Oprah and Suze Orman have teamed up to provide people a free financial plan for 2009. I went ahead and downloaded it (I love Oprah, not as much of a Suze fan, but she has good common sense advice), and here is my summary:
- Get out of credit card debt. Credit card companies are trying to reduce leverage and are taking tactics like lowering credit limits, canceling accounts and rising interest rates–this means you need to read each and every notice you receive from a financial institution so you are knowledgeable about what is happening with your accounts. These are not borrow friendly conditions. The best thing you can do is get rid of this type of debt (this is also a good thing to do, anyway, because credit card debt is the highest interest debt).
- Stock up an emergency fund. Credit cards are no longer the place to borrow in a pinch (see point above), and unemployment is skyrocketing. This can have a rippling effect and may even put your job at risk. You need to be prepared. You don’t want to get behind on your payments because of an unforeseen emergency.
- Keep investing in your retirement accounts. This is so important–you need to have a vehicle for your savings. You should continue to buy stocks, bonds, and whatever asset mix is appropriate for your age and goals. Even though a lot of retirement accounts lost as much as 30% it is not the time to stop putting money into stocks. Don’t be afraid, it is still a great time to invest–there are a lot of bargains and opportunities out there. I think that Suze does a great job outlining all the excuses and scenarios people have made with regards to putting more money into their 401ks–if you disagree with this advice you should certainly read the ebook.
- Be prepared to convert your IRA or old 401k to a Roth IRA in 2010. They are removing the income limit and allowing you to pay the taxes over 2 years. Roth IRAs are good because your money can go tax deferred.
- Spend less. It is the easiest way to achieve financial freedom. You should always spend less than you earn. Separate wants form needs and learn to do without the things you don’t really need. Then make sure you save that excess. Aim to have at least 8 months of living expenses tucked away. Suze also provides a handing worksheet to help catalog and inventory your monthly spending, so you can see where you might be able to cut back. And remember, every little bit helps.
- Get health insurance (being prepared for the worse), and have your estate in order. You need to protect yourself and your family, make sure you have taken the necessary steps to ensure that happens.
And her 3 big takeaways, which are really words to live by:
- When it comes to money, if it sounds too good to be true, it is.
- If you cannot afford it, do not buy it.
- Always choose to do what’s right, not what’s easy.
Over the past month or so we have been hearing about big banks failing under the credit crisis (you can’t really call it a mortgage crisis anymore). Merill Lynch, Lehman Brothers, Washington Mutual all have suffered headlining losses. Now there are rumors that Morgan Stanley and Wachovia are next (and possibly Goldman Sachs). We know more bank failures are on the horizon:
Bankruptcy guru Wilbur Ross predicted on CNBC that 1,000 regional banks could fail. Other economists pegged the looming failures at 50 to 300 regional banks. (source)
Many economists are predicting bad things but I am trying to stay optimistic (finding global data on what is really going on is actually *really* hard to do!). However, history has shown that even in down times there are still good stocks to buy and a bear market can mean opportunity for those who are willing to stick their neck out and take advantage of it. So what does this mean for you? Should you be worried?
To figure that out I went through most of the things on people’s minds and tried to address each one:
- Savings Accounts. Make sure that you don’t have more money in any one institution beyond the amount that is FDIC insured ($100,000 generally).
- Financial Stocks. If you own stock in any of these troubled banks it will be unlikely you will likely be unable to recoup your shares if they go bankrupt (the stock price decreases until it is less than $1 then after 30 days at that threshold it will be moved off the NYSE, etc–and regular common shareholders end are the last ones to be paid out). If I owned shares in these places I would consider selling them now–my guess it buying them will still be a bargain towards the end of the year as most investors will be gun shy about putting there money back into these big banks. A lot of mutual funds had stock in many financial institutions so it is likely your funds may be suffering. If that is the case, just hold tight I have no doubt the fund managers are scrambling to adjust the funds (and if you have an index fund, well at least you know you won’t do worse than the market!).
- Stocks. If you have stocks you might be best to just hold tight. We are entering unknown territory and while it is likely index stocks will trend downwards, buying a good company is always a smart move. This could be a great time for great deals. But it is not necessarily the best time to sell–things are too volatile so if you don’t need the money within the year you are probably best to hold tight and ride out the storm.
- Your home. Keep paying your mortgage. Even if your lender fails there is a good chance your debt will be sold to another institution. As far as home prices, just hold tight–it looks like there might not be much appreciation in home prices, but the lower mortgage rates will probably even out the housing market some. I still don’t think real estate is a great investment yet, but for the most part shelter is always a worthwhile investment so as long as you can afford your mortgage you should just hold tight.
- Retirement accounts. If you are not close to retirement age, and are properly diversified (I should write a post on how to do this–but if you don’t know how you should do some research or ask for help) then you should resist the urge to look at your account. It is protected even if your institution fails and looking at it everyday is only going to stress you out. Ride it out and remember that even severe decreases seem insignificant over time.
- Credit cards. Even if you bank goes under you should still keep paying. The debt will likely be transferred to another institution. This should be obvious, but I figured I would point it out just in case.
- Insurance. Even though AIG failed, the consumer arm was never in trouble. For the most part you are probably okay here, since even if your provider fails there are some fail safes and it will go to a state regulator. I don’t know much about these insurance policies though so you should really check with your carrier.
- Budget. Spend less, save more. You should be doing this anyway, but as the economy moves into troubled times trying to save money and be frugal is always a good move. This is probably the biggest concern for most people since recessions can mean less jobs and having a good safety cushion is important to handle anything that is unexpected.
Did I miss anything? Feel free to leave it in the comments!
No.
Not long ago I wrote my thoughts on real esate and where I thought we were headed. I articulated my concerns and researched data to support my arguments. However, I have come across a lot of individuals and propaganda that tell me “Oh no, Kate, now is the best time to buy.” Since I like buying things (shopping is one of my favoriate past times afterall) and I have been wanting to do more real estate investing (REI), I started to wonder if maybe they were right. Maybe I was wrong. Maybe we had hit the bottom. So tonight I went ona quest to uncover some numbers and determine if it really was a good time to buy.
No, it is not.
Here is some information I found:
* Caveats: Keep in mind for those readers not in Seattle, most of of my research us for this area and surroundings–and like all decisions, it is your job to do research and make the best decision for yourself–my ideas may or may not be inline with your parameters
- There is another large wave of mortgage resets heading to Seattle. From the article: about 12,600 loans are scheduled to reset in the next 6 months (which is 52% of the remaining sub-prime loans). This could mean more foreclosures, lower prices, and more inventory–especially if these people cannot refinance their loans (because of lower house prices or stricter lending standards).
- People are starting to come to the realization that Washington and Seattle are not exempt for the rest of the US economy. Our local economy is slowing down, commodity prices are on the rise, the housing market is seeing a big growth in inventory, and salary increases aren’t keeping up with inflation. This means that as recessionary fears and a slowing economy affect consumers people are likely to spend less and make big purchases (such as a new home).
- Housing prices are declining. August showed the first month of double digit percentage drops in home prices year over year (11.2%, with a media price of $423,950). This means that some homes may not be able to be refinanced. The NWMLS claims that a lot of the decrease in sales and increase in inventory is the tighter lending standards.
All of the aforementioned factors help support the theory that prices are going to continue to decline. There is no indication that the market has hit bottom and is making its way back up. So if you are thinking of buying it is still best to wait and keep saving up that money for a down payment for a home in a year, two years, or maybe more.
Part of the reason I chose to open my IRA at ShareBuilder was that there has been a stock I have been wanting to purchase but didn’t want to shell out the whole purchase price. Hence part of the appeal of ShareBuilder was that you could buy dollar amounts of many stocks including Berkshire Hathaway. For those of you not familiar with this stock, it is probably best to begin with a history lesson.
