Why do people not save for retirement

Ellen Rinaldi, who leads Vanguard's Investment Counseling & Research group, offered some observations to help investors overcome a few common myths and help achieve their long-term goals.

Myth #1: It's too late for me to start saving for retirement

This myth can lead to inaction—whereas the reality is that it's never too late to start saving.

Of course, the best strategy is to start saving early, because $10,000 saved in your 20s or 30s is going to be worth a lot more when you are 65 than $10,000 saved in your 40s or 50s. But no matter where you are in life, you'll benefit from putting your money to work for you now.

As Ms. Rinaldi explained, "The first thing to do is to maximize the contributions you make to your 401(k) plan, if you have one, and to make sure you're getting the full employer match. Second, look at a traditional IRA or a Roth IRA as a supplement. Finally, if you're 50 or over, take advantage of the catch-up contributions that are available to you—they can help you boost your savings in a dramatic way."

Myth #2: I got a late start, so I should invest aggressively to compensate

With this approach, you're trying to make up for lost time, but it may expose your savings unnecessarily to dramatic ups and downs in the market.

If stock markets drop precipitously—say, when you're 58—you may find yourself with insufficient savings, and you may have to work longer, save more, or spend less when you do retire.

Myth #3: My retirement savings need to last only 10 or 20 years

The pitfall of believing this myth is that it might cause you to run out of money.

Life expectancy tables tell us that for every 65-year-old couple, there's a 72% chance that at least one will live to age 85, and an almost 20% chance that one will live to 95. "Today, you have to plan on your retirement income lasting 25 or 30 years, not 10," said Ms. Rinaldi. Consider an investment strategy designed for asset growth and for an income stream.

Myth #4: I need a dozen or more funds for my portfolio to be diversified

Diversification is a good way to spread your risk, reducing the impact of a steep downturn in any one asset class or market sector. The danger here lies in misinterpreting diversification.

"For lots of people, holding either a target retirement fund—which is actually a basket of mutual funds—or a combination of a total stock market index fund and a total bond market index fund will provide all the diversification they need," said Ms. Rinaldi. "You don't need to hold a lot of funds to be diversified, if the funds you do hold are well-diversified themselves."

Myth #5: When I retire I should move out of stocks

This myth also can put you at risk of outliving your money.

"If an investor moves completely out of equities into bonds, this may allow inflation to eat up more of their return, because they're removing the potential for greater growth from their portfolio," said Ms. Rinaldi. Over long periods, returns from an all-bond portfolio are likely to be more modest and may not keep pace with inflation.

"Holding a well-diversified portfolio is key," said Ms. Rinaldi.

Related Links:

• Investing Strategy for building your Nest Egg
• How to choose Funds in your 401K
• Keeping Cash Under My Mattress..makes sense !
• Financial Planner: Do I need one ?

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Five Online Resources for Forex Beginners

(Guest post by Heather Johnson)

Have you considered getting into the foreign exchange market? Also known as Forex, this is a fast market that operates 24 hours a day, five days a week. If you have previous experience with trading on the stock market, Forex is quite different. However, it can be a great way to make some money and Forex is gaining popularity with investors all over the world.

If you would like some tips and tutorials for getting started with the Forex market, consult the following online resources for help.

1. School of Pipsology – This site will literally school you, as it is organized into lessons according to grades. Start out in kindergarten and, as you learn more about the market, eventually graduate from the School of Pipsology.

2. Cyber Trading University – This site, also constructed in the guise of an online Forex school, offers free tutorials for beginners. These include video tutorials, which can be viewed at no extra charge.

3. Forex Training – Not only does this site offer comprehensive lessons in Forex trading, it also provides a free practice account. Using a practice account with virtual money allows you to trade with real-time quotes and get used to the process before investing real money.

4. Forex Facts – If you are in need of an all-inclusive FAQ list for Forex trading, you will find it here. From charting to market analysis, this teaches you everything you need to know about Forex philosophy and strategy.

5. Investopedia – Always a reliable source for investment advice, Investopedia has a section devoted entirely to the Forex market. The whole site can be of great use to Forex traders, however.

People from all walks of life are trading on the Forex market. Thanks to the advent of the Internet, online trading has never been easier and it affords "regular Joes" the chance to try out the system. Whether you are interested in trading as a hobby or as a serious investor, learn the ins and outs of Forex with the five resources above.

Image Credit: OnlineForexTradingBlog

About the Author

This article is contributed by Heather Johnson, a freelance writer as well as a regular commentator on the topic of credit card review. Heather invites your questions, comments and freelancing job inquiries at heatherjohnson2323 at gmail dot com.

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Long Term Investing

Buying stocks you can hold in your portfolio for years is quite a different process than buying a stock you expect to sell next week. Of course, there is no guarantee that once you buy a stock with an eye to the long-term you'll never have to sell it. But identifying companies that are more likely to turn in a solid performance over the next five to ten years isn't that difficult if you focus on three key areas: Growth, Quality, and Value.

Going for Growth

Long-term stock investors hold one truth to be self-evident -- that ultimately, over the years, one factor can usually drive a stock's share price higher and higher. That single factor is the growth of a company's earnings (the company's profits). In turn, a company's overall growth is ultimately dependent on the company's growth of sales or revenues. Companies that sustain earnings growth over the years are likely to be rewarded with ever- rising share prices. On the flip side of the equation, companies with no profits can rarely be considered solid long-term holdings because it's impossible to predict when (or if) those companies will be able to maintain growth over the years or even stay in business.

