Recently, the investment company T. Rowe Price announced it had purchased a stake in Facebook worth $200 million. It has spread the investment across some 19 funds, including Science & Technology, Growth & Income, Global Stock and New America Growth. And T. Rowe’s New Horizons Fund, which doesn’t currently have a stake in Facebook, has invested in Twitter.
Obviously you are also sharing in other investments so the profit potential isn’t as lucrative as owning shares directly . But for many small-time investors this is actually for the best. If you are looking for a diversified portfolio with just a pinch of Initial Public Offering potential for kick, then funds like these may be a decent choice for you.Thursday, May 26, 2011
Wednesday, May 25, 2011
Money strategies for Mr. Mom
By Kelly Greene, Wall Street Journal
Husbands and wives increasingly are switching the traditional roles of breadwinner and household manager. But many of them haven't followed through with an appropriate financial tune-up.
In recent decades, women have outpaced men in education and earnings growth. According to the U.S. Census Bureau, some 29% of wives in dual-earner couples brought home more pay than their husbands in 2009, the most recent data available. That's almost double the 16% figure in 1988, when many of today's 40-year-olds were finishing high school.
With that shift in income, financial planners say they see more husbands supervising the home front. It's part of a long-term trend that appears to have been hastened by the recession. Although there is less social stigma than there once was—with "daddy play groups" proliferating—it is triggering money problems for some couples.
Given that employers in recent years have shifted management of most benefits—from retirement savings to health insurance—onto workers' shoulders, it is critical that couples recognize areas where adjustments might be needed. Among the most important:
Life insurance
Even in families where the husband is no longer the top earner, or where both spouses have similar incomes, the husband often carries more life insurance.
The wife probably needs just as much.
Michael Terrio, an investment adviser in Port St. Lucie, Fla., recently worked with a retired couple whose pensions and Social Security benefits were nearly the same. But the husband had $250,000 in term-life insurance, which is coverage at a fixed premium for a set time period, while the wife had only $75,000 in coverage.
"If she were to die, he'd be in trouble," Mr. Terrio says.
To fix the problem, he had the couple shop for a new life-insurance policy that also could be used to pay for long-term care for either spouse. He also helped the wife select a fixed annuity that would replenish most of the husband's income if he were to die first. The husband, not a fan of annuities, invested in a portfolio composed of exchange-traded funds and, to limit downside risk, options.
Couples who are still working should consider term-life insurance—typically the cheapest type available, says Emily Sanders, a CPA and chief executive of Sanders Financial Management in Norcross, Ga.
Ideally, a couple should buy enough coverage to replace their income until their youngest child is out of college—and to pay off a mortgage and any other loans. That way, "someone struggling to raise young children by themselves isn't strangled by debt," she says.
Even if the father is earning nothing while raising children or starting a business, "he should be insured so Mom could continue working and afford a nanny," Ms. Sanders says.
If you get life insurance through your employer, consider buying additional coverage elsewhere instead of getting it at work. "If you leave the company or are terminated, and something happens in the interim that makes you uninsurable, your family is in a hole," she says.
Retirement savings
A husband without a regular paycheck may be tempted to tap his retirement account early in order to continue to contribute to the household kitty. Try to avoid the temptation, even if it means swallowing your pride.
Ryan McKeown, a certified financial planner in Mankato, Minn., cites one couple he worked with recently in which the husband has retired, but the wife is still employed. The couple are in their 50s and have no mortgage or debt, and can live on the wife's paycheck alone. She also has $92,000 in her savings account.
Despite this, the husband started taking early withdrawals from one of his retirement accounts, triggering taxes, because he felt he should still be contributing to the household's income, Mr. McKeown says. To talk him out of it, Mr. McKeown says he put everything on one piece of paper so the husband could see how it was hurting them.
Another hazard: When a husband becomes the lower earner in his late 50s or early 60s, he may reflexively rebalance his retirement investments more conservatively—bulking up on bonds and selling off stocks, say—even if his wife is earning enough to meet the couple's needs. "I warn them away from that as much as possible," Mr. McKeown says. "You hate to give up growth potential too early on."
Child care
As obvious as it may seem, some families with out-of-work or underemployed fathers need to reassess their child-care needs and scale back.
If a mother quits work or shifts to a part-time job, the family typically sheds whatever child-care costs it can, Ms. Sanders says. But if a father is home, even if he isn't working, the family tends to keep some—or all—of its child care in place. The same goes for housekeepers and other domestic help.
"If someone feels like they have to have a nanny, we aren't going to tell them they can't," Ms. Sanders says. She tries to make her clients aware of the expense, which in many households rivals the mortgage payment. She suggests considering less-costly arrangements, such as sharing part-time care with a neighbor.
https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/money-strategies-for-dad&topic=financial-planningThursday, May 19, 2011
Look Before You Leap Into Commodities
By Christine Benz
With the threat of inflation looming large, many investors have been thinking about adding commodities to their inflation-fighting toolkits, particularly as commodity-tracking investments have become more widely available in recent years. The basic case for these investments is pretty intuitive: If prices for stuff trend up, the commodities fund or exchange-traded fund gives you a chance to participate in those gains. Those gains, in turn, partially offset the dent you put in your wallet as you shell out ever-higher amounts for food, gas, and so on.
Most strategic asset-allocation frameworks that include commodities don't use huge slugs of them. That's in acknowledgment of the fact that commodities as stand-alone investments can be terribly volatile, buffeted by the cyclicality of real demand for commodities as well as, increasingly, speculation.
There's also the not-insignificant issue that unless you're prepared to take physical delivery of some ears of corn or barrels of oil, most available commodities investments are an imprecise measure of actual commodities prices.
