Discover this One Technique that Will Help You Accomplish More…In Less Time

Man racing against time

Stop racing against the clock and get more done in less time by utilizing Parkinson’s Law

How would you like to get more work done in less time?

It seems like we always have so much to do, but so little time. In this article you will learn about Parkinson’s Law which will help you accomplish more in less time.

How this law helps you achieve financial freedom

We have a lot to do. We are working and hustling to get the next gig, pump out the next article, or write the next book.

As a result we never seem to have time.

Our work suffers, output drops, and we become burned out on the fringe of quitting.

We become stressed because we have allowed these tasks to take over your life. We resort to checking Facebook more frequently and binge watching Netflix.

This is where Parkinson’s Law will help you out. Once you understand this law you can use it to your advantage to do the work of two people in half the time.

What is Parkinson’s Law?

According to the Merriam-Webster Dictionary, Parkinson’s Law is a law that states “work expands so as to fill the time available for its completion.”

This Law was first mentioned by Cyril Northcote Parkinson in a humorous essay published in The Economist in 1955.

Parkinson developed this law over the course of his career working in the British Civil Service.

Parkinson theorized that people have a tendency to create more work for themselves because they have given themselves so much time to complete the task.

As a result they set long deadlines and work much less efficiently.

For example, let’s say you give someone ten hours to complete a task that would normally only take two. The chance of that person completing that task in exactly ten hours, no more, no less, are very high.

Even though the task only typically takes two hours, that person will find a way to make the task last the full ten hours you allotted it.

How can you use Parkinson’s Law in your favor?

Continue reading

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The 5 Reasons Why I am Gradually Moving More of My Money to Exchange Traded Funds

In the recent months I have begun moving more and more of my money to index funds/exchange traded funds. Below I list the 5 main reasons why I have chosen to do this.

1. Picking Stocks Takes Time

I love researching and picking my own stocks, especially when they turn out to be big winners. However, in order to pick the right stocks it takes time and patience.

When I pick stocks I am very meticulous in my research. I only pick stocks that appear to be a great companies at a good value.

Finding these stocks takes time.

In order to free up time for my other ventures, I have begun investing more and more into exchange traded funds, also known as ETF’s.

2. My Chances of Beating the Market are Slim

I know that the chance of me beating the market as a whole is slim. While I love researching and picking stocks, it is highly likely that my returns will be subpar, or right at the market at best.

Instead of hoping to match the market and maybe beat it, I have instead chosen to invest my money into the very funds I am trying to beat.

This goes hand in hand with #1 listed above. Why spend so much time matching the market when I can buy an ETF in the market?

3. Diversification is Simpler

Trying to diversify a portfolio with many stocks can prove to be a difficult challenge. This is another reason I have chosen to invest more in ETF’s.

Consider this: I have one Total Stock Market ETF and on Total Bond Market ETF. It is much easier for me to balance this portfolio than if I am juggling with 20 different stocks and bonds in my portfolio all at one time.

4. Keeping Track of Stocks Takes Time

I noted above that picking stocks takes time, but tracking your own stocks takes even more time.

In order to maintain your portfolio, you need to have some idea of how your stock positions are performing.

So you need to stay updated on the stock’s news and know when a good exit point for you will be.

I have lost out in some instances where I waited too long to sell a stock. As a result, I am still holding some stocks that have proven to be losers which brings me to #5.

5. It’s Hard to Cut Losses

With individual stocks it is hard to cut losses and move on. This is something that I have struggled with.

I currently own some stock in 3D Technology (DDD) which has dropped 39% since I bought in about a year ago.

What is holding me back?

If I had to guess, it would be the loss aversion theory in action. I wrote a post about loss aversion which you can check out here.

Do you pick your own stocks or do you opt to invest in an exchange traded fund instead? Why did you choose one over the other? 

What is Financial Freedom?

As you know this blog has been inspired by financial freedom. While there are differing opinions about what financial freedom, this article will present financial freedom from my personal perspective.

What is financial freedom to me?

Financial freedom to me is having enough money to live without ever really having to work again. Now this does not mean you never have to work again. Instead it means that you work on your own terms.

You never have to worry about the stress of losing your job. You don’t have to worry about whether you have clients or not. When you are financially free, work no longer becomes a requirement in life but rather a choice.

How would you get there?

There are a number of ways to achieve financial freedom. The most effective way is by building passive income streams. This is done in a few ways shown below.

Have Your Money Make You Money

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Build up enough cash so that it will generate money-almost like planting your very own money tree.

The first way to build a passive income stream is to build up enough cash so that it will generate money. Use your cash to purchase dividend paying stocks or bonds which pay you interest. You could also purchase annuities which would pay you over the life time of the annuity.

