The American economy thrives on debt. Debt is how credit card companies and banks make their money; it's how car salesmen and electronics retailers increase their profits. It's also why millions of American families are forced to move out of their homes, and why many families cannot afford to send their children to college. But you can avoid it. You don't have to be in debt. It's possible to not owe anyone a single sent for anything (even your house!). Here's how:
1. Don't spend money you don't have
It sounds simple, but it can be very hard. What happens when you go to Best Buy and you see that 60" flatscreen TV. Of course you don't have the money now, but you'll have it eventually, right? Sure, but don't forget that the longer it takes you to pay for that TV, the more money you'll eventually spend. You don't want to buy a $5,000 TV, then end up paying $10,000 to your credit card company over the next 5 years.
2. Just wait
Be patient! Even if you don't have the $5,000 now, if you just continue not to spend money you don't have (rule #1) you will eventually (and sooner rather than later) be able to afford what it is you want.
3. When you overspend, do it right
Here's what I mean. Very few people have the income to simple buy a house. Houses and perhaps cars are among the few exceptions to rule #1. But even so, there's a right way and a wrong way to go about buying a house. You have to make sure that it's a house you can really afford. That is, with each payment you can not only pay off the interest you owe the bank, but some of the principle as well. It may take a couple decades, but if you choose the right-price house for your income level, you will eventually own your house.
It's seems silly to think about how many people are in debt when it's so simple to not be in debt. The trick is, once you're in debt, it's pretty hard to dig your way out. So please, think about my rules, and if you can get out of debt, that's great. If you can avoid debt entirely, that's even better.
Thursday, June 26, 2008
Saturday, June 21, 2008
IRA 101
What exactly is an IRA? IRA stands for Individual Retirement Account. IRA's are essentially retirement plans that give you income tax advantages. If you invest in an IRA, you often eligible, in the year of investment, for an income tax deduction. If you withdraw money before retirement age (officially 59½) you are usually taxed for about 10% of what you withdraw.
Individual Retirement Accounts are great ways to save money for retirement, but come in a couple different flavors. Which one should you choose? Here's the breakdown:
Traditional IRA: Until you reach a high income level, contributions to a Traditional IRA are tax-deductible. Traditional IRA's get a little sticky when it comes to withdrawal laws. If you do not withdraw before the age of 70½, then half of the mandatory withdrawal amount will be confiscated.
Roth IRA: Unlike a Traditional IRA, contributions to a Roth IRA are not tax-deductible. However, the earnings accumulated by a Roth IRA are tax-free. The Roth IRA is often preferable for people in a slightly higher tax bracket, as its earnings are tax-free. Roth IRA's also have none of the bizarre withdrawal mandates.
So which one is best? Well, neither is the absolute best. Different IRA's are better for different people. If you are completely lost and have no idea, check out IRA.com or even Wikipedia for more information. It may also be good to talk with a financial adviser whom you can describe your particular circumstances to.
"To heck with it," you say, "it's all too complicated and I don't even care that much." Well we both know that's not true. Saving for retirement is extremely important if you want to be able to... buy stuff... after you retire.
Individual Retirement Accounts are great ways to save money for retirement, but come in a couple different flavors. Which one should you choose? Here's the breakdown:
Traditional IRA: Until you reach a high income level, contributions to a Traditional IRA are tax-deductible. Traditional IRA's get a little sticky when it comes to withdrawal laws. If you do not withdraw before the age of 70½, then half of the mandatory withdrawal amount will be confiscated.
Roth IRA: Unlike a Traditional IRA, contributions to a Roth IRA are not tax-deductible. However, the earnings accumulated by a Roth IRA are tax-free. The Roth IRA is often preferable for people in a slightly higher tax bracket, as its earnings are tax-free. Roth IRA's also have none of the bizarre withdrawal mandates.
So which one is best? Well, neither is the absolute best. Different IRA's are better for different people. If you are completely lost and have no idea, check out IRA.com or even Wikipedia for more information. It may also be good to talk with a financial adviser whom you can describe your particular circumstances to.
