In 2009 Go Back to Basics
Hi All,
Like most hardworking Americans you probably spend a good deal of time working for your money. After last years colossal bankruptcies and stock market declines, you are probably looking for ways to be sure your cash isn't wasted. Well, for 2009 consider these basic financial moves.
1) Max out your retirement accounts. There are several reasons to max out your retirement. First, you obviously don't want to turn 65 without any funding. But more importantly, you probably don't want your family to feel obligated to expend precious resources taking care of you in old age. Family aside, maxing your retirement contributions increases the effective return on your dollars due to tax sheltering. The 2009 contribution limits are here and here.
2) Spend Less Than You Earn. The math is very simple. If you earn $100 dollars and spend $120, then you're in the hole 20 bucks. You'll have to borrow or spend your savings. Either way, your financial position degrades. On the other hand, if you have $100 and only spend $75, then you've got a $25 dollar surplus. You can invest it to increase income or save it for future bad times.
Bottom line: overspending = financial problems. Saving = financial strength.
3) Dump High Interest Debt. If you've got any kind of high interest debt that's not tax sheltered, dump it immediately. If you've got a 9% car loan, or a 20% credit card. Dump it. If you owe money on rent-to-own appliances, pay it off. If you have back taxes, pay them off. Pay off anything that's more than 4 or 5 percent and isn't tax sheltered. Don't be wishy washy, eliminate high interest debt.
4) Own your own home. Home ownership increases your bottom line in several respects. First, its a key part of your networth. Most studies of household wealth show that, as a general rule, homeowners are richer than renters. This is due to a couple of mechanisms; mortgage payoffs result in increased savings, asset prices for real estate increase over time and there are substantial tax breaks for owning your home. Second, home ownership increases social prestige. Third, home ownership is better for children and families. Click here for the proof.
Most Americans will spend their entire lives working. If you don't want your efforts going to waste, stick to the basics in 2009.
Best,
James
Stumble It!
3 comments:
A good post its nice to go back to the basics every now and then and 2009 is definitely a good year for that. I think key above everything is spending less than you earn regardless of how you do it. If you're making more money than you're spending and you're comfortable with it then you're in a good situation to weather economic instability, especially if you have a healthy savings account.
I agree with everything except the home ownership bit. Net worth is meaningless if you cannot access the funds, or if accessing it costs you more than you put into it. Asset prices for homes over extended period barely keep up with inflation in reality, although the tax benefit can have an impact. However, most people spend the tax benefit rather than invest. If the current situation revealed anything it is that people were spending their net worth through HELOCs and home lines of credits. Last, the proof you site is from the National Association of Realtors, which should make you stop and question what they are saying since the industry has a vested interest in home sales. The social benefit comes from taxes not from home ownership. If not for property taxes, the taxes for social goods and services would come from something else.
I hope and believe the current housing implosion will redefine home ownership as a want not a need; people will re-evaluate what it means to have home equity and whether it will be realistic to tap that equity in the future in order to realize net worth; it will be quite a while before we have rapidly increased real estate as we did in the past, which we now saw was based on an unsupportable bubble; and, home ownership isn't the american dream, just as owning a luxury car isn't the american dream if it based on debt.
The basics of finance are the most important, obviously. I especially agree with owning your own home. It makes sense that homeowners are richer than non-homeowners. They are paying themselves when they pay the bank -- renters don't gain when they pay. Renting, on the other hand, is just a one way street.
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