AllFinancialMatters

The Future of AllThingsFinancial - Part II

2005-08-24T14:05:00.000-07:00

Well, I finally bit the bullet and set up an account with DreamHost to host AllThingsFinancial. I'm excited and nervous at the same time. I appreciate all the supportive comments from my first "Future of..." post. They (the comments) were very helpful and aided me in my decision-making. I'm very fortunate to be able to count most of my readers as friends. -JLP

Let's Talk About Risk

2005-08-24T09:46:00.000-07:00

In the investment world "risk" is defined as fluctuation. Of course, we are really only concerned with DOWNWARD fluctuation. Anyway, there are many different kinds of risks involved in investing. I'm going to take a couple of posts to talk about them.

I got the idea for this series of posts from Ric Edelman's book The New Rules of Money, which is a pretty good book (I can't say that about the rest of his books). Ric is a financial advisor and author. He also has a website.

So, what are the major types of risk? I'll list them first and then I'll go back and explain each one:

Default risk - The risk that an investment will become worthless. Does this remind you of Enron or Worldcom? Those people who had all their wealth tied up in those two companies lost it all. However, this risk can be minimized through proper diversification. Had you owned Enron or Worldcom in a portfolio of stocks, the impact of their default wouldn't have been nearly as severe.

Credit risk - This is the risk that an investment's financial stability might decline. Although this risk involves stocks, it is particularly important to bond investors. If you own a bond in a company who's credit rating gets cut by the bond rating services, the value of your bond is going to decrease. This is another type of risk that can be diversified away.

Tax risk - The risk of loss due to taxes (income and capital gains taxes). Loss to taxes can be either postponed through tax-deferred accounts like 401(k)s, IRAs, and annuities. Loss to taxes can be eliminated with the use of a Roth IRA or Roth 401(k).

Inflation risk - A very real risk faced by everyone (some have more exposure than others). This is the risk that an investment's purchasing power will be eroded by rising prices. This is a very real risk to someone invested in interest-bearing accounts. Stocks have been shown to handle inflation risk pretty well as long as the inflation is low to moderate.

Interest rate risk - The risk that interest rates will rise. If you buy a bond today for $1,000 that pays you 4% per year and then interest rates rise to 4.5%, your bond is worth less than the $1,000 you paid for it. Why? Becuase why would anyone want to pay you $1,000 to earn $40 per year when they could buy a bond for $1,000 that pays $45 per year?

Currency risk - The risk that foreign currency exchange rates will rise. If you are a US citizen and have an investment in China and China's yuan increases in value against the doller, your investment will decrease in value. (This looks like an excellent follow-up topic)

Political risk - This risk is related to currency risk. Political instability can be a substantial risk when investing in other countries - especially emerging markets. Diversification can reduce this risk.

Market risk - This risk has to do with the price fluctuations of the market as a whole. There's not a lot that can be done about market risk except for ignoring it.

Event risk - The risk that something unexpected and beyond management's control will cause the invesment's value to fall. September 11, 2001 is probably an the example most people think of.

Prepayment risk - The risk that the investment's principal will be returned sooner than expected. Investors in callable bonds face this risk when interest rates decline.

Extension risk - The opposite of prepayment risk. In other words, you might not get your principal back as soon as you expected.

Opportunity risk - The risk that by investing your money in one place you are missing out on the returns "you could be getting" elsewhere. Diversification can rid you of most of this risk.

If you are like me, you probably didn't think there were that many different kinds of risks. These risks are all very real and should definitely be considered when making your investment plans. However, please realize that risk is natural and in most cases if you want a decent return, you are going to have to except some risk.

Tags: Understanding Risk, Risk, Investment Risk

Carnival Submissions for Week 11

2005-08-24T06:03:00.000-07:00

Man, it is hard to believe that we have done 10 carnivals already! Time flies when you are at the carnival! Anyway, AllThingsFinancial will be hosting Week 11 on Monday, August 29.

I NEED MORE SUBMISSIONS!

So, if you are a blogger and have a personal finance article that you would like to submit (preferably original material), please send me an email with the following info:

Your Name

Your Blog's Name

Your Blog's URL

Your Article's Title

Your Article's URL

Your Article's Trackback URL (if you have one. If you don't no biggie)

Your Summary of the Article

Pick an article that you want lots of people to read and send it to me. My deadline is Sunday, August 28, at 5:00 PM Central Time.

Gas Prices

2005-08-23T09:15:00.000-07:00

First off, I hate paying high gas prices. I hate it with a passion. However, that doesn't mean we should be rash and blame whoever and whatever for higher gas prices. Really, we only have ourselves to blame.

My local paper has been inundated with letters from people who angry over gas prices. It is sad just how little most people know about economics. Here is one example from today's paper:

I don't understand the price-rising criteria for gasoline. If the station has already purchased the gasoline to sell at a set rate, why does the increase affect the gasoline already in the station's tanks. To me the increase should be on the gasoline that is ordered, not what is already there.
It's kind of like buying bread: On the shelf it's one price, by the time you get it to the checkout counter, there's an increase because of the instability of the flour market?

My response:

Using this woman's thinking, when prices decrease the opposite should be true. When prices fall, a gas station that might have paid more for their inventory would have to keep prices high until that inventory is sold and then they could decrease prices. I wonder how long that would work in the real world?

Although I'm not exactly familiar with the way gas stations set their prices, I would speculate that the reason we don't see wide swings in prices from station to station is to avoid long lines and shortages at some and gluts at others. I'm not saying I agree with it, I'm just saying that that is one way to look at it. I will say that it does seem that prices go up FASTER than they come back down.

Since we are on the topic of gas, I want direct your attention to a pretty good post on the Freakonomics blog critiquing an article (free registration required) that was in the past weekend's New York Times Sunday Magazine. Both (the NYT article and the Freakonimics' critique) are must-reads.

Tags: Gas Prices, Oil Prices, Freakonomics

This Week's Carnival of Personal Finance

2005-08-22T06:55:00.000-07:00

Dawn at FrugalforLife has done a great job hosting Week 10 of the Carnival of Personal Finance. Stop by and check it out.

AllThingsFinancial will be hosting next week's carnival. Please start emailing me your submissions (please include "Carnival Submission" in the subject line). My deadline for submissions is Sunday, August 28, 5:00 PM so that I can have the Carnival up at midnight on the 29th.

Building Wealth Doesn't Get Any Simpler Than This

2005-08-18T10:57:00.000-07:00

I'm a fan of Scott Burns. When he writes, I read it. Anyway, I noticed that he had an article on the Money Central website today. In that article he talks about how a person (a young person) can become a millionaire if they:

Work four summers, starting at age 16

Save the income in a Roth IRA account

Invest it in a simple, low-cost equity portfolio

Simmer slowly for 47 years

Serve ungarnished (and untaxed) at age 67

He then goes on to explain how it can be done. Good information! This is the kind of stuff I like. I think we tend to spend too much time talking about what can't be done instead of focusing on WHAT WE CAN DO NOW!

Tags: Starting Young, Becoming a Millionaire, Investing

AllThingsFinancial Mentioned in the Wall Street Journal

2005-08-18T06:02:00.000-07:00

I just want to say thanks to Andrew Blackman at the Wall Street Journal for thinking of AllThingsFinancial when he wrote this column that appeared in today's Wall Street Journal. It's nice to get some recognition.

He did mention one thing that he didn't like about my blog and that's the fact that I don't have my articles categorized. I have to agree with him. I hate that too, but Blogger doesn't have that feature. That problem will be fixed once I change providers. Until then, I'll have to manually organize my posts.

Posts Organized by Topic

2005-08-17T21:54:00.000-07:00

Last Update: Wednesday, August 17, 2005

Blogger does not offer categorization so I have to do it manually. Also, you can use the Google Search box to search for specific topics on AllThingsFinancial. I have used it a couple of times and it works pretty good. More changes are coming.

Buying a Home (Mortgages)

The True Cost of an Interest-Only Mortgage
Comparing 15, 30, and 40-Year Mortgages
Beware of Interest-Only Mortgages

College Planning

College Funding Math - Part IV
College Funding Math - Part III
College Funding Math - Part II
College Funding Math - Part I
Paying for College via Income Shifting

Debt Management

Is There Such a Thing as Good Debt?

Financial Planning Basics

Understanding the Time Value of Money
How to Calculate the Present Value of an Annuity
How to Calculate Annualized Rate of Return
Twelve Key Elements of Practical Personal Finance
How Much Life Insurance do You Need?
Financial Planning Basics - The Net Worth Statement
Net Worth Statement - Part II
Net Worth Statement - Part III
Net Worth Statement - Part IV
Net Worth Statement - Part V
Financial Planning Basics - The Cash Flow Statement
Cash Flow Statement - Part II
Analyzing Your Financial Statements with Ratios
Analyzing Your Financial Statements with Ratios - Part II

Getting Started

Why it is Important to Start Saving When You Are Young

Investing

A Look Back at Index Returns
The Importance of Understanding Objectives When Investing

IRAs

Trusts & IRAs - Part 2
IRS Publication 590
Trusts & IRAs
Make Sure Your IRA Can be Stretched
Stretch a Small Roth IRA
Facts About the Roth IRA
Should You Leave Your 401(k) With Your Company?
The Beauty of a Stretch IRA - An Example
Stretching an IRA
IRAs
You Still Have Time to Make an IRA Contribution for 2004
The Beauty of a Roth IRA

Kids & Money

Great Resources for Kids
Roth IRAs for Kids
Teaching Kids About Business and Investing

Miscellaneous

Are Hybrid Vehicles Worth it?

Mutual Funds

What's a Wrap Account
Understanding Mutual Fund Fees
Questions to Ask Your Broker
Questions to Ask Your Broker Before You Buy a Load Fund
How Does an A-Share Mutual Fund Work?
Kiplinger's Mutual Fund Guide

Portfolios

Model Portfolios
How to Calculate Personal Rate or Return When Dollar-Cost Averaging

Retirement Planning

Ten Steps to a Richer Retirment
Are Americans Ready for Retirement
The Penalty of Starting Late

Are Hybrid Vechicles Worth it?

2005-08-17T11:09:00.000-07:00

First off, let me say that I am not talking about the economy car hybrids like the Toyota Prius and the Honda Civic. What I am talking about is the new hybrid versions of bigger vehicles.

Sarah Breckenridge of Smart Money wrote an excellent article in which she took four vehicles (Ford Escape, Honda Accord, Toyota Highlander, and Lexus RX) and compared the hybrid version of those vehicles with the standard version. I wanted to see how much a person could save (or not save) by buying the hybrid version over the standard version. Keep in mind that my numbers do not reflect maintenance costs or tax beneifts of hybrid ownership. I also made the assumption that the vehicles are driven 15,000 per year divided evenly between city driving and highway driving.

	Ford Escape Hybrid
	City MPG	Gallons Used	Price Per Gallon	Ann. Cost
City	33	227	$2.40	$545
Highway	29	259	$2.40	$622
Totals		486	$2.40	$1,166
Cost Per Mile				$.0777
	Ford Escape XLT
	City MPG	Gallons Used	Price Per Gallon	Ann. Cost
City	22	341	$2.40	$818
Highway	25	300	$2.40	$720
Totals		641	$2.40	$1,538
Cost Per Mile				$.1025

	Honda Accord Hybrid
	City MPG	Gallons Used	Price Per Gallon	Ann. Cost
City	29	259	$2.40	$622
Highway	37	203	$2.40	$487
Totals		462	$2.40	$1,107
Cost Per Mile				$.0738
	Honda Accord
	City MPG	Gallons Used	Price Per Gallon	Ann. Cost
City	21	357	$2.40	$857
Highway	30	250	$2.40	$600
Totals		607	$2.40	$1,457
Cost Per Mile				$.0971

	Toyota Higlander Hybrid
	City MPG	Gallons Used	Price Per Gallon	Ann. Cost
City	31	242	$2.40	$581
Highway	27	278	$2.40	$667
Totals		520	$2.40	$1,248
Cost Per Mile				$.0831
	Toyota Highlander
	City MPG	Gallons Used	Price Per Gallon	Ann. Cost
City	19	395	$2.40	$948
Highway	25	300	$2.40	$720
Totals		695	$2.40	$1,668
Cost Per Mile				$.1112

	Lexus RX 400h
	City MPG	Gallons Used	Price Per Gallon	Ann. Cost
City	31	242	$2.40	$581
Highway	27	278	$2.40	$667
Totals		520	$2.40	$1,248
Cost Per Mile				$.0831
	Lexus RX 330
	City MPG	Gallons Used	Price Per Gallon	Ann. Cost
City	18	417	$2.40	$1,001
Highway	24	313	$2.40	$750
Totals		730	$2.40	$1,752
Cost Per Mile				$.0971

It is important to note that the hybrid models are $4,000 to $5,000 higher in price, which is definitely something to consider. Based on my gas price of $2.40 per gallon, these hybrids won't pay for themselves for a number of years.

Questions? Comments? Did I miss something?

