Here’s an excellent photo essay showing the human costs of war (h/t The Strategist)

AND…

Here’s how much Iraq and Afghanistan have cost us according to a few different sources:

The Congressional Research Service estimates the total cost of both wars to be just over $1trillion.

CostofWar.com estimates Iraq at over $700billion and Afghanistan at $255billion for a total of just under $1trillion dollars.

To give you better perspective that’s $1,000,000,000,000.00

Nobel prize winning economist Joseph Stiglitz and Linda Bilmes say the official costs are actually quite deceiving and estimate that the total costs of Iraq alone are closer to $3trillion dollars. He talks about it here at Big Think.

Popularity: 2% [?]

Now that the global economy seems to have settled down a bit, most people are rubbing the financial slumber from their eyes and trying to figure out what happened and how to better prepare for the future.  As I’ve thought about the economy and personal finance in the past few months I’ve continually come back to the idea of becoming more financially resilient – basically, becoming better able to withstand and even thrive during future economic downturns.

It’s nearly impossible to become completely independent of the world markets, but the following are a few ways to help ensure that if things go south in a hurry (they will again, someday, sometime), you will survive and won’t be swept up in the wave of financial destruction:

1. Learn to track your spending – unless you can get a grasp on where you money is going each month, you have no basis for managing your finances.  With the availability of free online budgeting software like Mint and Wesabe, there is no excuse for not being able to track your spending.  Once you can categorize and measure the various financial transactions you make on a regular basis you can then develop a realistic spending and savings plan.

2. Be merciless with debt - during the past two years of financial wreckage, the first people to go under have often been those buried in debt.  An unexpected job loss, pay cut, or rise in interest rates can overwhelm anyone with a high debt-to-income ratio.  Whether you start with the smallest balance first, or the one with the highest interest rate, the important thing is to rid yourself of debt as quickly as possible and avoid accumulating more.

3. Cut costs/D-I-Y/Sustainability – to become better off financially there are only two options: spend less or make more money. Cutting costs is often a much easier short-term solution to increasing our wealth. Start by looking at your monthly expenses (see Step 1), identifying your biggest costs and whether or not they can be reduced. Do you have interest rates or fees that can be negotiated down? Subscriptions that you don’t really use? A simple phone call may save you hundreds, it costs nothing to ask.

Second, identify things that you could produce yourself. For example, my wife and I discovered that our monthly grocery bill was larger than we liked, but felt that much of it was due to our desire to eat healthy, fresh foods, specifically produce. Rather than cutting this out of our diet, we made the decision to plant a vegetable garden this coming spring. It won’t completely replace the grocery store, but growing our own tomatoes, lettuce, cucumbers, etc. will save us a significant amount of money over time, provide us with healthy, organic food, and insulate us from rising food prices.

4. Develop multiple streams of income – the second part of the wealth equation deals with making more money in the first place. Even if you have a full-time job, you can increase your financial resilience by developing multiple streams of income. For example, while it doesn’t earn much, blogging provides me with an additional source of income.

Focus on developing passive income, or income that comes from activities that don’t require your full-time engagement. Examples of this would be rental income, advertising revenue from websites/blogs or royalties from publishing a book or other intellectual property. Think “set it and forget it.” By increasing your streams of income you help ensure that if one stream dries up you are still able to survive.

5. Build an emergency fund – If you live paycheck to paycheck you are not alone, but you’re playing a dangerous game.  No matter how well you budget there are always going to be unforeseen costs and emergencies.  Car trouble, medical issues, last-minute travel, etc.  The way to make sure these events don’t crush you is to build an emergency fund.  Trent at the Simple Dollar explains,

“An emergency fund is cash that you’ve saved up for the sole purpose of helping you maintain your normal life through the emergencies that life hands you. “

Check out his awesome step-by-step guide to building an emergency fund here.  Various numbers on how much you should have in savings get thrown around by the experts, but 6 months of income is a good place to start.

6. Maximize contributions to Roth IRA – there is no better retirement vehicle available to young people today.  The Roth IRA allows the money in your account to grow tax-free and keeps you from having to pay taxes when you begin to withdraw payments come retirement time.

Do everything in your power to contribute the maximum ($5,000 for 2009) each year.  It may not seem like much at first, but if you start in your 20’s the magic of compounding interest can work for you and provide you with a good chunk of retirement income.

