Things You Should Know By Now- MONEY!

If you haven't heard about this yet I'm going to blow your mind. Compound interest. Rather than telling you about it, let me show you.

I have been excitedly trying to explain to my nanny Lucy, why her first financial priority should be to open and max out a Roth IRA. She is just 21 and she mentioned that he wanted to discuss his finances with me. But be careful what you wish for I guess.

I immediately started scouring the Internet for one of those amazing compound interest charts that shows how Person A who starts saving at 22 will end up with hundreds of thousands more dollars than Person B who waits until 30. This is what I wish someone had shown me at a young age! It would have inspired me to start investing at age 14! (I didn't really get my stuff together until much much later, when I opened my own Roth IRA and funded it with low cost index funds).

If my nanny starts investing $5000/yr in a Roth IRA today, she will have $3,331,386 at age 65. If she waits one year to start, she'll have $3,100,621--that one year $5,000 delay costs her $230,765 at retirement! If she waits five years to begin, she'll end up with only $2,321,986!

Now I know the market has been a HORRIBLE, but investing is still the way to make money.

I know I should know more about investing and have already met with a financial planner. I need to get her back here though!

Suze Orman (nazi money mama) says right now, in this recession you should be:

Living on half your income and saving the rest.
Fund an eight month emergency fund and just pay minimums on credit cards.

Dave Ramsey says (this may have changed a little since the recession):

Baby Steps: Don’t start investing prior to completing Baby Step 3.

1. $1,000 to start an emergency fund.
2. Pay off all debt using the debt snowball.
3. 3-6 months of expenses in savings.
4. Invest 15% of household income into Roth IRAs and pre-tax retirement.
5. College funding for children.
6. Pay off home early.
7. Build wealth and give! Continue to invest in mutual funds and real estate.

What's your financial plan? Do you have one?
xo The Mrs.


Uncommon Blonde said...

I love Dave Ramsey, I heard him speak last year and it totally changed how I budgeted for things

CashmereLibrarian said...

Sage advice. However, my financial plan is to play the MegaMillions twice a week until I hit the biggie! ;-)

Happy Homemaker said...

You are such a good person to keep talking about financial planning. I hate that in some social circles it is considered a taboo topic- I mean, how are people to learn and discuss ideas with people they trust if those ideas cannot be talked about??

Mr. HH and I were lucky enough to learn about compounding interest when we were 20 years old (still in college). This began Mr. HH's fascination with finances. (Thank goodness because me... notsomuch)

We grew up in families where it was NEVER an option NOT pay the credit card bill EVERY month so luckily we've never struggled with cc debt.

And we do live on half of Mr. HH's income and invest the rest. With no family money, I might add... Mr. HH finds investing easier when the markets are down because your money goes further!

We do have several more years before our mortgage will be paid off. But we refuse to have a car payment.

So, I know this is a lonnngggg comment (you don't have to publish it) but maybe someone will read what we do and gain something from it? I'm really proud of Mr. HH for securing our future- even though it is hard for me sometimes to live amongst friends who live paycheck to paycheck. I just have to keep reminding myself what is truly important- security, not stuff.

debra said...

Ooh, my most favorite subject! I am so glad you brought it up. It is so important and people just don't talk about it - and then they end up broke & eating Alpo at retirement.

Happy Homemaker said alot of what I would have so I won't repeat it.

I listen to Dave Ramsey everyday and I will say that his advice hasn't changed even with the economy the way it is.

Thanks! If you help one person to invest for the future this post will have been worth it- what am I talking about - your posts are ALWAYS worth it!! :)

Summer Wind said...

My first semester of college, we learned all about these. It made me want to open so many accounts and start saving today!

PaperCourt said...

Great post! I was lucky enough to grow up with a smarty pants mom who taught me all of this....then I married a smarty pants man who keeps me in line financially.

We are big time savers. We definitely don't like in the biggest house or have the fanciest cars but we now how the opportunity to send our son to a top notch school.

Yay for saving!

icing on the cake said...

So wise! Thanks for posting this.

The 5 Bickies said...

Great post and I love Happy Homemaker's comment. This topic wouldn't be so taboo if so many weren't living beyond their means or so obnoxious about their spending.

I wondered about your Suze Orman comment to "just pay credit card minimums". I don't recall hearing her say that.

I struggle every day with save versus spend but thankfully I am married to a man who is a very good balance and reminds me frequently what it's all about.

Claire said...

Love Dave Ramsey - been through his class twice now and it helps everytime - one mom had her high school son go through it with her - can you imagine having that knowledge in high school!!! I love my all paid for second hand car!! Great post - and I really appreciated the one on government!

ilovepink said...

I married a financial planning nazi! It's like living with Suzi ir Dave! Ha! He is strict and frugal but, I love him and know he is right (and that is often hard to say when I have the desire to spend spend spend!).
On the "recession": I think our pastor had a good point. We should remember that all things happen for a reason. Use this time to cherish the simple things in life and focus on what really matters. For me, that is family.

Buford Betty said...

I'm definitely on Dave's plan. And that is still his plan - he hasn't changed anything because of the economy. He still says that if you have consumer debt and no emergency fund, you have no business investing. Which I totally agree with - we've put our 401(k) contributions on hold while we're rolling through our debt snowball.

But yes, if you are in a position to invest, this is definitely an awesome time - the market's on sale, hello!

Bee and Rose said...

HUGE fan of Dave Ramsey! When my husband had 3 unexpected heart attacks last year, it was really time to start being smart with the moo-lah:) I realized that I will probably be widowed young and I will have two kids who want to go to college. (One in medical school!) I love Dave's plan. It works!