How much can you save to invest?

For many, no day is complete without a trip to the neighborhood coffee shop. Many of us have been known to enjoy our triple nonfat caramel lattes, double espressos or half caffeinated mochas – whether we are shuttling our kids from school to the little league game, congregating with other parents to organize PTA functions or working on our company’s marketing plan.

But while the motivation for seeking out our daily cup of Joe varies, this daily ritual can come at a high price. What seems like a simple, inexpensive pleasure could add up to significant cash that goes nowhere except down the drain.

According to financial expert and New York Times Best Selling author, David Bach, the Latte Factor includes those unnecessary “little expenditures” that all of us find ourselves wasting money on every day. Bach says these little expenditures can add up to a lot of money over time, which we can invest elsewhere.

He maintains that the sooner you figure out your Latte Factor, the sooner you can start eliminating it. You’ll then be able to save more money, redirect it to savings and investments and get into a much stronger financial position. Bach argues that the impact of this can be life changing.

Think about it. Spending an average of $ 3.50 per day for a Latte adds up to $24.50 per week, $105.00 a month and $1260.00 per year. These figures could help you make big strides towards achieving important goals such as investing more in your 401(k) or saving to fund your children’s college education. And don’t forget about some of the fun family experiences that you could fund each year — all by simply foregoing your morning latte.

Why not take it a step further and use one year’s worth of savings and install your own high-tech machine? You can then enjoy a morning latte — all in the privacy of your own home. That’s what my frugal friends (let’s call them Tony and Maria) did. Now their kitchen includes a state-of-the art contraption – one that serves up lattes, espressos and just about any coffee that you’d like. For them, it provides a daily escape to the Italian countryside without the expense of airfare, hotel or driving to the nearest Starbucks for steamed milk and espresso in a little paper cup.

If you are interested in taking David Bach’s Latte Factor Challenge, a new iTunes app, the Latte Factor calculator, allows you to figure out what you could save and earn in potential interest over the course of one, five, 10 and up to 40 years if you invested those otherwise wasted dollars on a regular basis. After doing the tracking exercise that Bach recommends, you can use the calculator to view your total spend on an average basis ranging from daily, weekly and monthly. Next, after clicking “see savings,” you’ll be able to select a potential interest rate and discover what you could earn over time if you regularly invested the amount you’d normally spend on things like lattes, bottled water, eating out or other unnecessary expenditures.

For some, an aggressive approach to cutting out lattes and all the extra, nice-to-have items is top priority because it means gaining financial freedom sooner rather than later. For others, the occasional evening out, take-out pizza or latte is a small treat that can help keep the peace. It all comes down to achieving the right balance towards saving more than you spend — even if you indulge in a latte every now and then.

Coming Together On Family Finances

If you’ve found that talking about family finances with your spouse is difficult or completely uncomfortable, we have some suggestions that can help.  

Before doing anything, think about whether or not you and your spouse are on the same page in regards to how to budget money. Each of you is an individual, especially when it comes to your beliefs surrounding your finances. Are you a saver or a spender? What about your spouse? How were each of you raised to handle or talk about money? Addressing these issues is an important first step.    

The second step includes figuring out where you are going. How can money help you get there? Do you look at money as a tool to bring freedom and security? What type of lifestyle would each of you like to have? What is realistic, given your current income and goals?

How Much Comes In and How Much Goes Out?

To see where your money is actually going, we recommend that both of you get together and write down your monthly and weekly expenses on paper. List all details about what you buy and how much you spend on it.  

Then, see where you can shave costs. This is a budgeting basic that can give you some extra cash to put towards saving for a rainy day, college savings, your 401(k) or just good old fashioned family fun.

A good way to do this is to use a personal or home budgeting software program like Intuit Quicken or, if you operate a small business out of your house or apartment, Intuit QuickBooks.

“It is the responsibility of each person to watch their spending and talk about it,” says a Livermore, Calif. working mom of two – let’s call her Iris.

