Apr 29 2015

Beyond Six-Months’ Cash: Alternatives for your emergency fund

By |April 29th, 2015|Blog, Personal Finance Tips|4 Comments|

The concept of an emergency fund is simple. Ideally, we should all have 6 months of expenses put aside in a savings account, just for emergencies. There are generally two objections to this school of thought.

Objection 1: Inflation risk and opportunity cost

From an investment perspective, emergency funds held in cash represent significant opportunity cost. In fact, some experts will tell you that six months’ of expenses is way too much to subject to the inflation risk and opportunity cost of a traditional savings account. In certain circumstances, I would agree with that. As with most things financial, the answer comes down to an individual’s personal situation.

Cash is king when it comes to emergency funds for two reasons: first, it is liquid, and liquidity needs should always be an investor’s first consideration. Second, it is virtually free of investment risk. However, depending on how much emergency cash you have and your own level of risk tolerance, you might want to consider an alternative to a traditional savings account.

Solution 1: Increase yield with a short-term bond mutual fund

Short-term bond funds invest in investment grade bonds with short maturities, typically 3 years or less. As such, they are generally lower-yielding investments than longer bonds. Short-term bond funds are less sensitive to interest rates than longer bonds, making them a more conservative investment. As a trade off for slightly higher yield, however, these funds do carry a bit more risk. Look for a fund with low expenses and shorter duration to preserve your principal.

Checking and savings accounts are not the only options for your emergency savings. Here are alternatives for your emergency fund.

Objection 2: Six months’ expenses is a lot of money

It’s true – half a year’s expenses represents a daunting figure for many of us. A family whose expenses are $3,000 per month would be looking at $18,000, just for emergencies. And that doesn’t include funding other goals, such as college or retirement.

One way to meet this need is to reduce the amount needed by drafting an emergency plan. The idea is that in a true emergency, expenses would be ranked in order of need, and only the most necessary would remain. A second, even complementary strategy is to combine emergency savings with another goal.

Solution 2: Combine emergency and retirement saving in a Roth IRA

If you can’t afford to max out your Roth IRA and put money aside for emergencies, consider having your Roth pull double duty. Roth IRA contributions are made with after-tax dollars, and can always be taken out without penalty. Consider bulking up your Roth contribution by combining it with your emergency savings. That way, you don’t have to feel like you’re missing out on retirement savings to save for emergencies. Any money you don’t use will be available to you as retirement income. Also, once you reach your goal for your emergency fund, you can direct your entire contribution toward your more risky retirement investments.

I’d like to point out two considerations here. It is rare that I advocate earmarking retirement money for another purpose. This solution only applies if you are unable to max out your retirement contribution and save for emergencies at the same time. Second, money that is designated for emergencies should be in a separate, low-risk investment. (like a short-term bond fund, for instance) within your Roth IRA account.

Beyond the numbers

My personal viewpoint is that emergency saving is best thought of as insurance, rather than investing. In putting aside a pool of money for emergencies, we are self-insuring against job loss, medical expenses, or unforeseen catastrophe. While there is nothing wrong with maximizing your level of protection, doing so at the risk of not being covered is counterproductive. And prioritizing other goals at the expense of emergency funding puts everything at risk.

Apr 29 2015

Combating the Costs of North Facing Rooms With Your Windows

By |April 29th, 2015|General Personal Finance|Comments Off|

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Anyone who has embarked on the house-buying process will know all about orientation, and how it’s one of the primary things to think about when purchasing a new property. Particularly now, when heating costs are soaring through the roof, choosing a home which is suitably orientated can be absolute crucial from a money-saving perspective.

As the title of this post has highlighted, we’re today going to focus on north-facing rooms. Of course, the majority of properties in the country are going to have at least one north-facing room, but it’s all about how much time you are going to be spending in there. For example, a north-facing bathroom isn’t going to be the end of the world, but when it comes to a living room and you are cozied up every evening, trying to keep warm, it’s a different matter entirely.

