In my last post, I described my lower middle-class upbringing. I mentioned that my parents were terrible with saving money, and that we weren’t really taught to save either. That isn’t entirely true. We did have one person that tried to help us save money. Unfortunately, it didn’t work out the way she wanted it to. 

Grandma’s Help

We got a small bit of help in learning to save from our Grandmother on our mom’s side. When we were born, she convinced my parents to open a savings account for us. She gave us a check on every birthday and Christmas with “for deposit only” written on it, so we would be forced to deposit it into our savings accounts. We had the option to deposit the rest of our birthday money as well, but we rarely did.

My grandma didn’t have a lot of money, so she was only able to give us each $25 on special occasions. Over time, that does add up, and by the time I started working for my parents, I had about $800 saved up. That’s a lot for a fifteen-year-old!

I Learned about taxes the hard way

Unfortunately, the savings account didn’t work out the way my Grandmother intended. You see, when my parents started paying us for delivering papers, they set us up as independent contractors rather than wage employees. That meant that no taxes would be taken out of our paychecks. We didn’t make a lot of money, but as we all know, that doesn’t matter. The IRS still needs to get their share.

When tax season rolled around that first year, my father did our taxes for us. We each ended up owing the man around $700. My parents took us to the bank and drained our savings accounts so we could pay our taxes. They said we should have known better. We should have been putting money aside each pay check to pay. How we were supposed to know the subtleties of the complicated tax code at age 15, I’ll never know!

 

Making it worse

Unfortunately, I didn’t learn my lesson. I continued working for my parents as an independent contractor, and continued spending all of each pay check. When tax season rolled around, I just ignored it. I did the same thing the following year. Eventually, I stopped working for my parents and got a normal part time job. Unfortunately, by this time, I already owed the IRS almost two thousand dollars. Even worse, my father accidentally switched mine and my brother’s social security numbers on our tax returns, so we didn’t even know who owed what!

Digging out of the hole

I was a senior in high school when I realized how big my problem with the IRS was. That’s when I decided to take steps to dig my way out. Surprisingly, it was super easy to get the mess with the social security numbers straightened out. But what was even more shocking was that they were really nice about helping me set up a payment plan and get the tax debt straightened out. They are super willing to work with people who are trying to do the right thing!  It took me about a year to fully pay off my debt to the IRS, but it felt good to make that last payment.

 

Lessons learned

Learning about taxes the hard way had some advantages. I learned to always think about how taxes will work with any job, so I don’t get surprised with a giant bill at the end of the year. I also learned that the IRS isn’t as terrible as everyone thinks they are. One of the reasons I waited so long to call and get it taken care of is that I was terrified of calling them!  All I ever heard was horror stories about going to jail for tax fraud and IRS agents being super rude to people. Maybe it was my age that helped, or maybe it was the fact that I was actually trying, but every time I called, the agent was super nice and helpful. I never had a bad experience.

One final thing I learned is to always check over all the important forms.  One little mistake can cause huge complications down the road (on the plus side, I still have my brother’s SSN memorized, because I thought it was mine for so long…devious, I know!).

What lessons did you learn the hard way?  I’d love to hear your stories!

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"cosigning"

Today I’m writing a cautionary tale for all my readers (because it’s too late for me!). As you know from reading about the Worst Financial Decision of my Life, I cosigned on a car for someone when I probably shouldn’t have. But unfortunately for me (and please learn from my mistakes!) this wasn’t the only time I’ve cosigned. I haven’t even only done it twice. I’ve cosigned for stuff on three separate occasions!  And to be honest, I’m probably going to do it again (because obviously I don’t learn).

The First Time I Cosigned

My first experience cosigning came about 11 years ago. I cosigned on a type of student loan for my then boyfriend. We were getting ready to move from Illinois to California, and we didn’t have a lot of money. He was just getting ready to start college, and we found a student loan program that would give us cash for tuition and expenses. He couldn’t qualify on his own, so I cosigned.

I actually don’t regret this one. We were together and we needed the money. Having this loan really helped us survive during our first year in California. I am a bit annoyed that it’s been 11 years and we’ve only paid about 6K on the loan, but it is what it is. On the plus side, we still get along well and we are working together to pay it off.

Cosigning my life away for family

I don’t really regret the second time I cosigned either, even though I had to pay a bit more than I intended. I helped my brother buy his house. He is terrible with finances (most of my family is) and has horrible credit, but he makes decent money.  His wife has decent credit but works a low paying job. He could afford the mortgage, but with his credit he couldn’t qualify.

I have a little niece and nephew who mean the world to me. They are adorable little kids and I wanted them to have a house to grow up in. I also love my brother, he was my best friend for the first 16 years of my life. I want him and his family to be happy. So, I agreed to cosign. However, I only agreed under the stipulation that I would be co-owner, not just cosigner. This is a very important distinction, as it means I have ownership stake in the house; whereas if I was just a cosigner I would be financially liable but I wouldn’t be part owner.

