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.

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When the economy is doing poorly, it is often the case that people start acting irrationally when it comes to their finances. The best evidence of this is the scores of people who have sold off their investments in the past months – the investments they worked so hard to shore up for years.

One of the biggest reasons for poor investment decisions as of late is due to unmet expectations. People expect their investments to go up, up and up.  When they don’t, lots of little doubts begin to creep in.

“Do I have too much invested in the market?”

“Am I just invested in the wrong companies?”

“Will the market ever come back…and if so will it be too late for me?”

Much of these unmet expectations come from a single source. The holy grail of stock market statistics that has been preached by advisers and professors for ages as the ultimate reason to invest in the stock market:

The average return of the stock market is 10%

The thing about this statistic is that many people zone in on the “10%” aspect and completely ignore or minimize the word “average”.
The word “average” should emphasize the long-term nature of investing, but to most it’s more like the warning sign for a roller coaster – “yeah, yeah, yeah, we get it, just let us on the ride!”

This is why I love following presentation by Carl Richards of Behavior Gap that I found on Ramit Sethi’s blog this afternoon. It shows the fundamental flaw in most of our thinking when it comes to associating average with normal. Here it is:

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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

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I’m currently sitting on my couch listening to newscasters on television report the latest drop in the stock market with gloom face and menacing tone. Even those who don’t follow the market have not been able to escape the constant coverage of the current financial storm that has hit markets both at home and abroad.

Here are just a few of the headlines in the news recently:

“Wall St tumbles on economic anxiety”
“Recession to be ‘Worse than the 1990′s,’ experts warn”
“Markets latest lurch down raises new uncertainty”

In the midst of such volatility, misinformation and outright confusion, it has been hard to draw any logical conclusions. But, surveying the scene over the past month an age-old lesson in skilled investing has resurfaced:

When the market is going down in flames, seasoned investors see incredible buying opportunities where novices see only doom and gloom.

Warren Buffet, billionaire investor, recently wrote on Op-Ed piece in The New York Times where he said the following (emphasis mine):

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Everyone likes to say the key to investing is, “Buy Low, Sell High”, but how many people actually follow their own advice? Startlingly few, actually. Most people tend to follow the herd, buying stocks when the buzz of how well the market is doing finally reaches their ears and selling when they hear on the news that things are bad. Thus, they do the exact opposite, buying when stocks are inflated by market hype and selling when they have been beaten down.

So why is now such a great time to buy? Because what we essentially have is a HUGE STOCK SALE! Some great companies are selling for half, even 75% less than what they were a year ago. What this means is for every share you could have bought a year ago you can now buy 2 or even 3 for the exact same price.

Right now is an incredible time to buy.  This is the opportunity that seasoned investors recognize that others do not. And it’s why some people will get rich off the current situation while others will go broke.

There’s no doubt we’re in hard times, but part of skilled living is keeping your head in the midst of stressful and complicated situations. When others are scared and running for the hills there are some that come out swinging. Learn from those people and imitate them.

I leave you with some final words of wisdom from Buffett:

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

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If you look down the street, chances are you might see a house that has recently faced foreclosure. The last couple of years have been ripe with poor financial planning and the results have been felt throughout the country. Not only have individuals made poor choices on how to borrow and spend their money, but lenders have as well, lowering standards to a dangerous level, thus making it far too easy to receive a home loan. The result, the mortgage meltdown.

Call me an idealist, but I can’t help but wonder how many of these homes could have been saved, how many bankruptcies could have been avoided, if people had simply done their homework. As I mentioned before in my previous Alphabet Soup post on investing, half the battle in understanding any of these areas is simply learning the language. People often fail to ask questions not just because they don’t want to feel stupid, but because the don’t even know what questions to ask.

With this in mind, and in an effort to keep readers of Schaefer’s Blog well ahead of the financial education bell curve, I have singled out some common real estate terms that everyone should know. Whether you plan on buying, selling, or renting there are some terms and concepts that can benefit anyone as they walk through the process.

In knowing the language, the element of fear is greatly diminished and you will be much more confident in asking the right questions and getting the answers you need to make wise financial decisions.