But even if retirees accept the idea that they need to keep their commodities investments to a small part of a diversified portfolio, and that funds investing in commodity futures won't track actual prices with any sort of precision, I still worry about implementation. I also think there's a troublesome mismatch with the investment itself and the problem it's aiming to solve (inflation), particularly for retirees whose time horizons may be shorter than a couple of decades.
And if your time horizon was only 10 or 20 years, as is the case with many retirees, you may not have a realistic expectation of recouping what you'd lost during your lifetime, let alone obtaining any future inflation protection on a year-to-year basis. There's also the not-insignificant possibility that you'd be so spooked by your losses that you'd sell your commodities investment at the bottom, thereby ruling out your participation in a rebound.
http://news.morningstar.com/articlenet/article.aspx?id=381883
With the threat of inflation looming large, many investors have been thinking about adding commodities to their inflation-fighting toolkits, particularly as commodity-tracking investments have become more widely available in recent years. The basic case for these investments is pretty intuitive: If prices for stuff trend up, the commodities fund or exchange-traded fund gives you a chance to participate in those gains. Those gains, in turn, partially offset the dent you put in your wallet as you shell out ever-higher amounts for food, gas, and so on.
There's also a body of research showing that, in addition to their inflation-fighting abilities, commodities can improve a portfolio's risk/reward characteristics because of their historically low correlations with the stock and bond markets.
Most strategic asset-allocation frameworks that include commodities don't use huge slugs of them. That's in acknowledgment of the fact that commodities as stand-alone investments can be terribly volatile, buffeted by the cyclicality of real demand for commodities as well as, increasingly, speculation.
There's also the not-insignificant issue that unless you're prepared to take physical delivery of some ears of corn or barrels of oil, most available commodities investments are an imprecise measure of actual commodities prices.
But even if retirees accept the idea that they need to keep their commodities investments to a small part of a diversified portfolio, and that funds investing in commodity futures won't track actual prices with any sort of precision, I still worry about implementation. I also think there's a troublesome mismatch with the investment itself and the problem it's aiming to solve (inflation), particularly for retirees whose time horizons may be shorter than a couple of decades.
We could talk all day about what inflation is apt to be like during the coming decades, with some arguing for sky-high inflation because of demand from emerging markets. But historically, inflation has charted a slow but steady course, ranging from 0% (2009) to more than 5% (1990) during the past few decades, as measured by the Consumer Price Index.
But say you had the misfortune of buying a commodities investment at the wrong time, as many investors did when they glommed onto commodities funds in 2007 and the first half of 2008. You could lose 50% or more of your money right out of the box.
And if your time horizon was only 10 or 20 years, as is the case with many retirees, you may not have a realistic expectation of recouping what you'd lost during your lifetime, let alone obtaining any future inflation protection on a year-to-year basis. There's also the not-insignificant possibility that you'd be so spooked by your losses that you'd sell your commodities investment at the bottom, thereby ruling out your participation in a rebound.
For all of these reasons, I have a hard time getting excited about commodities investments in retiree portfolios, particularly in the wake of the generally strong performance these investments have enjoyed during the past year. If you're speculating on commodities or gold with money you can afford to lose, that's different. (Not advisable, but different!) But if you're a retiree thinking about commodities as a long-term hedge against inflation, go slowly, if you go at all.
http://news.morningstar.com/articlenet/article.aspx?id=381883
Do You Qualify for Tax-Free Capital Gains?
Thanks to the extension of the so-called Bush tax cuts through 2012, lots of folks still qualify for the 0% federal income tax rate on long-term capital gains and dividends. Even if your income is too high to personally take advantage, you may have children, grandchildren, or other loved ones who can benefit.
The 0% rate only applies to long-term capital gains and qualified dividends that would otherwise fall within the 10% or 15% federal income tax rate brackets (the bottom two brackets). As it turns out, one can be doing pretty well income-wise and still be within those brackets.
* Let's say you file jointly, have two dependent kids and claim the standard deduction for 2011. You could have up to $95,400 of adjusted gross income (AGI), including some long-term gains and dividends, and still be within the 15% bracket because your taxable income would be $69,000. That's the top end of the 15% bracket for joint filers.
* Or say you're divorced, use head of household filing status, have two dependent children and claim the standard deduction for 2011. You could have up to $65,850 of AGI, including some long-term gains and dividends, and still be within the 15% bracket. That's because your taxable income would be $46,250 -- the top of the 15% bracket for those who use head of household filing status.
* Say you're a single filer with no kids, and you claim the standard deduction for 2011. You could have up to $44,000 of AGI, including some long-term gains and dividends, and still be within the 15% bracket because your taxable income would be $34,500. That's the top of the 15% bracket for singles.
To put things in perspective, AGI is the number on the bottom of page 1 of your Form 1040. It reflects certain write-offs such as contributions to your 401(k) plan at work, any deductible IRA contributions, moving expenses and alimony payments to your ex. But AGI is before subtracting personal exemptions and itemized deductions (for those who itemize). If you itemize, your AGI can be even higher than the amounts listed above, and you would still be within the 15% bracket and therefore qualify for the 0% tax rate on some long-term gains and dividends.
The 0% tax rate is almost too good to be true. That said, it only applies to long-term gains and dividends that accumulate in taxable brokerage firm accounts and long-term gains from investment assets like real estate that are held outside your tax-deferred retirement accounts -- traditional IRA, 401(k) and the like.
Wednesday, May 18, 2011
What To Do With Old 401(k) Plans? Many Aren't Sure
A recent study by Fidelity Investments found that 30% of Fidelity 401(k) plan participants who made a job transition are unsure of what to do with their workplace savings.
Fidelity's data showed that about two-thirds of plan participants hadn't moved their money from a former employer's plan within four months of leaving the company. Nearly three-quarters (71 percent) of respondents said they are consciously keeping their assets in an old plan for the time being. The top reason stated (59 percent) was satisfaction with the plan features or services and access to specific investments. But 27 percent said a lack of time was preventing them from taking action.
