If not, here’s a quick version.  Let’s say you have a savings account that earns 1% per month.  (Don’t laugh too hard.  My dad had one that paid this rate at one point.)  Let’s say also that you put in $1,000 at the start of 2012, and never add anything more.  According to the Rule of 72, after about 72 months, I’ll have about $2,000.  In another 72 months, I’ll have $4,000.  In another 72, $8,000.  The amount in the account doubles each 72 months it sits there.  This happens because the amount that I’m basing the 1% earnings on increases a little bit each month, until some day, it gets really fun.  Almost like magic.

The amount of magic depends on the amount of the rate

Are you still laughing about when I proposed an account that earns 1% per month?  I wouldn’t blame you.  Some of the higher interest rates for checking accounts now are about 1% per year.  About all we can say about these kinds of rates is that they’re better than nothing.  (If you’re earning nothing on your money, try to earn something on it.)

At rates of 1% per year (or less) the magic still happens, but the magic isn’t exactly making-a-jet-plane-disappear magic.  The doubling would still happen, but it would be almost the end of the century before that happened.  And to boot, your $2,000 might only barely buy a nice suit.  Break out the champagne!

Banks are scared to lend now.  They’re reeling from the shakeout in 2008.  As a result, interest rates on savings accounts and checking accounts goes down as well.  And the fees get tacked on.  It’s just not a magical time to be a saver.

What’s the key to building wealth, then, if it’s not through saving money?

Putting money in the bank is low-risk, but it’s also low-reward.  Now, it’s extremely low-reward.

The key, I think, is to take calculated risks, and work to produce something.  Find a need, and serve customers to fill the need.  If you can deliver on time for the price agreed on, that’s a lot more than many businesses do.

This isn’t “stick money in a bank account and it grows while you watch Twilight” easy, but that’s what the times demand.  There’s barely any reward for doing it this way today.

Maybe the magic will come back into compounding, but until then, make your own magic.

Sign up for the Mighty Bargain Hunter Newsletter!

Can I Retire? is part of his “100 Pages or Less” series, and, well, the main text of the book ends squarely on page 99, so it’s truth in advertising.  His motivation in putting this series together was to give essential information on a particular topic in a size that wouldn’t be so daunting to read.  He fully admits that his book is just the beginning of answering the question in the title, so with that in mind, I read the book.

I enjoyed it.  The book was well written and free of financial jargon, but at the same time I didn’t feel like I was in third grade while reading it.  It was a quick read; I got through it in maybe 1 1/2 hours, and part of the time I was riding up to a friend’s house.  Which, again, is the point of the book:  It’s an approachable and doable introduction to the topic.

Standard topics with some essential details

The topics are nothing terribly mind-blowing:

• Calculating how much you’ll need to retire
• The 4% withdrawal rate rule
• Single-premium immediate annuities
• Index funds, exchange-traded funds, bonds
• IRAs and IRA accounts
• Tax consequences of conversions, rollovers, and the like
• Social Security

I picked up a number of things along the way.  Here are a couple of them:

• Dollar-cost averaging is a two-edged sword.  In a rising market, dollar cost averaging helps to automate the process of buying low (to sell high later).  But in a falling (or fallen) market, withdrawing a fixed amount has the opposite effect: selling low.
• The overview of annuities is very good.  I knew vaguely what annuities were but Chapter 4 laid the basics out very well, especially the pros and cons of annuities, fixed return vs. variable return annuities, and diversifying annuities.
• Having a tiered risk/reward investment structure in retirement is a good idea.  The idea and explanation of having short-, mid-, and long-term investments in retirement was clearly presented.  (Long-term in retirement is more than five years out.)

All in all, this was a well-organized introduction to answering the question of Can I Retire? and I recommend it.  The Kindle edition is certainly worth $5 if you’re new to retirement planning.

Sign up for the Mighty Bargain Hunter Newsletter!

But my friend has an interest in getting some gold.  (Or at least that’s the impression I got from him.)

