A Reader Writes: Financial Advice for 20 Somethings

financial advice for 20 somethings

financial advice for 20 somethingsI received the following email recently from a reader who needs some help. I post it as I feel the question is common for many recent grads and I can talk about financial advice for 20 somethings:

Hi,

I just graduated college and received a job offer from a great company. I’ll be making $40,000 to start. I have no problems budgeting, as I have lived off campus in college since sophomore year. The concerns I have are my retirement plan, health insurance, and saving money for a variety of things (trips, house, friends weddings). Any suggestions?

First off, congratulations on finishing school and landing a job. Your email didn’t go into great detail, so some of the things I will suggest may not apply.

Financial Advice for 20 Somethings: Retirement

First, Your 401k Plan

To begin, find out if your company matches on the 401k plan. They may match anywhere between 3-5%. Whatever the match is, contribute that amount. When it comes to investment selections, look for a fund that invests in the market as a whole. An S&P 500 index fund or a total stock market fund would be ideal. If those are not available, look at a large cap stock fund.

If you are comfortable with a little more risk (and you can be since you won’t need this money for 40 plus years), look at small cap stock fund. This fund will be a little more risky, but since you are just starting out, you can afford to take the risk. Always remember, the sooner you start saving for your retirement, the better.

One note about the above: pay attention to the fund expense ratio of the mutual funds being offered. The higher the fee, the more it costs you. There is no relationship between a higher fee and a better performing fund. In many cases, the opposite is true – lower fee funds tend to perform better since they are trying to match the return of the market.

At the end of the day, the fees you pay for a large cap stock fund should be at or below 0.50% and for a small cap stock fund, at or below 0.75%. To understand more about how fees effect your returns, I highly encourage you to read this post. [Read more…]

How Long To Keep Financial Statements

FInancial Documents

financial statementsThis time of year as many people go through their clutter of receipts and financial statements from the previous year, I always get asked, “how long should I keep my financial statements” or “do I need to keep this for any reason”?  I’ve decided to write a post on how long to keep financial statements: what you need to keep, for how long, and some of the reasons why you need to do so. As an added bonus, I created a financial statements checklist in PDF which you can download for free. The benefit of this is that you can keep the sheet in a folder with all of your other financial records and always have access to it.

How Long To Keep Financial Statements

General Financial Statements

Bank Statements

Each month, you should be reconciling your checkbook to the statement that the bank sends you, or you get online. After you verify everything is correct, you should keep the monthly statements for one year. The exception to this is if there was a purchase made that relates to taxes, home improvements, a business expense, etc. In these cases, you will want to hold on to the statement permanently, or until you sell the house/business.

(Note: Since many have online access to your statements, you may ask why the need to keep them. After all, the bank can get them for you. While this is true, most banks will only do this for you back to a certain time, say two years. Anything older is considered “research” and they charge you per the hour for this. The average charge: $25/hour. And while it should only take a few minutes to pull up your account history, who is to say it won’t take them a few hours because of the “complexity” of your account history? Save the statement, avoid the fee.) [Read more…]

16 Habits of Wealthy People

habits of wealthy people

habits of wealthy peopleI subscribe to Success Magazine because I want to learn about other successful people in the hopes that I can better myself and increase my odds of being successful. In a recent issue, there was a story about the 16 habits of wealthy people.

Since I want to become rich, I read that story first. It was so powerful, I thought it would be interesting to talk about these 16 habits because while some of them are ones I would classify as well-known to most of us, there are a bunch of habits on the list that I think many of us (myself included) tend to overlook. Here are the 16 habits and below them are detailed explanations:

16 Habits of Wealthy People

  • Live Within Your Means
  • Don’t Gamble
  • Read Every Day
  • Forget The Boob Tube and Surf The Internet Less
  • Control Your Emotions
  • Network And Volunteer Regularly
  • Go Above And Beyond In Work And Business
  • Set Goals, Not Wishes
  • Avoid Procrastination
  • Talk Less, Listen More
  • Avoid Toxic People
  • Don’t Give Up
  • Set Aside Self-Limiting Beliefs
  • Get A Mentor
  • Eliminate Bad Luck
  • Know Your Main Purpose

Live Within Your Means: Pretty straight-forward with this one. If you have to go into debt to buy something, chances are you cannot afford it. Granted, a house and a college education are exceptions (within reason of course), but for things like clothing, gifts, flat screen TVs, etc. you should not be going into debt to buy these things.

