Investing Curiouscatblog

Tag: Tips

  • How to Protect Your Financial Health

    There are external risks to your financial health. Many people ruin their financial health even before any external risk can, but lets say you are being responsible then what risks should you seek to protect yourself from?

    Risk Strategy Also
    medical costs health insurance emergency fund, healthy lifestyle to reduce the likelihood of needing medical care
    property losses (house damaged, car stolen, property damage…) homeowners insurance, rental insurance
    job loss emergency fund, unemployment insurance (provided by the government and paid for by the company in most cases – in the USA) updating skills, maintain a career network, education, learning new skills
    disability (which both damages your earning potential and often has medical care costs) disability insurance, health insurance social security disability insurance – in the USA
    investment losses sound investment portfolio and strategy (diversification, appropriate investments, adjusting investment strategy over time) extra savings
    having to pay damages caused to others homeowners insurance often includes personal liability coverage (and car insurance often includes some coverage for damage you cause while driving). check and likely choose to pay for extra liability insurance – costs to add coverage is normally cheap.
    unexpected expenses emergency fund extra savings
    loss of income of someone you rely on (spouse) life insurance extra savings

    Another protection is to be financially literate. You can risk your financial health by being fooled in spending money you should save, borrowing too much for your house, failing to buy the right insurance, using too much leverage, investing too much in high risk investments…

    Related: credit card tips – personal finance tips – personal loan information

  • Where to Keep Your Emergency Funds?

    Poorer Than You posed the question: Where to Stash Your Rainy Day Fund?

    One of the most popular places for emergency funds right now, online savings accounts offer the sweet spot of liquidity and interest rate. The funds can be transferred to your checking account within 1-3 days. Recommended account: ING Direct’s Orange Savings.

    Pros: Interest rate usually meets or beats inflation, transfers to checking account, separation from checking decreases temptation to spend, no minimum balance requirement

    Cons: Slow transfers may hinder urgent emergencies, limited by federal law to 6 transfers out of the account per month
    …
    Personally, I’m using a credit card/online savings account combination right now. After I graduate from college and grow my emergency fund, I’ll move most of the fund to a money market savings account, and perhaps keep a couple hundred dollars in cash as well.

    Here are my thoughts:

    A money market fund is where I used to hold emergency funds, but things have changed. Money market funds are paying less than inflation (especially true inflation – which exceeds reported inflation). Right now high yield savings is where I have my emergency funds. You need to not only pick a good choice but pay attention to see if the marketplace shifts and certain options are not as appealing as before.

    I would use a credit card for immediate spending needs and then paying the balance in full with funds from high yield savings. But right now high yield savings accounts pay more than money market funds, so just stay with high yield savings. If money market funds pay more in the future then I would put the emergency funds there.

    Related: Personal Finance Basics: Health Insurance – personal finance tips

  • Personal Finance Basics: Health Insurance

    Much of personal finance is not amazingly complex once you take some time to lay out the basics. We have covered some important topics previously: tips on using credit cards, retirement saving, creating an emergency fund… One of the most critical factors is to insure yourself against possible catastrophic events.

    Some personal finance mistakes can set you behind, say falling to save for retirement when you are 28 or cashing in your 401(k) when you switch jobs at 27. Those mistakes however are most often manageable. You just need to save more later. For health insurance the critical need is to protect yourself from huge costs.

    Bankruptcies are a huge problem due to health costs. If you have done everything else right and have saved up say $150,000 in mutual funds (in addition to retirement savings and a house) at age 40 but have no health insurance there is little I can think of more likely to result in your losing that saving than a health crisis when you are without coverage (disability insurance is another critical personal finance need that I will discuss in another post and the another such risk – as is an uninsured home). The costs of health care are just too large for any but the richest to survive a major cost without either ruining an entire lifetime of smart financial moves or coming close.

    There are certain things that cannot be compromised in your personal financial situation. Health coverage for significant costs is one of those. If you can afford a $5,000 (or higher) deductible that is fine. The critical need for health insurance is not the first $2,000 or $20,000 but the 2nd, 3rd, 4th… $100,000 bill. A bill for $2,000 you can’t afford is a challenge but a bill for $100,000 you can’t afford can ruin decades of smart and diligent financial moves.
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  • Angie’s List

    I heard of Angie’s List several years ago. I looked at it a couple times but thought the price was a bit much so I never joined (it is around $10/month). But I joined a few weeks ago and I am impressed. What they offer is information. And there is lots of information for free on the internet. But they do a good job of organizing what the information and provide a valuable service in my experience.

