capital http://www.wisebread.com/taxonomy/term/7693/all en-US 5 Questions Retirees Should Ask Before Starting a Small Business http://www.wisebread.com/5-questions-retirees-should-ask-before-starting-a-small-business <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/5-questions-retirees-should-ask-before-starting-a-small-business" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/woman_working_in_florist_shop.jpg" alt="Woman working in florist shop" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Retirement is a time to kick back, slow down, and do all of the things you didn't have time to do during your &quot;clock-punching&quot; years. But for an increasing number of retirees, becoming an entrepreneur is the new thing to do after leaving the workforce.</p> <p>In fact, the Bureau of Labor Statistics reported in 2015 that the self-employment rate among retirement-aged workers (65 and older) was the highest of any age group, at just over 15 percent.</p> <p>However, before diving headfirst into the pool of startups, here are a few questions you need to ask yourself before starting a small business in retirement.</p> <h2>1. What do you have to lose?</h2> <p>Unfortunately, in business, failure is a very real option. According to the Bureau of Labor Statistics, 50 percent of new businesses don't survive past five years. And if your business fails, you need to be able to survive. You must count the costs before you begin.</p> <p>Answering the question, &quot;What do I have to lose?&quot; will help you assess and determine your risk tolerance and accurately scale your business. It will help you develop a business model that works for your lifestyle, interests, financial status, and physical health.</p> <p>If you retired and are looking forward to leaving the world of nine-to-five, it makes no sense to start a business that operates primarily during these hours. If your health is beginning to deteriorate, doing work that is physically demanding with lots of heavy lifting or repetitive motions may not be the way to go. Be sure you keep your needs and limitations in mind before you begin. (See also: <a href="http://www.wisebread.com/8-common-myths-about-starting-a-small-business?ref=seealso" target="_blank">8 Common Myths About Starting a Small Business</a>)</p> <h2>2. How will you finance the business?</h2> <p>The adage, &quot;It takes money to make money&quot; is the truth when it comes to starting a business. You must understand that you may have to shell out &mdash; depending on the industry &mdash; large sums of money up front. Taking on huge amounts of debt, or any debt for that matter, during retirement is a tremendous risk and should be avoided if possible.</p> <p>If your business requires a large amount of upfront capital, you need a plan for getting your hands on funds. Dipping into your retirement stash to pay business expenses is not recommended by most financial advisers. You may need to scale back your business plan, take on a partner, or allow others to become investors. You may even need to delay starting the business for a year or two and reduce your living expenses to help set aside funds to get the business going.</p> <p>Another financial surprise that comes with new ventures is the hidden costs associated with starting a business. Again, these costs are contingent on the business type, size, and the area in which you live. Things like insurance, professional fees, permits, licenses, attorneys &mdash; and everyone's worse nightmare, taxes &mdash; can derail the business before it gets off the ground, and significantly impact your retirement nest egg. Do your homework to see which fees apply to your business in your area and plan accordingly.</p> <h2>3. How much time and energy will it take?</h2> <p>Nurturing a business in its infancy requires, time, energy, and a ton of diligence. Starting a single proprietorship with no staff, no outside financing, no products, and no facility will take a couple of months. If you factor in hiring staff, securing a bank loan, and purchasing product, the time it takes for your business to be up and running could be six months or more. And while you do have more time now that you are retired, you must understand that time affects your bottom line.</p> <p>Counting the cost of becoming an entrepreneur doesn't just mean finances, it also includes sweat equity. Retirement is a different season of life and, depending on your particular circumstances and the industry you enter, you could be making a bigger time commitment than you expected.</p> <p>Be sure you understand the marketplace and all of the &quot;small&quot; jobs that go into running a business &mdash; especially if you are doing it alone or with minimal staff. What will you do if your computer crashes or your printer breaks down right before an important meeting? Figure out what can you afford to outsource and what you can you do yourself. And most importantly, be sure you can commit the time and energy it takes to make your business successful.</p> <h2>4. What can you do before you retire?</h2> <p>If starting a business is something you know you want to do before you retire, you should do as much ground work as possible before giving up your income. It's even advisable to launch the business <em>before </em>you retire.</p> <p>Starting a business while working a full-time job is tough (speaking from experience here), but it does have its advantages. It makes you budget your time and start small. You have to go at a slower pace, which is a good thing. You are able to learn the intricacies of the business, establish relationships, and make mistakes within a controlled environment.</p> <p>If starting a business while working your regular gig is too much, see if you can shadow, intern, volunteer, or work part-time for a similar business. You can also establish your small business framework &mdash; write your business plan, become an LLC, and get any necessary licenses, permits, or certifications &mdash; so you are ready to go as soon as you retire. It is also advisable that you save, save, save to help offset startup costs, minimize debt, and to keep from disturbing your retirement funds. (See also: <a href="http://www.wisebread.com/6-ways-you-can-cut-costs-right-before-you-retire-0?ref=seealso" target="_blank">6 Ways You Can Cut Costs Right Before You Retire</a>)</p> <h2>5. What am I giving up?</h2> <p>Becoming an entrepreneur in retirement is a great way to indulge in your passion, spend your time and energy meaningfully, and earn some extra cash. But being your own boss comes at a cost. The biggest expense that comes with starting a business in your sunset years is opportunity cost.</p> <p>Opportunity cost is the cost of what you're giving up while choosing to do something else. Things like spending time with the grandkids, taking tropical vacations, or even establishing a college fund for the grands or giving your kids the down payment on their dream home are all things you may have to forgo, at least for a time. (See also: <a href="http://www.wisebread.com/how-to-find-your-new-identity-after-retirement?ref=seealso" target="_blank">How to Find Your New Identity After Retirement</a>)</p> <p>Before you make your decision, be sure you thoroughly count all of the costs. Pay a visit to your financial adviser, and discuss your options and sketch out a solid financial plan. Hold yourself accountable, know when to scale back, and know when to walk away.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2F5-questions-retirees-should-ask-before-starting-a-small-business&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2F5%2520Questions%2520Retirees%2520Should%2520Ask%2520Before%2520Starting%2520a%2520Small%2520Business.jpg&amp;description=5%20Questions%20Retirees%20Should%20Ask%20Before%20Starting%20a%20Small%20Business"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/5%20Questions%20Retirees%20Should%20Ask%20Before%20Starting%20a%20Small%20Business.jpg" alt="5 Questions Retirees Should Ask Before Starting a Small Business" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/denise-hill">Denise Hill</a> of <a href="http://www.wisebread.com/5-questions-retirees-should-ask-before-starting-a-small-business">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-common-myths-about-starting-a-small-business">8 Common Myths About Starting a Small Business</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-budget-consistently-without-a-steady-paycheck">How to Budget Consistently Without a Steady Paycheck</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-fundamentals-of-naming-a-small-business">10 Fundamentals of Naming a Small Business</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dont-despair-over-small-retirement-savings">Don&#039;t Despair Over Small Retirement Savings</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-myths-about-money-in-retirement">5 Myths About Money in Retirement</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Entrepreneurship Retirement capital expenses pros and cons questions self employment small business owners startups Wed, 17 Jan 2018 09:30:08 +0000 Denise Hill 2085768 at http://www.wisebread.com Capital Substitutes for Labor — and Vice Versa http://www.wisebread.com/capital-substitutes-for-labor-and-vice-versa <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/capital-substitutes-for-labor-and-vice-versa" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/factory_worker.jpg" alt="Woman working in a factory" title="Woman working in a factory" class="imagecache imagecache-250w" width="250" height="167" /></a> </div> </div> </div> <p>Whether you're hoping to retire early or worried that you won't be able to retire at all, this is something you need to understand. (See also: <a href="http://www.wisebread.com/can-you-buy-your-way-out-of-the-rat-race">Can You Buy Your Way Out of the Rat Race?