Showing posts with label building wealth. Show all posts
Showing posts with label building wealth. Show all posts
Sunday, August 5, 2018
To Manage Your Money, Manage Your Emotions
Building up your wealth is simple: spend less than you get. But it's hard for many people even though it's simple. Put a little money in their hands and it's gone as quick as a flash. Put a lot of money in their hands and it's gone quicker than a flash. This is no way to get rich. If you spend everything you get, how will you put together a down payment for a house, college costs for your kid(s), or retirement? Sometimes, you can borrow. But loans have to be repaid, so you'll enrich banks, not yourself. Retirement on just Social Security can be okay--if you move to Panama or Cambodia, places where your only option may be McDonald's if you want a taste of America.
Controlling your spending is the first and most important step to building wealth. Don't begin by reading the vast array of materials that discuss how to invest. It doesn't matter how you make money investing in ETFs, mutual funds, S&P 500 futures contracts, or covered stock options if you don't have any capital to invest.
First, learn how to save. This means getting control over your emotions. Learn how to deny yourself immediate gratification. Learn how to value long term rewards. Learn how to ignore the latest trends. Learn that keeping up with the neighbors could mean you're just as foolish as the neighbors. Aside from basic spending for food, shelter, clothing and transportation, essentially all spending decisions are driven by emotion. The latest smart phone? Designer clothes and accessories? The trendiest restaurant? A luxury nameplate on your car? An extra 500 square feet in your house? These things are marketed to people with impulse control problems. Status won't give you a comfortable retirement. You need money for that.
You've probably seen the news stories reporting that half of all Americans have no retirement savings and most of the rest don't have very much. How could this be when America is one of the wealthiest nations in the world? The hard truth is most people don't have the emotional composition to get rich. And they don't have the willpower to get control over their emotions enough to begin the process of saving. Sure, an illness or layoff can wreck your financial plans. But they're not an excuse not to try. If you don't try, you'll fail for sure. Those who try actually succeed in many cases. Give yourself a chance. Get control over your spending impulses and save. The only people who laugh all the way to the bank are people who have money to deposit in the bank.
For more, see (a) http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html; (b) http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html; (c) http://blogger.uncleleosden.com/2011/01/hope-for-financially-lost.html; (d) http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html; (e) http://blogger.uncleleosden.com/2011/03/how-to-avoid-running-out-of-money-in.html; and (f) http://blogger.uncleleosden.com/2010/11/how-much-do-you-need-for-retirement.html.
Thursday, April 27, 2017
The Truth About Getting Rich
Wealth is relative. That is, people tend to consider themselves wealthy by comparing themselves to those around them. The fact that most people today live healthier, longer and more comfortable lives than King Henry the Eighth is irrelevant to them. They care more about where they stand compared to the people next door or the colleague across the hall or the persons featured in today's news.
This means you can feel rich only if you have more wealth than others around you. That, in turn, means you have to be different from most people. You can't be just like everyone else and yet be wealthier than everyone else. But if you see yourself as just an ordinary, middle class person, does that mean you haven't got a chance to be wealthy?
No. You can be wealthy. While some wealthy people inherit their riches, most millionaires get there on their own by saving more. It helps if you earn more. You'll have more money to work with. But earning more helps only if you save more. If you spend all your above average earnings, expect to dine on dog food in your retirement.
You have to resist temptation to spend. An 856 inch big-screen TV and a 4,300 horsepower SUV won't make you wealthy. The same goes for $700 shoes and $1,200 handbags. You have to be comfortable with fewer European vacations and plenty of home cooking. When people laugh at your frugal ways, you have to focus on getting the last laugh.
Most people won't make it. They won't become wealthy. That's inherent in the definition of wealth as a relative concept, and it's also a result of the human tendency toward conformity and group think. But plenty of middle class people end up having comfortable retirements or better. In part, that's because of social welfare programs like Social Security and Medicare. But these programs alone don't provide a good retirement. You must be responsible and save.
What to do? It's not complicated. The main thing is save early, often and in significant amounts, like 15% to 20% of your income. Invest in a diversified portfolio to increase your chances for good long term returns. (See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html.) There are a variety of ways to build up your wealth: http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html. Look at each dollar you receive as a saving opportunity. Remember that no matter how much money you make, in the end you will have a finite income (we all do), and what you spend can't be retrieved. It's gone. So don't waste that opportunity to save (see http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html). Avoid debt as much as possible (see http://blogger.uncleleosden.com/2010/07/why-you-should-avoid-debt.html). Don't give up, even if you have financial setbacks. Like so many other things in life, quitters aren't winners when it comes to building wealth.
You can have a somewhat decent retirement even if you don't save much, by building up your benefits and eliminating debt. (See http://blogger.uncleleosden.com/2011/01/hope-for-financially-lost.html). But if you want to climb into the ranks of the wealthy, be different.
This means you can feel rich only if you have more wealth than others around you. That, in turn, means you have to be different from most people. You can't be just like everyone else and yet be wealthier than everyone else. But if you see yourself as just an ordinary, middle class person, does that mean you haven't got a chance to be wealthy?
No. You can be wealthy. While some wealthy people inherit their riches, most millionaires get there on their own by saving more. It helps if you earn more. You'll have more money to work with. But earning more helps only if you save more. If you spend all your above average earnings, expect to dine on dog food in your retirement.
You have to resist temptation to spend. An 856 inch big-screen TV and a 4,300 horsepower SUV won't make you wealthy. The same goes for $700 shoes and $1,200 handbags. You have to be comfortable with fewer European vacations and plenty of home cooking. When people laugh at your frugal ways, you have to focus on getting the last laugh.
Most people won't make it. They won't become wealthy. That's inherent in the definition of wealth as a relative concept, and it's also a result of the human tendency toward conformity and group think. But plenty of middle class people end up having comfortable retirements or better. In part, that's because of social welfare programs like Social Security and Medicare. But these programs alone don't provide a good retirement. You must be responsible and save.
What to do? It's not complicated. The main thing is save early, often and in significant amounts, like 15% to 20% of your income. Invest in a diversified portfolio to increase your chances for good long term returns. (See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html.) There are a variety of ways to build up your wealth: http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html. Look at each dollar you receive as a saving opportunity. Remember that no matter how much money you make, in the end you will have a finite income (we all do), and what you spend can't be retrieved. It's gone. So don't waste that opportunity to save (see http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html). Avoid debt as much as possible (see http://blogger.uncleleosden.com/2010/07/why-you-should-avoid-debt.html). Don't give up, even if you have financial setbacks. Like so many other things in life, quitters aren't winners when it comes to building wealth.
You can have a somewhat decent retirement even if you don't save much, by building up your benefits and eliminating debt. (See http://blogger.uncleleosden.com/2011/01/hope-for-financially-lost.html). But if you want to climb into the ranks of the wealthy, be different.
Thursday, May 7, 2015
The Zen of Investing
How do you allocate your investment funds in times like these? Stocks bound upwards for a couple of days when statistical data indicates the economy is slowing or a Fed governor smiles. Then, the market nose dives crazily the next couple of days when oil prices rise or unemployment falls or another Fed governor frowns. Bonds slump and then surge, or surge and then slump when inflation expectations rise or fall. One constant in the financial markets is volatility. Another is unpredictability. And a third is no net gains--as in, for all the hysteria, stocks have hardly done squat this year.
The financial media is full of conflicting predictions--the market will boom, the market will crash--and conflicting advice--buy this, sell that, short the world and stock up on survivalist gear. To paraphrase former Fed Chairman Ben Bernanke, things are unusually uncertain.
At times like this, the best option may be to step back from the chaos and cleanse your mind of desire. At least, of desire for short term gains and avoidance of losses. It's impossible to make money all the time, or to avoid all loss. With entropy seemingly on the increase, any effort to make every day a good market day will have you believing six impossible things before breakfast and doing battle with windmills.
There's nothing wrong with holding cash, maybe even a lot of it. Cash is beautiful. A goodly amount in a federally insured bank account or U.S. Treasury debt promotes equanimity and sound sleep. You will smile more. There may be some who would argue that a fully invested, well-diversified, periodically rebalanced portfolio will provide better returns than a partially invested portfolio with a lot of cash. This may be true in theory, but an awful lot of investors don't have the nerve to stay the course with a fully invested portfolio through the periodic mania of the markets. They sell and freeze up, never again to invest, and potentially lose a great deal of future gains. All the nice theory in the world doesn't amount to diddly if you're too stressed to implement the theory. To maximize returns in real life, you have to be calm and unemotional. And if doing that takes having bundle of greenbacks under the mattress, then so be it. Don't feel the need to allocate every last dollar to something or other right away. Hold off on betting your last buck until you feel comfortable. Be zen, and increase your chances of becoming rich.
