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, the cat, the 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, Motley Fool Green Light.
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. 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 a too generous 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.
Are any of these questions (which we answer in full in Green Light) 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. Individual dividend-paying companies such as PetroChina
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 Green Light.) 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 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, the Schwab Target Retirement 2040 has about 14% of its assets in bonds, 82% in stocks, and 5% in cash. Schwab 2010, on the other hand, has 34% of its assets in bonds. (Also look to other low-cost mutual fund companies when you're shopping.) 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, or take a look at the homework we already did in the September issue of Green Light with a free trial to our service.
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 $686
Our most recent issue doles out nearly $700 worth of money-making and money-saving secrets. Test-drive this issue for free for 30 days and get our month-by-month money calendar packed with important financial deadlines, tips, best buys, and more. The January issue also includes step-by-step advice on rolling over your old retirement plans, three tips for a fatter nest egg (they're simple steps you can accomplish during your lunch hour!), a recovery plan for those suffering from a holiday spending bender, and realistic advice that will help you keep your 2007 resolutions.
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 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. Unilever is a Motley Fool Income Investor pick. The Fool's disclosure policy is priceless.