Welcome to Financial Spiderplant!

Many people have the misunderstanding that banks work for you. Many also have the understanding that banks won’t do anything to help you unless it is in their self interest but don’t allow this understanding to change their behavior or their overall beliefs. There are few people that are willing to take the actions needed to better their situation and that is ok.

You are reading this because you are interested in making your situation better.

So, in an effort to try something new, here is a rant about why you should open a high yield checking account.

Getting a decent rate for your savings account isn’t that difficult. The banks take your deposit and put it in a money market account which yields a high interest rate. Most checking accounts don’t do this because there is more account activity in checking account. This makes the task of having checking account funds in a money market almost impossible…doesn’t it? Nope. The fact is that that whether you are dealing with $100 or $100,000 in your checking account, it still doesn’t add up to much in terms of the overall business that banks handle. There is no reason why your checking account shouldn’t be paying you interest.

How much interest does your checking account yield?

Do you EVER pay ATM fees?

Do you ever pay for new checks?

Do you feel that the bank you hold your checking account with does everything that they possibly can to reward you for choosing them?

If your checking account doesn’t pay interest, your bank is taking advantage of you because you are providing them with interest free capital that your bank can lend out and make money.

Are you a patsy? (1)

If you pay ATM fees, your bank is taking advantage of you because most bank have chosen to form an imaginary barrier that costs anywhere from $1 to $4 per transaction when the actual transaction cost to the bank is $0. They are literally taking your money just because they can.

Are you a chump?(2)

If you pay for checks, fees because your balance is ‘too low,’ fees because you want to download your transaction into Quicken, Money, Yodlee, or any other money tracker…or any fees whatsoever, your bank is taking advantage of you. The plain and simple fact is that these services should be provided as a cost of business but they haven’t been. Why? Because no one said that banks have to be there to help you…in fact, the banks are striving to boost their profit margins to please shareholders; most banks aren’t there to help you.

If you put a frog in boiling water, it jumps out because it realizes that being in boiling water is a bad situation. If you put a frog in lukewarm water and proceed to heat the water until it boils, the frog will contently sit in the pot and boil to death. Why? Because a slow and steady rise in temperature keeps the frog unaware of the potentially harmful situation it is in. (3)

You are a frog and banks are heating up the water. They will continue to nickel and dime you because there is no alternative…is there?

Charles Schwab has a high yield checking account that pays 3% interest, reimburses you for all ATM fees, give you free checks, debit card, and still FDIC insures your money just like your current bank. Charles Schwab is taking the high ground, rewarding their customers and providing top notch service. I guess the question is whether or not you are going to continue to be a patsy, a chump, and a frog in boiling water OR are you going to come on over to the bank that actually rewards you?

You can easily link all of your account to Schwab and out of curiosity, I checked how long it takes to transfer money from a Schwab investment account to a Schwab checking account. Results? 1 second. Before I could even refresh the page, the transfer had taken place. I think that being able to quickly move your capital from one account to another is an absolute requisite in choosing an account.

If you think that all banks will start to offer these same perks, you are wrong. There are just too many individuals who pay too little attention to the little details and will stay with the current system that rewards the banks and their shareholders instead of the actual customers.

On second thought, don’t change banks, please continue to use a system that takes advantage of you and spends every waking moment trying to make more money from their customers. I will continue to put all interest from my checking account into the stocks of those banks. You will become poorer as a result and I will become more wealthy because I use the system to my advantage and you simply ‘can’t be bothered to spend a couple minutes improving your life.’ (4)

Please do your own research and compare your current checking account with the account options Schwab offers or you can take my word for it because I’m a geek that already did the research for you.

Get a better bank account and be rewarded for your loyalty instead of shunned and taken advantage of.

Open a Charles Schwab checking account. Today.

Please e-mail me with any questions you have. My e-mail address is david113@gmail.com. You can also sign up for my RSS feed here.

Hope everyone is having a great week!

