Think Your Way to Wealth » Building Wealth

How to Save $1000 in 6 Months

RC — Wed, 26 Jan 2011 13:00:22 +0000

When it comes to frugality, little things do add up. The problem with small savings or “wins” is that it takes time for small savings to equal a significant, big dollar savings.

We all have heard about giving up a latte once a week, but at $4 a week, you are looking at a savings of $208 over a year’s time. It’s good, but not necessarily enough to motivate you towards frugal living all of the time.

We like to see bigger results, and faster- $100, $500, or a $1000 in a shorter period of time seems more appealing than taking almost 5 years, like a savings of $4 per week will get you. If you just can’t get your self to cut your spending in a noticeable way, make a game out of it or a challenge- with a reward at the end, if you so desire.

Saving $1000 in 6 months seems like a good place to start- a large enough amount in a short enough period of time.

Below are a few ways you could save up $1000 in 6 months- Many of you may already be doing some or even most of these- but there are a lot of people who don’t. Even if these don’t work for you, you can probably come up with some other areas you can cut back on to reach your $1,000 goal in 6 months.

We don’t always look at where we are spending there money, and whether everything you buy or pay for is something you really need. Examining all expenditures can lead to some areas in your life you can cut back on expenses or ways you can save on what you spend.

photo credit: A Girl Next Door

Save $1,000 in 6 Months

Coupons- Coupons do work, if you use them properly. If you use them consistently, and only use them for things you were already going to buy, you can easily save $5 per weekly grocery trip if you spend $100 or more regularly.

$5 a week for 24 weeks = $120

Drop down a tier on your cable bill- Do you pay for more channels than you watch or really need?
Drop down a tier on your cable TV service, and you could save $15 to $20 a month.

$15 a month x 6 = $90

Reduce your socializing- Do you go out once a week for a few drinks, or other social activity-the movies, golfing, etc.? Cut back on one a month, and the savings can add up.

$20 a month x 6 = $120

Eat out less every month- Skipping one meal in a restaurant a month or just a couple of lunches a month during the work week can add up to real savings.

$25 x 6= $150

Cut Your own Hair (Or color it yourself for the ladies)- I just started cutting my hair again (I cut it short with clippers), so I am doing this one myself. If you are a woman and aren’t so excited about cutting your own hair, consider coloring it yourself if you pay a hair stylist to do that now.

$20 a month x 6 = $120

Buy in Bulk-You can save money buying in bulk, especially items like toiletries, household products, diapers if you have small kids, and even food. You do need to compare prices, because not everything is cheaper at a warehouse club. Also, make sure you’re going to use it up if it has an expiration date.

$20 x 6= $120

Reduce your cell phone plan- See where you can cut back on your cell phone plan. For example, if you have a smartphone like the iPhone, you can get a separate number from Google Voice and use the Google voice app for all of your texting. Unlimited texting for AT&T is $20 a month! If you have a lot of roll-over minutes, try reducing your plan so you don’t carry them over. (This is the case for me!) Let’s assume at least $15.

$15 x 6= $90

Pay off High Interest Debt- If you can pay off a $2,000 balance on a credit card bill of $2,000 @ 20% interest in 6 months instead of letting it sit there for a year, you just saved approx. $200 (actually probably more, but you get the idea).

1 x $200= $200

Cut back on lawn or gardening costs- If you pay someone to cut your grass, consider doin’g it yourself. At the very least, instead of them coming once a week, tell them to come every 10 days- you
just saved 1 payment a month. Assume its $25/week (on the low side around here) and you eliminate one per month.

$25 x 6 = $150

Total saved in 6 months time= $1,160

As I mentioned above, these are really just examples that can add up to significant savings over a 6 month period- there are countless others out there. If you feel like you just have trouble saving try these out or think of where in your life you can make cuts that will add up over time- saving on gas, bringing your lunch to work, or others.

Once you make these cuts or changes, you need to SAVE the money you are saving, or you may end up spending it on something else!

Start sending automatic deposits to an online savings account, or stash it somewhere else instead of leaving it in your checking account you use for all of your other purchases.

Do you have tips on other ways to save $1,000 in 6 months? leave them in the comments!

