Feds Will Bust the Clock

Feds Will Bust the Clock!




The great National Debt Clock is running out of numbers. I took this picture of the clock after the government released its budget numbers for the next fiscal year, which will soon push our debt to TEN TRILLION DOLLARS. The debt clock can only go to $9,999,999,999,999. So that means...a NEW RECORD! Woohoo! For those of you who care about such things, and are still reading this, allow me to explain how this will affect you and your future generations.

Think of all the “Big Things” that the government gives out that most citizens think about—Social Security, Medicare, Medicaid, and other programs. Politicians have also tried to talk about other “free” things they want to give out to you like education, tax breaks, stimulus checks, subsidies, federal grants, etc. Nothing on that list is terrible, per se; but all this is often mentioned without how it’s going to be paid for. You see, the government doesn’t have a lot of money stashed away in a bank somewhere to pay for these things. Most of these things are paid for through a tax, which means you are paying for them.

Consider the future of some of our current programs: Medicare is running a large deficit. Social Security will also run a large deficit soon. Remember last week when we talked about when banks fail? Well, the government assumes the debt for those as well. This week, a mortgage bailout bill was passed, adding onto the deficit. But unlike you, when you run a deficit (by putting more things on credit cards than you can pay off at the end of the month), you can max out and the credit companies can call the debt. The government doesn’t “max out” anymore. They simply increase their own debt limit. Can you imagine what you’d do with such power? What if you could set your own credit limit and change it when you got close to maximum, over and over again?



Ballin!



And like a hopeless debt monger, the government doesn’t seem to see any reason to pay for the slew of new programs they are putting forward. Making more money available (by printing more of it or by lowering the rate at which people banks can borrow it) does not solve the problem—an increase in quantity of something usually means a decrease in quality (or value).

So, as we always say, don’t look for the government to take care of you, because at some point it just won’t be able to. Let the politicians debate the finer points of whether Social Security, Medicare, and other such programs will be there for Our Children. Instead, focus on guarding against future shortfalls by getting in the habit of investing (and diversifying those investments) as early as you can. You never know when the next economic shortfall will come, or when the next housing bust will be here.

Five Hot Links for the Week!

Summer has officially arrived! Check out some of these summer articles on blogs and finance sites across the net.

1. Get Rich Slowly explores the benefits of vacationing near home. In today's economic challenges, you'd be surprised at what you'll find just around the corner from you.

2. Free Money Finance explains rightly why index funds are still the best mutual funds to have as a central part of your portfolio.

3. Five cent Nickel details what works in improving your gas mileage, and, exploring further-- what doesn't.


4. CNN Money asks if Obama's plan to match the savings of families (up to $500 if you make less than 75K/yr) will work.


5. And if someone asks you for money, should you give it to them? Bankrate says It depends. -

Thursday Double-Dip

Hi Readers,

Today there are two articles I'd like to highlight for your enlightenment and reading pleasure. (By the way, If you haven't guessed, I'm still in the process of deciding what font to use. Sometimes it's to big, other times, too small. I'll find a delicate balance soon to stay easy on your eyes. ) OK, to the stories:

First, we have a good one from CNN Money which talks about ways to enhance your 401(k) offerings at your job. Believe it or not, you can have some impact on how it's set up, no matter if you are a senior manager , the entry-level analyst, or secretary. It's your future, so consider some of the options mentioned in the article. One of the more intriguing ideas I read was on the Roth 401(k):

Unlike a regular 401(k), the Roth version - permanently greenlighted by Congress in 2006 - lets you make contributions only after the money is taxed. But withdrawals are tax-free. If you'll be in a higher bracket in retirement, a Roth 401(k) can be a better deal.

Overall, it's a good read, but some of it seems somewhat suspect to me, like one that mentions choosing a re-balancing service that will buy and sell stocks and bonds for you in your 401(k) quarterly. I think that's far too many times to trade considering the fees you'd rack up. And then, what if you under-perform the market? You'd still have to pay them a certain amount of your balance.

