Inflation has a corrosive effect on retirement savings. To illustrate, let's assume you are diligently saving $10,000 a year in a retirement account like a 401(k), and your retirement savings earn 7% a year. After 30 years, you'll have a bit more than $944,000--almost millionaire territory. If you can stand another year in the work force, you'll be a millionaire. (We're using the calculators at money.cnn.com to get our numbers.)
But let's assume that over those 30 years, inflation runs at 3% a year (which is about its historical average for much of the 20th century). In that case, your savings would have a value of almost $379,000 on an inflation-adjusted basis. That's better than soggy fries with your burger, but you're a long way from being a millionaire measured by today's dollar.
Inflation was once an episodic event in America, and tended to coincide with exceptional economic stresses like wars. We actually had price deflation after the Civil War, again after World War I and yet again in the 1930's during much of the Great Depression. Since World War II, however, inflation has become virtually endemic. While its causes are much-debated, the fact is that inflation has, like an infestation of termites, taken up residence in our lives.
So how do you prevent inflation from eroding the foundation of your finances? Think judo. In judo, you use an adversary's momentum as your weapon. When an attacker charges at you, you slip to one side and flip him over your leg or hip.
Inflation creates price momentum. It pushes upwards the prices of goods and services you buy. But it also exerts upward pressure on the price of labor (i.e., wages and salaries). As the prices of goods and services go up, employees demand higher compensation to cover their increased costs of living. Much is discussed today about how the distribution of wealth is becoming more unequal and how median household income in America has stagnated, and perhaps even dropped. Nevertheless, household incomes for most workers tend to keep approximate pace with inflation.
To protect against inflation, boost the amount you save for retirement by the rate of inflation. Your rising income allows you to finance these increases. Your retirement portfolio will grow correspondingly faster, to give you a buffer you'll need. Following the example used above, save $10,300 in the second year of your retirement savings plan (i.e., 3% more than year one), $10,609 in the third year (i.e., 3% more than year two), $10,927.27 the fourth year (i.e., 3% more than year three), and so on. Even if your income doesn't always keep pace with inflation, accept a minor reduction in your current lifestyle, and continue to increase your savings in line with inflation. Start this process now, keep it up as long as you work, and you'll sleep better for many years.
Sometimes, the IRS's limits on contributions to retirement accounts (like 401(k)s and IRAs) don't always increase as fast as inflation. In that case, save more in taxable accounts. The retirement account contribution limits simply define the amount of tax sheltering effect you'll get and don't have any necessary relationship to your financial needs or goals. Don't let government tax policies dictate how much you'll have in your golden years.
Strange News: Even though we can explain how to protect yourself against inflation, we can't explain Phil Spector's wig: http://www.cnn.com/2007/LAW/04/26/spector.trial.ap/index.html.
For more personal finance ideas, check out this blog carnival: http://www.marketmatador.com/2007/06/11/the-personal-finance-and-investment-round-up-festival-2/
Monday, April 30, 2007
Sunday, April 29, 2007
Automate to Accumulate Wealth
To get to work on time, you probably set the alarm on your clock radio and let yourself hit the snooze button no more than three times. This automates the process of waking up. That makes you a more reliable, and therefore valuable, employee.
It's a good idea to automate the process of building wealth. Don't make saving something that you have to remember to do. If you automatically send part of each pay check into a retirement, investment, or savings account, the process of building wealth becomes much more reliable, and eventually, rewarding. You are paying yourself first. By making saving a priority, you are more likely to accumulate wealth.
Automating the wealth building process can be done a number of ways:
1. Payroll Deduction. Retirement accounts sponsored by your employer, such as a 401(k) account, will typically be funded through payroll deduction from your salary or wages. People who are 50 or over and want to make "catch up" contributions will have to separately authorize them; do so if you can afford them. You may also be able to buy other investments, such as U.S. Savings Bonds, through payroll deduction.
2. Automatic Transfers. You can arrange to have money automatically transferred from your checking account to another account at a specified time, such as the first of the month. The other account can be an IRA, a savings or money market account, an investment account, a mutual fund, a money market fund, or a variety of other accounts. It can be at a different financial institution than the one where you maintain your checking account. All you need to do is a little bit of paperwork (or online authorization), and the process will begin.
3. Extra Mortgage Payments. One way to reduce your housing costs is to prepay your mortgage bit by bit. In other words, if your mortgage payment is $3,000 a month, add a little bit more to each month's payment. Even an extra $100 or $200 a month is helpful. Your mortgage payment coupon may even include a line for adding an extra payment (but make sure you won't be charged a prepayment penalty). The extra payment will be used to reduce the principal balance of your mortgage. As a result, you'll repay the loan sooner and build equity in your house faster. Building equity matters. The real estate markets in many parts of the country are backsliding by day and by night. But extra mortgage payments remain a reliable way to build equity in your house. It doesn't matter that you might plan to live in this house only a few years. This method builds equity even if you stay in your current house only a short while.
One way to prepay your mortgage gradually is to make payments every two weeks. The amount of each biweekly payment would be half your monthly payment. You'd make 26 biweekly payments a year, or the equivalent of 13 month payments annually. You could repay the mortgage several years early this way and save tens of thousands of dollars or more. If you're interested in this idea, see if your bank will automatically deduct the payments from your checking account every two weeks. If not, you might have to pay a service company to make the biweekly payments, and that will involve fees that make the idea less attractive (although not necessarily a bad idea).
Once you routinize the process of building wealth, it will become largely painless. Even more important, it will become reliable. That takes you down the path toward champagne and caviar.
Weird news: do you think you can guess who was and wasn't a cheerleader? Think again: http://www.nbc4.com/slideshow/entertainment/13010870/detail.html.
It's a good idea to automate the process of building wealth. Don't make saving something that you have to remember to do. If you automatically send part of each pay check into a retirement, investment, or savings account, the process of building wealth becomes much more reliable, and eventually, rewarding. You are paying yourself first. By making saving a priority, you are more likely to accumulate wealth.
