Tag Archives: history

What is Personal Finance

What is personal finance? And Why does it matter?

Those are two very interesting and important questions to ask as one either begins their life as adults, or begins asking questions they’ve never approached before. For the past five months or so, this blog has predominantly been centered around personal finance, both the investing side, as well as the money management side.

I didn’t realize that before I choose to continue this journey with you all, I should probably take a moment to explain what Personal finance actually is. Personal finance clearly deals with how individuals manage their money.

While the topic briefly touches on the analysis and performance of businesses and organizations for investment purposes, it predominantly centers around the individuals’ approach to managing each dollar in and each dollar out.

Personal finance answers questions like:

What are my financial goals? What use do I have for money? What should my investment approach be? How much do I need to be saving? How large should my house purchase be? Should I buy this trinket or save the money?

Many of these questions are simply answered through quiet reflection or by asking your friends and family for feedback. However, some of these more complex questions like how to invest your money, or how to craft a financial plan can often be better answered by a financial advisor.

Why does personal finance matter? 

There are three basic reasons why you should pay attention to your finances:

1. Money has impact

2. Money can be complicated

3. Money is emotional

While we of course don’t have the time to go into the details of Personal Finance in one blog post, I hope this gives you a great picture of what this topic is all about.

Meeting A Different Donald: Real Estate and Ways to Invest

Most people, if not almost everyone, has heard of Donald Trump. As the 45th president of the United States, he has been a real estate developer and the previous host of the Apprentice show.

But have you heard of Donald Bren? He grew up as the son of two relatively successful parents. His father was a movie producer and real estate developer like him. His mother was a civic leader. After majoring in Economics and Business a the University of Washington, Bren attempted at Skiing in the Olympics but had to quit due to an injury. In addition, Bren became an Officer in the U.S. marine Corps.

After that he took a $10,000 loan out in 1958, he began developing and flipping homes until he had built up a business which he sold. He started another one, sold it, and then took the proceeds to buy a third stake in the Irvine Company. He eventually bought the outstanding ownership and now has a net worth of over $16 Billion.

Donald Bren took one path to real estate. But there are others. I want to briefly cover the three main ways you can approach real estate investing.

1. Direct Investment

A direct investment in real estate, like what Donald Bren did, involves purchasing property either directly or through a business entity. Either you focus on property appreciation, resale, or cashflow. With these metrics in mind, you seek to partner with others to produce above-average returns over the long-term. This is what Bren did.

2. Indirect Investment

The second, more modern way to invest in real estate is less direct. With an indirect investment you buy a company that invests in real estate. Usually this is either a REIT (real estate investment trust) or some sort of real estate syndication.

3. Hybrid

The last option is some sort of mix. It involves partnering with others so that you own the real estate but you don’t necessarily control management of it directly. An example might be a partnership between a handful of people in which you own, say, 20% of the upfront investment. You put a shared investment with say, 2 other people. One person is in charge of management, and the other two people sit passively by but provide the capital.

A hybrid between direct and indirect is usually less risky but also less financially rewarding if your investment becomes a success.

Conclusion:

Part of investing in real estate is understanding yourself. How much involvement do you want? Often the answer is not much, but for those adventurous few, you never know, you might become the next Donald Bren.

Acquiring a Domicile: How to Rent an Apartment

Most people have or will rent at some point in their life. What often comes up is concern about rising prices or lack of adequate amenities. These issues will always be a concern. However the following steps will help prepare you for a move into someone else’s rental.

1. Determine your Renting Criteria

As soon as you decide that you want to rent, you need to determine what you’re after. What kind of budget are you looking at? What square footage? What types of Amenities do you want? What are your needs verse what are your wants? In which location specifically does this rental need to be?

Answering these questions will give clarity, allowing you to start the next step…

2. Narrow Search to 10 Rentals

As soon as you’ve determined your renting criteria you will be ready to begin screening. Similar to how a landlord screens potential tenants, you will be screen potential landlords. Find ten places that most closely meet your criteria.

Some places you can find rentals include:

Pad Mapper, HotPads, Lovely, Trulia and Walkscore

3. Visit Your List and Come Prepared

With your list in mind you can begin visiting each one. To come prepared, bring a checkbook, wallet, or some means of payment in case they want to charge you for an application fee. Also bring proof of income such as a pay stub or other documentation. Lastly, you’re going to want a photo ID.

At this point you should be well on your way to both knowing which locations fit your needs, and entering yourself into the landlords application process. Assuming you meet the rental criteria, you will probably get one of your applications responded to within a week or to.

You’re on your way! I hope this helps you on your rental journey.

Becoming the Squirrel of Personal Finance: 4 Places to Stash Your Cash

Most folks around the world understand the concept of saving more; you can only increase savings when you either increase income or decrease spending. However if instead of investing, what if one were to put the money into savings? Where should they put it? That’s what I’d like to explore.

When considering where to put your savings there are two main factors: Risk of Inflation, and Risk of the Need for Capital.

Risk of Inflation:

When you put money into savings there’s not really a real risk of losing your money to a drop in the stock market. That’s a good thing. But the risky part is that with slower interest and growth on your money, you’ll have a harder time keeping up with inflation. Often the savings interest won’t even be enough to cover the different.

Therefore with saving there is always a risk your purchasing power can do down.

Risk of the Need for Capital:

What if you put money in a CD (Certificate of Deposit) and find out a few days later that you need the money for an emergency?

First, at least some of your money should have been in a liquid asset for emergencies. But secondly, if you have to take the money out, a CD will usually penalize you. So you should always be aware of the chance you’ll need the money and what you’ll do if you do.

With those to risks in mind, the need for capital and inflation, let’s explore the options for saving:

Conventional Saving Accounts

These usually command the lowest interest rates because of the relative liquidity of funds.

Online Savings Accounts

These are online accounts that you set up in which you usually receive higher rates of interest because there isn’t any brick and mortar building to maintain.

Certificates of Deposit

These are the best for funds you’re sure you won’t need for a short period of time. For example if you know you’re going to purchase a car in 3.5 months, then maybe taking out a 3 month certificate of deposit isn’t a bad idea if it gives you are larger return of interest.

Conclusion:

Decide your reason for saving and how much liquidity you’ll need. If you can stomach tying up your money for months or even a year at a time, maybe a T-Bill or CD is worth it. Otherwise, consider a regular bank account or Money Market.

The Stock Market is Falling: What Should I Do?

The last few weeks started as a few percent decline in the market. As gurus and commentators covered it, they viewed the decline as a temporary, week-long or even a few day-long event. However a few weeks later here we are, still waiting and wondering when the market will rebound.

As a long-term investor this is exciting for me. Not only have stock declined roughly –% from their high, they continue to fall to increasingly discounted prices. Everything might not be a bargain at this point, but after falling about 9% the market is a lot closer to reasonable pricing than it was a month or two ago.

So when prices drop like this, what should an investor do?  They should do what the best investors do – find good companies and buy them at favorable prices. This might mean waiting and watching for a good company to drop below your perceived value it.

But for index and active mutual fund investors slowing dollar-cost-averaging into the market may make the most sense. Understand that the market will come back. It’s just a matter of how quickly it does.

Building An Empire: Your Real Estate Investing Options

Real estate investing has become a sexy topic for many real estate channels, blogs and books. There are those who say buying a home is a great financial step. However those who want to go beyond the typical goal of homeownership, there are a wide variety of options.

Direct vs Indirect vs Hybrid

When you first decide to put money into real estate, you have to ask yourself how much you would like to be involved in the process. For those who want to buy or manage property directly, there is direct real estate investing.

If you don’t want any part in the investment process you can consider the real estate indirect investment options. These are things like REIT (Real Estate Investment Trusts) and syndicated real estate funds.

The hybrid between indirect and direct investing is partnerships. With a partnership you find someone to either provide the money and credit or do the more involved part. Basically you only are require to take part in part of the real estate investing process, whichever you decide as partners.

Step 2: Picking your strategy

If you decide to invest indirectly into an REIT or syndication you will need to do research and decide on one. For those who determine on either a hybrid or direct investment approach exploring strategy is your next step.

There are many strategies out there like flipping, buy and hold, BRRRR method (Buy, Rent, Repair, Refinance, Repeat), property development, house hack and a few others.

Finally: Choosing your Property Type

After picking which strategy to deploy, you have to determine which kind of property you’d like to buy. Examples include single-family, multi-family (duplex, triplex and four-plex), commercial office, commercial retail, industrial, commercial residential (apartments)

Funding

The last step in acquiring property is deciding upon a funding method. There are a few ways to do this. You can either buy the property cash, which of course is less common, or you can buy one using other people’s money (OPM).

Funding a property using other people money can either come from a bank or somewhere else. If you’re using a bank to buy residential property there are two basic kinds of loans that are usually deployed, either a conventional loan or an FHA loan. The FHA loan is basically a loan that requires less of a downpayment in exchange for paying (PMI insurance).

With an unconventional funding source there are usually two places to get it from: the seller (called seller-financing) or outside places. Seller financing can be fairly straightforward but let me explain that the other outside sources of financing can come from friends, acquaintances, or private lenders.

Conclusion:

Whichever form of real estate you decide to buy, whatever strategy you decide to employ,  and whatever funding method us use to buy them, real estate remains a solid investment option. Real estate can be consider a reputable option up there with stocks and business ownership. Next time you’re thinking you want to invest use these steps to uncover your own real estate path.

Are Commodities A Good Investment?

When it comes to discussing investment options, commodities often pop up as something that is seen as a gamble. But are commodities actually a viable investment?

Commodities

There are a few basic kinds of commodities. There are metals like gold and silver. There are gas-type resources like oil and gasoline. There are animals like cattle and pigs. And then there’s also grown commodities like wheat and corn.

Commodities as an Investment

Not only are there many forms of commodities, there are also different ways of investing in them, take gold for example. If you were interested in investing in gold, you would have a few options to consider. The simplest route would to buy a gold bullion ETF, but you could also purchase gold bars and physically store them, or you could even buy gold jewelry and other gold-based products.

Generally as a whole, commodities are simply a resource used in the means of production, that is valued based on simple supply and demand. By very nature, the price of various commodities aren’t specifically predicable because of the way in which commodities are traded. Just like stock prices can’t be determined on a short-term basis, commodities are very volatile even in long periods of time.

However, this brings us back to our original question, should one invest in commodities? First off, I wouldn’t consider commodities a real investment because resources, just by themselves, aren’t growing enterprises that produce cashflow or even profit. So if one is going to discuss “investing” in these, let’s call it what it is: speculating.

My option speculation is that speculation as a whole is generally a bad idea for long-term investing. However if one considers the prices of certain commodities there are predicable supply-demand patterns that arise. Gold for example, has done considerably well in times of economic panic.

Overall, commodities aren’t a wise “investment” choice for the majority of investors. However as part of a broad portfolio, it might not be bad to put a 5% or 10% stake in gold as a hedge against economic disaster. Ultimately the choice depends on the individual.

Different Stock Investing Strategies

I am going to briefly cover the top most widely used “investment” strategies for stocks. Technically not all of these methods are investing because a few of them involve short term trading.

1. Stock Index Mutual Funds

There are many types of indexes. Indexes are essentially a predetermined basket of stocks that are formulated using a set of rules. For example the most widely used index, the S&P 500, is an index that incorporates the 500 largest companies in the US and weighs them in the index accordingly. There are other indexes such as small-cap indexes or tech stock indexes. The bottom line is that with an index you are purchasing a tiny portion of a large basket of US stocks that is going to reflect your sector of choice.

2. Actively Managed Mutual Funds

Actively managed indexed funds are very similar to indexes except for 1 key difference: They aren’t bound by a predetermined set of guidelines. For example an active mutual fund might have a focus on large-cap stocks or international stocks, yet there aren’t any rules on how much of each of these have to be purchased. This is different from an index where the predetermined weight of each stock is set in stone. Out of this difference comes an increase in management fees because of the funds active, and therefore more costly management structure.

3. Value Investing

This is the method used by the smartest and most successful investors (in my opinion). Warren Buffet is the most famous example of this. Value investing involves determining a company’s value (regardless of current perceived value) by looking at a balance sheet and income statements using fundamental analysis. As the investor sees a price drop well below it’s determined real value the value investor can seize up good deals and hold on for the long-term.

4. Day Trading

This is a common strategy by short-term investors who use primarily technical analysis (looking at charts and trends) to make “investing” decisions about which stocks to buy and then sell quickly for a profit. The risky thing about this is that if you accidentally buy a stock or ETF that suddenly drops in price, you could get stuck with a plummeting investment that was truly overvalued.

5. Random Strategy

This strategy is specifically for people who don’t know what they’re doing and don’t even pretend to try to act like it. They randomly purchase stocks that “sound cool” and then hope that they rise in price. By far this is the stupidest strategy just behind day trading. You can lose your shirt much easier with mindless/random investing or day trading than you can with the other strategies I outlined above.

Conclusion:

Whatever you do, please don’t choose route 5, and preferably strategy 4 as well. Not only is day trading risky and the fees expensive, it has also be statistically been proven to outperform traditional investing methods over the long-term.

Lending Investments: Are They Worth It?

When it comes to investing money for retirement two of the most common investments are stocks and bonds. Today I want to focus on the latter.

When it comes to investing in debt investing there are a few main types which I will briefly mention:

1. Corporate Bonds

These are a form of debt security that is issued by a corporation. Because they aren’t backed by the government, there is a higher risk and therefore higher yield associated with this kind of loan. There are many forms of this kind of bond.

2. Government Bonds

These can refer to Treasury Bills (T-Bills) which are debt securities lasting less than a year, Treasury Notes (T-Notes) which are debt securities lasting between 1 and 10 years or Treasury Bonds which are debt securities lasting more than 10 years. In addition there are also something called Treasury Inflation Protected Securities (TIPS) which involve lending money to the government in return for small payments and ultimately principal that is indexed to inflation.

Under this category I will also place Government agency bonds. These are bonds that are issued by Government Sponsored Enterprises (GSE’s) and/or Federal Government Agencies.

Bonds issued by GSE’s usually have the following characteristics: 1) A small return that is slightly higher than treasuries because 2) they have credit/default risk. Examples of Government Sponsored Enterprises: Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal Home Loan Mortgage Corporation (Fannie Mae).

The second kind of agency bonds, which are issued by Federal Agencies have the following characteristics: 1) less liquidity and therefore 2) slightly higher yields than treasuries but 3) are backed by the full faith and credit of the United States. Examples of government agencies: Small Business Administration, Federal Housing Administration and Government National Mortgage Association.

3. Municipal Bonds

Municipal bonds are debt securities issued by states, cities, counties and smaller government entities. There are two types, General Obligation Bonds (Bonds issued by small local governments that are backed by their full faith and credit), and Revenue Bonds (Bonds backed by specific revenue sources like tolls). These will always have yields higher than government bonds because of the slightly higher risk.

4. Bank Debt Assets (mortgage-backed, asset-backed and collateralized debt obligations)

This is a type of asset-backed security that is secured by a mortgage or collection of mortgages. It can get complicated to explain but for now you just need to know that banks and financial institutions usually own these.

5. Peer-to-Peer Lending

This is by far the most recent debt invention. Peer-to-Peer lending refers to a means by which individuals give and borrow money to each other usually over the internet to produced higher returns than can be given by other bonds or get a loan they otherwise couldn’t get.

Conclusion:

So should you invest in lending investments, and if show which ones? The answer really depends on your goals, risk profile, capacity for risk and the options available to you. Talk to your finical advisor about this or refer to one of my upcoming posts on the subject of asset allocation.

3 Forces Standing Between You and Your Financial Goals

Time

Often all the things we want to accomplish aren’t feasibly achievable in a set period of time. When this is true, we have to make the often difficult decision of determining which path matches with our values. In other words, we probably can’t achieve every goal we have so we have to prioritize.

This is very true with short term goals like making it to your kid’s basketball game verses watching the football game live. But it can also be true with long term goals. For example I certainly would enjoy the process of being a masterful accountant who has both technical skills and people skills. However I have come to realize that I might never become the world’s greatest accountant if I have other goals more worthwhile (for example like becoming a great financial advisor).

Goals

You might think a strange thing to add to this list is goals. After all, aren’t goals things that empower us and keep us on track? Yes and no. In one sense goals are essential to producing the results we want in life. In another sense, goals by themselves, without effective plans to get there and way to streamline actions towards them, are meaningless.

As Warren Buffet and Bill Gates agreed in an interview: one of the greatest factors to success is focus. Putting all your energy on one task, both with your mind and body, is a powerful thing.

Having too many goals, I have found, can get in the way of this powerful focus. That’s why it’s so important to recognize the things that are worthwhile and the things that can wait.

Inflation

Lastly on this simple list of 3 is inflation. This is more of a technical obstacle than a mental one. However the force can be equally important. If you were to buy a house in a stable neighborhood today, do you think the same house would be worth more in 30 years? Yes, I would hope so. This fact that we can all bet on, the fact that prices will overall rise year after year, is called inflation.

Inflation is powerful because it covers both the consumption side (for example like purchasing gum) and the investment side like stocks or investment real estate. Inflation is such an important force that I will be covering a brief history and action steps around it tomorrow in my blog. Tune in!