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Simplify Your Financial New Years Resolutions

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To start 2012, many people will set New Year’s resolutions to better their finances. Starting is the easy part, to follow through on the resolutions you will need to make sure they are simplified and effective.

Employ these 3 tips to ensure your financial resolutions are a life long success.

1. Create a Spending Plan (Budget)

Nobody likes the word budget so think of budgeting more like a “spending plan.” Rather than spending money with no plan and wondering where it went, create a plan that tells your money where to go. This gives you more control over your money and also provides a lot of security and piece of mind.

“Beware of little expenses; a small leak will sink a great ship” – Ben Franklin

2. Pay Off Debt

If you have high interest debt (i.e. credit cards) be sure to allot for it in your spending plan. This type of debt steals your wealth so pay it off as soon as you can to avoid throwing money away. I recommend using the debt snowball method in one of two ways:

  • Highest interest debt first – Arrange your debt snowball to pay off your debts in order from the highest interest rate to the lowest. This method saves the most money.
  • Smallest to largest debt – Order debts from smallest to largest and pay them off in that order. This method focuses more on small wins to maintain motivation.

3. Invest and Save with Betterment

Once your spending plan is in place and you’re apportioning money toward debt be sure to set aside money for saving and investing. This is where Betterment helps simplify things for us. Create savings goals for things like vacations, emergencies, auto repair and maintenance, etc., and begin funding them automatically from your bank account each month. This type of  “autopilot saving” is the only way to successfully save money. If you don’t do it automatically chances are you’ll save for a few months, quit when “something comes up,” and never start again. The simplicity of the Betterment system will help make you successful, all you have to do is use it!

Try Betterment now, they give a $25 bonus to all new accounts opened with at least $250.

Take these 3 important tips to heart as 2012 approaches and put yourself on a path to a financially fit future.

High Return Investments for Low Income People

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Betterment is now offering a $25 bonus for all new accounts. There are no minimum balance requirements to sign up and no transaction fees.

High return investment advice

Olivia asked:

Greetings Matt,

Do you know of any investment return situations for lower income people? The best out there for our situation seems to be ShareBuilder, or CDs. The idea of a “side hustle” has crossed my mind as well, like selling on eBay, or writing more extensively. Doing daycare, heavy lifting, anything that ties up the car, etc. are not options. Thanks for putting your mind to this.

Regards, Olivia

If you have debt…

The easiest way to make a high return on your investments is to pay off debt.  If you have high interest debt, focus on paying that off.  When you pay off debt you continually lower the principal value of that debt thus reducing how much your debt costs you each month.  I currently choose debt reduction over investing because I earn more by reducing debt.  When that debt is gone I will shift my focus to building my Emergency Fund and investing in low-cost index funds.

If you have NO debt…

  1. Build a 3 – 6 month Emergency Fund using a high yield savings account by funding it with automatic monthly contributions.  I prefer Capital One 360 as a bank.  You could also go with CDs but then you sacrifice the liquidity of your funds for no added benefit – at the time of writing CD rates are comparable to high yield savings accounts.
  2. If you already have your Emergency Fund in place consider peer-to-peer lending and invest with Lending Club. or Peer to peer lending is one of the most sound investment advice I can give would be
  3. Another wise choice is to focus your efforts on long-term, buy & hold investing using low cost index funds or ETFs.  With income limitations, a wise choice is to invest with Betterment.  Betterment is one of the easiest, most effective ways for the layman to invest in index ETFs, which is really the best investment I know of… and they’re currently offering a $25 bonus for all new accounts, so it’s a great time to check them out.

$25 Betterment Account Bonus

Betterment is now offering a $25 bonus for all new accounts. There are no minimum balance requirements to sign up and no transaction fees.

Save for Emergencies, invest in peer-to-peer loans, and focus on index funds and ETFs.

One of your biggest allies to saving and investing is automatic deposits and automatic rebalancing… which is another reason I suggest you invest with Betterment.  They allow you to set up regular automated contributions, make it easy to determine your risk profile and diversify accordingly, and automatically rebalance your portfolio for you, all for a fee lower then any financial planner will offer.  Good stuff.

