Let’s be completely honest: most personal finance advice is not directed toward younger people. There are plenty of reasons for this, some good and some not so good. (Most personal finance magazines don’t write articles directed at young people, so most young people don’t read those magazines because they have no relevant information, and in turn the magazines don’t write articles for the young people who aren’t reading. It’s something of a Catch-22.) The end result is a tendency for younger people to ignore personal finance until much later in their life.

Get a Financial Life is one of the books that bucks the trend. Directed at people in their twenties and thirties, it covers a variety of personal finance information from many aspects of life. Does it provide enough information to help readers, well, get a financial life? Let’s read on to find out!

Summary

After a short introduction, Get a Financial Life opens with a ‘Crib Notes’ chapter, covering everything from insurance needs to preparing taxes in short thirteen page burst. Chapter two is about getting your personal life in financial order. It touches on everything from putting a price tag on your dreams to filling out a form to monitor where your money goes, and ends (as all the chapters do) with a ‘Financial Cramming’ section that summarizes the major points in the chapter on a page or so.

The third chapter covers debt, and how to repay it. Starting with one of the trickiest types of debt, credit card debt, it covers student loans, car loans, and home equity loans, providing information about each type and suggestions on how to handle the debt. Chapter four is all about banking, starting with finding a good checking account and ending with a variety of ways to save, from a standard savings account to Certificates of Deposit (or CDs, if you prefer).

Chapter five gets into investing, focusing on mutual funds and breaking them up into three broad categories: money market funds, bond funds, and stock funds. It stresses the importance of finding a good fund company and keeping inflation in mind while investing. The sixth chapter continues the theme, looking into retirement accounts and the importance of retirement saving (as well as what can happen if you don’t save enough to meet your needs).

The seventh chapter looks into renting or buying a place to live. For renters, there is advice on getting the best deal on rent and helping to ensure that you don’t have to deal with crazy or oppressive conditions from your landlord. For would-be buyers, there is plenty of information about the financial aspect of home-buying and mortgage financing, as well as how to get the best prices. Chapter eight covers insurance, insurance, insurance. From basic advice on shopping for any type of insurance, the chapter then covers a whole range of insurance types, including health, auto, disability, and life.

The ninth and final chapter is all about taxes: how to pay them, and how to minimize how much you need to pay. There is advice on how to fill out the forms and determine your tax rate, as well as advice on how to maximize your deductions and find a decent tax preparer, if you decide to go that route. The book ends with a long list of books for further reading.

Pros

The book is well-written, humorous and very informative. The chapters are generally fairly thorough, most doing a good job of covering their financial topic. There’s also a good amount of humor and congeniality in the writing style, making for a pretty entertaining read.

Cons

There are parts of the book where more depth could be helpful; the investing chapter doesn’t give more than a vague sense of a decent asset allocation, for example. The sheer amount of data in some of the chapters can be a bit overwhelming, or at least make it harder to sort out the most important data.

Overall

Get a Financial Life is a solid introduction to personal finance in all its glory. If you (or someone you know) want to get a decent start organizing their finances, it makes a good introductory guide, if a bit much to take in for some of the chapters.

Wow, it’s been quite a wild ride last week, wasn’t it?  The Dow was down, then up, then down again, all the while jumping four, five, six hundred points at a time.  I suppose that sort of instability in the market is where day traders can make a lot of money (assuming they can get in and out at the right times, of course), but for those of us who subscribe to more of a ‘buy and hold’ philosophy, it’s rough seeing these kinds of jumps.  I’m decades away from retirement or other reasons to draw down my investments, and it’s still painful to watch the stock market bouncing up and down more than a cat on a hot griddle.

It’s tempting at times like this to pack it all in, pull all of your money out of the market, and put it into something safer, like money market funds or an FDIC insured bank account.  But the growth of your money in those accounts is pretty low in the best of times, and now, you’d be lucky to get any profit at all.  No, if you want to retire at an appropriate age (if not retire early), you’ll need the sort of growth in your money that only stocks (or similar investments) can get you.

That doesn’t mean you shouldn’t do what you can to protect your money; there’s a difference between accepting the fact that you need to take on a little risk to meet your goals, and laying down so the world can step all over your plans.  It is possible to take on some risk, without putting your goals in danger.  All you need to do is know how to protect your money in times of risk (like we’re currently facing), and follow some simple steps like:

1. Don’t Panic: It’s on the cover of The Hitchhiker’s Guide to the Galaxy for a reason; no matter what sort of problem you are facing, from a rough economic climate to losing your towel, panicking is not going to help matters.  Just relax, take a deep breath, and focus on what you need to do next.

2. Make Sure You’re Diversified: I’ve said it before, and I will likely say it again: diversification is vital for making sure that your investments don’t all plummet in value at once.  If you are holding a variety of different types of investments (and many different investments within each type; it does little good to invest in stocks and bonds if you’re only holding, say, two of each), the chance that all the types of investments you own will go down at once is quite slim.  (The chance that each will go down the same amount is also pretty low.)  While we’re talking about diversification…

3. Consider ‘Alternative’ Investments: It’s quite possible, even likely, that you can hold a mix of stocks, bonds, and/or mutual funds that invest in stocks and bonds and find yourself weathering most economic storms with a minimum of difficulty.  That said, there may be times like we saw in 2008, where stocks and bonds both take it on the chin and lose money.  It’s good to consider adding less conventional investments to your portfolio, in the hopes that they zig while the zags.  In particular, you can consider putting (some) money into investments that tend to do well when the economy as a whole has trouble, like gold.

4. Change Your Perspective: It’s very tempting to view market downturns as a time to panic, to pull your money out of your investments and keep it somewhere safer (even if the only place that seems safe is under your mattress).  But most of the investments that get hammered when the market takes a tumble are high quality ones that will regain their lost value (and then some) when the market picks up.  Instead of viewing a downturn as a reason to panic, try looking at it as a fire-sale, a chance to buy more of the quality investments to boost your money when things turn around.  This doesn’t mean to indiscriminately buy everything that goes down in value (remember, our goal here is to protect your money), but if you can get quality investments for less, why not do so?  Just make sure you leave some money uninvested, because you want to be sure you…

5. Keep That Emergency Fund Healthy: Perhaps the most important thing you can do to keep your money protected (besides not panicking) is to make sure you have a buffer between yourself and your more volatile investments.  A healthy emergency fund (a solid three, six, or even twelve months worth of expenses, if not more) will help you weather most financial storms, as well as protecting you if you happen to, say, lose your job or something equally bad.

If you take the proper precautions, there’s nothing to worry about (and possibly some good buying opportunities to be found) in a shaky market.  Just make sure to be careful with your cash and try to minimize the amount you put at risk.  If you can do that, you’ll be able to make it through a downturn with a minimum of monetary losses.

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(As I try to get ready for my mid-terms and prepare for other tasks this last week of school before Spring Break, I find myself a bit pressed for time (to put it mildly).  So, in order to provide you with a new post while still enabling me to get in my needed studying, I present a guest post I wrote for My Life ROI at the end of 2009 about the financial lessons that childhood games can teach.  Enjoy, and be sure to check out the original posting on MLR’s website.)

I don’t know about you, but one of my absolute favorite activities from my childhood was playing games with my family members.  I have lots of fun memories of playing everything from card games to board games, and everything in between.  The number of evenings that we spent as a family, sitting together and playing one of the many games we acquired over the years.

Of course, as with any activity, there was plenty of lessons for life that worked their way into our games.  Some of the best money lessons I’ve ever gotten I actually learned as a result of playing games, particularly some of the board games I played with my sisters.  Now, I shall pass on the money lessons I learned (such a while ago).  We’ll start with the most famous money-related game of all…

Monopoly

By Hasbro

Of course, we could hardly start off our exploration of the money lessons from board games without an examination of Monopoly.  The classic real estate collecting and trading game is easily the most famous board game in the world (to say nothing of being used by McDonald’s for their yearly contest).  There are several lessons we can learn from this game (especially if we can make it all the way through a full game):

*Luck can affect our goals with money: In Monopoly, the roll of the dice will determine what properties you’ll have the opportunity to buy.  With good luck, you could end up with a useful set of properties in a good location without much trouble; with bad luck, you can end up with few properties scattered all over the board.  In life, luck can also have a strong influence on our fortunes.  While there are many things we can control (or at least influence), other events can come out of nowhere and alter the progress of our lives.  In the game, the best you can do is push onward and try to bargain your way to good fortune; while in life, insurance is a good option for smoothing out the wrinkles in life.

*Bargaining is a key to victory: Unless you have the fantastic luck mentioned above, you’ll need to bargain your way into a better position in the game.  There’s plenty of potential bargaining chips you might try to use to tempt other players: property, money, even those elusive ‘Get Out of Jail Free’ Cards.  In life, there’s also plenty of opportunities to bargain your way to better fortunes.  Trading goods and services with those around you can provide you with ways of saving money on the things you need and want in life.  Offer to swap some of your old stuff or offer to do some extra work with your neighbors in exchange for goods, services, or money from them can serve as a method of saving money (to say nothing of getting know them better).

*Cooperation can win the day: One of the best ways to improve your chances at Monopoly is to throw your lot in with one (or more) of the other players, forming an alliance in order to improve your chance of overall success.  Of course, what happens when it’s down to just you and your ally is a whole different story… In the real world, cooperation is also important.  You’ll need to work with your spouse or significant other to build a life together, with your coworkers to accomplish goals at work, and with society as a whole to keep things running smoothly.  Being willing to work together can leave you in much better financial shape than attempting to tackle everything alone.

Careers

By Tiger Games

A popular game around my house (more popular than Monopoly, although that might have been due to the shorter game length), Careers had you going around a variety of different careers, attempting to achieve your own personal success formula.  In spite of greatly underestimating how long it takes to complete a career path (a few rolls of the die, rather than decades of hard work), there were numerous life lessons to be found in Careers:

*We all have our own definition of success: Careers enabled you to choose what combination of attributes you think would satisfy your game piece alter ego.  You made up a formula that involved fame, fortune, and happiness (basically, the warm, fuzzy feeling you would get from pets or raising a family), and then attempted to achieve it.  You could opt for an equal mix, lean heavily towards one or two attributes, or even go all out in just one area.  Similarly, what satisfies me in the real world may not satisfy you; you may want fame and fortune while I’m happy with nice quiet home life and enough money to get by.  We all have our own needs.

*What we want is not always what we get: On the subject of defining our success, if you play Careers often enough, you’ll likely find yourself in situations where you could win, if you had only opted for a different success formula.  Perhaps you’ve got too much money (a problem we’d all like to have), but not enough happiness, or a surplus of fame when you need more money (*Insert a joke about MC Hammer or your other favorite bankrupted celebrity here.*)  In the game, the only option was to push on ahead, doing what you could to get your formula back in line, while in the real world, we can either try to bring things back in line with our desired ratio or adapt to our current set of circumstances, and find a way to declare success with what we have (which in the game is called ‘cheating’, so don’t try it.)

