Real World Finance$

There have been a rash of financial bailouts over the past several weeks.

• Bear Stearns
• Fannie Mae & Freddie Mac
  
• AIG

Add to that the restructuring of the last 2 large investment banks

• Goldman Sachs & Morgan Stanley

And don’t forget the other bailouts in the works by congress

• $700 Billion for the financial industry
• $25 Billion for the auto industry to re-tool for more efficient vehicles

Wow, that’s a lot of money going to help out companies who made bad decisions and I’m sure I’m forgetting some.  Should we really be helping out these companies?  Shouldn’t they be forced to face the consequences?  Yes…. and No.  It’s a difficult question to answer.  Yes, they should face the consequences of their actions, but those consequences if they were left to rot would have ripple effects to more Americans than those that will be felt by the bailouts.

Consider just the housing market for instance.  If all of these large banks were forced to make do at the same time, then the cost of mortgages would skyrocket in the very near future as no one would have money to lend (supply would be next to nothing).  With the difficulty of getting a mortgage, the construction market would turn even worse than it is today, forcing even more people into unemployment.  These workers had nothing to do with how the banks made their decisions, but they will feel the after effects.  Fewer construction workers means there will be fewer pick-ups sold, fewer hammers sold and so on and so forth.

As my wife and I listened to NPR over the weekend and heard about all these deals going on, part of me wanted to be a real fiscal conservative and say “tough luck.”  But as much as higher taxes and lower income will probably hurt me, it’s still for the greater good of me to be able to help out.  As I finally said to my wife, “Now is not the time to point fingers.  Now is the time to fix things.”  It’s not fun doing what this country is doing right now, but it needs to be done to keep things from going from worse to terrible.

Of course, there SHOULD come a time for finger pointing.  We must keep in mind what happened and work diligently over the next few years to avoid the type of scenario we have witnessed from reoccurring.   Failure happens, but it can also be a valuable learning experience.  As long as we use this massive failure as a way to learn from our mistakes, we will be a stronger country in the future.

So, what about me?  Where’s my bailout?  Well, either you will indirectly be bailed out by keeping your job and/or your home when you otherwise might have lost it, or you are part of the unfortunate bunch that will only pay the bill to help everyone else.  So sorry, thanks for the help, we promise to do better next time.

I read this post recently over at Five Cent Nickel:  Past Performance Does Not Predict Future Returns

It reminded me of my recent post on Oil Prices, Future Predictions and the Weather.

I mention this to my class every time we go over forecasting and regression analysis.  The further away from you set of data you get, the more inherent error will occur.  Outside of your data range is all sorts of things you don’t know about that could effect the outcome. 

One of my favorite examples in class to demonstrate this is global warming.  We have weather data from the last 50-100 years that show a gradual increase in average temperatures.  Some how, some scientists seem to think that means the trend will continue indefinitely.  We know better in statistics.  Because that 100 year time frame is very small in the grand scale of time, there is no telling what the actual temperature pattern would be.  Sure, it could be an increasing trend, but it could also be a sinusoidal trend as well.

While I won’t try to say here that global warming isn’t real, I will say that some of the methods of “proof” are scientifically flawed in nature. 

And yes, the same is true of looking at past returns for any kind of investment.  Take the time to do your research to understand the risk of the investment and that you are comfortable with that risk.  In other words, just because your friend tells you about all the money they made on some stock or mutual fund, don’t assume you can hop in and do the same.

I saw the title of this article over at CNN Money and I couldn’t resist reading it:

Don’t buy into dollar-cost averaging

Wow, talk about bucking the trend huh?  If you aren’t familiar, dollar cost averaging is the routine of buying a set dollar amount of an investment on a timed basis.  So, think of your 401(k) account.  You take out the same amount of money every 2 weeks with your paycheck and use that to buy your mutual funds.  By buying the same dollar amount, you actually get more shares when the price is low and fewer when the price is high.  What this allows if or you to make up for your losses on high cost shares, by buying more shares at  low cost. 

Mathematically, it’s a good deal, so seeing advice on a money website that tells you not to buy into it made me sceptical enough to click through to it.  What I found was actually an answer to a reader question about what to do with a lump sum investment.  In this instance, I would agree with the author.  If you have a large, lump sum to invest, why not go ahead and diversify enough (or get an index fund) and do it all at once? 

As he says, dollar cost averaging is a great way to encourage people to invest on a regular basis.  Some people are afraid of the inherent risks of investing and by showing them the power of dollar cost averaging it can encourage them that they won’t be so bad off. 

So, to get to the point, definitely keep up your regular investments through payroll deductions or automatic withdrawals.  However, don’t be afraid to go ahead and invest that lump sum tax refund or inheritance you just got.  Just keep yourself diversified and you’ll do just fine in the end.  As an early 30 something I still have a long time to watch the market go up before I retire (if I ever decide to), so playing out risks with a lump sum over the next year just isn’t worth it to me.

I have a decision I need to make that I’ve been putting off. Back in July I changed jobs. That left me with about $3k in a 401(k) at my previous employer. I’m supposed to move the money out, but they said there is no deadline, so not sure how they enforce that. The account is currently with Vanguard and my new job 401(k) is with a small local firm.

So, now I’m debating what I should do with my account. I’m really unfamiliar with this area and whether a Rollover, Roth or Traditional IRA is best. What are the pros and cons of each. I guess I’ll start with some research and see what I can find online. I’d probably like to do the move sometime early next year, so we’ll see what we do.

I do have banking accounts at E*Trade presently, but no investment accounts. I’m not disappointed in Vanguard either, they have a very good selection of funds. I’m not hip on moving them to my current plan as this is a contract job and I don’t expect to be here long term either. I’d like to start putting my retirement accounts all in one place at some point and would like to find a good place to do that.

Any advice from the blogging world out there?

I’ve seen a couple of articles the past 2 days on this topic over at Free Money Finance I thought I would share.

How to Get Rich on $20k a Year - A story about a 69 year old man who earns $20k a year as a parking lot attendant. He has amassed a half million dollar stock portfolio. Nice work.

Best Advice: Dave Ramsey - Advice from Dave Ramsey on keeping in touch with the Tortoise and the Hare story.

Both of these articles have reminded me that every little bit of savings helps. It’s easy to think of being glamorous and instantly being wealthy, but the reality is that many of today’s millionaire’s (regardless of how valuable you may think that is) got there by saving and investing $1 at a time. Very few of us will every win the lottery or make it big with an IPO.

I ran across this interesting article on NPR over lunch (Person-To-Person Lending Flourishes on Web). It is a short review of a couple of Person-To-Person lending sites on the web. Now, this is something I could get my teeth into. The 2 websites, Prosper and Lending Club, offer users the option to request or loan money from individual people. You can find someone looking to pay off a $5,000 hospital bill for instance. They are willing to pay 15% rather than a higher interest credit card. You can give just a portion of their funds and diversify your lending across many people. After enough is pledged to the loan seeker, they receive their money and start making payments. Lending Club at least, displays rates as low as 7.62%, but I’m not sure what it takes to qualify for that. I’m guessing a high credit score and low dollar amount.

A third website that was mentioned was Lending Circle. It was originally built to facilitate lending of money between family and friends. It was so popular that Virgin owner Richard Branson bought it and turned it into Virgin Money. It’s a little different concept, but interesting none the less.

I could see this as a way to diversify some of your savings to invest in some higher risk avenues when you are younger. For me, if I qualify for a rate less than my current line of credit (10.99%) then that might just be a good money hack to use my extra payments every month to pay off one of these sites while increasing the amount of principle I’m paying on the line of credit.

Anyone out there ever used either of these sites? How’d it work?

This issue has been coming up for me more and more lately. Of course, it’s always the case that when you are in a mindset you notice things more (like seeing your new car everywhere when you had not noticed it much before).

I first noticed it over at JD’s Get Rich Slowly blog (10 Ways to build the habit of saving money).

Next, I saw something similar over at CNN Money (Life and debt in suburbia).

These articles address the issue that no matter how much more money we make, we still tend to spend it all. My own family has seen this as evidenced over the past few years. Back when my wife was working full-time outside the home, she was making about 30k a year and I was in the mid 40k’s. I took a new job in an area with a lower cost of living that also bumped me into the mid 50k’s. This allowed my wife to stay home full-time.

