Investment http://www.wisebread.com/taxonomy/term/4808/all en-US $4,000, $8,000, or Even $453,500 in 5 Years: A Low-Risk Investment Plan http://www.wisebread.com/4000-8000-or-even-453500-in-5-years-a-low-risk-investment-plan <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/4000-8000-or-even-453500-in-5-years-a-low-risk-investment-plan" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/investment-plan-179003978-small.jpg" alt="investment plan" title="investment plan" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>How much can an investor accomplish in five years? Among the many possible answers, we're going to focus on two in this article: how much you could earn if you needed to use the money you invested at the end of those five years ($4k or $8k), and how much you could accomplish if those five years were used to give you a head start on a longer-term investment program ($453,500). (See also: <a href="http://www.wisebread.com/how-to-save-26000-in-5-years-or-less?ref=seealso">How to Save $26,000 in 5 Years or Less</a>)</p> <p>Ready? Let's go.</p> <h2>A Five-Year Goal</h2> <p>Let's say you wanted to buy a house in five years and planned to spend the time between now and then building a down payment. Or maybe you realized your car had another five years left in it and you were planning to buy a replacement in five years.</p> <p>Five years or less is a tough time horizon for an investor. It's not enough time to take much risk because if the market heads south, you don't have time to recover. On the other hand, tucking money into a super safe bank savings account isn't very appealing. Brick and mortar banks are offering just a small fraction of one percent as an &quot;interest&quot; rate. An <a href="http://www.wisebread.com/banks-still-offering-free-checking-and-great-interest-rates">online bank is a better choice</a>, but not by much.</p> <h3>&quot;Bond Funds. Short-Term Bond Funds.&quot;</h3> <p>So, what's a five-year investor to do? If Britain's most famous fictional spy were an investment, he would respond: &quot;Bond funds. <a href="http://money.usnews.com/funds/mutual-funds/rankings/short-term-bond">Short-term bond funds</a>.&quot;</p> <p>In essence, bonds are debt investments, as strange as that sounds. When governments, companies, and other entities want to raise money, one way they can do so is by issuing bonds. Investors send them money and the issuing organization promises to pay the money back with interest.</p> <p>Among investments, bonds are on the safer side of the risk spectrum. However, investors can lose money with bonds if the issuing organization goes belly up. And, while this gets a little complicated &mdash; and boring &mdash; if you invest in bonds through a bond mutual fund, rising interest rates usually hurt bond fund values, especially long-term bond funds (those holding bonds that are due to be repaid a long time from now) &mdash; hence, my emphasis on short-term bond funds as a viable place to invest today for a five-year goal.</p> <h2>Recent Bond Fund Performance</h2> <p>Sound Mind Investing did <a href="http://www.soundmindinvesting.com/visitor/2012/sept/level4.htm">an analysis of bond fund returns</a> using various Vanguard funds, looking at all of the one-, three-, and five-year holding periods over the course of 25 years. Its analysis looked at six different bond fund &quot;portfolios,&quot; with the one- to six-fund groupings designed to satisfy a range of risk appetites. Since each one consisted solely of bond funds, they were all, by definition, relatively low-risk.</p> <p>The most conservative portfolio generated an average annual return of about 6% across all of the one-, three-, and five-year periods studied. The most aggressive portfolio generated an average annual return of about 8% across all of the periods.</p> <p>Interestingly, none of the worst five-year annualized returns were negative. So, while past performance never guarantees future performance, it would be reasonable to assume a 6% annual return using bond funds to invest for your five-year goal.</p> <h3>$400 a Month</h3> <p>That means, if you invested $400 per month over the course of five years and were able to achieve a 6% average annual return, your $24,000 investment ($400 per month for five years) would turn into $27,908 &mdash; or nearly a $4,000 return.</p> <p>Even better, if you had $24,000 to start with and could put the full amount to work using bond funds, assuming the same 6% annualized return, it would turn into about $32,370 &mdash; or a more than $8,000 return.</p> <h2>A Five-Year Head Start on a Much Bigger Number</h2> <p>Now let's look at this five-year time frame through a different filter. Let's say you're 20 years old, graduated early, and are starting your first full-time job. Your employer offers a 401(k) retirement savings plan that includes a generous dollar-for-dollar match on whatever you contribute up to 6% of your $48,000 annual salary (just a touch over the <a href="http://www.glassdoor.com/Salaries/average-entry-level-salary-SRCH_KO8,19_IP5.htm">national median of $42,000</a> for entry level positions).</p> <p>At first, you think you'll wait a while before taking part in the plan. You have some things you want to buy, some trips you'd like to take. And besides, you figure, you're young; you have plenty of time to save for an abstract goal like retirement when you're older.</p> <p>Indeed, when you're 25, you finally start investing 10% of your salary. Assuming a very reasonable 7% average annual return, a 3% annual pay raise, and including your employer's match, by the time you're 65, you will have a nice nest egg of about $1,690,500.</p> <p>But what if you decided to start setting aside 10% of your salary from your first day on the job? Keeping all the other assumptions the same, by age 65, you would have over $2,144,000.</p> <p>Wow.</p> <p>By starting five years earlier, you would have contributed $26,250 more, but you would end up with $453,500 more!</p> <h3>Target-Date Funds</h3> <p>To accomplish that, you could take an extremely simple approach of using a target-date fund, a type of fund that is now commonly available in workplace retirement plans.</p> <p>While <a href="http://www.investopedia.com/articles/retirement/07/life_cycle.asp">target-date funds are not perfect</a>, they make some of the most important investment decisions for you.</p> <p>For example, all you have to do is choose a fund with the year of your intended retirement date as part of its name (2060, again assuming you're 20 years old and want to retire at age 65). Since you have a long time to invest, a typical 2060 fund would be aggressively invested in mostly stocks. As you get older, it will automatically adjust this mix, adding bonds to become more conservative.</p> <p>So, how much can you accomplish as an investor in five years? It depends on whether you need to use the money at the end of that time frame or simply use that time frame to get a head start on a longer investment program. Either way, you can accomplish a lot.</p> <p><em>What financial goals have you set for the next five years? How are you planning to reach them? Please share in comments!</em></p> <a href="http://www.wisebread.com/4000-8000-or-even-453500-in-5-years-a-low-risk-investment-plan" class="sharethis-link" title="$4,000, $8,000, or Even $453,500 in 5 Years: A Low-Risk Investment Plan" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/matt-bell">Matt Bell</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment bond funds goals investing saving Wed, 23 Jul 2014 13:00:05 +0000 Matt Bell 1164533 at http://www.wisebread.com This One Thing Will Get You to $1 Million (Tax-Free!) http://www.wisebread.com/this-one-thing-will-get-you-to-1-million-tax-free <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/this-one-thing-will-get-you-to-1-million-tax-free" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/retirement-savings-163904331-small.jpg" alt="retirement savings" title="retirement savings" class="imagecache imagecache-250w" width="250" height="146" /></a> </div> </div> </div> <p>We're surrounded by financial advice, often in the form of lists containing 10 (or 25! or 50!) things you can do to help solve a particular problem. While much of this information is useful, it can also be overwhelming. Where do you begin? On what things should you focus your efforts?</p> <p>I'd suggest starting with the end in mind &mdash; with your ultimate goal &mdash; and let that guide you to the highest priority activities to help you achieve it. For most of us the end goal is financial independence, and that requires accumulating enough wealth to no longer rely on income from a job. (See also: <a href="http://www.wisebread.com/just-saving-isnt-enough-how-cash-flow-allocation-helps-you-retire?ref=seealso">How Cash Flow Allocation Helps You Retire</a>)</p> <p>Okay, here's where focusing on the highest impact activities comes in. For most Americans, only two financial items generate around 80% of their wealth: real estate and retirement savings. Let's tackle one of them, retirement savings. If you get that one thing right then hundreds of other, lower impact activities won't matter much.</p> <h2>Retirement Savings</h2> <p>So let's begin. What are some typical sources of retirement savings?</p> <ul> <li>Your employer (in the form of a 401(k), 403(b) or similar program, or in rare instances a pension).<br /> &nbsp;</li> <li>The government (Social Security retirement payments).<br /> &nbsp;</li> <li>Yourself.</li> </ul> <p>Unfortunately, the first two sources are becoming increasingly uncertain, so let's narrow our focus even further, on the one retirement savings source where you have complete control: Yourself.</p> <p>IMPORTANT! Before proceeding, I would strongly suggest that if your employer offers a matching 401(k) or similar program that you contribute an amount that gets you the maximum match. What we're addressing in this article will <em>supplement</em> that 401(k) savings plan, if you're lucky enough to have one.</p> <p>Alright, so what one thing that you have control over can get you to $1 million in retirement savings, tax free? Drum roll, please&hellip;.</p> <h2>It's a Roth IRA</h2> <p>Contribute $200 per month into a Roth IRA (where earnings on the account and withdrawals after age 59&frac12; are tax-free).</p> <p>That's it! Simple, isn't it?</p> <p>Actually, yes, it is simple. That's the beauty of it. But it does require meeting a few conditions.</p> <h3>1. Invest the Money in Stocks</h3> <p>You have the option of putting your Roth IRA contributions to work in one or a combination of investments such as bonds, treasuries, CDs, money market funds, and stocks. Unlike bonds, treasuries, and especially CDs or money market funds, stock market returns have historically outpaced inflation by a comfortable margin. Over the past 50 years stock funds invested in large companies have yielded a return of 9.2%. Over the past <a href="http://usatoday30.usatoday.com/money/perfi/columnist/krantz/story/2011-10-17/rate-of-return-for-stocks/50807868/1">20 years it's been 7.9%</a>. For our purposes, to be conservative I will assume an average return of 7.5%.</p> <h3>2. Stick With It!</h3> <p>Religiously. Even obsessively, if that's what it takes. Make that $200 contribution without exception every month until it becomes automatic. In fact, setting it up as an automatic transfer from each paycheck is the best way to go. That way you never see the money and therefore never miss it.</p> <h3>3. Wait</h3> <p>This is where the magic occurs. After contributing long enough you'll reach a threshold, where your total saved amount starts to achieve a dramatic upward trajectory due to compounding.</p> <h2>The Power of Compounding</h2> <p>To illustrate the magical power of compounding, consider the story of the king and the court jester. Legend has it that a long, long time ago a court jester's heroic act saved his king. The king was so moved by the jester's bravery that he offered to give the jester anything he wanted. The jester asked for one cent, doubled each day for a month. &quot;That's all?&quot; said the king. The wish was granted. (See also: <a href="http://www.wisebread.com/10-easy-ways-to-supercharge-your-retirement?ref=seealso">10 Easy Ways to Supercharge Your Retirement</a>)</p> <p>Halfway through the month the balance grew to only $164. But during the final week it started its rapid rise &mdash; it passed the threshold &mdash; and spiked upwards, ending the month at over $5.3 million.</p> <p><img width="605" height="303" src="http://www.wisebread.com/files/fruganomics/Whelan Chart.png" alt="" /></p> <p>As you can see in graph, it took some time for the small initial amount to grow. Eventually, though, the balance grew large enough so that with each doubling it started shooting up very rapidly. That's the threshold you want to reach. But to do so you need to start early &mdash; i.e. NOW!</p> <h2>How Long Will It Take?</h2> <p>So, how long are we talking about to reach this magic threshold? If you start at age 21 and your $200 monthly Roth IRA contributions grow at 7.5%, then you will reach $1 million, tax-free, at age 67, which is the current target age for receiving full Social Security retirement benefits if you were born after 1960.</p> <p>What if you were to start saving at age 31 instead of 21? Then your total will only be $360,000. Big difference. That's because you didn't quite reach the threshold where compounding really starts to kick in. But still not bad.</p> <p>Now I'm guessing that not everyone who reads this is 21 years old, so you're probably thinking &quot;What can I do to make up for lost time?&quot; Here are some ideas:</p> <ul> <li>At $200 per month your total annual contribution will be $2,400 but for most households the maximum annual Roth contribution is $5,500, so if you can afford it double your monthly contribution until you're caught up.<br /> &nbsp;</li> <li>If you have money in a savings account, consider transferring up to $3,100 from it to supplement your $2,400 annual amount.<br /> &nbsp;</li> <li>You can reach your annual contribution limit by transferring money from a tax-deductible account (such as a traditional IRA) to a Roth in the same year. (Check with a financial or tax professional to be sure you understand the rules for this kind of transfer.)<br /> &nbsp;</li> <li>Getting a tax refund? Put all or a portion of it into the Roth account.<br /> &nbsp;</li> <li>Take advantage of the Roth IRA &quot;float&quot; period, which allows you to count contributions made until April 15th towards the previous year's total.<br /> &nbsp;</li> <li>Over time, as your earnings grow and you can afford more than $200 per month, increase that monthly contribution by $50 or $100 or more. Consider having all or part of your annual raise in salary automatically added to your monthly Roth contribution.</li> </ul> <p>At a time when a slew of financial information and advice seems to be coming at us from all directions it's easy to feel overwhelmed. You don't need to be. Take back control by keeping things simple and focusing on this one activity. As you approach your golden years and reach the threshold, you'll be glad you did.