Thursday, May 19, 2011

Taking control of your financial future...

I had a long call with a close friend yesterday who recently came into a large inheritance. She went from being almost $100k in debt – due to massive school loans, car loans and life’s unforeseen circumstances that have left so many in flux over the last few years – to now being $100k richer (even after paying everything off!). She confessed that she really had no idea what to do with it, although she was certain she was never going to allow herself to be in debt again. She told me how she wants to be as smart as possible with her new fortune – sharing how liberating it was to finally be relieved from the burden that finances have so heavily weighed her. Within about 20 min, we had a full plan in tact to get her started into her new chapter – on the right financial foot (she will also be consulting with a professional - I just gave her the basic rundown).

Obviously, I’m far from being a financial planner. The closest I’ve ever been is the fact that I’ve managed to figure where to be frugal so that I can enjoy splurging on the things that I enjoy most – wine-filled dinners with friends, traveling the globe and finding a pair fabulous pair of boots (that can last a lifetime). With that said, the second I started making, what I call, “real money” (meaning I wasn’t depending on my parents to get by anymore) I sought out opportunities to learn about investing, and have since been fortunate to build a nest-egg that has allowed me to take a step back and smell the roses (i.e. work part-time). So, while I’m no financial planner, I have gained knowledge of some simple steps to take to start making your hard-earned cash work for you...and I thought this might be information that could benefit my close friends, so I wanted to share.

You either love her or you hate her, but Suze Orman’s voice became very familiar to me in my mid-20s. I bought her books on tape (for my long commutes) and diligently listened as she squawked through my car speakers, lecturing me on the importance of opening an IRA and living within my means – or you will be doomed to a life of misery (or so she makes it seem)! And then, for my 24h birthday, my dad bought me one of the bibles of finance – Jane Bryant Quinn’s, Making the Most of Your Money – and I was hooked.

I didn’t grow up in a home where my parents discussed personal finance, and I didn’t study it during my college years. I’m still not really sure how I became aware of the importance of planning a healthy financial future – maybe Oprah?!? Perhaps it was my desire to never be in a situation where my finances (or lack of) could become a burden. I didn’t want to ever be a woman who had to depend on anyone else for my success, and I quickly realized the importance of investing in my future. I couldn’t stand the idea of spending beyond my means...God forbid ever having to pay the dreaded credit card interest rates! While I’ve been fortunate to have a career that has given me financial stability, even during my early years, I stock-piled savings like a little squirrel. Every month since I was 24, I’ve had money automatically withdrawn from my checking into investment accounts, and have never felt deprived. When I took a pay-cut during the recession, I still invested – be it, substantially less than previously, but I still kept up the routine (and cut out a lot of other frivolous spending habits). I just knew it would pay off. And it has.

In my opinion, financial responsibility can be one of the keys to happiness – whether as an individual or in a relationship. When I say, responsibility, I am not talking about being rich – I’m talking about taking your money seriously, whether you make $25k or $225k, and making wise and thoughtful decisions about how you choose to spend. Everything can change tomorrow – and if it did, would you have a comfortable nest egg to fall back on? Sadly, that’s a question that so many didn’t ask themselves prior to 2008.

I have continued to educate myself and get a better understanding of how to make my money work for me. Whether it’s gaining compounding interest by investing monthly (dollar cost averaging) into my IRA (the first investment everyone should make, assuming you do not have debt), to opening a Life Strategy Fund with Vanguard that is a fully diversified portfolio with an allocation that is just risky enough for me to make $ in the stock market without keeping me up at night. Even by choosing an ING savings account, rather than going with my traditional bank where I have my checking acct, I am making about $50/month in returns – while it’s a small amount, it still is a lot more than I’d be earning if I had kept in traditional savings. All simple, easy-to-implement ways that, over time, can create huge rewards. You just have to be patient.

Toward the end of the call with my friend, she asked, “do you think I’m too late in the game to make real money if I invest in an IRA?” She’s 31. Roughly 25 years of compounding interest ahead of her. Nope, not too late at all.

I wanted to share this post because I know many of my friends have not taken the opportunity to learn about personal finance, and I strongly encourage everyone to do so – it can be one of the most important lessons of your life and well worth the time. Suze Orman just came out with a new book –
The Money Class: Learn To Create Your New American Dream. She also has Women and Money: Owning the Power to Control Your Destiny.

For Money Lessons 101 online, I recommend checking out CNN Money - - and check out the Personal Finance tab. It's a fantastic crash-course in personal finance and can get you up-to-date on the lingo and your advised investment options in a jiffy! I also recommend subscribing to Money Magazine - it's another outstanding tool to help educate yourself on today's investment opportunities.

Many financial institutions offer All-in-One Funds and Target Retirement Funds - both of which automatically give you a diversified portfolio (without you having to choose investments), based on your age & goals, and creates an asset allocation that measures the risk you are willing to take (the younger you are, the most risk you can take). I've been using the firm, Vanguard, since I started investing, and they have been amazing - they make it so easy to invest and their customer service is stellar. Also, their funds are in Money mag's top 70 investment choices, every month. We maintain our retirement and non-retirement accounts with them - including our IRAs and a Life Strategy Fund that diversifies between stocks, bonds & cash.

Please note - we also consult with a trusted & reputable financial planner who is local to us, to help keep us on track (we pay him an hourly rate rather than him receiving commission on our investments, so we know his suggestions are sound - I highly recommend this same payment structure so you don't get pushed into investments just so the advisor makes bonuses). Vanguard also offers financial planning services (flat fee), if you don't have a recommendation. Our planner said that the Vanguard All-in-One Funds have been found to often out-perform more actively managed funds by large firms including JP Morgan and others on Wall Street b/c of the extraordinarily high fees involved with having them manage your money. Personally, after seeing Inside Job (documentary about the rise and fall of Wall Street), I'd like to keep my money out of the hands of many of the firms that were tied up in the mess!

Hope you find this info always, knowledge is power :) Again, I am not at all an expert - just passing along info that has been very beneficial to me over the years. So, if you haven't already, I hope you will take the time to start educating yourself on the importance of taking control of your money!