investment

How to Use T-bills to Safely Boost Your Emergency Fund

Dan Rafter — Wed, 27 Jun 2018 08:30:16 +0000

You know you need an emergency fund filled with six to 12 months' worth of daily living expenses. You also know that you need to keep this fund in a safe place that gives you easy access to your money.

The problem? Traditional savings accounts — the most obvious place to stash emergency fund dollars — pay so little interest. Your money will sit in a savings account safely, but it won't earn you anything, either. This is where T-bills, or Treasury bills, can help.

T-bills are short-term investment vehicles backed by the Treasury Department of the U.S. government. They're safe, they generate greater returns than traditional saving accounts, and because they are short-term investments, you can get at your money quickly.

As a result, T-bills can be an excellent way to boost the money in your emergency fund. (See also: How to Earn Money With Your Emergency Fund)

The basics of Treasury bills

T-bills are provided by the Treasury Department and are offered in short terms ranging from a few days to a maximum of 52 weeks. If you invest in a four-week T-bill, you'll gain access to that money after 28 days. This is good for an emergency fund: You never want your emergency fund dollars tied up in long-term investments that you can't access quickly.

You can buy T-bills by logging onto TreasuryDirect.gov or by working with a bank or broker. You make money by buying T-bills at less than face or "par" value. You might, for instance, buy a 13-week T-bill with a face value of $1,000 for $995.20. After the bill matures in 13 weeks, you'd get back $1,000. You'll have made $4.80 in 13 weeks, which is an annual interest rate of 1.9 percent (the rate as of June 20, 2018). It doesn't seem like a lot, but try getting that from your bank.

You don't have to spend a fortune to invest in T-bills. TreasuryDirect sells T-bills in denominations of just $100. Of course, you'll generally see greater returns by making larger investments. But T-bills do provide a way for people with lesser amounts of cash to invest in a safe, government-backed investment vehicle.

An important thing to note is that you will have to consider the interest you earn from T-bills as income. This income is subject to federal income tax. You won't, however, have to pay state or local income tax on this income.

Buying T-bills

You can buy T-bills through TreasuryDirect in four-week, 13-week, 26-week, or 52-week terms. You can also buy cash-management bills that come with even shorter terms of often just a few days.

T-bills are sold at auction, and you can either place a noncompetitive or competitive bid. All T-bills, except 52-week versions and cash-management bills, are auctioned every week. It is here that the discount rate is determined for each bill.

The 52-week T-bill is auctioned every four weeks, while cash-management bills are not auctioned on a regular schedule. You'll have to check TreasuryDirect to determine when these bills are up for auction.

With a noncompetitive bid, you accept the rate for your T-bills that has already been determined at auction. You can submit a noncompetitive bid on your own, and you are guaranteed to receive the bill you want.

Banks, brokers, or larger investors typically submit competitive bids since it's a more complicated process. Competitive bids might be rejected if the rate you choose is higher than the discount rate set at the auction.

Why T-bills are good for emergency funds

T-bills work well as a way to boost your emergency fund because of their combination of being safe and having short terms. They are backed by the federal government, so your money will be protected.

They also come with a guaranteed return of at least your principal investment. When you invest in a T-bill, you know exactly what you are going to get back. If you're building an emergency fund, that's a critical benefit.

To keep your emergency fund easy to access, don't invest all of it in a short term T-bill — leave enough in regular savings to cover the likeliest emergencies. If you invest in four week T-bills, the rest of your emergency is never more than 28 days away. You'll have to decide the right mix for you.

From an investment standpoint, you'd earn a higher return investing in the stock market — but the stock market comes with risk, which is detrimental to an emergency fund. Sure, you might make more money, but you might lose more, too. You don't want to take risks like that with money you need in case of a financial emergency.

Certificates of deposit are another relatively safe investment, but still not a great place to stash emergency fund dollars. They usually come with longer terms, with the most valuable CDs requiring you to keep your money in them for a year or more. With T-bills, you can invest for the short-term — as little as four weeks.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Best Money Tips: Turning Your Home Into an Investment

Amy Lu — Fri, 06 Apr 2018 08:30:09 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found articles on how to turn your home into an investment, how to choose the right accountability partner to help you reach your goals, and a guide to finding land for your tiny house.

7 Smart Ways to Invest in Your Health

Sarah Winfrey — Tue, 13 Feb 2018 09:30:08 +0000

If you invest in your health and live a healthy lifestyle, you could not only prevent diseases, but also save a ton of money along the way. However, investing in your health can feel daunting. Gym memberships can be expensive, healthy food feels like it costs an arm and a leg, and it's hard to know which investments will pay off and which ones will just suck your money down the drain. Here are some ways you can invest in your health without breaking the bank.

1. Comfortable running shoes

Get yourself fitted at a running store and buy the pair of shoes that fits best. If you really want to save, note the brand and the size you're looking for and check to see if it's cheaper online. Paying the store price is a good way to return the favor of the work they do sizing you, so check to see if they'll match the price you found online if it's cheaper.

Then set yourself a running goal and establish a regular routine. It costs nothing to run through your neighborhood or on the local high school track. Make it more fun by running with a buddy or joining a running meetup. (See also: The 5 Best Women’s Running Shoes)

If running isn’t your thing, try walking. Again, get yourself fitted for a proper pair of shoes and establish a regular routine several times a week. As your fitness improves, you can increase your distance. And walking is another activity that doesn’t have to cost a dime.

2. Incorporate exercise naturally

If don't have much time for workouts each day, find ways to incorporate little bits of exercise into things you already do. Take the stairs, park in the back of the lot, clean your house regularly — these adjustments add up and keep your body moving. It won't cost you a dime to park farther away or to take the stairs whenever possible, but it will cost you some time. It's still an investment that's absolutely worthwhile. (See also: 6 Apps That Pay You to Workout)

3. Walk or bike to work

If it's feasible for you, consider walking or biking to work (at least when it's warm enough to do so). This saves you money on gas and vehicle maintenance, and it also helps you get exercise in.

A bonus reason to walk or bike to work is so you can incorporate a time during the day when you can de-stress. Focus on what's in front of you, on the road and on your body, and the stress and strain of daily life will pass right by. (See also: 9 Ways Life Is Wonderful When You Swap Your Car for a Bike)

4. Buy seasonal produce

Produce can be expensive, especially if you occasionally let it sit too long in your fridge and it goes bad. Instead of buying whatever is in the store, though, try to buy veggies that are in-season in your area. Seasonal veggies are usually cheaper than imported ones, since there's less packing and transit involved in getting them to you. This also gives you a chance to try foods you don't always eat, which makes eating healthy interesting. (See also: 5 Offseason Foods That Are Destroying Your Grocery Budget)

5. Shop the frozen aisle for fruit and veggies

If you don't like what's available seasonally, or you live in a place where winters are long and there's not much growing around you, shop the frozen fruit and vegetable aisle. New flash freezing procedures allow this produce to keep most of its nutrients when frozen, so you won't have to skimp on taste or quality. You can even get convenient single-serving or single-meal packs that microwave quickly, so there's never an excuse to go without your veggies. (See also: 15 Veggie Noodle Dishes That Will Make You Forget About Pasta)

6. Purchase meat from local ranchers

Buying meat straight from the farmer is a practice that has grown in popularity over the last few years, to the point that it's available at weekend farmers markets in most major metropolitan areas. When you buy from a farmer, you can often choose the cuts of meat you want and how you want it packaged. If you're looking for organic and/or grass-fed meat, you can usually find that, too. Since you pay a single amount per pound, this is often cheaper than buying meat in the store, especially if you like steaks and roasts.

