What does financial freedom mean?

Does it mean that you have no credit card debt? Or does it mean being able to buy what you want when you want it? Does it mean having a mortgage free house? Or does it mean having a million dollars in your bank?

Financial freedom means different things to different people. However, what is common is that everyone desires it. People envision financial freedom in different ways. Some want to be able to take a nice vacation; some just want to get out of debt. Some would like to be able to purchase a nice home, a sports car, quit their corporate job, and work for a non-profit or just simply be able to take care of their family’s needs.

Yes, people certainly do desire financial freedom, but the reality is that most people never experience it at all in their lifetime. Not necessarily because they don’t make enough or that they are living from paycheck to paycheck but because they were never able to break the financial bondages that hold them down. Financial bondage takes many forms- debt being the worst one. However, even without debt, there is always that big expense looming around the corner, whether it is the engagement ring, the big family vacation, school, and college expenses for the kids, etc.

To experience financial freedom, one has to break these bondages. This does not mean one has to turn away from responsibility, in fact quite the opposite.

You have financial freedom if you can pay for all expenses without incurring debt, without stressing out, without making a lifestyle compromise, without letting your dream go. That is Financial freedom!

Simply put – once you make enough money required to meet your expenses without being actively involved in generating that income, you have achieved Financial Freedom!

Financial freedom is possible, but you have to be willing to be honest and make some changes. You must be proactive to attain it.

Step I: Get a grip on your financial situation

Start by clearing out things. If you have debt, make a list of it with minimum payments and interest rate listed against it. Estimate your total monthly expenses (you don’t necessarily need a full blown budget) and get a sense of where your money goes.

Step II: Save money for emergencies and get rid of debt.

Build a cash cushion, a.k.a an Emergency fund. Make a commitment to do what it takes to pay off your debts. Debt is the worst of all the financial bondages. Once you’re debt free, put money aside for Step III.

 Step III: Automate income

Look at ways to generate passive income. In a low interest rate environment, savings account and CDs may not be the most attractive investment but they’re a good starting point. If you are a freelancer, you can look at outsourcing some of your work so that you are free to get more clients. Build a diversified portfolio of dividend stocks. Buy assets that produce income, like a cash flow positive rental property not a gas guzzler pickup truck.

Step IV: Go back to Step I and Step III again.

Don’t stop here, it’s important to go back to Step I and get a handle on it again. Then back to Step III.

I want you to define what financial freedom means to you. And what are you going to do once you achieve it. That should be a good motivator to get started.

How to Achieve Financial Freedom in Four Steps is a post from: eMoneyLog, Money Blog

Thanks to all who included my post in the carnival. Really appreciate it.  It is staggering to see the amount of good posts published in just a week’s time.  The fun part is learning and sharing with you.

First up is

Young And Thrifty is hosting The Carnival of Financial Camaraderie #32

Money Talks Coaching is hosting the  Carnival of Personal Finance – The Color Wheel Edition

Balance Junkie is hosting the Totally Money Blog Carnival #65 -Success, Wealth & Happiness Edition

Arbor Investment Planner is hosting the Self Directed Investing For Retirement Carnival – Socialism is Winning Edition

Let me leave you with an interesting quote from Benjamin Franklin

Remember that credit is money.

So exercise the same caution when using credit cards or getting loans as you would have while spending cash.

Carnival inclusion form the past week is a post from: eMoneyLog, Money Blog

We recently wrote about why you should recycle your mobile phone, now that’s a pretty good idea and a good starting point.  However why stop there. Take a hard look at all the electronics you have lying around in your house and see if you can sell them.

Here are some tips you can use to identify electronic items you can sell.

When was the last time you used it?

Do you have your first generation iPod Touch or a portable DVD player lying around that you think you will you but haven’t used it in the last year, last two years or maybe more. Guess what? You are probably never going to use it. So get rid of it. Go ahead and sell ipad for cash or your VCR for that matter.

When did you buy it?

Did you buy it many years ago and the technology has now taken a leap forward? I am not talking about iPad 2 to iPad 3 ( or like apple calls it, iPad). I am talking about, Tube TV to LED TV. May be its time for an upgrade to catch-up with the world.

Is it still serving your intended purpose?

