Keeping Finances Simple – Two Wonderful Illustrations

Managing and understanding personal finances seems a daunting task to many people. The truth is you don’t have to be a money genius to keep your financial ship trimmed; you simply have to follow the basic principles. This often means being able to ignore many of the terms and confusions the financial industry has introduced and focus in on the key points.

Frugality & Personal Finance
This week’s Carnival of Personal Finance and Festival of Frugality are both good illustrations of keeping it simple. Dawn over at Frugal for Life showed us this with her “picture is worth a thousand words” presentation of how to be frugal.

Trent at The Simple Dollar got right to the heart of the matter of personal finance issues by giving us only the most telling sentence from an avalanche of personal finance advice.

Crawl then Walk
Both of these examples show how it is possible to simplify personal finances. Don’t be overwhelmed by the choices and jargon. Learn the basics and stick to them. Spend time periodically reading books, blogs, or magazines on different financial concepts and you’ll eventually feel confident in your financial decision making ability.

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New Personal Finance Indexes – PBH30 & BFP60

One of the challenges we face in today’s information age is sorting out content that is relevant and useful to us. There are many tools for this in investing world, every major finanical website has both free and paid fund or stock screening tools. What about a screening tool for personal finance information?

Personal Finance Sites
How can we find the most helpful advice among the hundreds or thousands of personal finance pages on the Internet? Yan from Pro Bargain Hunter and Jim from Blueprint for Financial Prosperity have come up with two personal finance indexes to help guide us towards valuable content. The idea is to “let the people decide”, they list the top personal finance blogs according to two different usage metrics.

Yan started out with the Pro Bargain Hunter 30 which measures the top 30 personal finance blogs by subscribers as measured by Feedburner. Jim followed up with the Blueprint for Financial Prosperity 60 that measures the top 60 personal finance blogs by Alexa rating. Of course you should’t read a site simply because of it’s presence or absence from a list, however, these lists are a good way to keep track of what other readers judge as valuable personal finance content.

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Investing With Simplicity. Reflections On Financial Planning.

Emily, the winner of the FinanceSpiration Challenge, emailed me her thoughts on the prize, a one-hour consultation with a financial planner. She shares the recommendations that Kristine made and her reflections on the financial planning process.

The financial consultation with Kristine was extremely helpful. She started by calculating a target number for my retirement savings, assuming that I retire at age 65. She said I needed to do two things to get to the target number: 1) Invest (not just save) and 2) Get a higher rate of return, between 8-9% per year on average.

Kristine advised me to move my company retirement plan out of the stable value fund and into a balanced fund consisting of approximately 65% stocks and 35% bonds. She said this fund is less volatile than all-stock funds and would allow me to get used to the risks of investing. The fund she recommended also has a low expense ratio.

Kristine recommended that I move my Roth IRA from my credit union to a mutual fund company, again investing in a balanced fund. She also urged me to sign up for the 403(b) plan at work, and to allocate my contributions to a balanced fund (instead of a stable value fund), again until I get used to the risks of investing.

I was surprised by the simplicity of her advice. When I’m done making these changes, all of my retirement accounts will be at one mutual fund company, and everything will be invested in one balanced fund. I thought it was going to be much harder than this!

Kristine said that once I get comfortable with investing, I will need to change the allocation to make it more appropriate for someone my age (early 30s). I will need to increase the percentage of stocks to 70-80% and add an international fund to get the percentage of foreign stocks up to about 20%. Kristine also pointed me to some great tools and articles at Morningstar.com where I can learn more.

Thanks to Ben’s contest and Kristine’s excellent advice, I now feel like I have a plan and I’m on the right path to a secure retirement.

Thanks to Emily for sharing her experience and to Kristine of Beacon Financial Advisors for helping her out!

