Browsing Category: "Financial Planning"
The 2008 Economic Stimulus Package
If you're new here, you may want to subscribe to my RSS feed so you don't miss anything. Thanks for visiting!
Looks like the economic stimulation package is going to pass through Congress. So this may leave you with a few questions: 1. How much do I get? and 2. What am I going to spend it on?
I can’t tell you what to spend it on, but if you want to get an idea of how much you might receive I found
The stimulus package does more than rebates.
The Package:
- To address the mortgage crisis, the package raises the limit on Federal Housing Administration loans from $362,000 to as high as $729,750 in expensive areas, allowing more subprime mortgage holders to refinance into federally insured loans.
- For consumers, up to $1,200/family
- The package would allow businesses to immediately write off 50 percent of purchases of plants and other capital equipment and permit small businesses to write off additional purchases of equipment.
Notably Absent:
- No extension of unemployment benefits.
- Removal of ability of businesses incurring losses now to reclaim taxes paid in past years.
There are a few things that concern me. The rebate is slated to be 1% of our GDP. Now I really doubt that it will move the economy much. In fact most of our consumption is on foreign goods. Of course our economy is 60% services so a good chunk would get spent on domestic services. In any case I think it to be inefficient.
Another concern I have is the cost - $100 billion. Putting cash in the hands of consumers is not what I consider a stimulus. It is irresponsible at best. What really stimulates the economy is investment in capital goods. The 50% capital equipment writeoff is a good start, but I think more targeted tax cuts would do a better job then giving away cash to consumers. This is a stop-gap measure that at best will have a very short-term effect of delaying a recession or at best provide a few quarters of flat growth.
You’re Not So Special - Affinity Marketing
I was recently going through my junk mail and I came across an affinity offer for my wife to buy life insurance with a “discount” for being a member of a medical association. This gave me a great post idea.
A Good Deal?
Looks like a nice offer. “Rates just lowered an average of 30%!” Wow! I better look at this closer. The offer is for a 10 year term life policy on a 27 yr old female. I quickly found a few problems with the affinity “special” offer.
Overpriced
I did a quick search and came across an insurance subsidiary of GE that sold term life. Below are the prices I found.
$100,000 policy - $7.18/month or 25% less than this “special” offer of $9.66/month
Wholesale Coverage at Retail Prices?
Another thing that struck me about this offer is that to go from $50,000 coverage to $100,000 or double coverage, the premium went up by 3x.
There is a baseline cost of doing business or writing an insurance policy. As such, the larget the policy the premium per dollar coverage. With GE I found the premiums to be:
- $100,000 - $7.18/month, 7.18 cents/$1000 coverage
- $250,000 - $10.50/month, 4.20 cents/$1000 coverage
- $500,000 - $16.63/month, 3.33 cents/$1000 coverage
- $1,000,000 - $28.83/month, 2.89 cents/$1000 coverage
Click the image above for the full cost schedule
The above should be the norm. Think of it as wholesale prices. Whether you buy $100K of policy or $1 million, the insurance company has to have an underwriter and agent write your policy and enter it into the system. There is not much difference to the insurance company in costs. Therefore, it is cheaper per dollar coverage for the insurance company. According to this offer it looks like they are offering wholesale coverage at retail prices. That’s not how it normally works.
You’re not so “special”
Affinity offers tend to appeal to an individuals need to feel special. If you are a member of the Bar Association, or the American Kennel Club, or the American Medical Association, or any other association you will likely get an affinity offer. These offers want you to feel special for being in your group. In effect they are banking that you will feel that you received a “special” offer and take the bait. With very little research you can usually find better deals. Sometimes you will find the affinity deals to be better, but do your research before you start feeling special.
This offer did have one thing right - “Send No Money”. Don’t worry, I won’t.
The Rule of 72, 114, 144
I am more aggressive with my investments since I day trade in addition to investing in alternative investments. I’m either lucky over 10 years or I’m good. Either way my broker is happy for it.
As an aggressive trader, I always plug away at numbers in my head. I’m almost ashamed to say I have a calculator by my bed. One of the things I always keep my eye on is how fast my money is growing. Also I estimate from time to time how long some of my risk capital will double, triple, or even quadruple. To do so, you don’t have to have 99.99% accuracy. That’s where the “Rules” come in.
The Rule of 72
You may be familiar with the Rule of 72. This formula can be used to estimate how long it will take to double your money based on an interest rate.
Example:
You expect to get an 8% return on your money. How long would it take to double your money based on that interest rate? To estimate, simply divide 72 by 8 and you will get 9 years.
