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The Real Story About $1 CEO Salaries

I was looking at the new Money Blog Network and noticed a post, by JPL of All Things Finanacial, about the top Google Exec's pulling down only $1 for their salaries. This is something that Steve Jobs has been doing for years, as well as other execs. Now, many of you are aware that they are not getting compensated with just a $1 salary. Many of them receive annual bonuses that could make your ten year income look pitiful. However, a great amount of their salary comes from Incentive Stock Options (ISO). Understanding ISOs and their tax implications sheds considerable light on this perk of taking a miniscule salary in exchange for hefty stock options.




So what is all the fuss about this? Well, for starters, it is only a PR stunt. These guys get huge compensation; They have $6.3 billion in Google (GOOG) already. But, they will likely get more stock in the form of Incentive Stock Options. Essentially, Incentive Stock Options are given to executives of companies. Non-executives that receive stock options usually receive Non-Qualified Stock Options (NQSO). There are two differences here. One, NQSOs are taxed when they are excercised, whereas ISOs are not. What is excercising? Well, with stock options, you are given the opportunity to purchase stocks at the lowest price in a period. This means, a stock may have been worth $10 at some point in the period, but it may now be worth $20. So, if the stock reaches $20, and you can purchase it at $10, you have already doubled your investment. For ISOs, you pay no taxes on that amount. However, for NQSOs, you pay short-term capital gains tax on the difference. Further, short-term capital gains tax is the same as your marginal tax rate. Once you purchase these shares, you have excercised your options.


Now, if you hold your shares for at least one year after you have exercised them, you qualify for long-term capital gains tax on the difference. So, let's assume that the stock is worth $30 after holding it for a year. If you purchased the shares with NQSOs, you pay long-term capital gains tax on the difference of the shares when purchased to the time they are sold (so, you paid your marginal tax rate on the difference between the purchase price and the value at the time of purchase, and you pay long-term capital gains tax on the difference between the value at the time of purchase and the time of sale). If you purchased these stocks with an ISO, you pay long-term capital gains tax on the difference between your original purchase price ($10) and the sale price ($30). Now, assuming your marginal tax rate is 28% and you purchased 1000 shares, you paid $2800 ($10 * 1000 * .28) in marginal taxes for the year you exercised your stock options, if you did so with NQSOs. When you sell them you pay $2000 ($10 * 1000 * .20) in long-term capital gains tax, for a total of $4800 in taxes. Now, if you purchased these with ISOs, you pay $4000 ($20 * 1000 * .20) in capital gains tax when you sell the shares. So, as an executive you get a tax break already, as compared to non-executives that receive NQSOs.


So, why would a company elect to give employees NQSOs rather than ISOs? Because they get a tax break for doing so. Executives get it because they are priviledged, or something. But this is not where it ends. If you earned more than $326,450, in 2005, your marginal tax rate would be 35%. The long-term capital gains tax is 20%. So, you take a $1 salary which places you in the 10% marginal tax rate for your earned income (of only $1), and you get a bunch of ISOs that are taxed at 20% when you sell them. So, you are saving over 42% in taxes. These guys don't seem like such great statesmen after all, do they? I do not necessarily think there is anything wrong with this, but having the proper perspective really helps when you may be deceived by someone's character, which is what this has typically turned out to be. For instance, both Apple and Google try to display a corporate image of liberalism. They show the executives as earning $1 salaries by choice, they give employees help with purchasing hybrid automobiles, and the like. However, they are avoiding taxes, which most American's try to do, but their image is displayed to the contrary. I am not really trying to persuade anyone, but just dismiss the illusion of what is being conveyed. And maybe, this is a great way to handle CEO compensation, because their compensation gets tied to corporate performance.



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New Salary Figures for MBAs - Consumerism Commentary - A Blog About Personal Finance

New Salary Figures for MBAs - Consumerism Commentary - A Blog About Personal Finance

Okay, I have finally decided what I am going to do after I graduate this May. I started out backwards, and I think it is going to help me in the long run. I started working in IT for a consulting company when I was 18. I put off going to school until I was 22 (this was a mistake, I should have started when I started my job, but it is a blessing to not postpone working until you graduate). I will graduate with my BS in Information Systems from the University of Indianapolis School of Business, at the age of 25 (completed in three year while working full-time).