For those of you who've been making it through the "recession" we're going through, congrats! However, if you think you may be a part of a workforce reduction (I prefer the term FIRED, but I guess that's not euphemistic enough), then consider reading this article from the NY Post on a graceful way to exit the stage (and set yourself up for the your next performance at your future job). And even if you feel safe, it won't hurt to give it a read.

Should We Allow Retirement Funds to be Used for Real Estate Investing?

No.

That’s it, no….

Oh, still around? Let’s talk about why. But first, some background. John Crudele, a columnist for the New York Post, penned

this article —in it, he talked about how the two major political parties are not facing reality, blasé blasé..you’ve heard the drill. To note, he says:

…my belief that the only stimulus package we can afford right now is one that allows people to spend their own money.

He was on the right path. It’s good point. Then, he goes wildly off course as to what this entails:

In other words, what we need is a simple law change that will permit Americans to use their own retirement money - without being killed by taxes - for such things as buying real estate.

What? Use their retirement money to buy real estate? But you can already do that you say. Yes, but with limits. It’s used to purchase your first home, and it’s limited to $10,000. Some employers require you to roll over the money to an IRA (and you have to pay it back). But there is a reason that the government makes it very difficult to pull money out of 401(k) and IRA plans—they are made for retirement purposes. Hence, the name.

Imagine for a moment that after running up student loan debt, credit card debt, and then home-equity loan debt, Americans start tapping into their last basket of (usually) forced savings—the 401(k) or IRA plan. What happens if we as a country haven’t learned from our lesson and begin buying homes way above our means because the “attractive” intro rates? You end up in a very bad position. You end up with millions of Americans (with the help of the doom-and-gloom media) playing on the emotions of everyone to bail us out of our problems (again). Only this time, it would cost a whole lot more because we would put a lot more stress on an already-fragile Social Security and Medicare program. Basically we’d further the citizen’s dependence on the government to survive. And that’s not a good thing.

Stock Market Game Final Results and Hot Links for the Week!

The table shows our final results from our year-long stock market game.

These are our closing Stock Market Game Results. Starting with 10,000 this is how we turned out. So if you kept 10,000 under a mattress last year, you may have made out pretty good. And if you invested in a Treasury bond or ING account, you made off with 10,300 since this time last year. Thanks to all who played, and if you’re down for another game or would like to play this year (for those who missed us last year), let me know.

As for what’s up around the personal finance blogosphere:

Free Money Finance tells you how to make sure your church is properly managing money.

Five Cent Nickel talks about timing the stock market, even in this unstable time.

CNN Money has an expert explore foreign CDs as investments.

And The Motley Fool tells you how to stretch your employee benefits (with some nice worksheets).

So take a look and get some knowledge!

Two Quick Money Tips for 2008

Hi Readers. Happy New Year! Sorry for the slackness between posts, but I’ve been a little involved in Presidential campaign activities. I know, no excuse. Now that you have set your resolutions and (hopefully) not failed yet, consider some of the money tips collected from writers around the Web for the new year.

Consolidate some of your banking accounts. This is the most effective way to ensure that all of your money is properly going to the right spots. You should probably try to consolidate your money to one or two main accounts. Because of the ease of checking and direct deposit, I have a brick-and-mortar bank and then I have my emergency/long-term savings with ING direct. You may like other options.

Automate your Savings Plan. Saving is awfully hard to do, especially if you consciously have to move money over every month. By setting up an automatic transfer plan that is connected to your main checking account or a part of your direct deposit, it gets much easier because the savings is out-of-sight and therefore out-of-mind. If you choose a high-yield savings account like ING Direct or HSBC direct you should be in good shape.

We’ll post more as we move along this year. Make 2008 the year you finally take active control of your finances.

Good Advice, Bad Advice.

The Financial Markets took it on the chin this week. However, while everyone around you is in full panic, it's important to keep your head. Those of you in our year-long Stock Market game (it's still not to late to jump on in), probably have experienced first hand the perils of day-to-day monitoring and trading in such a volatile market. This CNN Finance article provides some sound insight on the importance of investing a few nuggets, especially for you who hold 401(k) portfolios:

Fluctuations in the market shouldn't get to the 401(k) investor. Keep in mind your time horizon - most of us are going to be invested in the market until we retire, often decades from now.

