May is graduation season. I am always looking for articles to help get kids who are just getting out of college headed on the right track. Below is one of those articles. The article is on financial matters from the Wall Street Journal. Short and to the point, the items listed below are a great start for young adults just starting to manage their own finances. Reading them over and over helps build our resolve to do the right things with our money.
There are lots of ways to blow your money. Here are a few that stood out to me:
–Don’t start saving today. In reality you should never delay. Pay yourself first.
–Do not contribute to your 401(k). In reality, you should ALWAYS save at least to the maximum of your employer match in your 401(k).
–Carry a credit card balance. In truth, it should be standard operating procedure to pay off your credit cards monthly.
–How about buying a new car every three years? No way. I have owned three cars in the past 25 years.
There are lots of ways to spend money. See below for a few more, and the realities you should embrace with your finances.
Rule #10 from my book The Fantastic Life: Take the Decision out of the Moment
Be clear with your intentions. Don’t wait until the last minute to decide what to do. Form habits and values and practice them so that they become instinctual. Practice saving and paying off your debts every month so that when you start making real money, these things are second nature. When you have these habits in place, a stressful topic like finances becomes one less thing to worry about.
How to Throw Away a Fortune
Smart Moves to Neglect and Stupid Ones to Make
By JONATHAN CLEMENTS
Sept. 13, 2014 8:05 p.m. ET
Today’s topic: How to throw away a fortune—in seven easy steps. Ready to waste money? Here are some surefire strategies:
1. Delay saving.
Suppose you work for 40 years, save $250 a month, your investments earn a 5% pretax annual return and you lose 25% a year to income taxes.
If you start saving as soon as you enter the workforce, you will have roughly $279,000 at retirement. But if you delay by just 10 years, you’ll amass $167,000, or 40% less.
2. Shun retirement accounts.
OK, maybe it’s worth saving for 40 years. But is it really worth locking up money in retirement accounts, with a 10% tax penalty to discourage withdrawals before age 59½?
Let’s use the assumptions above. But suppose you skip the taxable account and instead fund a Roth individual retirement account, which can deliver tax-free growth. After 40 years, you’d have $383,000, with no taxes owed.
What if, instead, you had opted for a tax-deductible IRA? You might lose 25% to taxes when you cash out your IRA in retirement. But if you’d invested the tax savings from the initial tax deduction, you could sock away $333 every month, rather than $250. Result: After taxes, the tax-deductible IRA should give you $383,000, just like the Roth.
3. Forfeit the employer match.
Roughly 20% of eligible employees don’t salt away money in 401(k) plans, including plans with matching employer contributions, according to a survey by Chicago’s Plan Sponsor Council of America.
Are you among those who don’t contribute—or don’t contribute enough to get the full match? You could be missing out on a heap of dough.
Let’s assume your employer matches 401(k) contributions at a rate of 50 cents for every $1 you contribute. If you saved $333 a month for 40 years and collected the match, you’d have $575,000 at retirement, even after paying all taxes.
4. Buy active mutual funds.
We’ve been assuming a 5% annual investment return. But what if you buy actively managed mutual funds, rather than market-tracking index funds? Sure, you might enjoy the occasional market-beating year—but it is highly unlikely you would earn market-beating returns over 40 years.
A more likely scenario: You lag behind the market, perhaps by one percentage point a year, so you earn just 4%. Suppose you funded the 401(k) with the match for 40 years. At 4%, you’d have $445,000 after taxes, or 23% less than with the 5% return we assumed above.
5. Carry a credit-card balance.
In 2014’s second quarter, the average credit-card debt per borrower was $5,234, according to TransUnion, the Chicago-based credit bureau. Imagine you kept your card balance at that level, but incurred 20% in total annual interest costs. That would be almost $42,000 in interest over 40 years.
What if you hadn’t paid that interest, and instead stashed the money in a Roth IRA, where it earned 5% a year? After 40 years, you would have another $133,000 for retirement.
6. Get a new car every three years.
Let’s say you bought a $30,000 car. You might recoup 56% of the car’s cost if you sold it after three years, which means you’d need to pony up another $13,200 to buy a new $30,000 car.
By contrast, if you kept the car for six years, you might recoup just 34%, so you would need to come up with $19,800 to buy a new $30,000 car. But because you’re buying a new car less frequently, you’d spend $6,600 less every six years.
The potential cost savings are even greater if you drove the car for more than six years or, alternatively, bought a used car. True, you might incur somewhat higher repair bills by driving an older vehicle. But you would also save on insurance, which should be cheaper for a less valuable car.
7. Remodel your home.
Think that new kitchen will be a great investment? Check out Remodeling magazine’s survey at CostvsValue.com. According to the 2014 survey, a major kitchen remodeling might cost $54,909, but add just $40,732 to a home’s resale value. The survey found that other home-improvement projects were also money losers. Moreover, the longer you wait to sell, the shabbier your renovations will look and the less you’ll likely recoup.
I have nothing against home improvements. But you should undertake them because they will give you a lot of pleasure—and not because you think they’re a good investment.