The financial media is full of conflicting predictions--the market will boom, the market will crash--and conflicting advice--buy this, sell that, short the world and stock up on survivalist gear. To paraphrase former Fed Chairman Ben Bernanke, things are unusually uncertain.
At times like this, the best option may be to step back from the chaos and cleanse your mind of desire. At least, of desire for short term gains and avoidance of losses. It's impossible to make money all the time, or to avoid all loss. With entropy seemingly on the increase, any effort to make every day a good market day will have you believing six impossible things before breakfast and doing battle with windmills.
There's nothing wrong with holding cash, maybe even a lot of it. Cash is beautiful. A goodly amount in a federally insured bank account or U.S. Treasury debt promotes equanimity and sound sleep. You will smile more. There may be some who would argue that a fully invested, well-diversified, periodically rebalanced portfolio will provide better returns than a partially invested portfolio with a lot of cash. This may be true in theory, but an awful lot of investors don't have the nerve to stay the course with a fully invested portfolio through the periodic mania of the markets. They sell and freeze up, never again to invest, and potentially lose a great deal of future gains. All the nice theory in the world doesn't amount to diddly if you're too stressed to implement the theory. To maximize returns in real life, you have to be calm and unemotional. And if doing that takes having bundle of greenbacks under the mattress, then so be it. Don't feel the need to allocate every last dollar to something or other right away. Hold off on betting your last buck until you feel comfortable. Be zen, and increase your chances of becoming rich.
Friday, May 16, 2014
Why You Should Invest Like the Smart Money
One characteristic of the investing strategies of the wealthy is to diversify. Stocks, bonds, money markets, real estate, alternative investments, collectibles, precious metals, jewelry, and so on are frequently found in the portfolios of the high net worth crowd. Diversifying is a way to win no matter what's going on with asset values, and the wealthy want to stay wealthy.
The 99% should do no different, and recent market activity illustrates why. Bond values have improbably risen in recent weeks, while stocks are stuck in a trading range right about where they started the year. Gold and silver went up earlier this year, but have slid back. Real estate ended 2013 with a roaring comeback, but now seems to have stalled out in many markets. International markets have delinked, with Asian markets generally falling over the past six months, while European markets have moved up slightly (Ukraine crisis notwithstanding). It would not have been easy to predict this mix of events. Indeed, it's rare to find financial analysts who predict much of anything right. Few predicted the 2007-08 financial crisis. Few predicted the 30% jump in stocks in 2013. Few predicted that bonds would rise this year.
The investing patterns of the smart money reveal that the smart move is to diversify. Don't look for a quick buck. You'll probably get a quick loss. Don't look to hit a home run with a single investment. The financial press may glamorize the few who manage to do that, but generally pays little attention to the many who fail. Don't try to predict the unpredictable. There are rare situations, like 2008-09, when all asset classes seem to be falling in value. That's what can happen when vast amounts of debt and other leverage enter the financial system in one-sided bets dependent on rising asset values. When that debt begins to lose value, the assets it was used to buy are at serious risk. But more typical is what we have today--a lot of uncertainty, but some of the uncertainty is about the upside and some about the downside. Most of the time, diversification is the best way to play your cards.
And if you're still unhappy about your net worth, save more. Whether the markets are doing well or badly, adding to your pool of capital will pay off in the long run.
The 99% should do no different, and recent market activity illustrates why. Bond values have improbably risen in recent weeks, while stocks are stuck in a trading range right about where they started the year. Gold and silver went up earlier this year, but have slid back. Real estate ended 2013 with a roaring comeback, but now seems to have stalled out in many markets. International markets have delinked, with Asian markets generally falling over the past six months, while European markets have moved up slightly (Ukraine crisis notwithstanding). It would not have been easy to predict this mix of events. Indeed, it's rare to find financial analysts who predict much of anything right. Few predicted the 2007-08 financial crisis. Few predicted the 30% jump in stocks in 2013. Few predicted that bonds would rise this year.
The investing patterns of the smart money reveal that the smart move is to diversify. Don't look for a quick buck. You'll probably get a quick loss. Don't look to hit a home run with a single investment. The financial press may glamorize the few who manage to do that, but generally pays little attention to the many who fail. Don't try to predict the unpredictable. There are rare situations, like 2008-09, when all asset classes seem to be falling in value. That's what can happen when vast amounts of debt and other leverage enter the financial system in one-sided bets dependent on rising asset values. When that debt begins to lose value, the assets it was used to buy are at serious risk. But more typical is what we have today--a lot of uncertainty, but some of the uncertainty is about the upside and some about the downside. Most of the time, diversification is the best way to play your cards.
And if you're still unhappy about your net worth, save more. Whether the markets are doing well or badly, adding to your pool of capital will pay off in the long run.
Tuesday, December 10, 2013
Barack Obama's Curious Redistribution Ideas
President Obama recently spoke critically of the gap between the rich and the poor. He has endorsed an increase in the federal minimum wage, from $7.25 up to $10.10. He has argued for stronger enforcement of the labor laws. He seeks universal pre-school.
Predictably, Republicans stood in opposition. More government spending isn't the answer, they contend. Economic growth is the tide that will lift all boats, they say.
Republicans, whether they are right or wrong, have nothing to worry about. Barack Obama, whatever he may say, isn't really serious about changing the distribution of income or wealth. He favors reducing the cost of living adjustment for the Social Security, military and federal retirement benefits that tens of millions of Americans depend on. Cutting back on retirement benefits worsens the distribution of income and wealth.
There were some federal tax increases that took effect this year. But the income tax increase on high level earners was accompanied by an increase in Social Security taxes (which are regressive). So what was the net effect? Most likely, very little or no redistribution.
The Affordable Care Act would have a redistributive effect because of its health insurance subsidies for low income participants. If only people could enroll . . . .
Barack Obama has serious credibility issues. He drew a line in the dust over the use of poison gas, and Assad stepped over it. Obama squirmed, complained, and then let the Russians broker a deal. He didn't have the management skills to implement his signature legislative achievement, the Affordable Care Act. He negotiated some sort of deal on nukes with Iran, although that deal seems to have implementation issues as well. As negotiators talk, Iran continues to enrich. If you're looking for action from the White House on redistribution of income or wealth, don't hold your breath. Keep saving and investing, because you're on your own.
Predictably, Republicans stood in opposition. More government spending isn't the answer, they contend. Economic growth is the tide that will lift all boats, they say.
Republicans, whether they are right or wrong, have nothing to worry about. Barack Obama, whatever he may say, isn't really serious about changing the distribution of income or wealth. He favors reducing the cost of living adjustment for the Social Security, military and federal retirement benefits that tens of millions of Americans depend on. Cutting back on retirement benefits worsens the distribution of income and wealth.
There were some federal tax increases that took effect this year. But the income tax increase on high level earners was accompanied by an increase in Social Security taxes (which are regressive). So what was the net effect? Most likely, very little or no redistribution.
The Affordable Care Act would have a redistributive effect because of its health insurance subsidies for low income participants. If only people could enroll . . . .
Barack Obama has serious credibility issues. He drew a line in the dust over the use of poison gas, and Assad stepped over it. Obama squirmed, complained, and then let the Russians broker a deal. He didn't have the management skills to implement his signature legislative achievement, the Affordable Care Act. He negotiated some sort of deal on nukes with Iran, although that deal seems to have implementation issues as well. As negotiators talk, Iran continues to enrich. If you're looking for action from the White House on redistribution of income or wealth, don't hold your breath. Keep saving and investing, because you're on your own.
Sunday, June 26, 2011
Traits That Lead to Financial Security
The road to financial security is pretty boring. Most people who have meaningful amounts of money got there by patiently saving and investing, month by month, year by year. There are some who had spectacular career success and hit it big with stock options. Others inherited their wealth. But the majority of the financially secure got the the point of perhaps facing estate taxes because, in part, of their personality traits. What are these traits?
Insecurity. Assiduous savers feel nervous if they don't have a healthy balance in their bank accounts. More than an award winning beer mug collection or a closet full of shoes, they want a lot of zeros to the left of the decimal point in their net worths. Why they feel insecure isn't that important. It could be that one or both parents were that way. It might stem from a financially unstable childhood. It could come from difficulties starting a career--hard times early in adulthood often instill lifelong caution. Whatever the reason, insecurity promotes saving.
Faith in the future. Paradoxically, perhaps, building wealth requires faith in the future. You have to believe that money you save today will be there ten, twenty, fifty or even more years from now. If you're insecure about the future, it might make sense to party now and eat dog food later. Having faith in the future doesn't mean you believe that there are magical, no lose investments. Never rely blindly on any particular asset or class of assets. Real estate, gold, stocks, the British pound, and the U.S. dollar have all waxed and waned. What you need is a belief that you'll find something worth investing in no matter what turns events take.
