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Author Archives: Team Dinks

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Dealing with Competing Goals

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Hello Folks,

Lets face it, many people have aspirations that are often at odds with each other. For example a typical conundrum that many people are faced with is balancing their retirement savings needs with non-retirement financial goals.
Since most people are constrained in their ability to do more than one thing with their money, you should prioritize.
Common goals that conflict with retirement include: building an emergency reserve or saving for a home or business.
1) Building an Emergency Reserve:
So that you can effectively balance your needs for an emergency fund against other goals, you might consider different emergency fund amounts under different circumstances.
A) Three months expenses: You might only need to stash three months expenses if you have some retirement funds in a 401k or people you could borrow money from. This option also makes sense when you’re trying to maximize your investments elsewhere – like in a retirement account.
B) Six months expenses: If you don’t have other places to turn for a loan or you have some income instability consider socking away 6 months worth of expenses.
C) Twelve months expenses: If your income fluctuates wildly from year to year or if your profession involves a high risk of job loss and it would take you a while to find another job or if you can’t borrow, lay in enough cash to cover yourself for 12 months.
2) Saving for a Home or Business:
When you are starting out financially, deciding wheather to save for a home or to put money into a retirement account can be a problem. On the one hand, owing a home or business is a huge financial boost, on the other hand saving for retirement makes achieving other goals easier.
If you can, do both. If you’re not in a rush, consider allocating your cash so that you accomplish both goals. If you’ve got a few years left until retirement, you might consider reducing your allocation towards retirement and increasing your funds towards your house or business savings. For example, if you’ve got $500 after expenses, put $100 into retirement and $400 into house/business savings rather than all $500 into either category.
The reason why doing both makes sense is because the world is an uncertain place. Its always good to hedge your bets. For example, many people’s retirement savings took a hit during the stock market downturns in 2001 and 2007. If you were in this situation but had hedged your bets with real estate or business savings, you would be in better shape than those who had focused exclusively on retirement.
So just to sum this up: if you are confronted with competing goals, prioritize based on your income and borrowing situation. Where possible, pursue two goals at once.
Best,
James

Real Wealth Requires Sacrifice

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Hello Folks,

So, I was browsing through a copy of Felix’s Dennis’ How to Get Rich. If you haven’t read Dennis, its well worth the time to do so.

At any rate, whenever I come back to Felix’s book it makes a ton of sense to me. For example, check out this quote:

“Never yet have I met a self-made rich man or woman whose family or personal fortunes were not plagued by the burden of creating a fortune, even a small fortune. A rocky marriage; lack of time spent with children; the substitution of expensive gifts to repress guilt created by their frequent absences from home; the concern that their children have grown used to privilege and are consequently slacking in their education or lacking in ambition – all of these come as part and parcel of self-made wealth“.

– How To Get Rich, p. 91.

The great thing about this quote is that it illustrates one of the key things about making money – it requires sacrifice, time and effort. For example, my wife Miel has a high paying job here in Washington DC, but the price we have to pay for her success is that she is often in Africa. This means we can’t really have a normal marriage.

Our blogging is also illustrative of Dennis’ point. For example, to run this blog takes a good two hours per day of administrative work, drafting articles, marketing, HTML work, networking, etc., etc. This often cuts into Miel’s professional time or my study activities at the University. For the revenue the blog brings in, we have to do a lot of work. In other words, there isn’t any real way around the sacrifice required to make serious money.

Best,

James

Investing In REITs

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Its trite and tired, but if you want to invest in real estate and don’t want to deal with directly managing your property, then your best option is a Real Estate Investment Trust (REIT).

If you feel your portfolio could use some exposure to real estate, here is a quickie from Kiplinger to get you started.

Four Reasons Why Gift Cards Are A Bad Idea

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Hello Folks,

When it comes to gift cards, forget the card: give cash.

There are a ton of reasons why you should give cash instead of cards. Here are four:

1) People Don’t Use Them: According to a 2008 consumer reports survey, nearly 1 in 4 Americans didn’t use their gift cards. This is up from 2006 when only 19% of people didn’t use their cards.

2) Fees & Restrictions: Some cards contain high levels of fees and restrictions. This is especially true for bank-issued cards, which often saddle recipients with fees, expiration dates, and other gotchas. Retail cards generally aren’t as troublesome but some of them lose value or expire if you don’t use them quickly, depending on laws and regulations in your state.

