Beyond Paycheck to Paycheck

at August 31, 2007 in Media. 0 Comments

Yesterday, Ryan Healy, co-founder of the immensely popular Employee Evolution blog, reviewed Beyond Paycheck to Paycheck. In addition to the review, you’ll find some thought-provoking questions by Ryan and my corresponding answers. Not surprisingly, this conversation led to some great comments to this posting that you just might enjoy reading. Take a look at the blog posting.

FYI, Employee Evolution is dedicated to helping the millennial generation answer the hard-hitting questions that come with the biggest transition of their lives.

"financial education"

Strategy # 29: Social Security is to a 401(k) plan like a Walkman is to an iPod

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at August 30, 2007 in Retirement and Top 40 Introductory Strategies. 0 Comments

You: Explain to me the difference between Social Security and a 401(k) plan again. Both of them are for retirement right?

Yes, but the similarities fade very quickly. In fact, it wouldn’t be an exaggeration to say that Social Security and a 401(k) plan are both retirement plans in the same way that a Walkman and an iPod both play music through headphones.

You: What?

You would never mistake a Walkman with an iPod.

You: What’s a Walkman?

Really?

You: No, just trying to make you feel old. I think I saw one of those at a garage sale once.

I feel the love. The point is that you should never confuse what Social Security and your 401(k) plan each provide. They’re so dramatically different it is little wonder that Social Security remains an involuntary system. You must take part.

You: That’s FICA taking my money again, right?

Right. As a result, you must choose to participate in the 401(k) plan. Do so, because you may never have a better opportunity to save for retirement. As we discussed earlier, you need to turbo-charge your pogo stick for your retirement–and the 401(k) plan is the best way to get started. You simply can’t afford not to enroll in your 401(k) plan.

You: When?

Today is a great day.

You: But the form–

–is so easy to complete it’s scary.

You: But the cost–

–is far less than you fear, thanks to the tax savings.

You: Explain that part.

I will. Stay tuned. All part of your financial education and living Beyond Paycheck to Paycheck.

"financial education"

Fox News Chicago Segment

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at August 29, 2007 in Media. 0 Comments

On Tuesday night, Fox News Chicago aired a prime-time segment called Help for Families Living Paycheck to Paycheck. Watch the video to see some of my thoughts on the causes of this phenomenon as well as clips of a free seminar I gave at the Chicago ING DIRECT cafe on July 30.

Additional dates for the remainder of the ING DIRECT tour will be announced soon.

"financial education"

Strategy # 28: If it seems too good to be true, it usually is.

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at August 23, 2007 in General Financial Planning and Top 40 Introductory Strategies. 0 Comments

You: So what’s the real secret? I’m not talking about what you publicly advocate. How about sharing what you and all the other experts are really doing when no one else is watching? C’mon Michael—let me in on the real deal.

Nope.

You: I’m a loyal reader of your blog, I read your book, I’ve seen you live – maybe all three.

Thank you.

You: So tell me.

Won’t do it. Still, you could probably find 100 other ways to get the answer you want to hear from other books, blogs, magazines, and “free” seminars. But despite the hype, none can possibly deliver on the typical premise of guaranteed quick wealth.

You: That would guaranteed quick wealth easily and with no risk.

Of course.

You: But why not? Why can’t I achieve quick easy wealth with no risk?

Because finance doesn’t work that way (exception: heirs of multi-million dollar trusts.) But there is some good news.

You: Finally.

I do believe there is one “guaranteed” way to become wealthy. But it takes much longer than the four-hour workweek during which many people suddenly believe all necessary tasks can be accomplished.

You: I’d be happy to work more than four hours each week to become wealthy.

My way isn’t measured in hours or weeks. It’s long-term.

You: Months?

No.

You: Argh. Years?

Not really. More like decades. Look, I know it isn’t sexy and my position ensures I’ll never land on any magazine covers, but it is total candor.

You: So what’s your way to become wealthy?

It’s a simple two-step process. Here’s the lengthy details of my two-step program:

Spend less than you make.
Repeat step 1.

You: That’s it?

That’s it. Do it for a just a few weeks and you’ll find your net worth increasing. Do it for many years and you’ll find yourself becoming wealthy.

