Balance Your Portfolio: Determine Your Risk Tolerance

how to determine my portfolio balance

Risk vs Reward. We have all heard of the concept. Do you like to take on risks or are you afraid of losing money? When you first start investing, it is important to understand what your risk tolerance is. I created a very short questionnaire which will help you determine what your risk tolerance is.

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Why do you worry about money so much?

The other day I was walking around with my sister when the topic of money came up. I told her how I didn’t really like to spend money on things that I didn’t need. This was when she asked me the following question: “Why do you worry about money so much? Money doesn’t buy happiness” I thought about the question for a split second and replied, “It doesn’t buy happiness, true, but it does buy freedom.” Her reaction was priceless. “Woah. You just blew my mind.” The funny thing is, a lot of people don’t look at money in this manner.

While it is true money doesn’t buy happiness, it gives you freedom to do what you want. If you are fortunate enough to save enough money, you will be financially independence. As a result, you will be able to “retire” from work a lot sooner than your counterparts. Instead of sitting in traffic five days a week on your morning commute for forty years of your life, you will be able to sit back and live life the way it’s meant to be lived.

For me personally, I don’t want to be a part of the 9 to 5 until 65 club. I plan on achieving financial independence a lot sooner than that. I want to enjoy my life as much as I can. I want to have the ability to travel. I want to spend as much time with my future children and spouse. I want to be in control of money, not let it control me. In order to do this I have to make some sacrifices, and I am perfectly content with that.

What is your view of money? Are you in control of your money or do you let it control you?

Credit cards are great!

Credit cards don’t put people in debt, people put people in debt. Credit cards have a negative stigma around them due to their high interest rates and the horror stories from individuals in huge debt. As a result, many people are afraid to take out credit cards. In this article I want to dispel those myths and explain some of the great benefits you of owning a credit card.

What are the benefits of having a credit card?

Benefit #1: Credit Cards will help you build credit.

Good credit isn’t something we think of until we need it. It’s not as if we go through life thinking about what our credit score is. For that reason we tend to ignore this first benefit of credit cards. Having a good credit score can save you tens of thousands of dollars in the future.

How does you credit score affect interest rates?

The better your credit score, the lower an interest rate you pay on loans. For example, let’s say you borrow $200,000 to purchase a home on a 30-year fixed loan. According to myfico.com, if you have a credit score of 650 (which is considered a “fair” score), you will pay and annual percentage rate (APR) of 5.085%. However, if you have a score of 700 (which is considered a “good” score) you will pay an APR of 4.624%. What difference does this make over a 30 year period? If you have a “fair” score, you will pay $190,260 in interest over the life of the loan. If you have a “good” score, you $154,787 in interest over the life of the loan. This is a savings of $35,473! Try it out yourself! Go to http://www.myfico.com/myfico/creditcentral/loanrates.aspx and play around with some numbers and see what you discover.

Benefit #2: Credit card companies have strength, and will help you when you need it.

Another great benefit is that credit card companies are on your side when you make purchases. If you buy a product that you are not satisfied with, and the company you bought the product from is giving you a hard time, the credit card company can help save you the headache of trying to get your money back. If a company won’t refund your money, chances are the credit card company will. This is called a chargeback. The threat of chargeback will give the company you purchased from an incentive to provide good customer service and timely refunds if appropriate.

Benefit #3: Extended Warranties

Many credit cards will extend your warranty up to a year for purchases you make with your credit card. This can come in handy, especially for large electronic purchases. There is no need to buy the extended warranty if you make you purchase with a credit card!

Benefit #4: Customer Rewards

Many cards will pay you nice rewards in the form of travel miles or cash back bonuses. For example, American Express offers 6% cash back on groceries and 3% back on gas if you get their Blue Cash Preferred Card, which costs $75 a year. Chase offers 5% cash back on a rotating list of categories and 1% cash back on all other purchases with their Chase Freedom Card. There are a number of other cards which offer great rewards and travel miles, which I won’t go into too much detail here.

