Friday, November 16, 2007
I had both a government TSP and a company 401k account.
401k, 403b, TSP are all basically the same things. They are tax shelters that the government gives you so that you can save for retirement.
I had the option of keeping both TSP and 401k accounts but I wanted more control over my money. 401k's made me buy company stock and Mutual Funds. I didn't want to buy either, but the company match is worth it.
To rollover your money, or in other words move it from one tax shelter to another tax shelter you need to do the following.
1) Open a "Traditional Rollover IRA" account. I chose Scottrade because of their low fees.
2) Once your account is open, contact the holders of the TSP and 401k and tell them you want to move your money. They will have paperwork to fill out. Your HR department can tell you who holds your account.
3) Make certain you do not have them send YOU the money. They must send the money directly to your new Scottrade account. If you don't do that, then the IRS believes you "cashed out" and now you have to pay almost 30% in taxes.
4) Once the money is moved to the new Scottrade account, you now get to buy something with it.
What should I buy?
Ben Stein is one of my favorite financial voices to listen to. He has always state that people have to save more money and have a plan for that money.
The simplest plan is to spread your money equally between three diversified index funds and just keep buying them and don't sell until you retire.
3 Index Funds
VTSMX - Vanguard Total Stock Market Index (You are buying America.)
EFA - Europe Far East Asia (Foreign Developed Nations.)
EEM - Emerging Market. (Small nations that have huge opportunity for growth.)
This week I went to a Hilton in Tysons Corner and listened to one of the best financial planners in the business.
He goes through the fact that Mutual Funds (non-index) are ripping people off. The average mutual fund is costing you almost 3% a year or more.
Index funds are less than 1% a year.
Here is a great write-up by Ric about the fees of Mutual Funds:
The fees for Mutual Funds are called the Expense Ratio.
(Why can't they just call them fees?)
Mutual funds have other fees that they don't even have to tell you about called SAI charges.
SAI stands for Statement of Additional Information. You have to specifically request this information from your mutual fund.
The point is, the old way of buying Mutual Funds will severely hinder the profits. As a whole, Index Funds are cheaper and long-term they beat almost all Mutual Funds.
I would recommend listening to Ric's radio programs for free.
As always, I'm more than happy to help if you have questions.
Keep Saving, Keep Learning, Keep Investing, Retire Early!
For those who wanted a soft copy of the compounding Interest worksheet:
The book that we talked about:
The Wall Street Journal Guide to Money and Investing
For those who want an example of other portfolios:
The Picture is an Example of Ric Elderman's recommendation for the information that I put into his website. Buying broad based Index funds or ETFs makes you diversified because you are putting your eggs in multiple baskets. Instead of owning 1 stock, you own 1 Index fund that has hundreds of stocks.
Everyone will have their own idea of what is being properly diversified.
The other point Rick Elderman had is that many people are using Morningstar.com to choose Mutual Funds. First of all he doesn't want you to buy Mutual Funds. Secondly everyone is choosing a Fund based on how many stars it has.
A 5 star rating is telling you that this fund has done well over the last several months. Which means you are going to buy when it is high. Human natures makes you want to buy something so you can tell people you bought a 5 star instead of a two star.
When you buy a 5 start and you don't get the returns that you thought you would get, you sell the fund and buy another 5 star. Again, you are buying high and selling low. The exact opposite of what you should be doing.
I hope our group sticks to Warren Buffet's idea for small investors. Buy a good broad based index fund and just keep buying it. We don't care what stars it has. We don't care that it goes up one week and down the next. We care that there are low fees (expense ratios), low or no management fees, no SAI fees and it is widely diversified.
Why do I have to pay more taxes in Mutual Funds than in Index Funds:
Saturday, September 1, 2007
1) Statistically Speaking
Statistics show most Americans don't save money.
Statistics show that the number one reason for divorce is money.
Statistics show that money does not buy as much as it used to, so you have to save a lot more to get what your parents have.
Now ask yourself, "Am I a saver or a spender?"
"Will I marry a saver or a spender?"
Statistically you will marry a spender.
This is looking at marriage from a financial perspective only.
However, if both you and your spouse are spenders the chances of that relationship working long-term is significatly reduced.
September's Ensign has an article for saving that I highly recommend.
