Tuesday, December 7, 2010

Give Thanks

As many people have pointed out, it is easy to get lost in the hustle and bustle of the Christmas season and forget what the Christmas is really about. This holiday season make sure you take the time to be thankful for everything you have. Even the poorest of this nation truly are wealthy. We have freedom to worship who, what and where we may. We have shelter over our head, food on the table, and a warm bed. We have clothing on our back and education available to our children. We have refrigeration that makes it possible to preserve meat without bathing it in salt. We have ICE CREAM!

We have endless amenities and luxuries that we use on a daily bases and take for granted because they have always been there. They may not always be. Christmas isn't about a tree, it's not about presents, and it isn't about Santa Clause. Christmas is a day chosen to celebrate the birth of Christ our Savior. It's hard to imagine a baby born in a stable as you sleep in your bed. It's hard to imagine the true sacrifice of God's only begotten son when your children sleep safely in the next room. It's hard to think of the gifts given to a King of Kings when ours come from a mythical saint. It's hard to think of Christ as the centerpiece for our homes when a tree takes His place.

Money is not the root of all evil. The love of money and of physical things is the root of all evil. I purpose it to be very dangerous to celebrate a holiday with Christ's name in it by buying all sort of physical things. Maybe this year instead of Santa bringing gifts, we should make them ourselves and just exchange them to celebrate the birth of Christ. Maybe instead of placing them under a Fir tree we should find a stable or vagabond shelter of our day to leave them. Maybe we should give thanks to God for all that we have instead of trying to obtain more. Maybe we should read the story of Christ birth from the scriptures.

What ever you do this Christmas season, and however you do it, make sure that Christ is a part of it. Give God thanks for all that you have, every seemingly meaningless thing, because it may not always be there. True wealth is not cannot be found in monetary greatness alone, but in life, family and friends. Give thanks for that wealth and your monetary wealth no matter how great and small. Merry Christmas to all.

Wednesday, November 17, 2010

Food Storage

As we all hopefully know, there are more things to wealth than money and physical possessions. One of the greatest things we can have is freedom. We are enslaved on a daily basis by many necessary evils, and some not so necessary. For example, debt and work. Though some people may claim exception, debt is not a necessary evil. Work is the same way. We have certain obligations that limit our choices. Another unnecessary evil is lack of preparation.

You may not think a disaster will happen where you live. You may think that even if something did happen that the government would come to your rescue. This is America for crying out loud. Well, the people that experienced Hurricane Katrina learned that both of those assumptions are not necessarily true. So it is time we stop making excuses and prepare. When we are prepare we will feel the freedom that comes with it. We will feel the security knowing that if anything did happen we would be ok. If you're not sure how to prepare visit howtoprepareforadisaster.com. You can also find this link under my favorite links. It's not the prettiest site, but it has everything you need.

Food storage is one way you can prepare, and now is the time to do it. I have spoken many times about inflation and what I think is in the future. With the Federal Reserves latest round of what they call "easing" there is only one way prices can go. So if you are ever going to get food storage, now is the time to do it. Clothing is another thing that is going to get more expensive. Many U.S. retailers including Gap Inc. say that clothing prices will increase as much as 30% by spring.

There are a few places you can go to get your food storage. If money is not an issue then DailyBread.com is a good option. They definitely have the nicest food. If money is an issue, but not a problem then ShelfReliance.com is a good alternative. They still have a nice selection of food and they aren't as expensive. It isn't as nice of food though. If money is a problem then there is only one place to go. ProvidentLiving.org This link will help you find a home storage center near you. This is a cheap as it gets. Call them and they will give you a list of options.

Canning is another cheap option. You can find information on canning at www.howtoprepareforadisaster.com Click on food storage and then canning.

People may laugh at me. They may call me paranoid or delusional. What ever they call me I have the peace of mind that no matter what happens my family will be ok.

Tuesday, October 19, 2010

Tier 6: Exotic Investments

An Angel investor is someone who provides financial backing for small startups or entrepreneurs. They are usually the first round of financing of any business. That is they are the first ones to invest and they invest when the business isn't even off the ground. When it's just an idea. I have seen an Angel investor $10,000 in dozens of dozens of businesses and get nothing but ownership in worthless companies that die almost as fast as they were born. If this was the Angel investors retirement plan they would be broke. It's a good thing that most Angel investors are very wealthy, as they should be.

I have a friend and associate that helped people invest in real estate during the real estate bubble. The investments were "sexy." It's always the sexy investments that attract people because you can make a lot of money in a short amount of time. You can also loose a lot of money just as fast. During the real estate boom, normal people thought that the odds were better than they were. "Wanna be" investors found themselves making a lot of money easier than they should have. They also found themselves loosing it come the crash. If you're not ready to loose that money, really just throw it away, then you shouldn't invest in "sexy" or exotic investments.

The last tier of investing is Exotic Investments. Exotic Investments are any type of self managed investment including trading accounts. Exotic investments include but are not limited to: real estate, currency, commodities, private businesses, art, coins and antiques.

I have used an analogy about collecting Polo shirts. If I had a closet filled with every different kind and color of polo shirt, all I would have is a diversified collection of polo shirts. I use that analogy as an example of how someone shouldn't diversify. However, if I an expert on polo shirts, if I had studied polo shirts my entire life and knew them in and out, then it may be riskier for me to try and diversify with stocks and bonds. It may be wiser for me to invest more in polo shirts. Exotic investments are the same. If you have a special knowledge of commodities or real estate, then it may change the risk involved with those kind of investments. By changing the risk it may change the order of the tiers for that specific asset class.

No matter what your situation, you should always consider your risks before investing. When it comes down to it no one has a better opportunity to know your risks like you.