A company reports its earnings per share, or EPS, each quarter and each year on its financial statements, which are summarized in SEC Filings reports. Other financial news web sites report the EPS growth in the past as well as the future growth expected by analysts.

If a company demonstrates the ability to grow its earnings over time, you can reasonably expect similar performance in the future. Just remember, though, that since most companies experience a slowdown in growth as they get larger, you should expect the growth of even the best companies to slow a bit over the years.

Growth is the first benchmark to look for as you go through the process of selecting a stock to buy. If the company you're researching doesn't have a solid history of earnings growth, consider it a candidate for speculation, not investment. A company may increase its sales year after year, but unless it also consistently demonstrates its ability to convert those revenues into earnings (or profits), you can't be sure the company will ever figure out how to make a buck.

The Quest for Quality

Once you've identified that a company is growing at a reasonable rate and should continue to do so in the foreseeable future, you'll want to make sure it is built upon a stable foundation of quality. Besides being able to grow its sales, the company has to be able to generate sufficient profits from those sales, and in addition, provide a sufficient return for its investors. Well-run companies that consistently achieve these two goals will outperform their peers.

If you are looking for stocks that you can buy and hold for many years, you want to own solid, well-run companies. A company's management holds the keys to its success. But since you can't conduct in-depth interviews with the CEO and other members of the management team, you'll have to look at some other criteria. For instance, how do the company's profit margins stack up against those of their competitors? Has the company generated a decent return for its shareholders over the years?

A View on Value

The final benchmark in your quest to purchase suitable long-term stock is value. While you should aim to own a portfolio of well-run growth stocks, you have to be able to recognize when a stock is selling for a bargain price, and when it's selling at a premium. Simply finding high quality, growing companies isn't enough to make a successful investment. You also have to know when it's the right time to buy a particular stock. Buying a stock when it is undervalued will enhance your possible total return. Knowing the potential upside of your investment, as well as the potential downside, is key to making sure you have a good shot at your target rate of return.

The most common measure of a stock's value is its Price/Earnings (P/E) Ratio. The P/E Ratio compares a stock's price to its earnings. It's often described as how much investors pay for each dollar of a company's earnings. P/E Ratios can be used to compare a stock's current price with its historical prices to give you an indication of how the stock is valued today compared to a point in the past. You can also compare the P/E Ratio of a stock to other stocks in its industry, or to the market in general, or to an industry average.

Putting Dollar-Cost Averaging to Work

Rather than try to find the absolute best time and price to buy a stock, many investors use dollar-cost averaging to invest in shares over a long period of time. As we discussed in Lesson 1, dollar-cost averaging allows you to build a portfolio by investing a fixed amount on a monthly or other regular basis. When you use this method, you can choose companies that are well-managed and growing nicely, and then invest in their shares on a continual basis - without worrying whether the stock is currently under-valued or over-valued. Your dollars automatically buy fewer shares when the price of a stock is high and more shares when the price is low.

Dividends Can Add to Your Returns

For dividend-paying stocks, the dividend can provide an extra boost to your investment return and should also be considered. The amount of dividends a stock pays on an annual basis is its yield. A stock with a yield of 2.3% is expected to pay dividends that amount to 2.3% of the current purchase price of the stock. You can compare the yield to the interest you receive on an account at your bank, but it's important to note that dividends aren't guaranteed and could rise or fall.

Wrapping Up

By following the three benchmarks of Growth, Quality, and Value, you have a better shot at investing successfully in common stocks and growing your portfolio. You can learn a great deal about a company by reading its financial statements, press releases, news stories, annual reports, and other documents. As you become more experienced, you'll learn how best to interpret the information you discover in those documents in order to help you make better investing decisions.

I found these excellent points made in an article written by Douglas Gerlach.

Related Links:

• Investing Strategy for building your Nest Egg
• How to choose Funds in your 401K
• Keeping Cash Under My Mattress..makes sense !
• Financial Planner: Do I need one ?

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Best Kept secrets of financial planning

Some nice points made by a columnist at Yahoo Finance. I extracted the 6 points that she has mentioned and put it in here. Hope you find them useful.

The Six Best-Kept Money Secrets
by Laura Rowley

1. Understand what you can control, and what you can't.

"Too many investors spend time trying to predict what the market will do, where interest rates will go, or which fund manager will have the best year -- things that, ultimately, they have no control over," says Fran Kinniry, principal in Vanguard's Investment Counseling and Research Department.

"Meanwhile, they're not focused on the things they can control, such as keeping their investment costs down; maintaining a proper, balanced, tax-efficient portfolio; and taking maximum advantage of savings opportunities, such as an employer match in a 401(k)," Kinniry says. "Understanding and acting on the things you can control is the best way to prepare for long-term investment success."

2. You know more than you think.




"Don't believe you can't learn enough to be a savvy investor," says Karen Sheridan, founder of Money Mystique Asset Management in Lake Oswego, Ore. "You know more than you think you know. [Financial services company] State Street had an ad in the New York Times that actually compared investing to brain surgery. It says, ‘No one ever said investing was easy. Make one false move and you could start hemorrhaging money.' Ads like these are unconscionable."

3. Moonlight when you're young, and invest the income.

"Take on a second source of income and direct that income exclusively toward an investment vehicle," says Robert Manning, director of the Center for Consumer Finances at the Rochester Institute of Technology, and author of "Credit Card Nation: The Consequences of America's Addiction to Credit."

Whether it's freelance data-entry work or waiting tables once a week, invest the extra cash rather than spending it, or even paying off debt. "It's a step up psychologically to make yourself part of investor class rather than the debtor class," Manning says. "It's a huge opportunity to demonstrate that you're taking control of your financial life, even though you're not making much money."