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2011 401k and Traditional and Roth IRA Limits

RC — Mon, 15 Nov 2010 22:08:36 +0000

Several weeks ago, the IRS released pension plan limits for 2011, which sets the limits one can contribute to a 401(k), 403(b), and other retirement savings plans, as well as individual retirement account (IRA) limitations for traditional and Roth IRAs.

2011 401k limits

The maximum contribution limit for a 401k, 403(b), 457(b), or Government Thrift Savings Plan is remaining the same in 2011 at $16,500. If you are 50 years old or older, you can contribute an additional $5,500 in 2011.

Traditional and Roth IRA s

With a traditional IRA contributions are tax deductible and the withdrawals made from a traditional IRA during retirement are taxable. For a Roth IRA contributions are made with after tax money, and the proceeds can be withdrawn tax free after reaching age 59 1/2. Due to the ever present talk of tax rates increasing in the future, many people find the Roth IRA more attractive, particularly if they are already contributing to a tax-deferred plan such as a 401k or a 403b.

Income Phase outs based on Adjusted Gross Income (AGI) for 2011 Traditional and Roth IRAs

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.

2011 Traditional and Roth IRA limits

The maximum contribution limit for a Traditional IRA or a Roth IRA is not changing for 2011 either, so the max. contribution will remain $5,000. The IRA contribution limits are supposed to be increased in increments of $500 based on inflation, and should go up regularly, but apparently inflation did not rise enough according to the government’s estimate, to reach the $500 increment. If you are 50 years old or older, you can contribute an additional $1,000 in 2011, for a total of $6,000. Note that you can contribute to both a Traditional IRA or a Roth IRA in the same year, but the total for both cannot exceed the $5,000 maximum contribution limit ($6,000 for 50 yrs old and older).

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How You Can Be Incredibly Wealthy and Still Be Broke…

RC — Wed, 30 Jun 2010 11:36:27 +0000

Did you know you can be extremely wealthy and still be broke?

Doesn’t sound like that makes sense, does it, unless you are talking about wealth in some abstract way, as in “my family and friends make me the wealthiest man in the world.”

Well, actually, you can.

One person who is apparently is Elon Musk, who is said to have been used as a model for Tony Stark in the recent Iron Man movies, and is best known for being a co-founder of Paypal, rocket scientist and founder of SpaceX, and co-owner/founder of Tesla Motors.

According to this article, he is broke- as in out of cash- relying on loans from friends for the appx. $200,000 he spends every month.

Apparently, he is going through a divorce and sank his last $35 million into Tesla Motors, leaving him extremely wealthy on paper, but without sufficient cash flow to pay the bills, so to speak.

You can have all of the assets in the world, but if you can’t pay your bills due to insufficient cash or cash flow, you will likely run into problems- at least most people will.

The article goes on to mention that Tesla Motors is valued at appx. $1.4 billion, and Space X has a contract with NASA for appx. $1.6 billion, meaning in reality, Mr. Musk is actually worth quite a bit.

Although things may be looking up- Tesla Motors had their stock IPO (initial public offering) yesterday in fact, which likely netted Musk in the neighborhood of $15 million dollars, so perhaps he can start to put his cash flow problems behind him.

There are a couple of money-related lessons can be learned from this- it is a dichotomy of sorts.

Cash flow is king. Most of us won’t be able to borrow large sums of money if we have all of our money tied up in investments, especially ones that might be business related- I know my friends don’t have enough to lend me $200k a month .

Many people who end up really wealthy follow their passions and are willing to take risks- big ones-with their money, investing in what they believe in. Putting their money where their mouth is, so to speak. I don’t know about you, but I would probably have trouble investing my last dollars into a business if I knew I would be running into major cash-flow problems. Would you?

photo credit: Sh4rp_i

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Occam’s Razor, Simplicity, and Personal Finance

RC — Fri, 19 Feb 2010 05:05:14 +0000

Occam’s Razor is a rule of thumb or principle, that can be stated as follows:

That all things being equal, the simplest explanation or strategy is usually the best or correct one.

Another related quote sometimes attributed to Albert Einstein : Make everything as simple as possible, but not simpler. And then there is the KISS Principle, or “Keep it Simple, Stupid”.

