What makes a good investment? I want it to grow, be safe from market fluctuations, have a tax advantage so I can keep as much as I can, and I want to protect my family.
I want it to grow at a reasonable rate so my money will keep up with inflation. I want to know that I will be able to have at least what I am earning now without having to work at a job. If that isn't possible, then I will at least want to have enough to cover the basics like housing, whether I am renting, paying property taxes and upkeep on my own house or wandering the country in a motor home.
I have learned that the Rule of 72 tells me how quickly my money will double, assuming I can get a consistent rate of return. If I depend on the market, my return is going to flucuate between making me rich one day and making me work into my twilight years just to stay alive.
That means I also want some safety and consistency of growth. If I am going to depend on some nest egg of cash to tide me through to old age, I want to be sure I have enough and that it won't disappear due to something I have no control over.
I want a tax advantage. I have shown that money that grows without taxes is far better than being taxed as it grows. That eliminates things like CDs and savings accounts and even dividends received from mutual funds. All are taxed as I receive income. I want my money to keep up with inflation, too. I have seen that inflation can eat up value of my money.
Finally, I want my family protected if I die early and my wife and I protected if I live too long. To get all that, I need a very well-rounded and well-managed portfolio of investments, plus some life insurance for protection. Or do I? Let's look at this one level at a time.
For growth, I can put my money into a savings account or some other type of cash account, and let the interest accumulate. The best most banks and CDs pay, though, is about 2%, and we have seen that I need at least 5% to beat taxes and inflation. I can invest in mutual funds and even hire a manager, but that can be both risky and expensive. Still, not a bad idea, if I have enough money to start with. Banks call such managers Wealth Managers and they like to work with people with large amounts of cash they don't know what to do with. I am not one of those people, though, so count me out. What I would really like it something that guarantees me growth every year that beats inflation and taxes.
For safety, I would also like something that protects me from markets crashes. Again, savings accounts do that, though I still don't keep up with inflation. I have been told that bond funds are good in a lowering market so that is a possibility. But when the market goes back up, I need to run in and sell the bonds and move back to stocks. Who has time for all that? I want something that always keeps me above the market or at least doesn't deduct from my value when the market is poor.
My tax advantage comes with my 401k. I even get free money from my employer up to a certain percentage of my income. Maybe 401k's aren't so bad, after all. I can also buy a Roth IRA which lets me have tax free growth and tax free withdrawals. The trouble there is that I am only allowed to pay $5000 a year. In my case, since I am over 50, I can invest $6000, but that won't really grow fast enough for my needs. Remember, I need a million. What I want is something that allows me to invest as much as I want, let's my money grow tax free and also lets me take it out tax free.
In my next few articles I will show the type of growth I can get with and without the protection of market safety. I will also show how I can withdraw a living wage from my savings and still have it grow. Such safety isn't free, but the consequences of no safety net is like driving down the freeway without a bumper and seatbelt.
Wednesday, June 29, 2011
Tuesday, June 21, 2011
A note to my readers from around the world
As a blogger, I get to see the sources of people viewing my blog and I thank all of you for reading my story so far. I would like to get some comments from my readers either directly on the blog or to me at floreyroy@gmail.com In just a few weeks I have had almost 200 hits on my site so that makes me feel good about my writing.
Readers have been mostly from the US, though I see some from Malaysia, France and Thailand. From the people I have known over the years, I have an idea who those folks might be. I am curious about my reader from Germany. Are you enjoying this blog, as well?
I have a number of ideas about where I want this to go. Taxes and retirement are always a challenge is dealing with inflation, fluctuating markets and other disasters. I also want to meet with other people dealing with my issues and interview them.
From there, I plan to talk about businesses I have tried over the years and other investments and how they panned out. Each sounded very good on the surface and each took their toll on my finances. I believe I have found the best business for me now so that will be a topic in coming days.
I look forward to seeing more readers and followers to my blog.
Roy
Readers have been mostly from the US, though I see some from Malaysia, France and Thailand. From the people I have known over the years, I have an idea who those folks might be. I am curious about my reader from Germany. Are you enjoying this blog, as well?
I have a number of ideas about where I want this to go. Taxes and retirement are always a challenge is dealing with inflation, fluctuating markets and other disasters. I also want to meet with other people dealing with my issues and interview them.
From there, I plan to talk about businesses I have tried over the years and other investments and how they panned out. Each sounded very good on the surface and each took their toll on my finances. I believe I have found the best business for me now so that will be a topic in coming days.
I look forward to seeing more readers and followers to my blog.
Roy
Monday, June 20, 2011
Keeping up with and above the market
I started this story asking how much is too little. That is, how do I know if I have enough money for my future or is it too little? If it is too small, what do I need to do now? Life is supported by income streams. When we are born, we depend on our parents to pay for our food, clothing, home and so on. Then we leave home and start our own streams with a job or business or both. That stream needs to cover a number of things and how we approach those things is the real trick.
