Regardless if you’re a family of 2 or 5, there is no rule on how much you should be spending on groceries each month. Every family’s food preferences differ and your grocery budget will vary accordingly. I’ve seen a family of 5 budget $400 a month for groceries, while I’ve also seen other families of 5 struggle to make it on $800.

How to Save on Groceries

No matter your eating preferences, there are a few simple steps that every family (or person) can take to save on groceries. If you’re already following these guidelines, then kudos to your diligence, but if you’re not, here are the best ways to go about slashing that grocery budget:

1. Create a weekly or bi-weekly menu

Creating a game plan for what you’re going to be eating for the week is an important step to save money at the grocery store. If you go shopping on a weekly basis (as we do here at the WSL house), then plan your menu the day before (or the morning of) your shopping trip. If you only visit the grocery store every two weeks, then this will be a little more challenging, but it’s still a practice you should implement.

Tips:

• Put at least two meals on the menu that can be pushed off if need-be. We all realize that life is hectic and plans can change at a moments notice. With that in mind, having some meals that don’t include fresh food will allow you to keep flexibility and you won’t have to throw out a bunch of food that you didn’t eat because the menu didn’t go according to plan.
• Your menu should include the main dish and sides.
• Keep the meals balanced and always include a vegetable. If you struggle making meals (or have lots of evening events) then buying frozen (steamed) vegetables is a great way to get some nutritional value without the worry of having the broccoli go bad.

The first step to save on groceries starts with the menu. If you fail at planning ahead, then you’ll be stuck in the position most families find themselves: they’re not sure what to eat for the night, so they opt for the healthy option of fast food.

2. Create a grocery list according to the menu

While the menu allows you to have meals planned each night (so you’re not rushing around trying to figure out what to make for dinner), the most important part is that it allows you to create a grocery list for precisely what you need to make each of that week’s meals.

While I hate to admit this, I’ve developed a habit of watching others while I’m shopping for groceries. It’s AMAZING to see how many people randomly roam down isles and pick up whatever looks good to them. In addition, when you shop without a grocery list, it’s nearly impossible to save money as you’re more liable to buy things that you don’t NEED.

When you’re planning a grocery list, make sure to include snacks and food for breakfast, lunches, and dinner. While it takes practice to ensure that you remember everything you need to buy at the store each week, having a grocery list – and sticking to it! – is far-and-away the best way to save on groceries.

Shameless plug: if you want to start creating meal plans (and grocery lists) so you can save on groceries, then hop on over to my cheap healthy recipes page to get some ideas!

3. Cut back on the meat for goodness sake!

According to NPR, the only country that consumes more pounds of meat per person is Luxembourg. While they may have gotten the best of us, we still can be proud knowing that we consume an average of 270 pounds of meat per person per year!

Statistics further suggest that the average American consumes 62 pounds of beef, 50 pounds of pork, 60 pounds of chicken, and 14 pounds of turkey per year! While I’m not a vegetarian by any stretch of the imagination, and I could personally care less what you choose to feed yourself, the reality is that meat is expensive!

So, if you want to save on groceries then a logical step would be to cut back on your meat consumption. At the WSL house we typically have 1 or 2 meals each week that include meat. We never buy steak to cook at home and any meat we do buy is either (1) chicken breasts or (2) ground turkey or beef. Okay, and maybe some bacon.

If you’re a family of meat-eaters, then try thinking outside the box and buy a half (or quarter) of a cow or pig for the year. You can also negotiate deals with local farmers and buy chickens directly from them. My dad recently purchased an entire hog and it came out to about $.80 per pound! That included bacon, pork chops, ham, ribs, etc.

Finding ways to save on groceries is a challenge, but it doesn’t have to be that way. It simply takes a little planning and execution. If you’re looking for more ways to save on groceries then check out my post about 6 Ways to Save Money on Groceries.

Picture by FreeDigitalPhotos.

Read the rest of The Best Ways to Save on Groceries at WorkSaveLive.com

What is an Emergency Fund Exactly?

For some of you, defining what an emergency fund ISN’T may give you a better idea of it’s true purpose. An emergency fund isn’t:

• a cushion you leave in your checking account.
• money set aside for bills or expenses that will come within the next year (i.e., car repairs, Christmas gifts, property tax, or back-to-school supplies).
• money you dip into for a rockin’ sale at Best Buy, Gap, or the new iPad coming out later this year.

An emergency fund, as the title suggests, is cash set aside (in a savings or money market account) for EMERGENCIES. In my mind emergencies would be things along the lines of unexpected medical expenses, a job loss, or a short-term disability where you’re unable to work.