Credit cards have a number of benefits to consumers as stated above. If you are a reliable and responsible with your debt, a credit card could be one of the best investments you make.

What do you think of the benefits to owning a credit card? Do you own any credit cards? Why or why not?

Why you should always choose a Roth IRA

In my previous post I discussed the difference between a Traditional IRA and a Roth IRA. In this post I’m going to talk about why you should choose a Roth IRA over a Traditional IRA.

What a Roth IRA?

A Roth IRA is a retirement account which allows you to put away $5,500 (after taxes) a year. While these contributions are not tax deductible, a Roth IRA will pay off when you actually do withdraw your money. You see, with a Roth IRA you are allowed to take out your money without paying any taxes! You will get away with paying a 0% tax rate in retirement. What’s better than that?

I want to withdraw money from my Roth IRA, will I face a penalty?

You are allowed to withdraw your contributions from a Roth IRA at any point and time without facing a penalty. Here it is important to differentiate between contributions and earnings. Say you put in $1,000 and earn $50 in interest in your Roth account. You are allowed to withdraw your original $1,000 without facing any penalty! Why is this so wonderful? With a Traditional IRA you are required to pay both taxes AND a 10% penalty if you withdraw ANY money from your account.

In addition, you may contribute to a Roth IRA if you also participate in a 401(k) plan from your employer. While you may also be allowed to contribute to a Traditional IRA, you lose the benefit of deducting a certain percentage of your contribution, depending on your income rate. See the chart for deductions in my previous blog post. With a Roth IRA, you do not have to give up the benefit of tax free withdraws just because you have a 401(k). In summary, if you have a 401(k), open up a Roth IRA to maximize the tax benefits.

Finally, a Roth IRA does not require distributions based on age. You see, when you have a Traditional IRA, you are required to make withdrawals at the age of 70 ½ years old. With a Roth IRA you do not have to make withdrawals. If you are old and have a ton of money stashed away, you are not required to take money out of your Roth. Why does this matter? You will be allowed to let your wealth continue to build TAX FREE after the age of 70 ½, which means your can leave more money to your beneficiaries.

What are you waiting for? Open a Roth IRA today!

Traditional vs. Roth IRA, Which one should I choose?

What is a Traditional IRA?

An IRA stands for Individual Retirement Account. IRAs are held at banks and brokerages and allow you to invest in almost anything you can imagine. The benefit of having a Traditional IRA is that you can deduct your contributions on your tax return.

What is a Roth IRA?

A Roth IRA is very similar to a Traditional IRA. There is one exception: the money you contribute to a Roth IRA is taxed today (you cannot take a deduction on your tax return for contributions), but it is not taxed when you withdraw any money in the future. Therefore, all money you take out of an IRA, included gains on your investments, are not taxed in the future.

How much can I contribute to my IRA?

When you have an IRA, either Traditional or Roth, the most you can contribute is the lower of $5,500 or your taxable compensation for the year. If your taxable compensation is below $5,500, then you will be limited to the amount of your taxable income for the year. If you are over the age of 50, you are allowed to contribute $6,500 to your IRA.

How much can I deduct on my taxes for my IRA?

The amount you can deduct on your taxes depends on one condition: Do you or your spouse (if married filing jointly or separately) have a retirement plan at work? If the answer is no, they you are allowed to deduct the full amount of your contribution to your IRA. If the answer is yes then it can be a bit tricky.

I have a retirement plan at work, how much of my IRA contribution can I deduct?

The following chart is provided by the IRS to help determine how much of your IRA contribution you can deduct when you are provided with a retirement plan at work:

If Your Filing Status Is…

And Your Modified AGI Is…

Then You Can Take…

single or
head of household

$60,000 or less

a full deduction up to the amount of your contribution limit.

more than $60,000 but less than $70,000

a partial deduction.

$70,000 or more

no deduction.

married filing jointly orqualifying widow(er)

$96,000 or less

a full deduction up to the amount of your contribution limit.

 more than $96,000 but less than $116,000

  a partial deduction.

