Let's talk personal finance

[Skier]

Since being out on my own after graduating college, I've taken an interest in personal finance. It is truly amazing how easy it is to get started with getting a hold on your finances. Many people have overcome thousands upon thousands of dollars of debt by taking easy, simple steps. You can find a ton of information on the many personal finance blogs. Here are a few of my favorites:

Get Rich Slowly. The author has overcome over $35,000 of debt. Great articles with an amazing amount of information, success stories and more.

The Simple Dollar is another prolific blog. Some of my favorite entries are also the most popular, such as making your own laundry detergent and making homemade bread. Another great writer.

Generation X Finance isn't quite as prolific as the first two but has great information.

The three steps you'll find mentioned in all of these blogs are:
1.. Set up an emergency fund.
2. Eliminate debt
3. Save for retirement.

Naturally, the second and third steps may be reversed depending on your situation. It doesn't make sense to pay off low-interest debt when you can get a better return in the stock market for your retirement fund, especially if your employer offers contribution-matching. Employer contribution matching is basically free money.

The biggest help I've found is automating the process.

For about 12 months after I started my decent-paying fulltime job I didn't have an emergency fund. I started one up in a high interest money market account, FDIC insured, with monthly automated payments right after my paycheck was deposited. The interesting part? I never missed that $100 a month. While my paycheck was whittled away before, a chunk of it was automatically put away to an account I didn't withdraw from. The account ballooned in value over the next 12 months as I realized this and started increasing my monthly payments. It's at a very comfortable level now: I could lose my job and continue my level of living for three to six months without a problem. Plenty of time to find a new job, even in this town.

An emergency fund works very well for us motorcyclists. I wrote an entry on it in my new blag.

The article is for a general purpose emergency fund, which every rider should have, but it can be applied to motorcycles, as well. Having an extra couple thousand dollars in a bank account can make accident repair or big maintenance services much less painful.

Go take a look at some of the links. Read a few articles, some of the success stories and get your finances in order. It truly isn't difficult: let automated finances start your journey to financial security.

[High_Side]

Start young (first job, first paycheck), and maximize your contributions in tax sheltered equity funds. Don't waste your time in low paying jobs. By the time you are 40 you shouldn't have to worry about retirement

[Loonette]

You're very wise to be thinking of this now and to be taking steps toward a healthy financial future. Neither "Scan" nor I had any sort of good role model in the area of financial management while growing up. When we first got together we were dirt poor, and once we managed to obtain our first credit card, we slowly slipped down. By our early 30's we had more than $30,000 in debt to manage, not including our car and student loans. We managed to take care of that mess within 3 1/2 years, but then got sucked down again. Now we're doing it all over again (not quite as much, but still...).

We've taken better steps this time to track our money and have some set aside for old age - we also have good life insurance now to protect each other and the kids.

So again, kudos to anyone who faces this small challenge early in life - it's much better that waiting until you're in your 40's to get things together!!

Cheers,
Loonette

[storysunfolding]

I had a great role model in my grandfather. When my friends got out of college they all got expensive apartments ($1200 per person a month), new cars, and go out a couple times a week.

I on the other hand pay $600 a month with utilities. My 98 jeep wrangler is paid off, so is my V-strom, ninja and triple. My undergrad debt is paid off (grad school debt building ). I don't go out all that often. And I'm very careful with what I spend... other than with motorcycles. Over the last three years I've saved up almost two times my salary which will cover med school as soon as I get accepted. If I decide to go military medicine, I'll have half what I need to buy a house in this area.

Best thing to do if setup a budget and get rid of that debt first thing.

[koji52]

Everyone is always wants to get rid of debt. I feel that it is important to note that generalizations should not be made about debt as some is not bad. Debt definately plays an important and healthy role in building wealth. To me, that debt includes mortgages, traditional student loans and non-excessive low interest rate car loan. Pulling out debt now to do things that will later produce some kind of return is necessary to create personal wealth. It's the high interest credit card debt (though even this is necessary at times) and excessive loans for unecessary luxuries that are bad.

Hell, some debt (student loan and mortgage interest expenses, namely) give you tax benefits.

[Skier]

Everyone is always wants to get rid of debt. I feel that it is important to note that generalizations should not be made about debt as some is not bad. Debt definately plays an important and healthy role in building wealth. To me, that debt includes mortgages, traditional student loans and non-excessive low interest rate car loan. Pulling out debt now to do things that will later produce some kind of return is necessary to create personal wealth. It's the high interest credit card debt (though even this is necessary at times) and excessive loans for unecessary luxuries that are bad.

