In an earlier entry about the cost of waiting one year to begin investing for retirement, I posted a chart from AllFinancialMatters that demonstrated the power of compound returns. Vintek posted a math exercise related to the subject.

I got this from a book called The Random Walk Guide to Investing by Burton Malkiel. It's a book I recommend, and I'll eventually talk about it in the forum. Here's the exercise:

William and James are twin brothers who are 65 years old. 45 years ago (at the end of the year when he reached 20), William started an IRA and put $2K in the account at the end of each year. After 20 years of contributions, William stopped making new deposits but left the accumulated contributions in the IRA fund. The fund produced returns of 10% per year tax-free. James started his own IRA when he reached the age of 40 (just after William quit) and contributed $2K per year for 25 years, making his last contribution today. James invested 25% more money in total than William. James also earned 10% on his investments tax-free. What are the values of William's and James's IRA funds today?

Richard Jenkins at MSN Money has developed what he believes is a simpler way to save. Fed up with budgets that were a burden to implement, Jenkins came up with his own easy method to determine how much should go where each month.

What you're trying to do with a budget is to prevent overspending, which ultimately leads to piling up debt. Contrary to the way most people budget, however, it rarely matters what you're overspending on — dining out, entertainment, clothes. Who cares? It's still debt, right?

Jenkins proposes that your budget divide gross monthly income as follows: Continue reading...

An AskMetafilter user wonders: How many credit cards do typical people have?

For various reasons I have four credit cards. I always thought of this as too many, but haven't cancelled mine since the crappiest one is also the oldest, and has no fee, and I want to maintain the age of the card on my credit report. Most people I know have one or two cards. But reading online forums on credit, I see plenty of people with more than four. How many is normal? How many do you have?

According to How Many Credit Cards is Too Many? at MoneyCentral, "most Americans carry between five and ten credit cards". According to Steve Bucci at bankrate.com:

Every year I try to review the steps in Your Money or Your Life to see how we're doing. It's been about two years since my last review, but much to my delight, I found we are following most of the steps well, and I just needed to update some numbers.

Step 1: Making Peace With The Past

Determine your total lifetime earnings

The book was written before the Social Security Administration started sending out statements. If you have earned income all your life through regular jobs, this is extremely handy. I needed the numbers from my last review in 2004, Social Security statements, and our last tax return. The combined number for me and the Spousal Unit: $865,872.

Determine your net worth

So what do we have to show for all that moolah? Often, this is a depressing part of the assessment. Until recently, I came up in the negative, which is fairly common. For the last review, my net worth was a whopping $2,869. So. Add up assets: I include anything in the house that I could sell for cash, all bank accounts, current market value on the house, investments, etc. $316,183. Now for liabilities: the balance on the house, any other loans or credit card balances, and a tax debt from being a goob last year: $231,690. Net worth: $84,473. Hey! That's not entirely bad. I can tell you this: most of that increase is because we stopped throwing money away on rent and bought a house.

Just finished David Bach's Start Late, Finish Rich. At 42, I thought it would be a good intro to Bach's many treatises on personal finance. I'll come right out and say I highly recommend this book. It was full of great information, and took an optimistic, yet realistic tone. I'll try to touch on some key points.

Yes, because you started late, you are going to have to work twice as hard to put away some cash for later, but there are ways to make it less painful. Look at your every day expenditures. Is there something simple you can do without? He calls this the "Latte Factor", because so many of us spend a few bucks a day on fancy coffee. My personal Latte Factor is buying lunch and snacks, instead of bringing them from home. I can spend up to $12 a day on soda, breakfast, lunch, etc. I've cut that down to once or twice a week, and it's making a big difference. Not to mention the fact that my own meals are more healthy and delicious than anything I can buy.

Credit cards: it's the interest. Bach gives instructions on how you can call your credit card company and get them to lower yours, or how to transfer your balance to a card with a no-interest introductory offer, and make a big dent in the debt before fees and interest kick in. That last idea is a particular winner. Imagine you have $3000 credit card debt, at 18% interest. Your minimum payment is $50/month (always pay more than the minimum! But for this exercise, we'll stick to it). At the end of the year, your debt is $2940. Yes, you've just been paying interest. On the other hand, if you transfer to a card that offers no interest for a year (and don't forget to cancel that first card!), and make those same $50, at the end of the year your debt is reduced by an additional $540. Maybe it's time to take a closer look at those ubiquitous credit card offers.

Community colleges are an oft-overlooked resource for cheap education. They offer classes from trained professionals and provide access to expensive equipment that you otherwise would never be able to use. I love community college for several reasons:

Affordability

Community college classes are affordable. Despite recent tuition increases, a class at Portland Community College costs about $200. Community education courses (non-credit classes) cost even less. Some employers will pay for classes; my business will pay for one class per employee per term. If your employer doesn't have a similar policy, ask!

Facilities

Community colleges offer facilities and practical training unavailable at most universities. My local community college has a wood shop, an automotive shop, and quality darkrooms. Many students take classes simply for access to the facilities. A typical woodworking class is self-directed—you decide what your project is and then have open access to expensive equipment and an instructor willing to help you use it. Continue reading...

In the middle of December I received a bill for $5.30 from Sprint. There's nothing remarkable about this except that I've never had a Sprint account! I immediately called the customer service phone number on the bill. It only took a few moments to reach a live operator. "There must be some mistake," I told her. "Why am I receiving this bill?"

The operator tried to explain. "Well, sir, the Federal government recently approved a monthly fee for certain types of accounts." Notice how this phrasing is meant to make you believe the government is levying this fee.

"No," I said. "I don't care about all that. I mean why am I receiving this bill? I don't have a Sprint account. I don't think I ever have."

Nearly every financial adviser — from accountants to brokers to books — advises that debts should be paid off in a particular order: from highest interest rate to lowest interest rate. While this method makes sense from a mathematical point of view, it makes less sense from a psychological point of view.

The Traditional Approach

Assume a typical young woman in her mid-twenties who awakes one morning to realize that she's in debt and who decides to do something about it. She might be burdened with the following hypothetical liabilities:

• $20,000 college loan at 5%
• $8,000 credit card balance at 12%
• $2,000 computer loan at 10%
• $3,000 car loan at 4%

Most financial gurus would advise that the debts be paid off in the following order:

"Track everything you spend" is one of the key steps to getting rich slowly. It's easy to do this after the fact using a personal ledger or software such as Quicken. But how do you plan for expenses?

A budget is the best way to see where your money needs to go. Some people keep detailed budgets, and adhere to them religiously. Others — such as myself — keep loose budgets, and use them simply as guidelines. Whichever kind of budgeter you are, PearBudget is an excellent tool to help the process.

PearBudget Spreadsheet

PearBudget is a FREE budgeting program, written in Excel. It can be used by almost any spreadsheet program (Excel, Word, OpenOffice, etc.). Setup is a snap, and it takes less than half an hour a month to maintain it and see how you're doing. (And—did we mention?—it's free!)

Continue reading...

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