Get a Financial Life: Personal Finance in Your Twenties and Thirties by Beth Kobliner

From the Publisher

With 100 NEW FINANCIAL web sites!

If you're like most people, you want to get your financial life in order but don't know where to begin. Since its first publication in 1996, Get a Financial Life has helped thousands of people get out of debt, start saving, and begin investing. This updated edition -- expanded for the Internet age -- includes the latest information on how to:

• Use the Web to find the best auto loans, mortgages, and credit cards
• Invest in the stock market wisely and painlessly
• Refinance your high-rate debt -- and avoid hidden fees and traps
• Take advantage of the latest tax breaks -- including deductions for student loans
• Build a serious nest egg with long-term savings plans like the new Roth IRAs

You will also find classic, easy-to-understand advice on money basics -- everything from 401(k)s to car leases, from credit reports to life insurance, from buying the right mutual funds to buying a home of your own. Whether you earn $20,000 or $200,000, Get a Financial Life will help you navigate the new world of personal finance.

BUST Magazine

If you use money and are numbstruck by the world of finance, run—don't walk—to get this book....Kobliner id friendly, yet direct, and gets the information out by using an economy of words unmired by cutesy anecdotes...I would heartily recommend it to anyone who is as foreign to all matters of finance as I am. Was.

Bust Magazine

If you use money and are numbstruck by the world of finance, run—don't walk—to get this book....Kobliner is friendly, yet direct, and gets the information out by using an economy of words unmired by cutesy anecdotes...I would heartily recommend it to anyone who is as foreign to all matters of finance as I am. Was.

Tom Gardner

With numerous insights, this fine book demonstrates that, through discipline and enterprise, anyone can win their financial independence. (Tom Gardner, co-founder of The Motley Fool)

The New York Times

A highly readable and substantial guide to the grown-up worlds of money and business.

Newsweek

A daring book....A life's worth of smart financial advice.

Fortune - Eric Gelman

Smart, thorough-a tremendously useful guide to all the essentials of sound personal finance.

The New York Times -

Beth Kobliner is telling you it's time to smell the latte. In Get a Financial Life, Kobliner serves a rich, smooth brew of common sense on everything from paying off your student loan to saving for (gasp) your own kid's future. The advice is thoughtful, precise, and up-to-date. But the simple, step-by-step explanations make getting a financial life easier than steaming the perfect froth on a cappuccino.

Library Journal

Those in their twenties and thirties have special financial concerns, including paying off college loans, obtaining credit cards, buying a car, and financing a first house or apartment. Kobliner, a contributing writer for Money magazine, provides some assistance here. She "focuses exclusively on what you need to know now when you're just starting to pay attention to money matters whether you earn $15,000 or $150,000, whether you're single or married, whether you're financially inclined or financially challenged." Those consulting this book will find useful information and advice, from buying insurance to filing an income tax return. Helpful features include a bibliography of information resources and lists of agencies to contact. This source provides a helpful road map for young people striving for financial security.
-- Lucy T. Heckman, St. John's University Library, Jamaica, NY

What People Are Saying

Kobliner's done it again! Get a Financial Life gives clear and straightforward advice on how to manage your money-even in a financial meltdown. A must-read for 20-and 30-somethings who want to be fiscally smart and financially secure. --Soledad O'Brien, CNN

Beth Kobliner's book provides a much-needed and sensible guide. --Paul A. Volcker, Former Chairman, Federal Reserve Board

One of the best guides to help young people get a handle on money matters. --Burton G. Malkiel, Chemical Bank Chairman's Professor of Economics, Princeton University; author, A Random Walk Down Wall Street

Stop worrying and start reading Beth Kobliner's Get a Financial Life, the best book to help you understand your money in the toughest financial market since the Great Depression. --Jim Cramer, CNBC's Mad Money

A highly readable and substantial guide to the grown-up worlds of money and business. --The New York Times

Get a Financial Life gives you the essential information you need to get your finances in order as you're starting your career. The rest is up to you. Educate yourself, get motivated, and get your finances in shape now by reading this book. --Sharon Epperson, CNBC Personal Finance Correspondent and author of The Big Payoff

Smart, thorough -- a tremendously useful guide to all the essentials of sound personal finance. --Eric Gelman, Fortune

A daring book....A life's worth of smart financial advice. --Newsweek

With numerous insights, this fine book demonstrates that, through discipline and enterprise, anyone can win their financial independence. --Tom Gardner, co-founder of The Motley Fool

Beth Kobliner is telling you it's time to smell the latte. In Get a Financial Life, Kobliner serves a rich, smooth brew of common sense on everything from paying off your student loan to saving for (gasp) your own kid's future. The advice is thoughtful, precise, and up-to-date. But the simple, step-by-step explanations make getting a financial life easier than steaming the perfect froth on a cappuccino. --Saul Hansell, The New York Times

Paul A. Volcker
Beth Kobliner's book provides a much-needed and sensible guide.

Jim Cramer
Stop worrying and start reading Beth Kobliner's Get a Financial Life, the best book to help you understand your money in the toughest financial market since the Great Depression.

Soledad O'Brien
Kobliner's done it again! Get a Financial Life gives clear and straightforward advice on how to manage your money-even in a financial meltdown. A must-read for 20-and 30-somethings who want to be fiscally smart and financially secure.

Sharon Epperson
Get A Financial Life gives you the essential information you need to get your finances in order as you're starting your career. The rest is up to you. Educate yourself, get motivated, and get your finances in shape now by reading this book. (Sharon Epperson, CNBC Personal Finance Correspondent and author of The Big Payoff)

Burton G. Malkiel
One of the best guides to help young people get a handle on money matters. (Burton G. Malkiel, Chemical Bank Chairman's Professor of Economics, Princeton University; author, A Random Walk Down Wall Street)

Product Details

• Table of Contents
• Read an Excerpt
• Read a Sample Chapter

Table of Contents

Read an Excerpt

1

CRIB NOTES

A Cheat Sheet for Time-Pressed Readers Who Need Help Now

If you're overwhelmed by the idea of delving into chapter after chapter on personal finance, this section's for you. The advice below cuts to the chase and puts you on the road to a solid financial life. Adopting even one or two of these strategies will leave you ahead of the game, whether the economy is soaring or suffering.

Of course, as someone's mother once said, cheaters only cheat themselves. And while this chapter is a good launching pad, ignoring the remaining nine chapters is a little like relying on the Cliffs-Notes version of Macbeth: You'll get the basic plot line but never understand what all the fuss is about. Still, the following will give you the basics. I've tried to list them in rough order of importance, but your priorities will depend on your own situation.

1. Insure yourself against financial ruin.

There's been lots of talk recently about the health insurance crisis, but not much action. As a result, nearly 20 million people (18 to 34 years old) are uninsured. If you're one of them, you need to figure out a way to get some coverage. And even if you're insured through your job, you need to be smart about the choices you make. The right health insurance will protect you in case you have a serious accident or illness and guarantee that you don't bankrupt yourself or your family if you are beset with major medical problems. For that reason, health insurance should be your number one financial priority.

If you work for a company that offers employees health insurance, you're lucky;participating in your employer's group plan will almost always cost you much less than buying a policy on your own. You may be given more than one type of plan to choose from through your employer; make sure you consider not only the price but also the extent of the coverage you will receive. If, for example, you're thinking about joining a type of plan called a health maintenance organization (HMO), inquire about exactly what is covered, ask about the procedure for seeing specialists, and find out what happens if you want to visit a doctor who doesn't participate in the plan. Before you sign up for any plan, talk to coworkers about their experiences with the various options.

If the company you work for does not offer health insurance, you'll have to pay for it yourself. If you recently graduated from college, see if you can extend coverage from your parents' plan for a few years. (Some states will let you stay on your parents' insurance until you turn 26; New Jersey is the only state that will give you until age 30.) If not, see if there are any organizations you can join — a trade association, for example — that will allow you to purchase health insurance at a group rate. If you're job hunting, at the very least get so-called "temporary" coverage that will protect you from true medical disasters. If all else fails, you'll probably need to purchase a policy on your own. Go online to compare prices for individual policies — either temporary coverage or longer term — from sites like eHealthInsurance (www.ehealthinsurance.com) and Net-Quote (www.netquote.com), as well as your local Blue Cross/Blue Shield company (www.bluecares.com).

For additional tips on purchasing all types of insurance, see Chapter 8.

2. Pay off your debt the smart way.

More often than not, the smartest financial move you can make is to take any savings you have (above and beyond money you need for essentials like rent, food, and health insurance) and pay off your high-rate loans. The reason is simple: You can "earn" more by paying off a loan than you can by saving and investing. Paying off a credit card that has a 16% interest rate is equivalent to earning 16% on an investment, guaranteed — an extremely attractive rate of return. (Actually it's even better than that; it's the equivalent of earning 16% after taxes.) If you want a full explanation of this concept, turn to p. 34. Otherwise, take my word for it.

If you can't pay off your high-rate debt immediately, take steps to reduce the interest rate you pay. Start by simply calling your credit card company and asking them to lower the rate. Also, see if you can qualify for one of the lower-rate cards listed on websites like www.credit.com, www.cardtrak.com, and www.lowcards.com.

If you have several different types of debt — say, a credit card balance on a card with a 14% interest rate, a car loan with an 8% rate, and a student loan at 5% — pay off the loan with the highest interest rate first. One strategy you may want to consider is asking your student loan servicer to stretch out your student loan payments over 15, 20, or even 30 years instead of 10 years. This will reduce your monthly student loan payment and leave you with extra cash, which you can use to pay off your credit card balance faster. Once you've gotten rid of your credit card debt, increase the payments on your auto loan. After you wipe out that loan too, increase your student loan payments to at least their initial levels.

The only time it doesn't make sense to kill your debt is when the interest rate you're being charged is lower than the rate you can receive on an investment. If, for example, you have a special student loan with a 3% rate and no other debt, you'd be better off maintaining your usual payment schedule on the loan and putting your cash into an investment that pays you an after-tax rate greater than 3%, if you can find it.

For detailed information on credit cards, auto loans, student loans, and home equity loans, see Chapter 3.

