Archives for 5 Simple Rules category
25
Jun
Posted in 5 Simple Rules by Roger, the Amateur Financier |
Alright, we’re at the end of the week, and also the end of our list of simple rules. As usual, I’ve saved the most important rule for last. Always, no matter how you are doing financially, you need to remember to
Be Sure to Give Back
More than anything else we’ve covered this week, giving to charity will help not only you, but also your community. You can help to improve the lives of those around you, and feel good doing it. Of course, you can’t simply give to everyone who asks; besides the fact that there is a limitless amount of charities that want money, there are (unfortunately) plenty of dishonest people out there who would take advantage of your generosity. To be sure that your charity goes to those who most need it, here’s a few tips:
1) Check That The Charity is Legitimate: There’s more than a few ‘charities’ out there that are ineffective, at best, and downright deceitful at worst. Luckily, you can usually protect yourself and ensure that your money goes to worthy charities with a little preliminary research. I detailed some of the research I do when looking into a charity in my Choosing Charities series, and you should, before you hand over any of your hard earned money, be sure to put in some due diligence in order to ensure that the charity is on the up and up.
2) Don’t Overlook Local Charities: As the many stories, movies and video games can a test, it’s frequently easier to focus on the big fish rather than the individuals who surround you, even if it’s the latter group who actually make everything happen. In the same way, there’s the temptation to focus on only the big charities with large advertising budgets and/or high name recognition. There are plenty of smaller, more local charities that could use your help, from the local food bank to a nearby homeless shelter, where your money could do a great deal of good for your neighbors and friends, all in short order.
3) Don’t Leave Yourself in Poor Financial Shape In Order to Donate: Unfortunately, as with so many things in life, giving money to charity entails a trade-off: every dollar you donate is one dollar less you have for your own savings, investments, and spending. Obviously, I can’t give any hard and fast answers about whether you should or shouldn’t give to charity and under which conditions to make each choice; those are highly personal things, which will depend on everything from your personal financial situation to your religion and moral compass. I just want to point out that if doing so will put your other personal money goals at risk, maybe you shouldn’t give money and instead…
4) Consider Donating Time: If you are short of money (and who of us isn’t these days?), that doesn’t mean you can’t make a worthwhile contribution to a charitable cause. If you have time, you can always volunteer to help those less fortunate than you. Work in a soup kitchen, help out your church, even give to a blood drive the next time you have the opportunity; all of these (amongst many other options) are ways to improve the lives of those around you without needing to break out the check book or dig through your pocket for loose change. If you have skills that could benefit a non-profit or other charitable group, from marketing (even charities need to spread the word) to managing the money that comes in from other donors, volunteering your time will help the group to save money and be able to better focus on its charitable goals.
5) Work on Spreading the Word: While we’re on the subject of spreading the word, that raises another option for you when it comes to helping charities: pass on news and your interest in the charities to help draw others to the causes you support. Letting your friends and family know about the types of charities you choose to support, your reasons why, and what they can do to help can be an excellent way to increase the support that your chosen charity receives, as well as getting your loved ones more interested in the causes you support.
It can also backfire, though, and both annoy your loved ones and decrease the chance that they will help your charity. It’s a fine line to walk, and you need to be careful and not make it seem like you’re going to turn into a pushy telemarketer on them; just bring up your interests when an opening presents, and follow up or let the subject drop according to your loved ones’ response and interest level.
6) Just Do It: Sorry to rely on quoting a Nike commercial, but it is good advice (at least, in this circumstance): giving back is good. You’ll help to improve the lives of others, make the world a better place to live (if only by a tiny little bit) and feel pretty good about yourself. While I again caution you not to donate so much that you jeopardize your own financial situation, if you are able to give something, anything, really, it can go to improve the lives of others who are less fortunate. And that is an amazing feeling.
