Renting is cheaper, unless you bought your house in the 1920’s; I doubt buying a home would save you money compared to renting.  Have you ever thought of all the added expenses of owning a home?  Consider the following…

Mortgage – Generally around $300 more than renting a month.
Property Taxes – Depending on the home, a good number is $200 a month.
HOA Dues – A lot of communities surrounding cites belong to an Association, Dues vary, but $200 is another common amount. (Does your HOA have a website? Check out ours, it’s proven very helpful. http://laurellakevistas.com)
Home Maintenance – Over the course of a year, general maintenance and upgrades to a home could cost around $150 a month.
PMI Insurance – Private Mortgage Insurance, which is insurance you pay on your mortgage if you don’t own 20% of your home, can cost around $100 a month.

Adding It Up
$950 Extra a month to own a house vs. renting (approximately).

Of course, the numbers above can be drastically different based on multiple scenarios like location, state taxes, and your own personal financial makeup.  But the numbers above are similar to my situation living near Washington DC.

I think everyone should consider buying a home at some point in their life in order to retire without a monthly mortgage or rent payment.  However, the appropriate time to purchase a house might vary for many.  For example, why purchase a home if you never plan on owning it?  Why purchase a home on an interest only mortgage, which is essentially renting the home from the bank plus the added expenses of homeownership?

Factored over time, a savings of $950 a month stocked away and put to use in the markets will make more money in addition to being very diversified.  Don’t get me wrong, a home can increase in value over a quick period, but like many have experienced lately, they can deprecate just as fast.  If the stock market isn’t the place for your money, rent until you can actually afford a 20% down payment, this way you can avoid paying the PMI insurance as well as receive a better interest rate.  Many will disagree, but renting is a bargain and each year that goes by, renting can put yourself financialy ahead in life much faster than purchasing a home.

Having said all of this, I own a home and have the additional monthly expenses : ) $

I recently started a new job; the benefits are different than my previous one.  They offer a 401(K) match, as well as an employer paid pension.  Because they offer a pension, should I even be putting money in the 401(k)?  – Steve

Whatever you can afford to put into the 401(k), I would suggest doing.  You didn’t mention how much the match is for, but I’m guessing it’s around 2-6%.  At the very least, try to put away the exact amount as the match.  For example, if the match is 4% of your pre-tax salary, put exactly 4% into your 401(k).  It may sound like a significant amount, but I think you will be surprised how affordable it is.  Any match is free money from your employer that will grow substantially over time, try to at least match their match!

My current bank offers a decent interest rate on my checking account, but I have noticed I could earn an additional 1.5% if I switch banks – is it worth it? -  Lonnie

I’ve actually asked myself the same question.  It’s very tempting to try switch and always be getting the most for your dollar, but I think the reality is this is probably not worth it.  For one, banks often switch their rates at various times.  So you may find yourself wanting to change back to your original bank, because they are now offering higher rates.  In addition, unless you have lots and lots of money stashed away in your checking account, a 1.5% difference won’t really make a huge difference anyways.  It may be best to hold out and stick with your current bank, after all it’s probably not best to constantly be opening and closing bank accounts.

You guys talk a lot about finances, but what do you do for fun?  – Kathie

Great question!  Obviously I can only speak for myself with this one, but I’m happy to share.  I’m a big Minnesota Twins fan, so currently I spend a lot of time watching baseball.  As unproductive as this might be, I really enjoy it, and it’s cheap!  I’m kind of a project guy, so on the weekends I usually try to keep myself busy.  Whether it’s trying to fix something small on our car, or tackling a home improvement project, I usually find something to do.  My wife and I like to take small trips to surrounding cities like Annapolis and Baltimore for cheap little getaways.  Our next trip hopefully will be a day driving around Virginia taste testing various local wineries.

What software/website do you use to track the gains and losses of your portfolio?  – Anonymous

I use Google’s portfolio.  It’s very simple to use and has the only the basics, which is kind of why I like it.  Also, I like being able to log into my Google account from anywhere and see how my investments are doing versus using actual software that can only be accessed from your home computer.  As of late, I really haven’t like to check on my portfolio at all thanks to the market! $

Feel free to holler at us with any questions you might have!