You: Why will that ridiculously simple approach work?

Because every time you spend less than you make, the extra money allows you to either pay off some existing debt or increase your assets. Either one of these maneuvers increases your net worth. Over time, the impact is dramatic.
Furthermore, as you gain control over your financial life, getting the mail becomes enjoyable.

You: Why?

You see your credit card statement balances decrease. You also see your bank and brokerage account balances increase. This combination makes you healthier, both financially and emotionally.

You: What else?

Be skeptical of aggressive salespeople, guaranteed investments, and other “sure things.” Just focus on standard investment approaches and legitimate financial planning techniques. Remember the best and most important step is the first step.

You: Right. Start saving today.

You’re getting the hang of this.

"financial education"

Going on vacation without going broke

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at August 20, 2007 in Saving Strategies. 0 Comments

You: Okay, so where are you going?

San Francisco, Idaho.

You: You do realize San Francisco isn’t in Idaho?

I do. First I’m going to SF, then to Idaho.

You: Expensive?

It’s actually not that expensive. Like most money issues, advance planning of your vacation provides you with opportunities to spend less and have more.

Here are three tips to lower the cost of your next vacation:

1. Go somewhere close. Even with gas prices still high, driving 4-5 hours is still a lot less expensive than paying for airplane tickets (especially if there are two or more of you traveling). If you must go beyond the distance of a reasonable car ride (as in the case of my upcoming coast to coast trip for a wedding and to see family), book way out and be willing to be creative on airports, times, and days to get the lowest rates. I easily spent four hours getting the best airfares, but saved several hundred dollars in the process. On an hourly basis, it was certainly worth the time.

2. Pick hotels strategically. If you know you’re definitely going on a trip and can get a significant discount by purchasing a nonrefundable rate, consider that less expensive option. Once I bought nonrefundable airfare to my friend’s California wedding, I was certainly going on the trip. By committing to the hotel I wanted in advance, I saved over $100.

In addition, many hotels include a continental breakfast in their rate. Depending on your discretion, choosing such a hotel could easily save you $10 per person per day. So factor that in when selecting and comparing hotels.

3. Don’t assume you need (or will want) a car right away. Some times you’ll need a rental car when you land at the airport. But other times, like on my upcoming trip, you won’t.

In our case, we’re flying to California on Wednesday for a wedding that will be held on Saturday night an hour outside of SF.

You: Then why are you flying Wednesday?

Flying Wednesday saved enough money compared to flying Friday that it paid for the extra hotel nights plus some food money. So, we’ll enjoy those extra days in SF.

You: So what about the car?

Renting a car when we land at the airport would cost more than $50 a day. Plus it would cost over $40 a day to park it at the hotel. That’s a chunk of change for minor benefit. Instead, we’re going to take a taxi to the hotel (about $40 - one time) and we’ll pick up the car two days later from a location in SF.

Additional advantages of doing it this way.

Most states assess a ridiculously high additional tax on airport car rentals. Typically such taxes are less expensive (or even non-existent) if you rent in a city (away from the airport). Multiply the higher tax rate by the extra days you’ve rented the car, and you’re talking real money. All to have the ability to have a car at your hotel ready for when you want it. I’ll wait until I need it and spend the money on something else (or save it).

By returning the car to the airport, I won’t have to pay return trip taxi-fare. You too can often return a rental car to an airport location for no additional charge.

I won’t have to navigate SF after a cross-country plane trip and a tired 2-year old in he back seat screaming “hungry.”

I think that’s enough for now, but I may let you know of some others as we travel. Do you have any vacation spending reduction techniques you’d like to share? Provide your own financial education.

"financial education"

Strategy # 27: No one cares about your financial well-being as much as you do

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at August 16, 2007 in Gary and Top 40 Introductory Strategies. 0 Comments

You: Can I trust a financial professional?

Yes, but always verify.

You: What?

Trust, but verify. No matter the quality of a financial professional, no one ever will care about your financial well-being as much as you will.

You: Even the good advisors?

Yes, even the good ones. A quick aside: Previously, I worked for a Fortune 500 company. One day, my boss’s boss–someone who was a bit of a mentor–told me that no one would ever care as much as I would about my career. She clarified that no one would ever be as concerned as I should be about whether I was taking the right assignments and doing the necessary things to ensure my career growth.

You: Really? Sounds like you weren’t too popular there.

Actually, she liked me and my work. Her point was that it was simply human nature, regardless of who might lead me to believe otherwise, that everyone else would have their own priorities.

You: I get it, like their personal career advancement?

Yes. So, in effect, she was just being explicitly honest with me.
You: You mean speaking with Total Candor.

Precisely. The same rule of thumb applies when it comes to the management of your personal finances.

You: Does that mean I shouldn’t use a financial advisor?

No, it does not mean you shouldn’t use professionals. Professional advice is seldom a bad idea, especially if you’re choosing between advice and procrastination. However, never delegate responsibility to another individual, only expertise. Always evaluate carefully (i.e., verify) who you trust.

Although many excellent financial professionals are available, there are also those who take advantage of others’ ignorance for their own self-profit.

Gary: That’s an oversimplification!

Big word, Gary. These are the planners you do not want to work with. Furthermore, there are other professionals who may do their best but are just not great advisors. Their advice might lack awareness of other, more appropriate opportunities available to you because such options are beyond the scope of their expertise.

You: So what can I do to increase the chance that I pick a good financial professional?

If and when you decide to seek the help of a financial professional, treat it like the establishment of any new professional relationship, like a doctor. Talk to friends to get their recommendations. Meet with some - do any advisors seem particularly effective in their attempt to understand you? Is their office staff competent? Will they provide you with at least a basic financial planning education?

Ultimately, interview several candidates and ask each the following question:

How are you paid?

The ideal response you want to hear is “Fee-only.” You don’t want the planner to say “Commissions” or “You don’t have to pay me anything; I get paid by other companies based on the products you buy.” (The last two responses mean the same thing).

In general, commissions are unattractive from your standpoint because you want your best interest to be the only thing influencing the planner’s advice, not the amount of commission the planner earns by recommending one course of action over another.

Still, there are lousy fee-based financial planners out there and some excellent financial professionals who take commissions, so the payment question isn’t the only thing that matters. But advisor compensation is an important consideration and should be known at the outset of the relationship.

It’s best to choose a financial planner with good references from people whose financial situations are similar to your own. Such references are among the best ways to find any good professional and to avoid the Gary’s of the world.

Gary: I’m right here!

But none of my friends recommend you.

You: Neither did mine.

Good. Anybody here meet Gary? Tell us about your experience. Misery loves company and we can all learn from one another. Just make sure you refer to your misguided advisor by the name “Gary.”

"financial education"

FORTUNE can be wrong too or why market timing is stupid

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at August 14, 2007 in Investing. 0 Comments

You: What do you make of stock tips?

I am not a big fan. Market timing is not a strategy that works over the long-term.

Gary: Funny, that’s how I make most of my money.

That’s right Gary, it is how you make most of your money.

Gary: So you admit it, then?

I concede that you can make a good amount of money giving stock tips, yes. However, I must point out that you don’t make nearly as much money trading on your own stock tips.

Gary: You’re splitting hairs.

Not in the least. If your tips were worth half of what you charged for them, you wouldn’t share your tips because you’d be making too much money trading in your own account. But the reality is that you’ll never stop providing stock tips because it is from giving the advice–not using the advice–that you make the most money.

You: But what about tips that come from more reputable sources?

They’re still guesses and represent market timing so I’m still not a fan. For example, I greatly enjoy FORTUNE magazine and often read it from cover to cover. Well, not really, I usually read it from the front cover to about ten pages short of the back cover.

You: Why stop there? Next issue arrive? That annoys me too.

No, it’s just that I have better uses of my time than reading about the stock tips contained in each issue’s final pages. But like most people I do occasionally get curious. I just finished reading “Why Banks Beat Bonds” in the August 6 issue in which FORTUNE calls the following stocks “excellent choices right now”: Bank of America (BAC), Citigroup (C), and Wachovia (WB).

You: Okay?

You may recall that since this issue came out there has been a lot of tumult in the stock market and in financial (including bank) stocks especially.

You: That’s one way to put it. But the Dow Jones Industrial Average is down only slightly during this time.

Very true - good job taking the long-term, big-picture view. Note that the article wasn’t talking about the stock market in general. This is the section where they talk about specific stocks, in this case bank stocks.

Furthermore, remember that articles in print magazines must be finalized long before you actually see them. My unofficial investigative reporting concludes that “Why Banks Beat Bonds” was finalized on July 12 or July 13. The stock prices listed in the magazines of those bank stocks match up to those days.

You: Okay, Woodward, what’s the conspiracy?

No conspiracy, just the fact that if you had purchased each of these stocks when the article was finalized, when you had the most timely recommendations possible–as though you sat next to the editor–you’d currently be way down on your “hot picks.”

You: How so?

Based on current prices, you’d be down as follows:

Bank of America: -3.0%
Citigroup: -11.5%
Wachovia: -12.2%

You: That’s quite a hit.

Yes, in just one month.

You: Does this mean that these stocks are bad buys?

I don’t know.

You: What?

Gary: What?

I really don’t know. I don’t think like that and neither should you. You’re asking me about a form of market timing. One could expect that FORTUNE would be even more passionately in favor of buying these stocks now since they are cheaper. On the other hand, the market as a whole certainly doesn’t view these stocks as optimistically as it did just a month ago.

You: So what do you do?

Whenever I read or hear about a stock pick, I do absolutely nothing. And that’s what I suggest you do too. Be a buy and hold investor. Focus on high-quality low-cost mutual fund managers and index funds. That’s what allows you the best chance to grow your wealth over the long-term. That’s following an unbiased financial planning education.

You: Not too exciting.

No, you won’t dominate the cocktail party conversation, but you will be laughing all the way to the bank.

"financial education"

Strategy # 26: Have a good time with mutual fun(ds)

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at August 13, 2007 in Gary, Investing and Top 40 Introductory Strategies. 0 Comments

You: What should I invest in?

No financial advisor worth the time you invest in a free meeting could possibly answer that question without first getting to know you and your financial situation intimately.

You: Intimately?

The financial advisor/client relationship is a close one.

You: Okay, then say “close.” The idea of having an intimate relationship with anyone who likes investing that much kind of creeps me out.

I can see that angle, but the point remains that a successful advisor/client relationship is a close relationship. As such, you should always be very skeptical of anyone who can quickly tell you what you should be investing in. As you know, I have a name for such people.

You: Yes you do.

I call such advisors “Gary.” Remember, Gary isn’t concerned with the appropriateness of a recommendation from your perspective. Gary’s the kind of guy looking out for his best interests.

You: So where does that leave me?

Assuming you’ll be investing on your own (we’ll talk about identifying an appropriate financial advisor in a later post), the key–after you’ve determined your risk tolerance–is to keep your head on straight and your expenses low.

You: In other words?

Don’t swing for the fences. Establish an appropriate asset allocation based on your ability and willingness to tolerate risk and then purchase low-cost index funds.

Gary: Boring!

You know, I won’t argue that one, Gary. But responsibly growing people’s life savings is a good place to be boring.

You: Really?

Most people simply need their investments to grow steadily over many years. Trust me, those ending balances won’t be boring. And some weeks (like last week) the ride won’t be boring either. If you want crazy fluctuations of up 20% down 25%, go to your nearest casino. Play (because gambling is playing, not investing) with money you can afford to lose.

You: A little more info on mutual funds, please?

Sure. Mutual funds can own stocks, bonds, and even cash, all of which create value for the shareholder. Since mutual funds own many different investments, mutual fund shareholders benefit from diversification, which lowers the overall risk. In addition, mutual funds are run by people who dedicate their careers to managing investments–they’re experts. You can benefit from professional investment management.

You: I can?

Sure, but as with any other occupation, some mutual fund managers are lousy. But–and here’s where mutual funds have a leg up on the people who forecast the weather–it’s pretty easy to see how the manager has performed. If you do some basic research, you can pick a mutual fund manager who has done a good job for a while. Of course, you still have to monitor her annual performance, because anyone can be lucky for a while or become complacent.