For example, if you have $5 million in cash right now you could invest in bonds which pay out 5% a year. Just by having those bonds alone, you will generate $250,000 a year in interest income!

Imagine, $250,000 in your pocket and you don’t have to do anything at all! You can accomplish this with dividend paying stocks as well.

Stocks pay a wide range of dividends, and are not quite as reliable as bonds for paying you out every month.

But stocks do have the advantage of appreciating in value over time, so that when you sell the stock you have a chance to make more money.

I don’t have $5 million to put away, what should I do?

Fair enough. Most of us do not have $5 million in liquid cash at our disposal at any time. So what should you do instead?

Create a Business which Produces Cash with Minimal Effort

While I was writing that subheading, it sounded a tad bit scammy. Just like one of those spam emails which tell you how some guy makes $5,000 a day just by clicking a few buttons.

There are people out there with legitimate businesses that do not require much effort on their part.

They do this by doing one of two things

1)      They automate their business so they don’t have to do most of the work or,

2)      The create a product which they can sell to the masses

In order to accomplish number one listed above you would do a few things. First you would have to build a business up from scratch (if you can’t buy one initially).

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Automating your business by hiring employees is one method you can use to become financially free.

Then you would look to hire employees to help do the menial tasks that you don’t want to do. Then finally you would hire a manager to help oversee the employees and take care of the higher level duties that you don’t want to do.

This leaves you to plan for the future and grow, and takes you away from the day-to-day tasks that you would be doing at any typical 9 t
o 5 job.

For the second item, you would create a product that you only need to create once or can be created by others, and sell it to the masses.

Key Point: Learn How to Separate Time From Money

The key to building a passive income business is separating your time from money. Most jobs will pay you for every hour you work.

It has been engrained in us that we get paid when we work and don’t get paid when we don’t.

What if you did get paid when you didn’t work? How would you like to get paid when you didn’t work? When you are sleeping? When you are on vacation?

If you have an automated business, you will no longer trade your valuable time for money.

There are a ton of ideas to help you build up passive income streams. One of the best books to help you understand the different types of business systems is “The Millionaire Fastlane” by MJ Demarco.

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Check out The Millionaire Fastlane, one of my favorite business books that I’ve read recently

In that book he lays out the “Five Fastlane Business Seedlings” which are business systems which produce passive income for the owner. Those five systems are

  1. Rental Systems
  2. Computer Systems
  3. Content Systems
  4. Distribution Systems and,
  5. Human-resource Systems

If you want to find out more, check out the book on Amazon. It really is a great resource and I would recommend it to any entrepreneur or wantreprenuer looking to get started.

My Top Three Reasons for Wanting to Achieve Financial Freedom

I have told you what financially freedom is to me. Know I want to elaborate on why it is my goal to achieve financial freedom.

Reason #1: I want to have the freedom to do what I want when I want

If I want to sleep in until 12 I can.

If I want to meet friends for lunch on the other side of town at the last second I can.

If I want to go on vacation at the drop of a hat I can.

I would also have freedom to pursue hobbies that you enjoy but would never really make you money.

For example, I enjoy playing basketball and golf. I am not really good at either one of those. I could play those whenever I want.

Reason #2: I want to explore the world

Many folks don’t have to be financially free to explore the world, but I think it would be pretty amazing being able to travel all over without a timeline to get home like you would when you work.

I have never traveled much, and I think it would be great to be able to see the world.

Being financially free would allow me to travel on my own time, and have the money to do so.

Reason #3: Spend more time with those I love

I am personally not a workaholic. I’ll admit it.

I will work really hard doing the job the needs to be done. Once it is complete I go home and do the things that I want to do.

It’s not even that I am lazy, but I just like to enjoy life and do those things that I want to do.

I don’t want to feel obligated to go into some place five days a week for the next 35 years of my life.

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You now know my reasons for wanting to achieve financial freedom. What are yours?

I enjoy spending time with family and friends, and financial freedom will allow me to do this.

Down the road when I have kids, I want have the ability to spend time with them. I want to be a part of their life.

I don’t want to be at work all of the time and come home and be too tired to spend time with my family.

This is what financial freedom is to me. This is why I want to achieve it. What is financial freedom to you? Why do you want to achieve financial freedom?

Photo Credits (in order)

Flickr/Shari’s Berries, Flickr/Phil Whitehouse, Flickr/Kalyan Chakravarthy

Free for Five Days: “Get Rid of Debt Forever: A Guide to Understanding and Conquering Debt”

I am making this post to inform you that my first eBook, “Get Rid of Debt Forever: A Guide to Understanding and Conquering Debt” is available for download on Amazon for free for the next five days.

