It is so SIMPLE to retire well off, if you make just a little sacrifice now. The alternative is making a huge sacrifice later on (in your 40s) and still probably not doing as well as if you made a small sacrifice now.
You just finished your degree and you are probably looking for your first “real” job. This is the perfect opportunity to decide how you would like your financial life to be. You have the choice to spend and buy whatever you feel like which will likely put you in heaps of debt. If you choose this path, you will be in good company. You can be sure most of your peers will take this path.
Or, you can take the road less traveled. You can be one of the “weird” people out there who refuse to believe that they have to be in debt all their lives. You can get motivated by the thought of the freedom that comes with being debt free. This road can sometimes feel like a lonely road, when everything and everyone around you is yelling, “Spend! Spend! Spend!” But, be assured, those who go down this road get the last laugh. They experience freedoms that most people only dream of.
If you are like I was, you will think, “oh, I can spend now, because I will be making more money later.” Well, the truth is that it doesn’t matter how much money you make. Expenses rise to meet income. So, as your income increases, you can be sure that, by default, your expenses will increase as well. Believe it or not, there are people out there with $500K annual salaries filing bankruptcy and in the same moment, you have people who never made more than $50K a year retiring as millionaires. It is not about how much you make. It is about how much you keep.
So, I say all of this to say, if I could teach a college grad only one financial lesson it would be to:
Max out your Roth IRA for five years
By maxing out ($4000 for 2007 and $5000 for 2008) your Roth IRA for the first 5 years after you graduate - you will likely have over $24,000 by the time you are 27. If you add NOTHING else to it, when you are 67 and ready to retire it will be worth over $1,000,000 (assuming 10% growth). If you can keep adding to it, you can really watch the puppy grow!!
But don’t wait, if you wait until you are 27 to start rather than 22 - the million is now down to $675,000 when you retire. Still not bad, but definitely not a million. And if you wait just 5 more years until you are 32 - you are looking at about $415,000 when you retire. So, you can see the importance of doing this right away - no matter what age you are. You can make this retirement figure a lot larger if you keep adding to it, rather than just doing it for 5 years.
Figures calculated with the savings calculator at CNN.com.
Invest the money in an Index fund
Buy an Index fund that follows the S&P 500 - The average performance of U.S. stocks over the last 80 years is over 10%. You may find a few stock mutual funds that occasionally beat the index, but very few consistently beat the average. This is the big secret of the industry - you will never (yes, I can pretty safely say never) have a financial advisor tell you to buy an index fund, because the fees are a lot smaller with an index fund than with a managed stock mutual fund. Therefore everyone involved in the sale of the mutual fund is getting paid a lot less than if you bought a managed mutual fund. The fact is that the great majority of managed stock mutual funds fail to beat the index.
Bottom line: Buy an Index fund in a ROTH IRA account, max it out for your first 5 working years and forget about it until you retire. If you can’t afford to max it out, don’t worry about it, just do the best you can. The purpose of the article is to emphasize how important it is to START EARLY!!
What I wouldn’t tell the grad (but I am thinking)
The reason this is the one thing I would teach them, is because it will probably help them to spend less than they earn - which is the KEY to financial well being. Secondly, if they can do it for five years - it will likely become a habit that they should be able to continue for the rest of their lives. And lastly, there are a bunch of things I would love to teach the grad, but this was the lesson that got me interested enough in money to learn the other lessons that I needed to learn.
Technorati Tags: college grad, financial advice
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Do you need an emergency fund?
I previously wrote about how to make more money from your emergency fund, but I decided to take a step back and explain the purpose for an emergency fund. I used to think of an emergency fund as robbing myself. It was essentially the same as paying taxes in my mind. All I knew was that money was coming out of my pocket going somewhere else. Obviously, 
this was completely untrue, but it was how I felt at the time. Thankfully, I learned how beneficial an emergency fund is to my long-term financial well being.
If you had a $500 unexpected expense come up right now, how would you pay for it?
If you could come up with the money and NOT have to use a credit card, you are doing much better than most Americans. Life happens, and unexpected expenses are to be EXPECTED. If you prepare for them you will be able to better avoid a financial crisis, if not, that is what they call "learning the hard way." Lets say (for sake of discussion) that emergencies happen, on average, once every year (everyone’s definition "emergency" is different, so the frequency may be more or less for you) and cost an average of $500. The truth is that just about everyone does have an emergency fund. The only difference is that they are either earning interest or paying interest.