Though our total income was lower, we survived and did well on the lower income as the cost of living difference didn’t completely offset the change. After a little over a year of that, we decided we wanted to be back in St. Louis where there was more to do and my wife’s family as well. I managed to get a contract job in the mid 70k’s which eventually turned into a a full-time job in the mid 60’s. Buying a house on one income and having to drop back down that much was a bit of a challenge, but we made it work.

Now, I’ve finished my MBA and have moved on to more contract work and some part time teaching that, combined, will have me making close to 6 figures for the first time this next year. However, after almost 3 months of the new job, it’s tough to see the difference.

One thing I will note though, is that despite the change in spending to go with our incomes (this has all happened in the last 3 years by the way), our debt hasn’t really increased. But, it hasn’t really gone down either.

Where do we fall into the trap? We can do really well for a few months and then something happens and we overspend again. What I’m finding to be our biggest fault is not paying ourselves first. While we have goals, without having a real savings that we plan to use on bigger purchases, we end up paying down our debts, and then getting them right back when it’s time for those things.

It all goes back to show, it’s not about how much money you make, but how much you save/invest that really makes the difference.

We all know that starting savings at a young age and learning how to deal with money then are two things that are very helpful in not ending up overwhelmed by debt later in life. The only kind of financial education I had growing up was learning how to balance a checkbook in 6th grade and that is more than most kids in the US get in school.

I’m now trying to get my family out of the debt cycle and I want to make sure my step-son doesn’t get into it either (he’s 8). Luckily, we are a homeschooling family so we have a huge amount of control over what we teach.

I ran across this article online today form Business Week (Business Courses Give Kids a Leg Up) about the National Foundation for Teaching Entrepreneurship (NFTE) program for teaching high school students how to start their own business. I only wish I had something like this growing up.

From the NFTE website, I found a link to Merrill Lynch Global Philanthropy. There they have complete curriculum for teaching investing and money management to children in elementary, middle and high school. It is free to download in a PDF format as well. I started looking through the level one for elementary (ages 7-10) and it looks pretty simple and to the point. I think I’ll give it a try and see if it’s not something we can do together as our family works through budgeting and controlling our finances.

Do you like to imagine yourself a stock picking guru? Do you remember that one time you said you wished you could buy such and such stock and the price shot up shortly after?

Well, if so, then I have a site for you.

You may be familiar with the Motley Fool website. They are a very well known site for financial information and analysis. Sometime last year, they started a game called CAPS. Here you can pick your favorite stocks and tell all about why you are predicting them to Outperform or Underperform the S&P 500. The site then tracks your predictions and rates you against other players. You earn your color of CAP based upon your rating of both portfolio performance and accuracy of your picks. Then, based on all these ratings, the site can rate the stock for future performance. After all, if you seem to be good in your past picks, then odds are, you might be right in your next so others may want to follow in your glorious path.

Give it a try, have some fun!

For us, like for most people, our house is by far our biggest investment at our age. Yes, it is more than just a place you live, it is an investment that nearly always appreciates in value over the long term.

I know lots of people with 401(k) accounts who spend hours every week checking their value and the day to day status of their mutual funds and such. Yet, those very same people with a house worth 5-10 times as much, rarely do anything to keep up with the value of that investment. There are a couple of websites I would recommend you look into every once in a while.

National Association of Realtors - Yes, this is the self same group of professionals you likely used to buy your house. Because they are so well entrenched in the real estate industry, they have a wealth of information about the prices of homes in the US. Here you can find quarterly reports on the median home value in the US by region and even metropolitan areas (there are over 200 of them tracked).

Mortgage Bankers Association - This national group of mortgage industry workers, like the NAR, has wealth of information, but theirs is all about interest rates and mortgage types. They publish monthly data on the average mortgage rate and points by state. This is very helpful when you are starting to think about refinancing your home.

Zillow - Zillow is a real estate website that will give you and estimated value of your home (they call it a Zestimate). This is given as a range of vales and lets you see it in comparison to those around you. You will also be able to see recent sales in the area to do comparisons. Obviously, you will get a much narrower range in a neighborhood with homes of similar size and condition. My house has a range of nearly $100k, so beware.

Of course, actually working with local professionals who make this their day to day life is always best. Sometimes though, you want to do your own research and not bother someone else. So, take a few minutes and get up to date on your house.