Carnival of Financial Planning – Edition #207 – October 21, 2011

Welcome to the October 21, 2011 Edition #207 of the Carnival of Financial Planning.

The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security.

This edition is arranged by subject heading, so that you can browse efficiently.

Enjoy!

The Skilled Investor, Editor

Budgeting and Economics

My Journey presents Planning To Travel In Advance Makes a Trip Much More Exciting posted at My Journey to Millions, saying, “There is more to planning a trip then finally booking the airfare and hotel. Financially planning for a trip in advance will absolutely lead to a less stressful situation.”

Consumer Boomer presents Holiday Shopping Will Require Much More Detailed Budgeting posted at Consumer Boomer, saying, “In this economy holiday shopping will require much more detailed budgeting this year.”

Rogan Seager presents Retirement Savings Calculator posted at Retirement Savings Calculator, saying, “Valuable future investment portfolio assets and future investment returns slip through many people’s fingers at the checkout stand every day, because they spend beyond their long-term means.”

frugalwallets presents 3 Things to do Before Creating a Budget posted at Frugal Wallets, saying, “Creating a budget can be difficult if you don’t know where to start so I’ve narrowed it down to three simple things to do before you try and make one.”

Estate Planning

Charles Chua C K presents Easy and Effective Way to Update Your Will posted at All About Living with Life.

Marie@familymoneyvalues.com presents What Will Happen to Your Business? posted at FamilyMoneyValues, saying, “Do you have a succession plan for your business? If your family’s business is a public company, in which the family is a majority shareholder – you probably do have formal succession plans. But what if your business is a sole proprietorship and depends on your unique talents?”

Shawanda Greene presents Should You Leave an Inheritance for Your Children? posted at You Have More Than You Think, saying, “A selfish but important question to ask if you’re at risk of dying with mountains of cash. ”

Financial Planning

Jacob presents I’m Staying With Bank of America…”Are You Crazy?” posted at My Money Blog – Personal Finance and Investing, saying, “There’s been a lot of dissatisfaction recently among Bank of America customers due to the decision to start charging a $5/month debit card fee. This post examines my reasons for actually staying with Bank of America and hopefully helps readers plan their correct course of action for their own bank accounts.”

DJ presents Credit Unions and Banks: What Is the Difference? posted at The Family Wallet, saying, “These differences may not seem that significant, but they may be important if you’re looking for a financial institution.”

Kelly presents Emergency Fund: Are You Prepared for the Unexpected? posted at CreditDonkey.com Tips, saying, “we face the risk of natural and manmade disasters, job loss and medical emergencies every day — yet are we financially prepared?”

Super Saver presents Our Journey To Financial Freedom #4 – Lifestyle and Spending Choices posted at My Wealth Builder, saying, “Here are some of the frugal living choices I made that helped enable retirement in my late forties.”

Larry Russell presents Identity theft protection and prevention posted at Personal Investment Management and Financial Planning, saying, “As a threat to your financial security, you should take the potential for identity theft very seriously. Identity theft sometimes entails a loss of your money, but whether or not you lose money, it can take a very large amount of your time to rectify. Taking these steps to prevent an occurrence is prudent.”

DJ presents Chore-Based Earnings to Teach Your Children about the Value of Money posted at The Family Wallet, saying, “You can use chore-based earnings to teach your children about the value of money.”

SB presents I Care About Money, Do you? posted at One Cent at a Time, saying, “Do you take good care of your money? Do you value money as one of the most significant existance of your life? Or you go with the minimalist’s approach of making life independent of monetary demands? Are you happy with whatever money you make?”

Frank Knight presents Investment Asset Allocation posted at Retirement Planning Software, saying, “When you are already there and invested in an asset class, you are following a passive asset allocation strategy. Tactical asset allocation strategy advocates suggest that you can anticipate the crowd, but flow-of-funds studies show that almost all tactical asset allocation fund flows are late money flows that chase performance after valuations have already moved.”

Flexo presents The Emergency Fund in 1939 posted at Consumerism Commentary, saying, “Looking back at history is pretty awesome, especially when it’s tied to a billionaire and the great depression!”

Financing a Home

The Wealthy Canadian presents Purchasing An Investment or Retirement Property | The Wealthy Canadian posted at The Wealthy Canadian, saying, “This article discusses the prospects of purchasing an investment or retirement property and some of the unforeseen costs that can present themselves.”

Dough Roller presents What Credit Score do You Need to Buy a Home? posted at Dough Roller, saying, “Before you apply for a mortgage, make sure you know where you fall on the FICO score ladder. It could be the difference of tens of thousands of dollars in interest payments.”