David

(1)
pat·sy (pts)
n. pl. pat·sies Slang
A person easily taken advantage of, cheated, blamed, or ridiculed.
A plain sucker, someone who expects nothing and is granted nothing in return.

(2)chump 1 (chmp)
n.
A stupid or foolish person; a dolt.

(3)
I have never tried this experiment. I do not suggest you try this experiment. I heard it on a nature show or something and I think that it serves as a good example.

(4)
Of course I am joking. I desire what is in your self interest. Seriously…open a Charles Schwab checking account.

After my last posting, I received a few e-mails asking for more information about college planning.

College planning is something that anyone with children should be thinking about. The smallest of actions can help set your children up for a situation where they are able to avoid a massive debt load upon graduation.

The best way to prepare for your children’s college costs is a 529 plan. The plan is funded with after tax dollars and grows in a tax-deferred environment that is exempt from federal taxes but still subject to state taxes when withdraw from it. Worried what will happen to the funds if Junior chooses to forget about college and pursue a career without a degree? As the donor, you control where the funds are spent. The beneficiary has no claim to the funds in the plan. While you will face income taxes and a 10% penalty if withdrawals are used for expenses other than college, you also know that the eventual $100,000+ you save won’t be used towards the down payment on a Porche by Junior but should you child decide not to go to college, you can always get the Porche for yourself and get the personalized license place “JRS EDU.”

One of the strongest reasons for starting a 529 is the current changes that are likely to face the tax structure on investments in the near future. Long term capital gains taxes are likely to increase from 15% to 20% and the marginal tax rate on dividends is set to change from 15% to 39.6%. In a related note, the death tax is likely to increase to %%% for those with assets in excess of $1 million.

What does this mean? If your accounts aren’t held in a tax-deferred account, you will face some rather hefty tax bills in coming years. The potential change in tax structure has led me to believe that the best course of action will be to keep as many of your dividend stocks in tax-deferred accounts and to minimize any investment sales without careful attention to your tax burden. One of the easiest ways around the taxes you will pay is to take advantage of ETFs and mutual funds with can help you to minimize purchase fees but I’ll cover more on that in a future posting.

How much should you save for your child’s college cost in your 529 plan?

This is a simple college cost projector that I will be using for the majority of my calculations.

The calculator assumes a 7% annual increase in college costs. While I hope this price trend doesn’t continue and that future government plans regarding educational costs are effective in keeping college costs low…we don’t know what the future holds so we’ll continue to assume the annual 7% rate increase.

While tuition rates can vary across the board, I’ll make calculations for current tuition rates for a 4-year college at $20,000/year. If you plan to send your child to a more expensive college or wish to make calculations for grad school, just plus the numbers into the calculator. Even if your children are close to entering college, it is still a good idea to start a 529 plan! You could make your contributions today and use the generated returns to assist in making tuition payments towards for the 3rd/4th year of education in order to maximize the amount of time your investments have to compound.

Years to Enrollment: 18 years
First Year Projected Costs: $67,598.65
Second Year Projected Costs: $72,330.55
Third Year Projected Costs: $77,393.69
Fourth Year Projected Costs: $82,811.25
Total Projected Costs: $300,134.13

In order to raise $300,000 in 18 years when Junior goes to college, you will need to make an annual contribution of $5,500 each year. I reached this total with our compound interest calculator.

The investment options for your 529 will vary greatly depending on which plan you choose. Make sure to research the available investments but you should be looking for a diversified stock investment since you will be dealing with a longer time horizon. For those of you currently dealing with large decreases in your 529 balances, don’t worry, over time, you will recoup the loss. If you are a 529 holder who currently has children in college, it might make sense to take out college loans or to avoid cashing out your 529 investments until the market has recovered. Once the market recovers, you can pay off the college loans or use the higher balance to bay off a higher portion of tuition in future years.