Paying Interest
Let’s look at the typical American response to an emergency (costing our assumed average of $500). Emergency #1 happens and they don’t have an emergency fund, so they borrow the $500 from a credit card (17.5%). This solves the short term problem of paying for the emergency, but now they have to start making payments to the credit card company. Things are tough enough, they didn’t have the money to pay for Emergency #1 to begin with, now they have to try to find $20 each month to pay the minimum payment and to add insult to your injury the credit card company is going to charge them a huge percentage rate on the amount borrowed. When emergency #2 happens they will likely be:
- Still trying to pay for Emergency #1 (they will still owe $350)
- They will still be paying the interest to the credit card for Emergency #1
- It is probable that they were not able to save up for emergency #2, since they were still spending extra money to pay for emergency #1, therefore they will have to borrow again to pay for Emergency #2
- Now they are paying back both Emergency #1 and #2 ($850 total), paying interest on both amounts borrowed, and in even a more difficult place to start saving for emergency #3 since their minimum payment increased to $35.
This is only the beginning of the vicious cycle: it only gets worse from here. You can imagine what their financial lives will look like in 5 or 10 years.
The prudent see danger and take refuge, but the simple keep going and suffer for it. -Proverbs 27:12 (NIV)
Earning Interest
Let’s assume you are one of the few (but extremely wise) Americans who decided to start an emergency fund (because some equally wise 
blogger told you it was a good idea). If you were able to find that $50 a month now (before emergency #1 happens) and start saving it to prepare for it, you would likely (and hopefully) be here when emergency #1 happened:
- Have more than enough money saved for emergency #1 ($600 saved)
- Will have earned interest ($15) on your savings which will have just increased the size of your savings even more ($615)
- You will have a head-start saving for emergency #2, because you saved more than enough for emergency #1 ($615-$500=$115)
- You will be earning interest on what you still have saved after paying for emergency #1 ($115), and you will be saving and earning interest on the amount you are saving for emergency #2.
When emergency #2 rolls around you will have $735 saved up to pay for the $500 emergency. Just repeat the process again and again and you can imagine what this will look like after 5 or 10 years.
How much should I put in my emergency fund?
I think $50 a month is a good ballpark to get started for many people. Obviously if you are making six figures, you may want to increase the amount or if you are making four figures, that may be too much. If you are having trouble finding the extra money, you may need to quit spending everything you make or learn what to do with a raise.
Where do I start an emergency fund?
I recommend ING Direct for a high yielding savings account. The most important part is getting started, no matter where it is. But, look for something that you can direct deposit into so you do NOT have to think about it.
Before I get a bunch of comments arguing about the frequency of emergencies or how much the average emergency costs, let me just say these assumptions are based on how things have worked out for me. I am sure some will have "emergencies" every 6 months and some every 4 years, but I am basing this off averages in my life. My intention is only to show the long-term benefit of building an emergency fund rather than using a credit card.
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Well, I think everyone KNOWS what to do with a raise, but the challenge is DOING it (My definition of personal finance is DOING what you KNOW you should DO). Personal finance is 80% doing and 20% knowing. Just incase you don’t know what to do with a raise, here are a few ideas…
Don’t spend your raise…
until you get it. I can’t even count how many times I have received the news of getting a raise and started spending the extra money before I saw it on a paycheck. Inevitably I would spend more than I actually was getting and when it showed up on my paycheck I would be upset because I spent more than the raise was. By waiting until I actually saw the money in my paycheck, I could enjoy the raise, rather than just watching it go out the door to cover my purchases I made the 2 prior weeks.
Expenses rise to meet income, and naturally we find a way fill the gap between expenses and income. This is why you need to make a plan in advance on how you will…
Allocate your raise…
in a way that works for your financial situation. Personally, my allocation plan is:
- 10% Tithe
- 20% Pay down debt
- 20% Retirement savings
- 50% Spend!!
These percentages frequently change based on the needs of the family (i.e. if we are in desperate need of a vacation or if we are planning a large purchase). The point is to have some sort of plan for the increase, before it comes. I have tried it both ways, and I much prefer allocating the raise over spending it in advance. If you can resist the urge to SPEND immediately, allocate your raise wisely, and follow through, you will be nicely rewarded with the comfort of seeing your financial situation improve.
Just following this allocation over the course of a working life would yield a huge retirement nest egg and house that would be paid off many years earlier than scheduled.