</p> <p><em>Have you taken this one simple step toward putting aside money for retirement?</em></p> <a href="http://www.wisebread.com/this-one-thing-will-get-you-to-1-million-tax-free" class="sharethis-link" title="This One Thing Will Get You to $1 Million (Tax-Free!)" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/keith-whelan">Keith Whelan</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement 401(k) compound interest investing Roth IRA saving Mon, 14 Jul 2014 09:00:05 +0000 Keith Whelan 1157120 at http://www.wisebread.com Trading Options Is a Sound Investment (and It's Simpler Than You Think!) http://www.wisebread.com/trading-options-is-a-sound-investment-and-its-simpler-than-you-think <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/trading-options-is-a-sound-investment-and-its-simpler-than-you-think" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/stock-trading-465464871-small.jpg" alt="stock trading" title="stock trading" class="imagecache imagecache-250w" width="250" height="142" /></a> </div> </div> </div> <p>It's nice to have options.</p> <p>You know, choices. It's good to have them. We seem to feel safer, more secure, and more in charge when we have more than one possible path set before us. (See also: <a href="http://www.wisebread.com/6-basics-you-must-know-before-you-start-investing?ref=seealso">6 Basics You Must Know Before You Begin Investing</a>)</p> <p>Wouldn't it be nice to feel all of those things about your investments, too?</p> <p>These feelings are part of the reason that some people choose to invest in securities called, amazingly enough, <em>options</em>.</p> <p>If you haven't heard of an option before, you aren't alone. I hadn't heard much about them either, until a couple of months ago. But my family has recently started investigating ways to broaden our horizons, financially speaking, and options are&hellip; well&hellip; an option that we have come up with.</p> <p>Intrigued? Read on to discover the basics of what we have learned.</p> <h2>What Are Options?</h2> <p>At it's most fundamental, buying an option means that you are purchasing the right to buy or sell a security at a certain price on or before a certain date. It sounds confusing, but actually it's pretty straightforward.</p> <h3>Buying a Call</h3> <p>Let's say you want to buy a particular stock at $50 a share, but it currently costs $75. If you're pretty sure the stock's price will fall (or you're willing to bet that it will), you can pay to have the choice to buy it if the price goes down to $50 within a certain amount of time (a week, two weeks, 30 days, etc.). This is called <em>buying a call</em>.</p> <h3>Buying a Put</h3> <p>On the other hand, maybe you purchased a stock at $100 a share, and you think it might soon fall significantly. You can buy the right to sell your stock at a certain price (like, before it bottoms out), if the stock does lose value within a particular time frame. This is called <em>buying a put</em>.</p> <p>In actual practice, buying options can be much more complicated than this. People link all sorts of puts and calls into one trade, so that several (or many!) conditions have to be met for them to be able to exercise their option. This can provide additional investment security, if you know what you're doing.</p> <p>There are also different types of calls and puts, like the covered call and the cash-secured put, to name only a couple.</p> <p>Even with all the possible layers of complexity that options offer, buying a basic call or a put is pretty straightforward. The best way to learn the ins and outs of complex options trades is to trade alongside someone who has experience. Offer to help them with their research in exchange for some investing mentorship. If you don't know anyone like this, <a href="http://www.investopedia.com/simulator/">practice online with fake money</a> before you actually risk anything.</p> <h2>The Pros of Trading Options</h2> <p>If the possible complexity of the trades doesn't scare you off, trading options has a lot of things going for it.</p> <h3>Less Risk</h3> <p>When you buy an option, you are committing less of your own money up front, which means that you are risking less. An option is considered a fairly dependable form of hedging your investments, so it can help you save money in the long run.</p> <p>Of course, an option can be used poorly, too. You still expose yourself to risk if you don't know what you are doing, or if you jump into options investing without researching the securities involved in your trade.</p> <h3>Flexibility</h3> <p>When you buy an option, you're buying just that: a choice. Most of the time, you don't have to follow through if the deadline comes and you choose not to (though, in some cases, if you commit to selling at a certain price, then you must sell when the security hits that price). This expands the horizons of your investing, because you can basically wait and see what happens while maintaining the right to act if you so choose.</p> <h3>Low Capital Required</h3> <p>If you don't have the money to make a dent in the stock market, options investing can give you the chance to still play the game. In fact, many people start with amounts as low as $1,000, learning how options function and working their way up to larger and larger trades as they come to understand what they're doing. As long as you have at least a bit of money that you're willing to use, options trading can give you the opportunity to make more.</p> <h3>Make Money off Volatility</h3> <p>If you think the market is going to be moving around a lot, options are a way to make money off of that movement. Similarly, if you see the market beginning to move (up or down, it doesn't matter), you can use options to take advantage of that. Thus, market loss doesn't have to mean loss for everyone. After all, options were part of Warren Buffett's investing strategy in the recent economic downturn.</p> <h2>The Cons of Trading Options</h2> <p>Many people find that the benefits of investing in options outweigh the risks, but it's still smart to know what those risks are before you jump in.</p> <h3>Tax Rate</h3> <p>Most of the money you gain from options trading will count as short-term capital gains on your taxes, which face a higher tax rate than money held longer. This means that you could end up losing money even if you make money, which would be awful. Some options software will automatically calculate these taxes, so you have a better chance of making money.</p> <h3>Forecasting Is Hard</h3> <p>It's almost impossible to know exactly what the market is going to do, even if you have done good research and you have some experience. While you are only liable for the cost of purchasing the option even if you're wrong, being wrong a lot can add up and can end up being costly.</p> <h3>Liquidity Problems</h3> <p>A security has high liquidity if there are a lot of buyers and sellers in the market for it. You want this for the securities involved in your options trades. Without this liquidity, you can run into problems where the bid-ask spread, which is the difference between what a buyer is willing to pay and what a seller is willing sell, is large. That usually means that you are more likely to end up losing your money.</p> <p>You can usually get a sense of the liquidity of a particular security using several different methods, which should help you avoid this problem.</p> <p>In the end, options trading has a steep learning curve and can be just about as difficult as you want to make it. On the other hand, getting started is pretty easy, and you can make some significant money even if you don't understand every detail. So evaluate the pros and cons, do some research on your own, and decide if it's right for you.</p> <p><em>Have you ever considered trading options? Please share your experience in comments.</em></p> <a href="http://www.wisebread.com/trading-options-is-a-sound-investment-and-its-simpler-than-you-think" class="sharethis-link" title="Trading Options Is a Sound Investment (and It&#039;s Simpler Than You Think!)" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/sarah-winfrey">Sarah Winfrey</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment calls investing options puts stocks Tue, 08 Jul 2014 13:00:06 +0000 Sarah Winfrey 1154408 at http://www.wisebread.com A Lot of People Don't Understand What an Investment Really Is. Do You? http://www.wisebread.com/a-lot-of-people-dont-understand-what-an-investment-really-is-do-you <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/a-lot-of-people-dont-understand-what-an-investment-really-is-do-you" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/financial-planning-148173128-small.jpg" alt="investment" title="investment" class="imagecache imagecache-250w" width="250" height="151" /></a> </div> </div> </div> <p>We recently covered <a href="http://www.wisebread.com/a-lot-of-people-dont-understand-what-money-really-is-do-you">what money really is</a>, and how you can harness it to suit your needs. Now it's time to take a look at investing. What is an investment, exactly, and how can you make an investment strategy work for you?</p> <p>First, let's start with a definition. An investment is something bought with the expectation that it will rise in value or generate income, like stocks, bonds, real estate, or precious objects (I don't recommend the later, by the way). Let's start with rise in value.</p> <h2>An Investment Will Rise in Value</h2> <p>It's important to understand that the value of an investment is expected appreciate or rise in value over time. It's a tried and true sales technique to convince a buyer that what's being sold is an investment when really, it may not be. Here's the rule of thumb: If the item is expected to depreciate or lose value over time, it is a <a href="http://www.investopedia.com/terms/c/capitalexpenditure.asp">capital expenditure</a>, not an investment.</p> <p>That doesn't mean there aren't useful reasons to buy an expensive suit, a new car, or updated kitchen appliances. Those types of purchases will lose value over time, but they make life enjoyable or could even enhance a professional reputation (because in some industries clothes really do make the man). However, a buyer should know if they're purchasing with the intent to make money in the long run, or if they're splurging because they want to enjoy the utility of the item.</p> <p>Examples of investments that one could expect to rise in value over time include corporate stocks, mutual funds, real estate, and precious objects like art, jewels, or collectibles.</p> <h2>An Investment May Also Generate Income</h2> <p>Sometimes an investor is less interested in the capital appreciation of an investment and more concerned with the <em>income</em> potential it can provide. That doesn't mean that income generating investments won't rise in value over time (the most attractive investments do both).</p> <p>Examples of income generating investments include corporate stocks that offer a dividend payment, bonds (corporate, government, or municipal), and real estate bought for rental income.</p> <p>Most important, though, is how you can use an investment strategy to get what you want out of life, or to get where you want to go. Here's how to use an investment strategy to build the life of your dreams.</p> <h2>1. Determine Your Goals</h2> <p>When it comes to investing, it's easy to put the cart before the horse. Many people start an investment plan without stopping first to think about why they're putting their money away in the first place. Knowing what you want can help you develop focus and focus leads to increased productivity and drive.</p> <p>When many people think about setting up a savings and investment strategy, they focus on all the ways they'll have to deprive themselves to reach their goals. Sure, you may give up some small luxuries along the way but a look at the bigger picture can be truly liberating. Saving and investing can help you achieve your long term goals and give you the <a href="http://www.wisebread.com/this-one-financial-trick-lets-you-buy-happiness%20">freedom to live your life</a> the way you want to live it.</p> <p>Whatever you want &mdash; a boat, <a href="http://www.wisebread.com/10-easy-ways-to-supercharge-your-retirement">a happy retirement</a>, a <a href="http://www.wisebread.com/6-great-reasons-for-paying-off-the-mortgage-on-your-home">paid-off mortgage</a> &mdash; figure it out first, before you start saving a dime. Sit down and write down exactly what you want out of life. Writing it down will set an intention, which will help get your plan into motion. Once you've penned your life's goals, think about how much each goal will cost. Use an <a href="http://www.bankrate.com/calculators.aspx%20">online calculator</a> for help. Only once that information is all down on paper can you start mapping out your investment strategy. (See also: <a href="http://www.wisebread.com/6-steps-to-achieving-all-your-goals?ref=seealso">6 Steps to Achieving All Your Goals</a>)</p> <h2>2. Know How Much Time You Have</h2> <p>Short-, medium-, and long-term goals should be treated differently when planning a money strategy. The more time you have to invest, the more risk you can take on. This is because you'll have more time to recover from any market losses. The options for a 50-year-old who wants to retire in 15 years are different from those of a 25-year-old who has 40 years left until retirement.</p> <h3>5 Years or Less</h3> <p>Don't mess around with money you're going to need in the short term. No one can predict when the market will tank (or boom) and short term investors could find themselves with a fraction of what they expect if they find themselves on the wrong side of an economic cycle. If you expect to use the money within the next five years, it's better to forego potential market gains. Instead consider safer investment options like a savings or money market account or a Certificate of Deposit. (See also: <a href="http://www.wisebread.com/the-basics-of-cd-laddering?ref=seealso">The Basics of CD Laddering</a>)</p> <h3>5 to 10 Years</h3> <p>An intermediate time frame allows for some time to recover from market volatility. A <a href="http://money.usnews.com/funds/mutual-funds/balanced">balanced portfolio</a> of stocks and bonds can leverage equities to take advantage of a rising market while using fixed income securities to safeguard against a market in decline.</p> <h3>10 Years or More</h3> <p>A longer time frame can give investors more time to recover from a falling market, making a stock-heavy portfolio safer for those with plenty of time until they'll need access to their money (like for retirement planning). (See also: <a href="http://www.wisebread.com/using-time-horizons-to-make-smarter-investments?ref=seealso">Using Time Horizons to Make Smarter Investments</a>)</p> <h2>3. Assess Your Tolerance for Risk</h2> <p>No matter your available time frame, it's important to understand how you personally react to market volatility. Even a well-planned, diversified portfolio can lose 20% or more of its value in a given year, depending on the broad economic environment.