| Financial help for a newcomer |
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Ruston
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| Financial help for a newcomer |
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I am a young college student and I plan on getting married two years from now. I try to save every penny I earn and eventually put it in savings. Right now I am semi-dependent on my parents but I would like to see this change very soon. I would like advice on the simplest way to start understanding what it takes to finacially survive, how and when to save money and where to start. I know these questions are big, but I would appreciate your time on any advice yall could give me. Thanks again
Ruston
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Sun Sep 09, 2007 12:02 pm |
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oldguy
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quote:
I would like advice on the simplest way to start understanding what it takes to finacially survive, how and when to save money and where to start.
An important part of finance is 'risk analysis' and 'risk management'. A simple example - when you buy a car, the dealership wants you to buy an extended warranty, it is a high profit item for him. If you have a 'real' job and a good income stream, the warranty is a bad deal, it is obviously cheaper for you to self-insure and pay for repairs yourself. But if you are a poor paycheck-to-paycheck family, then a $2000 auto transmission repair would take food away from your kids for a month - so you would need the insurance even tho your $2000 bill actually costs you $3000 over time. Most things are in this catagory - life insurance, warranties, service contracts, health insurance, car insurance, stocks, bonds, CDs, real estate, mortgages.
Risk and return are directly proportional. You must determine what your desired risk level is - when you are 55 you will start your wealth preservation years, so you'll want lower risk. When you are in your 20's you are in your wealth accumulation years, so you will want a higher risk.
CDs (low risk) pay about 5% - a $4000/yr investment for 30 years gets you only about $280,000 (& 3% inflation eats up most of it). The same $4000/yr in a 12% investment gets you about $1M. So it is quite important to select a risk level that takes you to your goal in the time that you allocate. And it is equally important that you & your family enjoy spending the rest of your income stream.
I'm a retired engineer, my math and my statistics classes served me very well - they are the basis for 'probable outcome' calculations - and luck is nice too - in the 15 years that 401k's were available before I retired mine grew to nearly $1M - I invested in 12% risk products, but my actual return was about 17%.
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Sun Sep 09, 2007 11:48 pm |
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Fern1
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Speaking in more general terms, try to put your savings and investments on 'auto-pilot' so you don't have to think about it or otherwise be tempted to spend the money. That means taking full advantage of your employer-sponsored 401k.
Start saving now for retirement. You'll be glad you did so when you're 50. Nothing beats 401ks and IRAs for their tax deferral advantages, and i would say max these out first before saving/investing in any other way, with the exception of an emergency fund, which should cover your living expenses for 6 months in the event you lost your job.
Try not to get too dependent on credit cards. It's important to have several in order to establish good credit, which will serve you when you're ready to borrow money for a mortgage. But always pay the balance in full each month.
There are a million other things i could say, but these spring to mind first. Good luck!
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Mon Sep 10, 2007 8:15 pm |
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Apollo
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| Re: Financial help for a newcomer |
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Dear Ruston,
The position you find yourself in is the same 95% of the population are in and could also be referred to as the 'rat-race'.
There is an approach to this which will get you out of it and you will be financially independent from your parents and even your job. Here is the wealth formula if it's that what you want to call it:
Purchase assets.
Sounds very simple but it is harder then most think when it comes to execution of this strategy.
Most people don't know the definition of an assets. An assets is anything that puts money into your pocket. One of the biggest problem is that most people classify their home as their biggest asset which is exactly the point where your financial problems will start.
In order for you to become financially independent you need to have enough assets which will generate positive cashflow through which you will finance your liabilities.
This will take time, patience and a strong character to stick with the plan.
There are many ways to add to your asset column of your balance sheet but I prefer global equity markets.
Don't be fooled by 10% annual return on investment (ROI). A 10% ROI is for mutual fund managers which try to beat the market and for buy-and-hold investors.
Mutual Fund Managers are the worst investors and buy-and-hold works if you plan for the long-term, i.e. retirement, but does little for the short term.
It is always good to have a retirement plan for which a buy-and-hold strategy is perfectly suited.
The drawback will be that you won't gain financial freedom for a while and be dependent on your monthly pay-check.
There are companies which will be able to assist you with short-term financial goals as most people want to enjoy their life now and not wait until they are retired.
My recommendation to you is the following.
Have a long-term strategy in place for retirement BUT
Allocate a portion of your funds to a short-term investment strategy.
I would start to put money into a money market account for this short-term strategy. Set aside the same amount every month ($50, $100...) until you have saved up at least $2,000.
Get financial advise form companies which specialize in achieving short-term financial goals. They will guid you through your short-term investments.
As far as your long-term strategy is concenred your employers 401k or IRAs are a decent place to start with due to contributions from your employer and tax deferral advantages but I would also start another long-term investment portfolio which will offer you greater returns but also carries greater risk.
An emergency fund is always a nice cash cushion to have. I would allocate all funds for the emergency fund into a money market account.
You may ask yourself where to get the funds for all of the above.
