Monday, July 27, 2015

Is Your Emergency Fund Costing You Money?

There's always something coming in a few months that will cost money. So be prepared!
We all know that an emergency fund is an essential tool in personal money management. And even newbies to personal finance can probably tell you how big an emergency fund should be — large enough to cover about three to six months of expenses.
But what if that rule of thumb is incorrect? If you have an emergency fund that is larger than you need, it could be costing you.
Here is what you need to know about figuring out the emergency fund sweet spot for your budget, and why it matters so much.

1. What Constitutes an Emergency?

The typical advice for creating an emergency fund assumes that you would need this fund in case of job loss. That's why the recommendation is to have several months of living expenses set aside, and why Suze Orman in particular suggests that you need eight month's expenses, since an average period of unemployment lasts about 32 weeks.
But generally, people who access their emergency fund need the money for an unexpected one-time expense, such as a car repair or medical emergency. This is a far cry from the kind of ongoing emergency you would be facing after a job loss — and you have much more leeway to handle such a gradual emergency creatively.
That's why it's a smart strategy to create a Plan B budget that you could institute in case you lose your job. If you know ahead of time what specific budget items could be struck from your monthly expenses, a smaller emergency fund could handle unemployment much longer than the typical advice would have you believe.
In addition, having a Plan B budget gives you options when there is a small financial setback — such has having to take a pay cut, for instance — without you having to dip into the emergency fund.
It's also unlikely that a job loss emergency will mean you are completely without a paycheck for several months. You might be able to find temporary or freelance work or draw some unemployment benefits, while also seriously reducing some of your expenses.

2. Expecting the Unexpected

So you know that you don't need a large emergency fund in case of a job loss. What about those unexpected one-time expenses? It's not possible to know exactly when your refrigerator will give up the ghost, or when you will need expensive dental surgery.
Except that it is possible to plan ahead for most unexpected expenses. According to a 2007 survey by the Pew Research Center, 34% of people experienced unexpected expenses in the previous year. These were the kinds of unexpected costs they faced:
  • 34% had medical expenses,
  • 24% had car expenses,
  • 20% had home and housing expenses,
  • 9% had life event and child expenses, and
  • The remaining expenses were comprised of work, travel and vacation-related, pets, and taxes.
Each of these types of "unpredictable" expenses is actually fairly inevitable. No matter how healthy you are, it's likely that you will need some sort of medical care eventually. If you own a car or a home, you need to maintain it. Though you might not know when to expect a birth, a death, or a wedding, you do know that they will happen.
So instead of treating these sorts of situations as emergencies, it makes more sense to create a targeted budget category for any expense that might otherwise take you by surprise. For instance, you might create a car repair budget category into which you put aside $100 per month. Then when you have an "unexpected" repair, you will have money already set aside for that purpose.

3. The Cost of a Big Emergency Fund

Just because it's unlikely that you will need six months' worth of expenses set aside, and your unexpected emergencies can be mitigated with targeted budget categories, what's the harm in keeping a large emergency fund? It can feel good to have the security of a lot of cash on hand.
Unfortunately, there is a major cost for that sense of security: inflation.
The cost of inflation averages about 3% per year. Even the best high-yield savings accounts currently offer an annual interest rate of 1% or less. That means inflation is eating 2% of your emergency fund with every year that passes — and inflation, like interest, compounds. For instance, if you have $15,000 in a savings account with a 1% APR and 3% inflation, your money will only be worth $10,133.84 of today's dollars in twenty years. (If you would like to check my math, this is the inflation calculator I used.)
If you never experience a job loss and use targeted budgeting categories, it is very possible that you might not need to use your $15,000 savings account at any point during those twenty years. You could have done something much better with that money.

