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.
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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

"College"

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!

Hot Wheels!

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Throwback time!  Remember Hot Wheels?  I sure do.  Unfortunately, getting a new car is not as easy as heading to the toy store and picking up the latest and greatest.  Which brings me to my question of the day:

Who doesn’t love the smell of a new car?

Answer: Me, apparently.

A friend of mine recently asked me to help her figure how to be able to afford a new car. After a few minutes of talking about her wants and needs, I found myself trying to discourage her from purchasing anything. She seemed confused at first.

“But my car has 80,000 miles on it!”

“But what if it dies?”

“But I never really wanted this car anyway!”

Ok, I get it. You WANT a new car. Yes, I understand that you WANT something new, fun, and maintenance free. But that bottom line is this: it is just a WANT.

There are loads of reasons I can give you not to buy a brand new car. Cars depreciate the second you drive them off the dealer’s lot, blah blah blah. But I want to approach this from a different, more enlightening angle.

Cars are never an investment. Cars will never appreciate (increase in value), so they are a utility expense. I don’t care if you’re driving a Mercedes Benz of a Geo Metro, it’s still going to get you from place to place. Granted, there are features in different cars that will increase your comfort and safety. But these features will never change the purpose for owning your car.

With this in mind, you will probably want to create a compromise between comfort and expense. A good rule of thumb is that you should never allocate more than 20% of your income to transportation. Meaning, if you make $1,000 per month, your maximum transportation budget should be $200. For drivers, this includes car payment, gas, insurance, repairs, etc. For urban girls who take public transportation, this shouldn’t be as much of a challenge.

In the case of my friend, who is about to pay off her “old” car, I can’t help but wonder if a better move would be to keep her car until it dies. Let’s assume she makes $3,000 per month. This means that her maximum transportation budget should be around $600 each month. Assuming she pays $150 each month for insurance, $100 per month on gas, and sets aside $50 per month for maintenance, she has a budget of $300 per month that she can spend on a car payment. This can certainly get her into a new and exciting car of her choice.

However, I come from the school of thought that dictates her money would better spent on an investment instead of a utility. An investment could be a savings account, retirement account, or any other asset that will accumulate value. Instead of spending that $300 a month, which will not change the utility she gets out of her car, why not set aside the money and make it work for her?

Here’s an alternate scenario: Set aside the $300 each month. If you’re a beginner, put it into savings. If not, put it into a mutual fund, Roth IRA, 401k, stock, or anything that will help your money grow, and that you can contribute to on a monthly basis. You’ll still be able to get from point A to point B in your car. You may not feel excited about your practical set of wheels, but you certainly will feel excited as the value of your investment grows.

What do you think?  Are new cars worth the money, or would you rather save the cash?  Scroll down to share below, and join the conversation!