personal finance 1: Basic Vocabulary
June 14, 2008
I am woefully unlearned in money matters. Blame it on my previous disinterest, my sheltering parents, or how preoccupied I’ve been with getting educated, whatever; it’s time to learn. This weekend’s project is to get started with managing what little greenery thrives under my name, namely, researching the basic tools I’ll need to spend and save. My method includes testy inquiries with Dad, link-exploring with Boof, and advice from the few finance blogs that don’t make my eyes glaze over.
(iwillteachyoutoberich.com), a smart advice blog by Ramit Sethi.
This blog is me ranting about a few things and trying to get the points across. Getting started is more important than being the smartest person in the room. Making mistakes is ok. Action is more important than reading 50 blogs.
(mint.com), free software that produces lovely graphs to reveal one’s inner wastefulness. Less user-friendly (read: ugly) options include Yodlee and Wesabe.
Today’s topic. Some basic vocabulary on savings.
1. Managing large chunks of salary: Here’s how I set up my financial accounts
a. Monthly expenses and spending money at your favorite local bank.
b. Savings for emergencies and big purchases in ING Direct or HSBC, which have a 3%+ interest rate/APY (annual percentage rate), compared to the 0.49% offered by your favorite local bank. From what I see, ING is the savvier DIY option, while HSBC offers more traditional support, like ATM withdrawals. ING transfers take 2-3 days to process.
c. Long-term savings and investments on E-Trade or Ameritrade, including a Roth IRA and stocks that should be tended monthly.
2. Basic retirement accounts: World’s easiest guide to understanding retirement accounts
a. A 401k (max $15,000/yr + match) lets your company invest pre-tax money and will give you cushy old age. Matching is great; set it up so that an amt is automatically withdrawn from every paycheck.
b. A Roth IRA (max $5,000) lets you invest post-tax money, meaning you pay taxes on the initial amount, but not the earnings. “Every person in their 20s should have a Roth IRA. It’s simply the best deal I’ve found for long-term investing.”
c. Using both: “Here’s how I think about it. First, I would max out any 401(k) match that my company provides. Second, I’d max out the $4,000 $5,000 for my Roth IRA. Third, I’d max out the rest of my 401(k), up to $15,000. Finally–if your employer doesn’t offer a 401(k), you’re not employed yet, or you still have money left over–I’d open a regular, taxable investment account and put money there in stocks, index funds, etc.”
So, I’ve got a start. I’ve learned which bazillion accounts I should open (savings, retirement, online broker, investment) and found a tool to track my spending. Next steps for this project include opening those accounts and planning my summer budget.