One of the most ironic aspects of modern life is the lack of instruction on how to handle money, especially considering the consequences of poor money management.

There are only three things people can do with money: spend it, give it, and keep it.

The proper balance is important. If you spend everything, you’re broke. If you give it all away, you’re still broke. And if you keep all of it, you’re a miser.

Unfortunately, most of us are off balanced. We spend the majority of our day working for someone else and we keep little, if any, of our earnings which makes giving money away especially difficult.

You are productive, shouldn’t your savings be productive too?

Most people like to dream about a day in the future when they no longer have to work for someone else. Some people call this retirement. For others, it’s simply the opportunity to do work you enjoy when you want to.

This dream is possible if you start working for yourself today instead of simply collecting and then spending your paycheck. This decision is vital because you might need to radically restructure your finances. But first, you’ll need to have some savings to work with.

The more you save, the faster you can realize your dream. Consider 10% of your salary a good starting point. If you think that’s impossible, pull your head out of the clouds. Many people tithe 10% of their salary and save for retirement.

Break the paycheck to paycheck cycle

Living paycheck to paycheck works for some people, at least until it stops working. Not only is the lifestyle risky, but many of life’s pleasures remain out of reach (freedom, retirement, etc). Below you’ll find three types of savings and how to safely make your savings productive.

1. Life happens

Life happens, sometimes at the most awkward of times. For this reason, you should have at least 3-6 months of income set aside for emergencies. Stash the money in a high-interest savings account to protect yourself from inflation while still keeping it accessible.

2. Big purchases

Many of life’s biggest expenses can be anticipated (cars, college, and houses). And because these expenses are typically no more than 10-15 years out, you should be able to estimate how much you’ll need.

Make sure you carefully consider your assumptions. You will need to save significantly more if you plan to pay the majority of your children’s college expenses. Also, remember that the costs vary dramatically from college to college (just like with cars).

If college is five or more years away, you might want to invest in the stock market via a tax-advantaged account. Otherwise, you’ll want to stash your savings somewhere safe like a high interest savings account. Your down-payment and car savings will be safer in a savings account as well (just make sure to keep your different savings categories separate on paper at least).

3. Nest egg

Retirement is the biggest expense we can anticipate and yet most people do not save enough or even save for retirement. This is tragic because people deprive themselves of freedom later in life by indulging in short-term conveniences and luxuries.

Your nest egg isn’t necessarily just for retirement. For example, you might want to change careers, perhaps to something you would enjoy in semi-retirement. Whatever your goal, it is important to clearly define what you want to do and how much you’ll need to do it.

A clearly defined plan will help you save enough if you start now. How many dreams remain unpursued for lack of a plan? Do you have any long-term goals? How do you plan to make them a reality?

5 Comments

When is a book more than a book? Occasionally a book comes along with an idea so powerful, so simple that it threatens to transform the world.

Russell Roberts’ The Choice: A Fable of Free Trade and Protectionism is more than a book.

Roberts offers us a glimpse of a different America, an America free from foreign competition. A poorer America because it shunned trade. This alternative history is particularly relevant today as members of the media and politicians are all too happy to promote the idea that foreign countries like China are stealing our jobs.

Instead, Roberts shows readers how trade does not affect the number of jobs, instead it affects the types of jobs people work. Fortunately for us, one of the main characters is resistant to the idea.

This resistance to change provides the premise for the story. Ed Johnson, CEO of the Stellar Television Company is facing increased competition from lower priced Japanese televisions. Johnson is a generous man who wants to see his employees protected. His solution is a tariff on Japanese televisions.

In 1960, the tariff passes and employees of the Stellar Television Company continue to prosper. But this tax puts American down a dangerous path and it’s up to nineteenth-century economist David Ricardo to show Ed why (and to earn his heavenly wings in the process).

Their discussions range from outsourcing to tariffs to trade deficits and whether globalization helps the poor.

Roberts view of trade is anything but naive. Sometimes a few people are made worse off when their job moves overseas, but most people’s lives are enriched. The foreign worker now has a job much better than what was available before. Everyone now has access to a more affordable product. And the displaced worker is freed to pursue other opportunities that might pay more or be more rewarding.

Ultimately, the next generation has more money and more choices that were simply unimaginable when the jobs initially moved.

The Choice is a wonderful little book full of powerful examples that will help you better understand the benefits of trade. A clearer understanding is important today as free societies are faced with the choice between allowing people to make mutually beneficial transactions or protecting the incomes of a few at the expense of many.

