Five Basics for Building a Solid Financial Future

From nytimes.com

0. Live within Your Means. And start an emergency fund.

1. Simplify Your Investments. Allocate your investments among index funds. Reallocate occasionally.

2. Occasionally Pay For Help. Discipline in investing is worth paying for. Also, get help on taxes and financial planning.

3. However, there is a lot of good advices are on Internet.

4. Automate everything.

5. Communicate. Discuss your finances with your family.

Fidelity's asset allocation strategies

Source: Fidelity

Why we need to allocate our portfolio:






The following table shown the updated annual returns from 1926 to 2007

FI vs Stocks	100:0	80:20	50:50	30:70	15:85
Average return	3.7	6.2	8.2	9.2	9.9
1 yr best	15	31	77	110	136
1 yr worst	-0	-18	-41	-53	-61
5 yr best	11	17	22	27	32
5 yr worst	+0	-0	-6	-10	-14

New interest rate for US savings bonds

Treasury Direct released new interest rates for the saving bonds:

Series I savings bonds will earn 4.84% for next 6 months; however, the fixed rate is 0.00%!

I Bond earnings rate is a combination of a fixed rate, which applies for the life of the bond (30 years), and the semiannual inflation rate.

For the I bonds purchased from May 1 of 2008 to October 31 of 2008, their earning rate will only match the inflation rate.

Also, series EE savings bonds purchased from May 1 of 2008 to October 31 of 2008 will earn 1.20% for the life of the bond (30 years).

However, if the EE bond does not double in value as the result of applying the fixed rate for 20 years, the U.S. Treasury will make a one-time adjustment at original maturity (20th year) to make up the difference.

Is there any reasons to buy series EE instead of series I saving bonds?

Brokerage CD

Updated

Now I have 3 CDs from Countrywide Bank

1) 5.65% for 12 months.
2) 6.125% for 240 months
3) 6% for 240 months

I brought last 2 through Fidelity.

Despite recent drop of interest rate, I was able to put money into 2 CDs from Countrywide Bank with pretty high interest rate.

1) 5.65% for 12 months.

2) 6.125% for 240 months.

The second is a brokerage CD which is certificate of deposit sold for the bank (Countrywide Bank) by a broker (Fidelity).

However, this CD is callable after 12 months.

If the interest rate drops further in next year, Countrywide Bank probably will call this CD.

Personal recession

By Liz Pulliam Weston

You may feel increasingly squeezed even while your income or assets are growing. Or you might think you're doing fine when your economic foundations are being eroded underneath you.

Liz Weston looks at three important indicators on your personal finances -- your real income (and how far it goes), your net worth and your economic prospects.

If you're not doing well in at least two of these three areas, you're in danger of sliding backward in your journey.

Make some moves now to make sure that doesn't happen.

Is your real income rising or falling?

If you're not making at least 2% more than you were last year, you're not keeping up with the general rate of inflation.

Even if your overall wages are growing, you might still be feeling a pinch.

The most likely culprits are health care, energy costs and food.

All are 4% to 5% higher than a year ago. The more of your budget that is spent on these expenses, the more you're likely to feel as if you're losing ground.

How's your net worth?

Ideally, your net worth is higher now than it was last year. But it might not be.

Your home's value may have slid, your investments may have faltered or you may have added new debt.

A one-year drop in net worth isn't necessarily a crisis, but you should have a plan to start building your wealth.

Possible economic fixes:

Pay down your debt

Increase your contributions.

Build your savings.

Now it's time to look at the final piece of the puzzle: your economic prospects.

How's your future look?

Is your company growing so fast it's bursting at the seams -- or did it just announce another round of layoffs?

If it's publicly traded, what do analysts say about its future, and how's the stock price doing? What are the prospects for your industry?

Now look closer to home.

How well-regarded are you within your company and within your industry?

Have you identified your next career step and determined how to get there?

Are you adding skills and people to your network of contacts, or are you hiding in your cubicle?

Investing strategy from Ric Edelman

From his new book "The Lies About Money"

1) Save regularly.

2) Hold your investments for very long periods.

3) Build a highly diversified portfolio.

4) Periodically rebalance that portfolio.