With that in mind, here are five real estate terms every person should know:

Adjustable Rate Mortgage (ARM) – Yes, this is the three-headed monster that you have been hearing thrown about in the news for quite sometime now. An ARM is a type of loan in which the interest rate that you pay for borrowing the money is periodically adjusted based on what market rates are doing.

The interest rate you pay is tied to an index of some kind (common ones include the Treasury 1-year Constant Maturity series (CMT), and the Cost of Funds Index (COFI)).  On top of this, you pay an additional premium, also called a margin (additional interest on top of the index rate).  The premium is fixed and will not change during the loan, but the interest rate is variable.

There are many different types of ARM’s and many have a fixed interest rate for an initial period, normally anywhere from 1 month to 5 or more years, before they begin adjusting and following the market rates.  If you see numbers in front of an ARM such as 5/1 ARM:

• The first number is how long you will have a fixed interest rate (5 years)
• The second number is how often the rate will adjust after the initial fixed period (annually)

Finally, because an ARM transfers some of the risk from the lender to the borrower you can normally receive a lower initial interest rate (and therefore monthly payment) on an ARM than you can with a traditional fixed-rate mortgage.  So, if you plan on not being in your house for very long, an ARM might be the way to go, but there are several other factors to consider.  Here are some great questions to ask taken straight from the Federal Reserve Board website:

• Is my income enough–or likely to rise enough–to cover higher mortgage payments if interest rates go up?
• Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
• How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.)
• Do I plan to make any additional payments or pay the loan off early?

For more great information on ARM’s see here.

Closing Costs – also, known as “settlement costs,” they are the various expenses and fees on top of the price of the property that a buyer must pay during closing (when you sign the papers to purchase the property).  The following are some of the ordinary closing costs courtesy of REMAX of Parker, CO:

1. Loan Organization Fee: This fee is usually equal to 1% of your mortgage.
2. Discount Point(s): Each point is also 1% of your mortgage.
3. Cost of Title Search: Mandatory to ensure you are buying the property from the current owner.
4. Lender’s Title Insurance Fee
5. Survey Fee(if Applicable): The cost of surveying your property if not done already.
6. Transfer Tax: State and/or Local taxes, stamps etc. for property transfer of ownership. This fee is sometimes split among the buyers and sellers.
7. Lender’s Appraisal Fee
8. Recording Fees: Cost of turning closing documents into public records.
9. Prepaid Mortgage Insurance Premium: First payment.
10. Property Tax Escrows
11. Lawyer’s or escrow company’s fee

Earnest Money – money that a buyer gives accompanying an offer on a property to show that they are serious about making the purchase.  The amount varies from state to state (generally 1-3% of purchase price) and is often held in real estate broker’s trust until closing when it is then credited back to the buyer.

Equity – the difference between what a property is worth and how much the buyer still owes on it.  Basically, how much of the property you actually own.  So, if you still owe $150,000 on a $200,000 property, you have $50,000 in equity.  Equity is good…get some!

Escrow – assets (money, property, deed, etc.) put into the safekeeping of a third party until the conditions of an agreement are met.  When buying a house it is common that a,  “mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage” (Wikipedia).  The escrow company, in a sense, acts as a savings account for a borrower in that money is deposited and used to pay interest and taxes.

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Nearly every morning for the past 5 years I have sat down and read a chapter from the book of Proverbs.  Since there are 31 in all it sets up nicely for reading one a day.  It continues to amaze me the depth of wisdom found in each chapter covering every area of life from relationships to money to career advice.  If you have never read the book of Proverbs I highly recommend it.  Here are seven that enjoy terribly and share with you in hopes that they will benefit you as much as they have me:

“The wicked flee though no one pursues, but the righteous are as bold as a lion.” – Proverbs 28:1

Ever had someone start defending themselves before you even threw out an accusation?  Guilt has a funny way of making people weak and paranoid. We’ve all been there before and it’s a miserable way to live.  Hence the huge weight being lifted off our shoulders we often experience when we confess a wrongdoing.

On the opposite end, if you live with integrity and complete honesty you are, “relaxed and confident,” using the words of Eugene Peterson.  When the company has an audit or your work is investigated in some way you can be strong because you know you are in the right, bold as a lion.

“One person gives freely, yet gains even more; another withholds unduly, but comes to poverty.” – Proverbs 11:24

Most of us have heard the age-old adage, “It is better to give than receive,” and gave it a smile and nod, not paying it much mind.  Perhaps though there is a bit more depth to this idea than we realize.  Generosity obviously benefits the person on the receiving end, but the effects on the giver can be just as strong if not stronger. This principle applies to giving money as well as time and resources.

A 1998 study at Cornell University found that volunteering increases a person’s energy, self-esteem and sense of mastery over life. Other studies have shown that volunteers live longer and experience better health.  In a famous study at Harvard, the “Mother Teresa effect” was born after, “Researchers showed 132 Harvard students a film about Mother Teresa’s work among the Calcutta’s poor, and then measured the level of immunoglobin A present in their saliva. The test revealed markedly increased levels of Immunoglobin A, which is the body’s first defense against the common cold virus — all after simply witnessing somebody else involved in charity work.” (Sound Medicine, emphasis mine).  Start giving today!

“A wife of noble character is her husband’s crown, but a disgraceful wife is like decay in his bones.” – Proverbs 12:4

One of the most important decisions you will make in your life is who you marry.  All of us have seen great marriages as well as terrible ones and the products of each seem to multiply over time.  Nothing is worse than seeing two people suffering through a miserable marriage.  It really is like decay in the bones.  On the other hand, a great marriage is a pleasure to be around, the effects seem touch everyone in close proximity.

People often ask how I knew Marelize was “the one.” While I don’t think there’s a right answer to this question, I always say that I knew by the fact that I was proud to introduce her to my family and friends.  When they would meet her for the first time I didn’t even feel like I needed to be in the same room.  She could shine on her own and I knew they would see the quality of her character without me needing to point it out.  A spouse with character is indeed a great reward.

“One person pretends to be rich, yet has nothing; another pretends to be poor, yet has great wealth.” – Proverbs 13:7

In a culture that worships the rich and famous it is common to see people trying to project the image of wealth without actually having any.  And just the process of trying to look like you have it all can actually keep you from really acquiring any of it.  Going into debt in an attempt to keep up with the Jones’ is incredibly foolish, but all too common.

As Warren Buffet so aptly stated, “I just naturally want to do things that make sense. In my personal life too, I don’t care what other rich people are doing. I don’t want a 405 foot boat just because someone else has a 400 foot boat.” Much better to live below your means and slowly build your wealth even if it costs you some cool points.  In the end you’ll be the one everyone is trying to keep up with.  Financial advisor and talk show host, Dave Ramsey says it well “Live like no one else now so you can live like no one else for the rest of your life.”

“Walk with the wise and become wise, for a companion of fools suffers harm.” – Proverbs 13:20

For the first several years of your life it is your parents that have the greatest influence on you.  Then around middle school it is your friends that become your primary influences for the remainder of your life.  My friend Aaron Stern (great new blog) always says, “Show me your friends and I’ll show you your future.” He is on to something huge.

People naturally begin to imitate the people they spend the most time with.  If your friends like to whistle, you will mostly likely find yourself whistling after spending time with them.  If they like to read, chances are you will pick up a book the next time you’re out.  All of these things add up and largely determine the future outcome of your life.  So hang out with quality people, wise people…and keep yourself from fools.

“Plans fail for lack of counsel, but with many advisers they succeed.” – Proverbs 15:22

One thing that never ceases to amaze me is people’s fear of asking questions.  Businesses go bankrupt, opportunities go down the drain, and people make stupid decisions because they don’t take the time to ask others who have been there before.  Often times it is simply pride.  None of us like admitting that we don’t know what we’re doing.

The most successful people in the world all have a few things in common – they understand the importance of trusted advisers and they ask questions.  In my own life I have a group of men that I consistently go to with important life decisions.  They each have different backgrounds so the chances are high that I will get well-rounded counsel.  Their wisdom has saved me time and time again from making poor decisions.  Read more about building a personal council or board of directors here.

“Do not exalt yourself in the king’s presence, and do not claim a place among his great men; it is better for him to say to you, ‘Come up here,’ than for him to humiliate you before his nobles.” – Proverbs 25:6-7

While most of us are not likely to find ourselves in the presence of an actual king anytime soon, all of us have “kings” in our lives, people like our bosses, mentors and heroes.  One of the most awkward moments happens when someone assumes they are “one of the guys,” when they are not.  This is often a result of thinking of yourself more highly than you ought.

Situations like this can be all together avoided by being humble and letting others highlight you rather than jumping up to highlight yourself.  If you truly deserve credit and honor you won’t need to point it out, it will find you.

Have any favorite Proverbs of your own?  Please share! AND…

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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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The twenties are an amazing time in life. For most of us it is the first time that we are truly on our own and free to choose our own path. It is an age where we essentially get to start with a clean canvas and begin painting the type of life we have dreamed of since childhood. It is an opportune time to try new things, new jobs, develop new habits and enjoy the lifestyle that comes with having little responsibility and endless amounts of energy.

The twenties are also foundational years for us and should not be wasted or lived unintentionally. With the help of some friends and mentors, the following are some of the best things we could think of to do in order to make the most of your twenties:

1. Surround yourself with wise mentors – you don’t know how to get somewhere you’ve never been. that’s why you need mentors– insight and help from people who are where you want to be. None of us know the answer to every curve ball that life throws our way, but with the help of others that have been there, our chances of making the best decision grow exponentially. Choose a diverse group of mentors and utilize their experience.
2. Become a lifelong learner – as mentioned above, the awesome thing about your twenties is that you gain a tremendous amount of freedom to pursue whatever direction in life you choose. With this freedom comes an opportunity to study things for your own enjoyment rather than because you were told to. It’s easy to think that because, “school’s out for summer,” that learning is out as well, but keeping your mind active and continually challenging yourself are key parts of living well and developing these habits in your 20′s will help keep you from becoming dumb and irrelevant.
3. Travel – the practice of leaving home to experience new locations and cultures is fundamental, and one that nearly everyone I posed the idea of this list to told me to include. There is something magnificent about traveling that goes beyond just snapping a few photos or placing thumbtacks on a map. Traveling helps us understand that life is much bigger than ourselves and inevitably leads us to the wonderful question, “why?” as we notice the differences from place to place. It is this lifestyle of “why” that is so valuable as we learn to question the way we all live rather than just taking everything at face value.
4. Learn to listen and handle criticism well – if there’s one deadly mistake I’ve seen made by many of my peers over the past few years it is the inability to receive criticism. Guess what, all of us have things we could do better at, especially in our 20′s. Toughen up a little and have enough maturity to realize that criticism is a healthy part of life and doesn’t require a poor attitude, excuse or rebuttal on your part. Most importantly learn from criticism.
5. Develop an active, healthy lifestyle – by adopting healthy habits such as eating well and exercising regularly in your 20′s you are setting yourself up for a much better quality of life. No great experience or event matters if you are not healthy enough to enjoy it. Learn to cook healthy meals and join a gym…if you’re really adventurous, run a marathon. Developing these habits at age 24 is far easier than age 44.
6. Read a classic – even though we are required to read a few classics here and there throughout school, if you’re like me you have forgotten most of the characters and plot twists by now. Take the time to read something by Dostoevsky, or if length is a big issue for you, try something like “Catcher in the Rye.” The issue isn’t so much the specific book, just developing a habit of reading for personal enjoyment. If you’re not sure where to start, check out this list made by my friend Brett at Art of Manliness.
7. Go on an overseas missions trip – Traveling is wonderful, but it is possible to travel the globe without ever really stepping outside of yourself. Some of the moments that have changed my life the most came serving others in the poorest and most broken places in the world such as helping in the rebuilding effort in Thailand after the devastating tsunami in 2005. It is well-known truth that we often find ourselves the strongest when we spend our lives in the service of others.
8. Create a monthly budget – often the big advice from financial planners for young people comes in a cheeky remark about cutting back on the Starbucks lattes. Well, I love Starbucks and don’t plan on giving up my coffee. Instead I’ve built them into a monthly budget. Building a monthly budget is foundational to a healthy financial life, by starting one and living by it in your 20′s you can ensure a solid financial situation for years to come.
9. Start a Roth IRA – I know of no better retirement vehicle than the Roth IRA. A Roth is unique because your money grows tax-free meaning at retirement age (currently 59 1/2) when you finally decide to pull out the money you have accumulated, you don’t have to pay any taxes on any of it. For a layman’s guide to the Roth IRA including how to start one, read my post on the subject here.
10. Buy a used car – it may be tempting to show how independent you’ve become by pulling up to your friend’s house in a brand new car, but fight the urge. You are losing thousands of dollars the second you roll out of the dealership parking lot. Even buying a year-old car will save you tons of money while still providing you with a relatively new vehicle. I mention this for twenty-somethings because I’ve seen so many of my friends bury themselves in debt over a car, one of the few “investments” in the world almost guaranteed to do nothing, but depreciate during its lifetime.
11. Understand basic investment principles – there is no doubt that financial illiteracy is rampant among young people mainly due to it’s weak to non-existent standing in secondary school curriculum. Most people do not truly begin understanding the basics of investing until they are at an age where it won’t make much of a difference anyway. The three principles I have written about here at Schaefer’s Blog which I think every young person should know include: 1) Time Value of Money 2) Pay Yourself First 3) Dollar-Cost Averaging
12. Go to a concert – Ever noticed that many people’s fondest memories start with, “One time we got tickets to (fill in the blank).” There is something amazing about live music and thousands of screaming fans that turns up the volume of our lives in all the right ways. Whether it’s Coldplay, U2, Celine Dion (my wife drug me to her show in Vegas and….it was actually pretty good) or Willie Nelson (one of the best I’ve seen) pony up and buy some tickets to a good concert.
13. Learn a foreign language – there’s something wonderful about communicating with someone in their native tongue; it breaks down cultural barriers like nothing else. The 20′s are a wonderful time to learn a new language as you travel the world and immerse yourself.
14. Start a blog – the ability to communicate one’s ideas in writing is an incredibly valuable asset. Blogging is similar to journaling, but with the added bonus of exposing your ideas to the scrutiny of millions of eagle-eyed online viewers. It’s amazing how quickly your writing improves when you realize that people will actually be reading your work. For more great reasons why you should start a blog read here.
15. Get your college degree – according to a recent report from the Commerce Department’s Census Bureau a college graduate can expect to earn approximately $900,000 more over their lifetime than those with only a high school diploma. Whether you like it or not, a college degree is one of those things that society considers an entry ticket for most well-paying jobs. Instead of lecturing everyone on why a college degree is overrated, just take the time to get one and save your lectures for the classroom.
    
16. Pay off credit cards – We’ve all heard the alarming stats yet few seem to be changing their behavior. The average college graduate it now entering the workforce with approximately $3,200 in credit card debt. Add to this student loans and it is easy to see why most in their 20′s take the attitude of, “I’ll deal with it later when I’m making more.” The problem is credit card debt can affect things like qualifying for a home loan, saving for retirement and building a solid credit rating. If you can’t pay off the full balance of your card every month then do yourself a huge favor and don’t use one in the first place. Secondly, whatever debt you do have, pay off as soon as possible – it will save you a lot of headaches in the future.
17. Stay in a hotel that costs over $200 a night – My wife and I had a debate about this one. I said you should do this in order to see that it’s not that much better than the $89-a-night Holiday Inn down the street. She disagreed, stating it was normally much better and one should stay in a nice hotel at least once in their 20′s just to treat themselves with a nice experience. So, I guess whatever way you look at it, staying in a nice hotel is something every twenty-something should do.
18. Read the Bible cover to cover – no other book has been cited by others, recounted in the arts, or debated in the public arena more than the Bible. And yet, very few have actually read it cover to cover. Being that this book covers so many fundamental issues central to life such as the role of God, man, sin, death, salvation, etc. it is something every person should read for themselves instead of relying on hazy quotes from the university philosophy professor or television evangelist. Man’s decision of what to do with God is one of the most integral he will ever make. Better to make this decision based on a personal encounter rather than off-hand information.
19. Explore your family of origin issues (positive and negative) and pursue growth – so many studies in sociology always end up pointing back to one’s family life growing up as the major factor in their growth and development. No doubt some of us experienced a wonderful family life while others went through something more akin to a nightmare. Either way the 20′s are a key time in understanding any family issues that may be holding you back and taking the necessary steps to find healing. It may require some counseling or may be as simple as calling your parents and telling them how much you love them.
20. Figure out the type of person you want to marry – I happened to get married at the age of 22 to my beautiful wife. This may seem young to many, but it has worked well for us. While I don’t think getting married in your 20′s is for everyone, it is definitely the time of life to start deciding what traits and values you desire in a future spouse. I’m not saying you need a 3 page checklist, but deciding on some of the non-negotiables will allow you to narrow in your focus and keep you from jumping into one poor relationship after another.