Iris’ husband – let’s call him Tom — a sales executive for a technology company, says budgeting is very difficult for him since their income varies. They don’t have a strict monthly budget, although they keep track of everything by using Quicken. He says he takes care of the recurring monthly bills and Iris is charged with purchasing what they need to run the household.

And Baby Makes Three

Becoming a parent is a huge life change. Initially, it will be about sleep deprivation. Then trips to Walgreens or Target suddenly trump a night out on the town. And finally, you’ll notice the cash coming out of your budget to fund kid oriented expenses like music lessons; gymnastics; day care, if both you and your spouse work; and perhaps even private school.

Becoming a savvy household budget planner is truly an important requirement that gets kicked into high gear when you make that transition to parenthood.  

Working as a Team

The best way to assure harmony in dealing with financial matters is to make sure you and your spouse are one when it comes to saving and spending.

Who likes to handle the finances? Oftentimes, it’s one or the other partner who would prefer to be in charge of this task. Do you trust your spouse to make good financial decisions, or do you feel the need to stay in control? Keep in mind that sometimes where you came from can greatly affect your outlook when it comes to this.

A Los Angeles Calif.-based stay-at-home mom — let’s call her Fran — remembers a time, during her childhood, when her parents were going through a financial hardship. This, she says, shaped her awareness of saving and spending. As an adult, it made her want to always “maintain control” of the family finances. Fran is responsible for managing the family finances. And she prefers it that way.

Fran’s husband would rather not deal with the finances. So he is happy to have her do it. Fran says they each have their own individual checking account and credit cards. They do have a joint savings account. However, each of them pays certain bills out of their own account. Accessing each others’ accounts can be a challenge, says Fran. But now that she has taken time-off from her career in telecommunications to stay at home with their two kids, she feels even more compelled to be in-charge of the family finances.

Mutual Respect Is the Name of the Game

In the best of all worlds, and with a little budgeting help from your partner, you’ll be able to create a plan of action that allows both of you to get what you want. That being said, if you still find yourself feuding with your spouse over the family budget, there are various techniques that you can use to help work things out.

According to an article by Denver, Colo.-based clinical psychologist, Susan Heitler, PhD, Conflict Resolution: Essential Skills for Couples and Their Counselors, “spouses who do not know the basic guidelines for sustaining healthy dialogue are likely to crash and injure each other like car drivers who do not know the basic rules of the road such as driving on the right and stopping at red lights.” Here are some techniques that she recommends couples consider implementing for basic conflict resolution:  

• Express initial positions
• Explore underlying concerns
• Create a solution set responsive to all the concerns of both participants 

Communication and cooperation are obviously vital to the success of this process. But most of all, it is important to approach the process with respect for your differing points of view. It’s no easy task. Budgeting is an ongoing process with many bumps along the way. The key lies in being flexible to make adjustments and navigate the curves that might lie ahead.

Building Your Emergency Fund

An emergency can happen at any time. A special fund that you create for an unforeseen circumstance like an unexpected job loss or illness will see your family through it – all the while preventing unnecessary debt and the associated finance charges that could be very easy to accumulate.

How Much Is Enough?

The answer depends on your individual situation and how much you spend. In Smart Women Finish Rich, David Bach recommends that his clients save three to 24 months of living expenses. He explains that the “right amount” is different for every individual and depends upon one’s own comfort level. Other experts like Suze Orman recommend at least eight months of your salary to pay for the mortgage, if you own a home, in addition to basic living expenses. Most experts agree that the size of your emergency fund also depends upon how easily it would be to replace your current income if you were to lose your job, considering your current salary and position. Finally, one thing to remember is that once you’ve accomplished your goal of creating this fund, no matter how much you have saved, you’ll have less stress and the peace-of-mind to focus on other priorities like saving for retirement or your child’s college education.

What if I Have Credit Card Debt?

