Free Family Finance

Good news on the youth front:

Despite all the signs that young adults are becoming ever more dependent on their parents, they may be O.K. when it comes to saving, according to a study to be published early next year in The Journal of Consumer Affairs.

The study found that while those under 30 generally saved less than older adults in real dollars, when adjusted for factors like income levels, more young adults than older adults said they spent less than their income. The researchers found that about 61 percent of 25-year-olds and 58 percent of 35-year-olds said they would be spending less than their income, compared with about 56 percent of 45 and 55-year-olds who said the same. Spending less than one’s income was assumed by the researchers to mean saving.

Similarly, according to a Fidelity Investments study released earlier this month, more than 70 percent of employed adults aged 22 to 33 have set the goal of daily money management and budgeting as their biggest focus. More than 18 percent said saving for retirement was their “most crucial goal,” up from 13 percent in 2008.

A few thoughts:

• I wonder if the younger generation’s dependency upon their parents is directly related to their saving. Maybe they are only saving money because they are living with mom & dad. I would like to see the younger generation saving independently of familial assistance.
• Certainly the Fidelity study is hopeful. If 70% of young adults are budgeting, they are well on their way to success. If you don’t budget, you can’t do anything else…well.
• Maybe this is yet another upside to the great recession.

Article | Young Adults May Be Saving After All – Bucks Blog – NYTimes.com.

Photo | Nieve44/La Luz.

There is, what I believe to be, a common misconception in the world of personal finance. For years, there has existed a notion that ‘a person’s income is their greatest wealth-building tool’. To this notion, I must humbly disagree. I feel that this statement is a half truth, much like saying that the engine is responsible for the operation of a sports car. Certainly a car could not run without an engine. But there is much more to a car, than the engine alone (i.e. brakes, transmission, suspension, etc).

It is easy to dispel this misconception. One could simply look at a selection of people who have substantially high incomes. In theory, they should all be substantially wealthy. Right? But you don’t have to look far before you find high-income individuals who are not wealthy. In fact you could easily find a high-income individual who is flat broke. How could this be? They make tons of money!

There must be more to the equation, than income.

In its most simplistic form, why did these high-income individuals end up broke? They also had high-outgo’s. They spent to excess. They gave to excess – to friends & to family. They disposed of money at a greater rate than they earned it. Thus, the outgo is as fundamental as the income.

So what then, is the single greatest wealth-building tool? We have established that it isn’t income. And common sense would tell you that outgo alone isn’t the key. So what could it be?

I would suggest the single most important wealth-building tool is ‘the margin’. The what?! The Margin – the difference between the income and the outgo.

Income   -   Outgo   =   The Margin

It might be fair to call The Margin a personal net profit. For some people, their margin is a negative number. Those people are in trouble. For almost everyone else, the margin is a positive number, but statistics say it is a quite small number.

Why is it important to make the distinction between the income and the margin? Because if you believe that your income is your greatest wealth-building tool, then the answer to too many of your financial problems is, “make more money”. If your outgo is being neglected, “make more money” becomes a unicorn. It is unobtainable. You make more and inherently spend more, never truly addressing the financial issue at hand. You can work harder & harder, making more & more money, with no positive result.

The fact is, our greatest opportunity for building wealth lies within the margin. Subsequently, the key to maximizing wealth-building is maximizing the margin. As we raise our income and keep the reigns on our outgo (i.e. get out of debt & save money), we expose our greatest wealth-building tool.

When it comes to building wealth, the ‘Magic is in the Margin’.

I love ING DIRECT. I have been a customer of theirs for years. As I have described before in “How I Automate My Finances“, my ING DIRECT accounts are a vital part. Here is why.

There are two key products from ING that I use – a savings account and a checking account:

• The Orange Savings Account. Earn high interest. Great rates, no fees, no minimums. Start saving in under 5 minutes.
• Electric Orange – Earn high interest. Free Bill Pay. Free ATM’s at more than 35,000 locations. Apply online.

First, let’s look at the savings accounts. I have 5 of them. I use them for both my emergency fund, as well as my short-term savings vehicles. Thus, I have one account for each: Christmas, insurance, car maintenance, etc. ING automatically transfers a payment to each account, each month. This way, when my annual insurance premium comes due, I am ready. The same could be said for Christmas. They are like mini-escrow accounts! Because ING does not require a minimum balance, when the New Year rolls around (and I have $0 in my Christmas account), I don’t have to worry about minimum balance fees. Not only does ING allow me to keep my funds separate (which makes short-term savings goals a snap), but they also provide me an interest rate 13 times that of my last bank. Duh!

Last, let’s look at the checking account. First & foremost, it is interest bearing. The ING checking accounts are paperless. So your debit card is your preferred weapon. Additionally, ING offers a great online bill pay program. They will even overnight checks (for an small additional fee), if necessary. My wife & I are both paid via direct deposit. We use our debit card for everything , so we never write checks. We wouldn’t write checks even if we had them. For these reasons, switching to the ING checking account was pretty easy. They provide ATM access to ATMs all over the place and even if we are not close to an ATM, we usually just ask for cash back on our debit purchases. No big deal. I have been using my Electric Orange account since they began offering them. We have earned over $400 in interest over that time. For us, it is free money. Totally worth it.

As the old adage goes, it takes money to make money. And ING DIRECT makes it a breeze.