The ability to defer gratification. Success in almost anything requires the ability to defer gratification. Kids who do well in grade school not only are smart, but can forego playing in order to study and get As. Earning a college degree involves deferring the opportunity to earn money and enjoy life, while perhaps taking on a pile of debt, in order to have a higher income stream later in life. Career success often means giving up a lot of personal time early in one's working life, in order to build a solid foundation on which to progress professionally. And building wealth requires the ability to pass now on two-inch steaks, $100 bottles of wine, a luxury name plate on your car, designer brand names on your clothes, and an 86-inch TV, in order to have nice things later on.
Discipline. This is where things get really boring. The most reliable way to build wealth is to save early, often and relentlessly. This allows you to compound your earnings. Compounding is the investor's most powerful weapon (see http://blogger.uncleleosden.com/2009/09/if-you-love-compounding-compounding.html). A disciplined saver has a 4,368% greater chance of becoming well off than someone who is undisciplined.
We aren't talking about strategies or techniques. Always saving a portion of your paycheck, or assiduous use of retirement accounts can definitely make a difference in your financial well-being. (See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html, and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.) But you must have certain personality traits to execute the right strategies and techniques effectively. If you don't have them, you won't succeed. It's part of the American way to believe that you can change and improve yourself. If you don't have the right traits now, work to acquire them. You have a lot riding on the outcome.
Insecurity. Assiduous savers feel nervous if they don't have a healthy balance in their bank accounts. More than an award winning beer mug collection or a closet full of shoes, they want a lot of zeros to the left of the decimal point in their net worths. Why they feel insecure isn't that important. It could be that one or both parents were that way. It might stem from a financially unstable childhood. It could come from difficulties starting a career--hard times early in adulthood often instill lifelong caution. Whatever the reason, insecurity promotes saving.
Faith in the future. Paradoxically, perhaps, building wealth requires faith in the future. You have to believe that money you save today will be there ten, twenty, fifty or even more years from now. If you're insecure about the future, it might make sense to party now and eat dog food later. Having faith in the future doesn't mean you believe that there are magical, no lose investments. Never rely blindly on any particular asset or class of assets. Real estate, gold, stocks, the British pound, and the U.S. dollar have all waxed and waned. What you need is a belief that you'll find something worth investing in no matter what turns events take.
The ability to defer gratification. Success in almost anything requires the ability to defer gratification. Kids who do well in grade school not only are smart, but can forego playing in order to study and get As. Earning a college degree involves deferring the opportunity to earn money and enjoy life, while perhaps taking on a pile of debt, in order to have a higher income stream later in life. Career success often means giving up a lot of personal time early in one's working life, in order to build a solid foundation on which to progress professionally. And building wealth requires the ability to pass now on two-inch steaks, $100 bottles of wine, a luxury name plate on your car, designer brand names on your clothes, and an 86-inch TV, in order to have nice things later on.
Discipline. This is where things get really boring. The most reliable way to build wealth is to save early, often and relentlessly. This allows you to compound your earnings. Compounding is the investor's most powerful weapon (see http://blogger.uncleleosden.com/2009/09/if-you-love-compounding-compounding.html). A disciplined saver has a 4,368% greater chance of becoming well off than someone who is undisciplined.
We aren't talking about strategies or techniques. Always saving a portion of your paycheck, or assiduous use of retirement accounts can definitely make a difference in your financial well-being. (See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html, and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.) But you must have certain personality traits to execute the right strategies and techniques effectively. If you don't have them, you won't succeed. It's part of the American way to believe that you can change and improve yourself. If you don't have the right traits now, work to acquire them. You have a lot riding on the outcome.
Wednesday, January 26, 2011
Hope For the Financially Lost
Financial plans can be blown up because of job loss, illness, elderly parents who need support, or bad investments. Some people simply can't save. Whatever the situation, there remains hope for the financially lost to have at least a decent retirement.
Boost your benefits. Work as long as possible to build up Social Security and, if available, pension benefits. This is especially important for those that can't save. Even if you aren't working, delay taking Social Security benefits as long as you can (unless you're 70 or older). Delaying Social Security increases benefits. For more, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_02.html.
Stay together. Couples generally are better off than singles, because they can pool their resources. Even if their only resources are Social Security benefits, a couple are usually better off together than individually. Of course, togetherness isn't always possible. When it is, there are financial, as well as other, benefits. For more, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_03.html.
Get a job with a pension. Government, law enforcement, military and educational jobs usually offer a pension or other retirement plan. Although pension benefits in many state and municipal jobs are being adjusted to meet fiscal realities, they will still be better than nothing. Not everyone is cut out for these lines of work. If you find a private sector job with a pension, then try to stay there long enough to accrue meaningful benefits. For those who can't save, a pension is golden. You just have to work long enough to vest; saving isn't necessary. If you need assistance figuring out if the amount of pension benefits your employer promises is correct, contact the American Academy of Actuaries at http://www.actuary.org/palprogram.asp. They'll give you up to four hours of free help. If you think your benefits are too low, contact a regional pension counseling project for free assistance. http://www.pensionrights.org/counseling-projects.
Buy a house and pay off the mortgage. Buy a house, pay off the mortgage, and don't borrow against the house until you retire. This strategy will build equity in a piece of real estate that you can add to your Social Security benefits (and pension benefits, if any). Even though strategic defaults have become fashionable, the unfashionable may have an advantage in the long run.
None of these strategies will finance a yacht. Remember that it's never too late to save, even if you're living on just Social Security. Cash is sublime when times are tough.
Boost your benefits. Work as long as possible to build up Social Security and, if available, pension benefits. This is especially important for those that can't save. Even if you aren't working, delay taking Social Security benefits as long as you can (unless you're 70 or older). Delaying Social Security increases benefits. For more, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_02.html.
Stay together. Couples generally are better off than singles, because they can pool their resources. Even if their only resources are Social Security benefits, a couple are usually better off together than individually. Of course, togetherness isn't always possible. When it is, there are financial, as well as other, benefits. For more, see http://blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_03.html.
Get a job with a pension. Government, law enforcement, military and educational jobs usually offer a pension or other retirement plan. Although pension benefits in many state and municipal jobs are being adjusted to meet fiscal realities, they will still be better than nothing. Not everyone is cut out for these lines of work. If you find a private sector job with a pension, then try to stay there long enough to accrue meaningful benefits. For those who can't save, a pension is golden. You just have to work long enough to vest; saving isn't necessary. If you need assistance figuring out if the amount of pension benefits your employer promises is correct, contact the American Academy of Actuaries at http://www.actuary.org/palprogram.asp. They'll give you up to four hours of free help. If you think your benefits are too low, contact a regional pension counseling project for free assistance. http://www.pensionrights.org/counseling-projects.
Buy a house and pay off the mortgage. Buy a house, pay off the mortgage, and don't borrow against the house until you retire. This strategy will build equity in a piece of real estate that you can add to your Social Security benefits (and pension benefits, if any). Even though strategic defaults have become fashionable, the unfashionable may have an advantage in the long run.
None of these strategies will finance a yacht. Remember that it's never too late to save, even if you're living on just Social Security. Cash is sublime when times are tough.
Sunday, December 19, 2010
Year End Financial Checkup
Before you become too friendly with the nearest bowl of eggnog, give your finances a quick year end checkup. That way, you can roll into the new year hungover, perhaps, but with some idea of where you are financially and where you want to go. Admittedly, money issues bring less cheer than the bubbly stuff that makes the cork pop. Ignoring one's finances, though, won't lead to wealth.
A lot of year end financial advice focuses on tax planning or prognostications for next year. Like many things, though, a solid foundation in financial basics is more important than doing some transactions that invite an IRS audit or believing in the latest self-appointed soothsayer. Get the basics right and other things become easier.
Calculate your net worth. This is the where sound financial planning begins. If you don't know where you stand, you can't tell if you're making progress (or losing ground). If things are going well, you can give yourself a pat on the back. If not, save more and perhaps change what you're doing. Calculate your net worth every three months. For more, see http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Ensure adequate cash reserves. Make sure you have at least six months worth of living expenses set aside in an emergency cash fund that you never tap except during a crisis. Better yet, considering today's continuing albeit not-officially-recognized recession, have nine or twelve months of living expenses set aside. Unemployment remains a serious problem. Even though high ranking government officials are quick to tout even a tiny smidgen of improvement in employment levels, lots of people are still being laid off. Thrifty squirrels are the ones that survive winter.
Review portfolio diversification. Your portfolio's asset allocation may have changed as a result of market shifts. Most recently, bonds have been falling (contrary to every effort of the Federal Reserve to push them higher), while stocks have been rising. Consider whether you should adjust your allocations.
You may have different asset allocations for different pools of assets. The way you diversify a college fund for your kid(s) could be different from the ideal asset allocation for retirement savings. Keep these differences in mind.