*You’re probably going to take on several careers: Talk about being ahead of its time: in spite of being released back in the Fifties, Careers could only be won in most cases by going through 2, 3, 4, or even more career paths, trying a variety of different forms of employment.  In our modern economy, you’re quite likely to be fired (or end up quitting) your job, frequently multiple times throughout your life.  These transition periods are the perfect time to re-evaluate your life, to determine if you are enjoying what you do and whether you should continue on in your current career path.  Luckily, if you are interested in being hired quickly, there’s plenty of advice out there to help you.

Game of Life

By Hasbro

The Game of Life (not to be confused with Life Cereal, Life Magazine or Life Insurance) had you going through a truncated version of well, life.  You played a little plastic peg in a car, and as you moved through the game, you would get a career, a spouse, possibly a few children, and plenty of money.  That last part is especially important, as how well you did in the game was determined by your final net worth.  What lessons could you learn from condensing the entirely of a person’s existence into board game form?  Let’s find out:

*Whoever dies with the most money, wins!: Hey, I never said they were all good lessons.  But the Game of Life did have the advantage of stressing the importance of saving, investing, and even having insurance, all good pieces of advice for any would be financial success.  Plus, the person (or ‘family’, if we look at the little car with all its little pegs) with the most money heading into retirement was the winner, which is not a bad approach to take with our own retirement portfolios.

*Stuff Happens: How many games involve purchasing insurance?  How many games make it possible that purchasing insurance is one of the best moves you can make?  One of the good lessons from the Game of Life is that sometimes, bad things just happen.  Take the time to prepare yourself for the worst, and you’ll be in much better shape if they happen to you.

*People Dislike Change: This is less a lesson from the game itself, and more a lesson from people’s reactions to the ‘new’ version released in the early nineties.  A short perusal of the comments on Amazon shows that more than a few good old fashioned Life fans are disappointed with the changes made to the game.  In the real world, people can be just as scared of change, and many will attempt to avoid facing the chances that surround them.  But learning to tolerant change, whether in our board games or our lives, is an important part of growing as human beings.

There you go; several lessons from of the more most money-related games in existence.  What lessons did you learn from the games you played?  Am I forgetting any big lessons from these three classics?  Has anyone reading this actually played a game of Monopoly to completion, or did everyone else’s family also quit about three hours into each game? Inquiring minds would like to know!

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Ah, another year is nearly its end. Winter is upon us (with a vengeance, at least for those of us in the mid Atlantic region of the United States), Christmas is fast approaching (too fast, if you haven’t finished all your present shopping), and there’s a good chance that you’re off visiting relatives or friends for the holiday rather than staying at home. What’s almost certain, though, is that you’re busy with everything that comes with the end of the year and all the associated holidays.

Well, far be it from me to needlessly add to your already overflowing To Do List, but there are numerous things you need to do in order by year’s end to be sure in order to maximize your wealth (and minimize your taxes) in the coming year.  During your free time (or your not-so-free time, if that’s all you have available) over the next two weeks, be sure that you look into:

1) Making Charitable Contributions: Tis the Season of Giving, as they say, and that applies to giving to charities as well as your friends, family, coworkers and neighbors.  Unlike most of those gifts, though, gifts to charities have the added advantage of being tax deductible (assuming that you itemize your taxes and follow all other assorted rules, of course).  Whether you’re donating appreciated stock to your favorite charitable causes or giving gifts to the Salvation Army (and a small tax write off to yourself), you need to act soon to include them on your taxes in April.

2)Max Out Your 401(k)/IRA Contributions (If Possible): On the subject of contributions, you should also consider bumping up how much you’re putting toward your retirement, and if possible, max them out.  Maximum IRA contributions for 2010 are set at $5000 ($6000 if you’ll be fifty by the end of the year) and 401(k) contributions can’t exceed $16,500 ($21,000 for those who are fifty plus).

Granted, with such high limits, there’s a fair to good chance that you’re not going to be able to max them this year; between being unemployed for the first part of the year and my fairly low graduate student stipend, I’m not going to come close, myself.  (Note, though, that you can contribute to your IRA for tax year 2010 up to April 15, 2011, so you might not be completely sunk yet.)  Even if you aren’t able to max out your retirement contributions this year, you should definitely try to:

3) Increasing Your 401(k)/IRA Contributions: The above listed contribution limits are going to stay the same for 2011; even if you missed maxing out your contributions this year, next year gives you another chance to build up your retirement contributions.  Contacting your HR department (not during any holiday parties, of course; HR people need to relax, too) and having them increase your contributions as well as doing the same with your IRA provider will help ensure that you meet your financial goals next year and in the years to come.  (And if you’re already maxing out your contributions, good for you!  Congrats on your financial foresight and/or high income!)

4) Take Advantage of Unused Sick/Vacation Days: Depending on your company, you might have sick days and vacation days available to you that you haven’t used.  Also depending on your company, you might lose them at the end of the year.  Now, then, is the time to take advantage of your good health (and/or your lack of desire for world travel) and benefit from your accumulated sick days.  Not by calling in sick until mid January (companies tend to frown on that sort of thing), but in some companies, you can actually cash in your unused time off.  While you’re visiting your HR department to bump up your 401(k) contributions, ask them what their policy is on reimbursing unused sick days, and see if you can’t bump up your holiday spending money just a little bit.

5) Making Charitable Contributions: I know I included this one before (and didn’t even bother to change the phrasing or anything), but given the time of year it is, I thought it was appropriate to include again.  Even if you aren’t compensated monetarily for your contribution, it’s still worth giving to the less fortunate around you.  So, open up your wallet and your heart a little bit, and let all the love and joy of Christmas come streaming through.

Alright, sorry to get all ‘holiday special sappy’ on you there at the end; but again, Tis the Season, and all that jazz.  Hopefully, you’ve taken care of all these tasks already and are well prepared for this coming year.  If so, just be aware that I’ve barely scratched the surface with this list; there’s quite a lot that needs to be done as the year winds down.  (This post on The Digerati Life provides a longer and more thorough list than the one I’ve included here, and is a good place to start your search for end of the year things you might have missed.)  Have a good holiday season, and be sure to get ready for next year!

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There is a lot to learn in the personal finance realm.  Heck, I’ve written hundreds of posts on this blog, and have barely scratched the surface of this personal finance thing.  Even with hundreds of personal finance bloggers (or thousands, maybe?  Are there thousands of personal finance bloggers, or does it just feel that way when I look at my ‘To Be Read’ list?), we’re still only touching on a fraction of the financial sphere.  The world of money is quite expansive.

With that broad view, it’s kind of odd to go in the opposite direction and attempt to condense everything I’ve learned in just one page.  But it seems to be where the winds are blowing lately.  Inspired by Trent Hamm’s book Everything You Ever Really Needed to Know About Personal Finance On Just One Page, there is currently a contest for the best one-page summaries of financial knowledge.  It seems Adrian of 7 Million 7 Years is giving out Apple gift cards for the best one-page summaries being offered.  Not being a huge Apple fan, I’m not sure what I’ll do if I win, but what the heck, the holidays are coming up and I’m sure someone in my family would want it.

Here, then, is my one page guide to everything that you could need to know about money, ever:

Look, Ma, all on one page!

The only problem is that now, what else am I supposed to blog about it if I already put all of my knowledge in one page…

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Happy Labor Day to all my fellow Americans!  Hopefully, you’re reading this as you prepare to go visit your extended family and indulge in a nice, end of the summer picnic.  It’s Labor Day, the perfect time to take a break from your labors.

Of course, not all of us currently have jobs we need a break from; given nearly ten percent unemployment, there’s a fairly large possibility that you’re currently in between jobs, yourself.  If you’re a fairly recent graduate, you’ve probably come out into the world and found few, if any, people willing to hire you right out of the gate, especially with older, more experienced workers willing to take your place for the same pay due to their own situations.  If you’re young and just getting out of college, the thought of moving back in with your parents has probably already crossed your mind a time or two.

Well, good news and bad news on that front.  The good news is that you’re not alone; a sizable portion of today’s twenty-somethings have ‘boomeranged‘, returning to live with their parents.  (Although, as that link indicates, it’s not as unprecedented or widespread an event as some media figures, including those who dubbed Generation Y as the ‘Boomerang Generation’, would have you believe.)  It’s not considered evidence that you are horribly socially defective anymore, at least by most of your fellow Gen Yers.  (Myself included, as I ‘boomeranged’ for over three years after I graduated from my undergraduate institution.)

An entire generation, defined by an Aboriginal weapon

Now the bad news: that still doesn’t make it an ideal living arrangement, particularly when it comes to dating.  However understanding both your significant other and your parents might be, living with Mom and/or Dad is bound to add a snag to your social life and ability to romance the boy or girl of your dreams.  Not to mention that fact that the stereotypes and mockery of those who are still living with their parent(s) continue to exist; check out the tongue-in-cheek dating guide from the Financial Samurai to see some of the images the phrase ‘I live with my parents’ can conjure up while you’re at the bar.

Making Yourself More Date-able

So, what’s the solution?  Give up, throw yourself into the ‘living with my parents’ stereotypes, and start sewing your costume for the next comic book convention?  Not necessarily; there are ways to make yourself a more attractive romantic partner, even when you’re rocking your Mom’s basement.  (Although, if you still want to go to a comic book convention, go right ahead; I’ve been to a few, and they’re a blast if you’re in a geeky mood.)  If you want to make yourself a more attractive potential date, and gain some financial independence and confidence in the process, you should:

-Get a Job: “But,” you argue, “I’ve been trying to get a job since I first graduated; what more can I do?”  A complete guide to job hunting is outside the scope of this article (check my previous thoughts on the issue), but here’s the take-away for today: take a crummy, part-time, ‘just to put money in my pocket’ job if that’s all you can get.  You can (and should) continue to search for something more permanent, hopefully where you can put your formal education to work (although, if you have a degree in something like ’18th century French Romanticists’, I’ll warn you now that your only real chance for a job in that field will be to continue your education and get a position as a professor), but you should be willing to take a crummy job just to have some money coming in.  Because you’re going to need money in order to…

-Pay Your Own Bills: Your parents are letting you live with them; don’t stretch their generosity even further by having them foot your bills.  Pay them yourself, and get a taste of what it’s like to truly be a responsible adult in the world.  Your student loans will be a big one (how big depends on how much you borrowed to pay for your classes and other, hopefully academic related, expenses), but don’t forget to chip in for things like your share of the phone bill and groceries.  If you still have a sizable amount of money left after all that (or perhaps even if you don’t), you should also…

-Pay Rent: Even if your parents (or grandparents, or other relatives) don’t expect you to pay rent while staying in your old bedroom, you’d be wise to do so, anyway.  Not only will paying rent to your parents help to cover all the expenses you aren’t chipping in for above, doing so helps you to get in the habit of setting aside a sizable portion of your income for housing expenses.  It’ll also help change you from ‘freeloading mooch’ to ‘hard-working, potential date material’ in the eyes of would-be romantic partners.  (At least, it worked that way for me with my fiancee.)

If your parents refuse to take any rent money, try to make this deal with them (consider making this deal anyway; it’s a pretty good one): suggest that your parents take the money and put it aside, in a special saving account for you.  When you leave their house, the money will be yours again to help pay the down payment on a new house, or to cover the first few payments on an apartment that’s not in their basement.  You’ll still develop discipline as you keep paying them (discipline that will come in handy with your eventual housing payments), plus you’ll have a nice chunk of change when you’re ready to move out on your own.  Speaking of which…

-Make a Plan to Move Out: Living with your parents has lost of some of the sting, at least if you’re a Gen Yer, but it’s still easy to overstay your welcome.  Make a plan to move out after a certain period of time or after you’ve achieved some basic financial goals (like ‘building up a three month emergency fund’ or ‘earning at least $500 a month’) that you’re working towards steadily.  Having such a plan will let your parents, your dates, and even yourself know that you’re serious about not staying in your parents’ house forever, and should motivate you to work even harder to make it a reality.

There; a simple plan to get you from Chateau de Mom to a place of your own, and make you look less like a loser and more like a dedicated, driven person while you get there.  With luck, all of that should be enough to convince your date(s) that you’re a keeper.  Again, it’s worked for me, why not for you?

What else for you recommend for someone who’s ‘boomeranged’, and wants to help establish their financial lives?  Does being employed and paying their own bills make a potential date more dateable in your eyes, even if they do still live with their parents?  Do you have something fun planned for Labor Day?  (I’ve got a six hour drive home, myself.)  Inquiring minds want to know!

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I’m a mood that combines playfulness with nostalgia.  I think it’s because I’m currently back home and have a job interview today, so I’m both happy and thinking about my past.  I’ve been thinking a bit lately about some of the stories and fables I was told as a child.

So today, let’s have some fun with some of the most famous of Aesop’s fables, and see how we can apply the lessons found within to our personal finance situations.  After all, these are stories that I (like many of you, I’m sure) have heard since I was young.  Let’s go on a trip down memory lane and see what we can learn about money management from good old Aesop.

1) Fable Name: The Ant and the Grasshopper

Short and Sweet Summary: There was once an ant and a grasshopper.  (Good start, no?)  The grasshopper laughed, frolicked and played the days away, while the ant diligently spent his time during summer and fall gathering up extra food.  The grasshopper laughed at all this effort; why gather food when there was such an abundance all around them?  When winter came, though, the grasshopper found himself out of food while the ant had plenty, and the grasshopper comes to realize the folly of his short-sighted ways.

A hardworking ant, possibly working hard

(Depending on what version you read and the particular message the author is trying to push, the final fate of the grasshopper and the ant (or ants, in some versions) can vary.  In the most traditional versions, the grasshopper dies from starvation.  Since this doesn’t make the most child-friendly ending, in many cases he gets food from the ant, usually in exchange for providing some service or at least promising not to be as lazy in the future.  There are also plenty of more politicized versions, having the grasshopper suing the ant and taking his hard-earned food (to send up socialist/communist worldviews) or attacking the ant for being so stingy (to attack those who hoard wealth).  For our purposes, we can end the story once the grasshopper realizes the error of his ways.)

General Moral: Prepare today for lean times tomorrow.  Also, if an ant and a grasshopper both offer you financial advice, go with the ant.

Financial Moral: Pretty much the same as the general moral; be sure to stock up on money (or other supplies, etc.) while you have the opportunity, particularly if you know the lean times will be coming.  Replace ‘winter’ with retirement, ‘food’ with money, and ‘ant’ with anyone who didn’t get a trust fund for their 16th birthday, and you have a pretty good plan for saving for your golden years in our ‘fund your own retirement’ economy.

2) Fable Name: The Tortoise and the Hare

Short and Sweet Summary: A tortoise and a hare have a race because the hare was talking smack about the tortoise’s mama (or possibly just called the tortoise slow).  During the race, the hare takes an early lead, getting so far ahead that he decides to take a nap (or goes off to play keno, depending on the version of the tale).  While the hare is distracted, the tortoise slowly but steadily catches up, and then overtakes him.  By the time the hare wakes up (or gets kicked out the of the casino due to his bad credit), there’s no way for him to beat the tortoise.  Victory to the slow guy with the shell!

General Moral: Slow and steady wins the race, OR don’t take a nap until you finish the darn race.

Financial Moral: Pretty much the same as the general moral (the one about slow and steady winning in the end, not the napping one).  A decent to good financial plan, implemented over the course of a lifetime, will be much more effective at boosting your net worth than a great financial plan you only follow off and on.  (Note: you should not take the lesson that betting on a long shot in a race is a good way to improve your financial security; they’re long shots for a reason, and no every gamble will pay off in the end.)

3) Fable Name: The Dog and the Bone (noticing a pattern to these names yet?)

Short and Sweet Summary: A dog goes walking alone with a bone in his mouth.  He looks down into a still pool of water, and sees another dog looking back at him, also with a bone in his mouth.  Getting greedy as he looks at the other dog’s bone, and thinking that the other dog looks like a bit of a push over, our first dog opens his yap and barks at the second dog.  His bone drops into the water, disappearing under the waves, leaving the dog (and his reflection) without any bones at all.

Pictured: Dog; Not Shown: Lost Bone

General Moral: If you get greedy, you risk what you already have.  Also, mirrors can steal your soul (or at least, confuse you, if you happen to be a dog).

Financial Moral: Let’s quote another source of great wisdom, Warren Buffet: ‘Rule #1: Never lose money.  Rule #2: Never forget Rule #1.’  As with bones, so it is with money; it’s much easier to keep what you already have then it is to earn more.  If you get greedy and try for excessive gains, you can end up losing what you already have.  (Add in the number of scams and other simply fraudulent ways people will try to get your money, and the importance of keeping what you have comes into sharp relief.)  Invest smartly and don’t try to shoot for the moon with your returns, and you’ll have a much better shot at growing your wealth and adding to your supply of bones (or cash, if you prefer that type of thing).

4) Fable Name: The Goose that Laid the Golden Eggs (just like that, the pattern is gone)

Short and Sweet Summary: A farmer and his wife (I picture them as Ma and Pa Kent from the Superman comics, but I’m pretty sure that’s not what Aesop intended) discover that they have a goose who lays golden eggs.  After a few days of enjoying the bounty this goose puts out, they get impatient, and slaughter the goose to get all the golden eggs at once.  Alas, once the goose is dead, they find no golden eggs inside, and realize that they’ve just killed a source of great wealth.

General Moral: Greed and impatience destroy wealth.  Also, geese aren’t filled with all the eggs they’ll ever lay (at least, not in fully developed form).

Financial Moral: As usual, the general moral can be pretty easily applied to the personal finance; get greedy and it’ll backfire on you.  This is most apparent when looking at your nest egg (an apt term for a waterfowl based fable); if you start with a small, safe withdraw rate when you retire, your nest egg will have the chance to grow, continuing to generate more money (golden eggs) for your spending pleasure.  Pull out too much of your money in the first few years, and watch as your nest egg quickly withers away, and you spend your retirement years desperately searching for more money (or a goose that lays golden eggs).

Alright, that’s enough nostalgia for one day; hopefully, there’s plenty of stories mentioned here that spark a few memories of your own childhood, and maybe, just maybe, remind you of a

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There’s always a lot of questions when it comes to investing.  It’s hard to figure out everything you need to do.  How can you keep everything straight?

Well of course, you can use the classic rubric of 5 W’s (and that one H; there’s always one black sheep in every group).  If you can answer a few simple questions about investing, you can give yourself a guide to the financial world, as well as understand why you’re bothering with all this investment stuff at all.

Who should invest? The short answer is, just about everyone.  If you have enough money to meet your needs, you probably should be putting some money aside for your long term goals, such as retirement and major future purchases.  (What constitutes meeting your needs?  At bare minimum, earning an amount equal to the poverty line, although personally I’d be inclined to say that you shouldn’t worry too much about investing unless you’re making twice the poverty level.  Even that’s only about $20,000 for a single person and $30,000 for a couple; particularly in high cost of living areas, it could be hard to find money for investments in your budget.)

How much should I invest? That’s a tricky one; the minimum level most investing advisers suggest is 10% of your gross salary, although there’s plenty of mitigating factors that will push that up or down.  If you are barely earning more than the poverty line (or especially if you are below it), investing any amount should be the last goal you attempt to achieve.  On the other hand, if you are earning a good income, much more than you need for your immediate requirements, then putting much more than 10% into your investments will speed your progress to your investing goals.  In short, invest as much as you are able.

What should I invest in? There’s a number of possible investments to choose, perhaps too many if you’re just getting started at figuring out your money situation.  I suggested a variety of methods a few weeks ago, ranging from target date funds to index funds to individuals stocks.  Depending on your particular goals and desire to learn more about investing, you could choose any of these methods and still succeed.  My suggestion: stick with target-date or index funds unless you like investing enough to do a LOT of research.

Where should these investments be held? At a reputable mutual fund company (or discount brokerage, if you choose to go the individual stock route), preferably in a tax-advantaged retirement account.  Personally, I’m a fan of the Vanguard mutual fund family, although Fidelity and T. Rowe Price are also highly regarded.  At to which type of retirement account, either a Roth or traditional account, while either one can be good, the best one will depend on what the future holds (in terms of tax rates).

When should you start? As soon as possible.  The advantages of starting your investing early is that you’ll have more time for your investments to grow.  Compound interest is one of the most powerful forces in the universe, but it does require one thing to work properly: time for the investment to grow.  The longer you enable to your money to stay invested and grow, the less you’ll need to put into your investment account to reach your goal, whether that’s retirement or another long-term goal.

Why invest at all? The simplest reason is this: if you want to fund your retirement purely by saving, you’ll need to put aside a huge amount of money.  If you work for forty years, and think that you may live for forty years in retirement (a reasonable assumption, given the high and rising life expectancies in the Western World), you’ll need to save half your salary each year just meet your goal.  (Actually, unless you are saving in TIPS or another inflation adjusted vehicle, you’ll need to save even more to counteract the effect of inflation.  But saving half your salary is daunting enough already.)  By investing, you can greatly increase how quickly your money will grow, and thus decrease the amount of money you personally need to take out of your paycheck.

There you go, some of the most basic questions about investing asked and answered, so you don’t have to!

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If you’re a typical student, there’s a lot you still have to learn about investing.  Actually, if you’re a typical high school or college student, there’s a lot you still have to learn about most things in life, but investing is a big one.  There’s very little formal education you will receive about investing (or any other money management skills, for that matter), and many things that need to be learned.

I’m not saying all this to discourage you, but rather to point out the task you face.  If you’ve stumbled across The Amateur Financier, chances are that you’ve at least begun to seek out personal finance information on your own, which is an excellent start.  To help you get a good start to your financial future, here are some tips straight from Roger:

1) Start Investing Now – Being a young whippersnapper does have its advantages every now and then.  If you’re young, there’s lots of time for your investments to grow.  I touched on this last week; the longer you invest, the more your money will grow, and less you need to invest in order to reach your goal.  Start while you are in college (or even better, during high school, although you might need to use a custodial account under your parent’s name to do so) and even small amounts can turn into a decent retirement fund.

2) Get Good Grades – Particularly for you high school students, getting good grades should be task #1.  Good grades open the doors to more impressive colleges, and make it easier to get scholarships or other aid packages once you get into school.  Even if you don’t want to go onto college (if you want to join the armed services or start your own business, for example), making sure you get everything you can out of your education will help you to get a leg up in life, if only by expanding your personal level of knowledge.

3) Expand Your Experiences – It’s easy to get locked into a particular way of thinking or doing things, particularly if it’s a way that’s always worked for you.  But when you’re young and have relatively few obligations to fulfill (such as a family or a job), that’s the perfect time to do things that you’ll be unable to do in the future.  Take some classes outside your major, try a few part-time jobs to learn what you like to do, even try starting a small business in your free time (blogging is pretty fun, for one); it’s an excellent time for you to explore your options.  Speaking of which…

4) Take Some Big, Foolish Risks… -Speaking of experiences, youth is the perfect time to do stupid things.  Not just things like drinking until you pass out at a college party, but also things like trading stocks, making highly speculative investments, or generally doing everything that most investment financial guides tell you to avoid.  As mentioned before, when you’re young, time is on your side; even if you end up penniless at thirty because of some bad investment decisions, you’ll still have decades to recover before you need to rely on your savings for your living expenses, plenty of time to recover.  (Actually, if you find yourself with a net worth of exactly $0 at age thirty, you’ll be doing better than many people who are loaded up with debt at that age; that’s an accomplishment itself.)

5) …But Don’t Be Too Stupid – There’s a difference between taking on risk, even incredibly high risk, and being stupid with your money.  Day-trading stocks is highly risky and potentially hazardous to your wealth, but giving your name and identifying information to someone offering you Nigerian prince money is just plain stupid.  Even while you are taking risks, including potentially big risks, be careful with your financial information and don’t do anything that could seriously impair your wealth in the future.

6) Always Read The Amateur Financier – Alright, alright, this one is a little tongue in cheek.  But continuing to read and build your knowledge about money management throughout your life is an important step to controlling your finances.  Thanks to the Internet, it’s as easy as turning on your computer and looking through all the resources you have available online.  Some worthwhile first stops include Morningstar, Investopedia, and Vanguard, all of which have excellent resources for investors who are just learning the ropes.

There you go, hypothetical high school or college student to whom I’m directing this post, several things you can do to get your finances off to a good start.  Enjoy the head start on financial wellness!

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When it comes to investing in stocks for capital gains, there are two different approaches that can be taken in order to ensure that your stocks increase their worth: growth investing and value investing.  (There are other rationales for investing, such as investing for dividends, but for now let’s stick with growth and value investing.)  These two methods represent two different ways of viewing stocks and trying to profit from them.  So, what sort of considerations do you have to make when considering which method to use when choosing your investments?

Investing Rationales

Growth Rationale – The growth investor is looking for companies that growing their business (which you probably guessed).  These could be small, upstart companies that have a great deal of potential, or large companies that continue to expand into new areas and increase their business at a much faster rate than their rivals.  If stock investing were horse racing (a reasonably apt metaphor), growth stocks would be those that are the reigning champions or the quickly rising upstarts.  The growth investing model essentially involves trying to find some of the fastest expanding companies, and tethering your fortunes to their growth.

Horse Racing - An Ideal Stock Metaphor

Value Rationale – Value investing, on the other hand, focuses on finding stocks that have been knocked below the true value of their respective companies, then buying and waiting for the broader market to recognize their worth.  As with growth investing, these companies can be either large or small, and the reasons they are currently undervalued can be diverse: bad news that took the stock prize below a reasonable level, a run of bad luck that decreased the company’s perceived value, or even a broader economic storm that dragged everything down at once (like we’ve just experienced).  To go back to our horse racing metaphor, value stocks would be akin to the strong finisher who’s failed to win the past several races and wound up as the long shot.

Why Does This Matter?

The difference between growth and value might seem academic, and in a way, it is.  There are those people who have argued that assigning stocks to the ‘growth’ or ‘value’ columns have nothing to do with the actual value of the companies, but instead such dividers display their own ignorance.  (‘Those people’ in this case include Warren Buffet, as you can see at the bottom of this linked page, so perhaps they have a point.)  On the other hand, when looking at the performance of broad segments of the US economy, it appears that the value investing style has beat out the growth style in the past.

The results, if you are a mutual fund investor (particularly a passive indexer like me),  is that your portfolio should attempt to lean more towards value and less towards growth in terms of your funds’ orientation.  This does not mean that every value stock will outperform every growth stock; on the contrary, because the faster increase in value of growth stocks is sometimes deserved, the top performers in the growth category can and will outperform the best of the value classification.  Rather, it means that taken as a whole, stocks that are categorized as value will outperform those in the growth column over time.  Unless you fancy being a stock picker (and make a good job of it, as well), sticking to a portfolio that leans toward value stocks will lead to a much richer future for you and yours.

I hope you enjoyed this rather brief introduction to value and growth stocks, as well as the difference between the two.  Good luck with your investing, whichever option you decide to choose.

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Two trends that seem to be everywhere now are going green and cutting down on your expenses.  Both are rather similar in concept; by cutting back now, we can ensure a better future for ourselves (or our children).  You have to have an eye towards life yet to come in order to be motivated to save money or the Earth.

They also require some sacrifice on our part.  It’s more fun to party, buy expensive things  that will just sit on the shelf, and to just throw away anything we don’t need than to worry about the costs to our pocketbook and planet.  How can we overcome our less caring nature and start to focus on the future?

First, know yourself and your motivations.  It’s easier to commit to a plan to ‘green up’ your life or to get your finances in order if there’s some strong rationale you have to do so.  You might look to your faith for reasons to protect God’s creation or to not be a borrower.  If your family feels strongly about having financial security or saving nature, you can turn to them for support on your decision.  One big motivator for many parents is protecting and providing for their children’s future; these could be all the motivation you need to save money and the planet.

Once you have your motivation, start small.  Don’t try to cut your expenses or your emissions to the bone in the first month; much like trying to go on a crash diet, you’re going to feel deprived if you change too much at once.  Instead, trying making a few changes at first, to feel out where you can make cuts without too much trouble.  Cutting down on eating out, using less electricity or decreasing your driving won’t be enough to save the planet (or your financial future) all on its own, but will be easier to handle at first, and will give you encouragement to take on bigger reductions in the future.

Since we’re trying to do two things at once, it’s good to find ways we can work on both goals simultaneously.  If you can find methods that will be good for the environment and save you money, you can kill two birds with one stone, improving two areas of your life at once.  In addition to the already mentioned areas, you can also purchase energy efficient appliances or make an effort to drive no faster than the speed limit; both methods will help to reduce your expenses and carbon emissions over the long term.

Of course, there are situations where saving money comes at the price of increasing pollution, or where the environmentally best solution costs more money.  Buying organic food, for example, can be significantly more expensive than traditionally grown food, while decreasing the impact on the environment.  On the other side of the coin, shopping at a ‘big box’ department store can cut your expenses significantly, but the environmental impact of shipping the items around the planet is substantial.

For these circumstances, the only thing you can do is try to do the best you can, according to which principle you value more highly.  If you are a die hard environmentalist, you’re obviously going to make different trade-offs between cost and environmental principles than someone who wants more than anything to live frugally.  This goes back to our first point; if you don’t think about what you are really want to accomplish, your values, and your priorities, you’ll end up facing situations where you have to choose between the two without the guidance of a prior decision.

Follow these simple steps, and you’ll be able to go green and keep yourself on the right path financially.

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As we reach the middle of our series on investment scams, we’re going to take a little break from the world of liars, cheats and thieves, and take a look at some ways to protect yourself in general.  If you take the following steps, you’ll be much less likely to be targeted by scammers or to fall for the numerous scams that exist out there in the world of finance.  Here are a few tips that will help you to spot, identify, and avoid many of the scams out there, even for scams that haven’t yet been conceived:

1) Educate Yourself: Knowledge is power, and when you’re looking at investments, knowledge is also money.  If you understand a variety of investments (at least in principle, if not all the gory details involved), you’ll have a much easier time recognizing the bullshit investment pitches you will encounter during the course of your life.  If you know that stocks typically return about 10% a years (during the good years of the twentieth century, at least; many rather clever people maintain that the returns in the future will be going lower), it’ll be easier to call bull pocky on claims about miracle investments that can return 20% each month.

2) Be Leary of Everyone’s Advice, Even Friends and Relatives: No, I’m not accusing your cousin who keeps talking about her ‘hot stock investments’ of trying to scam you.  But, there are any number of reasons why their advice might not be in your best interest; from not fully understanding their investments to being victims of scams themselves, your friends and family might be making suggestions that are not in your best interest.  If you do get any hot tips, you can give them all due consideration, due thorough research, and decide whether it’s a legitimate opportunity or a scam; and if it is a scam, be sure to let your tipster know, so they can get out of it themselves.

3) Research, Research, Research: If you don’t understand an investment class, grab a book, check some websites, and do research to learn what’s going on.  If you hear a hot tip, be sure to hit the books before you put down money.  When you are trying to decide to what investment choice to make, what do you think you should do?  That’s right, research; don’t put any money into something you don’t understand, and if you don’t understand an investment, be sure to break out the books and start to do research.

Some good places to start your research include the Security and Exchange Commission (SEC), which monitors publicly traded companies and the Better Business Bureau.  There’s plenty of good information out there; it just takes some work to find it and sort out the good from the bad.

If you follow these steps, you’ll find yourself in much better shape when you next confront a possible scam.  Build a broad financial education, be leery when your acquaintances offer investment suggestions, and do plenty of research BEFORE putting any money down; stick to a cautious approach, and your investment career will be all the better for you.