Automating the wealth building process can be done a number of ways:
1. Payroll Deduction. Retirement accounts sponsored by your employer, such as a 401(k) account, will typically be funded through payroll deduction from your salary or wages. People who are 50 or over and want to make "catch up" contributions will have to separately authorize them; do so if you can afford them. You may also be able to buy other investments, such as U.S. Savings Bonds, through payroll deduction.
2. Automatic Transfers. You can arrange to have money automatically transferred from your checking account to another account at a specified time, such as the first of the month. The other account can be an IRA, a savings or money market account, an investment account, a mutual fund, a money market fund, or a variety of other accounts. It can be at a different financial institution than the one where you maintain your checking account. All you need to do is a little bit of paperwork (or online authorization), and the process will begin.
3. Extra Mortgage Payments. One way to reduce your housing costs is to prepay your mortgage bit by bit. In other words, if your mortgage payment is $3,000 a month, add a little bit more to each month's payment. Even an extra $100 or $200 a month is helpful. Your mortgage payment coupon may even include a line for adding an extra payment (but make sure you won't be charged a prepayment penalty). The extra payment will be used to reduce the principal balance of your mortgage. As a result, you'll repay the loan sooner and build equity in your house faster. Building equity matters. The real estate markets in many parts of the country are backsliding by day and by night. But extra mortgage payments remain a reliable way to build equity in your house. It doesn't matter that you might plan to live in this house only a few years. This method builds equity even if you stay in your current house only a short while.
One way to prepay your mortgage gradually is to make payments every two weeks. The amount of each biweekly payment would be half your monthly payment. You'd make 26 biweekly payments a year, or the equivalent of 13 month payments annually. You could repay the mortgage several years early this way and save tens of thousands of dollars or more. If you're interested in this idea, see if your bank will automatically deduct the payments from your checking account every two weeks. If not, you might have to pay a service company to make the biweekly payments, and that will involve fees that make the idea less attractive (although not necessarily a bad idea).
Once you routinize the process of building wealth, it will become largely painless. Even more important, it will become reliable. That takes you down the path toward champagne and caviar.
Weird news: do you think you can guess who was and wasn't a cheerleader? Think again: http://www.nbc4.com/slideshow/entertainment/13010870/detail.html.
Thursday, April 26, 2007
Goals for Retirement Saving and Why They Don't Always Matter
It's April, and millions of high school seniors across the land are obsessing excessively over where to go to college. The under-recognized truth is it matters a whole lot less than they (and perhaps some parents) think. If they choose the wrong college at first, they have plenty of time and opportunity to transfer to another school. And, regardless of where they go to college, their chances for success and happiness will depend first and foremost on them as individuals. Their choice of colleges may, more than anything else, dictate which institution will be dunning them for contributions when they are successful adults.
The same could be said about goals for retirement savings. Too many people (and their financial planners) obsess excessively over this question. Clever calculators are provided on numerous websites that purport to tell you, down to the penny, how much you need to save for retirement if you want to avoid dog food in your diet. The figures generated by these calculators are intimidating. People making $70,000 or $80,000 a year are told that they need to save $1 million (and more to keep up with inflation). People who haven't started saving for retirement at age 50 or older are told they need to put aside 30% or 40% of their incomes. Not uncommonly, many people are so discouraged by these numbers that they don't bother to save at all. That's a mistake, but people faced with seemingly impossible goals often don't try because failure appears inevitable.
A simpler approach is to target a particular percentage of your income for retirement savings. Instead of trying to figure out how you could be a millionaire by age 62, concentrate on saving, for example, 10% or 15% of your income. Don't worry about how many dollars you need 30 years in the future. Just stash away your target percentage each and every year. If you establish a reasonably high target level (like 15%), which is invested in well-diversified investments, you will probably, after 30 or more years, accumulate enough money for a decent standard of living that's not far from what you had during your working years. The higher the target percentage, the greater your ability to maintain your standard of living in retirement.
So, a simple rule of thumb for a good retirement is to put aside 15% to 20% of your income. That's a lot. By using the percentage of income method, however, you won't need to muck around with a lot of calculations. You'll save one step at a time, and that's easier than trying to project 40 years into the future.
All this assumes that you are steadily employed for 30 or 40 years and can afford to put away a significant portion of your income. Life for most people is more complex. Unemployment, time off to raise kids, aged parents who need support, kids headed for college, illness or injury, divorce and a host of other problems disrupt one's retirement savings plan. You may not be able to save a fixed dollar amount or a fixed percentage of your income. In those situations, forget about your targets and simply put away whatever you can. Don't abandon the process of saving. Even a little bit invested now can add up to a lot later (remember what we've said before: if you love compounding, compounding will love you). Even if life sends a tsunami or two your way, do your best to save whatever you can. Whatever it is will be better than nothing, and you can declare victory when you retire.
For more ideas and inspiration about money, finance and other things in life, go to http://www.unlimitedchoice.org/blog/archives/369.
The same could be said about goals for retirement savings. Too many people (and their financial planners) obsess excessively over this question. Clever calculators are provided on numerous websites that purport to tell you, down to the penny, how much you need to save for retirement if you want to avoid dog food in your diet. The figures generated by these calculators are intimidating. People making $70,000 or $80,000 a year are told that they need to save $1 million (and more to keep up with inflation). People who haven't started saving for retirement at age 50 or older are told they need to put aside 30% or 40% of their incomes. Not uncommonly, many people are so discouraged by these numbers that they don't bother to save at all. That's a mistake, but people faced with seemingly impossible goals often don't try because failure appears inevitable.
A simpler approach is to target a particular percentage of your income for retirement savings. Instead of trying to figure out how you could be a millionaire by age 62, concentrate on saving, for example, 10% or 15% of your income. Don't worry about how many dollars you need 30 years in the future. Just stash away your target percentage each and every year. If you establish a reasonably high target level (like 15%), which is invested in well-diversified investments, you will probably, after 30 or more years, accumulate enough money for a decent standard of living that's not far from what you had during your working years. The higher the target percentage, the greater your ability to maintain your standard of living in retirement.
So, a simple rule of thumb for a good retirement is to put aside 15% to 20% of your income. That's a lot. By using the percentage of income method, however, you won't need to muck around with a lot of calculations. You'll save one step at a time, and that's easier than trying to project 40 years into the future.
All this assumes that you are steadily employed for 30 or 40 years and can afford to put away a significant portion of your income. Life for most people is more complex. Unemployment, time off to raise kids, aged parents who need support, kids headed for college, illness or injury, divorce and a host of other problems disrupt one's retirement savings plan. You may not be able to save a fixed dollar amount or a fixed percentage of your income. In those situations, forget about your targets and simply put away whatever you can. Don't abandon the process of saving. Even a little bit invested now can add up to a lot later (remember what we've said before: if you love compounding, compounding will love you). Even if life sends a tsunami or two your way, do your best to save whatever you can. Whatever it is will be better than nothing, and you can declare victory when you retire.
For more ideas and inspiration about money, finance and other things in life, go to http://www.unlimitedchoice.org/blog/archives/369.
Wednesday, April 25, 2007
The Perils of Food in Your Diet
In our April 22 blog, "The Perils of Dog Food in Your Diet . . .," we pointed out the potential problem of tainted wheat, rice or corn gluten slipping into human food. Well, it turns out that our imagination wasn't overly active. A news story today (April 24, 2007) reports that some tainted pet was fed to hogs that were being raised for human consumption. See www.wtop.com/?nid=104&sid=1102390. Apparently, this was "salvaged" pet food that was sent to the hog farm before the pet food recall (so there isn't any evidence to date that something truly evil happened). But some of the hogs have reportedly tested positive for melamine, the bad chemical in pet food. There is also a suggestion that a poultry farm might have a role in our little gastronomic horror movie. It's unclear whether any tainted hogs (or poultry) entered the human food supply.
The news story also reports that the FDA has decided to test a variety of vegetable ingredients used to make human food, including wheat and corn gluten, corn meal, rice bran and soy protein. The FDA reportedly stressed that it has no evidence that any of these ingredients have tainted human food, but that it wants to get ahead of the curve.
It's nice to know that, a month after the pet food recall erupted, the FDA is getting ahead of the curve. Surely it would have taken a knowledgeable agency a month to figure out that tainted gluten in pet food could also suggest the possibility of taint in human food. We can all sleep better at night now. In the meantime, until the results of the FDA's tests are revealed, perhaps we should stop eating. I know that would be a hardship for some, and perhaps many. But things like wheat and corn gluten, corn meal, rice bran and soy protein are used in a variety of prepared foods--it's difficult to know how many. So we can't simply eat cake while the testing process proceeds.
The news story also reports that the FDA has decided to test a variety of vegetable ingredients used to make human food, including wheat and corn gluten, corn meal, rice bran and soy protein. The FDA reportedly stressed that it has no evidence that any of these ingredients have tainted human food, but that it wants to get ahead of the curve.
It's nice to know that, a month after the pet food recall erupted, the FDA is getting ahead of the curve. Surely it would have taken a knowledgeable agency a month to figure out that tainted gluten in pet food could also suggest the possibility of taint in human food. We can all sleep better at night now. In the meantime, until the results of the FDA's tests are revealed, perhaps we should stop eating. I know that would be a hardship for some, and perhaps many. But things like wheat and corn gluten, corn meal, rice bran and soy protein are used in a variety of prepared foods--it's difficult to know how many. So we can't simply eat cake while the testing process proceeds.
Tuesday, April 24, 2007
Spend Smart and Avoid that Sinking Feeling
One way to increase the amounts you save for retirement is to buy high quality goods and make them last by taking care of them. That way, you'll devote less money to buying things and save more. A look at cars illustrates the point.
A new car loses value the minute you drive it off the dealer's lot. In the first three years of their lives, many cars lose half their value. After five years, the total loss might be 70%. If you buy a new car every five years, you will lose up to 70% of the value of the car every five years.
But if you buy a new car and keep it for ten years, you'll lose around 70% of the value in the first five years, but only about 20% in the next five years. That beats having to make payments on a new car. Sure, you'd have to drive an older car. But, if you save the money you didn't spend on a new car, you'd have a larger net worth. Considering the price of a new car today (on average, something like $28,000), we aren't talking about pocket change. There's nothing wrong with driving an eight-year old car, especially if you have a better retirement as a result.
Smart spending means buying high quality, long lasting goods, and maintaining them carefully. Do this as a way of life and the money you save can go a long way to building wealth.
Consumer goods depreciate in value. They do not build wealth. Cars, furniture, TVs, entertainment equipment, computers, sports equipment, home furnishings, clothes, shoes, appliances, backyard grills, and lawn tractors all lose value over time. It's fair to say that the average American household contains a great big mass of depreciating goods that detract from one's ability to build wealth. And consumption items like cable TV, restaurant meals, pet grooming services, and $200 haircuts have no monetary value after you buy them. Of course, you have to buy some consumer goods and services to live in today's world. Heaven forbid that you should be unable to watch the shows that everyone else is talking about. Maybe you work hard and feel you deserve nice things. Okay. How about a nice big retirement portfolio?
Limiting the amounts you spend on depreciating goods allows you to invest more money in appreciating assets. You'll have less of a sinking feeling about your finances if you spend smart and invest more.
June 24, 2007 Answer to Comment Below: your debt-to-income ratio should not, if you are prudent, exceed approximately 35% of pre-tax income. This ratio is commonly recognized in the United States, and the figure for residents of other nations may be different because of differing tax and social welfare systems.
