Survival of the Fittest
September 30, 2011 by admin · Leave a Comment
As hard as we try to control our environment, the reality is that things are always changing; things that are beyond our control. Adaptability becomes the great separator between surviving well, getting by, and being destroyed. How we choose to move forward, and how well we anticipate and adjust to circumstances makes all the difference to the outcome. Those things we do control. Survival mode isn’t a bad thing; it actually forces us to be more creative and look at our challenges with urgency (and perhaps, a fresh eye). Consider examining your worries and see what creative solutions you can come up with. Be an active participant in your life, and don’t wait for the ceiling to come crashing in before acting. Anticipate well and make your move before you need to, in order to strengthen your chances for success. Here are some actions you can take now:
Increase Job Security. One of the greatest fears in a weak job market is being laid-off. In addition, there are jobs that are being exported overseas. Worrying and complaining about this won’t change the situation. Take this time to formulate a Plan B, and be wise to the writing on the wall. If your job (or your spouse’s job) is always dangling by a thread, it’s time to look at the skills acquired and the contacts made. Can this experience translate to another industry? For example, an unemployed teacher might pursue a career as a corporate trainer, which requires the ability to communicate and instruct.
Consider freelance or consulting opportunities available (provided your employer doesn’t forbid this). Would an investment in more education or training improve your job prospects? Is there a side business that can be started with little or no capital (ideally, that would allow you to keep your full-time job)? Maybe you have been itching for a change and want to explore a passion. Or, maybe you see a need that isn’t being filled in the market right now. Again, use the experience and skills you already have to turn this into something profitable. Brain storm, and write down everything you can think of, no matter how far-fetched it may seem. You may end up with a clear idea of where you should be personally and professionally.
Tap Resources. Local colleges and universities and libraries have education and job placement counseling. There are small business development centers that offer free mentoring to start-ups, including assistance with fleshing out your idea, developing a business plan, marketing and management issues. Career Zone and Job Zone can help you match your talents with prospective careers. There are resources for retired/mature workers looking to transition back into the workforce. Women and veterans have agencies dedicated to working with their needs. The Small Business Administration, SCORE, and the US General Services Administration are some websites to explore.
Work Hard. This sounds obvious, I know. But, how we invest our time has a lot to do with our success. Two hours of television watching could be better spent planning a new business, or going to school to get additional training. Of course we all need to unwind and recharge, but find the time to invest in getting “fit” for the challenges that may lie ahead.
Budget Wisely. A budget is only as good as the information you put in it. That is why you have to keep track of everything that you spend and everything that you make. Only by tracking every little expense can you see where the “fat” is. Saving/investing must be a line item in your budget. Make room for it by cutting unnecessary expenses. Every month, you should aim to put away at least 10% of your income (more, if you can). If you are contributing to a retirement plan at work, this money would count toward the 10%.
Refinance. With fixed mortgage rates at unbelievable lows, you can immediately improve your cash flow by refinancing. The key here is to pocket the difference, not spend it. This money should be used to fully fund your retirement, or to build up the emergency fund. If you are branching out into a business, some of these funds can be used in that manner. This money should strengthen you, and not be used to buy more stuff.
Pay Down Credit Card Debt. Get healthy and shed as much of this debt as you can. You should aim to pay off more than just the minimum and look to consolidate the debt to one lower rate card. Talk to your card company and try to negotiate a better rate. If you still have high rate cards, be sure to pay them off first. Of course, stop using credit cards for any new purchases.
Delay. Again, if you are nervous about job security, or debt is creeping up on you, put off purchasing anything you don’t really need. Don’t eat out, don’t go on a vacation, don’t buy a new car, don’t indulge in anything that you would consider something you want (a manicure) versus a need (an annual check-up).
Difficult times provide a chance to examine your life and to truly grow and benefit from the experience. Preparing for survival mode will strengthen you and, more important, give you confidence when you do rise to the occasion. Suddenly you will see possibilities that otherwise you might have never considered. Growing pains aren’t easy to bear, but they are necessary for survival.