Go over your benefits. Make sure you understand where you stand with Social Security and, if you have a pension, with your pension benefits. Maybe you don't believe either will be around by the time you retire. Well, people thought the same thing 30 and 40 years ago, and they're now retiring with Social Security and, sometimes, pension benefits. Figure out how to maximize your benefits. Then, maximize them as much as possible.
Review privacy. The Internet, by all indications, is becoming less private by the day. In an implicit but sharp rebuke to the private sector for its failure to display even a modicum of propriety, U.S. government regulators are now talking about setting federal standards for online privacy. Think about limiting your use of the Internet for financial matters (this includes banking, stock trading, online shopping and other online use of credit cards, debit cards, bank account numbers, and other financial transactions). The less often you do financial transactions on the Internet, the fewer opportunities you give bad guys to steal your money and/or identity. The Internet is unquestionably a convenience, but being robbed by cybercrooks can be highly inconvenient. If you must do transactions online, use the best security measures available.
A report in this weekend's Wall Street Journal (P. C1) indicates that smart phones (like the iPhone and Android) may be significantly less secure than computers. Apparently, some apps may sneak off with your name and other highly personal information without telling you or getting your permission. Avoid doing financial transactions on a smart phone, at least until security is greatly improved. If you must do financial transactions on your smart phone, check account balances and activity often. This means at least weekly and perhaps even daily for your bank accounts, credit card accounts and whatever accounts you use through your smart phone.
A cyberthief can make off with savings you took years to accumulate. Protect yourself.
Think about saving more. One of the best protections you have against an uncertain future is a nice, warm, fuzzy and large pool of savings. The more you save, the sooner you'll be able to retire and the nicer your retirement lifestyle will be. See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.
A lot of year end financial advice focuses on tax planning or prognostications for next year. Like many things, though, a solid foundation in financial basics is more important than doing some transactions that invite an IRS audit or believing in the latest self-appointed soothsayer. Get the basics right and other things become easier.
Calculate your net worth. This is the where sound financial planning begins. If you don't know where you stand, you can't tell if you're making progress (or losing ground). If things are going well, you can give yourself a pat on the back. If not, save more and perhaps change what you're doing. Calculate your net worth every three months. For more, see http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Ensure adequate cash reserves. Make sure you have at least six months worth of living expenses set aside in an emergency cash fund that you never tap except during a crisis. Better yet, considering today's continuing albeit not-officially-recognized recession, have nine or twelve months of living expenses set aside. Unemployment remains a serious problem. Even though high ranking government officials are quick to tout even a tiny smidgen of improvement in employment levels, lots of people are still being laid off. Thrifty squirrels are the ones that survive winter.
Review portfolio diversification. Your portfolio's asset allocation may have changed as a result of market shifts. Most recently, bonds have been falling (contrary to every effort of the Federal Reserve to push them higher), while stocks have been rising. Consider whether you should adjust your allocations.
You may have different asset allocations for different pools of assets. The way you diversify a college fund for your kid(s) could be different from the ideal asset allocation for retirement savings. Keep these differences in mind.
Go over your benefits. Make sure you understand where you stand with Social Security and, if you have a pension, with your pension benefits. Maybe you don't believe either will be around by the time you retire. Well, people thought the same thing 30 and 40 years ago, and they're now retiring with Social Security and, sometimes, pension benefits. Figure out how to maximize your benefits. Then, maximize them as much as possible.
Review privacy. The Internet, by all indications, is becoming less private by the day. In an implicit but sharp rebuke to the private sector for its failure to display even a modicum of propriety, U.S. government regulators are now talking about setting federal standards for online privacy. Think about limiting your use of the Internet for financial matters (this includes banking, stock trading, online shopping and other online use of credit cards, debit cards, bank account numbers, and other financial transactions). The less often you do financial transactions on the Internet, the fewer opportunities you give bad guys to steal your money and/or identity. The Internet is unquestionably a convenience, but being robbed by cybercrooks can be highly inconvenient. If you must do transactions online, use the best security measures available.
A report in this weekend's Wall Street Journal (P. C1) indicates that smart phones (like the iPhone and Android) may be significantly less secure than computers. Apparently, some apps may sneak off with your name and other highly personal information without telling you or getting your permission. Avoid doing financial transactions on a smart phone, at least until security is greatly improved. If you must do financial transactions on your smart phone, check account balances and activity often. This means at least weekly and perhaps even daily for your bank accounts, credit card accounts and whatever accounts you use through your smart phone.
A cyberthief can make off with savings you took years to accumulate. Protect yourself.
Think about saving more. One of the best protections you have against an uncertain future is a nice, warm, fuzzy and large pool of savings. The more you save, the sooner you'll be able to retire and the nicer your retirement lifestyle will be. See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.
Wednesday, September 22, 2010
Good News From the Forbes 400
In these populist times, the super-wealthy are hardly viewed positively. Many of them should not be. But the overall picture from this year's Forbes 400 (see http://www.forbes.com/wealth/forbes-400#p_3_s_arank_-1_) contains a measure of good news, especially when one looks at the top of the top: the Top 20. The wealthiest person in America is Bill Gates, a software guy, at $54 billion. The next wealthiest is Warren Buffet, an investments guy in Nebraska who's worth $45 billion. Third is Larry Ellison, worth $27 billion from working in the high tech industry. The wealthiest family in America, the Waltons, together worth about $84 billion, hold four places in the Top 20, primarily from their holdings in Walmart, a fairly well-known retailing company. Several other high tech people show up in the Top 20: Larry Page and Sergey Brin (of Google), Michael Dell (PCs), Steve Ballmer (computer software), Paul Allen (computer software), and Jeff Bezos (Internet retailing). Other people in the Top 20 provide news and data (Michael Bloomberg, who also dabbles in politics, and Anne Cox Chambers), or hold manufacturing and energy interests (Charles and David Koch).
It's heartening to note that only two of the Top 20, George Soros and John Paulson, are from Wall Street, and they're not part of the financial world's in-crowd. These two hedge fund guys may have made more money selling short than other ways. Many view them as renegades or outliers. But to their credit, neither of them has gotten a government bailout. They made their money the hard way, by taking a full measure of market risk and coming out smelling like roses. Wall Street's mainstream bankers, who float by these days on government-subsidized bonuses, don't begin to hold a candle to Soros and Paulson.
The good news is that a lot of wealth is still created through productive activities. This is essential for America's future. Wall Street dominates the business news, but the really, really wealthy for the most part didn't get there through financial shuffling and shenanigans. They made or provided useful things that other people wanted and needed. That's good for America's future. It's where government policies and private enterprise should be focused.
It's heartening to note that only two of the Top 20, George Soros and John Paulson, are from Wall Street, and they're not part of the financial world's in-crowd. These two hedge fund guys may have made more money selling short than other ways. Many view them as renegades or outliers. But to their credit, neither of them has gotten a government bailout. They made their money the hard way, by taking a full measure of market risk and coming out smelling like roses. Wall Street's mainstream bankers, who float by these days on government-subsidized bonuses, don't begin to hold a candle to Soros and Paulson.
The good news is that a lot of wealth is still created through productive activities. This is essential for America's future. Wall Street dominates the business news, but the really, really wealthy for the most part didn't get there through financial shuffling and shenanigans. They made or provided useful things that other people wanted and needed. That's good for America's future. It's where government policies and private enterprise should be focused.
Wednesday, November 11, 2009
Techniques for Retirement Saving
Technique matters a lot in tennis, golf, basketball and a host of other sports and activities. It also matters to investors. If a middle income American approaches investing--especially long term retirement saving--the right way, he or she can be hundreds of thousands of dollars better off when receiving the retirement watch, than someone's whose technique is poor. Here are a few basic pointers that can take you a long way.
Calculate your net worth regularly. Keeping score is essential. You have to know if you're making progress. You'll need to know when you're not making progress or losing ground, so you can take action to turn the tide. Knowledge can be painful in times of market downturns, but avoiding reality won't improve your retirement finances. You may or may not have a fixed saving goal. Having a goal is good, but not essential. See http://blogger.uncleleosden.com/2007/04/goals-for-retirement-saving-and-why.html. But it's essential to know where you stand. That knowledge alone will keep you focused on building wealth for the future. Calculate your net worth at least every three months. See http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Automate the saving process and use retirement accounts. Participate in any 401(k) or equivalent retirement plan your employer may offer. Maximize the amount you contribute. Some people think you might want to contribute only enough to get an employer match and then contribute to a Roth IRA; this isn't a bad idea but you have to be conscientious about the Roth contributions because they aren't necessarily automatic (read on for the solution to this problem). If you don't have access to an employer sponsored plan, open an IRA--or a Roth IRA if you think your future tax rates will be higher than today's--and arrange with your bank to have funds transferred every month (or every two weeks if you are paid on a biweekly basis) to the IRA. It's a good idea to use retirement accounts like 401(k)s and IRAs because they are separate from your regular bank and securities accounts, and the money in them is harder to spend before retirement. For more information, see http://blogger.uncleleosden.com/2007/04/automate-to-accumulate.html.
