Christmastime is Here..Well, Almost.

Well, we're on the latter end of October and it's almost time for the holiday season. Are you prepared? This year, try to get a jump on the season by bracing for the coming "generosity complex" by planning your holiday spending. What do I mean?


Well, it starts when you purchase that first ticket for Thanksgiving (for those of you who fly to other areas for the holiday). The day after the Big Meal (Black Friday) is often called the largest shopping day of the year (but this has not really been reliably confirmed). Then you have to fly/drive home again for the Christmas holidays. And then New Year's Day parties...And $500-$600 for a video game system? Does it come with spinning rims? Add in all the spending you do because you're "generous," and the next thing you know, you ring in the New Year with some new debt. Let's call it the January Jolt: you don't realize how broke you are until maybe that second week in January, and you think "What happened?" Then you start looking around for gifts to take back to the store…

This of course, can be prevented. By starting now, you can set aside a little bit of cash here and there for the coming season, it can help soften the blow. Try to give an estimated (but realistic) value on the amount you want to spend on gifts during the holiday season, being mindful of travel expenses, etc. Then, determine how much you expect to spend during the Christmas holidays. Finally, count the number of shopping weeks available to you—then count back to this week. Try to make a goal of saving a set amount over each available week.

For example, if you want to spend $500 on gifts, and $300 on travel and entertainment, and you find you have eight shopping weeks, then you calculate $800/8 weeks = $100/week. Try to consciously save this amount every week, and when it's time to shop, it's very important that you spend it! Not only does it program your mind to set and meet realistic goals and discourage being a scrooge at Christmastime, it'll soften the financial blow to your account. You'll be in better financial health, and you don't have to worry about debt!

So this time, ring the New Year in right: Christmas happens on the same date every year, and so your shopping days are coming. If you haven't started already, start saving now. Hit the Black Friday sales (if you dare), order online, and relax.

Special Contributor Joseph Hogans: Income Investing

[Ed. Note: Wealth Weekly Readers! Please welcome Mr. Joseph Hogans of Georgia Tech, who will help us out at WW by contributing articles for the site. This is his first, (with a little analysis from me). This article will appear in the next Hueman Press. Thanks to Joseph for giving us a sneak peek!]

There are two basic types of investments: growth and income. This article will present some income investment opportunities that are available. In case you are unsure about the difference between growth and income, the following examples should help clarify.

Growth vs. Income

Growth: On June 2, 2006, I invest $1,000 by buying 10 shares of AASU Inc. at $100 per share. On June 2, 2008, I sell my 10 shares of AASU Inc. for $140 per share for a total of $1,400. My total profit from my ASSU investment was $400. I earned this $400 because the price of AASU stock “grew.”

Income: One June 2, 2006, I invest $1,000 by buying 10 shares of GTSBE Inc. at $100 per share. On June 2, 2008, I sell my 10 shares of GTSBE Inc. for $100 per share for a total of $1,000. However for the past 2 years, GTBSE Inc. has paid a quarterly dividend of $5 per share. Every three months, I received a check for $50 ($5 per share* 10 shares). Over the span of 2 years, I have received $400 income from my GTSBE investment.


Bonds
Whenever a corporation or government needs money, a preferred method of raising cash is to issues bonds. In the simplest definition, bonds are IOUs. You give me $1,000 now; and I’ll pay you interest on your money until the bond’s maturity date. At maturity, I’ll stop paying interest and just write you a check for the original $1,000.
Bonds issued by the government are considered the safest investments possible. However because of this low risk, you can expect a low return on your investment. Bonds issued by corporations having varying degrees of risk and therefore varying rates of return. To help you determine which companies are safe and which ones aren’t, companies are assigned credit ratings that range from AAA (Lowest risk) to C (Highest risk). When buying bonds from a company with a high credit rating, you can comfortably assume that you will receive your payments as agreed. This high comfort level translates into low returns. When buying bonds from a company with a low credit rating, there is a good chance that you may never get your money back as originally agreed. However because you are taking on more risk, there is the potential to get a higher return on your investment.
The key to bond investing is determining your level of comfort when it comes to risk and reward. I hesitantly mentioned bonds with low credit ratings, known as junk bonds, because only experienced, educated, wealthy investors should even consider them. For everyone else, the only reason to invest in bonds is because you want a safe, low risk method of making money. It is just important to remember that you will not earn much income from low risk investments such as government bonds.

Mortgage-Backed Securities (MBSs)
If I want to buy a $200,000 home today, do I need to have to $200,000 sitting in the bank? No. Whenever a potential homeowner wants to buy a home, they place a small down payment on the house and borrow the remaining amount in the form of a loan known as a mortgage. A later article will discuss the various types of mortgages, but for now, let’s assume it is a 30-year fixed rate mortgage. This means that for the next 30 years, I will be making fixed monthly payments to my mortgage lender. A portion of this monthly payment goes towards paying principal (the original $200,000) and another portion goes toward interest (the price you have to pay for borrowing the money).
Investing in mortgage-backed securities allow you to become a mortgage lender. When you invest in a mortgage-backed security, your money is pooled with other people’s money to lend to homebuyers. In essence, you are financing other people’s mortgages. Every month when these homeowners make their monthly payment, you will receive a check in the mail. In this situation, the bank merely acts as a middle man. The home owner makes a monthly payment to the bank; the bank passes the money onto you. Of course, this is America so the bank takes a little cut of the money for all of its hard work and trouble, but you still receive a steady source of income. Because there are slight risks associated with this investment, you can expect a rate of return that is a couple points above that of a bond.
The easiest way to invest in mortgage-backed securities is to do so through a mutual fund that invests in MBSs or GNMAs. If you want to buy a MBS directly without going through a mutual fund, you’ll need to have a minimum investment of at least $25,000.


Real Estate Investment Trusts (REIT)
What’s the one thing your parents always told you about renting an apartment? “Don’t rent because when you do, you’re making somebody else rich.” Instead of blindly taking this advice, the prudent investor would figure out how to make money off of other people’s rent payments. Real Estate Investment Trusts are an opportunity to do just that.
A REIT is a company that owns income-generating commercial and/or residential property. A commercial example of such a property is a mall. Each store and kiosk in the mall pays monthly rent to the mall owner. A residential example of such a property is an apartment complex. (FYI- Post Properties, owner of apartments in the Southeast United States, is a REIT).
By law, REITs are required to distribute 90% of their taxable income to shareholders. These distributions occur quarterly in the form of dividends. REITs provide a unique opportunity that other investments do not because they usually perform well in multiple economy environments and provide both growth and income. When the economy is booming, interest rates are low, and real estate prices are rising, REITs do well become their primary asset is real estate and property. As the price of real estate increases, the value of the REIT’s assets increases which will usually cause the stock price to increase. On the other hand, when interest rates are high and people cannot afford to buy homes, REITs benefit from increased income because many people are forced to rent instead of owning.
The best way to invest in REITs is to do so through a REIT mutual fund. The average annualized return of these funds has been over 20% for the past three years. In case you’re wondering, 20% is considered a good return.

[Editor’s Note: 20% return, over three years, is a good return, however, we at Wealth Weekly encourage our investors to look to then long term. How do REITs work over a 5 year term? Or 10 years? Consider the fact that while REITs have returned about 13% over the past 20 years, index funds have returned about 15%. We look over long periods of time so that we can see how mutual fund managers handle volatile markets (like Real Estate) through the ups and downs.]

Bottom Line
The 3 income investments outlined above are by no means the only ones available. However if you are truly interested in investments, they are three with which you should be fairly familiar. Income investments are attractive investments for retirement accounts because the income generated from the investments are not taxable. You can take $1,000, put it in a savings account earning 0.5% interest, and still have to pay taxes on the minimal interest you earned. Alternately, you can take $1000 in your IRA, invest it in a REIT earning about 20% in growth and income, and never have to pay taxes on the money. The better choice is obvious.

[Ed. Note – Careful readers. When investing in any mutual fund, when you take the money out of the investment, you are charged capital gains taxes of about 20% on any profit you make on the investment UNLESS you invest in a tax-deferred retirement account known as a Roth IRA. (And would you invest in anything else?) And, you have to hold the REIT for at least 12 months for favorable tax rates.]


If you have any questions, feel free to write jwhogans@gatech.edu.

Family, Money, Health, and Career Balancing: The Concept of “Enough”

I finished a book a couple months ago (and never commented on) called Your Money or Your Life spoke about the important of reaching financial independence and letting that be the end-all of your money pursuits—and to instead consider the pursuits of Life as intended.