A new car loses value the minute you drive it off the dealer's lot. In the first three years of their lives, many cars lose half their value. After five years, the total loss might be 70%. If you buy a new car every five years, you will lose up to 70% of the value of the car every five years.
But if you buy a new car and keep it for ten years, you'll lose around 70% of the value in the first five years, but only about 20% in the next five years. That beats having to make payments on a new car. Sure, you'd have to drive an older car. But, if you save the money you didn't spend on a new car, you'd have a larger net worth. Considering the price of a new car today (on average, something like $28,000), we aren't talking about pocket change. There's nothing wrong with driving an eight-year old car, especially if you have a better retirement as a result.
Smart spending means buying high quality, long lasting goods, and maintaining them carefully. Do this as a way of life and the money you save can go a long way to building wealth.
Consumer goods depreciate in value. They do not build wealth. Cars, furniture, TVs, entertainment equipment, computers, sports equipment, home furnishings, clothes, shoes, appliances, backyard grills, and lawn tractors all lose value over time. It's fair to say that the average American household contains a great big mass of depreciating goods that detract from one's ability to build wealth. And consumption items like cable TV, restaurant meals, pet grooming services, and $200 haircuts have no monetary value after you buy them. Of course, you have to buy some consumer goods and services to live in today's world. Heaven forbid that you should be unable to watch the shows that everyone else is talking about. Maybe you work hard and feel you deserve nice things. Okay. How about a nice big retirement portfolio?
Limiting the amounts you spend on depreciating goods allows you to invest more money in appreciating assets. You'll have less of a sinking feeling about your finances if you spend smart and invest more.
June 24, 2007 Answer to Comment Below: your debt-to-income ratio should not, if you are prudent, exceed approximately 35% of pre-tax income. This ratio is commonly recognized in the United States, and the figure for residents of other nations may be different because of differing tax and social welfare systems.
Monday, April 23, 2007
Tawdry Affairs with Money
Maybe you've done this. You met up with some money and went to town. There were expensive dinners, Broadway shows, hoppin' nightclubs, weekend getaways, luxurious hotels, and limousines. Champagne flowed. Caviar was served day and night. Diamonds, pearls, and jewel-encrusted watches--nothing was too good. You had a great time with the money, a wild time. You were beautiful. You were hot. You and the money had a terrific fling.
And then the money ran out on you. Evaporated. You learned what it was like to wake with a crick in your neck from sleeping in your car. You were wrung out, drained, hung over. With the money gone, meals were cheap and delivered fast; but the service wasn't quite the same. Limos drove by without stopping, and you spent your weekends in the park. You didn't have the price of a newspaper in your pocket, and you made the credit card company's "most wanted" list.
If you've had experiences like this, you could have a relationship problem with money. Even in America, the free enterprise capital of the world, not everyone likes having money. Some feel they don't deserve it. Others think it's wrong to have money. Successful people whose siblings and friends haven't done as well might be uncomfortable with their success, and feel cut off from long time relationships. Yet others spend to escape their problems.
If you have trouble saving, or if you have a tendency to spend, give away or otherwise separate yourself from money, ask yourself whether you might have poor relationship with money. You need the stuff to provide for your future. You don't have to like it. You don't have to crave it or enjoy having it. But you should establish an emotional truce with money so that you can get on with the business of preparing for your retirement. Perhaps you can find a therapist or psychologist to help. Perhaps talking to friends or family might help. But don't ignore the problem.
Every tawdry affair you have with money burns up some of the finite lifetime income that you should save for retirement. For most people, wealth comes from a process of gradual accumulation. A steady, long term relationship with money provides the foundation for building wealth. It may not have the passion and intensity of a fling, but many of the best things in life come from long, enduring relationships.
And then the money ran out on you. Evaporated. You learned what it was like to wake with a crick in your neck from sleeping in your car. You were wrung out, drained, hung over. With the money gone, meals were cheap and delivered fast; but the service wasn't quite the same. Limos drove by without stopping, and you spent your weekends in the park. You didn't have the price of a newspaper in your pocket, and you made the credit card company's "most wanted" list.
If you've had experiences like this, you could have a relationship problem with money. Even in America, the free enterprise capital of the world, not everyone likes having money. Some feel they don't deserve it. Others think it's wrong to have money. Successful people whose siblings and friends haven't done as well might be uncomfortable with their success, and feel cut off from long time relationships. Yet others spend to escape their problems.
If you have trouble saving, or if you have a tendency to spend, give away or otherwise separate yourself from money, ask yourself whether you might have poor relationship with money. You need the stuff to provide for your future. You don't have to like it. You don't have to crave it or enjoy having it. But you should establish an emotional truce with money so that you can get on with the business of preparing for your retirement. Perhaps you can find a therapist or psychologist to help. Perhaps talking to friends or family might help. But don't ignore the problem.
Every tawdry affair you have with money burns up some of the finite lifetime income that you should save for retirement. For most people, wealth comes from a process of gradual accumulation. A steady, long term relationship with money provides the foundation for building wealth. It may not have the passion and intensity of a fling, but many of the best things in life come from long, enduring relationships.
Sunday, April 22, 2007
Driving Carzilla
Some people can't keep two nickels in their hands. They've never met a mall they didn't like. The shopping channels on cable TV beckon. Collecting rebate points on their credit cards feels better than earning interest on savings. Having a big screen TV feels better than having a big net worth. And a backyard grill that can roast a steer is worth having even when they can't afford a steer.
Serial spending undermines your ability to build wealth. It robs your future of the dollars needed to make retirement comfortable. While everyone needs to spend to survive, and also to enjoy life, when the spending becomes pathological, dog food looms as part of your retirement diet. You have only a finite amount of lifetime income and if you spend it as you earn it, none will be left to supplement Social Security in your "golden" years.
Do you really think people admire you when you're driving Carzilla? Maybe they'll envy you if you have the loudest speakers, the baddest rims and a navigation system that will guide you to the Moon. But remember that envy is the first cousin of dislike.
Don't buy something simply because you can pay for it. If you use a credit card to buy a suit, and then make just the minimum monthly payments, you could be paying for that suit 10 years after you donate it to charity. Ask yourself whether something is really worth the money before buying it. Savings have value, too. So does sleep, which comes easier if you're not bouncing checks.
Spend sensibly. Save part of your income. Ignore people who measure you by how much stuff you have. They won't support you in your old age. If you have to supersize something, supersize your wealth.
Serial spending undermines your ability to build wealth. It robs your future of the dollars needed to make retirement comfortable. While everyone needs to spend to survive, and also to enjoy life, when the spending becomes pathological, dog food looms as part of your retirement diet. You have only a finite amount of lifetime income and if you spend it as you earn it, none will be left to supplement Social Security in your "golden" years.
Do you really think people admire you when you're driving Carzilla? Maybe they'll envy you if you have the loudest speakers, the baddest rims and a navigation system that will guide you to the Moon. But remember that envy is the first cousin of dislike.
Don't buy something simply because you can pay for it. If you use a credit card to buy a suit, and then make just the minimum monthly payments, you could be paying for that suit 10 years after you donate it to charity. Ask yourself whether something is really worth the money before buying it. Savings have value, too. So does sleep, which comes easier if you're not bouncing checks.
Spend sensibly. Save part of your income. Ignore people who measure you by how much stuff you have. They won't support you in your old age. If you have to supersize something, supersize your wealth.
The Perils of Dog Food in Your Diet; or, Economize Now or Economize Later
An enduring American belief is the notion that you can always get a second chance. In an economy based on free enterprise, this is both advantageous and often true. But, when it comes to personal finance, you have to understand that your resources are finite. You will get a finite amount of income over the course of your life, and that will be it. If you're talented, hardworking and lucky, it might be a large finite amount. If you work a very long time, you can increase the amount. But, in the end, it will be finite. If you own a home, your home equity will almost surely grow over time. But it will grow only a finite amount. If you don't save some of your income, and if you borrow against all of your home equity, you'll have nothing except Social Security for retirement. What you spend today, you won't have in the future. The money may be well-spent, or not, but it will leave your life forever.
Your choices are economize now or economize later. If you can't bring yourself to economize now, you'll have to economize when your only income is Social Security. We all have excuses and reasons for not saving. But you won't be able to buy the blue plate special with excuses or reasons. Money is required.
Saving isn't a sacrifice. It's a choice. When you choose to save, you'll enjoy the money later, instead of immediately. Sacrifice isn't part of the equation. Saved money hasn't left your hands. It still belongs to you. Save enough, and you won't have to economize later.
We all know the stereotype of the retired and dog food: near the end of the month, a few days before Social Security payments arrive, you might observe an elderly person in a grocery store first look around to see who's watching and then load a few cans of the dog food on sale into a basket. If you don't cotton to the idea of dog food in your diet, build up your savings.
Recent news gives you even more reasons to save for retirement and avoid dog food in your diet. Pet owners are well-aware of a massive recall of pet foods because of apparent chemical contamination of wheat gluten, rice gluten and corn gluten used in the pet food. It's very bad that this gluten was contaminated. But what's also open to question is why the pet food manufacturers even included wheat, rice and corn gluten in the pet food at all. Does a cat patiently stalk wheat gluten? Will a blood hound track the scent of rice gluten? Have you ever seen a bunch of British people in red jackets and funny little hats on horseback ride after a pack of dogs relentlessly pursuing corn gluten? Why is this stuff there in the first place? Evidently, it may have something to do with the protein content of the pet food. But gluten isn't the only source of protein available. So, what's the reason or excuse for using gluten at all?
Here's the horror movie aspect of the gluten thing. If gluten is used in pet food, is there a possibility it might be used in human food? Well? Suspicion is starting to enter your mind. You were feeling outrage for your pet a moment ago, but now there's a worse feeling deep down in the gut. Perhaps, just perhaps . . . No. Don't get up. Don't go to the kitchen and start looking at the ingredients of the prepared foods in your cupboards and freezers. Please don't do it. Don't look. Stop. Stop. STTOOOPPPP!!!
Your choices are economize now or economize later. If you can't bring yourself to economize now, you'll have to economize when your only income is Social Security. We all have excuses and reasons for not saving. But you won't be able to buy the blue plate special with excuses or reasons. Money is required.
Saving isn't a sacrifice. It's a choice. When you choose to save, you'll enjoy the money later, instead of immediately. Sacrifice isn't part of the equation. Saved money hasn't left your hands. It still belongs to you. Save enough, and you won't have to economize later.
We all know the stereotype of the retired and dog food: near the end of the month, a few days before Social Security payments arrive, you might observe an elderly person in a grocery store first look around to see who's watching and then load a few cans of the dog food on sale into a basket. If you don't cotton to the idea of dog food in your diet, build up your savings.
Recent news gives you even more reasons to save for retirement and avoid dog food in your diet. Pet owners are well-aware of a massive recall of pet foods because of apparent chemical contamination of wheat gluten, rice gluten and corn gluten used in the pet food. It's very bad that this gluten was contaminated. But what's also open to question is why the pet food manufacturers even included wheat, rice and corn gluten in the pet food at all. Does a cat patiently stalk wheat gluten? Will a blood hound track the scent of rice gluten? Have you ever seen a bunch of British people in red jackets and funny little hats on horseback ride after a pack of dogs relentlessly pursuing corn gluten? Why is this stuff there in the first place? Evidently, it may have something to do with the protein content of the pet food. But gluten isn't the only source of protein available. So, what's the reason or excuse for using gluten at all?
