Personal Finance Tips

[maat55]

Tuesday, June 1, 2010
Personal Finance Tips
It seems that a large and growing segment of people and governments across the globe are hooked on the drug of debt. Too many people have also become heavily reliant on government programs.

Many European countries are struggling and nearing default on their massive pension liabilities. We have seen riots in a few countries as deficits continue to grow.

In america, we have massive debt, massive deficits and massive unfunded liabilities. Our mind boggling tax structure is anything but business friendly and would likely have our founders in tears. The only options on the table are to make an already bad business plan, worse.

I blame this on the people. For far too long, americans have grown to passive to government intrusion into their personal lives and the economy. This mindset has nowhere to go but to an eventual collapse, which will be very detrimental to our and future generations freedoms.

So, how do we fix this? Do we continue to trust our inept government? Or do we take back responsibility for our personal finances and lives? When an individual is not reliant on government, he will detest that government taking his freedom through taxation.

The average american applies way too much of his income to assets that depreciate in value. Most people have no idea how to allocate their incomes. Too many people are addicted to instant gratification and use debt to get what they want which limits their overall potential for wealth and overall prosperity.

Here is an seven step program to have as an financial plan, by Dave Ramsey.

1) Build an 1000k Emergency fund
2) Pay of all debts other than mortgage and large home equity loans.
3) Build Emergency fund to 3 to 6 months expenses.
4) Begin investing 15% of your income into Diversified stock mutual funds.
5) Any additional funds can fund college funds(529's).
6) Next, use any additional funds to pay down mortgage
7) Give. This can be done in parts after step three if you choose.

Ultimately, you want to have no debt other than your mortgage, have an EF of 6 months expenses and be applying at least 10 to 15% and more towards retirement savings.

Pay cash for all cars, tv's etc. If you do not have at least 10k in savings, you should not be buying cars worth over 5k, you should not be smoking(period), you should not be eating out, playing golf etc. Getting out of debt and saving an emergency fund should trump any luxuries.

If you do these things, you will prosper. You will also eliminate your desire for instant gratification and over consumption. You will eventually have wealth and be able to use it more wisely and abundantly.

Posted by maat

[jamesparker100]

Thanks for sharing fantastic tips. i think these tips are really useful for each one of us who is willing to get maximum benefits out of his/her business.
Thanks once again...

[Kjackson25]

Maat,

Great framework for people to begin getting better off financially.

We waste so much money in so many areas of our life. Cars are at the top of it.

I would differ with you on #4, at least the diversified stock mutual funds- these have hugely underperformed over a long period of time. Wall Street has done a great job of brain washing us into believing that a "diversified portfolio" sufficiently limits risk. Nothing could be further from the truth. There are safer ways to build wealth that are largely overlooked by just about everyone, especially financial pros.

[buildmybudget]

Quite frankly, I don't think most Americans even know where to begin. In my days as a financial adviser, few people I met even knew how much extra income they have each month. It was mind blowing! How can you begin to save if you don't even know if you have a surplus each month? This is a good post; it could have included DR's debt snowball technique of starting small and making small wins add up to big wins when it comes to paying off debts.

[disneysteve]

Wall Street has done a great job of brain washing us into believing that a "diversified portfolio" sufficiently limits risk. Nothing could be further from the truth. There are safer ways to build wealth that are largely overlooked by just about everyone, especially financial pros.

You've posted this to a couple of threads. How about telling us what you are talking about.

[Kjackson25]

disneysteve,

Wall Street's model espouses that the best way to mitigate risk is to have a well diversified portfolio. Yet many diversified portfolios got hammered in the market downturn from Late 2007-Early 2009. They suffered 20%, 30%, 40% or more in losses. That doesn't sound to me like they did much to reduce risk. Only losing 20% when the market was down 50+% may sound good, but you are still down 20%.

"To moderate (a quality or condition) in force or intensity; alleviate.
To become milder"

What we don't realize is the Power of LOSSES.

If I mitigate my risk I reduce my losses from 59% to 20% so now I only need a 25% return to get back to even instead of 144% or if I'm ONLY down 30% then I just need a 43% return to get back to even instead of 144%. Hmm, I know I'll sleep better tonight knowing that.

Another LOSS we don't always consider is the loss from inflation.

