Personal Accounting 101...Understanding the Basics to Accounting

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. -Thomas Jefferson (1743 - 1826), Letter to the Secretary of the Treasury Albert Gallatin (1802)

With the new year right around the corner, I have decided that one of my resolutions this year will be to track every dollar earned as well as every dollar spent in my personal finances. I am going to start up a new pseudo-company called "Jonathan Torian Inc." and become my own personal accountant. In order prevent failure and ensure a promising financial future, I am going to begin learning the basics in accounting and apply it to my every day life.

Two Types of Accounting

Cash Basis of Accounting

An accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid). The cash basis of accounting is usually followed by individuals and small companies, but is not in compliance with accounting's matching principle. (Citation)

Accrual basis of accounting

The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service). (Citation)

Cash Basis Accounting is the most applicable to the individual consumer.

Main Financial Statements

1. Income Statement
2. Balance Sheet
3. Statement of Cash Flows

Income statements

Show how profitable you are during the time interval. Profits will be measured in the amount able to be saved after a given time period. This can be used to show what time of the year money is more likely to come in or go out. Profitability involves two things, amount of money earned (revenue) and expenses.

Revenues

The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income. (Citation)

Expenses

The economic costs that a business incurs through its operations to earn revenue. (Citation)

Matching Principle

The principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. An example of this is Advertising Expense and Research and Development Expense. (Citation)

Balance Sheet

A financial statement that reports the amount of a company's assets, liabilities. (Citation)

A "snapshot" of a individual's financial position at a given moment in time.

Previous Article about using Financial Snapshots

Assets

Assets are things that an individual owns and are sometimes referred to as the resources of the individual. (i.e. Personal vehicle(s), its cash in the bank, home, etc.)

cost principle

The accounting guideline requiring amounts in the accounts and on the financial statements to be the actual cost rather than the current value. (Citation)

Depreciation

Depreciation is required by the basic accounting principle known as the matching principle. Depreciation is used for assets whose life is not indefinite—equipment wears out, vehicles become too old and costly to maintain, buildings age, and some assets (like computers) become obsolete.

In accounting, an expense recorded to allocate a tangible asset's cost over its useful life. (Citation)

Liabilities

Obligations of the company; they are amounts owed to others as of the balance sheet date. (i.e. Loans, credit cards, etc.) (Citation)

Statement of Cash Flows

Shows how Direct Delivery's cash amount has changed during the time interval shown in the heading of the statement. Good for helping to determine your financial circumstance and whether or not things need to be adjusted.

The goal of these articles will be to get a basic understanding of accounting principles then determine ways to integrate them into my personal finance. I am hopeful in being able to become the Chief Financial Officer of my finances for 2009.

Too often we rely on others' book keeping to determine if our finances are balanced. How many times do you check your bank account after you receive a bill to make sure that the power company debited the correct amount? How many times have you been overcharged by a department store or did not receive a store credit for returning an item. Unfortunately, I believe we can attribute much of the economic woes today due to not tracking expenses correctly and understanding the underlying debt trap that many Americans laid out.

By tracking my expenses, I hope to avoid this trap and being in less debt than what I owe today.

What are some of the financial resolutions you plan on doing for 2009?

Stay Disciplined!

Reading the Prospectus...A tutorial about knowing what you are invested in.

You can know the name of a bird in all the languages of the world, but when you're finished, you'll know absolutely nothing whatever about the bird... So let's look at the bird and see what it's doing -- that's what counts. I learned very early the difference between knowing the name of something and knowing something. -Richard Feynman

With the current downturn of the economy, many people are uncertain about their future with the current financial situation that the country is facing. If you were fully invested in stocks since October 2007, your portfolio is probably down somewhere in the neighborhood of 30% - 40% of its value on that date. It is amazing the difference a year can make.

I must admit, I have fell victim to the downturn of the stock market just as many of my colleagues have. As of today, I am currently down 38.8% in my 401(k) alone not to mention the many other investments that I currently own. While I am in no position to make a recommendation on what to invest in next, what I can do explain the tools provided for the investor that can help you make an informed decision about where to place your hard earned money.

