Pondering Money

Imagine you were able to get lectures on virtually any topic from world class professors from all of the top universities.  What if the classes were scheduled just for you?  You get to choose when and where the lectures were given and you control the pace of the course too.  Having a hectic week? Don’t worry you can move that physics lecture to next week.  Also, there is never any problem getting into a class you want you can pick any class.   If you don’t like a particular professor you have many others to choose from.  Oh and there is no tuition cost either!   Sounds like a student’s pipe dream doesn’t it?  The amazing thing is that it is a reality today!  Lectures from top professors are available for free- check out open culture.  You can get podcasts or video casts from a very impressive list of universities- Brown, Cambridge, Dartmouth, Harvard, MIT, Oxford, Penn, Stanford, UC Berkeley, Yale, and many others.   If you know how to get music from iTunes you already know how to get most of these lectures.  There is an amazing variety, and some very indepth topics- for example I downloaded a series of lectures from Yale on genetic engineering.   I can only imagine how the variety will grow in the future.   Here is something to ponder- with such a wealth of education available for free, why is college tuition so expensive, and growing even more expensive? 

From Oct 2007 to Mar 2009 the stock market declined a brutal 46%, a horrific blow to any investor but that is nothing compared to a divorce!  First and foremost a divorce has huge emotional costs- I am not going to even try to put a price on that.  Just consider the huge financial costs:

• A 50% loss across ALL  of your assets- your home, cars, investments, savings, everything!
• Tens of thousands in legal fees.
• Thousands for one spouse to move out.

A divorce will not only decimate your current wealth- but it also saps your future:

•  Significantly Lower Income
  • Loss spouse’s income or spousal and child support payments.
• Increased Living Expenses
  • Two residences
  • No shared items
• Additional Child Care Expenses
  • No one else to help watch kids

All of these factors make divorce horrifically costly.  Maybe the best financial move you can make today is to do something nice for your spouse!

Finding a good financial advisor is hard because you need someone that is both trustworthy and doesn’t have biases that will cost you a fortune.   You certainly don’t want a crook that will steal your money, but you also don’t want a salesman claiming to be an advisor that will mislead you.  Finally, you don’t want someone that believes they are the next Peter Lynch because chances are they aren’t!

Can You Afford a Financial Advisor?

For financial planning there are some cases where you just have to do it yourself.   If you are a new investor starting with $0 and investing $1000 each year you need to be self sufficient.  Any Planner that takes a % of assets under management will not talk to you- there just isn’t enough to cover their cost of doing business.  You could consult with a fee only advisor, but that could easily cost you a year of investing and a better plan doesn’t beat investing earlier.  At $1000/year even buying a $10 investing book will cost you 1% of your investment!  Your best option is to make your own investment plan initially then seek professional help later.  Your plan could be very simple like a low fee target retirement fund in an IRA.  After you have $200,000 or more a professional becomes a lot more cost effective.  At that point the optimization of the portfolio could potentially cover the cost of the advisor.How to StartAsk people you know for recommendations- who they trust to manage their money.  If you can’t get a personal recommendation I would try searching the NAPFA website.  I would plan to interview a few people.  Here is a list of questions to ask from the SEC,  I think how the advisor is paid is the most important question they list.  I would steer clear of advisors that earn commissions from what investments you purchase.  There is just too large a conflict of interest for such an advisor to give you the best advice.   I would prefer an hourly fee over a % of assets under management as advising how to invest $1,000,000 should not take significantly more time and effort than advising how to invest $500,000.

My Questions

In addition to those from the SEC I would also add the following questions:

1. How did you advise clients similar to me during 2007 and 2008?  Why?  Did they make good decisions- for good reasons?  I think the best answer would be “Stick to our plan but save more/withdraw less.”  Their plan was solid but they are adjusting to the possibility of a harsher reality.  Other good changes include- rebalancing, increasing % bonds as you age, or switching to a lower cost equivalent fund.  If their reaction to 2008 was to scrap the old plan and try some totally new plan seek someone else.
2. How do you pick the investments you recommend? I would be wary of someone that looks at past performance, remember all the warnings that it isn’t a predictor for future performance? I would also be wary if they claim some special knowledge- it is really hard to beat the market, what is the chance you found the next Peter Lynch? If they could really beat the market consistently then they are wasting their time planning for you as they should be running their own fund and making billions. I would like to hear minimal fees or covering different asset classes, which would naturally lead into choosing index funds.
3. Describe a time when you convinced a client not to make a stupid mistake? A good advisor should be able to prevent you from making mistakes. If they haven’t done that with other clients a lot they are unlikely to be good advisors.

Retaining Control

Finally, I would want an advisor that would allow me to keep control over my investment accounts.  There are two good reasons to keep control:

1. That insures you are informed of any changes since you have to make them.
2. It prevents the possibility of fraud.  Bernie Madoff could never have run his ponzi scheme without controlling the investment accounts and forging the reports and transactions.

There are some disadvantages- you don’t get to delegate the transactions and you may miss out on lower cost funds only available to very large investors.  I bet Bernie’s clients are regretting giving him control.

Have you ever wanted to be the bank and make a lot of interest lending people money?  If so peer to peer lending may be for you.  Peer to peer lending is when you lend money to others through a site like lending club or prosper.com.   They have many people fund each loan to minimize the risk of default,  I’ve been experimenting with the lending club and I’ve gotten over 10% on a pretty conservative loan.  I like their web intereface and it seems a viable way to invest.A great way to try it out is using a promotional offer so you don’t risk your own money.  Right now lending club has a promotional offer- you can send invitations to friends and they get $40 to start investing.  Leave a comment and I’ll send you an invite.  Note as far as I can tell I won’t get a referral bonus myself.

I thought it may be helpful to share my financial goals for this year:

• In order to have financial freedom in retirement:
  • Contribute at least 15% of my income to the company 401K plan via payroll deduction from each check.
  • Contribute $2,500 every three months to Roth IRAs for my wife and myself totaling $10,000 for the year.
• To open the possibility of early retirement
  • Invest at least $1200 this year in a taxable account by contributing $100/month.
• To have money available for my future goals:
  • Invest 15% of my income in my company’s employee stock purchase plan via payroll deduction from each check.
• To aid our children with college expenses
  • Save least $160 per month into 529 plans via automatic deposits.
• To pay my son’s tuition
  • Save at least $160 per month.

Are you tired of making resolutions every year and never making progress on them?  Well this year try something different make some goals instead of resolutions.  With goals you are much more likely to follow through and really accomplish something.

Goals that are SMART

To maximize your chances of achieving your goals, make them SMART:

• Specific- Every financial goal should have a specific dollar amount.  Instead of a vague resolution like “I will save for retirement” be specific “I will save $5000 for retirement”.
• Measurable - You need to have a way to gauge your progress, since your financial goals should have a number it is easy to measure the progress.  The progress percentage is the amount you have divided by your goal number multiplied by 100.
• Attainable - A goal must be something you have control over- like investing a certain amount.  There is no point in setting goals on things beyond your control like getting a particular return on your investments.
• Realistic - Your goals should be realistic so that you can stick with them- if you make them unrealistic you will most likely become discouraged and give up on them.
• Timely - The difference between a dream and a goal is that goals have deadlines!   It’s also helpful to break down goals into manageable pieces.  For example ”I will save $5000 for retirement this year by investing $417 each month.”

I like to add two features to my goals- a reason for them and an at least clause.   The reason is there to remind me why I chose this goal, and to remind me why I should sacrifice to achieve it.  The at least clause opens up the possibility to accomplish more if circumstances allow.  An example financial goal is “I will save at least $5000 for retirement this year so that I have freedom to live as I want by investing a minimum of $417 each month.”

Have a wonderful holiday!

When reading an article on get rich slowly about frugality it struck me that most of the comments assume that the only option for frugality is deprivation.   You can stick to your budget by denying your desires but aren’t there any better options?

Creativity

In stead of closing the door with a statement like “I can’t afford it.” What if you ask a question like: “How can I afford it?” that opens up a whole new world of possibilities.  I heard a wonderful example from a podcast: A caller into the show told the story of how he loved sailing and was able to sail for free!   What he did was to provide his labor as a crewman for sailboat races.  This is a great example of a win-win situation- the captains have the boats and need sailors, the sailors want to sail but need boats to sail.  This is a very specific example, but there is a general principle.  Ask how could my desires also serve others?  Could this service fund my desires?

Finding the Core

The other key is to understand exactly what you love to do.  Say you love going out to dinner with friends.   Is it eating out or the interaction with friends that you really love?  If it is interacting with friends – you could substitute having friends over for a pot luck dinner.  The critical part, interacting with friends, is the same, but the bill is LOT less!  

Your Thoughts

Do you have any stories where you used creativity to make frugality work for you? Leave a comment to share them!

If you don’t see an item then you won’t be tempted to buy it.  Instead of browsing through all the deals at online retailers like Amazon.com ONLY browse your wish lists.  This strategy insures you can see deals on items you want and will ignore the rest.  It will also save you a lot of browsing time too.  Just be sure to limit your wish lists to things you really want.

Happy Thanksgiving, I hope you have a lot to be thankful for today!  I’m going to take some time to try to appreciate all of the the people and things I have.-Rick