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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 is 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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(Once again, when it’s Tuesday, that means it is Investing 101 day!  We’re running out of individual investment vehicles to cover, so we’re going to start covering some broader investment concepts.  Today, that means asset allocation, a concept that comes up repeatedly in discussions of investing and personal finance.)

Q: What is Asset Allocation?

A: In general, asset allocation refers to how you have your money distributed among different investments.  The point of asset allocation is to view your portfolio holistically, ensuring that you aren’t taking more risk than you want, or less risk than you need, with the money and resources you have available.

Q: What’s the perfect asset allocation, then?

A: There’s no way I can answer that; no one single perfect asset allocation exists.  It’s a bit like individual investment choices; some people prefer investing in stocks, others in real estate, still others in mutual funds.  Each option could be equally effective at building wealth, it’s simply a matter of personal preference and individual needs with the investment that will dictate the best one for each person.  Similarly, the best asset allocation for you will depend on a number of personal factors.

Q: Alright, how do I determine the best asset allocation for me?

A: There are a few important factors to consider to determine how to build your asset allocation.  The first step is to consider what goal(s) you’re investing to meet.  The big one for most people is retirement, of course; besides being one of the most expensive events in your life, it’s also one of the few you can’t take out a loan to finance.  You might also find yourself investing for college (for yourself or your children) or investing in order to buy a house.  For the purpose of keeping track of your progress, it might be best to think of each of these goals as a separate portfolio, even if in practice they are co-mingled.

Second, know how long you have until you need the money.  The less time you have available to make up any shortfalls, the more conservative you’ll have to be with your investments.  In general, the advice is that any money you’ll need within five to ten years (depending on the source of the advice) should not be invested in the stock market or similar risky ventures.  (As an aside: for goals where you’ll need the money all at once, this means you should be completely invested in bonds, bond funds or cash equivalents five to ten years before the event.  For goals that occur over the space of years or decades, like retirement, you can (and should) remain invested in stocks or other growth investments at the start of your retirement, to maximize the growth of your money and help make sure it lasts through your whole retirement.)

The third consideration is how much growth you need.  If you can save enough money to meet the goal through your own efforts, you can focus on keeping that money safe rather than growing it, by putting it aside in a savings account or other secure cash equivalent.  You won’t see much return, but the money you save will be safe and secure for when you need it.  If you need a great deal of growth (for a huge event such as retirement), you’ll have to put your money into riskier but higher average growth investments like stocks.  (Of course, you still need to balance your need for growth of your money with your time frame; if you try to make up for a short time frame by investing in highly risky ventures, you put yourself at risk of losing even more money and falling even further behind in meeting your goal.  If you have limited time, you should try to boost your savings to make up the difference, not upping your investment risk.)

A fourth consideration is your own tolerance for risk.  Depending on how well you can stomach the ups and downs of the market, you can tweak your portfolio to be slightly less risky or slightly more risky (with a higher average return).  Note that I say tweak; you shouldn’t take a huge amount of risk if you only have a few years left to make up your losses, regardless of how ‘risk-tolerant’ you are, nor should you hide from any risk if you have a long investment horizon and a large amount of money that you need to gain through investing.  While much is made about risk tolerance, ultimately it has to take a back seat to more practical concerns of time and needed growth.  At most, you could shift ten to twenty percent of your portfolio to a more or less risky investment according to your tolerance; that should moderate your returns while still allowing a reasonable level of growth.

Q: Whoa, that’s a lot to think about; care to run through an example asset allocation?

A: Sure, here’s an example of an investment portfolio for retirement, showing how to start, how to shift the investment over time, and where to end up:

1. Start with stock mutual funds, approximately one-third in a total foreign fund and the rest in a total US stock fund.  (Consider adding more funds to cover other investment classes, like REITs or commodities, but don’t worry about getting too complex.)  Rebalance whenever the ratio gets too far from your desired allocation.  (A five percent threshold before selling off part of the portfolio will keep you from constantly buying and selling within your portfolio.)
2. About twenty-five years before your intended retirement, switch ten percent of your portfolio over to a bond mutual fund, either a total bond market or total short term bond fund.  Keep the same proportion of US and foreign funds in your stock allocation.  (Ideally, make the switch within a retirement account to avoid paying any capital gains taxes on the growth of your stock funds.)  Rebalance between the three funds as needed, ideally by directing new investment money towards the laggards in your portfolio.
3. Every five years, continue to build up the bond portion of your portfolio, ten percent each time.  In this way, you’ll slowly scale back on the risk that a bad stock market will deplete your retirement reserves.  Continue to rebalance if your actual allocation gets too far out of proportion.
4. At ten years to go, start putting the new bond money into a TIPS fund, to provide you with an inflation hedge.  With ten years until retirement, you should have 40% in US stocks, 20% in foreign stocks, 30% in bonds and 10% in TIPS.  Have I mentioned that you should rebalance your portfolio if it gets too far from this allocation?
5. With five years to go before retirement, ensure that your cash reserves equal three to four years worth of expenses, to give you a buffer if your investments decrease in value.  Add more TIPS to your portfolio, giving you a final portfolio allocation of 33% US stocks, 17% foreign stocks, 30% bonds, and 20% TIPS.  Rebalance when needed.
6. At retirement, start to live off your cash reserves (as well as any pensions, Social Security payments, or annuities you happen to have).  Put the dividends from your investments into your cash accounts, and when selling your investments (if the dividend income is not enough to meet your needs), try to maintain the same asset allocation you had before you retired (in that way, you’ll automatically be rebalancing your portfolio as you progress).  With a large enough investment portfolio, this method should enable you to live quite well in retirement.

Q: Wow, that’s kind of complicated.  Is this the only asset allocation I should use?

A: Far from it.  This is just a simple, off the cuff allocation progression.  With some effort and a little research, you can probably come up with an even better investment plan of your own, or at least tweak this one enough to meet your personal needs.  It does illustrate some key points about your own asset allocation plan, though.  First, when you have plenty of time to invest, you should invest agressively, using a lot of stocks and other growth investments.  Second, when you are approaching your goal, you should scale down your risk, starting to focus more on preserving what you’ve gained rather than gaining still more.  Lastly, there should be a ‘flight path’, a slow, gradual progression from agressive to safe investments, which you follow over the course of your investment career.

There you have it, some basics on creating an asset allocation and altering it over the course of a lifetime.  Hopefully, these tips will help you as you begin your own investing career.  Good luck, and happy investing!

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The internet is a glorious and wonderful tool, and not just for finding naughty pictures.  You can also find information about stocks, if you are so inclined.  In fact, you can probably find much more information than you would ever need, to say nothing of pitches, scams, and other assorted chicanery.  The best way to defend yourself: learn how to read through financial data.

To help you out, let’s have a little crash course in understanding online stock listings.  For our lesson, let’s use Buffalo Wild Wings (BWLD) as our example stock, since they make some tasty wings.  We’ll look at listings from Google, Yahoo, and Microsoft, as three of the major sources of financial information in the world.  There are, of course, any number of other sites that provide this information, such as the Motley Fool and stockbroker sites like Sharebuilder, but the information is essentially the same on any (reputable) site you could name.  So, as follows, here are Google‘s, Yahoo’s, and Microsoft’s listings, respectively, for BWLD on the evening of August 6, 2009:

Quite a lot of information, hunh?  Luckily, most of the information is the same no matter where you look.  I’ve gone ahead and lettered some of the important information given on each picture, to make it easier (I hope) to find this information on each one.  Let’s break down some of the most salient points:

A: Closing Price – The last price the stock traded at during the normal trading hours of the day, it’s how much the stock is worth, until trading starts up again.  Useful in figuring out the value of your stock holdings.  (Well.. there are some exceptions, as we’ll see in a few moments.)

B: Price Change – How much the stock price changed during the day, expressed in points and percentages.  Gives a quick view of how much the stock price shifted during the day.

C: After Hours – Data on the price change and new price of the stock as a result of trading after the market closes.  After hours trading tends to be rather sparse (Microsoft shows an after-hours volume of 2177 shares traded), but will shift the value of the stock from the close on one day to the open on the next.  My advice: don’t bother with after hours trading if you don’t know what you’re doing; and if you’re getting your info from a blog, chances are you still have quite a bit to learn.

D: Price Chart – Shows how the price shifted throughout the day.  If you’re a technical investor, this could be all the information you need (or want); if not, it’s just a plot of the background noise you encounter every day in your investing.

E: Open Price – The price the stock started trading at during the day in question, helpful if you want to know how the price has shifted during the day.

F: Daily Range – The highs and lows of the stock price during the day.  A larger than normal range could be a sign of more volatility in the stock price, possibly as a result of some unexpected news about the underlying company.

G: 52 Week Range – Similar to the daily range, this gives you some idea of where the stock has traded over the past year.  A value that goes above the high or below the low could indicate some big news about the stock itself, or possibly a broad economic trend (as occurred last year with the market meltdown.

H: Daily Volume/Average Volume – Shows the number of shares traded during the day as compared with the average.  As with large price shifts, higher than normal trading volumes indicate something has changed regarding the stock.

I: Market Cap – The size of the company as determined by the value of its assets.  Knowing the market cap can help you to figure out where a stock falls on the scale of small-cap to large-cap, which helps when creating an asset allocation of determining how the stock will perform under various conditions.

J: P/E – The price to earnings ratio.  As I’ve previously mentioned, the P/E ratio is one way to determine the expensiveness of a stock; high values mean that a stock is more expensive than one with low values.  Although, you need to look at comparable stocks to determine what constitutes a ‘high’ value for a particular class of stocks.

K: Dividend – The quarterly payments per share of stock, as well as the dividend yield (the annual payout divided by the current stock price).  Useful to know if you are investing for dividends (if so, you should look elsewhere; BWLD doesn’t pay any dividends, which is often the case for smaller, newer stocks).

L: EPS – Earnings per share, the value of the company’s net profits divided by the outstanding shares.  If you want to know how much of the company’s income belongs to you, the shareholder, just multiply this value by the number of shares you hold.  Obviously, higher values are better.

There is, of course, quite a bit more information that is available on each of these websites, but this is a good start.  Enjoy the stock researching goodness!

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As a consequence of the recent downturn in the stock market, one investing philosophy that has made a remarkable recovery is dividend investing.  Rather than investing purely for capital appreciation (or the growth in stock prices over time), you invest to get paid a regular, quarterly dividend from your stocks.  Besides the appeal of getting paid just for holding the stock, dividend payments also have the ability to grow extremely fast, thanks to a combination of compound interest and dividend growth.

