Invest So You Can Have Your Cake and Eat it Too!


 

Boatdock

You can’t have your cake and eat it too, right?  You can either have money in your bank account or take that vacation.  You can either have a mutual fund or a closet full of shoes.  You can upgrade your kitchen or retire early.  Sacrifice is what personal finance is all about, right?  You have the couple who spends every dime and enters retirement with little but who had a full life and the spendthrift who never did anything and ends up dying during his last day of work before he gets to spend his millions, right?

What if I said you can have both!  Take vacations each year, including some trips few people never even dream of, and yet still have plenty of cash available to provide security.  Get that dream kitchen, you still retire at 65 with plenty of money to last out your life.  Have thousands of dollars to spend on clothes and shoes each year, yet still have more savings and investments than any of your neighbors.

The way to have your cake and eat it to is summed up in one word – Invest!  Here’s how:

1.  Set a reasonable percentage of your income aside for luxuries and frills.  For example, if movies are your vice and you make $2000 per month, spending maybe $30 per month on movies would be reasonable (just skip the popcorn).  Be disciplined with your spending, possibly setting aside cash each month in an envelope if needed to keep yourself rom cheating.

2.  Start saving money for investing for your luxuries as well.  Start out saving up cash, then move money to a bank account, and then finally send it to a mutual fund company when you have enough to meet the minimums.  After that, you can send cash straight to the mutual fund company since most let you put in any amount once you have an account established.

(What kind of funds?  You want diversified index funds with low fees (less than 0.5%).  Maybe start out with a large cap fund, then add a small cap fund.  Add international funds when you’re accounts really start to grow.)

3.  For each $1000 you have invested in mutual funds (or in your bank account before you have enough to purchase a fund), add $10 to your luxury fund per month.  For example, if you have $3,000 invested, you can increase your movie fund by $30 per month.  Note if you’re investing regularly, you can just cut your contributions by the $30 or you can make withdrawals from the mutual fund semi-annually or possibly every three months.

Here’s why it works:

Over long periods of time, stocks will return between 12 and 15%.  When you’re withdrawing $10 per month with $1000 invested, you’re making an average of $120 to $150 in the mutual fund per year, but you’re withdrawing only $120 per year.  The growth of the stocks in your mutual fund will replenish the money you spend on your luxury.  Magic!

But what if you have a string of bad years where you don’t make 12-15%?  Well, because you’re spending is linked to how much you have invested, if your funds decline for a few years, you’ll start withdrawing less, allowing your funds to recover.  During great years, where you’re making more than 12-15%, you’ll be able to ramp up spending.

The system also works with your psychology to get you to invest more.  By increasing the amount you have invested, you get to increase the amount you spend each month.  You get rewarded for doing good things.  If you get a $3000 bonus at work or $3000 back on your taxes, you think, “Hey, I can invest this and then get an extra $30 per month to spend on luxuries forever!” rather than thinking “Hey, I have $3000 in found money to blow.”

It starts slow, but things start happening faster than you think.  Granted, it will take a year or more to get anything, but keep investing regularly and you’ll be amazed at the results.  Even if you make nothing from your investments, if you can put aside $100 per month, in five years you’ll have $60 more each and every month to spend as you wish.  Add the investment of a few bonuses and contribute more on the months when you have the “extra” paychecks and you’ll be feeling like Rockefeller before you know it. 

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is Your Financial Enabling Keeping Your Children from Becoming Fiscal Adults?


 

Are They Growing Up While You're on Your Phone?
Are They Growing Up While You’re on Your Phone?

When we first had children, it was very difficult because we lived an airline flight away from both of our parents.  This meant that we were with the children 24/7.  I think it was about five months before we spent any time without my son, when some friends offered very graciously to watch him for the evening.  After that we had a sitter once in a great while (maybe a couple of times per year), and we’d have relatives who would visit off and on, but in general it was us and our son, and then soon after us and two children. 

Our son as also high maintenance when he was young.  You could put him into a room full of toys and he’d find the electric plug with which to play, so we couldn’t really go off into the other room and watch TV (I gave up prime time shows at that point).   He would also run away from us if we put him down in the mall or other places, so he had to be in your arms or a stroller.  I watched with envy when families had children who would just follow them along.  Our daughter was just the opposite, so  we got a little more piece, but still, we were 24/7 parents. 

I remember going to parties and spending the whole time chasing my son around, trying to keep him from breaking things.  I also remember trying to go to children’s movies, only to find he had no interest in watching.  Even going to restaurants was a challenge since, if I didn’t get him safely strapped into the booster seat within the first five seconds of arriving, I spent the whole dinner trying to get him to sit down.  I had to take him and my daughter outside several times when we were at restaurants when they were infants because they started crying.  (If you’re annoyed by crying children at restaurants, try taking an infant child to a restaurant sometime.  If you are a server at a restaurant and a family asks for crackers, bring the crackers – they don’t care about getting drinks at that point and not getting crackers right away can destroy the whole meal.)  I remember looking at other people just quietly waiting for their food and thinking how wonderful that would be.