So, what I am doing after that? I was debating on starting an MBA program, a JD program, or a joint MBA/JD program. The latter would be great as it knocks a year off the total time to complete the degree. However, my wife really wants to start her degree program, and she deserves to start it. She has put up with the school work nearly every single night after working (it has been a huge drain). And she has done a great job with the kids. So, she has started back at school by taking a couple of classes online. She already has a couple under her belt, anyhow. Hopefully, she will be done with her AS in Nursing within a year and half. Then, she will find somewhere that will pay for her to finish her BS. That seems like a long time to wait (especially since tuition is always on an upward trend) when I could be making more if I had an MBA. So, Indiana University has a top 25 MBA program, and currently, has one of the best online MBA programs around. It is highly recognized (way more than University of Phoenix), and it from a school I would have liked to get an MBA from anyway (second to Notre Dame). However, it is expensive at $850 per credit hour. So, I think I will try and talk my employer into paying for at least half of it. They may pay for it all, but when they see that price, it may cause my companies president to have another heart-attack, and I don't want to be responsible for that (really, this is not a laughing matter, he is at home recovering from one right now).


Anyhow, I really want an MBA, just because it is one of my goals (and I am a very goal-oriented person). Also, I would really like to get very close to, or exceed, the six-figure mark on my salary. If you would have asked me, last year, if I thought I could get there in the next five years, I would have probably laughed so hard that I would have went into convulsions. However, with the career move that I made this year, I can see myself hitting $75K within three years fairly easily (without an MBA)... why not bust my tail and go for $100K.


Then, I could always go for a JD in a couple years after that... maybe that is what I can do when I become semi-retired at 25!


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MSN Money - The perfect portfolio of funds

MSN Money - The perfect portfolio of funds: "of investments designed to deliver the best"

Well, here is a nice article that discusses the Monte Carlo analysis. It is a conservative look at investing returns. However, every single fund selected is run by Vanguard! I wonder how much this guy is getting paid... Further, conventional wisdom suggests that no more than 15% of your assets should be allocated in one fund. There are two funds that have allocations of 31% and 30%.


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Sharia Compliant Bank Opens in Michigan

PRESS RELEASE $15,581,000 Deal Forms 1st U.S. Sharia'a Compliant Banking Sub

You have probably already heard about this. I heard about it on December 30th while listening to the Michael Savage Show. I dismissed for sometime because there are a lot of people, including Michael Savage, getting all worked up about this. The reason the bank was created is that Sharia Law (Islamic) does not permit the acceptance or payment of interest. So, this bank operates without collecting or paying interest.


Mike was all up in arms about this. He is under the impression that 1) They are FDIC insured, and 2) Get to buy their homes at market value at zero percent interest. Here is what we know: the bank is FDIC insured and home owners pay zero percent interest. I know, it sounds backwards, and it is, but it is all about semantics.




Technically, the bank should not be FDIC insured. It should be NCUA insured... which is basically the same thing (because it provides the same coverage) but is for credit unions, which is basically what this "bank" is, beyond that the fact that they are not a non-profit establishment... they are publically traded. So, that is why they are FDIC insured.


How do their mortgages work if they do not pay interest? Do they really get away with not paying fees to borrow money? Calm down a bit for a second on this one. They pay fees... just the same as anyone who goes to a non-Sharia compliant banking institution. Here is how their "mortgage" works: 1) Borrower applies for a "mortgage" and the bank approves it and sends funds to seller, 2) The bank sets up a trust account which amortorizes when its value equals the original principal of the amount borrowed, 3) Borrower pays "rent" each month where a portion goes to the trust account. Essentially, they are buying the home in a lease-to-own contract and will pay the same amount as if they got a normal mortgage. So, what do we have? A moral sham. Instead of following their moral convictions, they are rationalizing some way of making themselves feel moral by doing the opposite of what they believe. I do not see anything wrong with interest... but I see something wrong with people who do not hold true to their own convictions. If your convictions restrict you from interest and you rationalize your way into paying interest under a different name... well, you figure it out.


Here is the part that really makes it a credit union. When customers open savings accounts, they are not paid interest, but they are paid a share of the profits. This is what a credit union does... it is still interest, but when you place money into your savings account, you are purchasing shares of the credit union. The only difference here is that it is a publically traded, for-profit, company. So, they are purchasing "phantom-shares" and get to share in the "profits" rather than receive interest. Mike was under the impression that no matter how much money you put in, be it $10 or $10,000, that you received an equal share of the "profits." This simply is not the case. As a matter of fact, I am sure they give an "APY" for your investments... but they call it something like a annual return yield or something...


