A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Wednesday, December 29, 2004

New Year's Financial Resolutions

First off, I think New Year's Resolutions are dumb. I mean, if you are going to make changes in your life, why not do them now instead of waiting for a new year? But, I also understand the purpose of starting with a clean slate and since most of you are in the mood to make changes, why not consider some of the following regarding your personal finances:

1. Save at LEAST 10% in your 401K.

2. Open a Roth IRA for you and your spouse and set up automatic deposits into the account. You can put $3,000 in a Roth IRA for the 2004 tax year (you have until April 15th, 2005 to make a contribution for the 2004 tax year). In 2005, you can put up to $4,000 in a Roth IRA. If you can't afford to put money in a Roth AND 10% in your 401K , consider adjusting your 401K contribution so that you CAN utilize a Roth.

3. Have a budget. It doesn't have to be detailed. Just make sure that you have a written plan as to HOW you spend your money. If you make a budget and find out that you don't have enough for all your needs, then you might have to be a little more detailed to find out where you are spending too much money.

4. Set up an emergency fund. Most people say 3 to 6 months of your income should be in an emergency fund. An emergency fund is an excellent tool. Once you have money set aside in your emergency fund, you can consider upping your deductibles on your car and homeowner's insurance, which will save you on your monthly payment. Then, if you do have an accident or have to pay a deductible, you can take money out of your emergency fund.

NOTE: An emergency fund should NOT be accessed to buy a new pair of shoes! It should be considered a sacred account and should only be used in the event you lose your job or have to pay a deductible.

There are many other things you can do to improve your personal finances. I have just mentioned a few. But, I think it is best to concentrate on a few so that you don't get overwhelmed.

Have a great 2005!

Full text!
AllThingsFinancial has moved!

Wednesday, December 22, 2004

Don't Forget to Rebalance Your 401K!

It's the end of the year and that means that it is time to rebalance your 401K. In a previous post (link), I discussed the reason why you should rebalance (also called reallocate). With this post, the goal is to discuss how you should rebalance.

The first step is to find out how much SHOULD be in each fund, based on your allocation plan. For an equal allocation, you can get this number by simply dividing the total dollar amount in the 401K by the number of funds you are using. For instance, if you have $100,000 in your 401K allocated equally among 5 funds, then you should have $20,000 in each fund. If you don't, then you need to reallocate.

Once you know how much SHOULD be in each fund, simply subtract that number from the actual amount in each fund. A positive number will tell you that you have too much in that fund and a negative number will tell you that you don't have enough in that fund.

For example, say you have $100,000 in your 401K with the following year-end balances:

$15,000 - S&P 500 Index Fund
$13,000 - Large Cap Growth
$25,000 - Small MidCap Growth
$26,000 - Small Cap Value
$21,000 - International Fund

We already determined that you should have $20,000 in each fund. So, we have to do the following calculation to figure out how to adjust the different balances:

$15,000 - $20,000 = -$5,000 - S&P 500 Index Fund
$13,000 - $20,000 = -$7,000 - Large Cap Growth
$25,000 - $20,000 = $5,000 - Small MidCap Growth
$26,000 - $20,000 = $6,000 - Small Cap Value
$21,000 - $20,000 = $1,000 - International Fund

The RED numbers indicate funds that are UNDERFUNDED and the GREEN indicate funds that are overfunded. So, if you wanted even amounts in each of the funds, you would simply sell $5,000 worth of the Small MidCap Growth fund and use the proceeds to buy $5,000 worth of the S&P 500 Index Fund. Then, you would sell $6,000 in the Small Cap Value fund and $1,000 in the International fund and use those proceeds to buy $7,000 worth of the Large Cap Growth fund.

If you aren't sure why you want to go through all the trouble to do this, then you need to brush up on the purpose of asset allocation. You can read my previous post on the subject (link). Asset allocation helps you to have discipline when managing your portfolio.

Here's to a great 2005!

Until next time...
Full text!
AllThingsFinancial has moved!

