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2006 Makeover, Step #1: Get your accounts in order

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Last week I wrote an article about getting your finances organized for 2006: I’m going to kick some personal-finance ass–yours.

Today we’re going to start 2006 off by getting your money organized. Here’s the deal: We’ll begin step-by-step, starting with your spending (where are you spending money?), getting your accounts straightened out (are you paying fees?), and getting ready to divide your money into different buckets (saving, investing, etc).

Getting your budget stuff will be hard, but it will be worth it. Once you do it for the first time, it’s infinitely easier afterwards.

Then, in the next few weeks, we’ll get into the growth mode, where you can take your discretionary money and start investing it. I’ll help you figure out what kind of investment vehicles make sense (stocks, bonds, retirement accounts, etc) depending on your situation.

Along the way, I hope you add comments to these posts, asking questions and telling us what other personal-finance stories you’ve heard about from your friends, etc. The cool thing is that everyone can see and learn from it.

* * *

What to do by next Tuesday, January 17

1. Get all your investable money in one place (3 hours)
First, I want you to first figure out exactly how much you have to invest. This is money you want to put away for the short-term (1-3 years, maybe for a house or car), and money you don’t need for a long time (5+ years). Now, one of the biggest barriers to getting started is having money in 15 different places. You should also get this in one account so that it’s easy to reach. (Note: If your money is already in some place like a mutual fund, please don’t sell it just so you can get it in one place. You would think I wouldn’t have to say that, but…)

If you don’t think investing is important, just get your money in one place anyway. I’ll show you why it’s worth your time a little later.

Bottom line: Get all your investable money in one place.

2. Figure out how much you’re spending per week (4 hours)
Second, I want you to understand how much you’re spending per week–and what you’re spending it on. This is hard. If you already have a budget in Quicken/Money or something else, great! It’s just a few clicks to get the info. But since 99.99% of people don’t, you’ll have to reconstruct what you spent in December.

Here’s how to do it:

  • Write down your current income.
  • Write down what you currently spend in different categories like going out, clothes, food, car insurance, gas, etc. Keep it simple: Just include the stuff you spend money on, have a “Miscellaneous” category for stuff you don’t account for, and if you don’t know about your taxes, leave it blank. I have about 10 categories total. Here’s a sample budget.
  • Write down what you want to be spending per week in these categories.
  • Start crying.

Don’t worry. We’ll fix that.

If anyone comes up with a cool Excel file for this, send it to me and I’ll post it here. Here are the best 2 templates: Budget spreadsheet 1& Budget spreadsheet 2. (Thanks to Wayne and Kiran; FYI the 1st spreadsheet is from the MS Office template page).

3. Make sure you’re not paying fees on your bank account or credit card (1 hour)

  • Credit cards: Call your credit-card company and make sure you have a card with no annual fee. (The only reason you should have a fee is that the cost of $65 or whatever is outweighed by the benefits you get, like tons of free miles, etc. This is hardly ever the case with the spending habits of our age group.) If your card has a fee, get a no-fee credit card. More information in my previous article, All About Credit Cards.
  • Bank accounts: Call your bank and make sure you’re not paying any fees. If you’re a student, tell them that and politely but firmly ask to be switched to a no-fee, no-minimum account. If the bank says they can’t offer that, use my no-fee, no-minimum strategy.

4. Get your credit report. It’s free. (30 minutes)
Because of a new law, you’re entitled to get your free credit report once a year. Your credit report will show you what accounts you have open and your credit history. Check this for errors. They happen a lot and are very very bad. Get your credit report here: http://www.AnnualCreditReport.com.

(Note: This is not your credit score, which costs $30. I strongly encourage you to get your credit score, even though it costs a little money. This will tell you exactly what creditors are using to evaluate your loans and interest rates. Get your credit score here: http://www.transunion.com.)

5. Open a high-interest bank account (30 minutes)
Your bank’s interest rate is probably about 0.5% APY, which sucks. Open a high-interest savings account, which will get you a better rate. The two best ones are http://www.emigrantdirect.com and Capital One 360 (formerly ING Direct). Both are no-minimum and no-fee savings accounts. You transfer your money online and it’s safe.

FYI, here’s how I set up my financial accounts.

* * *

That will take us through to next Tuesday. I posted this today so you’d have 4 business days to get this stuff done. If you have questions about any of this stuff, post them here and I’ll try to help so everyone else can see.

Next week: We’ll work through the problems you found when doing steps 1-5. Then we’ll start moving forward on how to save better than 99% of your peers, we’ll start talking about which investment accounts to open, and I’ll show you why investing even a small amount–even $5 per day–can give you a great return.

Tell your friends: Please tell other people about this! I bet you have 5904326423 friends who need to manage their money, starting today. Point them to http://www.iwillteachyoutoberich.com

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51 Comments

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  1. I’m a non-resident alien in the US so, as far as I can tell, I’m not allowed to open any of those high interest accounts (I have one at home paying 5.4%, but I doubt it’s worth converting currencies). Anyone know of a loophole/non-resident friendly high interest account?

    I also just got a credit card in the last 3 months; is it worth getting a credit report already?

  2. Hi Ramit, Excellent start but I dont agree with your 1st suggestion. It runs contrary to the often repeated saying ‘Dont put all your eggs in one basket’. I also dont advocate having 15 accounts. So long as you know where you have your money invested and can reach them immediately, you are in good shape.

  3. One more comment that I wanted to add to my previous one…. Throw your credit cards that dont offer any cash back into a piggy bank (yes, piggy bank. Cancelling them might hurt your credit history) and get one of those credit Cards like Citi Dividend Platinum Select etc. This card offers 5% cash back on gas, groceries and pharmacy. On all other purchases you get 1% cash back upto a max of $300 (I think) per year. Write to me if you need a link to this cards application.

  4. How do you dispute things in your credit report?

    I have several things to dispute.

  5. Sripathi: I disagree about the eggs-in-one-basket thing. First of all, that’s meant to diversify risk.

    That’s nice if you have over 100,000 in your bank account (FDIC insurance), but most of the readers on this site don’t.

    With that said,I’m encouraging to get their investable money in one bank account temporarily–so they can see everything they have and then move it to the right place.

    For me, having buckets of different money is very useful. It’s just hard to get started if your money is all over the place.

    Adam: You have to write to the credit reporting agency and the creditor (loan, credit card, etc) itself. Here’s a link with more information:
    http://www.ftc.gov/bcp/conline/pubs/credit/crdtdis.htm

  6. HSBCdirect.com wouldn’t be a bad pick too. 4.25%, same old deal as ING, emigrant, with no minimum and fees.

  7. You should actually get your credit scores from myfico.com. Transunion can only give their own credit score out. There are 3 credit bureaus that each have their own scores and reports. Also myfico is run by fair-isaacs which started the whole fico business

    It’s a bit more expensive but you get all 3 credit reports AND 3 credit scores

  8. Immunokid – if you can open a PayPal account you can earn 4.26% (this week’s rate) by putting your balance in their money market fund:

    http://www.paypal.com/cgi-bin/webscr?cmd=_upgrade-interest-marcom&outside=1

    I don’t know why everyone gets so excited about ING and Emigrant…

  9. MyFico.com is good too. Or you can just go to any of the 3 reporting agencies and get a 3-in-1 report (they sell them in a bundle, or individually if you prefer).

  10. Maybe cuz of sites like this http://paypalsucks.com/

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