3: Mid-Range Savings
Most people would rather call this part of a financial plan safe investments. This is money you can live without having access to for 3 to 7 years. There is some risk involved in this sector, but it is much less risky than putting your money in stock. Some instruments carry no risk in this section such as I bonds. Others carry a good bit of risk such as mutual funds, but I'm sure most would agree what I recommend is historically very safe.
How do I do this?
For me, I like to have 6 months of my expenses ready (Short term savings). When I have met this criteria, all extra money hits my Mid-range savings plan. From here, I syphon a bit off and kick it up to the long term savings. In some cases, my wife and I just buy something that we have been wanting (morale factor).
I'm a big fan of bonds and specifically Treasure Direct. I put 60% of my mid-range in to Bonds. At times when the rate is really good, I'll throw closer to 80% at bonds. I prefer I-bonds over all bond types. I guess it's the 2-part percentage rate that makes me feel like I'm gambling and the fact that the I-bond has been a top performer (as far as bonds go) since introduced.
I usually am a bit hesitant on putting a good deal of money into mutual funds. I got burned during the dot.com bubble and lost 82% on all of my mutual fund money. Now years later, I'm about 40% up with my mutual funds.
I usually put 20% of mid range savings into mutual funds. I like to buy in diversified sectors. Even though they don't get ridiculous return rates, if you pick a good one, you can get about 10% annually. I'll take 10% any day.
I usually put any money I have left into Index Funds. An index fund is a company that just invests in other companies across several sectors. Mutual funds are more focused on a single industry or sector. These usually return 10-12% for me. As of late, I have been focusing my index money into: Vanguard 500 Index. Someone gave me a tip (Yeah, like I know a guy) and I have been doing very well with it.
How should you do this?
You have to decide on your own when you reach this stage. It real involves the nature of your work and how comfortable you are with being cash strapped. It you have a very steady career track and you don't real care if you get kicked out on the street, then start your midrange savings right away. If you are like most, you will wait until your short term savings goal is met.
I would advise you to start out small. Start out with 90% bonds (not going to lose your money there) and may be grab a SPDR or Index Fund along the way and see how it works out for you. Start to put more money into indexes and and SPDRs when you have money that you can wait on for closer to seven years, you will surely come away on top.
When Do I Have Money To Put Into Phase 4?
Once you have a full year of living expenses in Phase 3 money, you are ready to move to phase 4.
Phase 4: Long Term Savings
This section of your finances is the big show. This is money that can sit for 10 years or more. This money actually has the chance of doubling. Anything your employer offers (401K or basic pension) is great. I definitely would do that full throttle from the day I start working. But, you should also manage a little bit of your own because if you pay attention you can many times come away with more than your fund could every get you.
Now my thoughts on Long Term Savings are not radical and you won't be buying your own island with the proceeds. What my strategy lacks in sexiness it more than makes up for in piece of mind. Over the last 6 years, I have gained a minimum of 19% using it and a maximum return of 34%.
It's pretty simple:
1. Buy shares in an S&P 500 Index Fund. Vanguard is the common face and has been return mid-teens for years.
2. Pick 4 key blue chip stocks each dominant in their sector. Pick sectors that have a huge need in the future and are not going any where soon. Check into the companies and make sure that they have a good amount of cash and well spread out in their business model.
You really can't go wrong with that. When I'm feeling aggressive, I'll put 80% in the stocks and 20% in the Index. When I'm feeling like we're going to take a hit, I stick it out. Also as I get older, closer to when I need to begin cashing it out, I plan to move to mostly Index funds.
Because we all can be smarter with our money.