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).