Reach financial goals in your 20s and 30s
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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. (Sorry, but to find out exactly what these are, you'll need to read Chapter 5.) I recommend that you consider only no-load mutual funds. 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.
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 that you limit yourself to a type known as a stock index fund. Three companies that offer stock index funds with relatively low management fees are Vanguard (800-662-7447), Charles Schwab (800-2NO-LOAD), and T. Rowe Price (800-638-5660). Vanguard has the lowest fees and the largest selection of index funds, but you'll need at least $3,000 to open an account there. Schwab requires a minimum initial investment of $1,000, while T. Rowe Price allows investors to get started by putting in just $50 a month.
Bonds are generally 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. Two companies that offer no-load bond funds with low expenses are Vanguard (800-662-7447) and USAA (800-531-8181). 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.
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. But 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 lire 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 situation, turn to Chapter 7.
Many people who are ready to buy a home have difficulty coming up with a down payment. If you're in this position, don't despair. Several options are available to you. Start by calling your state housing office to see if it offers any low down payment mortgage programs for which you're eligible. The advantage of these state programs is that they typically charge lower interest rates than you can get on a bank mortgage. (For the phone number of your state housing office, see pages 158-59.)
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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 very small down payment — between 2% and 4% of the price of the home, depending on the amount you borrow — 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 (HUD) office 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. Some allow down payments of as little as 3%, and some require no down payment at all as long as a friend or relative is willing to pledge assets as collateral.
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.
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 ($4,000 for singles and $6,700 for couples in 1996) 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 or 1040EZ. 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 you get 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.
To get tax forms and a general instruction book from the IRS, call 800-TAX-FORM and ask for Tax Publication 17, called Your Federal Income Tax. Also consider using your computer to help you prepare your taxes. For about $35 you can purchase software that 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. Two programs worth considering are TurboTax (or MacInTax for Macs) and TaxCut.
Excerpted from “Get a Financial Life: Personal Finance in Your Twenties and Thirties,” by Beth Kobliner. Copyright (c) 2009, reprinted with permission from Simon and Schuster.
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