When most people think about budgets, they think – accounting and BORING.— Sure, it makes sense to budget but I have more important things to do than play with a bunch of numbers!The best budget is one the makes you aware of what you are earning and spending. The general goal is to earn more than we spend so that we are left with money to save and invest. You can start your budgeting process by following four simple steps.
Budgeting is a continual process. One where practice makes perfect. It is understandable that you will make mistakes at the beginning. Just think about taking small steps forward. When I started budgeting all I did was simply make sure that I never spent more in a month than I earned. If I overspent in any one month, I cut back in the next month until I was back in balance. I kept track mostly by monitoring my bank balance -- there were no fancy software programs at that time!
Your budget will become more sophisticated over time. And, once you see how budgeting can improve your financial position, you will become more motivated to give it more thought. For instance, in my twenties, I began automatic investing as part of my budget. Once I saw how the funds accumulated, I was motivated to save more and spend less
Trying to establish a budget that is too complicated or too severe at the beginning will just turn you off from the process. Nobody was going to tell me not to spend my hard-earned money when I first graduated from college! In later posts, I will get into more of the mechanical process for setting up a budget (you can also go to the GE money budgeting website shown as the budgeting link below). For now, I just want to leave your with the thought, “I think, therefore I budget.”
For the 2nd quarter 2006, I wrote that my 401k performance was negative. In the 3rd quarter 2006, I did better but not by much. At least it’s in the positive range. My personal rate of return for the period ending September 30, 2006 was: 3.54%.
Hope you’re doing better than that.
Lately I’ve been thinking of reducing my contributions to 401k to the minimum contribution dollar amount an employee needs to contribute to get the maximum employer match in order to pay off some home equity line of credit, which is at approx 8% or so interest rate. I’ve already maxed out the 401k in the past few years so I’m thinking that I can take a break until my higher interest line of credit is paid off. Is this a smart idea?
I want to post about a subject that frequently appears in discussions online in recent years (especially over the past several months). It's about authors and their sheep followers that continue to predict these great depressions and crashes. I am not saying that it can't happen but their readers sure make them rich by reading most of their negative crap. What happened to the predictions from the books in the late 1970’s and early 1980’s? Read the book titles from the 1970’s and 1980’s and then read the book titles from today (listed below). Are you seeing a pattern? I didn’t go back to the 50’s or 60’s but I could find similar titles and then many more in the 1930’s. My point is: don’t believe everything you read and stop panicking by reading books from theorists (talkers, not doers). I must give credit to many of the books listed by Martin Schwartz and his book Pit Bull. I enjoyed reading it over my last vacation as it was very funny and educational (not a “how to” book).
If you are reading this blog you are probably interested in getting rich. We all want to find the easiest and quickest way to get there. These days there is all this talk about how you can make a career out of playing poker. I googled “poker” and “career” and got 1,970,000 hits. Sounds an awful lot like the day-trading craze back in the dot-com era.What advice do you normally give to someone starting on a poker career?
Normally, I advise people to put their energy into something more productive. I explain that I have played cards since I was a young child. I am a mathematician. I am well versed in psychology. I am very easy going, yet very competitive. In short, I believe I have the essential qualities to be a good poker player. But even with that, it has not always been easy.
Maybe it's the TV and participating stars, I don't know, but around here, poker seems to have captured a whole new generation in a big way. Junior high and high school kids are having big games routinely and it's far more widespread than I ever remember. Beyond TV, the popularity of the game has led to a lot of other forms of media attention, and now your book, which has all this potential for mass-market appeal that just wasn't there even five years ago. Any thoughts, any qualms, about how this came to be?
Televised poker is similar to reality TV, but poker players are really competing for a million dollars and are not acting. When people watch professional sports they may project themselves as being able to “play with the pros,” but they know it is a fantasy. Viewers of poker can think along with the players and really feel that if they had the opportunity, they might be one of the players at the final table. Many of the viewers actually play poker with family or friends at least a few times a year.
I am uncomfortable when teenagers ask me for poker advice, even though I played a lot of poker when I was in my teens. I have told my teenage son Nathaniel and my teenage nephew Michael that I will not teach them to play poker until they have completed their educations and have accomplished something productive.
Take it from one who has been there, a poker career is best considered after establishing yourself in some other profession.
What you are not going to find in all those articles about making a career out of poker is the dangerous downside. Google “poker” and “addiction”and you get 1,340,000 – almost as many as for poker careers. Very few people get addicted to playing football but the sad fact is that many get addicted to poker and other forms of gambling. There is a lot ofeducational materials out there about the dangers of drug, alcohol andtobacco. Gambling addictions are just as bad if not worse. My advice is to stay away from competitive poker to avoid any potential for addiction. Compulsive gambling is a sure way to ensure that you will NOT become financially independent!
LaunchPoker has a good article on poker addiction. If you are not yet convinced about the wisdom of my words, I suggest you read it. http://www.launchpoker.com/psychology/-poker-addiction-/ The article has the 20 questions taken from the official site of Gamblers Anonymous that ANY poker player should ask themselves at least once a year. These questions are provided to help the individual decide if he or she is a compulsive gambler and wants to stop gambling. If you answer “yes” to more than 7 of them – you have serious problems. And remember – its not a joke!
If you play poker please ask yourself these questions. If you answer yes on 7 or more please seek help by talking with someone you trust and/or contacting Gamblers Anonymous or some other gambling addiction treatment organization. Gambling is NOT the way to financial independence!
You may have noticed that none of my posts discuss “investing” in real estate. If you are waiting for a post on this topic I will politely tell you not to hold your breath. Buying and selling individual real estate properties for rental or “flipping” purposes is one topic I won’t be talking about.
Sharon Harvey Rosenberg is a columnist for the Miami Herald, and she writes a personal finance blog called the Frugal Duchess. This dual role gives her exposure to 2 different audiences, and of course insight into the difference between blogging and the main stream media. In the interview we talk about vicarious frugality, and the person who inspired her to make smarter spending choices.
Links to Bloggers who contributed questions:
Nina from Queercents: http://www.queercents.com/
Mapgirl: http://www.mapgirl.net/mfc/
A Penny Saved: http://money.thatedeguy.com/
Links to other sites mentioned in the interview:
http://pfblogs.org/
http://www.mightybargainhunter.com/
http://simplicity-in-kansas.blogspot.com/index.html
http://frugalforlife.blogspot.com/
http://www.nolimitsladies.com/
http://www.consumerismcommentary.com/
http://www.mapgirl.net/mfc/
http://allfinancialmatters.com/
http://singlemomandmoney.blogspot.com/
http://www.mightybargainhunter.com/
http://millionaireartist.com/
Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.
Groucho Marx (1890 - 1977)
There are several questionnaires on the internet but I am not including links to any because, frankly, I didn’t find them to be that good. Perhaps in my free time I will put one together ;-). In the meantime I would use the list above. In addition, I would also ask to see the advisor’s ADV Form (or the state securities agency equivalent). This is an annual filing that is required by every registered advisor and provides useful information regarding their operations. You can read more about this form at this link. http://financial-dictionary.thefreedictionary.com/Form+ADV
Another simple rule to follow. Watch for hidden clues and body language. If the advisor is uncomfortable answering these questions or providing you with backup documentation, run don’t walk to the nearest exit!!!
Since I have started this blog, I have been surfing the investment sites on the internet. It makes me wonder whether the world really needs another blogging investment expert. We will find out won’t we? If anyone out there in cyberspace is finding my comments useful, I would appreciate hearing from you. I won’t promise to stop if I don’t hear from you, it just would be nice to know someone is listening ;-).A financial advisor that possesses one of these designations should have some level of knowledge in financial matters -- but -- a designation (or two) is not a guarantee of expertise. Just as I shudder to think about some of my college classmates that are now surgeons, there are many CPA, CFAs and the like that are not worth a lick. You still need to determine each individual’s competency based on their character and performance. In my next post, I will discuss the types of questions that you should be asking your advisor to assess these traits.
I have been searching around the internet for some good articles on investment basics. Imagine my surprise when I came across an article from the SEC (yes, the government agency) that was pretty good. In fact, it covers all the key points in just a few pages in plain easy to read words. Today is a good day as I see that some of my tax dollars are going to good use!Investment Choices – there are three broad classes of assets that are typically considered part of an investment portfolio – stocks, bonds, and cash. In addition there are other category specific investments (such as real estate) that might also be included in a portfolio. In my opinion these other categories should only be invested in after the investor has meaningful investments in the three major classes. I know many of you are wondering why I think this way because real estate is (or was) all the rage these last several years. I will write another post later on the appropriate place for real estate in your portfolio.
