Posts from — January 2008

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Due to my love for finance and my ability to throw out the random buzzwords like “asset allocation” and “diversification” to sound really smart, many of my friends have begun to come to me for investment advice. “Cameron,” they ask, “this investing stuff is just too complicated, I am (insert an age) and still haven’t invested in anything, I don’t even know where to start.” The first question I always ask is whether or not they have a Roth IRA? Judging by some of the responses I have received I think it’s time to explain what a Roth IRA really is and why if you are young (college, twenty-something) and you don’t have one, you are throwing piles of cash down the toilet.

IRA stands for Individual Retirement Account, basically a simple way of saving money for retirement — remember though, it is just an account, not an investment itself. With an IRA you can choose where you want to invest your money. Think of an IRA as a basket in which you can throw various kinds of investments. Most people choose to throw a mutual fund in their IRA which is why you will hear the terms getting thrown around and mixed-up most of the time. As long as you remember that an IRA is simply an account to place investments in, you’ll avoid a lot of confusion.

Traditional Vs. Roth - These are the two main types of IRAs. I will save you the trouble right now and tell you that if you are under the age of 50 and you don’t make six figures then Roth is the way for you to go. The main difference between traditional and Roth IRAs are how you are taxed. With a traditional IRA you get a tax break when you deposit the money in your account each year. This means if you make $50,000 of taxable income in a year and place $3,000 in your IRA you will only pay taxes on $47,000 that year. Your money will then grow and when you take the money out after age 59-1/2 you will then pay taxes on the money in your IRA. A Roth IRA is different because while you get no tax break up front, your money grows tax-free in your account and when you take it out come retirement time, YOU PAY NO TAXES, not even on the earnings. Another way of saying it, traditional IRAs are “tax-deferred” and Roth IRAs are “tax-exempt” savings. American Funds has a great comparison chart comparing the two types.

Some Rules to Know - First, being that it is a retirement account you will be heavily penalized if you take the money out early, meaning before age 59-1/2 (there are a few exceptions like a first-time home purchase). This means put money in your IRA that you won’t need in the near term.

Second, for you overachievers, the maximum contribution has just changed from $4,000 per year in 2007 to $5,000 per year in 2008.

Finally, to be eligible for a Roth IRA you must make less than $101,000 as a single filer or $159,000 as a joint filer in 2008. So, if you’re raking in some good money already and you exceed these limits you will only be able to invest in a traditional IRA, still not a bad thing.

How to Set Up a Roth IRA - First, remember that banks and investment companies want your money, so they’re going to make it as easy as possible for you to give it to them and if they don’t, shop somewhere else. All you need to set up your account is your W-2 form showing you have earned income. There are a few different places you can go to set up your Roth IRA: bank/credit union, mutual fund companies, or discount broker. The bank route would be for the ultra-conservative investor that wants to use CD’s or money market accounts as their investments (if you’re under the age of 50 this is probably too conservative).

Next would be opening it through a mutual fund company. My favorites include: Vanguard, American Funds, USAA (All of these links will take you to the page dealing with opening an account with the company). By going through a mutual fund company you can then purchase shares in one or multiple funds from the company and put them in your Roth IRA. This method also helps ensure greater diversity being that with a mutual fund you are automatically investing in hundreds of companies rather than just one or two, spreading out your risk substantially. Plus, many times the minimum investment is lower when opening a retirement account than it would be with a normal brokerage account. The final avenue would be using a discount brokerage service, similar concept as above.

Once you have opened your account the next step is setting up an automatic investment plan (takes out money from your paycheck and automatically puts in your investments) so you can harness the power of dollar cost averaging (DCA), an investment principle I wrote on earlier The World’s Easiest Guide to Understanding Retirement Accounts - Ramit Sethi (the man)
- Why You Need a Roth IRA - Kiplinger.com
- Roth IRAs: A better IRA for almost everyone - AmericanFunds.com

The last post, Create a Personal Board of Directors Part I, focused on who you should place on your board. The emphasis was on diversity, relationship, shared values and leaders. This post will focus on what to do once you’ve created your board, emphasizing purpose and structure. You can bring together the most diverse group of talented, creative and wise people in the world, but if there is no clear purpose or system to organize them you will have nothing but a few interesting conversations. With a bit more thought and intentionality your board can be of incredible value to your life, providing council, accountability, encouragement and security.

As I have discussed this topic with various people who have boards of their own, or similar systems of oversight, I have come across some common threads that make them successful. But, the truth is you must come up with a system that makes the most sense for you. Things like how many times you meet, if you communicate by phone, e-mail, face-to-face, what areas to cover…all of these things will depend completely on your current circumstances and should be decided on by you and your board, most likely, through a bit of trial and error. The following points are simply starting points, thoughts that have come forward as I’ve created my own board and begun the process myself.

