Q: Where’s the best place to protect my money from inflation?

A: Although the stock market has outpaced inflation in the past, the stock market’s returns are too volatile to only invest in the market.

In the past, investors had few options for shelter. Today, however, the government sells TIPS and Series I bonds which compensate investors for inflation (ironically, inflation directly caused by the government).

Although you can directly invest in these government bonds, most people would be better off investing in an inflation protected mutual fund like Vanguard’s Inflation-Protected Securities (VIPSX).

Q: You write about getting ahead as if it’s so easy. Most of us will never end up rich because the deck is stacked against us. -Skeptical

A: I don’t mean to make building wealth sound easy. It is simple, but far from easy. Spending less than we earn is a simple concept, but you won’t find many people who enjoy spending less, so they can invest more.

And while the majority of the world’s population still labors under oppressive governments and has little capital with which to work with, if you’re reading this, the odds are you live somewhere where freedom and opportunity abounds. You just need to set your mind to it.

That’s not to say that we’ll all end up rich. After all, rich is a relative term. You might not be rich compared to a multi-millionaire, but even the poorest people in the western world enjoy luxuries unimaginable to royalty just one century ago.

If you’re still skeptical, check out some of the personal finance and wealth building blogs where average, regular people are detailing their journeys to their own financial success.

A few blogs worth checking out: Frugal Dad, Mrs Micah, MoneyNing, Moolanomy, My Investing Blog, plonkee money, & The Wisdom Journal.

If you have a financial question, contact me to have it answered on the site. Please be sure to state whether your name can be listed, or if you’d like to remain anonymous.

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In recent years, long-term care insurance and disability insurance have become hot topics. An unexpected disability can decimate a family’s wealth and this unpleasant possibility has led many financial advisers to encourage everyone to get insured.

Now insurance is a wonderful invention and purchasing disability insurance can be a wise decision for many people. But the decision isn’t as simple as it is often presented and many of the statistics have been designed to push people towards purchasing insurance regardless of their real needs.

Continue reading this guest post at The Wisdom Journal.

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Q: We have one daughter heading to college next fall with another likely to attend in a couple of years. We don’t have any college funds or savings, so how should we go about paying the bills?

A: You should be commended for your desire to help your children start life with a strong education. Although many parents cannot afford to pay for college, most can at least help. Here’s a checklist to determine how prepared you are to cover your children’s expenses.

• You have no credit card debt
• You invest enough in your 401k to receive the maximum company match
• You have no car loans
• Your retirement accounts (IRAs, 401ks, pensions) are growing at the pace required to retire someday

If the first three statements are true, you may be in a position to help with tuition or their living expenses. Otherwise, you probably should focus on creating and following a written budget, paying down your debts, and investing for retirement. There are many ways to pay for college, but only two options in your golden years: live off a nest egg, or keep working to pay the bills.

College doesn’t have to be expensive

A college degree is one of the surest ways to raise your children’s income potential, but that doesn’t mean a degree has to cost a lot. Here’s the three biggest costs you need to discuss with your children.

Moving out vs living at home. The decision to live at home or flee the nest will probably have the biggest impact on your children’s expenses. Walk them through the bills they’ll be responsible for if they choose to move out on their own. Rent, food, utilities, and internet access will cost them thousands—month after month. Living on campus might be cheaper, but room and board will still cost eight to nine grand a year.

Community college or straight to university. Community colleges are a wonderful option. There’s often one near home, the tuition is affordable, and many students find the transition easier than heading straight to a university. With an average annual tuition cost of $2,361, community college tuition is almost four thousand dollars less than the average public university’s tuition.

Private vs public university. The decision to attend a private university or an out-of-state university can add thousands to the bill. At $6,185, a hard working student could pay for his or her public university tuition with a good part-time job. But, out-of-state tuition at an average cost of $16,640 is probably beyond most students’ reach. Even more expensive, the cost of an average private university comes in at $23,712 a year—before considering room and board!

Choices, choices, choices

Although college will be expensive, your children’s decisions will determine how expensive. Keep in mind that almost two-thirds of full-time undergrads receive grants and/or tuition wavers.

Pursuing scholarships is another option. Make sure you don’t overlook the smaller scholarships because they often only receive a handful of applications.

You’ll also want to include your second child in your college discussions. The sooner children start thinking about college and it’s implications, the better prepared they will be.

