An introduction to the crossover point
Trent at The Simple Dollar recently wrote about the Crossover Point, a notion popularized by the book Your Money or Your Life. The Crossover Point is simply that point in time at which your investment income exceeds your monthly expenses. For most people, this never occurs.
YMoYL is about getting readers to the Crossover Point. The authors want people to achieve Financial Independence, which they define as "having enough — and then some". They ask readers to track income, expenses, and investment income, plotting each of these on a wall chart. The entire book is about finding ways to get the investment income line (low on the graph) to meet (and then cross over) the expenses line.
This is esoteric, I know, but it's important. Reaching the Crossover Point means that, if you wanted, you could stop working for money. You could retire. You could work for self-fulfillment. You could travel the world or write a book. If YMoYL were a novel, this would be the climax of the story:
Questions and answers about Roth IRAs (Updated!)
The series on Roth Individual Retirement Arrangements (Roth IRAs) has covered a number of topics -- what they are, how (and where) to open one, and which investments are best. Now, in the final part, we turn to some of your questions. Remember: I am not a financial adviser. I'm just a regular guy trying to gather information to help you. If you need more specific answers, please consult a CPA or an investment professional.
All of the questions below were submitted by Get Rich Slowly readers via comment or email. If your question isn't here, please drop us a line so we can research an answer and add it to the list. If you are new to Roth IRAs, this article is not the place to begin. Start here, instead.
The New Graduate’s Guide to Financial Freedom
I graduated from college in 1991 with a degree in psychology and a minor in English lit. I was one course shy of a second minor in speech comm. With credentials like these, it's no surprise that my first job out of school was knocking on doors, selling crummy insurance to little old ladies in Eastern Oregon. I hated the job, but I could not quit. I was trapped by debt.
After I was hired, I had gone a little crazy. Because I would soon be earning a steady income, I figured it was safe to spend some of my future earnings. My car — a silver 1983 Ford Escort — was a piece of junk. I didn't think it made sense to repair it. Fortunately, the bank gave me a loan for a new car. I bought a 1992 Geo Storm. Then, using credit cards, I bought an entire wardrobe of business attire and a Super Nintendo. "It's okay," I kept telling myself. "I have a job. I'll be able to pay for this."
Which Should You Choose: Joint or Separate Finances?
Several months ago I mentioned in passing that my wife and I keep separate finances. I promised to eventually explain why, and to discuss the pros and cons of doing so.
When I was a boy, my parents fought about money often. And loudly. They had joint finances, but it didn't seem to matter. Each accused the other of being financially irresponsible. (Both were right.) Their example left me disenchanted with the notion of mutual money management.
During the years Kris and I dated, we had our own accounts. From the beginning, I was a spendthrift and Kris was a saver. She always made smart financial decisions. Because my money was my money, and her money was her money, my poor choices did not drain her savings.
What is a financial plan and why have one?
Having a financial plan is a lot like having a travel plan — it identifies where you're going, how and when you'll get there, how much it'll cost, and things do along the way. Like planning a vacation, your financial plan can be loosely structured or highly detailed based on your individual needs. But having no plan at all could leave you stranded in the middle of nowhere.
A financial plan answers three primary questions:
- How much, when, and where should you save while you're spending less than you earn? Examine your wages, debt payments, living expenses and other budget items to determine how much to contribute to your plan (when you have a cash-flow surplus), and decide which account the money should go in.
- How should your savings be invested until they're needed? Identify which asset classes to invest in, how much to put in each, and which actual investments to use. Diversification helps you manage investment risk.
- How much, when, and from where will you access savings when it comes time to spend them? Address situations when financial needs exceed available cash from income (a cash-flow deficit) and must be supplemented by withdrawing savings from your plan. This might be a limited-term need such as paying for a child's college education, or a lifetime need such as partial or full retirement.
To properly address these questions, identify your financial goals. Questions to ask yourself include:
The road to wealth is paved with goals
Ramit Sethi, author of I Will Teach You to Be Rich, recently shared his thoughts on a New York Times profile of Russ Whitney, a real estate mogul who charges thousands of dollars to learn the secrets of his success. (Whitney helped inspire Casey Serin's foreclosure odyssey. John T. Reed has extensive information on Whitney, not all of it negative.)
Ramit's post prompted me to read the original New York Times article. I began the piece planning to offer my own criticisms of Whitney and his get rich quick schemes. But two-thirds through the article, I realized there were actually two stories here: one about Whitney's brash hucksterism, and another about the people — like Casey Serin — who are so desperate to get rich now that they lose touch with reality.
Midway through the article we meet Tracie Taylor, who is leading Millionaire U, a three-day real estate training course for "advanced" students. Most of the students don't actually know much about real estate, so Taylor is giving them the basics. She's also touting goals, positive thinking, and visualization (all excellent tools when used correctly).
How to organize your finances in four easy steps
You've heard that to take control of you finances you sould track every penny you spend. You'd like to try this, but it sounds like such a pain. There's so much paperwork involved. You lose receipts. You forget when bills are due. It's hard enough making sure the bare necessities are tackled — who has time to track every penny?
I've been there. My financial life used to be a mess. Whenever a bill was due, I had to play a game of hide-and-seek to find it. I often overdrew my checking account because I'd lost track of how much money I had. Eventually I learned that it's easier to track your finances if you keep them organized.
To stay on top of things, you need to have a system. You also need to reduce the amount of information coming in; you need to keep all of your information in one place; and you need to process your finances regularly.
How to retire rich Dave Ramsey style
Eager to know how to retire rich? It might be surprising that Dave Ramsey's site has one of the best money hacks I've seen recently. Drive Free, Retire Rich explores the impact of carrying a car payment, and offers ideas on how your money can be used more wisely. Though the sentiment is familiar, I find Ramsey's approach novel.
You want a brand-new sports car that would normally cost you $475 a month. The car you're driving now is worth around $1,500. If you take that $475 and pay yourself instead of paying the dealer, you'll have $4,750 in just ten months. Add that to the $1,500 you can get for your current car, and you can pay cash for a used $6,250 car. That's a major upgrade in car in just 10 months — without owing the bank a dime!
Manage your finances like a professional gambler
Here's a guest entry from Tynan. This post is about how a professional gambler looks at money.
Small Things Add Up
I was eighteen, and a freshman in college. For the past few years I'd been making a few hundred dollars a month selling Palm Pilots on eBay. It was a lot of money for a teenager with no real expenses, but of course I spent it all. My knowledge of personal finance was fuzzy at best. Naturally I squandered any money I made.
Then, through a strange series of events, I became a professional gambler. It happened fast, and soon my "studies" were being neglected for long nights of blackjack, roulette, and video poker. Eventually I dropped out of school to make serious money, and thus began my real financial education.
How To Protect Yourself From Lifestyle Inflation
Jonathan at My Money Blog has been writing about personal finance for two years now. Here's some excellent advice on the standard-of-living trap.
One thing I worry about is lifestyle inflation. No matter how little or how much someone earns, their spending tends to match their income. When you're living the student life, your friends are also broke, and it's easy to eat frozen pizza for dinner and manage without a car. That was probably one of the funnest periods in your life! But when you have more money, you start looking to upgrade: a nicer car, a bigger house, brand name clothes, cooler gadgets. Call it peer pressure, entitlement, or simply money burning a hole in your pocket.
As we progress along our career paths, here are a couple of things that my wife and I are trying to do in order to try and inflation-proof our spending: