The Amateur Financier

Recently, Frank Curmudgeon of Bad Money Advice posted (or rather, reposted) an article in which he discussed hyperopia, or excessive far-sightedness.  The basics of this condition involve regretting excessive caution taken in the present to avoid a hypothetical negative outcome at some point in the future.  The study he cited included, as an illustrative example, students who increasingly regretted the decision to study rather than party during their college years.  Over time, more and more students came to regret having too much self-control, versus not enough.  (I feel their pain; I wish I had done a bit more socializing and a bit less studying during my college days.)

When it comes to your finances, hyperopia can hurt you, just as can myopia (excessive short-sightedness).  You might find, years or decades down the road, that you feel you’ve gone through life without having any fun, instead saving and scrimping during your best years.  At best, this point of view can taint the otherwise grand event of saving enough to retire, or even retire early.  At worst, in an attempt to make up for lost time in the wild and crazy department, you might end up spending a great deal of money when you’re older (and have less time to make it back) than you would have during your younger days.  (Think of the guys who go through a mid-life crisis and buy a car with a six-figure price tag.)

How Do I Avoid Financial Hyperopia?

There’s no certain way to avoid being too farsighted and frugal with your money.  Each person is different, and what I might consider an excessive amount of saving, you may feel is just right.  If you do too much spending in an attempt to capture all the joys that life has to offer (and to live with no regrets), you will likely end up with not enough in savings when it comes time to retire, and end up with a heap of regrets anyway.

If there’s no way for me to tell you how much to save and how much to spend to make you happy, what advice CAN I provide?  In a nutshell, know yourself, and adjust your spending to meet your own needs and desires, now and in the future.  For a bit more advice on avoiding hyperopia, consider the following tips:

1) Splurge on Events, Not Things – Probably my strongest belief related to financial hyperopia: events are more memorable than physical objects, and you shouldn’t skimp on them if you hope to live a life relatively regret free.  Just about all the really good memories I have are from things I did, usually with friends or family, rather than things I bought.  If you want to avoid feeling like you missed out when you retire, be sure to do plenty of new and interesting things with your loved ones throughout your life.

2) Don’t Make Spending a Routine – No matter how interesting and memorable something is the first time you experience it, if you do it repeatedly, it’ll become boring and routine.  Even the most exciting and interesting vacations will become boring and start to blend together in your mind if you take the same ones every single year.  Make sure to vary your spending, in order to capture different experiences throughout your life and avoid feeling like you’ve seen it all.

3) Don’t Try to Make Big Changes All At Once – If you feel like your frugality has caused you to miss out on some great experiences in life, you might be tempted to make up for lost time by becoming very loose with your money.  In a word, don’t; going on a spending spree is unlikely to make you feel more satisfied with your spending decisions in life, and is likely to leave you significantly poorer in a short period of time.  Instead, plan out some events (or things, if you prefer) that you feel will make your saver’s regret decrease, and slowly start to integrate them into your spending plans.

4) Try to Start Young When Saving – You might wonder why a tip saying to save is included in a list of solutions to excessive saving.  The answer is simple: thanks to the power of compound interest, each dollar you save and invest while you are young has time to grow into much, much more money in several decades time.  As a result, saving a little bit (more) while you are young will enable you to spend more as you get older, without having to worry that you won’t have enough money to retire.

That’s all I have on financial hyperopia and how to avoid it.  As money problems go, it’s hard to think of a better one to have; still, if you are preventing yourself from having interesting and memorable experiences in order to save more money, you may feel as if your life has passed you by when you finally get to enjoy your spoils, and that’s something we want to avoid.  Make sure you accrue good memories as well as money during your life, and you should end up fine.

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“R-E-S-P-E-C-T
Find out what it means to me
R-E-S-P-E-C-T
Take Care, TCB”

-Respect, by Aretha Franklin

As you might guess from today’s opening lyrics, today we’re going to talk about, well, respect.  That is, holding the people and things around you in esteem, treating them as if they have intrinsic value, and showing courtesy and good behaviour to the people around you.

What does this have to do with personal finance, you ask?  Well, on the surface, perhaps not much; but respect really underlies every aspect of the monetary system.  If you don’t respect the companies that issue stock, why should they expect to get any of your money?  If your investment advisors don’t respect you, what’s to stop them from taking your money and running (a la Bernie Madoff)?  And of course, if other countries stop respecting America and trusting in our ability to pay our bills, just think of what will happen to our currency and standing in the world.  In short, respect is an important part of lives, and there are many people and things of which we should be respectful.

Whom Should I Show Respect?

Your Family – Treating the members of your immediate and extended family as valuable, important people is an excellent place to start.  If you genuinely respect your relatives, regardless of their choices in life, you help to form stronger, more durable connections to them and have them much more willing to help you in future, should the need arise.  (Not that such an ‘emergency plan’ should be your primary motivation for respecting them, of course; it’s just a nice bonus.)