</a>)</p> <p>Did you know there used to be a return on capital? Sorry, a little joke there. With interest rates down near zero, it's starting to seem like a safe income on capital is an old-fashioned concept. Dividend rates had been low for some time &mdash; meaning that even the risky income was low &mdash; and then the stock market lost 40%, wiping out a couple decades of that low income. All in all, it's been a bad few years for income from capital.</p> <p>It used to be easy. You could talk about the 4% rule, which said if you had a diversified portfolio, you could spend 4% of your capital this year &mdash; and increase that spending with inflation &mdash; and reasonably expect that your portfolio to grow enough to keep up.</p> <h2>Planning Purposes</h2> <p>Even though <a href="http://www.wisebread.com/the-end-of-the-4-rule">the 4% rule is looking a little iffy</a>, I think the principle remains sound. At some ratio, capital substitutes for income from labor, and vice versa. For planning purposes, I think 4% is as good a ratio as any.</p> <p>If that's the right ratio, you need about $25 of capital to support every $1 of spending that you're not going to earn from your labor (because 4% of $25 is $1).</p> <p>On the one hand, this calculation can be pretty discouraging. If you see retirement age bearing down on you like an express train and your retirement savings has barely reached five figures...well, a $10,000 portfolio can be expected to support annual spending of around $400. Not the sort of dream retirement that most people had in mind when they first started putting money in their 401(k).</p> <p>In fact, the reality is much brighter, because the calculation also works in reverse.</p> <p>Let's say that your financial advisor has told you that, to supplement what you're expecting from social security (and maybe a pension, if you're getting one), you need to have retirement savings of $X. And let's further say that you're coming up short. And not just a little short. Let's finally say that even if you work a few extra years and save as hard as you can, you're going to be short by $100,000.</p> <p>There's going to be a gap, and using the 4% rule, we can estimate just how big that gap will be. In this case, the gap is going to be $4,000 a year.</p> <p>My point here is that filling a $4,000 gap isn't so very hard. One option would be to earn that much money. Another option would be to cut spending by that much. Neither option will be what you'd expected when you made your retirement plan, but neither option is necessarily a great burden. Lots of people choose to work in retirement. Lots of people find that they need to cut back on spending to stretch their retirement savings.</p> <p>Of course, there's every option in between &mdash; for every $100 you can cut spending, that's $100 you don't need to earn in retirement.</p> <h2>Tradeoffs</h2> <p>There's nothing new in these tradeoffs &mdash; you're already making them. Every economic decision you make has its roots in this sort of thinking: Which college to go to (indeed whether to go to college), which jobs to apply for (and which job offers to accept), where to live, what car to buy (or whether to go car-free), how often to eat out, how often to eat rice and beans, what brand of coffee to buy.</p> <p>The key takeaway here is that you can, within rough limits, make long-term plans based on these tradeoffs.</p> <h2>Insight</h2> <p>Without this tool, if your financial advisor (or some retirement planning website) tells you you need to triple your contributions to your 401(k), or else you're not going to be able to retire, you have no idea what that really means.</p> <p>With this tool, you can make a good, albeit inexact calculation. For each $1,000 you don't save, your spending in retirement will have to fall by about $40 a year.</p> <p>It is, of course, entirely up to you how you act on that insight. Maybe looking at an impoverished retirement will inspire a bit of frugality now. Maybe you'll try to work extra hours or find a second job. Maybe you'll look to a new career that pays better &mdash; or a new career with better options for continuing to earn some money in retirement.</p> <p>Do remember that it's just a rough calculation. The return on capital is so low right now, anyone spending 4% of their capital this year is probably spending at unsustainable levels. The 4% rule is a planning tool, not a guarantee &mdash; but it's a very useful planning tool.</p> <p>Knowing how you can swap labor for capital or capital for labor can help you <a href="http://www.wisebread.com/designing-your-life">design your life</a> to meet your goals.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/capital-substitutes-for-labor-and-vice-versa">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-6"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much do I need to retire? How much can I spend?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-solve-these-6-problems-your-heirs-could-have-with-your-estate">How to Solve These 6 Problems Your Heirs Could Have With Your Estate</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-ways-to-build-retirement-stability-in-your-50s">5 Ways to Build Retirement Stability in Your 50s</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/is-social-security-just-a-grand-ponzi-scheme">Is Social Security Just A Grand Ponzi Scheme?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-things-youll-encounter-when-taking-over-a-loved-ones-finances">6 Things You&#039;ll Encounter When Taking Over a Loved One&#039;s Finances</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance capital labor retirement accounts social security Fri, 21 Dec 2012 10:48:38 +0000 Philip Brewer 955721 at http://www.wisebread.com Simple Living Through Capital http://www.wisebread.com/simple-living-through-capital <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/simple-living-through-capital" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/478662794_cfe7bbeb84_z.jpg" alt="man drinking wine" title="man drinking wine" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>There are a lot of ways to live simply. Frugality is one. Self-sufficiency is another. My personal favorite is living simply through capital.</p> <p>The modern roots of &quot;simple living through capital&quot; run straight back to the classic of simple living, <em>Your Money or Your Life</em>. (See also: <a href="http://www.wisebread.com/book-review-your-money-or-your-life">Book Review: Your Money or Your Life</a>, one of my first posts here at Wise Bread.)</p> <p>There's a lot in that book, but here's one key idea &mdash; you can achieve financial independence by investing money so as to produce an income stream that matches your expense stream.</p> <p>It's a powerful idea, but it has a couple of downsides.</p> <p>One disadvantage of simple living through capital is that it takes <em>so much</em> capital, especially now that interest rates (and investment returns in general) are so low. It can easily take a lifetime to accumulate that much capital. In fact, standard retirement planning advice no longer calls for accumulating <a href="http://www.wisebread.com/the-end-of-the-4-rule">that much capital</a> &mdash; the assumption is that you can <a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">spend down your capital</a>, as long as you spend it down gradually enough that you'll die before it's all gone.</p> <p>The more fundamental disadvantage is that the whole vision of financial independence through a large capital-based income stream is really a false goal. Your real goal is live your life according to your values.</p> <p>A life worth living is almost surely going to involve some sort of work, even if it's not highly paid work. Even a modest amount of work &mdash; even if it's not highly paid &mdash; completely changes the calculations with regard to financial independence. Every thousand dollars a year that you can earn reduces the amount of capital that you need to set aside by at least 20 to 25 thousand dollars.</p> <p>(In exactly the same way, of course, each thousand dollars a year that you don't need to spend because you're living frugally also reduces the amount of capital you need to set aside by 20 to 25 thousand dollars.)</p> <p>The advocates of this capital-based version of financial independence point out that having a large capital-based income stream certainly doesn't <em>prevent</em> you from working. Rather, it <em>frees</em> you to do whatever sort of work calls you, regardless of whether it pays enough to support you.</p> <p>I agree whole-heartedly. I just want to extend that vision, by observing that it's not a case of either/or. You're not 100% trapped until your investment income matches your spending and 100% free afterwards. Even a rather modest capital-based income stream begins to free you. Capital that generates just a few percent of your annual expenses can make it possible to take a job that's more interesting than a better paid one.</p> <p>In your struggle to live life according to your own values, income from capital is a powerful tool. That's true long before your investment income is high enough that you don't need to work at all.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/simple-living-through-capital">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/frugality-simplicity-and-sustainability">Frugality, Simplicity, and Sustainability</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-simplest-way-to-live-simply-and-cheaply">The Simplest Way to Live Simply — And Cheaply</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-simple-ways-to-start-living-on-less-today">10 Simple Ways to Start Living on Less Today</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-ive-been-trying-to-say">What I&#039;ve been trying to say</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/on-the-importance-of-having-capital">On the importance of having capital</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Frugal Living capital follow your dreams simple living Thu, 19 Jul 2012 10:24:15 +0000 Philip Brewer 942673 at http://www.wisebread.com Unlikely Sources of Capital http://www.wisebread.com/small-business/unlikely-sources-of-capital <div class="field field-type-link field-field-url"> <div class="field-label">Link:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="http://www.openforum.com/idea-hub/topics/money/article/unlikely-sources-of-capital-julie-rains" target="_blank">http://www.openforum.com/idea-hub/topics/money/article/unlikely-sources-of-capit...