On average, stocks move higher - their long term average gain is 10.8 percent each year, according to Hugh Johnson of Johnson Illington Advisors.

Over those long time horizons, stocks will move up and down. It will be nearly impossible for you to call the highs and lows. If you sell now, you run the risk of missing gains and paying fees to re-invest in the market.

Here's an example of how damaging moving your money around can be:

If you sold your stocks at the market bottom in September of 1998 when the Dow was at 7539.07, you would have missed out on portfolio gains of 21.8 percent by the end of that year.

Amen to that. Main point here--trust the long-term returns of the market, and shun the emotion to sell off your investments, especially if you have established, blue chip companies or sound value stocks in your folder.


ON the flip side:

Sometimes, conventional wisdom and common sense coincide. The problem is, people often times cannot find this part of the Venn Diagram of Realistic Thinking. This young unfortunate soul, who actually works for a company that gives out investment advice (although he apparently was not hired on much merit) encourages shunning Personal Responsibility and instead bumming off of your friends, family, and Credit Card companies.

No really--I'm not kidding:
To wit:

What happens if your car breaks down and you need money to get it running again? What happens if you lose your job and need to support yourself? What happens if you get arrested and need to bail yourself out of jail?

If you get in trouble and need to bail yourself out, the last thing you want is to spend your own money. The best way to avoid that is to make sure you can't afford to fix whatever the problem is. Young people are better positioned to pass off the cost of emergencies than any other group...

Every financial hardship is an opportunity -- an opportunity for your parents to show you how much they love you. Nobody's going to label you a parasite if you ask for help when you're in trouble -- that's the beauty of it.

Yikes!

If you're wondering what Estate this sheltered young man came from, understand that he is a Harvard Grad. (Not the common-sense Harvard Grad, but the stodgy, trust-fund, stereotypical kind you see on TV.)

So what do you guys think? Am I misjudging here? Perhaps up is down, and bad advice is the new good advice (and vice-versa). I'm sticking with my guns, and hoping this guy is just trying to build an audience to give real advice. Let me know if I'm missing something.

Also, what more would you like to see from our site?

See you next week.

MSN to Twenty-somethings: Take Note!

So last week I posted an article on "Reckless Saving" on which I..disagreed with. There was an excellent rebuttal written by another writer for the same website which you can read here. Ok, on to today's topic.

I think it's important to re-emphasize the importance of time vs. money when you are working and investing a portion of your salary. Starting in your 20s to prepare for retirement is no new trend--I've come across many folks who plan to "retire" at 30 or 40. I don't know what they plant to do for the next 40 years after that, but that's another story that you can share in the comments section if you fall in said category.

But if you plan to slowly build up your investment income and retirement level, consider the following insight from MSN:

Imagine, for example, that you want to have $1 million by the time you retire in 40 years. That would be enough to provide an annual retirement income of $40,000 for the rest of your life.

But in fact, you’ll need $3.26 million, because if inflation averages 3 percent a year, that's how much it will take to buy what $1 million buys today. The $3.26 million should produce an annual income of $130,000 — equal to $40,000 in 2007.

I know what you're thinking--$1 Million would be plenty to live in retirement, right? I mean by then you would have paid off your home, sent the kids to college, and cut down your diet to the essentials of applesauce and medicine. (Well, maybe it won't be that bad.) However, there is some truth to the hidden tax of inflation--$1 Million went way farther in 1967 than in 2007 and rest assured that in 2047 $1 Million would get you even less.

As we've said before, it's not the money that matters. It's the time:

Start investing now and earn an average annual return of 10 percent — ambitious, but possible — and you’d have to invest about $7,400 a year to get to $3.26 million in 40 years. But if you wait 10 years to start investing you’ll have to set aside nearly $20,000 a year.

Yikes! Waiting a simple 10 years (meaning if you start at 33 rather than 23) you would have to expend three times as much money to retire with the same nest egg at the same point. (And that's over a 40-year horizon). It's tough sometimes--you get out of school and being responsible is the last thing on your mind--most feel that they will "always have money" and don't bother investing at all. Then you'll hit 30 or so and suddenly it's time to "get serious." Why wait till then?