When you buy new electronics, there is generally a reason, maybe the old one broke, maybe there was a better model available, or maybe you needed to get something done but no longer have a need for the item. A good example here is a 8GB iPod, may be at the time your collection could fit in, but it does not fit on the tiny 8GB anymore. Sell your iPod to get  cash for it.

Sell all your old electronics, not just mobile phones for cash is a post from: eMoneyLog, Money Blog

What happens to your clothes once you’re through with them? Most likely you donate them to some charity. Or give them off to someone who’s needy. And pretty sure you do this for most other things other than clothes too. Like food, household goods etc. But what about your phones? What do you do with your phones when you decide to buy a new one? Does it sit in a drawer forever or do you dump it?

Recycle Your Mobile Phones to save or even make money!

According to studies, an average person gets a new phone every 18 to 24 months. This means that there’s a huge amount of ‘mobile phone’ waste being generated on a daily basis and very few people sell their old mobile phones. Phones contain quite a lot of hazardous materials. According to the U. S Environmental Protection Agency, Americans discard 125 million phones each year. Go figure how much hazardous material that is!

Many people are now aware of the hazards of simply discarding mobile phones. There are a number of environmental implications of discarding electronic waste like old mobile phones instead of recycling them. When you recycle mobile phones, you are not just helping the environment but also people in the emerging countries. Most of the mobile phone recycling companies refurbish these discarded phones and resell them to distributors in poorer countries. This also helps in bridging the gap – the so called digital divide which exists between the ‘not so rich’ and the richer countries.

And to get to the main point: money! When you recycle your old phone  to buy a new phone, you get a discount or a reduction on your new phone. And who doesn’t like reductions? So why not always exchange your old phone for a new one every time you decide to get a new phone? If you have any old phones lying around, sell those ole mobile phones online as well. If you feel that you’re not getting the best deal by an exchange offer, sell your old phone on trading websites like eBay or Amazon. You’ll get a good deal, and have some cash in hand to get your new phone.

So remember to recycle your phone all, it’s a really good idea.  You’re not just helping your own wallet, but also the environment. That’s a double win!

Recycle Your Mobile Phones is a post from: eMoneyLog, Money Blog

Spending money seems to be second nature to most people, however, saving and investing money is usually an acquired skill. Fortunately, money management is not a difficult thing to learn, and the time it takes, is time well spent. Managing your money well will allow you to attain financial security even with a modest income.

The basic principles are simple:

• Save: Spend less than you make.
• Invest: Invest what you save.
• Repeat: Keep going at it, as you save more, invest it.

Save: Spend less than you make.

This is an important first step. If you blow away all your earnings, you will never be able to accumulate wealth. Develop a budget, this will work as your action plan. To begin with, you should make a list of all your current monthly expenses: housing, utilities, food, insurance, transportation, clothing, personal services, healthcare, entertainment, loan repayments, and any other expenditures you might have. If the total exceeds your current income, figure out ways that you can cut back. If you are spending too much on eating out, reduce the amount you spend in this category, eat at home more and pack your lunch. Some other cost-cutting ideas include switching from your cable company’s premium package to the basic package, using public transportation or organizing a carpool, and increasing the deductibles on your car and health insurance. If you’ve slashed all you possibly can and you are still spending more than you make, consider taking on a temporary part-time job.

Invest: Invest what you save.

Once you reached the point where your income exceeds your expenses, don’t find other ways to spend the extra cash. Instead, commit to putting a set amount away in a savings account each month. You won’t be able to earn a high return on this money, but it is liquid, meaning you can withdraw it in the event of an emergency ( see the series on Emergency Funds: A complete guide to emergency funds  ). Financial gurus differ on the amount you should have accumulated for an emergency fund, but an amount equal to three to four months of your monthly expenses is a reasonable target.

After you’ve built up your emergency fund, it is time to begin investing your additional savings. Although the money you deposit in your savings account is safe, as noted earlier, you won’t increase your wealth with this strategy. In fact, the interest you earn on a savings account may not even keep up with inflation, so your purchasing power may actually decrease. While you can lose money on your investments—including some or all of the money you invest—you also have the potential to earn a substantially higher return than you will on money that you hold in a savings account. According to bankrate.com, the national average annual rate that is currently being paid on savings accounts by U.S. financial institutions is 0.13%. Thus far in 2012, the S&P500 Index has returned 11.9% and its average annual return from 1962 through 2011 was 10.6%. So, assume you invest just $1,200 a year, or $100 a month, at this rate. You would have $19,684 accumulated at the end of ten years, $73,593 at the end of twenty years, and $221,236 at the end of thirty years. Invest $2,400 a year, or $200 a month, and the numbers become $39,368, $147,186, and $442,472.

Repeat: Keep going at it, as you save more, invest it again.

Don’t stop saving and investing after doing it diligently for a few months. You must continue to do it, every month, only then you can add to the savings you have built.

The Basics of Money Management – Save, Invest and Repeat is a post from: eMoneyLog, Money Blog

My checking account pays me 2.5% interest and as of this writing HSBC Direct pays 1% (which by the way is one of the top online savings account), which brings me the conclusion, DUMP YOU SAVINGS ACCOUNT…!

If you notice the interest rate is more than double, it used to be 5% when the rate HSBC was offering was around 2-3%.

The checking account is not a regular checking account it is High Yield Checking Account (HYCA).  There are some difference in a high yield checking account (HYCA) and a checking/savings account and to earn the high interest rate you have to meet certain requirements which are generally easy to meet.

My account requires:

1. One direct deposit or auto-pay per month.
2. Ten signature based purchase using DPS.
3. Online Statements.

I have looked at many other HYCA’s  and the requirements are pretty similar to the one I have (but please read and understand the requirements). Some accounts are available nationwide

But I anyway do this with my regular checking account, so with no added hassle I am getting a much higher interest rate than what I would have gotten.

I still use my Credit Card for big ticket items but for regular daily purchases < $10 I use the debit card (for ~10-12 transactions). If you are addicted to tea/coffee and you pay by CC for them then this debit card can your Tea?Coffee-Time-Credit-Card…!

Now if are wondering how to get a checking account that pays high interest you have obviously not read my post on Checking accounts.

How to do it.

1. After you have found your High yield Checking Account, make sure you understand the requirements.

2. Link your checking and Savings account both ways (always better to do).

3. Transfer money to your checking account.

4. Make sure you meet the requirements.

Don’t make any excuses here, these requirements are really simple to fulfill, if you do not have Direct Deposit, set up auto pay for your Credit card or utility bill. If you do not make ten CC purchases, buy something small on CC to cover up, like 99cents chips from a store that accepts CC for it (many do). There are many ways these were some that I could just think of the top of my head.

Now, whoever thought checking account could pay more interest than an online savings account…!

Let the savings account pig turn blue…here

PS: That was fun to do…

Dump your savings account…! is a post from: eMoneyLog, Money Blog

Note: This is not an article to guide you on stock picking.

You know Warren Buffet as a successful investor (and if don’t then you are probably an alien…!) and it’s no secret that he gets better deals in everything he does.  When he wants to invest in a company, the company offers him a better price for its stock and then throws in some preferred stocks or warrants. People pay millions to meet him and dine with him.

So how does he do it? And how can you do it?

1. Stick to the basics.

Warren Buffet has always only invested in businesses that he can understand well and he thinks that will remain in demand consistently; for they satisfy specific needs people have. If something is too complicated for you to understand you will probably not be able to take a right decision on it.  Stay away from things that are not intuitive to you. There will always be enough opportunities that you can understand and be comfortable with. You may have to just look around a bit.

2. Negotiate.

Do you think Warren Buffet takes the first offer he gets for a company stock? No way..! He negotiates. And you think it is cheap to negotiate even when billionaires are doing it. Negotiation is one of the best skills you can learn, it will come in handy at various points in life, right from buying your home or car to negotiation your salary.

3. Network and create a reputation for yourself.

Research may be a good source to find opportunities but the best deals are still struck by knowing people.  Warren Buffet’s network of rich and influential people who hold him in high regards helps him get to opportunities before other s.  Network with people, and care about what they think about you.

Communicate with your friends, employees, investors on a regular basis. If there is something they will come to know about you or your firm, let it be you who tells it to them. This is the best way to build trust and reputation.

4. Get there first.

Good deals don’t last forever and Warren Buffet knows that. You will never see Warren Buffet investing in what is hot now (because people have already got there). If you have missed the wave, you have missed the wave. There is nothing you can do about it.  Instead of trying to jump on it start looking for the next wave. Whether it is investing or any other decision; research and domain knowledge adds value. Spend time to gain some expertise in the domain of your interest and you will be able to spot opportunities before other people see them.