From August 21, 2014 to August 25, 2014, you can have the book sent straight to your Kindle or any other device and it will be completely free. All you have to do is go Get Rid of Debt Forever: A Guide to Understanding and Conquering Debt and click download to have it sent to you today.

This book (along with other projects) has taken up quite a bit of my time. As a result, I have not been blogging as frequently as I would like, and I apologize for that.

But, I have learned a lot in this process and I want to use this blog post to discuss what you will find in my book, why I decided to create this book, and what I learned in the process.

What You Will Find

The eBook I created is a collection of blog posts that I have made on this site, along with a few added chapters not found here, organized and put into one place.

You see, I originally intended on creating a comprehensive guide on personal finance that would be found on this blog. I came up with this idea back in April and it seemed like a great idea at the time, but then I recognized something.

My realization

I realized that I was writing A LOT. And I was only writing on one individual topic which was debt. If I was going to create a comprehensive guide on personal finance, it would take a LONG time.

What I decided to do was repackage these blog posts on debt into an eBook. I was originally planning on giving this eBook away as an incentive for people to subscribe to the blog. Then I changed my mind and decided I wanted to publish it on Amazon, which I’ll get to in a minute.

So I decided to repackage the book, add some chapters and make it more organized, and edit it to make it a little less informal and free from error (at least that’s what I hope!).

Why Did I do This?

I mentioned above that I was going to give this book away as an email opt-in book. There are a couple big reasons why I wanted to publish my eBook on Amazon instead.

Reason #1: I wanted to create my own product

The first reason is quite simple. I wanted to create my own product that I could sell. I wanted a product that has my name on it that I could put out there for people to purchase.

At the end of the day, that is why we are here. I thought it would be great to repackage these posts, make them more organized and better written, and allow people to purchase my product.

What I hope is that people get some great value out of this eBook and that it will help them.

Also, I want to work on some advertising and marketing skills. By creating my OWN product to sell, I can create advertisements to sell something that can give me some sort of a return on investment.

In the process, I will sharpen my advertising skills which will help me dramatically in the future.

Reason #2: I wanted to learn the Kindle Direct Publishing platform

I plan on writing a lot more in the future. This will include many eBooks which I want to sell to help solve people’s problems.

For this reason, I want to learn the process of creating a book and putting it on the Kindle platform. I have learned A LOT in the process. Discover what I learned in the next section of this post.

For this reason, I figured I might as well learn this platform and process now so that I won’t have to face this learning curve in the future.

What Did I Learn From Writing this Book?

Writing is hard. Despite the fact that this is a short eBook, it was still a long process. Creating, editing, and now advertising has proven to be a challenging process.

When writing a book it would seem that writing should take up the most time. Not for me. The thing that took me the longest was the editing and formatting of this book.

It took a while to make sure everything sounded good and the format of the book was good for the Kindle platform. I went through a few rounds of editing with my girlfriend which took a little longer than I was hoping.

Also, creating the cover is another challenging process. Luckily for me, my girlfriend grew up doing graphic design and was able to help create a pretty good looking cover photo for my book.

Creating is fun. I love creating something and putting it out there for all to read. For me, writing is such a rewarding experience. So much that I plan on creating and releasing another book soon.

Staying balanced is hard. I have had to balance writing and editing with my full-time job, along with social media for this blog, blogging, and having a life.

As a result, my blog has suffered. I haven’t written a post in about a month here. It is difficult balancing all of these things but a lot of people do it and I’m not going to complain.

The Most Important Lesson of All

Even if I fail it is okay.

I would be perfectly fine if my book sales don’t take off. Obviously I’d be happier if I made a million sales of course, but if sales fall flat I won’t have any regrets.

What I have learned through this entire process is more valuable than anything. Even if I fail, no one can take away those skills I acquired and the knowledge that I obtained. These skills can transfer over to other areas in my life down the road.

On top of that, I have something to show for my time. Instead of wasting time on TV or fooling around, I have an actual product that I can point to and shows what I did.

Finally, if I didn’t try, I never would have learned anything new at all.

Takeaway

Writing a book is fun. I recommend anyone try it out. It’s not easy by any means and it takes time and it probably won’t be worth it money-wise. But the experience you gain will be completely worth it.

Once again, you can get my eBook “Get Rid of Debt Forever: A Guide to Understanding and Conquering Your Debt” completely free on Amazon for the next five days. Click the picture below to check it out!

I would love to hear your feedback, so if you could leave a review on Amazon I would greatly appreciate it!

Get Rid of Debt Cover

From August 21 to August 25 you can get your copy of my eBook completely free!