]]> http://milkyourmoney.com/2008/07/23/mym-mailbag-1/feed/ 0 http://milkyourmoney.com/2008/06/30/is-your-patience-tanking-with-the-market/ http://milkyourmoney.com/2008/06/30/is-your-patience-tanking-with-the-market/#comments Tue, 01 Jul 2008 02:58:47 +0000 Frank http://milkyourmoney.com/?p=313 If you have been paying any attention to the markets lately, then you probably have noticed the huge fluctuations the past couple of weeks.  Key market events, like the Fed’s decision to keep the interest rate idle, and the rise and fall of the price of oil, seem to mean more to investors than companies actual books.  Lately, the market seems to be moving with the cost of oil,  if the market is way up or way down look at the price of oil, it’s almost guaranteed to have swung the opposite direction.  What does all of this mean to us and how should we react? 

We realize that looking at your monthly investment statements is starting to become a drag.  Each month seems to be getting worse.  Naturally, when we see negative amounts in our holdings we automatically feel like selling.  There are times when selling is probably the best option, for example when you sell losses to offset some gains or the company is just really going nowhere.  But for the most part, holding is probably your best option and if you can afford it, purchase additional shares at a discount.  For those of you that automatically invest with each paycheck, you are in the best position.  You are experiencing losses, but are buying cheaper, which in the end will amount to less stress and a decent return.   

Remember, when you sell a security at a loss, you lock in the loss.  In other words, that money went to the left, to the left (Beyoncé anyone?).  There’s no waiting for the stock or fund to recover and this fact is easily overlooked when emotions take over.  In particular, selling off small amounts of securities sets you back in commissions as well, which adds to your loss.  I’m not saying you should hold on and never sell anything, however, when times get bad, your best bet may be to pretend you don’t notice.  Check out a previous post where we discuss the benefits of staying calm when the market falls.  $

Earlier this week, Senator Christopher Dodd (D-CT), Chairman of the Senate Banking, Housing, and Urban Affairs Committee, expressed his less than enthusiastic financial forecast for the coming months during a Securities and Exchange Commission (SEC) confirmation hearing stating, “We have a wave of foreclosures coming after July 1, which may make the first wave look small by comparison.” The first wave, which sent investors swimming, had enormous impacts on not only the housing and mortgage markets, but also student loans, municipal securities markets and beyond. What does a second wave starting July 1 mean for investors and consumers?

You may remember seeing Sen. Dodd in the news this past year as he attempted to oust Sen. Clinton and Obama out of the top spot for the Democratic nominee for President. Although he is not publicly known beyond this role, he is a man of men in the business community. The committee of which he chairs, has jurisdiction over nearly all financial services issues ranging from mortgage reform, financial regulatory restructuring, and nearly all investment matters. Not only does he have jurisdiction, but being the Chairman, any bill he introduces he can immediately markup in his own committee. What does all of this mean? Well, Sen. Dodd has power and the attention of financial leaders around the world. He is in the know and he knows a lot. For the reasons set forth, I believe his forecast for foreclosures after July 1 may be a sad reality.

As everyone knows by now, any bad news is having a negative effect on our economy. With gas prices and commodities up, consumers are strapped for cash and investors have their fingers on the trigger anticipating future losses. A huge wave of foreclosures could mean another buying opportunity for the buy-and-hold investors. It could also mean your home value will plummet yet again, with another house on your block falling prey to an ARM mortgage. The Federal Reserve may be forced to lower interest rates again, although the prospective of this seems slim at the present time. If they do, first time home buyers would be offered a great chance to snag a bargain at a bargain rate. Another wave has the potential to give our economy that final knockout blow that could leave no financial expert claiming we are not in a recession. Whatever the case may be in whatever situation you are in, Sen. Dodd has sounded the warning. I hope he is wrong and I hope we can continue to show signs that the worst of our mortgage mess is behind us, but if he is right, be prepared…$

As we all sit around, glued to our bank accounts, waiting for our stimulus check, the country is hurdling towards an unknown that won’t officially be settled until July. Once the magic “R” word comes out, I would imagine that there is going to be a new shock to the system as a whole. Thats going to happen even without considering when the monstrous ARS issue thats going to hit the federal government to the tune of about $330 billion dollars.

It brings up another important issue that millions of Americans are currently facing. What to do about their home. If you bought your house in the past 3 or 4 years and it has a jumbo loan or more amount on it, then you are probably seeking as much information as possible about what to do to remedy your situation. Let’s discuss some of your options and see what is out there that can help you…

Renegotiate
If you have an ARM and its about to reset, or you just got some bad terms, one option you might look into is simply calling your mortgage company and begin some discussion about reformatting your loan. Many times, they have done things that aren’t even legal anymore and you were grandfathered in and they are taking money unfairly. Granted its every buyers responsibility but it takes two to tango. Lenders should now be in the position of trying to appease their customers and bending over backwards to keep you. In theory, they should be more than willing to renegotiate your terms and have everyone come to a new agreement. In theory.