3. Start contributing to a tax-favored retirement savings plan.

You may be scared to part with your money right now, or you may just think retirement is so far away, why bother? But here's the reality. Saving money in a retirement plan is one of the smartest things you can do when you're young. If you're lucky enough to work for a company that offers a retirement savings plan like a 401(k), you should take advantage of it. There are several reasons to participate in a 401(k). For starters, many employers will match a portion of the amount you put into such a plan. That means the company will contribute a set amount — say, 50 cents — for every dollar you contribute, up to a specified percentage of your salary. That's free money, equivalent to an immediate 50% return! (In fact, if your company offers such a fabulous matching deal, you should probably contribute to the plan even before paying off your credit card debt.) In addition, the federal government allows you to delay paying taxes on the money you contribute to a retirement savings plan until you withdraw that money. That translates into an immediate tax break of hundreds of dollars each year. If, for example, you contribute $1,000 to a 401(k), you will reduce your taxable income by $1,000. If you're in the 25% tax bracket, that's a savingsof $250.

Be forewarned that you're going to hear horror stories from people who lost huge amounts of money in their 401(k)s. But the benefits of matching and tax-deferred growth are so huge that this is still the best deal out there. And, if you're really nervous, there are ways to invest in your 401(k) without losing any of the money you contribute. (Learn all about this in Chapter 6).

Although you won't be able to withdraw your money until you reach age 59 without paying a penalty, many plans allow employees to borrow against their retirement savings at favorable rates. If you switch jobs, you may be able to move your 401(k) money into your new employer's plan (or transfer it into something called an individual retirement account; see below).

Your employer might have already signed you up for its 401(k). If not, contact your employee benefits office and ask how you can have a set percentage of each paycheck automatically transferred into your company plan. Many companies allow you to do this online. Try to at least contribute the maximum amount for which you're eligible to receive matching funds.

If you aren't lucky enough to work for an employer who offers a 401(k) or a similar company retirement plan, you should start investing in an individual retirement account (IRA). The most you can contribute to an IRA as of 2009 is $5,000 annually; if at all possible, contribute the maximum amount every year.

IRAs don't provide matching contributions, so putting money in an IRA is somewhat less pressing than enrolling in a companysponsored plan that offers a match. Also, unlike a 401(k), an IRA does not permit borrowing. That said, certain IRAs known as Roth IRAs do offer a special benefit: You are allowed to withdraw the money you contribute to them at any time. (You're not allowed to withdraw the interest you earned on the money you contributed until after you turn 59.)

Bottom line: Max out your company's 401(k) up until the matching limit if you have one. If not, go with an IRA.

For all your questions on tax-favored retirement savings plans, see Chapter 6.

4. Build an emergency cushion using an automatic savings plan.

If you find it impossible to save any money, you're not alone. But once you've gotten rid of your high-rate debt, taken care of Crib Notes 1 and 2, and started on Crib Note 3, it's time to begin stashing away three months' worth of living expenses in a safe spot.

Your safest choice is a bank savings account. You can have the money automatically withdrawn from each paycheck and funneled into your savings. That's a relatively painless way to force yourself to accumulate money.

A second choice is a special type of investment called a money market fund. Money market funds have historically been considered almost as safe as bank savings accounts and tend to pay higher interest rates. To find a money fund, check out websites like www.bankrate.com and www.imoneynet.com, which provide a list of the highest interest rates currently being offered. You can set up an automatic transfer from your checking account once or twice a month so it's as easy as saving in a bank savings account. (For virtually everything you need to know about money market funds, see Chapter 5.)

No matter what type of automatic savings plan you choose, focus on your goal of at least three months' worth of expenses. To figure out that amount, use the worksheet (Figure 2-2) in Chapter 2.

5. Consider investing in stock and bond funds.

Once you have your three-month savings cushion in place, you can continue putting money into low-risk bank accounts and money market funds, or you can choose to get more aggressive with your investments. The advantage of stocks and bonds is that they've historically tended to earn more for investors over long periods of time, allowing them higher returns to stay ahead of inflation. (For a discussion of inflation and why you'll need to worry about it, see Chapter 5.)

The downside of stocks and bonds is that they're riskier than money market funds. Translation: You can lose money by investing in them. Only you can decide how much risk you're willing to take for the chance to earn higher returns over time, but one common approach has been to put about half of the holdings you don't plan to touch for many years into stocks, one-third into bonds, and the rest in money market funds. This is a mix you may want to consider for your retirement savings plans, although some experts recommend putting somewhat more into stocks for IRAs and 401(k)s.

If you do decide to put some of your money in stocks and bonds, do so by investing in stock mutual funds and bond mutual funds. A mutual fund is a type of investment that pools together the money of thousands of people. It's headed by a fund manager, who invests the entire sum in a variety of stocks, bonds, and/or money market instruments. (To find out exactly what these are, you'll need to read Chapter 5.) Avoid investing in funds with a load, which is the commission that some mutual fund companies charge each time you put money in or take money out of a fund. They don't perform any better on average than no-load funds, so there's no point in paying extra for them. I recommend that you consider only no-load mutual funds with low expenses. Expenses are the annual fees charged by the fund and can take a huge bite out of your investment returns if you're not careful.

Although stock funds are considered somewhat riskier than bond funds, they have also performed somewhat better over long periods of time. If you decide to invest in a stock fund, I recommend you consider a type known as a stock index fund. "Index" means it tracks the performance of a recognized basket of stocks, such as the Standard & Poor's 500 Index.

Two companies that offer index funds with no loads are Vanguard (www.vanguard.com; 800-662-7447) and T. Rowe Price (www.troweprice.com; 800-541-6066). Vanguard has some of the lowest fees and the largest selection of index funds, but you'll generally need at least $3,000 to open an account there if you want to invest in its index funds. (It also has a special fund that only requires $1,000 to start; see p. 132 for more details.) T. Rowe Price has higher fees (still lower than the industry average) but allows investors to get started with a minimum of $50 a month automatically siphoned out of a checking account.

Bonds are generally less risky than stocks but riskier than money market funds and you can still lose money with them. Holding bonds as well as stocks will help to diversify your investments, reducing your overall risk. Vanguard and T. Rowe Price offer noload bond funds as well. While there are several different types of bond funds, a reasonable approach would be to choose a bond index fund that invests in government securities or highly rated corporations.

To learn more about bond funds, stock funds, index funds, and investing in general — you guessed it — you'll have to read Chapter 5.

6. Find out your credit score and improve it.

A credit score is a number that tells lenders whether or not you're a good risk. It's basically a mathematical representation of your financial behavior, and it's contained in files at three national credit agencies: Equifax, TransUnion, and Experian. These files, which include information received by the agencies from your various creditors, are called your credit reports. You're legally entitled to one free report from each of the agencies every year. You should get them at www.annualcreditreport.com and check to make sure all the information included about you and your financial behavior is accurate.

You can think of your credit score as the SAT score of your financial abilities; the only difference is that unlike your SATs, your credit score is being recalculated all the time — and will have a huge impact on your life forever. If you want to qualify for a low-rate credit card, car loan, or home loan, and if you want to rent an apartment, get insurance, or change cell phone plans, your credit score will matter. To find out your credit scores from all three agencies (they often vary), go to www.myfico.com. It costs about $50 for all three. (See Chapter 3 for details.)

Once you've collected all this information, take steps to make sure your score is as good as it can be. The higher your score, the more likely you are to get a lower interest rate on a loan. The biggest component of your credit score is your track record for making on-time payments, followed by the amount of credit you're using and the length of your credit history. One of the easiest, most foolproof ways to keep your score in good shape is to pay all of your bills automatically, which you can do online.

7. Think about buying a house or apartment.

Despite all the havoc in the housing market, at some point in the next few years you may start to feel that it's time to purchase a home of your own. Deciding that it makes sense to buy involves more than simply comparing your monthly rent with the monthly mortgage payments you'd make as an owner. A whole range of financial factors, including the tax break you'll get from buying, the fees you'll pay when you buy, and how long you plan to live in the new home, should enter into your decision. For a discussion of some of these factors and ways to analyze your own situation, see Chapter 7.

If you do decide that it's time to buy, you may wonder if it's really as hard as they say to get a home loan, also known as a mortgage, these days. The answer depends on your situation. One of the toughest obstacles is coming up with the down payment required by the lender. You will likely need to have an amount equal to at least 10% of the purchase price of the home to qualify for a mortgage. In addition to that cash, you will need a good credit score and to be able to prove that your salary is high enough to make the monthly mortgage payments. Mortgage lenders also want to make sure that your other debts are manageable.

Once you are ready to buy, your next step is to look at sites like www.hsh.com, www.bankrate.com, and www.freeratesearch.com to find the best mortgage deal you can get. It's also a smart idea to check with your local bank or credit union — sometimes the best home loan deals are right in your own backyard.

But what if you're eager to buy and can't come up with the full down payment or don't have great credit? All is not lost. One option, for example, is to look into the Federal Housing Administration (FHA) loan program. FHA loans require only a 3.5% down payment and they're usually easier to qualify for, but you may end up paying somewhat more in interest and fees over the long run. Contact a lender or your local Housing and Urban Development office (www.hud.gov) for more information on FHA loans. You can also call your state housing office to see if it offers any low down payment mortgage options for which you're eligible. The advantage of these state programs is that they typically charge a lower interest rate than you can get on a bank mortgage. (For the website and phone number of your state housing office, see pp. 186-87.)

If you don't qualify for any of these programs, don't give up. Make it your goal to spend the next one to two years improving your credit score (by paying all your bills on time) and saving up for that down payment. You'd be surprised how quickly you can build your credit record.

For more housing-related tips for buyers and renters, see Chapter 7.

8. Get smart about income tax.

Want to stretch your paycheck further? One way is to decrease the portion that goes to Uncle Sam by taking as many tax deductions as you're eligible for. Deductions are specific expenses that the government allows you to subtract from your income before calculating the amount of tax you're required to pay. Taking advantage of these tax deductions is simple.

The easiest approach is to take the standard deduction, which is simply a fixed dollar amount ($5,700 for singles or $11,400 for couples in 2009) that you subtract from your income. But you might pay even less if you itemize your deductions instead. Itemizing means listing separately the specific items that are deductible under the tax laws and then subtracting their total cost from your income.

If you choose to itemize deductions, you'll have to fill out a tax form called a 1040 (also known as the long form). You'll then have to list your deductions on an attachment to Form 1040 called Schedule A. Among the types of expenses you may be allowed to deduct are state and local taxes you've paid (or sales taxes you've paid), charitable donations, and certain moving, job-hunting, business travel, and educational expenses. To figure out whether you should take the standard deduction or itemize, look at the list of deductions beginning on p. 273.