In a normal compounding situation, like earning interest at a bank, the interest earned the first year can then be redeposited so it earns money the second year, and so on.  As a result, the longer time frame we consider for compounding to work its magic, the more
interest we earn.  If we start with a $10,000 deposit in an account that yields 5% at a fixed rate (perhaps a CD), the first year it will earn $500 in interest (5% of $10,000).  The second year, though, it’ll earn $525, as both the original $10,000 and the $500 in interest from the first year will generate interest, assuming the interest was reinvested.  After twenty years, the account will be earning about $1250 in interest, more than double the original interest rate, and in forty years, it generate roughly $3350 per year.  (Of course, with the ravages of inflation being what they are, the ‘real’ value of those payments will be much less; approximately $625 and $837, respectively.  Still more than you were originally collecting even after accounting for inflation, but not much of a gain for forty years.)

So far, so good.  But dividends have an advantage that bank accounts do not: they tend to increase over time.  Let’s look at a situation where we start with an investment of $10,000 in dividend paying stocks, again producing a starting yield of 5% on our invested money.  This time, though, let’s add in a yearly dividend increase of 5%, as well.  For the first year, our results are identical: we get $500 in dividend payments.  But, with year two, we end up getting about $551 in dividends; not only do we have a higher basis (since we reinvested our dividends, giving us $10,500 to start the year), but our dividend has increased by 5%, as well, raising the amount we earn from each stock that we own.  Skipping ahead, as with our simple compounding example, and after twenty years, it’s reasonable to expect a yearly dividend in the neighborhood of $3200 per year, and at forty years, about $22,500 per year, more than double your initial investment.  (Again, inflation will erode the value of these payout amounts; the equivalent present values of these payouts are $1600 and $5625, respectively.)

As they say on infomercials, ‘But wait, that’s not all!’  Remember that stocks, unlike a savings account, can also have capital appreciation.  In fact, because the company is steadily increasing the dividend payout, the stock will likely increase at least as much as the dividend rises.  This should make sense; if the stock price remained the same as the dividend increased, then after fifteen years, the stock would be yielding 10%.  After thirty years, the yield would be 20%, and by the end of our forty year period, the stock would be giving dividends equal to 33.5% of its price, more than one-third.  Before it gets to any of those points, though, the rising dividend will encourage more investors to buy the stock, driving up the price and decreasing the yield, as yield equals the dividend divided by the stock price.  Not withstanding the regular ups and downs of the stock market, the price of the stock will stay at an appropriate level according to the changes made to the dividend, with investors boosting or dragging down the yield as they buy and sell.

To show you just how these processes work, as well as where I got my numbers, have a look at a table showing the growth of money in one hypothetical dividend paying stock:

Here, we started with 1000 shares of stocks trading at $10 per share (because it made the math easy).  The stocks have a 5% yield at the time of purchase (or $0.50 per $10 share) which grows by 5% each year.  The dividends are calculated from the dividend yield and the number of shares, and then the dividends are reinvested at the going price per share.  (We’re assuming the stock will rise in value as fast as the yield increases, but no faster, just to make our math simpler.)  The stock value then represents the capital gains from the stock as well as the value of reinvested dividends.

What do we see in this table?  Well, the dividend per share and the number of shares both increased 6.7 times their starting values, the former from the company’s dividend increases and the latter from reinvested dividends.  (The fact that this value is nearly identical is purely a function of how I did the calculations and by no means indicates that this is a regular occurrence in real life.)  What’s more striking is that because the dividend depends on both the yield and the number of shares held, it has gone up more than 44 times the original value we were earning (6.7 squared is 44.89, which, if we multiply by our starting dividend of $500, gives a final expected dividend of around $22,477).  Similarly, the value of our holding is (at least in theory) worth more than forty times our initial investment.

And THAT, my friends, is the power of compounding dividends; with a relatively small initial investment and plenty of time, we can easily build a rather sizable sources of regular income.

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I like many things about economics, including the tendency to explain complicated issues through the use of metaphors and other stories.  One of my favorite economic stories is the ‘Tragedy of the Commons’.  For those of you who haven’t taken Economics 101 (or decided it would be a better use of your time to sleep through the class), here’s the nutshell version:

Imagine a small town, where one of the primary activities is raising sheep for wool.  In order to feed the sheep, the owners take them to a field in the center of town filled with grass.  For a while, everything goes well: the land more than supplies the sheep with grass, and everyone can graze their flocks as much as they would like without cost.

However, soon the individual farmers realize that they can increase their sheep herd to increase their profits while limiting their costs (as they don’t pay to feed the sheep).  A few families start to increase the size of their flocks, causing their income to rise and increasing the strain on the field to provide for all the sheep.  Their neighbors notice this, and start to increase their sheep populations as well, which inspires the first farmers to further raise the size of their flocks.  Before long, all the farmers are attempting to feed as many sheep as possible, the land starts to be overgrazed, and eventually, the field is unable to support grass or other plant life at all.  Without a ready source of arable land, nobody is able to feed their sheep at all, and the town soon suffers economically as a result of the over grazing.

The result is what is known as the Tragedy of the Commons; the benefits of increasing the number of sheep you grazed are privatized, while the costs to the town, the declining quality of the field, were public.  Each individual family was directly compensated for increasing the size of their flocks, while the costs of such increases were borne by the village as a whole.  As a result, even though each of the families may have known that increasing the number of sheep grazing on the field would lead to a loss of the field, there was still enough incentive for them to do so, and hope that their neighbors wouldn’t follow their lead.

In the real world, one of the most prevalent examples of a common good is the environment.  The air, wild animals, and natural settings we all enjoy aren’t directly owned by anyone, but are still considered valuable.  Unfortunately, because they aren’t owned by anyone, there isn’t any incentive to avoid overusing them; if a company can make more profit by pouring soot into the air or overfishing, the logical move for them is to do so.  There are a few possible solutions to the problem of common goods, most of which involve changing the incentives for the individuals who would otherwise overuse the resources:

1. It might be possible to get all the interested parties to cooperate, and act for the good of the group rather than the individual.  In our story of the shepherds and the field, if all the neighbors would agree to limit the number of sheep they kept, the tragedy could have been averted.  The problem is, a single neighbor who did not agree and increased the number of sheep he held could spoil the whole plan; with one of their neighbors benefiting from a larger flock, the rest of the group would likely increase their flocks in turn, thus causing tragedy again.  Similarly, attempting to get all the parties who fish in a river or add pollutants to the air to voluntarily cut back are frequently doomed to failure, if for no other reason than the difficulty in getting unanimous agreement (and then enforcing it).
2. Another solution is privatization; by converting a common good into a privately held one, the financial rationale will change, as well.  In our story, if each farmer had owned a portion of the field, they would have the incentive to keep it healthy and well cared for; the short term advantage of having more sheep would be off set by the long term disadvantage of having to buy extra food or pay to graze their flock on a neighbor’s section of field.  While this tack has possibilities, there are also limitations: it’s only really effective for resources that are fixed in place, like land or trees.  If you allow a company to pollute the air above its factory as much as it wants, you’ll soon find the air in the town downwind has gotten incredibly polluted.
3. In cases where private solutions are likely to fail, we can turn to government involvement.  If the town government charged a fee on each sheep that was grazed in the field, the economic logic would be changed, and there would be fewer farmers taking on huge flocks of sheep.  Similarly, a tax on pollution, such as a carbon tax (or a cap and trade program, for that matter), would make it less profitable to engage in activities that produce a great deal of carbon dioxide.  The downside, of course, is that governments cost money, and lead to less efficient outcomes than a purely capitalist system.

All three solutions have their place, and a combination of the three used properly can help to resolve the problem of the Tragedy of the Commons.  A good environmentalist, and a good economist, will realize the possible solutions, and attempt to use a combination of the three in order to protect the environment; convincing people and businesses to voluntarily restrict their emissions, allowing private businesses to regulate the wildlife on their own property, and having the government intervene when needed makes a pretty solid environmental policy.

(Sheep picture copyright www.copyright-free-pictures.org.uk; all rights reserved)

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On Monday, I talked about some of the negative lessons people, particularly those in my generation, are getting from this recent economic downturn.  It is turning some of them off of investing for their future, which is not a good thing.  (Especially as it is unlikely most of the workers in my age cohort will have pension plans by the retire, to say nothing of the shaky ground Social Security sometimes seems to be on.)

But, the ‘Great Recession’ is not all bad; if the press comments and spending data reports are to be believed, it seems that Americans have rediscovered how to be a bit frugal.  Savings rates are up (only to about five percent, but given that it used to be negative, I’ll call that a win), frivolous purchases are down, and television shows that glamorized spending and excessive wealth have all but disappeared.  This is all good, from where I stand, but I’m afraid that by the next time a boom comes around, the hard lessons learned over the past year will be forgotten.

So, just in case the economy picks up sooner than expected and people start to forget, here are some of the things you should keep in mind, all of which were reinforced by the ‘Great Recession’:

1) Prices Cannot Rise Forever… – Eventually, the prices for any highly desirable good get so high that new purchasers are unable to buy, or the supply created during the run-up in prices starts exceed the demand.  In either case, prices eventually start to come down.

2) …Bubbles Burst… – If the prices of a particular good got built up dramatically, you end up with an economic bubble, which, like all bubbles, is very easy to pop.  Just as greed and optimism can drive prices up, fear and pessimism can drag them down.  Once the panicked selling begins, the bubble has already exploded and the bubble bits fall down to earth.

3) …and Real Estate is NOT Immune – If the housing collapse that triggered the current downturn had a catch phrase, it would be this: ‘But, don’t housing prices always go up?’  While that may be the case over the long term (as in, say, decades), that doesn’t prevent housing prices from shooting up and then dropping down in the short run, especially in localized areas.  Consider real estate somehow impervious to market forces at your own peril.

4) Leverage Can Cut Both Ways – Yes, being able to borrow 99% of a house’s price makes it easier to get a house if you have little money.  But, if prices go down by as little as 2%, you would find yourself owing more than the house is worth.  That’s the downside of leverage; the higher the portion of an investment you buy with borrowed money, the smaller the price drop needed for you to be underwater (owe more than you could get by selling).

5) Having Credit Makes You Dependent on Your Creditors – When you have debt, whether a mortgage, student loans, or credit card debt, you have to play by the rules your creditors set out, from the interest rates to the repayment schedule.  If the rules are all fixed ahead of time, this might not be so bad; but if your creditors can change the agreement, as with credit cards and variable rate mortgages, you make find yourself getting a raw deal.

There are plenty of other, more narrow lessons to learn from this downturn, from ‘Don’t expect to refinance your way out of debt’ to ‘Flipping houses only works if you don’t get stuck during a downturn’, but with any luck, the worst practices from this past boom will disappear on their own.  Hopefully, these five lessons will stay in people’s heads for a good, long time.

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If you haven’t been unconscious for the past year, you’ve more than likely seen commentary about the current financial climate being deeper than any we’re seen in decades, if ever.  Already people are calling this one of the worst economic environments since the Great Depression, even using the nickname, ‘Great Recession’.  Financial media outlets, from Money magazine to CNBC, report on how this downturn has affected investors, businesses, and workers, noting the changes all of these groups are making in order to cope and survive during this time period.  And it is in this environment that I got my financial start.

