When I started Freelance Finances, I focused on being as general as possible with posts and advice, because I realized a good portion of my traffic was coming from google searches, and my specific audience (over 60% of which are 13-24 yr olds) don’t typically search “personal finance tips” on google.

I realize now that was a mistake, and why I quickly lost motivation to keep this updated. According to YouTube 47% of my online audience is 17 years old or younger. And seeing as how high schools don’t teach you how to balance check books, calculate finance charges on credit cards, or teach you about retirement accounts, I’m going to stop being general, and I’m going to start focusing on what’s going to help you.

Fortunately for you, I’ve already been in your shoes. In fact, I’m twenty-six years old, so I’ve already grown out of your shoes. The advice I’m going to offer here isn’t theoretical, it’s practical. And it comes from someone who knows what happens when you make the mistakes you’re likely to make, and what it takes to fix them.

So let’s relaunch this blog with the first mistake, the biggest mistake, and the one mistake that costs the most to correct… fortunately for my word count, all of those mistakes are the same: spending more money than you earn.

Right out of high school I wanted a digital camera. I couldn’t afford one. So I signed up for a Best Buy credit card and “bought” one. Then I wanted a new computer, so I called Dell and financed one. I wanted a car too, so I went to my credit union and took out a loan and got a car. Before the end of the year I graduated high school in, I was in debt by over $10,000 – and I was only working at a grocery store for $8.61/hour!

It took me seven years to pay for that digital camera, computer and car. And after all of the interest, finance charges and late fees, I ended up paying close to $16,000 for that original $10,000 I borrowed.

This is not the way to be successful with money.

It’s hard to think about tomorrow, next week, next year, when the world is in instant gratification mode. And retailers are more than happy to give you the money, at 30% interest, so you can buy the things you can’t afford. But if there is one thing you take away from all the things I ever write on the internet, it is this: do not spend money you don’t have.

If I would have just been patient and saved, I could have paid cash for that camera. I could have paid cash for that computer. And I could have at least put some kind of down payment on that car. And then, those $10,000 worth of items, would not have cost me seven years and $16,000 total to buy.

Money is scary to talk about sometimes. Some people hate even thinking about it. If you have any questions about money, credit cards, savings, checking, investing, retirement accounts, loans, anything, please send me an email at freelancefinances@gmail.com and I will answer your question. Do it anonymously, set up a fake free gmail account if you’re embarrassed to ask. Once you start talking about it and thinking about it, it isn’t so scary anymore. And if you have a money mistake that you’ve made, and want to share in the comments so others don’t make the same mistake, please do.

Stay tuned tomorrow.

Today I wanted to discuss the two most popular retirement accounts, their advantages and disadvantages, and why you should care.

We’re going to look at the 401(k) retirement account, which is typically available to those working for bigger businesses and corporations, and the Roth IRA retirement account, which is typically used by self-employed or freelancing workers. The rules for these accounts are set by the US Government and may change after this article is published. Always check that you know the current rules before investing.

401(k)s are what we hear discussed the most. 401(k)s are typically offered by the company you work for. You can have a portion of your income contributed, before taxes, to your 401(k) retirement account. It’s important that I mention the ‘before taxes’ part, because that’s one of the biggest differences between a 401(k) and a Roth IRA. Because you contribute money to your 401(k) before it is taxed, you lower your taxable income for the year in which you contribute, which also possibly lowers your income tax bracket, saving you money at tax time.

Your employer may even match a portion or all of your contributions to your 401(k). If your employer will match your contributions, I highly advise you contribute up to the employer’s match, as this is free money every month. Your employer is not obligated to match contributions though, so not all of you will have this opportunity.

When you retire and begin taking distributions from your 401(k), those distributions are taxed at your future income tax bracket because you contributed the money pre-tax while you were working. So all of the wealth you’ve accumulated in your 401(k) will be taxed as you withdraw it after retirement. As you will soon see, this is another big difference between 401(k)s and Roth IRAs.

So what’s a Roth IRA?

Roth IRAs are retirement accounts you set up individually, outside of your employer. Roth IRAs are one of the few (but not only) retirement account options for self-employed workers. The money you contribute to a Roth IRA is after tax money. You’ve already paid income tax on this money. Because of this, when you begin taking distributions from your Roth IRA upon retirement, your distributions are tax free. You won’t pay a penny of tax on distributions of your original contributions nor the decades of growth and interest and dividends within your Roth IRA account. This is what makes Roth IRAs so attractive.

One drawback to the Roth IRA is the low annual contribution limit. You are only allowed to currently contribute $5,000 per year to your Roth IRA. And if you miss a year, or don’t contribute the full $5,000, you’re out of luck – you can’t make that time up. This is why it is so important to open and start contributing to a Roth IRA when you’re as young as possible. Even if you only put in $20/month, it’s better than nothing, and it’s time that you won’t be able to get back.

The later you start, the harder you have to work and the more you’ll have to save. By starting early, even with smaller amounts, your money will have more time to grow, compound interest will display its positive effect on your cash, and your nest egg will grow beyond belief. If you wait until you’re 40 to start, you’ll have to work five times as hard, for half the reward.

