Archive for the ‘Personal Finance’ Category

10 ways to get your finances back into shape for 2008

Why? You might ask. Some might say why not but that’s just being cliche and not doing anything to help. How about so I can do a blog on “10 ways to invest the money you’ve made from 2008 in 2009”. Ok, that’s a cold one.

Start of the year is always about goals and resolutions, because doing that in Feb is too close to valentine to do any finance planning, in May and it’ll be weird and Oct, Nov’s just a case of hugging the Buddha’s leg. Let’s just take this crash course in personal finance. Always remember, all this , though everything might be reiterated, it helps you to stay focus and it’s always easier said then done. Treat it like a to-do list for the entire year.

Monitor every cent

Don’t just think about how money is going outpro on you, you must look at them in numbers and specifics! The human mind always tend to dilute ugly facts/guilt that you have just spend waaay to much on gadgets or drinking or handbags. Look at the numbers, feel the pain, you’ll need to be constantly reminded of the pain! If you find this too tedious, get some software, like an on-line tool Wesabe, or you can use a piece of software like Quicken or Microsoft Money. If not, the more manual way like a cash notebook and filing your receipts. Personally, it does not matter how you go about doing it. Just start and stick with it!

Have a backup fund

For years I lived paycheck-to-paycheck. I spent everything I earned. This worked well until something went wrong. And something always went wrong. Suddenly I’d find myself without money to pay for a car repair, or facing an expensive doctor’s bill. I financed emergencies with credit cards. After years of carrying debt, I finally paid off all these emergencies last month.

In The Total Money Makeover, Dave Ramsey explains why he believes an emergency fund should come before anything else:

Since I hate debt so much, people often ask why we don’t start with the debt. I used to do that when I first started teaching and counseling, but I discovered that people would stop their whole Total Money Makeover because of an emergency — they felt guilty that they had to stop debt-reducing to survive.

After you’ve saved $1000, then you can attack your debt. Open an online high-yield savings account (Standard Chartered and most banks seem to have one of these)and add $20 or $50 to your account ever time you get paid.

Set up a budget

After you’ve tracked your spending for a few weeks (or months), use the data you’ve collected to develop a budget. According to The Millionaire Next Door, budgeting is one thing that sets the wealthy apart from the rest of us — 55% of millionaires keep a budget.

Please for Christ sake, get out of debt

Are you struggling under a heavy debt load from credit cards or student loans? Make it a priority to unload some of this this burden in 2008. It feels fantastic to have that weight off my shoulders.

If you have the mental discipline, you’ll save money by paying down your high-interest debt first. But if you’ve tried that method before and failed, consider using a debt snowball. Pay your debts starting with the smallest balance first. Here’s how:

  1. Order your debts from lowest balance to highest balance.
  2. Designate a certain amount of money to pay toward debts each month.
  3. Pay the minimum payment on all debts except the one with the lowest balance.
  4. Throw every other penny at the debt with the lowest balance.
  5. When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.

The debt snowball can give you awesome psychological payoffs, keeping you motivated to stay in the game. It’s not mathematically ideal, but it worked for me=)

Start a retirement account

If you’re young, you probably don’t think you need to start a retirement account. You’re wrong. No matter how old you are, now is the time to begin saving for retirement. Compound returns favor the young, and in a big way! (Here’s an illustration of the rule of 72.) In The Automatic Millionaire, David Bach writes:

The single biggest investment mistake you can make [is] not using your [retirement] plan and not maxing it out.

Be frugal, spend less than what you earn

This is the fundamental money skill. It’s common sense, yet many people never learn do it. Only by spending less than you earn can you hope to build wealth. This is easier to do if you track your spending or develop a budget, but those steps aren’t completely necessary. Even if you do nothing else in this list, spending less than you earn can put you ahead of your peers.

Automate your finances (use more GIRO)

My current project is to move toward a system of paperless personal finance. Along the way, I’m learning the value of automating routine transactions. When you make things automatic, you remove the human element, making it more difficult for you to mess things up.

The classic example is overdraft protection. By tying your checking account to your savings account, you have a safety net if you bounce a check. But there are other ways this can work for you. For example, I’ve set up automatic payments with the gas company, the cable company, and my car insurance company. I also make automatic investments to my retirement account.