You can learn more about the benefits of trade at Russell Roberts’ homepage, or at Cafe Hayek where he blogs. He also hosts a regular “economics podcast for daily life” called EconTalk. The Choice is available at Amazon.com and sample chapters of his books are available.

7 Comments

Like all new year’s resolutions, the sooner we change, the more we benefit. And much like our health, the consequences of poor financial decisions can take years to appear. Fortunately, it is possible to restore our financial health later in life.

Just like exercise, but different

But just like exercise, the longer you delay saving, the harder you have to work to restore your financial health. So unless you have access to a trust fund or have earned a generous pension, you will need hundreds of thousands invested (a nest egg) to generate income for you when you are no longer able or no longer want to work.

There are two ways your nest egg can grow: contributions and investment returns. Thanks to the power of compounding interest, early, consistent contributions can grow to hundreds of thousands of dollars during your lifetime. If you’re young, start now because you will need to invest twice as much for every decade you delay.

If you’re not so young, start now. Further delay will only make the situation worse. Thankfully, this is not your health we’re talking about. You can turn this ship around if you to want to badly enough.

Smart strategies for a late start

When time is not on your side, you have three options. (1) You can work longer than you intended to make up for a smaller nest egg, (2) or you can make bigger contributions. (3) Some people even take on more risk in hopes of making up for lost time.

This is not a good idea.

Riskier investments, late in life is akin to going “all in” at a casino, hoping your luck has changed. This strategy will work for some investors thanks to dumb luck, but the vast majority will find themselves worse off than before.

If you have a large income, the solution will be simple—but not painless. Bigger contributions might require you to downsize your lifestyle, but you by no means will have to be frugal.

If your income isn’t quite as large, then you’ll need to cut some unnecessary expenses, earn more, or both.

So when is it too late?

What is the lesson here? Is it too late to begin saving? No—like all positive changes, the sooner made, the better off you’ll be. Begin saving today (or paying down debt) because even a modest nest egg will have a profound impact in your golden years.

Here’s four steps to get you back on track:

1. Start now with a written plan outlining your future needs and aggressively eliminate any debts
2. Contribute as much as you can by following a written budget
3. Invest responsibly with low-cost index mutual funds and a plan for allocating your investments
4. Don’t rule out valid options like downsizing your goals, working longer, or finding a career you can enjoy part-time during retirement

You might also want to checkout Four Steps to Financial Success, a pamphlet on four key steps to achieving financial success. Also, make sure to subscribe to On Financial Success to learn how to grow and protect your wealth.

7 Comments

While we’ve experienced unparalleled growth and prosperity around the globe, history teaches us that everything comes to an end.

• Alexander the Great carved out an empire over 13 years, but died one month shy of his 33rd birthday. His empire didn’t last.
• The Roman empire lasted for 1,480 years in one form or another.
• China was united and ruled by a succession of dynasties for 2,132 years.

Individual lives are even shorter

Even-though many people now live into their late seventies and beyond, many people do not.

So, don’t put off living today in hopes that you’ll have time to enjoy life later.

• Don’t live like a miser because that early retirement might be just as unsatisfying.
• Don’t put off your dreams, you might not have a better chance later.
• Most of all, don’t neglect your loved ones. Money can be replaced and priorities can be rearranged for more time, but death is final.

Sit back and re-evaluate how you use your time and what you’ve unintentionally been missing. If you haven’t started saving for the future, start now. If you’re not quite ready to pursue a dream, make sure you aren’t letting fear delay you.

Moving forward with a plan will help you resume living with vigor, focusing on what matters because you know you’ve prepared for a bright future.

4 Comments

One way of measuring our lives is by the friends we keep and the legacies we leave behind. Another option is measuring our successes. Sometimes we have big successes to point to, other times our success is found in our persistence and a job well done.

The pursuit of financial success

Opinions vary on financial success. Some people think it will be forever beyond their reach, others desire and work towards it intensely, and still others know it is possible but are unsure of the path.

We all want financial success because it provides freedom and opportunities.

But achieving success can be demanding. Successful people take risks. They innovate. They work towards their goals and in the end, they are more successful than they would have been if they’d settled for the status quo.

The beautiful thing about success

Success is contagious. Your neighbor’s success can inspire you, or if you choose, discourage you. But it always makes the world a better place (assuming it’s an honest moral venture).

When your neighbor invents a new tool, starts a business, or comes up with a novel idea—the world gets a tiny bit better. If your neighbor becomes wildly successful, even better! Because the financial success confirms that something useful and valuable has been created. People generally do not throw their money away; they exchange it for something they value more highly.

