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by Dedric
Other articles in this issue offer spiritual advice on bringing more prosperity into your life. This article complements them by focusing on the practical nuts and bolts of money management.
However, straightening out your finances is, in and of itself, a magickal act. Money is an effective magickal tool to get what you want out of life, including furthering goals such as healing Mother Earth and helping other humans. If you straighten out your financial life, you'll have that much more money energy for all the goals you seek. Furthermore, you'll free up energy you're now spending worrying about your finances.
To help you magickally as well as practically focus on prosperity, I include affirmations at the end of each step proposed following.
Please note: I am not a financial professional. This article represents what I have chosen to do, and what many financial experts currently recommend, but you should do your own research, and you are responsible for your own decisions. This article was written in April 2001, and the specifics of United States tax law will change over time.
Step 1: Spend Less, SoYou Earn More Than You Spend
Earning more than you spend and getting off the consumer treadmill can reduce your level of anxiety and leave you with greater appreciation for the deeper joys in life. This is the step where personal growth, concern for the environment and concern for your foundations for prosperity can meet.
Here are some tips on how to reduce your spending:
For one week, keep track of all the money you spend. At the end of the week, think about whether each type of expense could be reduced or eliminated. Do the same thing with the bills you paid at the end of the previous month.
If you're surprised by how much you spend dining out, and time is the issue, try to find a workable arrangement under which you do all of your week's cooking on one evening. When you do dine out, try less expensive restaurants. You might try one of your city's Vietnamese noodle soup ("Pho") restaurants -- they're very inexpensive, and the food is delicious.
If you find you spend a lot on entertainment, try holding your entertainment to high standards. Ask yourself: Would this evening out be more satisfying that a candlelit evening at home enjoying dinner or watching a rented (or library-loaned) movie with my friends? Can I trade CDs with a friend, or borrow them from the library, when I'm tired of the ones I have?
If you gamble, quit. You lose an average of 50 percent of your wager each time you play a state lottery, and an average of 5 percent of your wager each time you play a Vegas game. If it's truly the game you enjoy, try switching to a computer card game where you aren't wasting real money.
If you rent an apartment or house all by yourself, keep a close eye on the amount you spend on rent. Consider shared living arrangements, ideally on a direct bus line to your day job, which are the best value.
If you need insurance, choose the highest deductible you can afford, so your premiums will be low, and don't carry life insurance unless you actually need it. If you do need life insurance, then you may wish to look into an inexpensive "term" policy rather than "whole life."'
If you purchase a car, which is more expensive than using the bus system, don't finance it. Try to find a good used car before considering a new one.
If you're not in good condition, consider that one of the easiest ways to improve the quality of your life, while also saving money on medical bills in the long run, is to improve your health. Exercise, adopt a heart-friendly diet and quit smoking.
When looking for clothing, try some of the better second-hand shops before buying new.
On your checking account, avoid monthly fees and minimum balances, which tie up your money, and do what you can to avoid ATM fees.
Rather than buying books or renting movies, try checking them out from libraries, which are a great place for fiction and documentaries. I've found you can often read at the larger bookstores, which now provide comfortable reading chairs.
If you're itemizing deductions on your federal taxes, then be sure you're taking all the deductions you're eligible for. For example, you can deduct work expenses that your employer doesn't reimburse, expenses related to changing jobs and expenses for continuing education classes that help you do your job better. You can also deduct the "fair market value" of items you donate to charity; you'll need to keep a list of the donated items, but the charity may be able to provide you with the forms you need. Of course, there are caveats; see the official IRS publications for full details.
Step 2 addresses eliminating your credit card debt, but even before that, consider lowering the interest rate on your credit cards. Find a credit card you're eligible for that has a very low interest rate, and tell your existing credit card company that you'll need to switch unless they can bring your rate down to that level. Avoid credit cards with annual fees, particularly once you've paid your cards down.
All in all, reconsider your expectations of what it means to live well. As the book The Millionaire Next Door by Thomas J. Stanley and William D. Danko describes, it's a myth that millionaires spend money frivolously; the majority of real millionaires wear reasonably priced clothing, drive reasonably priced cars and look for bargains when they shop. This is one of the reasons they became millionaires in the first place.
Your affirmation for Step 1: "Each dollar has value."
Step 2: Eliminate All Credit Card Debt
No investment can consistently give you a higher rate of return than your credit card debt takes from you. In other words, it's pointless to begin investing until your credit card debt is eliminated, and it makes sense to use existing savings to pay down this debt.
There are circumstances when it's necessary to pay for something using Visa or MasterCard. However, this does not mean you need a credit card. Most banks now offer Visa debit cards, which pay for purchases out of your checking account balance but offer no credit past that amount.
In general, the only circumstances in which debt can be "good" are as a home mortgage or (under the assumption you cannot afford to purchase these things outright) as a low-interest loan to attend college or start a small business.
Your affirmation for Step 2: "Interest is not something I pay to other people; it is something other people pay to me."
Step 3: Open an Investment Account
I'll look at two types of investment, long-term and short-term.
Possibilities for Long-Term Investments
For the last two centuries, stocks have outperformed all other investments. Financial experts are now practically unanimous in recommending that your long-term investments be in stocks. They define long-term investments as those that you don't anticipate needing to spend in less than five years.
Stocks get a bad rep because individual investors misuse them, typically in ways that suggest they're approaching the market as a gambler rather than as an investor, such as the following:
In Step 1, I mentioned the confluence between healthy living and saving money. Now, I'd like to identify the confluence between stress reduction and effective investing. When you invest in stock funds for the long term, you're free to disregard market fluctuations while still getting the best possible yield for your money.
Many financial experts agree that, given the choice, you should select "no-load" index funds when you invest in the stock market. An index mutual fund owns a full participation in some portion of the market, matching the shareholdings of a target index, such as the Standard & Poor's 500 Composite Stock Price Index (S&P 500). "No-load" means these funds don't have various types of sales fees. Two of the most popular types of no-load index funds are S&P 500 funds and total market funds, which cover the entire market. The book You Have More than You Think, by David and Tom Gardner, goes into more detail as to why load-free index funds can be a wise choice.
Possibilities for Short-Term Investments
Money market funds and bond funds are to short-term investing what stock funds are to long-term investing. These funds are also available in tax-exempt versions, though the tax-exempt versions would probably only make sense for someone in the highest tax bracket who is investing outside their retirement plan.
You may notice that I have ignored socially responsible investment funds (SRIs). That's because I don't believe SRIs are all they're cracked up to be. To start with, on a fundamental level you can't invest in companies that have something other than self-interest as their basis: Only for-profit corporations may issue public stock, and by definition a for-profit corporation is looking out for itself.
The best that SRIs can do is avoid certain companies, rather than actively encouraging positive change. Even so, you still can't completely avoid "bad" companies, because almost any financial institution or company you may deal with might invest in these companies.
Furthermore, I talked to a financial advisor recently and confirmed that something else I suspected was true: The return on SRI funds is often terrible.
I believe a viable alternative is to select something like a no-load, total market index fund, which invests in every company in the market, both "good" and "bad," and use what you earn to assist the efforts of nonprofit organizations that are actively doing good.
To get started on investing, you can try Vanguard or Fidelity. Vanguard, established in 1975, is currently one of the largest providers of no-load stock funds; they also offer bond funds, money market accounts and retirement plans (see www.vanguard.com). Fidelity is another popular choice, though many of their funds aren't no-load funds (see www.fidelity.com). Or seek out your own preferred provider.
Your affirmation for Step 3: "The money I invest deserves the best available rates of return."
Step 4: Maximize Your Retirement Plans
One of the best ways of becoming financially secure is to maximize your retirement plans. Money in retirement plans can grow and compound tax-free until you reach retirement. In most cases, you can also deduct from your taxable income the amount you contribute to them.
Mentioning the word "retirement" brings up, for many people, the question of whether they're sacrificing enjoyment in their youth for a future in which they might be less able to enjoy themselves. But consider the following three things:
Creating one or more retirement accounts is an easy way to generate a staggering amount of wealth, for your good or the good of a worthy cause.