Sources:
529 plan : Wikipedia
Top things to know : Money 101 : Lesson 11 : Saving for College
College savings plans : Bankrate

Hello David,

I enjoy the honest, straightforward financial advice posted on your website. The lack of excessive brokerage jargon is much appreciated. It has been a useful primer for me as I enter the world of investing for my future as well as my family. I have a barrage of questions that I need answered, some of which I feel may be considered stupid. I apologize for my ignorance, but I just haven’t gotten straight answers. Additionally, I just need some solid financial advice. Before I begin let me tell you a little about myself. I’m 32, I’m in my first year of private practice (physician) and am raking in roughly $250,000 annually (approximately $150,000 post-tax and running expenses). My practice is offering several investment vehicles (a 401 K and a ROTH 401K). Well here are the questions:

Dr. S,

Thank you for your question! I’m glad that you like the site!

The important thing is that regardless of past action, you are willing to learn more about the paths you can take to lead towards financial independence.

1. In your opinion are 401Ks and IRA sufficient enough vehicles (considering my salary) alone to plan for retirement? Is it necessary to explore annuities?

Tricky question. It depends on what standard of living you expect during retirement.

While regular donations to your 401K and IRA can be sufficient for retirement, it is equally important to invest in taxable accounts since this will provide you with additional income and resources to utilize before retirement. If your goal is early retirement and an income that if similar to your current income, 401K and IRA contributions will keep you headed in the right direction but additional contributions to taxable accounts will expidite your progress.

An annuity can provide a payout of a specific amount over a specified time period and serve as an excellent investment tool for those already in retirement that are seeking guaranteed income. While the purchase of an annuity can be ideal for specific situations, I would advise against purchasing an annuity during a time when you should be focused on capital preservation and growth. An annuity will not allow you to take advantage of market growth from your current age of 32 through the time you retire.

2. What is the main difference between a ROTH 401K and a regular 401K besides the 401K tax break and tax free withdrawal at retirement for the ROTH?

A 401K is funded with pre-tax contributions while a ROTH 401K is funded with dollars that have already been taxed. 401K contributions are taxed upon withdrawal while ROTH 401K contributions are not taxed upon withdrawal.

The greatest advantage of a ROTH 401K is the tax benefits. The tax benefits alone are enough reason to contribute and other than the tax benefits, the differences between the retirement accounts is negligible. For young individuals that are making retirement contributions early, it makes sense to contribute to a ROTH 401K while in a lower tax bracket so that withdrawals will be untaxed when the investor is in retirement and most likely, a much higher tax bracket. Since you are earning ~$250,000/yr, you are already in the 33% tax bracket (until you make $350,000+ and are taxed at 35%), you will not receive as great of a tax benefit. Still, taking an upfront tax hit and allowing your dollars to compound in a tax free environment is an opportunity that you should take advantage of.

3. Can I contribute as much as wish to a ROTH 401K, unlike the ROTH IRA? Are there income stipulations for a ROTH 401k?

Contributions to a ROTH 401K and a 401K cannot total more than $15,500 in 2008 or $20,500 for those over 50. You could put $5,000 in you ROTH 401K and $10,500 in your 401K or any combination as long as you do not contribute a combined amount greater than $15,500. There are NO INCOME RESTRICTIONS for a ROTH 401K.

4. Would a ROTH 401K be better for me b/c I would anticipate retiring in a higher tax bracket?

The primary case could be made for 401K contributions if these contributions would bring you down to a lower tax bracket. Since even a $15,500 reduction in your taxable income would not bring you down to a lower tax bracket, I would advocate contributing to a ROTH 401K (if your employer offers it) and maximizing those contributions. You should still contribute enough for your company match in a 401K though since your pre-tax contributions. After your company match, put the remainder of your contributions into a ROTH 401K.

5. Do employers match and should they match my ROTH 401K contributions?

Many employers still do not offer the option of a ROTH 401K. I am not sure of the specifics of your employer’s 401K plan but expect that a call to the holder of your accounts (Fidelity, etc) would answer your question.

6. If I file jointly for a ROTH IRA, how much can I contribute because of my income? Also in regards to the income limit quoted for the ROTH IRA, is that a person’s post or pre-taxable income?

