financial zen

My baby boy was born July 25th at !:26am!

I’m going to take a brief break from writing while we get settled in and will try to pick back up this week!

The Rule of 72 has been mentioned on Personal Finance blogs before - and by no means should we forget it!

This simple rule is how long it would take your money to double at a given interest rate by dividing the interest rate into 72. The link above is to a handy calculator if you don’t think you can handle the math (and when you are dealing with 5.06% interest, it’s understandable you may need some help!). Initially, it seems like a pointless calculation - unless you start hearing people discussing doubling your money (or you’re wondering how much interest you’ll be needing in order to double your money by a certain time - maybe you’re saving up for a vacation, a car, or something similar?)

I’ll be revisiting this rule in the near future!

When weighing job offers, you have to weigh multiple factors into the job offer. For instance, let’s say your salary averages out to $29/hr (how did we get that? Let’s take a salary - $60,000/year, divided by 52 weeks in a year, divided by a 40 hour work week = Our hourly rate, rounded up). That’s assuming our employer pays for insurance, medicade, 401k, etc - and with that we can say it averages to $36/hr).

When we compare a job offer from city A to city B, we can use a formula to determine whether the increase (or decrease) in salary actually is worth it!
(Where do we get the Index? From Sperling’s Best Places!)

Salary in city 1 X (index city 2/index city 1) = equivalent in salary in city 2.

So, for Columbus, Ohio’s $70,000 would equal $138,960 (roughly) in San Francisco, or $120,733 in New York City. Crazy!

What should be noted, is these figures are living in those cities - if you made that salary but lived outside the city limits, you could see a substantial jump in income!

This is particularly relevant to me as I’ve started to weigh job options - the perks weigh into the total worth of the package, and the location determines if it’s worthwhile or not. Lots of options and factors to consider!

A bird in your hand is worth two in the bush - do you understand that metaphor?

Essentially, it’s saying having something in your hands today is worth more than having it down the road - but we aren’t talking about that new car, television, or hot new gadget. We’re talking about cold, hard, cash. It makes sense, right? A dollar in your hands for your expense or savings make more sense than a dollar down the road - where that dollar isn’t giving interest or reducing debt (and the interest you owe).

To show the TVOM we have two useful questions:

1. What will an investment be worth after a period of time? This is the future value.
2. How much must be put away today to provide some dollar amount in the future? This is present value

These calculations are based on basic interest principles: The dollar amount, the rate of interest earned, and the amount of time the money is invested. One formula is the simple interest formula. We break it down as:

• i = prt where
• p = the principal set aside
• r = the rate of interest
• t = the time in years that the funds are left on deposit.

For Example:
If someone invested $1000 (like in an ING CD - contact me for a referral and $25!) for four years with 5.35% interest, they’d receive $214 in interest over the four years. This simple interest formula assumes that every year we withdraw the interest and only keep the $1000 invested. As a savvy investor (or saver!) we don’t really want to do this if we don’t want to. What we want to do is use compound interest. Gain interest on your interest.

If we take our original $1000 and think of the compound interest:
At the end of our first year - our $1000 will grow to $1053.⁵⁰ [$1000 + ($1000 * 0.0535)].
At the end of our second year - our $1053.⁵⁰ will grow to $1109.⁸⁶ [$1053.5 + ($1053.5 * 0.0535)].
At the end of our third year - our $1109.⁸⁶ will grow to $1169.²⁴ [$1109.86 + ($1109.86 * 0.0535)].
At the end of our fourth year - our $1169.²⁴ will grow to $1231.⁷⁹ [$1169.24 + ($1169.24 * 0.0535)].

So compoinding means we gain an extra $17.79 in interest. Doesn’t seem like much, does it? But when we increase the interest (such as, the average return on your investment portfolio, or your 401k) the amount increases more - and the larger the balance, the more interest generated, and the more money you end up with!