For some reason, I think many of us are to quick to dismiss simplicity when it comes to personal finances and money management. Maybe we think that managing money and becoming wealthy is more complicated than it really needs to be. It can’t really be that simple, can it?

For example, I think there are a lot of personal finance truisms, that many of us are to quick to dismiss as being cliched, such as “spend less than you earn”. When we read or hear it, it is very easy to say or think that our own personal financial situation is more complicated than just spending less than we earn, isn’t it? But if everyone spent less than they earned, there would be a lot fewer people with money problems.

Simplifying your personal finances can go a long way to helping you live with less stress and worry. It can also help in eliminating distractions that keep us from reaching our financial goals.

One high interest savings account (or even a regular one) is enough to start building wealth, isn’t it? Do we really need 3 or 4 accounts, moving money around to get that extra 0.1% in interest for a month or two? When we are focus on things that make our finances more complex, what are we not spending time on? We could be making more money or spending less instead of juggling multiple accounts, credit cards, etc. I am not really picking on having multiple savings accounts or credit cards in particular, but just using that as one example.If you don’t have a problem with, and many people don’t, then it is likely not a distraction to you.

However, the fastest way to get wealthy is to make the gap between what you spend and what you earn as large as possible, for as long as possible. If that difference was 1 million dollars a year, for example, a lot of the things that you might worry about now regarding your finances might soon disappear. There might be new things to worry about, of course, but over time they would likely get less and less worrisome-at least when it come to money.

Are your finances simple and easy to deal with, or are they too complex? Do you to focus on the wrong things when it comes to building a secure financial future?

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Protecting Your Greatest Asset- Your Ability to Earn Income

RC — Thu, 19 Mar 2009 11:56:57 +0000

Unless you haven’t been exposed to the stock market at all in the past few years, or were a very lucky prognosticator and put your money into low-risk investments at exactly the right time, you have probably experienced some loss of net worth, or assets over the last year or so. Not to mention the real estate market, which has taken quite a beating in that time period as well.

But if the money you had in the stock market was for retirement and you are not retiring for a while, your standard of living probably did not decrease just because of the massive drop in the stock market. By the same token, if you still have a job and are gainfully employed, unless you try to sell your house, you won’t really feel the effects of the drop in housing prices.

The fact is, you may be fortunate enough that the massive drops in the stock market and real estate markets have not affected your current standard of living at all.

What can affect your lifestyle, however, is a job loss or a reduction of your income. As long as you are able to work and earn income, you have the ability to have control over your standard of living. While you may not have the ability to “name” your salary, you can take steps to increase your income by improving your education, performing well at your job, or even developing alternative income streams.

There several different aspects to consider when protecting your ability to earn income:

Your health, both mental and physical- Do you try to keep yourself healthy, both mentally and physically?
Your attitude towards your job- Do you have a positive attitude at work, or do you complain all of the time?
Your performance- Are you trying to do your best, or just enough to “get by”? Are you marketing yourself at work to maximize your earnings?
Developing multiple income streams- Do you rely on a single source of income, or are you trying to develop multiple income sources?

If you are not taking care of yourself and trying to perform to the best of your abilities, now is a really good time to start. Protecting yourself and your job should be a priority, as that is your ability to earn income. Even if you don’t care for your current job or employer, it is a good idea to perform to the best of your abilities while you look for a better job.

Starting to look at ways to earn additional income from alternative sources is important as well. If you have multiple income streams, the loss of one may not hurt as bad, if you have several and collectively they add up to a significant percentage of your primary income stream.

Have you taken steps to protect and preserve your ability to earn income? What are they?

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Do You Think Like A Rich Person?

RC — Tue, 17 Mar 2009 02:57:58 +0000

The following is a guest post from Trisha Wagner who writes at Destroy Debt.

If you are not wealthy you may have a distorted mental picture of wealthy people and how they live. Granted people who have achieved millionaire or beyond status are in a better position to enjoy the many perks in life that having money provides, however there are many wealthy people mingling among the rest of us commoners. What makes them different? How did they achieve financial success? Money is not the only thing that separates the wealthy from the middle class or poor. If you want to achieve real financial stability and build wealth you should ask yourself if you think like a rich person?