Joint filers can only fully qualify for a ROTH IRA if their taxable income is less than $156,000. Once you are making more than $166,000/yr, you are NOT ELIGIBLE for ROTH IRA contributions.

7. My employer uses a vesting schedule. What does that really mean?

When you contribute to a 401K, your contributions are automatically 100% vested. If your employer is using a vesting schedule, this means that your employer does not immediately provide a full 401K match. You would have to work for 5 years before your employer was providing a 20%/year vesting schedule. Employers often use this method to reduce employee turnover, your employer has established a vesting schedule to make sure that if you were to leave the practice in the next couple of years, you would not have been receiving a full company match. The longer you stay, the more your employer matches.

8. For the employer 401K matching amount, does it grow in a separate account that is taxed at withdrawal irrespective of the retirement age?

Your employer match is included in the same account as your contributions.

9. Would you still recommend utilizing Altria in my portfolio. What are it’s current annual returns?

I’m a big fan of accumulating solid dividend paying companies and have found investment in Altria to be rewarding. They are currently yielding a 4.1% dividend which is similar to the rates you would receive from a savings account. Altria has been service the purpose of a ‘long term savings account that generates interest and capital gains’ for me but whether or not you choose to allocate funds towards Altria is a decision you have to make. My current understanding of Altria would lead me to believe that any investment today will be highly likely to leave you with very solid returns over a long time horizon (10-20+ years). Invest over time, reinvest all dividends, and don’t sell it so that the power of compounding and dollar cost averaging can work in your favor.

10. Would you please send me your compounding interest calculator in excel?

I use a couple of different compound interest calculators. The package here is available for free download and includes several excel sheets that contain calculators for compound interest, annuities, and loan amortization.

Download the Compound Interest Packet

11. Lastly, now for your sincere advice. Assuming I am able to invest the maximal contributions annually to a 401K (If I shell out $15,500 yrly) based on your calculator, what will my return be after 30 years with varying rates of returns (love that table on your website)?

According to the Money Chimp Compound Interest Calculator, a $15,500 annual contribution compounding at 8% for 30 years would give you ~$2 million. An 8% return is pretty conservative given long term historical market returns, a 10% return would leave you with over $3 million. If you were to retire in 30 years and put ~50% of your investments into fixed income and 50% into conservative stock investment and get a 5% return, you would have an annual income of ~$150,000. Given your current income of $250,000 and the inflation that will occur in the next 40 years, this would not be sufficient to maintain your current lifestyle during retirement so I would suggest saving more.

Also what do you sincerely recommend for me? I am a conservative investor. I walk the middle road and plan to diversify investments. I have 3 kids and I will be setting up a 529 plan this year. I will assume a modest amount of volatility and risk. What type of taxable accounts would you recommend for me?

Dr. S

If you are fully maxing your 401K contributions of $15,500, with an income of $250,000, your effective saving rate is ~6%. Setting up 529 plans for your children is an excellent way to prepare for the future costs of education. The contribution limits for 529 plans are extremely high (over $200,000) and contributions are deductible in 31 states. College costs are expected to increase at a rate of ~7% although no one knows for sure how accurate this estimate is. If a year of college today would cost $20,000, the total cost for 4 years of college in 10 years will be ~$175,000. You didn’t mention the ages of your children but I’ll pretend your children are 10, 7, and 4 and assume that they are entering college at the age of 18 and will be attending a college that currently costs $20,000/yr

Estimated college costs
For your ‘10 year old’=~$150,000
For your ‘7 year old’ = ~$180,000
For your ‘4 year old’ = ~$225,000

‘Needed’ investment/year to fully cover college costs (assumes 8% rate of return on investments)
For your ‘10 year old’= You would need to contribute ~ $11,000/yr for 8 years
For your ‘7 year old’ = = You would need to contribute ~ $9,000/yr for 11 years
For your ‘ 4 year old’ = You would need to contribute ~ $8,000/yr for 14 years

College is expensive but with savings of ~$5,000/yr per child, you should be able to put a significant dent in the cost of college. With today’s college loan programs, there are plenty of options out there that can help to extend the payment plan and to allow you more time to save. You might also want to consider the gift tax which allows you and your spouse to give up to $24,000/yr to each one of your children (or anyone else you want to give money to) without paying additional taxes. You could put the money gifted into a custodial account in your child’s name. The investments in this account can continue to compound from now until your children graduate college and can be tapped over time to pay off college loans etc. I would recommend talking to a financial planner about the specifics of college planning because this really is a subject worth spending more time on.