I only have two problems with this: 1) they are FDIC insured and only provide services to muslims which seems like a violation of the First Amendment (isn't it funny how people are quick to jump to that conclusion for Christians?), and 2) It is just rationalizing moral, or more correctly, it is an experiment in moral relativism, and it is a sham.


By the way, shout out to Michael Savage! I am not criticizing you... you were just emotional at the moment, and I understand... that is why I listen to you!



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Why Am I Doing All of This (10-Year Plan)

I have become quite obsessed with finances lately. January 1st was the fiscal birth of my 10-Year Plan, but it is something that is already over a year old, in my mind. I have been so anxious about opening my HSCB Direct Saving Account that I have been driving them nuts. Why all the obsession? My past.


Here is a breif run down of my situation:



  • I am 25

  • I am approaching my seventh wedding aniversary

  • I have three daughters

  • I have over $100,000 left on my mortgage

  • I owe a little under $20,000 on two fairly new vehicles

  • I have been working in IT for nearly seven years

  • I will be completing my undergraduate work in May




Now, this may not seem very bad... I by all accounts I should not be complaining. I love my family, and they have a nice home, and we do not suffer. However, this was not always the case.


My father died in a motorcycle accident just before I turned six. He was only 26 at the time. He was smart enough to have a life insurance policy, and I received $60,000. He was divorced from my mother, and she was not to get any of it. However, she got half of it somehow and blew it on a car and clothes and gave $10,000 to my grandparents. So, it is down to $30,000. It got put in an annuity and I could not touch it until I turned 18.


In addition, my mother received about $800/month in Social Security benefits, in my name, to cover things for me (replaced child support). I soon received a monster of a stepfather, and then the trouble began. He made decent money, and my mother worked most of the time. You would think that we would have been financially sound, but that could not be further from the truth.


While I lived with them, I had to work to buy my own clothes and my lunch money for school from the time I was 12. This is not entirely bad, except for the fact that my living expenses should have been covered by the $800/month in Social Security. My mother had to sell her decent, but modest, Pontiac Grand Prix because she could not keep up with the payments, but my stepfather spent $500 a month on a boat that we used one-third of the year. I wanted out.


The day before my eighteenth birthday, I was on my way to work and I got into a physical altercation with my stepfather (this was not the first). I was gone. That was it.


The next day, I am wondering where my $65,000 (I cannot believe it just barely increased two-fold in twelve years, but that is what happens when you get into a stupid annuity with a ridiculously low interest rate... especially for the mid-80s) is. I try to find the lawyer who was the custodian over my annuity. Apparently, he became the judge for a small suburb town court (and I just met him last week for a stupid speeding ticket and he cost me another $2,500 in increased insurance and fines... and no, I was not speeding... the officer did not even have his radar gun out... sorry for ranting). So, I talk with one of his friends, and he sets it up so I can get $5,000 out. I figure that should be great, I will be able to get a new car (part of the altercation with my stepfather resulted in the inability to drive my car), and I will have some left over to keep me from being tempted to pull the rest out.


A month rolls by, and I am about to get married, and I need to find a place of my own. I had always planned on using the money and buying a foreclosed property and then I would fix it up, and I would flip properties for a while (I was thinking about this when I was ten). Well, I was too excited. Instead of being patient, I bought a freaking mobile home! WTF!?! I paid $19,000 for it and then spent abother $6,000 on appliances and furniture. I had also quit my job, so I was living off of my annuity by this time. Finally, I got married, and I got a really good IT job for someone with no college, and no experience. I made more than enough to get my in by hillbilly shack on wheels (actually, it was quite nice for what you would expect from a mobile home). I had the best health insurance I have ever witnessed, and they would pay for me to go to school. I started taking classes one night a week after work, but it seemed to hard, so I stopped.


About a year later, tax time rolls around and the IRS is pissed. Apparently, I was not supposed to touch my annuity for another nine months after I turned 18 (the freaking lawyer said nothing about that, nor did Prudential). So, I owe the IRS $10,000 for a penalty, and I owe them taxes on the money (I had no idea... I was a silly snot-nosed kid). Annuity gone, and then some. No house flipping. No college. Then the branch office closes of the company I was working for.


Well, the branch manager started his own company, hired me, and gave me a $5,000 raise (no what I know now, I should have asked for $10,000 because of the troubles that would follow me for dealing with him). The place lasted six months, but I was able to find a lateral position before they went under. And I had just bought a house that was about $200/month more than I could afford.


