Archive for the 'Financial Basics' Category

Planning for retirement part 2 - Choosing investments

Published on April 24, 2008 in Financial Basics and Retirement. 0 Comments

This is Part 2 of the Retirement Planning series. In Part 1 we covered what a retirement account is and some of the basic account types available.
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One of the more confusing things about retirement accounts is choosing where your money will go. After reading this post you should have a better idea of what you’re looking at when you are picking investments for your account.

Side note: this post is mostly in regards to mutual fund investments. If you are investing in individual company stocks with your IRA then you probably have a different approach to investing, and may find this article less useful.

Asset Allocation

At the broadest level, a mutual fund will cover one of the major asset classes: stocks, bonds, commodities, and real estate. Each asset class has it’s own risk and return characteristics that you should keep in mind when investing. The general rule of thumb is that riskier investments have higher returns, and that the longer your investment horizon the riskier your investments should be. The thinking behind this is that a longer time horizon gives you a larger chance to realize the higher returns.

Bonds are generally considered to be the least risky investment, but also the lowest returning. Stocks have historically had higher returns than bonds, but have higher swings up and down. Commodities, such as gold or crude oil, have the most risk, but can also exhibit large price swings. Real estate can be anywhere on the scale due to its unique characteristics. Most 401(k)s will have many stock fund options, a few bond options, and a money market (cash) fund. Commodity and Real Estate funds will be available for IRA accounts through a company like Vanguard or Fidelity.

When choosing investments for your retirement account you should consider the time until you retire. A person in their 20’s may decide that they want to have only risky investments with no low risk investments, with the hope to maximize their return potential. Someone closer to retirement may want to have more money in cash, bonds, and dividend paying stock funds, and less in risky investments so they don’t risk money they will need in a short timeframe.

Asset Allocation At Another Level

Once you’ve decided on the appropriate percentage of your account to allocate to stocks, bonds, and other investments, it’s time to break the allocation down further.

Company stocks are categorized into market capitalization groups. Capitalization is a fancy word for the size of the company. This means that based on size, a company’s stock will fall into micro cap, small cap, mid cap, or large cap. Market cap is calculated as the share price times the number of shares outstanding. To capture a broad range of stocks you should choose a fund from each of these groups to include in your stock portion.

In addition to capitalization, stock funds can be broken up into domestic and foreign. Foreign stock funds will have names like Euro-Pacific or Emerging Market. For now I think it’s important to diversify into foreign companies, especially considering the slide of the U.S. dollar.

Bond funds often have many types available as well. The most common types include total bond funds, high-yield bonds (called junk bonds by most), and government bonds. Again, each type of fund will have it’s pros and cons. High-yield bonds will have higher yields (obviously), but they will exhibit higher price swings similar to stocks. Government bonds will usually have lower rates, but should have less risk since their cash flows are backed by government agencies. A total bond fund will cover a range of all bond types.

Expense Ratios

While you can’t control the returns of your investments, you can do your best to minimize losses. The two biggest return robbers are taxes and expenses. Since retirement accounts are non-taxable, you have already eliminated the first issue. The second, expenses, is a little tougher to control for.

An expense ratio is the amount of money that the fund charges to manage your money. If the ratio is 1% then the fund will keep 1% of your money every year. It doesn’t sound like much, but over the long term any amount will hurt your returns due to the effects of compound interest.

Typically index funds will have the lowest expense ratios. Actively managed accounts run by a portfolio manager will have much higher expense ratios. It’s up to you to determine whether you think the expense is worth it. I personally try to stay with index funds as much as possible, due to both expenses and my belief that most managers cannot beat the market consistently (a topic for another post).

What About Lifecycle Funds?

One of the newest products of the mutual fund industry is the lifecycle fund. These types of funds give you an easy way to diversify, especially if you only have one account and all of your money is in that one lifecycle fund. A lifecycle fund will typically invest your money in a mix of stocks, bonds, and cash, depending on what year you specify for your retirement. As the retirement date approaches the ratio of cash and bond investments increases, and the amount of money in stocks goes down.

Sounds great, right? The downside to these funds is they generally have higher expense ratios than if you simply invested in a stock and bond fund yourself and handled the rebalancing yourself every year. The lifecycle fund options in my wife’s 401(k) had expense ratios around 1%, fairly high considering the index fund options all had ratios under 0.5%.

How Should I Pick Funds?

