Personal Finance Blog by Debit versus Credit

The Automatic Millionaire: Chapter 5

June 27, 2008 | Filed in: Finance 101, Friday Book Club | No comment

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Now that I’m finally back in the swing of things here at Debit versus Credit I’m ready to bring back a popular feature (and one which I enjoyed very much): Friday Book Club. I began Friday Book Club in November of 2007 with three goals.  First, to be able to share what I’m learning with all of you.  Secondly, to absorb the material that I’m reading more efficiently by reviewing it and summing it up in a matter of just a few paragraphs.  Then finally, to be able to apply what we’re learning to our personal financial lives and share with each other experiences that relate to the lessons and topics at hand.  These are my goals and I hope that you will share these common interests with me.  Now then, where were we?

Today’s Friday Book Club will feature chapter 5 of The Automatic Millionaire which was written by David Bach, the New York Times Bestselling Author of Smart Couples Finish Rich and Smart Women Finish Rich.  Chapter 5 is entitled Automate for a Rainy Day and is all about creating an emergency fund, or a rainy day fund, for protection.  I’m a big believer in this.  In fact, my wife and I are already well on our way to having a six-month emergency fund saved up.  We’re about halfway there right now and it has been one of the easiest things that we’ve ever done.  You see when we got married we decided that we didn’t want to be like some of our friends who got into financial troubles (even little ones sometimes) and didn’t have any way to cover these “emergencies.”  So we decided that before we did anything else with our money that we’d establish an automatic savings plan which would begin an emergency fund for us.  It’s paid off quite well for us and we have peace of mind now if anything bad were to happen.  On to David’s advice then…

The “Sleep Well at Night Factor”

“How can you provide yourself with some financial security today?” is the question that David asks within the first few paragraphs of this chapter.  Are you prepared if something were to happen?  Could you pay your bills if you lost your job and were unemployed for two months?  Things happen and as he says, “circumstances change.”  So what can you do to provide yourself with some insurance against this chance of risk?  Of course the answer is quite simple.  By setting aside cash as an emergency fund you can help protect yourself and your family from any financially devastating changes.  How well are you prepared to weather any storms that life might throw at you?  David asks just a few simple questions where you can easily figure out the answer to this question.  I’ll ask them as well.

• My monthly expenses currently total: $_______________
• I currently have $_______________ saved in a money market or checking account
• This equals _______ months’ worth of expenses

How’d you come out?  I’ll do it with you.  My monthly expenses currently total (roughly) $1,162 dollars.  This includes some items which I could drop if needed (such as the internet and my phone).  I currently have $3,299 dollars saved in an emergency money market.  This equals 2.84 months worth of expenses.  Not the six months that my wife and I are shooting for, but like I said it’s a good start. (more…)

Tags: Emergency Fund, Friday Book Club

Mutual Funds 101

May 29, 2008 | Filed in: Finance 101, Investing | No comment

I was talking to a friend of mine the other day about investing. She just recently received her tax refund and had yet to “spend it” as she said. Naturally I suggested that she invest it. We got to talking about what she might invest her money in and since she has absolutely no investing experience I suggested that she might consider a mutual fund. She had heard of mutual funds before, but wasn’t exactly sure what they are. Of course I told her she should read my blog post about mutual funds, when suddenly I realized I didn’t have one. Thinking that it was really quite irresponsible of me to not have covered this topic as of yet, I am now going to right this wrong. Welcome to Mutual Funds 101.

What is a Mutual Fund?

A Mutual Fund is a diversified portfolio of investments… essentially a ready-made, specifically focused, investment portfolio. A Mutual Fund is a large pool of money which is used to invest in stocks, bonds or other securities. Mutual Funds are attractive to a large number of people because it is easy to purchase shares and they are great for investors who do not have the time or the desire to create their own diversified investment portfolio. Mutual Funds are usually geared towards one of three different goals: income, growth or a mixture of the two. An income fund invest mainly in - you guessed it - income investments such as bonds, preferred stock and income-oriented common stock (stocks that pay a high dividend). A growth fund invests mainly in high-growth (often small or mid-cap stocks) stocks and other types of growth investments. And finally the growth/income fund would invest in a mixture of these types of investments so as to provide a stream of income to the investor as well as potential for future growth.

How do I purchase a Mutual Fund?

To invest in a Mutual Fund is similar to investing in the stock of a company. Mutual Funds are sold by the share, just as stocks are. The Net Asset Value (NAV) of a Mutual Fund refers to the value of just one share of a Mutual Fund. This NAV is updated daily. Investors have two choices when it comes to investing in a mutual fund. They can purchase shares of the fund from the fund company directly or purchase shares through a brokerage account.

If you already have a brokerage account you might consider purchasing shares of funds directly through your brokerage, so as to keep all of your investments in one “place.” One thing to keep in mind is that some brokerages charge a flat fee to invest in a fund. This fee might make it more practical to purchase directly from the mutual fund company.

Some brokerages include E*Trade, Scottrade and Zecco Trading. Some great Mutual Fund companies include Vanguard and T Rowe Price.

