Category Archives for Invest & Retire
Discover Your Future Social Security Benefits – Part 2
- Today, Social Security is the largest source of income for most elderly people. This is sad to hear.
- Social Security was NEVER intended to be a sole source of income for people, as it is being used today. The statement strongly encourages people to save their own funds to live off of and use Social Security as a supplement.
How are retirement benefits calculated?
- My Social Security statement lists that I have accumulated 19 credits at this time, and therefore, do not qualify to receive any retirement benefits yet.
Other Benefit Quantities Listed
- Currently, I do have enough credits (with 19) to qualify to receive disability income. If I were to become disabled right now, I would receive $1,485 per month in disability income.
- Additionally, I have accrued enough credits to qualify for a total of $3,315 per month of family survivor income, if I were to die right now.
- In order to get Medicare, you have to have accumulated at least 40 credits from earned income, and be 65 years old.
- Since I do not fall in to either of those categories, I am not eligible for this.
- In 2016, Social Security will begin paying more out in benefits than we collect in taxes.
- Just as a reminder, Social Security is paid as a part of your taxes from your paycheck.
- Without changes, by 2037 the Social Security Trust Fund will run out! Awesome!
- Additionally, in 2037, Social Security will only be able to pay out 76 cents of every Dollar of scheduled benefits.
What is the government doing to extend the life expectancy of Social Security?
To remedy the problem of Social Security running out, the government is, in short, raising the normal/full retirement age.
The table at the link below shows the different full retirement ages, according the year in which an individual was born.
SSA.gov – Ages At Which You Are Eligible To Receive Social Security
If you are like me, and was born after 1960, the full retirement age is now 67 (even though you can begin receiving Social Security benefits at a discounted/reduced rate at age 62, no mater when you were born).
How should this be used in personal finance planning (for retirement, etc)?
My Current Asset Allocation and Net Worth Growth – June 2010
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Achieved my short term target net worth for this year
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Contributed the maximum contribution level of $5000 allowed for my Roth IRA for the year 2010 (and 2009 as well)
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Eliminated all significant holdings in individual stocks from my portfolios
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Have accumulated ~80% of the cash towards my down payment target for a condo purchase this fall.
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Am under contract with a condo to purchase this fall and am on track to close end of July, 2010.
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Cash – As I have mentioned several times, I expected that this would be high due to accumulating funds for a down payment. No action can be taken.
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TIPS Bonds – Since I have no extra cash right now (due to cash accumulation above), I cannot purchase this mutual fund due to the fact that you have to have $3000 to purchase it with Vanguard. It is not available as an ETF with Vanguard either (I wish it was).
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Domestic Large Cap – Unfortunately, this is being held in my 401k account, and therefore, has a greatly reduced selection of index funds from which to choose.
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Because of this, the only options available to me are to exchange funds from this mutual fund to 1) an international equity fund, 2) a small cap index fund, or 3) a bond fund.
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Because I have 33% of my net worth currently held in fixed income instruments (and the stock market currently is going down anyways), I want to work towards decreasing my exposure to bond funds slightly.
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In order to do this, I performed the following actions in my 401k account – 1) Changed my future investment selections to 100% of funds going towards purchasing the Small Cap index fund, 2) Exchanged $1500 from the bond fund to the small cap index fund, and 3) Exchanged $3000 from the S&P500 index fund to the small cap index fund.
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Domestic Large Cap Value – Since this is held in a taxable account, I cannot sell my holdings to exchange money to this mutual fund. I will have to wait until new funds can be added to increase the allocation %. However, I did add a large cap value ETF to my taxable Vanguard account that I can begin funding whenever I get additional money coming in. This is good news.
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In addition, since my Emerging Markets exposure is currently 7% (4% lower than the target 11%), I exchanged $1000 in my Roth IRA from International index mutual fund to the Emerging Markets index mutual fund.
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Since I am looking at buying a condo/townhouse in the summer/fall time frame, I will be trying to build up cash reserves in my high yield savings account for the down payment and closing costs. I have already accumulated approximately 80% of the cash I am targeting for my down payment.
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Obtain condo insurance – including flood, earthquake, dwelling, personal property, title, and liability insurance.
