Driving Costs Driving You Crazy?
When you think of how you want to spend your hard earned money, rarely do you think “I want to overpay for car insurance and spend $70 to fill up my tank!” Car related expenses are a necessity for most families, but there are easy ways to reduce these costs and make sure you are not overspending.
The “rule of thumb” for transportation related expenses is that they should not account for more than 10% of your gross income. Depending on your salary, this could be a really big number! For example, if you make $150,000 per year the “rule of thumb” says that you can spend $1,250 per month on your cars. This could easily cover gas ($350), insurance ($115), commuting ($50) and a VERY nice car payment. While this rule might make sense in other parts of the U.S., I believe it overstates what a family in the Bay Area should spend given our significantly higher home related expenses.
So how much do most people in our area spend? Here are some facts on the biggest drivers of spending in this category and tips to save a few bucks.
Car Insurance
Most people do not know if they are paying too much for car insurance. I have seen families paying up to $3,000 per year for the same coverage as a family paying $1,400 per year because they failed to update their policies for critical information.
The average annual premium for car insurance in California is between $1,200 and $1,300. There are a number of factors that “drive” your premium:
- Driving Profile: Number of miles driven annually, driving record
- Type of Car: Repairs on a Ferrari are more expense than on a Toyota Sienna
- Personal Profile: Age, where you live, occupation
- Coverage: Amount of coverage and deductible
- Credit Score: The better the score, the lower your premium
TIPS TO SAVE: Update the number of miles you drive annually. If you no longer commute to work or are a Stay At Home Parent, you need to significantly reduce this number from the default number of 12,000 per year. Increase your deductible. If you have a sufficient Emergency Fund, you can retain more risk. See if increasing your deductible to $1,000 has an impact on your premium (the savings varies greatly depending on your insurance provider). Clean up your credit and make sure your insurance provider has the right score. You can get a free credit report each year from annualcreditreport.com. Review your report and make sure your credit is 740 or higher. If not, fix any errors and get it cleaned up.
Gas
The average spending on gas in the San Francisco Bay Area according to mint.com is $150 per month, which is very low compared to what I see for families. Most families that I work with spend an average of $250-400 per month on gas. You may not have any control over the price at the pump, but you can go further on each tank of gas.
TIPS TO SAVE: Get regular tune-ups and check brakes/alignment. A car that runs well does not have to work as hard and gets better mileage. Park in the shade and fuel up in the morning. Since gas evaporates in heat, this is an easy way to conserve fuel. Eliminate excess weight. Get rid of the junk in your car. By lightening your load, you will improve fuel efficiency.
Car Payments
Sometimes financing a car makes financial sense but if you are struggling to make ends meet each month or find yourself on a single income, a car payment can be a huge burden. So when does it make sense?
Financing a car makes financial sense if you: 1) want to improve your credit score, 2)have sufficient monthly cash flow for the payment, and 3)have your cash invested earning more than the interest rate on the car. With incredibly low rates and great deals out there, it is tempting to overspend on a car. Don’t fool yourself. If you don’t meet the three criteria above, do not buy a car that is above your means. If it makes financial
sense, here are some tips to get the best deal.
TIPS TO SAVE: Buy a used car. Cars depreciate the minute your drive them off the lot. A car that is a year-old will be a much better value than next year’s model. Buy at the end of a month, quarter or year. Dealerships and salespersons feel the pressure to meet quotas and are more likely to negotiate on the price. Put down the largest amount possible and shorten the term of the loan. This will reduce your overall loan costs.
Personally, I love my car but do not like to drive. I am also in biking and walking distance to almost everything I need. So I have implemented a “two mile rule” that means I walk or ride my bike (with two kids in it) if the destination is within two miles. I love not fumbling for my keys after the grocery store and buckling/unbuckling car seats ten times a day. I filled up my tank once last month, called my insurance company and reduced the miles I drive to 3,000 per year, and calculated that I am saving about $1,200 a year now.
Top 20 ESSENTIAL Financial Tips for Couples
I created the Top 20 ESSENTIAL Financial Tips for Couples that is available for download at Katysong.com . Clink on the link to receive your FREE copy.
By following these financial tips, you will create a solid financial foundation as a couple and family. Laying the ground work NOW ensures financial security and stability for years to come.
Posted in Steps to Improve your Finances
Tagged family planning, financial tips for couples, finanial security, marin financial advisor, marin financial planner
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Back to Basics: Three Tenets of Good Money Management
From time to time, I need to remind myself and my clients about the basics of good money management and the importance of creating a solid foundation on which to build your financial future. The three basic tenets as I see them are as follows:
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Live within your means and build a life you can afford.
- Create a spending plan
- Track your spending
- Pay off your credit cards each month
- Pay your bills on time
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Know your family values and define your goals.
