Category Archives for Invest & Retire

Should You Use A Short-Term or Regular Inflation Protected (TIPS) Bond Fund For Your Portfolio?

For several years now, one of the topics on my list of research topics has been to evaluate the potential of several “new” Vanguard index mutual funds for inclusion to my investing portfolio.

Of course, these funds are not necessarily new (several have been around for multiple years now), but they are NEW to me. Listed below are the current Vanguard mutual funds I use to make up my investing strategy:

1. Cash – Various online high yield savings accounts
2. Vanguard Short Term Bond Index (MUTF:VBISX)
3. Vanguard Inflation-Protected Secs (MUTF:VIPSX)
4. Vanguard Total Intl Stock Index (MUTF:VGTSX)
5. Vanguard Emerging Mkts Stock Idx (MUTF:VEIEX)
6. Vanguard Total Stock Mkt Idx (MUTF:VTSMX)
7. Vanguard Small Cap Index (MUTF:NAESX)
8. Vanguard Small Cap Value Index (MUTF:VISVX)
9. Vanguard Value Index (MUTF:VIVAX)
10.Vanguard REIT Index (MUTF:VGSIX)

Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIPX) Features

The first Vanguard fund on my list to evaluate is a shorter maturity version of the regular-maturity TIPS fund I currently invest in (Vanguard Inflation-Protected Secs (MUTF:VIPSX)). Mike from Oblivious Investor gives a good description of the short-term fund and the differences between the regular TIPS option.

Listed below are a few key features/details of the Short-Term Fund:

Maturity/Risk

This fund, the Vanguard Short-Term Inflation-Protected Securities Fund, has been around since October of 2012. It features an average maturity of around 2.4 years, much shorter than the regular TIPS fund, which features ~ 9 year average maturity.  As you would expect, the short-term TIPS fund carries much lower risk, and also lower return, than the regular TIPS fund.

Cost/Fees

With a low 0.20% expense ratio and no purchase or redemption fee, the expenses of this fund can be considered approximately equivalent to the regular TIPS fund (which also has a 0.20% expense ratio).

Inflation Protection

According to a Vanguard white paper and also several commenting threads in the Bogleheads forums, the consensus is that the Short-Term TIPS fund provides better tracking/protection against inflation. This is due to the fact that the shorter-term TIPS have less interest rate fluctuations.

Should The Short-Term TIPS Fund Be Incorporated in To Your Portfolio?

Overall, in researching this question, the answers have been quite mixed.

The general consensus is that this is a “small potatoes” decision, meaning that you will likely be just fine in either a regular maturity or short-term TIPS fund. Accordingly, I have come across good reasons to utilize the short-term TIPS fund, and good reasons to stay put in the regular TIPS fund.

Convincing Reasons to Switch to the Short-Term TIPS Fund

• If your primary goal of holding TIPS is to protect against pure inflation risk, than as mentioned above, the Short-Term TIPS fund will do this better for you.
• If you are older and don’t want to take on very much risk.
  • For example, if you’re close to retirement, and you want to hold TIPS as part of your fixed income holdings, but prefer to have less fluctuation.

Non-Convincing Reasons to Switch to the Short-Term TIPS Fund

• Shortly after the short-term TIPS fund came out, Vanguard replaced its regular TIPS holdings in Target Retirement Funds with the short-term equivalent. “And if Vanguard does it, you should do it too!” 🙂
  • To me, Vanguard making this switch is definitely a good reason to consider its inclusion in to a portfolio, but it’s not a good enough reason to blindly make the switch.
• You are trying to “time” and/or predict interest rates and inflation levels in the future.
  • To me, many studies have shown that even highly trained economists are not very good at all at predicting the future.
• You invest in short-term bonds for the other portion of your fixed income allocation. And therefore, you should match the short-term duration accordingly with TIPS.
  • This might make sense if you were closer to retirement. However, as mentioned in this Bogleheads thread, regular TIPS may actually have less overall risk than equivalent-maturity (~9 years) government bonds.
    • Because of this, it seems logical for folks further from retirement to use regular TIPS, even if they use short-term bonds for the rest of their portfolio.
    • For example, Rick Ferri recommends that folks saving for retirement use regular TIPS.

What is The Purpose of TIPS In Your Portfolio, Specifically?

So, having heard the reasons for and against the use of short-term TIPS, it seems like the most efficient path forward to determine what is right for you is to ask yourself, “Why did you add TIPS to your portfolio in the first place, and what is their specific purpose?”

As described in a previous post where I performed a historical backtest (using a regular-maturity TIPS price data set) to help determine the most efficient asset allocation to TIPS, I invest 25% of my fixed income asset allocation in TIPS. The rest is in short-term bond index funds and cash accounts. This 25% level was determined because it gave me the most diversification benefit, and highest return/risk ratio.

Sure, having protection against inflation is great, but it was almost a secondary purpose. Since I am ~35 years from retirement, I am able to take on a significant amount of risk, as shown by my overall asset allocation of 70% equity / 30% fixed income.

Typically, when asked what the purpose of my fixed income allocation is, I say that it’s primary purpose is to provide stability/security. That is why 75% of this fixed income allocation is made up of very low yield/low risk short-term bonds and cash accounts. Because of this, it doesn’t make me as concerned about the remaining 25% fixed income allocation being invested in a regular TIPS fund, with slightly higher risk, vs. a short-term TIPS fund, with lower risk.

Further, I also make it a policy to have my investing decisions made by life changes and/or data. Since short-term TIPS are a newer phenomena, I haven’t been able to find a long-term historical backtesting data set (similar to this one by Bogleheads) in order to get a quantitative feel for the differences in risk and return between short and regular term TIPS.

Therefore, with all of the unknowns, mixed opinions, and lack of strong current evidence for a change, I am planning to stay put being invested in the Vanguard Inflation-Protected Secs (MUTF:VIPSX). 

How about you all? Do you currently invest in a TIPS mutual fund? Is it a regular maturity fund, or shorter-term?

Share your experiences by commenting below! 

***Photo courtesy of https://www.flickr.com/photos/lendingmemo/11697736305/in/

Advice For Investing In Bitcoin: 4 Tips

The following is a guest post. Enjoy! 

The purchase and storage of Bitcoin has become a major factor for investors who manage their own accounts online. Despite widespread skepticism as to the digital currency’s place in the future, its persistent relevance is beginning to speak for itself. Bitcoin may or may not become the mainstream currency alternative advocates have long predicted it to be, but it is already a significant investable resource poised to gain greater influence in the years ahead.

However, as a relatively new concept traded digitally and operating with an uncertain future, Bitcoin poses unique challenges to investors. So here are four of the best tips I’ve gathered for how to handle investment in the crypto-currency.

Treat Bitcoin As A Long-Term Play

I would argue that this is the most significant tip to keep in mind if you are considering adding a stash of Bitcoin to your portfolio. Said famed billionaire investor Reid Hoffman on the topic, “When I invest, I think, ‘What is the way the world should be and is this investment part of that end?’…. So that’s minimum five years. When it comes to Bitcoin, that’s the framework that I think about it in.” This quote was part an Entrepreneur feature in which Hoffman was interviewed about his interest in Bitcoin. While the advice was meant in a more general sense, it’s a very important concept to keep in mind with regard to Bitcoin. This is one investment in which day-to-day fluctuations should not be a major concern, because you’re in it for the long-term.

Prepare For Volatile Fluctuation

As an add-on to the initial point about looking at Bitcoin as a long-term play, anyone looking to invest in the crypto-currency should be prepared for volatile fluctuations in day-to-day prices. As explained in an article on the history of Bitcoin, “Because Bitcoin is still a relatively small market in comparison with existing models, the market price of Bitcoins may go up or down in response to relatively insignificant amounts of money … This means that fluctuations in the price of Bitcoin can be quite volatile.” Simply put, Bitcoin is still small enough to be significantly affected by major purchases or sales, and investors should understand this and not be alarmed.

Don’t Predict – Analyze

This is actually a tip I’m borrowing from a Financial post featuring their five favorite quotes about investment. Specifically, the tip came from Ben Graham: “The individual investor should act consistently as an investor and not as a speculator.” In other words, act based on facts and real analysis, rather than predictions, hopes, or hunches. This is important advice regarding any sort of investment, but it is particularly significant with regard to something like Bitcoin, which is still in its infancy and attached to a great deal of passion and lofty expectations. There are fewer facts and pieces of genuine data available when dealing with a new or young resource, and investors must take care to heed real information.

Research Platform Potential

Regarding actual data that can be useful in making decisions about Bitcoin investment, consider the potential of the crypto-currency as a foundation for additional platforms. Venturebeat addressed this idea in an article encouraging readers to consider Bitcoin, specifically with regard to the common comparison of the currency to digital payment service PayPal. “Bitcoin can be used for this service,” the article acknowledged, “but it can also implement new and innovative financial services. The protocol allows for a significant degree of programmability…”

In other words, don’t think of Bitcoin solely as a currency or payment service, but as a technology with multiple potential applications that have not yet been realized. As additional platforms are created and new services and companies take advantage of Bitcoin, the currency itself will gain value. So, when investing, look to concrete data about emerging platforms and functionality for indications of performance.

Like any other financial transaction, investing in Bitcoin is a personal decision, and must be approached with regard to each individual’s particular situation. But for those considering a move in this sector, these bits of advice can help to clarify the market.

4 Reasons A Line Of Credit Is NOT A Good Emergency Fund

The following post is by MPFJ staff writer Travis, who blogs at Enemy of Debt where he candidly shares his family’s financial struggles, failures and successes. As a father and husband, he provides a unique perspective on balancing debt, finances, and family.

The subject line on the email read, “Be prepared for the unexpected.” The email from my bank was a solicitation for a line of credit. The email tried to convince me to click on the link to the online application by describing the line of credit as a way to be prepared for all those little unexpected things life throws your way.   What my bank was suggesting is that I use a line of credit as my emergency fund.

Having a line of credit for an emergency fund is a terrible idea for several reasons:

1. Used For More Than Unexpected Expenses

The marketing material claims that the bank is trying to help its customers be prepared for the unexpected with a line of credit.  I think it’s fairly obvious that they have a different motivation behind the product for a couple of different reasons:

• Credit Limit: The standard statement is that a $1000 emergency fund will handle 90% of all unexpected expenses.  The credit limit range for the offered line of credit is $3000 to $100,000.  Except for a medical crisis, I can’t think of a single unexpected expense that would cost $100,000.  Even in that case, I certainly wouldn’t be using a line of credit with a high interest rate to pay for it.

