Free Money Finance

The Value of Education

In the early days of this blog, I wrote how a key part of increasing your net worth was to maximize your income. One way to do this is to get a college education -- even beyond a 4-year degree if it suits your disposition. Why? Consider this from Money magazine:

The money you spend on a college degree still yields a sizable return on your investment. Over a working lifetime, the typical college graduate earns about 75% more than a high school grad does. On average, that difference totals $1 million more -- easily enough to re-pay those student loans and then some. The payoff from graduate school is even bigger: People with advanced degrees earn two to three times as much over their lifetimes as those without a college degree and increase their average total earnings by as much as $2 million.

Personally, I would be making a fraction of what I make today if I hadn't gotten my MBA. It opened the door to my first job (at a Fortune 500 company) that set my career on the right path.

Don't Give Up on Index Funds Yet

Smart Money has a good post on index funds and how they may (or may not) be replaced by exchange traded funds (ETFs). First, let's set the scene:

"Like index funds, ETFs are structured to mimic the performance of a benchmark index. Unlike index funds, their value updates throughout the course of the trading day, and they can be bought and sold like stocks. And ETFs are cheap. The average expense ratio for ETFs is 0.42% vs. 0.93% for index funds, according to Lipper. For all of these reasons, ETFs are gaining in popularity."

But Smart Money says, "We're not ready to eulogize index funds just yet." The details:

"For one thing, a number of fund companies have responded to the onslaught of ETFs with lower fees on their index funds. This is particularly true among S&P 500 index funds, which have engaged in a fee war over the last year."

"Clark thinks that index funds with fees of less than 20 basis points (or two-tenths of a percentage point) are "in the game." Of course, apples to apples comparisons of index fund fees with ETF fees aren't exactly fair to begin with. That's because, for now, ETFs can be purchased only through a broker, a transaction that in itself involves a fee. Most index funds, on the other hand, are available without a transaction fee when purchased directly through the issuing fund company.

The article then goes on to recommend various index funds based on criteria set up by Smart Money.

I have good-sized investments in the E*Trade and Vanguard index funds noted above. I'm not really anxious to change, but I'll keep an eye on this situation in case better opportunities do open up with ETFs.

Money Making Idea: Don't Flirt

Here's an idea you may not have thought of for making a higher income: don't flirt.

USA Today discusses a study that says flirtatious women get fewer raises and promotions. Here are a few main points:

"Women who send flirtatious e-mail, wear short skirts or massage a man's shoulders at work win fewer pay raises and promotions, according to a Tulane University study."

"Brief said the study goes so far as to suggest that women should even be careful about letting men open doors or lift boxes that aren't particularly heavy, because chivalry is "benevolent sexism" that advances the stereotype that women are vulnerable and weak. But Durkin says the pendulum can swing too far, and she praises men for opening doors, says hugs between longtime business friends are OK, and is happy that more feminine attire has replaced the female suit and tie."

Pretty interesting stuff. If you're a working woman (or married to/dating) one, you should pay attention to this advice. Ignoring it could be detrimental to your income.

New Feature at Free Money Finance: Money Making Ideas

One of the things I find lacking on many personal finance blogs (this one included) is the absence of tips on how to increase your income. And since maximizing your income from all sources is my Principle #1, I thought it was about time that I had a regular feature on it.

Rest assured that I won't start posting about off-shore financial schemes or how to set up your own import/export business. I'll focus on simple, easy, practical ideas that almost anyone can do -- the same types of things I try to do in other areas of this blog.

So stay tuned. The money making ideas are soon headed your way!

Michael Jackson and More: It's Not What You Make, It's What You Spend

As a follow-up on my post talking about It's Not What You Make, It's What You Spend, here are two real life examples from the news today:

First we go to Michael Jackson (everyone's talking about him, so I might as well too).  In an article titled "Michael Jackson's Money Troubles" it states:

"Jackson is thought to be in deep financial straits despite owning various music and real estate assets worth as much $600 million."

Why? It goes on:

"The King of Pop, for all his assets, spends far more money than he generates these days, according to an expert who testified at Jackson's trial."

Isn't that the same story for many today?

The second story is about Mike Tyson, the ex-heavyweight champ who lost his most recent fight this weekend.  ESPN reports:

"Though he once had $300 million in the bank, now Tyson is $24.4 million in the red, even after a settlement with promoter Don King that would pay the former champ $14 million."

If you need even more examples, check out "Debt Disasters of the Rich and Famous".

Once again: It's not what you make, it's what you spend that determines your net worth.

Update: Time to post on the Beltway Traffic Jam.

Investing for Beginners

Financial companies often portray investing as a complex, highly technical process, only to be attempted by trained experts.  In reality, the basic principles of investing are rather simple.  And if you follow these principles, you can do very well investing.  So whether you are saving for retirement, college, or just working to make your money grow, here are the basics you need to know to maximize your gains.

Time is Your Ally 

One of the most important investment principles is “invest early and often”.  This allows your money to earn compound interest – the snowballing process where your money earns money.  Given enough time, compounding can turn even a small amount into a fortune.

Consider Steve and Jim.  Steve began investing at age 25 and contributed $2,000 per year for ten years.  Jim waited until age 35, then invested $2,000 per year for 30 years.  Assuming both men earned 10% on their investments, who has more money at age 65?  Surprisingly, it’s Steve!  He has over $612,000 while Jim has under $370,000.  Why?  Steve’s money started working for him earlier; compounding its value.  If Steve had continued contributing $2,000 per year until age 65, he would’ve had almost $1 million.  Make time work for you by investing early and often.  The sooner you start investing, the better!

Maximize Your Return with Stocks 

The return you earn on your investments is as vital as the amount of time you invest.  Using the above example, reducing Steve’s return from 10% to 9% would produce only $440,000 instead of $612,000.  An 11% return would earn almost $850,000.  A single percentage point of return can make a huge difference over time.

To maximize your investment, use stocks.  Stocks have historically outperformed all other investments.  Over the last 75 years, they averaged 11.4% annual gains compared to only 5.1% for bonds.  But since stocks are volatile, they carry more risk short-term.  So use stocks for long-range goals, ten years or more, to reduce risk.  Doing so will also allow you to take advantage of compounding.

If your time horizon is less than ten years, you’ll need to move more investments into bonds or CDs.  A general rule: once within ten years, the sooner you’ll need your money, the more you need in non-stock investments.

Mutual Funds with Low Costs are the Best Way to Buy Stocks for Most Investors. 

Mutual funds are groups of stocks or bonds chosen and managed by an expert.  In exchange for an annual fee and other expenses, you get professional direction and instant diversification.  The most predictable element about a fund’s future success is how much you’ll be charged to own it – because the more they charge, the less they have available to return to you.  Do your homework and investigate all the fees involved before buying a fund.  Avoid those that charge a sales fee (also called a load), tack on high operating expenses, and lose a substantial portion of your gains to taxes.   

Index Funds are a Wise Choice

Index funds are mutual funds where the manager buys all the stocks in a market benchmark or index average (like the Dow Jones Industrial Average or Standard & Poor’s 500) rather than actively picking which stocks to purchase.  Funds based on an index, by definition, will never outperform the market. But because they minimize trading, tax, and sales costs, they outperform the vast majority of actively managed funds over time.

Take Advantage of the Government

The government has numerous programs to help you invest. The main ones are IRA’s and 401k’s.  With these investments, you pay no taxes until you withdraw funds, giving you a better total return on your money.  Better yet, contributions to these can often be deducted from your annual earnings, reducing your annual taxable income.  And some employers will match your 401k contributions, allowing you to earn even more.  The drawback?  There are severe penalties for early withdraw of these funds so don’t invest money you may need in the short-term.