I would concentrate on the short-term investments and use the cash generated from those investments to do the following:
Increase funds for the short-term investment strategy
Start your long-term investment portfolio
Start your emergeny Fund
Max out your 401K
Use the rest for whatever you need
Once again this will take time and patience to develop and your returns from your short-term investments will grow over time as the capital will be increased. The same is true for your long-term strategy.
Another advantage of your short-term portfolio is that it will act as a cash cushion in case of an emergency.
If you decide to start the short-term portfolio never draw down on your capital but use the cashflow genertaed form the investments.
Whatever you decide to do please keep in mind that you need to purchase real assets which will create positive cashflow in order to become financially independent.
I hope this will help you.
It is not smart to play it safe but it is safe to play it smart.
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Tue Sep 11, 2007 11:28 am |
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pf101
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First, I must say that the fact that you are even thinking about this at this point in your life puts you ahead of about 90% of your peers, so congratulations.
I have a couple of book suggestions for BOTH you and your future spouse.
1 - The Automatic Millionaire by David Bach
2 - Smart Couples Finish Rich by David Bach
You will notice some similarities in the content of the books because they're by the same author, but I still recommend reading both. And you both particularly need to read the 2nd one. Money is a leading cause of divorce and the reason it causes so many problems is that people don't talk about it until it's too late. This book will help you do that to make sure that you are both on the same page. Read it separately and then come together to discuss your responses to the activities/questions in the book.
As far as direct suggestions, here are two big ones:
1 - set some goals. And by set some goals I mean write them down, do the math and then make them work. [edited.] It's one of the most important parts of financial planning but something most people ignore.
2 - put your goals on auto-pilot. The less time and effort you have to put into your financial management, the more likely it is that you'll do well at it and stick to your plan.
When it comes to saving for your future, there is a standard formula which works for most people:
1 - invest in your 401k plan to get the full company match
2 - pay off any high-rate consumer debt
3 - max out your IRA (probably/preferably a Roth)
4 - max out your 401k
5 - invest in taxable accounts
If you follow that formula (tweaking it to your personal situation, of course) you'll be well on your way to a solid financial future.
Good luck
Personal Finance 101
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Wed Sep 12, 2007 9:18 pm |
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Apollo
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Two things that you should not forget if you want to be on your way to a bright financial future is:
1. Pay yourself first.
2. Purchase real assets.
Keep those two in mind when you evaluate your financial position and set out your investment strategy.
I agree that it is a good to write down you goals.
When you evaluate your investment strategy ask yourself the following questions:
What is my time horizon?
What are my investment goals?
What is my risk tolerance?
It is not smart to play it safe but it is safe to play it smart.
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Thu Sep 13, 2007 1:55 pm |
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pf101
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Tim edited my post above (and rightly so) which referred you to an article about goal setting which is on my site so I decided to post the content here in case you (or anyone else) were interested in reading it.
How to Effectively Set and Track Goals
Why set goals?
Setting goals is one of the most important things you can do to ensure financial success, but it is usually the last thing people think about. If you don't set goals, how do you know if you are actually being successful? If you are going to get to where you want to be in life, you have to know the path to take. Goals are your roadmap and if you set them up right, they will take you from point A to point Z with as few detours and as little pain as possible.
How to set goals
The key to goal setting is to make your goals concrete and measurable and to make meeting them automatic. By this I mean, your goal should have a date and amount associated with it. You don't just say “I want to pay down my debt.” You say "I want to reduce my debt by $5,000 over the next 12 months." By giving yourself a set $ amount and date to meet, you will be able to judge whether you are actually meeting your goals or not and make adjustments accordingly.
By making it automatic, I mean using technology to your advantage. Set up automatic payments for all of your bills so that you are never late. Set up an automatic deduction from your pay check that goes directly to your savings account so that you are paying yourself first and will be less likely to spend the money instead of saving it.
Just doing those two things: 1) Making your goals concrete and 2) Making them automatic, will drastically increase your chances of success.
The timeline
Goals can be divided into 3 categories:
~ Short-term
~ Mid-term
~ Long-term
Short-term goals are goals that will be completed within the next 12 months. Mid-term goals are ones that will be completed within the next 1-7 years. Long-term goals are goals that will be completed 7+ years from now. Some examples could be:
1. Short term – establish emergency fund of $1000
2. Mid-term – pay off consumer debt within 3 years
3. Long-term – have enough for retirement
One of the biggest challenges is being realistic! If you only make $40k/year, it won’t really do you much good to set goals that will cost you $20k/year to meet. Be honest with yourself about what you can do. If you find that you are ahead of your timeline for meeting your goal, you can always add another one or meet your goal early but if you find that you are behind, it can be disheartening and cause you to give up all together.
The process
As I mentioned above, to set your goals you have to set specific criteria as well as an action plan. If you open the accompanying excel workbook and click on the Goal Summary tab you'll see that I have taken the liberty of filling in some goals for you that should be on everyone’s list.
Remember, your goals don’t all have to be responsible. Your goal can be to buy a new TV or to go on a vacation. As long as you are meeting the core responsible goals, there is nothing wrong with enjoying your life and money. Setting a goal plan just means that you will be more likely to meet all of your goals without having to scramble and sacrifice something else that is important.