The only way to find out if you can save money on your taxes by itemizing instead of taking the standard deduction is to fill out a copy of Schedule A and see if the amount you're allowed to deduct is greater than the standard deduction. Even if you find that you won't save money by itemizing this year, this exercise will help get you better acquainted with some common types of deductions, and may help you plan things in a way that could reduce your tax bite next year.

One warning: If you don't earn a lot, you will be tempted to fill out the 1040EZ form, which is, well, easy to fill out. The problem is that you may miss out on some money-saving deductions. Although it may take a little more time, you should take a look at the more detailed forms like the 1040 and Schedule A so you don't pay more in taxes than you have to.

If you earn very little or have children or educational expenses, you may also qualify for valuable tax credits, which subtract money directly from the amount you owe the IRS.

Whether you owe money to the IRS or not, you will need to file your taxes. Make sure you do it. If you earn less than $54,000, you can file online for free at the IRS website. Otherwise, try www.taxcut.com and www.turbotax.com, which will let you download the forms for roughly $40 to $50.

For specific ways to cut your tax bill, see Chapter 9.

Copyright © 1996, 2000, 2009 by Beth Kobliner

Read a Sample Chapter

Chapter One: Crib Notes

A "Cheat Sheet" for Time-Pressed Readers

If the idea of reading a whole book on personal finance leaves you cold, this is the chapter for you. The advice below cuts to the chase and sets you on the road to a solid financial life. So if you don't have the patience to read the entire book right now, adopting one or two of these strategies will still put you ahead of the game.

Of course, as someone's mother once said, cheaters only cheat themselves. And while this chapter is a good launching point, ignoring the remaining eight chapters is a little like relying on the Cliffs Notes version of Moby Dick: You'll get the basic plot line but never understand it in any real depth. Still, the following crib notes should give you a rundown on the basics. I've tried to list them in rough order of importance, but your priorities may depend on your own situation.

1. Insure yourself against financial ruin.

It's not surprising that people don't like to talk about insurance. It's expensive, confusing, and mostly about sickness and death. But if you're interested in getting adequate medical care in case of a serious accident or illness, and would prefer not to bankrupt yourself and your family in the process, there really is no higher financial priority than health insurance.

If you work for a company that offers employees health insurance, you're lucky; participating in your employer's group plan will almost always cost you much less than buying a policy on your own, and the coverage you get is likely to be more comprehensive than any individual policy you could afford. However, in an effort to reduce their costs, many companies have shifted to what is known as managed care, which means you may be limited in your choice of doctors and treatments. If you're given more than one type of health insurance plan to choose from through your employer, make sure you consider not only price but also the type of coverage you will receive. If, for example, you're thinking about joining a type of plan called a health maintenance organization (HMO), inquire about exactly what is covered, ask about the procedure for seeing specialists, and find out what happens if you want to visit a doctor outside the HMO. Although HMOs are generally less expensive than other plans, if you come down with a serious illness and want to see a specialist outside your HMO network, you may have to foot the entire bill yourself. Before you sign up for any health insurance plan, talk to coworkers about their experiences with the various options.

If the company you work for does not offer health insurance, you'll have to pay for it yourself. If you recently graduated from college, see if you can extend coverage from your parents' plan for a few years. If you're job hunting, at the very least get temporary coverage. If you're employed but your company doesn't offer you insurance, see if there are any organizations you can join (a trade association, for example) that will allow you to purchase health insurance at a group rate. This can be much less expensive than purchasing individual coverage. Since plans vary dramatically from state to state, your best bet is to call the major insurers and HMOs in your area and see what they have to offer. Also try Quotesmith (800-556-9393; www.quotesmith.com), Insweb (www.insweb.com), and your local Blue Cross/Blue Shield company (www.bluecares.com) for quotes. And if you're having trouble getting insurance because of a preexisting medical condition, your state insurance department should be able to provide you with the names of companies that will cover you. (See page 220 for the phone number of your state's office.)

Another type of protection you may want to consider is life insurance, but only if you have children or someone else is financially dependent on you. If you don't have dependents, you don't need life insurance. If you do, the type you should buy is called term insurance, which is relatively inexpensive. Get quotes from agents at USAA (800-531-8000; www.usaa.com) and Ameritas (800-552-3553; www.ameritas.com). You should also consult Web sites that will let you compare quotes from different firms side by side, like Term4sale (www.term4sale.com) and Quotesmith (800-556-9393; www.quotesmith.com). One warning: If you deal with a life insurance agent, be prepared to hear a big pitch for a type of policy known as cash value life insurance. Ignore it. It's more profitable for the agent, but it's probably not a good deal for you.

Depending on your financial situation, you may also want to consider protecting your earning power with disability insurance. A disability policy will pay you an income (typically 60% to 70% of your current salary) if you're injured or very sick and are unable to work for an extended period of time. Depending on the state in which you're employed, you may already be covered by a mandatory disability insurance program and/or by insurance provided voluntarily by your employer as part of your standard employee benefits package. Even if you are, it's a good idea to find out how much coverage you have, whether it's possible to buy more, and what it would cost you. If disability insurance is not available to you through your employer's plan, look into purchasing some on your own. Companies that specialize in disability insurance are Unum (800-843-3426; www.unum.com) and Northwestern Mutual Life Insurance (800-672-4341; www.northwesternmutual.com).

