First off, I think New Year's Resolutions are dumb. I mean, if you are going to make changes in your life, why not do them now instead of waiting for a new year? But, I also understand the purpose of starting with a clean slate and since most of you are in the mood to make changes, why not consider some of the following regarding your personal finances:
1. Save at LEAST 10% in your 401K.
2. Open a Roth IRA for you and your spouse and set up automatic deposits into the account. You can put $3,000 in a Roth IRA for the 2004 tax year (you have until April 15th, 2005 to make a contribution for the 2004 tax year). In 2005, you can put up to $4,000 in a Roth IRA. If you can't afford to put money in a Roth AND 10% in your 401K , consider adjusting your 401K contribution so that you CAN utilize a Roth.
3. Have a budget. It doesn't have to be detailed. Just make sure that you have a written plan as to HOW you spend your money. If you make a budget and find out that you don't have enough for all your needs, then you might have to be a little more detailed to find out where you are spending too much money.
4. Set up an emergency fund. Most people say 3 to 6 months of your income should be in an emergency fund. An emergency fund is an excellent tool. Once you have money set aside in your emergency fund, you can consider upping your deductibles on your car and homeowner's insurance, which will save you on your monthly payment. Then, if you do have an accident or have to pay a deductible, you can take money out of your emergency fund.
NOTE: An emergency fund should NOT be accessed to buy a new pair of shoes! It should be considered a sacred account and should only be used in the event you lose your job or have to pay a deductible.
There are many other things you can do to improve your personal finances. I have just mentioned a few. But, I think it is best to concentrate on a few so that you don't get overwhelmed.
Have a great 2005!
Wednesday, 29 December 2004
Wednesday, 22 December 2004
Don't Forget to Rebalance Your 401K!
It's the end of the year and that means that it is time to rebalance your 401K. In a previous post (link), I discussed the reason why you should rebalance (also called reallocate). With this post, the goal is to discuss how you should rebalance.
The first step is to find out how much SHOULD be in each fund, based on your allocation plan. For an equal allocation, you can get this number by simply dividing the total dollar amount in the 401K by the number of funds you are using. For instance, if you have $100,000 in your 401K allocated equally among 5 funds, then you should have $20,000 in each fund. If you don't, then you need to reallocate.
Once you know how much SHOULD be in each fund, simply subtract that number from the actual amount in each fund. A positive number will tell you that you have too much in that fund and a negative number will tell you that you don't have enough in that fund.
For example, say you have $100,000 in your 401K with the following year-end balances:
$15,000 - S&P 500 Index Fund
$13,000 - Large Cap Growth
$25,000 - Small MidCap Growth
$26,000 - Small Cap Value
$21,000 - International Fund
We already determined that you should have $20,000 in each fund. So, we have to do the following calculation to figure out how to adjust the different balances:
$15,000 - $20,000 = -$5,000 - S&P 500 Index Fund
$13,000 - $20,000 = -$7,000 - Large Cap Growth
$25,000 - $20,000 = $5,000 - Small MidCap Growth
$26,000 - $20,000 = $6,000 - Small Cap Value
$21,000 - $20,000 = $1,000 - International Fund
The RED numbers indicate funds that are UNDERFUNDED and the GREEN indicate funds that are overfunded. So, if you wanted even amounts in each of the funds, you would simply sell $5,000 worth of the Small MidCap Growth fund and use the proceeds to buy $5,000 worth of the S&P 500 Index Fund. Then, you would sell $6,000 in the Small Cap Value fund and $1,000 in the International fund and use those proceeds to buy $7,000 worth of the Large Cap Growth fund.
If you aren't sure why you want to go through all the trouble to do this, then you need to brush up on the purpose of asset allocation. You can read my previous post on the subject (link). Asset allocation helps you to have discipline when managing your portfolio.
Here's to a great 2005!
Until next time...
The first step is to find out how much SHOULD be in each fund, based on your allocation plan. For an equal allocation, you can get this number by simply dividing the total dollar amount in the 401K by the number of funds you are using. For instance, if you have $100,000 in your 401K allocated equally among 5 funds, then you should have $20,000 in each fund. If you don't, then you need to reallocate.
Once you know how much SHOULD be in each fund, simply subtract that number from the actual amount in each fund. A positive number will tell you that you have too much in that fund and a negative number will tell you that you don't have enough in that fund.
For example, say you have $100,000 in your 401K with the following year-end balances:
$15,000 - S&P 500 Index Fund
$13,000 - Large Cap Growth
$25,000 - Small MidCap Growth
$26,000 - Small Cap Value
$21,000 - International Fund
We already determined that you should have $20,000 in each fund. So, we have to do the following calculation to figure out how to adjust the different balances:
$15,000 - $20,000 = -$5,000 - S&P 500 Index Fund
$13,000 - $20,000 = -$7,000 - Large Cap Growth
$25,000 - $20,000 = $5,000 - Small MidCap Growth
$26,000 - $20,000 = $6,000 - Small Cap Value
$21,000 - $20,000 = $1,000 - International Fund
The RED numbers indicate funds that are UNDERFUNDED and the GREEN indicate funds that are overfunded. So, if you wanted even amounts in each of the funds, you would simply sell $5,000 worth of the Small MidCap Growth fund and use the proceeds to buy $5,000 worth of the S&P 500 Index Fund. Then, you would sell $6,000 in the Small Cap Value fund and $1,000 in the International fund and use those proceeds to buy $7,000 worth of the Large Cap Growth fund.
