This is a guest post from Fred from Credit Card Finder. Fred helps people to compare and choose the best credit card online.

If you’re in debt with credit cards, or personal loans and a mortgage you may be feeling a little nervous when you think about your lack of savings – but does it make sense to direct funds towards a savings account when the interest earned there will be overshadowed by the interest you are paying on your debt. There are ways to save when you are in debt, and there are financial products which can help specifically with this situation. So here are five years you can save, even if you have debt.

1 Consolidate credit cards to one balance transfer card

Try and avoid using equity or a line of credit on your home loan to pay off your credit card debt because you are in fact just stretching out your credit card debt for another 30 years, when you can target it now and get it out of the way for good. Instead, find a balance transfer card with a low interest rate which will allow you to transfer all of your credit cards to be charged one low rate. In this way you have your debt under control, you have a manageable monthly repayment and you have a payment plan which will help you get rid of your credit card debt.

2 In debt to 9%

Many financial planners and advisors will use the 9% rule – if you have debt which is charging you interest of more than 9%, you should direct as much of your income as you can towards paying down that debt. This means you should continue to pay your home loan as usual as it is unlikely to be charging you more than 9% interest in the current financial climate, and any personal loans you have are probably below 9% too. Instead you can focus your debt repayments on your credit cards as in the first point, after which time it makes sense to start looking at a savings plan.

3 High interest savings accounts

If you are going to save effectively while paying off your debt, you need to be getting the most out of the dollars you are directing towards a savings plan. Therefore, choose a high interest savings account which will give you the best return on the money you are able to put away. .

By depositing your regular savings to a high interest savings account, even if you have debt you are going to be able to earn a regular and attractive interest rate on your savings as the interest is calculated daily and compounds into a monthly payment. Even if the interest rate on your savings can’t top that on your home loan, it is sure to be higher than the balance transfer card you are using to pay off your credit card debt.

4 Save for your retirement

Regardless of any debt you have you should be thinking about your future and about building a retirement fund. Retirement savings accounts and superannuation funds have different tax rates and can make your contributions go even further, even if you are also directing some of your income to pay off debt. In saving for your retirement you can also take advantage of employer or government contribution schemes which will match your personal contributions up to a certain amount. Therefore, make personal contributions to your retirement savings up to this amount, get all of the tax and government incentives you can, and you can still focus on paying off your debt while sticking to a savings plan for your future.

There is no point in directing all of your income to pay off your debts if there is nothing put aside for the future. Therefore, don’t be in a rush to pay off your mortgage in lieu of saving for your retirement, because if you haven’t been contributing to your nest egg, it won’t matter that your nest itself is paid off.

Photo Credit: The Consumerist

Post from: Personal Finance And Investing

How to Save When You’re in Debt

Photo Credit: WWarby

Today’s post is a guest post by Fred Schebesta who writes for Savings Account Finder where he helps people to choose the best savings account and term deposits.

While it is easy to spend all the money which comes in from your wages, and then some, today is the day you will start a savings plan and start using your money more wisely, for two reasons – firstly you’ll see how important it is to have a savings plan, and secondly you’ll see how easy it is to open a dedicated high interest saving account which practically manages and runs your savings plan for you.

Who Needs a Savings Account?

Not everyone needs a savings account, for example if you have a mortgage you should be directing your extra funds to pay off your debt before you start trying to earn interest on a savings account. Similarly if you are nearing retirement then an approved Retirement Savings Account will offer you better tax benefits and more attractive fee structures than a typical high interest savings account could offer in your situation. Instead, a savings account can benefit:

• · Children learning to save. Opening a savings account for your child can be the best gift you will ever give them as you are starting them on the road to financial knowledge and stability. Learning to save is an important skill and the earlier you teach your children about making regular deposits and how compounding interest is calculated, the sooner they will be in control of their money, rather than having it control them in the form of credit card and uncontrollable debt.
• · Young people saving for a house. A new home is a big investment and usually requires a big deposit too. Therefore, opening a high interest savings account can help you achieve the goal of a house deposit a lot sooner, as you can set up automatic transfers from your transaction account when your wages arrive so you are paying yourself first and allowing your house fund to regularly increase. You’ll also be earning a high rate of interest which is calculated daily and paid monthly so the more regular deposits you make, the more interest you will be able to earn on top of your own contributions.
• Families looking for more fun. When you are managing the family funds it can seem like there is never enough to go around. Unfortunately this could mean missing out on family holidays, trips to the movies or new bikes for Christmas. Whatever your family’s goals are, a dedicated high interest savings account can help make them a reality because your savings account safely guards your funds, adds interest to them and makes for a simple place for your family to save together and achieve their goals.
• · You there, with your dream purchase. If you have a dream purchase in mind, big or small, a high interest savings account can help make it a reality. By separating your savings from your everyday funds you are less tempted to spend the money you have so carefully saved, and you can instead watch it grow, contribute or reinvest it all online.

Features of the Best Savings Account

To achieve these savings goals you need to make sure you compare savings accounts and then choose it with your needs in mind. There is not one high interest savings account which is better than any other, instead you need to choose the account with the features, access, interest rate and benefits which suit you and your savings goal because the account which best suits you will be best suited to keep your savings on track.

How to choose the best savings account:

• Choose the best interest rate. High interest savings accounts often offer a higher promotional interest rate to new customers, which later reverts to a rate which can be much lower. To make sure you don’t miss out on interest earning options, choose a savings account with an interest rate to suit your savings plan. If you have a short term savings goal which you can achieve in just a few months, a high promotional rate can help you get there in that time, however if you have a more substantial goal like a house deposit, look for the best interest rate over the long term.
• Fee free savings accounts. A high interest savings account is opened and operated online and so should be fee free – not charging you for opening the account, or making deposits or withdrawals. However, to keep your savings entirely fee free, check the cost of transactions from your everyday account to your savings account – if you are being charged to withdraw funds to your savings account you are reducing your savings potential.
• · Access the account your way. While high interest savings accounts are primarily online accounts, some can be accessed in branch. If this is  an important feature for you, the best savings account will be one with branch access, cheque deposits and over the counter transactions included for free.
• · Understand all the account conditions. Some savings accounts will only pay you a high rate of interest if you make no withdrawals in a month and others require you to make a certain amount of deposits to be eligible for a higher interest rate on your savings. Therefore, it is important that before you decide which savings account really is best for you, that you have read and understood all the conditions of the account and you know that you can use the account within those conditions to achieve a high return on your savings.

A high interest savings account is an easy financial product to open and use, so make sure you follow our tips on choosing the best savings account for your needs, and you’ll have control over your money sooner.

Post from: Personal Finance And Investing

How to Choose a Savings Account

Photo by: Chapek Sergey

Probably the most self-destructive thing that a person can do for their financial future is to pay undue attention to what those around them are doing.  Obviously this has limits, but using your friends, family or neighbors as benchmarks for “success” can manifest itself in many ways and almost all of them can sabotage your financial progress.  You should always remember that what a person presents as their situation can be very different from their true situation.  Let’s look at some ways the Joneses can sabotage you.

Status Symbols

Typically when talking about “keeping up with the Joneses” we’re referring to buying status symbols.  Maybe your neighbor bought a new BMW, and it sure looks nice.  Or maybe you’d like to host the football watching party sometime, but your TV just doesn’t match up to your friends’.  These types of situations can inspire us to make purchasing decisions that may provide a short-term high for a lot of pain.

Almost all status symbols are depreciating in nature.  Your car and that new TV are going to lose their value over time.  The more purchases like that you can avoid the better your financial future is going to be.  This isn’t really very tricky, and most of us are aware of this, even if we don’t always follow through.

Debt

Debt is a less obvious way in which our neighbors and friends can influence us.  The Joneses can convince us that it’s reasonable to carry credit card debt or car notes.  The Joneses can also convince us that it’s perfectly reasonable to stretch our budget to make these payments.  When you use debt to finance the status symbols, the damage is multiplied.  Carrying debt for an investment like an education is one thing, carrying it for a television is quite another, especially given the kinds of interest rates credit cards charge.

Risk

One of the most insidious and pervasive ways your acquaintances can affect your financial future is by affecting your investment choices.  This is in many ways one of the driving forces of asset bubbles.  Take the dot-com boom and bust.  You neighbor might have bought a stock and is now making 50% per year on it.  He’s telling you you’re a fool to stay out of this market.  You know that those kinds of returns aren’t sustainable or realistic, but it seems like everyone else is reaping them.  Maybe it really is a new economy and you’re the only one being left out.  So of course you join in the bubble just in time for the bust and get the worst of it.

Letting other people’s returns affect your investment decisions is very dangerous.  When it comes to investments we seem to suffer a form of mass insanity.  Look at all the people buying houses with no money down and interest-only payments because everyone knows house prices always go up.  Deep down everyone knows there’s no such thing as a free lunch, but when it seems like everyone else is getting one, we can start to make very bad decisions.  It never pays to abandon your own principles just because the Joneses seem to be beating the system.  The system has a nasty habit of catching up with the Joneses.

Post from: Personal Finance And Investing

The Joneses Are Your Enemy

Photo by: Rob Lee

The term “Dollar Cost Averaging”, or DCA, can have many different meanings.  Oftentimes when referring to “Dollar Cost Averaging,” people actually mean “Automatic Investing.”  DCA typically refers to investing over a period of time an amount you could have invested initially.  So for example, if you had $10,000 to invest, instead of putting it all in now, you invest it over a period of several months in equal dollar amount increments.  Automatic Investing on the other hand is simply taking a set amount out of your income and investing it every month.  This is what the majority of people think of as Dollar Cost Averaging.

The Theory

Proponents of DCA claim that it reduces risk, because you tend to buy more shares when prices are low and fewer shares when prices are high.  This argument makes some sense in an oscillating market that isn’t moving overall in any particular direction.  One question remains, however: why would you want to be investing in an oscillating market that isn’t trending in one direction?  Typically most people’s faith in investing in stock markets is that over time they go up.  If the market is on average going to move upwards, why am I holding back investing a portion of my investment?  On average this simply means I’m going to get a higher price.

The Worst-Case Scenario

If we think about this matter anecdotally it seems intuitive however that by holding back some money to invest we’re reducing our worst-case scenario.  Suppose for example that we invest all our money today and tomorrow the stock drops precipitously.  We’ve avoided that risk.  At the same time however, what if the stock rises sharply and never returns to our original price.  While we may be reducing our worst-case scenario somewhat, we’re also risking leaving a lot of money on the table.  Still there seems to be some merit to increasing your exposure over time.

In Practice

In reality the way most of us “Dollar Cost Average” is that we invest a certain amount each month out of our paycheck into the stock market.  This is what is more accurately referred to as “Automatic Investing,” and is sort of a no-brainer.  However if you do receive an influx of funds and are trying to decide what to do with them, Dollar Cost Averaging may not be all it’s cracked up to be.  There can be psychological advantages to moving your money in over time, but transaction fees can add up quickly, depending on how your brokerage charges.  Think carefully before assuming Dollar Cost Averaging is right in all situations.

Post from: Personal Finance And Investing

Some Thoughts on “Dollar Cost Averaging”

Everyone knows what you need to do if you want to get out of debt and create a savings account; you have to make more money than you spend. So if we all know this, then why are so many of us still in debt? If you’re still spending more money than you’re earning then it’s probably because of one of the following reasons:

• You don’t know how much you spend. It is shocking how many people there are who don’t track their spending. If you don’t know what you spend, you can’t be sure you’re spending less than you’re earning. Tracking your spending is the best way to avoid this problem. In rare cases, people don’t even know what they earn; tracking your income is also necessary.
• You don’t budget. Some people know what they’re spending. They know it’s more than they can afford. But they don’t budget so they only see the problem after the fact. Create a budget that relies on spending less than you earn. Then learn how to stick to that budget.
• You justify “emergency” expenses. The problem is that there are “emergency” expenses every month. You justify over-spending because you “need” to take the cat to the vet, get your home cleaned since your parents are visiting, buy a birthday present for the party that your child was just invited to, etc. Stick to your budget unless there’s a true emergency.
• You expect instant gratification. You want what you want when you want it. You’re willing to spend money to get it. If you want more than your income allows for then you’re in trouble. Learning to delay gratification until you have the money in hand to pay for what you desire can go a long way towards getting you out of debt. It’s also a great sign of maturity!
• You don’t know what you really want from life. People who know what their goals are can live in a way that allows them to achieve those goals within their income. If you don’t know what you want then you may spend money willy-nilly to try to find happiness in life.
• You haven’t dealt with your money issues. People spend money for a lot of reasons. They want people to like them. They want to show off. They want to buy whatever the neighbors have. They feel an emotional high when they spend money. If you haven’t dealt with your emotions around money then you might be overspending because you don’t understand why you spend. Deal with the real issues and the debt may disappear.
• You don’t earn enough. This is the biggest excuse that people use to explain why they’re still in debt. The truth is that you need to adjust your spending to your income. However, there may be times that you face this problem anyway such as during a bout of unemployment. Creating passive income streams, taking on second jobs or earning extra money by consulting or teaching are ways that you can help combat this problem.
• You’re just used to it. You may complain about your debt but if you’re not doing anything to change your spending then it may be that you’re just used to being in debt. Ask yourself if you want to maintain this habit forever.

You already know what you need to do to get out of debt. What problem is causing you to still spend more than you earn?

Guest post by Kathryn Vercillo. Kathryn is a writer for Promotionalcodes.org.uk which gives away online codes (like this La Senza promotional code) and also publishes a save money blog.

Post from: Personal Finance And Investing

Why You Spend More Than You Make (and What To Do About It)

People get into debt in a variety of ways.  Some people have medical problems or other things that are largely beyond their control.  Others have simply traded their future earnings for current creature comforts.

While the ways in which people get into debt are varied, the ways out really aren’t.  A lot of people try to make debt reduction complicated.  It isn’t.  There are a few basic moves that will get you out of debt, but they’re predicated on being realistic, accepting that you’ve already had more fun than you’ve earned, and it’s time to redress the balance.  Even if your debt is the result of things beyond your control, here’s some basic advice for those who feel like it’s time to be realistic about how to get out.

Cut Your Expenses

So you have a certain standard of living you’d like to maintain?  Too bad.  When you’re in debt, every dollar you spend costs you that dollar, plus all the financing costs until all your debt is paid off.  Let’s take a simple example.  If you have a 20% APR credit card and it’s going to take you 3 years to pay down your debt, every dollar you spend is actually costing you over two dollars.  That’s without taking into account the fact that a penny saved is more valuable than a penny earned after taxes.  That five dollar burger is now going to cost you ten dollars.  While this ignores the effect of inflation, you get the point.  Putting that dollar towards debts was the better move.

Get a Second Job

Many people are very concerned about their free time.  If you have debt, you’ve already spent your future free time.  When you bought that flat screen TV on your credit card, you were trading your future free time for a TV.  Doesn’t seem like such a good trade now?  Imagine the impact of another twenty hours of work on your ability to pay off your debts.  Assuming you’re at least in the black and slowly paying down your debts, you can put every penny you make at your second job toward your debts.  While you’ll lose some free time, you’ll reduce the stress that all that debt is putting on you.

Sell Some Stuff

This never seems to occur to people.  They usually look at that $250 duvet cover and think if they sell it for $75 they’re losing $175.  The simple fact is that when you sell it, you’ll get $75 on which you don’t have to pay taxes, and which you can apply immediately to your debts.  In our example from before, with 20% APR and a 3 year pay off window, that $75 will have saved you another $75 by the time your debt is paid off.  That means you didn’t lose nearly as much as it seemed when you sold it.

Don’t Get Too Sold on Emergency Funds

This probably isn’t your fault.  Right now all the talking heads on TV are telling everyone to worry about having an emergency fund.  They advocate making sure your emergency fund is well stocked before you start paying down your debts.  I think there’s some merit to this, but there are a lot of other considerations:

Your credit card can be your emergency fund. Assuming you are below your credit limit every dollar you pay towards your credit card can be used to pay for things later on if necessary for an emergency.  If you can get a cash advance then you can even use it to pay things like rent or other things that require cash.  There’s a small risk that your credit card company will reduce your limit, but if you’re being wise that risk is diminished.

