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January 2015 Newsletter: Don't start nothing, won't be nothing; Making investments
January 31, 2015
|Hello to all my frugal friends:
I hope everyone is off to a great start in 2015, and I trust that this new year turns out to be all that you hope for. It's always around this time of year that I look forward to starting seedling for the veggie garden, and I start to plan for my family fishing vacation in northeast Texas. It's great to spend time with family, especially when sunsets across the lake are as beautiful as any that we see across the prairie here in Wyoming.
For some reason, sunsets seem to be more glorious than sunrises, but I appreciate them both, especially when it starts a new day of fishing, or wraps up a great day of fishing that provides a good haul of catfish, bluegill and crappie.
Last newsletter I asked for topics of interest, and I received a few, but I'm looking for more. Let me know what you'd like to see me discuss, because I'd much rather have this newsletter speak to issues that are of specific interest to my readers.
Let's take a look at the two articles for this month's newsletter. The first one is about not starting anything, so you won't have to worry about what you didn't start. I know it sounds a bit confusing, but I promise it'll make sense. The second article is a continuation of the economic and financial preparedness series...this time, I'm speaking to the idea of investments. As usual, these two articles are not to be found on the website.
Don’t Start Nothin’ Won’t Be Nothin’
by Clair A. Schwan
The ability to make use of wisdom is often contingent upon our ability to identify with it. If we can identify with it, we’ll feel much more comfortable about it because we’ll have a better understanding. Often, this requires an emotional connection or a fresh perspective before an idea clicks with us. That’s what I'm hoping to do...make something click.
A dear late friend of mine, Deborah Hutchinson, used to say, “Don’t start nothin’, won’t be nothin’.” She usually reminded her friends and family of this when she perceived unwarranted criticism, teasing or harassment just around the corner. Often, just this gentle reminder would defuse a situation that could have easily led to regrets. Just the idea of the lasting consequences of getting something undesirable started was often enough to keep it from happening.
It’s a good thought to keep in mind, but that little bit of wisdom doesn’t just apply to human interactions, it also applies to personal finance, especially the kind that can get you deep into debt. Let’s take a look to see how we might apply this reminder in the financial arena to help avoid situations that could lead to regret.
It’s a simple idea that reflects legal concepts we use in civil proceedings. If you “set something into motion,” you’re likely responsible for the outcomes, no matter the number or type of consequential damages that ensue. If we follow that logic in a practical example, then being irresponsible with money can lead to an inability to fix your car or buy another one when it bites the dust. What might likely follow is also your fault because of your careless handling of personal finances:
I once heard a man explain his forecast for getting himself out of a financial predicament by saying, “It’ll work out, it always does.” Another man predicted, “It’ll be alright.” Perhaps, but for millions of Americans living in tents, temporary quarters and homeless shelters, things aren’t working out as they expected, and it’s almost a certainty that they’re regretting something along the way that they started but couldn’t handle. Clearly, sometimes what we set in motion can run us over in more ways than one.
As the old saying goes, “An ounce of prevention is worth a pound of cure.” I have a propensity for preventing financial problems instead of trying to fix them. It’s easier when you manage the situation and not the other way around. The way I do it is simple, I’m careful about what I get myself into, and I always keep in mind, “Don’t start nothin’, won’t be nothin’.
Economic and Financial Preparedness – Financial Investments
by Clair A. Schwan
Let’s move along with our economic and financial preparedness series, and with this article I’d like to discuss financial investments. Since investments can take many forms, I’ll just stick to the basics. If we think long and hard we can probably consider just about anything we spend money on as being an investment. Be that as it may, let me just cover some of the basic ideas. I recommend speaking with a professional investment counselor to get a better picture of what’s out there that might suit your interests.
For some investments, you need nerves of steel, for others you need great patience. In any event, if you don’t know what to do, it’s time to do some thinking. The last thing you want to do is toss away the money you’ve worked hard for.