Average returns take you to Lake Wobegon. Money managers (such as those at actively managed mutual funds) usually don't perform as well as market averages like the S&P 500. There are a number of reasons for this, including their higher trading costs and their compensation. But the bottom line is you are likely to end up with less. Focus on long term gains. Stick with index funds and other low cost investments. If you aim to get the market average for a return, you'll probably end up doing better than average. For more, see http://blogger.uncleleosden.com/2007/06/why-average-investor-does-well.html.
Keep it simple. Investing is, among other things, a sales transaction. A financial firm is the seller and you're the buyer. Complexity favors sellers and places you at a disadvantage. The seller will naturally know more about the product than you will. The law requires that sellers of financial products make a variety of disclosures to buyers. But even if those disclosures are made, the seller will probably still have a better understanding of the product than you will. So you may have trouble figuring out if the product is truly to your advantage. The complexity of some annuities and other insurance products, and some leveraged ETFs, is so great as to make them virtually opaque. Investing in opacity isn't a good idea. Complex products also tend to have higher costs, which negatively impact investor returns. Stick to index funds, and maybe some individual stocks and bonds. Plain old bank CDs aren't bad when the markets seem turbulent. If you don't understand a financial product, avoid it.
The easiest budget of all--save a good percentage of your income (especially if you're self-employed). Budgeting sucks and it seems like every month something comes up that you didn't anticipate. Then, there are the "discussions" with your significant other about how much should be allocated to what expenses, and also last week's rampage off the budget. If you want a simple way to budget, don't focus on how much you spend, but instead on how much you save. Target a good-sized percentage of your monthly income (10% is good, 15% is much better, and 20% is a home run), and make sure that come hell or high water you save at least that much. If replacing your car's exhaust system one month prevents you from hitting your goal, then add enough more the next month or two so that you backfill the deficit. The percentage-of-income-saved method allows you to avoid a lot of handwringing over lattes or not, and inter-spousal sniping, while meeting retirement goals. If you can consistently save 15% to 20% of your earnings over the course of a 30 to 40 year career, you could end up with enough to pretty much maintain your pre-retirement lifestyle during your golden years. If you're self-employed and have an uneven income, it's particularly important to save a good-sized percentage of your income because you can't easily automate the saving process. For more, see http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html.
Build your benefits. Even though private sector employers are abandoning pensions faster than New York high society abandoned Bernie and Ruth Madoff, just about everyone has the equivalent of a pension through the Social Security system. Although much maligned and stereotyped, Social Security is the port in the storm for tens of millions of Americans. The longer you work, the greater your benefits will be. Even though the level of Social Security benefits is subject to the whim and caprice of Congress, the tenure of members of Congress is subject to the whim and caprice of voters (including most of the tens of millions of Social Securities recipients). Whatever Congress may do in the future about Social Security benefits, it won't destroy the system and you'll be better off by working longer. If you're fortunate enough to have access to a pension, work as long as you can to boost your benefits. You'll sleep better, without having to buy a new mattress, if you can count on the automatic deposit of a monthly check. For more, see http://blogger.uncleleosden.com/2007/05/how-to-retire-without-saving.html.
Attitude. Perhaps the most important factor, but the hardest one to control, is how you view money and saving. If you look at them the right way, you'll do fine. Understand that you have a finite stream of income during your life. If you spend your money, you can't save it. It's gone forever, and you're left with the now diminished remainder of your finite stream of lifetime income. Saving is a choice, not a sacrifice. Money saved now builds security for the future. Because your lifetime income is finite, you can economize now or economize later. Consider that eating dog food in your old age probably won't be a high point of your life. Remember that savings generate returns that can be compounded, so they may increase your finite lifetime income. Save enough, and you'll hit a financial home run by compounding. (See http://blogger.uncleleosden.com/2009/09/if-you-love-compounding-compounding.html.) This isn't about being greedy in an unseemly way or living like a pauper during your working years. It's about common sense and living within your means. If you adopt the right attitude, you'll establish control over your finances, and that will give you a very good feeling.
Calculate your net worth regularly. Keeping score is essential. You have to know if you're making progress. You'll need to know when you're not making progress or losing ground, so you can take action to turn the tide. Knowledge can be painful in times of market downturns, but avoiding reality won't improve your retirement finances. You may or may not have a fixed saving goal. Having a goal is good, but not essential. See http://blogger.uncleleosden.com/2007/04/goals-for-retirement-saving-and-why.html. But it's essential to know where you stand. That knowledge alone will keep you focused on building wealth for the future. Calculate your net worth at least every three months. See http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Automate the saving process and use retirement accounts. Participate in any 401(k) or equivalent retirement plan your employer may offer. Maximize the amount you contribute. Some people think you might want to contribute only enough to get an employer match and then contribute to a Roth IRA; this isn't a bad idea but you have to be conscientious about the Roth contributions because they aren't necessarily automatic (read on for the solution to this problem). If you don't have access to an employer sponsored plan, open an IRA--or a Roth IRA if you think your future tax rates will be higher than today's--and arrange with your bank to have funds transferred every month (or every two weeks if you are paid on a biweekly basis) to the IRA. It's a good idea to use retirement accounts like 401(k)s and IRAs because they are separate from your regular bank and securities accounts, and the money in them is harder to spend before retirement. For more information, see http://blogger.uncleleosden.com/2007/04/automate-to-accumulate.html.
Average returns take you to Lake Wobegon. Money managers (such as those at actively managed mutual funds) usually don't perform as well as market averages like the S&P 500. There are a number of reasons for this, including their higher trading costs and their compensation. But the bottom line is you are likely to end up with less. Focus on long term gains. Stick with index funds and other low cost investments. If you aim to get the market average for a return, you'll probably end up doing better than average. For more, see http://blogger.uncleleosden.com/2007/06/why-average-investor-does-well.html.
Keep it simple. Investing is, among other things, a sales transaction. A financial firm is the seller and you're the buyer. Complexity favors sellers and places you at a disadvantage. The seller will naturally know more about the product than you will. The law requires that sellers of financial products make a variety of disclosures to buyers. But even if those disclosures are made, the seller will probably still have a better understanding of the product than you will. So you may have trouble figuring out if the product is truly to your advantage. The complexity of some annuities and other insurance products, and some leveraged ETFs, is so great as to make them virtually opaque. Investing in opacity isn't a good idea. Complex products also tend to have higher costs, which negatively impact investor returns. Stick to index funds, and maybe some individual stocks and bonds. Plain old bank CDs aren't bad when the markets seem turbulent. If you don't understand a financial product, avoid it.
The easiest budget of all--save a good percentage of your income (especially if you're self-employed). Budgeting sucks and it seems like every month something comes up that you didn't anticipate. Then, there are the "discussions" with your significant other about how much should be allocated to what expenses, and also last week's rampage off the budget. If you want a simple way to budget, don't focus on how much you spend, but instead on how much you save. Target a good-sized percentage of your monthly income (10% is good, 15% is much better, and 20% is a home run), and make sure that come hell or high water you save at least that much. If replacing your car's exhaust system one month prevents you from hitting your goal, then add enough more the next month or two so that you backfill the deficit. The percentage-of-income-saved method allows you to avoid a lot of handwringing over lattes or not, and inter-spousal sniping, while meeting retirement goals. If you can consistently save 15% to 20% of your earnings over the course of a 30 to 40 year career, you could end up with enough to pretty much maintain your pre-retirement lifestyle during your golden years. If you're self-employed and have an uneven income, it's particularly important to save a good-sized percentage of your income because you can't easily automate the saving process. For more, see http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html.
Build your benefits. Even though private sector employers are abandoning pensions faster than New York high society abandoned Bernie and Ruth Madoff, just about everyone has the equivalent of a pension through the Social Security system. Although much maligned and stereotyped, Social Security is the port in the storm for tens of millions of Americans. The longer you work, the greater your benefits will be. Even though the level of Social Security benefits is subject to the whim and caprice of Congress, the tenure of members of Congress is subject to the whim and caprice of voters (including most of the tens of millions of Social Securities recipients). Whatever Congress may do in the future about Social Security benefits, it won't destroy the system and you'll be better off by working longer. If you're fortunate enough to have access to a pension, work as long as you can to boost your benefits. You'll sleep better, without having to buy a new mattress, if you can count on the automatic deposit of a monthly check. For more, see http://blogger.uncleleosden.com/2007/05/how-to-retire-without-saving.html.
Attitude. Perhaps the most important factor, but the hardest one to control, is how you view money and saving. If you look at them the right way, you'll do fine. Understand that you have a finite stream of income during your life. If you spend your money, you can't save it. It's gone forever, and you're left with the now diminished remainder of your finite stream of lifetime income. Saving is a choice, not a sacrifice. Money saved now builds security for the future. Because your lifetime income is finite, you can economize now or economize later. Consider that eating dog food in your old age probably won't be a high point of your life. Remember that savings generate returns that can be compounded, so they may increase your finite lifetime income. Save enough, and you'll hit a financial home run by compounding. (See http://blogger.uncleleosden.com/2009/09/if-you-love-compounding-compounding.html.) This isn't about being greedy in an unseemly way or living like a pauper during your working years. It's about common sense and living within your means. If you adopt the right attitude, you'll establish control over your finances, and that will give you a very good feeling.
Wednesday, December 3, 2008
How to Build Wealth in a Recession
Okay, it's now been officially announced that we're in a recession. Which you probably had noticed since the recession actually began in December 2007. Now that we're experiencing the volatile side of stock market volatility and 401(k) accounts are becoming 201(k)s, building wealth seems ever more difficult. It is, but there's a time honored way to increase your net worth that has almost been forgotten in America.
It's called saving. And it's the key to building wealth, in good times and bad. Here's why. Take the long term historical average gains in stocks, beginning around the early 1900s, and you'll get a figure like 6% to 7% per year. Let's work with 7%. Take out 3% for inflation, which is another rough long term average. That leaves 4%. Then, take out 1.5% for investment costs (read your mutual fund prospectuses; many of you will find this is no exaggeration). Then take out another 1.5% for taxes (remember that for 401(k)s and other retirement accounts, you'll pay ordinary income tax rates on your withdrawals, not the lower capital gains rates). We're down to 1% per year. If your investment costs and/or tax bracket are on the high side, you may be close to 0%. The numbers shown in your account statements may not seem so bad, but they aren't adjusted for inflation or reduced by the taxes you'll pay.
The picture gets grimmer when one factors in stock market volatility. The 7% per year average gain is just an average. As we so painfully know from this year, not all years are average and we're not in Lake Wobegon. The stock market first reached current levels (8419 for the Dow Jones Industrial Average) in February 1998. In other words, if you invested $1,000 in the stock market in early 1998 and held it until now, over ten years, your investment would have gone exactly, precisely nowhere. Passbook savings would have been more rewarding (plus you'd have a toaster and FDIC insurance). If your retirement strategy was to bank on stock market returns, you'd be looking at golden years eating dog food while working part-time at a discount store where you might be trampled by irrationally exuberant shoppers.
Simply stated, the key to building wealth is to save a lot. You won't net much from the stock market (and bonds and money markets are even less promising on a long term basis). Don't expect to be able to invest your way to millionaire status. We've seen what happens to those that buy into Wall Street's innovative financial engineering. And, unless you're a tremendously energetic self-starter with a very understanding family, you won't be able to become a millionaire by establishing a business.
In a sense, this is very reassuring. Saving is something anyone can do. You don't need a college degree, or even a high school diploma. You don't need a sophisticated understanding of investments or finance. Putting 10% of your earnings into passbook savings would probably do you more good than putting 1% of your earnings into stocks. While stocks, based on long term historical data, have been better performers than safer investments like passbook savings accounts, you should save in whatever way that gives you peace of mind. If you can't stomach stock market volatility, try the neighborhood bank. The worst thing you can do is give up and not save.
One advantage of saving a lot is you learn to live on less, because more of your current income is going into savings. As a result, you'll need less money in retirement to maintain your current lifestyle, while you'll put away more money. This saving-spending dynamic provides a powerful retirement planning tool. A little math reveals that saving 15% to 20% of your earnings for 30 years will, together with Social Security, pretty much allow you in your golden years to maintain your pre-retirement lifestyle. (See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html). While saving that much is a challenge, it's not impossible. Try to rationalize living without Carzilla or a gargantuan flatscreen TV today so that you can avoid eating dog food in old age. Some of us don't find that a hard choice.
Those that are unemployed, retired, or face large medical expenses can't follow this strategy. But with unemployment around 7% (the currently announced rate is 6.5% but it's headed upward), that means 93% of the work force is employed and most of them can save. You may have a lot of excuses for not saving, but you can't buy a steak in retirement with an excuse. You'll need money for that. In the marathon that is life, slow, plodding, frugal savers win in the long run.
It's called saving. And it's the key to building wealth, in good times and bad. Here's why. Take the long term historical average gains in stocks, beginning around the early 1900s, and you'll get a figure like 6% to 7% per year. Let's work with 7%. Take out 3% for inflation, which is another rough long term average. That leaves 4%. Then, take out 1.5% for investment costs (read your mutual fund prospectuses; many of you will find this is no exaggeration). Then take out another 1.5% for taxes (remember that for 401(k)s and other retirement accounts, you'll pay ordinary income tax rates on your withdrawals, not the lower capital gains rates). We're down to 1% per year. If your investment costs and/or tax bracket are on the high side, you may be close to 0%. The numbers shown in your account statements may not seem so bad, but they aren't adjusted for inflation or reduced by the taxes you'll pay.
The picture gets grimmer when one factors in stock market volatility. The 7% per year average gain is just an average. As we so painfully know from this year, not all years are average and we're not in Lake Wobegon. The stock market first reached current levels (8419 for the Dow Jones Industrial Average) in February 1998. In other words, if you invested $1,000 in the stock market in early 1998 and held it until now, over ten years, your investment would have gone exactly, precisely nowhere. Passbook savings would have been more rewarding (plus you'd have a toaster and FDIC insurance). If your retirement strategy was to bank on stock market returns, you'd be looking at golden years eating dog food while working part-time at a discount store where you might be trampled by irrationally exuberant shoppers.
Simply stated, the key to building wealth is to save a lot. You won't net much from the stock market (and bonds and money markets are even less promising on a long term basis). Don't expect to be able to invest your way to millionaire status. We've seen what happens to those that buy into Wall Street's innovative financial engineering. And, unless you're a tremendously energetic self-starter with a very understanding family, you won't be able to become a millionaire by establishing a business.
In a sense, this is very reassuring. Saving is something anyone can do. You don't need a college degree, or even a high school diploma. You don't need a sophisticated understanding of investments or finance. Putting 10% of your earnings into passbook savings would probably do you more good than putting 1% of your earnings into stocks. While stocks, based on long term historical data, have been better performers than safer investments like passbook savings accounts, you should save in whatever way that gives you peace of mind. If you can't stomach stock market volatility, try the neighborhood bank. The worst thing you can do is give up and not save.
One advantage of saving a lot is you learn to live on less, because more of your current income is going into savings. As a result, you'll need less money in retirement to maintain your current lifestyle, while you'll put away more money. This saving-spending dynamic provides a powerful retirement planning tool. A little math reveals that saving 15% to 20% of your earnings for 30 years will, together with Social Security, pretty much allow you in your golden years to maintain your pre-retirement lifestyle. (See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html). While saving that much is a challenge, it's not impossible. Try to rationalize living without Carzilla or a gargantuan flatscreen TV today so that you can avoid eating dog food in old age. Some of us don't find that a hard choice.
Those that are unemployed, retired, or face large medical expenses can't follow this strategy. But with unemployment around 7% (the currently announced rate is 6.5% but it's headed upward), that means 93% of the work force is employed and most of them can save. You may have a lot of excuses for not saving, but you can't buy a steak in retirement with an excuse. You'll need money for that. In the marathon that is life, slow, plodding, frugal savers win in the long run.
Sunday, June 10, 2007
Smart Spending Builds Wealth
Spending money can help to build wealth--if you spend the right way. Buy things when they are inexpensive. If you like tuna, wait until it goes on sale and buy a dozen cans for 1/3 or ½ off. As for meat or poultry, buy several pounds on sale and freeze what you don’t eat right away. If you like whole wheat bread, buy the brand that’s on sale. At most grocery stores, there will a dozen brands of whole wheat bread and one or another will usually be on sale every week. Also, read the nutritional labels. Sometimes, the supermarket’s generic brand has more nutritional content than more expensive and heavily advertised brands (no, not a joke). If you can get over the image problem, buying generic may be cheaper and better for you.
The next time you’re near a cheap gas station, fill your tank up completely. Then, top off at less expensive stations, even if you still have a half a tank. That way, you’ll always buy less expensive gas. Don’t wait until your tank is almost empty and you have to buy at whatever station is nearby regardless of cost.
On a larger scale, don’t buy expensive clothes until they go on sale. All stores have sales. Be patient and get suits, shirts and ties for 30%, 40% or even more off. If you want a large, flat screen TV, wait until a major holiday with a three-day weekend. The big box stores often drop prices to draw customers. Or find a discount outlet, either at a strip mall or online, and buy below the nationally advertised price. On an even larger scale, pay cash for your cars if you can. You may be able to get a very good price on a new car by asking for quotes from the dealer’s Internet departments. See our blog about buying a new car this way: http://blogger.uncleleosden.com/2007/05/buy-new-car-without-haggling-and-save.html.