- Stay in-tune with what matters most. Let this guide your spending and saving.
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Put your money where it will grow over time.
- Home, education and well-managed investments.
If you keep these basic tenets of good money management in mind each time you make a financial decision, big or small, you are more likely to make the right decision.
Financial well-being is about making wise decisions and not about making more money.
Posted in Steps to Improve your Finances
Tagged budgeting, family finances, katysong.com, marin financial advisor, marin financial planner, money management, saving
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Cost of Food: Eating up your budget?
Family Food Budget
One of the wonderful things about living in the Bay Area is the excellent food. But spending at great groceries stores, farmer’s markets and restaurants can add up each month. Food related expenses tend to eat up a big part of a family budget, and one of the most frequent questions I get from couples is “How much should we spend on food?”
My answer to that question depends on the family’s specific situation. Ask yourself the following questions right now:
1) Do you know how much you spend on groceries, eating out, and coffee?
2) Is buying organic a priority?
3) Do you love eating out?
Answers to these questions will drive a big portion of your spending on food. If you cannot answer question #1, look at your spending for a couple of months and add up all the charges for grocery, eating out and coffee. Take the average of those months and decide if that number feels comfortable for your family.
If you want to know how you compare to your neighbor, here are averages to help you gauge whether you are overspending in this area.
According to Mint.com, the average monthly spending on all Food & Dining in San Francisco is $1,325, compared to the California average of $1,282 and US average of $1,169. These averages are not specifically for families, so it probably underestimates how much a family spends on food. However, this clearly shows that it costs more to eat in the Bay Area.
From my years as a financial planner, most families in the Bay Area spend between $800-1,200 each month on groceries. Add to this the cost of eating out, coffee shops and convenience items; you are looking at an additional $250-$1,000 per month depending on your lifestyle. This is a wide range, and where you fall in this range depends on how important food is to you and how much you can afford to spend. The good news is that eating out is discretionary and can be reduced relatively easily by more mindful
planning.
For example, a burrito take-out dinner for a family of four will likely run you $35 without beverages. You could make that same dinner at home for about $15. Is the extra $20 worth the convenience? Sometimes the answer is yes. But consider the opportunity cost of that money. If you took the $20 per week and invested it earning 5%, you would have $1,067 at the end of a year.
The USDA kindly provides “Official USDA Food Plans” to help families decide how much money they should be spending on food. They provide four food plans: Thrifty, Low-cost, Moderate and Liberal. For a family of four with children under the age of 5, the four plans range from $533 to $1,035 per month[1] on groceries. These plans assume that all meals and snacks are prepared at home. If you adjust these averages for an increase in the cost of living in the Bay Area (about 13%), this brings you to $1,170 per month on food if you are on a Liberal Food Plan.
Inflation is also rearing its head in grocery prices. They have increased about 3.9% year-over-year. So a Bay Area “Liberal Food Plan” will likely increase from $1,170 to $1,217. Hopefully your paycheck will go up as well, but if it doesn’t, proactive planning can lessen the bite to your family budget.
Posted in Family Finances
Tagged budgeting, cost of food, cost of food monthly, cost of living in San Francisco, family money management, financial planning, inflation, marin financial advisor
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How to Prepare for the Long Road Ahead in Uncertain Economic Times
On August 8, 2011, the S&P lost 6.7% of its value, and most investors are still suffering from whiplash caused by the market’s ups and downs last week. Whether you watched your portfolio plummet, saw the drop as a good time to buy, or sat on the sidelines stunned, I have some advice… take a deep breath and exhale slowly. This is going to be a marathon, not a sprint.
It seems like every time a piece of economic data shows positive signs of a recovery, there is updated “official” economic data saying that the previous quarter is revised downward. Just like the market, if you drop 600 points and go up 400 points the next day, you are still down! So what can you do to better handle this volatility and prepare yourself for a long road ahead? Here are some simple steps:
Know what your money is for. Every account or pot of money you have needs a purpose. If you need it within the next three years, make sure it is liquid. Liquid means that you can quickly and cheaply convert it to cash. While stocks are “liquid”, you run the risk of needing to sell when the market is down.
Once you know the purpose of all of your accounts, match your investment to the time horizon of that goal. Most of us have retirement accounts that have lost most, if not all, of the gains from over the past year. If retirement is decades away, breathe deeply and find some solace in that the market is expected to rebound and the S&P has grown an average of 7% annually over the past sixty years. However, take the recent market volatility as an opportunity to assess your own risk tolerance and adjust your portfolio accordingly.
If you have money that you don’t need today that is also not meant for college savings or retirement, you need to make sure your money is at least keeping pace with inflation.