When respondents were asked if they are planning to take any action within the next year, nearly a quarter (24 percent) indicated they were not sure, and almost one-in-five (18 percent) stated they were going to move the money to an individual retirement account or their current employer’s workplace savings plan. But the majority (57 percent) stated they were planning to keep their investments in their old plan for the next 12 months.
“The findings of this study highlight reasons why some investors stay in their old plans, and it also stresses the fundamental need for more education on the basic options investors have with these assets,” said Sarah Walsh, vice president, Fidelity Investments.
The study was compiled from an online survey of 1,093 Fidelity participants who currently have an employer-sponsored retirement plan with a former employer, have stayed in their workplace plan since leaving their employer for at least 120 days, have at least $50K+ in plan assets and are the financial decision makers for their retirement plans.
http://www.fa-mag.com/fa-news/7445-what-to-do-with-old-401k-plans-many-arent-sure.html
Fidelity's data showed that about two-thirds of plan participants hadn't moved their money from a former employer's plan within four months of leaving the company. Nearly three-quarters (71 percent) of respondents said they are consciously keeping their assets in an old plan for the time being. The top reason stated (59 percent) was satisfaction with the plan features or services and access to specific investments. But 27 percent said a lack of time was preventing them from taking action.
When respondents were asked if they are planning to take any action within the next year, nearly a quarter (24 percent) indicated they were not sure, and almost one-in-five (18 percent) stated they were going to move the money to an individual retirement account or their current employer’s workplace savings plan. But the majority (57 percent) stated they were planning to keep their investments in their old plan for the next 12 months.
“The findings of this study highlight reasons why some investors stay in their old plans, and it also stresses the fundamental need for more education on the basic options investors have with these assets,” said Sarah Walsh, vice president, Fidelity Investments.
The study was compiled from an online survey of 1,093 Fidelity participants who currently have an employer-sponsored retirement plan with a former employer, have stayed in their workplace plan since leaving their employer for at least 120 days, have at least $50K+ in plan assets and are the financial decision makers for their retirement plans.
http://www.fa-mag.com/fa-news/7445-what-to-do-with-old-401k-plans-many-arent-sure.html
Senate Bill Would Limit Savers Using 401(k)s As Rainy-Day Funds
| (Bloomberg News) Workers will be limited in tapping their 401(k) retirement plans for loans under legislation two senators plan to introduce today that’s designed to counter the erosion of retirement assets. “During these difficult economic times, we are increasingly seeing 401(k) funds being treated as rainy-day funds,” Senator Herb Kohl, a Wisconsin Democrat, said in a statement obtained by Bloomberg News. “A 401(k) savings account should not be used as a piggy bank for revolving loans.” Kohl, 76, who’s chairman of the Senate Special Committee on Aging, plans to introduce the “SEAL 401(k) Savings Act” with Senator Mike Enzi, 67, a Wyoming Republican. The bill would reduce the number of loans workers may take from a 401(k) and give participants more time to repay after losing a job. It will allow savers to contribute to their plan after taking a hardship withdrawal and ban debit cards linked to the accounts, according to Joe Bonfiglio, a spokesman for Kohl’s aging committee. The Senate bill would limit the number of outstanding loans for each participant to three, Bonfiglio said. Employers would have the option to reduce the number for their plans. Almost 28 percent of participants in 401(k)-type accounts had an outstanding loan at the end of 2010, which is a record, according to a study released today by benefits consultant Aon Hewitt, a unit of Chicago-based Aon Corp. The average outstanding loan balance was $7,860, said Aon Hewitt, which used a database of about 2 million employees in 110 plans. Leaving A Job “The big risk with loans is that participants leave their job,” said Alison Borland, head of retirement strategy for Aon Hewitt. Most 401(k) plans require employees to repay loans in full when leaving a job, usually within 60 days, said Borland, who’s based in Nashville, Tennessee. Almost 70 percent default, Borland said, so the unpaid funds get counted as taxable income and may add to the burden of a jobless worker. Depending on the rules of an employer’s 401(k) plan, workers generally may borrow from their retirement account for any reason and pay the loan back with interest. About 89 percent of participants were in plans offering loans in 2009, according to the Washington-based Employee Benefit Research Institute, which has a database of 21 million 401(k) savers. Workers generally may borrow as much as 50 percent of their vested account balance up to a maximum of $50,000, according to the Internal Revenue Service. The loan must be repaid within five years, unless the money was used to buy a primary home. http://www.fa-mag.com/fa-news/7451-senate-bill-would-limit-savers-using-401ks-as-rainy-day-funds.html |
Middle-Income Boomers Put Brakes On Retirement
Most middle-income baby boomers are delaying their retirement by an average of five years, according to a new study.
The study, released by the Bankers Life and Casualty Company Center for a Secure Retirement, found that 73 percent of middle-income boomers are rethinking retirement and of those, 79 percent are delaying their retirement by an average of five years.
The study, Middle-Income Boomers, Financial Security and the New Retirement, which focused on 500 middle-income Americans between ages 47 and 65 with income between $25,000 and $75,000, found that one in seven (14 percent) believe that they will never be able to retire due to the turbulent economy.
According to the study, 71 percent worry about outliving their money once they retire, 68 percent have experienced a decline in the value of their retirement accounts within the past three years and more than half (55 percent) have saved less than $100,000. One-fifth (19 percent) have saved less than $10,000.
The study found that three out of four (75 percent) expect that their retirement will involve work in some form and more than half (57 percent) say that they will have to work for financial reasons.
Other interesting findings of the study include:
• Uncovered health-care expenses (80 percent), inflation (79 percent) and living longer than their money lasts (71 percent) are the top three financial concerns that middle-income Boomers have about retirement.
• Pensions and guaranteed income are what sixty percent (60 percent) of middle-income Boomers envy most about the retirement of previous generations.