Some parents believe that, rather than contributing to retirement plans, they should put their money into a nonretirement account to save for their children's higher educations. Actually, the opposite can end up being true. As of year 2000, the money in retirement plans is frequently excluded from consideration when your children apply for financial aid (particularly for state universities). Thus, by continuing to max out your retirement plans throughout your life, you might allow your child to qualify for financial aid that he or she might not otherwise qualify for. Because your own retirement remains secure, you'll also never have to worry about feeling like a burden to your children later on in life.
There are four basic types of retirement plans, as follows. By law, you may contribute to as many of them as you qualify for.
Employer-Sponsored Plans: 401(k) or 403(b)
We all need to do what we love, both for the sake of personal happiness as well as for the long-term viability of our chosen careers. However, particularly if you do not have access to an employer-sponsored retirement plan through your spouse, I would encourage you to look long and hard within your profession for an employer who, at a minimum, offers health insurance along with a 401(k) or 403(b) retirement plan.
If your employer matches your contributions, then you should definitely max out the company plan before looking at any of the other retirement plan options that follow. If a no-load stock index fund isn't one of the investment options that your company currently offers under their plan, then nag your financial officer until they offer it.
Your contributions to this sort of plan are tax-deductible.
Self-Employment Plans: SEP-IRA, SIMPLE or Keogh
SEP-IRA, SIMPLE and Keogh self-employment plans are the equivalent of 401(k)s for people who are self-employed. Your contributions to these plans are tax-deductible, and by law you can sock more money annually into these than you could into a 401(k) or a traditional or Roth Individual Retirement Account (IRA).
You can set up SEP-IRA and SIMPLE plans through Vanguard, Fidelity and other similar institutions.
Individual Plans: Traditional IRA or Roth IRA
You can contribute up to $2000 a year to traditional or Roth IRAs. They're available to individuals with employment or self-employment income, to nonworking spouses of individuals with employment or self-employment income and to individuals receiving alimony. You have complete control over what investment to select within your own IRA.
Although your money grows and compounds tax-free within your IRA, whether you can deduct your $2000 contribution on your taxes depends on how much you earn, whether you're married, whether if married you're filing jointly, whether you're covered by a employer-sponsored retirement plan and whether you're contributing to a traditional IRA or a Roth IRA.
For a traditional IRA, for the year 2000 as a single filer you can take the full deduction on a $2000 contribution if you weren't covered by any other retirement plan. If you did participate in another plan but your income was less than $32,000, you can also take the full deduction.
You cannot deduct amounts contributed to a Roth IRA on your taxes. Making a $2000 contribution to a Roth IRA instead of a traditional IRA for this year was only an option if your income was less than $95,000.
For current information on IRA eligibility, including information of interest to married filers, see IRS Publication 590 at http://ftp.fedworld.gov/pub/irs-pdf/p590.pdf.
Again, you can set up traditional and Roth IRAs through Vanguard, Fidelity and other similar institutions.
Annuities
If you don't qualify for any of the above plans -- perhaps because you don't earn money through either an employer or formal self-employment, and you aren't the spouse of someone who does -- or if you've maxed out all the plans you're qualified for and want to contribute more to your retirement, or if you want to dump a bunch of non-retirement money into a retirement plan in the hopes of not looking too wealthy for your child to receive financial aid, then you might consider an annuity. (Or, if you're a parent with extra money after your retirement plan, you might want to take advantage of some of the special educational investment options described in Personal Finance for Dummies, by Eric Tyson.)
You don't get to deduct your contributions to annuities, but the money you put in them grows and compounds tax-free, as in all of the other retirement plans described preceding. Annuities' advantage is that you can contribute as much money to them as you like, whenever you like, essentially regardless of where your income comes from.
Annuities should be a last resort: You don't get to deduct the money you put in them, and because they involve higher fees, it takes longer for their returns to outstrip nonretirement investments than with other retirement plans.
Your affirmation for Step 4: "I am taking charge of my financial future, and sowing the seeds of positive change."
To conclude, it saddens me that money is such a common source of strife within people's lives and between partners, and that so much potential for positive change is wasted through ignorance about the power of effective investing and compound interest. I hope this article has shed light on the basic steps by which anyone can create personal prosperity.