Emmie presents 6 Personal Finance Tips from Our Elders posted at Frugal Living, saying, “Current retires enjoy a high rate of home-ownership because they have learnt to squirrel their money away for emergency and future needs. ”

Financing Education

Corey presents How to Land that Job: Playing Hard to Get? posted at 20′s Finances, saying, “Gaining employment can be a difficult thing in this economy. Learn how the advice ‘playing hard to get’ may also apply to securing employment.”

David Leeman presents College Student Money Management, College Student Budgeting posted at Financial Freedom Advantage, saying, “The best college student money management advice starts with learning how to budget money and how to live frugally.”

Marie presents How Grandparents Can Help to Fund College Educations posted at Money Spending Mommy, saying, “There are many ways in which grandparents can help their grandchildren with college costs. Here are some to consider.”

Corey presents Five Things You Should Do With A Pay Raise posted at Money Q&A, saying, “Believe it or not, people in America are still getting pay raises and earning promotions. So, the real question becomes, what should you do with your pay raise?”

Dr. Dean presents Choosing the Right College: A Potential $100+K Mistake? posted at The Millionaire Nurse Blog, saying, “Choosing where you should go to college based on the cost of tuition.”

Health Care

Consumer Boomer presents Common Health Issues Of Baby Boomers posted at Consumer Boomer, saying, “If you are a baby boomer you need to be aware of the top common health issues to watch out for.”

Tanya Yoworski presents Top 9 Health Care Systems in the World posted at Medical Billing, saying, “Without question, improvements can be made.”

Consumer Boomer presents Humana Medicare Plans For Boomers posted at Consumer Boomer, saying, “If you are a baby boomer and are approaching the age for Medicare coverage or are already eligible there is a great deal to consider.”

Income

Kyle Taylor presents Get Paid to Go on a Scavenger Hunt Around Town posted at The Penny Hoarder, saying, “Who doesn’t love the thrill of a scavenger hunt, right? This new cell phone app will literally pay you to go on a hunt around town…”

The Financial Blogger presents Why I just Gave Up $4200 In Annual Income posted at The Financial Blogger, saying, “Why I turned some income down.”

Jason@LiveRealNow presents Why I Hate Payday Loans | Live Real, Now posted at Live Real, Now, saying, “When an advertiser contacts me, my rate sheet says very clealy that I will not take payday loan ads. The reason for that is–in my mind–when I accept an advertiser, I am–in some form–endorsing that company, or at least, I am agreeing that they are a legitimate business and I am helping them conduct that business.”

Gerry Sandis presents 28 Questions To Ask Yourself Before Accepting A Job Offer posted at Resume Mag, saying, “You may have spent the last few weeks, or even months, looking for a job and it can be very tempting to immediately accept the first thing that comes your way. Remember, this is going to be your new career, so you don’t want to be too hasty with your decision. Take your time to evaluate the offer and consider these questions.”

Investing

Investor Junkie presents Preparing Your Portfolio for the End of the Year posted at Investor Junkie, saying, “As the end of the year approaches, it’s time to consider your investment portfolio.”

Dividends4Life presents 7 Stocks Increasing The Compounding Power Of Dividends posted at Dividend Growth Stocks, saying, “Too often we take a short-term approach, to our long-term detriment. There is a reason we don’t see infomercials selling dividend growth investment strategies. For those looking to get rich now, a disciplined approach to investing that focuses on the long-term simply isn’t appealing. if I knew in my 20′s or 30′s what I know now about dividend growth stocks, I would likely be retired now.”

Dividends For The Long Run presents How To Build A Dividend Growth Stock Portfolio posted at Dividends For The Long Run, saying, “The tendency to rush to dividend stocks during hard times would seem to indicate that many investors did not already have a dividend paying “cushion” set up in their brokerage accounts prior market downturns. Therefore, in order to forestall future occurrences of this phenomenon, this article will take a beginner’s approach to building a dividend growth stock portfolio.”

Janet Russell presents The illusion of superior professional mutual fund manager performance posted at Personal Investment Management, saying, “If investment mutual fund managers were truly skilled at beating the market, then you would expect mutual fund manager performance prowess to persist over time. The effort to find those few supposedly superior money managers willing to sell their services sufficiently cheaply is a costly, time consuming, and futile, “Where’s Waldo?,” searching exercise for the individual investor.”

FMF presents Why Americans Should Focus More on Saving, Less on Investing posted at Free Money Finance, saying, “The investing community spends way too much time focusing on investment return rate and way too little time on simply saving more money. This is a terrible (and sometimes fatal) mistake.”

Ryan presents Betterment Review: Incredibly Simple Investing posted at Outlaw Finance, saying, “How Betterment works and what it costs.”

Barb Friedberg presents Do you check the price of stocks years after you sell? posted at Barbara Friedberg Personal Finance, saying, “Does it matter if you check the stock prices after you sell? Does it make you a better investor. Check out what I think about it and weigh in with your opinions.”

Frank Bertin presents Index Funds posted at Top Index Funds, saying, “Top ten no load index funds that track the Standard and Poors 500 composite index in terms of lowest costs.”

DGB presents How I Beat The Market With My Dividend Trades posted at The Dividend Guy Blog, saying, “I share a few investing secrets.”

Dividend Growth Investor presents Five Metrics of Successful Dividend Companies posted at Dividend Growth Investor, saying, “Everybody likes winners. Looking at the history of the most successful dividend stocks, I have been able to identify several traits, which have been strong predictors of performance.”

Mirelle Rowden presents Fixed Income Funds posted at Best Bond Mutual Funds, saying, “Vanguard dominates this low cost United States bond mutual funds marketplace for direct purchase accounts with both low and high minimum deposits.”

Consumer Boomer presents Mutual Funds Explained posted at Consumer Boomer, saying, “Here is a look at what a mutual fund is, how they work and what the advantages of investing in one are.”

Managing Credit and Debt

BIFS presents Check Your Credit Card Statements | Budgeting In the Fun Stuff posted at Budgeting In the Fun Stuff, saying, “An unauthorized charge reinforced the idea that I need to check every, single credit card charge every month though. If I hadn’t, I would have paid for someone else’s $499 fishing pole.”

Lazy Man and Money presents Who Wants $500? posted at Lazy Man and Money, saying, “That’s essentially the question that Chase Cards asked a few months ago. They didn’t word it exactly like that, but instead said that if got their credit card and spent $3000 in 3 months, I’d get the equivalent of $500 in points.”

Paul Vachon presents What Credit Card Law of 2009 Means for Consumers posted at The Frugal Toad, saying, “President Obama signed the Credit CARD Act of 2009 into law May 22, 2009 and ushered in a new era for consumers who use credit cards. Most of the provisions took effect on February 22, 2010 with the remaining provisions taking effect on August 22, 2010.”

Joe Plemon presents Are Your Credit Card Rewards Really Rewarding You? posted at Personal Finance By The Book, saying, “Are you really winning with those Credit Card rewards? I truly hope so, but this post will challenge you to give those rewards a second look.”

Meghan presents What Happens If I Don’t Pay My Credit Cards? posted at CreditDonkey.com Tips, saying, “What happens when you are unable to pay your credit card bills as well as some tips on what you can do now to help avoid that situation.”

Matt presents Debt is Debt. Except When it Isn?t? posted at Living In Financial Excellence, saying, “In my eyes, no matter how sophisticated you are with your debt, you’re still in debt. Debt is debt. Period.”

N.W. Journey presents Secured Debt vs. Unsecured Debt | The Critical Differences posted at Networth Journey, saying, “Get help distinguishing between these two forms of debt.”

Glen Craig presents How to Fix an Error on Your Credit Report posted at Free From Broke, saying, “See how to fix an error on your credit report. Why? Because a credit report error can potentially cost you thousands on a loan and even cause you to be rejected.”

Philip presents What Everybody Ought to Know About New Debit Card Fees posted at PT Money Personal Finance, saying, “What’s behind the fees and what you can do about it.”

Miscellaneous

Marie presents Helpful Tips on What to Do When Your Partner Is Financially Out of Control posted at Money Spending Mommy, saying, “If you think your partner’s spending is out of control, it’s crucial that you discuss it before it’s too late.”

Super Saver presents Billionaires and Millionaires posted at My Wealth Builder, saying, “Politically, a millionaire or billionaire is someone making $200,000 (single) or $250,000 (married).”

The Skilled Investor presents Market Timing Does Not Work posted at Personal Financial Management, saying, “Always stay invested to earn risk premiums. You must have your money invested and at risk to get risk premium returns. Jumping out and in or “timing the markets” doesn’t work.”

Craig Ford presents How I Consistently Get Thousands of Dollars of Free Flights Annually posted at Money Help For Christians, saying, “A summary of the strategy I use to earn points and miles for free travel.”

Tripp Danner presents No Load Funds posted at No Load Fund, saying, “There are over 60,000 different mutual fund investment share classes sold worldwide. Some mutual funds and ETFs must be better than others, but which ones are they? How can you tell before the fact?”

Jeri Ford presents Which Current 50,000 Point or Mile Credit Card Sign Up Bonus is the Best? posted at Help Me Travel Cheap, saying, “There are several credit card signup bonuses that offer 50,000 points or miles. Discover the best card for your needs.”

Retirement Planning

Consumer Boomer presents Late Retirement Planning posted at Consumer Boomer, saying, “Here are some tips to help you get started if you are a late retirement planner.”

Chris Holdheide presents How Much Money Do You Need For Retirement posted at stumbleforward.com, saying, “Learn the 5 step process I use to determine how much money you will need to retire the way you want.”

Consumer Boomer presents Early Retirement Lifestyle posted at Consumer Boomer, saying, “Here are some valuable questions you need to ask yourself as you plan to achieve an early retirement.”

Brockton Eaton presents Long Term Investment Strategies posted at Retirement Investment Strategy, saying, “The investment research literature repeatedly demonstrates that a fully diversified, low cost investment strategy is superior.”

FMF presents How Much Money Do You Really Need in Retirement? posted at Free Money Finance, saying, “Here’s a systematic way to know how much you’ll really need for retirement — and how to get there!”

Walter Binkle presents Large Cap Mutual Funds posted at Mutual Funds, saying, “Retirees can save a lot by paying attention to mutual fund expenses. Each of these S & P 500 index funds is among the least costly on the market.”

Mike Holman presents Social Security COLA is 3.6% in 2012 posted at Money Smarts Blog, saying, “Unlike the last two years, 2012 has a SS increase of 3.6%.”

Savings

Mike @ Green Panda presents Which Smartphone is the Best for You? Let’s Compare New Smartphones. posted at Green Panda Treehouse, saying, “Do you have a smartphone?”

Jonathan presents How to Save Money at the Airport posted at Money Mum, saying, “Spending some money at the airport is probably inevitable, but there are steps to take to avoid incurring extreme charges – and save money during your trip.”

Bradson Oakley presents Bond Mutual Funds posted at Best Bond Funds, saying, “Higher bond fund expenses tend to mean lower net returns to individual investors. It is not worth paying higher bond fund fees.”

Madison presents Can You Cut Your Grocery Bill in Half Shopping Only Once a Month? posted at My Dollar Plan, saying, “Can you save time and money by only shopping for groceries once a month?! Read on to find out!”

Ciana Locke presents Market Index Funds posted at Best Index Mutual Funds, saying, “The dominant issue in choosing among passively managed index mutual funds and ETF funds benchmarked against the S & P 500 is that securities industry management and trading fees are all over the map from reasonably low to shockingly high.”

Lisa presents Free Ways to Keep Your Kids Busy posted at Wallet Watcher, saying, “The following will help parents keep their children busy without having to spend hundreds of dollars on the latest technology to keep them happy.”

Stayathome presents How much Life Insurance do I need? posted at stayathomeworker.com, saying, “Choosing a type and amount of life insurance can be an emotional and difficult decision to make. While there is a plethora of available insurance agents to assist you in the process, many are weary of relying on their advice for fear of being “sold” a product they don’t really need. Most insurance agents can assist you in determining how much life insurance coverage is appropriate for your situation. However, ultimately the decision of how much coverage to buy is entirely up to the consumer. Here are some things to consider when deciding how much life insurance coverage is appropriate for you.”

Taxes

SteveR presents The Pitfalls Of Doing Your Own Taxes posted at 2010Taxes, saying, “Doing your own taxes may appear like an easy enough thing to drag off. You just win your W-2 form, make the numbers and you really are great to go. However, there are often more to doing all your taxes than simply simple math, and in many cases which might be hard to do possibly people.”

Finley Merriwether presents Retirement Planning Calculator posted at Retirement Plan Calculator, saying, “Tax-advantaged retirement savings plans give you the opportunity to make investments with deferred taxes in 401k, 403b, 457, Keogh, Simple, or other employer sponsored retirement plans.”

That concludes this edition. Submit your blog article to the next edition of Carnival of Financial Planning using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Technorati tags: carnival of financial planning, blog carnival.

1. No Payment for 90 Days – Delaying Ownership of Things You Cannot Afford @ Frugal Dad.

2. Is Unlimited Air Travel a Good Deal? @ Get Rich Slowly.

3. At Least It’s Always Shiny @ Canadian Finance Blog.

4. A Cup of Coffee Isn’t Just a Cup of Coffee @ TFB

5. Finding A Job Is Easy But Getting One Isn’t If You’re Unprepared @ The Wisdom Journal.

6. Making Our RESP Contribution @ The Wealthy Canadian.

7. Is Passive Income Online The Way of The Future? @ PIN.

8. Getting Involved On Campus – The Benefits Are Great @ My University Money.

9. How Long Does It Take To Become A Millionaire? @ Financial Samurai.

10. Great Small Businesses for Couples @ Studenomics.

11. Getting into Real Estate – What is ‘Errors and Omissions’? @ MJTM.

12. Using Twitter to Predict the Stock Market @ Consumerism Commentary.

13. How To Get Rich Without Leaving Your Home @ Buy Like Buffet.

14. Holding Dividend Stocks For Life…Illusion Or Reality? @ IS.

15. Carnival Of Personal Finance #322: Diminished Expectations Edition.

The Reasons You Owe Money.

