Building a wealth snowball ~ Get Rich Slowly

To conclude “back to basics” month at Get Rich Slowly, today we’re going to explore an important concept, one that’s new to most people. Today, I want to talk about building a wealth snowball.

After nearly twelve years of writing about money, I’ve gone from not knowing anything to having some very strong opinions.

I now believe know, for instance, that the single most important thing you can do to improve your financial situation is also the most elementary: Increase the gap between your earning and spending.

Spend less than you earn — that’s the basic rule of personal finance.

People don’t want to hear this. It sounds too basic, too facile and simplistic. It’s reassuring to believe that the answer to your financial woes is somehow more complex. It isn’t. The answer to every financial problem is to increase the gap between your earning and spending. (The complicated part, the tough part, is developing the skills and mental fortitude to make this happen.)

If you spend less than you earn, you’ll build a wealth snowball that will allow you do do the things you dream of doing and to have the things you dream of having.

What on earth is a wealth snowball? It’s the ever-increasing stash of cash you have in your banking and brokerage accounts as you boost your saving rate and earn returns on your investments. Your wealth snowball is your nest egg, your net worth.

To better explain the wealth snowball, it might help to first review the concept of the debt snowball.

The Debt Snowball

Most of you are probably familiar with the debt snowball. This term — popularized (but not invented) by Dave Ramsey — describes a method for rapidly repaying debt. Here’s how it works:

  • Let’s say Jim is in $20,000 debt. The minimum payments on his debts come to $500 per month. Each month, he pays this $500 total toward his debts.
  • When Jim repays his first debt, let’s say one $100 minimum payment disappears. Now his minimum payments total $400 per month. With the debt snowball, however, Jim doesn’t reduce his debt payments to $400. He keeps them at $500 per month, applying that extra $100 beyond the minimum payments to the debt of his choice.
  • Now let’s assume Jim pays off a second debt, eliminating one $120 minimum payment. Now his minimum payments total $280 per month. Again, Jim keeps his total debt payments at $500 per month, throwing an extra $220 per month at whichever debt her chooses.
  • This pattern continues until all of Jim’s debts have been repaid. He never drops his debt payments below $500 per month, even when his total minimum payments are far lower.

With the debt snowball, the order in which Jim repays his debts is irrelevant. (With Dave Ramsey’s version, you repay debts with low balances first. There are other ways to order the debts, though.) What matters is that as you eliminate each debt, you keep your total debt payments steady. Doing this creates an ever-accelerating snowball of debt reduction.

To make the snowball even more powerful, Jim could add to his total monthly debt payments. Imagine he gets a $200 per month raise at work. Instead of spending that money, he could add it to his $500 debt payment to achieve a total of $700 per month in debt reduction. In this manner, his debt snowball can become an unstoppable force.

Snowball by Kamyar Adi

Life After Debt

But what happens once Jim is able to get out of debt? What happens when he no longer has debt payments and suddenly finds himself with an extra $500 in cash each month?

For folks who take the view that debt reduction is a goal and not a side effect, there’s a real danger that this money will now be used to fund consumerism — and that this consumerism will snowball too, leading them right back into debt. I’ve seen it happen.

But debt reduction is an outcome and not a habit. As such, I think it makes a sub-optimal goal. Better instead to focus on the habit that leads to debt reduction. That habit is saving. That habit is creating a gap between your earning and spending.

For Jim to be able to pay $500 toward his debt each month, he had to increase his earning and decrease his spending until he had enough cash to make the payments. It’s this action — spending less than he earns — that should be Jim’s goal, not debt reduction. Debt reduction is merely a side effect, an outcome, a result of implementing a smart action.

If instead of focusing on debt elimination as a goal, Jim instead pursues the gap between his earning and spending, he puts himself in a terrific position to enjoy other positive side effects once his debt is gone. Perhaps the best of these side effects is the reverse of the debt snowball, the wealth snowball.

The Wealth Snowball

Now let’s imagine that Jim had never become focused on debt elimination as a goal. Let’s imagine that he always viewed it as a side effect, and that he (rightly) kept his attention on his saving rate.

Once Jim has finished his debt snowball, once he’s repaid his $20,000 in debt, he now has $500 per month to do with as he pleases. Because Jim is a smart fellow, he decides to build a wealth snowball. Here’s how it works:

  • Jim opens a retirement account. Because he reads Get Rich Slowly, he knows how to invest. He takes the $500 per month he had been using to repay debt, and now he puts that money into an index fund at Vanguard (or Fidelity).
  • Whenever Jim has a chance to work overtime, he works overtime. He doesn’t spend that money, but puts it toward his new wealth snowball. Same thing whenever he gets a raise: He invests that money for future growth.
  • Jim looks for ways to economize, large and small. He bikes to work during the summer. The money he saves, he invests. He and his wife move to a smaller home, one with a smaller mortgage. He invests the difference between the old payment and the new payment.

Jim does what he can to increase the gap between his earning and saving, because he’s come to understand that his saving rate is the key to building an enormous wealth snowball. If he can invest $1000 per month, his wealth snowball grows twice as quickly as if he were to invest $500 per month.