Refinance
A more specific goal in the renegotiation process, would be to refinance. But, you are thinking, Isn’t it too late? No. No it is not. Rates have never been lower and banks have never wanted your business this bad. I can only imagine that given the right circumstances, they would want to keep you in your house as long as possible because at least its consistent. And if you are still the owner, the probability of you trashing it on your way out is much lower. In addition to going back to your original lender and telling them the deal, shop around. Where one lender might have a crazy scheme that sounds like a fool proof plan, find out if that is best-practice. See if you can get hold of someone knowledgeable and that you trust and ask them about the terms of your new loan. Refinancing is little expensive but it beats selling right now. Its very similar to when you consolidate a credit card: one card company basically pays off all your debt and you owe a new group at, hopefully, a more favorable rate.

Government? Help?
So what is the US Government doing to help out these home owners? Well they are trying to do quite a bit. I am not going to muddy things up and start an endless, irrelevant discussion about my personal politics here in this venue so I will stick strictly to the facts. The Democrats have been cranking away on a bill that would rescue quite a few homeowners at risk of foreclosure. Their ultimate goal is to slow the rate of foreclosures and trying to do something about the “sliding of home prices.” Not only has Barney Frank (D-Mass, the author of the Bill) made every effort to appease the current administration, but there is a majority of Republicans that are in favor of it as well. Even Bernanke is a fan of it and would like to see it go through. But President Bush would not. In fact he has threatened to veto this Bill “if and when it reaches his desk.” The reasoning for him is that it would constitute a “bail-out.” Bear-Stearns got a $30 billion bail-out, why not the taxpayers and hard working people of America? “It would reward speculators and lenders,” is Bush’s reply. There must be another reason that we don’t know about. Without tipping my hand as to what side of the political fence I am on, thats all I have to say about that. I can see both sides of the aisle.
[UPDATE: The House officially passed the Mortgage Bill...Watch as Bush vetoes it.]

Selling
It boils down to a sludge. If none of the above options are available, then it still might be best to due what you can to increase your income and muscle through it. I think that option is better than selling. Selling right now just seems to difficult and too expensive. If you are having a local financial crunch, and have paid a small fortune already, and would end up selling at a loss, THEN on top of that paying a realtor 5% of your selling price…You have lost much more money than if you refi/reformatted OR got another job and scrimped through this mess. Its hard to say that selling is even a last resort at the moment. Give it a year and see what happens…

For years, the United States Government has encouraged citizens to become homeowners, primarily with tax incentives like deductions from mortgage interest, mortgage points, and property tax.  However, if the U.S. Government was held as a fiduciary by encouraging home-ownership, our tax breaks might subside based off recent numbers highlighted in a recent Washington Post article comparing home-ownership vs. stock investments. 

As you can see from the figures below, $48,700 invested in 1978 would appreciate to $700,266 via the stock market compared to a low $169,200 invested in a home.    While the numbers heavily favor stock investments, home-ownership has its advantages not easily measured in dollars.  Likewise, investing primarily in stocks has major upsides like no upkeep.  Considering these silent advantages, what is the best investment?   

                       1978 Initial Investment

Home Price                                                  Stock Investment
(median)                                                            (S&P 500)
$48,700                                                               $48,700

                         Returns Through 2007

5.3%               Average Annual Returns               9.9%
—————————————————————————–
347.4%                  Total Return                          1437.9%
—————————————————————————–
$169,200       Equity Appreciation         $700,266

Source: National Association of Realtors

Advantages to Real Estate

 Taxes.  Tax bills have been significantly reduced thanks to changes in the tax code allowing homeowners to deduct various expenses associated with purchasing real estate including: mortgage points, property tax, mortgage insurance, mortgage interest, and home equity loan interest.   

  Equity.  When a home appreciates, it allows for a low cost borrowing method coming in the form of a home equity loan, which is also tax deductible.  When stocks appreciate, they appreciate, that’s all.  Arguably, this could be considered a disadvantage because whenever borrowing is involved, interest is going to banks and not into our wallets. 

 Low-Cost Living.  A major advantage to purchasing a home is eventually, you will own it.  Once a home is paid for, usually 30 years after the purchase, a significant part of a budget is freed, thus allowing the extra money to be invested in other ways.  However, this advantage is wiped away when people continually sell their house in an attempt to “trade-up,” to a bigger more expensive home.       