4. Take a small step toward big success.

"Sometimes, clients are overwhelmed with financial tasks and expect perfection of themselves," says Candace Bahr, managing partner at Bahr Investment Group. "They may get ‘stuck' for months or even years, and ignore their financial lives."

Bahr says that even the smallest step can make a difference. "If someone spends just 15 minutes a day on their financial well-being, in the course of a year they'll have spent over two full work weeks improving their financial life. That's got to help!" Bahr suggests other small steps on her Money Clubs web site.

5. Consider a tax-managed fund.

The average equity mutual fund lost 1.8 percent a year to taxes over a 10-year period ending Dec. 31, 2005, according to a study conducted by Morningstar. Sound small? It's actually a difference of nearly 20 percent in terms of total annual return. Over the long haul, losing 20 percent of your gain each year to taxes can translate into a loss of tens or even hundreds of thousands of dollars.

One solution: tax-managed funds. "These funds come in various permutations -- and not all are good -- but they can be immensely useful tools for investors," says Christine Benz, Morningstar's Director of Mutual Fund Analysis.

Such funds, which come in many investment categories, employ a variety of tax-reduction techniques to avoid making income or capital-gains payouts, helping the investor keep a bigger portion of his or her return. (Don't choose these funds within a tax-advantaged vehicle like a 401(k).)

For higher-income savers who max out their company retirement plans, there aren't many other ways to shield investments from taxes. Individual Retirement Account contributions limits are low (or an investor's income may make him ineligible to contribute to a Roth IRA).

For an investor who wants to build an ultra-low-maintenance portfolio composed exclusively of tax-managed funds, Benz recommends Vanguard Tax-Managed Capital Appreciation (VMCAX), Vanguard Tax-Managed International (VTMGX), one of the firm's municipal-bond funds, and a municipal money market fund.

6. Don't shift your assets to your minor child.

"The Uniform Transfers to Minors Act (UTMA) is the newest four-letter word," says Joe Hurley, founder and CEO of Savingforcollege.com. "A small investment fund in your child's or grandchild's name is probably fine -- you may save some taxes by shifting the investment income onto your child's tax return. But put too much money into the UTMA and you are asking for trouble."

The potential savings are limited now that the kiddie tax has been expanded to children under the age of 18 (the cut-off used to be age 14). Even if the child's account stays below the $1,700 income threshold for triggering the tax, earnings beyond $850 require the headache of filing a federal income tax return.

"You might devise a strategy using tax-efficient mutual funds that keeps the kiddie tax at bay," says Hurley. "But the capital gains at some point come home to roost, and the tax hit may happen at the wrong time." Moreover, investments in a child's name are counted heavily against financial aid eligibility.

Most importantly, a parent loses custodial control over a UTMA when the child reaches age 18 or 21. "You don't have to look too hard to find parents who have regretted their children's decisions regarding the use of such newfound ‘wealth,'" Hurley says.

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Try to avoid these Investing Mistakes

Along the way, you may make a few investing mistakes, however there are big mistakes that you absolutely must avoid if you are to be a successful investor. For instance, the biggest investing mistake that you could ever make is to not invest at all, or to put off investing until later. Make your money work for you – even if all you can spare is $20 a week to invest!

While not investing at all or putting off investing until later are big mistakes, investing before you are in the financial position to do so is another big mistake. Get your current financial situation in order first, and then start investing. Get your credit cleaned up, pay off high interest loans and credit cards, and put at least three months of living expenses in savings. Once this is done, you are ready to start letting your money work for you.

Don’t invest to get rich quick. That is the riskiest type of investing that there is, and you will more than likely lose. If it was easy, everyone would be doing it! Instead, invest for the long term, and have the patience to weather the storms and allow your money to grow. Only invest for the short term when you know you will need the money in a short amount of time, and then stick with safe investments, such as certificates of deposit.

Don’t put all of your eggs into one basket. Scatter it around various types of investments for the best returns. Also, don’t move your money around too much. Let it ride. Pick your investments carefully, invest your money, and allow it to grow – don’t panic if the stock drops a few dollars. If the stock is a stable stock, it will go back up.

A common mistake that a lot of people make is thinking that their investments in collectibles will really pay off. Again, if this were true, everyone would do it. Don’t count on your Coke collection or your book collection to pay for your retirement years! Count on investments made with cold hard cash instead.

Related Links:
* Investing Strategy for building your Nest Egg
* How to choose Funds in your 401K
* Keeping Cash Under My Mattress..makes sense !
* Financial Planner: Do I need one ?



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Easy Ways to Save Money

Here are a few simple ways to start saving money. I follow, or have followed, or will soon follow all these ways.

Start small
Most financial experts feel that we need to save at least 5 percent, and preferably 10 percent, of our income and place it into an interest-bearing, liquid savings account. However, don’t give up if you’re not able to put aside 5 or 10 percent. Establishing a saving habit and saving consistently will eventually add up; even as little as $5 per pay period will accumulate. Once saving becomes a habit, set as your savings goal a maintained savings account of at least three to six months’ income. This will prevent borrowing when unexpected expenses arise or in case of a period of illness or unemployment.

Put money into a retirement account
If it is available, sign up with your workplace’s 401(k), 403(b), or similar retirement plan in which your company will contribute matching funds to the plan in your name. The most common match is 50 cents on the dollar. If this is the case for you, you will get an immediate 50 percent return on your contributions.