Related Websites
24
Jun
Posted in 5 Simple Rules by Roger, the Amateur Financier |
Ah, now we’re getting to the good stuff; now that you’re not spending all your money, have a decent emergency fund and have debt under control, it’s time to start having your money make money. If you want to retire (who doesn’t?) and aren’t earning several times the amount of money you spend each year (who does?), you need to put some portion of your money aside in investments that will grow your money at a rate faster than inflation, fast enough to let the magic of compound interest take hold and leave you with a sizable retirement fund (or college fund, or whatever you are attempting to save up to achieve). In other words, you need to
Invest Early and Often
Getting your investments started as early as possible is one of the best ways to increase your net worth that exist. Thanks to the power of compound interest, where the interest you earn in turn earns more interest, which in turn earns even more interest, you can turn a relatively small initial investment into a sizable fortune. Each dollar you invest at age 20 will turn into thirty two dollars by age 65 (assuming you earn a fairly modest 8% return on your money). If you wait until age 30, each dollar will grow to only about fifteen dollars by age 65, less than half of what you’d earn by starting a decade earlier. It only gets worse from there: start at age 40 and your dollar becomes seven dollars; start at age 50, and your dollar will only grow to three dollars when it’s retirement time.
Starting your investment career early has some other advantages, as well; you have more options for what investments you can use when you have more time available to recover from your mis-steps. If you want to choose highly speculative investments, the types that could either greatly grow your initial investment amounts to huge sums or leave you completely penniless, it’s much, much, much better to do so when you’re 20 than when you’re 40. While I certainly hope that you have good luck and end up with a sizable amount of money, if you do end up losing your shirt, it’s much easier to pick up the pieces of your financial life at 30 compared to 50 (just look at the difference in the grow of your money starting at those two ages).
Conversely, if you want to invest more conservatively, starting earlier gives your investments more time to grow, allowing you to stick with investments that allow you to sleep at night while still growing your money to meet your goals. If you’re earning only five percent return on your money (perhaps by investing in bonds, or even keeping your money in a savings account when interest rates start to go back up again), it’s important to get an early start to allow time for compound interest to work its magic. Starting at age 20 and earning a 5% return will yield nine dollars when you’re 65; wait until age 40, and you’ll have less than $3.50.
Of course, most people don’t put a lump sum into their investments and then just stop, only taking the money out at retirement. No, most people follow the second part of our advice and invest often, putting aside a bit of money monthly or whenever they get a paycheck. The advantages of investing regularly really add up over time. Remember how each dollar invested at age 20 grew to thirty-two dollars by age 65? If our twenty year old added an extra dollar each year, by sixty five he or she would have a total of $418. If we use more realistic numbers (after all, who invests only a dollar each year?), say $5000 each year, investing each year yields a total of over $2 million, compared to $159,000 for a single five thousand dollar investment at 20.
Investing often also allows you to dollar cost average your investments. By putting in the same amount of money on a regular basis, you’ll buy more shares of your investment when the price is low and fewer when the price is high. If you invest a single lump sum right before a big decline (say, back in 2008), you can end up losing years worth of compounded interest (at eight percent return, it’ll take nine years to get back to even with a fifty percent drop in value). If you invest year after year, though, a sizable drop in value offers you the chance to greatly increase the amount of your holdings, leaving you with a much more valuable investment.
Where to Invest
You’ll notice we haven’t discussed where to invest your money yet. There’s a reason for that: there’s a lot of investment options. From stocks and bonds to options, futures, and forex, a complete list would fill a pretty sizable blog entry by itself. As a result there’s no real way for me to give you a simple rule on what to invest in. You’ll have more options if you start investing earlier (as there’s more time to catch up if you run into trouble and more time to grow your money), but what exactly to invest in is up to you.
If you want a simple, set it and forget it type of investment that will automatically adjust your holdings to something appropriate for your investment goals, you could do much worse than a target date fund. Target date funds hold a mix of other mutual funds that is designed to slowly decrease in risk as you approach the target date (which is generally retirement or the start of college, or another major life event for which you’re setting money aside), making it less likely you’re lose all your money right when you need it. If you choose an appropriate fund from a quality company, a good target date fund (or one for each goal) could be all you need, investment wise, though they’re still far from the only option. Otherwise, reading and learning more about the other types of investments available is your best option. Good luck with your investments!
Related Websites
23
Jun
Posted in 5 Simple Rules by Roger, the Amateur Financier |
We are now at one of the most tricky spot in personal-finance, debt management, something that gives a great number of people quite a bit of trouble. But if you do it right, you will save yourself a great deal of time and aggravation.
Manage Your Debt
There are many different theories as to how much debt is acceptable. Some people, like Dave Ramsey, believe that you should do everything in your power to remain debt-free. Others, such as Robert Kiyosaki, consider debt, even substantial debt, to be necessary part of building your financial future, something you can’t do without if you hope to retire rich. And of course, there are many opinions that fall in between these two extremes.