For additional tips on purchasing all types of insurance, see Chapter 8.

2. Pay off your debt the smart way.

More often than not, the smartest financial move you can make is to take any savings you have (above and beyond money you need for essentials like rent, food, and health insurance) and pay off your high-rate loans. The reason is simple: You can "earn" more by paying off a loan than you can by saving and investing. Paying off a credit card that has a 17% interest rate is equivalent to earning 17% on an investment, guaranteed — an extremely attractive rate of return. (Actually it's even better than that; it's the equivalent of earning 17% after taxes.) If you want a full explanation of this concept, turn to page 51. Otherwise, take my word for it.

If you can't pay off your high-rate debt immediately, take steps to reduce the interest rate you pay. As a short-term strategy, you can switch to a new credit card and take advantage of the super-low introductory rates (known as "teaser rates") that many credit card companies offer to new customers. But these rates only last for a few months and then spike up to much higher rates. In the long run, it probably makes more sense to apply for a card with a long-lasting low rate, but you'll need an excellent credit rating to qualify. For lists of low-rate credit card issuers, visit the Web sites of Bankrate.com (www.bankrate.com), Consumer Action (www.consumer-action.org), and CardWeb (www.cardweb.com). (If you don't have access to the Internet, call 800-344-7714 or send a request and check or money order for $5 to CardTrak, P.O. Box 1700, Frederick, MD 21702.)

If you have several different types of debt — say, a credit card balance on a card with a 17% interest rate, a car loan with a 10% rate, and a student loan at 8% — pay off the loan with the highest interest rate first. One strategy to consider is stretching out your student loan payments over 15 or 20 years instead of 10 years through a process known as loan consolidation. (To see if you're eligible, call the company that handles your loan.) This will reduce your monthly student loan payment and leave you with extra cash. Use this money to pay off your credit card balance faster. Once you've gotten rid of your credit card debt, start paying off your auto loan faster. After you wipe out that loan too, increase your student loan payments to at least their initial levels.

The only time it doesn't make sense to kill your debt is when the interest rate you're being charged is lower than the rate you can receive on an investment. If, for example, you have a special student loan with a 3% rate, you'd be better off maintaining your usual payment schedule on the loan and putting your cash into an investment that pays an after-tax rate greater than 3%.

For detailed information on credit cards, auto loans, student loans, home equity loans, and credit reports, see Chapter 3.

3. Start contributing to a tax-favored retirement savings plan.

Next to flossing, saving money in a retirement plan is the smartest habit to acquire when you're young. If you're lucky enough to work for a company that offers a retirement savings plan like a 401(k), you should take advantage of it.

There are several reasons to participate in a 401(k). For starters, many employers will match a portion of the amount you put into such a plan. That means the company will contribute a set amount — say, 50 cents — for every dollar you contribute, up to a specified dollar amount. That's an immediate 50% return on your money! (In fact, if your company offers such a fabulous matching deal, you should probably contribute to the plan even before paying off your credit card debt.) In addition, the federal government allows you to delay paying taxes on the money you contribute to a 401(k) until you withdraw that money. That translates into an immediate tax break of hundreds of dollars each year. If, for example, you contribute $1,000 to a 401(k), you will reduce your taxable income by $1,000. If you're in the 28% tax bracket, that's a savings of $280. (You are in this tax bracket in 2000 if you are single and your taxable income is between $26,250 and $63,550, or if you are married and you and your spouse's combined taxable income is between $43,850 and $105,950.)

Be forewarned that you're likely to come across people who'll tell you you're too young to lock up your money in a retirement savings plan. Ignore them. While it's true that you won't be able to withdraw your money until you reach age 591/2 without paying a 10% penalty, many plans allow employees to borrow against their retirement savings at favorable rates. What's more, your money will grow tax-free in a retirement plan for years. The benefits of tax-free growth could easily outweigh the penalty you'd have to pay for making an early withdrawal. And if you switch jobs, you may be able to move your 401(k) money into your new employer's plan.

The easiest way to start contributing is to contact your employee benefits office and ask to have a set percentage of each paycheck automatically transferred into your company plan. Try to contribute the maximum allowed by law. If you can't afford to stash away this much, at least contribute the maximum amount for which you're eligible to receive matching funds.

If you aren't lucky enough to work for an employer that offers a 401(k) or a similar company retirement plan (and possibly even if you are), you should start investing in an individual retirement account (IRA). The most you can contribute to an IRA is $2,000 annually; if at all possible, contribute this amount every year. There are two main kinds of IRA: traditional deductible IRAs and Roth IRAs. Deductible IRAs, like 401(k)s, give you an immediate tax break and let you delay paying taxes on your money until you withdraw it. Roth IRAs work the other way around: You don't get an upfront tax break, but the money you invest grows tax-free forever; you won't have to pay federal income tax when you withdraw that money at retirement.