We need to know what we need versus what we want. If what we need exceeds our stream, we will do what we can to improve matters. We might get assistance from the government or family or we might find a second job or even just a better job. No matter, each has its own consequences and costs. Ideally, you want to find an income stream that meets your needs for the present and future. Along the way you would also like to have something you find interesting and challenging enough to keep you interested over the years. Reaching retirement is, afterall, a long journey, especially when viewed from our youth.
I have found that a general rule for retirement money is to take 5% from whatever savings I have and combine that with any pensions I might also receive. To do this assumes I will live another 20 years, and then I won't need any more. It also assumes that there will be an equal amount of money from year to year. What happened to retirees when the big crash hit is that they might have been on just year 10 or so with less than a few years left of funds. And when they took money out, it actually cost them more than when they had more value. For example, let's say I have $100,000 and I am taking my $5000 out each year. The first year I draw my account down to $95,000 then $90,000 and so on. But then the market crashes and my $90,000 is only worth $50,000. What can I do? I could just take 5%, or $2,500, but I need 5. That means the money I take out is going to cost me double what I would have had to take out when I had my value. That also leaves me with an even smaller fund to grow back when the market recovers. Doing this is called annuitizing the fund, or taking out a set amount annually. Unfortunately, I have no control over the value of the account as I draw against it.
I also need to be aware that taxes and inflation can eat up what I have earned. I need to find something that stays ahead; basically I need to row faster than the flow of the stream o rI will be pulled under. The most common savings plans available now are the pre-tax accounts such as 401k, 403b, and IRAs. These are all methods of saving as defined by our tax code. We are allowed to take a certain percentage of our pay before taxes are applied and save it in an account we can't touch. The rules of engagement are such that if we do take money out we pay a high penalty in taxes as a way to prevent us from using it too early. Saving and growing pretax is always better than allowing my earnings to be taxed each year. If you had one dollar and it was able to double every year for 20 years tax free, it would be worth over $1 million. (If you want to check the math, take 2, the first double and multiply to the 19th power. Isn't math fun?) If you did that with another dollar and taxed it at 35% at each growth, you would only have about $27,000. Big different, huh?
I like the tax free growth, but what I don't like is that my only choices are the mutual funds to invest my money. Mutual funds are basically clusters of stocks with different types of risk. Looking at the market in the last five years, though, it seems that all are just different ways of approaching a slot machine. A gamble, no matter how you look at. Or is it?
Enter my annuity. An annuity is a savings plan with a life insurance company. I can give them money that will be invested in a number of different ways and at some time I can begin to withdraw a payment from it. The beauty of the annuity is that I can have it pay me until I die, even if the original fund runs out of money. I can also set it up so that should I die before my wife, she will also receive a payment until she dies. Try to do that with a 401k. There are a number of different plans, depending on where you are financially. Annuities can be set up as traditional IRAs or Roth IRAs.
A traditional IRA is similar to a 401k in that it is funded with pre-tax money. A Roth IRA lets me invest with after tax money, my take home pay from work and invest it. The growth is tax free as it grows and, better still, all the money comes out tax free, assuming I follow the rules of the plan. If you have money from a previous employer, you can roll your money over as a rollover IRA. In my case, I rolled over money I had in previously rolled over money that was shrinking rapidly in the market. My plan lets me invest my money in the same sorts of mutual funds so I can still take advantage of market growth. But here is the real beauty of the plan. When the market value of my account drops, the insurance company keeps my fund at that highest amount and then pays interest. When the market recovers, the company allows my fund to grow again. What that means is I not only stay with the market as it grows, I also don't have to suffer the losses when it shrinks.
As my money went in from previous money I had invested pre-tax, I will have to pay taxes on the money someday when I withdraw it. Still, it is a far better solution than just praying the market will protect me. I am using the power of a company worth ten times the value of Microsoft. I think that is a pretty good deal.
We need to know what we need versus what we want. If what we need exceeds our stream, we will do what we can to improve matters. We might get assistance from the government or family or we might find a second job or even just a better job. No matter, each has its own consequences and costs. Ideally, you want to find an income stream that meets your needs for the present and future. Along the way you would also like to have something you find interesting and challenging enough to keep you interested over the years. Reaching retirement is, afterall, a long journey, especially when viewed from our youth.
I have found that a general rule for retirement money is to take 5% from whatever savings I have and combine that with any pensions I might also receive. To do this assumes I will live another 20 years, and then I won't need any more. It also assumes that there will be an equal amount of money from year to year. What happened to retirees when the big crash hit is that they might have been on just year 10 or so with less than a few years left of funds. And when they took money out, it actually cost them more than when they had more value. For example, let's say I have $100,000 and I am taking my $5000 out each year. The first year I draw my account down to $95,000 then $90,000 and so on. But then the market crashes and my $90,000 is only worth $50,000. What can I do? I could just take 5%, or $2,500, but I need 5. That means the money I take out is going to cost me double what I would have had to take out when I had my value. That also leaves me with an even smaller fund to grow back when the market recovers. Doing this is called annuitizing the fund, or taking out a set amount annually. Unfortunately, I have no control over the value of the account as I draw against it.
