Wednesday, September 23, 2009

A simple plan.

Today we will look at two investing companies and two nearly identical investment plans that only involve four funds. Yes, that's right, four funds. Investing does not have to be complicated! Let's sample each companies low cost funds.

Fidelity is a company you may have heard of. They are a privately held investment firm. They have an excellent website for the new investor that allows you to try many options and retirement type calculators.

Here is a sample portfolio using four of their low cost mutual funds.

Spartan Total Market Index (STM)
Fidelity Total Bond Fund (TBF)
International Enhanced Index (TINT)
Inflation-Protected Bond Fund (INFL)

The first row is the weighting, or the percentage of the fund in this sample portfolio.
The second row is the abbreviation for the fund.
The third row is the expense ratio, or cost as a percentage, for the fund.

40% 25% 20% 15%
0.10% 0.45% 0.63% 0.45

I really like looking at Vanguard's site. If you are not familiar with Vanguard, they have been around for a long time, and are famous for forcing mutual fund and investing costs down overall.

Let's take a look at a sample portfolio using Vanguard's low cost funds.

Total Stock Market Index (TSM)
Total Bond Market Index (TBM)
Total International Stock Index (TINT)
Inflation-Protected Fund (VIPSX) -- actual "ticker" symbol (for the NASDAQ)

The first row is the weighting, or the percentage of the fund in this sample portfolio.
The second row is the abbreviation for the fund.
The third row is the expense ratio, or cost as a percentage, for the fund.

40% 25% 20% 15%
0.18% 0.22% 0.34% 0.25%

Now with these two examples, you can see some differences in costs. The Spartan fund family from Fidelity has a high minimum investment amount compared to Vanguard's funds. The minimum for the Spartan funds is $10,000 while the Vanguard funds require $3,000. That is a lot of money. But up next time, we will look at short term solutions for saving enough money to put into a fund, and other options that will allow you to "chunk" your money into investments.

Disclosure: The author does not own any of the funds listed, but someday hopes to.

Tuesday, September 22, 2009

Saying "yes" to learning about your finances...

Ok, this post is a bit different than the normal fare, but stay with me.

The wife and I just watched "Yes Man" with Jim Carrey. Excellent comedy, with a good point.

Perhaps you have said "no" to learning about your finances. Maybe you didn't actually utter the word, but you have never thought it would benefit you to learn. Maybe you just didn't want to. Maybe it is always painted as too complicated for you. Maybe, like my personal situation a few years ago, you just had never bothered.

It took a pretty significant event in my life to really kickstart my interest, though I had been starting down the road for less than a year before that. I realized that personal finance is important. I realized no one was going to take care of it for me, and if they were...they would charge me a bunch of money to do it. That kinda pissed me off, and I decided to use that energy to do something constructive. So I decided to start learning. I went to the public library and checked out anything that looked interesting. So books were trying to sell certain things, or certain ideas on investing. I kept reading, trying to get a broad reference of many sources. Internet, TV, radio, books, magazines, and personal converstations. I even read the obvious marketing material from a number of investment firms and companies, keeping in mind that I was reading advertising.

I encourage you to take a second out of your day today to read something finance related. Anything. Think about your lifetime goals, and how a new idea or direction in your personal finance could help you achieve that. Personally, I want the Ducati from the movie! What is your goal?

Saturday, September 19, 2009

Weighing Risk

Don't be afraid of learning about your money/investments. This will make you powerful, and less likely to get taken advantage of in your financial affairs.

Ever notice that phrase at the bottom of every mutual fund advertisement? Something along the lines of "Past performance does not guarantee future results"

What does this mean in English? We hope we will do as well or better in the future but we really have no idea. Now as a potential investor, you have probably heard often that there are "safe" investments, and "risky" investments. Stocks over time have had a good rate of return, but always have the risk of going down. As evidenced in the financial markets last year, stocks do not always go up. As an investor, you should be ready for the type of drop we saw last year. I understand this is a tough thing to think about, and I respect your fear of losing money. I too have that fear.

Thinking of the big picture, long term investment time lines of 5 or more years should see better returns with stock exposure. But imagine, (or maybe you are) someone who was ready to retire and then saw the stock market start falling last year. Hopefully you had a diversified, age appropriate mix of assets. Hopefully you had enough time left in your accumulation phase (or buildup) to weather the storm. At or near retirement age, most financial plans call for the increase in cash/bonds/money market accounts (MMA's), and the decrease in stocks as far as asset allocation goes. Many had these types of plans, but let the huge returns that had been seen for some time lure them into going astray of their plans.