So SmartMoney is running an article - Private Colleges Can Be Just as Affordable as Public Ones - showing that Private Schools can be as affordable as public ones. How can that be so?

Private Universities tend to be a bit more open with their pocket books, so to speak.
Why a pricey private school could be cheaper
1. Privates have more money to give
I’ve seen this time and time again, with a few friends and relatives going to a private university - and having bills substantially lower than their in-state public college.

2. They meet a bigger percentage of need

3. They’re more willing to consider special circumstances
Private colleges basically are more friendly and understanding - and I’ve definitely witnessed this with my sister’s dealing with the financial aid office, and my repeated problems dealing with public universities.

4. Your child may graduate sooner
As a fact - my sister did. The relatives in public schools? We’re still trucking towards the five-year (or longer) route.

The point is - never rule anything out. You have to try before you can fail, and be told “NO” in writing before it isn’t an option. If you don’t try, you’ll always fail!

In covering the basics - one thing every person must do is get their free credit report. Do this yearly. Do it more often if you suspect fraud or identity theft.

But what does it all mean?

Bankrate has 20 must-know credit scoring terms to help out! The key to success in any topic always starts with a glossary of terms. A credit report is one more extremely useful, beneficial tools that one comes across in their personal finance journey.

Your credit report contains your credit rating which is comprised of your credit score. See? Three terms down - are you sure you know what they mean? A fundamental understanding is what separates you from the person across from in preparing yourself to mastering your finances.

For most people, an understand of economics isn’t necessary. You’ve got your checking account under control - you’ve got your own online billpay, you don’t send checks to Nigerian princes, and you don’t link any accounts to deduct from your account, you’ve got your savings accounts under control (speaking of which, I have ING referrals available! Make free cash by having a deposit!), you contribute to your 401k, have a financial planner, you’ve got everything going for you. But maybe you’d like to understand it a little more.

This leads us into Economics!

Understanding economics is important in personal finance - not just because of investments (like your 401k) - but because you should understand the current economic environment so you can forecast the state of the economy, inflation, and interest rates for the future. Essentially, you’re keeping your eyes open for any changes in the market that could be detrimental to your financial situation - whether you consider yourself successful, or on your way. The state of the economy can turn your life upside down if you aren’t preparing for it.

If you lose your job, suddenly your steady income is gone. Did you prepare an emergency fund? Are your financial affairs in order? If there’s a recession, is your job secure enough to not worry about lay-offs? Can your hours be cut but it won’t affect you detrimentally in your finances? Many factors can come into play - but the amount of information involved, between inflation, recessions and expansions, can take volumes to fully understand! I’m going to work additional articles in covering these certain angles this week so we can benefit and further our Personal Finance knowledge.

Lo, and BEHOLD! I’ve been tagged in AskDong’s 8 Things about Me(me) (who was tagged by goldnsilver)

1. Married to a girl I once went to grade school with (but never dated until I was out of high school).
2. Studied three forms of Martial Arts.
3. Lived in Chicago for a brief time.
4. Am expecting a son any day now.
5. Have a dog that shares my brother’s name (but was not named after him).
6. Am a huge fan of Raising Cane’s
7. Play guitar on occasion.
8. Design web sites for a living (and occasionally for friends and family).

That’s my random eight. I encourage you to participate in the comments, or throw a link back to me and post it on your blog!

The real measure of your wealth is how much you’d be worth if you lost all your money. ~Author Unknown

As I wrote about the fundamentals of personal finance success - and the fundamental truth of saving more than you spend to reach wealth, it’s important to recognize what that exactly means.

You can save all your money, live in your car until your debts are paid off, live at home and mooch - basically you can spend as little as possible now so you can have a lot of money in ten to twenty years, sleeping on a couch, eating ramen, and walking everywhere.

Or you can buy a car, live in an apartment, make your own lunch, buy used, and spend less than you earn. You can still have an occasional night out, party on occasion, go to Europe - it just means being mindful with your money. But how can you do this on a limited income?