Regardless of debt amounts…

You mention starting a “side hustle” – I would recommend you follow through on this.  Making money from a blog is possible, but not easy.  It’s very time consuming and is usually slow to show returns.  Unless you can afford to work for approximately 6 months with no return, then a monetized blog may not be your most lucrative route.

Make sure you choose a business idea you are passionate about.  Life is too short to spend our time doing things we do not like for money.

In Summary…

  1. Pay down debt.
  2. Build your Emergency Fund in a high yield savings account.
  3. Invest in peer-to-peer lending with Lending Club.
  4. Invest in index ETFs with Betterment – automation is your best friend.
  5. Start your own side business you’re passionate about.
If you need debt help or personal finance advice – Ask Matt Jabs.

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When Does Compound Interest Kick-in?

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The day we begin investing money into interest bearing accounts we begin to earn interest on that money.  But for most of us the interest amounts earned on our savings can be pretty minute for quite a few years.  Oftentimes piddly interest amounts earned can discourage investors and savers alike causing many to fore go saving altogether, opting instead to use their discretionary income on the here and now.

To help us avoid this huge mistake, let’s spend some time studying the meaning and payoff schedules of compound interest.

Kick-in = when we start seeing our yearly interest payments supersede our savings contributions themselves.

If we contribute to our savings regularly, when will compound interest finally “kick-in?”

Let’s take a look…

Compound interest explained

Compounding – The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.  Also known as “compound interest”.  source: Investopedia

Compound Interest – Interest that accrues on the initial principal and the accumulated interest of a principal deposit, loan or debt. Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.  source: Investopedia

Example: We have an annual salary of $50,000/year and save 12% of our pay.  At the end of the year we have $6,000, which earns us a 7.5% return in our retirement account leaving us $6,450.  If we continue to invest this money we earn interest not only on our original $6,000 but also on the $450 gained in interest on the original principal.

Why we should care

It can work for us…

Through the rough numerical examples above we are able to see how compound interest can be a very powerful savings tool that stands to benefit us more the longer we employ it.  That is why you always hear people saying to invest as early in life as possible.  The sooner we get compound interest working in our favor, the sooner we can live employment optional (my term for working when you want.)

Or it can work against us…

Anyone who has a mortgage is all to familiar with what I am about to say.  Let’s say your purchase a home for $150,000 with $0 down and finance it for 30 years at 5%.  You will have monthly payments of $805.23, with the majority going toward interest all the way until year 16 when your principal payments will begin to be larger than your interest payments.  When it’s all said and done, you will pay $139,883.68 in interest and your $150,000 house will end up costing you $289,883.68.

When does it pay off?

If we continue to save regularly, when will the yearly interest on our savings begin to supersede our savings contributions themselves?

The answer to that question is always going to be relative to how much we are earning and how much we are saving, but should generally conform to the secret of two times pay.

The Secret of Two Times Pay is a concept I recently came across while reading Your Money Ratios.  Author Charles Ferrell says that, “our finances hit a tipping point at about two times pay.” Charles goes on to say, “After you have saved two times your pay, the earnings from your capital will generally add more to your total wealth than the amount you save each year.”

Let’s consider our example from above once more:

Let’s assume we have been saving for 10 years and have $100,000 saved in our retirement account, or twice our annual pay.  With our 7.5% return the earnings on our $100,000 will be $7,500 which now exceeds our annual savings amount of $6,000.  This year we increase our retirement savings by $13,500 and more than half of it came from earnings on our capital.

How long will it take?

That all depends on you!

Don’t forget about the ‘Rule of 72’

The ‘Rule of 72’ – is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.  source:  Investopedia

Example: a 10% investment will take 7.3 years to double ((1.10^7.3 = 2).

Set a goal to save twice your annual income so you can begin watching your money work harder for you than you do!  This is a goal that is attainable with just a few years of disciplined, consistent saving.  Let’s use this as further motivation to stay on track.

All I know is the sooner we get out of debt and get started investing, the sooner we will be able to watch our capital work for us instead of us working for our capital!