7. Get regular checkups

Going to the doctor is a pain. I get it. You can't always see the doctor right when you need to, and god knows those waiting rooms deliver on their name. But not going at all can mean missing some major health problems when they can still be easily treated or cured. Many health insurance plans cover preventive care completely, or at a higher rate than other treatments. It's important to see your doctor and dentist once a year, in order to make sure your health is solid. (See also: 10 Reasons an HSA Is Actually Worth Having)

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This article is from Sarah Winfrey of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Ask the Readers: What Was Your Best Investment in 2017?

Ashley Jacobs — Tue, 12 Dec 2017 09:30:11 +0000

Editor's Note: Congratulations to Karen, Tabathia, and Ernest for winning this week's contest!

When we make investments in life, it isn't just about making money. We also spend time, effort, and yes, money too, on improving our health, relationships, and quality of life.

What was your best investment in 2017? How did this investment improve your life? Did you have to make any sacrifices for the investment?

Tell us about your best investment in 2017 and we'll enter you in a drawing to win a $20 Amazon Gift Card!

Win 1 of 3 $20 Amazon Gift Cards

We're doing three giveaways — here's how you can win:

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Good Luck!

Tell us about your best investment in 2017 and we'll enter you in a drawing to win a $20 Amazon Gift Card!

This article is from Ashley Jacobs of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The High Cost of Buying a Boat

Annie Mueller — Mon, 26 Jun 2017 08:30:18 +0000

"It's like glass, honey," my dad would whisper to my mom. "That water. Like glass."

My mom and dad, both avid water skiers and all-around fun folks, got lots of worth out of the beat-up old ski boats my dad managed to buy. We spent summers on the lakes and rivers. In between camping and skiing, Dad did the boat repairs himself and cursed the cost of engine parts. Owning a boat is fun, but is it worth the time and cost of upkeep? Calculate the price in full before you buy.

The initial purchase cost

Buying a used boat is the most cost-effective way to become a boat owner. Purchasing a brand-new boat is like purchasing a brand-new car; you'll pay a huge premium for that brand-new label, and it'll depreciate after you buy it. According to Boatshed's Market Report 2016, those sleek and speedy power boats depreciate the most, but all new boats drop in value dramatically in the first three years of ownership.

If you buy a used boat from a dealer, you may get a warranty of some kind. Or you may not. If a warranty is included, get specific information on what it covers.

There are no guarantees when you buy from an individual. Ask to see a maintenance log and receipts for parts or repairs. Don't expect a guarantee on a boat's continued performance. Once you buy, that boat is yours to take care of, for better or for worse.

Boat repairs

If you're mechanically inclined, you can do some repairs and maintenance on the boat yourself. My dad spent his high school summers working at a marina; he handled basic stuff. If your boat needs major repairs, you'll need a pro.

Expect to pay from $65 to $115 per hour for work by a certified marine mechanic. Replacement parts can be pricey, too. A new water pump, for example, can cost anywhere from $100 to over $1,000, depending on the size and style you need.

Even if your boat is in great shape, mechanical failures are probable at some point. It's a machine, which makes wear and tear inevitable. Other common repairs needed on a boat include cracks in the deck, saturated foam (causing the boat to sit unevenly), rot, and joint separation. Cosmetic repairs, such as replacing upholstery or repainting the hull, can be delayed. But others, such as cracking or leaks, must be dealt with immediately. Otherwise, your boat will incur more damage, lowering its value and adding to repair costs.

Seasonal maintenance

Don't forget to factor in the cost of seasonal maintenance work when estimating a budget for boat ownership.

Engine winterization

For boats that will be stored for winter, or for any extended period of time, engine winterization is important to prevent damage. You can do the work yourself (use this helpful winterization checklist) or pay a shop. Average cost depends on the size of your boat.

Hull cleaning

Larger boats that stay in the water need their hulls cleaned periodically. Hull cleaning prevents damage and increases fuel efficiency. Professional boat services either have divers go under and clean while the boat is in the water, or, if repainting is also needed, have the entire boat lifted out of the water to do the work. Rates vary widely based on location, size of the boat, and how long it's been since the last hull cleaning.

Cabin cleaning

You can do cabin cleaning yourself, or hire a professional to do the job. Regular cabin cleaning is important in order to find, repair, and prevent permanent damage, such as corrosion or rust.

Regular maintenance

Some other maintenance items include greasing the rudder box, checking belts and hoses, checking engine alignment, and replacing brake fluid.

Insurance, registration, and other fees

The cost of registration and licensing fees varies from state to state. If you're going to travel between countries, you will need to get an International Certificate of Competence. Insurance is optional in most states, but you might want to have it anyway. You'll pay a boat sales and use tax in most states, as well.

You'll need to pay lock fees to use canals and move from one body of water to another. You may also be required to pay for port fees and customs at various points of entry.

Necessary boat gear

Life jackets are a requirement on any boat, under any circumstances. U.S. Coast Guard regulations require one life jacket for every person on board. Other gear you'll want depends on what you want to do on your boat: fishing poles, tackle and bait, or skis, ski ropes, and tubes. Of course, you need to stock essential safety and health supplies such as a first aid kit, sun protection, and drinking water.

Docking and storage

If you want to dock your boat in a protected place, and you don't own a spot yourself, you'll need to pay a slip fee. A slip fee is typically calculated per foot of boat: so, for a 30-foot boat, you might pay $3 to $5 per foot, per day, to dock your boat at a marina. Marinas often have weekly, monthly, and annual rates, as well. Expect to pay more for a covered and protected slip, and pay for additional services like trailer storage or use of a boat lift or boat cover.

Our old ski boat lived in our backyard, covered in a tarp during winter. In the mild Mississippi winters, that was an acceptable storage solution. But in more extreme environments — or for boats with a slightly higher investment point — you'll want covered, protected storage from the elements. Maybe you have a place for your boat, such as an enclosed garage or barn. In that case, you'll save the cost of paying for storage. But you will need to have a way to get your boat from the water to your garage.

Trailer and transportation costs

If you don't own a boat trailer, you'll need to buy or rent one in order to move your boat from a body of water to any other location. Boat trailers need to be licensed and registered, and you'll pay personal property taxes on a trailer as well as on the boat. Fees vary from state to state.

Renting a boat trailer can be a better solution if you don't need to move your boat often. Trailer rentals run from about $50 a day (for a 20-foot trailer) to around $150 per day (for a triple axle trailer that can haul up to a 33-foot boat). Bigger boats, of course, require a bigger trailer and a vehicle that is powerful enough to tow it.

Whether your boating dream is a yacht or a fishing boat, consider the costs carefully before you invest. It's one thing to relax on a boat. It's quite another to pay for it.

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This article is from Annie Mueller of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 5 Biggest Mistakes Freelancers Make

Amanda Meadows — Wed, 18 May 2016 10:30:11 +0000

Freelancing is a constant push and pull. You have the freedom to be your own boss, but sometimes we're not the best bosses of ourselves. Steer from making these five common mistakes freelancers make, and get ahead of the pack.

1. Forgetting to Withhold Taxes

This is one of the first issues freelancers encounter. It's easy to get excited by lump sum contractor checks. You drop that check into your checking account to pay bills and buy yourself something nice, then before you know it, you've spent it all without saving anything. Come tax time, you're facing a hefty bill. Why?

