When someone approaches you about making an investment, you have to consider whether you're dealing with a dishonest person. You know the stereotype of a crook: shifty eyes, nervous snicker, sweaty hands, weak handshake, won’t look you in the eye. You’ve seen it in cartoons and movies. You’ve even met some people like this. But were they truly dishonest? Or were they just insecure?
Was every charming, engaging, and witty person you ever met truthful? Let’s disregard the jerks that didn’t call you the next morning. How about the person who promised you a job or promotion that you didn’t get?
You can’t tell by appearances if a person is honest. The annals of law enforcement agencies and financial regulators are filled with the names of charming, engaging people who turned out to be thoroughly crooked. Indeed, many of the most outrageous fraudsters are exactly the sort of person you’d like to have a drink with. The fact that they were so engaging and likeable is precisely why they were such successful con artists.
That’s why you have to be very careful about whom you entrust with your money. All investing involves giving your money to someone else. You can’t earn interest, dividends or capital gains if you stuff cash into a mattress. The money has to be given to someone else who uses or invests it, and pays you from the earnings they make.
Deal with people and institutions that are familiar. People who are known in the community and need to stay in good standing with their neighbors are more likely to be scrupulous. Look for organizations—whether national or local—that have good reputations. While there’s no guarantee that a person or organization known to you won’t be crooked, you’re taking a bigger risk when dealing with unknowns.
Never give personal information to anyone who calls you out of the blue or sends you an unsolicited e-mail. Be wary of anyone who contacts you, claims to be from the government or from your bank, and asks you to confirm personal information, either by e-mail or on the phone. Legitimate inquiries from the government or your bank won’t come in this manner. If someone contacts you and says you’ve won a prize, don’t pay money to collect the prize. Legitimate prizes won’t require you to pay money.
Invest in an asset, not a person (even if you like the person). Don’t invest in something just because a friend, neighbor, or acquaintance recommends it. Ask yourself whether the asset makes sense for your financial goals. You’ll get a lot of information about why the investment is a good idea. Research it yourself, and make sure you understand how things can go wrong. When you understand the risks as well as the rewards, you’ll be able to make a sound decision.
Celebrity News: If you’ve read enough already about Lindsay Lohan, don’t click on this link. http://www.wtop.com/?nid=114&sid=642554.
Monday, May 28, 2007
Buy a New Car Without Haggling and Save
There’s a way to buy a new car without negotiating and get a price that might be better than what you could get from hours of old-fashioned haggling. Try purchasing your new car through the dealership’s Internet department.
Here’s the process. If you know what vehicle you want, contact the dealer by e-mail and describe what you’re interested in. If they have it in stock, they’ll get back to you. The prices they quote may be surprisingly low. Word has it that Internet departments are compensated based on the volume of vehicles they sell, rather than the markup on each sale. By contrast, the salesperson on the showroom floor is paid a commission, so the dealership will be less enthusiastic about discounting a vehicle you buy through the showroom floor.
If you want to try the Internet route, start by researching the makes and models you’re interested in. Consider features, capabilities, mileage, safety, insurance costs and resale value. Decide what you want, preferably in detail. Your chances of getting a good deal are better if you can specify the make, model, features, colors and even the frilly options. Okay, a DVD player for the second row seats isn’t a frill; it’s a necessity when you have hyperactive kids. But you know what we mean.
Then, research prices. Go to sites like Edmunds.com (free, with ads) or Consumer Reports (no ads, but you need to subscribe) to get an idea of the dealer’s costs and what other buyers have been paying for the same vehicle in your zip code. Be sure to research total costs of ownership as well as sales prices. (Total cost of ownership, sometimes called “true cost to own,” is a five-year tally of the major expenses of owning a car, like depreciation, financing costs, insurance premiums, maintenance and repair costs, taxes and fees, and fuel expenses.)
Next, go to the showroom. No, we’re not kidding. You should test drive all vehicles that you’re interested in. Another reason for going to the showroom floor is that you’ll be able to ask to any questions you have. You might even get an idea of the price the dealership would ask if you went the traditional haggling route.
Line up your financing before you start shopping. Trying to get financing through the dealer may not be the lowest cost option. If you arrange your financing in advance, you'll very possibly get a better deal. (Hint: try a credit union.)
Now, prioritize your choice of vehicles. Identify the dealers nearby that sell your top choice. Send them an e-mail describing in detail what you want. American manufacturers offer a large variety of options, so your description could get lengthy. Still, it’s better to be specific because you’ll be more likely to get what you want. Foreign manufacturers are more likely to offer a choice of styles with largely fixed options packages—although this is less flexible, it makes shopping by e-mail easier.
The dealers that have your preferred car in stock will get back to you quickly. You may be pleasantly surprised by the prices they quote. If you see a deal you want, call and let them know you’re coming.
Last September, we tried this. Not every dealer had our top choice in stock. The first dealer to respond offered a price that was 8% lower than the best price advertised in the local newspaper. The second dealer offered a price 10% lower than the best newspaper price. The second dealer made a sale about three hours later. When you consider that the average price of a new car is somewhere around $28,000, discounts like these can fund half your annual contribution to an IRA. (For more information about IRAs, read the discussion of retirement accounts in Uncle Leo's Den.)
Of course, the price advantage you might get would depend on supply and demand. If you want the hottest car in the market, the Internet department won’t be selling it. But if you want something that's in lower demand, perhaps at the end of the model year when the dealer hopes to clear out old inventory, you might pocket a fair amount of dinero. Can you haggle with the Internet department? It’s a free country and you can try. But if they’ve offered you a very good deal to begin with, they may not be able to do much more (or anything). Even so, you could still have a very good deal.
Not everything is improved when you buy through the Internet department. If you have a vehicle to trade in, you’ll end up dealing with the same old bluster, bluffing and snake oil nonsense that you wanted to avoid. But if you get a good price on the new car, this is more tolerable. Another annoyance is that if a dealer doesn’t have the make and model you want, they’ll probably try to interest you in something else they have in stock. But it’s up to you whether you follow up. Since you’re probably e-mailing from the comfort of your home, you’re only under the pressure you place on yourself. A third annoyance is that if you send an e-mail to a dealership, they’ll put you in their customer address book and e-mail you for months about every car you didn’t want to buy. Just remember that you control the delete button.
It’s harder to use the e-mail technique to buy a used car. One used car won’t be strictly comparable to another used car, and each needs to be individually researched and checked out. But if you’re in the market for a new car, think about buying through the Internet department.
Crime News: A caper with toilet paper. http://www.wtop.com/?nid=456&sid=1150769.
For more shopping ideas, visit the blog carnival of shopping: http://www.become.com/pocketchange/2007/06/carnival_of_shopping_16.html
Here’s the process. If you know what vehicle you want, contact the dealer by e-mail and describe what you’re interested in. If they have it in stock, they’ll get back to you. The prices they quote may be surprisingly low. Word has it that Internet departments are compensated based on the volume of vehicles they sell, rather than the markup on each sale. By contrast, the salesperson on the showroom floor is paid a commission, so the dealership will be less enthusiastic about discounting a vehicle you buy through the showroom floor.
If you want to try the Internet route, start by researching the makes and models you’re interested in. Consider features, capabilities, mileage, safety, insurance costs and resale value. Decide what you want, preferably in detail. Your chances of getting a good deal are better if you can specify the make, model, features, colors and even the frilly options. Okay, a DVD player for the second row seats isn’t a frill; it’s a necessity when you have hyperactive kids. But you know what we mean.