How to maneuver out of being goldless

My friend cringed when I said that gold was now around $1,800/ounce.  So there’s a mental block to buying now.  What’s more, there’s a mental barrier to buying regardless of which way it goes.  If it goes higher, then it will seem foolish to buy: “If I’m not supposed to buy high, then I’m definitely not supposed to buy as it’s moving even higher.”  If it goes lower, it won’t go low enough:  “Just $50 lower and I’ll buy.  It’s been that low before.”

As with any investment, once the financial barriers are gone — that is, you have enough money to buy if you want to — the only other barriers are mental.  If left up, these barriers are paralyzing.  Gary North has talked about a solution to break through the paralysis.

Before I talk about this, I assume that you want to buy gold, but are hesitating to pull the trigger.  This isn’t meant to convince you to buy gold if you don’t want to.  It’s up to you to evaluate whether you’re at that point or not.

Here the trick.  Whatever the current spot price of gold is (basically its melt value) commit to buy some when it either goes up $50 per ounce, or goes down $50 ounce.  It will do one or the other at some point.  When it does, pull the trigger.

Once you have some gold in hand, you’ll be glad you have it regardless of whether it went up or down.  Here’s how.  If it went up, then you’re no longer regretting not owning any, and you’ll be glad you have some when it goes higher.  (If it doesn’t ever go higher again after you buy it, then you can come back to scold me.  I don’t expect to be scolded much.)  If it goes lower, then you not only have the gold, but you also got it for $50/ounce less than when you made the commitment.

It’s a win either way.  Happy golding if you’re on the fence!

Sign up for the Mighty Bargain Hunter Newsletter!

If you’re stashing your cash in a traditional savings account earning next to nothing, you’re wasting it. Make sure you’re getting the best return on your money. Search for the highest yields on CDs and money-market savings accounts. And consider using a free online checking account that pays interest, such as ones offered by Everbank and ING Direct.

Now, there isn’t a thing wrong with these banks.  I’ve used ING Direct for years, and I’ve had nothing but good experiences with them. I’ve heard many good reviews of Everbank as well.  I guess over the past few years we’ve had our expectations of “high-interest savings account” lowered a bit.  Both ING Direct and Everbank are quoting rates around 1% APY.

One percent per year. And this is supposed to be an alternative to wallowing in a low-interest account?!  By most measures, this is wallowing in a low-interest account!

Certainly it’s better than earning nothing, but truth be told, it’s not a whole lot better than nothing.

It makes me wonder if the whole idea of passive retirement income is out of reach for most people. How much would someone have to have saved up to have a retirement income of $50,000 per year in investments earning 1%?  Fifty thousand dollars is one percent of $5 million.  And this income is before taxes and the devaluing due to inflation!  Even if the return rose to 5% — say, with some very well-chosen dividend stocks — then this still requires $1 million invested.

Five million dollars is a lot of money, and with average retirement savings not even cracking six figures it’s not an amount of money that most people have at their disposal.  So for most people, there has to be more.  There probably has to be some kind of active income earning going on.  Things like building up a side business in an area that can be done part-time (or even full-time) in the normal retirement years.

This transition is far easier if the business is already chugging away when the traditional retirement age comes.  But this requires planning and consistent effort well before that time occurs.

Are you on top of this?  Are you laughing in the face of low-interest passive investments and taking the bull by the horns?  I hope so.

Sign up for the Mighty Bargain Hunter Newsletter!

And it’s going to stay that way.

This isn’t Prosper’s fault.  It’s mine.  I’ll explain.

I started investing in Prosper.com notes in June of 2006, as an experiment.  This was the year it launched.  After the books are cleared almost 5 years later, I’ve taken worse hits on my money than Prosper, but I’ve also done much, much better.  Here is a summary of my foray into peer-to-peer lending:

• Invested in 53 notes totaling $2,923.56
• Payments from the borrowers on these loans totaled $2,705.28, for a total net loss of 7.5%
• Of the 50 loans, 30 of them (57%) were to borrowers with the highest credit rating (AA)
• Of the 53 loans, 47 of them (89%) were to borrowers with one of the two top credit ratings (A or AA)
• Of the 47 loans to borrowers with ratings of A or AA, 15 of them (almost one-third) were charged off to some degree (meaning I lost money on those loans)

It did take me a little bit by surprise that I lost money on what should be a fairly safe portfolio: nearly nine out of ten of the loans I invested in were to buyers that appeared very creditworthy (A or AA).  The default rate I saw for these loans was several times the estimated default rate for these borrowers (I don’t recall exactly the percentages, but I’m pretty sure both A and AA default rates were estimated to be under 10%).  Of course, there are absolutely no guarantees: default is the risk for the greater reward, which was an above-market interest rate.  But it’s hard to deny that the notes I chose to invest in missed the mark pretty badly.