"To heck with it," you say, "it's all too complicated and I don't even care that much." Well we both know that's not true. Saving for retirement is extremely important if you want to be able to... buy stuff... after you retire.
Insurance
In brief, have insurance. Nowadays you can get insurance for just about anything: cars, houses, paintings, health, you name it. If you have something important to you that's insurable, you should insure it.
Sure, those extra car payments every month are kind of a pain. Car insurance can cost upwards of a couple thousand dollars per year. But how much does it cost to repair your car after some drunk guy smashes into it? How much does it cost for doctors to set your child's leg bone after he or she breaks it while skiing? How much does it cost to fix your house after someone left the stove on and it almost burned to the ground?
Of course, these are dramatic examples, but they illustrate my point. You may go through life (though it's highly unlikely) without getting in a single car accident; you may never get sick or injured; you may never have anything stolen. All of these things are possible, but it's almost impossible that all of them are true for any one person.
You've heard the horror stories from movies like SiCKO about people who don't have insurance, then get in an accident and fall into massive debt. You will probably never be like one of those people, because you're not likely to have a horrible accident. But you are likely to be in accidents, and paying a few thousand dollars each time one happens is going to cost you more than paying for insurance.
"What," you might ask, "should I do if I can't afford insurance?" The answer is that you can afford insurance. Maybe it means you buy the 45" plasma TV instead of the 60", or maybe it means you don't take that trip to Florida until next year. It's worth doing whatever you can do to cut back spending so you can buy insurance.
Sure, those extra car payments every month are kind of a pain. Car insurance can cost upwards of a couple thousand dollars per year. But how much does it cost to repair your car after some drunk guy smashes into it? How much does it cost for doctors to set your child's leg bone after he or she breaks it while skiing? How much does it cost to fix your house after someone left the stove on and it almost burned to the ground?
Of course, these are dramatic examples, but they illustrate my point. You may go through life (though it's highly unlikely) without getting in a single car accident; you may never get sick or injured; you may never have anything stolen. All of these things are possible, but it's almost impossible that all of them are true for any one person.
You've heard the horror stories from movies like SiCKO about people who don't have insurance, then get in an accident and fall into massive debt. You will probably never be like one of those people, because you're not likely to have a horrible accident. But you are likely to be in accidents, and paying a few thousand dollars each time one happens is going to cost you more than paying for insurance.
"What," you might ask, "should I do if I can't afford insurance?" The answer is that you can afford insurance. Maybe it means you buy the 45" plasma TV instead of the 60", or maybe it means you don't take that trip to Florida until next year. It's worth doing whatever you can do to cut back spending so you can buy insurance.
Cars And Transportation
Looking for a job? Maybe you've checked out the newspaper ads, asked around town, talked to friends, searched the web and you've found a couple. Problem is, the better paying jobs are farther away from your house and would require a car if you're going to work there, and that $8/hr job is right next door. Wouldn't it be better to take the nearby job just so you don't have to shell out a couple thousand dollars on a car?
Actually, it's not. Let's say you've found two jobs, jobs A and B. Job A pays $8/hr and job B pays $15/hr, both have 40-hour work weeks. But job B requires a car and job A does not. How do you know which one to pick? Unless you plan on moving in the next couple of years, it's best to go with job B. Why? Because if you buy a cheap car, the extra $7/hr will make up for the cost of the car and gas in only a few years.
As you read that, you may be saying, "A few years? That's kind of a long time." Well yeah, it is, but when it comes to money, things take a long time. In the above example, you are essentially investing by buying a car. You may not see returns on your investment for a while, but you will see returns.
If you come away from this post with nothing else, remember this: investment is a long-term affair. Investing for the short-term almost always leads to loss, but investing for the long-term almost always leads to profit.
Actually, it's not. Let's say you've found two jobs, jobs A and B. Job A pays $8/hr and job B pays $15/hr, both have 40-hour work weeks. But job B requires a car and job A does not. How do you know which one to pick? Unless you plan on moving in the next couple of years, it's best to go with job B. Why? Because if you buy a cheap car, the extra $7/hr will make up for the cost of the car and gas in only a few years.