The IRS charges a self-employment tax of 15.3% no matter how much or little you make. Unfortunately, there are only so many deductions you can claim, so it's very unlikely you can avoid the tax. Prevent the huge financial burden of a large tax bill now by automatically putting away 20% of everything you earn. The 15% goes to paying the self-employment tax, and the remaining 5% is there to help pay state taxes and, of course, the tax prep fees –– the more 1099s you have, the pricier your preparation will be.

2. Neglecting to Save for Retirement

New freelancers sometimes operate under the misconception that they don't have the knowledge or enough capital to invest in their retirement. It can also be difficult to consider saving for retirement when times are thin. If the freelance gigs are trickling in slowly at the moment, you might be savings-averse. But this is exactly why retirement savings are so important. Considering the uneven payment schedule of freelancers, a place where your money can grow slowly over time is an important safety net to have.

It's actually super easy to set up an IRA, Mutual Fund, CD, or any other kind of investment account. Find the financial institution you prefer, and they will give you the step-by-step in person or over the phone –– they'll even do most of the work for you (you are giving them money, after all!). At the end of the day, as a self-employed worker, you, and only you, are responsible for your future, so it's time to get proactive.

3. Losing Track of Expenses

Being a freelancer means having to balance both incoming and outgoing dollars. Do you have to spend money on raw materials? Do you spend hours of unpaid time and/or money on research before doing the job? This should all be tracked and never go beyond a certain limit you determine, based on the work.

Also, some clients are easier to please than others. If you fall into a deep hole on a problem project, be sure to speak up. They might be able to give you a bigger expense budget or increase your hourly rate to cover it.

4. Not Setting a Schedule

Next to setting a work budget, setting a schedule may be the most important thing you can do to ensure you can make the most of each project, and each day on the job. If you come to your desk each morning without a list or a plan, that's a sign that you may need a time management intervention.

Start each day with a to-do list. First, you need the overall to-do list –– one that covers all your ongoing projects and what must be done for each, with deadlines. Then, break those project to-do lists into weekly and daily to-do lists, respectively. Hang up a marker board in your office, with your milestones and goals for each day and week regularly updated. Google Calendar is also a great tool for creating tons of mini-calendars that sync with all your devices.

5. Skipping Self-Marketing

Are you the type of person who dives deep into a project then once it's done, dives into another? Well, not many people will know what you did if you don't take the time to tell them! Self-promotion is a crucial tool in managing your reputation. Build in time to your schedule to share your work with your personal and professional networks.

How do you keep former, current, and future clients updated on what you do? Try starting a portfolio website, updated every few weeks with new work you've completed. Are you the type of contractor who relies on lots of new clients? Consider posting listings on all the gig websites: Craigslist, Guru, Thumbtack, Tispr, and others.

Do you know a lot about topics related to your freelance job? Start a blog section to your website that answers frequently asked questions about your profession. Being known as an expert in your field can drastically improve your perceived value to clients, resulting in more work, and even better pay!

Have you made any mistakes as a freelancer? Share with us!

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This article is from Amanda Meadows of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Investing Lessons You Must Teach Your Kids

Damian Davila — Fri, 20 Mar 2015 13:00:11 +0000

Roughly 68% of Americans feel that saving for retirement is harder than they anticipated. Some 25% of all middle-class Americans "get depressed" when even thinking about it. And 40% of millennials have no idea how much money to save. The most frightening statistic: 21% of Americans think that winning the lottery is the most practical way for them to fund their retirement.

I discussed these problems and the financial behavior of investors with Rob Pivnick, a financial literacy advocate and author of "What All Kids (and Adults Too) Should Know About...Saving & Investing." His message is that parents should teach their children the right habits as early as possible, so they don't become one of these statistics. And it doesn't have to be difficult. Here are 10 easy ways to teach your children about smart investing.

1. Start Them Off Early

Starting to save as early as possible is the easiest way to let your money work for you. In fact, this is probably the number one thing you can teach your children about money.

Consider this example from Rob's book comparing two savers: One starts saving when he is 20 years old, while the other waits until she is 30 years old. Each one saves $100 per month until they are 60 years old, and they both get the same 8.5% return. The early saver will have $406,825. The saver who waited ten years will only accumulate $166,339. That 10 year difference results in over $240,000 more growth! But the difference in the amount contributed was only $12,000 — compound interest made up all the rest. So, encourage your children to start investing now.

2. Don't Try to Beat the Market

Your kids should want to be average — at least when it comes to investing. It is better to embrace the market than try to beat the market. It isn't very often in life that you won't tell your children to try to be the best, but when it comes to investing, teach them to be average. Passive management, or indexing, is an investment approach that tries to match the performance of the market as closely as possible rather than try to beat it.

Over the long term, it is impossible to consistently beat the market without taking on additional risk. Over just about any historical five year period, passive index funds beat actively managed funds. Over the last five years, for example, only 20% to 35% of actively managed funds beat the benchmark for their category. The professionals aren't smarter than the market. And neither are you (or your kids). It's a humbling fact, but still a fact nonetheless. (See also: 5 Investors With Better Returns Than Warren Buffett)

3. Minimize Expenses: Invest in Low-Cost Index Funds

Actively managed funds have an average expense ratio of a full percentage point higher than passive funds. One percent may not sound like much, but over the long term it becomes much more significant. How does this translate into lost dollars? Well, from another example in Rob's book, if you invested $100,000 over 30 years at an average yearly growth of 8.5%, paying for those higher fees would cost you approximately $280,000. (See also: 3 Steps to Getting Started With Index Funds)

Everyone should know that past performance is no indication of future returns. But does everyone know that the most accurate predictor of future returns is low fees? When looking at factors like past performance, fees, and Morningstar ratings, expense ratios are the only reliable predictor of future performance.

4. Think Long Term: Buy and Hold Is the Best Strategy

The average investor's annual return is around 4%. That's compared to the historical average market return of 8.5%. Why? Because we tend to invest emotionally — which causes us to buy high, and sell low (instead of the opposite).

Emotional investing is a losing strategy. Don't fall into this trap — teach your children to stick to their long term plan and ignore the daily market swings.

5. Don't Put All Your Eggs in One Basket

An important part of smart investing is diversifying. While diversification alone won't increase returns, it allows investors to reduce their risk. Diversification limits losses without sacrificing gains. It's the only way to do that. It's the "free lunch" of investing.

By spreading investments over a variety of sectors and assets, the risk that any specific investment will fail is partially canceled by the other investments, thereby lowering the overall risk. Teach your adolescent children to diversify among asset classes, and furthermore, to diversify within each type of asset (such as different sectors, geographical regions, market capitalization, industries, etc.). Pivnick's book devotes a very readable chapter to diversification and provides useful examples of how to make it work for you.

6. Involve Your Children in Investment Decisions

Parents know that children tend to model their behavior after them, so it should be unsurprising that children's saving and investing behavior also follows that of their parents. Any chance you have to involve your children in day-to-day discussions about money are learning opportunities. And they are habit forming. If your children see you making sound, reasoned decisions about spending, they will start to think the same way about their spending habits.

7. Have Kids Write Goals and Savings Charts

It shouldn't come as a surprise that those who write down their goals are a third more likely to reach them. Plus, this can serve as a teaching moment for budgeting.

As soon as your children receive birthday money, are old enough to do chores, or begin earning allowance, start a savings chart outlining their budget. People who write down their savings goals save, on average, over two times more than those that don't write a goal down.

