Dont be a Financial Moron
Add commentsI have been trying to get a handle on my finances for some time, its not that I am totally in debt. My wife and I have very few credit cards, most of our debt is in our vehicles and our house of course. What I am really struggling with was how I wanted to invest my money. I came across a really interesting article in the November 2007 issue of GQ over the holidays (Yes I read GQ), its in the men and money section and it was titled "Confessions of a Financial Moron", by Joel Lovell. In this article he basically mans up to his financial mistakes over the years and in the January 2008 issue he continues, in an article titled "Get Rich Slow", the discussion with five easy steps he took to get him on track financially so to speak. After reading through the article I talked it over with my wife who has been hounding me over the past year (if not more) to handle our investments better and we decided to do the five steps. I will paraphrase the steps, but I recommend reading the actual articles if you can get your hands on the GQ issues I mentioned above.
Step 1: Make out a Will and if you have a family buy term life insurance
Step 2: Pay off your damn credit cards, basically the interest being charged on a high credit card debt fully washes out any returns you will get from the market, so pay those off before you do anything else!
Step 3: Max out all tax-deffered accounts, such as your 401k and your IRA. This is pretax investment dollars, so it will grow on an average of 10-12 percent plus 40 percent because that growth is pretax, not to mention most companies match up to a certain percent so take advantage of that!
Step 4: Put 6 months worth of expenses into a money market account, the article basically explains this as an account that you can still use like a checking account so to speak, except instead of earning 0 percent interest like your standard checking account it will return 4-5% interest. Seems like another no brainer to me.
Step 5: Invest in a couple decent index funds, which are basically a group of stocks that represent some slice of the overall market.
So my goal is to get Steps 1-5 done the first week of January, I have already accomplished Step 2 (got to love online banking). Step 1 will require a lawyer and a small fee of about 75-100 bucks, Step 4-5 will require me to schedule an appointment with my financial consultant, which I will do first thing tomorrow. Step 3 is nearly completed already, I think I am half way there to maxing out my 401k, I have been putting my annual raise into my 401k for the past 2 years, I figure I made enough to keep the standard of living I had about 3-4 years ago so I might as well start putting anything extra I get into some type of investment. That is something I learned from my wifes Uncle Steve (kudos to you Uncle Steve).
I am really glad I read these articles, its been on my mind lately and well the articles helped remind me how imperative it is to get this done. More to the point, is that having a retirement plan is serious business, you dont want to be in a position when you are 60+ and not have any idea how you are going to provide for you and your wife! I have been investing for only 2 years of my Adult life, I am already 30 and wasted about 7 good investment years, if your reading this post I urge you to evaluate how your financial choices could be working for you and not against you in the long term.
http://www.daveramsey.com/
1) Start investing / saving ASAP the earlier in your life you do it the better. I can't stress that enough and how much I wished I had started sooner. Thank goodness my wife did.
2) Talk to a financial planner. They can give you a financial forecast to tell you what you will have at retirement. it is an eye opener. If your just doing a 401k that may not be enough.
As far as investing, I really suggest you check out the "low cost" fund companies such as Vanguard, TIAA-Cref and Fidelity. They are no-load and very low cost fund managers. You can't go wrong with them. If you decide on an index fund, pay close attention to the fees.
Basically the interest rates on my loans were washing out any thing I made on a CD/Money Market account or in a short term investment.
Once those are paid off, the money will be dumped into other types of investments. Not sure which ones yet, but at least I will something else besides my 401k and an IRA.
Thanks again for the comments, keep em coming!
Your Financial guy is spot-on! Get all your debts paid off first before you start to invest and save. Dave Ramsey does baby steps..(And don't start the next until you have completed the step)
Start off by stopping all 401k, iras or automatic savings plans.
1. Mini Emergency Fund - $1000 in a savings account.
2. Debt Snowball - Line your debts up smallest to largest and pay them off... This will snowball as you have more money to pay the next one once the previous one is paid off.
3. 3-6 Month Expenses in an emergency fund money market
4. Invest 15% of household income into Roth IRAs and pre-tax retirement. Sidenote: 401k's tend to be a bad investment in that your fund selection is minimum. I would suggested only putting in up to the match and the rest go to a Roth IRA. The beauty of the Roth is it grows tax free which means the money you put in is taxed but when you pull it out at retirement you won't owe any taxes on it. A thing of beauty! And your Roth should be in good growth stock mutual funds... no single stocks!!!!
5. Pay off the house... You will be amazed how fast you get it paid off paying 2-3 payments a month.
6. Spend like no one else!!!!