</a> </div> </div> </div> <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/small-business/unlikely-sources-of-capital" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock_000007301745XSmall.jpg" alt="Money offered from a computer" title="Money offered from a computer" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Entrepreneurs who run profitable businesses have told me that they regularly access capital apart from tapping bank credit lines, attracting angel investors, borrowing money from friends and family, and digging into their own personal wealth. In the past couple of years, their businesses have added new product lines, hired employees, expanded facilities, and experienced tremendous growth.</p> <p>Being frugal frees cash to fund growth initiatives, and these owners have certainly exercised prudent spending. But there are creative and financially-savvy ways to build growth capital without the exhibiting Scrooge-like behavior, sacrificing quality, or shifting focus from purpose to cost-cutting programs. Unlikely sources of capital and substitutes for outside cash infusion that can support growth include:&nbsp;</p> <p><strong>Using Research and Development by Outside Organizations</strong></p> <p>R&amp;D performed by vendors and university labs, for example, can dramatically lower a business&rsquo;s needs for capital to drive development of new products. Rather than spend on running a lab dedicated to research or software development, businesses can refine, repackage, and resell cutting-edge products using someone else&rsquo;s ideas.</p> <p>For example, <a href="http://www.openforum.com/idea-hub/topics/managing/article/how-to-lay-a-solid-foundation-for-your-business-julie-rains">Chuck Goad</a> of BrookStone Technology leveraged the strength of a larger technology company that created electronic medical record (EMR) software. Chuck recognized growth potential in the healthcare industry, but he didn&rsquo;t want to dedicate resources to the development, testing, and launch of EMR solutions. He partnered with a third-party developer and applied working capital to hiring a sales representative to build a local market for the solution.</p> <p>Your business may be able to locate a research-oriented organization that needs a partner to identify and market commercial applications of its intellectual property.</p> <p><strong>Cloud Computing</strong></p> <p>Your business can pay a monthly fee for web-based systems and applications&nbsp;technology services rather than spend money for infrastructure and software design, development, maintenance, upgrades, security, and more.</p> <p><strong>Tax Deductions</strong></p> <p>Make sure that your business is <a href="http://www.openforum.com/idea-hub/topics/money/article/31-small-business-tax-deductions-gregory-go">tracking all qualifying deductions</a> to lower taxes. Things likely to be forgotten are out-of-pocket expenses, so remember to hand those receipts to your accountant along with explanations of their business purposes.</p> <p>Take a Section 179 deduction on purchases of qualifying property (e.g., equipment and furniture), rather than deducting depreciation charges over the next several years. Though depreciation more accurately spreads the cost of the equipment, furniture, etc. over its useful life, deducting the full cost of a purchase will reduce taxes now.</p> <p><strong>Credit Lines with Vendors and Grace Periods on Card Charges</strong></p> <p>Not having to pay immediately will allow your business to receive and use products or services for a specified period (very often, about 30 days) prior to invoice due dates. During this time, your business can distribute products or deliver projects using services supplied by vendors to generate sales and collect payments from customers. As a result, cash is available when invoices are due. Even if there is a lag between receipt of customer payments and invoice due dates, any credit extended by vendors or card companies can shorten the days that your business needs to borrow money or tie up its cash.</p> <p><strong>Faster Payments from Customers and Quicker Deposits to Your Bank Account</strong></p> <p>Speeding up these processes reduces the need for borrowing from a credit line so that your business can pay its employees and vendors. Consider <a href="http://www.openforum.com/idea-hub/topics/money/article/taking-your-invoicing-and-accounts-receivable-management-online-julie-rains">online invoicing and accounts receivable management</a> as a technique to get your money as quickly and efficiently as possible.</p> <p><strong>Sharing, Leasing, or Borrowing Equipment</strong></p> <p>Consider alternatives to outright purchases. Copiers, common-area refrigerators, and grounds maintenance equipment, for example, are candidates for renting, sharing with neighboring tenants, or borrowing from trusted colleagues.</p> <p><strong>Agile Inventory Management</strong></p> <p>This focuses resources on high-turn, fast-moving products rather than tying up cash in inventory. For example, purchasing agents at <a href="http://www.valuepetsupplies.com/">ValuePetSupplies.com</a> place orders on a daily basis to ensure quick replenishment of inventory without overloading on merchandise.</p> <p>If your business is adding new items, consider buying a small quantity and testing its appeal with your customers. This approach worked beautifully for Heidi Kallett of <a href="http://www.thedandelionpatch.com/index.asp">The Dandelion Patch</a> in evaluating new price points of an existing product line. When the item sold quickly, she increased her stock levels.</p> <p><strong>Patience</strong></p> <p>Many would-be business owners have spoken with me about their eagerness to get bank funding or investor cash quickly in order to take advantage of (what they perceived to be) hot business opportunities. Even experienced business owners are often ready to make changes that require immediate cash outlays. Patience can yield financial benefits.</p> <p>For example, when Heidi decided to update her company&rsquo;s logo and its color scheme to reflect a <a href="http://www.openforum.com/idea-hub/topics/marketing/article/how-to-become-a-premier-local-brand-julie-rains">premier brand</a>, she didn&rsquo;t rush to replace marketing collateral, redo the interiors of her stores, and redesign the website. Her company continued to use its logoed business cards, shopping bags, etc. but when supplies ran out, she replenished the collateral pieces with upgraded logos. She will update colors when it&rsquo;s time to refresh the look of the stores and the website.</p> <p>Zach Piech of ValuePetSupplies.com told me that having to delay the launch of a new product line can be frustrating but worth the wait financially. Instead of borrowing from a bank to bring in inventory, he generated capital from business profit margins. In one case, the need for extra funds solidified the decision to discontinue a low-margin product category with a high customer return rate in order to free cash for less problematic, higher-profit product lines.</p> <p>Traditional sources of capital, such as bank financing or outside investing, may not be an option for many businesses. Deftly leveraging other people&rsquo;s assets and being the best possible steward of your business&rsquo;s assets can give you the resources to grow.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> of <a href="http://www.wisebread.com/small-business/unlikely-sources-of-capital">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/250-tips-for-small-business-owners">250+ Tips for Small Business Owners</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/cloud-computing-and-your-wallet">Cloud Computing and Your Wallet</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-5-best-credit-cards-for-small-businesses">Best Credit Cards for Small Businesses</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-smart-ways-to-get-a-small-business-loan">10 Smart Ways to Get a Small Business Loan</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-inspiring-stories-of-normal-people-building-a-thriving-online-store">4 Inspiring Stories of Normal People Building a Thriving Online Store</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Small Business Resource Center capital cloud computing small business small business funding Sat, 18 Dec 2010 22:42:31 +0000 Julie Rains 375208 at http://www.wisebread.com Guest Post: Living off Capital http://www.wisebread.com/guest-post-living-off-capital <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/guest-post-living-off-capital" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/allerton-mansion.jpg" alt="Allerton Mansion" title="Allerton Mansion" class="imagecache imagecache-250w" width="250" height="182" /></a> </div> </div> </div> <p>I have a guest post up on The Simple Dollar that talks about <a href="http://www.thesimpledollar.com/2009/12/17/living-off-capital/">Living Off Capital</a>.</p> <blockquote><p>People who come from wealthy families learn how to live off capital. The rules are taught along with all the other things they learn from their parents&ndash;how to dress, how to eat, how deal with bankers and trust officers. But even though most people don&rsquo;t learn the rules, living off capital is just a skill, and it&rsquo;s one that everybody should learn, because everybody lives off capital sometimes.