The DOW hit 10,000 in late 1997. After inflation is factored in you would need to get to more than 13,000 just to get back to even and we are below 9,700 today. That's 14 years and someone in the market is down huge. We don't have that many years in our lives to build wealth and spending the last 14 losing huge to the market and inflation is not a smart strategy.

Next is the power of "average returns!" This must be one of Wall Street's favorite terms.

Assume you have $100,000 to invest over 4 years (I chose 4 years because it's easier on my math and it gets the point across.)

Option 1) Earn an average return of 25%
Option 2) Earn a guaranteed 7% return.

Which would you choose?



We are on the honor system here so post what your answer was before you read the answer.






Option 1
Year 1 you are down 50%- balance $50,000
Year 2 you are up 100% - balance $100,000
Year 3 you are down 50%- balance $50,000
Year 4 you are up 100%- balance $100,000

Option 2
Year 1 up 7% -$107,000
Year 2 up 7%- $114,490
Year 3 up 7%- $122,504.30
Year 4 up 7%- $131,079.60

So the higher average return ends with a balance 31% lower than the guaranteed 7%. Wall Street always talks about average returns.

My point is the Average American has an extremely limited pool of money from which to build wealth and by following Wall Street's model their chances of being successful are slim at best.

Wall Street and Casinos have similar business models, they both need your money to survive it's just that when you spend your money in a Casino you know you are gambling where Wall Street makes it sound like what you are doing is safe and nothing could be further from the truth.

Does that make sense?

[disneysteve]

Kjackson25, I know and understand all of that. You still haven't answered my question. You posted this:

There are safer ways to build wealth that are largely overlooked by just about everyone, especially financial pros.

What are you referring to? What investments do you suggest as alternatives to the standard model?

[Kjackson25]

Steve,

There are vehicles that have the following features, some even have more than one of these features.

• Don't lose money when the market is down,
• Money goes up when the market is up,
• Money can grow tax deferred,
• Allow higher levels of contributions,
• Guaranteed minimum returns,
• Guaranteed income for life,
• Guaranteed income for life that rises when the market is up and stays the same when the market is down,
• Significantly boosts guaranteed income if you can't do two or more Activities of Daily Life,
• Allows lump sum distributions, but would reduce guaranteed income for life,
• Passes any remaining cash balance to heirs,
• Tax free growth,
• Tax and penalty free access,
• Insured similar to FDIC,

There are a number of options that can provide alternative options for people wanting to build wealth that might be safer and provide a more known result for them to be expecting when they do retire. From a personal perspective I try to inform people of different ways to be safer, better protect what is important to them, reduce or possibly eliminate risk (especially the risk of loss) and be able to sleep better at night because they are better informed and better understand what they are doing financially.

[buildmybudget]

KJackson, so what specific combination of vehicles do you use for your retirement? Do you have an IRA and 401k and only invest in fixed income securities or mutual funds? Do you invest in blue chip stocks? You mention various features of financial products and I'm wondering if you capture any of these features in your own portfolio.

[disneysteve]

Steve,

There are vehicles that have the following features, some even have more than one of these features.

• Don't lose money when the market is down,
• Money goes up when the market is up,
• Money can grow tax deferred.

Once again, you have evaded the question and failed to identify this miracle investment you are talking about but I see where this is going. So tell us which insurance company/annuity company you work for.

[Kjackson25]

Steve,

Since this is a public forum I try to choose my words very carefully. If you will notice I call them vehicles, YOU call them investments. The governing bodies, in their infinite wisdom, do not allow them to be called investments.

You call it evading, I call it being careful. From my limited time on here and in reading several of your posts you do have a lot of financial knowledge, I would assume you are in some capacity a financial professional, advisor, etc. If that is the case and you are in some capacity helping people financially, I am a bit surprised you don't know about what I am talking about. Of course, you may know and are just waiting for me to reveal them. Which is fine.

As I stated, I come to sites like these to try to help raise awareness to interested consumers. I don't feel it is my position to provide someone that I don't know, that I haven't met with, that I don't know their entire situation with the ammunition to do something that might not be in their best interest. I do want to raise their awareness that these types of vehicles do exist, are highly regulated, and that they are available. I do this in hopes that they take this information and ask their financial professional about them, if they will fit into what they are doing and more importantly if their financial professional doesn't know about them then that financial pro may not be the best one for them. If they do know about them and don't like them then the consumer is armed with enough information to ask why they don't like them and hopefully have enough information to be able to feel comfortable if they agree or disagree with their financial professional's position on them.

In my opinion when people, like Dave Ramsey or Suze Orman, spout off advice like it fits everyone listening to them I think that is not necessarily a prudent way of handling financial advice. Can anyone give prudent financial guidance in a 60 second phone conversation or a two question email? Would you dispense financial guidance in that manner?

I am by no means perfect and I'm sure at times I may fall into the trap of giving advice to someone that I don't have enough information about to be giving them said advice, but I will try to refrain from doing that very often.

What I am trying to say is I am just trying to provide information that I have found to be contrary to what a majority of people are doing with their money and in my opinion it does so more safely and can when properly structured provide much more certainty. I hope you can respect my position.

[disneysteve]

From my limited time on here and in reading several of your posts you do have a lot of financial knowledge, I would assume you are in some capacity a financial professional, advisor, etc.

Actually, I'm a physician.

I come to sites like these to try to help raise awareness to interested consumers.

And that is a worthy goal. As a long time participant here, I just find it a bit suspect when someone new comes along and starts posting about some wonderful "vehicle" but deliberately leaves out the details of what it is they are talking about. As a moderator here, I'm always on spam and troll patrol and I wasn't quite sure if you were fitting into that category from your initial posts. And still, you haven't told us what this vehicle is. I have some idea what you are talking about but I'm not 100% sure.

In my opinion when people, like Dave Ramsey or Suze Orman, spout off advice like it fits everyone listening to them I think that is not necessarily a prudent way of handling financial advice. Can anyone give prudent financial guidance in a 60 second phone conversation or a two question email? Would you dispense financial guidance in that manner?

I agree with you to some extent. One thing to remember, at least with Suze Orman (I'm not sure about Dave Ramsey) is that what you hear on her show is not the whole story. Before she airs a call, she has the caller fill out a very extensive packet detailing all of their financial information. We hear the 30-second summary. Suze sees the entire picture. So she isn't giving advice based on a little snippet of info.

There is no one-size-fits-all financial advice but there are some pretty decent rules of thumb that apply to the vast majority of people. If everybody would follow them, as a whole we'd be in a lot better shape even though some people could probably do better by deviating from the standard advice and tweaking it to fit their own unique circumstances.

[maat55]

Maat,

Great framework for people to begin getting better off financially.

We waste so much money in so many areas of our life. Cars are at the top of it.

I would differ with you on #4, at least the diversified stock mutual funds- these have hugely underperformed over a long period of time. Wall Street has done a great job of brain washing us into believing that a "diversified portfolio" sufficiently limits risk. Nothing could be further from the truth. There are safer ways to build wealth that are largely overlooked by just about everyone, especially financial pros.

The stock market has averaged about 10 to 11% over the last 70 years. There are numerous funds with long track records that meet and beat these numbers. There are many index funds that limit risk, but yes, the market will go down. We can thank our government and Federal Reserve for this in many cases.

My advice is fairly generic because there are no perfect investments. Most people do not want to manage their investments, so diversified mutual funds are a good longterm option. The point is to get people to get proactive in their finances. I also, have a bias against the government. It is my opinion that it creates more damage than it helps. IMO, there is no safe economy or investments while the government continues to intrude into the free market. My focus is on individuals planning around social programs for themselves.

Feel free to name your "vehicles" for those looking for a smaller(returns), safer investment.

[Kjackson25]

Actually, I'm a physician.

And that is a worthy goal. As a long time participant here, I just find it a bit suspect when someone new comes along and starts posting about some wonderful "vehicle" but deliberately leaves out the details of what it is they are talking about. As a moderator here, I'm always on spam and troll patrol and I wasn't quite sure if you were fitting into that category from your initial posts. And still, you haven't told us what this vehicle is. I have some idea what you are talking about but I'm not 100% sure.

I agree with you to some extent. One thing to remember, at least with Suze Orman (I'm not sure about Dave Ramsey) is that what you hear on her show is not the whole story. Before she airs a call, she has the caller fill out a very extensive packet detailing all of their financial information. We hear the 30-second summary. Suze sees the entire picture. So she isn't giving advice based on a little snippet of info.

