I'm Embarrassed

It has been over a week since I posted anything! I apologize blogger world and be I promise real posts coming soon!

Saving for Retirement Should be a Priority

This is a post in my series on setting up your financial life series. Disclaimer: These are my opinions. I am not a financial planner or certified to give financial advice.

Budgeting is the first step towards becoming financially responsible. Once you've become comfortable with your budget and tracking where your money goes it's time to figure our your priorities. Saving for retirement should be a priority no matter what your age. In fact the earlier you start the better. Why, because of compounding interest.

Compounding interest happens when the interest you've earned on your money is added to the principal. In other words, the interest you've earned is also making interest! To better understand how this works play around with one of the many compound interest calculators.

So, for example let's say I'm 22 and start by putting away $200 a year for retirement. With 43 years to save I end up with $30,028. Now let's say I don't start putting money away for retirement until I'm 32 - 10 years later. To end up with $30K I would have to save $360 a year. Obviously these numbers simplify things a bit, so I encourage you to play around with one of these calculators!

The next question is how to save. If you luckily enough to have access to a retirement account through your employer and there is a match - take advantage! The popular rule of thumb is that if you do not have a match then you should be contributing to a Roth IRA (if you are eligible). Or you contribute up to your match and then open and Roth IRA for other contributions. My opinion is contribute to whatever makes it easier for you. Personally, I like contributing to my 403b because the money is taken out of my paycheck before I receive it, so I never miss it. However, I also have a Roth IRA.

When it comes to your actual investments, I'm not a financial advisor so I don't presume to give advice. Though I do advise you to make sure understand how much fees are involved in your investments. If you are not careful the fees can eat up all your interest. This is why I prefer index funds, with are low fee, and follow the market. In my opinion the only way to beat the market is to start saving young, buy and hold, and invest in low fee funds.

Should you try to beat the market?

My retirement accounts at work are through Fidelity and recently they sent me an email with links to a few articles. I particularly enjoyed the article Trying to Beat the Market?, where Fidelity lays out four solid investment strategies on how to maintain your retirement accounts.

When it comes to retirement this recession has been scary for a lot of people. I'm lucky, I'm young and realized that there was not reason to pull my money from the market. However, I did realize that I was not as comfortable with risk as I thought. However, I managed to stop my urges to move all my money out of stocks and as I watch my retirement accounts slowly move back up I'm thankful. This is why I like Fidelity's tips so much - they are not about beating the market, but instead about saving and know where your money is going.

1. Stick to an investment plan

Fear and greed have long driven investors to overreach, throwing money at stocks near market highs, and fleeing at market lows. But while sticking with your investment plan through the market’s ups and downs is challenging, it’s critical to help you achieve your goals....

If you were one of the “sideliners,” you learned the hard lesson that attempting to time the market can be costly. After all, you have to be right twice, when you bail out and when you get back in. That’s virtually impossible to do consistently, though it hasn’t stopped investors from trying. The problem is, investors’ habit of jumping in and out of the market tends to erode their returns.

2. Save, save, save

Building wealth is not just about returns; your contributions make a big difference, too. In fact, maximizing your own contributions may be one immediate way to make up for any recent losses. At a minimum, save enough to maximize the matching contribution, if one is available from your employer.

3. Stay diversified

Consider the performance of two hypothetical portfolios from September 2008 to February 2009, the worst part of the bear market. One portfolio held all stocks, while the other held 70% stocks, 25% bonds, and 5% cash. The all-stock portfolio lost nearly half its value. Meanwhile, the diversified portfolio declined by about a third.¹⁰ That’s a painful loss, to be sure—but less painful than the all-stock portfolio.

4. Manage job transitions wisely

If you switch jobs, you’ll have to decide what to do with your workplace retirement savings account. Generally, if the account balance is $5,000 or above, you can leave the money in your former employer’s plan. You also may be able to roll the funds into your new employer’s plan, depending on your new plan’s rules. Alternatively, you can roll your retirement savings into an individual retirement account (IRA), which also preserves the plan’s tax deferred benefits.