My brother swore up and down that he would always pay on time and he wouldn’t do anything to hurt my credit. He promised not to screw me over. My brother may be a jerk sometimes (aren’t all brothers?) but he’s loyal to a fault and takes pride in keeping his word. So, I believed him.

How it screwed me

Unfortunately, his family fell a bit on hard times last summer, and he didn’t want to tell me that he missed a payment because he was planning on making it up in the coming months. It would only be behind by one month each month, so he didn’t think I would ever know. He didn’t want me to know because he didn’t want me to be disappointed in him.

Unfortunately for him, this was around the time when I got the job offer for Savannah. That meant I was selling my house and buying a new one, yay!

 

Imagine my surprise when I applied for a mortgage and was told that my other mortgage was thirty days behind. That’s not something you want to hear!  I was livid!  I called my brother and cursed him out like crazy. My sister had my back, she did the same.  He apologized and promised it wouldn’t happen again. I had to pay the one month that he was behind; because I wouldn’t be able to get a mortgage if I waited for him to pay it. I told my brother not to pay me back, but also to not let it happen again.

So of course, it happened again. I checked my credit score in January, and the mortgage was late again. He gave me some lame excuse about the homeowner’s insurance being wrong so they weren’t paying because they were trying to get it fixed. To his credit, he paid right after I called him out, so I guess he was telling me the truth (at least about having the money). It’s been a few months and I haven’t seen a late notice yet, so hopefully he will keep up with it.

The Third (and Worst Time) I Cosigned

I’ve told this story before (remember, the worst financial decision?). The third time I cosigned was on a car for Jonathan. Yeah, lets’ sign my life away to someone who I know is an alcoholic with absolutely no financial literacy. Great Plan Melanie! The good news is that I’m actually the primary on the account, and he’s the secondary so I do have some legal rights to the car.  He’s supposed to take over the payments starting in May, and if he doesn’t I’ll have to “recover” the car from him. I’ll let you all know how that one goes!

Why I’ll Cosign Again

You’d think I’d have learned my lesson by now. But alas, I probably haven’t. My sister really wants to leave California for cheaper pastures. She’s also planning on taking my mom with her. They want to move someplace on the East Coast with a much lower cost of living. Great idea, right? Unfortunately, they suck with money too. My sister has terrible credit and owns her own business, so has very little income to show. My mom gets by. There is no way that they are going to be able to get a house on their own.

They are family. My sister has stood by me when pretty much everyone else I’ve known in my life turned their backs on me. My mom is my mom. I have to help them if I can. So, although I know cosigning is a terrible mistake, it’s probably one I’ll make again. On the plus side, at least cosigning for a house gives me assets. I’ve got that going for me, right?

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"hidden costs"

Houses are expensive! The median home price in the United States is about $200,000 (Median is a better number to use than average, because it takes away the crazy expensive outliers). That’s a lot of money! But unfortunately, that’s only the upfront cost of buying a home. Make sure you factor these 10 hidden costs of buying a house into your budget!

Hidden Costs of Buying a House

Moving

Do you remember when everything you owned fit into your small two door sedan? I remember that too. I don’t know how I acquired so much stuff, but it most definitely did not fit in a sedan (or an SUV for that matter!). I did downsize a whole lot, so I just used a small pod to move everything that I didn’t want to throw away. The small pod cost me nearly three thousand dollars! Granted, I did move to the opposite side of the country, so that gets a bit pricey, but even moving across town will cost you.

Furniture

Are you going to buy new furniture to go with your new home? If you are moving your furniture, do you have enough to fill the new house? When you go from an apartment or condo to a single-family home, you generally have a lot more space to fill up. And it’s not just furniture! You will need shower curtains (I learned that the hard way!), area rugs, lamps, décor, and all the other items that make a house a home. My first trips to Bed, Bath, and Beyond after buying a new house cost me upwards of a thousand dollars! Granted, I hardly took anything with me when I moved, but it is still something to be aware of and to budget for.

Are you a realtor who wants to provide the best experience for your clients? Check out ClickyHomes!*

Closing Costs

Closing costs aren’t exactly hidden costs, but they are expensive and it’s definitely not something that everyone considers when buying a home. Closing can cost up to 10% of the price of your home!  I paid about ten thousand dollars to close on my house. This includes attorney fees, the first home inspection, escrow fees, and bunch of other miscellaneous things that all the companies involved in closing charge you for. You need to budget for this huge expense at closing so you aren’t caught off guard.

Warranty

Unless you are buying a brand-new home (which usually comes with a warranty) you should definitely look into purchasing a home warranty at closing. In my area, the top- level warranty costs about five hundred dollars. It covers plumbing, electrical, appliances, and anything that goes wrong with the house for the first year. It offers piece of mind.

I’m really glad I got the warranty with my house, because about 3 months after purchasing it, I had a pretty serious leak. I called the warranty company who hooked me up with a plumber; and I was able to fix the problem without having it affect my insurance.

Insurances

Speaking of insurance…homeowner’s insurance is a must have when financing a home. Usually, your lender will discuss the approximate costs of this with you well before you sign the final paperwork. But homeowner’s insurance might not be the only insurance that you need.