Well, I became depressed and stopped going to work. Then, I nearly foreclosed on my house. I met a super nice Realtor that was able to help me sell it before it foreclosed, though. She is one of the best contacts I have made in my life.


I had no home, and we moved in with my in-laws. I found a very good job for the economy at the time, and I was making about $8,000 more than before. I worked there for nine months, and then I was fired. We had just moved into an apartment to get out of my in-laws... back to the in-laws.


The only job I was able to get paid what my original job was paying, minus any benefits. I just kept working that job, though. Then, I finally got enough courage to start school. Too bad, though. I went to a barely accredited school that offered training courses for certifications. This was great, because I could use financial aid to get my certifications. I was determined to pull myself out of this mess. I got the certification, MCSE, and then I found a new job that started the week after my contract was over! Great! I wowed them. And I worked there for almost three years, and went to school full-time, in the evenings while working full-time. I started a 401(k) (which is now in my Rollover IRA), and I paid off my vehicles and saved for a down payment on a new home.


Time for a breather. Okay, so, we get into the new home, and I get a new boss. He is really stressing me out. I find the best job I have ever had, and I get a 40% raise! Yippy! Plus their 401(k) match is awesome, I put in 5%, they put in 14%, I am almost getting 20% of my pay saved for retirement without it affecting my take home pay too much!


Anyways, I have been down some slippery roads very early into my adulthood. I have seen people not make ends meet when they were more than capable, and I have done so myself. I will be graduating from school soon, and then my wife will be going to school to become an RN. I want to work from home and have ultimate flexiblity. And when my wife starts working, she will only be working three or four days a week (but still full-time). So, we will have insurance, and three or four days a week together instead of just two. That is why I am doing this. We have been through a lot already, and we deserve to give ourselves the future that we desire. I want to be financially secure before any of my kids start college. I want them to see financial success, and to learn from it. And, I want them to know they have a father that can put them first, no matter what.



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Tax Time 2006

It's that time of year again. Whether you are receiving a refund, or you have to pay more, taxes are always a daunting task. If you are focused on your finances, taxes are always on your mind. Outlined here are items for general understanding of taxes, items you can use to retroactively help for 2005, easy deductions, and how to get a good start for 2006.


You may have years of work experience under your belt, but you may not have even a rudementary understanding of taxes. That is not to say you are not intelligent; let's face it, taxes are messy. But, here are some quick items to help you understand taxes.






Get Your Tax Refund Faster -- TaxBrain




So, what bracket are you in for federal income tax? Its a simple question, but it is not cleary understood by most taxpayers. The IRS has a nice page they have set up to help you determine your tax bracket given your filing status and income. These brackets indicate your marginal tax rate.


For instance, let's assume that you are married, filing jointly, and your income is the nation average of $60,000 per year. This means that your marginal tax rate is 25%, or that you are in the 25% tax bracket. This does not mean that you are liable for 25% of your income, however. In the table provided on the IRS website, it indicates that you are liable for 25% for any income over $59,400, plus $8,180. This equates to $8,330.


Essentially, you pay taxes at a rate of 10% for income up to $14,600 (married filing jointly), 15% on income exceeding $14,600, but up to $59,400, and 25% on amounts exceeding $59,400. So, if you earn $60,000 you are actually liable for 13.88%, or $8,330 divided by $60,000. As you can see, this is not all that difficult. Now, comes more complex items that allow you to reduce your liability.



The first step to effecting both your liability and your tax bracket is calculating your adjusted gross income, or AGI. AGI is all income minus pre-tax deductions. What are pre-tax deductions? They are deductions that have been deemed by the IRS as an expense for which you should not pay taxes. These include insurance premiums, 401(k) or 403(b) contributions, flexible spending account deductions, and the like. This is the easiest way for you to get into a lower tax bracket, which can dramatically reduce your tax liability. For instance, let's assume that you deduct $150 for insurance premiums, $200 to a 401(k) account, and $50 to a flexible spending account per month. That addes up to $400 per month, or $4,800 per year in pre-tax spending. You then subtract $4,800 for $60,000 and you adjusted gross income is $55,200. This means you are now in the 15% tax bracket, and you tax liability has been reduced from $8,330 to $7,550 ((($60,000 - $4,800) - $14,600) x .15 + $1,460).



