With our credit crisis, I’ve been thinking about what we can learn from all all of this. Everyone knows that they shouldn’t buy what they can’t afford. Yet, many still do. What happens to those who’s house(s) have foreclosed? Where are they now? Why is it that everyone seems to believe that buying a house is always better than renting?

Fortunately, I haven’t spent beyond my means and have a modest amount saved up for cash flow, investments, retirement, etc, although I’m sure that I’ve made impulse buys here and there using my credit card. So I’ve been reading how some families have become financially successful by cutting out their credit cards. I don’t think I can totally part ways with plastic, but I could set some ground rules and learn to stick to them. Namely, only use credit card for gas, certain bills (e.g., cell phone plan), and groceries. I’ll take out a certain amount from the ATM every month and stick to a budget to monitor my expenses. I’ll use my debit card for all other necessary purchases. Every now and then, I can splurge, but it will definitely be less frequent than in the past.

It’s never to late to start saving for retirement.  Here are a couple tips:

1.  If your company offers a 401k plan, sign up and contribute at least as much as what your company will match, since that’s free money.  I’d recommend at least 15% of your paycheck (pretax) and pick a diverse set of mutual funds (if you’re in you’re in your mid 20’s-early 30’s, select 90-95% stocks, 5-10% bonds for your asset mix; make sure you pick a solid ‘core’ — at least 50% of your mix should be large cap, 10-15% in International Funds, and 10-15% in small or mid caps). 

2.  Contribute to a Roth IRA ($4,000/year max if you’re single; $5,000/year max if you’re married) on a yearly basis.  Sign up through a retirement/brokerage firm such as Vanguard or T.Rowe Price (two of the best) and purchase what’s known as Target Retirement Funds.  These funds automatically adjust your mix of stocks, bonds, etc according to your age.  So say, you’re 38 and you hope to retire in about 30 years, you’ll want to look for a Target Retirement Fund with the year that’s at or close to the year that you plan on retiring–in this case, “Target Retirement 2035″.  Here’s a good primer on Target Retirement Funds.

Unless you’re a bad driver (or you attract mishaps), you’re better off with a $1,000 deductible on your car insurance instead of $500 (can save around 150-200 dollars a year on average). 

 

There’s a good article in the latest issue of Businessweek magazine (January 30, 2006) that talks about Student Loans: “Outflank The Hikes Ahead”. They say that rates are going up on June 30 and there are ways to cushion the blow. Their advice is that “if you’ve already graduated and haven’t consolidated all your loans–or are graduating this spring–be sure to do so before June 30. That allows you to lock in a 4.7% rate for the life of your loan (if you’re still in school, ask your lender if you can consolidate now.).

If you’re in the mood for something gloomier, you may want to read the article on Sallie Mae and in the Fortune 2006 Investors Guide.

Also, according to an article in the latest Kiplinger’s Personal Finance, “Young workers should save 15% of their income for retirement”.

Went to the bank today and had this conversation with the bank manager .

BANK MGR: “Have you looked into some investment options? Our investment advisor’s in today.”
ME: “Yeah, I opened a Roth IRA and maxed it out to $4,000 for 2005.”
BANK MGR: “Roth IRA? May I ask why you chose a Roth instead of the traditional? Reason I’m asking is because I usually go with the traditional IRA because of the upfront tax savings.”
ME: “Well, I figured a Roth IRA not only can help me save for retirement, but also can serve as an emergency fund.”.
BANK MGR: “I usually advise that emergency funds be in something more liquid, such as a money market, or savings/checkings, or even CDs. And the reason I go with a traditional IRA is that I can deduct that amount from my income, so say I max out my traditional IRA contribution ($4,000), I can deduct this and save about $1,000 dollars ($4,000/4), since in my tax bracket, I have to pay 25% of my income over initial $29,700. ”
ME: . . .

So the moral of the story’s that my decision to go with a Roth IRA instead of a traditional IRA probably cost me around $1,000 dollars this year. One should also keep in mind that most if not all retirement accounts are only eligible for those who make under a certain amount (Roth IRA: $110,000, etc.).