4. Emergency Fund Best Practices

It makes sense to always keep some money in a savings account so you can access the funds quickly, just in case. But above a certain emergency fund ceiling, a smart move is to invest extra cash that would otherwise collect dust in your emergency fund. In particular, parking that money in a low-fee mutual fund can help you grow your money, while still keeping the funds available in the event of that mythical job loss.
The question is, where should you place the ceiling for your savings account emergency fund?
It all depends on what amount of money on hand helps you sleep at night and how much you otherwise have invested. If you get twitchy without a fat savings account, and you have a good handle on your retirement and other investment accounts, there's nothing wrong with having a large emergency fund.
If on the other hand you still haven't set up your 401(k) at work (but are otherwise not in severe financial distress), then it makes more sense to keep your emergency fund ceiling relatively low while you work on building up your investments.
It's also important to note that contributions to your emergency fund should be a consistent line item in your monthly budget. Staying in the habit of always putting that money away will help you to replenish the fund after an emergency, and give you another monthly amount of investable money once you reach your emergency fund savings goal.

Too Much of a Good Thing

Saving too much is generally not the biggest problem among American workers. But those who do work to protect themselves financially might be taking their good habits a little too far when it comes to their emergency funds.
Maintaining the right size emergency fund may require a little more work on your part — from figuring out a Plan B budget to anticipating surprise expenses to figuring out how to make your money grow — but that extra work will more than pay off in your sense of financial security.
How big is your emergency fund?


Thursday, July 23, 2015

6 Best Part-Time Jobs for Retirees

Retirement and work crossroads sign (dyscoh/Getty Images/iStockphoto)