Because I’m lazy and don’t want to make a new graph, I’m going to re-use the same graph I used in yesterday’s article about how to invest. Although the numbers are different than the ones I’ve been using for Jim, the idea is the same. Let’s assume Jim’s wife Jane invests $5000 per year for 45 years and earns an 8% return on her investments. Here’s how her wealth snowball would grow with time.

Pretty amazing, huh? Jane contributes $5000 per year for 45 years. That’s a total of $225,000. In the end, her investments are worth ten times what she contributed! That’s the wealth snowball in action.

The Shockingly Simple Math of the Wealth Snowball

This concept is what Mr. Money Mustache has famously referred to as the shockingly simple math behind early retirement. Look at these numbers.

  • With a 10% saving rate, you need to work for 50 years to save enough to afford to retire. Your wealth snowball grows — but not quickly.
  • With a 20% saving rate, you need to work for 37 years before you’ll have saved enough to retire.
  • With a 35% saving rate, you need to work for 25 years to achieve Financial Independence.
  • With a 50% saving rate, you only need to work for 17 years before you can retire.
  • And if you can manage to save 70% of your income, you could retire in 8-1/2 years!

The “shockingly simple math” is true even if you have zero desire to retire early. Whatever your goals are, the more you’re able to save, the quicker you can achieve them.

This isn’t magic. It’s not a scam. It’s math. It’s the wealth snowball in action.

The sooner you grow your wealth snowball — and the bigger you grow it — the sooner you can do the things you dream of doing.

Last week at Of Dollars and Data, Nick Maggiulli shared another benefit of a large saving rate: As you increase the amount you save, your investment returns become less important. Here’s a graph from Maggiulli’s article that demonstrates this phenomenon:

The more you save, the less the market matters

If you only save 10% of your income, then the growth of your wealth snowball is largely at the mercy of market returns. If the stock market has several good years in a row, your wealth snowball embiggens. If it has several bad years in a row, your wealth snowball remains roughly the same size.

But if you save half your income, for instance, market forces have a minimal impact on how quickly your wealth snowball grows, how quickly you can achieve your financial goals. Sure, there’s an impact, but because you’re saving half your income, that impact is much smaller than it is for your friends who are saving less.

A Call to Action

My not-so-secret wish is that every reader of Get Rich Slowly would make it their personal mission to increase their saving rate, to widen the gap between their earning snd spending so that they could build ginormous wealth snowballs that allow them to pursue their purpose.

For readers who already save, my dream is that you would save even more.

For readers who are in debt, start where you are. Rearrange your life to achieve a positive cash flow, then use that positive cash flow to build a debt snowball. When you’ve used that debt snowball to crush your debt, do not stop. Keep that snowball rolling, but now use it to build wealth.

The journey may seem difficult now. I get it. But I believe in you. You can do it. Wherever you are, whoever you are, you too can build a wealth snowball if you try.

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An essential guide for beginners ~ Get Rich Slowly

When I told readers that January would be “back to basics” month at Get Rich Slowly, the number-one request I received was to write about how to invest.

Rather than scatter investing info throughout the month, I decided to collect the essentials into one mammoth article. Here it is: all you need to know about how to invest — even if you’re a beginner.

In writing this article, I tried not to bog it down with jargon and definitions. (I’m sure I let some of that slip through the cracks, though. I apologize.) Nor did I dive deep. Instead, I aime to share the basic info you need to get started with investing.

What follows are eight simple rules for how to invest. And in the end, I’ll show you how to put these rules into practice. First, let’s dispel some popular misconceptions.

Investing Isn’t Gambling — and It Isn’t Magic Either

Investing scares many people. The subject seems complicated and mysterious, almost magical. Or maybe it seems like gambling. When the average person meets with his financial adviser, it’s often easiest to sit still, smile, and nod.

One of the problems is that the investing world is filled with jargon. What are commodities? What’s alpha? An expense ratio? How do bonds differ from stocks? And sometimes, familiar terms – such as risk – mean something altogether different on Wall Street than they do on Main Street.

Plus, we’re bombarded by conflicting opinions. Everywhere you look, there’s a financial expert who’s convinced she’s right. There’s a never-ending flood of opinions about how to invest, and many of them are contradictory. One guru says to buy real estate, another says to buy gold. Your cousin got rich with Bitcoin. One pundit argues that the stock market is headed for record highs, while her partner says we’re due for a “correction”. Who should you believe?

Perhaps the biggest problem is complexity – or perceived complexity. To survive and seem useful, the financial services industry has created an aura of mystery around investing, and then offered itself as a light in the darkness. (How convenient!) As amateurs, it’s easy to buy into the idea that we need somebody to lead us through the jungle of finance.

Here’s the truth: Investing doesn’t have to be difficult. Investing is not gambling, and it’s not magic.

Playing Poker

You are perfectly capable of learning how to invest. In fact, it’s likely that — even if you know nothing right now — you can earn better investment returns than 80% of the population without any scammy tricks or expensive tips sheets.

Today, I want to convince you that if you keep things simple, you can do your own investing and receive above-average returns – all with a minimum of work and worry. Sound good? Great! Let’s learn how to invest.

Note: This is a long article. I’ve tried to pack it with links to other resources and supporting material. You may want to bookmark it for future reference.

