Prioritizing Finances and Investments

"A wise man should have money in his head, but not in his heart."
Jonathan Swift (1667 - 1745)

One of the key points to success in your personal finance is learning to prioritize what exactly to do with your money. This is one of the harder things to do because it requires patience and self discipline to stick to a plan that you have created. In this article, I will be sharing with you my list of priorities in relation to my personal finances and goals as well as explain why I chose this particular ranking.

Below is the ranking of importance in my personal finances:

1. Checking AccountSavings Account (directly linked to checking account to prevent overdraft)
2. Emergency Fund (In high-yield savings account [e.g. HSBCDirect, INGDirect])
3. 401(k) (through my employer)
4. Roth IRA (Reputable Mutual Fund company [e.g. Vanguard, TRowePrice])
5. Mutual/Index Funds (Reputable Mutual Fund company [e.g. Vanguard, TRowePrice])
6. Individual Stocks (Through an online broker, refer to post "I have money, now who do I invest it through" for more information)
   

Checking Account

The checking account is the first priority because typically this is what most people use to pay their expenses and bills such as utilities, rent/mortgage, car payment, etc. It is important to have this account funded properly at all times so that bills are paid on time and bills can be paid in full without having to overdraft this account. This is also typically the account that most people choose to have their paychecks deposited to. I personally allocate funds from this account to fund my other accounts.

Savings Account

The whole purpose of my savings account is to prevent any type of overcharge fees from my checking account. This account is insurance for my checking account so I do not incur any unnecessary fees, further depleting my usable income. I typically keep this account a little above the minimum balance as specified by my bank so I do not incur any fees for it.

As mentioned earlier, since this account is only used as "insurance" it should not be constantly withdrawn from to cover back-to-back overdrafts. Since most savings accounts are covered by Federal Regulation D, you are limited to 6 overdraft transfers a month. For more information and details about this regulation, please click on the following links:

Regulation D FAQ
Regulation D
Regulation D Offerings
Regulation D -- Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933

Emergency Fund

The Emergency fund is the most important account I own. It contains approximately 5 months of my take-home salary that will hold me over in the event that I lose my job, become disable or encounter a major unplanned expense. The Emergency Fund is an account that I do not have easy access to. Since I have it all online with HSBCDirect, it takes approximately 3 days for me to receive money from this account once I have requested it. This is perfect for this type of account because that typically discourages me from using this account for anything else besides an emergency.

The reason I suggest keeping an account like this directly with an online bank is due to the fact that there is a stable interest rate that usually pays more than standard bank account. In addition to that, you do not have to worry about your money invested dipping below your original amount deposited. This refutes the idea of using a personal Individual Retirement Account (IRA) as your emergency fund due to the fact that IRAs are volatile and run the risk of being "down" at the time that you need to withdraw from it.

401(k)

The employee sponsored 401(k) is typically the "nest egg" that most people use to retire. Since this money is taken out pre-tax, it adjusts your taxable income and has potentially tax benefits that can make the difference in the amount of taxes you owe the government at the end of the year. In addition to that, most employers contribute some form of matching up to 6% of the employee's contribution (which translates into FREE MONEY). There is a 15,500 limit by law (reference) that you can contribute annually to this fund. However, I have set my own personal limit to 15% of my annual salary. This was done so that I can continue to invest my money through other investment vehicles.

Roth IRA

The Roth IRA is probably the best investment vehicle possible besides the 401(k). Typically, the 401(k)'s benefits exceeds the Roth IRA only due to the fact that most employers offer some type of "matching" plan for employee contributions and because the 401(k) can lower the overall taxable income. However, if the employer does not contribute to the employee's 401(k) at all through matching, then the benefits of the Roth IRA mostly outweigh that of the 401(k). The biggest benefit of the Roth IRA is that it is not taxed at all when it is withdrawn (pending that you meet your eligibility to withdraw requirements) For more information on some of the benefits of the Roth IRA, refer to the following links below:

Roth IRA by Wikipedia
401(k)/IRA Matrix

Mutual/Index Funds

For beginning investors, mutual and index funds are the best introduction into the stock market. The reason why these are the best way to enter into the market is because it offers the two key requirements in successful portfolios: Diversification and Low-maintenance. Typically index funds are better than mutual funds because they usually have a lower Expense Ratio ,with a comparable amount of diversification. Also, these are great for the buy and hold strategy where one can contribute a set amount of money each money to a steady investment to allow it to grow over time.