If you’re retired and the golf/beach/travel rotation is beginning to get old — and you’d love a little extra dough — you may be considering something your younger, cubicle-bound self never thought you would: going back to work (though only part-time). And now is a better time to do this than it has been in years, as an increasing number of employers plan to hire part-time help this year — and many of these jobs offer good pay and other perks that retirees desire.
You’re not alone in your want — or need -- to work in retirement: 72% of adults age 50 and older say they want to keep working after they retire, and nearly half (47%) of current retirees say they either have worked or plan to work during retirement, according to a survey of more than 7,000 adults conducted by Merrill Lynch Bank of America Corp. released last year. And it isn’t just lip service to the notion of working in retirement: While just 32% of people 55 and up were working in 2000, 40% were in 2014, according to data from the Bureau of Labor Statistics.
Working in retirement isn’t just about the money (though, let’s be serious, most of us could use a little extra). The most popular reason for working in retirement is to “stay mentally active” for 62% of retirees and 51% of older adults cite it as one of the top reasons they are working in retirement, according to the Merrill Lynch Bank of America survey. Earning extra money is the second most popular answer, with 31% of retirees and 51% of older adults citing it as a top reason.
Of course, most of us don’t want to re-enter that 9 to 5 grind (after all, retirement is about taking it down a notch — or two), so here’s the good news: the number of employers looking for part-time workers will grow this year. Nearly one in four employers say they expect to hire part-time workers over the next year, up six percentage points from last year, according to’s 2015 U.S. Job Forecast survey of more than 2,100 hiring managers. And because retirees often don’t need health care thanks to Medicare, part-time and project-based jobs, which don’t tend to have health benefits associated with them, have an appeal to this group that they won’t for many other groups.
Not only do retirees tend not to want to work full-time, they also want good pay that reflects their years of experience, flexibility so they can travel, and/or jobs that allow them to give back. With that in mind, MarketWatch asked leading career experts to tell us what some of the best part-time jobs are for retirees.
Adjunct professor
There are more jobs than ever for non-tenure track, or adjunct, professors. In 1969, just 21.7% of college faculty were adjuncts; now more than two-thirds are -- and you don’t always need a Ph.D. to get these positions. In fact, retirees’ decades of workplace experience can lend itself well to the position of adjunct professor. While the pay for these jobs is mediocre (the median, per-course pay for part-time faculty is just $2,700, according to a study by the Coalition on the Academic Workforce), Lauren Griffin, a senior vice president with Adecco Staffing, notes that many retirees will find this kind of work rewarding. Plus, the hours you’re required to be on campus are typically few, and once you’ve taught a course once or twice, your workload will decrease as you don’t have to spend quite as much time developing the materials. To get this job, look at the career section of the websites of universities in your area; now that online education is becoming much more popular, you may also want to explore that avenue.
Project-based consultant
Still gun shy about hiring full-time help, many companies are looking for consultants to help with projects in fields ranging from law to HR to marketing and project management. Thanks to their decades of work experience, retirees are a good fit for this position, says Griffin. Pay is good -- sometimes upward of $50 or even $100 an hour for those with lots of relevant experience -- and once the project is over, you’re completely off duty and free to travel or relax. To find jobs like this, Griffin says that networking (in person and online) -- with old colleagues, alumni associations, industry groups, etc. -- is key, because sometimes these jobs aren’t posted; if you’re near retirement but still working full time, talk to your current employer about making a transition like this one, says Griffin.
While this may not be the most exciting job on earth, there are lots of freelance and part-time positions in this field (many small businesses simply don’t need someone doing this full time) and the pay is decent, says Niki Badminton,’s regional director for North America. Roughly one in four bookkeepers, accountants and auditing clerks work part-time, the median pay is nearly $17 an hour (more for those with more experience and experience doing more complicated types of accounting) and the number of jobs in the field through 2022 is projected to grow 11%, according to the Bureau of Labor Statistics. Some of these jobs will be posted online, but it’s important to go to small-business networking and related events, as well as tap your online network, to find jobs like this.
Event coordinator/planner
While you may not have had a career as an event planner, by the time you’re 50-plus, you’ve probably planned dozens of events in your life -- family weddings, birthday parties, and more -- with the photos to prove it. You can use this wealth of event-planning knowledge to find work or even start your own event coordinating/planning business. To find a job, you’ll need to tap your network of friends and family (use social media to let people know the services you’re now offering) and may even consider doing an event for a friend pro bono to build up your portfolio. You can also sign up for a site like, which has an entire section on party and event planning. Pay may be low at first, but it does rise with experience, and the median hourly wage isn’t bad, at $22 an hour.
Patient advocate
The patient care and home health care fields are growing rapidly, says Mary Lorenz, the corporate communications manager at CareerBuilder -- and if you know where to look, this job might be a good option for retirees. While home health aide jobs may require too much physical labor for a retiree and nursing jobs require that plus a lot of additional certification, patient advocate positions don’t require either -- and these jobs can be rewarding because you get to help sick people navigate the daunting world of medical care. A patient advocate will make appointments for clients, fill out insurance and other paperwork, negotiate costs for medical care and generally make sure the patient is informed about his care and is getting good care. While there are programs to help you get certified as a patient advocate, they aren’t always required, especially if you work for an individual or family that you know already (if you’re retired, you likely know at least a few families who could use your help). Median pay is $15 an hour, more if you have hospital administration or related experience.
Becoming a tutor is a great option for retirees, says Nicole Williams, founder of career firm WORKS -- thanks to flexible hours, the ability to work near your home and the chance to help young people. You can teach any number of subjects from math to writing to piano (whatever you are good at) and pay can be decent (sometimes it’s as low as around $9/$10 an hour, sometimes upward of $20 an hour, depending on your knowledge base and experience). Retirees hoping to start up this business should see if their children’s friends might have young children in need of some tutoring help, as well as doing some in-person networking at family-focused events.

Monday, July 20, 2015

Will Getting Multiple Credit Cards Hurt My Credit Score?

Your goal should be to pay off your credit card bills in full at the end of each month and set aside money toward your emergency savings.
Suze Orman Quotes
As a credit card rewards enthusiast and credit expert, I am constantly asked the same set of questions. Not only do people want to know if credit card rewards are “real,” but they also want to know how pursuing them will affect their credit.
And it makes sense to be cautious. As we know, your credit score is an incredibly important component of your overall financial health. Without great credit, you may not be able to qualify for the best mortgage rates, borrow money to start a business, or get the best auto insurance rates. Meanwhile, an excellent credit score can help you accomplish all of those things – with the added bonus of qualifying for all of the best rewards credit cards.
In addition to general rewards questions, I also hear a lot from people who are afraid to push it too far. Once they get one rewards card they like, they worry that adding a new card will somehow hurt their score.
It makes sense to worry, but this is one case where the added stress is completely unfounded. Here’s the truth – you can have several rewards credit cards without wrecking your credit at all.

Here’s Why Having Multiple Cards Won’t Wreck Your Credit

In order to understand why having more than one rewards card won’t wreck your credit, you have to understand how your credit score is determined. As an example, let’s look at how FICO scores are calculated:
How a FICO score breaks down:
  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • Credit mix: 10%
  • New credit: 10%
As you can see, the most important factor is your payment history. If you make your payments on time every month, you will fare well in this category no matter what.
The second category – amounts owed – is the other main category you should worry about. This compares how much money you owe in relation to your credit limits, a figure which is commonly referred to as your balance-to-limit ratio, or “utilization.” Here’s how credit reporting agency Experian describes this factor:
“Your balance-to-limit ratio, also known as your utilization rate, is calculated by dividing the total of the balances on your credit cards by the total of the credit limits on your credit cards. A high balance-to-limit ratio warns creditors that you may be experiencing financial difficulty or using credit to live beyond your means. A high utilization rate is a strong sign of credit risk, second only to your payment history.”
This is where things get interesting — and where having more than one card can actually help your credit score.
Since your utilization is based on how much you owe on your cards in relation to your credit limits, having more available credit means a lower utilization rate — and thus, a higher score — as long as you’re not carrying a higher overall balance along with it.
Meanwhile, if you pay your credit cards in full each month before your bill is due (as you should), your utilization will always be zero no matter how many cards you have. In that sense, having more than one card will have little impact on your credit.

How Hard Inquiries Impact Your Credit Score

One determining factor where applying for new cards can negatively impact your credit score is “new credit,” which makes up 10% of your FICO score.
Each time you open a new account, you will gain a new “hard inquiry” on your report. A hard inquiry is a simple notation on your credit report that lets creditors know you applied for new credit.
Although a few hard inquiries aren’t cause for concern, they may cause your credit score to drop temporarily. If you’re worried about how a new inquiry will affect your score, consider this advice from
“First off, don’t sweat this too much; applying for new credit only accounts for about 10% of your FICO score, so the impact is relatively modest. Exactly how much applying for new credit affects you depends on your overall credit profile and what else is already on your credit report. For example, applying for new credit can have a greater impact on your FICO score if you only have a few accounts or a short credit history.”
In other words, a hard inquiry may have little impact on your credit score at all, especially if you have an established credit history already.
Meanwhile, any negative impact you do experience should only be temporary. Still, to be safe, avoid applying for a slew of new cards in the weeks before you expect to take out a mortgage or car loan — you want your score to be at its absolute best in those circumstances.

My Experience with Multiple Cards

When my husband and I started pursuing credit card rewards four or five years ago, our scores were in the low 800’s. I track our credit scores on and, as of today, our Equifax and TransUnion scores are 810 and 790 (me) and 800 and 790 (my husband), respectively.
Since an excellent credit score is typically considered anything over 740, I’d say we’re doing quite well – and that’s in spite of the fact that we have dozens of rewards cards across our personal profiles and three separate businesses.
Our experience serves as further proof that having more than one rewards card will not wreck your credit. However, it is crucial that you always pay your credit card balances in full every month. A new rewards card or two may not hurt your credit, but letting yourself get into credit card debt can have lifelong consequences.
As always, tread carefully – and if you’re worried you’ll get in trouble, it’s probably best to avoid rewards credit cards altogether.
Do you have multiple rewards cards? How has having multiple cards impacted your credit?