For your goals, fill out the following information for each goal:
1. Goal Name
2. Start Date
3. End Date
4. $ Needed
5. First Step
If you are married or in a similar relationship, you should do this with your partner.
Once you have set at a few goals in each category, print out that page and put it somewhere you will see it every day. It will remind you of what you are working towards and keep you on the right path. I would also suggest writing your most important goal on a sticky and attaching it to your credit card so you have to see it any time you want to use your card. That way you will know that every penny you spend on that card is a penny that is not taking you closer to your goal.
Make a plan
Now that you know what your goals are you need to plan how to meet them. In the same workbook is a tab called Detailed Goal. You should make as many copies of this as necessary – one for each goal. I would recommend re-naming the tab for each worksheet to reflect the name of your goal.
To develop your goal plan, you need to figure out what the steps are to meet your goals. The first step should be to implement whatever your automatic transaction will be. For example: if you want to buy a car in 5 years and you plan to spend $10,000 on that car, you can figure out that you will need to save $2,000/year or $167/month.
So, your first step should be to set up an automatic transfer to your savings account for that amount per month. Since this is a longer-term goal, you should set up milestones so you can check back in to make sure that this goal is still a priority and you are still on track to meet it.
I suggesting setting a milestone at least every year and preferably every 6 months. This allows you to take a minute to review your goals to make sure you're going the direction you want to go. Put your milestones on your calendar with reminders so you don't forget to check back in.
Implement your plan
So, you’ve gone through all the planning, now you just have to execute. The key to achieving your goals is to make them as easy to do as possible. This means making everything automatic. Set up all of your goals so that you don’t even have to think about them. Use auto bill pay and auto deductions to your savings/investment accounts. It takes a bit of time at first but it will be worth it in the long run.
Monitor/Add to your goals
Your goals are always going to be changing. You should keep adding goals as they come up. When you add a new goal, you have to look at your existing ones and figure out which is more important. It may be that your new goal is more important than one of the old ones so your old one gets pushed down the list. Look at your goal list as a fluid thing and don’t try to be too rigid with it. There is nothing wrong with reprioritizing as thing change.
How to manage your goal money
Everyone has a different method. It all depends on how much time/effort you want to put into it. Personally, I'm a fan of lazy accounting so I use ING for my goal savings accounts. I like the fact that with ING I can set up multiple sub-accounts and name them whatever I want. So I can have a car account and a vacation account and a furniture account, all separate, so I can tell at a glance how much money I've put towards each goal. It' makes things very easy for me and if you dislike book keeping as much as I do, this method may work for you as well.
Good luck with your goals. Just the fact that you're thinking about them puts you one step closer to success.
Personal Finance 101
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Thu Sep 13, 2007 5:24 pm |
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rhino2
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Start stocking piling your money into 'safe investments' like high interest savings accounts, CDs or short term bonds.
Read the book 'A random walk down wall street' - that should give you a good information on different investment instruments (part 4 of the book specifically) and gives you the pros/cons of each so you can make your mind up on where you want to invest your money.
Till then though, I would suggest putting it in 'safe instruments'.
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Tue Oct 09, 2007 5:54 am |
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switze22
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I would advise against Savings Accounts and CDs. Yeah, you make like 5%, MAX, but you can do so much better.
Start reading about the stock market (Thousands of books, websites, etc..) or even watch "Mad Money" with Jim Cramer.
With a little effort, you could do alot better with your money than 5% with little risk.
-/- David -/-
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Tue Nov 13, 2007 5:38 am |
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Apollo
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I agree, I also do not recommend to put money into CDs or short-term bonds and don't qualify that as an investment. Yes, they are safe but teh returns are very very low.
MMAs are a good place to temporarily park you money which will be used for investment purposes.
It is not smart to play it safe but it is safe to play it smart.
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Tue Nov 13, 2007 11:55 am |
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Keyblast
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| Your asking the right questions! |
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Congrats on asking how to get started! This is the first step.
First start with a budget, and stick to it.
Next get rid of the credit cards...then pay them off.
If you sock away as much money to savings, and invest properly you will be well on your way. There are many free budgeting tools out there that can help you as well.
Good luck.
Take the 30-day Financial Challenge!
Giving you the tools you need to succeed financially...for FREE! Visit Keyblast.com
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Wed Nov 28, 2007 6:52 am |
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Ashley Watson
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| Re: Financial help for a newcomer |
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There is lots of way for the saving you can go with Bank Fixed Deposits,RBI Bonds, or RBI Relief Bonds,Post Office Saving
Start saving now for retirement. You'll be glad you did so when you're 50. Nothing beats 401ks and IRAs for their tax deferral advantages, and i would say max these out first before saving/investing in any other way, with the exception of an emergency fund, which should cover your living expenses for 6 months in the event you lost your job.
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Fri Aug 27, 2010 9:52 am |
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mukeshkkashyap
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put your goals on auto-pilot. The less time and effort you have to put into your financial management, the more likely it is that you'll do well at it and stick to your plan.
Personal Finance Planner
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Fri Aug 27, 2010 1:41 pm |
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