</p> <p>&nbsp;</p> <p>People usually think about living off capital in the context of retirement, but that&rsquo;s just one (albeit important) example. Perfectly ordinary transitions, such as losing a job and having to find another, also amount to living off capital. There is also the broad swath in between: Living off capital for longer than just the length of time it takes you to run through your emergency fund, and doing so without the institutional support&ndash;social security, medicare, maybe even a pension&ndash;that comes along with retiring at an ordinary retirement age.</p> </blockquote> <p>It goes on to talk about&nbsp;investing for income, reinvesting to preserve your capital, diversifying, and <a href="http://www.wisebread.com/the-best-way-to-avoid-the-worst-financial-problems">keeping your expenses flexible</a>.&nbsp;If that sounds interesting, click on over to <a href="http://www.thesimpledollar.com/">The Simple Dollar</a> and check out <a href="http://www.thesimpledollar.com/2009/12/17/living-off-capital/">Living Off Capital</a>.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/guest-post-living-off-capital">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/understand-capital-costs">Understand Capital Costs</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dont-let-low-interest-rates-make-you-stupid">Don&#039;t let low interest rates make you stupid</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much do I need to retire? How much can I spend?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dont-despair-over-small-retirement-savings">Don&#039;t Despair Over Small Retirement Savings</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/capital-substitutes-for-labor-and-vice-versa">Capital Substitutes for Labor — and Vice Versa</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance capital the simple dollar Thu, 17 Dec 2009 21:16:31 +0000 Philip Brewer 4144 at http://www.wisebread.com A Society of Fear http://www.wisebread.com/a-society-of-fear <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/a-society-of-fear" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/free-labor-will-win.jpg" alt="Worker in front of American Flag with the text &quot;Free Labor Will Win&quot;" title="Free Labor Will Win" class="imagecache imagecache-250w" width="250" height="346" /></a> </div> </div> </div> <p>There are people out there whose livelihoods depend on the fact that most people go every day to some job or another. Business owners, investors, retired folks &mdash; capitalists in general &mdash; pay their expenses with profits that would be threatened if there weren't plenty of workers trading their life for a paycheck.</p> <p>I don't mean to speak ill of capitalists &mdash; I'm one of them (in my own &quot;eking out a meager existence&quot; way). But as a group, they have a vested interest in most people choosing to get up and go to work every day. And, as a group, they're terrified that most people wouldn't do that unless they had to.</p> <p>I think that's why society has been organized to make the <a href="http://www.wisebread.com/wage-slave-debt-slave">wage slave/debt slave trap</a> the default path for almost everyone.</p> <p>It's a gentle trap: borrow a bit to go to college, a bit more to buy a car, a bit more to buy a house... You earn plenty of money and enjoy a comfortable life &mdash; and all you lose is your freedom to do anything else besides get up everyday and go to work.</p> <p>When I wrote about it before, a lot of commenters chimed in to defend the wage slave/debt slave trap &mdash; on the grounds that it motivates people to &quot;work;&quot; that it teaches them how to &quot;manage money;&quot; that it keeps them &quot;honest.&quot;</p> <p>And I find that fascinating. Because, see, I can understand <strong>business owners</strong> feeling that way &mdash; their profits would drop if people managed to escape their debt traps, gaining options besides showing up at their job day after day. I can also understand <strong>managers</strong> feeling that way &mdash; their bonuses would be a lot smaller (and their jobs a lot harder) if their employees were in a position to choose the work that was the most fun or interesting or useful or important. I can understand the <strong>government</strong> feeling this way &mdash; income taxes could drop a lot if debt-free citizens could choose to earn less.</p> <p>But I'm mystified by <strong>ordinary people</strong> feeling this way. It's bad enough that people put themselves into the position of having to go to work every day &mdash; and worse, having to go with whatever job pays the most because it's the only way to get all the bills paid &mdash; rather than being able to choose work because it's interesting or because it helps people. But that's only the beginning of the madness. Everyone in the debt slave/wage slave trap has to worry that any little mistake could cost them all their worldly goods and their entire future.</p> <p>In a world where these sorts of debts are normal, an ordinary person with ordinary expenses has to be afraid all the time. An unexpected expense can put the whole household at risk &mdash; it means more debt, probably at a higher rate. Any little glitch in earnings can be ruinous &mdash; it means missed payments, late fees and penalty rates of interest.</p> <p>Imagine if things were different &mdash; if most people had a comfortable emergency fund and little or no debt. A lost job would mean belt tightening, but not foreclosure. A sudden spike in fuel costs would mean turning down the thermostat and wearing a sweater, but not pawning the wedding rings for enough gas to get to work one more week. It would mean not living in fear.</p> <p>As I said, there are a lot of people who think their livelihood depends on that fear. Those whose profits are higher and jobs are easier when there are plenty of frightened workers have a vested interest in things as they are. But I think we'd be better off if people were less afraid.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/a-society-of-fear">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-4"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/wage-slave-debt-slave">Wage slave, debt slave</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/self-sufficiency-self-reliance-and-freedom">Self-sufficiency, self-reliance, and freedom</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/whats-an-employee-to-do-part-1">What&#039;s an employee to do? Part 1</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/retirement-on-the-installment-plan">Retirement on the installment plan</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/does-generous-unemployment-benefits-prolong-the-length-of-unemployment">Do generous unemployment benefits prolong the length of unemployment?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Career and Income Debt Management capital capitalism debt debt slave debt slavery employee employment fear freedom unemployment wage slave wage slavery Wed, 28 Oct 2009 13:00:02 +0000 Philip Brewer 3760 at http://www.wisebread.com Don't Despair Over Small Retirement Savings http://www.wisebread.com/dont-despair-over-small-retirement-savings <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/dont-despair-over-small-retirement-savings" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/beach-vacation.jpg" alt="Early-morning sun on beach chairs under palm trees" title="Beach Vacation" class="imagecache imagecache-250w" width="250" height="249" /></a> </div> </div> </div> <p>If you quit checking your 401(k) balance last year, because the market crash made it too depressing, now might be a good time to take a fresh look. It'll still be well down from the peak, but it's probably recovered quite a bit from the low. However small it may be compared to some imagined goal, don't underestimate the value of any amount of retirement savings.</p> <p>My brother just told me about a colleague&mdash;a college professor approaching retirement age&mdash;who suffered so badly in the crash that his entire retirement savings were not much more than one year's pay. &quot;Obviously,&quot; my brother observed, &quot;He's not going to be retiring on that anytime soon.&quot;</p> <p>The fact is, though, there's a big difference between &quot;small&quot; and &quot;insignificant&quot; when it comes to money. If you're earning, let's say, $80,000 a year (which a full professor approaching retirement might well be) and your savings are only $80,000, it's easy to imagine that your retirement savings are insignificant. It's not true, though.</p> <p>A capital sum of $80,000 will support spending of $260 to $330 a month for the rest of your life (and probably forever&mdash;see my post <a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">How much can I spend in retirement</a> for a description of the 5% and 4% rules).</p> <p>Now, somebody who's been living on $80,000 a year is not going to support themselves on $300 a month&mdash;but that doesn't mean that $300 a month is insignificant. It might pay your property taxes, or your home maintenance expenses, or your utility bill. (If you have a small, well-insulated house in a low-tax community, it might pay all three.)</p> <p>If you have nothing else to retire on, this is probably too little&mdash;but hopefully your retirement is not dependent on just your retirement savings, but instead gets a boost from other savings, physical capital (such as a house), pensions from previous employers, social security, intangible capital (such as a copyright on a book), and so on. Most especially, of course, your retirement is based on your ability to save more money at your regular job before you retire, and then your ability to continue to earn some money after retirement.</p> <p>Finally, I'd like to point out that your expenses in retirement have only the most tenuous relationship to your pre-retirement income. Yes, those &quot;can you retire&quot; calculators all ask about your income and then assume that you need to replace a large fraction of it&mdash;but that's just stupid. In retirement you need to fund your <strong>expenses</strong>, not your <strong>income</strong>.</p> <p>Someone approaching retirement ought to be about at the peak of their earnings&mdash;which to my mind ought to mean that their expenses are rather less than their income. It's one thing for a 20-something just out of college with a low income and a high student loan burden to be spending every cent of his or her take-home pay. For a 60-something college professor, expenses ought to be quite a bit less.</p> <p>The difference, of course, is the money that's available for investment. But that's the less important part of the equation. More important is that a low cost of living means that you can retire without having to replace your entire income. And if that's true, even a modest amount of savings can support your retirement.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/dont-despair-over-small-retirement-savings">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/retirement-accounts-and-money-to-spend">Retirement accounts and money to spend</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/optimize-your-ira-and-401k">Optimize Your IRA and 401(k)</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-reasons-why-financial-planning-isnt-just-for-the-wealthy">6 Reasons Why Financial Planning Isn&#039;t Just for the Wealthy</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/when-not-to-put-money-in-your-401-k">When NOT to put money in your 401(k)</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/left-a-job-do-a-rollover">Left a job? Do a rollover.</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Retirement 401(k) 401k capital expenses income retire save saving savings Wed, 23 Sep 2009 13:00:03 +0000 Philip Brewer 3633 at http://www.wisebread.com Understand Capital Costs http://www.wisebread.com/understand-capital-costs <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/understand-capital-costs" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/Reichstag.jpg" alt="Reichstag in Berlin" title="Reichstag in Berlin" class="imagecache imagecache-250w" width="250" height="143" /></a> </div> </div> </div> <p>Especially for things people often buy on credit, like a car or a house, there's a tendency to divide the ownership into two periods--while the loan is being paid off, where the item is expensive, and after the loan has been paid off, where the item is free. This is a fundamental misunderstanding of capital costs.</p> <p>Ordinary items are an extreme case of this. A new t-shirt or coffee mug costs a few dollars one time and then lasts for a year or twenty. Once you pay for it the &quot;expensive&quot; phase is already over, and now the item is &quot;free&quot; for however long it lasts. Items bought on credit only seem different because the &quot;expensive&quot; phase lasts longer than a moment.</p> <p>Economists and accountants long ago figured out that this is the wrong way to think about capital costs. Each field came up with a slightly different path toward a correct understanding--accountants talk about depreciation while economists talk about present value--but it's the same idea.</p> <p>Imagine that you pay $20,000 for a car that's going to last 10 years. If you pay cash, one way to think about it is that the car costs $20,000 in the first year and then is &quot;free&quot; for the next nine years. That's not an insane way to think about it--that's what your actual cash flow looks like--but it doesn't lead to smart decision making. It's somewhat better to think of it as costing $2,000 a year for 10 years--that'd be pretty accurate in a world where interest rates were zero and you always knew exactly how long the car would last. Since interest rates aren't zero and you don't know in advance exactly how long the car will last, you need to make some adjustments. (Accounting is all about the rules for making those adjustments, so that one company's accounts can be compared to another's. The tax man has a certain interest as well.)</p> <p>The insight that the economists had is that <strong>what really matters is the interest rate</strong>. If you buy a car you might borrow the money--but then you have to pay interest on the loan.&nbsp; Alternatively, might pay cash--but then your cash is tied up in your car and can't be invested in something else. If the interest rates were the same, it wouldn't matter to you which one you did. (At least, it wouldn't matter to an economist.)</p> <p>In simple cases, like deciding whether or not to take out a car loan, people's intuition serves them well enough--you know that the interest rate on the loan will be several percentage points higher than what you can earn on your savings, so paying cash makes sense if you have the cash. You also know that making the car last as long as possible is a win however you pay for the car. But in more subtle cases, simple intuition can lead you astray.</p> <p>For example, suppose the location of your current home means that need to have two cars so that two adults in the household can both get to work. If you moved someplace where one person could get to work some other way (on foot, by bicycle, via public transit), you could get rid of one car. The economic analysis involves comparing the costs of the second car to the difference in rent. But--and this is the key point--<strong>it doesn't matter whether the car is paid for or not</strong>.</p> <p>In a situation like that, the simple-minded analysis is to add up just the cash costs of the car--fuel, insurance, registration, maintenance, etc. This leads you badly astray if you imagine that having a paid-off car is different from having one where you're still making payments. The capital cost of your car is completely independent of whether you're currently making car payments. If you adjust your household situation so that you can get by on one fewer car you reduce your expense profile by the entire cost of maintaining that second car--including the capital cost. (One way to think about it is that you no longer need to be saving up to pay for its replacement.)</p> <p>From a purely economic perspective, the only difference between buying something on credit and paying cash comes from the difference in interest rates. In the real world, of course, there are other differences--a debt constrains your future freedom, while cash in the bank expands it. But the purely economic perspective is worth understanding so that you don't make this kind of mistake.</p> <p>&nbsp;</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/understand-capital-costs">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/recession-depression">Recession Depression</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-ive-been-trying-to-say">What I&#039;ve been trying to say</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/peak-debt">Peak Debt</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-weird-logic-of-economic-growth">The weird logic of economic growth</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/can-a-little-inflation-be-good">Can a Little Inflation Be Good?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Financial News capital economics loan Mon, 10 Aug 2009 20:00:01 +0000 Philip Brewer 3482 at http://www.wisebread.com Don't let low interest rates make you stupid http://www.wisebread.com/dont-let-low-interest-rates-make-you-stupid <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/dont-let-low-interest-rates-make-you-stupid" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/national-bank-of-poland-gold.jpg" alt="Gold bullion from the National Bank of Polland" title="NBP Gold" class="imagecache imagecache-250w" width="250" height="228" /></a> </div> </div> </div> <p>When I went off to college in 1977, inflation was high and rising, but the maximum interest rate you could earn on a savings account was capped by the government at a fraction over 5%.&nbsp; The conventional wisdom was &quot;It's dumb to hold cash when inflation is over the rate you can earn.&quot;&nbsp; I absorbed that conventional wisdom, and it led me to make some dumb decisions.</p> <p>I had, through gifts and part-time jobs, managed to save over the course of my entire life up to then, about $1000.&nbsp; If I'd had any sense, I'd have understood that this sum was capital.&nbsp; I didn't, though--and because of that, I suffered from a lack of capital all through college.&nbsp; </p> <p>Because I didn't understand, here's how things worked out:&nbsp; The part-time jobs I had on campus earned me about $100 a month, which was pretty good money in those days.&nbsp; (In fact, it was all pretty good, except that the money wasn't paid until the 10th of the month after I'd earned it.)&nbsp; My expenses were pretty much zero (I lived in a dorm room and had a meal plan), so my earnings were pretty much entirely disposable, so $100 a month added up to plenty to keep me in pizza and sodas, with enough left over for all the pens and notebooks I could use.&nbsp; In fact, I generally ran a surplus over the course of the semester.</p> <p>The problem I faced though--over and over again-- was that the semester was front-loaded with expenses.&nbsp; The big one was books (about $100 to $150, payable as soon as the semester started), but also incidentals for the dorm room (tea, snacks, etc.).</p> <p>So, I showed up the first week of September, shelled out $150, and immediately found myself broke.&nbsp; And I stayed broke all month and well into the next month.&nbsp; Finally, on October 10th, I'd get $100 (not quite enough to get back to even).&nbsp; Worse yet, I typically had to send the money back to my bank, adding a couple days for the mail to get through--plus, banks in those days usually insisted on 5 to 10 days for an out-of-state check to clear.&nbsp; So I often didn't have access to the money until October 20th.