Thursday, July 16, 2015

Here’s Why Applying for a Credit Card Hurts Your Credit Score

 Your reputation is like a credit score. Everything you do can affect it.

If you’ve ever checked your credit score before and after applying for a loan or credit card, you may have 
noticed it dropped a little bit. Yes, applying for credit hurts your credit score, but it’s usually a small hit, and it won’t drag you down for long.
This is because applying for new credit results in a hard inquiry on your credit report, and credit scores view hard inquiries as a slightly negative bit of credit history. Hard inquiries are pretty straightforward, but understanding why they’re bad takes some explaining. First, you need to understand the difference between a soft inquiry and a hard inquiry.

What Are Inquiries?

Whenever someone looks at your credit report, it’s noted in your credit history. There are many reasons to pull a credit report: You do it to make sure everything in your history is accurate, monitor for signs of fraud and understand how a potential creditor may view you; lenders look at consumer credit reports when deciding to whom they should send offers; an employer may check your credit history as a part of the job-offer process — there are a variety of situations in which someone may want to review your credit history for something other than granting you a loan, and those informational requests are called soft inquiries. Soft inquiries have no effect on your credit scores.
It’s when you’re asking someone to take a risk and extend you credit that an inquiry has a negative impact on your credit standing.

Why Is Applying for Credit Bad for Scores?

This isn’t to say you should never apply for new credit, but it’s definitely something to do sparingly and cautiously. Applying for a new credit card is only going to shave off a handful of points from your credit scores, and that effect only lasts for about a year (inquiries stay on credit reports for two years, but most scoring models ignore inquiries older than a year). In addition to the damage being only temporary, the benefit of the new credit (if you receive it) will likely outweigh the few points you lost to the inquiry, because things like account mix and available credit relative to your debt matter more than inquiries.
Don’t underestimate those hard inquiries, though. If you apply for a lot of new credit in a short time frame, those little dings in your credit score will add up. Think of it from the lender’s perspective: Someone who is suddenly shopping around for a lot of credit may be doing so to cover a shortage in cash. That could indicate potential trouble repaying debts, which makes the consumer a credit risk. The drop in credit score resulting from many hard inquiries reflects that risk.
There are some exceptions to the “apply sparingly” rule: When searching for a mortgage, auto loan or student loan, most credit scoring models allow you at least a two-week period to apply for multiple loans of the same kind, so you can find the best deal. For example, if you’re shopping for the best mortgage pricing, any mortgage inquiries made within two weeks will count as a single hard inquiry — this encourages consumers to seek the most affordable deal, without having to worry about harming their credit standing.
In many cases, credit score shifts of a few points won’t matter much, but with large loans like mortgages or auto loans, small score changes could cost you thousands of dollars over the life of the loan. That’s why it’s important to apply for credit only when you need it, abstain from getting new credit in the months leading up to submitting a home- or auto-loan application and regularly monitor your credit scores and reports to make sure errors don’t adversely affect your chances at securing affordable financing. You can get a free credit report summary every 30 days on to help you stay organized and informed.


Monday, July 13, 2015

How Warren Buffett Chooses a Great Stock, in 4 Steps

Never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is—zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices.

Warren Buffett is one of the most brilliant investors of all time, yet his investing strategies are simple.
In an episode of their podcast “We Study Billionaires: The Investors Podcast,” hosts Preston Pysh and Stig Brodersen delve into the four rules Buffett follows before making a stock pick, citing “The Snowball: Warren Buffett and the Business of Life,” by Alice Schroeder and Buffett’s foreword of “Security Analysis,” by Benjamin Graham.
While Buffet doesn’t recommend that the typical investor cherry-pick stocks — he prefers conservative bonds and low-fee index funds for that purpose — Pysh and Brodersen emphasize that he makes sure to follow each of these four rules before investing in any company:

1. Invest in companies with vigilant leadership.

“The first rule is that the company has to have vigilant leadership,” explains Pysh, founder of “Everything within the company starts from the top and reflects the lowest position of the company. Finding the right leader of a company and organization is vitally important to Buffett.”
The renowned investor will look at the top of the company — at the CEO and the chairman of the board of directors. He looks at their salaries, whether or not they’ve kept company debt in check, and their past decisions, which give him a good idea of how prone to risk the company is.