5. Adopt simplicity.

Warren Buffet still lives in the house he bought several decades ago for approximately $31,500. A carefree life style will also affect other aspects of your decision making. As long as you are able to keep it simple, you are increasing your odds of success.

6. Be confident.

Warren Buffet once said:

I always knew I was going to be rich. I don’t think I ever doubted it for a minute.

That’s confidence.  Confidence can be the difference between what you dream about and what you achieve.  Believe in your abilities and work on improving your skills and you will get there.

How Warren Buffet gets better deals than you? (And how you can do it too) is a post from: eMoneyLog, Money Blog

We are probably already living in the longest recession since the great depression of the late 1920′s and early 1930′s. Many people have lost jobs; many large and small businesses have gone under; it’s difficult to get credit which many were so dependent on and need the most now. For many people like me this is the first recession they are seeing and things have been tough.

Now, I did not intend to scare you by saying all this but it is such difficult times that get us thinking on how could one prepare for such a situation if it was to happen again or still continue to worsen? How one could avoid the adverse effect of such a situation on their finances and wealth?

I read, discussed and pondered and then it struck me that we all knew the solution all along, but probably due to the economic prosperity we have seen in the recent years, one did not give these lessons enough importance. If only we re-learn these five lessons…

Buy a home that you can really afford.

Home ownership is touted as ‘The American Dream’. While home ownership has many advantages, buying a home is a big decision which if gone wrong can have several negative consequences like foreclosure, bankruptcy, etc. If you qualify for a mortgage it does not necessarily mean you can afford it. Buy a house for which you can comfortably afford to pay the monthly mortgage payment for throughout the duration of the loan and not just a teaser rate for the early years.

Build an Emergency Fund.

An emergency fund is like a safety net you can build to insulate yourself in case of any unfortunate events that may happens in your life. When we have a steady source of income we tend to ignore this and assume that things will continue to be smooth.  Some people depend on their credit cards limit for their emergency fund but it is not certain you will have it when you need it. Your credit line may be reduced or worse the credit card company may go under. One should also learn how to invest the emergency fund.

Stock market investment is not for everyone.

Historically stock market returns have been better than many other investments that are easily accessible but there has been significant volatility in their returns in the short run. Any money you need in the near future say 5 years (may be for college tuitions, travel, buying a home, medical expenses, etc.) should not be in the stock market. Passive investment in stock market (aka index funds, mutual funds) can also lose a lot of money (The stock market had tanked more than 50% in the eighteen months leading to March 2009).

Do not over invest in your company’s stock (or sector).

So let us say you worked for Chrysler/Lehman Brothers and also had a significant portion of your investment in their stock (normal accounts or via retirement savings accounts like 401K), what could happen? Your job may be in danger and a significant portion of your investments would have been wiped out, even worse, if you are close to retirement that savings could be your life’s hard work. I guess you see the point.

Frugality

A word that had some negative connotation associated with it has gained some popularity now. More and more people have started seeing the value in saving money for the future, trying to spend on necessities than luxuries and living within your means have become the ‘in thing’.

5 personal finance lessons we all should re-learn from the financial crisis is a post from: eMoneyLog, Money Blog

Everything you really need to know about checking accounts.

In this article:

• Why start with checking account?
• What should you look for in a checking account?
• Various types of fees associated with your checking accounts and how to avoid them.
• How many checking accounts should you have?
• Some additional tips.

Why start with checking account?

Selecting is good checking account is good way to start organizing your personal finance and to set the stage for better things in your personal finance.  (Which I will continue to help you with )

What should you look for in a checking account? How to select the best checking account?

Things you should consider are:

1. Does the checking account have any monthly fee?

It is crazy how many people are actually paying these fees. Almost all banks have ‘No-Fee’ checking accounts available if you maintain a minimum balance or do a direct deposit (or even without any of these requirements, see Some Additional Tips section). If you are on a payroll it should be easy for you to set up your direct deposit through your employer. If you are a student then many bank offer free student checking account without any requirements. Even if you are a part-time student, try investigating about this option.

