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.
Showing posts with label net worth. Show all posts
Showing posts with label net worth. Show all posts
Friday, May 16, 2014
Sunday, July 31, 2011
Little Money Secrets
Little things can make a difference in money matters. Just as small adjustments to a swing can change a golfer's game or a batter's average, paying attention to a few details can make you better off financially speaking.
Calculate your net worth. This is the most basic thing you can do. At least every three months, figure out where you stand. If you don't keep score, you won't know how well you're doing and whether or not you're making progress. You can't do any financial planning without knowing your net worth.
Reinvest dividends and interest. Rolling your investment income into new investments allows you to compound your earnings. The leverage from compounding over time is astonishing (see http://blogger.uncleleosden.com/2009/09/if-you-love-compounding-compounding.html). If you reinvest your investment income, you'll have a more reliable source of growth in your wealth than stocks, gold, oil or any other asset class.
Sweep excess income into savings. Let's say, near the end of the month, you've been true to your budget and have some excess income from your last paycheck. Sweep the excess income into a savings vehicle. The savings vehicle can be a savings or money market account at a bank, or a money market fund account. As funds build up in the savings vehicle, you can transfer them to a mutual fund or other longer term investment, if you like. But the point is to get them out of your checking account, where they may be viewed as immediately spendable, and into the category of savings. Resist the urge to view excess income as mad money. Sweeping even small amounts adds up. If you sweep $50 a month, on average, after one year you'll have $600. After ten years, you'll have $6,000, plus investment returns. After twenty years, the total will be $12,000. With investment returns, it might have grown to $20,000. After thirty years, you've swept $18,000, and investment returns may have made the total $30,000 to $40,000. Remember that this is in addition to your 401(k), IRA and other retirement accounts. Little crumbs can be made into crumb cake.
Focus on saving. Too much time and energy are devoted to searching for the ideal investment strategies, and not enough to saving as much as possible. There is no way to pick the optimal investment strategy for the next five years, let alone the next thirty, forty or fifty, because no one can predict the future with certainty. Look at the past five years if you think otherwise. People who save more have more capital to invest and diversify among different asset classes. People who save only modest amounts may find themselves taking big risks in order to ensure a comfortable retirement. The Great Recession has taught us that taking large risks doesn't always yield high returns, or any returns at all. Saving more, and moderating risk, is a smarter long term strategy.
Avoid debt. This is the biggest secret of all, because, judging from the growth of consumer debt in recent decades, so few people seem to understand it. Since most people borrow money to consume, they get no financial return from it. It's a pure cost item, with the repayment of principal and interest coming out of future income. Of course, most people need to borrow to buy large items, like a house, an education, or a car. But borrow only when you must and when there is an important reason. You have a finite lifetime income, and the more of your finite income you devote to debt repayment, the less you'll have for everything else. Why enrich banks? (For more on this point, see http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html.)
In baseball, most hits are singles, even for Hall of Famers. The same is true for financial planning. Apply these little secrets, and your golden years will likely glow more brightly.
Calculate your net worth. This is the most basic thing you can do. At least every three months, figure out where you stand. If you don't keep score, you won't know how well you're doing and whether or not you're making progress. You can't do any financial planning without knowing your net worth.
Reinvest dividends and interest. Rolling your investment income into new investments allows you to compound your earnings. The leverage from compounding over time is astonishing (see http://blogger.uncleleosden.com/2009/09/if-you-love-compounding-compounding.html). If you reinvest your investment income, you'll have a more reliable source of growth in your wealth than stocks, gold, oil or any other asset class.
Sweep excess income into savings. Let's say, near the end of the month, you've been true to your budget and have some excess income from your last paycheck. Sweep the excess income into a savings vehicle. The savings vehicle can be a savings or money market account at a bank, or a money market fund account. As funds build up in the savings vehicle, you can transfer them to a mutual fund or other longer term investment, if you like. But the point is to get them out of your checking account, where they may be viewed as immediately spendable, and into the category of savings. Resist the urge to view excess income as mad money. Sweeping even small amounts adds up. If you sweep $50 a month, on average, after one year you'll have $600. After ten years, you'll have $6,000, plus investment returns. After twenty years, the total will be $12,000. With investment returns, it might have grown to $20,000. After thirty years, you've swept $18,000, and investment returns may have made the total $30,000 to $40,000. Remember that this is in addition to your 401(k), IRA and other retirement accounts. Little crumbs can be made into crumb cake.
Focus on saving. Too much time and energy are devoted to searching for the ideal investment strategies, and not enough to saving as much as possible. There is no way to pick the optimal investment strategy for the next five years, let alone the next thirty, forty or fifty, because no one can predict the future with certainty. Look at the past five years if you think otherwise. People who save more have more capital to invest and diversify among different asset classes. People who save only modest amounts may find themselves taking big risks in order to ensure a comfortable retirement. The Great Recession has taught us that taking large risks doesn't always yield high returns, or any returns at all. Saving more, and moderating risk, is a smarter long term strategy.
