Tag: finance

Check out this article from CNN Money. I have to agree with this for the most part. I am personally still very carefully investing at this time. I am not saying to throw your money away. I had a friend tell me a few weeks ago that they bought stock in a company for a certain price that I KNEW didn’t have the liquidity required and had taken government bailout funds. I told them that it wasn’t wise, they told me I was stupid, they now have one tenth of their invested sum left.

Now with that said, I also believe that this is a good time to be investing. Don’t invest for tomorrow, don’t invest for next year. Invest for the next 5-7 years. And don’t simply “hold” those investments when the start to go up in value. Sell them when they make the return they should and move again.

Again, this is not for the faint of heart and not for anyone to use money that they should be using to pay bills, however, if you have funds that you can stash away for a few years, now is a great time to enter the market. I mean, at least at this point, you aren’t expecting a 50% plunge on everything you invest in.

And if I am wrong, I will pay the price. But… If I am right, I will be the one celebrating in the sun!

Be wise. Do your research and slowly debate investing with those retirement funds that you won’t need for the next few decades. Read this article and see if it gives you a bit of new perspective.

Just a thought,
dh

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Zeroing in on an arbitrary number – in this case 10 – can blind you to the short- and long-term gains that stocks have provided.

You’ve no doubt heard the term “lost decade” to describe what’s happened to stocks since 1999. And that may have you wondering whether equities are worth the risk and whether buy-and-hold investing, dollar-cost averaging and dutifully contributing to your 401(k)’s mutual funds are a sucker’s bet.

That’s understandable. But what if I could show you that instead of losing ground, stocks have been rising modestly in recent years? In fact, what if it turned out that even with today’s depressed prices, equities have been returning 4% annually – a modest sum to be sure, but better than cash nonetheless?

Rather than shun stocks, might you put new money to work in the market by rebalancing or by being a bit more aggressive than usual to take advantage of valuations approaching once-in-a-generation lows?

Then it’s time to expose the fallacy of the lost decade.
Rosier colored glasses

Yes, it’s true that the Dow Jones industrial average sits more than 1,000 points below where it was 10 years ago. But that’s irrelevant to your investing strategy for three reasons. First, it’s an arbitrary amount of time. We’re hung up on it because 10, as University of California-Berkeley finance professor Terrance Odean notes, “is a nice round number we can all relate to.”

Second, the market’s performance over the past decade is a red herring because the period you’re judging starts near the absolute pinnacle of irrational exuberance, when stock valuations – as measured by price/earnings ratios – were absurdly high. If you measure from the end of the last bear market, in October 2002 – when stock prices were still higher than average, by the way – you’ll see that the Dow has returned 4.5% a year (including dividends) while the Standard & Poor’s 500 index has gained 3.4% annually.

Third, as T. Rowe Price financial planner Stuart Ritter notes, “The only people the lost decade accurately applies to are those who invested absolutely nothing before the late 1990s, put all of their money in at the market peak and invested absolutely nothing ever since.” If such an unlucky soul does exist, history suggests that he’ll be rewarded. As the graphic shows, even money invested at a moment of high valuations – before the 1973-74 bear market – grew substantially over time.
Focus on what counts

None of this is to suggest that stocks will rebound tomorrow. Predicting short-term movements is a fool’s errand. The point is that rather than obsess over how the market has done since a meaningless date, you should focus on the long arc of your investing effort.

The annualized long-term gain for stocks over the past 25 years stands at around 10% – despite last year’s 30%-plus drop. Over the past 15 years, the S&P is up around 6%. That still beats bond funds and cash. Of course, to realize those gains you had to have stuck with your plan through the market’s ups and downs. That’s one more reason to look at the lost decade in a different light.

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Below your means? Within? Regardless of the difference, if you follow these simple steps, you’re living a financially responsible life.

NEW YORK (Money) — Question: I’ve been having an argument with a co-worker about the difference between living “within your means” and living “below your means.” I’m hoping you can settle the issue for us. What do see as the difference between the two terms? ?Mark E., Peoria, Illinois

Answer: I think the conversations that you and your co-worker are now having touch on an important issue that many Americans are now having to face after more than a decade of frenzied borrowing and spending — namely, the need to downsize a lifestyle that’s proven to be unsustainable.

