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Saturday, December 30, 2006

Did you know that the average millionaire drives a used car?

Unlike the belief that most millionaries drive fancy cars, most actually drive a paid for 2 year or older car! Yes, that's right. They don't care if they keep up with the Jone's or not. Most people don't even know that they have a lot of money. The average millionarie lives in an average neighborhood and drives an average car.

One of the reasons that they have built wealth is because they don't have a car payment. Just think about it for a second. The average car payment per month is 381 dollars. What if you could invest this amount of money instead of putting it towards a car payment. If you were to put this money each month into a mutual fund which averaged an annual return of 12% for 30 years (which is the long term average of most mutual funds over a 10 year or more period), that would equal $1,185,325! If you were to do that for 40 years, that would add up to $3,765,453! Yes, the math is correct... 3.7 million dollars!

To me, that's a HUGE price to pay for a car that goes down in value each year.

Building wealth takes time.

Building wealth takes time. You can't just become rich overnight. Whenever you see a program stating if you only do X you will become rich, you can bet that this is a hoax.

Remember that in order to build wealth, you must stay in the race for the long run. One of the greatest examples that correlates with this is the simple book about the tortoise and the hare. The tortoise wins because he outwits the hare and uses his knowlege. The same is true today. In order to build wealth, you can't just do it overnight, it takes time and dedication. This always goes back to setting goals. If you never set any goals in life, then you will never make anything of yourself. Each day you need to rememeber your goal and do whatever it takes to accomplish it. Go read a book about your field and always remember to do your hardest at work so that you might get that raise or promotion. Most important of all, make sure that you are frugal in your spending and making sure that you tell your money where it goes (make a budget and spend it on paper before using up your money).

Friday, December 29, 2006

New mini polls each week.

Hey guys, I have added a new feature to this blog, the mini poll. Each week I will come up with some form of a mini poll dealing with finances. You will then be able to answer that poll. After the poll is complete, I will cast my vote and blog about why I have chosen what I did. You will also be able to leave comments explaining why you chose what you chose. For instance, today's poll is about the type of payment option that you use most often. Next week I will explain why using credit cards is a bad idea and why the best option is cash! Hopefully I can help change some of your views and help direct everyone to becoming debt free and how to build some wealth during your lifetime!

Thursday, December 28, 2006

Whole life insurance vs Term Life insurance.

Whole Life insurance (or cash value insurance) is a type of insurance where you pay a high premium each month. You can cash this type of life insurance out at any time in your life. The thing about whole life insurance is that you pay high premiums for very little return. Although you may have $100,000 in a whole life insurance, when you cash it out, you will only receive about $55,000 of that after taxes and the commissions that come out of the check! On top of that, the premiums for that $100,000 dollar policy will be very expensive compared to the term life insurance! In my opinion, this is a terrible form of insurance. You shouldn't make an 'investment' on something as big as your life. Instead get Term Life insurance.

Term Life insurance is a type of insurance where you pay a low cost balance each month. The main difference between term life and whole life is that in term life insurance, you only get the money if you die, however, you can get a $500,000 dollar policy for as low as $22 a month (this quote was obtained from Zander Insurance)!

If you are stuck in a whole life insurance policy, the best thing you can do is to switch to term life and cash out your whole life policy today! Remember, you will want to get the term BEFORE you cash out your whole life insurance. This is because you don't want to get stuck with no insurance what so ever! One of the top causes of bankrupcy today is the costs of when a loved one dies without any insurance policies.

For more information about whole life vs term life insurance policies you can visit Dave Ramsey's website at daveramsey.com.

Mishaps of the 401k.

There are a lot of things that people don't know about a 401k. Sometimes people ask me a question like the following:

"I have $20,000 in debt. Why don't I just pay it off with my 401k?"

The answer is quite simple. The 401k was designed as a retirement plan, therefore, it was designed to only be used when people retire. The official age stated by the government is the age 59 1/2. If you are not at least 59 1/2 when you take out your 401k, you will take a huge financial hit in taxes. You will pay approximately 45% taxes if you were to take it out before the age of 45. From 45-59 1/2, you will pay approximately 10% in taxes. Let's look at it another way. Say I'm $20,000 in debt and I have $35,000 in my 401 which I wish to cash out. If my age was below 45, then I wouldn't even have enough cash to pay off my $20,000 dollar debt because of the taxes that will occur from me cashing it out early.