Investing Rule #1: Get Started

The first thing you need to know about investing is that you should start today. It doesn’t matter how much money you have. What matters is getting started — then making it a habit.

The amount of [money] you start with is not nearly as important as getting started early,” writes Burton Malkiel in The Random Walk Guide to Investing, which is an excellent beginner’s book on how to invest. “Procrastination is the natural assassin of opportunity. Every year you put off investing makes your ultimate retirement goals more difficult to achieve.”

The secret to getting rich slowly, he says, is the extraordinary power of compound interest. Given enough time, even modest stock market gains can generate real wealth.

As you’ll recall from your junior high math class, compounding is the snowball-like growth that occurs as the interest (or other return) from an investment generates more interest. Let’s look at some examples.

  • If you make a one-time contribution of $5000 to a retirement account and receive an 8% annual return, you’ll earn $400 during the first year, giving you a total of $5400.
  • During the second year, you’ll receive 8% not only on the initial $5000, but also on the $400 in investment returns from the first year, for total earnings of $432.
  • In the third year, you’ll earn returns of $466.56. And so on.

After ten years of receiving an 8% annual return, your initial $5000 will have more than doubled to $10,794.62!

Compounding is powerful, but it needs time to work its magic. The longer you wait to begin investing, the less time your money has to grow.

Assume you a one-time $5000 contribution to your retirement account at age twenty. And assume that your account somehow manages to earn an 8% annual return every year. If you never touch the money, your $5000 will grow to $159,602.25 by the time you’re 65 years old. But if you wait until you’re forty to make that single investment, your $5000 would only grow to $34,242.38.

The power of compounding can be accentuated through regular investments. It’s great that a single $5000 investment can grow to nearly $160,000 in 45 years, but it’s even more exciting to see what happens when you make saving a habit. If you were to invest $5000 annually for 45 years, and if you left the money to earn an 8% annual return, your savings would total over $1.93 million. A golden nest egg indeed! You’d have more than eight times the amount you contributed.

This is the power of compounding.

It’s human nature to procrastinate. A lot of people put off investing for retirement (and other goals) because they get distracted by the demands of daily life. (Studies show that only about half of Americans have money in the stock market.) “I can start saving next year,” they tell themselves. But the costs of delaying are enormous. Even one year makes a difference.

The following chart illustrates the cost of procrastination.

If, starting when you’re twenty, you invest $5000 per year and receive an 8% return, your account would have $1,932,528.09 when you’re 65 years old. But if you wait even five years, you’d have to increase your annual contributions to nearly $7500 to have that same amount by age 65. And if you were to wait until you were forty to begin investing, you’d have to contribute over $25,000 per year to hit the same target!

The Cost of Procrastination

When investing, time is your friend. Start as soon as you can. Tomorrow is good. Today is better. (You can’t invest yesterday, so now will have to do.)

True story: For a brilliant example of compounding in real life, turn to American statesman Benjamin Franklin. When he died in 1790, Franklin left the equivalent of $4400 to each of two cities, Boston and Philadelphia. But his gift came with strings attached. The money had to be loaned out to young married couples at five percent interest. What’s more, the cities couldn’t access the funds until 1890 – and they couldn’t have full access until 1990. Two hundred years later, Franklin’s $8800 bequest had grown to more than $6.5 million between the two cities! True story.

Investing Rule #2: Think Long-Term

A lot of people have the mistaken idea that investing requires following daily stock market movement, then buying and selling stocks frequently. That’s how it’s done in the movies, but you know what? People who invest like that actually tend to make less than the people who do nothing. I’m not making this up.

Smart investing is a waiting game.

It takes time – think decades, not years – for compounding to do its thing. But there’s another reason to take the long view.

In the short term, investment returns fluctuate. The price of a stock might be $90 per share one day and $85 per share the next. And a week later, the price could soar to $120 per share. Bond prices fluctuate too, albeit more slowly. And yes, even the returns you earn on your savings account change with time. (High-interest savings accounts yielded five percent annually in the U.S. just a few years ago; today, the best savings accounts yield about 1.5%.)

Short-term returns aren’t an accurate indicator of long-term performance. What a stock or fund did last year doesn’t tell you much about what it’ll do during the next decade.

In Stocks for the Long Run, Jeremy Siegel analyzed the historical performance of several types of investments. Siegel’s research showed that, for the period between 1926 and 2006 (when he wrote the book):

  • Stocks produced an average real return (or after-inflation return) of 6.8% per year.
  • Long-term government bonds produced an average real return of 2.4%.
  • Gold produced an average real return of 1.2%.

My own calculations – and those of Consumer Reports magazine – show that real estate returns even less than gold over the long term.

Although stocks tend to provide handsome returns over the long term, they come with a lot of risk in the short term. From day to day, the price of any given stock can rise or fall sharply. Some days, the price of many stocks will rise or fall sharply at the same time, causing wild movement in entire stock-market indexes.

Even over one-year time spans, the stock market is volatile. While the average stock-market return over the past 80 years was about 10% (about 7% after inflation), the actual return in any given year can be much higher or lower. In 2008, U.S. stocks dropped 37%; in 2013, they jumped over 32%.

