How are you doing financially? - Determining your Clone Level.

If you are just starting out, or just getting serious about managing your money, where should you start?  The following is our general guideline that you can follow.  It is progression of levels that are achieved one after the other.  Start by finding the first category that you don't fulfill and consider your Clone to be at that level.

For example, if you are contributing 10% to your 401(k) at work, but don't have any funds set aside for emergencies, you are at Level 1.

No two situations are the same, so some of these levels may not apply to your situation.  If you don't have access to an employer retirement account with matching funds skip Level 2.  If you don't need to fund a child's education skip Level 6.

It is important to remember that when you are at any given level you need to make sure you are still fulfilling the requirement for all of the levels below.  For instance, if you are at Level 3 but after updating your budget your determine that your monthly expenses are higher than they were before, you need to make sure that you still have one months's worth of expenses saved (Level 1).

[Level 1] - Funding a mini emergency fund.

If you have less than one month's worth of expenses in liquid assets, you should address this first.

Although it is important to pay down any debt that you have already accumulated, establishing at least a small emergency fund first makes sense.  If you put all of your money to paying down your debt and then run into an unforeseen issue you are just going to end up incurring debt again.

This money needs to be readily available, but should be separate from your regular savings/checking accounts so that you are not tempted to pull the money out for non emergencies.

[Level 2] - Getting your employer matched retirement savings.

If you have access to a 401(k) or 403(b) at work that includes an employer match you should make sure you are taking advantage of this.

All plans have the ability to contribute salary on a pre-tax basis and some also offer post-tax or Roth options.  The pre-tax contributions get you a tax benefit now and the Roth get you a benefit when you withdrawal your money in retirement.  The general rule on which type of contribution to make is that if you are relatively young or otherwise expect your income taxes to be higher in retirement you should contribute to Roth.  If both options are available to you and you are not sure which way to go you should be able to split your contribution 50/50.

If you have high interest debt, such as credit cards, or if you haven't fully funded your emergency fund you should limit your contribution to whatever is matched by your employer.  So, if your employer matches 50% of your first 6% of pay, you will remain in this Level until you are investing 6% in your retirement account monthly.

After you have achieved Level 3 and 4 you will contribute more to your retirement account.

[Level 3] - Paying down high interest debt.

As long as you are carrying high interest debt it is acting as an anchor against your financial progress.

The definition of high interest is relative, but most of if not all credit card debt would be included in this.

Sometimes when the stock market is performing very well it is easy to try to justify skipping this step and putting money in the market, but paying off an 18% interest rate credit card is a guaranteed 18% return, while gains in the stock market are not guaranteed and are taxed.

[Level 4] - Completing your emergency fund.

Your emergency fund should be a minimum of 3 months of expenses.  If your job situation is not stable or if your pay is not consistent, maybe because you are on commission, you will want more than 3 months.

[Level 5] - Contributing additional retirement savings.

You will either be adding to your 401(k)/403(b) if Level 2 applied to you or you will be opening an IRA.

IRAs also come in both regular and Roth similar to what was discussed in Level 2 for employer retirement plans.

You will move to Level 6 once you have saved enough to meet your minimum retirement goal which we will be discussing in a future post.  For now move to Level 6 once you are contributing 12% of your pay.

[Level 6] - Saving for College.

It might seem selfish that we aren't addressing college savings until Level 6, but there are important reasons to wait until this point.

• Your child will have most likely will have access to loans may qualify for a scholarship and , no one will be providing you either of these for your retirement.
• If money is tight your child could opt for a cheaper state school instead of private or even attend community college for a couple of years.  Again, this might not be very popular with them, but it most likely won't be any less popular than you living on their couch in retirement because you sent them to a pricey private school and didn't save for you retirement.
• You most likely have more time until retirement than you do until your kid goes to college.  Because of this you will be investing more aggressively in your retirement account than you will in your child's college savings account.  This means that your overall return will be higher investing in just your retirement account as opposed to investing that that same money in a college savings account.

You will want to open a 529 account to save for college.  This is a tax advantaged account specifically for educational expenses.

[Level 7] - Maxing out Retirement Savings and funding other investments.

You will max out this Level once you are saving enough to meet your Maximum Retirment Goal.  We will be discussing this in a future post.  For now try to maximize all available options if you can.  This includes employer retirement plans and IRAs.

The current maximum for 401(k)/403(b) is $17,500 a year.  The current maximum for IRAs is $5,500.  These limits are raised for people over a certain age.

Don't Forget May is clone awareness month.

Monthly Payment thinking (know what you are spending)

When making purchases or saving money it is best to know the true cost or benefit.

When purchasing a car, for instance, the salesperson will often try to discuss the cost of the car in terms of monthly payment.  Such as, "if you add feature x your payment only goes up $10".  Make sure that you are considering the true cost over the length of the loan including interest.  For example if you were planning on paying for the car with a 60 month loan at 2% interest the total cost is about $630.

When purchasing a house, especially when building a new house, it is easy to fall into the same trap.  When something is spread out over 30 years, the monthly payment doesn't seem that large.  Check out the following example.

You are taking out a $150,000 30 year mortgage on a house at an interest rate of 4%.  You decide to add $6,300 to the loan so that you can make some upgrades to the house.  Over the course of the loan the $6,300 is going to cost you about $30 a month or about $10,800 in total over the 30 years.

So, if you decided that you could wait for the upgrades until you saved up enough money you would be paying $6,300 for them instead of $10,800.

If you decide that you can live without the upgrades and instead invest the $30 a month in an investment earning 6% a year you will have a little more than $30,000 dollars at the end of your 30 year mortgage.

So, when buying a large ticket item always be aware of the total price and don't just focus on the monthly payment.  Similarly, when investing, know that even small increases in your savings can provide you will a big payoff down the line.