Building real wealth is not an entirely difficult thing to do. It will require some sacrifices to be made, but almost anything that’s worth having requires sacrifice in some form or another. What kind of sacrifices? Well that really depends on you. If you spend your money before you make it then you’ll have to change some of your buying habits. If you save your money for a month or two to buy something nice, well you have a head start, but you might have to start saving some of it for yourself, rather than for that new HDTV.

I’ve come up with a short list of things that I feel are important to starting out on the road to wealth. It’s all about habit building. Once you’re in the habit of saving and investing it’ll be hard to not do it.

Here’s what I’ve come up with:

• Establish and maintain a positive credit rating
• Learn to budget, and then to LIVE ON that budget
• Learn to save (and not to immediately spend your savings)
• Establish a 401(k) account, or if not offered establish an IRA or a Roth IRA

Sound difficult? It’s really not. I promise. Keep reading for some more insight.

Establish a positive credit rating

Establishing (and maintaining of course) a positive credit rating will more than likely be one of the most important things that you will ever do when it comes to your finances. Truthfully it’s not difficult to establish and keep your credit rating (e.g. credit score) at an above-average level. The average FICO score is in the mid 600’s, something which can be achieved with just a little dedication. What sort of dedication? Not much. Truly. Pay your bills on time (this can be easily achieved with recurring online bill pay). Don’t max out your credit cards. Get credit cards if you don’t have any; use them monthly and then pay off the bill every month (on time of course). Be smart about your credit. Don’t open up a charge account at every store you shop at just because they are offering you 10% off today’s purchase. Don’t use your credit card to pay for something unless you have the cash to pay it off (or if you insist on using it still, make sure you’ll have the cash within a month to pay it off). Doing these simple things will help you to establish a squeaky clean credit rating, which will lead to lower loan rates and a much easier time qualifying for loans… not to mention potential auto insurance savings, etc.

For a little more detail on how a FICO credit score is calculated, and how it can be used, check out How Your Credit Score Defines You.

Learn to budget

Budgeting is an important part of your financial health. Budgeting means, in a nutshell, living within your means. It doesn’t necessarily mean tracking every single purchase you ever make and not allowing yourself to spend more than “x” amount of dollars on entertainment in a given month. Instead I have learned that it means to know how much you earn in a month and to not let your expenses exceed your income. Sure it sounds like a silly thing to say, but many people have yet to grasp this concept. Another thing I’ve learned that must be a part of ones budget is to budget a portion of your money away into some form of a savings or investing account. Go ahead, enjoy your life and spend your money while you still can, but make sure that you save just enough to cover emergency expenses and larger more expensive purchases, such as a down payment on a house or that new 52″ HDTV you have been lusting after. For a detailed look at a budgeting method I use, check out My 33% Savings Plan.

Learn to save

This one is pretty self-explanatory. Save a bit of every single paycheck and you’ll find yourself living much more comfortably than those around you. This principle is important for a few reasons. First it’s a good idea to have an emergency fund of about 3 to 6 months worth of your income saved up… for emergencies of course. Having this fund will erase untold amounts of stress from your life. Finally learning to save will eventually lead you to financial independence, and isn’t that what we’re all really after? Chances are you won’t be winning the lottery in this lifetime, so you’ve got to provide riches to yourself rather than expecting others to provide them to you.

Establish a 401(k)

For those who might not be informed on what a 401(k) is, please check out Are You Ignoring Free Money. I believe most of you probably have a pretty good idea of what a 401(k) is and what they can mean to your financial health at retirement. Contributing regularly to your 401(k) starting at a young age can mean all the difference in the world to the lifestyle you will be able to enjoy at retirement. If a 401(k) is not something that is offered by your employer (if you don’t know if it’s offered ask your manager - there’s a pretty decent chance that it is) then you will want to spring for an IRA or a Roth IRA. These are retirement accounts similar to the 401(k) in that they are tax-advantaged, but instead of being managed by your employer they are managed either by yourself or by a financial services company such as Vanguard. If you are in a low income tax bracket then a Roth IRA might be a better choice for you, because they are only taxable before the money is deposited into them. In other words when you go to withdraw from your Roth IRA at retirement you will not owe taxes on ANY of the monies that you pull out of your Roth IRA. Fantastic eh?