Goals - If the purpose of a personal board or council is to guide you in your life then they must understand where you want to go. Making a set of goals each year is a good way to communicate to your board where you would like them to focus their energies. My previous post on balance provides a great starting point for making annual goals, but the method is not as important as the result, giving your board a starting point to work from.

Once you have created your goals it is important that each member of your board knows and understands them. Equally important is continually reviewing them, assessing your progress and discussing areas of improvement. Some system of review should be at place on your board, whether it means reviewing your goals once a month, once a quarter, or again, whatever makes sense for your situation. The key is simply to update your board on your progress from time to time.

Accountability - Just as a CEO is accountable to the shareholders via the corporate board of directors, you too should give your personal board the charge of keeping you accountable, nothing is off limits. One of the greatest lies is that there is such a thing as a secret. Secrets are always exposed, light is always shown on darkness, if not now, soon enough. All you have to do is look at the news over the past few years to see how destructive a secret can be. Enron, WorldComm, steroids in baseball, doping at the Olympics, the fall of prominent church leaders, the list is endless.

It is only when we live as if there is no such thing as a secret that we can truly be free to live our best. One of the reasons for filling your board with people you have had past relationship with is to allow this practice of accountability to operate effectively. Living with no secrets does not mean that everyone you meet should know everything going on in your life, but choosing a few trusted friends and mentors to continually ask you the tough questions is a life practice that will keep you from going down many wrong roads. As part of your board structure, make sure there is someone who will always ask you the tough questions each time you meet or communicate.

Life Decisions and Coaching - One of the most obvious benefits of a personal board of directors is their ability to give you advice during major life decisions such as a career change, relocation, etc. There is wisdom in the presence of a strong group of advisers. If you choose your board wisely there is a good chance that someone on your board has already walked through the situation you are facing at any given time. Even if they have not experienced it personally, chances are that one of them will have a connection to someone that has. This form of social capital can be very beneficial when making your way through life, giving you a forum to filter your ideas and decisions.

Coaching is another aspect of having a personal board that can benefit one greatly. Having quality people around to coach you as you walk through life enables you to avoid unnecessary mistakes. Why pay the price yourself for a stupid choice when you can learn from someone who already has. Make it clear to your board that you value their experience and desire for them to share it with you, no holding back. Coaching is another reason why it is important to have leaders on your board. As I said before, leaders love making other leaders so coaching is a natural part of this and one that you should emphasize if your personal board will be of any impact.

Celebration - Up to this point there has been a lot of talk about principles, life skills, etc. These are all very valuable things, but by themselves can be somewhat lifeless. For me, one of the most important aspects of surrounding yourself with a close group of advisers and friends is that of celebration. Successes, victories and fun times are only as great as the people you have in your life to share them with. One of my dreams has always been to have the money to take a group of my close friends and mentors on a vacation every few years. They wouldn’t have to do anything, but show up, I would take care of the rest including airfare, accommodation, food and whatever we were doing for entertainment. This dream is so exciting because it represents, in my opinion, what is best about life, time spent in quality relationships with the people you love. Climbing a mountain is fun, climbing a mountain with a group of good friends is more fun.

I think that in order for a personal board of directors to really thrive there must be an aspect of celebration among all the members. When someone has a child, celebration. When someone gets a promotion, celebration. Aaron Stern, pastor of The Mill, a college group of around 1,400 at New Life Church, once said that true friendships are measured not by how much a person is there for you during the hard times, but how much they celebrate with you during the good times. True friends are genuinely happy when you succeed, no jealousy, no envy, just joy. This is rare, but it’s good and it’s what makes friendships worth fighting for….and what makes celebration a necessary part of any personal board of directors.

At the start of the first post on this subject I shared that all of this had come about as a result of a conversation with my friend Beau Suder. The conversation is ongoing, as it usually is with us, and he brought up an important point a few days ago. His concern was that as we build a personal board of directors, or as he calls it, advisory council (I think he’s sometimes suspicious of my love for business metaphors) we don’t view members through the lens of, “what can I get from you,” but rather with a heart to serve them as well. I couldn’t agree more.

There is no doubt that when we are young we have less to offer in the way of experience, skills, etc. thus the need for a board in the first place, but it doesn’t mean we should view our relationship with members as a one-way street with us at the receiving end of all the benefits. Find ways to take care of your board in whatever ways you can. Don’t make it hard for them to coach and guide you. AND, understand that one day, when you have gained experience, knowledge and understanding you may be asked to mentor or advise in some capacity…do it!