Tuesday, August 29, 2006

Building Wealth On Just $1 Per Day

I love articles that break tough tasks, like saving money, into doable chunks. Even saving as little as a dollar a day can build significant wealth, over $400,000 in 50 years. The key is sufficient time, investment growth, and enough discipline to not spend it while it is growing.

The challenge, of course, is that I need to do it in a shorter time and at lower investment growth. I don't have 50 years and I typically don't get 10% investment returns. (I haven't done the calculation for 6% at 30 years, which I think I could get.) However, it is encouraging that I can start my children at 3 and create reasonable wealth for them by 53.

So start early even if it is small. You don't need to have brilliance or luck to become wealthy, just enough time and a mindset to save. I think I'll start my children on this plan before they're two:-)

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

Sunday, August 27, 2006

The Bursting of a Bubble

There is currently a lot of doom and gloom about the real estate market. I fully expect that there will be a decline of real estate. However, the real story is how it will affect each of us individually.

Here's how I rank the levels of impact:

  1. Very Worst - Own real estate with a adjustable mortgage you can barely afford and there will be an upward adjustment soon.
  2. Painful - Will need to sell real estate within the next two years and want to get a last year's price
  3. Ok with some risk - Have an affordable or no mortgage and plan to keep the property for 10 years.
  4. Sitting Pretty - Currently renting and have savings to invest in real estate or to buy a house.

Bottom line, situation 1 and 2 will be troublesome. Hopefully, some of these folks have some savings to mitigate the price decline. Situation 3 is not too bad if you weren't using your house as retirement savings since 10 years may not sufficient for recovery. Situation 4 may be a once in a life time opportunity to get the most real estate for the money. There are already numerous stories of people getting real estate for 50-80% of the original asking price.

I am in situation 3 with the possibility of going to situation 2. Ouch!

This is not financial or real estate advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

Friday, August 25, 2006

Using Your House as Retirement Savings

For the past 6 years, I have not been counting my house equity as part of my savings for retirement for a couple reasons:

I believe income generating savings are what's needed for a comfortable retirement. The equity in my home doesn't generate any liquid income until I sell it. And I don't plan to sell my home at retirement.

Since I have a mortage, my home is causing me to spend my monthly income. Even if I didn't have a mortgage, I would still need to pay for taxes, utilities and maintenance, which I estimate at 5% the cost of my house.

An August 25, 2006 article in The Wall Street Journal explains why using your house as a savings vehicle may not be a great idea. Forget the Mansion: Why Buying Bigger Doesn't Guarantee a Rich Retirement

However, it is a very common practice include home equity as part of one's retirement savings. I know many of my colleagues are doing so. My thinking is that this strategy works if one plan's to sell and move to a smaller home at retirement. Otherwise, I think I would be overstating my retirement savings.

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

Saturday, August 19, 2006

Buy Only What You Need

The challenge to saving is that most of us spend all of our monthly, biweekly or weekly paycheck before we have received it. To get money for savings, I had to break the cycle. I am not a big fan of budgeting. It is kind of like dieting. Most of us can do it for a short time, but then we fall back into the old habits.

The strategy I like is to "buy only what you need." A colleague and I started doing this in the late 1980's. We agreed to only buy what we needed for one year. It worked so well for me in that one year that I continued to use the strategy.

Here's how it works. Start with either big ticket items (electronics, cars, appliances, etc) or regular purchases (newspapers, magazine subscriptions, cable service, cell service, eating out, happy hour etc) and ask yourself before each purchase, "Do I need this item?" In some cases, the answer will be "yes." In other cases, the answer will be "no." Start eliminating the no's and saving that money. It adds up.

When I started doing this, I was surprised and how many purchases I didn't need. I dropped my daily paper ($100/year), started packing my lunch ($20/week), and took up running instead of joining a health club ($30/month). I never subscribed to cable ($20-50/month), I still don't have a personal cell phone ($40/month, but people think I live the dark ages), and I have a regular TV (not HD or wide screen .)

The savings added up and I took that money to the bank.

Here's where the debate occurs. What is really "need?" I do have a computer, Internet service, VCR/DVD player, dishwasher, and pool table. My friends have told me none of these are real needs. And they are right. I could live without a dishwasher appliance or a pool table. And I would if I needed to do so. However, I am also ok with buying them since I have already reduced many items I don't need.

The other benefit of asking the "Do I really need it?" question is that it prevents impulse buying. I just read an interesting article on why we get the urge to impulse buy and why we should avoid doing it. Money on the Brain says our brain is delighted by novel items and experiences. So seeing new items causes people to want to buy them. Advertisers and marketers know this and leverage the situation. However, owning it doesn't turn out be as delightful as considering the purchase and buyer's remorse occurs. Hence, checking if I really need it before buying saves the disappointment and puts money in my bank.

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

Thursday, August 17, 2006

The Really Reallies

Enough pontification. You get it. Save, save, save. That's the road to riches.

Now how do you get the savings to work for you? Stocks, Bonds, Real Estate or CDs?