Then, research prices. Go to sites like Edmunds.com (free, with ads) or Consumer Reports (no ads, but you need to subscribe) to get an idea of the dealer’s costs and what other buyers have been paying for the same vehicle in your zip code. Be sure to research total costs of ownership as well as sales prices. (Total cost of ownership, sometimes called “true cost to own,” is a five-year tally of the major expenses of owning a car, like depreciation, financing costs, insurance premiums, maintenance and repair costs, taxes and fees, and fuel expenses.)
Next, go to the showroom. No, we’re not kidding. You should test drive all vehicles that you’re interested in. Another reason for going to the showroom floor is that you’ll be able to ask to any questions you have. You might even get an idea of the price the dealership would ask if you went the traditional haggling route.
Line up your financing before you start shopping. Trying to get financing through the dealer may not be the lowest cost option. If you arrange your financing in advance, you'll very possibly get a better deal. (Hint: try a credit union.)
Now, prioritize your choice of vehicles. Identify the dealers nearby that sell your top choice. Send them an e-mail describing in detail what you want. American manufacturers offer a large variety of options, so your description could get lengthy. Still, it’s better to be specific because you’ll be more likely to get what you want. Foreign manufacturers are more likely to offer a choice of styles with largely fixed options packages—although this is less flexible, it makes shopping by e-mail easier.
The dealers that have your preferred car in stock will get back to you quickly. You may be pleasantly surprised by the prices they quote. If you see a deal you want, call and let them know you’re coming.
Last September, we tried this. Not every dealer had our top choice in stock. The first dealer to respond offered a price that was 8% lower than the best price advertised in the local newspaper. The second dealer offered a price 10% lower than the best newspaper price. The second dealer made a sale about three hours later. When you consider that the average price of a new car is somewhere around $28,000, discounts like these can fund half your annual contribution to an IRA. (For more information about IRAs, read the discussion of retirement accounts in Uncle Leo's Den.)
Of course, the price advantage you might get would depend on supply and demand. If you want the hottest car in the market, the Internet department won’t be selling it. But if you want something that's in lower demand, perhaps at the end of the model year when the dealer hopes to clear out old inventory, you might pocket a fair amount of dinero. Can you haggle with the Internet department? It’s a free country and you can try. But if they’ve offered you a very good deal to begin with, they may not be able to do much more (or anything). Even so, you could still have a very good deal.
Not everything is improved when you buy through the Internet department. If you have a vehicle to trade in, you’ll end up dealing with the same old bluster, bluffing and snake oil nonsense that you wanted to avoid. But if you get a good price on the new car, this is more tolerable. Another annoyance is that if a dealer doesn’t have the make and model you want, they’ll probably try to interest you in something else they have in stock. But it’s up to you whether you follow up. Since you’re probably e-mailing from the comfort of your home, you’re only under the pressure you place on yourself. A third annoyance is that if you send an e-mail to a dealership, they’ll put you in their customer address book and e-mail you for months about every car you didn’t want to buy. Just remember that you control the delete button.
It’s harder to use the e-mail technique to buy a used car. One used car won’t be strictly comparable to another used car, and each needs to be individually researched and checked out. But if you’re in the market for a new car, think about buying through the Internet department.
Crime News: A caper with toilet paper. http://www.wtop.com/?nid=456&sid=1150769.
For more shopping ideas, visit the blog carnival of shopping: http://www.become.com/pocketchange/2007/06/carnival_of_shopping_16.html
Friday, May 25, 2007
Investing for the Short Term
Almost all financial planning and advice focus on investing for the long term. The principal investment goals most people have are building wealth for retirement, and saving for the kids' college expenses. Long term investing often involves some degree of risk, primarily from investing in stocks. Taking moderate long term risks makes sense because it allows you to profit from the larger gains that stocks often provide, compared to bonds and bank accounts.
However, people also have important short term financial goals. Investing for the short term is very different from long term investing. Short term goals may include things like building an emergency cash fund (of three to six months living expenses), saving up a downpayment for a house, accumulating funds to cover medical expenses of an elderly parent who has declined and needs a lot of care (remember, Medicare and Medicaid don't cover everything), and building up your stash of cash so that you can pay for a new roof. Another scenario that is fairly common is that your child is 14 and you've just started to save for his or her college expenses.
With all these types of expenses, a common element is you can't afford to lose the money. The emergency cash fund is your insurance policy against every risk in your life that isn't insured by a traditional insurance policy. Lose the downpayment and you'll have to keep renting. Living with a leaky roof isn't fun. And when Mom or Dad needs medical care, they need medical care. So how do you invest the money?
Money market funds, especially those that invest only in U.S. Treasury securities, are generally safe and will pay competitive interest rates. Online banks often pay competitive interest rates and are federally insured up to $100,000. Regular bricks and mortar banks and credit unions also offer federally insured accounts (up to $100,000), although their interest rates are usually lower than money market funds or online banks. U.S. Treasury bills and short term notes, and short term bond funds, are likely to be reasonable investments for short term money. But they involve a little more trouble and perhaps investment savvy, than many people would want to be bothered with.
Perhaps this is obvious to many. However, with the Dow Jones Industrial Average having set a remarkable number of new highs in recent months, there are probably some who are investing short term money in stocks. It isn't fun to watch the market move up like this if you have, say, $20,000 sitting in a money market account earning 4.9% a year. But those who forget that the market can go down (and is more likely to go down after a major upwards spike) are doomed to get their butts bit when it happens (and it will). Some people who invested their downpayments in the hot stock market of 1999 lost the opportunity to buy a home when the market fell away in 2000.
When you can't afford to lose the money, don't put it into volatile investments like stocks. Do what is simple and safe.
Automotive News: If you own a Nissan Altima or G35, keep the electronic keys away from your cell phone or be prepared to use the keys the old-fashioned way. http://www.nbc4.com/automotive/13381081/detail.html.
However, people also have important short term financial goals. Investing for the short term is very different from long term investing. Short term goals may include things like building an emergency cash fund (of three to six months living expenses), saving up a downpayment for a house, accumulating funds to cover medical expenses of an elderly parent who has declined and needs a lot of care (remember, Medicare and Medicaid don't cover everything), and building up your stash of cash so that you can pay for a new roof. Another scenario that is fairly common is that your child is 14 and you've just started to save for his or her college expenses.
With all these types of expenses, a common element is you can't afford to lose the money. The emergency cash fund is your insurance policy against every risk in your life that isn't insured by a traditional insurance policy. Lose the downpayment and you'll have to keep renting. Living with a leaky roof isn't fun. And when Mom or Dad needs medical care, they need medical care. So how do you invest the money?
Money market funds, especially those that invest only in U.S. Treasury securities, are generally safe and will pay competitive interest rates. Online banks often pay competitive interest rates and are federally insured up to $100,000. Regular bricks and mortar banks and credit unions also offer federally insured accounts (up to $100,000), although their interest rates are usually lower than money market funds or online banks. U.S. Treasury bills and short term notes, and short term bond funds, are likely to be reasonable investments for short term money. But they involve a little more trouble and perhaps investment savvy, than many people would want to be bothered with.
