Posted by Matt and Paul
Recently we were asked by a good friend of ours to go over their finances and see what we thought.
In exchange for our advice, our friend said that we could post any lessons learned to our blog. So here goes:
Generally our friend was a breeze to Frugalize, mostly because they were already there. Here are some of the highlights we saw:
-They were totally aware of their monthly expenses. They couldn't quote their monthly expenses for car insurance from memory, but they were able to put their hand on the right document within minutes. The key point here is that THEY KNEW WHERE THEIR MONEY WAS GOING.
-They had a great emergency fund in place.
-They had medical insurance.
-They were saving.
-They had zero credit card debt.
-They were living within their means (which you could probably assume from the fact that they had no credit card debt and had been able to save).
This person had the kind of finances that I HOPE every American does, but everything I read suggests that they are by far the exception.
So to be honest we could have stopped at this point and said to our friend that all was good, but we kept looking for small details that might be helpful. Here's what we found:
1) Since they drive an older car, and plan to drive it into the ground, we suggested that they reevaluate their car insurance, and possibly drop their comprehensive and collision coverage (see previous article from Matt: The diminishing returns of comprehensive auto insurance coverage ). If they didn't want to drop the coverage entirely we suggested that they at least increase the deductibles to save some money on their policy.
2) They had a universal life insurance policy that had a death benefit of $15k and cost them about $90 a year. We suggested that they cash out the policy. If they wanted to have life insurance then that's fine, but since they were single and had no kids we didn't see the need to pay for life insurance. The way the policy is written, if something tragic did happen to our friend, their parents and siblings would split the $15000, which is a pointlessly small amount in relation to the rest of their estate.
3) Since their income varies somewhat we suggested that they increase their rainy day fund.
4) We helped them clarify their savings goals. They were doing a great job of saving so we just had a quick discussion about what they were saving for. The rainy day fund and retirement came up immediately (which is great), and they were also interested in saving up for the purchase of a new car someday. We suggested that they open a dedicated "new car" savings account. Separate savings accounts facilitates tracking progress toward each goal.
5) We suggested that our friend could simplify by getting rid of some credit cards that they never use (keeping a few for convenience). It's possible that this could negatively impact their credit score, but their credit was already good so we felt it would not be a problem.
One final thing that we learned from this experience is that good intentions are important, but thinking about and talking about personal finance are part of the equation too. Not everyone finds personal finance as interesting as Paul and Matt do, obviously, but it seems that the American public's reluctance to discuss personal finance could really be holding us all back. We (Paul and Matt) found it immensely valuable to be able to bounce ideas off of each other and I hope our friend feels that they have gained from joining the conversation as well.
Recently we were asked by a good friend of ours to go over their finances and see what we thought.
In exchange for our advice, our friend said that we could post any lessons learned to our blog. So here goes:
Generally our friend was a breeze to Frugalize, mostly because they were already there. Here are some of the highlights we saw:
-They were totally aware of their monthly expenses. They couldn't quote their monthly expenses for car insurance from memory, but they were able to put their hand on the right document within minutes. The key point here is that THEY KNEW WHERE THEIR MONEY WAS GOING.
-They had a great emergency fund in place.
-They had medical insurance.
-They were saving.
-They had zero credit card debt.
-They were living within their means (which you could probably assume from the fact that they had no credit card debt and had been able to save).
This person had the kind of finances that I HOPE every American does, but everything I read suggests that they are by far the exception.
So to be honest we could have stopped at this point and said to our friend that all was good, but we kept looking for small details that might be helpful. Here's what we found:
1) Since they drive an older car, and plan to drive it into the ground, we suggested that they reevaluate their car insurance, and possibly drop their comprehensive and collision coverage (see previous article from Matt: The diminishing returns of comprehensive auto insurance coverage ). If they didn't want to drop the coverage entirely we suggested that they at least increase the deductibles to save some money on their policy.
2) They had a universal life insurance policy that had a death benefit of $15k and cost them about $90 a year. We suggested that they cash out the policy. If they wanted to have life insurance then that's fine, but since they were single and had no kids we didn't see the need to pay for life insurance. The way the policy is written, if something tragic did happen to our friend, their parents and siblings would split the $15000, which is a pointlessly small amount in relation to the rest of their estate.
3) Since their income varies somewhat we suggested that they increase their rainy day fund.
4) We helped them clarify their savings goals. They were doing a great job of saving so we just had a quick discussion about what they were saving for. The rainy day fund and retirement came up immediately (which is great), and they were also interested in saving up for the purchase of a new car someday. We suggested that they open a dedicated "new car" savings account. Separate savings accounts facilitates tracking progress toward each goal.
5) We suggested that our friend could simplify by getting rid of some credit cards that they never use (keeping a few for convenience). It's possible that this could negatively impact their credit score, but their credit was already good so we felt it would not be a problem.
One final thing that we learned from this experience is that good intentions are important, but thinking about and talking about personal finance are part of the equation too. Not everyone finds personal finance as interesting as Paul and Matt do, obviously, but it seems that the American public's reluctance to discuss personal finance could really be holding us all back. We (Paul and Matt) found it immensely valuable to be able to bounce ideas off of each other and I hope our friend feels that they have gained from joining the conversation as well.
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