Whittling down unsecured debt should always be your first priority when it comes to your finances. So, if you have credit card debt, you should try to pay that off first. At the same time, however, it is important to try and save at least a little each month. One strategy to consider is to save the first $1000 towards your emergency fund. Then, pay down your debt until you are free and clear of it. Go back to saving for a rainy day after you’ve accomplished this goal.

Where Do I Start?

You can begin saving towards an emergency fund with as little as $5, $10 or $25. Before you figure out how much you can save, calculate your basic living expenses and make sure you have enough to meet them. A high interest yielding money market account is a good place to begin depositing your money. With a three-month bonus rate of 2.25 percent and an Annual Percentage Yield (APY) of 1.51 percent, EverBank’s Yield Pledge Money Market offers a high yield, FDIC insured account. Another good option is ING Direct’s Orange Savings account with an APY of 1.30 percent and no under the limit fees.

Out of Sight, Out of Mind

If you are tempted to spend your savings, put it in an account that is hard to get to. My friend from Los Angeles (let’s call her Fran) has kept a bank account that she opened when she was single, even though it was acquired by another institution in Arizona and moved there after its purchase. Now that Fran is married and has two kids, she uses this account to save her emergency dollars.  “It helps that I can’t get to it easily — I generally can only make deposits or withdrawals from it by mail.”

Cut Your Budget to Save More

To ensure that you are saving the optimum amount towards your emergency fund, see where you can cut your expenses. Here are a few Ideas recommended by some parents we talked to.

Opt for a Pay-as-You-Go Cell Phone Plan: Do you really need all those rollover minutes? Page Plus Cellular offers a pre-paid cell phone plan. At $29.99 a month, Talk n Text 1200 with 1200 minutes, 1200 text/MMS messages and 50 MB of data offers a cost-effective plan that serves most people’s needs. Unless you make a lot of international calls or go over your allotted voice usage, this plan can help put more cash in your savings account.

Stash Away Cash: After you pay all your expenses and deposited whatever you’ve decided to put away monthly, take the remaining cash out of your checking account and sock it away in your drawer. Use this cash to pay for groceries and anything else you need for your household.

Comparison Shop: To get the best deal, seek out at least three bids for items like auto and home insurance. You might be able to save hundreds of dollars by choosing the least expensive plan.

Forgo the Daily Latte: When you do the math, you’ll be amazed to realize that the $3.50 or more a day that you save by skipping the trip to Starbucks can add up to over $1200 per year. Why not save it for a rainy day? If you must, you can still treat yourself. You’ll still do okay by limiting yourself to one Latte per month.

Refinance Your House: If you are a home owner that bought before the market’s peak, there might be enough value left in your home to refinance into a lower monthly housing payment. Interest rates are still low. As long as you qualify with an acceptable credit score and DTI ratio, this option could help you save significantly on your monthly mortgage payment.

Sell Your Car: If you have an extra car that you own outright, why not unload the one with the car payment? Most large metropolitan areas are easily accessible by public transportation.  And there is always the option of carpooling. Alternatively, if you have a new car, you can downgrade for a cheaper, used model.

Curl Up to a DVD and Meal at Home: Stay-in instead of dining out. It’s more economical and generally healthier – allowing you to better control the quality of food you eat. And if you have an account with a company like Netflix, it’s  affordable and convenient to keep up with the latest blockbusters.

Remember, a penny saved is a penny earned. And in this economy, being prepared is a very good thing.

Pros:

• IT’S SO MUCH EASIER: By consolidating multiple 401(k) accounts into a single IRA, you eliminate the hassle of having to coordinate separate accounts with different investment options, administrative rules, passwords, etc.
• YOU’LL DO BETTER: 401(k) accounts generally have very limited investment options. Many times they have high fees and do not offer sufficient breadth to allow for diversification. In an IRA, you can just about invest in anything including mutual funds, stocks, and ETFs.
• SAVE ON TAXES: With a direct rollover, there are no tax implications. And your assets’ tax-deferred status remains unchanged. You’ll pay income tax when you withdraw the funds.