Cancel your credit cards leaving one

You don’t need all the flood of letter arriving at your doorstep reminding you that your annual subscription fees is here. Too many cards and you’ll forget when one is due and not. The discounts aren’t that fantastic anyway so let’s just cut them up.

Don’t drink, smoke or gamble

$11.60 per Marlboro Menthol? $205 for Chivas? Enough said.

Educate yourself

Knowledge is power. Personal finance doesn’t have to be a mystery. Subscribe to this site.

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Daily Rant : Don’t you get the feeling that money buys LESS these days?

I was at my friend’s for a visit an stayed over 12.  He kept a huge collection of old-time comics which really brought back fond memories of those days where I would sneak Dragonball/Old Master Q into classes and pretend to look interested.

Thereafter I took a cab back to my place, and Both of us live in Tampines.  Guess what, the bill came out @ $6.  yes, for a trip less than 2km, it was 6 dollars.

It was infuriating. I wish I earn that amount everytime I do a 2.4km run.

And this is just a service product. For any individual, the biggest asset one can own is probably this. His Home. But a pity that commodity is the one rising the fastest these days.

Inflation is sky high now and that is not going to stop. I have repeatedly mentioned that property prices in Singapore have been kept artificially low, but now with the surge of investment money with all the high profile acts in singapore, prices are set to soar like never before.

Yes, it will be unprecedented.

Yes, our prices will join the ranks of Hong Kong, Japan soon. If not, we are already on our way there. There is no running away. Especially with Singapore’s policy in welcoming foreign talents, we are already on our way to a vicious cycle.

Cycle 1:

more foreigners >> less housing available >> higher prices

Cycle 2:

High profile acts (F1, IR) >> Red hot asian investment outlook >> more foreign investment coming in >> speculation in properties

There is an urgent need to make your money work even harder for you now. Sometimes I don’t really understand why is it that one can pour some much time into their mundane office work and yet cannot afford to spare some time to sort out what to do with money on their hands.

With inflation this high, YOUR MONEY IS WORTH LESS EVERY PASSING DAY.

How To Get Out of Debt (Study loan, Credit Cards after your new job)

from :getrichslowly

Nick writes with a common question:

I am a NTU student with $15,000 of debt. What is the first step in paying this off?

Debt elimination involves three steps:

  1. Stop acquiring new debt.
  2. Establish an emergency fund.
  3. Implement a debt snowball.

Here’s how to approach each step. (I’ll use Nick’s situation as an example, but the principles apply to everyone.)

Stop acquiring new debt

(This step can be accomplished in an afternoon.)

This may seem self-evident, but the reason your debt is out of control is that you keep adding to it. Stop using credit. Don’t finance anything. Cut up your credit cards.

That last one can be tough. Don’t make excuses. I don’t care that other personal finance sites say that you shouldn’t cut them up. Destroy them. Stop rationalizing that you need them.

  • You don’t need credit cards for a safety net.
  • You don’t need credit cards for convenience.
  • You don’t need credit cards for cash-back bonuses.

You don’t need credit cards at all. If you’re in debt, credit cards are a trap. They only put you deeper in debt. Later, when your debts are gone and your finances are under control, maybe then you can get a credit card. (I don’t carry a personal credit card. I don’t miss having one.)

After you destroy your cards, halt any recurring payments. If you have a gym membership, cancel it. If you automatically renew your World of Warcraft account, cancel it. Cancel anything that automatically charges your credit card. Stop using credit.

Once you’ve done this, call each credit card company in turn. Do not cancel your credit cards (except for those with a zero balance). Instead, ask for a better deal. Find an offer online and use it as a bargaining wedge. Your bank may not agree to match competing offers, but it probably will. It never hurts to ask.

Establish an emergency fund

(This step will probably take several months.)

For some, this is counter-intuitive. Why save before paying off debt? Because if you don’t save first, you’re not going to be able to cope with unexpected expenses. Do not tell yourself that you can keep a credit card for emergencies. Destroy your credit cards; save cash for emergencies.