Whether it was by racking up huge credit-card balances, taking out mortgages with low teaser rates or using a line of credit to tap the equity in a home, many of us were able to bankroll a way of living that was out of line with what we could actually afford based on our earning power.

But the party has come to an end. And many Americans must now deal with the inevitable hangover. For better or worse, some will get government help. Wednesday, for example, president Obama announced a $75 billion plan aimed at helping up to nine million homeowners avoid foreclosure. Many more people will have to make a variety of other painful adjustments to live a more modest lifestyle, if they haven’t begun doing so already, voluntarily or not.

So, to put it in your terms, does that mean more of us will have to live “within our means” or “below our means”?

I don’t know of any universally accepted definitions for these concepts. But if by “means” we are referring to someone’s resources, I think you could plausibly say that someone living below his means is spending less than he can actually afford to spend given what he earns. Which means he is saving some money. Someone who is living within his means, on the other hand, would be spending all he earns, but no more.

But that distinction is too simplistic. I think it’s perfectly reasonable that someone might consider regular saving a necessary annual expense. A person who thinks that way could very well see meeting that expense as a natural part of living within his means, not below his means. In other words, for some people living within their means might automatically assume the need to save.

And there are other issues to consider, such as debt. Suppose you cover all your expenses from earnings and you also manage to save regularly, but a large chunk of your budget goes to make the minimum payment on huge credit-card debts you’ve racked up. Are you living below your means? Within your means? Above your means?

All of which is to say that I don’t think I can settle your argument with your co-worker. Terms like within your means, below your means and above your means can mean different things to different people.

What I can do, however, is throw in another phrase, “leading a financially responsible life” — which I would loosely define as arranging your financial affairs so that you have the best shot at creating financial security for you and your family now and in the future — and suggest two actions you should take to lead such a life.

Make regular saving a priority. There are two main reasons you need to save. One is to build a reserve to help you deal with normal financial setbacks such as a layoff or big unanticipated expenses that you can’t meet from your salary. To create such a cushion, you’ve got to plow some money into a secure stash like a savings account, CD or high-quality money-market fund. People can disagree about how much is necessary, but three to six months’ worth of living expenses is a reasonable guideline.

But you also need to save so that you can support yourself later in life. You know that at some point you’ll no longer be able or willing to work. The only way to assure you’ll have resources to fall back on at that time is to spend less than what you earn today so that you can spend it in the future.

Essentially, that’s what the Social Security program is all about. The payroll taxes deducted from your paycheck go to current retirees who have previously paid their payroll taxes. But unless you don’t mind living on Social Security alone — which isn’t very cushy, as you can see by checking out the Social Security Administration’s Retirement Estimator tool — you also need to save on your own.

Of course, there are other reasons to save: to buy a house, educate yourself or family members, start a business, to name a few. And, admittedly, some people may simply not make enough money to cover even their basic expenses. But such dire circumstances aside, if you’re not at least saving regularly for the two main reasons I’ve mentioned, then you’re not being financially responsible.

Control your debt. I like to divide debt into two categories: good debt and bad debt. Good debt is the money you borrow for something you truly need or that can enhance your financial security or that of your family. Here, I’m talking about a mortgage to buy a house, a loan to buy a car, borrowing to fund a college education or a business.

Bad debt is the debt you take on for things you could do without. Tapping home equity to fund lavish vacations would be an example of bad debt.

Of course, the line between good debt and bad debt can get blurry. For example, the money you borrow so you can have a car to get to work certainly would constitute good debt. Borrowing for a $70,000 Statusmobile when you’re earning $50,000 would push that debt into the bad category. The same principle applies to buying a more expensive house than you can actually afford, even if some stupid or unscrupulous lender is willing to give you the loan.

By the same token, it’s not as if every time you borrow for something that’s not an absolute necessity that you’re being financially reckless. An occasional splurge is fine; indeed, it can make life more pleasant. While I certainly don’t advocate using credit cards as a way to live large, as a practical matter it would be unrealistic for most of us to live our lives completely on a cash basis.