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Carnival of Investing – Super Bowl Edition

The world of sports shares many common aspects with investing; such as analysis, strategy, performance, discipline, statistics, winners, and losers. Of course the financial stakes are often higher in investing than sports but there’s still a lot we can learn from watching teams and coaches prepare and play their game. What better place to look for examples than one of the premier sporting events in the world, the Super Bowl!

The Super Bowl is known for it’s commercials and halftime show. On the commercial front, this carnival is made possible by Money Smart Life. If you enjoy your visit here, please subscribe to my feed for daily updates on personal finance in your life. You can also check out the Investing section of the site. Stay tuned for the halftime show coming up later.

Rookies
The great thing about new talent is watching the rookies grow and develop. Here is some advice for rookie investors hoping to someday come through with a “big play” in the financial Super Bowl.

Andy presents How to invest with a low budget posted at Money Walks. Remember rookies, everyone starts somewhere. You can’t be a star without being a rookie first.

Ed Mamula presents Ed Mamula.com; It Has to Hurt a Little posted at Book-Smart and Battle-Scarred Trading and Investing. You’ve gotta take some hits to learn to play with the big boys!

FMF presents Charles Schwab Agrees with Me – He Loves Index Funds and Says You Should Concentrate on Your Career posted at Free Money Finance. Index funds may not be very exciting for the new investor but they’re smart.

The Chef presents Investing into Intangible Assets posted at Recipe For Financial Freedom. Even though an athlete may not be the fastest or strongest, they can still play an important role through qualities such as leadership, communication, or determination. Although an early investor’s net worth may not be very high, don’t forget to figure in the intangibles.

Fantasy Football
No football season would be complete without a fantasy footall league to help you track and trade your favorite players. Having the right tools to analyze this year’s top picks can make or break the season. The same can be said about screeing tools for investing. Read about “seven scientifically based fund selection criteria and reports on the capabilities of free on-line website tools to do screens using these criteria.” The Skilled Investor presents On-line screening of mutual funds and ETFs: minimum requirements posted at THE SKILLED INVESTOR Blog.

Coaching
We’re all the coach of our own investments. Here are some strategies and tips we don’t want to forget as an investing coach.

FIRE Finance presents Investing – Asset Allocation – Part 1 posted at FIRE Finance. What coach would recruit a star running back but no quarterback? This lopsided offense would have no balance. So why would an investor stick to only one asset class?

jim presents Why You Should Rebalance Your Portfolio posted at My Retirement Blog. A good coach makes adjustments at the end of the season to prepare for the next. Rebalancing your portfolio will help keep your money team on top.

William Wallets presents Use Limits Orders When Buying Stocks! posted at A Financial Revolution. A seasoned coach knows the proper tools to use in different situations. This article discusses when to use limit orders instead of market orders.

The Dividend Guy presents Watching Dividend Payments Grow posted at The Dividend Guy Blog. When a coach wins a Super Bowl like the Colts did this season, reinvesting their success into the team should help make it even better next year. The same with investing, plowing your gains back into your portfolio can help you leverage the power of compound growth.

Dominic presents Online Compound Interest Calculator posted at Trader Knowledge. A coach needs numbers and statistics to help assess where they are and project where they could be. Use this compound interest calculator to determine where you could be years down the line.

Trent presents Macbeth’s Take on the Employment Report posted at Stock Market Beat. Scouting your opponent is part of being a being a good coach. Part of being a good investor is scouting the financial environment you’re working in. This article reminds us to look for trends in market reports.

Michael K. Dawson presents Investing in China Railways posted at The Time and Money Group.

Kevin presents Use Prosper and get a 312% Increase over a CD Ladder for Your Emergency Fund posted at RateLadder.com. A coach’s plan doesn’t always go as expected. Having a failed play with no backup plan in the 4th quarter of the Super Bowl could spell disaster. As an investor, having an emergency plan is key.

Dan Melson presents The High Cost of Waiting To Buy A Home posted at Searchlight Crusade. Any coach knows the value of home field advantage. Dan talks about the cost of not investing in your own home field.

