Perhaps you have kids in school, or perhaps you might even be headed “back to the books,” yourself. In today’s society, there is a greater need for additional education in the workforce, and to retrain for new careers. In addition to traditional and vocational education, more and more life skills classes are offered either at community colleges, various online companies, vocational schools and universities. While it is possible to learn hundreds of skills, and perhaps desirable to learn many, the list of essential life skills is actually rather short. What kinds of skills come to mind when you think of “essential” life skills? I might consider the following list as a place to start: relationship building-at home, work and in the community; healthy lifestyle planning; cooking and cleaning basics; basic bicycle, car and home maintenance; family planning and, certainly personal financial basics.

While it could be argued that many of these classes would be best taught in the formative years, our current education system fails to provide many of the basic life skills training. Without parental or family coaching, many kids leave high school and college ill equipped to manage their own apartments, relationships and finances. Indeed, while many adults become adept at managing homes, marriages, and their checkbooks, others flounder and make adjustments, only to fail again. Today, we’re heading back to school, for some financial basics, that will hopefully help you, or someone close to you.

Last week, we stressed the importance of “Safety First.” Being “”safe” in this scenario means saving for the future. Developing a long-term, sustainable savings plan is one of the most important financial habits to develop-and the earlier the better! As a kid, one might want to babysit, provide gardening services for neighbors, start a lemonade stand in the summer, or perform other odd jobs for extra money. Saving a portion of the money, consistently, will promote a sound financial foundation. As the savings grow into a more and more substantial sum, there will come a time to look at various investment options. There may be other opportunities to save money, such as birthday or holiday money from relatives, or offering to sell books or other items that aren’t being used, and taking a percentage of the profits.

If you developed good financial habits as a child, or you instilled good financial habits in your children, congratulations! If not, there’s always an opportunity for improvement, and there’s no time like the present to make a change. If you want to find more money to add to your savings plan, why not consider starting with a few adjustments to your lifestyle? First of all, do you know how much money you have to spend, and how much you are spending each month? If not, start tracking your income and expenses, today! After a month of knowing what you have, see if you can “find” more money to save. Can you make your own coffee at home, rather than buying a cup or two on the way to work? Perhaps you’d rather take your lunch, rather than spend the three, five, ten dollars, or more, each day, for lunch, at work? Can you find ways to share things with friends and neighbors, such as lawn mowers, athletic equipment, books, toys, CDs and games? What about reducing the interest rate on your credit card(s)? Sometimes, one phone call is all it takes to save thousands of dollars of interest, and years of payments. You can save the money you would be spending on interest. Isn’t COMPOUND interest in your best INTEREST?

Class is almost over, but before we are dismissed, what would happen if we actually made saving fun? If that seems like an impossibility, consider rewarding yourself, your children or your whole family after you’ve achieved certain savings objectives. When you achieve one of your goals, perhaps you can celebrate with a family fun night, with games, making pizza together, and creating the ultimate ice cream sundaes. Sometimes, the best things in life are the simplest. Keep this lesson fun, keep it sustainable, keep it simple, and get some “tutoring,” if you need it.

Class dismissed!!

Before we take a closer look at how a bond bubble might or might not affect you, it is important to understand the basic workings of bonds, specifically how interest rates affect bond prices, and how these factors impact a potential “bond bubble.”  

After working the first 12 years of my professional career in the bond arena at a major brokerage firm in Seattle, I developed a fairly good understanding of bonds.  Today, interacting with all types of investors, I am reminded that a lot of folks could benefit from a quick primer on bonds, and the issues that need to be addressed when constructing a bond portfolio to address both the current deflationary climate and the potential for inflation and rising rates down the road. 

To start, think of a bond the same as a CD. I know there are a lot of differences between bonds and CDs, but at the core, they are similar – an  investment that pays a fixed income on a regular basis, and has a stated maturity. 

For this discussion, the issue at hand is the price you would receive on your bond if you decide to sell before it matures.  Interest rates impact the price of bonds in an inverse manner.  When interest rates go up, the price of the bond declines.  When interest rates decline, the price of the bond increases. 

Let’s look at an example.  Say you invest $10,000 in a corporate bond issued by IBM that yields 5 percent interest and matures in 2020 – a ten year bond.  If you hold the bond to maturity, you will receive the entire $10,000 principal back, provided of course, the bond doesn’t default in the meantime.  If interest rates decline, and you want to sell your bond prior to 2020, chances are the selling price you will receive will be greater than $10,000. 