If you answered that you are a spender and not a saver the time to learn, disapline and commit yourself to a financial goal is now.
2) Financial Mantra
I believe everyone needs a personal saying that will help you save.
When you learn about finances your brain hears something that it truly connects with.
Not everyone will react to the same saying so find your own and stick to it.
My favorite saying this year has been:
"Pay attention to your costs and your revenues will take care of themselves."
I'm certain Warren Buffet said this in an article but I can't find the exact quote.
This saying helped me to reexamine all my costs and see where I could cut corners.
You can find your financial mantra by reading financial articles or books on tape.
Read the articles that yahoo has to offer.
"When it comes to saving money, there are two types of people -- those who save and those who wish they were saving."
"Nobody cares more about your money than you."
"A penny saved is a penny earned."
"The best way to save money is not to lose it."
"The individual most accountable for your future financial welfare, is the one you see in the mirror today"
"Money in the bank is like toothpaste in the tube. Easy to take out, hard to put back."
"I am indeed rich, since my income is superior to my expense, and my expense is equal to my wishes."
3) How much does my Mutual Fund cost me?
This month we discussed how to know what a mutual fund costs. You want to keep your costs below 1% a year if possible.
Yahoo is my favorite place to find costs.Here is the annual cost for SPY (S&P500 Index Fund)
In the lower right hand corner you will see a fancy word called "Total Expense Ratio."
All that means is what percent they will charge you per year for them to manage the fund.
SPY has an expense ratio of .08%
VTSMX has an expense ratio of .19%
EFA has an expense ratio of .35%
Most Mutual Funds have expense ratios of 1.4% and higher!
Try to get out of those and buy index funds that have less than 1% expense ratio.
4) Financial Planners
Some people have asked me about financial planners.
I'm against them, but if you really want to speak with one see if your company has one for free.
If not, get one on a fee basis.
Some of them will charge you $175 an hour, then put your in a mutual fund that has a "front load" of 5% of your money. (Front load just means a fee of 5% when you buy. A back load of 5% means a fee of 5% when you sell.)
The mutual fund could also have a "Total Expense Ratio" of 5%.
Which means they just took 10% of your money before you even invested!
Other finanical planners will charge you 1% of everything you have to invest. Which could be much higher than $175 an hour.
Many financial planners are just salesman looking to take your money away from you.
Get your own education on money.
If you make a mistake you now learned from it,
if they make the mistake, it's now your mistake too.
5) Everyone should be a millionaire.
6) Setting Financial Goals
7) Real Estate
This article just made me chuckle.
Read the last part about the chief economist for the National Association of Realtors.
Conclusion, nobody knows what's going to happen in real estate - especially the experts.
Make sure you know you can afford the house because YOU have done the math.
And make sure you have enough cash in a high-yield savings account to take care of the mortgage and all your costs for at least 3 months. You never know when you will be out of a job or even worst - an accident.
That's it for this time.
As always I'm more than happy to help if you have any questions.
With no action, there is only thought.
Thursday, June 14, 2007
- Emergency Fund. Save at least 3 months to a year of money for emergencies. That way if you lose your job, get in a car accident etc, you will not be tempted to take money out of your retirement accounts. You can keep this money in a High Yield Savings Account like HSBC or Emigrant Direct.
- 401k. Put money into your 401k before your Roth IRA.
- Roth IRA. After you have filled up your 401k to the "company matched" amount, then fill up your Roth IRA.
What’s a Stock?
Buying stock means you own a piece of a company.
Mutual Fund vs. Index Fund
Mutual Funds and Index Funds are just a lot of different stocks bundled together.
Mutual Funds and Index Funds are just a lot of different stocks bundled together.
Mutual Funds charge you 1-3% a year to own the Fund. There is someone managing the fund, so you pay extra to have it managed.
Index Funds charge less than 1%. This fund follows a major index. It's done by a computer so it's cheaper than a Mutual Fund. (This is a better idea.)
401k vs. Roth IRA
- 401k - IRS will tax you when you take the money out when you are retiring. (It's called 403b or TSP for government employees.)
- Roth IRA - You've already paid income tax so when you take the money out at retirement, the money is now TAX FREE.
This topic has been addressed on a previous blog under "Answer to a Question."
This topic has been addressed on a previous blog under "Answer to a Question."
Why don’t I just pay someone to invest for me?