Here’s a table showing the rise and fall of the S&P 500 index over a fifteen-year timespan. Looks like a roller coast, right?

[S&P 500 Annual Returns]

During any one-year period, stocks will outperform bonds only 60% of the time. But over ten-year periods, that number jumps to 80%. And over thirty years, stocks almost always win.

Despite the stock market’s ongoing wins, the average person almost always underperforms the market as a whole. Even investment professionals tend to underperform the market.

During the 20-year period ending in 2012, the S&P 500 returned an average 8.21%. The average investor in stock-market mutual funds only earned 4.25%. Why? Because they tended to panic and sell when prices dropped, and then bought back in as prices rose – just the opposite of the “buy low, sell high” advice we’ve all heard.

Investing is a game of years, not months.

Don’t let wild market movements make you nervous. And don’t let them make you irrationally exuberant either. What your investments did this year is far less important than what they’ll do over the next decade (or two, or three). Don’t let one year panic you, and don’t chase after the latest hot investments. Stick to your long-term plan.

Investing Rule #3: Spread the Risk

While the stock market as a whole returns a long-term average of ten percent per year, individual stocks experience drastically different fortunes. In 2013, the S&P 500 index grew 29.60%. But some of the 500 companies that made up the index did much better than others. Stock in Netflix (NFLX) soared 297.06%. Best Buy (BBY) was up 237.64% and Delta Airlines up 130.33%. Meanwhile, Newmont Mining (NEM) dropped 51.16% and Teradata (TDC) fell 27.18%.

To smooth the market’s wild ups and downs, smart investors spread their money around. Surprisingly, studies show that while diversification reduces risk, it doesn’t affect average performance much — if at all. (For more info, check out this guide to diversification from the U.S. Securities and Exchange Commission.)

Buying individual stocks isn’t really investing — it’s gambling. I know this from experience. In the past, I thought I could outsmart the market. In 2000, enamored by the PalmPilot, I bought shares of the company that made the devices. I paid close to $90 per share. Just over a year later, the shares had lost 90% of their value. (I made similar mistakes with The Sharper Image and Countrywide Financial.)

By owning more than one stock, you reduce your risk. If you have ten stocks and one of them tanks, the damage isn’t as bad because you still own nine others. True, you don’t reap all of the rewards if a stock skyrockets like Netflix did in 2013, but the smoother ride is generally worth it.

Investors also reduce risk by owning more than one type of investment. As we’ve seen, over the long term stocks are better investments than bonds or gold or real estate. But over the short term, stocks only outperform bonds about two-thirds of the time. Because the prices of stocks and bonds move independently of each other, investors can reduce risk by owning a mix of both.

One popular guideline is to base how much you put into bonds on your age. If you’re 35 years old, put 35% into bonds and 65% into stocks. If you’re 53, put 53% into bonds and 47% into stocks. This is a fine starting point for the average investor.

One of the best ways to spread risk when investing is through the use of mutual funds.

Mutual funds are collections of investments. They let people like you and me pool our money to buy small pieces of many companies all at once. Imagine, for instance, the hypothetical Awesome Fund, which invests in fifty different stocks and ten different corporate bonds. By buying one share of the Awesome Fund, You, Inc. would have a piece of sixty different investments. If one goes bust, the damage is minimized.

Mutual funds make diversification easy by letting you own shares in many companies at once. Plus, when you own a mutual fund, somebody else does the research and buys and sells the stocks so you don’t have to.

Because mutual funds offer great advantages to individual investors, they’ve soared in popularity over the past 30 years. But they’re not without drawbacks.

Investing Rule #4: Keep Costs Low

The biggest drawback to mutual funds is their cost. With stocks and bonds, you usually only pay when you buy and sell. But with mutual funds, there are ongoing costs built into the funds. (You don’t pay these costs directly; instead, they’re subtracted from the fund’s total return.) Some of these costs are obvious, but others aren’t.

All together, mutual-fund costs typically run about 2% annually. So for every $1,000 you invest in mutual funds, $20 gets taken out of your return each year. (On average.) This may not seem like much, but 2% is huge when it comes to investments.

In fact, according to a 2002 study by Financial Research Corporation, the best way to predict a mutual fund’s future performance was to compare its expense ratio with similar funds. Mutual funds with lower fees tend to have better performance. Again and again, other studies have found the same thing.

In his book Your Money & Your Brain, Jason Zweig notes:

“Decades of rigorous research have proven that the single most critical factor in the future performance of a mutual fund is that small, relatively static number: its fees and expenses. Hot performance comes and goes, but expenses never go away.”

There are a couple of reasons mutual funds are so expensive.

  • First, most funds are run by a team of people who research opportunities, buy and sell individual investments, and do other work necessary to maintain the fund. These “actively managed” funds subtract their operating costs from whatever money they earn (or lose) for their investors.
  • Many funds also carry a “load”, which is a one-time sales charge or commission. These loads are generally around five percent. Think about that. When you purchase a mutual fund with a load, you’re basically agreeing to handicap yourself by five percent before you even begin to run the investment race. That doesn’t sound like a smart investment to me!

Fortunately, there’s an alternative to these expensive actively managed funds. Some funds are “passively managed”.