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Find an attorney to help in the closing/settlement process of buying my condo.
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Include my condo equity and debt in my net worth calculations.
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Sign up for a biweekly home loan payment plan
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Set up accounts for making home ownership automatic – automatic deductions for loan repayments, real estate taxes, maintenance reserve funds, insurance, etc.
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Increase my Small Cap Value allocation target to 14% (from 13%), and decrease my Small Cap allocation target to 8% (from 9%).
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I also just realized that the short term bond fund that I have been using for about a year with (Vanguard Short-Term Investment-Grade Fund – MUTF: VFSTX) Vanguard is in fact AN ACTIVELY MANAGED FUND. This is a big error on my part for not realizing this!
- Vanguard Short-Term Bond Index Fund (MUTF: VBISX) – To remedy the situation, I sold my holdings of the actively managed fund and moved them all to this indexed short-term bond fund also offered by Vanguard! Never let your guard down!
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Wish List (since most of my extra cash this month is being used to save for down payment, I will not have as much extra to play around with as normal – so these may or may not happen)
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Purchase an inflation adjusted bond mutual fund (TIPS)
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Begin contributing to the large-cap value funds in my taxable Vanguard mutual fund account.
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At some point, purchase the Vanguard Total Stock Mkt Idx (MUTF:VTSMX) to replace S&P 500 index fund. This gives better, broader diversification to the US stock market.
Jacob
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Cubicle Copying – What It Is and Why To Avoid It At All Costs
, is a topic called “cubicle copying.”Essentially, cubicle copying is when an individual obtains financial advice for investments by simply asking their officemates what they invest in.
A good example of this is described below:
James just got his first job out of college as a chemical engineer at the paper plant in Southeast Virginia. Being fresh out of school, the only thing he knows about investing is that he should set up a 401k account with his employer.
Unfortunately, he doesn’t know the first thing about asset allocation or index mutual funds. More specifically, he doesn’t know whether to choose between the different options (small cap, large cap, S&P500, bond, international, etc) for mutual funds that his company’s 401k offers.
Since he isn’t really sure, James walks over to Kim’s office (Kim is a 23 year old chemical engineer that just started at the same plant 8 months ago) and asked in which mutual fund(s) she invests. She then tells him that she invests in the small cap mutual fund because it had the best performance over the past 5 years.
James says, “Great! I’ll do the same!” He then proceeds to set up his account to invest 100% of his 401k funds in the small cap mutual fund. He doesn’t even take in to consideration that 1) past performance in no way is an indication of future performance, 2) Kim is not a financial professional, or 3) whether or not the small cap fund is actively managed or not.
In other words, it is just a poorly thought-out financial decision.
How many people undertake this risky practice?
- Paying high mutual fund management fees for actively managed funds, thus decreasing overall return.
- Being overexposed or underexposed to certain assett classes, depending on your age and tolerance to risk.
- Being insufficiently diversified (if for example, you were to buy company stock with 100% of your 401k funds).
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James would have experienced a -54% decrease in his 401k holdings during the timeframe of May 2007-March 2009.
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This 54% decrease is the return of the small cap mutual fund.
by Jeremy Siegel. This split is not perfect, but it is getting closer to the proper asset allocation proportions between fixed income and equity securities for someone in their mid 20’s.-
Since James holds two mutual funds with different returns (3.2% increase for bond fund and 54% decrease for small cap fund), his total 401k return would be a mix of the two instruments.
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James would have experienced a -40% decrease in his 401k holdings during the timeframe of May 2007-March 2009. The calculation for this is shown in in the bullet below.
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0.25 x 3.2% + 0.75 x -54% = -40.02%
Keep on learning!
Jacob
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Discover Your Future Social Security Benefits – Part 1
My Money Blog – My New Favorite Financial Organization System
This is all well and good if you are one of those people that is already receiving these statements from the IRS or your employer. However, if you’re like me, I didn’t even know that there was any way to get a statement estimating my what my future Social Security benefit payments would be. And, truth be told, I was figuring that Social Security would not even exist by the time I retire in > 40 years from now.