For the best high yield savings accounts check out www.bankrate.com. Inflation-protected securities are another option; check out this helpful article for more information http://bit.ly/pPgRiA. You may also want to lock in some return through dividend paying stocks or ETFs while the experts try to figure out if we are growing or heading for another recession. The iShares Dow Jones Select Dividend Index Fund (Ticker: DVY) yields about 3.5% and tends to be less volatile than the overall market. It is also expected to keep pace as the market recovers.
Whatever you do, do not put your head in the sand and say you will deal with your money later. According to analysis from Blackrock, extreme down days (-6% or greater) have been historically closer to the end of a crisis. They are also followed by an average one-year return of +21.25%! So, if you are still sitting on cash and can handle the yo-yo market, put it to work.
Posted in Miscellaneous
Tagged finances for couples, investing, marin financial planner, money management, personal finance for families, san francisco financial planner
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Inaugural Blog – Time is Money
“Time is money,” is something I say when I am trying to get my daughter to hurry up and do something. Today she asked me what it meant. I paused and thought for a few moments. I told her it meant that we have a lot to do and have to move quickly to get everything done. She seemed happy with this response, but it got me thinking about valuing time.
First, if you are gainfully employed your paycheck likely lists your hourly rate. Is this the value of an hour of your time? Hopefully you have a very high opinion of yourself and think your hourly rate undervalues you. So, why don’t you ask for a raise? In this economy you probably feel like you need to keep quiet to keep your job, but I think this is incorrect. Now is the time to show your value to your employer or clients, and to yourself. Life is short, and if you don’t ask you don’t get. (I heard this from a motivational speaker when I was 23 and it has stuck with me!)
Second, a good example of time is money is the power of compounding. Most people have heard of the Latte Effect, which is about how inexpensive items can add up and over time result in a tremendous loss of potential wealth. There is even an iPhone application for this! For example, if you spend $2.00 on daily coffee and could earn 4% on that money if it were invested (this is very conservative given the current market), you could have earned over $4,000 in five years or $23,000 in 20 years.
The point of “time is money” is to get you into action doing what you really want to be doing. If you feel undervalued and want to make more money, figure out what it takes to get a raise. Your boss could say no, but at least you tried. If you want to have more money saved to invest in your goals, find your “latte” and stop buying it. Take that money and redirect it. My latte is magazine subscriptions. I am a junky and used to have a stack of magazines each month. Now I have whittled it down to three magazines (The Economist, Elle Décor and Money Magazine), and one weekly paper (Barron’s). It’s progress, and the money I save each year goes to cover a very important expense… pedicures.
Posted in Steps to Improve your Finances
Tagged cash flow, financial planning, inflation, investing, katy song, making money, marin financial planner
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Can We Afford a Second Child?
There are many factors that go into the decision to have another child and affordability is typically the biggest one. To determine whether having a second child is financially feasible, you need to consider the costs of raising that child from birth through financial independence, which is hopefully when they graduate college. As you know from your first child, there are an amazing number of unforeseen costs from soccer and dance classes to birthday gifts for your child’s entire preschool class. Here are a few of the largest expenses to evaluate.
Does Size Matter?
Housing-related costs (mortgage, insurance, and property tax) are the largest expenses for most families. In planning for Baby #2, ask yourself if you need (not want) to move to accommodate your growing family.
Not everyone is able to afford their dream house when they first move to Marin. If you bought at the peak of the market, you were probably thinking you would be in your house for 5-10 years and then upgrade to a bigger home in a better school district. Given decreased home values, you may need to stay in your “starter” home longer than anticipated. If staying put is not an option, you may want to consider renting for a few years while your children are young. Typically, you can afford a nicer home if you rent, and you can save the money you would have spent on homeowner’s insurance and property tax for a down payment on your next home.
Dreaded Childcare Costs
The cost of childcare in Marin is crazy! If you look at average childcare costs for the U.S., you see numbers like $400 per month. Unless you go the co-op route in Marin, I doubt you will find full-time childcare for under $700 per month. If you are a dual income family and plan to continue that route when Baby #2 arrives, childcare will likely be your second largest expense after housing. Even for the SAHP, you may have your first child in pre-school or want some childcare to maintain your sanity.
The most important thing to consider is that these costs are TEMPORARY. Your kids will grow up and go to elementary school, and since many families move to Marin for good schools, primary and secondary education will be relatively free. View these temporary childcare costs as an investment in your children’s education and your happiness, not just as a cost!
College Savings
If you have two children under the age of three, the full cost (room, board, tuition, etc.) of a public university education in California will be over $500,000 by the time they are in college. This assumes the costs of attending college grow 5% each year until they start school, which has been the trend. This means that you need to be saving over $16,000 per year to fully pay for college by their respective freshman years. Of course, you can take out loans and apply for financial aid or scholarships, but all parents should be aware of the magnitude of savings required.
