Investing Lessons: How to Invest, Trade & Achieve Financial Freedom

Showing posts with label Money Lessons. Show all posts

Showing posts with label Money Lessons. Show all posts

Friday, April 17, 2009

The Secret to Financial Well Being by Mike Tyson

Every bit counts

"Yachts? Six homes? That’s more luxurious than what most of us get to enjoy, but it’s nothing compared to the spending done by Mike Tyson. He might be the most well-known fighter of his generation, but if there was one thing Tyson was better at than boxing, it was spending money. In 2003, he filed for bankruptcy after his debt reached over $27 million, about half of which was to the IRS. What was he spending all his money on? For starters, two Bengal tigers for $140,000, for which he also had to pay a trainer $125,000 a year. But that was just a drop in the bucket. There was also the $4.5 million he spent on cars, and perhaps the most inane purchase of all, a bathtub for his first wife, Robin Givens, at a cost of $2 million."
Financial advice from athletes

The difference between these numbers and what I (or maybe you) deal with is huge. While I worry about small change, these athletes are squandering away millions. But there are fundamental similarities when you consider the financial playing field.

Lesson #1 - It is not about how much you make.
Millionaries can and do go broke. There is no financial tenure you can achieve which will make you immune from losing some or all of your financial fortune. Making more money allows you to have a wider margin of error but if you make unwise financial decisions like buying a home you cannot afford or buying more homes than you can afford - you lose.

Lesson #2 - What matters is how much you save.
Families with average salaries save enough to lead a comfortable life - so it is doable at most levels of income. You need discipline, a stong will and the desire to be financially independent but consuming less than you are making is the one and only way to build your egg nest.

Lesson #3 - What do you do with your savings?
You have to make your money work for you. Compounding, growth, inflation, returns, risk all go into this segment of financial management but smart choices can put on the fast track to financial freedom. Bad choices are akin to "Go To Jail" card in monopoly - you pay a fine and start again.

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Friday, November 28, 2008

Black Friday - Hopefully!

The kickoff to the annual holiday shopping bonanza - the day after Thanksgiving Friday was today. I ventured out today to shop for bargains and observe the public mood.

Recession - What Recession?
The mall was packed, finding parking was a challenge and stuff was flying off the shelves. Not sure how today measures up with the historical average but people were out looking for bargains and deals. The economy may be struggling but is it all doom and gloom - maybe not.

Visit Us Also
Everyone is not doing well and it was very clear today who those retailors are. Yes - those were the shops with anxious sales agents but no customers. Some jewelry shops, high-end stores and novelty item stores were struggling. This shopping season will be a do or die situation for some of these retailers.

Cash is King
We went with a stack of coupons, store cards and shopping list. We browsed but mostly stuck to the list. And if we did not find what we were looking for we moved on. At the end of the trip everything on the list was not crossed off but hey - in times like these having cash in the pocket is not a bad feeling.

Happy Thanksgiving!

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Sunday, August 17, 2008

Money & Relationships - To Mix or Not?

Money, money, money ...

Should you mix the two? Money and relationships that is. Popular advice is an emphatic no!

But the two also have a way of getting together. So what is one supposed to do when relationships and money come together?

Intentional Deceit - These are the cases when someone intentionally takes advantage of the relationship, my naivety or just circumstances. They may feel that they are justified in their actions because they have less, I have more or some other convoluted logic but to me it's not fair. No one should make assumptions about what is more or less concerning others finances and definitely not make a grab for something that is not theirs. My philosophy in such situations is to strictly avoid financial transactions and if I need to part with some money - it is done with the understanding that I am giving that money away not lending it.

The Oblivious - This category of people do not have ulterior motives, they are just oblivious to the value of money - their or someones elses. They are naive and uneducated about the value of money or what it means to people. I am carefull even in these situations and follow the same rule about money lending.

Seeking Help - It may look like other's need financial help but the prudent advice is mind your own business. Unless asked for advice - I am mostly an eager listener. I do ask people about their investing strategies and methods but that is more for my learning. Don't be the guy with the next hot stock tip or the pompous sounding financial expert.