Now for the taxable investments that will create your real wealth. Without a direct understanding of your expenses, I’m not sure how much ‘extra money’ you can invest every year. I’m sure that if you make a few changes, you would be able to save at least another 6% of your salary (bringing your total savings rate up to 12%). The additional $15,000/year will provide you with ~$1250/mth to invest in taxable accounts. You’ve said that you have a moderate risk tolerance and at the age of 31, you have plenty of time for growth!

I would recommend putting ~10% of this money into fixed income investments sticking to the rule that the amount you invest in fixed income should be around 120 minus your age. (120-31 = 11%) The remaining money should be split up into various stock investments. You can use a fund screener (provided by most major brokers) to find funds and investments that fulfill your specific needs because everyone will have different risk tolerance and investment expectations.

I would suggest keeping ~30% of your investments geared towards international index funds. A great diversified index fund is the iShares MSCI Emerging Markets Index (Symbol: EEM). ) This is an Exchange Traded Fund (ETF) that has management fees of 0.75% and an annual turnover rate of only 5%. This can serve as a stable base for your international investments with potential additional investments in other ETFs or international mutual funds. I would avoid individual international stock investments in order to maintain diversity until your gain enough experience.

The S&P 500 index fund (SPY)is a diverse ETF that will provide you with a solid domestic stock base. You should allocate ~30% of your funds towards a diversified domestic index fund or mutual fund that has provided consistent performance under experienced management.

Put 20% of your money towards companies that are large, established, and have a solid history of sales growth. I’m talking about companies that will continue to be around in some capacity. The big guys: Coke, Pepsi, Altria, Wrigley, Procter and Gamble, Johnson and Johnson, Bank of America, Alcoa, and many others. Put your investment dollars into these companies over time, reinvest all dividends, and don’t sell them. Large dividend paying companies have outperformed all other forms of investment in time horizons of over 20 years.

You can use the remaining 10% for your fun investing. Interested in investing in the Visa IPO or think that Google or Apple stock is looking a little cheap? Put some of your fun money towards it!

Recommendation Total:
10% Fixed Income
30% International Diversified Funds
30% Domestic Diversified Funds
20% Large Dividend Paying Stocks
10% Fun Investments

The allocations I’ve recommended are totally changeable to fit your investment style. If you love the idea of fixed returns regardless of market direction, focus more on fixed income! If you like the idea of having regular dividend checks that you can choose to reinvest (or even just spend the dividend), then focus on those. The most important thing is to get started as soon as possible!

Dr S, I hope that I have managed to provide you with some useful information.

Please feel free to write me with any additional questions! My e-mail address is david113@gmail.com

Sources:
Pros and Cons of Annuities - How to Evaluate Annuities
Federal Tax Brackets
Understanding the Roth 401(k)
Wikipedia : ROTH IRA Income limits
401(k) Vesting Basics
529 Plan FAQs
The 529 Plan: College Savings
Tax Benefits of Paying for College

It is an important thing to realize when your strategy is over weighted towards one particular goal.

I have been saving ‘too much’ for retirement.

