Automatic Accounting

They always say time changes things, but you actually have to change them yourself. - Andy Warhol (1928 - 1987), The Philosophy of Andy Warhol

On Saturday I attended a conference at the Peachtree Westin (in downtown Atlanta) where Travis Smiley gave a small motivational speech about what to do with the 60 seconds that we are given in every minute (AKA "the present"). It was very stimulating to say the least, but in summary, the biggest thing I took away from that speech is that if we need to make a change, we need to do it now.

In addition to that, I attended a small workshop after the speech hosted by Nationwide called "Securing your Future" (from a financial standpoint). The information that was being taught was the very basics of investing. (401k, IRA, annuities, etc) However it was shocking to see that to most of the faces around the room, this was brand new information. I see that it is a privilege to know as much as I know at 23 (although I am sure that I should know a lot more), however, I there is a need in Atlanta to educate many about basic principles about personal finances.

I decided to challenge myself and make this this is my personal mission to educate those I come in contact with simple personal finance principals so that the playing field is even. I was discussing earlier at our meeting that the rich get richer and the poorer get poorer not necessarily due to work ethic, but more because of knowledge. The rich have the "know how" and most others are left in the dark. To try to create a light in the darkness, I have written a small informational on a topic that I presented during our group meeting today.

Automatic Accounting

I. Introduction

• Been using automatic accounting since 10/2006.
• Reached emergency fund (approximately 50% of my salary ~ a year of necessity costs) goal in one year using this method.
• More Information: Started with 10% of salary and used this in conjunction with "ramping up" to reach goal.
  
• Have been steadily contributing to Roth IRA, 401k, personal stocks as well as discretionary funds with this method.
• Has worked great so far and has needed little adjustment (except for when there is unexpected income increases).
  

II. What is Automatic Accounting? (Introduction)

A. Automatic Accounting - A hands off approach to schedule fixed income transfers to various checking, savings, and investment accounts to reach a predetermined financial goal.
B. Summary: "Set it and forget it".

III. Why Automatic Accounting?

A. Benefits of using Automatic Accounting

1. As with most "automatic" things in life, allows less work to be done after initial planning/set-up to obtain financial goal.
• Allows consumers to create a plan and put it in motion automatically which typically helps people to stick to their plan because it no longer requires added input.
  
2. Hands off approach and becomes something that is not thought about, just happens.
• Helpful to the person who has a hard time remembering to pay bills or attend appointments.
  
3. Helps to control the amount of discretionary spending done throughout the month since the consumer knows how much is being allocated to savings goals.
• Helps with prioritizing spending. Eliminates large amounts of money that sometime give the illusion that you have more discretionary money than you actual have.
4. Allows for abstraction of funds to break up all expenses into their individual accounts and deal with each separately.
• This is useful in the case that you receive a raise and want to start allocating money to a new account. Instead of having to look at all of your expenses/savings goals as a whole, you can decide how much more you want to contribute to each.
  

B. Scenarios that investment accounting would apply to.

1. The consumer who pre-allocates money to dedicated savings.
• It is imperative for the consumer to know where money they are allocating is going. This helps with prioritizing expenses and eliminate unnecessary spending.
  
2. The consumer who typically pays bills on pay day rather than due date.
• Paying bills on time rather than by the due date also helps with prioritizing expenses. This also helps to avoid late fees which take away from net income and is easily avoidable.
  
3. The consumer who has enough money to allocate towards a savings goal.
• The consumer must have a plan as to what goal they are trying to accomplish with the pre-allocated money. That way the consumer is able to achieve their goals in order rather than trying to accomplish too much at one time. This is also useful when a consumer is ready to begin reallocation of their income.

IV. How to Set Up Automatic Accounting?

A. Preparation

1. Develop a financial goal.
• A person must have an end result (realistic goals) to achieve with automatic accounting. (Ex. paying bills on time, eliminating debt, saving for car, home improvements, new clothes, etc.)
  
2. Calculate to determine savings per month to obtain financial goal by the estimated goal date.
• Once a goal has been determined, used financial calculators (http://www.bankrate.com ) to get an idea of how much you need to contribute to obtain your goal in the defined time on a monthly basis.
  
3. Discipline yourself to abide by plan to have allocated funds applied to financial goals.
• Once you have developed your plan and determined how much you need to contribute to accomplish your goals, go through the process of setting up the automatic accounting with each of your institutions.
  
4. Make arrangements with bills to pay bills on date that they are due.
• Sometimes, arrangements can be made with certain companies (credit cards) to adjust your due date for a bill so you can arrange your notification for that bill as well as your scheduled pay day to coincide.
  

B. Steps to Automatic Accounting

1. Step One: Develop the Goal
2. Step Two: Create Accounts (Savings, Checking, Investment)
   
3. Step Three: Setup Automatic Transfers
• Automatic Bill Pay (review statements each month)
  
4. Step Four: Monitor and Adjust

V. Exceptions to using Automatic Accounting

A. What to do with unexpected income or bonus?

1. Prioritize what to do with the money.
• Contribute extra to an account
• Create a new financial goal (by creating a separate account) and contribute
  
2. Reward yourself for sticking with a plan.
• Treat yourself for sticking to your plan
  

B. What to do with an unexpected expense?

1. Emergency fund.
2. Dynamic reallocation (by skipping a month to a non-necessary expense).
• Skip contributing to non-necessary (investment, savings, etc) to cover necessary expense.

VI. Summary

Automatic accounting requires discipline and patience. Rome was not built in a day and in most cases, we can not expect our financial goals to be achieved in a day either. However, by sticking with a sound plan and well thought out strategy, in a few years, one will see and enjoy the fruits of their labor.

With that said, I challenge each of the members that read this blog to make a promise to themselves to help someone learn at least as much as you know about personal finance and share it with others. I challenge you to help someone to make a better financial decision no matter what immediate impact that it may seem to have. It is up to us to make a change and today I am choosing to to make that change...

Stay Disciplined!

Introduction to Stocks (Part 4) - The Conclusion

As all good things come to an end, this post is the final post in regards to the multi-post series in regards to "Introduction to Stocks". Below final portion of the information given by our presenter:

Tax provisions for trading short term vs. long term (25% vs 15%)

If you hold a security for less than 1 year, then you will have to pay a higher tax on your capital appreciation (the difference between what you paid for the stock, and what you sold it for). It is very high and around 25% (could be a little more, little less). Yet if you have the stock for more than a year, then you only have to pay around 15% (may be more, may be less) for your capital gains.

If you lose money on the stock, then when you trade it, you can use it to offset your capital gains on the stock (if you lose 25% on a holding, and gain 25% on a position, sold both, your net tax liability would “theoretically” be zero…Uncle Sam may still find a way to tax you though!). This is why towards the end of the year you see a mass selling off and activity in the stock market as large companies/institutional investors as they are responsible for a majority of the volume activity in the market. They sell holdings that were down during the year to help out with their tax liabilities. Then buy them back at the beginning of the year for a cheaper price than they paid for them.

You are also taxed on dividends (income gains).

Recommendations on starter books/Website

A Message to Garcia, Elbert Hubbard
Mad Money Book, Jim Cramer (any one of his collections are a good way to start. Gives you a good breakdown of the basics including understanding how the business cycle works- what we are going through right now, late stage cyclical trends, early stage cyclical trends, etc…)
Financial Dictionary, Webster
Old Financial Textbooks, Amazon.com/Ebay books
A Zebra in Lion Country, Ralph Wanger
The Intelligent Investor, Benjamin Graham
Richest Man in Babylon, George S. Clason

And this concludes the information presented by our presentation approximately a month ago. This is good information and I just spent a few moments today reviewing it all and bringing it all together.

My personal thoughts is that getting into the stock market is risky business if you do not understand the basics. It parallels much to the occupation of an electrician or chemist, if you are not aware of the dangers/risks, you can really hurt yourself. I encourage you to research and learn as much as you can about stocks, however, at some point, you have to take the knowledge that you have armed yourself with and put yourself in a position to learn from experience.

As usual, if you have any questions or comments, please leave them below or ask them on the group list.

Introduction to Stocks (Part 3) - Using Yahoo Finance

"We shall not fail or falter; we shall not weaken or tire...Give us the tools and we will finish the job." -Sir Winston Churchill (1874 - 1965), BBC radio broadcast, Feb 9, 1941

Investing in stocks is not an easy task to take on as a novice. In order to be successful, one must utilize every resource at their disposal in order to make sound decisions about the future of their money. One tool that the presenter introduced us to is Yahoo Finance. After reviewing this tool, I would say by far, this is the most detailed finance site out of all of the portal sites out there.

I have decided to take a different approach in trying to explain some of the key parts in using this site. I have created a small flash video with the use of the tool "Wink" to illustrate how you can use Yahoo finance to help do research on your stocks. Please refer to the link below for this information:

Click Here for Video of using Yahoo Finance

As usual, please let me know your feedback in the comments or if you have any questions, please let me know or ask the list. As usual, stay disciplined!

Introduction to Stocks (Part 2)

"Many an optimist has become rich by buying out a pessimist." -Robert G. Allen

With the stock market up 150 points one day and down 400 the next, investing can be one of the most challenging tasks that a novice can take on. However, with sound research and a basic understanding of analyst predictions and company finance sheets, one can mitigate some of the risks by making a good investment choice. I, personally, am a proponent of the buy and hold strategy when it comes to investing as I have been burned by the day-trading methodology. But, the information provided by our previous presenter gives a good understanding for any type of investor to analyze a company and decide whether or not they are a good investment choice.

