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As you scramble to file your taxes, it's impossible to avoid taking stock of personal finances, however bleak the picture seems. But as Platzman and others can attest, even if you're not bringing home a Wall Street salary, you can often live for less. "People who say they can't invest will buy a $4 cup of coffee," she says. "I do everything from rolling quarters to cutting back on going out to dinner several times a week," she says.
For a lot of people, personal finance translates to being able to pay the bills every month and deposit whatever is left over in the bank. Unfortunately, that's not enough if you want to live comfortably now and enjoy a little nest egg when you retire. If you have a goal and a regular income, you're ready to put your money to work for youeven if you think you don't have enough. The idea is to start small.
"People tend to think about Wall Street mumbo jumbo and that it's all complicated, but it's not like that," says investment guide Bill Staton, author of How To Become a Multimillionaire on Just $50 a Month. Novices should not be intimidated by all the charts, statistics, and jargon that plague the business world. "You don't need an MBA," agrees Karen Altfest, vice president at L.J. Altfest & Co., Inc. "To be a smart investor you have to educate yourself." There are a lot of ways to learn the basics: talk to friends; read personal finance books and magazines; enroll in a course; or, if you're really lost, make an appointment with a financial planner. (The first consultation is usually free; many planners charge a flat fee after thatoften between $300 and $500to create a savings plan.)
But before you invest that little chunk of dough you've been stashing under the mattress, you have to make sure you're out of the red zone. In other words, take any savings you have and pay off, or at least reduce, your high-interest debt. This requires a little common sense and a lot of discipline.
"Many people keep money in a savings account, earning 2 or 3 percent after tax, at the same time as they are paying 20 percent" on their credit cards, says Andrew Tobias, the author of The Only Investment Guide You'll Ever Need. "They're earning three cents on each dollar with their left hand while paying out 20 cents with their right hand." You can earn more by paying off your loans than by keeping your money in the bank. If you're living beyond your means and don't know how to save, you're either going to have to get a raise or curb your spending habits. Which is more realistic?
Next, make sure you have an accessible emergency reserve of at least three to six months' worth of living expenses in case you're left out of work. Now you're ready to start.
Keep in mind, inflation is the enemy. "You'll have to become a millionaire in the long run, because the amount of money you're going to spend in the future to buy the same things you're buying today is enormous," says Charles Hamowy, a financial "therapist" at American Express. That's why it's necessary to start contributing to a tax-favored retirement plan like a 401(k), which channels savings into a variety of investment options depending on your risk level.
According to Beth Kobliner, author of Get a Financial Life, there are many reasons to participate: the government gives you a juicy tax break on the money you invest; many employers match a portion of the amount you put in; a percentage of your paycheck is automatically transferred to the plan (i.e., out of sight, out of mind); and if you quit your job you'll be able to roll over at least some of the money. A few bucks can turn into a lot due to the tax-free benefits and growth potential. The only negative is that you won't be able to withdraw money until you're 59 1/2 without paying a penalty. If your job doesn't offer a plan then you should look into opening an IRA (Individual Retirement Account).
Decide what your goals, time frame, risk tolerance, and comfort level are, and work from there. "I would suggest you deal with mutual funds. They're safer, diversified, and you stand a better chance at succeeding," advises Hamowy. A mutual fund is an investment that combines the money of thousands of people with a common objective and invests it in a variety of stocks (shares of ownership in a company), bonds (loans you make to organizations), or money markets (short-term IOUs to governments or companies).
"This type of investment will help you take advantage of what the system has to offer," Hamowy says. Some companies let you start out with as little as $50 a month. The appeal of no-load (low-cost) mutual funds is that through variety you get diversification. You won't necessarily lose sleep at night over your money because if half of your investments lose value, the odds are the other half will probably be doing well, thus balancing out the losses. You can invest in a mutual fund by going through a discount brokerage firm, the middleman, who'll manage the fund, or by doing a little research and contacting the fund family directly.