While the prospect of having investments in a tax free environment is great, there comes a point where a great concept can go to far. Essentially, I have been finding it harder and harder to justify an 18% salary contribution (Down from a peak of 22% for 2007) towards my 401K. While it is nice to already have a retirement account working for you at a young age, there are sometimes additional goals can alter your plans. (Whether it is going back to school, getting married, having a kid, becoming a first time home owner, or wanting to build up your taxable accounts)

My previous thought line consisted of:
-Contribute as much as possible to your 401K and make sure you max out your ROTH IRA! The power of compounding over time will make each additional contribution all the more powerful towards creating large retirement account values and assuring a decent standard of living in spite of threatened social security and future events that might make it difficult to contribute towards my retirement funds in the future. Hell, just an extra $1,000 contribution each year generate an additional half a million dollars by the time I enter retirement!

While the logic behind this is sound, I guess the real question is whether or not there is such a thing as saving too much for retirement.

I have chosen to reduce my 401K contributions to 12% of my salary to my 401K. (6% pre-tax match + 6% company match)

The general rule is to make sure that you are putting at least 10% into your 401K when you enter the work force. If you are older, you will need to save a higher percent of your income in order to keep pace with others who have been contributing all along. The longer you wait, the harder it gets to keep up. The thing to remember is that guiding your financial future is a lot like a decathlon, there are many different ways to compete and you don’t have to excel at every even to win but to focus on only one event is a likely path towards failure.

The $150 billion stimulus plan is going to be sending you a check if you are a tax payer!

The basic plan is as follows:

$600 for individuals who pay income taxes
$1,200 for working couples who pay income taxes
$300 for every child

If you only make $3,000/yr, you get $300

The tax rebates start to phase out if you are making more than $75,000/yr.

While the plan hopes the plan will have a total impact of creating ~500,000 jobs through additional deductions of ~50 billion for businesses that are buying new equipment, (they get to deduct 50% of the cost) the effect of the tax rebates is unknown.

Traditionally, when the government gives out tax rebates, people do one of three things.
-Save/invest the money
-Pay down debt
-Spend it

What are you going to do with your rebate? The checks are expected to be mailed out in May, be on the lookout for your check and start thinking about what you are going to do with that bit of extra cash!

Sources:
Tax rebates on track
Stimulus Deal Seeks $150 Bil In Rebates, Investment Credits

It is that time again!

You should start receiving your tax documents for 2007. Make sure to keep these document in a folder or in a specific location so that you have them on hand when doing your taxes or for when you meet up with the person that does your taxes.

These are the documents that you should be receiving.

W-2 : You should receive this from your employer.
1098 : For homeowners so that you can report tax deductible mortgage interest
1098-E : For student loan interest, also tax deductible
1099-INT : For interest earned in savings accounts, CDs, and bonds
1099-DIV : For dividend payments received from stock and mutual funds
1099-B : For the sale of stock, mutual funds, etc so that you can record capital gains. (The date of purchase/sale is also included so that it can be determined whether or not you are paying short term or long term capital gains.)

Basically, save anything that is marked as a tax document.

If you save all of your documents in one place, it isn’t difficult to fill out your tax returns in less than an hour with Turbo Tax.

My Financial Goals for 2008

Charity:
1. Bump up charitable contributions by $1,000 for the year. Likely donations will go to Kiva.

Retirement:
1. Max my ROTH IRA with the 2008 limit of $5,000.
2. Continue AT LEAST 6% pretax 401K contribution to 401K for full company match of 6%. (Currently giving 10%)
3. Continue 6% after tax ROTH 401K contribution.
4. Rebalance my 401K allocations to fit my long term goals.

Other Accounts:
1. Prosper - do not reinvest repayments and use free cash flow to pursue other venues for time being.
2. Microplace - $1,000 contribution for 3 year term micro loans to entrepreneurs in developing countries.

Investments:
1. Be ready for VISA IPO.
2. Reinvest all eligible dividends in DRIP programs

Debt:
1. Make above the minimum payment for every debt obligation.
2. Use free cashflow to pay down smallest debts first and snowball the minimum payments.

HAPPY NEW YEAR! My New Years was spent in Adam’s Morgan in downtown Washington DC, talk about a fun time!

I also managed to lost my wallet in the taxicab on the way home. I paid for the taxi which dropped my friend and I off at my place and noticed in the morning…no wallet. While I was hoping someone would find my wallet and call my cell from the info on my business card. No dice.