• Three out of four (73 percent) middle-income Americans age 47 to 65 say that their financial situation, not age, is now the key indicator for when to retire.
• Three out of four (75 percent) middle-income Boomers expect to work in retirement; more than half (57 percent) of those expect they will have to work for financial reasons.
• Two out of three (68 percent) middle-income Americans age 47 to 65 have experienced a decline in the value of their retirement accounts since 2008; one-third (30 percent) of those have not seen any rebound in value as of March 2011.
The study was conducted in March 2011 by the independent research firm The Blackstone Group. A nationwide sample of 500 American baby boomers (ages 47 and 65) who are not yet retired and have an annual household income of between $25,000 and $75,000 participated in the Internet-based survey. Significant sub-sample differences were tested at the 95 percent confidence level.
http://www.fa-mag.com/fa-news/7449-alarming-number-of-middle-income-boomers-put-brakes-on-retirement.html
The study, released by the Bankers Life and Casualty Company Center for a Secure Retirement, found that 73 percent of middle-income boomers are rethinking retirement and of those, 79 percent are delaying their retirement by an average of five years.
The study, Middle-Income Boomers, Financial Security and the New Retirement, which focused on 500 middle-income Americans between ages 47 and 65 with income between $25,000 and $75,000, found that one in seven (14 percent) believe that they will never be able to retire due to the turbulent economy.
According to the study, 71 percent worry about outliving their money once they retire, 68 percent have experienced a decline in the value of their retirement accounts within the past three years and more than half (55 percent) have saved less than $100,000. One-fifth (19 percent) have saved less than $10,000.
The study found that three out of four (75 percent) expect that their retirement will involve work in some form and more than half (57 percent) say that they will have to work for financial reasons.
Other interesting findings of the study include:
• Uncovered health-care expenses (80 percent), inflation (79 percent) and living longer than their money lasts (71 percent) are the top three financial concerns that middle-income Boomers have about retirement.
• Pensions and guaranteed income are what sixty percent (60 percent) of middle-income Boomers envy most about the retirement of previous generations.
• Three out of four (73 percent) middle-income Americans age 47 to 65 say that their financial situation, not age, is now the key indicator for when to retire.
• Three out of four (75 percent) middle-income Boomers expect to work in retirement; more than half (57 percent) of those expect they will have to work for financial reasons.
• Two out of three (68 percent) middle-income Americans age 47 to 65 have experienced a decline in the value of their retirement accounts since 2008; one-third (30 percent) of those have not seen any rebound in value as of March 2011.
The study was conducted in March 2011 by the independent research firm The Blackstone Group. A nationwide sample of 500 American baby boomers (ages 47 and 65) who are not yet retired and have an annual household income of between $25,000 and $75,000 participated in the Internet-based survey. Significant sub-sample differences were tested at the 95 percent confidence level.
http://www.fa-mag.com/fa-news/7449-alarming-number-of-middle-income-boomers-put-brakes-on-retirement.html
Wednesday, May 4, 2011
6 Simple Steps To $1 Million
by Glenn Curtis
Let's face it; we all don't make millions of dollars a year, and the odds are that most of us won't receive a large windfall inheritance either. However, that doesn't mean that we can't build sizeable wealth - it'll just take some time. If you're young, time is on your side and retiring a millionaire is achievable. Read on for some tips on how to increase your savings and work toward this goal.
Unfortunately, people have a habit of spending their hard-earned cash on goods and services that they don't need. Even relatively small expenses, such as indulging in a gourmet coffee from a premium coffee shop every morning, can really add up - and decrease the amount of money you can save. Larger expenses on luxury items also prevent many people from putting money into savings each month.
Stop Senseless Spending
That said, it's important to realize that it's usually not just one item or one habit that must be cut out in order to accumulate sizable wealth (although it may be). Usually, in order to become wealthy one must adopt a disciplined lifestyle and budget. This means that people who are looking to build their nest eggs need to make sacrifices somewhere - this may mean eating out less frequently, using public transportation to get to work and/or cutting back on extra, unnecessary expenses.
This doesn't mean that you shouldn't go out and have fun, but you should try to do things in moderation - and set a budget if you hope to save money. Fortunately, particularly if you start saving young, saving up a sizeable nest egg only requires a few minor (and relatively painless) adjustments to your spending habits.
Fund Retirement Plans ASAP
When individuals earn money, their first responsibility is to pay current expenses such as the rent or mortgage expenses, food and other necessities. Once these expenses have been covered, the next step should be to fund a retirement plan or some other tax-advantaged vehicle.
Unfortunately, retirement planning is an afterthought for many young people. Here's why it shouldn't be: funding a 401(k) and/or a IRA early on in life means you can contribute less money overall and actually end up with significantly more in the end than someone who put in much more money but started later.
How much difference will funding a vehicle such as a Roth IRA early on in life make?
If you're 23 years old and deposit $3,000 per year (that's only $250 each month!) in a Roth IRA earning and 8% average annual return, you will have saved $985,749 by the time you are 65 years old due to the power of compounding. If you make a few extra contributions, it's clear that a $1 million goal is well within reach. Also keep in mind that this is mostly interest - your $3,000 contributions only add up to $126,000.
Now, suppose that you wait an additional 10 years to start contributing. You have a better job and you know you've lost some time, so you contribute $5,000 per year. You get the same 8% return and you aim to retire at 65. When you reach age 65, you will have saved $724,753. That's still a sizeable fund, but you had to contribute $160,000 just to get there - and it's no where near the $985,749 you could've had for paying much less.
Improve Tax Awareness
Sometimes, individuals think that doing their own taxes will save them money. In some cases, they might be right. However, in other cases it may actually end up costing them money because they fail to take advantage of the many deductions available to them.
Try to become more educated as far as what types of items are deductible. You should also understand when it makes sense to move away from the standard deduction and start itemizing your return.