I defininitely believe that the above listed principles are very important to maintaining a strong financial health, and I also believe that only by being prepared and informed will you be able to become financially independent and probably even rich.

Do any of you have any other suggestions on things that you have found to be important when starting out your financial life? Or maybe something you wish you would have known - or done - when you were younger? Please leave your comments, and if you like this post feel free to share it with others.

Updated April 15, 2009

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I’ve been wanting to buy a house for several years now. It was partly emotional, partly financial and partly a desire to establish a more permanent residence, thereby helping to fulfill my safety needs (Maslow anyone?). Well that day looks like it’s finally come. My wife and I have been hunting for homes for about a month now in the Phoenix area and about a week ago we found one that we absolutely adore. We placed a bid on it and our bid has been accepted. Now we work out the rest of the stuff: appraisal, inspection, closing and then we will be homeowners!

It’s rather quite exciting. I have some major plans, such as planting a garden to grow my own fruits and vegetables, or decorating the home exactly how I’d like it (I feel limited here in this apartment because I don’t want to paint or put too many holes in the wall).

We found a beautiful house that is offering us just about everything we want. It’s a single story three bedroom, two bathroom house with vaulted ceilings in all the right places and a very large (for the city) lot. It’s in a great location (North Phoenix) that’s not only close to work but also close to everything else: downtown Phoenix, Scottsdale and even the West Valley (where our families live). We couldn’t be happier about the home that we’ve found.

Before I cut off let me tell you what is not motivating me to buy a house. It’s really only one reason, and is often the main reason for certain types of people to purchase a home. I’m not buying this house as an investment. In my eyes a home is not a builder of wealth. It is not an ATM machine. The real return on homes has historically never been as good as other types of investments. Sure you can’t live in other investments, but that still doesn’t mean you should count on all of your wealth building to come solely from the house that you buy. I’m not counting on it, and neither should you.

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In 2010 there will be new rules for the Roth IRA. Starting next year the government is going to make it easier to convert a traditional IRA into a Roth IRA. Historically conversions were only an option if your AGI (adjusted gross income) was less than $100,000. This income limit is going to vanish in 2010. Another great option being given to us is the ability to spread out taxes on conversions implemented in 2010. You are being given the option to split the taxes payable due to the conversion between your tax returns for 2011 and 2012.

This is a great opportunity for those who are interested in converting an IRA into a Roth IRA in order to diversify their future retirement portfolio (and their future tax payments). I’d recommend meeting with your financial advisor for more information on the upcoming conversion and to see if a Roth IRA is right for you!

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With that being said, I present to you a new poll:

I’m interested to see your answers to this poll. We’ll see how it turns out, but I’m guessing a majority of us didn’t learn much about managing money in our education.

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This is especially true for those who are used to having part time jobs that supplement their income. Right now, additional jobs are harder to come by. Not only are their fewer jobs, there are also plenty of competition and frankly, employers will prioritize those who do not have day jobs.

But saving money is actually not as difficult as people make it out to be. Like everything else, it’s all about discipline. If you are committed to the task and you can do anything you want, even manage to squeeze in all your expenses into one measly budget and have enough left to put in the bank. Here are some of the ways on how to save money that you never really thought of.

1. Mind the plug

One of the biggest wastage that people do is their electricity. You don’t realize it but you are probably paying far more for your electricity that what you are supposed to be not because of the cost of electricity but because you have managed to waste those watts when you forget to unplug the appliance or you have left the lights on even when nobody is there already. By changing the schedule of your laundry and your ironing, you can already make a lot of changes in your bills and therefore save tons of money. All you need to do is to always remember. Besides, you will not only save money but you will also be able to help lessen the problems on energy.

2. Get an Insurance Quote

Getting quotes for insurance products that you already have can be a great way to save money. Find out about the different kinds of quotes from: cheap online health insurance quotes or online term insurance quote or free car insurance quote.

3. Skip the coffee

If you are the coffee addict and you just can’t go through the day without the cappuccino, curb the habit. If you can’t, at least resolve to have that cup of coffee inside the house and not buy it from Starbucks or other coffee shops. Coffee there are just so expensive and it is an absolute crime to spend money on just a single cup of coffee, something that you will be able to do at home. Lessen your trips to the coffee shops and you will find that you have a room in your monthly budget.

4. Take a walk or the metro

If you are so used to taking the taxi to work, now is the time to start walking and riding the sub. It’s not actually so hard. You just need to wake a little bit early so that you will have enough time to walk. Although it will definitely take more effort, commuting offers a lot of advantages. If you are on the plump side, you can already lose a lot of pounds when you do it. You can even forgo with your gym class because you are already getting the exercise that you need from it. If you are the fashionista, commuting can provide you with the chance to display your fashion sense.

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These tips can be found on three different personal finance blogs: The Simple Dollar, The Dough Roller and The Frugal Law Student. I’m going to quote for you some of my favorite tips, the rest you can check out from these respective PF blogs.

5. Make your own gifts instead of buying stuff from the store. You can make food mixes, candles, bread, cookies, soap, and all kinds of other things at home quite easily and inexpensively. These make spectacular gifts for others because they involve your homemade touch, plus quite often they’re consumable, meaning they don’t wind up filling someone’s closet with junk. Even better - include a personal handwritten note with the gift. This will make it even more special than anything you could possibly buy down at the mall, plus it saves you money.

45. Master the ten second rule. Whenever you pick up an item in order to add it to your cart or to take it to the checkout, stop for ten seconds and ask yourself whyyou’re buying it and whether you actually need it or not. If you can’t find a good answer, put the item back. This keeps me from making impulse buys on a regular basis.

100. Never give up. Whenever the struggle against debt feels like it’s too much, go read a personal finance blog and remember that there are a lot of people out there fighting the same fight. Read around through the archives and learn some new things - and perhaps get inspired to keep going, no matter what.

For more money saving tips from The Simple Dollar check out Little Steps: 100 Great Tips For Saving Money For Those Just Getting Started.

Don’t pay interest on credit cards. This is obvious, but I soon as you fail to pay off the credit card in full, the high interest payments start to eat away at your monthly budget. If the temptation to spend more than you can pay on a credit card is to great, get rid of the credit card…

Check the insulation in your home. Extra insulation can easily pay for itself in one or two years, and it helps save the environment, too.

For more money saving tips from The Dough Roller check out 75 Painless Money-Saving Tips.

Don’t buy into trends. Keep a wardrobe of classic pieces, so you don’t have to update your clothes every year.

Eat right and exercise daily. You’ll reduce health costs.

Don’t buy extended warranties. Eighty percent are never used, and they’re a major profit item for the vendor. That’s why they push you so hard to buy them!

For more money saving tips from the Frugal Law Student check out 180 Money Saving Tips to turn your Financial Life Around 180 Degrees.

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It may be cold and much too white outside for spring to be just around the corner (unless you’re lucky enough to live in Phoenix) but that does not give you an excuse to neglect your finances. To makes things easier for you I’ve decided to begin a monthly money review series to give you tips on what you can do to improve your finances. We’ll take it one step at a time, month by month, and with any luck we’ll all be much better off because of it.

If you’re owed a refund, file your taxes

Let’s face it, everyone likes to get money sent to them. If you haven’t already filed your taxes then get started. If the IRS owes you money then you might as well file now so you can get your money back sooner than later.

Contribute to an IRA

You can decrease your taxable income, and therefore increase your tax refund, by contributing to a traditional IRA before April 15th. Of course you’ll want to see a tax advisor for the specifics. Just keep in mind that if you have cash sitting around that you’re saving for retirement if it isn’t already in an IRA then it probably should be.

Review your savings plan

Do you have an emergency fund? This should be 6 months worth of living expenses stashed away into a savings account or money market fund. If you don’t already have an emergency fund then start one now. Set aside a certain percentage of every paycheck to go into this emergency fund and do not stop until you have at least 6 months worth of living expenses. You’ll feel a million times better by having cash in the bank.

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Personal Finance

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Economy

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Finance 101

Debit versus Credit

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Image courtesy of merz_akademie at Flickr.com

I was playing a version of the newlywed game the other night with my wife and some friends when a question was asked of my wife in regards to what career I’d most likely end up in given a choice of only four: a policeman, firefighter, EMT or a politician. I knew right away which one I’d choose if I had no other options, but I regretted that it was so from the very beginning. My wife, knowing me very well, was able to guess it without hesitation. I’d choose to be a politician if I had only those four fields to choose from. Her reasoning for this was, as she said, “because Joseph is a sissy.” (God bless her.)

