Out to lunch

I haven't run out of ideas to discuss here. It is just that my "real" life is catching up to me and I will be swamped for the next couple of weeks. I will be posting again soon so please stay tuned!

Budgeting is a State of Mind -- how to start a financial budget

When most people think about budgets, they think – accounting and BORING.— Sure, it makes sense to budget but I have more important things to do than play with a bunch of numbers!

It is true that some budgets are quite complicated and boring. In my opinion, simple budgets are better. Complicated budgets are hard to comply with and frequently have adverse consequences. Want an example of budgeting gone wrong? Look no further than the Budget for the U.S. Government. http://www.gpoaccess.gov/usbudget/

The best budget is one the makes you aware of what you are earning and spending. The general goal is to earn more than we spend so that we are left with money to save and invest. You can start your budgeting process by following four simple steps.

1. Track – The first step in effective budgeting is keeping track of your earnings and expenditures on a monthly basis. There are a variety of ways to do this. You can set up a simple paper or computer spreadsheet register or use a software program like Quicken or Microsoft Money These two programs are very inexpensive and easy to use. They usually come preloaded on many personal computers so you may have a trial version available right now. Paying for most of your purchases on a debit card or credit card saves you the trouble of tracking those expenditures – just make sure you don’t charge more than you can pay off each month. Even if you are not ready to put pen to paper, I suggest you start to mentally track these items.


2. Evaluate – At the beginning of a month, compare your prior month actuals to what you estimated (of course you can’t do that in the first month). If there are differences think about why/how they arose? Was it a bad budget? Was there an unforeseen cost? Did you temporarily lose your mind? In the evaluation process you might also be surprised by the “unaccountable” funds. Was there a hole in your pocket? Probably not. What was more likely is that you got cash from an ATM and spent it like a drunken sailor. While comparing your actual to budgeted amounts may be a somewhat embarrassing process, remember, this can be done privately. This doesn’t need to be shared with others. The important thing is that you understand why the actuals were different than the budget.


3. Estimate – Use the information from the evaluation process to establish a budget for the next month. . It is important that the budgets reflect reality. Don’t budget only $25 for entertainment when you plan on going out every weekend. We only fool ourselves when we make up an unrealistic budget (why am I thinking about the Government again?)


4. Act – Use the estimate to focus your actions for the next month. Correct any behaviors that caused you to go off budget in previous months. For instance, if you found that any cash you had on hand just burned a whole in your pocket, try to avoid ATM withdrawals. Also, determine whether you want to make any modifications to your behavior (e.g., earn more or spend less). Some modifications (such as making more money) might require months, even years, to fully modify. Just make sure that you are taking the necessary first steps. Most importantly don’t continue bad behavior. If you are spending more that you earn, you need to fix that ASAP.

Budgeting is a continual process. One where practice makes perfect. It is understandable that you will make mistakes at the beginning. Just think about taking small steps forward. When I started budgeting all I did was simply make sure that I never spent more in a month than I earned. If I overspent in any one month, I cut back in the next month until I was back in balance. I kept track mostly by monitoring my bank balance -- there were no fancy software programs at that time!

Your budget will become more sophisticated over time. And, once you see how budgeting can improve your financial position, you will become more motivated to give it more thought. For instance, in my twenties, I began automatic investing as part of my budget. Once I saw how the funds accumulated, I was motivated to save more and spend less

Trying to establish a budget that is too complicated or too severe at the beginning will just turn you off from the process. Nobody was going to tell me not to spend my hard-earned money when I first graduated from college! In later posts, I will get into more of the mechanical process for setting up a budget (you can also go to the GE money budgeting website shown as the budgeting link below). For now, I just want to leave your with the thought, “I think, therefore I budget.”

A Hard Way to Make an Easy Living --making money playing poker

If you are reading this blog you are probably interested in getting rich. We all want to find the easiest and quickest way to get there. These days there is all this talk about how you can make a career out of playing poker. I googled “poker” and “career” and got 1,970,000 hits. Sounds an awful lot like the day-trading craze back in the dot-com era.

Yes, some people do make money playing poker. Just like some guys make money playing football or basketball. Most of us realize that mastering some athletic skill takes hard work effort and a certain innate ability. We give up our dreams of going “pro” at a very young age. If you are thinking that you can make money playing poker you need to recognize that, like professional athletes, very few people have what it takes to consistently win at poker.

Trying to make money at poker sounds too much like work to me. If you don’t think I know what I am talking about how about taking the advice of a successful poker player, Barry Greenstein? Here are some of the comments found on his web page http://www.barrygreenstein.com/

What advice do you normally give to someone starting on a poker career?

Normally, I advise people to put their energy into something more productive. I explain that I have played cards since I was a young child. I am a mathematician. I am well versed in psychology. I am very easy going, yet very competitive. In short, I believe I have the essential qualities to be a good poker player. But even with that, it has not always been easy.

Maybe it's the TV and participating stars, I don't know, but around here, poker seems to have captured a whole new generation in a big way. Junior high and high school kids are having big games routinely and it's far more widespread than I ever remember. Beyond TV, the popularity of the game has led to a lot of other forms of media attention, and now your book, which has all this potential for mass-market appeal that just wasn't there even five years ago. Any thoughts, any qualms, about how this came to be?

Televised poker is similar to reality TV, but poker players are really competing for a million dollars and are not acting. When people watch professional sports they may project themselves as being able to “play with the pros,” but they know it is a fantasy. Viewers of poker can think along with the players and really feel that if they had the opportunity, they might be one of the players at the final table. Many of the viewers actually play poker with family or friends at least a few times a year.

I am uncomfortable when teenagers ask me for poker advice, even though I played a lot of poker when I was in my teens. I have told my teenage son Nathaniel and my teenage nephew Michael that I will not teach them to play poker until they have completed their educations and have accomplished something productive.

Take it from one who has been there, a poker career is best considered after establishing yourself in some other profession.

What you are not going to find in all those articles about making a career out of poker is the dangerous downside. Google “poker” and “addiction”and you get 1,340,000 – almost as many as for poker careers. Very few people get addicted to playing football but the sad fact is that many get addicted to poker and other forms of gambling. There is a lot ofeducational materials out there about the dangers of drug, alcohol andtobacco. Gambling addictions are just as bad if not worse. My advice is to stay away from competitive poker to avoid any potential for addiction. Compulsive gambling is a sure way to ensure that you will NOT become financially independent!

LaunchPoker has a good article on poker addiction. If you are not yet convinced about the wisdom of my words, I suggest you read it. http://www.launchpoker.com/psychology/-poker-addiction-/ The article has the 20 questions taken from the official site of Gamblers Anonymous that ANY poker player should ask themselves at least once a year. These questions are provided to help the individual decide if he or she is a compulsive gambler and wants to stop gambling. If you answer “yes” to more than 7 of them – you have serious problems. And remember – its not a joke!

1. Did you ever lose time from work or school due to gambling?
2. Has gambling ever made your home life unhappy?
3. Did gambling affect your reputation?
4. Have you ever felt remorse after gambling?
5. Did you ever gamble to get money with which to pay debts or otherwise solve
   financial difficulties?
6. Did gambling cause a decrease in your ambition or efficiency?
7. After losing did you feel you must return as soon as possible and win back your
   losses?
8. After a win did you have a strong urge to return and win more?
9. Did you often gamble until your last dollar was gone?
10. Did you ever borrow to finance your gambling?
11. Have you ever sold anything to finance gambling?
12. Were you reluctant to use "gambling money" for normal expenditures?
13. Did gambling make you careless of the welfare of yourself or your family?
14. Did you ever gamble longer than you had planned?
15. Have you ever gambled to escape worry or trouble?
16. Have you ever committed, or considered committing, an illegal act to finance gambling?
17. Did gambling cause you to have difficulty in sleeping?
18. Do arguments, disappointments or frustrations create within you an urge to gamble?
19. Did you ever have an urge to celebrate any good fortune by a few hours of gambling?
20. Have you ever considered self destruction or suicide as a result of your gambling?

If you play poker please ask yourself these questions. If you answer yes on 7 or more please seek help by talking with someone you trust and/or contacting Gamblers Anonymous or some other gambling addiction treatment organization. Gambling is NOT the way to financial independence!

Are You Holding Your Breath? -- how investing in real estate fits into a financial plan

You may have noticed that none of my posts discuss “investing” in real estate. If you are waiting for a post on this topic I will politely tell you not to hold your breath. Buying and selling individual real estate properties for rental or “flipping” purposes is one topic I won’t be talking about.

Don’t get me wrong. As I will discuss in a later post, I strongly believe that everyone should own the real estate they live in – your house, condo, or trailer if that is what floats your boat. I also believe that a diversified real estate product such as Real Estate Investment Trusts (REITs), are an important part of any investment portfolio. Buying individual properties in an attempt to make money, however, is, in my opinion, an occupation not investing. A whole different animal that requires a whole different skill set. I am not knocking it (ok maybe just a little), it is just something I don’t do. If you are looking for “hot” real estate tips you have come to the wrong place.

I don’t invest in real estate because, frankly, I find it too much like work. Owning individual investment properties requires securing/retaining tenants (dealing with the inevitable vacancies and deadbeats) and maintaining/improving the property (I struggle enough with keeping my own house in order!). If you are going to “invest” in individual real estate properties you need to make sure that you are competent in these two areas – and that you enjoy that line of work.

There are additional risks related to investing in individual real estate properties such as concentration risk (putting all you eggs in one basket) and illiquidity (can’t get the cash out quickly). Additionally, such investments almost always involve leverage (debt). While leverage can provide better returns when values are rising, it works against you when values fall. Most of you weren’t around to remember how real estate prices crashed in the 1980s. Not to worry, you are likely to see that soon. As the October 11, 2006 Forbes article, “Where to Worry About Real Estate” notes, “Everyone knows the housing market is slowing; the question is how fast and how painfully.”[1]