Enjoy your raise…
after all, you earned it. Don’t be such a good saver that you can’t enjoy spending money. If you received a raise, you most likely earned it. As you can see with my 50% going to spending money that I am very generous with myself. I love rewarding myself for all the hard work I have put into organizing my financial life.
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One of the joys of working at a brokerage firm is that people are always asking me for investment advice or telling me about how they don’t trust their broker.
Probably the most frequently asked question is, “how do i [tag]save money for retirement[/tag]?”
First, I tell them to follow these 4 steps to retirement savings, and then I tell them not to worry about your rate of return when you are starting out. Yes, it is better to get 12% on your money than 8%, but when you are just starting your retirement savings it should be the least of your concerns.
Let me preface this by saying, this advice is for [tag]beginner[/tag]s who are intimidated by saving for retirement to the point of DOING NOTHING. This is what I suggest to keep them from worrying about which mutual fund to buy when they are starting out.
The biggest hurdle for most people is [tag]saving money[/tag]. As Dave Ramsey
Let’s say you start saving $100 a month towards retirement. When you first start investing, the $100 a month contribution is going to have a larger impact on the size of the total amount saved than your rate of return.
For example, if you have $1000 saved up and add $100, you now have $1100 - which is a 10% increase. But if you have $10,000 saved and you add $100, it is only a 1% increase. Once you have $100,000 saved up that $100 monthly contribution becomes even more insignificant; it is only a 0.1% increase.
So, if you are only increasing your account value by .01% each time you contribute, then it would not be nearly as effective as having a 12% rate of return.
As you can see the importance of consistent contributions is CRUCIAL in the beginning stages, but becomes less significant as your nest egg grows in size. Conversely, your rate of return on your investments starts out with little importance, but becomes CRUCIAL as your nest egg gets larger.
So, if you are a beginner, get started saving and you can take your time learning about which mutual funds are going to give you the best returns.
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If you are asking this question now - I am sorry. You have missed out on, in my opinion, the 3rd best advancement in banking in the last 15 years (behind the debit card and high-yielding savings accounts). [tag]Bill Pay[/tag] is a service offered by just about every bank or credit union under the sun. It does just what the name implies; it allows you to pay your bills via your bank online.
Your bank foots the bill for the stamps and sends your payment from your checking account to whatever address you specify. Some banks charge a few bucks a month for this service, but most offer it for free. It saves just about every user 2-3 hours every month. Not to mention the money that you save on postage as well.
At my credit union I use this form to add a new merchant to send bills to. 
Once that has been set up you are ready to pay bills with the click of a button. Then, when it comes time to pay a bill, I simply fill out the form below and don’t think about it for another month.
Thats it. It is that simple. As far as security, I can say is that I have used it for 6 years and never not had a bill get to where it was supposed to go. I worked in a bank for about 3 years and never had anyone come into my branch with any kind of security problems related to bill pay. Please leave me comments if you have had any negative experiences with it.
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I have had a couple of scammers attempt to get me on this, so I think I need to pass it along.
[tag]Phishing[/tag] is when a scammer sets up a phony website using legitimate company logos and tries to direct you to that site usually via email. They normally will send you an [tag]email[/tag] with a link appearing to go to the legitimate site, but it will actually lead you to their phony site.
Once at their phony site, you will be asked to provide sensitive personal information. They typically go after your username, passwords, account numbers, SS numbers, credit card numbers, and pin numbers.
A few things that are usually tell-tale signs that you are being phished:
- There will always be a sense of urgency to the email they are sending. They will want you to respond immediately or something BAD will happen.
- There may be spelling or grammatical errors. These guys usually didn’t pay attention in English class; they were out robbing old ladies.
- The link may take you to a slightly different website than what it says. Rather than Citibank.com, it may take you to Cit1bank.com. Most people don’t pay close attention.
- The email may not be addressed to you.
How to beat the phishers
- Do not email important personal or financial information. Email is not quite as private as some may think.
- Think twice about opening emails from unknown sources.
- If you do receive any email requesting personal information do not reply or click any links in the email.
- If you are unsure of the validity of an email, type the company’s web address directly into your browser or call the company directly.
- Use virus protection software.
What else?
- If you think you may have given your information to scammers, contact the company they posed as in the email. They may already be aware of the scam, but be sure to let them know immediately.
- You can forward suspicious emails to spam@uce.gov and you can file complaints with the FTC at FTC.gov.
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