Do You Need an Investment Broker? (Carole)

Recently, one of you asked if we thought an investment broker was a necessity, or if it would be better to save the commission money and do your own online investing.  

Even though my husband and I have been consistent investors for many years, I do not consider myself an expert in any way when it comes to investing.  But, I've done a lot of reading about this subject over the years, and every reputable expert encourages having a professional along for your investment ride. 

One of my favorite experts, Dave Ramsey, has an excellent article about this  subject that I hope you will find helpful.   I would encourage you to read this very short article a couple of times.  Investing is a complicated venture and not one to rush into, and you should be careful who you trust with your financial future. 

You can expect that he/she will talk you through some simple yet important questions:

1.  At what age do you want to retire?

2.  What amount of money will you need at retirement?

3.  How much risk are you comfortable with in your investment strategy?

From here you can discuss your current financial situation (income, savings & debt), the amount of years between now and your retirement, and any personal criteria you might have for your investment options.  This person will also have tax advice to share regarding your decisions.   Your investment broker should be a valuable asset and a trusted associate through the years.  

On a personal note, my husband and I are big believers in not keeping all our eggs in one basket, and so we have two separate people we invest with.  Neither one knows about the other.  It just makes us more comfortable to split things up a bit (if one of them were to turn into a Bernie Madoff, we wouldn't lose everything).  Maybe you'll feel the same way too.  

The best advice regarding investing is to START EARLY and BE CONSISTENT.  Remember, when it comes to investing, Slow and Steady wins the race.  

  

  

What Would You Tell a Teenager About Money? (Carole)

A few weeks ago, I was asked to speak about money to the teenaged girls in our church congregation.  Thanks to all of you and your many good comments on this blog since January, I felt like I knew what kind of information would be most interesting and helpful to these girls who are just on the cusp of adulthood.

Here's what we discussed:

1.  Getting a job and saving 50% of what you earn while in your teens.  I also shared with them examples of impressive teenagers I've known through the years and the amounts of money they've been able to save in their bank accounts by the time they graduated from high school.

2.  The cost of tuition at local and out-of-state colleges and universities.  We even took a look at the cost of elite schools like Harvard and Stanford, just so they would know.

3.  Typical salaries of standard jobs:  surgeon, fire fighter, grocery store clerk, pilot, flight attendant, lawyer, school teacher. . .  and what the monthly take-home pay (after federal taxes) would be for each of these jobs.  So. . .is a college education really worth the time and money invested for your particular profession?

4.  How much adult life costs:  housing, groceries, transportation, utilities and insurance.  True to one of my previous examples of teaching children about money, I brought in $3,000 (which is a typical take home salary if you make $50,000/year -- the average salary in Las Vegas) in cash -- in $10 bills.  Together we paid the bills of a typical family in southern Nevada.  Much to their surprise, we ran out of money, long before we ran out of bills.  This was very eye-opening to this lovely group of girls.

5.  How compound interest works.  We walked through how compound interest works in your favor if you're saving money or investing, but how it works against you if you're paying off a loan or a credit card bill.  We also discussed how the length of the loan (or investment) and the interest rate influence your payment (or return) and the total you will pay (or earn) over the lifetime of the loan (or investment).

It was a fun night, and I felt like the girls were right with me.  But I'd love to know what YOU would have said to them?  What do you wish someone had told you at their age?

Automate Your Savings (Carole)

You've probably heard the oft-repeated phrase, "Pay Yourself First."  These just might be the most important words in the English language when it comes to your financial health.  If it's all you can do to pay the mortgage, utilities, groceries, car payment and insurance and you are not putting money aside in some kind of savings vehicle on a very regular basis, then you will never get ahead financially.

The only way to long term financial stability is to put money away somewhere for the future.  You can call this savings account whatever you want:  Emergency Fund, Rainy Day Money, Retirement. . .  Guaranteed the day will come when you will be glad it's there waiting.

If a personal savings plan (in addition to a 401k or IRA) is not part of your current budget and seems absolutely impossible, take heart.  Everyone feels this way!  It almost doesn't matter how much money you earn, you can easily spend it all.  We've all learned that if you make more money, then your bills automatically go up by at least that same amount.  I think it's one of Murphy's Laws.

