Wednesday, August 25, 2010

personal finance planning





photo: elycefeliz 


Do you want to become rich beyond your wildest dreams? The question may seem right out of a late-night infomercial — unless you follow one strategy that may actually help you achieve it: Act poor.


If you do this, you’ll be fast on your way to having a million dollars — or more. That money can buy you a lot of stuff, of course, which would allow you to act rich and show off in no time. But if you’re smart, you’ll use it to buy freedom and give yourself options that the rest of your graduating class won’t have because they just weren’t as smart coming out of the box.


What do I mean by “act poor?” Pretty much act like you have for the past four years. Maybe even live with Mom and Dad for a year or so, promising that you’ll tell them when you’re coming home at night and help with the dishes. (As a parent, I had to say that.) The point of keeping your expenses low is to save your socks off.


Your friends probably won’t be doing this. The moment they get jobs, they’re going to want a better car; fewer roommates; dinners on the town. And that’s ever so tempting to do since you’ve likely suffered through lean years as a college student. And that new job you’re getting could allow you to pay for some luxuries, even if it doesn’t pay a lot.


But there’s a great pay off to living like a college student. If you manage to save really prodigiously for just a couple of years, you can build an emergency fund that will tide you over when times are really bad. And you can get started on long-term stock market investing at the best possible time.


How could I possibly say that this is the best possible time to be investing in the stock market, when stocks have gone nowhere for a full decade? I’m a student of the market, the author of Investing 101 and can say with some authority that the market’s miserable decade-long performance is exactly what spells huge opportunity for you.


A company called Ibbotson Associates has been compiling data on investments for decades. Let me throw a few of their statistics at you so you can understand why I’m so bullish — and particularly bullish for those of you who get to start investing now.


Average stock market returns from 1926 to the present work out to 9.6% for big company stocks and 11.67% for small company stocks. But stocks rarely hit that average in any given year. Instead, prices dive and soar, scaring out the faint of heart — and those who don’t understand why they’re investing. These price swings are often lasting, which is why you never invest short-term money in stocks. Put the rent money in the stock market, and a normal market swing might just send you back to living with Mom and Dad. But over the long run, those downswings are matched by equally rewarding upswings.


Consider: During the decade of the 1920s, big company stocks returned an average of 19.2%, according to Ibbotson — way above the long-term average. But the next decade was miserable, with returns on big company stocks dropping 0.1% over the 10 year period. In other words, if you invested $10,000, at the end of that decade, you would have a little less than $10,000 and probably feel demoralized. What happened then? In the 1940s, market returns were pretty manic — alternating between big losses and huge gains. The average return, however, ended at 9.2%. Still, because of the really rotten returns in the 1930s, investors could expect a “catch-up” decade and they got it. During the 1950s, average stock returns rose 19.4%.


Stock gains were below average in the 1960s and 70s —  up 7.8% and 5.9% respectively; then way above average in the 1980s and 1990s — up 17.8% and 18.2% respectively. Are you detecting a pattern?


Okay, so the relevant decade for you was the one just completed, when stock prices fell 1% on average, according to Ibbotson. That’s the worst decade in history, which is a really good sign when you’re starting now.


It’s not clear whether your “catch up” returns will hit this year, next year or some time in the future, but the chances are great that you’ll get a stretch of above-average returns. What does that mean in dollars and cents?


For the updated version of Investing 101, I did an analysis of what would happen to somebody who put $1,000 a month into the stock market starting in January of 1970 — the last really miserable decade for stocks– and stuck with it for 30 years. The first decade was rotten (5.9% returns), but the next two decades were awesome.


At the end of 30 years, this investor had $4.03 million. If he earned just the average return over that time– or earned his returns in a different order — he would have had $1 million less — $3.08 million to be precise. Why? He had the least at stake when returns were rotten and a lot of money to compound when times got good.


I know $1,000 a month is an insane amount and feels really crazy to you now. You don’t have to save that much to get a big reward; you just have to start saving as much as you can.


But if you get a job where your employer offers a 401(k) plan, it’s not as hard as you might think to save even that stunning $1,000 a month. That’s because your contributions come out before tax, which reduces your out-of-pocket cost because it also cuts your tax withholding, and most employers match your contributions — some even at 100% on the dollar.


In other words, you contribute $500 and your employer contributes $500. And because your contribution comes out before tax, your paycheck is reduced by just $400 (assuming you pay 20% of your income in state and federal tax).