IRAs don't have all the advantages of 401(k)s, so putting money in an IRA is somewhat less pressing than enrolling in your company-sponsored plan. For starters, with an IRA you don't have the benefit of an employee matching program. Also, you can't borrow money from an IRA before you reach age 591/2 the way you can with most 401(k)s; if you need to get at your money, you'll probably have to pay the 10% penalty. (There are exceptions to this rule if you're withdrawing the money from an IRA for certain educational or homebuying expenses.) Even if you have to pay the penalty for making an early withdrawal from your IRA, you'll often still come out ahead.

If your employer does offer a 401(k) with matching, you should contribute to that plan before thinking about an IRA. Once you've hit the maximum your employer will match, you should contribute to an IRA as well.

For answers to commonly asked questions about tax-favored retirement savings plans, including which kind of IRA to choose, see Chapter 6.

4. Reduce your monthly banking fees.

Chances are you don't give your bank too much thought. But by becoming aware of bank charges, you may be able to save hundreds of dollars a year.

Two of the most burdensome bank fees are checking charges and automated teller machine (ATM) fees. To reduce these charges, and possibly eliminate them entirely, shop around for a bank that waives them for customers who maintain a specified minimum balance. Some banks require you to maintain the minimum in a checking account only; others waive monthly checking charges as long as the combined balances in your checking and savings accounts (and other bank savings options) meet the minimum requirement. Either way, look for a bank with a low minimum. While some banks require you to keep as much as $10,000 in the bank to get free checking and ATM use, others require you to keep just $100. Even if you have enough money to meet the higher minimum balance requirements, it still makes sense to find a bank with low balance requirements. That way you won't have to tie up large sums of cash in a bank account that pays a pitifully low interest rate.

Before you switch banks, ask whether yours will waive its minimum balance requirement if you sign up for direct deposit (which means that your entire paycheck would be automatically deposited into your checking or savings account each pay period); some banks will. You should also find out if you're eligible to join any credit unions, which are special not-for-profit banks that tend to have lower minimum balance requirements and lower fees all around. (For help in finding a credit union, contact the Credit Union National Association at 800-358-5710 or www.cuna.org.) Or look into opening a checking account at one of the growing number of banks that operate only over the Internet, many of which require no minimum balance for checking.

For more tips on banking smart, see Chapter 4.

5. Build an emergency cushion with an automatic savings plan.

If you find it impossible to save any money, you're not alone. But once you've gotten rid of your high-rate debt and taken care of Crib Notes 1, 2, 3, and 4, it's time to start saving. A relatively painless way to do it is to enroll in an automatic savings plan. These plans allow you to have money automatically withdrawn from each paycheck and funneled into a bank account or mutual fund. (See Crib Note 6 for a brief discussion of mutual funds.)

Once you've met the minimum balance requirement for free checking at your bank, you're ready to invest in a special type of mutual fund called a money market fund. Money market funds are considered nearly as safe as bank savings accounts and tend to pay higher interest rates. To find a money market fund, check out Web sites like Bankrate.com and Money.com, which offer lists of the highest interest rates currently being offered. Another strategy is to open a money market fund at the same low-cost mutual fund company where you plan to purchase all of your mutual funds in the future. (For my suggestions on specific low-cost mutual fund companies that offer money market funds, see Crib Note 6.) Find out if the fund company and your employer will allow you to have the amount you want to invest automatically deducted from your paycheck and deposited into the fund. If not, the next best option is to have the mutual fund company automatically siphon the cash out of your checking account once or twice a month and deposit it into the fund.

No matter what type of automatic savings plan you choose, your goal should be to save at least three months' worth of living expenses in a money market fund before you even think about the more aggressive investments discussed in Crib Note 6. To figure out what three months' worth of living expenses amount to, use the worksheet in Chapter 2. For virtually everything you need to know about money market funds, see Chapter 5.

6. Begin investing in stock and bond mutual funds.

Once you have your three-month savings cushion in place in a money market fund, it's time to get a bit more aggressive with your investments. The advantage of stocks and bonds over money market funds is that they've historically tended to earn higher rates of return for investors over long periods of time, and many experts predict that they will continue to do so in the future. You may need these higher returns to stay ahead of inflation. (For a discussion of inflation and why you'll need to worry about it, see Chapter 5.)

The downside of stocks and bonds is that they're riskier than money market funds. You can lose money by investing in them. Only you can decide how much risk you're willing to take for the chance to earn higher returns over time, but one reasonable approach might be to put about half your holdings into stocks, one-third into bonds, and the rest in money market funds.

If you do decide to put some of your money in stocks and bonds, I recommend that you do so by investing in stock mutual funds and bond mutual funds. A mutual fund is a type of investment that pools together the money of thousands of people. It's headed by a fund manager, who invests the entire sum in a variety of stocks, bonds, and/or money market instruments. (To find out exactly what these are, you'll need to read Chapter 5.) I recommend that you consider only no-load mutual funds with low expenses. A load is a fee that some mutual fund companies charge each time you put money in or take money out of a fund. Avoid investing in load funds; they don't perform any better on average than no-load funds, so there's no point in paying the extra fees. Expenses are the annual fees charged by the fund and can take a serious bite out of your investment returns if you're not careful.

