Common Sense Investing and Finance

America Today!

 

            “The top 10 stocks you must buy now!” touts one publication. “The price of gold will rise 1000% in the near future, now is the time to add this metal to your portfolio.” This commercial blares from your TV set. “My trading system will have you logging 30%, 50%, even 100% gains immediately! Subscribe now!” Almost every financial news publication has these ads nowadays. I could give you several pages of these pitches designed to do one thing. Get you to spend your money, in a most of cases a lot of money. I mean really, a subscription that cost $400.00 to $999.00 annually better do more than show me charts and graphs and the latest “Trend trades to make tomorrow!” Good Lord People, how did we let ourselves become a nation of consumers that wants someone to tell us how to “Get Rich Quick”, “Lose Weight Overnight”, or “Have longer, stronger, more powerful orgasms now!” The American people will buy anything, try anything, and believe anything that will let them find the easy way to reach their “I Want” quotient.

            We got that way in this country because since the 1940’s and 1950’s, our hard working parents did everything in their power to give their children everything that they wanted. The “Greatest Generation” that won a world war made sure that their children went to school instead of plowing a field. Those children that went to school started the boom in technology and efficiency and made sure that their children were able to have everything that they wanted times three. After that, we no longer knew what it was like to do without. Wait until you have the funds to pay for something? Screw that, we want it now! Put it on the card! Take out a bigger equity line!

            The “secret” to financial success for most of us in this country is not a hedging strategy.  It is not charting the relative strength of an individual stock. We don’t really need to listen to channels that devote the entire broadcasting day to the Gods of the markets. (The Dow, S&P, and the NASDAQ) What we need to do is follow the simple rules that our grandparents and great grandparents followed that made your life of opulence possible. Opulence, you say incredulously. Yes, I do. Because they got up before daybreak and fed the animals that would feed them before eating themselves. Those that worked off the farm came back to the farm in the evenings and worked again. So I would say that when you stop in the morning on your way to work or school and get a breakfast and coffee at the drive-thru would qualify as opulence. Hey! I have been just as guilty of it, so I’m not casting the first stone.

            I am going to lay out the strategies that they followed and I try to follow every day. They are not fancy or full of powerful sayings that make dollars magically appear in my bank account. These simple tactics do not work fast or give me what I want right now. What they are doing is making sure that I leave an inheritance to my children and hopefully they will provide for me and my wife in our old age so that we are not a burden on them or our already over burdened healthcare system. (I don’t want to get started on our countries unfathomable need to try and make sure that everyone is provided for and that everyone is politically correct and not offended. That’s for another book.)

            And now, you need to build a stool….. Oh, and by the way. If you are carrying too much credit card or revolving debt, then start with the third leg, deal with it, then come back to leg one.

 

Leg 1 – Beginnings

It’s called a savings account

 

            Yes, I can already hear your broker gasp in utter horror at your backwards financial ways. “Clearly, you just don’t understand or want to make money, Mr. and Mrs. USA” The fact of the matter is that your great grandparents passed down to their children more than they started with because they knew how to save a penny here and a penny there. Making it earn 20% was not the driving factor! Putting it away and keeping it away was the goal. Sure, who wouldn’t want 20% returns, but to get those you have to risk the possibility of loss and that’s not what this leg of the stool is about anyway!

            I have a great respect for those that believe and practice the theory of tithing 10% of their income. I have an even greater respect for those that tithe 10% of their income and then save the next 10% for themselves. What! Live on 80% of what I bring home! Are you crazed? No, I’m really not and actually the goal of this lesson is to live on 70% of your take home, but we’ll cover that later.

            Savings accounts are safe, low interest bearing accounts at your local bank that you can start you financial program with. Again, the purpose of this type of account is not to make the big returns. This account will be your emergency fund, your start for future purchases that you want to save up for, and the way that you are going to develop a discipline that you have never used before.  Now let’s review the reasons for this account one by one.