Did you know that homeowner’s insurance doesn’t cover floods or earthquakes? If you are purchasing a home in a flood zone, you will be required to purchase the FEMA flood insurance. Even if you aren’t in a flood zone, with all the crazy weather we’ve been having these past few years, flood insurance might not be a bad idea. You never know when that freak storm will dump 40 inches of rain on you. If you live in an area prone to earthquakes, you may also want to consider earthquake insurance. 

Renovations

If you are buying your absolute dream house, you may not have to worry about renovations. But most houses have at least some minor cosmetic issues that you will want to improve upon. The house I bought had hideous carpet and paint. These were super easy fixes, but they were definitely something that I needed to include in my budget.

Related: Check out these helpful tips for home buyers!

Inspections

I already mentioned the house inspection when I was talking about closing costs, but did you know that there are numerous other inspections you can get that aren’t included in your closing?  One of the most important additional inspections you should look into getting is a termite inspection. Nobody wants to buy a house only to learn that it’s been eaten away by these voracious pests. It’s much easier to prevent termites than it is to get rid of them when they are established.

HOA

Are you going to live in a community with an HOA?  Sometimes, there is no way around it. Pretty much all of the homes I looked at in Savannah had some sort of HOA. Some of the fees are outrageous! I looked at one house where the HOA fees were almost 300 bucks a month!  To be fair, that neighborhood had amazing amenities, but I wasn’t looking to pay that much. The HOA fee in my current neighborhood is only forty bucks a month, which is way more reasonable.

HOA fees aren’t always bad. Having an HOA helps to maintain the property values. Many of them also offer a club house or a pool. However, be sure to think about the monthly fee before committing to a mortgage payment.

 

Taxes

Ah taxes. One of the few certainties in life. We all know that property taxes are a thing that need to be paid; but the cost can be a surprise. Make sure that you speak to your lender about estimated property taxes before you agree on a purchase. Most lenders will include them in your total monthly bill, but some will only show you the total for the principle and interest. These customers are then shocked when they receive a monthly bill that’s two or three hundred dollars more than they expected.

Related: Check out the one thing I wish my realtor had!

Services

Owning a home is a lot of work. And there are a lot of things that you need to consider once you have one. Do you live in the South? Yeah, you’re gonna need an exterminator. Do you live anywhere near a city?  You’re probably gonna need a security system. You are also going to need to set up your trash, water, sewer, and utility services. And some cities don’t even include fire protection as part of the property taxes, you have to pay for it separately (WTF Savannah??). These are all things you will need to consider and budget for when purchasing a new home.

Bonus!

Miscellaneous expenses – because stuff always comes up. Always! Make sure you have an extra one to two thousand dollars set aside for that one thing that no one warned you about. Because it will come up, eventually.

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"pay yourself first"

Pay yourself first is one of the first pieces of advice you will here from pretty much any financial advisor or finance blogger. It almost doesn’t even need to be said. Almost.

Unfortunately, a majority of people in the United States don’t follow this tried and true advice. According to a recent survey of Consumer Finances published by Business Insider the median amount in American’s savings account is only about five thousand dollars. This tells me that most American’s aren’t paying themselves first.

Why Should I Pay Myself First?

You should pay yourself first because future you will thank you! Future you will be able to live comfortably in retirement. Future you will have the money to take that dream vacation. You should pay yourself first because you want to be secure and comfortable in the future. It may take some sacrifice now, but even saving a little bit today can pay off big years down the line.

What does paying yourself mean?

Paying yourself first means setting a portion of your paycheck aside for future you before paying your bills and before buying stuff. Many people pay all of their bills and buy all of their stuff first, and then decide if they should save something from the (usually) paltry leftovers. I get it, sometimes you have a lot of bills, and there isn’t a lot of paycheck to go around. If you are in this situation, I understand not being able to put aside some money for savings. But before saying you can’t, investigate your budget and make sure that you don’t have any fat that you can cut. Most people have at least a little fat; but we all know how much harder it is to lose that last tiny bit.

How should you pay yourself first

There are a few ways to pay yourself first, but I think the most tried and true way is to put it on autopilot. I have 7% of my paycheck automatically put into my retirement account, and I have another 3% automatically placed into various savings accounts. So technically, I never even see a full 10% of my paycheck. It goes to the most important thing – Me! The remaining 90% is used for bills, fun, incidentals and additional savings (technically, I pay myself first, and then I pay myself again with whatever is left over after the bills are paid).

What should I do with my paycheck to me?

In my opinion, the best way to pay yourself is by contributing to some type of retirement account; especially if you have an employer match. There are other options as well; you can put money into a savings account or a regular investment account. The main point is to put it someplace where you won’t accidentally spend it or include it in your monthly budget. If you need some tips on how to get started, check out our Beginner’s Guide to Investing.

 

It’s impossible to overstate how important paying yourself first really is. We want everyone to succeed and everyone to achieve the type of financial independence that works best for them. Paying yourself first is the first step to getting there.