2. Invest in companies with long term prospects.

The next crucial thing to look at is whether or not the company will be able to sell their product in 30 years.
A good question Buffett likes to ask is, “Will the internet change the way we use the product?” If the answer is yes, that means the product could soon become irrelevant and you might not want to invest. This is one of the reasons he chose to invest in Wrigley’s gum, because chewing gum will be around for a very long time.

3. Invest in stable stocks.

“The third rule is that the stock should be stable and understandable,” explains Brodersen. To figure this out, he looks at the company’s metrics over the past 10 years to make sure its earnings have been consistent and trending in the right direction. 
To help you see a company’s stability for yourself, Pysh and Brodersen built a stability calculator.

4. Invest in stocks with an attractive intrinsic value.

Finally, Buffett predicts the intrinsic value of the company — what it will be worth in the future. If he can buy the stock for much lower than the intrinsic value, he’ll consider investing.
“A dollar tomorrow is not the same as a dollar today,” emphasize the podcast hosts. If you’re interested in the intrinsic value of your investments, Pysh and Brodersen also built an intrinsic value calculator.


Thursday, July 9, 2015

The 5 Best Pieces of Financial Wisdom From Ben Bernanke

Image result for Ben Bernanke
There's no such thing as a free lunch.
Particularly when it comes to getting a few hours of Ben Bernanke's time. The former chairman of the U.S. Federal Reserve charges from $200,000 to $400,000 for speaking engagements at private equity firms, hedge funds, banks, and trade associations around the world.
However, "Helicopter Ben" (also known as "Bearnanke") has made a few pro-bono appearances and speeches in which he provides some great advice on financial matters. Here are the five best pieces of financial wisdom from Ben Bernanke.

1. Be Smart About Student Loans

Student loans are a key issue for Millennials, so it's not a surprise that the topic came up during a speaker event at the Romain College of Business in March 2015.
Chasing a college degree is a two-edged sword for many Americans. On the one hand, workers with a bachelor's degree earn about $1 million more in their lifetimes than those with just a high school diploma. On the other, 2014 college graduates owe an average of $33,000 in student loans.
"People have to be smart about how much money they take out," Bernanke recommends to young people. This short piece of advice is very powerful for retirement planning reasons. Your initial employment years are key for retirement savings because money invested then has the most time to take advantage of interest compounding. If student loan payments are preventing you from maximizing retirement savings, you're at a disadvantage.
Bernanke points out that you must find and talk with a student loan adviser on a regular basis. Remember that education is an investment, so that means it must provide returns. Keep student loans in check, live a frugal lifestyle during your college years, and choose your major wisely. (See also: 20+ Freebies for College Students)

2. Remember Money Isn't Everything

During a graduation speech at Princeton, Bernanke gave this suggestion to the class of 2013: "Remember that money is a means, not an end."
He wasn't trying to convince you that money doesn't matter. He is aware that there are many of us that don't have enough of it. Instead, he was suggesting to avoid making big decisions purely based on money. The perfect example is choosing a career.
More than half of Americans are dissatisfied with their jobs. While workers making more than $125,000 are the happiest with their jobs, there are still about 35% of them who are dissatisfied.
How can this even be possible? Turns out that the two criteria that make people happiest at work are non-monetary. "Interest in work" and "people at work" were chosen by 59% and 60.6% of workers, respectively.
Bernanke is right in warning that choosing a career based only on money without consideration on love for the work or desire to make difference is a recipe for unhappiness. Give appropriate consideration to these factors, as well.