For those of you that think there is free money to be had in real estate, I suggest you do your homework carefully. You will hear and read many stories about how someone made a fortune in real estate. You don’t hear, however, about the fortunes lost. The last real estate bust caused Donald Trump to declare bankruptcy in 1990. The Donald may have recovered personally but many of his creditors did not. To add further insult to injury, the Trump Hotels & Casino Resorts sought voluntary bankruptcy protection in 2005. Investing in real estate is not for amateurs. You might start doing your homework by reading The Key to Getting Stated in Real Estate Investing (Know Your Risks) by Dr. Steve Sjuggerud http://www.investmentu.com/realestateinvestmentadvice.html#key and “The real estate B.S. artist detection checklist” by John T. Reed. http://www.johntreed.com/BSchecklist.html


[1] http://www.forbes.com/home/realestate/2006/10/10/housing-bubble-metros-life-re-cx_tvr_1011restate.html

I Hire People to Do That! -- things you should know if you plan to use a financial advisor

Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.
Groucho Marx (1890 - 1977)

As hard as it is to believe, I do understand that some people just don’t like to think about money. Sure they want it but they want someone else to manage it. Nothing wrong with that. My only advice is to be careful who you hire. Anyone can call themselves a financial advisor, consultant, planner or whatever. Remember the simple rule that "you get what you pay for."

Perhaps the most direct question you should ask when engaging an advisor is “Why are they doing it? If they were really that good at managing money, wouldn’t they be too busy managing their own? I am always amused when I listen to analysts recommend stocks on CNBC and then proudly state that they don’t own any. Why would you want to take someone’s recommendation that has no financial interest in seeing how it turns out? Sure there are conflict of interest issues that need to be sorted out but I definitely subscribe to the “put your money where you mouth is” school of thought.

So, once you get past that hurdle, there are other questions that you should ask. These questions fall into four general categories:

• Compensation – how much do they charge, what way do they charge (hourly, flat fee, commission or combination) and who else pays them (beware of advisors that collect commissions or product placement fees)


• Qualifications – what makes them a good financial advisor? What licenses and professional designations do they have? What is their education and work history? Have they ever had complaints of disciplinary action taken against them?


• Products and Services – What exactly are they going to do for you? What services do they offer? What information will you need to provide? Do they offer a full range of investment vehicles or only those from particular companies?


• Performance – Many questionnaires leave this off but I think it is important. After all, that is the bottom line of why you are hiring them. I never bought into the logic that advisors could explain away bad results by bad markets. I want to see a proven history with accounts similar to mine. Further, the performance results should be in compliance with the CFA Institute’s Global Investment Performance Standards (GIPs). These standards are best practices for institutional investors. I see no reason why investment managers for the little guys can’t comply as well. The CFA Institute has a good 2 page article on evaluating investment portfolio performance that I would encourage you to read. http://www.cfainstitute.org/aboutus/investors/pdf/How_to_Evaluate.pdf

There are several questionnaires on the internet but I am not including links to any because, frankly, I didn’t find them to be that good. Perhaps in my free time I will put one together ;-). In the meantime I would use the list above. In addition, I would also ask to see the advisor’s ADV Form (or the state securities agency equivalent). This is an annual filing that is required by every registered advisor and provides useful information regarding their operations. You can read more about this form at this link. http://financial-dictionary.thefreedictionary.com/Form+ADV

Another simple rule to follow. Watch for hidden clues and body language. If the advisor is uncomfortable answering these questions or providing you with backup documentation, run don’t walk to the nearest exit!!!

What's in a Name? -- distinguishing amongst professional financial designations

Since I have started this blog, I have been surfing the investment sites on the internet. It makes me wonder whether the world really needs another blogging investment expert. We will find out won’t we? If anyone out there in cyberspace is finding my comments useful, I would appreciate hearing from you. I won’t promise to stop if I don’t hear from you, it just would be nice to know someone is listening ;-).

So who is worthy of your time? Call me biased but I do think that is important for financial writers/advisors to have some type of professional designation. Why else would I have worked so hard to get my CPA and CFA? I am sure that there are investment experts out there with no professional designations who are very good. The legendary investor, Warren Buffett comes to mind. Mr. Buffett has no letters after his name – just a whole lot of zeros! He does however have a Masters from Columbia University and was the protégé of the Benjamin Graham, the father of value investing. My point is that acquiring a professional investment designation shows a certain level of competency and dedication to the subject. If your advisor doesn’t have a designation, you need to do further research to make sure that he/she exhibits Buffett-like qualities.

OK. We’ve established the importance of professional designations now comes the hard part. Which one? The International Association of Registered Financial Consultants (IARFC) reports that as of January 2005 there are 89 designations, certifications and degrees and 87 financial services associations and professional institutions. If you want to torture yourself, you can read a little of each on IARFC’s web site. http://www.iarfc.org/content_sub.asp?n=64

In my, albeit bias opinion, there are three that merit special attention – CFA, CFP and CPA for generalist investment knowledge. I have shown the description from the IARFC’s web site for these designations below.

• CFA Chartered Financial Analyst. Has completed three comprehensive exams on ethics and professional conduct, securities and portfolio management and investment valuation offered by the CFA Institute (formerly Association for Investment Management and Research - AIMR). Candidates must also meet reference, ethics and work experience requirements. There are over 30,000 CFA charter holders worldwide.


