On My Own Two Feet: Money management made simple

January 3rd, 2008

onmyowntwofeet.jpgSeventy percent of Americans live paycheck to paycheck. Sound like anyone you know? Not to worry. My personal finance heroes, Manisha Thakor and Sharon Kedar, authors of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance, are here to answer a few questions about how we can all get our financial rears in gear in the new year, especially those of us who work for ourselves (or aspire to do so).

This is part 1 of my interview with Manisha and Sharon; I’ll post part 2 tomorrow. And if any of you have a personal finance question for Manisha and Sharon, feel free to post it in the comments. They’ll pick five questions to answer on this blog next week.

Q. Many people reading this are likely smarting from their holiday shopping bills. Do you have any suggestions for avoiding a holiday financial hangover in 2008?

A. When you are trying to lose weight, the basic recipe is “eat less, exercise more.” When it comes to staying financially fit in the new year, the same formula applies: spend less, earn more. The best way to avoid a holiday financial hangover in 2008 is to attack both sides of this equation.

In terms of spending less, the obvious place to start is to look through your daily expenses and see where you can cut back. Some not-so-obvious ways to spend less include going shopping in your closet. See if there’s anything you aren’t using that you could sell on eBay. Another idea to spend less is to make sure you actually use those frequent flyer miles or reward points you accumulate; if you don’t have enough for a flight, you can trade them in for merchandise ranging from fluffy bath towels to gardening supplies.

As for earning more, as next year’s holiday season approaches, consider taking on some temporary extra work — retailers, delivery companies (FedEx, UPS, etc.), and catering companies are frequently looking for a little extra help. The combination of the one-two punch of spending less and earning more can have an incredible impact on your overall financial state of mind.

Q. Let’s talk small business. What are your top three personal finance tips for self-employed women?

A. Make sure you have health insurance. One slip on an icy sidewalk and a broken bone could easily set you back $5,000 or more. If money is tight, shop for a high-deductible catastrophic health insurance plan. You can start your search on your own using an aggregator like eHealthInsurance or you can work with a local health insurance broker in your area (you can find one at NAHU.org).

Make sure you have at least a starter $2,000 emergency fund. According to the Consumer Federation of America, the average woman in her twenties and thirties has about $2,000 a year of unexpected expenses yet only $500 in savings. That’s a recipe for stress like you wouldn’t believe. Being self-employed involves enough uncertainty; you don’t also need to be worrying about how you’d pay for a last minute ticket to see a sick relative or a midnight call to the plumber. Our favorite place to stash that fund — savings accounts at online banks like HSBC.com and INGDirect.com.

Know that Money Is the Pink Elephant in the Room. According to the American Payroll Association, 70% of Americans are living paycheck to paycheck. Shockingly, this statistic cuts across income spectrums. As financial guru Dave Ramsey famously says: Act Your Wage! Don’t succumb to peer pressure to live beyond your means. If you feel like money is tight, as often it is when you are starting up a new venture, be honest with your friends and ask them to support your decision to live within your means.

Q. What are the biggest mistakes you see self-employed women making with their personal stash of cash?

A. The biggest mistake we see self-employed women making is not knowing when they should “protect” their cash and when they should “invest” their cash. Our rough rule of thumb is that money you know you need to spend in the next 1 to 5 years should be “protected,” by parking it in an account that generates sufficient interest to offset inflation but doesn’t put your savings at risk. Examples include online savings accounts, money market funds/accounts, and certificates of deposits (CDs).

For money you don’t need to touch for at least 5 years — which for most of us means our retirement money — this is the money you are free to “invest” in riskier options like stocks and bonds. A great keep-it-simple option for this longer term money is target date retirement funds. These are the financial version of the chicken rotisserie “set it and forget it” machine. They have names like “target date 2040″ and “target date 2045,” and the dates correspond to the year in which you will turn 65. The way they work is that a mutual fund company will shift your money between stocks (most aggressive), bonds (moderate risk), and cash (conservative) as you get closer to retirement — so you literally only have to make one decision, to invest your money in the funds. You can get these funds at all the major discount brokerage firms — Vanguard, Fidelity, and Charles Schwab.

Q. Roth, SEP, WTF? Do you have a favorite type of retirement account that you recommend self-employed women open?

A. For the disciplined self-employed woman, our favorite retirement account is the SEP IRA as it enables you to contribute more money than in a simple ROTH. While you don’t get the tax-free status on withdrawals that you would with a ROTH, the ability to set aside a significantly larger chunk of change makes it a classic. However, when it comes to retirement savings, the most important thing is to do it early and often — no matter what type of account you choose!

