mydotmoney.com Blog

Beginners Investing – Part 3

Jens — Thu, 01 Nov 2007 04:15:36 +0000

Now you’ve got a plan, and you’ve freed up income to invest with. The only question is now What do I invest in? There are hundreds of ways to answer this question, and if you asked a hundred different people, you might get a hundred different answers. I believe that if you are investing for your future, you want to pick low-risk investments, and try to diversify yourself as much as possible. Risk is directly related to the level of return. The greater the risk, the greater the possible gain (or loss). Diversifying properly will simply help lower the risk. If you are investing in mutual funds, try to pick some funds from different sectors. (ex: financials, mining, tech, energy, health care, retail… ect)

Once you have selected your long-term investments, I think its a good idea to leave them alone. Don’t move your money around trying to catch the latest trends and cash in on some short term profits. Simply make your monthly contributions and let the market do the work for you. Give it some time, and you will begin to see the magic of compound interest.

Why compounding works

If you put $1,000 in an account that earned 8% interest, after one year you would have an additional $80.00. If you took that $80.00 out and spent it, and did that every year for 10 years, you would have… well, $1,000. You would’ve spent a total of $800 over the 10 year period. On the other hand, if you didn’t want to spend the $80.00 per year, you would have $1080 after the first year. After the second year, not only would you have earned 8% on your original thousand, but also on the interest. You will find that 8% of $1080 is $86.40, leaving you with $1166.40 after two years. At the end of the 10 years, you will have $2158.92 – not only did your original principal earn you $800 in interest, but you also earned an additional $358.92 on top of that. Your annual rate was 8%, but your ‘effective’ total rate of return was about 11.6% due to the compounding.

I’ve included a worksheet that I drew up where I’ve compared two different investors. It’s an amazing example of the power of compound interest.

Beginners Investing – Part 2

Jens — Sun, 28 Oct 2007 20:16:39 +0000

The amount that your investment or portfolio grows in value, isn’t as important as how much money & how often you contribute to it. An ideal goal for anyone would be to set aside 10% of your gross earnings to go into investments. Make $50,000/year? 10% of that works out to $416.67/month, or approximately $208.00/paycheque. Seem like a lot? Try some of these simple steps in freeing up some extra cash every month.

Have some toast, fruit & coffee at home every morning, rather than stopping by Starbucks and purchasing a coffee & muffin.

Do you buy bottled water? Gallon for gallon, it costs more than gasoline. Try to train yourself to drink tap water. If for some reason that is absolutely out of the question, purchase a filter for your tap or water jug. Even buy in bulk and fill up smaller water bottles.

Stop buying lottery tickets! You have a greater chance of being hit by a meteorite than winning the lottery.

Other than the obvious health implications, cigarettes are an absolute HUGE waste of money. If you are a smoker, and want to save money – the very first thing you need to do is quit smoking!

When going on grocery trips, only purchase what you have written down in advance. This will help limit needless spending, and impulse buying.

No matter what you are shopping for, always look around and search for bargains.

These are just a few suggestions, there are obviously thousands of ways that a person or family can be smarter with their money. Do some research, and plan ahead. One of the first rules for saving, is that its not the amount of money that you save that matters the most, its the amount of money that you spend. There are numerous examples that I have read about, of people earning close to minimum wage their entire lives, yet retiring comfortably because they limited spending, and saved properly.

$12.00 a day?

I’l going to use an example of someone earning $16.00/hr. (In Alberta, where I live, the average salary is just under $22.00/hr so this is modest). $16/hr = $33,280/year. You work 8 hours a day. Even if you take 45 minutes out of that work day, and put the money earned aside ($12.00) you have an amazing financial instrument. $12/day at 0% interest will yield you $3,120 in one year. (about 9.3% of your gross income). If you open up a premium rate savings account at a mere 4%, and donate $120 every two weeks, at the end of 12 months you will have $3,650.62. (11% of your gross income)

Get rich automatically

Easier said than done, right? Every two weeks, taking $120 and putting it into a separate account. The best way to do this is to automate it. Every bank or brokerage house will easily set up automatic money transfers for you at pre-determined times. many employers also have the ability to split your pay up, and send different amounts into different accounts. The money comes right off of the top. We all know that money you can’t see, you can’t spend. Get your money working for your future, without you having to do anything!

Double up ROI for free

Many employers now have a program in place, where they will match your contributions into a retirement / pension account up to a certain percentage of your income. This is absolutely fantastic! Take advantage of this as soon as you are eligible. My current employer matches 3% of my gross income into my pension account. I put in 3% and my company puts in 3%. Essentially I am doubling my investment immediately. Even the best fund managers on wall street don’t turn a 100% gain on their funds. Most fund managers are very happy if they earn 8-12% per year. You would assume that taking advantage of this program would be a no-brainer, but believe it or not, there are people out there that decline it.

Once you’ve made a savings plan, and have freed up the cash that you would like to invest with, you are free to start selecting the different investment opportunities out there.

Beginners Investing – Part 1

Jens — Sun, 28 Oct 2007 19:23:59 +0000

n my mind, when it comes to investing, it is very had to make a ‘bad’ investment choice. What I mean by this, is that any decision to save your money, or invest it for the future is always a good choice. It is true that some decisions may pay off better than others, but the minute you decide to plan for your future and start saving, you’ve made the first step on the road to financial freedom.

With that said, where does one start? You’ve decided that you no longer want to live paycheque to paycheque, but you don’t know what to do next.

The very first thing that you should do, before putting any money into investments, is to pay off all of your outstanding high-interest debt. My definition of high interest debt, is anything above prime excluding your mortgage. If you have a balance on your credit card that is costing you 19%, there is absolutely no point in taking money and investing it. You can take your money and put it in a GIC, T-bill, Bond, mutual fund, or any type of financial instrument, but unless your investment is returning MORE than 19%, you are going to be loosing money.

So, pay off those credit cards, high interest LOC’s, and any other outstanding debt that you may have, and then you can start to create a plan for richness.

Curious about life insurance?

Jens — Sun, 21 Oct 2007 18:18:19 +0000

It is my personal opinion that if you have a family, you should never be without life insurance. That goes without question. The only question is; “What type of policy is best for me?”. If you find yourself making this choice, I would suggest than rather ask the actual insurance broker for advice, you should perhaps seek out a financial consultant. The best advice would probably be given by a third party, who wasn’t trying to make a sale. Before you talk to anyone though, it is best to gain some personal knowledge on the subject for yourself, so you aren’t completely lost. Here’s my simple guide.

Life Insurance consists of two basic types of policies. Term and Permanent.

Term Life Insurance covers you for a certain term. For example, a 10 year term policy lasts 10 years, and then it must be renewed. However, when the time does come to renew, the premiums will go up. (premiums = cost of the policy) This is due to the fact that insurance costs increase as you age. For younger people, term insurance is usually the cheapest option. If you do buy term insurance, you will want to match your policy length to meet your needs. For example if your children are in preschool, a 20 year policy should be enough to provide security all the way through their college years.

By age 65, lots of people end up switching to Permanent Life Insurance, which covers them for life. The premiums for this type of insurance are typically higher, but this type of policy also accumulates cash value. There are two types of permanent life insurance.

With a Whole Life policy, the premiums you pay remain the same forever, and the coverage never needs to be renewed.
A Universal Life policy is more flexible, allowing you to change the amount of the death benefit and the premiums you pay. Universal life has an investment attached that can affect the cash value of the policy.

How much coverage do you need? Insurers may try to convince you to get 10 times your annual income. My advice is – don’t buy more than you can afford! Also, when purchasing the policy, find out whether or not you can easily convert your policy to another policy, or even another form of insurance if need be. Make sure you check out the insurer’s financial strength through rating agencies such as www.ambest.com, www.weissratings.com and www.moodys.com.

Diversification through an ETF

Jens — Fri, 19 Oct 2007 00:44:28 +0000

As I may have mentioned in some of my earlier posts, I started out in the stock market playing around with Uranium stocks. I had no portfolio, as I had previously cashed out my RRSP’s and Mutual funds to help me bring together the downpayment on my house.

When I was ready to start putting money back into savings/investments I had decided that I wanted to invest in Uranium. I bought one uranium stock, that wound up merging with another. Within the first 3 months or so, I had seen a 50% gain in my stock price. I was super excited, so I went out and bought 2 more U companies. This was mabye.. 6 or 7 months ago when the U companies were HOT HOT HOT. Now, after watching my portfolio drop not only down to my original investment level, but even further I realize why everyone stresses diversification. My limited portfolio went from being up 60% to down 20% in under a year. Thats a pretty huge swing.

This all leads into diversification. Do not put all of your eggs in one or two or even three baskets, hoping to catch the next big stock. Even holding onto one sector is very risky. I actually took a loss on my investments in order to properly diversify myself.

Being a new and still fairly inexperienced investor, I didn’t want to have to hand pick the stocks in my portfolio, so I did something a little bit different. I bought into an Index Fund. I will write another post later explaining all about Index funds and ETF’s (Exchange Traded Funds), but I can quickly summarize it here. The fund that I bought is the iShares S&P TSX 60 fund, which is compromised of the 60 largest and most liquid stocks traded on the TSX. Now, I can’t say that my portfolio is truley diversified yet, as this TSX fund is weighted very heavily on the financial and energy sectors, but it is definitally WAY better than my previous picks. Over the past 10 years or so, the TSX exchange has averaged around 10%. Not an incredible return, but still very respectable. Over the past 4 or so years, the TSX has averaged closer to 18% return – thats pretty nice in my books.

I will follow up with more info on ETF’s and Diversification.

Back into the swing of things

Jens — Fri, 19 Oct 2007 00:18:36 +0000

I’ve had this blog on hiatus for a few months now. I’ve been very busy with work, and another project that I am working on (http://www.thestrengthcenter.com) I am currently compiling a list of topics to write about, and I am also going to try to recruit additional authors who might want a forum to express their thoughts / opinions.

I put a request in to Investopedia today to see if they would let me use their ‘term of the day’ newsletter as subject content for this site, but that was a no-go. Not a big drawback though, I can easilly compile my own list of terms and definitions and add one every couple of days.