With the stock market up around 8 or 9% recently, a number of friends of mine have gotten more active in trading. This is something which can end up losing you money unless you're careful. A few tips:
1) Ask yourself why you are investing. Is it to get a better return than a bank? That would be a good reason, because generally, the stock market has outperformed the interest rate you will get at banks. However, it may not be a good reason if you need money in the short term. The stock market is quite volatile, and many analysts tie recent volatility to the uptick in Exchange Traded Funds (ETFs). http://money.usnews.com/money/personal-finance/mutual-funds/articles/2011/09/08/are-etfs-to-blame-for-the-rise-in-volatility. You need to make sure you have the money you need, when you need it. In other words, don't invest money you need quite soon.
2) You're probably not that smart. You may think you know a lot, and have done your research, but then again, a lot of people felt that way right before the market crashed in 2008. And the tech market crashed in 2000. And in 1987. A strong way to invest money and rely less on your inflated sense of financial intelligence is to invest in low-cost index funds. http://www.ehow.com/list_5852407_list-low-cost-index-funds.html. Personally, I'm a fan of Vanguard, as the management fees for their investment funds are very small, and the cost to invest in most of their funds is 0 (meaning that you don't have to pay a service fee to invest). As you can see, Vanguard's expense ratio (how much they make off managing your money) is less than 20% of the industry average. https://personal.vanguard.com/us/funds. Take a look at their options, or those at other brokerages, and see what may work for you.
3) Use a discount brokerage. Most of the information you want to research on investing is available for free and online. Discount Brokerages like Charles Schwab, Fidelity, and Etrade Financial are all great bets because they charge less, meaning you keep more. Many of these brokerages also offer ETFs, which can be another way to get a diversified investment portfolio, so that your risk is spread across a broad spectrum of stocks as opposed to a single stock. UPDATE: I've been told to include TD Ameritrade and Sharebuilder from ING as well. Thanks for the tips...
4) Get in it for the long haul. Try to find a group of funds, stocks, and ETFs which work for you and invest what you can each month. Trying to game the market may means you miss the highs and instead, catch a disproportionate amount of the lows. Continually putting money into your accounts and reinvesting the dividends will likely yield a stronger return. http://money.cnn.com/2010/01/05/pf/funds/market_timing.moneymag/index.htm
5) Ask lots of questions. Ask your friends who work in finance, or the financial advisers at the brokerage you use. They are there to help, and a lot of their information is free of charge. Take the free workshops they offer. Find out how you should analyze a stock on your own. But ask lots of questions. Far better than losing lots of money.
Wednesday, February 15, 2012
Tuesday, February 7, 2012
Buying a Home
I bought a home two years ago, and it was a great experience. I learned a lot, both about the home buying process, and about what levels of frustration and confusion it can cause. Through the process, and watching a number of my close friends buy homes, here's a couple of ideas for what to think about when buying a home.
1. Forget what you think you want. Price Per Square Foot (PPSF) is what is important. My friend recently showed me some homes he was looking at on Redfin http://www.redfin.com. I asked him why he cared about having two full bathrooms when he would be living there alone with his wife, why he wanted two parking spots when he had only one car, or why he would want to live far away from his friends, public transportation, or where he or his wife work. He was thinking of amenities to the homes, but not the bottom line. What is most important is PPSF, along with location. If you buy at a higher PPSF than other comparable homes in your neighborhood, then you have done the seller a favor. It may be ok to have a higher PPSF than your neighbors, but you better be able to rationalize it with big ticket items, like modern kitchens or bathrooms, new HVAC systems, or other amenities which clearly set your home apart.
2. Location. It takes me six minutes to bike to work in the morning. It takes my wife 11 minutes. So, we get to spend a whole lot of extra time with our son. If there is an emergency, like the freak earthquake that occurred in DC, we can be home very quickly. We love our location, and are a little puzzled by our friends who moved out to the suburbs. It's ok for those people who work out in the exurbs, or people that moved for the school districts. But location is crucial. Location quality can be determined by a number of factors. Use these as they apply to you: Supermarket, School District, Public Transportation, Public Park, Crime Statistics, Travel Time to Work/School, Major Thoroughfares, Public Library. If you don't live close to these location factors which you want/need, or the crime statistics aren't good, you should pay less for where you live.
