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.

Statistics on savings, why we should beware

   According to the Employee Benefit Research Institute, nearly 30% of Americans have saved less than $1,000 for retirement. Most Americans just aren't planning adequately for a life in retirement. Around 3/4 of workers will work at least some in retirement. A whopping 40% of baby boomers will work full time forever, never retiring. These, and other similar statistics, are astonishing. Being lazy is not a retirement plan. Poor preparation can be blamed also. This is almost never an income problem, it's usually a spending problem. We need to look for ways to cut spending and put that money in long term savings accounts. Working forever is not a financial plan. I believe most of us can do better, start a plan, and stick to it. Finwiz.

Don't make these credit card mistakes

1. Making only minimum payments

   Doing this stands the investment pyramid on its point. The magic of compounding is extremely powerful and works both directions. When we make minimum payments that magic works for the credit card company and they keep more of our money. If we can't pay our credit cards in full every month, we shouldn't get one.

2. Paying to own one.

   There are many credit cards that offer no annual fees. If our credit isn't good enough to qualify for one, we shouldn't get one.  We should spend time repairing our credit, until it's good enough to get a free card.

3. Taking out a loan or cash advance.

   The interest rates and fees for these are exorbitant. We would be better off borrowing from almost any other lender at a much lower rate.

4. Not paying on time.

   This should never happen. We can pay so many different ways in this age of technology. I like to pay online and print my receipt. We can pick the day drafts are withdrawn from our checkbook. If you have a tendency to pay late, set up repeating monthly payments. Making late payments will lower credit scores and increase future loan costs also. Finwiz.

How much should we save before becoming an investor? Why emergency funds are so important.

   Everybody will have a different goal and opinion on this question. It is going to be up to us to decide when we can enter the investing world. Let's try to outline some general help to set an individual goal. Many people fail to understand the essence of investing is long term. People save a little, and then when that foreseeable but unplanned emergency comes along, they withdraw the funds to pay for it. Many stay in this cycle and never get out of it. We aren't ready to start investing until we KNOW the money won't be needed for at least ten years. This means we must have an emergency fund or current cash flow to pay for the unplanned expenses that come along. Emergency funds become the base of our investment pyramid that keeps the plan from collapsing. Once an emergency fund is established feel free to invest as much or as little as you like. Finwiz.

The reason we need to be focused on net worth

    Our net worth is defined as total assets minus liabilities. Basically these are the amounts accumulated in our investment accounts plus any personal property minus debt. This sounds boring at first so why should we focus on it, at least annually? I may not be super wealthy, but I know how they think about money. Wealthy individuals live off of interest and dividends. They don't touch the golden goose. The golden goose or principal that generates these earnings is their net worth. When our net worth can generate an income big enough, we can do what we want with our time. This could be working part time for some, or retiring all together for others, it's our choice. Everybody's golden goose or net worth number is going to be different. There is a tipping point where an individual starts to realize they have enough, depending on their income goals. See you next time Finwiz.

Understanding inflation and reducing its risk to our savings

   It's important to understand the risks inflation have on our savings over time. Reducing some of these risks is possible. Be smart about debt. Pay off high interest debt first or refinance at today's lower rates. This will increase cash flow for savings or allow more of our payments to go to principal reduction. Inflation has averaged around 3% annually. The spending power of our savings is eroded over time if we don't earn at least that much on our savings. I think Treasury Inflation Protected Securities, or TIPS for short, should be at least a small part of every portfolio. TIPS pay a variable interest rate based on the inflation index so spending power of our capital is protected. This does limit our upside for growth, reducing risk also has its costs. Having the right mix of stocks and bonds like TIPS is going to be different for everyone. Generally, we should add more bonds and less stock to our portfolios as we age. We want to reduce the risks of stock market downturns just when we start to withdrawal from savings. Finwiz.

People seem to concentrate on the wrong risk when investing

    Many of us never start to invest or save because of the risk of losing money. It takes a long time to save and invest enough to retire someday. Some never start because it's not easy, and the risks just seem too high. The truth is, after saving for many years, we could end up falling short of our goals and plans. The other alternative is to live for today and not save or invest at all. This solution does take all the risk out of saving and investing. With this solution we will be guaranteed to end up with zero. We will have zero money saved, zero money earning interest income, and zero percent chance of ever retiring. The choice is up to us, Finwiz.

We can still make 2011 IRA contributions and reduce our tax bill

    We can make contributions in our IRA accounts for 2011 all the way up to the tax filing deadline of 2012. This helps in a couple ways. First this means not all tax planning needs to be done before the end of the year. Those of us just starting to save can get a jump start because of this rule too. Basically this will allow contributions to IRA accounts for both 2011 and 2012 to be made simultaneously between January and the middle of April every year giving a boost to account balances for new savers. Finwiz.

Three investment mistakes to avoid this year

1. It's our time in the market not timing the market

     Many investors try to time the stock market's peaks and valleys. Timing the market has proven difficult over long periods of time. An investor that dollar cost averages ( adding to investments on a monthly basis ) has a much better record of returns over long periods of time.

2. Being under diversified

     Don't put all our eggs in one basket. We've all heard that before. This one is true however. Allowing too much to accumulate in company stock or even one type of mutual fund could be a mistake if that company or market segment reports bad news. Review investments over time; don't allow more than ten percent of your portfolio to accumulate in    one stock or mutual fund.

3. Not watching expenses

     Reducing the cost of investing is another way to save. Find a broker with no minimum balance or inactivity fees. There are many no load mutual funds to pick from, and there is no reason to pay high fees to invest. See you next time, Finwiz.