The major issue I commonly run into, and the reason most Americans are strapped for cash in the event of REAL emergencies, is that most people use their savings/emergency fund cash for expected expenses like car repairs, property taxes, house repairs, or to pay their semi-annual life insurance premium.

Personally, the WorkSaveLive household sports TWO savings accounts: one for expected expenses and one for emergencies.

How Much Should Be In Your Emergency Fund?

If you have debt, particularly car loans, credit cards, or personal loans, then I suggest you have somewhere between $1,000-$5,000 saved (the more income and expenses, the higher in that range you should have).

Once you’re out of debt then I would have at least 4 months worth of income or living expenses stashed in that emergency fund account. Some people I’ve met with prefer to have 12 months and I’ve seen a myriad of ranges in-between. At the end of the day it really depends on what you’re comfortable with, but I’d always caution that you shouldn’t have too much money that isn’t bearing much interest and losing pace to inflation.

Should You Invest Your Emergency Fund?

If you’re smart, no. Personally we have our emergency fund in a money market account, however other good places would be in a savings account like EverBank where you can get a bonus introductory rate right now, or in staggered CD’s at a place like Ally Bank where the rates on CDs are amazing!

I don’t suggest you put it in the stock market, invest in gold or peer-to-peer lending, or leave hundred dollar bills buried in the back yard or hidden under your mattress.

I realize you’re not going to get rich on the interest you’re making, but getting rich isn’t the point of your emergency fund. The point is for it to be there when you need it most.

4 Ways to Build Your Emergency Fund Faster

1. Sell stuff around the house

I’m willing to bet there is stuff lying around your house or stored in your attic that you haven’t used, wore, or touched in ages. Get rid of it! Host a garage sale or post it on Craigslist, Ebay, or Amazon. My friends over at See Debt Run just sold their guitar and amp as they’re working on getting out of debt. Sure, it’s tough to get rid of some of our possessions, but if you’re not using it, what’s the point of keeping it?

2. Get a part-time job or work overtime

If you’re serious about padding your emergency fund in a short amount of time then taking on a 2nd job (or working overtime) is a sure-fire way to get there. While it’s a difficult sacrifice to make, we’re just talking about committing a few months worth of your time; in the grand scheme of life, 6 months out of the next 40 years you’re alive is a drop in the bucket.

I have a few investment clients that work the part-time morning shift at UPS making $12/hour; while it’s not a lot of money and the shift is only 3 hours/day, they are getting GREAT health insurance, a company match on the 401(k), building a SWEET pension, AND padding their emergency fund!

3. Cut a particular budget category for a few months

For the first year and a half that I was overcoming my broke and desperate phase, I stopped eating out. Completely.

I also canceled cable, reduced my cell phone package, and took time to shop my home and car insurance rates. In a matter of weeks I was able to save an extra $400/month that helped me build my emergency fund faster than I thought was possible.

4. Give plasma or become a pin cushion

While plasma donation centers are thought of as a gathering center for junkies — at least it was for me — it’s actually a decent place, with normal people, where you can earn some extra cash while saving a life.

You’re able to give plasma up to two times a week, and for 1-2 hours a pop you could net $20/visit. While it might not be a lot, an extra $160/month will get you to your $1,000 emergency fund goal in 7 short months.

Have you ever had to dip into your emergency fund? What it for a real emergency or was it for one of those bills that we all know is coming?

Picture by FreeDigitalPhotos.

Read the rest of 4 Ways to Build Your Emergency Fund Faster at WorkSaveLive.com

What is the Cash Envelope System?

The cash envelope system is a money management tool that will:

1. Allow you to stick to your budget.
2. Give you the freedom to spend money without the feeling of guilt or regret.
3. Give you the power to say “no!” to your friends and family.

Basically, instead of making purchases with a credit card, debit card, OR writing a check, you instead only use cash for those purchases.

The cash envelope system is only to be used for discretionary spending items/categories. “Discretionary” simple means that you have a choice in the amount of money that gets spent on that particular item or category. So, for instance, here are all of the different categories (and envelopes) that we have in our cash envelope system:

• Groceries
• Eating out and entertainment
• Hygiene – tooth paste, toilet paper, shampoo, floss, deodorant, etc.
• Hair cuts
• Clothes
• Dog care – food, toys, pet visits, heartguard, flea medicine
• Housing products – cleaning supplies, paper towels, etc.
• Blow money – an equal amount of spending money that my wife and I get for the month to use on whatever we want (that’s not covered in the other categories).
• Dry cleaning
• House and kitchen fun money
• Gas (for the car)

Something that’s important to understand is that the cash envelope system must be modified to meet your life and budget. For instance, many of my clients buy their groceries, hygiene, and housing products at the same store. If that’s the case for you then you may want to consider having all of those categories as part of one envelope. For my household, we typically shop at different places for each of those things so it makes more sense for us to split them up.