3. Down Payment. Many many friends of mine have put down less than 5% on their homes. While this may be beneficial for tax purposes (it means you pay more in interest, which you can deduct on your federal return), it generally increases your monthly burden. If you keep money in a rainy day fund, and your mortgage is high, you will be limited in case an emergency comes up or you need enhanced cash flow. Personal Finance Personality Dave Ramsey recommends a 20% down payment http://www.daveramsey.com/article/how-much-house-can-you-afford/100362/, and some bills in Congress will penalize you on your interest rate for putting less than 20% down. http://www.washingtonpost.com/business/economy/housing-regulators-propose-20percent-down-payment-for-best-rates/2011/03/29/AFIRw5vB_story.html. Save your cash, and make a strong down payment. Remember, you can tap your IRA for up to 10k in earnings to buttress your down payment if it is your first home. Failing make a strong down payment could leave you in a potentially dangerous situation.
4. Do Your Research. Find out about the neighborhood. This is likely the biggest purchase of your life and you should make sure you're not getting into anything unexpected. Redfin can show you prices, and local blogs or websites can give you a neighborhood feel. Discount your first impression at your first open house because part of what you're feeling is pure excitement. Don't go live in a neighborhood which doesn't suit your interests or passions, because you will be spending an inordinate amount of time there, and why would you want to spend that time disappointed.
Buying a home should not be something which occurs in a state of passion. It is a very serious, analytical decision, which requires years of preparation and research, personal reflection and analysis, and questioning the knowledge you think you have gleaned. If for one second you question your own knowledge on the subject, seek out a friend who has bought before, and find out what they did and what they hate about their current home so you can add it to your checklist of what you are looking for in yours. Talk to your parents about what they would change as well. Through careful research, saving, and investigation, you'll be able to find a home you love and save a ton of time and money.
1. Forget what you think you want. Price Per Square Foot (PPSF) is what is important. My friend recently showed me some homes he was looking at on Redfin http://www.redfin.com. I asked him why he cared about having two full bathrooms when he would be living there alone with his wife, why he wanted two parking spots when he had only one car, or why he would want to live far away from his friends, public transportation, or where he or his wife work. He was thinking of amenities to the homes, but not the bottom line. What is most important is PPSF, along with location. If you buy at a higher PPSF than other comparable homes in your neighborhood, then you have done the seller a favor. It may be ok to have a higher PPSF than your neighbors, but you better be able to rationalize it with big ticket items, like modern kitchens or bathrooms, new HVAC systems, or other amenities which clearly set your home apart.
2. Location. It takes me six minutes to bike to work in the morning. It takes my wife 11 minutes. So, we get to spend a whole lot of extra time with our son. If there is an emergency, like the freak earthquake that occurred in DC, we can be home very quickly. We love our location, and are a little puzzled by our friends who moved out to the suburbs. It's ok for those people who work out in the exurbs, or people that moved for the school districts. But location is crucial. Location quality can be determined by a number of factors. Use these as they apply to you: Supermarket, School District, Public Transportation, Public Park, Crime Statistics, Travel Time to Work/School, Major Thoroughfares, Public Library. If you don't live close to these location factors which you want/need, or the crime statistics aren't good, you should pay less for where you live.
3. Down Payment. Many many friends of mine have put down less than 5% on their homes. While this may be beneficial for tax purposes (it means you pay more in interest, which you can deduct on your federal return), it generally increases your monthly burden. If you keep money in a rainy day fund, and your mortgage is high, you will be limited in case an emergency comes up or you need enhanced cash flow. Personal Finance Personality Dave Ramsey recommends a 20% down payment http://www.daveramsey.com/article/how-much-house-can-you-afford/100362/, and some bills in Congress will penalize you on your interest rate for putting less than 20% down. http://www.washingtonpost.com/business/economy/housing-regulators-propose-20percent-down-payment-for-best-rates/2011/03/29/AFIRw5vB_story.html. Save your cash, and make a strong down payment. Remember, you can tap your IRA for up to 10k in earnings to buttress your down payment if it is your first home. Failing make a strong down payment could leave you in a potentially dangerous situation.