• CFP Certified Financial Planner™. In the U.S. a Certified Financial Planner professional who successfully completes the CFP Board of Standards comprehensive examinations and meets ongoing certification requirements. CFP is an internationally recognized designation held by over 55,000 people in 13 countries, although there are some differences in the accreditation process outside of the U.S..


• CPA Certified Public Accountant. Has met educational qualifications, such as a bachelors or masters degree in accounting, passed four state-certifying examinations and met experience qualifications in the area of public accounting. CPAs are licensed individually by state and can hold licenses for more than one state at a time. An approximate number of CPAs is 600,000 with 55% of them being AICPA members.


• CPA/PFS Certified Public Accountant - Personal Financial Specialist. A designation awarded by the AICPA to accountants who have completed additional study and examination requirements in personal financial planning.

A financial advisor that possesses one of these designations should have some level of knowledge in financial matters -- but -- a designation (or two) is not a guarantee of expertise. Just as I shudder to think about some of my college classmates that are now surgeons, there are many CPA, CFAs and the like that are not worth a lick. You still need to determine each individual’s competency based on their character and performance. In my next post, I will discuss the types of questions that you should be asking your advisor to assess these traits.

Investing Basics

I have been searching around the internet for some good articles on investment basics. Imagine my surprise when I came across an article from the SEC (yes, the government agency) that was pretty good. In fact, it covers all the key points in just a few pages in plain easy to read words. Today is a good day as I see that some of my tax dollars are going to good use!

I would encourage anyone interested in investing to start with this article. http://www.sec.gov/investor/pubs/assetallocation.htm. My cliff notes version and comments from the peanut gallery are below:

Key Factors – the two key factors to consider when investing are what is referred to as the investment time horizon and the investors risk tolerance.

• Time Horizon – how long you plan to invest. In general a longer time horizon means an investor can have a riskier more volatile investment portfolio.


• Risk Tolerance –the investors ability and willingness to take losses on his portfolio is an important factor that should be identified prior to investing. Risk and reward are inextricably entwined. If you want higher returns, you need to recognize that you will need to accept higher risks (read losses)

Investment Choices – there are three broad classes of assets that are typically considered part of an investment portfolio – stocks, bonds, and cash. In addition there are other category specific investments (such as real estate) that might also be included in a portfolio. In my opinion these other categories should only be invested in after the investor has meaningful investments in the three major classes. I know many of you are wondering why I think this way because real estate is (or was) all the rage these last several years. I will write another post later on the appropriate place for real estate in your portfolio.

• Stocks – highest returns and highest risk. There are subclasses within the stock category, with varying degrees of risk. The broadest of these subclasses are U.S. large cap, U.S. mid cap, U.S small cap and foreign stocks.


• Bonds – bonds are generally less volatile than stocks and thus offer lower returns. Bonds are highly influenced by interest rates so their value will vary with movements in the rates (which is why bond traders pay close attention to the Fed). Subclasses of bonds include government bonds (lowest risk), corporate bonds (with risk related to the issuers credit rating) and foreign bonds (which have the added risk of foreign currency)


• Cash – the safest of the asset class but also the lowest returns. Cash portfolios are not likely to outperform inflation over long periods of time.


• Other – this class includes (real estate, precious metals and other commodities, and private equity. In my opinion, these asset classes should not represent a significant portion of a beginning investors portfolio (except of course the real estate that you plan to live in)

The initial decision that an investor needs to make is determining which asset classes to invest in. This is called “Asset Allocation” and will be determined largely based on the investors time horizon and risk tolerance. The SEC sites has a link to an asset allocation calculator offered by the Iowa Public Employees Retirement System. http://www.ipers.org/sub/calcs/AssetAllocator.html Imagine that, another good product from a government institution. Try it. I think you will find it useful.

The SEC article introduces two other important investment concepts – diversification (which I talked about in yesterday’s post) and rebalancing (maintaining the appropriate asset allocation).

Chomping at the bit? -- how to start an investment portfolio

Most of my posts so far have been about debt. This post is for those of you out there that are thinking “enough already, I want to get on to investing.” We will be talking a lot about investments in later posts. The main issue with starting with investments is that you need money to invest (at least $3,000 in most cases). It is also hard to start with investing because there is a lot to learn in order to invest successfully. For those of you chomping at the bit I want to show you how to get started. I want to provide you with a simple, low risk (note that this does not mean NO risk) method for investing small amounts. Putting myself in your shoes, I am seeing that this may sound easier than it is. I have just spent several hours researching this topic on the internet. There is a ton of information on investing for beginners but none of it is presented in a concise manner. So, here is my attempt.

1. First, take advantage of any tax deferred plans offered by your employer – if your employer has any saving plan you should first invest in this. Not only are taxes deferred on many of these plans, but many employers match contributions. This match almost guarantees that you will earn more on these investments that you earn elsewhere. The issue is that there are restrictions as to when withdrawals can be taken from these plans so you need to know the rules. While I started investing in these plans, I quickly moved to other investments because I knew that I wanted more access to my funds. To get the best of both worlds, you will likely need to invest more – this requires strong discipline in delayed gratification which you may or may not aspire to. As a student, this may not be an issue for you so we can move on.