The key when it comes to debt is to avoid clear abuses like borrowing heavily for things you don’t need or can’t afford and, most important, making sure that you’re able to comfortably manage the payments on whatever amount you borrow. People can disagree about what portion of your budget should go to debt service. But I think warning flags should go up once you start devoting 40% or so of your income to repaying debt, if not before. (To see how your debt holdings compare with those of other Americans, check out the debt section of the Fed’s Survey of Consumer Finances).

There are certainly plenty more things you can do to improve your financial prospects — work hard, manage your career, invest prudently, monitor your finances periodically. But if you save on a regular basis and avoid bingeing on debt, you’ll be living in a financially responsible way. As for whether this constitutes living within your means or living below them, I’ll leave that to you and your co-worker to settle.

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Americans are notorious for their ability to spend more than they earn. But now — as the credit crunch continues to cripple the economy — that notoriety has reached epic proportions.

According to the Federal Reserve, total consumer revolving credit, including credit-card debt , stood at nearly $974 billion last November, up from some $770 billion in 2003. Meanwhile, a January 2009 report by the American Bankers Association found that bank-issued credit-card delinquencies hit their highest level in five years during the second quarter of 2008. And consumer bankruptcy filings increased by nearly 33% in 2008, according to the American Bankruptcy Institute and the National Bankruptcy Research Center.

“We’re in a different time than we’ve been in any of our living memories,” says Gerri Detweiler, credit advisor for Credit.com. “The level of debt that consumers owe is much higher than it’s been in the past, and there’s this big gap in [debt] solutions.”

Fortunately, the first steps toward a debt-free life are some of the easiest. Cut down on discretionary expenses such as dining out or shopping. Then create a budget and stick to it. Another helpful move: asking lenders if they can offer better terms on rates or minimum payments.

Here are four more ways to help you reduce commonly-held debt.

Mortgage

If your mortgage payment is getting hard to afford, contact your lender to see if you can negotiate a better rate or lower monthly payments. If you’re in real dire straits, see if your lender is participating in Hope for Homeowners, a government-run program that encourages lenders to refinance mortgages of borrowers who are at risk of losing their homes. More than 200 lenders have signed up since the program began on Oct. 1, according to the Department of Housing and Urban Development (HUD).

Credit-Card Debt

Interest rates on credit cards can run as high as 33% for cardholders who are late with a payment or have a low credit score, says Curtis Arnold, founder of CardRatings.com.

To tackle this debt, pay more than the monthly minimum requirement and focus on paying off high-interest-rate cards first, says Sheryl Garrett, a fee-only certified financial planner.

Another way to rein in costs: Take advantage of 0% balance transfer offers or low introductory APRs. Just be sure to read the fine print. Currently, the average fee for a balance transfer is 3% or 4% of the transfer amount which can equal up to $120, says Arnold. (Some lenders don’t even have caps.) Also, make sure you can pay off the balance before the introductory period expires and the high rates kick back in.

Private Student Loans

According to the College Board, the average undergraduate student left school with more than $12,000 in debt during the 2006-07 academic year.

Just like credit-card debt, it’s best to tackle higher-interest loans, namely federal student loans issued before July 2006 and most private student loans, first. Both carry variable interest rates that can rise and fall each month. Last year, rates on private loans, for example, averaged 14%, says Mark Kantrowitz, founder of FinAid.org.

One solution is to consolidate all your private loans. However, since consolidation loans currently carry variable interest rates it would only make sense to do so if you have a good credit score . Otherwise, you could get hit with an even higher rate. One problem with these consolidation loans: They’re hard to find. Currently, only four lenders — including Wells Fargo and Student Loan Network — offer them.

Medical Debt

If you’re drowning in medical debt, make sure your insurer is paying its share of expenses. Often times, the doctor will use a certain code for the services rendered that the insurance company can’t identify, says Garrett. Instead of rectifying the issue, the insurer just doesn’t pay.”These mistakes happen way [too] often,” she says.

Next, speak with your medical provider. To ensure they get paid, medical providers are often open to working out payment plans. Before speaking with your provider, figure out how much you can afford to pay each month, then pitch that amount to the doctor’s billing department, says Garrett. In addition, many hospitals have government funds to help patients who can’t afford their medical care, and independent nonprofits also provide financial assistance.

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