A great site to read about 401k's and how they work can be located at the 401khelpcenter.

Searching for a mutual fund.

There are 3 forms of investments that Dave Ramsey suggests. Investing in your 401k, IRA, and mutual funds. In this post I will talk only about mutual funds.

A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities. Mutual funds are to be used ONLY as a long term investment. You should not do any investing in a mutual fund unless you plan to keep your money in the money fund for at least 5 years or more (preferably 10 or more). When looking for a mutual fund, you should look at the statistics to make sure that it has performed well and also has a track record of at least 10 years. The average mutual fund will perform about 12% over the lifetime of the mutual fund. Note that you will be looking for the average interest earned over the lifetime of the mutual fund and NOT for the past year...

A couple of great website that sells mutual funds are fidelity and ameritrade.

For a great company that compiles a huge database of mutual funds, you may want to visit morningstar. There is also a paid portion to this site where the company gives you software that allows you to sort the mutual funds based upon your preferences.

Wednesday, December 27, 2006

Considerations before buying a vehicle.

So, you want a new car because your friend next to you told you that your car looks like trash or you just decide that you 'need' to upgrade. Before going out and purchasing a car, take these financial considerations first:

Know your financial situation. If you have millions of dollars, then you probably don't need to read this as this probably won't apply to you, however, if you don't have millions of dollars then I suggest buying a car that is 2 years old or older because a car deppreciates the most in value the first 2 years (and the next most the 3rd year and so on). If you have no money in savings, consider 'making do' for the next couple of months until you save up enough money to buy a car in cash (yes, you can stop your debt snowball and pay all minimums if you and your spouse agree).

Buying a car is usually the second highest value 'thing' that you will ever purchase (with number one being your house). To top this off, vehicles always go down in value (were not talking about classics here). Because of this, you should never have more than half of your annual salary in a depreciating asset such as a vehicle. This basically means that if I make 50k a year, I should not have more than 25k in all of my vehicles combined if I wanted to have a chance at building wealth.

Know how much the car is worth. To get a price of what the vehicle is worth, you can go to kbb.com (Kelley Blue Book) and go to the private sale (which means you are buying from a private seller).

To sum it all up, I recommend buying a car that is 2 years or older. Statistics show that a car loses approximately 45% of its value in the first 2 years alone! Another thing to remember, buy the car in cash! This will allow you to save money for the future and invest more. The car will even feel different knowing that you own the car and not the bank.

Considerations before buying a house.

Do you want to buy a house? There are several things that you need to consider before buying a house.

First, I wouldn't recommend anyone to buy a new house until they are debt free and have a fully funded emergency fund (you can view the baby steps at the right side of my blog). I would also highly recommend that you save up at least 20% of the cost of the house before you buy. If you do not have 20% to put down on the cost of the house, then the mortgage company will consider you, the buyer, to be at risk. You will have to purchase either a second mortgage or pay PMI to cover this risk. PMI, or Private Mortgage Insurance, is nothing more than insurance to the mortgage company to insure them money in case you were to be foreclosed on, and, depending on the type of loan, may or may not be able to be cancled (most loans allow you to cancel PMI after you have paid 20% of the house's value). PMI, in the past, has not had a lot of benefits, therefore most people in this boat tend to get a second mortgage payment. Although the interest of the second mortgage payment right now is around 7.5%-8%, the added cost of the loan is usually less than that of PMI. In the year 2007, PMI will gain the advantage that the interest will be tax deductable, however, this law will need to be passed again for 2008. Although you will now get a tax benefit from the PMI, most people will still find it better to get a second home mortgage if they pay less than 20%.

Second, stay within your means. This means only buy a house that has a mortgage payment that is no more than 25% of your take home pay. If you do this, you should have plenty left over for everything else and also enough to invest and build wealth each month!

Third, location, location, location. Yeah, I know, you've probably heard this thousands of times. But it's the truth! Pick a location that doesn't have a lot of crime and a location that has great schools. Ask your real estate agent the average days on market that the houses have in that particular area. This will help tell you how long a house in that area usually stays on the market before selling. If you are moving to a new state and don't know the areas in the city, call the local police departments and ask them about their schools and crime rate. You can also visit http://money.cnn.com/magazines/moneymag/bplive/2006/index.html which has a list of the best places to live for the year 2006. Where your home is will decide how much your home will go up in value and affect the average days on market before the house is sold.