Your Coworkers – If you want a work environment where your stapler doesn’t suddenly disappear on you or your lunch gets eaten right out of the company fridge, it all comes down to respect.  Do your best to treat those around you respectfully, and hopefully, your sentiments will easily be returned.  While strict enforcement of company policies can help to decrease the problems of a workplace with disrespectful people, there’s no substitute for having coworkers that return your courtesy towards them.

Your Company – By the same token, you should treat your company and the area you work with respect.  Don’t make a mess, behave inappropriately, or treat your boss shoddily.  You’re just going to make things less pleasant for your coworkers, and possibly bring your boss’s wrath down upon yourself.

Your Significant Other – I wish I didn’t have to say this, but here goes: if you don’t respect your partner, things will not go well in your relationship.  If you are just using your significant other to meet your own needs, whether physically, emotionally, or financially, the best case is that they will quickly tire of you and move on.  The worst case ends with a huge court proceeding that drags on foever, and makes you seem like a massive jerk.  Just avoid either one by showing respect to your romantic counterparts.

Yourself – Lastly, but perhaps most important, respect yourself.  If you don’t respect yourself, nobody else is going to, either.  Then, since you aren’t getting respect, you’re not going to give it to anyone else either.  Break this circle, find out what about you is good and deserving of respect, and treat others with the respect you now feel.  (But don’t go too far in the other direction; there’s a surprisingly thin line between healthy respect for yourself and egotism.)

That’s all I have to say on the concept of respect.  Remember, respect yourself, respect others, and respect will come back to you.  Now, be safe and respectful to each other, all of you out in reader land!

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Yesterday, I had a horrible, horrible drive home from work.  Two of my wheels went flat, and it took the bulk of the day to get them fixed.  Luckily, since I’m working the night shift now, I had the time to get towed (to two different repair shops), have the wheels replaced, and have the hub of one wheel fixed (at a third shop I only reached thanks to my emergency spare).  Unluckily, because I had to run around repeatedly in order to accomplish all of this, I only got about three hours of sleep before I needed to go into the work that night.

Still, even though I had little sleep (and even less time to catch up on my blog writing and reading), it did inspire some thoughts for me.  The biggest one is to be prepared for trouble whenever you go out driving.  Although I was on the road for less than an hour, going a route I practically know by heart,  I still ended up having to stop.  If you aren’t prepared for such an eventuality, it could end up costing you in terms of time, money, and even safety.  With that in mind, here are some points of advice for anyone who drives regularly, as well as my grade in each of them.

Car Maintenance Tips

1) Keep your car in good shape: The more preventative maintenance you do, the less likely you will find yourself standing by the side of the road, calling desperately for help, trying to find someone who can give you a ride.  If you make sure you have fresh oil, plenty of fluid in your radiator, good tires with a nice tread, and no problems with the frame, you’re going to have much less trouble with your car during your drives.
My Grade: B – I do try to keep my car in good working order, but sometimes I let things get a little backed up and my tires get a bit bald or my fluid levels get too low.  After this event, though, I’m going to make much more effort to be up on these preventative maintenance tasks in the future.

2) Know thy car and how to repair it: Let’s face it, no matter how well we try to care for our ride and how much we try to keep it working, accidents happen.  A tire blows, the engine overheats, the radiator blows; when we drive, any number of things can occur that can stop us in our tracks.  Being able to determine the cause of your problems, and fix the most common minor ones, is a valuable skill for anyone who spends time behind the wheel.
My Grade: C – I can change my tires, check my fluids, and keep my car moving in most circumstances, but if anything happens to the engine or to the exhibition catacomb, it helps me way beyond my ken.  Luckily, that’s fairly rare.

3) Have the Appropriate Materials Needed: When you have car trouble, it’s likely due to problems with your tires or the engine.  Now carrying a complete engine and four spare tires is not the sort of thing most of us can (or will) do.  But if you make an effort to have some repair and replacement materials on hand, you’ll be that much closer to being able to fix your car problems yourself.  Being sure to have everything you could need (especially if you are going to be far from stores or other resources) is vital for the prepared traveler.
My Grade: D – I’ll be the first to admit, I don’t usually have enough car repair items in stock.  I have an emergency spare tire, a jack, and a wrench, but that’s it; no extra oil, no spark plugs, no jumper cables, no equipment of any kind to help if something other than a tire gives way on me.  For that matter, I only have the one emergency (non-full-sized) spare, so if two or more of my tires go, that’s all she wrote.

4) Stay Calm: If you do find yourself in a situation where your car is no longer functioning and you can’t repair it, don’t panic.  Stay calm, focus on contacting someone who can help (either a family member or, more likely, the nearest repair person), let your boss or whoever you were driving towards know the situation, and wait until the calvary shows up.  Yes, having your car break down is a pain, but if you keep focused, you can easily get through it without a problem.
My Grade: B – I’m pretty good at not panicking under pressure, and it has helped whenever I’ve had car trouble.  I could be better (less cursing my luck when these things happen, for example), but I’m not too bad.