As you read that, you may be saying, "A few years? That's kind of a long time." Well yeah, it is, but when it comes to money, things take a long time. In the above example, you are essentially investing by buying a car. You may not see returns on your investment for a while, but you will see returns.
If you come away from this post with nothing else, remember this: investment is a long-term affair. Investing for the short-term almost always leads to loss, but investing for the long-term almost always leads to profit.
Stock Market Investment 101
Stock market investment is never easy and always involves some degree of risk. Knowing about the current markets and their respective fluctuations certainly helps, but there's no guaranteed way to make money through stocks. For this post, I've put together the most important guiding principles that you should follow when investing.
1. Invest long-term
Market analysts will tell you that the average change in stock market gains is about +10% per year, with a standard deviation of 20%. What does that mean? Basically, on average, stocks go up. The standard deviation part means that while you will gain 10% of your investment on average, you'll sometimes gain less and sometimes gain more. Sometimes you might even lose money. So the stock market is relatively unstable on a year-to-year basis, but if you invest long-term, you can almost guarantee a positive return.
2. Have a diverse portfolio
This goes hand-in-hand with principle #1. Having a diverse portfolio basically means buying little amounts of lots of stocks. Because some companies will inevitably lose money, having a diverse portfolio insures that you still have money in businesses that are growing.
3. Invest in companies you know
You'll hear this a lot, but it's actually less important than principles 1 and 2. Generally, it's smart to invest in companies that provide services and products that you have experience with. If you know a lot about computers, you might consider investing in companies like Apple or Microsoft if you think that whatever new product they have coming out is going to be a success.
The last thing to remember about stock market investment is that it requires that initial leap: you have to spend real money at some point. Doing fake stocks on Facebook will never earn you any real cash.
1. Invest long-term
Market analysts will tell you that the average change in stock market gains is about +10% per year, with a standard deviation of 20%. What does that mean? Basically, on average, stocks go up. The standard deviation part means that while you will gain 10% of your investment on average, you'll sometimes gain less and sometimes gain more. Sometimes you might even lose money. So the stock market is relatively unstable on a year-to-year basis, but if you invest long-term, you can almost guarantee a positive return.
2. Have a diverse portfolio
This goes hand-in-hand with principle #1. Having a diverse portfolio basically means buying little amounts of lots of stocks. Because some companies will inevitably lose money, having a diverse portfolio insures that you still have money in businesses that are growing.
3. Invest in companies you know
You'll hear this a lot, but it's actually less important than principles 1 and 2. Generally, it's smart to invest in companies that provide services and products that you have experience with. If you know a lot about computers, you might consider investing in companies like Apple or Microsoft if you think that whatever new product they have coming out is going to be a success.
The last thing to remember about stock market investment is that it requires that initial leap: you have to spend real money at some point. Doing fake stocks on Facebook will never earn you any real cash.
Business Book Reviews Round 1
I like to read, and for some twisted, perverse, and nigh-masochistic reason, I like to read about work. I've selected a handful of the top-selling books about finance, business, and economics and I've written a few words elucidating my opinions on them. All of the following books are priced under $20.
First, Break All the Rules 4/5
First, Break All the Rules is a great book for managers and higher-ups who sometimes fall into complacent corporate mindsets that can actually diminish productivity. Authors Buckingham and Coffman explain how you can turn your business around and become a huge success (and a wealthy person).
The Tipping Point 4.5/5
Malcom Gladwell's book The Tipping Point is all about the little things. It's about those little ideas that grow into huge things. Ideas like Google, which start as humble little projects, but grow into massively successful business, offering hundreds of jobs and earning billions of dollars of annual revenue. Not all of us can be billionaires, but The Tipping Point proves to be an interesting read.
Getting Things Done 2.5/5
I hate to be a killjoy, but I really didn't like this book as much as the reviews on most sites suggest. To be fair, David Allen is a smart guy and knows what he's talking about. But somehow I feel sick just opening a book that has a picture of the author ,grinning like a total sleeze-ball, on the front. Content-wise, Getting Things Done is mostly the same old tripe about organizing your life according to some set of arbitrary principles. I'd skip this one.