So what should you do if you lose your wallet?

First, don’t panic.

Second, remember what cards were in your wallet that provide financial access. Debit cards, credit cards, and even that coffee card that auto-refills from your bank account so that you get the occasional free cup of joe.

Third, go online and check to see if your cards have been used. If you don’t have online access to every checking/saving account, every credit card account, and all your brokerage accounts, you should. There is NO REASON not to have online access to your accounts. No reason. Period. Get online access to all your accounts. If you bank doesn’t provide online access, switch accounts.

Fourth. If your accounts have been used, cancel your cards. If your accounts haven’t been accessed cancel your cards. It takes about 5 min per card and you’ll receive a new card in ~5-10 days. You can find the number to cancel your cards on your banks websites.

You’ve now taken the measures to prevent yourself from having to explain why you spent $400 at XYZ store to your credit card companies, filing out a police report, and having to fill out all sorts of boring paperwork. If your accounts were accessed, you are only liable for $50 worth of charges PER CARD under federal law as long as you report it within 24 hours of losing your wallet.

Fifth, make a list of all those other items you had in your wallet that you will now need to renew. Drivers license, AAA card, insurance card, smart trip card (DC Metro), etc. You now have more numbers to call and a trip to the DMV to plan. (Click here for average DMV wait times in VA by location.)

Finally, find that little extra money in your budget and buy a new wallet. Replace items and avoid losing again.

Losing your wallet really sucks, but it isn’t that big a deal as long as you act quickly and make sure you have your bases covered.

HAPPY NEW YEAR!

May this year bring everyone luck. And if the person that ‘found’ my wallet was directed to this site from my business card. Please mail it back to me…even if there ‘wasn’t any cash in it when you found it.’ I just don’t want to have to go to the DMV!

Sources :
How to Deal with Losing Your Wallet : Wikihow
Lost wallet? Take these four steps now : Bankrate

“Hey,
I read that article about your sister Jennifer and well - I will be in a similar situation very soon.
Here is my story: I am 22 years old, graduating from college this December with a BS in Electrical Engineering. Starting salary should be somewhere around $50k. I have about $20k in student loans and let’s say $5000 saved in the bank.
I am not the kind of person that spends a lot of money on dumb things, but I do want to spoil myself a little bit once I graduate.
What do you think a person in my position should do?
Thanks,
Jay”

Hey Jay,

Congrats on thinking of your financial future so early and also on your upcoming graduation!

First, the student loans, I also have a significant amount of student loans. The best advice I can offer is to just make sure your payments for them are on time. The interest you pay on the loan is tax deductible and the interest rate charged is likely less than those of credit cards or other potential rates of returns you could generate via investments.
(article on student loan interest deduction You get the full deduction if your taxable income is below 50$K, you can keep your taxable income down with 401K contributions)

It is also great that you have saved ~$5,000 in the bank, most college graduates are coming out with a hefty credit card bill but from the sound of it, you’ve managed to avoid that trap. I’d recommend keeping the $5,000 in a high interest yielding savings account to act as your emergency fund. (try Emigrant Direct and ING) It is also a potential source for a vacation upon your graduation depending on when you start your new job although I wouldn’t recommend flushing out the entire balance for the one big splurge. (11th hour vacations offer some GREAT deals) You might also use some of your savings to purchase some furniture if you are moving into an apartment.

The most important thing you can do is create a budget. It doesn’t have to be anything fancy and you can download many free budget templates in excel format. List your separate assets (Savings accounts, any investment accounts etc) , your individual liabilities (Credit card debt, college loans, etc) your sources of income, and then your spending habits. Try to keep your spending habits listed individually: entertainment costs, rent, food, car insurance/gas, your netflicks account or anything that you can predict with relative certainty as a cost you will incur each month. (Don’t forget once a year costs such as birthdays and Christmas) The number you end up with is your disposable income which can be used for additional entertainment, savings, retirement contributions, or anything else you feel like directing your money towards.