The absolute worst way you could choose funds is to pick the ones with the highest historical returns. Instead you should consider the advice above. A typical 401(k) plan or IRA mutual fund list will have funds that fall in the categories we just talked about. Start by thinking about your investment timeline and choosing the appropriate risk level. Decide what percentage you would like to devote to equities, what percentage to bonds, and what percentage to devote to cash. If they are available, also decide if you will contribute to a commodities or real estate fund.

Once you’ve determined a percentage to devote to stocks, decide what percentage will be domestic, and what percentage will be foreign. Choose ONE fund for each of the asset classes. For example choose one small cap fund, one mid cap fund, and one large cap fund. As I said before, if index funds are available I recommend choosing them. But you may decide another fund offers better prospects.

Do the same thing for your bond allocation. Determine an amount to put into high-yield, government, or any other bond funds that are available. Try to mix it up between high risk and low risk, just like you did with the stock funds.

You’re done!

If you follow these steps you should be able to create a diversified portfolio that covers a broad spectrum of investments. You should also have a better understanding of what is going on with your portfolio when you see month to month fluctuations. I realize this is an incredibly broad topic to cover, enough that an entire book has been written about it. But this should be enough for you to look at the funds available to you and determine what class they fall into. Next week will be part 3 of the retirement series, so keep on the lookout!

Planning for retirement part 1 - the basics

Published on April 15, 2008 in Financial Basics and Retirement. 0 Comments

This post is part 1 of a series on retirement accounts, and a continuation of the financial basics series. The idea of becoming free from money is based on having enough passive income that you never have to worry about working for money again. For most people that is retirement. And one of the most powerful financial tools available for investors is the retirement account.

Why a retirement account?

In the past a company provided for their employees with a pension. You worked for the company for x number of years, and they would provide a fixed payment for you to live off of for the rest of your days. These are called defined benefit plans, since you will receive a predefined amount of money when you retire.

Then somewhere along the line employers made the switch to defined contribution plans. With this type of plan (typically a 401(k)) a company could shift the burden of funding a retirement to the employee. This is obviously a huge benefit to the company, but not so much for the employee, who now needs to plan to save enough, invest it wisely, and plan how long they will be living after they retirement (obviously not an easy thing to know!)

The big benefit of having an individually owned retirement account versus a company funded one is that you can take it with you between jobs. The old days of being chained to a job for a certain number of years so that you can collect your retirement are over if you are not receiving a pension. So now you can actively pursue jobs you want, and roll your accounts when you leave.

What types of accounts are available?

There are many different types of retirement accounts available, but the most common are the 401(k), the IRA, and the Roth IRA. There are a few other types of accounts available as well, but they generally all have a few things in common. First is that they are considered long-term accounts, and will impose steep penalties if you take money out of the account before you reach retirement age (typically 59 1/2 or older). Second is that they will allow your money to grow tax free every year. This is different from regular accounts that require you to pay annual taxes on interest, dividends, and capital gains.

The 401(k) is generally offered by a company to its employees, oftentimes with a match of some sort, either as a percentage of pay or a flat dollar amount. The money that goes in is pretax, but you will have to pay taxes upon withdraw of the money. As of 2008, the annual cap is $15,500, not including the match from your employer. So if your annual income is $50,000, you could contribute 31% of your income a year, regardless of what your company matches you.

The IRA is very similar to the 401(k) in function. The money you contribute goes in tax free, reducing your taxable income, and is taxed when you take the money out at retirement. The amount you can contribute is capped at $4,000 a year ($5,000 if you are 50 or older). IRAs can be opened with many different financial institutions depending on where you would like to invest. Stock market investors can open IRA accounts with brokerage firms and buy individual stocks and bonds. Mutual fund investors can choose a company like Vanguard or Fidelity. Even banks usually offer retirement accounts, although sometimes the selection of investment choices can be slim.

Similar to the IRA is the Roth IRA. The major difference between the two is that money that goes into a Roth IRA is after-tax, but the money you withdraw during your retirement years are tax free (since the money was already taxed before it went in). This annual limit is the same for each, and generally the same financial institutions offer both IRAs and Roth IRAs.

Which one should I pick?

If the company you work for offers any matching amount for contributing to a 401(k), then investing at least that amount should be a no brainer. Not putting money in is saying no to free money, and no matter how strapped for cash you might be there’s no reason to say no to free money, right? Add to that the tax savings and this is an easy place to start.