Perhaps this is obvious to many. However, with the Dow Jones Industrial Average having set a remarkable number of new highs in recent months, there are probably some who are investing short term money in stocks. It isn't fun to watch the market move up like this if you have, say, $20,000 sitting in a money market account earning 4.9% a year. But those who forget that the market can go down (and is more likely to go down after a major upwards spike) are doomed to get their butts bit when it happens (and it will). Some people who invested their downpayments in the hot stock market of 1999 lost the opportunity to buy a home when the market fell away in 2000.
When you can't afford to lose the money, don't put it into volatile investments like stocks. Do what is simple and safe.
Automotive News: If you own a Nissan Altima or G35, keep the electronic keys away from your cell phone or be prepared to use the keys the old-fashioned way. http://www.nbc4.com/automotive/13381081/detail.html.
Wednesday, May 23, 2007
Get Some Fast Money: The Employer Match
There is a way you can get fast money, for real and you won't have to do any extra work. It's the employer match in a 401(k) account. Employer sponsored retirement savings plans, like 401(k)s and their equivalents (such as the federal government's Thrift Savings Plan) often have a feature where your employer matches your contributions up to a certain percentage. For example, an employer might match up to 3% of your salary or wages that you contribute to the plan. The match is equivalent to an immediate 100% return on your investment. There's nothing in the financial markets that an ordinary investor can get which would be better.
With some 401(k) plans, the employer match may not "vest" (meaning, truly belong to you) unless you stay with the company for a minimum period of time, such as 3 years. Even so, the employer match is a great deal and you should get it.
What if you have high interest rate credit card debt and would like to pay it off? Should you do that before investing in 401(k) to get the employer match? No. The return on the employer match is better. Cut back on your spending in order to pay off the credit card debt.
What if you want to save up money outside a 401(k) in order to accumulate a downpayment for a house? It's good if you're trying to put a downpayment together, because these days, with the messy state of the mortgage market, people who have a downpayment are more likely to be approved for a mortgage. But the employer match pays a better return than buying a home. So get the employer match; and try to save a downpayment some other way.
What if school loans are like thunderclouds hanging over your head and you want to get rid of them as soon as possible? You'd get more value from obtaining the employer match than from paying down school loans a little faster. If the school loans are driving you crazy, ease up on unnecessary spending. But don't cut back on the best retirement financing deal most people will ever get.
The employer match is about as close as most of us will ever get to free money. Don't pass it up. If you have access to a retirement account with one, contribute at least enough to get the match; and more if you can, since retirement isn't getting cheaper.
Strange News: Drilling for natural gas begins at Dallas-Fort Worth International Airport--http://news.yahoo.com/s/nm/20070523/od_uk_nm/oukoe_uk_energy_drilling_airport. But will they share the wealth with the passengers? How 'bout some free peanuts, at least?
With some 401(k) plans, the employer match may not "vest" (meaning, truly belong to you) unless you stay with the company for a minimum period of time, such as 3 years. Even so, the employer match is a great deal and you should get it.
What if you have high interest rate credit card debt and would like to pay it off? Should you do that before investing in 401(k) to get the employer match? No. The return on the employer match is better. Cut back on your spending in order to pay off the credit card debt.
What if you want to save up money outside a 401(k) in order to accumulate a downpayment for a house? It's good if you're trying to put a downpayment together, because these days, with the messy state of the mortgage market, people who have a downpayment are more likely to be approved for a mortgage. But the employer match pays a better return than buying a home. So get the employer match; and try to save a downpayment some other way.
What if school loans are like thunderclouds hanging over your head and you want to get rid of them as soon as possible? You'd get more value from obtaining the employer match than from paying down school loans a little faster. If the school loans are driving you crazy, ease up on unnecessary spending. But don't cut back on the best retirement financing deal most people will ever get.
The employer match is about as close as most of us will ever get to free money. Don't pass it up. If you have access to a retirement account with one, contribute at least enough to get the match; and more if you can, since retirement isn't getting cheaper.
Strange News: Drilling for natural gas begins at Dallas-Fort Worth International Airport--http://news.yahoo.com/s/nm/20070523/od_uk_nm/oukoe_uk_energy_drilling_airport. But will they share the wealth with the passengers? How 'bout some free peanuts, at least?
Tuesday, May 22, 2007
The True Price of Affordable Loans
We all know it's a bad idea to let an eight-year old loose in a candy store. Temptation and self-restraint will be mismatched, and cavities, hyperactivity and weight gain will follow. Today's credit market is about the same.
The U.S. economy is awash in credit. Vast quantities of the stuff roam around in every direction, like the enormous herds of bison that swept across the prairies 150 years ago. The abundance of credit puffed up the real estate markets until they bubbled and popped. In the financial markets, the ready availability of credit has enabled hedge funds to accumulate vast investment portfolios funded by borrowed money, and more recently has financed a flurry of "private equity" deals, in which private investors and corporate managements buy up major public companies using credit that banks line up to provide. All this activity has pushed blue chip stocks to record levels. But are these prices sustainable? Only time will tell.
For consumers, there's no shortage of credit, either. Credit card offers in our daily mail kill entire forests. If you have any unused equity in your home, banks rush to offer home equity lines of credit to burn up that equity and convert it into debt payments for you. Car loans now have longer and longer terms in order to make them "affordable" (meaning small enough for you to pay each month). All of this comes at a price, and it isn't cheap.
Car loans illustrate the point. Back in the bad old days when grown men wore leisure suits, cars were usually sold with three-year loans. If you assume an interest rate of 6%, a three-year loan increases the dollar cost of the car by about 10%. For example, a $25,000 car ends up costing about $27,500.
Today, many car loans have terms of five to six years. A six year loan at 6.5% (rates on longer term loans are higher than rates on shorter term loans) will increase the total dollar cost of the car by about 20%. The same $25,000 car ends up costing in the range of $30,000. Of course, the monthly payment on the 6-year loan is much lower--maybe 40% lower (about $425 a month for the 6-year loan, versus approximately $750 a month for the 3-year loan). That's why people take out the longer loans. But they end up paying more for the same car.
A related problem comes up with real estate mortgages. Some mortgage lenders are now offering 40-year fixed rate mortgages as a way to qualify people to buy homes. Arithmetically speaking, a 40-year mortgage costs many more dollars than a 30-year mortgage (around 30% more; so if you're talking about a $200,000 mortgage, that's an extra $60,000 for the same house).
You don't plan to stay in the house for 40 years, so you ask why does it matter? Because the rate at which you build equity in the house is slower with a 40-year mortgage than with a shorter mortgage. The early payments in any mortgage are mostly used to pay interest charges. Only a small portion goes to reducing the principal balance of the loan. As you make more mortgage payments, the amount that goes to reducing the principal gradually increases and you begin to build equity in the house (equity being the value that is yours). A 40-year mortgage with an interest rate of 6% increases your equity in the house by about 8% of the amount of the mortgage loan after the first ten years (about $16,000 for a $200,000 mortgage). A 30-year mortgage with the same interest rate will increase your equity in the house by about 16% of the mortgage loan in the same time period (about $32,000 for a $200,000 mortgage). Given that housing prices are now flat or dropping in most areas, paying down the principal of the mortgage is pretty much your only way to build equity. The monthly payments on a 40-year mortgage might be about 8% or 9% lower than the monthly payments on the 30-year mortgage. But you pay a large price in terms of slower equity growth to get that reduction.
For more information about the risks of financing your home purchase with "affordable" mortgages, please read our May 10, 2007 blog, "How the Right Mortgage Loan Helps You Build Wealth" (http://blogger.uncleleosden.com/2007/05/how-right-mortgage-loan-helps-you-build.html).
Remember that you will get a finite amount of money in your lifetime--basically, what you earn, what you gain from investments, anything you inherit, and your lottery winnings (haha, just a joke for 99.9999% of us). The more of your finite lifetime income you spend on interest payments, the less you will have for steaks and champagne. This is a zero-sum game: either the banks get your money, or you get it.
The reason why banks crowd around throwing credit at you is because they stand to make big money lending to you. From your standpoint, the problem with that is the big money comes out of your pocket. Borrow if you must, and borrow for a good reason. Getting an education is a good reason. Buying a house is a good reason. Buying a car is a good reason. But not every loan is a good loan. Buy less house or less car if necessary to keep your borrowing under control. You can't borrow your way to a comfortable retirement. You can save your way to a comfortable retirement.
Celebrity News: Paula Abdul and the risks of owning a Chihuahua--http://www.nbc4.com/entertainment/13364020/detail.html.
The U.S. economy is awash in credit. Vast quantities of the stuff roam around in every direction, like the enormous herds of bison that swept across the prairies 150 years ago. The abundance of credit puffed up the real estate markets until they bubbled and popped. In the financial markets, the ready availability of credit has enabled hedge funds to accumulate vast investment portfolios funded by borrowed money, and more recently has financed a flurry of "private equity" deals, in which private investors and corporate managements buy up major public companies using credit that banks line up to provide. All this activity has pushed blue chip stocks to record levels. But are these prices sustainable? Only time will tell.
For consumers, there's no shortage of credit, either. Credit card offers in our daily mail kill entire forests. If you have any unused equity in your home, banks rush to offer home equity lines of credit to burn up that equity and convert it into debt payments for you. Car loans now have longer and longer terms in order to make them "affordable" (meaning small enough for you to pay each month). All of this comes at a price, and it isn't cheap.
Car loans illustrate the point. Back in the bad old days when grown men wore leisure suits, cars were usually sold with three-year loans. If you assume an interest rate of 6%, a three-year loan increases the dollar cost of the car by about 10%. For example, a $25,000 car ends up costing about $27,500.
Today, many car loans have terms of five to six years. A six year loan at 6.5% (rates on longer term loans are higher than rates on shorter term loans) will increase the total dollar cost of the car by about 20%. The same $25,000 car ends up costing in the range of $30,000. Of course, the monthly payment on the 6-year loan is much lower--maybe 40% lower (about $425 a month for the 6-year loan, versus approximately $750 a month for the 3-year loan). That's why people take out the longer loans. But they end up paying more for the same car.
A related problem comes up with real estate mortgages. Some mortgage lenders are now offering 40-year fixed rate mortgages as a way to qualify people to buy homes. Arithmetically speaking, a 40-year mortgage costs many more dollars than a 30-year mortgage (around 30% more; so if you're talking about a $200,000 mortgage, that's an extra $60,000 for the same house).
You don't plan to stay in the house for 40 years, so you ask why does it matter? Because the rate at which you build equity in the house is slower with a 40-year mortgage than with a shorter mortgage. The early payments in any mortgage are mostly used to pay interest charges. Only a small portion goes to reducing the principal balance of the loan. As you make more mortgage payments, the amount that goes to reducing the principal gradually increases and you begin to build equity in the house (equity being the value that is yours). A 40-year mortgage with an interest rate of 6% increases your equity in the house by about 8% of the amount of the mortgage loan after the first ten years (about $16,000 for a $200,000 mortgage). A 30-year mortgage with the same interest rate will increase your equity in the house by about 16% of the mortgage loan in the same time period (about $32,000 for a $200,000 mortgage). Given that housing prices are now flat or dropping in most areas, paying down the principal of the mortgage is pretty much your only way to build equity. The monthly payments on a 40-year mortgage might be about 8% or 9% lower than the monthly payments on the 30-year mortgage. But you pay a large price in terms of slower equity growth to get that reduction.
For more information about the risks of financing your home purchase with "affordable" mortgages, please read our May 10, 2007 blog, "How the Right Mortgage Loan Helps You Build Wealth" (http://blogger.uncleleosden.com/2007/05/how-right-mortgage-loan-helps-you-build.html).
Remember that you will get a finite amount of money in your lifetime--basically, what you earn, what you gain from investments, anything you inherit, and your lottery winnings (haha, just a joke for 99.9999% of us). The more of your finite lifetime income you spend on interest payments, the less you will have for steaks and champagne. This is a zero-sum game: either the banks get your money, or you get it.
The reason why banks crowd around throwing credit at you is because they stand to make big money lending to you. From your standpoint, the problem with that is the big money comes out of your pocket. Borrow if you must, and borrow for a good reason. Getting an education is a good reason. Buying a house is a good reason. Buying a car is a good reason. But not every loan is a good loan. Buy less house or less car if necessary to keep your borrowing under control. You can't borrow your way to a comfortable retirement. You can save your way to a comfortable retirement.
Celebrity News: Paula Abdul and the risks of owning a Chihuahua--http://www.nbc4.com/entertainment/13364020/detail.html.
Monday, May 21, 2007
Scam Alert
It's past midnight and you've been in the bar for a while. Maybe you've had two or three drinks, or maybe a bit more. You're still alone and some of the people around you are starting to look better than they did a half an hour ago. One of them walks up and says, "I just won the lottery. Would you like to see the $20,000 shower curtain in my apartment?" Are you going to fall for this?
You're living paycheck to paycheck, and any time you have to buy both bread and potatoes at the grocery store, you wreck your budget for the week. Someone who is nicely dressed, sports an expensive watch, and drives a luxury car approaches you and says, "Would you like to get in on an investment that pays 10% a month? You can double your money in less than a year. Look at what it's gotten me!" Will you fall for this?
Life has taught you, in at least some settings, that desperation isn't an excuse to do something dumb. There's no exception to this rule when it comes to money and finances. There's always someone with a good story who wants to take your money. How many people are waiting around to give you money? The next time you hear a smooth sounding story about easy money and no risk, put your hand on your wallet and excuse yourself to take a walk around the block from which you don't return.
Here are some common scams that you may encounter.
1. Internet fraud: be wary of unsolicited e-mails or instant messages promoting investments, or which direct you to websites that promote investments. Always research the investments--see if any independent source of information will verify the claims made. When in doubt, don't invest.
2. Foreign exchange trading scams: foreign exchange, or "forex," trading basically involves betting that one currency (let's say the Japanese yen) will increase or decrease in value against another currency (let's say the Swiss franc). This is a zero-sum game--if one currency gets stronger, the other one by definition gets weaker, and if you don't win, you'll lose. Legitimate forex trading involves millions and even tens of millions of dollars per transaction, and is for the big dogs on Wall Street. There are, however, lots of opportunities for ordinary investors to be ripped off in foreign exchange scams. Avoid this stuff.
3. Oil and gas scams: with the prices of oil and gas scaling Mount Everest, energy and alternative energy scams are now a dime a dozen (and not even worth that much). Research energy investments carefully, and always look for independent verification. Independent verification means you, on your own, should find legitimate sources of information that support the claims made. Don't rely on sources of verification provided by the promoter of the investment--those sources could be in cahoots with the promoter. When in doubt, don't invest.