Smart Money - Any large financial transactions or business venture between friends or relatives should always be constructed using clarity, detail and formalization. You always run the risk of money impacting your relationship but the risk is manageable. If you are smart about your money and have strong relationships - mixing the two can be beneficial in some situations.

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Thursday, June 12, 2008

Seeking Therapy for Debt Management

After years of free spending -- $200 jeans, a silver BMW and other grown-up toys -- Michael Wagner had racked up $25,000 in credit-card debt and was behind on his mortgage and car payments. Creditors called night and day. It was a "hopeless downward spiral," he says.

Then, last November, the 34-year-old sales manager for the St. Louis Post-Dispatch joined the "Sunday morning breakfast club," a group of debtors who meet weekly over coffee and eggs to share money woes. Mr. Wagner says he is now on the road to financial recovery, helped by his discovery that "I wasn't alone."
WSJ

Does excessive debt reflect behavioral issues? Probably!

After you cross a certain line it is almost an affliction. A condition, not unlike, an addiction to tobacco or alcohol. Fine in moderation but bad for you in excess. When spending or debt management gets out of control you can either seek help or solve the problem yourself. If you have ever tried to quit (smoking) cold turkey - you know how difficult it can be. Recasting yourself as a born again frugalarian is no less difficult. Support groups, education, family support and resolve will eventually lead to success. It is difficult but it is doable.

But first you have to admit that there is a problem. So what are the tell tale signs that you may be headed for trouble

You buy first, ask questions later
You have a vague idea about how much money you have in the bank
You have an even vaguer idea about how much debt you have
You think every coupon is free money and a buying opportunity
Your mail box is overflowing with product catalogues
You feel lost and disoriented without your credit cards
You are acutely aware and crave the latest fad
You always seem to run out of closet/storage space
You keep finding things that you have bought but don't remember buying them
You live today - spend today, consume today and buy today

If you truly want to break the habit and get out of debt - extreme measures are required. Consider draconian measures like eating only rice & beans till you are in the black. Yes - it can be done although it may be painful. But it is worth it!

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Thursday, May 22, 2008

Building a Financially Smart Deck – A Check List!

We decided to add a deck to our house since we spend a lot of time outdoors and really enjoyed the deck at our last house. A deck is a significant expense so I decided to be financially smart about getting one. Based on my experience, some suggestions on how to do proper due diligence when considering a significant home improvement project.

Build or Buy
I pride myself in my ability to swing a hammer or use a screwdriver but building a deck? The thought crossed my mind so I did some research on the internet, browsed through some deck building books and mulled over the situation. There are significant savings if you build it yourself but a deck is a complicated project which I felt was better tackled by professionals.

When considering build or buy – think about

Time commitment – Do you have the time to get this project done?
Learning curve – Have you dealt with something similar before?
Competency – Are you really good at this stuff?
Building code compliance – Sloppy work is not acceptable and will cost you.
Complexity – The more bells & whistles – the more challenging the project.
Quality – Always a priority.

Many to One
Finding the right contractor for the job is key. I leveraged Angie’s list, contractor websites and word-of-mouth to contact four contractors. What I was focusing on was

Quality – Check out past work (pictures) and references
Credibility – Check for proof of insurance, bonded, member of local and state trade organizations
Service – Check out customer satisfaction history, complaints (open & resolved) , BBB reviews

Requirements
I spent time laying out my design on paper and listing all my requirements – decking material, railing designs, height, area and layout. Your design may change as you work with different contractors and review price impacts but a detailed design is essential. Why?

Comparison shopping – You want each contractor to bid on the same requirements.
Clarity – The more detailed your requirements, the less chance of misunderstanding your needs.
Options finalization – Decide on what you need (and can afford) to finalize your requirements. Vacillation on requirements is frustrating and will extend your project deadline (costing time & money).