5) Have a Cell Phone Handy: In these days, when everyone and their kids have their own phones, finding a working public phone is all but impossible.  If you are out driving, be sure that you or one of your passengers is carrying a charged cell phone, so you have some way to contact help should you need it.
My Grade: F – I carry a cell phone everywhere I go.  Unfortunately, it’s getting kind of old, and it no longer holds much of a charge.  In the case of this incident, I ended up having to go inside the nearest gas station and use their phone (the pay phone out front was out of order).  Being able to get help on your own is vital to your safety, so be sure to be more prepared than me.

6) Join AAA – The American Automobile Assocation provides any number of services to its members, offering towing to stranded vehicles and sending repairmen who can perform simple maintenance on your vehicle.  Plus, you can frequently get discounts at various retailers by presenting your card, potentially enabling it to pay for itself.
My Grade: A – I am a proud, card-carrying (literally) member of AAA, and have been since I first started to drive.  They’ve helped me out a pinch many times (more than I would care to admit, honestly), and are more than worth the cost.  If you are a US citizen who drives a car and aren’t a member, I strongly, strongly recommend you change that fact immediately.

There you have it, six pieces of advice from me to you that should make your driving life a lot smoother.  Farewell, and happy travels!

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I’ve been thinking lately about cashing out lately.  For those of you who’ve never heard the term, the concept is basically to build up your money so that you are able to effectively retire early, usually in your forties to fifties, and do whatever you want with your new found free time.  Depending on your personality, that might be taking on new hobbies, expanding the time you devote to your existing hobbies, simply spend more time with your family, or even start working a job you really enjoy, regardless of the pay rate.

So far, cashing out sounds pretty good; what could be better than calling it quits on your job a decade or two ahead of schedule and being able to live every day like it was a vacation?  Well, unfortunately, there are some downsides: because you’re trying to retire so early, you’re pretty much going to be on your own as far as saving for retirement.  Retiring before the age of 62 means you aren’t entitled to even partial Social Security benefits, and pensions (for those lucky few who still work at companies that have them) are likely going to unavailable to someone who’s only been on the job for fifteen or twenty years.

“No problem,” you say, “I’ll just depend on my own retirement savings to carry me through.” Well, that’s fine, except early retirement means you’re not giving your best friend as an investor, compound interest, much time to work. This means, if you want to get to the amount of money you need in a much shorter time frame, you need to add much more money to your investments.  How much more?  Well, let’s say that you crunch some numbers and decide that taking out $40,000 of your money each year will allow you to enjoy your early retirement.  If we assume this amount will represent no more than 4% of your total portfolio, that means you need one million dollars in your account on the day you retire in order to make your whole plan work.  If you’re saving for 40 years, no problem; according to my ‘back of the napkin’ calculations, an annual contribution of $2100 more than gets you to your goal.  (We’re setting aside inflation at the moment, to make the calculations a bit easier; don’t worry, we’ll cover how inflation affects the amount you need to invest soon.)

The problem starts if you try to cut down that amount of time until retirement.  If you want to retire in 30 years, expect to contribute $5600 a year to reach one million; more than twice as much, but still a workable amount for someone who requires about $40,000 a year to meet their needs.  To retire in twenty years, you’re looking at a contribution of about $16,000 a year, nearly tripling your savings requirement.  Finally, to reach a one million dollar nest egg in ten years, you will need to contribute $58,000 a year, nearly fifty percent more than you intend to spend each year in retirement.  If you are not making a six figure salary, you’re going to be hard pressed to come up with nearly sixty grand year; and if you are making that much, are you really going to be satisfied only spending forty thousand dollars each year after you retire?

If that hasn’t shattered your dream about retiring to a tropical paradise in just a few more years, let’s note that this is an oversimplification.  For one thing, we haven’t talked about inflation at all.  This is one area where the early retirees have a bit of an edge; less time until retirement means less time for inflation to eat away at the real value of your money.  Unfortunately, it also means you’re have to increase the figures we just gave for the yearly contributions; even ten years from now, a million dollars just won’t be worth as much.  To get an inflation-adjusted million after forty years (with a 3.5% assumed rate of inflation), you’ll have to increase your yearly contribution four-fold, to $8400 dollars; in order to retire in ten years with an adjusted million, you’ll need to put in $82,000, a nearly ten-fold increase in your contribution amount from a forty year horizon.