8. Practice Learning by Doing

Anything you can do that actually involves your children in "money" tasks is a teaching opportunity and can instill good spending habits. Here are a few examples Rob provided:

Have them help you figure out the restaurant bill and tip.
Take them to the bank with their piggy bank to deposit funds in a savings account.
Encourage them to take the lead on a refund or return with customer service.
Allow them to negotiate a discount on the purchase of goods and services.

9. Give Limited Control and Let Them Make Mistakes

Once they are old enough, young adults should be given limited access to their money or bank accounts. Limited, in the context of parents-get-final-say-and-approve-silly-purchases, but still providing enough room to allow them to make those silly purchases. It only takes one super wasteful purchase to teach a lesson.

10. Teach Rules of Thumbs and Takeaways

Studies have shown that rule-of-thumb money rules affect financial behavior more than a thorough lesson on the topic. So, the rules of thumb must be included in your discussions. Here are some examples.

After a lesson on compounding, provide an actionable takeaway, such as "start early."
Show the power of diversification with a rule of thumb: "A single stock is riskier than a stock mutual fund."

In Pivnick's book, you can find a great list of 14 takeaways to share with your children. After all, as parents, you want your kids to succeed — so set them up for that success by following these tips.

What are you doing to teach your children about smart investing?

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

If You Want Your 401K to Grow, Stop Doing These 6 Things

Darren Wu — Mon, 30 Jun 2014 09:00:05 +0000

Are you counting on your 401(k) to fund your dream retirement? If so, make sure you're not making the following common mistakes. By avoiding these pitfalls, you'll ensure that you end up with the most money possible. (See also: Optimize Your IRA and Your 401(k))

Stick to the Default Contribution Percentage

If your employer automatically enrolls you in your 401(k), that's a great thing. More employees usually end up participating in the plan than if they had to sign up on their own. Sticking to the default contribution rate, however, is not that good. The average default contribution rate for plans with automatic enrollment is just 3.4%.

There are two reasons why this won't help your 401(k) grow.

1. Too Low to Earn the Full Employer Match

This may not be the amount that'll get you the full matching contribution from your employer. On average, most workers would need to contribute an average of 5.1% of pay to get the full match their employers are offering. The employer match is extra money your employer will give you for free, as long as you contribute your own money first. Since you're entitled to this money as part of your compensation package, it wouldn't be wise to pass it up.

2. Falls Short of the Contribution Limit

This may not be the amount that'll get you contributing up to the full IRS contribution limit. The contribution limit is the most amount of money you can invest in a single year. And the more money you put in now, the more money you'll have later. In 2014, you can contribute a maximum of $17,500. If you're age 50 or over, this amount increases to $23,000.

In order to contribute at the 3% rate and still reach the maximum of $17,500, you'd need to be making about $590,000 per year. So if your salary is less than that, find ways to contribute more than 3%. Because the more money you invest now, the more you'll have later.

Stick to the Default Fund Choice

If your employer automatically enrolls you in your 401(k), they may also choose the fund you're invested in. Sometimes, this isn't the best choice.

Check to see if the default fund is either a money market or stable value fund. If it is, you may want to switch to another fund. These funds aren't designed to really grow your money. Instead, their purpose — as their name suggests — is simply to keep the value of your money stable.

Better investment choices include stock and bond index funds. For more help on choosing the best fund, check out The Bogleheads' Guide to Investing.

Put Too Much Money in Your Company's Stock

Professionals recommend no more than 5% to 10% in a company's stock. And there's a good reason why.

Remember what happened to Enron? Employees who put most of their retirement funds in their company stock not only lost their jobs — they also lost their retirement money.

Rather than investing most of your money in your company's stock, it's better to ensure that your money is properly diversified.

Borrow From Your 401(k)

The main reason not to do this is because if you take out a loan from your 401(k), then that money is no longer working towards your retirement needs. In other words, you lose the power of compounding.

Also, if you leave your job, you'll generally be required to repay the loan balance within 60 days. If you don't, the unpaid balance is considered as defaulted. This means you'll need to pay a 10% penalty on top of owing income taxes on the defaulted amount if you are not at least age 59 ½. (See also: This Is When You Should Borrow From Your Retirement Account)

Cash Out If You Leave Your Job

By cashing out, you not only get taxed and penalized, but similar to borrowing, you also lose the earnings that money could have generated.

Worst of all, you probably won't even get all of your money: If you haven't reached age 59 ½, your employer is required to withhold 20% for the IRS. On top of that, you'll need to pay a 10% early withdrawal penalty.

So for every $1,000 you cash out, you would only receive about $700. The other $300 would go to the IRS.

Settle for High Fees

Most employees don't realize it, but there are costs associated with investing in your 401(k).

These include fees to pay brokers, accountants, administrators, and fund managers just to name a few.

How much can all of this add up to?

In Fight For Your Money, David Bach found that when you add in these fees and hidden charges, the average 401(k) plan actually costs employees between 3% and 3.5% of what they've got invested each year.

So what should you do?

Ask your company or 401(k) provider for a breakdown of the fees you're being charged. If they are much more than 3%, complain.

By ensuring that you don't make these mistakes, you'll increase your chances of building a nice, large nest egg for your retirement.

Are you making any of these 401(k) mistakes? Any others we should be aware of? Please share in comments!

This article is from Darren Wu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

A Lot of People Don't Understand What an Investment Really Is. Do You?

Alaina Tweddale — Thu, 26 Jun 2014 13:00:06 +0000

We recently covered what money really is, and how you can harness it to suit your needs. Now it's time to take a look at investing. What is an investment, exactly, and how can you make an investment strategy work for you?

First, let's start with a definition. An investment is something bought with the expectation that it will rise in value or generate income, like stocks, bonds, real estate, or precious objects (I don't recommend the later, by the way). Let's start with rise in value.

An Investment Will Rise in Value

It's important to understand that the value of an investment is expected appreciate or rise in value over time. It's a tried and true sales technique to convince a buyer that what's being sold is an investment when really, it may not be. Here's the rule of thumb: If the item is expected to depreciate or lose value over time, it is a capital expenditure, not an investment.

That doesn't mean there aren't useful reasons to buy an expensive suit, a new car, or updated kitchen appliances. Those types of purchases will lose value over time, but they make life enjoyable or could even enhance a professional reputation (because in some industries clothes really do make the man). However, a buyer should know if they're purchasing with the intent to make money in the long run, or if they're splurging because they want to enjoy the utility of the item.

Examples of investments that one could expect to rise in value over time include corporate stocks, mutual funds, real estate, and precious objects like art, jewels, or collectibles.

An Investment May Also Generate Income

Sometimes an investor is less interested in the capital appreciation of an investment and more concerned with the income potential it can provide. That doesn't mean that income generating investments won't rise in value over time (the most attractive investments do both).

Examples of income generating investments include corporate stocks that offer a dividend payment, bonds (corporate, government, or municipal), and real estate bought for rental income.

Most important, though, is how you can use an investment strategy to get what you want out of life, or to get where you want to go. Here's how to use an investment strategy to build the life of your dreams.

1. Determine Your Goals

When it comes to investing, it's easy to put the cart before the horse. Many people start an investment plan without stopping first to think about why they're putting their money away in the first place. Knowing what you want can help you develop focus and focus leads to increased productivity and drive.

When many people think about setting up a savings and investment strategy, they focus on all the ways they'll have to deprive themselves to reach their goals. Sure, you may give up some small luxuries along the way but a look at the bigger picture can be truly liberating. Saving and investing can help you achieve your long term goals and give you the freedom to live your life the way you want to live it.