I also need to be aware that taxes and inflation can eat up what I have earned. I need to find something that stays ahead; basically I need to row faster than the flow of the stream o rI will be pulled under. The most common savings plans available now are the pre-tax accounts such as 401k, 403b, and IRAs. These are all methods of saving as defined by our tax code. We are allowed to take a certain percentage of our pay before taxes are applied and save it in an account we can't touch. The rules of engagement are such that if we do take money out we pay a high penalty in taxes as a way to prevent us from using it too early. Saving and growing pretax is always better than allowing my earnings to be taxed each year. If you had one dollar and it was able to double every year for 20 years tax free, it would be worth over $1 million. (If you want to check the math, take 2, the first double and multiply to the 19th power. Isn't math fun?) If you did that with another dollar and taxed it at 35% at each growth, you would only have about $27,000. Big different, huh?
I like the tax free growth, but what I don't like is that my only choices are the mutual funds to invest my money. Mutual funds are basically clusters of stocks with different types of risk. Looking at the market in the last five years, though, it seems that all are just different ways of approaching a slot machine. A gamble, no matter how you look at. Or is it?
Enter my annuity. An annuity is a savings plan with a life insurance company. I can give them money that will be invested in a number of different ways and at some time I can begin to withdraw a payment from it. The beauty of the annuity is that I can have it pay me until I die, even if the original fund runs out of money. I can also set it up so that should I die before my wife, she will also receive a payment until she dies. Try to do that with a 401k. There are a number of different plans, depending on where you are financially. Annuities can be set up as traditional IRAs or Roth IRAs.
A traditional IRA is similar to a 401k in that it is funded with pre-tax money. A Roth IRA lets me invest with after tax money, my take home pay from work and invest it. The growth is tax free as it grows and, better still, all the money comes out tax free, assuming I follow the rules of the plan. If you have money from a previous employer, you can roll your money over as a rollover IRA. In my case, I rolled over money I had in previously rolled over money that was shrinking rapidly in the market. My plan lets me invest my money in the same sorts of mutual funds so I can still take advantage of market growth. But here is the real beauty of the plan. When the market value of my account drops, the insurance company keeps my fund at that highest amount and then pays interest. When the market recovers, the company allows my fund to grow again. What that means is I not only stay with the market as it grows, I also don't have to suffer the losses when it shrinks.
As my money went in from previous money I had invested pre-tax, I will have to pay taxes on the money someday when I withdraw it. Still, it is a far better solution than just praying the market will protect me. I am using the power of a company worth ten times the value of Microsoft. I think that is a pretty good deal.
Sunday, June 12, 2011
Isn't a 401k enough?
I got the annuity which let me roll my IRA money over tax free. It works just like any other rollover IRA. In case you don't know, a rollover IRA is when I move my old 401k money from a former employer to an IRA, or Individual Retirement Account, that I can manage myself. A funny thing about all these IRAs and 401k's; they are both based on investing in mutual funds and similar security-based vehicles. Take a look at the Dow Jones Average over the last 40 years.
Before 1980, a worker had limited choices for saving for retirement. He had Social Security as some protection, but that was never intended to be the total amount needed. As I said earlier, many large employers had pensions for employees. Some were generous while others were not so, but all had the same thing in common. They provided a retired worker with a lifelong paycheck. Trouble was businesses didn't like having to keep so much money around that they couldn't use. In fact, the AICPA, the folks who do all the external audits of corporate books, wouldn't even allow businesses to put the balances on their financials; at least, not as an asset or even a potential liability. Meaning they couldn't tell investors that they were worth possibly billions more than they could show as their value as a business. The reason was because companies were not allowed by the federal government to touch such funds.
One group, a union, got in trouble back then for spending the money on expenses other than retirement, while a few other pensions just disappeared over night. The government, back when regulation was considered something good for the country, made it very difficult for companies to play with that money. To this day, companies with pensions have very strict rules as to how to invest and spend pensions. Then suddenly, businesses got a Get Out Of Jail card. Along came the 401k.
Pensions allowed companies to reward their employees with free money after doing a number of years of service. As the pension was based on salaries, everyone was able to get substantial lifetime benefits. The money was saved tax free until it was paid out to the retiree.
Then a lightbulb went off. I am not sure where, but someone suddenly realized that companies could get rid of pensions altogether. A pension had to be held by the company but a 401k was managed by a third party. That meant that they could dump pensions forever and leave the employees on their own to figure out how to invest. On paper that sounds very good, I suppose. Do you have any idea what that did to the market? Take a look at the Dow Jones Industrial Average, DJIA, from 1950 to now.
The DJIA is used as the baseline for the market. We hear about it every day. The Dow is up today, the Dow is flat, the Dow is plummeting. From the 30's to 1980, the Dow went from 200 points to 900. In that 50 years, the market increased by 7% per year (that is ((200-900/200)*100)/50). Not bad. From 1980 to 2000, it grew to almost 11,000 or about 56% per year (same math). How did that happen? 401k's. Before 1980, only large companies like insurance companies and pensions were the major buyers in the market. Ordinary people were just small potatoes. We might buy a few hundred or a few thousand shares. Some might have bought even more, but they didn't have any real effect on the market. Only the big buyers had any influence. And since the big buyers wanted stability and growth, the market slowly moved up. Buying a stock and following required a certain level of sophistication and knowledge to do well. Most small investors were lucky to make any money. When I was growing up, we talked about the market like we talked about Las Vegas. Investing was a gamble.
