Smart Saving and Investing

Do you have a plan? Do you have a financial plan? Do you have financial goals? Do you have any goals?

What do you want to be worth when you’re 30 years old, 40 years old, 50 years old, etc.?

What do you want to be doing with the rest of your life or at different stages of your life and how are you going to do that?

Do you want to be like Timothy Ferriss of “The 4-Hour Workweek”, where you take mini-retirements. Sounds good to me. I suppose a bit tough to do for a lot of folks but he is definitely on the right track.

I highly recommend you read his book The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich for some new ways to think about retirement, work life and thoughts on how to design your own life.

It’s important to ask these questions and try to answer them in some form, because not only are you looking into the future to try and sculpt or shape it, but it also creates a bit more stability in your mind as well as open the possibilities you might not have thought about.

I know some folks don’t like to perform repetitive tasks in life because they always want to do something different so they don’t get bored with life or complacent. However, if you’re married or have a family where other people financially count on you, then you might want to plan some of your financial future by setting goals.

We’ll take the first action that I talk about on this blog, open an online savings account. Sounds simple for some, on the other hand it might be difficult for others.

After you’ve accomplished that goal, you might set other goals for the account. Let’s say you’ve decided to save enough for that proverbial 3-6 months of emergency funds and that would make you feel good and secure about any hardships that come about during everyday life.

Well, write down the target amount. Let’s say you would like to save $5,000.00 before you stop automatic deposits to that account. So do some simple math and let’s say you deposit $100.00 a month through automatic deposits for four years.

You’d be contributing $1,200.00 a year for four years and you’d have $4,800.00 in your online savings account. Plunk $200.00 more in there for the final month or $100.00 for an additional two months and that would give you your $5,000.00, 3-6 month emergency funds that would then grow at around 5% which would give you $250.00 a year that your money would make for you.

Now, I know that sounds wonderful and that sometimes emergencies happen right when you’re in the middle of your savings plan or for some folks all the time, but this is something that you forge ahead with until you hit that magical number that you’ve set for yourself.

I would start thinking about your tax refund, if you usually get one, and NOT planning on using it at all except for your online savings account or funding your Roth IRA account.

Stop thinking about your tax refund as if it’s some kind of gift or Christmas present from the government. It’s you’re hard earned money that you lent the government instead of making money on it yourself. Just say NO to that type of thinking!!

“A journey of a thousand leagues begins with a single step” - Confucius

written by Bill Stevens

When you sign up for your employer’s retirement plan and it allows you to select mutual funds, you could be presented with a laundry list of mutual funds or a very limited choice of mutual funds.

So what do we do? We ask friends and possibly relatives for advice and go to www.smartsavinginvesting.com to get some help. Then we question our choices, ask our co-workers what we should do and just close our eyes and pick something.

Well, that’s the way I did years ago when I first started out investing in my employer’s retirement plan. No one really knew what to do. There was no Internet around to help do research. You could read trade magazines until your eyes turned red and you still didn’t know or understand what the heck to make of it all.

On top of that your co-worker ended up day-trading in and out of their mutual funds based on the economic news of the day, which is the worst thing you could possibly do and there are now provisions in place to help stifle that type of trading behavior.

So here we are today with a whole gamut of websites, blogs and every type of media to help figure things outs…or still continue to confuse the same person starting out in mutual funds under their employer’s retirement plan.

Well, I’ve narrowed it down to using a couple sites, namely Morningstar (a very well trusted site on financial data and news) as well as Fund Alarm. Fund Alarm allows you to look at a fund by typing in the symbols of the fund, let’s say FMAGX for Fidelity Magellan and quickly find out if it’s considered one of their “3-Alarm” funds.

At Fund Alarm, a “3-Alarm” fund can be considered a sell this fund immediately or do not buy decision. Here is a screen shot of Fidelity Magellan from Fund Alarm.

Notice the areas I circled. You can instantly tell that Fund Alarm considers this a “3-Alarm” fund. Here is their link that helps you determine if you should sell this fund or not. The second, bigger red circle displays the fact that the fund has underperformed its benchmark the Vanguard 500 Index for the last 12 months, last 3 years, and last 5 years. Which is not good. You want to match or handily beat the benchmarks used to compare your funds.