Some of the fundamental steps that is incorporated in "It's Easy as P.I.E" is the planning and evaluation phases. Both of these require that you do the necessary research to make sure that your current allocation is the best applicable to your current financial situation. It also requires that you periodically review your current allocation to make sure that your portfolio is best suited for the amount of risk you are willing to take on. One of the most important tools for doing this research for a stock or mutual fund investment is given in the form of a prospectus.

Prospectus: A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. (Link to Investopedia)

Prospectuses are usually broken down in the following structure:

1. Overview
• Typically provides a high level overview of what the stock or fund is comprised of.
• May provide a small summary of the objectives of the company and how they plan to make their revenue.
  
• Provides some general information about the investment and provides in general a snapshot of the investment Year to Date (YTD) performance and price.
  
2. Expense and Fees
• In the case of mutual funds, there is usually a management fee that the mutual fund charges you in order to maintain the fund purchased. This fee is usually referred to as the Expense Ratio.
• Expense Ratio: A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors. (Link to Investopedia)
• Some funds also contains a load fee that is charged for maintaining the fund.
• Load: A sales charge or commission charged to an investor when buying or redeeming shares in a mutual fund. (Link to Investopedia )
  
• May also contain a minimum amount required to purchase the fund initially. From my own experience, it does not look like this minimum price needs to be maintained, but just done on the date of the initial purchase of the fund.
  
3. Performance
• This section may be the most important part of the prospectus as it will generally give you an idea of what kind of return you will be able to get on your investment.
• Contains average annual returns for 1, 3, 5 and 10 years. May contain the funds performance since the fund's inception.
• Return: The gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment. It is usually quoted as a percentage.(Link to Investopedia)
  
• The use of the return helps gauge future performance of the fund or stock. Depending on the market conditions, it can allude to whether or not the investment is going to continue to provide a good return on your investment or whether you should look elsewhere as it might have hit its peak.
• Usually represented in a percentage form that displays your overall return in the case that the investment was made at whatever previous time period without further contributions.
  
• This section may also contain a graph of the prices of this investment over time for a predetermined time period allowing for an example of what a certain amount of money would have returned over the past.
  
4. Portfolio Composition
• Another very important section to the prospectus is the portfolio composition.
• Contains information about the specific stocks or other mutual funds and the amount of them that the investment is comprised of.
• In a mutual fund, usually contains a list of the Stock Style
• Stock Style: The investment approach or objective that a fund manager uses to make choices in the selection of securities for the fund's portfolio. (Link to Investopedia)
• Flash Movie of Stock Styles
• Displays the sectors of the market that the fund is exposed to.
5. Prices and Distributions
• This section contains a historical reference of the prices that the stock or mutual fund closes at on a daily basis.
• Can be useful for determining whether a stock is over-valued based on the price over a given period of time.
  
• Can also help to identify the best time to purchase the stock during the month.
• Contains the rolling 52 week high and low which allows you to gauge the high price and low price for the year of the investment.
  

Although I am unsure about how much lower the Dow Jones will go, I am still hopeful that the stock market will rebound and pull itself out of this funk. In my opinion, I think that there will be a lot of bad days down the road, however, if I am able to make an informed decision by investing in the sectors that I believe will bring America back to the forefront of the global economy, I may be able to reap some great rewards.

Feel like I missed something in this article about prospectus? Please share your knowledge about this topic in the comments below.

Stay Disciplined!

P.S. - For some real world examples of prospectuses, look at the links below:

Fund listing for Vanguard
Fund listing for TRowePrice

The Privilege of Giving

Title: The Privilege of Giving

Body:

“It is more blessed to give than to receive.” — Jesus, Acts 20:35

While watching CNN tonight, I saw a compelling story about a family in Phoenix, Arizona that was begging on the side of the street for money. The father had recently lost his truck driving job and has currently had to resort to panhandling in order to feed his family. Now although I strongly believe that people are in charge of their own fate to a certain degree, I cannot help but to have a few heartstrings pulled when I see a grown man cry due to being unable to feed his family by his own devices. With as much emphasis put on a man as being a "provider" in our society, I cannot help but guess that this man has to be feeling that he is failing in his responsibility.