Saturday, October 16, 2010

Tier 5: Managed Accounts

After you max out your retirement accounts like your IRA and 401k, the next step is to invest in accounts that do not have tax advantages. Some of the risks are the very same as your 401k and IRA. Some risks are additional. As always you should invest in Tier order (1-6). There are numerous places to open these accounts. Self managed accounts can be opened by ING Direct, Zecco.com, Scott Trade, and ETrade. I recommend Zecco for more actively managed accounts, and ING Direct for an automatic investment account. Both offer reliable service and very inexpensive trading. However, I would not recommend a self managed account unless you have been educated by yourself or others, and you can afford to loose the money you invest. Self managed accounts can be extremely risky.

Probably the easiest way and safest way to contribute to managed accounts is to get and financial advisor. Ironically it's not easy to find one. First of all don't pay someone a consultation fee. Second most financial advisors get paid by assets under management. That means they get paid a percentage (usually close to 1% depending) of the assets they are managing each year. It is important that you know so that if an advisors seems hesitant to allow another advisor to manage some of your money, greed is a possibility. Third, consider multiple advisors and multiple strategies. Take the time to interview multiple advisors. Ask about their strategies and philosophies. Ask your friends and family who they use. Most importantly find someone you trust.

This is not something that you can take lightly. There are many different advisors and many different types of strategies. Some strategies are better than others. It's hard to know what best and who is best. More often than not the difference between two advisors is a matter of good and better, not bad or good. That is why I recommend interviewing multiple advisors and finding someone you trust.

Tuesday, September 28, 2010

Tier 4: Retirement Accounts

There are several advantages and disadvantages of a tax-advantaged accounts. The biggest advantage is that they can grow tax deferred, meaning that taxes don't have to be paid on growth until the money is withdrawn. The biggest disadvantage is that they are illiquid, meaning that once you put the money into them it better stay. Early withdrawals can mean extra tax and penalties. The biggest problem with them is that most people contribute to them before they are ready. Then, without savings and protection, unexpected events happen, and suddenly they are in debt and have to make early withdrawals from their tax-advantaged accounts and they incur those taxes and fees.

After, and only after you have the proper protection and savings, and you are out of debt, should you start contributing to retirement accounts. If you are not sure whether or not you have the proper savings or protection see Tier 1 and Tier 2. So many people contribute to their 401k, IRA or 403b plans as soon as they become available. When I got my first full-time job with benefits, I made the mistake of contributing to the 401k plan they offered. I thought it was a great deal because they matched part of what I contributed. The problem was vesting. Vesting is when you gradually earn the right to keep what your employer has contributed on your behalf. If you don't work for them long enough, and I did not, then you don't keep their contributions.

So when I left I didn't get to keep anything that they contributed. I thought, "That's ok, because I was saving for retirement. I converted my small 401k to a Roth IRA and two years later I had lost enough money and my account was so small that the investment company closed my account and sent me a check. So A couple hundred  dollars and a few years got me nothing. That is why it is so important for  you to know when and how to contribute.

Roth VS Normal

In a Roth account contributions are made with money that has already been taxed. The contributions are then allowed to grow tax free and if properly withdrawn the proceeds are tax free as well.

In a normal tax advantaged account you are allowed to make contributions with money before taxes are paid. These contributions are commonly used to defer a tax burden.

As an example a person contributing to a normal account contributes a full $1. The person contributing to a Roth account has to pay their taxes and only contributes $0.70.  If they both grow at 5% for ten years then the Normal account will have $1.63 and the Roth account will have $1.14. Upon withdrawal the Normal account has to pay a 30% ($0.49) tax burden leaving $1.14. Mathematically it doesn't matter if you pay the taxes before or after. The trick is knowing when you will pay a lower percentage of taxes. Will taxes go up or down? Will your tax bracket go up or down?

IRA VS 401k

An IRA (Individual Retirement Account) is essentially for people who do not have 401k's available to them. However, just because someone has access to a 401k does not mean they cannot contribute to an IRA. An IRA is self managed. You decide what you invest in and, you are responsible for the success of your account. However, there are income and contribution limits.

A 401k is a retirement account sponsored by an employer. There are similar types of limits on these accounts, but different amounts. Each account has different rules depending on the plan provider. Generally there are 1/2 a dozen investment options you can choose from based on your time frame. Though I cannot speak on any specific option, usually these aren't too bad (i.e. you could do worse).

Friday, September 17, 2010

Get Out of Debt

I know we hear this all the time. "Get out of debt." Sometimes I feel like we are children who's parents keep telling us the stove is hot. We still have to touch the stove and learn our lesson the hard way. Well let me sum it up for you. THERE IS NOTHING MORE FINANCIALLY DESTRUCTIVE THAN DEBT! Debt is literally captivity. Those who have debt are enslaved to their debtors. If that debt is directly or indirectly callable (the debtor and ask for payment in full) then it isn't only enslavement but it is complete control.

Types of Debt

Mortgage: There is nothing wrong with one modest home mortgage. The problem with that statement is that everyone has their own definition of modest. I grew up with two brothers and two sisters. For most of my childhood the girls had one room and the boys had another. That small one story, three bedroom house was modest and justifies. My parents never got into financial trouble while we were living in a house like that. Now is a great time to buy. The market is down, but don't be in a hurray because the market isn't going anywhere anytime fast. Buy when you are financially ready to buy. I recommend doing this after you have at least a 6 month emergency fund and no other debt.

School Loans: Education is very important, but I have seen school loans abused. Don't kid yourself, this type of debt is just as bad as any other. I remember my senior year in high school I had an Engish teacher in her mid 50's come in and tell us how excited she was because she had finally paid off her school loans. Are you kidding me!? Most people start going to college before they have any clue what they want to do for a career. A large portion of the people that graduate don't even do anything in their field of study. If school loans are the only way you can go to school then I wouldn't not tell you to stay at home, but I have respect for the man that works full time and pays for his schooling. Even greater respect for the man who works full time and goes to school full time. If you do decide to get school loans you better be living off rice and beans.

Auto Loans: Today it is almost impossible to function as a member of society without a car. Yet millions of people do it successfully. It is easier when you live in a metro area or in a warm climate. A bike is a great alternative, also walking and public transportation. If a car is necessary then try not to drive it when you don't have to.

I read a story about a man that came to the united states. He worked in a bakery owned by his brother. He also lived there with his wife and two children. He said that he didn't get an apartment because then they would have to get a car, and if they had a car they would want to go places. After working in his brothers baker for two years he had saved enough money to buy the baker and pay cash. With in a few more years he had open several other bakeries and was a millionaire.

I would never use financing to buy a car PERIOD! Despite what people think it is not a necesity and if you are still convinced it is a necessity, then you can buy a car that you can affoard. By that I mean a car that you can pay cash for. I had a friend that was getting started from scratch in a new city. He needed a car but barely had money to pay rent. He traded his T.V. for a car that wasn't worth the gas you put in it, but the car ran and it ran until he could affoard a better car. I'm proud of him for making that decision.

Credit Cards: Do I seriously need to say anything. I guess the only thing I would say is that if you have ANY credit card debt then you should be living off of rice and beans until you get them paid off. This debt is the most destructive debt and second only to the next type of debt.

Retail Credit: This is actually a similar type of debt to credit cards. The only reason why I put this below credit cards is because the credit reporting agencies do. I feel this is just as bad or worse than credit card debt, and again if you have ANY of this debt you should be living off of rice and beans.

Friday, September 3, 2010

Ten Stock-Market Myths That Just Won't Die

The Dow Jones Industrial Average last week ended up pretty much where it had been a little more than a week earlier. A rousing 200-point rally on Wednesday mostly made up for the distressing 200-point selloff of the previous Friday.
The Dow plummeted nearly 800 points a few weeks ago -- and then just as dramatically rocketed back up again. The widely watched market indicator is down 7% from where it stood in April and up 59% from where it was at its 2009 nadir.
These kinds of stomach-churning swings are testing investors' nerves once again. You may already feel shattered from the events of 2008-2009. Since the Greek debt crisis in the spring, turmoil has been back in the markets.
At times like this, your broker or financial adviser may offer words of wisdom or advice. There are standard calming phrases you will hear over and over again. But how true are they? Here are 10 that need extra scrutiny.
1 "This is a good time to invest in the stock market."
Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut. "Certainly, sir -- step this way!"
2 "Stocks on average make you about 10% a year."
Stop right there. This is based on some past history -- stretching back to the 1800s -- and it's full of holes.
About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they're expensive, you do a lot worse.
3 "Our economists are forecasting..."
Hold it. Ask your broker if the firm's economist predicted the most recent recession -- and if so, when.
The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict "a slowdown, but not a recession." That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.
4 "Investing in the stock market lets you participate in the growth of the economy."
Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren't as rare as you've been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.
5 "If you want to earn higher returns, you have to take more risk."
This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, "risky" Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows. As for "risk," your broker probably thinks that's "volatility," which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.
6 "The market's really cheap right now. The P/E is only about 13."
The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom, and depressed in a bust.
Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or "Tobin's q," which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market's pretty expensive, not cheap.
7 "You can't time the market."
This hoary old chestnut keeps the clients fully invested. Certainly it's a fool's errand to try to catch the market's twists and turns. But that doesn't mean you have to suspend judgment about overall valuations.
If you invest in shares when they're cheap compared to cash flows and assets -- typically this happens when everyone else is gloomy -- you will usually do very well.
If you invest when shares are very expensive -- such as when everyone else is absurdly bullish -- you will probably do badly.
8 "We recommend a diversified portfolio of mutual funds."
If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that's good advice.
But too many brokers mean mutual funds with different names and "styles" like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as "midcap blend." These funds are typically 100% invested all the time, and all in stocks. In this global economy even "international" offers less diversification than it did, because everything's getting tied together.
9 "This is a stock picker's market."
What? Every market seems to be defined as a "stock picker's market," yet for most people the lion's share of investment returns -- for good or ill -- has typically come from the asset classes (see No. 8, above) they've chosen rather than the individual investments. And even if this does turn out to be a stock picker's market, what makes you think your broker is the stock picker in question?
10 "Stocks outperform over the long term."
Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: "In the long run we are all dead.

Saturday, July 31, 2010

Tier 3: Debt Reduction

This seems obvious but a lot of people tell me they will start investing when they get out of debt. All debt should be eliminated as soon as possible, especially short term obligations (everything but mortgage & student loans). However, it is important that you put your family first; both their present situation and future. It's a principle I call Pay Yourself First. After paying yourself, and God tithing, you can use what's left to pay down debt. I want to emphasize AS FAST AS POSSIBLE. If this mean you'll be eating rice and beans for a couple of years so be it. Maybe you can't handle just rice and beans, but Roman Noodles are cheap and so is pasta. Many soups can be made very cheaply as well. The point is that you won't be eating out, you won't be buy pre-made dinners or name brand anything. If you can put off buying something, put it off. It won't be easy and I never said it would be, but it will be worth it. It's time to separate the men from the boys, the rich from the poor, etc.

As far as debt settlement, consolidation, etc. Be very weary of any program you find because there are a lot of companies that prey on the weak and desperate. They'll show you what looks like a way out, and it may be, but not necessarily the easiest or fastest. Any kind of settlement, consolidation or bankruptcy will not change behavior. It will only mask the symptoms. If you cannot change the behavior that got you into debt then any program like this is worthless. If you don't think your behavior got you into debt, think again. At minimum you were not saving enough into an emergency fund to avoid debt. Just think about where you went wrong and try to learn from your mistakes.

0% interest. I know it's tempting. Especially when you need a car for work. I am even tempted when the dealer offers me an amazing deal on the jeep of my dreams. Avoiding is done for many more reasons than just avoiding interest costs. Debt is literal imprisonment. It creates an obligation that must be met and is trades for freedom. Instead of working because it right or you enjoying it, you end up working because you have to. I know people that were severely underpaid, but were too afraid of not being able to meet their obligations in order to search for other employment. Debt also creates risk. If something goes wrong the debt snowball can roll the wrong way and before you know it you're in a whole world of hurt. That 0% can easily turn into 12% when you miss or are late on one payment. Suddenly your payment has doubled so has your obligations.

Even mortgages and school loans need to be eliminated as soon as possible. Yes you can probably get a rate of return somewhere else that's high enough to offset your interest costs, but life is not a mathematical equation. Even those long term obligations enslave you in a way you don't know until you're free. Being debt free empowers you to make bold decisions that lead to success.

Friday, July 16, 2010

Tier 2: Protection

As I spoke before the first part of a building that has to be built is the foundation. Can you imagine if someone started building the walls to their house without a foundation. What if someone moved into their house before the roof was built? Can you imagine what would happen to their stuff when a storm came? Financially speaking a person's nest egg is the stuff they move into the house. But a nest egg isn't just a chunk of money. It's all their hopes and dreams, everything they want for the future. So even though they are moving into their dream house, they still have to wait for the foundation to be built, and they have to wait for the roof to be completed.

Tier 2 is the roof to our building. Protection includes auto insurance, home owners insurance, property insurance, life insurance, disability insurance, health insurance and any other type of insurance that may apply. The fact is few of us get through life without a little bad luck, and some of us have a lot of back luck. Instead of crossing our fingers and hoping nothing happens why not prepare for it?

When an unexpected event happens that causes a liability, it is absolutely essential that the proper protection is in place. If the proper insurance is not in place, assets are used to pay the liability that is created. With decreasing assets it also puts a strain on the family's cash flow.

You might say, but I won't become disabled, or I'm young I won't get cancer. I met a 22 year old man yesterday that is disabled for life because of a car accident. I have family and friends that both contracted cancer before the age of 23. Life happens. But when you are young, you feel invulnerable. As you get older you will understand that you are not invulnerable. I simply hope that you take the proper steps to protect your hopes and dreams from the rain.

Tuesday, July 6, 2010

Tiers of Investing: Tier 1

How many people do you know who have a 401k or IRA? Almost everyone right?! Would it surprise you to learn that I do not have either of these accounts. I don't even take advantage of the matching through my employer. The reason why I choose not to contribute to either of these accounts is NOT because I financially am incapable. It is because just like in construction there is a certain order in which you must build, in investing there is a proper order in which you should invest. Investing out of order is like building out of order. No one would start building the walls to their house before the foundation is built. At the same time no one would move into their house before the roof is built. Can you imagine what that would be like. Yet every day millions of Americans build their investment walls with no foundation and move into their investment house without a roof. Then financial storms rain on their nice things inside, and financial earthquakes come and knock down their financial house. Then they are left wondering what happened.

Tier 1: Savings

The first place someone should invest is in themselves. You should always pay yourself first. Even if you have some debt, pay yourself and then your debtors. It is important that you stay out of debt, but without any savings unexpected expenses will come along and create debt or exasperate debt you already have. Especially if you are working to eliminate credit card debt, and you have cut up all your credit cards. If you don't have any personal savings and your car breaks down you can put yourself in quite the bind. A good amount to shoot for is 3-6 months of your expenses. The following are tips to help you save the way you should:

1. Create a budget (shoot for 50% needs, 30% wants, 20% savings, but everyone is different)
2. Save 10-20% depending on circumstances (i.e. debt & other obligations)
3. Make it automatic (automatic transfers)
4. Treat it like a bill

The other question is where to put your savings. Good savings must be liquid, safe and consistent. What ever you do, do not put your savings into a normal savings account. My savings account at Wells Fargo pays .01% each month which means I earn an APR of about .12%. That's nothing. However there are online banks like ING that pay almost CD rates. Right now their savings account is paying an APR of 1.1%. That's almost 10 times Wells Fargo! (Email me @ ben@richestmaninzion.com and I'll give you a link for a $25 bonus with a new account. I will not add your email to any mailing list or share it with anyone). There are other options. I help a lot of my clients set up automatic savings plans that pay 4-5% annually. You can email me if you want more details on that as well.

Thursday, May 27, 2010

Tax Advantaged Accounts

Another financial myth out there is tax advantaged accounts. There are countless tax strategies to go with the countless tax laws. I say countless because by the time you finish counting them the number has changed. Some of the most common tax strategies involve some sort of tax deferred investment account, the most common being 401k.
            The benefit of a 401k account is that you can invest pre-tax dollars and allow them to grow tax deferred until you withdrawal them. This is nice, but only helpful if you will be paying less taxes when you withdrawal money than you would have to pay now. If the amount of taxes doesn’t change then it does not matter if you invest pre or post tax money. This is demonstrated by the chart below. In this example we have a 35% tax rate. We start with $10,000 pre-tax and $6,500 post-tax and invest it at 7% for 10 years. At the end of 10 years the post-tax money has only grown to $12,786, while the pre-tax money has grown to $19,672, but we still have to pay 35% of that to taxes. After we do that we end up with the same $12,786.


After 10 Years
Tax Rate
 $ 19,672
 $   6,885
 $ 10,000
 $ 12,786
 $   6,500
 $ 12,786

            If your employer does not offer a 401k, you are probably eligible for an IRA (Individual Retirement Account). As far as pre- and post-tax income, an IRA works the same way as a 401k. If you are eligible for an IRA you are most likely eligible for a Roth IRA which allows you to invest post-tax income.
            So the question that each individual has to ask themselves is when will they be paying a higher tax rate; now or in the future? There are two variables when it comes to the amount of taxes you pay; the first is tax bracket, the second is tax law. Your tax bracket changes as your income changes. The more income you make the higher tax bracket you will be in. Higher tax brackets generally pay a higher tax rate.
            Many people believe that when they retire they will be in a lower tax bracket than what they are in now. That isn’t necessarily true. Just think about what retirement is. Retirement is like turning everyday into a Saturday. What do we do on Saturdays? Spend money. During retirement your free time will be plentiful, and you will search for things to do during this time. As you fill your time with multiple entertainment activities it is likely that your expenses will go up as well as your retirement income needs. If your income needs go up, to fill those needs you will withdrawal more income and may unwillingly move into a higher tax bracket. Granted, all of this is relative and dependent on your income just before you retire.
            Some may argue that you won’t have expenses like house payments, and car payments because you’ve paid those off. The flaw in that logic is that cars wear out and have to be maintained or replaced. Houses start to require more and more maintenance; paint, siding, roofing, pluming, etc. Not only that but you will still have to pay car insurance, home owners insurance, and property taxes. So the only thing you can do is estimate your retirement income needs to the best of your ability. Giving the benefit of a doubt, and saying that the debts you pay off do somehow compensate for the increase in entertainment spending, you can estimate your needed retirement income the same way that needs based planning does it; adjust your current income needs for inflation. As we have already discussed, this is not an accurate or reliable method, but it is about all we have right now. Still, I would not depend on it.
            When it comes down to it, the decision must be an individual decision considering your current income, outlook for future employment and income, your own personal habits, and what you think or want your retirement to be like. Luckily for many young professionals while they are in college and starting their careers they will most likely be in one of the lowest tax brackets. This is virtually the only time anyone can accurately know they will likely be in a higher or similar tax bracket when they retire. I would recommend that anyone in the lowest tax bracket use as much post-tax money as possible for their investments. Coincidently, because of the law of compounding, this is also the most important time for an individual to save for retirement.
            Something else that should be considered is tax law. Will taxes go up or down. I will write more on this subject in the future, but until then a nice little blog about past and future taxes go to http://www.recklessgovernment.com/2010/03/taxation.html

Friday, May 21, 2010

"Keep it secret. Keep it safe!"

Ok, maybe not secret, but definitely safe. Your money is not just money. It's all your hopes and dreams for the future. It's how you want to live and what you want to do. You should protect your money the same way you would protect your hopes and dreams.

The other day I got an email in response to a posting for an apartment I have for rent. It was from a man named Derek Rice who had been hired by a local company called Layton Construction to do some engineering work on a project here in Salt Lake. He would be moving here for a year from the UK and needed a place for him and his wife to stay. He sent me some references and gave me a phone number in the UK.

I have met people that are working in this country for a company for a year or two. It often is an engineer. I thought, "Wow, the company basically would guarantee my rent payment!"

I don't have long distance so I started with the company he said he was working for. It was a legitimate construction company here in Salt Lake. Then I went to the reference he gave me. They worked for the company but were unavailable. I was a little excited because it seemed to check out. I also knew he would have steady income and be able to pay rent.

I replied to the email and asked some questions about him. He quickly responded answering most of my questions and asking for specific measurements of the apartment so that he could order furniture.

Something wasn't right though. In the email he said that he would be making $80,000/yr. and he wanted to rent my dinky two bedroom for $650. No pool, no gym, nothing. It just struck me as odd. If I was him I'd be staying in a big complex I could find online with all the amenities. It just seemed to good to be true.

So, I decided to do  some more research. I googled "Layton Construction Scam." Sure enough Layton Construction had an advisory on their page about the exact situation that this man was describing. It said that it was a scam which would soon ask for personal information from me.

The point is that if it sounds too good to be true it is.  However, people often get distracted by greed. When someone sees an opportunity that could pay off big they have a hard time saying no. If it sounds too good to be true it is. Don't believe you've found an exception. There is none. Anything that pays off big has equally large risk.

Friday, May 7, 2010

Risk Promotion

Previously I have discussed "Needs Based Planning." This post is a continuation of that discussion.

Whenever someone is setting a goal for retirement it will be estimation. Estimations are inherently inaccurate. The fact there are so many estimations involved in needs based planning is not a problem by itself. What makes it a problem is when people mistake the estimations for fact. As long as you remember that needs based planning is estimation you can use it as a tool to help you create a plan and a goal for retirement. However, one estimation used in needs based planning encourages risk, and can cause recklessness or complete failure. The reason this is because theoretically the higher Rate of Return someone chooses as their goal, the less they need to save. For example, if I give you the following three options in order to reach retirement which would you choose.

Option 1: Earn 8% ROR and save $400/month
Option 2: Earn 10% ROR and save $225/month
Option 3: Earn 12% ROR and save $120/month

When given the option of needing to save $400 or $120 per month, most people would choose to only have to save $120, because they think about all the other things they could do with that extra $280. They would rather have the gratification of spending their money now, and Option 3 says that they can. We already know that their ROR (rate of return) is likely not going to be a consistent 12%, but someone looking at this doesn’t know that, and the financial advisor giving them these options probably hasn’t thought enough about it. However, the planner does know that this is not a promise. A 12% annualized return is a goal. And only if they reach that goal will saving $120 per month get their client to their targeted retirement amount.
The only way that they attempt an annualized 12% return is by choosing riskier investments. In some cases you can get a greater return with less risk, but in this case higher returns imply greater risk and greater variation from the targeted return. There are plenty of scenarios that are far less risky and still fail. If shooting for 12% increases risk and variation, what do you think the success rate is? If I want to gamble, I go to Las Vegas, but when it comes to the financial future of me and my family, I don’t mess around. This would be unacceptable.

Wednesday, April 28, 2010


I could have a closet filled with every possible type of polo t-shirt, but all I would have is a diversified collection of polo t-shirts. When people refer to diversification they usually are referring to a mixture of stocks and asset classes. A person's 401(k) or 403(b) has very minimal options for diversification, but they are "diversified."

In these accounts, and most other investment accounts, most people just have a diversified collection of Polo t-shirts. What I mean is that they have a diversified stock portfolio. The fact of the matter is that stocks are only one asset class. If someone only owns one asset class then they are not diversified.

You might say, "What about bonds, and precious metals?" So now you have a dress shirt to go with you Polo Shirt collection. It's better, you are starting to see the point and get a little bit more diversification, but it's not enough.

The problem is that most people don't look at their entire financial picture. They only see what they think they think they need to. If they step back they might be reminded about their dresser, maybe a bureau or armoire. Who knows, maybe they even have a closet just for shoes. The point is that there is more to a wardrobe than polo shirts just like their is more to your financial picture than you investment portfolio.

Every where your money goes is part of your financial picture, and every part of your financial picture has an effect on your financial goals. So, when you are setting financial goals and trying to make a decision about money, remember to consider your entire financial picture.

Sunday, April 18, 2010

Step 1

I meet people everyday who are putting off investing for one reason or another. A very common one is that they feel like they don't have enough money to invest. The funny part is that they shouldn't start with investments. As I wrote about in "Column VS Pyramid" you can't build straight up. People who tell me that they don't have money to invest are right. If they are worried about something like not having money then they still have to start at ground zero. However, a lot of these people are contributing to their 401(k) plans. The problem with that is they haven't built their foundations yet.

If someone is starting at ground zero the first thing they should start doing is saving. I don't know anyone that is successful who hasn't saved 10-15% of their income. That's just what success people do. There are millions of reasons to put off saving, but the fact is that no matter how much someone makes they should live within their means and save 10-15%. If 15% is too much to start out with, then they should start with what they can. If someone cannot do 15% they should start with 5% in a short-term savings account. If they can save 10% then maybe they can handle a short and medium term account; 5% in each.

A person should save in order to create a 3-6 month emergency fund. The point of the emergency fund is to create a cushion for unexpected expenses. If someone does not have an emergency fund and unexpected expenses come along they use debt to pay for those expenses. By creating an emergency fund a person is able to create a foundation on which to build wealth.

I have met several people that want to pay off debt first. I am a strong advocate of paying off debt as fast as you can and staying out of debt. However, I do believe in the principle of paying yourself first. If you are trying to pay off debt and you have an unexpected expense come along then it will only exasperate your debt. However, if you are able to save a little along the way, and create your emergency fund, then unexpected expenses will not get you off track to paying off your debt.

Saving should in no way compromise paying off your debt. Save what you can and pay off your debts as soon as possible. Never let the furthering of someone else's wealth hinder the creation of yours.

Thursday, April 1, 2010

Every Purchase An Investment

Someone mentioned to me the other day that the Tri-plex I am buying is an investment, it's not the same as if it was a Single Family home. Though he is right in some ways, it made me think about what is and is not an investment. For example the Tri-plex I am buying is without question an investment. However, don't most people consider their homes an investment too? What I mean is that even if I was buying a Single Family home wouldn't it still be an investment. In fact it is my opinion that every purchase is an investment of one kind or another. Furthermore every person is an investor, good or bad. Let me explain.

Each dollar that we earn has the potential to create wealth. That is, every dollar has the potential to be invested and grow. If we didn't have any expenses and we invested every dollar we made into creating wealth, only then would we see our true wealth potential. Unfortunately we have expenses. For some crazy reason we are required by nature to do things like eat. And for some even crazier reason food costs money!

Of coarse most of us are going to spend the majority of our money. However, each dollar we do spend has an opportunity cost. An opportunity cost is the benefits you could have received by taking an alternative action in this case wealth creation instead of eating.

Dictionary.com defines investment as the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. If every dollar we earn has the potential to create wealth then I purpose that every time we use a dollar it is an investment. The question is it a good or bad investment.

"Every time we use a dollar it is an investment"

Now, I understand that we have expenses. I'm not suggesting that someone is a bad investor because they spend their money at the grocery store. However, we do have choices in how we meet our needs and how we spend our money. It is also important for us to distinguish our needs from wants. For example, I like to buy candy. I have one crazy sweet tooth. When I spend $1 on a candy bar it may not seem like much, but over a 30 year period that $1 can have an opportunity cost of as much as $300. The question is what do I want more? A candy bar or $300? Everyone of us faces questions like this on a daily basis. What makes us a good investor or a bad investor is how many choices we make like this.

Once we put our money aside in order to create wealth, that is an entirely different type of investing. Someone can be a good investor in the grocery store and a bad investor in their IRA. The trick is finding financial balance.

Thursday, March 25, 2010

Column or Pyramid?

Most everyone has some sort of a desire to get from point A to B; point A being where they are now financially, and B where they want to go. More often than not B is somewhere above A because usually people who have money and financial success don't desire to lose it. So the average person that enters the world get's out of college and usually their B is retirement. They really aren't sure how to get there, but they know it's up to them, so they find themselves a nice secure job and start contributing to a 401(k) or some similar retirement account. For the majority of people that is the extent of their plan.

It's like to get to point B from point A you must build. Since the average person knows they have to build they build the only way they know how; straight up. When someone is relying entirely on their 401(k)it's like they are building a narrow column. Yes they may gain height very quickly, but the higher they go the less stable the column becomes. Eventually they will not be able to build any higher without the serious risk of collapse. However, many people don't recognize these risks, and if they haven't reached point B they will likely continue to build. Few people with this kind of retirement plan reach point B with the circumstances they had desired.

The older you are the more likely you are to realize that there are many unforeseen events in life. Things happen. Few of us make it through life without a little bad luck. Some of us end up having a lot of bad luck. To prepare for that you have to build right. Start with a solid foundation and well engineered parts. The ancient Egyptians learned that the wider the foundation the taller and stronger they could build. They knew for a fact that the pyramids would not fall down. In fact they built them to last thousands of years.

Everyone starts at a different point A and tries for a different point B. Whatever your point A, a good first step to build a foundation is a 6 month emergency fund. That is enough cash to live off of for 6 months if you lost all other sources of income. Next is some protection. If you use proper life, health, disability, and long-term care insurance you can build an excellent foundation. You will know that no matter what happens to your building you will still be able to take care of yourself and your family.

Unfortunately there are more people selling insurance than I can count, and some of them are not very good. I have a friend that teaches classes to insurance agents and it is very apparent that there are many agents that have been in the industry for years and still are not very familiar with their products. I would recommend meeting with as many agents as you can handle until you find someone that you really like. From there everyone's building is different, just like their end goal. For anyone that will be in the SLC area, I am more than happy to meet with you and talk to you about your Point A and Point B. If outside of the SLC area feel free to email me at ben@bowmanventures.biz. I will answer you questions the best I can and if appropriate we can have a webinar.

Wednesday, March 17, 2010

Whole Life VS Term

I'm going to step away from the Financial Planning dissection and write something that has been on my mind, because if I can't say what's on my mind what's the point of having a blog? I live my life to help people. I've always been good with money and I love helping people, so it's natural that I enjoy helping people with their money. Everything I recommend to my clients is something that I truly believe is best for them. That being said, I come from a securities trading background. I studied portfolio theory in school. I was the Vice President of the Investment Banking Club. I follow the markets like most people follow sports. If anyone was for the strategy of "buy term and invest the difference" it was me. Buy term and invest the difference is the strategy of getting term life insurance instead of whole life insurance, and investing the difference of the premiums usually in the stock market.

Originally I planned on going into investment banking. Then the crash of 2008 happened and the entire industry was turned upside down. I had to start looking for other options. I did research in other parts of the financial field. I went to some career fairs at universities and met a man from a company called McPartland Group Financial Services. They had a pretty balanced approach at investment and retirement planning, so I applied and got the job. When I started my training they started talking about Whole Life Insurance. I was skeptical because I felt I had better things with my money, but I was open to learn.

I wouldn't be surprised if there are more strategies for financial planning than there are financial planners. There are dozens of reasons for this, but I think the main reason is ERISA. ERISA transferred the responsibility of retirement accounts from companies and professional to individuals. Essentially it turned millions of people into investors, good and bad. Though many people do reach retirement with enough money to retire, most of the typical financial planning strategies are naturally flawed and fail. Again, there are many reasons for this. I think the biggest reason is a failure to save. Another big reason is the fact that most of these strategies encourage risk without building a foundation first.

Building your retirement is like building a really tall tower. Let's say a couple thousand of years ago someone wanted to build the tallest tower they could with limited time. They could build a really skinny structure. It would gain height very quickly, but as soon as it started gaining significant height it would be come unstable. You could only build so high without compromising the structural integrity of the tower. If you tried to build higher the tower would fall over. As the ancient Egyptians knew very well, if you wanted to build an extremely tall structure it would require an equally wide foundation.

Most financial planning, and even our culture, encourages people to start building upward without building outward. Everyone knows they need to save for retirement. With many people this knowledge is limited to a 401k. However, your retirement does not solely depend on your 401(k), and a 401(k) is not a solo instrument. Whether or not you will be able to retire successfully depends on your entire financial picture. That includes your house, insurance, car and many other things. When I talk about building up instead of out, I'm talking about your entire financial picture. You have to build a foundation for your entire financial picture.

Life insurance is part of that foundation. Not only is it a very important part of your protection, but participating whole life can be used very well as part of your savings and short-term investments. Yes you can save in a high interest savings account, but it will never beat the return on participating life insurance. And yes you can have other short-term investments that pay out just as good, but they will never be as secure. Not only that but for anyone that has life insurance for at least 5 years, because of the cash value growth it is less expensive for them to have participating whole life rather than term.

So why do so many people get term rather than whole life? Mainly because they don't know how whole life works, and all they see is the "price" difference, not the cost. So if you are going to get life insurance or have it for another five years, please consider talking to me. I will help teach you the differences and help you make an educated decisions. Then I will be fine with whatever your decision. As I have learned with many of my clients and by observing others, you can lead a horse to water, but you can't make it drink.

Monday, March 8, 2010

Risk Promotion

Whenever someone is setting a goal for retirement it will be estimation. Estimations are inherently inaccurate. The fact there are so many estimations involved in needs based planning is not a problem by itself. What makes it a problem is when people mistake the estimations for fact. As long as you remember that needs based planning is estimation you can use it as a tool to help you create a plan and a goal for retirement. However, one estimation used in needs based planning encourages risk, and can cause recklessness or complete failure. The reason this is because theoretically the higher Rate of Return someone chooses as their goal, the less they need to save. For example, if I give you the following three options in order to reach retirement which would you choose.

Option 1: Earn 8% ROR and save $400/month
Option 2: Earn 10% ROR and save $225/month
Option 3: Earn 12% ROR and save $120/month

When given the option of needing to save $400 or $120 per month, most people would choose to only have to save $120, because they think about all the other things they could do with that extra $280. They would rather have the gratification of spending their money now, and Option 3 says that they can. We already know that their ROR (rate of return) is likely not going to be a consistent 12%, but someone looking at this doesn’t know that, and the financial advisor giving them these options probably hasn’t thought enough about it. Hopefully the planner does know that this is not a promise. A 12% annualized return is a goal. And only if they reach that goal will saving $120 per month get their client to their targeted retirement amount.
The only way that they attempt an annualized 12% return is by choosing riskier investments. In some cases you can get a greater return with less risk, but in this case higher returns imply greater risk and greater variation from the targeted return. Looking back at the example of the man that retired in 1998, we can see that 10% was not manageable in that case. Those were real returns from the S&P 500. If shooting for 12% increases risk and variation, what do you think the success rate is for that scenario? If I want to gamble I will go to Las Vegas, but when it comes to the financial future of me and my family I don’t mess around. This would be unacceptable. Later I will discuss way to avoid unnecessary risk by using efficient tax strategies, controlled spending, and balanced finances.