4. Do Your Research. Find out about the neighborhood. This is likely the biggest purchase of your life and you should make sure you're not getting into anything unexpected. Redfin can show you prices, and local blogs or websites can give you a neighborhood feel. Discount your first impression at your first open house because part of what you're feeling is pure excitement. Don't go live in a neighborhood which doesn't suit your interests or passions, because you will be spending an inordinate amount of time there, and why would you want to spend that time disappointed.
Buying a home should not be something which occurs in a state of passion. It is a very serious, analytical decision, which requires years of preparation and research, personal reflection and analysis, and questioning the knowledge you think you have gleaned. If for one second you question your own knowledge on the subject, seek out a friend who has bought before, and find out what they did and what they hate about their current home so you can add it to your checklist of what you are looking for in yours. Talk to your parents about what they would change as well. Through careful research, saving, and investigation, you'll be able to find a home you love and save a ton of time and money.
Tuesday, January 31, 2012
Amazon (Subscribe and Save & Prime)
I'm a big fan of finding ways to remove reminders and responsibilities from my life. If I can set up automatic payments or automatic billing, I try to do it just so I don't forget and find myself in a pickle. This is why I am a big fan of Amazon Subscribe and Save, and Amazon Prime.
If you are not familiar with Prime, it is a service where you pay 79 dollars a year for free two day shipping, a free kindle book from the lending library once a month, free streaming video from Amazon, and other discounts. http://www.amazon.com/gp/prime/ref=amb_link_84306931_4?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=auto-sparkle&pf_rd_r=8216E17D34CF41998504&pf_rd_t=301&pf_rd_p=1294973662&pf_rd_i=amazon%20prime
Subscribe and Save is a program where Amazon will send you things you need on a regular basis, without you proactively sending an order. You set up a recurring order, and it shows up at your door. http://www.amazon.com/Subscribe/b/ref=gro_SnS_sparkle_shop?ie=UTF8&node=979895011&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=auto-sparkle&pf_rd_r=D4DD67B5027A4BBFA003&pf_rd_t=301&pf_rd_p=1345024122&pf_rd_i=subscribe%20and%20save
Subscribe and Save saves you 5-15% on every order. Prime has additional discounts on some orders. One thing I get through Subscribe and Save and Prime is Diapers. The diapers I buy go for 47 bucks on Amazon, but I save about ten dollars per order using Subscribe and Save, and Prime. Also, it's a plus that my son then never runs out of diapers.
Now, I'm aware that one of the chief concerns is that 79 dollars a year sounds like a lot to not have the patience for free super saver shipping at amazon. But looking at the diaper transaction alone justifies Prime. 7 out of those ten dollars saved is from the additional discount through Prime (as part of the Amazon Mom Program). So, based on my membership in Prime, I save 84 dollars on diapers per year. I need to outfit my son in diapers, and this is the most efficient, most cost-effective way to do it. Consequently, the expedited shipping and other benefits of prime are free when you consider the cost savings of diapers alone.
Think about what you need and use on a recurring basis and find out if Subscribe and Save, and Prime can save you significant amounts of money. We have used it for baby food, vitamins, and a host of other items. Think about it for coffee, packaged foods, supplements or whatever else comes to mind. You'll save money, remove additional stress of remembering to buy things you know you need, and avoid being caught in an unprepared situation.