• Profitability : Banks make their money from customers paying interest when they carry a balance from month to month.  Unexpected expenses are by definition infrequent.  If the line of credit was truly meant to be a simply for unexpected expenses, use of the account would be infrequent, and most of the time be for a relatively small amount of money that could hopefully be paid off quickly.  These scenarios would not be a big money maker for the bank.

My bank is trying to get me to apply for a line of credit hoping I’ll use it for much more than the occasional unexpected expense.  With a potentially large line of credit, they’re hoping I use it for everyday use or for things much more grand such as home renovations or vacations.

2. Promotes Financial Laziness

A person building up an emergency fund must exhibit two very important financial behaviors:

• Regulate Spending : A emergency fund can only be built if a person spends less than the amount of money left over after paying all bills.  This is best accomplished through paying yourself first.  Or in other words, making savings a part of your required budget, ensuring that money is directed towards savings from each and every paycheck.

• Emergency Funds Are Off limits : Once a significant amount of money has been built up in an emergency fund, there is a temptation to use it to buy something instead.  To be fully prepared for an unexpected expense, a person has to practice financial self control to not touch those funds.

Depending on a line of credit as an emergency fund when a financial crisis arises requires neither of these behaviors.  It allows a person to spend every penny they have with reckless abandon.  It allows a person to live without planning financially for the future, with the perspective of dealing with any unexpected expenses if and when they arise.

3. Extends The Crisis

If a fully funded emergency fund is in place, not only can the unexpected expense be paid in full,  but the structure is already in place in that person’s financial behavior to begin to rebuild it.  The unexpected expense is taken care of, and a financial crisis is avoided.

A person with a line of credit for an emergency fund has not practiced the planning and self-control needed to build an emergency fund for unexpected expenses.  The expense is financed using the line of credit. They now have the difficult task of reducing their lifestyle to make line of credit payments for an indeterminate amount of time.  If only the minimum payment is made each month, it could take years to put the financial crisis fully behind them

4. Increases Cost Of The Crisis

Currently, most personal lines of credit have an interest rate of 10 to 12 percent.  Interest will start to accumulate immediately, increasing the overall cost of the financial crisis each month it takes to pay off the line of credit.  If at any time a payment is missed or late, the interest rate will likely be increased causing the cost of the unexpected expense to grow even more.

It really comes down to how a person wants to handle unexpected expenses.  A person can either be proactive, or reactive.  Using a line of credit as an emergency fund falls under the category of being reactive.  Such a methodology trades financial responsibility now, for budgetary and financial turmoil when an actual unexpected expense happens later.

How about you all? Do you have a line of credit as your emergency fund?

Share your experiences by commenting below! 

***Image courtesy of Stuart Miles at FreeDigitalPhotos.net

A Review of My 2014 Income Tax Results and 2015 Tax Planning

The past year has been quite a whirlwind. I finished my PhD program in Virginia, got married, went on an awesome honeymoon to Belize (great place to go by the way!), did the post-PhD job search/interview process, moved to Colorado to start the post-PhD job, bought a house in Colorado, and now have our first child on the way (due January 12th, his name is Alex – see picture below!).

Anyhow, all of that is to say that I am a bit behind on getting this post out. Normally, I do this post in around the April-May time-frame, but better late than never, right?!

In general, the results of filing my wife and my [married filing jointly] 2014 taxes were very good, as I felt like we leveraged the tax code to the best of our ability in order to maximize wealth. As has become my habit over the past few years, I feel that by analyzing some of the finer details/numbers, I can better plan for how to approach my tax planning for the 2015 and beyond year.

2014 Income Breakdown

Our combined total 2014 gross income can be broken down in to the following components:

• 47% from W2-reported wages / income.
• 8% from dividends, capital gains, and interest from investments.
• 25% from untaxed fellowship/wage income for my work as a graduate student.
• 20% from Schedule C self-employed business income.

2014 Deductions

Since the married-filing-jointly standard deduction was greater than our itemized deductions, we took the standard deduction of $12,400 for 2014.

After subtracting the 2 personal exemptions we get for myself and my wife (with no kids, filing jointly), we arrived at a taxable income that was only 68% of our original/total gross income that we started with.

2014 Federal Taxes

Having established our taxable income, our total personal federal taxes were computed. Next, self-employment taxes were added on top of the personal taxes.

This resulted in our total Federal taxes owed for 2014 being ~11% of our overall/total gross income.Nice! I am surprised this percentage is so low!

If we calculate this based on our AGI or taxable income, the percentages become 11% and 16%, respectively.

2014 State Taxes

Since we lived in Virginia January-November and then Colorado during December, we got to pay state taxes in two states for the respective portions of the year.

Our 2014 total state (combined for Virginia and Colorado) taxes owed was calculated to be 4% of my overall/total gross income. If we calculate this based on my federal AGI or federal taxable income, the percentages become 5% and 6%, respectively.

2014 Total (State + Federal) Taxes

If we put everything together from both state and federal taxes, we can find something useful for planning purposes going forward:

• We paid a total tax amount for 2014 equal to 15% of our overall/total gross income.
• Our marginal tax bracket was 15%.