Hell, some debt (student loan and mortgage interest expenses, namely) give you tax benefits.

This is a topic many are still unsure about. I agree: there are kinds of "good debt" that help you build wealth. As you mentioned, student loans are one of the types of good debt. Yes, loans mean you owe someone else money, but it was money spent on an appreciating asset: your education. You can make more money with more education and degrees. It also helps because you can build a history of making payments on time for many years, improving your credit score.

The tax benefits for student loans aren't a large amount but should also be taken into consideration. I knocked off almost $700 from my gross income from paying student loan interest.

Back to the topic of emergency funds, Get Rich Slowly has an article covering it as one of the steps to get out of debt.

Establish an emergency fund

(This step will probably take several months.)

For some, this is counter-intuitive. Why save before paying off debt? Because if you don’t save first, you’re not going to be able to cope with unexpected expenses. Do not tell yourself that you can keep a credit card for emergencies. Destroy your credit cards; save cash for emergencies.

How much should you save? Ideally, you’d save $1,000 to start. (College students may be able to get by with $500.) This money is for emergencies only. It is not for beer. It is not for shoes. It is not for a Playstation 3. It is to be used when your car dies, or when you break your arm in a touch football game.

[koji52]

I think for those unsure about the issue, consider this:

Debt provides a relatively cheap alternative to raising funds in order to invest and enjoy certain things in life. With all debt, however, people should be weighing the return they could be getting on their own money vs. the cost of their debt. You could spend all your cash paying down debt or you can maintain that debt and invest the cash elsewhere. Even paying down debt has a price in the long term. Over the long term, investing that money in index funds matching the stock market rather than paying down debt will yield you a higher return than the interest that you save. Additionally, you get a tax benefit from the interest on your loan payments.

For example:

Return on market (Dow Jones Industrial Average) over last 10 year period minus fees of we'll say 5%: 38.48%

Tax on this gain today (estimate 15% according to today's law...I'm no tax expert): 32.71%

After tax cost of debt (at a long term fixed federal student loan at 6% each year, for example) assuming a 25% tax rate: 4.5% per year. This over 120 payments (10 years) ends up costing 24.36%.

There's about an 8% difference in there. This is a $1 to $1 debt to market investment comparison.

Dollar for dollar, you may be paying more in interest in the early years of your loan than you may make on the market. This all depends on how much you have in loans vs. how much you have invested. When you're young this is probably a given because you don't have much to invest and you have more in debt. However, if you can make payments and still afford to put some money towards your investments each month, reinvesting your earnings and gradually adding more money to your investment you will win out in the end.

I really feel that the "emergency fund" should follow the same philosophy as I just stated above. While some of the emergency fund should be kept liquid, there is no reason to maintain all of your savings in a 4.5% yield savings account. The debt snowball I also disagree with. Paying more towards the principal of high interest debt will cost less in the end than just paying the lowest balances first.

Edited: Now is an apples to apples comparison

[koji52]

The above post doesn't take into account inflation and loss of buying power per dollar. If you take into account inflation from year to year, the dollar difference becomes even greater. $1 now is going to be worth much less 10 years from now. If you're interest rate isn't going to change, you definately shouldn't worry too much about paying off that debt.

[Skier]

The debt snowball approach is not the most efficient way to pay off your debt. However, it's the best way for feeling good about it. Being able to cross off an item on your "people I owe money list" provides a great confidence boost and can lead to bigger steps. As the name suggests, you build a large snowball of debt-obliteration by starting with many little flakes.

Your view on investing versus debt is optimistic: From what I understand, a 10% return in the stock market is more reasonable. Many credit cards have an interest rate above that, especially if you already have bad credit. In that scenario you would want to pay off the credit card debt before investing in the possibility of a 10% return.

[koji52]

I fully agree on paying off credit card debt first. It was the long term debt I was referring to maintaining. The return I had found was the actual 10 year return the Dow Jones Industrial produced. 10% over one year is a reasonable return on the market on average. When the market is good you could stand to make more than a 20% return whereas when the market is not doing well (like now) you could be losing money.

I will correct a flaw I made. I'm not completely comparing apples to apples there.