By now you all should be saving, budgeting, and consciously spending your money with the help of the previous blogs. If not you should check those out before you read this new post.
If you're like most young adults, you're curious about investing and the stock market but don't know where to start. I've scoured the internet and a couple books to find information to help those just starting including myself. So basically, I've done all the work and you can reap the benefits with your lazy ass.
I have a couple sites divided by topics to help you all out:
Now while you're diving head first into all of these new tutorials with all of this new jargon you can use this site to look up the exact meaning of unfamiliar words.
Now after you've done your homework and research here are a couple sites that allow you to practice your newly acquired skills with play money without any penalties. Sort of like Fantasy Football. Some require a fee but it would be non frugal of me to recommend those.
“Create a budget!” is the sort of redundant advice
that personal-finance experts feel good prescribing, yet when real people read
about making a budget, their eyes glaze over faster than a fat girl’s lips at
Krispy Kreme. Who wants to track their spending? The few people who actually
try it find that their budgets completely fail after a few days because tracking
every penny is overwhelming. A 2007 survey by bankrate.com, 75 percent of
Americans said they have a budget—which is complete nonsense.
The Difference between Cheap and Frugal
Let’s first dispense with the idea that saying no to
spending on certain things means you’re cheap. If you decide that spending
$2.50 on Cokes when you eat out isn’t worth it—and you’d rather save that $15
each week for a haircut—that’s not cheap. That’s using frugality to drive
conscious spending. (Hence the name of this blog being Frugal Freddy…)Unfortunately,
most Americans dismiss frugality because they confuse it with cheapness,
thinking that frugality is all-or-nothing: “Frugal people don’t spend money on
anything! I’m never going to cut all my spending, so forget it.”
Frugality isn't just about our own choices, though.
There’s also the social influence to spend. Call it the Real House Wives/
Air Jordan’s effect…. (FYI 95% them are broke in real life) where your
friends’ spending directly affects yours. Next time you go to the mall, check
out any random group of friends. Chances are, they’re dressed similarly—even
though chances are good that they have wildly different incomes.
Frugality isn't about cutting your spending on
everything. That approach wouldn't last two days. Frugality, quite simply, is
about choosing the things you love enough to spend extravagantly on—and then
cutting costs mercilessly on the things you don’t love.
Conscious Spending Plan
A Conscious Spending Plan involves four major
buckets where your money will go: Fixed Costs, Investments, Savings, and
Guilt-free Spending Money.
MONTHLY FIXED COSTS
Fixed costs are the amounts you must pay, like your
rent/mortgage, utilities, cell phone, and student loans. A good rule of thumb
is that fixed costs should be 50–60 percent of your take-home pay. Before you
can do anything else, you’ve got to figure out how much these add up to.
Check out the chart on the next page with common
basic expenses (the bare minimum that any ordinary person would use to live).
If you see any glaring omissions for major spending categories, add them.
Notice that I didn’t include “eating out” or “entertainment,” as those come out
of the guilt-free spending category.
LONG-TERM INVESTMENTS
This bucket includes the amount you’ll send to your
401(k) and Roth IRA each month. A good rule of thumb is to invest 10 percent of
your take-home pay (after taxes, or the amount on your monthly paycheck) for
the long term. Your 401(k) contributions count toward the 10 percent, so if you
already participate in a 401(k), you’ll need to add that amount to your
take-home money to get a total monthly salary.
SAVINGS GOALS
This bucket includes short-term savings goals (like
Christmas gifts and vacation), midterm savings goals (a wedding in a few
years), and larger, longer term goals (like a down payment on a house).
To determine how much you should be putting away
each month, check out these examples. They’ll shock you:
GIFTS FOR FRIENDS AND FAMILY.In
2011 Americans spent around $900 on Christmas gifts. If you’re an average
consumer and want to pay for your gifts without going into debt, that means you
need to save $75/month for your Christmas gifts. (And what about birthday
gifts?)
YOUR WEDDING (WHETHER YOU’RE ENGAGED OR
NOT).The average wedding costs about $28,000. The average
wedding age is twenty-seven for men and twenty-six for women, you can figure
out exactly how much you need to be saving, assuming you want to pay for it
without help or debt: If you’re twenty-five years old, you need to be saving
more than $1,000/month for your wedding. If you’re twenty-six, you should be
saving more than $2,300/month.
BUYING A HOUSE.If
you’re thinking about buying a house in a few years, log on to www.zillow.com and
check home prices in your area. Let’s just say the average house in your
neighborhood costs $300,000 and you want to do a traditional 20 percent down
payment. That’s $60,000, so if you want to buy a house in five years, you
should be saving $1,000/month. Crazy, right? Nobody thinks like this, but it’s
truly eye-opening when you plot out your future spending for the next few
years. It can almost seem overwhelming, but there’s good news: The longer you
have to save for these things, the less you have to save each month.
GUILT-FREE SPENDING MONEY
After all that spending, investing, and saving, this
bucket contains the fun money—the stuff you can use for anything you want,
guilt-free. Money here covers things like going out to restaurants and bars,
movies, and vacations.
Depending on how you've structured your other
buckets, a good rule of thumb here is to use 20 percent to 35 percent of your
take-home income for guilt-free spending money.
SET REALISTIC GOALS
Though it might not seem
like a big deal, small distinctions make all the difference in the world...i.e.
simply “saving” versus “saving for a down payment”. Saving with a goal—whether
it’s tangible like a house or intangible like your master’s degree—puts all
your decisions into focus.
SET UP A
SPECIFIC ACCOUNT. Another key difference was how I was
saving. I opened up an Ally savings account and named 3 accounts “Down Payment,
Vacation, and School” and regularly transfer in the amount I had determined I
wanted to save each month.
USE THE
ENVELOPE SYSTEM TO TARGET YOUR BIG WINS
All this conscious spending and optimizing sounds nice in theory, but
how do you do it? I recommend the envelope system, in which you allocate money for
certain categories like eating out, shopping, rent, and so on. Once you spend
the money for that month, that’s it: You can’t spend more. If it’s really an emergency,
you can dip into other envelopes at the cost of spending in that category.
These “envelopes” can be figurative (like in Mint or Excel) or literally envelopes
that you put cash in. This is the best system I've found for keeping spending
simple and sustainable.
And when it’s gone, it’s gone.
The best part about
setting up a strategic budget is that it guides your decisions, letting
you say no much more easily—“Sorry, it’s not in my plan this month”—and freeing
you up to enjoy what you do spend on. This is guilt-free spending at its best.
Tiger Tracks WEEK FOUR:
1) Get your paycheck,
determine what you’ve been spending, and figure out what your Conscious
Spending Plan should look like.Don’t
over think it. Just break your take-home income into chunks of fixed costs
(50–60 percent), long-term investments (10percent), savings goals (5–10
percent), and guilt-free spending money (20–35 percent).
Ask any of your friends how much they’ve invested and they’ll say things like, “Huh?” or “I don’t earn enough to invest.” Most of them will say, “I don’t know how to pick stocks,” which is crazy because INVESTING ISN’T ABOUT PICKING STOCKS. Although it’s true that some of them might participate in a 401(k)—a type of retirement account—that’s probably the extent of their investments.
401(k):
A 401(k) is just a type of investment/retirement account—one that offers huge benefits which include:
1) Money isn't taxed for many years (tax-deferred until the age of 59 1/2)
2) Free money with employee match
3)Automatic Investing
Out of employees age 25 and under:
1) Less than 1/3 participate in a 401(k);
2) Less than 4 % max out their contributions;
3) Only 16 % contribute enough to get the full company match. The company match is literally free money, so 84 % of young employees are losing thousands of dollars per year because they haven’t spent a few hours to learn how this stuff works.
The Ladder of Personal Finance
Track 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get 100 percent of the match. A “401(k) match” means that for every dollar you contribute to your 401(k), your company will “match” your contribution up to a certain amount. For example, for easy math, let’s assume you make $100,000. A “100 percent match up to 5 percent of your contribution” means that you’ll contribute $5,000 and your company will match it with $5,000. This is free money and there is, quite simply, no better deal.
Track 2:Pay off your credit card and any other debt. The average credit card APR is 14 percent, and many APRs are higher.
Track 3:Open up a Roth IRA and contribute as much money as possible to it. (As long as your income is $101,000 or less, you’re allowed to contribute up to $5,000 a year.)
Track 4: If you have money left over, go back to your 401(k) and contribute as much as possible to it (this time above and beyond your employer match).
The current limit is $15,500.
