Why You Need A Hobby

There are countless benefits associated with hobbies.  If you need to kill some time, clear your head, or just unwind after a long day of work, you need a hobby that will help “get you there.”  Studies show that participating in hobbies can reduce stress, lower blood pressure, and sharpen the mind.  They can decrease the risk of dementia, depression, and even delay Alzheimer’s.  There are also social implications.  Hobbies allow people to connect with each other while exchanging new techniques or ideas.

Choose Your Hobbies Carefully

If your hobby includes the accumulation of stuff, do yourself a favor and consider a new one. Stamps, coins, baseball cards, comic books, books, cds, or anything else that involves accumulating things is going to cost some serious money over time.  I’m not suggesting you completely give up your collection hobbies, wait, maybe I am…

Instead, take up a hobby that encourages personal growth or development, or one that can be monetized.

Learn how to play a musical instrument.  There might be small upfront costs associated with purchasing an instrument, but it’s a hobby that costs almost nothing when the hours spent playing are divided out over one’s lifetime.

As a musician, I can personally attest to the many benefits listed in The Top 10 Benefits of Playing a Musical Instrument.  I learned how to play the piano at the age of 5 and literally spent thousands of hours just playing as a percussion major in college.  It was awesome.  I can personally attest the following are all very real benefits that musicians enjoy:

• Better Intellectual Capacity
• Discipline and Patience
• Relieve Stress
• Communication of Your Emotions
• Emanate Your Personal Style
• Teamwork
• Phsyical Workout (especially for percussionists)
• Bragging Rights
• Fun

What Is Your Favorite Hobby?

If music isn’t your thing, there are countless other hobbies that still meet either the personal development/monetary criteria.  What about quilting, woodworking, or photography?  It doesn’t matter what it is as long as it isn’t getting in the way of the other facets of your life.  If your hobby is prohibiting you from reaching your financial goals, find a new one.

What are some other hobbies that you enjoy that don’t require an ongoing stream of cash?

The merits for establishing an emergency fund are solid. If your furnace quits working in the middle of winter or you lose your job, you’ll eventually need quick money to cover life’s potholes.  The recommended amounts often vary from $1,000 to a full year of expenses.  Personally, we have an emergency fund that would keep us afloat for 3-4 months if both my wife and I lost our jobs at the same time.

But what if you’ve already established your primary emergency fund?

There are plenty of places to send your money.  Retirement, college, vacations, home down payments and an infinite number of competing goals are fighting for each dollar.  However, before allocating all of your extra cash to your Tahiti vacation fund, I suggest saving monthly for life’s “guaranteed surprises,”  outside of your primary emergency fund. To me, an emergency fund is for the unforeseen worst case scenario, not for life’s guaranteed expenses (even if you don’t know exactly when they will occur.)

What are Guaranteed Surprises

If you drive you car long enough, repairs are guaranteed.  It’s still a surprise since you won’t know exactly when your car will sputter or how much it will cost you.  The same goes for home repairs.  Some experts recommend saving at least 1% of the homes value each year for this guaranteed surprise.  We use separate sinking accounts for what we currently think fits this category:

• Car Repair Fund ($50 per month)
• Car Replacement Fund ($350 per month)
• Home Repair Fund – for repairs only, not upgrades ($100 per month) – will start funding next month

Of course there are other guaranteed surprise expenses, but these three are the only things that currently come to mind.  I’m aware that my unexpected surprises may vary greatly from yours.  For example, if you have health problems, are an active runner/athlete prone to injury, or work around children all day, then you might consider your medical expenses to be a guaranteed surprise worth saving for outside of your normal emergency fund.  If your earn your living on your computer and it’s only a matter of time before it completely dies, then it might be one of your life’s guaranteed surprises worth saving for.

On a Side Note – Sinking Funds With Guaranteed Due Dates and Amounts

Notice the “Guaranteed Surprise” sinking accounts are different than these with specific due dates and amounts.  I know exactly how much money I need to save in each account at the beginning of each month to cover the amount due when the due date arrives:

• auto insurance bills due every 6 months
• life insurance bill due once every 12 months
• gift fund for Christmas

Obviously we love our sinking accounts.  They are a great way to save for both the known intermittent expenses as well as life’s guaranteed surprises.

