Dollar cost averaging

I have recently learned the importance of Dollar cost averaging and how it can REALLY help you with the ups and downs of the market.

Dollar cost averaging is just taking your money and spreading it over a time period, instead of just investing one lump sum. Here is my own personal example. We put a certain amount per child into a mutual fund (separate from 529) for their use when they get older (ie, missions, wedding, college, down payment, whatever). I was just putting a lump sum of money into that mutual find each year, at a certain time of the year (usually when we got our bonus or tax money). The problem with doing that is, what if the day that I put the money into the mutual fund just happens to be the day that the Market hits its high and it doesn't go back for quite some time?

So recently, I realized this was not the smartest way of saving this money. So now I am taking what I would have put into that lump sum, and split it up over the months of the year and I am investing that amount of money each month into the fund (it is a fund with a no minimum addition investment). So this way, one month, I may invest on a high day, but the next I may invest on a low day. It helps even out the ups and downs of the market by doing a little bit each month, instead of the huge sum each year. Now when we get that sum, we'll just put it into savings :)

When you have your money taken from your paycheck for your 401K, you are doing the same thing every paycheck. If you are automatically investing in an IRA every paycheck you are also doing this. That is the nice thing about sharebuilder - since you are building stocks/funds and a regular basis, you are dollar-cost averaging already :)

However, if you have a large sum of money and just want to get started, do it! Get going... If at all possible it is best to invest over time, but if you have the money, get it working for you ASAP... but then start doing a bit at a time, it REALLY helps you ride out the ups and downs of the markets.

529

Wow - sorry It's been a week since last posting.. We got caught by sickness around here :P

529's are one of the best ways to save for your child's college savings. However, you should give PRIORITY to saving for your retirement. Once you are saving enough for retirement, 529's are an excellent way to start saving for your child's college.

I know we will never be able to save enough to pay for their college (maybe if we only had 1 kid)- we just don't make that much money. However, I figure a least a little bit a month with help with at least some expenses.

529's allow you to save for their college tax-free. So when you go to remove the money you have saved, you will not owe any taxes on the increase you have earned. If you were to put the money into an ordinary mutual fund/savings account, you will owe taxes on the money you have made.

Depending on the state you live in, you will also get a state tax deduction for saving, but usually only in the savings plan your state has set up. For example, here in Oregon, we have a 9% income tax. So if you were to invest say $1000 in the Oregon college savings, you will get a tax deduction for that $1000, equaling around $90. So you made an automatic 9% already on that money. Not too shabby.

Most savings plans don't have high minimums or you can start for as little as $25 a month. If your state does not have a Tax deduction for using their plan, shop around and find a state with a good option of mutual funds and LOW costs. You can use any state you choose - but if you get a tax deduction, use your own state's plan! I have heard Utah has an excellent plan for those who do not receive a tax deduction.

A fantastic, no-brainer way of saving a little money is using Upromise. You can shop online through them, or you can just sign up your credit cards and store savings cards (safeway, albertsons, etc.) with their program and as you do your normal shopping, if you buy items that participate with Upromise, they will give you money back - with no effort on your part!

I have earned over $60+ from just my regular shopping with credit and store savings cards. I deposited $50 in a 529 - Oregon doesn't participate, so I had to open one in another state. I opened one (well, 2 - one for each kid and split the money) in Iowa since they have low costs and No minimums, and I didn't have to keep adding money too it. So I put $50 of the Upromise FREE money into the 529's , and I is already up to $100! So I now have $100 FREE money for my kids college. Hey it may not seem like a lot, but I will take it and it took absolutely NO EFFORT on my part, other than opening the accounts and setting up Upromise. Maybe they'll be able to get a book or two when they get to college ;)

So look into the tax deductions available in your state and once you are saving enough for retirement, these are an excellent way to start saving for your kids future.

Limit Orders

I wanted to do a quick post for those of you who may not know what a limit order is. This is a very important term for if you are going to buy stocks or ETF's.

Most brokerages should offer you limit orders for Free - if they don't, then you want to find another place to buy your stocks. This does not include sharebuilder, because they have a different way of buying stocks.

Limit Order lets you set a price that you want to pay for a stock (or sell a stock at) without you having to watch the market and time the buy/sell correctly. Who has the time to do that anyways?