So unfortunately I would have to say don’t buy Fidelity Magellan at this time and if you’re currently holding it, get rid of it first thing in the morning!!

Now, let’s take a look at a fund and use Morningstar and Fund Alarm together to do some quick research and decision making. Our choice today is PRGFX - The T. Rowe Price Growth Stock fund. This fund falls into the Large Growth category.

From previous posts you might remember I favor this asset allocation for 2007:

• Large Growth - 35%
• Large Value - 20%
• Small Growth - 20%
• Small Value - 15%
• International - 10%

The selection of funds where someone chose PRGFX was a company that only offered employees 20 different funds to get into so it can be tough when you don’t have a bunch of choices.

So let’s take a look at PRGFX at Fund Alarm:

Now this one looks very good at Fund Alarm. You can use this link at Fund Alarm to read about “How to Read the Fund Alarm Data Table.” It tells us that it’s a “NO-ALARM” fund and has beaten its benchmark (the Vanguard 500 Index) for the last 12 months, last 3 years and last 5 years. That looks very good and it would be one that I’d pick for the selections that were allowed at this employer.

Here’s the “Snapshot” page from Morningstar:

You can see the red line on the chart shows us that funds performance for the last 5 years…almost, because 2007 isn’t over yet. So with Morningstar they like to compare a lot of funds to the S&P 500 as its benchmark. Also, the data at Morningstar is more up to date than the Fund Alarm site. If you look closely at the date of the data reported on PRGFX at Fund Alarm you see “Data as of 5/31/07″. Morningstar is reporting as of 6/30/07.

Notice the Fund YTD (Year-To-Date), 3 year and 5 year under the Morningstar chart. This is the percentage (12.05, 15.01 and 14.96 respectively) of return on the hypothetical $10,000.00 that Morningstar likes to use over those time periods. Under those figures are the positive numbers that indicate how much the fund beat its benchmark during those times. Again, Morningstar is using the S&P 500 as the benchmark in this case.

Well, hopefully you’re not completely confused and there are lot of terms to think about and discover. I only presented a portion of the Fund Alarm site and Morningstar site. You can get into much more detail at the Morningstar site.

I hope this article presented some useful data and techniques to use when evaluating the mutual funds in your life. Let me know if you have any comments or questions and we’ll get them answered together.

If you want to make this process extremely easy then browse over to Smart 401k and pay for them to select your funds for you if you can afford to. Smart 401k you’ll answer a short questionnaire so they can determine what type of an investor you are and then they’ll email you the recommendations based on your fund choices and what type of investor you are as far as risk is concerned.

written by Bill Stevens

Well, my daughter will be reviewing what it will take to participate in her employer’s SIMPLE IRA soon. So what do we know about the SIMPLE IRA?

The SIMPLE part is Savings Incentive Match Plan for Employees of Small Employers. Cool. Don’t ya’ just love acronyms? Reminds me of my nieces and nephews text messaging their friends. Have you ever seen some of that? It’s like the shorthand that was used in emails like IMHO (In My Humble Opinion) but on steroids.

They use these little keyboards on their phones or other handheld devices that have keyboards so small that at my age I’d hit three different keys with my big ‘ol thumbs.

The SIMPLE IRA is a retirement plan for small businesses with less than 100 employees who earned $5,000.00 or more during the preceding calendar year. Compared to other retirement plans for small business owners it offers lower start-up and annual costs. They are simpler to operate.

Here are some advantages for the employee:

• Employees can contribute, on a tax-deferred basis, through convenient payroll deductions.
• Your employer can choose to match the employee contributions or to contribute a fixed percentage.
• Employees are 100% vested and are in complete control of their own accounts.
• Employers can make contributions for employees over the age of 70 1/2 even though the employee can’t if they are over 70 1/2.

The disadvantages include the benefits of a SIMPLE IRA don’t provide an adequate retirement in its self.

Only the following institutions can be designated as trustees of SIMPLE IRA plans:

• Banks
• Mutual Funds
• Insurance companies that issue annuity contracts
• Other IRS approved institutions

Trustees agree to:

• Receive and invest contributions, and
• Provide the employer with a summary description of the plan features each year.

Two models are offered:

1. Not for use with a designated financial institution, or
2. Use with a designated financial institution

Number one means the employees are allowed to select the financial institution to receive their contributions. Number two means the initially deposited contributions are with a designated financial institution.

