Archive for the ‘Investing’ Category

Taking the First Step Into Savings

Last week, a friend and I began talking about saving for the future.  I told him about my current plans and how I’m saving about 20% of my income annually for retirement.  He told me he really has not saved anything.  Personal circumstances had put him in a situation where he thinks he can’t save for himself right now.  As the conversation progressed, he asked me for some advice.  What should I invest on?  Where do I do it?  How do I start?  His focus was more on the investing side of the equation.  I told him that right now, that is not as important as taking action.  The last question was what I thought was the most important one-How do I start?

If you ever wanted to loose weight, change jobs, or any type of situation that might require some deep thinking, the most important thing you can do is to take action.  Taking that first step is what will help lay the road for the future.  This concept is no different when talking about personal finance.  Don’t worry about the schematics of investing.  Worry about doing something to get you started.

The first step you should take should be taking a closer look into what you spend your money on.  I had asked my friend if he new what his income was after expenses.  He didn’t know.  I told him to just take a look at where his money is actually going.  Then, he will notice  that either A) He needs to find a way to increase his income B) Decrease his expenses C) Both.

It does not matter how large or how small the amount of savings you put aside is.  The important thing is to do it.  When I first started saving for retirement, I could only save about 50 dollars a month, sometimes even less.  But that didn’t discourage me.  In fact, it motivated me into saving even more.  When you start to see your savings grow, you want to keep feeding it more and more.  You start to notice that you can maybe save a little bit more this month.  As the next month rolls around, you noticed that you can save a little bit more.  Soon, saving will become a habit.

As the saying goes “the journey of a thousand miles starts with the first step”.  So open a high yield savings accountlive more frugally, read about personal finance, do whatever it takes to get the ball rolling in savings. 

 

What is a Money Market Account?

As I created this blog, one of my main goals was to make this a place where people can find simple and to the point answers on personal finance.  In previous posts, I have covered things such as compound interest, high yield savings account, 401k’s, and more.  The next topic I would like to talk about would be money market accounts.

Money market accounts are similar to a savings account.  The money is usually invested in  short term securities.  What makes them different from a savings account is that they usually have higher interest rates and your are limited to the transactions you can do per month.  Warning:  Money Market Accounts are different from Money Market Funds.  MMFs are not insured by the Federal Deposit Insurance Company (FDIC).  For more info on MMFs check this article in About.com-Money Market Funds-Risks and Benefits.

Who/Why should one have a money market account?  I would recommend a money market account to those who are going to do some long term saving.  This is money that you would not be touching for a long time (3+ years).  Many people suggest using an mma for your emergency fund.

I don’t have an mma.  The interest rate that you can earn is higher than most regular savings accounts but the limited transactions is something I don’t like about them.  I prefer using a high yield savings account as a place to store your emergency fund.

If you would like to compare mma’s check out Bankrate for side by side comparisons.

 

The Simplest Guide to a 401K Part 1

One very important vehicle of investing that people can use is the 401k. But what exactly is it? How does it work?

A 401k is an employer sponsored retirement program. The name for it comes from the section in the U.S. Internal Revenue Code. Employees contribute a portion of their income (taken from their paychecks) pre-tax. Pre-tax means that you will not be taxed for it until you withdraw it.

The actual work of administration and monotoring the retirement accounts is done by an independent bank, mutual fund company, financial service and more. The types of investments that are offered are stocks, bonds, money market instruments, and my personal favorite-mutual funds.

So why should we invest money in a 401k? Companies are moving away from pensions and into 401ks. If you are looking into starting investing long term, they are a great place to start. The most important reason would be if a matching contribution is involved. That is free money! For example, my current employer offers a match of up to the first 3% of my income. Therefore, if I invest a minimum of 3%, the company will match 3% every time as well. It’s free money so take advantage of it.

When investing in a 401k one should study and understand the risks involved with investing. Most financial experts would suggest to have a well diversified portofolio to help minimize risk. As with any long term investing, this is not ment to make you rich overnight. This is ment to grow steady and slowly with compound interest working its magic.

In Part 2, I will talk about the details in a 401K.

Tough Times For Your IRA

Something that I am learning the hard way is that patience is a very good quality to have when investing your money long term. Specially when it comes into checking your IRA for gains/losses. At first, I remember checking almost daily how my Roth IRA was doing. Trust me, you don’t want to be doing this. Specially with the down turn cycle that our economy is in right now, you can worry yourself silly.