One sad realization about this is that this and many other stories will continue to happen due to the current economic situations. A co-worker once told me that layoffs always seem to occur when money is needed the most and with it being the holiday season, it would seem like the absolute worst time to lose your job. Many Americans unfortunately face this uncertainty as they are working in industries that are cutting back majorly due to the slowdown of the economy. Although it is hard to provide a solution that will encompass the multiple problems individuals face, there still are some things we can do to help.

One of the main principles I abide by in my personal finances is giving back. Whether through money, volunteering time, or donating my unused goods, I feel that one important aspect to help remain humble in personal finances is through giving. Below are some of the guidelines I follow when giving:

1. Take care of home first then branch out.
• Always make sure that you take care of yourself and immediate family before reaching out to others. It is hard to build someone else a house while your house is currently falling itself.
  
• Sometimes people decide against giving if they feel that there is no one they know who is in need, but you may be surprised to find out that people close to you may be in need but too proud to ask for assistance.
2. Have the right motive for giving.
• Giving is a privilege, not an obligation.
• The attitude you take towards giving will definitely reflect and affect those around you. If you give with good intentions, you may inspire someone close to you to do the same.
  
3. Give what you can afford.
• Giving must be done in moderation. There is no reason you should go into poverty or slacking on your responsibilities due to your giving.

I sat down and spoke with my great aunt today and she explained to me that during her younger years, she would go to school during the day time and work in the cotton fields immediately after she got home. She told me that all the food that they had was grown in a garden and many of the luxuries that we value today were not in existence or were too expensive to afford. She explained to me how she lived through the Great Depression and World War 2 and how they were able to get by with what they had. Unfortunately, we do not realize today how much of an abundance we have.

As mentioned by the quote at the beginning of this article, if you have the privilege to give, you are blessed. Often times we analyze our situation as being poor due to not having all the material things that we want. However, after talking to my great aunt, I find that we are much better off than our ancestors were. Some of the ways you can choose to give are listen below:

Feeding America
http://feedingamerica.org/take-action.aspx

Big Brothers Big Sisters
http://www.bbbs.org/site/c.diJKKYPLJvH/b.1539751/k.BDB6/Home.htm

VolunteerMatch
http://www.volunteermatch.org/

What other ways do you feel are positive ways to give back to society? Are you planning on giving back during the holiday season?

Stay Disciplined!

The Economy is in a complete recession...What do I do with my 401k?

Don't waste life in doubts and fears; spend yourself on the work before you, well assured that the right performance of this hour's duties will be the best preparation for the hours and ages that will follow it. - Ralph Waldo Emerson

At the time of this writing, the stock market has closed approximately 400 points down today. This is very disheartening information for many Americans today who are constantly saving money for retirement in the stock market. Although many of the analysts and financial gurus are saying that "this is the time to invest", it is hard to contribute 6% of my bi-monthly income to a retirement account only to see it decline 4-5 percent immediately thereafter. Even I find myself becoming a bit more doubtful in the future of our stock market because it just seems like every day we take one step forward, the next day we take two steps back.

This time period has given me the opportunity to begin researching other investment options outside of the stock market to learn the all important rule in smart investing...diversification.

Diversification: A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. (Cited from Investopedia)

A silver lining in a gray cloud

Some of the online analysts and experts recommend to have a 100% diversified stock allocation if you are saving 20+ years for retirement. I agreed with this particular recommendation until I came across this latest financial crisis. Now I believe that true diversification is having a mix of bond and stock securities at all times no matter the length of years to wait before retirement.

Back in July, during the time the Dow Jones index was around 11,000, I shifted about 30% of my total allocation from stocks to two specific bond securities. Although most of the positions in my 401k portfolio are down at the current moment, however the investments in the bond markets have provided a positive return.

