Money Matters

With all the discussion about money related issues that has been going on I thought this interview with Charles Schwab (http://money.cnn.com/magazines/moneymag/moneymag_archive/2007/01/01/8397411/index.htm) might interest some folks in here. Also, I find this site very informative (http://www.freemoneyfinance.com/). I particularly like this article (http://www.freemoneyfinance.com/2006/04/your_most_valua.html).

i wonder if this stuff works for everyone? or if he kind of fell into some of his money. reading some of the articles, it seems like alittle bit of both

Does anyone really save all their receipts? What receipts should you be saving? Just stuff that's deductible I'm assuming, right?

I'm referring to this article by the way

Free Money Finance: 7 Easy Steps to a Faster Tax Refund (http://www.freemoneyfinance.com/2006/02/7_easy_steps_to.html)

Does anyone really save all their receipts? What receipts should you be saving? Just stuff that's deductible I'm assuming, right?

I'm referring to this article by the way

Free Money Finance: 7 Easy Steps to a Faster Tax Refund (http://www.freemoneyfinance.com/2006/02/7_easy_steps_to.html)

I don't think you should be saving every lunch and grocery receipt. These are the items (http://apps.irs.gov/app/stdc/popup/specified-items-popup.html) you can claim as part of your sales tax deduction. I don't think you can claim the tax paid on that big screen TV but you should check on that with a CPA. Checkout the IRS' tool (http://apps.irs.gov/app/stdc/) to help you calculate your sales tax deduction.

Well, I did buy a car this year.

With all the discussion about money related issues that has been going on I thought this interview with Charles Schwab (http://money.cnn.com/magazines/moneymag/moneymag_archive/2007/01/01/8397411/index.htm) might interest some folks in here. Also, I find this site very informative (http://www.freemoneyfinance.com/). I particularly like this article (http://www.freemoneyfinance.com/2006/04/your_most_valua.html).

It's tremendous advice by Schwab to buy index funds. First off, they're diversified. Secondly, they have the lowest expense ratios out there, which means the investment company takes the smallest bite out of your investment.

An actively managed mutual fund can cost you anywhere from 0.5% to 3.0% each year. If you get one with a 1% expense ratio, and the fund earns 15%, that means you only earn 14%. Index funds from Vanguard or Fidelity only cost you 0.2% or so in expenses. Great deal.

It's hard for even the best stock pickers to beat the market over the long haul. Lots can do it for one year, fewer can do it three in a row, even fewer can do it five in a row, and hardly anyone can do it 10 years in a row. The index funds are there simply to emulate the market. It costs very little to run the S&P 500 index fund; you just simply buy all the stocks in the S&P 500. The actively managed funds hire all these analysts to research stocks, trying to outperform the S&P 500. But very few can do it over the long term, and all those analysts cost you money in the form of a higher expense ratio.

Index funds are definitely your friend. There are good buys for actively managed funds too, but if they're charging you more than 1%, steer clear IMO. Fidelity has some real good ones that charge 0.7% or so. But by and large, your best off with index funds, whether it's a stock index fund or a bond index fund.

The power of saving money:

Let's say you're 30. You open an IRA account and put $5,000 in the S&P 500 index fund today. You leave it there until you retire at age 65. Historically, the S&P 500 earns about 10% per year. Some years are downers, some years are way up, and overall it comes to an average of 10%. Here's what happens:

2007: $5,000
2008: $5,500
2009: $6,050
2010: $6,655
...
2042 (retirement year): $140,512

Now let's say instead of saving $5,000 today, you decide to put it off and you start saving when you're 40 years old, in the year 2017.

2017: $5,000
2018: $5,500
2019: $6,050
2020: $6,655
...
2042 (retirement year): $54,173

See that? You wait 10 years, and you just cost yourself about $85,000. If you had started saving at age 20 instead of age 30, you'd have $364,452 by the time you hit age 65.

Point being: it is never too late. Don't wait, it just costs you money. If you're talking about saving for your child's college education, or saving for retirement, or saving for a house, whatever. Do whatever you possibly can to get time working on your side.