Investing by Bogleheads

Source: "The Bogleheads' Guide to Investing"

Before you start investing

1) Graduate from paycheck mentality to net worth mentality. It's not how much you make, it's how much you keep. However, in recent years, high-income earners have gotten much wealthier than low-income earners.

2) Pay off credit card and other high-interest debts because it's the highest, risk-free, tax-free return on your money that you can earn.

3) Establish an emergency fund and carry proper types and amount of insurance. Emergencies always showing up when you're least expected; and bad news usually come in threes.

Start to save early and invest regularly.

Estimate your retirement need. You can't reach your goal if you don't have a target.

Indexing via low-cost mutual funds is a strategy that will most likely outperform the vast majority of strategies in long term.

More on balanced money formula

Key messages

Keeping your must-haves down to 50% gives you flexibility

If your must-haves creep higher — say, to 70 or 80% — there just isn't much room to maneuver. There's no space for you to scale back, nowhere you can cut if you need to.

But if you can get by on 50% of your (after-tax) income, you have the flexibility to cut back on your spending whenever you need to. You are in control. You can manage an unexpected expense like a car accident or a leaky roof. You'll be okay if your boss cuts your hours.

Debt reduction is a kind of savings

The assertion is that when you're making extra (more than the minimum) payments on credit-card debt, personal loans, medical debts, and most other debts, you are actually decreasing future obligations, and thus increasing your potential for future cash flow.

Those additional debt payments now, in other words, make increased future saving possible. Thus any extra payments toward debt principal are grouped with Savings.

The authors recommend if you're carrying credit-card debt, personal loans, overdue bills — basically any debts other than mortgages, car loans, or student loans; the entire 20% of savings should go toward debt paydown each month.

Just do your best

If you can't save 20%, can you save 15%? If you can't get your Must-Haves down to 50%, can you get them down to 55%?

The balanced money formula

From the book "All Your Worth" by Elizabeth Warren & Amelia Warren Tyagi

How to allocate your after-tax incomes

Must-have - 50%

Wants - 30%

Savings - 20%

The lifetime savings plan

1. Save $1,000

2. Pay off debt

3. Build a 6-month security fund

4. Lifetime of wealth creation

a. Save for retirement

b. Pay off your house

c. Save for other dreams

This plan is very similar to Ramsey's baby steps

7 financial disastrous mistakes

By Liz Pulliam Weston of msn.com. (She wrote this article in last year.)

7 financial disastrous mistakes that people make:

1) Carrying large credit card debt

Carrying credit card balances is not the norm in America. More than half of U.S. households have no credit card debt, and only 7.2% carried balances of $10,000 or more.

However, the average credit card interest rate is about 13% - 14%; carrying any credit card debt is a big, red flag that you're living beyond your means. Paying off that debt should be a priority.

2) Letting fixed-living costs swell

If you've cut your spending to the bone and are still struggling, maybe you need to take a closer look at the bones -- that is, your basic living expenses.

Elizabeth Warren, a Harvard University bankruptcy expert and co-author of the personal finance book, "All Your Worth" , recommends that people's "must have" expenses total no more than 50% of their after-tax income. (Your after-tax income is basically your take-home pay, with any tax deductions like 401(k) contributions and health insurance premiums added back in.)

"Must haves" typically include:

Mortgage or rent
Utilities (including basic phone service)
Transportation (gas, car payment, car insurance)
Other insurance (life, health, property, disability)
Groceries
Child care
Minimum loan payments
Child support or other court-mandated payments

Recently, subprime mortgage becomes a main factor in the swelling of fixed-living cost.

Once you've trimmed the easier stuff, like utilities and groceries, you come to more agonizing decisions, such as finding cheaper child care, opting for less expensive housing or taking in a roommate. Alternatively you can look for ways to boost your income.

3) Using retirement savings to pay off debt

To raid IRAs or 401(k)s in order to pay off debt is

Incredibly expensive.

Penalties and taxes typically eat up 25% to 50% of such withdrawals, but even worse is the loss of future tax-deferred gains that money could have earned. You should figure each $1,000 you withdraw from a retirement account now will cost you at least $10,000 in lost retirement income. That assumes 8% average annual returns over 30 years, which is a reasonable long-term assumption for a balanced portfolio of stocks and bonds.

