Money...For Dummies

Off Topic
101

[quote]PRCalDude wrote:
If you’ve got a brokerage account (for example, Smith Barney, etc), the people there can usually tell you where (i.e. at which bank) the CD rates are the best. [/quote]

You can do the same thing yourself at a multitude of finance websites such as Yahoo Finance.

Short term CD’s and Money Markets usually have about the same return. The difference is that with Money Markets you are buying shares over time that fluctuate in value and as such you can take advantage of dips in market value.

With CD’s you purchase the entire investment up front and when it matures you have the option of investing it again at a new rate or getting your cash back. If you have enough of a horizon to invest in a long-term CD then I would instead go for a mutual fund or a bond fund.

Professor - you seem like a reasonably smart person. I would suggest that you do some reading and educate yourself on the fundamentals of wealth building - note that I use the term wealth building instead of investing.

This is because the first and most important step is budgeting and living below your means - as long as you do this then it’s hard to make a mistake. Just don’t make it complicated, because it really isn’t. Don’t fall for any short cuts, because there aren’t any.

Go to some sound financial websites such as Yahoo Finance, Google Finance, Vanguard.com, etc. and read as much “beginner” and “fundamental” information as you can. Keep it simple - mutual funds, bond funds, and money markets (and/or CD’s). Don’t do anything you don’t completely understand, and don’t do anything that seems more complicated than it should be.

102

Well, here’s the first obvious question: Do you have an IRA, Roth IRA, 401(k) or Self-Employed 401(k)?

Because, first things first, you need to shelter some of your money from income tax.

A SE 401(k) allows you to shelter up to 25% of your income. But are you self-employed or an employee? (Not snooping. These are questions to ask yourself.)

103

We need a “10% Interest” thread to piggyback onto this.

104

Prof,

I’d add a few thoughts:

  1. Be concerned about banks that are offering higher interest rates on CD’s right now - many of the ones who don’t have healthy balance sheets are trying to attract deposits to improve their financial “health”. That doesn’t mean they are on the verge of folding, just be aware of that trend if you are looking around.

  2. Land is a good investment, but is often not nearly as “passive” as most investors would like. If you buy straight real estate, don’t forget about all the hassles and costs associated with ownership that eat up your return.

  3. Early on, don’t try to beat the market, just buy it - save a monthly set aside and plow that savings into some version of an index fund (since you are younger, go more aggressive if you risk-tolerant). Something on the order of 75% of fund managers can’t beat their indexes over time - so stop wasting money paying them to try.

  4. As CLaw pointed out, direct as much as humanly possible into whatever retirement accounts you can. Self-directed ones, if you have that due to your practice, are great opportunities - never pass on saving with all those tax advantages.

  5. Don’t suffer from “paralysis by analysis” with investing - learn some basics, but it’s like training: it’s not worth it to get wrapped up in the “latest, greatest”. Investing helps you grow wealth - you build wealth by saving money you would ordinarily spend, done systematically and over time - so get a hold of some basic principles and instruments and apply the same disciplines you do to lifting.

Hope this sparks some thoughts for you.

105

[quote]thunderbolt23 wrote:
Prof,

I’d add a few thoughts:

  1. Be concerned about banks that are offering higher interest rates on CD’s right now - many of the ones who don’t have healthy balance sheets are trying to attract deposits to improve their financial “health”. That doesn’t mean they are on the verge of folding, just be aware of that trend if you are looking around.

  2. Land is a good investment, but is often not nearly as “passive” as most investors would like. If you buy straight real estate, don’t forget about all the hassles and costs associated with ownership that eat up your return.

  3. Early on, don’t try to beat the market, just buy it - save a monthly set aside and plow that savings into some version of an index fund (since you are younger, go more aggressive if you risk-tolerant). Something on the order of 75% of fund managers can’t beat their indexes over time - so stop wasting money paying them to try.