However, if you're not willing or able to become very well educated filing your own income tax, it may actually pay to hire some help, particularly if you are self employed, own a business or have other circumstances that complicate your tax return.
Own Your Home
At some point in our lives, many of us rent a home or an apartment because we cannot afford to purchase a home, or because we aren't sure where we want to live for the longer term. And that's fine. However, renting is often not a good long-term investment because buying a home is a good way to build equity.
Unless you intend to move in a short period of time, it generally makes sense to consider putting a down payment on a home. (At least you would likely build up some equity over time and the foundation for a nest egg.)
Avoid Luxury Wheels
There's nothing wrong with purchasing a luxury vehicle. However, individuals who spend an inordinate amount of their incomes on a vehicle are doing themselves a disservice - especially since this asset depreciates in value so rapidly.
How rapidly does a car depreciate?
Obviously, this depends on the make, model, year and demand for the vehicle, but a general rule is that a new car loses 15-20% of its value per year. So, a two-year old car will be worth 80-85% of its purchase price; a three-year old car will be worth 80-85% of its two-year-old value.
In short, especially when you are young, consider buying something practical and dependable that has low monthly payments - or that you can pay for in cash. In the long run, this will mean you'll have more money to put toward your savings - an asset that will appreciate, rather than depreciate like your car.
Don't Sell Yourself Short
Some individuals are extremely loyal to their employers and will stay with them for years without seeing their incomes take a jump. This can be a mistake, as increasing your income is an excellent way to boost your rate of saving.
Always keep your eye out for other opportunities and try not to sell yourself short. Work hard and find an employer who will compensate you for your work ethic, skills and experience.
Bottom Line
You don't have to win the lottery to see seven figures in your bank account. For most people, the only way to achieve this is to save it. You don't have to live like a pauper to build an adequate nest egg and retire comfortably. If you start early, spend wisely and save diligently, your million-dollar dreams are well within reach.
http://www.investopedia.com/articles/younginvestors/08/millionaire-mindset.asp
Let's face it; we all don't make millions of dollars a year, and the odds are that most of us won't receive a large windfall inheritance either. However, that doesn't mean that we can't build sizeable wealth - it'll just take some time. If you're young, time is on your side and retiring a millionaire is achievable. Read on for some tips on how to increase your savings and work toward this goal.
Unfortunately, people have a habit of spending their hard-earned cash on goods and services that they don't need. Even relatively small expenses, such as indulging in a gourmet coffee from a premium coffee shop every morning, can really add up - and decrease the amount of money you can save. Larger expenses on luxury items also prevent many people from putting money into savings each month.
Stop Senseless Spending
That said, it's important to realize that it's usually not just one item or one habit that must be cut out in order to accumulate sizable wealth (although it may be). Usually, in order to become wealthy one must adopt a disciplined lifestyle and budget. This means that people who are looking to build their nest eggs need to make sacrifices somewhere - this may mean eating out less frequently, using public transportation to get to work and/or cutting back on extra, unnecessary expenses.
This doesn't mean that you shouldn't go out and have fun, but you should try to do things in moderation - and set a budget if you hope to save money. Fortunately, particularly if you start saving young, saving up a sizeable nest egg only requires a few minor (and relatively painless) adjustments to your spending habits.
Fund Retirement Plans ASAP
When individuals earn money, their first responsibility is to pay current expenses such as the rent or mortgage expenses, food and other necessities. Once these expenses have been covered, the next step should be to fund a retirement plan or some other tax-advantaged vehicle.
Unfortunately, retirement planning is an afterthought for many young people. Here's why it shouldn't be: funding a 401(k) and/or a IRA early on in life means you can contribute less money overall and actually end up with significantly more in the end than someone who put in much more money but started later.
How much difference will funding a vehicle such as a Roth IRA early on in life make?
If you're 23 years old and deposit $3,000 per year (that's only $250 each month!) in a Roth IRA earning and 8% average annual return, you will have saved $985,749 by the time you are 65 years old due to the power of compounding. If you make a few extra contributions, it's clear that a $1 million goal is well within reach. Also keep in mind that this is mostly interest - your $3,000 contributions only add up to $126,000.
Now, suppose that you wait an additional 10 years to start contributing. You have a better job and you know you've lost some time, so you contribute $5,000 per year. You get the same 8% return and you aim to retire at 65. When you reach age 65, you will have saved $724,753. That's still a sizeable fund, but you had to contribute $160,000 just to get there - and it's no where near the $985,749 you could've had for paying much less.
Improve Tax Awareness
Sometimes, individuals think that doing their own taxes will save them money. In some cases, they might be right. However, in other cases it may actually end up costing them money because they fail to take advantage of the many deductions available to them.
Try to become more educated as far as what types of items are deductible. You should also understand when it makes sense to move away from the standard deduction and start itemizing your return.
However, if you're not willing or able to become very well educated filing your own income tax, it may actually pay to hire some help, particularly if you are self employed, own a business or have other circumstances that complicate your tax return.
Own Your Home
At some point in our lives, many of us rent a home or an apartment because we cannot afford to purchase a home, or because we aren't sure where we want to live for the longer term. And that's fine. However, renting is often not a good long-term investment because buying a home is a good way to build equity.
Unless you intend to move in a short period of time, it generally makes sense to consider putting a down payment on a home. (At least you would likely build up some equity over time and the foundation for a nest egg.)
Avoid Luxury Wheels
There's nothing wrong with purchasing a luxury vehicle. However, individuals who spend an inordinate amount of their incomes on a vehicle are doing themselves a disservice - especially since this asset depreciates in value so rapidly.
How rapidly does a car depreciate?
Obviously, this depends on the make, model, year and demand for the vehicle, but a general rule is that a new car loses 15-20% of its value per year. So, a two-year old car will be worth 80-85% of its purchase price; a three-year old car will be worth 80-85% of its two-year-old value.