</p> <p>What would you do if your portfolio lost 25% of it's value over a four month span? What would you do with an unexpected $200 lottery winning? What is your general opinion of the stock market? It's important to know the answers to these questions and more like it before you plan an investment strategy.</p> <p>There are many online calculators available to help you figure out your risk tolerance but <a href="https://personal.vanguard.com/us/FundsInvQuestionnaire">here's one I've used</a>.</p> <h2>4. Figure Out How Involved You Want to Be</h2> <p>Are you DIYer, or do you prefer a set-it-and-forget-it approach? You don't need to pay pricey advisor fees for either strategy (although there are plenty of great financial planners out there, if you <a href="http://www.wisebread.com/do-a-background-check-before-hiring-your-financial-advisor">do your reserach</a>). Knowing how much time you want to spend learning about investments, monitoring your portfolio, and planning your short-term market moves will have a major impact on how you develop your investment strategy.</p> <p>For those who want minimal involvement, there are plenty of <a href="http://money.usnews.com/funds/mutual-funds/target-date%20">target-date investment options</a> available for a variety of goals including retirement and college tuition. A target-date fund takes care of all the heavy lifting for you. A portfolio manager selects the asset allocation (how much is invested in the different investments) and takes care of rebalancing as the portfolio grows and as you get closer to your goal. It's the most turn-key financial solution available today, and there are many low-cost options available. (See also: <a href="http://www.wisebread.com/easy-personal-finance-for-lazy-people?ref=seealso">Easy Personal Finance For Lazy People</a>)</p> <p>If you like to get your hands dirty, there are plenty of places to dig in and start learning. Start by learning about securities (stocks, bonds, mutual funds) and how to <a href="http://www.wisebread.com/the-basics-of-asset-allocation?ref=seealso%20">develop an investment portfolio</a> or get the inside scoop on <a href="http://www.wisebread.com/real-estate-investing-is-cheaper-and-easier-than-you-think">real estate investing</a>.</p> <h2>5. Get Into the Habit</h2> <p>If you want to be a successful investor, you need to make a habit of funneling money into your investment accounts. You can set up an automatic payroll deduction for most accounts or you can retrain your brain to get excited about the goal you're working toward. (See also:<a href="http://www.wisebread.com/the-surprisingly-easy-way-to-change-your-habits-and-your-life?ref=seealso"> The Surprisingly Easy Way to Change Your Habits and Your Life</a>)</p> <p>Many investors get excited to save more once they have their goals laid out and firmly in place. It can become a game to find new ways to cut expenses and pad an investment account instead. (See also: <a href="http://www.wisebread.com/how-to-save-26000-in-5-years-or-less?ref=seealso">How to Save $26,000 in 5 Years or Less</a>)</p> <p>While planning your investment strategy, remember that amassing a fortune is not the end goal. Your investments are a tool to help you reach your life's goals, whatever they may be.</p> <p><em>What are your life's goals and how are you using an investment plan to help you reach them? Tell us about it in the comments!</em></p> <a href="http://www.wisebread.com/a-lot-of-people-dont-understand-what-an-investment-really-is-do-you" class="sharethis-link" title="A Lot of People Don&#039;t Understand What an Investment Really Is. Do You?" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/alaina-tweddale">Alaina Tweddale</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment investing investment saving Thu, 26 Jun 2014 13:00:06 +0000 Alaina Tweddale 1148483 at http://www.wisebread.com Exchange Traded Funds: The Low-Fee Investment Option You Don't Know About http://www.wisebread.com/exchange-traded-funds-the-low-fee-investment-option-you-dont-know-about <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/exchange-traded-funds-the-low-fee-investment-option-you-dont-know-about" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/stock-market-78819432-small.jpg" alt="stock market" title="stock market" class="imagecache imagecache-250w" width="250" height="151" /></a> </div> </div> </div> <p>Although they've been around since 1993, Exchange Traded Funds (or ETFs) are among the trendiest types of investing out there today. Some people are drawn in by the fact that they trade like stocks, while others love the idea of following a market that seems to be going up again. (See also: <a href="http://www.wisebread.com/begin-your-investing-career-right-with-some-mutual-fund-basics?ref=seealso">Mutual Fund Basics</a>)</p> <p>But ETFs are also among the lesser-known types of investments. If you haven't heard of them, or you've only heard of them spoken about in hushed tones, don't worry. You haven't missed the boat. In fact, you can invest in an ETF anytime, once you understand what they are and decide that they'd be a valued part of your particular portfolio.</p> <h2>What Is an ETF?</h2> <p>Most investors can tell you that an ETF is a fund that is designed to track an index, a particular commodity, or any group (more commonly called a &quot;basket&quot;) of assets. But if you're new to investing or not familiar with the lingo, that might not mean much to you, so here's a breakdown.</p> <h3>It's a Fund&hellip;</h3> <p>A fund is what happens when many investors agree to put their money together and let someone else (a person or a company) manage which securities they buy and sell, and when these are bought and sold. A person indicates his or her agreement to this arrangement by buying into the fund, or buying shares in the fund. This means that the individual is not directly choosing which securities are being purchased or sold, though they can usually choose to sell out of the fund anytime they are unhappy with its performance.</p> <p>The benefits of a fund are many. Investors don't have to do the research to become experts in the market and in each security they want to purchase, but instead reap the benefits of having someone who has trained in these areas doing all of that for them. They also have more purchasing power when their money is combined with that of the others in the fund. In addition, while funds usually have fees associated with them, these are often lower than what an investor could get on his own.</p> <p>When you choose to buy into an ETF, the particular fund that you buy is designed to perform identically to a particular index (like the Dow Jones or S&amp;P 500), commodity market (like gold), or another group of assets (technology, healthcare, etc.). You will know all of this up front, before you make your investment.</p> <h3>&hellip;That's Traded Like a Stock</h3> <p>However, in addition to following the market, an ETF is traded more like a stock. Traditional index funds (funds that perform identically to an index) have been around for years, but they are expensive to trade. An ETF is much cheaper, and it often acts more like a stock, too, changing in value throughout the day as the index's value changes, because particular securities are bought and sold.</p> <p>It's important to note that an ETF is designed to follow the market, NOT to beat it. Some groups are attempting to create actively managed ETFs that do this, but this hasn't worked well so far. At the end of each day, each ETF must disclose which securities are held by the fund. This means that others can respond to the fund's purchases, which often negates the effectiveness of taking certain positions in the first place.</p> <h2>ETF Pros</h2> <p>Okay, now that we understand the basics, let's look at why you might choose an ETF over another investment.</p> <h3>Trades Like a Stock</h3> <p>One of the benefits to trading stocks is that you can can put in things like stop-loss orders, limit orders, and market orders. These help you maximize your gains while limiting your losses. You can't use them with mutual funds, which is one of the downsides of investing that way.</p> <h3>Relatively Liquid</h3> <p>Because ETFs trade like stocks, it's relatively easy to get your money out of them when you need it. If you have an emergency or just want to put your money somewhere else, it's easy to get it out of the ETF and back into your hands.</p> <h3>An &quot;In&quot; to a Difficult Market</h3> <p>The problem with investing in something like gold directly is that you have to come up with a place to store all that precious metal. When you invest in an ETF that tracks the gold market, though, you don't have to store anything, so you can take advantage of an upward trending commodity market without the hassle.</p> <h3>Lower Expense Ratio</h3> <p>The average expense ratio (the percentage of overall assets deducted for fees) for an ETF is <a href="http://guides.wsj.com/personal-finance/investing/how-to-choose-an-exchange-traded-fund-etf/">0.44%, as opposed to 0.74% for a mutual fund</a>. Thus, it costs you less to invest in an ETF. While this may not seem like a big difference to you, it means that you get to keep more of your money, which is always a good thing. And the more you invest in the fund, the more you will save.</p> <h3>Adds Some Diversity</h3> <p>Because you aren't picking and choosing individual stocks, buying an ETF often offers more diversification for your portfolio than simple stock investing. This is particularly true if your ETF tracks a large index, like the S&amp;P 500, which has many different types of companies represented. If your ETF tracks a narrower category, like tech or medical stocks, you will have some diversity within that field but less overall.</p> <h3>Better for Taxes</h3> <p>You will pay fewer capital gains taxes on ETFs than on mutual funds. When the ETF buys or sells shares in order to track the index or market, <a href="http://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp">these are seen as in-kind transfers</a>, which are not subject to taxes in the same ways that mutual funds can be. If you are concerned about not seeing surprises in your tax liability, ETFs might be a good idea for you.</p> <h2>ETF Cons</h2> <p>Naturally, an ETF is not without its compromises.</p> <h3>Not Cost Effective When Investing Small Amounts</h3> <p>Because ETFs do charge fees, they may not be a great idea for you if you are wanting to invest only a small amount of money, or if you want to move your money around a lot (as you'll pay a fee every time you buy into and sell out of a fund). If either of these situations apply to you, you may want to try amassing some money that you don't plan to move for a while before you buy into an ETF. (See also: <a href="http://www.wisebread.com/how-to-save-26000-in-5-years-or-less?ref=seealso">How to Save $26,000 in 5 Years or Less</a>)</p> <h3>Somewhat Limited Diversification</h3> <p>This is the other side of the diversification coin. While an ETF provides more diversification than many investors will achieve on their own, each fund doesn't necessarily hold as wide a variety of securities as you would want in your portfolio. Each ETF has to have at least 13 securities and can't put <a href="http://www.etfmarketpro.com/Pros-and-Cons-of-ETFs.html">more than 30% of the assets into any one place</a>, so you're guaranteed some diversification. If you want a truly diverse portfolio, though, you will need to hold more than one or two ETFs.</p> <h3>The Performance of Some Indexes Is Unknown</h3> <p>While it might make a lot of sense to invest in an ETF that tracks a well-known index, like the Dow Jones, there are other indices whose performance is unknown, or that have not been around long enough for us to know how well they will do long-term. Putting a large sum of money into an ETF following one of these could be too much risk, especially for a new investor.</p> <h3>Bid/Ask Spread Can Be Large</h3> <p>If the volume of the particular index that an ETF follows is low, <a href="http://finance.yahoo.com/news/why-bid-ask-spread-costs-130014865.html">you may end up losing money because of a large bid/ask spread</a>. This basically means that there is a large difference between the price that investors are willing to pay for shares and the price at which the shares are being offered. Over time, trading funds with a large spread will eat away at your returns.</p> <p>It's up to you and your financial advisor to decide if an ETF is right for you, right now. Once you understand how they work, though, you're in a better place to make this evaluation and, if they do seem like a good idea right now, choose the one that is most likely to help you earn more.</p> <p><em>Have you invested in ETFs? What was your experience like?</em></p> <a href="http://www.wisebread.com/exchange-traded-funds-the-low-fee-investment-option-you-dont-know-about" class="sharethis-link" title="Exchange Traded Funds: The Low-Fee Investment Option You Don&#039;t Know About" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/sarah-winfrey">Sarah Winfrey</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment ETF exchange traded fund investing Wed, 18 Jun 2014 13:00:03 +0000 Sarah Winfrey 1144289 at http://www.wisebread.com How to Save $26,000 in 5 Years or Less http://www.wisebread.com/how-to-save-26000-in-5-years-or-less <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-to-save-26000-in-5-years-or-less" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/investment-plan-dv1693007-small.jpg" alt="investment plan" title="investment plan" class="imagecache imagecache-250w" width="250" height="160" /></a> </div> </div> </div> <p>A penny saved is a penny that can be earning investment returns in a <a href="http://www.wisebread.com/3-steps-to-getting-started-in-the-stock-market-with-index-funds">well-diversified investment portfolio</a>. At least, that's what I think one of the late, great founders of our nation once said.</p> <p>It's hard to find ways to put money aside, but here are a few creative options that are often overlooked. Check out the strategies below, and you could have $26,000 (or more!) stashed away in just five years.</p> <h2>Shop Homeowner and Auto Policies</h2> <p>It's easy to become complacent about recurring-but-necessary bills like home and auto insurance policies. &quot;Most people sign up with a carrier and stay with them for 10 to 20 years,&quot; says Patricia Nelson, founder of the community outreach program Wise Women Workshop. &quot;Today though, there are no savings for loyalty. When a client switches carriers I see them save, on average, $600 to $800 per year.