I have just found out today that I will be receiving an $825 pay raise next year. I am deciding between putting this money in the Roth or to simply leave it in my savings account.
I haven't really planned on what to do with random bonuses on income. This bonus will turn out to be about $55 more a month, which is definitely not a lump sum, but something I feel like I should place somewhere automatically (so I never actually see it).
What are your thoughts? I am planning on making posts in the future on how to deal with windfalls and raises.
Showing posts with label saving. Show all posts
Showing posts with label saving. Show all posts
Monday, July 13, 2009
Sunday, April 13, 2008
Little expenses add up
It seems that everyone has something that they cant live without. Whether its a cup of coffee at Starbucks, cigarettes and alcohol, or going out to eat, many times these "wants" are not necessary and can hinder your future finances.
David Bach wrote an excellent book titled The Automatic Millionaire. You can find more information at the link below
http://www.amazon.com/exec/obidos/ASIN/0767923820
What David Bach states is that once you find your "Latte Factor" and eliminate this product or service, many times you can find enough money to save each month.
Dont think that $5 a day doesnt add up? $5 a day is $150 a month, and if you save this in a total stock market index for 30 years this amount is $275,403.43.
Little expenses add up.
David Bach wrote an excellent book titled The Automatic Millionaire. You can find more information at the link below
http://www.amazon.com/exec/obidos/ASIN/0767923820
What David Bach states is that once you find your "Latte Factor" and eliminate this product or service, many times you can find enough money to save each month.
Dont think that $5 a day doesnt add up? $5 a day is $150 a month, and if you save this in a total stock market index for 30 years this amount is $275,403.43.
Little expenses add up.
Importance of an Emergency Fund
It is vitally important to have an emergency fund that is truly used for an emergency because not having one can make for some bad financial practices. Believe me, I know from experience.
When I first moved to Austin it took me a good month to figure out that I wanted to go into financial planning. This also required an additional 4 or so months to study and pass the insurance and financial tests needed to be a planner. When I moved to Austin I had approximately $4,000 saved. During this 5 months (and another month waiting to work for Ameriprise), I have spent all $4,000 and brought upon myself quite a bit of credit card debt.
The 2 biggest problems I faced during this time was that I didnt work during these 6 months and that I was not properly budgeting my money. I wanted to explore Austin and I did have a really good time, however I will be paying for that for a while to come.
As for my lack of budgeting my money this was a problem throughout my whole life. I always thought I had a good running total of how much I made and spent each month. And I also had large credit card limits which I didnt think would be a big deal to use. Little did I know that when I wanted to switch from being a financial planner to being a teacher I would have another few months where I would at least have a decrease in pay until I was teaching. I took a job as a courier and about a month after the job my car needed a new transmission. I had to take out a car loan and get more into debt.
The moral of the story is that if I had an emergency fund and if I properly budgeted my money I would be in a MUCH better financial situation that I am in now. I could have possibly put a down payment on a house in a market where there are bargains. Instead I will need to first pay down my credit cards, then save for my down payment.
Have at least 1 month of expenses in emergency funds available if you are in a stable job (like a teacher), and at least 3 months of expenses for less than stable jobs in an extremely low risk account like a money market account. Ive been using ING since it is super easy and requires almost no paperwork.
When I first moved to Austin it took me a good month to figure out that I wanted to go into financial planning. This also required an additional 4 or so months to study and pass the insurance and financial tests needed to be a planner. When I moved to Austin I had approximately $4,000 saved. During this 5 months (and another month waiting to work for Ameriprise), I have spent all $4,000 and brought upon myself quite a bit of credit card debt.
The 2 biggest problems I faced during this time was that I didnt work during these 6 months and that I was not properly budgeting my money. I wanted to explore Austin and I did have a really good time, however I will be paying for that for a while to come.
As for my lack of budgeting my money this was a problem throughout my whole life. I always thought I had a good running total of how much I made and spent each month. And I also had large credit card limits which I didnt think would be a big deal to use. Little did I know that when I wanted to switch from being a financial planner to being a teacher I would have another few months where I would at least have a decrease in pay until I was teaching. I took a job as a courier and about a month after the job my car needed a new transmission. I had to take out a car loan and get more into debt.
The moral of the story is that if I had an emergency fund and if I properly budgeted my money I would be in a MUCH better financial situation that I am in now. I could have possibly put a down payment on a house in a market where there are bargains. Instead I will need to first pay down my credit cards, then save for my down payment.
Have at least 1 month of expenses in emergency funds available if you are in a stable job (like a teacher), and at least 3 months of expenses for less than stable jobs in an extremely low risk account like a money market account. Ive been using ING since it is super easy and requires almost no paperwork.
Saturday, April 12, 2008
Saving Young is Awesome
I just opened a Roth IRA in troweprice and they sent me a magazine about investing. they showed a chart showing how compound interest works. Starting early really works wonders.
Go to http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Under current principal put in what you are starting with. (I put $0)
Under annual addition you could put in any number you are putting into an account with your automatic savings plan.
Under years to grow it tells you how long your investment will grow if you dont touch this money.
Under interest rate you could put different numbers depending on what you are investing in.
Under compound interest time I put 3, but this seems pretty random.