Becoming a parent meant I needed to give up worrying about myself.  I remember thinking that I couldn’t go out and listen to music or go to movies because I had small children.  I also realized that by the time my children were old enough to be out on their own, I’d be way to old to go to clubs or concerts anymore.  Frankly, it was difficult to give up independence and freedom, now being tied down, but I did it because I was an adult who had a child who needed me.  At that point getting to cook dinner or mow the lawn was a thrill because it meant a bit of a break from giving constant attention.

An odd thing happened, however.  While at the time I missed things like concerts and going to clubs, and it certainly felt like a sacrifice, I found that being with my family all of the time made me grow closer.  Soon I got used to always being around my children and I started to miss them when I wasn’t.  In fact, when my wife and I went out on a date alone about five years later, having left the children with a sitter, it just felt odd.  We were both rather happy to go home around nine o’clock and back to the children even though we enjoyed the break as well.  While the transition – where I went from taking care of myself and worrying about my needs to taking care of my children and dedicating myself to them –  was difficult, but it has enriched my life where now the things that once seemed important seem silly.

Now that we’re a bit older, we have some friends who have adult children who are beginning to get married and have children of their own.  In many cases our friends – the grandparents now – are taking the infants a lot of the time while their children are continuing with their hobbies and activities as if nothing had happened.  I’ve also see families where the grandparents take the children for a week while the parents go off on vacation.  At first I thought maybe I was jealous because I didn’t have anyone to provide so much support, but now I realize that I actually feel sorry for these parents because they are not growing and maturing the way my wife and I did, and therefore aren’t reaching the same level of closeness with their children that we have with ours.  They will continue to do the things they’ve always done and never totally put their children before themselves, and I find this sad.  While there is certainly nothing wrong with taking the kids for an evening or a weekend, by providing so much support the grandparents are enabling their children to live in a perpetual adolescent/young adult stage and never mature into fully devoted parents.

Many parents also continue to enable their children financially long into their adult years.  While there is still a connection to home while you’re in college, if you’re out of college and working a job, but your parents are still paying for your cell phone and groceries, you have not matured financially.  Certainly this is true if you’re living at home and not paying rent.  They are enabling you to live beyond your means, which means you have not learned to sacrifice and do what is needed to make things work. 

 Parents enable their children because they don’t want them to have any level of suffering.  They don’t want them to live in an old apartment on the bad side of town.  They don’t want them to have a car that isn’t 100% reliable.  They don’t want them to need to live on ramen noodles, or give up their smart phone.  They certainly don’t want them to face having the lights turned off or an eviction notice served.  But this doesn’t allow them to mature and doesn’t help them reach the state of self-sufficiency needed.  Sometimes people need to have the chance to fail before they learn to succeed.   They need to live on their salary to learn how to handle money.

When you are just starting out, you might not have a smart phone.  You might have a flip phone or even a land line.  You might not have cable.  You might not have an apartment with a pool, or you might need to live with a roommate.  Your first home might not be as big as the one you grew up in.  You may have an older car that isn’t the prettiest thing.  You might not go on vacation except to the local park or national forest. 

By making sacrifices and learning to handle your own finances, you grow and mature financially.  You learn that money comes from hard work and that you don’t need all sorts of luxuries to survive.  In fact, you may learn that some of the best times happen when you’re in a small apartment sharing an evening with friends and not when you’re at an all-inclusive resort.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Can You Beat The Markets?


leverage

Professional money managers cannot beat the markets over long periods of time.

The above statement has been proven out many times,  There are a few money managers who will beat the markets for a few years or even a decade, but eventually they are swallowed up, just as the break-away riders in a bike race eventually get swallowed up by the pack. (Sorry, just thinking about the movie American Flyers, but I digress.)

Individuals can and do beat the markets over long periods of time.

The second statement is also true, yet it seems to contradict the first.  If a professional money manager, who has all of the education, all of the experience, all of the fancy tools, the assistants, the research staff, and the time to devote to picking stocks and tracking the markets cannot beat the markets over long periods of time, why can an individual who works forty hours a week doing other things and whom has none of the advantages beat the markets?

A money manager gets billions of dollars to invest and is constantly under the gun to perform.  If he makes 13% and the markets go up 15%, investors may pull their money out and into other funds that did as well as the market or beat it.  This both encourages the money manager to aggressively target short-term gains and forces him to pull money out of stocks at just the wrong time to raise cash to pay those redeeming their shares.