2014 Taxes Owed / Tax Refunds Received

When everything was said and done, we unfortunately had overpaid quite significantly in taxes during the 2014 year. As a result, we received almost a $3,000 in federal tax refund, $800 in a Virginia state tax refund, and we owed $93 for Colorado state tax (since we underpaid slightly).

The primary root cause for the overpayment in federal taxes was paying too much quarterly estimated taxes for my self employment income. This was due to my self employed income dropping in 2014 compared to 2013, and my 2013 taxes owed still being used as the basis for calculating 2014 taxes.

2015 Estimated Taxes – Prospective Planning

One of the nice things that my accountant does do for me each year is to calculate/prepare my estimated taxes for the following tax year (so 2014 was prepared during the 2013 tax preparation round).

Due to our significant overpayment in both state and federal taxes in 2014, our accountant advised us in April 2015 that we did not need to pay quarterly estimated tax payments for our self-employed income for 2015. He did, however, recommend that if we were “having a banner year” and earning much more self employed income than previous years, that I would need to look in to increasing my tax withholding from my post-grad school W2 income.

2015 Estimated Taxes – How It Actually Happened

So, now let’s fast forward 6 months to October 1st, 2015. This is the day I had marked on my calendar to assess our self-employed income and my regular W2 income and tax withholding year-to-date to determine if we were paying enough taxes (since the accountant advised that we didn’t need to send quarterly estimated taxes for 2015).

I proceed to add up my projected W2 income, our combined self-employed income, taxable interest, ordinary dividends, and capital gains. I then subtracted out the deductible part of self employed income taxes, student loan interest deductions, the standard married filing jointly deduction, and our two personal exemptions.

Upon arriving at our approximate taxable income and taxes owed, I was quite surprised to find out that, without changes/intervention, we were en route to be $8-10k behind in federal taxes owed for 2015 (state taxes owed were on track). As this is greater than 10% of our total taxes owed for 2015, an underpayment penalty would apply come April 2016 when we file our 2015 tax return.

Clearly, some drastic changes were needed to correct this. As such, since October, our main focus financially has been to 1) increase the amount of taxes withheld from my regular W2 income and 2) decrease our taxable income to as close as we can possibly get to the 15% marginal tax bracket level.

Specifically, listed below are the actions we took starting in October:

• Dropped the number of exemptions for my W2 income from 2 to 0 to increase the amount of taxes withdrawn from each paycheck.
• Requested that $1,000 additional federal taxes be withheld from each of my biweekly paychecks.
• Contributed as much as possible to regular/pre-tax retirement accounts to reduce our taxable income:
  • As we had already maxed out our Roth IRA contributions this year, we could not contribute any additional funds to our regular IRAs.
  • We stopped contributing to my job’s Roth 401k and our Vanguard Self Employed Roth 401ks, and instead have been contributing to our regular 401ks.
    • $5,250 contributed YTD to my wife’s pre-tax self employed 401k.
    • $935 contributed YTD to my job’s pre-tax 401k.
    • $1,774 contributed YTD to my pre-tax self employed 401k.

With these drastic actions, my wife and I are now on track with our federal taxes and should not have to pay penalties when we file for 2015.

Plan for 2015 Tax Filing – Accountant or Online Software?

Overall, 2015 has been a year of big changes from a financial perspective, as I went from a graduate school income to having a real job and my wife has been earning more self-employment income the past few months, in spite of becoming increasingly pregnant! 🙂

Because of all these financial changes, it’s understandable that our taxes experienced a bit of a “windfall,” and we are now having to play a little catch-up. However, it sort of makes you wonder – should our accountant who did our 2014 tax return advised us a little better and anticipated these changes? After all, they did advise that estimated tax payment likely wouldn’t be required.

In thinking about it, I don’t blame the accountant for a lack of attention or not doing a complete job. However, at the same time, I am not overly impressed, and it does make me question the value proposition, especially given that the accountant tax prep fee for 2014 was $685, whereas in previous years, I was charged a prep fee of $250.

Given the considerations above and the fact that we have moved from Virginia to Colorado (and we do not yet have an accountant here in Colorado yet), I believe that I will try my hand at using an online tax preparation software for filing our 2015 taxes.

The question then becomes, which online platform should I use?

As I found in my previous detailed explorations of Tax Act, H&R Block, and Turbotax, my favorite online tax preparation platform was Tax Act. As such, I believe I will use Tax Act for filing my 2015 returns.

How about you all? Are you on track with your 2015 taxes? Do you expect to have a tax refund or owe taxes when you file? Will you file using an online tax prep platform or use an accountant?

Share your experiences by commenting below!

How to Plan for Retirement in Your 20’s

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

If you’re in your 20s, planning for retirement is probably not very high on your list of things to do. Starting and advancing your career certainly seems more relevant, as does buying the things that you need to live your life.

But somewhere in the mix there needs to be an emphasis on retirement planning. Retirement is one of those areas of life where the sooner you start, the better you finish. It has everything to do with the time value of money, and you should want to get that working in your favor as early in life as possible.

Here are some ways to plan for retirement in your 20s. Most don’t require a lot of money to do either, but are based instead on getting into good money habits.

Save Up to the Employer Match on Your 401(k) Plan

If you have an employer sponsored retirement plan, you should participate in it, at least at a very low level. The most important step when it comes to a savings plan of any kind is just getting started. If 2% of your pay is all that you can afford, then go with it, and increase it over time.