However, after digging around a little bit online and on the Social Security Adminstration website (ssa.gov), I was able to find the link below where you can securely request a copy of your future benefits statement directly from the goverment.
Social Security Administration.gov – Request a Copy of Your Social Security Benefits
To request a copy of your statement, complete the following steps:
- Fill out the online form with all of your personal information, including name, birthdate, address, telephone number, and social security number.
- Enter the total income you received last year and what you will recieve this year.
- Enter an estimate of the average annual income you will recieve in the future.
- Lastly, enter the age at which you are planning to stop working.
After clicking, “continue,” the Social Security Administration will mail you a copy in several weeks.
Note: I requested my statement May 20th, and just received it today in the mail on June 4th. So, even though it may take a few weeks to receive your statement, don’t worry too much!
Part 2 of this series contains an in-depth analysis of my Social Security benefits statement and associated Social Security strategies. You can read more about it by clicking the following link.
My Money Blog – Discover Your Future Social Security Benefits – Part 2
So, request a copy of your statement, and let me know how it goes for you!
Keep on learning!
Jacob
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How to Save $10,000 for Retirement With It Only Costing $7,200 To You
In a post back in March of this year (shown at the link below), I developed a very useable spreadsheet for everyone to use in calculating how much they should save for retirement each year.
My Money Blog – What Percent of Your Salary Should You Save for Retirement?
However, one thing I left out of this post was demonstrating how powerful (and just how much money you can save) by being able to invest money in your 401k or Traditional Roth IRA account pre-tax. Therefore, this will be the subject of today’s post.
In my opinion, the best way to demonstrate the potential savings is with an example.
Let’s say that a 30 year old woman named Shantel makes $75,000 per year in gross income. She has been putting off saving for retirement for a very long time, but finally, she has committed to herself that this year will be the year. And, she wants to save $10,000 towards her retirment goal of $1,000,000. Clearly, she has quite an aggressive goal!
So, we know what Shantel wants to accomplish. Let’s first take a look at what her take-home income would be, assuming that she does not contribute anything towards her retirement goal and she has a tax rate of 28%.
$75,000 x (1-28%) = $54,000 take home pay
Now, let’s take a look at what her take home pay would be if she decides to contribute $10,000 towards her retirement account.
$75,000 – $10,000 401k contribution = $65,000 x (1-28%) = $46,800 take home pay
Difference in take home pay = $7,200 (28% less than $10,000 saved for retirement)
In this example, you can clearly see the POWER of paying yourself first (before the government takes ahold of the money through taxes). In fact, you end up allowing yourself to come out $2,800 ahead!
Now, let’s see what happens when you spread this advantage out over the number of years Shantel has until retirement at age 65.
In one scenario, we will assume that Shantel saves $7,200 per year after tax towards her retirement. In the other scenario, we will assume that Shantel saves $10,000 per year pre-tax (since it doesn’t cost her any more purchasing power to do this). In both cases, we will assume that she invests the funds at a rate of return of 10%.
The results of can be seen in the Google Docs spreadsheet at the link below.
Google Docs – Shantel’s Quest to Become a Millionaire
What we see is that by investing pre-tax, Shantel is able to become a millionaire 3 years quicker than she would if she were to invest her funds after-tax.
Even more impressive is that fact that at age 65, by investing pre-tax, she is able to accumulate close to $800,000 more for retirement. Quite an impressive sum!
So, I hope this article has given you some added perspective, and perhaps incentive, for doing your best to take advantage of your tax-sheltered savings accounts. This pre-tax contribution idea is especially important for those of us shooting for early retirement.
As always, please let me know if you have any questions.
Keep on learning!
Jacob
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Live Life to the Fullest – Create a Dream and Life Values Based Approach to Personal Finance – Part 4 – Place Your Dream and Life Value Savings Plan on Autopilot
In the action plan, we have defined end goals for our dreams and values and identified specific actions that can be taken in the next two days.
However, what we have not addressed is what sort of financial actions are required in order to make your life value goals and dreams become a reality. This (Step 6) will be the focus on today’s posting.
Step 6 – Financial Actions To Take to Automate Your Life Value Goals and Dreams
How to Save for Life Value Goals – Next 12 Months
Since everyone’s goals that they will want to accomplish are different, it is hard to make blanket statements about how you should save for them. However, there are two critical aspects of savings plans that you should consider incorporating in order to achieve your goals.
1) Make it automatic – set up your accounts to automatically transfer money at a designated time each month so that you don’t have to think about it.
As I was filling out the life values and dreams action plans, I found myself asking, “Why have I not gotten it together enough to execute on these actions before, given that they are obviously very important to me.” I suppose the best answer to this is that life just got in the way and distracted me.
I feel like an example will illustrate this very well for everyone. For this analysis, let’s look at my Freedom value based goal of going to the Grand Canyon in 2011. This is something that I have wanted to do since 2007-2008. Even though I have enough money to go on this trip, I just have not gotten myself in line and disciplined enough to specifically save the money and plan for it.
What has happened is that when my income comes in around the 1st of the month, it gets saved through my normal process of moving it to my individual and retirement investing accounts. And, no funds are committed specifically to achieving this life value goal of mine.
I’m sure this type of thing happens to a lot of people!
How the automatic solution helps:
However, what I can do to fix this annoying situation going forward is to 1) calculate the total cost of the trip to the Grand Canyon, 2) calculate exactly how much I must save each month in order to be ready for the trip by the set date, and then 3) set up my high yield online savings accounts to automatically transfer that amount each month.
If you are in the market for an online high yield savings account, I would recommend ING Direct (it is what I use as well). Just click on the link below to visit their page!
2) Keep your savings liquid (since will be used within next 12 months)
Since David Bach’s book instructs us to only set goals for our life values for things we want to achieve within the next 12 months, we will only want to invest our savings in short-term, liquid investment instruments.
Online high-yield savings accounts work very well for this purpose! For more information on these types of accounts, click on the link below.
My Money Blog – High Yield Savings Accounts
How to Save for Life Dreams
David does a superb job in his book discussing the various ways to invest your savings for your life dreams. I especially like the way he breaks up the decision according to the time frame for which you are wishing to realize your dreams.
- How much should you save each month for funding your dreams?
- David suggests setting aside 3% of your take-home (after taxes, retirement deductions, etc) pay in to your dream account.
- I think this is appropriate, and I have set up an automatic transfer accordingly.
- To reiterate, make sure you make the 3% transfer automatic so that you don’t have to think about it.
- How to invest for short-term dreams (2 years or less in the future)
- Because this is in the very near-term, we will only want to invest in highly liquid instruments, such as the high yield online savings accounts described at the link above.
- Since the dreams I am planning for are less than 2 years away, this is the instrument I will use for the time being.
- How to invest for mid-term dreams (2-4 years in the future)
- Short-term bond funds
- If I were investing in a short term bond fund, I would choose the Vanguard Short-Term Bond ETF with the ticker symbol, BSV (shown at the following link) Vanguard Short Term Bond ETF.
- It follows a passively managed, index approach to investing of which I am a fan.
- I would not invest in a mutual fund from Vanguard because it would require that I have the $3000 minimum investment to buy the fund.
- Balanced funds (is one fund that invests in both stocks and bonds)
- If I did have a mid-term dream, I would prefer investing in a short-term bond fund over a balanced fund to minimize risk.
- How to invest for long-term dreams (4-10 years in the future)
- Index mutual funds
- For more information about index mutual funds, visit my previous post at the following link – My Money Blog – Index Funds and Asset Allocation
- How to invest for very long-term dreams (10+ years in the future)
- For this term of dream, David recommends considering a Variable Annuity.
- For more information on annuities, see the recent post at the following link – My Money Blog – Should I Invest In Annuities?
I hope this post has been useful for your to take further action on executing on your life value goals and dreams. Please let me know if you have any questions.
Keep on learning!
Jacob
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Live Life to the Fullest – Create a Dream and Life Values Based Approach to Personal Finance – Part 3 – Discover Your Dreams and Take Action on Them
. Click on the link to pick up a cheap used copy of the book from Amazon.com. -
Step 1 involved discovering the importance of money in your life.
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Step 2 involved discovering the purpose of money in your life.
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Step 3 was to list out your top 5 values you want to focus on over the next 12 months.
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Step 4 covered how to create an actionable plan for executing on these life values.
- List our your top 5 dreams on a piece of paper.
- Remember – with this exercise, you want to dream big! Don’t be worried if one or more of your dreams “seems” unrealistic.
- For each of your top 5 dreams, further refine them so that they are specific and measureable.
- 48 hour action plan –
- As discussed in the life values section in Part 2 of this series, list at least some specific action that is possible to take upon your dreams in the next two days.
- Next, for each of your dreams, list who, if anyone, you want to share them with.
- Fifth, you will want to list what specific life value (from Part 2) this dream helps you fullfill.
- Personally, I feel this is one of the most important steps. For me, it is interesting to see how related my dreams are to my life values.
- Finally, for each of your dreams, write down a rough estimate of how much it will cost.
Do you have all of these 6 items recorded for each of your dreams? Good work!
Feels like quite an accomplishment doesn’t it?
My Results for Step 5
Jacob’s Top 5 Dreams
- Backpack on the Inca Trail in Peru
- Hike all of the Appalachian Trail in Virginia
- Own a cabin in the mountains/woods
- Be part of starting/growing a biotechnology company
- Visit Yellowstone National Park
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Dream – Backpacking on the Inca Trail in Peru
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Specific, measurable – Go on a 4 day backpacking trip on the Inca Trail in Peru, finishing at Macchu Picchu in 2012.
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48 hour action plan – Search online for Peruvian tour companies that offer these guided backpacking trips and their prices.
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Who share dream with? Family or friends.
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What value(s) does this help fullfill? Freedom and Health
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Approximate cost – $3,000
My Money Blog – Create a Purpose Focused Financial Plan – Part 4
Jacob
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Live Life to the Fullest – Create a Dream and Life Values Based Approach to Personal Finance – Part 2 – Determine and Take Action on Your Life Values
In Part 1 of this series (shown at the link below), I introduced everyone to the first two steps towards creating a dream and life values based approach to your life, and vis a vis, personal finance. Step 1 was to determine the importance of money in your life, and step 2 was to verbalize its purpose.
My Money Blog – Part 1 – Creating a Purpose Focused Financial Plan
This approach to personal finance is a subject I learned recently in reading David Bach’s very interesting book titled, “Smart Couples Finish Rich.” If you are interested in learning more about topics such as this one, I would encourage everyone to pick up a cheap used copy of his book from Amazon, using the following link – Smart Couples Finish Rich: 9 Steps to Creating a Rich Future for You and Your Partner
In Part 2 of this series, I will walk everyone through steps 3 and 4 of the journey towards creating this type of financial plan. I will also explain how I have applied it to my life as an example.
Note: Below is a link to download the section of David Bach’s book explaining this topic (it is free) in pdf format. I would encourage everyone to read this section. It just may change your life! You never know!
FREE PDF Download to Purpose Focused Financial Plan – Smart Couples Finish Rich
Creating a Purpose Focused Financial Plan (continued)
Step 3 – Create Your Value Circle
To create your Value Circle, you will need to think of and record the top 5 most important values to you (not your friends, family, spouse, etc) that you want to focus on in the next 12 months
In this exercise, it is best to think about what is important to you at the most basic level. Another important distinction to make is that you are listing out your top 5 values. Not activities. Not material desires. VALUES. If you get stuck (like I did), there is a great list of values in page 21 of the pdf above.
Once you have them ordered. print off a copy of the Value Circle below, and list them in the 5 areas.
- Making a difference
- Health
- Freedom
- Family/friends
- Growth
- Top 5 Values
- In this column, write down the top 5 values you identified for yourself in Step 3 above.
- The idea is that you will start your plan with these values in order to take action appropriately so that you address the person you want to “be.”
- Top 5 Financial Goals
- In this column, for each of your top 5 values, write down down specifically what you want do “do” in the next 12 months that relates to your values.
- For this section, it is perfectly OK for some of your top 5 goals to not have anything to do with financial matters.
- Specific, Measurable Translation
- In this column, for each of your top 5 financial goals, list a very detailed endpoint that you can hold yourself clearly accountable to reaching by the end of the year.
