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Monthly Archives: July 2008

Don’t wet your bed

I was reading an article over at Blueprint today, and It linked to a CNNMoney.com article about advice from some well known millionaires. It’s a great read and the best piece of advice I got out of it is not to wet my bed. Go read the article and you’ll see what I mean.

-Jared

Don’t die broke and alone

Back in our parents generation things were simple. Get a job, earn a pension, maintain a savings account, buy a house and retire on that pension and paid off home.

Those were the days.

Big companies, long touted for their excellent retirement packages, have turned to reducing or eliminating benefits completely. Couple that with the fact that social security will be out of money in a few years and you see a bleak outlook for the upcoming generation of retirees. What this tells us, is that our generation will be the first to have to provide our own retirement packages. Although it seems that big business has screwed us once again, ……..well OK, they have.

So how do you survive the long haul when you can’t work anymore? Invest in you’re future now while you have income. There are many options to use to build personal wealth and you my friend, are going to have to use them all. I’ll go over what each option is and amend this article as I add new choices for you to go over, but for now, let’s hit the big ones:

What is a CD and why do I want one?

The easiest way to explain what a CD is is to copy directly, someone else’s explanation:

“A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are “money in the bank” (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.”


Thank you Wikipedia.

So how do CD’s work? You go to your local bank or credit union and speak to a personal banker, the guys and gals at the desks. To open a CD account, there is generally a minimum balance required of $500 or more depending on the terms. The terms are laid out at the time of opening the account, the most common terms are 3 month,6 month,9 month, 12 month, 3 year and 5 year. The interest rates are generally higher than that of a savings account with some exceptions.

Why do you want one? Security. CD accounts are just as safe as savings accounts and are insured all the same. There is no risk of losing your money unless our financial systems collapse and at that point money won’t have a value anyway so it’ll be the least of your concerns.
Secondly, the rates normally beat inflation by a healthy amount. What many people don’t realize is that having your money in a savings account can actually make you LOSE money. I’m not talking about fees here. A typical bank offers you an interest rate as low as 0.01%, while inflation sits at a much higher 3% on average, making your oney worth less by the year. How does it make sense to be saving money and lose 2.9% of it’s value every year?

That’s why I suggest CD’s to anyone who is just starting to build up their money reserve. My suggestion is to keep an emergency fund in savings so it may be accessed immediately, but put the rest of your money is short term CD’s until you have an alternate idea for it. I’ll be laddering my funds in 3 separate 3 month CD’s, opened n consecutive months. This way I will never be more than 30 days away from money being available to me.

The man who changed my life

If you havent heard of Robert Kyosaki by now, where the hell have you been? Some people think he’s a fraud, some say he’s a genius but weather you like him or not means nothing because he’s rich and you’re not. A little back story:

Back in 2003, I was 21 years old. At the time I was racking up debt like crazy due to my family having no clue about money, or financial education. I got a job working for a life insurance company for a short time and met a man named Raymond. Ray changed my life. While I was working for this company and by the way not making a single paycheck, I was apprentice to Ray. He was an older guy, maybe in his early 40’s at the most and was of some unanounced latin decent. He told me stories of his past involving making and losing businesses and money and jobs. From his stories I did’nt learn much, I was young and ignorant and did’nt pay them much mind, but what I did pay close attention to was what he was trying to teach me about money and my future. Long story short, he told me about this book he was reading and how it was changing how he thought about money. He’d been wrong all these years and reading this book taught him why.

After leaving the job I was in the library one day, maybe a year or so later, and I ran into the business and finance section in my wandering. I decided maybe it would a good read, so I looked for the book and took it home. That night my life changed. I couldnt belive how simlple the whole thing really was, but how we just blindly look past the obviouness of it all.

The book may be fact or fiction, it doesnt really matter, the point is that the lessons it teaches about personal finance and money management are real, and correct. It got me started on my quest and made me want to learn. For these reasons I suggest everyone read the book, at least once.

I never saw ray again.

Thanks buddy, I hope we meet again.

-Jared

Cash out your 401k

   We are told all the time to stay in the market, not be scared off by market fluctuations and that investing is a long term position. While I agree with these age old pearls of wisdom, I recently cashed out my 401K. Here’s why.

    When I started working for my last employer, I decided to take advantage of the matching offer their plan had at the time. Through fidelity, I opened my 401K and dumped 4% of my pay into it each week, for which the company matched 2% on top. Year by year it grew slowly and surely just as I was told it would, that is until the end of last year of course. By the end of 07′ I started taking little hits, just a few bucks here and there but mostly it did nothing, zero growth , to me anyway, is still a loss. Then when the clock struck 2008, it really headed south. As the country entered this “Not a recession” the markets, and my portfolio, decided to head south for the winter, and seeing as its now summer I had hoped they’d be back by now….guess they like it down there.

    So as I do every month I opened up my financial spreadsheets and started crunching the numbers. I had lost over 4.4% of my portfolio in 08′ so far. To say the least I was a bit angry at this. I was in a set of funds that historically produced an average of 8% each year and I had lost over 4%. To me of course, in my own math I’m down 12.4% for the year. As I went over the rest of my spreadsheet I noticed id’ been losing a lot of money on a loan I had gotten a few years back. Comparing the loan with my 401K, I came to a realization.

    The loan would take me about 2 more years to pay off. I added up all the interest payments I would have to make in those two years. Then I took the balance of my 401K and figured out how much money I would have lost If I continued to lose 4% a year, then how much I could possibly make on that same investment if I had gained the estimated 8% a year that it had historically earned. In both cases, the amount of money lost from the loan was a significant amount more than any amount I could have made by staying in the market.