Often shortsighted.

Grabbing money from your retirement doesn't help you fix the problem that caused the debt in the first place, which is usually overspending.

Furthermore, money in retirement accounts can be protected if you end up filing for bankruptcy.

4) Using payday lenders

These lenders promise you a short-term loan, to be paid off when you get your next paycheck. But they charge you fees that are the equivalent of a 400% annual interest rate, or even more. Many people find when payday rolls around that they're not able to repay the loan, so they wind up rolling it over and incurring more fees.

5) Failing to have an emergency fund

Among the unemployed, the average time between jobs is around 17 weeks. Yet only about three in 10 U.S. households have liquid savings sufficient to last them even 12 weeks. Many either live paycheck to paycheck or have less than $1,000 in liquid savings.

Having a sufficient emergency fund can help you withstand all kinds of financial setbacks, from car trouble to losing your job.

Even if you're concentrating on other goals, like saving for retirement and paying down debt, you should keep at least $1,000 for emergency.

Keeping space open on your credit cards or home equity line of credit can be a temporary supplement to a real emergency fund, but as soon as you can you should give yourself a real cash cushion.

6) Using subprime mortgage to finance your house

The Center for Responsible Lending, a nonpartisan research group based in North Carolina, predicts that more than 18 percent of the people holding those subprimes loans will go into foreclosure in the next three to four years.

7) Trying to borrow your way out of debt

So many debtors are looking for a magic bullet in the form of a consolidation loan and think their problem is that they just haven't found the right one.

If you don't have home equity to tap, the debt consolidation loans available to you typically come with sky-high interest rates and hefty fees. Instead of getting you out of debt faster, they normally stretch out your loan term so that you wind up in debt much longer and pay a lot more in interest. Clearly, that's not the way to go.

Even if you do have lots of home equity, using it to pay off credit card debt is because, once again, you haven't fixed the problem that caused the overspending in the first place.

Often, the best option is to simply buckle down and pay off the cards, one by one. If you have good credit, you may be able to negotiate lower rates directly with your lenders. If not, and you're having trouble making progress on your debt, you might consider a debt management plan through a legitimate credit counselor.

If you're really drowning, and facing debts you can never repay, then bankruptcy might be the best of bad options. Filing bankruptcy is often unpleasant and expensive, but unlike real suicide, the damage isn't permanent.

Better yet, let's hope you can contain the damage to your finances before your situation gets that bad. Realizing how serious these seven missteps are can be the first step toward averting disaster, and getting yourself on the right financial path.

Personal finance websites from government

There are many websites on the personal finance from government, such as

Help for national banks customers from Office of the Comptroller of the Currency (OCC, it has a consumer help line 800-613-6743 too).

MyMoney.gov is the U.S. government's website dedicated to teaching all Americans the basics about financial education

IRS: Free Tax Return Preparation by volunteers

IRS: Free Federal Online Filing

The Federal Citizen Information Center provides the answer to questions about the Federal government and everyday consumer issues

Bankrate is not a governmental website, but

Financial literacy 2007 - financial education offer by Bankrate

Financial fire drill

Harvard Law Professor Elizabeth Warren is an expert on bankruptcy and is an outspoken critic of consumer lenders.

On this All Thing Considered interview, Warren argues that two-incomes families are at the greater financial risk than others.

A paradox

A middle-class lifestyle is increasingly out of reach for middle-class families, many of whom are going broke trying to attain it. And they generally need two incomes to make ends meet.

However, it's reliance on that second income (usually mom's) that's putting them in financial peril. By counting on two incomes to fund the basics of a middle-class lifestyle - including modest homes in safe neighborhoods with good schools and high-quality child care, preschool, after-school care, or college - families are without their safety nets.

Safety nets

A generation ago, if the sole breadwinner lost his (or her) job or became disabled, the family had a backup earner who could readily step into the workforce.

Today, families who hit a financial rock in the road often turn to credit cards, mortgage refinancing, and payday lenders - often at ballooning interest costs that drag families into a spiral of debt. More and more, bankruptcy becomes the only way out.

Financial fire drill

1) Can your family survive without the second income?

2) Can you downdrift the fixed expenses?

Don't stretch yourself to buy a house you can't afford.