Fortunately, there are solutions. North-facing rooms might get much colder in the winter months than any other region of the home, but through strategic window treatments it’s possible to control the heating costs tremendously. Admittedly, you could also turn to other means, such as an A+ boiler, or added insulation, but window treatments are where most homes flop and where some truly huge savings can be made.

Let’s start with the first suggestion; the suggestion that was actually designed for that room which just can’t get warm. We’re talking about insulated shades. Some companies might refer to them as cellular shades, others might call them honeycomb shades – but the fact remains that their design means that they prevent heat from escaping from a room. It’s possible to purchase some of these blinds which are actually two or three levels thick, which allow virtually no heat to escape. Nevertheless, whichever option you choose, it will make a big difference to your final energy bill.

It goes without saying that the above products are a little more expensive than traditional blinds, even if their benefits are considerably better. If you don’t want to part with such cash, it’s time to improvise. Any type of blinds will suffice in this regard, whether it’s roller blinds, blackout blinds or Roman blinds and your aim is to just leave them down all through the day. Again, you’re locking the heat into the room, albeit at the cost of natural light.

If you do want to use one of the three blind types we’ve just mentioned but with some natural light, it might be time to get creative again. Motorized blinds used to be for show, but now they can act as a money-saver as well. Using the programmable timer, you can set them to open and close in tandem with the movement of the sun. It means that they can be open to let sunlight filter through into your room, whilst closed the rest of the time. Of course, if you combined such a system with an insulated blind, the effects would just be multiplied.

As you can see, north-facing rooms certainly aren’t no-go areas anymore. If you can think strategically about the windows, there’s every chance you can make them at least habitable during the winter months – and not the deterrent they once were to prospective home buyers.

Apr 27 2015

How to Choose a Good Lender for a Car Title Loan

By |April 27th, 2015|General Personal Finance|Comments Off|

If you have a low income or bad credit, there are still borrowing options available to you should you be in a financial emergency. One such option is the title loan, which you can access if you have a clear title on a vehicle, essentially turning your car into an asset for collateral. The problem is that if you have poor credit, you are vulnerable to loan sharks who see you as easy prey. This is why you need to know what to look for if you do want to apply for auto title loans online in particular.

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What Is Predatory Lending?

Predatory lending is when there is actually no benefit to you as a borrower and you end up trapped in a permanent cycle of ever-growing debt. Predatory lenders use a number of illegal practices, ranging from aggressive sales tactics to threatening with physical violence if you do not pay your loan back.

How Do You Find a Good Lender?

If you are on the lookout for a lender who provides good title loans, you need to start by looking at the interest rates that they offer. Car title loans always have higher interest rates than bank loans or other loans, but this also due to the fact that they are short term loans.

You must be careful about balloon payments, which hide just how big the burden of your finance actually is. This means that you end up having to roll the loan over for longer periods of time, meaning you constantly pay interest and end up in more and more debt. This is a situation you must avoid.

Another thing you are likely not aware of is that you are within your rights to negotiate a reduction on your loan charges and interest rates. Predatory lenders will try to lock you into bad terms with exorbitant rates. In many cases, people end up being forced to hand over the title of their vehicle, because they simply cannot meet the repayments.

There is a chance of getting caught up in a cycle of inescapable debt. This is why you need to take your time in finding a reputable lender who actually has your best interests at heart. Naturally, the overall goal of any lender is to make money themselves, but this should not be achieved by forcing you into bankruptcy. They should be completely transparent about their charges and penalties and completely explain what your personal rights are as well.

The above may sound frightening and leave you turning towards any option besides title loans. In reality, however, you can avoid dangerous situations by exerting due diligence and common sense. Spend some time doing your research, look into your various options and know your rights. Always check the name of a lender you are considering with the Better Business Bureau and your local financial ombudsman, as this will tell you whether or not they are reputable and engage in fully legal lending practices.