The opposite is true if interest rates increase over the next ten years, and you want to sell your bond early.   In this scenario, the price you receive would be less than $10,000. 

This is where a bond bubble enters into the discussion.  Market pundits are saying that, because interest rates are so low, and the chance of inflation (and higher rates) so high,  a sharp increase in interest rates will cause a steep decline in bond prices, and a bursting of the bubble.    

Even if rates do increase dramatically, and the price of your bond declines, this only impacts you if you sell your bond before it matures.  If you hold your bond to maturity, you will get your entire principal back, no matter HOW far your bond declined in the interim.  

Getting a good grasp on bonds is important, especially for folks who are nearing retirement or are retired, as bonds are likely to make up a large portion of your portfolio.  So stay tuned – when it comes to bonds, we have a lot more to review.

When we plan for our long-term goals, more often than not, our short-term necessities and desires get in the way. “Why do I want to wait so long to enjoy life?” we ask ourselves. In reality, if we focus, consistently, on planning for our future needs, we will be able to greet our future self with a big congratulatory pat on the back, and maybe, just maybe, a big hug! If we fail to stay focused, we might resent and grumble at our future self, because we have failed to plan. To arrive, in style, to greet our future self, we might just consider revising our financial playbook from “invest whatever is left,” to: save first, then invest, then spend.

We’ll explore these three principles, in detail, over the course of the next week. Hopefully, we’ll even make the process fun.

Happy Tuesday!

Lori

He says that although we are facing serious challenges getting our collective financial house in order, investors who bet against the engine of corporate growth by abstaining from ownership in common stocks are likely to miss out on one of the best performing asset classes of the next decade.

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Now, back to getting our personal financial house in order . . .

After you make a personal commitment to keep track of your monthly burn rate, the next step is to figure out an easy way to accomplish this.  This is important, because if it becomes a laborious, time intensive activity, chances are you are not going stick with it throughout the year.  A simple approach that works for me is that, instead of using cash for purchases and transactions, I always use a credit card or write a check. 

The reason why this works for me is because it is amazingly easy to download your credit card expenses or checks to an excel spreadsheet, which can then be uploaded to a financial planning software, such as Quicken or mint.com, unless of course, you want those programs to capture this data automatically.    

Once in a while I use cash for purchases, but then am faced with the onerous task of keeping track of the receipts, and then manually entering these little slips of paper into excel or a financial software tracking system. 

Transferring credit card transactions and on-line bank check registers to an excel spreadsheet takes 15 minutes a month at the most.  More importantly, you have begun the essential task of keeping track of your burn rate and have taken a “giant” leap on your journey to financial freedom. 

In the past I have used Quicken to categorize my expenses, but even that became a little cumbersome. Instead, I created my own program in excel to do this for me.  The upside is that it extremely easy to operate.  The downside is that it doesn’t produce the wide array of charts and reports that software programs create, which can be useful at times.

In the August 25^thblog, Lou mentioned that his family uses clearcheckbook.com to record transactions.  I haven’t checked it out, but will, and report back.  Do you have a system that works for you?  Send in a comment, and we will send you the latest edition of The New Coffeehouse Investor.

This week’s headlines were filled with more economic bad news. But, did you see the good news buried underneath, or did the bad news “noise” drown it out? Did you see the news that landlords are raising rents in many cities across the country? In some areas, vacancy rates are below 4 percent. The next logical scenario is that, in those neighborhoods, the increased rents will encourage some renters to become buyers, due to low mortgage rates. The buyers will purchase the existing inventory, which will cause increased demand, which may cause builders to get back to the business of constructing homes.

Last week’s blog focused on “Green Shoots” in Seattle. There are many “Green Shoots” throughout the country, and yes, there is, and always will be bad news, as well. If we focus solely on the bad news, our emotions tend to get the best of us, and we tend to make decisions that aren’t aligned with our long-term objectives. The same is true if we get caught up in euphoria. Our best decisions tend to be made when we are able to evaluate the advantages and disadvantages of a situation, and how that situation relates to our goals. If we are basing our decisions on bad news-or even good news-in a vacuum, we may be getting in the way of obtaining the best results for ourselves.