Referees
Everyone loves to hate the ref. Not a Super Bowl will go by without one coach or the other challenging a call. They don’t always get it right but without them the game would turn into a brawl the likes of which we haven’t seen since the Ron Artest debacle.

Max presents Forget Day Trading Forex posted at RecycleMoney.com. Without regulations to referee the Forex markets, Max argues that Forex trading is not a wise move.

Leon Gettler presents Sarbanes-Oxley: is that really a wolf at the door? posted at Sox First. Calling a game too tight can slow down the pace of play and frustrate the players. Does Sarbanes-Oxley slow down the American markets, read this article to here Leon’s opinion.

Analysts
Sports analysts are full of projections and opinions on the pre-game show, Sports Center, sports talk radio, and in the newspaper. They offer insights into the game and sometimes make ridiculous claims or predictions. The world of investing is also flush with analysts and the Super Bowl of Investing is no different. This week we have insight and analysis on market conditions and individual stocks from several sources.

H.S. Ayoub presents Government Contract Could Set Hollis-Eden Stock Soaring posted at BioHealth Investor.

Brian Schumacher presents Charts of the Week – CLRT and AZL posted at $$ Trade 4 Cash $$.

Spencer Hill presents Hill Asset Management February Market Outlook posted at Hill’s Personal Finance.

wcsinvestor presents Reasoning about Two Sub-prime Lenders posted at Worst-case Scenario Investing.

Paul Smith presents Quick Analysis of 0 -10c stocks with PE under 10 posted at Investing using Fundamentals on the Aussie StockMarket.

Silicon Valley Blogger presents Mad Money Mayhem For Stock Pickers posted at The Digerati Life.

Frugal presents The Coming 2008 Headline News – Long ADM (Archer-Daniels-Midland) posted at 1stMillionAt33.

Halftime Show
There were several submissions to the Carnival of Investing that had interesting content but were not directly related to investing. These articles are provided for your reading pleasure as the Carnival of Investing Halftime show.

Bryan C. Fleming presents Million Dollar Savings Club Update: Week 5 posted at Bryan C. Fleming.

Murad Ali presents The importance of keeping business cash on hand posted at The New Business World.

Martin presents A Different Approach to the Emergency Fund posted at Money Blog Site.

Sagar Satapathy presents Americans: World’s Worst Savers posted at Debt Consolidation Lowdown.

Final Analysis
One final lesson to leave you with as we wrapup our coverage of the Carnival of Investing Super Bowl edition. Peyton Manning was awesome on Sunday night but a key reason the Colts won the Super Bowl was because of defense. You can’t win with just offense. Invest wisely and grow your money but don’t forget to play defense too.

We’ve come to a decision on the MVP of the game, it’s you, the readers! Thanks for reading the Carnvial of Investing Super Bowl Edition! If you had a good time, please subscribe to my feed for daily updates on personal finance in your life.

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How To Save Up To 50% On Your Cell Phone Bill

Do you spend more than you’d like on your cell phone bill every month? I felt the same way; here are some tips I used to cut this monthly expense in half!

Get a Discount
I take advantage of a group discount through both my employer and my insurance company. These combined discounts add up to a savings of 12% a month.

Save On Equipment

Free Cell Phone
Cell phone providers are always offering discounts on new phones if you’ll sign a several year contract. Oftentimes, if you go with a lower end cell phone you can get the phone for free. Don’t buy the newest, fanciest phone and you could save $50 – $100. Assuming a two year contract, that averages out to $2 – $4 in savings a month. Another 3.5 – 7% monthly savings.

Smart Battery Usage
How many times have you been cut-off mid-conversation because your cell phone battery died on you? Check out these tips on how to make your cell phone battery last longer. If you can avoid paying $20 – 30 for a new battery over a two year time period you’ll save another 1 – 2% per month.