Fourth, if you have to get a mortgage, get pre-approved. This is a big one. Whenever you offer the contract to the seller, they will know that you are serious because you have shown them that you are good for your word.

Fifth, don't buy a home on impulse. Go home and sleep it over. I've heard of too many times where people see a house and get 'house fever.' They believe that this is the perfect house for them, but 2 months later, they realize that they paid too much for the house when they see the bills coming in each month. Remember, try to keep your mortgage payments to 25% or less of your income each month.

Finally, negotiate wisely. Right now, the housing market is a lot slower than it was last year. This gives the buyer a huge advantage in that they can get a house lower than the asking price. However, know your market as well. There are still places where houses are selling in 3-5 days on average. In these types of situations, you probably won't be able to buy the house way underprice.

To sum it all up, it's a very good idea to save at least 20% plus have a fully funded emergency fund before buying a new home. If you don't you could be inviting Murphy to live in your spare bedroom (What can go wrong, will go wrong). If this happens, you could find yourself in a position that you never wanted to be in. Know when and how much you can afford and stick too it!

Baby Step 7 - Build Wealth and give!

This is the best baby step of all. Invest in mutual funds (only invest in those mutual funds with a proven track record of 10 years or more) and also in real estate if you wish. Dave recommends that you always buy real estate in cash (Yes, cash, no mortgage. If you just paid off your house, why would you want to go back in debt with another piece of real estate that you just bought?).

The next portion is to give. Give to charities, and increase your tithe to beyond 10% at your local church. Remember that this is not all about money, but also about people. It is better to give than receive states the proverbs.

Baby Step 6 - Pay off your home ... early!

For most people, the mortgage on their house is their single largest debt. Wouldn't it be nice to be able to walk in your back yard knowing that your house is paid for? The grass just feels greener knowing that you own your home and not the bank.

In this step, you will still be doing your 15% investments and savings for your kids college, but you can also begin to pay off your home early! Everything else that you have left over should go towards your house. Some people say, "Why pay off the when you get a tax break for the interest you pay on the mortage?" Let's answer this question with a question. Why would you pay $5000 dollars in interest each year to get back $1500 back at the end of the year? If you wish to do that, you can give me $5000 dollars a year, and I'll gladly give you $1500 dollars back.

Baby Step 5 - Save for kids college.

If you have kids, then you will need to save for your childs college. Because college inflation is around 7 to 8 percent per year, it is recommended that you put your money into something that will exceed this amount. Their have been a few programs developed in order to help parents save for their childs college expenses. The programs include the ESA, 529 accounts, and the PACT program.

The ESA (Education Savings Account) is a mutual fund to save for your kids college. It averages around 12% per year, therefore keeping ahead of inflation of college. In my opinion, it is the best choice available, however, you should learn about the 529 program as their are a few good 529 programs available. The PACT program is nothing more than a pay now, receive later type of program, therefore you get no increase in the annual yield. You are much better off with a ESA account instead in my opinion.

Baby Step 4 - Invest 15% for your future!

Now that you are debt free and have a fully funded emergency fund, it is time to start building investing and building wealth! You should take 15% of your income each month and invest it in your 401k, traditional Roth IRA, and mutual funds.

The strategy here is to invest in your 401k up to the amount that your employer matches and then max out your IRA. (For instance, if my company matches 100% for up to $2000 a year, then I would first put $2000 into my 401k so that my company would match that. I would then take the rest of my money and max out my Roth IRA [you can put up to $4000 a year into a Roth IRA]. After I had maxed out my Roth IRA, I would then max out my 401k). With any additionaly money, I would then invest in good growth stock mutual funds that have a long term proven track record of 10 years or more.

Baby Step 3 - Build a fully funded emergency fund of 3-6 months of expenses!

At this baby step, you are completely debt free except for the house! Congratulations! You are now on your way to building wealth! In this baby step, you will take your $1000 emergency fund and extend it to 3-6 months worth of expenses. Notice that this is expenses and not salary. If it takes you 500 dollars a month to live, then that is 1 months cost of living.