If your company doesn’t offer a match, or you’ve contributed enough to max out your company’s matching amount, an IRA (either a traditional or a Roth) might make more sense than investing in the 401(k). When a company sets up a 401(k) it generally has to choose a small number of funds for you to invest in. These may not always be the best funds, either due to poor management, lousy expense ratios, or they might just not be the types of funds you want to invest in. As I mentioned earlier, many financial institutions offer IRA or Roth IRA accounts. I personally invest with Vanguard and have been happy with them.

The decision to use a traditional IRA or Roth IRA is based on whether you think you will fall into a lower tax bracket when you retire or not. You could have both, but the $4,000 annual limit is cumulative between accounts - you cannot put $4k in an IRA and another $4k in a Roth IRA. If you are making a ton of money now, and could use a tax break, a regular IRA might be a good idea. Otherwise a Roth IRA may be a good idea.

Until next time . . .

So that wraps up part 1 of retirement basics. Hopefully this was helpful, and if you have any questions please leave a comment. Next week I will cover the basics of asset allocation and how to pick funds for your retirement accounts. See you then!

Break the credit dependence cycle: using ING sub-accounts to reach financial goals

Published on February 14, 2008 in Financial Basics, Organization and Saving Money. 0 Comments

This post is part of the financial basics series.

How often do you see advertisements saying $19.95 a month? How often have you thought to yourself that you could “afford” a new car since the lease payments are only $299 a month? Did you eye that new Macbook Air and think it could be yours for only $100 a month? If so you’re not alone. According to Bankrate.com, the average credit card debt is $8400 per person. On top of that, PBS estimates that there are roughly 641 million credit cards in circulation. That’s a lot of plastic.

Buying on credit is a dangerous game, especially when you start thinking in terms of monthly payments. What happens if you can’t make the payments one month? What would you do if you lost your job and couldn’t make the payments anymore?

How do you break out of that cycle?

What if instead of paying $100 a month to finance a new laptop computer, or $300 a month for a new car, you managed to break the credit cycle, and instead started saving for the things you wanted? What if instead of paying interest, you could begin to earn interest? If you could do this, you would be able to start affording a lot more stuff. It will take some time, yes. And discipline. But I promise the results will be worth it.

Setup sub-accounts with ING Direct

There are many online banks that offer higher interest rates than ING Direct, but I have never used any of them. I have been a customer of ING since March of 2004, and have had nothing but great customer service from them. I don’t have any experience with other online banks, so I don’t know if they have similar features. But if you’re looking for an online bank I can highly recommend ING Direct as a safe, FDIC-insured option.

One of my favorite features of ING is the ability to create sub-accounts. A sub-account is basically a separate savings account, each with its own account number, underneath your customer number. Using sub-accounts is a great way to budget and visually separate your money to more easily reach your goals. Every time you log in to your ING account, the main page will list all of your accounts for easy maintenance.

To open a new sub-account, simply log into your account, and click on the open new account button on the left-side menu. Choose to open a new Orange Savings account (click on the Open Now button), enter the account nickname, choose your existing savings account, put a few dollars in your new account, and then hit continue. Confirm that everything is correct, and then click “Open Account.” The whole process only takes a few minutes and shouldn’t present any problems.

Making use of your new sub-accounts

Now that you know how to open a sub-account, you need to know what to do with them. First, think of the things you would like to begin saving for, the typical things people put on credit cards or go into debt over. A few examples might be a new computer, vacations, clothing, or even Christmas gifts. Don’t forget big purchases like a car. Imagine if you bought all of these on credit. You would have a car loan and a credit card that you bought your computer with. You might have another credit card that you use to buy your clothes and gifts with, and yet another card that you used to go on a trip to Hawaii. Opening a few savings accounts that are all available in one place doesn’t seem so bad now, does it?

Consider again the things you would seriously like to save for, and open an account for each one. If you plan on buying a new computer every two years, open a computer savings account for example. Combing goals is also an option. For instance I only go clothes shopping once or twice a year, and I only buy Christmas gifts once a year. So I created one account, and named it Clothing and Gifts. Think of these accounts as your new debt payments, only now you’re the lender and you’re in control.

Once these accounts are open, you need to start thinking about how much you’re going to need total, and from that figure out how much you will need to contribute monthly. Let’s look at the new computer fund. Suppose you want to buy a new laptop computer every three years, along with a few accessories like a new external hard drive or new software. First factor in the actual cost of the laptop, say $2000. On top of the $2k you want to get a protection plan and upgraded ram. This might add another $500, bringing your total to $2500. Don’t forget to add sales tax! Including tax and the software you think you might buy, suppose your total number comes out to $3,000. So over the course of 3 years you will need to save roughly $83.33 a month to meet this goal. By the time you save that much money, you will actually have more than $3k, since you will be earning interest on the money while it sits in your account. I will talk about how you can use this to your advantage in another post, but for now just think of it as compensation for your hard work (but try not to spend it!)