Cons:

• While you can take a loan against some Employer sponsored 401(k)’s, you can’t take one out on an IRA. But hey, in most cases you shouldn’t do that anyway.

Four Simple Steps:

1. Call Your Favorite Brokerage Firm. To make life easier, pick one that already holds your other accounts.
2. Ask to Speak with an IRA Rollover Specialist who can help you with every step, from opening your new IRA rollover account to calling your current 401(k) custodian to initiate the process. He or she will also guide you through the paperwork. Both Schwab and Fidelity have very helpful specialists. How do they make money? Brokerage firms earn commissions when you trade and, if you let them, fees for managing your money.
3. Chose a Direct Rollover. The specialist will ask whether you’ve reviewed the IRS disclosure rules. (The government requires every brokerage to do this). After you say yes, the specialist will initiate the direct rollover and send you a check (made out to your brokerage of choice with you as the beneficiary), which should arrive within 10 business days.  Take the check and send it in to your brokerage.
4. Invest It Wisely. Once your account has been funded, use an appropriate strategy to invest it. Choose the right asset allocation.

Tip of the Day:

If you rollover your 401(k) to Charles Schwab right now, you can create a diversified asset allocation using the firm’s six new ETF’s. These ETFs have very low fees and Schwab currently does not charge commissions on them. So your rollover will be totally FREE.

Do it today!  We just helped one of our clients through this process – it took only a half hour.  It will relieve anxiety and stress.  Really!

It’s our kids that get this the most. Let’s not forget the sheer overwhelm that comes from opening all those presents — many of which get used once and then tossed aside. There is a simple solution. Enlist the support of your family and friends in saving towards something more meaningful.

Give the Gift of a College Education

Freshman Fund allows parents to open a college savings fund and invite anyone to contribute to it. Ugift, an online gifting service from Upromise Investments, also lets 529 plan owners invite others in their social network to contribute to their account.

Help Kids Reach Their Goals

With SmartyPig, parents can open an account for their kids, help them set concrete goals, and then watch them save to achieve them. Of course, parents can invite friends and family to help out. Finally, the site offers a number of redemption options.

Establish a Family Fun Savings Account

Opening a savings account for the purpose of sharing fun, family experiences is another terrific alternative to the run-of-the-mill holiday gift. Create excitement by making a list of all the great things you plan to do with the funds. Then, encourage everyone in your clan to contribute their allowances and spare change to the account. Bank of America Keep the Change Savings Program offers one good way to do this by rounding up purchases made with your Bank of America Check Card and then transferring the difference from your checking to your savings account.

In this economy, a holiday gift is a terrible thing to waste. The gift of savings today gives back tomorrow. And, at the same time, reduces the number of ugly sweaters under your tree! Sorry Grandma.

Just how are real parents doing it these days? What college savings tactics are they using? CloudFi asked three families. They wanted to share their stories, but not their names. So we changed them. Here are their stories.

A Balancing Act

Sabrina and Samuel are in their mid thirties. Sabrina is a software engineer for a telecommunications company and Samuel is a software engineering manager at a Silicon Valley technology company. They live in San Ramon, a San Francisco Bay Area suburb. Their six-year old daughter, Rebecca, attends the local elementary school.

For years, they have saved money into an employer sponsored 401(k) plan. And, when their daughter was born, they purchased a tax deferred, cash value life insurance policy. They plan to use this cash, tax-free, to help fund their daughter’s college education. And they would also like to start a college savings plan.

Recently, they purchased a home. So, while they haven’t been able to put money away for college, they plan to do so as soon as they are able. Sabrina believes it is now more important to prioritize saving for college above saving for their retirement. Sabrina and Samuel’s biggest concerns include planning for ever increasing college costs and tapping into advice that they can trust. They hope that whatever plan they embark upon will be safe and secure.

MYTH: All 529 Plans are made up of stocks and mutual funds, involving some risk.