Making Your Own Luck
September 22, 2011 by admin · Leave a Comment
“What’s your goal?” My husband’s question was simple, but I didn’t know if I should bother to share my complete answer, because it seemed unreasonable.
We hadn’t started our family yet, which was a goal of ours. But I wondered if winning Lotto was the only ticket to my other dream: to be able to stay home with our kids for as long (or short a time) as I wanted. Back then, my earnings were almost five times his salary and I doubted we could sustain ourselves on his take home pay alone, especially with the added costs of a baby. Sharing this thought with him might have made him feel badly; instead it motivated him.
”That’s it? That’s the goal?” Tony said, as if he had known it all along. “OK, give me some time, I’ll figure it out.”
I had it drummed into my head from friends and colleagues around me, who were enslaved to the double-income household: “There’s no way you can live on one salary – especially a teacher’s salary.”
Quietly I worried that I had given him a goal that was not within reach. I thought, maybe I could stay home for a year at most. I even started to accept that option, if it came to that. Thankfully, it never did. The more naysayers there were, the more determined he was to make a viable plan.
Stock piling became the first part of the strategy; generating investment income was the other component. We lived as if his salary was the only income we had, and aggressively saved and invested my salary and bonus. That is not to say that we didn’t enjoy ourselves. We made time for some travel; we ate out at restaurants within reason – but the savings/investing came first; what was left over was ours to play with. We put off starting a family until we felt we were on solid ground.
An interesting thing happened along the way. We had the opportunity to buy a small cabin in New England for a great price; it was very tempting and we came close to doing it. It was affordable based on our total income; but ultimately it would have taken us off our goal. When another opportunity presented itself — to move farther from New York City (where I worked) to an area we loved and where we wanted to raise our family– we struggled with the idea. I didn’t want all our savings/investing to dry up because this house was more expensive than the one we were living in. After careful consideration of all the numbers, Tony figured we could swing it, provided I was still willing to commute an extra 2 hours each day until we started our family. With trepidation, I agreed.
Then we faced a series of unexpected events. For starters I became pregnant and soon we found out we were expecting twins. Almost immediately, I ended up on bed rest. Short-term disability gave way to long-term disability, which was less than my salary (although I wasn’t spending any money commuting). When our sons arrived a full two months early, we were stunned. After more than two weeks in the neonatal intensive care unit, they were released to come home – but with all sorts of equipment (like an apnea monitor to detect the cessation of heart beats or breathing and caffeine to keep the heart beat rate up). To add to all this tension, I had used up all my leave and was due back almost as soon as the boys came home from the hospital. I still can’t say how I would have been able to leave my babies under those circumstances – or who we would have asked to take on such a grave responsibility. I am just so thankful that Tony thought to ask the question about my goals – and that I dared to utter it out loud. Otherwise, our backs would have been against the wall.
Many times, there isn’t one right way to reaching a financial goal. Sacrifices, compromises, and non-negotiable items differ by household. The point is the goal kept us focused and shaped all the decisions we made – we passed up opportunities to spend our money in favor of getting us closer to what was our top goal. Most important, had we not planned this out, I would have been headed back to my four-hour roundtrip commute; our preemie babies occupying my every thought. Some call it luck – but I know Tony’s careful planning and our commitment to reaching our (seemingly unreachable) goal had a lot to do with the blessings that came our way.
The financial wisdom I would like to impart is: Don’t be afraid to look at your dreams – even if they seem impossible to reach. Instead of thinking about why you can’t get where you want to go, ask how you might get there. Do this, and down the road, you may find yourself being referred to as the “lucky one”.
