Investopedia stock simulator

I have been playing this game: http://simulator.investopedia.com/home.aspx, and it's quite a bit of fun. You register (it is free - ad supported) and you can buy/sell stocks based on real feeds. I've found it a great way to get my ears wet in stock trading without actually risking any money (since I have fairly low income). Give it a try!

Research your financial adviser/investor

Our financial adviser handles our Roth IRAs. Beyond that we have our employers 401ks and personal investments that we handle ourselves. I believe a key part to spreading risk is to avoid having one person with total access to your money. Also important is to conduct research on a financial adviser before signing up.

You can do this by visiting NASAA's website, FINRA, and CFP.

Kilpinger offers some of these tips while conducting your research:

• 60% of those [victims of fraud] had hired a broker based on recommendations from family and friends
  
• look for other red flags, such as whether he or she has changed firms every year
  
• Check with your state insurance department to make sure the person is licensed and see if the state has taken any disciplinary actions against the salesperson
  
• verify that the person really holds the CFP and find out if the CFP Board has taken any disciplinary action against that person
  
• learn a bit more about any other designations they're touting. Some require a lot more education and training than others. A few of these designations are primarily marketing tools offered to anyone who pays a big fee and takes an easy test. ("Certified Advisor for Senior Investing", [for example, is a] totally fabricated designation)
  
• So it's also important to take precautions to protect yourself -- even if the person checks out. Establish an account at an independent institution (typically a brokerage) to hold your money because some scam artists hide a swindle by issuing false account statements.
  
• Never write a check directly to an adviser -- only to the custodial institution, which must send you quarterly statements. And meet with your adviser at least once a year to review your account.

Does "my house" = "my money"?

A comment in one of my articles reviewing a mortgage product got me thinking hard about the way we view our homes. What does a house represent? Sure its our homestead, where we raise our families and build memories. But is it an investment? Is it an asset or liability? Is it an ATM machine? Anonymous wrote:

in the 30 yr, I have to apply for HELOC 2nd or refinance again to get that money (MY MONEY) back!" Thus, I HAVE TO PAY (MORE MONEY)TO GET MY MONEY BACK!

What struck me about this was this idea that the HELOC was allowing us to get back "our money".

Is a house a source of cashflow? Let's look at that for a second. A house worth $200,000. You own it, you may or may not have a mortgage on it (so technically the bank owns most of it), you have (hopefully) "equity" in it. A HELOC is a "Home Equity Line of Credit".

If I buy a house, I've purchased something. The only way to really get my money back is to liquidate it. To sell it. Real estate is an "investment" because unlike just about everything else you buy, its value usually appreciates. So where do equity lines of credit fall in? Well, based on the value vs what I owe on the home, I can take out a loan using my equity as collateral.

How, may I ask, is this any different than going to a pawn shop and taking out a loan with a Rolex as collateral? Is that really "my money"?

It's a fallacy, I think, to regard your equity as money. It's not; it's simply the value of something you own. The only way to cash it out is to liquidate it. Anything else is simply a loan, a loan granted to you based on the presumed ability for you to pay it back because you have a large asset that you can liquidate.

However real liquid assets (cash) sitting in the bank earning interest does not equal a loan, where you pay interest. In fact, by taking out loans on your house instead of saving money and using that as your purchasing power and/or emergency fund, you are killing whatever "investment" your house might represent.

Borrowing money does not build wealth. A house is not an ATM. It is not "your money". When you take out a loan, any loan, you are paying someone else for the privilege. How is that "my money"?

Letter to their daughter

All Financial Matters posted a letter from a couple of financial-savvy parents to their daughter. I loved it and wanted to spread word of it around. These parents had $1,000 saved up for their daughter when she was 14, via her allowance. The letter details some investing and saving advice for their child.

Memorable quote

As you can see, when the interest rate doubled (from 5% to 10%), your earnings over a 51 year period grew by more than a factor of ten – from about $11,000 to about $128,000!!

Trivia: Albert Einstein discovered the Rule of 72.

Why investing over low interest debt doesn't work

Many people will argue that it doesn't make much sense to pay down a 5% interest loan when you can possibly make 10% in other investments. Let's say I have a $20,000 car loan with 5% interest for 5 years. I will be paying $2,645 in interest for the entire term of this loan. If I wanted to pay it down early, say $50/mo for the entire term, I would shave 7 months off the loan and only pay $2293 in interest, a savings of $352. I can then invest my monthly payment for 7 months and I get $3,287 assuming a 10% return. Even with the interest I saved, I'm still only ahead $3639. If I had invested that $50 for the entire 5 years alone, I'd have $3871, or $232 more.

Right? Well, I say no. Here's why.

10% (even a conservative 8%) is not going to be a short term realized return. Those statistics that investors and financial gurus boast about the market are based on 5, 10, and 20 year average returns. The shorter time I invest, the less likely I am to reach that average return. I could make more, I could make less. Investing during the entire loan term rather than after it is paid and investing the full payment is more likely to match the long term averages. Score 1 for investing rather than paying down the debt.

