Tuesday, February 26, 2008
Sunday, February 17, 2008
Get Your Financial Priorities Straight for 2008
Right now, your financial motivation tank is full; you're resolved to make all your New Year's resolutions stick. But I know that in a few weeks the tank is going to be running near empty as many of you get distracted or confused or frustrated about how to convert resolutions into reality.
What I hear time and time again is how hard it is to figure out how to set financial priorities. Resolutions to be more financially on top of things fall by the wayside because people don't know where or how to start. So, in my continuing series "You Asked For It," I'll review the most common questions I get on the topic of how to take control of your financial life.
Tackle Your Debt
Q: I can't afford to pay down my credit card debt and save for retirement at the same time. Which should I do first?
A: Getting your financial life in order is an exercise in multitasking. You should tackle different goals at the same time. Too often, I see people take the all-or-nothing approach; they think they need to concentrate all their money and time on just one task. I think it's wiser to take a broader approach.
For example, if you have a 401(k) or 403(b) at work and your company offers a matching contribution, there's no question that you must participate in the program and contribute enough to get the maximum match from your employer. I don't care how much you're drowning in debt, there's no bigger priority than to get what is essentially free money from your employer.
At the same time, you have to focus on the credit card debt. Often, people are flummoxed when they have multiple credit cards with unpaid balances. Here's the strategy: Pay the minimum due on each card each month, of course. That's the only way to stay in the good graces of the card company and keep your credit score healthy. But in addition to those minimum payments, add an extra payment to the card that charges you the highest interest rate.
Notice I didn't say the card with the biggest balance. Once you pay off all the debt on the card with the highest interest rate, start tackling the card with the second-highest interest rate, and so on.
Q: I can't afford to pay down my credit card debt and save for retirement at the same time. Which should I do first?
A: Getting your financial life in order is an exercise in multitasking. You should tackle different goals at the same time. Too often, I see people take the all-or-nothing approach; they think they need to concentrate all their money and time on just one task. I think it's wiser to take a broader approach.
For example, if you have a 401(k) or 403(b) at work and your company offers a matching contribution, there's no question that you must participate in the program and contribute enough to get the maximum match from your employer. I don't care how much you're drowning in debt, there's no bigger priority than to get what is essentially free money from your employer.
At the same time, you have to focus on the credit card debt. Often, people are flummoxed when they have multiple credit cards with unpaid balances. Here's the strategy: Pay the minimum due on each card each month, of course. That's the only way to stay in the good graces of the card company and keep your credit score healthy. But in addition to those minimum payments, add an extra payment to the card that charges you the highest interest rate.
Notice I didn't say the card with the biggest balance. Once you pay off all the debt on the card with the highest interest rate, start tackling the card with the second-highest interest rate, and so on.
Scrutinize Your Budget
Q: Where am I supposed to find the money to set aside for paying off bills and saving? I can barely get by today as it is.
A: I hear this all the time -- you're too broke to save money. I don't buy it. The majority of people who come to me with this question have all sorts of opportunities to spend less, which translates into saving more.
Look, I'm not going to tell you what's a necessity and what's a luxury. The only way to take control of your financial life is to decide that for yourself. If you really want to change your ways, just scrutinize your monthly bank and credit card statements; there are plenty of places you can scale back if you make that your priority.
A great way to get you to save more is to simply make it automatic. Set up a direct deposit from your checking account into a savings account. The reality is that once you take the plunge to automatic savings, you'll be able to adjust to having less in your checking account. Right now, you can earn more than 4 percent interest by setting up an account at online banks such as ING Direct, HSBC Direct, and EmigrantDirect.
Do the Right (Retirement) Thing
Q: I want to save for retirement, but I get lost when I try to figure out what to do. Is there a simple way to do the right thing?
A: If you're single and your modified adjusted gross income is under $101,000, or you're married and your gross income on your joint tax return is under $159,000, you can invest the maximum $5,000 in a Roth IRA in 2008. (If you're at least 50 years old, the maximum is $6,000.) By now, you know that I think a Roth IRA is the single best retirement investment after a 401(k) with a matching contribution.
If your income makes you ineligible for a Roth IRA, I recommend using a traditional IRA even if it's non-deductible. Both types of IRAs give you the benefit of having your money grow tax-deferred while it's invested. The difference between the two is that with a Roth IRA you'll owe no tax on your withdrawals in retirement assuming you pass some basic rules; with a traditional IRA, you'll owe income tax on all withdrawals in retirement. That's why a Roth is preferable if you're eligible.