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Have you ever heard of Regal Assets?  If not, you’re in luck, because that means you probably haven’t invested with them. 

Regal Assets is an IRA company that specializes in gold. It’s a company that basically lets you convert your cash/investment holdings into gold and other precious metals; supposedly for safety in retirement. 

High Paying Affiliate

I first heard of Regal Assets in a blog post that was discussing the top paying affiliates. Regal Assets was on the list, and the writer stated that they paid super high commissions. This was one of the only companies on the list that was in the financials sector, so like any awesome PF blogger I immediately signed up for the affiliate program. And then I started doing some research.

I found so many blog posts avowing the awesomeness of Regal Assets. This company was featured in Forbes, the Huffington Post, and Smart Money!  But I didn’t stop there, I decided to find out what these major players in the financial industry were saying about this amazing company.

The Unraveling

Unfortunately for Regal Assets, this is where the amazing opportunity started to unravel. I could not find one legitimate article on Regal Assets from any of these big publications. The only legitimate thing I found was that it was featured in INC Magazine’s list of 5000 growing companies back in 2013-ish but there is very little information posted about the company in that article, and I couldn’t find them anywhere else on INC’s website. I did find the Forbes article that they mentioned, but it was written by the CEO of the company, and it isn’t even posted on the Forbes website. That seems a bit fishy to me.

Related: Terrible Investments for Beginner’s

The Regal Assets website itself even lists that it was featured in all of these places, but there are not any links to the articles. I would understand this if the company has been around since the 1980’s, and all of their featured articles were from before the time of the internet. But Regal Assets was founded in 2009, and we all know that anything posted on the internet stays forever. So why wouldn’t the company link to the articles? And why couldn’t I find any of the articles through a google search?  That seems shady to me.

 

So is it a scam?

But is Regal Assets a scam? To be honest, I don’t know. I have found some stories on mainstream finance websites about their new bitcoin IRA, which seemed like a really interesting idea to me. There was a post featured on Market’s Insider (a subsidiary of Business Insider I believe) about this new fund.

Unfortunately, the article was a Press Release issued by the company. It wasn’t written by an independent journalist. This seems to be a common theme with this company. I haven’t found any non-affiliated journalists, market insiders, or financial experts talking about the company at all. To me, this is a huge red flag.

Red flag number two is that a great deal of the affiliates (blogs, you-tubers, etc) open with “is regal assets a scam?”.  If you have to get customers by promising you aren’t a scam, you’re probably a scam.

No Solid Proof

I can’t say for sure that Regal Assets is a scam. It may be a totally legitimate company who’s marketing just rubs me the wrong way. But I am not going to invest with them. I would advise you to do your own research and make your own educated decision before investing with them, but then again, you should be doing that all the time anyway. Happy Investing!

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"Realized vs unrealized gains"

Realized vs Unrealized gains and losses

The stock market is freaking nuts! The Dow is up, now it’s down, now it’s the highest it’s ever been, now its dropped the largest percent in history…what the hell is going on?  You’ve lost big, then you’ve won big, and now you’ve lost again. But have you really lost?  Did you realize your losses? Knowing the difference between realized and unrealized gains and losses is incredibly important.

The Big Secret

The truth is that neither gains nor losses are real until you make them real! (Of course, there are exceptions to every rule. The one exception to this rule is if an individual stock you hold goes bankrupt…that loss is usually real!). But in most other cases, you don’t score big until you realize your gains, and you don’t lose big until you realize your losses.

Unfortunately, a lot of people don’t always understand this. Maybe they do on a logical level, but when emotions get involved, that logic can fly out the window. When stocks plummet, people tend to freak out and sell.  So, what ends up happening? They realize their losses at the worst possible time, and lose a whole bunch of money. If they would have stayed invested, the markets would eventually improve and they would never have realized the loss. In effect, they wouldn’t actually have lost money!

Related: Check out our Beginner’s Guide to Investing!

Exceptions to every rule

There are caveats to this. Owning individual stocks is way riskier than owning index funds. Your initial investment may be decimated, and it may never regain its value. When I was a novice investor, way back in 2007, I bought a whole bunch of individual stocks. One of them was this random European shipping company. During the crash of 2008, the company lost more than half of it’s value. It’s been 10 years and it still hasn’t improved. I’m still holding onto it (because at this point it doesn’t really matter) but I doubt it will ever improve. However, the losses haven’t been realized yet, so there’s always the possibility (albeit slim) that the company will somehow turn itself around and I’ll recoup that initial investment. There’s also the possibility that the company will go bankrupt and I’ll lose everything I have in it. You win some you lose some.

 

Housing

Housing is a huge sector in which people don’t consider whether gains have been realized or not. People love to claim how much their house has risen in value and talk about how rich they are because their house is worth a pretty penny. But you can’t buy food with that money (unless you take out a home equity loan, which is a terrible idea!!!). You can’t actually make money on your house until you sell it.

