Planning Your and My Financial Future

[PeaveyFury]

how many people really have a 6 month "emergency reserve". Does that include money set aside for retirement?

 

Typically no. The 6 month reserve is usually savings, money market, etc that is liquid, penalty-free, and not ear-marked for anything else.

[wallus]

With being a new home purchaser, I am kind of relying on the $8000 tax credit to be my emergency reserve sadly. I know that even if I get laid off after next year, I will have to stay in the area for 3 years. I am in a position where I should get at least 60% because I am the only one who teaches what I do. Looking at national statistics, I would say very few younger people have a 6 month reserve.

[FVBrewerFan]

I would say very few younger people have a 6 month reserve.

True, in fact I would say very few people of any age have a 6 month reserve. I think too much emphasis is being placed on paying off your mortgage early. If you're only going to be in that home a few years, making extra payments probably isn't the best use of your cash. If you plan on being in that house for the next 15-20 years or longer, it makes sense. But instead of fooling around with extra payments, it is easier to just get a 15 year loan at fixed rates that are incredibly low today. Your monthly payment won't be that much more.

 

The key is to set aside a fixed amount EVERY month no matter what. What you do with that is less important than the habit of saving it every month. As others have said, pay off all other loans before your mortgage. The mortgage loan is (in theory) for an asset that is appreciating in value. Plus it's tax deductible. If not today for you, down the road it may be. Car loans, student loans, et.c should all be paid off as quickly as possible. Credit cards, you should pay in full each month.

 

Beyond all that, don't sacrafice everything that's enjoyable in life just to squirrel away as much money as you can. It's refreshing to see young people with responsible attitudes concerning finances, but have some fun too!

[homer]

Most people do not have 6 month reserve - young or old. This was something I struggled to acheive for a long time. It wasn't until I bought a condo, got a sizaeable tax return and paid off all my credit cards that I got going. One thing that helps is to put away just $50 per paycheck into a money market. It's amazing how fast that accumulates and you don't really miss the money. Then when you get some unexpected bonus (like a tax refund) you just plunk it in the fund instead of spending it. Now I'm up to about a year's worth of cash on hand that I can use for whatever and since it's in a money market I have access to it almost immediately.

[theavrock]

Lots of good advice here. I am starting to do this as well so a lot of the information is pertinent to me. Anyone out there use any budget/money tracking programs. I was thinking of Quicken, but just thought people might have some good advice. I am horrible with tracking my day to day, non-fixed expenses and thats where all my money seems to go instead of into savings. I thought tracking every dollar I spend might be a good way to identify where it is all going and then consequently stop spending it in those places.

[FVBrewerFan]

I am horrible with tracking my day to day, non-fixed expenses and thats where all my money seems to go instead of into savings. I thought tracking every dollar I spend might be a good way to identify where it is all going and then consequently stop spending it in those places.

Add a wife...and then kids and see what happens to your non-fixed expenses! Honestly. I used to use Quicken, etc., but don't anymore. Now my system is very simple. I pay my fixed expenses first. (Mortgage, car payment, utilities, etc.) Then I put away "x" amount for various "slush funds" I have set up. Section 125 for college savings, a retirment account in addition to my 401k, vacation, a fund for for future relatively major expenses (new furnace, new carpeting...etc.) What I'm left with is what we can spend every two weeks (I get paid bi-weekly) on non-fixed expenses. This covers Food, entertainment, clothes, and about 2,000 other things that seem to pop up.

 

The key is to leave a realistic amount in the non-fixed expense area. Otherwise you'll always be making exceptions and not sticking to it. That's the key, not so much the amount. Something it took me many years to fully understand.

 

Finally, cars are the biggest wallet killer. They depreciate in value, and when it's time to trade it in you never really get what you think it should be "worth." This is still hard for me, because I am a car guy. But I never buy new cars anymore, and hold onto them longer than I used to. Now if you're young, over the course of 30 or 40 years you will save tens of thousands of dollars. Heck, save $3,000 a year on average for your cars and that's $120,000 over 40 years. If iinvested in a Roth IRA that could esily be worth over $200,000 by the time you retire.