4. Affinity fraud: some of the lowest forms of life in the financial markets take advantage of social or religious ties to defraud investors. This is called "affinity fraud." For example, a crook might join a congregation, win over one or two prominent members, and use their respected status to convince other members of the congregation to invest in a scam. Or else, a member of a minority group might try to sell phony investments to other members of the same minority group. In these cases, the crooksters exploit the natural human tendency to trust those who have something in common with you. Stay vigilant whenever anyone wants to take your money. Invest in an asset, not in a person.
5. Prime Bank investments: an endemic problem in the financial markets is the prime bank fraud. Scumbag promoters offer you a chance to get into investments offered by "prime banks," which are supposed to be prominent foreign banks that ordinarily serve only the ultra-rich. These investments are touted as high return, low risk and tax free. None of that is true. You're more likely to encounter a swimming pool in the Sahara than a real prime bank.
The North American Securities Administrators Association, which is composed of the state securities regulators in the U.S., has put together a longer list of scams du jour. Go to http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/6669.cfm.
The elderly are among the most likely to be victimized by fraudsters. If you have elderly parents or grandparents, try (gently) to keep an eye on their financial well-being.
Crime News: Is this your parakeet? http://www.nbc4.com/news/13352686/detail.html. If so, the police may have your camera.
You're living paycheck to paycheck, and any time you have to buy both bread and potatoes at the grocery store, you wreck your budget for the week. Someone who is nicely dressed, sports an expensive watch, and drives a luxury car approaches you and says, "Would you like to get in on an investment that pays 10% a month? You can double your money in less than a year. Look at what it's gotten me!" Will you fall for this?
Life has taught you, in at least some settings, that desperation isn't an excuse to do something dumb. There's no exception to this rule when it comes to money and finances. There's always someone with a good story who wants to take your money. How many people are waiting around to give you money? The next time you hear a smooth sounding story about easy money and no risk, put your hand on your wallet and excuse yourself to take a walk around the block from which you don't return.
Here are some common scams that you may encounter.
1. Internet fraud: be wary of unsolicited e-mails or instant messages promoting investments, or which direct you to websites that promote investments. Always research the investments--see if any independent source of information will verify the claims made. When in doubt, don't invest.
2. Foreign exchange trading scams: foreign exchange, or "forex," trading basically involves betting that one currency (let's say the Japanese yen) will increase or decrease in value against another currency (let's say the Swiss franc). This is a zero-sum game--if one currency gets stronger, the other one by definition gets weaker, and if you don't win, you'll lose. Legitimate forex trading involves millions and even tens of millions of dollars per transaction, and is for the big dogs on Wall Street. There are, however, lots of opportunities for ordinary investors to be ripped off in foreign exchange scams. Avoid this stuff.
3. Oil and gas scams: with the prices of oil and gas scaling Mount Everest, energy and alternative energy scams are now a dime a dozen (and not even worth that much). Research energy investments carefully, and always look for independent verification. Independent verification means you, on your own, should find legitimate sources of information that support the claims made. Don't rely on sources of verification provided by the promoter of the investment--those sources could be in cahoots with the promoter. When in doubt, don't invest.
4. Affinity fraud: some of the lowest forms of life in the financial markets take advantage of social or religious ties to defraud investors. This is called "affinity fraud." For example, a crook might join a congregation, win over one or two prominent members, and use their respected status to convince other members of the congregation to invest in a scam. Or else, a member of a minority group might try to sell phony investments to other members of the same minority group. In these cases, the crooksters exploit the natural human tendency to trust those who have something in common with you. Stay vigilant whenever anyone wants to take your money. Invest in an asset, not in a person.
5. Prime Bank investments: an endemic problem in the financial markets is the prime bank fraud. Scumbag promoters offer you a chance to get into investments offered by "prime banks," which are supposed to be prominent foreign banks that ordinarily serve only the ultra-rich. These investments are touted as high return, low risk and tax free. None of that is true. You're more likely to encounter a swimming pool in the Sahara than a real prime bank.
The North American Securities Administrators Association, which is composed of the state securities regulators in the U.S., has put together a longer list of scams du jour. Go to http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/6669.cfm.
The elderly are among the most likely to be victimized by fraudsters. If you have elderly parents or grandparents, try (gently) to keep an eye on their financial well-being.
Crime News: Is this your parakeet? http://www.nbc4.com/news/13352686/detail.html. If so, the police may have your camera.
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.
Thursday, May 17, 2007
Unclaimed Money
(As Updated Jan. 26, 2013)
There are billions of dollars worth of unclaimed assets in America. It's important to marshal your assets, particularly as you approach retirement. If you've been careful about your finances, chances are that you have everything that you're entitled to. But there are places you can check to make sure you haven't left any money on the table. Remember that you may have money coming to you directly, or perhaps from a deceased family member through inheritance. That means you should check under your name and the deceased person's name. And if your spouse is busy unloading the dishwasher, you may want to check for him or her as well.
Old bank accounts, shares of stock, insurance policy assets and payments, annuities, uncashed checks, unredeemed money orders or gift certificates, security deposits, contents of safe deposit boxes, customer overpayments, and other financial assets must be turned over to the state of the customer's last known address, if the customer has not made any contact or engaged in any activity for a period of time (such as a year or more). You can search at www.missingmoney.com. Also, you can go to www.unclaimed.org to get more search options (this site can link you to each state's treasurer, which allows you to search individual states). If you search individual states, make sure to check all states where you, your spouse, your kids, your late parent, or your deceased wealthy uncle, aunt, grandparent, cousin, sugar daddy, sugar mommy or other potential benefactor lived, as far back as you have information.
Remember that there is a chicken and egg problem with unclaimed property. You may have forgotten to cash a check. Maybe a small bank account slipped your mind when you moved some years ago. You may not know that you're a beneficiary of a will or insurance policy. Or you may not realize that your late parent, in the forgetfulness of old age, lost a number of checks without depositing them. You can't get what you've forgotten or never knew about in the first place. States, facing severe budgetary pressure, have become aggressive about getting these assets from insurance companies, corporations, banks, and so on. While the states are looking out for themselves, the consolidation of all this unclaimed property into the hands of state treasurers gives unknowing beneficiaries and claimants centralized places to look for assets to which they may be entitled. So don't be shy about poking around. You have nothing to lose.
You can check for an unclaimed federal income tax refund at www.irs.gov. Use the "Where's My Refund" feature on the front page. State tax agencies usually provide a way to check online for the status of a refund.
If you think you may have a claim to a matured U.S. Savings Bond, check at http://www.treasuryhunt.gov/. You might locate bonds you bought yourself but forgot, and bonds that your parents, relatives or others bought for you.
If you worked 10 years or more for an employer with a pension plan, you may have earned the right to a pension, even if you no longer work there. You can check with the employer. If it has gone out of business, its pension may have been taken over by the Pension Benefit Guaranty Corp. This is a federal agency that guarantees pension benefits up to a limit (around $49,500 for pensions with a single beneficiary). You can check at http://search.pbgc.gov/mp/ to see if you might have a pension claim. Even if your name doesn't appear in this search, you may want to find out if the pension plan is now being administered by the Pension Benefit Guaranty Corp. Search at www.pbgc.gov/workers-retirees/find-your-pension-plan/content/page676.html. There's always a chance your name is spelled differently in the government's records, so you should find out who's taken over the plan and then figure out how to establish any claim you may have. Another resource for finding or dealing with a pension plan would be a regional pension counseling project. These projects are listed by the Pension Rights Center, a nonprofit organization, at http://www.pensionrights.org/counseling-projects. You can also try the federal Employee Benefits Security Administration at 1-866-444-3272 or http://www.dol.gov/ebsa/. You can get the address and phone number of a local EBSA office where you could seek assistance. If you need help figuring out whether the amount of pension benefits your employer promises is correct, you can get four hours of free assistance from the American Academy of Actuaries. See http://www.actuary.org/palprogram.asp.
