Archive for Personal Finance

Personal Finance Favorites

A friend recently loaned me the book Financial Peace Revisited by Dave Ramsey. It has a lot of good advice, though I find the writing to be somewhat wordy, and there’s a contradictory part about Roth IRAs versus regular IRAs that I think must have happened in the revision to the original book. However, my friend had loaned me the book to advocate responsible saving, investing and avoiding debt. She wanted to help make sure I don’t make the financial mistakes that can be easily avoided. I felt inspired by her desire to help me. Therefore, I want to help others also know how to avoid financial mistakes.

It is my belief that everyone should:

  • Spend less money than they earn.
  • Have absolutely no consumer debt. This means not going into debt for anything except school or a house.
  • Have an emergency fund in a savings account to cover 3-6 months of income.
  • Save as much money as possible every month in a high-interest savings account and in a retirement account.
  • Everyone should START NOW!

First, there are a lot of great resources on the internet, but it’s sometimes hard to know if a website has good information. So, here are some of my favorite sites:

  • Bankrate.com: This site has great calculators for renting vs. buying a home, saving money, paying off your debt, etc. Here’s a fun one to motivate you to save money NOW . Just type in your age, some amount that you would like to save monthly, and an interest rate. Use a rate around 10%, which is a good estimate of the interest rate you could get in an investment. I used a lower interest rate as a sign of mourning that the economy has slowed down recently.
  • FreeMoneyFinance.com: This blog has a ton of information. Start with the “Best of FMF” links in the leftmost column. I read a post on this blog about how to make an extra $10,000 per year by selling your used items, starting a business based on a hobby, or talking your way into a raise. Looking at all the textbooks and other items we’ve sold and the income from my tutoring business, we won’t quite make an extra $10,000, but we’ve made more than you’d expect.
  • IWillTeachYouToBeRich.com: This blog has bit more on being an entrepreneur than Free Money Finance, and the author is not much older than I am, so it’s motivating to see how we can manage money while we’re young.

Some of my favorite books (and a pamphlet) on personal finance I’ve read are:

So anyway friends… I just felt like trying to motivate you to save money now, or get out of debt, or stop spending more than you earn.

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Start Saving Now

This example has been given many, many times, but it makes such a great point.  Investor A contributes $2,000 from age 26 to age 65 (40 years, $80,000 contributed); Investor B contributes $2,000 per year from age 19 to age 25 (7 years, $14,000 contributed).

Compound Interest

Who ends up with more money at age 65? By contributing early, Investor B ends up with $36,937 more than investor A, even though he contributed $66,000 less of his own money. So start saving now!

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SNL Skit – Don’t Buy Stuff You Cannot Afford

Here is a hilarious Saturday Night Live skit with Steve Martin (as the host) about consumer debt.

“If you don’t have any money, you should not buy anything.” Classic.

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Textbooks for Sale

Scott and I have decided to liquidate one of our assets, namely our inventory of college textbooks. Amazon.com has revolutionized the way textbooks are bought. No longer are the students at the mercy of the university to buy their textbooks (new or used) at the university bookstore for a premium price. Student always had the option of selling their books back to said bookstore at the end of the semester, but the price paid to them was way below the books value, and the university turned around to sell those books to next semester’s students for three times what they paid last semester’s students to buy their book back. My university always touted how much money they had saved students with their buyback policy. What a boldfaced lie!…or is it baldfaced?

Enter Amazon, which connects you, last semester’s student, directly to next semester’s student. Since there’s no university ripping you off, you sell your books for a higher price than the university would give you and they buy them for lower than what the university offers. Ah, how I love Amazon!

Additionally, you can buy old editions on Amazon. They are usually less than five dollars plus shipping, and ye olde university bookstore would never ever even offer the old editions for sale. You’d never be able to find them. Scott and I decided to buy our textbooks back when and if we need them once they have become an outdated edition.

All in all, we’re still losing money by buying textbooks for our courses and later selling them for less than we bought them. However, by not letting them sit in our closet until they are outdated, we have minimized our losses. To us it seems like extra income, since we never planned to turn a profit on textbooks anyway. In just two months we’ve sold over $700 in textbooks. How cool is that?!

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The Millionaire Next Door – Thomas J. Stanley & William D. Danko

The Millionaire Next Door
Thomas J. Stanley & William D. Danko

This book is and should be considered required reading for…well, really for everyone, but at the very least for entrepreneurs and anyone interested in personal finance. The point is not just that there are average-looking people who live near you and just happen to be millionaires. The point is that you almost have to be average-looking to ever become a millionaire in the first place.
Stanley and Danko back up all their claims with statistics, and provide a lot of information about who the affluent of America really are. It becomes incredibly obvious how one should build wealth in this country. There is no trick to becoming affluent. You simply have to spend less than you earn. I don’t mean a little bit less. If you live well below your means, you can save millions before you retire easily on even a modest yearly income.

I personally like the equation given to measure your expected net worth.

Expected Net Worth = Age * Pretax Annual Income ÷ 10

If you are over this amount, you are a “prodigious accumulator of wealth” (someone who saves more than the average for their income and age); if you are under this amount you are an “under accumulator of wealth” (someone who saves less than average for their income and age). Where do you fall? Simply multiply your age by your pretax annual income and divide by ten. That is your expected net worth. Oh, and don’t forget to subtract from your net worth any inheritances that you have received. Money that you did not actually earn does not count.

Prodigious accumulators of wealth are those who are or will become your millionaire next door. What may surprise you is that many of those who live in fancy houses, drive expensive cars and wear trendy clothes and accessories are really not very wealthy at all. In fact most of them are under accumulators of wealth. Despite their six or seven figure incomes, they couldn’t live off their savings for more than a few months.

The mindset you have to have is that you want to become wealthy in order to be financially independent, to protect your family and to manage your own future. You will then budget, save and plan your personal finances. If you just want to have fancy toys, go ahead, but don’t fool yourself into thinking you are or ever will become financially independent without working to become so.

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