13 Days on $100.17

Want to know what it's like to check your online bank statement and realize you have $100.17 dollars left and 13 days to make it last...

This was the situation I found myself in during the 2nd semester of my sophomore year in college. The first thing I did was sit down and write out a list of the absolute bare necessity purchases I was going to need to make.

I ended up going to the grocery store and picking up a GIANT sack of potatoes, some lettuce, and carrots. I survived the week, barely. Did you know there are like a million ways to cook a potato?. It took me 6 months before I could eat another one.

A few things to keep in mind when you are extremely strapped for cash:

• Organize yourself, plan to purchase only the bare necessities


• Don't be shy to ask around at the grocery store for deals on overstock food, etc


• Take public transportation when possible (seen gas prices lately?)


• Keep yourself busy doing something you've been meaning to do for awhile (read a favorite book, do some much needed yard work, organize the junk in your attic or basement)


• Celebrate when your next paycheck comes in (cost effectively of course!)


• Learn from your mistake, keep a better eye on your finances and control unnecessary expenses in the future

Also check out this article: Retirement Concerns

Personal Finance Fridays

Welcome to Personal Finance Fridays. My goal for the year is to return 12% on my investments, but so far I am not doing as well as I would like this year. For the year-to-date (YTD) I am up 2.54% compared to 5.93% for the S&P 500. Listed below is the breakdown of my portfolio:

18.47% iShares NYSE 100 Index (NY)
18.18% Under Armor (UA)
16.10% iShares S&P 500 Index (IVV)
7.12% Apple (AAPL)
6.81% Coca-Cola (KO)
6.42% Goldman Sachs (GS)
5.73% Citigroup (C)
5.10% Borg Warner (BWA)
3.69% Montpelier RE Holdings (MRH)
3.59% Best Buy (BBY)
2.41% Colgate Palmolive (CL)

I am not as diversified as I would like to be. However, my plan is to make periodic purchases as my income allows to re-balance it. The good news about this strategy is that over time I will become more invested in the market as I diversify, the downside is that I am putting myself in greater risk right now. In my defense, I am SLIGHTLY more diversified than first meets the eye because 2 out of 3 of my biggest holdings are index funds, which are themselves diversified.

I am taking steps to diversify and correct my performance and hopefully continue to build wealth as the years go by. Feel free to post constructive criticisms or anything you feel relevant, look forward to more of these Personal Finance Fridays so we can track my performance over the long term.

Easiest Way to Invest in the Market

My college Econ 201 professor gave us one piece of investing advice: invest in index funds that track the overall market.

Here I am a few years later repeating the same advice, only wishing I had been listening more closely.
Index funds are essentially mutual funds that attempt to track the performance of a specific index (although they don't have to). The most common index funds track stock market indices such as the S&P 500, Russell 2000, Wilshire 5000, Lehman Brothers Aggregate Bond, Nasdaq 100, DJIA, etc. The advantages of index funds is they have much lower expense ratios (around 0.3% vs 2-3% for mutual funds), more tax friendly and THEY BEAT 75% OF ACTIVELY MANAGED FUNDS over long periods of time.

Examples of Index Funds:
Vanguard S&P 500 6.51% return (Jan '07 - May '07)
Vanguard Total Stock Market 6.94% (Jan '07 - May '07)
iShares S&P 500 5.53% (Jan '07 - May '07)

Retirement

Retirement? I haven't even graduated yet. This is typically the first response from recent college grads, but the truth is that retirement saving starts the day you get that diploma. .

One of the first things anyone should do when they start work is inquire about 401(k) plans, matching contributions, Health insurance (including dental plans), etc.

The great thing about 401(k) and Roth IRAs is that the money grows tax-deferred, meaning you do not pay taxes until you withdraw the money. So remember that even though you may only be in your early twenties, there has never been a better time to begin saving for your retirement... golf in Florida anyone?

Young American's making a mistake

Investment Options

There are tons of ways to invest, but the easiest and most common way is with stocks and bonds. There are other ways to invest though and below are some of the common ones:

Bonds, Real Estate, Stocks, Mutual Funds, Index Funds, Exchange Traded Funds (ETFs), Hedge Funds, Private Equity, Venture Capital, Commodities,Futures,Fund of Funds, Certificates of Deposit (CDs), Treasury Bills

DO NOT worry if you haven't heard of half of these, investing is a very broad category. Many people invest in things such as art, or even hobbies like rare coins or baseball cards. Does anyone have some unorthodox investments? If so we would love to hear about them.

Power of Compound Interest

One of the most powerful mechanisms in the world in terms of finance is that of compound interest. This is your money making money for you. Most banks pay about 0.3% interest on accounts less than $10,000. Let's say you put $10,000 in a savings account and didn't touch it for 5 years:

Year 1: interest ($10,000 x .003) = $30
Year 2: interest ($10,030 x .003) = $30.09
Year 3: interest ($10,060.09 x .003) = $30.18
Year 4: interest ($10,090.27 x .003) = $30.27
year 5: interest ($10,120.54 x .003) = $30.36
Total = $10,150.90

You earned a return on your money, but it was PITIFULLY low.

Let's say you are able to save $2,000 per year and invest it in an index fund that mirrors the New York Stock Exchange (NYSE). The stock market has historically returned roughly 10% per year over the past half century (substantially more than any bank can offer). The downside is the increased risk of your money depreciating. You are 22 when you graduate college and plan on retiring at the age of 65. Check out what your retirement nest egg would be after 43 years returning 10% per year:

Initial amount: $0
Annual contribution: $2,000
Annual interest rate (rate of return): 10%
Time: 43 years

With steady saving, investing, and the power of compound interest, you would have a little over $1.3 million when you retired at 65. Here is a financial calculator for you to check out your numbers.

Spend Less, Earn More

The single most important thing you can do to build wealth is save money. My first piece of advice is to become aware of how much you spend and what you spend it on. People who know what they spend money on are less likely to thro money around on the latest gadget. While budgeting your money is a great way to cut costs (if you actually stick to your budget), I first recommend writing down your expenses (http://www.buxfer.com/).

The key to building wealth is not spending more than you make. Without cash in the bank you have no chance to invest and grow you money, and no buffer in case of an unexpected expense.