- Basically, the purpose of this column is to go from the general to the specific.
- 48 Hour Plan
- In this column, for each of your specific, measurable translations, list some type of action step you can take in the immediate term (next 48 hours).
- Personally, I love this idea because studies have shown that even if you take a very small action step towards a goal immediately, you are far more likely to complete it.
- Help Needed
- In this column, list the names of any people you will need to turn to or lean on for assistance in realizing your goals.
- Define Start and Stop Limits/Timings
- This column is pretty self explanatory. However, you will want to list the dates/timings for when you will start and finish the goals for each of your top 5 values.
Once you have filled out your Plan, be sure to place a reminder on your calendar to reevaluate your values, goals, and actions 6 months from now to see how you are doing and where you can make improvements. Document action steps required so that you don’t lose track of what you have committed to doing.
- Making a difference
- Goal – Contribute 5% of my income to charity this year and a few hundred Dollars in a Microplace.com microloan to Latin America.
- Make specific – Contribute $ XXX to charity in 2010 year (specify exact amount I need to donate). Partcipate in $500 microloan to Latin America using Microplace.com
- 48 hour plan – Total up charitable contributions already made this year. Determine how much remaining to reach 5% of income level.
- Help needed – Need to find and use a good charity search engine. Additionally, when tax time arrives in 2011, I will need the accountants help to realize my tax benefits from making contributions.
- Start and stop timing – start = today, end = December 31, 2010.
- Health
- Goal – Do more trail running half marathons.
- Make specific – Compete in 5 trail running half marathon races in 2010 year.
- 48 hour plan – Search for half marathons to do on www.runningintheusa.com. Find 5 specific races to target. Sign up early to commit to doing them.
- Help needed – Someone to go to the races with me. TBD.
- Start and stop timing – start = today, end = December 31, 2010
- Freedom
- Goal – Travel to places in domestic US that I have always wanted to see.
- Make specific – Go to the Grand Canyon and hike to the bottom during Spring Break, 2011.
- 48 hour plan – Set up travel savings account and determine approximate price of Grand Canyon trip.
- Help needed – Ask around for friends/family that would be interested in going.
- Start and stop timing – start = now, stop = when go on trip Spring Break, 2011
- Family/friends
- Goal – Go visit home in Arkansas more often.
- Make specific – Visit home in Arkansas every 2 months instead of 1X every 3-5 months.
- 48 hour plan – Talk to family about possible trip home to Arkansas in July to see if would be feasible.
- Help needed – See bullet above.
- Start and stop timing – start = now, stop = ongoing.
- Growth
- Goal – Practice Spanish language more often.
- Make specific – Listen to movie in Spanish or with Spanish subtitles 1X per week, and talk to someone in Spanish 1X per month.
- 48 hour plan – Pick a DVD to listen to in Spanish, preferably one that I know the words to already (Harry Potter possibly?).
- Help needed – Need to find someone to chat with in Spanish.
- Start and stop timing – start = now, stop = Summer 2011
I hope you all have found this post/exercise insightful and helpful in improving both your financial situation and quality of life going forward. Please let me know if you have any questions.
The link to Part 3 of this series is shown below. The topic is on determining and taking action upon your life dreams! Click on the link to find out more!
My Money Blog – Create a Purpose Focused Financial Plan – Part 3
Keep on learning,
Jacob
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Live Life to the Fullest – Create a Dream and Life Values Based Approach to Personal Finance – Part 1 – Determine the Purpose of Money in Your Life
Take a moment and reflect on that statement. There is a big difference between the two when you stop and think about!
This posting series will chronicle my journey to discover and create this Purpose Focused personal finance strategy and strive to give you all advice from my learnings that you can adapt to your situations.
Step 1 – Determining the Importance of Money in Your Life
The first step to creating this system for yourself is to ask yourself the simple question, “How important is money in my life?”
After really thinking about this for 5-10 minutes, rank the importance of money in your life on a piece of paper, using the scale of 1-10. A score of 1 would indicate that you believe that money is the root of all evil, and a score of ten would mean that you think money is the most important reason for living.
Next, if you have a partner/spouse, rate and record how you think he or she feels about money, using this same scale.