Advantages to Stocks

 Smooth and Simple Transactions.  Buying and selling a stock can cost as little as $4.  In contrast, selling a home can cost thousands – especially in down markets where the seller bears the bulk of the closing costs.  Assuming to purchase a $300,000 home, a buyer pays an estimated 2 % of the home’s value in closing costs and also pays an additional 5% when selling the home in real estate commissions.  Adding up the total amount paid to buy and sell a home with these percentages, is around $21,000.  If this $21,000 was instead invested into the stock market over a 20 year period, could potentially grow to $103,000, assuming an 8% return.  I feel that these closing and selling costs are often grossly overlooked because the cost is either hidden in a mortgage payment or in equity – money is money especially when the compound interest is working in our favor.

 Diversification.  With the purchase of a simple index fund, an investor has the advantage of being heavily diversified over hundreds of companies involving multiple sectors of business.  Whereas with the investment in a house, a homeowner has all of the investment in one basket.  A fire, flood, or multiple foreclosures in the area could wipe away your home’s equity or significantly reduce it.  This is why stocks offer great for hedging against losses with easy diversification.

 Liquidity.  Stocks have a great upside and that is they give us confidence in knowing the price they reflect, is accurate to the price we will receive when selling.  Unlike homes, where you can list your house at a certain price, but actual profits are determined by the buyers and the market. 

 Hassle Free.  Stocks don’t require new roofs, heat pumps, and paint.  The ease associated with owning stocks is as easy as your emotions allow.  These additional costs involved in home upkeep have the potential to raise the overall value of the home, but like with closing and buying costs, would be worth more if put into the stock market instead.$   

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Improving and maintaining your credit score is one of the best ways to qualify for lower interest rates, acquire credit, and reduced insurance premiums. However, the majority of us don’t keep a close enough eye on our credit scores and frankly probably don’t understand them. How your credit score is actually determined is a topic for another post, but today we feel it’s important to give everyone a few methods to improve your current score and if you’re lucky, maintain a high one.

Pay Your Bills on Time
A significant portion of your credit score is determined by your history of making on time payments. Missing just a couple payments can knock your score down and which only time can heal. Do your best to get into a routine when it comes to paying bills, or better yet, organize your bills with online bill pay.

Keep Credit Balances Low
It’s good to use your credit, but not all of it. You will hear different percentages of how much of your credit you should actually spend, we think around 35 percent is a good number to try to stay under. In other words, if your credit card balance is $5,000 try not to charge more than $1750 on it. This shows that you have credit, but also restraint from blowing it all.

Don’t Cancel Your Oldest Cards
Another factor weighed into your credit score is your credit history. Because of this, you should try to keep your oldest accounts open to show that you are a good long-term customer. Even if you are not using your oldest cards, you will benefit by not closing the accounts.

Try to Avoid Pulling Your Credit
Each time you apply for a credit card or get a quote on a loan, your credit is pulled to help determine the amount of money a lender should give you as well as what interest rates. If you have an excessive amount of inquiries, it will negatively affect your score. It’s good to remember that shopping for loans is not a bad thing and is actually encourages, but try to keep your inquires within a 30 day window.

[Ben's Note: Don't forget that you are entitled to 1 free credit report a year and that there are 3 credit scoring bureaus; TransUnion, Experian, and Equifax. One more thing... MyFICO has a great deal of information in addition to a nice little widget on their front page that shows what your payments might be based on the loan amount and where you live against a spectrum of potential FICO scores, it really shows the difference in payments with a shift in your score! Read all about it.]

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In a recent post, which you can view by clicking here, I broke down a recent offer my student loan lender, Iowa Student Loans (ISL) has presented. Because of the recent turmoil in our credit markets, the Federal Reserve has been cutting the Federal Funds rate, which for many has been a good thing. These cuts have meant better rates on mortgages, credit cards, and auto loans. However, it’s possible that your loans are actually moving in the opposite directions as the rate cuts – which is the case with my student loans.

My current private student loan rates are based off a benchmark called the Cost of Funds Index (COFI). This particular index has soared in the past couple of months, which has pushed my student loan rates from around 8% three months ago to about 13% as of April 1. Because of this drastic raise in rates, ISL has actually offered all of it’s borrowers a chance to amend our original contracts to follow a different index, the 3 Month London Interbank Offered Rate (LIBOR). Currently the LIBOR rate is about 2.68% – ISL adds an additional 2.70% to the LIBOR rate to calculate the rate they will offer. Thus, my current rate, if I change to the LIBOR index would be 5.38%.

You can read more about how your student loans rates are set here.

As I mentioned in an earlier post, the decision seems so obvious, which is exactly why I’m a little hesitant to amend my original loan. However, after doing some research, I have determined changing to the 3 Month LIBOR index is by far, the correct thing to do. As you can tell from the 3 Month LIBOR history chart below, this particular index reached a high of 6.684% since 1998 – even at the highest point in the last 10 years, my rates would be 9.384% (with the 2.70% added). Although this rate is still high, it’s nearly identical to the rates I have been facing anyways during the past couple of months.

