Category Archives: Financial

Money Mistakes to Avoid – 3

The last two posts in this series have been primarily about saving early and wisely. But what if you didn’t do that in your past and now have a lot of debt? What should I do first, save or pay off debt?

It’s a question commonly asked by clients and friends facing this dilemma. If you have enough income our first suggestion is to do both. Develop a plan of systematic debt payments and saving contributions that you can manage within your budget. But many people who pose this question feel that they are not in a position to do both simultaneously. In this case, saving money instead of paying off high-interest debt would be a huge mistake.

True if your only savings is your emergency reserve, paying off your debt first can be risky. But it’s a risk you have to take if you ever want to be debt-free. Here’s why. Once again it comes down to the math.

Notice we referenced HIGH-INTEREST debt. If you put money into a typical savings account (with the “high yield” ones currently offering about 1%) instead of making larger payments on a debt that has an interest rate of 30%, you’re still paying 29% and not doing anything to shorten the length of time you’re paying that debt off. Unless you pay the debt off quickly it doubles in about 2 and 1/2 years according to the Rule of 72. By saving instead of paying off the debt quickly you would be trading freedom from debt for a sense of security that depending on other financial circumstances may not be genuine.

So how do you take this risk of paying debt off first responsibly?

One option is begin by focusing on paying off the smallest debt first. Pay more than the minimum on that debt while maintaining minimum payments on the others. Once the first debt is eliminated, you can either roll that payment amount on to the next smallest debt or split the payment amount between your savings and the next lowest balance. Repeat this process until all your debts are gone. An alternative strategy is paying off the debt with the highest interest rate first thus saving yourself added interest payments.

Other options to consider when eliminating debt is consolidation to zero or low-interest rate credit lines or debt relief programs. At the end of it all there is no one size fits all approach to the question of whether to save or pay off debt first. If you are unable to decide which method would work best in your situation, consult with your banker or other financial professional for a personalized plan.

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How to Divorce Your Job and Keep the House – THE REVIVAL

Wow it’s been 10 months since our last Divorce Your Job post! embarassed emoji

Unfortunately the personal quest to divorce my job occupied my time and while new blog postings were made, none pertained to this series.

The following infographic from an Entrepreneur.com article shows why this Divorce Your Job series is still relevant despite it’s most recent extended hiatus. In case I haven’t complained earlier about the millenial title that I feel has been inappropriately applied to too wide a span of birth yearsEntrepreneur infographic

In my experience, the two years to entrepreneurial independence is an accurate average. While I haven’t fully divorced my job, I did manage to divorce my job location in favor of somewhere that will better serve my entrepreneurial endeavor.

If you have been following this series, tell us what steps have you taken so far in divorcing your job.

Money Mistakes to Avoid – 2

It’s been two weeks (and a few days – sorry about that) so it’s time for our next money mistake to avoid. Last time we talked about not saving from as early as possible. Hopefully if you weren’t saving before you read the last post you are now.

Mistake #2: Locking away all your savings.

safe

‘But Ms. ME didn’t you tell me last week to open a Roth IRA? Once the money is in there I can’t touch it until I’m retirement age.’

Yes, yes I did tell you that last week. But I did not tell you to put ALL of your savings in there. Let me be clear and restate this comment from the last post.

“Once you have a couple of hundred dollars in that savings account it’s a great idea to go ahead and open a Roth IRA at an early age.”

Notice I said “a couple of hundred dollars” and then I reference opening an IRA with only $100 of those dollars. The remaining funds should stay in your savings account. You never want to lock away ALL of your savings in any account that restricts you from accessing it. In the context of the last post, we were encouraging parents to start savings accounts & then IRAs for their children. From that point on split your saving for your children between the two accounts. If you desire to earn a higher interest rate, using some of the funds from the savings account to open a certificate of deposit can be a valuable option.

Once your children become independent, these initial savings accounts can serve as their emergency funds for when life happens. That way instead of calling mom & dad for help immediately, they can first turn to the help mom & dad have already given them by getting their savings started early.