After hearing all this, are you sad, depressed, and ready to just give up on your dreams of early retirement?  No?  Good; if you realize the enormity of the task ahead of you and still are determined to retire early, you might just have the resolve and determination in order to make your dream come true.  To help you out, let’s end this column on a higher note and go over a few steps for anyone who shares my dream of leaving the rat race and retiring early:

1) Plan carefully, and conservatively - Your first step should be to sit down, crunch some numbers, and see (a) where you currently are, financially, (b) where you hope to be when you retire, and (c) what path you need to travel to get from (a) to (b).  Decide just how much you will need when you retire (adjusted for inflation), the amount to invest each year, and whether it will be possible for you to pull that much from your budget to add to your future plans.  If it’s simply not mathematically possible to retire at the time you want (without working two more jobs or simply never eating), try to shift your desired retirement date a bit; aiming to retire in twenty years rather than ten cuts the (inflation-adjusted) amount you need to save down more than fifty percent (to $32,000, if you are curious), and going from a twenty to thirty year time frame  (which could still lead to retirement before the AARP decides to add you to their ranks) cuts the needed amount in half again (to $16,000).  Of course, all these figures assume you’re shooting for an inflation adjusted one million dollars at retirement; you’ll have to adjust them to meet you own particular situation.

2) Cut down on your spending – There are two advantages to this course of action.  First, if you’re spending less each month, you have more money to put towards your early retirement, making it easier for you to meet your investment goal.  Second, if you find you’re able to live a good, full life spending only thirty thousand a year rather than forty thousand, you can probably adjust your final goal downward, requiring less in contributions (or netting a quicker time to reach the needed amount with the same contributions).

3) Invest More – If you’re trying to retire years, if not decades, ahead of the rest of your office mates, you can’t invest the same amount that they do.  Putting 10% of your paycheck into a 401(k) every year might (and I stress, MIGHT) provide you with enough of a return in order to retire at 65, but it won’t be enough to give you a ‘Get of Work…Forever’ card by the time you turn 50, to say nothing of when you’re even younger.  Shoot for 20-30% of your gross income, and try to ramp it up a bit more, if possible.

You should also look carefully at the rules governing retirement plans, to determine if, should you invest in a 401(k), IRA, or Roth, whether you will be able to get the money out when you need it and how much it will cost you in penalties and other fees when you do.  If they look like they will benefit you, feel free to take advantage of their tax advantaged nature for a portion of your retirement savings; if not, simply use taxable accounts.  (A complete guide to all the subtleties of retirement accounts as they pertain to early retirees is bit more than we’re going for right now; just be aware that usually, taxable accounts will be better when you’re trying to retire early, but not always.)

And most importantly…

4) Make sure to have fun along the way – It might be tempting to take every spare cent you have and put it into your retirement savings (and you might argue that I just told you to do as much in my last point), but if you do so at the cost of your current enjoyment, you’re going to spend some of the best years of your life doing an impression of Scrooge while your friends, coworkers and classmates are having the times of their lives.  Furthermore, if you spend the first twenty years of your adult life depriving yourself, you’re going to be that much more likely to live it up when you do retire, and possibly blow through all the money you worked to accumulate.  Neither of these events is something I want to happen to you.

A much better strategy is to be conscious of your financial goals and how much you are trying to save, but not to let it stop you from having a life.  Go on, attend parties, go on dates, spoil your significant other every now and then, and perhaps even spoil yourself occasionally.  Just try not to go over the top when you do so; be frugal in your day to day life as well as your celebrations, and you can have your fun AND save your desired amount for an early retirement.

Here’s looking at good luck to you in your attempt to retire early; I hope I’ll have the chance to join you!

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Ah, it’s Thursday already.  Time flies by when you’re spending hours each day in training at your new job.  So far, things have been going pretty well; a lot of general information about the company (Sanofi Pasteur) and the practices it follows are being presented, and we’re just starting to go over the actual building and area where I will be working.  I’ll working on vaccines for the H1N1 strain of flu (swine flu, don’t you know), so feel free to give me a passing thought when you’re lining up for your injections this flu season.

The only bad thing is that a combination of this job training and the fact that I’ve been feeling under the weather lately means that my blog has had to take a back seat for much of the week.  Once I am officially on shift and can get a good rhythm going, I should be able to catch up, but for now, I’m having a little trouble in keeping up with everything.  Don’t worry, though: short of coming down with the flu myself, there’s nothing that will keep me from updating my blog as often as life allows me the opportunity.

On that optimistic note, let’s see what some of the other personal finance bloggers out there are talking about:

Dairy Farms Rely on Illegal Immigrants – So often in debates about immigration, some basics of economics are lost in the shuffle.  Namely, more immigrant workers mean lower labor costs which in turn mean lower prices in the store (particularly for agricultural products, a field where most Americans aren’t exactly jumping for jobs).  On My Life ROI, these points and others are discussed in detail, a discussion that we as country seem to be endlessly trying to put off (but really can’t).