3. Evaluate If Annuities Make Sense for You

During his four-year tenure as Federal Reserve Chairman, Ben Bernanke had one of the toughest financial jobs in the world.
So, it's no surprise he kept his investments simple. His two largest assets are two annuities, TIAA Traditional and CREF Stock Large Cap Blend, each valued at between $500,001 to $1,000,000 as of 2007.
High net worth individuals, workers close to retirement age, and workers with a late start in the retirement saving race could all benefit from owning annuities for four reasons.
  • Like with other retirement accounts, all monies contributed to an annuity grow tax-deferred until they are withdrawn at retirement age, when you're more likely to be in a lower tax bracket.
  • Unlike other retirement accounts, annuities have no contribution limits. This means that high net worth individuals could put away more for retirement than the $18,000 limit set by the IRS.
  • Immediate annuities allow workers close to retirement to stuff away more money in their nest eggs and start receiving distributions after a short period of time.
  • Some annuities offer a guaranteed stream of income, which is key for those close to retirement age or who have very low tolerance to investment risk.
Owning annuities isn't for everybody, but evaluating whether or not annuities should be part of your retirement planning definitely is. Talk with financial advisor to learn more about these financial vehicles. (See also:Don't Know What Annuities Are? You Might Be Missing Out)

4. Improve Your Financial Literacy

"Financial education supports not only individual well-being, but also the economic health of our nation," said Bernanke during a teacher town hall meeting in 2012.
Low financial literacy is an issue for Millennials. According to a survey from FINRA, only 24% of them are able to correctly answer four or five questions on a five-question financial literacy quiz. While Millennials are offered courses in financial education in high school and college, or by an employer, only 61% of them participate in those courses.
However, Millennials aren't the only ones in dire need of improving their financial education. More than a fifth of Americans think that winning the lottery is the most practical way to accumulate wealth.
Bernanke advises us to improve not only our own financial literacy but also that of our children. He recommends that our focus shouldn't be on memorizing financial products or calculations, but learning essential skills and concepts necessary to make major financial choices. For example, to shop around for a loan to get the lowest interest rate and to start saving early for retirement. (See also: 10 Investing Lessons You Must Teach Your Kids)

5. Minimize Costs

When discussing raising gas prices and their effect on the American worker, Bernanke said "it must be awfully frustrating to get a small raise at work and then have it all eaten by a higher cost of commuting."
This piece of wisdom is applicable to several financial scenarios.
  • If you were to invest $5,000 in the average actively managed U.S. mutual fund, you would pay $66 in management fees. On the other, you could pay just $8.50 in fees by investing the same $5,000 in the Vanguard Total Stock Market Index (VTSMX) fund. Over a 30-year period that difference would give you an additional $4,692.21, assuming a 6% rate of return.
  • When putting down less than 20% of the price of a property, you have to pay PMI on your mortgage. In 2014, the average PMI payment ranged between $775 and $1,551 per year. By saving enough for a 20% down payment to buy a property, you could avoid the PMI expense.
Whether it's the sale price of your home or the size of your nest egg, you can't always have full control on the returns of your investments. However, you always have much more command on the cost of your investments and purchases. Minimize any type of fees so that you give your investments a better fighting chance.
What are other great pieces of financial wisdom from Ben Bernanke?

Monday, July 6, 2015

Why Invest For Dividend Income?