401k's started a whole new game for Wall Street. Suddenly millions, then billions than trillions of dollars were being thrown at their feet by unwitting buyers who only wanted to have something for their old age. Wall Street exploded and the market grew exponentially. And the market suddenly became far more volatile.
After the big growth in 2000, the market crashed down to 9000 in 2002, the time after 9/11. Again by 2007, it almost hit 14,000 when it all came tumbling down again. Where were the 401k's during all that? They were riding this roller coaster of value every day. In 2009, it was down below 8,000. All this volatility hurt millions of Americans of every age. I lost almost half my money in a few days. From 2000 to 2010, my balance stayed exactly the same value even though I had been adding to it all along. The Rule of 72 says that I will never see my money double. According to a fellow I know who is pretty good at investing, in any market, someone is making money. Just not folks like me.
Throughout all this, one type of company has managed to survive and grow. And the reason for this is because they have only one job....to protect the people who buy their products. Insurance companies. I want somebody on my side.
Before 1980, a worker had limited choices for saving for retirement. He had Social Security as some protection, but that was never intended to be the total amount needed. As I said earlier, many large employers had pensions for employees. Some were generous while others were not so, but all had the same thing in common. They provided a retired worker with a lifelong paycheck. Trouble was businesses didn't like having to keep so much money around that they couldn't use. In fact, the AICPA, the folks who do all the external audits of corporate books, wouldn't even allow businesses to put the balances on their financials; at least, not as an asset or even a potential liability. Meaning they couldn't tell investors that they were worth possibly billions more than they could show as their value as a business. The reason was because companies were not allowed by the federal government to touch such funds.
One group, a union, got in trouble back then for spending the money on expenses other than retirement, while a few other pensions just disappeared over night. The government, back when regulation was considered something good for the country, made it very difficult for companies to play with that money. To this day, companies with pensions have very strict rules as to how to invest and spend pensions. Then suddenly, businesses got a Get Out Of Jail card. Along came the 401k.
Pensions allowed companies to reward their employees with free money after doing a number of years of service. As the pension was based on salaries, everyone was able to get substantial lifetime benefits. The money was saved tax free until it was paid out to the retiree.
Then a lightbulb went off. I am not sure where, but someone suddenly realized that companies could get rid of pensions altogether. A pension had to be held by the company but a 401k was managed by a third party. That meant that they could dump pensions forever and leave the employees on their own to figure out how to invest. On paper that sounds very good, I suppose. Do you have any idea what that did to the market? Take a look at the Dow Jones Industrial Average, DJIA, from 1950 to now.
The DJIA is used as the baseline for the market. We hear about it every day. The Dow is up today, the Dow is flat, the Dow is plummeting. From the 30's to 1980, the Dow went from 200 points to 900. In that 50 years, the market increased by 7% per year (that is ((200-900/200)*100)/50). Not bad. From 1980 to 2000, it grew to almost 11,000 or about 56% per year (same math). How did that happen? 401k's. Before 1980, only large companies like insurance companies and pensions were the major buyers in the market. Ordinary people were just small potatoes. We might buy a few hundred or a few thousand shares. Some might have bought even more, but they didn't have any real effect on the market. Only the big buyers had any influence. And since the big buyers wanted stability and growth, the market slowly moved up. Buying a stock and following required a certain level of sophistication and knowledge to do well. Most small investors were lucky to make any money. When I was growing up, we talked about the market like we talked about Las Vegas. Investing was a gamble.
401k's started a whole new game for Wall Street. Suddenly millions, then billions than trillions of dollars were being thrown at their feet by unwitting buyers who only wanted to have something for their old age. Wall Street exploded and the market grew exponentially. And the market suddenly became far more volatile.
After the big growth in 2000, the market crashed down to 9000 in 2002, the time after 9/11. Again by 2007, it almost hit 14,000 when it all came tumbling down again. Where were the 401k's during all that? They were riding this roller coaster of value every day. In 2009, it was down below 8,000. All this volatility hurt millions of Americans of every age. I lost almost half my money in a few days. From 2000 to 2010, my balance stayed exactly the same value even though I had been adding to it all along. The Rule of 72 says that I will never see my money double. According to a fellow I know who is pretty good at investing, in any market, someone is making money. Just not folks like me.
Throughout all this, one type of company has managed to survive and grow. And the reason for this is because they have only one job....to protect the people who buy their products. Insurance companies. I want somebody on my side.
Wednesday, June 8, 2011
How much protection do you need?
I want to have money to retire on. That is the plan. But how much do I need? And before I retire, I want to be sure my family is protected in case I die too soon. The quandary is what if I don't live long enough and what if I live too long? For the first, I need to figure out what I would not want my family to have to pay for if I were to go. I heard about the DIME approach which I will share here.
D is for debt. How much debt do I have? If I were to go, I would not want my wife to have to pay for that debt, so some sort of protection is order. Fortunately I don't have a lot of debt. For an example, I will say I have $10,000 in debt, counting credit cards and auto loans.
The I is for income, or how much income would my wife need to get back to a normal life. Typically, it takes about ten years to recover from a death. If my income were $50,000, I would want her to have ten times that or $500,000.
The M is for mortgage. In my case, I have none. If I had a home here, I would probably owe around $200,000. In California, it could be more like $300,000 or $400,000 or even more.
Finally, E is for Education. If my kids were younger, I would want to set aside money for their education. A state school costs around $15,000 a year. For one child you need $60,000. My kids are grown, but it would be nice to set aside money for grandkids.
Putting it all together I would need:
D - $10,000
I - $500,000
M - $200,000
E - $120,000 for two kids, be they my own or grandchildren.
Total $830,000. A lot to set aside on my own.
My savings in my 401k would be taxable to my children as would my pension. Assuming there is only 25% withholding, I would need well over $1 million in savings to protect my family. However, a life insurance policy would pass to my heirs tax free, at least income tax free. Congress is still playing around with the inheritance tax. The last time I looked, the family would have to get over a million dollars to pay taxes.
I bought insurance for my wife with my sons as secondary, should we both go at the same time. Surprisingly, only about 40% of Americans have any sort of life insurance, and most of them are underinsured.
Managing my debt allows me to buy less protection or at least have the protection go directly to my family instead of creditors. Debt is another animal that will be considered later.
And then if I live too long, I have another issue. What sort of protection did I buy? Did it have any savings included? That is something else to ponder as I continue my blog.
D is for debt. How much debt do I have? If I were to go, I would not want my wife to have to pay for that debt, so some sort of protection is order. Fortunately I don't have a lot of debt. For an example, I will say I have $10,000 in debt, counting credit cards and auto loans.
The I is for income, or how much income would my wife need to get back to a normal life. Typically, it takes about ten years to recover from a death. If my income were $50,000, I would want her to have ten times that or $500,000.
The M is for mortgage. In my case, I have none. If I had a home here, I would probably owe around $200,000. In California, it could be more like $300,000 or $400,000 or even more.
Finally, E is for Education. If my kids were younger, I would want to set aside money for their education. A state school costs around $15,000 a year. For one child you need $60,000. My kids are grown, but it would be nice to set aside money for grandkids.
Putting it all together I would need:
D - $10,000
I - $500,000
M - $200,000
E - $120,000 for two kids, be they my own or grandchildren.
Total $830,000. A lot to set aside on my own.
My savings in my 401k would be taxable to my children as would my pension. Assuming there is only 25% withholding, I would need well over $1 million in savings to protect my family. However, a life insurance policy would pass to my heirs tax free, at least income tax free. Congress is still playing around with the inheritance tax. The last time I looked, the family would have to get over a million dollars to pay taxes.
I bought insurance for my wife with my sons as secondary, should we both go at the same time. Surprisingly, only about 40% of Americans have any sort of life insurance, and most of them are underinsured.
Managing my debt allows me to buy less protection or at least have the protection go directly to my family instead of creditors. Debt is another animal that will be considered later.
And then if I live too long, I have another issue. What sort of protection did I buy? Did it have any savings included? That is something else to ponder as I continue my blog.
Tuesday, June 7, 2011
Starting Early, Starting Late
I have saved most of my life. My brother used to tease me when I was quite young. We would receive a dollar on Monday from mom for our allowance and by the end of Monday his dollar was gone. By Friday, I still had my dollar in my pocket. Nevertheless, I have managed to spend money on things I need and don't need, gotten in to debt when I shouldn't and taken money from my retirement when I should have left it alone. The mindset was there, but sometimes it is difficult to see so far in the future. Now that I am nearing retirement, or at least the age when I would like to retire, I see that living comfortably will be a challenge. Where would I be if I had not spent my retirement? When is the best time to start saving?
The best time is as soon as possible. Not tomorrow, not next year.... Now. Here is an example. Mr. Early Starter decides to save $300 a month every month for 7 years and is able to get 8% interest. Where as Ms. Start Later puts off saving until she turns 32. By the time they are both 48, they end up with just about the same amount of money. But Mr. Early only invested $25,200 whereas Ms. Start Later had to invest $61,200 or over double the amount.
If you are my age, it all looks quite overwhelming, but if you are younger, I suggest you give serious though to beginning a savings plan now.
The best time is as soon as possible. Not tomorrow, not next year.... Now. Here is an example. Mr. Early Starter decides to save $300 a month every month for 7 years and is able to get 8% interest. Where as Ms. Start Later puts off saving until she turns 32. By the time they are both 48, they end up with just about the same amount of money. But Mr. Early only invested $25,200 whereas Ms. Start Later had to invest $61,200 or over double the amount.