I was originally hesitant to sign; because my thought process was that the rates are about as high as they will ever be (barring any more rate cuts) which in the long run my rates would slowly go back down. Although this is probably the case, the huge drop I see right now by far outweighs this long term approach, because even if the 3 Month LIBOR reaches it’s high of 10 years ago, my rate would still be reasonable and I would have had the benefit of paying off more principal during the low rate months while I have a larger balance.

I will continue to pay the current amount I budget away for my loans regardless of the dramatic reduction I will have due each month, this will allow me to take full advantage of this kind offer from ISL (I didn’t realize until researching, that ISL is a non-profit). I feel as though I have caught a major break with this offer and I plan to take full advantage, it looks as though this change will allow me to cut years off my repayment. Thanks ISL! $

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Every month we will gather up some of our most well received posts and quotes, in case they were missed as well as to give some financial highlights to consider for the month ahead. We will also discuss some of our sites traffic activity. Have you subscribed yet?

So this is our second month of “real” traffic on a “real” site. Things really got much better and our message has reached far more now that we have been more established on our own domain. The advantages of getting away from Blogger are pretty good although Blogger had some really nice attributes as well. I am able to better expand us graphically here however and we have more control.

Last month we received well over 3,500 visitors and had moderate subscription levels. Now let’s talk about March…

Visitors: 16,948

Page views: 39,844

Comments: 63

As a reminder, we do our best to post daily (before noon) and we encourage our readers to submit any financial questions that they would like discussed. You can ask us just about anything financially related and we will research and let you know the ins-and-outs, with the goal of milking the most from your money! Here is a quick list of some of the best articles for the month of March:

3/19/2008 Five Common Money Mistakes to Avoid
Here are five common mistakes that we want you to be sure you watch out for…

3/26/2008 Don’t Pay Interest on Items That Lose Value
New vehicles, vacations, credit etc…

3/18/2008 Your Economic Stimulus Rebate Check is Scheduled for Departure
What are the last two digits of your SSN? This is where you will find out when your check will arrive…

3/12/2008 Analysis of “The 11 Principles” by Money Crashers
A must read for everyone who would like to know the simplest principles for milking their money…

This is not an April Fool’s Joke…for that, check this out. And this. $

Our current housing market, which is giving homeowners around the country financial headaches, is providing a grand opportunity to a certain class of potential buyers – first time homeowners. One man’s trash is another mans treasure is a saying that accurately reflects our current housing mess. Aside from those with a substantial amount of cash reserves, which allow them to take advantage of our down market, first-time home-buyers are finding their unique situations more than ideal.

Large Selection + Dropping Home Values + Low Interest Rates + Little Buying Competition = Happy Potential Homeowners

Take Your Pick
The tidal wave tsunamis of foreclosures and the down market has put an increasing number of homes on the market, but with no buyers, which gives potential homeowners an incredible selection of houses to choose from. First-time lookers are able to concentrate their efforts on homes they truly want. No longer are they feeling forced to make quick decisions that they could ultimately regret. Buyers are now able to coast into their closings 100 percent sure that they are making the correct decision, which is something that has no price tag.

Prices and Interest Rates are Down
In an attempt to help stimulate our economy and put more faith into our credit markets, the Federal Reserve has continually lowered interest rates in the previous months. This has left home-buyers with not only an increased selection to choose from with low price tags, but low interest rates that we could only dream about a couple years ago. If you consider all three of these variables, you can see why first-time home owners should be excited – nearly everything they could wish for is the reality our markets currently provide.

In the Drivers Seat
Low home prices, low rates, a large selection, and little buyer competition offer first-time home owners the chance to drive a potential sale in their favor. A good example of this is demanding the seller to pay for various cost associated with buying, like closing costs. Closing costs are a major hurdle for fist-time homeowners to cross because of the substantial amount of money needed to put down for decent mortgage rates or for much needed immediate house rehab, all of which could potentially leave no money for closing costs, which can be a real deal breaker. With little home buying competition, the buyer can demand that these costs be a burden on the seller, as well as other costs like home inspections and appraisals.

I encourage fist-time buyers to pull the trigger and take advantage of our current credit crisis, after all, the ultimate goal is to buy low and sell high. $

At this time last year; we were all enjoying money market returns nearing 5 percent. Many were not only parking their money in these liquid funds for emergency cash, but using them as active investments. Unfortunately, one of the downsides of the Federal Reserve’s recent interest rate cuts is the declining returns money market funds provide. Currently, money market funds average a staggering 2.5 percent – a number that hardly outpaces inflation, but should we even care? In my opinion, the answer is without a doubt, no.

Emergency Funds are NOT Investments
That’s right, I said it – emergency funds are not investments. Emergency funds, which should typically hold at least two months worth of living expenses, are intended to serve as a last resort to unavoidable life situations. Whether your emergency fund is earning 5 percent or 2 percent, it doesn’t matter because the liquid safety net these funds provide us, by far outweigh the slight increase or decrease in yielding amounts.

Avoid Looking for Higher Returning Savings Vehicles
Try to get over the fact that your emergency fund seems to be losing money when taxes and inflation are factored into the equation. Don’t be tempted by different financial offers to park your savings in CD’s or by purchasing bonds. By reallocating your money into these higher returning vehicles, you are forfeiting the essential purpose of your emergency fund, which is liquidity. You never know when your savings is going to have to be tapped into; a life changing event could unfortunately be around the corner, which is why it is important to be insured. Emergency funds essentially serve as a premium-free insurance plan, by allowing you to save by paying yourself month to month. Even if you need your savings to make a property tax payment, you need easy access to this cash, which money market funds provide.

When times are good and your emergency fund is earning a surprising 5 percent, consider it a bonus. When times are like the current, swallow your smaller returns and take confidence in the insurance your emergency fund provides. $

Today, the Washington Post reported that, “prices have risen 9.2 percent since 2006 for the groceries, gasoline, health care and other basics that a middle-income American family has little choice but to consume.”  Usually I would be happy with a 9.2% raise, but apparently, Americans need this just to keep pace with purchasing everyday essentials.  Obviously, this drastic rise in inflation – especially for must have items – will not continue, but it’s important to take precautions now, to help us currently fight the increases and prevent us from feeling the pinch down the road. 

Should you Ignore Inflation? 
Inflation is inevitable, although there are steps the Federal Reserve and others can take to try to tame inflation, it will and must occur.  The recent interest rate cuts by the Federal Reserve are intended to aide our economy from sinking further, do to the current credit crisis.  However, by making credit more readily available, inflation is always a legitimate concern.  So, should we even worry about a problem we cannot control?  Worry may be the wrong word, but we feel it is necessary to keep inflation in mind when you are doing your financial planning and budgeting, but it is not everything. 

Adjust Your Budget to Accurately Reflect Inflation Concerns
For the most part, inflation increases are reasonably low and do affect on our bank accounts, however, unless you compare your receipts from the previous year, the change would probably slide under your radar.  Because money can leak away from you with these small increases, it’s important to track your spending habits with an active budget.  In addition, increase the amount you budget for everyday items like food, gas, and health care.  If you are not adjusting your budget to accurately reflect changes in prices and spending amounts, it will be hard to ever spend within your budget, thus proper savings will never occur. 

Inflation Concerns with Retirement Planning
I’m sure you have often heard the argument against having money placed in low yielding CD’s or money market accounts, because after inflation is adjusted into your earnings, the actual amount pocketed turns into a poor investment.  While this is true, I think it is important to look at the bigger picture.  Inflation will technically eat into returns on any investment; the most important thing is that we are actually investing.  The biggest battle for many is just getting started; inflation should be the least of your worries when it comes to starting a retirement account.  At first, we should worry only about variables we can actually control, like seeking out low expense ratios and commissions. 

As for lower yielding savings vehicles, I feel it is again important to ignore short-term inflation concerns.  We need emergency funds in liquid accounts like these, and smaller interest rates come with the territory of short-term financial security.

Some times, more important than inflation concerns and annual yielding amounts are that we are taking the necessary steps of putting money away in order to properly plan for our futures.  For the most part, let the Fed worry about inflation after all, that’s what we pay them for.  $

MoneyCrashers.com has an article a list about a few principles regarding money and we would like to address them.  Over all, its a great list.  Feel free to comment!

1.  Always spend less than you make.
Naturally, this is in first place as it keeps the saver moving in the right direction, regardless of how fast or slow.  By setting up a budget and keeping to it, your options down the road are far more substantial and lucrative.  Lets face it, if you even want to stand a chance of reaching your financial goals, spending more than you make will never get you there, so stop it! 

2.  Do not believe in money myths.
Research, research, research.  Take everything with a grain of salt and don’t believe anything until you have read or heard from either the source or someone equally reputable.  There are a great deal of myths out there dealing with money and of course if a deal sounds too good to be true, you can bet that’s the case.

