Step One: Start Early and Save Often

The single most important way to invest in your future is to get started early. If you get started when you are young, then time and the power of compounding returns is on your side. One of the single biggest complaints I hear from younger people is the fact that they cannot save very much money to get started investing. While it is understandable for that to make you question its value, the truth is that a very small investment can make a lot bigger difference than you realize over time. Every chance you get to save some money, set aside just a little bit and get started investing in your future.

Step Two: Develop Good Spending Habits

The development of wise and frugal spending habits is essential to properly investing in your future. Those who waste money on things that aren’t necessary and continually fail to get the best prices on the basics, such as groceries, are always going to have a difficult time saving up anything to invest. Take advantage of sales at your local grocery store, buy in bulk, cut out coupons, and use price comparison tools to your advantage.

Step Three: Take Advantage of IRA’s and 401k’s

Both IRA’s and 401k’s have unmistakable advantages that each and every person can use. The tax advantages are tremendous and well worth the investment. 401k’s often bring with them an attractive company matching feature. This is something that must be utilized at all times to receive what is essentially free money invested in your future. These are great programs that help you build wealth over time and do so in an efficient way.

Step Four: Be Proactive and Track Your Progress

In life, you must be proactive to get to where you want to in your career, and it truly is no different when it comes to your finances. Take the reins and do your homework before making major financial decisions. Also, keep track of how you are progressing financially. It is a good idea to set goals and evaluate how you are doing over a period of time. Staying on top of this allows you to see where you are doing well and where you need to improve.

Step Five: Adjust Asset Allocation Near/During Retirement

As retirement grows closer, and then eventually comes, you’ll need to realize that your investment portfolio needs to suit your current situation. Asset allocation changes will need to be made to make your money work for you during retirement. Recent times have shown us that financial and economic uncertainty can happen at any time, and you must be prepared for this whenever it may come.

Benefits of Both Are Clear

You should realize that both a discount brokerage and a full-service, or traditional brokerage, have plenty of benefits. First of all, the discount brokerage allows you to have a low minimum and small trading fees, which are geared specifically toward the individual investor and reducing the costs associated with investing. At the same time, a traditional brokerage is able to provide you with much more research and even sit down with you and discuss your investments one on one. In this day and age, both the discount brokerage and the traditional full-service brokerage are available almost all of the time through their website.

Downfalls of Both Are Evident As Well

While it is certainly true that the benefits of both are clear, they both have clear negatives as well. A discount brokerage comes at a discount with a price to be paid. This price is often a lack of support for investors who need assistance or access to top notch research from the likes of Lipper and Standard and Poor’s. A traditional brokerage charges a large amount of money for their services, and they can also have some pretty tough fine print that can catch up with you over time.

Evaluate Your Personal Situation

The single most important thing you can do when choosing between a traditional brokerage and a discount broker is evaluate your personal situation and discern which one suits you the best. If you are the type of person who likes to speak with someone regarding your investment goals and try to set up an ideal portfolio for you, then the discount brokerage won’t serve you very well. On the other hand, if you like to do independent research and work on setting up your personal portfolio, while saving on commission fees, a discount brokerage is definitely the way to go.

Time Matters

While many investors fail to consider this when they are making their decision, time plays an important role in where you should be investing your money. Realize that when you put together a portfolio of investments, you’ll need to keep up with the current news so that you can be a well-informed investor. If you have little time to do this, you may be better suited allowing someone else to monitor your portfolio for you. If you believe that you can put the time in and keep your portfolio healthy, then a discount brokerage should work well.

Take Your Time and Make an Informed Decision

Finally, as is the case when making an investment, you should always take your time and not make a decision before considering all of the factors first. Be well-informed and do what is best for your financial future!

Potential Gains are Astronomical

The average penny stock trades for less than 25 cents per share, which certainly allows an investor to get deeply involved in a stock without putting too much of their money on the line. If the penny stock trades at just 10 cents per share you can own 1,000 shares for just $100. Let’s say you buy that stock for 10 cents a share and it becomes the next hot stock and makes its way up to the major exchanges and a price level of $25 per share. Do the math here and you’ll see a profit of $24,900 would be made on your original investment if you sold at $25.