I’m thinking Edward Jones. Which I hear nothing but bad news about. So we’ll keep our ears open and see what’s available to my daughter and I’ll review some of the “bad news” I’ve heard and report back. Geez, it’s always somethin’!!

Employee Contributions:

• You can contribute up to $10,000.00 per year.
• Employees can change their contribution level once a year during the plan’s election period. However, there can be more election periods during the year.

Employer Contributions (two choices):

1. A 2% non elective employer contribution equal to 2% of their compensation, regardless of whether they make their own contributions.
2. A dollar-for-dollar match up to 3% of pay, where the employer matches the employee’s contributions up to 3%.

Click to Enlarge

Click to Enlarge

Distributions

• Employees cannot take loans from their SIMPLE IRAs.
• Contributions and earnings can be withdrawn at anytime as a lump sum or a roll over to an IRA or another employer’s retirement plan.
• Subject to income tax for the year in which the distributions are received
• If withdrawn prior to 59 1/2, generally a 10% additional tax applies. If this happens within two years from the beginning of the plan the 10% penalty is increased to 25%.
• There is a Required Minimum Distribution when the employee reaches 70 1/2.

So there you go. Everything you wanted to know about a SIMPLE IRA. Finally!!

Ok, so anyone have a SIMPLE IRA out there? Has anyone rolled one of these over? Anyone out there taking distributions? Anyone have more information about Edward Jones? What’s the investment choices?

written by Bill Stevens

Here’s a real budget for a 75 Year-Old woman.

I rounded the numbers so they were a bit more understandable. The property insurance, car insurance are split out over 12 months even though they are not paid every month, just when they’re due, once and twice annually.

Her assets include (rounded of course):

• Home - Paid off for some time now - Approximately $125,000.00
• Credit Union - $20,000.00
• Vanguard Funds - $15,000.00 in Prime Money Market Fund - VMMXX - Yield 5.14%
• Vanguard GNMA Fund Investor Shares - $30,000.00 in Bond Fund - VFIIX - Yield 5.34%
• Checking Account - $10,000.00
• EE Bonds - $3,000.00

Some attributes to be concerned about:

• Weekly visits to the casinos
• Honoring her husbands wishes to update certain aspects of the house both minor and major

Work Ethic and Mindset:

• Born in The Great Depression era
• Clipped/Clips coupons
• Food was the topic of daily life
• Normal day jobs - 9 to 5
• Lived in two houses over their life and ended up in the current house for more than 40 years with one major addition to the house.
• Always looking for deals and how to save money on purchases of anything
• Only takes the Required Minimum Distribution from the Vanguard Funds - around $2,000.00/year
• “The money in the Vanguard funds will never be spent!!” she proclaims.

Other benefits include family members who are able to buy her things like new car, new TV, and other around the house items. Can move in with family members when the time comes.

written by Bill Stevens

Subtitle: We’re Goin’ To Hawaii!!

Don’t Buy Variable Annuities. Why? Because they could provide your money manager with a free trip to Hawaii on you right from the get go (when you first fork over your cash).

Well, that’s not the only reason and it’s not the only investment that could do that.

There are different annuities (variable, fixed, etc.), but here’s the downside on variable annuities and they’re just not worth getting into. Besides being confusing as heck for some folks, sometimes the financial person trying to sell them doesn’t come right out and tell you they are annuities.

Variable Annuities are a family of mutual funds you can invest in by an insurance company. They can:

1. Have the highest commissions and that’s why some of the financial folks sell ‘em. (Trip to Hawaii part)
2. You have a limited number of investment choices. There might be 20-30 funds in the annuity but there are tens of thousands of funds out there to choose from. What are the odds that the annuity has the best 20-30 funds to choose from?
3. Fees and expenses can be very high. Over time could possibly be 20% right off the top of your earnings. (Trip to Hawaii part)
4. Taxed as ordinary income - could be taxed much higher than investing in the same mutual funds outside of the annuity.
5. If you take money out the first year it could be charged 7% or more.
6. And a host of other rules and regulations. Just say ‘No’.

Again, it would be better to invest in mutual funds that are going to work for you from the get go.

written by Bill Stevens