According to the article, wealthy people save 20% of their income and spend the remaining 80% (in other words, they pay themselves first) while almost all of those struggling financially spend more than they earn. Learn to automate your savings so you are paying yourself first.

Don’t Gamble: I gamble, but I don’t gamble. What I mean by this is that I take part in a weekly football pool picking the winners of each week’s games. I also will spend $100 on slots/blackjack when my wife and I or my friends and I head to Atlantic City. The keys are:

  • the money I spend is small in amount, and
  • the money is spend is money I can afford to lose

This is important because too many people play the lottery on a daily basis hoping to strike it rich or they use money that they really cannot afford to lose. If you are choosing between buying a loaf of bread and buying 2 scratch off lottery tickets, you need to seek help.

The main difference between the rich and poor here is simple: poor people rely on luck to improve their financial situation while wealthy people rely on themselves to improve their financial situation.

Read Every Day: I’ve gotten better at reading on a regular basis. Why is reading important? A few reasons come to mind:

  • it makes you think
  • it expands your horizons
  • it grows your vocabulary
  • it keeps your mind sharp

The more you work to better yourself, the more it will overflow into other areas of your life, like your career and income.

The key though is to read things that will better yourself. Only 11% of those that read on a regular basis read for entertainment purposes. Most read career-development material, self development books, current events and biographies. [Read more…]

Following Your Passion In Retirement

passion sign

passion signMaking the transition to retirement can be a difficult one for some people. They spend 40+ years getting up every morning and going to a job that when they retire, they suddenly feel as though they don’t have a purpose. But they do have a purpose, it’s just that it is buried deep inside them. It’s called a passion.

As we progress through life, some push aside their passion or their dreams because real life is happening and there are bills to pay and mouths to feed. But once you retire, you have to opportunity to find those passions and dreams that were once buried and see them through, to start a new chapter in life. In the video below, you will see examples of this. You will see real life people who have retired and are now living their passion. They understand that they only get one shot at life and retirement is their opportunity to follow their dream since they couldn’t do so earlier in life.

(Note that there are 6 versions of the below video. If you refresh the page, you will cycle through them all.)

3 Ways Of Becoming Your Own Financial Adviser

Expert

ExpertTolstoy famously said: “Everyone thinks of changing the world, but no one thinks of changing himself”. This can be very aptly applied to our own personal financial situations. When we find ourselves in a bit of fiscal rut, it can be tempting to pick loopholes in the economy and find shortcuts where there are none. But, when the chips are down, we can only ever look at our own financial habits in the hope of creating significant change.

You can’t change the financial world but you can change your own. Take a stand and regain control of your finances like so many others are – by becoming your own financial expert. We’ve outlined 3 simple ways you can become you own finance guru.

Plan Ahead

It may seem an obvious step to take but the biggest favor you can grant yourself is to have a long-term action plan. This means planning clearly and strategically for each of life’s milestones, whether you wish to set up a college fund or start saving for retirement.

Fortunately for the fiscally-challenged among us, finance data is more accessible than ever. So take advantage of the many internet tools available to you that do the work of a financial expert for next to nothing.
[Read more…]

5 Investing Lessons To Live By

investing lessonsIn a previous issue of Kiplinger’s magazine, Kathy Kristof wrote a column that compares the lessons learned in the movie Moneyball with investing advice.

For those that haven’t seen the movie, Moneyball is a baseball movie about the Oakland Athletics General Manager Billy Beane. The A’s are a small market team, meaning they can’t spend a ton of money on high priced free agents. They have to find a way to win with a small payroll. Beane accomplishes this by looking at statistics of players and building his team around this. In many cases, he looks at statistics that other general managers overlook. It has proven successful as the A’s have been a competitive team most years since he took over. This is quite an accomplishment when there are so many other teams spending large amounts of money on the best players in the world.

In the magazine, Kristof takes the lessons from the movie and applies them to investing. In summary the investing lessons are:

  1. Don’t Believe Your Eyes
  2. Capitalize On Inefficiencies
  3. Don’t Watch The Game
  4. One Game Is Not A Season
  5. Experience Reduces Risk

I love all of these investing lessons. Here is my takeaway from each one.

5 Investing Lessons

Don’t Believe Your Eyes

For baseball, not believing your eyes simply means to dig deeper into analyzing a player. Just because he hits the ball the farthest doesn’t mean he is the best player. He may have artificial help or maybe he is playing against inferior opponents. The key is to not trust what you see, but to do the research to get to the real reasons why a certain player is successful.
[Read more…]

Income Versus Personal Net Worth

personal net worthPaul Stanley, the author of  The Millionaire Next Door: The Surprising Secrets of America’s Wealthy and The Millionaire Mind talks about why one should focus on personal net worth over income when building wealth. Why is this? Because in the long run, you need wealth, not a high income to survive financially.

In this country, many times we mistake someone that has a high income for being wealthy. This isn’t always true. Just because a person has a high salary, it doesn’t mean they are living like a king. If you really want to be wealthy, forget about focusing on having a high income and focus instead on your personal net worth.

On average, a millionaire’s income is 7% of their personal net worth. The median income is 8% of their net worth. (For a quick lesson on average versus median, read this post.) But what exactly is this telling us?

It means that the typical millionaire has a ton of money! In all seriousness, it shows that the typical millionaire is safe should they lose their job. After all, the income they bring in from their job only accounts for 7% of what they are worth. Should they lose their job, they can still get by financially intact because most of their income comes from other sources (think rental real estate, investments, side hustles, etc.).

This is also the reason why the wealthy pay less in taxes than most others. Income from your job is taxed at ordinary income levels while investment income is taxed at investment income levels. The rate for ordinary income is much higher than investment income tax.

So I ask you, what is your income to personal net worth ratio? Do you know?

Calculating Your Personal Net Worth

Remember that net worth is your assets minus your liabilities. (I have a free net worth template for you to download here. I also have a net worth calculator as well.) Your income is your salary plus any dividends and interest you receive, as well as any other forms of income you earn.

To calculate your ratio, simply take your income number and divide by your personal net worth. The lower the number, the better off you are financially. Currently, my wife’s and my ratio is 50%. Not ideal by any means. When I analyze our numbers, what are weighing us down are my house and my wife’s house. If we were to magically breakeven on my house (currently underwater), we would be at 35%, which is better.

You Need To Increase Your Personal Net Worth

This is a relatively easy calculation to perform and it will give you a good idea of where you stand. While earning money is important, it is equally important to save as much of it as you can. Saving and investing your money creates your net worth. The higher your personal net worth, the better your ratio will be.

Take a look at this example as proof. You have two doctors, John and Mark. Both earn $100,000 per year. John’s net worth is $600,000 while Mark’s is $50,000. John is a saver and Mark is a spender. What are their ratios?

personal net worth chart 1

John’s ratio is 17%, which is very good. Mark’s on the other hand is 500%. Remember, the lower the number the better. While you may see Mark earning a high salary and “living the life” with his big house and multiple cars, he really is barely keeping his head above water. In fact, Mark is really Stanley below:

Using the personal net worth ratio holds true for lower income people. Take Joe and Kevin for example. They both earn $30,000 per year. Joe has a personal net worth of $600,000 while Kevin has a personal net worth of $50,000. Their ratio’s are 5% and 60% respectively.

personal net worth chart

This shows us that Joe is a master saver and is truly wealthy. Kevin on the other hand saves some money, but could save more.

Your Takeaway

The point of this post is to show you that you shouldn’t focus on income alone. Yes, you should do everything in your power to earn the highest salary possible, but that high salary is worthless to you if you aren’t saving any of it.