</p> <p>I didn't have any way to go into debt, so I wasn't <em>really</em> behind all the time, but it sure felt like that--each paycheck would merely get me back even again, so the upshot was that I was <strong>behind all the time</strong>.&nbsp; Finally, after the semester was over, on the 10th of the first month of vacation I'd get one last paycheck for the last month of the semester--and, with my accumulated surplus, be back even again.</p> <p>If I'd only understood the nature of <a href="http://www.wisebread.com/on-the-importance-of-having-capital">capital</a>!&nbsp; I could have stashed my $1000 in my savings account, except for, let's say $250 transfered to my checking account.&nbsp; Then I'd have been able to pay my $150 beginning-of-semester expenses and still had $100 to see me through until the paycheck showed up.&nbsp; Instead of being behind all the time I'd have been ahead all the time.&nbsp; When that last paycheck had turned up on the 10th of the first month of vacation, I'd have been just about able to top off my checking account for the following semester.&nbsp; (And if I had a job during vacation, maybe even get a little bit ahead.)</p> <p><img align="left" alt="Graph showing inflation rising from 5% to over 14%." src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u203/inflation-1977-1981.png" />The problem (aside from just not understanding capital) was that &quot;conventional wisdom&quot; I mentioned at the beginning.&nbsp; Here's a graph of the inflation rate from 1977 to 1981.&nbsp; As you see, it started the period higher than what a small saver could earn, and would soon soar to almost three times that.&nbsp; </p> <p>Over that time I read a lot of books about money management.&nbsp; The books suggested several strategies for dealing with the problem.&nbsp; If you had lots of money (over $10,000) you could earn market rates on treasury securities or 6-month bank CDs.&nbsp; Money market funds were just becoming available (with minimums of $1000 or more).&nbsp; You could also buy gold (private ownership was legalized for Americans in 1974) or silver.&nbsp; Or you could just buy stuff that you were going to use (the other bit of conventional wisdom being &quot;buy now before the price goes up.&quot;)</p> <p>Most of those strategies required more cash than I had, but it just seemed dumb to leave my $1000 sitting in my savings account, losing purchasing power every day.&nbsp; Rather than do something as dumb as that, I went ahead and spent most of it over the course of my first year of college--hence my subsequent shortage of capital. </p> <p>In fact, though, none of that was necessary.&nbsp; Sure--if I'd stashed $1000 in a savings account earning 5.25% it would have grown to only $1227 by the time I'd graduated, rather than the $1500 it would have taken to have preserved my purchasing power.&nbsp; However, that downside would have been much more than offset by the advantage that I'd have spent 4 years being comfortably well off all the time, rather than being broke all the time.&nbsp; Plus, I'd have come out of the whole thing with $1227!</p> <p>This seems topical now, because even though inflation rates are low, interest rates are also very low.&nbsp; It's easy to imagine that, when cash earns almost nothing, it's dumb to hold it.&nbsp; It's easy to start thinking that you should invest it in something with a better return--or even just spend it.&nbsp; My counter to that is that holding a little capital returns a bunch of other advantages totally aside from the cash return--starting with the win of not being broke.<br /> &nbsp;</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/dont-let-low-interest-rates-make-you-stupid">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dont-despair-over-small-retirement-savings">Don&#039;t Despair Over Small Retirement Savings</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/savings-rates-below-inflation-save-anyway">Savings Rates Below Inflation? Save Anyway</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-three-interest-rates">The Three Interest Rates</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-save-during-an-inflation">Why save during an inflation?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/getting-by-on-a-lot-less-money-3-ways-its-easier-than-you-think">Getting by on a lot less money: 3 ways it&#039;s easier than you think</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance capital inflation inflation rate interest rates rates saving savings Thu, 11 Jun 2009 14:39:51 +0000 Philip Brewer 3253 at http://www.wisebread.com Retirement on the installment plan http://www.wisebread.com/retirement-on-the-installment-plan <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/retirement-on-the-installment-plan" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/beachfront.jpg" alt="Beachfront" title="Beachfront" class="imagecache imagecache-250w" width="250" height="178" /></a> </div> </div> </div> <p>Among the fraction of the population who manage to put money aside, many view their investments through the lens of retirement.  They&#39;ve got a number in mind--call it $X--enough that they never need to work again.  Until they&#39;ve got that, they&#39;re stuck working away at the daily grind.  There&#39;s another way to do it, though.  Make your goal to live live on your own terms for the whole length of it, not just for a little while at the end. </p> <p>This is really the story of Sam, a guy I knew back when I lived in Florida, right after I graduated from college.  I had very little student loan debt (generous parents), but I had more than none, which meant that I had no choice but to get a job and start earning some money.  Sam, though, had a little capital.</p> <h2>A little capital</h2> <p>For the past 30 years, most Americans have started their lives in debt, thanks to the way we&#39;ve decided to fund college education--everyone but the wealthy ends up with student loans.  Before that--and even today, if you can put together low-priced colleges with generous parents--people tended to start out flat broke.  A few people though, even people who don&#39;t come from wealth, start out with a little capital, or accumulate a bit on their own.  </p> <p>My friend Sam had a little, around $5000.  This was the early 1980s, so today&#39;s equivalent would be $10,000, maybe $11,000.</p> <p>He&#39;d gotten it mostly as gifts.  His uncle had given him some railroad stock when he was 14.  A crappy gift, he&#39;d thought at the time.  He didn&#39;t even get pretty stock certificates, just a receipt that showed the shares had been transfered into a brokerage account in his name.  Once he had a brokerage account, though, other relatives had taken the opportunity to dump their odd-lot holdings on Sam.  (Back then, the commission on selling less than 100 shares could easily eat up all your profits, even if the stock had done well.)</p> <p>In those days, brokerage accounts came with brokers.  Sam&#39;s broker was pretty good--collected the dividends, sold the crappy shares, held onto the good stuff and bought more.  Sam didn&#39;t pay much attention then, and didn&#39;t pay much attention later, when he went through a rough patch at an age that most people would be going to college.  By the time I knew him, he was over that, and none the worse for it, except that he hadn&#39;t gone to college.</p> <p>It was the early 1980s, though, and you could get jobs in software without a degree, and that&#39;s what Sam did.  He did contract work as a computer programmer.  He made pretty good money, but it was irregular.  The contracts he got ran for a few months at a time, and he could never be sure there&#39;d be a next contract. </p> <p>For a young guy living in south Florida, with no debt and a little capital, it seemed to me like a nearly perfect life.</p> <p>He lived pretty frugally.  He had a roommate, which was important because rents were high.  His roommate was a student, which meant that his income was low but stable.  Sam&#39;s was higher, but irregular.  When he had a job, he&#39;d put some money aside--in particular, he&#39;d pay himself back for any of his capital that he&#39;d had to spend when he was between jobs.  He might get a few months ahead on the rent and the cable bill.</p> <p>When he didn&#39;t have job, he&#39;d work on his MGB, hang out at the beach, maybe travel down to the Keys, and generally do exactly what he wanted.  It was like taking his retirement a month or two at a time, right along the way.</p> <p>There are two big downsides to this:  it&#39;s expensive, and it&#39;s risky.</p> <h2>Expensive</h2> <p>Think of your long-term investments as buying your future retirement income:  each one-time payment today will provide a certain income starting when you&#39;re 65 and going on for the rest of your life.  A $1000-a-year stream of retirement income might cost as little as $1000 when you&#39;re in your twenties.  It&#39;ll cost twice as much if you buy it when you&#39;re in your thirties.  It&#39;ll cost you almost five times as much, if you don&#39;t buy it until you&#39;re in your forties.</p> <p>If you keep spending your savings when you&#39;re in your twenties, you miss out on the chance to buy your retirement income at a huge discount.  On the other hand, lots of twenty-somethings do that without managing spending a few months in early retirement along the way.</p> <h2>Risky</h2> <p> I never knew enough about Sam&#39;s finances to know things like whether or not he had health insurance.  Doing without was a risk then, even for a twenty-something, and it&#39;s a bigger risk now.</p> <p>The other big risk was the risk that he wouldn&#39;t find another job as good as the one he left.  That&#39;s a paralyzing fear for a lot of people.  Even a pretty crappy job, if it pays the bills with enough left over to save for retirement, can seem worth hanging on to.</p> <h2>An option worth considering</h2> <p>You can&#39;t do it if you have debts.  