&quot;</p> <p><strong>Annual Savings</strong>: Up to $800</p> <h2>Negotiate With Cell Phone and Utility Carriers</h2> <p>It's a little known fact that <a href="http://bgr.com/2014/01/29/att-bill-discount-how-to-guide-shrink-bill/">cell phone rates are negotiable</a>, but even less known is that you can also haggle with your utility providers. &quot;Most of these companies will figure out a way to knock $20, $30, $40 per month off of your bill because they want to keep your business,&quot; says Nelson. &quot;But, they're not going to call you and tell you ways to save money on your existing services with them.&quot; If you have success with just one utility bill and your cell phone provider, you could cut about $60 off your monthly expenses.</p> <p><strong>Annual Savings</strong>: $720 or more</p> <h2>Forego Cable TV</h2> <p>Most people think that the only way to get network TV stations at home is to pay for at least a basic cable TV package. That's just not true. Similar to the analog days, you can put a digital antenna on your roof and watch network TV for free (it's 100% legit and the shows come through in HD quality). (See also: <a href="http://www.wisebread.com/how-everyone-can-cut-cable-and-still-watch-what-they-love-even-sportsfans?ref=seealso">How Everyone Can Cut Cable and Still Watch What They Love</a>)</p> <p>Expanded cable TV packages average between $60 and $75 per month, and <a href="http://www.fcc.gov/document/report-average-rates-cable-programming-service-and-equipment-1">costs are on the rise</a>. If you can't make it without your shows, there are plenty of cheaper options like Netflix or Hulu Plus, and you can play them on your TV thanks to all of the streaming boxes now available. In my house we gave up cable TV 10 years ago (except for the occasional, infrequently used introductory package after moving), and I was surprised to find I barely missed it. (Cable Internet, though? Like bread or water. Must have.)</p> <p><strong>Annual Savings</strong>: Up to $900</p> <h2>Shop Around for Prescription Drugs</h2> <p>Surprising but true, the cost of prescription drugs are not fixed. &quot;You could be purchasing your medication at the wrong store,&quot; says Nelson, who adds that Walmart offers a list of over <a href="http://www.walmart.com/cp/4-Prescriptions/1078664">1100 drugs at $4 each</a> for a month's supply, substantially lower than most co-pays. &quot;If you're taking two medications and paying a $15 co-pay for each,&quot; she says, &quot;you could be saving $22 per month.&quot; No prescription plan required.</p> <p><strong>Annual Savings</strong>: $264 (more or less, depending on your prescription needs)</p> <h2>Bank Your Annual Raise</h2> <p>The <a href="http://www.wisebread.com/5-money-lessons-from-millionaires">millionnaires next door</a>are notorious for maintaining a consistent lifestyle, despite rising incomes over the years. The average raise is expected to be 3% this year. If you make $50,000 now, that's a $1500 increase. Why not add that extra cash to your bank account instead of using it to trade up to a grander lifestyle? (See also: <a href="http://www.wisebread.com/5-new-income-streams-anyone-can-create?ref=seealso">5 New Income Streams Anyone Can Create</a>)</p> <p><strong>Annual Savings</strong>: $1500 on average</p> <h2>Brown Bag It</h2> <p>Bankrate.com estimates you can <a href="http://www.bankrate.com/calculators/savings/bring-lunch-savings-calculator.aspx">save $70 per month</a> by packing your own lunch (more if you live in a high-cost area).</p> <p><strong>Annual Savings</strong>: $840 (or more)</p> <h2>Cook Dinner at Home One Extra Night a Month</h2> <p>A recent study estimated the <a href="http://retailfeedback.com/component/k2/item/6-home-cooked-meals.html">cost of a home cooked meal</a> (per person) is $5.93 on average, compared to an average $12.28 to eat out. Skip family pizza night just <em>once</em> per month for your family of four, and the savings add up.</p> <p><strong>Annual Savings</strong>: $304.80</p> <h2>(BIG) BONUS: Ditch the Car</h2> <p>According to AAA, the <a href="http://newsroom.aaa.com/2014/05/owning-and-operating-your-vehicle-just-got-a-little-cheaper-aaas-2014-your-driving-costs-study/%20">average annual cost of owning a car</a> is $8,876 per year. If you live in a walkable area or in a city with a good transportation system, you could forego the cost. Of course, not everyone lives in a walkable area or can get by without their own transportation, so this is a bonus option.</p> <p>Add up the savings (minus the car) to see how quickly a few small changes can add up.</p> <p><img width="605" height="360" alt="" src="http://www.wisebread.com/files/fruganomics/u5123/Alaina%20T%20Saving%20Chart.jpg?ggnoads" /></p> <p>Over five years, all that savings adds up to $26,644 ($71,024 if you're lucky enough to not need a car!). The results could get even better if you invest the money in a well-diversified investment portfolio.</p> <ul> <li>At a 3% average annual return over five years: $29,140.06.</li> <li>At a 5% average annual return over five years: $30,917.23.</li> <li>At an 8% average annual return over five years: $33,762.90.</li> </ul> <p>(Please note that investment returns cannot be predicted, and you should talk to an investment professional before selecting your investment portfolio.)</p> <p>Of course, the key to this and any other cost cutting plan is to remember to <em>bank the savings</em> you find. Otherwise, you're just shuffling money from one spending category to another, and not actually saving and getting ahead.</p> <p><em>What is the most effective way you've found to cut costs and boost wealth? Let us know in the comments!</em></p> <a href="http://www.wisebread.com/how-to-save-26000-in-5-years-or-less" class="sharethis-link" title="How to Save $26,000 in 5 Years or Less" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/alaina-tweddale">Alaina Tweddale</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Budgeting Investment bargains discounts investing saving savings shopping Mon, 16 Jun 2014 09:00:04 +0000 Alaina Tweddale 1142780 at http://www.wisebread.com Think the Housing Bubble Was Bad? Check Out These Other Crazy Investment Bubbles http://www.wisebread.com/think-the-housing-bubble-was-bad-check-out-these-other-crazy-investment-bubbles <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/think-the-housing-bubble-was-bad-check-out-these-other-crazy-investment-bubbles" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/recession-180956394-small.jpg" alt="recession" title="recession" class="imagecache imagecache-250w" width="250" height="149" /></a> </div> </div> </div> <p>A couple of months ago, an in-law gifted my five-year-old twins a five foot tall box filled entirely with beanie babies. My daughters were thrilled as they sorted through a hundred or so miniature toys. My husband grabbed a pair of scissors and started to cut the tell-tale Ty tags from beanie ears and for a moment I silently screamed &quot;No! They'll be worthless if you cut the tags!&quot;</p> <p>Of course, beanie babies today are already next to worthless, tags or not. Back in the late 1990s, though, beanie baby collectibles resold for hundreds, even thousands of dollars. There were collector manuals, trade publications, and a proliferation of specialty stores that resold the plush toys in plastic preservation boxes. Parents hoarded the toys, keeping them safe from the grimy hands of their kids. There were more than a few parents who thought their <a href="http://qz.com/114753/meet-the-family-who-lost-100000-when-the-beanie-baby-bubble-burst/">beanie collections would pay for their kids' college tuition</a>. I even owned a few, most notably Peace the Bear who, at one point, was selling for a lofty $200. Sadly, I never cashed in on the capital gain. (See also: <a href="http://www.wisebread.com/how-to-create-a-speculative-bubble-and-profit?ref=seealso">How to Create a Speculative Market Bubble and Profit</a>)</p> <p>Beanie babies are far from the only unpredictable market. Collectible toys, internet stocks, and homes have all fairly recently seen unexpectedly high gains, only to dramatically crash later. Experts overwhelmingly recommend an investment strategy that focuses primarily on a broad-based investment portfolio of diversified assets because history has shown that even the most learned experts can't regularly predict market ups and downs. (See also: <a href="http://www.wisebread.com/6-basics-you-must-know-before-you-start-investing?ref=seealso">6 Basics You Must Know Before You Start Investing</a>)</p> <p>Market crashes seem to happen when just about everyone has hopped on a bandwagon and is excited about a particular offering. Let's take a walk through history to see some of the worst timed investments of all time.</p> <h2>Tulips in 1636</h2> <p>The newly imported tulip in 16th century Holland was a popular-yet-expensive addition to many upscale home gardens. It became even more popular after a tulip virus caused the flower's petals to develop beautifully colored stripes in contrasting patterns. A second virus hit the plant, this one lethal, and tulip supply dwindled. The price of bulbs spiked, and soon after, the cost of a single bulb rose to the staggering equivalent of $1,250 (price adjusted for time and currency).</p> <p>Tulip bulb prices rose steadily from there and soon people stopped planting bulbs and started investing in them instead. At the height of the frenzy, nearly everyone &mdash; nobles, farmers, and chimney sweeps alike &mdash; were trading in bulbs. People sold off their land, jewels, and furniture to buy more flowers. A good tulip <a href="http://www.damninteresting.com/the-dutch-tulip-bubble-of-1637/">trader could once make the equivalent of $61,710</a> USD per month, just from trading bulbs. Thanks (or no thanks) to leveraging, tulip options were bought at 15%&ndash;20% of actual cost, leading many investors to buy more than they could afford to lose.</p> <h3>How the Tulip Bubble Ended</h3> <p>One day, a merchant didn't show up at market to pay for the bulbs he'd bought. The history books point to this one deal gone sour as the impetus for what became one of the greatest market crashes in history. Tulip owners rushed to sell, prices spiraled down, and widespread panic ensued. Dealers went bankrupt, and soon no one honored their buying commitments. Eventually the Dutch government stepped in and offered to bail contract holders out at 10% of contract value. Even so, prices continued to fall, and eventually everyone in the nation was affected as the market crashed and a long economic depression settled in.</p> <h2>Pretty Much Any British Stock in 1720</h2> <p>In early 18th century England, stock investing for the middle class was a new phenomenon, and many Englishmen were excited to get in the game. There were countless offerings that promised ridiculous business ventures such as trading in human hair, extracting silver from lead, or removing sunlight from a cucumber. Many investors didn't believe in the feasibility of the absurd ventures they funded. They simply thought that stock prices would rise, they'd sell their shares, and they'd profit handsomely from the sale.</p> <p>Around this time, an unknown man started a company &quot;for carrying on an undertaking of great advantage, but nobody to know what it is.&quot; Stock prices were rising to great heights across the country and investors were so excited to get in on the action that when the offering opened, it took just five short hours for a thousand people to invest in the mysterious investment.</p> <p>The largest investment opportunity gone awry during this time was the <a href="http://www.investopedia.com/features/crashes/crashes3.asp">South Sea Company</a>, which was founded to conduct trade throughout the South Seas. The company's stock rose from an initial offering price of 130 to more than 1,000 pounds per share, even though none of the company's directors had any experience in South American trade.</p> <h3>How the South Sea Bubble Burst</h3> <p>The directors and officers of the South Sea Company realized that the company's share price was heavily inflated and so sold their holdings. The general investing public heard of the sale, panicked, and sold their shares at increasingly lower prices. The British public credit system almost collapsed, and as a result, it was more than 100 years before it was again legal for a company to issue public stock. Oh, and the man with that mysterious stock offering? He closed the issue at the end of that first day and promptly sailed off for America. No one ever heard from him again.</p> <h2>Internet Stocks in Early 2000</h2> <p>Personal computer growth exploded in the early 1990s, followed by multiple web browser developments, bringing the mass public online for the first time ever. Internet upstarts proliferated as companies rushed to profit off nascent Internet traffic. The only hitch was that many tech companies had yet to figure out how to make a profit in the online world.</p> <p>This technicality didn't matter to investors, though, who regularly overlooked traditional metrics and invested at staggering price-to-earnings ratios on the assumption that technological advances would far outpace the growth of a company's stock price. One such profit-less company, TheGlobe.com, ended a five-day IPO at <a href="http://news.cnet.com/2100-1023-217913.html">a 249% gain over its initial target price</a>.</p> <p>Excitement heightened as established companies and upstarts alike rushed to cash in on the tech boom. Some created new and exciting online businesses while others did little more than change their corporate name by adding a .com suffix or an e- prefix. Internet giants Amazon.com, eBay, and Google were founded during this time, but so were the now defunct and long-forgotten Pets.com, e-Stamp.com, e1040.com (notice the tell-tale prefixes and suffixes). The NASDAQ rose by more than 700% on a cumulative basis in the 10 year decade before the bubble eventually burst. (Note: the NASDAQ has yet to return to its year 2000 peak.)</p> <h3>How the Internet Boom Ended</h3> <p>By the end of the decade, there was a new IPO issued almost every day, and day trading seemingly became a new national pastime. Tech companies were unable to keep up with market expectations and some, like <a href="http://www.nytimes.com/2002/07/22/us/worldcom-s-collapse-the-overview-worldcom-files-for-bankruptcy-largest-us-case.html">WorldCom</a>, were later found to be cooking their books in an effort to keep the party going. A majority of tech companies didn't survive the crash, but even those that did saw significant drops in stock price (e.g., Amazon saw its stock price fall from $107 to $7 per share). In the end, <a href="http://en.wikipedia.org/wiki/Dot-com_bubble%20">over $5 trillion in market value was lost</a> in the crash between 2000&ndash;2002. The following years from 2000&ndash;2009 became known as &quot;the lost decade&quot; as stock market returns were unprecedentedly low.