Pondering Money

Welcome

Welcome to Pondering Money, this site is dedicated to trying to help you think about money differently!  Here are a few sample posts you might find interesting:  Which wins 401K Match or High Interest CC debt?,  Simple Strategies to Improve Your Money Management, and Strategies for Achieving Your Goals This Year.

A Tough Choice!

Thank you to all of the authors who submitted a post, choosing the top ten posts wasn’t easy! Imagine going to Baskin Robins and trying every flavor of ice cream- and you enjoy all of them but have to choose just a few!  Here are this week’s top 10 posts:

1. Dustin presents Should Married Couples Have Joint or Separate Bank Accounts? posted at Engaged Marriage.  I know how important this choice is because my wife and I had a terrible time when we made the wrong choice!   I’ll need to make a post with the story, for now check it out and see if you should change how you bank.
2. Jeff Rose presents How to Choose The Best Financial Advisor/Planner for You posted at Jeff Rose.  I guess great minds think alike as  I just wrote about how I would choose a financial advisor.
3. Ray @ Financial Highway presents Myth Busters: Myths About Frugality posted at Financial Highway.  I believe a lot of people hold onto at least one of these myths,  I feel very strongly that frugality should be about creativity.
4.  The Investor presents How to run your portfolio like a hedge fund posted at Monevator.  Curious about how a Hedge Fund works, check out this post to find out!
5. BWL presents Make Your Own Personal Budget: Articles, Tips, & Resources posted at Christian Personal Finance.  I really don’t like budgeting so I was impressed that this article convinced me there is a value to it.
6. Evan presents Three Common Qualities of High Net Worth Individual’s Balance Sheets posted at My Journey to Millions. It’s always interesting to look at successes- but I wonder did these common qualities came before or after they achieved high net worth status?
7. Abdulrasool Sumar presents How to Retire as a Millionaire with your 401k Plan and 7 Strategies to Achieve Growth of your 401k Plan posted at 401k.  I really loved the compound interest graphs!  You need to understand compound interest because it makes a huge difference when investing for the long term.
8. Wise_Bread presents The 10-Step Staircase to a Comfortable Retirement posted atWisebread.  Some great steps to get you to a comfortable retirement.
9. Adam presents Thermals of Wealth posted at Magical Penny.   Adam focuses on the first step to financial success saving, I liked Adam’s writing style and I hope you will too.
10. Darwin presents How Much Could You Reduce Your Budget if You Get Laid Off? posted at Darwin’s Finance.  Even if you think your job is secure, doing this analysis could help you figure out if your emergency fund is reasonable.

From Oct 2007 to Mar 2009 the stock market declined a brutal 46%, a horrific blow to any investor but that is nothing compared to a divorce!  First and foremost a divorce has huge emotional costs- I am not going to even try to put a price on that.  Just consider the huge financial costs:

• A 50% loss across ALL  of your assets- your home, cars, investments, savings, everything!
• Tens of thousands in legal fees.
• Thousands for one spouse to move out.

A divorce will not only decimate your current wealth- but it also saps your future:

•  Significantly Lower Income
  • Loss spouse’s income or spousal and child support payments.
• Increased Living Expenses
  • Two residences
  • No shared items
• Additional Child Care Expenses
  • No one else to help watch kids

All of these factors make divorce horrifically costly.  Maybe the best financial move you can make today is to do something nice for your spouse!

Finding a good financial advisor is hard because you need someone that is both trustworthy and doesn’t have biases that will cost you a fortune.   You certainly don’t want a crook that will steal your money, but you also don’t want a salesman claiming to be an advisor that will mislead you.  Finally, you don’t want someone that believes they are the next Peter Lynch because chances are they aren’t!

Can You Afford a Financial Advisor?

For financial planning there are some cases where you just have to do it yourself.   If you are a new investor starting with $0 and investing $1000 each year you need to be self sufficient.  Any Planner that takes a % of assets under management will not talk to you- there just isn’t enough to cover their cost of doing business.  You could consult with a fee only advisor, but that could easily cost you a year of investing and a better plan doesn’t beat investing earlier.  At $1000/year even buying a $10 investing book will cost you 1% of your investment!  Your best option is to make your own investment plan initially then seek professional help later.  Your plan could be very simple like a low fee target retirement fund in an IRA.  After you have $200,000 or more a professional becomes a lot more cost effective.  At that point the optimization of the portfolio could potentially cover the cost of the advisor.How to StartAsk people you know for recommendations- who they trust to manage their money.  If you can’t get a personal recommendation I would try searching the NAPFA website.  I would plan to interview a few people.  Here is a list of questions to ask from the SEC,  I think how the advisor is paid is the most important question they list.  I would steer clear of advisors that earn commissions from what investments you purchase.  There is just too large a conflict of interest for such an advisor to give you the best advice.   I would prefer an hourly fee over a % of assets under management as advising how to invest $1,000,000 should not take significantly more time and effort than advising how to invest $500,000.

My Questions

In addition to those from the SEC I would also add the following questions:

1. How did you advise clients similar to me during 2007 and 2008?  Why?  Did they make good decisions- for good reasons?  I think the best answer would be “Stick to our plan but save more/withdraw less.”  Their plan was solid but they are adjusting to the possibility of a harsher reality.  Other good changes include- rebalancing, increasing % bonds as you age, or switching to a lower cost equivalent fund.  If their reaction to 2008 was to scrap the old plan and try some totally new plan seek someone else.
2. How do you pick the investments you recommend? I would be wary of someone that looks at past performance, remember all the warnings that it isn’t a predictor for future performance? I would also be wary if they claim some special knowledge- it is really hard to beat the market, what is the chance you found the next Peter Lynch? If they could really beat the market consistently then they are wasting their time planning for you as they should be running their own fund and making billions. I would like to hear minimal fees or covering different asset classes, which would naturally lead into choosing index funds.
3. Describe a time when you convinced a client not to make a stupid mistake? A good advisor should be able to prevent you from making mistakes. If they haven’t done that with other clients a lot they are unlikely to be good advisors.

Retaining Control

Finally, I would want an advisor that would allow me to keep control over my investment accounts.  There are two good reasons to keep control:

1. That insures you are informed of any changes since you have to make them.
2. It prevents the possibility of fraud.  Bernie Madoff could never have run his ponzi scheme without controlling the investment accounts and forging the reports and transactions.

There are some disadvantages- you don’t get to delegate the transactions and you may miss out on lower cost funds only available to very large investors.  I bet Bernie’s clients are regretting giving him control.

Have you ever wanted to be the bank and make a lot of interest lending people money?  If so peer to peer lending may be for you.  Peer to peer lending is when you lend money to others through a site like lending club or prosper.com.   They have many people fund each loan to minimize the risk of default,  I’ve been experimenting with the lending club and I’ve gotten over 10% on a pretty conservative loan.  I like their web intereface and it seems a viable way to invest.A great way to try it out is using a promotional offer so you don’t risk your own money.  Right now lending club has a promotional offer- you can send invitations to friends and they get $40 to start investing.  Leave a comment and I’ll send you an invite.  Note as far as I can tell I won’t get a referral bonus myself.

I thought it may be helpful to share my financial goals for this year:

• In order to have financial freedom in retirement:
  • Contribute at least 15% of my income to the company 401K plan via payroll deduction from each check.
  • Contribute $2,500 every three months to Roth IRAs for my wife and myself totaling $10,000 for the year.
• To open the possibility of early retirement
  • Invest at least $1200 this year in a taxable account by contributing $100/month.
• To have money available for my future goals:
  • Invest 15% of my income in my company’s employee stock purchase plan via payroll deduction from each check.
• To aid our children with college expenses
  • Save least $160 per month into 529 plans via automatic deposits.
• To pay my son’s tuition
  • Save at least $160 per month.