There could be all kinds of reasons why things went south for me:  the recession in 2008 and the years that followed; lower-than-average judgement on my part (though I did take the time to read all of the listings); lack of real default data at the time I was investing.  No matter.  It was my risk to take, and I took it.

It could be a better environment for lenders now.  Prosper.com has added a secondary market for loans, and has changed the way that lenders invest in borrowers — the rates are now fixed rather than determined by auction.  So maybe I jumped in too early.

If you’re looking to borrow money, it’s a great site for borrowing money.  It’s a fairly clean way to consolidate debt at (possibly) a lower percentage than you might be paying now, and pay that debt off over three years.

There are lots of lenders ready to lend, and if they’ve been with it from the beginning, they’ll love looking over what you need and making a decision based on their own criteria.

I just don’t think I’m cut out to do that anymore, so I’ll get out of the way.

(This post may contain affiliate links.  Read my policy on endorsements here. Also, a big thanks to My Personal Finance Journey for including this post in the Carnival of Personal Finance.)

Sign up for the Mighty Bargain Hunter Newsletter!

But anyway, this is from his latest net worth post:

But wow, what a month!  Going on back to back ups here – love it.  Even though I really only worked hard at 1/2 of this $11k increase   As always the rest was left up to the stock market Gods…

To be completely fair here, he does have $66,000 in between his savings and his emergency fund, which is huge.  And to boot, he’s even covered what I’m going to talk about.

In the short run — certainly a month is short-run — the stock market gods (volatility) can bring a portfolio up or down.  That’s the risk, which is hopefully justified by a greater reward.

But what if the reward bypasses a generation?  This article from MSN MoneyCentral suggests that the market can be really good for some generations, and mediocre to bad for others.  (Basically giving investors the pagan equivalent of forty years wandering in the wilderness.)  Hitting one of those bad patches means either (a) there won’t be enough money waiting for you in retirement, or (b) there will need to be a lot more investing needed to arrive at the  happy number.

If you’re not near retirement age (and neither J nor myself are, though I’m closer than he is!) then investing in yourself is a great end-run around the stock market gods that play roller-coaster with your portfolio.  Get some side projects going.  Learn some skills.  Create something you own rather than buy stock in something that someone else owns.

This isn’t without risk either, of course, because you either succeed or you fail.  It’s no one’s fault but your own.  But if you don’t sink a lot of money into starting things up, and start early enough, a failure or two is fine, and they improve your odds of success later.

Whimsy is flimsy.  Take some of the whimsy out of your investment portfolio!

Sign up for the Mighty Bargain Hunter Newsletter!

Everyone knows that a 401K is set up almost exclusively as a retirement plan, and as such, it comes with some pretty hefty penalties for early withdrawal (which is to say, before the age of 59 1/2). However, this hasn’t stopped many people from taking funds from their 401K, and finding ways to avoid the astronomical costs of doing so. Whether you’ve lost your job, you’re facing a medical emergency, or you could simply use the extra dough, there may be a way to access your 401K early. But there are a few things you need to know about before you treat your retirement fund like an ATM:

1. Income tax. The first penalty you will be hit with is income tax. Remember, any monies you filter into your 401K enter the account pre-tax. So the moment you begin to withdraw, the money is subject to income tax, just like any other earnings. Not only will you have to pay the government their normal pound of flesh, if your withdrawals happen to bump you into the next tax bracket, you could be facing a lot more expenditure come April 15th.
2. The 10% tax. On top of any income tax you will be required to pay, there is a standing, across the board 10% penalty applied to any funds you pull from your account before the age of retirement. When you think about it, you may as well be flushing that 10% down the toilet. Honestly, even check-cashing services don’t charge that much!
3. Exemptions. Luckily, there are a number of exemptions that will allow you to withdraw money without the 10% penalty (although you absolutely cannot avoid the income tax). Death, permanent disability, loss of employment after age 55, excessive medical expenses, and court-ordered divorce settlements are just a few instances of ways that funds can be withdrawn early without penalty, so you may want to see if you qualify for any of these exclusions (although if you do, you are probably in a pretty sorry state).
4. Borrowing. Some plans also offer a lending option where the 401K is concerned (although this is an addition to the policy that must generally be adopted by the company you work for, and most companies don’t want to pay extra for this feature). If you are lucky enough to have this option, you can pull money early and pay it back like any other loan: with interest (usually based on the prime rate). Of course, most companies restrict the uses for this money to circumstances like paying for schooling, purchasing a home (or staving off foreclosure), and medical expenses, just to name a few.
5. SEPP. A substantially equal periodic payment plan is another way to withdraw funds early, but it, too, comes with some unfortunate side effects. It works like this: you set up an account that pays you a certain amount annually from your 401K as a way to supplement your income, and you don’t have to pay any penalties to do so. Sounds pretty good, right? It is, except for the fine print. Once you set up a SEPP, you can no longer contribute to your 401K, thereby depleting your retirement fund. Plus, you have to continue to withdraw either for five years or until you reach retirement age, whichever is longer.

While you may be tempted to dip into your retirement account early, you are almost guaranteed to take a financial hit if you choose to do so, whether you pay penalties or you simply lose out on the interest that the money could have been earning if you’d left it alone. There are certainly ways to buck the system, but in the long run, you are essentially only hurting yourself when you opt to use your future funds today.

Sign up for the Mighty Bargain Hunter Newsletter!

Is the Yale Portfolio by David Swenson too conservative for a twenty-something with a mid-sized portfolio … ?

He asks if the portfolio is “too conservative.”  He’s been told (as we all have been, probably) that his investment allocation should be “less conservative” when he’s young and “more conservative” when he’s approaching retirement age.  Usually this translates to “more stocks” when young and “more bonds and more cash” when old.  The reasoning goes that one can stand more volatility in investments at a younger age because, although the value of the investment can go down substantially in the short term, the long-term returns make up for this and will beat the less-volatile, more conservative investments in the long term.

All well and good.  But deep down, does this gentleman want others to tell him what his tolerance for volatility is?  Does he really want people to tell him to have a higher percentage in stocks, or some other high-risk, high-reward investment vehicle?

Or, instead, does he want a warm fuzzy that this allocation is prudent? Conservative or not, is it intelligent and wise?

Having a prudent portfolio is far more important than having a portfolio that adheres to some age-related notion of risk tolerance.  Basically, a prudent portfolio is the following:

• It is understandable. It’s not prudent to invest in things that aren’t fully understood.  A “target date” retirement portfolio could have a perfect taper from stocks to bonds over time, but if there’s no understanding of the investments, then it’s imprudent.
• It is purposeful. Regardless of what is in the portfolio, the things put in the portfolio were put in there for good reason.
• It is researched. Frankly, I get a little leery of people speaking of stocks and bonds as if they’re the only two kinds of investments in existence.  They’re common ones, but far from the only ones.  It makes me wonder how much research went into constructing a portfolio if that’s all that’s there.
• It is monitored. Vehicles go in and out of favor all the time.  Part of riding the way up is knowing when to get off before it goes off a cliff.

Following the advice that a large chunk of other investors follow will ensure that you’re keeping pace with them.  This can be good if these investors are doing well, and bad if they’re not.

The main question is: “Is it prudent to trust the majority?”  Or is it more prudent to reach your own conclusions on how to invest your money?

Sign up for the Mighty Bargain Hunter Newsletter!

