Saving isn't enough to be financially secure, understanding how debt works against us is key

    If we take out a 30 year $150,000 mortgage at a fixed rate of 4% and buy a home, how much debt are we in? Most accounts and bankers would say that's easy $150k. We have just committed to $760.03x 360mo.= $273,000 that's $123,000 in interest over that 30 year mortgage. We may be 150k in debt technically, but in reality we're going to need 273k plus cash flow to pay back that loan. Understanding this reverse compounding is a key lesson in personal finance. If we aren't careful about borrowing, any savings we accumulate will just be spent paying back loans.

   Let's save an instant 80k. Take out a 15 year $150,000 mortgage at a fixed rate of 3.5% and we pay back only $1072.32x180mo.= $193,018. We just saved 80k in interest to invest or spend on other things. Few people ever notice that payments on 15 year loans usually increase our monthly payment by a manageable amount not 100%. In the above example paying another $300 a month over 15 years we save 80k, that's a lot of coin. Finwiz.

Don't keep putting off saving for retirement

   The excuses I hear for not starting savings are comical: I need to pay off my credit cards first, I'll wait until I get married, I have student loans to pay off, and my all time favorite, I'll wait until I have more money. Don't make excuses, you need to plan for retirement as early as possible. Consider the following information on what you need to save (based on starting age) to have a million by age 65. For simplicity I assume an 8% return.                             

                                                                                                                

Age 20 $200  mo.

Age 30 $450  mo.

Age 40 $1055 mo.

Age 50 $2850 mo.

   The cost of waiting is just too high! Einstein once said  "compound interest is the eighth wonder of the world". You can see in the above table we only get that 30 or 40 years of compounding once. Don't just make the assumption that a million is enough either. Inflation of 3% a year will cut the dollars purchasing power in half over 25 years. My twenty and thirty somethings' readers should consider a much higher savings goal. In other words 25 years from now you guys will need  two million to have the purchasing power one million has today. SAVE! SAVE! SAVE! Finwiz.

You got the job, now what?

1:  Take advantage of any retirement plan as soon as you qualify. Even if your employer's plan doesn't match contributions you're reducing taxable income, a large part of any good  financial plan.

2:  Create a budget and track spending. You need to know where your money goes so you can learn to recognize bad spending habits and change your pattern.

3:  Build a good credit history right away. Don't charge anything on a credit card you can't pay off when the bill comes. If you can't do this, go to the bank and use cash for all expenses. We think about purchases a little longer when breaking a fifty dollar bill than we do when pulling out the plastic.

Later. Finwiz.

What should come first paying off debt or saving?

 The answer is going to be different depending on our individual situation, there isn't one answer fits all. There are advantages in both situations.

  Paying off debt first (this works best for me)

      1. Peace of mind

      2. Frees up income, higher cash flow

      3. Less debt usually equals higher credit scores

       

 Saving first 

      1. Gives you a cash cushion 

      2. Starts the magic of compounding sooner

      3. Gets you into the habit of paying yourself first

 I recommend looking at the interest rates in either situation. If you can get a 3% return at the bank, why pay back a car loan that is 1%? When you have a mortgage rate of 4.5% make an extra payment instead of saving it at 3%. It's about making the decision that maximizes your return. Finwiz.

Money habits to retire young

   Taken together, here are four money habits that will help you retire young:

Save and Invest

   Always, always, always save and invest a portion of your income. Start out at 10%, and increase it each year from there until you’re setting aside a large percentage. If you do this from your very first job on, you’ll have painlessly accumulated a good sum of money.

Diversify Your Investments

   Things happen to all of us, no matter how charmed our lives might be most of the time. Investments go bad, employers go out of business, and skills become outdated. Invest across industries, companies, and types of investments — and understand your investment choices. Make sure you aren’t devastated by a job or income-source loss by having multiple things to fall back on.

Prepare For Emergencies

   Keep an emergency fund on hand. This emergency fund should be accessible and safe, not in investments. Laddered CDs can work, so long as you’ve got enough in them to leave you with a year’s worth of expenses after early withdrawal penalties.

Insure Adequately

   Keep a good health insurance policy and disability policy in force. Health care expenses are a big cause of bankruptcy, so guard against them even if you’re young and healthy. No one plans to get sick or injured.

   Use these good money ideas and you'll be on your way to a happy retirement and whatever else you want. Finwiz.

The high cost of spending binges

   Immediate gratification is great but costly. You can still live the life you dreamed by changing your habits when it comes to unnecessary purchases. Don't make excuses for charging something, put your money in savings instead.

 1. Use long term goals to motivate yourself.

 2. Allow yourself a small treat monthly when you stay on track to meet these goals.

 3. Purchase quality items that don't need replaced as often.

   Delaying purchases has a huge long term positive effect. We learn to live below our means and we have more resources available when they are really needed. Finwiz.

Automate your savings for long term success

                                                     It can be hard to start saving so make it automatic. Start small with as little as $10 to $20 every week or month. If your employer allows you to divide your deductions into more than one account put some in a savings account. When you get paid make it a point to deposit the money on that day so you'll be less tempted to spend the money. If you can't do this you're never going to start saving. You'll be tempted to spend the money when it's available so get in the bank as soon as possible. Saving automatically with each paycheck makes it easier and you don't have to think about taking any extra steps. Remember it's steady saving in small amounts that leads to large savings accounts. See you next time Finwiz.

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Saving and giving should work in conjunction

                                          Some feel saving and giving are opposites to each other, I view these as working together. Saving is not the opposite of giving, useless spending is. When we save, those funds can be used at a later date, to spend or give to our favorite charity. Saving also allows us to not be reliant on charities ourselves at some point in time, letting the really needy get the money that would have gone to us. Giving is not just about monetary donations, giving our time to a cause is just as important. Teaching others our skills is another way to increase their savings and maybe future charitable endeavors. Learning not to waste our resources allows us to save more and donate more, they work in conjunction. Finwiz.

How many savings and retirement plans are available to you?

   It's a good idea to study all the different plans available to you. Even if you contribute to a plan at work it probably won't be enough for a comfortable retirement. You're going to need three or four savings vehicles to accumulate enough. Many people work for non- profits like hospitals and school districts that allow them to save in 403(B) plans. These plans are similar to setting up your own 401(K). You can contribute to Roth IRA's and traditional IRA,s outside of work as well. These plans have annual maximum contribution limits. If you contribute the maximum to these tax deferred accounts, consider opening a taxable brokerage account. Brokerage accounts have no limits on deposits and can be used to maximize tax efficiency when used in conjunction with tax deferred accounts. Finwiz.