Replacement Cell Phone
When the audio on my cell phone went bad I got a quote from the Sprint PCS store for repairs. Because it was 4 years old, ancient in cell phone years, the replacement parts weren’t available. They offered me a new phone for only $30 if I signed up for the insurance plan on the new one.

I canceled the insurance plan after the first week and they didn’t charge me the $30 when I picked up the new phone at the Sprint PCS store so I got the new phone for free! When your phone goes bad, work with the company to get a new one and you could save $50 – $100 dollars! Factor those savings over a two year period and it averages out to another 3.5 – 7% monthly savings.

Manage Your Minutes

Leverage Customer Goodwill
I’d been a Sprint PCS customer for 6 years when Local Number Portability gave consumers the option to switch phone numbers between providers. Sprint wouldn’t lower my fees to convince me to stay with them; however, they did give me more minutes for the same price. In the past, overage charges cost us about $5 a month. Now I don’t have to worry about extra fees, which used to tack another 5-10% on our total bill.

Share Minutes
My wife and I use a shared plan across two phones, much cheaper for us than signing up for two lines of service. I figure we save about $10 a month by sharing minutes. Another 15% in savings!

Dropped Call Credit
If you use Sprint PCS, check out this tip on how you can get a dropped call credit. According to the site, the average credit is $11. I imagine if you try it every month they might get wise to you but it might be a good way to knock off a few bucks every once in a while.

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Do You Shop Online? Say No to the State Simplification Tax Project!

What’s one of the big benefits of shopping online? No sales tax right? Well an initiative called the State Simplification Tax Project (SSTP) looks to put an end to these tax-free purchases.

On a Mission to Tax
The mission of the SSTP as stated on their website is to “develop measures to design, test and implement a sales and use tax system that radically simplifies sales and use taxes.” Basically, the SSTP would require merchants to collect sales tax on purchases via the Web to customers in states where the retailer does not have a physical presence.

eCommerce Taxation
The SSTP is being led by a group of US States that are looking to increase state government income by tapping into the huge market of online retailing. The initiative is being opposed through information campaigns by major e-commerce players such as eBay. The eBay site explains why we don’t have to pay sales tax for most online purchases and how the SSTP is looking to change that.

“In 1992, the Supreme Court ruled that forcing remote sellers to collect sales tax in states in which they do not have a physical presence would constitute an undue burden on retailers and commerce in general.

Since that ruling, states are prohibited from collecting remote sales tax until they have simplified their tax regimes enough to lift the burden on remote sellers.”

The SSTP is attempting to simplify state and local tax laws in order to comply with the Supreme Court ruling so that they can begin to charge sales tax on internet sales.

Business Effect
According to the information from eBay the proposed SSTP does not succeed in simplification but instead allows for a different rate for each zip code, potentially 49,000 different jurisdictions. eBay warns those that sell online of the potentiAl consequences of the SSTP:

“Small entrepreneurs like you will be disadvantaged by a distant sales tax collection regime that forces you to comply with thousands of different rates, laws, filing instructions, and audit procedures.

Moreover, this would place you at a competitive disadvantage vis-Ã -vis your offline counterparts, who are only required to collect and remit taxes in one jurisdiction. This could force thousands of Internet businesses like yours to shut down.”

Consumer Effect
The way I see it, the SSTP project has the potential to hurt consumers in several ways. The most obvious would be if states “simplified” the tax codes and were allowed to charge sales tax on online transactions. A good example of this is the growing number of people that do their Christmas shopping online every year. The extra sales tax would put an even heavier burden on already strained budgets during the Holiday season.

If the SSTP were to deter individuals and small businesses from selling online I think we would experience fewer choices and fewer good deals. With fewer people selling things online the variety of items would decline. In addition, smaller sellers usually have to charge lower prices to compete with more well known large retailers. If the small guy left the marketplace we’d have less to choose from and not as many low prices.

What can we do?
Let your member of Congress know that you oppose the State Simplification Tax Project and checkout www.streamlinedsalestax.org to keep up to date on the status of the project.

