Spring Cleaning

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The weather finally is getting warmer, the clocks have sprung forward, and it’s time for some spring cleaning! I enjoy cleaning out my closet as much as the next gal, but let’s get serious. Spring is a time for cleaning up everything, including those pesky personal finance tasks that you’ve been putting off.

Here are a couple of things you might want to consider getting done to complete your spring cleaning:

  1. Finish your taxes. If you didn’t do it yet, do it soon because the deadline is April 15. Be sure to use a tax professional to help you get the most deductions possible.
  2. Get a handle on your debt. Start organizing bills and stop putting them aside. Figure out how much you owe everyone, figure out what debt has the highest interest rate, and focus on paying down that debt first.
  3. Clean out your closet and donate the clothes you haven’t worn in 24 months. Did I mention that charitable donations are tax-deductible?
  4. Shop around for insurance. Have you been using the same company for 5 years without comparing rates? You might be able to reduce insurance rates by comparison shopping.
  5. Cancel subscriptions that you don’t use. Have you been receiving a magazine you don’t care for anymore? Are you still subscribing to xBox live even though you don’t use it? Cancel the subscriptions and stop paying for service you don’t use.
  6. Compare shop for cable/internet. Some companies offer a deal if you “bundle” cable/internet and commit to a year or two long contract. If you are feeling really adventurous, cancel cable completely and try using Hulu/Netflix.
  7. Check on your cell phone usage. Is there a new plan available that can better suit your needs? If you cell phone plan expires soon, ask yourself if you really need that fancy new smartphone. Odds are, you don’t.

You Need an Emergency Fund. Really, You Do!

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I was recently talking to a friend who told me that she never learned how to save money. Her family never saved, so she never saved. I learned that her family’s financial mantra is “you can’t take your money to the grave, so you might as well spend it today.” Although I’ve heard this philosophy, I was surprised to know that someone so close to me believed it!

Knowing this wasn’t sound financial wisdom, I decided to introduce my friend to the phrase “saving for a rainy day.” It refers to the idea of a savings account where you stash enough money for a “rainy” (crappy) day. Things that could cause said “rainy” day include unexpected emergencies such as getting laid off, illness, large unforeseen expenses (car accident, leaky roof, etc.), and so on. The purpose of the emergency fund is to provide you with the resources to deal with the unexpected challenges that life can something put in your path.

There is a general rule of thumb for saving up enough money to deal with the unexpected. Most financial planners will tell you that you need to save up enough money to cover three to six months of expenses (rent/mortgage, transportation, food, bills, etc.) for your emergency fund. The money in this fund should be liquid, meaning you can quickly, easy access it. This way, if you are laid off/get sick/incur a large expense, you can easily withdraw the money you need to support yourself while you get back on your feet.

If the idea of saving up six months worth of bills seems overwhelming, start out by setting a series of more immediately attainable goals. Try to start by saving up one week’s worth of expenses. Once you’ve got one week, work towards saving up one month’s worth of expenses. From there, work towards two months, and so on. Setting up attainable, incremental goals will help you feel feel good about the milestones you reach on your way to setting up your emergency fund.

It’s true you can’t take your money with you after this life, but setting up your emergency fund can help you deal with the financial challenges that life brings. You never know when your “rainy day” will come, so get prepared and start saving.

Lessons Learned From My Parents

My mom and dad are inspiring and amazing people. They have hearts of gold, they are generous, and they have never left me wanting for love of affection. They are strong, and put family first. This is just the tip of the iceberg; they have tons of wonderful qualities, the vast majority of which I feel grateful to have in my genepool. However, they share one major flaw: they lack financial common sense.

My mom, an accountant by trade, doesn’t have a taste for fancy things. She lives for family, her cat, the L.L. Bean catalog, and the slightly more than occasional meal out. My dad also likes to eat out, attend sporting events, travel locally, and smoke a cigar here and there. They don’t have extravagant tastes, so what gives with their finances?

They have done a spectacular job of living beyond their means over the past 30 or so years. Whether it was living in a house that was a little bit beyond their budget, buying the car that was just a little more expensive than their last one, or eating out when they had a fridge full of groceries, they kept making the wrong financial moves, be them big or small. Couple these habits with repeatedly changing or losing jobs, unexpected illness, stagnant incomes, and a recently crashed real estate market, and you’ve got the perfect storm for fiscal crisis.

Now that my parents are approaching retirement age, these issues are more pressing than ever before. They’re paying the price of living beyond their means each day. 

The situation sounds bleak, but I’m retelling it because it’s a story of transformation.  My parents are improving their situation each and every day. They are adapting, changing their their day to day habits to keep their budget in mind. They are living in a home they can afford and drive cars that are in their budget. They even have a property that they’ve begun renting out for a profit. Each day is a fresh start, and I am proud of my parents for turning over a new financial leaf.

Remember, it’s never too late to make a fresh start for yourself and your bank account. If my parents can do it as they approach retirement, you can in your 20’s, 30’s or 40’s. Commit yourself to making your finances change and it will happen!

Rule of 72

Image courtesy of howtheinvestmentbusinessreallyworks.blogspot.com

Image courtesy of howtheinvestmentbusinessreallyworks.blogspot.com

For those of you who don’t know, I am an undeniably proud math nerd. Obviously, this has its pros (understanding money, finance, statistics, etc.) and its cons (math jokes aren’t such a big hit in most social circles). Luckily, it’s enabled me to do some financial translating for you, and so today I bring to you the rule of 72.

