Disposable Income

What is disposable income? It is the amount of money that households have available for spending, saving and investing after income taxes and mandatory payments (i.e. mortgage, food, transportation and health insurance) are accounted for.

A recent survey initiated by Money Magazine disclosed that the disposable income of American households is disbursed as follows:

Travel: 30%

Home and Beauty: 22%

Eating Out: 20%

Clothing: 17%

Recreation: 11%

Did you notice anything missing?  Yes, you got it!  Based on this survey most American households apparently aren't using any of their disposable income  to put towards savings or investments.  We can not expect our finances to grow if there is no system of saving and investing.  

This is  a huge problem that will result in Americans having to work far longer than their parents and grandparents had to.  Let's get in front of this and begin developing a plan to save and invest.

2012 Money Play

As a new year approaches, it is a great time to starting talking and thinking about your finances for 2012.  There are some things that you and I want to consider now for 2012:

Develop a budget

It is going to be important to develop a budget for 2012 and to stick to that budget as best as you possibly can.  Here are some things you can do right now to construct your budget. 

1.      Log onto your bank account.

2.      List all of the things you have spent money on from January 1, 2011 until now (include all the transactions in your accounts – checks, withdrawals, debit card usage, bank fees, etc.)

3.      Categorize all of your expenses into the following categories for each month: Housing (mortgage, insurance, real estate taxes, rent, utilities, repairs to home, etc). Transportation (automobile expenses including insurance, taxi/cabs, bus or train fare, etc). Meals (meals purchases at work, groceries, etc.). Entertainment (meals outside of work and home, movies, subscriptions – magazines, NetFlix, etc). Travel (vacations). Personal care – haircut, salon, spa, etc. Investments – any amount you spend on investments outside of job sponsored retirement plans, this includes savings and life insurance. Miscellaneous – anything else which does not fit in any of the above categories.

4.      List your monthly take home income.

5.      Subtract your total expenses from your total income.

6.      Are there any negative months?  What happened in those months? Was there some level of emergency? Were there any months that were profitable? Did you break even in some months? What happened in those months?

7.      Take another sheet of paper and a calculator and figure out how much of your annual take home salary is being spent in each of the eight expense categories. 

8.      Compare your results to what I call a typical budget: Housing should consume no more than 30% - 37% of your take home or net pay. Transportation – about 20%. Meals – between 15% and 20%. Entertainment – 3% to 5%. Travel – 5% to 10%. Personal care – 3% to 7%. Investment – 5% to 10%. Miscellaneous – 3% to 5%.

9.      If your percentages don’t match up with those in item 8, you should consider adjusting your expenses accordingly.

10.  Stick to the budget you created in 2012. Don’t go astray from the path.

Get out of debt

Debt grows faster than your income so it is a mandate to get out of debt as soon as you can.  With the rate that the world’s economy is going make it a priority to retire your debt as soon as you possibly can.  This includes student loans as well.  I would suggest opening a separate bank account where you pay your debt from and call it your DSA - Debt Shrinking Account.  Make extra payment if you can to shrink your debt faster.  Email me for more advice on this.

Develop a plan to save and invest

Now that you have your budget and DSA in place you will need to develop a plan to save and invest.  The 5% to 10% that is being set aside for investments should be split in half between investments and savings.  Your savings here would be your “rainy day” fund.  The way the world’s economy looks we are in for quite a few rainy days in 2012.  It is always best to be prepared.

Speak with a financial advisor on what you should use the other half of your funds to actually invest in.

Watch the markets

This doesn’t mean only the stock market.  But watch all the markets.  What are you looking for?  You are looking for opportunity, an opportunity that can catapult you and your family to the next level.  With the other three items, mentioned above, in place you now have the ability to not only watch the markets but also take advantage of some of the opportunities that are presented to. 

The Cup Is Really Half Empty

Reports are that this year the Social Security fund will pay out more than it actually takes in.  Entertainment costs are increasing – try going to the movies or to a sporting event.  The healthcare reform bill has been signed.  The war in the Middle East is a constant vacuum which never gets full.  Do you see the recurring theme here?  Expenses are rising but there is no mention of revenues rising for individuals like you and I.

This should make both you and I look a little differently at our budget and what we spend our money on.  Right now is the time more than ever not to be optimistic but be realistic.  We need to examine our investments because this is the time, more than any other time, which we need to invest in assets.

What are you going to invest in?

Decisions

Life is full of opportunities to make decisions.  Should I go right or left, forward or back, take this job or that job?  Each decision we make shapes our experiences and path of life. Therefore it is important to make the correct decisions.

One of the decisions some must make is whether to pay down or invest their money, especially with tax refund time upon us. Which one should you choose? I would say, do both.  There is a win-win situation if you have the ability to do both. Let’s take a look at a scenario for a moment.

Aaron has $400.00 left over each month after all of his monthly obligations have been met.  He has an outstanding credit card balance of $5,000.00, which is also part of his monthly obligations.  If Aaron uses the $400 each month to pay down his debt, he would retire his debt faster but two things work against him: (1) while paying down the debt there is no money to invest and (2) he might be missing a golden opportunity to take advantage of investments as they materialize. 

But if Aaron were to split the $400.00 reserve evenly between investment and paying down his debt he would enjoy the benefit of retiring the debt a little faster and investing.  Suppose his $200.00 monthly investment generated $500.00 per month, what type of position would Aaron find himself in? Aaron could use the profits from the investment to retire the debt even faster. 

So think about the dual benefit in your next financial decision!

Money on The Table

This year put your money to work for you more efficiently than you have done in the past. This is one of the best things you can do. We consistently work for money. However, for many of us, money never works for us.  It doesn’t matter how much or how little money you have, invest it wisely and watch it work for you.

With the unemployment rate reaching record highs, the stock market seemingly on a recovery run and a little fear in the market, it is a great time to invest.  Invest what do you mean?  Try some alternate investments with the cash you have laying around. 

Who has cash lying around?  More then likely you do! If you have been separated from an employer that offered a retirement plan that you were apart of, then you have money lying around.  Let me show you how to move some of those funds from simply lying around to working for you.  You have the power and opportunity to do some great things this year with the money you have on the table.  Contact me at info@frederickotowles.com. 

I Want to Invest But ….

I have had a number of people tell me they want to invest; get back in the real estate game but there is an issue. The issue usually starts out like this “but my credit” or “but the bank”. Unfortunately that is the story for many these days.

My question to those individuals is always who says you have to do it the traditional way? Did you know there are a number of alternative methods of financing for an individual who wants to invest?

There are self-directed IRAs, private equity and joint ventures along with several other alternative methods of investment. Have you tried or heard about any one of them? Please understand that many of these alternative financing methods are not exclusive to real estate but for almost any type of business. If you would like to learn more about alternative financing for real estate send me in an email info@frederickotowles.com.