These simple steps provide the recipe for you to manage your own investments. Take some cash, add this advice, and allow some time for it to grow.  Before you know it, you’ll be well on your way to investing success!

Turn a Hobby into Income

Isn't it everyone's dream to take a hobby, something you love to do, and start making money from it?  While you'll probably not make millions doing so, you can add some additional income (which you can use to pay down debts or save). 

I found an old article (two years old, but still valid) at Entrepreneur that claims, "Whether your passion is pottery, painting or playing video games, there's money to be made from your hobby."  Here's the opening paragraph:

"Spending your free time gardening, restoring classic cars or collecting antique jewelry can be a joy, right? It's the thing that renews your passion, the thing that makes you feel that all is right with the world. Wouldn't it be great to find a way to make money doing what you love? Turning your treasured hobby into a business will take hard work and a truckload of creativity, but the rewards are endless. You'll be doing what you love--and getting paid for it."

Check out this article and think about how your hobby might become part of a Principle 1 plan for your finances.

Update: Time to post to the Beltway Traffic Jam.

The Best Financial Advice I Can Give, Part 2

Here's part two of our series asking five top personal finance experts to offer their single best piece of advice:

“Spend less than you earn. Successful financial planning really stems from that simple statement. If you retain a portion of your current income, you’ll soon ask yourself a question: what should you do with that money? And that question is the beginning of wealth creation. It is essential that you do not spend 100% (or more) of your current income on current expenses. One day, expenses – housing, education, medical, retirement – will exceed your affordability if you are relying solely on current income. That’s why you’ll be glad (and relieved) that you’ve got past income to rely on.  Spend less than you earn. That’s how rich people got rich.”

Ric Edelman, author of several best-selling books on personal finance, including “Ordinary People, Extraordinary Wealth.”

Principles 1 and 2.  Maximize income, minimize expenses.

Continue to part 3 of The Best Financial Advice I Can Give.

Update: Time to join the Traffic Jam at Outside the Beltway.

More Creative Ways to Create Cash

My post a few days ago on how to create cash seemed to hit home with people.  So, I thought I'd give you some more ideas for turning up extra dollars:

• Sell stuff – Consider turning some of your belongings into cash.  Have a garage sale or place ads for items of value you own but can do without such as antiques, cars, appliances, etc. Just by cleaning out your closets each spring and fall you can easily earn $200 to $300.
• Get a part-time job – Most Americans are already working pretty hard, but you may be able to pick up an extra part-time job for a year or so.  That extra $200 per month could come in handy as a debt-fighter.
• Change your withholding – Americans get tax refunds averaging nearly $2,000 because they claim low exemptions.  Although people like refunds, they are really giving Uncle Sam an interest free loan!  Set your W-4 exemptions correctly and you could generate over $100 per month.
• Cash out insurance – For those people who have cash value insurance, you may be able to get access to that cash.  But there are drawbacks, and this can be a complicated venture.  See your insurance agent for specifics.
• Restructure your debt – Consider taking out a consolidation loan to borrow at an attractive rate, and then use this money to pay off higher interest rate loans, effectively “moving” a chunk of your debt to a lower-cost loan.  Again, you have to be disciplined and not spend the windfall, but this can often allow you to be debt-free sooner. The down side to consolidation loans is that you’ll have to pledge something of value (that you might lose if you default) as collateral.

That's it for this time.  Come back frequently -- we'll have more!!!

Eight Unusual Ways to Create Cash

If you've been reading this blog for any amount of time, you know that Principle 1 is to maximize income from all sources and Principle 2 is to minimize expenses.  But these are easier said than done.  After all, everyone would have more money if it was that easy to make more or spend less, right?

O.k., I'll give you that making more might be a bit tough, but it's also not impossible.  And spending less is relatively easy if you approach it with the right attitude and commitment.  In fact, here are eight ways you can create extra cash that you may not have considered -- some simple steps to help you uncover hundreds of dollars you probably already have!