Ways to research stocks
What I have found to be useful:

• Yahoo finance
  
• Free research reports
  
• Going into consensus expectations in earnings
• whisper number
• Growth
  
• EPS
• top line
• bottom line
• Revisions

1. Research what you know! If you like Nike, and you see everybody buying Nike, then start with Nike (Extra Info: In a previous two year period, the stock went up 67%).
2. The Internet is the best database (everything is on the internet…almost everything…its getting to it that’s the problem)
3. Check company website like the investor relations pages (go to www.Nike.com, and select “about Nike/jobs” and it will take you a page that will let you look at investor relations information. Check out a 10-Q (the company’s latest filings for the last reported quarter of earnings, then for a more detailed description, check out their 10-K, an annual report showing a more in-depth look into the business, including there own stated weaknesses or potential threats that they face currently or may face in the coming years- KEY). Listen to their conference calls or other webcast presentations and listen to what the analysts are asking about at the end of the conference calls. These questions are the main concerns for the people either recommending or downgrading the company, note though that because of the relationship with a majority of the banks with the companies, they do not typically issue too many negative recommendations like “Sell” ratings, they just say to “Hold” or the company will weather the storm and in the near future, the company will come out on top…they are full of hot air!
4. You will never know as much as the sell-side research people do, these are the guys that are (typically) asking the questions during the conference calls. It is their job to know the CFO, CEO, Board members, and other high company level management by name, and have close relationships with them so that that may make or mask the company’s performance to their own clients or the market place.
5. Pay attention to company guidance and consensus numbers, this is key. This is normally what drives the arbitrage in a share price. This is what you are looking for when you invest in a company. Question? Is the company consistently beating earnings, and surpassing the markets expectations (ie. Are they growing/doing better than what was already factored into the share price [this deals with Efficient market Hypothesis, meaning that if all information is factored into a stocks price, then the stock is correctly valued by the market place]).
6. Whisper number- Even if they meet consensus numbers, another number formed by the best-of-the best analysts may have come up with a earnings number- not published- that they expect the company to meet or beat.
7. Growth, P/E, ROE, Analysts revisions (last 30 days 60 days, etc… You also want to look at the overall consensus of the company, if its high, and something happens with the company, unexpectedly, then the stock will plummet. If the company has really low expectations than any positive data that comes out will help the stock if any information comes out that is “not as negative as expected” or to the upside/positive.

As mentioned in the previous post, this is a multi-part article that I will continue to post about until all the information is distributed. The next article I hope to post is about how to analyze a yahoo finance sheet which may even contain pictures (if I can figure out how to add this to the blog). Anyways, I hope you enjoyed the information above and as usual, if you have any questions, please respond to the group email or leave a comment below. Stay Disciplined!

Introduction to Stocks [Part 1] (Presentation from May 31, 2008)

I know that I have been ranting and raving about the presentation that took place last week, but honestly, it was really that good! With that said, as mentioned before, to those who were unable to attend, I am posting this article to disseminate the information learned from the presentation. For those who do not know, our presenter was a member of Pamplona Finanace who works for an investment firm in Atlanta, GA. Due to the large amount of information that was covered during this presentation, this will be part of a series of articles containing the different parts presented.

What is the Stock Market

• The stock market is an actual market with people who buy and sell stock.
• Much like in an actual marketplace, if someone wants to buy something, they will typically pay whatever price that is being ask for the item that the buyer wants to purchase.
• Conversely, for the seller, they typically have a price at which the stock is set, but if the buyer is not willing to pay that, then the seller will most likely sell it for the price that is bid for the stock by the buyer.
• The simple economic principle of Supply and Demand are the driving factors behind the stock market. The more people want of something of a set volume, the higher the price will be. The less people want it (the more people trying to get rid of it), the lower the price will be.

Different types of investments

1. Fixed Income (Bonds)
2. Money Markets (cash) - Savings Accounts, Treasury Bills (backed by the government)
   
3. Home Ownership (Real Estate)
4. Company Equity (Stocks)

*Please Note, Money Markets and Home Ownerships will have their specifics omitted as stocks and bonds were the focus of the presentation*

Fixed Income

Safe but think of inverse relationship between bonds and stocks. People buy bonds when interest rates are high, and a guaranteed investment will give you a yield (the difference between a coupon payment, like a dividend, compared to the price paid for the bond) higher than what they can get in a savings account, money markets, e. You recoup your initial investment at the end of the maturity of the bond, and you had little risk if the credit rating of the company/person who sold you the bond is trustworthy of not defaulting on the loan. Also, keep in mind that when inflation goes up, normally interest rates are too low, too much liquidity is a cause/result, and there is a lot of dollars floating around so more money can be charged for items.