One way to do this is by increasing your retirement contribution each time you get a raise. Let’s say that you start contributing 2% of your pay into your employer’s 401(k) plan. One year from now you get a 2% increase in pay. Cut that in half, allocating 1% to your 401(k) plan contribution – increasing it to 3% – and keep the remaining 1% in your regular budget.

Under ideal circumstances, you should aim to participate in the employer plan to the point you maximize the employer matching contribution. For example, if your employer has a 50% match (3%) up to a contribution by you of 6%, your goal should be to contribute 6%. The employer match is like free money. You’ll get $1 added to your plan by your employer for every $2 that you contribute. That’s too good to a pass up.

If you delay participating in retirement savings until a time when you can afford it, you’ll probably never get started. Throughout your life, there will always be major expenses and challenges that will compete for your income. The only way to rise above it is to start saving money as soon as possible – as in now.

If You Don’t Have an Employer Plan Start an IRA – Even a Small One

Not all employers have a 401(k) plan. If yours doesn’t, create an alternative strategy by setting up a self-directed IRA. You can contribute up to $5,500 to an IRA each year, and your contributions will be tax-deductible if you do not have an employer plan (and may be partially or completely tax-deductible if your income is within certain limits).

Don’t worry that you can’t make the maximum contribution. Start by adding $50 per pay period. If you are paid twice a month, that will be $100 per month, or $1,200 per year. As your income increases, allocate a larger amount of money to go into your IRA.

Just as is the case with a 401(k), getting started is more than half the battle.

Make Getting Out of Debt a Priority

This is certainly a tall order when you’re in your 20s. After all, if you already have student loan debt, and you need to buy a car, you’re virtually guaranteed to be in debt. But as difficult as it is to avoid the debt trap as a young adult, avoid it you must.

There are two major reasons why getting out of debt is important when you’re in your 20s:

1. Debt becomes a pattern early in life – if you “get comfortable” being in debt in your 20s, you might spend the rest of your life there, and it can get progressively worse
2. By getting out of debt, you gain full control of your income, and free up money to invest for retirement and for your long-term prosperity.

This isn’t necessarily to say that you need to make getting out of debt an all-consuming activity – seeing it through until the last dollar of debt is paid in full. But you should establish a pattern of paying down your debts ahead of schedule. The idea to set a goal of getting out of debt within a specific time. You can make that five years from now, or at a certain age, say when you turn 30.

The sooner you defeat the debt monster, the easier it will be to do all things financial in your life, including preparing for retirement. And as you get your debt situation under control, be sure not to add any new debt to your life. Once again, you’re trying to avoid bad habits that can become a lifestyle.

Develop a Life of Thrift

Now is a good time to spend a couple of minutes on the topic of lifestyle inflation. If you’re in your 20s, you’re likely to see a steady increase in your income in the coming years. Lifestyle inflation describes a financial process in which your standard of living rises as your income increases. You get a promotion with a substantial increase in pay, and you upgrade your car, move into a more expensive living arrangement, and adopt some expensive hobbies.

That’s a typical pattern, but it’s also one of the major reasons why people find that they don’t have any more money even though they’re earning more, often a lot more. Lifestyle inflation is one of those habits that’s best avoided when planning for retirement, or working out any financial goal you can think of.

The basic idea should be to keep your living expenses as low as possible, while using pay increases to fund saving and investing, and getting out of debt. And again it’s important to remember that this point in your life, you should be trying to establish the kinds of habits that will enable you to move forward, rather than getting trapped in a financial mess.

Don’t Try to Beat the Market

Millions of people – including investment managers – try to beat the market, and fail miserably. Unless you work in investments professionally, it’s probably not worth your time to even try to figure it out. In fact, you can lose a lot of money trying to learn how to beat the market. That’s probably something you don’t want to try to do until you have a large portfolio, and can allocate a small percentage of it into a small secondary account where you can try your hand at it.

In the meantime, and especially as a new investor, stay with funds, particularly exchange traded index funds. You won’t beat the market with these, but you won’t get clobbered by it either.

And if you would like to try active management, look into low cost robo advisors, like Wealthfront and Betterment, that offer professional management at very low fees and are specifically tailored for new and small investors.

At this stage in your life, retirement may seem so far away that you have plenty of time to ignore it. But it’s worth repeating – when it comes to retirement planning, or any other financial endeavor, the sooner you start, the better you finish. Get working on retirement planning now.

How about you all? If you’re in your 20s, have you started saving for retirement? What age did you start your retirement planning process?

Share your experiences by commenting below! 

***Photo courtesy of https://www.flickr.com/photos/digitalsextant/4491928640/sizes/n/

Why Millennials Need To Save For Retirement

The following is a post by MPFJ staff writer, Jeff.  Jeff writes about reducing waste, saving money and building freedom at his website, Sustainable Life Blog.

With incomes stagnating and expenses for larger cities where jobs are easier to come by constantly going up, millennials are getting squeezed financially from both ends, making it difficult to save. Everyday, a decision must be made on what to prioritize and what to cut out or spend less on, and seemingly people in the millennial generation choose to forgo retirement saving, to their great detriment.

