If you are uncertain about the Roth IRA or traditional IRA, read this article by CashMoneyLife. I have also reference some of my other posts below. This is a very important idea to understand, especially for young investors and students right out of college who are looking for ways to save and invest extra cash.
Cash Money Life - Roth or Traditional IRA
You may also want to read:
Manage Your Money
When you increase your income or decrease your spending, you’ll find yourself with more cash at the end of the month. That cash is your ticket to financial freedom, and the more you can get each month, the better off you are. The trick though, is not to spend it, but to do things that will build a stable future for you.
1. Pay Off All High Interest Debt
Anything with an interest rate over 9% needs to go as soon as possible. The extra money should be used to make double or triple payments on these debts, focusing first on the one with the highest interest rate.
These steps can help you take care of your debt:
i. Make the first list – 4 columns, Name of debt you owe, the amount you still owe on that debt, the monthly payment for that debt, and most importantly, the current interest rate on debt.
ii. Order all of the debts by their current interest rate. The one with the highest interest rate, not biggest balance, should be paid off first.
iii. Look for ways to reduce the rates, focusing most strongly on the highest current one. Readjust the priority of the list to reflect to new rates.
iv. Direct all of your extra payments towards the top debt on the list. Each month, make minimum payments on all of the debts on the list except for the top one. With that top debt, throw everything you can at it. Make a double payment or a triple payment or more.
v. When a debt vanishes, cross it off the list and feel good about it.
vi. Update the list when you acquire a new debt.
vii. Update the list when one of your debts adjusts to a new rate.
2. Build an Emergency Fund
An emergency fund is an amount of money you keep in a savings account that’s intended to be used in the event of a major crisis, such as a job loss, a medical emergency, major car damage, and so on. It’s a good idea to measure your emergency fund in terms of months’ worth of living expenses – you should have a month and a half worth of living expenses for each person you claim as a dependent.
A good rule of thumb is to have 6 – 8 months worth of living expenses in your emergency fund. If this seems like a lot, set it as a long-term goal and begin putting aside a small amount each week. Right now, I have an automatic monthly deduction from my checking account to a high yield savings account at ING. Don’t wait, begin right now with as much as you can afford.
3. Max out Retirement
Go to one of those retirement meetings at work, ask exactly how much you should be putting away to ensure that your living expenses are well-covered in retirement, and put that much away. This varies a lot depending on how much you have in right now, how much your employer matches, and so on, so you should talk to your retirement planner at work about the specifics. It is never too early to start investing for retirement!
Save 10% of your income at the bare minimum. You should not have more than 5% of your retirement in the stock of any one company. If your company doesn’t have a retirement plan, open a Roth IRA on your own with a reputable company like Vanguard. If your company offers any matching on your retirement, contribute enough so that you can get all of it. If you don’t know what you are doing, put your money in a “target retirement” fund so that it gradually becomes less risky as you approach retirement.
4. College Savings
Establish a 529 college savings plan for them and start automatically putting a certain amount into this account each month. There are many different plans, just pick a good one and start investing now. I use the New York 529 Savings Plan managed by Vanguard for my lovely niece.
5. Pay Off All Debts
If all of these are covered and you still have cash left over, the next step is to pay off all of your debts. Get rid of car loans, student loans, and your mortgage using the debt reduction plan discussed in the previous section.
6. Invest
Now, this is a good time to start investing. Trent Hamm recommends buying low-cost broad-based index funds because they don’t have many fees and grow very nicely over long periods of time. Don’t invest in individual stocks unless you’re quite content to lose the money or want to invest many, many hours in research. Trent Hamm invest with Vanguard directly through vanguard.com – their fees are miniscule, they offer a huge array of index funds, and their customer service is stellar.
Thank you for Trent of the Simple Dollar for allowing the free distribution of this e-book. For the entire e-book, click on link below.
Everything you ever really needed to know about personal finance in one page, by Trent Hamm.
