We're debt free, what should we do now?

  Many individuals and couples are thrilled when they become debt free. This is a pivotal time in personal finance. Most people simply spend the extra cash flow that was used to make debt payments. We should make a savings plan before the debt is completely paid off. Making plans will keep us from squandering this large opportunity to increase our savings. The freed up income could be used for any of the following: rethinking emergency fund levels; increasing 401K or IRA contributions; treating ourselves to a vacation; helping our favorite charities. Wealth doesn't usually happen by accident. Making plans gives us a much better chance to succeed in any endeavor. This will be the last post until fall, golf is calling. Please go back and read past posts. Wealth building is about applying ourselves, not how much income we generate. Finwiz.

Four ways to never be wealthy

1. Buying or leasing a new car every three years to keep up with our neighbors 

  This sounds like a no brainer. Many people just get used to making payments and assume it's time for a new car when payments end, don't do it. Save the payments you were making and keep that old car awhile. This gets interest coming in instead of going out.

2. Never doing the basic maintenance to our home or car

  Ignoring maintenance costs much more in the long run. Not replacing windows can increase utility bills over time. Not replacing brake pads can lead to much higher car repairs than necessary. Just doing basic maintenance can increase the lifespan of most large products.

3. Don't budget or track expenses

  When we never add up what's coming in or going out, how can we know where we are financially? Family budgets are the same as businesses taking Inventory. We need to know where the starting line is in order to set and reach any goal.

4. Load up on TVs, smart phones, gadgets, and all the expensive monthly service plans to maintain them.

  Many people I know have smart phones that cost $100 or more in monthly fees. This is fine if we can afford it, but these people complain about being poor or not making enough money to save. Saving is almost never an income problem, it's a spending problem. We need to look at recurring monthly payments and check for opportunities to save. If we don't make saving a priority, it won't be. Finwiz.

Four mistakes that will delay our retirement

1. Failing to plan or even get started

   Not making the choice to save is still a choice. We would be choosing a long term standard of living below what we are capable of. This choice also leads to working full time pretty much forever, just make a plan and start saving.

2. Taking contributions early

   I've never understood this one, but I see it too much. People will pay a huge tax penalty and spend their 401k contributions when they switch jobs. First they need to start saving all over again, second they've lost all the valuable compounding time on that money.

3. Paying high fees

   Before opening any type of retirement or savings account, research the fees and understand them. Shop around and find a company you trust with your future.

4. Not educating ourselves on a continual basis

   This seems like common sense, but many just refuse to learn. If we want to succeed in anything, educating yourselves is a must. Retirement planning is complex and laws continue to change over time. We can't read one book and be prepared to retire. Make the commitment to a daily or weekly block of time to study about personal finance. Finwiz.

Another way to look at how nest eggs work. Employing our savings.

  In the February 21st post I blogged some about rich people and how they think about nest eggs. The wealthy are just taking advantage of a concept called employing money. If we spend just the growth or interest from our portfolio, we keep the original balance, or nest egg, completely intact. A modest 3% withdrawal rate usually keeps us from dropping below our original balance, so I'll use 3% in the following examples. My cell phone bill is about $50 monthly or $600 a year. If I would like to have my cell phone bill paid forever, I need   X times 3%= $600 or $20,000. We can use this method to pay for anything we want permanently. I don't want to pay $400 a month for food. I need   X times 3%= $4800 or $160,000. When our nest egg can pay for all monthly expenses, we've reached a point at which we can retire or do what we want with our time. Looking at current monthly expenses and using the 3% formula gives us an excellent idea of how much we'll need to retire. If I need $5,000 a month to live the lifestyle I want, I need   X times 3%= $60,000 or $2,000,000.  I guess we should start a savings plan today. Finwiz.

Interest is a two way street

  Interest works two ways; we can pay or collect it. Paying interest isn't always a bad thing. Credit card interest rates are usually high. Most financial advisors consider them a drain on family finances. Loans for homes that can appreciate over time are a better reason to take out a loan. These loans normally have a much lower interest rate. We just need to be aware of what types of Interest we are paying and manage our debt properly.

  Collecting interest works the other direction; somebody pays us for using our money. Bank deposits (CD's) and money market funds are a good place to start. Government and corporate bonds should be considered also. Bonds usually pay interest two or four times a year. My dad called this “Making money while you sleep." Interest earned can be spent any way we like or saved to compound over time. There are risks to be aware of when we loan money. Interest rates can increase in the future and reduce the price of our bonds. Like people, corporations can default on bond payments or the entire loan if business gets bad enough. We should always consider these and other risks when investing in anything. Finwiz.

The closest thing to a free lunch when investing is time.

   If I only knew, what I know now, when I was your age. We hear this from time to time, usually from somebody older, on a myriad of subjects. Time is the only thing we get for free when talking about investing. I've blogged about compound interest and even repeated some past posts that show how money compounds over time. How successful our individual investing experience becomes is going to come mostly from our time in the market, not timing the market. I enjoy using a small portion of my investment capital to trade in and out of certain stocks. This can be fun, making a large percentage gain in a short period of time is intoxicating. This type of trading is more of a short term gamble and isn't serious investment advice I would give to anyone. We need to remember we're only going to get that 30 or 40 years of compounding once. People that start an investment plan in their twenties, instead of waiting until they're forty or fifty, will have a much bigger chance of success. The price they paid for a particular stock or bond just won't matter much. Finwiz.

Why I like being a contrarian

   When buying and selling stocks, I believe going against the majority has some large benefits. Everyone should develop their own investment style. Contrarian investment strategy is just one of those styles. My style is about half contrarian. The number one rule of investing is to buy low and sell high. When faced with a stock that most investors don't like, the price is usually low. When everyone likes a stock its share price gets bid up. I'm not suggesting the majority is always wrong. We should look at each company individually to determine if the majority might be wrong. Contrarian investing doesn't make that determination. We need to do our own research to make a buy or sell decision. Contrarians are simply researching possible purchases when they are lower, and looking for stocks to sell when they are higher. I believe this gives contrarians better entry and exit points throughout the investment process. Finwiz.