If you aren't sure why you want to go through all the trouble to do this, then you need to brush up on the purpose of asset allocation. You can read my previous post on the subject (link). Asset allocation helps you to have discipline when managing your portfolio.
Here's to a great 2005!
Until next time...
Saturday, 18 December 2004
Young People and Debt
I saw this interesting and scary article about young people and their use of debt.
Link
This article just proves the importance of giving kids a financial education.
Link
This article just proves the importance of giving kids a financial education.
Friday, 17 December 2004
What the Heck is Asset Allocation?
Basically, asset allocation is how a person "allocates" or divides up their investable assets among different asset classes. It can be as simple as dividing a portfolio in half and putting 50% in a stock index fund and 50% in a bond fund. It can be taken a step further by taking the stock portion and dividing it up among large-caps, mid-caps, and small caps and dividing the bond portion among bonds with different maturies.
Just like having a financial plan, it is important to have an asset allocation plan (also known as an investment plan). Why? Because without an investment plan, people tend to buy what they shouldn't buy when they shouldn't buy it! I know a lot of people who move their 401k money into whatever fund performed best LAST YEAR! The chances of that fund performing best THIS YEAR are pretty slim. But, people do it anyway.
The importance of asset allocation can be best seen with an example. Suppose a person has a written asset allocation plan that says that they will invest in the following manner:
25% or $25,000 - Large-Cap fund
25% or $25,000 - Mid-Cap fund
25% or $25,000 - Small-Cap fund
25% or $25,000 - Bond fund
Let's say in this particular year, the different funds had these rates of return:
Year 1
+10% - Large-Cap fund
+08% - Mid-Cap fund
+15% - Small-Cap fund
-02% - Bond fund
The portfolio would look like this:
(the formula for calculating a return for one year is: Beginning Amount X (1 + the rate of return expressed as a decimal)
$25,000 X 1.10 = $27,500 Large-Cap fund
$25,000 X 1.08 = $27,000 Mid-Cap fund
$25,000 X 1.15 = $28,750 Small-Cap fund
$25,000 X 0.98 = $24,500 Bond fund
Total Portfolio value at end of year 1: $107,750 or a 7.75% rate of return.
Most people would probably want to sell all of their bond fund and put it all in the small-cap fund (since it went up the most!). That's human nature. Nobody likes to hold an investment that seems to be losing money. However, suppose the next year, the fund's returns were like this:
Year 2
- 05% - Large-Cap fund
+03% - Mid-Cap fund
- 20% - Small-Cap fund
+05% - Bond fund
At the end of year 2, the portfolio would like this:
$27,500 X 0.95 = $26,125 Large-Cap fund
$27,000 X 1.03 = $27,810 Mid-Cap fund
$53,250 X 0.80 = $42,600 Small-Cap fund
The portfolio would be worth $96,535 (for a one year LOSS of 10.41%!)
Finally, had this person stuck with their asset allocation plan and reallocated so that 25% was in each of the 4 funds, they would have only had a loss of 4.25% instead of 10.41%:
$26,937 X 0.95 = $25,950 Large-Cap fund
$26,937 X 1.03 = $27,810 Mid-Cap fund
$26,937 X 0.80 = $21,550 Small-Cap fund
$26,937 X 1.05 = $28,284 Bond fund
The portfolio would be worth $103,170 (for a one year loss of 4.25%, which is MUCH better than the 10.41% loss in the above example!).
I must mention one important note: Asset Allocation does not mean that a portfolio will get the best return in any one year, instead it helps smooth out returns.
I hope this helps! Until next time...
Just like having a financial plan, it is important to have an asset allocation plan (also known as an investment plan). Why? Because without an investment plan, people tend to buy what they shouldn't buy when they shouldn't buy it! I know a lot of people who move their 401k money into whatever fund performed best LAST YEAR! The chances of that fund performing best THIS YEAR are pretty slim. But, people do it anyway.
The importance of asset allocation can be best seen with an example. Suppose a person has a written asset allocation plan that says that they will invest in the following manner:
25% or $25,000 - Large-Cap fund
25% or $25,000 - Mid-Cap fund
25% or $25,000 - Small-Cap fund
25% or $25,000 - Bond fund
Let's say in this particular year, the different funds had these rates of return:
Year 1
+10% - Large-Cap fund
+08% - Mid-Cap fund
+15% - Small-Cap fund
-02% - Bond fund
The portfolio would look like this:
(the formula for calculating a return for one year is: Beginning Amount X (1 + the rate of return expressed as a decimal)
$25,000 X 1.10 = $27,500 Large-Cap fund
$25,000 X 1.08 = $27,000 Mid-Cap fund
$25,000 X 1.15 = $28,750 Small-Cap fund
$25,000 X 0.98 = $24,500 Bond fund
Total Portfolio value at end of year 1: $107,750 or a 7.75% rate of return.