When it comes to your credit card, don’t carry a balance over from month-to-month. Once you start rolling over a balance, the interest and other charges become a part of your financial life. If you pay off each month’s balance, you are effectively getting a loan at zero percent interest. That’s bargain basement credit. (Don’t feel sorry for the credit card companies—they ding the merchant a percentage of each charge, so they make money anyway.)
Think of smart spending as an investment. When you buy tuna at 50% off, you effectively make a 100% profit, because you save as much as you spend. When you buy a suit at 35% off, you effectively make about a 50% profit. The amount of money you “make” on a dozen cans of tuna this way is a few dollars. But if you approach all your spending this way, you could save hundreds and even thousands of dollars a year. Assuming you have a 50 to 60 year adulthood, your lifetime savings can amount to tens of thousands, and maybe more than a hundred thousand, dollars. Invest the savings, and you’ll notice an improvement in your retirement. To learn more about the power of compounding, go to our earlier blog at http://blogger.uncleleosden.com/2007/04/love-in-time-of-financial-planning-part.html.
This technique is most effective if you don’t buy when prices are high, and then buy in quantity when prices are low. Also, don’t buy things on sale simply because they are on sale. Use sale prices to your advantage, and purchase what you would buy anyway—when prices are low.
In order to buy things when they are inexpensive, you have to have some extra money around. An $800 charge for suits, shirts and ties at a sale may cause an unexpected jump in your credit card balance. It takes money to make money, even when we're talking about smart spending. So keep some cash on hand to cover these uneven expenses. How much you keep depends on your spending needs. A couple thousand dollars may be all you need for most household expenses. Obviously, more would be needed for something like a large high definition flat screen TV or a car. Set aside some money for spending capital. “Buy low, sell high” is an old adage in the investment business. Buying low is also a good way to spend.
Crime News: Here’s a criminal twist on a shopping list. http://www.wtop.com/?nid=456&sid=1162977.
The next time you’re near a cheap gas station, fill your tank up completely. Then, top off at less expensive stations, even if you still have a half a tank. That way, you’ll always buy less expensive gas. Don’t wait until your tank is almost empty and you have to buy at whatever station is nearby regardless of cost.
On a larger scale, don’t buy expensive clothes until they go on sale. All stores have sales. Be patient and get suits, shirts and ties for 30%, 40% or even more off. If you want a large, flat screen TV, wait until a major holiday with a three-day weekend. The big box stores often drop prices to draw customers. Or find a discount outlet, either at a strip mall or online, and buy below the nationally advertised price. On an even larger scale, pay cash for your cars if you can. You may be able to get a very good price on a new car by asking for quotes from the dealer’s Internet departments. See our blog about buying a new car this way: http://blogger.uncleleosden.com/2007/05/buy-new-car-without-haggling-and-save.html.
When it comes to your credit card, don’t carry a balance over from month-to-month. Once you start rolling over a balance, the interest and other charges become a part of your financial life. If you pay off each month’s balance, you are effectively getting a loan at zero percent interest. That’s bargain basement credit. (Don’t feel sorry for the credit card companies—they ding the merchant a percentage of each charge, so they make money anyway.)
Think of smart spending as an investment. When you buy tuna at 50% off, you effectively make a 100% profit, because you save as much as you spend. When you buy a suit at 35% off, you effectively make about a 50% profit. The amount of money you “make” on a dozen cans of tuna this way is a few dollars. But if you approach all your spending this way, you could save hundreds and even thousands of dollars a year. Assuming you have a 50 to 60 year adulthood, your lifetime savings can amount to tens of thousands, and maybe more than a hundred thousand, dollars. Invest the savings, and you’ll notice an improvement in your retirement. To learn more about the power of compounding, go to our earlier blog at http://blogger.uncleleosden.com/2007/04/love-in-time-of-financial-planning-part.html.
This technique is most effective if you don’t buy when prices are high, and then buy in quantity when prices are low. Also, don’t buy things on sale simply because they are on sale. Use sale prices to your advantage, and purchase what you would buy anyway—when prices are low.
In order to buy things when they are inexpensive, you have to have some extra money around. An $800 charge for suits, shirts and ties at a sale may cause an unexpected jump in your credit card balance. It takes money to make money, even when we're talking about smart spending. So keep some cash on hand to cover these uneven expenses. How much you keep depends on your spending needs. A couple thousand dollars may be all you need for most household expenses. Obviously, more would be needed for something like a large high definition flat screen TV or a car. Set aside some money for spending capital. “Buy low, sell high” is an old adage in the investment business. Buying low is also a good way to spend.
Crime News: Here’s a criminal twist on a shopping list. http://www.wtop.com/?nid=456&sid=1162977.
Sunday, May 20, 2007
Why the Tortoise Ends Up Wealthier Than the Hare
Remember how the slow, steady, plodding tortoise of legend beat the swift but all too confident hare? When it comes to investment savings, the tortoise is also the winner. Here's why.
Research has shown that investors tend to chase returns. (See http://www.investopedia.com/articles/05/032905.asp.) When a market is hot and prices are skyrocketing, people tend to jump in. Often, they enter the market as prices are peaking, and then begin to take losses when the market falters. This happened to many investors in the late 1990's with high tech stocks, and more recently to many buyers in the real estate markets (many of whom exacerbated their problems with high risk loans).
Then, the same investors that plunged into the market when it was rising tended to sell when it declined. They were therefore not invested when the market began to recover, and missed out on the gains that the recovery offered.
The end result is that many investors buy high and sell low. This isn't a way to make money.
What leads people to chase returns like this? From a psychological standpoint, it's unclear. But the financial phenomenon that triggers buying high and selling low is market volatility. That is to say, the tendency of a market or investment to rise or fall rapidly. The faster the market or investment rises, the more it lures people in. The harder it falls, the more likely they will flee. But they aren't making a lot of money this way.
How does an ordinary investor combat the tendency to chase returns? By seeking out more stable investments. The less your investments create false hopes or major gastronomic distress, the more likely you are to stay with them and capture long term gains. You shouldn't embrace risk--too much of it is likely to lead y0u to buy high and sell low. Instead, you should take conservative, calculated risks--enough to have the potential for long term gains from stocks, but with some stable assets like bonds, bank or credit union certificates of deposit, or money market funds to keep you from abruptly exiting the financial markets and putting the money in a mattress.
One of the easiest ways to get a good mix of stability and the potential for long term gains is to invest in lifecycle or target date funds. We discussed them recently in our blog, "Investing Made Simple" (blogger.uncleleosden.com/2007/05/investing-made-simple.html).
Perhaps it's counterintuitive to invest in a way that limits your potential for big investment gains. But recognize that we're all human, invest in a way that saves us from ourselves, and you may end up winning the tortoise's victory over the hare.
Retirement News: If you thought you could fund your retirement with lottery tickets, think again. See http://www.nbc4.com/money/13345064/detail.html.
Research has shown that investors tend to chase returns. (See http://www.investopedia.com/articles/05/032905.asp.) When a market is hot and prices are skyrocketing, people tend to jump in. Often, they enter the market as prices are peaking, and then begin to take losses when the market falters. This happened to many investors in the late 1990's with high tech stocks, and more recently to many buyers in the real estate markets (many of whom exacerbated their problems with high risk loans).
Then, the same investors that plunged into the market when it was rising tended to sell when it declined. They were therefore not invested when the market began to recover, and missed out on the gains that the recovery offered.
The end result is that many investors buy high and sell low. This isn't a way to make money.
What leads people to chase returns like this? From a psychological standpoint, it's unclear. But the financial phenomenon that triggers buying high and selling low is market volatility. That is to say, the tendency of a market or investment to rise or fall rapidly. The faster the market or investment rises, the more it lures people in. The harder it falls, the more likely they will flee. But they aren't making a lot of money this way.
How does an ordinary investor combat the tendency to chase returns? By seeking out more stable investments. The less your investments create false hopes or major gastronomic distress, the more likely you are to stay with them and capture long term gains. You shouldn't embrace risk--too much of it is likely to lead y0u to buy high and sell low. Instead, you should take conservative, calculated risks--enough to have the potential for long term gains from stocks, but with some stable assets like bonds, bank or credit union certificates of deposit, or money market funds to keep you from abruptly exiting the financial markets and putting the money in a mattress.
One of the easiest ways to get a good mix of stability and the potential for long term gains is to invest in lifecycle or target date funds. We discussed them recently in our blog, "Investing Made Simple" (blogger.uncleleosden.com/2007/05/investing-made-simple.html).
Perhaps it's counterintuitive to invest in a way that limits your potential for big investment gains. But recognize that we're all human, invest in a way that saves us from ourselves, and you may end up winning the tortoise's victory over the hare.