That’s the reason why I wanted to move out of California. My house’s value skyrocketed!  It was amazing! But I was still paying the same in mortgage, and the increased value wasn’t helping me financially in any way. I was sitting on a pile of unrealized gains. However, when I sold, I realized (and pocketed!) the gain. I wasn’t going to be left holding the bag when the housing market drops again!  And It will, eventually. All markets have peaks and valleys.

Related: Getting lucky with Real Estate

Never sell?

I hope you aren’t taking away from this post that you should never sell. I’m not! Sometimes it’s prudent to take a loss. If an individual stock is plummeting and its fundamentals are poor, you may want to sell it before the company goes bankrupt, before you lose even more money, or if you aren’t happy with the amount of risk in your investment. Or maybe it’s time to diversify. There are plenty of good reasons to sell even in a down market. My point in writing this is to explain that losses (and gains too!) aren’t actually real until you pull out. No money is gained or lost until you sell your investment (again, unless the company goes bye-bye or something drastic happens – exceptions to every rule and all that!).

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I may have too many bank accounts. Are you familiar with the envelope method?  You know, that budgeting method where you put all your cash in separate envelopes for each need?  Well I might do that with bank accounts. I have a bit of a collection.

How many bank accounts do I have?

I have two separate banks and with 6 accounts between them. This isn’t even counting my investment accounts!

I know most people only have one main bank, but having two has served me very well. The biggest advantage to having two banks is to protect yourself in case of identity theft. I’ve had my identity stolen twice, and the first time they got into my main bank account. That was a pretty awful experience, and the only thing that kept me afloat was the fact that my other bank was spared from the attack.

Why So many?

Ok, It may seem like overload, but each bank account has a very special and specific purpose. And I need all of them!  Well, I probably could consolidate, but I don’t want to!

Transactions

Ok, lets start with checking accounts. I have two of them. The first one is for all my regularly monthly transactions. This includes my direct deposit for my pay check and all of my bills. It also includes my ATM withdrawals for my weekly cash allowance. I use it the same way most normal folks use their bank accounts.

Big Purchases (and Paypal)

My other checking account is a staging area for big purchases. I know that I’m going to need to buy something big every few months or so (Currently I’m saving for a new water heater) and I need a place to store that money so I don’t spend it on other things. This is a great strategy to budget for those big expected costs.

I also use this account for Paypal for some reason. It seems like my paypal should be tied to my main transactions accounts, and while that makes the most logical sense, it’s not. The reason for this is that I initially set up my paypal for my Ebay Sellers account, and I was saving all the money I made. Therefore, it had to go to this bank in order to go into the correct savings account.

Related: A Tale of Three Vanguard Funds

Short Term Emergencies

The big known expenses have older meaner cousins. These are the big unexpected costs. It’s hard to budget for them because you don’t know exactly what, when, or how much it will be. It may be as simple as a flat tire, or as complicated as broken refrigerator (or worse!). I have a special bank account ready to go with a few thousand dollars in it for just such short-term emergencies.

Long Term Emergencies

Unfortunately, a few thousand dollars isn’t going to fix everything. That’s not really going to help much if I lose my job, or if I can’t work for some reason. Enter my long-term emergency fund. I currently have enough money in it to pay 6 whole months of living expenses or one full year of my mortgage. My goal is to get it up to 1 full year of living expenses.

Travel

We all know I love to travel. So, of course I have a separate account dedicated to that!  I put a little bit of money aside each paycheck to fund my next adventure. I usually have my trips planned out (at least in my head!) months in advance, so I know how much I’ll need. Egypt is going to run me about five thousand dollars, so I have to put up a little more each month for that. But it’s super fun to see my travel fund grow and know I’m getting closer and closer to that awesome trip!

 

FIRE Goals

This is the bank account that I’ll probably get some question marks on from my personal finance friends, but hey, I have to do me. I have one savings account that’s dedicated to all the things I want to do once I quit my job. This includes going back to school, studying Tai Chi in China, buying an RV, and all the other crazy stuff I want to do once I’m job independent. I need to save up a whole lot of money for these things, and I know a lot of my finance friends will tell me that keeping this much cash in a bank account is a terrible idea. I know, it’s not going to grow in the bank. But this money isn’t for growing. I have investments for that. This money is earmarked for specific goals, and I don’t want to risk losing it.

What do you have?

So now you all know my dirty little secret. I hoard bank accounts. Is this normal?  Does anyone else have more than 2 or 3 bank accounts?  Let me know how many you have in the comments!

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"bad investments"

Bad Investments for Beginners

As a companion piece to our Beginner’s Guide to Investing, I thought it would be nice to flip the script and write about some bad investments for beginners. Keep in mind, none of these are bad investments in general (except the shady ones at the end!). They are definitely things to research and consider when you achieve intermediate investor status. However, as a beginner, these are things you should steer clear of until you have a bit more investing experience.

Individual Stocks

I have a few individual stock holdings, so don’t take this to mean that buying company stock is a bad thing. It’s not!  It’s an awesome thing!  I don’t think they are the best investment for beginners for a couple of reasons:

Expensive

Sure, you could buy penny stocks for decent prices, but those are terrible investments (they are more of a gamble). If you are going to buy individual stocks, you need to focus on strong companies that pay dividends. Unfortunately, these stocks usually don’t come at bargain basement prices. In addition, you have to pay a brokerage fee every time you buy and sell, and you can’t set up automatic investing (Well, I’m sure there are websites that let you do that, but it will cost you the brokerage fee each time, and that’s ridiculous). 