Track 5: If you still have money left to invest, open a regular nonretirement account and put as much as possible there.
401 k facts:
1) If you need the money you can be penalized around 10% for early withdrawal but there are certain exceptions: medical expenses, buying a home, education.
2) Tax deferred not tax free
3) If company offers 401 k but no match, open anyway. Pay off debt with extra money and max out Roth IRA.
If you switch jobs:
1) Roll over 401 k into an IRA (preferred).
2) Roll old 401 k into new 401 k
Roth IRA:
A Roth IRA is another type of retirement account with significant tax advantages. It’s not employer sponsored—you contribute money on your own. Every person in their twenties should have a Roth IRA, even if you’re also contributing to a 401(k). It’s simply the best deal I’ve found for long-term investing.
One of the benefits is that it lets you invest in whatever you want. Whereas a 401(k) has an array of funds that you must choose among, a Roth IRA lets you invest in anything you want: index funds, individual stocks, anything. A second difference has to do with taxes: Remember how your 401(k) uses pretax dollars and you pay taxes only when you withdraw money at retirement? Well, a Roth IRA uses after-tax dollars to give you an even better deal. With a Roth, you invest already-taxed income and you don’t pay any tax when you withdraw it.
Roth IRA facts:
1)You contribute your own money, no match.
2)Invest in what you want.
3) No taxes after you withdraw
4)You do not pay taxes on the earnings.
5)Penalty if you withdraw early..some exceptions
6) You can withdraw the principal (amount you contribute) after 5 years.
7) If you make more than 100,000/yr there are restricitions on how much you can contribute..see traditional IRA
8)Over a certain income you aren't eligible for a roth IRA....see traditional IRA.
9)Start with at least $50-$100/month. I know Fidelity requires at least $100/month.
To start a Roth IRA, you’re first going to open an investment brokerage account with a trusted investment company. I use Fidelity, but companies include Scott-trade, t.rowe price, Vanguard, Schwab, etc.
Tiger Tracks Week 3:
1) Open your 401(k). Get the paperwork from your HR manager and fill it out.
2) Come up with a plan to pay off your debt. I can't stress this enough.
3) Open a Roth IRA and set up automatic payment. Send as much as you can, but even $50/month is fine
Credit is one of the most vital factors in your life from 18-60, but because it’s hard to wrap our minds around it, we often overlook it
entirely. Think about it: Our largest purchases are almost always
made on credit, and people with good credit save tens of thousands of dollars
on these purchases.
There
are two main components to credit (also known as your credit history): the
credit score and the credit report.
Your credit
report gives potential lenders—the people who are considering lending
you money for a car or home—basic info about you, your accounts, and
your payment history. In general, it tracks all credit-related activities,
although recent activities are given higher weight.
Your credit
score is a single, easy-to-read number between 300 and 850 that
represents your credit risk to lenders. It’s like a Cliff’s Notes for the credit
industry. (Best range is 760-850)
It’s easy to check your
credit score and credit report—and you should do it right now. Once a year, by
law, you’re allowed to obtain your credit report for free at www.annualcreditreport.com. To get your credit score, on the other hand, you’ll have
to pay. You’ll get the option to pick any of
the three major reporting agencies. Just pick any one—it doesn’t really matter.
A
good credit score can save you hundreds of thousands of dollars in interest charges.
You might say naively, “I don’t care about
this. I don’t need to borrow money.” Maybe you don’t today. But in three or
four years, you might need to start thinking about a
wedding or a house. What about cars? Vacations? Etc.
If you doubt that a loan’s interest rate really
makes that much of a difference, check out the following table. Assuming you
borrowed $200,000 for a 30- year mortgage, look at the differences in what you’d
pay based on your credit score.
As you can see, a high credit score can save you
hundreds of thousands of dollars over your lifetime—and that’s just on a
mortgage. Its fine to be frugal, but you should focus on spending time on the
things that matter, the big wins. So,
let’s look at some tactics for improving your credit, which is worth
much more than any advice about frugality.
Building
Credit with Credit Cards
One of the biggest
problems with credit cards is the hidden cost of using them.It may be
incredibly convenient to swipe your card at every retailer, but if you don’t
pay your bill the same month, you’ll end up owing way more than you realize.
Take, for instance, an iPod.