Being a millennial myself, I am familiar with the tug of student loans, consumer debt, as well as basic expenses like food and rent that seem to be advancing at a steady clip. With all of those budget pressures and retirement so far off, who has the leftover money to save?

Unfortunately, with that attitude, millennials are giving up their biggest advantage in saving for retirement: Time. A long time horizon (~40 years) can help your money grow and compound beyond what you can imagine now, but if you’re not putting anything away for retirement, you wont get any of that benefit and could find yourself in your mid 40s worrying about whether or not you’ll have enough money, and wanting to go back in time to kick yourself for not saving. With all that extra time, even the smallest bit matters when it comes to retirement.

To give you a quick lesson on how powerful time is, consider this: 1 dollar invested at the year end of 1929 grew to $1,188 dollars in 2010, by year end. That’s a 9.1% return Year Over Year. While that time frame of 80 years is about double the amount of time that you have, I think it perfectly illustrates how powerful time can be.

Build a Solid Foundation to Take Risks

Even early in their careers, millennials are already taking more career risks and moving for jobs with more responsibilities and bigger paychecks at far quicker rates than their parents did. In my 6 years in the workforce, I’ve switched jobs 3 times (stayed in the same industry though), which is about 3x more companies that I’ve been employed by than my dad, and he’s been working almost 8x as long as I have.

If you start saving early (both for retirement and general savings) you can build yourself a solid cash cushion and allow yourself to take more risks in the future. Perhaps switching to a job that you would thoroughly enjoy or get a lot out of that doesn’t pay as well as your current career, or perhaps you’d use that savings to strike out on your own.

Even if you don’t end up doing either of these things, since you’ve got a big cash cushion, you’ll be free to make that decision.

No One Else Will Do It For You

As it stands right now, something will have to change with the social security program for it to continue paying out benefits. At some point in the future (experts think it will be around 2037) social security will start having to pay out 75 cents for every dollar of expected benefit. Of course, that is a ways away and many things can change between now and then (such as taxes being raised or benefits being lowered) but as a millennial, you should not assume that you’ll be able to get a significant portion of your retirement needs met by social security. Sure, things could change, but who knows when and what that will look like.

Even though things are tough with rent, food, student loans and other bills, it’s important to take advantage of the time that you have in front of you before retirement and save some money while you can – even if it’s a small amount.

How about you all? How much are you saving for retirement, and if you’re a millennial, what’s the biggest challenge you’re facing? How are you getting around that challenge?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/68751915@N05/6870886851/

Why Is Share Trading Profitable?

The following is a guest post. Enjoy! 

Share trading can be extremely profitable if you have a game plan and know what you are doing.  In addition, it is important to have a sound and fundamental strategy.  When one uses the term trading stocks they should thing of buying and selling securities within the stock market.

In today’s environment the trader has been equipped with the latest and greatest share trading platforms which allow he/she to take advantage of trading opportunities that traders in the past did not have access to.  Prior to on-line trading the best way for a trader to receive information and research a stock was to interact with a broker via the telephone.  Today the stock trader has the ability to research stocks both fundamentally as well as technically at the touch of a key stroke.

Presently, there are numerous trading platforms which offer the stock trader execution speed as well as a robust platform with numerous options.  The stock trader should do his/her homework to determine what trading options are best for them prior to executing their trades.  The term online stock order/trade is simply a set of instructions to either buy or sell a specific stock.  The trade is entered into what is called the stock order ticket.  The stock order ticket incorporates the action, the number of shares, the specified symbol to be traded, price and the length/duration of the trade.

Although there are many platforms presently available for share trading though trading organizations it is important that one has a general idea on the speed to which their orders are processed.  Many share traders today believe that they have a direct connection to the stock markets, however, this is the furthest from the truth.  Typically, when you execute a trade the order is sent via the internet directly to your broker who will then decide which stock market to send it to for execution.

As you can see share trade execution is extremely important and you want to be partnered with a broker that can process your trades at the drop of dime.  Trade execution is typically seamless but it does take time.  Also, prices can change abruptly, particularly in quick moving markets.  It is extremely important to understand the significant of order execution.  The longer it takes for your order to be placed the chance the trader can lose money on a transition.

There are a number of ways that a trader can develop a strategy focused on share trading.  You can evaluate individual stocks and use fundamental analysis and statistics such as earnings per share, and cash flow to determine the future value of a share price. You can also base your strategy off of historical price movements by using technical analysis.

In closing, a stock trader is at the mercy of the technology that he/she works with.  If the trader does his/her homework and knows the best tools to you to trade along with the fundamentals of share trading they are bound to be successful with hard work.

How to Qualify For a Mortgage When You’re Self-Employed

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

If you’re self-employed and have applied for a mortgage, you probably have a sense that you were put through a meat grinder. And if you’re self-employed and have merely heard how difficult it is to apply for a mortgage when you’re self-employed, I’m here to tell you that it’s all true.

I spent more than 15 years in the mortgage industry as both an underwriter and a loan originator, and I saw this unfortunate bias against the self-employed again and again. People who are paid by W-2 can often squeak into a mortgage with a shoehorn, but the self-employed must always be prepared to run faster and jump higher.

And even then there may be no guarantees.

The Bias Against the Self-Employed in the Mortgage Industry

I think most of us understand that the job market has become far less reliable since the financial meltdown, and probably going all the way back to the dot-com bust. But in the mortgage universe that doesn’t matter – lenders continue to view salaried employees as if they have a guaranteed income for life.

