Well, Hello There 2014

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The holidays always tend to set people back a pretty penny. Whether it’s gifts, travel, fancy meals, or just general socialization, the holidays can be an expensive time of year. While the time between Thanksgiving and New Year tends to fly by in the blink of an eye, it can leave lots of us with unexpected debt that we will be dealing with for months into the New Year.

Happily, with a new year come New Year’s Resolutions. Try committing yourself to one or two financial resolutions this year to pump up your financial health and recover from the holiday crunch. Here are a few that might tickle your financial fancy:

1) Save at least 10% of your income each month. You need savings, and you need a plan to develop your saving skills. Start out with as little as 1% if you have to, but make a point to get into the habit of saving.

2) Live within your means. This means actively avoiding getting into situations where you will incur unneccesary consumer debt. You may need to forgo some nights out, adjust your plans to socialize, or forget about shopping for the next 6 months, but it could free up the wad of cash that you need to pay the bills on time, or prevent you from using your credit card unneccesarily.

3) Pay down debt agressively. I suggest focusing on the debt with the highest interest rate first, the second highest interest rate second, and so on. If you are feeling overwhelmed, try consolidating debt into a single monthly payment with a fixed interest rate. This could cut down the number of bills you are dealing with significantly, and give you the structure you need to manage your money more effectively.

4) Clean out the closet. Organize a clothing swap with your friends or head to a local consignment shop and see if you can sell any of your old duds. If thos aren’t options, virtual consignment and eBay can be great ways to digitally clean out the closet and make a few extra dollars. You can even donate your old stuff to charity, and might be able to use the donation as a tax write off for the new year (check with an accountant on this one).

5) Get in shape. Studies show that people who take control over their physical health take control of their financial health too. I don’t know if it’s because of the endorphins, or the time spent at the gym, but it is just an extra reason to get fit, so get off the couch and get motivated. You’ll feel good when you look in the mirror and when you look at your bank statement too.

 

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.

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.  

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!

10 Potential Tax Deductions

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Tax season is upon us. It’s just about everyone’s least favorite time of year. Doing your taxes is definitely a bit of a drag, but it doesn’t need to be as painful as many people make it out to be. Try hiring a professional to help you get through the process, or, if you are a true DIY-er, pick up an at home tax program. No matter how you do your taxes, remember, there are tons of items that are tax deductible. Here’s a short list of some of the things that may contribute to your refund this year:

  1. Mortgage Interest
  2. Medical Expenses
  3. Home and Business Improvements (Especially if they increase energy efficiency.)
  4. Student Loan Interest
  5. Business Expenses (Potentially everything from pencils and paperclips to entertaining clients during a business trip.)
  6. Transportation and Accommodations (Do you use your car for business purposes? Did attend a work related seminar last year? Do you travel to a monthly business meeting in another city?)
  7. Charitable Donations
  8. New Car (Again, especially of the energy efficient variety.)
  9. Expenses Incurred While Seeking Employment (You may be able to write off your new “interview” suit.)
  10. Continuing Education (Did you renew a professional certification? Maybe you took a few classes to brush up on skills you need to move your career forward?)

Remember, this is not a comprehensive list, and you may qualify for even more deductions than I’ve listed. Also, be aware that this isn’t a be-all end-all list. Consult a tax professional to find out how this year’s tax code applies to you and your individual situation.

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.  

New Year, New You!

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Photograph: http://www.alamy.com

It’s a new year, and that means a new you! It is certainly a time for new beginnings, and you may have set some goals for yourself this year aside from the totally predictable (and forgettable) “work out regularly.” While I’m an avid fan of getting my sweat on, I like to make sure my finances are also in good shape. So I’ve made up my own to-do list for 2013:

  1. Align bills to all be due around the same time. This way, they can all be paid at once, saving time.
  2. If you haven’t already, set up your bank account online and pay your bills digitally. This will save the following: time managing paperwork, money spent on stamps and envelopes, trips to the post office, etc.
  3. Compare shop insurance companies and utilities. Maybe I’m paying $150 for cable, internet and phone to Company A, but I can switch to Company B and receive the same service for $100. Maybe I can’t. But I’ll never know unless I ask.
  4. Haggle. Sure, this isn’t possible at say… a department store. But I bet you can talk down the quote the salesman gave you on that new refrigerator. Women are notorious for being too intimidated to haggle. Compare shop, educate yourself, and do it!
  5. Save. It can be as simple as a starting with $1 this week.  This 52 Week Money Challenge , brought to my attention by a reader (thanks Ali!), is trending for the new year.
  6. Invest in yourself. Take class (or a few) to improve your skills and improve your workplace marketability. Update your resume. Join a professional or hobby-related association. Network with other like minded individuals. Get new business cards. Market yourself!
  7. DIY. Yes, I said it. Do it yourself. My fellow HGTV fans may likely already embrace this concept. There’s nothing like the feeling of completing a project you know how to do, instead of delegating it out and paying someone else to do it. Case in point: I just finished painting my living room. Could I have hired someone to do it? Sure. Was it a little bit of a pain in the butt? Yes. But did I feel amazing at a job well done when it was finished? You bet.
  8. Buy what you need. Purchasing random items that catch your eye can leave your wallet feeling light at the end of the month. Try to skip the impulse buys and use those dollars for something else.
  9. Cook. Yes, you’re tired and it’s just so easy to order in or head out to eat. But remember all that those nights out to eat can put more of a dent in your budget than you realize.

What’s on your to-do list for 2013? Leave a comment below to share your ideas with the rest of the Chickvesting community!

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!