For example, say you want to by share of GE and the current price is $19, but you have seen it fluctuate over the last few days. So you decide you only want to pay $18.50 per share. You set that as your limit order and just set it as Good until Canceled. Then the brokerage (well, their computers) do all the work - as soon as it gets to that price, it will buy it for you - even if it was only that low for like 3 minutes....

Yesterday, the market started off low and I had some limit orders in for some ETF's in our Roth IRA, It bought those at the low price before I even got out of bed, and by the time I was out of bed, the stock market had gone back up. That is why Limit Orders can help save you a lot of money!

The same can go for when you want to sell - in fact, is is about the ONLY way I would sell stocks. Say you own GE (just to keep the same stock example) but you think it will go to $20 and it is only $19. Set your sell price at $20 and as soon as it hits that, if only for a moment, then you will get your stocks sold at the price YOU want - you are sure of the amount of money you will make for that sale.

So be sure to use limit orders when buying (except for sharebuilder) or selling stocks/ETF.

ETF

I have a new love of my financial life and they are ETF's.

The company we used for our Roth IRA (and our Roth 401K, but I have no control over what funds I can buy in there), Fidelity, recently started offering a few ETF's commission free, so it costs you nothing to buy them... and it is not just because they each have made me 3% in the week I have owned them (it was a good week), but that always helps :)

ETF stands for Exchange Traded Fund. They trade like a stock, but are like a mutual fund in that they hold a basket of stocks in one fund. You can buy them at anytime during the day, like a stock, but they are like a mutual fund in that they to follow a certain index or sector. There is usually no minimum because you buy the shares like you would any single stock. It is a great way to diversify over an index or sector instead of buying individual stocks without having the minimums that most mutual funds require.

The most important thing about them is that they have a VERY LOW expense ratio! I sold about 3/4 of one of the mutual funds we held in our IRA to buy 4 different ETF's (a large cap, a mid cap, a small cap, and a foreign based ETF's) Large, medium, and small cap, just refers to the size of the companies are involved in that index. The expense ratio for the iShares S&P500 (large cap) one I bought is a measly .09% and already has a YTD performance of a little over 7% (the mid and small cap ones I bought so far have a YTD 12% return! I have only owned them a couple of weeks though)

To put that in perspective, the fund that I sold had a .75% expense ratio. So in a year, let's say I had 10,000 in it, to make it even numbers. I would pay $75 in expenses compared to only $9 with the ETF. $66 a year - or if that money was invested (and you never added anything to that initial 10,000 and it was consistently $66 more a year for the more expensive fund), it would come to a little over $8300 in 30 years!

That is why expense ratio is so important and you should look for funds with good returns and LOW expense ratios (less than 1% is ideal, but as you can see, the lower you can get it and still get a good fund/return, the more overall you will earn) FYI- foreign funds often have higher expense ratios than other funds - but they usually have great returns (But are riskier) and you should have them as part of your overall portfolio - I'll talk about foreign funds more in another post

Homework

I am going to give you all some homework for the weekend - so you can get honest and ready to go on your financial future. I want you and your spouse (or just yourself if single) and gather up your fiances (bills, savings, debt, goals) and I want you to figure out goals that you have for getting rid of your debt and setting savings/investing goals for the future (no matter how little it may start out with)

There is a GREAT Calculator on Suze Orman's website (BTW, we don't get CNBC anymore, because we are cheap and got rid of our extra channels, but you can get her show -and many others from their site for FREE on itunes and watch it on your computer, or my case iPhone) that tracks ALL your spending - even averaging what you spend on vacations, insurance, gifts, etc. each year to what you are actually spending on it each month. It think it is a very useful tool to see where you can cut spending, where you are spending too much, and just to see where all your money is going... I did it for us and found it useful to see how the money is spent every month. It is important to know where all your money is being spent and be HONEST with yourselves, so you can be as accurate as possible.

The calculator will show you if you are overspending or underspending each month and try to show you how you can live within your means. Which, if you are overspending each month, you really need to get honest and figure out how you can live within your means each month and make a plan to achieve it.

Next, if you have debt, make an action plan on how you can eliminate it - I hope if you do have credit card/loan debt, that you do in fact already have a plan, but if you don't it is never too late to start one! Here is another calculator from Suze, to work on your credit card debt.

