Blog - Page 17 of 37 - Financial Literacy

Where does ‘luck’ reside?

January 15, 2017 admin Personal Development Comments Off

Richard Branson has launched dozens of companies and has a net worth over $5 billion. He says, “You have to be relentless in order for luck to visit you. Those who play it safe do not get lucky.”

Lucius Annaeus Senaca, “Luck is where opportunity meets preparation.”

Louis Pasteur, “Chance favors the prepared mind.”

Benjamin Franklin, “Diligence is the mother of good luck.”

Thomas Jefferson, “I’m a great believer in luck. I find the harder I work, the more I have of it.”

Emily Dickenson, “Luck is not chance, it is toil. Fortune’s expensive smile is earned.”

Ray Kroc, “Luck is a dividend of sweat. The more you sweat, the luckier you get.”

Brian Tracy, “I’ve found that luck is predictable. If you want more luck, take more chances. Be more active. Show up more often.”

Multi-millionaire success coach and author, Steve Siebold, says it simplest “There are two steps to success. Set a goal, and then persist until you succeed.”

Where, exactly, are you creating your own luck?

Do you know precisely where your money is spent?

January 8, 2017 admin Personal Finance Comments Off

Author and blogger, Thomas Corley, wrote a book after interviewing hundreds of self-made millionaires. He recently wrote on his blog, “Do you know where your money goes? Some people do. They are called self-made millionaires.”

Of course, ‘knowing where your money goes’ is only one of the puzzle pieces for becoming a millionaire. However, it is an important foundational skill for both personal and business financial management. In order to have savings for investing and learning, there must be surplus money at the end of each month, quarter, and year. For that to happen, you need financial awareness to know where your money is going in both your personal life and business life. It is the only way to reveal reality; plus uncover over-spending and errors. And most importantly, it is a tool for setting priorities against limited resources, namely your income and time.

As an exercise in learning where your money is going, Mr. Corley recommends, “tracking every penny you spend for 30 days and then review it at the end.” I would go a step further and advise that you budget the entire year, by major categories, and then evaluate each month to determine if you are on track or not. This way, you can make adjustments before there is any financial crisis that is developing over time.

If you are interested in more of Thomas Corley’s material, this is his website: http://richhabits.net/

Where is your professional development plan?

January 1, 2017 admin Career Comments Off

Keep your career momentum by updating and executing your professional development plan. Naturally, many people don’t know what this is (and ambitious people do it without labeling it). It is a formal professional plan; a written outline of career goals combined with a map and timeline to attain them. Many large companies have a process for this, but few supervisors or businesses take it seriously enough to actually advance your career. Like everything else, it is solely up to you to build, and act upon, your own professional development plan.

The most difficult step is starting. First, you need to select a vision or activities you enjoy and have an aptitude around and select several industries and geographic areas where those activities are best rewarded. While these may change over time, you must have a thoroughly consider your target as a starting point. The second step is to list the job and leadership skills that will be needed. Then write out those steps and target dates to acquire those skills. You’ll need to determine:

How you will acquire skills and certifications
How much it will cost
The amount of weekly time required
What other support or mentorship you may need
How will you measure progress

The third step is taking action to accomplish your personal plan. By having a written plan, you can review your results each month or quarter and make any adjustments moving forward. There is a career satisfaction and pay gap between people that use a professional development plan and those that do not. Which side of this gap do you want to be on?

When did 5 cents turn into $5?

December 25, 2016 admin Personal Finance Comments Off

Venezuela’s largest denomination of currency, the bolivar, is now worth only 2-cents in U.S. dollars. The socialist government has printed money to cover its deficits, which has hyper-inflated its currency down to almost nothing.

So how is the U.S. dollar doing? It has depreciated as well, and although it is over a much longer period of time, the U.S. dollar is down about the same as the Venezuelan bolivar, down by 98%.

The U.S. currency was taken over by the latest U.S. Federal Reserve, which was founded in 1913. Since then, the U.S. dollar has lost (depending on whose inflation numbers you utilize) either 95.8% or 98.8% of its value. For example, if an item had cost $100 back in 1913, then today that same item would cost $2,442. That item has not become more valuable, the escalation in price is solely because the U.S. dollar has collapsed in value.

Back in 1879, Frank Woolworth opened a “5 Cent Store.” That later became a “5 and Dime Store” retail concept that competitors also used for decades. Can you imagine buying anything at a store for 1-5 or 1-10 cents? Today we have a modern version of that industry called Dollar Stores, and when that is not enough money to buy something of value, there is another store named, “Five Below” that sells items up to $5. So the 5-cent store has turned into a $5 dollar store, reflecting the fall of the U.S. dollar: nearly 100 fold. This is the effect of long-term inflation.

How does this apply to your finances? It is most graphic to people during retirement, a several decade period where your income is modest, mostly fixed, while inflation eats away at the currency, year after year. A decent retirement income when you first retire may not be so luxurious after a decade or two of currency depreciation. A few ways to mitigate inflation eroding your investments include:

Pay attention to your investments to be sure that they earn a return that covers the rate of inflation.
Put some of your portfolio into inflation-protected or inflation-indexed securities.
Invest in real estate where rental income can keep pace with inflation.
Invest in stocks with high profit margins and the ability to raise prices with inflation.

Asset allocation strategies and adjustments

December 19, 2016 admin Investing Comments Off

Investors who have heard about academic studies on investing returns may know that: up to 90% of your long-term investing return is dependent upon your portfolio’s asset allocation. Asset allocation refers to the proportion of money you have in categories of investments: equities, fixed-income, commodities – and a few of their sub-components.

There are several websites that track asset allocation returns. This is an up-to-date one that you can examine: https://novelinvestor.com/asset-class-returns

It shows 15 years of annual returns for 9 asset classes. Some active investors use tables like this to make minor adjustments to their allocations. For example, if a particular asset has performed well for 3 years, then it is less likely to perform well in the immediate future. Contrarily, if a particular sector has been performing poorly for a number of years, then it may be time to expect it to perform better. These are both contrarian investment ideas; the opposite of which is momentum investing – adding more money to last year’s best asset class. This momentum-asset investing idea has consistently proven to be a losing investment method.

There are many models of asset allocation. If you don’t have one, a couple excellent models for you to consider are:

The Yale University Endowment Asset Allocation described by its Chief Investment Officer, David F. Swensen, in his book, “Unconventional Success: A fundamental approach to personal investment.”

Money manager, Mebane Faber’s asset allocation described in his book, “The Ivy Portfolio: How to invest like the top endowments and avoid bear markets.”

There are many asset allocation models that can be found online, plus there is one in my book as well, “Financial Literacy: timeless concepts to turn financial chaos into clarity.”

Willpower for advancing your career and finances

December 11, 2016 admin Career Comments Off

What is the opposite of willpower?

Procrastination – Have you been procrastinating on updating your resumé or applying for a new job?
Indulgence – Have you been indulging on purchases that you simply cannot afford?

These are the everyday battles that we face with whatever willpower that we can summon. You already know that: your success in life is dependent upon your general level of self-control. Self-control means the capability to do the thing that needs to be done and avoid temptations. When stakes get high, can you take on a difficult task or do you routinely seek fun or easy tasks instead?

Like anything else, willpower is a limited resource but similar to a muscle, it can be increased with appropriate exercise. The more willpower you employ, on a regular basis, the more your willpower capability will grow. According to Dr. Jason Hunt of Brigham Young University, another way to build your willpower is to perform a selfless act. A selfless act uses the exact same part of the brain and the same hormones are released as employing self-control over a temptation. By actively performing a selfless act every day, you are strengthening your willpower that will aid you in parts of your life that need more self-control. There is a lot of research and tactics on motivation, self-control, and willpower that can be found online. Anyone may benefit from learning more about self-motivation and self-control.

For what we are interested in, taking steps toward advancing your career and finances, there is a common and proven tactic to increase your ability to get past procrastination. This is to go somewhere away from any activities and sounds, eliminate distractions and temptations, and then begin taking small steps to advance toward what you want. Even if it is only 15 minutes a day, repeatedly and consistently doing this can lead to material progress toward your goals.

Financial advice just became more expensive

December 4, 2016 admin Personal Finance Comments Off

The U.S. Dept. of Labor passed a new regulation requiring financial advisors to always act in the best financial interest of their clients. This regulation went into effect 7 months ago, called the “Fiduciary Rule,” it is 1,000-pages long and is supposed to improve the quality of investment advice. Although this sounds like a great idea, Fidelity Investments surveyed 485 advisors about how they are responding to this rule:

75% Say their cost of compliance will go up
62% Will fire their small clients
73% Expect it to have a negative impact on their business
58% Expect their income to go down

Many smaller advisor firms are expected to close and the remaining larger firms will service only wealthier clients who can afford the new higher fees.

So the unintended consequence of this regulation is: an increasing number of people will be left with no financial advisor that they can afford. For example, State Farm is laying off 12,000 agents and will only offer a reduced number of products through a self-directed call center. Rules now require insurance products to be labeled equity products that may confuse consumers as well.

The regulation increases transparency as advisors disclose all of the ways they are compensated by different products, but you may have to actually ask for this information to get it. Fee-only financial advisors believe this regulation tilts the industry more in their favor. Opponents call the regulation, “Obamacare for your 401(k): complex rules that limit your choices and raise your costs.” Many are hoping that President-Elect Trump will cancel the regulation once he takes office.

However it shakes out, companies are spending a fortune for ongoing compliance with this regulation and somebody has to pay for that, who do you think it will be?

Risk is growing for bonds

November 27, 2016 admin Investing Comments Off

Recent financial market headlines include: “30-year bond bull market is over,” “The bottom is in for bond yields,” “London Interbank Rate Highest in 8 Years,” and “The Great Rotation from Bonds to Stocks Has Begun.” By looking at long-term charts and recent bond prices, it is possible that a 30-year run in bonds has hit its peak price, at least in the short term. As proof, bond investors are selling bonds at the fastest rate in 3 years, mortgage rates are above 4%, and many investors are expecting an interest-rate increase by the Federal Reserve next month. Looking at a 20-year price chart you can see that bond prices have a very, very long way to fall if this is a price peak. How should you react with the bonds or bond funds that you own?

Most people hold some bond mutual funds or bonds as part of their portfolio allocation in retirement accounts. There are also many securities highly correlated with bonds such as REITs, utility stocks, and others known for historically paying a decent interest rate or dividend yield.

If today marks a medium or long-term top in bond prices, there are some actions you can take to minimize downside risk. The first and easiest is to sell some or all of your bonds. But then you have another problem – deciding where to place this money instead of bonds funds?

For most casual investors, the best approach to hold bonds is to own individual bonds until they mature and are fully paid off. This way, no matter what the price gyrations do, it is irrelevant to your interest payments and final payback of your principal. Rather than research individual bonds, there are bond funds that do for you called, “Target Date Bond Funds.” There are two large sponsors of these funds, Guggenheim Bulletshares and iSharesBond. They have many offerings so you can choose among several types of bonds that will mature anywhere from 1-7 years. You can choose maturities to time your income needs, or “ladder” by purchasing bond funds that mature in a variety of time frames.

Another way to manage your bonds is to use some money to hedge them. This requires some homework. Let me briefly explain:

First, the bond market is a complex terrain of many types of bond issuers – U.S. Treasuries, Corporate, High-yield Junk, and many different maturity dates. There are also country specific bond funds, and today, Emerging Market Bonds are collapsing in price. You may want to sell all you have of these. Since a falling price pushes yields up, these countries will likely find it more difficult going forward to roll-over debts at more expensive rates. Another factor to consider is that when interest rates rise in a country, then that country’s currency becomes more valuable. So if the Federal Reserve raises interest rates, then the U.S. dollar will likely strengthen as well. This is yet another dimension to analyze for your investments: will a rising dollar help or hurt your specific investments?

Second, because there are so many types of bonds, your hedge needs to match your specific holdings as much as possible. There are many inverse bond ETFs that you can purchase to hedge your bonds, they move in the opposite direction of a particular class of bonds. There are over 30 of them, but the top 20 in trading volume can be found here: http://etfdb.com/etfdb-category/inverse-bonds

Third, you need to decide if you own enough bond investments for the cost of hedging. If you have less than $100,000 in bonds, it probably isn’t worth the cost to hedge. It takes money (and opportunity cost) to purchase $100,000 worth of the appropriate inverse ETF (it moves in the opposite direction of your bonds). But you don’t have to hedge all of it; you could also hedge 25%, 50%, or 75% of your holdings, depending on how much interest-rate risk you’re willing to accept. If you don’t want to learn and manage hedging, just sell your bond funds and look for something to re-invest the money in that will profit from rising interest rates. For example, an industry that performs well with rising interest rates is insurance companies. They will buy bonds paying a higher interest and have portfolio teams that manage hedging and other portfolio risks.

Whatever your level of interest in managing your money, you or your money manager must have a plan of action when the economy or financial markets change. There is growing evidence that there is a big change happening right now: the ever-lowering interest rates in the U.S. is pausing and may be starting to move the other way. How are you adjusting to this new condition – to defend yourself from losses in bonds or profiting from rising interest rates?

Government insolvency and retirees

November 20, 2016 admin Government Finance Comments Off

The U.S. federal government and several states are in horrific financial condition. But I like to keep an eye on Illinois because they are running the fastest toward a financial cliff. Illinois spends more of its annual budget on state-employee pensions than any other (more than 25% of its state budget), and it also has the most underfunded pension (only 37.6% funded). The result is a $130 billion pension shortfall and the state is checkmated into doing nothing about it:

Illinois cannot raise taxes higher without more residents and businesses fleeing the state
The Illinois state constitution forbids reducing pension benefits for any reason

I am curious how this will play out because this situation cannot last for long. The state has long been operating without a budget and not paying vendors; so what would happen if the state goes into a recession? However the Illinois financial calamity unfolds, it could become a model for other insolvent government institutions such as Chicago and the state of California.

When the city of Detroit went through bankruptcy two years ago, its $18B debt was reduced to $7B and the pension benefits to city employees were reduced. The pension trustees had to decide if they wanted to accept a slight reduction or risk the possibility of dramatically larger reductions. Public pensions are simply unaffordable, as the state of New Jersey is finding out. Their state credit rating has been reduced 10 times since 2010 because the already sky-high taxes in New Jersey are not enough to cover their pension shortfall. New Jersey recently raised its gasoline tax “for roads,” but some of the money was diverted to its pensions instead. Philadelphia passed a soda tax to fund “children’s programs,” but instead, some of the money was diverted to fund the city’s underfunded pensions. Government pensions seem to slowly consume all tax revenue.

The implication for state employees is sobering – you accepted a job based on a commitment of a pension, but what if that pension payment is cut by a substantial amount or even goes to zero? If your money is in someone else’s hands, particularly the government’s hands, it is at risk. Federal Social Security payments need to be reduced within a decade as well. There are reports on their website pointing this out to anyone who reads it. But instead of taking action, most people ignore it and hope the politicians will be able to solve the insolvable, or at least kick the can down the road.

The most financially prudent people that I know live off of their investment income from either stock dividends or real estate rents. Any pension and social security payments that they receive are just a small financial bonus. This way, they have no stress about potential reductions to pension or social security payments because they don’t rely upon them. This is the opposite for most people: What is the percentage of retirees whose social security payment provides over 50% of their total income?

48% of married couples
71% of single retirees

My best advice is to save a minimum of 15% of your income for your retirement. This way you’ll have the money to buy an annuity to create your own monthly pension payment, or build an investment portfolio from which you can withdraw from to support yourself when you stop working.

Critical budgeting basics for households

November 13, 2016 admin Personal Finance Comments Off

Many people have no interest in money management, let alone budgeting. I recently had a conversation with someone in his late 40s who still cannot force himself to budget, so his family suffers predictable and painful financial struggles.

Whatever your average monthly income may be, divide that number by weeks or days to put it into some manageable perspective.

First, determine how much of your income is available each month after you pay necessary fixed costs like rent and utilities. This leftover amount is what you can spend on variable expenses, such as food, clothing, maintenance, and repairs.

Second, select a percentage of money for savings. You’ll need to be setting aside 15% of your income for retirement, but you’ll also need a savings percentage for other savings goals: vehicle replacement, home repairs, vacations, college, and an emergency fund. Spend time to be thorough with your savings goals. This is because savings is the area that most people overlook and then start a downward spiral by putting these expenses on credit cards with high interest charges. By going over your savings goals, most people begin to recognize how far above their means that they’ve been living. Your housing and utility costs need to be low enough that you can afford to meet your savings goals.

Third, accumulate the amount of your monthly income as the “base amount” that you maintain in your checking account. This way, you can pay any normal bill whenever it arrives, avoid the stress of timing bills, and never have to face a shortage in your checking account or experience late fees. If you place bills on auto-pay then you can eliminate having to think about them; which can also reduce the burden of managing money.

A co-worker of mine grew up in a household that did not budget. Even though his father earned enough money, it was quickly frittered away. The last days of each week, his family went without food until payday, when they’d gorge themselves at dinner. My co-worker, as a successful middle-aged adult, still has emotional scars and odd food behavior from that early and repeated trauma. Do yourself and family a big favor by going through budgeting basics. Every bank offers assistance, software, and help, and libraries are filled with free books on the subject. Or, you could read my book, Financial Literacy, which outlines the steps.

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Financial Literacy

Timeless concepts to turn financial chaos into clarity