[Diskono]

Lots of good advice here. I am starting to do this as well so a lot of the information is pertinent to me. Anyone out there use any budget/money tracking programs. I was thinking of Quicken, but just thought people might have some good advice. I am horrible with tracking my day to day, non-fixed expenses and thats where all my money seems to go instead of into savings. I thought tracking every dollar I spend might be a good way to identify where it is all going and then consequently stop spending it in those places.

If they support your bank & all of your credit accounts, mint.com is awesome.

[PeaveyFury]

The mortgage loan is (in theory) for an asset that is appreciating in value. Plus it's tax deductible. If not today for you, down the road it may be. Car loans, student loans, et.c should all be paid off as quickly as possible.

 

For the record, student loan interest is tax deductible as well (to a limit). And depending on when people were lucky enough to take out or consolidate their loan, you might not want to pay them off early. I got my consolidation locked in before the major student loan reform of about 5 years ago which caused majorly higher rates, and mine is locked in at 2.875%. I'd be practically nuts to pay that off early....

[valpocrewsader]

Heck, save $3,000 a year on average for your cars and that's $120,000 over 40 years. If iinvested in a Roth IRA that could esily be worth over $200,000 by the time you retire.

 

$250 per month ($3,000 per year) invested in solid mutual funds yielding 10% for 40 years will be worth a lot more than $120,000 or $200,000. Try $1.5 million. Hope you like the car! Spending money on new cars, or anything requiring car payments really, is pretty much a fantastic waste of wealth-building opportunity.

 

mine is locked in at 2.875%. I'd be practically nuts to pay that off early....

 

Unless, y'know, you just didn't want to be a debtor anymore. "The borrower is slave to the lender." That's a great rate, but even if your interest rate was 0.00% I wouldn't call it nuts to pay it off early. There's a lot to be said for paying back what you owe in an accelerated fashion. It's a great feeling to know you've fulfilled your obligation. There's great convenience in getting one more distraction out of your life and out of the way of your wealth-building plan. There's a security in eliminating the risk that comes with someone else having claim to your money. I know I have no interest in keeping my student loan around for 10-15 years like it's a pet or something -- as fast as I can get it gone, it's history!

[hawing]

There's a lot to be said for paying back what you owe in an accelerated fashion. It's a great feeling to know you've fulfilled your obligation.

 

Yeah, I paid off my student loans in about 7 years instead of the 10. I had decided once I got to under $3000 I'd pay it off. (Yes, my balance reflected late 1980s tuition rates, but also 1980s wages.) So I did, and within a month or so I inherited $3000 from my grandfather. Woah solvdd. The best part was knowing how pleased my grandfather would have been that I paid the last student loan off on my own.

[JJHardy7]

$250 per month ($3,000 per year) invested in solid mutual funds yielding 10% for 40 years will be worth a lot more than $120,000 or $200,000. Try $1.5 million. Hope you like the car! Spending money on new cars, or anything requiring car payments really, is pretty much a fantastic waste of wealth-building opportunity.

 

Can you get 10% right now?

[ajgodson]

For keeping track of things, I can't say enough good things about Mint.com. Since about 95% of my spending is done by debit card, check, or automatic payment it categorizes it based on their data (e.g. Pick & Save = Groceries) and show where you spend your money. Pretty cool.

 

 

"Can you get 10% right now?" -- Not in anything without a ton of risk, and it's never guaranteed. Still, if there was ever a time to start investing for the long term, the time is now if you've got it.

[homer]

"Can you get 10% right now?"

 

No, but over 40 years you might be able to average that return.

 

EDIT: I just took a look at Mint and it appears to be a really cool site. I'm going to give it a test run. I'm interested in knowing where my disposable income goes - I have a good idea but am too lazy/scared to add it all up and see how much I waste on eating out and drinking beer.

[PeaveyFury]

Unless, y'know, you just didn't want to be a debtor anymore.

 

You can take the great feeling, I'll take the extra money I'll make instead.

