Only a small fraction of people contribute to a 401k and many that do have little understanding of the investments within their portfolio. With that being said, here's a concept that many people understand...the concept of compound interest. It can work for you if you are invested in a Certificate of Deposit, Bond or even a Mutual Fund that has been performing and you reinvest interest or earnings. For many Americans the concept of compound interest works against them as in their credit card debt. When you make the minimum payment, the jeans you paid $80 for are accruing interest, but that very next month, the interest on your $80 jeans is accruing interest as well. So you are not only paying interest on the jeans, but you are paying interest on interest. Credit card debt can quickly spiral out of control not only because of lax spending but due to the compounding effect of interest against you. The stock market has been exceptionally volatile lately, which we may need to get used to. But there is a way, that you can earn 18% on your money. Pay off the balance on a credit card at 18% interest.
Some people keep their money in the bank earning 1.5%, while paying 18% or more on their credit card balances. By paying off the balance, you are effectively earning an 18% return on your money. That is a return that anyone that has been invested in this market would be ecstatic about.
Wishing You Wealth in all its Greatest Forms.
5.22.2008
Stu vs Steve Part II
Now let’s take a moment and look at Steve.
Steve is 47 years old, being raised in the family electric business, he never attended college. At the age of 21 he began working for a small grocer earning $29,000 a year. He always put 6% of his paycheck into his 401k and received a company match of 75%. Today, continues with his 6%, putting in a little more when possible. His job has never paid more than $75,000. He owns a small house in Valencia and drives a Honda Accord. Due to the power of compounding, he has over $850,000 in his retirement account. He still has almost 20 years of compounding before he is going to retire. By that time, he should have amassed nearly $2 million and with his modest lifestyle and house being paid off, he will be able to live out his retirement years at a great degree of freedom with vacations and spoiling his grandkids.
These are two different people in very different circumstances? Who do you want to be? Stu or Steve? If you want to be more like Steve and less like Stu there are some basic steps you can take today to make that possible. I will cover those in my next post.
Wishing you wealth in all its greatest forms.
Stu and Steve Part I
There are two people I know personally that are showing me finance lessons that I never learned in the classroom. One is now retired, while the other has almost 20 years until retirement. I know them both but their names aren’t really important… let’s call them Stu and Steve. Today, I will introduce “Stu” .
Stu is 76 years old…has a business school education and a law degree. He is one of the kindest, honest and most generous people you will ever meet. He has worked for banks and was also a practicing real estate attorney. He has worked for himself and paid very little into social security over the years, believing that he would save on his own. He has had jobs that paid $15,000 a year when he was young to $150,000 a year in his mature years. Today, he is receiving $672.00 a month from social security. He is “living” on a very small amount and I use the term living very loosely. He doesn’t own a home and instead lives in a bachelor apartment in Los Angeles.
It’s unfortunate…but the hourglass sand has run dry for Stu. In his retired years, his focus should be on relaxing since he has spent his entire life working. Tomorrow, I will go over Steve’s story.
Wishing you wealth in all its greatest forms.
5.11.2008
What a waste.
I was recently sent a link to an article in the San Francisco Gate about waste. You may have heard of this story, since Ari Derfel was all over the airwaves for good reason. He actually saved all of his trash for an entire year to make a point. Initially, it seems like a pretty crazy idea, but how easy is it for us to ignore how much trash we create in our daily lives. For Ari, its around 96 cubic feet of trash. Things in small amounts rarely seem to impact us very much. Yet, they quickly gain significance when taken over a longer period of time…like a full years worth of trash. Last year, our garbage people (read waste disposal) went on strike for two weeks. Unfortunately, the week earlier I had decided to do some cleaning up and my huge trashcan was filled to capacity. I still had my usual weekly trash, but with nowhere to put it, I had purchased an additional trashcan to keep it out of the sun. Every time I went outside, I stared at my trash and just wanted it to be gone. It actually made me think of how much waste is created and if I could reduce any amount of it. I did a pretty good job of sifting through and putting all recyclables together.
After that week, where I had garbage just sitting around…I started to rethink things a bit. These days, I do my best to buy just enough, eat what I buy and waste as little as possible. A couple of ideas on reducing waste are:
- Use and re-use gift bags instead of wrapping paper that can’t be saved
- Bring a backpack to carry your items home when you go shopping
- Recycle bottles, cans, and all paper products
Retirement Planning: Generation X
Generation X is defined as those born between 1965 and 1980. In speaking to friends and colleagues, it’s pretty obvious that we are not a generation of savers. Many of us are going to face greater challenges than our parents. It's going to make you wish that all you had to do was carry your sister uphill in the snow both ways. In addition to the high cost of mortgages, student loans and credit card debt, the pension of yesteryear is missing in action. For my parents, the pension is going to be the foundation for my parent’s retirement. It will be augmented by passive real estate income and IRAs. Most pensions have been traded in for the 401(k). The 401(k) at most companies comes in one flavor, but many choices…maybe even too many. This shifts the risks from the company to the employee. Trying to plan can be mind boggling...but you have to start somewhere.
The million-dollar question is “where and how do we start?” Considering that nearly every time you turn on the television, get on the Internet, or even open a newspaper there is an advertisement for the newest online brokerage. The financial arena has become exceptionally confusing. There are stockbrokers, financial planners, and even financial consultants at the bank. We all know that we should plan for the future…but the who, what, when and how questions remain.
I think the first step is to find out what your retirement means to you. For some retirement means that they can just sit on the back porch sipping lemonade, while for other’s it’s that time when they are finally able to travel and do all those things they have put off. Imagine what you want retirement to look. Once, you know what you want it’s easier to get there. “Those that don’t know where they’re going will always get there.” Then you should take some time to interview financial professionals who help you clarify your vision, time frame and other specifics. The third is the easiest…creating a plan that doesn’t financially cripple you today, but provides the greatest freedom when your only job is to enjoy your life, on your terms.
The first part is the most difficult. Only you know how you want your future to feel. The second part is just asking the right questions to the right people. The third part is simple once you have a trusted partner in your life. Keep in mind that there are always people out there willing to help you, but you have to stay committed.
5.03.2008
Real Estate Review for May 2008
It seems as if every nightly news report has a section titled “real estate crisis” or something to that effect. It has been widely speculated that the S&P/Schiller Case Index is skewed since it tracks prices in only twenty major markets, of which many have had the most dramatic price appreciation and the most dramatic price compression. The S&P/Schiller Index claimed that median prices were down 12.7%, whereas the National Association of Realtor’s reported that the median price was down only 7.7%. These figures may have an undeterminable margin of error and inaccuracy due to the nature of the market. If more properties are sold in a lower price range than in a higher price range, the median price will decrease. With the market for jumbo loans being nearly frozen, it makes obvious sense that many properties being bought and sold will most likely come from the lower end of the price spectrum. So be prepared to question the very general figures that are being disseminated through the media and have a trusted realtor review comparable sales in your area since every market is different.
Keep in mind that I am not stating that prices aren’t decreasing. Seller’s are finding out that buyer’s are not willing to pay “2007” prices. There has been downward price compression, but seller’s who have the luxury of pricing their homes at reasonable levels are garnering offers at asking prices or higher. Even bank short sales that are priced below market prices are receiving a lot of attention. A
Buyer’s who have been priced out of the market for the past few years are beginning to take notice. With interest rates still at relatively low levels and a large inventory of homes, the right time may be right now. The bottom line is that new buyers should work with a realtor to find out what opportunities are available in their local area.
Wishing you wealth in all its greatest forms.
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