    I can already hear the cries in the background saying that the compounding of the investment gains have to be considered, but rest assured we’re dealing in fairly small amounts of money here, so compounding losses won’t hurt me in the long run. Also, the amount of money I’m saving on the loan can now be added to my Roth IRA, which will net me a greater savings and greater investment than having left it in my currently slumping 401K. So now all the money that was once going to that last debt every month is now going into building a positive investment instead.

    Less loss + more savings = better deal

Next post: This old house, looking to our first home.

Pay yourself first

   Maybe not first, but make sure to pay yourself at some point. With all the scrimping and saving and sacrifice that you will be doing in your quest for financial Independence, you can sometimes lose focus or feel deprived. That’s why you have to give yourself something nice once in a while, buy little something to make you happy here and there.

    As we speak, or more accurately I write, I’m sitting on my front porch with a bottle of wine, the sun and my new laptop computer that I bought two days ago. Now, I didn’t just go out on a whim and say I feel bad, I’m buying a computer to be happy, oh no. I decided a year ago to buy a new lappy. I scrimped and saved, not for the computer, but for the whole “financial Independence” thing. The laptop came as long awaited reward for hard work and smart decisions. I decided last month that if I reach a financial goal of “X”, I get “Y”(the computer) as a reward. Clearly, “X” was accomplished.

    Money does in fact buy happiness, to a point. In this case, great financial decisions bought a new laptop for your truly and the rewards for an education in Personal finance have began to roll in. Robert Kyosaki has a great way to explain this. The poor buy what they want first to make them happy. The rich plan for the expense, they make the money first, invest it and use the excess to buy what they want. In the end, they have the item they longed for, AND still have the money in hand. Not his words exactly, but close enough.

   If you had that one thing to work towards what would it be? And in what time frame do you want to achive the goal ?

Your credit report

Your credit report and score are all the rage nowadays. Your credit report is checked when you open a bank account, line of credit, get a mortgage, apply for car insurance or even get a lease for an apartment. Most banks only know you by a number now, and that number is your credit score. There are plenty of people touting their own credit report business on TV and radio the past few years, all of them trying to scare you into getting one or make you think that you can save thousands of dollars by going to their site and paying for a service. Poppycock. Well, not totally, but most of it has nothing to do with the average consumer. Most people turn 18, get a few credit cards, maybe an auto loan and then struggle with their debts until they get a mortgage later in life and then the eventual consolidation loan or second mortgage, which they have so cleverly marketed as a “home equity loan”. So I’ll go a bit into how to get your credit report and what it means to you.

First you need to get your hands on the pesky thing. You can do that by going to Google, searching for credit report and clicking on pretty much any link that you see come up. Don’t do that. Instead, go to Annual credit report.com and get it for free, without having to sign up for any services. The Government mandates that every citizen over 18 be entitled to a free report once every year, to help protect them from identity theft. So go there, and no where else. Even at that site, there are always going to be advertisements to try to get you to sign up to monthly monitoring services ,you don’t need that for any reason, ever. No one does. Check it once a year for free and look for discrepancies and you should be safe for the most part.

Once you have your hands on the report, it will show you a few pages of information. Since I’m not looking at my report right now, I’ll not go into extreme detail, but most of it is self explanatory. You have a page showing all of your debts, past and present, with a total of how much you owe them, what your limits are and lists of the highest your balances have been for each account in relation to the limits.
It will also show a time line under each each account for the past three years, showing weather you have had any late or missed payments on the account in question. The reason they go back three years on the list, is because most creditors look back that far. If you clear your credit for that amount of time your in good shape.
The one thing you will notice is missing is your credit score. The score is of no value in protecting you from identity theft, so they don’t have to give you that information for free. If you want it, you have to sign up for the service, which I don’t recommend doing. If you do sign up, be sure to cancel it before the end of the following month, so you don’t get charged undue fees. The average score is generally around 650, with anything above 800 being near perfect and below 600 being pretty bad (although it is rated as fair).

HOW TO RAISE YOUR SCORE

As you can imagine if you are a regular here, there is no magic fix. Anyone who says they can help you is lying with the exception of a few non profit organizations. Even they can’t do much for you, because the report is based entirely on what the company you were indebted to decides to report to the credit bureaus. There are however some simple things you can do to slowly but surley raise your score.

One- Pay everything on time, always. There is no excuse to give a creditor for why your bills are late. Pay on time, every time.

Two- Keep zero balances on credit accounts. Holding a zero balance on cards will help you immensely when it comes to your score. It shows creditors that you can control yourself with regards to money. It shows responsibility, and overall that’s what they want, responsible debts.

Three- Opt out. When you get all those offers for credit in the mail, look at the bottom and use the opt out feature. You don’t need that new card, and it certainly doesn’t help your credit to have people looking at your report 24/7.

Four- Stop applying for credit. The more often you apply for credit, the lower your score. Every time you apply for anything, your score drops about 6 points just for asking. It also looks bad to any potential lenders if your looking to take on a lot of debt suddenly. That doesn’t make them want to jump on the lending train any faster.

Five- Have a higher income. Most of the time it’s out of your hands, but the more you make, the more they are willing to lend. there are equations that are used to determine the amount of debt a person can handle. The larger your income, the larger the assumed ability to pay back debt.

Always be aware of your credit. Check it once a year at least signs of identity theft. You should be aware of how every decision you make affects your score and report and make responsible decisions at every turn. As always, if you are unsure Ask someone. better to feel foolish than be foolish.

Here is a short movie from an “expert” that explains the FICOscore.

-Jared