Think you can’t save that much — or even at all? Try tracking all of your expenses, suggests Danny Kofke, a special education teacher and author of How to Survive (and Perhaps Thrive) on a Teacher’s Salary.


Little things like going to lunch each day, instead of packing a sandwich, are likely to cost you about $5 bucks a day, $25 a week and $1,300 a year. The soda that you buy from a vending machine is likely $1 more than the one you bought at the store. And, of course, if you put off buying that new car and drive your junker (or take the Metro or bus), you’re likely to save $150 to $300 each month on car payments, too.


“Times are tough to get a job, but if you can start off without immediately getting used to spending how much you’re making, you can get way ahead,” Kofke said.


This is the formula that Thomas Stanley explains in The Millionaire Next Door and is, in fact, the most reliable way to get rich. If you play your cards right, you could be the youngest millionaire on your block.


Kathy Kristof is a syndicated personal finance columnist, speaker and author of three books, including the recently updated Investing 101 (Bloomberg, 2008).


More on Money Watch



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Personal finance site for women LearnVest has had a big year. Launched last fall at TechCrunch50, the startup raised its first round of funding from Accel Partners and seed investors a few months ago ($4.5 million to be exact).


LearnVest has a simple goal: to help women organize their finances and learn how to become financially savvy. It’s kind of like an online version of financial planner Suze Orman blended with personal finance site Mint.com.


Today, the startup is launching three online programs, called ‘bootcamps,’ to educate women on various financial subjects, including a Financial Basics Bootcamp, Cut Your Costs Bootcamp, and Investing Bootcamp. Instead of creating a book-like online experience, LearnVest is making email newsletters the foundation of the educational sessions.


For example, the Investing Bootcamp, which costs users $7.99, teaches women how to make smart investing decisions and properly allocate their portfolios. For three weeks, women will receive daily emails with advice and actionable items that they can perform on LearnVest, making the newsletter interactive. For example, for the Financial Basics bootcamp, one of the daily actionable items is ‘Get Your Credit Score.’ Cut Your Costs Bootcamp topic range from Bootcamp topics range from ways to save on energy bills to exactly how to negotiate a lower cable bill. Learnvest will incorporate all of the information users complete and input in bootcamps into their LearnVest account.


Alexa von Tobel, LearnVest’s CEO and founder, tells me that the idea is to encourage women to not only learn, but also motivate them to make actionable decisions about their accounts and finances at the same time. She chose a newsletter format because the ‘LearnVest woman’ simply doesn’t have time to read the same information in a book. Women are more inclined to read a daily tidbit in an email vs. sitting down with a book, says von Tobel.


LearnVest held a pilot bootcamp in January and saw impressive results—8,000 people signed up for the basic financial bootcamp. With the new additions LearnVest expects to sign up a total of 40,000 participants. LearnVest plans to launch additional bootcamps in the future, including sessions realted to how to get a mortgage for a home.


The integration between the bootcamp educational sessions and the user’s LearnVest profile is key to the success of the initiative. As we wrote in our initial review of LearnVest, the site will ask you a series of questions about your financial health (i.e. how much credit card debt do you have), you life stages (i.e. do you rent, are you planning a family soon, do you own a house) and your financial education level and will diagnose your financial health and give you a snapshot of what you need to learn and improve. LearnVest will create customized plans for you, depending on your goals, and allow you to chart off your improvements and achievements.


Von Tobel says that LearnVest is steadily adding more female users flock to its site and is currently seeing 500K uniques per month. The next step is to take the site mobile, says von Tobel, and help women access LearnVest on the go.




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Thursday, August 5, 2010

managing personal finances




In 2006, recent Harvard grad Alexa von Tobel was headed for a job at Morgan Stanley. But though she would soon be managing the bank’s investments, she realized she didn’t know the first thing about her own finances. Most financial guides seemed to be written for middle-aged readers with millions in assets, rather than recent college grads. "I was reading every book I could find, but none of them spoke to me," she says. So she came up with the idea for LearnVest, an online personal-finance resource for young women like her, and ended up writing an 80-page business plan.