RELATED LINKS:
Personal Finance in One Page: Part 1
Personal Finance in One Page: Part 2
Personal Finance in One Page: Part 3
Personal Finance in One Page: Part 4
Personal Finance in One Page: Part 5
This article discusses some simple yet, great ideas on achieving financial independence. These could be considered secrets, but they aren’t really. Most of these points we all know of.
Here are a dozen of the non-secret "secrets".
1. Pay off your credit cards.
With credit card rates at 15% to 20% (or even more), there's just no risk-free investment that can provide you with as good a guaranteed return as you'll get by paying off your high-interest credit cards. (If you have multiple credit cards, pay off the one with the highest rate first.) Once you've paid off your credit cards, only charge what you can afford to pay off in full each month.
2. Live below your means.
Try to save at least 10% of your income. (20% would obviously be even better.) Regardless of how much money you make, if you don't live below your means, you'll never achieve financial independence (unless, that is, you hit the lottery or get a large inheritance, and I wouldn't recommend planning your financial well-being around either of these options).
3. Differentiate between needs and wants.
Fund your needs and try to minimize your spending on the "wants". (You'll want to discuss your goals, and how you plan to achieve them, with your spouse or partner. It's so much easier when you're both on the same page, working as a team to achieve your financial goals.)
4. Start to save and invest early.
Pay yourself first. The earlier you start, the more time you'll have to let the power of compounding go to work for you.
5. Establish an asset allocation plan that's appropriate for you.
Determine the percentage of your portfolio that you want in equities and the percentage you want in bonds, based on your needs and your risk tolerance. (In your planning, remember that over your investing career, you'll inevitably experience at least one bear market (perhaps more), during which you should be prepared to lose as much as 50% of your equity holdings. So, a portfolio that's 80% equities and 20% bonds could lose ~40% in a bear market. You need to set your asset allocation according to the amount of risk you're willing to take so that you don't panic and sell at the bottom of a bear market, after the damage has already been done.)
6. Invest in a diversified portfolio of low-cost mutual funds.
Choose the low cost funds needed to flesh out your asset allocation plan. (I'd recommend Vanguard, the low-cost leader.)
7. Contribute to your company retirement plan
(at least enough to get the company match). If your company doesn't have a match, and has poor investment choices with high costs, consider other available options.
8. Contribute additional money if you can.
If you qualify, fund a Roth or Traditional IRA.Then fund your taxable account.
9. Minimize taxes.
When you invest in a taxable account, place your tax-inefficient holdings (like bonds) in your tax-deferred accounts and tax-efficient funds (like Vanguard's Total Stock Market Index Fund) in your taxable account.
10. Save part of every raise.
When you get a raise, invest at least half of it. (Even being able to spend the other half of your raise is an increase in your spending, so you can certainly do it!)
11. Rebalance.
When you rebalance back to your desired asset allocation, you're controlling risk. (You're selling high and buying low, and that's the "secret" to successful investing.)
12. Stick to your plan
and watch your financial garden grow. (You do have a plan, don't you? See #5.)
ARTICLE CREDIT: Morningstar.com
STAGE 1: The Early Years.
Traditional advice: You’re finally earning a decent income. Now put that money to work for you.
Changes to financial system:
Leverage is out; saving more to meet your goals is in.
Don’t count on supersize gains in stocks and real estate going forward.
Expect the market’s sharp zigs and zags to continue.
Right moves now:
Buy that house if you plan to stay in it.
Save for a hefty down payment.
Go all out for retirement.
Smooth the roller-coaster ride.
Set priorities.
These steps cannot be repeated often enough. The majority of people don’t adhere to the basics of personal finance. If you are looking for a place to start, this is it. Click link below to read more.
1. Save for a rainy day.
2. Be prepared for an emergency.
3. Invest for retirement.
As I have always mentioned, the intention of this blog is to provide you with solid information that will allow you to make sensible decisions when it comes to money and personal finance. After reading studying many books and reading many blogs, one starts to have a sense as to what is good information from what does not work. Even though money management is different for different people in different situations, certain information works very well in general. This blog posting on The Digerati Life provides a great and simple breakdown of Dave Ramsey's basic steps to financial success.
I have listed the steps briefly; click Dave Ramsey's book to purchase from Amazon. Highly Recommended.
DAVE RAMSEY'S BABY STEPS
1. Save up for a small emergency fund.
This is very important and is usually very liquid cash that you can access quickly in the case of an emergency.
2. Pay off your debts with the debt snowball strategy.
A very important step in being free of financial distress.
3. Grow (or extend) your emergency fund.
This should equate to approximately 3 - 6 months of your expenses.
4. Save and invest in your retirement.
Put money in your employers 401k or 403b; enough to get the matching. Next, open up an IRA; a traditional or a Roth IRA depending on whether or not you think you will be in a higher tax bracket closer to retirement (which means that you should have a Roth IRA now).
5. Save for your child's college fund.
Open up a 529 plan. Save for your child's college fund. Let's face it, it's not getting any cheaper. The earlier you start the better.
6. Pay off your home mortgage early.
Once you get to this step, you can contribute more to your mortgage.
7. Continue saving, build your wealth, invest and give.
This is a great position to be in; just focus on growing your net worth.
If you have not already noticed, I have posted a lot of articles around retirement, IRAs and 401ks etc. Why? It is all part of my personal investment philosophy of preparing for the long term and having the right strategies. 360 Degree Wealth is meant to provide you with all the necessary information to assist you in making a well-informed decision. With the right information, and the right understanding, I believe most people will be able to become great financial planners. I think this article adds to that mission.
Retirement Investing is very important because it allows you to start thinking long term. The mind-set that is created when thinking long-term is valuable when it comes to investing. There are many wealthy people out there and a large majority have become wealthy because they are able to plan well; they are very responsible with their finances. An important part is retirement.
I encourage you to read this article below and get an understanding of the various options that are available to you; IRA, Roth IRA, Roth 401k, 401k, 403b etc. Understand the difference between them and know the contribution limits. Your decisions here can have a huge impact on the quality of your lifestyle closer to your retirement years.
Enjoy!!
You may have heard the three basic personal finance rules to achieve wealth; earn money, spend less than you earn, and invest. These are very important, however, applying what I am learning in my risk management and other finance courses, it is important to not only do those, but to manage risk as well. How do you do so, through great planning. Look at these 10 basic personal finance tips.
1. Make a will or estate plan. (not done yet)
2. Obtain sufficient insurance. (through my employer)
3. Set up a high yield savings account. (I have an ING Direct account)
4. Track your money. (I use both MS Money and Mint.com) See my Mint.com review.
5. Build an emergency fund. (set up automatic savings through ING Direct)
6. Get out of debt. (I have zero debt)
7. Improve your credit score. (I own high reward credit cards that I pay in full every month; I use them merely to build and maintain excellent credit- they are important to get lower rates for mortgages and insurance etc.)
8. Start investing for retirement. (I have opened a Roth IRA, max out my 403(b) and invest through Sharebuilder)
9. Increase your income. (I work hard at my job and keep my options open)
10. Negotiate to save money. (I am a net saver, not a net consumer; however, I do look for deals like anyone else.)
Pay attention to all of these and carefully and strategically incorporate them into your lifestyle.
During this difficult period, I have come across several of my young colleagues who have switched much of their 401k or 403b plans to bonds. When I say "young", these people have 25+ years to retirement at least. This is fundamentally a bad idea because those who do not intend to take out their money early and accept the huge penalty (10%), have nothing to worry about and should be concentrated in stocks. Now is the time where equities are very cheap, so you will actually be purchasing units at a very low price. When this downturn is over, and I do not know when that will be but I do believe it will eventually happen, you will fully benefit from the market recovery. Please do your research on this very important and seek the best financial advice for your personal situation.
One piece of advice that John Bogle, the founder of the Vanguard Group, says is that your percentage investments in bonds should be equivalent to your age. For example, if you are 25 years old, you should have 25% in bonds and the remainder in stocks. This is a basic yardstick to use if you are not the sophisticated investor or ignorant of how investments work.