</p> <h2>U.S. Real Estate in 2007</h2> <p>Housing prices skyrocketed in the early part of this century and it seemed that prices would never level off. Around this time I had a marketing professor ask his class of graduate students to raise their hands if they owned a home. &quot;If your hand isn't raised,&quot; he told us, &quot;you'll never own one. Prices are going up too quickly and they aren't coming down.&quot; This was pretty much what everyone thought about homeownership at the time.</p> <p>The overinflation of the housing market became even more evident in 2005 when then-Fed chairman Alan Greenspan said that &quot;at a minimum, there's a little 'froth' (in the U.S. housing market)&hellip; it's hard not to see that there are a lot of local bubbles.&quot;</p> <h3>How the Housing Boom Ended</h3> <p>Housing prices peaked in 2006 before a dramatic drop in the market left many homeowners owning homes that were worth far more than they had paid. In 2008, the Case-Shiller home price index reported its <a href="http://en.wikipedia.org/wiki/Real_estate_bubble%20">largest price drop in history</a>. Many experts believe the burst housing bubble was the primary cause of the 2007&ndash;2009 U.S. recession. By the end of 2010, 23.1% of all U.S. homeowners held negative equity in their homes. (See also: <a href="http://www.wisebread.com/six-options-if-youre-underwater-on-your-mortgage?ref=seealso">6 Options if You're Underwater On Your Mortgage</a>)</p> <h2>Avoiding the Bubble</h2> <p>It might be tempting to try to cash-in on an inflating bubble, but it's impossible to predict how any one investment will perform over time. Those who try inevitably lose. Don't risk losing all your assets in the next best thing. Take the advice of the overwhelming majority of wealth managers and create a diversified portfolio strategy, and <a href="http://www.wisebread.com/the-basics-of-asset-allocation">rebalance your mix of stocks and bonds often</a>. Check out <a href="http://www.wisebread.com/the-basics-of-asset-allocation">The Basics of Asset Allocation</a> for a primer.</p> <p><em>Have you ever lost money on tech stocks, beanie babies, your home, or another market bubble? How did that loss affect your investment strategy? Tell us about it in the comments below.</em></p> <a href="http://www.wisebread.com/think-the-housing-bubble-was-bad-check-out-these-other-crazy-investment-bubbles" class="sharethis-link" title="Think the Housing Bubble Was Bad? Check Out These Other Crazy Investment Bubbles" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/alaina-tweddale">Alaina Tweddale</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Consumer Affairs Investment Economy investing money real estate Wed, 11 Jun 2014 21:06:39 +0000 Alaina Tweddale 1142403 at http://www.wisebread.com The Simple 5-Step Plan to Complete Money Management http://www.wisebread.com/the-simple-5-step-plan-to-complete-money-management <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-simple-5-step-plan-to-complete-money-management" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/stress-4973257-small%20copy.jpg" alt="money stress" title="money stress" class="imagecache imagecache-250w" width="250" height="158" /></a> </div> </div> </div> <p>Do you struggle with managing your money? Is staying on top of your finances complicated and time-consuming for you?</p> <p>If so, follow the simple five step plan below &mdash; and the calculators and tools suggested for each &mdash; to get in control. With these simple tools, you have everything you need to make sure you're achieving your financial goals. (See also: <a href="http://www.wisebread.com/5-painless-ways-to-manage-money-with-your-partner?ref=seealso">Painless Ways to Manage Money With a Partner</a>)</p> <h2>1. Create a Debt Elimination Plan</h2> <p>This is the most important tool. You can't build wealth and win the money game as long as you're in debt.</p> <p>This tool lets you track all your debts in one place, so that you have a good grasp of your overall financial picture. The beauty of this tool is that you can run different payment scenarios, such as determining the order you want to off your debts. This lets you see how fast you can get out of debt, and how much money you can save in interest payments.</p> <ul> <li> <p><a href="https://drive.google.com/previewtemplate?id=0Ak7JTr_5ZgQBdEhKSmRDNGdjY3Ezc3libU1qSE1DMWc&amp;mode=public">Debt Elimination Calculator</a> (Google Sheets)</p> </li> </ul> <h2>2. Develop a Budget</h2> <p>The next tool you need is a budget. This lets you see how much money you're bringing in and how much you're sending out.</p> <p>With this tool, you can tell if you're overspending, which leads to debt. But it'll also show you if you're spending within your means, which creates a cushion to help you get ahead financially.</p> <p>If you're overspending, you can instantly see where you may want to cut expenses. And if you're spending within your means, you can think about the many possibilities you have for spending the extra money (such as the occasional splurge).</p> <ul> <li> <p><a href="https://drive.google.com/templates?q=vertex42+budget&amp;category=14&amp;type=spreadsheets&amp;sort=user&amp;view=public">Budget Spreadsheets</a> (Google Sheets)</p> </li> </ul> <h2>3. Improve Your Credit</h2> <p>If you're like most people, you need to get around town with a car, and you think about owning a dream home. Unless you have the cash to pay for these in full, you'll probably need to take out a loan. And that means you'll pay interest.</p> <p>To save the most amount of interest, you'll need a good credit score. Let's say you take out a 30-year mortgage on a $200,000 house. Comparing the difference between a score in the best range with the worst range (According to <a href="http://www.myfico.com/myfico/creditcentral/loanrates.aspx">myFICO</a> as of May 2014), you'd save over $68,000.</p> <p>There are several &quot;free&quot; sources of credit scores (you've heard the jingles and seen the commercials). While those services may provide some value, they do not actually report the credit scores kept by the <a href="http://www.consumer.ftc.gov/articles/0155-free-credit-reports">three major reporting agencies</a>.</p> <p>To get those scores, visit <a href="http://www.annualcreditreport.com/">AnnualCreditReport.com</a>. You're entitled to one free report from each of the three bureaus per year.</p> <h2>4. Create an Investment Plan</h2> <p>Investing is one of the best ways to build financial security for your future.</p> <p>And the biggest determinant of your investing results is your asset allocation, which is how you decide to split your money between stocks and bonds. (See also: <a href="http://www.wisebread.com/the-basics-of-asset-allocation?ref=seealso">The Basics of Asset Allocation</a>)</p> <p>So how do you decide on yours?</p> <p>Most of the major investment services offer lots of calculators and tools to help you figure it out, but here's one:</p> <ul> <li> <p><a href="https://personal.vanguard.com/us/FundsInvQuestionnaire">Vanguard Investor Questionnaire</a></p> </li> </ul> <p>With this knowledge, you can make investing decisions for accounts such as your 401(k) and IRA. Better yet, you can revisit this tool when circumstances in your life change, and see if this changes your proposed asset allocation.</p> <h2>5. Track Your Net Worth</h2> <p>The last tool you need is one that'll keep track of your net worth. This is important because it'll show you how you're doing overall in the money game. It'll help you stay focused.</p> <p>For instance, if your goal is to leave your day job once you become a millionaire, this tool will show you when you've reached that target. Then you can stop working and enjoy more time with your family and friends!</p> <p>Here, you have two options.</p> <p>If you want your net worth calculated automatically and don't mind storing your personal account information online, a site like <a href="https://www.mint.com/">Mint</a> will do the job for you. It can also help with budgeting, and paying your bills on time, and preparing your taxes.</p> <p>But if you don't want your personal details kept on the web, here's a spreadsheet you can use:</p> <ul> <li> <p><a href="https://drive.google.com/previewtemplate?id=0An50IrnQTTJQdExpTW9KclF3ZTRZSE5ESWFjejNIMmc&amp;mode=public">Basic Net Worth Calculator</a></p> </li> </ul> <p><em>What tools do you find most helpful in staying on top of your finances? Please share in comments!</em></p> <a href="http://www.wisebread.com/the-simple-5-step-plan-to-complete-money-management" class="sharethis-link" title="The Simple 5-Step Plan to Complete Money Management " rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darren-wu">Darren Wu</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Banking Debt Management Investment debt financial calculators money management Thu, 29 May 2014 08:48:32 +0000 Darren Wu 1140874 at http://www.wisebread.com The Only 4 Things You Need to Do to Start Investing http://www.wisebread.com/the-only-4-things-you-need-to-do-to-start-investing <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-only-4-things-you-need-to-do-to-start-investing" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/cash-466310089.jpg" alt="stacks of coins" title="stacks of coins" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>Do you want to get rich through investing one day? Do you think it's even possible? Well, it is. And the best part about investing is that it's simple.</p> <p>It's not a get-rich-quick scheme, and it's also not rocket science.</p> <p>I'm going to show you four simple and actionable steps you can take. After reading this article, you'll be able to just follow the directions and start investing right away. Really, there are just four steps.</p> <p>Let's begin.</p> <h2>1. Choose an Investment Company</h2> <p>Before you can invest, you need to choose an investment company to invest with. There are tons of options out there, including Fidelity, Schwab, and T. Rowe Price. But I'm going to recommend the company that I think is the best. And that company is Vanguard.</p> <p>Why are they the best? Because the company is owned by its investors, which means that the company's interests are aligned with those of their clients.</p> <p>One specific way they show this alignment is by sharing their profits with their investors, using the profits to lower the fund fees for them (fund fees are expenses you pay no matter where you invest). So the benefit to you as a client is that you get to invest in funds that are some of the lowest cost in the industry. (See also: <a href="http://www.wisebread.com/a-guide-to-online-brokers-for-investing-newbies-and-beyond?ref=seealso">Online Brokers for Newbies</a>)</p> <h2>2. Open an Account</h2> <p>Now that you have a company to invest with, you need to <a href="https://personal.vanguard.com/us/openaccount?CompLocation=Home&amp;Component=OpenAccntLnk">open an account</a>. Here, you have a few options.</p> <p>If you meet the <a href="http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2014">income requirements</a>, you can open a Roth IRA, which is a retirement account that comes with some unique tax benefits. You can also open a traditional IRA or general savings account.</p> <p>To open an account, all you need is to enter some basic personal information, and it only takes about 10 minutes. If you want to speak to someone and have them walk you through the process, the bigger brokerages such as Vanguard have efficient customer service departments.</p> <h2>3. Pick an Investment</h2> <p>After you've opened an account, the next step is to choose your investment. And just as there are many investment companies to choose from, there are many types of investments to choose from as well.</p> <p>But again, I'm going to recommend what I think is the best option for most beginning investors. And that is a <a href="https://investor.vanguard.com/mutual-funds/target-retirement/#/">Target Retirement Fund</a>.</p> <p>Why? Because they follow all the rules of effective investing. The details behind these rules are beyond the scope of this article, but they include:</p> <ul> <li> <p>choosing an asset allocation,</p> </li> <li> <p>diversification,</p> </li> <li> <p>regular rebalancing; and</p> </li> <li> <p>low cost.</p> </li> </ul> <p>All you need to do is choose the fund with the year closest to the time you expect to retire. For instance, if you're 32 years old and expect to retire in about 31 years, you'd choose the Target Retirement 2045 Fund.</p> <h2>4. Invest Regularly and Often</h2> <p>Lastly, after you've chosen your investment, you need to add money to it. And the sooner you start, the more you'll have later. (See also: <a href="http://www.wisebread.com/dollar-cost-averaging-my-path-to-becoming-a-not-so-nervous-investor?ref=seealso">Dollar-Cost Averaging Is One Path to Confident Investing</a>)</p> <p>For instance, let's say you start at age 35 and invest $5,000 every year for 30 years. If your investments grow 8% each year, by the time you're age 65 you'll have just under $612,000.</p> <p>That's not bad. But check this out.</p> <p>Let's say you start 10 years earlier &mdash; at age 25 &mdash; and invest $5,000 every year for just 20 years &ndash; 10 years less than our example above. And again, let's say your investments grow 8% each year. Even though you stopped adding money at age 45, by the time you're 65 you'll have over a million dollars.</p> <p>In other words, by starting just 10 years earlier, you can invest $50,000 less, and still end up with over $540,000 more than the person who started later.</p> <p>So the key to getting rich is investing as much as you can, as early as you can, and as often as you can. And to make this easy for you, you can set up your account to have money automatically invested from your checking account. That way, you make money regularly, without any effort on your part.</p> <p>Check out <a href="http://www.bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx">this calculator</a>, where you can play with different numbers to see just how much money you can end up with.</p> <p>Now you know the simple steps to begin investing. Get started now, and you'll be making money in no time.</p> <p><em>Have you set up a basic investment account with one of the big brokerages like Vanguard? Share your experience in comments!</em></p> <a href="http://www.wisebread.com/the-only-4-things-you-need-to-do-to-start-investing" class="sharethis-link" title="The Only 4 Things You Need to Do to Start Investing" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/darren-wu">Darren Wu</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> General Tips Investment investment accounts mutual fund investing retirement planning simple investing Tue, 06 May 2014 08:24:19 +0000 Darren Wu 1137943 at http://www.wisebread.com These Are the 4 Terms You Need to Know to Get Started in Stocks http://www.wisebread.com/these-are-the-4-terms-you-need-to-know-to-get-started-in-stocks <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/these-are-the-4-terms-you-need-to-know-to-get-started-in-stocks" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/laptop-78528538.jpg" alt="laptop and newspaper" title="laptop and newspaper" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>Whether you are looking to set up your nest egg or start a new life as a rapid fire day trader, the stock market can be simultaneously exciting and overwhelming. Movies like &quot;The Wolf of Wall Street&quot; simplify the world of shares and trading, making it appear as though anyone with half a brain can jump in and make a fortune. However, while the potential for turning a profit is there, considerable knowledge is required to navigate the loaded language and confusing jargon of the stock market.