Review Corner: I Will Teach You to be Rich by Ramit Sethi

A few weeks back, I was able to get my hands on a copy of  Ramit Sethi’s (a personal finance blogger gone best selling author) new read.  Sethi’s book, “I will Teach You to be Rich” is a six-step program offering financial advice for people just starting out managing their money.  Like most financial know-hows, IWTYTBR doesn’t break any new barriers when it comes to basic financial principals.  But let’s face it:  personal finance isn’t nuclear science.  A successful PF book teaches people how to implement those basic ideas into their daily routine and make them stick.

I’ve read a decent amount of personal finance and investment books, and the ones that I find particularly effective and worthwhile are always the ones that break down the financial jargon into simple to understand terms.  No investopedia needed.

Luckily, Ramit’s book fits the bill with its easy-to-understand concepts and injected case studies that further explain financial concepts with realistic scenarios from friends and blog readers.

The starkly different concept of Sethi’s book, however, are his ideas on spending.  While hoards of other financial writers and bloggers will praise frugality and lecture you on the merits of reusing ziploc baggies and making your own laundry detergent to save $6 a month, Ramit does quite the opposite promoting an alternative to traditional budgeting called a “Conscience Spending Plan”.  And in doing so, he succeeds at bringing a sense of reality to money management.

As an example, in his chapter on controlling expenses he discusses his friend “Lisa’s” shoe spending — dropping a whopping five grand a year on footwear.  However, he further describes, that along with a healthy salary, she also still lives with a roommate, nixes expensive electronics and keeps eating out at a minimum.  While her priorities may seem out of whack to the rest of us, she’s spending money on the things that are important to her, while conserving funds in other areas of her life that she deems less important.

IWTYTBR revolves around a six-week program promoting a different financial concept each week that includes:

• Setting up credit cards and improving credit history
• Setting up the right bank accounts by negotiating no-fee, high interest accounts
• Opening and managing your 401(k) or Roth IRA Investment account
• Analyzing your spending and conceptualizing a budget that fits your spending
• Automating your banking infrastructure to make things run as smoothly and flawlessly as possible
• Learning how to get the most out of your investment accounts with very little work

At around 250 pages, it’s a quick read — and definitely worth your time if you’re like most people and trying (or perhaps forced?) to restructure your finances during the down economy.  And with the majority of young adults exiting college with an average of $12,000 in student loan debt and 66% having at least one credit card, it really couldn’t come at a more opportune time.

You can pick up a copy of Ramit’s book here , take a test run of a few chapters here, or you can play our little game in the Comments section for a chance to win a FREE copy!  Keeping on the topic of personal finance, we’re asking you guys to chime in with your own tips for saving money and managing your finances.  Our favorite tip wins a brand spankin’ new copy of I Will Teach You To Be Rich.  Contest officially closes on May 1st at 5pm, and the winner will be announced on May 4th.

Know Your Stuff: Breakin’ Down the Roth IRA

Investing in your retirement has never been more important than it is now. With the current state of the economy, there’s not much of a reason to have faith that you’re social security payments will provide much stability to you in your golden years. With the rising costs of living and pretty much everything else, social security contributions can’t and won’t keep up with inflation, and what may barely pay your bills now certainly won’t pay them when you’re 65.

This leads us to the following, inevitable fallback plan:  start piling up your own source of future income.  Since retirement planning is such a vitally important part of everyone’s long term plan, the government has blessed us with the Roth IRA. Keep on reading for a few basics that you need to know to get started with one:

• A Roth IRA is an Independant Retirement Account which allows you to save money for retirement by contributing a set amount of money per year and letting you earn interest through investments.
• Roth IRA’s currently have a contribution limit of $5,000 a year, considering that your earned income falls below $101,000.
• The major difference between a Roth IRA and a Traditional IRA is that you are not penalized and charged a fee if you take out your contributions (not your earnings) before you retire.
• The Roth IRA is 100% completely tax-free when you make your withdrawals after your retirement age. Kiplinger gives this startling (and inspiring) example: If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of 8% on her investment, she’ll have $1.4 million saved by the time she retires at age 65. If that same 25-year-old invested that same $5,000 a year in a regular taxable account earning the same 8% return, she’d only have about $1 million after 40 years if her earnings were taxed at 15% federal. That’s more than one-fourth less money than if she’d gone with the Roth.
  

There is really no excuse against opening a Roth IRA account. It will only benefit you and it also offers this additional bonus:

• You are allowed to take out up to $10,000 tax and penalty free to purchase your first home. This is per person, so if you and your significant other both have a Roth IRA, this would give you a $20,000 limit.

To open a Roth IRA Account, you need to first decide what you feel most comfortable investing in. A lot of people choose to go the mutual fund route because it offers a more diverse portfolio (investing in many different industries as opposed to just focusing in on say, real estate). There are a few places where you can open a Roth IRA:

• A bank – this is a good choice if you want to invest in COD’s (Certificates of Deposit) and Money Market Accounts, which are less risky investments.
• A Fund Company like T. Rowe Price or Vanguard is a good choice for mutual funds because you will have a professional choosing your stocks. For these funds, you normally need around $2,500 to start, and they will usually waive the minimum if you sign up for monthly automatic deposits into your account.
• A Brokerage Firm – this is a good choice for a more seasoned investor to purchase individual stocks and bonds. Usually the same $2,500 minimum applies, but these companies tend to charge hefty fees when it comes to each trade and maintaining the account. You should always double check to make sure your fees won’t hurt you.