Kids are great, aren't they? And, they can bring you an added bit of joy during tax time! You are able to deduct $3,200 for yourself, your spouse, and each child from your adjusted gross income. So, for your family of three you can deduct $9,600 ($3,200 x 3) from your adjusted gross income. Your AGI is now $45,600 and your tax liability is now $6,110. Since you have this child, let's assume that you purchased a new home to accomodate this new child!



Now, you have your base liability out of the way, and you can begin deducting items allowed by the IRS. One of the best deductions around is for mortgage interest on your first and/or second home. Your mortgage company should supply to you a 1098 form that has the facts about your mortgage that are important for tax purposes. Let's assume that everything is simple, and you purchased an average home for about $100,000, and you paid $5,000 in interest for 2005. There are some crazy calculations for determining your deductible interest if you have second mortgages, HELOCs, second homes, etc., but we are going the simple route. If this is you, you can most likely deduct all of your interest and it will go on schedule A. Now, you subtract $5,000 from $6,110 and you are left with $1,110. You have now reduced your liability by ~86% from before adjusted gross income.


Now that you only have $1,100 left to reduce, it get's to the nitty gritty. Here are some things to look for:



  • Charitable Donations

  • Work-related Relocation Expenses

  • Education Expenses (including interest to student loans)

  • The Cost of Tax Preparation


Using tax preparation software, like Turbo Tax, can also help you to find hidden deductions.


So, now that you have a better understanding of some very simple tax deductions, and how taxes work, you can begin to plan for 2006 by utilizing items that you previously left untouched. As stated earlier, pre-tax deductions are quick and easy, and can also help save you money on medical expenses, as well as, help you save for your retirement. You could also get married or have a child... but don't do it for taxes. Beyond that, buy a home. If you do not already have a home, you need to begin to consider what steps you need to take in order to make that happen. Check your FICO score, save for a down payment, reduce your outstanding debt, and search for a mortgage. Buy something that meets your needs, is affordable, and something that can sell quickly if you are ever in that situation.



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Carnivals for the Week of January 9th, 2006

Here are this weeks carnivals, enjoy!






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Investment Limits 2006

Each year, there are limits on the amount of funds you can set aside in tax assisted investment accounts. In 2005, 401(k) accounts had a limit of $14,000 for the year. For a Traditional or Roth IRA, your limit was $4,000. In addition, you could contribute $4,000 to an IRA for a non-working spouse.


While the IRA scene seems bleak (IRA limits are set to increase to $5,000 annually, beginning is 2008), there is a nice increase for 401(k) accounts this year, to $15,000.




Here is a nice little chart of investment limits for the past couple of years.










YearTraditional
& Roth IRA
Simple IRA401(k), 403(b),
& SEP
Coverdell ESA
StandardCatch-upStandardCatch-upStandardCatch-up
2004$3,000$3,500$9,000$10,500$13,000$16,000$2,000*
2005$4,000$4,500$10,000$12,000$14,000$18,000$2,000*
2006$4,000$5,000$10,000$12,500$15,000$20,000$2,000*
2007$4,000$5,000Indexed to Inflation$2,000*
2008$5,000$6,000$2,000*

* Coverdell limits are per child



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IRA Battle: Roth vs. Traditional

It is a new year and tax time is coming sooner than you think. It is always a good time of year to evaluate your possiible tax savings for next year. One way to lower your tax liability is to contribute money to tax-deferred retirement savings, including 401(k)/403(b) or individual retirement accounts (IRAs). Coupled with medical benefit premiums and flexible spending accounts, these tools let you take a big stab at your adjusted gross income (AGI). However, you may be best served by paying taxes now, and skipping them later by contributing to after-tax retirement accounts, like a Roth IRA.


In 1929, total government spending (federal, state, and local combined) was only about ten percent of the gross domestic product (GDP). Today, government spending is about 20 percent for federal, and ten percent for state and local, amounting to about 30 percent of the gross domestic product. Given this trend, along with our relatively low tax brackets, do you think that you are likely to be in lower tax bracket when you retire? Shake the magic eight ball... doubtful.




What are we to do? Well, many companies sponsor 401(k) plans that accumulate pre-tax funds. When you draw on these funds, you will pay taxes in your current tax bracket. Many financial advisors claim that you are likely to be in a lower tax bracket when you retire, as your expenses will be less. But, as we have witnessed, this may not be the case. Our only option is to diversify our retirement earnings between pre-tax and after-tax plans. Enter the Roth IRA.