How to get started saving with small amounts

  Most mutual funds have minimum initial investments of at least $2,000. How do we get started investing when we don't have much money to start with? I started by saving $50 a month until I reached the initial minimum investment. A second option would be to open an IRA at a local bank and have deposits automated from a checking account. If you have access to a 401K plan through your employer, sign up as soon as you're eligible. These plans usually allow contributions as a percentage amount, not dollars. The point is to get started somehow and as soon as possible. The sooner we get some kind of savings plan in place, the faster our savings can start growing. Finwiz.

The trick to a happy retirement is to start saving early.

  

   This is a repost from last year because I feel the math could be repeated. 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 something’s' 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.

Are your retirement savings enough?

   Securing a retirement is the reason most of us start to save in the first place. Ultimately, the quality of our life in retirement is going to depend on how much we've saved beforehand. Google searches show that only about half of Americans have retirement savings. This is a huge mistake that can't be undone at the last minute. Savings accounts need to be started early because they need to grow over time. Most of us would like to know how much we'll need to save for our own retirement. The Internet is a great source to start these calculations. Find a good retirement calculator and start to play around with different monthly savings numbers. Consider seeking a professional money manager to discuss your goals and individual situation. The whole retirement process depends on our individual situations, and how we manage our income sources today. Finwiz.

We need to stop kidding ourselves about finances and reality

 There is a list below that contains subjects in personal finance. We all need to be aware of what these are and study them over time. If we don't learn about these subjects and take responsibility for them, no one will. Picking a subject to study monthly is a good start. The more time that passes without taking this responsibility, the more time we're kidding ourselves about what our financial futures will look like. Finwiz.

1. What are our sources of income, budgets?

2. What's our total net worth?

3. Emergency funding.

4. Credit scores.

5. Insurance.

6. How much debt?

7. Estate planning.

8. Portfolio funding options.

Savings doesn't just happen, it has to be a goal or hobby

    We aren't going to just wake up rich someday, unless we win the lottery or inherit a large sum. If that's your retirement plan, please find a different blog to follow. Spending less than we earn and investing those funds over a long period of time is the only way to achieve financial security. Our individual income levels don't have much to do with success either. Many people with below average incomes save and retire early. I've known others that earned high six figure salaries and still accumulated debt because they never made saving a goal or hobby. When the time for retirement comes, only those that have had a long term plan in place, to spend less than they earned, will be ready.

Take financial inventory at least once year

    The new year is a good time to take financial inventory and review where we are in our personal finance plans and goals. Reviewing our current household budget and looking for more saving opportunities would be first on my list. I think it's a good idea to list assets and liabilities and figure our net worth every January. This gives us a baseline to compare to the following year. We can also use this list to make sure we are reducing liabilities and debts and increasing assets and savings.

Four ways to increase your net worth

1. Reduce high utility bills

    Adding insulation to the attic will save on utility bills in both summer and winter. A programmable thermostat has saved me a bunch over the last twenty years. Lower it at night and warm up with an extra blanket.

2. Use all the money saving perks our employer offers

    Make sure you know the benefits your employer offers and take advantage of them.
Many of us sign up for healthcare only. Many other options like flexible spending, life insurance, dental, 401K, and eye care could be available. Deductions for these are usually pretax adding to their benefit.

3. Do it on our own (DIY) when possible

    The Internet has the answer to almost any question you have about home and car repairs. I've been able to save on basic wiring and bath repairs. I even found the directions to program my car's keyless remote entry when a dealer wanted to charge $45. Try to DIY when possible, there's a lot of satisfaction in being self-reliant.

4. Keep our credit scores in order

    Make the commitment to pay all bills on time or a little ahead of time when possible. We can check our credit report for free once a year at www.annualcreditreport.com. Checking for mistakes and knowing what's in our reports should be an annual exercise. See you next time Finwiz.

Three things we can do to improve our finances

1. Make sure insurance coverage is up to date.

    It's a good idea to do an annual review of all insurance coverage. Knowing what our deductibles are and having the coverage we want will reduce stress if something happens.

2. If we are in debt,  cut up the credit cards and stop borrowing.

    This is one of the easiest ways to get out of debt, pay cash. It's just too easy to charge on credi. Don't get credit cards until they are used for convenience only. That means the bill can be paid in full every month.

3. Open a tax deferred account now.

    Open a 401k at work as soon as you're eligible. If it's not available to you, open a traditional IRA and make the commitment to start funding it yourself every payday. I can't repeat the importance of these tax deferred accounts enough. Finwiz.

More savings tips to start the new year

 1. Stick to one phone line.

   

     Reduce expenses by going to either a cell phone or home phone don't pay for both. Recurring monthly expenses should be reduced when possible. Cable, cell, and Internet services will increase their rates little by little over time hoping we won't notice. Don't play their game.

2. Buy ebooks or use the library

    Ebooks sell for around half price of printed books. We can check them out at most libraries also. This adds up to huge savings over time for readers.

3. Consider increasing insurance deductibles.

    Review insurance coverage at least every two years. Auto and home owner premiums can creep up over time. Increase deductibles or consider eliminating collision coverage on older cars. Collision coverage doesn't make since on a car valued at $3000 when the collision premium is $150. Finwiz.

Have a healthy financial plan for 2012

 1.  Ignore that raise or year end bonus.

    We've talked about this before. Pretend you never got a pay increase and save it instead. Never seeing a decrease in take home pay makes this one of the easiest ways to add to savings over time.

2. Consider automatic transfers to a savings account.

    By never having the money in our hands we are never tempted to spend the money. I've done this for my Roth IRA with only $50 a month, and I don't even notice it's gone. Over a year or ten years it still adds up.

3. Review our current budget with an eye on expenses. 

     The beginning of the year is a good time to refresh our family budget or plan a new one. Keep an eye on where we spend the most. Finding ways to cut expenses is going to be the fastest way to wealth creation. Have a great year, Finwiz.