What if an old employer had a 401(k) plan, and you want to check to see if you have an account? Contact your old employer. If your old employer has gone out of business, you can search a Department of Labor website for information: www.askebsa.dol.gov/AbandonedPlanSearch.
Of course, keep track of your Social Security benefits. The Social Security Administration, in a deplorable display of exceptional penny-wise pound-foolishness, announced in early 2011 that it would no longer send out annual benefit statements. You also can no longer request a copy at www.ssa.gov/mystatement. The Social Security Administration has said that it would allow citizens Internet access to electronic statements of their accounts, although that system isn't ready yet and may not be ready until the end of 2011 or early 2012. Until then, all you can do is wait and hope they get your record right. Whenever it is that you can again check on your benefits, remember that not only do you get benefits, but your spouse and perhaps even your dependent children may get benefits. This is something we discussed earlier at blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_03.html. Make sure everyone in your household gets the benefits to which they're entitled.
Veterans of limited financial means may be eligible for an income supplement called the Veterans Pension. This pension supplements other income you have to bring your total income up to levels prescribed by Congress. For those who served during the Vietnam War or earlier, benefits may be available if you had at least 90 days of active service, with at least 1 day during wartime. Veterans whose active duty service began on or after Sept. 7, 1980 need at least 24 months of active service (or the full time period for which they were called up for active duty). For more information, go to the Veterans Administration website at http://www.vba.va.gov/bln/21/pension/vetpen.htm. It's very important to note that veterans eligible for a basic veterans pension, who have serious health problems and need assistance from others for personal living tasks, or who have one or more disabilities, may also be eligible for Aid and Attendance or Housebound benefits, which are paid in addition to the basic veterans pension. For a vet facing nursing home expenses, or the costs of home health care, Aid and Attendance or Housebound benefits can make a difference.
For more information about Social Security, read our May 1, 2007 blog blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement.html, and May 2, 2007 blog, blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_02.html.
To avoid having your money or property go unclaimed, see http://blogger.uncleleosden.com/2008/08/how-to-avoid-having-unclaimed-property.html.
Animal News: if you're stressed out by work and want an escape, here's a soothing animal story. www.wtop.com/?nid=456&sid=1143000.
There are billions of dollars worth of unclaimed assets in America. It's important to marshal your assets, particularly as you approach retirement. If you've been careful about your finances, chances are that you have everything that you're entitled to. But there are places you can check to make sure you haven't left any money on the table. Remember that you may have money coming to you directly, or perhaps from a deceased family member through inheritance. That means you should check under your name and the deceased person's name. And if your spouse is busy unloading the dishwasher, you may want to check for him or her as well.
Old bank accounts, shares of stock, insurance policy assets and payments, annuities, uncashed checks, unredeemed money orders or gift certificates, security deposits, contents of safe deposit boxes, customer overpayments, and other financial assets must be turned over to the state of the customer's last known address, if the customer has not made any contact or engaged in any activity for a period of time (such as a year or more). You can search at www.missingmoney.com. Also, you can go to www.unclaimed.org to get more search options (this site can link you to each state's treasurer, which allows you to search individual states). If you search individual states, make sure to check all states where you, your spouse, your kids, your late parent, or your deceased wealthy uncle, aunt, grandparent, cousin, sugar daddy, sugar mommy or other potential benefactor lived, as far back as you have information.
Remember that there is a chicken and egg problem with unclaimed property. You may have forgotten to cash a check. Maybe a small bank account slipped your mind when you moved some years ago. You may not know that you're a beneficiary of a will or insurance policy. Or you may not realize that your late parent, in the forgetfulness of old age, lost a number of checks without depositing them. You can't get what you've forgotten or never knew about in the first place. States, facing severe budgetary pressure, have become aggressive about getting these assets from insurance companies, corporations, banks, and so on. While the states are looking out for themselves, the consolidation of all this unclaimed property into the hands of state treasurers gives unknowing beneficiaries and claimants centralized places to look for assets to which they may be entitled. So don't be shy about poking around. You have nothing to lose.
You can check for an unclaimed federal income tax refund at www.irs.gov. Use the "Where's My Refund" feature on the front page. State tax agencies usually provide a way to check online for the status of a refund.
If you think you may have a claim to a matured U.S. Savings Bond, check at http://www.treasuryhunt.gov/. You might locate bonds you bought yourself but forgot, and bonds that your parents, relatives or others bought for you.
If you worked 10 years or more for an employer with a pension plan, you may have earned the right to a pension, even if you no longer work there. You can check with the employer. If it has gone out of business, its pension may have been taken over by the Pension Benefit Guaranty Corp. This is a federal agency that guarantees pension benefits up to a limit (around $49,500 for pensions with a single beneficiary). You can check at http://search.pbgc.gov/mp/ to see if you might have a pension claim. Even if your name doesn't appear in this search, you may want to find out if the pension plan is now being administered by the Pension Benefit Guaranty Corp. Search at www.pbgc.gov/workers-retirees/find-your-pension-plan/content/page676.html. There's always a chance your name is spelled differently in the government's records, so you should find out who's taken over the plan and then figure out how to establish any claim you may have. Another resource for finding or dealing with a pension plan would be a regional pension counseling project. These projects are listed by the Pension Rights Center, a nonprofit organization, at http://www.pensionrights.org/counseling-projects. You can also try the federal Employee Benefits Security Administration at 1-866-444-3272 or http://www.dol.gov/ebsa/. You can get the address and phone number of a local EBSA office where you could seek assistance. If you need help figuring out whether the amount of pension benefits your employer promises is correct, you can get four hours of free assistance from the American Academy of Actuaries. See http://www.actuary.org/palprogram.asp.
What if an old employer had a 401(k) plan, and you want to check to see if you have an account? Contact your old employer. If your old employer has gone out of business, you can search a Department of Labor website for information: www.askebsa.dol.gov/AbandonedPlanSearch.
Of course, keep track of your Social Security benefits. The Social Security Administration, in a deplorable display of exceptional penny-wise pound-foolishness, announced in early 2011 that it would no longer send out annual benefit statements. You also can no longer request a copy at www.ssa.gov/mystatement. The Social Security Administration has said that it would allow citizens Internet access to electronic statements of their accounts, although that system isn't ready yet and may not be ready until the end of 2011 or early 2012. Until then, all you can do is wait and hope they get your record right. Whenever it is that you can again check on your benefits, remember that not only do you get benefits, but your spouse and perhaps even your dependent children may get benefits. This is something we discussed earlier at blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_03.html. Make sure everyone in your household gets the benefits to which they're entitled.