            Reason #1 – Most financial “experts” will tell you that you need a minimum of 6 months living expenses tucked away in case you lose your job. I say that if you have never tried to start a financial wellness program before then let’s shoot for three months. As we go along you can expand that to six months or even a year if you get really good at the living on 70% to 80% of your income idea! Another reason for establishing this emergency fund other that the job loss issue would be for major repairs that pop up when you least expect it. For instance, your car throws a tie rod through the engine block. “Oh, I can just put that on my credit card.” Yes, you could, but when you have an emergency find you don’t have to! You don’t have to pay the 10%, 15%. 21% interest by carrying that debt! And you know as well as I do, you carry that debt and build on it too, so jolly old Mr. Banker man is enjoying a nice $1000.00 to $2000.00 a year stream of income courtesy of you not having an emergency fund and not knowing how to handle credit cards.

Now, once that savings account hits $1000.00 you buy your first CD or certificate of deposit. Ideally these cd’s will pay a higher rate of interest than the regular savings account, but of not, then continue with the savings account. When you have several thousand dollars in the emergency fund, buy several cd’s. That’s called “laddering” or “layering”. You buy different maturities, $1000.00 worth at a time. That way you always have one coming due in case of an emergency and you also take advantage of the interest rate swings in the economy.

Reason #2 – Chances are if you are reading this, you are new at trying to save money for the future needs. That’s the reason you need to start with the savings account, to learn how to save. Most of us are paid by direct deposit from our places of employment. We have no need to go into a bank to cash a paycheck anymore and guess what? That makes it even easier to set up a savings program. Some employers have credit unions or even let you direct your direct deposit check to more than one account. My own employer lets me use up to three accounts to direct my paycheck. I direct 10% to my “emergency fund”, another 5% to a “want” account, and the rest to my checking for the bill paying I’m so fond of. (Not!) If your employer does not have this option, then visit the bank where you have your direct deposit go. They can set up a savings account for you and at certain days of your choosing, sweep the preset dollar amount you want from your checking to the savings account. Once you get used to the lesser amount in your checking account deposits, you’ll be ready to move on to other tools of building the family inheritance. (Big tip! Make sure that the ATM / Debit card IS NOT linked to your savings account, only the checking account. It’s easier to break over and spend it if you have easy access to it.)

Reason #3 – We need to learn to live within our means. The level of debt in this country is outrageous. We are a give me, give me now, nation. Our government carries massive debt. Hell, our latest financial crisis/recession was caused by some idiot’s fantastic idea to package and sell debt. If you can learn to save that % out of your paycheck, rather than buying the new dvd series this month, you will be on your way to solving an endless cycle of having to work to pay someone else back.

 

Leg 2 – Intermediate

Utilize what you have

Now that you have your savings account up and running and have given yourself 60 – 90 days to get used to funding it each payday, it’s time to attach the second leg to the stool.

The biggest mistake made by the American worker today is not participating in their employer sponsored retirement plan. Whether it is a 401k, 403b, Simple IRA, or group annuity, we pass up a good thing because “I need all my money now” or “I’ll never live long enough to retire”. Spoken like the true “give me now” disciple that you are. Refer back to the beginning of our lesson. We have gotten used to living on more than we earn. You are going to have to dial it back if you want to reach your later years with something besides a handful of air cookies.

Most plans will offer some sort of match. Even if they do not, it is still a constant, reliable way to put a certain percentage of money away every pay day. Take advantage of it! Yeah, yeah, I know. “It has a vesting schedule; I won’t be fully vested in the match for four years!” Waa, waa, waa. How quick did the time pass from when you got your learners permit to when you started your college or professional career? About four years? How quick was that just out of curiosity? One thing you learn as you get older, nobody out runs that old fart Father Time. Think of it like this, it’s free money! It really is. If I promised to give a dollar and ten cents for every dollar you could give me, the next time I saw you it would like you were on your way to the local strip bar! Your pockets would be bulging with singles waiting to exchange them to pick up that extra dime, and who wouldn’t! That is what a match is. Your employer is kicking into the kitty for every dollar you put in. Some employers match 50% to 100% on the dollar up to a specified amount! So do it!