Retirement News: If you thought you could fund your retirement with lottery tickets, think again. See http://www.nbc4.com/money/13345064/detail.html.
Wednesday, May 2, 2007
Mysteries of Social Security Retirement Benefits: Part Deux--When
In our preceding blog, we gave you a thumbnail sketch of how Social Security determines your retirement benefits. Now, we discuss when you might want to start collecting benefits.
The earliest you can start collecting retirement benefits is age 62. The amount will be less than what you'd get if you waited until your "full" Social Security retirement age. Your "full" Social Security retirement age depends on when you were born. If you were born any time from 1943 to 1954, your full retirement age is 66 (it's lower if you were born before 1943, but in that case you're probably already collecting benefits or about to start collecting them). If you were born in: (a) 1955, full retirement age is 66 and 2 months; (b) 1956, full retirement age is 66 and 4 months; (c) 1957, full retirement age is 66 and 6 months; (d) 1958, full retirement age is 66 and 8 months; (e) 1959, full retirement age is 66 and 10 months; and (f) 1960 or later, full retirement age is 67.
The next question is how much less do you get if you start collecting benefits before your full retirement age. While the Social Security website (www.ssa.gov) isn't precise, it does give a couple of examples. If your full retirement age is 66, the reduction in benefits: (a) at age 62 is about 25%; (b) at age 63 is about 20%; (c) at age 64 is about 13.3%; and (d) at age 65 is about 6.7%.
If your full retirement age is 67, the reduction in benefits: (a) at age 62 is about 30%; (b) at age 63 is about 25%; (c) at age 64 is about 20%; (d) at age 65 is about 13.3%; and (e) at age 66 is about 6.7%. If your full retirement age is between 66 and 67, the reductions apparently are somewhere between the amounts for ages 66 and 67.
It's important to understand that these reductions are permanent. If you start collecting benefits at age 62, they will always be about 25-30% less than the benefits you would have gotten if you had waited until your full retirement age. The fact that you are getting benefits sooner, and may be able to stop working at an earlier age, may make it worth your while to forego the higher benefits available at a later age. Just be sure you understand the cost.
If you delay taking benefits after your full retirement age, your benefits will increase even more. That's especially true if you continue to work. The amount of the increase will depend on whether or not you work, how long you work and how much you earn. For people born in 1943 or later, a boost of 8% per year is provided for each year of delay (and your benefits may be further increased if you keep working). So you might be able to leverage your benefits upwards as much as 24% or more over your full retirement age benefits if you wait until age 70. But start collecting them when you hit the big 7-0, because they don't increase with further delay.
So, when should you start collecting retirement benefits? That depends on your personal situation. If your health is good and you think you have a long life expectancy, delay benefits as much as possible. That way, you'll have better protection for the last years of your life, when your savings may run low. The benefits you get by waiting until 70 can be 50% or more than the amount you'd get starting at age 62, so we're talking about some serious pocket change. As we discuss in Uncle Leo's Den, boosting your Social Security benefits is a valuable way to pump up your retirement resources.
But be careful if you've stopped working. Without a job, how would you live for the years before you started to take Social Security? If you have a pension, you may be able to get by with that. But if you'd have to burn off a lot of your savings in order to delay benefits, you may be better off starting benefits earlier and conserving your savings. Retired people can't replace spent savings, so if your savings are modest, keep them warm and dry for big expenses like medical care.
On the other hand, if your health is poor, consider taking benefits at age 62, especially if you are unable to work. That way, you'd get something back for all the Social Security taxes you paid.
The answer becomes more complicated if you are married. Your spouse is entitled to Social Security benefits based on your record, and can collect up to half the amount of your benefits (but only when you start to collect). If the two of you are short of cash, and the total amount of your combined benefits would provide badly needed cash flow, it could make sense to start collecting earlier. However, be cautious about jumping the gun. The spousal benefit shrinks if your spouse begins collecting it before his or her full retirement age, similar to the shrinkage in your benefits if you begin collecting them before your full retirement age. Make sure the sacrifice is worthwhile.
While there may be many nuances to the question of when you begin collecting Social Security retirement benefits, our discussion should give you a general idea of what it's all about. Granted, thinking about this stuff can become mind-numbing after a while. But you could receive hundreds of thousands of dollars from Social Security during your retirement, and that's worth a few headaches.
Our next blog will continue to explore the mysteries of Social Security retirement benefits.
Interesting News: If you're still concerned about your SAT or ACT scores not quite landing you in the 99th percentile, stop worrying. Intelligence isn't closely related to how much wealth people accumulate. See http://www.wtop.com/index.php?nid=456&sid=1125913.
The earliest you can start collecting retirement benefits is age 62. The amount will be less than what you'd get if you waited until your "full" Social Security retirement age. Your "full" Social Security retirement age depends on when you were born. If you were born any time from 1943 to 1954, your full retirement age is 66 (it's lower if you were born before 1943, but in that case you're probably already collecting benefits or about to start collecting them). If you were born in: (a) 1955, full retirement age is 66 and 2 months; (b) 1956, full retirement age is 66 and 4 months; (c) 1957, full retirement age is 66 and 6 months; (d) 1958, full retirement age is 66 and 8 months; (e) 1959, full retirement age is 66 and 10 months; and (f) 1960 or later, full retirement age is 67.
The next question is how much less do you get if you start collecting benefits before your full retirement age. While the Social Security website (www.ssa.gov) isn't precise, it does give a couple of examples. If your full retirement age is 66, the reduction in benefits: (a) at age 62 is about 25%; (b) at age 63 is about 20%; (c) at age 64 is about 13.3%; and (d) at age 65 is about 6.7%.
If your full retirement age is 67, the reduction in benefits: (a) at age 62 is about 30%; (b) at age 63 is about 25%; (c) at age 64 is about 20%; (d) at age 65 is about 13.3%; and (e) at age 66 is about 6.7%. If your full retirement age is between 66 and 67, the reductions apparently are somewhere between the amounts for ages 66 and 67.
It's important to understand that these reductions are permanent. If you start collecting benefits at age 62, they will always be about 25-30% less than the benefits you would have gotten if you had waited until your full retirement age. The fact that you are getting benefits sooner, and may be able to stop working at an earlier age, may make it worth your while to forego the higher benefits available at a later age. Just be sure you understand the cost.
If you delay taking benefits after your full retirement age, your benefits will increase even more. That's especially true if you continue to work. The amount of the increase will depend on whether or not you work, how long you work and how much you earn. For people born in 1943 or later, a boost of 8% per year is provided for each year of delay (and your benefits may be further increased if you keep working). So you might be able to leverage your benefits upwards as much as 24% or more over your full retirement age benefits if you wait until age 70. But start collecting them when you hit the big 7-0, because they don't increase with further delay.
So, when should you start collecting retirement benefits? That depends on your personal situation. If your health is good and you think you have a long life expectancy, delay benefits as much as possible. That way, you'll have better protection for the last years of your life, when your savings may run low. The benefits you get by waiting until 70 can be 50% or more than the amount you'd get starting at age 62, so we're talking about some serious pocket change. As we discuss in Uncle Leo's Den, boosting your Social Security benefits is a valuable way to pump up your retirement resources.
But be careful if you've stopped working. Without a job, how would you live for the years before you started to take Social Security? If you have a pension, you may be able to get by with that. But if you'd have to burn off a lot of your savings in order to delay benefits, you may be better off starting benefits earlier and conserving your savings. Retired people can't replace spent savings, so if your savings are modest, keep them warm and dry for big expenses like medical care.
On the other hand, if your health is poor, consider taking benefits at age 62, especially if you are unable to work. That way, you'd get something back for all the Social Security taxes you paid.
The answer becomes more complicated if you are married. Your spouse is entitled to Social Security benefits based on your record, and can collect up to half the amount of your benefits (but only when you start to collect). If the two of you are short of cash, and the total amount of your combined benefits would provide badly needed cash flow, it could make sense to start collecting earlier. However, be cautious about jumping the gun. The spousal benefit shrinks if your spouse begins collecting it before his or her full retirement age, similar to the shrinkage in your benefits if you begin collecting them before your full retirement age. Make sure the sacrifice is worthwhile.
While there may be many nuances to the question of when you begin collecting Social Security retirement benefits, our discussion should give you a general idea of what it's all about. Granted, thinking about this stuff can become mind-numbing after a while. But you could receive hundreds of thousands of dollars from Social Security during your retirement, and that's worth a few headaches.
Our next blog will continue to explore the mysteries of Social Security retirement benefits.
Interesting News: If you're still concerned about your SAT or ACT scores not quite landing you in the 99th percentile, stop worrying. Intelligence isn't closely related to how much wealth people accumulate. See http://www.wtop.com/index.php?nid=456&sid=1125913.
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.
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