It looks like it costs
$250, but if you buy it using a credit card with the average 14% APR and a 4%
minimum payment, and then only pay the minimum each month, you’ll be out almost
20 percent more in total.
If you paid
only the minimum monthly balance on your $10,000 purchase, it would take you
more than 13 years and cost you more than $4,000 in interest alone. Instead of paying off a
$10,000 furniture set for 13 years, if you’d invested the same amount and earned 8%, it
would’ve turned into about $27,000! Try calculating how much your own purchases
really cost at www.bankrate.com/brm/calc/minpayment.asp
This isn’t meant to scare you away from using credit
cards. In fact, I encourage you to use credit cards RESPONSIBLY. If you don’t have good credit, it may be difficult
to get an affordable home loan—even if you have a high income.
Getting a New Card
Whether
you’ve never had a credit card before or you’re thinking about getting an
additional card, there are a few things to think about.
1) Avoid those credit card
offers you receive in the mail.If
you hate those credit card offers in the mail as much as I do, visit www.optoutprescreen.com to
get off their lists. Out of every
thousand students who are mailed offers, 150 accept them, a CRAZY high
number. Students—and young people in general— are especially
susceptible to these offers because they don’t know any better. For
something as important as your credit, make the effort and pick a good card.
2) Avoid cash-back cards,
which don’t actually pay you much cash.Get 1 percent back on all your spending!” Wow,
if I spend $2,000 per month on my credit card, I’ll get back $20. Smdh
3) Compare cards
online.The
best way to find a card that is right for you is by researching different
offers online (try www.bankrate.com).
4)Rewards are important.
5) Don’t go card crazy.
The less information in your
credit report, the higher the prominence of each new report. For example, if
you’re in college and you only have one credit card in your name, when you open
another account, the weight of that action is more than it would be ten years
down the line. If you limit yourself to opening one card a year, you’ll be
doing yourself a favor.”
The Six Commandments of Credit
Cards:
1) Pay off your credit card
regularly.
a.Consequences of missing one payment
i.Credit Score can drop
more than 100 points
ii.APR or interest rate on
other purchases can go up around 30%
iii.Late Fee
iv.APR or interest rate on
other cards you weren’t even late on.
2)Get all fees waived on
your card
a.Give the company a call
if you are late the first time and explain to them why you were late and how it
will not happen again. Do not take no for an answer.
3)Negotiate a lower APR
a.The average is 14%
4)Keep your cards for a
long time and keep them active
a.Lenders like to see a long
history of credit, which means that the longer you hold an account, the more
valuable it is for your credit score. Don’t get suckered by introductory offers
and low APRs
b.Play
it safe: If you have a credit card, keep it active using an automatic payment
5)Get more credit (only if
you have no debt!!!)
6)Use your rewards
Mistakes to Avoid:
1)Avoid closing your
accounts (usually).
a.For example, having $2,000 in
debt and $8,000 in available credit is better than having the same debt with
only $4,000 in credit.
b.People with zero debt get a free
pass. If you have no debt, close as many accounts as you want. It won’t affect
your credit utilization score.
2)Manage debt to avoid
damaging your credit score.
For example, if you carry $1,000 debt on two
credit cards with $2,500 credit limits each, your credit utilization rate is 20
percent ($1,000 debt ÷ $5,000 total credit available). If you close one of the
cards, suddenly your credit utilization rate jumps to 40 percent ($1,000 ÷
$2,500). But if you paid off $500 in debt, your utilization rate would be 20
percent ($500 ÷ $2,500) and your score would not change.
3)Think ahead before
closing accounts.If
you’re applying for a major loan—for a car, home, or education—don’t close any
accounts within six months of filing the loan application. You want as much
credit as possible when you apply.
4)Avoid getting sucked in
by “Apply Now and Save 10 Percent in Just Five Minutes!” offers.Stay away from the cards issued
by every single retail store. These cards might as well have “You Are A Dumbass”. Written across.
Tiger Tracks Week 2:
1) Get your credit report and credit score. Check them to make sure there are no errors and to get familiar with your credit. You can access your report and score at www.my fico.com. If you don’t want to pay the $15 fee at www.myfico.com, at least get your free credit report from www.annualcreditreport.com.
2) Set up your credit card. If you already have one, call and make sure it’s a no-fee card. If you want to get a new credit card, check out www.bankrate.com.