No one has retirement on the brain at 18 or 19 years old, but if I could change just one thing about my financial past, it would be starting a Roth IRA right out of high school instead of waiting until I was 25. I cannot stress this enough, knowing that 41% of my readers are under 18, and another 17% are under 24.

If you’re currently working for a company that offers a 401(k) plan, ask them about employer matches and start contributing. Then, whether your employer offers a 401(k) or you work for yourself, everyone is able to open a Roth IRA account. So do that. It doesn’t cost anything to get started, and you can contribute as much or as little as you can afford each month (up to the $5,000 annual limit).

Roth IRAs can be set up online at E*Trade (which is where mine is), T. Rowe Price and many other online brokerages. Don’t worry about what to invest in within your Roth IRA yet, just get it started, and start contributing. We’ll have plenty of time to talk about investment options later, or you can reread yesterday’s article for some brief overviews of the investment options available to you.

No one wants to retire to a restrictive budget and a menu of cat food. And you won’t have to, if you just start early, and contribute often.

Last week I had to write the About Me page for this blog. At the end, I wrote an overall goal for the blog. Without writing out a goal, I’d be tempted to let posts go off in all different directions. But a goal gives me focus and guides me when I feel at a loss of what to write about.

Goals will do the same for your personal finances. Especially specific goals.

If you say you want to “have money” or “be rich”, there’s no direction there. No definition. However, if you say you want to “have enough money to cover all of my bills for six months, just in case” or “have enough money to take a trip this summer to see my friends in England”. Those are specific goals, goals that you can attach a dollar amount to, and work towards.

Here’s an exercise to try, either privately, or down below in the comments section:

Write down your top five money goals. What do you want most right now? To never be overdrawn in your checking account again? To stop making payments on your car? or your credit card?

Write out your goals, and, attach a dollar amount to each goal.

The dollar amount will be easy if it’s a car loan or credit card you want to pay off, just write down the amount you owe. Other goals might require a little bit of fun research or planning. That trip to England I mentioned, look up flight costs, google a few hotels you might like to stay at. Not only will this research help you decide on a dollar amount to save for, but imaging yourself being there and visiting the various locations you find, will inspire you to sacrifice and actually save the money required to make your goal a reality.

Visualization helps so much with this. If there’s a certain dollar amount you want to reach, make a progress bar on a sheet of paper. Every time you put $50 in your savings account towards that goal, shade in a portion of the progress bar. When you can visually see your savings jump from 10% to 15% to 25%… you’ll stay motivated and on course.

Personally, I wrote two long-term goals, and three short-term goals:

• I want to be (and remain) consumer debt free. Which I currently am. Now I just need to work on my student loans to become completely debt free. Having no “easy, monthly payments” allows my money to work for me, rather than me working for my money. (10 years (for the school loans) and beyond)
• I want my small business’ sales to outperform the previous year, every year. When my business does well, the artists I work with do well, and, frankly, I do well. My record label will be exactly one year old next week, and first year sales have been incredible. It will be a personal and creative challenge to top them over the next year. (1 year and beyond)
• I want to put 20% down on my first house. Probably a condo. While living with Jenny is nice, and the rent for the two rooms here is cheap enough, I’d like my own place in the near future. (1-2 years)
• I want to pay cash for the production, studio time and hired musicians on my next album. Production costs look to be about $3,000 to $4,000. I’d like to pay this all in cash, up-front, no credit. (6 months)
• I want to be able to retire early and live off of the interest of my non-retirement investments. This is my biggest goal, which, if I’m able to save and invest at my current rate, will be attainable before I’m 40. (15 years)

It’s hard to start making changes in life. It’s less hard to continue, once you’ve made a change. Little sacrifices now can pay off huge later. But if you don’t have an attainable goal, you’re never going to have the motivation to make any changes… in your budget, in your career, or in your life.

An emergency fund is the money your grandma always said she was saving for a rainy day. Life happens. And sometimes life can be expensive. Car problems are usually the most frequent. But if you own your house or condo, there are also broken water heaters and refrigerators that go out. And so on.

For us freelancers, emergency funds are extremely important. Our income usually various from month to month and some months can be really slim pickings. Of course, on our slow months is when everything will break down. You don’t want these unexpected costs forcing you to turn to credit cards and debt.

Most financial advisers recommend an emergency fund that would cover 3 to 8 months of expenses.

Take a quick look at your budget. How much do you need to cover your bills for a single month? For our example here, let’s say you need $1,500/month. You’d then want to save a minimum of $4,500 in your rainy day emergency fund. We can slowly build this emergency fund while paying down our debt, and then attack it once our debt is gone.

Having this emergency fund money readily available when something terrible happens means you won’t have to whip out a credit card, and add even more stress – financial stress – to an already terrible situation. If you’re in a car accident, or a relative gets ill, or your muffler falls off, you don’t want to be worrying about where the money to get through will be coming from. Instead you should be focused on fixing or dealing with whatever the emergency is.

