Debt is the albatross for young people these days. Often, we're leaving college or grad school with more than 100k in debt. http://www.forbes.com/2009/03/10/college-graduate-school-loans-personal-finance-retirement-grad-school-debt.htmlWhile this is daunting, this debt is an investment in future earnings and options. However, there are a number of excellent options in debt repayment which could help you to greater financial flexibility faster.
First, get rid of all of your private and personal debt. That means credit card debt, car debt, and any private loans. Credit card debt and car debt can be avoided with effective budgeting, restraint in shopping, and avoiding overspending. Private loans are a different story. Often, these loans will carry a higher interest rate, and thus, be more costly than government subsidized loans. There are two ways to manage this money. One, try to avoid it by working while you're in school, and thus avoiding the need for private loans. A second option is the immediate termination of the private loan through no-interest methods. One way which can work is by asking for a salary advance from your job. Your employer will dock your pay to cover it, but you're not paying out over 13%. http://www.thefreemortgagecalculator.com/interest_rates/Personal_Loan.html
If a salary advance is not available, perhaps a no interest loan from family or a close friend may be an alternative. But getting rid of that high interest rate is crucial.
In terms of federally subsidzed loans, look into consolidating your amounts and getting the lowest interest rate possible. http://studentaid.ed.gov/PORTALSWebApp/students/english/consolidation.jsp?tab=repaying The goal is to ensure you get the lowest interest rate possible. Also, at the same time, don't just pay the minimum. Find out how much you can afford to pay off monthly, and do your best to devote a lot of cash to that. The money you are paying in interest is for the privilege of having enhanced earning power, and you should do everything in your power to make that cost as small as possible.
If you have a very low interest rate (some Stafford loans are around 2.4%), don't concern yourself with paying that off on a rushed schedule. You may be able to get a better return for your money in other investments, and so, it would be a prohibitive opportunity cost to pay off the debt rather than get that return.
Also, remember that there are potential loan forgiveness programs and loan repayment options offered from employers. Ask your HR about whether or not your job can help you out. Further, mortgage interest and interest on education loans may be tax deductible, depending on your income. Research this to see if you qualify, and if so, take advantage of these deductions.
Do your best to remove the bad debt (debt with high interest, no tax benefits) as soon as you can, as long as you are not sacrificing more lucrative opportunities. You can find yourself debt free much sooner, allowing you greater financial freedom.
Showing posts with label Investments. Show all posts
Showing posts with label Investments. Show all posts
Friday, March 9, 2012
Wednesday, February 15, 2012
Investing, a.k.a. You're Not Smart
With the stock market up around 8 or 9% recently, a number of friends of mine have gotten more active in trading. This is something which can end up losing you money unless you're careful. A few tips:
1) Ask yourself why you are investing. Is it to get a better return than a bank? That would be a good reason, because generally, the stock market has outperformed the interest rate you will get at banks. However, it may not be a good reason if you need money in the short term. The stock market is quite volatile, and many analysts tie recent volatility to the uptick in Exchange Traded Funds (ETFs). http://money.usnews.com/money/personal-finance/mutual-funds/articles/2011/09/08/are-etfs-to-blame-for-the-rise-in-volatility. You need to make sure you have the money you need, when you need it. In other words, don't invest money you need quite soon.
2) You're probably not that smart. You may think you know a lot, and have done your research, but then again, a lot of people felt that way right before the market crashed in 2008. And the tech market crashed in 2000. And in 1987. A strong way to invest money and rely less on your inflated sense of financial intelligence is to invest in low-cost index funds. http://www.ehow.com/list_5852407_list-low-cost-index-funds.html. Personally, I'm a fan of Vanguard, as the management fees for their investment funds are very small, and the cost to invest in most of their funds is 0 (meaning that you don't have to pay a service fee to invest). As you can see, Vanguard's expense ratio (how much they make off managing your money) is less than 20% of the industry average. https://personal.vanguard.com/us/funds. Take a look at their options, or those at other brokerages, and see what may work for you.
3) Use a discount brokerage. Most of the information you want to research on investing is available for free and online. Discount Brokerages like Charles Schwab, Fidelity, and Etrade Financial are all great bets because they charge less, meaning you keep more. Many of these brokerages also offer ETFs, which can be another way to get a diversified investment portfolio, so that your risk is spread across a broad spectrum of stocks as opposed to a single stock. UPDATE: I've been told to include TD Ameritrade and Sharebuilder from ING as well. Thanks for the tips...
4) Get in it for the long haul. Try to find a group of funds, stocks, and ETFs which work for you and invest what you can each month. Trying to game the market may means you miss the highs and instead, catch a disproportionate amount of the lows. Continually putting money into your accounts and reinvesting the dividends will likely yield a stronger return. http://money.cnn.com/2010/01/05/pf/funds/market_timing.moneymag/index.htm
5) Ask lots of questions. Ask your friends who work in finance, or the financial advisers at the brokerage you use. They are there to help, and a lot of their information is free of charge. Take the free workshops they offer. Find out how you should analyze a stock on your own. But ask lots of questions. Far better than losing lots of money.
1) Ask yourself why you are investing. Is it to get a better return than a bank? That would be a good reason, because generally, the stock market has outperformed the interest rate you will get at banks. However, it may not be a good reason if you need money in the short term. The stock market is quite volatile, and many analysts tie recent volatility to the uptick in Exchange Traded Funds (ETFs). http://money.usnews.com/money/personal-finance/mutual-funds/articles/2011/09/08/are-etfs-to-blame-for-the-rise-in-volatility. You need to make sure you have the money you need, when you need it. In other words, don't invest money you need quite soon.
2) You're probably not that smart. You may think you know a lot, and have done your research, but then again, a lot of people felt that way right before the market crashed in 2008. And the tech market crashed in 2000. And in 1987. A strong way to invest money and rely less on your inflated sense of financial intelligence is to invest in low-cost index funds. http://www.ehow.com/list_5852407_list-low-cost-index-funds.html. Personally, I'm a fan of Vanguard, as the management fees for their investment funds are very small, and the cost to invest in most of their funds is 0 (meaning that you don't have to pay a service fee to invest). As you can see, Vanguard's expense ratio (how much they make off managing your money) is less than 20% of the industry average. https://personal.vanguard.com/us/funds. Take a look at their options, or those at other brokerages, and see what may work for you.
3) Use a discount brokerage. Most of the information you want to research on investing is available for free and online. Discount Brokerages like Charles Schwab, Fidelity, and Etrade Financial are all great bets because they charge less, meaning you keep more. Many of these brokerages also offer ETFs, which can be another way to get a diversified investment portfolio, so that your risk is spread across a broad spectrum of stocks as opposed to a single stock. UPDATE: I've been told to include TD Ameritrade and Sharebuilder from ING as well. Thanks for the tips...
4) Get in it for the long haul. Try to find a group of funds, stocks, and ETFs which work for you and invest what you can each month. Trying to game the market may means you miss the highs and instead, catch a disproportionate amount of the lows. Continually putting money into your accounts and reinvesting the dividends will likely yield a stronger return. http://money.cnn.com/2010/01/05/pf/funds/market_timing.moneymag/index.htm
5) Ask lots of questions. Ask your friends who work in finance, or the financial advisers at the brokerage you use. They are there to help, and a lot of their information is free of charge. Take the free workshops they offer. Find out how you should analyze a stock on your own. But ask lots of questions. Far better than losing lots of money.
Wednesday, January 18, 2012
401(k) Matching
How much do you put away for retirement? The answer, invariably, is not enough. Money put into your 401(k) or other pre-tax retirement program is exempt from Federal income taxes, so it benefits you later by having money saved, and benefits you now in terms of lowering your tax burden. It goes without saying that you should, at the very least, contribute as much as your employer will match. For instance, my employer matches dollar for dollar up to the first 3% of salary, and then 50 cents on the dollar up to 5%. Translation: 5% of my salary is contributed, and 9% of my salary goes to my 401(k) equivalent each month.
But I could do more. For 2012, the contribution limit is $17000. http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html That's just under 654 dollars per paycheck, assuming you get paid on a bi-weekly basis. And because most millennials don't believe social security will be there for them when they get older, or at least, won't pay out what it pays now, http://iomechallenge.org/wp-content/uploads/NEW-iOme-Millennials-on-Social-Security.pdf, you should do whatever you can in your budget to get as close to this $17000 figure as possible. One thought could be this. Many people receive bonuses around Christmas or around the end of the year based on performance or other successes. Perhaps using that bonus to make a balloon contribution to your 401(k) would be a better use of the funds instead of consuming them on something unnecessary or trivial.
If your organization doesn't have a 401(k) program or equivalent with employer matching funds, check out my post on an IRA, and then you can at least get a benefit of $5000 a year (you don't get the tax benefit of the IRA if you also participate in a 401(k) or equivalent. If your organization does have a 401(k) or equivalent, start contributing at least to the point of full matching, BECAUSE IT IS FREE MONEY. Then, take a look at your budget and see if you can increase your contribution an extra 100 dollars per month. That's less taxable income, a more financial secure retirement, and intelligent budgeting for the future.
But I could do more. For 2012, the contribution limit is $17000. http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html That's just under 654 dollars per paycheck, assuming you get paid on a bi-weekly basis. And because most millennials don't believe social security will be there for them when they get older, or at least, won't pay out what it pays now, http://iomechallenge.org/wp-content/uploads/NEW-iOme-Millennials-on-Social-Security.pdf, you should do whatever you can in your budget to get as close to this $17000 figure as possible. One thought could be this. Many people receive bonuses around Christmas or around the end of the year based on performance or other successes. Perhaps using that bonus to make a balloon contribution to your 401(k) would be a better use of the funds instead of consuming them on something unnecessary or trivial.
