The Money Ladder

Smart Money Advice For Smart Young People

Archive for the ‘Cash’ category

Put Your Spare Cash To Work

January 9th, 2010

A recent college grad in his twenties asked me a question that is relevant to many people who have recently started working. What do you do with your spare cash? When you get your paycheck, there are some expenses that are unavoidable: rent/mortgage, utility bills, health care and car insurance premiums etc. Once you pay these off, and still have some cash left over, consider the following options.

Student loan repayment is always a good idea. Reserve all performance bonuses and salary increments to pay down student loan principal. Pay down the higher interest loans first. Make sure to deduct student loan interest from your taxable income every year that you make repayments. You will receive a Form 1098-E from your lender to help you fill out the details on your tax forms.

Beyond that, I strongly recommend putting away a piece of your disposable income into an Emergency Fund each month. This fund should grow to be at least 4-6 months of your monthly living expenses. This will empower you to go ahead and confidently invest in the markets.

If going to grad school in a few years is your goal, do some medium term financial planning. Decide on an appropriate dollar amount and start saving/investing to meet this target. To start off on investing, I recommend a balance of stock and bonds. When you are in your 20s, your younger age enables you to have a higher amount in stocks than bonds. (80% stocks, 20% bonds is a good general rule of thumb for people in their 20s).

There are two ways in which you can invest.
1) Through your employer’s 401-K.
2) Through your own investment account: brokerage, IRA, Roth IRA etc.

401-Ks and IRAs are for long term financial planning because you cannot withdraw from it without penalty before age 59 and ½. Therefore I recommend that you make it only one part of your financial planning, not the whole of it, especially when you do not have the advantage of an employer match.

If you have never invested in stocks before, a well-known broad-based US market index ETF such as the iShares Russell 3000 Growth Index Fund (IWZ) or iShares S&P 1500 index fund (ISI) can be a good start. If most of your investments are already in US stocks, consider buying an emerging markets ETF such as MSCI Emerging Markets Index Fund (EEM). For a broad-based bond mutual fund try the Vanguard Total Bond Market Index (VBMFX).

Again, the specifics depend upon your overall financial situation. The above ideas are general suggestions for what to do with some extra cash.

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Posted in Cash, Investing, Loans

Tags: investing in twenties

Financial New Year’s Resolutions

December 25th, 2009

As you say goodbye to 2009 and look forward to better times in 2010, take a moment to review your list of New Year’s resolutions and add some that will help you manage your finances and lead a richer, more fulfilling life. Here are some that will help you feel more in control of your money when 2011 rolls around.

I will budget.
Have a plan at the beginning of each month on how you will spend your money and how much you will save. Keep track of your expenses and try to stay within the budget of each category. Use online software such as Mint or Quicken to make this easy, and also to compare your expenses to averages in your state or area.

I will keep track of my cash
Make it your business to know where every single penny of your money is going. In an age of autopayments and online bank statements, it is easy to put your finances on autopilot. While there is nothing wrong with taking advantage of these online features, you must still make it a priority to check each of your statements and transaction histories for irregularities. Avoid fees and finance charges by knowing your credit card balance and paying it off in full each month. Also, keep account of where you spend your money. This will help you understand your own lifestyle better and make cuts or increases in proportion to your income as it changes. For example, let’s say you have been spending $200 on eating out each month for the last few months and now would like to save more money by cooking at home. If your income has gone down by 25%, you can reduce your dining out budget proportionately and decide to spend only $160 each month on restaurant meals. This type of proactive change is only possible if you know how much you have been spending on eating out in the past.

I will make my money work hard for me.
Take an interest in investing your money for the best returns at an acceptable level of risk. You can never have too little to invest. Even if you have only $1000 saved, you can open a brokerage account or buy indexed mutual funds to get started on the path to making your money work hard for you. Educate yourself by reading the many financial news websites out there. It is easier than you think.

I will give away.
The best part of having financial security is being able to help others. Make giving a part of your overall financial plan. If you are constrained for money, make it a habit to regularly give away your time or advice to those less fortunate. If you can afford to make donations, then spend time on researching organizations and causes to find something you are truly passionate about. The joy of giving is another happy outcome of good financial management.

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Posted in Cash, Investing, Obligations

Read Before You Sign: Credit Card Change Of Terms

October 25th, 2009

The Federal Reserve has drafted a new set of rules to protect credit card holders from unfair practices by card companies. Unfortunately these don’t go into effect until 2010 and in the meanwhile, card companies are moving fast to make changes to boost their profits from fees and late payments.

Next time you get an updated customer agreement to read and sign from your card company, watch out for any changes that are meant to circumvent the rules set to take effect next year.

1) Interest rates can no longer be arbitrarily hiked up particularly in the first year of opening an account. At least 45 days of notice is required before rate increases. To outwit this legislation before it takes effect, card companies have started jacking up rates for current customers. Call your card company to demand an explanation for any rate increases on your card.

2) Because rates can be changed more easily on variable rate cards than fixed rate cards, companies are racing to convert their fixed rate customers into variable rate ones. Do not be tempted by offers to make to switch to a variable rate card with a low teaser rate. This is similar to what home buyers fell for when they signed up for ARM-type mortgages.

3) Planning to transfer balances? Ensure you are not charged an obscene transfer fee for getting out of your current card. Card companies are jacking up transfer fees to make up for the losses they fear are coming from the new laws.

If you don’t like the changes in your Customer Agreement, you can refuse to sign the change of terms contract. In that case, your account will be closed and you will no longer be able to charge your card. You can then pay off the balance under the old agreement. This will not affect your credit, but I do recommend paying off your balance entirely before closing your credit card account.

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Posted in Cash, Credit

The Sliding Dollar And Why You Should Worry

October 25th, 2009

If you have been following the news lately, chances are you have heard plenty of talk about how the Federal Reserve’s actions are fueling a decline in the value of the dollar. As part of the economic stimulus package, the Federal Reserve has had to keep interest rates at historic lows (thereby making the “price” of dollars very cheap) while borrowing enormous quantities of money from foreign and domestic lenders. These actions have weakened the dollar against several foreign currencies.

Why should this decline concern you? Consider the following:

Inflation: The decline in the value of the dollar is just like a shortage of gas or other commodities. It leads to inflation. Prices of everyday items rise, as do rents. Your expenses take a bigger bite out of your paycheck (which is unlikely to keep pace with inflation over the short term), leaving you with fewer savings for a rainy day.
Foreign Goods and Services: Turn over that DVD or sweater you just bought at Walmart. Chances are it says “Made in China” (or Brazil or India). When the value of the dollar declines versus that of foreign currencies, the price of foreign goods shoots up for American consumers. And that Mexican or Swiss vacation will become more expensive than ever. Similarly, companies that rely on imports of foreign raw materials will see their costs rise and will need to start charging higher prices for their finished product to keep their profits.
Dollar returns decline: Inflation will chew away at your investment returns. If you make a return of 2.5% on your portfolio and inflation rises by 1%, it’s as if your investment return had declined to 1.5%. Fixed income assets such as bonds and CDs are most vulnerable to this decline.

It is important to keep an eye on the decline in the value of the dollar versus other currencies. It is often a precursor to inflation and a signal for you to start protecting yourself against inflation.

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Posted in Cash, Investing

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