The Ultimate Financial Survivial Guide for New College Students – While the ‘ultimate’ in the blog title might be mostly good marketing on his part, Studenomics does an impressive job of covering many of the financial considerations of which incoming college students should be aware.  In fact, I’d go even further and extend his first few points to everyone over the age of twenty: if you are old enough to drink, you should have an online bank account, a retirement account, and a credit card already.  If you don’t, it’s time to get on the ball.

Deciding on Home Ownership – Given the recent decline in house prices as well as government incentives for new home buyers, it’s a good time to purchase a house.  That’s the thinking over at Green Panda Treehouse, apparently, as they finally took the plunge and purchased a townhouse.  Also covered is some of the logic behind the decision; while it’s a good time for those who want to be homebuyers, that doesn’t mean it’s the right time for all potential home buyers.  You need to consider your own needs and resources.

Spend Time to Save Money – Mrs. Micah provides a few good ways to spend a little extra time in order to save money on your purchases.  Using coupons (both online and off), creating a price book, negotiating lower insurance rates, and opening a higher yielding bank account are all good suggestions.  If you put your mind to it, there are plenty of ways to add some value to your life with only a (relatively) small investment of time.

What Kind of Saver Are You? – A list of different savings personality types, covering a range of people, is up on the Weakonomist’s website.  It’s kind of neat to read through his different descriptions and see which one fits you the best.  I like to think of myself as a Sweeper, for the most part.

Don’t Chase High Rates for Savings Accounts – I’ll admit, I’ve tried to chase high interest rates in the past (and actually, would probably continue to do so if the chance to earn a much higher rate presented itself).  Luckily, Stephanie of Poorer Than You provides a good idea of what to do with a wide number of online savings accounts, using each one for a different savings goal.  Not bad advice if you have a number of different accounts you want to put to go use.

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I’ve discussed options briefly in the past, as part of my Investing 101 series.  While they can be useful as a way to profit from market movements without owning the underlying stocks, they can get a bit tricky.  To help you understand who profits from different option related situations, let’s go over a few examples.  (Don’t worry, there’ll be pictures soon!)

Calling in the Profits

As you hopefully remember from the aforementioned Investing 101 post, calls are options that enable you to purchase shares of stock at a particular value (the strike price) at some point in the future.  (Either at the expiration date, for European-style options, or at any time before or on the expiration date, for American-style options.)  You might be tempted to assume that after you have bought a call option, all you need to do is wait for the price of the underlying stock to go above the strike price, exercise the option (that is, buy the stock at the strike price), and bingo, instant profit by buying at a discount.

Well, that’s not quite the way it works.  In order to get someone to agree to sell you the stock at a particular, fixed value (which is known as writing a call), you have to give them an incentive (read: money).  This is called the option premium.  But that’s not the end; you also have to factor in the money you are paying to the brokerage in order to match you up with a call writer, the commission and other transaction costs.  All told, the price for you to break even on your option transaction (and make as much profit as if you simply bought the stock and held it while it rose in value) is found like this:

Break-Even Price (Calls) = Strike Price + Option Premium + Commission and Transaction Costs

If the price of the stock when you exercise the option is between the strike price and the break-even price, you (our option buyer) will be able to buy the underlying stock for less than the current market price, but the savings you get will not be enough to make the whole process (buying the option, then exercising it and buying the stock) profitable for you.  For a graphical representation, take a look at this (click the picture to expand it):

If we go from left to right across this chart (following the increase in stock prices) we see:

• Red: The call writer gets to pocket the option premium, and doesn’t have to part with his stocks.  Good for him, bad for the call buyer.
• Yellow: The call is exercised (it is ‘in the money’, meaning the strike price is less than the market value) but the savings on the buyer’s part don’t cover the cost of the option.  The call writer gets the strike price for the stocks, as well as some profit from writing the call, although not as much as if the stocks stayed below the strike price.  The call writer’s profit decreases the further to the right you do in the yellow area.  (Actually, because of the commissions charged by the brokerage, the far right area of the yellow section is one where neither the writer nor the buyer profit.  As a result it’s possible for opinions to be a lose-lose proposition (at least for everyone but the brokerage).)
• Green: The call is exercised, and the total cost to the option buyer is less than the cost of purchasing the stock at the new, higher price.  The buyer profits, and makes more profit the higher the stock price goes, while the call writer makes less profit than by holding and selling the stock outright.

Where are you Putting that?

