Below are eleven intermediate-level personal finance tips that will help you save more, spend less and earn faster. They assume you already know the basics of setting up a budget, getting out of debt, and saving as much as you can.
1. Never break down an expense in terms of cost per day. It will make everything seem cheaper than it is. A $19.95 subscription is
only about $0.67 / day. Too cheap to care about, right? But that same $19.95 subscription is $240 / year. Ouch.
2. When keeping track of your every expense,
do not simply download your transactions and import them into Quicken or whatever expense tracking system you use. It's easier, yes, but kind of defeats the point. That $300 you dropped on a new gizmo two weeks ago may not have hurt at the time, but it might now when you enter it into your books. You'll also know immediately if you've become a victim of identify theft.
3. Use credit cards for every purchase. I know you were told to
never use credit cards in personal finance articles written for the beginner. That's because they assume you lack the self-control to pay off every card in full
each month. Since this is an article written for a more advanced audience, I assume you already know that you should never, ever carry a balance on plastic. Assuming this is true you should use credit cards wherever possible.
Why? First, it builds credit.
Second, goods and services are priced assuming you'll use a credit card anyway. People who don't use credit cards are basically just subsidizing people who do. Sure, you don't pay the credit card transaction fees directly--but merchants do, and they simply raise their prices to compensate. Might as well take advantage of it.
How? Rewards. Assuming you have good credit you can find a plethora of cards with decent cash back. You won't get the unrealistic deals you could in 2005/2006, but there's still plenty of good offers out there. I like
American Express' Blue Cash Card. It has a tiered reward structure which means you get pitiful rewards on the first $6500 you spend. But after that it's at least 1.5% on every purchase (up to 5% on certain purchases, such as at grocery stores, etc). If you get this card you'll want to get a decent Visa card as well since many vendors refuse to accept American Express.
Given that you put most of your purchases on a rewards credit card (some things, such as rent, generally can't be put on a credit card) you're likely to get $200-$300+ a year in cash back.
4. Setup automatic transfers to transfer money
weekly from your checking account to your savings account. Treat this transfer as an expense.
Why weekly? Because this forces you to adapt your budget around it. Let's say you want to save $800 / month. If you deduct that monthly, you might be tempted to cancel it if unexpected expenses come up that month. This is a big chunk of money, after all. On the other hand, paying $200 every Monday may seem a bit more manageable. This is the same concept as item #1. By making our savings more frequent they feel smaller than they might otherwise.
5. Put your short-term savings in a high-yield savings account. At today's interest rates you should be earning
at least 4.5%. My favorite online bank,
Presidential Bank offers 5.25% on their Premier Savings account. Assuming you keep $10,000 in short-term savings that's over $500 / year in interest. If you don't like Presidential Bank, many people I've talked to have had great experiences with
ING Direct.
How much should you sock away into short-term savings? Assuming you're not saving for a large, upcoming expense (down payment on a new home, etc) the general rule of thumb is three months expenses worth, although this can vary depending on your comfort level. More info can be found here:
http://www.fool.com/60second/savings.htm
6. While we're on the topic of interest, don't let your checking account collect dust when it could be collecting interest.
Presidential pays 4.5% on their Internet Checking Account, so long as you keep a minimum monthly balance of $1000 and setup direct deposit. You don't want to keep more than two or three paychecks in your checking account--even if it
does pay interest--since this will encourage you to spend more. However, given that it's necessary to have somewhere between $2000-$5000 in your account at all times, why not earn a bit of interest on it? It doesn't seem like much, but that adds up to $100 - $200 / year.
7. Increase your W-4 allowances as high as you can go until you will either just barely owe money to the IRS or get a tiny tax return at the end of the year. Remember, the money you get at the end of the year as a tax return is not free money--it's money your government
overcharged you over the course of the year. It's basically like giving the government an interest-free loan.
You can use the following calculator to help determine how many allowances you should declare:
http://www.irs.gov/individuals/artic...=96196,00.html
8. Open and max out a Roth IRA. Yes, you have to use post-tax money, but it still beats everything out there, including 401(k)s if you don't count employer-matched funds. Sadly, there are rather harsh income limits setup for single people contributing, so not everyone has this vehicle available. The limits are a bit higher for married couples, but for some retarded reason the federal government doesn't think gay people can get married. Find out more information here:
http://en.wikipedia.org/wiki/Roth_IRA
9. Max your 401(k). No matter what put away as much as qualifies for employer matching. After that, once your short-term savings is funded and your Roth IRA is maxed, drop as much here as you can until you hit the federal limit ($15,500 / year for 2007). Research the mutual funds your 401(k) is invested in. If index funds are offered, take them--90% of mutual funds under-perform the market. If you're lucky your 401(k) plan will offer a wide variety of index funds. Take advantage of this. Avoid buying high-fee mutual funds. And for the love of Snoopy
don't buy one of those all-managed retirement packages--you know, the ones that set retirement dates and allocate all your funds for you. At 25 or 35 years old you should
not have 5-10% of your assets in bonds, dammit.
Money Chimp has a great overview of index funds if you want to learn more about their grandeur:
http://moneychimp.com/articles/index_funds/overview.htm
10. Once you've fully-funded your short-term savings and maxed out your Roth IRA and 401(k) plans it's time to start thinking about investing. A house is nice and typically a good investment--but really only if you like living in it. The stock market will
blow away real estate in the long term. I'm not saying don't buy a house--I'm saying don't buy a house as an investment.
So what should you invest in? Index funds. For many people that's the end-all, be-all answer. You just can't go wrong with them. Invest a set amount each month and watch your money grow. Never sell, only buy. You don't need to focus on only the S&P 500, either. There's tons of index funds out there. Emerging markets index funds. Sector index funds. Anything and everything. Go nuts.
11. Mastered all these steps and hungry for more? It's time to move on to individual investing, which is entirely beyond the scope of an intermediate-level personal finance article. I'd suggest learning from the masters--Buffet, Lynch, etc--and moving on from there. A bit of a warning, though--investing properly takes a lot of research. If you can't imagine spending a few hours each week reading financial documents save yourself the trouble and stay out of individual stocks. Most individual investors don't beat the market.
If you're up for it, however, it can be great fun and rewarding in more ways than just financially. There's a wide range of investment opportunities, from small-cap stocks, blue chips and a vast array of ETFs (exchange-traded funds. Basically index funds in security form).
Money Chimp and
The Motley Fool can get you on your feet.
Investing is a gigantic, magnificent world. Once your personal finances are in order, I highly recommend joining in.
