More on Budgets

When deciding on your finances and creating a budget of your income versus your expenses it is important to be through and accurate and honest will yourself.

First figure out how much money you bring in (gross and net). Then create an Excel Spreadsheet (or any spreadsheet software you have) with columns detailing the finances you spent and another for a new amount of how much you would like to spend. Start with your major expenditures like Shelter. Here you need to include rent or mortgage payment, gas, electricity, garbarge, water, cell phone, telephone, assessments (if applicable) and property taxes. Next, you should list Food. Here you can list what you spend on groceries, school and work lunches. Transportation is important as well. If you have a car(s) enumerate the car payment, insurance, gas and repairs. Then you can move to Other Basic Expenses. This can include various things like child care, child support, clothing, haricuts/personal care, insurance (life, health, disability, other), laundry and dry cleaning, medical and dental, newspapers/magazine/cable tv, school expenses, taxes. Hopefully you can Save some money and that is the next category. Put a row for emergencies, long-term savings, and retirement.

Next is the section for spending that can be curbed or controlled and this is where you will need to make decisions on your finances and spending. The first thing under your monthly expenses will be Credit card payments. If you are in debt and have high interest rate credit cards your first priority should be to pay them off as soon as possible. So if you have a minimum payment of $100 and you can pay $300–then do it. There is no better investment if your card is at 18% than paying off that debt. Next you might have some installment loans–list them here. They might be a college loan or you are still paying off that furniture you bought last year.

The nitty gritty of your finances is next on the spreadsheet. Alcoholic beverages is one–if you drink. This can consume a large percent of your finances if you allow it to. I you drink and there is any way to cut the spending on this then do it. Then you have things like CDs, downloaded music, music supplies, newsstand purchases and subscriptions. Cigarettes and tobacco are similar. As you know these products are getting more expensive and are tough to give up, but giving them up can help you save in many areas (health and life insurance for one). Charitable contributions are great, but if you cannot afford them then think about doing volunteer work instead. Children allowances (if applicable) is next. Pay yourself first because in the long run it will be much more beneficial to your kids than giving them an allowance. Club dues and Expenses need to be added as well in addition to any professional organizations you belong to. Eating out and ordering in are fun and convenient as well as necessary sometimes, but often this is an area that people can save just by cooking at home a little more. No one wants to be seen as a miser when giving gifts, but with a little more searching and creativity you can save. Internet access fees are expensive, but most need this service and if you do, try to find a way to save. Movies, plays and concerts are another. Rent a movie instead of seeing it in the theater–remember it all adds up. With Pets and pet food there is not much you can do if you already own a pet to curb the expenses unless you go overboard in conspicuous consumption for your pets. Snacks at work, convenience stores and vending machines add up if you do it often. At work you can bring some snacks from home so you do not end up spending $5 a week ($250/year) on the vending machine at work. Sports can be another expensive item if you like to attend live games–tickets are no longer easy to afford. Vacations are often something we all like to do, but if you need to cut some fat out of your budget temporarily you can go an extra year if you need to without an extravagant vacation. Lastly, think of any other miscellaneous expenses that might come up and list them as well. Categorize everything and you can see how much of your money goes to an individual item as well as an entire category. Examine this information and try to cut some unneccesary items if you need to have less money outgoing.

Written by mike on April 23rd, 2006 with no comments.
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I have a 401k at work–now what do I do?

Many, if not most, white-collar jobs these days offer a 401k. A 401k is an investment vehicle for retirement offered through employers. It is taking directly from your paycheck and is pre-tax investing. If you are a novice investor this can be pretty intimidating, but here are some things to think about while deciding.

Does your employer match your contribution?

• Some do and some don’t.
• Some are generous and some are not so generous.
• If your employer matches up to a certain percentage that you contribute to your 401k then it is often best to invest as much as possible up to the matching point.
• So if your employer matches up to 5% of your contributions and you can afford to contribute 5% of your income then you should because it is FREE MONEY!
• Keep in mind many companies do not allow you to leave your job and immediately take the 5% your employer matched with you. Often there can be a timetable for the amount of years tenure at your job that allows you to keep a certain percentage of the employer match.
• Let’s say 1 year=25%; 2 years=50%; 3 years=75% and 4 years employed you are 100% vested. You make $50,000 a year you contribute 5% of your pre-tax income to your company’s 401k–that is $2,500 a year. Your employer matches that 5% so after 1 year you have $5,000 in your 401k (not counting market losses or gains). You now decide to leave that job after 1 year of service. By following the vesting timetable above you would keep 1/4 or $625 of your employer’s match. Therefore, you have $2,500 that you contributed plus the 25% vested interest of the $2,500 match equalling $3,125. So you made $625 for free because of the vesting timetable.

• Your employer does not match any contributions you make. In this scenario it is often best to not contribute to the 401k and instead pay back credit card debt (if you have any) or contribute after-tax money to a Roth IRA. You should do the Roth IRA because you will have many more options to invest in with a Roth of your own than investing in your company’s 401k which will have a limited amount of choices to invest.

Written by mike on April 23rd, 2006 with no comments.
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Budgets

It sounds very rudimentary, but if you examine what you spend and how you spend it oftentimes with small compromises or changes in behavior you can save a little or a lot more.

First, create a thorough spreadsheet that includes every time of expense you may encounter. Categorize them. Then you must remember to keep all your receipts. By doing this you have an accurate record of everything you have spent money.

