"Every choice you make has an end result" - Zig Ziglar
We all need to invest. But on the other hand, a financial house that is not built on sound money smart ideas, is not a building a sound foundation for the future and your retirement. We also need to save, be prudent with the costs of our efforts and understand, more than anything, that this is a long-term commitment.
So, Finance Guy, should we invest, save, or pay down debt?
The answer is all of the above. But not in that order. Debt still acts like a negative on any plan. It takes away from potential before we even have a chance to move forward. How you manage that debt is key to how you allocate your savings and eventually your investments.
It is estimated that almost two-thirds of us pay our debts last when it comes to monthly bill paying. Not paying does not mean that these creditors will simply go away. If you have more than one card, chances are also high that your credit card debt (commonly and correctly labeled bad debt) exceeds $10,000. If you do, here is a simple way to get that debt under control after you take these simple actions.
First: contact your creditors. Ignoring them means that they will act swiftly and with impunity. Working with them on the other hand, might allow you some breathing room. Always call them at the first sign of trouble and explain your case. By law, they must work with you.
Second: organize your debt. I have suggested using the sliding scale method. Lining your debt out in front of you, smallest minimum payment to largest, begin by paying the smallest minimum payment with twice the amount due. Pay the minimums on the remaining cards - and do so on time. As the first one is paid off, simply roll that payment (the smallest payment times two) into the next smallest minimum payment. For example, a minimum payment of $25 on the first card would have you paying $50. If the next highest card suggests a minimum payment of $35, when the first card is paid for, you new minimum on the next card would be $50 plus $35. Each time a card is paid off, the balance, which by now you are accustomed to paying faithfully (and have budgeted for) is rolled over to the next. This will take some time but the effort is worthwhile and a lesson in patience.
And then what?
The next step is savings. Just like paying down debt, this is a slow slog through time as you rebuild your financial house from the foundation up. Start with paying yourself first. Your budget allows for your bills to be paid in full and on time. Now the sacrifice begins with removing some disposable income from your wallet. It can begin with as little as $25 which is not much of a sacrifice for most folks. By the end of the year, not allowing for interest and compounding (which will vary depending on where you put the money for safe keeping - Bankrate.com can help with who offers the best savings rates) and you will have saved in excess of $1200.
If you can double that amount, you will be much closer to building an emergency account. Many of you can jump start that account with your tax return. If you haven't done so by now, change your weekly tax deduction so you eliminate that tax season bonus. Go to your HR office and fill out a W-4 to hit as close to zero owed taxes as possible. Doing so might help you find that $25 easier than you might think.
And then we should invest?
Even with debt, you could have been investing. For those of who have access to a 401(k), deducting 3-5% from your check pre-tax is not likely to have any effect on your take home pay. In many cases, your employer may match with these percentages used as a threshold. This not only doubles your investment profile but put you that much closer to where a good investors plan is headed.
Keep two things in mind: Avoid target dated funds (the default fund some employers enroll you in if you haven't done anything on your own) and index funds (these are tax efficient funds that are better utilized outside of a retirement plan. Until you become better versed in how mutual funds work stick to combination of large cap, mid-cap and small-cap funds. This will give you a broad profile of the market. If you are older than 40, I suggest a little different strategy.
Suppose I want to buy a house?
In order for you to be even considered for a home purchase, all three of the previous techniques need to be employed for at least three years. You may think you are missing rock bottom prices in today's market. But the cruel fact of the matter is that mortgages have become incredibly tough to get unless you have no debt, some savings and an ability to control your future. The goal is simple: lenders want you to be able to buy a house you can afford and be able to make good on the promise to pay for it.
Should I be saving for college for my kids?
The simple answer is no. No, if you have not been able to handle your debt, have no savings and have failed to invest for your own future. The 529 plan has seen some rough patches and the fees, investment styles and the funds themselves have fallen on some tough times. Few are doing well and even fewer are worth the effort.
Yes if your income is in excess of $100,000 and your debt, savings and investments are in line with that income level. If so, here is a list of the best 529 plans according to Morningstar:
Ohio CollegeAdvantage,
Ohio Tuition Trust Authority;
Indiana CollegeChoice 529 Direct Savings Plan, Upromise Investments, Inc.;
Utah Educational Savings Plan Trust, UESP Trust;
Virginia Education Savings Trust, Virginia College Savings Plan Board;
Virginia CollegeAmerica 529 Savings Plan, American Funds.
In many cases, you do not have to live in those states to use their plan. These top five were simply managed better.