Once you have dealt with your spending and debt, decide how much you can dedicate to investing and savings - it doesn't have to be much, but you NEED to start - the younger the better! Most say you need to put 10% of your pay into retirement. Well, that would be ideal, you need to start somewhere, no matter how small.

Make a plan on how you are going to save/invest this money. Are you going to do a simple savings account? Are you going to open a ROTH IRA? Decide what is best for your situation. Open a savings or investing account.. Look for incentives to opening an account - many companies will give you money to start an account. Sharebulder will give you $50 for opening an account and if you only have $20 a month to invest, that is over 2 months of extra savings for you. Decide what company will serve your needs best and set up an automatic savings/investing option to have that money taken out every month.

Once you have a complete spending/debt/savings/investing plan, I think you will feel so much better about your future and your financial stability. It may seem depressing (especially if you don't have much or enough money) but you still need to face it and make a plan and get yourselves going for a stable financial future.

If you are local - and I know you well- I would be more than happy to help you set up a plan and go through your finances with you (for free of course - but I would take homemade chocolate chip cookies). I honestly love this stuff and want everyone to succeed and have a plan :)

Next week's topics include: ETF, Limit Orders, 529 college savings, and more.. Let me know what you would like to know more about or what topics you would like to see!

#1 tip

I told you that today that I would tell you, how most of you (will not apply to everyone, especially self-employed people or those already doing this) can EASILY find $20 or more a month to invest (most likely will be more like $40-50+) :

IRS

How many of you get a big refund from the IRS every year? This is one of my biggest pet peeves. People complain they don't have enough to be investing, but they all get so excited in the spring about their Tax refund - well, you could have had that money all year, instead of waiting for the government to give you YOUR money back. Interest free loan to our government. If you are getting more than $400-500 back in your tax refund, you are OVERPAYING!! You could have been investing it all year...

Now, before you go messing with your withholding's, you have to PROMISE yourself that you are going to set up an AUTOMATIC savings/investing plan EACH month or paycheck with the extra money that you will be getting. It MUST be automatic, so you don't see that extra money, and therefore spend it! Have it automatically taken out of your paycheck/checking account and go into an account without any thought from you and it will be like you never had that extra money and you will be saving with no effort! (if you can afford it, do the same thing with raises, if anyone even gets those anymore :P)

There is a calculator on the IRS website to calculate the amount of withholding's you can safely claim without having to pay them. You can then go to your company's HR and change your withholding's (we can do it online with our company) and you'll have more money in your next paycheck (just less refund each year - but if you are good about AUTOMATICALLY putting that extra money into an account, you will already have what you would have gotten for a refund sitting in YOUR account, plus any increase you will have made over the year :) )

Unfortunately, at least for the State of Oregon, we can only claim 10 withholding's. So, at least for us, we are guaranteed a large (over $1000+) refund every year :P Especially with this new baby/deduction coming.. and yes, it irks me alot! We also usually get a large refund from the feds each year because Joseph often gets a bonus at the end of the year - unfortunately it is not a guaranteed bonus (and we never count on it) and then they tax it at almost 50%, so there is no way to plan for it :( (otherwise, we would be closer to even with them)

If you own a home, have kids, pay property and state tax, pay tithing/charities, and don't make a fortune, you probably don't actually pay that much in federal taxes. We make a comfortable living, but we have kids, own a home, pay high property taxes and state taxes, pay our tithing, etc. so we hardly pay anything in federal taxes (state is a whole other thing - we do have to pay them a bunch). I used the calculator for what we hypothetically will owe next year, with this new baby/deduction/tax credit, and we will owe almost nothing in federal taxes (according to the calculator, we are already overpaying, when we consider the new baby as a factor). So try the calculator out and see how much extra you can have in your paycheck to invest/save - just make sure, I'll say it again, it put that money AUTOMATICALLY into an account!!

Compound Interest

I have been saying how you can start investing with just $20 a month. Want to see what that $20 a month will do for you over the years? (if you continue to invest $20 a month and re-invest the dividends/interest)

$20 a month at just 5% (conservative in the market - AT&T or Verizon stock alone gives a 6% dividend)
In 5 years, you can have $1391
In 10 years, you will have $3151
In 20 years, you will have $8309
and finally in 30 years, you will have $16803

and all for only $20 a month - I love how compound interest helps you grow exponentially - that is why you leave the money alone, and let the dividends/interest re-invest!