Most people would probably want to sell all of their bond fund and put it all in the small-cap fund (since it went up the most!). That's human nature. Nobody likes to hold an investment that seems to be losing money. However, suppose the next year, the fund's returns were like this:
Year 2
- 05% - Large-Cap fund
+03% - Mid-Cap fund
- 20% - Small-Cap fund
+05% - Bond fund
At the end of year 2, the portfolio would like this:
$27,500 X 0.95 = $26,125 Large-Cap fund
$27,000 X 1.03 = $27,810 Mid-Cap fund
$53,250 X 0.80 = $42,600 Small-Cap fund
The portfolio would be worth $96,535 (for a one year LOSS of 10.41%!)
Finally, had this person stuck with their asset allocation plan and reallocated so that 25% was in each of the 4 funds, they would have only had a loss of 4.25% instead of 10.41%:
$26,937 X 0.95 = $25,950 Large-Cap fund
$26,937 X 1.03 = $27,810 Mid-Cap fund
$26,937 X 0.80 = $21,550 Small-Cap fund
$26,937 X 1.05 = $28,284 Bond fund
The portfolio would be worth $103,170 (for a one year loss of 4.25%, which is MUCH better than the 10.41% loss in the above example!).
I must mention one important note: Asset Allocation does not mean that a portfolio will get the best return in any one year, instead it helps smooth out returns.
I hope this helps! Until next time...
Tuesday, 14 December 2004
Hidden Inflation
Next time you go to the grocery store, go to the frozen food section and look at the ice cream. If you look real hard you might see something different. I'll give you a hint: (the size of the container is smaller). Ice cream companies have started putting their ice cream in 1.75 quart containers instead 1/2 gallon containers, which is really a significant price increase. I call this "sneaky" inflation because most people probably don't even notice.
How much of a price increase is this?
Before, 2 quarts (1/2 gallon) of ice cream sold for $3.98.
Now, 1.75 quarts of ice cream sells for $3.98.
To figure out the price per quart, simply do the following:
$3.98 divided by 2 = $1.99
$3.98 divided by 1.75 = $2.27
To calculate the percentage change in the price, do the following:
FORMULA:
(New Price - Old Price)/Old Price
THE MATH:
($2.27 - $1.99)/$1.99
$.28/$1.99 = .1407 or 14.07%
So, by reducing the container size from 1/2 gallon to 1.75 quarts and keeping the price the same, companies have raised prices over 14%!
Inflation is just a fact of life. But, I respect companies more if they just raise prices instead of being sneaky.
I won't buy the new size of ice cream. I will buy Blue Bell, which is still 1/2 gallon. In fact, they have now started putting "Still 1/2 gallon" on the side of their cartons.
That's my rant for the day. Until next time...
How much of a price increase is this?
Before, 2 quarts (1/2 gallon) of ice cream sold for $3.98.
Now, 1.75 quarts of ice cream sells for $3.98.
To figure out the price per quart, simply do the following:
$3.98 divided by 2 = $1.99
$3.98 divided by 1.75 = $2.27
To calculate the percentage change in the price, do the following:
FORMULA:
(New Price - Old Price)/Old Price
THE MATH:
($2.27 - $1.99)/$1.99
$.28/$1.99 = .1407 or 14.07%
So, by reducing the container size from 1/2 gallon to 1.75 quarts and keeping the price the same, companies have raised prices over 14%!
Inflation is just a fact of life. But, I respect companies more if they just raise prices instead of being sneaky.
I won't buy the new size of ice cream. I will buy Blue Bell, which is still 1/2 gallon. In fact, they have now started putting "Still 1/2 gallon" on the side of their cartons.
That's my rant for the day. Until next time...
Saturday, 4 December 2004
Kids & Money Part III
I took my boys to the library today. I like going to the library. It is nice and quiet there (something I don't get too often since we have 3 kids!).
Anyway, I was browsing through the stacks when I came across a book called Kids, Parents & Money by Willard Stawski. Since I am sort of on a mission when it comes to educating kids about money, I sat down and started reading it. It turns out that Mr. Stawski has a website that accompanies the book (KidsParentsandMoney.com) so I went and checked it out too. I really like his website. I would recommend checking out the links page.
Now go check it out!
Until the next time...
Anyway, I was browsing through the stacks when I came across a book called Kids, Parents & Money by Willard Stawski. Since I am sort of on a mission when it comes to educating kids about money, I sat down and started reading it. It turns out that Mr. Stawski has a website that accompanies the book (KidsParentsandMoney.com) so I went and checked it out too. I really like his website. I would recommend checking out the links page.