Very easily. Cut out the unnecessary expenses. No cable, no memberships, no magazines. Okay, you want cable? Get basic. Skip the DVR package and the “VOD - only $10/month!” ‘deals.’ Go to the library. Read more. Go to the park to jog. Pick up some used weights on ebay or craigslist. The point is - be frugal not cheap. You don’t need a huge house that you can’t afford - I don’t care if you think you can afford it in a few more years, that’s moronic. If you knew tomorrow you were winning the jackpot billionaire lottery - but only made $26,000 a year now, and you were thinking of getting a new car/house/xbox/whatever - treat it as if you only had the $26,000. Oddly enough, I heard someone talking to a friend at an old apartment (back when I made $11/hour as a trainer):

You do not go out and buy a Bentley because you think you deserve one. You do not buy one because you think you can afford it in a year. The car does not make the player! When you are set, you will know you can buy the Bentley outright because you can get it if you want it, not because you need it.

There be wisdom in these walls! The guy who said it made a decent living in a factory, drove a convertible, and lived in off-campus housing. Cheap housing that allowed him to buy the material possessions he wanted. Not necessarily the best move financially, but wiser than buying a bentley, a mansion, and maxing out credit cards to give the illusion of wealth. You earn your lifestyle, you don’t choose it.

No doubt everyone’s heard of the guy who tried to flip houses by lying on his credit applications saying he made more money (which they made no effort to check or clarify, either). Here’s a stripper in 24 million debt because she wanted to quit her life and find a new way - and instead of researching she signed her life away, ruining her credit while the brokerage got to inflate housing prices. Do not be duped by easy money. There is no such thing.

Let’s look at it this way - you want to retire rich? Then set aside some money now.CNNMoney has a useful retirement calculator to help figure out how much money you want to live on and when you want to retire. There are a lot of factors involved, and it’s something you should always be working towards - so don’t think your plan is set from day one - it’ll need constant nurturing, but as you watch your retirement fund grow, you’ll realize it’s worth it. Just don’t put off your life until then - I’ve met many an old couple that says they wished they spent more money when they were younger to travel and do the things they can’t do because of their age - and seldom have I met an old couple that regrets traveling or managing their money for trips.

Just remember - manage your debt, spend less than you make, and focus on your long-term goals while keeping yourself satisfied and happy in the present. A delicate balance, but one that you (your loved ones) will enjoy!

(Read more stories of how other people paid off debt at Chris Pirillo’s blog)

My problem lies in reconciling my gross habits with my net income. -Errol Flynn

People are often confused with financial planning - they mix up three basic fundamental ideas, or combine them and create a skewed, warped version that makes financial planning a complicated ordeal. Financial success is meeting our plans and goals and reaching a certain milestone in our expectations of finance:
Security is reaching that point with your finances that you are comfortable with your money and savings that will cover your needs and your wants.
Wealth is having an abundance of money, investments, and resources. A fundamental truth is that in order to build wealth you must spend less than you earn. You must hold off on your current standard of living to reach a higher standard of living.
Happiness goes beyond making more money. It’s about being in a good position of your finances and bills - you are on the way of reaching your goals with well-established, healthy financial goals.

Of course, it seems every way we turn we encounter impediments to our financial success. The second your of legal credit-bearing age the offers start. When you reach college campuses you’re surrounded by companies wanting you to sign with them for credit card offers, loans for an over-priced computer, for a new car you don’t need. Money is thrown at the 18+ crowd by telling them how important it is to build credit, and also to give the appearance that you have wealth - get your Abercrombie and Fitch credit cards and dress for success! Give that illusion of richness by driving a brand new Acura! It doesn’t matter that you’re drowning in debt… does it?

OF COURSE IT DOES! It’s important that you establish your financial foundation - use your current and regular income to provide your basic lifestyle and savings. Once you’ve got your foundation, you can continue on your financial journey (where we will continue down the road).