This simple exercise is a great way to get the creative juices flowing to drill down to what you believe is the true purpose of money in your life.
Step 2 – Determine the Purpose of Money in Your Life
Having ranked the importance of money to you, it is now time to search your soul a little and verbalize exactly what you feel is the purpose of money in life.
In Bach’s book, I believe he skips over this exercise too quickly (he goes straight to listing your specific life values. That will be the subject of part 2 of this series). I feel that is very important to have a good grasp in your mind how you feel about money in general.
To get you all thinking, I will ask some rhetorical questions – do you feel money helps you to buy things? does it help provide you security? the freedom to travel? the ability to attract people to you? to give you power? to give you recognition?
Now, record on your piece of paper what you are thinking!
My Results from Steps 1 and 2
After thinking about it for a while, I came up with that money is a “7” on the 10 point scale of how important it is to me in my life. How did I come up with that ranking? It basically all comes down to the purpose of money in my life.
To me, money is very similar in importance to blood. Someone once said that blood is very necessary for life, but it is not the purpose of life. I feel that money is very similar because it is unmistakenly necessary for people to do what they want to experience in life, but it is not the purpose of life.
Give this quick exercise a go, and let me know if you have any questions.
Keep on learning!
Jacob
Part 2 of this series can be found at the link below. It contains Steps 3-4 of creating this dreams/values based approach to personal finance.
My Money Blog – Create a Dream and Life Values Based Approach to Personal Finance – Part 2
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5 Essential Financial Products Most People Need
Tonight, I have the honor of introducing an article by My Money Blog’s first guest-poster, Alban. Please visit his website at the following link to read more of his articles! – Home Loan Finder. To become a guest poster on My Money Blog, simply email me at the address in the Contact Me section.
As you go through life, your financial needs will change, but there are five important financial products that most people will need at some point. As a result, it is important that you know why you need each of these products, and that you know how best to use them to make the most of your finances no matter what stage of life you are in right now.
1. Savings
A savings account is something you can have from the time you start school and a good savings plan will make it easier to achieve every important milestone in your life from a new bike to a new house. With the best savings account you can:
• Live within your means by saving for purchases and avoiding credit
Spending less than you make seems like a simple plan to follow, but for most people credit is so readily available that it is just as easy to make purchases which don’t fit within the budget with the intention to repay them later. Unfortunately it is also easy to forget about putting the extra amount from next week’s wage onto your credit card when you can roll over your balance for the next month and the next. However if you get into the habit of saving for your purchases then you won’t have to worry about accumulating bad debt or rising interest and without crippling credit card debt you’ll more easily be able to preserve your credit rating, apply for a home loan, or simply enjoy the freedom of not owing anyone anything.
• Plan for emergencies
Emergencies happen and unexpected bills arrive and whether you need extra funds because one of the kids is sick, the car broke down or that last heatwave shot your power bill through the roof, you need to have an emergency savings fund to cover these emergency expenses. Again, having the funds available in a savings account can mean you don’t have to resort to your credit card and you can rest easy knowing you have a secure financial plan no matter what happens.
• Teach your children good financial habits
You can lead by example, but you can also open a savings account for each of your kids to teach them the importance of saving. Most savings accounts will allow account holders as young as 12 years old, while younger savers can have their account held in trust, or in your name. Teaching your children how to stick to a savings plan is a lesson which will serve them for life.
2. Credit Card
You may have heard a credit card referred to as a necessary evil and while a credit card isn’t always necessary and it doesn’t have to be evil, it does make sense to have a credit card at certain times in your life:
• You can build a responsible credit history
Being able to hold a credit card account and make regular payments to maintain control of your credit limit makes a positive impression on your credit report. If you maintain your responsible credit card use it can be helpful when it comes time to apply for a home loan or personal loan.
• Spend the bank’s money and earn interest on your own
If you choose a credit card with a long interest free period, you can spend on your card during this period, while you leave your wages in a high interest savings account. Before the interest free period ends, you transfer the amount you need to pay off your credit card purchases and you don’t get charged interest, and you continue to earn interest on your savings.