It’s been less than a year since I first started to think about my finances in any kind of long term, serious way, and even less time that I’ve actively been taking actions to improve my financial future.  Much as the Great Depression shaped the mindsets of those who lived through it, the ‘Great Recession’ is going to have a huge impact on those people in my generation; I’m just not sure the lessons some of my cohorts are receiving are the correct ones.  I’ve heard many questionable claims, if not downright false ones,even from my own family members.  Here are a few that I have encountered:

“The Stock Market is Too Risky” – This is exactly the wrong lesson to learn if you are young and have plenty of time before you retire.  The stock market is one of the few ways to ensure that your money will grow enough to enable you to retire by the time you hit 65 (or earlier, if you invest a sizable amount and begin early enough).  Furthermore, investing in a broad based index fund and regularly contributing money is a good way to ensure that you will have enough by the time you retire.

What you should think: “The Stock Market can be volatile” – A good lesson to take from this downturn is that the stock market, while moving broadly upward, can and will bounce around in valuation over the short term.  The key to profitability in the stock market for the average investor, then, is to hold a diversified portfolio and to avoid focusing too much on the day-to-day movements of your investments.  As you get closer to retirement, you should decrease the amount you hold in stocks and add more to your bond and cash stakes; the lowered volatility will help in both simplifying planning out your future and decreasing the chance of an eleventh hour panic due to dropping investments.

“It’s Safer to be in (CDs, bonds, Treasuries, etc.) Than Stocks” – Akin to the last comment, this one misses the forest for the trees.  Yes, all the mentioned investments will be less volatile than stocks in the short run, but if you are invested predominantly in them (or worse, entirely, as my sisters plan to do), you will giving up a great deal of growth.  The only ways to recover from such a loss of potential gains are to increase the amount of money you put aside or be willing to work longer; neither are terribly attractive prospects.

What you should think: “Stocks for growth, bonds for safety” – This old chestnut still holds true, and reiterates what I was saying before: use stocks to build your money, then shift that money into less volatile investments as you get older to preserve it.  You’ll maximize the growth while still protecting your money for when you need it.

“I’ll think about investing when things start to look better” – I have news for you: if you think you can tell a recovery early enough to get in when stocks are at their lowest, I have a bridge to sell you.  There’s a good chance you will miss much of the upside of the recovery when it comes if you wait until there are definite upward trends.  Plus, if you get in the habit of pulling out your money when the economy is looking rocky and investing again when it picks up, you’re likely going to be buying high and selling low, the exact opposite of how your want to invest.

What you should think: “The Best Time to Start Investing is Now!” – No matter when now is, you will almost certainly be better off in the future if you start investing now, as opposed to waiting.  If you are worried about getting into the market just as it’s about to fall, you can always dollar cost average your investments over time (that is, regularly invest a small, fixed amount rather than put in all the money at one time).  Not only will this allow to avoid any sudden drops right after you invest, but you will also help develop the habit of putting new money into your investments on a regular basis.

With any luck, the fellow members of my generation will be able to shake off the worries and fears they have about investing, while still holding onto some of the things this downturn can teach us, like ‘don’t get a mortgage that could become unaffordable to you’ and ‘having savings can help you in a downturn’.  Take the good lessons and leave the bad; that’s the way to success.

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Imagine for a moment that you have received $10,000.  It might be from an inheritance, it might be a bonus for outstanding work at your job, it could be winnings from a gambling trip (although, hopefully you’re not spending much of your money gambling); the source is immaterial to this particular example.  Furthermore, imagine you have two possible options for this money: you can use it pay some of your student debt, which currently has a fixed interest rate of 7% annually, or you can put the money into a diversified portfolio that should return about 10% annually.  Now for the question: which choice will leave you richer one year from now?

The correct answer, of course, is ‘I don’t know’.  It’s pretty easy to calculate the financial repercussions of paying off the debt: Cutting down $10,000 of debt with a fixed interest rate of 7% will save you from paying $700 in interest, giving you a total net worth boost of $10,700. (Actually, you will save a little more; if the debt is compounded monthly, you would have paid $723 in interest on the debt by holding it the whole year, for a real total boost of $10,723 in your net worth.)

But the stock market investment is highly variable; while you can expect a 10% return over the long term (and even that is the subject of more discussion and argument than I’m going to get into right now), in any particular year, stocks could soar, they could crash, or they could be somewhere in between.  Being able to predict how much stocks will return in any given year is a bit beyond the skills of most people; guessing a year in advance how the stock market or particular stocks will do is all but impossible.

Why do I bring all this up?  Quite simply, there’s a tendency among financial writers (myself included) to skim over the difference between fixed returns and variable returns on your investments.  Because variable returns are, well, variable, you should expect higher returns, on average, to compensate for the variability.  If stocks yielded only as much as bonds while still being more variable in their return rates, they would have ceased being a popular investment choice a long time ago.

When considering your investments, then, you need to consider both the expected investment return and the variability of that return.  When you can get a fixed return that is the same or higher than the highest reasonable return from a variable investment, you should go for the fixed return.  If the choice is between paying off credit card debt at 23% or investing in the stock market and hoping for a 10% return, the obvious choice is to pay off the debt.

If the fixed return is lower than the expected variable rate, as it frequently is, things get more complicated.  You have to consider how much of a premium will make the variable investments worth-while to you.  If you are choosing between an 8% fixed and a 10% variable return, it might not be worthwhile, while the difference between a 6% fixed and 10% variable could be worthwhile to you.  (Personally, I happen to follow the latter view, which is why I suggested paying down your debt to a level of six percent in my Ten Steps.  Now, you have a better idea of the logic behind that suggestion.)

You also have to be aware of how much risk you are willing to take in order to achieve your desired return.  It is possible to only invest in instruments with fixed rates and less rate risk, but you will have to deal with lower returns (and thus higher amounts that you need to invest).  Generally, the suggestion goes that you should take more risk in variable return vehicles when you’re younger and have time to make up your losses.  (Plus, if you have decades over which to invest, your returns should approach the averages, allowing you to treat the variable returns as close to fixed returns for your planning.)  Then you gradually shift to investments with fixed returns as you get older, so the swings in value aren’t as severe.

Hopefully, all of this helps you to get a bit of a better understanding of some of the considerations you need to look at when comparing the return rates for your investments and debts.

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If you’ve been reading my blog all this week, you know I’ve been going through a list of ten steps to get your financial life in shape.  If you don’t feel like going through five posts to review my suggested steps, here is the whole list, collected and put in the proper order:

0) Help Those Who Are Less Fortunate – Even before you have your own finances under control, give what you can to charities and others who need help.

1) Earn More Than You Spend – Cut your expenses or increase your income so you have a surplus.

2) Have Adequate Insurance to Protect Yourself and Your Family- Make sure that you have homeowner’s/renter’s insurance, car insurance, health insurance, and life insurance to cover you in emergencies.

3) Fund Your 401(k) or Equivalent Plan Up to the Match Provided by Your Company – Not doing so is essentially giving up free money from your bosses.

4) Create a Small Emergency Fund – Put aside at least enough money to cover one month worth of expenses, more if your job situation is shaky or you generally need more protection.

5) Pay Down Your High Interest Debt – Pay off any debt that charges more than six percent interest.

6) Bulk Up Your Emergency Fund – Save at least enough money to cover six months of your expenses.

7) Increase Your Retirement Savings if Needed – Increase your retirement savings (if necessary) in IRAs, your 401(k) and taxable accounts so that you are on track to meet your retirement goals.

8 ) Buy A House (If You Want to Own a Home) – By this point, you should be ready to save up for a house down payment and start on the path to home ownership.

9) Start Donating to Charity (If You Aren’t Already) – If you haven’t already started to give back to others who are less fortunate (preferably as early as you are able without jeopardizing your own financial situation), do it now!

10) Save and Invest for Other Long-Term Goals- Now’s the time to consider where you want to go in life, and meet whatever goals you desire:

-Pay down low interest debt

-Invest for your childrens’ education

-Invest more to retire early

Once you complete these ten steps, you will be in great shape financially.  And that’s a wonderful thing.

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I imagine that most of my readers already have a pretty good grasp on personal finance; most of the people who have commented on my posts are financial bloggers themselves, after all, so there’s the sense that I’m preaching to the choir (or to a group of other preachers, which might be more accurate).  But for much of the population, there seems to be a number of persistent myths that keep them from taking action toward improving their financial situation.  So today, I attempt to address some of those myths, and if I can change just one person’s mind about investing and other personal finance issues, it’ll be a successful column.

1) Understanding my finances is too complex – Nonsense.  Yes, it requires some time and effort to learn about things like Net Asset Value, annualized return, and ask-bid spreads.  But it’s no more complex than researching the performance of baseball players for your fantasy league.  A little bit of basic reading to learn how to interpret your financial statements, and you should have no problem following your investments.

2) Keeping up with my accounts takes too much time – This one has an element of truth; if you have three savings accounts, five checking accounts, four IRAs, two brokerage accounts, and a half dozen 401(k)s from various old jobs, then yes, it will take time to monitor them.  The one word solution: Consolidate.  Roll over your old 401(k)s, combine your IRAs at your favorite mutual fund company, and close down extraneous accounts.  Yes, all this consolidation will take time, but if you can cut down the number of accounts to a minimum, you’ll have a much easier and quicker time reviewing your account information in the future.

3) You need to be an expert to invest properly – This one is clearly false; just take a look at how many hedge funds ended up closing last year to see how even experts can make errors.  It’s not too difficult to assemble a simple portfolio of mutual funds with a major fund family; just use some broad based index funds to build a portfolio that meets your needs.  If that’s still too much trouble, most major fund families offer target date funds that will automatically adjust to your changing investment needs for your whole life.  Just regularly contribute to one, and you’ll do well financially.

4) I’m too broke to invest – I might let this one slide, if you are genuinely poor and not just broke.  If your household income falls below the poverty line, you could genuinely have trouble meeting all your living expenses and still having money left over for investing (especially if you live in an area with a high cost of living).  If you are making more than that amount, then for the most part, having money to invest is more about having control over your spending and less about how much you actually earn.

5) Why should I deprive myself now by locking up my money for decades? – Possibly the most pernicious myth, particularly among younger people.  The simple fact is that compound interest means every dollar you invest at twenty will be worth thirty-two dollars by the time you turn sixty-five (assuming a somewhat conservative 8% annual return on your investment).  A five thousand dollar investment will turn into $160,000 without another dollar being added.  Delay saving for only five years, and that total shrinks to $108,000; put off saving until you’re thirty, and you’ll have only $80,000, half of what you end up with had you started a decade earlier.  The lesson to be learned: small sacrifices when you are young can lead to large potential profits by the time you are ready to retire.