Although a lot of focus is not placed on bonds, I wanted to highlight the two that I am currently invested in. I believe these bonds have the potential to give a decent return in the current market conditions:

1. Inflation Protected Bond Fund (TIPS)
   
• What it invests in
  The return earned on an inflation-protected bond comes from two components that respond to movements in inflation and real interest rates. The first component of return adjusts the yield by the change in consumer prices. In contrast, the second component of return operates inversely with the movement of real rates; if real rates rise, the price of the fund will fall, and vice versa. (Taken from the Prospectus on Fidelity's 401K Site)
  
2. Stable Value Fund
• What it invests in
  The fund invests in fixed-income securities and book value wrap contracts issued by banks and insurance companies, which provide for the payment of a specified rate of interest and for participant withdrawals at book value (i.e. principal plus interest). (Taken from the Prospectus on Fidelity's 401K Site)

Although they do not have great returns, something positive is better than something negative.

Timing is Everything

Although I am looking at approximately 35 - 40 years before I am able to touch the savings in my 401k and Roth IRA, I have already planned how I hope to allocate my funds as it gets closer to retirement. The strategy I plan on following is to place most of my allocated money in an aggressive (higher risk/higher return) allocations and continue to have some money allocated in more conservative (less risk/less return) investments while I have more than 10 years to touch my money.

The thought behind this is that although the stock market may continue to be volatile, I will end up positive in the long run. The goal of this type of allocation is to gain a higher interest rate than that of investing in a high yield savings accounts or in bonds.

As I approach closer to the time where I am able to access that money without penalty (within approximately five years), I will make the shift to a more conservative portfolio that will allow me to reduce my risk in the stock market and continue to keep the majority of my money on fixed rates. Although I will not potentially make as much in interest on my money, I can rest assured that I will not lose the majority of my money in volatile stocks. An example of a conservative portfolio is 75% bonds and 25% stocks.

Eyes on the Prize

The key to succeeding in long term investing is to develop a plan and stick to it. Although I have seen the value of my funds decrease over the past few months, I have seen the overall number of the amount of shares that I own increase. I have continued to contribute to my stocks to continue increasing the shares that I own. It is my hope that the economy will rebound soon to help continue to increase the overall value of my retirement plan.

How are you holding out with your 401K plan? Do you still contribute? Share your thoughts below.

Secure Computer Practices to Protect Your Personal Finances from Identity Thieves

The onset of a recession is causing some people to try to get more income by any means possible. Although this is a great motivational tool for people when this is done ethically and legally, it can also be very negative when illegal means are used to increase one's income. Due to the dire situations (banks failing, credit crunch, etc) of our economy, there are many opportunities forscammers and thieves to try to take advantage of the average consumer.

To the average computer user, security is not a top priority. It is simple for most users, turn the computer on, read a few emails, pay a couple of bills, browse a few websites, turn the computer off. Although this seems like a relatively simple and safe thing to do with every day computing, statistics show that over 15 million Americans are victim of identify theft every year. (Citation)
With these circumstances, it is extra important for people to become vigilant to protect their assets as well as identity.

Things to Protect Yourself From While Online

1. Spamming: the abuse of electronic messaging systems to indiscriminately send unsolicited bulk messages. (Cited From Wikipedia)
2. Phishing: The criminally fraudulent process of attempting to acquire sensitive information such as usernames, passwords and credit card details, by masquerading as a trustworthy entity in an electronic communication. (Cited From Wikipedia)
• Ways to Spot a Phishing Attempt
  
3. Malware: a portmanteau word from the words malicious and software, is software designed to infiltrate or damage a computer system without the owner's informed consent. (Cited From Wikipedia)

Types of Malware

1. Virus: a [malicious] computer program that can copy itself and infect a computer without permission or knowledge of the user. (Cited From Wikipedia)
2. Trojan Horse: Malware that appears to perform a desirable function but in fact performs undisclosed malicious functions. (Cited From Wikipedia)
3. Spyware: Computer software that is installed surreptitiously on a personal computer to intercept or take partial control over the user's interaction with the computer, without the user's informed consent. (Cited From Wikipedia)
   

Although there are a lot of malicious things out there to try to compromise your security, securing your computing is not an impossible. Below are some easy ways to prevent your identity from being compromised online:

Ways to Prevent Your Identity from being Compromised

1. Passwords
• Choose a password that is at least 8 characters in length. If allowed, a combination of upper and lower case letters, numbers and symbols.
• Never store your passwords in a public place accessible by many. (Good idea to keep it in a wallet or purse, bad idea to keep it on a sticky note on your work monitor)
  
2. Delete Spam
• Use the built-in spam filters of your email provider.
  
• Be sure to report obvious spam to increase the accuracy of the spam filter being used.
  
