Thursday, July 17th, 2008
While I am convinced that some (read: very few) people in the world have the ability to time the market, you and I are not them. That is not meant to be an insult to you, but if you could successfully time the market then you certainly wouldn’t be reading this article.
The Market Moves Mysteriously
Yesterday the American stock market had one of the best days in recent memory. The returns of the major indexes were as follows:
- Nasdaq - 3.12%
- Dow - 2.52%
- S&P 500 - 2.51%
Why do I tell you this today?
You see, yesterday was a great day to be invested in the stock market. However, you would not have known it if you had been listening to the so called “experts”.
Here are some of the morning headlines from major investment news sources:
(Heresy is a dislocation of some complete and self-supporting system of belief)
Fed Worried About Rising Inflation at June Meeting - CNBC
Unemployment rise at 16-year high - Financial Times
Dollar Declines Against Yen as US Banks May Report Losses - Bloomberg
Fed Chief Gives Gloomier Outlook On US Economy - CNBC
Inflation Data Tame Stock Futures - Investors Business Daily
Recession Under Way? - Morningstar
Seeing Bad Loans, Investors Flee From Bank Shares - New York Times
Is Your Cash Safe at the Bank? - TheStreet.com
What Does This Mean?
No, I am not saying that just because I said to stay the course and keep investing in equities yesterday that I am any better at predicting the future than the authors mentioned above. Heck, for all I know the market could lose yesterday’s gains and then some in today’s session!
What I do know, however, is that being a long-term investor is a better option for me than being a short-term trader.
What I am also suggesting is that we have to develop our own investment plans that work for us and stick with the plan. We can’t be bothered by the hype in raging bull markets, nor the doom and gloom sentiment in bear markets. I know as well as you that what I propose is easier said than done, but it is for our own financial well being that we develop an investment plan that makes sense to us and stick to it. Once we start straying from what we know, we are more likely to get burned.
Remember, the above authors get paid to sell papers not to invest your money! Those headlines make them money, but you don’t have to let them lose your money.
Just think about it.
Posted in Investment News | No Comments »
Monday, June 9th, 2008
A recent article in The Globe and Mail has me slightly concerned about the financial well-being of our baby boomer generation. It appears that there has been a trend of late (from 2001-2006) according to census data that shows baby boomers assuming more debt.
Why This Concerns Me
At a time when many folks should be enjoying life and harvesting the fruits of their labor, they have assumed more debt. Why are taking on more debt?
It appears that many are completing renovations to their homes, and that is not all bad. If the repairs are needed to sustain the home for the rest of their days, like new windows, shingles, furnace etc. then so be it. However, taking out a second mortgage to add a sunroom or additional living space does not make sense for the majority of empty-nesters.
Even worse, some are taking out a second mortgage to buy depreciating assets like vehicles and may find themselves on the car loan treadmill for the rest of their lives if they are not careful.
Why This Is Smart
Taking out a second mortgage is smart if you are not planning on retiring until the mortgage is paid off because mortgages are the cheapest source of capital (next to student loans). There is no sense paying more interest that you have to, which is why I have a large line of credit on my home. The line of credit on my home is currently at 4.75% and is interest only. This works great for acting fast on “no-brainer” investing opportunities.
Another reason that this data might not represent a clear picture of a trend is that it is not indexed to life expectancy rates. You see, people of a certain age, even 10 years ago, had a much lower life expectancy that baby boomers do today. Not only that, their health and quality of life is much better than previous generations. What this means is that they may be working later in life and they expect to live a healthier and longer life being more active. All in all, today’s baby boomers may not be in as much trouble as this data may lead us to believe.
My Take
While I certainly don’t plan on having to use the equity in my home when I am in my 60’s (at least for anything other than investing), I suppose we never know what circumstances might present themselves in the future.
I am a relatively conservative individual by nature and I don’t really like to own “stuff” just for the sake of having something, so I can’t see myself wanting to increase my standard of living if I don’t have the additional income stream to provide it.
Have the baby boomers finally fallen victim to the consumer driven marketing ploys that have been so effective at convincing those of us in our twenties and thirties that we must keep up with the Jonses?
What do you think?