How does this relate to blogging success?

Like most types of success, blogging success improves our world. New ideas, more friendly packaging, or interesting entertainment is rewarded with attention and even money.

At this point, my biggest blogging accomplishment is simply my transition from observer to blogger. This leap was challenging because I had to get beyond my “need” for perfection, so I could actually get some work done!

I also had several more important and simultaneous priorities at the time: (1) transitioning from bachelorhood to being a husband and a father to my adopted son, (2) my graduate studies which involved teaching and grading hundreds of papers, and (3) building a house out in the woods.

Set yourself up for success

The internet has opened up a world of opportunity and blogging has made sharing your ideas easier than ever before. We are only just beginning to reap the rewards, but we can be certain the outcome will be amazing because:

The biggest leaps in human development have always come from trade—resources, products, and ideas.

So, start yourself on the path to success today. Put your dreams to paper and create a list of concrete goals that will help you make your mark on history.

On Financial Success will be here to help you set your financial life up as a resource instead of a distraction or barrier to pursuing your dreams.

This article was written for All Tips and Tricks’ Best Blogging Achievement Writing Project.

13 Comments

That’s it. These key steps lead to financial success if you start now. Of course, there is still more to learn if you want to:

• be more comfortable making financial decisions
• avoid personal finance and investing pitfalls
• better craft a plan for your unique situation

On Financial Success covers all of these topics and more. Below you will find a list of important articles and links to engaging blogs on personal finance.

Four Steps to Financial Success is a six-page pamphlet on building wealth, distilled into four simple, reliable steps. Read it online, or download the color pdf.

Supplementary Information

The National Association of Personal Financial Advisors (NAPFA) is a good place to start looking because their advisers are solely compensated by an upfront fee.

The method of compensation is important because many mutual funds charge investors enormous fees for the privilege of investing. Naturally, these funds would die out because they offer nothing in return for their higher costs. However, many of these dishonest funds thrive because financial planners receive a kickback for introducing their clients to the funds. Financial planners who are only compensated by your fee have no incentive to direct you to these types of funds.

Resources & Places of Interest

I’ve been a long-time reader of All Financial Matters, My Money Blog, Five Cent Nickel, Consumerism Commentary, Blueprint for Financial Prosperity, and the heavy weights Get Rich Slowly, and The Simple Dollar.

1 Comment

If we can’t beat the market, what’s left? Well, we can cross our fingers, selecting individual stocks and fund managers in hopes that we’re making the right decision.

Or we can approximate the market’s returns by owning everything. There are several benefits to this approach:

• You’ll beat approximately 85% of managed funds
• When the market goes up, you will know for sure that your investments are going up too
• You’ll be insulated from spectacular Enron-like bankruptcies

So, how does one go about owning everything?

 
Low-cost index mutual funds.

They match the market’s return, minus small annual fees (the expense ratio).

They beat the majority of actively managed funds every year.

They beat an even higher percentage of actively managed funds if you consider consecutive years.

They don’t change—you don’t have to worry about a new manager changing the way the fund invests.

They are more efficient because there are far fewer transaction costs from the manager’s trades into and out of stocks.

So owning a little of every stock will be enough to ensure success?

Hardly. Stocks are still risky, especially over the short term. Diversifying will bring a level of stability to your nest egg that would be impossible if you only invested in a handful of places.

There are four main types of diversification:

1. Holding index funds instead of individual stocks
2. Investing in multiple industries instead of a single sector (owning different types of companies instead of owning, say just internet-based companies)
3. Investing in foreign stock markets instead of only owning your nation’s stocks
4. Investing in a combination of stocks, bonds, and cash instead of putting all of your money into one type of asset

While everyone should diversify, your personal tolerance for risk will help you decide on the exact percentages of stocks, bonds, and cash. A good, common rule of thumb is to hold your age in bonds.

As you age, your bond holdings take up a bigger percentage of your nest egg and your stock holdings decrease, protecting you from a catastrophic setback at an age when you won’t be able to replace your loses.

Four Steps to Financial Success is a six-page pamphlet on building wealth, distilled into four simple, reliable steps. Continue reading online, or download the color pdf.

• An Introduction
• Step 1 - Start now
• Step 2 - Save enough
• Step 3 - Minimize expenses
• Step 4 - Own everything
• What’s next?

2 Comments

Most investors skip this step and billions are made thanks to their oversight.

