Hemorrhaging from Your Capillaries

Over the past 30 years I have given many presentations about money. As a way to describe massive losses of money from small expenditures I coined the phrase "hemorrhaging from your capillaries". Capillaries are tiny blood vessels and it is hard to imagine how you could bleed to death but it's the image I want to create of losing significant cash through passive, unconscious spending on seemingly insignificant items.

Folks meet with me wanting to save for a house down payment, college education or retirement BUT they are living paycheck to paycheck and cannot find those dollars to put towards their goals. To help, I suggest they practice "conscious spending". For one month to pay close attention to where their money goes.

Here are a few suggestion where you might find hidden savings:

- If you take $200 or $500 from your ATM can you account for how you spent that money? Keep the ATM receipt and record your spending on the back of it. Any surprises?

- How much do you spend on lunch out each week? Brown bag it once or twice. Leftovers usually taste better.

- Add up the cost of your daily Starbucks latte. Maybe go to Starbucks MWF and visit MacDonald's TTh.

- How many magazines come into your home? Do you make time to read them all? Cancel one.

- When you go out to dinner and the cute waitress or waiter suggests appetizers, specials, desserts do you succumb and run up a bill that surprises you? Try using cash instead of your credit card to limit how much you spend.

- Does your bank charge you a monthly fee for a checking account? Maybe you qualify for a simpler one with fewer components and no fee.

- Have you added up what you paid in credit card interest? Paying down those cards could free up hundreds of dollars.

I'm not suggesting you deprive yourself; I am recommending that you PAY ATTENTION. Before you can find those dollars to fund your dreams, you must become aware of how you spend your money to avoid hemorrhaging from your capillaries.

Be $ Smart - track your incidental spending to find money to save. Then take those savings and invest them!

Dual Purpose - Roth IRA

Saving for retirement can be tough while you are trying to build an emergency fund, pay off student loans, car loans and other expenses. But we all know the importance of saving early. The earlier you start saving for retirement, the faster your money will compound and grow.

Here is where a Roth IRA (Individual Retirement Account) can serve two functions. The principal (original money invested) may be withdrawn without penalty and taxes at any time making that money available for emergencies. (It's the earnings - dividends and interest - that would be subject to taxes and penalty if you are under 59 1/2.)

Aim for three months emergency fund in a savings account and three months in your Roth.

How to open a Roth IRA:
You may open an IRA at a bank, credit union, brokerage house (e.g. Fidelity, Vanguard, Merrill Lynch) in person or online.
Questions to ask:
- What is the minimum investment?
- What fees are charged for the account and for transactions?
- What investments are available? Stocks? Bonds? Mutual funds? Exchange Traded Funds (ETF's)?
- How may I arrange for monthly automatic transfer from my savings or checking account?

Your biggest stumbling block may be the required initial deposit. Some firms require only $500 where others $1000 or $3000. Subsequent investments may be as little as $25 or $50. If you are expecting a bonus or a tax return, it may be a good use of that money. Otherwise, keep the emergency money building in your savings account until you reach the required minimum amount then open the Roth.

Using the Roth as part of your emergency fund means taking NO big risks with the money. Choose a very conservative investment for the emergency portion. As your balance grows, start to invest the difference more aggressively.

Keep in mind a Roth IRA is not for everyone. Only those individuals with earned income may contribute. And individuals earning under $112,000 and couples under $178,000 may contribute $5500 (if over 50, $6500). Remember it's not all or nothing. If you cannot contribute the max, contribute some amount.

Be $ smart - use the flexibility of a Roth IRA to your advantage in building your emergency fund.