</p> <p>Whether you're working through a licensed broker or trying to go it alone, it's important to know the lingo. Here are few key terms to get you started. (See also: <a href="http://www.wisebread.com/why-invest-in-the-stock-market?ref=seealso">Why Invest in the Stock Market?</a>)</p> <h2>What Is a Stock?</h2> <p>A stock, simply put, is a piece of a company. Most people have heard the phrase, &quot;buy low, sell high.&quot; While this is perfectly sound advice, determining which companies will give you a return on your investment is a bit more complicated.</p> <p>Fortunately, boring old <a href="http://www.nasdaq.com/investing/dozen/">research is your best friend</a> in the world of stocks, and the perplexing phrases doled out by Wall Street big shots are nothing more than indicators of stock performance. Once you know the basic definitions, you can start making moves on the trading floor just like all of the Geckos and Belforts out there.</p> <h2>Market Capitalization (Market Cap)</h2> <p>Like a lot of things, the stock market is often more complicated than it should be. <a href="http://www.wikinvest.com/metric/Market_Capitalization">Market capitalization</a> is a fancy way of stating the current price per share multiplied by all of the outstanding shares, where outstanding shares refers to the number of shares held by investors.</p> <p>What does this mean to the average Joe? Market capitalization gives you a general idea of the value of a company. Since share price fluctuates and the number of shares available differs for each company, the market cap allows you to compare the value of companies with a similar number of outstanding shares.</p> <h2>Earnings Per Share (EPS)</h2> <p>Earnings per share is generally considered the single most important stock performance indicator. EPS essentially tells you how profitable a company is by taking the net income of that company and dividing it by the average number of outstanding shares.</p> <p>Wait&hellip; what? In a nutshell, the value of the company becomes diluted by how many shares are out there. Because of this, each share or &quot;piece&quot; of the company becomes less valuable. Of course, EPS is <a href="http://www.investopedia.com/articles/analyst/03/091703.asp">significantly more complex</a> than this because the world of accounting wants to make you as uncomfortable as possible.</p> <h2>Price to Earnings Ratio (P/E)</h2> <p>This is the current share price divided by the earnings per share (or EPS). This figure tells you how much the market is willing to pay for a company. For example, if a stock has a price to earnings ratio of 10, that means folks are willing to pay 10 times that company's earnings to own the stock.</p> <p>What does it all mean? Without getting too complicated, stocks with a higher P/E are generally perceived to have greater growth potential. Essentially, investors are betting that the company will continue to prosper. Stocks with a low P/E are seen as high-risk investments, meaning that the market isn't willing to pay a high price for the level of risk involved. However, as with most of these indicators, <a href="http://www.fool.com/investing/general/2009/06/19/why-the-pe-ratio-is-dangerous.aspx">nothing is guaranteed</a>.</p> <h2>Price to Sales Ratio (P/S)</h2> <p>The price to sales ratio can determine if a stock has potential for revenue growth or if it is overvalued. This ratio is determined by a company's market capitalization divided by its <em>total sales</em> over the previous 12 months. The lower the ratio, the better the investment.</p> <p>Why does this matter? The price to sales ratio is simple way to <a href="http://www.briefing.com/investor/learning-center/analysis/price-earnings-ratio-vs-price-sales-ratio/">size up stocks</a> by showing how much the market values the company's sales instead of its earnings. For example, if the P/S is 1, that means you are paying $1 for every $1 of sales the company generates. If the P/S is .5, then you are paying $0.50 for every dollar of sales, which is obviously a bargain.</p> <p>While these metrics and many others are useful, they are by no means a guarantee. The stock market is as volatile as the fickle people who invest. Because of this there is debate as to whether or not any of these metrics do any good, or if they are all simply <a href="http://www.investopedia.com/terms/v/valuetrap.asp">value traps</a>. But then again, what's the fun if there isn't any risk involved? (See also: <a href="http://www.wisebread.com/2-investing-concepts-everyone-should-know?ref=seealso">2 Investing Concepts You Should Know</a>)</p> <p><em>What do you look for in a stock before investing? Let us know in the comments!</em></p> <a href="http://www.wisebread.com/these-are-the-4-terms-you-need-to-know-to-get-started-in-stocks" class="sharethis-link" title="These Are the 4 Terms You Need to Know to Get Started in Stocks" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/ryan-lynch">Ryan Lynch</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment investing indicators stock market jargon Fri, 02 May 2014 08:00:32 +0000 Ryan Lynch 1137748 at http://www.wisebread.com Is This Hidden Cost Sapping Your Retirement Savings? http://www.wisebread.com/is-this-hidden-cost-sapping-your-retirement-savings <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/is-this-hidden-cost-sapping-your-retirement-savings" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/cash-126464752.jpg" alt="spilling coins" title="spilling coins" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Mutual funds are the most commonly discussed investment vehicle. They are an option in almost all 401(k) retirement plans, individual retirement accounts (IRAs), and brokerage accounts. However, there is more than meets the eye when it comes to underlying expenses. Over time, this minor detail can have a severe impact on the growth of your money.</p> <p>You may be aware of expense ratios within mutual funds, but the list of fees goes on &mdash; and these additional fees are not readily apparent. The expense ratio consists of the operating costs of the mutual fund. (Think of a mutual fund as a business and the expense ratio as the costs of running that business.) It is shown as a percentage, and the average mutual fund expense ratio is about 1.19%. (See also: <a href="http://www.wisebread.com/the-3-step-plan-to-choosing-your-first-or-next-mutual-fund?ref=seealso">3-Step Plan to Choosing Mutual Funds</a>)</p> <h2>Mutual Fund Trading Costs Are Hidden</h2> <p>Trading costs are the expenses that accrue when buying and selling the individual securities (stocks, bonds, etc.) within a mutual fund. The problem is that mutual fund companies are not required to disclose this information. Therefore, these fees are virtually hidden from the average person. Sure, there are ways to estimate these fees, but it's complicated and still only an estimate.</p> <p>To better understand what I'm talking about, let's compare a mutual fund to a commonly used item: the credit card. We all know that most credit cards charge interest on the unpaid balance each month. It's pretty clear that they do this &mdash; the interest rate is listed right on your statement. This is like the expense ratio in a mutual fund.</p> <p>Just like you calculate the interest for your credit card by multiplying your interest rate by the current balance, the same goes for calculating the expense ratio cost in a mutual fund. You multiply the expense ratio by your total investment amount in the mutual fund. For example, a $10,000 investment in a mutual fund with a 1.20% expense ratio would cost you $120/year. (These calculations are over-simplified, but you get the idea.)</p> <p>What if I told you that credit cards also tack on another (hidden) fee based on the number and size of purchases you make on your card each month? (They don't, but for comparison's sake, imagine they did.) How would you feel about not having that information disclosed anywhere?</p> <h3>Investors End Up Paying Undisclosed Buying and Selling Costs</h3> <p>This is exactly what happens with mutual fund trading costs. The more a mutual fund buys and sells stocks, bonds, etc., the more expenses you pay as an investor. According to a recent study, these <a href="http://www.cfapubs.org/doi/pdfplus/10.2469/faj.v69.n1.6">hidden trading costs</a> average 1.44%, which is more than the average expense ratio of 1.19%. This means that the overall expenses could add up to 2.63% or more. Yikes!</p> <p>The study points out that if mutual funds were able to deliver better returns by trading more, then paying these expenses would be worth it. Unfortunately, the results of the study prove that the invisible trading costs actually weigh down the funds, thereby reducing the overall performance. Put simply, your money has less potential to grow.</p> <h2>How to Avoid Trading Costs</h2> <p>So what do you do? Avoid investing in mutual funds completely? You could do that, but that is impractical. As mentioned previously, mutual funds are the most common investment vehicle used today. However, there is a solution to this dilemma.</p> <p><a href="http://www.wisebread.com/3-steps-to-getting-started-in-the-stock-market-with-index-funds">Index mutual funds</a> and <a href="http://www.wisebread.com/etfs-offer-incredible-benefitswith-a-dark-side">exchange traded funds (ETFs)</a> focus on low-cost trading strategies, and therefore don't accrue large amounts of hidden fees. These investment vehicles often have much lower internal expenses (expense ratios) than the average mutual fund as well, which can save you as much as 1% or more in total costs. (See also: <a href="http://www.wisebread.com/a-guide-to-online-brokers-for-investing-newbies-and-beyond?ref=seealso">A Guide to Online Brokers</a>)</p> <p>The goal of these investment vehicles is to track a benchmark (i.e. the S&amp;P 500), which means they invest in various stocks (or bonds) and make minor adjustments over time. Basically, index fund managers do much less buying and selling and therefore they accrue fewer costs. (See also: <a href="http://www.wisebread.com/3-steps-to-getting-started-in-the-stock-market-with-index-funds?ref=seealso">3 Steps to Getting Started With Index Funds</a>)</p> <p>The mutual fund industry is still working through various solutions to this hidden cost issue. But don't hold your breath, as this issue has been argued for years. Until then, be prudent and choose your investments based on your long term goals. The key is to be aware of the potential costs of investing. A diversified set of index mutual funds or ETFs may be the answer for you.</p> <p><em>Did you know about hidden trading costs in mutual funds? Will you be reconsidering them now that you do?</em></p> <a href="http://www.wisebread.com/is-this-hidden-cost-sapping-your-retirement-savings" class="sharethis-link" title="Is This Hidden Cost Sapping Your Retirement Savings?" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/eric-roberge-cfp">Eric Roberge CFP</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement investing mutual funds retirement trading costs Thu, 01 May 2014 08:24:15 +0000 Eric Roberge CFP 1137576 at http://www.wisebread.com Don't Know What Annuities Are? You Might Be Missing Out http://www.wisebread.com/dont-know-what-annuities-are-you-might-be-missing-out <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/dont-know-what-annuities-are-you-might-be-missing-out" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/couple-86497392.jpg" alt="couple" title="couple" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>When it comes to finance, most people like stability.</p> <p>Having the certainty of when and how much cash you will receive for a set period of time provides you peace of mind that allows you to focus on more important things. This is the reason that annuities may be an attractive long-term source of income for some investors. (See also: <a href="http://www.wisebread.com/intro-to-5-super-safe-investments?ref=seealso">5 Super Safe Investments</a>)</p> <p>Let's take a look at what are annuities and when they are a good choice.</p> <h2>How Annuities Work</h2> <p>Annuities are contracts between you, referred to as the annuitant, and a financial institution, such as a mutual fund or insurance company. In these contracts, you commit to make a lump sum payment or to follow a schedule of periodic payments in exchange for a guaranteed income stream. Under most annuities, you have to hold the annuity until age 59 1/2.</p> <p>The financial institution, often an insurance company, uses your annuity contributions to make investments based on your target start date for your distributions. Financial institutions make money from annuities by charging recurring monthly, quarterly, or annual fees, which are all deducted from your annuity funds. The more complex the annuity, the more additional fees you can expect. Additionally, there is the infamous surrender charge. If you decide to cancel your annuity during the surrender period (ranging from 4 to 15 years), then the financial institution is entitled to keep a portion of your deposits.</p> <p>Despite all of these fees, do not hesitate to negotiate for a better deal. The annuity business is very competitive so make sure to get several quotes. Insurance agents are able to increase your annuity rates or lower your fees, but only if you ask. (See also: <a href="http://www.wisebread.com/10-costs-you-should-always-negotiate?ref=seealso">Costs You Should Always Negotiate</a>)</p> <h3>Tax Deferral Benefit</h3> <p>During the &quot;ramp-up&quot; period, all monies contributed to an annuity grow tax-deferred until they are withdrawn. You are still responsible for applicable income taxes on your contributions, but your earnings are tax-free until withdrawal. Unlike retirement accounts, annuities have no limits on how much you can contribute. The tax deferral benefit and absence of contribution limit make annuities attractive for wealthy individuals as retirement planning tools. Most annuities allow you start collecting payments at age 59 1/2, but there are some exceptions (e.g. immediate annuities). The financial institution issues distributions for a fixed amount of time (usually 10, 15, or 20 years) or until the death of the beneficiary.