Bonds should be purchased when interest rates are typically high.

Company Equity (Stocks)

Stocks give you ownership in a company. As a stockholder, you are entitled to ownership to a companies earnings. Dividends are the only way to evaluate a true company’s worth. Capital gains are just an outcome of future potential to pay out dividends (or just keep re-investing in the company and growing).

Why Investing in stocks is the best in terms of accessibility, liquidity, risk/reward, etc.

1. Stocks are easy to research and understand with some effort. We can see the basics of the how the companies make money (either a product or a service that they provide).
2. Accessibility is normally high for large-cap stocks, and low for small-cap stocks, which presents opportunities to make large amounts of profits if you find a small company that you think will grow to be very big one day. As in a market place, if nobody knows about (or wants) an item, then it will probably not be valued as a lot in investors eyes. Given the person that takes the risk, the chance to make a good long term investment, as the company’s works come into fruition increases dramatically.
   
3. On the same note, small names that nobody covers can lead to big risks. Yet the golden rule is that more risk equals more reward, less risk equals less reward (normally this holds true, but you can always find an exception).

How to value stocks, what makes them go up/down, attractive etc.

1. Valuation is a unique craft. Do not waste time trying to perfect it. Most come up wrong when trying to make predictions, and when you’re right, the market may react in the total opposite of how it should react.
2. To baseline principals of the stock market:
1. Stocks go up because people are buying more.
   
2. Stocks go down because people are trying to sell.
3. The Institutional Investor comes into play at this point. They, along with the other millions of shareholders, buy/sell/cover/short stocks all day, everyday. They are responsible for the large moves in the markets. Individual investors have little say in the price of a stock day-to-day. Its best to think long term as an investor, not getting caught up in trends, but thinking fundamentals of a company (not so much valuations, but understanding top-line, how the company is controlling margins, costs, and how they generate bottom-line, the only thing that the shareholder is entitled to as an investor)

As for now, this is the first post of a multi-article series covering the information that was presented at our last financial meeting. As usual, if you have any questions, please leave a comment or email me directly. Please stay tuned as more posts covering the Introduction to Stocks will be following shortly. Stay Disciplined!

Fast Track to Saving for Emergency Fund

Learn the art of patience. Apply discipline to your thoughts when they become anxious over the outcome of a goal. Impatience breeds anxiety, fear, discouragement and failure. Patience creates confidence, decisiveness, and a rational outlook, which eventually leads to success. -Brian Adams

So after a year and half of working, I have finally saved enough money to reach my goal for my emergency fund. As a quick side note, if you do not have an emergency fund I suggest you begin saving for one as I cannot stress enough the importance of having one. Now back to our regularly scheduled programming, I can remember at the start of that undertaking, it seemed like it would be almost impossible to reach my goal. However with the technique I'm going to detail in this article, I will explain how I was able to reach my goal.

The technique that I used is something I coined as "ramping up". I got this idea from Dave Ramsey's "Debt Snowball" effect When I first opened my emergency fund (e-fund) account, I started it with $1000. After that point, I decided how much money I could budget for this fund and set an automatic investment (i.e. minimum payment to this fund) from my checking account to the bank that housed my e-fund. Initially, I allocated $250/month from my budget to go directly into my emergency fund. It is a great idea to set up an automatic investment each month, however, personally, the $100/month was not providing the security that I wanted fast enough. To actually get some real sense of accomplishment, I began to take whatever extra money I had (whether it be from a bonus, excess from good budgeting for the month, birthday money, tax return checks, rebates, etc) and began my "ramping up" process to immediately deposit all extra income into those accounts.

This extra effort into funding my emergency fund provided results quickly where I was able to increase my initial deposit from $1000 to quadruple that in a matter of months. This provided extra motivation because it gives a sense of accomplishment and security to know that you now have a large "safety net" in the event that an emergency arises. In addition to that, once you have this fund built up, you actually start to see decent returns from the interest that the bank pays. After all, it is a beautiful thing to see a free $10/month given to you by the institution housing your fund just for letting them borrow your money. What is even better is the fact that the money that they are paying you on top of your savings is compounding also with your principal savings to add up to even more money over the lifetime of the savings since the bank is also paying you interest on the previous interest they added to your account.

All in all, for this to work, it does require a substantial amount of discipline. However with cutting costs at every opportunity as well as saving (rather than spending) any extra/unexpected income, one can find that they reach their goal for their emergency fund a year or two ahead of schedule. At that point, let the real investing begin...