Huge Gains Are the Exception and not the Norm

If you are going to get into buying penny stocks, you must realize that huge gains are extremely rare. In fact, most people that invest in penny stocks end up losing everything they invest because the company goes out of business. After all, there is a reason these stocks only cost a few cents per share. If you get into penny stocks expecting to become a millionaire, the odds are you will end up sorely disappointed.

No Transparency or Rules

In my opinion, the single biggest problem with investing in penny stocks is that there really are absolutely no rules involved and there is no transparency as far as financial information on the companies. In the end, what you have is pure speculation about the prospects of a company that almost no one knows about. As an investor and portfolio manager, I pride myself in my ability to research companies and get a leg up on other investors, but this is simply not possible in the penny stock world.

Easily Manipulated and Scams are Abound

Since they are thinly traded, and there are no regulations or rules on their markets, penny stocks are the perfect spot for scammers to target. It is simple to manipulate prices in stocks with such a low float and small volume each day. Internet fraud and constant newsletter promising you of the “next big thing” are all over the place. You would be wise to understand that these people who send you messages promising you huge amounts of wealth if you buy a penny stock are only looking out for themselves and in the end you will get hurt because of it.

Bottom Line

Dabbling in penny stocks can be exciting for some people, but it really isn’t an investment per say. Sure the potential is terrific, but the reality is most people come out much worse than they started when they commence buying penny stocks. If you want to speculate on a penny stock here and there feel free to do so, but realize this isn’t a normal investment and the risks associated almost always trump the possible gains.

While no one can predict exactly when home prices will reach bottom, individuals interested in buying a home can work with a local real estate agent and do research on websites such as Zillow.com and Trulia.com to evaluate how their local market is doing. Real estate prices vary widely even within a particular zip code, so just because you’ve heard that prices have dropped in your state or city doesn’t mean that they haven’t already started to climb again in the community where you want to live.

Taking advantage of low interest rates and low home prices could be a valuable investment in your financial future, but buying real estate requires preparation. Novice buyers in particular should get recommendations from friends and colleagues and interview lenders and real estate agents before assembling the team they need to make an informed decision.

Here are some steps to take to get started:

Check Your Credit Report

Pull your credit report for free from www.annualcreditreport.com. No one should start the home search without first become financially ready with a real understanding of the budget and credit qualifications you need to buy a home. Your credit report will show you how you look in lender’s eyes.

Evaluate Your Finances

Evaluate your finances before visiting a lender. · Do you have a steady job with a strong indication that you will keep it for years to come? · Do you have savings? Even with low down payment loans and closing cost assistance, you are likely to need at least 6.5% of the home price in cash – 3.5% for a down payment and 3% for closing costs with an FHA-insured loan. You also need some cash in the bank to cover unexpected maintenance or repair problems. · How’s your debt situation? Lenders will typically allow a maximum debt-to-income ratio of about 40%, including all housing payments. (Debt-to-income compares all your minimum monthly payments with your gross monthly income.) · Determine a housing budget that makes you comfortable. A lender will tell you how much you can qualify for, but first you should think about how much you pay in rent and how much more you can comfortably spend on a mortgage.

Visit a Lender

Visit a lender. Bring along pay stubs and bank statements and be prepared to reveal all your financial information. Ask questions to make sure you understand your options. Most buyers today opt for a 30-Year Fixed-Rate mortgage since rates are low and this is the safest way to know what your payments will be.

Check Available Programs

See if you qualify for any first-time homebuyer programs. In addition to the federal tax credit, which expires April 30, 2010, state and local governments have incentive programs for low down payment loans and closing cost assistance.

Choose an Agent

Interview several real estate agents and choose one to represent your interests.

Set Reach and Limits

Work with your agent to narrow your priorities and estimate what you can comfortably afford to buy. Sometimes your wishes may be bigger than your budget, but a good agent can help you decide what’s most important to you and perhaps find a similar neighborhood to the one you love that is more affordable.

Check Resell Value

Make sure to consider resale value when you are buying because that’s what will make your investment worthwhile.

Se Before Your Buy

Have a home inspection. Go on the inspection to learn as much as you can about the property you will soon own.

While buying a home can seem like a daunting prospect, it can be a much smoother process if you work with a team of professionals who have the experience you lack.

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her clients include The Washington Times, Bankrate.com, Urban Land Magazine, NAREIT’s Real Estate Portfolio and numerous Realtor association publications. Michele’s first book, “HOMEBUYING: Tough Times, First Time, Any Time” is available now at Amazon.com or from MicheleLerner.com

Evaluate

Evaluate your finances to be sure you can handle the additional mortgage payment on an investment property. [If you are paying in cash, this of course isn’t an issue, but do make sure you are keeping plenty of additional cash available for maintenance and taxes.] Don’t assume your mortgage will be covered by the rent. In some cases, landlords have empty units for months at a time, in others, the market rate rent is less than the mortgage payment and you will have to make up the difference each month.

Research

Do your research. Just as when you buy a home to live in, you want to make sure you either know your local extremely well or work with a real estate agent who does. Understanding home values is more important than ever with an investment, since you are looking at this purchase not as an emotional choice of a home for your family but as a way to eventually earn a profit. Buying low and selling high sounds like a good plan, but if you buy a home in an area flooded with foreclosures it could take a decade for the value to come back.

Estimate

Estimate your potential rental income. This one is “research, part two”, after you have analyzed home sales, analyze your local rental market. Just because your mortgage payment is $1500 per month doesn’t mean that you can find a renter who will pay that much. In order to attract and keep a renter, you’ll need to be within the range of market rents.

Be a Landlord

Be prepared to be a landlord. This means taking care of maintenance issues, dealing with renters who don’t pay on time and perhaps being wakened in the night by a locked-out tenant. If you are not buying property near where you live, it can be harder to make sure the home is maintained, so you may want to consider hiring a management company. If you are not handy, make sure you establish a good relationship with a reliable contractor.

Check Creditworthiness

Carefully check the creditworthiness of potential tenants, even if they are acquaintances. While it’s great to rent to someone you know, make sure you are openly checking their credit and making all agreements in writing.

Sort Your Tax

Tax rules are different for investors. Make sure you consult www.IRS.gov for the rules about what you can and cannot deduct off your taxes, since the rules are far different for property that is not your primary residence.

Investing in real estate can be rewarding, particularly now since home prices have declined. Like any other investment, the best success will come to those who do their research and make informed decisions.

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her clients include The Washington Times, Bankrate.com, Urban Land Magazine, NAREIT’s Real Estate Portfolio and numerous Realtor association publications. Michele’s first book, “HOMEBUYING: Tough Times, First Time, Any Time” is available now at Amazon.com or from MicheleLerner.com

It's how you dress. It's how you arrange your furniture. It's the car you drive. It's how you invest.

Wait a minute... Do you have an investing style?

Everybody has an investment style. (And, like some of the fashion clueless, there are lots of people who have no money style at all.)

Your investment style is based on your risk tolerance, your desire for returns, and the time you have to spend in researching and executing your investment plan. Although the variations of investment styles are almost as endless as the number of investors there are some basic financial philosophies that you can investigate when determining your own approach to money.

Buy and Hold

The simplest investment style is "buy and hold." Investors purchase stocks (or other assets) that they believe will increase in price over time. There is little to track and trade for buy and hold investors. The goal is for initial research to spot stocks that will increase consistently over time.

Day Trading

Day trading is the polar opposite of buy and hold investing. Day traders expect to make sudden price fluctuations. While day traders may not do extensive research on a stock, they usually spend hours in front of a computer screen waiting for opportunities to buy or sell. The risk that a trade could go against a day-trading investor is higher than buy and holders, but the possibility of high returns are high, as well.

Trend Investing

Trend investors are philosophically between Buy and Holders and Day Traders. Essentially a trend investor looks for a stock that will head in a certain direction--up or down--over an indeterminate time period. The trend trader will probably not make multiple trades each day; nor will they hold a stock for a lifetime. Risk and return levels are somewhere between the buy and hold and day trading strategies. The research and trading time is more involved than the buy and holder, but less than the day trader.

Choosing a money style, then, is a matter of matching up your risk tolerance and return needs with the time and effort you can put in. For example, if you work 12 hours a day and have a strict budget, you might want to start with a buy and hold strategy. If you have some cash to spend (or fritter away), a day trading strategy might interest you.

In a future post, we'll discuss how you can build a money style pyramid.

Matt is the marketing director at Online Investing AI (http://www.onlineinvestingai.com), a company that is developing automated trading strategies for individual investors based on solid investment principles and advanced artificial intelligence technologies.

Have you heard this before? You may have even uttered these sentences yourself. Even if you don’t have a lot of money you can still invest for the future. This may not be as simple on you as somebody with loads of cash, but there are options to take advantage of.

When attempting to invest on a tight budget keep these tips in mind:

You have to find the money

Don’t say that you don’t have any money to invest – this is not true. If you look at your budget there is a very good chance that you will be able to find a few dollars here and there to invest in some way, shape, or form. For instance, how much money do you spend each month eating out? What about on miscellaneous gifts? If you can cut back in these nonessential areas you can free up money for your savings accounts and for investing.

Play it safe to start

Those who do not have a lot of money to invest often times worry about moving forward because they don’t want to lose what they have (which is not a lot). There is nothing wrong with this way of thinking. To feel better about what you are doing, play it safe for the meantime. For example, instead of investing in the stock market buy CDs. This is a safe investment that gives you a guaranteed return.

Consider all your options

There is more than one way to invest your money. You can turn to the stock market, CDs, money market accounts, basic savings accounts, etc. Only you know how far your money can take you. Make sure you consider which investment vehicle is right for you at the time being.

Get creative

Some people hear the word “invest” and think they have to get involved with the stock market. Nothing could be further from the truth. You can get creative with your investments and spread them out across many different options.

Have a plan for long term success

You may not see much progress month after month if you are only investing a little bit of money. But remember, over time your money will grow and you will begin to see the returns. It is important to have a plan for long term success, as well as goals that you are trying to reach. This will help to keep you moving in the right direction even when you feel like giving up.

Even if money is tight, you can still invest wisely. The five tips above should help you get off to a good start.

Here are four questions to ask yourself if you are trying to time new acquisitions while managing your current assets:

1. How much do I still owe? You can have an asset, such as a home, but not own it outright. For example, you may have taken out a $200k mortgage to purchase your home. While this is debt, if you only owe $5k, for example, and your home is worth $200k, you have an asset of $195k on your hands. It is important to know how much your assets are worth, as well as what type of debt you are still dealing with.
2. Is it really an asset? Some people think that have assets but are actually mistaken. For example, you owe $15k on a car that is only worth $10k. This is a bad spot to be in, and is definitely not an asset to you. In fact, if you were to sell the car right now you would lose $5k. As long as you realize you are in this position you are at least ready and willing to do something about it.
3. Will my budget allow me to make a big purchase? Timing new acquisitions is all about one word: budget. You need to look at your current budget and see just how much money you have available. If you don’t have much wiggle room between your income and expenses, you may want to forget about your purchase for the time being. Only you know if the money is there – be a smart consumer.
4. Timing a new acquisition, such as a house, has a lot to do with money. As noted above, your budget will more or less tell you if you can afford the property. But remember this as well: you need to consider what else is going on in your life. You may be able to afford that new home right now, but if you are planning for children in the very near future this may not be the best idea. When deciding whether or not to make a purchase you need to look at your current budget, as well as what may happen down the road. You are not a fortune teller, but there may be something you are planning for that will cost a tidy sum.

You may be very good at managing your assets and deciding when to make purchases. But if you aren’t, ask yourself the four questions above. They will help you to see where you stand with your assets, as well as what the future holds for new acquisitions.

It is very important that your small business is always moving in the right financial direction. The moment you get off track is the moment that bad things can begin to happen.

Here are five budgeting tips for small business:

Reality check - Do you even have a budget?

It is hard to believe, but some businesses do not have a budget in place. Instead, they “wing it” and hope nothing bad happens. As you can imagine, this is a good way to ask for disaster to strike. No matter how big your business is or how many employees you have, it is important to have a budget in place at all times. This is your responsibility, and you should not take it lightly.

The all-seeing eye - Keep close track of your income and expenses

Just like a budget for your personal finances, you need to know how much money your company is bringing in as well as what you are spending every month. This may sound difficult, but once you get a system in place you will not have any trouble charting your progress. Remember, your income and expenses can and will change month after month.

Crouching tiger, hidden dragon - Be ready to adjust when need be

This goes along with point number two. Take for example a situation in which you are no longer earning as much money. In this case, you need to cut back on expenses until your income catches back up. The same adjustments are needed if you have to add some new expenses to your budget. Maybe you need to travel to meet with a client. Maybe you need to purchase a new computer system.

It does not matter why you need to adjust. The only thing that matters is that you are willing to do so.

The golden egg - Plan for the future

Yes, you need to keep a close eye on your current budget but you should also be thinking about what can and will change down the line. How much money can you afford to spend to grow the company? What ramifications will your current budget expenses have on the future of your business? Make sure your budget is built for both the short and long term – this will ensure success now and later.

A little help from my friends - Get professional help

Some small business owners don’t know the first thing about financial planning and accounting. Does this sound like you? If so, instead of making mistakes you can hire a professional to assist you. Hiring an accountant could be the best move you ever make.

From a small business perspective, budgeting is very important. These five tips will give you the direction and guidance needed to get your budget on the right track.

Of course, debt is not something that you want to drag you down. There is a big difference between controlling your debt and letting it take over your life. As you can imagine, it is best to have total control at all times.

Here are five debt management tips that will help you to keep your personal finances and related goals on track:

Know how much debt you have, as well as what kind it is

If you don’t know the beast you are fighting how are you ever going to win? It is essential that you have a firm grasp on your debt down to every last penny.

Know what debt you want to attack first

While you probably have to pay some money on each debt every month, there should be one or two that you really want to get rid of. For example, credit card debt is among the worst kind you can have. If you have this type of debt you want to pay it down before others, such as student loans.

Get the help of your spouse, if you have one

Debt is not something you should have to handle on your own – especially if you were not 100 percent responsible in creating it. Do yourself a favor and make sure your spouse is on the same page. This will help immensely in the long run.

Get a Plan

What does your debt management plan look like? If you don’t have one, stop right now and get started. You need to create a debt management plan that will get you back on the path to financial freedom sooner rather than later.

Work your plan

It is great that you have a debt management plan. But if you don’t follow it, it is more or less a waste of time and mental space. Make sure you are on board with your debt management plan, and that you are doing whatever it takes to stay on track.

These five debt management tips can help you and your family lead a better financial life.

Here are five tips for investing wisely:

Know your options

There is more than one way to invest your money. For instance, conservative investors may put all their money in a certificate of deposit and let it sit. On the other hand, there are others who like to get involved with the stock market. How you choose to invest your money is up to you – just make sure you know all your options.

Spread it around

You do not have to invest all your money the same way. For instance there is no good reason to take your entire nest egg and put it in the stock market. Sure, some money here is a good thing but not all of it. This goes along with point number one, knowing your options.

