Thoughts About Deloreans… and Investing

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 Like most children of the 80’s and 90’s, I have a deep love for the Back the the Future movies. No, not because Michael J. Fox was oh-so-dreamy as Marty McFly in those movies. It’s really because time travel via a Delorean is just about the coolest idea ever.

We’ve all got a couple of things we’d like to take back ever having said or done, and the Delorean is certainly the tool of choice for fixing those faux pas. However, few mistakes ever will top failure to plan for your financial future. Remember, those who fail to plan, plan to fail. Which means that if you aren’t investing in your future today, you’re already planning a financial belly flop for retirement.

We all do our fair share of moaning and groaning about bills, rent, mortgage, debt, utilities, and whatever other expenses we incur from month to month. It’s already enough of a challenge to pay bills and stay ahead of the game, especially for those of us at the beginning of their careers, or on the lower end of the income scale (or both). But it’s a challenge you need to be up to if you want to secure your future financial stability.

I’d suggest starting out by taking 1% of your income – more is better – and investing it into a 401(k) program (or similar) at your workplace. Most employers offer some type of 401(k) program to their employees. For those unfamiliar with what a 401(k) is, here’s a definition, courtesy of Investopedia.com:

A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

Chickvestor Translation: You choose to enroll in a 401(k) program and the following things typically happen:

  • You choose to have some of your pay put into a 401(k) account. This usually happens pre-tax. Pre-tax means that the money you choose to put away is taken out of your pay before Uncle Sam takes his share. You are not paying tax on the money you are putting into the 401(k)… yet. This decreases your taxable income, which in turn can reduce your tax bracket, decreasing the percentage of your income that you are required to pay in federal taxes. Any money that you don’t pay in taxes is money in your pocket!
  • Employers typically will match your contribution to your 401(k) account, up to a certain amount, usually in a percentage. Meaning, if you put away your maximum of 5% of your pay in your 401(k), and that equals $3000, your employer will put in $3000 just to match what you put in. Suddenly, your $3000 annual investment is a $6000 annual investment.
  • You earn interest on the money that you put away. That means your money accumulates value while waiting for you in the 401(k) account every year. You don’t pay tax on this money until you choose to withdraw it from your account, so let it compound interest work its magic on your money for a few years before withdrawing it!
  • Be sure to read the fine print. Different 401(k) programs have different perks and limitations. Check with your employer to find out the specifics offered at your place of work.

Although 401(k) programs are not the only programs offered by employers, they usually are the most common. Other programs include Roth IRA’s, tax-deferred annuities, life insurance, and a whole bunch of other investment tools and strategies. Your best bet is to speak to your employer to find out your options for retirement planning.

The bottom line here is that if you aren’t planning for your future, you are committing a major financial faux pas. So unless you’ve got Doc Brown’s Delorean in the garage at home, start your savings account, the sooner, the better.  

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. 

 

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.

Hiatus Over

 My apologies for the hiatus, but I’ve been busy doing something I hate. Something I despise. Abhor, even. It’s been the bane of my existence (and the reason my social life has been on pause) for the past month, and it’s finally coming to a close. I’ve been moving.

Granted, my reason for moving has been positive and wonderful. I’ve taken an important step on my financial path by purchasing a multi-family home. That’s right; I’ve become a landlord.

True, I already work full time. Yes, this will add to my list of responsibilities. However, it’s done some positive things for me, such as:

  1. Diversified my income. Most of make our income by working. By purchasing a home that can get rent from, I’ve created an additional stream of income, called passive income. Passive income is money that you can make without having to work (Making money for no work? Yes please!). Lots of über-rich people do this. They call it collecting money on their investments. may not be among the ranks of the Warren Buffetts of the world (yet), but everyone has to start somewhere.
  2. Taken a significant step towards paying off my mortgage. True, I have a mortgage and it will take years for me to pay off. However, the passive income I am making from rent covers all but $300 of my mortgage each month. That means all I am responsible to pay for are the taxes, insurance and utilities/home improvements. Granted, these expenses are significant, especially in my area, but it’s more palatable when your mortgage payment is minimized.
  3. Invested in an asset. Property values have been volatile, and are down at the moment. I was lucky to get a deal on a property which I never would have been able to afford before the property bubble burst. Coupled with an exceptionally low fixed interest rate on my mortgage, I really feel like I’ve scored. With some luck, my property will appreciate in value over the years that I plan to own it, creating another opportunity to make money on my investment.

True, every investment comes with a risk. But with proper research and planning, I’ve done my best to invest in a property with the potential to appreciate and produce income. Now, readers, I’m looking for suggestions for cost-effective home improvements. Comment below!

To Plan or Not to Plan? That is the Question!

There’s an old adage that educators, such as myself swear by:

“Those who fail to plan, plan to fail.”

This applies to most aspects of life, particularly to your finances. And at the start this new year, lots of us are busy making resolutions, especially of the financial variety.  But if you’re not sure what goal setting or financial planning entails, or even what that means, who do you turn to?

Most of us turn to our parents, spouses, mentors; pretty much any person we trust or admire. The problem is that these people rarely have financial credentials.

Let’s say for argument’s sake, you’ve found a friend or family member that displays the signs you perceive to signal financial success. Do you know for a fact that this person you are trusting for financial advice is actually financially savvy? Maybe this person drives a luxury car and lives in a fancy neighborhood. How do you know that this person doesn’t have heavy credit card debt? Or multiple mortgages on their home? Maybe this person has a lot of stuff, but is struggling to pay the bills each month.

Make sure that whoever you consult for financial advice actually knows a thing or two about how to successfully handle money. Consider talking to a professional financial planner or consultant instead of a friend or family member. Just like your friends and family, your planner should have your best financial interests at heart – that is part of what you will be paying him/her to do. But a planner has something that your family might not; financial expertise. A good planner should be able to help you set up an effective plan for your individual situation based on your income, debt, assets, and so on. You should be able to work with your planner to set specific short and long term financial goals that are realistic and attainable. Ultimately, the time you dedicate to planning your financial life should empower you to live the life you want to live instead of the life you have to live in the future.