The source of my quote above come from an informative MSN Article on advice for young investors. There's other tidbits on getting involved in mutual funds (and less on individual stocks), watching those fund fees (just get an index fund), and having the discipline to pull out of the market as it ebbs and flows. Good reading material.

I'll be traveling again, so make sure read about other blogs to the right (Face Bookers click through to see what I mean). And do me a big favor? Make sure you mention that I referred them to you. Traffic exchange and all :-)

See you soon.

Young and Confused…or Maybe Not?

So I found this article via TheStreet.com, written by Cliff Mason an-up-and-coming 20 something who wrote about "reckless saving." I read with interest with the pull-in line that advised young people "not to save money." Continuing in disbelief, he continues the theme with the following gem:

Many of you thought I was being reckless and irresponsible when I advised young people not to save money. I couldn't disagree more strenuously. There's no percentage in being a paragon of self-restraint and spending discipline while you're in your early 20s.

I was stunned that this guy works for a major financial media agency. The only saving point I can pull out of this is "early" 20s (he's 22). I'm 26, and I think I'm starting right on time (I began funding my 401(k) at 25). Perhaps he says this because most people in their early 20s have little or no money to save. However, he kills any last remaining hope I have for his philosophy when he states the following later in the article:

If anything, you're taking a dangerous and unnecessary risk if you try to be disciplined about money in your 20s. The risk is that you might make it to 30 or 40 without ever having had a prolonged period of irresponsibility in your life. And it's not just your youth that's at stake, it's your future.

If you spend your 20s grinding away, trying to follow all the financial disciplines that we're told make you a responsible adult, you'll never get the recklessness out of your system.

So, this is what he's going with. The two main points I've pulled from his article (you can read it to see if I've misled) is that between 20 and 40 there two extremes—you either save/invest your money OR you can live the fantastic life, but definitely not both. It's an unfortunate false choice.

As with anything in life, balance is the key. You should work to save what you can as early as you can. If you start in your 20s, saving 8-10% of your income in a 401(k) is a great idea because you have time to outlive the risks and market fluctuations and still do well. Not to mention that many companies will add more money to your contribution (free money). Waiting until you're late 30s or 40s to get started just makes things much harder. Plus, we've covered the importance time has over the actual money invested, here—with the actual Excel math calculation.

That being said, I think Mr. Mason is smart—he probably wrote the article to get a rise out of some readers. (He got me). I also think he makes some good points about how kids can't be kids these days with over-scheduling and rigid discipline (but I thought our generation was lazy and undisciplined…) which I could agree. It's not all about money, but with the protective safety nets projected to get smaller (Social Security, rising costs of health insurance, decline of pensions, and rising taxes) the burden of providing for your future days are falling more on the individual.

But maybe I'm just being too much of a financial "stiff"...what do you readers think? Does this guy know what he's talking about?



By the way, regarding our stock market game. Two points to understand-- (1) It's not too late to join us. (2) This game is to help people have a long view of the stock market. If anything, the game should be even longer, but I figured that it would be hard to keep people's interest for a year. Also, I don't know who 2win or SS07 are. If those are you, send me an e-mail or Facebook message.

Total Investing, Chicago Style

Ever Heard of John Rogers?

Maybe you've heard of his company--Ariel Capital Management. I was reading an article posted on CNN and was quite intrigued with his "investment plan." Summed up in the article title "Buy. Hold. Profit. Give Back." Here are some of the highlights of the article:

Rogers typically holds a stock for four or five years, an eternity compared with the 14-month holding period of the average mutual fund...In the past decade his fund has earned nearly 14 percent a year, beating the market by more than five percentage points annually and outperforming three-quarters of all similar funds.

Ariel appears to refrain from loads or high fees, but if you have a 14-year record of beating the market by an average of five points is not too shabby at all! It just goes to show the superiority of patience and risk-taking by buying and holding the right stocks, without running up fees by having a high turnover (the flagship Ariel Fund has a turnover of 28%). To be fair however, compared to others in the business under the same investment strategy, he is par for the course in terms of performance--about average. But let's not stop there.

