Beating Broke

Personal Finance from the Broke Perspective

How to Build Your Financial Foundation

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“Can I afford that?” 

If you’ve ever asked yourself this question and not been sure of the answer, it’s time to establish your financial foundation.

Think of a gleaming, towering skyscraper.  It didn’t appear out of thin air.  It took months of preparation and carefully designed installation.  Most importantly, that skyscraper’s construction started with its foundation.  Then, floor-by-floor, it was eventually completed.

The key point here is that the foundation came first.  It’s an absolute necessity to the stability and longevity of the building.  Without it, the tower would crumble.

Your financial foundation works the exact same way.

Without a proper financial foundation, your finances will never be in perfect harmony and you will never be financially stable.  Moreover, you’ll never relieve yourself of financial stress, which is a heavy burden too many people bear.

Financial foundations are an easy concept, but they take a mindful, dedicated approach to put together.

Sticking with the building theme, your foundation will consist of three “pillars”:

  1. Short-term money
  2. Emergency money
  3. Long-term money

Pillar #1: Short-term money “STM”

Your STM reserve will be used to cover your active, day-to-day expenses.  Think groceries, rent, utilities, etc.  Although there isn’t a universal dollar amount, there is a guideline you should follow to determine how large your STM reserve should be.

Follow the below steps to determine your STM reserve:

  1. Calculate the amount of money you usually spend in a month. If you use a debit or credit card, you can use your monthly account statements as estimates.
  2. Take this dollar amount and multiply it be three.

That’s it!  That number is the amount of money you should have set aside for your short-term expenses at any given time.  For example, if your monthly expenses are $1,000, you should have $3,000 in your STM reserve.  This covers the volatility and variance of your expenses.

Let’s face it, we’re all human.  Some months you’re going to spend a little more than others, some months you’ll spend a little less.  But with a STM reserve, you’re covered.

This will ease your day-to-day financial stress.

Pillar #2: Emergency money “EM”

Think of your EM reserve as a rainy-day fund.  You can’t predict your next fender-bender or doctor’s visit.  So, you need to have EM at the ready for such an occasion.

Again, there isn’t a universal dollar amount, but the calculation is easy: take that same monthly expenditure amount and multiply by six.  Using our example from earlier, $1,000 multiplied by six would give us a $6,000 rainy-day fund.

See how easy this is?  This number provides you six months of leeway if you were to ever lose your main source of income (i.e. your job).  This gives you plenty of time to reestablish that income stream or find a new job.

Pillar #3: Long-term money “LTM”

We’ve accounted for your active expenses and potential, unexpected expenses.  Now, it’s time to turn our attention to the future.

Your LTM is for your future goals, such as a house, graduate school, kids, etc.  The sooner you prepare for those occurrences, the sooner you can take advantage of compound interest.

After satisfying your STM and EM reserves, you should contribute at least 20% of your monthly income to your LTM goals.  If you’re making $3,000 a month, net of taxes, you’ll set aside $600.  Want to reach your goals faster?  Up that percentage.

And there’s your financial foundation blueprint!

Tie it all together

Construct these pillars by filling your reserves one-by-one, in the order listed.  In other words, start off by focusing on your STM reserve.  Once you’ve hit a comfortable point (i.e. about three months of expenses), move on to your EM.  Lastly, after you’ve covered your short-term expenses and potential, spontaneous expenditures, you’ll start investing in your future.

A solid, formidable financial foundation is integral to financial success.  These three pillars will provide clarity to your financial horizon and ease your financial stress.  I know it’s easier said than done, especially if you’re living paycheck-to-paycheck.  If that’s the case and you’re barely breaking even, create a budget and cut back on discretionary, non-essential expenses.  Or, commit some of your free-time to building a secondary source of income.  That way you’ll be on your way to sitting pretty at the top of your skyscraper!

How to get More Financial Peace of Mind

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Money troubles kill relationships. They also cause major stresses, catalyze health problems, ruin plans, mess up sleep schedules, and so much more. We hate to admit it, but money is easy to worry about, and many of us do it a lot. What’s more, there is good reason to worry about money. Without enough of it, we can’t live where we want, eat what we want, get educated, have a fun time out of the house. Like it or not, your sense of well-being has much to do with how much money you have and how you use it. So here are a few ways to earn more peace of mind with your money.

  • Life Insurance

    Perhaps the best way to get peace of mind in your financial life is to buy life insurance. If you’ve never thought about buying life insurance before, you probably don’t have much of a sense of how much it costs. Many people that life insurance quotes come in at a much lower price than they anticipated, especially for people who are young and healthy. Life insurance creates peace of mind not just for you, but for the people who depend on your for income and security.

  • Know Where Your Money Goes

    If you’ve ever made a budget after a long period of not paying attention to your money, you know how much it hurts. It can seem like your spending record is judging you, and some people avoid this at all costs. But the only way to spend money more wisely is to take a close look at how you need to spend, and how you actually spend in practice. Often there is too much difference between these two criteria, and you should find a way to spend your money according to better measures and goals.