I loathe politics. As I already mentioned I regretted immediately that out of those four professions I’d eventually choose to be the politician. In all fairness the reason I’d choose a politician over a policeman, firefighter or EMT has to do with my distaste for blood, guns, extreme heat and dangerous situations. Or, as my wife so eloquently put it: because I’m a sissy. So be it.

Let me tell you why I hate politics. Politicians are (generally speaking, of course) the kids who never learned how to get along in grade school. They are the kids who manipulated others around them to get their way. They can be completely self-serving, egotistic and just plain stupid. Before I go too much further, I’d better stop. Let me show you what recently got to me. We’ll kick things off with a quote… from a politician, of course.

“Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.”

That quote is straight from the lips of the White House Chief of Staff Rahm Emanuel, as quoted in November 2008. Obviously he’s referring to the current economic crisis that our nation is facing. Unfortunately Washington politicians (specifically the Democrats) have taken his advice to heart, and used the recently passed stimulus package as their bridge to opportunity.

Before you go any further read A 40-Year Wish List at the Wall Street Journal. That article is the inspiration for this post, and filled with information on all of the small (and not so small) Democratic proposals that were slipped into this so-called stimulus package. Of particular interest:

• $1 billion for Amtrak, the federal railroad that hasn’t turned a profit in forty years.
• $2 billion for child care subsidies
• Only about 5% of the spending in the bill will go toward fixing bridges and other highway-related projects

Unfortunately this stimulus package is probably filled with fluff that won’t actually go toward stimulating anything. Of course there are billions of dollars that will go toward helping the poor or the unemployed (COBRA benefits, food stamps, etc), but overall this package is poorly constructed and not likely to go toward stimulus like it’s been touted. What it really is? A spending package, with a smidgen of stimulus.

That, my friends, is why I don’t like politics… or politicians. Let’s hope I’m never actually forced to choose a career in public service.

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The most obvious difference between using your credit card or your debit card is the way the funds are taken from you. Use your debit card and the money is pulled out of your checking account, but if you use your credit card it will be added to any existing (if any) loan balances on your credit card statement.

Beyond whether or not you’d like the funds to come directly from your checking when making a purchase there’s no glaringly obvious reason why you should use one card versus the other, but if you take a look at some of the fine print you’ll start to realize there are obvious benefits to using your credit card instead of your debit card, or the other way around. Let’s take a look at just a few of them.

A few reasons why you should pay with credit:

• When you shop online. When you buy something from the internet you’ll want to use your credit card because the funds don’t come immediately out of your checking. This way if you have any disputes with the online merchant you can call up your credit card company and get the charge removed. This also works to protect your cash balances because if someone somehow gets a hold of your credit card number they can only ring up a bill that you don’t have to pay (because you didn’t charge it), but if they get ahold of your debit card number they can cause you one major headache.

• When you buy a big-ticket item. You might not be aware of this but most credit card issuers offer an extended warranty on anything you buy with credit. Obviously you’ll want to review your credit cards terms but this can come in handy as some credit card issuers automatically double the manufacturers warranty.

• When you want to build your credit history. Using your debit card won’t build you any credit but if you use your credit card and pay it off on a monthly basis you’ll start to build your credit up quickly.

• When you want to rent a car. Many credit cards offer damage protection coverage when you pay for a rental car with them. This offers the same coverage as the damage insurance that car rental companies will try to sell you. Pay with your card and save yourself some money.

• You want to earn points. Most credit cards nowadays offer reward points which can be redeemed for cash, gift cards and even airline tickets. If you don’t mind using your card for everything and paying the bill off at the end of the month you’ll rack up the points real quickly.

A few reasons why you might want to pay with Debit:

• You want cash. If you want to get cash quick without paying any ATM fees then just use your debit card and ask for cash back at the merchant. Quick, free and easy.

• You want to avoid interest charges. Obviously if you use your credit card you will likely be charged interest for any purchases you put on your credit card. This is not the case when you use your debit card because the funds are transferred automatically out of your checking account.

• You don’t want (yet another) bill to pay. Let’s face it, we’re overrun with bills every single month. If you want to streamline your life and just don’t want to have yet another bill to pay then use your debit card. If you don’t have a balance on your credit card then you don’t get a bill. Good stuff!

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