3) What is your emergency backup plan?

- Protect what you value the most, such as family and home.

Warren encourages families to create a plan - savings to cover the mortgage payment for a few months, valuables to sell, a relative to move in with if circumstances dictate giving up the house - before disaster strikes and debt rages out of control.

Lastly, Warren really discourages families from using credits as safety nets.

Mail in rebates (MIR)

The good

Getting products at lower cost

The bad

Paperwork
Mail-in the resquest
Waiting

The ugly

Request denied
Request lost in the mail

Life's firsts

From wsj.com

1st job

-401(k) (to capture full company matching)
-Asset allocation - contact the company managing your 401(k) plan
-To make most of other benefits - seek fee-only planner for an hour or two
-Absent workplace health insurance, shop for high-deductible policy and combine with a Health Savings Account
-Debt-management - especially student loan and credit card
-Other saving / investing priorities - seek advice again from fee-only planner

1st family

-Buying 1st home, stick to what you can afford (30%)
-Budgeting
-Debt-management
-Operate finances together

1st child

-Life insurance
-consider term life
-Estate plan
-Planning for college - 529 plan and other options

Brokers banks

Fidelity Investments
- mySmart cash account
- 3.5% interest rate

Charles Schwab Corp
- Invest checking
- 4.25% interest rate

E*Trade Financial Corp
- MaxRate checking
- 3.25% interest rate ($5,000 in average monthly balances to qualify)

Do these high interests and other perks outweigh the hassles of switching from your local banks?

Direct deposit and automatic payments have made it trickier for consumers to move their primary checking account to another firm.

Rebalancing your portfolio annually

Source: When It Comes to Rebalancing, a Little Means a Lot By PAUL J. LIM of nytimes.com

Over the long term, stocks tend to outperform bonds.

If you have not rebalance your portfolio for several years, chances are that you probably have more exposure in stocks than you intended.

Moreover, you are probably overexposed to the most volatile types of stocks.

So some rebalancing may be better than no action at all.

Example of asset allocation

Over the last half-century, the worst one-year stretch for a portfolio of 60 percent stocks, 30 percent bonds and 10 percent cash was a loss of 24.1 percent. That occurred in the 12 months that ended in September 1974.

By comparison, the worst one-year loss for a more conservative mix — 40 percent stocks, 40 percent bonds and 20 percent cash — was just 15.5 percent during the same period.

Yet to achieve this lower risk, you would have to give up a decent amount of gains. The switch in asset allocation strategy would have reduced your average annual returns to 8.3 percent from 9.2 percent.

Rebalancing your portfolio once a year

Say you started investing at the end of 1984, in a portfolio consisting of 60 percent stocks, 30 percent bonds and 10 percent cash. And further assume that you never rebalanced this portfolio back to that 60-30-10 ratio. Instead, you let the market take your investments for a ride.

Through the end of June, this strategy would have earned an average annual gain of 11.1 percent since 1984.

Now, had you started in 1984 with the same strategy, but this time rebalanced your portfolio annually, you would have earned nearly as much on your investments: 10.7 percent a year, on average.

But at the same time, that portfolio would have been 18 percent less volatile, based on standard deviation.

The buffering effect of rebalancing might have been enough to let you sleep better at night.

More on rebalancing

Rebalancing is not just about resetting your mix of stocks and bonds. You should also consider periodically resetting the types of stocks you own.

For instance, over the last five years, many of the best-performing areas of the stock market have also been among the most volatile.

Those include the basic materials, telecommunications and technology sectors, all of which have a “beta” of more than 1.0. (Beta measures the tendency of an investment to go up or down, relative to the market — in this case the S&P 500 index. So a beta of more than 1 implies that if the S&P 500 were to rise or fall 5 percent, for example, that investment would rise or fall even further.)

On the other hand, two of the lowest beta sectors in the market — health care stocks, with a beta of 0.6, and consumer staples stocks, at 0.5 — have been the market’s worst performers over the past five years.

One way that investors might consider rebalancing the stock portion of their portfolios is to gravitate toward areas with lower volatility, like health care and consumer staples, while avoiding those highly volatile areas that have already done exceptionally well..