Now once you have set up the spreadsheet and gone through a month of recording your income and expenses you can analyze your spending habits. If you would like to cut your spending by $100 a month so you can put it in a Roth IRA you can look and see what you can realistically give up or cut down your spending. You have to decide what you are willing to go without or go with less of in order to reach your goal. I am sure you will see many options once you examine your spending, but it is ultimately up to you.

Even if you do not need to cut your spending budgeting is still very important so you can understand where you money is going. Often you will be surprised at how much you can cut by just seeing where it goes.

Written by mike on April 23rd, 2006 with no comments.
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One word on Investing . . . DIVERSIFICATION

Whether you are just starting investing or you have been doing it a long time you need to know one thing: YOU MUST DIVERSIFY YOUR INVESTMENTS!

What does this mean? Diversifying your investments means that you should not put all your eggs in one basket.

For example, you have come into $5,000 and never invested before. You get a great stock tip from a broker-friend-of-yours. While it is true that you could make some quick money with that investment and that can work fine. However, if you know for sure you do not want to lose a large percentage of that money in one fell swoop you would never put all your money in one stock.

If you really want to buy this stock you have been tipped on then maybe you put $1,000 of your windfall into that speculative stock. In addition to that you could buy four other stocks at $1,000 each that are different types of stocks. WHAT DOES THAT MEAN?
It means that you could buy stocks that are in different assest classes or different industry sectors.

e.g.

1. Your speculative stock is a microcap technology stock(meaning it is a very small company with a large possiblility of making money and an equal risk of losing that money).
2. Then you pick a stock like GE. General Electric is a conglomerate, which means it is a company that makes its money from many different avenues. Also, GE is a large cap stock, meaning that is a very large company that has less of a risk than a micro-cap stock, but it also does not have the perpensity to bring large gains quickly.
3. Your third company is a local bank that is a mid-cap (Its capitalization puts it in between a large-cap and small cap stock). You like the bank and you know a lot about it because it is local.
4. Next, you watch some investing shows and you hear about a small-cap stock (In between mid-cap and micro-cap) that is in the healthcare industry. You know that it has more risk than a mid-cap stock, but its growth potential is more than a mid-cap.
5. Lastly, you have some friends that live in foreign countries and you become exposed to some of the companies that reside outside the U.S.A. You decide that there is a utility company in South Korea that really interests you.

So let’s check out you new portfolio. You have a large cap stock, mid-cap stock, small-cap stock, micro-cap and international stock. You have exposure in a conglomerate stock, technology stock, healthcare stock, financial stock and a utility. You might think that this is very risky, but by being exposed to all these different asset classes and industry sectors you have actually lowered your risk and increased your potential for long-term gains.

Diversification is the key to having a smoother ride in the stock market and not a bumpy one that seems like a rollercoaster.

Written by mike on April 22nd, 2006 with 1 comment.
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Traditional IRA and Roth IRA

Roth IRA

• You never have to take minimum distributions
• Distributions are not subject to income tax as long as the Roth is open for at least 5 years and the holder is at least 59 1/2 years old.
• Heirs must take contribution, but they do not owe taxes

Traditional IRAs

• If you are 70 1/2 or older you are required to take minimum withdrawals (a.k.a. distributions).
• You are taxed on your distributions
• When the account holder dies the heirs must take withdrawals and pay income tax on that money.

For more information on how to decide which IRA is for you go to:
www.smartmoney.com/retirement/roth/index.cfm?story=whichira

Written by mike on April 22nd, 2006 with 1 comment.
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Savings Accounts

Let’s say you have saved up some cash and you need it to be in a safe place in case of emergency or you are accumulating money for a large purchase and do not want the value to fluctuate dramatically. This money that you know you will need for one reason or another and you should not invest in the stock market because if it tanks in the meantime you will have less money than you started with.

www.hbscdirect.com, www.emigrantdirect.com, and www.ingdirect.com are some of the most popular online saving account providers. Often you will see commercials on television for their services.

Some offer a better savings rate than www.ingdirect.com, but I feel that the customer service aspect is really worth the lower savings rate. The customer service for other providers will not match ING and they have built a loyal following, myself included. My wife and I are saving money for a home. We could easily put that money in stocks and hope for the best, but we know it is wisest to put it in a place like ING and watch it grow why we wait to purchase a home. Setting up an account is a breeze and if you have any issues while doing it online you can call up ptheir customer service and they will walk you through it. So if you do not care about customer service the other savings account providers that offer a higher percentage rate might be your answer. However, if you are a little hestitant and not 100% sure of yourself and like to you a knowledgeable person to help you www.ingdirect.com might be your answer.

Written by mike on April 21st, 2006 with no comments.
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More Banking . . .

Yesterday we started on the subject of bank accounts and how to maximize their worth for you. If you are considering a switch from a bricks and mortar banking do not feel like you are going into unchartered water.

Typically there are no fees, no minimums and you can acquire some interest on your online checking account. Many bricks and mortar banks are trying to play catch up and have deals out there that might be sweeter than than the online banks so examine all options before you go forward. Bankrate.com is a great place to start your research. And if you want to make the switch www.netbank.com is an excellent option for an online checking account. I have had an account there for about 5 years and have found it to be convenience and easy to use.

Written by mike on April 21st, 2006 with no comments.
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Bank Accounts

The information age is entrenched today, however, there still is trepidation for online banking. The story goes that if there are no bricks and mortar then the bank has the ability to offer better rates. This is true. If you still have your money in a non-interest bearing account at the home-town bank, you are losing out. You can go to www.bankrate.com and find the best rates.

There is no reason to throw away compounding interest.

Written by mike on April 20th, 2006 with 2 comments.
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