How much should you save? Ideally, you’d save $1,000 to start. (College students may be able to get by with $500.) This money is for emergencies only. It is not for beer. It is not for shoes. It is not for a Playstation 3. It is to be used when your car dies, or when you break your arm in a touch football game.

Keep this money liquid, but not immediately accessible. Don’t tie your emergency fund to a debit card. Don’t sabotage your efforts by making it easy to spend the money on non-essentials. Consider opening a savings account at an online bank like ING or StandChart. When an emergency arises, you can easily transfer the money to your regular checking account. It’ll be there when you need it, but you won’t be able to spend it spontaneously.

Implement a debt snowball

(This step may require several years.)

After you’ve stopped using credit, and after you’ve saved an emergency fund, then attack your existing debt. Attack it with vigor. Throw whatever you can at it.

Many people say to pay your high interest debts first. There’s no question that this makes the most sense mathematically. But if money were all about math, you wouldn’t have debt in the first place. Money is as much about emotion and psychology as it is about math.

There are at least two approaches to debt elimination. Psychologically, using a debt snowball offers big payoffs, payoffs that can spur you to further debt reduction. Here’s the short version:

  1. Order your debts from lowest balance to highest balance.
  2. Designate a certain amount of money to pay toward debts each month.
  3. Pay the minimum payment on all debts except for the one with the lowest balance.
  4. Throw every other penny at the debt with the lowest balance.
  5. When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.

I’m a huge fan of the debt snowball. It still takes time to pay off your debts, but you can see results almost immediately.

Supplementary solutions

You can do other things to improve your money situation while you’re working on these three steps.

First, focus on the fundamental personal finance equation: to pay off debt, or to save money, or to accumulate wealth, you must spend less than you earn.

Curb your spending. Re-learn frugal habits. (Frugality is something with which most college students are all too familiar.) You can find some great ideas in the archives of this site. Also check Frugal for Life.

While you work to spend less, do what you can to increase your income. If possible, sell some of the stuff you bought when you got into debt. Get an extra job. (But don’t neglect your studies for the sake of earning more. Your studies are most important.)

Finally, go to your local public library and borrow Dave Ramsey’s The Total Money Makeover. Don’t be put off by the title — this is a fantastic guide to getting out of debt and developing good money habits. I rave about it often, but that’s because it has done so much to help my own personal finances. After you’ve finished, return it and borrow another book about money.

The most important thing is to start now. Don’t start tomorrow. Don’t start next week. Start tackling your debt now. Your older self will thank you.

There’s No Shame in Renting, Home Prices Will Fall

In our society, there is a prevailing assumption that buying is better than renting. The fact is, there is no shame in renting, especially right now. Home prices are due for a major correction. When prices finally hit bottom, renters are one of the few groups whose finances will survive the crash.

Renters are always being bombarded by the same question: ‘When are you going to buy a house?’

Nobody ever assumes that the decision to rent is a conscious choice. People have become so enthralled with status that they seem to have forgotten the reason why we live under a roof and between four walls–shelter.

At one point, that’s all a home really was. Nowadays, things are a bit different. Owning a home has not only become the equivalent of owning a piece of the American dream, it has become a way to measure success.

An overwhelming number of people embraced this concept during the most recent housing boom. Home prices began to swell beyond reasonable levels as more and more people bought into the market.

It wasn’t long before it became impossible for most people to buy median-priced homes on median incomes. By 2005, people were spending 60 percent more on average in the largest metro areas to buy rather than rent.

This should have been enough to deter potential home buyers, but it was not. People were still buying into the idea that a home is the best investment an American can make.

They were so confident in their beliefs that they were willing to finance their dreams with preposterous mortgage products like interest-only loans and option ARMs. The desire to keep up with the Joneses was so strong that some went as far as to lie about their incomes and their ability to afford the required monthly loan payments. In short, they committed mortgage fraud just so they could buy their homes.

Were these people really that ashamed to admit that they couldn’t afford to buy? Was renting so embarrassing that they were willing to risk their financial futures and possibly even their freedom?

Why Home Prices Will Fall

median

Source: NAR; US Census Bureau

As you can see from the graph, affordability problems first began in 1997 and have since culminated in the biggest price bubble in U.S. history.

The home prices we see now are not sustainable. They are built upon an artificial foundation instead of upon the traditional fundamentals that have always ruled the housing market.