Do You Have The Discipline?

The media is largely responsible for bringing images into our lives each day portraying celebrities jetting off to sunny beaches or spending their day shopping and getting beauty treatments. Actors and musicians are not the only people in the world who are wealthy and for the average person building wealth will require significant discipline and sacrifice along the journey. If you waiting for your “big break” to find instant wealth you may find yourself waiting a long time.

Do You See The Big Picture?

In reality eighty percent of American millionaires are first generation millionaires, which means they did not receive an inheritance from which to grow their wealth. They live well below their means, do not drive the current model-year car and live in homes valued well below one million dollars. They are generally well educated and fastidious investors, investing on average twenty percent of their annual income. Most are self employed entrepreneurs or self employed professionals. In other words you do not have to be born rich to become rich. Living in a huge home, driving dozens of cars and wearing expensive clothes should not be the only indication of wealth. Many millionaires work over forty hours a week and look like the rest of us. What the choose to do with the money they make is the real difference between the classes.

Can You Look Long Term?

Amassing wealth for most people will not happen overnight. To get started you will have to think long-term about your financial life. This should include determining where you want to be (and how much you want to be worth) ten and twenty years from now. Don’t just think about it, or dream about it, instead write it down. In order to reach these goals you have to a clear idea of where you want to be and how you are going to get there. Successful people think of their long term goals and adjust their daily behavior to achieve them. This will involve overcoming the immediate gratification attitude which is common in our society. You will not get rich by spending every dollar you make or worse spending money (credit cards) that you have yet to make.

Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

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Tips on Practicing Smart Personal Finance

RC — Tue, 17 Feb 2009 12:04:17 +0000

Everyone has heard the piece of advice when it comes to working:

“Work smarter, not harder”

This can be applied to your day job behind a desk-by working more efficiently instead of just working longer hours. It can also apply to physical tasks as well, by performing laborious tasks in an efficient manner so you don’t waste energy- by using tools, machines, or other devices, or developing a more efficient routine, to help you accomplish tasks while expending as little energy as possible.

Well, the same can apply to your personal finances as well.

How can you practice smart personal finance?

Being more efficient with your money management and spending, using tools to track your money, maximizing your returns and limiting your spending are a few general ways.

Develop habits that save money or cost less money- bringing your lunch to work is an example of choosing the most cost effective alternative or solution to your needs or wants. You don’t have to scrimp on everything, though. Prioritize the things that are important to you to determine what you want to spend money on, and try to spend as little as possible on things that don’t matter to you that much.

Maximizing interest on your savings- Use accounts that don’t have fees, and keep the majority of your money earning interest for you- like keeping your emergency fund in a high interest savings account. Making your money work for you is a smart move.

Use tools to track your spending- It came be as simple as using a household budget spreadsheet, or even keeping it on paper. Or you can use online tools such as Mint or Wesabe to manage your money. Examining your expenditures regularly can help you eliminate waste or reduce spending on unnecessary things.

Plan ahead- You wouldn’t try to put up a wooden fence in your backyard without a hammer or nails, would you? Have you planned out this year’s vacation yet-or more specifically, how you are going to pay for it? Planning ahead is a great way to get a jump on future spending.

Work as a team- If you are married, or have a partner, or have kids- are you all working towards common goals when it comes to money and personal finance? Goals are a lot easier to accomplish when all of the people involved are on the same page and working together, not against one another. Discuss your financial goals with your wife, husband, or kids, and include them in the decision making process as well.

Get organized- If you misplace bills, can’t find important financial papers, or have other problems with disorganized finances, it can really hurt. Late fees can be added on to bills, coupons you wanted to use can expire, and you may end up wasting time as well looking for important documents or other financial paperwork.

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Gold as an Investment: A Gold Rush or Fool’s Gold?

RC — Thu, 05 Feb 2009 12:20:40 +0000

There’s a whole lotta talk about GOLD these days. “Save yourself from the eroding value of the dollar” and “combat inflation” are two common refrains. As much talk as there is of a total global economic meltdown, and gold being a protection against a massive loss of wealth, it’s almost enough to to make a regular person, who might normally not even think about investing in gold, wonder if gold is something they should consider. But before you run out and start buying gold ETF’s in your retirement portfolio or gold coins, you should think carefully about what is really going on.