  4. As CLaw pointed out, direct as much as humanly possible into whatever retirement accounts you can. Self-directed ones, if you have that due to your practice, are great opportunities - never pass on saving with all those tax advantages.

  5. Don’t suffer from “paralysis by analysis” with investing - learn some basics, but it’s like training: it’s not worth it to get wrapped up in the “latest, greatest”.

Investing helps you grow wealth - you build wealth by saving money you would ordinarily spend, done systematically and over time - so get a hold of some basic principles and instruments and apply the same disciplines you do to lifting.

Hope this sparks some thoughts for you.[/quote]

Thanks.

Dumb question: “What is an index fund?”

106

[quote]Professor X wrote:

Dumb question: “What is an index fund?”[/quote]

It is a mutual fund that holds the stocks of a given stock index, an index being a collection of stocks in a given category used to measure that category as a whole.

Like the S&P 500 - it’s a collection of 500 big American companies. It is similar to the Dow Jones Industrial Average.

Index funds merely hold the stocks in that fund, so as the market generally grows, the index grows, so your fund grows. This is in contrast to trying to “pick” which stocks will be winners and which will be losers - you just buy the whole basket of big American companies.

What makes them attractive is that they generally do well and since there is no hotshot stockpicker on staff trying to pick winners, you don’t pay high fees to the fund, so costs are low and you keep more of your gains.

There are several index funds available, including some aggressive ones. Try:

Pretty good stuff.

107

Learn your tax system…I’m from Canada so it’s different, but find any loopholes or what not to save money and use them.

108

[quote]poophead wrote:
For Duke & the other investment savvy posters:

What’s the general consensus of investing in the US dollar and how hard is it to do ?

Thanks in advance.[/quote]

Like falling off a log, it’s very easy to do. But IMO - don’t bother. Volatile money markets with seemingly increasing fear makes it too risky for my liking.

Several folks here have mentioned Gold Bullion - Physical stock - I’d be seriously considering that.

109

This is a great thread. I hope it continues.

This is a topic very close to my heart too. I start work in my first “real” job in October as a trainee auditor with BDO so I guess I expect myself to be able to manage my own money.

I’m hoping to have my car paid off within a year of working there. It’ll mean not being able to save much, but I think it makes sense to take the initial hit in my first year and be able to save more in years 2, 3 and 4 (ie at the minimum I’d be saving the repayments on my car but since the salary scale is quite steep in the first few years I’d probably like to save alot more).

Wealth building is something I’ve been thinking alot about recently, and the more I look at it, the less individual stocks appeal to me.

110

A quick note…

Several people have commented about the costs and troubles and high maintenance of property investing.

I have property managers who collect the rent and take care of all my properties, they do all the work.

Each state here has it’s own threshold of property before land tax kicks in. Therefore I buy up to that limit in each state = no tax. Then, I buy more, up to the threshold in my wife’s name.

The expenses involved in holding property are tax deductable.

I buy new property to maximise the depreciation allowance which further reduces my tax payable and gives me more cash in pocket.

new properties will not need maintenance. and again, any maintenance that is necessary is claimable on your tax.

And finally - I can borrow 80 to 106% of the value of a home when I buy it, so all I have to inject is up to 20% of value at most. Yet the growth on the whole amount goes to me. I’m using other people’s (banks) money to make my returns, not just my own.
Putting money into CD’s etc means you get a return on your money, but that’s all.

The time taken to manage my properties is virtually zero. Buy them, throw the paperwork in the drawer and check it again in a few years.

I do invest in other things of course - but my wealth came from property, and it will continue to do so for decades to come, even if I do nothing from here on.

111

You should check out prosper.com

Just make loans to people with good credit and you can make 10% a year. At that rate, you’ll double your money every 7 years.

112

Prof X:

You have the goal of retiring at age 55. You should consult a financial planner, he will help you to reach that goal on the time frame you need/want.

Many will think this is off topic, but economic solvency is quite important for those who want to take this lifestyle to the next level (bodybuilding). After all, stable personal finance is what the majority of the people is after.

