Monthly Archives: March 2011

Finances, Investing

Investment Advice: Cash Reserves and Insurance

Murphy’s Law: What can go wrong, will go wrong.
O’Toole’s commentary: Murphy was an optimist.

Rule 3 Don’t Be Caught Empty-Handed: Cash Reserves and insurance

After a short section on why you need cash reserves, this chapter focuses options for where to put the cash, and then concludes for some words on insurance, with a focus on life insurance.

In the chapter, Malkiel provides a helpful overview of the options where your money will be safe, readily assessable and still earn a little return (unfortunately in our day, the return is a very little).

Establishing a Cash Reserve

Many investment advisers say “Cash is trash” as you don’t make much return on it. Yet everyone needs some reserves in safe, liquid investments for life’s surprises, as bad things happened to good people. In addition, you should be fund expected large, future expenditures (college for kids, etc) with short-term investments (e.g. bank CDs) whose maturity matches the date when needed.  Here is a look at his alternatives (and at the very end, what we are using at this writing).

Money-Market Mutual Funds

He believes this is the best instrument for cash reserves. They are safe and have “relatively generous yields” [at his writing of 2003 he was saying 1-5%; at this time (2011) do not expect much].

His list of low-expense money market funds (at the time) included:

Minimum purchases listed in his book are $ 2,500 to $20,000.

Below (under CDs), he suggests you go to www.bankrate.com to look at rates. They have them for money market accounts as well. As of 3/27/11, it appears the best rate with no minimum is 1.2%; with several options between 1% to 1.2%.

[Again, see the bottom of the article for what we are using.]

Bank Certificates of Deposit (CDs)

You get these through a bank. They require you to tie up your money for a period of time but can have higher yields (although not much today). Interest earned is subject to taxes.

He suggests you go to www.bankrate.com to look at rates. Best rates as of 3/27/11.

1 year: 1.25%
2 year: 1.5%
3 year: 1.75%

Internet Banks

You can find them included in bankrate.com above. [I think our choice below, ING, is in this category; although it does not show up on bankrate.com.]

Treasury Bills

Know as T-bills. These are backed by the federal government. They have maturities of 4 weeks, 3 months, 6 months, one-year. He says all but the 4-weeks are purchased directly from the government. Earnings are exempt from state and local taxes.

Go to http://treasurydirect.gov/ to purchase. It looks like they are currently (March 2011) paying well under 0.5 % for the shorter term bills.

Tax-exempt Money-Market Funds

See the book for more (as I do not have to worry about this).

Buying Insurance

He says that one is negligent if one does not purchase insurance: auto, home owners, medical, and life insurance. He also recommends disability insurance (which I do not carry, not a bad idea; I built up my sick leave as my disability insurance).

Most of his discussion is on the difference in term and whole life insurance, recommending term (and investing the difference according to the principles in the book).

For term he suggests you consider:

  • Renewable term. He says decreasing term will work best for most families with an investment plan as you insurance needs will diminish over time (and as premium rise over time).
  • Or level-premium insurance to cover extended period of insurance needs (I have some of this).

For term insurance rates, see http://term4sale.com/. He recommends buying from a firm with no less than an A rating with AM Best.

Variable Annuities

This is another life insurance vehicle, which he recommends avoiding, that combines insurance and investment. He thinks you can do better by getting insurance separate from investing. But if you wish to buy such, he suggests buying directly from TIAA-CREF or Vanguard rather than through an agent.

What we do for our cash funds (including our emergency fund): ING Orange Savings Account. Paying 1% (3/27/2011). They advertise: “No minimum, no fees, no catches”. This has been the case with us. http://home.ingdirect.com/index.html. You open an on-line account and link it to your checking. Then you can transfer money easily from one to the other. We have 8 of them: emergency fund, home improvement, college (almost done!), weddings (one more to go), car purchase/maintain/repair, property tax/propane, vacation, special giving. 6 of the funds get monthly transfers from our checking account, 2 of them get influxes twice a year when I get three paychecks in a month.  I pull from them as needed. It takes about 3 days.

What we do for expected large, future expenditures – Much of this money is in our INGs above.  But based on advice from our financial counselor: we have also been using an account with https://www.ftjfundchoice.com/, their Litman/Gregory Capital Preservation Fund. I am not sure what all is in the fund but it has been returning about 4 – 5% per year. The value does drop some when the DOW goes down but not much. Returns have been good enough for me to keep there. You may have to use an advisor to set this up.

Next time: Stiff the tax collector

The above is from my on-going study on investing, from Malkiel’s  The Random Walk Guide on Investing. For more, see the index page to my full summary.

Diet, Health, Personal

Health journey: progress, regression and renewal

Surprisingly my last post on “my progress toward health” was last June. It was titled: “Initial goals accomplished, heading to second base.”  Baseball is not likely the best illustration for a journey to health as health is not something accomplished in 4 steps but as something gained ever a lifetime of good habits.

From June though Betsy’s wedding in October and beyond, I continued to make good progress. But as life sometimes does, November and December brought some regression and struggles. It started with significant time on the road and lots of holiday eating (too much chocolate around; a real problem to me). Then I got the shingles; and as I recovered from that, I got a flu. Through all of this, my exercise routine become very hit or miss (mostly miss). So over the weeks I gained about 7 or 8 pounds and dropped some toning.

But since the first of the year, my health and habits have been renewed, as I re-started regular exercise and better eating, I have dropped much of the weight gained and the tone is returning.