Veterans of limited financial means may be eligible for an income supplement called the Veterans Pension. This pension supplements other income you have to bring your total income up to levels prescribed by Congress. For those who served during the Vietnam War or earlier, benefits may be available if you had at least 90 days of active service, with at least 1 day during wartime. Veterans whose active duty service began on or after Sept. 7, 1980 need at least 24 months of active service (or the full time period for which they were called up for active duty). For more information, go to the Veterans Administration website at http://www.vba.va.gov/bln/21/pension/vetpen.htm. It's very important to note that veterans eligible for a basic veterans pension, who have serious health problems and need assistance from others for personal living tasks, or who have one or more disabilities, may also be eligible for Aid and Attendance or Housebound benefits, which are paid in addition to the basic veterans pension. For a vet facing nursing home expenses, or the costs of home health care, Aid and Attendance or Housebound benefits can make a difference.
For more information about Social Security, read our May 1, 2007 blog blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement.html, and May 2, 2007 blog, blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement_02.html.
To avoid having your money or property go unclaimed, see http://blogger.uncleleosden.com/2008/08/how-to-avoid-having-unclaimed-property.html.
Animal News: if you're stressed out by work and want an escape, here's a soothing animal story. www.wtop.com/?nid=456&sid=1143000.
Wednesday, May 16, 2007
Investing Made Simple
There's a simple way to invest that gives you the diversified portfolio designed for long term growth that financial experts recommend. And the best part of it is that you don't have to a lot of research into stocks, mutual funds or other investments. We're talking about lifecycle funds, which are also called target date funds.
Lifecycle and target date funds solve two basic problems investors face. First, you should diversify your investments, so that you don't have all your eggs in one basket. Typically, a variety of stocks and bonds is recommended.
Second, you should change the focus of your diversification as you grow older. In your 20's and 30's, your portfolio should be heavily weighted toward stocks, since they have greater potential for long term growth. Of course, stocks can nosedive in value if the market stumbles--and you can be sure it will stumble every now and then. But when you're young, you still have plenty of time to ride through market turbulence and profit from the next upswing. As you grow older, you have less time to recover from investment losses. Therefore, you should shift more of your portfolio into bonds and even money market funds in order to lock in the gains you've achieved and stabilize your financial foundation.
Given the vast array of investments available, how could an ordinary investor figure out how to diversify, and then how to change the diversification appropriately over time? If you have time every week to devote to investment research and strategizing, you could probably do reasonably well. But what if you have a job to keep, kids to raise, housekeeping to do, and fun to have?
The solution is to invest in lifecycle and target date funds. These mutual funds provide a diversified portfolio for you. All you do is pay in your money and they automatically invest it in a diversified way. They have "target dates," which are years (usually in increments of 5, like 2010, 2015, 2020, 2025, 2030, etc.). You pick a year that's close to the time when you plan to retire. For example, if you were born in 1975 and expect to retire around age 65, you'd invest in a fund with a target date of 2040. Right now, this fund would probably be mostly invested in stocks (probably somewhere around 80% in stocks, with the remaining 20% in bonds). As you grow older, the management firm operating the lifecycle or target date fund will gradually reduce the stock portion of the fund's assets and increase the bond portion. By the time you reach 65, the fund might have something like 30% to 40% of its assets in stocks, and the rest in bonds and money market funds. This conservative allocation is meant to lock in much of your investment gains so that you'll have some certainty for your retirement finances.
As with any mutual fund, you should look closely at the fees and expenses of lifecycle and target date funds. Some are noticeably more expensive than others, and in the long run, high fees and expenses can be costly. Vanguard and Fidelity offer lifecycle or target date funds that have pretty low costs. Other mutual fund management companies may also offer low cost funds.
If you are a bit of a stock market buff, you may want to think about the diversification philosophies of the lifecycle or target date funds you consider. They tend to have slightly different approaches--some are more heavily weighted toward stocks, while others have a greater preference for bonds. Make sure you are comfortable with the fund's diversification philosophy.
With a lifecycle or target date fund, all the investment strategizing and diversification happens automatically. You just pay in your money and the fund's managers do the rest of the work.
More and more 401(k) plans are offering lifecycle or target date funds as an investment option. If your employer doesn't offer them, lobby for them. They'll make the process of retirement saving much simpler for you. You can invest in these funds through an IRA--just open the IRA with the mutual fund management company offering the funds in which you are interested. If you've maxed out your retirement accounts and want to save more, you can always open a taxable account with a mutual fund management company and invest in a lifecycle or target date fund that way.
Doing things the simple and easy way means you're more likely to do them. We all recognize the importance of saving for retirement. Keep lifecycle and target date funds in mind as one of the easiest ways to build wealth.
Entertainment News: Celebrity phobias. You've heard of some of this stuff--claustrophobia, fear of flying, fear of heights, and fear of snakes. But pigs? Eggs? Ferns? Gerbils? Houseplants? Antiques? Silver cutlery? Bright colors? And chewing gum? We're not making this up. See www.nbc4.com/slideshow/entertainment/13331800/detail.html.
Lifecycle and target date funds solve two basic problems investors face. First, you should diversify your investments, so that you don't have all your eggs in one basket. Typically, a variety of stocks and bonds is recommended.
Second, you should change the focus of your diversification as you grow older. In your 20's and 30's, your portfolio should be heavily weighted toward stocks, since they have greater potential for long term growth. Of course, stocks can nosedive in value if the market stumbles--and you can be sure it will stumble every now and then. But when you're young, you still have plenty of time to ride through market turbulence and profit from the next upswing. As you grow older, you have less time to recover from investment losses. Therefore, you should shift more of your portfolio into bonds and even money market funds in order to lock in the gains you've achieved and stabilize your financial foundation.
Given the vast array of investments available, how could an ordinary investor figure out how to diversify, and then how to change the diversification appropriately over time? If you have time every week to devote to investment research and strategizing, you could probably do reasonably well. But what if you have a job to keep, kids to raise, housekeeping to do, and fun to have?
The solution is to invest in lifecycle and target date funds. These mutual funds provide a diversified portfolio for you. All you do is pay in your money and they automatically invest it in a diversified way. They have "target dates," which are years (usually in increments of 5, like 2010, 2015, 2020, 2025, 2030, etc.). You pick a year that's close to the time when you plan to retire. For example, if you were born in 1975 and expect to retire around age 65, you'd invest in a fund with a target date of 2040. Right now, this fund would probably be mostly invested in stocks (probably somewhere around 80% in stocks, with the remaining 20% in bonds). As you grow older, the management firm operating the lifecycle or target date fund will gradually reduce the stock portion of the fund's assets and increase the bond portion. By the time you reach 65, the fund might have something like 30% to 40% of its assets in stocks, and the rest in bonds and money market funds. This conservative allocation is meant to lock in much of your investment gains so that you'll have some certainty for your retirement finances.
As with any mutual fund, you should look closely at the fees and expenses of lifecycle and target date funds. Some are noticeably more expensive than others, and in the long run, high fees and expenses can be costly. Vanguard and Fidelity offer lifecycle or target date funds that have pretty low costs. Other mutual fund management companies may also offer low cost funds.
If you are a bit of a stock market buff, you may want to think about the diversification philosophies of the lifecycle or target date funds you consider. They tend to have slightly different approaches--some are more heavily weighted toward stocks, while others have a greater preference for bonds. Make sure you are comfortable with the fund's diversification philosophy.
With a lifecycle or target date fund, all the investment strategizing and diversification happens automatically. You just pay in your money and the fund's managers do the rest of the work.