I would also recommend you open a 401K plan when you start your new job. (Great article over at 401K-center.com) You should contribute a minimum of 6% of your salary as this is generally the max match your company will provide. If you can, contribute 10% and as you start to buildup more cash, you can start thinking about putting your money into a ROTH IRA. (ROTH IRA 101 the most powerful retirement tool for young people thinking about their retirement assets) This focus is one that I have chosen because I’d like to make sure that I have my retirement contributions working for me as soon as possible.

If you’d like to focus more of your money towards travel, entertainment expenses, or anything else, that’s totally fine. If you choose to live a life with no/little debt and are making 10% contributions to your retirement at the age of 22, you’ll be much further ahead than most of the individuals your age on your path towards financial success, future property ownership, and any other dreams you hold.

I realize that I may have just flooded you with a lot of information, I would be more than happy to explain any of the concepts I mentioned in more detail and direct you towards other information sources, just ask if you need any help. Is it ok with you if I put your question/response on the website? How did your get directed to the website?

Hope you have a great weekend!

Dave

PS: Anyone else is welcome to e-mail me at david113@gmail.com…free financial advice, is there still an excuse not to e-mail me?

My sister, Jennifer, visited me last week on her way up to school. She’s taken the altruistic route of becoming a nurse and will likely graduate from school directly into a job that allows her to work anywhere in the country (and to a certain extent, the world), with high job security, and will also make a pretty good salary. I’m not envious if the potential patient :nurse ratio that she will face in her future career but she’s a little more patient than I am so I’m sure she’ll do an excellent job.

While she was visiting, she ended up talking about some financial issues.

“After I graduate, I’m going to live with as little debt as possible; Dad also mentioned something about making sure that I should contribute to a 401K and even a ROTH IRA once I start working. What’s a good start for how much I should contribute?”

I damn near fell over. I was quite impressed that my sister had made this decision (with little input from me) so early in her life and had made a conscious choice to have her money work for her instead of against her. Most people aren’t obsessed with business and finance; most people happily go through their lives knowing little of compound interest, a basic budget, or how to effectively save for retirement. The simple fact that a base decision to ‘live with as little debt as possible’ and to contribute to retirement accounts is all that most people need to achieve a secure financial future. It isn’t a difficult decision after viewing a couple of statistics and facts, it can take a little as 15 minutes to do the research and become convinced that there is a right way to achieve success and a wrong way to approach finances. Unfortunately, most people don’t spend the time to do this research, certainly not before their 23rd birthday.

Here are the simple rules for financial success:
1. Don’t load up on debt. Student loans are ok. Long term credit card debt should be avoided at all costs. The earlier you start, the better!
2. Credit should be used effectively. You can use credit cards with cash rewards for a little bonus every once in a while. Use your cards for everyday purchases but pay it off in full each month. Don’t pay late.
3. Contribute at least 6% of your salary to a 401K/TSP/IRA plan. Most companies provide some sort of match and it would be a shame to miss out on literally free cash. The earlier you start, the better!
4. Save as much as you can so that you can contribute to your ROTH IRA. Just go to Schwab.com or any of the other investment sites to open up an account. The earlier you start, the better!
5. If you aren’t interested in learning about individual stocks or financial instruments, invest your money in low cost index funds. (You own a little of everything, talk to your broker for more information) Some of your money should be domestic (~60%) and some should be invested internationally (~40%) Index funds will beat most actively managed funds and have been strongly recommended by many financial gurus and experts.

Low debt, save for retirement, diversify, and start as early as possible. That’s all you really need to know to achieve a moderate level of financial success and this is a level that most would be fully content with.

If you’ve already made the decision to be successful in your financial pursuits, make sure to share this information with your friends and family. Financial knowledge is a powerful thing and even the most basic understanding of this knowledge can help you in ways that many cannot imagine.

If anyone has any questions on how to get started in their path towards financial success, please feel free to send me an e-mail at david113@gmail.com and I would be happy to provide any assistance requested. Good luck!