2. Interest rate.

For long I was under the impression that checking accounts do not pay any interest (or a negligible rate of interest, at best). However after some looking around I found some high yield checking account and the interest rates were pretty high. They generally have some additional requirements but they can be easily satisfied and they pay anywhere from 3-5% interest rate. To find a checking account that pays high interest you can use a website like CheckingFinder or a list like this. This single piece of information can be a game changer for your passive savings and your emergency fund savings. This is also one of the reasons I stick my emergency fund in a checking account over a CD.

3. Accessibility and Convenience.

Things like, how convenient it is for you to go to the bank (if you have to)? Do they have online banking (nearly all banks have online banking these days and it makes sense to use it to cut down your visits to the bank).

4. Debit Cards.

Debit cards that are Visa, MasterCard or Amex can really come in handy at times. They will be accepted anywhere credit cards are accepted. Make sure your bank issues one of these to you. Some banks also have cash backs and rewards associated with debit card.

5. Personal relationships and community.

Banking with people in your community is great way to help your community. Consider local credit unions, they are easy to deal with and they play a role in the development of the locality. You can locate a credit union in your area using one of these two services,  Credit Union and Find a Credit Union.

6. Special rates.

Some banks offer lower rates on loans and higher rates on CDs to their checking account customers. I would suggest that you some research here and open a checking account with the bank if it helps you get a better rate just before making a large CD or getting a loan from that bank. Banks like Chase will take of up to 0.25% of your mortgage interest rate which can be substantial savings.

7. Security of your Money.

Is the bank FIDC or (NCUA) insured? Is the bank location physically in a safe area?

Various types of fees associated with your checking accounts and how to avoid them.

There are various fees a bank charges in association with a checking account. Some of these are:

a. Monthly account fee.

b. Overdraft fees: When you try to withdraw (or write a check for) more money than you actually have in your checking account banks will charge you a fee, unless you have an over draft protection plan. These can be exorbitant.  Some banks are really cruel when it comes to this fee. I read an article where a person was charged an over draft fee for a debit card transaction and then another over draft fee as the original over draft fee could not be paid…! (Thankfully it did not continue recursively).

c. Over draft protection fee: Some bank will scare you with the huge over draft fee and then tempt you in to paying a couple of dollars per month to avoid any over draft fees. Avoid accounts with such plans, there are many banks that offer over draft protection as a line of credit or will link it to the cash advance on your credit card.

d. Check writing fees: I have never encountered a checking account which actually charges this fee but I have seen some claim that they do not, this make me wonder that there might actually some banks that charge this fee (or it may just be a marketing gimmick..!)

e. Fees for check books: Some accounts come with unlimited check books, so no worries for them. While I would suggest that you perform most of your transaction electronically; so you would not need so many checks in the first place but not having to pay for a checkbook when you need one cannot hurt. If you do have to buy a checkbook then compare your bank rates with other online services, on average the later should be cheaper than the former. Do not spend money on buying fancy checks they are simply not worth it.

f. Bounced check fee: If you happen to deposit a check that does not clear for some reason, the bank may charge you a fee. It’s a double whammy.

g. (Out of network)ATM fee: When you use an ATM that is outside the network of your bank (generally your bank and any associated subsidiaries) you may be subject to two fees:

i.  The ATM machine provider charges you for using their machine.

ii.  Your bank may charge you for using an ATM out of their network.

h. Block check fee:  If you happen to write a check and loose it or if you have already given it out to someone and later decide that you do not want them to use it, you can ask your bank to block the check (i.e. only before the check has already cleared…!). The bank will also charge you a fee for this.

Banks are very creative with these fees and they actually make a lot of money by charging these fees.

How to avoid these fees?

Most of this is pretty obvious and just knowing about these fees will make you try to avoid them. So read about these fees or ask your banker about them.

The minimum balance requirement may be computed in different ways by different banks, some require a daily minimum balance and some require an average minimum balance over the month. If you do not know what the requirement on your account is; call you bank to find out…! Or you may assume it is a daily minimum balance, that way you are covered for both the cases. If you have to maintain a daily minimum balance, keep some more money in your checking account than the required minimum balance to allow some transaction to go through without actually going below your required balance.

How many checking accounts should you have?