A couple of weeks back I posted an entry about the wonder that is compound interest, Financial Advice From Einstein. The rule of 72, which Einstein discovered and  relates directly to the idea of compound interest. When you invest in any account that gives you compound interest, all you need to do is divide 72 by the interest rate you are receiving and it gives you an estimate of how long you can expect to wait for your money to double.

For example, let’s say you have $1000 invested in any account. Imagine you are receiving a 6% interest rate (rate of return) on the account. According to the rule of 72, all you need to do is divide 72 by 6 to figure out about how long it will take your $1000 to turn into $2000.

72 ÷ 6 = 12

So, assuming you just let your money sit in your savings account and never add to it, it will take about 12 years for your $1000 to turn into $2000.

You can start to get a sense of how important rate of return is when you compare interest rates of 1, 4 and 8 percent using this rule:

72 ÷ 1 = 72 years to double

72 ÷ 4 = 18 years to double

72 ÷ 8 = 9 years to double

Money invested in the account that has an 8% return only takes 9 years to double, while money invested in the 1% account takes a whopping 72 years! That should make you think twice about leaving your money in a savings account with an interest rate of 1% or less. Counter-intuitively, the account making a 4 percent return won’t be halfway between 9 and 72. However, it is important to note that a 4% return will take twice as long to double as an 8% return.  

You can, and should, also use this rule to keep track of your debt.  If you have $1000 in credit card debt, and the interest rate is 10% on your credit card, it will take just over 7 years for your $1000 debt to turn into $2000 in debt.  This rule is especially handy these days, when credit card interest rates can run in excess of 20%.

Granted, the rule of 72 isn’t an exact science, but it is known and used by financial gurus everywhere as an estimation tool. Even if you aren’t a self proclaimed math nerd like me, whip out your calculator and start dividing! You might be surprised to find out how little, or much, your investments are making. 

 

College: The Aftermath

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I remember a lot about college. Where to begin; the parties? The classes? The dating scene? It may not have been quite as wild as portrayed in “Animal House,” but I still remember it like it was yesterday. The one thing I don’t remember is accumulating all of my student debt. Sure, I had an academic scholarship and a job, but I still managed to accumulate nearly $20,000 in student loan debt from my undergraduate degree. Luckily, I wised up before I began grad school, and accepted a fully subsidized fellowship for my masters degree. Nonetheless, I’ve managed to pay down my student loan debt, and plan to have a $0 balance by the time I turn 30.

How did I manage it you ask? The truth is that it hasn’t been easy. I committed myself to pay more than the minimum each month, no matter what. I also made it a point to take overtime work, and committed at least part, if not all, of my extra income to my student loans. Most importantly, no matter what was happening, I stuck to my plan!

This is not to say I neglected my other responsibilities. I still saved, contributed to my retirement, paid my bills, paid off credit cards, bought a home, made some investments, and even did a bit of traveling. I made this all work out by creating a balanced budget and sticking to it, even when times got tough. You can do it too. Create a plan, commit yourself, and make it happen!

Cheers to Good Times!

Imagine this: you just got a new job!  Or a raise! Or a bonus! Or some other type of windfall.  In any case, wahoo!

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First off, congratulations. No doubt, you have earned it. Now, what to do with that extra income becomes the question. Your first impulse is probably to go out and celebrate, but should you? Maybe you should save it? Invest it?

How about all three? Yes, you can have your hard earned cake and eat it too! Try divvying up your newfound earnings in a way that allows you to feel like you are enjoying your money but making it work for you too.

To achieve this, try splitting your extra income into three equal quantities. Set aside the first third to put into your retirement, savings, or other investment account. Use the second third to pay down any debt you may have, be it credit card debt, student loans, mortgage, or whatever other bills are on your mind. Last, use your final third to treat yourself. Get a manicure, take an overnight trip, or go out to dinner with some friends.

It’s important to keep your financial psyche positive by rewarding yourself for your hard work. So be sure to take the time to invest wisely and grow your nest egg, but don’t forget to allow yourself to enjoy the fruits of your labor.

Financial Advice from Einstein

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“Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.” – Albert Einstein

Compound interest has been referred to as the 8th wonder of the world. Even Albert Einstein has referred to compound interest as man’s greatest invention. So, what is so great about it?

Let’s start out by defining compound interest. According to Investopedia:

 Interest that accrues on the initial principal and the accumulated interest of a principal deposit, loan or debt. Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.  

If you have a savings account, you have experienced the phenomenon of compound interest. Let’s say you deposit $1000 into a savings account that gets 2% annual compound interest. After one year, you will have $10,000 (your principal investment) plus $200 (your 2% compound interest) for a total of $10,200. In the second year, you will get 2% interest on your new principal of $10,200. At the end of the second year, you will have $10,200 (principal) plus $204 (interest) for a total of $10,404. At the end of the third year, you will have $10,404 plus 208.08 for a total of $10,612.08. The growth will continue until your withdraw your funds, with your investment earning interest on both the principal and the interest it has earned in previous years.

Compound interest has the ability to grow your money over time in the context of savings or investment. But compound interest can work against you too. If you’ve even taken out a mortgage, used a credit card, or taken out a loan of any type, you’ve probably experienced the negative side of compound interest. Just as you earn interest on your interest in a savings or investment, you pay interest on your interest to a bank, lender, or creditor when you take a loan. This becomes especially important when you are dealing with large sums of money, such as mortgages, car notes, and credit card debt because a larger principal will equate to a larger amount of interest, compounding, that you need to pay off.

Investing wisely can make compound interest your greatest financial ally, but spending carelessly can make it your worst financial foe. Take Einstein’s advice and use “man’s greatest invention” as a tool to invest and spend wisely to maximize your compound interest earnings and minimize your debt.