  • Get an Emergency Fund

    Saving for an emergency fund is one of the most important financial habits you’ll ever get in. An emergency fund is meant to protect you in the event of an accident, a breakdown, and any number of unexpected expenses. It takes awhile to build an emergency fund enough to cover you and your family for 6 months (the oft-recommended amount), but once you’ve managed to do it, you’ll find it’s worth it. An emergency fund provides great peace of mind 1) because you know you’re taken care of, and 2) to make one you will have had to attain other important financial goals like debt elimination and saving habits.

There are many ways to live beneath your means and acquire better financial peace of mind. We lose our cool financially when our money is out of control. Learn the basic ropes of personal finance, spend time caring for your own financial garden, and you may be surprised at the extent to which it improves your life. People don’t feel secure when their means of sustenance and shelter are constantly in upheaval. When you have financial security, you are very likely to have physical security, which can only have a positive impact on your state of mind.

Turning Your Old Junk Into Investments

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Excuses, excuses, excuses. I’m seeing them on forums, blogs, and comment sections. There is always some reason why people can’t start investing today. The most widespread excuse is “I don’t have the money to start”. Today, we are going to solve that, because we’re going to show you how to turn your old junk into investments.

I recently started my journey towards living frugal and have learned a great deal of lessons since beginning. One of the most important lessons is the need to invest early on in life to take advantage of compound interest and a good rate of return.  The problem? I didn’t have the cash to put towards an investment. I could have made excuses, but I didn’t. Instead, I found a way to earn the cash.

Turning Junk into Investments
Turn Junk into Investments

Is your garage littered with old junk you never use, or do you have unloved trinkets laying around your living room? If you’re anything like me, you do. If you want to clean up your space and make some cash in the process, you could look into selling your old junk.

Your trash could be another person’s treasure! You never know what people are looking for, in terms of old kitchen appliances, old tools, even old art or trinkets. Someone might be looking for a blender jar for a broken blender, and you might have one laying around from an old blender you never bothered to get rid of.

Or, you maybe you recently upgraded your mower and you need a way to get rid of your old one. As you learn to live a more frugal life, you will realize there are cheaper ways to live a rich life than spending money on items you will only use a handful of times and then take up space in your home. Take those old mistakes into cash by selling your old stuff for cold, hard cash.

Here are a few steps that I took to get cash and start investing.

Sell it at a Pawn Shop

If you want to get cash quickly and with little hassle, you can take it to your local pawn shop. Make sure you price your stuff reasonably, otherwise they won’t take it. Have you ever watched Pawn Stars? While your items might not be as rare or unique, (or maybe they are!) most pawn shops are similar to the shop in Pawn Stars- they are most likely not going to offer you your asking price, they will price lower so they can sell higher to their next buyer. Remember, they need to make money too!

Pawn shops will take anything from old jewelry to DVDs to old lawn equipment. If you have specialty items, like art or antiques, research your local pawn shops to find the place that will give you the most money for them. Don’t get sellers remorse at the last second though, they may not be willing to sell it back to you!

Have a Garage Sale

The thought of a pawn shop may be too impersonal, and if so that is okay! You could always sell your stuff at a garage sale. This requires a little more planning- you will want to make signs and price your items individually like a department store. You will also want to enlist the help of friends or family to help collect cash, answer questions, and make sure nobody walks away without paying.

Garage sales can attract all sorts of people, including young people, families, and collectors. Some might not have the best intentions, so it is good to have a system that makes sure no buyers can walk away without paying for their items. Trust me, they will try! A garage sale gives you the opportunity to tell the story behind your pieces and watch them walk away to their new home, which is much more personal then selling them to some guy behind the counter at a pawn shop.

Sell on Craigslist

For higher-value or larger pieces you may want to post them on Craigslist. Craigslist gives you the opportunity to reach out to more potential customers without having to ship a bulky or expensive item. If you are worried about the crazy stories you have heard about Craigslist deals going bad, you can enlist the help of a friend or family member to accompany you.

Don’t meet buyers at your house or late at night. It is preferable to meet them in a neutral location, such as a parking lot or mall, with a friend or family member with you. Make sure to ask the potential buyer to bring cash- do not accept checks, money orders, or anything else! There are plenty of scammers mucking about on Craigslist, but there are also plenty of serious buyers.

Sell on Ebay

Ebay is perfect for smaller items, like kitchen appliances, clothes, jewelry, and trinkets. People from all over the world use this website and are usually excited to find pieces that are just exactly what they are looking for. You can give buyers the opportunity to bid on your items, or simply buy them outright. The only drawback of Ebay is that you will have to ship the items. Be sure to build the cost of shipping into your price, and be sure to pack your items securely! The last thing you want is for the item to arrive to the buyer broken.

This can be an amazing opportunity to reach buyers all over the world. You really never know what people in Michigan, France, or Thailand are looking for- it could be exactly what you have in your hot little hands.

Now that you’ve turned your old junk into investments

Selling your items online or in-person can add some extra cash to your pockets. Now that you have it, download the Robinhood app from the iPhone or Android store. The Robinhood app allows you to start trading with as little as $1. And the trades are free.

Don’t let sentimentality destroy your future! Start investing now. I promise, that old lawnmower or ugly pillow you got as a gift aren’t worth keeping. You may not get full retail price, but you will get more than you have in your pockets right now.