Freakonomics 4.5/5
The only reason not to give Freakonomics a 5/5 is that it doesn't quite fit into that fine category of books that help you make money. Nevertheless, Freakonomics is a wonderful read, and a fascinating exploration into the inner workings of economy and sociology. If you're looking for something fun and interesting to pass the time, look no further. Freakonomics is a stellar book, and a great buy.
The Intelligent Portfolio 5/5
I saved the best for last. Christopher Jones' The Intelligent Portfolio is a must-buy for anyone even vaguely interested in finance. The Intelligent Portfolio is a top-notch guide for individual investors. This is a book that has influenced countless readers and is one of the top sellers in its genre.
First, Break All the Rules 4/5
First, Break All the Rules is a great book for managers and higher-ups who sometimes fall into complacent corporate mindsets that can actually diminish productivity. Authors Buckingham and Coffman explain how you can turn your business around and become a huge success (and a wealthy person).
The Tipping Point 4.5/5
Malcom Gladwell's book The Tipping Point is all about the little things. It's about those little ideas that grow into huge things. Ideas like Google, which start as humble little projects, but grow into massively successful business, offering hundreds of jobs and earning billions of dollars of annual revenue. Not all of us can be billionaires, but The Tipping Point proves to be an interesting read.
Getting Things Done 2.5/5
I hate to be a killjoy, but I really didn't like this book as much as the reviews on most sites suggest. To be fair, David Allen is a smart guy and knows what he's talking about. But somehow I feel sick just opening a book that has a picture of the author ,grinning like a total sleeze-ball, on the front. Content-wise, Getting Things Done is mostly the same old tripe about organizing your life according to some set of arbitrary principles. I'd skip this one.
Freakonomics 4.5/5
The only reason not to give Freakonomics a 5/5 is that it doesn't quite fit into that fine category of books that help you make money. Nevertheless, Freakonomics is a wonderful read, and a fascinating exploration into the inner workings of economy and sociology. If you're looking for something fun and interesting to pass the time, look no further. Freakonomics is a stellar book, and a great buy.
The Intelligent Portfolio 5/5
I saved the best for last. Christopher Jones' The Intelligent Portfolio is a must-buy for anyone even vaguely interested in finance. The Intelligent Portfolio is a top-notch guide for individual investors. This is a book that has influenced countless readers and is one of the top sellers in its genre.
Friday, June 20, 2008
Search Smart
Google is an amazingly powerful tool that we all use every day. But oftentimes, people don't get the results they want, or perhaps just not the best results. The trick to Google (or any search engine for that matter) is constructing your search terms carefully.
For example, say you're looking for job listings online. You might think that searching for "jobs" is a good thing to do. But you end up with literally a billion results. How do you sift through it? How do you know what's good and what's not? Are the advertised/sponsored links actually worth clicking on or are they just some schmoozy guy who paid $1/month for advertising? You just don't know.
The most important thing to do is to narrow your search. What kind of job are you looking for? What area of the country do you want to work in?
You can search "jobs" all day and get nowhere. But what if you're, say, experienced with technology and you want a job somewhere near Beverly Hills? Try searching for "IT jobs near 90210." The results you get are much clearer and much better suited to what you need.
I don't want to belabor the point. Just make your searches as specific as you can, and try not to fall into the traps that advertisers tend to lay for you.
For example, say you're looking for job listings online. You might think that searching for "jobs" is a good thing to do. But you end up with literally a billion results. How do you sift through it? How do you know what's good and what's not? Are the advertised/sponsored links actually worth clicking on or are they just some schmoozy guy who paid $1/month for advertising? You just don't know.
The most important thing to do is to narrow your search. What kind of job are you looking for? What area of the country do you want to work in?
You can search "jobs" all day and get nowhere. But what if you're, say, experienced with technology and you want a job somewhere near Beverly Hills? Try searching for "IT jobs near 90210." The results you get are much clearer and much better suited to what you need.
I don't want to belabor the point. Just make your searches as specific as you can, and try not to fall into the traps that advertisers tend to lay for you.
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