You may be familiar with the Roth IRA, you may not. Roth IRAs are different from Tradional, or Contributory, IRAs in one fundamental way: it is created with after-tax funds. So, instead of taking a deduction today for your contributions, you pay your taxes and then contribute. This has some obvious downsides, but one nice advantage: you never pay any taxes on your withdrawals. You already paid taxes on your contributions, so now you get to keep your returns tax free as well.


In addition, there is now a Roth 401(k) that is being offered by some companies. However, I would not put all of my eggs in one basket. You need something to keep your taxes low today, as well as something to keep them low tomorrow. Stick with a traditional 401(k), up to your employers point of match, and anything you would like to contribute beyond that, put it in a Roth IRA.


Currently, 401(k) accounts have an annual limit of $15,000 (for 2006, up $1,000 from 2005). IRA accounts have an annual limit of $4,000, through 2007. Get the free money that your employer offers with the 401(k), deduct your benefit premiums, and setup a flexible spending account. Then, use after-tax funds and setup a Roth IRA.



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Plan A To Getting Rich

I am sure the general consensus is that not worrying about money is better than worrying about it. So how do you get to that point? You could always just quit worrying about money; let the bills pile up. That probably won't work out too well, however, when you decide to need to buy a house or something else. The alternative is to build your wealth in a slow and steady manner, over time. This is exactly the idea that is outlined in the Automatic Millionaire.


It is a great read, and I am sure it will be inspiring... you have no further to look than the first chapter to see that. However, I had developed this "Plan A" idea independently of the book. So what is the main idea? Well, just live a normal life, and spend less than you make; it is that simple. How and what are the questions that are left to you to decide.




How do you save? Well, the best methods for Plan A savings are to take advantage of tax-deferred growth made available through retirement accounts. Further, with 401(k) and 403(b) accounts, you typically get an employer match that is like an automatic return. The typical match seems to be about 50% for the first six percent that you contribute. At the very least, you should take advantage of the match provided by your employer. By saving six percent in an employer matched retirement account, with a match of 50% on those contributions, you are accumulating 9% of your annual pay, and it is only affecting your net income by 3-4%, since it is pre-tax money that also lowers your adjusted gross income, and may lower your tax bracket. Keep in mind, there is a $15,000 annual limit for 401(k) accounts, and there are early withdrawal penalties unless you take advantage of provision 42(t), but that will significantly lower your accumulated earnings.


One of the largest gripes about 401(k) plans is the lack of control that you have when investing your funds. With 401(k) plans, you are limited to the investment opportunities made available by your employer. The retirement savings option here is IRAs. In addition, you can contribute up to $4,000 a year (through 2007), in addition to your 401(k) contributions, to an IRA. You can invest in nearly anything under the sun with an IRA; it depends upon what is available with the brokerage firm you choose. I have even been exposed to people investing their IRAs into real estate purchases.


So, those are the tax-deferred options available to save for retirement. Being wealthy is not all about retirement savings, however; who wants to wait until they are 59 1/2? What else is out there? Your home, for starters. Pay down your mortgage. By paying an additional payment, annually, you can shorten the amortization of a mortgage from 30 years to 23 years. There are many ways to do this, but the simplest seems to be paying an additional ~10% to your principle, monthly. Other methods include paying half of your monthly mortgage every two weeks (works well if you are paid bi-weekly or weekly). Getting rid of your mortgage, which is typically one of your largest expenses, can free up a lot of money. Further, you end up paying much less in interest over the life of the mortgage. In Automatic Millionaire, the McIntires went crazy with this idea and were able to move into a new home, while renting out their original home, and paid off its mortgage too, all before they entered their 50s.


Beyond those simple things, you want to have some very liquid assets that can be used in an emergency. Suze Orman recommends saving 8-months worth of expenses in an emergency fund. You can save this in a nice money market account and get a decent return when compared against traditional savings accounts. Further, if you are able to drastically reduce your expenses by paying off your debts, 8-months may not be as much money as you would think.


If you contribute to your 401(k), have maxed out your IRA contributions, are making extra payments to your mortgage, and have a nice emergency fund established, what else can you do? Invest some cash into some mutual funds. Mutual funds are special funds that are automatically diversified by the fund manager, so you do not have to play any of the silly market games (who has time for that anyway... you work hard, and you have a life). Traditionally, the market yields a 10% return over the long haul. However, since this is Plan A, keep your mindset conservative and consider it 8%.