Ok, ok, so you work for a miserable son of a gun that doesn’t put anything in for you, or worse yet does not even offer a plan. Well pull yourself up, dust yourself off and head to the local bank or get online an open your own IRA. If you need a tax deduction and qualify within the income limits, open a Traditional IRA. If a tax deduction is not that important to you, then probably a Roth IRA would be the way to go. (Again, check the income limits and latest IRS rules on retirement plans) The Roth will let you take the money out at retirement tax free. Let me say that again, TAX FREE. Don’t look a gift horse in the mouth, just ride it before they realize all the tax money they are going to miss out on in the future and do away with it. IRA’s can be funded on a monthly or bi weekly schedule also with periodic investments or deposits. You just have to start it and get used to it being gone out of the paycheck. Again, get it started and give it two or three months to get used to living on less.

How you invest the funds in this IRA are actually less important at this point than just getting started if this is your first one. The “experts” will tell you that all retirement money that is more than five years away from being utilized should be invested in “The Market”. Why? Because they say that any market corrections can be overcome in five years time, maybe, maybe not. I say invest in what you are comfortable with whether it be stocks, bonds, mutual funds, CD’s, or savings accounts. Just get started with something!

 

 

Leg 3 – Advanced

Debt; It’s either a tool or a cross to bear

 

            If you started your reading in this section, then you have a cross to bear. I sympathize completely. Once you owe money and start paying it back with interest, you find our real quick how hard it is to do what you want with that chain around your right ankle. For those that remember Sunday school it was called “usury” If I recall correctly, the only time Jesus got pissed off was with the money changes and money lenders in the temple. Things that make you go Hmmm….

            Getting out of this jam is going to take just as dedicated an approach as starting a savings plan. The basic premise is the same you just apply it to the debt.

1)      If you have more than one card then choose the one that charges you the highest interest rate and focus all the extra cash you have on that one until it’s paid off. Just pay the minimum payment on the others and then take them out one at a time.

2)      Cut each card up and write the issuer with instructions to cancel the account when you get it paid off. You must write them to make sure that the account closes! If not, it just hangs out there on your credit report as an open line of credit. In reality, you only need one card anyway for renting a car, getting airline tickets and things like that so close them all but the one with the most favorable options for you.

3)      If you are a homeowner, you could consider using your homes equity to consolidate the debt into one payment. This has its advantages and disadvantages. Firstly, by using the home you now have a second lien against your house and our ultimate goal of course is to get this thing paid off. So only do this if you are committed to getting out of debt and are serious about sticking with it. The advantage is that now the interest could be tax deductible for you. This is not a big deal and really not worth opening the home equity line for a couple of thousand dollars, but if you are like most Americans and owe 10, 20, or even 30 thousand dollars, that tax deduction can add up.

4)      If you are deeply in debt, you may have to suck it up and get a part time job until the debt is paid down. Holy cow! You may have to sell that extra vehicle, or even the ATV or weekend bass boat. Realistically, sit down and look at your situation. Do you have a bunch of stuff that is nice to have but you really don’t need? Then do something! If you truly do not have this situation, then get the job. It is not going to be a permanent change for you. (Unless you want it to be) There are many things you can do to make an extra $500.00 - $1000.00 per month. I encourage you to think creatively and as much like an entrepreneur as possible. For example, when we had to start shaping up in my family, my wife had the courage to try something on her own and started cleaning homes. She managed to get a few homes a week and was making on average $20.00 to $25.00 an hour or about $500.00 a month. Then, she started watching a friend’s children 1 day a week and added another $200.00 a month. All in all, a great alternative to working at stuff mart for $8.00 to $10.00 an hour. She makes much more, still somewhat controls her own schedule and is her own boss! I am thinking of picking up a morning paper route for several months and adding another $400.00 a month to the kitty. Now we are talking about hitting the debt monster with an extra $1100.00 a month!

Ok. I have preached long enough. The bottom line is, use your head when it comes to money. Whether investing or paying down debt. Make a plan and stick to it. When it comes to investing don’t get involved in anything you don’t understand and definitely follow the old clichés. If it sounds too good to be true it probably is, a penny saved is a penny earned, etc. etc. When tackling debt, make the sacrifice! Get rid of the extra stuff you don’t need or get some introspective by picking up an extra job for a year.

            Good Luck!