This week we are going to have our first ‘guest’ investment tip. Several years ago a client of mine gave some advice to a young man named Mark, about dealing with money. It’s pretty good stuff, and he graciously agreed to allow me to share it with you. Here is what he had to say:
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Mark-Here are some thoughts on money management that have worked for us over the years. Hope there’s something here that will also help you and your family. Bear in mind that this is only a beginning.
Phil
- Decide on your long-term money objectives-the things that are most important to you and your family. Make sure that you and your wife are in agreement on the high-priority objectives, whether it’s a college education for each of the kids, a retirement fund, or what.
- Do some research to decide on the amount or amounts of money you’ll need by specific yearly dates-2010, 2015, or whatever.
- Write out the amounts and dates from steps l and 2 and review it from time to time. Inflation will increase the amount needed for any given task, year by year
- Write down the amount you have already saved that could be applied now toward your goal.
- You will be increasing this amount by:
(1) Saving-making regular contributions from family earnings. Once in a while, you may get a windfall that you can add to savings-a gift, inheritance, or work bonus, but obviously you can’t be sure of getting any of these at any particular time.
(2) Investing the money and increasing it by the earnings from investment. You can use the “rule of 72” to make a rough estimate of earnings from investment. It goes like this: Take the rate of compound interest you can get on your investment, divide it into 72, and the result is the number of years it will take to double your investment. Example: You are earning 3% on a Certificate of Deposit for $10,000. Dividing the rate, 3, into 72 means that in approximately 24 years you will have $20,000. BUT: in 24 years, inflation may have whittled away at the value of the $20,000. In fact, if the rate of inflation is also 3%, you will wind up with the same buying power that you started out with. Bummer. But you might also be able to earn 6 or 8 percent or more with only a little additional risk by careful thought and study. - Do the arithmetic to figure out how much you have to save to accomplish your goal in time. Make a payment to the savings fund out of every paycheck before you spend anything else.
SAVING
Saving is the key. You have to “have money to earn money.” We started out very poor, so we learned fairly fast. Aside from basic food needs, you have to be tough with yourselves. Here are some thoughts on that.
Credit cards. Never carry a credit card balance from one month to another. The interest rate is horrible. Take out a bank loan if you absolutely have to, but don’t pay credit card interest rates.
Cars. A car or truck is never an investment unless you use it in business. Cars are an enormous and bottomless rat hole to pour your money into, so do your best to minimize the cost. Shop thoroughly with the aid of a mechanic friend and buy a GOOD used vehicle if you can. Look at the projected operating and repair costs as well as the first cost. Change the oil regularly, protect the upholstry and finish. Don’t buy an extra car if you can possibly avoid it. Delay -as long as you can-the day when you have to provide your kids with their very own wheels.
Ongoing expenses. We are constantly tempted to commit ourselves to ongoing future expenses. To counter that temptation, we do a simple calculation: Multiply the monthly cost by 12 to get an annual cost. Then multiply that result by 10. The result is the amount of money that decision will cost you in ten years. And that’s not even considering what we could earn with that money if we invested it month after month at a rate exceeding the annual rate of inflation.
Friends, Co-Workers, and Neighbors. Don’t keep up with the neighbors. What they choose to do with their money is their business. Keep their friendship, admire their new furniture, cars, and boats, but don’t be tempted to match their spending.
Budgets. Some families keep budgets to help control expenses. We have never done that; instead, we just keep track of our expenditures, item by item. We used to go over those expenditures together once a month. Now, it’s just once a year. In our family, my wife is the record keeper for expenses. (I keep track of investments.) In other families, it’s the husband who keeps the day to day records. Use a computer program if it helps. But it’s essential to go over these expenses regularly together. Listen carefully to each other. Choke down any impulse to be defensive; don’t jump on your partner if you think she made a mistake. Remember that you’re on the same team, working for the same goals you agreed on-right?
Earning: If you have everyday work skills like carpentry or plumbing or fix-it stuff, or if you can learn these skills, it pays off very well in the long run. If you can do $20 a month of stuff that otherwise you’d buy, that’s $240 a year and $2400 in ten years. And you don’t have to pay taxes on those “earnings.” Sure, you’ll make mistakes, but over time you’ll learn which types of things you can do well and what you should leave to the pros.
Kids can earn, too, to meet day-to-day wants or set up their own college funds. I love it when a neighbor kid wants to do our windows for pay. It’s hard for us to find kids who are dependable, cheerful, and hardworking who want to take care of the tasks we can’t do or don’t like to do. It could be working with plants and shrubs, ironing out a computer problem, minor painting, etc. A big plus is that kids learn to manage their own money while they earn. And they can learn a lot about how to get along well with all sorts of people.
Special Situations: I know that some couples can’t talk about money matters without getting into a scrap. Sometimes it might pay to hire a fee-only investment planner to advise on managing your expenses and investments. There’s a national organization of such planners who maintain some standards for their members. It’s called NAPFA, and you can find them on the Internet.
Some of these folks will work by the hour; others work on a percentage of the money under investment. But you’ll want to be very cautious about who you hire and how you work with them. Above all, stay away from brokers, bank people, insurance agents, and others who have something to sell other than their time and expertise. I’ve made a few mistakes over the years by mistakenly trusting these kinds of people. It may help to think of them as used-car salesmen, except that they’re worse.
Odds and Ends:
Mutual Funds: Mutual funds, well chosen, are a good choice for folks with limited amounts of money under investment. You get experienced management and diversification at minimum cost. Some good rules: Never buy a fund that charges a “front end load.” That’s a commission to the seller, and it does absolutely nothing for you. Likewise, stay away from funds with a “12b1” charge. And don’t buy a fund whose operating charges are more than 1.5% per year. Chances are you can find a very good fund with expenses of only 1.0 % or lower. Buy your funds directly from the mutual fund itself-don’t go through any kind of agent, because if there’s an agent involved, he gets a fee, and it will come out of your pocket, one way or another.
Look for funds that have had the same manager for several years and who have fairly consistent, strong results for five and 10 years. Likewise, choose a fund that has low or at least below average risk ratings.
You can find loads of information about mutual funds of all kinds. That info is free from Morningstar.com or several other sources. I can help you find and use that information if you like.
Most advisors tell you to keep a portion of your portfolio in bonds (or bond funds). Good bonds have a low return, but also low risk. This is a place where a good advisor can really help you, because there are many different types of bonds and bond funds.
Also, every good advisor will tell you to diversify your investments-spread your risk over many investments-and show you how to do it wisely.
You might try to find a book on personal finance in the library. Two of the best-known writers are Jane Bryant Quinn and Andrew Tobias, but there are many others.
Okay, you already know much of what I’ve written. But-do you REALLY use that knowledge???
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Like I said pretty good stuff. Thanks for sharing, Phil.