 $116,000 or more

 no deduction.

married filing separately

 less than $10,000

  a partial deduction .

 $10,000 or more

 no deduction.

If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “single” filing status.
married filing jointly with a spouse who is covered by a plan at work

$181,000 or less

a full deduction up to the amount of your contribution limit.

more than $181,000 but less than $191,000

a partial deduction.

$191,000 or more

no deduction.

married filing separately with a spouse who is covered by a plan at work

 less than $10,000

 a partial deduction.

 $10,000 or more

 no deduction.

By utilizing this chart, take your filing status and adjusted gross income, and you can see if you are allowed to deduct the full amount, a partial amount, or no amount.

When can I withdraw money from my IRA?

The IRS allows you to withdraw from you IRA (Traditional and Roth) without any penalties after the age of 59 1/2. If you do withdraw from your IRA before this age you will be hit with a 10% penalty on top of the taxes you owe to the IRS. There are certain exceptions that will allow you to withdraw money penalty free before the age of 59 ½, which I will discuss below.

How can I withdraw money from my IRA without facing a penalty?

  1. You are over the age of 59 ½ you can withdraw money from your IRA penalty free. ‘
  2. You use withdrawals to pay higher education costs for your spouse, your children, or grandchildren.
  3. You can take up to $10,000 (or $20,000 if you are a couple) to buy, build or rebuild your first home.
  4. You use money from your IRA to pay for medical expenses in excess of 10% of your AGI which are not reimbursed during the taxable year.
  5. You become disable and can no longer be gainfully employed.
  6. You die and leave it to an heir.
  7. Roth IRA – You can withdraw your contributions but not your earnings (interest and dividends accumulated) from your Roth IRA at any point in time.

How long can I contribute to my IRA?

If you have a Traditional IRA, you are allowed to make contributions until the age of 70 ½ years old. If you have a Roth IRA, you are allowed to make contributions as long as you are alive.

Should I choose a Traditional IRA or a Roth IRA?

When deciding between a Traditional IRA and a Roth IRA, it could be tricky. With a Traditional IRA you can deduct your contributions in the current year that you make them. This is appealing if you want to lower to tax burden in the current year. You would also want to choose a Traditional IRA if you believe you will be in a lower tax bracket when you are older. That way you limit your tax payments to the lower future tax rate. In addition, you can contribute to a Traditional IRA at any time without income limitations. This differs from a Roth IRA which does not allow you to make contributions if you make over a certain income level.

With a Roth IRA, you cannot deduct your contributions in the current year that you make them. However, you will not be taxed on the money you take out of a Roth IRA in the future. This is appealing if you think you will be in the same or higher tax bracket when you are older. In addition, you can take out your principal contributions at any time without facing a penalty.

When it comes to choosing retirement accounts, take your time. Consult with your accountant or tax professional and make sure you pick the retirement account that best suits your needs.

What scares you?

Doubts. Worries. Fears. At the end of the day, everyone has them. When it comes to finances, many people are in the same boat. If you are reading these, you are probably share similar feelings. We all have a similar goal, and that is to be financially independent. We want to break loose from the live to work mentality. That’s why we I created this blog. I want to help you while also helping myself. By providing insight into personal finance, I hope to make a little bit of a difference in your life. In return, I have had the pleasure of reading many of your insights on personal finance.  

What am I afraid of?

I am afraid that I won’t save up enough money. I have concerns about my investments. Although I feel pretty confident they will continue to go up in value, there are no guarantees. I worry that I won’t be able to buy a house until I’m too old due to my student loans. I worry that I won’t be able to live a fulfilling life because I will always be concerned about money. I think about these fears a lot. My biggest fear at the end of the day is that I will be stuck working a job I don’t enjoy the rest of my life just so I can make enough money to get by. If I don’t achieve financial independence, these fears can become a reality. Some of these fears are irrational, but they still stick in the back of my mind.

What are your fears? Is there anything you do to help overcome those fears? Please leave a comment below. I look forward to your response.