We can develop systems to help us filter through the daily “noise.” Questions such as: “How does this impact my situation, short and long-term?” “Will this piece of information help me achieve my goals?” “Is this information presented to a general audience, or does this speak to me, specifically?” If we continue to filter the news through our series of questions, sometimes the news has less impact on us, and those we care about.

Review your life, and all of your accomplishments. Were you at your best when you listened to everyone else, or when you were very focused on your own goals? When you needed to lose weight, did you go on one diet after the next, just to replace it with the next latest fad? Or, did you settle into a eating plan that worked, long-term? What about your financial situation? Are you following today’s “guru” or do you have a long-term financial roadmap? Today, I encourage you to reflect on your life goals, and seek out a system that will work for you and your long-term objectives. Granted, it isn’t easy to do-especially in our complex and ever-changing world. No, it isn’t easy, but it can be simple.

Have a great weekend,

Lori

And it was, in the form of a comment a Coffeehouse Investor submitted in response to my August 21 entry of keeping track of the infamous burn rate. 

Ever since the Coffeehouse Investor was established, about 12 years ago, I have encouraged folks to keep track of their burn rate, in the form of a financial plan that allows direction on reaching goals.  This exercise is by far the most important of the three Coffeehouse principles. 

In the below post, Lou shares a journey he and his wife embarked on many years ago to reach financial independence. His comments are so profound that I didn’t want them buried at the end of a previous blog. Here is his story . . .

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Being able to retire early was a goal of ours since the early 1980’s. In the beginning, we just lived below our means and invested what was left over. Most of the time there wasn’t much left over. The kids were young, the mortgage was expensive, etc.

In 1991, we were ages 39 & 36, we really became focused on being able to retire early if we chose to or if we were forced to. The economy was very bad. People were losing their jobs… even people in their 50’s who were very well established in their jobs were being encouraged to quit (layoff’s, golden handshakes, early retirements, etc.) It became quite apparent to me that even though companies claim to be “Equal Opportunity Employers” they really don’t want you on their payroll when you are in your fifties. We decided that we wanted to be able to retire in 20 years. Our target was the year 2010 when we would be ages 58 & 55. In order to achieve this goal we decided to set up a more measurable investing plan. We would still live below our means but now we had a yearly goal that we strived to meet. Our plan was to invest 10% of our gross income that year and then increase the amount by 1% each year thereafter. We found that this was fairly easy for us to accomplish, in fact we far exceeded that…. probably because we were already in the mode of living below our means, but also because any time one of us got a raise in income we also raised our investment amount.

In 2001, even though the stock market was down, we were in a good position to meet our target of 2010 retirement. I realized that I needed to get a better idea of what our “burn rate” would look like if we decided to stop working. I decided to track our spending for a few years and that would give me a basis for estimating our spending if and when we decided to leave our jobs.

I started tracking our spending using the popular Quicken software. I found that Quicken wasn’t very user friendly so I tried using Microsoft Excel. That didn’t work out as easy as I had hoped so I went back to Quicken.

In January, 2006, we were ages 53 & 50, we felt that we were in a financial position to retire. This was a major decision so we decided to work with a fee-only financial planner to see if he could confirm this, which he did! It was very important that we had a good handle on our “burn rate”, which we did because of the tracking that I had been doing.

To make this long story short, my wife and I retired in January, 2007 at the ages of 54 & 51. This was 4 years earlier than we had planned. In 2008 we purchased a vacation home in Florida so we could get away from the New England winters. Knowing our current “burn rate” and how a purchase of a second home would affect it was very important in making this decision.

I still track our spending and I expect that I always will, but I’m no longer using Quicken. I found something simpler and better for my needs. I am now using ClearCheckbook.com which is a free on-line money management program. There is also a premium version that offers more features but I’ve found that the free version does everything I need and it’s very easy to use. You have to register and create a password before you can use it. Then you create your accounts that you will be tracking. I think you can track as many accounts as you like but I’ve found that three accounts (Checking, Savings, and Cash out of pocket) works for me. Next you create your categories that you will be tracking (like Clothing, Gas, Groceries, etc.) You can create as many categories as you need for your situation. Once you’ve created your accounts and categories you can enter your transactions (deposits & spending) just like you would with a checkbook register. After recording some transactions you can then start making meaningful reports. I found that the one report that gives me everything I need is the Category report with a report type of Text.