Also, some of you may have to add an envelope or two. For example, if you have children you may want to include an “allowance” or “commission” envelope. If you have teenage kids then you can have an envelope for the money you’re going to give them each month for their spending or gas.

How to Start the Envelope System

1. Get on a budget

Without a budget it’s impossible to know how much you can allocate to each cash envelope. If you’ve never budgeted then start with the principles of budgeting and walk through that budgeting series.

2. Determine which categories need to become cash envelopes

See my list above as those are the most common categories (less “dry cleaning”) in the cash envelope system.

3. Go buy some envelopes

This isn’t called the “cash envelope system” for no reason. Each category has a separate envelope with it’s own money. Write the name of the category on the front of the envelope and use use that cash envelope only for its designated category.

4. Determine how much cash each envelope should get

It’s important to understand that it takes 2-3 months to really get this part right because there is no “perfect” amount for every family out there. So, with that in mind, you MUST test it out and see if the amount you allocated works! If you’ve never budgeted before, then use these average budget numbers to get started and adjust from there. When determining the amount each cash envelope should get, think in terms of monthly amounts.

For instance, if you’re a family of 5 (husband/wife with 3 kids under 10) then consider starting your grocery envelope with $500/month. At the end of the month, if you have money left in your cash envelope system then try starting with $450 next month. However, if you discovered that $500 didn’t work, then increase it to $550 next month. Do this for each cash envelope category.

Lastly, if you go to the grocery store once/week and budgeted $500 for the month, that doesn’t mean you have to take all $500 with you. Simply take $150 for that week and leave the rest in the envelope system at home.

5. Determine when to withdrawal the cash each month

Everybody’s budget will vary, but if you make a decent amount of money (and have a relative low amount of cash expenses), then you might be able to take out all of your cash and fund your cash envelope system with the first paycheck of each month. If you get paid every-other week, then consider splitting up the monthly total and taking it in two equal amounts on your pay dates. If you get paid weekly, then split the monthly cash envelope total by 4 and withdrawal 1/4 of the cash each time you get paid.

6. Make it work and stick to it

The cash envelope system isn’t some perfect, flawless system that will work for every family out there. Some people prefer to avoid using cash completely and opt to maximize their budget by taking advantage of credit card rewards. With that said, mold the envelope system to fit you and your family. If you’re hesitant about using cash envelopes for all of your spending categories, then start with one item such as groceries. Test it out for a month or two and see if you like it. If you do, then slowly transition other categories to the envelope system.

Finally, if you’re going to use the cash envelope system, then stick to it! The sole purpose of the envelope system is to ensure you don’t overspend on a particular category (as your cash serves as your monthly limit). So, it’s pointless if you’re going to blow through your cash and use your credit card or debit card once you’re out of money.

Conclusion and Why It’ll Help Control Spending

Most people throughout the world fail to pay attention to how much they spend each day, week, and month. We’ve become accustomed to swiping our debit or credit cards and it doesn’t dawn on us how much we’ve spent until we look at our bank account and see that we don’t have any money left!

Solution: the cash envelope system. You’ve taken the time to establish a budget so that you can determine how much you CAN allocate every month to each envelope category. Once you’re on the cash system then you’re making it a habit to withdraw the cash at the beginning of each month, where you begin spending it as needed. You spend the cash freely, but you remain cognizant that it’s supposed to last you the entire month! Once the money is gone, you’re out of cash for that category until the next month begins at which point you’re allowed to go back to the bank to get more.

The cash envelope system has worked wonders for the WSL house. We first got on the system nearly 5 years ago and it has forced me to be disciplined and to learn to say “no” to my friends and family (and myself) when we run out of money. Learning to control spending is an integral step to paying down debt, building savings, and getting your financial life in order, and the cash envelope system will help you get there!

Have you tried the cash envelope system? Did it work for you?

Read the rest of How to Start and Use the Cash Envelope System at WorkSaveLive.com

Before we move ahead, I want to point out on thing:

Americans put far too much value in their FICO (Fair Isaac Corporation) scores.

I will acknowledge that the score is becoming increasingly important because it is now linked to insurance rates, mobile phone plan prices, and a myriad of other things. However, “FICO pride” is alive and well in this country. What I mean by that is MORE people care about a high credit score than they care about having money in the bank or their 401(k) account.

I’m not saying you shouldn’t have a high credit score, because you should. All I want to point out is that a high credit score DOES NOT mean you’re winning financially. It DOES NOT mean you manage money well, and it certainly DOES NOT mean you have wealth.

All a high credit score means is that you’ve borrowed money frequently, for a long period of time, and consistantly pay it back on time.