What really stands out is the "give back" portion of the investment strategy, on how he decides to empower inner-city students by teaching them the importance of investing.

Question: Why don't African Americans save and invest more?

Answer: I think it comes down to public education. The "three Rs" need to be the three Rs and an I: reading, writing, arithmetic and investing. Financial literacy is just as important in life as the other basics.

Question: How have you tackled that problem?

Answer: We wanted to start with very young kids. So we adopted a public school on Chicago's South Side and made investing part of the curriculum.

We give a $20,000 class gift to the first grade and manage it, with John Nuveen & Co., until they are in sixth grade. Then the kids take over and pick real stocks with this real money.

When they graduate in eighth grade, they give the original $20,000 back to the incoming first grade. They donate half of any investing profits to the school and divide up the rest.

With that money each student opens a 529 college savings account, to which we donate another $1,000. So they leave with something tangible. And the investment curriculum helps these kids with their math skills; the test scores are really high.

I think this is a great idea, and I hope to do something similar in the future--I may not be able to pull from millions to give back, but I definitely admire and will support results-oriented programs like the one above in any capacity that I can, financially or otherwise. I also encourage you readers to seek out and support similar programs in your area--whether it's through corporate responsibility programs like Ariel is doing in Chicago, or giving regularly (financially and by volunteering) to your place of worship or civic organization. Seeing this makes me hope they will pull out a similar program here in New York City. It also shows how investing in your community will help us all over the long term.

Well, there's a thunderstorm a-comin,' so I'll get off this computer. I will be traveling over the next two weeks, so if you don't see any articles from me directly, please don't hesitate to check out our Newsreader over to the right (which is updated every day). Those of you reading through Facebook will have to click through to our website.

See ya soon!

CNN Finance - Rules to Grow Rich By...

Besides the convoluted title, I read with interest some of CNN Finance's "25 Rules to Grow Rich By." I will post a couple of them here (with comments) but you should click the link for the full list.

12. If you're not saving 10% of your salary, you aren't saving enough.
The earlier you start saving, the less you'll need to set aside every year to meet your goals. That's because you allow your money more time to grow -- the gains on your invested savings will build on the prior year's gains. That's the power of compounding, and it's the best way to accumulate wealth.

Saving at least 10% of your annual salary for retirement is recommended, but the older you start saving, the more you'll need to save. If you start at 50, you may need to put away 30% a year and still postpone retirement by a few years.

From site stats, it appears most of the readers here are well under 50 and can probably meet this one, although I can see how it can be pretty tough starting out. I personally am saving 8% because I'm setting aside a good bit of my savings for shorter-term endeavors (house down-payment, and Other Things).

7. To figure out what percentage of your money should be in stocks, subtract your age from 120.
Since 1926, stocks have returned an annual average of 10.5 percent, long-term government bonds returned 5.1 percent, and "cash," measured by Treasury bills and other short-term investments, has returned just 3.1 percent. In other words, if you're investing for the long-term, stocks are the place to be. But in the short term, the stock market can be downright dangerous, with much more severe drops than the bond market has.

That's where this rule comes in - the younger you are, the more time you have to recover from stock-market crashes. As you get older, you should gradually move money out of stocks and into bonds.

Note that these returns are over a long-term period. If you are looking for short-term (less than 5 years) place to park your money, I wouldn't advise you to place it in the stock market. Over longer periods though, there's no better place to put it--even real estate returns about 4-6% on average. And to get that market average, the best place to be invested is probably a market-tracking index fund.

13. Keep three months' worth of living expenses in a bank savings account or a high-yield money-market fund for emergencies. If you have kids or rely on one income, make it six months'.
An emergency fund is a hassle to build, but you'll be glad you did next time your transmission sputters or your boss hands you a pink slip.

I was talking to some mentees of mine and made sure they were aware of this rule at a young age. You won't be able to build six months of income in a month or two (unless you're very good.. Nah, I don't think anyone is that good.) It will take probably 4-6 months to get a secure account unless you spend much less than you earn. Nevertheless, it's a very important step. And don't use just any old "bank saving account." Loook for a high-yield savings or checking online.