Although stock funds are considered somewhat riskier than bond funds, they have also performed somewhat better over the years. If you decide to invest in a stock fund, I recommend you consider a type known as a stock index fund. Two companies that offer index funds are Vanguard (800-662-7447; www.vanguard.com) and T. Rowe Price (800-638-5660, www.troweprice.com). Vanguard has the lowest fees and the largest selection of index funds, but you'll generally need at least $3,000 to open an account there. T. Rowe Price allows investors to get started by putting in just $50 a month.

Bonds are typically less risky than stocks but riskier than money market funds. Holding bonds as well as stocks will help to diversify your investments, thus reducing your overall risk. Companies that offer no-load bond funds with low expenses include Vanguard (800-662-7447; www.vanguard.com), Galaxy Funds (877-289-4252; www.galaxyfunds.com), and USAA (800-531-8181; www.usaa .com). While there are several different types of bond funds, a reasonable approach would be to choose an intermediate-term bond fund that invests in government securities or highly rated corporations.

To learn more about bond funds, stock funds, and investing in general — you guessed it — you'll have to read Chapter 5.

7. Think about buying a house or apartment.

At a certain point in life, you may start to feel that you should buy a home. Deciding that it makes sense to purchase a place of your own involves more than simply comparing your monthly rent with the monthly mortgage payments you'd make as an owner.

A range of financial factors, including the tax break you'll get from buying, the fees you'll pay when you buy, and how long you plan to live in the new home, should enter into your decision. For a discussion of some of these factors and information on where you can get software to help analyze your own situation, turn to Chapter 7.

Just a few years ago, the biggest obstacle to buying a home was coming up with the down payment. Today there are several options available, especially if you have good credit. Start by calling your state housing office to see if it offers any low down payment mortgage options for which you're eligible. The advantage of these state programs is that they typically charge a lower interest rate than you can get on a bank mortgage. (For the phone number of your state housing office, see page 192.)

Your next step is to get information on Fannie Mae and Freddie Mac, two companies that were established by the government to help banks and mortgage companies expand their mortgage offerings to all types of borrowers. Fannie and Freddie offer several low down payment loan programs (as low as 3%). When you shop around, ask lenders if they participate in Fannie's "Flexible 97" and "Community Home Buyer's Program," or in Freddie's "Affordable Gold" and "Alt 97." They'll know what you mean. For several free booklets from Fannie Mae on purchasing a home, call 800-688-HOME (www.fanniemae.com).

If you don't qualify for one of these programs, a third alternative is the Federal Housing Administration (FHA) loan program. FHA loans require only a 3% down payment, and they're usually easier to qualify for, but the deal you get may not be quite as good. Contact a lender or your local Housing and Urban Development office (www.hud.gov) for more information on FHA loans.

If you don't qualify for any of these programs, don't give up. There are many lenders out there that offer creative options. For more housing-related tips for buyers and renters, see Chapter 7.

8. Get smart about taxes.

Nobody likes paying taxes. One way to reduce the portion of your paycheck that goes to Uncle Sam is to take as many tax deductions as you are eligible for. Deductions are specific expenses that the government allows you to subtract from your income before calculating the amount of tax you're required to pay. Taking advantage of these tax deductions is a lot easier than it may sound.

The government allows you to take advantage of deductions in either of two distinct ways. The easiest approach is to take the standard deduction, which is simply a fixed dollar amount ($4,400 for singles, or $7,350 for couples, in 2000) that you subtract from your income. Although all taxpayers are permitted to take the standard deduction, depending on your circumstances, you may wind up paying less if you itemize your deductions instead. Itemizing means listing separately the specific items that are deductible under the current tax laws and then subtracting their total cost from your income.

If you choose to itemize your deductions, you'll have to fill out a tax form called a 1040 (also known as the long form) rather than the simpler 1040A (the short form) or the 1040EZ (the really short form). You'll then have to list your deductions on an attachment to Form 1040 called Schedule A. Among the types of expenses you may be allowed to deduct are state and local taxes you've paid, donations you've made to a charity, and certain moving, job-hunting, business travel, and education expenses.

The only way to find out if you can save money on your taxes by itemizing instead of taking the standard deduction is to fill out a copy of Schedule A and see if the amount you're allowed to deduct is greater than the standard deduction. Even if you find that you won't save money by itemizing this year, this exercise will help get you better acquainted with some common types of deductions and may help you plan things in a way that could reduce your tax bite next year.

There are some deductions you can take whether you itemize or not, like contributions to a deductible IRA or interest payments on your student loans. If you have children or educational expenses, you may also qualify for valuable tax credits, which subtract money directly from the amount you owe the IRS.

To get tax forms and a general instruction book from the IRS, call 800-TAX-FORM (or go to its Web site at www.irs.gov) and ask for Tax Publication 17, Your Federal Income Tax. Also consider using your computer to help you prepare your taxes. The Web site TurboTax (www.turbotax.com) provides you with the forms and instructions you'll need, performs all the necessary calculations, and prints out completed forms you can send to the IRS. It will also let you send your return straight to the IRS electronically. For about $35 you can purchase tax software that performs the same tasks; two programs worth considering are TurboTax (or MacInTax for Macs) and TaxCut.

For specific ways to cut your tax bill, see Chapter 9.

Copyright © 1996, 2000 by Beth Kobliner