If you are not familiar with Prime, it is a service where you pay 79 dollars a year for free two day shipping, a free kindle book from the lending library once a month, free streaming video from Amazon, and other discounts. http://www.amazon.com/gp/prime/ref=amb_link_84306931_4?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=auto-sparkle&pf_rd_r=8216E17D34CF41998504&pf_rd_t=301&pf_rd_p=1294973662&pf_rd_i=amazon%20prime
Subscribe and Save is a program where Amazon will send you things you need on a regular basis, without you proactively sending an order. You set up a recurring order, and it shows up at your door. http://www.amazon.com/Subscribe/b/ref=gro_SnS_sparkle_shop?ie=UTF8&node=979895011&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=auto-sparkle&pf_rd_r=D4DD67B5027A4BBFA003&pf_rd_t=301&pf_rd_p=1345024122&pf_rd_i=subscribe%20and%20save
Subscribe and Save saves you 5-15% on every order. Prime has additional discounts on some orders. One thing I get through Subscribe and Save and Prime is Diapers. The diapers I buy go for 47 bucks on Amazon, but I save about ten dollars per order using Subscribe and Save, and Prime. Also, it's a plus that my son then never runs out of diapers.
Now, I'm aware that one of the chief concerns is that 79 dollars a year sounds like a lot to not have the patience for free super saver shipping at amazon. But looking at the diaper transaction alone justifies Prime. 7 out of those ten dollars saved is from the additional discount through Prime (as part of the Amazon Mom Program). So, based on my membership in Prime, I save 84 dollars on diapers per year. I need to outfit my son in diapers, and this is the most efficient, most cost-effective way to do it. Consequently, the expedited shipping and other benefits of prime are free when you consider the cost savings of diapers alone.
Think about what you need and use on a recurring basis and find out if Subscribe and Save, and Prime can save you significant amounts of money. We have used it for baby food, vitamins, and a host of other items. Think about it for coffee, packaged foods, supplements or whatever else comes to mind. You'll save money, remove additional stress of remembering to buy things you know you need, and avoid being caught in an unprepared situation.
Thursday, January 26, 2012
Monday, January 23, 2012
Automatic Withdrawal Budgeting
Idle hands may be the devil's plaything, but idle funds are what gets us into trouble. Unappropriated money is what leads to splurges, debt, and purchases which are later regretted. I have generally found that creating a budget which allowed for the least amount of idle funds is the best way to ensure that your money is going to where it belongs. But how can you properly appropriate funds. Automatic Withdrawals and payroll deductions.
There are some general payroll deductions which many employers offer which are smart for almost everyone. These include health insurance, 401(k), and a flexible spending account for medical expenses. All of these are deducted from your adjusted gross income, and should be utilized to some extent by everyone.
Then there are some personal initiatives you should take in order to secure yourself financially. Automatically paying off 100% of your credit cards, utility bills, mortgage, and insurance each month. Don't put yourself in a position where you need to think about it. Not only do most banks have online bill pay, but some provide incentives for signing up for it. http://online.wsj.com/article/SB110246841042693926.html Think about it. All of your bills get paid, you don't need to think about it, and you get an incentive.
Lastly, you can create ongoing disbursements for your personal priorities. Automatic withdrawals for your IRA http://helpcenter.ingdirect.com/ingd/Topic.aspx?category=DIST1, 529 Account http://www.529.com/content/how_aippayroll.html, Debt Payments http://www.moneyunder30.com/debt-payments, or just moving 10% of your take home salary to a high interest savings account on a monthly basis. http://www.gobankingrates.com/savings-account/easy-ways-to-build-your-savings-account-automatically/ This will keep your checking account pretty lean, and you will not be tempted by higher balances to purchase things you don't need.
We all have far too many things to think about, and setting up automatic withdrawal budgeting priorities from your checking account takes away the burden of remembering what needs to be done. It allows you to prioritize with a clear head and ensure that your money goes where it needs to be, and not where you may want it merely in the short term. Moving idle funds to your established personal priorities by setting up automatic payments and withdrawals will help you build the financial foundation you want without the revolving burden of keeping your priorities at the top of your to do list.
There are some general payroll deductions which many employers offer which are smart for almost everyone. These include health insurance, 401(k), and a flexible spending account for medical expenses. All of these are deducted from your adjusted gross income, and should be utilized to some extent by everyone.