</p> <p>You are responsible for income taxes on earnings only when you start receiving distributions. Note that a fixed amount of each distribution is not taxable because it is considered to be a return of your contributions, which were already subject to tax. This allows annuitants to defer applicable income taxes until they are in a lower tax bracket during retirement. (See also: <a href="http://www.wisebread.com/the-10-worst-tax-moves-you-can-make?ref=seealso">The 10 Worst Tax Moves</a>)</p> <h2>When Are Annuities a Good Choice?</h2> <p>Annuities offer an option for those who have maxed out their contributions to other retirement accounts. They fall under three broad types: fixed, variable, and indexed. Each type offers different income potential and is appropriate for a different purpose and reason. Let's start with fixed annuities.</p> <h3>Fixed Annuities</h3> <p>Fixed annuities offer you the most stability because they guarantee a stream of income. The financial institution holds all of the market risk. This is why fixed annuities are a good choice for people that are very risk averse when it comes to their retirement planning.</p> <p>Within fixed annuities, there are two subtypes: immediate annuities and deferred annuities. Immediate annuities require a single and very substantial lump sum payment, but they start issuing distributions after a short period of time. This makes immediate annuities a great choice for people that are very close to retirement age. (See also: <a href="http://www.wisebread.com/boost-your-retirement-savings-fast-with-this-6-step-plan?ref=seealso">Boost Your Retirement Savings Fast</a>)</p> <p>On the other hand, deferred annuities require several smaller payments over several years. These annuities start issuing distributions once you turn age 59 1/2. If you receive distributions earlier than that, then the IRS applies an additional income tax. Young workers should look into deferred annuities so that they can take advantage of the tax deferral benefit.</p> <p><strong>Fees and Rates:</strong></p> <ul> <li>Fixed annuities typically offer a 5% return.<br /> &nbsp;</li> <li>When investing in deferred and immediate annuities, you can expect around 1.5% of your total investment to be assessed towards expense charges. For example, if you invest $10,000, then you can expect about $150 to go towards expense charges.<br /> &nbsp;</li> <li>When investing in deferred annuities, you can expect the surrender charge to be around 7% of the total investment if the annuity is cashed during the first year. The surrender charge usually decreases by 1% per year until it reaches zero. Remember that withdrawals before age 59 1/2 receive an additional 10% income tax by the IRS.<br /> &nbsp;</li> <li>The minimum investment requirement for deferred and fixed annuities is typically between $1,000 and $5,000. For example, Prudential requires a <a href="http://www.prudential.com/view/page/public/11628">minimum of $3,500</a> for an immediate annuity.</li> </ul> <h3>Variable Annuities</h3> <p>Unlike fixed annuities, variable annuities offer you a higher income potential. The catch is that your return is no longer guaranteed and you do hold part of the market risk from the annuity investments. Variable annuities provide you more freedom in selecting investments. Some variable annuities offer a death benefit so that the beneficiary is guaranteed your original investment, in case you pass away.</p> <p>Variable annuities are useful tools for estate planning. If you would like to set up a steady source of income for your children, grandchildren, then variable annuities may be a good choice. It is a good idea to add the death benefit to your annuity to protect your estate.</p> <p>Additionally, variable annuities are a good match for people who would like to have a more &quot;hands on&quot; approach on directing their investments for retirement. (See also: <a href="http://www.wisebread.com/5-killer-free-investment-tools?ref=seealso">Awesome, Free Investment Tools</a>)</p> <p><strong>Fees and Rates:</strong></p> <ul> <li>On the average, variable annuities provide a 7.1% return.<br /> &nbsp;</li> <li>They offer a minimum return on your investment in case of your death (known as the &quot;death benefit&quot;) while not forgoing excess gains in case of good investment performance.<br /> &nbsp;</li> <li>Financial institutions may or may not charge a fee for the death benefit. Make sure to check this when shopping for a variable annuity.<br /> &nbsp;</li> <li>On top of the average 1.5% expense charge, you can expect an extra 0.82% of your total investment to go towards subaccount management fees. The greater availability of investment options comes with an extra cost per selected subaccounts. This means that if you invest $10,000 in a variable annuity, you can expect to pay at least $232 in fees.<br /> &nbsp;</li> <li>When investing in variable annuities, you can expect the surrender charge to be around 7% of the total investment if the annuity is cashed during the first year.<br /> &nbsp;</li> <li>The minimum investment requirement for variable annuities is typically $10,000. For example, Fidelity requires <a href="https://www.fidelity.com/annuities/FPRA-variable-annuity/overview">$10,000 for a variable annuity</a>.</li> </ul> <h3>Indexed Annuities</h3> <p>Under this scenario, the annuitant receives distributions that are indexed to a market benchmark, such as the Dow Jones or the S&amp;P 500. Indexed annuities often offer a minimum return, but it depends on the financial institution issuing the annuity.</p> <p>Indexed annuities are a good choice for people that would like to have just a bit more market exposure than that of fixed annuities but less than that of variable annuities. Indexed annuities are full of additional rules and fees.</p> <p><strong>Fees and Rates:</strong></p> <ul> <li>Most indexed annuities put a cap on your return: <ul> <li>If your selected market benchmark returned 12% over a period, and your annuity has a cap of 6%, then you only get 6%. The cap of an indexed annuity determines the maximum return you can get on an indexed annuity.<br /> &nbsp;</li> <li>Another way that an indexed annuity can limit your return is through the participation rate, which is the annuity's participation in the index's return. For example, if the annuity's participation rate is 90% and the benchmark went up by 5%, then your return is 4.5%.<br /> &nbsp;</li> <li>On an indexed annuity, you can expect a spread fee. This is a percentage fee that may be subtracted from the gain linked to the market benchmark. If the benchmark gains 15% and the spread fee is 5%, then your annuity return is 10%.<br /> &nbsp;</li> </ul> </li> <li>The minimum investment requirement of an indexed annuity ranges between $5,000 to $10,000. For example, Jackson requires <a href="https://www.jackson.com/annuities/fixedindex/AscenderPlusSelect.jsp?&amp;framework-guid=ff0035dc661c8679453b01210091007a">$5,000 and $10,000 for indexed annuities</a>, depending if you meet its qualification criteria.</li> </ul> <h2>Bottom Line</h2> <p>From these three broad categories: fixed, variable, and indexed, you can find all kinds of different annuities. In general, the terms of fixed annuities are easier to understand than those from variable and indexed annuities. However, the return of a fixed annuity is lower than that from variable and indexed annuities.</p> <p>No matter the type of annuity you prefer, the consensus among financial advisers is that you should not choose an annuity within an existing retirement account because those products already have a tax-deferral benefit. Plus, the management fees of annuity within a retirement account are quite high, particularly the more features you add to your annuity.</p> <p>Different financial institutions provide different annuity features. Make sure to read the fine print and choose one that matches your level of risk tolerance, your investment objective, and your desired start date for distributions.</p> <p><em>What is the type of annuity that appeals to you?</em></p> <a href="http://www.wisebread.com/dont-know-what-annuities-are-you-might-be-missing-out" class="sharethis-link" title="Don&#039;t Know What Annuities Are? You Might Be Missing Out" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/damian-davila">Damian Davila</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment Retirement annuities insurance retirement Wed, 23 Apr 2014 08:24:18 +0000 Damian Davila 1136591 at http://www.wisebread.com Best Money Tips: How to Start Investing http://www.wisebread.com/best-money-tips-how-to-start-investing <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/best-money-tips-how-to-start-investing" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/finances-480177597.jpg" alt="money graph" title="money graph" class="imagecache imagecache-250w" width="250" height="173" /></a> </div> </div> </div> <p>Welcome to Wise Bread's <a href="http://www.wisebread.com/topic/best-money-tips">Best Money Tips</a> Roundup! Today we found some stellar articles on how to start investing, time management for part-time entrepreneurs, and home staging on a budget.</p> <h2>Top 5 Articles</h2> <p><a href="http://asklizweston.com/how-to-start-investing/">How to start investing</a> &mdash; If you are just getting started with investing, remember to not try to beat the market and keep fees low. [Ask Liz Weston]</p> <p><a href="http://ptmoney.com/time-management-part-time-entrepreneurs/">Time Management for Part-Time Entrepreneurs</a> &mdash; To better manage their time, part-time entrepreneurs can harness the power of routines. [PT Money]</p> <p><a href="http://money.usnews.com/money/personal-finance/articles/2014/04/11/10-keys-to-home-staging-on-a-budget?int=aa6a09&amp;int=a86509">10 Keys to Home Staging on a Budget</a> &mdash; Refreshing your landscape and painting are a couple low-cost ways to stage your home on a budget [US News &amp; World Report]</p> <p><a href="http://www.thesimpledollar.com/celebrating-your-achievement-without-undoing-your-progress/">Celebrating Your Achievement Without Undoing Your Progress</a> &mdash; Celebrate your achievements without undoing your progress by finding other ways to commemorate the occasion if you think your celebration may be something you will regret. [The Simple Dollar]</p> <p><a href="http://www.savvysugar.com/Ways-Deal-Difficult-Co-Workers-34332751">Don't Let Your Co-Workers Bring You Down</a> &mdash; To avoid letting your co-workers bring you down, try to be positive. [PopSugar Smart Living]</p> <h2>Other Essential Reading</h2> <p><a href="https://www.mint.com/blog/investing/5-easy-investment-strategies-that-build-wealth-0414/">5 Easy Investment Strategies that Build Wealth</a> &mdash; Cutting costs and diversifying your investments can help you build wealth. [MintLife Blog]</p> <p><a href="http://www.forbes.com/sites/sage/2014/04/02/four-tips-to-help-women-excel-in-the-workplace/">Four Tips To Help Women Excel In The Workplace</a> &mdash; Women need to be willing to take risks in order to excel in the workplace. [Forbes]</p> <p><a href="http://www.mainstreet.com/article/smart-spending/autos/car-insurance-woes-millennials">Car Insurance Woes for Millenials</a> &mdash; Millenials are being subjected to the highest car insurance premiums. [MainStreet]</p> <p><a href="http://moneyning.com/kids-and-money/4-baby-products-worth-splurging-on/">First Baby? Here are 4 Products Worth Splurging On</a> &mdash; It is worth it to splurge on the safety gear you'll use the most often with your new baby. [MoneyNing]</p> <p><a href="http://parentingsquad.com/10-best-blogs-for-your-family-budget">10 Best Blogs for Your Family Budget</a> &mdash; Have you ever checked out Mom Advice or Daily Finance? [Parenting Squad]</p> <a href="http://www.wisebread.com/best-money-tips-how-to-start-investing" class="sharethis-link" title="Best Money Tips: How to Start Investing" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/ashley-jacobs">Ashley Jacobs</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment best money tips how to investing Wed, 16 Apr 2014 09:24:20 +0000 Ashley Jacobs 1135645 at http://www.wisebread.com 5 Beginning Investor Mistakes I've Made (And You Don't Have To) http://www.wisebread.com/5-beginning-investor-mistakes-ive-made-and-you-dont-have-to <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/5-beginning-investor-mistakes-ive-made-and-you-dont-have-to" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/stress-5253414-small.jpg" alt="stressed man" title="stressed man" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>There's something I've noticed about a lot of people who write about investing: They're either very rich or they work as investment professionals. Now, I don't think that that makes them unqualified to give advice to those of us who don't have a seven (or eight!) figure net worth, but it does make it a little hard to identify with them. After all, if I had a million bucks in the bank, putting some of it in riskier investments would be a lot easier to stomach. Ditto for investing other people's money.</p> <p>But here's the thing. I'm an investor, too. I'm not a professional one or a rich one. But I am <em>richer</em> than before I started. And I'm a smarter investor than I was when I started, too. I'm also getting more confident about investing money in the stock market. That said, I made a lot of rookie mistakes along the way. Here are five of the ones that stand out. Try to avoid them, OK? (See also: <a href="http://www.wisebread.com/a-guide-to-online-brokers-for-investing-newbies-and-beyond?ref=seealso">Online Brokers for Newbies</a>)</p> <h2>1. Avoiding (Any and All) Risk</h2> <p>When you've lived as a poor college student for five years, a salary is a beautiful thing. A precious thing. A thing to be carefully guarded, saved, and lovingly spent on all the things you couldn't afford before. If it feels like you don't have enough money to risk losing a penny in the markets, I hear you. Investing &mdash; especially investing in things that could potentially lose value &mdash; can be a tough sell for anyone on a tight budget.</p> <p>It was for me, so at first, I stuck to investing in things with guaranteed returns. The problem with this strategy is that guarantees come at a price. And while funneling my savings into investments that yielded two or three percent made me <em>feel</em> safe, what I didn't realize is that in most cases, those guaranteed returns weren't even keeping pace with inflation. I might have been amassing money, but it was technically becoming less valuable over time.