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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, marketing hype, or off-season Santa -- it's simple money physics.

Like a slow leak in your tire, a pinprick in your finances can turn into massive money blowouts if ignored. Patching these holes while they're still manageable is the key to wealth (not to mention safe highway driving).

Hey, the little things actually do make a big difference ...
Life is busy -- there's the mortgage, credit cards, insurance, college savings, carpools, vacation plans, retirement accounts, work benefits, the kids, the cat, the guinea pig. So that rip in your hem and that little crack in your nest egg get shoved onto the back burner time and time again.

No big whoop, right? (That's rhetorical, by the way.) Here's the "whoop" about some of the little things that keep getting pushed to the bottom of your "to do" list:

To do: Stop following the payment plan the lender has laid out ... one of these days.

Damage report: 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.

I'll get to it later, really: Move your investments to a cheaper brokerage house to save a couple of bucks per trade.

The cost of procrastination: 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.

That form is in this pile somewhere: Since I can't find that 401(k) plan rollover information, I'll just have my old company make out a check in my name.

Big-money oopsy: 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.

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

Hey, honey, I found $450 in the couch cushions!
If you've successfully patched each of those costly scenarios, congrats. There's more where that comes from -- and in our Motley Fool Green Light we find simple ways to add $450 to your bottom line every month -- guaranteed.

Start looking in the most common hidden spots...

  • 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. Did you know that the average taxpayer overpays Uncle Sam by more than $400 each year? Here are some tips on making sure you're not giving the IRS too generous a tip.

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.

My co-advisor Shannon Zimmerman (yes, he, of the Motley Fool Champion Funds service) serves up investment ideas in every issue -- from stocks for first-time investors to ETFs that will help you play the real estate market to mutual funds that can help you hit your retirement date on the nose. (Test-drive this month's issue for free for 30 days for three ETFs for your IRA.)

In the meantime, here are some answers to a few of the most common questions we're asked:

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, everyone! But that doesn't mean cashing out all your stocks and shoving the dough into your checking account. So consider an asset-allocation plan that allows you to:

  1. Have the cash you need to cover your costs for year one. (This will go in your checking/savings account).
  2. For years two to five, consider bonds or certificates of deposit that mature when you need the dough.
  3. For that big chunk of change that will get you through the rest of your retirement, the stock market's still where it's at. However, depending on your risk tolerance, consider dialing down your exposure to risk by picking up some dividend-paying stocks such as TXU (NYSE: TXU  ) , Heinz (NYSE: HNZ  ) , Kroger (NYSE: KR  ) and Fortune Brands (NYSE: FO  ) . While those might sound like yawners if you're used to zippier investment fare, consider the sleep-well factor of such companies that offer better dividend yields than the S&P 500 without any more volatility.

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 Motley Fool Green Light.) But the best advice here is to start early. 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 parents who wait 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 parents who set 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, Vanguard Target Retirement 2050 (FUND: VFIFX  ) holds 10% of its assets in bonds and 90% in equities. Check 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. Take some time to compare and contrast account minimums and other details.

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.

Psst... here's another $1,576
Our most recent issue doles out $1,576 worth of money-making and money-saving secrets. Test-drive this issue for free for 30 days and get tips on choosing the right type of IRA, what to invest in, slashing your home-improvement tab by 10% to 50%, and five money rules you should break.

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. Make 2007 the year you get back on track.

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

Dayana Yochim is co-advisor for Motley Fool Green Light. 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. TXU and Heinz are Income Investor recommendations. The Fool's disclosure policy is priceless.


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Related Tickers

12/31/1969 7:00 PM
FO.DL2 $0.00 Down +0.00 +0.00%
Fortune Brands CAPS Rating: *****
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H.J. Heinz Company CAPS Rating: ****
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