For everyone who started saving since the last post, the basic advice is don’t put it all away in an inaccessible savings instrument just for the higher interest rate. The trade-off isn’t worth it if you end up having to resort to using credit in an emergency situation.

Money Mistakes to Avoid – 1

If you’re over the age of 18 it’s likely you’ve made some mistakes with your money. Even I have made some because let’s face it no one is perfect. So we’re starting a new series on the money mistakes you want to avoid if you haven’t made them yet.

Mistake #1: Not saving from an early age.

By gringer on Open Clip Art Library. (Created by 'gringer' on Open Clip Art Library.) [Public domain], via Wikimedia Commons

First let me state this mistake is not always our own to claim. I strongly believe that anyone who has a baby should make their first outing into the general public include a trip to your local bank or credit union to open at least a savings account for the child. So if you didn’t have one as a child, this is one time you can rightfully say it is your parents’ fault.

Now I understand some parents become parents unexpectedly and that $25 you need to open an account needs to spent on diapers, formula and all the other necessary baby paraphernalia. That’s when taking it old school and getting a piggy bank to save that spare change will help get you there.

Once you have the account opened for your child, create a regular savings plan. Determine what amount you can reasonably deposit into the account on a regular basis. Then stick to it! The great part about starting this savings plan for your child is that they have a longer amount of time for the money you deposit to grow, no matter how small the amount. I recently had the opportunity to help a business partner grasp compound interest by stating, ‘You’re earning money (interest) on free money (interest)’.

Compound interest Einstein quote
Listen to the genius..

Once you’ve started your child off saving early, it’s important that you include them in the process when they are ready. There’s no set age for this as children all mature differently, but it can be as simple as teaching them what change in your local currency looks like so that when they spot some carelessly discarded on the ground they know to pick it up and put it in that piggy bank you got them earlier. From there you can teach them how to count it, show them how to deposit it in their account, and start helping them to understand how to read their bank statements. So far no complicated math involved.

Oh but there will be some…

But it’s simple Math, something you can use for your own savings no matter when you started and that you can teach your children once they learn how to divide. To get a general idea of how long it would take to double your money simply from interest alone, divide 72 but whatever interest rate their account earns. For example, a savings account earning 1% (one of the highest rates we could find for a savings account btw) would double in 72 years [72/1=72]. Just one more reason it’s important to start saving early.

Of course since you’re adding money to the account it won’t take quite as long to see your money double. But let’s say you want to earn more than 1%. Up until this point we’ve only been looking at regular savings accounts and we haven’t mentioned a specific savings goal. Let’s talk saving for retirement now. Once you have a couple of hundred dollars in that savings account it’s a great idea to go ahead and open a Roth IRA at an early age. That concept of compound interest applies to those accounts also, they can be opened for children, and require relatively low initial deposits, some as low as $100. There are other benefits as listed in this Investopedia article. Talk to your financial professional for more details.

Check back in 2 weeks for another money mistake.

How to Get Out of Debt

Debt: It’s something a lot of households in America have but few like to admit or talk about. But that doesn’t make it go away. Here are some useful tips to get out of debt.

debt-01

First, try to pay more than the minimum monthly amount required on each bill, credit card, or other commitment. Paying only the minimum will result in you spending exorbitant amounts in interest.

Second, concentrate initially on paying the debt that carries the highest interest. Albert Einstein famously said,

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Here’s why you want to pay off the highest interest rate first. Every balance that you are charged interest on doubles every so often and your creditor knows this. It’s a little thing called the Rule of 72. Divide 72 by your interest rate and that’s how long it takes for your balance to double. So if you have a credit card with a 29% rate and one with a 14% interest rate, you want to pay off the one that doubles in about 2 years (72 divided by 29) before you worry too much about the one that doubles in 5 years (72 divided by 14).

Third, curb your spending habits. This is especially important but often the hardest thing to do. Check back next week for useful tips on how to manage this last but very important part of getting and staying out of debt.