Here's the horror movie aspect of the gluten thing. If gluten is used in pet food, is there a possibility it might be used in human food? Well? Suspicion is starting to enter your mind. You were feeling outrage for your pet a moment ago, but now there's a worse feeling deep down in the gut. Perhaps, just perhaps . . . No. Don't get up. Don't go to the kitchen and start looking at the ingredients of the prepared foods in your cupboards and freezers. Please don't do it. Don't look. Stop. Stop. STTOOOPPPP!!!
Friday, April 20, 2007
Love in a Time of Financial Planning, Part Deux
In our preceding blog, we explained the value of compounding your investment returns to make your net worth grow in ever-increasing amounts. We pointed out that if you love compounding, compounding will love you. In this blog, we will discuss another aspect of love in the world of financial planning: namely, love.
If you stay together with your significant other, the two of you will have much more financial strength than you'd have separately. Very few people have storybook lives, in which they work for 40 years straight with ever rising incomes and then collect the gold retirement watch on their way to a Gold Coast penthouse apartment. Most people have ups and downs, periods of employment and periods of unemployment. During their working years, two people together can support and help each other. If one becomes unemployed or ill, the other can support the household until the first recovers and resumes working. As the two of them of ride through the ups and downs of life together, they stay on a much more even financial keel than they would separately.
The same remains true in retirement. Consider this example: each of you is eligible to collect $15,000 from Social Security and has $250,000 saved up in retirement and other accounts. We'll assume that neither of you has a pension (which is increasingly the case). A conventional financial rule of thumb is that, if you retire around 65 and want to make your savings last for the remainder of your life, you can spend 4% of your savings per year, adjusting annually for inflation. Thus, each of you would be able to withdraw $10,000 from your savings the first year of your retirement. Add that to your $15,000 from Social Security and you'd have $25,000 apiece. If you're living alone, that's enough to be okay, but not more. If you are together, you'd have a combined income of $50,000, enough to be solidly middle class (except maybe in a few high cost cities on the East and West Coasts).
The idea of staying together for financial reasons conjures up images from yesteryear of bedraggled housewives economically locked into loveless marriages with slovenly loutish pigs who never tucked in their shirts, drank cheap beer by the case, watched TV all day, filled their homes with the acrid smoke of nickel cigars, and demanded to be served from dawn til dusk. That's not what we're talking about. In some instances, no relationship is better than a bad relationship, regardless of the financial impact. And a relationship based only on money isn't likely to last. But you have a lot of reasons to make your special relationship work, and increased financial strength is one of them. Much of love involves sharing and giving, and love in a time of financial planning benefits both of you.
If you stay together with your significant other, the two of you will have much more financial strength than you'd have separately. Very few people have storybook lives, in which they work for 40 years straight with ever rising incomes and then collect the gold retirement watch on their way to a Gold Coast penthouse apartment. Most people have ups and downs, periods of employment and periods of unemployment. During their working years, two people together can support and help each other. If one becomes unemployed or ill, the other can support the household until the first recovers and resumes working. As the two of them of ride through the ups and downs of life together, they stay on a much more even financial keel than they would separately.
The same remains true in retirement. Consider this example: each of you is eligible to collect $15,000 from Social Security and has $250,000 saved up in retirement and other accounts. We'll assume that neither of you has a pension (which is increasingly the case). A conventional financial rule of thumb is that, if you retire around 65 and want to make your savings last for the remainder of your life, you can spend 4% of your savings per year, adjusting annually for inflation. Thus, each of you would be able to withdraw $10,000 from your savings the first year of your retirement. Add that to your $15,000 from Social Security and you'd have $25,000 apiece. If you're living alone, that's enough to be okay, but not more. If you are together, you'd have a combined income of $50,000, enough to be solidly middle class (except maybe in a few high cost cities on the East and West Coasts).
The idea of staying together for financial reasons conjures up images from yesteryear of bedraggled housewives economically locked into loveless marriages with slovenly loutish pigs who never tucked in their shirts, drank cheap beer by the case, watched TV all day, filled their homes with the acrid smoke of nickel cigars, and demanded to be served from dawn til dusk. That's not what we're talking about. In some instances, no relationship is better than a bad relationship, regardless of the financial impact. And a relationship based only on money isn't likely to last. But you have a lot of reasons to make your special relationship work, and increased financial strength is one of them. Much of love involves sharing and giving, and love in a time of financial planning benefits both of you.
Thursday, April 19, 2007
Love in a Time of Financial Planning, Part 1
We're not talking about a decades-long romance. We're talking about a decades-long process in financial planning that is crucial to understand. Because it involves a lot of money--and we mean a lot--it's something you would grow to love as you learn more about it. We're talking about the compounding of investment returns.
Compounding of investment returns simply means reinvesting the interest, dividends, capital gains and other profits from an investment. For example, assume you have $10,000 invested and receive a 5% gain each year, or $500. If you spend the $500 on lifestyle enhancement, your return every year will remain $500. But if you reinvest the the $500, look at what happens: (a) in year 2 of the investment, you'll have $10,500 invested (i.e., the original $10,000 plus the $500 return for year 1), which yields a return of $525; (b) in year 3, you'll have $11,025 invested ($10,500 from year 2, plus the reinvested $525 return from that year), which yields a return of $551.25; and (c) in year 4, you'll have $11,576.25 invested ($11,025 from year 3, plus the reinvested $551.25 return from that year), which yields a return of $578.81. As you can see, the process of compounding increases both your invested total and each year's returns. Over time, they grow by ever-increasing amounts. That's the heart of the process of compounding: you'll get more over time, which will help you get even more in the future. In other words, the more you love compounding, the more compounding will love you.
If this investment compounds for 30 years, it will reach a total of about $43,000. If it compounds for 40 years, it will reach a total of about $70,000. If you don't compound, the investment will remain at $10,000. That doesn't build wealth.