 

Apr 27 2015

3 Decisions that may Hurt your Diversification Efforts

By |April 27th, 2015|Blog, Personal Finance Tips|Comments Off|

Asset allocation and diversification are important concepts in investing. Although many investors think of them interchangeably, they are, in fact separate concepts. Asset allocation refers to how you choose to spread your money among investments. Every investor practices asset allocation by virtue of having invested. Whether or not that asset allocation represents diversification is another matter altogether.

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Diversification is a portfolio attribute that can be achieved through asset allocation. The purpose of diversification is to manage risk by investing in many different types of assets. Stocks and bonds from companies of different sizes and from different countries all have places in a diversified portfolio.

There are many considerations in building a diversified portfolio, but here are three decisions that may hinder your quest for ideal diversification.

  1. Choosing to invest in individual stocks and bonds instead of mutual funds or ETFs. It is difficult to find consensus among experts on the number of stocks or bonds required to build a diversified portfolio, but the numbers generally fall in the 20-50 range for the US stock market alone. Effective diversification requires exposure to international stocks and bonds, as well. For most individual investors, diversifying this way just isn’t practical.
  2. Using a global fund to fill an international allocation. Global funds may invest in securities from every country in the world, including the one you live in. Some global funds from US companies can invest up to 50% (or more) of their assets in US securities. This may lead to overlap with your domestic investments and make your portfolio less diversified than you intended. If you’re looking for exposure to countries other than the one you live in, go with an international fund. If you’re looking to diversify further, choose a fund with allocations to emerging markets, which don’t correlate as closely to the US as larger countries do. (Keep in mind that emerging markets also add risk, so size your allocation accordingly.)
  3. Choosing a fund by name alone. Sometimes investors spend a great deal of time determining exactly how they want their portfolios to be allocated, then lose it in the implementation stage. Some, as described above, may end up with far less international exposure than they wanted. Others match their asset allocation goals with fund names that describe asset classes without looking any further. A mid cap fund that behaves like a large cap fund, for example, defeats the purpose of the mid cap allocation altogether. A careful reading of the prospectus will tell you how much latitude is given the portfolio manager for an actively managed fund, and which index is being used to define an asset class for an index fund. Also, a look at a fund’s Morningstar style box will tell you if its name is representative of its current holdings.

Eggs and baskets

Diversification is the embodiment of the old adage about eggs and baskets. Just as important as choosing asset classes, however, is how you choose to invest in those asset classes. A diligent investor looks beyond the theoretical world of indexes to actual investments, making sure they reflect the desired asset allocation

Apr 27 2015

Essential Features of a Qualified Binary Options Broker

By |April 27th, 2015|General Personal Finance|Comments Off|

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Success in binary options will depend on a number of things. However, it shouldn’t come as any surprise that a trader will never get very far in their career without a solid binary options broker and platform to handle their business. While you’ll have a number to choose from, thanks in large part to how popular binary options have become in a short amount of time, this also means you have quite the challenge ahead of you in trying to choose one.

The following features should be signs, though, that a binary options broker is worth your time and money.

Sound Security

Any site you spend money on should involve high quality security. Otherwise, it suggests they don’t take your business very seriously. Maybe they do, but they’re clearly not taking any steps to safeguard your money, which is just as bad.

Make sure a binary options broker is using 128 bit SSL encryption from a reliable provider. Most traders keep a lot of money with their online brokers. If this type of encryption isn’t being used to protect your investment, expect a hacker to eventually take advantage.

Demo Software

In the past, most traders had a long and treacherous road separating them and success. Not only did they have to make a number of mistakes, but each of these had to cost them a good deal of money too.

Fortunately, binary options help cut down on a lot of these risks. However, you can do even more by only considering a broker who provides demo software. This will allow you to play the market without ever losing any money. Although you won’t win any either, the learning opportunity is more than worth it.

Even veterans of trading should look for demo software. Whether you want to test out a new strategy or explore new markets, doing so without risking any money is ideal.