More and more 401(k) plans are offering lifecycle or target date funds as an investment option. If your employer doesn't offer them, lobby for them. They'll make the process of retirement saving much simpler for you. You can invest in these funds through an IRA--just open the IRA with the mutual fund management company offering the funds in which you are interested. If you've maxed out your retirement accounts and want to save more, you can always open a taxable account with a mutual fund management company and invest in a lifecycle or target date fund that way.
Doing things the simple and easy way means you're more likely to do them. We all recognize the importance of saving for retirement. Keep lifecycle and target date funds in mind as one of the easiest ways to build wealth.
Entertainment News: Celebrity phobias. You've heard of some of this stuff--claustrophobia, fear of flying, fear of heights, and fear of snakes. But pigs? Eggs? Ferns? Gerbils? Houseplants? Antiques? Silver cutlery? Bright colors? And chewing gum? We're not making this up. See www.nbc4.com/slideshow/entertainment/13331800/detail.html.
How to Retire Without Saving
Many people can't save. Sometimes it's for good reasons--illness, an aged parent who needs support, a child with special needs, or too low an income. Other times, the reasons are not so good--serial spending, reckless investing or indifference to the future. Whatever the reasons, good or bad, these people need to retire, too. How can they do it? Here are some ideas.
1. Get a job with a pension. Government jobs, military service, law enforcement and educational jobs usually offer pensions. Some of these employers also offer retirement savings accounts similar to the 401(k) plan--the federal government's Thrift Savings Plan is an example. These jobs aren't for everyone. Governments are often bureaucratic, and action-oriented people may have a hard time fitting in. Teachers sometimes find that their jobs involve as much babysitting as teaching. Military and law enforcement personnel perform yeoman's duty for everyone else, but they have to be disciplined, motivated and able to deal with a highly structured and high-pressured environment. It often takes 20 or more years to qualify for a pension, so this isn't a cakewalk. But if you think you're cut out for one of these jobs, and your retirement savings hover around zero on a good day, give it a try.
Corporate pensions continue to exist, especially at the larger, old line companies. But most corporations are fleeing the traditional defined benefit pension (the good kind) faster than rich folks left New Orleans before Katrina. New hires often are unable to participate in the older pension plans. If you have the opportunity to participate in a corporate pension plan, consider yourself lucky. But don't rely entirely on the company pension. You may be disappointed.
2. Buy a house and pay off the mortgage and all home equity debt. Many people who can't put $20 into a savings account always manage to pay the mortgage one way or another. The house can be used as a vehicle for forced savings. Just don't mess things up by taking out a home equity loan or home equity line of credit. You'll get only a finite amount of home equity in your life. If you take out home equity debt, you use up some of your finite lifetime home equity. Yes, you can repay the home equity loan, but you have to use cash that could otherwise have been devoted to retirement savings. If you enter retirement with a home that's free and clear of all liens, you'll have a valuable asset that could add much to your golden years.
3. Work longer. The longer you work, the more your Social Security payments will be. We explained how this works in our earlier blog, Mysteries of Social Security Retirement Benefits, Part 1 (blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement.html). An added benefit of working longer is that it gives you more time to save, and, if you are lucky enough to have a pension, it may help you earn a larger pension. While working longer isn't the fastest way to the cabana on the beach, you may end up with a nicer cabana.
4. Stay together. This is something we discussed in our blog "Love in a Time of Financial Planning--Part Deux" (blogger.uncleleosden.com/2007/04/love-in-time-of-financial-planning-part_20.html). Two people together can often do better than if they were alone. Consider the following example. Each member of a couple gets $15,000 in Social Security benefits, and has $250,000 in savings, enough to allow withdrawal of $10,000 a year in retirement beginning at age 65. Individually, they'd each have $25,000 a year, enough to be okay, but not more than that. Together, they'd have $50,000 a year, enough to be solidly middle class. The idea of staying together for financial reasons conjures up images of bedraggled housewives stuck in loveless marriages with unshaven, potbellied louts who drink too much and smoke cheap cigars. That's not what we mean. Sometimes, no relationship is better than a bad one. But you have many reasons to make your relationship work and your financial well-being may be one of them.
None of these strategies will get you luxuries. You need savings for that. But if you feel like you're financially lost, don't give up. There's still hope for you.
Strange News: Trying to make fast food faster--www.nbc4.com/news/13326368/detail.html?dl=headlineclick.
1. Get a job with a pension. Government jobs, military service, law enforcement and educational jobs usually offer pensions. Some of these employers also offer retirement savings accounts similar to the 401(k) plan--the federal government's Thrift Savings Plan is an example. These jobs aren't for everyone. Governments are often bureaucratic, and action-oriented people may have a hard time fitting in. Teachers sometimes find that their jobs involve as much babysitting as teaching. Military and law enforcement personnel perform yeoman's duty for everyone else, but they have to be disciplined, motivated and able to deal with a highly structured and high-pressured environment. It often takes 20 or more years to qualify for a pension, so this isn't a cakewalk. But if you think you're cut out for one of these jobs, and your retirement savings hover around zero on a good day, give it a try.
Corporate pensions continue to exist, especially at the larger, old line companies. But most corporations are fleeing the traditional defined benefit pension (the good kind) faster than rich folks left New Orleans before Katrina. New hires often are unable to participate in the older pension plans. If you have the opportunity to participate in a corporate pension plan, consider yourself lucky. But don't rely entirely on the company pension. You may be disappointed.
2. Buy a house and pay off the mortgage and all home equity debt. Many people who can't put $20 into a savings account always manage to pay the mortgage one way or another. The house can be used as a vehicle for forced savings. Just don't mess things up by taking out a home equity loan or home equity line of credit. You'll get only a finite amount of home equity in your life. If you take out home equity debt, you use up some of your finite lifetime home equity. Yes, you can repay the home equity loan, but you have to use cash that could otherwise have been devoted to retirement savings. If you enter retirement with a home that's free and clear of all liens, you'll have a valuable asset that could add much to your golden years.
3. Work longer. The longer you work, the more your Social Security payments will be. We explained how this works in our earlier blog, Mysteries of Social Security Retirement Benefits, Part 1 (blogger.uncleleosden.com/2007/05/mysteries-of-social-security-retirement.html). An added benefit of working longer is that it gives you more time to save, and, if you are lucky enough to have a pension, it may help you earn a larger pension. While working longer isn't the fastest way to the cabana on the beach, you may end up with a nicer cabana.
4. Stay together. This is something we discussed in our blog "Love in a Time of Financial Planning--Part Deux" (blogger.uncleleosden.com/2007/04/love-in-time-of-financial-planning-part_20.html). Two people together can often do better than if they were alone. Consider the following example. Each member of a couple gets $15,000 in Social Security benefits, and has $250,000 in savings, enough to allow withdrawal of $10,000 a year in retirement beginning at age 65. Individually, they'd each have $25,000 a year, enough to be okay, but not more than that. Together, they'd have $50,000 a year, enough to be solidly middle class. The idea of staying together for financial reasons conjures up images of bedraggled housewives stuck in loveless marriages with unshaven, potbellied louts who drink too much and smoke cheap cigars. That's not what we mean. Sometimes, no relationship is better than a bad one. But you have many reasons to make your relationship work and your financial well-being may be one of them.
None of these strategies will get you luxuries. You need savings for that. But if you feel like you're financially lost, don't give up. There's still hope for you.
Strange News: Trying to make fast food faster--www.nbc4.com/news/13326368/detail.html?dl=headlineclick.
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