Discover Antiques

PBS’ popular Antiques Roadshow has demonstrated that many people unknowingly have valuable antiques in their homes.  For instance, one woman discovered the “worthless” vase given by a friend was actually a rare piece worth $12,000.  Scour your closets, attic, and basement and take items you suspect are valuable to an expert for appraisal.

Or if you enjoy searching for treasure, hunt for antiques at garage sales, flea markets, and consignment stores.  An avid cookie jar collector, Tiana Brown of Jasper, Georgia recommends the following for new collectors: “Start off slow and small, and pick an area of antiques/collectibles that captures your fancy. Browse as many antique stores as possible to get an idea of where you would like to start, and what resale price range you can expect on your specialty.  Keeping in mind a small percentage for resale profit, set a limit of what you will bid for an item.”  For tips on how to find and buy antiques, check out the Antiques Roadshow section of www.pbs.org or read Buying and Selling Antiques: A Dealer Shows How to Get into the Business.  You may find something priceless!

Use Only Cash

It seems impossible to exclusively use cash in today’s credit-oriented world, but those who do “create” significant cash.  How? By spending dramatically less. Ron Blue, author of Master Your Money, notes that the mere use of credit cards causes a family to spend 34 percent more even if the statement is paid off monthly.  Author Nancy Dunnan agrees in Never Call Your Broker on Monday by noting, “People like your parents or grandparents actually went through life using checks or cash.  It worked then and it works now.  Do the same and you’ll wind up spending 20% to 45% less.”

So use cash and reap a windfall. Imagine how spending one-third less could impact your family finances!

Practice Self-Control

One of the greatest ways to save money is to avoid impulse buying.  Establish a rule that if you see something you want, you’ll wait at least two days before purchasing it.  If you still feel you need it, then buy it.  In most cases, the desire to have that item will be gone, and you'll have avoided an unnecessary purchase. 

Financial counselor Larry Burkett recommends a similar plan in Your Finances in Changing Times.  Larry comments he experienced dramatic results when he initiated a delayed purchase plan for tools (his weakness): “I continued that plan for over six months without purchasing a single item on my chart.  The reason was obvious: once I left the store, the impulse passed.”

Eliminate Debt

(yes, even Principle 3 is in this post)

Paying off a credit card charging 17% annual interest is equivalent to investing money with a before tax, guaranteed return of almost 20% -- a rate any investor would love. According to debtguru.com, the average amount of credit card debt in households with more than one card is now more than $8,000. That’s 167% more than the $3,000 average for households in 1990.  Eliminating this debt would save almost $1,400 per year!  If you need help getting out of debt, call the nonprofit National Foundation for Consumer Credit at 800-388-2227.

One way to lower debt easily is to refinance your mortgage.  By lowering your rate only 1 ½%, you’ll save over $64 a month over 15 years on a $75,000 mortgage (a total savings of almost $11,600!).  Many banks are so hungry for customers that they’ll forego the closing costs you’d normally pay.  (Your current bank may be willing to decrease your rate just to keep your business.)  But even if you pay these costs, it makes sense to refinance if you will own your house long enough to re-coup the expenses. 

Maintain Your Stuff

One way to create cash is to avoid major expenses.  Regularly maintaining the high-cost items you own can significantly increase their lives. This means servicing your car regularly, having the furnace and lawn mower cleaned seasonally, and vacuuming refrigerator coils monthly. Check owner’s manuals for maintenance specifics.  Maintaining your possessions can keep them running more efficiently and lasting longer saving thousands over the years on utilities, repair bills, and, of course, replacement costs.

Jodi Doyle (formerly) of St. Petersburg, Florida has reaped the benefits from this practice.  "My last refrigerator and washing machine each survived 20 years and a move to Europe because I took care of them regularly,” she comments with pride.  “It took some extra time and effort, but I even performed preventative maintenance.  And the appliances repaid me by lasting much longer than I expected.”