4 Ways to Obtain Initial Credit

If you’re asking ‘how can I get credit?’ I will simply let you know that your options are limited. This post is merely to give you the options that I know to be available. However, please understand that I’m not saying you should do all of these.

Some of these options are good and a few of them are terrible. I will get into that in my follow-up post here in a couple of weeks.

1. Apply for a Secured Credit Card

A secured or bad credit credit card simply means that you have to pay for your line of credit upfront. The amount will vary depending on the banking institution and the amount you’re willing to put down. It can range from a couple of hundred dollars to a couple of thousand.

A secured credit card is good for the bank and it’s good for you in that:

1. If you were to miss a payment, the bank has your initial deposit on-hand to cover the balance. So the bank has very little risk.
2. It’s good for you simply because it gives you the opportunity to build and get credit. FICO says that they do not differentiate between unsecured and secured debt, which simply means that they both have the same impact on your credit score.

As with all forms of credit, you should shop around to find the best interest rates and deals. Try to avoid any cards with annual fees (money they charge you just to have the card). A good place to start this search would be to talk to the bank or credit union with which you have a checking/savings account.

2. Get a Car Loan

This is not a good idea if you are not planning to get a car in the first place; however (unfortunately), it is an option.

Car dealers and manufacturers are always willing to sell you a car. If you show any ability to pay the monthly payments, they’ll wisk you into a new car as fast as Jimmy John’s can make you a sandwich.

The dealer knows that they don’t make money when they sell a car…they make the money when you finance a car. If you don’t have any credit, and you’re looking to build it, they’ll be more than happy to put you into a loan with a 20% interest rate.

3. Find a Co-Signer

As I mentioned at the start of this post: getting initial credit is tough. When I was trying to get student loans on my own, prior to having established credit, I was shot down every time.

There aren’t many companies that want to take the risk of helping you start your credit — and rightly so. In their eyes you don’t have a track record of borrowing money and paying it back…so it only makes sense.

One of the ways you can get approved though for a loan or a credit card is by having a co-signer that has established credit (and a high credit score).

By having somebody co-sign with you, the bank mitigates their risk by being able to go after the co-signer if you’re unable to pay the bill or monthly payment.

4. Use Money as Collateral

This is similar to a secured credit card. With the secured credit card, you’re using your upfront cash as collateral on your line of credit.

So, if you have money in a savings or checking account, your lending institution may allow you to use that as collateral for a small loan. The loan would have to have a purpose though: buying a car, furniture, or something of that nature.

Just like with the secured credit card, the collateral (money) alleviates the risk for the bank and ensures that they’ll have money to take if you’re unable to make the monthly loan payment.

There may be some other options out there to get credit, but these are a few ideas that I know of. You may be able to get credit if your utility bills or mobile phone carriers report to the credit agengies (TransUnion, Equifax, and Experian), but that isn’t very common.

Always be smart with building credit. It won’t happen overnight, but after 6 months to a year of making your payments on time, you’ll have built up enough of a rating to have other options available to you.

Picture by FreeDigitalPhotos.net.

Read the rest of 4 Ways to Get Initial Credit at WorkSaveLive.com

Instead of cashing out, some homeowners are instead using a cash-in refinance. This type of refinance is the complete opposite of a cash-out refinance; instead of taking money out, you pay money to reduce the principal while you refinance your home.

How Does a Cash-In Refinance Work?

Right now, the idea of refinancing is attractive to many homeowners. Mortgage interest rates are at record lows. However, some homeowners can’t take advantage of the rates because they don’t qualify for government programs that allow them to refinance, and their loan-to-value ratios are too high. In these cases, the ability to pay down the principal, and then refinance what’s left can be helpful.

Others might be interested in building a little more home equity in order to reduce monthly payments, and save on interest over time. Reducing the the principal can allow some borrowers the opportunity to reduce what they owe, as well as shorten the loan term in a manageable way, since the amount borrowed is lower (along with a lower interest rate).

With a cash-in refinance, you offer to pay a large amount toward the principal of the loan. You put money into your mortgage loan, rather than take it out. Now that the principal is reduced, the remaining balance is smaller. Your refinance is a lower amount, and you can use different terms: A lower rate, and a possibly lower term. A cash-in refinance can provide you with the opportunity to improve your cash flow, as well as save money over the long-term.

Is a Cash-In Refinance Right for You?

Of course, a cash-in refinance, like any other financial decision, requires careful thought. Before you complete a cash-in refinance, you need to consider whether or not it’s right for you. And, of course, you need to have a sizable chunk of capital at your disposal in order to reduce your principal at the time of refinance.

