There's a change in the air, hopefully...

As 2008 draws to a close, many are fearful of what next year holds in store for us. As an observer of the recent financial crisis, I am optimistic that many of us are beginning to awaken to the poor financial decisions that got us here in the first place. As we gradually feel the hangman’s noose of our financial creditors tighten, we've started replacing ill conceived spending habits with prudent ones. This past summers grossly inflated gas prices provided an additional wake up call, as we were forced to begin making choices on how best to spend our finite incomes.

It might come as a surprise to learn that not everyone is panicked by this recession in which we find ourselves. Folk’s recessions are going to happen, so you might as well get used to them. The economy is cyclical. It expands and contracts in a constant battle to find a balance between supply and demand. Right now we are in a period of contraction. A period for which a select few have prepared. So, what does one do to prepare? You live within your means and save for a rainy day.

"Living within your means", means to stop spending money you don't have. Aside from buying a house, if you can't pay cash, you can't afford the item. If you want, or need the item, save up your money and buy it! Stop playing the credit card shuffle and begin making plans for your money. Imagine your life without payments. No mortgage, car loan, credit card bills etc. It is possible! Make a New Years Resolution to stop borrowing, begin paying down debt, and prepare for the future. For more on budgeting, check out www.longrunfinancial.com and click on the "Financial Services" tab.

Reality Check

So, it’s happened. Unprecedented in our lifetimes is the financial crisis that’s upon us. It is amazing to me that so many were caught off guard. As a steward of my client’s money, I must admit that I too have been amazed at the depth and breadth of this global event. And, it continues to spread like cancer to all corners of the globe.

For the past several years, much of the investing advice has been to allocate a larger, and larger, portion of our portfolios to other regions of the globe. The prevailing ideology has been that the overseas markets aren’t as closely linked to the US as in years past. That is, that they are capable of sustaining themselves. As it turns out though, much of the overseas growth can be attributed to the ever increasing consumption by the American Consumer. Now I’m not an economist or statistician but consider this, over the past decade thousands of jobs have been shipped over seas. The recipients of these jobs are spending their incomes on goods in their own respective countries. This increased demand for goods has in turn created additional jobs in these regions. I know this example is simplistic, but it appears to me that much of the economic growth in the developing world has been fueled by America’s hunger for cheaper goods and services. As the US has fallen into a recession, growth around the world has ground to a halt.

I was reading an article today that discussed China and how it’s been buying our Government bonds with its new found wealth. Understand folks, that when an entity sells bonds (in this case, the US Government), it is essentially borrowing money, money that must eventually be paid back. Now where do you suppose our Government gets its money? Yep, that’s right, by printing more money, and taxation. Guess who pays those taxes. Uh huh, you and me! Now I’m not going to say that China is currently doing that well, but they are now sitting on billions of dollars compliments of the American consumer. How’s that for a transfer of wealth?

Now we have a new problem. The average American Consumer is tapped out. We simply cannot sustain the standard of consumption to which we’ve grown accustomed. This can be evidenced by the unprecedented amounts of debt, and the negative savings rate of Americans. As you know, I wasn’t a fan of the Government’s $700,000,000,000 bailout. The reality is that the credit party is over. The Government has simply paid the band to play on for another hour, or so. It may keep the guests (American Consumer) happy for a little while longer. But eventually it’ll sink in, if it hasn’t already.

The credit markets meltdown

It was disheartening to see the Government pass the $700 billion bail out plan last week. Supposedly, the intention of the plan is to stabilize the credit markets and ultimately restore the American consumer's ability to get the credit that we "need" and "deserve". Immediately after the bill was passed by the Senate, and prior to it's passage in the House of Representatives, one misguided senator justified the Senate's decision by explaining that if consumers were unable to borrow money, they would be unable to purchase goods such appliances and other household items. What I'd like to know is, "What ever happened to paying cash"? Credit Cards didn't even exist prior to the 1970's, and yet many of us are so frightened by the prospects of being denied credit, that we are willing to give even more power to the Government. Yes, we might have been given a brief reprieve, but creative financing and credit extensions are not the solution to our long term problems. And, as we shift personal responsibility from the individual to the Government, we are yet another step closer to Socialism.

No Load Mutual Funds vs Load Mutual Funds ,and the on-going debate.

