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Posts Tagged ‘financial advice’

Times are difficult for many but they don’t have to be. Parents are the most important teachers their kids will ever have. If you want your kids to grow up to be financially independent, then be a good role model for them.

  • Tell your kids school is important. Although a college degree is no guarantee of financial success, those with a college degree tend to make more money than those without. Graduate and professional degree earners tend to make more than those with a baccalaureate. https://moneyprovidesfreedom.wordpress.com/2010/06/18/the-value-of-an-education/
  • Don’t display wealth. If you look rich (drive an expensive car, own a huge house, wear expensive clothes/jewelry), most likely you are not wealthy. You are probably living in debt. Be a good role model to your children and let them know that having money in the bank is more important than trying to impress their friends. To achieve financial stability, you must save more than you spend – it’s as simple as that.
  • Compounding for decades. When your children are young, open a 529 College Saving Plan for them and set up automatic monthly deposits. I opened 529 College Saving accounts for my kids when they were born. Currently there is about $40,000 in my nine-year olds account and about $34,000 in my seven-year olds account. It’s easy if you start when they are young and make it automatic.
  • Teach your kids how to live on a budget, balance a checkbook and to save. When my kids receive money for their birthday or for Christmas, some of the money can be spent but some must be saved for a “rainy day.” Discuss money and bills with your kids in an age appropriate way.
  • Teaching personal responsibility. Hard work over time is the only way to succeed for most people. Teach that success and wealth are not entitlements. No one is entitled to a “free lunch.” I don’t believe in allowances. Kids shouldn’t get paid for doing nothing. It’s not that way in the real world. If you want your kids to have spending money, tie the money to the amount of age appropriate chores that they do.
  • Don’t bail out your kids too easily. Let them experience the consequences of their actions while they are still living under your roof.

Many parents need to do a better job teaching their children about money. Kids want to learn about money and it is up to parents to successfully nurture their thirst for knowledge. By doing so, you help make sure your kids will have a financially bright future.

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If you been thinking about hiring a financial professional but don’t want to get ripped off (think Bernie Madoff), then this article’s for you.

  • Identify areas you need help and then decide which professional groups would be best suited to help. Different financial professionals have different areas of expertise. One size does not fit all.
Area of Need Financial Professional
Asset allocation, college planning, getting out of debt Financial Planner
Buying bonds or stock trades Broker
College funding Financial Planner
Disability insurance Insurance agent
Divorce Attorney, Financial Planner
Life insurance Insurance Agent
Retirement planning, IRA accounts Financial planner, Broker
Taxes CPA, EA (Enrolled Agent)
  • Create a list of potential candidates through referrals. Use professional referrals, employer referrals (EAP), and personal referrals. Possible referrals services include: Certified Financial Planner Board of Standards, Inc (www.cfp.net) and Financial Planning Association (www.fpanet.org).
  • Develop a list of questions that must be answered before you hire someone. Interview questions include (at the least): How much training and experience do you have? How long have you been in this profession? What professional credentials do you have? How many clients do you have? What’s the profile of your typical client? How are you paid (fees, commission, both)? Will I be working with you directly or a junior member of the firm? Have you ever been reprimanded or disciplined by regulatory or industry bodies? Do you have references that I may contact?
  • Interview the candidates, check references, and research the professional’s background. Due diligence is required here. Hire professionals who have recognized credentials (CPA, CFP, CFMA, MFP, etc) in their specialized field. Not all credentials are created equally and some are quite dubious (i.e. certified “senior” advisor).
  • Watch out for red flags. Possible red flags are when someone avoids answering questions about his professional background, offers investment products before asking you for basic financial information, sells penny stocks or claims insider knowledge, trades investments without informing you, or if it sounds too good to be true it probably is.
  • Hire the most suitable professional.

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Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects. When you buy a bond, you are loaning money for a certain period of time to the issuer. In return, you get back the loan amount plus interest. Bond prices move in opposite direction of interest rates.

Important bond elements include:

Issuer, Interest rate (coupon rate), Call feature, Maturity date (short-term <1 year), Face value, and Rating (repayment ability).

There are many different types of bonds:

Bond Type Features
Savings Non-marketable security issued by US Treasury in small denominations for investors. Series EE and HH bonds. Low risk, low-interest rate of return
Treasuries Direct obligations of the US Government. Includes treasury bills, notes and bonds. Interest income and Federal tax only.
Municipal Debt issued by a state or local government. Interest income received is free from federal tax and is generally exempt from state and local tax if you live in the state the bond was issued.
Corporate Debt issued by a corporation that pays interest semi-annually at a fixed rate and matures on a specific date.
Zero coupon Provides no periodic interest payments. Bonds issued at fraction of face value and become worth their face value at maturity.
Junk (High yield) High risk, high interest paying bond with a low bond rating due to the poor financial condition of issuing company. I don’t recommend these.