FACT: You can fund a 529 plan that is made-up of CDs, money markets or savings bonds, which involve little or no risk. Yet, unlike a traditional savings or taxable brokerage account, these type of 529 plans allow you to use the money, tax-free, for college funding purposes.

The Best Laid Plans

Ronald and Tamara live in Westborough, an affluent suburb of Western Massachusetts. Now a full-time writer, Ronald is a former director of grant development at a local community college. Tamara is a science teacher at the local high school. They have three boys. The eldest, Christopher, is 13. The twins, Edward and Noah, are 11.

Ronald and Tamara started saving for college in early 2000 when Ronald’s father encouraged them to invest in the first Massachusetts-based 529 plan that was offered by Fidelity. Ronald and Tamara were investing $50 every month into the plan until recently when Ronald left his job to pursue his newly formed freelance writing business.

Their portfolio consists of a variety of mutual funds. With a blend of conservative and aggressive funds, they are modest investors.

Soon, Christopher will turn 14. As the college years fast approach, Ronald and Tamara realize that they must step-up their college saving efforts. “We have to come up with a lot more money,” says Ronald. He would like his boys to have the opportunity to attend a university in the Midwest, like Northwestern, or one in the Southeast, like Duke.

For Ronald and Tamara, saving for college is secondary to saving for retirement. They worry about having enough left over to be able to save for college.

MYTH: Private Schools are out of reach unless you have saved a lot of money.

FACT: Many private colleges and universities offer more financial aid than their public, state-run counterparts. This sometimes means that they can be more affordable than state-run schools.

Thinking about Tomorrow

Clare and Bob live in Pleasant Hill, another suburb of the San Francisco Bay Area. This is the second marriage for both of them. Clare is a senior account executive for an advertising specialty company. She has a 15-year old daughter, Maureen, from her first marriage. Bob works as a project manager in the oil industry. He has a daughter, Karen, from his first marriage. Karen is now a senior at California State University, Chico.

When Maureen was six or seven, Clare opened a custodial IRA through Morgan Stanley. She selected this type of account because 529 plans did not exist when Maureen was younger.

And she likes the flexibility of being able to use the funds for other purposes, just in case Maureen chooses not to go to college in the U.S. Currently, she saves around $200 per month into that account.

If Maureen turns 18 and isn’t sure what career she wants to pursue, Clare expects Maureen to take all her general education requirements at a local community college. Then she can transfer to complete her bachelor’s degree at a four-year institution such as UC Berkeley.

Sending Maureen to a community college first will give Clare more time to save. And, if Maureen must work during the summer months to contribute somewhat, Clare thinks that is okay. “We could put more away. But, we believe there is nothing wrong with allowing a child to make her own way,” says Clare. “Our retirement is first and foremost.”

MYTH: Some children are not able to receive financial aid because their parents earn too much.

FACT: There are a wide-variety of financial aid options available, including grants, work-earning programs, scholarships and loans. Most American families qualify for some financial aid. Since there is not a precise cutoff for financial aid, it is a big mistake not to apply.

We’ve received quite a few questions regarding where do I park this money. With rates so low, folks are reluctant to put it in a savings account or a money market fund. You can put part of your rainy day fund into bank certificate of deposits and even short-term bond funds. These portfolios consists of corporate and government bonds that have average maturities of just under three years. One advantage of these funds is that these days people are increasingly concerned that the Fed will eventually raise the currently historically low interest rates. As rates rise, bond prices will fall, and so will value of bond funds. Short-term bond funds are less vulnerable to rate changes than those with longer maturities.

For example, try Vanguard Short-Term Investment Grade with an average maturity of 2.6 years. As with most Vanguard funds, its characteristic low fees will not eat into your returns. Remember, a fund with 2% fee with a 4% annual return will net your 2% effective return. Go with low cost.