Invest Young: A Few Simple Tips Will Make You a Millionaire

In my last article I made the argument that fear was the leading cause of young people investing. I illustrated how not doing anything with you extra cash will make you lose money. In this article I will go more into detail about how implementing an investing plan at a young age will make a giant impact on your life. I will also present a few simple steps that will help you become a millionaire.

Long-Term Impact of Investing When You are Young

Compounding and time value of money is a powerful thing. In a prior article, I showed how small changes coupled with time value of money can add up to giant sums of money. Time value of money also plays a huge role for your retirement and is the reason you need to start saving today. To illustrate my point I will discuss two different people. These people are Sally the Saver and Sam the Spender.

Sam and Sally are very similar. They had the same major in college, graduated at the age of 22, and got a job at the same time. Both make pretty good money working. They don’t have too much student debt.

Sam the Spender likes to spend money. As soon as he makes money he spends it. He continues this way until he hits his 30s. It is then that he realizes he has nothing put away, and he needs to start taking his investments seriously. Sam saves $500 dollars a month from his paycheck. He puts this into a stock market fund that returns an average of 8% a year. He continues on this path for 35 years, until the age of 65 when he retires. By the time Sam is 65 he will have put away $1,033,900! He is a millionaire!

Sally the Saver likes to save money. As soon as she makes money she saves it. She “pays herself first” if you will. At the age of 22, Sally begins to save $500 a month. She also puts this into a stock market fund that returns an average of 8% a year. She continues on this path for 43 years, until the age of 65 when she retires. By the time Sally is 65 she will have put away $1,977,500! This is almost twice as much as Sam and all she did was start saving eight years sooner!

Investing at a young age is the best decision you could ever make. When you put away cash when you are young, you open yourself up to so many more options as you age. You could continue to save up as you work. Or, you could have enough money to give you financial independence which would allow for you to start your own business. You won’t be on the constant treadmill where you work for a paycheck only for it to be gone two weeks later. The key here is financial independence. Being free from the shackles of work will make you happy. It will enable you to take chances in life that you wouldn’t otherwise take.

How to Become a Millionaire?

Becoming a millionaire isn’t as difficult as it may seem as displayed above by Sally and Sam. To become a millionaire you must be willing to save money. It doesn’t necessarily have to be a lot, but it has to be enough that will accumulate over time.

Don’t spend money on things you don’t need. You need to create a budget for yourself and stick to it. How can you force yourself to stick to a budget? Pay your investment plan first. Whether it is a 401(k) or just a plain old brokerage account, force yourself to make a payment to that investment plan first. Whatever money you have left over will be used for all of your other expenses you budgeted out.

Big financial decisions can lead to big savings

When you are buying a home or a new car, keep the long-term financial impact in mind. Make sure you can get the best deal you can on a new home or car. Don’t buy something that is unnecessarily big. Live below your means and you will achieve financial freedom. It’s these big decisions that either make or break people financially.

Don’t make dumb investments

If you are new to investing, don’t try your hand at picking stocks. Chances are that you are not going to beat the market. It is hard enough for people who do it for a living to beat the market. My recommendation is to put your money into a total stock market exchange traded fund (ETF). One good ETF for this situation is the Vanguard Total Stock Market ETF (VTI). This ETF tracks the market as a whole, has extremely low expenses, and will help reduce your risk. As you begin to learn more and more about investing, then you can start picking individual stocks.

A call to young people.

Start investing as soon as you can. If you have money leftover at the end of the month, open a brokerage account and begin putting it into a total stock market ETF. The longer you wait, the more you have to lose.

The Psychology of Getting Started: Discover Why You Haven’t Started Investing

Are you under the age of 30? Do you want to retire before all of your peers? Do you want to achieve financial independence? If you answered yes to all of these questions then you are on your way to becoming financially independent. If you’re young and haven’t started investing yet, you’re not alone.

Young people don’t save

Many young people hesitate when it comes to investing. Fear is one of the biggest causes of that hesitation. These initial fears are common in young investors. You worry because you are young, and you don’t have that much money as it is. You worry that you are going to lose money. You’re worried that all your hard earned money will vanish into thin air and you’ll have nothing to show for it. All financially independent people have been there before. It is difficult to get started. The first thing you need to address are these fears. Limiting beliefs will prevent you from ever becoming financially independent. In order for you to get on the path of financial freedom, you must first conquer your fears.

Fear of Loss

Young people don’t have a whole lot of wealth. That is a fact. Unless you win the lottery or are reborn as Mark Zuckerberg, you’re not going to be young and rich. Do not let your lack of wealth prevent you from investing your money.

A lack of wealth will hold you back from investing. Why? It’s simple really: losing a small amount of money will hit you a hell of a lot harder than it does someone who has stacks on stacks of money. As a result, you don’t invest anything at all when you are young.

Why are you afraid?

The stock market crash of 1929. Enron. WorldCom. Bernie Madoff. The Great Recession. Why should you feel comfortable when you consider all of these events that occurred in the past century? Your fear stems from the fact that we don’t want to lose your wealth. You don’t want to lose what little wealth you have as it is. I mean, what if you are a part of the next market collapse or scandal? Instead of taking that risk, you would rather hold onto your cash then even take this marginal risk of losing everything.

Your fear of losing money will always lose you money

Instead of risking the loss all of your wealth, you decide to sit on your money. You can’t lose money in the bank, right? Money in the bank FDIC insured up to $250,000 so you should be fine, right?…WRONG. When you account for inflation, sitting on your money is the absolute worst financial decision you could make. You are guaranteed to lose money when you just let it sit in the bank, no matter what.

Are you willing to lose two to seven percent of your wealth a year?

Nobody likes to lose money. When you sit on your cash and keep it in a low interest bank account you are guaranteed to lose at least two to seven percent a year. How you figure? Well, the average inflation for any ten year period since 1940 has been two to seven percent. In addition, the average annual inflation since 1913 has been 3.22%

What does this mean to you?

Your dollar becomes weaker as time goes on.

For every $1 you let sit in the bank for the next year, it will be worth about today’s equivalent of 97 cents next year. If you let that same $1 sit in the bank for five years, it will be worth today’s equivalent of 85 cents in five years. If you let that same $1 sit in the bank for 10 years, it will be worth today’s equivalent of 70 cents in 10 years. So on and so forth.

Don’t let your fear of loss stop you from investing.  If you want get on a path of financial independence, you need to begin investing today. You may be young and anxious when it comes to making investment decisions, but you are not alone. Remember, being too fearful of losing money will ultimately cost you in the long run.

In my next article I will go into more detail about the long term impact of in investing at a young age and how you can become a millionaire with just a few simple steps.

What is your purpose?

Why do you want to learn about investing? What is your purpose for becoming financially independent? These are two important questions you need to ask yourself before you dive into personal finance. It is important to know what your purpose is and what your ultimate end goal is.

While reading “Rich Dad Poor Dad” I have reinforced the reasons why I want to invest and financially independent. I want to be free from the shackles of the work force and I want to escape this rat race as Robert Kiyosaki, the author of Rich Dad Poor Dad calls it. I want to be free to do what I want when I want. It may sound crazy and far-fetched, but I want to retire before I’m 40. Maybe even sooner if I could.

I always thought this idea was ridiculous and unreasonable, because that’s not what everyone else does. Everyone else works for 40 years, retires when their 65 and then lives out whatever little bit of their life that they have left. They work hard and long for 40 years, trying to make more money so they can spend more money on things they don’t need. That’s not for me. That’s not what I want to do.

My purpose is to retire early and spend time with my loved ones. I no longer want to worry about how I am going to pay the bills. I don’t want to work 40+ hours a week at a job that I don’t enjoy. I don’t want to feel obligated to wake up every morning a 6 am. I want to do what I want when I want, without having to second guess my decision. It is vital that you have deep-seated, emotional reasons for why you want financial freedom. These are my reasons, what are yours?