Say you decided to put $4,000 into a Roth IRA for yourself and your spouse. Would it be smarter to dump the $8,000 in as a lump sum or would you be better off dividing it up in some fashion and for example put in $1000 a month over 8 months? The thinking behind splitting up the investment is that if the market is going up and down over the course of the year you have a good chance of buying some stocks at the drops as well as minimizing the chance that if you dropped the $8,000, today’s price would turn out to be the highest for the whole year.

There is an interesting article at the moneychimp regarding dollar cost averaging a large sum of money into the stock market vs just dumping the whole amount in. He has a calculator in the article that you can pick the month and year you would have started and see if the money would have done better as a lump sum investment or spread out over a year using historical returns.

The moneychimp article says that dollar cost averaging will loose 2 out of 3 times according to the calculator.

Of course, dollar cost averaging will win if your start date falls right before a dramatic crash (like October 1987) or at the start of an overall 12 month slump (like most of 2000). But unless you can predict these downturns ahead of time, you have no scientific reason to believe that dollar cost averaging will give you an advantage.

I really liked his closing paragraph where he wonders why it is then that so many people persist in believing that dollar cost averaging is better. His answer:

Maybe because it has a psychological appeal: if the market dips, people will be happy because DCA will be saving them money; and if the market goes up, people will be happy regardless.

The Automatic Millionaire is subtitled, “A Powerful One-Step Plan to Live and Finish Rich”, is written by the David Bach who has recently been showcased on the Oprah Show’s “American Debt Diet“. He is the author of Give What You Didn\’t Get - Steps Toward a Karmic Psychology (1997), Smart Women Finish Rich (1999), Smart Couples Finish Rich (2001), 1001 Financial Words You Need to Know (2003), Start Late, Finish Rich (2005), and the latest The Automatic Millionaire Homeowner (2006). Start Young, Finish Rich is scheduled for release in 2008.

Chapter 1 of the book is titled, “Meeting the Automatic Millionaire”, and introduces the McIntyres, a couple who were attending one of the author’s classes. The author states that their story changed his life and can change the reader’s. I did not catch why these ‘millionaires’ were attending a class on ‘how to finish rich’ but that is besides the point.

This is the philosophy behind the author’s “Automatic Millionaire” approach:

• You don’t have to make a lot of money to be rich.
• You don’t need discipline.
• You don’t need to be “your own boss.” (Yes, you can still get rich being an employee.)
• By using what I call ‘The Latte Factor’ you can build a fortune on a few dollars a day.
• The rich get rich (and stay that way) because they pay themselves first.
• Homeowners get rich; renters get poor.
• Above all you need an “automatic system” so you can’t fail.

The chapter introduces a number of these ideas. First, the McIntyres are introduced as a couple of modest means who earn about $50,000 a year but who have a couple million invested for retirement. They had money automatically put into their individual and company sponsored retirement plans so that they never ‘missed’ the money.

They both gave up smoking and earmarked the money that had gone to buying cigarettes towards investment. Except for their home, they do not ‘do debt’. Their cars and boat are bought used and not financed. They turned their first home into a rental property when they purchased their new home. They also mention in passing having their bills automatically paid each month, be it the mortgage or their donations to their church.

The idea to pay yourself first is not new to Bach. Stanley and Danko talk about this in The Millionaire Next Door. Givens taught this in his More Wealth Without Risk and George Clason is perhaps the best known for teaching this in The Richest Man in Bablyon. Many people have written about the idea of paying yourself first, many more have read about it, but few have implemented it. The question will be, can Bach make this automatic. Can we become “Automatic Millionaires” without discipline? That is his claim. We will see.

Chapter 2 of The Automatic Millionaire is subtitled, “Becoming an Automatic Millionaire on Just a Few Dollars a Day.” According to the author the trick to getting ahead financially is “watching the small stuff — little spending habits you have that you’d probably be better off without.” We spend money because we have it. If we get extra money we do not save it. The proof that we do not save extra money is that anytime the government wants to jump start the economy they talk about cutting taxes - the government knows we will spend the extra money and rather than save it.

In this chapter Bach introduces The Latte Factor and as he quotes People magazine, “A latte spurned is a fortune earned.” If you can quit wasting your money on frivolous spending and invest it instead then you can get your money to work for you, instead of you working for money. He saying “It is not how much you earn but how much you spend” is just a twist on the more common “It is not how much you earn but how much you keep.”

The author contends we all have things we waste our money on each day. These things add up. Over a month they are big money, Over a year even more. Over a lifetime at compound interest — possibly a million dollars. Yes! Saving 5 dollars a day for 40 years adds up to over a million dollars! Before reading this book I have already searched for my “Latte Factor”. I was spending $2.00 a day on Diet Coke and another $2.00 a day for lunch. (Yea, I am cheap). But still, this is $20.00 a week that I have found I can eliminate, thus saving over $80.00 a month.

He then goes on to show how compound interest can work for you. There is a chart showing how a 15-year-old only has to save $3,000 for 5 years in order to have $1.6 million at age 65. A 19-year-old has to save for 8 years, and a 27 year old would have to save $3,000 a year until they were 65 and still only have $1.3 million.

The first chapter stated that the reader could become an automatic millionaire without any discipline or will power. Changing your lifestyle will take quite a bit of discipline and will power — even though the results will definitely be worth the effort.

Brokerage commissions are probably the biggest disadvantage to ETFs. Since you have to buy them through a broker, you must pay a commission.

According to CNN Money.com:

Even with the low fees available at discount and online brokers these days, brokerage commissions can seriously erode ETFs’ low-expense advantage, especially when investing small sums of money.

For example, if you were planning to invest, say, $100 a month in ETFs, even a cost of just $10 per trade would mean 10 percent of your investment is being siphoned off. So your ETFs’ price would have to rise 10 percent just to recoup your buying cost — and you’ll have to pay a commission when you sell too.

For this reason alone, ETFs are generally better suited for investors who are socking away larger amounts of money — as in 401(k) and IRA rollovers. If you’re more likely to be dollar-cost-averaging with small sums or you tend to invest sporadically with modest amounts of money, you’re probably better off in a regular mutual fund.

So, one thought I have is to have my automatic deposits go into a no load fund that I can then move into an ETF after the dollar amount is up high enough? or when it is time to balance?

Chapter 3 of The Automatic Millionaire says that almost everyone makes enough money to become an Automatic Millionaire. You don’t do it by following a budget but by paying yourself first.

Bach says there is a better way to get rich than budgeting. He says that any system that is designed to control your normal human impulses is ultimately bound to fail because human beings don’t want to be controlled. We want to be in control. Instead Bach says the only way to become rich is to pay yourself first and pay it automatically by payroll deduction into a retirement account.

He then goes into a discussion about working for yourself. Not as your own employer but how many hours of each day/week/year are you able to invest for your own retirement? Bach says that most of us work barely 22 minutes a day for ourselves if any at all. The author, rather than focusing on a percentage of your income that you should put away, he suggests working an hour a day for yourself.

I will wait for the author to give more details about how he expects people who spend more than they earn by building up credit card debt. So far the steps are 1) Don’t buy lattes, have money payroll deducted to a retirement account, and forget about budgeting.

Blueprint for Financial Prosperity has a a good article on what credit counseling is, what to expect if you use a credit counseling service, and things to watch out for.

Credit counseling, also known as debt consolidation, is professional counseling provided by organizations that help consumers find ways to repay their debt - through careful budgeting and management of money. This is usually performed by the credit counseling agency taking over your debt payment; you agree to pay a certain amount each month to the credit counseling agency, which is then paid out among all of your creditors.

There are many non-profit credit counseling organizations are nonprofit that will work with you to solve your financial problems. But just because an organization says it is “nonprofit,” there’s no guarantee that its services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden, urge consumers to make “voluntary” contributions that can cause more debt, urge consumers to enter “debt repayment plans” they simply cannot afford.

Go check out the entire article.

According to a Reuters report on CNNMoney.com rising gas prices shouldn’t be enough to cause families to cancel this summer’s driving vacation this summer.

The federal government’s top energy forecasting agency, Energy Information Administration (EIA), delivered its report on the same day MapQuest released a new poll showing that one in 10 respondents planned to cancel trips because of high gas prices.

Even though summer gasoline prices are forecast to be an average 34 cents higher than last year, motor fuel costs won’t cut that much into the family vacation budget, the EIA said.

At an estimated average summer price of $2.71 a gallon, the added gasoline costs for a 500-mile round trip vacation in a vehicle that gets 20 miles per gallon would be just $8.50, the agency said.

Even if gasoline soars 75 cents higher than last year to a record $3.12 a gallon and vehicles only get 15 miles per gallon, the fuel bill would be just $25 more for a 500-mile round trip.

The EIA pointed out this would “likely be less than lunch for a family of four at a moderately priced restaurant.”

Sounds reasonable to me. It is amazing how the psychology of paying more for gas might change our plans. Would an extra $25 cause you to cancel your vacation?

Edmunds.com says that by simply changing your driving habits you can improve fuel economy up to 37 percent.

They took several of the most common tips and tested them under real-world conditions. Some worked like a charm. Others didn’t work at all.

What worked:

• Aggressive Driving vs. Moderate Driving
  • Up to 37 percent savings, average savings of 31 percent
  • Recommendation: Stop driving like a maniac.
• Lower Speeds Saves Gas
  • Up to 14 percent savings, average savings of 12 percent
  • Drive the speed limit.
• Use Cruise Control
  • Up to 14-percent savings, average savings of 7 percent
  • If you’ve got it, use it.

• Avoid Excessive Idling

  • Avoiding excessive idling can save up to 19 percent
  • Stopping longer than a minute? Shut ‘er down.

  Read the rest of this post »»

According to a Reuters report on CNNMoney.com the higher gas prices probably won’t be enough to cause families to cancel this summer’s driving vacation this summer.

The federal government’s top energy forecasting agency, Energy Information Administration (EIA), delivered its report on the same day MapQuest released a new poll showing that one in 10 respondents planned to cancel trips because of high gas prices.

Even though summer gasoline prices are forecast to be an average 34 cents higher than last year, motor fuel costs won’t cut that much into the family vacation budget, the EIA said.

At an estimated average summer price of $2.71 a gallon, the added gasoline costs for a 500-mile round trip vacation in a vehicle that gets 20 miles per gallon would be just $8.50, the agency said.

Even if gasoline soars 75 cents higher than last year to a record $3.12 a gallon and vehicles only get 15 miles per gallon, the fuel bill would be just $25 more for a 500-mile round trip.

The EIA pointed out this would “likely be less than lunch for a family of four at a moderately priced restaurant.”

Seems reasonable to me. It is amazing how the psychology of paying more for gas might change our plans. Would an extra $25 cause you to cancel your vacation?

Now Make It Automatic is the 4th and longest chapter of The Automatic Millionaire. The author’s obvious emphasis in this chapter is that “you need to have a system that doesn’t depend on you following a budget or being disciplined.” No matter how little you think you can set aside each month, even if it is just 1% of your income, set it up so that you do not have to write a check but instead have it auto deducted from your paycheck or your bank account.

Bach’s first insist that you sign up for whatever retirement account is available to you at work. These plans are almost always pre-tax so that any amount you contribute is not counted as income for your taxes.

If you don’t have a retirement plan at work, you need to open an IRA. The author makes some suggestions to help determine whether it should be a Roth IRA or a traditional IRA. Then, as the title of this chapter makes clear, he shows you how to make the contributions to your IRA automatic

Read the rest of this post »»

MSN Money has an article looking at the finances of twenty-somethings. It is easy for an old guy like me to reminisce about those days, but actually with my kids now in or approaching their twenties I want them to start planning for their future - and hopefully be better at it than I was.

I did open my first IRA at 16 (my dad made sure of it) but have not been faithful in my savings over the years - times get tight and sometimes food is an important commodity. This article not only gives you an idea where others are at this stage of life but also has links to some good articles and ideas on how to improve your situation.

Read the rest of this post »»

According to the Federal Trade Commission, millions of Americans have their identity stolen each year. They want you to have the information needed to protect yourself against identity theft. In order to guard yourself against identity theft, it is important to:

DETER identity thieves by safeguarding your information.

DETECT suspicious activity by routinely monitoring your financial accounts and billing statements.

DEFEND against ID theft as soon as you suspect a problem.

The following brochures and slide presentations can be used to educate yourself or others about how to deter, detect, and defend against identity theft are available on the site. The materials are available in English and Spanish.

	Deter, Detect, Defend A brochure with easy-to-read tips (PDF - 207KB)		Talking About Identity Theft: A How-To Guide A guide with tips to educate consumers (PDF - 6.25MB)
	Presentation Slides A presentation on identity theft (PowerPoint - 893KB)		Take Charge: Fighting Back Against Identity Theft (PDF 4.9MB)

Getting Rich Slowly has a great collection of personal finance spreadsheets you can use for budgeting, debt reduction, personal finance calculations, track auto expenses, home maintenance schedules, and the magic of compound returns.

Spreadsheets more useful than web-based calculators because:

• You can modify the fields and formats to meet your own needs,
• You can create “what-if” scenarios by making copies of a sheet, and
• You can save the data for later use.

I have some spreadsheets I have created but am always looking for ways not to have to reinvent the wheel. These spreadsheets will definitely help and it is great to have the links collected in one place.

HatTip: AllFinancialMatters for pointing me to GetRichSlowly

John C Bogle, in his speech at The Money Show in Las Vegas, Nevada on May 15, 2006 states that the arithmetic of investing is simple because the long-term economics of investing can be forecast with remarkably high odds of success. This is because, in the long run, it is investment returns – the earnings and dividends generated by American business — that are almost entirely responsible for the returns delivered in our stock market.

He then quotes Benjamin Graham, the legendary investor and author of The Intelligent Investor:

“in the short run the stock market is a voting machine . . . (but) in the long run it is a weighing machine.”

He explains that Graham was saying is that while illusion (the momentary prices we pay for stocks) often loses touch with reality (intrinsic corporate values), in the long run reality rules.
As investors then, we must not harbor the idea that the past is prologue to the future. It is only when we can distinguish the reasons why the past was what it was, that we can establish reasonable expectations about the future.

• Text of speech
• Accompanying slides

“When the dumb investor realizes how dumb he is and buys a low-cost index fund, he becomes smarter than the smartest investors.”

-Warren Buffett

Source: John C. Bogle Speech