Returns on Losses

More and more, brokers are offering returns on options that don’t end up in the money. It won’t be a ton of money, but when you consider that many brokers give back as much as 15%, you can see how that would add up quickly over time. That’s all money that can all be used to make better investments that pan out too.

Plenty of Assets

A binary options broker can have all the expertise in the world and a great platform to complement it. However, if they lack a wide array of assets for you to invest in, your profits are going to be limited. Beginners will also suffer from a lack of exposure and may never fully appreciate the markets that are available to them.

The next time you’re looking for a binary options broker to handle your business, consider the above features that are essential. This way, you’ll know that hard work is the only thing standing between you and success.

Apr 24 2015

Retirement Planning Means Life Planning

By |April 24th, 2015|Blog, General Personal Finance, Life|Comments Off|

Retirement planning is a broad concept. So broad, in fact, that the term is almost useless in discussion without clarification as to context. To one person, retirement planning means directing as much money as possible to a 401(k). To another, it means maintaining the ideal asset allocation as retirement draws nearer. Still others are worried about withdrawing funds in a tax-efficient manner. But in all three examples, much like on the first page of results from a Google search of the subject, retirement planning is about money.

Saving versus planning

Some of us are so daunted by the sheer task of accumulating enough money that we don’t give enough thought to what that money is for. We save, but we fail to plan.

If your dream is to have a place to live, food to eat and adequate health care, your task is relatively simple. But if your vision of your golden years includes a more exciting existence, now is the time to plan.

Write it down

It’s time to make a list. A really big list. Don’t hold back. Start with the things that first come to mind, then dig deeper. Inside all of us is a trunkful of ideas that we’ve put away without even realizing it, labeling them as unrealistic or far-fetched. This is the time to locate that trunk and drag it out into the light. Have you thought you might like to live in another country? Put it on the list. Try out a new career? Live in an RV? It all goes on the list.

Most of us know that saving now is essential to a comfortable retirement.  But retirement planning goes beyond the money.

Include everything – things you want to do or have (though I’d put more emphasis on the first), how you want to feel, what words you want to use to describe your life. Will your life be active? Peaceful? Simple? Putting all of these ideas in one place can build a framework for decision-making later in the process.

Take some time with the list. Let it stew and revisit it. Add things. Take things off. Take time to periodically force rank each item to see if your priorities have changed. The list may change dramatically over time, more so if you are in your early working years. But the fact that the list exists can help you make decisions today about saving and spending today by giving shape to your retirement goals.

Make “some day” today

The danger of overly diligent retirement saving is in focusing so much on tomorrow that you fail to live today. The items on your list are things to look forward to, yes, but they also serve as a record of things you’re putting off. None of us is guaranteed time, so consider moving some of them to a more immediate list.

You may also discover that some of your dreams are better suited to your younger self or that you can benefit from them earlier than planned. Some may be obvious – if your dream is to climb Mt. Everest, you have a substantially better chance of succeeding if you attempt it in your 30s than if you wait until your 70s. Furthermore, if your dream is to build a house on a lake to live in when you retire, you might be able to purchase the property earlier and enjoy it during your working years.

Funding the list

Obviously, we only have so many retirement dollars. Inevitably, some things will have to come off your list. If you’ve put enough work into your list, that decision will be easier. It is less painful to give up your dream of spending a year traveling around the world if you gave it up in favor of owning a vacation home for spending time with your children and grandchildren.

Moving some of your dreams into your working years can also help you stretch your retirement dollars. Saving up your vacation time to take a month-long trip around the world before you retire, for example, can be the compromise that reduces your retirement income needs but still lets you get a taste of your dream.

The Bottom Line

The hard truth is that most of us spend our working years focused on the financial aspects of retirement, and fail to imagine our total retirement experience. But failing to plan for your retirement dreams can mean failing to plan for your life, and that can lead to missing out. You may not be able to do everything on your list, but don’t let it be because you waited too long to plan.