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I’m In A Good Position Financially, What Can I Do To Take My Personal Finances To The Next Level?

24 July 2008 78 Comments

I recently had a conversation with a friend who mentioned they are in a pretty good financial situation. He had no debt, had just purchased his first house, and participated in a 401(k) plan at work. His question was what else could he do to improve his already solid personal finances?

Most of the personal finance information is targeted towards one of two groups:

  1. People who are a disaster financially: No assets, increasing high interest debt, and an income that becomes less and less sufficient. The advice for this group is typically to cut spending, pay down debt, and work harder.
  2. People who have more money than they know what to do with. These people are targeted because, well, they have money. Financial planners and advisers want them as clients. The typical advice is to diversify, diversify, diversify.

What about a normal 20-something that actually is in a good place financially like I described in the first paragraph?

There are steps to take to improve the already strong financial position that my friend is in. Let’s look at how we can take a good financial position and make it an excellent financial position.

  • Open an investment account and begin to learn how to invest money and learn the stock market. If you are maxing out your 401(k) and still have money you want to put away, consider opening a Roth IRA. I would definitely recommend using Zecco.com for your brokerage account. You’ll have no trading commissions and great service. Why are you currently paying for trading commissions?
  • Open a high interest checking and savings account to ensure maximum return on all money. Don’t be one of those people that has idle money. All of your money should be working for you, even your checking account.
  • Have an iron-clad identity. Identity theft is expensive and can take an enormous amount of time to get your identity completely back. Who can afford the cost and the time taken from you? I know I can’t thats why I use LifeLock. to ensure I don’t get hit by the surprise of a phone call telling me I’ve had my identity taken. It was an absolute nightmare for a buddy of mine who experienced identify theft; everything was fixable, but the time it took to deal with it was insane.
  • Sell your clutter. De-cluttering your house and life can make you feel better and put some cash in your pocket at the same time. Put some old furniture or other items for sale on craigslist, then throw that money you earn into your Roth IRA. Everytime I sell something on craigslist, I’m amazed again and again how easy it is.
  • Shop around for a better auto insurance rate. When is the last time you have done a comparison on what you pay for auto insurance? You might be paying more than you have to. I recently did a free quote comparison at Kanetix and was able to find a better rate and save a few hundred dollars a year. Not bad, and you can find out in a matter of minutes if you’re over-paying.
  • Earn more on your spending through a high rewards credit card. I use a Starwood Preferred Guest American Express Card to earn hotel points at my favorite properties. I love to travel and I love to stay at Westin and W properties, so everytime I spend money, I am earning points towards free stays. Figure out what you want to earn, then find the right card to earn it. It’s worthwhile to note that I never carry a balance; instead, I think of my AMEX as a debit card.

Additionally, the following items apply if you have a spouse and/or family. If you are single and nobody else depends on you, then the following probably do not apply. Although, you may still have an interest in researching and learning about the below listed products.

  • Protect your family with a will. I’m recently married and am expecting my first child. It’s weird when you find yourself thinking about a will for the first time. Being young is not an excuse to not get a will. Make sure your family is protected should something happen to you. I used LegalZoom to create a will. It was extremely easy and inexpensive. I would definitely recommend them.
  • Get Term Life Insurance. As a 20-something, you can qualify for some fantastic rates. I was able to get more coverage for more years than I thought for a very cheap price. Now that I’m married, this was a necessary move. If you’re young and healthy, get some cheap term insurance now and as your income rises, get additional policies for more coverage.

If I’ve left out any action to take to take your personal finances and wealth creation to the next level, feel free to add to the list by adding your comments!

78 Comments »

  • Chris said:

    Only thing I don't agree with is the how you said to max 401k first and then throw the rest in ROTH IRA. I think you should meet the company match for 401k, then max out your ROTH IRA. Then if you have money left go to investment account or back to 401k to max out. Most 401k plans do not put you in the best investment choices(high expenses, limited choices), but of course you should take the company match first. Good Stuff though!