3) Poor Resale Value: Lets say that you have a gift card, but you don’t need stuff, instead you need cash. Well, in order to really quickly convert your card to cash you’ll have discount its face value by 40 to 50%. So basically, the cards don’t have good resale value especially when you need a quick sale.

4) Ownership Issues: Its not often clear who owns gift cards, which can be problematic if a legal dispute arises. Part of the problem is that the person who buys the card is not the person who ends up using it, raising questions about who “owns” the card and has legal standing to challenge the issuers’ regulations.

Credit card companies who issue gift cards are regulated by banking authorities and generally follow the rules that govern electronic funds transfer, but it’s not clear whether those rules can properly be applied to the gift cards. In short, its not clear who owns the cards from a legal standpoint and its also murky as to who is responsible for regulating gift cards. In either cases, if you have a dispute, you could be at a disadvantage.

On the other hand, cash is almost always appreciated. Also, there are no restrictions, you have 100% resale value and nobody will sue you for paying with cash. So the next time you are thinking about getting a gift for someone, get them cash.

Best,

James

Evaluating Small Business Investments

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Hello Folks,

At some point you may have the personal finance basics covered – got your debt paid off and have an emergency fund built up – and may be looking to juice your bottom line beyond what vanilla investments like stocks and bonds can offer you. In this case, you may be considering investing in a small business.

Statistically, most small businesses fail within the first few years. Because of this small business investments are among the most risky that investors can make. Given the risk though, these types of investments can also be tremendously profitable. Here are some thoughts you might consider when determining whether you should make a small business investment.

1) Risks and investment strategy:

A basic principle of investing in a small business is: don’t investments that you cannot afford to lose! Its better not to use funds that may be needed for other purposes, such as college education, retirement, loan repayment, or medical expenses. Instead, use funds that would otherwise be used for a consumer purchase, such as a vacation or a down payment on a boat or a new car.

Legitimate securities offerings need to be registered with the proper state authorities. However, just because the state has registered the offering does not mean that the particular investment will be successful. The state does not evaluate or endorse any investments. If anyone suggests otherwise, its probably nonsense.

If you plan to invest a large amount of money in a small business, you should consider investing smaller amounts in several small businesses. A few highly successful investments can offset the unsuccessful ones. However, even when using this strategy, only invest money you can afford to lose.

2) Analyzing the investment:

Although there is no magic formula for making successful investment decisions, certain factors are considered important by professional venture investors. Some questions to consider are:

A) How long has the company been in business? If it is a start-up or has only a brief operating history, are you being asked to pay more than the shares are worth?

B) Consider whether management is dealing unfairly with investors by taking salaries or other benefits that are too large in view of the companies stage of development, or by retaining an inordinate amount of equity stock of the company compared with the amount investors will receive. For example, is the public putting up 80 percent of the money but only receiving 10 percent of the company shares?

C) How much experience does management have in the industry and in a small business? How successful were the managers in previous businesses?

D) Do you know enough about the industry to be able to evaluate the company and to make a wise investment?

E) Does the company have a realistic marketing plan and do they have the resources to market the product or service successfully?

F) How or when will you get a return on your investment?

3) Making money on your investment:

The two classic methods of making money on an investment in a small business are resale of stock in the public securities markets following a public offering, and receiving cash or marketable securities in a merger or other acquisition of the company.

If the company is not likely to go public or be sold out within a reasonable time (i.e., a family-owned or closely held corporation), it may not be a good investment for you despite its prospects for success because of the lack of opportunity to cash in on the investment. Management of a successful private company may receive a good return indefinitely through salaries and bonuses, but it is unlikely that there will be profits sufficient to pay dividends in proportion with the risk of the investment.

4) Other suggestions:

Investors must be provided with a disclosure document and a prospectus before making a final decision to invest. You need to read this material before investing – seriously. Read it.

Even the best small business venture offerings are highly risky. If you have a nagging sense of doubt, there is probably a good reason for it. Good investments are based on sound business criteria and not emotions. If you are not entirely comfortable, the best approach is usually not to invest. There will be many other opportunities. Especially if you are buying your small business through a sales person, don’t let them pressure you into making a decision.