A few things to consider:

Adjusted for inflation, the price of gold peaked around 1980, at about $2300 per ounce.

Even at $900+ multi-year highs over the last year or two, gold is still less than half of what it was worth in 1980, adjusted for inflation. As a long term investment, it is a money loser. I don’t know about you, but 1980 was a long time ago. Gold had a tremendous run between 1971 (when the US went off the gold standard) and 1980, but it hasn’t kept pace with inflation since then.

Gold will not be used as a means of trade should there be any type of financial or political collapse.

Do you really think that your neighborhood grocery store is capable of conducting transaction, should you have your hands on a few gold coins or a vial of gold dust? Do you think they would know how to value it or even tell if it was real?

If you are just trying to make a guess for the short term, good luck.

I mean, when is anyone really right? Can you or I predict the stock market or any other commodity price and where it is going to be in 6 months? Did anyone think, last summer, that a barrel of oil would plunge to the low to mid $30 range? I know I didn’t. Many talking heads were predicting $200 per barrel in the near future.

My point is, don’t take arguments for any investment, whether it be gold, the stock market, or other commodities at face value, especially due to fear or worry. If you think gold is going up, and invest in it, you are really betting that it will go up or stay the same (as a hedge against inflation). It’s entirely possible, but it may not be for the same reasons you might think now. I don’t think there is anything wrong with having a modest amount invested in gold or any other commodity, but I also don’t think investing in gold is going to save me from financial ruin, either.

photo credit: Velo Steve

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Should You Try to Get Rich Quick or Just Get Rich Slowly?

RC — Thu, 04 Dec 2008 12:15:00 +0000

Apologies to JD Roth aside, I think most people would like to get rich quick, if there was a tried and true way to do it. But, while it works for some people, there really is no set road map to do it. Some people do it by starting a business or in real estate, others by quickly rising up the corporate ladder, or even winning the lottery comes to mind.

But to me, trying to get rich too quick has a few drawbacks that make it unattractive, such as:

Risk- In order to make money fast, through investing, real estate, or other methods, you have to be willing to bet big and take on a lot of risk. It has worked for some people, but, using real estate as an example, many, many people can get burned. Investing in risky stocks can have the same high upside potential, but you could risk losing everything you have invested. Is it worth it? I don’t really think so.

Damage to Relationships-Both personal and professional relationships can be damaged, often unrepairable, by spending too much time focusing on money or spending too much time working or at the office. How many divorces have been caused by one partner working too much and not really giving to the relationship? How many business relationships have been severed do to one person’s focus on money and personal gain to the detriment of the other party?

Stress-Working long hours, leading a sedentary lifestyle behind a corporate desk, not getting exercise, and bad eating habits, as well as the pressures of the corporate workplace, can all be a detriment to your health.

So, the way I see it, getting rich slowly is the way to go about it. Does that mean you don’t try to get ahead at work, increase your income, develop new income streams, or try to make more money? Of course not. But don’t let it have a negative effect on your health, relationships, and don’t take on too much risk trying to do it. I work more than 40 hours a week on a pretty regular basis, mostly to try to pay down my debt faster. But I have limits, and I try to stick to them.

What are your thoughts on chasing after the money? Should you try to do it quickly, or take it at a more leisurely pace? What other drawbacks to trying to get rich too quickly can you think of?

Image by Yomanimus

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Going from Debt to Wealth- A Closer Look at Dave Ramsey’s 7 Baby Steps Plan

RC — Wed, 19 Nov 2008 04:00:36 +0000

Dave Ramsey, the personal finance guru heard on the radio around the country and well known popular author, is pretty well known for two main concepts. The debt snowball, and Dave Ramsey’s 7 baby steps. I’ve talked about the debt snowball before, but have not discussed the baby steps plan to get out of debt and build wealth. Here is Dave Ramsey’s 7 Baby Steps Plan, with some of my own thoughts as well.

