Deaver Brown, Author Brown co-founded the Umbroller stroller company, American Power (APCC), and Simply Media. He published The Entrepreneurs Guide with Macmillan in hardcover and Ballantine in mass market paperback. He published a business series of CD-ROM’s with Macmillan and another series with Simply Media. Brown graduated from Harvard College and Harvard Business School. He has published numerous articles in trade journals and business magazines.
Copyright 2003 Simply Media, Inc. Lincoln, MA 01773-0481 www.simplymedia.com
Personal Finance & Investing Checklist Here’s the paperwork you should keep! Place a copy of your paperwork in a home safe, and have your attorney keep a backup set. Copy of your will & power of attorney. Copy of last six year’s tax returns, federal and state. Copy of your Personal Financial Statement. Copies of stock certificates and all securities owned. Copies of locations and description of all assets. Copies of evidence of all ownership interests. Copies of your bank statements for three years. Backup disk or CD of your financial software program and data files.
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About the Survival Kit Series Our Survival Kits are designed to be quick, concise, and much easier to read than most reference books. As in true wilderness survival kits, the key to success is limiting your materials to the least amount necessary. This provides users with fast, light, yet complete packs, and ensures easy travel without excess baggage. At Simply Media our hardest task is eliminating materials that are not absolutely necessary for traversing the subject’s territory. We take the time to make each of our Survival Kits as short and concise as possible so you can learn the most important facts with a fast cover-to-cover read.
About the Personal finance & Investing Survival Kit The Personal Finance & Investing Survival Kit pares down the enormous amount of information available and provides you with the essentials so that you can manage your personal finances effectively. In the Survival Kit spirit of “less is more,� the book eliminates all schemes and recommends a straightforward earning and investment program with which average people can succeed. The fancy stuff is left behind because it is just too much extra baggage. The Kit is outfitted with helpful tools such as organizational checklists, resource icons, internet sites to get stuff done, and a complete action-oriented resource section. Good luck with your plan!
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Chapter one
Getting Started choose who you deal with and reap the results of your lifework. Guilt. You feel you should. Although this has a negative implication, at least it gets some people to take the first important steps. Guilt is OK if it motivates you to put your plan together!
Audio One: Introduction to Personal Finance & Investing
Why Create A Financial Plan Is it right for you? Financial plans appeal to people for three reasons: Wealth. To create substantial wealth for your family and yourself. Independence. Financial independence lets you have the right to choose in most areas of your life. If your plan works, you get the right to
Most plans are too complex. Most personal financial plans fail because they are too complicated and grandiose. In a word, they are intimidating. The best plans emerge from simple goals. The Millionaire Next Door uncovered and publicized the fact that most millionaires are people who just stuck to their knitting; avoided schemes; didn’t get rushed by the crowd; implemented a simple plan; did not try to keep up with their neighbors; and kept their spending under control. You chose a modest approach. Financial planning is for you because you took the trouble to buy this CD not a scheme book that promised to make you a million bucks by next Wednesday. Read this text; learn from the videos, and stick with the plan you develop as a result. Just get back up on the horse. Life is like a horse that throws you. Successes get back up and try it again. Failures complain about being thrown. Getting up again sounds simple but takes guts to do. Losing a job, a spouse, an investment, or other sets of problems is hard on anyone that endures it. The challenge is to get over it and 4
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move on. Our credo is derived from a wise yet ironic letter written by Justice Louis Brandeis to his daughter, “My dear, if you only recognized how hard life is you would find it so much easier to manage.” Financial planning is exactly the same way. You must give yourself permission to find it hard to put together so you can find it easier to execute.
most financial fortunes. Getting small things done every day is the method to prepare for bigger ones along the way. Our plan is the classic nickel, dime, and quarter one. We leave the high rollers to Vegas and day trading! You should too.
Personal Bankruptcies 1998-2003
Video One: Three Ingredients for Success
Personal Bankruptcies
Why People Avoid Planning 4.00 3.00 2.50 2.00 1.50 1.00 .50
1998 Most people avoid creating personal financial plans for three reasons: Big thinking. Many people won’t start the planning process until they perceive they have something “big” to plan. This is classic lottery thinking, “if I don’t make a million by next week, why bother?” The key point is to start early when less is at stake so you can both learn and have the plan in place when bigger things do happen. Delay. Others think, like with diet planning, that next week would be a better time to start.
‘99
‘00
‘01
‘02
‘03
Chart in millions. Personal bankruptcies are expected to keep growing rapidly.
The Eleven Step Survival Plan Our battle-tested personal financial and retirement plan has just four categories and eleven components. The four categories are career development, investment growth, debt elimination, and having fun.
Career Development Complicated. Others believe that financial plans are too complicated for them. Some plans may be. Ours is not. You must focus for results; complicated plans rarely work for anyone. Think in small steps. Plenty of traditional mothers have paid for the education of their children out of nickels, dimes, and quarters saved from the food budget. Thinking small is in fact the method that was used to achieve
1. Invest in yourself first. Your career is your most important investment. It is the source of your cashflow to do everything else. Work hard at your job. Network and educate yourself in your specific field and those related to it. Most plans neglect your career, the foundation of your potential feast. Don’t make this mistake yourself. Put your career first. 5
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2. Ask your boss how you can help. Ask your boss at least once a week what you can do to help and what they want done in your job responsibility. Be sincere; mean it; and above all, do it. Many people worry about giving too much value, putting themselves out, and other self-absorbed ideas. They hired you to pitch in. Most people don’t. If you do, you will stand out, have an accelerated career path, and job recommendations for life. 3. Work an extra two hours per week. Commit to more hours at your job than are expected. Read related books, articles, and trade journals about your work and work area. Hire someone else to cut the grass! You take care of the day job. Financial planning should not be about spending more time on yourself and less on your career. Devote attention to your job and career today. All you can really do is get stuff done in the next three hours. Do it. Then you can hope some justice catches up to you. It usually does. If not, move to the next employer and execute the exact same strategy of doing more than required of you.
people in retirement as long as you follow the debt elimination rules below. 6. After paying off your mortgage, make the same payment into growth stocks or mutual funds. This will provide a cushion to pay off your kid’s education and other unexpected expenses along the way. If you have anything left over when you retire, all to the good! 7. Keep your financial records organized. Good record keeping is an important discipline in the Survival Plan. Good records let you check up on your progress for encouragement, get you back on track when you wander off as all of us do from time to time, and saves you a ton of time and money in financial and tax requirements over the years. Debt Elimination 8. Pay cash for your cars. OK, so you can only afford a clunker. Then buy it; drive it; and save big time. Sixty million people buy used cars each year. Only sixteen million waste their money buying new ones. Cars are the second largest purchase (houses are number one) people
Investment Growth 4. Buy a house or condo. You need shelter. This is a forced saving plan with tax advantages due to the federal tax laws and those of some states too. This is the most logical first step in the investment portion of your plan. You will probably have to settle for a small place to start with. Then make your final move the second house or condo unless your job or family situations requires you to move again prior to retirement. 5. Invest to the max in your 401 (k) or other deferred savings programs you are eligible for. You have approximately nine different choices. You can not qualify for all of them. But do as many as you can afford. If you start before age 45, this should be more than enough for most
Did You Know? 1% of Americans owned their house in 1900; over 65% do today.
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make. Unlike a house, cars depreciate and therefore have no value beyond transportation and show. Fortunately, car makers are helping here because they are making far better vehicles than just ten years ago. Take advantage by buying a good used car and coaxing it along for as many years as you can. My 1988 Volvo Sedan chugs along nicely with no car payments, no collision insurance, and a $58 annual excise bill! 9. Pay off all other debt. Use debit cards so you can resist the temptation of running up credit card bills. The key to Survivalist thinking is to avoid temptation. You will feel poorer; good. The Millionaire Next Door got there by feeling poorer, spending less, and saving more. Eliminate any home equity or other loans. If you have them, pay them off as promptly as possible. If you must, dip into your savings or sell off a few stocks if you have them. 10. Finance or refinance your mortgage to 15 years. This way, you will own your house in half the typical time. Lenders will give you a substantially lower rate. Your extra monthly payment, for half the time, will only be about 15% more. This is a terrific bargain. Do it as soon as possible. Have Fun! 11. Have Fun. If you do the first ten steps, you are entitled to have fun in the last step. Unless you want to be Donald Trump or Bill Gates, our plan will provide for you well in retirement! Go for it!
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How Do You fit in? about getting right back on again.
Video Two: Approaches and the Life Cycle
Know Thyself. Identify and accept where you are in your lifecycle so you can develop an appropriate financial plan. Then you should test yourself for the levels of risk you can willingly accept. This is necessary so that you can stick to your plan and not panic at the first, or even second, sign of adversity in your personal life, the stock market, or the economy in general.
Your first financial plan. Most people make their first financial plan when trying to buy their first house or condo. The loan forms become your financial report card which the lender will either pass or fail you on. Then, after the closing, most of us realize just how long a 30 year mortgage is. This tends to frighten and intimidate most people enough that they put their plan away for awhile. Don’t fall into that trap. Take a deep breath, read further, and develop your two-year Good Habit Survival Plan.
> Learning years. In school and/or college and the first few years working.
In retirement it’s too late. In retirement, people finally have time to think seriously about money but can’t do much about it then other than scrimp, cut coupons, and save a bit. Your challenge is to review where you are before retirement and make the most of it, so you won’t be scrimping and cutting those coupons in a tiny one bedroom apartment near Miami Beach!
> Earning years. Approximately 26 to 65 years old.
Lifecycle:Standard Categories
> Yearning years. Retirement.
Classify yourself in one of the six following categories according to your age. Although there are variations within each category, they are broadly correct. For example, virtually everyone under 21 is in the learning stage and over 70 in the retirement one.
People have three stages in their financial lives:
Your challenge. Your goal should be to make the most productive use of each stage of your life. As a Survivalist, we remind you that we all fall off the horse from time to time. The challenge isn’t about not falling off the horse. It is
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16 to 25. In this period, most people create the fundamental structure for their future career. They determine where they are going to go to college, what postgraduate training they will take if any, and work the first few years in a formal or informal apprenticeship. Late Learning Stage:
In the late learning stage, the best investment a Survivalist can make is to get the best education and professional/vocational training they can obtain. Incurring educational debts are often a wise investment in order to gain the learning and income opportunities that results from the accompanying knowledge, contacts, and degrees. This period primes the pump for the rest of your life. Use it as wisely as you can. Early Earning Stage: 26 to 35. This period kicks off with your first serious job, after possibly an initial apprenticeship one or two. This is such a busy period for most people that they give little thought to their financial future despite usually making a number of good moves instinctively.
By the end of this period, most people have bought their first house or condo and started investing in at least one deferred savings account such as a 401(k), Roth, or IRA account. The same people enter their biggest spending years as they get married, have children, live up to the lifestyle of both events, and wear out several ATM cards in the process! Prime Earning & Spending Years: 3 6 t o 5 5. In this lifecycle stage, most people
establish their permanent lifestyle level, whether it is high, low, or in-between. At the tail end of this period, most people are poised to save some serious money as their mortgage, kid’s college, and other payments start to wind down or are eliminated completely. The Stretch Run: 56 to 65. These are www.simplymedia.com
Tip In the late learning stage, the best investment a Survivalist can make is to get the best education and professional or vocational training you can obtain.
the years most people sock away whatever they have for retirement except for their house which is usually close to being paid for at the beginning of the stretch run. Supposed golden parachutes, divorces, late children, downsizings, illnesses, and other unexpected events can wreck havoc upon your plans in these golden saving years. There are not many of these years. Make the most of them. Early and Semi-Retirement: 6 6 t o 7 5. As Peter Drucker predicts for 21st century
workers, they will have to extend their work career into this period to get together enough savings for a comfortable retirement as well as their lifestyle need to stay involved with work and connected with society in general. Already 80% of boomers say they plan to hold at least a part time job in this phase of their life. This is a radical change from their parent’s wistfulness for complete retirement with no job at all. In this period, smart planners live on their pensions and social security while still socking away interest, dividends, and capital appreciation on their investments for their late retirement years. Retirement and the No-go Years: 7 6 and older. Although this seems old to many
of us, many people who reach 76 will live for at least another twenty years. As individuals enter these years, they need to have preplanned what they want done in their lives because most people gradually lose a competent ability to invest Personal Finance & Investing Survival Kit
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their funds, their health deteriorates, and they lose their capacity to manage their own personal affairs effectively in this time period.
the basic Survival rules. In fact, under these circumstances, your stretch run should begin in your 30’s and be over by 50.
Lifecycle: Subcategories
Accident or golden boot. An accident, golden boot at work, or any other event that disrupts your stretch run is a killer for most financial plans. Since you can’t do much to prevent these problems from arising, the best you can do is get started on your plan today and not rely too much on the stretch run even if you are already in it.
Your subcategory status determines largely how you should plan within the standard categories. A great deal of your planning will depend upon whether you have children and how old you were when you had them. This determines how your own retirement savings needs conflict with college payment requirements for your children, if you have them. In simple terms, it dictates when your stretch run can begin, with the kids gone and paid for, and how long afterwards you have to get your retirement plan in good order. Late children or divorce and starting over. Late children means your stretch run starts later. Many boomers will be having their children attend college while the boomers are still in their 50’s, 60’s, and even 70’s. This means they either must have had a lot of money saved to start with, a rare occurrence indeed, or they will have to work past what used to be considered the normal retirement age. Many of these people will have to make severe financial compromises about their children’s college choices based on their own financial situation.
Your Financial Profile The next step in the process is to determine the level of risk you are comfortable with and then develop an appropriate Survivalist plan for yourself. People who invest in instruments with higher levels of risk than they are comfortable with usually get panicked and blown out of markets in troubled times with substantial losses. You need to be totally at ease with the level of risk you accept now so that when times get tough again, and the media then loudly screaming that the sky is falling, such as happened as recently as 1974, 1982,1990, and the dot com Nasdaq bubble burst in 2000, you can hold on and ride out the bad times until prosperity sets in again.
These two phenomenon are already accounting for a large percentage of boomers planning to keep working in their retirement years and a significant increase in the applications of boomer children to state colleges from middle and upper middle class families. The Heat is On, as that great song goes! No children or children planned. If you have no children or do not plan to have any, you should have little to worry about as long as you follow
middle•age
A time most people complain about but actually have a pretty good time in.
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Your Self-Diagnostic Test To take the test, read each of the twenty statements that follow. Place a check mark next to each statement that best reflects your true beliefs and convictions. If you don’t agree wholeheartedly with a statement, don’t check it. There is another copy, by the way, in Appendix II. There are no “right” or “wrong” answers in an absolute sense. There are right and wrong answers for you personally. Be as objective as possible in answering these questions for your own benefit or you will not benefit from the analysis. If you are not an active investor now, imagine how you would react in each circumstance described. Take your time with your answers. Warning: answer truthfully. This is a critical aspect of your financial planning process. You need to base your plan on your genuine investment behavior style so you can tailor the best possible program for yourself as an individual and not just some random person in your situation. Be sure to answer what is true for you. Don’t answer what you think is “right,” “correct,” or the way you would like it to be. Candor is the best policy. You need to answer impeccably honestly. You have storms ahead, as we all have. You need to ascertain what level of risk you can reasonably tolerate so you can navigate through those inevitably turbulent times. Remember, you don’t have to show the answers to anyone else. Burn the answers if you must! This analysis is just for you! Now, once more, answer candidly! ___ 1. I demand superior returns on my invest-
___ 6. I don’t like to take any losses in my
ments. This means I recognize that I sometimes will have big losers as well as big winners. That’s ok with me. I can live with that high level of uncertainty and risk.
investments, even short term stock dips. ___ 7. I believe that risk brings rewards; no
pain, no gain is my motto.
___ 2. I thoroughly investigate and research
___ 8. I believe in the Swiss motto, “You can
each investment before I make it. To do otherwise would be foolish.
never get hurt taking a profit.” I never second guess investment decisions I have made. I can invest and not worry about it afterwards.
___ 9. ___ 3. I have invested in one or more startups
or private placements. I like the upside and can accept losing all my money in a few of these deals in order to make a lot in others.
___10. I thoroughly review the history of my
___ 4. I take time to learn a lot about any
investment decisions with the purpose of doing better next time.
potential investment before I make it. Then I like to sit on the decision before acting.
___11. I believe in Mark Twain’s comment, “If
___ 5. My investment style succeeds because I
you find yourself on the side of the majority, watch out!”
can accept my write-downs and move on. believe your first loss is your best loss.
___12. I prefer safe down the middle type
I
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investments that are common practice in the marketplace. GE is my kind of stock.
Classify Yourself Based on Your Score:
___13. Most investments are a gamble. The key is to gamble right. I can live with that.
Type A Investors: Your odd and even totals are each greater than 5.
___14. Good research delivers good investment
Type B Investors: Your odd total is greater than 5; your even total is less than 5. . Type C Investors: Your even total is greater than 5; your odd total is less than 5.
results. ___15. If I find a winner, I like to ride it all the
way up. ___16. If I find a winner, I like to sell a piece of
it to cover my initial investment and lock in an immediate profit. ___17. For the right deal, I am ready to take a
shot. ___18. I have trouble trusting other people to make my financial decisions. ___19. I like to buy individual stocks.
Type D Investors: Your odd and even totals are each less than 5. Type A Investors: Active & Risk Oriented. These investors are entrepreneurial and aggressive. They seek out high growth companies such as a Microsoft, Dell or Starbucks in their early days. They like in-fashion investments like the old Internet craze because of the upside; they are willing to accept several individual stock crashes in the quest to land the next big thing in a major stock hit.
___20. I like to buy funds not individual stocks.
Scoring Your Responses: Total the number of odd numbered ques tions you have checked_____. Total the number of even numbered questions you have checked_____.
Tip
These investors tolerate dips and depressions in the financial markets. But during the down markets they usually sell out and move to the sidelines until a hot market re-emerges. Sideways or slightly positive movements in stocks have no appeal for them. Many of these investors moved over to the com-
Life is like a horse that throws you. Successes just get back up and try it again. Failures whine about being thrown!