3.  Get out of debt and stay out of debt.
This is most important in the early stages of getting on the right track with your finances.  Always keep this in mind when contemplating purchases.  The best thing to consider, I feel, is to explore the long term effects:
     a) Is there an interest rate?  If so, for how long?
     b) Will this put me into debt or overdraw my account?
     c) Can I live without this item for two weeks or is it an impulse buy?

4.  Save money for the unexpected
Murphy’s Law states that if something can go wrong, then it will.  Life pops up sometimes and really gives it to us and we have a responsibility to be prepared.  There’s no reason not to prioritize an emergency fund.  You will be glad you did and you will then have ample time to rebound from it successfully.  Remember, it is probably better to make payments on a debt and keep a couple thousand in the bank, than it is to withdrawl the money to pay down the debt. 

5.  Pay for education with cash.
We could probably write a whole other site on student loans, or at least a few posts.  Student loans are normally taken when a student is excited and has a ”fake money” approach to borrowing because payments are deferred and its one of those “out-of-site-out-of mind” type things.  Well, those loan companies are going to come looking for all that money about 6 months after you graduate.  One of the worst things for your credit is to default on these loans.  Be diligent about it and take any extra disbursements and give what you can right back.  You will actually save yourself quite a bit of money in the long run and have a huge leg up on your net worth.

6.  Find creative ways to boost your income.
Another quote I like is “What you do on Saturdays is what puts you ahead of the competition.”  Is there anything you can think of that you do really well?  Write about it!  Even the tiny trickle you can get from Adsense will pay for it and you will learn a great deal?  What about eBay?  Is there anything you can sell?  You might even buy certain things and resell them for a profit.  There are about 40 trillion sites out there dedicated to this very topic.  The idea is that we are all given time but it comes down to what we devote our time into.  Preferably, it turns out to be lucrative. 

7.  Invest for the long-term and keep it simple.
Automatic investing will be your best friend for this.  Find out what monies you might be able to live without and get it deposited into something.  Even if your parking it at first, as long as you eventually get that money working for you, you will be far, far better off than if you hadn’t.  The important thing to remember is to NOT touch it.  No matter what.  Even if its in the stock market and the value drops:  Don’t be emotional about it, have faith.  Remember that for long-term investing, a drop in price is actually good: Its on sale!  We also recommend heavy research in stocks unless its an index or ETF.  Google Finance is a great free tool.  Consider reading an early post on the subject titled, “When the Market Falls, Don’t Panic.”

8.  Educate yourself about real estate, cars, and financial products.
A little redundant since we already talked about doing tons of research, but this also refers to investing in yourself some.  With knowledge.  Being an informed user of real estate, cars and other financial products can only benefit you.

9.  Avoid scams and financial predators.
Your bank has not lost your account information.  There is absolutely no one in Nigeria that needs your help moving millions.  Any email that inquires for you to log in right away is trying to spoof your identity and walk off with all your hard earned money.  Be wary of links that don’t match when you hover over them.  Its very easy to have a link say one thing and go somewhere else and pull the images from the real site.  When you suspect something, close the email or browser and go to the actual sites: if its for real they will put a message on the main page of the site.  But for the most part, be skeptical and educate yourself.  Getting your identity stolen is an awful violation that you need not be a part of.

10.  Give, Give, and Give more.
I would say that this applies when you have some extra money and are aggressively maintaining assets that have no place to go.  When would this happen?  Well keep in mind that there are those that are not as fortunate and it feels good to give.  Just be sure that you won’t be hurt financially by it, in the sense that it can cause debt or missed payments.  Giving when appropriate will also be your friend during tax time.

11.  You and your spouse are a team!
One of the leading causes of divorce is due to money.  You have to be united to be successful; not just in money but in most things.  It can strain a relationship where you are working hard toward a goal and your significant other removes all your progress with what seems like carelessness.  Communication is key here.

 Any thoughts on this?  $

Quotes have the potential to inspire people to make changes in their lives for the better or to keep them on their chosen path.  As passionate as we are about our writing, we know others in the world simply say things better.  Having said that, we have picked five financial related quotes that we hope will open your eyes to the power of money and perhaps, give you a different and positive financial outlook.    

“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope
Now that the U.S. finds itself in a credit crunch, due in large part to banks lending money to people that could not prove they didn’t need it, the quote by Bob Hope should help redirect us.  Banks are now taking action to tighten up their lending practices, which will eventually have a positive impact on our economy.  In the meantime, interest rates are lowering to help balance our troubled markets, read our post titled, “The Federal Reserve Interest Rate Cuts and Home Refinancing,” to see if you should take advantage of the lower interest rates.