1.) Save $1000 for an emergency fund- If you don’t have any money saved for an emergency fund, start here by saving at least $1000. Dave says save $1000, but if you feel you need more, like $1500 or $2000, do what makes you feel comfortable. The important thing is to get some sort of financial cushion going so you don’t have to use credit cards to pay for unexpected expenses or minor emergencies.

2.) Pay off all debt using the debt snowball -According to Ramsey, you should pay the minimum on all of your debts (including credit cards, auto loans, etc.) and make extra payments on the one with the lowest balance every month until it is eliminated. You would then take those extra payments and add them to the debt with the next lowest balance, and so on, until you are debt free -except for your home mortgage. As I’ve mentioned regarding the debt snowball before, if you want to pay the debt with the highest interest rate first, go ahead and do what feels right to you, as long as you continue to reduce your total debt.

3.) Save 3 to 6 months of expenses in savings- This is the “real” emergency fund. While the first $1000 you save in step one is designed to keep emergency expenses from having to get put on a credit card or keep you from getting behind on your bills, saving 3 to 6 months expenses can help you get through major emergencies, such as losing your job, a medical emergency, a major repair to your home, or having to buy a new car because your old one died on you.

4.) Invest 15% of household income into Roth IRAs and pre-tax retirement- After you have a comfortable safety net for just about anything life can throw at you, it is time to start investing. It’s probably a good idea to at least the company match to your 401k if one is offered before you reach this step, but now is the time to ratchet it up on the 401k and Roth IRA contributions.

5.) College funding for children -This is another somewhat debatable one, at least on the order you do it in, after funding your retirement. But if you think about it, it does make sense. If you have not saved up enough to pay for your children’s college, there are other options, such as loans, grants, scholarships, or even you child working part time to help pay for college. But if you hit retirement age and you don’t have enough saved, you only have one choice-keep working.

6.) Pay off home early- Now is the time to eliminate your last debt, the home mortgage. If you can knock this one out, you will probably be in pretty good financial shape. While some people prefer not to pay off their mortgage, it does offer a very large sense of security, I would imagine.

7.) Build wealth and give! Invest in mutual funds and real estate- If you have your primary mortgage paid off, Dave advocates investing in mutual funds and real estate, i.e., diversify your portfolio and continue investing. While if you had invested in either of these a year or two ago, you might not feel so confident, if you have gone through the other 6 steps and have no other debt, and are in it for the long haul, you probably shouldn’t worry about it too much. Don’t forget to help others with your new found wealth!

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Mastering Frugality- The Art and Science of Saving Money

RC — Fri, 31 Oct 2008 10:22:40 +0000

I am by no means a master of frugal living. But more recently, I have been giving a lot of thought to simplifying my life, both for monetary and other reasons, such as reducing clutter and making life less stressful. Becoming more frugal. Practicing frugal habits is a great way to avoid consumerism, prevent buying too much stuff (although I am a pack rat by nature), reducing stress, as well as spending less money on things, much of which I personally do not really need. The way I look at frugality is that it can be both an art and a science.

The Art- There is no one way to be frugal, like a work of art, it can be subjective. Just like two people looking at a painting, what works for you may not work for someone else. Something you do in order to save money, or something you can live without having, might seem spartan or miserly to someone else.

There is no right or wrong.

The Science- Frugality can be quantified, however. How much money do you save by doing X, Y, or Z? You can figure out what it would cost you to do something, and even include a value for your time for something you do yourself that you normally would pay someone else to do for you.

What exactly is frugality then, or the definition of frugality?

According to wikipedia, Frugality is the practice of:

1. acquiring goods and services in a restrained manner, and

2. resourcefully using already owned economic goods and services, to

3. achieve a longer term goal.

What I really like about this definition is the third part, “to achieve a longer term goal”.

The goal can be to save money, become financially independent, but it does not have to be money related. It could be to reduce waste to benefit the environment, or just to reduce your own personal impact on the world we all live in together, or as I mentioned above, to simplify your life.

For me, my main goals are to get out of debt, become financially independent, and also to live simpler. Having gone through Hurricane Katrina in 2005 (was very lucky though-did not flood), and evacuating again this year for Hurricane Gustav, I have really come to understand that possessions mean very little, it is people and relationships that are important.

So what areas of frugality do I need to improve in?