This depends on your personal situation and how many accounts you wish to mange. Most of us should be fine with 1-2 accounts. I would suggest having two checking accounts, one with a high interest rate (even if the account is not very easily accessible) and one which is easily accessible (even if does not have high interest).

Some additional tips.

1. Never have more balance in your checking account than what is protected by FDIC coverage. Bankruptcies of bank come as a surprise and it may just catch you at the wrong time. If you do happen to have so much in cash consider splitting them in to accounts in various institutions so you are still under the limit.

2. If you are a married, then at least have one joint account and one independent account. Merging your finances can be a long process; a joint checking account will be a good start. Even if you have decided not to merge your finances completely, it is still easier to have one for common transactions. An independent one can come in handy when you want to plan that surprise vacation for your partner and do not want them to become aware of it when they see the statement.

3. Checking account is great place to store some portion of your Emergency fund. However if you have a checking account that pays low interest rate (consider moving to a high yield checking account) do not put a lot of money in it as you will lose some valuable interest, instead keep the money in high yield savings account.

4. Some banks (like Bank of America) offer free checking accounts without direct deposit if you open them online. If you cannot satisfy the requirement for direct deposit or minimum balance then open such an account.

5. Many banks let you set alerts on your account in case of a withdrawal/deposit above a certain limit. This feature can be used as tool to enhance security and identify unauthorized transactions as soon as they occur.

6. Always look at your monthly statements to identify if the bank is charging you any fees or if there any unidentifiable expenses.

7. Getting all the factors right in a bank can be difficult, so get an account that fits most of your needs rather than trying to get the best and holding on to a really crappy checking account.

PS: This article was featured in the Carnival of personal finance #211.

Checking Accounts, A complete reference is a post from: eMoneyLog, Money Blog

This is a two part post covering the following topics.

Part 1:

What is an emergency fund?

Why do I need an emergency fund?

How much do I need to save?

Part 2:

How to get started?

How to invest your emergency fund?

What are the common pitfalls of emergency fund and how to avoid them?

How to get started?

So you know how much you need in emergency funds, but do you have that much allocated?

If you are well covered, then that’s great. That is like a landmark achievement in your personal finance history…! Now you can feel more comfortable to face any surprises life may present you with however if the number you came up with overwhelms you, don’t get worried, now is the time to start to achieve that number.

If possible you should devote most of your savings in the next few months towards building your emergency fund. If that is not possible or that will not be enough, start small, say by saving 10% of your salary, by not eating out for some time or by cutting down on your daily addictions, whatever works for you and helps you save a little extra, even if its $10-20 a week. Eventually you will find ways to save more or earn more.

• Transfer these savings in a separate savings account or a designated checking account on a regular basis. This is very important. If you do not separate out the money, you may not be able to save more.
• Do not use the money in this account for any other purpose but an emergency.
• Keep setting small achievable targets for increasing the funds, if you miss the target think about cutting back on some of your regular expense to cover up for it.

How to invest your emergency fund?

Congratulate yourself for coming to a stage where you can think about investing your emergency fund.  The key here is to keep your money accessible. Putting it in a designated high interest savings account or a designated high yield checking account is a good idea. This will help your emergency fund grow passively and you can focus on other financial goals.

Only if you have saved more than what you came up with as a number you need for your emergency fund you should consider other investments.

What are the common pitfalls of emergency fund and how to avoid them?

Resist any temptations to invest this money in stock market or mutual funds. Although they may be a good long term investment, they are very volatile in the short term and can lose you substantial amount of money. It gets even worse in times of economic turbulence when many people lose their jobs as well as take a huge hit in their savings which they had intended to use in case of emergencies.

Avoid putting these funds in long term certificate of deposits (CDs) as they are not very easily accessible and you may have to pay penalties to en-cash it before they mature.

Another common pitfall is that you may have created an emergency fund some time back and forgotten about it but as the circumstances in your life change, the amount of money you need in your emergency fund also change. So keep monitoring the amount you have in your emergency fund.

Rebuild your emergency fund as soon as possible after you have used some or all of it for an emergency. If you faced an emergency you would have realized how well this emergency fund served you, so if you have to; get started all over again.

Keep coming back to see tips some tips on how you can accelerate your savings and earn a little extra.

A complete guide to emergency funds – Part 2 is a post from: eMoneyLog, Money Blog