Just to keep us on track, here’s where we started in the original article about earning more money as a key to economic and financial preparedness:
Basic Forms of Investment
Let’s take a quick look at what one might do with their money when their interest is building a nest egg as part of their approach to financial preparedness.
Savings – it’s money in the bank that earns interest as a payment to you for letting others use it. Consider this the crayon level of investing because it’s so easy to do. It used to be that compound interest could make you some additional money with reasonable safety, but with interest rates scraping near bottom, don’t count on that in the near future. We’ll have to have a radical change in our economy before we’ll have interest rates that make it worthwhile to have a good portion of our wealth sitting in a bank. Also, there are additional downsides to money in the bank: 1) you’re considered an investor in that bank, so when they go under, your money does too; 2) the FDIC cannot possibly cover even a small portion of depositors if a good number of banks fail; 3) ultimately, when banks fail it’s you the taxpayer who funds the payback; 4) even at somewhat higher interest rates, the value of your money still erodes because inflation currently far outpaces interest paid on the account; 5) large cash withdrawals can be limited, and banks can close, so access can be an issue; and, 6) money in the bank is money “in the system” that can be frozen or confiscated...just ask our friends over in Cyprus who experienced a “bail-in” from their accounts to raise money to keep the country from going bankrupt.
Money Market Accounts – a small step up from a savings account as they too suffer from artificially low interest rates. Money market accounts generally pay more than savings accounts, but that isn’t saying much. These type of accounts are generally for those who have more to place in an account and would like to write a check against the account on occasion. Like a savings account, they are insured through the FDIC. If savings accounts are the crayon level, think of money market accounts as a large box of colored crayons.
Certificates of Deposit (CDs) – a long-term savings program that generally has considerably higher yields than savings. They’re insured against loss just like a savings account, and it usually takes about $1,000 to open one of these accounts. There is a minimum length of time (a term) the funds must remain in the account or a penalty is assigned. Usually the duration of a CD determines the amount of interest you’re going to get. Longer term deposits generally offer higher interest rates. When interest rates are on the rise, you’d want to have shorter term CDs so you’re not tying up your money at a lower rate when you could get a higher rate of return. When interest rates look like they’re going to drop, you’d favor the longest term of deposit offered. Your money is generally available to you at any time, but there might be a 90 day interest penalty associated with early withdrawal. At today’s rate of return, 90 days interest is nothing, but back when you could make 10% interest on a 5-year term CD with a deposit of $20,000, you’d generally never consider withdrawing your money until maturity. If money market accounts are a large box of colored crayons, think of certificates of deposit as larger colored crayons with a sharpener built into the box.
Stocks – a way to own a small piece of another company by buying shares. A company can offer shares of stock as a way of raising money for the business. In general, there are common shares and preferred shares. One would buy common shares in the hopes of the stock rising in price so it could be sold at a profit. Preferred shares cost more per share and provide the same benefit, but they also provide a dividend which represents a small piece of the profits made by the company. Stock can be purchased through a traditional broker, or you might play the role of the “day trader” by opening an online account with one of the brokerage houses.
Bonds – a way to lend government money, with the expectation that you’ll get a specific return on your investment. Some bonds pay out over the maturity of the bond, and some are “zero coupon” bonds that settle up at the end of the term of the bond. Most bonds are sold in the form of a bond fund where professional money managers make the trades. U.S. Savings Bonds were a popular way to lend the federal government money. They have various terms and generally provide small return on investment. One school of thought might suggest that bonds are risky because you’re lending money to the government, and another school of thought might argue that government will always find a way to raise money to meet their obligations...at least they have so far.
Annuities – a hybrid between life insurance and investment. They’re often used as a vehicle for funding retirement on your own. Some have guaranteed rates of return over the long haul, some have a feature where they match a small portion of your initial investment. There are limits as to the window of opportunity for making initial investments, and most have options for annual income payments once the annuity reaches a particular maturity date...your target retirement age. You’ll also find they have requirements for making withdrawals after so many years after the maturity date. In addition, the annuity acts as a life insurance policy where the proceeds to a beneficiary will be the greater of the total account value minus any withdrawals, or the original investment made. Annuities are good vehicles for preservation of capital, reasonable appreciation, and a guaranteed long-term stream of income. Monies earned above and beyond the original investment are taxed as income, whether withdrawn by the annuitant or paid out to beneficiaries.