[homer]

Unless, y'know, you just didn't want to be a debtor anymore.

 

You can take the great feeling, I'll take the extra money I'll make instead.

What extra money? You still owe a decent sum (I assume) at 2.8+percent. Are you investing the money that you aren't using to pay off the loan in something that has/will average better than 2.8%? Not paying it off is fine but only if you are making more in some other venture than the interest that's accruing on the loan.

[PeaveyFury]

Are you investing the money that you aren't using to pay off the loan in something that has/will average better than 2.8%? Not paying it off is fine but only if you are making more in some other venture than the interest that's accruing on the loan.

 

Exactly. As valpo himself mentioned, putting that money into stocks/mutual funds should be able to average you somewhere between 6-10% in a long-ish term investment (ie, considerably more than 2.8%).

[rm121978]

My advice would be don't make too much money. The government hates when you run your life (or business in my case) better than they can and makes you pay for it http://forum.brewerfan.net/images/smilies/wink.gif

[craigharmann]

Read Dave Ramey's material. Common sense stuff, but great things to follow! Just make sure to live within your means. That's what has gotten me into trouble. But slowly, I'm getting back on track. NO CREDIT CARDS

[monkeyman343434]

One of the best pieces of advice I've heard came in one of my last classes before I graduated this past December. I was in a personal finance class and had a speaker come in, and his suggestion for budgeting money was this: After taxes try and budget your money in the following : 55% on necessities, 10% play (just blow it/have fun money), 10% for future education, 10% for retirement, save 10% for something in mind long term, like a new tv, furnature, etc., 5% give away (charities, etc)

just my 2 cents

[valpocrewsader]

Can you get 10% right now?

 

Now? Or over 40 years? Historically, I believe the market's long-term performance has been about ~11.5%. Growth stock mutual funds should average +10% over 40 years. True, there's always a chance that in any year, maybe even year 39, the market dips down like we're seeing right now so your balance isn't anywhere near $1.5 million. But that's fine as long as you don't panic and cash out anything to lock in the losses. In the year or two that follows should be the full recovery, probably plus more. (By the same token, the market might be UP in year 39, putting you above that $1.5 million figure, just when you're ready to cash out some of it! Score.)

 

FWIW, interesting and informative material on the subject of investing: http://a1611.g.akamai.net...m_of_great_investors.pdf . Lots of charts and pictures, almost like a PowerPoint; easy read.

[JJHardy7]

Now? Or over 40 years? Historically, I believe the market's long-term performance has been about ~11.5%.

 

I agree. My point is that it's hard to see putting money in the market when it's down. I know it is still the 'smart' thing to do though. I think it also makes it hard to invest for those early on their path to retirement. There's nothing like seeing the first few times your 'extra' cash drops.

[I Heart Brewers]

Now? Or over 40 years? Historically, I believe the market's long-term performance has been about ~11.5%.

 

I agree. My point is that it's hard to see putting money in the market when it's down. I know it is still the 'smart' thing to do though. I think it also makes it hard to invest for those early on their path to retirement. There's nothing like seeing the first few times your 'extra' cash drops.

Yep, buy high, sell low, that's my philosophy! I know that's not your point but if you can't buy when the market is down then you clearly don't have the stomach for it and should stick to paper. Complaining about the market now is foolish if your time horizon is more than 7-10 years out.

[JJHardy7]

I know that's not your point but if you can't buy when the market is down then you clearly don't have the stomach for it and should stick to paper. Complaining about the market now is foolish if your time horizon is more than 7-10 years out.

 

Oh I agree. It is just important to diversify. It's hard to put money in and then see it go down in a short period of time. No doubt now is a great time to get in the market if you can.

[wallus]

valpocrewsader wrote:

FWIW, interesting and informative material on the subject of investing: http://a1611.g.akamai.net...m_of_great_investors.pdf . Lots of charts and pictures, almost like a PowerPoint; easy read.

But the question I have to ask is: Where and/or with whom do I invest? I think I could possibly afford a couple of hundred dollars per month but want to do it right.