Your Fear of Losing Will End Up Costing You Big Time

I was discussing the stock market with one of my co-workers the other day, and we were talking about how stocks are generally overvalued and how the market will have to come back down eventually.

He said “This is why I don’t want to invest in the market right now. Everything is just too high and it’s going to fall eventually. I would rather wait for things to come down to get started.”

I don’t blame him for not wanted to invest everything in stocks right now, but he could invest a small portion of his money in stocks and put the other portion into other forms of investments. Keep in mind, he didn’t invest in the market when it was high in 2007, but he also didn’t invest in 2009 when it hit rock bottom.

It’s not unusual for first time investors to have this mentality

Many first time investors hesitate when it comes to investing. Personally, I spent a couple of years dreaming of investing but never took the leap of faith. What was holding me back those two years is the same thing that holds back many first time investors: loss aversion.

The loss aversion theory explains why many people are afraid to get started. People will make excuses as to why they don’t want to invest in the stock market because they are scared of losing money.

But, this begs the question, when exactly do you plan on investing in the market?

What I saw with my co-worker was a classic example of the loss aversion theory in action. He was so afraid of losing money in the market. As a result, he has not investing in the stock market at all in the past 8 years.

So you may be wondering “What exactly is the loss aversion theory?”

The theory states that people have a tendency to value gains and losses differently. So if something is presented in terms of gains and losses, people are more likely to pick the item based off the gains presentation.

Why do we value gains and losses differently?

This is due to the fact that people strongly prefer to avoid losses rather than acquiring gains of the same amount. In some studies, they have showed that the pain of losing is almost twice as strong as the pain of gaining.

In one example, people were given the option of risking $5,000 to make $10,000 on a flip of a coin. Many people would forgo the gain just so that they didn’t lose any money.

Think about that one for a second. If you could flip a coin and make $10,000 or lose $5,000, would you take that chance? Truth is, you really should take that chance. 50% of the time your will come out ahead with $10,000. What do you think you would do in this situation? Why?

How can you apply loss aversion theory to investing?

The thing about loss aversion is this: it causes people to stay in stagnant positions just so that they don’t have to risk losing any money. Due to the fact that people are so afraid of losing, they will stay in a position that is worse in the long run.

For example, some individuals would stick with losing investments over a long period of time because they don’t want to realize losses. As a result, they will ride down with a sinking ship so that they don’t have to experience the pain of losing…until it is too late of course.

To make matters worse, some people will actually invest more money into a losing stock to average out the cost of their investment. This makes it seem as though the stock hasn’t lost as much value.

How can you avoid the loss aversion bias?

Above I have illustrated two situations in investing that are subject to the loss aversion bias.

The first one being new investors who just don’t get started because they are afraid to lose money.

The second one being experienced investors who hold on to losing stock positions because they do not want to realize losses, which would turn paper losses into actual money losses.

How can new investors avoid the loss aversion bias?

For new investors, it is important to realize that there is some risk to investing in the stock market. You need to understand that your investments may lose value in the short term.

What you also need to know is that the market has been upward trending for the past 130 years and more. You can’t let your fear of losses hold you back from investing.

Another way to hedge your losses is to make sure your portfolio is well diversified. Make sure you have your money invested across a range of stock indexes, bonds, and other investment types. This will help limit your losses over the long haul and make you less likely to lose your money.

Finally, you need to stop worrying and accept the fact that you could lose money. You need to grow comfortable with the fact that your portfolio will have extremely high days and extremely lows days. The most important thing is to weather the storm and not panic on those bad days.

How can experienced investors avoid the loss aversion bias?

My advice for experienced investors is quite different from new investors. New investors are afraid of losing money from the get go whereas experienced investors are afraid of realizing losses on certain investments.

For experienced investors, you need to maintain a long term view of investments. It is important for you to understand how a loss will impact your portfolio as a whole.

One way you can avoid holding on to a losing stock for too long is to place a stop loss order on that stock. This will force you to sell your stock once it hits a certain low point.

Another good thing to remember is that selling investments at a loss will actually help you. When you sell at a loss, you will be able to offset any short term and long term taxable gains.

Final word to experienced investors

Do not hold onto a stock longer than you should. If there are legitimate, solid indications of a sign to sell your stock now, you should absolutely sell.

Now, this doesn’t mean every time a tv pundit tells you a stock is a sell that you should sell it. However, if a company is going through turmoil and revenues and profits are way down, then you should probably sell before it is too late.

You don’t want to hold on to a stock just because you hope it will go up in value. You shouldn’t buy a stock which you hope goes up in value, so why would you have that mentality for a stock you currently own?

What do you think?

What do you think about the loss aversion theory? Have there been times where you didn’t do something because you were afraid of losing? Can you apply this theory to other areas of your life?

Should you pay off your mortgage or invest your money?

Suppose you win the lottery and you win just enough to pay off your mortgage. Should you pay off your mortgage? Or would you be better off investing that money?

In order to answer this question, we must weigh a number of factors. The most important factor deals with your risk profile. You will also want to consider how your current investments are allocated. There are numerous other factors that you must consider. Before we get to all of those factors, let’s make a few assumptions.

Let’s assume the following:

Yeah, I know the saying about people who assume. However, for purposes of answering this question in as full of detail as possible, I need to assume a few things before we dive in and discover my opinion to this question.

The following assumptions are being made:

  1. You have 25 years left on your mortgage so you have a long timeline left to pay it off.
  2. You are in the 25% federal tax bracket, and will remain there for the foreseeable future.
  3. In addition, your state income tax rate is 8%
  4. You current mortgage rate is on par with national averages at 4.5%
  5. You have $200,000 left on your mortgage
  6. You expect the average rate of return of the stock market to be 8% over the next 25 years.

With those assumptions being made, we have the foundation to truly evaluate what you should do with your lottery winnings: invest in the stock market or pay off your mortgage?

Tax deductions make your interest rate lower

The first item that you must consider is that your interest rate is really not the 4.5%. Why is this true? The United States has favorable tax deductions available to homeowners, so your actual interest rate will effectively be lower. What would be the effective interest rate based on our assumptions above?

Your effective interest rate after considering the mortgage tax deduction would actually be 3.105%. How did we arrive at that number? Using this handy calculator at Bankrate, you can easily calculate what your interest rate will be after your mortgage tax deduction.

Go ahead and play with the calculator a bit. It is interesting to see how much the mortgage tax deduction will actually help you. In this example it is almost like cutting 1.4% off your interest rate on your loan!

Paying off your mortgage means no mortgage tax deduction

Why is your interest rate important? This will help us in making our final decision whether to invest our money or pay off the mortgage.

If you choose to pay off your mortgage, you will no longer be eligible for the mortgage tax deduction. You will have to pay more in taxes as a result. But, you won’t be making mortgage payments anymore!

So it looks like a win for paying off you mortgage, doesn’t it? But wait, it can’t be that simple. Well…I guess we have to consider a few other factors before making our big decision.

The opportunity cost of paying off your mortgage

Paying off your mortgage would be a great relief. However, there is an opportunity cost to paying off your mortgage. Ah, opportunity cost, that word you used in economics and never thought you would see again.

By paying off your mortgage, you are foregoing other options with your lottery winnings. What specific opportunity costs can you think of by paying off your mortgage?

The biggest opportunity cost to me is that you will not have that money to invest. This is the biggest opportunity cost in my opinion, so hear me out.

By paying off your mortgage you are taking all of your money off the table to get rid of a huge debt, which can be a relief. However, you will not be able to do anything with that money once to pay off your mortgage.

This brings up an age old question: Should you invest or pay off your debt?

Generally, you would rather invest any extra money when you can achieve returns which are higher than the interest rate on your debts. For example, let’s say you have a loan with 2% interest. Let’s also say that you can make an investment which will return 5% in the next year.

If you choose to pay off your loan, the money will be gone for good. However, if you choose to go with the investment, your money will appreciate by 5%. Now you will have to pay 2% on your loan. As a result, you end up with a net positive return of 3%. Simple enough, right?

The answer is staring you right in the face

Let’s go back to our original example and decide whether you should pay off your mortgage or invest in the stock market.

Based on the assumptions being made, you will be able to achieve an average annual return of 8% in the stock market in the next 25 years. During that same time period, you will be paying an effective interest rate on your loan of 3.105%. You do the math. What will be your total net return of this decision?

Got your answer? Okay good.

I’m sure you answered 4.895% you smart cookie. For simplicity sake, let’s just say you will get an average net return of 4.9% if you decide to invest in the stock market and keep your mortgage as is.

This is precisely where I would stop and not even consider paying off the mortgage. I’m a numbers guy, and the numbers are telling me one thing: INVEST! However, I know that many people aren’t as into the numbers as I am, so I will lay out a few other factors that will help you make your decision.

Factor one: Your risk profile

Your decision will depend heavily on your risk profile. If you like to take on risks and live life on the edge, you would want to invest in the stock market regardless. You don’t care about the fluctuations of the markets, you live for this sort of thing!

Even if you have a moderate risk profile, you would likely opt to invest in the stock market as opposed to paying off your mortgage. Sure, paying off your mortgage would feel good, but you know there is a very good probability the market will return around 8% in 25 years’ time.