But all of this looks great on paper when you take out a car loan and decide to invest a certain amount above the loan. It doesn't usually work that way. What happens is you are in the middle of your loan, decide you want to get rid of that debt, and start paying it off early. Thats when people advise to invest it instead.

The problem with this is that we are goal oriented, and paying down debt - eliminating a car loan and owning our car, is a far more exciting goal than investing money and watching it grow slightly higher and all the while making car payments. Debt is a burden. So when you are deciding to pay down a debt, or invest some extra cash, what is more likely to drive you to pay more? I would say the debt. My reasoning is that you are more likely to make sacrifices and stretch your money to pay $50 a month to eliminate a debt, while you may just throw extra cash into an investment, which could be significantly less.

What should you have done? In the case of our car loan, you should have saved up for the car. If you calculate your payment of $377 earning the same 10% over 5 years and then purchase the $20,000 car with cash, you have $10,381 left over, or $14,410 if you included your $50 extra payment. Even a conservative 6% return gives you a nice 10k. Not incurring debt, saving, and paying cash pays off.

Vanguard Podcast: Young investors

A great little podcast that I had to pass along. Vanguard gives tips on 401ks and other investments for young people.

Vanguard Podcasts

Highlights:

• Investing is for your long term goals
  
• Regular savings don't provide high returns
  
• Spend less than you earn
  
• Credit card debt must be resolved before investing
  
• Even small investments can go a long way if you start early and do it regularly
  
• First investment priority is saving for retirement
  
• Target-retirement funds can provide an easy way to begin investing
  
• Teach yourself about investing through online articles, parents, etc.
  

529s get even better!

Congress recently added new advantages to the popular 529 investment plan for college savings. The savings vehicle can now accumulate interest and be drawn tax free. This is a great advantage to parents who are saving for the children's college expenses because they will not have to pay taxes on the account as it grows. Another benefit? A child can still qualify for financial aid (grants, scholarships, etc) because it is not included in their total assets. All students must submit a FAFSA that lists their assets and, in most cases as dependents, their parents assets to determine what kind of financial aid they qualify for. Once again, the 529 comes out ahead as the ideal college fund.

If you don't already know what a 529 is, you should definitely read up on them.

Why save for your children's college? I find it incredulous that some parents do not believe in saving for their kids college education. College is no longer optional, and the cost continues to rise. It is absolutely impossible for a student to work their way through college anymore. As is the case now, and will be more so in the future, the basic tuition will be more than any part-time high school graduate could possibly make.

That leaves 3 options: Scholarships, grants, and loans.

Scholarships are the ideal solution to paying for college, but here's the rub. Not all kids are going to qualify, and just because you can't get a scholarship doesn't mean you won't do well in college.

Grants are great for low income families and they can sometimes pay a very large portion of tuition. I myself used grants during college.

Loans are the worst possible way to finance college, yet everyone seems to take them for granted. You not only pay far more for your education over the long term, but you put a young adult fresh into the business world already in a mountain of debt. Graduate students, borrowing money all through college, will likely have a monthly loan payment higher than their parent's mortgage. Face it, college isn't a guarantee at a job, and everyone starts at the bottom. Despite recent polls of students whose expectations are far too high, most college grads won't be making six figures out the door. Yet that $1,000 a month loan payment is still going to be coming in the mail whether your kid is making $30,000 a year or $100,000.

If you are ready to start, you can open up a 529 online at sites such as Vanguard.com.

Why pay more?

I was having a discussion with my wife last night and the subject of our debt and mortgage came up. My interest was further peaked on this topic when I saw a blog article from Might Bargain Hunter regarding an unusual fixed mortgage. From my perspective, borrowing money is a necessary evil. Why pay more for a product than its advertised price if you don't have to? Mortgages, unlike other debt, have the distinction of being tax deductible. But again, why would I pay two or three times the value of my home to a bank just to keep a couple thousand of my pay from the IRS?

We talked a bit about our mortgage, and how much we would save if we just paid $100 extra. Our escrow account adjusted last month - we had a shortage because of an insurance fiasco (long story) and now are paying $50 less a month since the escrow account has now balanced out and is paid up in full. Instead of reabsorbing that into our spending, I've kept paying the bank an extra check with instructions to apply it to the principle. It's only $50 a month but it's better than nothing. And why not? We were already accustomed to saving the full mortgage payment and it doesn't affect our budget to continue doing so. Further, it saves us tens of thousands of dollars.

My wife was shocked to hear how much we would save in interest by paying just $100 extra, and how early we would have the house paid for. Imagine investing that mortgage payment, I told her. With our current savings plans (which at present will already give us a million by the time we reach 65) we would be able to invest and save that mortgage payment for another 10 years, ending our payment to ourselves and letting the money sit and stew for another 10 years until retirement and we'd have another quarter million, a good $50k more than we'd have if we just invested that $100 every month for the next 40 years. A little less if you include the extra taxes we'll be paying for the 10 years without a mortgage.