After two years at Morgan Stanley, von Tobel entered Harvard Business School in 2008. But upon winning a business plan competition held by Astia, a non-profit that supports women entrepreneurs, she took a five-year leave of absence and invested $75,000 of her Wall Street earnings to start LearnVest in November. She quickly enlisted advisors, including Betsy Morgan, the former CEO of the Huffington Post, and Catherine Levene, the former COO of DailyCandy, to help develop the site’s content and technology. In January 2009, she secured $1.1 million in seed funding from executives at Goldman Sachs.


LearnVest’s site launched a year later and has since signed up more than 100,000 members. It offers online budgeting calculators, video chats with certified financial planners on the company’s staff, and free e-mail tutorials on topics such as opening an IRA. The company earns revenue from advertising and by referring its users to companies such as TD Ameritrade. In April, after just four weeks of fundraising, von Tobel closed a $4.5 million investment round led by Accel Partners, which has also invested in Facebook and Etsy. (Incidentally, Facebook CEO Mark Zuckerberg lived in the same dorm as von Tobel at Harvard.)


Von Tobel likens LearnVest to an online version of The Suze Orman Show, but with the goal of reinforcing positive finance habits early on. “Suze Orman helps 45-year-old women get out of debt,” she says. “Why not reach 20-year-olds to keep them from getting into debt?”




As you’ll read tomorrow (or Monday), I’ve entered a new phase in my life. After years of hard work and long hours building this blog (time that I’ve enjoyed), I’ve been shifting things around so that I have more free time. As a result, I’m going to have more time to devote to creating quality blog posts, instead of rushing around at the last minute looking for something to write about.


Because of this, it’s time yet again to take requests. I do this about once a year, and it’s a great way to get a feel for what GRS readers are interested in. I’d be grateful if you’d take the time to leave a comment below with topic suggestions or article requests. It doesn’t matter if we’ve covered the subject in the past. If you’d like me (or one of the other GRS staff) to write about it, let me know.


Have there been too many articles about credit cards? Too few articles about credit cards? Would you like to know more about individual savings accounts? Do you like the articles about the psychology of spending? Would it be helpful to have somebody come in to explain insurance concepts in plain English? Should I try to persuade my wife to share more of her recipes now and then? Let me know what you’d like to read about!


While you’re all providing feedback about the site, here are a few recent articles of note:


Over at The Simple Dollar, Trent and his readers had a thoughtful discussion about the obligations of wealth. “I think there is some inherent distrust of the rich in the mainstream of American society,” Trent writes as he describes how a wealthy person can keep from alienating his friends. There’s so much to say about this topic; I’m tempted to write an entire article about it.


GRS reader Steven writes a blog called Hundred Goals, which is about achieving your goals while managing your finances. After Sierra’s post this morning about travel, he dropped me a line to let me know that he has a recent article about how to have a great vacation.


Speaking of vacation, my pal Jason over at No Credit Needed spent time compiling day-use fees and free days for state parks across the United States. Handy page to bookmark!


And here’s more travel! At The Art of Non-Conformity, my good friend Chris Guillebeau has posted a beginner’s guide to travel hacking. I’ve been asking him to share this info for a long time; now I’ve got to take responsibility to use the knowledge he’s shared.


Finally, I’ve been giving a lot of interviews lately. I’m much more comfortable with these than I used to be. (They used to scare me to death!) Some examples:



  • Colleen from The Frisky interviewed me about how to save money even when you’re living paycheck to paycheck. This is a tough quandary, something I’m asked about a lot.


  • In an interview with BeFrugal, I discuss frugality, happiness, and conscious spending. (Note: “the ballot” should be “the balance” — I must have mumbled.)


  • Jeff Rose at Good Financial Cents also interviewed me. This interview is very much about the process of writing a book, which may or may not interest you.


  • I also spoke with Beverly Harzog from Card Ratings. We chatted about credit cards, of course, but also about other aspects of personal finance.


  • Finally, USA Weekend has a short piece on how to give your 401(k) a midyear check, for which author Richard Eisenberg interviewed me back in May. This is a perfect example of how much work goes into even a small newspaper article. Eisenberg spent 20-30 minutes on the phone with me, and I’m sure he did the same with the other folks he quotes. Plus, I’ll bet he spent a lot of time writing. I wouldn’t be surprised if there were 4-6 hours in this small piece.


Okay, one last thing before I go. Tim pointed me to a two-year-old New York Times series about the debt trap, which includes an interactive infographic showing average household debt loads over the past century.


That’s enough links for today. Please do leave a comment with topic requests or other feedback. Meanwhile, it’s time for me to go do some yardwork…










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