Sure, it seems like you owe everybody money each month. While you do have bills to pay and financial responsibilities, your first priority for payment should be to yourself.  After all, you can borrow money for most of the big purchases in life, and you can even declare bankruptcy if need be (pay close attention to asset protection if you’re thinking of going that route), but there’s one thing you can’t borrow money for:  retirement.

How Much Should You Save?

There is no right answer to this question. You should set up savings goals that meet your needs for the immediate future and long-term.   A common rule of thumb is to pay yourself 10% of what you earn. For instance, if you make $5000 a month you should be putting away $500 cash each month. If 10% is not currently attainable with your current budget, tuck away 5% until you can manage the full 10%. You can also make cuts to your regular spending to find extra cash each month that is better served in savings than going to your cable company. Don’t forget to throw in your loose change you have stored in jars and couch cushions around your home. It may be a few pennies now but you’ll be surprised at what it can be transformed into over time.

Where Should You Put It?

There are many places you can save your cash. An emergency fund is a good place to start, at least until you have 6-12 months of expenses in case you find yourself out of work. This fund can also be used to cover unexpected emergencies like car or home repairs. Set up side accounts to cover upcoming vacations or big-ticket purchases.  A traditional savings account at your bank or a money market mutual fund will both work just fine, but I prefer high yield online savings accounts.  High interest CD’s are another option.  Check bankrate.com and shop around for the best rates.

Once you have a decent emergency fund, you should seriously consider starting a Roth IRA or at least investing in your company’s 401k plan up to the company match.  Check out the Basics of Retirement Investing for more on securing your golden years.

When it comes to saving cash, research shows that people just don’t do it enough (although we’re getting better). As more and more families find themselves living paycheck to paycheck, it seems there is rarely ‘left over’ money after the bills are paid.  But not paying yourself first, even if it comes in the form of paying down high-interest credit card debt, is a financial disaster waiting to happen.

You Need A Budget!

Developing a financial budget for your self or your family should be the starting point of any financial plan. Start by tracking each and every expense you make for a solid month. Afterwards, take your bills, tracking sheet and income statements and see where you are financially. At first glance, it may seem like there literally is nothing left to save. But if you take a closer look and a red pen to your numbers, you will find that cutting out unnecessary items from your daily living expenses will allow you some room to save.

Cut The Fat

Go through your expense tracking sheet very carefully. See where and how you spend your money. If you are eating lunch or dinner at restaurants five days a week, it may be time to start brown-bagging your food at work. Check out how much you are paying in utilities. Be more vigilant about wasting electricity. Condense your phone or cable service to basic plans. Doing any number of things can free up some savings money.

Set Goals

Small and large goals need to be formed as soon as possible. A good start is to put into action a plan for saving for emergencies. This fund can be used when the car breaks down or you need a new roof on the house. Real emergencies arise at any time and having a financial cushion can make it much easier to deal with such trying times. Otherwise you are likely to overextend your credit and acquire even more debts than you have now. Write lists for short and long term savings goals: vacations, insurance, fun money, etc…can be just the start of your goal sheet. As time goes by and you achieve your smaller goals, set new ones and keep moving forward.

Electronic Deposits

If you have a 401k plan at work, elect to have a small portion of your pay diverted into your retirement plan. There is nothing wrong with starting small. Additionally, plan on having, say, $25 from each check deposited into an online savings account (I use ING Direct). As you begin to see funds add up, you’ll likely be motivated to increase your deposits and find ways to cut spending in favor of saving. Following the theory of what you don’t see, you won’t spend so automating your savings can be a sure-fire way to be consistent with your financial goals.

Leave It Alone

The account you choose to use as your primary savings should be researched carefully to ensure you get the best interest rates and set up so that it is used only for savings purposes. As time goes by and the account grows, you should also keep in mind that temptations may arise. An account you don’t have to look at on a regular basis may be a good idea to help you keep from digging into the funds unnecessarily.