Passively managed funds – also called index funds – try to mimic the performance of a specific benchmark, like the Dow Jones Industrial Average or S&P 500 stock-market indexes. Because these funds try to match (or index) a benchmark and not beat it, they don’t require much intervention from the fund manager and her staff, which means their costs are much lower.

The average actively managed mutual fund has a total of about 2% in costs, whereas a typical passive index fund’s costs average only about 0.25%. So, to come out ahead on a passively managed fund, the average fund manager doesn’t just have to beat his benchmark index — he has to beat it by 1.75%! And since both types of funds — active and passive — earn market-average returns before expenses, investors who own actively managed funds typically earn 1.75% less than those who own index funds!

Although this 1.75% difference in costs between actively and passively managed mutual funds may not seem like much, there’s a growing body of research that says it makes a huge difference in long-term investment results.

Further reading: If you’re a math nerd and want to see all the calculations and proof as to why index funds do better than actively-managed fund, check out this short (but dense) paper from Stanford professor William Sharpe: “The Arithmetic of Active Management”.

Investing Rule #5: Keep It Simple

Index funds offer another great advantage for individual investors like you and me.

Instead of owning maybe twenty or fifty stocks, an index fund owns the entire market. (Or, if it’s an index fund that tracks a specific portion of the market, they own that portion of the market.) For example, an index fund like Vanguard’s VFINX, which attempts to track the S&P 500 stock-market index, owns all of the stocks in S&P 500 and in the same proportions as they exist in the market.

The bottom line is this: The only investments you need to hold are index funds. They provide lower risk, lower costs, and lower taxes than stocks or actively managed mutual funds. Yet they provide the same returns as the market as a whole.

I’m not the only one who believes this. Over the past twenty years, many intelligent investors have come to this same conclusion. In fact, the greatest investor of all time — Warren Buffett — has publicly and repeatedly argued that 99% of people should be invested in index funds.

Still, there many different index funds from which to choose. Plus, how many should you own? As always, it pays to keep things simple.

One good way to get started is to use a lazy portfolio, a balanced collection of index funds designed to do well in most market conditions with a minimum of fiddling from you. Think of them as recipes: A basic bread recipe contains flour, water, yeast, and salt, but you can build on it to get as elaborate as you’d like.

This two-fund portfolio from financial columnist Scott Burns may be the simplest way to achieve balance. He calls it his “couch potato portfolio”. It’s evenly split between stocks and bonds:

  • 50% Vanguard 500 Index (VFINX)
  • 50% Vanguard Total Bond Market Index (VBMFX)

Burns has also created a “couch potato cookbook” that lists several different lazy portfolios and answers some common questions.

In his book How a Second Grader Beats Wall Street, Allan Roth (no relation to your humble author) explains how he taught his son how to invest. He used this lazy portfolio:

  • 40% Vanguard Total Bond Market Index (VBMFX)
  • 40% Vanguard Total Stock Market Index (VTSMX)
  • 20% Vanguard Total International Stock Index (VGTSX)

This is the medium-risk version of Roth’s second-grader portfolio. For higher risk, you’d put 10% into bonds, 60% into American. stocks, and 30% into international stocks. A lower-risk allocation would be 70% in bonds, 20% in American stocks, and 10% in foreign stocks.

Though I’m a passive investor, I don’t actually use a lazy portfolio. But if I were to use one, it’d follow three simple rules. First, I’d want the bond portion to equal my age. Second, I’d want 10% in real estate to spread risk a little more. And third, I’d want the stock portion to be two-thirds American stocks and one-third international stocks. Since I’m 48 years old, it’d look like this:

  • 48% Vanguard Total Bond Market Index (VBMFX)
  • 28% Vanguard Total Stock Market Index (VTSMX)
  • 14% Vanguard Total International Stock Index (VGSTX)
  • 10% Vanguard REIT Index (VGSIX)

This lazy portfolio changes with your age, which I like. It takes on more risk when you’re younger and then eases into bonds as you get older.

These are just a few suggestions. There are scores of index funds out there, and countless ways to build portfolios around them. In fact, there’s a subculture of investors who love lazy portfolios. You can read more about lazy portfolios at sites like Bogleheads and Marketwatch.

There’s no one right approach to index-fund investing. Yes, it’s simple, but you can spend a long time deciding which asset allocation is right for you. While it’s important to do the research and educate yourself, you probably shouldn’t spend too much time sweating over which choice is “best.” Just pick one and get started. You can always make changes later.

Investing Rule #6: Make It Automatic

After you’ve set up your investment account, it’s time to remove the human element from the equation. As always, you should do what it can to automate good behavior.

If you plan to do all your investing through your employer’s retirement plan, it’s easy to get started. Contact HR to have retirement contributions automatically taken out of your paycheck. You should at least contribute as much as your employer matches. But remember: The more you contribute, the sooner you’ll reach the goals in your personal action plan. Funnel as much profit as possible into investing for the future.

Many company plans don’t offer index funds. In that case, find funds that have low costs and are widely diversified. So-called lifecycle or “target-date” funds are often an okay backup option. If your employer-sponsored plan doesn’t offer a lot of choices, ask HR if it’s possible to get more. They might say “no,” but then again, they might expand the company’s menu of mutual funds. It never hurts to ask!