7. Diversify investments – “I believe that 98 or 99% – maybe more than 99% – of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.” Warren Buffett.

The principle laid out by the Oracle of Omaha is sound advice for investors.  Since you don’t have enough knowledge (worry not, even the “experts” on CNBC don’t) to consistently and accurately predict which markets will provide the best returns and which will tank in years to come, invest in all of them.

How does the average 20-something do this?  By investing in low-cost index funds like the Vanguard S&P 500 Index Fund, which purchases shares of every company in the S&P 500.  By taking out the guess-work (excuse me, ehem, “technical analysis”) of fund managers the funds are able to charge the investor significantly less.  For more info check out Ramit Sethi’s in-depth post on mutual funds.

Of course, diversification extends beyond stocks.  Many have found real estate to be a profitable place to invest, as well as bonds, commodities, currencies etc.  However, for the average investor, index funds provide a great place to start.

8. Learn entrepreneurship – entrepreneur and author John Robb explains, “One of the best ways you can prepare for the future is to train yourself to become an entrepreneur — essentially a person that makes their own economic opportunities.”

Not everyone dreams of running their own business, but as more and more jobs are outsourced to countries who can do them for less money, the types of skills that may help you survive are those found in successful entrepreneurs.

Start small, test fast, fail fast and keep going.  Entrepreneurial opportunities are often much closer to home than you may think (sounds eerily like a piece of fortune cookie wisdom).

9. Nurture relationships – Very few people get through life without depending on the generosity, wisdom, or partnership of their friends and families in reaching their financial goals.  Besides the obvious benefits of having people to bail you out if you find yourself in trouble, relationships provide you with a network of people who can give you advice, mentorship and in some cases capital for a start-up or investment opportunity.

By nurturing close personal relationships you tap into a greater resource than any bank or investment firm could ever offer you – people who share in your vision and authentically want to help you succeed.  And in the end, no amount of money will fulfill if you don’t have people to share and enjoy it with.

10. Hold on loosely – Some of you might be asking, “Wait a minute Cameron, you just got done telling me how to make more money and keep it, now you’re saying to loosen my grip?”  Absolutely!  Money is a great tool, but it has an amazing ability to corrupt people who make it the chief end in itself.  When taking positive steps to better your personal finances it’s easy to become greedy as you witness just how much is possible with a few solid decisions and some daily fiscal discipline.

How do you fend off greed?  Simple, by giving money away.  Being rich isn’t about the bling, it’s about freedom.  For me this means the freedom to support my family and bless others at the same time.  Many of my friends are involved in some incredible non-profit organizations and missions – being able to support them is one of my favorite things in life.  Holding on tightly to your money may help you feel in control, but in the end it keeps you from receiving a much greater reward, the joy of helping others.

Popularity: 9% [?]

Economist Paul Krugman presents an alternative view on the falling US dollar in his piece, “Misguided Monetary Mentalities,” (hat tip Fabius Maximus) saying,

The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.

I agree that shrinking our trade deficit is a definite plus, but there have to be better ways to get rid of it than a falling dollar.  Right?

**What say you readers?  Is Krugman right or is he off his rocker?**

Popularity: 3% [?]

No doubt about it, last year was atrocious when it came to the world of finance.  If you’re like me you watched your investments magically get cut in half like a Ginsu knife commercial.  It was a year that brought high costs, pay cuts, slow business and even layoffs.  So what can the average guy do to turn things around in 2009?  What new strategy can be implemented to see rapid gains and a replenishing of one’s finances?

Unfortunately, nothing too sexy, just the same dusty principles that many great men of finance have taught for ages — principles that all revolve around one grand idea: make less money go out and/or more money come in.

The reality is there’s no secret or magical formula when it comes to personal finance…it’s boring! No one knows the next hot stock, no matter how many degrees they hold or how many times they’ve appeared on CNBC.  No one knows where the bottom of the market is or when the economy will turn around.  And although many young brokers on Wall Street have tried (credit-default swaps), no one has figured out how to make money appear out of thin air.

Sure people catch a lucky break every now and then, people also win the lottery and get struck by lightening, it doesn’t mean anything.  What people have lost sight of, and what helped lead to our current mess, is that making money on a consistent basis takes self-control and discipline. It means making lots of small, but good decisions over a long period of time.