Next time I want to tackle this myth I keep hearing that you have to be rich to invest. We'll try to convince you that you should look at that the other way around. Take Care.

J. Hogans: Mutual Funds

A proven track record, a fund you know, and the ability to take risks are just a few things you should know about Mutual Funds. Special Contributor Joseph Hogans returns to cover the basics.

My previous article focused on ways to build wealth through income-generating investments such as bonds, mortgage-backed securities (MBSs), and real estate investment trusts (REITs). While it is possible to put money directly into these investment vehicles, there are often high minimum investment amounts associated with these choices. Most mortgage-backed securities for example, require a minimum investment of $25,000. If you have that kind of money to put into one investment, consider yourself blessed. For the rest of us however, there is a way to get around these high investment minimums and increase the diversification of our portfolio at the same time. The solution lies in mutual funds.

A mutual fund is a pool of money from multiple investors that is used to invest in specific stocks, bonds, and other money-making securities. Instead of you needing $25,000 for a MBS, you and other investors can invest $1,000 each in a mutual fund that invests in MBSs. In this way, you can reap the benefits of a MBS investment without needing the large amount of money required to buy one directly.

The Basics

Mutual funds are denoted with a 5-letter ticker symbol (eg. ARGFX) and are run by a person, or group of people, known as a fund manager(s). The investments that these fund managers make will be guided by the fund objective, which is a statement defining the goal and types of investments that can be made. For example, a fund whose objective is “long-term capital appreciation” will only invest in securities that are expected to increase in value over the span of many years, as opposed to investing in securities to make a quick short-term buck. Therefore, it is important to review the fund objective and the history of the fund managers before you choose to invest in a mutual fund. Since the fund manager is the one who actually chooses how to invest your money, you need to make sure this person has a good history of choosing wise investments and sticking to the statements given in the fund objective.

Fees

After you have reviewed various fund objectives and managers and compiled a list of funds in which you may be interested in investing, it is time to look at the fees. Of course, the fund manager is not going to invest your money out of the kindness of his/her heart. They expect to be paid and also need some money to cover other necessary expenses (operating and administrative costs, private jet excursions to the Bahamas, Little Johny’s golf lessons, etc.). These costs are given by the fund’s expense ratio which represents the percentage of the fund’s net assets that are used to cover annual expenses. Though all funds have expenses, it is important to only invest in those whose expense ratios are low (~1.1% or less). However because you’re pretty smart, you know that with anything involving the movement of large sums of money, there are ways that people will try to hustle you. In the world of mutual funds, these hustles are known as “loads.”

No Load- A no load mutual fund is a fund that you can purchase without the fund manager charging a commission. If you invest $1,000 into the fund, $1,000 will added to the net assets of the fund.

Front-End Load- A front-end load mutual fund is a fund in which the manager takes a portion of your money before you even have a chance to invest it (he/she takes your money on the “front end”). Let’s examine the effect of a 5.0% front-end load fund. If you choose to invest $1,000, instead of the fund manager putting the entire $1,000 into the net assets of the fund, he/she will put $50 (5%) in their pocket and only put $950 into the net assets of the fund. This means that your investment has to have at least a 5% return for you to even break even. You’ve already lost money the moment you decided to invest in the fund.

Back-End Load- A back-end load, also known as a deferred load, fund is similar to a front-end load except your money is taken when you sell your shares (on the “back-end”). With a 5% back-end load, you will receive $950 when you sell $1,000 worth of shares. Once again, you’ve been hustled.

The Bottom Line

Mutual funds are a great way for the average person to become involved in the stock market. You are basically handing your money to someone who will invest it with specific goals and objectives in mind. Accordingly, it is important that you trust this someone (the fund manager) and you feel comfortable investing in the types of securities that your money will be used to buy (i.e comfortable with the fund objective). Once you have decided what your investment objectives are, do some research to find funds that match your objective. Analyze these funds to determine their previous returns over the long-term and decide what particular funds will be successful in the future given the objective, management, and fees. Most importantly, DO NOT invest in a mutual fund that charges a load. You are shooting yourself in the foot and making someone else rich when you do so.

If you have any questions feel free to e-mail me jwhogans[at]gatech[dot]edu.