Monitor ATM withdrawals
Decide how much money you will take out each week or each month and make it last; discipline yourself to stick to your decision. Try to decrease the amount withdrawn every month. If you discover that you have money left over, deposit it into your savings account.

Pay off charges and loans
With the desire, discipline, and time, anyone can pay off his or her charges and loans and stay out of debt. There are four basic steps to eliminate charge and loan debt: (1) Transfer ownership of every possession to God; (2) Allow no more debt (no bank or family loans and cut up the credit cards); (3) Develop a realistic balanced budget that will allow every creditor to receive as much as possible; and (4) Start retiring the debt. Begin by first paying extra on the debts with the highest interest rates. If interest rates are comparable on all of the debts, first pay extra on the one with the smallest balance. After this first one has been paid, apply the regular payment as well as the extra money that was going to it toward the next highest balance. After the second is paid off, apply what was being paid on the first and second to the third highest, and so forth.

Pay extra on home mortgage
You will add equity to your home, reduce the amount of interest paid over the term of the loan, and reduce the length of the loan if you pay extra monthly on your home mortgage. If you consistently pay $100 extra each month on a $150,000 loan at 6 percent, you will save almost $73,000 in interest and shave more than 7 years off the original loan. If you can’t commit to an additional $100 each month, just round your payment up to the nearest hundred.

Pay off car loan
Interest on your car loan is not tax deductible and the rate is generally higher than on your home mortgage. Pay it off as soon as possible by rounding up your monthly payment to the nearest hundred and then add $50 (or as much as you can afford) to that amount.

Open an IRA
If your funds are limited, open an IRA only after you have maxed out with your company’s retirement plan. If you do not have a company retirement plan, open an IRA immediately.

Evaluate life insurance
If you’ve had the same term life insurance policy for five years or more, you can possibly cut your premiums by changing policies. If you apply for a new policy and get a new medical exam, chances are the insurer may feel that you are a better risk than fixed insurance health assumptions indicate, which means that you will qualify for a lower premium rate.

Be accountable for your money
Know where your money is going by establishing a budget and sticking to it. If the expense is not budgeted, the money should not be spent. Keep a small notebook with you to record miscellaneous budgeted expenses.

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Investing Strategy for building your Nest Egg

As far as building your retirement fund is concerned, the most important strategy is to Reduce Your Loss. The best way to minimize this risk is through the power of diversification. By diversifying your portfolio, you are ensuring that your nest egg is spread across different baskets. Diversification helps to strengthen and protect your portfolio.

Your chances are increased that if one area falls another area that you have invested in will remain strong, and your assets will be protected..

We can define risk as the probability of things going wrong. Once things have gone wrong, they cannot go right. Older investors will remember this feeling they have after their losses, of wanting to turn the clock back. It is the same feeling you get after losing a loved one, when you want to reach out and touch the person after she or he is gone.

The preventive part is all about ‘diversification’, almost the only way to manage risk as defined in financial markets. Both risk measurement and diversification lend themselves to mathematical and statistical analysis, giving classical finance its biases. .

Value investors do the opposite. They add to their positions as a scrip goes down, playing to be the ‘last man standing’, i.e. trying to buy the last falling share as sellers depart the stock. The more of these ‘last’ shares they can pick up, the better their returns, provided of course, they have bought a safe, steady business at a great price, and the business recovers subsequently. .

In this strategy, you should try to trade a correlated pair as part of your diversification strategy. Like buying the market leader and short- selling the market laggard. A caution here is that if you are buying at the bottom of the cycle, then the laggards gain more than the market leaders. In a bull market, buying the market leader and short-selling the laggard may be a good trading strategy. Make sure that you don’t make a mistake in reading the market for example, is this a bull market or a bear?. Across the world, the cost of capital will soon start to drop. That would suggest a very shallow bear market, if we see one at all. Even a normally ‘bearish’ person like me is not willing to take a stand.

Statistically one thing is clear - traditional means of diversification won’t save you. Remember one common mistake: mindlessly diversifying into, say, 100-200 stocks, which then go unmonitored for entry and exit points. Since the investor no longer knows enough about these businesses, he is prone to fall prey to rumors. In effect, the act of ‘diversifying’ will actually increase the probability of losses rather than reduce it.

True diversification includes far more investment choices than just stocks and bonds. It includes other non-correlating asset classes that don’t intrinsically involve either speculation or timing. Aggressive investors like the readers of this article must be having more than 50 per cent of their net worth in equities, especially if they are below 40.

With each investment be sure to invest no more than you can afford to lose, so you can sleep peacefully at night. And use dollar cost averaging - taking a fixed proportion of your personal savings each month to add to your investment holdings, so that volatility becomes an advantage over a long time horizon. Only then will diversification begin to make statistical sense.

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Investing in a Tradtional IRA

Recently, there was a lot of talk going on in my office regarding IRAs and 401K. So I am going to try to unravel the mysteries behind these investment vehicles in a few posts. Today, I'm starting with Traditional IRA.

A traditional IRA is an individual retirement account (IRA). The IRA is held at a custodian such as a bank or brokerage, and may be invested in anything that the custodian allows (for instance, a bank may allow certificates of deposit, and a brokerage may allow stocks and mutual funds).

Income limits

If a taxpayer's household is covered by one or more employer-sponsored retirement plans, then the deductibility of traditional IRA contributions are phased out as specified income levels are reached.