You: It feels good to receive an unbiased financial planning education.

Thanks - tell a friend. Let me tell you - it feels even better to give an education.

"financial education"

Strategy # 25: Stocks go up, stocks go down, but it’s stocks you’ll want

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at August 10, 2007 in Investing and Top 40 Introductory Strategies. 0 Comments

You: Is the sky falling?

What do you mean?

You: What do I mean?!!?? What do I mean?!!? Did you see the market yesterday?

Yes.

You: How can you be so freakin’ calm?

It’s normal for the market to –

You: Oh don’t tell me - you sold everything a week ago, didn’t you? I really hate all the people who did that!

No, I didn’t. Isn’t hate a strong word there? Look, of course I saw what the market did yesterday. And of course it wasn’t a good day to be in the stock market. But it has been a good year so far.

You: Really?

Absolutely. If you invested in nearly any standard index fund, even after today’s lousy day, you’re likely still up a few percentage points for the year, with still most of five months to go.

You: Are you saying it’s going to go up from here?

Gary: Not everything will. You need to be in the right stuff. Index funds are a loser’s bet. You’ll do what everyone else does. Boring!

Not quite. I have no idea what the market will do from here.

Gary: But I do. You just need to come on in.

Look, if Gary really knew what was going to happen, he wouldn’t be here trying to get you to invest your money. He’d be counting his yachts. No one–not you, not me, and certainly not Gary, has the ability to know what will happen next.

You: It will be hot again.

I mean with regard to the stock market, not the weather.

You: I know, I was just complaining. This heat really is ridiculous.

You just have to keep in mind that, historically, there has been no more rewarding long-term investment than stocks.

You: Which do ultimately represent more than just lines on my account statements, right?

Indeed. A share of stock represents ownership in a publicly traded corporation.

You: That’s right, so I get–

No you don’t qualify for discounts off company merchandise.

You: Darn. Can I–

And you can’t affect management decisions either, but you will feel the pride of ownership and experience financial benefits.

You: Kind of soft benefits, no?

Not when the market goes up. Just remember, individual stocks, by their nature, are risky, so the best place for a beginner to start investing in stocks is through index mutual funds. Those who a few months ago purchased some of the the stock market’s best performers–the banks–are taking it on the chin right now.

A volatile market is just one reason it’s better to get a truly unbiased financial planning education.

"financial education"

Strategy # 24: Not Barry Bonds! Series EE Bonds!

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at August 8, 2007 in Investing and Top 40 Introductory Strategies. 0 Comments

You: Is the fact that the United States government borrows so much a bad thing?

That is a very sophisticated question that goes way beyond personal finance.

You: Impressed?

Well, I am glad you’re reading up more on more finances. Whatever the topic, you can’t know too much. But this is a personal finance blog, so we’ll focus on that aspect of your question:

There might be some good news for you that the U.S. government borrows so much.

You: How so?

Some of that national debt might be owed to you.

You: Really?

Absolutely. If, for example, you own a U.S. savings bond, part of the United States government’s debt is actually owed to you.

You: And I so much wanted a remote control car at the time.

Me too! But now you finally see the foresight of your elder relatives.

You: Not yet, still waiting on that one.

Fair enough. Bonds are investments representing debt owed by another entity. In the case of Series EE bonds, the borrower is the U.S. government. Other bonds feature a state or a corporation as the borrower.

If you are a bond owner, you typically collect payment in two forms:

periodic interest payments, and
the principal at the end of the bond’s term.

In the case of Series EE bonds, however, you get all the interest when you decide to cash in the bond.

You: That’s weird.

I agree, but it’s why bonds you own for a very long time might be worth even more than the amount listed on them.

You: Kind of like how a Barry Bonds rookie baseball card is worth much more than what it originally sold for?

I suppose so. Aggravating too. I can’t believe I sold my Darryl Strawberry and Don Mattingly rookie cards for less than a nickel each at a local garage sale.

You: You did that?

Yes. It was one of my first “investment” decisions. Didn’t go so well. Then again, I was 12 years old or so.

You: So what do you think about last night? Asterisk?

I am not going there, but you can.

Gary: Ethics are very important.

Oy.