Category Archives: investing

3 Tips for Beginning Investors

Investing is a scary word right now. An unstable stock market, decreased value of the dollar, and political unrest all around the world make investing a big risk. Do you still want to attempt to be part of the solution? Then take a couple of risks and consider investing in stocks.

But how do you start? What can you do to be part of the solution without plunging into unknown waters unawares? Today, we’re going to look at three things that all wise investors take into account when planning their investments.

  1.  “Don’t put all your eggs in one basket.” This is probably the age-old investment tip. Basically, it means that you shouldn’t put every dollar that you invest into one stock or even the same category or stocks. Heck, it means you shouldn’t put it all in the stock market, either! This is referred to as diversification and its one of the best strategies out there to help your portfolio have the least amount of risk. Many experts suggest that you diversify between standard savings accounts, the stock market, and bonds. How much you put in each of these three things will depend on how much risk you want to take; the more you have in “safe” investments (savings accounts and bonds which cannot lose money), the less overall risk you have.
  2. Do some research, both before you invest and while you have money in the stock market. Don’t just go on your whims. Get out there, read about the companies you’re considering putting money into, see what their patterns have been for the last year, and compare them to other companies in the same industries. No, eeny-meenie-miney-mo does not work. Please don’t try it; the results will not be what you’re looking for.  After you put money into stock, keep an eye on it. It’s not like a crock pot; you cannot ‘set it and forget it.’ Continue to read up on the industries you’ve invested in and on the market as a whole. Staying “in the know” will help in further reducing any risk you have.
  3. Don’t play it too safe. Now, these first two tips were about risk and reducing it. But any knowledgeable investor knows that there has to be some risk involved in your portfolio or your profit will be minimal. If your intention is just to set some money aside that you can come back to later with accrued interest, then this doesn’t apply. But if you want to be successful and get ahead, take a couple risks. Don’t be stupid with taking risks, but be willing to lose a little to potentially gain a lot.

This definitely isn’t everything that you need to know in order to invest successfully, but it’s a great start. What other tips and hints do you have to start investing? Have you invested, or are you too nervous to take the leap? Share some thoughts in the comments, have a great week, and we’ll see you back here next week!

My Money Market

percentage.jpg

So today I decided to take a look at my Money Market account, which I usually try to check only once a month, and saw that the interest rate went from 5.30% to 4.90%. I was surprised that my initial reaction wasn’t disappointment but rather quite passive. There was a point in time where I used to think that every one hundredth of a percent counted and mattered and that I would find the best money market account accordingly. But the truth is, unless you have a nice amount of money, say a million dollars, it really doesn’t matter too much.

I think people who are new to finance and just started saving have this same problem just as I did. People are always looking to get the highest percentage rate on their interest, but the thing is, the percentage rate really doesn’t matter unless you’re dealing with substantial amount of money. Instead of concentrating on trying to find an account that offers a percent higher than the current one you’re considering, you should put that energy into concentrating on how to stay saving for more than 3 months. Most Americans fall short on their savings goals, I don’t have a percentage rate to offer you but I’m sure its quite high. The personal savings rate in the United States is a negative number, but majority of Americans think of themselves as people who “always look for ways to save money“.

So back to the money market account, lets do a quick example to demonstrate what I’m talking about.

For the sake of my story, lets use my interest rate(in case you were wondering, my account is with Gmacbank) at 4.90%, which used to be at 5.30%. We’ll say account 1 has $5,000 and account 2 has $500,000. Lets crunch some numbers.

Account 1($5,000):
In one year, at 4.90%, this would make $245/year ($20.42/month).
Now at 5.30%, we get $265/year ($22.08/month).
So not a huge difference eh? Just 20 more bucks a year or $1.66 a month. I somehow doubt I’ll even notice this small difference. Now account 2 on the other hand…

Account 2($500,000):
In one year with 4.90%, this account would make $24,500/year ($2,041.66/month).
At 5.30%, this account would be $26,500/year ($2,208.33/month).
Now in this case, the difference is quite notable. This account dropping by as little as .4% makes a difference of $2,000/year and $166.67. If I was in this case, my reaction most probably would have been quite different than that of today.

The point I’m trying to make is don’t worry about the percentages now and focus more on getting our accounts to $500,000. Lets continue saving and worry about the minor details later. Chances are, you don’t have $500,000 so percentage rate is not going to help you become rich, well at least not now. The idea of saving on the other hand is a complete different story.

Quick note: If you are looking for a place to put your money into for savings and also concerned with not having to worry about commitment, then you should really consider looking into getting a money market account. I strongly suggest going with Gmacbank. I’m not saying this because they’re paying me or anything like that but just from my personal experience, they really have it well together. They are really helpful each time I call and all my calls end with the feeling of satisfaction. For more information, you can go here.

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GMAC Bank

gmac.jpgToday I just opened up a Money Market Savings account with GMAC Bank. It’s great because it’s just like a checkings account with a super high interest rate. I mean why not make some interest while my money sits in my checkings account right? So my plan is to make this new account my primary checkings account and also as well as my savings account.

Here are some Benefits of the account:

  • The interest rate for this money market account is currently going for 5.30 %, which is fairly high.
  • The minimum opening deposit is only $50.00
  • FDIC-insured up to $100,000
  • I get my atm fees reimbursed up to $6.00.
  • Just like a checkings account, I get a check card and a check book.
  • No monthly fee as long as the monthly average balance is over $500.00.
  • Interests are compounded daily.

Some of the negatives:

  • It’s an online banking firm so that means I can’t go into a physical branch for assistance.
  • I’m limited to only 6 electronic transactions per statement cycle (ATM withdraws and electronic transfers.
  • Along with many other money market accounts, the interest rates are not fixed.

Those are the main negatives I can think of at the top of my head. If you know of any other, please feel free to comment.

So I’m really excited about this account. It’s neat to think that I can move all my money from my checkings account and savings account and now make interest on it. My old savings account was going for something like %1 – %2 percent so its an upgrade from it. For my first deposit amount, I tranfered $1,000 from my savings account to this account and eventually I will move all my money from checkings and savings to here. I’m hoping to have $5,000 – $6,000 in this account by the end of the summer.

CD’s or Money Market?

money-market.jpgScenario: So you’ve got a nice stash of cash just laying around and you want them to be put to work. You also figured that you didn’t want to be too aggressive buy investing directly in stocks and at the same time you don’t want to invest in long term either so that rules out mutual/index funds.

So then you ask, “should I put my money in a CD or a Money Market”?

Good question. In order to make the right decision, you have to define your goals and needs. Getting it wrong the first time is all it takes for it to cost you the big bucks so you want to make sure that you do your homework first.

For those who do not know, Certificate of Deposit or simply CD, are debt instruments issued by banks and other financial institutions to investors. In exchange for lending the institution money for a predetermined length of time, the investor is paid a set rate of interest.

While on the other hand, Money Market offers many of the same benefits as CD’s but with the added features of a checking account. As far as the interest rates go, they are fairly close. Last I checked, CD’s were running at 4.90% and Money Market at 4.80%.

Here are a short Pros and Cons of Money Market and CD’s.

Money Market:

Pros: Depositing money in a money market is as easy as depositing cash into a savings or checking account. Cash is immediately available for alternative investments so you’re a lot more flexible with Money Market.

Cons: Money Market’s interest rate is not fixed. The rate of interest is directly proportional to the investor’s level of deposited assets, not to maturity as is the case with certificates of deposit. Hence, money markets are disproportionately beneficial to wealthier investors.

Certificate of Deposit (CD):

Pros: The investor can calculate his expected earnings at the outset of the investment since the interest rate is fixed. Certificates of deposited are FDIC insured for up to $100,000 and offer an easy solution for the elderly who desire only to maintain their capital for the remainder of their life.

Cons: Not as flexible as Money Market and will be penalized for withdrawing before it reaches maturity. If the investor opts for a longer maturity and, thus, higher rate of interest, he will lose access to his funds and forgo alternative uses of his capital.

Final Analysis: So if you are absolutely certain that you will not be needing that $10,000 for the next year or so, then I say go for the CD, but if you are not sure, then Money Market is the way to go.

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Are you a Traditional or a Roth?

retirement.gifAs many of you know, the importance of investing is crucial. Since investment is tied with time, it’s also obvious that the sooner you start your investment portfolio, the better and bigger your outcome.

Today we’re going to look at the individual retirement account, or also known as the IRA. In short,  IRA is an personal, tax-advantaged retirement plan. An employed person can contribute earned income into an IRA account up to $4,000 per year if you’re younger than the age of 50 and $5,000 if you’re over. In 2008 this amount will increase by a thousand dollars. If you need some more information on IRA accounts, you can get more details here.

Although there are more than just two types of IRA accounts, I want to just pick on Traditional and Roth today.

So how do you know what account is best for you?

If you compare a Traditional IRA with a Roth IRA, a Traditional IRA may be a better move for you than a Roth IRA if you:

  • Don’t qualify for a Roth because of your income level but still want the tax deferral on earnings in a Traditional IRA.
  • Believe that income tax will decrease in the future.
  • Expect to be in a lower tax bracket during retirement.
  • Qualify for a tax-deductible IRA contribution.

Now, if you compare a Roth IRA with a Traditional IRA, a Roth IRA may be a better choice than Traditional if you:

  • Anticipate remaining in your current tax bracket after your retirement.
  • Believe that income tax will increase in the future.
  • Expect that when you retire, you will be in a higher tax bracket.
  • Have income below the MAGI limit for a Roth IRA, but still too high to qualify for a deductible Traditional IRA.

Even though you may have an idea on what kind of account you’re interested in, its always a good idea to ask your personal finance advisor and seek their opinion. From personal experience, they always seem to have some useful information.

Time is More than Money

treemoney.gifTime, more than money, can help you achieve your life goals.

If you have a future in mind, whether it’s a home, starting a family, going to college, or building a nice nest egg, the main problem of achieving your goal is that money is tight and hard to come by.

The best tool you could use to help achieve that goal is time. It doesn’t take that much,  but just good time management and a simple plan which you can stick to. When is the best time to start investing? The sooner the better.

There are certain circumstances in which you might want to wait before starting to invest. An example would be, say you have a credit card debt of 5,000 and your interest rate is over 12%. In this case, it’s probably a smarter move to pay off your credit first before starting to invest because you don’t want to be losing 12+% each month from your debt.

Otherwise, the sooner you start the better. You don’t even need a lot of money to invest. You can start with as little as $20, $50 or more a month.

The more you save, the more you will have. The more you have, the harder your money will work for you.

Start now while time is on your side. The younger you are the more time your investment has to potentially grow. What is why it is important to start investing as soon as possible.

Lets do a recap of your possible future investment lineup:

Say you invest $100 a month at an 10% return.

1 year —- -$1,320.00 ($120.00+)

5 years  —-$8,058.73 ($2,058.73+)

10 years —$21,037.40 ($9037.40+)

15 years—$41,939.68 ($23939.68+)

20 years—$75,603.00 ($51603.00+)

In twenty years, you can turn $24,000 into a little over $75,000. And this is just with $10o a month. The sooner you start, the longer you have to let it grow.

When is the best time to start investing?

I’d say today is looking pretty good.

5 Basic Concepts To Teach Kids About Money

piggy2.gifOne of the most important life lessons you can teach your kids is to develop successful money management habits  and  a sense of financial responsibility. When it comes to teaching your kids about money, the sooner they learn the better.

  1. Help your child understand the value of saving money.  Here is where you start showing them the importance and the  benefits of saving money. This can be done with a simple but balanced form of an allowance. While they are young, giving them small amount of money will help them prepare for the future when the amount becomes larger.
  2. Discuss the privileges and pitfalls of owning a credit card.  Show that credit cards can be a very powerful tool which could help you dramatically with your finances and also in return, how you could misuse a credit card and how much that could affect your life.
  3. Give your teen ‘real world’ experience with money and budgeting. Instead of buying their yearly school clothes yourself, give them a set amount and let them decide what they need and what they don’t need. Emphasis that that is all they are getting so chose wisely.
  4. Teach your child how to track spending. Get them in the habit of tracking their spending by either getting a notebook or a creating a simple excel spreadsheet on your computer.
  5. Cover the basics of investing. It’s never too early to start explaining the general overviews of investing. The earlier you start, the better they’re equipped when it’s actually time for them to start investing.

Roth IRA

investmentpic.jpgSo my last post from yesterday covered the basic fundamentals of what a Traditional IRA was. Today I want to cover Roth IRA and just like last post I want to keep it sweet and simple. So lets get started.

A Roth IRA’s main advantage is its tax structure. The contributions made to this account is only from earned income that has already been taxed, therefore it is not tax deductible. The total contribution for all IRA’s are limited and changes from year to year. This year the limit is at $4,000.00 for people 49 and under and $5,000.00 for people 50 and over. And starting in 2008, the contribution will increase to $5,000.00 for people 49 and under and $6,000.00 for people 50 and over. Here is a simple chart to see the previous and the future limits.

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Here are some Advantages and disadvantages:

Advantage:

  • At any time, the IRA owner may withdraw up to the total of his contributions without getting a penalty fee.
  • When a Roth IRA owner dies, and the spouse is the sole beneficiary of that Roth IRA and he or she also owns one, the surviving spouse may combine the two Roth IRAs into a single account without penalty.
  • If you are a first time home-buyer or paying qualified educational expenses, you are able to take out not only your contributions but also your earnings without a penalty( up to $10,000.00 in earning).
  • Lack of forced distributions based on age. All other tax-deferred retirement plans, including the Roth 401(k), require withdrawals to begin at age 70½, and impose an annual minimum distribution once withdrawals begin at any age beyond 59½. The Roth IRA is completely free of these mandates.

Disadvantages:

  • Contributions are not tax-deductible. This can be a disadvantage in the long run if you are making a decent amount of income. I suggest Roth IRA for people who are just started out and Traditional IRA for those who are making well over 80k.
  • With a Roth IRA, there are heavy penalties for early withdrawals of earnings. An unqualified withdrawal of earnings will result in federal income tax plus a ten-percent penalty on the amount.
  • Just a rumor but there is the risk that Congress over the next few years may decide to tax earnings on Roth IRAs.

So in general, Roth IRA has these following characteristics:

1.) Unlike Traditional IRA, contributions are not tax-deductible.

2.) Withdrawals are usually tax-free.

3.) At any given time, the Roth IRA owner may withdraw up to the total amount of his contributions.

General Overview of Traditional IRA

investing.jpgSo I’m in the process of researching what investment funds to choose from for my first contribution. Since I’ve been reading a lot about IRA accounts I decided to share some useful information that I gathered.

The traditional and the Roth IRA, also known as Individual Retirement Account, is a retirement plan account that offers some tax advantages  for retirement savings .They are usually invested in stocks or mutual funds( there also other methods such as Certificate of Deposits, notes, and derivatives). There were 5 different kinds of IRA that I came across.

  1. Traditional IRA
  2. Roth IRA
  3. SEP IRA
  4. SIMPLE IRA
  5. Self-Directed IRA

Out of these 5 I’m going to concentrate on the two most popular the traditional and the Roth. Today I will cover just the Traditional  IRA and tomorrow I will go over Roth IRA.

I think the easiest way to understand what Traditional IRA is is to develop a list to differentiate between the goods and the bads. So heres a list of 4 advantages and disadvatages of Traditional IRA:

Advatages:

  • The main advantage of a Traditional IRA, is that contributions are often tax deductable. If a taxpayer contributes the maximum amount of $4,000 to a traditional IRA and is in the twenty-five percent marginal tax bracket, then a $1,000 benefit ($1,000 reduced tax liability) will be realized for the year.
  • If a taxpayer expects to be in a lower tax bracket when the person is close to his retirement than during the working years, then a traditional IRA offers an increased incentive over the Roth IRA.
  • The taxpayer gets the tax benefit immediately
  • This is just a rumor but With the Roth IRA, there may be a risk that over the next several decades Congress will decide to tax Roth IRA distributions.

Disadvantages:

  • There are the eligibility requirements for the tax-deductibility.
  • All withdrawals from a Traditional IRA are included in gross income and subject to federal income tax.
  • If one has a lot of disposable income, (total amount of income an individual makes after taxes), a Roth IRA in effect shelters more assets from taxes on gains than a Traditional IRA does.
  • The greatest disadvantage of the Traditional IRA is its forced distributions based on age.

So in general, Tradiontal IRA have these following characteristics:

1.) Contributions are often tax-deductible

2.) All transactions and earnings within the IRA have no tax impact

3.) Withdrawals at retirement are taxed as income

Tomorrow I will be covering Roth IRA so stay tuned.

Start saving for retirement asap, compound interest says so.

So here is the scenario:

Person A is 20 years old and has nothing start off with since he’s fresh out of school. But he has a decent job and he able to invest 100 dollars a week. He does this til the age 60.

  • Starts with $0.00
  • Invest $100.00 a week ($4,800.00 a year)
  • Interest rate going at 10%
  • 40 years to invest

Person B is 40 years old and has waited this long to wait to start saving for his retirement. He has some money saved up and is able to put down 15,000.00 dollars to start off with. Also, since hes much older, he makes more than person A and is able to put 200 a week. He does this til the age 60.

  • Starts with $15,000.00
  • Invests $200.00 a week ($9,600.00 a year)
  • Interest rate going at 10%
  • 20 years to invest

Lets put these numbers in the compound interest calculator I found in MoneyChimp.com and see how we do. 

So here are the charts.

Person A: 20yearoldinterest.JPG

 

 

 

 

 

 

 

 

Person B:40yearoldinterest.JPG

 

 

 

 

 

 

 

 

As you can see, although person B invested 15,000.00 more than person A, he still has no where near as much as person A when it comes time for retirement. The difference comes to a total of $1,631,152.20! This is all because person A decided to start 20 years before person B. Now that’s the power of compound interest baby!

I don’t think there is a “right” age to start saving for retirement but I do know that there’s no such things as starting too early. Most people think to themselves, “Retirement is long ways from now and I can afford to wait another year…”. Well if you keep thinking in that mentality, you’ll find yourself in person B’s shoes and miss out on millions of dollars.

As for myself, I don’t have a retirement savings account yet but if everything goes according to plan, I will by the end of this month. :) We’ll see.