When it comes to saving, yesterday is gone, but today is better than tomorrow. I even like to think about Rage Against the Machine when it comes to saving money:

"It has to start somewhere, it has to start somehow. What better place than here? What better time than now?"

Some might say, well I don't have $5000 to put in an IRA today. That's OK. Put in whatever you can afford. Then next year, put in what you can afford. Keep doing that. You'll be pleased with the results when all is said and done.

I personally like to have a little bit automatically withdrawn from my checking account each month and into my retirement account. That way I don't have to think about it. Some people even go a step further and have a piece of their paycheck deducted right away and sent straight to their retirement account. That way they don't even notice the money's gone. Even if it's just $25 per paycheck or something, it puts time on your side.

seriously:

- first max your 401k matching (ie, if your employeer will give you free money in a ratio to the amount you invest) - its free money

-second max your roth ira (uses post tax dollars, but unlike traditional IRAs, it' not tax deferred, it's TAX FREE).

-third you can invest anything beyond that you wish into IRAs or what have you. tax deferred investments aren't as good as free money or investments that are only taxed on principle and not on interest.

debts grow faster than savings though, so accelerating mortgage payments and paying off those credit cards and loans are generally good ideas.

seriously:

- first max your 401k matching (ie, if your employeer will give you free money in a ratio to the amount you invest) - its free money

-second max your roth ira (uses post tax dollars, but unlike traditional IRAs, it' not tax deferred, it's TAX FREE).

-third you can invest anything beyond that you wish into IRAs or what have you. tax deferred investments aren't as good as free money or investments that are only taxed on principle and not on interest.

debts grow faster than savings though, so accelerating mortgage payments and paying off those credit cards and loans are generally good ideas.

Good post. There are so many articles and books out there on getting your financial situation in order. They all basically go like this:

1) Figure out how much you spend. Either track everything anally by keeping receipts and whatnot. Or at the end of the month, check out your bank and credit card statements, and total up the outflows.

2) Figure out ways to cut your spending, and start doing it. Make sure you're spending less than you're earning each month. Hopefully at least 10% less.

3) Build up an emergency nest egg. Take that 10% and sock it away in a savings account or money market. Save up enough to support yourself for 3-6 months if you were laid off. Everyone needs a financial safety net.

4) Once you have the nest egg, take that 10% of your pay, and use it to pay down high-interest debt, like credit cards. Once that stuff is paid off, go to step 5.

5) Start building up your retirement and cash savings. Keep socking away that 10% in IRAs and your savings accounts.

If your employer offers a 401K with matching, as That Guy said, DO NOT pass on it. It's like they're putting a bag of money on the table and saying here take it. To not take it would be retarded. If your employer has a 401K, before you even get started on Step 1, make sure you're contributing enough to get the full match.

Other tips:

- If you have children and/or a spouse, make sure you have life insurance. Don't leave them without a safety net if you croak. It will be hard enough on them if you died, the last thing you want is to see them struggling financially too.

- In retirement accounts, hold stock funds. First off, retirement accounts are either tax free or tax deferred (depending if it's a Roth or a Traditional). And in your cash accounts, tend to hold safer investments. Definitely don't do it the other way around. It's inefficient tax management.

- If you've got 20+ years before you retire, make sure you're mostly in stocks (aka equities). Stocks make the most money. They have down years, so you have to be willing to stomach the occasional dip. Just know that if you have enough time before you need the money, they'll surely come back up. Be willing to ride the rollercoaster and it will pay off in the end.

- Diversify your holdings. Dont put 100% of your money in 3 different stocks. Own mutual funds. This way if one company goes belly up, you're not screwed.

- Index mutual funds are the most cost efficient funds available.

- If you don't own a house/condo, save up for one as soon as you possibly can. There's no better way to build net worth. The mortgage interest is tax deductible which equals a big tax refund each year. The value of your house grows over time, so when you sell it, you'll have more money for a bigger house. And your mortgage payments help build up equity in the home, which is an asset you can draw on later.

- Don't spend money on fancy cars. Cars depreciate in value faster than just about any asset out there. Just get something reliable and safe. It's no fun, I know, but it's financially wise. Certified pre-owned with about 20K - 40K miles gets you the most bang for your buck from a depreciation standpoint.