But, that message doesn’t sell books or DVD sets.  So, most people brush it off as old-fashioned and set off on their next get-rich-quick scheme only to find the pot of gold at the end of the rainbow is actually full of red ink.

The following points are probably ones you’ve heard a thousand times, but maybe it’s time you took them seriously.

1)  Live Within Your Means – Just because you can buy something, doesn’t mean you should.  All of us have something inside us that leaps with excitement when we buy something shiny and new, but within a few days, weeks or months, that feeling is gone and all we’re left with is less closet space.  I’m not saying you should stop buying new things altogether, I’m simply asking that we recognize our weakness and tendencies to justify buying things we don’t really need.

One must decide on a daily basis how much short-term comfort and pleasure they would like to sacrifice for long-term prosperity. There are a million factors that go into these decisions, but in the end life is about choices.  Each person must decide for themselves how much they are willing to sacrifice and plan their finances accordingly.  If you buy the brand new Land Rover now that’s fine, just don’t be surprised if your neighbor who bought the used Honda is doing a little better financially in five years.

2)  Create and Stick to a Budget - Two words: Wesabe and Mint.  These two completely-free online budgeting services are incredibly useful in helping one set up a detailed budget.  Not only do they automatically upload the information from your various bank and credit card accounts, they also allow you to tag purchases (groceries, entertainment, bills, etc.) and set spending limits for each.

If a person wanting to better their finances is not using one of these free and easy services they are missing out on a great opportunity.  The trick after setting up the account is checking it at regular intervals to monitor one’s progress.  This is the only way to consistently adjust your living habits to your budget (the purpose of making a budget in the first place).  If I know that I only have $100 left for the month to spend on groceries it will make the decision between filet mignon and chicken breast a much easier one.  Just like a business cannot begin to make progress without great accounting, an individual has no hope navigating the world of personal finance without a budget and an understanding of where they stand in comparison.

3)  Be Aggressive With Debt – The problem with debt is that you become a slave to another person or institution.  The whole point of money is to give one freedom, not bondage. There are times where taking on debt is necessary, maybe even advisable (student loans, exceptionally low interest rates, etc.), but for the most part it should be avoided like the plague.  Unfortunately, credit cards make taking on debt seem acceptable, even exciting.  When one finds himself in debt, the best tactic is to be incredibly aggressive in paying it down.  Everyone has seen the charts showing how expensive a purchase can become if one makes only the minimum payments, if you haven’t see here.

Pay down the debts with the highest interest rates first.  Also, don’t be afraid to call your credit card company and ask for a lower interest rate, in many cases they will help you out if you are adamant enough.  See here.  Debt is a dangerous thing for one’s finances because it always costs more than you want to pay. Most people understand this and struggle with more complex debt-related questions like whether to pay-off debt completely before investing, buying a house or renting, to consolidate or not.  Theses questions are highly dependent on the specific circumstances the person asking them, so I would be silly to offer any sweeping conclusions.  Do your homework, ask lots of questions and make a good decision.

4)  Max Out Your Roth IRA – Whenever one of my friends asks me what they should do with their extra income I always have the same question two questions for them: 1)  Have you started a Roth IRA  2)  If so, have you maxed out your contributions for the year?  If they answer no to either of these the answer is simple, get it done.  There are millions of different investment options available, but if you’re young and don’t make a significantly large income (more than $105,000 single filer) it is almost always the best option for you.

Exception*** If you’re employer offers to match your 401k, then max that out first and use whatever you have left to contribute to your Roth.

As I explained in a previous post,

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.

For a good summary of the Roth IRA rules for 2009 see here.

5)  Educate Yourself – How much time do you invest in your financial education?  Chances are it is very little…probably less than the time you spend watching “The Office” each week.  It’s funny that for such an important aspect of our lives so many of us spend startlingly little time trying to educate ourselves.  It’s not surprising since much of the industry seems to thrive on making itself seem overly complicated – not to be understood by mere mortals.  Liars!  It’s not rocket science, even basic science for that matter.  It just takes some time and effort.

There are a lot of great books, blogs and classes out there to help you understand finance, but I’ll keep it simple and recommend two for 2009:

1)  A Random Walk Down Wall Street by Burton G Malkiel

2) I Will Teach You to Be Rich – Ramit Sethi’s Blog

Popularity: 3% [?]

Ever hear words like diversification and asset allocation dropped in conversations at the office or on CNBC and feel like you’re a stranger in a strange, strange land?  If so, I have news for you, you are not alone.  America is financially illiterate.

While the world of personal finance and investing can be quite intimidating, it’s not hard to learn a few of the basics AND in doing so, make better-informed financial decisions than the other 99% of the world.  Most of the terms used on Wall Street are fancy words for very simple concepts.

So, in an effort to make sure that readers of Schaefer’s Blog are well-equipped to “speak the language” of finance, I’ve surveyed a few of my friends and come up with the following terms and ideas that people should know.  This post will focus specifically on investing with an emphasis on the stock market.

The Basics

First things first.  When a company wants to raise money it basically has two options: sell stock or issue bonds.  By selling stock it’s essentially breaking up the company into a bunch of little chunks and selling them to investors.  By issuing bonds it is retaining ownership, but selling debt or, in other words, getting loans from investors.

Stock – Also known as “shares,” represents ownership in a company.  It usually entitles you to voting rights on company decisions and a claim on part of the companies earnings.

So when you hear someone say they bought 100 shares of Google, they are simply saying that they bought 100 units of ownership…they now own a fraction of the entire company.  How much ownership a share represents is dependent on how many shares of the company exist.  For example, Google currently has approx. 314 million total shares outstanding, so someone that bought 100 shares would only own .0000003% of the company.

Finally, when you’re looking in the newspaper in the finance section or you see a stock ticker online what you are seeing is the stock symbol (Google is GOOG, Coke is COKE), then the current price of one share of stock and how much it went up or down that day.  Looks something like this:  COKE   34.32   -0.56

Bond – an investment where the investor is purchasing a companies debt by loaning them money at a fixed interest rate for a defined period of time.  Different than stocks because instead of investors having to rely on company profits to make money, the company pays a fixed amount back to investors each year.

Another way of looking at it.  Just like you get a loan from the bank when you need to buy something, companies issue bonds to get lots of mini-loans from individual investors.  By buying a bond you are simply lending a company some money and trusting they will pay it back with interest.

Blue Chip – a stock of a well-respected company that is known to be consistent with paying dividends.  A blue chip is most likely a big company that you have heard of like Coke or Johnson&Johnson.

Mutual Fund – a pool of money managed by an investment company.  They all have different objectives, but the most common is a fund made up of many different stocks.  It is a great tool for the beginning investor because through buying one share of a mutual fund you are actually buying a fraction of several hundred or even thousands of different stocks.  Mutual funds are an easy way to diversify (to be discussed next) when you don’t have several thousand dollars to buy several different individual stocks.

A great explanation from Ramit Sethi, author of one of my favorite blogs, I Will Teach You to Be Rich:

Mutual funds work like this: You pick a fund you like (e.g., growth, value, technology, international…), buy shares of the fund, and let a money manager pick the stocks he thinks will yield the best return. In exchange for this diversification and his expertise, you pay an annual fee.

Diversification – This term is thrown around a lot and while it sounds complex it’s really just a fancy way of saying, “don’t put all your eggs in the same basket.”  If an investor puts all his money in American automotive stocks like GM, Chrysler and Ford he is NOT diversified and is at great risk if the auto industry or American economy in general hits a rough patch.  If, however, he buys GM, Nestle (Switzerland), Bank of America, Boeing and Petrobras (Brazil) he is much more diversified and as a result, taking on much less risk since it is less likely that all of these businesses and economies would hit a rough patch at the same time.

Asset Allocation – Instead of reinventing the wheel on this one I’ll defer to Ramit’s definition, “…asset allocation is a fancy way of describing where you put your money (e.g., 50% in stocks, 20% in index funds, etc). It’s like outlining a paper: You want to know where you’re going with your investments. Otherwise, you just get a hodgepodge of random investments with no central goal.”

A general rule is that when you are young most of your assets should be in stocks (less conservative, more potential for large growth) and as you get older you should transition more to bonds (more conservative).  The main reason is when you are young your investment horizon is much longer, you have several decades to let your investment grow so a few drops here and there won’t have a big impact in the end.

Bull/Bear Market – A prolonged period where the market is performing better than normal (Bull) or worse than normal (Bear).

Rally – when the majority of stocks in the market are going up for a given period of time, a sudden upturn.  Most investors love when the stock market rallies because prices are going up which means they are making a profit when they sell.