For several years, I kept my emergency fund in the Vanguard Prime Money Market Fund (VMMXX).  For a while, this Vanguard money market fund was yielding over 5% while most high yield savings accounts were stuck in the 4.5% range (those were the days, huh?).  This made perfect since, because while online savings accounts are FDIC insured, money market mutual funds are not;  I interpreted the yield differential as being compensation for taking on slightly more risk.

All figures are accurate as of the date of publication:  2/8/2010.

And Then Came The Crash…

2008 was a bad year for pretty much everything, but money market funds were hit particularly hard.  A few of the larger ones even broke the buck, meaning they had to be subsidized by their sponsoring company to prevent investors from suffering losses.  That was the last straw for me.

To add insult to injury, money market fund yields are as low as I ever remember them being in my (admittedly short) investing experience.  The highest-yielding taxable Vanguard money market fund, VMMXX, is not yield a dismal 0.02%.  That’s not a typo:  0.02%!  Surprisingly, the Vanguard Tax-Exempt Money Market Fund (VMSXX) yields over three times as much as its taxable equivalent, or 0.09%.  Even investors in the very lowest tax bracket will come out ahead with the tax-exempt fund, and that’s practically unheard of.

It’s Not Worth The Risk

To be sure, Vanguard is a fine mutual fund family and no Vanguard money market fund has ever lost money.  Furthermore, the Prime Money Market Fund has been very attentive to risk throughout its history.  There is no reason to believe any Vanguard money market fund will ever lose money;  however, I’m sure most investors in those other funds felt the same way.  It’s just not worth the risk.

Now, I hold my emergency fund at ING Direct, which is yielding 1.2% as of this writing.  Not only that, but my account is 100% FDIC-insured to the fullest extent of the law.  Even if the money market funds regain their usual yield advantage going forward, I think I’ll stick with ING because

1. ING Direct’s rates are consistently competitive.  My emergency fund isn’t huge, so chasing the very highest yields isn’t a priority.  ING usually isn’t the highest on the market, but they are also never the lowest.
2. Money Market Funds aren’t as safe as I thought they were.  The risks can go undetected for years at a time until the fund implodes with no warning.  I’m willing to take on additional risk with my long-term investments, but not my emergency fund.
3. I have better things to do than worry about an extra $200 per year in interest from my emergency fund.  It’s there for safety, not for earning maximum returns.

The Orange Savings Account. Earn high interest. Great rates, no fees, no minimums. Start saving in under 5 minutes.

Another week, another round-up.

Carnival of Personal Finance

This week’s carnival of personal finance was hosted by Cash Money Life and included my post 5 New Rules Of Credit Cards.  This week’s theme revolved around how fun taxes can be!

Should You Pay Off Your Mortgage? by Funny About Money.  I waffle back and forth on this one.  On the one hand, the numbers often show that keeping your mortgage is the better move financially.  That said, it’s difficult to overstate the benefits of being debt-free, especially if you value cash flow over net worth.

Confusing Frugality With Minimalism by The Everyday Minimalist.  Minimalism 101.  On a somewhat-related note, check out her 2010 money goals.

Financial Advice:  Hourly Fees, Asset-Based Fees, Or Annual Fee? By The Oblivious Investor.  Can you tell which one I would choose?

Dividend Stocks Are Attractive Buyout Targets by Dividend Growth Investor.  This could indeed be true if a business wants to diversify their income streams without actually breaking out of their core area of competence.  Partial buyouts can make particularly attractive investment opportunities, since in that case the dividend of the partially-acquired company is effectively senior debt for the acquiring company, since the acquiring company often needs the cash dividends to cover its own debts.

When You Fall Behind On A Mortgage:  Mindset Of The Collector by Suburban Dollar.  Debt collectors can’t all be evil, right?

Set Aside 10% Of Your Work For Retirement, Not 10% Of Your Income by Early Retirement Blog.  Okay, so this one wasn’t in the carnival, but I couldn’t resist.

A car loan is one of the biggest monthly financial obligation next to a mortgage for most people. A vehicle is a necessity to get to work and for all other transportation needs so it stands to reason, at some point most people will end up buying or leasing a new car (although I prefer used cars). However, the difficult part comes when a decision must be made regarding the purchase or lease of a vehicle. Some will find that a lease suits their lifestyle and driving habit perfectly, while others are not convinces.