Not worth it unless you have lots of capital

Not only are individual stocks expensive, but you need also need a lot of them to see any investment gains. You have to buy at least 100 shares to see any real gains, even on dividend paying stocks. And 100 shares of a quality stock can get crazy expensive! 

Story time! I bought 1 single share of Microsoft stock back in 2010 (ish) for about $26. You know what that stock is worth now? Seven years later, that single share swelled into a whopping 1.25 shares!!  And my investment gains are sitting at around $70!  Can you imagine how much money I’ll make off this investment in another 20 years if the market keeps going the way it is?  You guessed it: Not much.

So why did I buy it?  Honestly, I was just trying to experiment with buying stocks. I had maybe $100 bucks to invest, and instead of putting into a mutual fund, I decided to try my hand at the stock market. So, I bought 1 share of Microsoft for a quarter of my money, then I bought a bunch of useless penny stocks. I guess I got back to my initial investment with Microsoft, so it wasn’t a total loss.

Non-dividend paying stocks are even worse. You could buy 100 shares and never see any investment gains. The one positive side about the Microsoft stock is that it pays dividends, so eventually I’ll have 2 whole shares, and eventually that will grow into more shares. I’ll have something to leave to my niece and nephew, because it may actually be worth some good money by the time they retire.

Risky

Another big drawback to buying individual stocks is that they come with a huge amount of risk. Sometimes companies get bought out and sometimes they go out of business. There may be an economic crash that certain companies just can’t recover from (who remembers Circuit City?) You can risk losing your entire investment if the company that you picked goes bankrupt. You can also lose your entire investment if the company you picked ends up on an episode of American Greed. It sounds funny, but it seriously happens! 

 

Investing in Stocks

Because of those three things, I wouldn’t recommend investing in individual stocks until you are fully reaping the match of your employer sponsored account and invested in some low-cost index funds. I also would recommend getting familiar with the market before making any stock investments. Sign up for Investopedia’s free stock market game  and practice investing with virtual money. Once you have it figured out, take some real money and pick some individual stocks. Start with highly reputable companies that pay dividends.

Bank accounts

Bank accounts (checking and savings) aren’t investments. They are safe havens for your money. If you live in the US and have under two hundred and fifty thousand dollars in the bank, all of your money is insured by the FDIC even if the bank goes under (the only exception would be if the United States collapses, and if that happens I’m pretty sure we will have more serious problems). So bank accounts are awesome safe places to store your money.

Unfortunately though, we are living in a time of low interest rates. According to Bankrate the national average interest rate on savings accounts is just under 1%. That’s ridiculously low! You won’t even beat inflation with that!

Now I’m not saying not to store money in the bank. They definitely have their place. Having liquid cash in accessible accounts is extremely important, but it’s not going to make you any money. Therefore, its not a good investment.

Other Investments

Are you extremely risk adverse but looking for better gains than a bank account?  Well I have two options for you!

CDS

CDs are very similar to bank accounts, but they usually pay a little bit more in interest (though with interest rates so low, they have been fairly close in recent memory!). CDs are long term investments though. The bank is agreeing to hold your money and pay you a higher interest rate than you would get with a savings account, while you are agreeing to not withdraw your money for the life of the CD. There are shorter term CDS (as short as 3 months) and longer term CDS (3 or more years!). In general, you will get higher interest rates with longer terms. You will also find higher rates on the CDS with higher minimum investment amounts. The best CDs are paying about 2.5% interest right now, and while that it better than nothing, it probably isn’t enough to beat inflation in the long run.

Bonds

Bonds are basically loans. There are two types, corporate and government. When you purchase a corporate bond, you are lending money to a company. When you purchase a government bond, you are lending money to the government.

Bonds are way safer than stocks. They are a great investment that helps keep large portions of money safe while still offering a bit of growth to combat inflation. Unfortunately, safety comes at a cost. You won’t grow your money very well if you invest in bonds. This investment type is best for someone who is close to retirement age and wants some protection against market volatility in their final stretch. It’s a bad investment for beginners.

Shady Things

Shady things are bad investments for everyone, not just beginners. But when you are just starting out, it may be harder to spot the red flags. Some examples of shady investments are: a “hot tip”; a friend’s amazing business opportunity, pyramid schemes, non-reputable investment firms, and companies in which the only information you can find about them are obviously affiliate links (you’ll know them when you see them!). It’s unfortunate, but there are tons of people out there trying to get a piece of your money in nefarious ways. My recommendation to avoid this is to always do your research and utilize well established, highly rated firms for all of your investment needs.

Does anyone else have any examples of bad investments for beginners?  Let us know in the comments and lets all partner together to help each other achieve financial independence!