On IRAs and Lifecycle Funds
So where exactly should you invest your IRA money? If you're up for making two investments, I recommend putting 80 percent or so in a low-cost broad index fund or exchange traded fund (ETF) and the remainder in an international index fund or ETF. I'm a stickler for low costs, so funds such as Vanguard Total Stock Market Index (VTSMX) and Vanguard Total International Stock Index (VGTSX) are sound choices. For ETFs, you have plenty of options with Vanguard, as well as iShares S&P 500 (IVV) and iShares MSCI EAFE (EFA).
For those of you who really want a super-easy investment solution for your IRA, check out what are called lifecycle funds, or target retirement funds. A lifecycle fund is basically a one-stop-shopping option.
You choose a portfolio with a "target date" that's close to when you expect to retire. The portfolio will then hold a mix of investments that are considered correct for your time horizon; as you get closer to that retirement target date, the portfolio will automatically move into more conservative investments. Vanguard and T. Rowe Price have a full lineup of low-cost target funds you can choose from to match your expected retirement date.
Q: I want to save for retirement, but I get lost when I try to figure out what to do. Is there a simple way to do the right thing?
A: If you're single and your modified adjusted gross income is under $101,000, or you're married and your gross income on your joint tax return is under $159,000, you can invest the maximum $5,000 in a Roth IRA in 2008. (If you're at least 50 years old, the maximum is $6,000.) By now, you know that I think a Roth IRA is the single best retirement investment after a 401(k) with a matching contribution.
If your income makes you ineligible for a Roth IRA, I recommend using a traditional IRA even if it's non-deductible. Both types of IRAs give you the benefit of having your money grow tax-deferred while it's invested. The difference between the two is that with a Roth IRA you'll owe no tax on your withdrawals in retirement assuming you pass some basic rules; with a traditional IRA, you'll owe income tax on all withdrawals in retirement. That's why a Roth is preferable if you're eligible.
On IRAs and Lifecycle Funds
So where exactly should you invest your IRA money? If you're up for making two investments, I recommend putting 80 percent or so in a low-cost broad index fund or exchange traded fund (ETF) and the remainder in an international index fund or ETF. I'm a stickler for low costs, so funds such as Vanguard Total Stock Market Index (VTSMX) and Vanguard Total International Stock Index (VGTSX) are sound choices. For ETFs, you have plenty of options with Vanguard, as well as iShares S&P 500 (IVV) and iShares MSCI EAFE (EFA).
For those of you who really want a super-easy investment solution for your IRA, check out what are called lifecycle funds, or target retirement funds. A lifecycle fund is basically a one-stop-shopping option.
You choose a portfolio with a "target date" that's close to when you expect to retire. The portfolio will then hold a mix of investments that are considered correct for your time horizon; as you get closer to that retirement target date, the portfolio will automatically move into more conservative investments. Vanguard and T. Rowe Price have a full lineup of low-cost target funds you can choose from to match your expected retirement date.
Plan Ahead
Q: We have two young children we want to start college funds for, but we can't afford to save up for their school costs and continue to build our retirement funds. What should we do?
A: Focus on your retirement. Trust me, if you love your children, you'll make securing your own retirement the priority.
There are plenty of ways for your kids to get help with college costs -- loans, scholarships, etc. -- but there's no help if you find yourself without enough money to live on in retirement. I don't want you to end up needing to ask your kids for help down the line because you didn't make saving for retirement your main priority.
Q: What are the best investments for next year?
A: Who knows? Anyone who tells you they do is just guessing. Oh, sure, they may be paid a lot of money to guess for you, and no doubt some Wall Street watchers will guess right. But plenty will guess wrong.
My point is that it's ridiculously hard to nail what the top individual investments will be, especially over a short time period of 12 months. I think one of the biggest problems investors create for themselves is thinking that investing is about making a big killing fast.
Yes, that would be ideal, but it's extremely hard to pull off, and the risk is that you end up losing a lot of money if you bet wrong. Or you never start investing in the first place because you're too scared of losing it all. That's why I recommend broadly diversified index funds and ETFs for your core portfolio.
Will you have the No. 1 investment next year? Probably not. Will you have the worst investment next year? I seriously doubt it. What you will have is a portfolio that will grow over time -- years, my friends, not months -- in line with the general markets. Over decades that's proven to be a profitable approach -- no doubt one of your biggest financial priorities.
Q: We have two young children we want to start college funds for, but we can't afford to save up for their school costs and continue to build our retirement funds. What should we do?
A: Focus on your retirement. Trust me, if you love your children, you'll make securing your own retirement the priority.
There are plenty of ways for your kids to get help with college costs -- loans, scholarships, etc. -- but there's no help if you find yourself without enough money to live on in retirement. I don't want you to end up needing to ask your kids for help down the line because you didn't make saving for retirement your main priority.
