Fortune 500 Budgeting For Our Personal LivesWritten by Deborah Carraro
January and February are traditionally busy months in financial industry as many New Year's resolutions typically include goal of becoming debt free or saving for a major purchase. While many of our clients understand importance of getting professional help when managing their business bookkeeping, only a few think to ask for our services in managing their personal finances.In business world, a budget is a financial framework that provides checks and balances to prevent overspending and ensures availability of funds should company run into unexpected trouble and requires capital. These same principles can be applied to our personal lives. We are still close enough to Christmas holidays to understand how easy it can be to overspend. Presents for kids, dinners with family and friends, new clothes for New Year's Eve party all can add up to significant debt come January. I'm reminded of a Visa commercial that typically gets a lot of airplay in December: The postman comes bearing monthly bills. The Visa statement is opened showing a large listing of purchases all with zero balances and recipient can't believe his luck and faints from shock. The commercial advertises Win What You Buy Contest. The more you buy, more chances you have to win. A certain recipe for financial disaster! While statistically speaking I don't know chances of winning Visa promotion, I haven't met or read about one person who has. We shouldn't base our spending on chances of winning our purchases or even lottery. With a little common sense and a trusty calculator, you can manage your spending and save for future and for unexpected expenses - and feel like you've won lottery! Fortune 500 companies rely on budgeting and financial reporting. CEOs of major corporations do not make a move without consulting their financial plan. Revenue and expenses are carefully tracked and estimates are created for variable expenses. Corporate debt is studied with goal of reducing amounts owing without incurring additional debt. Money is diligently earmarked for future expenses and “rainy days.” Almost every financial expenditure is determined a year before incurred – a business cannot thrive without actively managing its cash flow. Most people understand that business success relies on creating a budget and sticking to it. I'm here to tell you that personal success does too. Everyone talks about setting up a budget and sticking to it, but how do you really go about figuring out what your budget is, or should be? There are a few simple steps to creating a personal budget. We’ll use example of Steve, a computer technician. 1. Calculate your income Calculate your monthly household income from all sources: salary, investment income, pension funds, lottery winnings - both yours and that of your spouse or partner. For example, Steve earns $50,000 after taxes annually. He has no other income. Dividing by 12, Steve calculates his monthly income as $4,166.67.
| | Going Against the Conventional Investment WisdomWritten by Terry Mitchell
First of all, I want to give everyone disclaimer that I am not a registered financial advisor and I don’t play one on TV. Therefore, I cannot legally provide financial advice and I will not do so. This is for informational purposes only and I’m not recommending any of my personal investment strategies to anyone else. Now, with that being said, I will outline some techniques I use for my personal investment strategy, without going into a whole lot of specifics. I generally go against conventional investment wisdom that you are accustomed to hearing, although I do use both a conservative and a not-so-conservative strategy. Most financial advisors put a great deal of emphasis on diversification. While this is probably appropriate for most people, I personally don’t buy it. The idea is that it limits risk. While it does indeed limit risk, for me it also limits my upside potential way too much. Therefore, I basically disregard whole concept. Most advisors will encourage investing for long term. This strategy is generally successful in building wealth, but unfortunately for me, it wouldn’t until after I’m old or dead. I invest for short and intermediate terms. I also do not buy or trade individual stocks. Instead, I buy and trade no-load mutual funds, including index funds. Even with use of a deep-discount broker, commissions from trading individual stocks will add up and cut into my profits. True no-load mutual funds don’t cost me anything to buy or sell. Besides, owning shares in a mutual fund is like owning shares of a lot of different stocks at one time without having to actually buy any of those stocks. Instead of buying individual stocks, I am buying classes or groups of stocks. I also don’t have to worry about which stocks to buy or sell, as that job is being taken care of by fund managers. Now, let’s talk about some guidelines I use specifically for my conservative strategy. I only buy funds that have earned a "Five-Star" rating from Morningstar (www.morningstar.com). They must also have a Morningstar risk rating of "low", "below average", or "average." In addition, they must have a Morningstar return rating of "above average" or "high." Also, they must be long-term winners, i.e., near top of their categories in five-year and/or ten-year performance. I also require them to be "Lipper Leaders", as deemed by Lipper (www.lipperleaders.com), in categories of "Returns", "Capital Preservation", and "Consistency." In my mind, consistency is just as important as high overall return and capital preservation. An inconsistent or volatile fund can cause problems for short and intermediate term investors, even if its longer term performance is excellent. Here’s problem: Let’s say a fund that I invested in went down 50% in first year I owned it. It would have to go up a whopping 100% next year for me to break even after two years. However, let’s say it went down 25% after first year. In that case, fund would only have to go up 33% in second year for me to break even. A 20% drop in first year would need only a 25% increase in second year to break even; a 15% drop would need only an 18% increase; a 10% drop would require only an 11% increase; and so on. Therefore, I stick with funds that have never gone down more than 10-20% in any one year. I prefer funds that have never had a losing year, but those are very hard to find. What about my more aggressive strategy? This is one that I’m using more and more often and is becoming more profitable, although I probably couldn’t quit my job and make a living off of it just yet. Is it going to make me rich? Probably not. However, I hope it will eventually put me in a financial position to retire early. This strategy involves actively trading various no-load market index funds. The experts say you can’t successfully time market. I believe this is true when using strictest definition of term, “market timing.”
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