Monday, May 08, 2006

Personal Finance 101

Personal Finance 101

1. Credit cards - Never use a debit card. They can incur fees and also
if lost can cause losses to your account. Obtain a credit card that gives
rebates. Some card will give you 1% back on all your purchases each month.
Always pay off your monthly balance - on time. Never let the revolving
credit kick in. They can charge you as high as 18% interest or more on your
balance month after month.

2. Banking - Select a bank that will provide free-checking and have low
minimum balance requirements. Always maintain the minimum balance in the
account or they will charge you fees every time you go below the balance.
Pick an on-line bank such as ING which currently pays (4.15% interests as of
4/2006) which is much higher than any commercial bank. They will allow you
to link the account to any checking account from another bank so that you
can transfer money back and forth within a day.

3. Retirement saving - If your company has a 401K plan, you should take
advantage of it. They usually have a match percent as incentive to enroll.
If you can, put away the maximum percent allowed. This will give you "free"
money and will compound tax free until you retire. It is the best saving for
your retirement. The earlier you enroll, the most you will get out of it.

4. Compounding formula - the Rule of 72. The rule says that to find the
number of years required to double your money at a given interest rate, you
just divide the interest rate into 72. For example, if you want to know how
long it will take to double your money at eight percent interest, divide 8
into 72 and get 9 years. If you at age 22, put away $5000 per year, for 43
years with 6% interest compounded monthly, you will have over $1 Million
dollars by age 65. Never underestimate the power of compounding - Time is on
your side.

5. Taxes - You should always try to minimize your income taxes by legal
means. By itemizing your deductions, you can reduce your taxes. Keep good
records, and save your receipts.

6. The best deduction is your home mortgage. Your house is usually your
most valued possession. When you are young, save for the down payment,
usually 20% of the sale price. Once you have it, buy a starter home. Once
you have a house, you can use "leverage" to work for you and also get the
mortgage tax deduction. It's like getting a double bonus. Leverage comes
when you buy something of value with borrowed money. When the value of the
house goes up, you are making a huge return on your small investment. When
you are ready to trade up, you will have enough equity built in so that it
won't be so painful.

7. Credit Score - It is very important to maintain a good credit score.
This will allow you to obtain a lower rate loan. To get a good credit score,
make sure you pay all your bills on-time. You can get a free copy of your
credit report once a year. Checkout

8. Passive Investments - (Mutual Funds) - If you don't want to actively
manage your investments, select a no fee (no load) mutual fund such as
Vanguard family of funds. Put your extra funds (savings) into the fund on a
regular basis (monthly or every pay period). This will automatically "dollar
cost average" your investments. Check the statements once or twice a year to
see how well your fund is doing compared to others and if necessary move it
around to get the better returns.

9. Active investments - (Stocks) - If you want to actively trade
stocks, you need to do your homework. You will need to monitor your stocks
on a daily or weekly basis. You should only buy stocks you know (companies
you understand) and buy through a discount broker that charge low fees ($7
per trade). Buy stocks using limits. Don't over pay for a stock. Once you
buy it, put an automatic "stop loss order" on it so that if the value of the
stock drop below 10% of your purchase price, it will automatically sell and
thereby minimizing your total loss. You also need to diversify your
holdings. Don't put more than 5% of your total investments in any given
stock. Try to pick companies from different business sectors. Recently, the
energy sector and the precious metals sector have done extremely well. Don't
be too greedy. Once you make 25% gain, you should cash out some to preserve
your winnings.

10. Budgeting - You need to setup a simple budget that tracks all your
expenses, on a monthly basis. Make sure you include items that you pay
annually such as insurance, taxes.Check this against your income and see
what the delta is. Any extra money left should be put into your savings
account. You will need about 6 months of funds for your emergency - such as
if you loose your job. You must adjust your spending to within your income
level. Don't forget, even millionaires can go broke. If you spend more than
you make - you will go broke. That is true with income of $1 Million or
$20,000 per year. You must live within your means.

11. Charity - You should always count your blessings and donate a small
percentage of your income to Charity. It is tax deductible.

12. Debts - Avoid any debt, personal or business. Debts should only be
incurred for a house or a car or emergencies. When ever possible, pay off
your debts. You will sleep better and have less stress. You will feel "free".

-Jack C. Lee

May 7, 2006


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