his guest post from Christine is part of the "reader stories" feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes. This reader story is a little unusual. It's the product of Daily Worth's "The Money Fix". But I'll let Christine explain…
My name is Christine, and I'm a school teacher. Last year, I set a goal for myself. I'd been renting homes and apartments to live in for eight years, and the last two rentals were particularly bad. The houses themselves were nice, but after one rental foreclosed underneath me and the next was leased by an awful realtor who couldn't even get me a key to the pool that was 100 feet outside of my door, I knew I needed a change. That's when I decided to buy a house.
When I made the decision, I started getting all my ducks in a row. About six months before my lease was up, I met with a good friend who was a realtor, and he hooked me up with a lender he trusted. We sat down and both spent half the day getting me pre-approved for my loan and answering every question I had. After crunching some numbers, I knew the price range I could afford for the monthly payment, principal, interest, insurance, and taxes. (This range was well under the maximum I was approved for.) I took notes, and with this new knowledge under my belt, it was time to save.
Actually, therein lay the problem: saving money.
Months before meeting with the realtor and lender, I had begun to stash away money here and there to meet my goal. However, after talking with the both of them I began to feel wholly unprepared to buy the house of my dreams. My meager savings was far from what I needed to make my first home purchase.
Not only that, but I wanted to be sure I was financially sound after buying my first house. I wasn't going to wipe out my savings to buy a home; I wanted to make sure I still had a cushion of money in the bank in case there was an emergency or some sort of surprise repairs.
At the time, I had almost $5,000 saved to go towards my down payment and closing costs; I needed about $3-4,000 more in order to be able to be able to afford to buy. This meant I needed to save between $500-$1000 a month to be able to purchase and close before my lease was up. I needed help — and fast if I was going to be buying before the end of the year.
That's when I got lucky.
The Money Fix
Daily Worth — a financial website for women — ran a contest asking readers about their financial problems. If you wrote to describe your situation, you could receive advice from a financial expert and $200 for writing two posts reflecting on your experience.
I wrote in, and one morning I received a phone call telling me I had won, and financial expert J.D. Roth would be getting a hold of me soon to discuss my problem. (FYI, Daily Worth is currently taking applicants for their third season of this contest, so if you have a money problem its probably worth checking out!)
This next part may sound cheesy or cliche, but from the moment I won and began getting advice from J.D., my life changed.
J.D. called me one morning and I laid out my problem: I wanted to buy a house but didn't know how to save enough money in a short amount of time. I admitted I wasn't financially perfect, and I probably spent too much on silly things, like going out to eat, when I should be more frugal. I had experienced some financial troubles in the last few months, like paying off medical bills, dental work, and car maintenance, which were putting a dent in the amount I was able to save.
J.D. asked me a lot of questions in order to figure where I could make changes in order to save. When I put down the phone I was not only relieved that I was getting some help, but I also felt like just talking to someone helped me realize what flaws I was making financially. I was ready for a change and awaited J.D.'s advice eagerly.
A few days later, I received J.D.'s financial plan. There were no curve balls or any strange tips; actually all the suggestions he mentioned were things I read before (mainly at Daily Worth or GRS). The difference is that when J.D. laid out his advice for me, I had no more excuses. I couldn't read the same advice in a blog or website and think, "Oh that's great advice for someone, but not me," because the suggestions were tailor-made for me. I had no more excuses for dismissing good financial advice.
What did J.D. recommend?
In the past, my plan was to save all my leftover money; however that wasn't working. There was always an extra expense (car repairs, dental work, a pretty pair of shoes, etc.) to take that extra money away. J.D. suggested I automatically transfer about 10% of my paycheck to my savings every pay period, and that I should aim to gradually increase this amount to 20% or more of my take home pay.
This would force me to learn to live on a smaller chunk of my income and stretch my money, because the money that went in my savings wouldn't be readily accessible to me in my checking account, and I could no longer fall back on the "extra money" that I knew would be there at the end of the month when I wanted to go buy something I could live without
Keep Multiple Savings Accounts
J.D. suggested multiple savings accounts, so I will always have a back up stash of cash to cope with new tires, dental work and other such emergencies. This will also allow me to have a separate account solely for saving for the down payment and closing costs of my future home. He also suggested a third account for other things, like Christmas or birthday gifts or future vacations.