If you are extremely risk averse, you will take the sure thing and pay off your mortgage. What if the stock market crashes tomorrow and you lose all your money? You don’t want to take that risk no matter how unlikely it is. You want a sure thing, and the only sure thing is today. You would get rid of that mortgage.

Based on your risk portfolio, what would you do in this situation? Would having a shorter time horizon make you more likely to pay off your mortgage?

Factor two: Asset allocation

Another factor you have to consider is your asset allocation. This will depend on how many assets your had just before winning the lottery.

If you have very few investments, and you choose to pay off your mortgage, you are essentially putting all of your eggs in one back: real estate. This will throw your asset allocation all out of whack, and you will have a high risk exposure to the real estate market. This risk is even higher when you consider you are putting all of your money into one single asset: your home.

If you have few investments and choose to invest in the stock market, you are better able to spread your risk out among number companies, funds, and indexes.

However, if you already have many investments you would not be as impacted by choosing either option. We would assume that you already have a well-balanced profile. Paying off your mortgage wouldn’t expose you to asset allocation risk.

Factor three: Interest rates

In the example above, I illustrated that if you had a low interest rate you would be better off investing in the stock market. I did not consider the factor of higher interest rates.

The interest rate on your mortgage will affect whether or not you choose to invest your money or pay off your mortgage. Logic says the higher the interest rate on your mortgage, the better off you are to pay off the mortgage.

Other factors to consider

Psychological effect of paying off your mortgage early

Paying off your mortgage is a huge accomplishment. For many people, paying off debt is a rewarding experience. You will sleep better at night knowing that your will not have to make to monthly payments every month.

You will no longer have to worry about whether you will have enough money to make mortgage payments. The only payments you will have to make will be for insurance, property taxes, and any miscellaneous repairs and other expenses.

You will have excess cash to invest

While you won’t have the initial $200,000 to invest when you first pay off your mortgage, you will have an extra $1,000 to invest.

While you are deferring compounding interest on your investments, you will also be reducing your risk over time. Having this extra money each month will give you some flexibility for investing and give you extra cash flow every month.

Question to consider:

Would you borrow 3.1% to invest in the stock market?

Answer: for me the answer is a definitive yes. That is basically the decision you are making if you do decide to take your lottery winnings and invest them in the market (again, using our assumptions about market return made above).

What do you think you would do in this situation? Do you think you would pay off the mortgage or invest your money? What other things must you consider before making this decision?

Investment Options for College Students Revealed

Question: I’m currently in college and I am looking to get started investing. What are the best investment options for me?

For first time investors, especially those still in college, investing can be a daunting challenge. Given the number of investment options, it is no wonder many people don’t begin investing at a younger age.

In this post you will learn about what the investment options that are available to you. These options are broken down into different categories which will depend on how long you plan on keeping that money invested.

What is your time frame?

What investments you choose to go with will depend largely in part on how long you plan on keeping that money invested. In other words, how long do you think you will go without having to touch your savings?

There are several investment options available for those who don’t plan on needing money for a long time and for those who will need money in less than a year and everyone in between.

Different time frames

The first thing that you want to do is understand the four basic time frames for investing. By understanding your time frame you will be able to make the most educated decision as to where to put your money.

Very Short Term – If you think you will need to use your savings within the next year, you will have a very short term time horizon. This would be you if you think that you will have to use your savings to cover expenses at some point within the next 12 months.

Short Term – If you think you will be able to put you money away for over a year, but might need access to it within the next three years, you would have a short term time horizon.

You would have a short term time horizon if your future is uncertain, and you do not know what will happen in the next few years.

I imagine most college students would fit under this category. Uncertainty in the job market and your living situation make it better for you to have money quickly accessible, given the unpredictability of your situation.

Intermediate – If you think you can put away money for the next three to six years, you would fit best under this time frame.

A person in an intermediate time frame would be one who would likely need money in a few years to purchase a home, pay for a wedding, or some other large expense, which would require a significant amount of cash.

Long term – If you are able to put away money for ten years or more, you will take a long term approach to your investment decisions.

This would be you if you are comfortable not touching your money for at least ten years. If you can get comfortable with not having access to your cash for that long, this approach is best for your.

What time horizon are you?

Now that you have learn of the different time horizons, which one best suits you? Keep in mind you don’t have to be ONLY short term or ONLY long term.

You have flexibility in what you choose with your decision. This exercise is just to help you understand what investments you should be making based on your situation.

Here is what I want you to do: Figure out how much savings your have (or you plan on having) and then determine what percentage you plan on putting away for a certain time horizon.

For example, if I had $40,000 put away, I would put away 15% for very short term, 20% for short term, 25% for intermediate term, and 35% for the long term.

Don’t take too long to do this, but just jot down some numbers to get an idea, and then continue reading below.