Close the Deal
When you have decided who you want to work with and what you want build – make sure you take care of the following

Final review – Confirm your final design, specifications, material selection, color, size and final output. No turning back after this point.
Price discount – Always explore discounts or price breaks. It never hurts to bargain for a better price.
Pressure Tactics – Don’t be pressured to agree to something you are not comfortable with – price, features or design. You are the customer – feel free to assert the fact.
Contract – Get your requirements, price, payment method, penalty, warranty and reviews in writing. Make sure you review before your sign.

Upfront time and effort spend in analyzing your requirements and conducting appropriate due diligence is always a prudent approach. Prudent when you consider the financial, functional and aesthetic impact of such projects.

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Tuesday, May 13, 2008

Understanding the Stock Market Cycle

A cheatsheet on market cycles by John Train - author of Money Masters of Our Time, The Craft of Investing.

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Tuesday, April 22, 2008

Frugal Innovation

Lots of ideas!

"I think frugality drives innovation, just like other constraints do. One of the only ways to get out of a tight box is to invent your way out." - Jeff Bezos

How to you apply this principle to innovate your financial life?

Deduct money at source: When you have less money coming in you will figure out ways to cut expenses.
Reduce eating out: You have to eat - so you will cook, which is cheaper and healthier.
Define a vacation budget: Limited money does not mean limited vacation - it means an opportunity to explore options. Camping, hiking, off-season rentals, advance planning are some of the options to consider.
Reduce your grocery bill: Grow some vegetables, use coupons, get creative with your leftovers, overstock, shop discount stores or find your own way to reduce the grocery bill.
Set a public deadline: To create a budget, to open a 529 account, to start contributing to your 401(K), to create a financial plan, to get another job ...

Put yourself in a financial box (not a hole) and figure a way out. To succeed - you have to!

(Photo courtesy: BB (O.ö)/Flickr)

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Thursday, March 13, 2008

It Is Still Your Money!

Trust me!
"A couple who stayed with their adviser for seven years even though they never received information quantifying their returns. During that time they were reassured by the fact that their investments increased enough for them to withdraw the cash they needed without falling below their original deposit.

When the couple finally worked up the courage to ask about their account's performance—the husband called—they didn't get a good answer. The adviser made excuses, saying the returns were too difficult to compute because of all the withdrawals. Many investors would have yanked their money then and there. But the couple couldn't bring themselves to do it, and for six months they kept asking, until he finally produced a number. How'd they do? Far worse than the markets. Still, it took them three more months to actually work up the courage to call the adviser back and quit."
BW - Saying Goodbye to Your Money Guy

Hopefully this does not apply to you but if it does - wake up! I am not sure about you, but I work hard for my money. And what I take great pains to earn and save should ideally be invested carefully and dilligently. Many things in my life hinge on this investment portfolio so I have no issues with being a little paranoid about the health and well being of my finances.

If you don't get regular feedback from your advisor, you should insist on a monthly performance and activity summary. Your advisor may be great (or suck like in the example above) but you are still responsible for checking on your portfolio occasionally. It is still your money!

A financial advisor brings financial maturity and market understanding to the table. He/she should be providing holistic financial advise that is pertinent and applicable to your financial well-being. In the end it is still advise, which you as the customer should understand, digest, review, discuss and then agree or if requried, disagree with. It is still your money!

Like any other professional service you should seek quality, efficient and excellent customer service. If you are unhappy with the service you are getting - change your financial advisor. After all it's your money!

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Thursday, February 14, 2008

Fear Of Investing

Its a ride

Can you win the financial game if you are fearful of investing?

A friend of mine abhors the market and as a result shies away from any and all investing options. He is a big proponent of saving and frugal living so he has been building up substantial savings, which sit in low yield savings accounts. He likes to pay cash for his purchases, including big-ticket items like cars and home improvement. He is smart to save, live frugally and not get into high interest loans but that is not the full story.

His contention is that he sleeps better at night knowing that his money is safe. My contention is that he has a false sense of security. Here is why -

Capital Erosion
The big culprit here is inflation. If you do nothing with your money - over time it will lose its value. In other words - your buying power will reduce over time as cost of living increases and prices of goods go up. So if you have a big bank balance today but are not growing your money to keep up with inflation - you will have less money down the road. Sad but true!