Now, I try to look at my investments at a quarterly basis. But even then, it is still tough seeing your investments sometimes not doing so well, and even loosing money. Just remember that the market is cyclical. So sooner or later, the upswing will begin and your investments will most likely begin to record profits. The good thing about having an IRA during tough times in the market, is that it is a way to “bargain shop” for stocks. But a question that I always had was what if you are nearing retirement and the economy is not doing good?

CNN Money blog has a great post where Walter Updergrave answers this question. Here are some of the advice he gives:

The worst things you can do to your IRA is cashing it out. The taxes you would have to pay would be tremendous so this option should rarely be done. If you did, you would still need to re-invest. This time, you will have much less money and you will no longer have the tax-deferred compound gains you might generate.

If you have been using a long term investing strategy, stick to it. That means that you have a well balanced portfolio. At this point of your investing life, your strategy probably has shifted to one with much less risk to prevent a large portion of your investments to be loss right before retirement.

If you don’t have a long term investing strategy, create one now. It is not a good idea to have a collection of holdings that can help you when the market is doing good, but can really hurt you during rougher time. figure out your goals and come up with a strategy that will protect your investments, and provide you with a constant income during retirement. Your allocation will most likely consist of less stocks than before and more bonds to accommodate risk and return

If you don’t feel comfortable creating an investing strategy, choose a target-retirement fund. These are funds that are adjusted according to a persons age, retirement year, and risk tolerance. You simply choose the one that corresponds to you and you get the right mix of stocks/bonds that will fit your situation.

Short term losses are bound to occur no matter what. But if you plan ahead, you can prevent a lot of headaches in the future.

The Meaning of a Diversified Portofolio

One of the advices we hear most often given to us about our personal finances is to start saving now and to have a diversified portfolio. Everyone says it, but what exactly does it mean. Heck, at one point I thought that it meant having many different types of briefcases! Well… Just joking. In all seriousness, a diversified portfolio actually is one of the most important things one should have, especially if they are investing long term.

This is the simplest definition of what a diversified portfolio is-Having your investments spread out into different stocks, bonds, markets, etc. In other words, not putting your eggs into one basket. What diversifying does for you is help you reduce risk while keeping a somewhat similar rate in return.

Let’s say that a one, or two, or even three companies or banks that you invested some of your money completely plummet while the rest of your investments stay on average. By having a diversified portfolio spread around the different markets (including international), the loss will not be as bad compared to if all of your money was invested into one asset. On the other hand, if all of your investments do good, you get about a similar rate of return that you would of gotten if you did not have a diversified portfolio.

Remember that in investing there is never guarantees. One should carefully research and plan how they want to diversify their investments. As I mentioned earlier, this strategy works best for the long term. This by no means is will get you rich overnight. Many will argue that for the short term investor, investing in just a couple of high performance investments is a better way to go. That sometimes may be the case, but for the average investor, I believe that the tortoise will slowly win the race.

I highly recommend reading JD in GetRichSlowlywho wrote an excellent post dealing with diversification as well.

Mutual Funds Rock!!!

When I first started thinking about investing, I remember being scared and confused. I just couldn’t grasp how people picked individual stocks. To me, it felt like almost gambling. One day, while watching television, I saw a commercial for one of the major mutual fund companies. I didn’t know anything about mutual funds so I started to do some research on them. To my surprise, I had found the way for me to begin investing. Mutual funds would be the way to go.

According to most financial adviser’s, the best way one can invest long term is through the use of funds. The most common funds you here talked about are mutual and index. So what is the difference between them?

Mutual Funds

Mutual funds are the compilation of many different stocks and bonds by a mutual fund company. They can be any combination of the two. The stock/bond mix is developed by a mutual fund manager to meet a specific investment goal. Mutual funds tend to be less risky than individual stocks because they are much more diversified. Unlike individual stocks, mutual funds will not make you rich over night. They are intended to be use as long term investments specially for retirement. U.S. mutual funds are also strictly regulated. They are subject to various requirements that ensure that they are working in the best interests of the shareholders.

When picking a mutual fund, things such as fees, and past performance should be taken into account to assure they highest return on investment as possible.

Index Funds

Index funds are mutual based portfolios that are designed to try and mirror the different markets such as the S&P 500 or the Rusell 2000. Records show that index funds perform better than actively managed funds. They are considered to one of the best ways to invest when it comes to mutual funds. They have low fees, and their return has been stellar since their introduction over 30 years ago. I highly recommend reading about the history and reasoning behind index funds.

Warning

I have given a very simplified version of what mutual and index funds are. One has to remember that when investing, there will always be risk. The goal of mutual funds it’s to help minimize some of the risk and to somewhat simplify the investment process. As always one should research a fund and understand it’s position before investing.