Pay off your credit card debt: Maybe you didn’t think of repaying debt as saving money, but think again. You’re saving the future annual interest you’d otherwise pay, which puts cash directly into your pocket. Every dollar used to reduce your credit card debt earns a return that equals the card’s interest rate.
For example, paying down a 12-percent debt gives you a 12-percent yield on your money, guaranteed. Paying down a 20-percent debt gives you a 20-percent return. That’s the highest safe return the market offers. So set up a speedy debt-repayment plan, even if it squeezes your style for a little while (didn’t you always know this day would come?). The more you pay, the less interest you’re charged and the faster your debt will drop. How to repay? You guessed it — automatically, from your checking account.
Reinvest all dividends:
Next to gravity and the tides, compounding is nature’s strongest force. And I mean strong. An investor who put $100 into Standard & Poor’s 500-stock average on the last day of 1925, held it until the last day of 2004, and reinvested all the dividends
, would have earned a huge $253,220, according to a calculation by Ibbotson Associates. If that same investor had taken out all the dividends and spent them, the gain would have come to a measly $9,400. Hard to believe, but true. That’s the power of compounding.
When you own a mutual fund
, you can reinvest all dividends in new fund shares automatically. Your gains compound without any effort on your part. By contrast, if you own individual stocks that pay dividends, you might have to take the money in cash. That makes it easy to fritter away. (Some companies offer shareholders a dividend reinvestment plan. For more information on these plans, see Dripcentral.com.)
Start a college fund:
Every state runs tax-deferred college savings
plans. I mention them here because all these plans love automatic contributions. Depending on your state, you can start with as little as $50 a month.
Pay off your mortgage:
Your home is your piggy bank, or ought to be. As you pay off the mortgage
, more of the value of the house becomes yours to keep. There’s nothing so sweet as a paid-up home when you finally move from full-time work into your retirement years.
At the moment, that sounds like a dinosaur of an idea. Homes feel more like ATMs. Owners are stripping the value out, by taking home-equity loans or doing cash-out re-financings (you “cash out” when you take a new and larger mortgage, pay off the older, smaller loan, and pocket the difference). Some of you are using that money to make financial investments — stocks, annuities, insurance policies, anything that sounds good in a salesperson’s mouth.
That won’t simplify your life. Instead, it adds a lot of risk. If your investments lose value, you’ll have wasted your home equity and will be stuck with the misery of higher mortgage payments, besides.
You might tap your home equity for a down payment on a second home. That works, as long as you’re sure you can cover both mortgages every month. When you’re a two-home owner, you should keep extra savings in the bank, just in case your income drops. You want to be sure you can pay all your bills, if you have to sell one of the houses and it takes a while.
Homeowners have more financial freedom when they let their home equity build. It serves as a second cushion fund and saves you from mortgage debt when you’re not working anymore.
Your bank will cheerfully automate your mortgage payments, or you can set up the payments yourself through your online account. But why stop there? Add an extra $100 or $200 a month, to reduce the principal of the loan. Every extra payment lowers the future amount of interest you have to pay. It also adds to your equity, meaning more cash in hand whenever you sell.