So, what have I missed? What should not be on the list and why? Please leave a comment and make your voice heard!

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Popularity: 63% [?]

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

Popularity: 4% [?]

For the past several months my wife and I have been using the free, easy-to-use, web-based software called Wesabe. Many of you have been asking me about it lately so I decided to give a brief overview of what it is and why I like it.

First, I’m a firm believer in the importance of spending your money intentionally, rather than being surprised by your purchases at the end of each month. In order to do this a detailed budget must not only be created, it must be constantly maintained. There are many different programs out there to help you in this endeavor like Quicken and MS Money, but Wesabe is free and it adds the community element which I’ll explain later. Before I forget, here’s the link to a quick 3-minute video tour of Wesabe if you’re more of a visual learner: VIDEO TOUR

Some of the highlights of Wesabe:

All Your Accounts in One Place – Wesabe is nice because it allows you to view all of your bank and credit card accounts in one place making it easy to budget, categorize and view all of your spending rather than having to skip from site to site.

Creating Spending Categories – When you first upload an account (checking, savings,
credit card, etc.) with Wesabe it displays the transaction exactly like it reads on your financial statement, often meaning pointless numbers and codes with no relevance to you. Wesabe then allows you to edit the transactions individually changing the bank code into something you can use like, “McDonald’s” or “Apple Store”. What makes Wesabe great is that from that point on it will recognize if a similar transaction comes though and will assign it the name you chose automatically; meaning, if you receive a paycheck on the 1st and 15th of each month from the same place Wesabe will recognize this and call the transaction “Paycheck” (or whatever you assign).

Also, as part of the editing process Wesabe enables you to “tag” each transaction, putting it in a specific category like “Restaurant” or “Entertainment.” This ability to create spending categories is obviously key in creating and maintaining a detailed budget. The tag process also “learns” as you use Wesabe more, automatically assigning repeat transactions the right tag. For example, if you go to Chili’s every week you will only have to assign the first transaction a name and tag, after that it will do this for you as it recognizes the same purchase item or place.

Creating Spending Limits – Another handy tool Wesabe offers its users is the ability to create spending limits. Users can assign each “tag” or spending category a certain spending limit for the month and Wesabe automatically keeps track of where you are as you make your purchases. If you set a “Restaurant” limit of $150 for the month, Wesabe will let you know that you only have $50 left for the month if you go out one night and spend $100 on a meal. This is probably my favorite feature as it eliminates the guessing of where you are at any given point in time in regards to your budget…helping you spend intentionally

The Community Element: Tips and Goals – Wesabe is unique from traditional budgeting software in that it relies on its community of users to provide guidance and tips on how to successfully manage your money. The “Tips” section of Wesabe looks at common themes in your spending and automatically provides user-generated tips specific to you. So, if you’re a single-person with no kids you won’t be receiving advice on saving money on diapers or budgeting for your kids’ college tuition.

The community also comes into play in the “Goals” section of Wesabe, a place where you can create and monitor your personal financial goals. The wife and I currently have goals including buying our first house and maximizing our yearly Roth IRA contributions. Wesabe allows you to connect with other users with the same goals giving you an opportunity to discuss, share and learn.

Overall, we’ve been very pleased with Wesabe. Every once and a while it mis-tags a purchase, but that is rare and easy to fix. The only other problem we ran into was having one transaction come up twice in “Bills” and “Payments”…we fixed this using the filter feature, filtering out the “Payments” from our spending and earning summaries. Finally, many have questioned the security aspect of uploading financial accounts onto the web…understandable, but Wesabe takes security just as seriously as any of your financial institutions that you bank with daily. Check out there security policies here: https://www.wesabe.com/page/security.html

Popularity: 2% [?]