There is no one-size-fits-all financial advice but there are some pretty decent rules of thumb that apply to the vast majority of people. If everybody would follow them, as a whole we'd be in a lot better shape even though some people could probably do better by deviating from the standard advice and tweaking it to fit their own unique circumstances.

Steve,

A physician, interesting, I wouldn't have guessed that.

I thought you might be a moderator, but wasn't sure. I understand you concern about spam and certainly understand wondering where I new poster is coming from. The only thing I am selling here is information and my point of view.

I think the traditional Wall Street view of investing is severly flawed. The buy and hold, have to be in the market, mutual funds are the way to go, diversification protects you, since you don't have enough money saved for retirement you need to keep your money in the market in retirement to have a chance for your money to last, and my favorite you can take 5% of your portfolio and add the amount of inflation to it every year and have a better chance you won't outlive your money. Oh wait, that didn't work too many people were running out of money so let's drop that to 4.5%, oh wait that's not working eithe, let's drop that to 4%, oh wait- now some are talking 3%. Well if you don't take ANY money out the chances are good your money will last your lifetime. I just don't see it working all that well.

I think a lot of the advice given from the suitability standards are a joke. Wall Street has fought fiduciary standards for a long time, heck in the latest FInancial Reform they have managed to get the fiduciary standard to be "studied" by the SEC. That is a joke.

I am just trying to get consumers to realize this so they can go into relationships with their eyes open, ask the right questions and be able to tell if the financial professional they are talking to is in fact looking out for the consumers best interests and not their own or their companies.

As far as Suze goes, her advice sure seems to be geared to who is paying her bills. For years she preached buying used cars and then GM became a sponsor and all of a sudden buying new was the way to go.

As I thought a little more about the spam line of thinking, wouldn't I be more spamming if I was here talking in specifics about products than to just be giving people some information so they can ask about them to their financial professional? Just a thought.

[Kjackson25]

The stock market has averaged about 10 to 11% over the last 70 years. There are numerous funds with long track records that meet and beat these numbers. There are many index funds that limit risk, but yes, the market will go down. We can thank our government and Federal Reserve for this in many cases.

My advice is fairly generic because there are no perfect investments. Most people do not want to manage their investments, so diversified mutual funds are a good longterm option. The point is to get people to get proactive in their finances. I also, have a bias against the government. It is my opinion that it creates more damage than it helps. IMO, there is no safe economy or investments while the government continues to intrude into the free market. My focus is on individuals planning around social programs for themselves.

Feel free to name your "vehicles" for those looking for a smaller(returns), safer investment.

Averages, that is what the stock market espouses. 70 year time line, isn't there a better time frame that you could use to "prove" the market is the place to be? Isn't a 70 year time line a little longer than the average American's investment time frame? So since the market suffers losses I should just be okay with that? I should just take it? IMO stock market investing glosses over the power AND timing of losses. The power of losses are huge and the fact we don't know when they are coming is even bigger.

What about the people that planned to retire in March of 2009? What are their options? Work longer? Get by on less? Hey the market goes up and goes down you just chose the wrong time to want to retire? The problem with the average American and the market is they don't know when the drops are coming (well neither do you or I) and they don't have an exit strategy. I doubt their financial pro does either. That would go against the Wall Street creed of "Buy and Hold!"

I know people that are very successful in the market, they have solid investing strategies, they have exit strategies to limit losses, they do a lot of things to make their clients money. What they don't do is work with lower wealth or lower income people. They focus on the top 5% of the food chain. That doesn't help the other 95%.

I agree it would be great if we could get people proactive in their money, but the truth of it is that they don't. They are scared, they are intimidated, they get a lot and I mean a lot of advice from people that are everything but interested in what is best for the consumer and these financial pros are largely protected by the governing bodies that have the rules set up to protect the company, their representatives and not the consumer.

I am also not pro government, in my opinion they have made a bad situation worse and have increased the possiblity it will happen again. We probably agree more than we disagree, we have just chosen different paths to a similar goal.

Maat, if the way you are talking about is the best and you are so convinced it is the best way- why then does that model not offer any guarantees of lifetime income and guarantee you won't lose your money?

If I was within 20 years of retirement I'd much prefer a way to guarantee me an 8% return on the income base of my money with a guaranteed income for life amount based on my age at the time I begin taking money than to have my money in the market. I'll give up the potential higher returns and potential losses for the certainty and guarantees.