* Married Filing Jointly or Qualified Widow and Modified Adjusted Gross Income is between $75,000 and $85,000 (this is scheduled to rise to $80,000 to $100,000 in 2007)

* Married Filing Separately (and you lived with your spouse at any time during the year) and modified AGI is between $0 and $10,000

* Single, Head of Household or Married Filing Separately (and you did not live with your spouse) and modified AGI is between $50,000 and $60,000

The lower number represents the point at which the taxpayer is still allowed to deduct the entire maximum yearly contribution. The upper number is the point as of which the taxpayer is no longer allowed to deduct at all. The deduction is reduced proportionally for taxpayers in the range. Note that people who are married and lived together, but who file separately, are only allowed to deduct a relatively small amount.

Traditional IRA contributions are limited as follows:


Tax Implications

Contributed money is at first post tax money.
However, contributions are tax deductible which reduce your tax basis for that tax year.
Then, distributions are taxed at the normal income for distributions.

Advantages

* The main advantage of a Traditional IRA is that contributions are often tax-deductible. If a taxpayer contributes $4,000 to a traditional IRA and is in the twenty-five percent marginal tax bracket, then a $1,000 benefit ($1,000 reduced tax liability) will be realized for the year. Because qualified distributions are taxed as ordinary income (the taxpayer's highest rate), the long-term benefits of the traditional IRA are only comparable to those of a Roth IRA (whose qualified distributions are tax free) if the current year tax benefit ($1,000 above) is reinvested.

* Also, if a taxpayer expects to be in a lower tax bracket in retirement than during the working years, then a traditional IRA offers an increased incentive over the Roth IRA.

* Another advantage of a Traditional IRA is that the taxpayer gets the tax benefit immediately.

Other important Facts

• Any Individual can set up a Traditonal IRA
• No matching contributions available
• Distributions can begin at age 59 1/2 or owner becomes disabled
• 10% penalty plus taxes for distributions before age 59 1/2 with exceptions
• Can withdraw up to $10k for a first time home purchase down payment with stipulations
• Can withdraw for qualified education expenses of owner, children, and grandchildren
• Can withdraw for qualified unreimbursed medical expenses that are more than 7.5% of AGI; medical insurance during period of unemployment; during disability
• Capital gains, dividends, and interest within account incur no tax liability

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The miracle of compound interest

Here is an interesting way to look at compound interest.
Source: MSNMoney

This is a concept best illustrated by example. Let's say I give you a penny today, and promise to double the amount every day for a full month. How much money would I be giving you on the 31st day?

The answer: $10.7 million. Check it out:

Day 1 0.01
Day 2 0.02
Day 3 0.04
Day 4 0.08
Day 5 0.16
Day 6 0.32
Day 7 0.64
Day 8 1.28
Day 9 $2.56
Day 10 $5.12
Day 11 $10.24
Day 12 $20.48
Day 13 $40.96
Day 14 $81.92
Day 15 $163.84
Day 16 $327.68
Day 17 $655.36
Day 18 $1,310.72
Day 19 $2,621.44
Day 20 $5,242.88
Day 21 $10,485.76
Day 22 $20,971.52
Day 23 $41,943.04
Day 24 $83,886.08
Day 25 $167,772.16
Day 26 $335,544.32
Day 27 $671,088.64
Day 28 $1,342,177.28
Day 29 $2,684,354.56
Day 30 $5,368,709.12
Day 31 $10,737,418.24

Each day, the "interest" I paid you the previous day earns more interest. At the beginning, the amounts are nominal, but by the end we're talking big bucks.

Of course, no one's going to double your money every day. But this concept explains how people who save relatively small amounts over the years can build rather substantial nest eggs. After a few decades, their actual contributions represent only a small part of their burgeoning wealth -- it's mostly their returns that are earning returns.

But this also illustrates how debts can quickly balloon out of control. If you're paying interest, rather than incurring it, and you're not diligent about paying off the finance charges in full every month, the unpaid amount will incur additional interest charges, increasing the total amount that you owe. This is why so many families who incur credit card debt eventually find themselves in trouble as the amounts they owe explode past their ability to pay.

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Credit Cards, Store Financing Deals and Receipts Hacks !

Credit Card Hack

If you pay your credit cards off in full every month (which you do, right?), you can give yourself an interest-free loan of a month or more on major purchases simply by charging big-ticket items right after your card's closing date.

Let's say your statement typically closes around the 20th of the month. You charge your big-ticket item the day after, the 21st.

The charge doesn't show up until the next month's bill, and you typically have 10 to 15 days from the closing date to pay it, effectively giving you a 30- to 45-day interest-free loan. (You'll want to confirm the closing date, since they can change month to month, but typically that just takes a visit to your card's Web site or a call to the 800 number.)

You can take this hack a step or two further by using three credit cards.

"Make sure their statement closing dates are evenly spaced throughout the month, say on the 1st, 11th, and 21st of the month (many cards do allow you to specify your closing date if you ask). Delay major purchases until the day after a card's statement closing date, and then use that card for the purchase."

Store Financing Deals Hack

Warning: This is an expert hack, recommended only for folks who have good money management skills.

"Whenever I buy a big ticket item, I make sure I have the cash to pay for it. Then I wait for store financing offers -- same-as-cash or deferred interest for an extended period. I opt for the financing, put the cash in a (certificate of deposit) that matures just before the end of the promotional period, and pay it off before the deferred interest becomes due. It's like a free loan from the stores and I can earn interest while I enjoy the item!"

Obviously, this hack works ONLY if you keep your mitts off the invested money and if you pay the bill before it comes due; otherwise, you could pay a truckload of finance charges. If you do it right, though, there are benefits, as sneakers explains:

"Circuit City recently had a special (of) no payments until January 2008. I bought a flat-screen TV, the camera I've been ogling for two years, and a bunch of other little things I needed, like printer cartridges. Total $2,500. Put $2,500 in 2-year CD earning 5.25% APY. That's $262.50 I'll earn during that time."