Regardless of which tactic you prefer, it’s important to know how to manage your debt in a way that will keep it from overwhelming you. If your amount of debt continues to rise beyond what you have the capability to manage, it can overwhelm you, wrecking your financial goals and your life. (That’s one reason I came forward with my current debt issues before they got to be too overwhelming.). So we’re going to go over a few tips to help you keep your debt under control.
Controlling your debt
The first step in managing your debt is knowing where you stand. You need to take an honest inventory of your current debts and obligations. It might be painful, but it’s important that you know what you owe, whom you owe it to, and how much interest you’re being charged in order to know how to get out of debt.
Once you know where you stand, it’s time to work out your plan. There’s a variety of techniques you could use in order for you to get out of debt. I’ve covered several of them previously, even comparing their effectiveness, but it’s worth a quick review.
The most effective technique is to pay down the highest interest debt first and then go to the next highest interest debt, pay that debt down, and so on. This has the advantage of being the most efficient means of paying down your debt. Dave Ramsey, on the other hand, favors paying down the lowest balance debt first. While not as financially efficient, unless of course your lowest balance debt also happens to be the debt with the highest interest rate, it does have the advantage of a quicker repayment of the first debt, giving you a psychological boost as you attempt to pay down your other debts.
Rather than spending too much time worrying about which is the most effective or “best” method, it will be much better for you to simply begin paying down your debts in whatever fashion you prefer. Put extra money (beyond the minimum payments, which you should be making for all your debts) toward one of your debts, and you’ll slowly wear down the debt and eventually eliminate it. Keep doing that for all the other debts, and you’ll soon be debt-free (or at least, free of non-productive debts like credit card debt).
I realize that all of this is easier said than done, as there will be no one in uncontrollable debt if repayment was as simple as I make it sound. Obviously, the psychological element is very important as well. In order to have the willpower to eliminate your debt, you need to have as much encouragement as possible. If you are married or in a committed relationship, your spouse or significant other should be able to provide you with support. Other members of your family or your friends can also serve to help support and encourage you in your debt elimination goals. And of course, there’s any number of personal finance writers and bloggers whom you can read to gain encouragement. (Many of them, myself included, will gladly accept e-mail describing your challenges and attempt to provide you with whatever help and encouragement will enable you to succeed.)
Good debt versus bad debt
There is much discussion about the concept of good debt and debt. While there is general agreement that the worst debt is debt taken on to buy goods that decline in value, such as taking on credit card debt to buy consumer goods, there is more disagreement on whether there is such a thing as good debt. Mortgages and college loans, for example, are used to acquire goods that grow in value over the years. Some commentators, such as the aforementioned Kiyosaki, considered it perfectly acceptable take on such debt; others, like Ramsey, believe that debt should be avoided at all costs.
Which position you take is going to depend on your personal beliefs and values. I can’t tell you which will be the best position for you, but regardless, any debt you do have needs to be treated with caution and kept under control. If you find your debt increasing, or it’s getting harder and harder to make the needed payments, you should take a step back, reconsider you need for that particular debt, and if needed, stop adding to it and start trying to eliminate it.
That’s all very really is to know about debt. It’s not really that hard a concept, although fully getting a handle on it does take time and effort. Here’s to both you and I getting out of debt as soon as possible. Cheers!
Related Websites
22
Jun
Posted in 5 Simple Rules by Roger, the Amateur Financier |
We’re continuing today with our list of five simple rules to help you make your financial life easier. After yesterday’s advice to earn more than you spend, you should have a bit of extra money left at the end of each month. One of the first things you should try to do with that money is
Keep An Emergency Fund
Actually, if you do much personal finance reading, you’ll discover that there’s actually two types of emergency funds that you need. The first is designed to protect you (and your wallet) from sudden, unexpectedly high short term expenses. For example, if your car breaks down or you need to go to the hospital, you should be able to cover the expense without having to put it on your credit card or sell off some of your investments. This is a buffer fund, designed to keep your income flow buffered from the sudden expenses that life throws your way.