If you&#39;ve got monthly payments to make, it doesn&#39;t matter how frugally you live, you&#39;ve still got to come up with cash, and that generally means that you need to have a job.</p> <p>Even for someone with no debt, it&#39;s not a practical way to live without some capital.  To get by with an irregular income, it&#39;s essential to have some savings.  It&#39;s also nice if someone else in your household has an income as well.</p> <p>Some people do well in the daily grind.  If you&#39;re not one of them--if you&#39;re the sort of person who spends his days checking his stock portfolio, dreaming of the day he&#39;ll have enough to retire, this is an option worth considering.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/retirement-on-the-installment-plan">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dont-despair-over-small-retirement-savings">Don&#039;t Despair Over Small Retirement Savings</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/a-society-of-fear">A Society of Fear</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/these-choos-were-made-for-walkin-an-interview-with-a-modern-urban-nomad">These Choos were made for walkin&#039;: an interview with a modern urban nomad</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/i-am-doing-well-financially-now-what">I Am Doing Well Financially. Now What?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-money-lessons-you-can-learn-from-the-joneses">4 Money Lessons You Can Learn From the Joneses</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Debt Management Lifestyle Retirement capital career debt job retire Mon, 17 Mar 2008 14:13:45 +0000 Philip Brewer 1923 at http://www.wisebread.com How much do I need to retire? How much can I spend? http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-much-do-i-need-to-retire-how-much-can-i-spend" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/sailboat-cabo_0.jpg" alt="Colorful sailboat off Cabo San Lucas " title="Sailboat off Cabo San Lucas" class="imagecache imagecache-250w" width="250" height="181" /></a> </div> </div> </div> <p>Especially for people hoping to retire early, but also those just hoping they can retire at all, there&#39;s the question, &quot;How much money do I need?&quot; People who are already retired want to know &quot;How much can I can spend, without running out of money?&quot; Some people refer to the answer to the first question as &quot;The Number.&quot; Really, though, these are both the same question.</p> <p>There are a lot of ways to calculate your number. They all suffer from the same fundamental problem: nobody knows the future. To come up with the correct number you&#39;d need to know (at a minimum) how long you&#39;d live and what interest and inflation rates will be between now and then. Even if you knew those things, though, reality could come back and bite you.</p> <p>Still, even without knowing the future, it&#39;s possible to take a useful stab at calculating your number. Here are a few of the classic methods.</p> <h2>Living on income</h2> <p>If there were no inflation, and you weren&#39;t desperate to retire early, this would be the number one choice: Save and invest until your interest and dividends reach the point that they cover your expenses. Once that happens, you&#39;re done and you can retire.</p> <p>Of course, there <strong>is</strong> inflation. To deal with that, you need to reinvest enough of your income to replenish your starting capital each year.</p> <p>For example, if your number were $1,000,000 and inflation turned out to be 2%, then you&#39;d need to reinvest enough of your income that your capital was boosted to $1,020,000 by the end of the first year. As a practical matter, what you need to do is estimate future inflation and make sure that your income covers not only your expenses, but does so with enough left over to make those reinvestments.</p> <p>If the government&#39;s inflation data could be trusted, this wouldn&#39;t be too hard. In fact, there&#39;d an easy way to do it: invest in <a href="/TIPS-and-i-bonds">TIPS (Treasury Inflation-Protected Securities)</a>. They automatically do exactly what I&#39;ve described--the face value of the bond adjusts so as to keep the inflation-adjusted value of the principle constant.</p> <p>Unfortunately, the government&#39;s reported inflation numbers have been seriously understating the actual rise in the cost of living just lately. I don&#39;t tend to assign malice to this. (I&#39;ve read some of the papers written by the economists at the Bureau of Labor Statistics, and they sound to me like sincere people trying very hard to produce honest numbers.) In the final analysis, though <strong>it doesn&#39;t matter</strong> what the overall inflation rate is. What matters is <a href="/roll-your-own-cost-of-living-index">your own cost of living</a>. You need to adjust your capital by however much your cost of living is going up, or else you&#39;re going to gradually fall behind.</p> <p>Having some of your money invested in stocks can cushion this--there&#39;s a good chance dividends will rise, and there&#39;s a good chance the values of the stocks will rise. There&#39;s no guarantee that it&#39;ll match inflation (or even that it will happen at all), but it has generally happened for decades now.</p> <p>Two other gotchas to beware of:</p> <ul> <li>Be sure that you know what your expenses actually are--any unexpected ones (taxes? a new car, new roof, new furnace? health insurance?) eat into your standard of living (or worse).</li> <li>Be sure your income is secure--it can be very tempting to take a little extra risk, to boost your standard of living, but that can bite you badly.</li> </ul> <p>Now, all the fiddly detail work of adjusting for inflation aside, the real downside of living on income is that it takes too much money. Let&#39;s say you can live on $50,000 a year. The amount of money that you&#39;d need to invest in TIPS to earn that $50,000 (guaranteed by the government and adjusted for inflation) would be something like $2.8 million. Now, if you&#39;ve got $2.8 million (and you can live on $50,000), then you&#39;re pretty much all set. I wouldn&#39;t invest it all in TIPS--diversify into stocks as well--but a very straightforward investment plan will do the trick for you, and I think you can safely retire right now.</p> <p>Most people, though, would like to retire without having to save up quite that much capital relative to how much money they&#39;re going to need to live on. Happily, that&#39;s almost certainly possible, if you make the (rather likely) assumption that you&#39;re not going to live forever.</p> <h2>Spending down capital</h2> <p>If you invest $2.8 million in TIPS and just spend the income, you&#39;ll eventually die with a nest egg worth (an inflation-adjusted) $2.8 million. That&#39;s great for your heirs, but doesn&#39;t otherwise do you a lot of good.</p> <p>If you knew how long you were going to live, you could calculate how much of your capital you could safely spend each year, and die with any particular sum you wanted. </p> <p>If you have a financial calculator, here&#39;s how to do the calculation. (If you don&#39;t, there are plenty of <a href="http://www.arachnoid.com/lutusp/finance.html">financial calculators</a> on the web.)</p> <p>Suppose you knew you were going to live for 34 years in retirement and wanted to die broke. You could plug in a Future Value of zero (dying broke), a payment of $50,000 (or whatever you need to live on), an interest rate of 1.85% (the current rate on 20-year TIPS) and solve for Present Value (the amount you need to invest today to get those 34 payments of $50,000 (adjusted for inflation because you&#39;re buying TIPS). It&#39;ll tell you that you need about $1.25 million--a big improvement over the $2.8 million income-only solution, assuming that you want to retire early.</p> <p>If you knew you were going to die younger--for example, that you&#39;d only live in retirement for 12 years--you wouldn&#39;t need nearly as much. In fact, just a bit over $500,000 would do the trick.</p> <p>That&#39;s still pretty conservative, mainly because we&#39;re using the very low interest rate that TIPS are currently paying (just 1.85% over inflation). If you invest in a diversified portfolio of stocks and bonds, you can probably earn more than that. The average return in the stock market runs in the 10% to 12% range. Deduct 3% or 4% for inflation, and there&#39;s a good chance the stock market portion of your portfolio can return 6% or even 7% after inflation. Use that rate in place of the 1.85% you could get on TIPS, and you&#39;ll find that you can retire on a very modest amount of capital, as long as you&#39;re sure that you&#39;ll die on schedule.</p> <p>People have long looked for a sweet spot somewhere in between assuming that you&#39;ll live forever (income-only spending) and assuming that you&#39;ll die on schedule (spending down capital). They&#39;ve come up with a couple rules of thumb.</p> <h2>The 4% and 5% rules</h2> <p>Among people who invest for large institutions, there&#39;s a rule of thumb that you can spend 5% of your endowment each year, and then expect to have a bit more to spend next year than you spent this year.</p> <p>Of course, they can&#39;t expect that 5% to be more every single year. Some years the investment portfolio does poorly--and after one of those years, the 5% that&#39;s available for spending will be less than the previous year. Maybe much less.</p> <p>That may be okay for institutions, but it doesn&#39;t work so well for households. Most people, especially most retired people, don&#39;t have the flexibility in their budgets to easily accept, let&#39;s say, a 20% budget cut--an amount that&#39;s not only possible but entirely to be expected, if a good bit of your investment portfolio is invested in stocks.