If you plan to invest on your own — whether instead of or in addition to investing through your company’s plan — contact the mutual fund companies directly instead of going through a broker. Three of the larger no-load mutual fund companies are:

If you’re just learning how to invest, you should probably pick one company and stick with it; that’ll make things easier because you’ll be able to track all your investments in one place. Vanguard is probably the most popular company for passive investors. Personally, I use Fidelity. T. Rowe Price is fine too.

For a more detailed discussion of how to automate your investing, pick up a copy of David Bach’s The Automatic Millionaire.

Investing Rule #7: Ignore the Noise

As you’re learning how to invest, one important skill to master is ignoring all of the noise. Ignore the news. Ignore your friends. Ignore everyone. Make a plan. Put that plan into action. Make it automatic. Then forget about it. Seriously, this is the secret to investing success.

People tend to pour money into stocks in the middle of bull markets — after the stocks have been rising for some time. Speculators pile on, afraid to miss out. Then they panic and bail out after the stock market has started to drop. By buying high and selling low, they lose a good chunk of change.

[USA Today Hyperbole]

It’s better to buck the trend. Follow the advice of Warren Buffett, the world’s greatest investor: “Be fearful when others are greedy, and be greedy when others are fearful.”

In his 1997 letter to Berkshire Hathaway shareholders Buffett — the company’s chairman and CEO — made a brilliant analogy: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?” You want lower prices, of course: If you’re going to eat lots of burgers over the next 30 years, you want to buy them cheap.

Buffett completes his analogy by asking, “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?”

Even though they’re decades away from retirement, most investors get excited when stock prices rise (and panic when they fall). Buffett points out that this is the equivalent of rejoicing because they’re paying more for hamburgers, which doesn’t make any sense: “Only those who will [sell] in the near future should be happy at seeing stocks rise.” He’s driving home the age-old wisdom to buy low and sell high.

Following this advice can be tough. For one thing, it goes against your gut. When stocks have fallen, the last thing you want to do is buy more. Besides, how do you know the market is near its peak or its bottom? The truth is you don’t. The best solution is to make regular, planned investments — no matter whether the market is high or low.

Meanwhile, ignore the financial news.

In Why Smart People Make Big Money Mistakes, Gary Belsky and Thomas Gilovich cite a Harvard study of investing habits. The results?

Investors who received no news performed better than those who received a constant stream of information, good or bad. In fact, among investors who were trading [a volatile stock], those who remained in the dark earned more than twice as much money as those whose trades were influenced by the media.”

Though it may seem reckless to ignore financial news, it’s not: If you’re saving for retirement 20 or 30 years down the road, today’s financial news is mostly irrelevant. So make decisions based on your personal financial goals, not on whether the market jumped or dropped today.

Investing Rule #8: Conduct an Annual Review

During a given year, some of your investments will have higher returns than others. For example, if you started the year with 60% in stocks and 40% in bonds, you may find that you now have 66% in stocks and 34% in bonds. What’s more, your goals may have changed, or you might discover you can’t stomach as much risk as you thought you could (this happened to a lot of folks in 2008).

To compensate, rebalance your investments at the end of each year. This simply means you should shift money around so your assets are allocated the way you want them to be. Doing this is another way to take the emotion out of investing.

There are two ways to rebalance.

  • You can sell your winners and buy your losers. By selling the investments that have grown and buying those that lag behind, you’re buying low and selling high, just as you should. Be aware, though, that you might owe taxes if you go this route, so check out the tax implications before you sell any securities.
  • If you can afford it, contribute new money to your investment account, but only to buy the assets that need to catch up. By doing this, you don’t have to worry about taxes, but you’ll need some cash on hand.

Though many investment professionals swear by rebalancing, there’s some research that shows it’s not as important as people once thought. In The Little Book of Common Sense Investing, John Bogle writes, “Rebalancing is a personal choice, not a choice that statistics can validate. There’s nothing the matter with doing it…but also no reason to slavishly worry about small changes…” In other words: Rebalance if your asset allocation is way out of line but don’t worry about small changes — especially if you’d end up paying a lot of fees by rebalancing.

The Bottom Line

In this article, you’ve learned that the stock market provides excellent long-term returns, and that you can do better than 95% of individual investors by putting your money into index funds. But how do you put this knowledge to work? What’s the best way to take advantage of the things you’ve learned?

The answer is shockingly simple: To get started investing, set up automatic investments into a portfolio of index funds. Here’s how:

  • Put as much as you can into investment accounts – as soon as possible. Fund tax-advantaged accounts (such as retirement accounts) before taxable accounts.
  • Invest in a low-cost stock index fund, such as Vanguard’s Total Stock Market Index Fund (VTSMX) or Fidelity’s Spartan Total Market Index Fund (FSTMX).
  • If the stock market makes you nervous, or you want to spread the risk, put some of your money into a bond fund like Vanguard’s Total Bond Market Index Fund (VBMFX) or Fidelity’s Total Bond Market Index Fund (FTBFX).
  • If you want diversification with less work, invest in a low-cost combo fund like Vanguard’s STAR Fund (VGSTX) or Fidelity’s Four-in-One Index Fund (FFNOX).