Keeping a Cool Head Can Mean Money
June 25, 2011 by admin · Leave a Comment
You’ve heard it before: Don’t let emotions get in the way of business. Well the adage holds true for investing, as well – probably even more so. It seems easy enough to do, but when you see the value of your savings falling like a botched Martha Stewart soufflé, your first instinct may be to sell, sell sell! But acting out of emotion can often be the worst thing you could do when it comes to investing. Here are some tips to prevent sabotaging your financial well-being.
- Make sure you have a specific financial goal (or goals) with a specific time frame in mind. Sounds pretty basic, right? It may be, but the trick is to really give this some serious thought. Very rarely are you saving for just one thing at a time. Most of us are saving for retirement, future college costs, and near-term goals like buying a new car or house, a home remodeling project, or planning a big vacation. The way you invest for a short-term goal is very different from the strategies you would use to meet a goal that may be 30 years away, like retirement. Long-term goals require growth provided from stocks (equities), because you will need the money to outpace inflation. If you put your retirement savings into CDs, after thirty years, your investment would be worth less than what you put in because inflation would have reduced its purchasing power. Short-term goals require stability, because you plan on using the money soon. If the stock market has a set-back, you can loose a substantial amount of your investment in an eye-blink. Therefore, CDs, money market, or even short-term bonds would be a good choice for a shorter investment time frame. When I hear people say they want to make as much money as fast as they can – they need to know the reality is that the inverse holds true for that investment, as well. If an investment can move up in value rapidly, it is volatile and it could just as easily (and swiftly) move in the opposite direction.
- Diversify your investments. Yes, stocks are for growth and bonds, money markets and CDs are for income, but having a mix of investments can really protect your investments from times when the stock market may be volatile, or times when rates on CDs or money markets are anemic. Alternative investments, as a group might be risky, but when added to a portfolio (and combined in very specific percentages) can actually reduce a portfolio’s overall volatility.
- Start as early as you can, and invest regularly. The earlier you begin investing for your long-term goals, the better, because time is on your side. As your investment grows, you can take advantage of compounding, which is when you take whatever income or gains from an investment and buy more shares. Investing regularly is another good strategy, because it helps remove emotions from investing. By treating investing like a bill to pay every month, you stop thinking about how else you could spend the money. Over the years, the money adds up and one day you look at your balance, and you can’t believe how painless it was to actually save. Most mutual fund companies will even link payment to your bank so every month your bank account will automatically be debited and you won’t ever need to remember to write out and mail a check. There is also another big advantage to making regular fixed investments every month: it is called dollar-cost averaging. Because there may be some months when the price of a fund is lower than other times, you will buy more shares, and during the months when the price is higher you will buy fewer shares. The price, in effect, gets averaged out over time. It helps protect you from sinking all of your money into an investment on a day that may happen to be a high. Yes, this also means that you will not be buying on the absolute lowest day, either. But, since the market is impossible to time, this is the most logical (unemotional) way to invest, not to mention it puts an element of discipline into your commitment to invest.
- The markets can be fickle, but don’t you be. A well constructed plan needs to be followed out. If you shift your plan as the market moves, you will forever chase performance and be a reactive investor. Holding firm to your plan isn’t always easy, but deviating from it can prove fatal.
Remember, like most things, the planning is the hardest part. Once you’ve determined what your goals are, and how much time you have to reach these goals then you can begin selecting the right investments. Then, you can let your money work for you.
Penny Wise, Pound Foolish
When most of us go to make an important purchase – a refrigerator, furniture, or a car – we shop around. We want to make sure that we don’t get taken advantage of and that we get a good value for our money. So why is it that when it comes to investments, (mutual funds, in particular) many of us have no idea what we’ve invested in and what it costs? Why would we rather haggle with a car salesman on a one-time purchase, than pay attention to our investment costs and our long-term financial goals?
There are many possible answers: maybe we’re not sure what we should be paying; or, in order to find out what we pay we have to read the dreaded prospectus (who wants to do that, and who can understand it, anyway?); or perhaps we really don’t believe that we can win this game, so why try? Right? Wrong.