History Lesson
Warren Buffet is one of the more famous investors. In February, Forbes magazine listed him as one of the world’s richest people with a fortune around $62 billion. He is known for his value investing and finding great companies, as well as being frugal (he lives in the same house he has lived in since the 1950s, despite his increase in wealth). He was an entrepreneur at a young age, and consistently looked for opportunity. He is known for his sense of humor, and one of the things I like best about him is that he worked his way into his role and values quality and hard work. I really respect him and admire. Berkshire Hathaway is the company is founded and is now CEO and majority shareholder. You can find out more about him via wikipedia here.
Picking a Stock
So obviously I am a Warren Buffet fan. Part of the reason I like him so much is that he truly tries to find great companies and real value in stocks. He believes that you pick companies for the long term–great companies that will grow shareholder value over time (I am currently Built to Last
which talks about characteristics some of these types of companies). His company, Berkshire Hathaway started as a textile manufacturing company in Omaha, Nebraska; now the company deals largely in insurance and investments.
Berkshire Hathaway stock has averaged a 21% return over 42 years. (much more impressive than any index fund). The stock climbed to be the highest priced stock on the NYSE, climbing up to almost $150,000 per share (the stock has never split)! Berkshire class B stock (BRK-B) is 1/30 the amount of real Berkshire Hathaway shares and is currently trading around $3,800 or so.
So why did I want to invest my IRA in Berkshire:
- I like the company’s values and business (and Warren Buffet of course!)
- Since the company invests and owns shares in lots of other companies, it is kind of like a mutual fund and you get built in diversification
- Using ShareBuilder I could essentially buy shares I wouldn’t normally consider in a normal brokerage account (since I am investing smaller dollar amounts even buying 2 whole shares of the BRK-B was a bit more than I could contribute to my IRA for 2008–the limit is $5,000)
- The 21% return sounded much better than an index fund
- And the shares have gone down a bit in the last few months, so are a bit of a “deal”
I am really happy with my choice and I am excited to own a little bit (even if it is a fractional bit) of Warren Buffet.
When most people ask about setting up their 401k and which mutual funds to pick the easiest answer is to choose index funds. Since most people don’t actively manage their retirement accounts (most people just direct deposit and forget about it, they aren’t interested in following the ups and downs of the stock market) this is probably some of the best advice an average joe can receive.
Yes, it is true there are many mutual funds that can outperform mutual funds.
However, if you aren’t paying attention the churn (buying and selling stocks that is) can have all sorts of fees and interest associated that aren’t transparent by just looking at the annual rate of return.
In addition as fund managers can change, so can performance. Index funds tend to track with the market (which for the most part always trends upwards over time) and have very little churn (so fees and hidden taxes don’t eat away at your gains).
When ever you think about an investment it is super important to take fees into consideration because they can have a big impact on your returns.
Take for example my recent ShareBuilder IRA…..
Even though my investments are relatively small compared to many people (you have to start somewhere right?) I have been trying to do lots of research and make careful selections of each stock that I want. As I said previously, I opened a ShareBuilder account for my new IRA. I have elected to do the automatic investment plan (just like a 401k you put money in every month and it can be invested in the stock or your choosing–even if you can only own a fraction of the stock). Since I have the basic account there is a $25 yearly fee, and $4 per month commissions. This results in $48+$25 = $73 in fees every year (assuming you pick one stock per month to invest in). You can also elect to use the basic plan which charges $12 per month, or $144 year, but you can pick 6 stocks every month–which gives you a lot more diversification. Since I am only investing $5000 per year, $144 is only about 3% of total gains. Although, if you have a regular ShareBuilder account (which also works out to $144/year) the $25 fee is waived (you still have the $48 in purchase commissions if you deposit into the account monthly). While I really want a Foliofn account at $29 per month ($348/year) ($209 per year if you subscribe to their yearly plan) it is a bit more than I want to spend on fees (but like ShareBuilder it allows you to invest in stocks in dollar amounts, but does allow unlimited free trades twice daily)–although perhaps it is better than ShareBuilder which charges you $9.95 to sell any investments.
Thinking through all these fees and how they affect your returns is more complicated than it should be!