Now go check it out!
Until the next time...
Mission Statements & Financial Planning
It is hard to believe that it has been almost a month since I last posted! Time flies!
The end of 2004 is near, making December a perfect time to reflect on the happenings of this year and begin planning for 2005. I was reviewing my personal mission statement when I started thinking about how a personal mission statement can and should be part of a financial plan. If a personal mission statement is a summary of one's life purpose, shouldn't it be reflected in their financial plan? I think so!
That said, the first step is to develop a personal mission statement. Questions one might ask may include the following:
The end of 2004 is near, making December a perfect time to reflect on the happenings of this year and begin planning for 2005. I was reviewing my personal mission statement when I started thinking about how a personal mission statement can and should be part of a financial plan. If a personal mission statement is a summary of one's life purpose, shouldn't it be reflected in their financial plan? I think so!
That said, the first step is to develop a personal mission statement. Questions one might ask may include the following:
Why am I here?
What do I want to accomplish in life?
What or who is important to me (also known as "values")?
What are my priorities?
Before I wrote my mission statement I read Stephen Covey's Seven Habits of Highly Effective People. Although I don't agree with everything Mr. Covey writes, I do agree with most of this book. I highly recommend it for everyone to read! In order to effectively write a personal mission statement, one must know what is important to them. What's important to me is:
My relationship with God
My wife
My kids
My job
Charity
Myself
Once a person knows what is important to them, they then need to know what their different roles are in life. My roles are:
Follower of Christ
Husband
Father
Financial Planner
Den Leader
Of course these aren't all the roles I play in life. I listed just those that are most common to me. Once a person knows what's important to them and their roles, they can begin composing their mission statement. Here's my mission statement (altered a bit for privacy purposes):
My mission in life is to first and foremost live for Christ. A man must decide whom he is going to follow. I will follow Christ and seek God's will in all that I do. I will do this by studying the Bible and by praying on a daily basis and by walking in His ways.
Secondly, I will be a loving husband to my wife. I will strive to love her like Christ loved the church. I will practice selfless love, striving to put her needs before my own.
As a father, I will strive to be loving and accepting. I realize that my kids are different, each possessing different talents and abilities given to them by God, and I will strive to treat them accordingly. I will discipline them with love. I will strive to be a good role model for them.
As a financial planner, I will always strive to do what's best for my clients, even it if might not be what's best for me. I will study and keep up on what is happening within the financial planning field. My goal is to develop my firm into a top-notch planning firm with over $50,000,000 in assets by the year 2010! With God's blessing, it can be done.
As a successful financial planner, I will give back to my community. I will teach classes on financial planning and will dedicate myself to worthy causes. I will also strive to be the best Cub Scouts Den Leader that I can be.
Finally, in order to live out this mission, I must be healthy. Therefore, I will eat a proper diet and exercise daily.
I will read this every day!
That's my mission. That's what I'm about. Now, that's not saying that I ALWAYS act in a way that is congruent with my mission. After all, I am human. But, by having my personal mission statement, I can refer back to it daily and it brings me back to where I need to be.
So, what does all this have to do with financial planning? In my next post I'll attempt to explain it.
Until next time...
Wednesday, 10 November 2004
Getting Organized Part II
I came across a product that I think could be very helpful in getting personal finances in order. The product is called Financial Planning Organizing Kit by a company called HomeFile. I haven't used one yet but am going to order one. I'll post my opinion once I get my HomeFile system.
Thursday, 4 November 2004
Getting Organized
Here's an interesting article I found today on the MSN website. This lady has some pretty good pointers on getting personal finances in order.
To that, I might add that it is a good idea to set up an IRA on automatic deposit. This will help a person keep a disciplined investment program.
Good luck!
To that, I might add that it is a good idea to set up an IRA on automatic deposit. This will help a person keep a disciplined investment program.
Good luck!
The Financial Planning Process
What are the steps in the financial planning process? If a person wants to work with a financial planner, what can they expect? What are their responsibilities and the financial planner's responsibilities?
Most Certified Financial Planners* (CFP) use the six step process defined by the CFP Board. Those steps are:
1. Establishing and Defining the Client-Planner Relationship.
This step is usually accomplished with a 30-minute initial consultation. Most planners do not charge for this meeting.
2. Gathering Client Data, Including Goals.
Once the client and planner decide to work together, information is needed from the client. This step can also be conducted during the first meeting.
3. Analyzing and Evaluating the Client's Financial Status.
This step is conducted by the financial planner and can take up to a month to accomplish.
4. Developing and Presenting Financial Planning Recommendations and/or Alternatives.
This step is done in conjunction with step 3. The word "alternatives" means that oftentimes a client's goals are unachievable under current circumstances. Therefore, it is necessary to have an alternative plan of action. This step also requires a client meeting.
5. Implementing the Financial Planning Recommendations.
Once the plan has been accepted by the client, the planner makes out an action items list and both the client and the planner work together during the implementation step. Some clients may prefer to implement on their own.