Update: A great place to do research on mutual funds is over at Morningstar.com

Tags: diversification, diversified portfolio, funds, Investing, mutual funds, stocks, vanguard

Investing 101

November 12, 2007 | Filed in: Finance 101, Investing | No comment

Let me begin this post by saying that I am by no means a seasoned investor and my advice might not be as complete as someone who has been investing for 20 or 30 years. That being said I do not believe that investing is rocket science, and I do believe that the average Joe has the ability to earn returns on their money that can match - if not beat - the returns that the “professionals” achieve. Truthfully it’s really not all that difficult to do. There are just a few things one needs to remember when they begin investing.

• Investing is not gambling; luck should never be something that you rely upon when choosing an investment.
• Investment decisions should never be made without doing any research.
• One should never buy into a stock or fund when everyone and their grandmother is telling them how great an investment is and how it is going to make EVERYONE rich.
• Always diversify your portfolio (i.e. invest in more than one industry and/or stock type)
• Determine your level of risk tolerance (how much risk are you willing to take on?)

Choosing a stock to invest in requires first choosing a few companies in which you are interested, researching the companies and finally (this is the easiest part of all) purchasing the stock from your brokerage of choice.

Choosing a stock to research

The first step to investing would be choosing a few stocks each from different industries that you are interested in, or you could go about it by merely choosing companies that you do business with, determining their industry of business and finding out who their competitors are. For example let’s say that I am interested in the Oil Industry, the Retail Technology Industry and the Restaurant Industry. These are just three industries I picked off of the top of my head, but they do a good job of diversification considering that different economic events would not all have the same affect on these three different industries. Now that I have chosen a few industries I would want to think of a few companies that I know in these industries. For Oil I will choose Exxon Mobil (ticker: XOM) and Chevron Texaco (CVX). For Retail Technology I will choose Best Buy (BBY) and Radio Shack (RSH). Finally for Restaurants I will choose Cheesecake Factory (CAKE) and PF Changs (PFCB).

Researching your chosen companies

Now that I have chosen these few companies in each of my selected industries I would want to do some research on them and compare them to other companies in their same industry. This part is probably a little bit more time consuming than choosing stocks to research or purchasing them, but is also the most important step in investing. Just as a quick note, if you are not willing or do not have the time to do periodic research on your investments, such as reading earnings reports then stocks are probably not the best choice for you. If this is the case you might be interested in investing in one of the hundreds of mutual funds available out there. These funds are based on a diversified index of stocks such as the S&P 500 and would earn you the historic average of 8-9% a year.

Before we dig into research ideas I’d like to introduce you to a few of my friends, who if you are serious about investing will soon become your best friends also. My friends are finance.yahoo.com and moneycentral.msn.com. These sites should be all you need to do some basic research (and view results of research already completed) on your chosen stocks.

Because this is just a basic overview of investing and research I won’t go too deeply into the different methods of researching, but will instead just skim over some of more traditional and basic things to look up and compare. You’ll want to look up your companies P/E ratio, which means price to earnings ratio. Basically this ratio compares the current stock price of a company with its earnings. Traditionally the lower the number the more of a value the companies stock is, but this would not always hold true, for example P/E ratios between industries would not be a good thing to compare. As an example you would not want to compare the P/E ratio of Exxon Mobil (XOM) to that of the Cheesecake Factory (CAKE). Other things you can research and compare are sections of your chosen companies financial statements. It’s always a good idea to see how well the company is doing in bringing in revenue, how much debt they have and how well they are doing at paying it off and how effective they are at increasing revenues and decreasing expenses.

Let me just leave you with one other quick note on researching: I asked my friend Josh (who is a successful investor/day trader) if he had any advice other than what I’ve already mentioned and he mentioned how “you should never invest in a company that you don’t understand. If you don’t know how AAPL (Apple, Inc.) makes money or what their products are then you should not be investing in it… Research and then invest in companies that you understand.”

Purchasing your chosen stocks

Now that you have a good idea on how to choose companies and do a little bit of research on them you’ll want to open an investment account of sorts. The company that I used when I first began investing is Sharebuilder. I like a few things about Sharebuilder. I like that they make it easy to set up automatic investing plans, I like it that you can purchase stocks in dollar amounts instead of only per share price and I like it that their trading fees are extremely well-priced. It is for these reasons that I’m going to say that if you are just starting out then you might consider Sharebuilder. As you can see there is a large banner right below. As a disclaimer to you, my readers, I will let you know that if you click that banner and sign up for service with Sharebuilder and fund your account I will receive a commission. I do this to try and earn enough money to pay for my hosting and also because I’m hoping I’ll be able to raise enough to return some to you, my readers, in the form of contest prizes and what-not. We shall see how this second idea develops in the future. In the meantime if you disagree with providing me with some support by clicking on that affiliate banner please feel free to follow this link to Sharebuilder.

Also if you are not interested in Sharebuilder as much as a traditional broker you might try Scottrade or Etrade.

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