To stem this tide, you need to set your personal savings plan like any other BILL THAT MUST BE PAID.  Pay yourself -- every month, or every paycheck.  My husband often tells of our first experience with this.  We decided (after being married for many years) to have $100 electronically removed from our checking account every month and put into a money market account.  We both almost hyperventilated after setting it up!  Could we really afford this???  Would we have to transfer it right back within seconds of having it taken out?  Maybe you feel those same fears.

But guess what?  The $100 came out the next month and we still paid all of our bills.  Whew.  And it happened again the next month and the next month.  It was magical.  And easy.  Unbelievably, we didn't really miss it.  Most budgets (even tight ones) have more wiggle room than you think.

After a few months, we sucked in our breath again and increased the amount to $200.  Same thing.  We didn't miss it.  But we did love watching that money market account grow bit by bit each month.  That gave us some serious endorphins to keep going.

After a year, we decided to really ramp things up and increased our auto-withdrawal amount to $1000!  Surely this would kill us.  But it didn't.  We survived and paid all our bills.

Start small.  But start.  I'm not saying you need to do the same amounts we did, but try something.  Call your bank or get online and set yourself up for an automatic withdrawal to some kind of safe savings vehicle (CD, money market, savings account. . .) and watch your stress level go down as your personal savings goes up.

This is what's called "Getting Ahead."

Setting Financial Goals (Carole)

Anyone who knows anything about my husband knows that he is a goal setter.  I'm not sure how old he was when he set his first goal, but by the time I met him when he was 23, it was deeply entrenched in his soul.  In fact, when we were on our honeymoon back in the summer of 1983, he insisted that we take the time to write down our life goals.  These goals dealt with education, career, lifestyle, finances, travel, life experiences and habits to name a few.  We still have the original papers we wrote these down on in our Goals Binder that is kept at his desk at home.  We bring these sheets back out at least once a year and review how we're doing.  I'm frankly flabbergasted at how many of these goals we have achieved over the past 27 years!  We continue to set goals every year (both as a couple and individually), but we especially enjoy looking back at those original goals.  A few of them didn't turn out to be realistic or even relevant, but many of them were right on track.

You'll not be surprised that paying off our student loans in five years, paying off our house early and a set $ amount saved for our retirement years were a major portion of what we talked about that day.  In 1983, David was just about to begin his 2nd year of dental school and we were right in the middle of the whole student loan thing.  The idea of even buying a house was still years in the future and retirement seemed light years away.  But even so, we tried to make our best guess for
1.  How many years until we would be able to buy a house?
2.  What would a dental practice cost?
3.  How many years would it take to pay off our student loans?
4.  How much money will we need to retire in 2030?
This was an exciting discussion!  Our entire lives were ahead of us.

Now 27 years later (our anniversary is 2 weeks away) we've accomplished MANY of these goals -- and amazingly close to the dates we chose way back then.

I would highly recommend that you take time to think your life-time finances through, map out a plan and write it down.  I would encourage you mix in a hefty dose of Blue Sky with your Reality.  You really need both.  I think goals should move you forward at a speed (and maybe in a direction) that normal life would not.  If this were not true, why bother?   It's nice to be able to look back every year at a written goal sheet and be reminded of what you had hoped for when you were young and idealistic.  Maybe you'll discover you're ahead of the game in a few areas and possibly you'll be grateful for a nudge to get moving forward again.

What is a Mutual Fund? (Carole)

Sometimes we hear financial terms (maybe even use them ourselves) and yet don't really know what they mean.  Maybe the term Mutual Fund falls into this category for you.  I'm going to try explain what a Mutual Fund is in less than 200 words.  Here we go. . .

*A Mutual Fund is a pool of money (millions and millions of dollars) from thousands of investors.  Get it?  You are all mutually funding this huge investment vehicle. 


*These millions and millions of dollars are used to buy DIFFERENT types of stocks (or possibly bonds) within this one Mutual Fund.  Your Mutual Fund can own stocks from stores, high tech companies, oil companies, banks. . .whatever businesses out there are selling stocks.  