Individual Retirement Accounts (IRAs) – whether taxed deferred or after tax, funds in the account are intended for building wealth for retirement. Generally the account invests in traditional securities like stocks and bonds. The traditional IRA is tax deferred so one can build up value during working years and avoid tax on a portion of their income. Withdrawal from the account after retirement is taxed, but it’s expected that income will generally be lower then, so tax exposure will also be lower.
Company investment and saving plans – this is attractive, especially to the extent that your company matches a portion of your contribution. It’s generally a good idea to participate at least to the point where you obtain maximum matching funds from your company. It’s common that matching funds are used as a means of retaining you as an employee...they’re placed in your account to match a portion of your contributions and you gradually become owner of a greater percentage of the matching funds over a certain number of years until they become entirely yours at some maturity date. Such savings programs are a way to put money aside regularly and automatically, a kind of out-of-sight-out-of-mind operation. Much like the pot that isn’t watched, your account can grow in a substantial manner rather quickly when you’re not watching it. One of the reasons for growth is you can pay less attention to stashing money away and more attention to making it.
General Investment Advice
There are many hundreds of types of investments that one might make. It pays to sit down and carefully think through where and how you’re going to put your hard-earned income to work for you, because it’s also putting it at risk. Here’s my general suggestions with respect to investing: 1) talk to individuals who are experienced and successful when it comes to investing; 2) understand the risks and benefits associated with your investments; 3) invest with the long haul in mind; 4) understand the marketplace within which you’re investing and what drives the market; and, 5) have some diversity in your portfolio. I can’t guarantee that following these five suggestions will bring you success, but I can promise you that you’ll be on thinner ice if you ignore them.
One last suggestion, if you walk into a professional investment firm with $5,000 and explain to them your objectives, they ought to be able to immediately recommend several ways that you could invest it. If they don’t, then your best bet is to thank them for their time and go elsewhere. Banks and investment firms can have a wide range of talent within, and I’ve seen some simpletons behind the desks at banks and investment offices. They know just enough to be dangerous. Your best defense is to do some research first, so you can recognize someone who knows what they’re talking about. One thing I like to do is explore how they invest their money, how much, and why. Sometimes that can be quite revealing and enlightening. After all, their investment strategy (or some variation of it) could work just fine for you. If they don’t have one that makes sense, it might be best to go elsewhere.
Wealth accumulates faster if you make more of it, and one way to do that is to let money work for you through various types of investments. As I’ve mentioned before, if you don’t turn your cash into something, you really only have a big stack of paper or a bunch of numbers in an account. Investing serves as one way to turn your cash into a mechanism for making more money. More money will put you in a better position in terms of financial preparedness, and if you use your investment proceeds to jump-start your own enterprise, you’ll be in a better position as a player in the economy.
Whatever you do to make your money work for you, just take your time, make a good plan, and think things through so you’re comfortable with what you’re doing and what it’s likely to do for (or perhaps to) you. When in doubt, wait it out. I think there is often more harm done by jumping into something too quickly. If it’s a good opportunity, it’ll be a long-term opportunity, and that means it will be there next week, next month, next year, or whenever you’re ready to invest your hard-earned money.
Next MonthI hope you’ve enjoyed these articles and can put some of this information to good use in your life. Please feel free to pose questions about issues of concern to you. I’d like to use your interests to create relevant material for a year's worth of upcoming newsletters.
Next month, let’s look at an expression I heard a friend of mine use, “The problem with having money in your pocket is it just goes!" And, as we look at being better prepared from a financial and economic perspective, we’ll take a look at multiple revenue streams.
Wishing you all a fun, rewarding and prosperous 2015,
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