You see, it is not right for median incomes to increase by only 10 percent when median home prices increase by 50 percent during the same period. Any time the two deviate, a bubble forms and pops.

In the end, home prices always fall back to previous levels. It’s the way markets work.

Renting is Smart

If you want to play it smart during a housing bubble, renting is the best thing you can do. Renting is not risky. Unlike the people who bought in the last decade (or those who plan to buy in the next five years), renters have nothing to lose.

When home prices begin to fall, homeowners stand to lose 100 percent of their investments. As equity erodes, any money they put down on their homes will disappear. But that’s just a start.

Prices are predicted to fall back to 1997 levels. If this happens, it will be devastating to homeowners who bought their homes in the last 10 years.

Picture it:

It’s 2005. A family buys an overpriced house in San Diego for $550,000. They think they got a great deal.

Flash to 2007.

Home prices have already started to fall. By the time prices hit bottom (1997 levels) that $550,000 home will only be worth $250,000.

But the family still owes the bank more than $500,000. Refinancing or selling is out of the question. Renting the house out to someone else is also not an option–no renter is crazy enough to cover those mortgage payments.

The family is left with two undesirable choices: stay in their bad investment or hand the keys back to the bank.

There is no shame in renting. If the family in the previous example had only realized this, maybe they wouldn’t have been so quick to gamble with their future.

Remember that the next time someone asks you when you are going to buy a house. Tell them about this example–or better yet, tell them you’ll buy when buying makes sense.

Use the Rule of 72 to Understand Compound Interest

Most people generally understand the concept of compound interest, knowing that over time, interest earned will begin to snowball and accumulate more rapidly. Even though it is a relatively simple concept, visualizing how it works can be more difficult.

I think Albert Einstein said it best:

Compound interest is the greatest mathematical discovery of all time.

So, what is the Rule of 72 and what does it have to do with compound interest? The rule simply states that if you divide 72 by the interest rate, it will tell you how long it takes for your money to double. For example, assume you earn a 6% rate of return on your money. To find out how long it takes for your initial amount of money to double, just do the simple calculation: 72 / 6 percent = 12 years.

It doesn’t matter if you have a starting balance of $500 or $50,000, if you earned a real rate of return of 6% each year, you will double your money after 12 years.

Table of Returns

Rule of 72This table should highlight the importance of squeezing the most out of your money. If you notice, your checking or savings account at the bank earning 1%, by keeping your money there and you’ll need 72 years to double it. But, if you can manage to even get 3% on that money, you can shave 48 years from that goal. Even a modest 7% return will allow you to double your money in just over 10 years.

Even more impressive is when you consider the higher rates of return. For instance, if your investments are in the market during 5 good years and you can realize around a 14% return, you will double your money in that same period.

The Big Picture

For most people, the number of years to double your money seems like a long time. Even at a modest 7% return, that’s just over 10 years. Well, it may seem like a long time, but this is where you have to really take into account the power of compounding over the long term.

Let’s use an example of a 25 year old who has $10,000 saved up in a retirement account. For simplicity, let’s say that the account is earning 7.2% per year, so according to the Rule of 72, the money will double every 10 years.

Rule of 72 v. 2As you can see, it starts out kind of slow. By age 35, it might not feel like much to have $20,000 saved up. But as the decades pass, the numbers accelerate in value as they double, to a point where by retirement, a measly $10,000 has turned into over $150,000. Money begets more money over time.

Also keep in mind, this is simply using a single lump-sum with no additional money being saved. When you consider that most people would be continuously adding money to this investment, the rate of compounding goes up significantly.

Some Caveats

Keep in mind that the Rule of 72 is just a guideline. Clearly, in the real world you’ll almost never have a constant interest rate unless your investment is in a long-term fixed income vehicle. In addition, you will want to consider the impact of taxes and inflation on your results. This rule is simply a tool to help illustrate the impact that time and rate of return has on your money.

Remember, time can be either your greatest asset, or your worst enemy. The sooner you start, even if by just a small amount, it will provide more time for your money to compound. On the other hand, every passing week, month, or year is time that you can never get back. It is up to you to decide if you want time to be on your side or working against you.