Living below your means, saving for a rainy day, having a diversified portfolio, having a goal, tracking your spending …..it worked for us. My wife and I had decent jobs but we were not highly paid professionals. We just used some common sense.

I hope this helps someone.

We all face various times in our lives when important decisions must be made regarding health, finances, asset protection, etc. What is our process for determining whether or not we need an expert?  How do we determine the experts with whom we will entrust our personal information? We might be able to start by reflecting on the process we use to select a physician. Did you select your physician as a result of a referral by a friend or relative? Was this person someone you know from school, or from a group in which you both participated? Do you continue to visit your doctor because you know, trust and like him or her?

Most people-even extremely healthy people-realize that they need to visit with a doctor on an annual basis, at least. Our doctors create a database with our health information, and note changes in our health, as we age. When required, our primary care physicians refer us to other specialists that will assist us when we have a specific need. Many other experts are needed during a lifetime. Perhaps you’ve had the need to create a will, which may have required a visit to an attorney. Did your golf buddy or business partner recommend her favorite attorney?

When selecting an advisor or expert of any kind-doctor, investment advisor, attorney, veterinarian, hair stylist, golf professional, CPA-it is important to determine how well you know, trust and like your advisor. Once you have confidence in their knowledge, it’s all about the relationship. Will your advisor put your interests in front of their own? What is their reputation? When selecting an investment advisor, will he or she connect with you on a regular basis? Will the advisory process be transparent? Will you look forward to meeting with your advisor, because you genuinely respect and like him or her, or will you find reasons to procrastinate.

What happens when your situation changes? Can you count on your advisor to help you navigate the new path? Can you rely on him to listen to your changing objectives? Listening. Understanding. Serving your needs. Someone you can trust. If you’ve surrounded yourself with advisors who treat you as their best client, then you just might have a relationship that will last a lifetime.

Have a great Tuesday!

Lori

Now, as the market continues to languish in 2010, the frustration level has reached a boiling point, with investors fleeing the market like never before, as pointed out in this New York Times article.

The financial industry, always eager to make a buck off of the emotions of investors, are promoting the recent stock market crash as a “black swan” event, and offering up all sorts of newfangled investment products to investors in hopes of protecting them from the next bear market as detailed in Saturday’s Wall Street Journal (subscription required).     

Wall Street can offer up non-solutions to investors and charge huge fees on products that won’t get you any closer to your financial goals.  Is it time to turn to them for false problems or turn inward and deal with the reality of our own emotions?   

Instead of exacerbating the problem by turning to Wall Street these investors need a dose of “investing” reality with their investment choices. 

To put it bluntly, if you are going to invest in the stock market, expect volatility.  Expect long periods of outperformance followed by long periods of underperformance.  Expect years when the stock market goes through the roof (1997-1999) and years of steep declines (2002 & 2008). 

When the stock market is hugely overvalued, as it was in 2000, expect periods of low returns.  When the stock market is hugely undervalued, as it was in 1982, expect periods of high returns.  When the stock market is moderately overvalued, as it is today, expect moderately undervalued returns. 

But don’t think for a moment that these returns will be generated in a straight line; in fact quite the opposite is going to occur.  You will experience years when the stock market appreciates 30 percent a year, and periods when the stock market declines 30 percent a year. 

With this type of volatility, why invest in the stock market at all?  Because over the next 5 to 10 years and beyond, there is a good chance that common stocks will significantly outperform bonds and other fixed income investments, and greatly enhance the returns of portfolios.

What happens if you are retired, and can’t afford to lose money in the stock market?  Don’t invest in the stock market!  This is where an intelligent financial plan enters the picture.  If, after creating your financial plan, you come to the conclusion that a small allocation (maybe 25 – 35 percent) in the stock market is warranted, there is a good chance that even this small allocation will enhance your portfolio returns.  The problem is not the volatile stock market. The problem is the investor – most haven’t created a financial plan to know what an appropriate level of risk and allocation is for thier holdings 

I find it interesting that the financial media only talks about “black swan” events on the downside, but never on the upside.  Investors are all too happy to participate in bull markets, but try to run for cover when bear markets come around, instead of accepting bear markets as a normal part of the market cycle. 