Puts, in case you forgot, are essentially inverse calls; rather than allowing you to buy a stock at the strike price (regardless of the current market price), puts enable you to sell stock you own at a given price, regardless of the current market value.  Buying a put is a way to profit when your stock goes down in price, without having to sell the stock and buy it back later.  Of course, as with call options, puts have a premium and commission costs associated with them.  However, because you expect the price of your stock to go down (or are trying to insure against such a fate), when calculating the break-even price, we need to subtract these costs from the strike price:

Break-Even Price (Puts) = Strike Price – Option Premium – Commission and Transaction Costs

It might seem a bit odd, if you’re used to regular stock investing, but when buying puts, the more the stock price declines, the more profitable the put becomes (as it forces the writer to buy the stocks at a much higher than current price).  To see how this works in graphical form:

As you can see from this chart, the lower the stock price, the more profitable the put option.  If we go from right to left:

• Green: Below the break-even point, the put buyer can force the put writer to buy the underlying stock at the strike price for more than current market value, also netting enough profit to more than cover the cost of the option.  The buyer benefits, while the writer has to pay an overpriced amount for a declining stock.
• Yellow: The put is exercised and the put buyer can force the writer to buy the underlying stock for more than current market value, but not enough to cover the cost of the option.  The further to the right you go, the more profit from the option premium that the writer gets to keep.  (Again, the area right next to the green portion of the grid is one where, due to commissions, neither party will actually make a profit.)
• Red: Above the strike price, the put writer gets to both keep the premium and not have to buy the underlying stock.  The put writer benefits, while the put buyer is out the option premium and commission costs.

One final point about options before we call it a day.  You might be wondering why anyone would bother to buy options, when there are two areas of our graphs, the red and (most of) the yellow, where selling yields a profit.  Well, there are several reasons; first, no matter how the stock price moves, the only profit you can get from selling options is the option premium.  By way of contrast, when buying an option, you can get spectacular profits if the stock shoots into the stratosphere (with a call) or drops to nearly nothing (with a put).  Second, if you find yourself on the wrong on of one of the aforementioned greatly profitable deals (and did not buy back your option), you could end up selling a spectacular stock for a song or forced to buy a crummy one for much more than market value; whereas the option buyer will only be out the option premium and commission costs if the trade breaks badly for him or her.  Finally, if you are working with American-style options, all you need is one day when the option you sold goes into the green territory, and you can find yourself losing your profit.

What’s the moral here?  Don’t underestimate the risk with options, particularly when selling them; unlike buying options, you’re abdicating your ability to control when (or if) the option is exercised, leaving you to the mercy of the option buyer.  But don’t forget if you choose the buying path that you need to not only need to be concerned about the strike price, but also the break-even price.

Options aren’t for the lazy or weak of stomach; if you decide to invest in them, be sure you understand everything, including all the ways you could lose money (ESPECIALLY all the ways you could lose money) and only put a small portion of your portfolio at risk, at least until you become an options expert.  (And even then, only use options when needed.)  Good luck, and happy investing!

• Investing 101: Futures
• Investing 101: Options
• Book Review: Dave Barry's Money Secrets

• Making money with an eBay Store, Part 2: What is it and do I need one?
• Freeing Up Breathing Room in a Tight Budget
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(Welcome once again to my ongoing feature, Investing 101.  This week, we’re looking at indexes, those things whose prices you hear quoted at the end of most business news reports.  But what are they, how do they work, and why does everyone seem so concerned about this ‘Dow Jones’ guy?  Read on for the exciting answers to these and other questions of vital importance!)

Q: So what is an index, anyway?

A: An index is simply a collection of stocks, bonds, or other individual investments.  Depending on the particular index, it can represent the entire market or some smaller portion, divided up according to index creator’s criteria.  You can think of them as imaginary portfolios holding the particular investments that it tracks.

Q: Alright, why should I care about indexes?

A: Well, if you are investing in index funds, where the mutual fund company attempts to own all of the stocks in the index (or a representative portion, in some cases), then indexes should be quite familiar to you.  They serve as the basis of your funds’ holdings.  You can thus use the performance of the index (which are frequently reported in newspapers) as a proxy for your investment performance.  (Although, it’s worth mentioning that your index fund will (almost) always lag the performance of your index; real mutual funds have expenses while indexes themselves do not.  Still, your fund should perform roughly the same as the underlying index, making the index a useful tool.)

Q: That’s fine for index investors, but I buy actively managed funds and individual stocks.  How do indexes help me?

A: Well, indexes serve as a benchmark for your actively selected investments.  If you own an actively managed fund (or attempt to manage your own money), you should compare your returns to an appropriate index.  If your fund is not outperforming the index (or an index fund, to take into account the aforementioned mutual fund fees) that holds the same type of investments, you should consider switching to an index fund and being done with it.  You’re paying higher fees (or trading commissions) to achieve worse results than you could get with an index fund.  (Now, of course, be reasonable with your comparisons; dropping a fund for one year of under-performance is not usually justified.  But do be sure to watch how your active investments perform compared to an appropriate index.)

Q: Alright, what sort of indexes are out there?

