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Almost two weeks ago, Major League Baseball wound up its regular season and now the post-season playoffs are underway. You probably know by now that I am a huge baseball fan and I have been for over 60 years! I have even written about it a few times on the blog, so I’m not kidding when I say that baseball has parallels to real life and that a baseball team succeeds or fails just as we do, based on its foundation, preparation, daily efforts, a tad of good health, and some luck! That’s why today, I’d like to explain how you can become a real winner in your personal finance basics just like the baseball teams all try to do each season!
Personal Finance Basics
1B – First Base: Setting Up Your Goals
This isn’t like the old phrase that was used back when you were a teen out on a date. It is rather the concept of where to begin in the pursuit of financial wellness just like for a baseball player who needs to get to first base in order to have a chance to score a run.
Once you actually start earning an income either from a job or self-employment, your foundation comes from setting your financial goals. There are three types of goals: short-range, mid-range, and long-range. Short-range goals are to be met in one year or less, mid-range in one to five years and long-range in five years or more. Vacations, gifts, and electronics are typical short-range goals. A down payment for a house is a common mid-range goal. Long-range goals include saving for retirement and may include saving for a child’s higher education.
If you are in a relationship and are planning finances with another, always plan together and make sure you are on the same page. When you do, it makes your chances of success much better.
2B – Second Base: Create a Spending and Savings Plan
Once you take stock of what your current situation is and you have planned your goals, it is time to create a spending and savings plan known as “the budget” which I call second base. That spending and savings plan should show where you want your money to go in the future. How much will you spend on clothing? Will you set aside enough in your retirement fund? How much will you spend at the grocery store? Planning by the month is the best way to do it.
When you are creating your plan, keep in mind the golden rule of money management: your expenses (including the money going into savings) should never exceed your income. Start by looking at your cash flow which is how and when money comes in and how and when money goes out. You may need to make a few adjustments. For example, you may want to put aside more money in savings than you originally planned or you may want to start sending your child to a private school.
If needed, think about ways you can increase your income and/or reduce your expenses. Can you get a part-time job? Rent out a room in your house? Cut back on dining out? Skip that daily $4 mocha latte? Get a cheaper cable package or cut your land-line phone? Increasing income can be difficult, but most people have some expenses they can cut or trim. Honestly assess what is a necessity and what isn’t and take action.
SS – Shortstop: Tracking Expenses
Handling a wide area and making sure nothing gets past you is the job of a shortstop and in finances that means tracking your expenses on an ongoing basis to help you to see when you should stop spending because you have reached your limit in a particular category. You can use software or an app to track your expenses, including ones that automatically track and categorize your debit and credit card purchases, such as Personal Capital. If you overspend one month, try not to get discouraged. No one is perfect. However, if overspending happens often you will need to re-adjust your plan so that it is more realistic.
3B – Third Base: Establish an Emergency Savings Fund
Third base is always played by someone who has great reaction time and great instincts. In your finances, you need to have the same kind of readiness. If you lost your job, would you be able to pay your bills for the next few months and not miss a beat? If your car broke down, would you be able to pay for the repair without putting it on your credit card? Unexpected things happen, and for those living paycheck to paycheck, it can be hard to deal with them. You may find yourself skipping payments and risking utility shut-off, car repossession, and/or foreclosure or eviction from your home or even charging too many things to credit. After all, the credit cards need to be repaid.
Establishing an emergency savings fund provides a cushion that allows you to pay for expenses should you face the unexpected. Financial experts recommend saving at least three to six months of essential living expenses. If you do not already have that amount in savings, determine how much you can set aside each month until you reach your goal. Since you don’t know when you will need the money, make sure that it is put in an account that is easily accessible and where there are no penalties for early withdrawal. A savings account is usually a good choice.
You can also make it an automatic process. Direct deposit into your checking and/or savings account is a good way to make sure you do it each month without fail. Additionally, many financial institutions allow you to set up a periodic automatic transfer of funds from your checking account to your savings account.
RF – Right Field: Diversifying Investments
Right Field has the best throwing arm of the outfielders and that means long range play. There are three types of investments you use to build up financial wellness. Stocks may be the best for long term.
Stocks represent a percentage of ownership in a company called a share. When a company is divided into a million shares and you buy one share, you would own one millionth of that company. You can make money from receiving dividend payments and selling the stock for more than you bought it for. Historically, stocks have provided the greatest earnings long term. However, there are no guarantees—one day your stock may be worth more than what you paid for it, the next, less.
CF – Center Field: A Middle Strategy to Grow Your Finances
Bonds: A bond is a loan to a company or government, with you, the bondholder, as the lender. Organizations issue bonds when they want to raise funds. Generally, you receive the principal, called the par value, at maturity of the bond and interest periodically while you are holding the bond. Depending on the market, you may purchase a bond below, at, or above its par value. In general, bonds are between or in the center of stocks and cash equivalents in regard to risk and return.
LF – Left Field: The Least Volatile Position Out There
Cash equivalents: Cash equivalents are assets that can be readily converted into cash, such as savings and checking accounts, certificates of deposit, money market deposit accounts, and U.S. Treasury bills. They tend to be low-risk, so there is little or no danger that you will lose the money you deposit. As a result, cash equivalents provide a low return.
A good way to reduce the risk of losing money when you invest is to diversify. A well-balanced portfolio will have a mixture of stocks, bonds, and cash equivalents. It is also a good idea to diversify within each type of investment class from manufacturing companies, technology-oriented companies, and financial services companies. A simple way to get diversity is to purchase shares in a diversified mutual fund. Diversified mutual funds have stocks pooled together into one place to maximize your return.
C – Catcher: Tax Deferred Accounts
The rock solid player on the team who makes key decisions on the field is the catcher. Controlling the long term future is just like a catcher’s job in the game. Take advantage of tax-deferred accounts when they are available. For example, for retirement, use a 401(k) or 403(b) if your employer offers it, or you can set up a traditional IRA or Roth IRA on your own. If you are saving for your child’s higher education, you can use a Coverdell Education Savings Account or 529 plan. All of these accounts put you in better control and allow your earnings to grow tax free. 401(k)s, 403(b)s, and traditional IRAs allow you to make tax-free contributions, while Roth IRAs, Coverdell Education Savings Accounts, and 529 plans allow you to make tax-free withdrawals.
P – Pitcher: Cover Home Plate and Hit your Target
Anything can happen in the game and events such as a severe illness, car accident, or house fire can put a serious cramp in your financial health in life, even if you have savings. Having a game plan in your life requires you to protect yourself and that is where these things come into play:
- Health Insurance
- Disability Insurance – Short and Long Term
- Life Insurance
- Auto Insurance
- Homeowners Insurance / Renters Insurance
- Will / Estate Planning
Bench – The Back-Up: A Good Credit History
Your credit report and score can affect your life in many ways. Obtaining a mortgage or car loan (especially one with a good interest rate), renting an apartment, finding a job (many employers check credit reports), and obtaining insurance with low rates is usually easier with a good credit history.
Your credit score is a numeric summary of the information in your credit report and is designed to measure the risk you will not repay what you owe.
In order to have a good credit report and score, you need to have credit. However, it can be hard to get approved for credit when you don’t have a credit history. A good option for many people just starting out (or rebuilding) is a secured credit card. A secured credit card requires you to put down a deposit, which the creditor gets to keep if you do not make payments. While they are typically easier to get than regular credit cards, the credit limit is usually low, and the fees can be high. However, many creditors are willing to convert a secured credit card to a regular credit card after a year or two of on-time payments.
Another option is to ask a close friend or family member who has a good credit to cosign on a loan or credit card for you. Once you have credit, it is very important to use it responsibly. Always make your payments on time, and keep the balances on revolving credit, such as credit cards, low.
The Bull Pen: Getting Good Relief and Delete Your Debt
It is best to never carry a balance on your credit cards. However, you may be in a position where you are already dealing with credit card, personal loan, student loan, and/or other type of debt. Having debt can not only absorb a significant portion of your income each month but also cost you thousands of dollars in interest payments. Conversely, paying off your debt can provide a feeling of relief and give you more money for other things, like savings.
There are two basic methods of accelerating debt repayment. One is to increase your payments. Minimum payments are often set very low, so it could be years before you are debt free if that is all you pay. You will save the most money by starting with the debt with the highest interest rate (the “debt avalanche” method). Once the first debt is paid off, put that money toward the debt with next lowest balance or highest interest rate and so on until all of the debts are paid off. Alternatively, you could start with the smallest debt (the “debt snowball” method) to help keep your motivation up.
The other method is to lower your interest rates. You can ask your creditors directly to lower the interest rates. Creditors are usually more willing to do this if you have made your payments on time. Of course, they may still say no, but it does not hurt to ask.
You can transfer your balance to a card with a lower interest rate or get a consolidation loan. To get one will depend on your credit score, income, and current level of debt.
It’s also possible to pay off existing debt with a home equity line/loan or cash out refinance (where you refinance your mortgage for more than you owe). The interest rate is usually lower than for other debt, and the interest is tax deductible. However, it is important to remember that you are increasing your mortgage payments, and you will lose your home if you cannot make them.
You could participate in a debt management plan, in which creditors offer lower interest rates in exchange for going through counseling and closing your accounts. These options work best if you are committed to not taking on more debt. These two methods of accelerating debt repayment are not mutually exclusive. In fact, it is a good idea to try to increase your payments and lower your interest rates at the same time.
So that’s my take on how baseball and building good financial habits and results are related. The NY Yankees are historically the best in baseball and are the team who has won the most championships over the years. They are always real contenders, almost all of the time.
How do they do it you ask? They plan well, execute, and apply themselves in every phase. They recognize quickly if they need to make adjustments and fix whatever they need to fix quickly. If you pay that kind of attention to detail, it will work for you too.
Where are you at on the financial field these days? Have you reached any of your goals and are you heading for a championship?