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Archive for March, 2010

Top 10 From The Top Personal Finance Pros

March 25th, 2010 at 07:19 pm

We all have our favorite writers: Ernest Hemingway, Jane Austen, John Steinbeck...Jackie Collins. We savers/spenders/investors have our own list: David Bach, Janet Bodnar, Dave Ramsey and the venerable Jane Bryant Quinn are some of my favorites.

From their wit and wisdom, I have compiled a Top 10 list of saving, spending and investing guidelines. All four have a slightly different perspective on personal finance, but they all espouse these ideas:

1. Educate yourself. That doesn't mean spending months becoming an expert. Read Kiplinger's Personal Finance (kiplinger.com) or learn about investing at Morningstar.com. Two good books are Dave Ramsey's 'Total Money Makeover' and David Bach's 'The Automatic Millionaire.' Both are easy reads that cover most of the saving, spending and investment fundamentals you'll ever need. If you want the bible that covers virtually every personal finance topic, pick up (carefully) Jane Bryant Quinn's 1,000-page 'Making The Most Of Your Money.'

2. Make a budget. Rich, poor and in between, we all get more fun out of our money when it's working for us rather than the other way around. For one month, keep track of every dollar from your paycheck. Don't cheat. Be honest, and after that one month, you'll find money you've wasted. Mint.com is one of the most popular budgeting websites.

3. Invest early. See page 95 in David Bach's 'Smart Couples Finish Rich' to see what happens when Susan puts away $2,000 per year for eight years, beginning at age 19. Her buddy, Kim, does the same thing starting at age 27. When they both turn 35, guess who has $59,322 and who has $29,874. Ah, the magic of compound interest. Investing early doesn't mean latecomers should give up. Even if you're just starting to squirrel away money at age 35 or 55, 'investing early' means starting this month rather than next year.

4. Expect the best, prepare for the worst. That's why all of our favorite authors agree that a $1,000 emergency fund (prepare for the worst) comes first, followed by socking money into stocks and bonds for the long run (expect the best).

5. When your boss offers free money, take it. Hopefully you are one of the 53 percent of employees covered by a 401(k) or similar retirement plan at work. Most of them offer a match. You put in 8%, for example, and they'll put 4% of the company's money into your retirement account. Short of an inheritance from Aunt Maude, this is the easiest money you'll ever find.

6. Insurance is really boring, and really important. You need health insurance and disability insurance, and your kids who live at home need the security of your life insurance. If you drive a car, own a home, or rent, you need the appropriate coverage. But watch out for those selling variable annuities, whole life or universal life insurance. That's where insurance agents get their biggest commissions.

7. Your credit card balance should be $0.00. It's tough to save when you're paying Visa every month. It's also tough for most of us to put off buying the TV, phone or granite countertops we really want. But if you'll save up and wait until you have the cash, that big-screen will look even bigger and brighter.

8. Buy the big items wisely. A house can be a good investment, especially if you put down 20% (allowing you to skip private mortgage insurance), keep your mortgage to 20 years or less, and make sure your monthly mortgage payment is no more than 25% of your take-home pay. The average new car is twice as expensive as the same car with two years and 20,000 miles on it, according to Edmunds.com. And you'll come out ahead in the long run if you buy rather than lease.

9. This, too, shall pass. 2008 was a terrible year to be in the stock market. 2009 was a great year. No matter how good or bad the investing world appears, all you can be sure of is change. That's why the 'D' word is so important. Staying diversified according to your age (your investments should become more conservative as you get older) is your best strategy.

10. Spend it! Tightwads, listen up. Your goal is not to skip every vacation opportunity, or ignore giving to charities or your church, just so you can die with a million bucks. Your kids will end up spending money they didn't earn, and you'll be turning over in your grave (which is very uncomfortable). Frugality does not have to be a lifelong lifestyle. In the words of Dave Ramsey, "Live like no one else now, so that one day you can live like no one else."