A: There are literally hundreds of indexes, run by numerous different companies.  There are indexes created by Standard & Poor’s, Morgan Stanley, and the Russell Investment Group, amongst others.  Three of the most commonly encountered indexes are the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite Index:

• The Dow Jones Industrial Average, commonly called the Dow, is composed of 30 different stocks that are among some of the largest companies traded in America.  These companies are considered some of the leaders in their fields, and the index, although limited, is considered a good representative of how American industry is doing.  It’s also the most commonly and prominently mentioned index on financial and other news programs, and thus one that’s easy to track.  For a more complete picture of how American business is doing, we can look at:
• The Standard and Poor’s (S&P) 500 Index, which measures the performance of 500 of the largest companies in the United States.  It includes all the Dow stocks and an additional 470 stocks of large companies, making it a more complete and accurate picture of American industrial performance.  It does not include mid- and small-cap stocks, though,
• The NASDAQ Composite Index measures the performance of the more than 4,000 stocks that trade on the NASDAQ exchange.  It tends to be weighted towards technology and other ‘hipper’ stocks (one reason why it suffered a tremendous fall at the end of the tech boom).

Q: That’s quite a list; you say there are other indexes?

A: Oh yes, indeed.  There’s the DJ Wilshire 5000, which includes all the stocks in America, making it even more representative of the American economy than the S&P 500, the MSCI EAFE, which invests in European, Asian, and Far Eastern stocks, and the Russell 2000, which invests in small- and mid-cap stocks (a total of 2000 of them, to be exact).  Which index funds (and related indexes) you should invest in and how much money you put into each one will depend on your goals, financial situation, and personality.

Good luck in the wonderful, funderful world of indexes, and see you for the next edition of Investing 101!

• Book Review: Jim Cramer's Mad Money
• Investing 101: Mutual Funds
• Investing 101: REITs

• Mutual Funds 101
• Index Funds 101
• The Vanguard Asset Allocation Fund (VAAPX) Isn't Worth Owning

Hello, good readers.  If you’ve been following my little ramblings for the past month or so, you’ve heard me give advice on several aspects of job hunting, from how to behave at a job fair to how to follow up on a job interview.  Of course, the ultimate goal of job hunting is to find new employment.  (Unless you’re a rich tycoon with an odd sense of fun who gets a kick out of interviewing for jobs you would never, ever, really accept; in that case, do whatever you want.)  So, if (or more properly, when) you get your chance, how should you behave on your first day of work?

First, even before you get to work, dress appropriately.  What constitutes an appropriate outfit will depend on what sort of work you’re doing.  If you work on a construction site, blue jeans and a T-shirt will likely be all you need; if you’re working in an office environment, wearing a suit and tie (or nice skirt and jacket, if you happen to be a female) will work best.  If you need to wear an uniform or other specialized outfit, be sure you know whether you need to put it on before you get to work or whether you are changing on the job.  In either case, ensure that you have the appropriate outfit available before you get on the job site (unless it’s provided in a locker room or other staging area at your job site).  If you don’t know what to wear, or will have training in a classroom setting before getting on the actual job site, business casual attire is a safe bet, such as seen here:

An example of Business Casual Attire

Speaking of training, know what you’re going to be doing on your first day of work.  If you have several days of training, covering the details of your job as well as the rules and regulations of your company, be sure to bring any needed supplemental material to your training session.  Handouts from your interviews, paper for notes, writing implements, folders for any handouts (and there can be lots of handouts), all should be part of your first day training session supplies.  While attending your training, listen closely, take any notes you need to follow the material, and be sure to ask questions, particularly if there is anything you don’t understand.

If your first day has you shadowing someone, be sure to pay close attention and study what they do as  you watch; it might be your best chance to learn what the job entails.  Chances are you will spend your first day observing and learning the ropes, but don’t let that be an excuse to slack off.  You only get one chance to make a good impression on your instructor, who is likely to be your overseer on the job, as well.  It’s best to be on your best behavior and try to make a good impression.

On that subject, one last consideration: be friendly with your coworkers.  You don’t have to find a new best friend on the job site, but if you are pleasant, cheerful, and willing to chat with your new fellow workers, chances are that you can make your on-the-job time more enjoyable.  In addition, if your coworkers have a positive impression of you, it’ll only help when you face job reviews or have to get their help with some aspect of the job.

That’s all there really is to getting started on the job; dress appropriately, be prepared for the first day’s tasks, and try to make some new friends.  Have a great first day on the new job, and enjoy your work!

• Book Review: Rich Dad, Poor Dad
• Book Review: The 4-Hour Workweek
• Thoughtful Thursday: On the Job Training can be Fun

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• guest post at "Consumerism Commentary"
• Weekend Edition: Spring Training

I’ve been thinking lately about everything I have going well for me in my life.  Good friends, loving family, a sweet girlfriend, and now, a good job.  So, since I’m currently spending the last weekend before I start my new job visiting my girlfriend (who would rather I spend my time obsessing over her than over my blog), I thought I would list a few things in this world that make me content.  Not merely happy or joyful, but satisfied with my life and the way it’s worked out so far.  Some of the things that satisfy me in this way:

My Family – An endless source of support, encouragement, and love, my family is always there for me.  They are sweet and wonderful, and if it weren’t for all the support my mother has given me over the years, I would have turned out much differently (and probably much, much, MUCH worse).  My family is just fantastic.