Saturday, February 27, 2010


Inflation is another one of the things that can go wrong with needs based planning. Inflation is when the general price of goods and services goes up over time. When the price of goods or services goes up it means that each unit of currency can buy less. Inflation erodes the purchasing power of money and any return on investments. For example, if you are able to earn 10% interest, but inflation is 4%, your inflation adjusted rate of return is 6%. Underestimating inflation can cause a person to think they need less money for retirement than you actually do. If someone is using needs based planning and they underestimate inflation, their expenses during retirement will be more than they expected. Even if they meet their original retirement goal, they still will not have enough for retirement.

In recent history inflation has been pretty stable, but looking back only 30 years you can tell that inflation is anything but stable. Between 1979 and 1981 (3 years) annual inflation was above 10% peeking at 13.58%. In 1947 it was 14.65%, and between 1917 and 1920 (4 years) it was above 15% peeking at 17.5%. So as you can see inflation can creep up out of nowhere.

There are a few different things that can cause inflation, but one of the major factors involved is the amount of money in circulation and the rate at which that amount increases. Since the late 1960’s the money supply of the United States has been growing very significantly. In the last few years we have more than doubled the money suppy. I can’t imagine how we are not going to have inflation problems in the near future. The only reason why we haven’t experienced the full effect of the increased money supply is because it hasn’t all gotten to the public yet. I’m not a doomsday kind of person, so I won’t go as far to say that we will have hyperinflation, which destroys almost all value of your money. However, I have a hard time figuring out any other scenario than at least 10% inflation in the next 5-10 years.

Monday, February 15, 2010

Rate of Return - Bench Mark

First I would like to thank everyone that comments. Second I would like to encourage people that are new to this blog to read previous post in order to catch up. For example, this post is a direct lead off of the post "Needs Based Planning." If you read that post this one will make a little more sense.

When it comes to needs based planning, one of the variables most likely to be off is rate of return. Rate of return (R.O.R.) is the gain or loss from an investment over a period of time expressed as a percentage of the original amount invested. So, if I invest $100 and in a few months I sell my investment for a total of $125, then my gain or loss (return on investment) is $25, and if expressed as a rate of return is 25% ($25/$100). Investors use rate of return to gage their investment and know how well it is doing. The ultimate bench mark, and what most investors try and beet is the Standard and Poor’s 500 (S&P 500). The S&P 500 is an index comprised from the stocks of 500 companies selected as a representation of their specific industries. The goal of the S&P 500 is to reflect how good or bad the U.S. economy is doing.

It is said that the S&P 500 index averages a 10% annual rate of return. That means that year to year the S&P’s average annual return is 10%. Even though most people accept the average rate of return as 10%, between 1971 and 2009 it is actually 10.59%. This means that when investors are trying to beat or match the S&P 500 as a bench mark they usually expect about a 10% return. However, average and actual returns are two different things, and averages can be very tricky. I’ll give you an example of what I mean. Let’s say that we invest $100 in the stock market. In Year 1 we receive a return of 100%. So after Year 1 we have $200. In Year 2 we lose 50% (return of -50%). We now have $100 again. Then in Year 3 we gain 100% again. In Year 4 we lose 50%. In Year 5 we gain 100%, and in Year 6 we again lose 50%. After 6 years we now have $100. This is demonstrated by the chart below.

So, our average rate of return is 25%, but if we started with $100 and ended with $100, then our actual rate of return is 0%. Obviously this is as pretty extreme example, and I seriously doubt this would ever happen with any market index. However, it demonstrates the difference between the average and actual rate of return. If you would like to know the actual annualized (year over year) rate of return for the S&P 500 between 1871 and 2009 it is 8.89%. However, that comes with an average standard deviation of 18.94%. For those of you who are not statisticians, this means that any given year can have a return that varies at least18.94% in either direction. For example in 2008 the return of the S&P 500 was -37.22%. In 2009 it was 27.11%.  What does this mean to the average investor? It means that your actual return depends on your timing. If you put $100 into the market at the beginning of 2008 you would now have $79.80.

Tuesday, February 9, 2010

Needs Based Planning

           Probably the most popular and naturally flawed form of financial planning is called needs based planning. This method is widely accepted and commonly practiced. 95% of financial planners and advisors would likely use this method. It very logically calculates what your monthly expenses will be at retirement by adjusting your current monthly expenses for inflation. Then, using your estimate of the time between retirement and death, it calculates how much money you will need at retirement in order to have income for the rest of your life. Then, again discounting for your planed rate of return, it calculates how much money you will have to invest every month in order to reach your goal. Below is an example of a needs based plan.

Current Monthly Expenses                                     $5000.00
Years Till Retirement                                                   30
Estimated Inflation                                                     4%
 Monthly Expenses at Retirement =                        $16,217
(This is how much your living expenses will be in 30 years when you retire)

Estimated Years in Retirement                                    20
Estimated Need for Retirement =                        $2,676,167
(This is a lump sum you will need in order to retire)

Estimated Rate of Return                                          10%
Monthly Investments Required =                            $1,176

            If you notice how many times estimates are included in the calculation (4 times) you will begin to see the first and most basic flaw.  It is all an estimate assuming that some very volatile things will remain consistent. If any one of these things is off in the slightest way it could mean disaster. In this case disaster means going back to work or moving in with your children during retirement. Neither of these things would be the end of the world, but neither are they ideal. Over the few weeks I plan to discuss a number of these variables, and other variables that aren't so obvious. I'll discuss where we have been and where we are headed. Email me with requests that you might have for topics that will be discussed first. bbowman@richestmaninzion.com