Monday, March 18, 2013
In my opinion, this country needs to educate people on the basics of handling money. We know that our federal government sets a poor example on how to do that. Imagine if the average person had $1 million dollars in credit card debt, and acted like it was no big deal, and kept on spending. That is what our politicians do with our money. Financial expert Dave Ramsey know makes it possible for high schools to teach his class to teenagers. This should be a required curriculum in every high school in America. Teach the kids financial responsibility early. Then, they will avoid the pitfalls of credit card debt and making poor decisions. College students are often bombarded with credit card offers from all directions. People who are taught about money early will learn the importance of saving for retirement. Imagine if everyone in America started investing during their teenage years. Retiring at age 65, or for many people earlier, would be no problem. Find out more about the curriculum here: http://www.daveramsey.com/school/foundations/
Saturday, March 16, 2013
No matter who you are, managing money is a challenge. Here are some basic tips that will make it easier.
1. Invest automatically. Have your 401k/retirement investments taken out automatically each paycheck so you don't have to think about it. If your employer has a certain amount they will match with their own contribution, take full advantage of it. That's free money. Or, you can invest a certain amount automatically by using an online broker such as e-trade or sharebuilder. Start as early as you can. If you start investing at age 25 and want to retire at 65, you have 40 years for your money to grow. Time is money. Track your investments and make changes if your results are not satisfactory. Inflation is normally about 3% per year, so if your investment gains 3% per year, you have no real gains.
2. Don't buy a new car. The depreciation on a brand new car is rapid, the value drops as soon as it is driven off the lot. Buy a slightly used car, maybe one that is a year or two old. Even the rich do this (maybe that is why they are rich). The book "The Millionaire Next Door" points out that most millionaires do not buy new cars.
3. Banish debt payments. Do what you can to get rid of car payments, credit card debt, student loans, any other debts, and finally, house payments. Dave Ramsey says that debt is the #1 thing standing in the way of building wealth. Pay cash whenever you can. Why give the bank your money? Think about what you could do with your money if you had no house payment, no car payment, no credit card debt and the like. You could save tons for retirement, give to charity, and simply have peace of mind financially.
4. Avoid wasting your money on things like lottery tickets, rent-to-own businesses and payday lending services. The chances of winning the lottery are miniscule. Putting your money in a good growth mutual fund is a better bet. Rent-to-own businesses and payday lending services are scams that charge obnoxious interest rates.
5. Separate wants from needs. This is tough since in America we are big time consumers, being bombarded with advertising every where we look. Some feel pressure to keep up with the Joneses. You might want to buy a $50 shirt, but a $25 shirt will still do the trick. Sure, we'd all like to drive a Mercedes, but a Chevy might be 1/3 the price and it still gets you from pont a to point b. Give up on seeking status symbols, it is an empty pursuit.
6. Term life insurance trumps whole life insurance. Go with the no-frills, basic, convertible, renewable term life insurance. Sales people will try selling you whole life or universal life or annuities but those are a waste. The investment component of most whole life policies is poor. But, insurance agents love them since their commission is greater. Financial experts like Bruce Williams and Dave Ramsey recommend term life insurance. Do your investing elsewhere, not with insurance.
7. Make more, spend less, sell stuff. Want more money? You have three options. Make more by working overtime or getting a second job or a better paying job. Analyze your spending habits and spend less. Set up a monthly budget and stick to it. Sell things you don't need. Have a garage sale. Set up an amazon.com or an e-bay account to sell some possessions.
8. Diversify your investments. This means, don't put all of your eggs in one basket. If you have $1,000 to invest, don't buy $1,000 worth of stock in one company. Consider a mutual fund or an ETF (exchange traded fund). These will diversify your risk and invest in many stocks that compose one financial investment vehicle. Or you can choose an index fund, perhaps one that mimics the return of the S&P 500 or the Dow Jones Industrial Average. Vanguard and Fidelity are two of the top mutual fund companies. Analyze before you buy though. What is the track record of the mutual fund? How diversified is it? Does it have any international stocks (this may be good or bad)? what are the associated fees? Is it a no load fund (no fees for purchasing) or a loaded fund (you pay fees when you buy)? All mutual funds or ETFs are not the same. Seek out a financial advisor if you need assistance, or do your homework, as mentioned in the next tip. If you are dead set on buying individual stocks, make it a small part of your total portfolio, perhaps 10%. The stock market is incredibly resilient. It goes up and down, but over the long run, it generates a good return on your money. Those who stay with it for the long haul will do well. Buying and selling frequently is risky and the tax implications can be expensive. Beware of fad investing trends. When gold was at an all time high, we heard lots of ads telling people to buy gold. Why would you buy a commodity when it is at an all time high? Seems like selling gold would be a better move, then buy when it is cheap.
9. Seek out the experts, and educate yourself. Buy books by Dave Ramsey, Suze Orman or Clark Howard. Listen to financial radio shows or watch financial TV shows on CNBC. Get a subscription to Forbes magazine, Kiplinger's Personal Finance or The Wall Street Journal. It's amazing what you can learn on your own. Take a class at a community college about the stock market or personal finance. Community college classes are affordable and the instructors are knowledgeable. You'll get out of it whatever you put into it. Jim Cramer has a TV show and he writes many investing books. He is not a buy and hold advocate. He says to buy and homework (study your investments). Decide which approach is better for you. Some are risk adverse when it comes to investing.
10. It doesn't matter what you make, it matters how you handle it. This is perhaps the biggest tip to remember. How often have we heard about celebrities who made millions and ended up broke due to poor decisions? It happens all the time. A person who makes $25,000 per year might be better off financially than someone who makes $250,000 per year. The person with the high salary might be up to their eyeballs in debt, on the verge of financial ruin. The person with the modest salary might be a saver who is smart with money, building a nice nest egg a little at a time. Think about money decisions, look before you leap. The decisions you make today will determine your financial fitness in the future. The rich get richer and the poor get poorer for distinct reasons. The rich get richer since they know about money management, investing wisely and they put their money to work for them. The poor get poorer since they do not do their homework regarding investments and they make poor decisions with money on a day-to-day basis.