Borrowing money isn't in our best interests. We want to pay cash for everything that we can, which is one reason why we are not going to stop paying our car payment after our current auto loan is paid off. We'll save it for our next vehicle. That alone will save us thousands. And our mortgage? Why pay more when we don't have to? Even if we just broke even by paying early as opposed to investing the extra money now, we have the satisfaction of owning our home outright.

Banks make enough from real estate anyway. Since the average person moves something like every 5-7 years, all those young 30 year amortized loans raking in interest off the same home as it is passed on from owner to owner is a perpetual income for the banking industry.

I'd rather give extra money to the government. At least they build roads.

How I save.

Before I have posted about my 6 essential savings goals. Now I'd like to mention how I personally am going about meeting them. I started my savings vehicles a few years ago and have added about one every year to make my goals, and its a system that has worked out so far. I now have a short term emergency fund, a readjustment account, and a statistical readjustment account. I've started my retirement portfolio, but so far it only consists of a small Roth IRA (which I do not contribute regularly to yet because of some debt) and a 403b with a 5% pre-tax contribution, a 5% base and a 4% match - ie, 14% of my pre-tax income.

So far I have a 10% after-tax disbursement into my short term emergency fund. We've fully funded that ($2,000 in a low-yield easily accessible savings account) and are funneling that 10% now into the 6 month emergency savings, but that savings is still pretty low. Another 5% - what should be going towards Roth IRA contributions, is being put into some debt repayments. We have a personal loan and a car loan that need to be eliminated before we can really free up come money for saving. Those two debts cost us around $500 a month in payments and although the interest is low, I don't like having debt.

When those are paid, we can start funding our Roths at 5% and take that $500/mo payment and split it up between a car purchase savings (to save for our next car so we don't have to finance it) and mortgage prepayment. My goals are to have the car/loan paid off by January of 2009 - which it will be at our current rate and shave at least 10 years off our mortgage. To do that I need to pay only $100 a month extra, which won't be hard at all once the other debt is gone.

The vehicle I want to fund this year, my goal, is our freedom funds to let my wife and I freely spend money without always worrying about whether its going to impact our budget (and without having to always consult each other), and can be funded with a modest 2.5% of our income. Not much at our income level but it's better than nothing. It will be a while (maybe 5 years) before our 6 month savings fund - which needs to be around $25,000 - is done, but once it is we can take that 10% and add to our retirement portfolio and skim the interest off the 6 month fund as spending cash for the freedom funds.

I also hope to increase my income by this time in 2008, which will make all these funds balloon nicely.

So my outlook right now is 2 years to eliminate all my debt, 5 years to fully fund my savings vehicles, and 20 years to pay the mortgage (assuming a job doesn't force us to move). The short answer is that the way I meet all of my goals is by having one or two to meet per year and slowly build them so they don't heavily impact my budget.

Why I do NOT play with stocks

There's absolutely nothing wrong with investing in the stock market. I just don't believe it is within the range or ability of the average middle class American. Just purchasing stock can be a confusing and expensive proposition for anyone starting out. Online trading is the new fad in the market, with brokers popping up all over the net and offering a variety of services and packages.

I like Vanguard myself, because of their low fees and ease of use. Now granted I've not actually purchased stock through Vanguard, so I can't attest to their customer service or reliability, but after reviewing some 5 other online possibilities they came out on top.

However I suspect that most of the people making money in this game are the people working for Vanguard.

First you have trading fees, then account fees, perhaps setup fees, minimal balance fees, minimal trading fees...the list goes on, and that's just to buy a stock! Have $500 that you'd like to invest in a company and let the stock sit and ride the waves of the market? Not likely. Your entire investment will probably be eaten up by fees, fees that increase as a percentage of your total principle should the market temporarily fall. Most of these stock brokers collect their fees by...yep, selling your stock. Imagine buying 50 $1 shares of ABC, Co. and during a month that the stock has dipped to $0.50/share, your online service decides to sell $10 worth of shares. You can see how that would kill your long-term return.

Of course, making any good decision in the stock market requires a good understanding of the economy and the particular market you are investing in. The one-month game we played in elementary school social sciences class where we picked a stock and tracked it for a week to learn how stocks work didn't exactly prepare me. Besides, my stock value had risen by $25 and I wanted to sell but my teacher wouldn't let me. Not a good enough return, he said. $25 on a $100 investment in a couple of weeks? It sounded good to a 9 year old, but what do I know. I should have threatened to pull my money out and go with Mrs. Tucker down the hall.

So the short answer is that I don't have a full work week to dedicate myself to tracking my stocks and predicting the market. By the time a stock tip shows up on CNN the train has already left the station. How am I supposed to work with that?

I'll stick to professionally managed, diversified funds.