While calculating your personal net worth is a great first step in looking at your financial life, it’s not a complete picture. By running this ratio, you can see exactly how well you are doing and how well you can handle an emergency should it ever come up.

Action Steps

You may be asking how you should go about increasing your net worth. Remember that your net worth is simply your assets minus your liabilities. The more you save the higher your net worth will be. Therefore, the first step in increasing your net worth is to budget. I know, the dreaded b-word. Luckily, there are some awesome tools that make budgeting easy and in some cases, dare I say, fun. OK, that was a stretch, maybe enjoyable is a better word.

First is Power Wallet. It’s 100% free and is just plain awesome. I use it myself. Before I found it, I was tracking my net worth through excel spreadsheets. If you find Power Wallet isn’t for you, then I suggest You Need A Budget. This costs some money, but makes you look at your money differently. Definitely one to check out as well.

Once you have the budget in order, it’s time to start investing. Automated is the way to go here, as it takes away your biggest threat to success – your emotions – out of the equation. For investing, I use Betterment. It’s simple and gets the job done. I also encourage you to read my post on becoming a stock market millionaire. It outlines everything you need to know to be successful in the stock market.

Now that you are budgeting and investing your money, your net worth should begin to increase. As you live within your means and pay off your debts, you will begin to see your ratio change so that you aren’t relying on your income as much.

Final Thoughts

I encourage you to sit down annually and determine your ratio and record it. Work to better your ratio each year. It will get you in the habit of trying to save more, which will make your financial future that much brighter.

If you don’t want to manually track your net worth, there is a free solution that will track your net worth for you, along with your spending, saving and investments. It’s called Personal Capital. I’ve been using it for a few months now and am amazed at the graphs and how it encourages me to save more to improve my finances.

How To Save $100,000

how to save 100000

how to save 100000I saw this great article over on Investopedia and thought I would share it my readers. It offers seven tips on how to save $100,000. To some, $100,000 might not seem like much. But to others, $100,000 is a ton of money. Regardless how you view $100,000 know that saving this amount of money can change a lot of things financially for you. Here are the tips for how to save $100,000:

Tips For How To Save $100,000

  • Have The Right Mindset
  • Create Short-Term Savings Goals
  • Save on Taxes
  • Reduce Interest Burden
  • Take Advantage of Employer Benefits
  • Generate Additional Income
  • Keep Costs Low

Have The Right Mindset

I agree with all of the points listed on how to save $100,000. You need the right mindset and have to stay positive, regardless of what is happening in life. I have read studies that if you place two people out in the wilderness, one person with all of the survival skills and a negative attitude and someone else with no survival skills and a positive attitude, the one with a positive attitude will survive.

The point being that you need to stay positive. Life gets tough at times. But learn to see the positives in everything. You’ll be much happier and much more likely to succeed. If you are in debt currently, realize that you didn’t get into debt overnight and you won’t get out of debt tomorrow. But stay in the mindset that you WILL get out of debt.

You have to stay positive and believe that you can overcome your financial troubles. If you doubt yourself from the start, you really have no hope in changing things. Learn to believe in yourself and think positively.

Be sure to read more about thinking positively or learn how to start thinking positively if this is an area where you need help.

Create Short-Term Goals

I follow short-term goal making too. If you have read my monthly goal posts, you will see that I like to focus on goals at 30 day increments. Keeping goals short keeps you interested and more likely to succeed. Succeeding makes you feel good and everything comes full circle.

Of course, there are some goals that are long-term and breaking them down into 30 day increments don’t make much sense, like paying off your mortgage. Even though this is the case, you should still break the goal down into small, more manageable chunks.

If your current balance is $150,000 then make your goal to get your mortgage to $140,000 this year. If you have $25,000 in student loan debt, focus on getting the balance to under $20,000. When you hit these mini-goals along the way, you keep your motivation high and your focus on achieving your goal. After all, seeing your mortgage balance drop from $150,000 to $147,000 in a year when your goal is to have it paid off will cause feelings of doubt. Push through these feelings by making smaller, more attainable mini-goals.