The reverse is true when it comes to the self-employed. The mortgage industry views the self-employed as if they’re one step away from destitution.

In a way, this view is not entirely without merit. Something like 80% of businesses fail within the first 18 months of operation; if you’re a lender, this is not a statistic that is easily ignored.

Businesses fail for all kinds of reasons, many of which are impossible to know upfront. This is the reason a mortgage lender will generally look for the self-employed person to be in business for at least two years. By contrast, a salaried worker coming out of college can often qualify for a mortgage simply with a promise of employment letter.

If you’re going to apply for a mortgage as a self-employed person, the first step is to recognize that it will be an uphill fight. The second will be to prepare yourself in advance. It’s not impossible to get a mortgage when you’re self-employed – just more difficult. That’s what you have to be ready for.

What the Mortgage Lender Will Be Looking For

The documentation requirements for self-employed borrowers are extensive. The laundry list reads something like this:

• Evidence that your business has been in existence for a minimum of two years – this may require a copy of a business license, a letter from a CPA, or a letter from a licensing bureau.
• Income tax returns for the past two years – this includes both personal and business returns, and all schedules.
• The lender will also verify your income information with the IRS.
• If any income will be needed from the current year, for which an income tax return obviously has not been filed, you’ll need financial statements provided by a CPA. Under certain circumstances, they may need to be audited statements, which can cost thousands of dollars.
• Your income will be averaged for the past two years. If your net income (not gross) was $100,000 in 2014, and $50,000 in 2013, your income for mortgage purposes will be $75,000 ($100,000 + $50,000 = $150,000, divided by two years).
• If your income for the most recent year was lower than it was for the previous year, your income will be based off of the current year, and not averaged.
• If your income for the most current year is significantly below what it was the previous year, your income may be considered unstable, and the loan application denied.

To put that in perspective, a salaried borrower only needs a copy of a recent pay stub, the previous year’s W-2, a verbal verification from their employer that they are still employed there and likely to be so in the future. The lender will also use current income for qualification purposes (no averaging), even if it has increased substantially from the previous year.

Your Response to Their Demands

If you want a mortgage, your only choice will be to comply with the lender’s requirements. Even if you don’t agree, you will not be able argue around any of those requirements. Since nearly all mortgages are sold to the same agencies (FNMA and FHLMC) or require mortgage insurance from either the FHA or the VA, the guidelines will be the same in all cases.

If you have not been in business for at least two years, you’ll need to be patient and wait until at least that much time has passed. You will also need to make sure that your business shows a pattern of increased earnings from year to year. This is not always entirely within your control, since business cycles can affect your bottom line.

But there is one thing that you can do, and that’s not be overly aggressive with deductions on your income tax return.

All self-employed people have a built-in disadvantage when it comes to applying for a loan of any sort. One of your primary objectives is income tax minimization. You will accomplish that by taking every deduction that the IRS allows. But that strategy works in reverse when you are applying for a mortgage.

The conflict is that filing income taxes focuses on income minimization, while applying for a loan requires income maximization. If you know that you will be applying for a mortgage in the near future, you will do well to go light on your income tax deductions.

Developing Strengths of Offset Your Weaknesses – a.k.a., “Compensating Factors”

A salaried person can often get a mortgage with a minimum down payment, less-than-perfect credit, and even a little bit too much debt. But if you’re self-employed, don’t count on getting similar treatment. Your financial profile will have to present a picture of a stronger borrower.

There is a term in the mortgage industry called compensating factors and while it applies to all borrowers, it’s generally most important to the self-employed. Compensating factors are indirect lending criteria that can make a borrower look stronger, even if that criteria is not strictly required.

Here are some examples of compensating factors that can help you if you are self-employed:

• Making more than the minimum down payment – if this is 5%, making a 20% down payment will make you a stronger borrower.
• Strong credit profile – most lending programs require a minimum credit score of at least 620; yours should be well in excess of 700.
• Cash reserves – this is the amount of cash that you will have available after closing. The typical requirement is liquid savings (not retirement money) sufficient to cover at least two months of the payment on the new home. You should have six months or more.
• More than the minimum self-employment history – it’s generally at least two years, but you should figure to be in business for at least three years.
• Not buy more house than you can afford – many borrowers buy a house that’s up to the maximum amount they qualify for. This is usually based on a debt-to-income ratio (DTI) of not more than 36%, and sometimes it can go higher. Make sure that the home you want to buy is keeps your DTI well below 36% .
• The increase in your house payment should be reasonable – lenders generally consider an increase in your house payment of up to 15% or 20% to be reasonable. A doubling of your house payment could make your loan too risky, and result in a decline.

If you can keep all those factors in mind, and develop a financial profile that largely matches them, your loan will be considered lower risk even though you’re self-employed. No, it’s not fair, but it’s how the mortgage world works. If you are aware of the obstacles – and have a strategy to overcome them – then you’ll get the loan you want.

How about you all? Have you ever applied for a mortgage when you are/were self-employed? What kind of roadblocks did you run into?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/nikcname/4893848354/sizes/q/

Financial Steps to Take Before You Turn 40

The following is a post by MPFJ staff writer, Jeff.  Jeff writes about reducing waste, saving money and building freedom at his website, Sustainable Life Blog.

