Young and Money Smart

Retirement

2011-02-08T11:01:00.001-05:00

How much should you save for retirement?

IRA maximum is $5,000 per year until you are 50 years old. Is that enough or too much? The 401(k) limit until age 50 is $14,500. You can find out what amount you need to save by using some calculators online. There are a variety out there that will tell you what you need to save per year or what you need in total to attain your goal.

Here are some of my favorite ones:

AARP Calculator - Tells you what percentage of your income you should contribute to retire by a certain age. Also tells you the age you will retire if you keep contributing the percentage that you are currently contributing

FINRA Calculator - Shows you a schedule of exactly how much you should contribute each year. Every year, the contribution grows so that you are not overwhelmed by a large amount from the start.

CNN Money Calculator - Tells you the likelihood that you will attain your goal for retirement with a percentage. For example, "We believe there is an 80% chance, you will attain your retirement goal."

Also, you might find it helpful to see how much social security you will be getting in the future by plugging in your social security number and other info on the official SS website: Social Security Online Services. You have to have enough working credits to get the personal estimates at this website, which means that you have to have 10 years of working experience.

If you can't get your personal estimates through the website, you can estimate your future social security through the Social Security Online Services - Quick Calculator.

Renting vs. Buying

2011-02-07T09:48:00.001-05:00

Before even considering if you should be a home owner, you should have a 20% down payment to minimize the risk of foreclosure and to avoid paying the mortgage insurance. You also should have a full funded (whatever that means for you) emergency fund since home emergencies can come up regularly. Some even advise that you should build a separate home emergency fund valued at 1-3% of the purchase price.

Once you have both of those criteria, it is smart to see if you should purchase a piece of property for yourself. The NY Times "Is It Better to Buy or Rent?" Calculator is great for determining just that. Have you considered association fees, insurance, taxes, maintenance, and closing costs? The property costs more than just the price tag. Do you know how long you are going to stay in that property? The break even point can come 10 years after the purchase. If that is the case for your situation, are you prepared to wait that long before your investment pays off?

Having lived several years in CA, I always thought that buying is better than renting, however, now that I live in Miami (a renter's market), I can see that there is no way I could afford a house in the area that I am renting and break even, even after 30 years. Therefore, landlords seem unavoidable in my foreseeable future.

Budgets

2011-02-04T10:42:00.001-05:00

How to Build One and How to Stick to One

As discussed in my Cash Flow Blog Post, you could use Mint.com to set up your budget as it automatically tracks the amounts you spend in each category for you. However, another important part of building a budget is seeing if you are spending too much in one category or another.

Gail Vaz-Oxlade's Budget Worksheet will help you see if you are overspending in one area or another. Go to the site and at the bottom of the page, there is an option to download it as Excel as well. She says that housing should be 35%, which I believe is a little high. I think around 30% is more reasonable. Also, there is only room for 10% savings and I think that 15% is better. She is Canadian and they have a better retirement plan, therefore, their savings do not have to be as high. I think if you cut back 5% from the housing and add it to the savings, you'll be doing great if you are able to spend within that budget. Transfer whatever numbers you come up with to the Mint.com budget, which will help you stick to it, and you'll be set!

Always remember that the more you can save the better. If you are earning $30K after taxes, for example, you are only saving $4.5K if you are saving 15%. This means that you are not even maxing out your Roth IRA, which you should. This also does not allow any room for saving for emergencies, a down-payment, grad school, or a vacation. Therefore, always remember that the more you can save, the better you will be off in the future.

Credit Report and Score

2011-02-03T10:35:00.004-05:00

Your must know your credit score if you are going to apply for any credit as your interest rate depends on it. Your credit report is what determines your credit score. Therefore, you should look at your credit report regularly to spot any inaccuracies. The best place to check your credit report is from the free website Annual Credit Report where you can check three credit reports from the three different companies: Equifax, TransUnion, and Experian. I suggest looking at one report every 4 months so that you can check your free credit report 3 times a year.

As for the credit score, most companies charge even when they say the credit score is free. Or, they charge if you don't cancel their service, which some people forget. Therefore, there are two great truly free credit score websites available: Credit Karma and Quizzle. My Credit Karma score has always matched one of my scores that I have purchased from MyFico.com exactly. Quizzle has always been around 80 points lower than the average of my three scores, which have always been only a few points away from each other or equal. However, you can get a rough idea of where you are by getting both of these free scores.

Mutual Funds

2011-02-02T15:18:00.002-05:00

I am starting a Roth IRA this year partly because I'd like a nice retirement, but also partly due to the available IRS Retirement Credit.

Since I am new to investing, I'm going to start with mutual funds. I strongly believe in the freedom to buy and sell if I needed to without considering the commission, therefore, I am choosing NTF or no load funds only. You do not pay a commission to buy or sell these funds.

However, after signing up for the Roth IRA on ShareBuilder (where I already have a brokerage account due to a $50 incentive), I was a little lost about choosing the actual mutual funds. I looked at Standard & Poor's, The Street, MorningStar, etc. ShareBuilder advised I look at Lipper's detailed ratings. Choosing from 200 NTF funds from various fund families was no easy task until I bumped into US News Mutual Funds website.

The website easily compares MorningStar, Zack's, Lipper's, Standard & Poor's, and The Street ratings. Also, there is a lot information on each fund including the history of the returns, management, MaxFunds.com scores, etc. Searching for each stock (and remembering to select the right stock from the family in the drop down menu) left me with only 3 funds that I feel are rated the highest by all. I also wanted a semi-consistent return of at least 5%.

I'm not sure about all the details that the websites base their scores on, yet I feel that if several popular websites recommend a fund, it must be doing well. There is no way that even an experienced financial adviser can know everything about the management, the return, the risk, the average return, etc of each of the 200 funds I was considering. Therefore, now I need to choose 2 from IDROX (Real Estate should go up soon, the inconsistent return history is due to the inconsistent real estate market), ACMVX (I wanted to invest in the Republic Services stock, but finding it as the top stock in a highly ranked fund is even better), and PTTDX (great looking fund with mortgage backed securities).

Update: Went with ACMVX and IDROX. PTTDX is government based and invest a lot in low paying US Treasury Bonds as well as Fannie Mae, just didn't feel right.

Missing Money - Unclaimed Property

2011-02-01T10:16:00.001-05:00

Did you know that if a company ever owed you money and could not find you, they could have placed the money into the unclaimed funds. To check to see if you any unclaimed funds, you could check two great sites:

Unclaimed

Missing Money

Please remember that the reason the company could not find you was because you moved, so look for all states that you have previously held an address at. Check your friends and relatives. Every time I have checked, I have always found money for friends, unfortunately never for myself though.

You could also check out your favorite celebrity for fun to see their previous addresses or who owes them money.

Debt Pay-Off Methods

2011-01-31T13:08:00.001-05:00

Here are the two most popular debt pay-off methods:

Debt Snowball

How - You pay the minimum payment on all your cards/loans, except the loan with the smallest balance on card A. Once that is paid off, you apply whatever you were paying on card A to the next card with the smallest balance, let's call it card B. This payment will be in addition to the minimum that you are already paying on card B. The idea is that you get a psychological high from paying off one of your cards and your payments on the main card at the time increase as you continue to pay off card after card.
Pros - You get the psychological benefit of seeing some debts disappear.
Cons - You must have a lot of cards with varying unpaid balances. This is usually not the best way to save on the interest costs.

Highest Interest First

How - Pay as much as you can on the card/loan that has the highest interest. Once that loan is paid off, pay the balance with the next highest interest off and so on.
Pros - Mathematically, you save the most in interest by attacking the highest interest account first.
Cons - You must be dedicated to paying off your debt even if you do not see great results consistently.

I want to get out of debt as quickly as possible, so I like the Highest Interest First method. However, my two student loans are both at 6.25%, therefore, I am paying more on the private student loan as it has a variable rate and could go up. Also, this student loan was co-signed by a friend, therefore, I feel obligated to pay this one off first. Therefore, even if the private student loan had a lower rate, I feel that I would pay it off first as there are other factors to consider other than your psychological motivation and largest savings in interest.

High Interest Savings Accounts

2011-01-28T12:37:00.002-05:00

Where should you keep your emergency fund?

You should always look for a high interest savings account to keep your savings. Now, the highest interest banks out there with no restrictions are AmEx with 1.3% interest rate and SFGI Direct with 1.4% interest rate. This is a great way to earn at least some money on your funds. Also, since the banks are online, it will take you time to draw on the balance and will, hopefully, prevent you from spending the money you should be saving.

AMEX Bank
SFGI Direct

Some savings accounts that have restrictions such as the requirement to use the debit card at least 10 times per month and have a direct deposit into the account pay as much as 4.5% interest rate.

To check for current highest rates, go to:

Deposit Accounts
High interest accounts with requirements

My Bank Tracker
No fine print savings accounts

Emergency Fund

2011-01-27T15:06:00.001-05:00

Everyone needs to have an emergency fund. The amount of the fund varies. Most experts will agree that you need at least 3 months of your expenses. Suze Orman, on the other hand, believes that everyone needs to have 8 months of pay in their emergency fund. What is comfortable for you, depends on how stable your job is, what your expenses are, how much debt you have, and what type of personality you have.

What is important is that you set an amount for yourself and try to achieve that goal. You should save at least 10% of your salary, however, 25% would be something to strive for. You could start with 10% and every paycheck, month, or year up it by 1%. You would not notice the 1% decrease in the take-home pay, however, your savings, over time, would.

Personally, 6 months of expenses is enough while I pay down a private student loan and put some away in a Roth IRA. I do not have dependents and my job is pretty stable, however, I sleep better at night when I have a larger financial cushion.

An interesting way to determine your financial fund would be to align it to the current unemployment rate. Therefore, since the US currently has 9% unemployment, it would be wise to save 9 months of expenses as it would take longer to find a job.

Use these calculators to see other methods of calculating your emergency fund:

Money Zine Emergency Fund Calculator

Bankrate Emergency Savings Calculator

Cash Flow

2011-01-26T16:07:00.002-05:00

First rule to financial stability - earn more than you spend.

To know what you earn and what you spend, you should create a budget. There are easy ways to do this. My personal favorite is the Mint website. The website takes all of your accounts and puts them in one place. In addition to seeing the overview of each account, Mint also offers easy budgeting as it keeps a history of all your transactions and sets a suggestion for each budget category.

Before signing up for Mint.com, sign up for eBates.com. eBates is giving $5 to anyone who signs up for Mint.com using their referral link.