Compounding allows you to plant a money seed and watch it grow over time. Even a relatively small seed like $10,000 grows to $70,000 in the example above (which assumes a modest 5% annual rate of return). There is the question of inflation. Assuming that inflation stays at its long term historical rate of approximately 3% per year, the $70,000 will be worth about $20,000 in today's dollars. Not impressive, you think. But consider what happens if you don't compound: the original $10,000 becomes equivalent to about $3,000. Whatever inflation does to compounding, its effect is far worse if you don't compound.
Compounding is one of the most powerful tools an investor has, and it's available to everyone. You don't have to have an MBA or be a favored customer of a Wall Street firm to be able to compound. Anyone who saves and invests can compound. Any time you put some money in a bank account, money market fund, or mutual fund, make sure you reinvest the interest, dividends and other gains. Remember, if you love compounding, compounding will love you.
Our next blog will continue the discussion of love in a time of financial planning.
Compounding of investment returns simply means reinvesting the interest, dividends, capital gains and other profits from an investment. For example, assume you have $10,000 invested and receive a 5% gain each year, or $500. If you spend the $500 on lifestyle enhancement, your return every year will remain $500. But if you reinvest the the $500, look at what happens: (a) in year 2 of the investment, you'll have $10,500 invested (i.e., the original $10,000 plus the $500 return for year 1), which yields a return of $525; (b) in year 3, you'll have $11,025 invested ($10,500 from year 2, plus the reinvested $525 return from that year), which yields a return of $551.25; and (c) in year 4, you'll have $11,576.25 invested ($11,025 from year 3, plus the reinvested $551.25 return from that year), which yields a return of $578.81. As you can see, the process of compounding increases both your invested total and each year's returns. Over time, they grow by ever-increasing amounts. That's the heart of the process of compounding: you'll get more over time, which will help you get even more in the future. In other words, the more you love compounding, the more compounding will love you.
If this investment compounds for 30 years, it will reach a total of about $43,000. If it compounds for 40 years, it will reach a total of about $70,000. If you don't compound, the investment will remain at $10,000. That doesn't build wealth.
Compounding allows you to plant a money seed and watch it grow over time. Even a relatively small seed like $10,000 grows to $70,000 in the example above (which assumes a modest 5% annual rate of return). There is the question of inflation. Assuming that inflation stays at its long term historical rate of approximately 3% per year, the $70,000 will be worth about $20,000 in today's dollars. Not impressive, you think. But consider what happens if you don't compound: the original $10,000 becomes equivalent to about $3,000. Whatever inflation does to compounding, its effect is far worse if you don't compound.
Compounding is one of the most powerful tools an investor has, and it's available to everyone. You don't have to have an MBA or be a favored customer of a Wall Street firm to be able to compound. Anyone who saves and invests can compound. Any time you put some money in a bank account, money market fund, or mutual fund, make sure you reinvest the interest, dividends and other gains. Remember, if you love compounding, compounding will love you.
Our next blog will continue the discussion of love in a time of financial planning.
Wednesday, April 18, 2007
The Secret to Building Wealth
Never go for a get rich quick scheme. It's probably a scam. Even if it's not a scam, chances are it's a high-risk long shot that won't pay off. If you need a quick fix for your gambling jones, buy a lottery ticket. You'll probably lose, but at least your money goes to a deserving purpose like public education.
There is, however, a secret to building wealth: keep track of your net worth. In other words, know how much you have. It's the baseline reference point for your financial plan. You can't be sure that you're increasing your wealth if you don't know how much you have.
Maybe you think this is obvious. Maybe you aren't worried because you faithfully put 10% of your salary into a 401(k) account (and, if you're lucky, get an employer match of 2, 3, or 4% of your income). If you're really diligent about saving, maybe you put away some more money in an IRA or in the stock market. But is it really that simple?
Are you running up your credit card balances in order to maintain lifestyle even while you save? Are you tapping into your home equity for your next car? Has your home equity dropped with the recent slowdown in the real estate market? If so, your net worth could be shrinking even though you are building up your retirement accounts. You can figure out if this is happening by calculating your net worth regularly. Knowledge is power. When your level of wealth is backsliding, you can get back on track by increasing the amount you save or easing up on spending.
Net worth is the value of your assets minus the amount of your debts. For retirement purposes, count only assets that contribute to long term financial security. In other words, count things like cash, mutual funds, stocks, bonds and home equity. Don't count things like cars, furniture, clothing and appliances; they depreciate in value and won't add to your retirement savings. But count all of your debts, including debts incurred to buy cars, furniture, clothing and appliances, because all of your debts have to be repaid.
Calculate your net worth at least once every three months. January 1, April 1, July 1 and October 1 are good times to give yourself a financial checkup. If you haven't been keeping track of your net worth, don't be surprised if the first time you do the calculations it turns out to be negative. That's especially likely if you're young and still saddled with school debts and the expenses of starting out in full-time employment. Whatever the number is, don't be discouraged. It's important to know where you stand and to move forward from there. Indeed, the mere fact of determining your net worth will motivate you to improve. That's why it's the secret to building wealth.
For more ideas about building wealth, please go to http://fundszine.com/93-investing-for-simple-people-2-miscellaneous/.
There is, however, a secret to building wealth: keep track of your net worth. In other words, know how much you have. It's the baseline reference point for your financial plan. You can't be sure that you're increasing your wealth if you don't know how much you have.
Maybe you think this is obvious. Maybe you aren't worried because you faithfully put 10% of your salary into a 401(k) account (and, if you're lucky, get an employer match of 2, 3, or 4% of your income). If you're really diligent about saving, maybe you put away some more money in an IRA or in the stock market. But is it really that simple?