Be patient

Nobody ever said that you have to invest your money right now. You don’t want to wait year after year to get started, but it is very important to take your time when choosing where to place your money. It is better to be patient than it is to make a rash decision that will cost you dearly in the future.

Get professional help

This is a point of discussion for many people. Some enjoy the help of a financial planner, whereas others feel this is a waste of time and money (commissions, fees, etc). If you are opting for professional help make sure you get involved with somebody you can trust, as well as somebody with a lot of experience. You are dealing with your money; mistakes should not be tolerated.

Track your investments

What is working? What is costing you money? You need to know which investments are returning the most money so you can alter your plan as you move forward. Make sure you track all your investments no matter how big or small they are. You never know when you will come across a detail that could help you better invest in the future.

Is it difficult to invest wisely? In today’s day and age most people believe that it is. But remember, you can achieve success. If you want to successfully invest your money you should start by following the five tips above. At the very least they will open your eyes to what smart investing looks like.

After about a 40-50 percent drop in 401 K and IRA plans, the word investment is now used almost as a curse word. If George Carlin was around, he might add "investment" to the seven words you can't say on television.

Despite the economic downturn and a lot of less-than pleasing financial statements, investing still matters. Believe it or not, this is a great time to invest. And it's a great time to learn about investing.

People are emotional creatures. While we like to believe that we make rational investment decisions, actually emotions like greed and fear influence these decisions. Because the market is a collective organism, emotional reactions lead to herd movements. Bubbles and busts result.

According to Benjamin Graham, a professor in finance and a pioneer in stock market psychology, "Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."

Astute investors, like Graham, however, distance themselves from the sway of the crowd.

As investor Warren Buffett, Graham's favorite student, puts it:

“Be fearful when others are greedy and greedy when others are fearful”.

So, in today's market, when fear dominates, the market is actually an opportunity for smart investors who have time to recover losses. For example, the Dow Jones Industrial Average fell 46 percent in 1974 only to rise 49 percent the next year.

Also, during Bear markets, the price-to-earnings ratio (one measure of relative cost of a stock) comes down. This means it's easier to find good stocks at a relatively cheap price.

Here's another bit of info. According to All Star Stocks:

"The worst sustained bear market of the past half century occurred from 1968 to 1981 when the Dow Jones Industrial Average essentially stood still for 14 years. Now that s a bear market! But even during that bear market, including dividends, you still would have earned an average annual return of about 4.3 percent. And that s if you didn' t invest at all during that 14-year period."

Good investors are born in Bear markets.

Matt is the marketing director at Online Investing AI (http://www.onlineinvestingai.com), a company that is developing automated trading strategies for individual investors based on solid investment principles and advanced artificial intelligence technologies.

In today’s financial climate, budget planning is extremely important. If you’ve managed to hold onto your job and escape the unemployment wave sweeping across America, pat yourself on the back. And if you are one of the 15 million unemployed Americans in today’s weak economy, financial budgeting is even more important. While you look for work, or wait for a miracle job to land in your lap, you should be aware of what you are spending. Unless you are filthy rich, engaging in a budgeting process is a smart thing to do.

Making Your First Budget

Step 1: Tallying Your Expenses

Listing your expenses is usually the most tedious and unpleasant part of the budgeting process. Budget planning software provides much-needed help with tracking one’s expenses. It is also better to think in terms of annual sums versus monthly, factoring in differences caused by seasonal changes (i.e. air conditioning, heating, gift-giving season).

To get started, list your expenses according to two categories: fixed and variable.

Fixed expenses must be paid each month and are more-or-less stable. Housing payments/rent, car payments, and bills such as real estate tax, gas, electricity, water, cable, phones and cell phones. If you pay membership at a gym, or to a movie store, include these under “fixed” as well. Debt and loan payments count too.

Variable expenses are not pre-set, and vary monthly. These include everyday expenses, such as food (groceries and restaurant spending), drug store/pharmacy, transportation/gas, alcohol, entertainment, gifts and shopping. Also factor in vacation expenses, doctor’s appointments, medications and unforeseen costs such as replacement of items lost or furniture/car repair.