Posted in Investment News | 1 Comment »
Saturday, June 7th, 2008
Lately I have been reviewing my investment portfolio in light of the new addition to may family and have discovered a few minor things that needed tweaking.
I mentioned in an earlier post that my wife and I have purchased additional life insurance through my employer’s group plan. This plan offers a heckuva great deal on life insurance if you are a younger, non-smoking employee or spouse.
The Cost of Life Insurance
My wife’s additional life insurance of $200,000 costs us $4.10/month.
My additional life insurance of $200,000 costs us $7.90/month.
For those of you unfamiliar with Life Insurance, females are proven to be less of an insurance risk with their typically longer life spans and lower frequency of accidental death. Therefore, it is usually very inexpensive to purchase term life insurance for a female in her twenties.
I really couldn’t believe how cheap a good life insurance policy can be. If you’d like to check it out for yourself you can click here to get a free life insurance quote.
Employer Sponsored Life Insurance Benefits
Like many employers, both my wife’s employer and mine offer life insurance as part of a paid employee benefit package. Our employer paid plans are quite different and it is fairly typical that not all plans are created equal.
My wife’s employer sponsored life insurance plan offers her a flat benefit (as of her union’s last contract) of $177,000. This equates to approximately 3X her annual gross salary at this time. However, her life insurance benefit is not indexed to inflation (except when a new bargaining agreement is reached) and is not derived as a function of her salary. As such, when her salary increases as it does annually, her life insurance benefit remains at $177,000.
My employer sponsored life insurance plan, on the other hand, is derived as a function of my salary. It is in fact 3X my gross earnings (not including commissions and bonuses). My employer sponsored life insurance is now $186,000.
How Much Life Insurance Should I Have?
There are many, many schools of thought on life insurance and I am certainly not an expert in the field. However, I do feel that my wife and I are adequately insured.
Because our only debt is our mortgage at about $175,000, my $386,000 in coverage will more than cover that debt allowing my wife to focus her income solely on the day to day living expenses of the household which would obviously decrease if I am not around to eat 90% of the groceries, take long hot showers, and leave the TV on all night!
This would also leave my wife with $211,000 tax free dollars to invest for my daughter’s future and take care of any unexpected expenditures that may arise in the future.
If the life insurance proceeds invested in a basket of dividend growing common stocks, this lump sum should provide her with approximately $8,000/year in additional income that is likely to grow at a higher rate than inflation over time.
Do I Really Have Enough?
As mentioned earlier, there are many different schools of thought on the calculations that should be used to determine the “proper” amount of life insurance. Some people would say that I need at least 10X my income; I think that is over-insuring.
I don’t want my wife and daughter to struggle financially, but at the same time I don’t want to spend a lot of money banking on my own demise that I could invest in other assets with current cash flow- like stocks (which would be left to my wife as well) !
There has to be a happy medium and I believe that I am very close to that with my current insurance situation.
Your Take on Life Insurance
Am I missing anything?
How do you calculate your life insurance needs? There are several calculators out there, most online insurance companies have them on their websites. Click here and go to InsureMe.com to use their calculator for your life insurance needs.
I’d love to hear your thoughts in the comments.
Posted in Investment News | 5 Comments »
Thursday, May 22nd, 2008
As we all know, mastering or even just managing our personal financial situations is a long and tedious road. We make decisions that affect our personal financial situation several times each day. From the clothes we wear to the car we drive, to the lunch we eat..it all affects our finances.
Whether we like to think about it or not, we cannot escape the reality that we will never be completely free from the day to day management of our finances. The increasing stack of bills piling up in the mailbox and the all-too-automatic withdrawals from the checking account are a relentless reminder of our consumption.
There are people, like me, that are intensely concerned about their finances. I am certain there are others who are more concerned and more diligent with there finances than I am; this article is not for them.
What motivates you to manage your finances?
Of course we could sit here and debate the semantics of motivation and personal finance. However, for this exercise, we will let Wikipedia define those terms for us:
Motivation:
“The reason or reasons for engaging in a particular behavior, especially human behavior as studied in psychology and neuropsychology. These reasons may include basic needs such as food or a desired object, hobbies, goal, state of being, or ideal. The motivation for a behavior may also be attributed to less-apparent reasons such as altruism or morality.”
Personal Finance:
“The application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save and spend monetary resources over time, taking into account various financial risks and future life events.
Components of personal finance might include checking and savings accounts
, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management.”
There, now that the definitions are out of the way we can get down to business!
What Motivates You?
Many people have been turned on to managing their personal finances more diligently because of a financial meltdown of sorts. It seems to be a common theme among financial writers and I think it is one that carries the most weight with the average reader.
Lets face it…we all want to make more money. It’s not a bad thing and it’s not evil. Wanting to excel is a basic human function. The need for constant improvement is what separates us from animals and the reason for our progression as a species.
My motivation comes from the fear of being poor. I grew up poor; not as poor as some…but poor.
Just to give you an idea (without too much detail):
- I did live in a trailer park
- My family did receive the charity hamper of food at Christmas for several years.
My family’s financial situation was hampered by the bankruptcy of the family business caused by my father’s health. In case you need further clarification about bankruptcy - it’s horrible. My parents are still recovering from that devastating financial blow and I vowed that it would never happen to me.
Even though I swore I wouldn’t be in debt up to my ears, I ended up with over $40,000 in student loan debt. I managed to pay that off and, within 3 years, my net worth has reach over $250,000.
How did I do it?
I Started To Learn About Money
I learned from the mistakes of my parents and began to research (formally and informally) the ways that the wealthy made money. I also learned about the importance of education and building the power to earn money.
Your ability to generate an income is the most important asset that you have. This is why Life Insurance and Long-Term Disability insurance are critical components of your financial plan in your younger years.
I also studied how mortgages work and the ways that financial leverage can accelerate your wealth exponentially. The concept of leverage is instrumental in learning how to carefully and methodically speed up the wealth accumulation process.
The ability to earn an income is the greatest asset that you have.
Think about that.
This is exactly why I am a huge fan of dividend paying stocks and income producing real estate. These assets generate cash flow. Increasing cash flow is the basic building block for generating wealth.
Cash Flow is the ticket to play the game.
Personal finance is a game. A very serious game, but a game nonetheless. As long as you have enough cash flow coming in to pay the bills, you can continue playing the game. Evaluate the cash flow that you generate and be sure to begin with a solid budget that does not exceed the cash flow.
Plug The Holes, Then Turn on the Hose!
I also started to learn about budgeting. Many of the people that I have talked to about growing wealth continue to harp on the fact that a budget is a budget, no matter the size. What they mean is that before you go looking to earn more money, you need to learn to master what you have.
This lack of control and poor foundation of the concept of financial planning is the reason why many lottery winners go broke within just a few years. Regardless of the amount of money you earn, if you have no idea how to manage it, you will end up in the same position.
It is essential to learn basic finance and budgeting skills. Don’t fall into the “I need to earn more money trap” before you learn to manage what you have.
- Work first to decrease your expenses; then look for additional sources of income.
Remember, it’s not how much you earn, it’s how much you keep!
Make keeping more of your money automatic. Learn how to save more money every month by reading this previous article of mine:
http://dividendmoney.com/automatic-savings-is-essential
Golden Rule of Finance
This leads us back to the golden rule of finance which is:
Spend Less than you Earn!
*Note: Another dividend investor has also pointed out that in addition to spending less than we earn, we must simultaneously find ways to both increase our income and decrease our expenses.
I’d love to hear your motivation for mastering your personal financial situation! Feel free to contact me with your story or drop a note in the comments.
Posted in Investment News | 6 Comments »
Saturday, May 10th, 2008
I recently had a conversation with a gentleman who really “gets” dividend investing and he provided me with a synopsis of what is going on on a macroscopic scale in the world today. He came up with a “fictitious” conversation that will hopefully make sense to you all. Maybe it will even assist you in determining that you should buy dividend stocks now?
A General Overview
The central banks around the world are dealing with a liquidity crisis by lowering interest rates or injecting money into the financial system.
The Fed has been the most aggressive in cutting rates and injecting dollars into the system, causing the U.S. dollar to fall.
To the U.S., this means that its exports become cheaper and imports become more expensive.
While the world is fighting a credit crunch, inflation is creeping higher. Over time, as the cost of goods and services increase, the value of the dollar is going to fall because people won’t be able to purchase as much with their dollars as they did previously.
The Conversation
(PS - I live in Canada,so the gas price is in liters or litres :))
“Wait a minute,” Bob said. “I recently read that both Canada’s and the U.S. CPI (consumer price index) is roughly two per cent.”
“You’re partially right,” I replied. “Core inflation is roughly two per cent, but it excludes certain items that are considered too volatile, including food and energy.”
“How can that be?” Bob asked. “Eve (Bob’s wife) told me eggs have jumped 62 per cent in price over the last two years and our food bill has increased more than four per cent over the last year.
“If memory serves me correctly, it cost 94 cents a litre to fill up my car last year.
“Now I am paying $1.18 per litre. If my math is correct, that’s roughly a 25 percent increase,” Bob said.
“Including food and energy, inflation in North America is running closer to four per cent,” I said.
“If oil and food commodities keep rising, then higher inflation and eventually rising interest rates will eventually follow. This is one reason why European countries are reluctant to cut their bank rates.”
A recent report from Bloomberg indicated that CPI in Ukraine was running at 19.4 per cent, in Vietnam it stood at 14.1 per cent, Russia was 12.6 per cent. Inflation in India is at 5.1 per cent and in China currently stands at 6.5 per cent.
These numbers are rising, not declining and there has been social unrest throughout the world because of rising food costs, even in some of the oil exporting nations.
“So what your are saying is that this sub-prime mess is temporarily forcing the central banks to reduce interest rates to help the economy get through this slowdown and credit crisis,” Bob said.
“But eventually, if food and oil costs remain high or continue to rise, interest rates will eventually follow suit.”
What this Means For Investors
(Hint: Buy Dividend Stocks)
As a result, the biggest dilemma savers face today is that at four per cent guaranteed investment rates on products, like GICs, they are only breaking even.
When you include income tax, these savers are likely losing money.
But an equity investor can invest in companies providing a four-per-cent dividend that also have growth potential at, or greater than, the rate of inflation.
So if inflation does rear its ugly head, ultra-conservative savers will be hurt, while with increasing dividends, equity investors will, at least, keep pace with inflation.
Posted in Investor Education | 3 Comments »
Friday, March 28th, 2008
I have mentioned in previous articles and on my About Page that I like to use my credit card to manage my monthly cash flow.
Just like mortgages can be used to your advantage, credit cards are another debt tool that can have a positive impact on your personal finances. As with those other tools, credit cards just need to be managed effectively.
Credit Card Rewards
We all know that credit card companies offer various reward systems that are designed to encourage use. To the average person, these are effective in creasing spending and making the card companies money. How do I know that? It’s quite simple. If these reward systems didn’t increase usage and profits, the card companies wouldn’t have them. They are in business to make money…period.
These reward systems can be utilized to your advantage and actually save you more money than if you purchased your item with cash, if you’re smart!
Cash Back Rewards
Cash back rewards are a favorite because of their flexibility and ease of understanding. Other types of “points” rewards systems can be obfuscated with black out dates, minimum redemptions, and other “fine print”.
I would highly suggest finding a credit card with a cash back rewards feature. This will allow you to utilize the rewards as you see fit and prevent any headaches from restrictions of use from other point systems.
How To Use Credit Cards To Manage Cash Flow
One reader has suggested what I believe is a very effective strategy for utilizing credit cards to manage cash flow and increase profits. It is designed to work very effectively if you have the will power to manage your credit wisely and pay your credit card balance in full each month.
Here are the steps to set it up:
1.) Set up your main chequing account with a high interest provider.
(I prefer ING Direct because of ease of use and low fees: Sign Up for ING here.)
2.) Have your employer directly deposit your pay into that high interest account.
3.) Find a good credit card that suits your needs and offers cash rewards.
(You can use this no-cost Credit Card service to find the card that is right for you)
4.) Use your cash rewards credit card for all of your monthly purchases.
(You can even set up your utilities and mortgage to be paid with your card in some cases)
5.) Pay your credit card bill in full from your checking account when it comes due.