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How to Get the Stuff You Want for Almost Nothing

One of the best ways to fit big purchases into your budget is to simply ask for some help. If you know there is a big ticket item that you want or need in the future put it on your wish list. Next birthday or Christmas when someone asks what you’d like for a gift, tell them you’d love a money contribution towards that item.

Gimme Money
People sometimes shy away from giving you money because it seems so impersonal. Instead you’ll end up getting a gift you don’t really need or want. It was nice of the person to go to the effort of buying you something they thought you’d enjoy. However, often times you’d probably be better off if they’d have just given you money. If you have the receipt you have to take time to return the item. If you can’t take it back it will simply clutter up your life until you get rid of it.

Money With a Purpose
Friends and family are much more likely to give you money as a gift if they know it is earmarked for a specifc purpose. It’s kind of like when someone asks you to donate money to a cause. You’re more willing to give when you know exactly what the money will be used for and who it will help.

So plan your big purchases and ask for help. If you can get a little money from several family members or friends it will add up and can really help reduce the cost of big ticket items. Since we’ve been married, my wife and I have done this most every Christmas and it’s saved us a lot of money.

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The Great Big Lie About Personal Finance Blogging – A Response

An entry in the most recent carnival of personal finance by makingourway talks about people’s expectations of making money by writing about personal finance online and questions whether these efforts are worth it. If you want to know what I think about the article then read on.

Adding Value
I’ll begin with a point that I agree on. Like makingourway, the sites I value the most are ones that offer unique insights into personal finance, not just regurgitated articles from the mainstream media. However, I do think discussing articles published by financial sites can offer value to readers.

In some cases people may not have seen the article in the first place. If it really is a great article then discussing its strengths may inform someone that might have missed it otherwise. We can offer alternative viewpoints than the author, just flat out disagree, or provide personal experiences that help illustrate the point of the article.

Hollywood or Bust
One of the main topics of the article is summed up with these two paragraphs.

“My point in this posting is that many people think they can or will escape the rate race by becoming personal finance bloggers; i.e. the advertising and related income from their personal finance blog will be enough to replace their day jobs and day income.

Except for those with very limited needs, demands and lots of time, this is a pipe dream. It’s fairly easy for me to identify a small number of financial successful PF Bloggers because there are so few!”

I look at it kind of like all the people that rush off to Hollywood to become a star. Many of them that make the trip to Los Angeles hoping to make it big never achieve that huge break. However, the effort becomes part of their life story and makes them who they are. The people they meet and lessons they learn along the way are invaluable to their future and may create opportunities they never would have even considered.

I think writing about personal finance in your life and the world around you has a lot of the same benefits. Plus, if everyone gave up the Hollywood dream where would the next big actors and actresses come from? If people gave up on self-publishing online think of all the talent and insight the rest of us would miss out on.

Alternative Income
I have an opinion on the closing question as well:

“But for many, there is an important question – should you spend more time thinking about how to succeed in your job and less about starting a side business? Should you spend more time saving what money you have and investing it carefully than starting a side business to live up to your income?”

I think earning money on the side is a valuable skill that everyone should learn. We often talk about the importance of diversification in personal finance. How diversified are you if all of your income comes from a single source? If that income source goes away for whatever reason, what will you do?

I don’t think people should quit their day job with hopes of becoming a six figure blogger. If you’re thinking about it, Yaro Starak has a series on blogging as a sustainable business model that you should read first.

However, I think creating income streams in addition to your primary job is a smart thing to do. In addition to the financial benefits, it helps hone skillsets you may not use in your daily job and helps you network with others. These skillsets and networks can come in handy if your main income suddenly dries up and blows away.

Thanks
The great thing about the personal finance blogging community is that there is always something new to learn and people are willing to share and discuss important topics that affect the quality of our lives. Thanks to makingourway for bringing up this topic and to the readers for the amount of deep thought I’m sure you’ll put into it.