113

Prof X,

Long time lurker. Thought I would jump in to hopefully provide you some help, as I think you help out a lot of people on T-Nation.

While finance is complex, the fundamentals of investing are very easy. And, you can easily put together a very simple investment portfolio of passive index funds.

My suggestion is go to http://www.diehardsforum.org. This website is completely non-profit and focused on helping individual investors manage their own portfolios. This is the best financial forum on the internet that is devoted to simple, low cost, passive investing.

I suggest going to this site and looking at the “Investing - Help with Personal Investment” forum. Read the first 2 topics pegged to the top of that forum. These 2 topics cover how to get started and how to format questions on the forum.

This link will take you to the message I think is the best starting point Investment Planning - Bogleheads.org. It will give you a great groundwork for understanding how to get a handle on your investment plan.

In addition, on the www.diehardsforum.org, there are many medical industry professionals that participate. They provide unique perspective on the personal finance issues impacting medical pros and other high income earners - high incomes, appropriate insurance planning, etc.

BTW - I have no financial interest in the financial forum. I am just a participant.

One last thing, if you feel you need a financial planner, please make sure you get a fee based financial planner that you pay by the hour. Other financial professionals call themselves planners, but they are generally sales people that are serving their own interests.

114

These are the investments I’m familiar with in my research or experience and it’s my opinion.

Lots of time and effort -----> Minimal time and effort

Start your own business
Real estate (Interchangeable with above)
Individual Stocks
Index and mutual funds (Choose index IMO)
Bonds, CDs
Money Market
Savings account

Others please add to, change, or delete from my list.

It will make a good abd easy to read list to lead people towards topics to research.

115

NEW QUESTION

Is it better to do a traditional 401k or a Roth 401k?

Tax now or tax later?

I am 22, and get to enroll in my 401k in September. First dance for me.

They match half of the first 6% in the traditional 401k. I’m not sure on the matching of a Roth one, but I know they have a Roth one.

I’m going in for just 6% at first, get the rest of my debt squared away, then I get to “adjust” it in 3 month intervals. So in January I can bump it up to 10% or whatever after all my debt is gone. Definitely getting the free money first though.

If there is NO matching for a Roth 401k, then the choice is clear, right, traditional?

116

MSD0060:

Is it better to do a traditional 401k or a Roth 401k?

Tax now or tax later?

I am 22, and get to enroll in my 401k in September. First dance for me.

They match half of the first 6% in the traditional 401k. I’m not sure on the matching of a Roth one, but I know they have a Roth one.

I’m going in for just 6% at first, get the rest of my debt squared away, then I get to “adjust” it in 3 month intervals. So in January I can bump it up to 10% or whatever after all my debt is gone. Definitely getting the free money first though.

If there is NO matching for a Roth 401k, then the choice is clear, right, traditional?

MSD0600 - If there is no match on the Roth, then do the Traditional 401k. But, make sure that the cost of your 401k plan is not excessive.

If there is a match on the Roth, then the key consideration is do you expect your tax rate to be higher in retirement than it is now? At 22 early in career, I am going to guess your tax rate is reasonably low now and would likely be higher at retirement.

But, you have to make your best judgement on that point. So, it is likely that a Roth is a “good deal” for you. There are various calculators around the internet to help sort through the Roth versus Traditional question for 401k’s and IRA’s.

Roth’s also have an additional benefit: you are not required to take required minimum distributions at retirement. Thus, you can keep your money earning interest in your tax free account longer.

Traditional 401k/IRA accounts have required minimum distributions, which you may not want to take when required. Roth accounts let you decide when to take the money out of the account.

Also, when you are young, let compound interest work for you by maximizing your contributions to your 401k and a Roth IRA. At age 22, you could have 40 years of compound interest working in your favor. Get rid of high interest debt, like credit cards, but try to maximize the amount you are putting away in your 401k.

117

[quote]financeguy wrote:
MSD0060:

Is it better to do a traditional 401k or a Roth 401k?