It is generally a good idea to see management of the company face-to-face to size them up. Focus on experience and record of accomplishment rather than a smooth sales presentation. If possible, take a sophisticated businessperson with you to help in your analysis. Beware of any information that differs from, or is not included in the disclosure document. All significant information is required by law to be in the disclosure document. If anything looks fishy, it probably is.

Just to wrap this up, its possible to get in on the ground floor by investing in small businesses. When successful, these enterprises enhance the economy and provide jobs and can supercharged profits. But the advantages must be balanced against the highly risky nature of small business investments.

Best,

James

Getting A Mortgage Today

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Hello Folks,

I’m getting slammed at the University and won’t get a chance to put down a longer, more substantive posting today. Instead, here is a video from Kiplinger’s personal finance. Its on the topic of how the mortgage market has changed in recent years. Some of the highlights: its harder to get a mortgage, but you can still get an adjustable rate loan if your budget will allow it.

Housing Market To Double Dip?

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Hello Folks,

This quick video from Meredith Whitney caught my eye. Just as a reminder, Whitney is an independent analyst who called the housing bubble and subsequent crash back in 2008. She’s a smart cookie. In this one her comments echo what I’ve been hearing from Mortgage lenders in the DC area, so it might be an informative watch if you’re investing in real estate or mortgage backed securities.

Are You Sure You Want to Invest In Real Estate?

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Do you want to invest in real estate? As an owner of several rental properties here are six things you should be aware of first.

Do you want to invest in real estate? As an owner of several rental properties here are six things you should be aware of first.
Since we’ve been in the process of buying an investment property, it occurs to me that not everyone realizes the difference between getting an investment and buying a home for yourself. Also, sometimes it seems like new real estate investors often fail to appreciate the complexities and hassles involved in owning property.

In a nutshell, owning investment real estate means running a small business. There are several dynamics that are found in owning investment real estate that aren’t when you have a place of your own. For example:

1) Investors tend to buy properties that are smaller, and have fewer amenities.

So, when you are going shopping for investments you aren’t buying the same sort of places as you would for yourself.

2) Investors often get places in neighborhoods that aren’t as nice.

The reason for this is the more money investors put into their properties, the less profit they make. Neighborhoods that are downscale tend to have lower prices, which means lower overall costs.

3) For investors there is much more focus on expenses.

Typically rents have to cover ALL expenses plus 5%. This includes mortgage, taxes, insurance, advertising, repairs, utilities, maintenance, etc. etc. Changes in rental property rates can make this hard to do. On the other hand, there are fewer costs associated with having a primary residence.

4) Temperament.

Being a landlord requires having a thick skin. You need to be able to deal with rejection as well as be able to reject people yourself. For example, you’ll need to show your property and deal with people not wanting to rent from you. Also you’ll need to be able to reject people. This means you may have to perform an eviction or tell people they can’t rent your place. In both cases, normal standards of social decorum really don’t apply. Instead, you’ll have to develop a capacity to handle conflict.

5) Being a landlord means holding large cash reserves.

If you have rental property, usually you’ll want to hold some cash to cover periods when the property isn’t rented or in case you need repairs. The more property you have, the more you’ll need to hold in reserves. This is a problem as the yield on cash and equivalents is currently ridiculously low. Thus, you could be stuck with a large amount of cash mandated to an underperforming asset category if you get into investing in real estate.

6) Having rental real estate adds more complexity to your life.

Unlike owning a home, you’ll need to develop a set of basic managerial skills, you’ll need to monitor rental markets and learn basic household maintenance. You wouldn’t have to do as much of this when buying real estate to live in.

Of course, most of these points are more geared towards landlords, but other types of real estate investing strategies carry their own risks as well.

Finally if you’d like to invest, but don’t know where to get started, Young Money Finance has a great guide for beginning investors, check it out if you get a chance.

Wealth is Back, But Not For Everybody

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Hi All,

Well, it had to happen eventually. Evidently after the bloodletting in 2008, wealth is coming back.

The Wall Street Journal’s Robert Frank has two great postings on the topic:

1) The US millionaire population jumped 16% in 2009.

2) Resources of the world’s billionaires grew 50% in 2009.

Also, the AP is reporting that US household networth increased 5.5% in the 3rd quarter of 2009.

Despite this good news, not all is peachy keen. African American and Hispanic women lag far behind White women in their overall networth. So, it seems that despite the wealth rebound, not everyone is progressing evenly.

Best,

James

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