If you’re young, going the Vanguard route may be the way to go – you have plenty of time to increase your earnings with a much higher return compared to a traditional COD.  It’s also the best way to get a well-rounded and diversified portfolio for your money without paying huge management fees.

But if the idea of calling up an investment company is still a little daunting, set up a meeting with a financial advisor at your current banking institution.  It’s free, and they’ll be able to set you up quickly with an IRA account or at the least, give you a sampling of helpful information to get you started on the right path.

A Surefire Way to Spend your Retirement in the Poor House

After speaking to various older coworkers and family members, I’ve come to the realization that it’s not only the younger generations that need a crash course in personal finance — many of the ones closing in on retirement need a refresher course too.

The red flag that signifies this need for a major overhaul of financial planning and education is the fact that people seem genuinely surprised when they’re five years away from retirement and lose 50% of their 401(k)’s because they kept all their holdings in stocks.    I think most people would roll their eyes if someone took $100,000 of their savings and gambled it away in a casino, yet we’re shocked and appalled when a 60-year old loses half of their retirement savings because of having a majority of  stock holdings.  This isn’t bad luck — this is bad planning.

Take for instance my father.  At 62 years old, he’s getting close to the day when he’ll be able to kick back, relax, and maybe play a little golf.  Or will he?  In October, he lost a good chunk of his 401(k) after the stock market plummeted.  Although he had amassed a nice pile of retirement cash and had a strong company match, he neglected to check on where his holdings laid — which turned out to be completely in stocks — and lost half of his savings.  I love my father dearly — he’s an intelligent man, but that clearly wasn’t the smartest of moves.

Over the past 25 years, companies have become varied and (somewhat) generous with their retirement plans, offering a myriad of pensions and 401(k)’s.  And for the most part, I think that’s great.  But someone has to be responsible for educating people in what these plans actually do and what risks are inherent in each of them.  As a country that emphasizes the importance of wealth building,  we are seriously falling short in our ability to educate our citizens on how to prepare themselves for the financial future.

This lack of personal financial knowledge when it comes to the risks and uncertainties of investing, is going to keep hurting uninformed individuals unless we start focusing on financial education.  I think we need to start with our high school and college students and not stop until work our way up to Gen Xers and Baby Boomers who haven’t yet clearly mapped out their future finances.

Stock markets do nose dive, like we recently witnessed, and until we start educating the masses about their investments, the people that lack a basic financial know-how will be the ones who come out of it marred and flat broke.

How To Spend That Holiday Bonus – Responsibly.

If you were lucky enough to have a job this holiday season, and even luckier to get a holiday bonus from the boss, then pat yourself on the back. Since funds are few and far between these days, that holiday bonus is even more precious. And precious things should be spent well — or shall we say invested well. We know it’s hard to not spend that cash, but hold out for another week or so when most of the shopping mania calms and the urge to spend dies down. And in the spirit of saving cash and building wealth, we’ve thrown together a few ideas on where to go and what to do to get the most out of your bonus this year.

1. Open or Fund a Roth IRA

If you haven’t opened one yet, this is your year! It’s never too early to start planning for your retirement. And if you think that your company pension is going to offer you a warm retirement, chew on this for a minute: a 25 year old currently making an annual salary of $40,000 a year would need to save approximately $600,000 by the age of 65 to effectively battle inflation and live on 75% of their ending salary (assuming they received living wage raises each year). Keep in mind that the majority of pension payment lump sums are in the $100,000 range, meaning that most people only save that much throughout their entire career, and social security payments are barely a drop in the bucket. Never underestimate the crippling power of inflation and economic instability. Supplement your future income by chucking away even a hundred dollars a month into a Roth IRA, and your future self will thank you.

2. Open a Vanguard Stock Account

I will be the first person to tell you that now is the time to Buy, Buy, Buy! Stocks are cheap, the market will rise again, and the people who take advantage of opportunities now will be in better financial shape ten years down the road because of it. Don’t believe me? Follow Warren Buffet’s lead. He’s been buying up stocks like they’re on the 50% off aisle at Wal-Mart. I’ve been putting more money into my stock account, and am planning to invest in another fund this year. And since I’m a big Vanguard fan, here are my three favorite funds managed by them: 500 Index Fund, Extended Market Index Fund, and the Total International Stock Index.

3. Debt Repay

Nothing says “Hello 2009″ like a clean financial slate. Throwing a lump sum at a mountain of student loan debt can be a big motivator to getting that balance paid off. Plus, knocking down a balance can drastically reduce your monthly payments, although I prefer the snowballing method rather than lowering your minimum payments to hasten the repayment process. There are few feelings that trump being free of debt, and the extra disposable income you’ll see each month after finishing off that last bill will feel like sweet victory.

4. Invest in Yourself with a Networking Vacation

I’ve decided to sock away some cash to go towards Networking Vacations. This is not your typical vacation, but attending industry conventions and networking events to further promote my freelance career. After a quick Google search for industry networking events across the country, I realized that there is a convention for absolutely everything. So far for 2009, I’ve planned three small trips and I’m treating them as personal investments in my budget. To save funds, I’ve set up a recurring savings transfer to a high yield checking account with a savings goal (this means once I reach my target amount, the money transfers will automatically stop). And since I’m planning pretty early (almost a year in advance for two of them), I’ll be able to get super cheap airline flights and good hotel rates.