6. Monitoring the Financial Planning Recommendations.
Notice that these are steps in the Financial Planning Process. A financial plan is a process and not a product. Changes must be made over the years to make sure the plan meets the client's needs. It is recommended that the financial plan be examined at least yearly.
Those are the six steps according to the CFP Board. Not all planners use the six steps, either because they combine various steps or they have additional steps.
I hope my readers found this post helpful. Please send me an email with any questions or comments.
Until next time...
*I am not yet a Certified Financial Planner. I am in the process of preparing to obtain my CFP designation.
Most Certified Financial Planners* (CFP) use the six step process defined by the CFP Board. Those steps are:
1. Establishing and Defining the Client-Planner Relationship.
This step is usually accomplished with a 30-minute initial consultation. Most planners do not charge for this meeting.
2. Gathering Client Data, Including Goals.
Once the client and planner decide to work together, information is needed from the client. This step can also be conducted during the first meeting.
3. Analyzing and Evaluating the Client's Financial Status.
This step is conducted by the financial planner and can take up to a month to accomplish.
4. Developing and Presenting Financial Planning Recommendations and/or Alternatives.
This step is done in conjunction with step 3. The word "alternatives" means that oftentimes a client's goals are unachievable under current circumstances. Therefore, it is necessary to have an alternative plan of action. This step also requires a client meeting.
5. Implementing the Financial Planning Recommendations.
Once the plan has been accepted by the client, the planner makes out an action items list and both the client and the planner work together during the implementation step. Some clients may prefer to implement on their own.
6. Monitoring the Financial Planning Recommendations.
Notice that these are steps in the Financial Planning Process. A financial plan is a process and not a product. Changes must be made over the years to make sure the plan meets the client's needs. It is recommended that the financial plan be examined at least yearly.
Those are the six steps according to the CFP Board. Not all planners use the six steps, either because they combine various steps or they have additional steps.
I hope my readers found this post helpful. Please send me an email with any questions or comments.
Until next time...
*I am not yet a Certified Financial Planner. I am in the process of preparing to obtain my CFP designation.
Tuesday, 26 October 2004
Saving for College
Putting a child or grandchild through college is NOT CHEAP! Therefore, it is important to plan ahead if at all possible. Two of the most popular ways to save for college is a 529 Plan or an Education IRA. I will briefly discuss 529 Plans today and the differences between the two tomorrow.
529 Plans are great, provided they have low expenses. They are excellent for grandparents who want to take money out of their estate and do something for their kids and grandkids at the same time. The grandparent is the owner of the 529 Plan and the grandchild is the beneficiary. If the child gets to college age and doesn't want to go to college, the grandparent can change the beneficiary and give the money to someone else.
For those interested,check out SavingforCollege.com. This is a very nice website dedicated to the 529 Plan.
I'll be back tomorrow!
529 Plans are great, provided they have low expenses. They are excellent for grandparents who want to take money out of their estate and do something for their kids and grandkids at the same time. The grandparent is the owner of the 529 Plan and the grandchild is the beneficiary. If the child gets to college age and doesn't want to go to college, the grandparent can change the beneficiary and give the money to someone else.
For those interested,check out SavingforCollege.com. This is a very nice website dedicated to the 529 Plan.
I'll be back tomorrow!
Thursday, 21 October 2004
Website(s) of the Day (10/21)
This post is basically a continuation of yesterday's "Kids & Money" post.
One of the best writers on kids and money is Neale Godfrey. She has a really nice website at Children's Financial Network. I urge all parents and grandparents to check it out. For those interested, books can be purchased directly from the site.
I got an email yesterday from the David McCurrach, owner of the Kid'sMoney.org telling me about a new book he has written called Allowance Magic: Turn Your Kids Into Money Wizards and AllowanceMagic.com. I haven't yet had a chance to read the book. I'll review it and post my thoughts as soon as I get a copy.
Please check out those sites and let me know what you think by sending me an email.
One of the best writers on kids and money is Neale Godfrey. She has a really nice website at Children's Financial Network. I urge all parents and grandparents to check it out. For those interested, books can be purchased directly from the site.
I got an email yesterday from the David McCurrach, owner of the Kid'sMoney.org telling me about a new book he has written called Allowance Magic: Turn Your Kids Into Money Wizards and AllowanceMagic.com. I haven't yet had a chance to read the book. I'll review it and post my thoughts as soon as I get a copy.
Please check out those sites and let me know what you think by sending me an email.
Wednesday, 20 October 2004
Kids & Money
One of the best gifts we can give our kids is a solid understanding of the handling of money. Unfortunately, most parents do not talk about money with their kids, leaving the kids to either follow in their parent's footsteps (whether good or bad) or fend for themselves. This can be a recipe for disaster.
So, what's a proactive parent to do? First off, get an education. There is a wealth of resources on the internet that can help parents teach their kids about money. One such site is iVillage's "kids and money" website. They have put together a very nice website, full of articles and information that should be of interest to parents. Another nice website is David McCurrach's Kid'sMoney.org. Parents of older kids will especially like the Kids' Making Money section.