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mercial real estate market, for example, when the stock market went flat from 1966 to 1982. They tend to own small cap NASDAQ stocks, as well as large cap growth stocks. They like investment property and often dabble in options and futures accounts. These people like to do all of their own investing. Type B Investors: Passive and Risk Oriented. These investors have a similar profile to Type A investors but leave the investing up to professional fund managers. These people get very nervous doing their own investing. However, they bounce around from one fund to the next, seeking the next hot sector, hot concept or hot fund manager. Type C Investors: Active and Risk Adverse. These investors want to invest for themselves like Type A investors, but are almost the opposite when it comes to their risk profile. They like cautious safe conservative investment vehicles. They may move their money around quite a bit between activities, like Investor A types, but in very different kinds of investment vehicles. They tend to like bond and income mutual fund instruments. They feel most comfortable with bonds, CD’s, and liquid real estate investments. They don’t really feel comfortable with stocks, even the large cap bluechip ones. Type D Investors: Passive and Risk Adverse. These investors have a similar profile to Type C investors but leave the investing up to professional fund managers. These people get very nervous doing their own investing. Investor Type Summary Understanding fully your own attitudes towards risk and approach to money management should guide you more effectively in the process of developing a Survival Plan right for you. You must feel secure in your own style so when you hit the inevitable potholes in the road, you can live with them psychologically, stick with your investment www.simplymedia.com
plan, and ride out the inevitable storms that hit every decade or so in all financial markets.
Your Attitude Towards Money This section addresses your attitude towards money. This is usually formed indelibly by your first experiences with it. To become secure with your investment style, you need to come to terms with your memory about money, deal with your fears on the subject, and then work to get control of them. Survivalists, however, do not try to change their memories. They do not rely on their ability to overcome their basic fears on the subject; they try to; but they don’t bet on it. The Survivalist concept states that when times get tough, people revert to old form, and this includes old memories. We believe you should understand your memories in order to live comfortably with your new plan--so you don’t get spooked off as so many people do in bad times. This is also going back 26 centuries to the honored tradition of the Delphic Oracle inscription, “Know thyself.” The Delphic oracle had two other inscriptions, neither was about “Change thyself.”
Ageless Wisdom
“Know thyself.”
Thales of Lindus, 6th Century BC The second of three inscriptions on the Temple of Apollo at Delphi, in Ancient Greece.
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both your good and bad feelings about the subject, and then determine how they effect your attitude towards financial planning.
The attempt to change oneself is always a difficult proposition at best. It is more subject to failure than success. Being knowledgeable about this dilemma coupled with attempts to “know thyself,” will prepare you to avoid the more troublesome problems associated with your investment personality. This is a more cautious approach than many best sellers on personal finance. But, we believe, the quest to change yourself in major ways while admirable is rarely accomplished and causes tons of stress to individuals along the way. If you do change yourself for the better, all to the good. But don’t bet on it, a key refrain of a Survivalist. Play the Odds. Survivalists play the odds, try to learn one’s own shortcomings, but not overplaying our hands by counting on reforming. As in dieting, we all hope to cut back but few of us really do so in the long term. Survivalists are realists and plan to do the best they can with what they have. If you reform, wonderful. If not, you will be OK too. So relax and read on!
Memory Memory. Most people’s attitude towards money and behavior surrounding the subject stems from their early experiences with money. As a Survivalist, you should examine these memories to learn more about how you truly and deeply feel about the subject. To do so, you must liberate your early memories, examine them, identify
Savings is like Chastity
Effective Survivalists Are Skeptical About Change. Survivalists applaud the effort of those who try to manage these feelings and transform them into something positive. But you should remain skeptical about reforming oneself. People tend to be willing to change in the salad days of rising markets. But in a downturn, most of us revert to form, abandon our good intentions, and fall back into our old bad habits. On the other hand, exploring your memories and trying to understand them is a worthy effort and sometimes can lead to good results by providing antidotes and remedies for our ineffective tendencies. Make a list of your memories based on your own and some of the following questions: Earliest Memory of Money. What remember about it specifically?
do you
> Did it make you feel powerful? Vulnerable? Worried? Secure? Safe? Important? Strong? Powerful? Something else? > What were your family influences? What were your parents attitude towards money? Savings? Work? Retirement? Allowances? Other money related subjects? > What incidents do you recall specifically? Most people recall one or two early profound experiences that formed their attitude towards money, work, savings, and related subjects. Evaluation. Write your thoughts down. It often helps to talk with siblings close to you so you can discuss and define your family’s attitude
Most people like to respect it at a distance.
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towards money and how it effected them too. Seeing how they are dealing with money and related issues may open an important window in your mind to gaze upon the subject.
Fears
Audio Two: Intimidation, Slippery Slope to Poverty Fears. Early memories are generally the ones that cause you to develop the fundamental fears about money and all it represents. Once you identify what they are from examining them you are on your way to control. Control. Controlling your fears is about uncovering them, coping with the revelation, and then combatting them. A Survivalist knows, however, that in tough times most of us revert to old fears no matter how hard we have worked to irradicate them.
your Survivalist plan will carry you through. Stick with your basic investor profile. Bank on it; invest upon it. Recommendation. Suze Orman’s book The 9 Steps to Financial Freedom suggests a number of wonderful approaches for dealing with your early memories, fears, and control techniques. We recommend you read her book and/or listen to her audio tapes. With all due respect to her confidence and optimism, we suggest you make the attempt, work hard at it, but don’t bank on the results. Keep your backup investor type plan working for you so you do not choose a new style that may become uncomfortable in hard times and cause you to abandon all your plans in the rush to conform to the dominant negative opinions of the time. In a tight corner, most of us revert to early behavioral patterns. Don’t bank your Survivalist plan on being in the minority though it is certainly worth the effort to try to reform. PS. If it was this easy, everyone would be rich--is our credo!
So, first we work to identify them; then we move to understand our fears; finally we attempt to control them. But, to quote an early American philosopher, Mr. Dooley, we trust everyone, including ourselves, but we still need to cut the cards! In other words, we hope for the best but prepare for the worst. Summary. Early memories dominate our thinking as the first great psychologist, Sigmund Freud, said. He also said, interestingly, that work was the ultimate therapy. We concur and agree. We want you to deal with your early memories, identify your fears, and try to control them. But at the same time, Survivalists should behave as if they will not succeed in these attempts during tough times. If you do overcome them, all the better. If you don’t, relax, 15 www.simplymedia.com
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Your Personal Financial Situation
Audio Three: PMI Thinking
People have a much easier time making money than preserving it. Consider how few family fortunes last even two generations. Almost none make it three or more despite the best financial planning. With this perspective in mind, don’t feel badly that you find the preservation of capital a daunting task. We all do. You are in good company, or at least a large company! Now that we have identified where you fit in the lifestyle cycle, your investor type, and dealt with your own insecurities, you should now move on to analyze your own financial situation.
Personal Financial Statement This is the statement required for house mortgages and many other loans, including an abbreviated form for credit card applications. It is no more than a statement of what you own, called assets, what you owe, called liabilities, and the resulting difference, called your net worth.
Savings
Preparation. The preparation of your statement is an ongoing process. It is your financial report card that tells you how you are doing now. Comparative statements over the years help you diagnose problems, identify opportunities, and help guide you to do a better job in the future. They are handy tools to keep on hand. There is another copy, by the way, in Appendix III. Category Definitions Used in the Statement. The categories in this Survivalist personal financial statement have been combined in the spirit that less is more. Each category can be split out into numerous sub-categories. We have not done this because it becomes daunting and of little practical use for planning purposes. Therefore, we have opted to combine similar categories such as cash, checking, and money market funds on the asset side and all other loans on the liability part of the statement. Bills owed or due in a normal 30 day cycle have been eliminated since these belong more properly in an income statement. Child support and alimony have been included as long term liabilities as opposed to being removed to an income and expense statement because the obligations are essentially fixed and of a long term nature.
“Savings are what you pay yourself; the rest is just getting by.� Deaver Brown, Investing. 2001.
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Personal Financial Statement What You Own (Assets) These are divided into easily sold items (current assets) and those that take time to sell and liquidate (long term assets). Short Term Assets Cash, checking, savings, and money market accounts $_______________ Mutual funds (No deferred savings accounts included) $_______________ Publicly traded stocks & bonds (No deferred savings accounts included) $_______________ Life insurance cash values $_______________ Precious metals, jewelry, paintings, antiques $_______________ Total Short Term Assets: $_______________ Long Term Assets House Other real estate (second house or other property) Private or restricted stock & partnerships Equity value in a small business (if not counted earlier as private stock) Total Long Term Assets
$_______________ $_______________ $_______________ $_______________ $_______________
Total Assets (Short & Long Term)
$_______________
What You Owe (Liabilities) These are divided into immediate debts (current liabilities) such as your monthly bills and those that are not due for at least a year (long term liabilities) such as a house mortgage. For purposes of comparison, we have eliminated all bills that are due in the ordinary course of 30 days just as we exclude your normal income for that period on the asset side. Instead, we ask you to focus on those short term bills due in more than 30 days but less than one year. Short Term Liabilities Credit Card & Other bills over 30 days past due Principal due on car, installment, or other short term loans) Total Short Term Liabilities:
$_______________ $_______________ $_______________
Long Term Liabilities House mortgage Other real estate mortgages) Other loans (e.g. student, investment, notes) Child Support/Alimony totals Total Long Term Liabilities
$_______________ $_______________ $_______________ $_______________ $_______________
Total Liabilities (Short & Long Term)
$_______________
Net Worth: (Difference between Total Assets and Total Liabilities)
$_______________ 17
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ple, memorable and workable plan that gives you a chance to get stuff done.
Summary. Your personal financial statement is your report card. Be tough on yourself with regard to both assets and liabilities. It is similar to a company taking a one time write off. Once you get it out of the way, you can concentrate on the future and reward yourself accordingly. In our opinion, for example, putting child support and alimony in the long term liability section can be initially intimidating because of the substantial obligation on paper.
Avoid discouragement. Otherwise you fall into the trap of trying to do too much too soon which in every activity winds up being impractical and discouraging. One doesn’t start skiing on expert slopes, begin math with calculus, or long distance running with a marathon. Don’t try it in financial planning either.
On the positive side, each of these payments gets deducted from the long term liability side and improves your personal balance sheet accordingly. Similarly with other loans, each payment usually reduces the principal balances which improves your balance sheet. It is very satisfying to a Survivalist to witness the positive impact of these monthly payments upon their balance sheets.
Start slowly. All training advice would suggest you build up to your goals over a long period of time; advice as to personal financial planning is no different. As Woody Allen said, “I wanted to become a concert violinist until I learned I had to practice.” You need to take small steps at first and move forward slowly. Each step will help your plan. The worst advice in any new endeavor is to try to do too much too soon.
And, as a good Survivalist, pat yourself on the back for these payments. On a personal note, once I put my child support payments in the long term category, I could applaud the monthly payment of $1850 bringing down my indebtedness rather than just being another monthly expense. Similarly, each mortgage payment drives down my principal balance on my house.
First step: the two year plan. Stretch goals in any activity tend to discourage participants in the early days. With this in mind, a Survivalist should take the cautious step of starting with a simple straightforward initial two year plan.
Your Financial Goals
Video Three: Is it Harder to Earn or Keep Money?
Avoid complexity. Most initial plans are so complicated and overconstrained that you need to take a nap before even reading half way through them. The largest challenge is to simplify your goals enough so you can create a sim-
This will provide you with enough progress and emotional support to get your plan rolling, orient your habits towards positive financial steps, and lay a solid foundation for a longer term plan for you to implement at the end of the initial two year plan. After you have successfully launched your training or two year plan, you can work towards a five year plan that should precede your final plan to take you to 75 years old. Each plan should be viewed as a rung on a ladder. First plan is the hardest. The hardest step is always the first. So respect the two year plan as the beginning of your training and long term planning.
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The Two-Year Good Habit PLan
Audio Four: Medium Term Thinking
Your major objective in the two year plan is to develop good habits for the long term. If you were to compare it to dieting, you would work on eating less rather than specifically changing the types of food you ate. In other words, no gimmicks here. Just solid financial planning without putting undue stress on yourself as you begin to develop good financial habits. Alignment with 11 step plan. The next step in implementing your good habit plan is to get yourself in alignment with as many of the 11 steps as possible without placing undue strain on yourself. At a minimum, be sure you are not actively working against any of the 11 steps even if you can’t get them all working for you in the initial two year period.
Career Strategies Survivalist Step One: Invest In Yourself. A
few simple steps can be taken to make you more productive in your work and career: Library. Familiarize yourself with your local library. Checkout three books in your field and
read them in your spare time. Most of us spend a lot of time waiting at service providers, in other people’s offices, or just waiting for friends and family. Use this time effectively by having one or two of these books available to read. Action Item: Put one of the books in your brief case and another in your car. The advantage of library books is you can dabble in ideas without having to commit to the expense of ownership. It helps you think outside of the box. This is especially important in your career with so many things changing quickly in the world. The next big thing is out of the box; try different stuff at the library and it will stimulate your thinking. Audiotapes. Most libraries have them. Many video stores do as well. And, there are several good audiotape clubs with very cheap initial membership offers. Instead of mindlessly listening to the radio while stuck in traffic, listen to tapes and enjoy a learning subject. You can vary the experience by listening to novels, non-fiction in different subjects, or mysteries. Don’t restrict yourself to self-help financial or career subjects. Try a lot of different things. Ebooks. Our books are on peanut press.com. Two bright young guys realized that lots of us travel passively on planes with nothing inter19
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esting to read but airline magazines and newspapers. They came up with “ebooks”. A very cool idea if you travel a lot. Simply Media is now making printable books too. See Simply Media.com. Bookstores. Browse and buy books that really interest you. Dabble in the library; buy in the stores. Financial books by people such as Jane Bryant Quinn, Sylvia Porter, John Train, and Venita Van Caspel are always good to own. Many other books are equally good in this field where no one has a monopoly on insights and knowledge. Night Classes. Most communities have some form of night classes in areas that could further your career and financial self-awareness. My experience in teaching these classes is that the students are wonderful because they are selfmotivated, interested in learning, and bring a wide variety of information and experience to class. Survivalist Step Two: Ask Your Boss.
Tell your boss about your plan and ask what you can do to help more at work. You will stand out immediately. Less than one percent of people who have worked for me have ever asked me or their immediate boss what they can do to help. In fact, most employees hired specifically to help their bosses don’t do this either. Trivial tasks. Ask about what small tasks need doing. Most bosses these days are reluctant to ask subordinates to do trivial tasks that might help them get their own job done due to political correctness in all of its varieties. Small errands are such a task. Be their go-to guy for these tasks and you will go a long way. At General Foods, I asked my sales boss what I could do to help on a frequent basis. Our district was up against a sales crunch with one day left in the quarter to meet our numbers and the District Manager had to be on hand to deploy www.simplymedia.com
people and get the numbers in. I asked what I could do and he said go out on my key account route. He suggested, that along the way, could I get his company car inspected because it was the last day and so on and so on. I said absolutely; gave him my car; off I went. It was the most productive thing for the company to keep him at headquarters; it was little trouble for me; and I earned his undying respect for not being a twit and “above” the work needed to be done. Timing. Ask about what you can do about your own work schedule that might help your boss and the company. This may just mean an earlier start time, a different lunch hour, or a later departure time. It may also mean he or she might like reports or meetings at a different time. This question will inspire them to think about how you can contribute to the company. Their response may well be to give you added responsibilities, refocus your job to something different, or merely let them confirm you are already on the right path. Any of these results will be good for you, your boss, and the organization. Important Tasks. After you have established yourself as willing to do the trivial tasks, and willing to adjust your schedule for the benefit of your boss and company, then the important tasks are more likely to be assigned to the “reliable” you. They will want you to succeed because you Personal Finance & Investing Survival Kit
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positively contributed to the organization in small but important ways. Step Three: Work Two Extra Hours Per Week.
Do this several weeks or months after you have implemented step two and you have demonstrated your ability and willingness to do those tasks named above.
ficial “union” rules. The best way to deal with this is to speak quietly with your boss and explain you don’t want to be caught up in those kind of politics. Ask him or her not to use you as an “example” to admonish others; but you would appreciate recognition upwards. This approach inoculates you from peer group attacks as well as assures upward notice.
Investment Strategies Then tell your boss you want to renew your commitment to your job and work an extra two hours per week. Don’t commit to this larger step until you have privately and publicly succeeded with the above steps. Otherwise you would be putting too much of an initial burden upon yourself. Most people find that making the transition to becoming more responsive to their boss and company hard enough. Don’t risk stretching the limits. You have plenty of time left in your two year plan to get this step started. Timing. Ask your boss if any two particular hours would be helpful. In seasonal businesses, it may be a few entire days during the busy season. In other organizations it may just be for you to be identified as the on-call guy when an extra hand is needed, a wonderful place to be when people are considered for promotions and raises. Also, in downsizing, they rarely terminate the go-to guys! In fact, in downsizings, the company needs the remaining staff to step up rather than be recalcitrant or grim. Who better to keep around than Mr. or Ms. Positive who steps up at work. This is some of the best job security you can buy for yourself. And it will be well deserved and not some gimmick. You have stepped up in good or normal times. You have committed to extra work at peak load times. This kind of employee is always a prized one. Caution. Some of your peers and co-workers may not feel so pleased about your positive attitude because you are breaking the unofwww.simplymedia.com
Audio Five: The First Stages of Investing
In your first good habit plan, do not attempt to be too aggressive in this area. You have enough other steps to work on. You do not want to get unduly discouraged by trying to do too many things at once. Results come from concentration, not from being busy on numerous fronts. Step Four: Buy a House or Condo.
If you already own one, keep owning it! If not, see the “Housing” chapter under the Planning section to learn more about the subject and take the first ownership step if you can.
Video Four: Where to Start
Step Five: Invest To The Max In Deferred Savings Accounts.
Do this right away. Check out the “Deferred savings” chapter in the Planning section for more details about your choices. You have up to Personal Finance & Investing Survival Kit
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nine choices not all of which anyone qualifies for participating in. Continue Plans In Which You Are Enrolled. Invest to the max now in all plans in which you are currently enrolled. New Plans. Explore and try to enroll in any plans you could qualify for. Step Six: After Your Mortgage is Paid Off, Invest The Payment Amount in Growth Stocks or Mutual Funds.