| Early Starter | Start Later | |||||
| Age | Annual Contribution | Total Accumulation | Age | Annual Contribution | Total Accumulation | |
| 25 | 3,600 | 3,888 | 25 | |||
| 26 | 3,600 | 8,067 | 26 | |||
| 27 | 3,600 | 12,622 | 27 | |||
| 28 | 3,600 | 17,520 | 28 | |||
| 29 | 3,600 | 22,809 | 29 | |||
| 30 | 3,600 | 28,522 | 30 | |||
| 31 | 3,600 | 34,692 | 31 | |||
| 32 | 37,467 | 32 | 3,600 | 3,888 | ||
| 33 | 40,465 | 33 | 3,600 | 8,067 | ||
| 34 | 43,702 | 34 | 3,600 | 12,622 | ||
| 35 | 47,198 | 35 | 3,600 | 17,520 | ||
| 36 | 50,974 | 36 | 3,600 | 22,809 | ||
| 37 | 55,052 | 37 | 3,600 | 28,522 | ||
| 38 | 59,456 | 38 | 3,600 | 34,692 | ||
| 39 | 64,212 | 39 | 3,600 | 41,355 | ||
| 40 | 69,349 | 40 | 3,600 | 48,552 | ||
| 41 | 74,897 | 41 | 3,600 | 56,324 | ||
| 42 | 80,889 | 42 | 3,600 | 64,718 | ||
| 43 | 87,360 | 43 | 3,600 | 73,783 | ||
| 44 | 94,349 | 44 | 3,600 | 83,574 | ||
| 45 | 101,897 | 45 | 3,600 | 94,148 | ||
| 46 | 110,048 | 46 | 3,600 | 105,567 | ||
| 47 | 118,852 | 47 | 3,600 | 117,901 | ||
| 48 | 128,361 | 48 | 3,600 | 131,221 | ||
| Total Spent 25,200 | Total Spent 61,200 | |||||
If you are my age, it all looks quite overwhelming, but if you are younger, I suggest you give serious though to beginning a savings plan now.
Sunday, June 5, 2011
Four ways to wealth
We wanted to find a way to protect our investments and to make some money on the side. We did this before I read Kiyasaki's Rich Dad Poor Dad so I didn't really know what I was doing. My first was selling promotional products. We were at a home and garden show when I saw a fellow demonstrating a screen printing system for making shirts and such as well as a pad printer for smaller things like pens. I had taken print shop in high school, so I had always found printing interesting. I just didn't know how to get into the business. This seemed like a great opportunity. We met with the fellow in our home later and he was quite convincing. The trouble was, we were living in a condo at the time with no place to set up a printing business and the start up cost was around $30,000. I didn't have that much money and didn't want to get into so much debt.
We later found a fellow who, for about a quarter of that amount, was going to train us to arrange our own print jobs through vendors and all I would have to do is find the business. I probably should have saved my money and found something else. We gave him the money, he set us up with a web page and I was in business. Well, sort of. I had no idea how to sell such a service, had no marketing skills or artistic skills, so I had to figure everything out on my own. We never made any money in the business but this is what I learned.
First, working for an employer and working for yourself are completely different. At a job, you can show up late, call in sick, complain about the boss, have a good or bad attitude, go on vacation and get benefits. So long as you do what you need to, you will stay employed, take your check home each week and not have to think much more about it. A good life, really, unless you have a desire to do something on your own.
What does Kiyosaki say about all this? He says there are four ways to gain wealth and he shows it in a simple diagram he calls ESBI.
E is for employee. On the top left corner he writes Employee. This is the traditional way to make a living. Go to school and get a good education. Find a job and do well and move up. Our economy is based on that. I have been an employee all my life as have been most people, if they were able to keep a job. If you are lucky, you find something that pays you well, gives you opportunities to move up and give you benefits. Years ago, you could also get a pension, if you happen to connect with a large company like a utility or financial institution. Before 401k's came along, there used to be pensions. These were sponsored by your employer who paid you a certain amount for the rest of your life upon retirement based on years of service, age, and last two years of pay. Most of those disappeared in the 90's. I managed to pick up a couple over the years, but not enough to keep me going to 90.
S is for Self Employed. These are the doctors and lawyers and guys like me who wanted to start a small business at home. You gain the freedom of working for yourself but you never really have any freedom because the business always calls you. My mother ran her own bookstore for 30 years and loved it, though she never had much time to herself. She was fortunate enough to have a boyfriend who took her around the world when he retired, so there was a happy ending there. The risks are that you are still dependent on yourself.
B stands for business. You own the business but other people make money for you. There are many opportunities out there such as franchises, multi-level marketing, and such. If you get them going right, you can earn money from the labor of others. Just like your employer does from you.
And the I stands for investments. These are passive like stocks, bonds and, in my case, real estate. I will talk about my adventures in that in another post.
Basically, though, my aim is to find a business that I can start and then get others to work in it where we all benefit. Does that exist?
We later found a fellow who, for about a quarter of that amount, was going to train us to arrange our own print jobs through vendors and all I would have to do is find the business. I probably should have saved my money and found something else. We gave him the money, he set us up with a web page and I was in business. Well, sort of. I had no idea how to sell such a service, had no marketing skills or artistic skills, so I had to figure everything out on my own. We never made any money in the business but this is what I learned.
First, working for an employer and working for yourself are completely different. At a job, you can show up late, call in sick, complain about the boss, have a good or bad attitude, go on vacation and get benefits. So long as you do what you need to, you will stay employed, take your check home each week and not have to think much more about it. A good life, really, unless you have a desire to do something on your own.