3) Make sure you’re handling your credit cards effectively. Set up an automatic payment so your credit card bill is paid off in full every month. (Even if you’re in debt, set up an automatic payment for the largest amount you can afford.) Apply for more credit if you’re debt-free. Make sure you’re getting the most out of your cards.
First off, I just want to say that if you don't have any debt let me give you a round of applause.
I myself was fortunate enough to graduate college without any loans or debt thanks to scholarships and another program in Louisiana called TOPS. Well, except my car which I'm trying to pay off now. Some people differentiate between debt by saying “good debt” and “bad debt,” depending on whether the debt appreciates (education) or depreciates (car) over time. Others despise debt altogether. Whatever the case, most people have it and in the words of my boy Rack em Willie (RIP), "It Ain't no fun!" I was listening to 102.5 on my commute to work and the broadcaster was speaking on how the interest rate for the Stafford loan for college education plans to more than double up to 6.8% by July. Did you know that the average student graduates
with about $20,000 in student loan debt? So let's do some quick numbers:
Average Student loan: $20,000
1) @ 3%
Balance: $20,000 Min Payment/ Month: $200 Time it will take you to pay it off: 9 years, 8 months Total Interest they make off you: $3,043 Total you pay at the end: $23,043
2) @ 6.8%
Balance: $20,000 Min Payment/ Month: $200 Time it will take you to pay it off: 12 years, 4 months Total Interest they make off you: $9,597 Total you pay at the end: $29,597
So basically with this new increase in interest rate for the Stafford loan, the average student will have to pay about $6,500 more and will have 3 extra years with that debit monkey on their back with having to pay it off. (Even if you file bankruptcy, you have to pay back student loans)
I want you to pay attention to how much money you’re
putting toward monthly payments because the loan amounts are so large that even an extra $100/month can save you years of payments.
First, to inspire you
to take action on paying off your student debt, play with the financial
calculators at www.dinkytown.net. or at www.calculatorweb.com . You’ll be able to see how paying
different amounts can change the total amount you’ll owe.
Second, I want to encourage
you to put AT least $50 more each month toward any debt you have. (Draw up a monthly budget to see where your money is going!!) Not only is this a psychological victory to know that you’re consciously working towards paying off
your debt, but you’ll also be able to focus on investing sooner, either in yourself or a 401(k) /IRA, which I will touch on in the future.
Make sure this
is automatic, drawing right out of your checking account, so you don’t even see
the money.
PAY YOUR DEBT
OFF AGGRESSIVELY
If you've found yourself in debt—whether it’s a lot or a little—you are basically in a fight against 3 different entities:
First, you’re paying tons of high
interest on the balance you’re carrying.
Second, your credit score suffers—30
percent of your credit score is based on how much debt you have—putting you
into a downward spiral of trying to get credit to get a house, car, or
apartment, and having to pay even more because of your poor credit.
Third, and potentially most
damaging, debt can affect you emotionally. It can overwhelm you, leading you to
avoid opening your bills, causing more late payments and more debt, in a
downward spiral of doom.
Let's look at an example scenario:
DUMB DAN VS. SMART SALLY: PAYING OFF
$5,000 DEBT AT 14% APR:
Five Steps to Ridding Yourself of Credit
Card Debt:
Figure
out how much debt you have
.
2. Decide what to pay off first. (There are two strategies that are recommended to paying off debt.)
Pay min on all debt, but pay more money towards bill with highest APR (interest rate). Most credit cards have an average APR of 14% so it might be wise to tackle those first.
OR
Pay min on all debt, but pay more to the bill with the lowest total balance.
3. Decide where the money to pay off your debit will come from:
Check your regular cash flow and draw out your monthly budget
Prioritize your bills using the chart in step one.
Pay min on all debt but attack at least one bill using methods in step two
Stop accumulating more debt!!!!
4. Get started NOW!
Eliminating
your debt should have a positive effect on your credit score. Get your current score for free from Credit Karma and simulate scenarios to see how
your future score might change with improved money habits. www.creditkarma.com.
Tiger Tracks
Week One:
Step 1: If you have debt, start paying it off. Give yourself one week to figure out how much you owe, call the lender to
negotiate down the APR or restructure your payments (in the case of student loans),
and set up your automatic payment with more money than you’re paying now. Getting out of debt quickly will be the best financial decision you ever make.
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