Reducing Waste

Delaying Gratification

Developing Self-Sufficiency

Simple Living and Avoiding Consumerism

Over the next few weeks, I am going to write about how I am trying to improve in each of these ways.

Do you actively practice frugality? What are your motivations? What areas are you successful in, and in what areas would you like to improve?

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Asset Allocation and Your Age- Finding the Proper Allocation that Makes You Comfortable and Reduces Risk With Your Retirement Investments

RC — Thu, 30 Oct 2008 11:19:10 +0000

One of the unfortunate byproducts of the current stock market meltdown, is the fact that many people are going to have to delay their retirement by a few years, if not more. When times are good, and the stock market is increasing at 8% to 12% per year, it is very difficult for people to pull money out of the stock market and put it in safer investments.

Even though I am in my mid-thirties, I have experienced two periods of time in my working life where I have had co-workers or acquaintances tell me they were going to have to defer retirement for a few years due to heavy losses sustained in their retirement accounts, both after the tech crash and subsequent effects of 9/11, and the current stock market crash.

An equally unfortunate part of the equation is that many people getting close to retirement age these days are now pulling ALL of their retirement investments out of the stock market, and may never be able to make up the difference.

So how do you avoid this scenario?

The answer is asset allocation.

Asset allocation is how you have your investments proportioned in each investment category. For example, you could invest in stocks, bonds, real estate, and commodities (gold, oil, etc.), leave your money in cash, or even invest in foreign currency. Most of the categories can be broken down further, such as large cap stocks, small cap stocks, etc. Also, you can invest in some categories, such as commodities or even real estate by either buying certain companies that are part of that industry (i.e., stocks), or exchange traded funds that invest in a particular commodity (such as gold or oil), or even a real estate investment trust (REIT) for real estate. For the sake of simplicity, and because it is frequently the only investment outside of a home, let’s just look at retirement accounts an focus on stocks vs. bonds vs. cash-keeping in mind that some stocks could be a gold ETF or a REIT for real estate. The goal of asset allocation is to reduce volatility and limit the potential downside of loses to one class of asset. By the same token, however, the upside (or potential for gains) can be reduced if one asset class sees large gains.

There are two components of asset allocation that you need to examine:
1.) Your asset allocation vs. age, or when you want to retire.
2.) How often you rebalance your portfolio, or changing your asset allocation.

Asset allocation vs. age

There is an old rule of thumb, that the amount of investments you keep in stocks (vs. bonds or cash) should be 100 minus your age. For example, if you were 40 years old, the amount of money you keep in stocks would be 100-40 = 60%. While this may have seemed conservative a year or two ago, there are many, many people who would have loved to have this type of allocation over the last year. I would surmise that this could be adjusted somewhat based on your own personal risk tolerance, as well. But even if you were 20 years old, it would still mean that you would have 20% of your retirement funds in bonds or cash, such as a money market fund. Benjamin Graham (Warren Buffett’s mentor) recommended at least 25% in each category, and suggested that a 50/50 split might be appropriate.

Rebalancing Your Portfolio- Re-allocation of Assets

At some interval, whether it is every 6 months or every year, you should rebalance your portfolio back to the asset allocation you determined was right for you. You should also take into account your age, or how soon you want to retire. The closer you get to retirement, the “less risky” your overall portfolio should be.

Why?
Because this is how you lock in stock market gains, and limit losses. Going back to Warren Buffet’s mentor, he recommends a simpler way-

A good case can be made for a consistent 50-50 (stocks vs. bonds) division here, with adjustments for changes in the market level. This means the investor would switch some of his stocks into bonds on significant rises of the market level, and vice-versa when the market declines.

I do not see this as market timing-it is not based on what the stock market or your investments are going to do, but what they have already done-there is a key difference there.

By properly allocating your retirement assets to your age or retirement, as well as your risk tolerance, and rebalancing on a regular basis, you can limit the volatility in your retirement accounts and approach retirement age without worrying about a massive drop in the stock market putting your retirement plans on hold.

Are your retirement accounts allocated across different investment types? Do you rebalance on a regular basis?

Asset Allocation and Your Age- Finding the Proper Allocation that Makes You Comfortable and Reduces Risk With Your Retirement Investments is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

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