</p> <p>For households, therefore, the rule of thumb is 4%. If you have a well-diversified portfolio of stocks and bonds, you can spend 4% the first year, and then increase the amount by the inflation rate each year, and you will very likely die before you run out of money. (In fact, you will very likely die with quite a large portfolio indeed, because you probably could have started out spending 5%.) But if you have enough capital that 4% will support you at an acceptable standard of living, then you&#39;re in a position to ride out a good bit more in the way of bad luck. (Such as, for example, a 20% drop in the market the very first year after you retire.)</p> <h2>Social Security, pensions, and other annuities</h2> <p>An annuity is a stream of money that gets paid to you until you die. You can buy one from an insurance company. Annuity payers are in a position to (roughly) follow the 5% rule, because they can play the averages. Some people will buy their annuity just before the market takes a 20% dive, but most people won&#39;t. Some people will live a very long time, but most people will live an ordinary length of time and a few will die young. If you die young, they keep the rest of the money, and that puts them in a position to pay out more than you could safely spend yourself.</p> <p>It&#39;s worth having some sort of an annuity, as a fall-back in case you both face poor investment returns and live a long time. As I said, you can buy one from an insurance company, but you may not need to, if you have a pension.</p> <p>Pensions are a special case of annuity. In the old days, many people earned some sort of pension, if they worked for a largish company for many years. These days, they&#39;re pretty rare, but lots of older folks are still owed a pension from jobs that they worked back when they were more common.</p> <p>If you have a pension, even a pretty small one, you may not need to annuitize any more of your capital. But, if you don&#39;t have any pension at all, an annuity is worth considering.</p> <p>Besides the now-rare pension, almost every worker in the US is promised a Social Security pension (and people in other wealthy countries have similar promises from their governments). I don&#39;t know about the situation in other countries, but in the US a lot of people are dubious about that promise being paid in full--and with good reason. My own take on the situation, though, is that most people will actually get a large fraction of what they&#39;ve been promised. In fact, it would be pretty easy to adjust things to pay people nearly all of what they&#39;d been promised, if they did the adjusting sooner rather than later.</p> <p>At any rate, the way to deal with any sort of annuity, Social Security or otherwise, is to discount it by however much you think is appropriate (against the risk that you won&#39;t get the whole thing), and then deduct what&#39;s left from the amount that you want to spend each year. Your investment portfolio needs to cover the remainder.</p> <h2>The answer</h2> <p>So, that&#39;s your answer for the questions we started with.</p> <p>How much do you need to retire? Take what you want to spend, subtract the amount you confidently expect to receive from Social Security and any other pensions or annuities you&#39;ve got coming to you, and then divide by 0.04.</p> <p>How much can you spend? Multiply your investment portfolio by 0.04 and then add whatever you&#39;re getting from Social Security and other pensions (suitably adjusted, if you&#39;re not confident you&#39;ll keep getting them).</p> <p>There are too many variables for it to be safe to put any of these things entirely on autopilot. When you figure the inflation adjustment for next year&#39;s spending, cross check to see if you&#39;re spending more than 4% of your capital. (If the market hasn&#39;t kept up with inflation, you probably will be.) If that&#39;s true, you&#39;d be well advised to cut your spending a bit--a few bad years, especially early in retirement, can put a portfolio into a hopeless downward spiral if you go on spending without regard to how much money is really there.</p> <p>If you can earn some money in retirement, even a pretty modest amount, that can take a big weight off the investment portfolio. Well worth trying, even if just for a few years early on.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/how-much-do-i-need-to-retire-how-much-can-i-spend">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/book-review-cash-rich-retirement">Book review: Cash-Rich Retirement</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-ways-to-build-retirement-stability-in-your-50s">5 Ways to Build Retirement Stability in Your 50s</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-make-sure-you-dont-run-out-of-money-in-retirement">How to Make Sure You Don&#039;t Run Out of Money in Retirement</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-startling-facts-that-will-make-you-want-to-invest">8 Startling Facts That Will Make You Want to Invest</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-playing-it-safe-with-your-money-is-actually-risky">Why Playing It Safe With Your Money Is Actually Risky</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance Retirement annuities capital dividends early retirement pensions retirement planning social security tips Wed, 09 Jan 2008 15:23:03 +0000 Philip Brewer 1606 at http://www.wisebread.com On the importance of having capital http://www.wisebread.com/on-the-importance-of-having-capital <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/on-the-importance-of-having-capital" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/tall-ships.jpg" alt="Tall Ships" title="Tall Ships" class="imagecache imagecache-250w" width="250" height="137" /></a> </div> </div> </div> <p>One of the most frugal things you can do is have capital. Whether it&#39;s money in the bank or a nice chunk of reasonably liquid investments, having capital not only makes money (through the investment return), and gives you security and flexibility, it also cuts your expenses.</p> <p>I wrote a while back on the difference between <a href="/voluntary-simplicity-versus-poverty">voluntary simplicity and poverty</a>, even if the amount of money spent each month is about the same, and how the difference had a lot to do with choices.</p> <p>There are two key elements to the difference. One is spending less than you earn, which gives you flexibility in almost every aspect of life. The other, though is capital. Having some capital often makes all the difference in what choices you have available to you and how you are treated.</p> <p>The extra income, security, and flexibility are nothing to sneeze it, but for this post I want to talk about the frugal aspects of having capital.</p> <p>The most obvious way that having some capital lets you save money is that it lets you arrange your purchases to take advantage of deals. If you have capital, you can take advantage of store sales and seasonal low points in prices . You can also make bulk purchases. (To take full advantage you need to have a clear idea about both what you&#39;re going to need and about what is a good price, and you need the storage space and the organizational skills to put things somewhere and find them again.)</p> <p>Less obvious are the frugal options that come when you&#39;re in a position to put some money at risk. For example, suppose there&#39;s a house-sitting gig available where the owners haven&#39;t found anyone they know personally and are considering strangers. If you want that gig, your chance of getting it might go up quite a bit if you&#39;re in a position to offer a substantial damage deposit.</p> <p>To carry that example a bit further: Suppose after the house-sitting gig wraps up the homeowner tries to cheat you, offering to return only part of the damage deposit. If you lacked capital, you might have to settle for what they were willing to give back, because you needed the money to rent your next place. If you&#39;ve got some capital, you can play hardball for what&#39;s owed to you--not only refusing to settle, but also credibly threatening to go to court.</p> <p>Note that none of these things actually cost any money (except perhaps the interest that you might have earned on the damage deposit). Because you had capital, you had additional opportunities without needing to actually spend extra money.</p> <p>People with capital get the best rates on loans--in large part because they&#39;re in a position to forgo the loan and just use their own money, if they&#39;re not offered a good rate. They also get freebies from banks and investment companies--advice, personal service, access to special programs, and so on. Even just a little gets you free checking. </p> <p>And, if only as a psychological effect, <strong>being</strong> prosperous can make you feel less like you need to <strong>look</strong> prosperous, making it easier to resist the urge to spend money merely to keep up appearances.</p> <p>It&#39;s a truism that the rich get richer. This is part of the reason why.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/on-the-importance-of-having-capital">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-5"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-you-spend-your-money-while-you-can">Should you spend your money while you can?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/frugality-simplicity-and-sustainability">Frugality, Simplicity, and Sustainability</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-line-between-frugal-and-crazy">The line between frugal and crazy</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/chinese-money-habits-how-my-culture-influences-my-attitudes-toward-money">Chinese Money Habits - How My Culture Influences My Attitudes Toward Money</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-signs-youre-not-frugal-youre-cheap">6 Signs You&#039;re Not Frugal — You&#039;re Cheap!</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Frugal Living capital frugality Mon, 27 Aug 2007 00:15:21 +0000 Philip Brewer 1047 at http://www.wisebread.com