The same idea holds true for saving money as well. Your emergency fund may not look like a lot of money, but over time, a monthly savings into the account will have it grow. Just set up short-term goals to grow the account by. Make it your goal to save $1,000 this year and when you reach $500, have a mini-celebration.

When it comes to saving for retirement, realize again that it’s a journey. You don’t need the money tomorrow, so don’t get frustrated or discouraged that you “only” have $50,000. Continue to invest and over time, the balance will grow. I started out saving for my retirement with a measly $20 from each paycheck. Close to 15 years later and I’ve cleared six figures and continue to save.

Save on Taxes

It’s a must to keep taxes as low as possible. You don’t need to be CPA or study the IRS rules. At the end of the day, to reduce your taxes the most you should:

  • Contribute as much as you can to your 401(k) plan. Your contributions are taken out of your pay before taxes, making your taxable income lower, meaning less tax paid.
  • Contribute to an HSA account if you have a high deductible insurance plan. If not, contribute for an FSA. Both will reduce your tax burden.
  • Know the difference between a credit and a deduction. Many people confuse the two. A credit is much more valuable to you then a deduction.
  • Invest wisely. Bond interest is taxed at ordinary income rates whereas capital gains and dividends from stocks are taxed at a lower rate. If you hold taxable bonds or bond funds, they should be in your retirement accounts so that you don’t have to pay taxes on the income.
  • Take advantage of tax-loss harvesting. This is where you sell some holdings at a loss if you have already some some investments at a gain. You can offset your gains with the losses, eliminating any tax you owe.
  • Give to charity. You should be giving because it is the right thing to do. But you do get the added benefit of writing off your donations. Keep a detailed list of the donations you made throughout the year – money, clothing, time, travel, etc.
  • Pay attention to the law. I know I said you don’t have to study the IRS rulebook, but you should stay abreast of new tax laws and changes every year. You never know when something will change that will affect you. Just keep your eye out for news stories and read them. If you don’t understand what it is talking about or if it benefits you, ask your CPA.

Reduce Interest Burden

There are a few ways to reduce your interest burden. When talking about credit cards, the solution is to pay off any outstanding balance as quickly as possible. If you are paying 18% interest on your debt, by paying your card off in full you are essentially getting an 18% guaranteed return on your money. You won’t find this kind of return anywhere else.

To pay off your debt, find ways to cut monthly expenses, take a second job, or start a side business for additional income. Understand the wealth equation and learn to increase your income. Apply the savings or extra income to your debt.

Another area where you pay interest is on your mortgage. You can refinance or you can look to pay off your mortgage early. In either case, doing so will save you thousands of dollars in interest.

Employer Benefits

When it comes to employer benefits, the biggie is the retirement plan. If your company offers you one, you need to be investing in it. At the very least, you should be investing up to whatever your company matches you with. So if they offer a 4% match on your contributions, you better be investing 4% of your salary.

But again, that is what you should do at the very least. Ideally, you should be saving between 10-15% of you salary in your 401k. The more the better. I know that money might be tight, but you have to find a way to save now for retirement. You are going to need money to live and it’s not going to magically appear in your account. Take advantage of time and let your money work for you.

For those that can afford to save for retirement but are scared of the stock market, you need to get over your fear. Yes the stock market has been on a roller coaster ride as of late. But there is always short-term volatility in the market. When you look long-term, much of the volatility goes away and the general trend is positive. The stock market is not a game that is rigged and you have no shot at winning. If you play the market and try to chase returns, you will fail miserably. But if you are smart about your investing, you can easily become a stock market millionaire.

Aside from retirement plans, many employers offer other benefits as well. One company I worked for had a discount on cell phones through AT&T. I was able to get a 17% discount on my monthly bill. In addition, they had relationships with all sorts of local companies offering discounts on flowers, golf, car washes and more. Email your benefits team to see if your company has any such benefits.