One trick I like to use, when naming your account, put the amount of money you would like to save next to the name. So the computer fund for example, would have the nickname “Computer Fund 3000.” I know that sounds like the name of a bad science fiction movie, but seeing that goal every month, and seeing the balance get a little bit closer to that goal every month, will provide you with the motivation to keep saving for that goal.

Don’t forget to start an emergency fund!

The number one sub-account you absolutely need is an emergency fund. This is going to be your shelter from the storm, your rudder keeping you steady when the water gets rough. This account will be used for emergency expenses, like unexpected car maintenance costs or medical bills, sos you don’t have to pull out the credit card. Buying a new shirt to impress your date Friday night is not an emergency, so be careful not to use the account frivolously.

Final thoughts

Using the sub-account feature is a great way for you to budget for your goals, and to budget for annual expenses like Christmas or your kid’s birthday. But when you’re just starting out, don’t over do it. Building up a small emergency fund should always be first on your list. After that it’s important for you to pay off all of your current debt before you start trying to save a major amount of money. It wouldn’t make much sense to save for a new car when you haven’t even paid off your current one.

Using ING you can set up an automatic withdrawal every month or every paycheck, giving you an easy way for you to fund your accounts. Don’t forget to budget those withdrawals, or you might spend that money and get hit with overdrafts. Now go open those accounts!

Get Rid of Your Debt!

Published on February 6, 2008 in Debt and Financial Basics. 1 Comment

This post is part of the financial basics series

When you have multiple credit cards, car payments, student loans, and other consumer debt it’s easy to begin to feel overwhelmed by the payments.

If you want to take control of your debt, it is important that you have a method and a plan to pay your debts off. A plan will give you control and put you one step closer to financial freedom.

So how does it work?

The first thing you will need to do is make a list of all your debts, including the balance and the minimum payment due each month. Next you will need to figure out your budget and determine the maximum amount of money you can pay towards your debt each month. Ideally you can pay more than the total minimum payments, but it may be that the most you can pay is the minimum amount due. This is fine. If the total amount you can pay is less than the minimum payment you need to go back and rebudget, and figure out where you can cut costs elsewhere so you can make your payments.

Now that you have a budget, you will need to decide which debt to pay off first. There are multiple ways to choose which order you should pay your debts off, but there are three main schools of thought on which debt payoff order is best, each with it’s own pros and cons which you should consider.

1. Payoff the lowest balance debts first (the debt snowball)

This is the method advocated by Dave Ramsey, and is the method my wife and I are using to payoff our debts. Using this method you will put any extra money towards the debt with the lowest balance, paying extra on it every month until it is paid off. When that one is knocked out you will put all of the money you were paying on the first debt and add it to the minimum payment of the next lowest balance debt, paying extra on it until it’s paid off. You will keep doing this until you have paid off the last debt. By the time you get to the debt with the largest balance you should be able to put a massive amount of money towards it every month (hence the name debt snowball), since the rest of your debt will be gone. While it may not actually be the quickest method to paying off your debt, it will feel like things are in motion since you every few months you can potentially get rid of another debt payment, which means one less bill in the mailbox.

The downside is that, mathematically, it is the least efficient method if your highest balance debts are also the ones with the highest interest rates, and over time you will end up paying the most amount of interest. My wife and I actually faced this dilemma, since our credit cards have both higher interest rates and higher balances compared to our car loan and student loans. Still, the excitement for us of paying off our car is worth the higher costs.

2. Payoff the highest interest rate debts first

With this method, endorsed by Suze Orman, you will order your debts from the highest interest rate to the lowest interest rate, and begin to pay them off in that order. Again, once a debt is paid off you will put that money towards paying down the next debt. As I said before, if you are looking for the method to pay the least amount of interest over time, and the method to pay off all debt in the absolute quickest fashion, this is the one to use.

The only downside to this method is a psychological one. If your highest interest rate debts also have high balances, it might take a long time to pay them off. It may begin to feel like you’re not getting anywhere with your goals, and you may find yourself in a rut. And if this leads to a breakdown in discipline, you might go off on a spending spree and quit altogether. And that, of course, would not be good.