Q: What are the best investments for next year?
A: Who knows? Anyone who tells you they do is just guessing. Oh, sure, they may be paid a lot of money to guess for you, and no doubt some Wall Street watchers will guess right. But plenty will guess wrong.
My point is that it's ridiculously hard to nail what the top individual investments will be, especially over a short time period of 12 months. I think one of the biggest problems investors create for themselves is thinking that investing is about making a big killing fast.
Yes, that would be ideal, but it's extremely hard to pull off, and the risk is that you end up losing a lot of money if you bet wrong. Or you never start investing in the first place because you're too scared of losing it all. That's why I recommend broadly diversified index funds and ETFs for your core portfolio.
Will you have the No. 1 investment next year? Probably not. Will you have the worst investment next year? I seriously doubt it. What you will have is a portfolio that will grow over time -- years, my friends, not months -- in line with the general markets. Over decades that's proven to be a profitable approach -- no doubt one of your biggest financial priorities.
Saturday, February 16, 2008
Thursday, February 14, 2008
Monday, February 11, 2008
Money Management Tips
Automate investing and keep an eye on your credit score. Just two smart money management moves.
Some of these may seem like no-brainers, but all are worth a look, and a few might just change your life.
Automate your financial life. Call your mutual fund or broker to have monthly investments routed from your bank. Do the same for your monthly utility, cell-phone and cable payments. You'll find it easier to budget, and you'll never pay a late fee again.
Know your credit score. Order your credit score from all three major credit bureaus for $45 from Myfico.com. True, you're entitled to free copies of your credit reports this year, but one detail will be missing: the magic number that lenders and insurers use to judge your credit-worthiness. Pay for that.
Don't take it with you. Pass on money to your children now rather than bequeathing it. Gifts of up to $11,000 a year are tax-free. Besides, your kids and grandkids will thank you -- which they can't do if you're dead.
Digitize the financial drudgery. Buy either Quicken or MS Money, software that will help you track your spending, see your portfolio allocations, estimate next year's tax bill -- all the tedious tasks you know you ought to do but never would unless someone made it very easy. Pick up the premium edition of either program for $70 and change at Amazon.com. You'll spend a couple of hours on initial setup, but from then on, you'll be amazed at what you can do with your money, once you know what you're doing with your money.
Have a financial plan. Hire a financial planner to review your retirement and college savings plans. At http://www.garrettplanningnetwork.com/ and http://www.myfinancialadvice.com/, you'll find planners who work by the hour (usually $150 to $200 per). Getting on track will take eight to 10 hours up front, plus an hour or two for a yearly checkup.
Stop assuming you're immortal. Hire a lawyer to craft a will, a durable power of attorney, a living will and a health-care proxy. It may cost $1,500 to $2,000 (more for large or complicated estates), but could save your heirs thousands in taxes and fees. Unless, of course, you live forever.
Some of these may seem like no-brainers, but all are worth a look, and a few might just change your life.
Automate your financial life. Call your mutual fund or broker to have monthly investments routed from your bank. Do the same for your monthly utility, cell-phone and cable payments. You'll find it easier to budget, and you'll never pay a late fee again.
Know your credit score. Order your credit score from all three major credit bureaus for $45 from Myfico.com. True, you're entitled to free copies of your credit reports this year, but one detail will be missing: the magic number that lenders and insurers use to judge your credit-worthiness. Pay for that.
Don't take it with you. Pass on money to your children now rather than bequeathing it. Gifts of up to $11,000 a year are tax-free. Besides, your kids and grandkids will thank you -- which they can't do if you're dead.
Digitize the financial drudgery. Buy either Quicken or MS Money, software that will help you track your spending, see your portfolio allocations, estimate next year's tax bill -- all the tedious tasks you know you ought to do but never would unless someone made it very easy. Pick up the premium edition of either program for $70 and change at Amazon.com. You'll spend a couple of hours on initial setup, but from then on, you'll be amazed at what you can do with your money, once you know what you're doing with your money.
Have a financial plan. Hire a financial planner to review your retirement and college savings plans. At http://www.garrettplanningnetwork.com/ and http://www.myfinancialadvice.com/, you'll find planners who work by the hour (usually $150 to $200 per). Getting on track will take eight to 10 hours up front, plus an hour or two for a yearly checkup.
Stop assuming you're immortal. Hire a lawyer to craft a will, a durable power of attorney, a living will and a health-care proxy. It may cost $1,500 to $2,000 (more for large or complicated estates), but could save your heirs thousands in taxes and fees. Unless, of course, you live forever.
Subscribe to:
Posts (Atom)