Are you running up your credit card balances in order to maintain lifestyle even while you save? Are you tapping into your home equity for your next car? Has your home equity dropped with the recent slowdown in the real estate market? If so, your net worth could be shrinking even though you are building up your retirement accounts. You can figure out if this is happening by calculating your net worth regularly. Knowledge is power. When your level of wealth is backsliding, you can get back on track by increasing the amount you save or easing up on spending.
Net worth is the value of your assets minus the amount of your debts. For retirement purposes, count only assets that contribute to long term financial security. In other words, count things like cash, mutual funds, stocks, bonds and home equity. Don't count things like cars, furniture, clothing and appliances; they depreciate in value and won't add to your retirement savings. But count all of your debts, including debts incurred to buy cars, furniture, clothing and appliances, because all of your debts have to be repaid.
Calculate your net worth at least once every three months. January 1, April 1, July 1 and October 1 are good times to give yourself a financial checkup. If you haven't been keeping track of your net worth, don't be surprised if the first time you do the calculations it turns out to be negative. That's especially likely if you're young and still saddled with school debts and the expenses of starting out in full-time employment. Whatever the number is, don't be discouraged. It's important to know where you stand and to move forward from there. Indeed, the mere fact of determining your net worth will motivate you to improve. That's why it's the secret to building wealth.
For more ideas about building wealth, please go to http://fundszine.com/93-investing-for-simple-people-2-miscellaneous/.
Monday, April 16, 2007
Why Uncle Leo Rumbles
After retiring, Uncle Leo was faced with the problem of too much time on his hands. Idleness led to all sorts of bad things, like: (a) actually watching daytime TV; (b) spending a lot of time cleaning cat litter boxes; (c) increased access to free food samples in supermarkets; (d) unbidden thoughts of participating in fantasy sports; (e) fewer excuses to avoid eating five servings of fruits and vegetables a day; (f) enough time to exercise; (g) discovering how late in the day the mail is delivered; and (h) taking mid-day naps on one's own time instead of an employer's. Faced with a future of more reruns, litter boxes, samples of fried kielbasa, exercise, fruits, vegetables, and unpaid naps, Uncle Leo sought refuge in blogging. Drawing on his career in the SEC's Division of Enforcement pursuing knaves, scoundrels and rapscallions in the stock markets and corporate America, Uncle Leo created this blog to make it easier for ordinary folks to save and invest for their retirements and for college expenses.
Saving for retirement seems difficult because you have to plan 30 or 40 years into the future. Many of us don't know where we'll be a year from now, so how can we plan decades ahead? To make things worse, financial planning, with its jargon and technicalities, can be confusing and intimidating. Often you have pay hundreds of dollars or more to get financial planning information.
At the same time, pensions are disappearing faster than rich folks left New Orleans before Katrina and Social Security has made so many head fakes toward the edge of a cliff that you start to wonder when it will take the plunge. So how will you provide for your retirement? Rich folks like to marry other rich folks, so that's not a high percentage play. Your back tends to stiffen as you get older, so dumpster diving isn't a great alternative. And the high levels of homelessness mean that the good panhandling spots are already taken. About the only option left is to save and invest.
Saving and investing are the primary subjects of this blog. We will take you through the process, step by step, in future blogs. If you have less than $100,000 in investable assets (meaning assets like stocks, bonds and cash, but excluding the equity in your home), you will find that many financial planners won't take you on as clients. You just don't have enough money to make it worth their while. But we provide our financial planning information free of charge to help ordinary savers and investors get started. It costs you nothing to stay with us, and maybe you'll learn something you didn't know. Of course, you can always pay for financial planning information if you want. Maybe you believe that anything that's free is worth what you paid for it (in which case you must believe that the Internet and its enormous resources are worthless). If you buy a financial plan, however, consider using us as a second opinion. Preparing for retirement is likely to be one of the biggest financial undertakings of your life, and getting a second opinion may well be valuable.
Saving for retirement seems difficult because you have to plan 30 or 40 years into the future. Many of us don't know where we'll be a year from now, so how can we plan decades ahead? To make things worse, financial planning, with its jargon and technicalities, can be confusing and intimidating. Often you have pay hundreds of dollars or more to get financial planning information.
At the same time, pensions are disappearing faster than rich folks left New Orleans before Katrina and Social Security has made so many head fakes toward the edge of a cliff that you start to wonder when it will take the plunge. So how will you provide for your retirement? Rich folks like to marry other rich folks, so that's not a high percentage play. Your back tends to stiffen as you get older, so dumpster diving isn't a great alternative. And the high levels of homelessness mean that the good panhandling spots are already taken. About the only option left is to save and invest.
Saving and investing are the primary subjects of this blog. We will take you through the process, step by step, in future blogs. If you have less than $100,000 in investable assets (meaning assets like stocks, bonds and cash, but excluding the equity in your home), you will find that many financial planners won't take you on as clients. You just don't have enough money to make it worth their while. But we provide our financial planning information free of charge to help ordinary savers and investors get started. It costs you nothing to stay with us, and maybe you'll learn something you didn't know. Of course, you can always pay for financial planning information if you want. Maybe you believe that anything that's free is worth what you paid for it (in which case you must believe that the Internet and its enormous resources are worthless). If you buy a financial plan, however, consider using us as a second opinion. Preparing for retirement is likely to be one of the biggest financial undertakings of your life, and getting a second opinion may well be valuable.
Saturday, April 14, 2007
Dawn at the Den
The earliest rays of morning light slip into the Den, gossamer threads brushing over the dark hues of night. Uncle Leo rolls over and tries to keep on sleeping. But the four-legged denizens pace impatiently, tails swishing, ready to eat. They have had a long wait during the hours of darkness. One of them jumps on top of Uncle Leo, pogo-stick paws jabbing and pushing. He-who-would-sleep is forced to his feet and into the kitchen. With eyelids drooping, Uncle Leo reaches for bowls and cans. He wants to think about how to use the Den to help people save money and build wealth. But, first, the beasts must be fed.
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