Now instead of paying extra to your smallest debt each month, you will now take the money and put it in the bank. This money will be an emergency fund and should not be touched except for emergencies. Just because you wanted to go on vacation this year doesn't mean that you should take money out of this account, you should have a seperate account for that. I prefer either a money market account or a high yield savings account. Some great high yield savings accounts on the internet are E-Loan, ING-Direct, GMAC, AmboyDirect, and EmmigrantDirect.

Baby Step 2 - Become debt free!

Baby step 2 is to become debt free. The idea here is to list your debts from smallest to largest. These debts include everything from credit cards to car loans. The only debt that you should not include here is your home.

You may ask, "Why from smallest to largest and not list the one with the highest interest rate first." The answer is quite simple. A lot of people find themselves overwhelemed with the amount of debt that they have, and if they were to pay the debt with the highest interest off first, then they may find themselves discouraged because of all of the other debt that they have to worry about. Getting rid of your debt from smallest to largest gives you more of a sense of success because your small debts you can usually pay off quickly. It also helps keep your determination up. A lot of people may struggle with this issue, but you need to remember, this is a proven plan that has worked for hundreds of thousands of people (literally).

Once you have your debts listed, you will want to pay the minimum payment on all of your debts per month except for the one you are currently working on (which will be your smallest debt). You will pay extra on this payment until you get it payed off. After this debt is payed off, mark it off the list and start on the next one in the list. This is referred to as the debt snowball plan.

Dave suggests that you do everything you can to pay extra on these debts each month. Get an extra job if you need or work overtime (Pizza delivery jobs pay quite well. As a matter of fact, the pappa johns down the street from me now has a 'Now Hiring' sign for delivery drivers in front of it with a salary range of 14-18 dollars per hour! Not bad for just delivering pizzas!). Stop eating out every weekend and live on a budget! Make yourself control your money instead of letting the money control you. Remember to never buy on impulse and also to use cash or a debit card (preferably cash as people tend to spend more with debit or credit cards). Don't buy things that you can't offord. Remember, if you don't have enough cash in your bank to buy the item you want, you can't afford it!

This baby step should not take more than 18-24 months if you do it correctly. For some people this may take longer.

Baby Step 1 - Put $1000 in the bank.

The first baby step is to put $1000 in the bank. For a lot of people, this may already be completed. If this is the case, then you can proceed to baby step 2! If not, then your very first goal before you begin to get out of debt is to put $1000 in the bank. You should stop any investing that you are currently doing (401k, IRA, etc) and immediately put $1000 into the bank. This step should also be done as quick as possible as it is an essential step in establishing security and a feeling of success.

This money will be used as a beginner emergency fund and should not be spent unless a rainy day comes (car breaks down, heater dies, or some other bad event). You shouldn't ever use this money unless you have too. If you ever do have to use this money (say in baby step 2 which will be provided in the next blog), then you should immediately refill your emergency fund!

How to get out of debt and build wealth.

In the next few posts, I will blog about Dave Ramsey's baby steps. These are the steps that people should take when trying to get out of debt. These simple to follow steps will teach you how to get out of debt, save money, and how to build wealth. These steps will take a lot time and effort to implement and is no means a get rich quick program. However, if these steps are followed, it is a proven and effective way in order to get out of debt!

Thursday, December 21, 2006

Who is Dave Ramsey

Dave Ramsey lives in Nashville Tennessee and the is the author of the New York Times best seller, 'The Total Money Makeover.' He also has a nationally aired radio show called The Dave Ramsey show. You can visit his website at http://www.dave.ramsey.com and click on the tab 'The Dave Ramsey Show' to find local radio stations and the times that his radio show is aired. You can also listen to his recordings online at this website as well.

Dave Ramsey's teachings are geared at motivating and teaching people how to get control of their money and how to get out of debt!

Who I am

Hi, I am 22 years old and I am a software engineer. I was first introduced to Dave Ramsey about 6 months ago by my fiancee's father. He gave me the book 'The Total Money Makeover' by Dave Ramsey would which change my life. I now have a huge lookout of what money really is all about.

This blog is dedicated to the teachings of Dave Ramsey and how to NOT be a slave to your money, but instead be in control of your own money!