</p> <p>Does that mean I threw all my money into risky stocks? No! But if you actually want to grow your portfolio (and this is especially true for those who are young and just starting out) you have to add some higher-risk investments. My fear of risk stemmed mostly from a lack of education about investing risk and how to manage it. To be honest, it took me a couple of years of reading and thinking to be able to embrace it and move into investing in more stocks, but it's made a huge difference in my portfolio. (See also: <a href="http://www.wisebread.com/the-basics-of-asset-allocation?ref=seealso">Asset Allocation Basics</a>)</p> <h2>2. Listening to the Guy at the Bank</h2> <p>For many people, their only exposure to investment advice comes from whichever associate happens to be available at the bank that day. And if you're a brand-new investor it can be really easy to feel like you have to listen to whatever the guy in the suit says. What I learned, however, is that you have to be very, very careful about who you take advice from. (See also: <a href="http://www.wisebread.com/investment-advice-you-should-never-hear-from-your-financial-advisor">Investment Advice You Shouldn't Hear from Your Advisor</a>)</p> <p>I quickly learned that while many of the representatives at my bank did receive training, most were more salespeople than they were advisors. What I also noticed is that they tended to really want me to buy certain investments, like mutual funds, even though my research told me that index funds were the better bet. Unfortunately, it took me a while to get the courage and confidence to take my own advice over theirs. And that cost me money.</p> <p>Does this mean you should close your ears to every piece of advice you're given? Absolutely not. What you do need to learn is that you don't need to be intimated by a business suit. In fact, if you've really been doing your investing homework, chances are the guy or girl behind the desk knows less than you do. So don't be afraid to ask questions &mdash; and even question the advice you're given. If it doesn't feel right to you, refuse it. It's your money we're talking about!</p> <h2>3. Fearing the Crash</h2> <p>I started investing a few years before the mortgage bubble popped in the U.S., sending stock markets into a tailspin. That crash scared me. In fact, it scared me so much I failed to buy a single thing during that downturn. Big mistake.</p> <p>What I've since realized is that I should have been doing the opposite, because when the entire market as a whole takes a beating, that's a great time to buy a solid stock.</p> <p>Think of &quot;the market&quot; as an ocean. When things go wrong with the economy, it's like the tide going out, and all the boats are left bobbing in shallow water, no matter how stalwart and seaworthy they are. What we often forget, however, is that those big, strong, air-tight companies will float right back up when that tide comes back in.</p> <p>I'm not saying you should throw your life savings into a down market, but if you can afford to purchase a couple of great, profitable companies, that's the time to do it. Next time the financial markets crash, you can bet I'll be buying. (See also: <a href="http://www.wisebread.com/3-ways-to-stay-calm-when-the-stock-market-gets-volatile?ref=seealso">Staying Calm in a Volatile Market</a>)</p> <h2>4. Failing to Play With &quot;The House's Money&quot;</h2> <p>I recently bought a small amount of stock in a company that had declared bankruptcy. It was a small buy &mdash; the company was bankrupt after all &mdash; but because of the industry it was in, I believed it would survive. I was right: The stock climbed as the company worked its way back to solvency. I made a 40% return and, when things started to look pretty risky, I sold it. And I was happy with that ... except for the fact that my husband decided to keep his shares. And guess what? That stock kept appreciating, and appreciating and, well, it's still appreciating.</p> <p>Should I have kept those shares when things looked uncertain? Maybe not. But I still could have done better by selling some of the stock to recoup my initial investment and letting the rest run. That's called &quot;playing with the house's money.&quot; It was definitely worth considering in this situation; I just wasn't thinking. As a result, I lost out on some major gains. And trust me, I know just how major they are; every time that stock goes up, I have someone to remind me.</p> <h2>5. Holding a Loser</h2> <p>I've made a few truly bad stock picks, mostly because I had some money to invest and wasn't patient enough to wait for the right thing to come around (that's another rookie mistake right there). But where I've really gone wrong is in holding these bad apples in the hope that they'll break even again. And holding them. And holding them.</p> <p>That strategy makes me feel like I'm preserving my initial investment. In reality, what's more likely to happen is that I miss out on buying other, better stocks that could be making me money<em> right now</em>. In other words, I'm obsessing over the money I'm supposedly losing, when I could just redirect my energy to making it back somewhere else. I guess breaking up is hard to do, but when you're sure the stock you've picked is a loser, it's time to kick it out of your portfolio and find something better.</p> <h2>Bonus Lesson: Learn From Your Mistakes!</h2> <p>Investing is hard, but what really makes the stock market seem so insurmountable for people is that they just don't understand how it works. Learning that takes, time, energy and, to be honest, a certain amount of failure. What's important is that you avoid taking on too much risk at once, and learn everything you can from your mistakes &mdash; and, I hope, from a few of mine.</p> <p><em>What investing mistakes have you made? Please share in comments!</em></p> <a href="http://www.wisebread.com/5-beginning-investor-mistakes-ive-made-and-you-dont-have-to" class="sharethis-link" title="5 Beginning Investor Mistakes I&#039;ve Made (And You Don&#039;t Have To)" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/tara-struyk">Tara Struyk</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment beginning investing investing advice investing mistakes new investors Mon, 14 Apr 2014 08:36:29 +0000 Tara Struyk 1135139 at http://www.wisebread.com 12 Smart Ways to Turn $500 Into a Better Future http://www.wisebread.com/12-smart-ways-to-turn-500-into-a-better-future <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/12-smart-ways-to-turn-500-into-a-better-future" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://www.wisebread.com/files/fruganomics/imagecache/250w/blog-images/cash-478115175.jpg" alt="cash" title="cash" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p style="font-size: 13px;">Do you have a little extra money you don't know how to spend? Maybe you've been tweaking your budget so that you now have $500 saved. Or perhaps you've just received a nice little tax refund, or&nbsp;<a href="http://www.wisebread.com/5-savings-tricks-you-havent-tried-yet">you've been saving your $5 bills for a while</a>&nbsp;and realize that they add up to the equivalent of five Benjamins. What do you do now? (See also:&nbsp;<a href="http://www.wisebread.com/5-savings-tricks-you-havent-tried-yet?ref=seealso">5 Savings Tricks You Haven't Tried</a>)</p> <p style="font-size: 13px;">You've worked hard to save that money, so you want to put it to good use. You might think it's not enough to really invest in anything useful, but nothing could be further from the truth. A smart investment of your $500 could reap some very big rewards. So the next time you're wondering what to do with a spare $500, plan on doing one of the following.</p> <h2>Traditional Investments</h2> <p style="font-size: 13px;">Yes, $500 really is big enough to invest in stocks and bonds, whether via a retirement account or a brokerage account.</p> <h3>1. Contribute to Your Retirement Account</h3> <p style="font-size: 13px;">The $500 you put into your 401(k) or IRA today will grow to over&nbsp;<a href="http://www.davemanuel.com/compound-interest-calculator.php">$8,700 in 30 years</a>, assuming a 10% yearly interest rate. If your employer matches your contribution and you have not yet reached the matching limit, then your $500 will be worth even more.</p> <p style="font-size: 13px;">While you're at it, adjust your monthly contribution to your 401(k) up by $42. That equals an additional $500 per year, and you'll never miss the money from your paycheck.</p> <h3>2. Consider an Exchange Traded Fund</h3> <p style="font-size: 13px;">If you already have an IRA or brokerage account, then you could use it to purchase a&nbsp;<a href="http://www.wisebread.com/commission-free-etfs-a-great-option-for-cost-conscious-investors">commission-free, indexed ETF</a>. These investments are like mutual funds, in that they have a variety of assets within each ETF, but they trade like stocks. They also have lower expense ratios than mutual funds. Since $500 is a low investment to start, you will want to find an ETF that does not charge a commission and that keeps its expense ratio very low.</p> <h3>3. Invest in the Stock Market</h3> <p style="font-size: 13px;">If you already feel like you're on a good path with your retirement account, you might try your hand at stock investing with your $500. Stocks are risky assets, but that also means they offer the greatest opportunity for big returns.</p> <p style="font-size: 13px;">However, since nearly all brokerage accounts (which you have to have in order to play) charge a fee per transaction, it does not make sense to try to buy and sell your way to wealth. Instead, choose a stock that you can purchase and &quot;forget&quot; about. Ideally, you'll want a large company that you can rely on for decent growth and whose stock pays dividends. (See also:&nbsp;<a href="http://www.wisebread.com/3-steps-to-getting-started-in-the-stock-market-with-index-funds?ref=seealso">Getting Started With Index Funds</a>)</p> <h3>4. Make a Peer-to-Peer Loan</h3> <p style="font-size: 13px;">Peer-to-peer lending allows borrowers to qualify for loans at rates that they generally would not be able to see from banks, while the lenders are able to invest smaller amounts and get higher returns than they could find elsewhere. In addition, investors in peer-to-peer lending are not charged fees, so your entire $500 can go toward growth.</p> <h3>5. Improve Your Investment IQ</h3> <p style="font-size: 13px;">If options one through four were all Greek to you, and the thought of your (non-existent) retirement account puts you in a cold sweat, then spending your $500 on your own financial education could be an excellent investment. For instance, you could spend your $500 on<a href="http://www.businessinsider.com/the-most-important-finance-books-2013-12?op=1">&nbsp;Business Insider's list of the 22 most important finance books ever written</a>. Not only will you provide yourself with an excellent reading list for the year, but you will improve your understanding of investment, finance, and past market disasters.</p> <p style="font-size: 13px;">Alternatively, your $500 will pay for a meeting or three with a fee-only financial planner who can help you define and start working toward your financial goals. Generally, you can expect to pay between $100 and $150 per hour to meet with a fee-only planner, which ought to give you enough time to set up a financial plan for your future. Find a fee-only planner in your area at&nbsp;<a href="http://www.napfa.org/">napfa.org</a>.</p> <h2>Invest in Your Home</h2> <p style="font-size: 13px;">With just $500 you can spruce up a room, improve your home's energy efficiency, or protect your important papers.</p> <h3>6. Buy a Safe</h3> <p style="font-size: 13px;">If you're like most people, you have important papers scattered around your house that you've been meaning to put someplace secure for a long time. Purchase a fire-resistant safe to protect all of those documents &mdash; especially in case of a fire, flood, or zombie apocalypse.</p> <p style="font-size: 13px;">You can find a good safe for prices as low as $200. Plan on cashing whatever is leftover of your $500 and keeping it in your safe. In addition to your important documents, you will also need some cash in case of an emergency. (See also:&nbsp;<a href="http://www.wisebread.com/6-items-you-might-have-forgot-in-your-emergency-kit?ref=seealso">Add These Items to Your Emergency Kit</a>)</p> <h3>7. Insulate Your Attic</h3> <p style="font-size: 13px;">Whether you buy some blanket insulation rolls or rent a blower to blow loose-fill insulation into your attic, you can easily improve your home's efficiency and your utility bills for under $500 and one weekend's worth of work.</p> <h3>8. Update a Bathroom</h3> <p style="font-size: 13px;">For about $500 &mdash; and as long as you are willing to DIY &mdash; you can brighten a bathroom. Plan on investing in a can of paint, a new faucet, and a new light fixture with your $500. The best part is that bathroom remodels (even modest ones) tend to have a&nbsp;<a href="http://www.wisebread.com/recoup-more-of-your-investment-8-home-improvements-that-add-the-most-value">high return on investment</a>.</p> <h2>Invest in Yourself</h2> <p style="font-size: 13px;">You're a valuable asset, too. Five hundred dollars can go a long way toward improving that asset in mind, body, and soul.</p> <h3>9. Take a Course</h3> <p style="font-size: 13px;">Your local community college likely has courses on any number of topics that could help your career or simply stimulate your mind. Expect the tuition for a single course, plus books and associated costs to take pretty much all of your $500. (See also:&nbsp;<a href="http://www.wisebread.com/11-ways-to-learn-something-new-every-day?ref=seealso">Ways to Learn New Things Every Day</a>)</p> <h3>10. Hire a Personal Trainer</h3> <p style="font-size: 13px;">There are so many great reasons to get in shape &mdash; and having a personal trainer help you map out fitness plan and teach you the basics can be the impetus needed to finally get fit.</p> <h3>11. Write Your Will</h3> <p style="font-size: 13px;">If you haven't put together a will, you ought to make an appointment with a lawyer to do so. It will ensure that your family is taken care of and that your estate will go where you intend. Find a local lawyer at&nbsp;<a href="http://www.lawyers.com/">lawyers.com</a>.</p> <h3>12. Buy a Bike</h3> <p style="font-size: 13px;">You can get a decent bicycle for under $500, and work on improving your health and reducing your commuting costs by using it to get to and from work. (Make sure you budget enough to also buy a helmet!)</p> <h2>Knowing That Your Spending Is Just Right</h2> <p style="font-size: 13px;">No matter how you choose to invest your $500, remember that you can make responsible money choices even with relatively small amounts of money.</p> <p style="font-size: 13px;"><em>How would you spend $500? Share the wealth in comments!</em></p> <a href="http://www.wisebread.com/12-smart-ways-to-turn-500-into-a-better-future" class="sharethis-link" title="12 Smart Ways to Turn $500 Into a Better Future" rel="nofollow">ShareThis</a><br /><div id="custom_wisebread_footer"><div id="rss_tagline">Written by <a href="http://www.wisebread.com/emily-guy-birken">Emily Guy Birken</a> and published on <a href="http://www.wisebread.com/">Wise Bread</a>. Read more <a href="http://www.wisebread.com/taxonomy/term/"> articles from Wise Bread</a>.</div></div> Investment investing saving windfall Mon, 31 Mar 2014 09:36:22 +0000 Emily Guy Birken 1133519 at http://www.wisebread.com