The unfortunate scenario many investors found out last year is that stocks can go down just prior to your retirement and wipe out years of portfolio gains. This is why I am a big advocate of rebalancing, and increasing your amount in cash/Certificate of Deposits/bonds/MMA's as retirement age nears. If you stay too invested in stocks, you may not have enough time to see those "gains" materialize again.

Personally, I have chosen an asset allocation plan or in plain English, a "what the heck am I going to invest in" plan of a higher amount of bonds/cash equivalents than most financial magazines and media recommend. It is ultimately a personal decision, and one that can be an easy one. If you are less risk tolerant (Example: you never want to see your account balance drop like many with a high proportion of stocks did last year) then you may find it much easier to sleep at night with more of an allocation of bonds/cash equivalents.

If you are worried about long term returns, keep in mind that although accepting less risk is usually associated with lower returns, a healthy dose of bonds and the like can actually greatly reduce the risk of holding too much in equities (stocks.) The reduced risk of these assets can help "smooth" out the sharp ups and downs, or volatility, that can be seen in the equity markets on a daily basis.

Ultimately it is a personal decision, and one that should be an educated one. I encourage you to do your own research and soul searching and start thinking about your investment choices more instead of blindly following the advice of anyone, including the author of this blog!

Next time we will sample a "what the heck should I invest in" plan and look at the benefits/risks associated with it.

Thursday, September 17, 2009

The importance of investment costs

The simplest portfolio choices with the lowest costs can equal better long term gains than a high cost investment. Do you own any mutual funds? Do you know what the expense ratio is for your fund(s)? If the answer is no, read the most recent prospectus (the pamphlet with all the financial jargon in it you get annually). You may be surprised to know there are most likely lower cost funds that have matched or beaten your mutual fund(s).

Over time, an investment that had an expense ratio, or cost, of 0.2% annually vs an investment with an expense ratio of 1% will illustrate the importance of looking at costs. A higher expense ratio will eat into your compound interest year after year.

A $20000 dollar investment, at a rate of return of 6% and expense (or cost) of 0.2%, over a period of 35 years will yield around $144,000. This is a one time investment, with no regular contributions, which even with small additions would result in a much higher amount.

The same investment, with the same numbers except with a higher expense ratio of 1% would yield around $108,015.

With this example you can see that a higher cost investment will yield a much lower result. In reality, it is a hidden but direct reduction to your rate of return. A small percentage change in expenses adds up to 25% less money at the end of your savings window in this example. Pay attention to your expense ratios!

Saturday, September 12, 2009

Take the Free Money!

Some companies offer as part of their benefit package a 401k contribution matching up to a certain amount. This is usually a percentage. It could be a dollar for dollar match, or they could match fifty cents for every dollar you put in up to a max percentage of salary. In this example, let's say your company matches up to 3% of your pay. If they offer a dollar for dollar match for up to 3%, you have to take the opportunity.

This will be the best return you will ever get on your investment...a 100% gain instantly!

If you saw 3% of your annual salary on the ground would you pick it up? Free money!

As an example, your annual salary is $40,000. Your total for taking full advantage of your employer's matching would be $1200 for the year. In a year that has the normal 26 pay periods, this would break down to $46.16 per pay period. If you can contribute this much, which could be the result of making coffee at home instead of grabbing a $5 "fufu" coffee at the local coffehouse, you will be well on your way to starting your retirement savings.

Because of the power of the employer match, if you do this until you retire at 65, you could end up with around $250,000 in your account. These numbers reflect the following:

Age at start of savings: 32
Current retirement savings: $0
Rate of investment return: 5%
Annual salary increase: 2% -> which at your first raise would ratchet up your contribution per year by the small amount of $24

A 3% match is a pretty decent benefit to the employee. If your employer does not offer as much of a much, it is still worth it to contribute enough to obtain the full matching amount.

With this example you can see that the power of compound interest is amazing long term.

To highlight how powerful starting your savings earlier really is...

Take the same numbers, and start the savings at 22 instead of 32. This increases the amount put into your 401k by a comparatively small amount when you look at the gains possible.

You would end up with a whopping $477,000 if you started just 10 years earlier. That's almost double the amount!

What would happen if you waited until age 32 to start saving, but contributed double the amount? You would end up with $380,000 if all of the other numbers stayed the same.

As I hope I made clear, changing one piece of your savings behavior can have a huge long term impact. Above all, the benefit gained by starting your savings early cannot be overstated.

Simply, habitual contributions with compound interest will secure your retirement.

Not so simply, and up next time, a question from a reader "What the heck do I invest in?"