The sort of emergency a buffer fund is perfect for
For longer term situations where your cash flow is decreased (or nonexistent), you need something more substantial. The second type of emergency fund is really an unemployment fund, a sizable chunk of money that is easily accessed, safe from any (major) losses in value, and substantial enough to supply with living expenses for several months, at least. This is what most people tend to think of when you mention the term ‘emergency fund.’
In practice, these two types of funds can (and should) be used in conjunction with each other. What you want is a step like arrangement of emergency funds, where each step contains more money, earning a little bit more interest, in a little bit harder to reach location. As you use up the money in the preceding step, you move onto the next step, slowly drawing down the money you have available there to provide living expenses. I like to think about the number six as I try to organize my emergency fund, as follows:
Emergency Fund Levels
Six Days of Expenses: Cash – Keeping nearly a week’s worth of your average spending in cash on hand. You don’t have carry the full amount on your person at all times; a locked safe at home with a few hundred dollars in it would be an excellent idea. That way, you’ll have a little money available for those sudden unexpected expenses, or if (knock on wood) you find yourself in a disaster a la the aftermath of Katrina, unable to reach a bank and unable to use credit cards to get needed supplies.
Six Weeks of Expenses: Bank Account - Once you’ve got a nice cash supply, the next step is put some money away into a regular, brick and mortar bank account. This will form the basis of much of your financial life, and will also provide a ‘hub’ to which you can link other accounts (like an online bank or investment firm). Most importantly for our purposes, a bank gives you a safe place to put some extra money, enough to cover your regularly monthly bills (and then some, hopefully). This will form the bulk of your buffer fund, keeping you from living pay check to pay check and having to hope you can cash your latest check in time to cover the monthly expenses.
Six Months of Expenses: Online Savings Account or CD Ladder – The disadvantage of accounts with traditional brick and mortar banks is that they tend to have very low yields, regardless of whether you have a checking or savings account. The cost of being able to run to the ATM or write a check against the balance in your account is a low interest yield. Once you have enough money stored away to cover your monthly expenses, you can start trying to seek a higher yield for your money (while still keeping it safe). Online savings accounts, like those for ING, HSBC, or Smartypig, make it harder to get your money (you’ll usually have to a wait a few days to transfer the funds), but offer a much higher yield than most traditional banks in exchange.
Once you have a sizable amount of savings, if you want to boost your return even more, you can opt for a CD ladder. Essentially, you’ll buy CDs of varying maturities, attempting to arrange your money so that each month, a CD with one month’s worth of expenses will mature. You’ll be able to (usually) get a higher interest rate than with a straight bank account, without much added risk. Be careful though; if you need to get the money in a CD before if matures, you’ll usually pay a stiff fee. Be sure that you have enough money in other, more accessible accounts to cover any foreseeable (and some unforeseeable) expenses you may incur.
(Up To) Six Years of Expenses: Other Cash Equivalents – Once you’ve gotten the previous steps complete, you might be ready to call your emergency fund finished. Six months is a pretty sizable emergency fund, and if you’ve been high-balling your expected expenses, six months should cover you pretty well. But perhaps you want even more money set aside in your emergency fund because you have a large family to support, or you’re approaching retirement and will soon be using your ‘emergency’ fund to provide your regular living expenses for decades to come.
In those cases, you’ll be best served by looking into some the higher yielding but still fairly safe investments, allowing your cash a chance to grow at a faster clip than any of the previously mentioned locations without too much risk of it dropping in value. One possibility is money market funds, mutual funds that invest in highly safe and steady short term investments. They frequently yield more than regular bank accounts (although, as of this writing most money market funds have essentially zero yield) with only a tiny chance of losing money. If you’re in a retirement account, you can also consider a stable value fund, which has as its goal keeping the value of your investment safe while still earning a yield (however low that might be).
For those willing to take a little bit more risk to get a higher yield, there are other reasonably safe options. Short term bond funds, for example, have much higher yields than money market funds. In the event that interest rates start to rise, though, short term bond funds will decline in value, at least temporarily, while money market funds almost certainly won’t. If you have a substantial amount of money in the other parts of your emergency fund, though, you might be willing to take that chance in exchange for the higher rates of return offered.
There you have it, how to build a sizable and complete emergency fund. It’s a bit trickier than you might have guessed (at least, if you want to be ready for any emergency), but still fairly easy to do. The piece of mind it can bring is hard to understate, though.
Related Websites