 

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"Spend your tax refund on assets to achieve financial freedom"

Hey folks! Transparency Disclosure- Some of the links in this article are affiliate links. That means I’ll receive a small commission if you decide to click on it and buy something. Don’t worry, it doesn’t cost you anything extra!

 

What?  A personal finance blogger is telling me to spend money?  What backwards world did I just step into?  Don’t fret yet! Yes, I am giving you ideas of the best things to spend your tax refund on, but (most of) these options are financially friendly!

Best Things to Spend Your Tax Refund On

Debt

The best thing you can spend your tax refund on is debt if you have it (and I don’t mean getting shiny new debt!). Put that few hundred extra dollars towards a credit card bill, student loan, or even car payment! It will make you feel good about yourself and push you a little further down the road to freedom!

 

Emergency Fund

Do you have money squirreled away for a rainy day? If not, you can use that nice chunk of change that you get from Uncle Sam to start saving!  Experts agree that you should have three to six months of living expenses saved up in case of an emergency. Getting a tax refund is a great opportunity to either start an emergency fund or shore up the one that you already have.  

Travel!

Yeah, my personal finance blogger friends are going to hate me for this one. But I’m a firm believer that you only live once, and you have to enjoy the time you have. So if you don’t have a lot of debt and have your emergency fund topped off, treat yourself!  Take that trip!  Money spent on experiences is always better than money spent on stuff.

Investments

Another awesome thing to spend your tax refund on is something that makes you even more money!  That’s right, I’m talking assets and investments!   My favorite investment for beginners is Vanguard’s total market fund, but there are plenty of options. They key here is to buy an asset, not a liability. That shiny new car is not an asset!!

File Your Taxes with H&R Block* 

Needs

I get it, sometimes stuff happens and we need to spend some of our tax refund money on fixing that stuff. If your house needs a new roof, or you need a new appliance, now is a good time to get it. You won’t have to budget the money out of your paychecks and the tax refund can kinda feel like free money. But don’t go buying these things just because you can. If your old dryer works great, there’s no reason to upgrade. Be smart about it. These things aren’t assets, so only buy them if you absolutely need them.

Something fun!

Yep, my PF blogger friends are totally going to crucify me!  But what’s the point of having a little extra cash if you can’t spend it on something cool for yourself?  Now I’m definitely not advocating spending all of your tax refund on something fun, but I do recommend taking about 10% of it and blowing it on something that you will enjoy. That might be a nice dinner out, or some new shoes, or even a mini-shopping spree. Giving yourself this little treat will help you feel like all the rest of the stuff is more worthwhile, and it will give you extra motivation to keep up the good spending habits. Think of it as a reward for being smart with the rest of your money!

Related: 6 Reasons why I love getting a tax refund

What am I going to do with my tax refund?

I like to spread my money out a little bit, so I’m going to use a lot of these ideas for this year’s tax return. First, I’m going to top off my short- term emergencies saving account (yes, I have two savings accounts, one for long term emergencies and one for short term emergencies). Next, I’m going to add a few hundred bucks to my Vanguard account. After spending the majority of my return on savings and investments (gotta take care of future Melanie firs!), I’m going to have some fun with the leftovers. I’m going to add a little bit of extra cash to my Egyptian vacation fund, and I’m going to take about a hundred dollars and buy some new clothes.

 

What are you going to do with your refund? Let us know in the comments!

*Links with this next to it are the affiliate links that we talked about above. We appreciate your readership!

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"beginner's guide to investing"

Beginner’s guide to investing

Do you want to start an investment portfolio but aren’t sure where to start? We are here to help you! In this beginner’s guide to investing, you will learn what type of plan to use, what the best investments for beginners are, and how to how to actually invest the money. After all, what are Partners for?

Investment Plans/Accounts

The first thing you need to learn in the Beginner’s Guide to investing is what type of plan or account you should be investing in. The three best account types for beginners are employee sponsored plans, individual retirement accounts, and brokerage accounts.

Employee Sponsored Plan

If your employer offers any type of match, then the first thing you absolutely need to invest in is your employee sponsored plan. Many employers will offer matching contributions of up to 5%!  That’s like getting a 5% pay raise!  It’s basically free money, but you only get it if you contribute. So, if you work somewhere that offers the match, take it!  Start there!

Individual Retirement Accounts

Regardless of whether your employer offers a plan or not, you should be putting money away for retirement. Luckily, most investment firms offer Individual Retirement Accounts (IRAs) to let you do that! There are two types of IRA, the traditional one (usually just referred to as IRA) and the ROTH IRA.

There are two major differences between the IRAs, and whichever you chose will depend upon your individual situation. The traditional IRA is a tax deferred account. That means you can deduct all of the money you put into it from your taxes each year. It also means that you will be penalized for taking out any money before you hit 59 and a half years old. When you reach retirement age and start withdrawing, you will have to pay taxes on your withdrawals as if they are income. If you need the money before you reach the minimum age, you will have to pay the taxes and an early withdrawal penalty. You definitely want to avoid that!