Here is a rundown of both vehicle finance options to consider:

The Purchase

Paying cash for a new vehicle will almost always be the cheapest option; however, if it comes down to a choice between financing and leasing a new car, financing usually wins out. You be paying more each month on an auto loan but in the end, a lease will usually cost you more. You can typically secure financing for up to 72 months. The vehicle you purchase at the end of the loan will be yours to keep and do with as you wish. You may even want to trade it in on your next new car. There are no driving limitations with a purchase as there are with a lease. You are responsible for the cost of maintenance, repair problems that are not covered by a warranty, and you will likely want to keep your vehicle for as long as possible after paying off the loan.

The Lease

When you agree to lease a vehicle, it will cost you more money than a purchase would over time but it can also be an easier financial option if monthly costs are a concern. You’ll likely have a smaller upfront cash requirement and smaller monthly payments through a vehicle lease. The bonus part of a lease is that you can generally trade up to a newer vehicle as time goes on. Those who may not be able to afford a more luxury vehicle if they were to purchase, may find that a lease allows some more room to upgrade to a better make and model of car. The cons of a lease may mean different things to different drivers. A lease does have its limitations, such as mileage allowances for a year and the responsibility to keep the vehicle in excellent condition. Damages to the vehicle including tears or stains can cost additional money per the lease agreement.

If you are in a position to lease or finance, you need to consider all aspects of what each deal brings to the table when it comes to terms and conditions as well as the total cost of the monthly payments. There is no right answer and the numbers generally speak for themselves when compared to a family budget. You also will need to consider the incidental costs of any new vehicle in your budget equation. A more expensive leased vehicle may require higher insurance premiums. An upgrade in vehicle size may cost you more money in fuel and maintenance. Whatever you decide to do, make sure it makes the most financial sense for your budget and your transportation needs. Getting out from under a lease or a loan can be very difficult, very expensive, and can damage your credit for future use.

At some point, you may find yourself in need a little financial pick-me-up between paychecks. Emergency expenses can crop up at any time and when you are in need of quick cash, a payday loan can be a tempting offer. The true costs of a payday loan, however, are absolutely astounding and are usually swept under the rug by greedy lenders.  Needless to say,  a payday loan should be an absolute last resort.

Paydays loans are titled as such because one borrows cash with the promise to pay back the full amount plus interest on the next payday. There is an upside to payday loans, such as the ability to get a quick approval, access fast cash, and essentially all you really to initiate the process is a job and a bank account. Overall the process is relatively simple, which is likely one of the main reasons people fall into a cycle of payday loans and debt.

What’s The Bad News?

Payday loans may be convenient and in some cases even necessary for extreme emergencies but there are drawbacks to taking out a payday loan. For many people, the bad often outweighs the good with this type of loan.

Here is a brief summary of the downside to payday loans:

Very Expensive

You may not realize how much it actually costs to obtain a payday loan at first glance and therein lies the problem for many. The law requires that you are informed of the interest rate but those in desperate times may not truly understand the consequences financially. The interest rates on payday loans can be upwards of 700%. What you take out certainly is not what you are going to be paying back. Without some serious planning, one loan can result in the loss of your entire paycheck before you even realize.

Vicious Cycle

Once you allocate your paycheck to pay back the loan and interest fees, you may again find yourself in need of financial assistance. This can leave you in the position of having to take out another loan. A vicious cycle can start and debt will likely soon follow. Payday loans should never be used as a means of income.

Not-So-Reputable Lenders

While there are some payday lenders that are legitimate, there are many that are unscrupulous and illegal. Since you will need to supply the lender with your personal financial information, it is highly recommended that you check out the company you plan to do business with before signing any contracts. Check with the Better Business Bureau or ask people you trust for a referral before you select a payday lender.

While desperate times do call for desperate measures, you don’t have to get taken by payday lenders. Keep in mind that you may have other options for borrowing money for emergency purposes before resorting to a payday loan (such as taking a hardship withdrawal from your 401k). If you do need fast cash and a payday loan is what is available to you, be sure to read everything in the agreement and the fine print before signing any documentation.

Or, you know, you could always move to Thailand!

When you are looking to buy a new car, it can be very exciting and even somewhat overwhelming when you realize the options you are faced with. There are many new makes and models of vehicles for sale with prices that range from the reasonable to the obscene. Consumers often make the mistake of buying more car than they can afford or they go about financing in a sloppy manner. Any number of mistakes can turn buying a new car into your worst financial nightmare.

Here are several ways you can make the process of a new car purchase much easier on yourself:

Research Your Vehicle Specifics

You may already know you are looking for a sedan, an SUV, or a family mini-van but you may not know anything else about what to get. There are many resources today for selecting exactly the vehicle you want before you even step foot into a showroom. Use these resources (ie. magazines, Internet) to conduct a search for the kind of vehicle you want. You will be able to access safety information, gas mileage figures, and cost. Never choose a vehicle because of the color or amenities unless you are independently wealthy and can afford to play around with your money.

Check Your Credit

Your credit score needs to be excellent to find a good loan these days.  If you don’t know where you stand credit-wise, get a free copy of your credit report at annualcreditreport.com and purchase your score from myFico. Scores of 720 or better will likely warrant you a choice in vehicle financing.

Budget Yourself

It may be tempting to buy the same kind of expensive SUV your neighbor just got but if you can’t afford the payments each month, it’s hardly worth the time you put into the purchase. Consider how much you pay out in bills, loans, and other debts each month. Calculate your expenses against your income and see how much is left over to be used for a new vehicle. Don’t forget to include the car-related expenses that will come with a new vehicle such as cost of gas, maintenance, tires, insurance, registration, and other fees.

Shop for Financing

You can get financing from most dealers but that may not be your best avenue for a deal. Instead of relying on the salesman to offer great rates, start shopping on your own before hand. If your credit is good, consider applying for a vehicle loan at your bank, credit union, or other reputable lender.

Get Pre-Approval

Once you have checked out what kind of loans and rates there are for a loan, complete the application process with the lender of your choice to secure financing before you start shopping. This is a great way to ensure you don’t go over what you can afford and leaves room for the dealer to make a competitive loan offer.

If you do some legwork before talking to salespeople who only want to sell you a vehicle, you’ll have more confidence and likely take the time you need to make the best choice in vehicles and pricing.

Just a few years ago, savers were enjoying high yield savings account rates over 5%.  Then came the crash.  The Fed promptly cut overnight rates to near zero, driving the rates available on savings accounts down with it.

A Downward Trend In High Yield Savings Account Rates

Things have gotten a bit better since then, with some online savings accounts (such as Smartypig) topping 2%.  As the market recovery gained steam, so too did the anticipation that the Fed might begin raising rates again.  Well, that hasn’t happened, and just the other day the Federal Reserve announced they would be leaving rates low for a while, perhaps a long while.

Rate increases stalled, and the past few months I’ve noticed many banks lowering their interest rates.  I first noticed it with ING Direct (my online savings account of choice) and then Ally Bank (whose rates I track because I have an affiliate relationship with them).  I’m sure it’s been happening with other banks as well, but I don’t pay too much attention to most of the rest of them.

Is this the beginning of a trend?  Are low savings account rates here to stay?  Nobody knows for sure, but I would guess that savings account rates will remain low until the Federal Reserve makes a move.  I believe previous rises were due primarily to banks competing with each other for a flood of capital from the public equity and debt markets as well as an increase in the general U.S. savings rate.   Now that the easy business has been won, banks are lowering rates again, betting their accounts are sticky enough to get away with shaving a few tenths of a percent off their interest expense.

If the Fed announces a significant change overnight rates, I would expect high interest savings account rates to rise proportionally.  Until then, savers will have to make due with rates in the low-1% range.

