Dealing with Your New File

Now that you've completed those five zippy steps, this next exercise requires a more full-bodied vino, and a little more oomph from you. (If you haven't read my post from yesterday, "Five Quick Steps" do that first -- it'll bring you up to speed.) Since it's getting cold out there -- unless you're one of the lucky few to live by a warm, sunny beach, I'm recommending Syrah. It's typically packed with luscious fruit and balanced by peppery spice -- just like you on a hot date!

Start with the easiest account, checking. If you don't bank online, now is the time to set that up with your provider. By the way, if you have a parent or husband in the military, the bank of choice is USAA -- they are phenomenal, and best of all, you can put all of your eggs in their basket. They offer everything from checking to renter's insurance (more on that later) to bling! Here are some initial questions to ask yourself:

1. Do I bank online (for those who haven't been reading carefully)? And is my password secure -- i.e., not easily figured out?

2. Does my company offer direct deposit of my hard-earned paycheck and if so, am I using it?

3. Am I paying myself and my creditors first? (This means you buy the lattes after accounting for all of your bills and putting some aside.)

4. Do I routinely overdraw my checking account and incur fees? If so, STOP! Go back to question number three.

There is no one answer for how much should be sitting pretty in your checking account, but it should be enough to pay your bills and provide a cushion. I actually keep relatively little in my checking for two reasons: 1) I almost never use a credit card and instead pay with my debit card using the "credit" option because this keeps me from over-spending; and 2) I'd rather be getting a higher rate of return with any leftover cash. And that ain't in checking! (Pretty good for someone who at one point had over $13k of credit card debt due to going out, laser hair removal treatments, buying a car I couldn't afford at the time, etc.)

Reward thyself with a sip or two of Syrah! We're moving onto your savings account -- you do have one, don't you?!! (Now is not the time to protest that your live in the most expensive city and don't have anything left to save, as I won't buy it. Ever. If you went to Starbucks this month, you can start a savings account.) Set one up with that handy online banking system you've created -- even if it's just $25 a month. This is the beginning of your new emergency fund! While not quite as exciting as Mr. Choo's newest footwear, it'll help you out if you get in a bind, like the time I almost burned my house down on a "date". Sh*t does happen, so think of this as your SDH account if you don't like the emergency nomenclature. Even if you're not dumb enough to burn down your apartment, I could be your new next door neighbor :)

The reasoning behind the SDH account/ emergency fund is that you don't want to turn to credit or have to call your parents if you need cash in a bind. A lot of finance gurus say you should have 6 months of living expenses racked up in there (this is the point where I'm running a "do as I say, not as I do" play). I might argue that 3-4 is sufficient because there are other options if the SDH happens, but the point is that you shouldn't be coasting paycheck to paycheck. If you're staring at that bottle of wine like you want to throw it at me, now is the time to seriously consider removing the credit card from your wallet. I probably don't even know you. (Or wait, since my mother and closest friends are the only ones reading this, I probably owe you dry cleaning since last time I saw you, I spilled wine on you! To rectify the problem, ring me and I'll walk you through your SDH set up.)

Some of you have the opposite issue -- a wad of cash in a savings account. I'll deal with y'all now. Keeping a huge amount of cash in a savings account (more than 6 months of living expenses unless you're about to put a down payment on a house or make another huge purchase in cash) is akin to keeping it under your mattress. So wipe that smug grin off your face and behold the power of time value of money, especially if you aren't maxing your 401(k). Basically, you want to be beating inflation and in a savings account, that is barely, if at all occurring. The good news is, this is easy to fix!

Down to investing business. Since you're a HMW, you are likely aware of your 401(k), the tax-deferred (as in you don't pay until you withdraw when you're gray) retirement account. If your company offers one and you're not contributing, put that glass down, cork the bottle, and come back stone-cold sober. There are a myriad of reasons to contribute, and almost none not to do so. First, your company may offer a match as a percentage of your salary, a dollar figure or another metric. This is free money! The only "catch" is that you have to contribute (and you might need to be there for a certain amount of time for this money to vest or become yours). Second, Social Security distributions will absolutely not give you the lifestyle to which you've become accustomed. Third, the prince on a white horse is not going to come rescue you; retirement is no longer the (future) man's problem. Even if you're married, there's nothing hotter than an independent HMW with a phat investment account. DO NOT give me any "my man deals with that stuff" -- you wouldn't be reading this if that were the case. And you definitely aren't one of my friends.

So here's what you need to do:
1. Contribute the maximum amount possible. This may mean $25 a pay period (like me right out of college or if you're saving the world in a low-paying non-profit job), or it might be the full $15,500 per year ($20,500 if you're over 50).

2. Commit to raising this level of contribution annually until you reach the summit (which may increase in the future). I started at 5% three years ago, went to 10% last year, and this year will be the proud owner of a fully contributed (and matched) 401(k). Point being, it may take time to get there, but you should get on this plan like you hit the treadmill after a pint of ice cream weekend! One of the best things about "maxing" is lowering your net income and therefore the amount you owe in taxes. Given that we're HMW, a good number of us are in danger of the Alternative Minimum Tax (more on that later) and lowering our net income is one of the best ways to avoid this ridiculous legislation. Make this escalating contribution scheme slide down more easily by upping it each time you get a raise.

3. Put your dough in the right places! That means creating a diversified portfolio -- you don't own all black pants do you? A diversified portfolio in the finance sense typically means getting exposure to different types of asset classes, like stocks (call them "equities" to sound really cool among finance dorks), bonds (ditto so say "fixed income") and cash-like investments ("money market funds"). I, however, beg to differ on this point. (A lot of you are going to disagree with me, but I'm not taking any flack until you read Stocks for the Long Run by Jeremy Siegel.) If your time horizon is over 20 years -- and I don't mean the date you're going to retire, I mean the date you're going to expire, you need to be in 100% stocks. Yes. Take a deep breath. Throw in a down dog if you must. Here's why: in every rolling 20 year period except for one since the Civil War, a diverse basket of stocks has beaten bonds. Sure, it's a wilder roller coaster ride, but who has time to check her accounts between trips and dates anyway?

4. Look at your 401(k)'s array of choices. Now that we're tossing anything with "fixed" or "target" in the title (these have bonds), it gets a lot easier. Ideally, your company offers stock index funds since they're cheaper! If you're not that lucky, choose a few funds invested in equities with the lowest expenses (listed on the fund sheet). You're aiming to have about 50% in the good ole USofA and the other 50% in the rest of the world. (I have 10% in emerging markets and about 40% in international stocks to make that 50%.)

Whew. Pour another glass, we're almost there. If you happen to be a HMW with cash left over post maxing your 401(k), you'll want to start either a Roth IRA or a traditional IRA, depending on your income level. Still awash in cash? Time to set up or deal with your taxable investment account. In the spirit of brevity and me actually getting to work (this is a blog so I'll be back to expand on all of it), you want to focus your taxable account similarly to how you set up your 401(k). And if your 401(k) doesn't offer international stocks or emerging markets, this is your golden opportunity to invest in the rest of the world -- the US has less than half of the world's stocks and you wouldn't want to miss out on Beamer (BMW), LVMH, Nestle (chocolate!), Nintendo, and any of the other fine companies earning cash across the oceans. This is pretty simple, really:

1. 50% in the S&P 500 Index
2. 40% in MSCI World Index
3. 10% in Emerging Markets Index

By the way, a nice hard cheese -- perhaps Gouda, would go well with your Syrah. You'll need something to soak all of it up after finishing this article!