So, you have some ideas on how to invest in a slow and steady manner, but how do you get the funds to do this? Well, you have to pay yourself first. This is the entire idea behind Automatic Millionaire. Setup your finances to be automated so that you invest automatically, and pay your bills automatically. This way, you do not leave yourself with the discipline demanding decisions month after month. Then, you can feel free to do as you wish with what is remaining. It is a liberating feeling to not really care about a budget, because you just live with what you have available to you.


If you follow this simple plan, and have the time to accumulate wealth, you will succeed. How much time? The more the better. The later you start, the more you will have to save... and that means a lot more. Starting this by your forties can provide acceptable results. Starting this in your twenties will give you a much better outcome, however. Also, if you started in your teens, you would be flabbergasted by the results.


If you are in doubt about whether you can free up the necessary funds check out Reducing Your "Latte Factor" Easily.



Categories: Investing, Becoming Wealthy, Expenses, Books

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$6,000 in 2006!

This is not really a New Year's Resolution, as it is part of my 10-Year Plan, but you can call it that if you like. By December 31, 2006, at 24:00 hours, I am requiring of myself to have contributed $6,000 into my 10-Year Plan. Essentially, I could get by easily enough by contributing $500 per month, or $250 per paycheck (I get payed semi-monthly). Obviously, this my plan.


Currently, I have already contributed $26, which is a tad of a headstart, as my first paycheck in the new year does not get deposited until January 13th (it is for January 15th, but that is a Sunday, and I always get paid on a day of business). As noted in Reducing Your "Latte Factor" Easily, I started an HSBC Direct Online Savings Account. I opened the account with $1, and I get a $25 bonus for using the promotional code of "start."




I have decided that I really need to contribute $250 per paycheck regardless of whether I meet the goal early, or not. There is no reason to stop just because I reached this little short term goal. I have a much larger goal to meet, and I will not get their by short changing myself. The goal of $1,000,000 is going to be very difficult to do within the next ten years, especially considering that I will only make about $600,000 over that period of time if I keep my current employment status and get minimal raises over that period of time.


Obviously, I will not reach the goal if I am merely saving $500 per month and getting a return of 4.25%. As I have stated, already, I will be increasing my contributions by 15%, annually. So, for 2007, my goal will be to contribute $6,900. So, during the tenth year, I will be contributing a minimum of $21,107.26, for a grand total of $121,822.30 contributed over the ten year period. So, that is well short of the goal of $1,000,000. Given a 4.25% annual percentage yeild, it will only end up with slightly more than $147,000.


The plan is to have multiple investments. When I get a substantial amount of capital, I will invest in mutual funds, and hopefully get an average return near 10%. This will not happen until I can get about $5,000 saved up (so later this year). Further, that will still not be enough. So, I plan on leveraging my assets to purchase some investment properties at decent rates and then I will hold them for a few years and lease them out. As the years pass, the tenants will be building equity in the properties for me. Also, despite the doom and gloom reported by the "experts," the properties' values will increase. I know this because I will not be purchasing properties in saturated areas, and I will be improving the properties. After I have built enough equity in the properties via appreciation and paying down the principal, I will sell the properties and invest the gains in more mutual funds. These gains will not be considered part of my contributions, as they will be created by leveraging my existing contributions. Hence, additional return.


The goal is to have an average return of 40% throughout the ten years. Maybe I will get there, maybe I won't. However, I will certainly lose if I do nothing.


And for the naysayers... I don't care that $1,000,000 will not be worth the same as it does today! No matter what day and age, I am sure I would rather have $1,000,000 than not. Further, this is for ten years from now... not 30.



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Reducing Your "Latte Factor" Easily

I was shopping for some laundry detergent at a local super center over the weekend, and stopped in the book section. I picked up Automatic Millionaire, by David Bach, and read the first chapter. I must say, I was hooked. First off, let me say, nothing in the book was really new. It is an aggregate of all the things you have heard people say, but combined and automated with things like direct deposit and online bill pay.


The next day, I was at my in-law's home and read the first chapter aloud to everyone who would listed. It was inspiring. Everyone loved the story of the McIntires. So, at that moment we all opened up HSBC Online Savings Accounts with the promotional code, "start," and deposited $1, and had a nice head start of $26 to our new millionaire status.




There are a few themes in the book that seem like a beaten horse, but they are made anew by Bach. First, paying yourself first... Bach says, as have many others, that you should pay yourself first (even before Uncle Sam). Further, you should do this automatically, so you do not have to make a conscious effort to make it happen. You should pay yourself about 10% of your pay. The easiest way to get started is by contributed to an employer sponsored 401(k). I absolutely agree, and you should Contribute Early, Contribute Often; however, you should only contribute to the extent that you receive a match from your employer, because you could have more freedom with your money in a self-directed IRA, if you wanted to set aside more pre-tax savings.