What are the differences between No Load Mutual Funds and a Load Mutual Funds, and which is better?

No Load Mutual Funds are mutual funds that don't carry a sales commission. They're typically found at discount brokerage firms and can be purchased directly without using the services of a broker.

Load Funds carry a sales commission and are sold by Brokers or other Financial Professionals employed at full-service brokerage firms, banks, and other institutions. These funds are typically available to individual investors in 3 share classes:
• The A share carries an up-front sales charge to purchase the fund. This charge usually falls within 4.00% and 6.00%. A person spending $1,000 to purchase A shares in a fund that has a 5% sales commission would be investing $950, after paying the sales charge. Load Funds also have a fee called a 12b-1 fee. This fee continues to pay the broker between .25% and .35% annually until the fund is sold.
• The B share has no up front charges, but carries a back-end load that diminishes over time, usually 5 or 7 years. It also has a higher 12b-1 fee imbedded in its annual cost. After the fund is held for a specified length of time, the 12b-1 fee is reduced to that of an A share. Like the A share, this fee continues to compensate the broker until the fund is sold. Since it carries no up front charges the B share looks more attractive than the A share, at first glance. But, the selling restrictions and higher 12b-1 fee makes the B share less preferable than the A share.
• The C share carries no up front sales charge, and has a level 12b-1 fee of usually 1 percent. This fund must be held for a specified period of 12 to 18 months, or the buyer is subject to a back end load. The 12b-1 fee remains at 1 percent until the fund is sold.

No Load Funds and Load Funds both have underlying administrative fees. These fees defray the operational costs of the mutual fund companies. Which type of fund to purchase depends on the individual investor. If you are a do-it yourselfer, understand or are willing to learn about investing, and are cost sensitive, then No Load Mutual Funds are the likely candidate. On the other hand, if you believe that your broker has your best interest at heart, you don't understand investing and aren't inclined to learn, then perhaps Load Funds are more suitable.

I would like to offer a few words of caution. All mutual funds, both load and no load, are basically invested in the same "stuff", i.e. stocks and bonds. The returns on the underlying investments are the same whether you own a No Load Fund, or a Load Fund. For this reason, the investor should be price sensitive and aware of what he is actually paying. Over the long run, the erosive effects of fund expenses and sales commissions can be detrimental to a comfortable retirement.

The trouble with commissions

I began my finance career working for a major brokerage firm as a Financial Advisor trainee. The first phase of my job was to obtain the licenses to sell investments and insurance. Upon receiving my licenses, my next task was to obtain clients and create investment portfolios with the numerous products available through the firm. Along with my peers, I was given a sales quota, a desk, and a phone. The firm appeared indifferent about which investments were selected, it's concern was only that I produce. The company had a variety of investment products that paid varying degrees of compensation to me. So far so good...

As I commenced the process of gathering clients, I began to experience internal conflict. Early on, I had decided to use a fee-only platform in which clients were charged a flat fee rather than a commission. I was having some success with this platform, but found myself discounting fees to a level that I believed was appropriate. I noticed that some of my peers were selling Annuities which carried higher commission rates than other Investments. Still others were selling a more expensive share class of mutual funds than was required. It dawned on me that this was an inherent flaw built into the Advisor pay structure. In the area of self-interest the incentive to use higher commissionable products was creating a conflict of interest between the broker and the client. The question arises, " Is the investment I'm selling to the client in his best interest, or is it in my best interest. After several weeks of agonizing over this issue, I decided to exit the firm and seek a model that was in-line with my value system.

Retirement Number

I recently read an article discussing the ING television ads which show people performing their daily activities while carrying a sign under one arm. On each persons sign is a 6 or 7 digit number that represents that persons required nest egg figure. The author explains that rather than focusing on a specific number, the saver should focus instead on how much income will be needed, and then plan accordingly. He suggests that the reader use an online retirement calculator to derive his specific income need based on various data inputs.

I agree with the writer that focusing on retirement income makes more sense than trying to derive your magic nest egg number. But, I would challenge the reader to take the concept a step further. Based on my experience with clients, it seems that their main concern is to maintain the same standard of living post-retirement that they was attained during their working years. For many, this will present an enormous problem. In attempts to maintain present lifestyle demands, many are postponing their retirement savings. And, as lifestyle demands continue to increase, current paychecks have become barely sufficient to keep up with the monthly bills. Many are subsidizing their financial needs through a variety of methods including refinancing, home equity loans or lines of credit, borrowing on credit cards, and financing as much as possible. Such demands on present and future income makes calculating a retirement income an unrealistic fantasy.

So, here's the challenge. Suppose that you have no mortgage, loans, or monthly credit card or car payments. Run the calculator again (without all of these payments) and you'll discover that your retirement income requirements are dramatically reduced. Retirement begins to look like a tangible concept that almost anyone can achieve.

The following steps provide the means for you to lower your present and future income requirements:

(1) Separate your wants from your needs.
(2) Stop borrowing money.
(3) Develop a budget and stick to it.
(4) Pay off your debt and stop creating more.
(5) After your debts have been eliminated, begin saving as much as you can for retirement. Ten percent is a good place to begin.
(6) Persevere

I agree that this process appears to be too simplistic. But, implementing the process and seeing it through presents quite a challenge. However, I can assure you that it is an endeavor that is worthwhile, and one that will increase the odds that you attain the retirement of your dreams.

Why should I plan?

Financial planning isn't simply about socking away as much money as you can during your working years and then hoping that you don't run out in retirement. Rather, it provides a means to attain the things that are important to you in the present and throughout your life. Not too long ago, I read a quote that went something like this; "If you fail to make a plan, you'll be working for someone who has a plan for you." Now, if you're one of those few people who actually knew what they wanted early in life and then went for it, then this quote likely doesn't apply to you. For the rest of us, it rings true. If we take it a step further, we find that this message applies to many facets of our personal lives as well. While businesses spend countless hours and millions of dollars annually to find ways to get us to part with our money, most of us toil away at jobs we don't like to pay for things that we don't need and all the while wondering why we're unhappy. Happiness isn't found in the accumulation of stuff and at the whims of creditors. Rather it's found in taking control of your life and being responsible for your actions. Begin living your life on purpose. Develop a plan, and discover how rich and fulfilling life can be. In doing so, you'll stop working for creditors and begin working for yourself.

So, what wrong with making payments ?

Most of us are currently making payments on items for which we couldn't pay cash. So, what's wrong with making payments? For some of us nothing. But, for most us a lot! Here's the problem. Making payments has become a way of life for many Americans. Many are so mired in debt that it is robbing us of our financial peace. Now, my concern isn't about mortgages, rather it's about the average American's addiction to debt. Instead of asking how much something costs, we begin by asking what the payments will be. When I was a child in the 1970's, the extent of most peoples indebtedness was their mortgage. In the 1980's, as the price of auto's increased, financing became more common. Credit cards also began gaining in popularity since they made items that for most of us were unaffordable, affordable. We no longer had to delay our satisfaction!
Fast forward to 2008, it's now normal to have two car notes, a mortgage, a second mortgage or home equity loan, and several credit cards. Most households require two incomes just to stay ahead of the creditors! And, you'd better not be late on the payment or your rates will sky rocket. Many people believe that they are in so far over their heads that there's no way out. So, what are we to do? We've got to get back to money basics, which include spending less than you make, saving for emergencies, budgeting, and delaying gratification. If you're unsure of where to begin, here's the first step, "Stop Borrowing !"

So, how much should I be saving for retirement?

You're told that should be saving as much as you can for retirement. So, you contribute diligently to your employers retirement plan. Maybe you also maximize your annual IRA contribution, all in an attempt to hopefully have enough saved so that your money won't run out in your retirement. But how much will you need, really?
In order to develop an understanding you should first create a picture of what you want your retirement to look like. For some, retirement means travelling abroad and sampling exotic foods. For others it means being home more and spending time with the family. Obviously, our required nest eggs are as varied as our retirement dreams.
Once you've created your picture of retirement, ask yourself what it would cost annually in todays dollars and additionally, how many years you expect to live in retirement. Armed with this information, google "retirement calculators" and try your hand at a couple. You will likely have to supply the following figures; how much you have currently saved, how much you're contributing each month, and how many years you have left before you retire. The calculator will tell you if you are saving enough, and if not, how much more you should be saving monthly.
Try changing a few figures in your calculations. Try putting retirement off a couple of years, and/or change the monthly contribution amount.
While there are many additional factors to consider, this will give you a basic idea of where you're at on the retirement track. Hopefully you also discovered how making a few subtle changes can have a huge impact on whether or not you attain the retirement you'd envisioned.
In summary, this article has attempted to provide a basic understanding of how to determine and save for your desired nest egg. For some it will provide a wake up call, others will say it's too simplistic, and still others will say that the results are unrealistic. Whatever your reaction, I'm convinced that most of us are capable of creating the retirement of our dreams, but it comes at a price tag.
It might even mean delaying immediate gratification in this era where we've been conditioned to live for today.

