Managing your personal finances

Personal finance is an important aspect of each of our lives, whether we would like to admit it or not. We all spend money; we go out to eat, we buy gifts and we buy gas. There is seemingly always some expense that keeps us from getting ahead.

We are all good at spending money, but how good are each of you at making your money make more money? My goal is to help guide others to get the most out of their money and to understand the importance of investing today, not tomorrow.

Investing, similar to thinking about graduating and finding a job, tends to be something that we do not want to talk about or to think about right now. I'd like to change that.

I understand that money isn't everything. Surely it isn't. But, I know for a fact that in 30 years I would rather have $1 million in an investment account than nothing, wouldn't you?

Investing is very important because it can lead each of us to financial success, even when done in small, consistent amounts. The reason behind this is the magic of compound interest, which means having your money work for you.

For example: You put $1,000 away today in an investment account earning 10 percent. In a year you will have $1,100 thanks to the 10 percent interest rate. The longer your money works, the more you will make.

This leads us to the following question: How do I take advantage of compound interest? First off, make sure you have a savings account in addition to your checking account.

Most checking accounts do not give you any interest on the money that you have in the account (although some do). While a normal savings account will pay you interest, they generally produce a low yield, around 0.10 percent.

Fortunately, there is a way to boost the yield you can receive by opening an online savings account. I personally use ING Direct (ingdirect.com), which currently yields a 1.10 percent interest rate, which is still low, but it's significantly higher than your average savings account.

So by now you are probably thinking, "How can I do better than one percent?" Luckily, there is a way!

I would like to introduce you to two ways: 1) a personal investment account and 2) a Roth IRA. By opening either one or both of these accounts you can begin to invest.

A personal investment account is fairly straight-forward. It is an account that you transfer your money into and then use that money to buy a security (stocks, bonds, etc.), which then allows you to sell the stocks at any point and withdraw your money.

A Roth IRA is slightly more complicated, but it definitely has some advantages as well as disadvantages. The money you put into your Roth IRA will grow tax-free.

Yes, that means you will never pay taxes on the earnings on that money ever again. How it works: You contribute after tax income to your account, up to a current maximum of $5,000 and then buy a security on which your earnings grow tax-free.

The disadvantage, on the other hand, is once you put money into the account, there are guidelines to follow. You cannot take out any earnings in the account without several penalties until you are 55 years old (For more information, visit http://www.sharebuilder.com/retirement/traditional-roth.shtml).

You are allowed to take out the money you contributed, but I would advise you to keep it in the account to take advantage of the compound interest. The beauty of your earnings growing tax-free is the compound interest your money will make.

If you are 20 years old and contribute $1,000 per year to a Roth IRA earning 10 percent a year and you retire at 65, you will end up with $790,795. If you contribute the yearly maximum of $5,000, you will have $3,953,977.

Now I understand that not everyone can contribute the maximum right now, but clearly it would be worth your while today to find a few extra dollars to get started. So why not start now?

Several good Web sites you can look at for more personal finance information are: WSJ.com, Dinkytown.net and Beginnersinvest.about.com.

Please feel free to direct any questions to charles.sabatier@richmond.edu.

If you would like a referral link to get a bonus on your account, feel free to e-mail me as well.