Tags: Hybrid Cars, Hybrid Vehicles, Comparing Hybrid Cars, Comparing Hybrid Vehicles

Interesting Article About Blog Readers

2005-08-16T05:02:00.000-07:00

This article was mentioned on Instapundit. The article talks about a survey called "Behaviors of the Blogosphere" that was conducted by comScore Networks. I have not yet had time to read the survey but hope to do so later today. Maybe blogging will pay off after all.

Tags: Behaviors of the Blogosphere, comScore Networks, com Score Networks

Sorry for the Lack of Blogging

2005-08-16T04:15:00.000-07:00

I have been really busy today. We have a fair coming up in October and I am on a committee in charge of finding volunteers to help park cars. It's a lot of fun trying to get people to volunteer their time. Anyway, my mission this week is to fill 20 slots and so far I only have 3 filled. Wish me luck.

UPDATE: Here are my calling stats from yesterday (Monday):

49 Dials
18 Not Available
13 Left Messages
13 No - They can't or won't be able to volunteer
3 Yes - They will volunteer
2 Maybe - They have to check their schedules (I'm not optimistic)

Considering that I am working off a membership roster (that is full of names of men that understand that this is a volunteer organization), these numbers stink. I hope I do much better today. Based on those numbers, I have a 6.12% "closing rate" (3/49 = .0621). In order to find 20 volunteers, I need to make 327 calls (20/.0612 = 327).

I have some good stuff in mind for this blog. Stay tuned...

Tips on Cutting Gas Prices

2005-08-15T20:22:00.000-07:00

Tonight, as I was catching up on my reading, I saw this article offering tips on how to cut your fuel costs.

We spend enough at Kroger to get $.10 off per gallon of gas. That $.10 is becoming a smaller and smaller discount percentage-wise, but every little bit helps.

I'm curious to know what my readers are doing. Got any tips you want to share?

Tags: Saving Money on Gas, Cutting Fuel Costs

12 Years Ago Today...

2005-08-14T07:06:00.000-07:00

My wife and I were married! A lot has happened in those 12 years. I'm sure the next 12 years will be just as much fun.

We've Come A Long Way

2005-08-13T17:54:00.000-07:00

I was out perusing the 'net when I saw this post. I'm so glad technology has improved so much since then. I can think of a lot better way to spend $8,000!

Taking a Proactive Approach With Your Finances

2005-08-12T12:36:00.000-07:00

I'm currently re-reading Stephen Covey's The 7 Habits of Highly Effective People. It is the kind of book that is good to read every year or so because the ideas it contains are that important.

The first habit discussed in the book is that of proactivity. According to the book, "proactivity means that as human beings, we are responsible for our own lives. Our behavior is a function of our decisions, not our conditions. We can subordinate feelings to values. We have the initiative and the responsibility to make things happen."

In that light, I would like to lay out what a proactive person looks like when it comes to personal finances.

When it comes to personal finances, a proactive person:

1. Takes responsibility for their financial situation.

2. Lives within their means.

3. Saves a significant portion of their income.

4. Invests their money prudently.

5. Does not chase after the hottest investment ideas.

I'm sure there are other attributes that could be added to the list.

I realize that I'm probably preaching to the choir when I talk about this stuff because if you are reading this blog, chances are you are serious about personal finance. If you stumbled across this blog, I hope the material it contains helps you become a proactive person when it comes to your personal finances.

Tags: The 7 Habits of Highly Effective People, Stephen Covey

College Funding Math - Part IV

2005-08-12T09:37:00.000-07:00

This is the last post in the College Funding Math series. Hopefully, by following the previous three posts, you have an idea of how to use math to figure out how to meet a goal. I also hope that you weren't bored to death by reading these posts!

In Part III, we figured out that with a beginning balance of $3,000, Hector's parents would need to save an additional $3,206 per year, invested to get 8% annual return, in order to meet his future college funding needs.

Now, with this post, I will show you an example of what all this looks like laid out in a spreadsheet. To conserve space, I had to abbreviate some of the titles for the columns. Here's a listing of each title means:

Age = Beginning Age, for this example Hector is 5.
Beg. Amt. = The balance at the beginning of each year. Since we have $3,000 already saved up, that is the beginning amount for the first year. We are also assuming that the deposits are made at the beginning of the year.
Ann Dep = Annual Deposit, which is $3,206. Deposits are made at the beginning of each year.
Total = The total of the Beg. Amt and Ann Dep. columns.
Withdrawal = Amount withdrawn to pay for college.
Ending Balance = (Beg. Amt + Ann Dep - Withdrawal) x 1.08

      Beg.    Ann            With-   Ending
Age   Amt.    Dep   Total   drawal   Balance
  5   3,000  3,206   6,206            $6,702
  6   6,702  3,206   9,908           $10,700
  7  10,700  3,206  13,906           $15,018
  8  15,018  3,206  18,224           $19,682
  9  19,682  3,206  22,887           $24,718
 10  24,718  3,206  27,924           $30,158
 11  30,158  3,206  33,364           $36,033
 12  36,033  3,206  39,238           $42,377
 13  42,377  3,206  45,583           $49,230
 14  49,230  3,206  52,435           $56,630
 15  56,630  3,206  59,836           $64,622
 16  64,622  3,206  67,828           $73,254
 17  73,254  3,206  76,460           $82,577
 18  82,577  3,206  85,782  $24,513  $66,170
 19  66,170  3,206  69,376  $25,739  $47,128
 20  47,128  3,206  50,333  $27,026  $25,172
 21  25,172  3,206  28,377  $28,377       $0

There you have it. It is pretty self-explanatory. However, if you have questions or comments about this series, please let me know and I'll be happy to answer them.

Once again, I would like to thank the UnknownProfessor at the FinancialRounds blog for his help with the formula. It is always nice to count a professor among your friends.

Tags: Saving for College, College Funding, Time Value of Money, Annuity Due Formula, College Funding Math, Planning for College

College Funding Math - Part III

2005-08-11T08:24:00.000-07:00

I'm sorry it has taken me so long to get this follow-up post done. I was basing my calculations for this exercise on an example from a financial planning book that I own. The book is WRONG! Anyway, I think I got it all figured out thanks to the help of the Unknown Professor (UP - pretty cool initials), who writes for the FinancialRounds blog. It is one thing to use a program to solve problems. It is quite another to solve problems using the actual formulas. UP came through for me and I really appreciate it.

In Part I of this series, I showed you how to use a formula to figure out how much your future college funding needs could be, using today's college tuition prices and an assumed inflation rate.

I followed up with Part II by showing you how to calculate how much you need now in order to meet those future needs. We discovered that a lump sum of $31,580, invested to get an 8% return, would fund four years of college for Hector.

The obvious problem with the lump sum is that there aren't a lot of people with $30,000 available to invest for college. So, in this post, it is my aim to show you how to calculate how much you need to save each year in order to meet Hector's college funding needs.

NOTE: I must warn you that the formula used to perform this calculation looks like something out of a scary movie. But, if you take it one step at a time, it really isn't that bad. I promise.

We are trying to figure out how much we have to save each year to meet a goal. The amount saved each year is called a "payment." So, we need to use a formula to calculate a payment. This formula involves two steps. First, we have to solve for the factor (or constant). Then we use the factor to solve for the payment.

The first formula looks like this:

[((1 + i)ⁿ - 1)/(i X (1+ i)ⁿ] X (1 + i)

i = interest rate or rate of return expected, which is 8% or .08.
n = number of years, which is 17
X = multiplication sign

Once we add in the appropriate numbers, the forumula* looks like this:

[((1 + .08)¹⁷ - 1)/(.08 X (1+ .08)¹⁷] X (1 + .08)

[((1.08)¹⁷ - 1)/(.08 X (1.08)¹⁷] X 1.08

[(3.7000181 - 1)/(.08 X 3.7000181)] X 1.08

[ 2.7000181 / .2960014] X 1.08

9.1216383 X 1.08

9.8513693

So, after all that, we find out that our constant is 9.8513693. Now we simply divide our goal, which is $31,580 by our constant to get our payment amount.

$31,580 / 9.8513693 = $3,205.65

So, we have found out that if we take the $3,000 we already have saved and add $3,205.65 to it at the beginning of each year at an 8% return, we will be able to fund Hector's college. Keep in mind that this $3,205.65 must be saved through Hector's college.

In Part IV of this series I'll show an example of a timeline so you can see how all this works.

*This is the formula for payments made at the beginning of the time period, called an "annuity due." The other formula is called an "ordinary annuity." For more on this, you can visit this website.

Tags: Saving for College, College Funding, Time Value of Money, Annuity Due Formula, College Funding Math

What if Everyone Saved 10% of Their Income?

2005-08-09T10:24:00.000-07:00

This is an interesting question raised by Hazzard over on the Everybody Loves Your Money (ELYM) Blog. Here's my 26.4 cents worth:

First I have a couple of questions:

1. Is paying off credit card debt and other consumer debt considered "savings?" It would make no sense for Americans to "save" 10% of their income while still holding so much consumer debt.

2. Is investing considered "savings?" I have not researched this topic enough to know if retirement savings through IRAs and 401(k)s and other savings vehicles is considered savings. (This would be a great time for an economist to offer up some information)

That said, I would think that initially, the savings would hurt companies that produce luxury goods and other unnecessary products that we buy. Banks, on the other hand would probably see an influx of new money from all these savers. Banks, sitting on top of a mountain of cash would probably buy other smaller banks.

Mutual funds and brokerage firms would also see increased deposits. It would be interesting to see how the stock market would reach an equilibrium since lots of companies would be hurt by America's new zeal for saving.

Since I am not an economist, it would be hard for me to project out what this would mean for our economy in the long-term. I welcome anyone with an economics background to comment. Also, be sure and check out the post and the comments on the ELYM blog that I linked to.

Tags: Economics, Savings

My 26.4 Cents!

2005-08-05T12:21:00.000-07:00

Okay, this is going to expose the "weird" side of me. My friends who read this blog (all 2 of them!) are already familiar with my sense of humor. Those of you who aren't, please forgive me.

I was just commenting on SavvySaver's blog about the subject of school uniforms. Anyway, at the end of my comment I wrote "That's my $.08 (adjusted for inflation)." Then I got to thinking: what is "our $.02 really worth once it is adjusted for inflation?

Surely we must adjust this to show the effects of inflation. Otherwise, our opinions become more and more worthless with each passing year. Nobody wants that! So, the question becomes what is our two cents really worth?

When did the saying "that's my $.02," start? What year? Let's say it started in 1930 (I really have no idea but I need a base year). If we assume an inflation rate of 3.5% for opinions, then our $.02 is becomes our $.264! Wow! Now instead of saying "that's my two cents," we should be saying "that's my twenty-six point four cents."

This is going to completely change the world. Every December the Opinion Research Foundation will have to make an upward adjustment so that we have an accurate measure of our opinions.

College Funding Math - Part II

2005-08-05T10:55:00.000-07:00

With the last post, we figured out that four years of college was expected to cost $105,655. Now we need to know how to reach that goal.

So that we don't have to keep referring back to the first post, here are the assumptions:

Assumptions: Hector (I figured we might as well have some fun with the name) is 5 years old and will start college when he is 18, which is 13 years away. You currently have $3,000 in Hector's college fund. One year at a public university currently costs $13,000 and we will assume that the college inflation rate is 5.0% (or .o5) per year. We will also assume that Hector will be in college for 4 years. We will assume the growth rate on the investment account is 8% (or .o8). Finally, we will assume that the annual amount saved will cease once Hector starts college.

Step 2 - Calculate the present value of four years of college

The costs for each of the four years of college are expected to be:

Year 1 = $24,513
Year 2 = $25,739
Year 3 = $27,026
Year 4 = $28,377
TOTAL = $105,655

In order to know how much we need now to meet these future expenses, we must discount them using our expected investment return, which is 8%. The formula for Present Value of a Lump Sum is:

Present Value = Future Value / (1 + ROR)^N
Future Value = $24,513
ROR = 8.0% or .08
N = 13 years
/ = the division sign

All plugged in, the formula looks like this:

Present Value = $24,513 / (1 + .08)¹³

Present Value = $24,513 / 2.7196237

Present Value = $9,014

What this tells us is that if we had $9,014 that we invested at an 8% return per year, we would have $24,513 in 13 years. We simply need to perform this calculation for each of the other three years of tuition and then add them together to get the total lump sum that we need NOW in order to fund Hector's college expenses.

Performing the calculation on the other three years of tuition, we get the following:

Year 1 = $ 9,014
Year 2 = $ 8,763
Year 3 = $ 8,520
Year 4 = $ 8,283
TOTAL = $ 34,580

So, this tells us that if we had $31,580 LUMP SUM (remember we ALREADY HAVE $3,000 SAVED UP, so the we only need $31,580 additional funds) to invest today at an 8% annual return, we would have enough to fully fund Hector's college education. The problem is that there aren't a whole lot of people who have an extra $33,159 sitting around to invest for college. Most people have to save smaller amounts each year. I'll talk about that in Part III.

