Saving Money -- what do I do next?

[magenta321]

Ok, I'm not that good with the money thing. I'm also young, and have no large bills beyond my credit cards, my car payment, taxes, and car insurance.

So while I'm young, and don't have tooo many bills, I figured I better start saving some money. I started out with the checking account and savings acct. that I've had since I was 11. I got two other accounts due to promotions with banks. I was only doing it for the money that I would earn for opening accts (see threads in shop till you drop forums).

Anyway, on my 3% interest account savings acct, I'm syphoning off money from my checking account, in regular and small intervals. I'm socking this money away in sort of a secret savings (as in, I'm trying to forget I have it, so I don't get tempted to spend it). My other savings is readily available should I need it (I consider it emergency only money) and this savings, the 3% acct is like my investment money at the moment.

Since it's a small amount at the moment, I'm thinking the 3% savings is probably a good place for it. However, at what point should I start thinking about investing it in something with a higher yeild? And what is my best bet... cds? stocks? bonds? mutual funds???

Right now we're talking about a very small amt of money. Honestly, I'm afraid to go any further than putting it into a cd. Cds worry me in case I ever needed my money... I hate the thought of paying a penalty for using it.

Stocks scare the crap out of me. Everyone close to me is taking a blood bath at the hands of Tyco, Worldcom, and Quest. I was afraid of stocks even when the market was good. Yeah... I know... in it for the long haul. But what if the rough spots happen right when I need to cash out? Stocks seem like such a gamble.

I am getting rid of all my loans right now... paying off credit cards and hopefully paying off my car loan (two years early, yes!). So, that's going to be my first major priorty (becoming completely debt free) while squirreling money away from myself too. Then I'll be able to put more money away than I am currently.

So any advice for someone just starting to squirrel money away? This will probably ultimately become part of the down payment on a house money, so, hopefully, it will be needed within about ten years or less. Hopefully less but possibly more. Who knows what the future holds?

Anyway... where do I go from here? I know erasing all debt is the first step, since nothing is going to pay me as great of a return as I am paying to the damn credit card companies, or to VW credit But then what?

[magenta321]

Oh, in case it matters, the money might need to be pretty liquid for a while, in case I do decide to go to grad school, and in case I actually have to pay for it. If I do have to pay for it, the rate of savings will not increase once I pay off all my debts. I'll esentially cancel out one debt with another, and the only money I'll be squirreling away will be about the same as what I am doing now.

Damn... I didn't realize how good it was to go to school for free when I was doing it I gotta do that again for my next degree

[vonboob]

You are doing great Margaret: you are on the right track too. Next thing after paying high interest depts, is purchase of a house. There is nothing more profitable than replacing payment for apartament with a mortgage. Saving for down payment should be your priority. If your money has to be easy to withdraw, I'd not bother with any "real" investing: you'll pay too much in sevice fees.

Savings accounts are probably best but you could inquire about another possibility. In Canada there is an option for first time house buyers to use for down payment money tax-sheltered in registered retirement funds. Maybe there is something similar in US. Talk to your bank manager...

[Prepoia[$]]

You can also look into Money Market Reserve Funds. It works like a checking/savings account at a brokerage (Fidelity for example) but they pay a little bit higher than a standard checking/savings account. Another possible (since you need to keep assets liquid) is try using a credit union instead of a bank. They too pay a wee bit higher than most banks.

Sandy

[mjfrombuffalo[$]]

1) Pay yourself first. Take a certain percentage (like 10%) of every paycheck and send it to savings BEFORE you pay your bills. Otherwise, it might not make it there.

2) Figure out how much money you would need to pay all your expenses for three months - car payments, credit cards, etc. That's the amount you want to keep in a liquid savings account so you can get to it if (God forbid) you need it due to sudden problems, job loss, etc. If you drop below your minimum, cut expenses until you're back up to your minimum. Adjust your minimum as your expenses change.

3) Take any money over and above that minimum and look at higher-paying bank accounts like CD's and money market accounts. Neither one is doing very well right now but it's more than regular savings in most cases.

4) If you're starting to think about investing, check with your employer. Are there voluntary investment programs available? I was able to take $20 from every paycheck and buy shares in a mutual fund via my retail employer. Because it was through an employer-sponsored account, I didn't have to pay any account maintenance fees or other fees that I would have had to pay if I walked down to my local Big Investment Firm Branch Office.

I now put $125 a paycheck into a 403(b) (the non-profit version of a 401(k)) which not only invests the money in several types of funds but shelters the money from taxes since it's a retirement account. You're probably NOT thinking about retirement now, but it never hurts to plan ahead and if you start now, you won't have to play catch-up later.

The big key to investing, and why mutual funds are so popular now, is to diversify your assets and your risk. Buying stock can be risky if you don't know what you're doing and can't closely follow the ups and downs of the companies. Shares in a mutual fund are shares in all sorts of stocks of many types in many companies.

Stocks/bonds/mutual funds are also, for the most part, long-term investments, like if you're saving for a house you'll buy 10 years from now. Even if it dips here and there for the short term, the stock market averages better returns than bonds and bank accounts over time. If you're saving for a car you want to buy next year, don't do the mutual funds/stocks route.

Hope this helps.

mj

[brian_igo]

Good advise and good for you!

I'm going to go Paul Harvey on you for a minute. There's a guy in the auto industry named Ignatio Lopez. Weird name and he isn't the most likeable person from what I hear. But for three years in the nineties, General Motors and Volkswagen waged all-out war for his services. GM lured him away from VW by making him the second-highest paid person in the company after the CEO. VW, in return, filed a nine-figure lawsuit against Lopez and GM claiming that Lopez would reveal VW's trade secrets.