Whatever you want — a boat, a happy retirement, a paid-off mortgage — figure it out first, before you start saving a dime. Sit down and write down exactly what you want out of life. Writing it down will set an intention, which will help get your plan into motion. Once you've penned your life's goals, think about how much each goal will cost. Use an online calculator for help. Only once that information is all down on paper can you start mapping out your investment strategy. (See also: 6 Steps to Achieving All Your Goals)

2. Know How Much Time You Have

Short-, medium-, and long-term goals should be treated differently when planning a money strategy. The more time you have to invest, the more risk you can take on. This is because you'll have more time to recover from any market losses. The options for a 50-year-old who wants to retire in 15 years are different from those of a 25-year-old who has 40 years left until retirement.

5 Years or Less

Don't mess around with money you're going to need in the short term. No one can predict when the market will tank (or boom) and short term investors could find themselves with a fraction of what they expect if they find themselves on the wrong side of an economic cycle. If you expect to use the money within the next five years, it's better to forego potential market gains. Instead consider safer investment options like a savings or money market account or a Certificate of Deposit. (See also: The Basics of CD Laddering)

5 to 10 Years

An intermediate time frame allows for some time to recover from market volatility. A balanced portfolio of stocks and bonds can leverage equities to take advantage of a rising market while using fixed income securities to safeguard against a market in decline.

10 Years or More

A longer time frame can give investors more time to recover from a falling market, making a stock-heavy portfolio safer for those with plenty of time until they'll need access to their money (like for retirement planning). (See also: Using Time Horizons to Make Smarter Investments)

3. Assess Your Tolerance for Risk

No matter your available time frame, it's important to understand how you personally react to market volatility. Even a well-planned, diversified portfolio can lose 20% or more of its value in a given year, depending on the broad economic environment.

What would you do if your portfolio lost 25% of it's value over a four month span? What would you do with an unexpected $200 lottery winning? What is your general opinion of the stock market? It's important to know the answers to these questions and more like it before you plan an investment strategy.

There are many online calculators available to help you figure out your risk tolerance but here's one I've used.

4. Figure Out How Involved You Want to Be

Are you DIYer, or do you prefer a set-it-and-forget-it approach? You don't need to pay pricey advisor fees for either strategy (although there are plenty of great financial planners out there, if you do your reserach). Knowing how much time you want to spend learning about investments, monitoring your portfolio, and planning your short-term market moves will have a major impact on how you develop your investment strategy.

For those who want minimal involvement, there are plenty of target-date investment options available for a variety of goals including retirement and college tuition. A target-date fund takes care of all the heavy lifting for you. A portfolio manager selects the asset allocation (how much is invested in the different investments) and takes care of rebalancing as the portfolio grows and as you get closer to your goal. It's the most turn-key financial solution available today, and there are many low-cost options available. (See also: Easy Personal Finance For Lazy People)

If you like to get your hands dirty, there are plenty of places to dig in and start learning. Start by learning about securities (stocks, bonds, mutual funds) and how to develop an investment portfolio or get the inside scoop on real estate investing.

5. Get Into the Habit

If you want to be a successful investor, you need to make a habit of funneling money into your investment accounts. You can set up an automatic payroll deduction for most accounts or you can retrain your brain to get excited about the goal you're working toward. (See also: The Surprisingly Easy Way to Change Your Habits and Your Life)

Many investors get excited to save more once they have their goals laid out and firmly in place. It can become a game to find new ways to cut expenses and pad an investment account instead. (See also: How to Save $26,000 in 5 Years or Less)

While planning your investment strategy, remember that amassing a fortune is not the end goal. Your investments are a tool to help you reach your life's goals, whatever they may be.

What are your life's goals and how are you using an investment plan to help you reach them? Tell us about it in the comments!

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This article is from Alaina Tweddale of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Surprising True Source of Wealth Creation (That You Probably Already Have)

Eric Roberge CFP — Fri, 09 May 2014 09:12:18 +0000

What is the first thing that comes to mind when you hear the word "wealth"?

I may not be able to guess what that "thing" is, but I can tell you what it isn't… "save"… or any variation of the word.

We have done a great job in this country of hiding the true facts about how people really grow their wealth. And the reason is obvious. Saving is boring. Plus, it certainly doesn't make big retailers and other companies any money. So, from a purely profit driven standpoint, why would anyone want to show you how good saving habits might actually help you financially?

Let's take a look at some simple math for a minute.

Some Simple Savings Math

Do you know how long it takes an investment to double with a guaranteed 10% compound rate of return? It takes over seven years.

So how long does it take your money to double if you have been saving $100 per month for seven years (you now have $8,400) and you continue to do so? Seven years.

Hmm… that's interesting.

If you invest $8,400 today at 10% compounded annually, you will have $16,369 in seven years. However, if you have $8,400 in the bank making 0% and continue to save $100 per month for the next seven years, you end up with $16,800.

Now there are certainly other factors to consider before you choose to pull all your money from the stock market and stick it in a bank account, but for now let's keep this simple. The truth is that you won't find a "guaranteed" return of 10% anywhere these days. But, if you are capable of saving just $100 every month, you are guaranteed to grow your assets, and therefore, your net worth. (See how saving grows your net worth using this simple net worth calculator.)

The Rule of 72

Let's put this into perspective. Investments follow a very simple rule. It's called the rule of 72.

This rule states that you can figure out how long it will take an investment to double by simply dividing 72 by the expected rate of return. For example, if you expect to receive a 7% rate of return on your money (compounded annually), then your money will double in 10.3 years (72 divided by 7 = 10.3).

This also works the opposite way. If your goal is to double your $20,000 in 10 years to make a down payment on a home (and not adding any additional savings), then you need to find an investment with an expected rate of return of 7.2%. (Still not getting it? Check out this short Rule of 72 video for further explanation.)

Although the rule is simple, finding a decent rate of return is the challenge. You don't really have much control here. However, what you do have complete control of is your spending and savings habits. It's this often-overlooked area that is the source of growing wealth over time.

One reason that people may not focus on saving is because it's not sexy, and it cuts into their spending. Clearly, if it was simply a choice of choosing to invest your money and letting it grow on its own or using your own income to save $100 a month, the answer would most likely be to take the investment route.

The problem is that when the stock market does well, people start letting their investments do all the work, forgetting that good savings habits can have a huge positive impact on personal finances. Plus, everyone likes the instant gratification of being able to make purchases with their hard earned money. Saving doesn't quite create that same feeling.

5 Easy Ways to Save More

Unfortunately, the stock market and other investments don't always rise. So, rather than sit back and complain that the stock market isn't growing your money, why not set up a system for saving each year? Here are five ways to do just that! (See also: 6 Ways to Get Paid for Saving Money)

1. Use Your Tax Refund

Your tax refund is a great place to start. Although not guaranteed, the average IRS refund so far in 2014 is over $3,000. Even if you just take a third of that money and save it, you'll have $2,000 right now!

2. Make a Plan for Your Company Bonus

Company bonuses typically come but once a year, and when they do, they hit your paycheck all at once. How about taking some of that hard-earned money and moving it into a savings account before it "accidentally" gets gobbled up by the gremlin that lives in your checking account?