The seeds of debt

As a newly wedded couple in 1984, one of the first goals of my wife Lisa and I was to build our credit. I can't remember when the seeds for debt had initially been planted, but the common theme amongst well intentioned friends and family was to build your credit so that you could purchase a home or car. So, there we were willing to enslave ourselves to anyone who'd offer us a line of credit. Five months into my four year Air Force commitment, Lisa and I had decided that we couldn't bear the separation and so decided to get married. Anyone who's been in the military will remember the predators lined up just outside the base gates waiting to get a slice of that guaranteed biweekly check paid to every soldier by the U.S. Government. These purveyors of debt include businesses offering payday loans, furniture rental, new cars etc.

Those first years of marriage were filled with financial missteps. Once the decision had been made to get married, I went to the mall and put an overpriced ring on lay-away to profess my love for Lisa. Still in technical school and living in the dorms on base, I was able to pay the ring off in just a couple of months. Paying for the ring had absorbed all of my salary and savings, so I took a pay advance to pay for our wedding. My future salary would be garnished for the next six months of our marriage until the loan was paid. I can remember sitting on the bed the night of our honeymoon opening the wedding cards to pay our remaining wedding expenses including the hotel. Two days after our wedding, Lisa and I drove to Omaha Nebraska in the Chevy Chevette, that had been given to her by her father, with all of our worldly possessions jammed in the back. We found a small apartment and paid our deposit with our remaining wedding funds. Less than a month into our marriage, the transmission failed on the chevette. Lisa's dad agreed to be a cosigner on a new car loan. We purchased our first car on a five year note at 15.75%, which was the prevailing rate back in the mid 80's. The service light went on several months after purchasing the car. I left the car at the dealer and received a call later that day. The car just needed a minor part. I assumed that everything was covered under warranty, so told them to go ahead and fix it. After work, a coworker drove me to pick up the car, I received a bill for $175. We called her dad, and again he came to our rescue wiring the money the next day. Amongst our many blunders, sticks out another instance.
We'd been watching a borrowed 12-inch black and white TV and decided that we needed a color set. We still hadn't saved any money, so again tried our luck at financing. We wrote a down payment check for about two hundred dollars with the assurance that the store would call us the next day to let us know if we'd been accepted for credit. The following day we were informed that we'd been denied and that our check would be mailed to us. Assuming this to be true, we added the money back into the account and began writing checks against the balance. A couple of days later, we began receiving notices for insufficient funds. It turns out that the check had been cashed. Five bounced checks and several days later, we were eventually able to get the issue resolved. We were indeed living the American Dream....

Living like there's no tomorrow...

Most of us baby boomers are living our lives without a plan. Our consumerism society has convinced us that as long as we can make the required minimum monthly payment, then we can "afford" and are deserving of, satisfying our every whim. Way back in the early 70's, before the proliferation of credit cards, the 2-car families, and Mcmansions people paid cash for nearly everything except for perhaps their homes. Most intact families had a stay-at-home mom, one paid for car, and a single television set. Today, certain that we'll be happy if we can just purchase that next gotta-have toy, we've stretched our finances to the limit and forsaken the future for our immediate gratification. Second mortgage anyone?

In the late 1990's, tired of living month-to-month and feeling like I was at the mercy of my creditors, I began a quest to educate myself and my family in the area of personal finance. As my knowledge increased, it became painfully evident that my wife and I would have to make some dramatic changes if we were to succeed in changing our family's course. Fast forward ten years. We now have minimal debt, better communication, and less stress in our marriage. The objective of this blog is to share our story and hopefully prompt you to share yours. Let's learn from each other...