*These diverse stocks are carefully chosen by a Fund Manager.  His or her job is to choose wisely and broadly so that if one segment of the financial world (say, the price of oil) goes down, chances are that a different segment of the financial world (say, the value of Wal-Mart stock) goes up.  The Fund Manager's needs to make sure you own both kinds of stock, so your investment money is safe -- and hopefully earning interest.  Actually their job is to make sure you own dozens of different kinds of stocks that can balance one another out, which greatly reduces your risk.  With this kind of diversity, the chance that you will lose all of the money you (or any of the investors) have put into the fund, are very very small.  

That's it.  That's all a Mutual Fund is.  You can purchase Mutual Funds that specialize in a particular philosophy or segment of society:  Green Products and Technology,  International Companies, U.S. only based companies, Christian Principles or just about any niche you can imagine.  Mutual Funds are also divided into categories based on how risky the stocks are that the Fund owns.   Your investor can help you determine how much of a gambler you really are as you choose your Mutual Funds.

The reason most small investors like Mutual Funds, is because they allow you to have a very diverse portfolio of investments with very little money invested.  If you had $2,000 invested on your own in the stock market, you could probably only afford to buy a few stocks in a couple of companies.  But in a Mutual Fund you will own parts of hundreds or thousands of different stocks.

Mutual Funds tend to be a much safer way to invest your hard-earned $$.

The Magic of Compound Interest (Carole)

When you are investing money, there are two basic types of interest your money can earn:  Simple Interest and Compound Interest.

Quickly, let's look at the difference between these.

Simple Interest 

(Interest is only calculated on the money you have invested):  

If you invest $10,000 (your principal) at 5% interest for 20 years:

$10,000 x 5% x 20 years = $10,000 (interest earned) 

Add this interest earned to your original $10,000

$10,000  + $10,000  = $20,000

Compound Interest 

(Interest is calculated on your invested money PLUS your previously earned interest):

If you invest $10,000 (your principal) at 5% interest for 20 years with compound interest  you'll end up with $26,532.98 .   


The formula is a bit complex and hard for me to type out, but you can look it up here if you just really need to see it for yourself.

In addition:

The more often  your compound is calculated (daily, monthly, yearly) the more interest you will earn.  Daily Interest = $27,180.96
Monthly Interest = $27,126.40
Yearly Interest = $26,532.98

The longer your money is invested the more interest you'll earn.  Your same $10,000 at 5% for 30 years turns into $43,219.42   Same money, same interest for 40 years is $70,399.89

The higher your interest rate, the more interest you'll earn.  Your same $10,000 at 10% for 20 years will become $67,275.00

Combine longer time and higher interest and it starts to get really fun:
$10,000 at 10% for 30 years =  $174,494.02
$10,000 at 10% for 40 years =  $452,592.56

$10,000 at 12% for 20 years =   $96,462.93
$10,000 at 12% for 30 years = $299,599.22
$10,000 at 12% for 40 years = $930,509.70  (yep, nearly a million $)

Imagine if you could scrape together only $10,000 by age 20 and find a good mutual fund that paid 12% interest (not that difficult really) and just LEFT YOUR MONEY THERE until you were 65 years old, you would have $1,639,876.04   That's without you ever adding one more cent of principal to this investment.  The sooner you can get investing in something earning a decent interest rate, the better off you will be at retirement.


That is magic.  If you want to work some magic yourself, here is a compound interest calculator.  I'll warn you -- it's addictive!

P.S.  Your mortgage (or car payment, student loan, credit card bill. . .) works on a compound interest formula in your lender's favor.  That is why you often end up paying 3 times the cost of your house by the time your loan is completed.

Financial Goals (Janssen)

Two months ago, my husband and I paid off the last of our student loans, making us completely debt-free. It was glorious.

Once those were gone, though, we had to figure out what our new financial goals were. This was a little tricky because now instead of having one single-minded purpose for any extra money, we had so many categories we could consider - investing, emergency funds, vacations, a new baby (that makes it sound like we are saving to buy a baby. . . ), cars, etc.