Get Money That’s Owed to You

Believe it or not, there are billions of unclaimed dollars in America.  They are held by federal and state governments as well as private companies in the form of pensions, bonds, taxes, real estate, and savings accounts.  These items have been forgotten, abandoned, or belong to unsuspecting heirs of someone deceased.  In Assets Unknown: How to Find Money You Didn’t Know You Had, David Folsom outlines the process people should follow to find assets owed to them.   Folsom notes that discovering these assets is easier than you’d think.  In addition to his book, he says a seeker simply has to use “her telephone, some stationery, and a little common sense.”

Folsom claims several success stories such as the retired school nurse who found $5,000 in retirement funds due her nineteen years after she left the job. Uncover any hidden assets you’re due by following Folsom’s advice or checking out www.unclaimedassets.com. 

Get Freebies and Coupons from Companies

Many companies will give you products just for asking because they want you to try their brand.  To find a list of freebies, call for Freebies magazine at 805-566-1225 or search under “freebies” at www.google.com.

Or if you’re more of a “show me the money” kind of person, simply ask companies for coupons. Getting coupons on products you always buy is money in the bank.  Check out the internet (www.valupage.com) or contact a company directly for coupons.  Sandi Johnson of Bloomfield, Iowa regularly writes companies and compliments their products.  She has received free products, coupons, and other offers for a small time investment.

Asking for Discounts on Purchases

Many retailers are willing to sell an item for less than the listed price, but most consumers don’t think of asking.  With mark-ups of 20-100%, stores have plenty of room to lower prices and still make money.  So ask.  Also, be knowledgeable.  Come armed with competitive prices from other stores or the internet.  And if you’re not satisfied, use the greatest power you have -- walk away.

One effective technique is to offer cash when negotiating.  Nancy Dunnan points out that “retailers, restaurants, and hotels pay 2% to 5% to the credit card company when you use your card.  If you pay cash, bargain for a discount.” But 2% to 5% is just a start. There’s something magical about cash that just makes people want it.  The powerful sight of five $100 bills for that $750 couch will be hard for many managers to refuse.

Dave Ramsey, best-selling author of Financial Peace, wholeheartedly recommends bargaining with cash.  And so he should.  Ramsey bought his three-year-old van for $4,000 below wholesale book value simply by “laying out sixty $100 bills in front of the seller.”  As Ramsey placed the last bill down, the seller scooped them up and said they had a deal.  Kelly Talcott from Nashville, Tennessee offered $350 cash for a $500 mattress.  The combination of a slow sales season for bedding (the holidays) and the offer of cash was enough for the salesman to accept immediately.  Talcott then got him to throw in bed rails and delivery for free.

These are just a few unique ways you can create cash.  Use them to give your family that extra cash you need.

Update: Check out Outside the Beltway.  I'm part of the Traffic Jam!!!

Principle 1: Maximize Income from All Sources

As discussed in the last post, your personal financial health comes down to five simple principles. That’s it. Just five.

However, it’s not that easy. (It never is.)

These five all have significant sub-points. So over the next few days, we’ll take each of the five principles and describe these sub-points.

Principle 1 is to “maximize income from all sources”. In order to maximize your income from all sources, you must:

• Get as much education as possible – the more meaningful education you have, the more money you’ll make.
• Manage your career like an asset to maximize your happiness and income.
• Consider generating more cash by starting your own business, getting a second job, turning a hobby into a cash business, or being creative like renting out a room in your house.
• Make your money earn money through investing wisely.

Yes, there are exceptions to all of these. Bill Gates didn’t get 30 years of education. Warren Buffet doesn’t have a second job (and though he likes bridge, I don’t think he’s turned it into a money maker), and Ross Perot doesn’t have a co-ed living in his basement (at least to my knowledge he doesn’t). So while there are exceptions to the rule, generally, for the vast majority of people out there, these hold true.

And since they impact almost all of us, we’ll be talking about them quite frequently as we learn to follow Principle 1.

Click here to read about Principle 2.