Tags: Saving for College, College Funding, Time Value of Money

College Funding Math - Part I

2005-08-05T10:07:00.000-07:00

Today, I'm going to show you how to calculate how much you should be saving to meet future college expenses. It isn't that hard to do, but it will require some mathematical formulas that border on the complex. But, don't worry, I'll walk you through it so you aren't alone! So, here we go:

Assumptions: Hector (I figured we might as well have some fun with the name) is 5 years old and will start college when he is 18, which is 13 years away. You currently have $3,000 in Hector's college fund. One year at a public university currently costs $13,000 and we will assume that the college inflation rate is 5.0% (or .o5) per year. We will also assume that Hector will be in college for 4 years. We will assume the growth rate on the investment account is 8% (or .o8). Finally, we will assume that the annual amount saved will cease once Hector starts college.

Step One - Calculate the future expected cost of four years of college

This is a simple time-value of money calcuation, using the following equation:

Future Cost = Current Cost X (1 + Inflation Rate)^N

Don't let the formula scare you. We will plug in the numbers that we know:

Current Cost = $13,000
Inflation Rate = 5.0% or .05
N = Number of Years Away which is 13

So, after plugging in the appropriate numbers, the formula looks like this:

Future Cost = $13,000 X (1 + .05)¹³

We perform the following steps to solve for the Future Cost:

Future Cost = $13,000 X (1.05)¹³

Future Cost = $13,000 X 1.8856491

Future Cost = $24,513

So, we now know that in 13 years, the first year of college will cost $24,513. Since this is the amount for only for the FIRST year, we must run the calculation 3 more times, using the same formula as above but changing "N" to reflect the appropriate number of years away. NOTE: since the first year of college is 13 years away, the second year would be 14 years away, the third would be 15 years away and the fourth would be 16 years away.

After you run the formula for each year, you should come up with this:

Year 1 = $24,513
Year 2 = $25,739
Year 3 = $27,026
Year 4 = $28,377
TOTAL = $105,655

We now know that at a 5.0% inflation rate four years of college for Hector is going to cost $105,655. The next step is figure out how much you need to be saving to meet this goal. That will be the subject of the next post.

Tags: Saving for College, College Funding, Time Value of Money

Ten Tips to Help You Avoid Investment Fraud

2005-08-04T11:46:00.000-07:00

I saw this earlier and thought it was worth sharing. I put a link to the actual site so you can download and print out a PDF version of this list if you choose. This is targeted towards Senior Citizens but is still information that we all need to know. Thanks to the New Jersey Board of Securities for printing this up.

1. When in doubt, check it out.

Anyone offering financial advice or selling stocks, bonds, mutual funds or other investment vehicles in New Jersey must be registered with the New Jersey Bureau of Securities (BOS). Contact the Bureau to make certain the person is registered before investing any money. Ask if the State has taken any disciplinary action against the person.

2. If it sounds too good to be true, it probably is.

Investments offering very high rates of return should be questioned. Ponzi schemes, where money from new investors is used to pay high returns to only a few of the original investors, are on the rise. When this pyramid scheme collapses, most investors lose all their money.

3. You know me, so invest with me!

Con artists who claim they were referred by members of a club or organization to which you belong are a growing concern. They lower your guard by claiming to know people that you trust. The con artist may join a group and begin preying on its members. Check to make sure the person offering an investment is registered with the BOS.

4. Trust me! Would I LIE to you?

Ask if the person recommending a particular investment stands to benefit. If the person will make a commission or get a fee for selling a particular investment, you should consider whether his or her recommendation is unbiased and accurate.

5. You can see a lot by looking.

Read your monthly investment statements carefully. Any errors or irregularities should be reported in writing to the investment company at once. If the problem is not resolved, then contact the BOS immediately!

6. Keep all records safe and secure.

Keep all contracts, forms and orders that you sign or authorize in a safe, secure location. These documents are the paper trail that investigators may need to examine. In addition, keep copies of all investment correspondence in a safe place.

7. You’ve got the power!

Authorizing someone to invest on your behalf sounds convenient but lessens your control over your money. Understand what investment powers you are giving to someone before signing an agreement.

8. Let’s play follow the leader.

A favorite scam of con artists is the promise of high returns through access to the investment portfolios of the world’s elite banks. The negative publicity attached to these schemes has caused con artists to avoid explicitly referring to elite or prime banks. Now they underplay the role of banks by referring to these schemes as risk-free, guaranteed high-yield instruments or something equally deceptive!

9. Who knows what evil lurks in the Internet?

The Internet has reshaped our lives, but it also has become a prime hunting ground for scam artists. For example, one scam involves e-mail offers from individuals representing themselves as foreign government or business officials in need of help to deposit large sums of money in overseas bank accounts. Always know with whom you are investing and where their office is located by meeting them.

10. Never invest only on word-of-mouth advice.

Read and understand all documents. Take your time and be in control. You should ask for literature and other printed information to review that gives more facts about the investment being offered. If you are told you must act at once or lose out, walk away.

Source: New Jersey Bureau of Securities

Tags: Preventing Investment Fraud, Fraud

The Pitfalls of Annuities

2005-08-04T06:01:00.000-07:00

This comes from today's Wall Street Journal in an article($) about how states are cracking down on annuity sales. They list three pitfalls to annuities:

Long-term surrender charges that can cost 10% or more of the value of the contract.

Unfavorable tax treatment, since profits in annuities are taxed at ordinary income rates.

No step-up provision, meaning that when passed to heirs, gains are taxed, unlike some other investments.

According to the article, last month New Jersey began enforcing its new Senior Citizen Investment Protection Act, which limits how long annuity sellers can impose surrender charges. The article also lists what other states are doing:

Overall, I think this is a good thing.

Tag: Annuities

The Seven Common Denominators of Building Wealth

2005-08-03T12:34:00.000-07:00

I'm on a The Millionaire Next Door kick. In the introduction, the authors list the seven common denominators among those who successfully build wealth (which are each given a chapter in the book):

1. They live well below their means.

2. The allocate their time, energy, and money effieciently, in way conducive to building wealth.

3. They believe that financial independence is more important than displaying high social status.

4. Their parents did not provide economic outpatient care.

5. Their adult children are economically self-sufficient.

6. They are proficient in targeting market opportunities.

7. They chose the right occupation.

In my opinion, the most important factor is number one, living below your means. Anybody can build wealth by living below their means and wisely investing the difference.

Tags: Determining if You Are Wealthy, Millionaire Next Door

The Millionaire Next Door - Part III

2005-08-03T11:26:00.000-07:00

The most popular posts I have done were in relation to the book, The Millionaire Next Door. Since the posts are now buried in the archives, most of you probably haven't seen the comments to my first two "millionaire" posts. You can check Part I and Part II.

The biggest critic of the book is Miguel, who says the following in his second comment:

"JLP,

Darned, I wrote a good response that seems to have disappeared into cyberspace. Well, here goes again if I can even remember what I said.

My biggest problem with the Millionaire book is that it purports to have conducted "research" on the topic. Sorry, but interviewing a bunch of old men in shopping malls who claim to be millionaires is not research by any meaningful definition. There is no scientific or statistical method here. They are an embarrassment to the field of demographics.

Why is that a problem? Cause people will draw inaccurate conclusions from the books. So, they claim as you say that "millionaires use restraint and don't fall for the material goods that most Americans fall for". That is complete BS. Like I said before, I am a millionaire. Did it before the age of 40. Most of my neighbors are millionaires. Some fit the book's profile, some don't. Personally, I like to eat out a lot, I like to vacation in the Hamptons, I like to travel to Europe, and I like owning a big house. I don't own a luxury car - In fact I don't own a car at all. I live in NYC and I rent them when I need them.

I will concede that the advice to "marry well" is quite sound. I married someone with a sharp eye towards saving & investment, budgeting & penny-pinching. We love the luxuries, but we don't pay retail for them.

My use of the word "conservative" was not in reference to politics, so there is no "liberal" version to be told. The authors are advocating a conservative life style for no other reason than they beleive its a good idea - it's their OPINION and it's not based on any real research.

There are plenty of millionaires who do not fit their lifestyle. So, then what is really the point of the book. I just think they are trying to promote fiction as non-fiction.

American likes to think of itself as a class-less society, and the book feeds right into that uniquely American mythology. That's exactly what people want to hear.

It's not that there aren't some decent concepts in the book. It's that if you don't know any better, you simply don't know what of their writing is BS and what of it is ok."

Thanks for the comment, Miguel.

Personally, I think Miguel is being particularly hard on the book. The point of the book is that "wealth" is not what we think it is. Rather, "wealth" (in financial terms) is our net worth. It's not how much we make, but what we keep from what we make that ends up making the difference.

I think EVERYONE can gain some insight from reading this book.

Off the Topic of Personal Finance: JLP Asks...

2005-08-03T10:30:00.000-07:00

What are some good books to read to boys in the 8-10 year-old category?

I enjoy reading to my boys. I'll read to my daughter as soon as she quits trying to eat the books! Anyway, over the last couple of years we have read:

1. The Mouse and the Motorcycle - Beverly Cleary
2. The Mayor of Central Park - Avi
3. Captain John Paul Jones - Ronald Syme
4. Mystery of the Midnight Message - Florence Parry Heide
5. Mystery of the Silver Tag - Florence Parry Heide
6. The Hidden Box Mystery - Florence Parry Heide
7. Mystery of the Vanishing Visitor - Florence Parry Heide
8. Mystery of the Mummy's Mask - Florence Parry Heide
9. Adventure of the Elements - Richard James III
10. Mystery of the Lonely Lantern - Florence Parry Heide
11. Henry Reed, Inc. - Keith Robertson
12. The Book of Virtues for Young Readers - Edited by William Bennett
13. Henry Reed's Baby-Sitting Service - Keith Robertson
14. J.C. Penney - Golden Rule Boy -
15. Thomas Paine - Common Sense -
16. The Book of Proverbs from the Bible (we are reading from the New Living Translation)

I have really enjoyed reading to them and I think they enjoy it too. I'm also learning cool things like:

Did you know that Thomas Paine was the FIRST person to ever use the term "The United States of America?"

Did you know that Thomas Paine received no compensation for writing Common Sense? He had all his profits from the book donated to the American cause for Freedom. Now that is a true Patriot and someone I want my kids to know about.

Do any of you read to your kids? If so, what do you read to them? Any recommendations?

Shoulda, Woulda, Coulda - JLP Laments

2005-08-03T08:00:00.000-07:00

I read in today's Wall Street Journal that Adidas is buying Reebok. A look at the latest quote shows Reebok is trading at nearly $57 per share. All I could think when I read the news was "coulda, woulda, shoulda..."

Why?

Well, way back in December 1999, Oprah Winfrey did one of her "Oprah Loves..." shows. Anyway, she went on and on about this particular shoe from Reebok. I remember sitting there thinking that this was going to be huge for Reebok. So, I went and looked up their stock price. They were trading around $8.00 per share. I seriously thought about buying 100-200 shares. But,... I DIDN'T.

Anyway, right after that Oprah show, the stock started moving up and six months later was trading in the mid-teens. One year after the show, it was trading at $23 per share - a 187.5% gain. Had I purchased the shares at $8 per share and held on to them until today, I would have had an annualized rate of return of just under 42% (not including dividends).

Oh well, such is life. Shoulda, woulda, coulda,... I guess.

Another Cool Blog to Check Out

2005-08-02T15:03:00.000-07:00

One of the things I love about blogging is all the cool stuff I come across. Today I came across a blog called CausticMusings by Maggie Wang. I love her post about the Millionaire Next Door. According to her bio, Maggie is a full-time video game level scripter and part-time illustrator fascinated by numbers, cats, computers, muscles, karaoke, and healthy foods that don't taste like sawdust.

Alternatives to 529 Plans

2005-08-02T14:36:00.000-07:00

The 529 Plan is still a great way to save for college. Parents can sock a lot of money away and the account can grow tax free (for now). However, many 529 Plans are run mutual funds who have loaded them to the max with fees. To make matters worse, a lot of the plans are sold by commission-based brokers, who may or may not have your best interest at heart.

There are alternatives to 529 Plans as this article by Penelope Wang, writer for Money magazine, points out. The article talks about the Coverdell Educational Savings Account (formally the Educational IRA), UGMA/UTMA custodial account, and Taxable accounts.

Of the three, the Coverdell is my personal favorite since it operates like an IRA. Your investment options are virtually limitless and you can utilize low cost investment vehicles like exchange-traded funds and index funds - something you won't find in 529 Plans.

Tags: 529 Plans, 529 Plan, Saving for College, Education Funding

Female Personal Finance Bloggers

2005-08-01T13:47:00.000-07:00

There are several personal finance-related blogs that are authored by women. Here's the list I have so far (the newest ones are marked with an *):

(If I have left anybody out, please let me know and I'll be happy to add you!)

TheBudgetingBabe
Clutter 2 Cash
Frugal for Life
Karen's Financial Progress Report*
Kate Spills the Beans
My Open Wallet*
MMB's Personal Finance Journal*
SavvySaver

When to Fire Your Financial Advisor

2005-08-01T13:03:00.000-07:00

Flexo at ConsumerismCommentary posted a link to an article on when to fire your financial advisor by Liz Pulliam Weston. I have written a couple of times on questions to ask before you hire, but never how to fire. Anyway, Liz has written an interesting article.