3. Take Advantage of Your Company's 401(k) Match

Your company may be willing to give you extra money just for contributing to your 401(k). Check with your HR department to see if your company offers this match. If you are not currently taking advantage of this, do it immediately. Here's why: Let's say you make $75,000 per year in salary. If your company matches 100% of your contribution up to 3% of your salary, all you have to do is contribute $2,250 this year and you will receive another $2,250 for free! That's 100% gain on your money… unheard of!

4. Sell Your Stuff Online

Sure, this one sounds complicated if you haven't done it before, but it really isn't that bad. You may have a ton of quality items in your attic that you just don't need. You know what they say, "one person's junk is another person's treasure!" Do you have an extra Apple product lying around? Check out Gazelle to see what you can get for it. Getting rid of just a few things might just add up to a decent chunk of money to… yes… save!

5. Set Up an Auto-Transfer

One great thing about technology is that it makes monotonous tasks quite simple. By simply logging into your bank account online, you can set up an auto-transfer from your checking to your savings account each month. This way, you don't get tempted to spend that extra cash sitting in your checking account, because it has magically disappeared and reincarnated as money you have saved for the future!

The bottom line is that it isn't up to the stock market to make you wealthy. Sure, it can help support the growth of your money over long periods of time, but it all starts with you and your saving habits. Take advantage of your working years by setting up specific annual savings strategies. This, combined with an appropriate investment plan can take your finances to the next level!

Have you seen your net worth increase because of your efforts to save more? Please share the wealth in comments!

This article is from Eric Roberge CFP of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Reasons Why You Must Open a Roth IRA Before April 15

Darren Wu — Tue, 25 Mar 2014 09:36:14 +0000

It's that time of year again. While tax season can bring a lot of stress, there are some things you can do to make it pay off for you.

One of them is to open a Roth IRA, which is a little different than a traditional IRA. The key difference is that contributions to traditional IRAs are pre-tax, while Roth IRA contributions are after tax. There are a few other differences with respect to withdrawals, but rather than focus on all of that, let's look at four reasons you should consider funding a Roth IRA this year. (See also: How to Set Up an IRA to Build Wealth)

You Can Double Your Annual Contribution

If you open up a Roth IRA by April 15, you get a great opportunity — you're still allowed to make a contribution for the previous (2013) tax year.

How much?

The most you can contribute in 2013, depending on your income and filing status, is $5,500 if you're 49 years old or younger in 2013. But if you're 50 years old or older in 2013, then you're allowed to contribute an additional $1,000, bringing your total to $6,500.

But that's just for 2013.

In 2014, you can contribute another $5,500 if you're 49 years old or younger in 2014. Similarly, if you're 50 years old or older in 2014, then you're allowed to contribute an additional $1,000 — again bringing your total to $6,500. (Check out the IRS page for more details on contribution limits.)

This means that this year, you can potentially put a total of $13,000 towards your Roth IRA to build a financially secure retirement.

Don't think that the extra $5,500 for 2013 will make a big difference?

If you put the $5,500 in an investment that grows 7% each year, then in 30 years it'll be worth over $41,800. Best of all, if you obey the rules in withdrawing the money, you get to keep all of it and won't have to pay any taxes.

What could you do with an extra $41,800?

You'll Have Better Investment Options

A lot of people have employer-sponsored retirement plans, such as a 401(k). Many, however, complain that the investment fund options available to them are poor. Specifically, these funds tend to have high expense ratios, which are the fees that go toward managing the fund. (See also: Why a Roth IRA May Be Better Than Your 401(k))

Even though all funds have these fees, they tend to be much higher in employer plans. With a Roth IRA, on the other hand, you can invest with a company that offers funds with much lower costs.

For instance, it's not uncommon that funds from employer plans cost around 0.9% each year. If you open up a Roth IRA, however, you can invest with a company that offers funds that cost about 0.2% each year.

That small amount makes a big difference over time.

Let's say you invest $5,500 each year in a fund that grows by 7% each year. If the fund costs 0.9%, in 30 years you'll have just under $439,000. That's not bad.

On the other hand, what if you invest in a lower-cost fund? If you invest $5,500 each year in a fund that grows by 7% each year, but that fund costs only 0.2%, then in 30 years you'll have over $499,000.

In other words, a difference of over $60,000. How much would it hurt you to lose $60,000?

You'll Have Tax-Free Money

With a Roth IRA, you contribute money that's already been taxed. But if you follow the withdrawal rules (the main one being to wait until you're 59 ½ years old), then you get a huge benefit. That benefit is the pleasure of spending the money — including the money earned via investments — without paying taxes. (See also: Get the Best Tax Benefit From Your Retirement Portfolio)

Let's say you invest $5,500 in a regular, taxable investment account each year, and your money grows by 7% each year. If you're in the 25% tax bracket, in 30 years you'll have just under $402,000.

But if you contribute $5,500 in a Roth IRA each year, and your money grows by 7% each year, in 30 years you'll have over $555,000. (Check out this calculator to run your own numbers.)

In other words, taxes would eat up over $154,000 of your retirement money.

You'll Have Emergency Access to Your Money

Lastly, your contributions (that is, the money that you put into your Roth) can be taken out at any time, free of taxes and penalties. This is not true, however, of earnings on your contributions, which have more complex rules. (See also: Balancing Retirement Savings, Emergency Fund, and Paying Off Debt)

Of course, since this a retirement account, you should only do this in the event of a true emergency. But it's nice to know that some of your money is available if you really need it. This is not the case for most other retirement investments you could put your money in.

Remember, tax time doesn't have to be associated only with stress. With opening a Roth IRA, there's a bright side to the season.

What other reasons for opening up a Roth IRA can you think of?

This article is from Darren Wu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Investing Basics That Can Make You Rich

Darren Wu — Tue, 14 Jan 2014 10:36:16 +0000

So you want to become a better investor, build more wealth, and gain financial freedom?

Great!

Where do you begin? There's tons of advice out there about how to make money in the market. And sadly, not all of it is good advice. In fact, some of it is downright damaging. (See also: Investing Concepts to Ignore and to Follow)

But don't worry, there's good news: If you boil all the advice down to a few key fundamentals, what's left is a short list of true words of wisdom — real advice that'll put more money in your pocket over a lifetime of investing.

1. Start Early and Invest Regularly

If you start at age 25 and put in the maximum to your Roth IRA ($5,500 in 2014) every year for just 10 years (until you're 35, and then stop contributing), and your money grows by 8% each year, by the time you're 65 you'll have over $865,000. (See also: Retirement Planning If You’re Under 30)

But if you procrastinate for 10 years, start investing at age 35, and invest the maximum every year until you're 65 (30 years), you'll have just under $673,000 — a difference of over $192,000.

How much would it hurt to lose $192,000?

By starting a bit earlier, you put in less of your own cash, and end up with more money than if you started later and had to put in more of your own cash.

2. Choose Your Asset Allocation

This refers to how you split your money between the two main types of investments — stocks and bonds. (See also: Asset Allocation Basics)

To highlight the importance of this decision, here's what William Bernstein, author of "The Four Pillars of Investing," says about it: "The fundamental investment choice faced by any individual is the overall stock/bond mix."

So how do you choose?

Here's a rule of thumb recommended by John Bogle, founder of the Vanguard, the world's largest mutual fund company: Put your age in bonds. So if you're 30 years old, put 30% in bonds and 70% in stocks. Once you turn 60, put 60% in bonds and 40% in stocks.

3. Rebalance Yearly

Rebalancing means restoring your investment portfolio to its original asset allocation. For instance, if stocks have a good year, they'll increase in value and make up a larger percentage than your original allocation.