Then there are some personal initiatives you should take in order to secure yourself financially. Automatically paying off 100% of your credit cards, utility bills, mortgage, and insurance each month. Don't put yourself in a position where you need to think about it. Not only do most banks have online bill pay, but some provide incentives for signing up for it. http://online.wsj.com/article/SB110246841042693926.html Think about it. All of your bills get paid, you don't need to think about it, and you get an incentive.
Lastly, you can create ongoing disbursements for your personal priorities. Automatic withdrawals for your IRA http://helpcenter.ingdirect.com/ingd/Topic.aspx?category=DIST1, 529 Account http://www.529.com/content/how_aippayroll.html, Debt Payments http://www.moneyunder30.com/debt-payments, or just moving 10% of your take home salary to a high interest savings account on a monthly basis. http://www.gobankingrates.com/savings-account/easy-ways-to-build-your-savings-account-automatically/ This will keep your checking account pretty lean, and you will not be tempted by higher balances to purchase things you don't need.
We all have far too many things to think about, and setting up automatic withdrawal budgeting priorities from your checking account takes away the burden of remembering what needs to be done. It allows you to prioritize with a clear head and ensure that your money goes where it needs to be, and not where you may want it merely in the short term. Moving idle funds to your established personal priorities by setting up automatic payments and withdrawals will help you build the financial foundation you want without the revolving burden of keeping your priorities at the top of your to do list.
Friday, January 20, 2012
The Public Library
I am an unapologetic supporter of the public library. Maybe it's because a lot of the libraries in DC have been spruced up as of late, but, I am a huge supporter on the following levels.
1) Music. How much money do you spend on music in a given year? Probably too much. In DC, the public library buys hundreds of albums per year, which you can rip to your ipod for free. Additionally, the library has a service called Freegal, http://www.freegalmusic.com/, which is a free, online distribution network run by Sony and a bunch of independent labels. You get three downloads per week, and I guarantee you will find at least a handful of artists on there you will like. Take a look at the entire music selection of the library (go to advanced search, select the format "music cd," and enter the year of release), and you'll probably be amazed at what you could be listening to for free. This should significantly decrease the amount you are spending on digital downloads.
2) Movies. We all know netflix has screwed the pooch of late, and that there are a number of competitors coming up. The library isn't an expert at streaming video yet, but they routinely get dozens of movies around the same time as netflix. You don't pay for them, and you have them for three weeks, and you can have out a handful at a time. My netflix plan is for one move at a time, without streaming, for 9 dollars a month. So I spend over 100 dollars a year on what I could easily get from the library. I routinely suspend my netflix account when I get frustrated.
3) Books. Duh. The library will give you books and audiobooks for weeks at a time. Addicted to your kindle or ibooks? There are digital downloads where you can rent an ebook for weeks at a time. Unless you are planning on collecting books for fun or plan on showing off books in your beautiful library, there is virtually no reason to buy a book anymore. Only in those very rare circumstances where you are looking for a book which is not available in the library should you consider buying, and even in that case, look for an interlibrary loan from a jurisdiction that has your book.
Check out your local library. It's free, and they probably have a bunch of programs you would really enjoy. See if they subscribe to Freegal, and if they don't, encourage it. Scroll through the online catalog and find out if there are downloads you might like. You'll be amazed to how much entertainment you can get for free. http://www.dclibrary.org/
1) Music. How much money do you spend on music in a given year? Probably too much. In DC, the public library buys hundreds of albums per year, which you can rip to your ipod for free. Additionally, the library has a service called Freegal, http://www.freegalmusic.com/, which is a free, online distribution network run by Sony and a bunch of independent labels. You get three downloads per week, and I guarantee you will find at least a handful of artists on there you will like. Take a look at the entire music selection of the library (go to advanced search, select the format "music cd," and enter the year of release), and you'll probably be amazed at what you could be listening to for free. This should significantly decrease the amount you are spending on digital downloads.