Organizing Receipts Hack

Receipts now go in one of three compartments in my wallet. Receipts that I probably won't need for long, such as those for routine purchases, get stuffed in with the bills; receipts that require action, such as a rebate, get put in the center section; tax-related receipts and those for big-ticket items go in the third compartment. Every week or so I clean out my wallet, taking action on the middle-compartment receipts and filing the tax-related ones.

The "short-term" receipts get put in a folder marked "This Month." At the end of the month, I move them into the folder marked "Last Month," while the receipts from that folder get moved to the "Two Months Ago" folder and the contents of THAT folder get dumped in the trash.

This system ensures I keep receipts long enough to check against my credit card statements, if I need to, and to make any returns. But I no longer have to spend valuable time sifting and sorting.


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25 Rules to Grow Rich by

Here are some fundamental rules, not to become filthy rich, but live a comfortable life.
The ones in bold are ones that I religiously follow, or at least try to.

1. For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.
   
   
2. It's worth refinancing your mortgage when you can cut your interest rate by at least one point.
   
   
3. Spend no more than 2 1/2 times your income on a home. For a down payment, it's best to come up with at least 20%
   
   
4. Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%
   
   
5. Never hire a roofer, driveway paver or chimney sweep who is going door to door.
   
   
6. All else being equal, the best place to invest is a 401(k). Once you've earned the full company match, max out a Roth IRA. Still have money to invest? Put more in your 401(k) or a traditional IRA.
   
   
7. To figure out what percentage of your money should be in stocks, subtract your age from 120.
   
   
8. Invest no more than 10% of your portfolio in your company stock - or any single company's stock, for that matter.
   
   
9. The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund and 0.6% for a U.S. bond fund.
   
   
10. Aim to build a retirement nest egg that is 25 times the annual investment income you need.
    
    
11. If you don't understand how an investment works, don't buy it.
    
    
12. If you're not saving 10% of your salary, you aren't saving enough.
    
    
13. Keep three months' worth of living expenses in a bank savings account or a high-yield money-market fund for emergencies. If you have kids or rely on one income, make it six months'.
    
    
14. Aim to accumulate enough money to pay for a third of your kids' college costs. You can borrow the rest or use some of your income to help out when your child is in college.
    
    
15. You need enough life insurance to replace at least five years of your salary – as much as 10 years if you have several young children or significant debts.
    
    
16. When you buy insurance, choose the highest deductible you can afford. It's the easiest way to lower your premium.
    
    
17. The best credit card is a no-fee rewards card that you pay in full every month. But if you carry a balance, high-interest rates will wipe out the benefits.
    
    
18. The best way to improve your credit score is to pay bills on time and to borrow no more than 30% of your available credit.
    
    
19. Anyone who calls or e-mails you asking for your Social Security number or information about your bank or credit card account is a scam artist.
    
    
20. The best way to save money on a car is to buy a late-model used car and drive it until it's junk. A car loses 30% of its value in the first year.
    
    
21. Lease a new car or truck only if you plan to replace it within two or three years.
    
    
22. Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower.
    
    
23. Buy airline tickets early because the cheapest fares are snapped up first. Most seats go on sale 11 months in advance.
    
    
24. Don't redeem frequent flier miles unless you can get more than a dollar's worth of air fare or other stuff for every 100 miles you spend.
    
    
25. When you shop for electronics, don't pay for an extended warranty. One exception: It's a laptop and the warranty is from the manufacturer.

For explaination of these rules please read the original article here

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Nickel-and-Diming Your Way To Riches, if That's Your Thing

I came across this article in the Wallstreet journal, that has some interesting ideas to make more out of your money.

Article

I thought I was fairly deft at handling money. But that was before I met the maestros of money management.

We're talking here about the legions of Americans who manipulate their monthly cash flow like chess masters, along the way snagging frequent-flier miles, cash rewards and interest income.

Behind all this lies that unquenchable human desire to beat the system, score a bargain and turn a buck. In my book, those are admirable qualities. But you've got to wonder: Is it worth it?

Reaping rewards. To make it as a money maestro, you need the right combination of bank accounts and credit cards -- and a certain financial fanaticism.

Consider Dan Goldzband, a cost accountant in San Diego. He has his paycheck deposited directly into a high-yield savings account, where the money sits until he transfers it to his checking account to pay bills. His reward: $35 to $85 in interest each month.

"My checking-account balance rarely exceeds $100," Mr. Goldzband says. "If it does for more than a couple of days, I am doing something wrong. Of course, only a compulsive like me could make this work. But the general idea, less rigorously applied, would still work for many people."

Don't have much money in your savings account? No problem. Maestros will borrow from credit cards with 0% introductory rates and then use the money to earn a little interest, often stashing the cash at EmigrantDirect, HSBC Direct or one of the other banks with high-yield online savings accounts.

"One year, I took $62,000 in cash advances on four cards with 0% rates and put it in a money-market account," chortles Scott Bilker, founder of DebtSmart.com, who has 80 credit cards to his name. "I made $1,800 in interest."

When the maestros aren't gaming those 0% offers, they're hunting for the credit cards with the best rewards. Thanks to this strategy, Mr. Bilker says he hasn't paid to take his family to the movies for two years. He's also got $500 in convenience-store gift cards, and he garnered a $1,700 discount by charging $17,000 in kitchen remodeling expenses.