We sat down together, looked over our finances and our budget and decided that our priorities were the following three:

1. A fully-funded emergency fund. Following Dave Ramsey's steps, we had previously had an emergency fund of $1000 before we began pounding away at our student loans. Once you're done with your debt, however, he recommends an emergency fund that could support your family for 3-6 months. We reviewed our budget and decided what that amount was for us and started working away at it as quickly as we could. The good thing about this goal is that it has a finish line - once we got that dollar amount in the account (actually, we have it spread out over several accounts at different banks), we could just leave it and move on to our next goal.  
2. Long-term investing. We significantly increased the amount of money we contribute into my husband's 401(k). Because time is on our side at this point, we wanted to take advantage of that, as well as the match that his company provides. 
3. A down payment fund. We currently are renters and probably will continue to be for the next several years, as we don't want to buy another house until we are certain we will stay in it for at least five or more years (we owned a house in Texas for three years and even after selling it for more than we paid for it, we still would have come out ahead if we'd continued to rent for those years - a house is a money pit). Our goal is to have a down payment of 20% since this would allow us to avoid paying mortgage insurance. We have a fairly good idea of how much the kind of house in the locations we're considering would cost us, so while we don't have as solid a number as we do for our emergency fund, it's a pretty accurate ballpark figure, I think. 

It's not as easy to figure out how to approach these goals as it was with our student loans since we knew it was a short time period where we could be incredibly focused. We're less interested in sacrificing all fun for several years than we were in making do on very little for six months. On the other hand, knowing what our long-term goals are and what the payoff will be, it's easier to be a little more careful and a little more frugal.

What is an IRA? (Carole)

You probably already know that IRA stands for Individual Retirement Account.

It is the U.S. Government's way to encourage each citizen to save up to $5,000/year (or $6,000/year if you are 50 years old and older) with some pretty nice tax benefits.  This means a married couple can save up to $10,000/year (or $12,000 if you're both 50 or older).

There are two types of IRAs.  Traditional and Roth.  They are quite different.  Here are the basic concepts of each.

Roth IRA

*  If you file your taxes singly, you have to earn $120,000 or less that year to invest in a Roth IRA.  If you are married and filing jointly, you have to have a combined income of $177,000 or less for the year.  These amounts change nearly every year, so check with your investor for the current limits.  In fact, I found various $ limits mentioned for 2010, but the above amounts seemed to be the most accurate.  Investing through a government plan is a bit confusing!  A good banker or broker will easily navigate you through it all.

*  Your contribution is NOT tax deductible, but ALL the principal and interest earnings are tax free when you withdraw them after age 59-1/2.

*  You can withdraw your principal (the money you actually invested in the Roth IRA) at any age with no penalty.  But you will pay penalties if you withdraw any of your interest earnings before age 59-1/2

* Your Roth IRA money can be invested in almost anything:  stocks, bonds, CDs, investment property. . . through a bank or brokerage.

Traditional IRA

*  There is not an income requirement to invest in a Traditional IRA.

*  Contributions ARE tax deductible.  However, taxes (on principal and interest earned) will be charged when you begin to withdraw your money.

*  You cannot withdraw any of your contribution or interest earned until age 59-1/2.  You do not have to withdraw at that age, but MUST begin withdrawing by age 70-1/2.  If you withdraw your money before you are 59-1/2 there is at least a 10% penalty.  Ouch.

*  Again, your Traditional IRA can be invested in almost anything:  stocks, bonds, CDs, investment property. . . through a bank or brokerage.

To max out your yearly contribution would be a monthly investment of $416.67 per person (or $500 per person/month age 50 and older).  However, your contributions can be made in any increment at any time, and you do not have to reach the $5,000 limit.

$10,000/year savings might not sound like it will ever amount to much, but if you can consistently put that away in either kind of IRA from age 40 until you retire at age 65, you'll have over $1,000,000.  Just think how much you'll have if you start investing in your 20's!!!  The earlier you start saving any amount in an IRA, the more money you'll have at retirement -- remember, compound interest is your very best friend over the long haul.

Careful on Any Income (Carole)

When I was 5 years old my grandfather gave me 3 silver dollars.  I carefully put them in a little pink coin purse for safe-keeping.  I was SO proud of these and had absolutely no intention of ever spending them.   I kept them perfectly safe for about 2 weeks (you can see this coming, can't you). . . then lost them (and the pink purse) somewhere deep in the bowels of the Sears' Bargain Basement.   I must have set the purse down while trying on some shoes and, of course, forgot all about it and walked away.  When I realized that I no longer had the purse in my hand, it was too late.  Someone else had decided that they really wanted my pink purse and silver dollars too, and they were lost forever.