Since we’re talking about milestones to reach to ensure that your financial life is on track, we started with financial milestones to reach in your 20s. It’s time to talk about financial milestones that you should reach by the end of your 30s. By the time you’re in your 30s, you should have a solid financial foundation under you, with no consumer debt, a solid emergency fund, and you should be steadily contributing to your retirement account.

Your foundation will be critical, as this is the phase where many people purchase houses, have kids and do a bunch of other things that cost a lot of money. If you’ve got a solid foundation under you you’ll be able to easily weather these choices and make other moves that can put you further ahead. Here are a few things you should accomplish by the end of your 30s.

Save 15% (or more) of Your Income

Feel free to include whatever your employer matches as well as what you contribute to your retirement plans, but to keep yourself on track you’ll want to be saving 15% or more of your income at this stage. This will allow you to save for vacations, kids college and more. You’ll also have your own retirement to consider, and potentially aging parents to take care of. Having a solid buffer of savings (and the ability to keep saving) would be a great way to make it out.

Getting yourself in the pattern of a healthy savings rate will pay dividends down the road.

Make Sure Your Loved Ones Are Taken Care Of

This is one that’s crucial – at this stage, you probably have many people depending on you. A spouse, perhaps a child or two, and maybe even parents. You’ll want to ensure that if something were to happen to you, they would be taken care of. This means having adequate life insurance, making sure that your accounts have updated beneficiaries, set up health care directives and a will if you feel the need. You know what your loved ones will need if you’re gone, and you can help ensure they get it.

If you’re gone, you don’t want them to end up in court (or worse) if you have no plan for what to do when you’re gone. Don’t add added stress for your loved ones – they have enough to deal with already.

Start Thinking About Retirement Needs

How much money are you spending right now, and how much do you anticipate you’ll be spending when you retire? Once you know these numbers, you’ll be able to plan how much you’ll need, and figure out how much you will need to save to get there. While your budget right now might include kids expenses and a house that’s a bit bigger than you’ll be having in retirement you can still start trying to estimate your retirement needs. There are a lot of moving parts to retirement, such as when you should consider taking social security, as well as tax considerations.

Make sure that you’re getting the planning started so you’re not shocked at how much you’ll need in the future. There’s still time if you’re a bit behind.

How about you all? What milestones did you reach by 40, and were they crucial?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/jamiesrabbits/11717173094/

Financial Steps to Take Before You Turn 30

The following is a post by MPFJ staff writer, Jeff.  Jeff writes about reducing waste, saving money and building freedom at his website, Sustainable Life Blog.

I have recently turned 30, and since this happened I’ve been looking over my finances and thinking about where I was when I started my 20s, and where I am now and if I would have done anything different. Given that you’re so used to living a very cheap life in your early 20s and progress in your career (and earnings) typically increases. This affords many options for people, and expenses typically go up as your age increases and you stop living like a student.

Here are the things that I think are most important to master when you’re in your 20s to set yourself up for a good financial future.

Contribute Up to the Match of Your 401k as Soon as You’re Able

This is something that is vastly important for two reasons.

The first reason is that if you don’t contribute up to the max your employer offers to match you’re turning down free money. It’s as if someone was handing out ten dollar bills and you decided to walk by and not take as many as they were willing to give to each person!

Huge mistake. If you start your first job at a modest 40k per year and your employer matches your contributions up to the first 3%, that doubles your investment from 1,200 to 2,400 bucks in your first year.

The second thing you’re missing out on is the compound interest. There are some calculators here to figure out how much money after you have let your interest compound over years and years, but needless to say it’s a lot.

I’m sure you’ve heard the story of the 2 people saving for retirement, and one person puts away 3k per year from 22-30, then nothing until 65, and the other person that started putting away 10k per year at age 30 all the way until 65, and they both about have the same amount of money when they finish at age 65.

Pay Off All Consumer Debt

Debt will do nothing but handicap you as you continue your financial journey. Paying off all debt incurred in college on credit cards will free up a lot of space in your budget, as well as allow you to build up savings for emergencies and further advancing your goals. Instead of paying someone else interest money, you can use your spare cash to earn it. Paying off debt includes all non-mortgage debt: credit cards (pay these first), student loans and car loans.

Yes, student loans are a big deal and many people are leaving college with high balances, but you’ve probably been living on less than 12,000 per year for your entire life. Keep in the same mindset and focus all of your energy and extra money on buying your freedom from debt. I paid off the last of my student loans right after I turned 29, and it allowed my huge amounts of freedom.

Build a 6 Month Emergency Fund

As they said on Forrest Gump; “$hi# Happens”, and you can bet that at some point its going to happen to you. You’ll never know when or how much it’s going to set you back, but you’ll want to make sure that you’ve got the cash to cover it instead of falling back on your credit cards and paying huge amounts of interest to bail you out of whatever issue you’re in.

You wont know what you’ll need, but here are a few things you should cover: your health and car insurance deductible amount, at least 3 months of bare bones living expenses, and if you have any special conditions you should account for those as well.

How about you all? How many of these did you hit before your 20s ended? Can you think of other things you should do before you turn thirty to help with your financial journey?

Share your stories by commenting below!

***Photo courtesy https://www.flickr.com/photos/ky_olsen/5145374771/