Running again (for now at least).  Last spring I started running again (I did some running in my early 30’s but quit after an injury). When I finally got to my initial goal of 3 miles (5 kilometer), I started experiencing some pain in my knee again. Rather then give up as I did 20+ years ago, I decided to have it examined by a specialist. The doctor did a series of x-rays but did not see anything wrong. He gave me some strengthening exercises to do, which I did over late summer and early fall; only to have the knee pain return when I got up to 3 miles again.  I was convinced it was bad running form or perhaps a weakness in a set of muscles around the knee. In a final attempt to make running work, I called the doctor’s office to see if I could see a physical therapist who could work with me.  I have been doing that. He found my leg a bit longer than the other and has given me a small pad to put in one shoe. And he found that my hamstrings are very tight and has given me some specific stretches and strengthening exercises to do.  We will see. I am re-building my mileage now. It seems I have trouble when I get to 3 miles.

It is good to be on the road to health. It is well worth the effort. I see so many of my peers on another road.

The above is from my on-going series on my health journey. For an index and summary, see http://dbarfield.org/healthdiet/

Uncategorized

Investment advice: the only sure way to wealth is regular savings

A widely held belief is that the ticket to a comfortable retirement and a fat investment portfolio are instructions on how to allocate your assets and what extraordinary individual stocks or mutual funds to buy… The harsh truth is the most important driver in the growth of your assets is how much you save, and saving requires discipline.

Rule 2 – Keep a steady course, the only sure way to wealth is regular savings

This is a meaty chapter. I will only share the parts I think are the most helpful. The heart of this chapter is his practical advice on places to cut (savvy savings tips).

1. Pay yourself First – The best way to ensure that you don’t spend every nickel of every paycheck is to set up a plan so that you never get your hands on the money in the first place. You can do this by establishing a payroll deduction plan where you work.

He esp. advocates plans that allow you to save for retirement with tax advantages through your employer (e.g. a 401k).  And if your employer matches all or part of your contribution, do everything you can to get started.

My input: While we all wish would have started earlier, now is the time to get started. Start small if you need to, but get started. However, as important as saving for retirement is, you may have to “pay yourself first” to build your emergency fund, car repair/replacement fund, etc. If you don’t, you might get started on retirement only to get derailed with an unexpected need. We use ING Direct’s Orange savings account. They are on-line accounts you link to your checking account. You can set up regular drafts and then move money back to your checking accounts when needed.

2. Find (or do your own) “Save more tomorrow” plan

Malkiel cites some fascination work by two economics who applied psychology to economics to encourage most consistent retirement savings. It is difficult to get started as most people fully spending their paycheck and they perceived a start in savings as a pay cut. Individuals weigh losses like this more than the gains of the savings. In a “Save More Tomorrow Plan”, instead of making a start today, an employee commits a portion of future pay raises to retirement savings. Where implemented has been popular and has high retention rates.

3. Make Out a Budget / change a spending habit or two

  • Ben Franklin: Beware of small expenses; a small leak will sink a great ship.
  • Even if you don’t want to live on a formal budget, he suggests you track your expenses for 2-3 months. Separate your expenditures into two categories: necessary and things you wanted at the time. Learn and reduce the unnecessary so you can save.

4. Think about opportunity costs ($2 today is really $16 at retirement)

What is the cost of a $2 treat at McDonalds (or fill in the blank)? If you recall that time is money, your realize that $2 today (at 7.2%/year) is $4 in 10 years, $8 in 20 years, $16 in 30 years, $32 in 40 years. So if you are in your 20’s today, multiple your expenditure by 16 times to figure out what it might be costing you at retirement. And if you change a habit, you can multiple the savings time after time. Remember, $300/year at 8 percent over 40 years adds up to $90,000.

5. A dollar saved is NOT a dollar earned (it is more).

Why? a dollar saved is much more than a dollar earned because taxes reduced earnings to far less than a dollar.

Here’s another idea:  When you go out to eat with kids, offer them $1 if they will drink water instead of soft drinks. It keeps the money in the family, teaches the kids to forge present gratification, and the water is healthier for them.

6. Pay Off Your Credit Card Balance.

“Credit cards are the crack cocaine of the financial world.”

“Keeping a balance on your credit cards is about the worst financial move you can make.”

Strategies for Catching Up

1. Downsize Your Life

“There is no other way to make up for lost time than to start a rigorous program of savings now. You have not other choice but to be frugal.  It may mean downsizing.

2. Consider Pushing Retirement Back a Few Years

Here are some sites with help on retirement planning:

  • Fidelity.com
  • Morningstar.com
  • Trowerprice.com
  • Vanguard.com

The Millionaire Next Door

Results of a 20 years study on the wealthy in America:

  • Most people who live in expensive homes and drive luxury cares do not have much wealth.
  • Conversely, many who are wealthy don’t live in fancy neighborhoods. Nor have the earned advanced degree or inherited wealth. They do not appear to be rich.
  • Wealth is most often the result of a lifestyle of hard work and the discipline of regular savings.
  • “Getting up in the morning and knowing that there is no mortgage on the house, every bill is paid in full and on time, is the most wonderful feeling in the world. It is a lot better than buying a $5,000 watch that will be used only to impress someone in a $1200 suit. I do take great family vacations, go to dinner a few times a month and move my own lawn. I do not deprive myself of anything I really want. I just don’t want the latest things that are being peddled on TV.”

Next time: On Insurance and Cash Reserves

The above is from my on-going study on investing, from Malkiel’s  The Random Walk Guide on Investing. For more, see the index page to my full summary.