Your Two Bits

Every day people ask me, “Michael, how do you do it? How do you keep it all together?”

I humbly reply, “Budget. It’s all in the budget.”

…And then their eyes glaze over.

If I weren’t such a fan of the budget, the word budget would be a conversation killer. Hopefully you’re still with me. Rather than extolling the virtues of a budget, which I will likely do in another post, I am providing a simple budget template.

You can download the template (I’ve also added it to the Resources page) and view a short video explanation I made about how it’s laid out and how to take advantage of its being a quarterly budget.

Quarterly Budget Template (MS Excel)

This budget covers one quarter—3 months—at a time. I’ve found that with an annual budget, it’s too hard to anticipate future expenses, and with a monthly budget, there’s not enough flexibility to work with expenses that vary from month to month. Some months have car registration, others have insurance premiums due, and others have Christmas. Most budgeting templates we found addressed the problem by distributing infrequent expenses over the year, such as $10 every month for an annual $120 car registration fee. But that was hard to keep track of. Our solution came with the quarterly budget.

First we determined our average monthly income, and then made sure that our budgeted monthly expenditures—including our savings and debt payoff—did not average more than our monthly income. If our income was $3500 a month, one month we might budget $3400, one month $3500, and one month $3600, but averaged together we would be on track. We figured that each quarter, we would have different large expenses come up, but that different large expenses would come up during different quarters, so that overall things would balance out.

One of the keys to this budget system is that you have a savings account into which all your income goes. Before a given month, you should have enough money saved there to transfer to your checking account all the money budgeted for that month. And then during that month while you’re going about your business, you are earning more money that is deposited into your savings account, ready to be transferred to checking for the following month. As you record expenses during the month, you are able to see how much money you have left as the month’s end approaches, and either reign in spending, responsibly put away more money to invest, or go on a shopping spree, depending on how the month is going.

If you don’t already have a budget or if you’re looking for ideas, this could be very useful. Feel free to share your two bits on budgets or on ways to enhance the template.

Remember, a budget can be painful or empowering. It’s up to you to decide which.

Related Posts:

• Here’s a Way to Collaborate on Your Budget
• Winning the Lottery
• Paycheck into Checking or Savings?
• Budget = Communication

What do traffic jams teach us about investing? That investing is infuriating and you have no control over how your investments do, especially because of buffoons making the traffic jam worse? Not exactly. While there are plenty of buffoons who affect our investments, buffoons don’t control our investments (unless you are one or hire one, which would also make you one).

Aside from patience and long-suffering, freeway gridlock can illustrate good ways to approach investing. Have you ever noticed the car that keeps switching lanes, trying to get into the one that is moving the fastest at that moment? I have seen that countless times, and when I was younger, before I had much experience sitting in traffic jams, also did that. However, when I started commuting to work longer distances on a regular basis I tested my assumptions. Rather than anxiously watching for the lane that was moving at 8 miles per hour rather than 6 miles per hour like my current lane, I tried picking a lane and sticking with it. I tried inside, outside, and middle lanes. What I found was that generally, if I just got in what is normally the fast lane, I fared just as well as the fidgety speed demon trying to maneuver in and out of lanes but with a lot less stress.

I take that same approach to investing. Rather than trying to constantly pick the best new stock or mutual fund or any other random fad, I look for a good mutual fund that I can get in and ride. It may have its starts and stops, but I will get there with less stress than the person trying to time the market and having done better than the person who also picked a lane and stuck with it but only chose a CD fund. (View the short video illustration below, by clicking its Play button.)

Link zu Google (HTML in Multibox)

The fast lane tends to work best, if you have a longer time horizon. Likewise, if you are going to get off the freeway at the next exit or two, it may be best to stay in the slow lane to make sure you don’t miss your exit.

There are different ways you can approach investing and freeway congestion. A lot of it has to do with your attitude. If you want to keep life simple, just jump in the fast lane and be patient as you work through the jam.

There’s my two bits, what about yours?

Related Posts:

• Should I Pay Off Debt or Invest?
• What’s Your Doughnut Hole?
• If My Employer Drops the 401(k) Match, Should I Still Contribute (Part II)?
• Why Ride a Loser?

“Why should I stick with an investment that is losing value? That doesn’t make any sense.” This question was asked of me by the husband of the woman I mentioned last week, who had reallocated all of her 401(k).

In last week’s post I wrote about the guiding principle I use when trying to decide whether to stick with an investment or overall strategy, particularly in a down economy. Basically it helps to think long term.

This week I want to discuss why you might just want to ride that “loser” of an investment. Deciding to do so relies heavily on the type of investment. If it is part of your 401(k) or something similar where you are making regular purchases, it can be great. On the other hand, if you bought, say a mutual fund in one lump sum a year ago and don’t necessarily plan to buy any more, this may not apply as well.

The reason why is that the regular purchases mean you are still buying shares even though the value has gone down. Assuming that we are only going through a down cycle and that the market will eventually recover, you will be buying a lot more shares at a lower price than you had been when the economy was strong. Then as the economy recovers back to where it was, everything you bought while the economy was in a slump will increase significantly.

Look at this chart below for an example of how people tend to invest, causing their retirement to perform poorly.

Stock market performance from 1999-2009

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It is common for people to get scared and sell their investments or stop buying new shares as the economy’s growth starts to slow (A). Then, during the lowest point (between A and B), people do nothing because the economy and the market are doing so poorly. Finally, as the economy begins to recover, people gain confidence and reinvest in the market (B). However by that time they have missed out on the opportunity for great earnings.

Often, it takes a steady hand and a calm head to be patient and brave and ride the loser that can become a winner. We hear people lament they don’t have the luck to pick investments at the right time. Investing through a recession can make the difference.

That’s my take. Feel free to share your two bits.

Related Posts:

• If My Employer Drops the 401(k) Match, Should I Still Contribute (Part II)?
• Should I Change My 401(k) or Retirement Investments?
• Should I Pay Off Debt or Invest?
• If My Employer Drops the 401(k) Match, Should I Still Contribute?

Are you considering switching around your 401(k) or retirement investments? Someone recently asked me if she had done the right thing by reallocating all of her money in her 401(k). TIAA-CREF manages her company’s 401(k). They primarily offer the employees 4-5 predefined options that can include domestic or international stocks, bonds, or real estate. Based on the mix, the 4-5 predefined options are given a classification, ranging from conservative to aggressive. The woman had moved all of her money from an “aggressive” predefined mix of funds to “ultra-conservative” money market funds.

She is not alone in this concern. I have heard others ask if they should reallocate how their retirement is invested or sell off certain investments entirely. Given the major swings—generally downward—that we have seen recently in the market and the overall economy, it is understandable that people would look for something safer, something guaranteed.

Market fluctuations can be painful. I’ll admit that I don’t check on my investments as much as I did six months or a year ago—the results aren’t as exciting. However, I also haven’t changed my strategy either, which is to invest in mutual funds that I think will do well over the long term, meaning at least five years.

How do we keep calm, and even optimistic, as we roll on these tempestuous market waves? For one, I would suggest spending less time watching the news, but I find it even more useful to ask myself a question: “Do I really think that my investments will be worth less than what they’re worth now, when I am ready to sell them?”

If the answer is “No,” why not stay with it? If the answer is “Yes” and is causing me to move all of my investments around, then along with getting out now I may want to buy a year’s supply of food. This assumes that most all of your other options are going through the same slump, which is generally the case with the current market.

Again, in the current economy, it’s easy to understand the desire to find a guaranteed return. Still, use caution when considering pulling all of your money out of one investment to put it in a “safer” place. If you’re like 99% of the rest of us, doing so right now will mean that you bought high and sold low. While it can be a little gut-wrenching to see your retirement or other investments way down in value, just ask yourself this guiding principle: “When I’m ready to sell, do I think this investment will be worth less than it is worth now?”

That’s my take, what are your two bits?

In my next post, I’ll further discuss why it may be great to stick with an investment that is losing value.

Related Posts:

• If My Employer Drops the 401(k) Match, Should I Still Contribute (Part II)?
• Why Ride a Loser?
• Should I Pay Off Debt or Invest?
• If My Employer Drops the 401(k) Match, Should I Still Contribute?

With today being the first day of the new year, I figured I would achieve my goal to start blogging more regularly. To do so, I needed to actually begin; hence the first post on Your Two Bits.

With the economy in a tailspin, waiting to be corrected by the financial wizards on Capitol Hill, I couldn’t think of a better time to begin a blog about money and investing. Everybody is so anxious to get their money into the stock market and watch their portfolios exceed their wildest dreams…

Hold on a minute…

My wife informs me that people aren’t feeling that way at all and are actually quite scared of the market if not currently running from it, right now. That being the case, I think the next six months will be rather telling as far as how severe and long the economic downturn will be. Regardless, can I suggest that we all make a new year’s resolution to be optimistic? I’m not suggesting a Pollyanna complex, but simply that we have some optimism in us. It seems to make life more enjoyable.

Wishing you all a happy new year!