Finance Tip - Overheard Edition

Saturday afternoon I was on the bus making my way up Wisconsin Ave, when I overheard a girl talking on the phone. The bus was very crowded, I was standing next to her, and she was talking loudly. She was talking to who I assume was her mother, and she wanted her mom to try and get her a credit card again since she now had a job and was 21. She wanted this credit card so she could "make the minimum payments" and not have to pay back the full amount to her mother each month.

There were so many things wrong with this conversation. First of all, a credit card does not equal free money. By not paying off her balance each month, she is paying somewhere been 20 - 25% interest on all of her purchases. This means $100 for a pair of shoes turns into $120. Also, by making only the minimum payments each month on your credit card, this means that you are carrying over the balance month to month, meaning you are paying interest on the carry-over. Let's say you have a credit card bill of $500, and you make the minimum payment of $10. The next month, you spend $400, but the $490 that you didn't pay off the previous month rolls over. Then, you have to pay 20% interest of the new total ($1090) * 20% + $1090 = $1308. Now your $1,100 in purchases has turned into $1,308. See how quickly it escalates.

Seeing that she was so young, this is a crucial stage for her to learn proper money management. Mistakes she makes now will effect her future - they run a credit report (usually) when you apply for a lease to rent an apartment, they sometimes run a credit report when you apply for a job, your credit score will come into play if you want to take out a loan (maybe for school or a house), and if your score is high, then your rate will be high, and you will end up owing more than someone with a better score.

The moral of the story is - pay off your credit card in full every month (or make more than the minimum payment at the very least). And don't have loud personal phone conversations on the bus if you don't want others listening and then blogging about your life.

Finance Tip

I have been reading some finance blogs (my favorite of which is Get Rich Slowly), and have decided that I shouldn't let my vast knowledge of Finance go to waste, so here comes a Finance Tip:

401ks: A 401k is a special type of saving account where you can save money for retirement. Most companies should offer at least a 401k plan, and some companies offer matching (more on this below). The reason that 401ks are so valuable are that you can put your money into an account tax free. The taxes are deducted when you withdraw from the account, which assuming you don't withdraw the money until you retire, and if you are retired you probably are making very minimal income, your taxes on the money will be very minimal, as opposed to now when you are in a much higher tax bracket because of the money you are earning.

The key to a successful 401k plan is that you do not withdraw the funds until you need them, preferably when you retire. If you decide to withdraw the money, you will incur a penalty fee for doing so, AND you will have to pay the taxes on the money was well. This is not a wise choice. The IRS have made a few concessions to let people withdraw the funds penalty-free (but you will still have to pay the taxes) for things such as buying a home, if you or a family member get sick with something like cancer, etc.

I mentioned above that some companies offering matching to a 401k plan. Each company's matching program works differently, but let's say your company offers matching up to 3%, this means that if you put 3% of your revenues into your 401k plan, your company will MATCH that 3% that you put away. Did you get that - that's free money! When the recession hit, I know a lot of companies (mine included) took away the matching feature, but that's doesn't mean that you shouldn't utilize the 401k plan if there is no matching. Also, at the very bare minimum, you NEED TO at the very least be invested whatever you company is matching. If you don't then you are simply throwing away free money.

Another thing to note about retirement saving in general is that many people think that being in your 20s means that you don't have to think about saving for your retirement, that this is something you think about when you in your 40s or 50s. But this is exactly the time to be saving for your future. There is something called compound interest, called "the greatest force in the universe" by Albert Einstein, means that you are earning interest on the interest from the money you have in there now. I won't bore you with boring calculations, but basically it boils down to the fact that if you invest just a little in your 20s for your retirement, you will have a lot more money at retirement time than someone who invests substantially more but waits until their 40s to start For more information on this, read this.

For those of you who aren't already investing if a 401k plan, DO IT NOW. For those of you who already are, see if you could invest more. If you are not taking of advantage for your company's matching, DO IT NOW. Lastly, if your company does not offer a 401k plan, there are other alternatives such a Roth IRA or a 403b.

Hope you all learned something, and look forward to more Finance Tips!

Productive Day at Work

So it's Friday afternoon and I'm sitting here counting down the hours and minutes until I can leave work and have the glorious weekend begin. My sister is out of town and she let me borrow her car, so now I have all this freedom at my fingertips!

First, let me start with some celebratory news - I got a raise at work! They love me so much over here! Hooray! It was effective Jan 1, so this paycheck included all my retro-active pay so my paycheck was extra happy this time!

Speaking of paychecks, I was thinking about how much money I pay in rent, and I calculated it out that I pay about 32% of my take-home pay to rent. Now, this number is skewed a lot because I am basing it off of my paycheck amount, which includes my deductions for things like flexible spending and my 401k - which I try to put a lot into, but more on that later.

Anyways, I got to thinking - what is a normal percentage of my take-home pay to spend on rent for a 20something? I think 50% is way too much, especially if you are one of those people who are never home. I also think it's always a good thing to live well below your means, but what is the norm?