3. Use Encryption (https) when possible.
• Most reputable companies that require you to do any kind of online transaction usually support encryption.
4. Use caution when on public wireless access points.
• Wireless access points transmits unencrypted network traffic in plain text. That means Instant Messaging, email, web traffic and any other transmitted information can read by someone using a network sniffer.
• If at all possible, always try to encrypt your network traffic (using https) or use caution and refrain from transmitting sensitive information while connected to a wireless access point.
  
5. Security Software
1. Anti-Virus software will help protect the integrity of your computer and check the files located on them for any malicious programs. Below are recommended free anti-virus software.
   
• Avast
• AVG
  
2. Firewall software will allow for you to make sure no unsolicited connections will be allowed on your computer preventing unauthorized access to your files and personal information. Below are some recommended firewalls:
• Built-In Windows Firewall (Windows XP and Vista)
  
• Comodo Firewall
  
3. Spyware Removal
• Adaware
• Spybot
  
4. Browser Protection consists of programs used to identify false websites that may try to portray a legitimate site
   
• No Script
• Automatic phishing detection (Internet Explorer 7 and Mozilla Firefox )
  
6. Monitor Credit Reports
• The government has mandated that all consumers be allowed to receive at least one credit report for free from all the credit reporting bureaus (Equifax, TransUnion and Experian)
  
• The only free (without any strings attached) credit report can be acquired from Annual Credit Report.
  
7. Keep your Operating System up to date
• Microsoft constantly finds new vulnerabilities in their software that can allow a malicious user to access your computer without any authorization. They release security software updates at least once a month to fix these vulnerabilities and close these holes.
  

It is impossible to eliminate your risk of identity theft when using the your computer on the Internet however, using the recommendations above, you can reduce the likelihood of your identity being stolen. What are some of the ways you protect you identity when using your computer?

Stay Disciplined!

More Information for Foreclosure Investments

I realize that the previous post about the foreclosures was a bit incomplete because I did not really leave you with too many links that you can use to actively research the foreclosure market. Having these tools listed in this article can help you decide whether an investment in the foreclosure market is a sound decision.

Finding Foreclosures

As mentioned in the previous articles, foreclosure listings can be bought in three different phases. Those three phases are:

1. Pre-Foreclosure (Short Sale)
   
2. Foreclosure by the Bank (Courthouse Steps)
3. Sold/Auctioned as a Foreclosure

Below are some of the links that you can use for researching these properties. Please hover over the links for a description of each link.

Atlanta Journal Constitution Foreclosure Listing

US Home Auctions

Hudson and Marshall Auctions

Georgia MLS

Trulia

Due Diligence

Part of the due diligence for determining whether or not any property is a good investment is find out key pieces of information. Some of the things to research are:

1. Crime in the Area
2. Schools in the Area
3. Property Taxes to pay
4. Previous value of the home
   

Below are some of the links that you can use for researching this information. Please hover over the links for a description of each link.

Atlanta Police Google Map Showing Crimes in the City of Atlanta

Listing of the current and previous value of a home

Georgia MLS

County Tax Records for Homes in Georgia

Getting the Finances in Order

The last and in my opinion, the most important step is getting your finances in order to purchase any kind of investment. In addition to the information listed in my previous post below is a website that contains great information to help calculate whether or not you are in a good position to finance an investment.

Great Place to learn about Financing an Investment

I hope that these links assist in your decision of whether or not to pursue an investment in real estate. Please share with us any other links that you find useful to assist you in your decision of whether or not to invest.

Stay Disciplined!

Index Funds...The Investor's Training Wheels

The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. -Jesse Livermore

On my birthday during one my wonder years (where I did not have to worry about things like bills, stocks, recession, etc), my father bought me a bike. After the initial excitement of realizing that I got a bike had passed, I realized that I was going to have to learn how to ride the thing. I was a bit timid of the thought of having to get on the bike, maintain balance and pedal all at the same time. After all, I could fall off the bike, get hit by a car in the street or many other bad things.