To rebalance, simply sell the appropriate amount of your stocks and buy more bonds (or, to avoid capital gains tax on the sale, try this contributions rebalancing trick). By doing this, you're also following another investing idiom: buy low, and sell high.

4. Make Index Funds the Core (or All) of Your Portfolio

Here's what Warren Buffet, second richest man in America, has to say about the effectiveness of index funds for building wealth: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."

5. Keep Costs Down

When it comes to fund investing, your costs are the fund's expense ratio. According to a report from the Investment Company Institute, the average actively managed fund costs 0.92% a year. With index funds (see #4 above), however, you pay a lot less. The average index fund costs just 0.13% a year.

Why does this matter?

Suppose you invest $5,500 each year for the next 20 years. Also, let's assume that both the actively managed and index funds grow by 8% each year.

If you chose the actively managed fund, at the end of the 20 years you'd have just under $242,000 — a fair amount. But if you invested in the lower-cost index fund, you'd have grown your wealth to the sum of over $267,000 — a difference of over $25,000.

Could you use an extra $25,000?

Following these investing fundamentals, and you'll be sure to gain the financial freedom you're seeking.

Anything I've missed? What additional fundamental investing rules do you follow?

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This article is from Darren Wu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

One Simple Trick to Get the Best Tax Benefit From Your Retirement Portfolio

Philip Brewer — Wed, 08 Jan 2014 10:37:23 +0000

The most basic strategy for long-term investing is asset allocation. But keeping to an allocation means rebalancing your portfolio, and rebalancing is fraught with complications — one big one being the tax implications of the sales you need to make. A simple trick can help you deal with that issue, but first let's take a closer look at asset allocation and rebalancing. (See also: The Best Asset Allocation for Your Portfolio)

What Is Asset Allocation?

The idea of asset allocation is to spread your investments among various categories (stocks, bonds, cash, gold, real estate, etc.), with the percentages in each category chosen to balance your desire for return and willingness to take risk.

There are a lot of rules of thumb for asset allocation.

Spreading Your Wealth Around

One simple one is to set the stock fraction of your portfolio equal to 100 minus your age — so a 24-year-old would go with a portfolio of 76% stocks with the rest in bonds. Each year the portfolio gets a little more conservative, gradually shifting to only 35% stocks by age 65.

An asset allocation championed by financial writer Harry Browne was a simple 25% each divided among stocks, bonds, gold, and cash.

Many financial writers and advisors have model asset allocations. There is, of course, no way to know what asset allocation will turn out to be the best (until the future arrives, and it turns out that an asset allocation of 100% in whatever went up the most would have been best).

My own sense is that any reasonably well-diversified portfolio will be okay: Just pick one. Sticking to an asset allocation means that you automatically avoid the error of putting all your money into whatever last year's hot investment was. (See also: How to Know if a Company Is Worth Your Investment)

What Is Rebalancing?

Because investment prices are constantly changing, your portfolio will almost immediately be out of balance. If stocks have gone up, the percentage of your portfolio invested in stocks will be above the target level. Rebalancing is the process of getting each category of your portfolio back to its target percentage. (See also: 7 Online Investing Tools and Apps)

In theory, rebalancing is easy:

Calculate your total assets.
Apply your target percentages to figure out how much money you should have in each category.
In any category that's over its allocation, sell enough to bring the category down to the target.
Use the money from those sales to buy the appropriate amount in each category that was under it's percentage.

In practice, rebalancing is trickier than that, for several reasons.

Rebalancing Complications

The first issue with rebalancing is deciding how often to do it. You could do it every day — or even every second — selling a little of anything that had gone up a penny and buying whatever had gone down a penny, but that much churning would just add complexity and expense to no particular benefit. The general consensus is that annual rebalancing is about right, but you could make the case that doing it monthly or quarterly would be better.

The second issue with rebalancing is procrastination. There's just natural inertia — it's one more thing to do, but one that doesn't have a real deadline, so it gets put off until later. (See also: 10 Ways to Stop Procrastinating)

There's another factor, though, which is that after a year, your portfolio is probably pretty far off from its target percentages — but in what seems like a good way. You'll have more of your winners and less of your losers, and who doesn't want that? Selling your winners is always tough, and buying the laggards even tougher.

Those are both real issues, but this post is about the third issue with rebalancing, which is taxes.

Tax-Efficiency in Rebalancing

Besides the issue of it just being tough to let your winners go, rebalancing also raises the issue of capital gains taxes. All those sales of winners incur tax liabilities. (Worse, since you're not selling the losers, you don't even have any losses to offset your gains.)

Rebalance Via Contributions Rather Than Sales

There's one basic trick to ameliorate this issue, which works pretty well: Use your contributions to rebalance your portfolio. Instead of dividing your contributions up the same as your target percentages, divide them up so as to move your portfolio closer toward balance.

The calculations can get complicated if you let them — but you don't need to let them.

If you make contributions frequently, and especially if a single contribution isn't big enough to bring your portfolio entirely back into balance, you can do it the easiest possible way: Figure out which category is the most dollars below its target, and put your whole contribution into that one category. Do the calculation afresh for the each contribution, and your portfolio will stay reasonably close to your desired asset allocation.

The same thing can work when you leave the contribution phase of your life and move into the draw-down phase: Use your withdrawals to move your portfolio back into balance by selling from whatever category is the most dollars over its target.

Rebalancing by targeting your contributions works very well, especially in the early phases of building your portfolio, when each month's contribution is large compared to the size of your total portfolio.

After ten or twenty years, your portfolio (we very much hope) will be large compared to each month's contribution, and it will drift from your target asset allocation faster than targeting your contributions can bring it back in line. This is somewhat eased by the fact that you'll probably be able to make larger contributions as you progress along in your career, but eventually market volatility will almost certainly force you to going back to plan A: Sell things that have gone up and buy things that have gone down. But a careful application of rebalancing with your contributions will minimize the amount you have to sell — and thereby minimize the amount of capital gains taxes you incur. (Clever use of tax-advantaged accounts, like IRAs and 401(k)s, will also help.)

Do you look after your retirement funds via asset allocation? What tricks do you use to keep everything in balance?

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Much Money Will You Have in 30 Years?

Darren Wu — Tue, 26 Nov 2013 10:30:22 +0000

For some of us, it's hard to know how much money we'll have a month from now, let alone 30 years from now. Yet, if you're planning your dream retirement, or even for your child's college fund in the nearer term, you've got to make some educated guesses. And that's not always easy. (See also: What Is Your Retirement "Number"?)

Fortunately, Rick Ferri, investment expert and author of six books on the subject of investing, has taken a lot of the guesswork out of this process. He's done extensive research to provide a forecast of stock and bond market returns for the next 30 years.

Of course, it's important to remember that this is just a forecast and not a guarantee. Still, as humans, it's inspiring to think about what our future could look like. And taking action by investing always beats not taking action. (See also: Mutual Fund Basics to Start Your Investing Career)

The thing that's different about Ferri's forecast, as opposed to someone else's, is that he does it every year. That means he takes into account changes to the factors that affect the return forecast, such as fiscal and monetary policy. This gives you the most accurate, up-to-date forecast possible.

So without any further delay, let's look at the forecast.

The 30 Year Forecast

Looking at the middle of the three columns filled with numbers, we see that U.S. large-cap stocks, which are stocks of companies worth more than $10 billion, are expected to grow by 7.4% over the next 30 years.

However, experts don't suggest putting all your money in the stock market. That's because your money is likely to see wide changes in value as it rides along the ups and downs of the stock market.