I read somewhere that the amount you spend as overhead on your investments should be less than 2% of your total capital. That means if you are only investing $5,000, you shouldn’t spend more than $100 on investing newsletters, brokerage fees, account fees, etc. That means that even for 1 year of an IRA I am going to be over paying in fees 
— now by year 2 if you contribute another $5,000 (the maximum contribution) your fees will be make a little more sense. Overall I still think ShareBuilder makes the most sense for me since I am just starting my IRA. I am considering opening a regular investment to waive the $25 annual fee on my IRA and invest a little bit of money with low commissions.
But all these fees certainly are certainly having an influence on my decisions!
Wherever you choose to invest, whether it is your employer’s 401k plan or your own little brokerage account, make sure you do research and factor in the fees associated with your investment. This will have an impact on your gains, and depending on how actively you manage your portfolio, should influence your decision about which vehicle makes sense for you. And for those of you that know very little about finance, I would still suggest index funds as a great start for your investments.
If your employer offers a 401k, then by all means you should make sure you are contributing (this is particularly good if they match your contributions, since that is basically free money you are missing out on if you don’t participate). If you don’t have a 401k though, you should definitely have an IRA (and yes, you can have both a 401k and an IRA–a Roth IRA in particular–but you have to meet certain requirements and not everyone is eligible). One of the best things about leveraging your retirement account is the tax benefits (and you miss out if you don’t have one of these accounts). In many ways 401ks are easier for people–the money is deposited pre-tax (allowing you to earn interest on the income you normally pay as taxes) and each individual can select from a set of investment vehicles (usually stocks, funds, bonds, and money market, but the actual options depend on the 401k itself). IRAs are a specific type of account where people can deposit after-tax money and allow those investments to grow tax deferred (or with Roth IRAs tax free), and some people can get a tax credit for their contributions (this means you can earn additional interest on money you would normally pay as tax).
As I am learning more and more about investments and getting the most out of your money I have been thinking about the role of retirement accounts and how they play into your overall money strategy. An IRA your income can grow faster with tax benefits and it is just like a regular investment account (you can buy stocks and mutual funds and the account has the same set of fees as a normal investment account). So this means you want have a regular investment account and an IRA account (or other retirement account). You should put as much as you can in your retirement account (because of the tax benefits)–that means as much as the government allows (for most of us that is $5,000 for 2008) or as much as you can afford (since in order to realize the tax benefits you shouldn’t withdraw the money early–which means you don’t want to put money in there you may need in the short term future).
The other important thing to think about has to do with the fees where you open your IRA. Since most stocks in there you may want to hold for the long term and not actively manage, there are certain sites that are better than others. You really have to investigate and weight factors like monthly/annual fees, cost per trade, and account minimums. For example, ShareBuilder allows you to make small monthly contributions and put that money into shares (they also have no minimum)–this is great for people just starting out to begin investing in stocks. This was the route I went, since I just started my IRA and have only this year’s contribution so far. [BTW I have a link where you can get $25 free for opening and account so email me if you want one] The new investing tool I am really excited about also has an IRA account option. Foliofn charges a monthly fee though, so I think that will eat too much into my profits until my IRA gets a little larger so I might rollover my ShareBuilder IRA there in a year or two. There are many others though, so do your research and find one that will work with your goals and plans.
As for what I am buying with ShareBuilder? That is what I am trying to figure out and will be updating in the coming weeks with my progress and decisions.
Most of us have 401ks, but a lot of people don’t really know what the best way to allocate your money. Most 401k programs require you to invest in set of pre specified mutual funds. Often times one or more of these funds will be invested in growth or value stocks (and a lot of them are a combination of both). How do you know which one to invest in? The first step is understanding the difference between them, and the second step depends on your goals (but I will share with you what I do).
Growth stocks are the glamorous stocks–think sequins and sparkles.
- They are stocks that are projected to have either than average growth rates. Often times this is based on the industry (for example, in recent years technology stocks have fallen into this category) and how that area of the market is projected to grow (such as via economic factors or demographic factors).