He suggested using an online savings account, as having an account separate from my existing bank would make my money more difficult to access. Multiple accounts for specific purposes would give my money a specific purpose and give me an idea of what I can and cannot afford.
I had been tracking my spending prior to J.D.'s suggestion by keeping a spreadsheet in Excel. I would make two pages for each month: One with all my regular monthly bills and expenses (rent, electricity, my car payment, insurance, etc.) and one page keeping track of the charges I put on my credit card.
I know it seems silly to write down all the charges I put on my credit card, because anyone can just look online and see how much they have spent, but that never worked for me. Writing my charges in Excel gave me an idea where I stood (even if I didn't always follow the budget I laid out). However, J.D. suggested using Mint or Quicken to get a clearer picture of where my money was going. I could use the software to set targets on how much money I wanted to spend each month on expenses like gas and groceries.
J.D. also suggested I use the Balanced Money Formula to set my spending targets. Using this formula, you aim to spend 50% or less on needs, save more than 20% (including debt repayment), and use the rest, around 30%, to spend on wants.
I liked the idea of using software to track my spending because keeping the spreadsheet can be a lot of work, and it doesn't tell me too much about what percent of my spending is on things I need, like food, versus how much of it is on my wants, like going out to eat, makeup, and clothes. The 50-20-30 formula gave me a guideline to use in regards to my spending.
Take a Second Job
This was another thing I was already doing. During the school year, aside from teaching, I also worked as a habilitation provider. The problem with my second job was that I always looked at the extra income as extra spending money, when what I needed to do was think of it as extra saving money. I need to change my viewpoint and think of that income as my primary source of savings, and pick up extra work until I have saved enough for my down payment and closing costs.
Plan into Action
From there I put J.D.'s advice into action. I used Get Rich Slowly: Best Savings Accounts for 2011 to guide my search for an online savings and narrowed my search down to ING Direct, Ally Bank, and Sallie Mae. In the end, I chose Sallie Mae, because not only did it have one of the higher compound interest rates, but it also offered up to a 10% match of your rewards through Upromise, a service that allows you to earn a small percentage of money from your everyday spending.
About a month later, I also opened a Perk Street checking account. I now had four separate accounts for specific purposes: my checking and savings accounts at my brick and mortar bank for regular bills and unforeseen repairs and expenses, my Sallie Mae account to save for my home (which would later turn into my emergency fund after buying my home), and my Perk Street checking for all wants, gifts, and vacations.
I picked up some extra work tutoring and created an Etsy store to bring in some extra income. All surplus income I would not normally have to pay bills was put towards saving for my future home. I also redistributed my regular income, arranging for 10% of my income to automatically deposit into my savings each month.
I switched to Mint to track my finances, and abandoned my former budgeting spreadsheet. Since I am a visual person, I like that Mint shows my spending using graphs, which allows me to see how close I am to the individual budgets I have set up. Mint.com showed me that I was over spending on groceries, and when my Money Fix story ran readers gave me great suggestions to help me slim down this area of my budget, like making a monthly menu to help me plan out what I need to buy at the grocery store. This also means that I am not only going to the store with a list and a plan, but I'm also only going to the grocery store about once a month and filling in with small trips when I need to.
However, Mint didn't just help me trim my grocery bill; it helped me trim my overall budget. I cut back my restaurant spending and started going out to eat only once a week, instead of 2-3 times. I've been going out less on the weekend, and therefore have been spending less on gas. When it was time to get new clothes when I had to go back to work this school year, I resisted the temptation to go to the mall and hosted a clothing swap.
The bottom line is that the plan worked. I was able to cut my overall spending by 30%. I made saving a priority. After putting the plan into action, on November 15th, I closed on my first home.
The journey to saving for my first home has taught me that I need to make saving for my future a priority. Savings shouldn't be whatever money is leftover, but the money that is taken out first, because there will always be a need to have money in the bank (especially now that I have a home to maintain). My savings now comes first and completely shapes the way that I budget my money.