• If you can’t control a credit card, use a debit card
A debit card looks and acts like a credit card in that it allows you to make purchases online, over the phone or in person by choosing the ‘credit’ function. Unlike a credit card, a debit card accesses your own funds each time you use it, so when your money runs out, you can’t spend on the card anymore. This means there are no interest charges and no monthly payment to make, plus it allows you to budget your purchases for what you can afford with the money you have available.
3. Term Deposit
A term deposit account was typically for large, long term investments, but you don’t have to wait until you have the corner office or the company partnership to start investing in a term deposit because just about anyone can enjoy a secure, guaranteed savings account. A term deposit account allows you to:
• Save for long term plans without having to manage your savings
Once you have chosen the term and investment amount you can afford within your budget, you don’t have to monitor or manage your term deposit account. It goes about earning interest and keeping your money save, so it can grow towards your future plans of children, a house or further investments.
• Choose the best term and investment amount so you don’t break the term
If you access your funds before maturity you will be charged early access fees and the interest you are paid will be calculated on a lower rate. However, before your investment is fixed you can invest just the amount you can afford, and you can choose a term between one month and five years to invest.
• Grow a guaranteed investment amount calculated for the future
During a term deposit, your rate of interest is fixed so you will earn the same guaranteed rate every day of your term. This means your returns are also guaranteed, so at maturity you have a principal amount, plus interest returns, which have been calculated to keep up with official rate rises and the costs of inflation.
4. Home Loan
Another necessary evil, since most of us would be saving our whole lives to accumulate enough to buy a house, and just as few are lucky enough to borrow or be given enough to buy our first home. Instead, we need a home loan, however a mortgage is much more than just another monthly bill if you know how to use it:
• Borrowing money for your house and leave your savings free to live
If you were trying to save up all you had to be able to afford to buy a house, there would be no money left to live. However, when you take out a mortgage on your home, you buy a property you can afford, with a loan you can afford and you are then free to use the rest of your savings to live out the other dreams you have.
• As you pay off your loan you build equity
As the value of your loan decreases, the value of your home is likely to be increasing – as property prices do over time. This builds equity because the bank will now be willing to lend you more money, up to the value of what your house is now worth. You can leave this equity in your loan to grow for a time when you want to sell and use it to go towards the price of your new home, or you can apply to have the equity available for a family holiday, a renovation or an investment.
• Choose a feature packed loan
You are going to have a home loan for a substantial portion of your life, so you want to make sure it is working for you. Therefore, consider the features you could benefit from, such as an offset savings account where the funds in your savings account reduce the interest you pay, a payment holiday option where you can pause your payments when you have kids and less spare cash, or a redraw facility where you can pay extra into your home loan each month, but have the option to redraw it if you need it.
5. Retirement Plan
This is the point that all your other financial products have been working towards; a time of your life when you are free from work commitments and so you also want to be free from financial commitments too. You have worked hard to get to your retirement, so make sure it works hard or you:
• The pension is increasing but you want to live the best you can
Since you’ve worked hard for the majority of your life, you want to be able to enjoy your retirement in the comfort and style you’ve always dreamed of. This is why you need a solid retirement plan so that you really can rest and enjoy your golden years.
• Plan your retirement budget
Be clear about the type of retirement you want to have and you will be better able to map out a financial plan, and pinpoint the financial product you need. Whether you want to live six months of the year overseas or you want to buy a bigger house so your family can stay with you when they visit, if you make a budget for the life you want to live, you will be able to work out how much you need to make that dream a reality in the future.
• The future can be an expensive place
This means your retirement plan needs to not only meet the budget for the life you want to live, but also needs to grow at a rate which stays ahead of inflation costs. If you work out your retirement budget now, the amount your plans will cost in 30 years when you retire will be much greater.
Planning your future and the financial products doesn’t have to be difficult, and if you take the time to map your needs, and match them with these five essential financial products, the future may be more expensive – but you’ll be prepared.
Thanks for reading.
Alban is a personal finance writer. He provides budgeting and personal finance tips and helps people to find the best home loan online.
If you are interested in becoming a guest poster on My Money Blog, please email me at irwin.jacob@gmail.com.
Keep on learning!
Jacob
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