  • hank said:

    But again if it is someone who isn't financially knowledgeable a 401k might be a better place to stick it. You can still pick poorly in a ROTH IRA setup as you have the whole financial world at your fingertips, but in 401ks, the company is usually pretty good about what they'd let the employees invest in and a lot of times target-date funds make up a good chunk of it, and are bad for people that know what is going on, but good for people who have no clue what's cooking but want to put their $ somewhere…

  • hank said:

    Hm – just wrote a long one and it apparently didn't save – recap:

    If you're a complete newbie to investing and have a 401k and the option for a ROTH, yea, ROTHs are easy for us to understand how they work and setup is a breeze, but for someone that is just coming out of the brush to learn investing, a 401k is sometimes a better place to keep it. Most companies aren't going to put their employees 401k money in crappy funds. There are teams of people that watch this each year at the big companies.

    True you could get stuck with a bad 401k team at your company, but they will usually default your money into a target-date fund and for those that haven't a clue, it's a decent start whereas a ROTH means setup, and finding your own financial advice (which can clearly be found here, but likely those that don't know what a ROTH is may never find this site) and then deciding what to invest in.

    You'd be surprised by the power of laziness! :)

  • kevin duffey said:

    Chris,

    Actually I’m in agreement with you. You’ll see that whenever I reference 401(k)s, you should only input as much as needed to maximize company matching because like you said you don’t have the flexibility in what investments to choose. I prefer all other money to go into a Roth after company matching is maximized.

    Thanks

  • kevin duffey said:

    Hank, sure if the person has no idea what they’re doing when it comes to investing, a 401k is a great option. I really encourage people to LEARN more so they can take more control of the investing.

    If a person has no desire to do more, than sure the best thing for them to do is to put as much money as possible into their 401(k). It definitely will compound over time.

  • Chris said:

    unless your company offers index funds in your 401k (or really good low cost mutuals), you are better off going to a Roth and buying them there. I don't think it is difficult to open a Roth and select an S&P 500 index fund. This has historically beat most mutual funds in the past when you include expenses. So if you are a set it and forget it investor, and still young, I still think people should be encouraged to go outside the 401k (most 401ks are set up for the benefit of the plan provider, not the consumer). #1 reason we should have financial planning as a course in high school, to indoctrinate them with the simple things.

  • kevin duffey said:

    Remember, a 401(k) is a must if company matching is offered. Don’t refuse free money. After matching is maxed out, I agree with you on the Roth point.

    A financial planning course in high school would be incredible for the future of our country. I’m in total agreement there.

  • Honey said:

    Actually, a will is a bad idea because the beneficiaries have to pay tax on what they inherit. If you form a trust (which I'm not sure if you can do on LegalZoom or if you have to get an attorney to do for you), then as long as one member of the trust is surviving no one has to pay taxes on anything when another member dies.

  • Rob said:

    @Honey — since when? A will (or no will, known as intestacy), does not trigger a tax liability for the benficiaries. Taxes (assuming the estate is large enough to generate estate tax) are paid by the estate itself. As for the theoretical "trust" you're talking about, you had best set it up right if your want to achieve tax savings in the manner that meets your objectives. You don't do that with online forms.

    Please be careful. What you have just repeated is dead wrong.

  • Honey said:

    I could be phrasing it incorrectly, but my boyfriend is an attorney and he says that any attorney worth his salt will tell you to never ever form a will but always to do a trust instead.

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    If you're anything like me, you graduated from college and perhaps even took a finance class or accounting class here or there, but you didn't learn anything about managing your personal finances. In fact, there probably wasn't even an opportunity to take any such class in either high school or college. But if college is partly about training us for a job, shouldn't we learn what to do with the money we earn from a job? Especially in a country where 45% of college students are in credit card debt and 40% of all Americans say they live beyond their means, I think it's time to wise up to some of the challenges of money management.

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