In addition, because he has so much to invest, he cannot just buy the stocks he most believes in.  If he were to put a billion dollars into one stock, he would move the price way up and get a bad cost basis.  He would end up taking over the company.  Instead, he must buy several stocks he doesn’t fully believe in just to be fully invested.  He may like Coke, but need to buy Pepsi too.  If he is not fully invested and the markets go up, he will make less than the markets and people will sell out.

The individual investor, on the other hand, doesn’t have such constraints.  He can pick just a hand full of stocks in which to invest.  He can invest without worrying about moving the share price up, and can sell out without worrying about moving the share price down.  He can also hold on for years and years, waiting for the market to realize the value of the company and bid the price up accordingly.

So the strategy that allows you (but that won’t ensure that you will) to beat the market(but that won’t ensure that you will) (but that won’t ensure that you will) is the following:

1.  Select the best stocks from a few different sectors.  Find the stock in the restaurant industry that has the best prospects for growth.  Find the internet stock that has great potential.  Find the retailer that is well run and opening up new stores in new markets.

2.  Buy in over a period of time, buying on dips and being patient.  Understand that you will not get the perfect price most of the time, but know that you’ll get a good price by putting money in a little at a time.

3.  Plan to hold the stocks for many years – a decade or more.  Give the company time to grow and expand.  Don’t worry about the stock price – you wouldn’t sell you home just because the price went down during a quarter, would you?

But wouldn’t you be better off just buying index funds and ETFs?  Buying individual stocks, you could pick badly and lag the markets.  You could also have a stock go bankrupt, or just go nowhere.  Emotions could also take over and you could end up selling out at just the wrong time.

The answer is, there is no reason to not do both.  Buy index funds in your IRA and 401k where you can defer taxes on distributions and dividends.  Buy long-term growth stocks in your taxable account.  If you do well picking stocks and have some big winners, trim back your holdings a bit and add some ETFs to your taxable account.  Preserve the gains you make while still letting your winnings grow in proportion to the size of the risks you are willing to take.

You can beat the markets, over long periods of time, through stock picking, even if the professional cannot.  But it takes a lot of patience, and it doesn’t hurt to hedge your bets.

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Countdown to Freedom Starts, Balance: $300


cropped-smallivy_1x1.jpg

About a week ago I initiated what I’m calling the Countdown to Freedom, where I’m starting the process of saving and then investing to reach financial freedom.  This is similar to blogs where people are paying down their debt, but in this case I’m going the other way, starting with some contributions to a money market account and some small investments and going towards financial freedom.  That is the state where your investment income is equals your work income, allowing you to live without working anymore if you so choose.  In actuality I’ve already made this journey, but thought people might like to see how it is done to inspire them to make the same journey.  You’re invited (and encouraged) to do same and let everyone know how you’re doing.

I’m planning to put at least $200 per month into a money market fund.  This is money I’ve budgeted after already making payments into 401K IRA.  On good months, like July which has an extra paycheck, I may put more.  If I get a raise I my increase the amount.  That is how you chip away at the stone – little by little.

I made the first payment last week.  I put in $300 for the month, which is now parked comfortably in a money market account, earning something like 0.3% interest.  Note that these first several posts will be like watching grass grow.  Those getting out of debt start with large numbers, which makes it a bit more exciting.  When you go the other way, it starts really boring, with small amounts being put into money market accounts that pay essentially nothing, so all of the growth you see is due to your own payments into the fund.  (But hey, that means I get to increase my balance by 100% next month – woo hoo!) I’m probably about 8 months to a year away from making the first investment.  But stay with me – it starts slow but then grows like you won’t believe near the end.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Countdown to Freedom


cropped-smallivy_1x1.jpgIt seems like there are a lot of blogs out there that talk about their experience getting out-of-debt.  They share where they start with their debt, allow you to share their victories as they pay off each card or put their student loans to rest.  Finally, they reach the point where they’re out of debt entirely, maybe including their home.  At that point their site usually becomes a set of guest posts and paid advertisements.

I’d like to know the rest of the story.  What next?  Do they fall back into old habits and run up the cards again?  Do they just tread water the rest of their lives?  Or do they keep up the intensity that they had when they were getting out of debt start to grow wealth?   Getting out of debt is really just getting back to the starting line of the race.  The real finish line is financial independence – the point where you have enough wealth to generate the income you need to live, even without a job.  Sadly, probably less than 3% of people ever attain this level, and probably less than 1% of the people who earn less than $200,000 per year.

Well, if you see a need that no one is filling, sometimes it is up to you to step up to the plate.  I’m therefore starting a new series I’ll call the “Countdown to Freedom(TM).”  I am going to start putting away a least $200 each month into a money market account sectioned off from my portfolio as if I were just starting a first job (or having just gotten out-of-debt,) and putting money away.   Once I have enough to invest, I’ll start a portfolio, one stock at a time.  I’ll record my progress periodically.