Instead, to lower your chances of seeing this happen, experts also suggest investing in bonds. So looking at the same middle column, if you were to invest in U.S. Treasury notes, you can expect your money to grow by about 3% over the next 30 years as well.

If you'd like an example of specific stock and bond funds that you can invest in, check out the Core Four Portfolio.

The S&P 500 is the most widely used representation of U.S. large-cap stocks. That means if you invest in an S&P 500 index fund, you can expect your money to grow by about 7.4% over the next 30 years as well. (See also: How to Get Started in the Stock Market With Index Funds)

Dollars and Percents

Now let's say you decide to split your money by putting 60% of it in stocks and 40% in bonds, which is considered by experts to be an appropriate amount of risk to be taking over the long-term. Combined, your money would grow at the rate of 5.6% every year. Here's the math behind it: (7.4% x 60%) + (3% x 40%) = 5.6%. You can also do this for whatever stock and bond split you choose simply by changing the percentages.

How about in dollar terms? If you invest just $1,000 each year, in 30 years you can expect to have over $78,400 — more than doubling your money.

Getting Yourself Started

You can begin with a retirement account that most employees already have — the 401(k). In 2013 and 2014, most of you can invest a maximum of $17,500. (See also: How to Make the Most of Your 401(k))

So let's say your 401(k) plan has index funds that track these assets, and that you invest the maximum each year. Doing this, you can expect to have over $1,372,000 to your name before taxes by the time you retire in 30 years. To verify the math, here's the formula, which is known as the Future Value of an Annuity Due: (1 + .0564) X $17,500[((1 + .0564)^30 - 1)/.0564]

(Note that .0564 is the combined expected return from Ferri's forecast above; $17,500 is the yearly contribution; and, 30 is the number of years. Substitute your own values for your personal calculation.)

You can also plug this formula into an Excel spreadsheet: =FV(0.0564,30,-17500,,1)

In addition to this, you may also be able to invest in a Roth IRA. In 2013 and 2014, most of you can invest a maximum of $5,500. (See also: Why a Roth IRA May Be Better Than Your 401(k))

Again, let's say you invest in index funds that track these assets. Let's also say you invest the maximum each year.

Doing this, you can expect to have over $431,000 to your name by the time you retire. Again, to verify the math, here's the formula: Future Value of Annuity Due = (1 + .0564) X $5,500[((1 + .0564)^30 - 1)/.0564]

Or just plug this formula into an Excel spreadsheet: =FV(0.0564,30,-5500,,1)

Not as much as with a 401(k), but the good thing about the Roth is that it's tax-free — ALL the money is yours.

By starting to invest a little bit now, you can build a nice amount of wealth for yourself later.

So how much money will you have in 30 years? Do the calculation and let us know in comments!

This article is from Darren Wu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

2 Things You Must Know Before Making a Major Spending Decision

Keith Whelan — Fri, 01 Nov 2013 10:24:03 +0000

Most would agree that successfully managing your finances is near the top of the list of important things to do in life. In fact, for most Americans only two other things, family and health, are more important. But how do you define success? (See also: Defining What Financial Success Means to You)

Without a clear and measurable definition of financial success, like Alice in Wonderland you risk falling through the looking glass and losing your way. Or as George Harrison paraphrased the book's author: "If you don't know where you're going, any road will take you there."

So, what should your financial goal be? And what's the best road to get you there?

Financial Independence, Not Wealth, Is the Goal

It's best to start with the goal and work backwards, so let's begin there.

Most personal finance advice focuses almost exclusively on only one thing: increasing your wealth, or net worth. But what good is wealth if it doesn't pay the bills? Yes, you want to accumulate wealth, but some sources of wealth actually increase debt and drain your monthly income.

It's that monthly income that pays the bills, and if you have enough of it from sources other than salary, you will be… financially independent. That is the goal: financial independence; and it's measured by cash flow. Wealth does play an important role, but it's a supporting role. You want to accumulate the types of wealth that generate cash flow, and avoid or minimize those that don't. (See also: How Cash Flow Allocation Helps You Retire)

The Two Rules of the Road You Must Follow

OK, we've defined the destination. That's half the battle. Now, what's the best road to get you there?

There are actually many roads — many ways — to achieve financial independence. The key to success is to avoid the detours and dead ends that can delay your trip. To help you avoid the wrong roads and make more positive choices, you just need to follow two rules of the road. Before making any important investment or major spending decision, ask yourself two questions.

1. Will This Item Appreciate, or Grow in Value?

Appreciation is the "wealth" question. Does the asset increase or decrease in value over time?

2. Will It Generate Positive or Negative Cash Flow?

The other question is, of course, the cash flow question. Will I spend more on the purchase than the income it generates?

You need to consider the impacts on both your wealth and your cash flow to make a fully informed purchase decision.

Where the Rubber Meets the Road

Here's where the rules actually help you make decisions. Just asking these two questions will allow you to prioritize every investment.

Best: It BOTH appreciates AND generates cash flow (rental properties, stocks that pay dividends, business ownership).
2nd Best: It EITHER appreciates OR generates cash flow but not both (savings accounts, CDs, bonds, a primary home).
Worst: It NEITHER appreciates NOR generates cash flow (cars, boats, furniture).

Your strategy? Avoid, or at least minimize, the "Worst" investment decisions. Also, keep the "2nd Best" items in check. And, when possible, take advantage of opportunities to invest in "Best" items.

Cars Are Among the Worst

For example, a car purchase slows your progress on the path to financial independence because it's money spent on something that loses value and creates a negative cash flow in the form of a monthly loan or lease payment. Still, most people need a car. That's fair, but don't buy a costly one. Pay it off quickly to eliminate the negative cash flow; that will free up money you can use to pay off other debts (which frees up more cash flow), or to make a "Best" investment. (See also: Guide to Buying a Used Car)

A House Is 2nd Best

Another example, this time from the "2nd Best" category, is a house.

On the surface you might think a house is a good investment. In fact, a primary residence often accounts for the majority of a household's wealth, and over the long term it even appreciates in value. But that's looking at it in terms of wealth only. What about cash flow? Truth is, a house can be a real cash flow killer, suffocating your ability to pay off other debts or to make "Best" investments… especially if you buy a house that's too big, or if you keep pouring cash into repairs or improvements. (See also: 9 Costly Things New Homeowners Don’t Prep For)

So a poor house purchase decision can slow your progress to a crawl on the financial freedom highway.

What about a rental property? That's a different story, for if you make a good multifamily purchase it could appreciate in value and also generate positive cash flow. You win on both measures, and the additional cash flow will supplement your traditional retirement savings sources.

When You Come to a Fork in the Road…

Spending money involves making choices. In fact, the first choice is to spend or not to spend. Every decision has consequences, both in terms of wealth creation and cash flow gains or losses.

It's the negative impacts that pose the greatest threat, because they carry an opportunity cost — a lost opportunity to grow your wealth or improve your cash flow. Even small everyday purchases trickle away cash flow and, taken together, they can add up to an annoying negative income stream. But the big purchases, like a car or a home, are the ones to really watch out for. Poor decisions on these big items can create large, ongoing negative cash flows.

So when making an important investment decision keep your destination — financial independence — in mind. If you follow the rules of the road and consider the impacts to both your wealth accumulation and to your cash flow, you're bound to avoid the detours and arrive at your destination years ahead of schedule.

What rules do you rely on to help guide your spending decisions?

This article is from Keith Whelan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

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