Investors spend countless hours trying to find an angle to give their investments a boost. This hope persists because the financial industry invests millions spreading the myth that you can beat the market.

Unfortunately, beating the market is highly unlikely, especially over the long term.

Focus on what you can control

If investors cannot control what their investments’ return, what can you control? You control how much money you give to your investment company.

This gift (the expense ratio) is really a fee for managing your investments. Most investors pay tens of thousands more for the same, but often sub-par, performance.

The cost of doing business

The expense ratio is charged annually, even when you lose money (returns are negative) and is expressed as a percentage of your total investment. Because large amounts are involved, the percentage is measured in basis points, one hundredth of one percent (0.01%). However, even small differences in fees add up over time.

Some investors are pretty generous, giving up two, three, four, even ten times as much for the same performance.

This generosity is not repaid. Over forty years, an investor simply paying 1% more (for the same 6% return) will lose over $192,000 compared to a more cost savvy investor. (see chart to the right)

To get the best deal, compare your current costs to this list of Vanguard’s funds. Vanguard pioneered low-cost mutual funds. Their expenses are generally the lowest in the industry because they are a non-profit, member-owned organization.

Four Steps to Financial Success is a six-page pamphlet on building wealth, distilled into four simple, reliable steps. Continue reading online, or download the color pdf.

• An Introduction
• Step 1 - Start now
• Step 2 - Save enough
• Step 3 - Minimize expenses
• Step 4 - Own everything
• What’s next?

1 Comment

People often set money aside for retirement, but underestimate how much they need to save. Fortunately, figuring out how much to save isn’t too difficult.

How much will I need at retirement?

Experts generally agree that you can safely spend 2-3% annually of your nest egg. Anymore, and you significantly increase the risk of outliving your savings. However, bigger withdraws are an option if you do not intend to leave your nest egg to heirs.

How does 2-3% translate? Well, a million dollar nest egg would provide $20-30,000 annually. If you have a pension, or expect to collect social security, that might be plenty. If your nest egg will be your only source of income, you might need more or a plan to work part-time.

The number will also vary wildly based on your hobbies and how often you travel. Some advisers suggest you plan on generating 70% of your working income; however, expenses will vary. Don’t forget that you shouldn’t have any debt when you retire and you won’t be contributing to retirement accounts anymore!

How much will I need to save?

Lots. The market won’t turn small contributions into a pot of gold.

People often claim the stock market returns 10-12% over the long term. But this number isn’t as big as it sounds. When you take ½ % off for investing fees (the expense ratio) and another 3-4% for inflation, your real gain is closer to 6-8%.

Also, you will only be earning 6-8% on a portion of your nest egg. You’ll want to protect a percentage of your savings in bonds. Bonds are far less likely to rapidly drop 10, 20, even 30% in value like stocks can.

But with this reduced volatility (think of it as security) also comes much lower expectations for growth.

How can I get the best return on my money?

In the end, the market dictates how much we earn. Unfortunately, there is no way to game the system or to super-size our returns consistently.

However, we can take some steps to earn more than the majority of investors. Steps 3 and 4 cover how.

The table below provides rough estimates on how much to save. The figures are based on a flat 6% return, year after year.

Four Steps to Financial Success is a six-page pamphlet on building wealth, distilled into four simple, reliable steps. Continue reading online, or download the color pdf.

• An Introduction
• Step 1 - Start now
• Step 2 - Save enough
• Step 3 - Minimize expenses
• Step 4 - Own everything
• What’s next?

2 Comments

This step is essential; it is hands down the most important, for this reason:

For every decade delayed, one must save twice as much.

This means if $1,000/month was enough in your twenties, you’ll need $2,000 monthly if you’re in your thirties. For those of you starting in your forties, $4,000 might be in order.

Once you pick yourself off of the floor, we’ll move on.

The numbers are broken down in greater detail on the next page, but the rule is simple. The power of compounding interest can either work for you or against you. That’s why it is so important to get started right now.

If your mind is running through excuses—you are procrastinating. Starting doesn’t mean investing. If you are in debt, create and follow a plan to get out of debt. If you aren’t, start investing or increase your contributions if necessary.

Four Steps to Financial Success is a six-page pamphlet on building wealth, distilled into four simple, reliable steps. Continue reading online, or download the color pdf.

• An Introduction
• Step 1 - Start now
• Step 2 - Save enough
• Step 3 - Minimize expenses
• Step 4 - Own everything
• What’s next?

4 Comments