Feel free to do the same. Of course, you’ll need to make your own stock picks.  I guarantee some of mine won’t work out, so you would be wise to make your own choices.  If you aren’t into stock picking, you may also just want to put some money away into a mutual fund.  Well, here we go…. 

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Savings Bonds Are a Lousy Prize


This month I was going through our savings bonds and typing them into the Treasury website to see what they were worth.  I discovered that one of them that my wife had from 1984 had stopped paying interest (EE bonds stop after 30 years).  The value of the $50 savings bonds, which was bought in 1984 for $25, was something like $116.  Note that bonds at that time came with a guaranteed interest rate of 4% per year.  More recently they went to a floating rate that is currently a little of 1%.

US Savings bonds might be a decent alternative to bank CDs – I haven’t checked and compared the rates.  Looking at this particular bond, however, I can see that it was a terrible prize.

You see, my wife won this bond in an eighth-grade science fair.  I can just see her now, excited to win a $50 bond. (Note that the $50 is a misnomer – they are actually worth $25 when you buy them.  They double the value on the face to make them seem like something more than they are.)  I can also see her parents tell her she needs to save it up and it will be worth a lot more someday.  I also expect that the group giving the prize felt that this was a way to teach her to save and invest her money.  They were “starting her on her way to saving.”

Looking at it now, it seems like she got jipped.   As an eighth-grader back in 1984, $25 would have seemed like a lot of money.  She could have bought something nice that she could have used and enjoyed for years.  Now, as an adult with a family with an income of tens of thousands of dollars per year, the $116 she can get doesn’t seem like much.  Hopefully it won’t disappear into a checking account.  Maybe she can get a nice blouse or something, but nothing she couldn’t easily afford.  As I’m sure most readers know, as you get into your late thirties and forties, even suggesting a gift you would like becomes difficult because you tend to buy the things you need and most of the things you want.

A better prize, if the group wanted to encourage savings, would have been a contribution to a bank account for her.  Even better, if they had the money to offer a truly large prize, they could have given her shares of a mutual fund in a Uniform Gift To Minors Account (UGTMA).  She and her family could then continue to contribute to that account and she’d be in great shape by the time she was ready to leave home.  It could have resulted in the down-payment for her first house (or even the whole house, depending on how aggressively she saved).

So what’s your thoughts?  What would be a good gift to start children saving?  What do you think she should do with her $116 that would be special and memorable?  Comments?

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Married? Merge the Accounts. Dating? Keep Things Separate.


 

 

 Barrel Christmas Tree

I’m a strong believer in joint accounts for married couples.  Once you agree to be one, there is no more his and hers.  Just ours.  Handling money well is important for a marriage, and money fights, along with kids, in-laws, and religion fights are prime reasons for divorce.  Beyond just financial security, how we choose to use our money shows where our heart and priorities are.  Monthly budget meetings are really the way a couple communicates about priorities, wishes, and dreams.  Life insurance is a way to say, “I love you and want you to be protected.”

When you get married, if you do it right, you also become a family (even if you remain at two).  It doesn’t matter who gets the paycheck, or the bigger paycheck.  The support of the spouse is what makes the paycheck possible.  Don’t believe me?  Try bringing a 2-year old with you to work all day, every day and see just how well you can concentrate and get things done.  It is because you are able to cover for each other that you can do so well.

That said, there are financial things couples who are not married, even if they are living together, should not do.  These include:

1.  Buy a home together, particularly with a mortgage.

2.  Put all of their money into the same account.

3.  Buy a timeshare together.

4.  Really, buy anything together worth more than $500.

5.  Get a credit card together.

6.  Sacrifice one career for the other’s.

7.  Get a pet together – OK, this one’s up to you.

The reason isn’t that you aren’t really in love or that things won’t work out.  It is just that often they don’t.  And unlike if you were married, when you’re just a couple and things don’t work out, you don’t have a judge to help you sever your financial ties.  If your ex decides to get back at you by running up the bills on the credit card, there is no way you can stop him.  If your ex decides she wants to stay in the house and not pay the mortgage, there is no way you can stop her.  There is also no alimony, so you’ll be on your own with a very old resume trying to find a job to eat if you gave up your career for his or hers.

So what is the alternative if you want to buy a home or a car using pooled resources but you don’t want to get married?  The best method is to have one individual buy the home or the car and the other pay rent to use it.  There is one name on the mortgage or the car loan.  If things work out and you eventually get married, you can always add the other name.  If they don’t, you can go your ways and not have to worry about being tied financially at the hip.

The bottom line is that being almost married or effectively married is not the same thing as being actually married.  You shouldn’t do financial things married people do like buy a home until you are actually married.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.