Avoid debt. This is the biggest secret of all, because, judging from the growth of consumer debt in recent decades, so few people seem to understand it. Since most people borrow money to consume, they get no financial return from it. It's a pure cost item, with the repayment of principal and interest coming out of future income. Of course, most people need to borrow to buy large items, like a house, an education, or a car. But borrow only when you must and when there is an important reason. You have a finite lifetime income, and the more of your finite income you devote to debt repayment, the less you'll have for everything else. Why enrich banks? (For more on this point, see http://blogger.uncleleosden.com/2010/07/how-to-think-about-saving.html.)
In baseball, most hits are singles, even for Hall of Famers. The same is true for financial planning. Apply these little secrets, and your golden years will likely glow more brightly.
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.
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, 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, April 18, 2007
The Secret to Building Wealth
Never go for a get rich quick scheme. It's probably a scam. Even if it's not a scam, chances are it's a high-risk long shot that won't pay off. If you need a quick fix for your gambling jones, buy a lottery ticket. You'll probably lose, but at least your money goes to a deserving purpose like public education.
There is, however, a secret to building wealth: keep track of your net worth. In other words, know how much you have. It's the baseline reference point for your financial plan. You can't be sure that you're increasing your wealth if you don't know how much you have.
Maybe you think this is obvious. Maybe you aren't worried because you faithfully put 10% of your salary into a 401(k) account (and, if you're lucky, get an employer match of 2, 3, or 4% of your income). If you're really diligent about saving, maybe you put away some more money in an IRA or in the stock market. But is it really that simple?
Are you running up your credit card balances in order to maintain lifestyle even while you save? Are you tapping into your home equity for your next car? Has your home equity dropped with the recent slowdown in the real estate market? If so, your net worth could be shrinking even though you are building up your retirement accounts. You can figure out if this is happening by calculating your net worth regularly. Knowledge is power. When your level of wealth is backsliding, you can get back on track by increasing the amount you save or easing up on spending.
Net worth is the value of your assets minus the amount of your debts. For retirement purposes, count only assets that contribute to long term financial security. In other words, count things like cash, mutual funds, stocks, bonds and home equity. Don't count things like cars, furniture, clothing and appliances; they depreciate in value and won't add to your retirement savings. But count all of your debts, including debts incurred to buy cars, furniture, clothing and appliances, because all of your debts have to be repaid.
Calculate your net worth at least once every three months. January 1, April 1, July 1 and October 1 are good times to give yourself a financial checkup. If you haven't been keeping track of your net worth, don't be surprised if the first time you do the calculations it turns out to be negative. That's especially likely if you're young and still saddled with school debts and the expenses of starting out in full-time employment. Whatever the number is, don't be discouraged. It's important to know where you stand and to move forward from there. Indeed, the mere fact of determining your net worth will motivate you to improve. That's why it's the secret to building wealth.
For more ideas about building wealth, please go to http://fundszine.com/93-investing-for-simple-people-2-miscellaneous/.
There is, however, a secret to building wealth: keep track of your net worth. In other words, know how much you have. It's the baseline reference point for your financial plan. You can't be sure that you're increasing your wealth if you don't know how much you have.
Maybe you think this is obvious. Maybe you aren't worried because you faithfully put 10% of your salary into a 401(k) account (and, if you're lucky, get an employer match of 2, 3, or 4% of your income). If you're really diligent about saving, maybe you put away some more money in an IRA or in the stock market. But is it really that simple?
Are you running up your credit card balances in order to maintain lifestyle even while you save? Are you tapping into your home equity for your next car? Has your home equity dropped with the recent slowdown in the real estate market? If so, your net worth could be shrinking even though you are building up your retirement accounts. You can figure out if this is happening by calculating your net worth regularly. Knowledge is power. When your level of wealth is backsliding, you can get back on track by increasing the amount you save or easing up on spending.
Net worth is the value of your assets minus the amount of your debts. For retirement purposes, count only assets that contribute to long term financial security. In other words, count things like cash, mutual funds, stocks, bonds and home equity. Don't count things like cars, furniture, clothing and appliances; they depreciate in value and won't add to your retirement savings. But count all of your debts, including debts incurred to buy cars, furniture, clothing and appliances, because all of your debts have to be repaid.
Calculate your net worth at least once every three months. January 1, April 1, July 1 and October 1 are good times to give yourself a financial checkup. If you haven't been keeping track of your net worth, don't be surprised if the first time you do the calculations it turns out to be negative. That's especially likely if you're young and still saddled with school debts and the expenses of starting out in full-time employment. Whatever the number is, don't be discouraged. It's important to know where you stand and to move forward from there. Indeed, the mere fact of determining your net worth will motivate you to improve. That's why it's the secret to building wealth.
For more ideas about building wealth, please go to http://fundszine.com/93-investing-for-simple-people-2-miscellaneous/.
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