The formula is fairly accurate for estimating.
| Interest Rate | Period to Double |
|---|---|
| 4% | 18.0 years |
| 5% | 14.4 years |
| 6% | 12.0 years |
| 7% | 10.3 years |
| 8% | 9.0 years |
| 9% | 8.0 years |
| 10% | 7.2 years |
The formula is most accurate between 5 and 9 percent. Above and below it is less accurate, but still useful for estimation.
The Rule of 114
The Rule of 72 is great for estimating how long it takes to double your money, but what if you are more ambitious and want to triple it? That’s when the Rule of 114 comes in. Divide 114 by your expected interest rate. Using the 8% return figure from the first example, we would calculate it as 114 / 8 = 14.25 years.
| Interest Rate | Period to Triple |
|---|---|
| 6% | 19.0 years |
| 8% | 14.3 years |
| 10% | 11.4 years |
| 12% | 9.5 years |
The Rule of 144
To estimate how long it will take to quadruple your money, you can use the Rule of 144.
| Interest Rate | Period to Quadruple |
|---|---|
| 6% | 24.0 years |
| 8% | 18.0 years |
| 10% | 14.4 years |
| 12% | 12.0 years |
Time Value of Money
These 3 rules underscore the concept of the Time Value of Money. Time value of money simply states that money received today is worth more than the same amount received in the future. The core principle of finance holds that if money can earn interest, an amount of money is worth more the sooner it is received. The current value is called Present Value or Present Discounted Value.
Time Value of Money is useful for financial planning for things such as retirement and college financing. If you remember anything remember, a dollar today is worth more than a dollar tomorrow.
The First Million is the Hardest - No Really
A penny saved is a penny earned or so Ben Franklin said. Well it is true especially for your next million. If you have ever felt like it takes forever to build up your large nest egg you’re right. It is due to the time value of money. The earlier you save, the better off you are assuming you keep that money working for you. Looking at the above chart, if you saved $1,000/month and earned 10%/year for 22.4 years, you’d have your nest egg grow to $1 million. To get to your next million it would only take 6.4 years.
While 22.4 years may seem like a long time, it shows that it is possible to become a millionaire without inheriting or winning the lotto. If you’re like me you don’t want to wait 22.4 years. So here’s what you need to do now.
- Realize that $1 million 22.4 years from now is not the same as $1 million today. Inflation will bite into your spending power.
- Try to earn more. As you can see earning more interest sooner will get your there faster. For example earning 11% vs 8% will get you to $1 million 3.3 years faster.
- Earn it sooner rather than later. Don’t have a savings plan where you contribute $12K at the end of the year and invest it. Contribute it monthly to your investments or if you can put more up front and defer expenses until later in the year, you’ll be better off. In the above chart one thing is apparent. Your first million works hard for you to get to the second million. The same holds true for the first dollar you save and invest. Save early and invest early.
- Don’t let money sit around. By sitting around, I mean don’t let it sit in an account earning 1% in a checking account. Look around. There are many options such as online money market accounts such as Everbank and HSBC. Direct deposit your paycheck into a high-interest account. If you prefer the convenience of local banks, then just setup an automatic monthly transfer to your brick and mortar bank. That’s what I do.
- Know where you stand. I highly recommend using some personal finance software such as Intuit’s Quicken or MS Money. There are also online tools such as NetworthIQ that help you track your networth and compare against others to see how well you’re doing. They also have good tips on how to achieve your goals.
- Lastly - Believe you can do it and be disciplined. For every person that says you can do it, you will find a hundred that will tell you you can’t, and another thousand that will say you’re crazy. Look at the chart above. It is doable. Keep your eye on your goal and don’t lose sight of it.
Nest Egg Score from A G Edwards
Though full-service brokers charge a lot for their services, they do a good job of marketing their product and educating their potential clients about their financial needs. Before you start planning the future it is important to understand where you stand now. A.G.Edwards has a simple quiz that will give you an idea of your nest egg.
My results were “excellent” which means I’m “done an outstanding job of building your nest egg up to this point in your life”. I always look at what is the max score I can get. On this scale the max is 850. I scored well, but I’m still disappointed I didn’t score higher. My guess is I’d need a much higher income to reach the 800’s.
The results give you an idea of where you stand relative to the National Score and also provides some tips on how to improve your financial situation.
Here are a few canned suggestions I was given:
1. Continue to manage debt. .
2. Maximize your retirement contributions.
3. Consider your other financial goals.
4. Review your investment mix.
5. Create or review your estate plan.
The tips to further improve are quite generic, but are good in general. Each tips has more detail and usually recommends talking to a financial advisor or using some other A.G.Edwards tool. Not surprising since the goal is to get new clients.
Try it out and see where you stand. There are 14 questions and takes a few minutes to complete.
Get your A.G. Edwards Nest Egg Score