While I can empathize with the importance of an emergency fund, try to keep it as low as possible.  It’s a very questionable decision to be paying 20% APR on your debts, while you have cash earning 1% or less in a standard savings account.

Make More Money and Spend Less

Ultimately getting out of debt revolves around this one simple formula.  Spend less, earn more.  That can be daunting–and easier said than done.  At the end of the day however, that’s what you’re going to have to do; so it’s time to get out there and show some hustle.  Grit your teeth and get your debt paid off as quickly as possible, and then look at all the finance charges as an education expense, since you won’t let yourself get in that position again.

Post from: Personal Finance And Investing

Debt Reduction for the Willfully Stupid

Photo by: Collin Anderson

Back in the era before I started falling asleep at night terrified by visions of inflation, I had a retirement plan.  Every month I would open a CD.  Eventually I would get to where I had a CD renewing every month, then every week, then every day.  Once the interest on those CDs paid my living expenses, I was done and could retire.  Of course my dreams of building a CD ladder were somewhat upended by the recession and  banking crisis.

What Is A CD Ladder?

A CD ladder is a way to get the improved returns CDs usually offer without the problems of diminished liquidity.  The idea is that you get CDs set up in such a way that the money you have invested in them matures periodically, maybe every month, giving you easy access to liquid funds while retaining better returns than a regular savings account.  This can be a good way to maximize returns on your cash.

How to Build a CD Ladder

A typical way to build a CD ladder is to build it all at once.  Let’s say you have $12,000 and you want to build a ladder where you have a one year CD renewing every month.  One way to approach the problem is to simply open a CD with one month, two month, etc. maturity dates, and then when the time comes to renew them, renew at a 12 month period.  Of course it can be hard to find a seven month CD, so you may have to go to plan B and build it over time.  My approach was simply to buy a 12 month CD every month until I had mine set up.  You do not have to use one year CDs of course.  You could use half as many six month CDs to get the same effects, although likely with inferior yields.

Some Hassles of CD Ladders

Part of the logic of my ladder was that I had chosen “good” banks with which to do business, and I could simply let the CDs auto-renew.  For a couple of years that worked fine.  While I didn’t always get the best rate at renewal time, it was close enough that I didn’t bother changing it.  The value of my time was higher than the difference in the interest.  Unfortunately, once interest rates plummeted, I began having to move them around frequently.  The amount of time it took to deal with all those CDs was absurd.  Many banks make it very difficult to get your money back unless you are aggressive.  The whole process was stressful and time-consuming.

To make matters worse, once the banking crisis hit, some banks started trying shenanigans like offering ridiculous rates on CDs (lower than their savings account rates) in the hopes that inattentive people would renew and they’d get free money.  I have had to be very diligent to make sure this doesn’t happen.  I have since decided that fewer CDs is better, since the cost of dealing with them is the same regardless of size.

Even when you don’t have craziness in the economy, banks still try to pull the wool over your eyes by offering “promotional” yields one year and then terrible yields the next.  So you either have to deal with the hassles of moving your money around, or get a terrible yield.

Bank Reviews

I have had some particularly bad experiences that I thought I might share, since it’s difficult to know which banks are good and bad.

GMAC Bank

GMAC bank has done the best as far as not changing interest rates too much, however, because of this, I don’t know how difficult it would be to get my money back from them.  They haven’t offered me an awful rate yet, so my money is still with them.

E-Trade Bank

E-Trade bank was fairly easy to get my money from, however I think that was aided by the fact I have a brokerage account with them, so I had more business to take away if they played any games.

Indymac Bank

I had one CD with Indymac.  Obviously I don’t have to warn anyone against using them since they’ve been seized by the FDIC and sold, but I had to spend a considerable amount of time making sure my CD wasn’t renewed when their interest rates dropped.