Decide if you have room in your spending plan to save for college now or whether to wait until your children are out of daycare. While the power of compounding is important, i.e. get the money working now, it may not be worth the stress of feeling like you cannot take a real family vacation and are barely making end meet each month. Whatever you do, make sure you are maximizing retirement before saving a penny for college!
Start-Up Costs
You probably already have most of the supplies you need, so the costs of baby’s first few years should be minimal. If Baby #2 is not the same gender as your first child, you may need some clothes and toys. Here is where you can recycle, reuse and borrow. Fortunately, you probably have a lot of new friends through playgroups or pre-school that may have already gone through Baby #2 phase and can give or loan you things you need. Also, check out kid consignment shops and Craigslist. Some items have never been worn, and books and toys are available at steep discounts.
Don’t Forget the Tax Benefit of Baby #2!
While all of these costs add up, Baby #2 also brings certain tax benefits. Depending on your Adjusted Gross Income (AGI), Baby #2 may enable you to increase your Dependency Exemption by an additional $3,700 for 2011, and provide up to $1,600 in tax credits ($1,000 Child Tax Credit and $600 Child and Dependent Care Credit).
The costs of raising children in Marin can be staggering, but the happiness I get from my second child cannot be measured. Before having him, I ran through my own analysis of the costs outlined above. For us, Baby #2 meant less income (since I want to spend a lot of time with both children) and increased expenses for childcare. Having taken the time before my son was born to calculate the financial impact made me feel more in control, and now that he is here, it isn’t a shock each month when we pay pre-school tuition and our nanny share. I have also resisted the urge to buy him anything new. I have received more hand-me-downs than I know what to do with, and he is perfectly happy.
If you cannot answer the question of affording a second child on your own, contact me for more information.
Posted in Family Finances
Tagged buying home, child care, costs of baby, costs of child care, costs of raising a child, financial planning, growing family, marin financial planner, new baby, second baby, stay at home mom
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How to Stop Fighting About Money
Most often newly married couples do not sit down with each other to agree on a new set of guidelines for how to manage and talk about money as a couple. Once you have a baby or a house, what seemed like small differences in spending and saving become amplified and a major source of tension in the relationship.
No one likes to fight about money, so why does it happen? Usually, it is caused by a communication breakdown and lack of understanding about one another’s past relationship with money. If left unchecked, financial pressures can become too big to handle. Money is one of the top reasons for divorce.
Instead of focusing on the past and mistakes already made, couples can break the cycle by following the steps below to ensure that they have a non-judgmental platform on which to build a positive financial dialogue for the family.
Decide who is CFO. The job of CFO is a serious one. While you both need to be aware of your family’s finances, the role of day-to-day money management typically falls to one partner. Decide who wants the role and who is willing to take on the additional time and energy required to do the job well.
If your finances are in good order, set a quarterly meeting to run through the family’s financial status. This includes looking at your family balance sheet as well as your cash flow (income versus expenses). At least once per year, you should convene to discuss your family’s goals for that year (vacation, savings for retirement and education, home improvements, etc.) and make sure that your investments match the timeline needed to meet those goals.
If you don’t know where to start, hire a financial planner to help you get on track so you can effectively manage your family’s finances for years to come.
Set rules for talking about money. Most couples argue about money between 6:00 and 9:00 pm on weekdays. This is a recipe for disaster since most everyone is tired from a long day at work or with the kids. Agree to NOT talk about money during these hours. Instead, find a time during the weekend or during the day when you can talk about money without distractions.
Understand your partner’s relationship with money. Studies show that opposites attract when it comes to money. For example, the “spendthrift” is attracted to the “spender” initially because he or she exhibits a more carefree relationship with money. Unfortunately, this initial attraction can turn to frustration and lack of communication if not addressed later in the relationship. Write down a description of your relationship with money and of your partner’s relationship with money, then share what each of you wrote. Agree, in advance, that this exercise is not meant to be judgmental but to help you better understand each other.
Determine your family’s goals and money philosophy. Together, decide on what matters most to your family, such as: owning a home, travelling the world, getting the best education, or having a stay-at-home-parent. These goals are not mutually exclusive, but you will need to decide which ones are most important and where to focus your resources. Your family’s money philosophy should remain constant over time and not adjust to suit your changing financial situation. For example, you may decide that you will only take on debt if it directly corresponds with one of your goals and does not add financial stress. This may mean holding off on purchasing a home so that a parent can stay at home with the kids, or postponing a big family vacation until sufficient funds have been saved.
While there may be few things in life you can control, you have complete power over your relationship with money and how you talk about it as a family. Improving this communication is just a few steps away! Regardless of how you were brought up, think about how you want your children to relate to money and set that example for them.
Posted in Steps to Improve your Finances
Tagged budgeting, cfo, family money, financial control, marin financial planner, money fights, money management, spending
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