The Amateur Financier

Happy Leap Day, Everyone! It’s that rarest of holidays, the one that shuns all those ‘only once a year’ days to come along only once every years (and sometimes not even that often; people had to wait eight years between Leap Days from 1996 to 2004). So, let’s all get up and celebrate!

Although, the problem with a holiday that comes around only two or three times is that there aren’t any obvious ways to celebrate. No Leap Day trees, no special Leap Day desserts, not even too many Leap Day sales (little point in setting up a sale that you won’t be able to repeat until 2016, I guess).

Leap into earning more this Leap Day! Or something like that.

So, to ensure there’s something at least a little celebratory about this Leap Day, I decided the theme of this post was going to be related to ‘leaping’, that is, leaping ahead of the typical personal with your net worth and future prospects. It won’t always be easy, but if you can do the following, you’ll end up far richer than the average person:

1. Invest More Than 10% of Your Salary: The 10% figure is one that almost every source I’ve read agrees on for a good minimum to invest. It’s not a bad starting goal to set; investing 10% of your salary at a 10% rate of return (another 10%; the markets love this nice, round value) for forty years leaves you with about twelve times your salary in savings (even assuming a higher than historically seen inflation rate of 5%). Not too shabby; you could live off that without too much trouble, and if you toss in Social Security, you could live pretty well.

But if you up your contribution to 15%, you can achieve that 12-fold increase in 33 years, and have 18 times your salary in savings within forty years, a much nicer way to start the ol’ retirement. Up your investment rate to 20%, 25%, or even higher, and you’ll see your time to having more than enough to retire go down steadily in turn. Putting a third of your income into retirement savings is certainly tough, but being able cut your time to having significant retirement savings in half (or have three times as much available if you keep it up a full forty years) could make it all worthwhile.

2. Aggressively Pay Off Debt, Particularly High Interest Debt: More than a few of you probably read through the above point while thinking, ‘Yeah, everything looks good if you are consistently earning 10% on your investments, but that’s far from guaranteed. How can I ensure that I’m maximizing my money’s ability to increase my net worth?’ The answer, in a nut shell, is to pay off debt. Most of the debt you can accumulate will have a fixed interest rate (and most of those that don’t, like credit cards, will likely only increase for most of us). Paying off a 17% interest rate debt on a credit card saves that 17% interest, plus you don’t have the worries about taxes that arise with profits from investments. Try finding that sort of return on a typical investment.

3. Build Up Side Income: This is possibly the biggest thing you can do to get ahead of the curve, money-wise; with more income, you can invest, pay down debt, or simply save more than you can otherwise, allowing you to boost your income much faster as a result. It’s no longer an issue of needing hours of time and tens, possibly hundreds of thousands of dollars to get started. With modern technology, you can start anything from a craft boutique to a world-dominating omni-company with little more than the computer you’re using to read this very blog entry. Don’t get me wrong, it can be tough at times, but being willing to put in the effort can prove the difference between a moderate net worth and an impressive net worth when it is time for retirement.

There you go, three methods of boosting your net worth this Leap Day. Keep it up, and by the time next Leap Day rolls around, you should have ‘leaped’ well ahead of most people your age. Plus, you have four years before you have to put up with any more leap year puns, so that’s always a good thing.

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.

(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!