Amtrust Bank

I have saved the worst for last.  Part of my motivation in writing this article was to warn people who are considering dealing with this bank.  Although I had the most money with them and have dealt with them for the longest time, they have been simply awful since the banking crisis.  They dropped their interest rates on CDs to 1% and then 0.75%.  They have savings accounts that yield 1.5%, so clearly they don’t want my CD money.  They have sent out letters offering to let you “get out” of your CD without penalty, i.e. lose your interest rate.  Each time I’ve tried to keep a CD from renewing I’ve been told a different process was necessary-each more difficult and time-consuming than the last.

Like so many others in the banking industry, they seem to be focused on the short term only.  They are causing me stress and costing me time in an attempt to screw me out of a few dollars.  However, when times were good, and they may be again, I was a customer with a considerable amount of money invested there.  Do you imagine they’ll ever get my business again?

Summary

Here is some quick advice based on my experience with CD ladders:

• Shop around for good interest rates.  Bankrate.com has a good service for finding good yields.
• Favor fewer, larger CDs.  You will spend less time dealing with the logistics of managing the same amount of money.
• Get information on bank customer service in addition to their interest rates.  Your time is money, and you don’t want to spend a tremendous amount of time just to gain slightly higher yields.
• It can be easier to set up a ladder all at once than over time.  Once you have the CDs set up, they will renew, reminding you to take action each month.  If you set them up over time, you can forget one month and then have your schedule confused.

In all, I still hope to establish a ladder that will represent my retirement income.  But I’ve definitely changed my methodology.  I hope I’ve saved you some time on the learning curve as well.

Post from: Personal Finance And Investing

CD Ladders: Some Personal Experience

Photo by: Hamed Saber

This post is step 7 in our Investing Template.

While there are no explicitly tax-deferred savings plans for housing, the Roth IRA can work very much like one.  If you are looking to buy your first home in the future, more than 5 years from now, or if you have a Roth IRA opened already, such an account may be a very reasonable option for your investing dollar.  While you cannot take your contribution out pre-tax, any income you make over those 5 years can be used tax-free to buy a house, up to $10,000 per person.  This can be a considerable savings.

While retirement and college may seem like distant issues, buying a home is much closer on our investment timeline for most of us.  If you already own a home, or have in the past, you can pretty much skip this section as a Roth IRA will not do you much good.  Its exemption for buying a home only applies to first time buyers, but it can be very powerful for those looking to maximize their earnings.

Your Strategy

When you contribute to your Roth IRA, the account must have been opened for 5 years for you to be able to withdraw money to help buy your first house.  Additionally, you can only withdraw a maximum of $10,000 per person.  This means that if you are married you can withdraw $20,000.  If you are slowly saving for a house, putting money into an Roth IRA can be a great option, since all of your investment proceeds can be used without ever paying any tax on them.

Generally your approach here would be to contribute money towards your Roth IRA until it looks like your window is getting close.  At the point where you approach your maximum contribution for your home, you will have to consider whether continuing to contribute to your Roth makes sense.  You may have better options for your other investment goals, but why pay taxes on your home down payment investment when you don’t have to?

An Example

Imagine if you want to buy a house in 10 years.  Each year you put $1000 in your Roth IRA and it earns 11% (a lofty goal, but it helps illustrate the power.)  If you pay 33% in taxes each year, by the time you were ready to buy the house you would have almost $3,500 more dollars in your Roth IRA than you would in a regular investment account.  The Roth would have $18,561 vs $15,097 in the regular account.  You made $3,500 simply by selecting the right account in which to save your money.

This is a fairly narrow option.  It only applies to those who have never owned a home and who can qualify for the specifics of the Roth IRA, bu it should be included in your timeline if it applies to you.  Dedicate some of your investment funds to your Roth and you can get the massive returns that the absence of taxes can provide you.

Post from: Personal Finance And Investing

Investing Step #7: Home Ownership

Photo by: Joe Shlabotnik

This post is step 6 in our Investing Template.

After retirement, the next farthest investing event is your kids’ college education.  While in some cases a first house may be sooner than college, or in more rare cases retirement might come before your kids go to college, generally money that is invested in College Savings Plans will be tied up the second longest, next to your Retirement Accounts.

Why College Savings Plans?

College Savings Plans, often referred to as 529 plans, allow you to contribute money towards future tuition, have that money grow tax-free, and if it is used for appropriate expenses, used without paying taxes.  Thus, while your contributions are not typically pre-tax, they grow without taxes and can be used without taxes, which can be a huge advantage.

