No, this isn't a late-night ad for a credit repair clinic or a loan consolidation company. And I promise not to ask whether you're near a phone and can take down a number.
This is truth time for me. I'm going to go out on a limb here and claim the title of black sheep of the Fool family. Because here at the Fool, the following guidelines are generally espoused, and I tend to flout them all:
- Live below your means.
- Save, and then invest what you save wisely and diversely to get the most out of your money.
- Learn to manage your own money, because too often, Wall Street and lenders care more about their cut than about your financial success.
What fun is living below my means?
At the risk of being pelted with eggs by my penny-pinching colleagues, I admit that I have no intention of living beneath my means. To me, that conjures up images of day-old-bread subsistence and misanthropic weavers like Silas Marner hoarding satchels of gold coins beneath the floorboards. In fact, if asked to come up with a motto summing up my attitude toward life in general, it would be: "Life's too short for cheap wine."
I'm hardly an anomaly, either. Those of us born after the Great Depression are generally a consumption-loving people willing to rack up obscene credit card debt and refinance our homes to buy bigger cars, smaller iPods, and the newest seasonal must-haves. Although I may be a bit odd in that I prefer the subway to cars, I don't own a house, and I have no interest at all in electronics, I fit right in with my spend-happy compatriots when it comes to buying luxurious clothes and home decor.
Going broke without even trying
But even if you're not a shopaholic, you could be a financial train wreck just trying to make ends meet. Dayana Yochim wrote about why America is really in debt, and it's not all the result of reckless spending. Actually, most debt-strapped households use credit to pay the bills. These days, it just costs more to be a middle-class citizen.
According to the Economic Policy Institute, wages and incomes of the average American are down despite the fact that company profits are up, job creation has not kept up with population growth, and rising health-care costs are eroding already-declining incomes.
Living within my means
In these depressing times, my goal isn't to depress myself more by living below my means. Instead, I would like to live within my means. Care to join me?
Let's face it: Getting older is no fun if you live on a deficit, have no money saved, or don't take advantage of a 401(k). (Arguably, getting older isn't fun for anybody, but these factors make it extra painful.) Sure, borrowing money from family and friends, repeatedly putting student loans in forbearance, and eating a hard-boiled egg for dinner the last week of every month may be perfectly acceptable when you're in your 20s, but after that, it becomes sort of pathetic -- the stuff of tragedy.
But working at the Fool has made me realize that, with a few minor tweaks, I can keep on chugging in the fast lane without coming off the tracks entirely. In fact, I can even think about that distant day when I retire (or marry a count).
Here are five simple tricks to help get your finances in order without having to forgo most of the finer things in life. Believe me, they're words to live (and save) by.
Start saving today! Even if it's only $25 a paycheck, set it up with your employer so that a certain amount of your income goes into a savings account. The same goes for your 401(k), even if it's only 1% of your income. And don't feel silly handing your human resources director a form that says, "I'd like to set aside $50 a month, or 1% of my income." We all have to start somewhere.
Make the most of those savings. If you're like me and think of your regular savings account as an extension of your checking account, try an ING money market account. ING's Orange Savings Account yields 4.15%, which is higher than most savings accounts, and there's no minimum balance. Also, you don't have immediate ATM access to your savings, so those raging impulses to buy are somewhat hampered.
Get in the market. If you can somehow manage to keep your grubby paws out of your ING and other savings accounts long enough to save up enough money for a couple months' worth of your extravagant living expenses, look to the stock market. You can put the power of compound interest -- not to mention the market's 9% historical rate of return, which trumps all other asset classes (including vintage Balenciaga) -- to work in your favor.
Are the phrases "compound interest" and "9% historical rate of return" Greek to you, too? Well, I hear that the easiest way to start is with a broad market index fund such as Fidelity Spartan Total Market (FUND:FSTMX). For very low fees (an expense ratio of just 0.17%), you'll have access to all the market's superstars. And they're companies even I've heard of. Microsoft (NASDAQ:MSFT) makes up 1.62% of FSTMX's net assets, and Bank of America (NYSE:BAC) another 1.35%. The list keeps going -- Fidelity Spartan Total Market holds more than 3,500 stocks in all, giving you instant diversification and wide exposure to all the market's crevices. See? Even I'm catching on here.
If you're brave enough to want to own a piece of some individual stocks, I'll start you with two ideas I've borrowed from my colleague Robert Brokamp, who is a fan of dividend-paying stocks (assuming you reinvest those dividends now that you don't need the cash). Here are two companies he highlighted in his Rule Your Retirement newsletter a while back: HJ Heinz (NYSE:HNZ), a globally diversified consumer-staples company with a 3.3% dividend yield; and British bank Lloyds (NYSE:LYG), which sports a 7.6% yield.
Think quality over quantity. This one will come naturally if you like your pricey purchases. You just need to apply it to your spending habits. This means cutting out any extraneous spending so that you'll have more to save. I don't mean doing without Camembert, of course. I mean doing things like canceling the voicemail on your home phone that you never use. I made a simple phone call to Verizon, and by changing to a more basic plan, I saved myself $21 a month.
Just get to know what's really a pleasure for you and what's just a habitual waste of money. (This, incidentally, is the same principle espoused by millions of French women for staying thin while enjoying all their favorite foods, according to French Women Don't Get Fat author Mireille Guilian, so try it for dieting purposes as well.)
Pay your bills on time and automatically. This helps to avoid late fees and bad credit scores. (WARNING: If the reason you're not paying on time is not because you forget but rather because you occasionally just don't have the money to cover it, skip this step -- except for the really important bills that charge interest for late payments, like credit card bills. After all, it makes little financial sense to automatically pay bills in order to avoid late fees only to pay the bank later in overdraft fees. And the goal here, remember, is to make more financial sense.)
Generation Y me?
If you're not yet 35, you can blame at least some of your financial problems on the macroeconomic problems I listed above. According to Anya Kamenetz's book, Generation Debt: Why Now Is a Terrible Time to Be Young, a large portion of the workforce is starting out saddled with immense debt, without anything approaching the job stability their parents had.
If you want to know more about those mystifying things called IRAs, or Roth IRAs, or 401(k)s, or high-yielding savings accounts, get aboard the Motley Fool Rule Your Retirement train -- guaranteed not to derail -- with a 30-day free guest pass. You'll get access to retirement guru Robert Brokamp's vast stores of knowledge on how to retire in style. Click here for more info.
Although Fool editor Carrie Crockett keeps a lot of True Religion in her art deco armoire and orange label in her icebox, she does not own shares in any company or fund mentioned in this article. Bank of America and HJ Heinz are Income Investor recommendations. Microsoft and Lloyds are Inside Value recommendations. The Fool has an ironcladdisclosure policy.