If you can get past these and the other savings and investment myths that exist, you’ll be well on your way to

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Welcome to List of Five week.  All this week, I’m going to be dispensing my usual advice and commentary in the form of lists of five (hence the name of the week).

To start off this week, we’re going to take a closer look at five of the many financial clichés that are out in the ether.  Unless The Amateur Financier is one of the first things you are reading on the subject of investing and personal finance, chances are you’ve read or heard these gems of wisdom already, perhaps many times.  But what do they really mean?

1) Pay Yourself First – Probably the most famous advice about retirement saving of them all, pay yourself first relates to how you should save for retirement.  Basically, you should take 10% of your gross salary (or more; depending on your age and other data, some experts would recommend 15%, 20% or more) and invest it for your retirement.  In essence, you treat your retirement funding like a bill from your future self, and make sure you pay that bill before any others.

Why is this such popular advice?  Well, retirement is possibly the only big goal for which you can’t get a loan.  Unlike college loans or a mortgage, there aren’t retirement funding loans you can get for your golden years.  (Which should make sense; you would need to have such loans last until you shuffle this mortal coil, at which point it would be hard for them to collect what you owe.)  Furthermore, treating your retirement savings as a regular expense makes it harder to blow off saving, and the decreased money available for spending will help you to live within your means.  It’s the investment advice equivalent of a hat trick.

2) Buy Low, Sell High – Ah, the classic advice on how to get rich; buy (whatever) at a low price, then sell (that same whatever) at a much higher price.  But the question is, how do you know when the (whatever), such a stock, is at a low price and when it’s at a high price?  You could get all kinds of answers, depending on who you ask; value investors would tell you to compare the current price to the fundamental value of the company, technical traders would rely on signals from the stock price, and other investors would share yet more advice.

One good, and fairly simple way, to buy low and sell high is to create an asset allocation that meets your needs and rebalance it when it gets too far from your desired allocation.  If you want a portfolio that is half US stocks and half foreign stocks, you could buy two mutual funds that track those respective groups of stocks.  Then, if some time went by and you found that the US allocation was only about 40% of your holdings, you could put all your new investment money into buying more shares of the US-invested mutual fund (buying low) or sell off some shares of the foreign invested mutual fund (selling high) to get your portfolio back in alignment.

3) Diversify, Diversify, Diversify – Not quite as famous as ‘Location, Location, Location’, encouragement to diversify your holdings is widely considered a good way to hedge your investments.  If you diversify between asset classes, that is, holding a mix of stock, bonds, and other investments, you can help to cushion the blow if one or more of your holdings takes a hit.  (Even in the nasty investment climate of the past several months, there were still some investments that increased in value, like Treasury bonds.)

Diversifying within each asset class can also benefit your returns.  If you buy only one stock, you have the risk that the company could go bankrupt and you’ll lose all your money.  Hold ten stocks of companies that are in a variety of fields, and the chance that you will lose all your money goes down substantially.  Hold all the roughly 8,000 publicly traded US companies, as in a US Total Market mutual fund, and nothing short of a total financial Armegeddon will destroy your investment completely.

4) A Fool and His Money Are Soon Parted – Not a cliché that deals with investing directly, but a broader money comment. There are people who rely on the lack of financial and investing knowledge to take advantage of those who need advice and help with their money.  If you don’t know what you are investing in, don’t invest.  There are plenty of easy to understand investments out there; there’s no need to jump into something that doesn’t make sense to you.

5) It’s Not Where You Start, It’s Where You End Up That Matters – To end on a more positive note, keep in mind that saving and investing is not a single event, it’s more of a journey.  Even if you’ve never invested a penny up to this point, starting now can have a huge impact on your future finances.  It’s never too late to start investing in your future.

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You might have noticed that over the past few weeks, I’ve been posting about good charities on Sundays, and subtly urging people to contribute.  I’ve been feeling as if I haven’t been giving back enough lately, and these posts have been part of my attempt to change that pattern in my life.  And, if I happen to encourage a few readers to contribute to the charities I support, all the better.

However, you might find that you want to check on charities on your own.  After all, you probably have causes and organizations that are important to you, and you might like to ensure that these charities are going to use your money properly, to achieve the results they state and accomplish the goals you want them to pursue.  Fortunately, there are several good resources out there to check out your potential charities:

JustGive.org – A basic website listing over one thousand charities, powered by Guidestar.  It lists the charity’s mission, the programs they sponsor, and classification of the charity.  It also provides some financial data, including the revenue and financial data for the most recent year.  It’s a good one-stop place to get a better understanding of any charity that catches your attention.

Give.org – The branch of the Better Business Bureau that oversees charities, you can get an even more detailed view of the charity’s finances, including a pie chart that graphs the relative amounts the charity spends on adminstration, fund raising, and the programs that is provides.  That way, you can have a better idea of where your money is going.

More importantly, the BBB determines whether the charity meets its 20 standards of good governance.  These standards cover every aspect of the charity’s activities, from the board of governers and how they are compensated, to how the charity goes about raising its funds and the proportion of donated money spent on fund-raising.  A charity meeting all these criteria is a good candidate for donations, while one that misses on some of them (or even worse, doesn’t have a BBB report at all) should be avoided.  (With exceptions allowed for churches or other local organizations that aren’t big enough to merit a BBB report; for these, you’ll have to do your own due diligence.)

IRS.gov – Why look up a charity through the IRS?  Well, if you are looking to take a deduction on the donated income, what better source to double-check the charity’s tax-deductable nature than on the website of the tax collector?  The most useful feature offered by the IRS website is the ability to search an online version of Publication 78, a complete list of charitable organizations on file with the government.  You can search for a particular charity, and see (a) if they are listed in the directory (if not, you probably want to reconsider your donation) and (b) just how the IRS has them listed, as different types of charities are eligible for different amounts of deductions.

With these resources in mind, you should be able learn all the vital facts about almost any charity to which you’d care to donate.  Happy giving!

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On Monday, I discussed several popular methods for paying off your debts.  In the course of that discussion, I mentioned that paying off the accounts according to the interest they charge is the most effective method, while Dave Ramsey’s method (the Debt Snowball, or paying off the lowest balance account first) and David Bach’s method (the Dead On Last Payment or DOLP(R) Method, paying down the balances based on the total balance and minimum payment required) may require more time and money.

Well, today I’m going to throw in some hard numbers to back that assertion up.  I created four different credit card debt repayment scenarios, and calculated how long it would take to pay off the debt under each one.  First, a few explanations for the terms I used in each test:

• Card Name: This is pretty obvious; I used three fictional Credit Card companies, Vesta, Servant Card, and Canadian Express for this experiment.
• Interest Rate: The APR charged by the credit card; I made the test a bit more realistic by compounding the interest rate monthly, rather than yearly.  (I could have done it daily, as most credit card companies do, but that would have greatly complicated my calculations and made only a slight differences to the end results.)
• Repay Percent: Most credit base the minimum payment amount on a tiny percentage of your overall balance, so I chose several repayment values on which to base my calculations.
• Starting Debt: Pretty straight-forward; this is the amount of debt held at the start of the experiment.  For the sake of simplicity, I made the total debt for each test equal to $30,000.  (Which, sadly, is not an unreasonable amount of credit card debt for an average American family.)
• Initial Repayment: The amount the credit card company requires for their minimum payment, equal to the starting debt multiplied by the repayment percentage.
• DOLP: A quick calculation of the DOLP score for David Bach’s repayment plans, it’s equal to the starting debt divided by the initial repayment amount.  (It’s also equal to 100 divided by the repayment percentage, meaning a higher repayment percentage leads to a lower DOLP score.)
• Money Available for Debt Repayment: For the sake of simplicity, I assumed that a total of $1000 would be used each month for credit card payments.  This is the amount left after making the minimum payments to all the cards, and it is applied according to the rules for each repayment plan.

For each test, I will list the number of months it takes to pay off one of the debts, as well as the months to pay off all the debts.  The three methods I tested are paying off the card with the highest interest rate first (High Interest), following Dave Ramsey’s Debt Snowball method (Lowest Balance) and David Bach’s Dead On Last Payment (DOLP Method).  On to the tests!

Scenario 1:

Here, our highest interest rate card has the highest amount of debt and our lowest interest rate card has the lowest balance, so our Lowest Balance method will be paying off the debts in the opposite order compared to our High Interest method.  Our lowest DOLP value (with the highest Repay Percent) matches our Lowest Balance, so both of those methods will be in sync.  And our results are:

The Lowest Balance and DOLP methods give a fairly quick victory, eliminating the first debt a full 25 months sooner than the High Interest method.  But, the High Interest method has the last laugh, knocking out all the debt six months quicker than the other two techniques.  And, quicker debt elimination means quicker debt freedom and less money spent on interest.

Scenario 2:

Here, we’ve just reversed the amount of starting debt for the Vesta and Canadian Express cards.  As a result, both the High Interest and the Lowest Balance methods will lead us to knock off the Vesta debt first, while the high repayment rate (and low DOLP) will have our DOLP money going to Canadian Express first.  Which technique leads to debt freedom first?

This time, the High Interest (and Lowest Balance) technique eliminates both the first debt and all of the debts the fastest.  The DOLP method isn’t too far behind, but why pay more money and spend more time eliminating your debt if you don’t have to?

Scenario 3:

For this scenario, we’ve reversed the order of the repayment percentages; now, the high interest rate Vesta requires the highest initial repayment rate and has the lowest DOLP.  As a result, that will be first target for both the DOLP method and the High Interest method.  However, the Lowest Balance method will be focused on the Canadian Express debt first.  Which leads to the fastest repayment?

As you’ve probably come to expect, the Lowest Balance method retires one debt sooner than the other two methods, but takes five months longer to complete eliminate the credit card debt.  The High Interest method (in this case, tied with the DOLP method) is the fastest for debt elimination again.

Scenario 4:

For this test, we have a trifecta: Vesta has the highest interest rate, the lowest starting debt, and the lowest DOLP score; all threee methods tell us to pay that off first.

As you probably guessed, all three debt repayment schemes generated the same results in this case; each is equally effective in paying down the debt.

Conclusions:

The big lesson from this test: paying down the debt with the highest interest rate first IS the quickest way to completely eliminate your debt.  The other two methods only match(but never exceed) the rate of debt repayment when the order of debt repayment they recommend matches the highest to lowest order of the interest rates.  While it is possible to pay down one debt faster using one of the other methods (especially, starting with the smallest balance), you’ll end up paying for it in the end, as it will require more time and money to knock off the remaining debts.  Keep that in mind, and the potentially long process of eliminating the first debt should be easier to handle.

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