However, my friend Zack would come by my house on his bike. His house was a mile away from mine and while it took me about 15 minutes to walk to his house, he could get to my house in 5 minutes. Well, now it was my turn, now that I have my bike, I was capable of getting to his house within 5 minutes or less, I just had to learn how to ride it.

So when I tried to ride my new bike for the first time, I hopped on and tried to pedal. Unfortunately I did not understand the concept of balancing on the bike and got approximately 1 foot forward before having to put my feet down to prevent me from falling. After a week after these failed attempts, my father came out and showed me a couple of tricks. He taught me how to coast down a heel to learn how to maintain my balance. Once I learned how to maintain my balance, I learned how to pedal and eventually was able to put the two together and ride my bike.

At the end of the whole learning process my dad told me, "Man, maybe I should have gotten you some training wheels, that would have made this a lot easier and you would have been riding in no time." What, training wheels? Are you serious!? Are you telling me that I could have gotten back at least a few days of failures if I just had training wheels!?

Well, it seems like history repeats itself, because I made the same mistake on my initial entry into the stock market. The simple rule to succeeding in the stock market is to "Buy low, Sell High". Sounded simple enough to do so back in October 2007, Washington Mutual was on its way down and I thought that they looked like a good buy. They were down to $20 from their high of $47 and I just knew when they rebounded, I was going to be able to recover all of my money as well as make a hefty profit.

Well, if you have not followed Washington Mutual's fate, currently they are bankrupt meaning that their stock is worth $0 and no longer exists. Fortunately, I was able to recover some of my money before losing it all, however, the fact of the matter is whether I lost $1000 or $10, I still lost which is the exact opposite of my motivation for investing in the stock market.

Once I realized that my individual stock picking skills were not up to par, I realized that I need to get some "training wheels" so that I do not let history repeat itself. While researching one day, I came across Index Funds.

Index Fund: A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.

(Index Fund Definition taken from Investopedia)

*For a list of other common stock indexes, view the Wikipedia page*

An Index Fund is the novice's best investment tool as it offers the following benefits:

1. Allows you to easily diversify your portfolio without having to choose individual funds
   
• Diversification: A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. (Cited from Investopedia)
  
2. Low Management Costs
• Since Index funds are managed by computer models that try to purchase the exact funds listed by an index rather than relying on stock analysts, the fee to manage index funds are typically lower than those of other mutual funds.
  
3. Low Turnover
   
• Turnover: The number of shares traded for a period as a percentage of the total shares in a portfolio or of an exchange. (Cited from Investopedia)
• Lower turnover allows you to pay less transactional costs as well as reduce the capital gains tax that you will incur for trading funds held less than a year.
4. No commissions to pay when bought directly from some mutual fund companies.
• Unlike many online stock brokers, when you buy more shares of an index fund directly from the mutual fund company, you do not have a to pay a commission for each purchase. In addition to that, you typically do not have to pay a commission to redeem the fund at a later date.
5. Easier to do Automatic Investing for dollar cost averaging
   
• Dollar Cost Averaging: The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. (Cited from Investopeida)
  

Although there are many advantages to investing in Index Funds, there are some disadvantages as well.

1. Index funds are designed to perform at the index rate of return
• If you are trying to get a higher return than the rate that is given by the market, you will typically not achieve it by having an index fund.
  
2. As with all investments, there is a risk that the overall index can go down meaning you would get a negative rate of return. (i.e. our current market situation)
3. Investing through a brokerage typically requires a hefty minimum if you are investing in a general account.(i.e. Vanguard requires $3000 for a minimum investment into their funds for a general investment account)
   

Index funds give you the chance to invest in the stock market without a lot of experience or knowledge. I highly recommend that you if you wish to start investing in the market, that you do so using an index fund especially with the market at historic lows. For those who are interested in getting their feet wet with index funds, you can do some research at Vanguard for the different funds they offer.

Do you have any recommendations for Index Funds or any other beginner investments, please share them in the comments below.

Stay Disciplined!