    From their site: “Angie’s List is where you’ll find thousands of unbiased reports and reviews about service companies in your area. Our members share their experiences with each other so that you can choose the service company that’s right for your job the first time around.”

    The usefulness boils down to their ability to get accurate and useful information and present it well. And they do. The reviews, provided by other users, are detailed and helpful. I found two companies to do some work for me based on the site and both were very good. So far so good. I hope the track record continues.

  • Real Free Credit Report

    From the official US Federal Trade Commission site:

    A recent amendment to the federal Fair Credit Reporting Act requires each of the nationwide consumer reporting companies – Equifax, Experian, and TransUnion – to provide you with a free copy of your credit report, at your request, once every 12 months. But there’s only one online source authorized to do so. That’s annualcreditreport.com. Beware of other sites that may look and sound similar.

    Viewing your credit report is an important step to financial security. You should review your credit reports annually (at least) to correct and any errors. Also doing so can be a tool to help you spot identity theft. The credit report site also has a large frequently asked question section with answers to questions like: What is a credit score? How do I request a “fraud alert” be placed on my file? Should I order all my credit reports at one time or space them out over 12 months? (I would suggest spreading the requests out during the year myself).

    Reposting, original is from last January.

  • 401k’s are a Great Investment Option

    The title of a recent article asks: Are you a sucker to invest in a 401(k)? The answer is an emphatic: No.

    Let’s say you put $10,000 in your 401(k) and invest in a stock-index fund that earns an average of 8% a year. After 20 years it will be worth $46,610. Withdraw the money all at once and you’ll pay $13,051 in taxes, assuming you’re in the 28% bracket, leaving you $33,559 to spend.

    But what if instead you had bought that tax-efficient stock fund outside your plan? Wouldn’t your tax bill be lower? Yes, but that’s the wrong way to look at it. If you skip your 401(k) in favor of a taxable account, you must first shell out taxes on that $10,000, which leaves you with just $7,200 to invest (assuming the same 28% bracket).

    Plus, over the next 20 years, you’ll have taxes on any dividends and gains the fund pays out. Even though you will get a lower 15% rate on your gains when you sell, you end up with $28,950, or about $4,600 less than with the 401(k). A tinier final tax bill can’t make up for having to pay taxes all along.

    This is a very good short simple personal finance article. It explains an issue that might be tricky for some to understand. Those that read it can learn more about personal finance. And it has several points – some of which, I can imagine, might be hard for some to understand. But it does a good job of explaining things simply. And a few points, made well in the article, are often overlooked or under-appreciated:

    tax rates will go up – we are passing higher taxes onto the future by not paying our bills now
    the tax deferral is a huge benefit – often minimized when people discuss the benefits of IRAs
    401(k) employer matches are another huge benefit

    As I have said before, learning about personal finance is a long term effort. If you don’t understand everything in an article that is fine, over the years you want to learn more and more. Hopefully this is a useful step on that journey.

    Related:
    Roth IRAs a Smart bet for Younger Set     – Saving for Retirement

  • Starting Retirement Account Allocations for Someone Under 40

    One of the most important financial moves you can make is to start investing for your retirement early. This post is directed at those in the USA (but you can adjust the ideas for your particular situation). Retirement accounts with tax free growth, tax deferred growth and/or even tax deductible contributions can add to the benefits of such an investment. And matching by your company can give you an immediate return or 100% or 50% or some other amount. With 100% matching if you invest $2,000 your company adds $2,000 to your retirement account. For 50% they would add $1,000 in the event you added $2,000.

    In other posts I will cover some of the other details involved but some people can be confused just by what investment options to chose. Normally you will have a limited choice of mutual funds. Hopefully you will have a good family of funds to choose from such as Vanguard, TIAA-CREF, American, Franklin-Templeton, T.Rowe Price etc.). If so, the most important thing is really just to get started adding money. The details of how you allocate the investment is secondary to that.