What does Kiyosaki say about all this? He says there are four ways to gain wealth and he shows it in a simple diagram he calls ESBI.
E is for employee. On the top left corner he writes Employee. This is the traditional way to make a living. Go to school and get a good education. Find a job and do well and move up. Our economy is based on that. I have been an employee all my life as have been most people, if they were able to keep a job. If you are lucky, you find something that pays you well, gives you opportunities to move up and give you benefits. Years ago, you could also get a pension, if you happen to connect with a large company like a utility or financial institution. Before 401k's came along, there used to be pensions. These were sponsored by your employer who paid you a certain amount for the rest of your life upon retirement based on years of service, age, and last two years of pay. Most of those disappeared in the 90's. I managed to pick up a couple over the years, but not enough to keep me going to 90.
S is for Self Employed. These are the doctors and lawyers and guys like me who wanted to start a small business at home. You gain the freedom of working for yourself but you never really have any freedom because the business always calls you. My mother ran her own bookstore for 30 years and loved it, though she never had much time to herself. She was fortunate enough to have a boyfriend who took her around the world when he retired, so there was a happy ending there. The risks are that you are still dependent on yourself.
B stands for business. You own the business but other people make money for you. There are many opportunities out there such as franchises, multi-level marketing, and such. If you get them going right, you can earn money from the labor of others. Just like your employer does from you.
And the I stands for investments. These are passive like stocks, bonds and, in my case, real estate. I will talk about my adventures in that in another post.
Basically, though, my aim is to find a business that I can start and then get others to work in it where we all benefit. Does that exist?
Friday, June 3, 2011
When is growth good enough?
With the rule of 72, I can figure out how long it will take my money to double. Getting 10% interest? You will double in 7.2 years. 5%? 14.4 years. But who pays 10% consistently? Or 5, for that matter. And if I put my money there, will it be safe? Will it be there when I need it? I want to be safe so I am going to put money in something guaranteed, like CD's and other money certificates. Is that wise? They may only pay a small percent, but it will be there when I need it? And it feels so good to get those statements every year saying how much I earned. OK. I also get a 1099 that I have to report as taxable income. So that is even better, right? When I spend the money, I don't have to pay any taxes like I would with the 401k.
I wrote earlier about the difference between earning tax free and paying taxes as you go. There is another thing to worry about. Inflation. Though there seems to be a bit of debate right now about the current inflation rate and how it should be measured, what it comes to is this. You money buys less this year then it did last year, and certainly 10 or 20 years ago. During the 70s, we thought you were crazy in California if you paid over $100,000 for a house. Who could be so rich? And before the crash, the same homes were going for $700,000, $800,000 or more, depending on where it was. Your salary may have gone up, but I doubt it kept up.
The average inflation rate has been around 3.5% over the last 20 years. If you were to put away $100 a year ago and were able to earn 4% interest, you would have earned $4. But since you put it in a bank account, you had to pay a dollar of it, 25%, to taxes. So now you only have $3. Then you also have to take away 3.5% in buying power, so deduct $3.50 from your total. What have you got left?
If you want to stay ahead of taxes and inflation, you have to make at least 5% interest.
I didn't know this when I spoke with my friend, Chat, so I now realize he knew more about money than I did. He was.....sophisticated. I like that.
I wrote earlier about the difference between earning tax free and paying taxes as you go. There is another thing to worry about. Inflation. Though there seems to be a bit of debate right now about the current inflation rate and how it should be measured, what it comes to is this. You money buys less this year then it did last year, and certainly 10 or 20 years ago. During the 70s, we thought you were crazy in California if you paid over $100,000 for a house. Who could be so rich? And before the crash, the same homes were going for $700,000, $800,000 or more, depending on where it was. Your salary may have gone up, but I doubt it kept up.
The average inflation rate has been around 3.5% over the last 20 years. If you were to put away $100 a year ago and were able to earn 4% interest, you would have earned $4. But since you put it in a bank account, you had to pay a dollar of it, 25%, to taxes. So now you only have $3. Then you also have to take away 3.5% in buying power, so deduct $3.50 from your total. What have you got left?
| Start with | 100.00 |
| Plus 4% interest | 4.00 |
| Minus tax at 25% | 1.00 |
| Total | 103.00 |
| Less 3.5% | 3.50 |
| Your actual return | 99.50 |
If you want to stay ahead of taxes and inflation, you have to make at least 5% interest.
| Start with | 100.00 |
| Plus 4% interest | 5.00 |
| Minus tax at 25% | 1.25 |
| Total | 103.75 |
| Less 3.5% | 3.50 |
| Your actual return | 100.25 |
I didn't know this when I spoke with my friend, Chat, so I now realize he knew more about money than I did. He was.....sophisticated. I like that.
Thursday, June 2, 2011
Stop me before I save again!
When 401k's and IRA's came out in the 80's, I was so excited. I could save money, lower my taxes, and make tax-free earnings while I go. Then I would only have to pay taxes when I took it out 30 or so years later. What I hadn't really thought about was the fact that I couldn't touch the money without paying tax and if I took it out early, I would have to pay a penalty, too.