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Family’s Will Suffer, Mortgage Lenders & Investors Will Profit

Robert Reich reported on Marketplace today that home foreclosures were up 42% last year resulting in over a million families losing their homes. Many of these people had signed up for adjustable-rate mortgages or interest-only loans with no down payments and sometimes 100% financing.

Rough Times Ahead
The bad news for families that borrowed with adjustable rate mortgages is that these rates are projected to climb. According to estimates by the Mortgage Bankers Association, this will affect over $500 billion worth of mortgages in 2007. The easy money of the real estate boom years has dried up and people that overextended themselves are going to struggle as rates increase. Reich projected further struggles for families based on a recent report.

“According to a report issued last month by the Center for Responsible Lending, 1-in-5 sub-prime loans made in past two years will end in foreclosure. That’s about 2.2 million borrowers who are likely to lose their homes.”

Lessons Learned
Reich points out that the millions of families are the big losers here. While mortgage lenders and investors may lose money, they’ll still have the properties to resell. The families will be out of a place to live.

What can we learn from this tragic, yet inevitable outcome? Don’t overextend ourselves to pay for anything, let alone the home we live in. Eventually interest rates or the economy will catch up with us and we’ll regret our actions. The second thing to think about is how the increase in foreclosures will affect the availability of discounted housing in the market for investment opportunities.

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Stop Comparing Your Finances With Others. Five Financial Ratios To Keep You On Track.

Get Rich Slowly recently told Flexo’s story of how he’s become the Chief Financial Officer of his own life. Flexo tracks his finances with the same financial statements that businesses use, net worth and income/expense worksheets.

Financial Ratios
So as the CFO of your own life, how can you measure your financial progress against other people since everyone’s financial situation is a little different? Corporations have a similar challenge comparing their success against one another because no two businesses are exactly alike. Corporate executives and Wall Street use financial ratios to distill the numbers down to help compare apples to apples. We can use similar ratios in our personal finances.

Key Ratios
My wife and I sat down with a financial advisor a few years ago and she pointed out 5 key ratios to keep an eye on. Below I give the formula, an example calculation, and a recommended target for each ratio.

Liquidity Ratio
Formula: Liquid Assets / Monthly Expenses
Our Example: $68,070/$6,892 = 9.9
Target: 3-6 months

Housing Payment Ratio
Formula: Monthly Housing Costs / Monthly Gross Income
Our Example: $825 / $7585 = 10.88%
Target: Less than 28%

Solvency Ratio
Formula: Total Assets / Total Debt
Our Example: $265,570 / $146,654 = 1.81
Target: Greater than 1.0

Savings Ratio
Formula: Savings per Year / Annual Gross Income
Our Example: $18,000 / $91,000 = 19.78%
Target: 8-25% depending on age

Debt to Income Ratio
Formula: Annual Debt Payment / Annual Gross Income
Our Example: $9900 / $91,000 = 10.88%
Target: Less than or equal to 30%

Why Measure?
As we read about other’s situations we often find ourselves comparing our finances to theirs. If someone else has a huge net worth it may seem intimidating, like you’ll never get where they are. If you’re ahead of most other people you might have a tendency to slack off financially. Rather than comparing yourself with others, measure your finances against these target ratios to help keep yourself on track.

Compute these ratios periodically and keep a record of the results so you can see your trend over time. I haven’t done a good job of this; the numbers I use in our examples are from 2003. In my defense, our expenses/debts haven’t gone up much since then while our salaries and savings rates have increased so our ratios should be the same or better. However, as we move to a one-income family a lot of things will change financially and I’ll need to stay on top of our ratios to make sure we’re still headed in the right direction.

If these ratios will help you keep better track of your finances, subscribe today for similar helpful tips.

Update, Flexo has started a series on personal finance ratios. Check out the first ratio in the series, the Working Captial Ratio.

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