Consider how long you plan to stay in the house. If you are staying in your home for a short period of time, the money you put in might turn out to be lost to you, especially if your housing market is a ways from recovering. Additionally, your interest savings might not outweigh the loan fees you pay if you move before you can recoup the costs. Run the numbers to determine whether it makes sense from that standpoint. You want to make sure that you really are saving over time with your cash-in refinance.

Another consideration is liquidity. Once you put that money into the home, it’s locked up. Can you afford to lock up $10,000 to $15,000 just to save a little bit of money each month? As soon as you finish your cash-in refinance, that money is inaccessible to you unless you get a home equity loan or line of credit. In some cases, if you can get a refinance (check to see if you qualify for government programs) without putting the cash in, you will be able to save on interest, improve your cash flow, and keep your assets a little more liquid.

Those who can benefit the most from a cash-in refinance are likely those who don’t have a low enough loan-to-value (LTV) ratio to refinance. With tighter requirements, it can be difficult for those with a LTV higher than 80% to qualify. Another consideration is private mortgage insurance. If you have a LTV greater than 80%, you are probably paying private mortgage insurance. You can get rid of those PMI premiums by bringing your LTV to less than 80%. Your cash-in refinance qualifies you for the best terms, as well as helps you get rid of the mortgage insurance premiums. These advantages, especially if you can get a no-cost refinance, can save you money over time.

How to Do a Cash-In Refinance

For the most part, a cash-in refinance operates similarly to a regular refinance. You need to have good credit, and you also need to go through the steps required of you to qualify for a mortgage. The main difference is that you use a sort of “down payment” as part of your refinance. When you ask for a refinance, which is essentially a replacement mortgage, you can choose to pay money toward the principle.

Before you do, though, consider the pros and cons. If you won’t qualify for a refinance without the cash-in, or if you want to get rid of your PMI, consider putting in only the minimum needed to accomplish your goals.

Photo via Wikimedia Commons.

Read the rest of What is a Cash-In Refinance and Does It Make Sense for You? at WorkSaveLive.com

Pros and Cons of a Prenuptial Agreement

As with any aspect of getting married, there are significant pros and cons to prenups.

Pros of Having a Prenup

A prenup will protect both parties in the event they decide to end their marriage together. That protection comes in the form of a (mostly) clean split of financial assets as predetermined by the prenup. A prenup agreement protects both parties from having divorce law dictate how their assets are divided up. It helps both individuals to see the consequences of ending their marriage up front.

Cons of Having a Prenup

On the other hand, some argue that having a prenup is like putting a quick escape door next to the entrance of their marriage. If both parties know what will happen when things go downhill, it might just be easier to end things then rather than working through the pain.

A prenup is a contract. Having a plan of exit in case a business relationship doesn’t work out makes sense, but some believe that a prenup is like planning for your marriage to fail from the beginning. If that’s the case, why get married at all?

4 Reasons to Consider a Prenup

Aren’t sure if a prenup is right for your relationship? Consider the following reasons that you might want to consider this type of agreement.

One person has significantly more assets

If the wife brings a significantly higher level of assets to the marriage, she is at higher risk of losing something if the marriage ends. Many divorces result in an even split of the couple’s assets. If the husband brings $1 to the relationship and the wife brings $100,000, both parties could end up with $50,000 after ending their marriage. For the person that had nothing, this is a great deal. For the spouse with the $100,000 to start, a prenup suddenly looks attractive.

One person is a partner in a business

If the husband is a parter in a business, his share of the business could be split in a divorce and given to the wife. His business partners may not be comfortable with someone not directly involved in the business owning a share and may require him to have a prenup that at least covers this scenario. This protects not only the husband and wife in the event of a divorce, but the business partners as well.

One person has significantly higher debts

Likewise if one person has $100,000 in debts and the other enters the marriage without any debt at all, a divorce could result in the debt-free spouse owing part of the debt. If the debtor files for bankruptcy the creditors may look to the former spouse as a source of payment.

One person plans to stay home to raise the children

A final reason a prenup can be beneficial is to protect a spouse that stays home to raise kids. Voluntarily leaving the work force — and any developed career behind — has a significant financial impact from an individual perspective. A prenup could value this work and provide financial protection to the stay at home spouse in case the couple ends the marriage.

One Reasons to Not Get a Prenup

There is one reason where it simply is a horrible idea to get a prenuptial agreement: if you don’t think it is going to work out.

If that’s the case you don’t need to be getting married to anyone. There is a significant issue with going “Eh, it might not work out, but hey! I’ve got my contract so I’m covered!”

A prenup boils a (hopefully) deep emotional relationship down to a simple business transaction. There are instances where it can be used correctly to protect a business or from significant debts, but most of the time it just expedites the dissolution of a marriage.
Photo by Rio Calle.

Read the rest of 4 Reasons to Consider a Prenuptial Agreement at WorkSaveLive.com

Is Your Home an Investment or Not?