There are many costs associated with owning a fund. Many investors do not actually see these costs, as they are deducted from the fund’s returns, but make no mistake: High fees handicap your portfolio’s ability to outperform the market. If you think of it as a race, a low fee investment starts one mile ahead of a high fee investment. Wouldn’t you rather have that one mile edge?
Let’s look at three similar investments, each returning 10%, but the fees charged vary widely. After the deduction of fees, the returns are dramatically different: ranging from 6.65% for the high-cost investment to as high as 9.80% for the low-cost fund. After 30 years, these fees would really impact your bottom line. If you invested $10,000 in each of these investments, after 30 years, the high-cost investment would be worth $68,996; the average mutual fund would be worth $91,289; and the low-cost mutual fund would be worth $165,222 – nearly $100,000 more than the high-cost investment. Of course, this example is hypothetical and does not reflect past or future results for any investment.
| High Cost Investment | Average Mutual Fund | Low-Cost Mutual Fund | |
| Assumed Return (before expenses) | 10.0% | 10.0% | 10.0% |
| Total Expenses | 3.35% | 2.35% | 0.20% |
| Assumed Real Return (after expenses) |
6.65% |
7.65% |
9.80% |
| After 30 years, $10,000 grows to: |
$68,996 |
$91,289 |
$165,222 |
So, how can you protect yourself from high fees? How can you “shop around”? For starters, know if the Fund carries a sales charge.
Typically, if a Fund carries the letters A, B, or C after its name, it is considered a “loaded” fund (has a sales charge). These products are “sold” to investors. That is, a salesperson (a broker, for example) earns a commission for selling you the Fund. These loaded funds also compensate a broker over the lifetime that you own the Fund. That is why these Funds carry higher expenses. Someone needs to pay the broker. Look at it as a transfer of wealth: a transfer from you to the Fund Company, and ultimately a piece of that goes back to the broker. There is nothing improper about this; however, you may question if this arrangement between the broker and the Fund Company is as beneficial to you, as it is to them. If the broker works for a company that sells its own proprietary funds (for example, Merrill Lynch), they are paid even more to sell the in-house product. Will this influence a broker’s recommendation?
Fee-only registered investment adviser firms (RIA), such as our sister company ATI Investment Consulting, Inc., are only compensated for the advice they dispense, so they work purely for their clients. In fact, should an RIA receive compensation from any source other than a client, it must be disclosed to clients as a potential conflict of interest.
By law, RIAs are held to the higher standard of acting in an investor’s best interest, which includes keeping expenses low. Brokers need only sell you something that is deemed “suitable”. To compare the RIA fiduciary standard to the Broker’s suitability requirement, consider this: If a client needs long-term growth and a S&P 500 fund is an appropriate investment choice, but one option carries fees of 1.5% in addition to a 5% commission, and the other carries a fee of 0.15% with no commission, the RIA would be obligated to recommend the lower cost option, because low fees are in the client’s best interest. The broker could sell the one that paid him more (a commission) even though it is more costly to the client, because the investment is still suitable for the client.
Furthermore, brokers are paid on transactions and earn commissions every time clients buy or sell, and they earn trail commissions when a client holds an investment. Therefore, client satisfaction does not affect the broker’s compensation nearly as much as it does for the RIA. A fee-only adviser does not have these additional sources of income as a safety net. All an RIA has is the quality of his/her advice. If that is shoddy, the RIA will soon be out of business.
Don’t be afraid to ask your investment professional how he/she is compensated. It is in your best interest to know if his/her interests lie elsewhere. Ignoring this question while clipping coupons, shopping sales and looking for bargains is truly an exercise in being penny wise and pound foolish.
Investing Your Time Productively
June 3, 2011 by admin · Leave a Comment
“Hello I’m a procrastinator,” I may as well have introduced myself in this manner at the training session on time management. It turns out, I was in good company. Though I didn’t realize it at first, the room was filled with others who shared my dirty secret. The instructor stood at the front of the room holding up the calendar/planner and asked us to start our day – as we should every day – with a to-do list. When our pens stopped moving, he asked us to prioritize our list with A for urgent, B for important, and C for keep on track. Next numbers were placed after the letters to further prioritize the list: A1 being the most important, then A2, and so on. It seemed simple enough, and yet I found myself itching to tackle C3 and B2 first. These were projects I knew what to do about. These were things that would produce an immediate reward to my efforts. A1 — well, that one I wasn’t sure how to start. Once I had these goals and priorities written out, it was hard to justify wandering off to handle the less urgent issues. I felt better, though, when most everyone in the room giggled nervously when the instructor asked how many of us were not even looking at the As, but were thinking about the Bs and Cs.
Financial matters are a lot like those A1s that seem overwhelming or perplexing, so we jump ahead to the more interesting B and C issues – like shopping for a new car, or planning a weekend trip. Even the “not so interesting” things on our list take a priority because they have a deadline – like paying bills, for instance. The truth is, while there is no “deadline” imposed by anyone on your financial management, it is up to you to set them. If you don’t, time has that funny way of passing by very quickly. Before you realize it, a whole year will pass before you call to get the forms you need to Rollover your 401k from your previous employer, set up a Roth IRA, or the open the kids’ college savings accounts. There is no bill that is sent showing you what you miss out on, but the reality is that time is the most powerful tool in growing assets. The table below gives a snapshot of how planning ahead, and making the best use of time can be a powerful wealth builder.
The Planner and the Procrastinator are the same age, but The Planner invests early on, contributing $2,000 every year to an IRA starting at age 22. Though the Planner only makes these investments for nine years (a total of $18,000) versus the Procrastinator, who invests $70,000 over 35 years, the Planner ends up with $109,222 more at age 65. How? The Planner started investing 10 years earlier, and time alone made all the difference.
The Price of Procrastination
Based on an Average Annual Return of 9%
The Planner The Procrastinator __________
Invests $18,000 in an IRA Invests $70,000 in an IRA over
over 9 years (age 22 until 30) 35 years (starts investing at age 31)
Account Value at 65 $579,471 $470,249
The Planner Invested $52,000 Less than The Procrastinator,
But Earned $109,222 More.
Source: National Endowment for Financial Education
This example proves that wealth can be built with little investment if you maximize time. Of course, had the Planner kept contributing for 35 years, the results would have been even more impressive. So what do you do if you feel time has passed you by? The point is not to fret over what has already passed – you can never regain it – but to get on track as quickly as you can, so that you make the most of the time you do have.
Like time management, a thorough to-do list will get you focused on what you want to accomplish. Paying off credit card debt, establishing an emergency fund (3 to 6 months of income), opening a retirement account, and setting up college savings are the basic places to start. Next, look at what you can realistically contribute every month to work towards these goals. Finally, treat this commitment as sacred as your rent or mortgage payment.
While it is easy to get caught up in the day-to-day grind of living and get sidetracked, when you make these goals an A1, you are, in effect making yourself and your family an A1. That, I believe, is a very productive use of your time.
Do You Know…
- …How Long You Might Live? The Average life expectancy for a woman is 80, and 77 for a man. That means half of all people will live longer than this. If longevity runs in your family, you should think about have retirement savings that can take you through to age 90.
- …How Much You’ll Need to Retire? Some say you’ll need to withdraw 70% of your gross pay (before retirement) every year to cover your living costs. A more conservative approach is to look at your pre-retirement salary and deduct expenses that you shouldn’t have in retirement (like social security tax, mortgage payments, and contributions to your retirement plan).
- …How Time is the Greatest Grower of Assets? Like the example above shows, it is not how much you invest, but how long you invest for that makes the biggest difference on your results. Wealth can be built with small, consistent investments over time. But you can’t procrastinate!
Check out http://www.atiinvestment.com for calculators to help you plan for retirement based on life expectancy, income and your current retirement savings.