Pros

• Tax-Deferred: Save on taxes now.  You will need to pay for it later though.  Your tax rate now will most likely be higher than during retirement.   If this is true, you’ll end up paying less in taxes and have more for retirement.
• Automated Savings:  The savings come out of your paycheck so you never see it and it actually gets saved rather than spent.
• You Can Save A Lot:  The amount you can save is decent.  In 2009 it is $16,500 and it tends to rise.
• Free Money  (Sometimes):  Your employer may match your contribution.  In this case, it is free money until you hit the contribution limit.  ie.  If you employer has a 50% match up to $5,000,  and you contribute $5,000, they will add another $2,500 for a total of $7,500.  You should aim to get the maximum employer match whenever possible.

Cons

• You Do Pay Taxes Eventually:  In some situations, your tax rate now will likely be lower than during retirement.  This is more likely to be true if you are…
  • Early in your Career:   Your income is likely to grow by 2-3 times in the next 20-30 years.
  • Lots of Income Tax Deductions:  If you claim lots of income tax deductions due to a house or other reason that you don’t expect to have during retirement, your tax rate now may be lower than in retirement.
• Fees:  Some plans charge an administrative fee of 0.5% on to of mutual fund expenses of 0.7%.  This can drag down your long term returns substantially.
• Investment Choices:  Most plans offer 10-12 investment options.  The choices may not match your investment preferences or they may charge higher than normal expenses fees.
• Mandatory Distributions:   When you are retired, you will be required to withdraw funds whether you need them or not and regardless of your tax situation.

Your Alternatives

So you might ask where else can you save that might be better based on the circumstances?  If you think you’re in a low tax rate now as compared to when you retire,  here are some options.

• Roth IRA:  So you can pay your taxes later with a 401K or pay them now with a Roth IRA (Wikipedia).  You need to earn less than $95,000 if you are single and $150,000 if you are married.  Otherwise, anyone can open this account at a brokerage and contribute up to $5,000 per year.
• Roth 401K:  (Wikipedia) This works similar to a 401K except you put funds in after you’ve paid taxes on them.  Then you never pay taxes again.

If you self-employed or your employer doesn’t offer a 401k, you do have some other options such as a traditional, SIMPLE or SEP IRA (Wikipedia).

Instead, we should save by making it a fixed monthly expense, just like your rent.  Here are some easy to follow steps on how to do it.

1. Open a High-Yield Savings Account

If you don’t already have a savings account that pays at least 1.5% you should consider opening an account at one of the following FDIC-insured banks.

• SmartyPig: 2.01%.  No fees and no minimum.  They have a goal-saver tool that automates your savings for you.
• Dollar Savings Direct:  1.60%.  No fees and a $1,000 minimum.  Online branch of a NY-based bank called Emigrant Savings Bank.
• Ally Savings: 1.50%.  No fees and no minimum.  This is the re-branded GMAC bank.

Rates updated on November 10, 2009.

2. Figure out how much you can save regularly

A decent estimate of how much you can save in the short-term can be calculated with the following formula.

Potential Savings = Income – Fixed Expenses – (80% X Variable Expenses)

To get an estimate of your income and expenses, the following online money management services can aggregate all your transactions across multiple bank accounts and give you a report on how much you spend each month.  It takes about 15-20 minutes.

• QuickenOnline - If you use TurboTax, you’ll find this service familiar.  It’s offered by the same company.
• Buxfer - Concerned about giving someone your banking password.  They have a solution to avoid that.
• Wesabe - They have a Cutback tool that suggests easy ways to cut costs.

It’s important to start saving right away, so go ahead and start with $100 per month while you do the calculations.

3. Set-Up an Automated Transfer

Each of the online banks listed above have the abilty to automatically transfer funds on a scheduled basis (e.g. Dollar Savings).  Your checking account should be able to transfer funds into your online savings account.  You’ll need to take the following steps to get this set-up.

• Link your online savings account to your checking account.  You’ll need some numbers from your checkbook. It typically takes a few minutes.
• Set-up a recurring transfer with a date that is 3-4 days after the date that you normally receive your paycheck.  If you don’t have direct deposit, you may want to give yourself a 4-6 day buffer.
• Watch your savings grow and smile!