3. Payoff debts according to their ‘DOLP’ number.

DOLP (Dead On Last Payment) is a trademarked term used by David Bach, author of The Automatic Millionaire. This system actually works out to be a hybrid of the previous two methods. To use this method you will need to find the DOLP number for each debt, calculated as the total balance divided by the minimum monthly payment due. Once you have all of the DOLP numbers calculated, you will order them from lowest number to the highest. The lowest DOLP debt will be paid of first, and the highest last. If you have no extra money to pay down your debt every month you are actually using this method by default, since you will pay off whatever debt is receiving the highest % of its balance first.

Let’s look a little deeper into the DOLP method. There are two ways a debt could have a low DOLP number. The first is if the minimum payment due is large relative to its balance. For example, consider two credit cards with the same balance, but with different interest rates. The credit card with the higher interest rate will have a higher minimum payment, and thus a lower DOLP number, and should be paid off first. The other factor leading to a high DOLP number is a relatively low balance. An auto loan payment for instance, is a fixed amount every month. As the balance gets lower, the DOLP number goes down, meaning you will pay it off sooner. Getting rid of low balance debts means more money freed up to pay down other debts, and one less bill in the mail every month to worry about.

In short, using the DOLP method prioritizes higher interest rate debts and lower balance debts. Of course using this method doesn’t guarantee that you will pay off the highest interest rate debts first. You can still end up paying more interest over time than simply paying off debts in order of the highest interest rates.

Attack your debt

Once you have decided what order you will pay your debt off, the next step is to start doing it. Being consistent every month is the hardest part, especially if you figure out that it is going to take years to pay everything off (like I did). You may think to yourself “What’s the point?” I know this feeling well, but if you don’t do it now, when? Unfortunately your debt is not going to magically disappear. The only way to overcome it is to attack it with every bit of money and effort that you can. Keep picturing how great it will be to not have anymore debt. And think about the money you will have to save every month once that debt is out of the way.

It won’t be an easy road, especially if you have a lot of debt. But stick with it and you will be debt free before you know it.

Create an Emergency Fund!

Published on January 28, 2008 in Financial Basics, Money Managemenet and Saving Money. 0 Comments

This post is part of the financial basics series.

Dsc02088Once you’ve created your spending plan, the next step is to start an emergency fund. At this point it doesn’t have to be huge. $1000 is a good goal for for most people, but you may want to adjust that amount upwards if you live in a high cost of living area such as New York or the San Francisco Bay Area like your truly.
Creating an emergency fund is important for a few reasons. Number one, it is important for peace of mind. Number two, it helps to keep you from charging up more debt. For most people living paycheck to paycheck, random unexpected expenses like emergency car repairs can break a budget like nothing else. This is where the emergency fund comes in. Not having to put expenses on a credit card is a great feeling. And peace of mind is a feeling that no material possession can truly replicate.

But where should I keep this money?

If you’re thinking about saving that money in an ordinary bank savings account, stop that thought right now. Most banks offer atrociously low interest rates to their savers. A much better solution is to keep the cash under your mattress. Just kidding. The best option for saving money that you need to remain both liquid and risk-free is to open an online savings account somewhere like ING Direct, Emigrant Direct, or HSBC online. The only online bank that I have used is ING Direct, and I highly recommend them for the ease of opening a new account and their reputation. The other banks do offer slightly higher interest rates, so they may be worth looking into as well.

One side note, many banks have incentives, ING Direct for instance has a referral program that gives you $25 if you open an account with $250 (although there’s no minimum if you don’t have $250). So if you know someone that banks with them, ask for a referral link to see if you can get some extra cash in your account for free.

Opening an online account has two large benefits. The first is the boost from the higher interest rate. Although rates are relatively lower now after the fed rate cut, when rates go back up the online banks are quick to increase the savings rate. The second benefit for many people is having an account that is one step removed from your checking account, meaning you will have to wait a few days before you can use the money. This should help to eliminate at least some of the impulse spending, and will make it harder for you to use it in a non emergency.

Funding

Once you have your spending plan created and online account funded, you need to fund it. Any extra money in your budget should go to funding this account while you make the minimum payments on any debt. Then you can proceed with debt payoff, which we will discuss sometime soon.

Creating an automatic withdrawal into your emergency fund is important. This automation is what will help you reach you financial goals. Two options are to either create an auto debit through the bank, or to have part of your paycheck deposited directly into your savings account. I prefer the later approach since it makes keeping a check register that much easier, since the money never actually goes into or out of my checking account. It is also nice because you don’t feel like you’re losing money every month, since you never see it come into your spending account.

Next Steps

Once you have reached your goal amount, it is time to pay off debt. There are differing opinions on whether you should continue to fund the account while you’re trying to pay debt off. Personally I think it’s worthwhile to keep the auto withdrawal going into your savings. Seeing your money grow is a great feeling.

Once you become debt free, the next step is to build up a true emergency fund. This fund is one that could see you through months of no job or cover you in a major financial crisis. A good rule of thumb is 3-6 months salary. This can take a long time, but it is an important step to become free from money. Once you know that you can sustain your living for half a year without a job, the burden of living paycheck to paycheck becomes smaller. If you want to pursue a new, higher paying job, the opportunity is out there.

So what are you waiting for? Opening an online savings account is the first step. Do it now! Then start making whatever contributions you can to it, and before you know if the money will be there.

Taking the first step: Create a spending plan

Published on January 24, 2008 in Financial Basics and Money Managemenet. 0 Comments

This post is part of the Financial Basics series.

To be Free From Money you must be in control of your money

The first step on the road to financial freedom is taking a look at your spending versus your income. If you are spending more than you make, you will be a slave to debt for the rest of your life. Most people hate the word budget, so I’ll use the term “spending plan” instead.

The first step to creating a realistic spending plan is to know where your money is going. Start tracking your expenses for a month or two. Make a list of everything you spend your money on, and then sum up each category for any given month. Spreadsheets are a very useful tool for for tracking spending and then summing up the total. You will probably want to use a few general categories, like groceries or gas for the car. I think it’s a good idea to create a separate category for non-essential spending like dining out so you can start to see how expensive these habits can be. Make a list of your average utility bills like water, electricity, and gas. Find out the MINIMUM payments due on each of your debts and list those individually. Also be sure to think about your average entertainment expenses. If you go clothes shopping every weekend, include it in the budget spending plan. Like to play golf on the weekends? Make sure you figure out the average cost, including green fees, lunches, or the cost to practice at the driving range. Keep going through your spending to get an idea of where your money goes and create whatever groups you need for your spending plan. When you are just starting out this should be a monthly routine until you refine your spending plan to the point of automation.

Now, sum up everything you spend money on, and compare it to your after-tax income. You’re going to fall into one of two camps: either your income is greater than your expenses, or your expenses are greater than your income.

I hope that your spending is less than what you earn. If it’s not, you need to start evaluating your spending habits and think about where you can cut expenses. Play golf once a month instead of once a week. Shop less. Skip the manicure and pedicure every month, or learn to do it at home. Cancel the cable bill. There are numerous resources on the internet to get ideas for cutting expenses, so I won’t go over other ideas in depth here. But reducing the amount of money you spend is the number one thing you must learn to do if you are going to be successful in creating wealth.

Hopefully your spending plan tells you that you are making more money than you spend. If you are at this point, then you are starting on the right foot. Subtract your spending from your after-tax income to get the extra money you have each month. This amount will be the key to financial independence. This is the amount you will use to start your emergency fund. This will be the amount you use to payoff each of your debts one by one. This will be the money you save for yourself to become free from money. If you can, take a look at your spending and see where you can make cuts. The larger the gap between your spending and income the more you will have to keep for yourself and the better off you will be.

Creating a spending plan is not a one-time thing that you do in the beginning and forget about. It will take continuous refinement as you start to get a grip on where your money goes every month. Every time you pay off a debt you will take the minimum payment out of the plan and add it to the free amount. This free amount will in turn grow larger, allowing you to pay off other debts quicker or reach savings goals faster. You also need to remember to follow your spending plan! Of course this sounds obvious, but so many people who create a plan never actually follow it. And whatever you do, please do not fall into the trap of putting “just one thing” on your credit card every month. You might be surprised at how often you actually put stuff on every month. I stopped using credit cards altogether for just this reason, but you may prefer to keep one around for peace of mind only.

So I encourage you to start keeping tabs on where your money goes. It will be an enlightening experience I’m sure, even if you think you know exactly how much you spend every month. Good luck!

Starting the Financial Basics Series

Published on January 22, 2008 in Financial Basics. 0 Comments

finbasics Starting this week I will begin a series called “Financial Basics.” These will be the ideas and habits that I feel are essential to becoming free from money. These will eventually culminate in my Free From Money Blueprint, the basic outline to controlling your money and reaching financial independence. I will try to publish one of these a week, so be on the lookout!