Now check this. Lopez isn't a designer or an engineer. I don't know if he could even change a spark plug. He is a purchasing agent of all things. And he made that the most important job in the company. His motto is, "The profit is not in the sell, the profit is in the buy." And he was right. The way he forced suppliers to lower the cost of their products created billions of dollars in profits for GM and Volkswagen.

It's just as true for personal finances as it is for a huge company. Say you can set aside $5,000 a year for savings and investment right now and you're putting it into a conservative but solid mutual fund that is averaging a return of four points over inflation. So after inflation that money you have set aside will grow by $200 after the first year. (And outside of a bubble market, four percent over the rate of inflation is considered a pretty good long-term stock or fund.)

Here's where the Lopez rule comes in. How hard would it be to cut your expenses by $200 a year? That's just four bucks a week. If you can do that you just matched the performance of your $5,000 investmentin the market. What if you can cut $20 a week? At the end of the year you have $1,000 you wouldn't have otherwise. To get the same from your proper investment you'd have to beat inflation by twenty points. And it would have to be tax-free because you're not paying capital gains on the thousand dollars you didn't spend. No brokerage fees, either.

Money you don't spend and money you earn from investments is money in your pocket. Its all profit, and the profit's not in the sell-the profit is in the buy.

What you pay in credit card interest is obviously lost profit. But so are the annual fees. Same for any bank fees. If you're not making $300-400 monthly car payments, there is $3,600-4,800 in annual profit.

What are you paying in monthly expenses? How many phones are you paying for each month, and how many extra-cost options on each? What is your long distance plan? The free long distance on a cell phone is a mirage, divide the minutes you use each month into the cost of your plan to determine what the actual rate is. (The least-expensive long distance available is to cancel the long distance carrier on your home phone and use calling cards: two cents a minute to anywhere with no taxes or fees.)

How often does your cell phone ring when you're not home, and where you can answer it? Calls you get while you're teaching your class might as well go to your message box in the office. And how many cell phone calls do you make that genuinely can't wait until you get to a phone?

Anyone who has problems keeping their checkbook balanced would be better off without it. The $50 (or more) in merchant and bank penalites for one NSF check will buy money orders for all the bills you'll pay in a year. (I'm in that group. About ten years ago I got sick of wasting time balancing and always fighting with my bank. I've only had savings accounts since. Just not having that stress makes it so worthwhile.)

If you belong to a gym, what equipment do you use and can you replace it someplace for less? Does the television package you're paying for match what you watch?

This isn't about denying yourself of what you need, its about not duplicating stuff or paying incredible amounts of money for something when you look at the time you actually use it.

Anyway, that's my advise. Cat's calling-gotta go.


Brian

[murasaki]

Margaret, I won't reiterate some of the great advice already given here. I do want to suggest a book that can help you develop a life-plan for dealing with money: Smart Women Finish Rich by David Bach. The book can answer a lot of your questions about investing and where to put money first in line with your goals, etc. (I've reviewed it on eps if you need more detail.)

You are in the perfect position to start investing now: time is definitely on your side. I wasted some time after I got out of college and didn't start investing until I was nearly 25 and now I'm kicking myself.

You're on the right track!

--naomi

[poseidon]

Perhaps I'm not understanding correctly...

You have credit card bills? Do you mean that you pay them off every month, or do you mean that you carry credit card debt?

If the former is true, then yes, this advice is excellent. If the latter is the case, then I've got to wonder why nobody has told you to pay off those credit card bills first... in full.

When I was in credit card debt, it was impossible to save money. The interest would accumulate faster than I could pay it off. However, once I put my nose to the grindstone and changed everything so that I could get those credit cards paid off, it was amazing how quickly my bank account grew -- by leaps and bounds. In two years, I was able to save enough to put down 20% on my first (and current) home.

And, while I'm not able to save at the same rate I was saving before I bought my home (there's always stuff to fix, update, whatever), I'm still socking away more money than I could ever imagine? Why?

I'm building equity... and it's not just my paying my mortgage every month.

I was smart -- I purchased in a growing area. My property values have climbed 50% in five years. That's money that I don't have to put into my home, that's basically a gift (and a tax-free one at that).

[mjfrombuffalo[$]]

Originally posted by poseidon
Perhaps I'm not understanding correctly...

You have credit card bills? Do you mean that you pay them off every month, or do you mean that you carry credit card debt?

If the former is true, then yes, this advice is excellent. If the latter is the case, then I've got to wonder why nobody has told you to pay off those credit card bills first... in full.

I thought of that, but everything I've read stresses you need a savings cushion first just in case. It won't help to toss the $$ at the credit cards if you have no savings and suddenly lose your job or something that might prevent you from making the minimum payments on the debts.

But you're right, before investing money and earning 6% on it, pay off what you owe at 19%.

mj

[jenninca]

I got a book at the library yesterday that looks pretty interesting. It's called How to Get What You Want With the Money You Already Have and it's by Carol Keeffe. I haven't read much of it yet, but so far it seems to advocate what MJ said - don't pay the credit cards without accumulating some savings. That's what I've been trying to do. I've been making big credit card payments thinking that after they were paid off, I could put those big payments in the savings account. However, the credit cards either got some more charges (oops!) or something else came up, like auto insurance or car repairs or test fees that would prevent me from saving. Or I'd take those big payments and use them to double up on car payments. Bottom line, no savings. So now I've decided to do that pay yourself first thing.

Cindy