"Indeed, I have terrible news about brokers and money managers generally - news which I expect you've suspected, but couldn't quite believe, all along. There are no brokers who can beat the market consistently and by enough of a margin to more than make up for their brokerage fees. Or, if there are a few, they are not going to work for peanuts - and any account under $500,000 is peanuts.
By and large you should manage your own money. No one is going to care about it as much as you.”
"The Only Investment Guide You'll Ever Need."
(There are three copies of this at the Arlington Library)
Open an Account
Picking a discount broker is like choosing an email account between Hotmail, Yahoo and Gmail.
There are pros and cons to each, but they all do basically the same thing.
Here is a recent list of pros and cons for Discount Brokers.
They boast a no-fee Roth IRA
To open an account you will go to this site and click "Apply Online Now".
You will fill out some paperwork with Social Security number, birthday, beneficiary and end up signing and sending in some papers. It takes around 10 days for an account to be created.
Once your account has been created you can fund the account by sending them a check, or better yet transferring directly from your checking account. There is no cost to do this.
- This money will be transfered into your Scottrade account and sit as cash.
- You will then buy something and that will cost $7: Stock, Index Fund, Mutual Fund, etc.
What do I buy?
Answer: Index Funds!"The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry," Warren Buffett (Rich old guy everybody should listen to.)
So which Index Funds do I buy?
That's a little more difficult as there are many to choose from. Here are two that I keep coming across in many articles which I have also purchased myself.
VTSMX is the ticker symbol for "Vanguard Total Stock Market Index Fund."
You are buying America. This fund has thousands of US based companies.
Here is a good article that explains this idea and recommends VTSMX.
(iShares MSCI EAFE Index Fund)
Covers Index funds for Europe, Asia,
Most popular International Index.
How much do I buy?
60% - VTSMX
40% - EFA
Jeremy Siegel’s book “The Future for Investors” recommends different investment strategies. The simplest one is buy 60% in US based companies and 40% in Foreign based companies.
As you gain more experience and more financial knowledge you will begin to buy more and different fund to "diversify."
Please read one financial article a week or listen to a finance book on tape from your local library.
No one will care more about your money than you.
The final goal is to make long-term around 10% a year on Index Funds. This amount beats out almost all Mutual Funds over time.
If the economy goes up, keep saving money for retirement.
If the economy goes down, keep saving money for retirement.
Continuously put money away over a long period of time and you will retire rich.
Time is your biggest asset. Since most people don't save, you will be in a position to help others.
The sooner you take action, the sooner you will be in this position.
Learn more, save, buy index funds, continue to learn more, continue to invest.
You are now an investor, start taking action like one!
Wednesday, May 2, 2007
I have some "Home Buyers Guides" for those who could not attend.
Here is a summary of things he went over.
1. Do you know your credit score (FICO)? (Between 500 and 850)
- If your credit score is less than 720 it will cost you more to purchase a home.
- Helpful ways to increase you credit score, read this article.
- Hold onto old credit card accounts if you have a history of prompt payments.
- FICO is a type of credit score that most banks look at so you need to take interest in it.
2. Loans and amortization schedules
- There are a lot of different mortgages out there and you need to figure out what is right for you.
- 30 Year fixed loans, 80/20 loans, interest only loans. If none of these make sense to you , join the club.
- Simply, if this is your first home purchase, use an agent so they can explain everything and help you avoid the bad ideas and rookie mistakes.
3. Why buy (or why buy now)?
- If you intend to own less than a few years, DON'T BUY!!!
- Real Estate is a nice tax shelter.
- Pride of Ownership (hang up those pictures without landlord approval).
- Let roommates help pay the mortgage.
4. How can a Realtor help me?
- Expertise of the area and the process. (Knowledge of schools, neighborhoods, planned developments).
- Someone to hold our hand through the process:
- Explain contracts
- Negotiate on your behalf
- Assist in home inspection process
- Help sift through inventory to find good deals
- The seller has someone looking out for their interests, you should too!!!
- You've never done this before and may not know what your rights are.
5. Helpful links:
(This will help to watch interest rates.)
(Great articles and help in figuring this all out.)
(Visually understanding principle versus interest)
6. Interesting side notes:
- Stephen notices more women than men having enough money and saving sense to purchase homes. (Come on men. You can do it!)