The ROTH IRA is different in both of those regards. You cannot deduct your contributions from your taxes (because you are investing post tax dollars), but you aren’t penalized for taking any of your initial investment out (you are penalized for taking out any profits). You also won’t have to pay taxes on anything that you withdraw when you reach retirement age (as long as you’ve had the account for more than 5 years. There are lots of withdrawal rules for the ROTH IRA, and you can read about them all here

The main thing you should take into account when deciding upon which IRA type you want is your tax strategy. Do you want to pay the taxes now or do you want to pay them later?

IRA problems

The biggest issue with both types of IRA is the contribution limit. You can only put $5500 into any type of IRA account per year if you are under age 50, and only $6500 per year if you are 50 or over. If you want to save more than that (and you should!) you need a different type of account.

 

Non-retirement Brokerage accounts

The last main account type for investing is a brokerage account. These are great because not all of our investments are meant for retirement. You may be on a path to financial independence, so you may need to start withdrawing money from your investments before you get to the traditional retirement age. There are plenty of companies that offer non-retirement brokerage accounts. Some banks even offer them as well. Vanguard is my favorite, but there’s also Fidelity, Merril-Lynch, Edward Jones, and a whole lot of other investment management companies (you can also open IRAs with these companies, if you want all of your investments in one place). 

Types of Investments

Ok, so you’ve decided upon what type of account you need to open. The next step in our beginner’s guide to investing is to decide which type of investment is best! There are basically only three different types of investments that I would recommend to beginners. These are: index funds, target date funds, and mutual funds.

 Need a ledger to track your investments? Check out this accounting book on Amazon* 

Index funds

Index funds are my favorite type of investment. They are low cost funds that track certain market sectors. They usually aren’t actively managed, so whatever companies are tracked in the fund are the ones that you are invested in. One of the most well-known index funds is the S&P 500,  an index fund which tracks about 500 of the biggest companies in the US.

Related:  Which Vanguard total market fund should you pick?

My favorite types of index funds are full market index funds, because they basically track the entire stock market. I highly recommend Vanguard’s total market fund. It is well diversified and has a super low expense ratio. That means that it won’t tank if only a certain sector of the market tanks and it doesn’t cost a lot to maintain. Additionally, it is very very rare that a total market fund will completely go out of business. The markets may have a correction and go down, but as long as you stay invested you probably won’t lose money over time. Remember losses aren’t real until you cash out.

Target Date Funds

Target date funds are index funds that automatically adjust the amount of risk they are exposed to as the fund holders get closer to retirement. This means that they will slowly sell off equities and move into bonds as the target date gets closer.

 My work has 6 different options for target date funds: 2025, 2030, 2035, 2040, 2045, and 2050. Every five year a new fund gets created. I have some of my money invested in the 2040 fund, because that is when I’ll be close to retirement age. My older coworkers are invested in the 2030 or 2025 funds, because they are much closer to retirement.

The target funds are the absolute best for people who hate actively managing investments. If you want to be a “set it and forget it” investor, this is the best type of fund for you.

"Beginner's guide to investing"
 

Mutual Funds

Mutual funds are another good investment for beginners. Usually, a mutual fund will track a certain sector of the market. Some mutual funds are dedicated to certain sized companies while some invest in certain industries. Mutual funds are usually actively managed, which means that somebody is working every day buying and selling stocks to try to boost the fund’s performance. This also means that they have a higher expense ratio (cost more!). All of the people invested in the fund are paying the fund manager to make those trades. Sometimes this ends up being beneficial, and the fund outperforms the general market. Sometimes it doesn’t. Investing is inherently risky. If you do decide to invest in mutual funds, be sure to diversify and pick a few different ones. That way, you are protected if something happens to a certain sector.

How to invest

The last main step in our beginner’s guide to investing is how to invest. There’s really only one option that I like, and that’s dollar cost averaging. With this method, you take a regular amount each paycheck/month/week and invest it. I have $100 per paycheck automatically going straight to Vanguard, regardless of what the market is doing. Sometimes you are buying when the market is up, and sometimes you are buying when the market is down. It averages out over time.

Its also super easy to do. You just have to set up an automatic withdrawal from your checking account or bank account. Most investment firms have an online step-by-step, so it’s super easy to set up. 

The other methods are lump sum purchases and investing when you have the money. Investing at some point is better than not investing at all, but if you make it a regular thing it’s easy to stick to. Also, with dollar coast averaging, you don’t even think about timing the market, so it’s great psychologically too.

Beginner’s Guide to Investing

So there you have, a quick and hopefully easy beginner’s guide to investing. I hope this helps you start your own journey to financial independence. We also published a post outlining the bad investments for beginners,  check it out to learn what not to do!

If you have any additional investment ideas or tips that would help beginners out, please feel free to share them in the comments!

 

*Links with this next to it are affiliate links. That means I’ll receive a small commission if you decide to click on it and buy something. Don’t worry, it doesn’t cost you anything extra! Also, I am not in anyway affiliated with any of the investment firms that I mentioned (outside of having accounts with some of them). I recommend Vanguard because I use them and I like them, not because they pay me to!

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