Secondly, parents should help their children come up with their own budget. Understanding and practicing the "live within your means" philosophy can put kids on the highway to financial success. Because the child can see where their money comes from and where it goes, they get a sense that money is very real and very important.
Finally, once the child has come up with a budget, parents should help them set some goals to work towards. Perhaps it's a new bicycle or a Playstation. Let the child decide. Then, figure out how much the goal is going to cost (remember to add sales tax). Write down the amount and decide on how much money the child is going to put towards that goal each pay period. Then, make them stick to it. Fulfilling that goal will show the child the power of goal-setting and hopefully help them start a habit that will last a lifetime.
I urge ALL PARENTS to start teaching their kids proper money management skills. It just might save your child from committing some serious money mistakes.
Good luck!
So, what's a proactive parent to do? First off, get an education. There is a wealth of resources on the internet that can help parents teach their kids about money. One such site is iVillage's "kids and money" website. They have put together a very nice website, full of articles and information that should be of interest to parents. Another nice website is David McCurrach's Kid'sMoney.org. Parents of older kids will especially like the Kids' Making Money section.
Secondly, parents should help their children come up with their own budget. Understanding and practicing the "live within your means" philosophy can put kids on the highway to financial success. Because the child can see where their money comes from and where it goes, they get a sense that money is very real and very important.
Finally, once the child has come up with a budget, parents should help them set some goals to work towards. Perhaps it's a new bicycle or a Playstation. Let the child decide. Then, figure out how much the goal is going to cost (remember to add sales tax). Write down the amount and decide on how much money the child is going to put towards that goal each pay period. Then, make them stick to it. Fulfilling that goal will show the child the power of goal-setting and hopefully help them start a habit that will last a lifetime.
I urge ALL PARENTS to start teaching their kids proper money management skills. It just might save your child from committing some serious money mistakes.
Good luck!
Tuesday, 19 October 2004
What are Exchange-Traded Funds?
Stated in the simplest of terms, Exchange-Traded Funds (ETF) are index mutual funds that trade like an individual share of stock. There are ETFs for practically any sector or market imagined.
The advantage to using ETFs is that if a person doesn't want to index the broad market, they could buy individual ETFs that cover the areas they are interested in. For instance, a person could just buy an ETF that covered biotechnology. Although it is risky to buy just one sector like biotechnology, it is less risky to do so than just buying a couple of biotech stocks.
To learn more about ETFs, go to iShares. IShares is one of the biggest providers of ETFs. They have put together a really nice website to help individuals understand ETFs. Another good website to check out is Ameritrade's ETF section. They have a ton of information regarding ETFs to help people make informed decisons.
Now before running out and buying an ETF, it is important to understand that since the ETF is essentially a "stock," buying shares will require a transaction fee. In other words, there is no free lunch. Therefore, it might be prudent to use ETFs in a long-term buy and hold strategy rather than trying to trade them. Also, regular index funds may be better for those people who are trying to build wealth by dollar-cost averaging since most index funds don't charge a fee every time a purchase is made (as long as their minimums are met).
Good luck!
The advantage to using ETFs is that if a person doesn't want to index the broad market, they could buy individual ETFs that cover the areas they are interested in. For instance, a person could just buy an ETF that covered biotechnology. Although it is risky to buy just one sector like biotechnology, it is less risky to do so than just buying a couple of biotech stocks.
To learn more about ETFs, go to iShares. IShares is one of the biggest providers of ETFs. They have put together a really nice website to help individuals understand ETFs. Another good website to check out is Ameritrade's ETF section. They have a ton of information regarding ETFs to help people make informed decisons.
Now before running out and buying an ETF, it is important to understand that since the ETF is essentially a "stock," buying shares will require a transaction fee. In other words, there is no free lunch. Therefore, it might be prudent to use ETFs in a long-term buy and hold strategy rather than trying to trade them. Also, regular index funds may be better for those people who are trying to build wealth by dollar-cost averaging since most index funds don't charge a fee every time a purchase is made (as long as their minimums are met).
Good luck!
Monday, 18 October 2004
The Beauty of the Roth IRA
Personally, I think the Roth IRA is a wonderful gift from our government. To put it simply, if a person opened a Roth IRA at age 25 and put in $3,000 per year and received a 10% annual rate of return for 40 years, they could have over $1,400,000 by age 65. And, they could access this money tax free!
To put that in perspective, imagine taking withdrawals at a 5% rate ($70,000) annually starting at age 65. If this were taxable as income, a person might expect to pay taxes in the 20%* range, which would be $14,000, leaving $56,000 to live on. In other words, in a 20% tax bracket, a person would have to withdraw $87,500 in order to have $70,000 to live on. That's the power of the Roth IRA.
That's not it, in addition, there is also the flexibility of not taking a withdrawal if it isn't needed. A person does not have this same flexibility with other retirement plans. With other retirement plans, the IRS insists that a person must take withdrawals beginning the year after the year in which they turn 70 1/2. The Roth IRA is MUCH less confusing.
I haven't discussed all the intricacies of Roth IRAs. In a future article, I'll talk more in detail about the Roth IRA and how it compares to other retirement plans. In the meantime, for those interested, they may want to read "The Retirement Time Bomb and How to Defuse it" by Ed Slott. It is an excellent resource for understanding IRAs and other retirement savings vehicles. Mr. Slott also has a website called IRAhelp.com.
*I used the 20% tax bracket for easy math. Individual brackets may vary from the one I listed.
To put that in perspective, imagine taking withdrawals at a 5% rate ($70,000) annually starting at age 65. If this were taxable as income, a person might expect to pay taxes in the 20%* range, which would be $14,000, leaving $56,000 to live on. In other words, in a 20% tax bracket, a person would have to withdraw $87,500 in order to have $70,000 to live on. That's the power of the Roth IRA.
That's not it, in addition, there is also the flexibility of not taking a withdrawal if it isn't needed. A person does not have this same flexibility with other retirement plans. With other retirement plans, the IRS insists that a person must take withdrawals beginning the year after the year in which they turn 70 1/2. The Roth IRA is MUCH less confusing.
I haven't discussed all the intricacies of Roth IRAs. In a future article, I'll talk more in detail about the Roth IRA and how it compares to other retirement plans. In the meantime, for those interested, they may want to read "The Retirement Time Bomb and How to Defuse it" by Ed Slott. It is an excellent resource for understanding IRAs and other retirement savings vehicles. Mr. Slott also has a website called IRAhelp.com.
*I used the 20% tax bracket for easy math. Individual brackets may vary from the one I listed.
Friday, 15 October 2004
Website of the Day - 10/15
One very nice website for personal financial advice is Scott Burns' site at the Dallas Morning News:
http://www.dallasnews.com/business/scottburns/
New users will have to register with the Dallas Morning News (which is free) before they can have access to Mr. Burns' site.
It is a site that you will want to bookmark and refer back to periodically.
http://www.dallasnews.com/business/scottburns/
New users will have to register with the Dallas Morning News (which is free) before they can have access to Mr. Burns' site.
It is a site that you will want to bookmark and refer back to periodically.
What is "Fee-Only" Financial Planning?
According to the National Association of Personal Financial Advisors (NAPFA) website, a fee-only planner is "...one who, in all circumstances, is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product."
Basically, the fee-only compensation structure allows for the consumer and the advisor to be on the same team. The advisor gets paid for their knowledge and time and for telling the consumer what is best for them. Fees can either be paid on an hourly or project basis, or the advisor can charge a management fee based on the assets that the advisor manages for the client.
Why is this important for consumers? The main concern with commission-based advisors is that the client may only be offered products or solutions that compensate the broker the best. I've known mutual fund companies to offer trips to those brokers who sell the most of their mutual funds. One can only imagine how many clients were sold mutual funds simply because the broker was trying to win a trip.
This does not mean that ALL commission-based advisors are bad. But, consumers need to be aware of the pitfalls of dealing with this type of advisor. Before a consumer signs anything, they should find out how much the product is going to cost them and how the broker is compensated.
So, does working with a fee-only planner guarantee success? Not necessarily. The compensation structure doesn't mean a thing if the advisor is incompetent. In a follow-up post, I'll give some pointers on what consumers should ask a prospective advisor.
Basically, the fee-only compensation structure allows for the consumer and the advisor to be on the same team. The advisor gets paid for their knowledge and time and for telling the consumer what is best for them. Fees can either be paid on an hourly or project basis, or the advisor can charge a management fee based on the assets that the advisor manages for the client.
Why is this important for consumers? The main concern with commission-based advisors is that the client may only be offered products or solutions that compensate the broker the best. I've known mutual fund companies to offer trips to those brokers who sell the most of their mutual funds. One can only imagine how many clients were sold mutual funds simply because the broker was trying to win a trip.
This does not mean that ALL commission-based advisors are bad. But, consumers need to be aware of the pitfalls of dealing with this type of advisor. Before a consumer signs anything, they should find out how much the product is going to cost them and how the broker is compensated.
So, does working with a fee-only planner guarantee success? Not necessarily. The compensation structure doesn't mean a thing if the advisor is incompetent. In a follow-up post, I'll give some pointers on what consumers should ask a prospective advisor.
Thursday, 14 October 2004
Which is better: 15-year or 30-year Mortgages?
The quick answer is: it depends. The main factors to consider when deciding which mortgage is best are:
1. The interest rate on the mortgage.
2. The rate of return that can be received on the money that would have gone towards paying off the mortgage early.
3. Personal financial constraints.
For example, let's say someone has a choice between a $100,000 mortgage with a 30-year fixed rate of 6% or a 15-year mortgage at 5.5%. Let's also assume that the house appreciates in value at 3% per year. We know from a historical perspective that the stock market (using the S&P 500) has returned on average about 10% per year over the last 30 years. The following steps can be used to calculate which mortage looks better on paper (there are other factors to consider that I will discuss later):
1. The 15-year mortgage would have a monthly payment of $817 while the 30-year mortgage has a monthly payment of $600 for a monthly difference of $217 ($817-$600=$217). This $217 we will assume is saved in a Roth IRA and invested annually in the stock market and getting an average return of 10% per year. We will also assume that $817 per month will be saved after the 15-year mortgage is paid off (also in a Roth IRA and getting a 10% return per year).
2. Calculate the total amounts paid towards principle and interest over the two time periods.
Tags: Mortgage Comparisons
1. The interest rate on the mortgage.
2. The rate of return that can be received on the money that would have gone towards paying off the mortgage early.
3. Personal financial constraints.
For example, let's say someone has a choice between a $100,000 mortgage with a 30-year fixed rate of 6% or a 15-year mortgage at 5.5%. Let's also assume that the house appreciates in value at 3% per year. We know from a historical perspective that the stock market (using the S&P 500) has returned on average about 10% per year over the last 30 years. The following steps can be used to calculate which mortage looks better on paper (there are other factors to consider that I will discuss later):
1. The 15-year mortgage would have a monthly payment of $817 while the 30-year mortgage has a monthly payment of $600 for a monthly difference of $217 ($817-$600=$217). This $217 we will assume is saved in a Roth IRA and invested annually in the stock market and getting an average return of 10% per year. We will also assume that $817 per month will be saved after the 15-year mortgage is paid off (also in a Roth IRA and getting a 10% return per year).
2. Calculate the total amounts paid towards principle and interest over the two time periods.
(15 years X 12 payments per year) X $817 payment = $147,075
(30 years X 12 payments per year) X $600 payment = $215,838
The 30-year mortgage results in $68,763 ADDITIONAL interest expense. Most people stop here and proclaim that the 15-year mortgage is the best way to go. However, they are missing one VERY IMPORTANT factor.
3. Calculate the investment earnings on the monthly difference.
$217 monthly savings X 12 = $2,610 savings per year invested annually in a Roth IRA.
$2610 invested per year and getting a 10% rate of return will be worth $472,334 in 30 years. For those interested in the math the formula is [$2610 X (1 + .10)^30].
4. Calculate the investment earnings on the monthly savings ($817) after paying off the 15-year mortgage.
$817 monthly savings X 12 = $9,805 savings per year invested annually in Roth IRAs (this amount of money would require 2 Roth IRA accounts).
$9805 invested per year and getting a 10% rate of return will be worth $342,682 in 15 years. The formula is [$9805 X (1 + .10)^15].
5. Now compare the two scenarios to get the full picture. In 30 years, the home will be worth $242,726 ([$100,000 X (1 + .03)^30].
To find the net worth under each scenario simply add the home's value and the investment balance:
15-year mortgage: $242,726 home value + $342,682 investment balance = $585,408 net worth.
30-year mortgage: $242,726 home value + $472,334 investment balance = $715,060 net worth.
So, in this example a person gains an additional $129,615 in net worth by going with the 30-year mortgage instead of the 15-year mortgage.
How is this possible? Well, since the mortgage rates are 4 - 4.5% lower than the assumed rate of return on the stock market, going with the 30-year mortgage and investing early allows for 15 years of additional compounding. This is the difference maker. But, this ONLY WORKS if the person is dedicated to investing the difference and not spending it on something else like a car note.
Now, even given all that, are there still reasons to go with a 15-year mortgage? I suppose there is a certain peace-of-mind in knowing that the house is paid for. Also, there is no guarantee that the stock market is going to return 10% per year for the next 30 years.
So, there it is. Each person has to decide what is best for them.
Good luck!
Tags: Mortgage Comparisons
Wednesday, 13 October 2004
The Purpose of this Blog
Hello all,
I decided to start a blog (short for Web Log) dealing with all things financial (hence the name AllThingsFinancial).
The internet has created a wealth of financial information. This is both good and bad. The good part is that most of this information is free. The bad part is there is SO MUCH OF IT! So, my goal is to post what I think is important in one convenient place.
This is a "community" effort. If you have any suggestions, please let me know
I decided to start a blog (short for Web Log) dealing with all things financial (hence the name AllThingsFinancial).
The internet has created a wealth of financial information. This is both good and bad. The good part is that most of this information is free. The bad part is there is SO MUCH OF IT! So, my goal is to post what I think is important in one convenient place.
This is a "community" effort. If you have any suggestions, please let me know
Website of the Day
One of my favorite economic/political writers is Thomas Sowell. He has a way of cutting to the chase when it comes to economics. He writes articles at least weekly and is well worth checking out.
To check out his latest, go to:
http://www.townhall.com/columnists/thomassowell/archive.shtml
Enjoy!
To check out his latest, go to:
http://www.townhall.com/columnists/thomassowell/archive.shtml
Enjoy!
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