More to Come…

Obviously this is just the tip of the iceberg, but hopefully it has given you a few of the basics and shattered the idea that personal finance should be left to the “experts.”  I’m planning on continuing the Alphabet Soup series and including posts with emphasis on real estate, credit and banking.  So keep an eye out people!

***For a great resource in finding more definitions, check out Investopedia AND I Will Teach You to Be Rich AS WELL AS my other posts on Personal Finance

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If you’ve been following my blog for the past few months you know that my family and I have spent the spring going through the process of buying our first house. Since this is a major decision I have tried to share with my readers the lessons we have learned (here and here). Now that we’ve finally found a home I wanted to look at some pitfalls for first-time home buyers. Some we narrowly avoided, others we fell right into, but they are valuable things to think about when facing this milestone. The following are 7 common first-time home buyer mistakes:

1. Don’t Ask Enough Questions – It’s often the case that people avoid asking questions when walking a path they know little about. This seems counterintuitive, but the fear of looking stupid or immature drives many first-time home buyers into making really poor decisions. Smart people ask questions.

When my wife and I decided to start the search for our first home I had my dad get me in touch with a good friend of his who had been a successful real estate agent for several decades. I spent 45 minutes on the phone with him one morning asking him every question I could think of in regards to buying a home. The knowledge I gained through this conversation was immense…not only did it help me avoid potential pitfalls, I acquired in 45 minutes what would have taken me weeks or months of reading and research to discover. ASK QUESTIONS!

2. Underestimate Additional Costs – If only the cost of buying a house was wholly represented by the sticker price, life would be so much easier. Unfortunately the purchase price is just one of many costs included in purchasing a home. Earnest money, lending fees, closing costs and home owner’s insurance are the obvious ones that come to mind, but often people fail to account for other future costs as well.

For example, the landscaping for the backyard was not included in the purchase agreement for our house so we will need additional money to put up a fence, lay sod and plant trees and shrubs. On top of this we will have to buy paint, supplies, window dressings, etc. And then comes utilities, maintenance, the list goes on and on. Because the purchase price is the most visible, first-time home buyers often unconsciously think of this as the single cost that drives their purchase decision rather than one part, albeit significant, of a much larger equation.

3. Overestimate How Much They Can Afford – I wrote a post earlier on determining how much of a house you can afford. Unfortunately, many first-time buyers either don’t take the time to really determine this or they take the largest amount that they qualify for as the amount they can afford…not necessarily true. The lender is simply using a few different formulas to determine what they feel they can safely loan you, but this doesn’t mean you can really afford this much house.

When you find the perfect house that costs a little more than you can really afford, it’s easy to think that you will just suck it up and find the money. Reality is often far less kind. The last thing you want is to be stuck with a house that is a major drain on you and your family, leaving you with the sick, heavy feeling of financial drowning. Be realistic about what you can afford and stick to it.

4. Forget About Resale – As exciting as buying your first home can be, chances are it will not be long before you are ready to sell. According to Realtor.org the average first-time home buyer only stays in their home for 4 years. Characteristics about a house that makes it uniquely perfect for you might not be as attractive to other home buyers.

For example, my wife and I don’t have school aged children, but we realized that finding a house in a great school district will be important, not for us quite yet, but for the majority of other home buyers. Things like school districts, age of house and major features like the roof, plumbing, electrical system, and type of community developing around the house and neighborhood all play important roles in resale.

5. “Tim the Tool Man” Syndrome – Home repair is much like driving…everyone considers themselves above average. The tendency of many first-time home buyers is to look for “fixer-uppers,” partly because of the reduced price and partly out of the naive romanticism of building your house with a hammer, some nails and the sweat off your brow. In home speak, “fixer-upper” normally means “money drain.”

Watch any house flipping show on television and you’ll see that remodeling a home almost always costs more, takes longer and results in far less enjoyment than owners expect. Obviously there are some that have the skills, patience and desire to take on projects like this. But, for the rest of us, put the drill back in it’s case and buy a home that requires only minor improvements.

6. Forget They’re Buying a Neighborhood – Many first-time home buyers are so excited to get into their first house that they become like a horse with blinders, falling in love with a house, but failing to see the terrible neighborhood surrounding it. Location is the number one driver in real estate. Having the best house in the neighborhood can actually be a terrible thing when it comes to the future value of your home.