It's been more than 40 years since that dark day, but I still remember and regret being so forgetful and foolish!  Maybe you have a similar story from your youth.  Or possibly you squandered a decent sum of money on something foolish that brings you sorrow even today.  Yes?

Well, never fear.  There are those out in the world that make just about any money mistake you've ever made seem paltry by comparison.  As you can guess, most of these famous/infamous folks, in the following list, lost all of their money and had to file bankruptcy, due to mis-management of their huge fortunes.  The most common themes in these bankruptcies are:  drugs, iffy investments, and uncontrolled spending.

Donald Trump
Dorothy Hamill
MC Hammer
Gary Coleman
Toni Braxton
Burt Reynolds
Mickey Rooney
Sheryl Swoopes
Kim Basinger
LaToya Jackson
Zsa Zsa Gabor
Mick Fleetwood
Walt Disney
Leif Garrett
Willie Nelson
Ted Nugent
Larry King
Mike Tyson
Isaac Hayes
Tammy Wynette
Wayne Newton
Don Johnson
Margot Kidder
Meatloaf
Many, many big lottery winners

The take-home message here seems to be that you have to be careful with your money, no matter how many millions you've got.  Seems pretty obvious, but maybe not.

Re-thinking the Cabin (Carole)

I didn't grow up in an environment where people had second homes.  But when I moved to the mid-west I found that many people (even people with the most modest of means, it seemed) had a lake house.  This was astonishing to me.

But like any red-blooded American woman I began to think, "Wouldn't that be GREAT to have a lake house??"  Or a mountain cabin, or a beach house or a vacation home or whatever this kind of 2nd home is called in your area.  Something I'd never considered before in my life, suddenly became something I really wanted in my future.  It just sounded so relaxing. . .

Luckily I have a wise mother-in-law.  She mentioned to me about 20 years ago that she didn't understand the whole 2nd home idea.  I was shocked.  I knew she had many, many friends who had cabins and lake houses.  How could she think this??  Then she told me why she wasn't interested:

1.  You feel obligated to go to the same place -- EVERY YEAR.  She wanted the freedom to go somewhere new when she had the inclination to get away -- anywhere in the world.

2.  You have to clean it every time you go and again when you leave.  On the other hand,  every vacation destination pays people to not only clean things up when you leave, but they keep it clean every day that you're their guest.

3.  You are always concerned about vandalism (when you're away) and seasonal maintenance.  At your vacation destination, you have none of these concerns.  You waltz in and you waltz out.

4.  Your down payment ALONE on the property (say $20,000) could buy you 50 nights at a hotel charging $400/night.  That's one terrific vacation room!  If your room was only $200/night you'd be able to vacation for 100 days!   And this money doesn't even count your $1000 mortgage payment (and home owners insurance) every month for 15 or 30 years.

I'm not too quick sometimes, but I began to see that her reasons made a whole lot of sense.  I've joined her No Vacation House Club.  Maybe you see a 2nd home as an investment.  That's great.  But I'd personally rather have an investment that didn't require me to clean toilets and kill mice.

To borrow (and alter) my college's motto:  The World is My Vacation House.

A Peek at the Promised Land (Carole)

A few weeks ago, Tara commented that she didn't see the point in being frugal, frugal, frugal just so she could be a millionaire when she and her husband are 80!  What is the fun in that??  Maybe some of you have had the same thoughts as you've thought about coupon-ing, garage sale-ing, eating at home. . .   Hopefully, I can give you a glimpse at where this whole Frugal Life thing is really headed.

If you have credit card debt, car loans and/or student loans, most people (when you finally get very serious about it) can pay all of it off within 3 years.  We have never carried credit card debt, but we've had a few car loans and we had over $60,000 in student loans back in the 1980's -- so about $130,000 in today's money.   We paid minimum payments for a number of years, and then we got religion.  We paid off our car in about 8 months and our student loans in about 2 years.  So we paid off all our consumer debt in right around that 3 year mark.  We weren't making tons of money and we had 3 children.  We were extremely average.  You could probably pay things off faster than we did.