Now lets say you can make the average 8% rate of return on that $20 a month (that is probably a more accurate average, as long as you don't play it too safe)
5 years - $1509
10 years - $3727
20 years - $11,957
30 years - $30,224

So if you wonder how you can possibly squeeze $20 out of your budget each month, think of something you can get rid of and remind yourself that in 30 years, you could have $30,000+ just from that measly $20!

This is also a reason to keep costs REALLY low, as not to eat into your profits!

So what if you can manage $50 a month? Well at 8% here is what you could have -
5 years- $3772
10 years - $9319
20 years - $29,839
30 years - $75,561

You can calculate the amount you think you can save a month and the possibilities from savings each month here

Enough motivation to find the money? Well, tomorrow's post, I will show you how most of you can EASILY find that $20 a month (for most of you it will be more like $40-50!) and it does NOT include you cutting any spending! It is also one of my pet peeves.. So check back tomorrow and I will show you the easiest way to get this extra money a month without cutting back your spending! I will also be giving other hints as this blog evolves ;)

New blog

I have said I love investing and I believe that anyone can do it, no matter how little you know or how little you have in your bank account. You can do it and you don't need to pay someone to help you. I want to help with the information I have learned to get everyone on the road to investing and securing their futures - you can do it and don't need to pay a lot for it!

I am just testing the waters with this blog - we'll see if it goes anywhere and how it evolves. I need your help. Ask me questions or leave comments about what kind of posts you would like to see and what is important to you. I can't address people's issues unless I now what they are... Feedback!!! PLEASE!

A few years ago, I knew NOTHING about investing, but knew I needed to do something for all this money we had been setting aside and to work on our family's financial future. I was scared and thought I would mess it all up, but I was too cheap to pay someone our hard earned money to do this for us, so I decided to learn and do it myself. And I have - we are not rich by any means, but we are doing alright, and I have kept up with what the professionals would have made us.

It is gratifying to look at your accounts and know you managed this and you actually saved this amount of money. Yes, you may make mistakes, but everyone does - even the professionals- and wouldn't it be better for you to make those mistakes and learn, than to pay someone to make them and still lose (plus the money you paid them?)

So come on, you can do it - ask me anything you want to know about and if I don't know the answer, I'll research it and try to figure it out :) Also help me evolve the blog and let me know what you would like to see - I am very open to suggestions!

I have several post ideas coming in the next few days - so keep checking back often!!

crash course for stock/mutual fund picking

I got a lot of people that were interested in my previous post on investing, so I thought I would give bit more information on picking out good stock and mutual funds in a few easy steps.

First stocks -

Pick a stock of a company you are familiar with and a company you like - unless you are experienced and have a lot of time to research and study, stick to companies you know. Then go to any site - the site where you buy your stocks should have all this information and look up your stock

Look at the P/E ratio (price to earnings).. Each sector has a different p/e ratio that will tell you if the stock is a good buy. Look at what the P/E ratio is on your stock, and compare that to the industry average P/E ratio (hopefully the site you have chosen will show you this.. thestreet.com has it under Earnings when you search for your stock).. If your companies P/E ratio is lower than the sector average, then it is a good buy - it means that the price of the stock compared to its earnings is cheaper than competitive companies... if it is much higher than the rest, then the stock may be overvalued.

Then look at the dividend - might as well choose a company with a high dividend. Anything over 2% is pretty good and they can go as high as 6%+ - the current highest yielding stocks are T,VZ,DD,MRK,KFT,CVX,MCD,KO,JNJ,INTC - all companies you have heard of and all dividends currently over 3% (I have not checked their p/e ratio though)

If you are wanting to buy more than one stock - diversify yourself and buy over many different sectors - for example, don't buy both Target and Walmart - you are just repeating the same sector.

Mutual Funds

The company you choose should have several options for a No-Load, No-transaction fee mutual funds. In other words, you do not want to pay anything to buy this fund. If you have $500 to put into this fund, you want ALL $500 to go into that fund and NO fees to buy it!