Thankfully, it turned out that I had heard of what it means, just not by that word.  “Forex” is an abbreviation for the (huge) foreign exchange market, also known as the currency market.  It’s the place where you can take your United States dollars and buy Japanese yen, pounds Sterling, Euros, Canadian dollars, etc.  Or the other way around, of course.  The bid and ask prices for a currency pair (Euros to US Dollars, for example) determine the “exchange rate” that people pay when they travel abroad from one country to the other.

Of course, there are many more reasons to buy and sell currencies than just to get vacation spending money (or, on a larger scale, because you have employees in different countries that you need to pay).  All of these boil down to the following:

“I think Currency A is going to get stronger (or weaker) relative to Currency B because … “

Traders buy a currency that they think will appreciate relative to the other, so they can buy more of it back later.  There are lots and lots of people who think they know how to complete that sentence.  Many of them want to charge you to find out how they complete that sentence.

I don’t know a whole lot about currency trading beyond what I told you, except that some of the sharpest traders on the planet are currency traders.  (I can’t remember where I heard that.)  Given two different strategies, I couldn’t tell you which one is more sound.

This is a great example of something I shouldn’t try for the simple reason that I don’t understand it. This is probably the clearest, and best, rule of investing.  If you don’t understand an investment vehicle, it’s too easy to be sold on it.  To add insult to injury, the person selling you on it (or some service related to it) makes money regardless of whether you do or not.

This isn’t to say I’ll never invest in foreign currencies, but I shouldn’t now.  I barely understood the lingo!

Sign up for the Mighty Bargain Hunter Newsletter!

But if that sounds like way too much work, there’s always the chance you can hit the jackpot by suing the entity that consumed most of your time for an obscene amount of money.  That’s what Craig Smallwood is doing to NCSoft, creator of Lineage II, a 3-D massively multi-player online role-playing game.  Allegedly Mr. Smallwood spent 20,000 hours playing the game from 2004 to 2009, and is now suing NCSoft for damages under the guise that he wouldn’t have started playing the game had he known that he would have become addicted to it.

First, let’s break this down a little bit.  How much time is twenty thousand hours?  If we take the time span (generously) to be six full years (January 1st, 2004, to December 31st, 2009), 20,000 hours is over nine hours per day, seven days a week, 365 or 366 days per year, for six full years.

That’s mind boggling, but not nearly as mind boggling as (a) his allegations that this stupendous waste of time wasn’t his fault, (b) the fact that this lawsuit wasn’t thrown out immediately, and, most importantly, (c) how far ahead he’d be now if he even played that game just five hours a day and invested the difference in himself. Five hours a day is still way too much time, but there’s a whole lot someone can learn in about 9,000 hours.  It’s enough time to not only become proficient at, but completely master a skill, or maybe two skills!

What’s the alternative to hoping for a misguided jackpot judgment like this guy is?

I’ll let you in on a little secret.  I have a very addictive personality.  I’ve spent more than my fair share playing mindless games and surfing sites that I really shouldn’t be surfing.  The only thing that’s really helped me battle the game sites and other junk was installing a content filter and having my wife be the only one who has the password to change the permissions and delete the surfing logs.  Before, I could pretend like I wasn’t spending all of this time, but now I can’t.

What’s even better is that the best one I’ve found is free:  Blue Coat K9 Web Protection.  In addition to categories aimed at protecting children from content related to violence, drugs, hate, adult content, etc., and categories that should be limited or controlled (chat sites, social networking, peer-to-peer, etc.), it also can filter a whole bunch of (potentially costly and/or damaging) time-waster categories:  gambling, shopping, and games.  In addition to the bad sites, I block the game sites.  I know that how I spend my time is my own responsibility, and that I have to ask for help if I can’t use it productively.  Suing MiniClip.com for my lost productivity makes about as much sense as suing McDonald’s for not telling me that I could burn my legs if I spilled their coffee on them while I was driving.

So, the main point is this:  If something is eating up a lot of your time and affecting your finances and even your life, don’t blame or sue someone else.  Own up and get it out of your life.  Get help if you can’t do it yourself.  Those who depend on you and love you will thank you.

Sign up for the Mighty Bargain Hunter Newsletter!