If not, all hope is not lost. Depending on who your health insurance is through, they might offer you discounts as well. Mine provides a $25 coupon on a bike helmet, a reimbursement for visiting a gym and a free consultation with a nutritionist each year. They even have an 800-number with counselors to help if I am going through a tough time. If you aren’t covered by an employer, shop around for the best health insurance for your money.

Generate Additional Income

Taking a second job or starting a side business is great to help you pay off your credit card debt, but the income from these ventures after paying off the debt goes a long way too.

I have done this since college. I am always looking for ways to add some extra money to my pocket. The reason is simple: the more money I have saved, the more it can compound upon itself and grow more.

With the proliferation of the internet, you can do all sorts of things to generate additional income. Just figure out what you enjoy doing and then see if there is a way to earn an income from it. When you do this, your “work” never feels like work at all.

Keep Costs Low

Being aware of what you get charged in expenses for mutual funds and ETF’s is a must. There is no point in paying high management fee’s when you can get funds that suit your needs for a fraction of the cost. It is one of the things you can control when you invest. After all, the fees you pay are like being charged twice:

  • You first pay the fee that the investment charges
  • You lose out on the opportunity of that money growing for you

Here is what I mean by this. Let’s say you have an investment that charges you 1% and another that charges you 0.50% and you have $1,000 invested. At the end of the year, with a 1% fee, you paid $10 in fees. With a 0.50% fee, you paid $5 in fees. (This is the first charge.)

Had you not invested in the investment that charges you 1% but only in the fund that charges you 0.50%, you would have $5 more in your account. While this $5 might not seem like a lot, it becomes huge when you take into account the real value of your account and time. (This is the second charge.)

Over the lifetime of investing, you are paying over $75,000 in investment fees! This shouldn’t cause you to rethink if investing in the stock market should be done or not (it should be), it’s just showing you that you have to pay attention to fees.

If you have no idea how much you pay in fees and want to know, you should sign up for a free account with Personal Capital. They have a great tool that looks at your investments and tells you exactly how much you are paying in fees each year. It was truly an eye-opening experience for me.

Final Thoughts

If you can incorporate these tips into your daily financial life, you are going to see a complete change in your finances, and all for the better. You don’t have to use every tip, but the more you do, the better off you will be financially.

While making all of these changes at once might seem overwhelming to you, use the one tip to your advantage right off the bat: create short-term goals. Divvy up these points into manageable pieces and attack them one by one. This will remove the feeling of being overwhelmed and will allow you to take action instead of being paralyzed by seeing too much to do.

What are your thoughts on how to save $100,000? Do you think anything needs to be added or removed?

The Round Table – May 4, 2014

Round TableWelcome to May! April was a great month, but now I am looking forward to all that May has to offer, in particularly, the option of leaving the windows open all night as it won’t get so cold!

A few weeks ago, I had mentioned I had some big news. I’m really to release it now. I bought a personal finance blog! Longtime readers of this site know that I’ve been a staff writer for Penny Thots. Well, things happened and I ended up buying the blog. I’ve spent the past month refreshing the site adding social media accounts, etc. I’ve also written a handful of posts as well. So if you haven’t checked it out yet, be sure to click on the link above! Be sure to follow me on social media too and I’ll be sure to follow back! Also, if anyone wants to “partner up” and cross-share content, be sure to shoot me an email. Onto this weeks awesome blog posts!

Great Blog Posts from Other Bloggers

Personal Finance: Doing What Works For You at Cash Money Life
58 Habits To Increase Wealth at Barbara Friedberg Personal Finance
Beginners Guide To Index Investing at Mom and Dad Money
How Far Should We Go To Help Others Financially at Don’t Quit Your Day Job
Learning To Live With Risk at Five Cent Nickel

Posts MoneySmartGuides Wrote for Other Blogs

Do You Have An Opportunity Fund at Penny Thots
3 Ways To Safely Handle Stock Market Volatility at My Dollar Plan
Learning How To Learn at 20s Finances

Carnivals MoneySmartGuides Appeared In

Carn. of Fin. Camaraderie at Finance with Reason
Carnival of Retirement at Save and Conquer
Lifestyle Carnival at Lisa Vs. The Loans