Why Your Home IS an Investment

At its core, to be defined as an investment, you must invest money in expectation of interest, profit, income, or appreciation in value. When you purchase a home you are trading money in the form of a down payment for equity in the value of the home. You are trading money for ownership in an asset. That asset — your house, condo, or townhouse — can go up in value and be sold in the future at a profit. In the most basic sense of the word, your home can be considered an investment.

Why Your Home IS NOT an Investment

Your home is a place where you live. It is four walls and a roof over your head. Even if you are able to sell your home for a great profit, you still have to have a place to live — this alone should disqualify your home as an investment.

If you truly looked at your home as an investment, you would sell it once it meet a certain predefine criteria. Would you sell your house today if it went up 25% in value? Would you leave behind the great neighbors and close commute you currently enjoy? And with other homes in your area also going up in value, you may not really be getting that much additional value because you still need some place to live.

If your home was truly an investment you could sell it without it greatly impacting your life — just like selling stocks.

Does Your Home Belong in Your Portfolio?

When you are looking at things like asset allocation and overall risk, should your home enter the equation? First, let’s talk about what counts. Your home likely has a mortgage associated with it. It is both an asset and a liability. So I think what counts should be your equity in the home, i.e., the difference between the current home value minus what you still owe.

And if you have negative equity (e.g., you owe more than the house is worth), the difference should be counted as a negative bond allocation.

Now let’s talk specifically about primary residence versus rental property

Primary Residence

When you first buy the home the impact to your net worth is practically zero because you put money down (an asset), got a mortgage (a liability), and some equity in a property (an asset). But when you’re looking at things like asset allocation, should your home count?

I think the best way to deal with this is to frame it as a question: Would you sell your home if this portion of your portfolio increased dramatically to keep it in line with your asset allocation goals? Most people would say absolutely not because they see their property as a place to live, not an asset that should be bought and sold to stay in line with portfolio expectations.

So the short answer is NO — don’t count your primary residence in your portfolio asset allocation.

Rental Property

The story is a bit different if you own rental property. Rental property in its most basic form is not a place for you to live. You want renters living there, paying rent, paying off the mortgage, and generating rental income for you. At its core, rental property is in an investment. As such, it should be factored into your portfolio.

If you only want a 10% exposure to real estate and your rental property currently makes up 10% of your portfolio, you shouldn’t go invest additional funds into other real estate investments (such as REIT mutual funds). That would throw your portfolio out of whack and give you too much exposure to that asset class.

Comparing Your Home to Other Investments

Even if you considered your home an investment asset, it turns out it is a pretty bad one when you compare it against other investments.

Why Your Home is Worse

Slow Appreciation

Over a long period of time your home will go up in value, but not because it is a superior investment. Home prices have risen gradually over decades dues to inflation. Granted, there are spikes where home prices go crazy (as we saw a few years ago), but these are anomalies that eventually come crashing back down to the historical averages.

Buy on Margin

When you trade stocks, you have the option of borrowing money from the broker to buy shares. In general, this is not a good idea because the cost of margin is very hard to overcome. When you buy a home, you almost always have to borrow money (unless you have a pile of cash sitting around). On a 30 year mortgage you will practically buy the house twice with all of the interest you pay over the life of the mortgage.

High Expense

When you buy shares in a mutual fund you are charged a fee based on the amount of money you have invested with the fund, i.e., the expense ratio. The average cost across all mutual funds is around 1% per year. When you buy a home your “expense ratio” is significantly higher.

You have maintenance costs that you have to pay, e.g., your roof will need replacing, the water heater will go out, and the air conditioner will need recharging. These costs are all your responsibility and can really add up. On top of maintainance, you have other annual fees that typically include property tax, home insurance, and home owner association fee.

All of these expenses do add up and can easily cost you more than 1% per year.

High Trading Fee and Low Liquidity

When you deal with other asset classes, you only have to worry about the trade commission and the bid-ask spread. These expenses are miniscule compare to what it takes to buy and sell a home. Also it takes months to buy and sell a home, compare to the few minutes it takes to buy and sell stocks.

If you decide to buy $10,000 worth of a single company’s stock you can almost always be able to sell off that investment through the massive stock exchanges. Your home is not a liquid investment like a stock. If you buy a home and decide you want to sell, you have to wait for the right buyer to come along. You can’t sell your house on a whim like you can your stocks or mutual fund investments. When it does sell, you have 6% realtor commissions (usually) to pay, plus other closing costs. It’s a tough asset to sell and the transaction costs are massive.

Why Your Home is Better

Tax Efficiency

Not counting the annual property tax you have to pay, the one main advantage of a house is its tax efficiency. Compare to other investments that are subject to capital gains tax, the capital gains on your home sale could be tax free. This alone can make up for many of the deficiencies listed above.