Look for the least expensive house in a really nice neighborhood. It’s age-old advice, but true. This isn’t always a sure thing, but it definitely will get you on the right track when it comes to buying in a good location. After all, the nicest starter home on the market is worthless if your neighbor likes to keep rusted cars in his front yard and wild hyenas in the back (You laugh, but stuff like this happens, trust me).

7. Buying Before They’re Ready- Sometimes it’s a much better decision to continue renting rather than buying a home. This is hard for some people to swallow being that home ownership is often touted as the greatest single investment one can make. This is true in some cases, but all one has to do is look at the current mortgage mess and see that often times home ownership is actually a financial disaster in the making. Ramit Sethi makes some great points concerning the benefits of the recent meltdown and I must say, I agree completely.

One of the best things to happen from the real-estate bust that we’re undergoing is to make people think twice about real estate as an investment. That’s right — to actually consciously think about why they’re making the biggest purchase of their lives, rather than just buying a house because “it’s the next thing to do.”

Buying a house is exciting, fulfilling and can often times be incredibly rewarding, but it’s a decision that each person must make for themselves. It should be researched and discussed thoroughly, not jumped into because it seems like the next step in the “becoming an adult” process.

What mistakes have you made in this area? What would you differently if you could purchase your first home again? Comment below with your answers.

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Warren Buffett is to investing what Michael Jordan is to basketball with one twist, Buffett hasn’t retired. For those of you finding yourself confused and humming “Margaritaville,” here’s Buffett’s bio. I could write for hours on this blog about why I prefer certain investment strategies over others or why I’m a huge “Random Walk” fan, but at the end of the day it is much better to hear from someone who has mastered their craft.

Last month Buffett talked to a group of students from UT Austin and Emory about investing, life, leadership and other topics. What can I say, the man is incredible. I remember first being introduced to him in my Personal Finance class by my professor Lt Col Steve Fraser and his partner in crime Lt Col Jim Parco (at the time just lowly Majors). They would annually take the class to the Berkshire Hathaway shareholder’s meeting in Omaha, NE…or as they liked to refer to it, “Woodstock for Investors.”

Since that class I have always kept an eye and ear open to anything coming from Buffett so today I share some of my favorite pieces from his recent Q&A session, the full transcript is here:

On diversification:

I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you’re liable to be really dumb.

On happiness and love:

I won the ovarian lottery the day I was born and so did all of you. We’re all successful, intelligent, educated. To focus on what you don’t have is a terrible mistake. With the gifts all of us have, if you are unhappy, it’s your own fault.

I know a woman in her 80’s, a Polish Jew woman forced into a concentration camp with her family but not all of them came out. She says, “I am slow to make friends because when I look at people, I have one question in mind; would they hide me?”

The most powerful force in the world is unconditional love. To horde it is a terrible mistake in life. The more you try to give it away, the more you get it back. At an individual level, it’s important to make sure that for the people that count to you, you count to them.

On humility and personal influences:

I was lucky to have the right heroes. Tell me who your heroes are and I’ll tell you how you’ll turn out to be. One of your most important jobs in life will be raising your children. They will learn more from you than they will in graduate school. My father was a huge influence, and later on Graham came along. I was also never let down by my heroes.

On the current credit crisis and economy:

What we are seeing is a huge repricing and evaluation of risk, correcting for problems of the past. I don’t know of good credit propositions that are going unfulfilled. There’s lots of cheap credit for sensible deals, which I don’t define as anything that happened over the last 12, 18 months. A lot of things that didn’t make sense are being washed out of the system. It is painful for bad decisions. Comparatively, this is not a credit crunch. In 1982 the prime rate was 22% and money was very expensive. In the late 60’s, we made a sound deal there wasn’t any money to be had. That’s not the case now. The Fed has opened the window, and rates are down. It doesn’t mean there won’t be a major recession.

On individual investors finding opportunities in a market dominated by institutions and hedge funds:

Markets are efficient most of the time about most things. But for these opportunities, nobody will tell you about them. They won’t be on CNBC and they won’t be in brokerage reports. You have to go find them yourself. In 1951, after I graduated from school, I used Moody’s and S&P manuals as my sources of information. I went through them page by page. I was like a basketball coach looking for 7-footers. I still have to find out if he’s coordinated, and can stay in school. But if someone comes up to me that’s 5’6” and says, “Wait ‘til you see me handle the ball”, I say “No thanks”. On page 1443 of Moody’s, I found Western Insurance Securities. It had earned $21.66 per share 2 years ago, and earned $29.09 last year. Over the past year the stock was selling for between $3 and $13 per share. I still had to do the work to make sure the earnings were valid. The markets will get it right eventually. But they are there. You don’t have to find too many. Finding 10 of these opportunities in your lifetime will make you so rich. But you can’t be wrong. You can’t have any zeroes. A list of big numbers multiplied by zero will equal zero. You can’t go back to “Go”.

On picking the top contemporary investors:

I know guys who can make 50% a year with $5 million, but not with $1 billion. The problem with guys that do well is they attract so much money that it neutralizes their advantage. It’s hard to identify them, and even harder to make a deal to keep them from attracting other capital. It’s like betting on a 12 year old horse that won at 3 years old. It’s also important to avoid managers who use leverage. It’s the reason that investors with 160 IQs flame out.

On positioning yourself to deserve success:

Keeping score is terrible in marriage and terrible in business. I put myself in the seller’s shoes. With most humans there is a great desire to reciprocate. If you do something for them, they will do 2X for you. How rare is it to work during lunch hours and be the first one there in the morning. You’ll get noticed if you do something extra. It’s good to have a willingness to pitch in when you aren’t going to get credit for it.

On corporate tax rates and national debt:

Relative to GDP, government taxation is 18.5% and spending is 20%, so we borrow the balance. The national debt should not be a scary topic and the fact that it’s gone up is fine as long as it’s proportional to GDP. Where do we get that 18.5%? There’s 2.7 trillion in government revenues. 2.2 trillion comes from individuals, and less than 1% of that comes from the estate tax. 1.1 trillion comes from income taxes, with payroll taxes consisting of 900 billion, but it’s capped at the first $100,000 of salary. We want a tax system that encourages greater prosperity, but it needs to take care of the family.

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I was perusing the archives of one of my favorite bloggers, Ramit Sethi, and came across this great post highlighting the differences between one being cheap versus frugal. There is a definite difference between the two, but they are often thrown in the same pot. Here are some of the highlights from Ramit’s post contrasting the two:

Cheap people care about the cost of something.

Frugal people care about the value of something.

Cheap people try to get the lowest price on everything.

Frugal people try to get the lowest price on most things, but spend a lot on items they really care about.

Cheap people are inconsiderate. For example, when getting a meal with other people, if their food costs $7.95, they’ll put in $8.00, knowing very well that tax and tip mean it’s closer to $11.

Frugal people won’t order a Coke if they’re on a budget, so that when the bill comes, they don’t look cheap.

Yes, being cheap and/or frugal can be a cultural quality. I won’t spend much more time on this one.

Cheap people keep a running tally with their friends, family, and co-workers. Some frugal people do this, too, but certainly not all.

I think the difference between being cheap or frugal comes from one’s attitude and philosophy towards money and possessions. Someone who is cheap generally has a view that 1) they deserve the money they have 2) their money is for them only. Frugal people on the other hand often have the attitude that money is not an end in itself, but simply a means to achieve other goals. They believe they are stewards of money rather than owners. Frugal people are often generous while cheap people are not. Cheap people place accumulating money above relationships while frugal people use money wisely to enhance relationships.

One of the most interesting aspects of this issue (pointed out by many commenting on Ramit’s post) is that people who are cheap constantly live in fear. Fear of not getting their money’s worth, fear of getting ripped off, fear of not getting what they feel they deserve. In the end, a cheap person ends up becoming a slave to their money rather than its master.

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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 (here).
Once you have this set up your goal then becomes to “max out” your IRA each year, or getting as close as possible.

With our country’s social security system looking more and more shaky all the time and many businesses moving away from traditional pensions, taking control of your own retirement is becoming more necessary than ever before. Probably the biggest reason people put off retirement planning and investing is simply lack of knowledge. The financial education given in the primary and secondary school systems is abysmal and unless you actively seek out investment classes in college, one can go through many years of school without learning even the most basic investment principles. So, if that is you, start now. Don’t be afraid to ask questions. Remember that your future is no one’s responsibility, but your own. As a young person time is on your side and by starting now you can quite easily amass a large amount of money so you can do the things you want to do when you want to do them.

Other good articles on Roth IRAs:
- 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

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