To keep you from making the wrong advisor choice in the first place, read this from the CFP Board.

Tags: Liz Pulliam Weston, When to Fire Your Advisor

Look Before You Leap Into the Roth 401(k)

2005-08-01T12:25:00.000-07:00

Could there be potential pitfalls to the Roth 401(k)?

According to this article by Jeanne Sahadi on the CNN/Money website talks about some of the drawbacks to investing in the new Roth 401(k) that will be available starting in January of 2006. The Roth 401(k) seems like a no-brainer until you consider the potential tax issues.

However, the younger you are, the more beneficial the Roth 410(k) seems to be. Why? Because the longer you have for your money to grow, the more likely you are to be in a higher tax bracket when you retire.

Also, Jim at Blueprint wrote a pretty nice piece about the Roth 401(k) a while back. He also links to a website called Roth401k.com that was set up specifically for the Roth 401(k).You may want to check it out.

Tags: Roth 401(k), Roth 401k, Retirement Planning

Top 6 Reasons to Participate in Your 401(k) Retirement Savings Plan`

2005-08-01T11:53:00.000-07:00

My wife's company sent this out today and I thought I would share it with you. I agree with all of them except number one. I think number one should stress the fact that you won't have to rely on Uncle Sam during retirement. Anyway, here they are:

6. You can increase your take home pay, really!

5. The "company match" can help your investments grow

4. Your money can go with you, job to job!

3. Your plan's investment choices are managed by professionals (except for parent company stock)

2. The plan allows access to maoney in an emergency

1. Automatic payroll deduction makes it easy to save

Tags: 401(k), 401k, Reasons to save in a 401k

This Week's Carnivals

2005-08-01T08:52:00.000-07:00

Steve at the InCashFlowWeTrust blog is hosting week 7 of Carnival of Personal Finance. Stop by and check it out.

Michael at SmallBusinessMarketingSystems is hosting this week's Carnival of the Capitalists.

Both of these are great resources. I urge you to stop by and check them out.

The Future of AllThingsFinancial

2005-07-30T12:59:00.000-07:00

I took the first step towards setting up AllThingsFinancial on its own. I registered AllThingsFinancialBlog.com (it's not an active address yet) for 5 years. Now I'm looking for a host, which is both confusing and intimidating.

I have heard of Dreamhost and TypePad. Jim at Bargaineering uses Dreamhost and has told me that he is happy with it. My main questions are:

1. How much space is enough? Is 2400 megabytes large enough? What does that mean?

2. What about bandwidth? What does that mean? I have ambitions to make AllThingsFinancial grow but I want to be realistic. I don't want to buy a bunch of extra storage and bandwidth if I won't need it.

3. Anyone using TypePad or Dreamhost?

4. Is MoveableType or WordPress better? Is there another programming language that I'm not thinking of?

What other issues should I think about?

Wilmington Trust Has an Account Offering 3.35%

2005-07-29T15:56:00.000-07:00

NOTE: This is not a recommendation. I just saw this information on the web and thought I'd pass it along. I also am not getting paid to promote this.

Wilminton Trust has a savings account similar to ING Orange and Emigrant Direct's American Dream Savings Account. Savers might want to check it out.

Tags: Wilmington Trust Savings, Wilmington Trust Savings Account, ING Direct Orange Savings Account, ING Direct, Emigrant Direct

OT: A Little Friday Afternoon Humor

2005-07-29T12:16:00.000-07:00

My father-in-law sent this to me today. I'm calling this the Dynamic Impact of Aging:

Jacob, age 92, and Rebecca, age 89, living in Florida, are all excited about their decision to get married. They go for a stroll to discuss the wedding, and on the way they pass a drugstore. Jacob suggests they go in.

Jacob addresses the man behind the counter: "Are you the owner?"

The pharmacist answers, "Yes."

Jacob: "We're about to get married. Do you sell heart medication?"

Pharmacist: "Of course we do."

Jacob: "How about medicine for circulation?"

Pharmacist: "All kinds."

Jacob: "Medicine for rheumatism and scoliosis?"

Pharmacist: "Definitely."

Jacob: "How about Viagra?"

Pharmacist: "Of course."

Jacob: "Medicine for memory problems, arthritis, jaundice?"

Pharmacist: "Yes, a large variety. The works."

Jacob: "What about vitamins, sleeping pills, Geritol, antidotes for Parkinson's disease?"

Pharmacist: "Absolutely."

Jacob: "You sell wheelchairs and walkers?"

Pharmacist: "All speeds and sizes."

Jacob: "We'd like to use this store as our Bridal Registry."

Money 101

2005-07-29T10:05:00.000-07:00

The CNN/Money website has a really good series called Money 101. I have listed the entire series below and added links to posts from AllThingsFinancial that are related to the subject.

Here we go:

_______________________________________________________

LESSON 1

Setting priorities

Here's help for the first -- and often the hardest -- step in achieving your financial goals: deciding which goals to pursue.

_______________________________________________________

LESSON 2

Making a budget

How to bring your spending under control, so that you get the most out of every dollar.

_______________________________________________________

LESSON 3

Basics of banking and saving

Here's how to get the best banking services at the best price, either online or off.

_______________________________________________________

LESSON 4

Basics of investing

An introduction to making money in stocks, bonds and mutual funds.

Related posts on AllThingsFinancial:

Understanding the Time Value of Money
How to Calculate the Present Value of an Annuity
How to Calculate Annualized Rate of Return

_______________________________________________________

LESSON 5

Investing in stocks

The market can be a great place to turn savings into wealth -- or to lose your shirt. Here are some fundamentals of investing wisely.

Related posts on AllThingsFinancial:

A Look Back at Index Returns
The Importance of Understanding Objectives When Investing

_______________________________________________________

LESSON 6

Investing in mutual funds

It's a mutual-fund jungle out there. Here's how to create a simple portfolio that works.

Related posts on AllThingsFinancial:

What's a Wrap Account
Understanding Mutual Fund Fees
Questions to Ask Your Broker
Questions to Ask Your Broker Before You Buy a Load Fund
How Does an A-Share Mutual Fund Work?

_______________________________________________________

LESSON 7

Investing in bonds

Bonds can provide a steady and reasonably secure income, while adding ballast to your portfolio--but only if you really understand what you're buying.

_______________________________________________________

LESSON 8

Buying a home

Owning your home is part of the American Dream, but if you’re not prepared, buying it can be a nightmare. Here are some fundamentals for buyers and sellers.

Related posts on AllThingsFinancial:

The True Cost of an Interest-Only Mortgage
Comparing 15, 30, and 40-Year Mortgages
Beware of Interest-Only Mortgages

_______________________________________________________

LESSON 9

Controlling debt

You've got to know when to hold debt--and when to fold it. This lesson shows you how to accomplish your financial goals by making debt work for you.

_______________________________________________________

LESSON 10

Employee stock options

More companies are handing out stock options, and to a much broader group of employees. This lesson gives you vital information on how to handle ESO's.

_______________________________________________________

LESSON 11

Saving for college

It's not rocket science, just common sense. By starting early and investing regularly, your children may have a wider choice of colleges, and paying the bill won't hurt as much.

_______________________________________________________

LESSON 12

Kids and money

Up until they start earning a living, and sometimes well beyond that, kids are apt to spend money like it grows on trees. This lesson will help you put your children on the road to handling money responsibly.

Related posts on AllThingsFinancial:

Great Resources for Kids
Roth IRAs for Kids
Teaching Kids About Business and Investing

_______________________________________________________

LESSON 13

Planning for retirement

Achieving a comfortable retirement in the 21st Century requires a new approach to retirement planning.

Related posts on AllThingsFinancial:

How Much do You Need During Retirement?
What is a Safe Withdrawal Rate From Retirement Savings?
Taking Money Out of Your Retirement

_______________________________________________________

LESSON 14

Asset allocation

The single most important thing an investor can do is practice asset allocation. Here's how.

Related posts on AllThingsFinancial:

What the Heck is Asset Allocation?

_______________________________________________________

LESSON 15

Hiring financial help

What to keep in mind when when seeking professionals to handle your financial planning, stock trading, insurance coverage and tax returns.

Related posts on AllThingsFinancial:

Questions to Ask Your Broker
What is Fee-Only Financial Planning?

_______________________________________________________

LESSON 16

Health insurance

Whether your employer provides you with a group medical plan or you need to buy coverage on the individual market, understanding how health insurance works is the best way to get your money's worth.

_______________________________________________________

LESSON 17

Buying a car

Buying a car is like no other shopping experience. The choices seem to be endless. This lesson helps you sort through your options.

_______________________________________________________

LESSON 18

Taxes

Among the long list of necessary evils we must encounter throughout our lives, perhaps the most constant -- taxes -- is also the least understood. But the whole process isn't nearly as baffling as you may think.

_______________________________________________________

LESSON 19

Home insurance

Homeowners' insurance can be a nightmare. It's costly, confusing, and unrewarding -- until you have to use it. Here, you'll learn how to purchase peace of mind now and later.

_______________________________________________________

LESSON 20

Life insurance

Life insurance is critical to financial planning. It's a necessity for anyone with dependents who would be affected financially by your demise. Yet life insurance is one of the hardest financial products to understand and it's sold by agents who are sometimes more concerned with their commissions than your needs. This Money 101 lesson is all about a better way to buy life insurance.

Related posts on AllThingsFinancial:

How Much Life Insurance do You Need?

_______________________________________________________

LESSON 21

Estate planning

Americans are in the midst of one of greatest inter-generational transfers of wealth in history, yet few of us have done any planning for it. Here's how to start.

Related posts on AllThingsFinancial:

The Beauty of a Stretch IRA - An Example
Stretching an IRA
Trusts & IRAs - Part 2
Trusts & IRAs
Make Sure Your IRA Can be Stretched
Stretch a Small Roth IRA

_______________________________________________________

LESSON 22

Auto insurance

Auto insurance can be a nightmare. It's costly, confusing, and unrewarding -- until you need it. Here's how to purchase peace of mind now and later.

_______________________________________________________

LESSON 23

401(k)s

It's the most important tool you've got for retirement. Here's how to make the most of it.

Related posts on AllThingsFinancial:

Don't forget to Rebalance Your 401(k)
Trusts & IRAs - Part 2
IRS Publication 590
Trusts & IRAs
Make Sure Your IRA Can be Stretched
Stretch a Small Roth IRA
Facts About the Roth IRA
Should You Leave Your 401(k) With Your Company?
The Beauty of a Stretch IRA - An Example
Stretching an IRA
IRAs

Tags: Money 101, Basics of Financial Planning

Something to Save For!

2005-07-28T21:55:00.000-07:00

Okay, this is sort of related to personal finance.

I'm a car nut - always have been, probably always will be. I saw this today and thought I would share it. Porsche is going to build a "sedan" called the Panamera. From the looks of the sketch, it looks like it is going to be pretty cool looking.

It probably won't be available until 2009 so I have plenty of time to save for it's $75,000+ price. If I start saving $1,386 per month now at 6%, I'll have $75,000 by the summer of 2009! Of course, it might be smarter to just put that money towards a better goal like retirement.

Tags: Porsche, Porsche Panamera

Try on a Pair of Gap Jeans and Get a Free Song From iTunes

2005-07-28T15:47:00.000-07:00

Here's something for my frugal music-loving readers:

From August 8 to 31, each customer who tries on any pair of Gap's new jean fits -- three new fits for women and one for men -- will get a complimentary song from Apple's iTunes music store.

Here's a link if you want to read more about it.

Tags: Gap, iTunes, Gap iTunes Promotion

Watch Out for PayPal Scams

2005-07-28T11:34:00.000-07:00

I know this is nothing new but I still wanted to let those of you who may not be aware of the PayPal scams. Today I received the following email:

____________________________________________________

You have added electronics4free@paypal.com as a new email address for your
PayPal account.

If you did not authorize this change or if you need assistance with
your account, please copy and paste this link into your webbrowser

https://www.paypal.com/us/cgi-bin/add?f=app_email

Thank you for using PayPal!
The PayPal Team

Please do not reply to this e-mail. Mail sent to this address cannot be
answered. For assistance, log in to your PayPal account and choose the
"Help" link in the header of any page.

----------------------------------------------------------------
PROTECT YOUR PASSWORD

NEVER give your password to anyone and ONLY log in at
https://www.paypal.com/ . Protect yourself against fraudulent websites
by opening a new web browser (e.g. Internet Explorer or Netscape) and typing
in the PayPal URL every time you log in to your account.

----------------------------------------------------------------

PayPal Email ID PP007

____________________________________________________

It looks like an authentic email. It's NOT! One thing you have to look out for is the links that they put in the email. Although they look legit, if you hover your pointer over them, you will see the real address pop up. DON'T CLICK ON THE LINKS!

If you ever get an email that is supposedly from PayPal, go directly to the PayPal website through eBay. If PayPal has a message that is important, they will have it on their website.

Tags: PayPal, PayPal Scams

Characteristics of Empowering Mission Statements

2005-07-27T13:19:00.000-07:00

I just posted a bit about the Characteristics of Empowering Mission Statements on Man on a Mission. It might inspire you to write your own mission statement. A clear sense of purpose has everything to do with personal finance.

Tom Peters Has Been Blogging a Year

2005-07-27T11:25:00.000-07:00

I was just over on the Tom Peters blog and noticed that today marks his one year blogging anniversary. If you haven't ever checked out his blog, give it a try. I am a big Tom Peters fan but have been disappointed with his last couple of books. They were just too busy for my tastes. I think I would get a headache if I tried to read them. In my opinion, his best books were (in order of my preference):

1. A Passion for Excellence
2. In Search of Excellence
3. Thriving on Chaos

Happy Birthday TomPeters.com

Tag: Tom Peters

The Power of Dividends

2005-07-27T09:47:00.000-07:00

I like dividends. I suppose that's why I like TheDividendGuy, a blog written by a guy who also like dividends. Go check out his blog and while you are there, check out this post. I like the way he keeps track of his dividends. Maybe his spreadsheet can help you set up your own tracking system.

One other guy who likes dividends is Jeremy Siegel. His book, The Future for Investors, stresses the importance of reinvesting dividends in a portfolio. He states:

"The power of the basic principle of investor return is magnified when the stock pays a dividend.

Consider this. If earnings are better than expected, that means that the stock is underpriced and purchsing more shares through dividend reinvestment will enhance your returns even more."

Dividends count!

Tags: Dividend Investing, Dividends

The Deal That's Not Really a Deal

2005-07-27T07:19:00.000-07:00

This is kind of humorous. My wife received a magazine subscription offer from Better Homes and Gardens. It was for a two-year subscription for "only" $14.97, which isn't a bad deal. But, upon further reading, I found out it was $14.97 PLUS $6.00 postage and handling. It's kind of like saying, "Sure, you can subscribe to the magazine for $14.97 but if you want it delivered, you have to pay $6.00 more."

What do companies expect to accomplish with this kind of stuff? I don't know about you, but it ticks me off when I think the price of something is one thing and then find out later that there was some sort of hidden fee. Just tell me the WHOLE price upfront and allow me to make an educated decision as to whether or not I want to buy it.

I'm curious as to what you guys think about this.

Tags: Better Homes and Gardens, Magazine Subscriptions

Carnival of Personal Finance - Week 6

2005-07-25T08:12:00.000-07:00

Week 6 of the Carnival of Personal Finance is up at FreeMoneyFinance. Stop by and give it a look. I'll add it to the Carnival list on the sidebar.

Carnival of the Capitalists is up

2005-07-24T21:26:00.000-07:00

Political Calculations is hosting this week's Carnival of the Capitalists. Lot's of interesting links to check out. Have fun.

Prudent Portfolio Updated

2005-07-22T21:55:00.000-07:00

The PrudentPortfolio has had another good week. The portfolio was up 1.95% for the week and 6.67% since its June 13^th inception. Meanwhile, the S&P 500 Index was up .47% for the week and 2.97% since June 13^th. Both Phelps Dodge and Cummins were up over 10% this week alone. If you want to see the portfolio, just click on the link above.

Emigrant Direct Has Raised the Yield Again

2005-07-22T13:47:00.000-07:00

The Emigrant Direct American Dream Savings Account is now paying 3.50%, which is up .25% from the 3.25% rate.

Exchange Rates - A Really Simple Example

2005-07-22T08:19:00.000-07:00

I am not an exchange rate authority. My goal with this post is to simply show you how exchange rates work and their impact on trade.

We all hear talk about exchange rates and international trade. Most recently, talk has been heating up about China's currency, the Yuan, and the fact that it is pegged to the US Dollar. What that means is that whichever direction the US Dollar moves, the Chinese Yuan follows.

As of yesterday, each US Dollar could buy 8.11 Yuan. Another way to state that is that each Yuan could buy .1233 US Dollars (or each Yuan is worth about 12 cents to us). Here's a simple example of what this means for trade:

Let's say you own a US company and you make rolls of tape that you sell for $1 each here in the US. Now lets say you ship 100,000 rolls of tape over to China to sell there. To get the point across in a simple way, we will assume there are no transaction costs to shipping the tape to China. Once your tape gets to China, they pay you $811,000 Yuan for it. They then charge the Chinese citizen $8.11 Yuan for each roll of tape.

Now let's switch it around and say that the Chinese ship 100,000 rolls of tape to the US that will cost $100,000 Yuan. Since each Yuan is worth 12.33 cents, the 100,000 rolls of tape will cost the US $12,330 (100,000 X .1233 = $12,330), which they then sell to US customers for $.13 each. So, the rolls of tape that were manufactured in the US cost $1.00 each, while the imported rolls of tape from China only cost 13 cents each! That's quite a difference.

Say the Yuan Appreciates 20% Against the Dollar

Suppose the Yuan were to appreciate 20% against the dollar. That would mean that each Yuan would buy .1480 US Dollars (and each US Dollar would buy 6.76 Yuan). Using the same examples as above, the rolls of tape would cost the Chinese 6.76 Yuan instead of $8.11 Yuan (a 16.7% decrease). Meanwhile the rolls of tape would cost the American consumers $.15 each (a 20% increase).

In my opinion the 2 cent increase in price for the American consumer isn't going to hurt us as much as the 16.7% decrease is going to help the Chinese.

Hopefully you have gotten the idea of how exchange rates work. If you have any questions or comments, please leave them.

Tags: Understanding Exchange Rates, Chinese Yuan

Chinese Yuan Revaluation

2005-07-22T05:59:00.000-07:00

I was going to write a post today about the Chinese Yuan Revaluation, but I saw this post on SeekingAlpha and decided that I don't need to write anything. David has done an awesome job of putting up links to important articles regarding the revaluation. I think it would be smart for everyone to get a handle on what this means for the US economy.

I'll add any articles that I find throughout the day.

The Kinds of Businesses Warren Buffett Avoids

2005-07-21T22:45:00.000-07:00

Warren Buffett doesn't like businesses that are price-competitive. These businesses are easy to spot because they usually sell a product of service whose price is the single most important motivating factor int he consumer's decision to buy. Here's a list of some of those businesses:

Internet portal companies

Internet service providers

Memory-chip manufacturers

Airlines

Producers of raw foodstuffs such as corn and rice

Steel producers

Gas and oil companies

The lumber industry

Paper manufacturers

Automobile manufacturers

Tag: Warren Buffett

How to Determine if You're Wealthy - Part 2

2005-07-21T10:20:00.000-07:00

Wealthy, as it is defined in the The Millionaire Next Door, is determined by one's net worth. The authors define the threshold level of being wealthy as having a net worth of $1,000,000 or more.
(NOTE: This book was published in 1997, therefore, $1,000,000 today isn't worth what $1,000,000 was worth back in 1997.)

Another way the authors defined wealthy is based on one's expected level of net worth. I referenced this definition in Part 1. People who exceed this number are considered Prodigious Accumulators of Wealth (PAW). People who have a net worth less than expected are called Under Accumulators of Wealth (UAW). Those who fall in the middle are, you guessed it, Average Accumulators of Wealth (AAW).

If you haven't read The Millionaire Next Door, I urge you to do so. Also, if you know young people who are just starting out in life and haven't yet made serious mistakes with their money, GIVE THEM A COPY OF THIS BOOK!

Tags: Determining if You Are Wealthy, Millionaire Next Door

How to Compete Against the Big Boys

2005-07-21T09:33:00.000-07:00

Tom Peters has a list of 16 Musts for competing and succeeding against the Wal Marts and Starbucks of the world. It's an interesting list and one that most people should already know.

I can't remember the last time I had a pleasant experience at Wal Mart. I don't necessarily have bad experiences at Wal Mart, I just don't have any positive ones that stand out and make me say to myself, "man, I really like Wal Mart."

Brain Damaged People Make Better Investors

2005-07-21T07:54:00.000-07:00

I bet that title got your attention. There was a study done recently by a team of researchers from Carnegie Mellon University, the Stanford Graduate School of Business and the University of Iowa. They studied 15 brain-damaged people with normal IQs and the areas of their brains responsible for logic and cognitive reasoning were intact. But they had lesions in the region of the brain that controls emotions.

It makes perfect sense to me. We all know that if you allow your emotions to dictate your investment decisions, you will most likely make poor decisions. Take emotions out of the equation and you become a better investor. Now we know what to look for in portfolio managers!

For those interested, you can read the article(free) in today's Wall Street Journal.

Tag: Emotions and Investing

Unocal Says no to Cnooc

2005-07-20T11:51:00.000-07:00

Just saw this on the Drudge Report. Apparantly Unocal is going with Chevron.

Oh, and I just figured out that this is my 400th post!

What Are Your 43 Things?

2005-07-20T11:33:00.000-07:00

We all have things we want to accomplish in life. They can be anything from climbing Mt. Everest to reading the classics to saving for retirement. No matter what your things are, there's a really cool website called 43Things that allows readers to share and keep track of their 43 Things. I haven't yet entered any of my 43 Things, but plan to soon. You really ought to go check it out.

How to Determine if You're Wealthy

2005-07-20T09:50:00.000-07:00

Have you ever wondered if you were "wealthy?" There is a rule-of-thumb formula used in The Millionaire Next Door for determining whether or not you are wealthy. For those who are interested, the formula is:

Multiply your age by your income from all sources. Then divide that number by 10 to arrive at what your net worth should be.

So, if you are 35 years old and your household income is 60,000 per year, your networth should be $210,000 [(35 X $60,000)/10 = $210,000] in order for you to be considered wealthy.

If you are 9 years old and you get an allowance of $468 per year, you would be considered wealthy if your net worth was greater than $421.

UPDATE: You can also read a follow-up post to this one.

Tags: Determining if You Are Wealthy, Millionaire Next Door

Warning Signs of Too Much Debt

2005-07-20T09:09:00.000-07:00

I saw this in an article (free registration required) on the Dallas News website.

The American Bankers Association advises consumers to review their finances yearly to make sure they aren't overextended on credit.

Signs of being too deep in debt include:

Paying only the minimum payment month after month.

Being out of cash constantly.

Being late on important payments, such as rent or mortgage.

Taking longer and longer to pay off balances.

Borrowing from one lender to pay another.

Tags: Debt, Warning Signs of too Much Debt

Another Blog to Check Out

2005-07-19T21:01:00.000-07:00

I found this blog a while back and meant to tell you about it but forgot about it. Anyway, it is this cool little blog called K's Financial Progress Report. The author, Karen, is keeping track of her financial progress so that we can all see how she is doing. Good luck Karen!

Clash Action Lawsuit Against Dupont

2005-07-19T20:39:00.000-07:00

I saw this on the USA Today website. Two law firms in Florida are bringing a $5 BILLION class action lawsuit on behalf of 14 clients against Dupont over Teflon. Notice the article says that the clients BOUGHT and USED teflon products. It doesn't say anything about them being sick.

I think class action lawsuits are a waste. The ONLY people who benefit from class action lawsuits are the lawyers. That's it! What do you guys think?

Tags: Class Action Lawsuit, Teflon

Money Math

2005-07-19T14:46:00.000-07:00

Recently, I have been posting about personal finance math. If you haven't had a chance to read the posts, you can check them out here:

How to Calculate the Present Value of an Annuity

Understanding the Time Value of Money

The Unknown Professor over at the FinancialRounds blog has written an excellent follow-up to my posts explaining how to use financial math to answer loan questions. It is a must read.

Understanding Mutual Funds Fees

2005-07-19T13:02:00.000-07:00

With so many mutual funds available and so many different ways to buy them, it is important to understand the different ways fees are charged.

Basically, there are two types of mutual funds: Load and No-Load.

No-Load funds (full-service brokers are notorious for calling them "no-help" funds) are funds that investors buy for themselves either through a discount brokerage or directly through the mutual fund company. There are no up front charges or loads to get into these funds although there may be transaction fees if bought through a broker.

Load funds are funds in which there is a charge associated with investing in the fund. To complicate matters, there are different types of loads (A,B, and C are the most common).

A Shares

An A-share mutual fund charges the load up front. The typcial front-load starts at 5.75% and decreases for larger investments. An investment of $10,000 in an A share mutual fund with a front-load of 5.75%, will result in a $575 load. That means only $9,425 goes to work right away. In addition, there are annual management fees, which I will talk about later.

B Shares

B-share mutual funds are quite controversial. A B-share mutual fund does not charge an up front load. Instead, there are contingent deferred sales charges that will be deducted from the account if the investor decides to sell the mutual fund before a certain number of years (usually around 6 years) has passed. In addition to the deferred sales charges, the mutual fund will charge additional management fees of around 1% per year during the deferred period to recoup the broker's commissions.

The reason B-shares are controversial is that some brokers were telling people that B-Share mutual funds were no-load mutual funds. There have also been instances in which the broker used B-shares in order to avoid breakpoints associated with A-shares. I have a hunch that we will see B-shares outlawed.