Step 2: Average Monthly/Weekly Expenses

Once you have a full-year figure of expenditures, divide by 12 or 52 to see what you spend on average per month or week.

Step 3: Compare Expenses to Income

The goal is for your expenses to equal your income. If you can save 10% of your income toward pension, this is highly favorable.

The “60% solution” budget recommends the first 60% of your income going toward the heavy-duty and necessary expenses such as bills, loans, debt payment and utilities. The rest can be used for everyday and “fun” spending.

Cutting Costs

Reducing your fixed expenses is tougher than cutting back on variable and smaller costs, but both are possible. Here are some of the major ways to save:

• Utilities: Learn to live with less air conditioning, and in the winter use blankets in exchange for lower heating costs. Find out if your digital cable and phone service are the best deals available. If single, eliminate your landline phone service and use your cell only.
• Food: Favor cooking over restaurants, and pack lunches to work. Organize potlucks or dinner parties with friends instead of making plans based on eating out. Shop at larger supermarkets or wholesale stores rather than gourmet markets and make your own dishes instead of buying pre-packaged ones. Make your own coffee.
• Transportation: SUV and sports cars can be exchanged for more fuel-efficient varieties. Arrange carpools for your kids or for yourself to work. Using public transportation saves. Or save on gas entirely and invest in a bike. (This can justify canceling your gym membership as well!)
• Shopping: Wait for items to go on sale before purchasing, especially at large chain stores. Think twice before buying, or only go shopping with friends who have voices of reason. Sell old items you no longer want on E-bay. Get a stylish friend to cut your hair, and cut your kids’ hair yourself.
• Housing: Put an ad up for a roommate. Consider moving to a less-expensive neighborhood.

Extra Cash?

If you have extra money per month, put it in a savings account or invest it. Don’t just let it sit in your wallet, or it will likely be spent. If you are like many Americans, and your spending exceeds your monthly budget, it’s probably time to cut a few costs and smarten up about your spending.

The 401(k) may as well change it’s name to the Free and Simple Way to Save Plan.

What is a 401(k)?

A 401(k) plan is a retirement fund. Each company has its own unique 401(k) plan, but they are all generally the same thing. It is an employment benefit provided by an employer, much like vacation days and health insurance. However, your 401(k) benefit can be considered free money, and should be considered more valuable than most other benefits provided.

401(k) plans offer simple and smart ways to save.

You (the employee) selecting a percentage of your income, or a “contribution”, to be transferred into your 401(k) account, which is set up by your employer. (Note: self-employed workers can set up 401(k)’s as well.) The money is transferred pre-tax, which means you get the full benefit of what your salary is, on that percentage. You will eventually pay the taxes on this money (hopefully upon retirement), once you are probably in a lower tax bracket.

Invest in your future. In today’s economic climate, investing in your future is extremely important. Safekeeping your money in a 401(k) plan enables you to automatically save a little bit each month, in a sound and secure way. Think of it as protecting your earnings, while deferring tax deductions, and possibly receiving even more money in the form of “matching contributions” by your employer (see below).

Free tax-breaks. By deferring a portion of your earnings toward a 401(k), you reduce your taxable income, since usually your contributions are made before tax is deducted from your salary. This results in you paying less tax, for the same salary. Once you withdraw your money, you will owe tax on the income but will likely be in a lower tax-bracket.

5 essential tips for your 401(k)

1. Calculate your contribution.

Figuring out how much to contribute each month will require you to estimate how much you’d like to save by the time you retire, and work backwards to see how much is required from you each month.

Know your limits, and act accordingly. See if you can set aside 10% of your income – a nice, round number, recommended by most financial advisors – and go from there.

There is a “401(k) limit” on the amount you are able to defer per year, which is set by the IRS on a yearly basis. (In 2009, this limit was $16,500, or $22,000 if you are over the age of 50.) Your employer may have its own additional limits on the amount you can defer each year. These limits are likely to rise due to inflation.