Moreover, your home has several tax advantages over other investments:

• The mortgage interest you paid each year is tax deductible
• Your property tax is deductible
• In addition, if your home is an investment property, many of the maintenance expenses are deductible and you could claim depreciation on the asset

Inflation Hedge

One reason why real estate is a good alternative investment is because its ability to hedge against inflation. Your home is a hard asset that requires raw material to build and the land it sits on is limited in quantity, both of these factors ensure that your home with at least keep up with the rate of inflation over the long-term.

Moreover, your mortgage is a hedge against inflation. When you take out a mortgage, you pay the same amount over the course of 30 years. At the long-term inflation rate average of 3.43%, this means that you are effectively paying about 10% less every 3-4 years. If you are paying $1,000 a month mortgage payment today, in 10 years, it is the equivalent of $740 in today’s dollars; and in 30 years, it is the equivalent of $380. This works especially well with today’s mortgage rates where the rates are approaching the long-term inflation rate average.

So, what do you think? Do you count your home as part of your investment portfolio?

Photo by Images of Money.

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1. Do Really Well in Your Current Job

I think this one goes without saying and if you can’t get this one right, other ideas below will not help you. If your manager is not good with giving feedback, schedule some one-on-one time with him to go over your performance — remember, it’s his opinion that matters. I believe that if you want to position yourself for a career advancement, you have to perform within the top 20% of your peer group.

2. Put Together a Career Plan.

If you haven’t thought about where you want to be a year, three years, or five years from now, then think about it. The way I see it you have about 40 years to get to where you ultimately wanted to end up. Each job is a stepping-stone that takes you one step closer to your goal. If you spend on average 2 years in each job, you have about 20 chances to get it right. If you spend too much time in a job, you’ll have to figure out short cuts or you may never get there. It’s important to know where you are and where you want to go. In your career plan, each job should help you build skills and experience necessary to get you to the next level.

A good way to put together a plan is to ask people that are already in the position you want to be in, and ask if they could share the steps they took to get to where they are today.

3. Perform a Gap Analysis.

Next, look at your strengths and weaknesses along with gaps in your skills and experience. Write them down and figure out how you are going accentuate your strengths, improve your weaknesses, and close the skills and experience gaps. This list becomes your developmental action plan, and all you have to do is just keep working your plan until you complete all the tasks.

Remember, you don’t have to do this all by yourself. Reach out to your manager and others within your organization for help. Also, there are external clubs, associations, and groups that you can join to help you improve various skills.

4. Let Your Manager Know.

If you haven’t done it already, get your manager involved. Let him know that you have a desire to advance your career, share your career plan, and your developmental action plan. When you get your manager involved, you open up more opportunities for development. For example, he may give you more managerial responsibilities to help you learn the essential skills, or get you involved in management meetings to help you develop. A good manager will be more than happy to help you grow and achieve your career goal.

5. Volunteer for Special Projects.

It’s one thing to be an excellent employee; it’s another to go above and beyond. A great way to help your career is to volunteer for special projects; especially the ones that help you meet people outside of your core group and develop skills identified in your developmental action plan. Moreover, don’t limit yourself to the confine of your company. You could also participate in relevant professional and industry associations to get the necessary skills and experience.

6. Network. Network. Network.

Networking occurs at many levels and in many forms. There is no right way or wrong way to network. The goal is to get your name and good reputation out there. You want other people to think about you when there’s an opportunity or a need. In my opinion, there are four levels of networking (from worst to best):

1. No Networking – Do your job, mind your own business, and go home when the day is over. This is a surefire way to stall your career advancement. This is not recommended.
2. Casual Networking — You connect with your peers and theirs through social networking sites like Facebook and LinkedIn. You attend meetings and social gatherings. You participate in professional and affinity groups. This casual networking (inside and outside of your job) helps get your name out there and opens doors to opportunities.
3. Work Related Networking – These are people who are working or have worked with you. They know how you perform in various professional capacities and could become your eyes and ears, or even vouch for you. These are the people that help build and spread your reputation.
4. Core Networking — These are the core group of people that you establish extensive relationship with. They are your coaches, champions, mentors, or otherwise people that act as your sounding board. These are the people that know you really well and understand what you are capable of — you may even consider some of them personal friends. These are the people that will have the most significant impact on your career.

You should always remember that networking is a two way street. You must give before you take, so be sure to act as eyes and ears for people in your network. If you help enough people advance their careers, yours is bound to move in the right direction as well.