Saturday, December 18, 2004

Young People and Debt

I saw this interesting and scary article about young people and their use of debt.


This article just proves the importance of giving kids a financial education.
Full text!
AllThingsFinancial has moved!

Friday, December 17, 2004

What the Heck is Asset Allocation?

Basically, asset allocation is how a person "allocates" or divides up their investable assets among different asset classes. It can be as simple as dividing a portfolio in half and putting 50% in a stock index fund and 50% in a bond fund. It can be taken a step further by taking the stock portion and dividing it up among large-caps, mid-caps, and small caps and dividing the bond portion among bonds with different maturies.

Just like having a financial plan, it is important to have an asset allocation plan (also known as an investment plan). Why? Because without an investment plan, people tend to buy what they shouldn't buy when they shouldn't buy it! I know a lot of people who move their 401k money into whatever fund performed best LAST YEAR! The chances of that fund performing best THIS YEAR are pretty slim. But, people do it anyway.

The importance of asset allocation can be best seen with an example. Suppose a person has a written asset allocation plan that says that they will invest in the following manner:

25% or $25,000 - Large-Cap fund
25% or $25,000 - Mid-Cap fund
25% or $25,000 - Small-Cap fund
25% or $25,000 - Bond fund

Let's say in this particular year, the different funds had these rates of return:

Year 1

+10% - Large-Cap fund
+08% - Mid-Cap fund
+15% - Small-Cap fund
-02% - Bond fund

The portfolio would look like this:

(the formula for calculating a return for one year is: Beginning Amount X (1 + the rate of return expressed as a decimal)

$25,000 X 1.10 = $27,500 Large-Cap fund
$25,000 X 1.08 = $27,000 Mid-Cap fund
$25,000 X 1.15 = $28,750 Small-Cap fund
$25,000 X 0.98 = $24,500 Bond fund

Total Portfolio value at end of year 1: $107,750 or a 7.75% rate of return.

Most people would probably want to sell all of their bond fund and put it all in the small-cap fund (since it went up the most!). That's human nature. Nobody likes to hold an investment that seems to be losing money. However, suppose the next year, the fund's returns were like this:

Year 2

- 05% - Large-Cap fund
+03% - Mid-Cap fund
- 20% - Small-Cap fund
+05% - Bond fund

At the end of year 2, the portfolio would like this:

$27,500 X 0.95 = $26,125 Large-Cap fund
$27,000 X 1.03 = $27,810 Mid-Cap fund
$53,250 X 0.80 = $42,600 Small-Cap fund

The portfolio would be worth $96,535 (for a one year LOSS of 10.41%!)

Finally, had this person stuck with their asset allocation plan and reallocated so that 25% was in each of the 4 funds, they would have only had a loss of 4.25% instead of 10.41%:

$26,937 X 0.95 = $25,950 Large-Cap fund
$26,937 X 1.03 = $27,810 Mid-Cap fund
$26,937 X 0.80 = $21,550 Small-Cap fund
$26,937 X 1.05 = $28,284 Bond fund

The portfolio would be worth $103,170 (for a one year loss of 4.25%, which is MUCH better than the 10.41% loss in the above example!).

I must mention one important note: Asset Allocation does not mean that a portfolio will get the best return in any one year, instead it helps smooth out returns.

I hope this helps! Until next time...
Full text!
AllThingsFinancial has moved!

Tuesday, December 14, 2004

Hidden Inflation

Next time you go to the grocery store, go to the frozen food section and look at the ice cream. If you look real hard you might see something different. I'll give you a hint: (the size of the container is smaller). Ice cream companies have started putting their ice cream in 1.75 quart containers instead 1/2 gallon containers, which is really a significant price increase. I call this "sneaky" inflation because most people probably don't even notice.

How much of a price increase is this?

Before, 2 quarts (1/2 gallon) of ice cream sold for $3.98.
Now, 1.75 quarts of ice cream sells for $3.98.