Investments to make based of your time horizon

So you now have an idea of what your investment time horizon is. Simple enough, right? Now let’s get to the meat of the subject: what you should invest your money in.

Very short term investments

If you have a very short time horizon, you are best keeping your money in a checking account, high yield savings account, and money market account.

Checking Account

Now, a checking account is not really an investment option and I know you already have one open. The only reason I put this here was because you do need some money on hand so you can cover typical monthly expenses, along with any unexpected repairs and other expenses that could pop up.

Other than that, checking accounts don’t yield any money. They are more like a storage space for you cash that you have immediate access to. Now on to the actual investments…

High Yield Savings Account

Opening a high yield savings account is a useful option for the very short term and short term investor. High yield savings accounts have a return of about 0.75% to 0.95%, depending on where you open your account.

You generally will not get that high of a yield if you go to your local or big branch bank. The best savings accounts are usually found online and will require a little research, but are well worth the time and effort.

Money Market Account

Money market accounts are similar to a savings account in terms of returns. They net an average of 0.75% to 1.00% a year, depending on where you go.

Money market accounts and savings accounts are very similar in nature. You really should not spend too much time deciding between the two. Just pick the one you think is best and go with it. Close your eyes and pick one. It doesn’t really matter. What matters is getting started today.

Short term investments

You already know of two short term investments, high yield savings accounts and money market accounts. In addition to those two, another short term investment option is a Certificate of Deposit.

Certificates of Deposit (CDs)

Certificate of Deposits are investments in which you place you money for a set period of time, and do not touch that money until the term is up.

As a result, you get a slightly better return on your investments. Keep in mind, the terms of a CD can vary from a few months up to a few years.

Returns for a one year CD will be about 1% whereas your return for a two year CD will be around 1.10% to 1.40% per year. Basically, the longer the term of your CD, the higher your rate of return.

CDs are not quite as attractive as savings accounts or money market accounts because the money is locked in for a set period of time. While you do get slightly better returns, you will generally not have access to that cash until your CD is fully matured.

One note about short term investments

With many short term investments, you will get higher returns for the more money that you invest. Banks do this to encourage you to give them more money, and the reward you with a higher yield on your investment.

Also, there are a number of extremely useful resources on the web to help you find different savings accounts, money market accounts, and CDs, along with the rate of return on those investments as well as any fees you have to pay to own them.

Long term investments

For now I will skip intermediate term investments and will get back to them shortly. The reason for this is because intermediate investments are simply a mixture of long term and short term investments.

What types of investments for the long term?

The two investments you would want to make for a long term time horizon are in stocks and bonds. The reason for this is because stocks and bonds will yield much more over a longer period of time than other investments.

In addition, stocks and bonds are more volatile in the short term, so their value could drastically go up or down in any given day. They are not good short term investments for this very reason.

Stock and Bond Funds

The two types of long term investments that would be best for any beginner are the Vanguard Total Stock Market ETF (VTI) and Vanguard Total Bond Market ETF (BND).

It is recommended that you have 50% of your balance in stocks and 50% of your balance in bonds to help hedge your risk.

The reason you should invest in these two ETF’s are numerous:

  1. Vanguard has extremely low fees compared to others, which means more money for you
  2. Most people are better off NOT picking their own stocks
  3. You get good coverage of the total market, and thus diversify your portfolio by investing in these two.

Another Option for long term investors

Another investment option for long term investors is a Target Retirement Account. These investments are good because they require no management on your part.

You would want to invest in a Target Retirement Account if you plan on keeping your money invested for a very long time (retirement basically), because your portfolio will change over time.

Intermediate investments

Finally, we are on to intermediate investments. With intermediate investments, you basically want to balance short term investments with long term investments.

Remember the exercise that you completed above? You figured out what percentage of cash you would need in the short term, intermediate term, and long term. This is pretty much how you will want to balance your investments.

You will spread your investments across your savings account, money market account, CDs, stocks, and bonds.

Now I could write an entire article on how you would want to do this, but the take home message is this: you should always spread your investments among different time horizons, depending on your own situation.

Conclusion

Above I have presented investment options for college students. I believe that they best way to understand your options is first by understanding how long you plan on investing your money.

From there, you will have various options to choose from. Don’t complicate things, just GET STARTED. Thinking too much will lead to analysis paralysis.

Take some time to carefully consider your options, then act immediately. RIGHT NOW!

My crazy financial goal

“I want to be a millionaire in ten years.” That is my goal for myself that I set last October, and I plan on sticking with it. If everything all goes according to plan, I will be a millionaire by the time I am 33 years old.