The initial decision that an investor needs to make is determining which asset classes to invest in. This is called “Asset Allocation” and will be determined largely based on the investors time horizon and risk tolerance. The SEC sites has a link to an asset allocation calculator offered by the Iowa Public Employees Retirement System. http://www.ipers.org/sub/calcs/AssetAllocator.html Imagine that, another good product from a government institution. Try it. I think you will find it useful.
The SEC article introduces two other important investment concepts – diversification (which I talked about in yesterday’s post) and rebalancing (maintaining the appropriate asset allocation).
Most of my posts so far have been about debt. This post is for those of you out there that are thinking “enough already, I want to get on to investing.” We will be talking a lot about investments in later posts. The main issue with starting with investments is that you need money to invest (at least $3,000 in most cases). It is also hard to start with investing because there is a lot to learn in order to invest successfully. For those of you chomping at the bit I want to show you how to get started. I want to provide you with a simple, low risk (note that this does not mean NO risk) method for investing small amounts. Putting myself in your shoes, I am seeing that this may sound easier than it is. I have just spent several hours researching this topic on the internet. There is a ton of information on investing for beginners but none of it is presented in a concise manner. So, here is my attempt. Based on these pointers, I found a few funds that you might want to look at. If you are interested in investing in one of these funds, I would suggest that you go to their web site for further information.
| # of | Price as of | Expense | 5 Yr Total | Minimum | Investment | ||||
| Mutal Fund Name | Ticker | Style | Stocks | 11/24/06 | Yield | Ratio1 | Return | Initial | Subsequent |
Vanguard 500 Index | VFINX | Large/Blend | 513 | $129.38 | 1.65% | 0.34% | 7.13% | $3,000 | $100 |
| T. Rowe Price Equity Market Index | POMIX | Large/Blend | 1,849 | $15.35 | 1.20% | 0.80% | 8.53% | $2,500 | $100 |
| Schwab Inv 1000 Index | SNXFX | Large/Blend | 990 | $41.25 | 1.13% | 0.72% | 7.70% | $2,500 | $500 |
1 Expense and Management Fee
Source: Standard & Poors Mutual Fund Reports
Data quoted represents past performance. Past performance is not an indication of future results and investment returns and prices for exchange-traded funds will fluctuate. Your investment may be worth more or less than your original cost at redemption. Current performance may be lower or higher than the performance data quoted. Before investing you should consider the appropriateness of this investment based on your individual circumstances. You should also obtain updated information regarding this investment from sites such as http://finance.yahoo.com or https://us.etrade.com and obtain and read a copy of the investment's prospectus.
There may be some of you out there that don’t want to wait until you have $2,500 to $3,000 to invest. While I think it is generally better to wait, I don’t want to discourage anyone. My opinion is that we learn the most when we have a vested interest. Another way to invest is to invest using ETFs or Exchange Traded Funds. These funds trade like stock and you can buy them through an online broker. Kiplinger Personal Finance’s latest ranking of online brokers[3] named the following as the top brokers for accounts of $50,000 or less:
Kiplinger Ranking of Best Brokers for $50,000 (and less) accounts1. OptionsXpress
2. Muriel Siebert
3. Wells Fargo
4. Firsttrade
5. Fidelity
6. Vanguard
7. TradeKing
8. Schwab
9. E*trade
10. Scottrade
I have listed a few ETFs in the chart below that should be appropriate to start your investment portfolio. While these funds provide essentially the same performance as the index funds and expenses are typically lower, the issue is that you are charged a commission every time you buy an ETF. Even with low cost brokers, commissions are likely to be between $10 and $20 a trade. This adds considerably to your cost. The upside is that you can start you investment with much less than $2,500. You can buy at little of one share but you must remember the commission cost.