In my last post I suggested making goals instead of making resolutions this year.  Below are some strategies to insure you achieve your goals.  You should not need to use all of these strategies, but I listed several so you can pick the ones you think will help you keep you on track:

• Hand write a list of your goals and sign it- Your writing is a powerful influence because people desire to be seen as consistent.  Use that influence to your own advantage!
• Get your friends to set goals for the year as well – and talk about them.   Think about the social pressure- everyone is doing it, you better do it too!
• Automate whatever you can for example 401K contributions or automatic transfers to savings- set it up then cruise to success with no worries of forgetting.  Leverage laziness!
• Post a copy of your goals in a place you will see daily- Don’t let your goals out of sight so that they can’t fade out of mind, make that written statement into a daily visual reminder.
• Re-read your goals at least weekly.  Keep the specifics in mind by rereading your goals!
• Keep a progress chart with the % completion for each goal, update it at least monthly.  Keep it clear and easy to update.  Filling in a progress bar with a marker is sufficient-  it’s a second to update and it’s difficult to hide from a progress bar that is only 10% full.
• Mail copies of your goals to friends and family or announce your goals in public- such as on a blog.  Use peer pressure to your advantage, think of the shame if you don’t meet a goal without a good reason.
• Mail copies of your progress charts to friends and family or post them on your blog.   Do you want to have to explain to everyone why you aren’t meeting your goals?
• Schedule days to review your goals and progress at least every three months- force yourself to look at your progress and see if you want to revise your goals upward.

Have a happy New Year and accomplish your goals in the coming year!

Are you tired of making resolutions every year and never making progress on them?  Well this year try something different make some goals instead of resolutions.  With goals you are much more likely to follow through and really accomplish something.

Goals that are SMART

To maximize your chances of achieving your goals, make them SMART:

• Specific- Every financial goal should have a specific dollar amount.  Instead of a vague resolution like “I will save for retirement” be specific “I will save $5000 for retirement”.
• Measurable - You need to have a way to gauge your progress, since your financial goals should have a number it is easy to measure the progress.  The progress percentage is the amount you have divided by your goal number multiplied by 100.
• Attainable - A goal must be something you have control over- like investing a certain amount.  There is no point in setting goals on things beyond your control like getting a particular return on your investments.
• Realistic - Your goals should be realistic so that you can stick with them- if you make them unrealistic you will most likely become discouraged and give up on them.
• Timely - The difference between a dream and a goal is that goals have deadlines!   It’s also helpful to break down goals into manageable pieces.  For example ”I will save $5000 for retirement this year by investing $417 each month.”

I like to add two features to my goals- a reason for them and an at least clause.   The reason is there to remind me why I chose this goal, and to remind me why I should sacrifice to achieve it.  The at least clause opens up the possibility to accomplish more if circumstances allow.  An example financial goal is “I will save at least $5000 for retirement this year so that I have freedom to live as I want by investing a minimum of $417 each month.”

Have a wonderful holiday!

If you want to spend less shop for the cheapest items first!  I found this advice from Robert B. Cialdini, Ph.D. in Influence: The Psychology of Persuasion (Collins Business Essentials) surprising, why should the order matter?  It turns out our perceptions are colored by recent experiences.   If you start shopping for an expensive item first like a $1000 suit then paying $100 for a sweater seems very reasonable in comparison.  Therefore you are more willing to pay full price for the sweater.  However, if you start looking at the sweaters first you will negotiate or bargain hunt saving money on the sweater and when you shop for the suit it will seem even more expensive motivating you to really watch your money.  So do yourself a favor and shop for the cheapest things first!

Would you believe people are much more likely to agree to your requests if they contain the word because?   This was one of the many interesting findings from Influence: The Psychology of Persuasion (Collins Business Essentials) by Robert B. Cialdini, Ph.D.  Even more interesting is that the reason given doesn’t have to be valid.  People are more compliant when given ANY reason.   The example used in the book was a person asking to cut in line for copies.  Using the reason “because I need to make copies” was good enough to increase the chances people would agree!  It’s not even a reason since if you want to use a copier it is always to make copies!I really enjoyed this book and will be periodically sharing some of the influence tips and suggestions to counter them as many sales people will know the strategies that can separate you from your money.