{article} Investment Tips from a Financial Planner

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Email from my financial planner, sent December 2008

I’ve noticed a common theme in many of my conversations lately — money. Okay, I’ve always been one to talk about money (and how best to manage it) more than most, but with the economy the way it is and the uncertainty we face heading into 2009, I’m making the bet that many of the people I love most are thinking/stressing about their personal finances.

If you haven’t decided on a New Year’s resolution yet, why not make it a goal to save more, spend more thoughtfully and settle up as much outstanding debt as you can in 2009? No matter what your personal financial situation is, I truly believe that you can have complete control over your money and achieve your dreams with careful financial planning. Then again, I’m drowning in the kool-aid over here.

Whatever your resolutions and hopes for 2009, I wish you and yours the very best!

p.s. Please feel free to forward this email to anyone who might find it helpful.

If you’re still with me, here are my tips for better financial security in 2009:

1. Create a budget. (Online budgeting tools) Track your spending for 1-3 months (and by spending, I mean everything – even that $1 deli coffee adds up). Group your common expenditures into overarching categories (fixed expenses: rent/mortgage, car insurance, bills, etc & variable expenses: dining out, entertainment, etc) and figure out how much you spend on average in each category every month. If you’re not saving as much as you’d like, determine where you can tighten your belt in 2009. Set goals and stick to them. I’ve been tracking my expenses since 1999 – I guarantee that it’s an eye-opening experience.

2. Pay off your credit cards and then stop carrying a balance. Forever. Start with the cards that have the highest interest rates first. Pay more than the minimum. Pay as much as you can stomach. Then, refer back to tip #1 so that you don’t rack up credit card debt again.

3. Establish an “emergency fund.” Good financial planning advice is to have 6-months of living expenses on hand in a savings account at all times. In this economy that advice is even more meaningful. This money should only be used in the case of an emergency (e.g. losing your job). This provides the cushion to protect you in hard economic times (and should prevent the need to live off credit cards if income is lost or reduced).

4. Max out your 401K or IRA. You know who you are. Stop putting it off (especially if your company has a matching program in place)! I won’t explain the beauty of compounding interest here, but saving as much as possible as soon as possible pays off more than you may realize (Learn about Compound Interest). If you don’t have an employer-sponsored plan (or even if you do) max out an IRA – $5,000 in 2009, and you can contribute $5,000 for 2008 up until April 15, 2009. I personally prefer Roth IRAs, but anything is better than nothing. Speaking of Roth IRAs, if you’re thinking of converting a traditional IRA to a Roth, now is probably the time to do it. More on that here: Why now is a good time to convert to a Roth IRA.

5. Save more. You can never save enough. I set aside 10% of my pre-tax income every month. This is not easy, especially at first, but like most things in life you adapt and living off a little bit less each month soon becomes normal. I choose to invest my savings (other than the emergency fund). If you’re interested in this, see tip #8.

6. Track your net worth. If you’re paying off debt or adding to your savings, it’s encouraging to watch your net-worth grow. Also, it’s a good idea to keep track of all your accounts in one place – especially if you have your money in many different institutions. Recommended online tools: http://www.mint.com/ (this is what I use) or http://quicken.intuit.com/ (they just made this tool free, which is great).

7. Check your credit report. It’s free! Check your credit report for free here. Please do this. Regularly. For all the reasons you already know.

8. Consider investing. (Good model portfolios for cheap) There are lots and lots of ways to get involved in investing, and really, it’s the only way to make your money grow in a material way (cash under the mattress is certainly not going to help with the wonders of compounding interest). Given the current economic environment, the stock market may seem a bit ominous, but if you stick with it over the long-term, it really does pay off. Just make sure to seek out quality advice before jumping into anything – and never, ever invest in something you don’t understand.

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