7. Groom Your Replacement.

A lot of people will disagree with me on this one, but I think it’s important for you to start grooming your replacement as soon as you are able to. Remember that you want each job to be a stepping-stone and not a final resting place. You want to be able to move into a position, do really well, and take your next step. If you are hard to replace, it will also be tough for you to move forward without burning bridges. Always give yourself the ability to leave any job gracefully.

I know it’s tough out there and career advancement may be the last thing on your mind. However, you’d be doing yourself a disservice if you don’t at least try to position yourself for the best possible outcome.

Photo by Mingo.nl via Flickr

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Traditional Banking

Many banks have started moving their full suite of services online. In fact, there are several banks that are all online, such as Everbank and Ally Bank.

These banks offer many traditional lending services, such as auto loans and home loans, but do it from the convenience of the internet. If you are looking for a traditional loan online, this can be a great solution for you.

Peer to Peer Lending

Peer to peer lending has become extremely popular because it is other individuals loaning money, not institutions.

As a result, there are no lending standards that have to be met, or other qualifications. Instead, most borrowers put together a post (like an eBay ad) that highlights what the money will be used for and why they would make a good borrower.

The company then vets the borrower, and puts together a credit score for the lenders to see. Lenders then bid on the loan, and if it gets funded, the company will handle everything.

This is a great alternative for borrowers who many not have the best credit, or are going to be using the loan for a non-traditional reason. Many of the borrowers on these sites are looking to start businesses, or are looking to consolidate their debts. As such, these loans are a bit more risky than traditional loans.

There are two main players in the market – Prosper and Lending Club, and several smaller ones. However, these companies are booming in the lending market. It was recently announced that Peer to Peer Lending Crossed $1 Billion in Loans Issued, as reported by Tech Crunch and the SEC. That is a lot of money changing hands online.

Alternative Lenders

Finally, alternative lenders are getting into the online space as well. For example, there are many payday lenders that offer personal loans online and send you money almost immediately. Some lenders require documents to be emailed or faxed in, but since the internet is about convenience, many lenders have opted to avoid the extra hassle and streamline the process.

A popular alternative, and one that I’ve recently seen a large push from to enter the online space, has been online pawn shops. They’re letting customers mail in certain items (like electronics), while offering short-term loans or the option to buy your item outright.

While the online and technological era continues to push forward, things are evolving at a rapid rate. There are now more options than ever for people that are looking for a short-term solution to their financial woes and it has provided wonderful opportunities for people that are looking to finance start-up businesses. While I haven’t applied for any loans in the last few years, I have heavily considered investing in the Peer-to-Peer lending market. The returns have just been impressive!

Picture by FreeDigitalPhotos.net

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What is Market Awareness?

To be aware of the market means to follow the market, even if at a very basic level. This doesn’t mean you need to know the exact level of the Dow or the NASDAQ each day, but it does mean you have a good feel for the current level and trends of the broad stock market. For example, you should be aware that we hit historic lows back in March of 2009 and historic highs recently.

Now, a market timer would typically try and identify a top at this point and perhaps sell their positions or maybe even go short against the market or specific positions. This is not the recommended strategy because it is too difficult to identify a market top to make a move this bold. Bold moves require a high level of certainty, and future predictions of broad market direction will rarely have such a high level of certainty.

Altering Your Buying or Selling Based on Awareness

Most professionals will recommend consistent buying of stocks over a long period of time. This dollar-cost averaging approach will prevent you from being over-exposed to a bad timing of purchases. Many will even recommend blindly continuing this approach no matter what the stock market has done or is currently doing. I disagree with this approach.

Going back to our current example, I would recommend using market awareness to adjust an investor’s buying activities. In a market that is up and near its record high, I would not want to buy as much as I have been buying as the market has gone up over the last several months; therefore, I would cut my buying activities in half at current levels. If the market continues to go up, then you’ll continue to do well. If the market corrects and moves lower, you’ll be well positioned to buy larger “chunks” at lower, more attractive prices.

Remember, you want to buy low and sell high. Most people tend to buy high and attempt to sell higher, but in many cases, this doesn’t work. Since you’re probably focused on the long term, selling is not really on your mind, but this doesn’t mean you shouldn’t attempt to maximize lower prices and minimize your purchases at high levels.

Financial Advisors Aren’t Likely to Recommend this Strategy

Remember, a financial advisor is the professional or the expert in your relationship; therefore, they want to be the ones making strategic decisions. Furthermore, if you slow your buying when the stock market is high, you will be accumulating cash. Financial advisors typically don’t make money on idle cash. They want you to be fully invested at all times. Is that in your best interest or the financial advisor’s best interest?

To sum up, nobody is recommending becoming a market timer, but being aware of the stock market levels and trends can boost your long-term returns by helping you buy stocks or funds at more attractive levels over time.

Photo by gadl.

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