The Magic of Compounding Interest

Why do I invest in Vanguard Mutual funds?

1)  The low cost allows me to gain broad access to the entire stock market (I’m young so my investments are strictly in domestic stock and I have the mental capacity to accept volatility).

2)  I can seamlessly add money to my accounts (yes accounts plural… Brokerage, Roth IRA, and 401k) on a monthly or bi-weekly basis without even seeing it in some cases.

3)  MOST IMPORTANTLY I let the dividends I make on my investments reinvest in the funds which ultimately takes advantage of the Magic of Compound Interest.

The point of this post is to help you realize the benefits and exponential growth one’s portfolio can have if you take advantage of compound interest.  Mutual funds make it super easy to reinvest the returns you make and by contributing on a regular cycle you take advantage of market highs and lows.

The following link is to an article which emphasizes how compound interest can impact your retirement.  The more you save and the earlier you save, the more time you have for the interest to continually compound.  Please leave a comment if you have any further questions.

http://www.dailyfinance.com/2014/12/03/401k-catchup-might-cost-1million/

Budget smart, invest wise!

Budget Spreadsheet for Starters

Today I will focus on helping you build a budget.  The way to wealth is a two-way street.  You can make a lot of money, but if you spend a lot of money you may never build wealth.  Look at your income as your offense, and your budget as your defense.

When I graduated college I had a solid job, but I had over $30,000 USD in student loans to pay back.  It took me about 6 months before I finally realized I needed to focusing on paying down this debt hard-core in order to achieve my financial freedom.

Whether you have student loans or not, creating and KEEPING UP WITH a budget is a great way to monitor your finances.  Today’s post comes complete with an Excel spreadsheet to help one get started in building a budget.  The following steps will help you use the spreadsheet provided to create your own personal budget!

1) Open spreadsheet and enter your income you expect to receive for a given month (this should be fairly easy if you have a salaried position)

2) On the left hand side of the sheet enter any and all expenses you might have for a given month.  For Example, if you don’t own a car and use public transportation you can eliminate the “Car Insurance” category or replace it with a monthly expense you do experience, such as “Entertainment”.

3) There is a formula already entered that totals the amounts in each of the categories at the bottom of the month.  You want this to be a positive number.  A positive number indicates you are making more than you are spending.

One final note, whether it’s a Roth IRA, savings account, or traditional brokerage account, I highly advise setting aside money every month for retirement or a major expense you might be saving up for (Home purchase).  Getting on the right financial track starts with a sound budget, so don’t delay, begin today!

Monthly Budget (Example)

Navigate your way to the proper IRA

Roth IRA: You make after-tax contributions, which allows income to grow and be withdrawn tax free in retirement.

Traditional IRA: You make pre-tax contributions.  Your income is allowed to grow tax free, but you will have to pay taxes upon withdrawal based on your income tax bracket at the time.

As the year comes to an end look at making an IRA part of your retirement plan.  Taxes and investment fees are the biggest hindrances to one’s portfolio returns.  Consider a low cost index fund.  I prefer Vanguard but many others offer similar investment options.

The following link describes common IRA mistakes and will allow you to have better insight if you qualify for one:

http://finance.yahoo.com/news/avoid-these-8-common-ira-mistakes-171412790.html

 

Budgeting is where it all begins

Have student loans?  Credit card debt?  Feeling bogged down?

Paying down debt begins with budgeting and tracking expenses.  Set a monthly dollar amount limit for how much you eat out, spend on entertainment, and at the grocery store.  Tracking one’s spending is the best way to see how much you can afford to put towards debt.  Check out the following story which shows a real life example of how paying down debt can be managed in a short time.

http://www.dailyfinance.com/2014/03/18/paying-down-student-debt-living-manhattan/