The reason I chose the goal of being a millionaire in ten years was I had just finished reading Think and Grow Rich by Napoleon Hill. Napoleon Hill illustrated many examples of people who set specific, definitive goals. He said that it is not enough to just wish to be rich. That is not a real goal because you have no way to truly measure it. Goals that can be measure in time and value are much more motivating because you have a very specific point to work towards.

If I don’t become a millionaire in ten years, I will have failed my goal. If I just said that I wanted to be rich in ten years, there is no way for me to know if I failed or succeeded. I suppose I could poll a bunch of strangers and ask them if I am rich, but that would just be silly.

Another point on why you want you want goals to be specific is because you will be much better off in the long run shooting for something and failing than you are by just having a vague goal. By striving for a singular point, you are more likely to push yourself to achieve such goals.

“Shoot for the moon. Even if you miss, you’ll land among stars.” – Les Brown

So that’s it. I want to be a millionaire in ten years. I don’t know how exactly I will accomplish this goal or what the journey will entail, but I do know one thing: I will learn as much as I can through the entire process. I will work hard to provide great value to people. I will do what it takes to become a success. 

Businesses know how to make you buy a product. Don’t become a victim of their mind tricks.

What an amazing deal! I can’t believe I’m getting such a steal! 

When buying a product on credit, it’s not hard to fall victim to believing you got a great deal. Big companies know how consumers think and they know how to get a product into their hands as quickly as possible. Millions of dollars are spent advertising and researching consumer behavior.

One technique companies use to peddle their product onto consumers is to make them believe they are getting an amazing deal. I’m sure you’ve seen infomercials which tout that you can buy a product with “6 easy payments of $99 a month, no money down!” Would you still but the product if they told you it was “$600 dollars plus interest at a ridiculously high interest rate!” I don’t think so.

This same thing goes for cars. In the last article I discussed the negatives of taking out car loans. Once again, companies with throw out phrases like “only $299 a month for 60 months.” For them, it’s all about framing and making your gigantic purchase seem not so gigantic. When you spend a little amount over a long period of time you are dying a very slow but painful financial death of a thousand cuts. You become a servant to the lender and lose any chance at financial freedom.

The little things add up on both sides of the coin

You know how saving small amounts over time can add up? Well spending small amounts over time can have that same effect, except you suffer instead of benefiting. Don’t get fooled into thinking you aren’t paying a lot. Don’t look at purchases as payments in monthly installments. Take a step back and realize what the total cost of your purchase is, and then decide if it is really worth it to you.

We are all victims of the instant gratification bug

Instant gratification. We are all guilty of it. How could we not be. We live in the of the fastest generations ever. I was on Amazon the other day looking for books to read and stumbled across one that was on my short list of books to read. I went to the page for the book and in less than 10 seconds and the click of a single button, that book was delivered to my Kindle. I even commented to my friend how scary it was that I just bought something with the single click of a button.

With how quickly it is to buy things now, it is easy to get tripped up and knocked off the path to financial independence. In a matter of seconds you can spend hundreds, heck, even thousands of dollars. Back in the olden times you actually had to get in your car, drive to a store, find the item you wanted before you could even purchase it. You had time to think about the purchase you were about to make before you made it. By the time you got to the store you may have even reconsidered making the purchase altogether.

Once again, companies are behind making it easier for consumers to buy products. The faster you can buy a product, the less time you have to think about whether or not you truly needed it. It is their job to figure out how to get a product into your hands as fast as possible. Look around you. It’s everywhere. Fast food, Wal-Mart on every corner, one click purchases.

Considerations you should make before a major purchase

1)      Do I really need this product?I advise you, before you buy a product, take exactly three minutes before you click buy and consider the following:

2)      Will I still be satisfied with this product in six months?

3)      Does this product help improve my life?

4)      Is this not an impulse purchase?

5)      Can I afford this product without going into debt?

6)      Finally, Do I have a good reason for this purchase?

psychology of debt

The more “Yes” answers you have, the more likely it is that your purchase is a good one. It can be a dangerous trap when you combine instant gratification with credit cards. Not only are you mindlessly buying something, you are buying it with debt which can take months or years to pay off. This is precisely why I advise you take at least three minutes to really think about what you are about to do. Don’t set yourself back two years for a purchase you made in ten seconds.

Summary

  • Companies know how consumers think, and will make a large purchase appear smaller by giving you the cost per month instead of the total cost of a product.
  • Just like saving a little bit adds up over time, spending a little bit in monthly installments will add up over time. Understand the actual cost of your purchase.
  • Companies know consumers seek instant gratification and have responded by making products quicker and easier to buy.
  • Take into consideration the six questions I listed above before you make a major purchase. Don’t let a split second decision set you back years.

Photo Credit/Flickr User Paul Inkles

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?