In short, especially when you are young, consider buying something practical and dependable that has low monthly payments - or that you can pay for in cash. In the long run, this will mean you'll have more money to put toward your savings - an asset that will appreciate, rather than depreciate like your car.
Don't Sell Yourself Short
Some individuals are extremely loyal to their employers and will stay with them for years without seeing their incomes take a jump. This can be a mistake, as increasing your income is an excellent way to boost your rate of saving.
Always keep your eye out for other opportunities and try not to sell yourself short. Work hard and find an employer who will compensate you for your work ethic, skills and experience.
Bottom Line
You don't have to win the lottery to see seven figures in your bank account. For most people, the only way to achieve this is to save it. You don't have to live like a pauper to build an adequate nest egg and retire comfortably. If you start early, spend wisely and save diligently, your million-dollar dreams are well within reach.
http://www.investopedia.com/articles/younginvestors/08/millionaire-mindset.asp
Tuesday, May 3, 2011
Risks to your investments now: Playing it too safe
Playing it too safe
Of course, one way to avoid risk is just not to suit up for the game. But that puts you in danger of not having enough money in later years, and of missing major market advances.
“What you don’t want to do is just focus on the risk and cap your upside,” said Harold Evensky, a financial adviser in Coral Gables, Fla. “Returns come in short spurts. If you miss one, you’ll never recover it.”
Your best bet: If the “sleep at night” factor is most important to you as an investor, then bank any money you might need over the next five years, Evensky said. That way, you won’t be as tempted to unload assets when the going gets tough.
You still might feel queasy when markets gyrate, but that’s the point. The late Peter Bernstein, a sage chronicler of financial-market history, once observed that “if you’re comfortable with everything you own, you’re not diversified.”
His advice: “You hate bonds; you ought to own bonds. You hate gold; own some gold. You’re scared to death — own stocks because maybe things will have a happy ending.”
Risks to your investments now: Markets
Markets and companies
Market risk is inescapable, but can be tempered through diversification. The same goes for the risk that a favorite stock in your portfolio could be the next Enron or Bear Stearns.
“The Seven Immutable Laws of Investing,” published recently on the website of investment firm GMO, highlights three key risks all investors should understand: valuation risk, or overpaying for an asset; fundamental risk, buying something that turns out to be flawed; and financing risk, using leverage.
Before committing your money, said James Montier, part of GMO’s asset-allocation team and author of the article, “always insist on a margin of safety.” Put simply, don’t get carried away. As the U.S. stock market moved fitfully through 2007 and early into 2008, Montier recalled, “people were acting with no regard to a margin of safety. Everyone was reaching for return and behaving very badly. We knew it wouldn’t end well — just not when.”
Your best bet: Don’t overlap markets or sectors, and avoid concentration in similar stocks and mutual funds. For the stock portion of your portfolio, consider mutual funds that have beaten a market benchmark with considerably less volatility.
For example, a search of the Morningstar database turned up a handful of funds that topped the S&P 500 over the past three years with no more than two-thirds of the market’s volatility. Those making the cut include Neuberger Berman Select Equities , CAN SLIM Select Growth and Reynolds Blue Chip Growth .
Risks to your investments now: Disasters
Disasters, war, political and economic upheaval
Even the biggest geopolitical events — those “black swans” that cause widespread disruption — typically don’t leave a lasting mark on financial markets. For instance, when Asia’s fastest-growing economies went into a skid in July 1997, investors feared that the contagion would spread worldwide and they scurried for safety. The Dow Jones Industrial Average took one of its worst drubbings ever on Oct. 27, 1997, losing 554 points, or 7.2%, but the index recovered and ended that year up more than 22%.
Even with all the shocks so far in 2011, both the Dow Jones Industrial Average and the Standard & Poor’s 500-stock index posted their best opening three months of the year in more than a decade. April was another big winner, with the Dow rising 4% in the month.
“The question I hear more often than not is, ‘What is it going to take to break this market?’” said Ed Yardeni, chief investment strategist at Yardeni Research in Great Neck, N.Y. “The black swans that are out there are pretty scary, but the market has been extraordinarily resilient.”
Still, the current troubles in the Middle East and Japan seem more serious than anything the world has faced since the 2007 subprime mortgage crisis. Japan’s disaster disrupts the technology and automobile industries; the Middle East crisis threatens crucial oil supplies. Said Baumohl, the Economic Outlook Group strategist, about the Middle East uprisings: “If the State Department can’t figure out what to do, investors ought to show some caution.”
Your best bet: Add gold and other precious metals, which, like Treasurys, are considered a safe haven. Know that a little bit of gold can go a long way to offset declines in other assets. You can own physical gold via several exchange-traded funds, including SPDR Gold Shares and iShares Gold Trust. (Be aware, though, that if you decide to invest in gold-mining companies, they may perform better or worse than the metal itself.)
“We control risk by owning gold,” said Charles de Vaulx, co-manager of the IVA Worldwide and IVA International funds, which each had about 5% to 6% of assets in gold at the end of March. “I know the price of gold is not [as cheap as] what it used to be,” he said, “but there are still risks out there.”
De Vaulx points to such examples as the Middle East and the potential for the U.S. bond market to react violently once the Federal Reserve begins to raise short-term interest rates. “As a hedge against extreme outcomes,” he said, “gold makes sense.”
http://www.marketwatch.com/story/the-4-biggest-risks-to-your-investments-now-2011-05-02?pagenumber=2Risks to your investments now: Inflation
Inflation and interest rates
While the U.S. inflation rate is far from the crushing double-digit levels of 35 years ago, higher energy and commodity costs are taking a toll on consumers and producers alike.
The question investors need to ask is how much of this sticker shock is due to speculation. When speculators grab hold of a market, prices can soar rapidly and sink just as quickly. Investors have to weigh that factor against supply-and-demand realities.