| # of | Price as of | Expense | 5 Yr Trailing | ||||
| ETF Name | Ticker | Style | Stocks | 11/24/2006 | Yield | Ratio | Returns |
| iShares Dow Jones US Total Market Index | IYY | Large/Blend | 1,629 | $ 68.33 | 1.52% | 0.20% | 6.75% |
| iShares Russell 3000 Index | IWV | Large/Blend | 2,959 | $ 81.39 | 1.50% | 0.20% | 6.95% |
| iShares S&P 100 Index | OEF | Large/Blend | 100 | $ 65.38 | 1.55% | 0.20% | 3.69% |
| SPDRs | SPY | Large/Blend | 500 | $ 140.35 | 1.69% | 0.10% | 5.71% |
| Vanguard Total Stock Market | VTI | Large/Blend | 3,764 | $ 139.31 | 1.66% | 0.07% | 7.53% |
[1] http://www2.standardandpoors.com/spf/pdf/index/071906_SPIVA_pr.pdf
[2] http://www.tamasset.com/pdf/assetclass/may06ac2.pdf
[3] http://articles.moneycentral.msn.com/Investing/Extra/TheBestOnlineBrokers.aspx
The period between Thanksgiving and New Year’s is typically the slowest time of year for home sales and this year looks to be the same. While most consumers are looking to the great deals at stores, for those that are also looking to buy a houses, they don’t see that this is also the best time of year to get a good buy on a home too!
This time of year, most sellers have been on the market for several months (or much longer!) and are growing weary from showings (or lack of them) and are frustrated with the slower tempo of the market. This time of year weekly Pending Sales are about half of what they are in March, April and May. As a buyer, this gives you a great opportunity to be a hero to a seller by bringing them an offer that would end their struggle to sell their home before the New Year. The reward for your heroism is likely to be a lower sales price than you would have received earlier this year or what you may receive next year.
While not all sellers are motivated enough to significantly drop their price, there are good bargains in this market as many of the houses for sale are already priced well. Very recently I was in a negotiation with a buyer on his first home. We looked at everything in his price range and this home was far superior to the rest. We made an offer about $10,000 under its $220,000 asking price but ended up settling on the seller’s counter of $3500 under asking. We both looked at each other and said “you know, this house is priced right and in excellent condition… it’s worth every penny of $220,000.” Had the house been greatly overpriced, more aggressive negotiations would have been needed. My buyer is thrilled with the outcome and closes in January.
If you’ve been sitting on the fence about buying or been thinking that you’ll wait to January to get serious, you may be missing out on the best values in the market!
In celebration of the busiest shopping day of the year, I thought we might talk a bit about credit cards. I hope I am not the first to break it to you but credit cards are NOT free money! Here are some “fun” facts about college students and credit cards from a Nellie Mae report:
While I cringe at the average balance and the high percentage of students that don’t pay off their card each month, I need to remind myself that reality is probably even worse than this. These statistics are just for students applying for student loans. The statistics on the general population would probably show higher balances and poorer repayment patterns.
Carrying a balance on a credit card is one of the easiest ways to ensure that you never achieve financial independence. Paying only the minimum balance or less will mean that you will always be paying the highest rates. Funny how no one told you this as all those offers for credit cards were rolling in. While credit cards can be a wonderful thing, the sad fact is that too many young adults have to learn a painful lesson before they properly manage their credit cards. Take heart, however. By absorbing this lesson early in your credit life, you will be way ahead in the game. Many Americans never learn this lesson and that is why they continue to work for their money rather than have their money work for them.
In a later post, I will discuss how you can work yourself out of high credit card debt. The lesson for today is just “stop digging the hole any deeper.” If you can’t pay off the balance on your card, don’t use it again until the balance is paid in full. You really don’t have to do any fancy budgeting. Sure this may mean that you have to wait to buy stuff but delayed gratification isn’t all bad. As shown in the famous marshmallow test, the ability to wait has a positive impact on where you end up in life. http://ezinearticles.com/?Delayed-Gratification-and-Money-(or,-Marshmallows-and-Your-Financial-Health)&id=237818 As Morgan James notes “When you go to spend your money, think about the Stanford Marshmallow Test. Then think about how many marshmallows you could buy if you delayed your gratification.”
In my opinion credit cards are not about buying things before their time. Card credits should be paid off in full each month. So why use them you ask? The primary benefits of credit cards are that they:
Liz Pulliam Weston has a good article on MSN Money that list 9 ways to build a killer credit score[1]. She notes that “if you’re just starting out, you have an once-in-a-lifetime opportunity to build a credit history the right way.” While I encourage you to read the entire article, I will summarize the 9 points below:
