Find us on Google+ My Sensible Cent: August 2012

Friday, August 31, 2012

The Most Importnat Investment Advice For The Newlywed

I have repeatedly discussed stocks, bonds, annuities and 401 (k) as my favorite investment topics. Unfortunately however, for the newlyweds, the most important investing topic is none of those – it is debt.
Debt is the exact opposite of investment. Investment involves passing over your hard earned cash to someone else to use it for their own business and hope for some return. But when you borrow money, someone is investing in you.
That, however, does not mean that all debt is bad. Once in a while you will find yourself in need of cash and the only viable option will be to borrow. Nevertheless, mixing debt and investment is the worst blunder you can do (with a few exceptions), especially if you are newlywed.
It is, therefore, not surprising that most financial advisers for newlyweds argue that debt and bad spending habits can ruin your new marriage. Let’s assume you or your bride/bridegroom to be has a student loan that charges 6.8 percent interest, which is the current rate for unsubsidized Federal Stafford Loan. Servicing this loan is the almost equivalent to earning 6.8% on risk free investment (the effective rate is slightly lower due to tax deduction on the interest).
Now, what’s the most you can earn on a risk-free-investment? Roughly 2.25% on a five-year CD (Certificate of Deposit) rate. The same goes for car loans and credit card debts. It is not logical to start investing in bonds and stocks when you can get a guaranteed risk-free return by simply paying the debt.
Most couples find it stressful to discuss their debts, partly because it is always printed out in black and white and is clearly visible for anyone who has eyes. It is also painful but obvious whose debt is bigger and (for peace in the house) that’s not a contest you would want to participate.
Probably, by now, you and your fiancé already know your debt situation, but if not, now is the perfect time to discuss how you will conspire to wipe it out.
Oh, and put aside some emergency fund, too.
A few Exceptions to the “Pay off Debt First” Rule
Having coughed out the unpleasantness of debts, let’s now discuss a couple of reasons why you may still want to proceed and start investing - even before you clear your debts.
To get the 401(k) Match: If your employer is offering you a 401(k), take it without looking back. Even if you have high interest debts, turning down a 401(k) match would be akin to turning down raise. I plead with you not to do that.
Consider Your Mortgage Attitude: This one is now one for debate. If you want to buy a house some people (me included) would contend that should first embark on paying off your mortgage loan and neglect investing – at least for some time. Others will also give you an exact opposite advice: Mortgage rates keep going low, you can therefore refinance when they go even lower and you will likely earn higher return on your investment (RIO) than the interest you pay on mortgage.
You should sit down with your fiancĂ© and come up with a plan which suits you. If you settle on the “pay it down” option then you may consider a 15 year fixed-rate mortgage plan. You will get a low interest rate and compel yourself to pay down the loan quick.
Look out for my next post on Advance move for newlyweds. 

Sunday, August 26, 2012

When Should I Start Investing?

My Sundays are always occupied by a hell of activities and therefore, today wasn’t any different. Given that Saturday night is “Movie Night” waking up on Sunday morning is usually a big task. However, being ‘staunch” church goers, everyone in the family made it up by 10 am. My 10 am alarm was a bitter reminder that the day had just broken and so I woke up to face my most boring day – Sunday. As usual our mass takes 2 hours and so means by 1.00 pm we are through. Mass is somewhat a boring session for young people but we rarely have a choice. What about following that with a 3 to 4 hour shopping? Pushing the trolley behind your mum/dad as they collect this and that meant to be used in the house?
Despite the many boring activities which fill up my Sundays, it still remains a day I look forward to. Sunday is the only day I get to sit with my dad to ask him question pertaining to investment, family life and employment. This usually happens shortly after shopping, mostly in restaurants, as we gulp a few bottles of sodas. This is the only time we have a father-son chat as the ladies (mum and sis) are busy in the saloon.
Today my dad whispered something into my years. I didn’t get it at first and wondered why he had to whisper it, in the first place. “You should start investing almost immediately….” he repeated upon request. These words stuck me hard; I have only just landed my first employment two months ago and know investment will follow – but not now, of course.
Perhaps you have been asking the question: “when should I start investing?” but, as is expected, have not yet settle on a satisfactory answer.  We are definitely not alone.  Most individuals push investment to the back burner simply because they aren’t sure of when, where or how to initiate the process of building their nest-egg.
As a matter of fact, many people want to start building their investment portfolio, but just aren’t ready to take the plunge. Even if they were ready; they lack the knowledge of where to start. In this post, I am going to focus on the readiness question.
The most apparent answers
People are often reluctant to tie up their money in long term investment until they have accomplished a couple of milestones.
  1. High interest debt is paid off: You first priority should be to get rid of your high interest consumer debt before embarking on investment. Some debts are just annoying like the student loan and mortgages. If possible, put your investment plans on hold and clear these loans first.
  2. Building Liquid savings Buffer: It is very important to have some money set aside for use in times of need. Therefore, make sure you have enough money saved in a high interest paying savings account before you start investing.
Apart from emergency savings and debt reduction, there other several factors which may influence your investment decisions.
Other important factors to look into:
  • Job status: Is your current job stable enough? If you have a stable job, a solid savings and zero (or near zero) high interest debt, then you can start thinking of locking some of your income in your retirement plan. If your job situation is still shaky and you may face the axe any moment, you would rather stash more backup funds into your savings account.
  •    Age: There is no precise age to start building your nest-egg. However, the sooner you start the better. Having said that you need to get a stable job, pay all your debts and even have adequate liquid cash in your savings account before you start investing; my argument on age may sound like a contradiction. It is not. If you can satisfy all these pre-requisite conditions, then start investing “almost immediately”. Starting early will help you take advantage of compounding.
  •   Children: Having children may tempt you into saving for their education. However, this shouldn’t come ahead of investing or retirement savings. Consider remitting 15% of your monthly income into your retirement scheme before you start saving for children education.
  • Insurance policies: It is vital to have the proper type of insurance at each stage of our lives. Our investment decision should not be made without balancing the investment strategy with an insurance coverage appropriate to our situation. Disability insurance health insurance, life insurance cover and long-term cover are all important and should be considered together with the decision to invest.
  • Marital Status: My dad’s argument was that it is good to start investing before I get married as this protect me from the “wastefulness”. Women are known for their addiction to spending, sometimes unnecessarily. The old man therefore sees them as a distraction from achieving lifelong investment goals. However, I feel investment decision is a tricky one and therefore you may need a second sound mind to help you through. This does not mean that you should wait till you marry to invest. If you have your better half and you are considering starting any kind of investment, it is better to involve them.
In conclusion
While there are numerous other factors to put into consideration before you start investing, the list above can act as a good foundation and help you start in the right direction.
Making financial decisions require sound reasoning and cautious movement. Always ask questions and consider as many influencing factors as possible. If necessary, consult a professional.

Thursday, August 23, 2012

Planning your Retirement: The Three Killer Investment Myths to Avoid

Definitely, I don’t know anything about you or what takes most of your time, but I personally spend a bit of time a day planning my retirement. I seriously do.
I dedicate a good number of hours each day to settle on where on this earth I should build my dream beach bungalow. How minutes, hours or even days I will spend surfing against the waves versus the time I will spend idling or sitting in a pub, pretending I can.
How often I will come back to Kenya. That’s if I will come back to Kenya. Whether I would buy an old beat-up Vitz, or just walk the dusty streets of Kampala, Uganda. You definitely know what’s important here.
You may think am crazy….. especially, at this point in time when we are facing the worst bear market of our lifetime.  
In fact your next suggestion or ‘advice’ for that matter would be that I should wake up, stop day dreaming about retirement. I am only in late 20s, that’s time to dust my resume and continue working.
From the analysis of the stock market Warren Buffet noticed that despite the major problems the U.S economy faced in the 20th century: the two world wars, dozens of recessions, a flu epidemic, and oil shocks; the Dow went up from 66 to 11,497. In fact this observation still holds today and is what Warren used to make his investment decision. He believed that stocks will usually grow your money in the long run. His investment motto was “buy a good stock and hold on to it as long as possible”.  
I know most investors would want to think like Warren Buffet or act like him at times – which is not bad at all. Unfortunately, however, some of us do not have the 10, 15 or so years before retirement. In this case it will be tricky holding on to Buffets advice on investment – I would straight away suggest that you be quick to think of your retirement plans.
But for those of us who still have 10, 15, or 50 years before retirement, you should follow Buffet’s lead and search for these great businesses with powerful moats, selling at competitive prices.
Whatever you choose to do, do not fall prey of any of the following investment myths which have kept people away from their dreams:
Myth 1: It is too early to Start Saving for Your Retirement Plan
Too early to invest into your retirement plan? Hogwash! Imagine Tiger Woods waiting until he is 35 to swing his first golf club or Serena Williams waiting for her first forehand touch at a mature age, possibly 24. Would we be having these two stars now? These two players made it big on the international scene by making the first leap ahead of others and never looking back. Golf has always been known to be the old man’s game – at least in this part of the world. This same belief is held by many whenever they think about planning for retirement.
Back to investment, it is more of a coincidence that Warren Buffet started investing at the age of 11. Does it mean that he did his first investment at quite young age and continued practicing everyday so as to become the most successful investor? I don’t think so.
Then what is the trick? May be avoiding myth no. 2 may help.
Myth 2: The “I can’t Beat Serena Williams” Syndrome
If you have watched Tennis tournaments in the past decade or even in the just concluded 2012 London Olympic then you will certainly believe that no one can beat Serena Williams, not even Maria Sharapova. Likewise, beating Woods on a cool Sunday or otherwise is certainly impossible.
Moreover, it is against all odds that any of us will be a better investor than Warren Buffet. Nor is it likely that we will one day brag of how early we got in and rode to success.
So what? Just because I can’t beat Serena doesn’t mean years of practice, persistence and dedication won’t turn me into a good tennis player or that practicing how to hit the bucket on a daily basis won’t improve my drive.
Similarly, the fact that you can’t match Buffet’s investment success or wealth doesn’t mean you shouldn’t follow his investment style - finding and buying the stocks of those great companies which are selling at lower price.  Unfortunately, most investors think their life changing investment option will only come in through getting an early venture into the next Dell or Sun Microsystems.
Myth 3: It is hard to plan for Retirement
One final thing which holds prospecting investors from achieving their dream goals is the same thing which should help them achieve it – hard work.
There is no source to quote here, but I will be a liar if I’m to tell you that planning for retirement or making any investment is easy. But you will have to commit yourself to this course and make investing a priority today. You may just realize that it is much easier than it would have been.
It is never too late to plan for your retirement or start any form of investment. The earlier you start the better. So start now when there is still time and work hard to make this investment count.