My Fiancee – She’s sweet, she’s cute, she’s adorable, and she shares my sense of humor (crazy though it is).  Why else would she let me call her a hamster as a term of endearment?  (I’d share the story, but I think she’d more than a little upset if I share anything else).  In short, I love her, I adore her, and I want to be with her all the time.  My biggest qualm with getting a new job is that it pulled me away from her; but hopefully, when she finishes school, things will be different.

Work – I am happy that I’ve found a new job.  I like to keep busy, to make myself a useful part of society, and now with my new job, I’ll have that opportunity again.  The fact that I am going to working in the vaccine field is all the better, as I’ll be able to help society as I earn a living.  Talk about a good deal!

My friends – I’m blessed in life to have a great deal of people that I call friends in this world.  There’s a good chance, if you’re reading this, that you fall within the realm of people that I consider as friends; some of the most interesting and funny people that I know I’ve met online (see the entry on my fiancee, for a stunning example).  As they say (or should, if I’m not remembering an actual quotation), ‘friends are the sprinkles on the sundae of life’, and boy, are they tasty!

Everything else – Alright, a little bit of a cop out; I could break things down even more, I suppose.  I have the joy of living in a country where I can express my views freely, where I can say and do (almost) everything I want.  I am reasonably healthy, have a long life ahead of me, and enough money available that I don’t have to worry about struggling for food or shelter in order to survive.  For all the complaining I sometimes do, there’s really nothing wrong with the life of Roger

When all is said and done, I lead a very full life.  Thanks everyone for reading, and have a great weekend if I don’t get to tell you personally!

• Book Review: The Money Book for the Young, Fabulous and Broke
• Weekly Thoughts: Happy Grundsow Day
• Happy Fourth of July!

• Prioritizing The Important Stuff
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Yes, yes, tomorrow is the day that I go in to do some paperwork, listen to some information about my soon to be new job, and take a mandatory drug test.  It’s not quite as fun as the first day of actual work (which comes next Tuesday, happily enough), but it’s still a pretty sweet day.

The only problem is, I seem to be having trouble getting to sleep; it’s nearly four in the morning as I write this, and I’m still not tired.  I don’t know if it’s nerves or just inertia, but the Sandman has been eluding me tonight.  I have gotten a chance to read up on some of the articles that, with spending the past few days with my girlfriend and then going home to get ready for this interview, I haven’t had a chance to read up to this point.  So, here are a few of the articles that caught my eye in my late night ruminations:

Marriage and Money: Joint or Separate Accounts - An interesting view of the future, provided by Green Panda Treehouse. I haven’t had to worry too much about combining my expenses with my fiancee up to this point, as a result of the aforementioned living on opposite sides of the state, but at some point, we’ll have to combine our finances, and this is a pretty good template to follow.

To Prepay Your Mortgage or Not – In general, paying down your mortgage early is a good thing; you’ll save on interest payments and there’s the always fun ‘being free from debt’ aspect to consider.  But, as My Life ROI points out, doing so at the expense of your other investments is generally not a good option.  Basic money nerd rule: if the (after-tax, where applicable) return of the investment you’re considering doesn’t beat the return of your current investment, stay with what you have.

Moving: Maximizing Space When Packing Your Car – Some surprisingly time appropriate advice from Stephanie at Poorer Than You, just as I find myself needing to move my stuff across Pennsylvania again.  Most of the advice should make sense; reduce what you take, remove extraneous packaging, and using clothing as cushioning.  My favorite part of the article is that she refers to packing a car as ‘Tetrising’, which tickles my dork senses.

9 Small College Expenses That Add Up – On Mrs. Micah’s blog, there’s yet more advice for future (and current) college students: watch out and save up for situations where you spend small amounts that can add up.  Sure, ten cents a page in the computer lab doesn’t sound like much, until you have to spend the money you were saving for the weekend on in order to print out the five research papers your teacher assigned you to read, each averaging about 30 pages.  Yup, there goes your beer money.  Moral: Small expenses add up quickly, a lesson we can apply both in college and out.

Carnivals and Round-Ups Featuring my Columns

• Money Hacks Carnival-By the Books Edition hosted by Personal Finance by the Book, which features my Reading Online Stock Data column
• Weekly Dividend Investing Round-Up – August 8, 2009 hosted by The Dividend Guy, which features my Why Investors Care About Dividends column

• Book Review: Jim Cramer's Mad Money
• An Investment Pyramid: A Solid Foundation
• How to get Ahead of the Game: Three Tips for Students

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