If your organization doesn't have a 401(k) program or equivalent with employer matching funds, check out my post on an IRA, and then you can at least get a benefit of $5000 a year (you don't get the tax benefit of the IRA if you also participate in a 401(k) or equivalent. If your organization does have a 401(k) or equivalent, start contributing at least to the point of full matching, BECAUSE IT IS FREE MONEY. Then, take a look at your budget and see if you can increase your contribution an extra 100 dollars per month. That's less taxable income, a more financial secure retirement, and intelligent budgeting for the future.
Friday, January 6, 2012
Saving for College, and Saving on State Taxes
When my son was born in October 2010, one of the first things I did was make sure I had filled out his application for a social security number. Before he had one, I could not open a bank account, or a 529 college savings account in his name. A 529 college savings account is a state-run investment account which allows parents, friends, extended family (anyone can contribute) for someone's qualified education expenses. http://en.wikipedia.org/wiki/529_plan
What does this mean. It means you can invest money, and use the proceeds to pay for college, without paying taxes on the earnings. No capital gains taxes. Sounds good, right. You may think: But I don't want to have to remember it every month. Many plans will do an automatic withdrawal, so you don't need to think about it. http://www.axa-equitable.com/plan/education/529-plans/contributions-and-withdrawals.html
You may think: We just had a baby. Why should I save for college now? College tuition calculators, like the one below, suggest college in 18 years will cost about $440,000 for 4 years. Yeah. Take that in for a second. Now breathe. http://www.fool.com/college/college01.htm
BUT WAIT. There's an even better reason than pure panic to open a 529. Most states will allow for a state tax deduction for the amount you put into that State's 529 (you don't need to use the 529 of the state you live in, but that's the way to get the state tax deduction). My state (which is not a State), DC, allows $4000 in state tax deductions per filer (if filing jointly). http://www.dccollegesavings.com/pdf/dc_disclosure.pdf
Which means, if you are married, filing jointly, you can get an $8000 tax deduction. So, if you put away 666 dollars per month towards your child's education, you will get that much credited back on your taxes. Plus, after 18 years, you will have contributed 144000 of principal towards the account, and you'll likely have much more money in it due to investment growth. The deductions vary by state, and you should determine which plan you approve of based on its performance and tax deduction benefits. A good place to start your research is here. http://www.savingforcollege.com/compare_529_plans/
Also, you can have multiple 529 plans. http://www.savingforcollege.com/intro_to_529s/can-I-have-529-plans-from-multiple-states.php Say you live in DC and want the $8000 tax deduction, but want to contribute more, or want to contribute to multiple funds that may have a better performance. That's ok under the law, just don't contribute more than $13000 per contributor, per year. http://www.irs.gov/newsroom/article/0,,id=213043,00.html
In short, with proper budgeting, you can save a lot of money for college, and have the money you save refunded on your state taxes. College is going to be expensive, and utilizing a 529 plan is probably the smartest thing you can do to ensure your child's future education.
What does this mean. It means you can invest money, and use the proceeds to pay for college, without paying taxes on the earnings. No capital gains taxes. Sounds good, right. You may think: But I don't want to have to remember it every month. Many plans will do an automatic withdrawal, so you don't need to think about it. http://www.axa-equitable.com/plan/education/529-plans/contributions-and-withdrawals.html
You may think: We just had a baby. Why should I save for college now? College tuition calculators, like the one below, suggest college in 18 years will cost about $440,000 for 4 years. Yeah. Take that in for a second. Now breathe. http://www.fool.com/college/college01.htm
BUT WAIT. There's an even better reason than pure panic to open a 529. Most states will allow for a state tax deduction for the amount you put into that State's 529 (you don't need to use the 529 of the state you live in, but that's the way to get the state tax deduction). My state (which is not a State), DC, allows $4000 in state tax deductions per filer (if filing jointly). http://www.dccollegesavings.com/pdf/dc_disclosure.pdf
Which means, if you are married, filing jointly, you can get an $8000 tax deduction. So, if you put away 666 dollars per month towards your child's education, you will get that much credited back on your taxes. Plus, after 18 years, you will have contributed 144000 of principal towards the account, and you'll likely have much more money in it due to investment growth. The deductions vary by state, and you should determine which plan you approve of based on its performance and tax deduction benefits. A good place to start your research is here. http://www.savingforcollege.com/compare_529_plans/
Also, you can have multiple 529 plans. http://www.savingforcollege.com/intro_to_529s/can-I-have-529-plans-from-multiple-states.php Say you live in DC and want the $8000 tax deduction, but want to contribute more, or want to contribute to multiple funds that may have a better performance. That's ok under the law, just don't contribute more than $13000 per contributor, per year. http://www.irs.gov/newsroom/article/0,,id=213043,00.html
In short, with proper budgeting, you can save a lot of money for college, and have the money you save refunded on your state taxes. College is going to be expensive, and utilizing a 529 plan is probably the smartest thing you can do to ensure your child's future education.
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