Types of 529 Plans

There are two major variations in 529 plans:

• Prepaid Tuition: In this case you pay for tuition at today’s rates and they are locked in for the future.
• Savings Plans: These allow you to contribute your after tax dollars to grow tax free and offer various investment options.

Overall, 529 plans are implemented at state levels, or sometimes even at the particular institution level.  Thus you see a much wider variety in options and details than in many federal plans. 

Considerations

Due to the wide variety in the plans there can be many key details, but ultimately the primary consideration in these plans is the likelihood that this money will be used for college.   If it is not, then the money will be taxed when withdrawn, as well as a 10% penalty, similar to early withdrawal in a retirement account.  At the same time, college can be a major expense in a family’s life, and the tax benefits of these accounts can be huge.

When deciding if and how to contribute to a college savings plan, I typically recommend caution.  While these plans can offer huge savings if your child goes to an appropriate college, that is not a guarantee.  Many other expenses will definitely happen and are slightly safer options because you can guarantee their use. 

Still, this money should not be viewed as a terrible investment either way.  If you use a typical college savings plan for 15 years and then your child doesn’t go to college, you can withdraw that money with a 10% penalty.  While this may sound harsh, you’ve had 15 years of your gains compounding without taxes, which will generally overcome the 10% penalty.

Post from: Personal Finance And Investing

Investing Step #6: College Saving

Photo by: SqueakyMarmot

This post is step 1 in our Investing Template.

Deciding when and how to pay off your debts is not a simple matter.  While it can be comforting to be debt-free, that may not always be the most financially expedient approach-nor is it the whole picture. Here are a few steps, including analyzing and paying off debt, that really make your money work FOR you.

Step One: The Basic Emergency Fund

The absolute first thing you need to have is something to pay for unforeseen events.  I personally recommend keeping this fund as small as possible at the beginning.  We’ll get to creating a larger cushion later, but right now the goal is simply to get enough money so that you’re covered if your car breaks down or something else untoward happens.  In fact, in some cases I’d recommend skipping this step altogether.  If you have friends or family you believe you can reliably rely on in case of an emergency, get right down to paying off any debts.  Once your debts are paid off, go on to creating an expanded emergency fund.

Step Two: Minimum Payments

Paying off your debts is one of the best investments you can make, but it isn’t always the best.  You need to take a lot of things into account to decide when and how to pay off your debts, and the analysis isn’t always simple.  One main rule is this:

Always Pay Your Minimums

You cannot possibly hope to match the interest rate you will be charged with late fees and penalties, so you have to pay at least the minimum to every debt you have.  So no matter what other options are open to you, do not let yourself be subjected to these kinds of charges.  If you cannot meet your minimum payments, it’s time for another job, or to sell some things.  Getting your head above water is a separate subject, but make sure to do it.

Step Three: Tax-Deferred Options

Now despite the allure of being debt-free, there are some rare occasions that your bottom line will be better served by contributing to your tax-deferred savings.  Quite simply, if your company matches your tax-deferred account at 50% or better, you may be better off contributing to that account.  This is of course only true up to the amount that they match. Do not contribute more than they match until your debts are all paid off.

For example, if my company will match up to 3% of my salary in my 401(k) at 100%, I am possibly better off making this contribution instead of paying off my debts.  I will make 100% return on that money put into my 401(k), while I will probably be charged 20% on the debts I leave unpaid.

Generally speaking however, unless your debt is relatively small compared to your income, or you are very secure that your income will continue, you are probably still better off just paying the debt.

Step Four: Pay Off Your Debts

There is no sense investing in anything when you have the option of paying off your debts.  The only debt you may want to carry is a house or a car, and even those are questionable.  Even beyond the dangers of high-interest debt, it simply provides a security blanket to have your debt cleared.  There are various approaches to paying off your debt, but get it done before you start investing your money elsewhere.  Moreover, when in doubt: pay off your debts sooner than later.

Post from: Personal Finance And Investing

Investing Prerequisite #1: How To Deal With Debt