Coincident with inflation risk is interest-rate risk. Many market observers are convinced that rates have nowhere to go but up — and soon.
Rising rates reduce the value of existing bonds, especially longer-term issues, bringing pain to bond investors. The throngs who flocked to bond mutual funds over the past couple of years need only look at what happened to bond-fund share prices in 1994, when rates jumped. By the end of that year, the average taxable-bond fund had lost 3.3%, according to investment researcher Morningstar Inc. Already this year, shareholders of long-term government-bond funds and many municipal-bond funds are getting pinched.
Your best bet: Make sure your portfolio is broadly and efficiently diversified. Own U.S. and international stocks, commodities, inflation-protected bonds, real-estate investment trusts and cash, all of which have the ability to withstand inflationary bouts. Cash is king when interest rates rise, as money-market funds and bank certificates of deposit pay correspondingly more.
But don’t abandon traditional bonds. Diversification isn’t about maximizing return; it’s about minimizing risk. That means owning unpopular assets — because you could be wrong. High-quality U.S. and international corporate and government bonds of varying maturities, or bond funds that own these securities, provide you with diversification and lower the risk of a stock-heavy portfolio.
Many bond-market strategists nowadays advise controlling interest-rate risk by shortening a bond portfolio’s duration, or sensitivity to rate swings. Bonds that mature in five years or sooner, for example, don’t suffer as much as longer-term issues when rates climb, since once they mature their proceeds can be reinvested at prevailing higher yields. Bond funds don’t have maturity dates, but their investment objective is usually stated in the fund’s name, and the portfolio’s average duration is easily found online.
Finally, keep in mind that most assets nowadays are correlated, meaning they move in the same direction, though not to the same degree. In fact, the only global assets now that are truly uncorrelated with stocks, bonds, commodities and precious metals are Treasury bonds, according to Morningstar. If fears of sharply rising inflation and interest rates are unfounded, or when another geopolitical shock spurs investors to seek safety, Treasurys will be in good graces again.
http://www.marketwatch.com/story/the-4-biggest-risks-to-your-investments-now-2011-05-02?pagenumber=1Monday, May 2, 2011
Wealth is what you save, not what you spend
CHICAGO (MarketWatch) — We all may not be millionaires but there are plenty of financial and life-planning secrets we can learn from the well-heeled.
Most people know that wealth in the U.S. is in the hands of a small percentage of the total population. And, today, most of those folks with a net worth of $1 million or more have earned it themselves.
They’re mostly entrepreneurs who create everything from high-speed networks to garbage haulers. They dig ditches and build houses and grow corn and make jewelry. They deal stamps or coins or artwork and control pests and cut lawns. They also cure people and give them new teeth. Others will defend their neighbors or even feed them.
And they’re not big spenders. In fact, most of those with big bucks live well under their means — think about Warren Buffet still living in that modest Omaha home — and they put their money instead toward investments that help them stockpile more wealth.
“Wealth is what you accumulate, not what you spend,” according to Thomas Stanley and William Danko, the authors of the seminal tome on America’s wealthy “The Millionaire Next Door,” first published in 1996.
“It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes,” the authors wrote. “Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline.”
Wealth is defined in many ways, though it’s generally determined as the value of everything you own minus debts. But there’s a difference between marketable assets — things you own that could be liquidated rather quickly, like stocks, bonds, real estate — and possessions like cars, clothing and household items that you use regularly and aren’t likely to sell.
Income alone does not make one rich. It helps, of course, to build wealth, but the financially independent look to their salaries as a means to an end, which is that pile of cash.
“The wealthy don’t spend their wealth on discretionary purchases,” said Pam Danziger, founder of Unity Marketing, a consumer market-research firm specializing in luxury goods and experiences. “They get rich by maximizing the value of their investments.”
That doesn’t mean they don’t pay big bucks for pretty shoes or outfits, but that most choose those items carefully and shop for value and quality. “They truly evaluate the purchase as an investment, not an expense,” Danziger said.
What they do though is diversify those investments, which gives them more flexibility to ride out difficult times. “The wealthiest clients have very, very diversified portfolios that go way beyond just stocks and bonds into hedge funds, currencies, commodities and emerging markets,” said Leslie Lassiter, managing director of the JPMorgan Private Wealth Management.
“There are many, many mutual funds out there that will allow you to get exposure to those types of asset classes,” Lassiter said.
Among the biggest differences between those flush with cash and those wishing they were is in how they pay for things. Millionaires tend to use cash for most of their purchases, including cars, homes and boats.
For the average wage earner, of course, that’s not always an option but it still holds this lesson: Don’t look to debt to fund your lifestyle.
Most wealthy people use debt for investment purposes and are careful not to over-leverage themselves. “A prudent use of debt is an appropriate thing for anyone,” Lassiter said.
They also plan very well and spend a lot of time at it. Many are compulsive savers and investors who often say the journey to riches was far more fun than the reaching the goal.
And they’re patient, willing to invest in the long term and wait it out. “They stick with their investments and are more likely to have a financial plan,” said Sanjiv Mirchandani, president of National Financial, a subsidiary of Fidelity Investments.
Many take the long-term approach to investing because they’re working at being financially independent. When they retire, for example, many will know exactly how much they need to live on, to give away and to leave as a legacy.
“The best ones really understand how much liquidity they need to cover their expenses and make sure they have that much cash on hand,” Lassiter said. “That’s something the average person should do as well.”
At the same time, she said most are very careful about leveraging debt. “The wealthy tend to balance between the two,” she said.
Recommendations for accumulating wealth:
Live below your means: People with high incomes who spend all that money are not rich; they’re just stupid.
Plan: That means plan for today, tomorrow and 30 years after retirement. Take time doing it too and spend time monitoring it every day. Use budgets and stick to them.