Another way to rebalance — without selling any holdings — is simply to take your new money and invest it in areas that many investors have ignored in recent years, like large-capitalization domestic growth stocks and stock funds. These may be worth buying now.

Turbulent market offers 6 lessons

GETTING GOING by JONATHAN CLEMENTS of wsj.com

1. GO MODERATELY WILD

No more than 5% of your portfolio should be in these fringe sectors such as emerging-market stocks, emerging-market debt, commodities, gold shares, high-yield junk bonds and real-estate investment trusts.

2. CHECK YOUR PULSE

Every investor should have exposure to the broad U.S. stock market, to high-quality U.S. bonds and to developed foreign stock markets. These three core holdings should probably account for 70% or 80% of your investment portfolio, and maybe more.

How you divvy up your money among these three core holdings will depend on your tolerance for risk and your need for returns. Think about what mix you can live with when markets turn volatile.

3. IT'S A BIG MARKET

At this juncture, blue-chip U.S. stocks may be one of the global stock market's most reasonably priced sectors. After all, the S&P 500 is trading below its March 2000 stock-market peak, while small-company stocks, emerging markets, REITs and other sectors have all posted impressive gains over the past seven years.

4. LOSE YOUR CONFIDENCE

Not only do we need to think about risk as well as reward, but also we shouldn't be nearly so confident in our predictive powers.

5. FUNDAMENTALS TRIUMPH

When investments are hot, it can seem like there's no limit to the possible gains. Yet there are always limits -- and economic fundamentals always win out in the end.

For instance, the broad market's share-price gains frequently outpace the economy's growth rate over the short run. But unless investors are willing to pay higher and higher price/earnings multiples for stocks, that can't go on forever.

6. WINNING TAKES TIME

The lesson: It's mighty tough to predict which sectors will shine and which will sink, so our best bet is to diversify broadly, never betting too heavily on any one investment.

Rules to grow rich by

Many articles on personal finance all seem to suggest these few rules to grow rich by :

- boost your earning power by work hard and educate yourself

You couldn't be rich if you can't make any money.

- live frugally, live below your means, and also live healthy too

- control your debts (mortgages, credit cards, and student loans)

- save 10% to 15% of your incomes for retirement, emergency reserve, and college education; in that order of priority

- asset allocate your investments, and defer taxes on your investment as long as possible

By the time you're in late 50s or early 60s, your household should have a net worth well over a million dollars

DETAILS

Retirement investments
- Financial planner
- 401(k)
- IRA
- Lifecycle funds
- Index funds
- Allocation of stocks & bonds

Real estates as an investment?
- TBD

College education savings
- 529 as soon as possible
- keep student loan debt to 1x of the annual income of your first job

Emergency reserve
- Start a "beginner" emergency fund as soon as possible
- Full emergency fund should be 3 - 6 months of living expenses

Mortgages
- Ensure you can afford the monthly payment
- The payment should not exceed 28% of your income

Money magazine's 25 rules to grow rich by

By Money.com

HOUSING

1. For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.

2. It’s worth refinancing your mortgage when you can cut your interest rate by at least one point.

3. Spend no more than two times of your income on a home. For a down payment, it’s best to come up with at least 20%.
Make absolute certain that you can afford the monthly payments, especially if the loan is adjustable-rate.

4. Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%.
If your monthly payments near the limit, consider re-financing the mortgage to longer term.

5. Never hire a roofer, driveway paver or chimney sweeper who is going door to door.

SAVING AND INVESTING

1. All else being equal, the best place to invest is a 401(k). Once you've earned the full company match, try to max out a Roth IRA.

2. To figure out what percentage of your money should be in stocks, subtract your age from 120. Consider lifecycle funds instead.

3. Invest no more than 10% of your portfolio in your company stock – or any single company’s stock, for that matter.

4. The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund and 0.6% for a U.S. bond fund.

5. Aim to build a retirement nest egg that is 25 times the annual investment income you need. So if you want $40,000 a year to supplement Social Security and a pension, you must save $1 million.
You could safety use 5% as the withdrawal rate.

6. If you don’t understand how an investment works, don’t buy it.

7. If you’re not saving 10% of your salary, you aren't saving enough.
Saving of 15% is needed for comfortable retirement.