I just started my Roth IRA and am maxing it out.
Annual addition = $5000
Years to grow = 35 (I want to retire when I am 62)
Interest Rate= I put a realistic number of 9%. (Getting 9% is key and my future posts will explain my philosophy on how to invest for the long term)
Compound interest = 3
Can you guess how much money I will have in my Roth for retirement if I keep this up?
$1,217,669.
Rediculous.
At that amount, I can reasonably take out $73,000 a year (6% of amount) and that money will never go away. And it will grow TAX FREE! This doesnt include the new tax law that will let you put in more than $5,000 a year (It will be adjusted for inflation). I think if I max it out with inflation it should be over 2 million when I retire.
The whole point of this? say I start doing this at 37 instead of 27. How much money would I have?
$468,016
Enough said
Go to http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Under current principal put in what you are starting with. (I put $0)
Under annual addition you could put in any number you are putting into an account with your automatic savings plan.
Under years to grow it tells you how long your investment will grow if you dont touch this money.
Under interest rate you could put different numbers depending on what you are investing in.
Under compound interest time I put 3, but this seems pretty random.
I just started my Roth IRA and am maxing it out.
Annual addition = $5000
Years to grow = 35 (I want to retire when I am 62)
Interest Rate= I put a realistic number of 9%. (Getting 9% is key and my future posts will explain my philosophy on how to invest for the long term)
Compound interest = 3
Can you guess how much money I will have in my Roth for retirement if I keep this up?
$1,217,669.
Rediculous.
At that amount, I can reasonably take out $73,000 a year (6% of amount) and that money will never go away. And it will grow TAX FREE! This doesnt include the new tax law that will let you put in more than $5,000 a year (It will be adjusted for inflation). I think if I max it out with inflation it should be over 2 million when I retire.
The whole point of this? say I start doing this at 37 instead of 27. How much money would I have?
$468,016
Enough said
General Philosophy on Finances
From my personal experiences I feel that the most important thing that anyone can do to improve their finances is to create a budget. Most of my friends might have a rough idea of how much they are making and saving, but when I first started writing down all of my expenses I have noticed a few things.
1) I have spent less money in general when I wrote things down
2) I was spending more than I was making even with a pretty high paying job.
3) I visually saw where my money was going.
I feel that everyone should at least spend 30 or so minutes a month and track where all of their expenses have been going.
I have an excel file that i have created which has categories for basic expenses and income, and tells you if you have saved money each month. Let me know and Ill send you a copy.
The next important thing that should be done is to have some type of automatic savings plan where you pay yourself first immediately after you receive your paycheck. A century ago the US government allowed everyone to pay everything they owed in taxes once a year. the government was smart however, and started taking payroll deductions because they know that most people do not budget their money. I feel that everyone should do the same thing and save at least 10% of their income right off the top. Many people end up spending everything they make and then have nothing left at the end of the month. By automatically investing it helps people budget their remaining money. To be honest once I started doing this I havent missed it!
After setting up a budget and automatically saving, it is important to know where to put this money you are paying yourself. Depending on your situation, I feel that in order of importance you should
1) Pay off and high interest credit card debt
2) Build an emergency fund (of at least 3 months) and leave it in a money market account.
3) Invest in a 401k up to the employee match (if available, if not go to #4)
4) Invest in a Roth IRA with low expense index funds.
5) If the Roth is maxed out and there is money left over, save for a house.
In conclusion
1) Make a budget
2) Create an automatic savings plan
3) With the automatic savings plan, pay off credit card debt, invest in a 401k or Roth, save for a house.
If you follow these steps you are well on your way to financial independence.
Many of my future blogs will explain why I believe in these steps.
1) I have spent less money in general when I wrote things down
2) I was spending more than I was making even with a pretty high paying job.
3) I visually saw where my money was going.
I feel that everyone should at least spend 30 or so minutes a month and track where all of their expenses have been going.
I have an excel file that i have created which has categories for basic expenses and income, and tells you if you have saved money each month. Let me know and Ill send you a copy.
The next important thing that should be done is to have some type of automatic savings plan where you pay yourself first immediately after you receive your paycheck. A century ago the US government allowed everyone to pay everything they owed in taxes once a year. the government was smart however, and started taking payroll deductions because they know that most people do not budget their money. I feel that everyone should do the same thing and save at least 10% of their income right off the top. Many people end up spending everything they make and then have nothing left at the end of the month. By automatically investing it helps people budget their remaining money. To be honest once I started doing this I havent missed it!
After setting up a budget and automatically saving, it is important to know where to put this money you are paying yourself. Depending on your situation, I feel that in order of importance you should
1) Pay off and high interest credit card debt
2) Build an emergency fund (of at least 3 months) and leave it in a money market account.
3) Invest in a 401k up to the employee match (if available, if not go to #4)
4) Invest in a Roth IRA with low expense index funds.
5) If the Roth is maxed out and there is money left over, save for a house.
In conclusion
1) Make a budget
2) Create an automatic savings plan
3) With the automatic savings plan, pay off credit card debt, invest in a 401k or Roth, save for a house.
If you follow these steps you are well on your way to financial independence.
Many of my future blogs will explain why I believe in these steps.
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