2. Plan your investment strategy.

Your employer will offer you some options from which you will decide how your 401(k) money should be invested, so that it can earn its maximum potential. Your employer will likely offer a mixture of stocks, mutual funds and bonds.

Before deciding how much to invest and in what form, you must recognize: (a) the amount of time you have left before retirement, and (b) your personal risk tolerance. Stocks tend to be riskiest; in exchange for uncertainty, they offer a greater possibility of return. They are better conceived as a long-term investment, and not a reliable way to quickly earn money (or to quickly lose your savings!)

Even if you don’t understand (or don’t want to understand) the options provided by your employer, don’t decide to simply forget about your 401(k) altogether. Stay focused! Talk to your benefits provider or human resources rep for additional help, or simply invest in an index fund (for example, the Dow Jones and Standard and Poor’s 500), which provide a reliable method of gaining returns, in exchange for low fees.

3. Match contributions

As an added bonus, some employers offer to “match” the contributions you make toward your 401(k) plan. This may sound too good to be true, but it’s one of those rare gifts in life that come around once in awhile. Find out from your employer if there is a minimum amount you must contribute to qualify for their matching contribution, and be sure to devote at least this much to your 401(k) plan to fully benefit.

4. Changing jobs and “rolling over” your 401(k)

• (a) Leave it alone. Leave your 401(k) money where it is, in the plan set up by your old employer.
• (b) “Roll over” the money out of your old 401(k) account and into a new one, as provided by your new employer.
• (c) Transfer your 401(k) into an IRA (Individual Retirement Account). If your new employer doesn’t offer a 401(k), this may be the best choice.

Whatever you do – don’t cash out. You will owe penalty fees, and taxes on the money withdrawn. No to mention you will effectively terminate your own retirement fund.

If you do decide to transfer money either way, request from your new employer a “trustee-to-trustee transfer”. This allows your new employer to transfer the money directly from the old 401(k) account. Otherwise, you have 60 days to deposit the money yourself from your old employer into the new account, and you run the risk of incurring late penalty fees, not to mention the automatic 20% withholding for income taxes your old employer will take. In short: make it a “trustee-to-trustee” transfer!

5. Manage early withdrawals and loans wisely.

401(k) plans are retirement plans, and need to be treated with proper respect by those investing in them. Our government is encouraging us to plan for a better future for ourselves – so be smart about it! 401(k) plans are not schemes by which to arrive at fast cash. Having a nice chunk of change set aside that grows year after year might tempt you into tapping, but beware:

If you withdraw your 401(k) prematurely (i.e. before retirement – 59.5 years of age) you will have to pay a hefty price: income taxes on the funds withdrawn, plus a pesky 10 percent penalty fee for early withdrawal.

Of course, emergencies and unforeseen events do occur every now and then. Check the fine print of your 401(k) to see what qualifies as a “hardship” withdrawal; you may be able to get a reduction in penalties in certain occasions such as medical fees, funeral expenses or education payments.

A nice option, if you really are strapped for cash, is to loan yourself money from your own 401(k) plan. If you absolutely must dip into your retirement fund, a self-owed loan may be a reasonable tactic, as the interest will go towards yourself. However, if you suddenly find yourself out of that particular job, the loan is due immediately. So consider this option wisely.

Don’t Waste Another Day – Start Investing Now!

Don’t be part of that 1/3 of people who out of negligence miss out on a valuable benefit. When it comes to making the most of your salary, and planning your future ... it’s never too late to start. Sharpen your knowledge of what 401(k) can do for you – and prepare for a better future, now!

Over the last few months, we have been making interface and usability changes based on a limited alpha release we made. This helped us identify ways to improve the categorization system, and the workflow for entering payments into Finance Trails. We are also making some core changes to make future extensibility easier - this will help us roll out features at a faster rate, once we have launched the first public beta.

Stay tuned. We'll be announcing a limited public beta in the near future.