David Bach is a financial advisor, by trade, and shared experiences of his job and explaining to people that the need to save. He shared how one young woman said that is is all great, but... I live paycheck-to-paycheck, how can I save anything? Well, Bach discuess the "Latte Factor." The basic idea is that we all have frequent, but small, expenses that add up to a lot over our lifetimes. The young woman actually spent $25 per day, by 10 AM without hardly getting anything (a latte, a muffin, a smoothy with some ginko biloba, and a power bar). This could be nearly anything though, so do not think you do not have a "Latte Factor."


Essentially, I started thinking about my "Latte Factor." This is, again, not something new, and I had been thinking about this for a long time. I am certainly a coffee drinker, and more specifically, I like a triple (sometimes quadruple) vente, non-fat, with whip, mocha. That is about $5. And, not to mention, my new house is right next to a Starbucks! Talk about a self-disciple nightmare. What was I to do? Well, instead of spending $10 a week (I was able to curb it to that with disciple), I bought a cheap little, steam driven, espresso machine for my home for $20! Now, the normal price was $50, but it was a return that was opened, and I got it on sale. Plus, I paid $15 for a decent little conical burr grinder. Now I have about five drinks a week, get more entertainment by learning to make them myself, and get a better drink... all for about $2 per week.


Another aspect to my "Latte Factor" was soda. I would get one or two sodas a day, from the vending machine. This came out to an even $1 per day (luckily, these vending machines still sell soda for $.50). Well, that is another $5 per week. What to do there... by a two liter, and bring it in to work. I buy one generic two liter of soda for $.58. That is about the same soda in 5 1/2 cans. If I drink it all, I drink water for the rest of the week. So, I save over $4 per week there.


It is also pretty easy for me to eat out for lunch every day of the week. This is the one that adds up quickly. Not only does it cost a small fortune, each year, but it takes a lot of time, as well. So, instead of always eating out, I bring lunch. However, I do not bring a typical lunch, either. I keep a couple of snacks around, like some wheat crackers and some small bits of chocolate, and then I bring a banana or other fruit, and a sandwich for lunch. I do not do this every day, though. Occassionally I eat out. It is a nice reward, and it is certainly better than doing it more often than not, let alone, every day. Luckily, my employer likes to do lunch quite often, as well. So, once a week, we have a "lunch and learn" where they have lunch brought in, and we learn about new developments with our products. So, I do that nearly every time. Also, we celebrate birthdays at work, with lunch and cake, and do this once a month, for everyone whose birthday is within that month. So, there are five or six lunches per month that I don't worry about. Beyond that, I try to limit my lunches as much as possible. Occassionally, I will get a mystery shop that I can do and actually get paid to have lunch. These are great. Beyond that, I like to use my lunch time for reading the newspapers, studying for an upcoming exam (I am finishing my BS, hopefully by May), walk up and down the stairs, or run some errands. If I can get some errands completed during lunch, that is great, because I do not have to take personal time to do it.


What could your "Latte Factor" be? Could it be cigarettes, which will also cost you in healthcare? Could it be McDonald's on the way to work? Could it be a newspaper? There are plenty of things that you may be able to either do without, or find a less expensive way to do. I do not like cutting things out entirely, but finding a way to to it for much less is usually available.




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The Rising Price of Postage

On January 8th of this new year, the price of postage is scheduled to increase by two cents to $0.39. That is over a 5% increase in the price of postage. A lot of people try to use this an economic indicator. Regardless, many people use stamps and the postal service, which does mean that this will effect them (be it ever so slightly).




Considering the rate increase, now may be a good time to evaluate the cost of using the postal service. For example, if you mail out, a very conservative, 12 bills a month, you will be paying $4.68 a month in postage. This doesn't include the cost of envelopes and checks, which are minimal, but can give a round number of $5 per month for a very small number of bills.


Now, this is not very much, at all; it is about $60 per year. But, it is money you could be saving by using online bill pay. Considering that you do not have to pay the money for postage, and it is not in any way a hassle, why wouldn't you do this? Besides, I am ultra-paranoid about identity theft, so I always take my bills to the post office directly (on the way to work, of course). This measure will save me that effort.



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