2. Invest in an index rather than individual stocks – study upon study shows how very few investors – professional or otherwise – are able to outperform the market. Standard & Poors reports that “actively managed mutual funds underperformed their relative S&P benchmark in 8 of 11 general domestic equity styles during the first half of 2006.”[1] When you start out, you have the added disadvantage of having limited funds which would result in inappropriate concentration. While stock pros like Warren Buffett have the appropriate skills to make concentrated bets, diversification is an important tool for the beginning investor. Don’t worry. Once you have accumulated some knowledge and funds, we will move on to investing in individual stocks. To start, however, stick to the index funds.


3. Dollar cost average – don’t you hate it when you buy something and then find it on sale a week or two later? Dollar cost averaging means that you make systematic investments at over time rather than all at once. This reduces risk and helps to establish a good habit of saving. Just as the pinch of tax payments are lessened as they are taken from your check before you see it, making an automatic investment on pay day helps you to think of this money as unavailable.


4. Invest only those funds that intend to keep invested for at least five years – we are talking about investing not gambling (that will be a subject of another post). Investing in a diversified portfolio over an extended period of time should result in a fairly predictable return. Most studies will show you that you can expect to earn 8% to 12% on large cap U.S. stocks over a 5 to 10 year period. If you want more information on historical returns, I suggest that you read an interesting article from TAM Asset Management, Inc.[2] This return is only expected over long periods of time. There are years that you could lose up to 20% of your investment. Since, no one can predict up and down years, it is important to keep this money invested for the long term.


5. Minimize expenses – the nasty hidden secret is that many investor returns are eaten up by expenses. Keeping expenses to a minimum helps avoid that. This is also a topic for another post. For now, I will just tell you that, in my opinion, you should never invest in a fund where expenses are greater than 1%.


6. Restrict initial investment to large cap U.S. securities that is a blend of the value and growth styles – Investing in large cap securities should result in performance that is consistent with the U.S. economy. While other asset classes are sexier and could result in higher returns, they also involve more risk. To start, it is better to investment in the broad market.


7. Make sure that you keep some funds in cash or other low risk investments – investing in stocks involve risk and it is important that you plan on keeping these investments for a long period of time. Accordingly, it is important that you only invest funds that you will not need for the short term. You need to think about you day-to-day expenses as well as maintaining a “rainy day” fund.


8. Know what you are investing in – It is important to know what you are investing in. While I am attempting to provide you some useful information, it will be important for you to do your own homework.

Based on these pointers, I found a few funds that you might want to look at. If you are interested in investing in one of these funds, I would suggest that you go to their web site for further information.

			# of	Price as of		Expense	5 Yr Total	Minimum	Investment
Mutal Fund Name	Ticker	Style	Stocks	11/24/06	Yield	Ratio1	Return	Initial	Subsequent
Vanguard 500 Index	VFINX	Large/Blend	513	$129.38	1.65%	0.34%	7.13%	$3,000	$100
T. Rowe Price Equity Market Index	POMIX	Large/Blend	1,849	$15.35	1.20%	0.80%	8.53%	$2,500	$100
Schwab Inv 1000 Index	SNXFX	Large/Blend	990	$41.25	1.13%	0.72%	7.70%	$2,500	$500

1 Expense and Management Fee

Source: Standard & Poors Mutual Fund Reports

Data quoted represents past performance. Past performance is not an indication of future results and investment returns and prices for exchange-traded funds will fluctuate. Your investment may be worth more or less than your original cost at redemption. Current performance may be lower or higher than the performance data quoted. Before investing you should consider the appropriateness of this investment based on your individual circumstances. You should also obtain updated information regarding this investment from sites such as http://finance.yahoo.com or https://us.etrade.com and obtain and read a copy of the investment's prospectus.

There may be some of you out there that don’t want to wait until you have $2,500 to $3,000 to invest. While I think it is generally better to wait, I don’t want to discourage anyone. My opinion is that we learn the most when we have a vested interest. Another way to invest is to invest using ETFs or Exchange Traded Funds. These funds trade like stock and you can buy them through an online broker. Kiplinger Personal Finance’s latest ranking of online brokers[3] named the following as the top brokers for accounts of $50,000 or less:

Kiplinger Ranking of Best Brokers for $50,000 (and less) accounts1. OptionsXpress
2. Muriel Siebert
3. Wells Fargo
4. Firsttrade
5. Fidelity
6. Vanguard
7. TradeKing
8. Schwab
9. E*trade
10. Scottrade

I have listed a few ETFs in the chart below that should be appropriate to start your investment portfolio. While these funds provide essentially the same performance as the index funds and expenses are typically lower, the issue is that you are charged a commission every time you buy an ETF. Even with low cost brokers, commissions are likely to be between $10 and $20 a trade. This adds considerably to your cost. The upside is that you can start you investment with much less than $2,500. You can buy at little of one share but you must remember the commission cost.