For many cardholders, the prize is frequent-flier miles. Bob Smith, a retiree in rural Michigan, has 30 credit cards. He charges everything, from groceries to utility bills, to whichever card is currently paying the highest reward. He figures he and his wife have collected more than 100,000 frequent-flier miles over the past year.

"We've been to Finland," Mr. Smith says. "We've been to Lake Tahoe. And we've got enough points so we can go to Europe again."

Going easy. Add it all up and the savings can clearly be significant. But there are also risks involved. Bounce a check or miss a credit-card payment, and you could get whacked with hefty fees and a black mark on your credit report.

Sound too risky -- and too much like hard work? Forget shuffling back and forth between your checking account, your savings account and the latest, greatest credit-card offer. Instead, go for the easy money.

Pile your expenses onto a good rewards card and be sure to pay off the balance every month. Let's say you charge $1,000 a month to a credit card that earns frequent-flier miles. That should give you enough points every two years to get a domestic round-trip ticket worth perhaps $400 -- and maybe two or three tickets if the card pays double miles and gives you a sign-up bonus.

Meanwhile, if your checking account is on the plump side, keep enough there to avoid triggering fees and move the rest into a high-yield savings account or a money-market fund. If you shift $5,000 into an account paying 5%, you will pick up $250 in interest over the next 12 months.

Most important, focus first on your portfolio rather than your monthly cash flow. Suppose you revamp your $300,000 mutual-fund portfolio, cutting your annual fund expenses by half a percentage point. That would save you $1,500 a year -- without the ongoing hassles that come with juggling credit cards and bank accounts.

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Simple Question..quite a Simple and Real Answer

CNNMoney had this simple question-answer article that explains a 3 step savings plan in lay man terms.

Question:
I'm a 24-year-old woman looking to start a saving plan. I've cleared all my debt and have started an emergency fund, but I'm unsure how to proceed from there. I've read so many books and articles that I'm more confused than when I started. I tried talking to a financial adviser, but she told me to come back when I have $10,000. I'm so worried about doing it all wrong that I'm tempted to just open an IRA at my bank and leave the rest of my money in CDs. Can you point me in the right direction?

Answer:
If you follow a few simple principles you should be able to build some financial security for yourself fairly easily. And you already seem to have a good head start given that you've pared down your debt, started an emergency fund and have already begun to save.

Resist that urge to go down to the bank and dump all your cash in CDs, and instead follow my simple three-step Starting Out plan:

1. Sign Up for Your Retirement Savings Plan at Work

This is the single most important thing you can do to start building long-term financial security. If your company offers a 401(k) or similar tax-deferred savings plan, sign up for it ASAP.
The money you contribute and the investment earnings on that money isn't taxed until you withdraw it. So in addition to improving your financial prospects long-term you also get a nifty little tax break now. Most likely, your employer will also match a portion of what you put in with a 50 percent match of the first 6 percent you put in being the most common arrangement.
Best of all, signing up for an employer's plan makes regular saving so easy. You don't have to write out a check each month; the money goes right from your paycheck into your account before you get your hands on it.
So put as much into the 401(k) as your plan will allow, or as much as you can afford. At the very least, try to contribute enough to get the maximum match from your employer. If your employer's plan has an automatic contribution-increase feature, sign up for that too.
If your employer doesn't offer a 401(k) or similar plan, then contribute as much as you can to an IRA. You can do either a traditional IRA -- in which case your contribution may be tax deductible. Or you can do a Roth IRA. Your contributions to a Roth aren't deductible, but you can pull your money out of a Roth tax-free. For reasons too complicated to get into here, you're probably better off doing a Roth when you're young, although it's not as if you're going to sabotage yourself if you do a deductible IRA.
The most important thing, though, is to put money into some form of tax-advantaged savings vehicle. By the way, most mutual fund companies have an automatic investing option that will move money directly from your checking account into your fund account. Like payroll deduction, this is a great way to make saving easy, convenient and more likely to happen.

2. Invest Smart, but Keep It Simple.

Yes, it is possible to do both. In fact, the fancier people try to get about their investing strategy, the more likely they are to mess things up.
You want to put most of your savings into stock mutual funds, since they have the best shot at high long-term returns. On the other hand, it's always wise to hedge your bets a bit. So you'll also want to keep a small part of your stash in bond funds, which can also add a bit of stability just to keep things from getting too wild.
The easiest way to get a mix of stock and bond funds that works for you is to buy what's known as a target retirement fund. Essentially, these funds are mini portfolios themselves in that they own a mix of stocks and bonds.
You just buy a fund with a date that roughly corresponds to the date you think you'll retire - say, 2050 or so - and you'll get a blend of stocks and bonds that's appropriate for someone your age (probably 80 to 90 percent stocks and 10 to 20 percent bonds). What's really neat about these funds, though, is that they gradually shift more assets into bonds each year so the fund becomes more conservative as you age.
Many 401(k)s offer target funds, and they're widely available outside of 401(k)s through well known fund firms like Vanguard and T. Rowe Price.
If a target fund isn't an option in your 401(k), then you might go with an asset allocation fund, which is similar to a target fund except the stocks-bonds mix remains roughly the same over time. If you choose an asset allocation fund, go with one that describes its strategy as "growth" or even "aggressive growth."
If your 401(k) doesn't offer a target or asset allocation fund, then put 70 to 80 percent of your money in a broadly diversified large-stock fund (a large-company index fund, if possible) and the rest in a broadly diversified bond fund (again, an index fund if possible).