Individual Stocks

The last financial priority should be investing in individual stocks, however this is commonly one of the higher priorities on most people's list. I, too, am guilty of mis-prioritizing this particular vehicle and was severely burned by this strategy. Individual stock picking requires a lot of research and time that most people are not able to invest. It is very rare that novice stock investors will be able to beat the S&P Index fund's average return rate approximately 15% in their first year of trading. My recommendation is to fund the higher priority vehicles first and then use any left over money (that you do not mind losing) to play individual stocks.

Overall, my priorities may not fit your financial situation. Different people have different needs and goals that they have set as to what they want to accomplish. This particular methodology works well for me and has so far allowed me to stay on top of my finances as well as plan for my future. Please let me know your thoughts below and any other strategies that you have in the comments section. Remember...stay disciplined!

I Have Money, Now Who do I invest it through?

I received a request from one of the members of our group about which online broker to use to invest their money with. Although I have one particular online broker that I trade with (which will be revealed at the end of this post), I feel like it is only fair for me to give a comparison between the companies to support my reasoning behind my choice.

This article is written with the assumption that the user will only be using these online brokers for online stock trading only. Mutual funds are a whole different story and a different article will be written to address that issue.

Below is a link to the comparison between the online brokers:

PDF List of Online Brokers

All of the provided data is based on the assumption that the user will not be using any broker assisted trading. In addition to that, all information listed above was gathered from the companies' websites as well as through interaction with their customer service departments.

So after all consideration, I decided to go with TDAmeritrade as my online stock broker. The reason why I chose them was because out of all the brokers that I called, their associates seemed to be most knowledgeable and friendly. In addition to that, their interface is really easy to use and they have a lot of help topics that a novice investor can use to educate themselves on the ins and outs of trading stocks.

At the time that I chose TDAmeritrade, I only researched 3 other companies (Sharebuilder, E-trade and Scottrade). Given the knowledge that I have today, if I could do it all over again, I would more than likely choose TradeKing as my online broker as they have close to the cheapest trades as well as some of the highest customer satisfaction rates I could find online.

As usual, leave your comments below about your experience (good and bad) with online brokers. All feedback is always welcomed!

"You Won the Lottery! Now What?"

At one point or another in our lives we have all sat and daydreamed about what it would be like to inherit or win a large sum of money. The vast majority dream of buying lavish gifts or taking trips all over the world. The fact is we oftentimes think of the present and dismiss planning for the future. The cold reality is that a a million dollars nowadays can be spent in the blink of an eye if not carefully managed. Believe it or not there are countless stories of those who have struck it rich only to find themselves bankrupt a few years later.

In this article, I will touch on four basic principles that will guide you in managing your finances before you make that impulse decision to take that exclusive spaceship tour of Mars. If or when the day comes that you find yourself on the receiving end of a cash windfall, you will be much better equipped to handle that money much more confidently and intelligently.

Know your money….inside and out.

"When you fail to plan, you plan to fail"

This may sound basic to most, however, this is a key step that many neglect which leaves them not only worse off than before they had acquired their wealth, but deeply depressed as well. What many fail to realize is that there is an emotional toll that comes with handling large amounts of money and with that many relationships can be affected for the good or bad. You must understand that you are in complete control of your finances and that you must not let outside influences affect how you make decisions.