			# of	Price as of		Expense	5 Yr Trailing
ETF Name	Ticker	Style	Stocks	11/24/2006	Yield	Ratio	Returns
iShares Dow Jones US Total Market Index	IYY	Large/Blend	1,629	$ 68.33	1.52%	0.20%	6.75%
iShares Russell 3000 Index	IWV	Large/Blend	2,959	$ 81.39	1.50%	0.20%	6.95%
iShares S&P 100 Index	OEF	Large/Blend	100	$ 65.38	1.55%	0.20%	3.69%
SPDRs	SPY	Large/Blend	500	$ 140.35	1.69%	0.10%	5.71%
Vanguard Total Stock Market	VTI	Large/Blend	3,764	$ 139.31	1.66%	0.07%	7.53%

[1] http://www2.standardandpoors.com/spf/pdf/index/071906_SPIVA_pr.pdf
[2] http://www.tamasset.com/pdf/assetclass/may06ac2.pdf
[3] http://articles.moneycentral.msn.com/Investing/Extra/TheBestOnlineBrokers.aspx

Just DON"T do it! -- how to use credit cards properly

http://www.bichons.btinternet.co.uk/bichon.htm

If You Find Yourself in a Hole,

Stop Digging!

(Will Rogers)

In celebration of the busiest shopping day of the year, I thought we might talk a bit about credit cards. I hope I am not the first to break it to you but credit cards are NOT free money! Here are some “fun” facts about college students and credit cards from a Nellie Mae report:

• 76% of undergraduates in 2004 began the school year with credit cards; 56% reported obtaining their first card at the age of 18.
• The average outstanding balance on undergraduate credit cards was $2,169.
• 21% report paying off all cards each month; 44% say they make more than the minimum payment but generally carry forward a balance; 11% say they make less than the minimum required payment each month. [1]

While I cringe at the average balance and the high percentage of students that don’t pay off their card each month, I need to remind myself that reality is probably even worse than this. These statistics are just for students applying for student loans. The statistics on the general population would probably show higher balances and poorer repayment patterns.

Carrying a balance on a credit card is one of the easiest ways to ensure that you never achieve financial independence. Paying only the minimum balance or less will mean that you will always be paying the highest rates. Funny how no one told you this as all those offers for credit cards were rolling in. While credit cards can be a wonderful thing, the sad fact is that too many young adults have to learn a painful lesson before they properly manage their credit cards. Take heart, however. By absorbing this lesson early in your credit life, you will be way ahead in the game. Many Americans never learn this lesson and that is why they continue to work for their money rather than have their money work for them.

In a later post, I will discuss how you can work yourself out of high credit card debt. The lesson for today is just “stop digging the hole any deeper.” If you can’t pay off the balance on your card, don’t use it again until the balance is paid in full. You really don’t have to do any fancy budgeting. Sure this may mean that you have to wait to buy stuff but delayed gratification isn’t all bad. As shown in the famous marshmallow test, the ability to wait has a positive impact on where you end up in life. http://ezinearticles.com/?Delayed-Gratification-and-Money-(or,-Marshmallows-and-Your-Financial-Health)&id=237818 As Morgan James notes “When you go to spend your money, think about the Stanford Marshmallow Test. Then think about how many marshmallows you could buy if you delayed your gratification.”

In my opinion credit cards are not about buying things before their time. Card credits should be paid off in full each month. So why use them you ask? The primary benefits of credit cards are that they:

1. Help you establish credit.
2. Allow you to take advantage of specials (e.g., airline miles, cash-back).
3. May provide insurance/protection for your purchases.
4. Provide a tracking of your purchases.
   
   
   [1] http://www.nelliemae.org/library/research_12.html

Got Credit? -- tips for establishing good credit

A bank is a place that will lend you money,

if you can prove that you don't need it.

Bob Hope

Good credit is one of those funny things in life. The better your credit is, the less likely you are to need or use it. One of my “lessons in life” is to borrow cautiously. Knowing when and how to borrow is an important skill that you will need to become financially independent. While I don’t encourage you to have a lot of debt, I do encourage you to establish a good credit record early in your life. There are three key reasons for this. Establishing good credit:

• Helps you to get the best possible terms when you do borrow.


• Teaches you important money management skills.


• Is an important character reference. Rightly or wrongly, employers, landlords and others will look at your credit as a measure of how responsible you are.

Liz Pulliam Weston has a good article on MSN Money that list 9 ways to build a killer credit score[1]. She notes that “if you’re just starting out, you have an once-in-a-lifetime opportunity to build a credit history the right way.” While I encourage you to read the entire article, I will summarize the 9 points below:

1. Check your credit report – while you may not think you have a credit report, it is possible that your information has been confused with someone else or that you have been the victim of identity theft. It also serves as a reference point and helps you understand the rules of the game.


2. Establish checking and savings accounts – these should be established as early as possible as lenders see them as signs of stability.


3. Understand the basics of credit scoring – the two most important factors used in credit scoring are on-time bill payment and keeping well within your available credit limits (use only 30% of your available credit). Also, pay off the entire balance. Carrying a balance IS NOT a key factor in building your credit score.


4. Piggyback on someone else’s good credit – this is a good strategy in certain circumstances especially when you are finding it hard to get credit yourself. Personally, I would only use this on a limited basis, if at all. You need to make sure that whoever you are piggybacking really does have good credit and that the issuer reports the history on authorized users to the credit agencies.