2) Movies. We all know netflix has screwed the pooch of late, and that there are a number of competitors coming up. The library isn't an expert at streaming video yet, but they routinely get dozens of movies around the same time as netflix. You don't pay for them, and you have them for three weeks, and you can have out a handful at a time. My netflix plan is for one move at a time, without streaming, for 9 dollars a month. So I spend over 100 dollars a year on what I could easily get from the library. I routinely suspend my netflix account when I get frustrated.
3) Books. Duh. The library will give you books and audiobooks for weeks at a time. Addicted to your kindle or ibooks? There are digital downloads where you can rent an ebook for weeks at a time. Unless you are planning on collecting books for fun or plan on showing off books in your beautiful library, there is virtually no reason to buy a book anymore. Only in those very rare circumstances where you are looking for a book which is not available in the library should you consider buying, and even in that case, look for an interlibrary loan from a jurisdiction that has your book.
Check out your local library. It's free, and they probably have a bunch of programs you would really enjoy. See if they subscribe to Freegal, and if they don't, encourage it. Scroll through the online catalog and find out if there are downloads you might like. You'll be amazed to how much entertainment you can get for free. http://www.dclibrary.org/
Wednesday, January 18, 2012
401(k) Matching
How much do you put away for retirement? The answer, invariably, is not enough. Money put into your 401(k) or other pre-tax retirement program is exempt from Federal income taxes, so it benefits you later by having money saved, and benefits you now in terms of lowering your tax burden. It goes without saying that you should, at the very least, contribute as much as your employer will match. For instance, my employer matches dollar for dollar up to the first 3% of salary, and then 50 cents on the dollar up to 5%. Translation: 5% of my salary is contributed, and 9% of my salary goes to my 401(k) equivalent each month.
But I could do more. For 2012, the contribution limit is $17000. http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html That's just under 654 dollars per paycheck, assuming you get paid on a bi-weekly basis. And because most millennials don't believe social security will be there for them when they get older, or at least, won't pay out what it pays now, http://iomechallenge.org/wp-content/uploads/NEW-iOme-Millennials-on-Social-Security.pdf, you should do whatever you can in your budget to get as close to this $17000 figure as possible. One thought could be this. Many people receive bonuses around Christmas or around the end of the year based on performance or other successes. Perhaps using that bonus to make a balloon contribution to your 401(k) would be a better use of the funds instead of consuming them on something unnecessary or trivial.
If your organization doesn't have a 401(k) program or equivalent with employer matching funds, check out my post on an IRA, and then you can at least get a benefit of $5000 a year (you don't get the tax benefit of the IRA if you also participate in a 401(k) or equivalent. If your organization does have a 401(k) or equivalent, start contributing at least to the point of full matching, BECAUSE IT IS FREE MONEY. Then, take a look at your budget and see if you can increase your contribution an extra 100 dollars per month. That's less taxable income, a more financial secure retirement, and intelligent budgeting for the future.
But I could do more. For 2012, the contribution limit is $17000. http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html That's just under 654 dollars per paycheck, assuming you get paid on a bi-weekly basis. And because most millennials don't believe social security will be there for them when they get older, or at least, won't pay out what it pays now, http://iomechallenge.org/wp-content/uploads/NEW-iOme-Millennials-on-Social-Security.pdf, you should do whatever you can in your budget to get as close to this $17000 figure as possible. One thought could be this. Many people receive bonuses around Christmas or around the end of the year based on performance or other successes. Perhaps using that bonus to make a balloon contribution to your 401(k) would be a better use of the funds instead of consuming them on something unnecessary or trivial.
If your organization doesn't have a 401(k) program or equivalent with employer matching funds, check out my post on an IRA, and then you can at least get a benefit of $5000 a year (you don't get the tax benefit of the IRA if you also participate in a 401(k) or equivalent. If your organization does have a 401(k) or equivalent, start contributing at least to the point of full matching, BECAUSE IT IS FREE MONEY. Then, take a look at your budget and see if you can increase your contribution an extra 100 dollars per month. That's less taxable income, a more financial secure retirement, and intelligent budgeting for the future.
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