Why This Works
This concept works very well because it gives you a full 30 days of interest earning power from your bank account every month before your credit card bill is due. This “float” can add up to hundreds of dollars per year in earned interest and does not cost you one extra penny.
Of course, you must be diligent in paying the bill off as soon as it is due - no earlier and no later. You need to leave it until the last day so that you earn the most interest on the money in your account, but you don’t want to be late or you will be paying those pesky high interest credit card rates.
The Bonus
The bonus to all of this is that you are also building up a cash reward stash that is usually paid on an annual basis from the card company. So, on top of earning extra interest each month from the high interest account, you will also be earning cash back from your credit card purchases.
Many credit cards offer 1% cash back and some even offer 2%. Depending on your spending habits and how diligent you are with your credit card purchases, you can rack up several hundred dollars in cash rewards over the course of a year as well.
This strategy should only be applied if you have a strong command of your spending. However, it can also help you to stay on budget because many card companies offer an online service that allows you to download your credit card statement directly into financial software like MS Money or Quicken.
How do you use your credit cards? Do you have any tips or tricks you would like to share?
Posted in Investment News | 7 Comments »
Tuesday, March 4th, 2008
It appears that I shocked a few people when I wrote about my thoughts on maxing out your student loans to get every penny that you can. Of course, there are the same arguments about other kinds of debt as well. I have received my fair share of email regarding my advice on the use of debt.
Debt is a Tool.
It is that simple.
Loans, mortgages, credit cards etc. These are all tools that, if used correctly, can not only help you manage your cash flow but increase your wealth as well. Yes, debt can be terrible if you can’t control it, but it can also be your best friend if managed correctly.
I already talked to you about the power of using a mortgage as leverage to build wealth and why lenders are more eager to hand out money when it is backed by an asset such as real estate versus consumer debt - like a car loan!
Why is This Article Titled “Student Loan Strategies”?
Well, as mentioned in the previous article on student loans, the student loan is some of the easiest money (debt) that we can obtain as average individuals. It is even easier to obtain than a mortgage because you are not required to prove that you have an established income. The debt is backed by your future earnings - how’s that for pressure!
Anyway, as we get back to the moral of the story and we understand how we can leverage our student loan money so we might graduate without a negative net worth, there is a way to combine the above strategies in order to profit while getting your degree.
Kiss The Dorms Good Bye!
This strategy is directed toward the parents of children who are on their way to college. So, if you are a college student, or about to be one get your parents on the phone!
To the parents…
Your child will have to live somewhere and either you or they will have to foot the bill regardless of where they hang their hat, so why not profit from it?
The strategy is to purchase a house with as many bedrooms and bathrooms as possible in a location that is as close as possible to the university. Yes, you will be renting this house out - but your child will be managing the rental.
College rentals can be unique and very profitable in that it is possible in this situation to rent “by the room”. While most residential real estate rents by the unit or the house, the college market will allow increased returns by renting by the room.
An Example
A 4 bedroom home that would normally rent for say $1000/month as a unit can often be rented by the room in the college market for between $350 and $450/month per room. As you can see the potential for profit is much higher and the potential for your child graduating without a mountain of debt it also greater.
This strategy requires more management as you must collect rent from each person separately instead of collecting one check from the entire house. If you trust your child and they are responsible, this should not be a huge issue as they will be living there to manage the property.
This will also help your child to learn to better manage finances and learn business skills such as management, marketing and basic accounting.
The Benefits
Ideally, the monthly profits (cash flow) from the roommates can cover expenses, repairs, vacancies etc. or may be used to have your child live, essentially, for free!
However, the best part about this strategy is that over the course of the 4-5 years that your child is in college, you will be gaining equity in the home courtesy of your child’s college roommates. This equity can be crystallized by selling the home when the child graduates and using the equity to pay off the student loans for example.
If you have a steady income and a good credit score, buying a house for your child to live in while going to college is typically a sound strategy.
If you don’t know if you have good credit or not, you can check out your credit score for free at Experian.
The Kicker
If you have more than one child that attends the same university, this strategy can have a compounding effect as the younger ones enter school and the rooms continue to be rented out, your equity grows and grows.
If you are fortunate enough to realize a substantial capital gain along with your home equity, you executed this strategy exactly as my good friend and his parents did when I attended college. I only wish my parents and I could have undertaken this strategy instead of paying off someone else’s house!
I hope you enjoyed this example and are able to benefit from it. I share this with you, not because I profited from it, but because I was a victim of it! If it helps your child start their professional life without the same $40,000 in student loan debt that I had, then it has been worth the time to write this article.
Stay tuned later this week when I will tell you a story about what I learned from falling victim to this strategy and how it catapulted my net worth right out of college!
Posted in Debt | 8 Comments »
Monday, March 3rd, 2008
I’m about to let you in on the secret of how I used my student loans to build wealth. Now, coming from a frugal individual like myself, this secret may shock you.
Are you ready? Do you have your notepad and pen? OK.
I maxed them out.
Yes, that is correct. I completely maxed out every penny that I could in student loan funds. I took advantage of every student loan program that I could find and you should too!
Why You Should Max Out Your Student Loans
No Collateral Needed
The premise behind student loan programs is that the financing institution is banking that your education will allow you to repay the loan at some point in the not too distant future. These programs are put into practice to assist those of us who came from poorer backgrounds as a way to enhance our futures by financing an education. The education is then supposed to lead to a successful career that will allow us to be a contributor to society instead of a drain on society.
This means that your future is all you need for collateral. This is great for students, if it used correctly. When you view student loans in this light, they hold more wealth building power as financial tool of leverage than a mortgage does!
How To Leverage Student Loans To Build Wealth
First off, don’t take my heading the wrong way. I lived rough in college - but I had a purpose!
Most student loan programs, or the ones that you should take advantage of, have deferred payments until after graduation. Essentially, this means that you have access to FREE MONEY for at least 4 years!
*Note: Some programs require minimum - interest only payments.
Student loan money is meant to be used for tuition, books, and living expenses. The first trick to leveraging this student loan money is to ask scholarship or grant money after you receive your loan. I accomplished this by simply approaching the financial aid department at my University for additional funding. I would make an appointment and plead my case days before the semester would begin. It wasn’t often that I received less than an additional $500.00/semester.
So there I was with an extra $500 in free money along with my student loan that would pay for my tuition, books and allow me to live comfortably. This was the beginning of my strategy. Read on to the end of the article to find out how to leverage this money!
Get A Job
Put time and experience on your side.
It is essential that you have a job in college. I know that sounds obvious, but I’m heading in a different direction with it. I don’t suggest working full time or finding the job that pays the most money; I’m suggesting that you get a part-time job in your field of study.
Working at even a menial job within your field of study will at least give you some experience when you head out into the workforce with your hard earned degree. This will often allow you to skip the entry-level positions and actually earn a mid-level salary right after graduation.
The Strategy
Live like a peasant and invest like crazy.
Because repayment of student loans is deferred until after graduation, sometimes up to one year after, it provides the perfect opportunity to leverage free money to your advantage and harvest the growth of investments over a short time period.
As long as you invest the money and don’t use it to live “high on the hog” in your college years, this strategy works. Depending on the investments you choose and their performance, you could graduate with a positive net worth! So, don’t go and blow the money - be smart.
We have all heard the stories of the poor college student living on Ramen noodles and kool-aid. Well, that’s how I did it. Actually, mine was more of a macaroni and cheese and canned tuna - I need my protein!
Anyway, I took all of the money that was left over from my scholarships, student loans and part-time job and rolled it into certificates of deposit that matured in the year I was to graduate. I would have invested in the stock market, had I had the knowledge that I do now.
Hindsight is always 20/20!
This has been the basic strategy of leveraging student loans, if I have skipped over something or if you have any suggestions, please share them in the comments below.
Coming Up!
Find out how I used Credit Cards to my advantage and still do! If you can’t wait for that article, part of the secret is using the right credit card to suit your needs. There is a website that helps you sort through the thousands of cards to find one that suits your needs - you can try out that site for free here.
If you have children that are heading off to college in the next few years I have an even more powerful strategy for you to use. I’ll be posting that article within the next week - so stay tuned!
Posted in Investor Education | 5 Comments »