Knowledge Deficit
There was a time when I did not know much about the stock market or investing. I trusted others with my money and was happy to be earning and spending. The issue was a lack of education in matters related to finance. Like many other facets of life - if you want to succeed you have to work hard at it. Your job, your business, your marriage, your kids and your money all require your time and commitment.

Knowledge about money management is an essential requirement in today's world of self-managed retirement and limited retirement benefits (corporate or governmental). Ample resources exist to educate and equip you with the right knowledge and tools - but it is an investment you have to make.

Growth
You can save all you want but if you cannot grow your money - your financial life will be very challenging. Here is a simple example to illustrate the power of compounding and reasonable market returns.

Suppose I invest $10,000 for 20 years in the US stock market and get an average return of 10%, which grows compounded. At the end of 20 years I would have about $60,000. A gain of about $50,000 in 20 years.

In the other scenario we start with $10,000 sitting is a savings accounts that returns only 3% annually. We add $1,000 every year and let this money grow compounded over the next 20 years. You end up with $40,000! A gain of only $10,000 after 20 years.

The market and investing principles may initially sound intimidating but they are not. Start small, take baby steps, read, learn, listen and in no time you will on your way to managing and growing your money.

"When your money doesn't feel appreciated, it won't appreciate for you in return."
Love Your Money. It Will Love You Back

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Wednesday, January 23, 2008

Perspective Makes A Big Difference

What do you see

You could be panicking in the morning and sipping champagne in the evening - such is the current market sentiment. Intraday swings of 500 points are becoming common occurences. Traders are happy, investors may be a little nervous. When you get above the noise or in other words - view the same scene with a different perspective, the situation looks a lot different.

Is it really that bad?
Remember that the S&P index is up more than 60% over the last five years. Add emerging markets to this mix and you have sizeable gains sitting in your portfolio. If you have a well diversified portfolio - what is the impact of the recent market correction on your portfolio? Probably very small.

When you consider the long term perspective - is it really that bad? Should you be panicking and liquidating stocks because the stock market has gone through a correction?

Can the Fed fix what ails the market?
Probably not. It's a well known fact that rate cuts have a significant lag - six months to a year before their full effect is felt. Beyond timing, the fed cannot make the subprime mess disappear or pull out the housing market from its slump. It took some time for the current mess to coalesce and it will take some time for banks to rid themselves of bad debt, for housing inventory to reduce and for consumer confidence to turn positive. The prudent investor should be focusing on the large trends affecting the economy and not be reacting to the volatile swings in the stock market.

"No matter how much the Fed cuts interest rates we are not going to see an appreciable pickup in home construction for a couple of years."
WSJ - Columbia Business School economist Christopher Mayer

No turning back

Are we "coupled" or "decoupled"?
Either way the fact remains that the world is changing. At least the emerging economic powers and their impacts are not fads but reality. We live in a global economy and there will be impacts when there are imbalances. But will the growth of China and India be impacted significantly if the US slips into a recession? Impacted - yes, significantly - probably not. When you think long-term, there is huge potential in the developing world and that perspective will serve you well over the years.

"It is the world’s fastest growing country and the biggest capital exporter; it possesses the largest foreign currency reserves and is already the world’s third-largest trading entity; it is the largest consumer of metals and the biggest emitter of carbon dioxide; and, quite soon, it will also be the world’s largest consumer of primary energy."
FT - China Changes the Whole World

So should I buy now?
If you have done your research. In which case you would have a price target that will support your analysis. And if the market is offering you a discount - then go for it. If you are influenced only by the media then there is a problem. The media is just pandering to the need of the moment - they have no interest in your portfolio. The perspective that matters now is personal accountabilty for your money and your investing choices. Read, observe, learn but then make your own decisions.

"Today it may still be too early to plunge in heavily, but for the first time in quite a while you can start to see some value out there, especially among blue chips and in some overseas markets."
WSJ - Finding Bargains Amid the Panic

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Monday, January 21, 2008

$892.35 for a 90K service!

I don't like paying the repair shop close to a thousand dollars for preventive maintenance but in my experience that is a better choice than "have-to-fix-it-now" situations. My thoughts on car maintenance

- Trust: Yes, this is my biggest gripe with car repair shops. I always feel like I am getting ripped off. There is limited information on what service will be performed, I always get a phone call that adds a few more "urgent" repairs to the list and they always miss something.

It's better to stick with a shop where you have some level of trust and a promise of quality work, even if it costs you a little more. When I tried the $9.99 oil change at the "Cheap Oil Change Now" shop - I ended up paying $50.00 for addon repairs which had nothing to do with oil change.

- Written Estimate: Always, always insist on a written estimate. Make sure you understand what service the shop intends to perform and what repairs you have authorized. I have learned not to be shy or pressured when understanding the service details and cost.

- Hype: Don't fall for the hype. 3K oil change, winterize package, fall special - do I need all these packages? There is some value but a large dose of marketing included in these promotions. The car owners manual recommends oil change at every 7,500 miles so that is what I do - no issues so far. With regular maintenance I don't see the need for a winterize package. The best way to get beyond the hype is by looking under the covers - what service do you really need?

- Schedule: The cars of today are more complex but also smarter. They can self-diagnose problems, indicate issues and prompt you for maintenance checkups. To ensure a trouble free and long life for my car - I follow the maintenance schedule laid out by the manufacturer (not the dealer or repair shop).

My motto is - read the owners manual, keep up with the maintenance schedule and don't fall for the marketing.

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Monday, January 14, 2008

Now, Later or Never

Will you get it back?

A friend of mine is relocating and ended up putting his house on the market. Obviously this is not the best time for selling a house so the realtor offered some aggressive options to help sell the house quickly. The list went from the simple tasks like cleaning and de-cluttering to the more extreme, which included new carpets, new granite counter-tops, interior/exterior paint, new light fixtures and updated window treatments. The final bill was about $15,000 but the house looks fantastic. My friends only regret is that he will not enjoy these upgrades for long (hopefully!).

So I started wondering - should one invest in home improvement upgrades as soon as possible so you can maximize your usage of these improvements. Should you phase in these improvements or maybe leave some improvements for the last minute.

Do it now
High usage additions should be tackled as soon as financially possible. I want to emphasize my usage of the word addition since these features are lacking today and can add significantly to your life style. Additions I would invest in include - deck or patio (if you spend substantial time outdoors), finished basement (if you have young kids), adding any appliances (sump pump, radon mitigation system, water softener, humidifier etc.) and investing in your yard (trees take time to grow!).

Lets phase it in
This category is about aesthetics and upgrades. Not a necessity but if the house needs these upgrades before it goes on the market then maybe you should consider phasing them in. Counter-tops, kitchen appliances, window treatments, light fixtures, carpet and flooring etc. fall in this category.

Maybe in the end
Some improvements are better off just planning for the last minute. It's the added price you pay for putting the house on the market. These repairs and enhancement include painting, flooring (cleaning or replacing) and cleaning.

There is always a balance between financial well-being and quality of life. That balance is a personal choice but some prioritization can help in achieving that balance.

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Tags: Selling House Prioritization

Tuesday, January 8, 2008

We Bought A Couch - Finally!

Time to relax

What took longer - finding a house, starting a side business or finding the perfect couch? Yeah - the couch is the winner by taking almost a year of bargain hunting, reviewing options, sitting on a few hundred couches and discussing couches ad nauseam. But like most things in life - there is always a lesson to be learned!

Men and women shop differently
No mystery here - men are more logical and decisive whereas women are more emotional and exploratory. I am generalizing but at a personal level that is how we are (Mr. and Mrs. Runta). Over the years we have learnt to shop smart by exploiting our personalities. The wife does the scouting and researching and vacillating - which she enjoys. We join forces to conduct final evaluation and decision-making. Seems to work for us.

Know what you want
Smart shopping starts by knowing what you want and what your budget is before you get to the store. Our strategy is to review catalogs, discuss features with friends, read reviews and form a loose opinion about what we are seeking and the price range. You need to 'kick the tires' at the store but you can do most of your research at home. And one more time - define your budget!

Quality, time and cost
Usage and duration requirements indicate quality, which dictates price. A couch is a long-term buy with strong usage requirements thereby quality is important. To buy quality you should be willing to pay a premium, which in my experience is worth it.

Sales, sale, sale
If it is a pre-planned purchase you should always wait for the super-sale. There are a few times a year when you get those opportunities but if you can afford to wait, the price discounts can be substantial. If you are unsure about upcoming sales or need more information - asks the store manager about it.

How are you going to pay
Store financing, credit card, cash, first-born - have you reviewed your payment options. My preference is no-interest store financing if I get more than a year to pay. You can earn interest for a year on that money which is always nice. Cash back via a credit card also has some incentives. If you go for store financing - make sure to read the fine print and understand the interest, payment and penalty clauses before you sign.

Avoid the sales pitch
Stick to your primary purchase and avoid the sales persons overtures to buy add-ons. Add-on warranty, maintenance kit, service contracts etc. might not be necessary unless you have researched and deem any such add-on to be a requirement.

Always ask
It never hurts to ask for any ongoing discounts or deals. On our recent purchase - the store was offering 5% off if paying upfront. We also asked for free delivery and the sales clerk agreed. That is a $120 saving - just for asking.

An exhausting experience but thankfully there is a nice reclining couch to relax on till the next shopping adventure begins.

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Tags: Smart Shopping

Thursday, December 13, 2007

Is Bigger Better?

(This is huge!)

No double entendre intended here. I am talking about bigger TVs, refrigerators and obviously the place where you keep these appliances - your house. So is bigger better? If you are talking about TVs, it’s a lost cause. A HD rendition of Discovery's Animal Planet on a 60 inch 1080i plasma TV is indeed an experience. But an expensive experience!

Wall street reported today that to run the whole show - TV, set top box, game console, speakers, DVDs and DVR could add upwards of $200 to your annual energy bill. Wow! And that is just the entertainment system. Add in the stainless steel four door fridge, wine cellar ... and you know where your energy bill is heading.

Bigger may be better but it is usually more expensive. When you think expensive, consider the immediate cost and the recurring cost. And it’s the recurring long-term expense that will cost you a lot more. After all it’s the latte factor in reverse. Think about it.

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Monday, December 10, 2007

Is Identity Theft Inevitable?

(Still looking ...)

The proliferation of electronic money, online shopping and lagging security standards confirm that the answer is a resounding yes. Here are a few facts to jog your memory on this subject
- The FBI calls it the fastest growing white collar crime in America
- Oprah Winfrey, Steven Spielberg, and Tiger Woods, all have had their identities stolen
- FTC estimates that as many as 9 million Americans have their identities stolen every year
- Identity theft costs almost $53 billion annually
- Americans spent 300 million hours resolving issues related to identity theft
- Victims know the thieves who steal their precious name. In over 25 percent of reported identity theft cases, the victims know or are related to the identity thief.
- Most identity theft cases start in the workplace. Studies show that up to 70 percent of all identity theft cases are an inside job--perpetrated by a co-worker or an employee of a business that you patronize. Perhaps the greatest surprise is that a large number of the identities were stolen not by an employee -- but by the business owner.

So what is identify theft?
The FTC defines it as

"Identity theft occurs when someone uses your personally identifying information, like your name, Social Security number, or credit card number, without your permission, to commit fraud or other crimes."

How are you exposed?
If you use a credit card, get credit card offers in the mail, shop online, visit a health care faciltiy, have a bank account or maybe throw out your garbage - then you are vulnerable. If your personal information is with someone and in today's world it is probably with someone, then you are exposed. Plus cyber criminals are using more advanced techniques like phishing to get you to divulge your personal details.

What can you do?

Check your bank statements and credit card bills regulary for any discrepancy.
Monitor your credit reports on a regualar basis. Now you can get a free freeze put in place which could act as another deterant.
Shred your sensitive financial information before you throw it in the garbage
Never disclose your financial information to unknown email inquires
Get firewall protection for your computer, secure encryption for your wireless router and activatve your virus/spyware protection
Add identity theft protection to your insurance policy. It is not very expensive and should help pay for the expenses you may incur if your identify is stolen.

References
Check out the Federal Trade Commision site for good identify theft information.
Department of Justice also has a good section on identity theft.
CBS 60 Minutes recently had a segement on identity theft
MSNBC reviews the merits of identity theft insurance
Forbes claims identity theft insurance isn't insurance
MSN Money presents 10 ways to stop identity theft cold
Interesting facts from About.com

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Tags: Identity Theft

Thursday, December 6, 2007

Myth - Housing is a Low Risk Investment

Moody's Economy.com states - "Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30 percent before the housing crisis is over"

Risk management - Every investment carries a risk. Housing fluctuates less than the stock market but can incur a substantial correction. The only sure risk mitigation strategy is knowledge. Understand your investment asset - what is it, how does it work, why does it make money, what is it affected by, when to buy and when to sell.

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Tuesday, December 4, 2007

Paying a High Price for Ignorance

In most things financial – ignorance is usually not bliss. The case for educating oneself on financial matters is made consistently and regularly. But I guess we tend to ignore this sage advice and end up paying a high price for this lapse in judgment.

"The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy -- including middle-class and wealthy communities where they once were scarce. They also affirm that thousands of borrowers took out loans -- perhaps foolishly -- with little or no documentation, or no down payment, or without the income to qualify for a conventional loan of the size they wanted."
WSJ - Subprime Debacle Traps Even Very Cedit-Worthy

Evaluate your options – We spend considerable time and effort exploring and evaluating the type of house or car we will buy. Even if a small percentage of that time and effort was spent in evaluating the financial options available for these purchases we would be so much better off. The price for picking the wrong product or not understanding the details of the transaction could be extremely expensive as the excerpt above highlights.

Read the fine print – It’s legal mumbo-jumbo and boring as hell. Agreed but in the fine print lie the details about the fees, penalties, rates and default clauses. If you don’t get it – hire some help to decipher the contract for you. A few hundred dollars spent on a competent attorney could save your thousands in the long term.

Education – We can’t be experts on everything but that does not mean you have to be absolutely ignorant either. A person who is not looking up a car’s blue book value online before walking into a showroom is choosing to be taken for a ride. There are enough financial tools and education available to the retail investor today to give you an edge. If you choose to be ignorant – you pay the price!

But everyone else is doing it - That is called herd mentality and we all like to follow the herd. Before you join the herd, think about what carrot the herd is running after and who is dangling that carrot. My mantra is – “if it looks too good to be true – it probably isn’t”.

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Friday, November 23, 2007

Compelled To Shop

The deals, the ads, the early bird specials, the savings ... you feel compelled to shop. Almost feel guilty that there are some fantastic deals out there and you may be missing out on them. Missing out on a once in a year opportunity! A few thoughts on Black Friday -

- A Deal is A Deal: Be an astute shopper. If you know what you want and you can buy it at a discount (maybe a substantial discount) - go for it. The key is being organized about your shopping by knowing what you want.

- Splurge a Little: This is the season and if you need to splurge a little - why not. Get it out of your system in a controlled fashion rather than have a shopping breakdown. Set a splurge budget and stick to it.

- Once in A Year?: Don't fall for the hype that this is THE sale event. There is an after-Christmas sale, a New Years sale, a end-of-season sale, a start-of-season sale ... If you sit this one out - rest assured there will be many more opportunities down the road.

Be smart and rational about your shopping this season. Stay away from the hype but capitalize on the discounts that make sense.

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Tags: Black Friday Smart Shopping

Tuesday, November 13, 2007

Save or Explode

I have been wondering how to engage my kids in money management. Reading the Wall Street Journal or watching CNBC together has not been very productive. Strolling through the blogosphere and surfing finance sites today – I came across this unique piggy bank gizmo made in Japan by toy manufacturer TOMY.
I see some merit in buying this gizmo for my kids. I assume the novelty of the exploding piggy bank will wane over time but hopefully it will get my kids started on the path to savings and some financial education. To make the banking concept interesting and maybe even create a little saving fund for the kids by the time they are ready for college age – I plan to regularly invest in the bank.

A $25 investment every week that is invested at a rate of 10% return will yield about $33,500 in 13 years. My daughter is 5 and if I invest $100 in her account every month she will have a reasonable account balance by the time she is 18. Market fluctuations, inflation, taxes and admin cost will impact the final balance but this is a learning exercise. And I am hoping to explore learning options in the following areas

- Consistent Saving Habit: Regular and consistent savings is the hallmark of creating wealth. This piggy bank will reinforce that concept by consistently saving $100 month in this account.

- Make Your Money Grow: Money sitting in the piggy bank will not grow. To make the money work, we will have to invest the money. That opens the door to asset allocation and investing in stocks, savings bonds etc. I plan to invest in kid friendly companies like Disney, Mattel and McDonalds to keep my daughter engaged.

- How Compounding Works: When you regularly save and invest over years – compounding kicks in. There is no better way to explore this concept than by engaging kids in a joint venture.

- Affecting the Top Line: As my daughter grows, she will have opportunities to invest more capital in her account based on income she might generate via summer jobs etc. With added income there will be opportunities for some profit taking also which can be used to explore concepts around P/L, balance sheet etc.

- Having Fun: Financial education is important but the subject can be dry and impersonal (hint – Wall Street Journal) for a kid. These creative ways to save money and explore investing options may be more engaging for my daughter. And a crying and exploding piggy bank sure does sound like fun!!!

Photo courtsey Reuters

Tags: Educational Investing Saving

Tuesday, November 6, 2007

Getting Ready for the Unknown

You may think that you are ready – but reality has a way of “getting you”. Think about the readiness of FEMA and it’s handling of the Katrina crisis. FEMA thought they were ready and competent to handle any crisis – how wrong was that assumption. Or consider the hedge fund strategies used by the two Bear Sterns funds that went bust recently. The hedge fund managers had planned for all relevant scenarios but reality was significantly different. Similarly we can plan and prepare for our financial well-being but our resolve is periodically tested. And we don’t have to create a situation – life usually throws a curve ball that our financial plans have to deal with. That is the ultimate test of any financial plan and strategy.

You may have a savings goal that can get blown away during the holidays. Or (like I did last weekend) you may end up hosting some guests and end up spending more than planned on food, entertainment and sight seeing. You may blow your budget on vacation or holiday shopping. You may assume an unrealistic return on your portfolio (the recent bull market is making us complacent about risk and greedy about large returns). And there are life situations that can throw the best laid financials plan awry – birth, death, marriage, divorce, college, job, parents …

My sentiment on readiness covers both the proactive and reactive

Financial Contingency – You plan for the unknowns by creating a financial contingency plan - a financial buffer to tide you over the financial difficulty you encountered. This contingency is for the truly unknown event in your life. Experts recommend 3-6 months of living expenses as a buffer – that may be a good starting point.

Another option is to create a slush fund that can be used to fund the various spending temptations you come across. The slush fund will shield your core savings and investing strategies from being adversely impacted.

Lessons Learned – When you are hit with a surprise (and it will happen) – deal with it the best you can but don’t forget about it. Review it, analyze it and figure out how to avoid this situation in the future. Learn a lesson from the situation – update your readiness for the next time. If the stock market undergoes a correction and your first reaction is sell and run – stop! The ups and downs of the market should be used to review your allocation, diversification and investment strategy and tweak it as appropriate. Remember – the smart learn from their mistakes and become stronger, the fool makes the same mistake over and over again but expects a different outcome.

Be ready for an event that will test your financial readiness – plan for a financial crisis, learn from it and become financially smarter.

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