As a rule of thumb, I suggest not doing ANYTHING with your money for at least one month. It is during this time frame that emotions and impulses run high and when the road to financial turmoil begins. During this time, write down on paper a detailed list of what you plan to do with your money and the costs associated with each activity. Be sure to consider the pros and the cons about each decision and weigh each option carefully. There is a psychological advantage to doing this in that you now have a sense of ownership over your finances

First things first, you absolutely must assemble a "power" team of financial professionals.

This is the downfall of many who strike it rich in the first place because they feel as though they can do it all alone. It is imperative that you put together a highly-qualified group of financial gurus who have experience with working wealthy clients. At minimum the core of your team should include a CPA (certified public accountant), financial adviser, investment adviser, and estate lawyer.

I suggest interviewing 3-5 prospective advisers for each area of expertise. Some of the information you should get out of the interviews include outlining some of the successes of past clients, the credentials of their portfolio, and all fees associated with their services. This is not to say that you can now relax and take a hands-off approach to your money.

Stay actively involved and continue educating yourself with the knowledge of these advisers at your fingertips. Engage yourself in every decision that is made and ask questions when things aren't clear to you. If you are not 100% satisfied with their services you have the right seek another adviser.

Please note that this step is typically reserved for those who have the means to afford hiring a group of professionals. If you do not have the financial backing to afford a power team of financial professionals, do research on each of those occupations to at least understand how each professional is helpful in regards to your finances.

Pay off all debts starting with the highest interest debt first.

This step is self-explanatory, however one that is often overlooked. Many people focus their energy on accumulating more debt instead of eliminating the ones that they currently have. Contrary to popular belief, all debt is created equal.

In my book there is no good or bad debt. All debt prevents you from maximizing your overall net worth and wealth potential by minimizing the money that you have at your disposal to invest and save. With that being said, pay off all debts (credit cards, student loans, etc.) with the highest interest debt first. As Dave Ramsey states…"Debt is dumb" and "Cash is King!"

Invest for the future

This doesn't just mean your own future, but that of others as well. As the old adage goes, "with large wealth comes large responsibility." With your newly acquired wealth you now have the power to leave a lasting impression for many generations to come. The possibilities and opportunities to change lives are endless.

Consider immediately opening up trust funds, ESA's (Educational Savings Accounts), or Roth IRA's for your children and grandchildren. Donate to an organization that is near and dear to you heart (Charitable contributions are great tax write offs!). Whatever it is, make it your mission to create a legacy of giving that can passed down for
years to come.

Bankruptcy and Foreclosure Avoidance

One of our members gave a great presentation on education about bankruptcy and foreclosure. In order to prevent something, you need to understand the cause and purpose behind it. The presentation that Micah gave was informative as well as very eye-opening. Below are the notes taken from the presentation.

Bankruptcy and Foreclosure Avoidance: 4/12/08

Real Estate Seminar at Georgia Tech
Lender Presented the following information:

• Buying Real Estate can be used as an investment tool
• Real Estate in Georgia appreciates on average 6.2% per year

Reasons to choose Real Estate over stocks

• Leverage
• Example: If one wanted to make 6.2% interest on $100,000 in a stock, one would have to invest a full $100,000 into that stock. However, in Real Estate, you can put $10,000 down on the $100,000 investment, it appreciate 6.2% in one year and then sell it for the full $100,000 + 6.2% interest accrued on the properly

Foreclosure

• Government is making it harder to obtain loans. New requirements in place to make sure that you can afford the loan before signing up for it.
• The government and loan companies were less strict before and people started to obtain loans they could not repay.
• Foreclosure is typically executed on a home after the buyer gets behind three mortgage payments (typically failing to pay for three months).
• The bank usually tries to warn the buyer prior to the foreclosure notice

Foreclosures buyouts occur the 1st Tuesday of each month. An attorney has to publish into the county's records publicly one month before the foreclosure is executed. Investors typically go to the courthouse to find out which homes are being foreclosed on and by up the remaining amount on the loan. The investor typically tries to work with the buyer directly to prevent foreclosure while renegotiating the terms with the buyer to make more money than the investor put up for the buyer.

Foreclosure Avoidance

1. Mortgage companies do not want to foreclose on homes due to both parties lose in that situation.
2. Establish a good relationship with the mortgage company so alternatives can be agreed upon in the case that the original terms to the loan are failing to work over time.
3. Contact the mortgage company in advance at the first sign of problems to repay the loan.

Bankruptcy Definitions:

Chapter 7, 11, and 13 bankruptcy definitions

Rearages: After one files a claim for bankruptcy, it is the increased payment to make up for the loan + late fees all in one package.

"An ounce of prevention prevents a pound of cure"

It is best to avoid bankruptcy at all costs as it causes heartache and grief for at least 3 - 5 years of your life. In addition to that, debtors usually sell your debt amongst each other create a continuous cycle of the same debt remaining on your credit for an indefinite period of time.

Before declaring bankruptcy, try to settle the debt with the creditor at a lower price. Most companies rather get something rather than nothing. If you do decide to do this, be sure to document all procedures and always obtain the agreement in writing. Always obtain a reference number, name and worker ID when working with customer service representatives.

Always dispute negative ratings that are in error on your credit. After a formal dispute is issued to a debtor, they have 30 days to challenge the dispute or it can be removed from your credit.

More Information on Disputing Credit Errors

Please share your comments below about this topic or let us know if you wish to have more information about the subject.

Home Buying Powerpoint Presentation

One of our members gave a presentation on home buying during our last meeting. Below is the link to the powerpoint presentation that he created with the information he presented.

Things to Consider When Buying A Home Presentation

Please comment below if you would like to leave any feedback.

The Investor's Mindset (Introduction)

Getting in the mindset to invest has been a challenging experience. Dealing with the challenges of wanting to keep up with the Jones's, being able to gracefully accept a gain in stock and dealing with the humbling effects of losing half of my total investment (in that very same stock) has caused me experience a roller coaster of emotions. The most important thing to note during this experience is that through each of these times, one goal has remained in my mind:

"Retire comfortably by age 45"

Before investing, I find that one needs to set a goal. Whether it be to purchase your dream home, become a millionaire or just retire earlier than the "status quo", a goal is needed to keep the focus during the times of emotional instability caused by the ups and downs of life. This mindset is taken from the motto, "It's easy as P.I.E."

• Plan
• Implement
• Evaluate

Basically, as long as you "Plan, Implement and Evaluate", you can accomplish whatever you set your mind to. With that said, I have decided in my mind that my goal is to retire comfortably by age 45.

After deciding what your goal is, you must define it. "Reitre comfortably" to me means to be able to have enough money to sustain a lifestyle that is comparable to my life now. Understand at the moment as a 23 year old bachelor, I do not have much responsibility. However, with a wife, children or whatever other responsibility I may have, I want to be able to spend money using my debit card without having to check my bank statement every month and possibly overdrafting my account. With this understanding, I decided to look at my current allocation of funds to all of my expenses and calculated that "comfortable" at age 45 would require me to have at least be 130% of that per year for at least 40 years.

Now although there is little rhyme and reason as to why that number was chosen, it gives me an actual tangible figure that I can set as my goal. To determine how I will reach my goal, I used sites like BankRate.com to calculate different scenarios and figure out how much money I need to save per month in an investment suitable for my goals. In addition to that, I have read books (Investing for Dummies), countless blogs and magazines and have literally surrounded myself with investing and finance. After putting all of this information together, I finally developed an investment plan and have come up with my means to reach my goal.

I will begin to detail my saving strategies as well as provide other information that I find useful in the journey to obtain my financial goals. This blog will also continue to have the notes from each of our meetings and may even have a special guests to contribute their own personal finance goals and means to obtain them. Overall, I hope that you are able to use the information here to assist with obtaining your financial goals. Stay tuned...