If you are looking at a major purchase in the next few months, one way to save both a lot of time and money is by seeking financing approval before you actually start shopping (especially critical when purchasing a home). Buying a vehicle, a home, a boat, or any other large item generally requires financial assistance of some kind. If you can walk onto the car lot or the realtor’s office fully prepared and knowing how much you can afford, it makes the deal negotiations much smoother and hassle-free.

Pre-approved financing essentially means you go through the application process for securing a loan before you have begun shopping. The lender will provide you with pre-approval documents that you can use to provide proof you are serious about the purchase. It may also serve as a valuable tool for negotiating price. As a budget-conscious buyer, you have the advantage of understanding exactly how much you can afford to spend and how much it will cost you each month.

How to Shop for Pre-Approved Financing

Check With Your Bank

If you have been a long-time customer of your current bank, approach them first about financing. Since you have already established a relationship and a history with your own bank, you may have more options for getting the best interest rates and loan amounts.

Stop By Your Credit Union

Some of the lowest interest rates around are available through your local credit union. If you are associated with a credit union, schedule an appointment to see what kind of deal they can offer you for your big purchase.

Shop Around

While you may think your bank will do you no wrong, it pays to check out some of the lending competition. If you maintain excellent credit, you have much more opportunity to have lenders competing for your business. An internet search is a good way to look at different kinds of financing for different kinds of purchases. As the popularity of Internet business continues to grow, you may find there are financing programs available now you were not even aware of.

Look Locally

Beyond the local bank and credit union, there may be other local lenders looking for your business. Check out the ads in the local paper and phone book. You may be a very welcome addition to a smaller, local lender than you are to a big business lender.

Seller Financing Is Still An Option

Financing your new car through the place where you make the purchase may not be the best way to save money but it is still an option for you to consider. You can contact the company and inquire about the pre-approval process over the phone or via the Internet before actually going to the lot and facing the sales personnel.

Homeowner’s insurance is necessary to protect you should your home ever suffer damage from fire, theft, or other costly incidents. This type of insurance will also protect you if you are found to be liable for injuries suffered by somebody else while on your property. Most mortgage lenders will require in their loan contracts that you maintain home insurance coverage throughout the life of the loan.

As with most insurance policies, homeowner’s insurance can be costly and it certainly is worth the effort to find the best policy for you. A little research and effort on your part can end up saving you hundreds or thousands of dollars each year.

Here are 5 tips to help you cut the costs of your home insurance coverage:

Shop Smart

Your parents, sister, and brother all may use the same insurance agent for their homes but it doesn’t mean you have to follow suit. You should check out the competition and see what kinds of deals are available. Ask at least three other insurance companies for quotes and coverage highlights. You may be surprised to see the differences in quotes. Choose the plan that makes sense for you. Do not judge only by rates. Make sure the whole package meets your needs, including the level of customer service you expect to receive.

Check Your Credit

Insurance companies do monitor credit histories so if you want the best rates, maintain great credit. Some insurance carriers will refuse policies on the highest credit risks.  Monitor your credit report for free using annualcreditreport.com.  There’s probably no need to check your actual credit score, but if you insist I’d recommend going directly to the source at myFico.com.  They also have a nifty free FICO® Credit Score Estimator you can use to estimate what your score might be without having to pay for it.  But yes, they will try to up-sell you.

Combine Your Insurance Needs

If you presently have insurance policies for other needs, like auto and disability insurance, consider transferring them all over to one company and take advantage of the discounts you may be able to get for having multiple policies (I use Allstate). Be sure to inquire what kind of services your homeowners insurance company offers and what kind of discounts are available.

Improvement Discounts

Your insurance agent should be able to provide you with a list of DIY projects you can do around the home to lower your premium costs. Adding a security system for instance, could save a couple of hundred dollars each year. There are many improvements you can make rather inexpensively to lower your payments and improve the value of your own home.

Increase Your Deductible

Discuss with your agent about increasing your deductible amount to something higher but still manageable should something happen. A higher deductible generally lowers the overall amount of the insurance policy.

After you have been in your home for awhile, your financial situation and lifestyle may change. Be sure to review your policy on a yearly basis to ensure you are still paying for coverage you actually need as well as keeping an eye out for possible discounts being offered by your insurance company.