Why are dividend investors fanatical about rising dividend income?
The answer illuminates why dividend investing continues to attract new adherents.
Simply put, dividend investors realize that investments should pay you real money. Too often, people approach the stock market as the world’s largest virtual casino.
The World’s Largest Virtual Casino
It is very easy to think of each stock ticker as a virtual bet. Sometimes, the price rises, and sometimes it falls. It all feels so random. It is the same feeling you get in Las Vegas… You either get lucky and win money, or you don’t.
Stocks are much more than virtual lottery tickets.
Buying a share of stock entitles the investor to a fractional share of ownership of a business. When you buy a stock, you are investing in a real-world business.
Business and gambling are very different. Businesses earn money when they provide services or products that their customers are happy to purchase. If a business is run well, it will continue to grow larger. If it is run poorly, it will eventually decline.
Notice the stark difference between business and gambling. In business, success depends on serving your customers better or more efficiently than your competitors. Sure, there is some luck involved, but intelligence and hard work will lead to favorable results.
Gambling is completely different (this does not include games played against other people instead of the house, like poker). The odds in gambling are set. You will lose over time. There is no amount of skill that can make someone a winner playing slots or roulette. You will lose if you play long enough. The house always, alwayswins.
The stock market is not a large casino, even though many investors treat it that way. The stock market allows people to purchase small percentages of the world’s greatest companies (or mediocre companies, if you want).
Dividend Paying Businesses
At this point, hopefully readers see the difference between buying random stock tickers and investing in sound businesses to take advantage of their attractive economic prospects.
Dividend paying businesses are different than non-dividend paying businesses. First, for a business to pay a dividend for any lengthy amount of time it must be profitable. Businesses that lose money simply cannot pay dividends for any meaningful length of time. Unprofitable businesses will run out of money and declare bankruptcy faster by paying dividends.
Profitable businesses, on the other hand, can return profits to their owners by paying dividends. A dividend payment is the return of profits to the owners of a business. As a shareholder, you are an owner.
Take Coca-Cola (KO) as an example. Coca-Cola pays out 64% of its earnings as dividends. Every time someone buys a Coke, Coca-Cola shareholders get 64% of the profits paid to them.
You may be wondering, what happens to the other 36% of Coca-Cola’s earnings? If shareholders own the company, why aren’t 100% of earnings paid out to shareholders as dividends?
The reason Coca-Cola does not pay out 100% of its earnings as dividends is because the company’s management attempts to maximize the long-term value of Coca-Cola shares.
To do this, Coca-Cola needs to grow. Coca-Cola’s managers have estimated that the optimal amount of profits to reinvest in the business is around 36%. This money goes to repurchasing shares, building up cash balances for stability, repaying debt, and investing in future growth.
Coca-Cola is expecting earnings-per-share growth of 7% to 9% a year. The company will likely grow dividends at around the same rate.
If Coca-Cola paid out 100% of its earnings as dividends, it would have a yield of 5.1%. Coca-Cola stock currently has a yield of 3.3% and is expected to grow at 7% to 9% a year. In 10 years, Coca-Cola shareholders will have a yield on cost of around 7.1% thanks to growth. If the company paid out all of its dividends and reinvested nothing in growth, shareholders would be worse off in 10 years than if Coca-Cola does reinvest some of its earnings for future growth.
Why Invest for Dividend Income?
Investing for dividend income places focus on what matters in investing – a businesses’ ability to generate growing income over time. Dividend investors look for businesses that will be able to pay increasing dividends because the business is growing its income.
This eliminates unprofitable businesses from consideration for dividend investors. Avoiding the worst businesses is certainly a good start in not losing money investing. If you aren’t losing money, you will end up making money.
Dividend paying businesses also produce passive income. Dividends roll in each month or quarter, without you doing a thing. Over time, this passive income stream will grow as the businesses grow and as you invest additional money. This ‘snowball effect’ results in compound growth of passive income.
The ultimate goal of dividend investing is to be able to live off the passive dividend income your portfolio generates. The speed at which a dividend investor reaches this goal depends on a few key variables:
  • What your monthly expenses are (the lower, the better)
  • How much you save every month (not how much you make)
  • How quickly your dividend income grows
Why invest for dividend income? Because you will build a growing, passive stream of income while focusing on what makes investments successful.

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