5. Apply for credit while you’re a college student – I probably don’t need to tell you how anxious lenders are to give you a credit card while you are still in school. Take advantage of this but remember to pay off the balance each month. When you don’t carry a balance, it really doesn’t matter what interest rate applies to the card.


6. Apply for a secured credit card – this is another last resort method to build credit when you can’t get credit any other way. Secured credit cards is basically using your own money as you are required to deposit money with the lender and your limit is usually this deposit. If you take this method, you need to make sure that the fees are low and that your credit history will be reported to the credit bureaus.


7. Get a finance company card – gas companies and department stores are usually easy to qualify for. You should apply for more than a few of these and again you need to make sure that you pay off the balance each month.


8. Get an installment loan – once you have a few years of credit card management under your belt, you should obtain auto loans, personal loans and mortgages. Credit scores are based on a mix of credit so it is important to develop a history on these credit types along with credit cards.


9. Use revolving accounts lightly but regularly – to maintain your credit score, you should have some activity in your account at least every six months.
   
   [1] http://articles.moneycentral.msn.com/CollegeAndFamily/MoneyInYour20s/9waysToBuildAKillerCreditScore.aspx?page=1

Giving Thanks

I was a little too busy cooking to post this message on Thanksgiving but I didn't want to let the opportunity pass without my giving thanks. I recognize that I was one of the winners in "The Ovarian Lottery," a term coined by Warren Buffett. I am truly grateful for being born at a time and in a country where I have the opportunities and freedom to pursue my dreams.

Warren Buffett frequently talks about the Orarian Lottery. I have heard him speak about it at the Bershire Hathaway Annual Meetings. Blogger Darren D. Johnson provides a nice summary of Mr. Buffett's comments on this subject. I am reproducing Darren's post below:

Be Grateful -

There are roughly 6 Billion people in the world. Imagine the worlds biggest lottery where every one of those 6 Billion people was required to draw a ticket. Printed on each ticket were the circumstances in which they would be required to live for the rest of their lives.

Printed on each ticket were the following items:- Sex-Race- Place of Birth (Country, State, City, etc.)- Type of Government- Parents names, income levels & occupations- IQ (a normal distribution, with a 66% chance of your IQ being 100 & a standard deviation of 20)- Weight, height, eye color, hair color, etc.- Personality traits, temperment, wit, sense of humor- Health risks

If you are reading this blog right now, I'm guessing the ticket you drew when you were born wasn't too bad. The probability of you drawing a ticket that has the favorable circumstances you are in right now is incredibly small (say, 1 in 6 billion). The probability of you being born as your prefereable sex, in the United States, with an average IQ, good health and supportive parents is miniscule.

Warren spent about an hour talking about how grateful we should all be for the circumstances we were born into and for the generous ticket we've been offered in life. He said that we should not take it for granted or think that it is the product of something we did - we just drew a lucky ticket. (He also pointed out that his skill of "allocating capital" would be useless if he would have been born in poverty in Bangladesh.) http://darrenjohnson.blogspot.com/2005/04/wisdom-of-warren-buffett.html

Just Do It! -- how to start saving

Sometimes it is hard listening to "older folk." I know many of the things told to me in college went in one ear and out the other. So, I won't be surprised if you just skip over this. Try, however, to give it a few minutes thought.

Many of you in college are thinking that money is tight. It is hard to get enough cash together to pay for the happy hours, Starbucks and -- horrors -- cigarettes! There will come a time when you are likely to look back at your college days and see how much you could have saved if you had focused on it. This is especially true if you are one of those "failure to launch" types that is still living at home.

The hardest part is just getting started. I would challenge you to set a goal today of trying to save just $50 to $100 a month. How hard would that be? It might be as simple as giving up your daily Starbucks fix ($5 day x 20 days a month). The 50 bucks is for those of you that can't give it up completely and need to do every other day. Give up cigarettes and you free up a lot of loose change! Happy hours are a very personal thing so I will leave it up to you to decide whether you can free up any funds there.

The next step would be to open up an account to accumulate these funds. A saving account at your local bank might do (make sure you understand any fees). While I am not recommending any particular firm (and am taking no money from them), I might suggest you look at E*trade bank or any other bank that has a similar deal. E*trade allows you to open up a saving account that is currently earning about 5% with $1. That is right -- one dollar! You can also set up an automatic monthly transfer from your main bank account. That automatic thing is quite important because it keeps you focused once the initial willpower wears off and you are hankering for that Starbucks. Here is a link to the description of the E*trade account. https://us.etrade.com/e/t/home/completesavings?_skinnertab=bank I like E*trade because it sets you up for the next step -- investing. Please remember that this is only a suggestion. Do some more research about other brokers and banks and pick the one that is right for you. The important thing is to get started.

I want to keep this brief (so that you will read this!). Motley Fool has a FREE online seminar that shows you how to get started in greater (and better) detail. I suggest you take a look at it.

http://www.fool.com/seminars/sharebuilder/index.htm?sid=0008&lid=000&pid=0000

Balancing a Budget -- There are only two moving parts

If you want to be financially independent the math is simple -- you need to make more than you spend.