This step is usually not available to most people until later in their planning cycle. Even just a few years of these investments can make a huge difference for your retirement years. This step usually becomes available in your stretch run, after your kids have gone to college and are out of the house. If you don’t have children, nor plan to have them, you can do this far earlier than other people can. If you can take this step, max out your deferred savings accounts first with the extra payment available to you. Put money into the kinds of stocks or funds that conform to your investor type. Payoff Punch. After all of your financial work, this is the payoff punch. Now you can move from defensive debt elimination to positive investment growth. Make the most of this offensive opportunity.
Start right now and put your records in order going forward. By the end of the two year period, if you do this, you will have most of your records in good form--and far better than most people’s. Home Safe. Get one. Get a fireproof home safe cemented or permanently fixed to a floor where you keep your key records. Bank safety deposit boxes have all kinds of legal entanglements that come into play exactly when you need to get at them (e.g., upon the death of the boxholder). In a crisis, such as a death or disability, it is often a godsend to have these records available at home to review privately. Prune Your Records. Only keep what you must. In an IRS or legal examination you must produce all records under your control and custody as well as in your possession. If you don’t have them, you are not required to produce them. Be sure you only keep what you need. Unless you have made questionable IRS deductions, you may not need to keep all of those documents either. See our Tax Survival Kit for more advice on this subject.
Debt Elimination Strategies
Video Five: Investment Versus Expenses
Step Seven: Good Record-Keeping.
Good record keeping takes time to master. Many of us never do. Start in this two year period and be patient with your results. It is not an easy task for most people. Even the best of accountants often have their personal financial files in disarray.
The next three strategies are defensive and address debt elimination. As in championship series in sports, a great defense usually beats a great offense. It is no different in financial planning.
Start Now. It is always hard to go backwards and reconstruct records. Don’t try this feat.
Few Survivalists have any complaints who have no debts but own their own house and have
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invested to the max in their deferred savings accounts. Many people who own tons of assets are beleaguered by their accompanying debt, especially in troubled economic times when they are often forced to liquidate good assets at market panic prices (e.g. 1974; 1982; 1990, 2000, to name a few recent times). Step Eight: Pay Cash For Your Cars.
Effective immediately only replace one of your current cars with one you pay cash for. This generally involves buying a good used car as opposed to a new one that depreciates 20% or more the day you drive it off the lot. Delay Buying. Since cars depreciate or go down in value, you always save money by delaying a purchase. As your car gets older, excise taxes, insurance, and other costs tend to decline. Even repairs tend to go down since people tend to be less concerned about minor cosmetic or tuneup problems as their cars age. Jiffy Lube is enough--and it is plenty good and highly recommended! Buy Used, Not New, Cars. A used car has depreciated down to approximately what you pay for it. A new car loses money the day you drive it off the lot. Your total investment in a good used car need not exceed $10,000; $15,000 can buy you a good BMW or Jeep if you wish a higher end vehicle. No New Cars. At least drop the new car habit for these two years while you get your plan in order. Step Nine: Pay Off All Other Debt. Mortgage, home equity, and current car debt are not in this category. If you stick to the two year good habit plan, you will pay off most of your car debt in that time and make some progress against your mortgage and/or home equity debt.
“Give a pledge or surety, and trouble is at hand.”
Ageless Wisdom
The third of three inscriptions on the Temple of Apollo at Delphi, in Ancient Greece. This important step of paying down “other” or junk debt should be done in the good habit period, even if you have to use some of your savings to do so (but not any from deferred savings accounts). These debts include credit cards, installment loans, student loans, personal loans, and anything else outstanding similar to those. List Them. Make a clear list of each debt and your plan to discharge them over the next two years, if possible. Use a Debit Card With a Mastercard or Visa Feature. Replace all your credit cards with debit cards. This means if you don’t have the money you can’t spend it. Good. No New Credit Cards. OK, if you can’t part with your beloved credit card (s) in the good habit period, at least don’t get any new ones. You can’t throw out every bad habit at once. If you must hold on to a credit card, do so in order to stay on the plan. Step Ten: Finance or Refinance Your Mortgage For 15 Years. This is a bold step.
Don’t take this step until you have conquered the nine steps above. Once you have done those, do this immediately. If you can swing the slightly higher payment sooner, then consider doing it as well. Payment. The 15 year mortgage has a lower interest rate but higher principal amortization or 23
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reduction due to a shorter period of payments. The bonus is you only pay 15% to 20% more per month but eliminate the entire payment in half the time, 180 versus 360 months. The day you get these payments behind you is the moment you can move from defensive debt elimination to positive investment progress. Shop For The Best Rate. It counts here. Work hard to get the best deal. Don’t Overcommit. If this feels too tight on your budget, get your other ducks in a row first. You can wait two years on this, if you feel more comfortable getting the rest of your life in order first. Nothing stops you from making extra payments immediately to your mortgage holder, earmarked for extra principal paydown. This has the same basic effect without having the extra benefit of a lower interest rate on the whole loan.
nest egg with personal guarantees or investing money needed in the first ten steps, you should be fine.
Summary
Video Six: Extra Money
You have now reviewed and accepted the concept of the eleven step plan. You have observed how you fit into lifecycle categories; analyzed your financial profile; identified your investor style; written down your personal financial statement; and committed to your two year good habit plan.
Final Strategy, Step Eleven: Have Fun!
This is what you have been working for. If you get the other ten steps in order, have fun with the rest of your money. Unless you start the plan in your late 50’s, or wish to live the baronial life of Donald Trump, this plan should provide enough capital for most people. If either is the case, you will have to extend your investment activity beyond the ten steps listed above. Otherwise, you are free to play around with your extra dough! Risk of Wanting More. My worst investment errors have come from wanting “more.” The Millionaire Next Door describes eloquently the positive power of spending less, keeping investments under control, and being respectful of your money. Entrepreneurial Activities. A perfect place to seek more for those who must do it. Just remember the third inscription at the Delphi oracle, which in modern terms means give no personal guarantees which inevitably lead to enormous trouble. As long as you don’t risk your www.simplymedia.com
This has been a ton of work. It concludes the getting started stage and is an enormous accomplishment once you have completed it. Take a bow if you have done this! Next Steps. The next steps are less important because you will have momentum on your side. The hardest steps are the first. As a result, and we repeat, don’t try to do too much too soon. You need to stay energized so you will remain on course. The Foundation. The two year good habit plan is like the foundation of a house. If solid and well built, the house will stand a lot of stress and storms. If not, the first winds may blow down the garage I have seen it happen, literally! The Horse of Life Will Throw You. Life will have its setbacks. You will get off plan: you will have unexpected problems and expenses. This is natural. Success comes from sucking it up and getting back up on the horse again. 24 Personal Finance & Investing Survival Kit
Chapter Two
Saving 3. Spend extra time at work getting stuff done. Demonstrate your commitment to your
job. The sales person who makes the last call and sends out the extra information is the one who prospers. If your current employer isn’t delighted and appreciative, your next one will be. 4. Get stuff done at work. Be the go-to guy
who gets large and small things done at work. 5. Support your boss and company. Don’t
Video Seven: Long Term Thinking
get into back biting gossip no matter how tempted you are to engage in this pleasant activity of complaining. Being negative is contagious. It makes you a “sick” worker. The only cure available for sick workers is termination by their employers. 6. Ask your boss what you can do to help.
Be sure they are sitting down when you try this approach. They may never have heard this before. Ask, listen, and do it.
Quick Tips 1. Your career is your number one investment. Don’t start day trading and watching the
stock tables. Invest for the long term, 10 years or longer as Lynch and Buffett do, and pay attention to your day job.
7. Don’t try to compete with Jack Welch as an executive or Warren Buffett as an investor. Set reasonable goals for yourself.
Grandiose ambitions only lead to discouragement. Just try to get small stuff done each day.
2. Upgrade your career skills constantly.
8. Refinance your house with a 15 year mortgage. A 15 year mortgage liberates your
Read books; listen to audiotapes; attend lectures and night courses; ask questions at work; and reflect upon your subject matter in detail.
largest asset debt free in half the time of a traditional 30 year mortgage, for just 15% to 20% more per month. A genuine financial bargain.
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9. Deposit unexpected bonus checks directly against the principal on your mortgage. Don’t even let the check hit your bank
account--and be tempted to spend it elsewhere. Pay it over to your mortgage company and be done with it! 10. Use payroll deductions for your deferred savings accounts. This generally
reduces your taxes immediately while it avoids the temptation of spending the money today. 11. Deferred savings accounts often put you in a lower tax bracket. Less taxes and
more money in your investment accounts is always good.
money on the wild side, consider one of this guy’s deals if he or she has a proven track record-which will include a few ups and downs. Invest only what you can afford to lose. 16. Investigate companies that sell great products at moderate prices. American
Power, Best Buy, Costco, Dell, GE, Home Depot, IDG Books (“For Dummies” books), Intel, Microsoft, McDonald’s, Pfizer, Starbucks, Target and Walmart come to mind for review and consideration. 17. Screen prospective companies for consistent stock buybacks. Consistent stock
In most cases, other than the Roth’s, you don’t have to pay taxes until you withdraw the money. In the meantime, your investments compound tax free.
buybacks means the firm is making real cash profits, is shareholder oriented (not just trying to get bigger for bigger’s sake), and probably won’t diversify into something stupid. Citibank, GE (they are continually acquiring related companies), IBM, and Walmart (growing quickly but still taking care of shareholders through stock buybacks).
13. Only invest in stocks you think will be big and alive in 25 years. Avoid companies
19. Generally avoid companies with lots of stock options for executives. Lots of stock
with unpronounceable names or on the bleeding edge of technology. Stick to nice solid Peter Lynch and Warren Buffett stuff like Coke, GE, Gillette, and Walmart on the large size and American Power, Home Depot, and Starbucks on a smaller scale.
options usually means the value is in the people not the corporate franchise. This indicates risk. Companies that come to mind are most high tech companies, including Cisco and Microsoft but not Dell or IBM.
12. Even if deferred savings don’t put you in a lower bracket, you still save tax money.
14.
Avoid speculative stocks. Speculative
stocks are for speculators, who invariably lose over the long term. A speculative stock is defined as one that rises on buzz, not earnings or cashflow. Amazon and most Internet companies are therefore speculative. Companies such as GE, Intel, and Microsoft have risk due to high P/E’s but they also have very solid earnings and cashflow--so they are considered “growth” and not speculative stocks. 15. Keep an eye on that genius entrepreneurial friend. If you want to put a little
20. Sell formerly great companies that have lost their way. AT&T, all department
store chains, GM, major non-specialty primary metals companies, HP, Reebok, and Sears come to mind. A few come back momentarily such as Apple with their Imac, but most do not and those that do, like Apple, usually sink again. Don’t risk your money on this group 21.
Picture your plan in 25 years. Your
house has been paid for; your investments are cooking, and you are having fun. Let this picture inspire you to greater efforts! 26
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Your Career Your Number One Investment
Your Current Job Video Eight: Planning Your Career
Your career funds all of your other investment activities. Survivalists protect their careers from encroachment by outside activities, family needs, and other considerations secondary to their job and career. In today’s less rigid and more politically correct workplace, many people forget the same old rules apply to the workplace: you were hired to get stuff done, not cut corners, and certainly not to over-negotiate with your boss or company. The politics of the modern workplace means employers can say and do less to manage and control employees. This means that employers fear their employees more and terminate people on many occasions without giving overt signs as to their prior dissatisfaction. In other words, the modern employee has much more protection in many ways than even ten years ago. But these gains come at the expense of employer candor about their situation. This means fewer early warnings about problems they may have with you. So stay alert!
Most employees are pegged by their company and people within 30 days. You are subject to the same classifications which range from also rans and so-so’s to stars and fast trackers. Over time, people can move up somewhat in this hierarchy. But if you have been stuck with an also ran or so-so label, seek another job if you want to really move up the ranks and will work to earn a better label. In the meantime, use four survivalist career rules in your current job: 1. Keep learning on and off the job. 2. Work two extra hours per week beyond the norm. 3. Ask your boss at least twice a week what you can do to help him or her and the company in general. 4. Ask your boss every three months how he or she defines your job, what you can do better, and what you should stop doing. Your next move should be to observe how others relate to your stepping up to bat in your job. As the stars and fast trackers observe your improved performance, they will be more willing to assist you in the next six steps since you will now seem to be one of them, if you were not already so before. 27
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1. Learn from the stars in your company. Company stars generally share skills, talents, and abilities. Identify what these are. If these traits are similar to your own, fine, develop and build on them. If not, seek another situation where your talents are more in line with the organization’s stars.
firing these kinds of people, my fellow employees and I could never find out what they did all day long except to complain, do irrelevant activities, or do personal things on the job. These people are sick employees who, to quote Robert Townsend from Up the Organization, get progressively sicker.
2. Talk with the stars. Find out what they did to get where they are. You will often have to seek this information indirectly because some will not wish to share their trade secrets and others just do it instinctively. Learn what their plans are and try to get on their team and network within the firm. If you succeed at this, some of their stardom will rub off on you.
6. Don’t ask for “more,” to do less, or other special privileges. Some employees make a practice of catching me off guard to try to get special dispensation. They want more, to do less, or get something special. Since they learn how to grab you on the way out the door, or in the midst of something, they often succeed in getting the quick brush off “OK” just to get rid of them. But both the approach and the result is deeply resented by the boss. Take it from one. Don’t do it. Ever.
3. Get stuff done. Back to square one: make things happen. Keep your in box, e-mail, and task list clean. This applies to both large and small stuff, but especially those things that others must work on next such as sending out a check, invoice, or document; getting a contract closed or internal memo signed; and other similar participative things done that timeliness will tag you with stardom and lateness with being a roadblock to performance and progress. 4. Contribute at least one new idea per month. They hired you to help not go along for the ride. If you aren’t tossing out new ideas to make progress, you are square in the middle of the downsizing list. 5. Don’t say you are “buried.” To an employer, the first sign of a sick employee is one who says they are “buried.” Being “buried” is a mind-set and a short term defensive approach to taking on less work. It also means you are immediately tagged as the person not to go to--since complaints will be everyone’s punishment for talking to you. After
Negotiations
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Your Next Job A Survivalist can put his or her career plan to work more easily in a new job where you start with a clean slate. You can search out companies most compatible with your strong points. Then you can launch your relationship with your new boss using the Survivalist approach of supporting your boss, your company, and going the extra mile at work to get stuff done. Job Search process: write your plan down. Your first step is to develop your job hunting plan and write it down. Job hunting research has proven conclusively that the most successful people write down their career plans before launching their search. Their commitment to putting things on paper (or computer) helps people clarify their goals, broaden their search, improve their networking among friends, acquaintances, colleagues, peers, and former employers. Your technical skills. Write down what your tech-
An event in which the parties try to resolve differences.
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nical skills are in detail. Inventory your computer skills from typing and editing, to working with specific programs such as Act, Acrobat, Director, Excel, Goldmine, Quark, Quicken, Quickbooks, Word and so on and so on. Consider how to improve your skills as well as emphasize your intent to do so in your resume and job interviews. Can-do skills. Write down what you can do well and be specific with illustrations. Sell? Produce? Execute? Motivate? Lead? Think? Routine work? Plan? Strategize? Projects? Emphasize the critical few. No one will expect you to be the renaissance man. He died in the renaissance. What work will you do? The dilemma for employer and employee alike is “will do” skills. Most interviews revolve around prospective employees trying to please the interviewer about what they “will do” without recognizing that if they won’t do it the job will be miserable at best and the candidate will be fired at worst. To get the job, many people will promise the interviewer what they want to hear. While this is a decent short term strategy, it is a horrible long term one. From day one on the job you then must duck and hide from the work you were hired to do. Your peers and bosses will be angry because you won’t be carrying your load. And, sooner or later, some justice will catch up with you and it won’t be pretty! Be Realistic. If you won’t do it, be upfront about it so you are not hired into a job you will find miserable and where, at best, you can be an also ran and at worst quickly terminated. Tip: Only select job interviews for work that you will do willingly. Have others evaluate your plan. Have several people review your plan. What may seem obvious to you may be questioned by them; they may also suggest many improvements, new areas to www.simplymedia.com
explore, and challenge your opinions of your estimation of your strengths and weaknesses. In my job counseling experience, most people underrate both their strengths and weaknesses. Other people can help you clear away this debris and eliminate the misdirection from your plan. Temperament. In my experience, the most important qualification for a job is the candidate’s temperament. If you are a stickler for detail, marketing and selling will rarely work since much of the work is by its very nature vague, disruptive, and disorderly. Similarly, if you are not naturally neat and orderly, accounting and fulfillment tasks can almost never work out. As I have counseled numerous entrepreneurs, for an example, if you are not comfortable with ambiguity, don’t do it. Period. The Interview. Your prospective employer is seeking someone who will do what they need done. All too many people try to con the employer, get the job, and then don’t realize why they are so miserable in the job--they didn’t or couldn’t do what they said they could and would do! Then they try to make their employer appear like the boss in Dilbert! Resolve this potential difficulty by only interviewing for jobs you will do. This may seem simple and obvious; but, it requires a lot of candor on your part in your search plan for you to identify what you won’t do. For example, if you don’t like talking to people, don’t look for a people oriented job such as selling or customer support. If you don’t like detail, don’t seek an administrative or accounting job. And so on and so on. Your Interview Mission. In your interview, tell the interviewer you want to find out exactly what the job entails so you can be sure you will do it. Then honestly discuss whether you will do it or not. Discuss the pluses, the minuses, and the interesting points about the prospective job. 29 Personal Finance & Investing Survival Kit
Most interviewers have already screened out those who clearly lack the technical or can do skills. The interview is all about “will do” attitudes, though not many interviewers realize how simple (yet hard!) this point is to uncover with prospective interviewees. If it is the right position. If it is a will do job for you, your obvious enthusiasm will inspire the interviewer to lean in your favor because of your prior candor. Very, very few job candidates ever say, “I really WANT to do this.” You are committed and the interviewer is off the hook. If you say this, you are committed. The interviewer is largely off the hook--if you fail, “hey, they jumped up and down about how they’d love to do this job. Don’t blame me.” You have given the interviewer cover for his or her decision in your favor. This can only help your prospects for selection by them. If it is the wrong position. The interviewer will be delighted with your candor and saving everyone a lot of time and trouble. They will be much more inclined to consider you for another job that would suit your “will do” abilities. In other words, you have not burned a bridge and potentially gotten into a horrible situation. You have left a door open for a future opportunity. Classic Job Candidate Traps: √ Sales job: The employer is seeking a sales person. The employer’s problems are job candidates who don’t want to do sales work but want to do inside marketing where they can avoid the hard sales work. Opportunity: if you can sell, and are willing to do so, tell them directly you will not try to slide in as a sales person in order to move over to an easier marketing position. √ Accounting: The employer is seeking someone to do the work and post the books. The employer’s problems are job candidates who www.simplymedia.com
don’t want to do what they perceive as grunt work but do want to do budgets and planning to avoid the hard accounting tasks. Opportunity: if you can do the accounting, and will do so, tell them directly you will not try to slide in as as a go-to accounting person in order to try to slide over to an easier staff planning position. Pattern. Technology has provided the tools to put more people on the front lines doing stuff as opposed to “administering” the activity. This is why there has been such a widespread downsizing of middle management jobs and corresponding increase in productivity and profits. Employers are looking for more people to do stuff because the former “communication middle management” jobs have been made increasingly obsolete by technology.
Tip: Enhance your career by signing up for line work--on the front lines doing stuff. Staff work is rapidly disappearing since it is a cost and not a profit center. The old marketing staff job, for example, has been transformed into a line alliance manager actively signing up income producing partners for their organizations. Warning: Paper pushing middle management work may seem more appealing than getting your hands dirty “doing” stuff such as making sales calls, posting books, producing product, or servicing customers. However, trends indicate these paper pushing activities are being squeezed out of even the largest firms. Action oriented jobs are in and growing. Get on the winning side here. After You Get The Job Get something tangible done in the first hour on your new job. It may be as simple as eliminating a phone line, a report, or another non-essential overhead item. It may be moving a file, entering phone numbers into a data base, revising a sales Personal Finance & Investing Survival Kit
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sheet, or calling a customer. Make a copy for someone, answer a phone, return a phone call, enter data, whatever. Do something now. Ten Rules of Conduct on Your New Job: √ Never discuss the good old days at your last company. They don’t want to hear it. This kind of talk makes you sound both negative and ungrateful, not an appetizing combination! √ Do not avoid menial work. In the modern downsized gender neutral world almost everyone must pitch in and do some of the basic tasks such as typing, filing, garbage emptying, errand running, and the like. Do what needs to be done and pitch in whenever possible. Remember, they hired you to help them not vice versa. √ Don’t lean on others. Your new employer hired you to get stuff done independently, not to absorb other people’s time. If you lean on others, your employer loses both their productivity and your own. Try to get stuff done on your own even if it is a struggle and takes longer than you believe is efficient. They will appreciate it. That’s what they hired you for. √ Don’t waste time arranging your office space. They hired you to get stuff done not to be an interior decorator. That stuff can wait. Do the work first. As in, right now. √ Adopt their dress code. Dress their way--without comment, especially without jests harmless though you may think them to be. If you don’t like it, you shouldn’t have taken the job in the first place. √ If you don’t understand something, be patient. Every time you say you “don’t understand” or are “confused”, you will inflame them. Assume it is your responsibility not theirs to find out things. They hired you to help not to have to train you, explain things to you, or cheer you up.
√ Don’t complain. Not complaining includes everything from the hours, to the coffee, the boss, your commute time, the office, and anything else that comes to mind. No whining. Keep a “No Whining” sign in your office as a warning. I do - and it is a good reminder for everyone -- including myself! √ Volunteer at work. They hired you to help. Don’t duck after getting the job. Step up and volunteer. √ Support your boss. If you start talking about your boss as Dilbert, you are cooked. Revise your attitude or get another job. Don’t ever go down the Dilbert road. √ Find out who the heroes are in your new company. Find out who they are and model your actions and behavior accordingly. If possible, meet and talk with them too. These rules apply as much to a part time job at McDonald’s as to higher status work. In today’s world, even McDonald’s won’t tolerate negative attitudes. Those days are over except in a few tight union shops - and they are being squeezed hard too. Most major downsizings are attempts by large companies to wring the fat and negativity out of their organizations. The good people are working too hard and long to put up with with negativity and slackers. Don’t be one yourself. Learn from this trend towards positivism and harder work. The convergence of these new attitudes with a robust American economy has been no accident.
You Don’t Say are few ways a man ” “ There can be more innocently employed than in getting money. Samuel Johnson, English Philosopher & Wit
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Your House Your Number Two Investment
Homeownership with a paid off mortgage is the primary way for you to eliminate your biggest expense, housing, in your retirement years. Rent goes on forever. Unless you pay off your mortgage prior to retirement, you will be living the effective life of a renter--just paying a different party, a mortgage company, versus a landlord. Don’t be concerned about your house as a perfect investment. There are always a few better investments than a house. The names Dell and Walmart come to mind. But, those are two names among thousands and are known now due to 20/20 hindsight. Investing in your own house is much simpler and more predictably solid. Over the long run, houses have kept up with inflation and usually done several percentage points better. This is virtually always true if you live in a solid and stable community. If you happen to live in a fast growing place, your house will be in even more demand and your ROI should be quite a bit higher still. Win-win at its best. Forced savings. Monthly mortgage payments include a principal payment which reduces your indebtedness by this amount each month. With a 15 year mortgage, you only have 180 of these payments to make. Although this may seem like a long time, it means if you start at 35 you will be done by 50. Even if you start at 50, you will be done by 65, the normal retirement age. www.simplymedia.com
Tax advantages while you pay. The federal income tax code strongly favors home ownership. You get to write off all of your interest and local taxes paid on your mortgage and even that of most second mortgages or home equity loans. Renters do not get any of these benefits except for a few states such as Massachusetts that favor renters and provide them with a deduction on their state taxes. Tax advantages when you sell. The federal tax code has increased the tax free gain you can earn on your house from $125,000 to $500,000 with only a few restrictions. See our Tax Survival Kit for more details on this subject. Summary. In sum, homeownership provides a forced savings plan that delivers you a major asset without debt upon the final payment of your mortgage. The tax laws favor the investment by providing you up to $500,000 tax free upon the sale as long as a few modest conditions are met.
Downpayment: Getting In The Game As in most things, the hardest part is taking the first step. You generally can not buy a house or condominium without a downpayment. There are a few exceptions but these are rare and usually involve purchasing distressed properties. So for purposes of most Survivalists, you should assume you will need a 10% to 20% downpayPersonal Finance & Investing Survival Kit
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ment to buy your first property. The following are the ten best ways to raise the money. √ Family. Many people get their downpayments from their parents, grandparents, or other relatives. After their investment in your college education, this is the next best investment they can make on your behalf. You can point out to them that nothing will keep your nose to the grindstone and you out of trouble more than a mortgage payment due each and every month. √ Withdrawing or borrowing from a deferred savings account. The new provisions in the tax code regarding deferred savings accounts are becoming increasingly generous with regard to withdrawing money for first time house purchases. See the section about deferred savings in the planning section for more detail. The chapter also points you to the appropriate IRS publications to get more detail. √ Save the money. Save up for the downpayment through aggressive use of your deferred savings accounts that permit early withdrawal for first house purchases. If you max out these accounts, save into normal mutual fund or direct stocks, depending on your investment style. Since your time frame for this type of savings is usually short, you should also consider parking your money in a short term bond or money market fund. This approach will limit the exposure of your principal amounts though they may return less interest or capital appreciation as a result of this more conservative approach.
Tip: If you approach a family member for a downpayment gift or loan, you will increase your chances of getting it if you demonstrate you have already started a savings program of your own. √ Commute further. An extra 20 minutes of commute per day can often save 20% to 30% off a house price. This is often enough for people to www.simplymedia.com
swing the finances to purchase their first house. Don’t take this option unless you must since your day job is the foundation of your investment plan. Long commutes tend to make people arrive late, leave early, and whine more. All career killers. √ Move. Consider taking a job in a lower cost area where you could scrape up the downpayment and close on your first house. This is a risky approach because many people who move into an area on a supposedly temporary basis wind up staying there through retirement. Be sure you want to be there before contemplating this option. √ Buy Down Market. Buy a fixer upper and renovate it. When you buy a junker and live in it for awhile, you can fix it up enough to build equity, turn it over, and move to a step up house. This is a safer strategy than you might think. A little tender loving care can significantly boost the value of a down and out property! For example, if you scraped together $15,000 to $25,000 for the downpayment on a $75,000 to $125,000 house, 10% annual appreciation would give you a downpayment on your next house of $30,000 to $50,000 in a couple of years. Two or three years should turn that trick in most markets. √ Federal Housing Administration (FHA) or Veteran’s loans (VA) Depending on your circumstances and qualifications, you may be able to acquire a house with no more than a 3% to 10% downpayment with an FHA or VA loan. Their formulas reward those who are low to low middle income earners with a prospective house at the low end of your community’s housing stock. For a VA loan, you also have to meet other criteria relating to military service or being related to a military person. √ Private Mortgage Insurance. Private mortPersonal Finance & Investing Survival Kit
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gage insurance can drive down your downpayment requirements to 10% in most cases. You need a spotless credit record to qualify. There are other additional costs; but, this is a good way to get the key to your first house! √ Blended Purchase. Buy from a developer who needs to move his houses. They will often make a deal with you such as leasing with a buyback clause with your lease payments counting towards your eventual downpayment. √. Assume a Mortgage. This is hard to do these days but not always impossible. To pursue this option effectively, notify your realtor that you are looking for such an opportunity.
Your Mortgage: Affording It! Dozens of mortgage options are available to you. Your initial choice is not “for life” as it was only a decade or so ago. Now refinancing is popular with individuals and lenders alike. So your choice should depend most on what is good for you in the near term. 1. Fixed rate 15 year. This is the ideal choice if you can afford it. You only have 180 payments to make, not the 360 under the standard 30 year mortgage, and they are entirely predictable. 2. Fixed Rate 30 Year. If you can not qualify for the fixed rate 15 year one, take this one. You will not get the benefit of the 1/4 point lower interest rate that usually comes with a 15 year fixed rate mortgage, but you can still make extra principal payments to reduce the time of your mortgage.
Warning! “A man builds a fine house; and now he has a master, and his task for life is to furnish, watch, show it, and keep it in repair.” Ralph Waldo Emerson.
the near and medium term due to projected low inflation. 4. Adjustable Rate 30 Year. If you can not qualify for the above three options, consider taking this one. As with the 30 year fixed rate mortgage, you can still make extra principal payments to pay off your mortgage more quickly. 5. Hybrids and Variations. There are dozens of other options. They range from graduated payment mortgages in which payments step over time to renegotiable ones which have their rates adjusted at periodic intervals. There are also balloon notes available from some private investors. Only resort to these kinds of loans if your circumstances do not permit you to get one of the basic four fixed and adjustable mortgages listed above. If you decide to accept a hybrid or variation mortgage, have a lawyer check out the instrument in detail. Other Real Estate Tips
3. Adjustable Rate (ARM) 15Year. Adjustable rates are riskier because they can go up as well as down. Having said this, you should probably risk taking on a 15 year adjustable if you can not qualify for a fixed rate 15 or 30 year mortgage.
√ Check out the Internet for the best rates. Many great deals are available these days. The net can help you scope them out quickly. At a minimum, it will inform you as to the going rates so you can negotiate appropriately with a local lender.
Interest rates are expected to remain fairly flat in
√ Check Out Your Sunday Paper’s Real Estate
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Section. Most papers now list a range of banks and mortgage rates weekly, often with their phone number listed as well. √ Mortgage Brokers. Mortgage brokers originated because banks needed deals. Their own loan officers were so well trained in risk aversion and “No” that they needed outside brokers to bring them deals. These people tend to be more openminded than bankers and less dedicated to preserving an aura around banking and particular institutions. As a result, they usually give less biased advice about rates and terms in general. √ Beware of Real Estate Brokers. They work for the seller, not the buyer. They are not your friend. By law and custom, they are not allowed to disclose information that indicates the seller would take a lower price unless specifically authorized to do so by the seller. So watch out; they may drive you around and give you coffee, but they work for the other guy! √ The Mortgage Lender’s Lawyer Works for Them, Not You! Like the real estate broker, this guy works for them, not you. Treat them accordingly. √ Your Real Estate Lawyer Is Your Friend. Use your real estate lawyer as a sounding board. Most real estate lawyers do tons of deals and can give excellent advice simply and at little cost to you. Take advantage of their services; closings are automated these days. As a result, most real estate lawyers enjoy the non-routine aspects of giving advice to interested clients such as yourself.
the seller granting you a lower price.
T i p: Keep the house inspection report. This report can be very helpful for future reference for a variety of purposes such as repairs and improvements all the way to the later sale of your house. √ Negotiations on price. Most of the time good houses sell near the asking price. If you are in an unusual situation or in a down market, you can often negotiate a sweeter deal. In our opinion, most of these kinds of negotiations are usually for the pros alone. A true Survivalist sticks to the “most of the time” rule and avoids overnegotiation. Summary Once you have closed on your house, and if you were unable to manage a 15 year mortgage at the closing, your next mission is to get a 15 year mortgage as soon as you can swing the payments. In addition, make a determined effort to apply the occasional windfall or bonus check to your mortgage principal to bring it down even faster. Once you get your starter house mortgage paid, and then your tradeup house mortgage paid (if you choose to take this step of trading up), you are into your stretch run when you can really make some money.
√ Inspection Clauses Are Important in Older Houses. Inspection clauses are important to give you an out if significant problems detract from the house’s value. They are especially important in older houses where all kinds of issues can occur from grandfathered in clauses relating to lot setbacks, septic systems, and other issues. Defects uncovered can usually be remedied by www.simplymedia.com
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Retirement & Deferred Savings Accounts Your Number Three Investment
Recently, Congress has been modifying retirement and deferred savings accounts on an annual basis. The changes have been favorable for the investor. This chapter outlines most of these accounts as they presently stand; however, you must consult the annual charts as to the exact rules due to these frequent changes.
Overview The Plans There are four types of IRAs: Traditional IRA, Spousal IRA, Roth IRA, and Coverdell Education Savings Account(formerly Education IRA). There are three employer-sponsored plans: SIMPLE IRA, 401(k), and 403(b). There are also two plans available to the self-employed: SEP-IRA & Keogh. Medical Savings Accounts (MSA) exist but are rarely used due to their complexity and hidden traps. New ones are frequently being created and old ones changed. So you must keep up to date on these. Eligibility to Participate in a Plan When choosing tax-deferred plans, be aware that participation in multiple plans is not always an option. For example, your employer chooses the employer-sponsored plan in which you participate. If you are offered a 401(k) plan, you will not have access to a SIMPLE plan. In cases where you do invest in multiple plans, keep their respective guidelines in mind. If you contribute $1,500 to a traditional IRA you can only contribute a maximum of $1,500 to a Roth IRA, so www.simplymedia.com
that the combined contributions don’t exceed the $3,000 maximum annual IRA contribution limit ($3500 for taxpayers over 50). Similarly, coverage under an employer sponsored plan can limit the tax deduction for contributions you make to personal IRA plans. As with any complex tax situation, if you find you participate in multiple plans, seek the advice of a financial expert. Contributing to a Current Plan The maximum allowable contributions for each type of plan are outlined in the table below. The guidelines for qualifying for these maximum contribution levels vary from plan to plan. See the discussion of specific plans to determine what level of contribution you qualify for. Note again that these figures are now changing frequently. Maximum Annual Contributions Regular IRA Spousal IRA Roth IRA Educational IRA SIMPLE IRA 401(k) 403(b) SEP-IRA Keogh
$3,000($3500 over 50) $3,000($3500 over 50) $3,000($3500 over 50) $2000 per beneficiary $7,000($7500 50+) $11,000($12,000 50+) $11,000($12,000 50+) $40,000 $40,000 36
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Withdrawals For all plans, contributions and earnings accumulate tax-free. However, withdrawals from your plan may be taxed. This varies from plan to plan. In addition, there is generally a penalty for early withdrawals made before you turn 591/2 . The penalty is 10% of the amount withdrawn. Some plans require you to begin withdrawing funds on April 1 of the year after you turn 701/2 . For more information see IRS Publication 590 and the discussions of specific plans below. You can withdraw up to $10,000 tax-free from any IRA account for a first home purchase (defined as your not having owned a house in the last two tax years) or for college expenses for a child, grandchild, spouse, or yourself. Otherwise early penalties apply. Tax Deductions In some instances your contributions are deductible. Whether you qualify for this deduction, and the actual size of the deduction, will vary depending on the type of IRA, your AGI, and other factors. See the discussion of a specific plan to determine what size deduction you qualify for.
Specific Plans This section focuses on specific provisions unique to each plan.We advise you to consult a tax and/or investment advisor for expert advice on specific plans to determine eligibility. Traditional IRA Who is Eligible? All taxpayers with earned income may participate. Contributions As of 2003, you can contribute up to $3,000 per year per person (up to $3500 for taxpayers 50 or older), or the amount of your earned income, whichever is less. www.simplymedia.com
Withdrawals Withdrawals are generally taxable. (certain exceptions apply). Refer to IRS Publication 590, Individual Retirement Arrangements (IRAs) for details on early withdrawal penalties and mandatory withdrawal regulations.