After that, ignore the news no matter how exciting or scary things get. Once a year, go through your investments to be sure your investments still match your goals. Then continue to put as much as you can into the market—and let time take care of the rest.

That’s it. That’s how to invest so that you earn great returns without stress and worry. Seriously. Do this and you should outperform most other individual investors over the long term.

This strategy isn’t just great for investing novices. Even market professionals endorse it. In his 2013 letter to shareholders, for instance, Warren Buffett outlined what will happen to his vast wealth when he dies. Most of it will go to charity; some will go to his wife. How will his wife’s money be handled?

“My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors…”

Are there other investment strategies that might provide similar returns? Sure. But these approaches also require greater education, sophistication, and attention on the part of the investor.

Unless you know for a certainty that you have this knowledge, sophistication, and attention, you’re better off sticking with index funds.

Footnote: How I Invest

Do I practice what I preach? You bet! All of my money is in index funds and individual bonds. Here are my top four holdings as of today:

[My Top Holdings]

That gives me an overall asset allocation that looks like this:

[My Asset Allocation]

I’m 48 years old and have 80% of my portfolio in stocks, 10% in bonds, and 10% in other investments. I do still own 1115 shares of now-worthless Sharper Image stock. I keep it to remind me of my past stupidity.

One of my personal goals over the next few years is to gain the knowledge and sophistication necessary to dabble in other forms of investing. (I believe I have the mindset already.) For now, I’m content heeding Warren Buffett’s advice. It’s served me well.

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How to save for lucky breaks ~ Get Rich Slowly

There’s a consensus among money writers that one of the most important first steps on the road to financial freedom is establishing an emergency fund. Your emergency fund is like self-insurance to protect you from all the small, surprise disasters we each encounter in daily life.

But not every unexpected event is unwelcome. Sometimes life brings us lucky breaks — but these opportunities can still cost money. That’s why I believe it makes sense to also keep a chunk of cash in an “opportunity fund”.

The Opportunity Fund

I first learned about opportunity funds from reading about billionaires and business owners. These savvy savers often set aside money specifically to take advantage of unexpected opportunities.

I once read an interview with Mark Cuban, for example, in which he described how a person should handle a windfall. “First, I pay off all my credit card debt and evaluate paying off any other debt I have,” he said. “What I have left I put in the bank.”

Why? “Because then it’s available for when I get a good opportunity. Every five years or so there is a bubble bursting or amazing deals available because of a change in the economy.”

Jim Wang from Wallet Hacks is a strong proponent of opportunity funds. “Missing out on an opportunity is often as bad as being struck by an unexpected expense,” Wang wrote for U.S. News a couple of years ago. “In reality, both funds are important if you want to be financially responsible.”

Your emergency fund should be liquid and easy to access. It’s best to keep it in a savings account. But your opportunity fund can be (can probably should be?) more difficult to access. It’s okay to put that money into mutual funds or certificates of deposit. (Right now, mine is in mutual funds. When I see an opportunity I want to take advantage of, there’s about a week delay between selling the shares and having the cash in my checking account.)

Your opportunity fund will start small. But as your financial situation improves, you can contribute more and more to the account. In time, your opportunity fund will become large enough that you can do some truly amazing things — like take time off for a round-the-world trip with your best friend, or quit your job to start your own business, or buy that classic car you’ve always wanted.

Real-Life Examples

Longer ago, when I was in debt, I felt like I was unlucky. I watched as my friends took trips to far away places, bought shiny new gadgets, or moved into bigger homes. I wondered why I couldn’t have these things.

Many times, a friend would come to me and ask if I wanted to join him for some sort of fun — dinner out, a basketball game, a trip around the world — and I’d have to decline because I couldn’t afford it. I wasn’t able to seize the opportunities that came my way because I didn’t have the free cash to do so.

Perhaps the biggest example from own life occurred twenty years ago. My friend Sparky had worked hard to save enough money to travel the world for several months. He asked if I wanted to join him for part of the trip. Of course, I wanted to — but I couldn’t. I had no savings and was deep in debt.

Today, however, I do keep money on hand to take advantage of unexpected opportunities. Here are some real-life examples:

  • When I spotted a great deal on a last-minute Alaskan cruise, I was able to book a fun (and relatively cheap) vacation.
  • When I found a deeply discounted display model at the local warehouse store, I was able to purchase a top-rated television at a bargain price.
  • I was recently chatting with a friend about how Kim and I want to buy a cheap used pickup. “My father might have one for sale,” he said. We’re exploring the idea. We couldn’t do that without an opportunity fund.
  • Over the past few years, I’ve discovered a handful of new businesses I believe in. I want to be a part of them. Because I keep money on hand to take advantage of opportunities, I now own 0.86% of The Financial Gym — among others.

These are just a few of the many opportunities I’ve been able to enjoy because I have money ready to pay for unexpected positive events.

Be Prepared for Opportunity

It’s not just me. I’ve discovered that many folks keep an opportunity fund (even if they don’t call it an “opportunity fund”.)