Diversify: Look for mutual funds and investments that allow you exposure to asset classes that aren’t related to each other.
Reduce use of credit and turn to cash: It’s easier, of course, for a prosperous person to pay for a house in cash than it might be for most folks, but credit-card debt for luxury purchases or extravagant vacations will never pave a road to riches.
Have access to cash: While the rich keep much of their wealth invested, they can get cash when they need it. Have some kind of line of credit available, like a HELOC (home-equity line of credit) that you never use. It’s a safety valve. A year’s worth of cash to cover expenses; Some think three years worth is a better bet.
Spread cash around: When the wealthy pulled money out of the equities markets two and three years ago, they opened a bevy of bank accounts, all guaranteed up to $250,000 of deposits by the Federal Deposit Insurance Corp.
Bring your children into the mix, and remember the importance of estate planning: The affluent can go to great lengths to teach their children about money and how to manage it — something every family should do. Though talking about money with children consistently ranks as one of the most dreaded conversations, it’s important that your heirs know where all the bank accounts and safe-deposit boxes are — even that their names are on them, too — who the attorney is, where the will and trusts are filed.
https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/what-the-wealthy-can-teach-us&topic=financial-planning
Most people know that wealth in the U.S. is in the hands of a small percentage of the total population. And, today, most of those folks with a net worth of $1 million or more have earned it themselves.
They’re mostly entrepreneurs who create everything from high-speed networks to garbage haulers. They dig ditches and build houses and grow corn and make jewelry. They deal stamps or coins or artwork and control pests and cut lawns. They also cure people and give them new teeth. Others will defend their neighbors or even feed them.
And they’re not big spenders. In fact, most of those with big bucks live well under their means — think about Warren Buffet still living in that modest Omaha home — and they put their money instead toward investments that help them stockpile more wealth.
“Wealth is what you accumulate, not what you spend,” according to Thomas Stanley and William Danko, the authors of the seminal tome on America’s wealthy “The Millionaire Next Door,” first published in 1996.
“It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes,” the authors wrote. “Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline.”
Wealth is defined in many ways, though it’s generally determined as the value of everything you own minus debts. But there’s a difference between marketable assets — things you own that could be liquidated rather quickly, like stocks, bonds, real estate — and possessions like cars, clothing and household items that you use regularly and aren’t likely to sell.
Income alone does not make one rich. It helps, of course, to build wealth, but the financially independent look to their salaries as a means to an end, which is that pile of cash.
“The wealthy don’t spend their wealth on discretionary purchases,” said Pam Danziger, founder of Unity Marketing, a consumer market-research firm specializing in luxury goods and experiences. “They get rich by maximizing the value of their investments.”
That doesn’t mean they don’t pay big bucks for pretty shoes or outfits, but that most choose those items carefully and shop for value and quality. “They truly evaluate the purchase as an investment, not an expense,” Danziger said.
What they do though is diversify those investments, which gives them more flexibility to ride out difficult times. “The wealthiest clients have very, very diversified portfolios that go way beyond just stocks and bonds into hedge funds, currencies, commodities and emerging markets,” said Leslie Lassiter, managing director of the JPMorgan Private Wealth Management.
“There are many, many mutual funds out there that will allow you to get exposure to those types of asset classes,” Lassiter said.
Among the biggest differences between those flush with cash and those wishing they were is in how they pay for things. Millionaires tend to use cash for most of their purchases, including cars, homes and boats.
For the average wage earner, of course, that’s not always an option but it still holds this lesson: Don’t look to debt to fund your lifestyle.
Most wealthy people use debt for investment purposes and are careful not to over-leverage themselves. “A prudent use of debt is an appropriate thing for anyone,” Lassiter said.
They also plan very well and spend a lot of time at it. Many are compulsive savers and investors who often say the journey to riches was far more fun than the reaching the goal.
And they’re patient, willing to invest in the long term and wait it out. “They stick with their investments and are more likely to have a financial plan,” said Sanjiv Mirchandani, president of National Financial, a subsidiary of Fidelity Investments.
Many take the long-term approach to investing because they’re working at being financially independent. When they retire, for example, many will know exactly how much they need to live on, to give away and to leave as a legacy.
“The best ones really understand how much liquidity they need to cover their expenses and make sure they have that much cash on hand,” Lassiter said. “That’s something the average person should do as well.”
At the same time, she said most are very careful about leveraging debt. “The wealthy tend to balance between the two,” she said.
Recommendations for accumulating wealth:
Live below your means: People with high incomes who spend all that money are not rich; they’re just stupid.
Plan: That means plan for today, tomorrow and 30 years after retirement. Take time doing it too and spend time monitoring it every day. Use budgets and stick to them.
Diversify: Look for mutual funds and investments that allow you exposure to asset classes that aren’t related to each other.
Reduce use of credit and turn to cash: It’s easier, of course, for a prosperous person to pay for a house in cash than it might be for most folks, but credit-card debt for luxury purchases or extravagant vacations will never pave a road to riches.
Have access to cash: While the rich keep much of their wealth invested, they can get cash when they need it. Have some kind of line of credit available, like a HELOC (home-equity line of credit) that you never use. It’s a safety valve. A year’s worth of cash to cover expenses; Some think three years worth is a better bet.
Spread cash around: When the wealthy pulled money out of the equities markets two and three years ago, they opened a bevy of bank accounts, all guaranteed up to $250,000 of deposits by the Federal Deposit Insurance Corp.
Bring your children into the mix, and remember the importance of estate planning: The affluent can go to great lengths to teach their children about money and how to manage it — something every family should do. Though talking about money with children consistently ranks as one of the most dreaded conversations, it’s important that your heirs know where all the bank accounts and safe-deposit boxes are — even that their names are on them, too — who the attorney is, where the will and trusts are filed.
https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/what-the-wealthy-can-teach-us&topic=financial-planning
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