- Typically these companies have a return on equity (ROE) that is hire than the industry average, and many times these companies will exceed their earnings projections.
Sounds great right? Well there are caveats to growth investing….
Like most flashy things, they can grow and increase in popularity (just like sequin dresses or tops) but in time they can fall out of favor (i.e. end up on the clearance rack). So when fashion is favoring flashy and sparkly clothes sequin items are fetching top dollar and selling out, but when the trend changes (in the fall people start buying chiffon as an example) the prices on sequin clothing go down. The manufacturer or designer hasn’t done anything differently (and may still be absolutely fabulous) but the market no longer has the demand for sequins so the prices of those items will increase. Growth investing is a lot like following trends, you have to keep your eyes open because what is hot now may not be in a year or two years and therefore may not be the place you want your investment.
So if growth investing is like trendy fashion–fickle and changing–what are value stocks and how are they different? Here are some of the characteristics of value stocks:
- They tend to have higher than average earnings/share ratio (so the amount of the company earns divided by the total number of shares should be better than average)
- They are solid, have a proven track record, are often not in volatile or fast changing industries (this is why they are the more boring stocks)
- Many pay high dividends
- Value stocks typically have a longer holding period than growth stocks
I think of value stocks like classic wardrobe pieces, your little black dress, classic trousers, and pencil skirts–the pieces that season after season, and year after year, are your go-to-pieces. No matter what the current trend is, you know you will always be in fashion for the long term with these choices.
So think of your look like a stock portfolio. It is important to build your look around the classic pieces–well made and well purchased. However it is also important (and to really take your look to the next level) you have to know what trends to adopt and when to let them go. So invest in some value stocks for the long term, and know they will always be there for you. And follow the trends buying and selling growth stocks (or investing a portion of your portfolio in a growth mutual fund). Just know that value stocks are classics and in long term will outperform most growth stocks, but to really get noticed and blow away expectations you will need to take some risks
I put together my 401k like I do my wardrobe. I focus the majority on high quality foundation pieces and add a few trendy items here and there. That is to say the majority of my money is spent on items that are timeless and I can wear over and over again. Then I have a percentage (about 15%) set aside for the higher risk growth stocks (although due to the restrictions of my 401k this is distributed across 2 mutual funds). Of course your investment strategy should depend on your age, your goals, and of course your risk tolerance–but hopefully this gives you a good idea and causes you to take a closer look at your retirement account.
I was chatting with some of my colleagues about why I am so intrigued by finance and why I would want to spend all my free time devouring everything I can find on economics and finance–well part of it is that I am inherently greedy and materialistic (Madonna’s Material Girl was my theme song when I was younger), but part of it also has to do with my circumstances. Let me explain.
When I first started my blog I wanted to write about stuff I knew about–knowledge I thought I could share with the world and help people learn from my mistakes and my triumphs. Which is why, if you read this blog here, you will see some of my opinions and advice have changed a quite a bit (the more I learn the more perspective I have on things and it makes me realize decisions are not always black and white). Lately my blog has been really focused on documenting the things I learn and my progress. I thoroughly enjoy reading about the markets and the economy–it is fascinating. And I am even hoping to one day work in finance (perhaps when my career at Delve, the greatest company in the world, is all said and done), ideally at one of the top hedge funds (since that is where the smartest people seem to be working).
Anyhow, I recently started helping one Garrett and some of my friends with their finances. I put together a graph for our crossover point (the point at which the interest on your savings exceeds your income, adjusted for inflation). It was amazing the differences in which 8% vs. 10% vs. 12% could make on the year you could retire. So of course I started to think, how does someone without millions of dollars make the most interest on their money? I consider myself much smarter than most of the financial advisers that handle clients with my kind of capital (and I have a strong aversion to pay one of those people to manage my finances). There are high interest savings accounts but they only earn about 3%; index fund can do about 7%–but what if you only have $10,000 or $20,000 or more and you want to see 12% or more interest on your money?