My choice right now is CDs. You can get 5-6% for 1-2 years. That's no risk and FDIC insured. I'm loading up on these. Almost all of my IRAs are invested in CDs ranging from 4.1% (unfortunately I started getting CDs in mid-2005) to 6.0%. Yeah I know, interest could go up to 10% and I will lose out. Yes that could happen. But I'm only locked in for 2-5 years. And then I get my money back. I prefer to use a brokerage account. My favorite discount brokers are TD Amreritrade and Schwab, both of which I have been with for over 10 years. Schwab service did decline when the founder left. But he has returned and they are improving.

I have stocks, primarily through a financial advisor. Personally, I like to invest in stocks but I trade too much. My financial advisor keeps me in the market through thick and thin. Me, I like to buy a depressed stock and sell when it bounces. I've been with the financial advisor 2.5 years. In year 1, the advisor outperformed me at 6% vs. 3% for me. In year 2, advisor underperformed me at 3% vs. 7% for me. 75% of my stock investments are with the advisor.

Overall, I think the market is pretty weak, in spite of the rally the last two days. I plan on selling into this rally. If I am wrong, my advisor will keep me fully invested. If I am right, 25% of my stock accounts will benefit. Favorite longer term bet, Google. Full disclosure, I own Google. Favorite out of favor sector, Biotech. I own Alcon, Barr Labs, and Gilead. I own Genta as a speculative Biotech. My CEO bet, Apple. I like their innovations and products. I also own Apple. To note, all of these stocks are down from my original purchase price last year. So please do your due diligence.

Bonds are also a pretty good deal. I am buying insured municipal bonds from my state. So the interest is completely tax free. I am getting between 3.5% and 4.2% tax free. (Did I mention I like use all legal ways to defer or avoid paying taxes?) I have about 15% of my investments in bonds.

Real Estate. My first comment is that your house doesn't count. Not unless you plan to sell it and move to a less expensive house. I think real estate works if it generates income and you buy at a good price. Every piece of property I 've looked at is overpriced. I have noticed that the number of sheriff sales is going up and some are happening in high priced (>$350,000) neighborhoods. Hmmm .....

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

Your Savings Goals

Now that you are ruthlessly saving. How should you parse your savings? Here's how I divide up my savings.

My first goal is to create an emergency fund. Many articles suggest 3-6 months. I personally like 1 year's salary before taxes. That will give me quite a buffer. And will likely last 2 years should I ever need it. (Remember, we pay about 30% or more in taxes).

Next is my retirement. If your employer has a 401K with matching contributions, DO IT! At least up the match. It's like getting a raise equal to the match. My employer does not match my 401K contributions, but I still contribute the maximum each year. Next is a deductible or Roth IRA. Either one is about the same. A colleague proved to me that after taxes, they are the same. (Let me know if my colleague is wrong.) I put the maximum into my wife's and my IRAs.

Next is for our kid's college. I don't want them to be saddled with student loans like in the tens of thousands. I plan to scrimp on the ballet lessons and put what I save towards their college tuition.

Next is for things to buy. I always save for a car and pay cash. I also pay cash for funiture, vacation, or other big expense. I don't want to paying 7 -21% more for my big ticket items due to interest. I'd rather pay cash and have the interest avoided go into savings.

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

Wednesday, August 16, 2006

The Only Saving Strategy You'll Ever Need

Here are the top three strategies for savings:

  1. Pay yourself first from every paycheck.
  2. Pay yourself first from every paycheck.
  3. Pay yourself first from every paycheck.

Simply put, the first money taken from your paycheck should go into your savings account. Every thing else is secondary. That includes rent or mortgage, utilities, food, credit cards, car loans, and any other payment.

If you aren't able to pay yourself first, you need to make more or spend less to enable this strategy.

Don't make the mistake of not using this strategy. It is the key foundation to building your wealth.

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

Sunday, August 13, 2006

Saving is the Starting Point

Saving was the first thing I needed to do to create wealth. Sure, there are many stories of creating great wealth via new ideas and businesses. And these are valid ways. However, this was not the way for me, an average person.

First, what is wealth? Some define it as your assets, that is , what you own. Thus, if you have a $300,000 dollars in cars, houses, cash and property, your wealth is $300,000. I think it should be your net worth (assets minus debts). So if you own a million dollars $300,000 of assets with a $150,000 mortgage and $50,000 other debts, your wealth is only $100,000.

However, in this example, you also owe about $1000 per month in mortgage payments. So your wealth could quickly be eliminated if you miss a few mortgage payment. Therefore, I refine the definition of wealth to be my net worth which is constantly being adjusted by the net inflow/outflow of funds. To create wealth, I needed to create a net positive inflow of funds.

For me, that meant saving part of what I earned each month. The more I saved the wealthier I became. This was different than just owning more.

How much should one save? Depends on how fast you want your wealth to grow. I started at just 5% ( before taxes) and have raised it to around 25% today. Here is a quote from an article titled "Taking the Mystery Out of Retirement" by Laura Rowley. "One of the niftiest methods I've seen comes from Charles J. Farrell, a financial consultant and former tax attorney in Medina, Ohio. His bottom line? For a comfortable retirement, you need to save 12 percent of your annual pay starting at age 30 and pay off all your debts by age 65."

This is not financial advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC