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The Hidden Fortune Inside Your Paycheck

What would it feel like to open your wallet and find hundreds of dollars you didn't know you had? What if your money multiplied like that month after month?

It's not magic or marketing hype -- it's simple money physics.

Like a slow leak in your tire, a pinprick in your financial life can turn into a massive money blowout if you ignore it for too long. Patching these holes while they're still manageable is the key to achieving wealth (and a clean driving record).

The problem is that it's easy to ignore the tiny cracks. We're busy -- there's the mortgage, credit cards, insurance, college savings, carpools, vacation plans, retirement accounts, work benefits, the kids, cat, guinea pig. So the little stuff is relegated to the back burner. We think:

  • What's the harm in following the payment plan the lender has laid out?

  • Why go to the trouble of moving your portfolio to a cheaper brokerage house just to save a couple of bucks per trade?

  • Who cares how our 401(k) is paid out after we leave a job, as long as we take it with us?

Those three small, seemingly innocuous money issues -- everyday financial decisions that pop up regularly -- can end up costing thousands of dollars a year. Consider the following:

  • It'll take you 10 years and cost you an additional $10,000 in interest alone on a $10,000 credit card balance if you pay only the minimum amount required.

  • The difference between 10 trades at a full-service broker and 10 at an online discounter is more than $600. That's $600 of your money lining your broker's pocket, not multiplying in your portfolio.

  • Say sayonara to 35% or more of your 401(k) balance to taxes (the early-withdrawal penalty plus ordinary income tax) if you cash it out instead of rolling it directly into an IRA.

See how easy it is for slow leaks to turn into a massive money gusher?

Caulk your cash leaks
Imagine those little leaks draining money from your bank account a dozen times over, month after month.

Now imagine having a repair kit at the ready every time a pressing personal finance issue arose. That's what we did when developing our personal finance/beginning investing service, GreenLight.

Wanna know where your extra dough is hiding? Try looking ...

In your bank account. With interest rates rising, there's no need for your everyday money to languish in a low-rate checking account.

In your insurer's profit margins. You may be able to slash your insurance tab by deep-sixing three kinds of useless policies: credit card insurance, life insurance for a child, and mortgage insurance.

In Uncle Sam's pocket. The retirement tax credit is one of the most beneficial tax breaks available for those who qualify. Shockingly, it's also one of the most overlooked -- even some tax pros miss it when completing their clients' returns.

Need some answers?
Once you've done some digging (and started counting your "extra" cash), you'll probably be inspired to ask what else your money can do for you -- and what you can do to make it grow more.

Are any of these questions (which we answer in full in GreenLight) on your financial "to do" list?

Q: Where should I move my money as I get closer to retirement?
A: The closer you are to your last day at work, the safer you want to play it with your investments, particularly the money you've allocated to cover your first years of expenses. Safety first! But don't suddenly move all your money into your checking account. Instead, make sure you have the cash on hand to cover your costs for year one. For years two-to-five, consider bonds or Certificates of Deposit that mature when you need the dough. After that, depending on your risk tolerance, consider having a chunk of your portfolio in dividend-paying stocks. Utility companies (like Duke Energy (NYSE: DUK  ) ), real estate investment trusts (e.g., Simon Property Group (NYSE: SPG  ) ), and big conglomerates (3M (NYSE: MMM  ) ) can make for stable, rewarding, and inflation-resistant investments.

Q: How will I be able to afford to send my kid to college?
A: There are lots of accounts set up to help parents cover the costs of higher education. (We cover Coverdells, Custodial Accounts, and 529s in detail in the "Money Answers" section of GreenLight.) But the best advice here is to start early. Yet so many parents scramble at the last minute, putting their finances in jeopardy. In fact, six years is the average amount of time most parents spend saving for Junior's college costs. Consider how much easier it is on your wallet if you start early. Assuming a 10% growth rate (and no pesky tax issues for the time being), the parent who waits until their offspring is three years old will have to save one-and-a-half times as much to have the same college kitty as the parent who sets up a savings plan right when the child leaves the womb. That's the magic of compounding.

The following piece of advice might not be popular with the high school students out there, but if you're stretched thin financially now, and paying for a child's education will dramatically set back your savings needs (namely retirement), look into loans, scholarships, and work-study. After all, there is no scholarship or PELL grant for retirement. (Sorry, kids!)

Q: Is there an easier way to allocate my assets?
A: For some guidance on how much to put where, check out the asset allocation makeup of target retirement funds (those that base their investment mix on a standard risk-reward model for different retirement dates). For example, the Vanguard Target Retirement 2045 (FUND: VTIVX  ) has less than 10% of its assets in bonds, about 11% in European stocks, and less than 1% in cash. The holding of T. Rowe Price Retirement 2010 (FUND: TRRAX  ) , on the other hand, has nearly 30% of its assets in bonds and about 4% in cash. Checking out the pie charts on these funds to get an idea of how the industry allocates for risk, and then adjust accordingly.

Q: Could my short-term savings earn more?
A: Heck, yeah. You might have noticed that banks are suddenly gunning for your attention with attractive interest rates on high-yield checking/savings accounts, CDs, and money market accounts. The deals make mincemeat of the paltry interest rates offered on traditional checking/savings vehicles. You could spend hours comparing and contrasting account minimums and other details. But we did the homework already in the September issue of GreenLight. (A subscription includes access to all back issues and more.)

Q: Is there a painless way to see some real everyday savings?
A: Here's a simple trick for shaving 60% off your grocery bill: Leave your credit cards at home and pay in cash only. Yup. It's that easy. Studies show that the majority of grocery-store purchases are impulse buys, and folks tend to spend more (and more mindlessly) when they use plastic instead of cash.

Our No. 1 goal with GreenLight is to save you time and money -- to identify the big gushers in your plan and help you quickly plug the leaks. Our mandate with every issue is to unearth at least $450 you didn't even know you had.

Psst... here's another $1,102
Our most recent issue doles out more than $1,000 worth of money-making and money-saving secrets. Test-drive this issue for free for 30 days and find out how to minimize your tax losses and offer more tips on rebalancing your portfolio. If all the talk about adjustable rate mortgages has got you stressed, we'll let you in on a little secret: Refinancing may not actually be the best financial move to make right now. Plus we review Quicken versus Money for those considering financial software, and lay out some rules on when to sell a stock.

Start counting your extra cash
When it comes to your finances, those seemingly undetectable cracks in your checking account, portfolio, bills, and rainy-day fund can seriously sideline your dreams. Let us help you patch them up.

This article was originally published on July 13, 2006. It has been updated.

Dayana Yochim is the advisor forMotley Fool GreenLight, which offers simple, straightforward money-saving, money-making tips you can put into practice without breaking a sweat. Each issue has a $450 "money in the bank" promise -- that's the amount you can make or save following our tips. Dayana doesn't own any of the shares mentioned in this story. Duke Energy is an Income Investor pick. 3M is an Inside Value pick. The Fool'sdisclosure policyis priceless.


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