To entice me, I was given the opportunity to invest my money in things I thought only rich people could get in to. I could invest in stock funds, bond funds, certificates of deposit. Wow! Me, investing. The only thing I had invested in before that was my house and savings bonds. I could have high risk with a high potential to grow...and lose, of course. It was all quite heady. Getting myself involved with such things was good, in that I was saving, but bad in so many other ways.
I wasn't a sophisticated investor. I depended on the companies managing my money to give me good advice. Perhaps it was good advice, but I still lost money at every drop in the market. I had put my hard-earned money into something that gave me no security. I would go to the annual meetings put on by HR to learn more about investing. What I wanted most, though, was for me to save more. OK. I can accept that concept. Save more and have more. That was the theory.
Life goes on, though. I had to dip into the funds for this and that, and gradually, I saw my money shrink. Worse yet, I had to give back over 30% of it to taxes. I felt like I was losing and the investment companies, and the IRS, were the big winners. When do I get to win?
In the last decade, the market took such a tumble, that took nearly half of what I had left.
And then, a few years ago, I was attending a conference in San Diego. I wasn't happy with my job, or where I was living at the time having moved to the middle of the country, and I was very worried about my finances. I had lost my home to foreclosure and was considering bankruptcy. With that in mind, I was invited to dinner with a good friend of mine who was an audit director from the bay area. She had brought her audit team, being the generous soul that she was, and I happened to sit next to Chat. I didn't know him at the time.
We introduced ourselves and I asked him what sort of name Chat was. He told it was Thai, I told him my wife was Thai, and from then on we were nearly inseparable friends. We talked of work and dreams and concerns and then I told him my issues with money. I am not too shy about such things. He left it at that, and we went our separate ways at the end.
Then we started writing regularly via email and he asked to talk to me on the phone.
"Roy, I was wondering. Would you like to put your money into something that protects you from market downturns?" He had me. He told me about something called an annuity. I thought those were just for old rich people. I was wrong. He showed me how I could roll my money over to one, I could invest in various types of mutual funds, and...here is the best part. When the market drops, they hold my account at the highest value and start paying 6% interest. I didn't believe him.
I had heard of so many ways to get rich, to save and double my money and so on, and I was far too skeptical to believe. He understood and then he did something I was again surprised at. He showed me his own annuity. And it showed how it protected him.
I did it. Even though it guarantees me 6%, it has already grown over 15%. Remember what I said about the Rule of 72? Do the math.
Finally, I get to win. I take back my title of this article. Don't stop me from saving!
I check it every day, btw.
To entice me, I was given the opportunity to invest my money in things I thought only rich people could get in to. I could invest in stock funds, bond funds, certificates of deposit. Wow! Me, investing. The only thing I had invested in before that was my house and savings bonds. I could have high risk with a high potential to grow...and lose, of course. It was all quite heady. Getting myself involved with such things was good, in that I was saving, but bad in so many other ways.
I wasn't a sophisticated investor. I depended on the companies managing my money to give me good advice. Perhaps it was good advice, but I still lost money at every drop in the market. I had put my hard-earned money into something that gave me no security. I would go to the annual meetings put on by HR to learn more about investing. What I wanted most, though, was for me to save more. OK. I can accept that concept. Save more and have more. That was the theory.
Life goes on, though. I had to dip into the funds for this and that, and gradually, I saw my money shrink. Worse yet, I had to give back over 30% of it to taxes. I felt like I was losing and the investment companies, and the IRS, were the big winners. When do I get to win?
In the last decade, the market took such a tumble, that took nearly half of what I had left.
And then, a few years ago, I was attending a conference in San Diego. I wasn't happy with my job, or where I was living at the time having moved to the middle of the country, and I was very worried about my finances. I had lost my home to foreclosure and was considering bankruptcy. With that in mind, I was invited to dinner with a good friend of mine who was an audit director from the bay area. She had brought her audit team, being the generous soul that she was, and I happened to sit next to Chat. I didn't know him at the time.
We introduced ourselves and I asked him what sort of name Chat was. He told it was Thai, I told him my wife was Thai, and from then on we were nearly inseparable friends. We talked of work and dreams and concerns and then I told him my issues with money. I am not too shy about such things. He left it at that, and we went our separate ways at the end.
Then we started writing regularly via email and he asked to talk to me on the phone.
"Roy, I was wondering. Would you like to put your money into something that protects you from market downturns?" He had me. He told me about something called an annuity. I thought those were just for old rich people. I was wrong. He showed me how I could roll my money over to one, I could invest in various types of mutual funds, and...here is the best part. When the market drops, they hold my account at the highest value and start paying 6% interest. I didn't believe him.
I had heard of so many ways to get rich, to save and double my money and so on, and I was far too skeptical to believe. He understood and then he did something I was again surprised at. He showed me his own annuity. And it showed how it protected him.
I did it. Even though it guarantees me 6%, it has already grown over 15%. Remember what I said about the Rule of 72? Do the math.
Finally, I get to win. I take back my title of this article. Don't stop me from saving!
I check it every day, btw.
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