FINANCIAL FITNESS - how to stay healthy with your personal finances
No. 1
Welcome to the inaugural FINANCIAL FITNESS column which is intended to help you understand, get excited about and get you started on planning your financial future. We all know that a key to physical fitness is exercise. The same can be said for financial fitness. Exercising your financial muscles by constant reps will strengthen your personal knowledge and freedom.
I agreed at our last SOAAP planning conference, in Houston, to share what little I know about planning for financial security. Based on the latest report published by Ariel Capital and Charles Schwab, African Americans are trailing the rest of the nation in many areas of financial acumen, including saving, knowledge of, and preparing for retirement. My hope is to inform and excite you about the possibilities for overcoming these huddles and enjoying the freedom each of us so rightfully deserve as citizens of the richest nation in the world. I promise to keep it brief and insightful in future columns. We will cover a broad array of financial topics to make you are smarter and therefore sharper about how, where and when to invest your money. Look forward to learning something about such exciting topics as TVM, NPV, ROI, compound interest, rule of 72, asset allocation, LIBOR and EFT to name just a few.
Remember, each of us controls our own destiny. Start by tithing ten percent of your gross salary to yourself each pay period. We'll talk in the next column about what that can mean to you in the future.
Good luck on achieving this initial goal and happy savings and remember I am not available for individual investment advice, only here to introduce you to an array of investment terms and concepts.
Bob Howard
President/CEO Boys & Girls Clubs of Chicago
bhoward@bgcc.org
FINANCIAL FITNESS - how to stay healthy with your personal finances
No. 2
Happy 2nd Quarter. Last Quarter, I promised I would share some common information that all folks who end up with extremely huge net worth's know. We all know that net worth equals assets minus liabilities. The greater the number is on the positive side the wealthier you are. This rule is constant. It doesn't matter if you are Bill Gates, or Bob Howard, your long-term goal should be to maximize your positive net worth. Here's a big surprise. It's very simple to develop a positive net worth. It's like dieting. If you stick with it you'll lose weight. If you save 10% of your salary each week, I guarantee you will have a six-figure savings account at the end of twenty years. Here is how it works.
If you make $500 a week and you save $50 in your Boys & Girls Club 401K, this is what your financial future will look like:
- There is no tax until you take out the money during retirement. So you have $2,600 per year for 20 years. Assume the average of the Standard & Poor's 500 over the 20 years of 10%, you will have $166,434.32. Not bad! As Albert Einstein once said, "Compound interest is the most important formula in the world."
- Couple this savings with your organization's contribution to your pension plan (say 5% of your salary) and you will have a tidy little nest of approximately ($166,434.32 – your savings and $74,457.50 – from your organization over twenty years = $240,891.82). Again, not bad!
- These calculations assume no increase in the organization's or your own contribution over the 20 year period, which you know is not true.
- It's important that this nest egg remains untouched over the savings period. But, I don't think it is rocket science to see that like healthy living, healthy financial planning pays off in the long run.
Good luck on achieving this initial goal and happy savings and remember I am not available for individual investment advice, only here to introduce you to an array of investment terms and concepts.
Bob Howard
CPO-Chicago
FINANCIAL FITNESS - How to stay healthy with your personal finances
No. 3
Okay gang, I apologize that I skipped my letter for the 3rd quarter, 2008. Many of you know I was busy preparing for retirement. This preparation was coupled with a crazy time in the financial community, with the stock market dropping 40% and credit markets tightening. These two things, along with many others, helped push our new President-elect Barack Obama on to victory in the general election.
What does this all mean to common folks like us? Think about it, if you had $10,000 in your 401k pre-meltdown, it's now worth about $6,000. After we take a breath and come down from the ledge, we all can learn a couple of lessons from this calamity.
- THE MARKET GOES UP AND THE MARKET GOES DOWN. However, in the long run the market has about an 8%-10% growth rate. Remember, if you have experienced a growth rate over three years of 25% per year and the fourth year the market drops 30% your average is still about 11%. When investing in the market, we must "take the good with the bad."
- ASSET ALLOCATION. Understanding this concept is important. Basically, this means, don't put all your eggs in one basket. Investing 100% in stocks or 100% in bonds is not a good strategy. I would have been devastated if I retired with a 100% stock portfolio. One rule of thumb is to have at least your age in fixed income bonds or CD's. If you are 30 years old you need to have 30% in bonds and 70% in equities. This gives you some protection when the market dips. You will also have time on your side to recuperate when the market dips as it did in the 3rd quarter. There are two strong elements you should always consider when structuring the asset allocation of your portfolio; compound interest and time. These are the two most powerful variables in that equation.
- INCOME AVERAGING. You should continue to contribute to your 401k. Just put the new money in bonds during these tough times. Another thing to consider is to flip your allocation until you feel comfortable with the market. However, don't forget to take the tax consequences into consideration, e.g. see your accountant first. Also remember the good news about a down market is you can buy stocks at a very cheap price, (This is the income averaging concept). The bottom line is, you get more bang for your buck
Watch the market by reading the business section of the newspaper or on-line every day to get a sense of the trending direction of the Dow Jones Industrial Average and S&P 500, (research the definition of these two averages if you are not familiar with them). Get to know someone that is knowledgeable about investments and ask their opinion. But remember, you are always the ultimate decider.
This crisis will pass just like others. By taking the long view, you are likely to be more financially secure when you reach retirement so you can weather any storm. I lost some market value early in the 3rd quarter, and then I shifted the equity portion of my portfolio to money market funds. I am retired so I needed to play it safe. In the words of the now infamous Sarah Palin, "You betcha", I feel more secure now. Many of you have lost so much of your equity you may want to consider staying invested in that piece until the market comes back.
A reminder: this is not financial advice but financial information and the examples are hypothetical.
Good luck and stay invested. This is the only way to have high network years from now. In the short term, watch your spending over the holidays. This will allow you to have as I wish all of you, a Happy Holiday Season. I will talk with you again in the 1st quarter.
Bob Howard-the Lou Danztler Chair of SOAAP
FINANCIAL FITNESS - How to stay healthy with your personal finances
No. 4
Happy New Year-this is the year of Obama. Yes it's a new day, with the first Black President of the United States. I had the good fortune to attend the inauguration and it was awesome. Sure there were a few glitches but overall the atmosphere was great and the mood of the people was super positive. With this as a back drop, 2009 should be the year that each of us pay close attention to breaking financial news and our personal financial situations. President Obama and the Congress will be moving to shore up our economy and many of these policies will impact each of us, e.g. changing the saving and withdrawal guidelines on 401k accounts. New laws to insure money market funds with FDIC-like insurance laws are also on the horizon. Expect to see different rules for mortgages, tax law changes and many other rule changes. For example, the current rate for mortgages is around 5% at the time of writing this article. This means that a $100,000 mortgage holder could save about $200 per month if they refinance a 6.25% mortgage. This is easy money. Even I am going to take advantage of this refinancing opportunity. But, you can only benefit from these lower rates if you have good credit.
So, it's also a good time to become better educated about credit card debt. The rules are changing in this arena as well. Credit card companies are raising the interest rates on their cards and shortening the time frame before your payment is past due. Read those credit card announcements closely when you get them in the mail. It may be time to pay down a major portion of your credit card debt. At least take advantage of the free annual credit report to see what it takes to improve your score, (Google Equifax, Experian or Trans Union websites and follow the instructions.) You will also be able to see which companies report on your credit history. You should make sure your payments are always on time with these companies even if it’s just the minimum amount. You should also make sure your credit card companies include your line of credit (LOC) limit, when reporting and not just your outstanding balance. If they only report outstanding balances it makes your report look like you have exhausted your LOC. If you have a good history of monthly payments, feel empowered to call your credit card company and ask for a lower interest rate. This is done all the time. They want your business.
The following website can help you as you crystallize your personal financial literacy and take advantage of impending rule changes.
www.mymoney.gov
Remember it pays to spend about one to two hours per week on improving your financial literacy, home budgeting and other personal financial planning. These days what you don’t know can hurt you! Finally, my variation on an old saying is, if you don’t have a plan for where you are going any road may not get you there.
Have a safe and prosperous 2009 and always pay yourself first. A reminder: this is not financial advice but financial information and the examples are hypothetical. I am not available for individual investment advice, only here to introduce you to an array of investment terms and concepts.
Robert (Bob) Howard
Retired CPO-Chicago
Current Lou Dantzler Chair for Management, Youth and Parental Programs-SOAAP