- Right now is a poor time to look at buying a condo. The market is heading down and a lot of new condos are scheduled to be built.
- Recent articles show DC prices going down from now into 2008. But nobody ever perfectly predicts where the bottom is.
7. Questions that Stephen can help you answer:
- Appraisals vs. Assessments
- Do I need a home inspection?
- What are home warranties, and why should I consider buying one?
- What is title insurance?
- What is the difference between a lender pre-qualification letter and lender pre-approval letter?
- What are polybutylene pipes and why should I care?
- Do I have to pay out of pocket for a buyer agent to represent me?
- What happens at settlement (i.e. when I sign over my life)?
- How much should I expect for closing costs?
- What is earnest money?
- Should I pay down my mortgage early?
- What are the tax benefits of owning a home?
Friday, April 6, 2007
To all those who were able to show up and contributed at the first Investment Club.
Since there is such an interest in it, next time we will go over mortgages and how to afford a house.
Here is what we went over for our first meeting.
1) Keep a budget.
Keep a budget so that you can figure out where your money is going.
Here is the Excel Sheet from Nathan to help you get started:
Nathan also recommended keeping 3 months worth of receipts to keep an average of your costs.
2) Keep track of your credit.
This is the website that is free.
Other sites will try to sell you a service, but this one is free.
It's good to look at this at least once a year to know that nobody has stolen your identity.
You can also make sure there are no mistakes.
3) Take advantage of High Interest Savings Accounts.
I believe everyone should have a High Interest Savings Account.
This account will be extremely beneficial to you.
Here is the one I currently use:
6% until April, then back to 5.05%.
I can not stress this point enough,
if you have cash that is just sitting in a regular account you are most likely making 1% interest.
Just moving that money into an HSBC account means your money will work harder for you.
4) Make your Credit Card Work for you.
Ben in our group has a good Credit Card Chase Rewards Plus (Visa).
Unfortunately, it doesn't appear to be available right now.
Here is a site that has a comparable Chase card as well as the card I currently have
Citibank Dividend Platinum Select (Mastercard):
My favorite features of this card are:
3% cash back on gas, groceries etc.
1% cash back on everything else.
Once I have accumulated over $25, I just login and click "send me a check."
I get a couple hundred dollars a year from this.
Virtual Credit Card: This is a program that lets you buy things online with a credit card number that will expire the next month. That way if the company gets hacked and they steel your credit card number, it will expire too soon for them to use it.
I have friends who don't use credit cards. They got burned and they stay away from them. If you know you can't trust yourself with Credit Cards then stick with what you are comfortable with. My suggestion would be that if you learn more about credit you will learn to become more comfortable using it. It's also very difficult to get a loan with no credit history. If you don't have a credit card, you won't have a credit history.
5) Take advantage of Compounding Interest.
This file shows what can happen with a little money and a lot of time.
In short, the sooner you start the more you will have for retirement.
If you don't have a retirement account (401K, Roth IRA), then you need to start one now.
6) Read Financial Articles.
Nobody is going to take care of your money better than you.
I would suggest reading the weekly articles posted by yahoo.
These are from authors of many famous financial books.
The authors tend to repeat what is in their books and they speak about more up-to-date information as well.
My favorites are Ben Stein, Suzy Orman, Jeremy Seigel and Robert Kiyosaki.
Books from these authors are at your local library.
Here is a website that keeps up-to-date information on the best interest rates.
7) Ask a lot of questions.
For some reason it's a faux pas to speak about finance.
Yet we all need to master finances to take care of ourselves and our family.
Hopefully we will all be willing to share our successes and mistakes so that others may benefit.
Answer to a question:
Here is the article that goes into details about keeping both Roth IRA and 401k.
1) Fill up your 401K to the amount that your employer matches (around 5%). then
2) Fill up your Roth IRA since it grows tax-free (which is better than tax-differed if you expect to be in a higher tax bracket when you start to withdraw from the Roth).
Roth IRA contribution limit for 2007 = $4000, then
3) If you still have money that you want for retirement, go back to filling your 401K.
Also take into consideration that you want to buy a house. Roth and 401k are investment vehicles for money you don’t want to touch until retirement.
There is the ability to take money out, but the point is to not touch it and let it grow with the tax shelter benefits.