The answer to that question, as well as just trying to be more savvy about my finances and planning is what started my foray into finance. Now it is my obsession. I have traded my reality TV shows for CNBC and Bloomberg. I read as much as I can, learning everything I come across. I would love to be able to do this for my full time job, but I love my current job, so maybe I will move into finance next 
I think it would be a great idea if someone put together a fund for normal people to be able to invest in a hedge fund (or other high risk, high return investment vehicle) by pooling their money, but until then I am still researching and trying out new things. Feel free to offer me any tips and tricks you might have
You should make your money work for you. Part of this is to make sure you have a credit card, you pay the balance every month, and that your credit card gives you some sort of perk (this is what I refer to as responsible credit card use–living within your means). Of course if you overspend, then stick with cash–that is preferable than paying someone interest and being in debt. However if you can get something free for just spending your money, why not?
In the past I had an Alaska Airlines credit card. Living in Seattle it made a lot of sense, Alaska had a major hub at the Seattle airport, I wanted to travel more, and for the $75 annual fee you got a $50 companion ticket. I have had this card for about 4 years. I managed to use the companion ticket for all the years (although 2 of the 4 years I had to “plan a trip to use it up”). One thing about the companion ticket is that you still pay the fees, so it usually about $75 for the companion to fly (not $50). And with the annual fee you are paying $150 for that ticket. Maybe still worth the card–plus you get the miles. Well what are the miles really worth?
Well based on my math (and availability levels) it seems like a ticket that is $300 can be redeemed for about 30,000 miles, a ticket that is $700 is about 70,000 miles give or take a little. Doing research online for mile value you see something between $0.007-$0.014. Assuming that you use the card primarily for ordinary expenses and not tickets on the airline, then you get 1 mile per every $1 spent. This means you about 0.7% – 1.4% return on your money. Many other cards (take Amazon’s card or Nordstrom’s card) give you 2% back.
So besides the fact the return is less on your miles there is also the problem of redemption. Airlines are notorious for not having availability on the days you want to fly. While this hasn’t been a problem for me with Alaska, it has been a big issues trying to leverage their partner airlines. In addition, I am currently very bitter about the fact that airlines change their mileage programs before you have the chance to redeem them. For example, when I signed up they had a partner that flew to Fiji, this year that partnership ended and therefore that is no longer an option as a destination for my miles. And there is this, now they have changed their policy such that if you want to redeem those same miles on one of their partners (a reason why their program appealed to me in the frist place) they now charge a $25 fee.
In my opinion you are better off with a cash back card that gives you money back on purchases. Then you get the money right away, can contribute it to things you are already spending and there is no risk to program changes or not being able to utilize your rewards. Moreover when you do travel you can actually pick the best price, best airline, and best schedule to meet your needs (without the limitations of the mileage plan). Either way, take a good look at your card and do some research and make sure your money is working hard enough for you
An old coworker of mine and I once argued about 401ks. He said “Why would I put my money in that account when I can make more investing it on my own and don’t have to wait until I am 65 to leverage it?” Fair enough, I argued about the 3% employer match we had at the time (you essentially getting a 3% raise for storing away at least 6% of your pre-tax earnings–not so shabby). He said it was a good argument but he didn’t agree. I still don’t totally get his rationale as to why putting money in a 401k is not a smart investment decision (if anyone else does please feel free to enlighten me in the comments section), but I do know he was one smart cookie and one savvy investor.
About a year ago he turned me onto a site, Financial Sense, and suggested I spend 10 minutes per day reading a few of the articles. While I don’t read it everyday I do read it frequently and I must say I have learned a whole lot about the economy and commodities. This is the type of site they should make kids in economics classes read as literature. Most of the articles are written by advisers or fund managers who are trying to win business with their thoughtful articles, but they offer up a lot of free and good information. There are lots of opinions expressed on the site, but it is the type of discussion that you would imagine professional economists have with one another. It is definitely interesting, and if you aren’t super interested in finance and economics you probably think it is boring, but if you take the time it is a great resource. I don’t invest in commodities or currencies (yet) but if you do this is a great site to get lots of thoughts on those markets.
Next Page »