“I have never been in a situation where having money made it worse.”  – Clinton Jones
Perhaps being mugged would be the only situation where having money could make things worse.  Money is not everything in life, but being financial secure and confident can dramatically change your outlook on life.  For fun, leave a comment on our post titled, “What Would You Do With $1 Million Dollars?,” I’m sure there are a few ways in which a million dollars could make your life easier.

“Time is more valuable than money.  You can get more money, but you cannot get more time.”  – Jim Rohn
Like we mentioned before, money is not everything, and this quote is something everyone needs to be reminded of, including us.  Taking time now in your busy life to arrange for saving for your future retirement can really take working years off your life, which will leave time for you to spend with the ones you love doing the things you love.  Consider participating in your employers retirement plan, read about the advantages of doing so in our post titled, “Participate in your Employers 401(k) Match Program.” 

“The art is not in making money, but in keeping it” – Anonymous 
Perhaps it’s fitting that the author of this quote is unknown considering many of us have made a substantial amount of money in our lifetime, but where it has gone is unknown.  Just as important is getting a solid education and job, so is saving and investing.  Hold yourself back the next time you feel the need to purchase something.  Try the two-week rule, if you still really want an item after two-weeks of pondering, it’s probably something you can feel secure about buying.  Save some money on new purchases by reading our post titled, “Five Things to Buy New and Five Things to Buy Used.” $

This topic is not really in line with saving day to day or financial managment, but since its Friday, we thought we would have a little bit of fun.  Shown below, is a couple that won $270 million dollars and looked as though it was an inconvenience.  Very entertaining to watch to say the least.  So the question is…”What would you do with just $1 million?  How would you  spend it?”

Ben:

I think that given the tax bracket would be ramped up due to higher income level on a lump sum, I would elect to get them in monthly payment.  Given that, the first thing I would do would become debt free as fast as possible.  Pay off my car, student loans and the little bit remaining on my credit card.  After that, I think I would split the rest between a high interest savings account and an IRA and some long term ETFs.  With even a fraction of that, you could be very comfortable with simply the interest that would be generated.

If it were more I would take a hard look at real estate.  Prices are dropping as the bottom is getting knocked out of the whole market and with that much capital it would be easy to swoop in and snap things up when the winds of change are more favorable.  With anything I came up with I would be turned around and rent out for some passive cash flow.  I was tihnking some vacation apartments.

But given that it would only be 1 million dollars, I would not quit my job.  Inflation is too intense for me and given the state of the economy, it would not be wise to do so.  Now 500 million…that’s a different story.  What would you do if you won the lottery?

Frank:
First, I’d buy Ben a green dress, but not a real green dress that’d be cruel. In all seriousness, if I were to win a million dollars today, the decision on what to do with the money is easy. A windfall of cash as big as this, represents two things to me: 1) I can now live debt-free and 2) early retirement. When I look at my long-term financial goals, these two items rank at the top and are basically stand alone.

Debt Free
Unfortunately, both my wife and I went to an overpriced private college which we are paying for now. Speaking for myself, I do not regret the decision completely, as it has led us to where we are today, and in my opinion, this is a good place. Having said that, we are now left with a substantial amount of debt to pay off, which a cool mill will come in handy. My wife and I are lucky enough to have no credit card debt, as well as do not have an outstanding car loan. Therefore, the only debt we have coupled with the student loans is our home mortgage. Although there may be a benefit to invest all of the money to hopefully earn about 8% annually, and continue making payments on our low interest federal student loans payments month to month, which have an interest rate of 3.5%. The reason for this is the interest I could potentially receive from the investments would be greater than the amount of interest I would be paying on my loans, thus more money in the bank. The reason I would not go this route is because in my opinion, the “phew” feeling of being debt free, has no price tag.

Retire Early
Currently, it’s safe to say, depending on your lifestyle, that a million dollars is enough to retire on at age 55. I would love to retire at age 55; however, with this extra cash in my lap, I could conservatively expect to reduce this number to age 45. Yes, I would continue working and living moderately in order to retire at age 45 with some luxury. Assuming after taxes and paying off debt I’m left with about $500,000, I could invest this for twenty years with an 8% earnings and retire at age 45 with $ 2,667,862.49 (remember, this amount would continue to earn interest, likely faster than I could spend it). Sound good to you? I wouldn’t get risky with the investment; I see no reason to not invest in a low-cost index fund. Why try to beat the market with a free huge windfall of cash like this? I’m going to take it, invest it, and relax knowing that in twenty years, I’m done.

Now, back to reality, see ya at work on Monday.