And finally, don’t sacrifice your financial health by helping more than you can afford to. You won’t be doing your children any favors by spending money you either don’t have or can’t afford to spend.

Source: College Board

This article was featured in the Carnival of Personal Finance hosted by MoneyNing.

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Q: I’ve invested in my 401k for 11 years now and have experienced many ups and downs, but I didn’t do much research when I started. What’s the best way to invest for retirement?

A: You’re right to step back and start anew with a more methodical, researched approach. I’d recommend you read a good investing book or two like The Coffeehouse Investor, which is both quick and easy to read.

While you won’t be able to avoid the stock market’s downs without also missing out on the gains, you can set yourself up to see more of the latter.

Diversifying your investments will protect you from the steep declines that come with investing too heavily in a specific stock, industry, or type of asset. Your asset allocation should also take into consideration your tolerance for risk.

Understanding your risk tolerance is essential. Overly aggressive investors have lost millions and nest eggs have been shattered by risky investments. Historically, more stock market risk has translated into higher returns, but only when the stocks are held long enough.

Investors who panicked after a bad day, year, or even decade lost money. Holding your age in bonds is one way to control your exposure to stock market risk. For example, a fifty year old investor’s nest egg would be split evenly between stocks and bonds.

And while stocks return more than bonds, their prices fluctuate more wildly which can be disastrous if you are near retirement. To learn more about your comfort with and need for risk, check out William Bernstein’s The Four Pillars of Investing & Larry Swedroe’s Wise Investing Made Simple.

Investing through index funds is the final key to successfully investing in your 401k. Index funds are a basket of stocks that fulfill a specific criteria. For example, the S&P 500 includes the 500 largest American companies based on their market capitalization (the total value of their outstanding stock).

Index funds are the foundation of a successful investment strategy because investment brokers, mutual fund managers, and day traders are not consistently successful. More than 80% of mutual fund managers fail to beat their respective indices.

So the odds that one of your 401k options is a market-beater is very unlikely. And even if one was, how would you even know beforehand?

These three considerations–diversification, reasonable risks, & index funds–will start you towards a secure retirement. To learn more on investing, saving enough, and minimizing investment expenses, read the aforementioned books or subscribe to On Financial Success for free.

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Q: With housing prices dropping, we’re hoping to buying our first house. Is now a good time to buy? What do we need to do to avoid the housing crisis?

A: There are two issues here. Is it a good time for anyone to buy a house? And, is it a good time for you to buy a new house.

Generally, any time is a good time if you have the money and you plan to stick around for 5-7 years. The longer you plan to stay, the better.

Although the “housing crisis” may cause some homes to depreciate, these foreclosures are different from a natural disaster which would actually destroy homes. Instead, for every foreclosed home, “one family moves out, and another moves in,” according to economist Steven Landsburg.

Multiple foreclosures nearby could significantly affect your house’s value, so you shouldn’t count on appreciation or buy a house without a full down payment. A home should be a shelter first and an investment a distant second.

How to tell when you’re ready to buy a house

You’re buying for the right reasons. Although a house might turn out to be a good investment and some people do invest in real estate, for most of us, a house is a place to rest our head. You are much likelier to be happy if you buy a house for the purpose of shelter and you stay in it at least five years.

You can afford the house. Houses are expensive. They cost a lot up front, they cost a lot to maintain, and your mortgage payments are very much like rent payments to the bank.

Opinions differ on mortgages, but homeowners are better off when they have the full 20% down payment and the cash on hand for closing costs. A down payment reduces interest expenses and protects home owners from dropping valuations.

Taking a 15-year fixed rate mortgage will keep your true costs down, protect you from spending too much, and will give you the freedom pursue other financial dreams sooner. Unfortunately, many mortgages haunt people up to–and even beyond–retirement.

You can get a reasonable mortgage rate. Most of the housing crisis is due to “homeowners” buying houses before they were ready. If your credit score is damaged or you are carrying other debts, you should take a couple of years to aggressively pay down your debts and make a habit of paying your bills on time.

The American dream is a wonderful goal, but one that can quickly become a burden if you are trapped by debt or an aggressively rising interest rate.

You have an emergency fund. Although many people skip this step, many disasters could be avoided if people had a rainy day fund equal to 3-6 months of income. Home owners face all kinds of small to large disasters. When something breaks (and something will break), you’ll be thankful you were prepared.

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