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Tax Deductions Whether contributions are deductible is regulated by two different factors: whether you and/or your spouse are covered by an employer-sponsored plan, and your AGI. A. If a single filer doesn’t participate in an employer plan, both spouses don’t participate in a plan, or one spouse does not. If a single filer, or both spouses filing jointly, don’t participate in an employer plan, they may deduct the full amount contributed to their IRA. For married joint filers, where one spouse is not covered, that spouse must have an AGI of $150,000 or less to take the deduction. The amount of the deduction gradually drops to zero as their AGI approaches $160,000 (this is referred to as a “phaseout.”) B. If a single filer participates in an employer plan, both spouses participate in an employer plan, or only one spouse participates. To deduct the full amount of their IRA contribution, single filers must have an AGI of $34,000 or less, the AGI limit being $54,000 for married people filing jointly. The deduction is gradually phased out as AGI approaches $44,000 for singles and $64,000 for married people. If only one spouse participates in an employer plan, the $54,000 AGI limit applies to that spouse. C. To set up a Spousal IRA for your non-working spouse, five conditions must be met. 1) You must be married at the end of the tax year; 2) your spouse must be under 70 1/2 ; 3) you Personal Finance & Investing Survival Kit
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after you turn 59 1/2 . No mandatory withdrawals are required after 70 1/2 either.
must file a joint return; 4) your spouse must have no compensation; and 5) you must have taxable compensation. You and/or your spouse can still invest in IRAs if your AGI is above the limits stated above. You can contribute per the guidelines listed above but your contribution is not taxdeductible. If you do make a non-deductible IRA contribution, you must report it on Form 8606 and include it with your federal return.
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Tax Deductions Contributions to Roth IRAs are not deductible. Coverdell Education Savings Account (formerly Education IRA) Who is Eligible? Anyone can contribute to a Coverdell ESA for any child. Note: currently, over 24 states have tuition plans as well; you can not contribute to both a Coverdell ESA and a state plan; you must select one or the other each year, for each child.
Roth IRA Who is Eligible? All taxpayers whose adjusted gross income (AGI) is less than $160,000 (married filing jointly) or 110,000 (single).
Contributions Any qualifying adult (or beneficiary) can contribute up to $2000 per year to the ESA, until the beneficiary of the plan reaches age 18. Contributions are gradually phased out for single taxpayers with a modified AGI between $95,000 and $110,000 and for married people filing jointly between $150,000 and $160,000.
Contributions You may contribute up to $3,000 per person ($3500 if aged 50 or older) each year, or the amount of your earned income, whichever is less. This rule is no different that that for a traditional IRA. Allowable contributions are gradually phased out once AGI reaches $150,000 for married couples filing jointly, $95,000 for all others.
Coverdell ESAs for any one individual can not receive more than $2000 total per year.
Withdrawals Withdrawals are not taxed as long as you hold the account for 5 years and make withdrawals
Withdrawals You can make withdrawals tax-free if they are used for qualified education expenses. Accounts
The $20,000 Difference
Value of IRA* $250,000
Investor A – $244,692 Investor B – $224,326
$200,000
$20,366
$150,000
Example $100,000 $50,000 $0
10 years
20 years
30 years
Investor A made his $2,000 IRA contribution on Jan 1 of each year. Investor B waited until the last possible day, April 15, of each year to make his contributions for the year prior. Over the course of 30 years this oversight cost Investor B over $20,000.
*assumes $2,000 contributed every year and an annual return of 8%
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must either be closed no later than the recipient’s 30th birthday, or the funds must be rolled over to another family member under age 30. Tax Deductions The original contribution is not tax deductible, but the earnings are.
Contributions In a SEP, as of 2002 you can invest up to 25% of your self-employment income (business revenue minus all expenses) up to a maximum of $40,000 per year. In a Keogh, you can invest 25% of your income up to a $40,000 maximum. Defined benefits Keogh plans may allow larger contributions. Seek the advice of a financial advisor.
SIMPLE IRA, 401(k) & 403(b) Who is Eligible? These are voluntary employer-sponsored plans. If your employer has a plan, speak to 575 them about eligibility requirements. Contributions SIMPLE IRAs have a maximum yearly employee contribution of $7,000 ($7500 if age 50 or older at the end of the tax year). Your employer must make some contributions to a SIMPLE IRA plan. For 2002, the maximum for 401(k)s is $11,000 ($12,000 for taxpayers over 50). For 2003, these maximums rise to $12,000 and $14,000 respectively. The maximum for 403(b)s is either 25% of salary or $11,000, whichever is less. Employees with 15 years of service may be able to contribute an additional $3,000. Withdrawals Withdrawals are taxable. The rate is based on your tax bracket at the time of withdrawal. See IRS Publication 590 for details. Tax Deductions Your contributions to these plans are generally excluded from federal, and sometimes state income taxes (each state has its own rules), but not Social Security and Medicare taxes. Your W-2s will reflect the correct breakdown for your tax returns. SEP-IRA & Keogh
Withdrawals Withdrawals are taxable. The rate is based on your tax bracket at the time of withdrawal. Tax Deductions Your contributions are excluded from your federal and state income taxes. Medical Savings Accounts These are so complex we do not recommend you consider them until you have invested fully in other accounts. If you do want to consider this investment option, seek professional investment advice first.
Summary Note that these accounts are now changing so rapidly that you should consult a professional to determine the current situation before making new investments or withdrawing any funds. Tax-advantaged deferred savings accounts are increasing in numbers and benefits. You are well advised to consider them as a package and select the ones most advantageous for your own use. Since these aspects of the tax laws have changed rapidly in recent years due to the impending retirement of the baby boomers, you can count on more changes soon. It is likely that changes will favor investors and retirees. Stay tuned!
Who is Eligible? If you are self-employed, these are the two plans available to you. www.simplymedia.com
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Is the Roth IRA Right for You? To convert or not to convert The Taxpayer Relief Act of 1997 awakened interest in IRAs as a means of saving not only for retirement but also for other long-term goals such as first time home ownership and a college education. The Roth IRA is a “back-ended� IRA, which means that contributions are nonde-ductible, but distributions, if specific requirements are met, would be tax-free and/or penalty-free. Allowable contributions to a Roth IRA depend on your adjusted gross income (AGI). The maximum annual contribution to a Roth IRA is $3,000 ($3500 for taxpayers 50 or older) or 100% of earned income, whichever is less. Contributions are phased out for singles whose AGI is between $95,000 and $110,000, and for married couples whose AGI is between $150,000 and $160,000. Funds in your Roth IRA grow tax-deferred until they are withdrawn. The tax and penalty status of the funds depends on how long ago you made the first contribution to your Roth IRA, your age, and what these funds will be used for. If you withdraw the funds after age 59 1/2 and the first contribution was made five years ago, then the withdrawal is tax- and penalty-free under all circumstances. If the funds in a Roth IRA are used for the purchase of a first home, all withdrawals up to
$10,000 are tax- and penalty-free, as long as they were held in the Roth IRA for at least five years from the date of the first contribution. By contrast, funds used for college expenses for yourself or your immediate family are penalty-free, but are subject to ordinary income tax on the accumulated earnings. Finally, if funds are withdrawn before five years from the date of the first contribution, the earnings on these funds are subject to regular income taxes and will be assessed the 10% penalty for early withdrawals.
To Convert or Not to Convert? An Interesting Question. The Roth IRA poses an interesting question: if you own a Traditional IRA and your AGI is $100,000 or less, should you convert these funds to a Roth IRA? The longer your investment horizon, the more attractive this option may be. You will gain the benefit of tax-free withdrawals sometime in the future; however, current taxes, but no penalty, will have to be paid at the time of conversion. If the conversion occurs in 1998, the taxes will be spread over a four-year period. Transfers made after 1998 will be subject to taxes in the year the transfer is made. If you fit any of the following profiles, a Traditional to Roth IRA conversion might be worth considering: 40
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Profile A: Your traditional account has been opened for a short period of time and most of the balance is comprised of nondeductible contributions. Since there is little growth in your current IRA and since no taxes are owed on nondeductible IRA contributions, your tax liability will be low at conversion because taxes are only paid on the growth of the funds and on the deductible contributions.
probably not benefit from a Traditional to Roth IRA conversion: Profile E: You are near to retirement and will have to make withdrawals from your existing IRA upon retirement. A conversion would decrease funds available during your retirement, and you would probably not have time to recover the taxes paid at the time of conversion.
Profile B: You do not need your existing IRA funds for support during retirement.
Profile F: You expect to be in a lower tax bracket at retirement.
You will have a longer time to recover the taxes paid at the time of conversion if you don’t take distributions out of your Roth IRA. Also, minimum distributions are not required in a Roth IRA at age 701/2 and, in fact, if you have earned income, you can continue funding a Roth IRA after age 701/2 . Your Roth IRA has more time to grow tax-deferred and funds can be passed on to heirs tax-free.
There is no reason to pay taxes on the conversion at a higher rate than you would at retirement.
Profile C: You are many years from retirement. The longer you are away from retirement, the more time your Roth IRA will have to recover from the taxes paid at conversion and the longer the account will benefit from years of tax-free growth.
Summary. These are just some guidelines to help determine if you should convert your existing IRA to a Roth IRA. In order to find out if a Roth IRA makes sense for you, you should contact your tax or financial advisor and request a comparison between a Roth and a Traditional IRA and the effects of a conversion using your specific IRA balance and tax situation. Simply Media does not provide tax or legal advice. Please consult your tax and/or legal advisor for such guidance and for information on state and local tax issues regarding IRA conversions.
Profile D: You anticipate your tax bracket will remain the same or will be higher during retirement. At the time of conversion you will pay taxes at the same or lower rate than you would if you took money out of the existing Traditional IRA after retirement. Also, any growth in the Roth account after conversion will be tax-free after five years and at age 59 1/2 .
You Don’t Say
“
If you want to know the value of money, go and try to borrow some!
”
Benjamin Franklin
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Trusts: Taking Care of Your Family You can’t take it with you, so consider leaving more to your family
Audio Six: Investing and Your Children
Trusts, wills, and taxes are about as exciting, but necessary, as going to your dentist. In this case, however, it is your financial health 950 that is at stake. We all know we should attend to it, but even estate lawyers and trust administrators often do not. You have taken a first step by at least reading about trusts. The largest difficulty most of us have is that we believe we have acknowledged death, and possibly given it an invitation, by even thinking about estate planning. Most of us have this unspoken superstition which is hard to squash. The most important reason to set up a trust is so that your spouse and children, when they are in bereavement, have an organized approach to your family finances. In this period, as Ann Landers has wisely said, a newly grieving spouse should not take any serious action for at least the first six months. If you have not put together a solid will and/or trust, this advice is impossible to follow. In fact, if you neglect to provide for this contingency, your spouse will usually have to make immediate
decisions that effect his or her long-term welfare when they are least equipped emotionally to make such choices. The second reason is to protect your estate legitimately from unnecessary taxation. The tax-free cutoff point for estate bequests was increased from $600,000 to $625,000 in 1998. Although this number seems large, it is, as they say, a lot less than it used to be. For that reason, Congress provided for estate tax exclusions to increase in increments until it reaches $1,000,000 in 2006. Despite this good news, the tax rates over the tax-free exclusion numbers range from 37% to 60%, and this does not count the impact of some additional local and state taxation. Of course, none of these changes effect the spousal exclusion from federal taxation, which is nice, but your other heirs can lose out substantially without trust planning. To appraise your risk of substantial tax liability for your estate, you should first consider “what� goes into your estate according to tax rules. The answer is everything; but what is everything? Insurance policies are the number one item people forget to include; if another party buys the policy on your behalf they get the benefit taxfree. But, if it is bought by you, as many company paid or subsidized policies are, your policy is included in your estate. The tax rules require that you include all of your real estate, stocks, bonds, and any other property you may own. 42
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The risk younger families have is they may live in high cost areas where home prices alone can put them over the tax-free exemption levels. This problem can be compounded when any small company stock is included in an appraisal. Congress has made some provisions for this small company problem by allowing qualified small business owners to pass on a higher amount of gross estate value on a tax-free basis. The difficulty presented here is that inappropriate estate planning can put a family’s house and/or business at risk since these assets tend to be illiquid (e.g. unlike publicly listed stock you can not sell off “part of ” your house or small business, as a rule, to raise some capital; one is usually faced with the dilemma of selling all or none of it, making for a very tough choice). The risk older families have is they have not reappraised their property in so long that they are often stunned by the appreciation. As a result, many of these estates must pay substantial federal estate taxes due to a lack of planning based on current values.
Step 1: Assessing Your Estate Your first logical step is to do a personal financial statement on all of your property including all stocks, bonds, collectibles, and retirement funds, less your personal debts for mortgages, cars, and other payments. If this sum approaches $400,000, you are well advised to take the following advice to heart. If you are married, and your estate is worth more than the $400,000 referred to above, divide your assets into two parts. This will minimize your future tax implications, especially as your estate continues to grow over time. Our father’s generation often did this by putting assets in the wife’s name to protect against lawsuits as well as to
trust
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provide the spouse a tax-free estate that would be taxed less vigorously upon her death. We suggest you divide the estate relatively equally between husband and wife.
Step 2: Consider Setting Up a Trust The second step is to consider setting up trusts for your wife and/or children. This essentially serves to “collect” or organize your assets. This satisfies the first reason for doing all of this; to use your knowledge to get your assets in order prior to your death. It is especially important if you have some “oddball” assets such as private stock, minority ownership in limited partnerships, or obscure public stock that a trustee would not understand well. It especially applies to collectibles when only the true collector knows the value of this versus that object. Example
The most common and useful trusts are “bypass” or “credit shelter” trusts. If you and your spouse have assets worth $1,250,000 in 1998, you can set up a bypass trust that will receive $625,000 of your joint assets (the amount that can be sheltered from federal estate taxes) upon one spouse’s death. Note that this number will begin increasing in 1999 to $650,000 and continue in increments until it reaches $1,000,000 in 2006. You should be sure your attorney includes these new factors in your trust agreements as well as giving you the benefit of his or her advice about trusts in general. This is not a matter you should ever attempt to do without an expert trust lawyer. Under the trust provisions outlined above, when either spouse dies, all of the estate (including the trust) goes to the surviving spouse tax-free under
Property under the charge of a trustee who has nominal ownership of the property which they keep, use, or administer for another’s benefit.
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the provisions of the tax-free federal marital deduction (there is no dollar limit on this deduction). To provide the surviving spouse with maximum control, your trust can name the surviving spouse the trustee of the trust, but that person would only be able to take out principal if the money is limited by “an ascertainable standard.” In other words, it must be used for strictly defined purposes such as education, health, maintenance, or support. Support can, however, be defined broadly to include maintaining the surviving spouse’s “former and usual standard of living.” Upon the second spouse’s death, that spouse’s estate is required to pay the required federal estate tax only on sums above the $625,000 unified credit, which is the tax-free limit now. This will be increasing yearly under the new estate tax rules referred to above. The other $625,000 in the bypass trust will now pass, tax-free, to the beneficiaries of your spouse. In other words, the first spouse’s estate has been protected by the bypass trust from any tax upon the death of the second spouse. In the case of the second spouse’s estate, the first $625,000 moves tax-free to the heirs and only the increments above the tax-free amount then in force must be paid by the estate. So, the net result is that you and your wife have passed on $1,250,000 taxfree to your children or other heirs. Quite an accomplishment! Without the trust, the children would have had to pay about $240,000 on the second spouse’s estate of $1,250,000.
Points to Consider 559
Common advice is to make the trusts flexible, giving the spouse “power of appointment” which permits the surviving spouse to
How a Bypass Trust Works Example
Total Household Assets
$1,250,000 (set up bypass trust = $625,000) one spouse passes away assets passed on to surviving spouse
Surviving Spouse’s Assets
$625,000
$625,000
(tax-free bypass trust)
(tax-free inheritance)
second spouse passes away assets passed on to heirs
Heirs’ Assets*
$625,000
$625,000
(tax-free bypass trust)
(tax-free inheritance)
*less expenses incurred by surviving spouse prior to death
restructure the estate to provide for changing circumstances. The flexibility allows for a second look, which is especially important if the husband (normally first to go) dies young. We add an important caution and one that causes many people not to write wills or trusts at all. With the high probability of remarriage in this society, and the pressures on the second spouse to readjust the trust to benefit “new” children, stepchildren, or other people, there is a strong argument to make an ironclad provision that your children get x, y, or z. This locks out change and it protects the second spouse from being pressured by a new marital partner to make 44
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adjustments. This is all too common a problem these days to be overlooked. It is important for both spouses to sit down and agree that this is not a matter of “trusting” each other; it is a matter of circumstances changing if one party died. Only the bypass trust would go directly to the heirs of the first spouse; the second spouse can change his or her will at any time. There are several other important things to consider here: 1. Most people should not write an “I love you” will. This is known in the trade as the “All to Wife” will. The major exception to this rule is during the early days of a marriage if neither party has many assets or if this is the only way you will write a will at all! Once you have children you should consider changing your will to include them, if only in a small way. If your estate grows to a sizable amount, you should consider the bypass trust. The risk of not doing the trust is that if the marital couple has a relatively small estate and one of the two dies, the children from
the first marriage often get less than children of the second. Not only does this happens all the time, it also causes a great deal of dissension in second marriages. 2. Gift up to $10,000 per year to each of your children under the Uniform Transfers to Minor Act. You can create separate trusts for them that can accumulate a substantial amount of money this way. If you or your spouse die, or have hard financial times, the custodian of the trust can use the income for health or educational expenses for the child. 3. Set up an irrevocable life insurance trust. This protects your estate from including these funds in your gross estate and subjecting it to additional taxation. 4. Talk about your estate planning with your adult children. Putting them in the know is important; this is especially true if they have reason to expect something. It also encourages them to speak with their own spouses or partners about their own financial future. 5. These issues change all the time, so always review these points before entering into any of these activities. In addition, review the area at least once every two years.
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Growth Stocks or Mutual Funds Your Fourth Investment Vehicle
Successful investing requires a solid framework and a set of simple rules that can withstand the assault of misgivings, doomsayers, recessions, and possible depressions. People get rich slowly and poor quickly, the lottery and Internet stocks come to mind. History teaches some hard lessons in this area that you are well advised to observe closely. The Survivalist investment strategy is based on the lessons of history and the knowledge passed on by great investors such as Peter Lynch and Warren Buffett.
Audio Seven: Basic Investing Rules
Survivalist Ten Investment Rules 1. Over 25 year periods stocks are the best investments. Since this is the investment
time frame for survivalists, stick with proven stock investments. 2. Diversify. The ability to diversify is what led
to so much 20th century wealth. With a basket of good stocks, you protect yourself from the unexpected bad news hammering a few of them. 3. Type B & D investors should buy growth www.simplymedia.com
Research the best growth mutual funds. Diversify by investing 50% in a few growth mutual funds and 50% in an S & P low expense index fund such as offered by Vanguard or Fidelity.
mutual funds.
4. Type A & C investors should buy stocks themselves. Research and select 8 to 10 won-
derful stocks. That is enough to diversify but not too many to keep track of properly. A rule of thumb is to neither sell nor buy more than one stock each year. Feel free to add to any holdings during any year. 5. Hold on to your mutual funds or stocks through thick or thin. The greatest risk is sell-
ing out at the bottom, when everyone says to do so, and buying at the top, again, when everyone says to do so. All research shows that long term holders outperform short term traders. One obvious reason is the expense involved in trading; a subtler reason is the all too human tendency to dump stuff at the bottom and buy it up at the top. 6. Ignore the market and market timing.
The great investors such as Warren Buffett ignore general market trends and only invest in individual companies based on their 25 year and longer prospects. And, as Peter Lynch says, “If their story doesn’t change, hold on.” Follow their example. Trying to predict short term market behavior is about as effective as 46 Personal Finance & Investing Survival Kit
consulting a crystal ball! This is part of the Survivalist commitment to deferred savings plans. 7.
8.
Invest regularly.
Reinvest your dividends automatically.
Automatic dividend reinvestment plans produce substantial extra growth. What you don’t see, the small dividend checks, won’t get spent! 9.
People lose the most money when they panic and sell out at the bottom of markets.
Tip
Keep your investment plan simple.
Invest in publicly listed stocks. Invest with a 25 year time frame in mind. Reinvest all dividends. Make no more than one stock trade per year; this trade should be made only because the firm in question has changed its story or is losing its focus. Good examples are Sears in the 1960’s; Xerox and GM in the 1970’s; K-Mart and Digital Equipment in the 1980’s; Woolworth and AT&T in the 1990’s, HP in the 2000’s. 10. Patience. An average investment strategy
consistently executed will beat a great strategy inconsistently implemented every time! Remember, you are not trying to beat Wall Street as much as stay up with it so you can focus on your day job and the rest of your life.
How to Pick Your Standard & Poor’s 500 Index Fund Your most pressing need is to pick the best S & P 500 Index Fund so you can park your money there while selecting either growth mutual funds if you are a Type B or D investor, or your eight to ten best stocks if you are a Type A or C investor. The S & P generally outperforms the market and most mutual fund managers because of the subtle and gradual changes that take place within the Index. The S & P 500 is a model of good investing practices. The Dow Jones has a problem because it is so relatively small with only 30 stocks. www.simplymedia.com
Therefore, laggards like Sears, US Steel, and Woolworth not only remained in the Dow longer than they deserved but also disproportionately dragged it down. In the S & P 500, these laggards gradually decline in importance until they become inconsequential or are flushed out completed as Woolworth was recently. In addition, bright new prospects usually make it into the S & P far more quickly than into the Dow 30 or the unofficial nifty 50. Starbucks, for example, was just included into the S & P 500 group. Each time there is a merger between two companies in this group another emerging firm is added to freshen up the list. Therefore, this is a vibrant group of stocks that reflect a good deal of the upside in the market with a tendency to reduce the importance of the laggards rather automatically. Use the following five criteria to choose the best Index fund for you. √ Identify the large safe funds administered by firms expected to survive the consolidation in the financial services market. This would include firms such as Fidelity, State Street, Stein Roe, and Vanguard. √ Select two or three firms with the lowest expense levels over the last two years. Over the long term, even the smallest differences in expense levels can have a huge impact on your total return. 47 Personal Finance & Investing Survival Kit
√ Make your final selection based on what is available to your current deferred savings plans based on entrance requirements. The minimums have to be in line with what you can invest for example. And, of course, the funds selected must be available under your plan. Some may not be. √ If more than one fund is left, select the one with the lowest historical expense level. √ Review your choice once and only once per year. We do not want you pulling up the flowers to check on the roots. Keep focused on your day job.
How to Pick Your Ten Stocks
Audio Eight: How to Choose Stocks If you are an Investor Type B or D you should go through a similar reasoning process regarding your stock or mutual fund selections. The mutual funds you want to invest in are the ones whose stock holdings most clearly reflect your stock preferences. By identifying those stocks you would like in your top ten first, you can check out mutual funds to find those that invest in these stocks. First and foremost you are seeking wonderful stocks. The essence of a “wonderful stock” to quote Warren Buffett, or a “10 to 100 bagger,” to cite Peter Lynch, is one that can grow 10 to 100 times its current size without requiring substantially more outside capital so shareholders are not diluted on the way up. 1. Stock in a growing market. Virtually every stock capable of growing 10 to 100 times with-
out diluting stock by having to raise more equity to finance itself or buy other companies to get growth is in a strong growth business. Your first screening device is to identify growing markets. 2. Markets you understand. Only invest in businesses you understand. New Englanders should generally stay out of oil and Oklahoma out of high tech, as a rule. Doctors should concentrate on medical companies and accountants on financial services companies. These same people need not avoid retailers or consumer brands if they are familiar with them. And so on and so on. This is your second screening device. 3. Competitors are profitable. Industries tend to be profitable or unprofitable. The good main frame computer companies, except for IBM, were unprofitable for a long time. So this was a good market to avoid. The mini-computer and PC computer companies were almost instantly profitable. Therefore, these were both good markets until the story changed for mini-computer companies when they got beaten to the punch in the PC market. Consumer branded products and retailers in general tend to be profitable. This should be your third screening criteria. 4. Expansion straightforward. The 10 and 100 baggers tend to be those that can do “more of the same” without having to rely on finding or developing new concepts or ideas. This is why Lynch likes to consider regional retailers and restaurants. They can simply add “more” outlets, or sales locations, in nearby markets. They do not have to invent new products or find new markets in order to grow. If retailers or restaurants do well locally, they can rollout nationally and internationally quite easily. Barnes & Noble, Best Buy, Home Depot, Starbucks, Target and Wal*Mart did exactly this. Or consider consumer branded products that 48
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You Don’t Say
“
Money is the seed of money, the first (dollar) is sometimes more difficult to acquire than the second million. Jean-Jacques Rousseau,
”
The Confessions can grow right along with their markets like American Power, Coke, Dell, EMC, Gillette, and Proctor & Gamble--without doing too much new other than standard line extensions. This is the fourth screening device. 5. High margins, profitable, positive cash flow. Be sure your stock has high margins, is profitable, and has positive cash flow. This permits it to grow without secondary offerings to raise more money and dilute current shareholders. Seek out firms that pride themselves on these factors and have demonstrated the ability to grow on their own cash flow. 6. Low cost producer. Select companies with cost expertise that makes them the low cost producer in their industry. This does not mean that these firms necessarily sell their products at the lowest cost. IBM has long been a low cost producer yet usually sells their products at a premium. Their recent alliance to produce products for Dell underscores this talent. Similarly, P & G and Wal*Mart are masters of the low cost game. This cost positioning usually locks in profits for a long time. This is your sixth screening device. 7. Brand name important. You want stocks whose brand names are important in their marketplace. This means they can retain their dominance for a long time. Brand names lock in corporate value because customers desire the reassurance of it. This is the seventh screening device.
8. Strong stock buyback programs without much stock option dilution. Seek out companies with aggressive long term buyback programs. IBM has been a recent master of this game. Be sure they don’t give away the ranch with management options. Reduction of just 2% of all shares per year buys back 50% of the company in 18 years; 3% does it in 12 years. It doesn’t take a big program to have a huge long term impact on current shareholders--as long as it is implemented consistently. 8. 25 Year Test. You should be able to imagine your stock as a vibrant and sturdy company in 25 years. As Warren Buffett says about Microsoft and other technology companies, “I’m not sure where they will be in 25 years. I know that Coke, Gillette, and the Washington Post will be there.” Any doubters on this point? The Buffett test is your final screening device. Summary. Do your own research. Use the Internet to get a list of the Fortune 1000, S & P 500 Russell 2000 stocks. Check out Investor’s Business Daily for their lists of great stocks. Start your own screening process. Do not be unduly discouraged about how many merely average and good companies are out there. Best Buy, Coke, Costco, CVS, Dell, Disney, GE, Gillette, Home Depot, Paychex, Pfizer, Southwest Airlines, Starbucks, Target, TJX, Walgreen, and Wal*Mart are among the companies that pass these tests. And remember as Peter Lynch says, the really big day is when you 49
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can identify a microcap stock that meets these criteria. Remember: each current great company passed through the microcap stage. You just need to find one, two, or three of them in your lifetime for a real bonanza!
Stocks to Avoid Avoiding the wrong stocks is usually more important than finding the rights ones. The stocks to avoid are usually the ones that are tempting as short term speculation. Others just have weak fundamentals or are bought on weakness with the hopes of a turnaround. The five key don’ts: 1. The hottest stock in the hottest industry. Amazon.com and CMGI took the cake in this category. Hyper growth and hyper losses, with no end in sight. No hopes of consistent profitability any time soon, if ever. Yet both stocks were hot as a pistol. Home Shopping Network did the same thing by soaring from $3 to $47 and then sliding back down to $3 again. These kind of stocks violate all the fundamental rules and keep soaring until the next big thing happens, and then they crash back to earth. Your risk is trying to call the turning point. 2. The next something. Avoid the next Dell, Disney, or Wal*Mart. They usually don’t do it. Better to “pay too much,” buy the real thing, and watch it grow! 3. Buyers of unrelated businesses or in fact anything. Avoid acquirers in general. Really avoid those who acquire unrelated businesses. Circuit City did this by acquiring CarMax instead of focusing on BestBuy, their number one competi-
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tor. Surprise surprise. BestBuy got back off the floor and is giving Circuit City all it can handle while CC tries to “explain” CarMax. Whoops, whoops, whoops is the right answer. When they start to acquire or diversify outside of their market, watch out. Shrewd companies such as IBM and Cisco do acquire companies to fill in related market niches. 4. Beware of the middleman or dependence upon them. Middlemen are being squeezed out by computerization. Any middleman company is subject to elimination the day their suppliers and customers wake up and realize they don’t need them anymore (they don’t; many just haven’t realized it yet). The other risk is companies that rely on middlemen when their competitors do not. Compaq, for example, sells through retailers versus Dell who goes direct to the end user customer; Compaq loses!. 5. Beware of stocks with emotional appeal. The sizzle is so great no one pays attention to the quality of the steak, especially management. Worlds of Wonder in toys, Pizza Time Theaters in restaurants and entertainment, Planet Hollywood in restaurants, Bowmar in calculators, and most Internet companies fell into this trap. Avoid them. For every one you win on; you will lose on many more. Summary. Follow the rules for finding wonderful stocks and avoiding losers, no matter how tempting the alternative is. Once in awhile you can win going outside of the boundaries; but, most of the time, you lose swinging at bad pitches. And like Ted Williams said, the key is to hit only strikes and take a lot of walks. Good stocks do not require much maintenance. In fact, as Warren Buffett has said, “My
The key is to follow Ted Williams approach to baseball, only hit strikes and take a lot of walks.
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investors would have made more money if I took longer vacations.” If you limit yourself to owning 10 stocks and one trade per year, your stocks should not be one of the activities you need to cut back on. The more active forms of investing may be candidates for cutbacks.
How to Pick Mutual Funds
Your
Growth
Mutual funds are a vehicle for Type B and D investors to own stocks without having to manage their portfolio directly. There is a steep price for this management by others. Mutual fund managers tend to trade stocks more frequently than virtually all long term holders. This means you must pay taxes on their profitable trades more frequently than if you held stocks for longer periods of time. You also have to pay their fees of 1% to 2% of your investment deducted each year. The primary reason to buy funds is defensive. You won’t make the returns of a smart long term investor. But you probably won’t get wiped out by bad choices either. As was said earlier, the key reason to buy funds relates to your investor style and how it effects you in terms of being tempted to sell out at just the wrong time, when the market is down and everyone is discouraged.
many other fund managers, because this was his day job. 4. You can buy and hold your fund or funds for the long term because the fund does the buying and selling of individual stocks. As Bill O’Neill says in Investors Business Daily, “The key to buying funds is stay with them long term unless the fund is vastly underperforming the market.” 5. You are more likely to avoid the worst investing mistakes with professional fund managers. 6. You can pick funds without a lot of outside advice. The good growth funds are pretty apparent from public information sources. Individual company data is much harder to sift through.
Six Reasons to Buy Funds:
Selecting Your Funds
1. You want to leave the stock picking to the pros. You then should choose the pro carefully and go along for the ride.
Use a straightforward screening device. There are now more funds than publicly listed stocks so you can afford to be picky.
2. You can focus fully on your day job versus selecting, buying, and selling stocks.
√ Select a no-load fund.
3. You get more diversification that you can afford to follow yourself. Ten stocks is about the practical limit for a shrewd individual investor. Peter Lynch had hundreds in his fund, as do
√ Select a fund with a good ten year performance record. √ Select a fund that holds several of the stocks you determined you would like to hold if you 51
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bought stocks separately.
Tip: If you wish to dig deeper, get a three month trial subscription to Mutual Fund Values, 53 West Jackson Blvd., S-460, Chicago, IL 60624. When to Sell
Audio Nine: How to Monitor Your Stocks Take a hard look at your funds no more than once a year. Pick an anniversary date such as your birthday or January 1, and stick to that date for review. The three signs of trouble that should make you consider selling. √ Management changes at your fund or sale of the mutual fund company itself. √ The kind of stocks you prefer are sold and not replaced by other stocks you are comfortable with.
Tip: One Book to Read before Buying stocks or a Fund Read Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor, by John Bogle, founder of Vanguard, before buying any funds. If you currently own any funds, read this before buying another one. He speaks to the benefits of index funds versus sector or investment style preference funds, the problems of “taxation without representation” in terms of fund manager fees and the tax and fee consequences of stock churning, and the problems of large funds unless they are Index based. He speaks with conviction and heartfelt belief.
Summary Stick to these four savings vehicles: your career; your house, your deferred savings accounts, and your growth stocks or mutual funds. The next section, Danger, will warn Survivalists about all of the other forms of investments which are wise to avoid for the average investor. The Danger section will also indicate other issues that can negatively influence your financial plan.
√ Your fund lags average fund performance for two consecutive years. Do not be put off by a single bad quarter or year; even great funds have a bad quarter or year or two from time to time. Be patient and careful with your fund investments. Do not change funds rashly. If you find a hot new fund, consider adding it to your fund portfolio rather than dumping any of your current ones--unless they give you good reason. Churning mutual funds is not only costly but eliminates the reason for investing in them in the first place: to create long term value by not jumping around unless you are given cause. 52 www.simplymedia.com
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Chapter Three
Danger ed and sold to pay a pressing bill or two. The challenge is to hold on to what you acquire and defend it through the inevitable rough spots in your life. Danger strikes in a variety of guises. This chapter alerts you to how to hold on to what you acquire and shows you how to protect your assets from these lurking dangers.
QUICK TIPS 1. Cut up your credit cards. No one can resist the temptation to use them. So cut them all up so you will not be tempted to use them.
Audio Ten: The Stock Market Today
Personal finance is full of danger. Most people never save anything at all. A smaller fraction save a tiny fraction of their earnings despite owning a variety of good solid assets during their lifetimes--but they let them go along the way, one by one, to pay short term bills. Most people work their way through several houses, collectibles (those discarded baseball cards and old children’s books), stocks, and savings accounts. Most of these assets get liquidat-
2. Use a debit card with a credit card affiliation on the card. Most banks and financial
institutions offer these combination debit and credit cards. If you don’t have the money in your account, you must go home empty handed. Good! 3. Don’t buy anything on credit except for your house. Period. Payimg $500 for a junker
car is a lot better for you than a $20,000 or $30,000 vehicle on credit--every time! 4. Buy used cars. They are not as uncool as
they used to be. Sixty million are bought every year. Only 16 million new ones are driven off the lot each year! 53
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5.
Used cars have already depreciated.
$10,000 to $15,000 will get you a good used car: a Jeep, Volvo, or BMW, for example. $5,000 to $9,000 will still get you a pretty good vehicle. $8900 bought me a Volvo sedan a few years ago and it is still going strong! 6. Pay cash for your car. Never buy anything on credit that goes down in price. You can count on cars going down in value. So, if you really want a new car, pay cash for it or back it down and get a used car you can afford to pay cash for. 7. Pay off all your other debt as quickly as possible. Other debt is a polite term for junk
debt and potential financial disaster. Suck it up for awhile, live more cheaply, pay off any nasty high interest credit card, student, home equity, or other loan you may have hanging over you. 8. Don’t try to keep up with your neighbors. Trying to keep up with your neighbors is
a never ending uphill battle. If you feel the impulse strongly, change your social group to one more compatible with your income level. Keep in mind that most competitive neighbors become dissatisfied, get the itch to move on, and so won’t be with you long anyway.
in the family room stimulate reading, thinking, and good conversation while warding off the spending habit! 12. Use your local library. Libraries today
loan out videos, audiotapes, magazines, and reference works as well as best sellers and backlisted books. Useful, smart, and cheap entertainment. 13. Avoid speculation of all kinds. Options,
futures, lottery tickets, straddles, day trading, and precious metals all sound speculative and risky because they are! These investments are bad for everyone--except for those on commission. They are certainly wrong for a Survivalist. 14. Avoid investing in anything you don’t understand or can’t pronounce. This is
pretty obvious but some people try to get around it. Others believe mystery is a key to investment success. Remember that virtually none of these kind of businesses make it to the Dow 30! 15. It is easier to earn money than keep it.
Why else do you think so few people are debt free with ready cash?
9. Eliminate costly activities you don’t really enjoy. Most hobbies have enormous
hidden costs. Select one or two and stick to them. A lot of related expenses come from these habits. The best way to get rid of the expenses is to kick the hobby habit. 10. Orient your children towards education and work. Lead by example. If your fam-
ily is focused on education and work, you will all have tons of mental resources without the need to create expensive physical ones. When a child reads a book they not only learn something but they also don’t spend money at the mall!
You Don’t Say Nothing stings more “ deeply ” than the loss of money Livy, Historian
11. Put books in your family room. Books
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16. Traders make money on commission not as owners. The great investors such as
so aptly, “If you find yourself on the side of the majority, watch out!” Indeed.
Warren Buffett buy and hold. The great brokerage houses make money by getting you to trade frequently so they can earn their commissions!
20. Trading is the worst enemy of all plans.
17. Avoiding the wrong investments is more important than finding the right ones. Mediocre investments let you keep your
capital; poor ones cause you to lose it. You only need a few hits in a lifetime to make a lot of money. If you are not a good stock picker, and most people aren’t (including most mutual fund managers who do not beat the S & P 500), stick to index fund investments. 18. Fear and impatience are the twin killers of good investment returns. Fear
Trading eats up your time and money in expenses. No one but the commissioned broker, online or otherwise, benefits from your trading. 21. If in doubt, pass. Warren Buffett believes
overactivity and impatience is the major problem for most investors. He says that if he had only taken more extended lunches and set more on his porch, he would have been less active and more successful. Sitting on the porch, reading, learning, being patient, and hanging tough can make you a lot more money than pouring over charts with active schemes in mind.
drives people out of markets at the low point just before a big market upturn. Impatience makes investors act in haste and repent at leisure. 19. Group (herd) thinking undermines solid investing. The group is usually wrong. The
great investors are loners. As Mark Twain said
You Don’t Say
“
If you find yourself on the side of the majority, watch out!
”
Mark Twain
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Spending The Number One Danger
simplifying your infrastructure and placing it on solid ground.
Audio Eleven: Short Term Thinking
Consumption is the number one threat to all financial plans. The Millionaire Next Door is just the latest in a long list of books that demonstrate that people with money got that way by not spending it. The “Keepers” are not usually the “big” earners. In fact, they are often moderate earners with lifestyles under total spending control. The Survivalist investment plan will take you a long way as long as your spending does not undermine your good intentions. This chapter describes ways to get your spending under control and keep it that way. Just as the Harvard Medical School letter emphasizes there are no tricks to losing weight other than eating less, Survivalists know there are no tricks to saving money other than spending less of it.
Infrastructure: The Place to Start Infrastructure is a marvelous word. It means the structure in your life and everything within it. You should start your avoidance of danger by
Start by examining and reviewing the substructure of your financial life, or the infrastructure. Spending problems arise because people tend to support and expand their infrastructure. New acquisitions lead to new related spending. The challenge for a survivalist is to resist the urge and temptation to spend on new things after making a new acquisition. The following is a short list of the impact of major new acquisitions upon your spending habits. The point is to beware of them so you can guard against this inevitable tendency in your own life. To be forearmed is to be forewarned is an old aphorism because it is so true! New House You buy your final step up house
that is 1000 square feet larger than your old one and is in a better neighborhood. Impact of Larger Space: more furniture required, more heating, cooling, cleaning, and maintenance demanded. Impact of Better Neighborhood Furniture that fit into your old house and neighborhood no longer quite fits. Your car or cars are out of style or a little older than your neighbors. 56
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Your clothes, hobbies, kid activities, and vacations are out of phase with those of your new surroundings. All of this costs money to fix so your family feels more at home in your new surroundings. Ouch!
you fall into the trap of more expensive lunches and after hours activities to support your image in the new job, it can cost you $60 to $100 per week, $3,000 to $5,000 per year in pretax money to do so.
Impact of New Neighborhood Friends. In better neighborhoods, your new friends will inevitably spend more money on stuff in general. And, as you get to know them, you will undoubtedly fall into these habits as well. This is especially true as you try to break in to the “new group.”
Impact on Wardrobe. $2,000 or more in clothes, cleaning, and maintenance is easy to spend each year.
Impact of Newness. Stuff simply doesn’t fit into your new environment, from drapes and rugs to furniture, cars to outside gear in general. You also have to line up new stores and service people to buy from. As you work your way through your mistakes, and adapt to new circumstances, money will burn!
If you do all three new activities, you are actually out of pocket several thousand dollars more than with your old job. This can also contribute to dissatisfaction with the new job and new circumstances which is dangerous as well. In simple terms, you have raised your breakeven level and increased your monthly “nut.”
Impact on Mortgage Extension or Increased Principal. If you leveraged your house by taking on more debt or increased the length of your mortgage, you have just put yourself back on the debt treadmill again.
Summary: Anything New Can Contribute to More Spending.
The $100,000 extra it cost you to trade up from your starter to your final house can cost you many times that figure in hidden extra lifestyle expenses such as those listed above. Very few people are aware of these subtle dangers. Beware yourself and be vigilant. New Job. You are offered a more prestigious
job and/or in a more urban and/or formal environment. Your salary is increased by $10,000 per year. It sounds good. But is it? That depends on what you do with the extra $10,000. Here are some of the potential pitfalls you should consider before taking the job and in adapting to the new job if you take it.
Impact on Transportation. $2,500 per year on a car upgrade and related maintenance and insurance costs is easy to also spend each year.
Anything new requires time and money to adapt to and support. Many people lose their jobs because they get focused on the new stuff and forget to do the day job. They are busy calling decorators instead of doing their work. What is a Survivalist to do in this all too common situation?
Wait six months before changing your environment after making a large new purchase such as a new house or taking on a new job.
Tip
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1. Recognize that change and new stuff are the enemy of expense control. Be vigilant about allowing new activities into your life. As Peter Drucker has said, you can not cut back on expenses, you can only forgo or eliminate activities. Your challenge is to eliminate activities instead of tormenting yourself trying to cut back on them. 2. When taking on a big new thing, don’t change anything else for six months. Ann Landers suggested this to widows and recent divorcees, as early as the 1950s. It makes sense for anyone facing a big new thing, good or bad. “New things” qualify financially for being a possible tragedy. Think of how many athletes or software barons that instantly acquire fame and fortune, then blow it and regret their quick moves in the first years of their success. 3. Get comfortably situated with your new things before making changes. In other words, leave the new 1000 square feet empty in your new, larger house until you decide how you really feel about your new life style. A classic architect piece of wisdom applies to most of these things, “Wait two years before changing your environment. “ 4. Be sure the new thing is worth the disruption it causes. In The Millionaire Next Door, many of the happiest people were those who stayed put. Warren Buffett did it in Omaha; Bill Gates did not in Seattle. Who sounds happier in the press? 5. Keep your sense of humor. When you start thinking about buying a second house to save money on condo rentals, stop and have a laugh at yourself! Your first loss is usually your best one. If you do buy some stupid things, don’t worry, dump them--and laugh along the way. Habits: Your Only Hope!
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You Don’t Say
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It costs a lot to keep up appearances
”
Deaver Brown
or expenses is to eat or spend less. Cutting back doesn’t work. You have to eliminate whole activities. Your first step is not to let a new activity into your life without eliminating an old one. There are steps to go through to develop candidates for elimination: 1. List your assets and the maintenance they involve. Houses, especially second houses, can be a money pit. As my mother used to say, you can stay in a suite at the Ritz any time you like for what it costs to maintain a second house. Yep, mine fits that bill--and it is no castle! Consider your stock picking--how much does it distract you from your day job? A major benefit of mutual funds is they do the investing; you do the earning. And these are just a couple of examples for you to consider in this category. 2. Ascertain the true costs of maintaining each hobby. If you view this objectively, you will notice that the older your assets are, the less maintenance they require. Cars are a classic example. New cars cost less in direct repairs but tend to get more TLC maintenance, have higher insurance and excise taxes, and generally cost more to run. Old cars clunk along with lower insurance and excise tax rates. Older houses require less new stuff as do older hobbies. And so on and so on. Personal Finance & Investing Survival Kit
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3. Rank your activities in terms of personal satisfaction. Logical cutbacks are in clubs you don’t go to or hobbies you maintain an infrastructure for but rarely engage in. Sports activities are classic examples. Many people relentlessly try to dump off their season tickets because they really don’t want to go any more. 4. Eliminate activities that cost more than they are worth to you. The best way to deal with a bad habit, as Mark Twain says, is to coax it down the stairs, don’t try to throw it out the window. If you don’t really enjoy the big summer or winter vacation, big skiing trip, or the like, skip one year and see how you feel. The money saved may give you a lot more pleasure than the worry of spending it. This is especially true of activities that encroach on your work time and have you leaving early, getting in late, and the like.
over ten times that amount in your lifetime. The simple math says the difference can be your nest egg of about $500,000 over your lifetime. These savings are on capital expenses alone. Lower valued cars also have less excise tax and insurance costs during each year of your driving lifetime.
Tips on investing in the right used cars to create your nest egg through savings: 1. Buy solid reliable well designed cars that do not make a fashion statement. This will mean you won’t be embarrassed at work, seeing friends, or just driving around in general. The names that come to mind are relatively obvious since they target this market: Volvo, Jeep, Honda, Toyota, Taurus. There are others; but these are all reasonably safe choices.
Used Cars: Some Simple Math
Most people drive cars for about 50 to 60 years in their lifetime. After housing, it is the second largest cost in most people’s budgets. However, unlike houses, cars always go down in price-except for the rare antique and that is a different matter entirely. If you spend $10,000 per car, and drive each one an average of ten years, you will only spend $50,000 to $60,000 in your lifetime. If you buy a $25,000 car every three years, you will spend
You Don’t Say
“
The best way to deal with a bad habit is to coax it down the stairs, don’t try to throw it out the window. Mark Twain
”
2. Try to buy one of these cars from a reliable friend who is turning their car in. The kind of person who drives these type of cars tends to be a safe conservative driver. They usually don’t like to hassle with new car dealers when buying a new car. So, you can take their old car off their hands for cash. They avoid the hassle, get a little better negotiating room with the new dealer, and you get a car you know pretty well. 3. Use Jiffy Lube or similar service regularly to maintain your cars. Regular car maintenance will keep most cars on the road for ten years or longer. Regular light maintenance done at Jiffy Lube can be a big contributor to keeping your car purring along to your satisfaction. 4. Get full detailing of your car at least once per year. Nothing brings an old car to life like detailing. When I had mine detailed, for example, they had heavy detailing and light. Mine qualified for “Extra heavy.” And was it worth it; new car smell, junk removed, and so forth. You could have fooled me. It smelled like a new car. 59
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5. If a two car family, buy in alternate five year cycles. This means you will have a pretty new car most of the time and can nurse the other along. We do that in my family with a 95 Volvo Wagon and my 88 Volvo Sedan. We use the 95 wagon for trips, nights out, and the like. We use the 88 beater for commuting, running around town, and for leaving it at long term parking lots--who would want to bother with it, after all! 6. Coax them into an extra year or two of service. The best way to do this is to use your newer car for all the longer trips. Use your second car as a backup. This is more difficult for the one car family that may have to trade theirs in a year or two earlier. 7. Keep your sense of humor. Let your friends know this is a foundation for your retirement plan. Credit Cards: Cut them up.
Get debit cards from your bank with a credit card feature. This way you can not spend money you do not already have in your account.
Perhaps the most intriguing part of this book is about how the millionaire next door just gets by with what they have. They tend not to get caught up in wanting “more.” They instinctively seem to know that getting more stuff only means more things to be concerned about. Less is more. The average magazine today is just the opposite: it is about buy, buy, buy. The millionaires next store seem to have kicked that habit. We can learn a lot from their successes. Stores: Don’t go in them.
Lifestyle studies have shown that many women 18 to 34 consider shopping their number one hobby. That says it all about the insidiousness of the shopping habit. It has moved from being a necessary task to a promotion to “hobby.” Avoid the hobby aspect of shopping and you will do much better. Don’t just go to the mall, shop the Internet, or cruise around town looking to buy something. Redirect your energies towards your career or your personal life itself, or perhaps better, some of both. Summary
Without regular credit cards, you will be less tempted to buy things you do not have funded in your budget. It will make you feel poorer which will further moderate your spending habits. Make Do: approach.
Tip
The Millionaire Next Door’s
There are hundreds of ways to save money. The best way is to get into good habits that avoid spending money as a part of the habit itself. In other words, try to select activities that do not involve spending a lot of money. Or, at a minimum, restrict your money spending hobbies to a
“You can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many new ideas on your own. You can just apply the best of what you see.” Warren Buffett. 60
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very limited repertoire.
Budgeting: Getting Proactive to Avoid Danger Budgeting works best when people use it to learn about their spending habits and then working on them to improve their financial life. Using budgeting to torment yourself with keeping slips, accounting for small amounts of money, and other such wearisome activities will only drive you farther away from establishing a productive financial plan. The first step is to use a simple financial program such as our Simply Money®. It is not as complicated or sophisticated as Quicken or Microsoft Money. As a result, it takes a lot less input to get good output. Your Personal Financial Software
1. Setting up your program. Elect the normal tax deductible standard choices. Do not customize your system, it will only make your work more complicated. 2. Categories. This identifies where your money is going. The trick is to identify patterns of high spending that you were not aware of before. This usually happens in the “hobby” area, whether it be shopping, sports events, or other activities. 3. ATM. Unless you are a real paperwork fanatic, and enjoy the process, don’t overconstrain your bookkeeping habits by tracking each one of these transactions. Better to list once a month your total cash withdrawals as a miscellaneous entry. This is not perfect; some people would like a more exact accounting. But it is good enough for most budgeting purposes.
cellaneous expenses is prudent. Most people use “miscellaneous” when they really mean “occasional.” Such expenses include fixing broken household appliances, repairing major car problems, emergency trips of all sorts, and the like. 5. Budget for your savings. If you don’t budget for savings, such as making automatic bank withdrawals, you will find it much harder to execute on the regular basis you need to in order to meet your financial planning objectives. 401k plans provide for this savings device which is very good. 6. After creating your budget, target spending activities for elimination. Now you can review your expenses by budget category. Most people are appalled by how much their hobbies cost them. You need to evaluate which ones you can eliminate or at least cut back on. Most people can cut back on some easy ones like cell phones, unused health club memberships, and similar slightly used things. Divorce: The granddaddy of disasters.
This is the major earthquake in financial planning. Even the death of a spouse is less traumatic financially because it usually leaves the rest of the family intact and often an insurance policy as a bridge. All you can do is the best you can do, clean up the mess, and move on.
Tip: Speedy resolution helps both parties. Drawn out negotiations or court battles only enrich the lawyers while wearing down the former couple and injuring both their emotional and financial lives.
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Divorce: Tax Implications Be sure to take account of these financial changes in your life
The first step in your new financial life is to file Form 8822, Change of Address, with the IRS. This guarantees that any IRS notices for prior years’ tax returns are sent to both parties. 504 This is especially important if you and your spouse are involved in any disputes with the IRS, or you have claimed the negligent or innocent spouse rule against your former spouse. If you have filed, or are considering filing, any of these claims against your former spouse, consult a tax professional for advice.
Points to Consider: As you organize your taxes, be aware of the following considerations: Filing Status In the year you are officially divorced, you can not file jointly with your former spouse. If you remarry during that year, you can file jointly with your new spouse. Legal Fees Not deductible for the divorce itself. However, the legal fees for tax advice are deductible. Be sure to get your lawyer’s bill broken down to define the portion related to tax advice. This deduction has become harder to take because these costs fall into the category of miscellaneous expense that are deductible only to the extent that the total costs exceed 2% of your adjusted gross income (AGI).
Child Support Child support is not deductible for the paying party, nor taxable for the recipient. All payments are considered child support, not alimony, if payments are contingent upon any future occurrence involving the children. Property Settlements Property settlements are not deductible or immediately taxable to either party. Property Settlement Tax Basis Whoever gets the property is responsible for all appreciation before and after the transfer. Therefore, the property basis has a large impact on the value to the recipient; the higher the basis the greater the value to the recipient because less tax will be due when sold. The transactions themselves are tax-free between the spouses until any of the property is sold; then normal capital gains rules apply. Community Property Some states have community property laws. If you are married and your permanent legal home is in a community property state, 555 there are special rules for calculating your income. See IRS Publication 555, Community Property, for specific guidelines. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 62
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IRAs, 401(k)s, 403(b)s, or Other Pension Benefits These retirement plans can be transferred taxfree because they are considered part of the divorce property settlement. Once transferred, the rules governing each item are then in full force with regard to the recipient. Alimony Alimony is deductible for the paying party and considered taxable income for the recipient. Certain standards must be met to prevent taxpayers from classifying payments as alimony when they should be considered either as child support or property settlements (the recipient may be tempted to classify all payments as either child support or property settlements since they must pay taxes on alimony payments). The IRS has a recapture rule to be sure alimony is in fact claimed as alimony and not disguised as child support or property settlement payments. If the alimony payments are less than $15,000 per year, you are generally in the clear. If the first year alimony payment exceeds the average payments in year two and three by more than $15,000, the excess is recaptured. If the second year payment exceeds the payment in the third year by more than $15,000, the excess is also recaptured. The recapture rule does not apply if all of the money is paid in the first year or if payments drop off or end in year two or three because the recipient remarries or dies. Children: Who Gets the Exemption? Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, is available and should be used to enforce who gets the exemption. Either the custodial or noncustodial parent can get the exemption. Without a signed form, the IRS presumes the custodial parent gets the exemption. Note: if your divorce decree states that each parent may claim one
child’s exemption, include a copy of the decree with your return. Children’s Medical Deduction This is one of the IRS’s special rules. Whichever parent pays the bill can generally claim the deduction; for this purpose, the IRS accepts the fact that the child or children are dependents of both spouses. Three conditions must be met to claim the deduction: 1) parents were legally separated or divorced or were married and living apart for the last six months of 1998; 2) both parents together provided more than half the child’s support; and 3) one of the parents had physical custody of the child for more than half of the year.
Post-Divorce Tax Checklist Pay special attention to these items when paying taxes this year: Your filing status Tax-related legal fees Property settlements (community property rules may apply) Retirement plans and pension benefits Alimony payments Child support payments, if applicable Exemptions for dependent children, if applicable Medical deductions for children, if applicable
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Unexpected events Lurking Dangers
The most serious unexpected event is one that effects your current job or career. This includes dismissals, layoffs, downsizing, or industry contraction generally. It also can involve a disability, major accident, or personal lawsuit.
collision provisions on your used cars and you will save a lot of money. In many circumstances, even without specific collision insurance, you can get collision paid for by your company or the other party’s insurer.
Life Insurance
Collision insurance is relatively expensive for very little coverage. Liability insurance is quite cheap for a lot of coverage. Investigate these opportunities to expand your coverage where you need it--the big potential disaster, a personal liability claim--and cut it where you don’t -small collision claims, and you will still save money year in and year out.
Five times your annual income is a good rule for people with families. Term insurance is the simplest, cheapest, and most effective vehicle to purchase. Don’t get fancy. When your house is paid for, your kids through college, and your deferred savings accounts cooking, you can cancel the insurance. The insurance rule of thumb is to self-insure what you can afford to lose. Insure conservatively what you cannot. Insurance has the added benefit that when you need it most, when young, it is the cheapest to purchase, especially term insurance.
Disability Insurance Many employers offer it. Enroll immediately if you have not already. If self-employed or your employer doesn’t offer it, get it. Seek advice from a reputable financial planner on this one.
Car Insurance Get high limits on the liability sections. You can usually get a one million dollar plus umbrella policy for very little extra money. Eliminate the
House Insurance Always insure for replacement value. This is generally required by financial institutions when issuing mortgages. However, be sure to check your policy to be sure you have this clause included. Be sure to report and document all the elements of your house should you need to invoke the replacement cost. Insurance companies have become increasingly sophisticated in documenting their own policies to be sure they charge appropriate sums for each aspect of insurance offered. This means you must be careful to record all improvements to your house if you want it covered by the policy. Insurance does not have to cover your land, 64
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foundation, driveway, and power lines into your house. This all means the face value of your policy is far less than the actual value of your house and all that goes with it. Saying this, one must be sure to have replacement cost and not just a “lesser” number covered.
wise to do so as appropriate. Another way to do it is create a corporation through which you operate any side businesses you have. This can provide you an extra level of protection as long as you adhere to corporate niceties (i.e., you keep it formal and legal).
Tip: Beware of special riders on your policy for “extra” insurance for things such as jewels, paintings, or antiques. It is relatively easy for the bad guys to get hold of this information and target you for theft.
Insurance Summary
This advice was given to me by an antique dealer after my house had been burglarized 3 times in ten years. After I removed the rider, no burglary in fifteen years and still counting!
Insurance prepares you for the bad luck that may happen in your life. You can take many steps to avoid the bad luck in the first place, as described above, such as installing alarm systems. But, after that is all done, most of us need to insure against “disasters.” It is usually cheaper to selfinsure for affordable risks, which should encourage you to increase your deductible levels to save on premiums.
Second Tip: Get alarmed into the local police station. This cuts down on burglaries as well as protects you from fires. Post the alarm company tags prominently. In my little town, burglaries have gone from 40 or so a year 20 years ago, to 18 or so ten years ago, to 3 or 4 per year recently. The local police chief thinks it is because of most homeowners having alarms these days. The insurance companies agree and give you lower rates if you do so. Third Tip: Use higher deductibles to the extent they save money on the policy. A deductible change from $500 to $1000 can be paid back in policy savings in less than four years, as a rule. Higher deductibles can save money as well. Check it out. Why is this true? Because you are sharing the “risk” with the insurance company from the first dollar; the “kind” of people that use higher deductibles are better risks from the insurance company’s point of view--and they reward you with lower rates.
You Don’t Say
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Virtue has never been as respectable as money.
”
Mark Twain
Professional Insurance Doctors, lawyers, and professional athletes have been doing this for years. You would be 65 www.simplymedia.com
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Investments to avoid The best rule of thumb is to avoid any investment that Warren Buffett or Peter Lynch would not make at any time in their career. The second rule is to not employ any investment tactic or strategy they would not employ and especially avoid those they would scorn.
Those You Don’t Understand Lynch and Buffett repeatedly encourage investors to seek out only investments they understand. This relates to the companies themselves as well as the vehicle of investment in them.
Those You Haven’t Thoroughly Researched Buffett and Lynch advise to cast out your net for new investment opportunities. But they repeatedly warn novices, and supposed experts alike, to investigate thoroughly each investment before they make it. As Brian O’Neill of Chase has said, “Identify their key weakness and see if the facts warrant investing in it anyway.” Only solid research can provide this information.
Too Many Most people can not track more than 10 investments. A number of advisors believe you can cut your risk and still invest in as few as three stocks. The safer choice seems to be between eight and
ten investments. Keep buying into the ones you like best.
Churning Buffett and John Bogle of Vanguard believe activity is the enemy of high returns, especially tax free returns. Patience and sticking to the investment unless the story changes, to quote Peter Lynch, takes nerve, patience, and cool. Use them. Be the Clint Eastwood of investing. The old fashioned work ethic about “doing something” works against the investor. The only thing to be “doing” is to keep your research up to date, stick with the winners, and prune no more than one stock per year. Few investors have the iron will to do this. So, if you drift off course, do the best you can to avoid activity for its own sake.
Bonds a Poor Investment for Most People Bonds have been losers to stocks for every 25 year period over the last century. There is no reason to consider them at all unless your time horizon is shorter than this. Even when you retire at 65, your expected life span is 20 years or so. So think carefully before investing in bonds.
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from those such as Wal*Mart and Home Depot.
You Don’t Say
“
In the short term, the stock market is a voting machine; in the long term it is a weighing machine.
Commercial Real Estate
”
Warren Buffett, Berkshire Hathaway, 1996 Chairman’s letter
An investment rule is that risk increases geometrically with distance. In simpler terms, you are the last to know. This is really no different than people in the oil patch sticking to oil and not high tech investments based in New England or California. Local tech companies such as Dell can be a different matter, of course. If you wish to diversify through having US based companies with a substantial foreign presence, you have many to choose from ranging from Merck to GE. If you want some that are growing from a small base abroad, you can choose
Real estate is a specialty. When amateurs turn to real estate in booms, they generally get slaughtered in the inevitable down turns. In addition, this whole field is being professionalized as large real estate concerns such as Simon Properties are taking over the category--and all the prime properties with them. Efficient real estate investing involves a lot of debt and leverage, the dual enemies of Survivalist thinking. Better to avoid this specialty and leave it to the specialists.
Commodities, and Options
Day
Trading,
Virtually no one makes money in these activities other than those on commission. The basic reason for this is that timing is at the heart of the profitability opportunity. As a good Survivalist knows, timing is the one think hardly anyone can consistently determine. It is a sucker’s game. Let others play if they must. If you like to gamble, go to Las Vegas with a certain amount of money and have fun. But don’t think of it as investing!
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Chapter four
Planning The Microsofts and Intels have no debt unlike the big winners of 30 years ago, IBM, GM, and Exxon. These strong balance sheets contribute to their high market caps. 3. Best US based companies doing stock buybacks. Big company liquidity is further
enhanced by large buy back programs by traditionally conservative companies such as IBM and GE. This not only returns a substantial amount of capital to the equities market but also increases the percentage share owned by remaining shareholders. 4. New high growth companies increasingly using equity as opposed to debt to finance their growth. IPO’s and VC invest-
Audio Twelve: Summary
Trends that Matter
ments means less pressure on the debt market and higher stability for the companies themselves. 5. Downsizing: Emphasis on doing more with less. Wall Street rewards downsizers
decades of inflation starting in the Vietnam years of the 1960’s, inflation is back to its long term centuries old trend. What seems “abnormal” now is actually the norm for most of the past.
which further focuses CEOs on the bottom line. As Peter Drucker has said, it takes about 30 years for businesses to learn how to use innovations. Technology is finally being harnessed to drive down costs. Everything from ATM’s, voice mail, faxes, and e-mail to UPC scanners, FEDEX, and e-commerce are converging to drive down costs at all levels of organizations.
2. Best US based companies now have no debt.
6. Most boomers are in their last preretirement house. This means a massive shift
1. Inflation has returned to its long term trend of 1% to 2% per year. After several
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Conclusions
Tip “Traditional wisdom can be long on tradition and short on wisdom.� Warren Buffett
1. Interest rates should trend down over the next 25 to 30 years. The fundamentals
say this will happen although there will be blips in the long term trend, as occurred in 1999 and 2000. 2. Inflation should trend down for awhile.
from boomers borrowing to paying off their mortgages, month by month. This is another incremental downward pressure on interest rates. 7. Deferred savings accounts means a big tax collection bonus when the boomers and x generation retires. Undue emphasis is
placed on the potential social security shortfalls in the future without recognizing the huge amount of taxes that will be due as this same generation must begin, by law, liquidating their retirement nest eggs--and pay taxes on them. 8. Social Security is not running out of money.
The actuarial tables used are based on lower than historical growth rates in the overall economy. They also assume that baby boomers will stop working at the same age as their parents. In fact, 80% of boomers intend to work past their retirement, a many fold increase over their parents generation when a much higher percentage of work was considered drudgerous. 9. Government is beginning to privatize activities and may become a smaller percentage of the overall economy. This not
only saves money now but even larger amounts in benefits paid to government workers in the future, especially in pensions. It also means that private companies such as EDS will grow, pay taxes, and further contribute to government coffers.
It already may be there now if accounted for correctly. New efficiencies allow producers to make more with less which is the essence of inflation elimination. This should boost the return on capital for investors. All of these trends suggest a strong long term equity market for the next 20 to 25 years.
3.
Equities should prosper.
Professional Advisors The most effective professional advisors are only available to an elite clientele, unless you get one early in their career. For the rest of us, most advisors available are generally little better informed than we are ourselves. Brokers. Brokers make their money on com-
mission so are always tempted, no matter how well meaning they may be, to get you to trade more. This is churning, the enemy of the survivalist. Therefore, e-trading is best for your annual trade or two; no one will tempt you with talk about hot new stocks. Financial Planners. Fee based planners tend
to be best. The greatest harm they do is to suggest complexity that is more difficult to implement than you may want or is effective. However, this is not that serious a defect if you can find someone compatible with realistic long term goals that fit within the survivalist model. Lawyers. Lawyers should do your trusts, estate
planning, and wills. They are generally not good with numbers or negotiations. The law boards, 69
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Accountants are notoriously poor CEOs and investors themselves. They are skilled at putting numbers in the proper categories, or buckets, for financial and tax reporting purposes. They are not trained to think creatively about numbers.
Accountants.
This is why even the great accounting firms such as Price Waterhouse set up a separate and distinct organization, which was subsequently purchased by IBM, to advise companies on financial matters. Most members of these organizations do not have accounting degrees. That should tell you something! Summary. There is no simple place to go for
a requirement to get into law school, do not have a mathematical component. So, the legal profession tends to attract smart people with verbal but not mathematical skills. Therefore, the one thing they tend to be weak in is numbers--the foundation for any sound personal financial plan. So don’t use them for financial planning.
financial advice. The best of the advisors either stick to their own account or work with the elite. The rest are not particularly helpful. This is why financial planning is such a treacherous area. Ultimately, you must rely on yourself. There is no sugar coated marvelous formula. Be forewarned!
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Appendix I Clickable List of Audio & Video Clips Audio One:
Introduction to Personal Finance & Investing
Audio Two:
Intimidation, Slippery Slope to Poverty
Audio Three:
PMI Thinking
Audio Four:
Medium Term Thinking
Audio Five:
The First Stages of Investing
Audio Six:
Investing and Your Children
Audio Seven:
Basic Investing Rules
Audio Eight:
How to Choose Stocks
Audio Nine:
How to Monitor Your Stocks
Audio Ten:
The Stock Market Today
Audio Eleven:
Short Term Thinking
Audio Twelve:
Summary
Video One:
Three Ingredients for Success
Video Two:
Approaches and the Life Cycle
Video Three:
Is It Harder to Earn Money or to Keep It?
Video Four:
Where to Start
Video Five:
Investment Versus Expenses
Video Six:
Extra Money
Video Seven:
Long Term Thinking
Video Eight:
Planning Your Career
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Appendix II Your Self Diagnostic Test To take the test, read each of the twenty statements that follow. Place a check mark next to each statement that best reflects your true beliefs and convictions. If you don’t agree wholeheartedly with a statement, don’t check it. There are no “right” or “wrong” answers in an absolute sense. There are right and wrong answers for you personally. Be as objective as possible in answering these questions for your own benefit or you will not benefit from the analysis. If you are not an active investor now, imagine how you would react in each circumstance described. Take your time with your answers. Warning: answer truthfully. This is a critical aspect of your financial planning process. You need to base your plan on your genuine investment behavior style so you can tailor the best possible program for yourself as an individual and not just some random person in your situation. Be sure to answer what is true for you. Don’t answer what you think is “right,” “correct,” or the way you would like it to be. Candor is the best policy. You need to answer impeccably honestly. You have storms ahead, as we all have. You need to ascertain what level of risk you can reasonably tolerate so you can navigate through those inevitably turbulent times. Remember, you don’t have to show the answers to anyone else. Burn the answers if you must! This analysis is just for you! Now, once more, answer candidly! ___ 1. I demand superior returns on my invest-
ments. This means I recognize that I sometimes will have big losers as well as big winners. That’s ok with me. I can live with that high level of uncertainty and risk.
can accept my write-downs and move on. believe your first loss is your best loss.
I
___ 6. I don’t like to take any losses in my
investments, even short term stock dips.
___ 2. I thoroughly investigate and research
___ 7. I believe that risk brings rewards; no
each investment before I make it. To do otherwise would be foolish.
pain, no gain is my motto. ___ 8. I believe in the Swiss motto, “You can
___ 3. I have invested in one or more startups
never get hurt taking a profit.”
or private placements. I like the upside and can accept losing all my money in a few of these deals in order to make a lot in others.
___ 9.
I never second guess investment decisions I have made. I can invest and not worry about it afterwards.
___ 4. I take time to learn a lot about any
potential investment before I make it. Then I like to sit on the decision before acting.
___10. I thoroughly review the history of my
investment decisions with the purpose of doing better next time.
___ 5. My investment style succeeds because I
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___11. I believe in Mark Twain’s comment, “If
___19. I like to buy individual stocks.
you find yourself on the side of the majority, watch out!”
___20. I like to buy funds not individual stocks.
___12. I prefer safe down the middle type
Scoring Your Responses:
investments that are common practice in the marketplace. GE is my kind of stock.
Total the number of odd numbered ques tions you have checked_____.
___13. Most investments are a gamble. The
key is to gamble right. I can live with that.
Total the number of even numbered questions you have checked_____.
___14. Good research delivers good investment
results.
Classify Yourself Based on Your Score:
___15. If I find a winner, I like to ride it all the
way up.
Type A Investors: Your odd and even totals are each greater than 5.
___16. If I find a winner, I like to sell a piece of
it to cover my initial investment and lock in an immediate profit. ___17. For the right deal, I am ready to take a
shot. ___18. I have trouble trusting other people to
make my financial decisions.
Type B Investors: Your odd total is greater than 5; your even total is less than 5. . Type C Investors: Your even total is greater than 5; your odd total is less than 5. Type D Investors: Your odd and even totals are each less than 5.
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Personal Financial Statement What You Own (Assets) These are divided into easily sold items (current assets) and those that take time to sell and liquidate (long term assets). Short Term Assets Cash, checking, savings, and money market accounts $_______________ Mutual funds (No deferred savings accounts included) $_______________ Publicly traded stocks & bonds (No deferred savings accounts included) $_______________ Life insurance cash values $_______________ Precious metals, jewelry, paintings, antiques $_______________ Total Short Term Assets: $_______________ Long Term Assets House Other real estate (second house or other property) Private or restricted stock & partnerships Equity value in a small business (if not counted earlier as private stock) Total Long Term Assets
$_______________ $_______________ $_______________ $_______________ $_______________
Total Assets (Short & Long Term)
$_______________
What You Owe (Liabilities) These are divided into immediate debts (current liabilities) such as your monthly bills and those that are not due for at least a year (long term liabilities) such as a house mortgage. For purposes of comparison, we have eliminated all bills that are due in the ordinary course of 30 days just as we exclude your normal income for that period on the asset side. Instead, we ask you to focus on those short term bills due in more than 30 days but less than one year. Short Term Liabilities Credit Card & Other bills over 30 days past due Principal due on car, installment, or other short term loans) Total Short Term Liabilities:
$_______________ $_______________ $_______________
Long Term Liabilities House mortgage Other real estate mortgages) Other loans (e.g. student, investment, notes) Child Support/Alimony totals Total Long Term Liabilities
$_______________ $_______________ $_______________ $_______________ $_______________
Total Liabilities (Short & Long Term)
$_______________
Net Worth: (Difference between Total Assets and Total Liabilities)
$_______________
Eleven Smart Personal Finance Strategies 1. Invest in yourself first. Your career is your most important investment. It will be the source of your initial cashflow to do everything else. Work hard at your job. Network and educate yourself in your field and related fields.
2. Ask your boss once a week how you can help. Ask your boss what you can do for him or her; be sincere; mean it; and above all, do it.
3. Work an extra two hours per week at your job. Commit to more hours at your job than are expected. Hire someone to cut the grass; your number one investment is the day job.
4. Buy a house or condo. You need shelter. This is a forced saving plan that is tax advantaged.
5. Invest to the max in your 401(k) or other deferred savings programs. You have up to nine choices. Do as much as you can.
6. After you pay off your mortgage, make the old monthly payment into growth stocks or mutual funds. This will provide a cushion to pay for your kids’ colleges and other unexpected expenses. If you have anything left over, all to the good!
7. Keep your financial records organized. Good record keeping is an important part of your personal finance & investing plan.
8. Pay cash for your cars. OK, so you can only afford a clunker. Buy it, drive it, and save.
9. Pay off all other debt. Use debit cards so you resist the temptation to run up credit card bills. No home equity or other loans. If you have them, pay them off as promptly as possible.
10. Finance or refinance your mortgage to 15 years. You will own your home much sooner. The forced savings will take you a long way.
11.Have Fun. If you do the first 10 steps, you are entitled to have fun. Go for it! Unless you want to live a baronial life, this personal financial plan should be all you need. 75 www.simplymedia.com
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