In a later post we will discuss how you can make your money work for you but that is hard to start with when you have no money. So first things first, you need to think about your intended lifestyle. It is easier to focus on how much you plan to spend (we have been doing that our whole life!). Once we know that, we can target how much we need to earn in a salary to support this life style. Knowing what we need to earn should help us decide on a career.

Our chosen career should help us select a major. Of course, you want to do something that you enjoy, but you need to understand the financial implications of your choice. For example, I always wanted to be a teacher. My mother (who was a teacher) recognized that this was a low paying job and encouraged me to consider other careers. I choose accounting since I enjoyed math and knew I could get a good job when I graduated. I didn't give up on the teaching though. Throughout my career I have used my teaching skills -- presenting a seminars, training staff even this blog!

So many students pick majors without really knowing what the payoff will be. To empower yourself you need to educate yourself. Here is a good web site that discusses careers, salaries and majors. http://www.studentsreview.com/choosing_career.php3

Paying Cash for Your Car

One of the first rules I learned in money management is to limit debt to "good debt." In my opinion the only good debt is 1) a reasonable mortgage on your house/condo (less than 90% with no fancy interest only options), 2) debt for your education 3) loans for serious health matters and 4) loans on your first two cars. That's right. By your third car you should be paying cash. How is that possible? It is all about the term of the loan and the expected time you plan to use your car. You should always plan on using your car for twice the term of your loan. If you have a three year loan you should plan to use your car for six years. Four year loan requires an eight year use of the car. Five years -- plan on driving that car for 10 years. Then what? Once you pay off the loan continue to make payments to yourself (set up a special saving account for this). When you are ready to buy your next car, the funds will be available for a larger downpayment. Do this twice and you should be able to pay cash for your third car.

That is it. It really isn't rocket science. If anyone wants to see the math I will post that later. Of course sticking to this rule means bucking the materialistic trend and tuning out all the new car advertising. But, is it really that much of a hardship to drive a six year old car? Think about it. Would you rather be driving the new ride each year or being financially independent?

How about car leases you ask? Well I am a CPA and CFA and find most car leases difficult to understand. I can't be bothered to take the time to figure them out but I know that the lenders are looking to get paid. There has to be fees and interest embedded in them somewhere. In my opinion it is easier to stay away from leases unless you really understand them. Prior to signing a lease ask yourself the simple question, "are you prepared to take a quiz on the terms of the lease?"

Seeking Comments

Please respond to this post with any questions you want to see addressed relating to money management. I will use this to prioritize my comments over the next month or so.

Thinking About Taking Your Lender's Offer of a Skipped Payment? DON"T!!!!

Many credit card companies and lenders offer you a "deal" to skip a payment. This is a good article showing why this is such a bad idea.

http://secure.agoramedia.com/newsletters/viewissue.asp?nlid=11&email=k_rubsam@MSN.COM&d=B6A1E9E1FC6154692BBC

A word about comments

Most of my posts will allow reader comments as I want to know what people are thinking on that topic. This post is a test post that doesn't allow reader comments.

New Book -- Why We Want You to Be Rich

I just picked up the new Donald Trump and Robert Kiyosaki (Rich Dad, Poor Dad) book entitled "Why We Want You to Be Rich."

I haven't read the whole book yet but I think it will have some interesting comments. The introductions states:

"The rich are getting richer, but are you?

"We are losing our middle class, and a shrinking middle

class is a threat to the stability of America and to the world

democracy itself. We want you to be rich so you can be part of

the solution . . . rather than part of the problem."

Chapter 21 is titled: "I am Still In School, What Should I Do?" Some of the key points:

Robert

• If you're in high school or younger -- focus on having fun.
• If you are growing up in a family who think wanting to be rich is bad, even evil, keep quiet. Find friends that think like you.
• If you have a supportive family take them along for the journey.
• Remember to be kind and respectful to all kids and not be a snob.
• Take time to learn from your mistakes rather than trying to avoid making mistakes.
• Two great exercises -- prepare a budget and learn how to make money with money.
• Seek out a mentor/apprentice relationship.
• Complete your education
• Study accounting and business law (that doesn't mean you need to become an accountant or lawyer!)
• Understand cash flow

Donald

• Raise the bar on yourself. Never settle for doing "enough."
• Keep up with current events worldwide.
• Do not neglect your life skills.
• Spend some time on your focus.

It seems that they cover many of the points that I plan to talk about here. While I can't recommend the book yet since I haven't read it all, it might be something to take a look at. Stay tuned!

Welcome

Hi and welcome to my blog. I am starting this blog as I want to share my knowledge on financial matters with young adults to help empower them. When you stop worrying about money, you can start focusing on the things that really matter. The earlier you learn this lesson the happier your life will be. I will be posting on some of the issues that I think are important like budgeting, credit card management, car loans, student loans as well as saving and investing. My first challenge will be determining what you want to hear so I welcome your posts to tell me other discussions that you might like to read about.

I will start this blog by identifying some of Lessons to Live By:

1. Find good teachers and mentors
2. Become financially literate
3. Budget & understand your income and expenses
4. Pay yourself -- Save 10% of your earnings
5. Borrow cautiously
6. Invest prudently
7. Be charitable to the less fortunate