3. Resist the Urge to Tinker.

Once you've got money flowing into your 401(k) or IRA, you may get the urge to "make improvements." Perhaps you'll hear of other types of funds that are doing well. Or a friend may talk about how well his or her investments are delivering smokin' gains.
This is the time when you've got to dare to be dull -- that is, just stick to your nice little mix of stocks and bonds and don't try to do anything fancy.
Believe me, simpler works out better in the long run.
Nonetheless, it is a good idea to "rebalance" your holdings every year or so by selling shares of funds that have done well and putting the proceeds into ones that have lagged to bring your mix of stocks and bonds back to the appropriate proportions. (You don't even have to do this if you're in a target or asset allocation fund; the fund does it for you.)
But unless something drastic has happened -- like your funds have performed horribly compared with their peers over the course of a few years -- that sort of minor maintenance is about all you need to do.
Those three steps should get you started. Is there you more you can do? Sure, although frankly I don't think there's a whole lot more that will dramatically improve your results (other than trying to save even more than what you stash in tax-deferred plans).
I've purposely refrained from giving you lots of links to previous columns of mine and other sources that can provide more detail on various issues I broached above. I did this because you said your head was already spinning from too much information.
But once you've gotten started investing and you've recovered from information overload, I do think it would be a good idea to learn some more about the right way to go about saving and investing, if only to reinforce what I've already said.
So when you feel ready, I recommend you check out our Money 101 library, which has 23 lessons on everything from setting priorities to making a budget to the basics of investing to planning for retirement. They're easy to read and, dare I say it, even border on enjoyable.
So if you take on one lesson a week I can almost guarantee that in less than six months, you'll have an excellent grasp on the fundamentals of personal finance -- and a clear head to boot.

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Keeping Cash Under My Mattress..makes sense !

If growing up in India taught me anything, its that CASH IS KING !
We always saved up the cash first and then bought stuff, no credit cards. Well thats not true anymore, not even in India ! When my wife and I moved to the Unites States and started living in Ohio, we became so used to debit and credit cards, that we never carried cash...we didnt have to! Then we had this ice storm, and the power got knocked out. So no heat, no internet, no phone in my case because I had a VOIP phone..just a cell phone. Well, you can always drive to the nearest ATM and get cash, but the ATM need power too! So when I read this article on the Simple Dollar blog, it made a lot of sense to keep some cash in the home, in the event of ...the unexpected !

Trent@Simple Dollar blog wrote:

It’s true. After all the financial advice I give out on this site, I keep a decent amount of cash “under my mattress” (actually, it’s in another secure place in my home, but it’s effectively the same thing). At first, this seems to fly right in the face of everything I preach on this site. Why isn’t this money at least earning 4.5% in an ING Direct savings account, if not earning a lot more in a mutual fund or something else? No, because this is a different kind of investment.

I keep a small pile of twenties in my home as my ultimate emergency fund. I keep this money on hand for the sole purpose of being available if I have no access to funds in any other way - in the event of an absence of electricity or some other essentials, a cash economy will dominate and I do not wish to risk being in that situation with no leverage to make sure my family has food, water, and protection.

Even though it’s not earning anything, I view this money as an investment. It’s an investment against the unexpected - situations where everything else has failed and I have no other options to turn to. Knowing that it is there provides a certain level of security that money sitting in a bank account somewhere can’t quite provide.

Is this necessary? Let’s step back to Labor Day 2005, when Hurricane Katrina basically wiped a major city off of the map in the United States. Let’s step back to the summer of 2003, when much of the northeastern United States blacked out, many areas for weeks. What about the San Francisco earthquake of 1906 - I do live near the New Madrid fault line, after all. I’m only mentioning domestic disasters so far - what about the tsunami of 2004? The dozens of devastating earthquakes in recent years?

The fact is that such disasters happen, and quite often you have no way of knowing these things are coming. To not be prepared for them on some level is a poor choice, the type of choice that leaves people in situations of desperation, like those poor souls who inhabited the Superdome after Katrina.

I view the pile of bills under my mattress as an insurance policy against such a disaster, so that I can get my family the things that they need or at least get us to a place where we can get the things we need. Is this the right thing for you? That’s a question you’ll have to ask yourself - it comes down to whether or not you feel that such preparation for a relatively slim possibility is worthwhile. Is it? Give it some thought today as you go through your activities - and put a few twenties under the mattress tonight if if feels right to you.

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Grow your Income in 5 ways

Even though most of the suggestions made in this article do not apply ot me, there may be others who might learn something from it.

This article has been written by David Bach who has written many best seller books like Start Late, Finish Rich: A No-Fail Plan for Achieving Financial Freedom at Any Age and The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich

Five Ways to Grow Your Income by 20 Percent
Posted on Monday, February 26, 2007, 3:00AM

One of the things I like most about the new Yahoo! Finance format is the immediate feedback I get from readers. Just last month, my column "Five Ways to Save $2,500 in 20 Minutes" received enormous positive feedback.

I also received comments from concerned readers who basically said, "Your ideas won't work for me -- what else can I do to stop living from paycheck to paycheck?"

These readers certainly aren't alone. I completely understand that too many people today simply can't make ends meet with the salary they're earning. If that's the case, it's time to consider ways to grow your income.

Meet the Egglestons

Over the past year, I've had the honor and pleasure of appearing on The Oprah Winfrey Show as an expert money coach for her Debt Diet series. The mission of this life-changing program is to start a worldwide movement helping millions of people get out of debt and finally realize their goal of true financial freedom.

On the show, I coached an amazing couple -- Dan and Sally Eggleston. Dan and Sally are both elementary school teachers earning a combined income of $92,000, and live in Indiana, where they're raising three wonderful kids. When I first met them a year