This money should only be tapped into for emergencies. Christmas isn’t an emergency. A trip to England isn’t an emergency. A new book, or lunch out with a friend, or LeakyCon – not emergencies.

So where should we stash this cash?

My emergency fund is in an online savings account. Safe, boring and easy to ignore until I need it. My emergency fund is fully funded for 6 months worth of expenses. It’s not earning me much sitting in a boring old savings account, but this money isn’t for investing. It’s meant to be liquid and available the moment something happens.

Many people choose to keep their emergency fund in a CD (Certificate of Deposit) with a local bank. You’ll certainly earn a little more on interest than I will, but remember, most CDs have rules about when they can be cashed in, and if you cash them in too early, you may have to pay a small penalty. One way around the cash-in penalty is to ladder your CDs, and we’ll discuss how to do that in a future post.

Finally, you could also keep your Emergency Fund in a money market account. Where you decide to start saving and building up your emergency fund really isn’t important, what’s important is that you start saving and building up your emergency fund.

Keep in mind you don’t need to save your entire emergency fund at once. If you’re focused on paying off debt right now, then set up an automatic deposit of just $100/month. The important thing is that you start. And start with a goal. If you say you need $4,500 in your emergency fund, write that number down, and write down how many months it will take you to hit that number at your current contribution rate.

Goals and milestones are so important when learning and trying something new. You have to be able to track your progress and see that you (and your money) are growing. And you wouldn’t be here reading this if saving wasn’t new to you.

I’ll spend more time in future articles on goals, their importance and which ones you should start setting soon. Until then… have you started contributing to your emergency fund yet? Why not? Get on that before your transmission fails or your boss catches you tweeting from your desk and fires you.

While it may be true that money won’t make you happy, it sure as hell won’t make you sad.

Now that we’ve budgeted, we’ve cut expenses, and we’ve looked into various ways to make more money, we should be running at a surplus every month. So, what do we do with all this “extra” money?

You will fall into one of the following two groups: Group A has debt (credit cards, student loans, personal loans, car loans) to pay off. Group B is debt free and needs to learn to save and invest.

Group A: You guys are going to take every extra penny you can squeeze out of your budget and you’re going to throw those pennies and dimes and dollars at your debt. Sit down with a notepad and write down all of the creditors you owe. Then list them in order of smallest amount, to largest.

We’re going to use Dave Ramsey’s Debt Snowball method (I’ll explain in a minute) to get rid of these debts.

Making a monthly payment sure does sound like a good deal in the beginning. Department stores will let you take home HDTVs, laptops, clothes, Playstations, and anything else you want, in exchange for a low, low monthly payment. But stop for a moment and calculate the interest payments you’re making on all of that stuff. Reader Bill (@drnoise) had a credit card with a $500 limit. He used it to buy some tools for his job a few years ago. He’s been making monthly payments since and just paid off that credit card three days ago. He ended up paying a total of over $1,300 for those $500 tools.

That is not how you build wealth.

Now that I’m no longer making monthly payments on my car, my credit cards, or any other debt, I’m able to save and spend and donate all of that money however I see fit each month. There is a wonderful feeling of security and safety that comes with not living paycheck to paycheck. It’s completely changed my life and daily attitude. And you can feel that security too.

Bill started his Debt Snowball four months ago when he and I were talking and he asked how I got out of debt. So, let me share with you too how it works.

The Debt Snowball method is taught by financial adviser Dave Ramsey. I did not invent this. But Dave advocates preaching it as much as possible, and I’m proof it works. So here we go:

• Line up all of your debts from smallest amount to largest amount. Do not worry about interest rates.
• Pay the minimum amount due on all debts except the smallest one. We’re going to take all the extra money we can find, and focus on paying off the smallest debt first and fast. The goal here is to pay off the smallest debts quickly. Not only is this going to free up more cash in our monthly budget, but it’s also going to help motivate you to get out of debt, and start building wealth.
• After you pay off the smallest debt, take the amount you were paying on that, plus your extra money every month, and roll it over to the next smallest amount. When a snowball rolls, it picks up more snow with each rotation. That’s exactly what we’re doing here. Each time we pay off a debt, we’re going to take the amount we were paying towards it, and roll it over into the payment on the next debt.

Using the Debt Snowball last year, I paid off all of my credit cards within six months. Then cut them up. After that, I took the payments I was using on my credit cards, and rolled them over into my monthly car loan payments. Suddenly, instead of paying $200/month on my car, I was paying $600/month. At that rate, it doesn’t take long to save a ton on interest payments, and pay off the loan completely.

Before beginning your Debt Snowball, many people advise you first save up a small emergency fund. This is a $500-$1,000 buffer in a savings account. This isn’t for clothes or vacations or awesome sales on Amazon. This is for emergencies only. Flat tires, broken windshield, extended illness where you must miss work.

We’ll talk more about emergency funds in the next post. For now, start compiling your list of debts.

Group B: Congrats on having no debt! Now we just need to be smart about how we save and invest our extra money. Starting with the next post, I’ll discuss various savings accounts, retirement accounts and investments for your money.