C Shares

The third most popular type of load is the C-Share. C-Share mutual funds do not charge front-loads but instead charge a higher management fee (usually 1%) each year. This 1% fee goes to the broker in charge of the account. Although in the long-run C-Shares are more expensive than A-shares, the broker's and the client's interests are more aligned since the broker has an interest in the client's success.

Management Expenses

All load and no-load funds have management fees. A common misconception is that no-load funds are cheaper than load funds. This may not always be the case. American Funds is a load fund family that has rock bottom management fees. Over the long-run, their funds would be cheaper to own than a lot of no-load mutual funds.

Management fees are usually broken down into the following categories:

Management fees

Distribution or Marketing (12b-1) fees

Other fees

The other category includes custodial, legal, transfer and other fees.

I hope that helps explain the different types of fees. In a future post I will talk about how to compare fees of different mutual funds.

Tags: Mutual Funds, Mutual Fund Fees, Load Mutual Funds, Comparing Mutual Fund Fees

A Look Back at Index Returns

2005-07-18T14:40:00.000-07:00

Way back in February, Murray over at the CapitalIdeas blog made reference to The Callan Periodic Table of Investment Returns, which lists the returns from 1985 - 2004 for the following indexes:

S&P 500 Index

S&P 500/BARRA Growth Index

S&P 500/BARRA Value Index

Russell 2000 Index

Russell 2000 Growth Index

Russell 2000 Value Index

MSCI EAFE Index (International Index)

Lehman Brothers Aggregate Bond Index

I spent most of yesterday afternoon analyzing the returns of those indexes. Out of all those indexes, the best performer was the Russell 2000 Value Index, which turned in an average annual rate of return (also known as the Geometric Average) of 13.50%. The worst performing index was the Russell 2000 Growth Index, which had an average annual rate of return of 8.59% over the 20-year period. Here's a look at how all eight indexes performed. (Keep in mind that these are not average rates of return but average annual rates of return.)

Index	Average Annual ROR
S&P 500 Index	13.22%
S&P 500/BARRA Growth Index	12.84%
S&P 500/BARRA Value Index	13.16%
Russell 2000 Index	11.54%
Russell 2000 Growth Index	8.59%
Russell 2000 Value Index	13.50%
MSCI EAFE Index	11.44%
Lehman Brothers Aggregate Bond Index	8.84%

Here is a table showing the performance of a portfolio of $10,000 invested equally in each of the indexes (rebalanced annually) over the last 20 years:

Index	Ending Value
S&P 500 Index	$12,187
S&P 500/BARRA Growth Index	$11,665
S&P 500/BARRA Value Index	$12,718
Russell 2000 Index	$13,006
Russell 2000 Growth Index	$12,564
Russell 2000 Value Index	$13,436
MSCI EAFE Index	$13,250
Lehman Brothers Aggregate Bond Index	$11,468
Portfolio Total	$100,292
Average Annual ROR for the Portfolio	12.22%

Not too shabby, if you ask me. But, you could have done even better if you had simply put 1/3 into each of the S&P 500, Russell 2000, and MSCI EAFE. Doing so, would have given you a total ending value of $105,975 for an average annual rate of return of 12.53%. Of course these numbers do not reflect brokerage commissions and management expenses. But, even considering commissions, you still could have built a pretty nice portfolio over the last 20 years simply by indexing.

Tags: Index Returns, S&P 500 Index, Russell 2000 Index, Portfolio Analysis

Carnival of the Capitalists is up

2005-07-18T08:07:00.000-07:00

You can read the latest Carnival of the Capitalists at The Club for Growth. There's a lot of good stuff there!

Personal Finance Roundup - July 18, 2005

2005-07-18T07:43:00.000-07:00

Good morning! Here's a little of what's going on in the world of personal finance:

Carnival of Personal Finance - Week 5

It is hard to believe we are already in the 5th week of the Carnival of Personal Finance. Week 5 of the Carnival of Personal Finance will be hosted by I Will Teach You to be Rich. You can also read previous Carnivals:

Week 4 - SmartMoneyDaily
Week 3 - AllThingsFinancial
Week 2 - Blueprint
Week 1 - Consumerism Commentary

Financial Myths

Michelle Singletary of the Washington Post is Getting to the Bottom of Myths on Money. Michelle also has a weekly personal finance newsletter that you can check out. Both of these links require free registration.

Retirement

Amy Baldwin of the Charlotte Observer writes about whether or not retirees should be tapping their retirement savings. Since the oldest of the Baby Boomers turn 59 1/2 this month, this is the beginning of what is going to be a hot topic. Speaking of retirees, Michelle Melendez of the Newhouse News Service has an article on the Houston Chronicles website about how retirees are selling their wares.

Happiness

Would you leave a high-paying job just to be happy? Dave Carpenter talks about several people who did just that in this column in the Houston Chronicle. Personally, I think it is important for people to find balance in their lives. Of course, that's easier said than done.

Buying a Home

Did you realize that there are eleven stages to buying a home for first time home buyers? According to this article by Steve Kerch, who writes the Resident Authoriy column for Marketwatch, there are.

Those are a few personal finance articles I thought were worth checking out. Enjoy!

Understanding the Time Value of Money

2005-07-17T13:28:00.000-07:00

On Friday, I showed you how to calculate the present value of an annuity. Today, I hope to show you how to make choices regarding your money by showing you two deals.

DEAL 1:
Someone offers you $100 today or $105 a year from now, which one would you choose?

The correct answer is, "It depends." It depends on what the current interest rate environment is. Let's say for this example that the only available way for you to utilize the $100 is in a bank account that pays 5% per year. If that were the case, you could take the $100 now or $105 a year from now and it wouldn't make a difference to you.

DEAL 2:
Someone offers you $100 today or $105 a year from now, but you know that you can get 6% interest on your money at another bank. Which one would you choose?

This example can best be explained using this formula:

Present Value = Future Value X [1/(1 + i)^N]

We are solving for the present value. We know the future value is $105. We know the interest rate (i)at the other bank is 6% (.06 as a decimal). N is the number of years, which for this example is 1. X is the multiplication sign. So, the formula looks like this:

Present Value = $105 X [1/(1 + .06)¹]

Present Value = $105 X [1/(1.06)¹]

Present Value = $105 X [1/1.06]

Present Value = $105 X .9433962

Present Value = $99.06

So, based on an interest rate of 6%, $105 a year from now is only worth $99.06 today. (If you want to double check the math, multiply 99.06 by 1.06 and see what the answer is. It should be really close to 105.) For this example, you would do better to take the $100 now and invest it at 6% so that you had $106 a year from now.

We are faced with financial choices everyday. Hopefully this post will help you make more informed choices. I welcome any comments or questions.

Tags: Net Present Value, Present Value, How to Calculate the Time Value of Money, How to Calculate Present Value

How to Become a Millionaire

2005-07-16T07:54:00.000-07:00

I saw this on the MS Money website today. It is nine stories on how various people from varoius backgrounds became millionaires:

Firefighter sees a need and fills it

Singer gets 'run over by a reindeer'

Couple rides the real-estate wave

Student athlete takes a sporting risk

Struggling actor waits 14 years for a hit

Bookkeeper helps build the ground floor at Lowe's

Pair invests through bull and bear markets

Couple wins an 'Amazing Race'

Would-be 'Pampered Chef' finds an idea to love

Pretty interesting mix of stories here. Of course for those who don't have a million-dollar idea, there's always another way to become a millionaire:

1. Spend less than you earn.

2. Invest the difference in a stock index fund>

3. Repeat steps 1 and 2 until you become a millionaire.

How's that for simple?

Tags: How to Become a Millionaire, How to Make a Million Dollars

Prudent Portfolio Update

2005-07-15T14:29:00.000-07:00

I updated the PrudentPortfolio to reflect today's closing prices. So far, the portfolio is up 4.62% since its June 13th inception, while the S&P 500 index is up 2.49% for the same time period. To read more about it, go to PrudentPortfolio.

How to Calculate the Present Value of an Annuity

2005-07-15T10:21:00.000-07:00

It is amazing how the math we all thought was useless back in high school is really pretty useful today. Understanding mathematical concepts is very important in understanding personal finance. It is also very liberating to be able to do different "complex" calculations with the aid of a spreadsheet.

Today I want to show you how to calculate the present value of an annuity stream. Huh? Well, before you zone out or click away from this post, let me start with a question: Say you want to live on $50,000 per year from your investments once you retire. Let's say you are going to retire at age 60 and expect to need the money for 25 years. We will also say that you expect to get a 5% return on your money. Now, how much money do you need at age 60 to be able to meet your goal?

Well, if you were to put all your money under your mattress where it got zero return, you would need $1,250,000 ($50,000 X 25 years = $1,250,000). You would stick $1,250,000 under your mattress and each year take out $50,000 to spend. At the end of 20 years, you would have nothing left.

However, if you are like most people, you probably want to get some sort of return on your money. This makes the calculation more difficult but not impossible. As we said earlier, let's say you expect to get 5% per year on your money. To do this calculation, we have to use the following formula:

(1/i) - [1/(i X (1 + i)ⁿ)]

The "i" stands for expected interest rate, which is 5% (.05). The "n" stands for the number of periods, which is 25 years. The "X" is the multiplication sign. So, using real numbers, the equation would look like this:

(1/.05) - [1/(.05 X (1 + .05)²⁵)]

20 - [1/(.05 X 3.3863549]

20 - [1/.1693177]

20 - 5.9060554

14.0939446

14.0939446 is our "factor." To get the amount of money we need at age 60 to fund this income stream, you multiply $50,000 by the factor (14.0939446). So, for this example, we need $704,697 in the bank at age 60 in order to fund an annual income of $50,000 for 25 years. IMPORTANT NOTE: At the end of 25 years, the money will be gone!

Was this helpful? Let me know by leaving any questions or comments. In a future post, I'll show you how to do this same calculation with a spreadsheet.

UPDATE: Here's a link to a follow-up post to this one.

Tags: Net Present Value, Present Value, Present Value of an Annuity, How to Calculate Present Value of an Annuity, How to Calculate Present Value

I Love a Bargain

2005-07-14T21:26:00.000-07:00

I took the kids to the library today. Our library has a little room with a few shelves of books for sale for $1.00 each for hardbacks and $.50 for paperbacks. I always go in there just to see what they have. Well, today I found a copy of David Swensen's Pioneering Portfolio Management, a book I had been wanting to order for quite a while but just couldn't bring myself to do it.

I also found a copy of Optimal Investing by Scott P. Frush. This is a book I had never heard of before today. But, since it was only $1.00 I figured I'd give it a shot. The best part is, both of these books look brand new. Based on their retail prices, I saved $60.95.

It was a good day!

World's Greatest Investors

2005-07-14T12:37:00.000-07:00

The August issue of Smart Money magazine profiles The World's Greatest Investors: Warren Buffett, Bill Miller, Peter Lynch, Sir John Templeton, and Bill Gross. They also list some of what these gurus are buying (or could be buying based on their philosophies). Here's the picks:

Buffett-Worthy Picks

Anheuser-Busch - BUD

iShares Dow Jones US Utilities - IDU

Sysco - SYY (From a value screen based on Buffett's value approach to investing)

Miller Picks

Cisco Systems - CSCO

Citigroup - C

Yahoo - YHOO

Lynch-Worthy Picks (These picks were made using a value screen)

ConocoPhillips - COP (Currently in the PrudentPortfolio),

Independence Community Bank - ICBC

Aetna - AET

Templeton-Worthy Picks (Based on an American Association of Individual Investors screen)

Harley-Davidson - HDI

Home Depot - HD

Matthews Asia-Pacific - MPACX

Gross Portfolio

Blackrock Core Bond - BHK

PIMCO Corp. Opportunity - PTY

Blackrock Muni Bond - BBK

Interesting mix of stocks and funds. It will be interesting to see how these perform in the future.

Tags: Warren Buffett, Bill Miller, Peter Lynch, Sir John Templeton, John Templeton, Bill Gross

Personal Finance Roundup

2005-07-14T10:51:00.000-07:00

There's a lot going on in the world of personal finance. These are some of the interesting things I found today:

Careers

The Wall Street Journal Online has a nifty little feature called Go Figure (click on the link and scroll down to the Go Figure section). Today's Go Figure is about the hottest starting salaries for various college graduates. Chemical Engineering is tops at $53,813.

Housing Bubble

Kiplinger's has an interesting article on the 13 Riskiest Housing Markets. Boston's housing market has been deemed the riskiest. As a side, Kiplinger's is running a contest for the best idea of what to do with $1,000, which is based on their August issue cover story "What $1,000 Can Do" (link to follow later).

Fortune asks the question Is it Time to Cash Out of Your Home?

For more on the housing bubble, stop by Ben's Housing Bubble blog. Ben has been tracking the housing bubble for a while now and has gotten really good at finding links to news stories about the housing market.

Exchange-Traded Funds

Exchange-traded funds (ETF) are big right now. Once again, we stop by Kiplinger's for ETF Spells Opportunity. They also have a chart listing over 175 ETFs that is helpful. Smart Money has a whole section dedicated to ETFs. Be sure and check out their ETF Education Center - lots of excellent stuff there. I really like their Model Portfolios.

In the blog world, don't forget about David Jackson's ETFInvestor, which is loaded with lots of useful information and ETF-related links.

401(k)

Jeff Brown at Knight Ridder explains that the oldest Baby Boomers have turned 59 1/2, which means they can now tap their retirement savings without penalty. Question is: should they? Matthew Keenan at Bloomberg News reviews a study that says automatic 401(k)s may help workers save.

Martha's Rules

Finally, Martha Stewarat is writing a book about the rules of business. I wonder if it will include a rule about not lying?

What's a Wrap Account?

2005-07-14T07:51:00.000-07:00

Basically, a wrap account is an account that can hold mutual funds from different mutual fund families. Full-service brokerage firms like wrap accounts because they can offer their clients different fund families without having the hassles of setting up individual accounts with each fund family. Because the wrap account has it's own fee attached to it, sales charges (commissions) and 12b-1 fees are usually waived.

Fees

Average cost of a wrap account nationally is about 1.17% of assets per year. Keep in mind that that 1.17% is in ADDITION to regular mutual fund expenses (minus 12b-1 fees). For example, say you wanted to set up a wrap account and you wanted to invest in American Funds' Growth Fund of America, which usually has a 5.75% sales charge and .76% annual expense ratio. Under a wrap account, American Funds would agree to waive the 5.75% sales charge and also reduce the annual expense ratio by the 12b-1 fee of .25%. So, you would be paying a total of 1.68% per year (1.17% + (.76% - .25%) = 1.68%) for this particular wrap account.

Now, how does that compare with going the regular route of simply paying the sales charge and regular expenses? We'll do a five-year comparison, assuming a $25,000 investment at an 8% annual return reduced by the annual expenses of 1.68% for the wrap account and .76% for the non-wrap account.

To Wrap

You put $25,000 into the wrap account and it immediately goes to work for you. At the end of the first year you have $26,580 (25,000 X (1 + .0623) = $26,580). At the end of five years the balance in the wrap account would be $33,964 ($25,000 X (1 + .0632)⁵ = $33,964).

To NOT Wrap

If you decided not to go the wrap route, you would pay an upfront sales charge of 5.25%. So, you're $25,000 would be reduced to $23,562 after you paid a front load of $1,438. At the end of the first year, you're balance would be $25,264 ($23,562 X (1 + .0724) = $25,264). At the end of five years, the balance would be $33,419 ($23,562 X (1 + .0724)⁵ = $33,419).

So, for this example you gain over $500 by going the wrap route. But, there are a couple of things to think about:

1. The more money you have to invest, the more likely you are to qualify for reduced front loads on mutual funds. This can be significant.

2. Even based on this example, with all things being equal, eventually the load account would outperform the wrap account. By my estimation, that would happen about the end of the 9^th year.

3. Under the wrap account, the broker has an incentive to work for you since his compensation is paid annually and not in one lump sum at the beginning of the relationship.

4. Additional deposits change everything. I don't have enough time to go into detail here, but you need to consider whether or not you will be making additional deposits into the account. This will affect the outcome.

Final Thoughts

I think wrap accounts can be a good thing. But, you need to really consider all fees associated with the wrap account before you commit your money to it. I hope this post was helpful. I welcome any questions or comments.

Tags: Mutual Fund Wrap Accounts, Wrap Accounts, Mutual Funds

Questions to Ask Your Broker

2005-07-14T06:22:00.000-07:00

Information is key to making sound decisions. Too often, people make investment decisions with too little information. Why? Because they don't know the right questions to ask. Below are some excellent questions to ask your broker BEFORE you make an investment:

How do you get paid for giving me advice?

Are you registered as an investment advisor and do you have a fiduciary duty to me?

Are you giving this particular advice to me in your capacity as a broker or as my investment adviser?

Do you or the firm you work for receive any payments from mutual fund firms to sell their funds?

What are your credentials in financial planning?

Before you talk with any advisor you should at the very least understand the different kinds of mutual funds and the different ways to buy them. I'll discuss that next.

NOTE: I found this information somewhere but do not remember where. I always try to give credit where credit is due.

Tags: Questions to Ask Your Broker, Investing

Are You Part of the Herd?

2005-07-14T06:20:00.000-07:00

By "herd" I'm referring to the herd mentality that exists in the stock market (or it can also be seen in any bubble situation). According the wonderful book Why Smart People Make Big Money Mistakes by Gary Belsky and Thomas Gilovich, there are warning signs as to whether or not you are a herd-follower:

You may be prone to following the herd if...

you make investment decisions frequently.

you invest in "hot" stocks or other popular investments.

you sell investments because they're suddenly out of favor, not because your opinion of them has changed.

you're likely to buy when stock prices are rising and sell when they ar falling.

ou make spending and investment decisions based solely on the opinions of friends, colleagues, or financial advisers.

your spending decisions are heavily influenced by which products, restaurants, or vacation sports are "in."

If you live by the herd, you die by the herd.

Tags: Herd Mentality, Investing

States are Raising Estate Taxes

2005-07-13T07:05:00.000-07:00

Federal estate tax gets all the attention. As President Bush tries to do away with the federal estate tax states are in the process of raising estate taxes. According to this article(free) in the Wall Street Journal, a lot of states had orginally tied their estate tax amount to the federal credit for state "death" taxes, which disappeared this year. Many staes have separated their estate-tax system from the federal system.

The article does a good job of explaining the situation.

Tags: Estate Taxes, State Estate Taxes

Some of the Crazy Mail I Receive

2005-07-12T09:52:00.000-07:00

This was in my inbox (I have actually received several of this sort of email) this morning. Obviously, it is some sort of shady operation. But, I thought I would share it with the rest of you. Here is the email:

Hello,
I am contacting you to partner with me in respect of transfer of certain funds, which is being held in a floating account in my organization, Fountain Securities , in Madrid Spain. I am privileged to have full knowledge of the availability of this fund due to my function and position in the organization at present. I have to contact you because it is imperative for me have the cooperation of a foreigner to be able to transfer the fund out of my country.

This fund, was deposited by Mr. George Martins, who died in 1994 without leaving any information of any next of kin to inherit the fund. The account therefore has not been operated since his death.

The total amount involved is Fifteen Million American Dollars. My name is ####### ######. I would give the details of the transfer process if I receive your response and am convinced that you are willing and dependable to carry out the transaction with me in absolute confidentiality. We have to establish mutual trust such that it will be glaring to both parties that we could work with open mind. On transfer of the fund into your account, your share would be 35% of the total sum while the rest part would be for me and I intend to invest the major part of my share in your country with your assistance.

I would appreciate if you could respond to me on my more private mail: #########@k.ro. Kindly state your telephone number so that I could call you too.
I await your response.

Sincerely.
######## ########.
Reply to:#########@k.ro

Oh yeah, this has legitimate written all over it!

OT: 2007 Hyundai Sante Fe

2005-07-11T09:53:00.000-07:00

I'm a car nut. I love seeing what's coming out and who's doing what. I just came across a some pictures of the 2007 Hyundai Sante Fe. I have to say, it's a much better-looking vehicle than the current model. Personally, I think the current Sante Fe is clumpy-looking. I hate it. I can't see how they sold as many of them as they have, but you see them all over the place. Anyway, I'm looking forward to seeing the 2007 model around town.

Tag: 2007 Hyundai Sante Fe

Carnival of Personal Finance - Week 4 is up!

2005-07-11T06:52:00.000-07:00

Go over to SmartMoneyDaily and check out this week's Carnival of Personal Finance. I hosted Week 3 last week, which you can read here.

Tag: Carnival of Personal Finance

Smart Money Interview with eBay CEO Meg Whitman

2005-07-10T14:22:00.000-07:00

SPECIAL WARNING: This is a bit of a rant.

Although I have bought some things off eBay in the past, I'm not really a big fan of the company. I don't like the fact that they have moved away from pure auctions and more into being a mall for sellers. I hate the "buy it now" feature because it seems like it is getting harder to find bargains on eBay.

Anyway, there is an interview with Meg Whitman in the August (can it be August already?) issue of Smart Money magazine. The interviewer asks the following question:

What have you learned at eBay that could be applied at other companies?

Here was her response:

"Many companies operate from more of a command-and-control environment - they decide what's going to happen at headquarters and have the organization execute. That doesn't work here because it's the community of users who really have control.

"So we enable, not direct. We think of our customers as people, not wallets. And that has implications for how we run the company. We partner with our customers and let them take the company where they think it's best utilized."

Hmmm...Ms. Whitman seems to be detached from how things really are. What about the fee increases that eBay pushed through earlier this year? Did they have a bunch of users saying "you know what,... we aren't paying enough in fees. Why don't you significantly raise our fees so we can be happier?"

This is an example of how CEOs think what they want to think and ignore the rest.

Tags: eBay, Meg Whitman

Worthwhile is Worthwhile

2005-07-09T20:01:00.000-07:00

I found a pretty cool website/blog called Worthwhile, which is a team-run blog about balancing work and life. I even put a copy of their mission statement up on Man on a Mission. They put up a lot of short readable posts about various topics. It's worthwhile to give Worthwhile a look (sorry for the terrible play-on-words).

A Review of FOLIOfn

2005-07-08T10:00:00.000-07:00

If you are like most people you probably haven't heard of FOLIOfn. For the right kind of investor, FOLIOfn can be an awesome tool. FOLIOfn is an online brokerage firm that allows investors to construct portfolios (called "folios") of stocks and exchange-traded funds. When constructing the folio, you pick the allocation for each security.

For example, say you wanted to invest an equal amount in each of the Fortune 40 I talked about in my last post. You would simply give each security a 2.5% allocation. Once the folio is set up, FOLIOfn makes the trades for you in what is called a "window trade," which is a process by which FOLIOfn matches buyers and sellers internally. Windows trades are done at no additional charge. Speaking of charges...

FOLIOfn Fees

FOLIOfn offers four different platforms: Basic (does not allow folios), Bronze, Silver, and Gold. The Bronze and Silver accounts allow one folio. The Gold allows up to three folios. You can view the differences between the accounts by clicking on the link above. Personally, I would like to see FOLIOfn allow more folios. It would make allocation much, much easier and would also make tracking performance against benchmarks much easier.

The different plans have different fees attached to them. The Basic account has $14.95 market trades and $4 window trades. If you don't make at least 4 trades per quarter, there is a $14.95 "account maintenance" fee. The Bronze account also has $14.95 market orders but has 200 free window trades per month, but also charges $19.95 per month or $199 per year. For $29.95 per month (or $299 per year), the Silver account has $3.95 market orders and up to 400 free window trades per month. Finally, for $39.95 per month (or $399 per year), the Gold account gives you 10 free market trades per month and up to 600 window trades per month.

FOLIOfn probably isn't the best choice for small investors. $199 per year on a $10,000 account works out to a 1.99% expense ratio. That's pretty steep. I would only recommend FOLIOfn if the total fee is less than 1% per year. At the Bronze level, you would need around $20,000 ($199/.01 = $19,900) to keep the fees to less than 1% of the portfolio's value.

Final Thoughts

Overall, I think FOLIOfn is a great alternative to the other brokerage firms. I like the folio concept. I just wish they allowed up to 10 folios instead of just the one (or 3 if you opt for the Gold account).

Tags: FOLIOfn, Folio Investing

2005 Fortune 40

2005-07-08T08:28:00.000-07:00

NOTE:None of the stocks in the portfolios is a recommendation by AllThingsFinancial and cannot be held responsible. If you decide to buy any of the stocks listed, you assume the risk.

Fortune has just released the Fortune 40 for 2005. According to the article in the July 11th magazine, they revamped their screening system for this year's list. The 40 stocks are divided up into 5 portfolios of 8 stocks. The categories are:

The Fortune 40 from 2004 returned 9.7% compared to the S&P 500's 9.2% return. Keep in mind that those returns do not reflect commissions.

Tags: Fortune, Fortune 40

Payback Time for Wronged "Investors"

2005-07-07T07:28:00.000-07:00

The front page of today's Wall Street Journal has an article on the settlement with the companies and mutual funds that were guilty of fraud. They opened with a story about a woman who sold her house and put HALF of her money in Worldcom stock. Well, we all know what happened to Worldcom. That lady's $43,000 went up in smoke. Granted, it doesn't take a genius to figure out that it is stupid (I hate to be harsh but there really is no other word for it) to put that much money in ONE stock.

Anyway, it is finally payback time for that lady and the millions of people who owned shares in the companies and mutual funds that were guilty of fraud. Here are a couple of links for those who are affected:

If you owned share in a company or mutual fund that settled with the SEC, you can see if a payback fund has been established by clicking here.

Also, there is a separate settlement with a number of major brokerage firms that includes more than $400 million for those affected. To find out more, go here.

Tags: SEC Settlement, Mutual Fund Settlement, Investor Fraud

Imagine Winning "Free" Tickets That Cost You $19,000

2005-07-06T11:55:00.000-07:00

There's an article in today's Wall Street Journal about a man who won 12 round-trip airline tickets for him and his wife (12 for each of them so 24 tickets in all) from American Airlines. He decided not to take the tickets. Why?

Well, American Airlines valued each ticket at $2,200 for a total prize worth $52,800 (24 X $2,200 = $52,800). If you are familiar with prizes, you'll know that they are taxed as income. This guy lived in New York City and figured that when it was all said and done, his tax bill for the prize would be over $19,000 or $794 per ticket.

To make matters worse, the tickets had to be used within 12 months and also were not transferable and could not be redeemed for cash. I think I would turn them down too!

Tag: Taxation of Prizes

Carnival of Personal Finance - Week 3

2005-07-04T22:00:00.000-07:00

NOTE: Week 4 of the Carnival of Personal Finance can be seen at SmartMoneyDaily.

AllThingsFinancial is proud to host Week 3 of the Carnival of Personal Finance.

First stop is Dawn's FrugalforLife blog for her Tuesday's Tips for saving money and simplifying your life. Lots of good stuff there.

Jim at BluePrint is in a giving mood. Check out this post in which he gives Tips for Deducting Donations from your taxes.

Flexo at Consumerism Commentary talks about whether or not GM's Employee Discount Program is a good deal.

FMF at FreeMoneyFinance discusses how you can save money by buying Energy Star appliances.

Nicole, aka "TheBudgetingBabe," tells us that Goal Setting Really Works. That's good to hear.

Where would blogging be without talk about Social Security? F.D. over at Modblog offers his opinion on Social Security in a post called Victory with Social Security. Based on how political this issue is, I'm sure his post will ruffle some feathers.

My friend, Arbee, from Canada discusses Tax Freedom Day. I like the sound of that!

THC at TheHappyCapitalist offers up an excellent post called Alphabet Soup that explains all the different professional designations in the financial field.

Jon at SmartMoneyDaily offers advice on Creating a Business Plan That Always Works. Good advice for anyone thinking about starting a business.

Protecting Yourself from Identity Theft

Identity theft is also a hot issue right now. It seems like everybody is at risk to have their identity stolen. There are lots of credit protection programs popping up. FrugalGirl talks about Credit Protector - The Good, Bad and Ugly.

Nickel at FiveCentNickel talks about the dangers of writing checks with this post titled Think Before You Write That Check.

Housing Bubble

Talk about the housing bubble has really been heating up lately. Smarty at the GrowingMoney blog offers his take on the housing situation in New York City in a post called Real Estate Bubble?.

Ben at the HousingBubble2 has been writing about the bubble for a while now. Here's one his latest posts titled Housing Bubbles Everywhere, Not Just Here.

Personal Finance Basics

Ironman at PoliticalCalculations offers a calculator to help figure out how much you should be Saving for College.

Finally, in what I call the basics of financial planning, I show you how to calculate annualized rate of return, which is something I think everyone should know how to do.

That's it for this week. Thanks to all who contributed to this week's carnival. Also, thanks to everyone who linked to this carnival. Next week's Carnival will be hosted by SmartMoneyDaily. For a schedule of future Carnivals and to read previous Carnivals, see this post on the Consumerism Commentary blog.

Happy 4th of July!

2005-07-02T11:26:00.000-07:00

Happy 4th of July!

Source: StrategyPage.com

Wells Fargo's New Online Bill Pay

2005-07-01T08:47:00.000-07:00

Wells Fargo updated their online bill pay program. It is really nice now. It has a couple of new features that I really like.

1. With the old system, I had to log on to the Bill Pay account, select the accounts that I wanted to pay, then go to another screen to actually pay them. The new system has all the accounts listed on one page with places for you to enter how mcuh you want to pay. So, you can type in the amounts beside each account and then hit the submit button when you are ready. It gets rid of one step, which is very nice.

2. The second new feature is on the checking account page. When reviewing transactions, if there is a check number, you can click on the view icon and it will show you a copy of the actual check! That is really cool. No more hunting for those duplicates.

Wells Fargo's Bill Pay costs $6.95 per month. They are running a special right now where you can get the first two months free. But, you better decide whether or not you want to pay the $6.95 per month before you sign up because I think it would be a major hassle to switch services.

Tags: Wells Fargo Online Banking, Wells Fargo Bill Pay

OT: 2006 Honda Civic

2005-06-30T10:54:00.000-07:00

With gas prices where they are, the Civic is most likely seeing an increase in demand. Here's some spy shots of the newest Civic. Call me crazy, but I'm not impressed.

Tag: 2006 Honda Civic

Carnival of Personal Finance - Week 3 Update

2005-06-30T10:06:00.000-07:00

I have had a few submissions so far for the upcoming Carnival of Personal Finance - Week 3. I NEED MORE! If you want to be included please send me an email with "Carnival - Week 3" in the subject line along with the following information:

1. The name of your blog with a link
2. A permalink to the story you want submitted and any background information to the story. This will make my write-up much easier.

Since Monday is July 4th, I will post the Carnival on Tuesday. Otherwise, I think it would be a big waste of time. I would appreciate it if ALL PERSONAL FINANCE BLOGGERS WOULD MENTION THE CARNIVAL. That way we can build a brand.

Here is the schedule of the Carnival.

Also, you can check out Week 1 and Week 2.

Personal Finance Quote of the Day

2005-06-30T09:45:00.000-07:00

"In a bubble, hype becomes truth, and hard facts that don't fit the new paradigm are discarded as 'irrelevant.'"

- Jeremy Siegel The Future for Investors - page 105

If you have never read any of Professor Siegel's books, you owe it to yourself to do so. I would start out with the book listed above. It is written in a very easy-to-understand way. In fact, you might even call it a page-turner (at least I would!). I started this book a couple of months ago. Unfortunately, I have this bad habit of reading more than one book at a time, which means it takes me a long time to finish a book.

Anyway, I'm almost finished with this book and plan on doing a full review. This is easily going to be one of the best investment books of 2005.

Tags: Jeremy Siegel, The Future for Investors

How to Calculate Annualized Rate of Return

2005-06-30T09:22:00.000-07:00

I set up the Prudent Portfolio with $100,000 nearly three weeks ago. As of this morning it had an account balance of $102,127, for a total gain of $2,127. If that were the gain for the year, it would be a 2.13% return for the year. But, it's not. It's the return for 17 days. So, how do you annualize that number to get a rate of return for a year? That's simple enough. Here's the formula:

((1 + Rate of Return)^1/N) - 1

N = Number of years

In this example, since we are only 17 days into the year, you divide 17 by 365 to get .0465753

The Rate of Return is 2.13% or .0213

So, the formula looks like this:

((1 + .0213)^1/.0465753)-1
((1.0213)^21.4706078)-1
1.5722717 - 1
.5722717 or 57.23%

Looks pretty good, doesn't it? Well, don't count on it staying that high for long. The closer you get to a full year, the smaller that number will be (unless you are one genius of a stock picker!) You can play around with the numbers to see what I mean.

Now I'm open to any questions and comments you might have.

Tags: Calculating Annualized Rate of Return, How to Calculate Annualized Rate of Return, Investing Math

More on Cnooc

2005-06-29T20:35:00.000-07:00

Like I said in earilier posts (here and here), this is big news. Here's another article (I don't know how long this link will be good for since it is a NYT article) I found on through the Drudge Report on the Cnooc situation. Personally, I hope this deal doesn't happen.

Tags: Cnooc, Cnooc Ltd., China

The Best of AllThingsFinancial

2005-06-29T20:34:00.000-07:00

I was reading through all the posts I have done since I started this blog on October 13, 2004. There's some pretty good stuff - at least in my opinion it's good stuff. Unfortunately, in the beginning of this blog a lot of my posts were never read because people couldn't find this blog. Now that I have some readership, I'd like to share with you some of my favorite posts. These posts are posts that I think are useful. So, here they are:

From October 2004:

The Beauty of the Roth IRA

Which is Better: 15 or 30-Year Mortgages?

What is Fee-Only Financial Planning?

From November 2004:

The Financial Planning Process

From December 2004:

Hidden Inflation

What the Heck is Asset Allocation

Don't Forget to Rebalance Your 401(k)

From January 2005:

Do the Math BEFORE You Refinance

Be Careful Which Credit Card You Use

How Much do You Need During Retirement?

What is a Safe Withdrawal Rate From Retirement Savings?

Taking Money Out of Your Retirement

That's it for now. I'll try to finish up this list later today.

Tags: Roth IRA, Mortgage Comparisons, Fee-Only Financial Planning, Financial Planning Process, Asset Allocation, 401(k), Retirement, Retirement Planning

Pension Problems and What to do About Them

2005-06-29T14:16:00.000-07:00

There's a really sad story($) in today's Wall Street Journal about how companies reduce or eliminate pensions for their current and retired employees. I just want to say that I think the practice is disgusting. It's one thing to change benefits for someone in the 20s and 30s. It's quite another to send a retiree a letter saying "...oh, by the way, if you don't die before February 3, you will lose your death benefit."

We all know by now that many companies bit off more than they could chew when they promised benefits years ago. But promising something and then taking it away is much like a company buying something from a supplier and then not paying. How long do you think that company would last?

So, what's a person to do? First off, I wouldn't count on anything that has to do with a pension. If you are not putting money away in your 401(k) because you have a pension, you are TAKING A VERY BIG RISK! Start saving money on your own right now! Open a Roth IRA and max it out if you can. Then, once you retire, you are under no obligation to use the Roth. You can just let it sit there and accumulate tax-free. If you have a named beneficiary, you could possibly pass on tax-free income to them should something happen to you.

Secondly, buy your own life insurance if you need it and can afford it. Don't count on life insurance from your pension. If you get it, great, but you don't want to take a chance of leaving your spouse with nothing. Ideally, you should be building wealth so that life insurance isn't necessary.

Thirdly, when you retire, don't leave all your assets in company stock. Diversify! You should never have all your money in company stock to begin with, but you REALLY shouldn't have it all there when you retire. The WSJ article I referenced to had a story about a guy who worked for AT&T and retired with $250,000 in company stock only to see it drop to $20,000! Don't let that happen to you!

I welcome any comments and suggestions from my readers. If you have something worth saying, please say it.

Tags: Company Pensions, Planning for Retirement, Retirement Planning

Problems with Blogger

2005-06-29T11:05:00.000-07:00

Okay, now this I can't figure out. All the sudden several of my posts are not showing up. I can still see them in my posts list, but I don't see them when I republish my blog. So,... I'm going to refresh each of the posts and give them new dates. It will look like a published a whole bunch today. Stupid software!

Twelve Key Elements of Practical Personal Finance

2005-06-29T11:03:00.000-07:00

There's a neat little book by James Gwartney, Richard L. Stroup, and Dwight R. Lee called Common Sense Economics. I have referred to this book in the past. The last section of the book is dedicated to the Twleve Key Elements of Practical Personal Finance, which are:

1. Discover your comparative advantage.

2. Be entrepreneurial. In a market economy, people get ahead by helping others and discovering better ways of doing things.

3. Spend less than you earn. Begin a regula savings program now.

4. Don't finance anything for longer than its useful life.

5. Two ways to get more our ot your money: Avoid credit=card debt and consider purchasing used items.

6. Begin paying into a "real-world" savings account every month. (this seems identical to number 2, but the authors have it listed again.)

7. Put the power of compound interest to work for you.

8. Diversity - Don't put all of your eggs in basket. (Remember, the name of the book is Common Sense Economics!)

9. Indexed equity funds can help you beat the experts without taking excessive risk.

10. Invest in stock for long-run objectives; as the need for money approaches, increase the proportion of bonds.

11. Beware of investment schemes promising high returns with little or no risk.

12. Teach your children how to earn money and spend it wisely.

Tags: Common Sense Economics, Principles of Personal Finance

Getting America to Save

2005-06-29T10:58:00.000-07:00

How can we get Americans to save?

I pose this question because the root of a lot of our problems is the fact that we, as Americans, are not saving enough money. It is really a shame that we have to come up with ideas on how to inspire people to save. But, that's how it is.

Anyway, I have a few ideas:

1. Start a massive advertising campaign about the benefits of saving. Kind of like they did with the savings bonds campaigns during war time.

2. Set up tax-free savings accounts. No, I'm not talking about IRAs. I'm talking about a standard savings account that is tax free. I really have no idea how it would work. I'm just trying to throw out some ideas.

3. Give tax credits for saving.

4. Give additional interest for specific savings accounts.

Personally, I think the only feasible solution is the first one. I'm curious as to what my readers think.

The Real Estate Bubble

2005-06-29T10:57:00.000-07:00

The other day I posted about how foreign investors buying up our 10-year treasury notes is causing mortgage rates to stay low. We all know that when mortage rates are low, more people will want to buy houses, which increasing the demand, which raises prices.

Someone commented with a link a to this article in The Economist that I think is a must-read. Thanks, Ilya for posting the comment.

Also, in case you haven't heard about this blog yet, check out TheHousingBubble2. Ben has been doing a nice job of posting articles and links regarding the housing market. Just don't stay too long or you'll get depressed.

Tags: Housing Bubble, Mortgage Rates, Treasury Yields