Q. If a newly self-employed gal isn’t yet bringing home enough bacon to open a retirement fund (let alone pay herself her target salary), should she maybe eat a bit more Ramen and open the fund anyway? Or wait a year or so till she’s more solvent?

A. Eat the Ramen. The money you save early on is the most valuable. Quick quiz: Who has more money at age 65 — the woman who invests $500 a year starting at age 25, or the woman who invest $1,000 a year starting at age 35? Assuming both women’s investments go up 10% a year, the woman who started at age 25 will have $221,000 at age 65 while the woman who started at age 35 (even though she saved more!) will only have $165,000. It’s so important, we’ll say it again: START SAVING NOW are the three most powerful words in personal finance!

Come back tomorrow for part 2 of the Q&A with Manisha and Sharon. And if you have a personal finance question you’d like Manisha and Sharon to answer next week, post it in the comments.

Entry Filed under: Money honey,Q&As

7 Comments Add your own

  • 1. Finance guide » On &hellip  |  January 3rd, 2008 at 12:58 pm

    [...] Original post by Michelle Goodman and software by Elliott Back This entry is filed under Finance guide. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Prev/Next Posts « How to Find Your Passion Before You Start Your Business | Home | Turkey to speed up privatizations in 2008 » Leave a Reply [...]

  • 2. rachelyra  |  January 3rd, 2008 at 1:38 pm

    I’d love to hear some advice on how all these savings and retirement ideals fit into credit card debt. My income has stabilized but i’ve got a little debt from starting my business – should i be stashing money anywhere else besides into paying this off?

  • 3. nicki  |  January 3rd, 2008 at 3:59 pm

    we have a story which complements this advice today on theglasshammer.com have a look. great minds think alike!

  • 4. Michelle Goodman  |  January 4th, 2008 at 9:46 am

    rachelyra, i’ll pass that question on.

    nicki, thanks for stopping by. i love your “get out of debt” post! great minds indeedy…

  • 5. Georjina  |  January 13th, 2008 at 5:56 pm

    May be a bit off topic here, but what about single women in their 40′s, 50′s and sometimes 60′s. Not all ‘married well’ or married at all and are just now learning about investing or money management. I’d like to see the ‘age’ thing taken out and the ‘autonomy’ put into how women can take care of themselves.

  • 6. Michelle Goodman  |  January 13th, 2008 at 6:22 pm

    Georjina, I just turned 40, have never been married, and am with you 100%. I am pretty behind on investing, too, and am nowplaying catch-up. I’m passing your question on to Manisha and Sharon; hopefully they’ll have time to answer this last question.

    Just so you know, this discussion — and their book — has ALWAYS been about women standing on their own two feet (note the book’s title, On My Own Two Feet) rather than relying on a spouse. So I don’t think your question is off-topic at all.

  • 7. Michelle Goodman  |  January 17th, 2008 at 10:57 am

    Georjina, here’s an answer from Manisha and Sharon. They also recommend checking out David Bach’s book Start Late, Finish Rich.

    “Yep, we so hear you. We are all about women – at every stage of their lives – living from a position of financial strength. Alas, right now that is not the case. According to The Women’s Institute for Secure Retirement, a stunning 2 out of every 3 women over the age of 65 are currently relying on meager Social Security payments as their PRIMARY source of income. In plain English that means that literally MILLIONS of women who have devoted their lives to making the world a better place and caring for others along the way are now having to choose between food and essential medicine in their golden years.

    When we talk about this to groups of younger women, sometimes we’ll see eyes glaze over and we can almost feel the heat as thoughts meander through the air… “That’s not going to happen to me…” But here’s the stark reality: 80% of men die married & 80% of women die SINGLE. Most of us ladies will be the sole providers of our personal finances at some point in our lives. This is why we firmly believe that ALL women should have financial knowledge and strength. That said, we’ve chosen to focus our initial financial literacy advocacy efforts on women in their 20s, 30s, and 40s – because as women who have worked in the financial services industry we know firsthand that if you do a few simple things early on in those decades (save, invest & protect) you can avoid the fate that so many older women are currently suffering. From what we’ve seen, the reason so many women later in life are struggling today is that they didn’t get the necessary financial education early on. That’s why we’ve decided to make it our cause. We’re on a mission to create a MOVEMENT… to try and prevent this cycle from repeating with the next generation!”

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Hi, my name's Michelle Goodman and I've been freelancing since 1992. I'm author of My So-Called Freelance Life and The Anti 9-to-5 Guide. Read my full bio here.

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