    So once you have made the decision to save for your retirement what allocation makes sense? Well diversification is a valuable strategy. Some options you will likely have include S&P 500 index fund, Russel 5000 (total market index – or some such), small cap growth, international stocks, money market fund, bond fund and perhaps international bonds, short term bonds, specialty funds (health care, natural resources) long term bonds, real estate trusts…

    Just to get a simple idea of what might make sense when you are starting out and under 40 and don’t have other substantial assets in any of these areas (large mutual fund holdings, your own house, investment real estate…) this is an allocation I think is reasonable (but don’t take my word for it go read what other say and then make your own decisions):

    25% Total stock market index (~Wilshire 5000)
    25% international stocks
    20% small cap stocks
    10% real estate
    10% high quality short term bonds in a Euros, Yen…
    10% short term bonds (or money market)
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  • Telephone Savings

    Update: I would not even consider using Vonage. Any company that takes you money using there online site and then refuses to cancel your service without you call them is exactly like the traditional phone companies they try in ads to say they are different than. Then you call and then force your through a ridicules voice mail tree and then they tell you you have to call back between 9-5 on weekdays to have the privilege of not having them take your money. Completely unacceptable behavior. You can get VOIP phone service without a monthly free now via Ooma by purchasing a device to plug your broadband internet connection into (I got mine for $203 via Amazon).

    old post:
    Cutting expenses is a great way to free up money to add to savings.

    A couple years ago I switched to Vonage for my phone service. They provide phone service through my DSL high speed internet line. I play just $18/mo for local and long distance calls (this is for 500 minutes or less – for $29/mo you can get unlimited calling in North America and Europe). I still use my same phone (I just plug my regular phone into a modem they provided). You do lose the ability to make phone calls when the internet is down which happens if the power goes off – people can still leave you voicemail). I have been very happy and get free voice mail and free caller ID.

    More recently I picked up a prepaid phone from Virgin. I pay only for the time I use (no monthly charges) – 25 cents a minute for the first 10 minutes any day and 10 cents a minute thereafter. There are no fees for calling from out of your service area and you have a regular cell phone number. They require I add a minimum of $15 every 3 months to the account but if I don’t use that much the balance just keep growing. This is ideal for anyone that doesn’t spend much time on cell phones. Now some people are very attached to their cell phone. Then this isn’t a good way to save money but for those that don’t feel the need to to stay in touch at all times this is a good option to stay connected when you want without having to pay high monthly fees.

    Together I save at least $35/mo. (over $400 a year) and loose nothing I value. I would have to earn an extra $700, or so, to have the same impact (I have to pay taxes on additional earning).

  • Retirement Tips from TIAA CREF

    The TIAA CREF site has some valuable retirement planning advice (link updated since some pointy haired boss doesn’t know that web pages must live forever – when are we going to get competent people running web sites?). Take some time to read one of their articles (or read more), for example: Retirement Strategies, a 48 page overview. Yes it requires some time to read but the money involved in retirement is huge. Making the wrong decisions can cost you not $2-5,000 but $100,000, and more, easily. Don’t avoid the steps you need to take to learn cost you.

    The key is to get started. If you are relatively young you are lucky, you have decades to learn more and improve your plan. Don’t wait until you are only 10-15 years from retirement. The early you get started the better for you and the more money you will make by choosing wisely. The documents TIAA CREF puts together make it much easier to succeed. We will continue to point out resource to aid your continual quest for financial literacy. It is a long term project.

  • How Not to Convert Equity

    CNNMoney is not exactly intellectual discussion of economic and investing issues but normally it offers fairly good material for the large number of people. Especially those who really don’t want to read Warren Buffett or Brad Setser. Still the following quote in their article, Cashing in on hot real estate is just wrong:

    They also have one extremely valuable asset: a house in the now trendy Silverlake neighborhood of Los Angeles that’s worth $1 million, nearly four times what they paid in 1995. The equity, Handel says, is “lovely,” but it’s not doing them much good right now.
    …
    San Diego-based certified financial planners Christopher Van Slyke and Terry Green recommend an unconventional plan: taking out a new $500,000 ARM.

    Handel and Laport can pay off their existing mortgage before the rate rises and retire their other debts. They can put the remaining $200,000 into stock and bond funds.

    To be sure, borrowing against a house to put the proceeds into the market rarely makes sense. But in Handel and Laport’s case it does because so much of their net worth is tied up in their home, and the super-hot L.A. real estate market looks primed for a fall…

    They can convert equity that might melt away.

    They can what? In no way does increasing their leverage convert equity that might melt away. Any amount of “melting away” will still happen after this increase in leverage – no conversion has happened. They still have a full ownership interest in the real estate. If the value of their house fell $300,000 before or after this supposed “conversion” they would “lose” (on paper) the same amount: $300,000. The investment risk for the house has not changed (for the whole portfolio you could argue it has but that gets complicated and subject to debate).
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