Before looking at how to make a decision on when to invest if you still owe money, let’s take a look at the reasons you carry debt. If you think back to the different articles from this Debt Management Solutions Series, perhaps you are benefiting from a mortgage, have car payments, or have used a line of credit as an emergency fund. If these are your only debts and you are working, you can and should be saving for the future on a regular basis. If the reason you owe money is not one stated directly above, ask yourself some serious questions. Do you have a budget? Just as important, do you adhere to it? Do you understand where your money goes? Are you experiencing lifestyle inflation? This is otherwise known as keeping up with the Jones, who just had an outdoor oasis deck built off their patio to the tune of $100k! But seriously, you need to understand what your net income actually is and where does it get spent. If a sizable chunk is dropped on restaurants and the wine/beer store, the next section is for you.

Prioritize Your Expenditures.

Most people shudder when they hear the word budget. Many state they have never used one and don’t need one. This may very well be true. If you prioritize where your income gets spent, who cares if everything is itemized in a spreadsheet. This means that you already save and invest for your future. According to The Wealthy Barber, you don’t have to earn a 6-digit salary to become rich. You have to pay yourself first. So if you believe in your desire to stop working one day, invest some of your income to reach that goal. This should be one of your most important expenditures. If you need some help to get started, take a look at how to Reduce Your Debt Level to Save for Retirement.

Calculate Your Cost vs Benefit.

If this hasn’t convinced you that you can save for the future while you owe money, take a look at this. While you are working, you have several choices to make when deciding how to spend your income. Whenever you decide to buy something, you can pay cash (this includes using a credit card and paying the balance in full on a monthly basis). You can decide to save up for it until you can afford to pay cash or you can borrow to buy it. Now when you purchase a house or new car, the mortgage/loan contracts will explain what your cost of borrowing looks like. In the cast of a 30 year mortgage, the interest cost may equal the purchase price of the home.

When you compare your monthly payment, you find the cost worth the benefit of owning your own home. Is this true for your meal at the restaurant? Or the latest iPad? If you are spending more than you earning and the line of credit is on the rise, calculate your monthly interest costs and add them to your latest purchases. When compared to saving for your future, investments over time tend to generate gains. So the cash you set aside will grow over time. If you don’t save for the future, Borrowing at Retirement may be your alternative.

So my advice to you is to Get Over It Already, Invest in Your Future, you are likely to adjust to this new found situation. Look to balance your expenditures to include living expenses, debt servicing and saving for your future. Drop us a comment to let us know if we can help with your case in particular.

Author: Robert

The Yakezie hits:

1. Why Do You Treat Me So Badly Bank Of America? @ Financial Samurai.

2. Is Sleeping on the Floor Crossing the Frugality Line? @ MHFC.

3. Look at the BIG PICTURE @ Control Your Cash.

4. You Should NOT Be Losing Sleep Over This Market Crash @ Darwin’s Money.

5. Ways to Save with Banking and Recurring Payments @ Beating Broke.

6. 5 Ways to Lower Home Energy Costs @ Saving Money Today.

7. What are the Perks of your Job? @ Young and Thrifty.

8. Budgeting Isn’t For Everyone: Is It For You? @ Sweating The Big Stuff.

9. Fun fact: When the furnace runs out of propane @ ERE.

10. Time For a Swift Kick in the Butt @ TFB.

11. How One Family Survived Unemployment, Part One @ Mom’s Plan.

12. The Market Isn’t On Sale… Yet @ Canadian Finance Blog.

13. Market Meltdown, What Should You Do? @ Money Cone.

14. How to Start Planning for Your Retirement Early @ MPFJ.

15. Should I Hire a Staff Writer? @ BITFS.

Volatility Rules in 2011.

As was the case in 2010, volatility rules was again in 2011. There have been numerous reasons to point out, European sovereign debt, crazy commodities, surging emerging markets and their inflation dangers and the King of all risks: AAA US Treasuries. How long will this game last? What does this mean for investors? When the market goes through a correction (or Crash, depending on how sensitive you are), it could be the best time adjust your portfolio. Now, we’re not advocating timing the market, just taking advantage of how the world works. Once again fear rules! If you can remain objective, you may be able to benefit.

Sell Fixed Income.

We’ve seen fear take over and drive up the price of fixed income. It is possible that this coupled with the drop in stocks means that you now have too much fixed income in your portfolio. If this is the case, it may be advantageous to sell some of of longer maturities. If you are only holding term deposits, remember than patience is a virtue.

Dividend Stocks Make Great Sense.

Last week I was reading about the dichotomy in today’s economy. The companies with the most cash in the bank can still borrow and move forward with their projects. Those who need financing to keep on going on running into difficulty. How can you translate this into success for your portfolio? Invest in businesses with proven track records and solid balance sheets. Where do you find these companies? They pay dividends! At the risk of sounding like a broken record, my suggestion is to pick investments with the best track record. Picking investments that pay dividends gives you access to the best of both worlds, income and growth!

Your Self-Directed Retirement Savings Plan.

Since you are in control of how to invest your self-directed retirement savings, you are able to pick and choose how to make portfolio match Your Ideal Asset Allocation. As previously mentioned, be sure to look at the 7 Ways to Invest Your Retirement Savings to ensure you take advantage of the situation that has presented itself. So instead of panicking over the portfolio you own, take an objective look at where you stand compared where you want to be (asset allocation). If you have cash on the sidelines, use it to fill in the gaps. There are great deals to be had. If you don’t have idle cash, sell some fixed income (before rates rise) to buy dividend producing stocks.

After watching Shark Week on Discovery, go for the kill!

Author: Robert

2. 5 Alternatives to Gym Membership @ Couple Money.

3. Sign Up for the New BFS Newsletter!!! @ BITFS.

4. Steep Stock Market Decline – What To Do Now @ Wealth Pilgrim.

5. Are You Taking Credit For Your Credit Score? @ GPT.

6. Do Experts Share Their Best Tips? @ PIN.

7. Know Your Stuff Before Renting Out Your Home @ PT Money.

8. Start Thinking Like A Wealthy Person @ Canadian Finance Blog.

9. 7 Apps and Software to Help You This School Year @ Studenomics.

10. Would Apple (AAPL) Be The Perfect Dividend Stock? 10 Reasons Why It Just Might Be! @ IS.

11. Check the Fine Print Take 2- Don’t Screw Your Estate @ Good Financial Cents.

12. Why Work When You Can Get Scholarships? @ My University Money.

13. How to Transition from Employee to Entrepreneur @ Christian PF.

14. Learning To Dream Again @ DFA.

15. Does More Weights Equal More Dates? @ Training Shark.

These include non-guaranteed investments; ETFs, mutual funds, debentures, banker assurance notes, commercial paper and preferred shares as well as those with a notion of guarantee; term deposits (certificates of deposit and guaranteed investment certificates), bonds and treasury bills. Let’s look at these last three in greater detail.

Treasury Bills.

Treasury bills are issued by Federal Governments and are generally hold the highest rating in terms of safety against default and have terms to maturity of less than one year. So the safety of the guarantee is related to how solid the issuing government is in the ability to pay back their debt. Stay away from the PIGS (Portugal, Ireland, Greece and Spain) if you are looking for guaranteed investments.

These are rarely held in individual portfolios of less than a million dollars as there are other ‘safe’ products that pay higher interest rates and therefore are less affected by transaction costs. Often used as the basis for money market mutual funds, as well as the cash portion of institutional portfolios and pension funds. So if you are looking for an investment in “near-cash”, treasury bills are the benchmark to measure against. If you see another investment, such as asset-backed commercial paper boasting the same AAA rating yet offering twice the yield of t-bills, remember the fiasco that touched off the most recent stock market meltdown before you make your purchase.

Term Deposits.

The next segment to look at are term deposits which are also referred to as certificates of deposit and guaranteed investment certificates, depending on where you live and where you look. The concept is rather simple. You deposit your hard-earned cash in a financial institution for a certain amount of time (term) in return for their promise to pay you a guaranteed rate of interest and the return of your capital. The guarantee offered is as good as the strength of the financial institution and the government agency that regulates the deposit insurance, if available.

In the USA, the Federal Deposit Insurance Corporation (FDIC) guarantees the safety of deposits in member banks, up to $250,000 per depositor per bank. In Canada, the Canadian Deposit Insurance Corporation (CDIC) works in a similar manner up to $100,000 per depositor per financial institution for deposits up to 5 years in length. In general, the higher the amount invested, the higher your rate. Again if security is really important, be sure to understand the rules regarding federal deposit insurance.

Bonds.

As touched upon last week in an article I wrote a while ago, Create a Fixed Income, Don’t Confuse Return with Revenue, you will need to be even more careful when buying bonds. First of all, not all bonds are alike. The safety of a bonds guarantee is based on the financial strength of the issuer. In general, federal government bonds are safer than state/provincial and municipal issues (PIGS notwithstanding). More often than not, government bonds are safer than corporate issues.

Now let’s see how a bond works, the issuer has created a security (always read the prospectus before buying) that states the rate of interest is paid, the frequency of payments (annually or semi-annually) and the maturity date (when the capital borrowed is returned).

So, in other words, an investor lends the issuer their hard-earned cash for a set period of time and is paid rent in the meantime. This is done as the issuer can normally pay less interest than if they are borrowing from a financial institution (as the risk is diversified over many lenders). As an investor, the return on your investment (yield) and capital are only guaranteed if you hold the security until maturity and if the issuer does not default. So stay away from companies, municipalities, even states (ex. California) who are not financially sound. You should be concerned with the long-term financial viability of the issuer because it is the maturity date that counts if you want your capital back, just ask Germany about their Greek debt!

We hope that this information about guaranteed fixed income investments has helped clear up any lingering questions about the subject. Next time out, we’ll diversify the portfolio beyond fixed income by adding a growth segment and look at different approaches using Asset Allocation. Does your portfolio include guaranteed fixed income investments? If not, where are you invested?

Author: Robert

Let’s jump right into the Yakezie hits:

1. 100 Words On: The Importance of Having a Financial Back-Up Plan @ Len Penzo.

2. Movie Experiences Are Expensive: How to Handle The High Costs @ STBS.

3. Could You Decrease Your Lifestyle Spending? @ TFB.

4. If I Had A Million Dollars @ PF Firewall.

5. How to Find a Programmer, Web Designer, and Other Freelancers @ Car Negotiation Coach.

6. Are CSAs Worth the Cost? @ Ultimate Money Blog.

7. Financial Tips for Women in the Midst of a Divorce @ Financially Poor.

8. 6 Ways To Eliminate Food Waste @ Money Beagle.

9. Market Thoughts: US Debt Drama and Pinecrest Energy @ Beating The Index.

10. How to Survive a Heat Wave With No Air-Conditioning @ Inexpensively.

11. Different Types of Bankruptcy @ Deliver Away Debt.

12. Thank You, Netflix. And No, That’s Not Sarcasm @ Control Your Cash.

13. The story that made me save for retirement @ First Gen American.

14. Starting My Dividend Investing Portfolio @ Saving Money Today.

15. Why Isn’t That Enough? @ Krant Cents.

Asset allocation has been proven as a key to efficiently maximizing your investment returns and will always generate a number of questions. Today, we will strive to provide answers to those who question how to make sense of your asset allocation when a significant amount of your savings is tied up in a pension plan. So after reviewing Amy’s Results: Generate Income From Your Own Pension Plan and discussing fixed income products in depth, we turn our attention to diversifying a portfolio by adding a growth segment to the mix.

We will concentrate on how to incorporate growth investments into the picture and as such, you will find it helpful to look back at 6 Considerations of Where to Invest Your Retirement Savings. We’ll divide our attention based upon whether or not you are fortunate enough to work where they provide a company pension plan.

Company Pension Plan: Defined Benefits.

While we have already addressed the importance of choosing Your Ideal Asset Allocation, let’s look at how your company’s pension plan fits into your overall portfolio. If you are among the few left with a defined benefit pension plan, you are quite fortunate. Many businesses (and soon governments too, perhaps) have started to move away from offering these types of plans. Here is why: a defined benefit pension plan is a fixed income offering.

So, in terms of your asset allocation, the cash transfer value of your company pension plan should be used in its entirety when calculating the dollars you have allocated to fixed income. Employers are shying away from defined benefit plans as safe investments have historically low returns and growth investments in the stock markets have been drubbed on an increasing rapid rate. So rather than be responsible for benefits, employers are changing to defined contribution plans to reduce their risks. Remember, a defined benefit pension plan is 100% fixed income.

Company-Sponsored Defined Contribution Pension Plan.

If you are like the rest of us and have a defined contribution company pension plan, you probably have a list of investments to choose from. My suggestion is pick the investment with the best track record (use an independent firm like Morningstar to judge) and the lowest fees. More often than not, the trust company or insurance firm who manages the account on behalf of your employer charges their fees on top of those within the mutual funds/segregated funds. Often these fees go up when the amount of growth inside the fund rises, for no explicable reason. It’s like like their fiduciary costs climb based on the risk inside the fund!

Anyways, you are better off with a balanced or dividend income fund if the fees are lower and the fund has a solid track record. In this way, you can likely just pick one or two funds for the contributions. Use the funds asset allocation to determine what percentage of your assets are allocated to fixed income versus growth. Send us your comments if you have questions on the choices available to you.

Self-Directed Retirement Savings Plan.

If you have total reign over how to invest your retirement savings, then the choices available to you are virtually unlimited. If you haven’t already done so, take a look at the 7 Ways to Invest Your Retirement Savings that covers the range of options open to you. You will want to start off by understanding your investor profile. This will help you understand your comfort level with risky assets and depending on where you invest, guidelines will be suggested to help you determine the percentage of your savings dedicated to growth and fixed income products.

These days, you might want to consider Guaranteed Fixed Income Investments to go along with your growth investments. As interest rates rise in the coming years (we hope), any fixed income ETFs and mutual funds will likely drop in value, or at best tread water. So don’t be greedy, just try to beat inflation for the next two to three years in the fixed income component. The remainder of your portfolio can concentrate on growing your nest egg for retirement.

Enough said for today, we’ll look at how your age and the number of years until retirement affects your Asset Allocation and Pension Plan choices.

Author: Robert

(photo credit: bluecowboy2002)

Therefore, we will walk you through the strategy of a laddered approach, the different products to choose from when creating a ladder, and their differences when it comes to flexibility. We’ll also address how to choose the term to maturity and the the importance of considering where we are in the economic cycle.

What’s the strategy?

As touched upon last week when we looked at Amy’s Results and How to Generate Income From Your Own Pension Plan, a laddered approach to the fixed income portion of your retirement is often recommended. The priorities for most people on a retirement income are three fold: to have guaranteed investments (both the capital invested and the yield), to get the highest interest rates possible and to have a stable income. While this is totally understandable, you should realize that these objectives are polar opposites.

This being said, a laddered approached can help you maximize yield while respecting the need for guarantees and income stability. A basic ladder is having 20% of the fixed income mature every year over the next five years. If your income needs change during the year you can adjust at the next maturity. If not, reinvest the capital for another five years, usually the highest rate (while ensuring Canadian deposit insurance coverage).

Products?

As discussed earlier, you are looking for investments that guarantee your capital and the yield. This narrows the choices available for your portfolio. Fixed income means that the amount of income generated by the product is fixed ahead of time.

Another important aspect of a product: who is guaranteeing the capital and return. It may also be helpful to review an article I wrote a while ago, Create a Fixed Income, Don’t Confuse Return with Revenue. The different products available are: term deposits (certificates of deposit and guaranteed investment certificates), bonds and treasury bills. You will notice I have not included ETFs, mutual funds nor preferred shares as we are looking for guaranteed capital and yield.

Flexibility?

It is important to determine your need for flexibility. I should stress the word: Need. Everyone wants flexibility. If you insist on it, you will reduce your return. Term deposits can be cashable/redeemable prior to their maturity dates. Often the rates are significantly lower (50% less at times) than certificates of deposit and guaranteed investment certificates that are not redeemable before the maturity date. On the other hand, treasury bills and bonds can be sold in a secondary market before the maturity date (see The Economic Cycle below for other risks involved).

Term to Maturity?

The number of maturity dates depends on the amount of your portfolio invested in fixed income products. This is because smaller investments have lower returns due to rates and commissions paid for bonds and t-bills. I have met numerous clients who would prefer to have 12-24 maturities, one every month for the year or two. As was the case for flexibility, few people really need this. Often, dividing your nest egg into five to ten portions makes sense. With investments of $50000 or more, it is possible to get bonified rates and commissions on bonds can be negotiated. If you have more than a million, look at bond terms over 5 years, after rates have gone back up (we are still looking at some of the lowest interest rates in history).

The Economic Cycle.

We have saved the most important news for last. Your ability to maximize the return/yield/interest rate is greatly affected by the economic cycle. It used to be a local thing but lately has been more affected by global events. So when you ask your advisor to find you a 5% term deposits and he answers with a nine year term to maturity, don’t be insulted. Thank the most recent bad news from around the planet. From the natural disasters in Japan, to the Greek sovereign debt or the unemployment closer to home in the USA, bad news creates a flight to safety. When more investors buy bonds, the price goes up.

As the prices go up, the yield goes down. Then to add insult to injury, once you have bought bonds, if the interest rates rise, the market value of your portfolio decreases. So, the lesson to remember, if rates are likely to rise (and remember: we are still looking at some of the lowest interest rates in history), be sure to hold your bonds to maturity. Yes, we said that bonds can be sold in a secondary market before the maturity date and the risk is they could be sold at a loss.

Next time out, we’ll look into the guarantee aspect of fixed income products. Let us know how you structure your fixed income ladder.

Author: Robert