Financial Thoughts

The year is quite young and I have wanted to write about some ways you can save your money in 2007. This is one of my favorite topics, although I tend to avoid writing about it. What is written here is opinion and suggestion only; please do not take it as the only way to do things, or even the best way of doing things. What I have done here is prioritize this list in the order of importance.

First, if your employer offers a retirement plan, make sure you have signed up for it and contribute at least the amount that they match. If it is a 401(k) plan and your employer matches contributions up to 4%, then it is smart to invest at least 4%. You can save more, but at a minimum contribute what your employer matches. You will also have the advantage (usually) of getting to reduce your taxable income by what you save towards that employer retirement plan, which will lower your taxes.

Second, focus on paying off any high-interest debt. This has a significant effect on how much you can save. What is high-interest debt? Any account that has an interest rate that exceeds the amount you can earn in your high-interest savings account (see below). In this example, focus on paying all credit accounts that exceed 4.5% interest. And start with the highest interest account first and work your way down. Make the minimum payments on the other accounts, and focus your maximum payment on the highest interest-bearing account. For credit accounts less than the 4.5% example rate (usually student loans and even short-term "no interest" accounts), simply make the minimum payment.

Third, open a high-interest savings account. You can earn at least 4.5% interest currently in many of the online accounts, such as ING Direct. This is a great place to keep short-term savings, such as emergency funds. It is recommended that you have between 3-6 months in expenses saved in case of emergency. While this amount might seem daunting, you can start by saving small amounts today.

Fourth, consider opening and investing in a Roth IRA. This retirement account type is one of the best savings tools today. A Roth IRA is an account in which all earnings and interest are tax free upon retirement. Invest as much as you can in this account, up to the yearly contribution limit ($4,000 in 2007). You can open a Roth IRA in a number of investment firms such as T. Rowe Price, Vanguard, or Fidelity.

Fifth, consider investing in the stock market. One mechanism for this is a drip, which is an investment account where you purchase a certain dollar amount of shares in a stock or mutual fund every month. This is an excellent way of investing small amounts that build up over the long term. And it is a good place to begin investing in the stock market without committing substantial amounts of money.

You can also consider opening a brokerage account to invest in the stock market. In the suggestion above (DRIPs) and in this one, make sure the account supports dividend reinvestment. This is one of the most important requirements in a brokerage account. When a stock pays a dividend, instead of depositing that amount into your account, it will just buy more of that stock for you. Over the long term, this can result in significant increases in your portfolio.

This list may seem overwhelming, but it is only a prioritization of where you can save money in order to maximize your finances. If you start with step 1 and 2, you will be doing great!

1. Contribute at least what your employer matches in your retirement account.
2. Pay off high-interest credit accounts, beginning with highest rate first.
3. Open high-interest savings account and build up at least 3-6 months in expenses.
4. Open and invest in a Roth IRA.
5. Invest in the stock market, through DRIPs (automatic monthly investments) or a brokerage account.

What I will do over the next few weeks is specifically post on each one of these list items in greater detail. As always, if you are in doubt of what to do, there are plenty of tools out there to answer your questions, and you can always consult with a financial advisor. The choice is yours. Begin saving today!