Speaking of fees, look at the Expense ratio (what it costs a year to own the fund) - ideally, you want something that is much less than 1%, and definitely not higher than that. I have recently started with ETF's (exchange traded funds) because Fidelity has started to offer them (finally) with no fee to buy and that have extremely low expense ratio - like .09% - really low! If your company offers them at no cost - they are a low expense alternative. But if they are not offered, just pick a fund with a reasonable and low expense ratio.

Next, look at the Morning Star rating. Ones with a 4 -5 star rating are ideal.

Look at its lifetime performance. You want a fund that has been around for awhile and over it's lifetime has done well.

Of course then we would need to go into balancing your portfolio, but that is a whole other post... Sites like Fidelity, will actually tell you how to do that once you get more and more funds/stocks.

If you have to choose - mutual funds are easier and overall safer because you are paying someone that will hopefully make you money :) but stocks are fun too - just a bit riskier (that is why you go for good reliable companies and not chase stocks - unless you have a lot of $$ to waste, which I don't :P) You hear of people buying JNJ and holding it for 30 years and it pays for their retirement :) Just buy and hold... I would just put most of your money into mutual funds/ETF's and a smaller percentage into stocks that you like (sharebuilder works GREAT for slowly building stock shares at only a little $$ a month!)

Remember to just be mindful of all the fees and go with companies that are upfront about all their fees

Get investing!

I love investing - I read magazines about investing and like to watch shows on CNBC. I took a year or more off from paying attention to it much, due to the fact it was depressing. I let all our investments ride and ignored them, and when things turned around, we made all the money back (lesson to never panic and wait it out - unless you are older, then that is different case)... So recently I have renewed my love for investing and gotten back on the bandwagon - I have been rearranging retirement accounts and buying stocks, ETF's, etc...

Recently, someone asked me the best way to start investing (mainly because they didn't want to have to do the reading on what was best way to start).. First of all, if you have a 401K at work and your work matches, you BETTER be putting money in to get that match (up to the match), otherwise you are just THROWING away money!

Second, if you are doing that, or your work does not offer a 401K, open a Roth IRA ASAP! Many companies have minimums, but some don't so look around to find one with LOW costs and NO hidden fees. Roth IRA will give you tax free money when you retire. We have both a Roth 401K and Roth IRA's, so we shall be living our retirement mostly tax free :) (we personally use Fidelity for everything but our 529 college savings accounts and sharebuilder, but there are MANY good companies)

Now if you just want to put a little money into investing a month - I would start something like a sharebuilder account. If you don't have a Roth IRA, you can make this account a Roth IRA and they have NO MINIMUM amounts to invest and no account minimums, so even if you only have $10 or $20 to invest a month, you can still do it! No excuses. Their cost to buy a shares or mutual funds is only $4 - one of the cheapest rates you'll find (I have one of their plans, so it is even less a month per trade)... They even GIVE you $50 as an account bonus for opening an account.

Then pick a stock (or mutal fund) of a good, reliable company that gives a good dividend. companies like (these are their stock symbols) JNJ, PG, GE, WMT, COST, T, KFT, etc... all are companies you can almost rely on doing well - just think of one of you favorite companies and look at their stock. Pick one with a good Dividend rate - for example AT&T (T) has one of the highest divided rates at a little over 6%!!! You can't get 6% from your money sitting around. So high dividends are nice. The last few years, when stocks were in the crapper, my Disney shares were stagnant, but they still made money from the dividends.

Then just set up your account to invest - at least sharebuilder can do this, I am not sure of other sites - to invest $20 or so a month (or less, No minimums, but you do still pay the $4 to trade, so make that $4 worth it!) into that stock (or mutual fund) - if you are going to do more than 6 stocks, then get one of their plans, but if you are new to investing, stick to ONE stock at first (with a good dividend) and then once you are more comfortable, you can try some more. Have it set up Automatically each month (forced savings/investing), and you don't have to even worry about it - really easy :)

So there - almost everyone has an extra $10-20 a month - or you can find it - to start investing (make it a Roth IRA if you don't already have one!!) Remember, you can always remove your principal investment from a Roth IRA at anytime (but you must leave the earnings in until you retire) Just pick GOOD, RELIABLE companies and go for that dividend!! Now go start investing - it is easy and we aren't getting any younger, and you NEED to do this for your future!!