Any of these options is better than cashing out the account. Withdrawing your money not only erases your savings—it also subjects you to additional costs. You’ll generally have to pay taxes on the amount you withdraw, and if you are younger than 59½ you’ll also pay a 10% penalty for the early withdrawal.

The article also gives concrete advice on what to do to maintain these strategies. If you have the time or inclination I suggest you read it!

Budgeting 101

This is the first post in my series on setting up your financial life series. Disclaimer: These are my opinions. I am not a financial planner or certified to give financial advice.

No matter how old you are or what your financial situation is like, the first step to taking control is to know where you money is going. Trying to budget before you know what your spending habits are makes the likelihood to sticking to the budget slim. How do you know where you can cut back if you do not know exactly what your spending habits are?

As such, the first step is to track your spending for an entire month (I don't suggest using February). Trust me, once that first month is over you will be amazed at where your money goes and what it says about your priorities. I spend a large part of my budget on food, both groceries and dining out, but if I'm not careful I will end up spending a large amount of clothes. Food is my priority and so I budget accordingly.

During this month there are other steps you can be taking (from a previous post):

Figure out what is really important to you.
Prioritize. Decide what it is that you can't give up. Perhaps it is important you buy lunch everyday so you can socialize with coworkers, or maybe you can't live without your cup of coffee from that one coffee place.

Decide how much you want to save each month.
Take a guesstimate and choose an ideal number. Once you have finished tracking your spending you may find that you can save more, or maybe it's less. The important thing is that you start thinking about saving right away.

Make a list of your fixed expenses.
Include your rent, mortgage, student loans, other debt payment, internet, cable, utilities, newspaper subscriptions, etc.

Develop your goals.
Do you want to pay off your credit card? Save for retirement? Travel across the country? Figure out your goals and write them down.

Once the month is over and you have completed the steps above you can create your budget:

Budget for your fixed expenses first.
Make sure you have enough money for them and schedule payments to match your pay days.

Add your savings into the fixed expense portion of your budget.
Think of savings as a bill. It is something that should be paid at the beginning of every month. The key to being successful is to leave your money in your savings account. This money shouldn't be used to buy a new pair of boots that you had to have. You are saving for a reason (remember your goals) so the next time you want to take money out of your savings account, remember that reason.

Break up your non-fixed expenses into categories.
The way you decide to do this is completely up to you. You may want to identify a certain amount to be spend on groceries, household items, etc. Or you may want to have a lump sum you can't go over but you can spend on anything.

Be prepared to tweak your budget.

Your budget is a living document. You may end up tweaking it every month, or you may love it just the way it is from the start. Either way it is yours to do with as you like. Just use it!

Most importantly, remember the last point. The first budget you create is most likely not going to be the same budget you using six months from now. I am constantly changing and tweaking my budget depending on what is going on in my life and my shifting priorities. Consider your first budget an experiment. You are trying to figure out what works best for you! The goal is to do the best you can to meet your goals, not to beat yourself up every time you make a mistake.

Finally I thought I would give you some examples of real budgets:

I decide how much I'm going to try and spend in each category each month. However, if I go over I'm okay with it. My ultimate goal is to stay within a certain amount of what I call "liquid" spending (anything that does not include bills, necessary costs like transportation, and savings). I also track every penny no matter how small. I like to know where my money is going.

My F uses something he calls 'bonus money'. Any money that was not in his budget, like gifts, salary from part-time jobs, etc. he can spend however he likes. Sometimes he puts it into savings and sometime he treats himself or me with it. While I don't use it, I like the idea of 'bonus money'. It feels like freedom to every once in a while spend money on whatever your want without having to track it.

My friend doesn't use categories at all. He just tracks the amount of money he spends every day and tries not to go over the total amount he allocates to spend each year.

As you can see budgeting is personal, but it is also an important step to setting up your financial life.