Do you have similar “guaranteed surprise” funds?  If so, what are they?  If not, would you consider creating them outside of your normal emergency fund?  Why or why not?

At the end of every semester, I often reflect on each class' most important topics and how I can apply them in the future.  I learned a great deal about personal finance in my personal financial planning course.  It was an excellent class full of practical information and I am much better for taking it.  But if I had to narrow it down, the biggest lesson learned was this:

The Financial Planning Process
When properly applied to your personal financial situation, this process will help you make better decisions in the future.  It will make your goals attainable, whether they be paying off your debt to funding your dream retirement.  It will ultimately change the way you think about your financial future by giving you a framework in which to work.

So what is the financial planning process?  According to "Personal Finance, Skills For Life" by Vickie Bajtelsmit, this process is composed of five steps:

STEP #1 – Analyze Your Current Finances
Without knowing where you stand, you'll never know what direction you should take.  At a minimum, you should take stock of the following:

1. All Debts
2. All Assets
3. Net Worth
4. All Saving, Checking, and any other Bank Accounts
5. Investments Accounts
6. Insurance Documents
7. A Budget (know where each dollar came from and where it is going)

Luckily, there is help for the organized and unorganized alike.  Check out my post on some of the websites that offer free "financial simplification" services.

STEP #2 – Develop Short-Term and Long-Term Financial Goals
Once you know where you stand, you will have a better basis on which to set your goals.  You should think about where you want to be 5, 10, and even 40 years from now.  Do your goals consist of monetary achievements or personal satisfaction?  Are you concerned about your net worth or something more altruistic?  It doesn't really matter what your goals are, as long as they are your goals and inspire you to achieve something more than you might have previously thought possible.

STEP #3 -  Identify and Evaluate Alternative Strategies for Achieving Your Goals
Depending on your goals, countless strategies will exist to help you achieve them.  All strategies will have costs and benefits that you will need to carefully evaluate.  The subject matter of this blog will provide you with information regarding such strategies.

STEP #4 – Implement a Plan For Achieving Your Goals
When you have successfully analyzed all of your possible strategies, you will be able to implement a plan by selecting those most conducive to your financial situation and personal preferences.  This blog will also provide you with useful tools and examples to help you make these decisions.  For example, I recently posted about how much house we can afford and how we arrived at that number.

STEP #5 – Regularly Reevaluate and Revise Your Plan as Necessary
Your situation, goals, and strategies will not be the same at age 20 and age 45.  Things will change over time and so should your financial plan.  So with that in mind, it's simple.  All you have to do is review your plan on a periodic basis and continue through the steps when necessary.

“Building a Solid Financial Foundation – Before you Invest!”

There is no shortage of advice encouraging you to begin investing at a young age, or at least as soon as possible.  This argument is a valid one.  The earlier you begin investing, the more time your money is subjected to the positive effects of compound interest, a phenomenon that Albert Einstein supposedly called the “eighth wonder of the world.”  I’ll save the benefits of compound interest for future posts, but please keep in mind that regardless of how magical compound interest might seem, it is best to have armed yourself with a solid financial foundation before ever dropping a dime into an investment.

My steps to a solid financial foundation:

1. Set short/long-term goals and develop a monthly budget
2. Buy adequate insurance
3. Stash 3-6 months of expenses in a separate savings account to be used only in emergencies
4. Eliminate high interest debt
5. Eliminate low interest debt if able to do so in a relatively short amount of time*

* I consider this step optional depending on your risk tolerance and investing style.  This step sounds counter-intuitive when looking at the mathematics. For example, I could probably beat the 4% interest rate on my outstanding student loans by placing my excess funds into the stock market, assuming a conservative 8% return.  Also, many investors use debt as a tool to increase their wealth. However, there is validity in the psychological benefits associated with being “debt-free,” including a good night’s sleep!

The only exception I have made to financial guideline #1 has been saving for retirement through my company’s 401(k) plan.  They currently match 4% of my contribution and I have taken advantage of this “free money.”  There are too few guarantees when it comes to investing and the company match is a guarantee that you should almost always take.