Tax now or tax later?

I am 22, and get to enroll in my 401k in September. First dance for me.

They match half of the first 6% in the traditional 401k. I’m not sure on the matching of a Roth one, but I know they have a Roth one.

I’m going in for just 6% at first, get the rest of my debt squared away, then I get to “adjust” it in 3 month intervals. So in January I can bump it up to 10% or whatever after all my debt is gone. Definitely getting the free money first though.

If there is NO matching for a Roth 401k, then the choice is clear, right, traditional?

MSD0600 - If there is no match on the Roth, then do the Traditional 401k. But, make sure that the cost of your 401k plan is not excessive.

If there is a match on the Roth, then the key consideration is do you expect your tax rate to be higher in retirement than it is now? At 22 early in career, I am going to guess your tax rate is reasonably low now and would likely be higher at retirement.

But, you have to make your best judgement on that point. So, it is likely that a Roth is a “good deal” for you. There are various calculators around the internet to help sort through the Roth versus Traditional question for 401k’s and IRA’s.

Roth’s also have an additional benefit: you are not required to take required minimum distributions at retirement. Thus, you can keep your money earning interest in your tax free account longer. Traditional 401k/IRA accounts have required minimum distributions, which you may not want to take when required. Roth accounts let you decide when to take the money out of the account.

Also, when you are young, let compound interest work for you by maximizing your contributions to your 401k and a Roth IRA. At age 22, you could have 40 years of compound interest working in your favor. Get rid of high interest debt, like credit cards, but try to maximize the amount you are putting away in your 401k.

[/quote]

Well I’ll just air my shit here then, don’t care. I make 41k a year. Turn 23 in 3 weeks.

Got 3k in Credit Card debt, no student debt. Very lucky guy.

I was thinking do the full on 6% to get all their matching money, while I take the next 3 months and get rid of all debt. Once I can adjust again (January), bump it up to 10% or higher.

The mutual fund handler is American Funds.

Would you recommend leaving it at 6% and then doing my own (non mutual fund) investing with another fixed amount every month? Or just let the pros do it and set aside money in a savings account? I do not yet have 4-6 months’ expenses set aside just in case, also working on that. Only been “working” for 2 months now.

118

And I damn well better be making more than what I am now when I’m older, which should put me in a much higher tax bracket, so Roth don’t sound too bad. But after tax contributions sounds like it sucks a bit though… more of a direct hit on take home pay.

119

msd0060 - will reply to your points probably tomorrow.

Also, I would suggest you take a look at the links I recommended to Prof X above. I think it will help you think through getting a whole plan together around your investing and how to think about investing in your 401k, IRA, Taxable, and your 4-6 month emergency fund. It will help you put the whole picture together.

120

[quote]msd0060 wrote:

I was thinking do the full on 6% to get all their matching money, while I take the next 3 months and get rid of all debt. Once I can adjust again (January), bump it up to 10% or higher.

The mutual fund handler is American Funds.

Would you recommend leaving it at 6% and then doing my own (non mutual fund) investing with another fixed amount every month? Or just let the pros do it and set aside money in a savings account? I do not yet have 4-6 months’ expenses set aside just in case, also working on that. Only been “working” for 2 months now.

[/quote]

If the same match applies to the Roth, then you should clearly choose the Roth because of your age and potential to be at a much higher bracket when you retire. If there is no match then it would be in your best interest to dump 6% into the regular 401k to get the maximum match benefit and then start a Roth on your own with the rest.

You can invest the Roth as you see fit. If you don’t want to actively manage the money, make sure it is invested in an index fund or a mutual fund. There has been quite a bit of poo-poo’ing the idea of mutual funds but they do have some advantages and you can find some decent no-load ones.

This all assumes that you like the idea of passive investing and you want to do other things with your time. If you want to put in time and effort into learning markets (including real estate) then you can probably achieve better results actively managing your money. Until that point, leave it to the pros.