To figure out the price per quart, simply do the following:

$3.98 divided by 2 = $1.99
$3.98 divided by 1.75 = $2.27

To calculate the percentage change in the price, do the following:


(New Price - Old Price)/Old Price


($2.27 - $1.99)/$1.99
$.28/$1.99 = .1407 or 14.07%

So, by reducing the container size from 1/2 gallon to 1.75 quarts and keeping the price the same, companies have raised prices over 14%!

Inflation is just a fact of life. But, I respect companies more if they just raise prices instead of being sneaky.

I won't buy the new size of ice cream. I will buy Blue Bell, which is still 1/2 gallon. In fact, they have now started putting "Still 1/2 gallon" on the side of their cartons.

That's my rant for the day. Until next time...
Full text!
AllThingsFinancial has moved!

Saturday, December 04, 2004

Kids & Money Part III

I took my boys to the library today. I like going to the library. It is nice and quiet there (something I don't get too often since we have 3 kids!).

Anyway, I was browsing through the stacks when I came across a book called Kids, Parents & Money by Willard Stawski. Since I am sort of on a mission when it comes to educating kids about money, I sat down and started reading it. It turns out that Mr. Stawski has a website that accompanies the book ( so I went and checked it out too. I really like his website. I would recommend checking out the links page.

Now go check it out!

Until the next time...
Full text!
AllThingsFinancial has moved!

Mission Statements & Financial Planning

It is hard to believe that it has been almost a month since I last posted! Time flies!

The end of 2004 is near, making December a perfect time to reflect on the happenings of this year and begin planning for 2005. I was reviewing my personal mission statement when I started thinking about how a personal mission statement can and should be part of a financial plan. If a personal mission statement is a summary of one's life purpose, shouldn't it be reflected in their financial plan? I think so!

That said, the first step is to develop a personal mission statement. Questions one might ask may include the following:

Why am I here?

What do I want to accomplish in life?

What or who is important to me (also known as "values")?

What are my priorities?

Before I wrote my mission statement I read Stephen Covey's Seven Habits of Highly Effective People. Although I don't agree with everything Mr. Covey writes, I do agree with most of this book. I highly recommend it for everyone to read! In order to effectively write a personal mission statement, one must know what is important to them. What's important to me is:

My relationship with God

My wife

My kids

My job



Once a person knows what is important to them, they then need to know what their different roles are in life. My roles are:

Follower of Christ



Financial Planner

Den Leader

Of course these aren't all the roles I play in life. I listed just those that are most common to me. Once a person knows what's important to them and their roles, they can begin composing their mission statement. Here's my mission statement (altered a bit for privacy purposes):

My mission in life is to first and foremost live for Christ. A man must decide whom he is going to follow. I will follow Christ and seek God's will in all that I do. I will do this by studying the Bible and by praying on a daily basis and by walking in His ways.

Secondly, I will be a loving husband to my wife. I will strive to love her like Christ loved the church. I will practice selfless love, striving to put her needs before my own.

As a father, I will strive to be loving and accepting. I realize that my kids are different, each possessing different talents and abilities given to them by God, and I will strive to treat them accordingly. I will discipline them with love. I will strive to be a good role model for them.

As a financial planner, I will always strive to do what's best for my clients, even it if might not be what's best for me. I will study and keep up on what is happening within the financial planning field. My goal is to develop my firm into a top-notch planning firm with over $50,000,000 in assets by the year 2010! With God's blessing, it can be done.

As a successful financial planner, I will give back to my community. I will teach classes on financial planning and will dedicate myself to worthy causes. I will also strive to be the best Cub Scouts Den Leader that I can be.

Finally, in order to live out this mission, I must be healthy. Therefore, I will eat a proper diet and exercise daily.

I will read this every day!

That's my mission. That's what I'm about. Now, that's not saying that I ALWAYS act in a way that is congruent with my mission. After all, I am human. But, by having my personal mission statement, I can refer back to it daily and it brings me back to where I need to be.

So, what does all this have to do with financial planning? In my next post I'll attempt to explain it.

Until next time...

Full text!
AllThingsFinancial has moved!