8. Keep three months’ worth of living expenses in a money-market fund for emergencies. If you have kids or rely on one income, make it six months.
Emergencies are short term disabilities or loss of jobs.
The money-market fund may not has the highest interest rate.

9. Aim to accumulate enough money to pay for a third of your kids’ college costs. You can borrow the rest or cover it from your income.
Use today's college costs as guidelines. Aim to have a third or half coming from your savings and the rest should come from financial aids and your future incomes.
Consider 529 college savings plan for the savings.

PLANNING

1. You need to have enough life insurance to replace at least 5 years of your salary – as much as 10 years if you have several young children or significant debts.

2. When you buy insurance, choose the highest deductible you can afford. It’s the easiest way to lower your premium.

3. The best credit card is a no-fee rewards card that you pay in full every month. But if you carry a balance, high interest rates will wipe out the benefits.

4. The best way to improve your credit score is to pay bills on time and to borrow no more than 30% of your available credit.

5. Anyone who calls or e-mails you asking for your Social Security number or information about your bank or credit-card account is a scam artist.

SPENDING

1. The best way to save money on a car is to buy a late-model used car and drive it until it’s junk. A car loses 30% of its value in the first year.

2. Lease a new car or truck only if you plan to replace it within two or three years.
It is expensive to drive a leased car.

3. Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower.

4. Buy airline tickets early because the cheapest fares are snapped up first. Most seats go on sale 11 months in advance.

5. Don’t redeem frequent-flier miles unless you can get more than a dollar’s worth of air fare or other stuff for every 100 miles you spend.

6. When you shop for electronics, don’t pay for an extended warranty. One exception: It’s a laptop and the warranty is from the manufacturer.

Mortgages are a double-edged sword

Source: JONATHAN CLEMENTS of wsj.com

Mortgages are the cheapest money you will ever borrow. But if you took out a big loan that you can't afford, and are falling behind on you payments; you may lose your homes to foreclosure.

Playing the spread

If you need to borrow, you couldn't do better than a home loan, especially the adjustable-rate loan which monthly payment is often lower than the payment of fixed-rate loan.

Not only are interest rates typically lower than other types of loan, but the mortgage interest is usually tax deductible. To get a mortgage, you need to own a home or agree to buy one. But once you have that debt, the effect is to leverage all your assets. That can be highly profitable.

Suppose you have $300,000 in stocks and you want to buy a $300,000 home. You could sell your stocks and pay cash for the house. But you will likely fare better by putting, say, $100,000 of your stock money toward the house and funding the rest with a $200,000 mortgage.

Result: You control $500,000 of stocks and real estate, 40% of which ($200,000) was bought with borrowed money. As long as your assets generate higher returns than your mortgage rate, the leverage is working in your favor.

On one end, some are missing the boat

Many homeowners, however, are striving to pay down their fixed-rate mortgage quickly. Sometime they also are reducing their contributions to their employer's 401(k) or 403(b) plan.

That means these people are missing out on their 401(k)'s initial tax deduction and tax-deferred investment growth. That combination should easily outpace the interest expense they save by paying down their mortgage.

Throw in a matching employer contribution, and the 401(k) would be even more compelling.

Similarly, you could probably improve returns by taking money earmarked for extra mortgage payments and using it to fund an individual retirement account or to buy stocks in a taxable account.

Still, prepaying a mortgage can be attractive, especially if the alternative is to purchase bonds or money-market funds in a taxable account. The mortgage's after-tax interest cost is likely higher than the after-tax yield on these conservative investments.

On the other end, some are unraveling fast

Like the idea of supercharging your returns with low-cost leverage? Carry a mortgage of $300,000 for the house and you will be in control $600,000 of stocks and real estate.

But, before you take out such hefty home loan, make absolutely sure you can handle the monthly payments. Especially if you're getting an adjustable-rate loan to keep the initial mothly payments low.

Indeed, that's why I (Clements) get nervous when experts advocate getting the largest mortgage possible or recommend re-mortgaging a house to buy stocks or cash-value life insurance.

However, if the interest rate rise, you may not able to afford the larger monthly payments; things can unravel fast.

Now, if you have other savings, you could pay off a chunk of your mortgage. That should lower your monthly payment next time your mortgage rate resets.