Our next step was paying off our house.  We knew a couple of families our own age (early 30's) who had paid off their houses.  We were AMAZED.  Could we do that too??  How long would something like that take?  We owed about $160,000 on our house at the time.  As a little family we confronted this monumental financial goal with everything we had.  We printed out an amortization schedule (numerous pages of small type -- very scary), and taped it ALL to the back of the door where the bills were paid in our house.  Every month when we paid our regular house payment, we also added as much extra $$ as we could scrape out of our home budget and sent that along to the mortgage company too -- that extra money goes straight to the principle.   We often gathered our 3 girls into the room while we marked off  the payment amount with a highlighter pen and circled all the skipped interest payments that NEVER HAS TO BE PAID-- EVER!!  Did we starve through this time?  Live on nothing?  Never leave the house?  No, we actually took a few pretty decent vacations along the way and fed and clothed everyone.  Probably saw a few movies too.  But we stuck to our house payback schedule.  We threw everything we could at this debt and in 3+ years we received our title, free and clear, in the mail.  That is a moment never to be forgotten.

We paid that house off in 1996.  In 2003 I wanted a bigger house (we had more children, the older ones were larger, and we wanted to live in a better school district).  We found the house we wanted and went back into a $100,000 mortgage (we were able to pay for MOST of the house with cold, hard cash from the sale of our first house -- that felt very, very nice).  We paid off this new mortgage in about 2 years.  I thought I would mention here that both times we got down to the last $30,000 on our mortgage, extra money just started appearing.  I can't even explain it.  It's like the Lord knows you are serious about taking care of your family and your finances, so He blesses you beyond anything you've ever seen.  The last $30,000 was paid off about 5 months earlier than scheduled -- both times.  When you get to that point, let me know if this happens to you too!

So, when you've paid off all of your debt -- in under 5 years probably -- how does life look?  It is an amazing place to be.  Think of the amount of money you bring home every month in your paycheck.  Now think of how much it would cost you to live with no major bills.  No credit card payments, no car loans, no student loans, no house payment.  Can you even wrap your mind around that?

You still have to buy food, electricity, gasoline, car insurance, clothes, property taxes.  That's about it.  Hmm.  How much would that add up to in a month?  Not very much.  All the rest of your take home pay is YOURS.  Wow.

What will you do with it?

Saving is a big thing.  Putting as much money as you can into tax-free or tax-deferred programs is very smart.

Beyond that, you can spend it on anything you want.  You could buy a new car with cash  -- every few months!  You could buy a brand new boat in cash, also in just a few months.  You could redecorate your entire house.  Put in a backyard pool.  You can be generous beyond anything you can imagine.  Travel to Europe, Asia, Africa -- every few months.  All for cash.

You will finally be free.  All the hard work you (or your spouse) puts in to bring home money, will finally benefit YOU.  All in about 5 years.

Enjoy.

Why Live Frugally Now? Reason #3 (Janssen)

I am willing to live frugally now so that my money can become an additional income earner. I think this one reason is the single most important way that your frugality can really pay off in a tangible and very major way.

If I spend every dime I make, the only money coming into my household is the money that comes via my paycheck. If, instead, I can resist spending $50 or $100 or whatever amount of money per month and put that money in a Roth IRA or in mutual funds, that money now becomes an additional income earner. (As my dad likes to joke, "I say to my money 'Get off the couch and go get a job!'"). That money can earn interest, day in and day out, while you exert no additional effort. Who doesn't like the idea of your money working for you?

And, of course, the earlier you can get your finances under control enough to have money to invest, the longer that money will work for you. Who wouldn't rather have your dollars working hard for 10 years instead of 5 or 30 years instead of 20?

I'm willing to guess most of us hate interest when it's us paying it (22% for a burger you paid for on your credit card, anyone?), but when interest is working in my favor, well, I love the fact that it doesn't take weekends or holidays off and that it never gets sick or needs a personal day.

If you can discipline yourself enough to live frugally today, you can reap the rewards of it for the rest of your life and in a really substantial way (we're talking hundreds of thousands, if not millions of dollars, that you did not have to earn yourself because your money, which you already earned, is now working for you).

It's worth asking yourself how much suffering $25 or $50 or $100 out of your monthly budget would cause you. Would it be worth it?