(I do not sell any investments, or any investment products. My hope is I can help some of my friends and family with advice that I have gained from lots of personal time spent reading and learning about my own personal finances.)

Thursday, September 10, 2009

Paying off Debt

Everyone always talks about how important it is to get out of debt. Let me highlight how it will effect your pocketbook.

Let's make some assumptions:

$1000 on credit card A with an interest rate of 7.9%

$2500 on credit card B with an interest rate of 11.9%

$10000 on an auto loan for your car at 4.99%

Your situation may be different, with varying interest rates or amounts. If you are not in debt, I applaud you! Try to stay that way!

Going back to the example..

What is your first inclination on how to approach paying the debt off? Do you want to pay off the highest amount first or the highest interest rate?

Well you can't go wrong either way, because you will still be paying down debt, but the best choice would be to pay down the highest interest rate first. It will take you longer to pay off the higher interest rate card in this example, rather than starting with the lower balance, but you will be paying less interest overall.

Interest saved = money back in your pocket!

If you do nothing but pay the minimum on the above example, you will end up paying for the tanks of gas, new clothes, and cell phone bill you put on your credit card for a ridiculous period of time. This will keep you from achieving your financial goals and should be avoided.

Your credit card debt alone in this example will take over 8 years to pay off if you only pay the minimum (used a 4% minimum payment). That's a long time to pay for a slurpee/starbucks habit.

If you can add $100 dollars to your total debt paydown each month, and apply it to your highest rate card, you can reduce the amount of interest you pay significantly. Here are the steps to pay down debt faster.

1. Apply your extra $100 to your highest rate card (along with your usual minimum payment) ; continue to pay your other minimum payments.

Using the above example it would be highest rate 11.9% minimum payment = $100 so increase your monthly payment to $200.

2. Once you pay off your highest balance card, apply both the $100 dollars and the old minimum payment to your next highest balance card. Keep paying all of your minimum payments.

This would mean now we are paying the next highest which would be 7.9% minimum payment around $40. Add your old minimum from the old card plus the extra hundred you are using to pay debt down early.

$40 + $100 +(old minimum which would have gone down with a lower balance.)

3. Move on down your debts and continue with your plan.

By doing this, you could pay off your debt in around two years instead of eight.

Now what to do once you've paid off the debt? That's next! Until then, think about what you will do when you are debt free!

PS: Bonus, you will save over $1000 dollars in interest by paying it off early :D

Wednesday, September 9, 2009


A brief conversation on laptops.

When I bought the laptop I am typing this post on nearly two years ago, it was to be my first laptop. I know, I know, I am behind the times. Since my purchase of nearly $1500, the computing environment has changed a bit, as it usually does. I have come to realize that it is neither cost effective nor intelligent to buy an expensive laptop unless you are a specialized user. Here is my list of reasons why a user should buy a cheap laptop compared to a specialized laptop:

Most laptop users are casual computer users who use their laptop for little more than word processing/spreadsheets, internet, online games. Most users simply do not need a specialized (read: expensive) laptop with 1 TB of ram and a 900 GB solid state hard drive.

Most users will want a new laptop before their old one breaks or is otherwise completely unusable. Simply put, people like new stuff.

The cost of a new specialized laptop like the Alienware from Dell starts at $2199. The cost of the new laptop in the newspaper circular that I advised a friend to purchase instead, $400. Take the difference, $1799, and add it into your savings account. More on this later.

You won't use all the features you pay extra for. Really.

So four reasons may not be enough to dissuade you from buying a more expensive one for yourself or your loved ones. Let's look at the financial benefits, both immediate, and potential long term.

Take the difference of $1799 and save it for a rainy day.

Take the difference of $1799 and put it into a Money Market Account at 1-2% (MMA) and save for your next laptop or computing purchase.

Put the difference in a CD at 1-3% your bank.

Put the difference in a mixture of stock and bond index funds in your Roth IRA. Warren Buffet says the stock market will return 7% annually over time. Obviously last year that didn't work out, but keep the faith. Let's say you get 5% returns annually. That $1799 could turn into 76,084.82 if you add another $500 annually to it for 40 years. For a younger person, this could be a huge starter conversation for the benefits of compound interest and why the laptop may not be the most important thing in the world.

Welcome to Future Think Dollars!

Good Morning!

Thanks for stopping by my new blog.

My blog will cover the following topics and more:

Personal Finance
Mutual Funds
Index Funds
Investing Theory
Money Saving Tips
Budget Tips
Thought Provoking

I hope you enjoy it!