Money 101

A while back one of my nieces asked for money advice and this morning I found that the latest USAA (My Insurance Carrier) magazine had some advice to compare with my advice to Kim.

• Number one thing in the entire equation is that income must be greater than outgo in the long run. You might have a month or so each year where things like taxes and insurance make the flow negative but for the year (s), you need to have more income than outgo. A long time back Barb and I decided that it is always better to pay our own taxes and Insurance rather than have our House Lender save the money for us. Now that we own the house, we know what to expect. As much as possible, we have always tried to owe Income Taxes rather than have Uncle Sam hold our money. Having the ability to save and not depend on a Tax refund is kind of the foundation of control.
  
• It is almost always better to be a land lord than a renter. People that rent walk away from the monthly payments and land lords get a pretty good deal between depreciation and having the ability to write off a few items each year.
  
• My advice was to pay off the smallest debt first and get or establish a good taste in your mouth when you start cleaning up your debt. USAA said to pay off your biggest debt that has no good tax implications. They say Credit Card debt is top of their list.
  
• There are some good times to use home equity loans and continual overrun of your spending just isn't one of them. In most cases, the home is the one asset that increases in value and allows most families to accumulate value or $ in their savings portfolio. Did you notice that they were home improvement loans and now all of a sudden they are home equity loans? They are good to put in things that really improve the value of your home but you need to understand that granite counters are eye candy and real value is a new high efficiency furnace, insulation and good windows.
  
• One thing we agree on is that you have no ability to control spending or to budget without a handle on what you have been spending your money on. Get a good program like Quicken and use it. It might surprise you as you enter your spending that you are using your debit card like cash. There was a study done and it found that most people will spend more when using a debit card than they would if they were spending cash. (by about 10%) Didn't you ever have an allowance and learn anything? If you were like most kids, you spent it on junk and asked for more. Write it down and spend what you need not want. Some day you will have everything you need and most of what you want.
  
• When you are younger, you should be more willing to have risk in your investments. As you age, the return of your money is as important as the return on your money. I have had a lousy track record with the stock market when I bought individual stocks. By the same notion, I could have invested a 401 K into a stock program when the Dow was at $5,000 and not it is at least twice that. I have made a little over 4% per year for the intervening 20 years. I would have doubled my money not made 80% return. Oh well.
  
• One of the nicest feelings is to make the final payment on a house and get that big ol'e hulking package from your lender that includes your title. We have done that twice now and both times it felt so good. It does leave you with a wonder what will happen when you don't have that big interest deduction to write off each year. I promise you that not paying the interest payment is more than offset by having the extra money. If you want to send me $500 a month, I'll be glad to send you a return at what ever tax rate you are paying. Lets see, if you are in the 20% bracket, that $6,000 a year saves you about $1,200 a year. That would give me a net profit of $4800. Get the point?
  
• One of the toughest things is where to invest your dollars when you finally break over to a positive side of the ledger. It ain't a boat, a new car or a house on the lake. Savings need to be just that. First I tell everyone to have a nest egg of a month or two in cash. Second have about 3-6 months in a pretty highly liquid form and then do some serious investment. Barb and I bought IRA's when they first came out. We were able to put $2,000 each in them and shelter them from taxes. That small investment of about $12,000 each over six years is now nearing $50,000 each. One year I got a pay raise and just started putting it in a 401K. We didn't need it and just invested it. yep, $50,000 later it is still there waiting for a need. Barb got a nice raise one year and started a 503B investment for Teachers. I won't go into the details of that now, but I promise you that I am worried now about cash flow and taxes not what the heck am I going to do to pay the bills.
  
• One big difference today over things 40 years ago is that when we started out, we were in careers that if we kept our noses clean we would probably hit a day when we retired from those jobs. (We did and we have) They had a pretty good retirement package in them and are a form of investment that is paying off today. Unless the trend changes, your futures will be based on your savings in whatever vehicle you choose and less on a retirement program. There are times that I wish we had put our $ in a Roth IRA so they can be taken out after taxes and not taxable now. It is too late now for us. Start early and save often.
  

MUD