You want to buy a car? Start a business?

STUDENT asks:

"OK so I know that investing in retirement is VERY important, but this is where my financial worry comes in. In the future, lets say I want to start a business, buy a car, a house etc (and by future I mean late 20's-30's) I would need something in savings to do this with---is that correct? Or is there a way to invest somewhere else so that in say 10 years, I could have that money set aside for such things which collects annual interest"

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MONEY PROF responds:

You would have another acct with Ag Edwards ( or another brokerage)

What would be different is it would be taxable.

Another major difference is you would have to invest much more conservatively.

We'll get into this in detail when we're into investing. But for example:

x time until you'll need money = x % to have in stock market.

This is very rough as there are other factors, age, future income, tolerance for risk, etc., etc.

Will need money in 5 years= none in stock market, 10 yrs = 30%% in market. 20 yrs = 80% in market. Why is because based on past history the market goes up over 20 yr periods. On a year to year bases anything is possible. ( BTW: if you ask someone their opinion on what the market will do this qtr. or this year and they answer you, then you know they don't know sh*t. The correct answer is it might go up, or it might go down.)

Really shouldn't have got into the above investing theory at this point.

Why.....................
repeat after me:
5% of zero is zero, 8 % of zero is still zero. repeat after me: 5% of zero is zero, 8 % of zero is still zero. And 20% of zero YES, is still zero.

So that takes us to lets say buying a car in future. You would compute the estimated needed amount of money, less trade in on current car.

( you would use current car price and add say 3 % per yr for increase.,

then take your current make of car and use the yr of an older car that equals the yr you'll buy the new car. For example: say you have a 2002 now and you're plan is a new car in 2007, then look up a 2000 car to get rough trade in amount on 2002 in 2 yrs. All this can be done in 10 min. using NADA on Internet.

NADA Guides - New Car Prices, Reviews, Rebates, Dealer Quotes

Once you have that figure you'll know the amount you'll need for car.

The correct answer is YES you pay cash. But obviously that won't be an option on this car ( but should be in future). So you compute what will be saved and what on credit. NEVER exceed 3 yr loan on new car. ( less on used).

Now the IMPORTANT part. Reread this often:

I know all of you want to learn about investing and making money in the market, but I'm telling you this below is the important part now.

...............repeat after me:
5% of zero is zero, 8 % of zero is still zero. And 20% of zero YES, is still zero.

The first step is to promise yourself you will always have a budget. The next step is to commit to be saving for retirement now. Yes, now. You will be a millionaire if you invest 10-15% of what you earn per week into the stock market. EVERY week.
The easiest way to do that is to have two separate checking accounts. One (called household) is for bills that you don't have much control over, example: Savings, phone, electric, rent, car payment, car insurance, plates for car, car repairs etc.
The other is for credit cards, ( which I highly recommend you don't use unless you make payment before you use the card or debit card) food, beer, partying, gas, restaurants, clothes, gifts etc.
You compute what the bills are per week and deposit that total amount into household acct. every week, so if car insurance is $520 a yr. then you deposit $10 a week into household acct.
This sound like a pain, but it isn't as you would only compute this a few times a yr. once you came up with what the weekly figure needed to be. Best way to deposit is "direct deposit" if where you work offers this option. IF IT'S NOT AUTOMATIC IT WON"T WORK.
After the correct amount is deposited into household acct., the balance goes into the other acct. The rules are simple, you can only write checks out of household acct. for the items that you listed as weekly deposit items. No excuses to yourself.
In the other acct. the only rule is don't bounce a check.
The important part is the mental attitude. For example "what if I don't have enough money in the other checking acct. to go out with friends for drinks and dinner," then stay home and eat spaghetti. ( because you should have saved for this)

Now I have a question for you: do you think the guy that closed his IRA yesterday was following the above advice on "household acct"???