For the most part, investors across the country “cut their investing teeth” during the markets of 1982-1999, a period that coincided with the introduction of personal retirement accounts, otherwise known as 401k plans.  During this 17 year period, we were treated to a bull market of enormous proportions, and that is what we came to expect.  We never stopped to ponder that if the stock market is going to outperform for a stretch, it will have to underperform for a stretch as well, in the process of reverting to its average annual return of around 10 percent. 

How do you handle volatility in the stock market?  Is it something that causes you sleepless nights, or have you created a smart financial plan that recognizes bear markets as a normal part of life, and allocated your assets accordingly?

Of all the financial suggestions I have offered up over the years, this straightforward exercise tops the list, in terms of importance.  Keep track of your monthly burn rate. 

Please note that I am not encouraging you to make a “budget”, which can seem like an overwhelming burden and restraint, as it is for me.  In fact I don’t budget.  I have tried to, and it doesn’t work for me.  Some people are great at setting a budget and sticking to it. I am not one of those.  This is not about budgeting, it is about “keeping track.” 

Keeping track is at the heart of financial planning.  For most people, including me, the overriding question seems to be, “Am I on track to maintain my current lifestyle for the rest of my life, and if not, what changes need to be made?” 

It is difficult, if not impossible, to answer this question without a financial plan.   A primary factor that goes in to analyzing this is how much money you are saving (or spending, if you are retired), and what dollar amount your portfolio needs to reach, to sustain you for the rest of your life. 

Keeping track allows me the personal freedom to know that I am in charge of my financial future.  Because of my line of work as a financial advisor, every day I wake up and tune in to the news of the global economy.  Is German’s growth rate for real?  Are Irish banks in trouble?  Is deflation going to trump inflation? Should I buy gold futures or wheat futures?   

I have to admit I enjoy tuning in to the dynamics of world affairs. As an investor, these events are largely irrelevant to my investing success, and whether I reach my financial goals.  What is relevant to my financial success is how much I am saving for today for my retirement down the road.   

The same holds true for someone who is retired and needs to keep track of their spending.  Is your burn rate $4,000, $8,000, or $15,000 a month? This figure will have a profound impact on whether or not your “glide path” through retirement will see you through safely, or whether your portfolio will crash and burn long before your time is up.  If you are spending $15,000 a month, and your glide path indicates you should only be spending $10,000, isn’t it better that you have this awareness today, rather than ten years from now?  On the flip side, if you are only spending $4,000, but find out that you could be safely spending $8,000 a month, that awareness allows you the freedom to make choices aligned with your lifestyle values. 

Keeping track of your monthly burn rate allows you the freedom, at the end of the year, to analyze whether or not your spending is aligned with what is important to you.  For instance, if you are spending $X,000 dollars a year on dining out, are you getting $X,000 dollars of enjoyment, or would those dollars be better spent elsewhere, offering you more enjoyment or fulfillment?  Or. . .  maybe you could save and invest those dollars, allowing you more freedom when the time comes to retire sometime down the road.       

Keeping track of your monthly burn rate is quick and easy, once you have a system in place that works for you.  We’ll cover that next time.  In the meantime, if you have a tracking system that works for you, send us a comment, we’d like to hear about it and share it with others.

While unemployment data is a leading economic indicator, it is interesting to look in one’s own ”backyard” to see growth, or the lack thereof. The economic indicator, and ”green shoots,” in my neighborhood, is revealed in residential real estate sales. A home on the corner of my block, sold in three days, and there have been pockets in the greater Seattle area where real estate agents are seeing some multiple offers, again. While most agents believe that the bump in activity is seasonal and unsustainable, it is significant nonetheless. Real estate sales have picked up in neighborhoods north of Seattle, and in areas on Seattle’s Eastside.  If sales activity continues at this pace, there may actually be a housing shortage within the next two years, as some experts have recently predicted.

There is always good news and bad news, but the barrage of bad news that the media tends to highlight, can impact our psyche. If we each focus in on some “green shoots” in our local areas, and share the good news, perhaps we can have a positive impact on others, and it’s possible that we could have a positive impact in our local economy. Do you have any positive local economic news that you can share with us?

What are your “backyard” economic “green shoots?”

Happy Friday, and thanks for sharing!

Lori