 

Bonds have seen record buying in the past year or so from panicked investors. However, some investors like Warren Buffett are now saying that bonds are overvalued, expensive, and ready to “burst” much like the stock market did.

http://finance.fortune.cnn.com/2010/10/05/buffett-hints-at-bond-bubble/?section=money_topstories

However, bonds do provide income and stability. As part of a diversified portfolio, you should own both stock and bond funds. That way, if the economy heats up and stocks jump in value, great. If bonds stay at low rates, that is okay because bonds are your safe money. If the economy tanks again, that is okay because you own some bonds to protect you from market declines. How much you allocate to stocks or bonds depend on your goals, risk aversion, and time horizon.

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One of the “secrets” of wealth is long-term investments that pay compound interest. When given a choice between a good investment with compound interest and a great investment with simple interest, pick the good investment every time. Over time, the investment that compounds will outperform.

Throughout stock market history, the average yearly returns for periods of 25 years or longer has been around 9-10%. For example, the yearly returns from 1900-2009 was 9.4%. For the last 25 years, the annual return was 11.9%.

So the secret of wealth is to invest when you are very young so you have time on your side. When your child is 16 and starts his first job, match his income and place that amount in an IRA account. Do this every year for five years and your child will be a millionaire by the time he or she retires.

Let’s illustrate with an example. When your child is 16 years old and starts his or her first part-time job, you place $2,000 into an IRA account for your child every year until he or she reaches age 20 for a total investment of $10,000. Even with no further investments, your child would have about $1.1 million by the time he or she retires at age 67 (assumes 10% interest). That $10,000 investment allowed your child to retire a millionaire.

Opening an IRA for your children when they are young is probably one of the easiest and surest ways to make sure your kids will have a great financial future.

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Parents are the most important teachers their kids will ever have. I believe most parents want the best for their children and want them to be financially savvy. However, many parents are actually doing the opposite and are teaching their kids how to be poor. Here’s how:

  • Telling your kids school is not important. Although a college degree is no guarantee of financial success, those with a college degree tend to make more money than those without. Graduate and professional degree earners tend to make more than those with a baccalaureate. https://moneyprovidesfreedom.wordpress.com/2010/06/18/the-value-of-an-education/
  • Encouraging outward displays of wealth. If you look rich (drive an expensive car, own a huge house, wear expensive clothes/jewelry), most likely you are not wealthy. This type of spending creates financial stress. Famous people who made lots and lots of money but filed bankruptcy anyway include Mike Tyson (boxer), Donald Trump (entrepreneur), Anna Nicole Smith (model-actress), Ted Nugent (rock star), Nicolas Cage (actor) and Larry King (talk show host). You need to save more than you spend to become wealthy.
  • Compounding for decades. When your children are young, many parents don’t open a 529 College Savings Plan or Coverdell account. I recommend opening some sort of college  savings plan for your child before he or she is one year old so the account has many years to grow.
  • By not teaching your kids how to live on a budget, balance a checkbook, or to save.
  • By not teaching personal responsibility. Hard work over time is the only way to succeed for most people. Success and wealth are not entitlements.
  • By bailing out your kids too easily. Let them experience the consequences of their actions while they are still living under your roof.

Many parents need to do a better job teaching their children that managing money is what leads to a rich lifestyle instead of the money itself. Kids want to learn about money and it is up to parents to successfully nurture their thirst for knowledge.

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Most people would like more money than they have but are unsure how to achieve greater wealth. There are two basic ways to increase your financial position:

  • Spend less money.
  • Make more money.

Today, I discuss a few ways to spend less money.

  • Think priorities. Think reward. Align your money habits to promote your values. What do you really want in the next 5, 10, or 15 years?
  • Stop paying rent. Rent is a big money waster. Can you cut or decrease your rent payments by moving into a less expensive apartment or taking on roommates? Can you move back in with your parents? If you can afford to buy a home, now may be a great time.
  • Cut your food bills by 50%. Bring bag lunches to work and cut back on restaurant meals. When I was a kid, we only ate out on special occasions like birthdays. Buy unbranded food in bulk.
  • Cut up your credit cards. Get rid of debt by paying cash or by paying your credit card bills in full each month.
  • Reliable and affordable car. If you are thinking of buying a more expensive car, stop! One of the worst things you can do is own a Mercedes or BMW. Cars are a debt and don’t make you money. Expensive cars massage the ego. Use debt to buy appreciating assets. Own a dependable car but not an expensive one.
  • Eliminate costly vices. How much are you spending each month or cigarettes, beer, drinks at restaurants, or illegal drugs?
  • Buy clothes at thrift shops or wait for sales. Never buy retail.

If you have other suggestions, please include them so we can learn from your experiences. I would love to hear your favorite money-saving tips.

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