I keep hearing about Terrell Owens recent incident and the aftermath it created. One of the small things that seemed to go overlooked is the publicist’s remark that T.O. had no reason to kill himself –in fact, he had “25 million reasons” not to, referring to the superstar’s paycheck. Because of course, we’ve never had cases of rich people offing themselves. I mean, if they have money, they have life right?

OK, let me hop up on this here platform.. Man, this soapbox is awful dusty..Anyway, what was I saying? Oh yeah:

In writing about personal finance, I’ve often overlooked the concept of “enough”—how much money is enough for you to live a fulfilling life? Clearly, money is tied to success in life, but it is NOT the whole thing. You must consider your health, your family, and how far you want your career to go—and it all is determined how we value those things and why.

I really like capitalism. I think it provides a great way for people to acquire the capital they need to pursue those dreams and meet their goals, especially if you not only work hard, but intelligently. However, some think that it takes large amounts of money to acquired in a short period of time so you can retire and “live a complete life,” when it really doesn’t.

Some think they need large amounts of capital so that they can buy things to entertain (impress) their friends, relatives, love interests, or neighbors. Smart, enterprising individuals and corporations have found a way to exploit this feeling by telling you that if you really want to feel good, be noticed, attractive sexually, then you must own The . Your kids will love you, women/men will flock to you, your friends will praise you, etc. Seriously, I want you to consciously go out one day on your way to work, or on your way to school, and see how many commercials, billboards, and products you use everyday. See how you are tricked into believing that only millionaires have the good life. Shoot, there’s even a MySpace clone site out now, Zebo.com, which is specifically designed to list your status about what stuff you have.

At some point, you have to say “enough.” It won’t come easily either. It’s human nature to always want more stuff. In your pursuit of stuff though, always be conscious that happiness will elude you by placing itself just out of your reach. I can’t help you with that. Each person has to set a major goal and to set things in order to reach that one particular goal. Determine what will make you happy

Career/Family Aspirations—today’s society is filled with ways for individuals to reach certain income levels—for the average technically-oriented college graduate these days 100,000+ salaries and Soon, that $50,000+ entry-level job out of college inspires you to go for 70,000..then 90,000, then 100,000, and on and on. As salary increases, so does responsibility and hours worked. Investment bankers, for example work notoriously long hours. If you are single and unattached, a few years in this profession may not hurt you, but you should still be aware. Those who end up getting married and have kids have the ultimate job of balancing work and family responsibility and determining how money fits into that equation. If you

Health and Spiritual Aspirations—Many people who attain wealth still are unhappy because of many reasons. Sometimes, there are health concerns. There are many people who would trade all the money in the world for their health. Another issue is the feeling that people feel unfulfilled (empty inside) because they spend so much time working for the pursuit of more and more money that they fail to seek a spiritual balance. Instead, they try to fill it with “stuff” that will make them “happy.” However, the stuff they chase usually brings on a temporary feeling of happiness that goes away after, oh, say a week or two. Then it’s on to the next “thing” which cost more money, which you have to work so hard to get.

Importance of Balance—all that rambling to say that balance is extremely important, and it’s good to make a habit of it at a young age to prevent a mid-life crisis (or even a quarter-life crisis). Seek a profession where you are content and you see a future for yourself. Determine early on how much money you think you will need to be happy and to invest in the things to make you and your family’s future secure. It must also fit into a dedicated spiritual pursuit--whether you have a place of worship, practice a spiritual enlightenment activity like yoga or tai chi, or even something as simple as volunteering regularly in your local community will get your mind off the everyday challenges and can help keep yourself grounded

Dangers of Exceeding Enough— There will come a time where you may go through some self-evaluation. If you find your self falling into the get-up-go-to-work-go-home-go to-sleep-get-up-again cycle, and this is your life, be careful. Soon you find yourself living to work. You should actively implement other activities and downtime in your life while pursuing financial satisfaction. Seek financial independence, but be mindful of your future and decide at what point you are more than just a company’s cog. Find an interest and pursue it.

Its important to recognize the concept of what is “enough.” For some it may be a million, others 10 million; some more, some less. Be sure though that you know how money fits into maintaining you health, your spiritual life, and how you family (or your future family) will fit. Generally, families cannot be “planned” (as in “I will work and find a man/woman at the age of 35 and we will have 3 kids and one dog…) because usually, it doesn’t happen that way.

Or, you can sit on this soapbox I’ve been standing on, and think of another solution. I've rambled on too much. In fact, I’ve said enough.

Comment (as you often do) below!

Basic Investment Vehicles, Part I: The What, How, and When of Investments

Below is a comprehensive (but certainly not exhaustive) choices of where you can put your money. I’ve also listed a time-horizon for when you should place your money in these investment vehicles. I also tried to talk a little bit about risk. Most young investors (under 40) should probably be heavily invested the last three choices.

Low-Yield Savings Accounts

The first interest-bearing account most people learn about. Most banks offer a small percentage of interest (usually no more than 2%). It’s also the lowest risk. Local bank Savings Accounts should actually be the place to store the majority your next-day funds if it is directly connected to your checking account (meaning if you have a Wachovia savings account attached to your Wachovia checking account). That way instant transfers are available and you can get the money quickly.

Note – notice I didn’t start with checking accounts—this is because the majority of checking accounts are NOT investment vehicles. In fact, you should only keep enough money in your checking account to stay above minimum-balance requirements and to cover everyday expense. Large balances in checking accounts do NOT help you.

Money market Accounts (MMAs), High Yield Savings and CDs

For the savvy folks out there these options are the superior place to put the majority of your money for the short-term (under 5 years). To repeat, these options present the SUPERIOR place to park your SHORT-TERM savings. If you plan to use your savings in the next 5 years, consider the following:

High Yield Savings (HYS) accounts (generally online) have little or no overhead and so are able to offer higher rates. You should generally only stick to rates with low or no balance requirements. In fact, many people associate/interchange MMAs with HYS accounts HYS are just glorified versions of MMAs (and usually, a more attractive option). The top 5 $1-or-less-minimum, no fee HYS accounts and their interest rates, according to this writing as of October 3, 2006 appear below:

1. UFB Direct (5.27%)

2. Amboy Direct (5.15%)

3. Grand Yield Direct (5.25)

4. Emigrant Direct (5.05%)

5. Citibank Direct (5.00%)

There is a lead time of about 2 business days to transfer your money. You should keep this in mind when allocating savings from everyday spending.

CDs (Certificates of Deposit) are like lending agreements. Basically you lend the bank some money for a certain period of time. After that time period is up, they give you the money back with interest. Generally (but not all the time), CDs offer the highest interest rate among low-risk investments. However (and this is big) the “risk” involved is more on you than it is with the bank. In a CD, once you put the money in it is agreed that you can’t take it out before the agreed-upon time period. If you do, there is a penalty that may even leave you with less money that you put in the account in the first place.

401(k)/IRAs

Finally, for long-term saving (more than 5 years), its best to consider the higher-risk, higher reward option that comes with your job. Most employers have a 401(k), which is a deferred-payment program and is a good introduction to investing. I highly recommend it. Many major companies require it and will auto-enroll you into their 401(k). Once you’ve set up your budget, this should be your primary investment vehicle. The earlier you start contributing to this program, the better off you’ll be.

So how does it work? You simply elect to set aside a portion of your gross pay into a series of mutual funds or company stock (or a mix of both). Usually the company leaves the allocation to you, but usually will have someone offer investment advice. However, they will leave the final decision up to you.

The 401(k) is tied to your place of employment. When you leave that particular company to work for another company (or yourself), you have some options. If you are satisfied with the investment holdings that company has (and you have more than 5,000 invested) you can leave it with the company, especially if the holdings your new company owns are not as attractive.

The other advisable option is to roll over that money into an IRA (Individual Retirement Account). Think of as a 401(k) that is not attached to the company. You get more freedom in how your money is allocated and to what funds are included. When you change jobs, the IRA can go with you, and no more rolling is needed.

What is NOT advised though, is to take the “cash option”—this is where people elect to simply take a check from the company they’re leaving. This is very bad because it will be subject to absurdly high taxes which can cut your savings SIGNIFICANTLY. First, there will be a 10% penalty if you take out the money before you’re 59 and a half. Then, you’re taxed in whatever bracket your income is in—so if the income is enough to be taxed at the 28% tax bracket, then that’s 10+28=38% of your money gone when you get your check. And unless you live in Texas, Florida, or any other no-income tax state, you will be subject to state taxes as well!

So save yourself the trouble. By rolling the money into an IRA, there’s no loss.

Some of the best reading and tips explaining the IRA in detail can be found at fool.com. Go here to find info on 401(k)s, and here to find info on IRAs.