Over the past five years, for instance, I’ve spoken with hundreds of people who have achieved financial independence. These folks have accumulated enough capital that they’re no longer compelled to work for an income (although some choose to work for other motives). Many have remarked that money hasn’t bought them happiness; rather, it’s bought them freedom. When an opportunity arises, they have the freedom to take advantage of the situation.

The bottom line: It’s smart to set aside money in savings so that you’re prepared for both emergencies and opportunities.

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How and why you should start an emergency fund ~ Get Rich Slowly

This article is another installment in “back to basics” month at Get Rich Slowly.

Most personal finance experts agree: The first thing you should do — after meeting basic needs — is to establish an emergency fund.

Life is full of unexpected surprises, many of which cost money — a thief smashes the windshield of your car, your son gets sick, your water heater overflows. When people live paycheck to paycheck without any savings, they’re at the mercy of these small crises. Sometimes a tiny problem becomes a huge one because the victim wasn’t prepared for possible trouble.

Fender Bender

That’s where the emergency fund comes in.

What Is an Emergency Fund?
An emergency fund — or “rainy-day account” or “safe and sound money” or whatever you’d like to call it — is a chunk of change set aside specifically for the unexpected things life throws your way. It’s not to be used to buy a new car. It’s not to be used for a vacation to Paris. It’s not to be used to remodel your bathroom. It’s for use only in case of emergency: a tree falls on your house, your youngest daughter breaks her arm, you lose your job.

I have a couple of friends who believe emergency funds are unnecessary. They’re wrong. Maybe emergency funds are unnecessary if you’re rich. But these friends aren’t rich. For most people, emergency funds are a form of self-insurance. They’re a proactive way of protecting you and your family from random crappy events.

How Much to Save in an Emergency Fund

Though personal finance experts agree emergency funds are necessary, there’s no consensus on how much is enough. Here are just a few recommendations:

  • In The Wealthy Barber, David Chilton argues that it’s best to have adequate insurance to cover the big emergencies, and to set aside between $2000 and $3000 to cover small crises and the things that insurance won’t cover.
  • In The Six-Day Financial Makeover, Robert Pagliarini writes: “Your emergency reserve is your financial cushion in case something goes wrong and you lose your job or you need access to money quickly. Your emergency reserve should consist of at least three months’ worth of cash. Once you’ve saved enough for the cushion, you can [move on] to other goals.”
  • In You Don’t Have to Be Rich, Jean Chatzky recommends three to six months of living expenses.
  • In Your Money or Your Life, Joe Dominguez and Vicki Robin recommend six months of living expenses — but only once you’ve achieved financial independence. Before that, they want you to put your money toward debt reduction and wealth building.
  • In The Total Money Makeover, Dave Ramsey recommends a two-stage approach. First, before anything else, set aside $1000 to cover emergencies. Then, after you get out of debt, boost you emergency fund to cover 3-6 months of living expenses.

My own advice is to do what works for you.

Start small. If you don’t currently have a rainy-day fund, then anything is better than nothing. Set aside $500. Or $100. Or $20. Over time, work to build this buffer until you have $1000 or $5000 on hand for catastrophe. Ultimately, you’ll sleep more soundly if you do have six to twelve months of living expenses in the bank. It’s a comfort to know that if you lose your job, you won’t lose your home right away.

How to Start an Emergency Fund

Starting an emergency fund is totally non-difficult. Anyone can do it. Here’s how:

  • Pick a bank. I’m a fan of local credit unions and community banks, but I also like high-yield savings accounts at online banks. (My emergency fund is at Capital One 360, although there are plenty of other options.)
  • Build a buffer. If you’re still in debt, it’s probably best not to stick a lot in savings. You should set aside $500 or $1000 to deal with annoying emergencies like a car that breaks down, but the rest of your money should be thrown at your debt.
  • Resist temptation. When you have a big chunk of change sitting in the bank unused, it can be tempting to use it for other things. Resist the urge. Use your emergency fund only for emergencies, otherwise you defeat the purpose.
  • Save more. As your debt dwindles, and as you get better control of your finances, build your emergency fund. Pick a number that helps you sleep at night. For me, that number was $10,000. That seemed like a lot of money to me (and still does!), and if anything disastrous happened, it would help me survive for a long time.

Finally, it’s wise to keep your emergency money someplace that’s not too easy to access. (Ignore this piece of advice if you know you’re disciplined enough not to use the money for other purposes.)

You might, for example, open an account at a bank across town. Or deposit the money with an internet bank. Or put the money into a certificate of deposit. Don’t carry a debit card tied to your emergency fund. You’ll still have access to the cash when you need it, but you’ll be forced to consider your actions before making a withdrawal.

Final Thoughts

From experience, I know that it can sometimes be painful to see a large pool of money sitting unused for months (or years) on end. But also from experience, I know that when a natural disaster strikes (or any other kind of disaster, for that matter), an emergency fund goes a long way to preventing financial disaster as well.

Studies show that those without emergency savings are more likely to accumulate debt. Your emergency fund acts as self-insurance, cushioning you from small disasters. If you have a cash cushion, your financial plans can’t be derailed by a single unexpected event — unless it’s huge.

[photo by Incase]

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Life after debt ~ Get Rich Slowly

This guest post from Marissa — a local woman I learned about last November — is part of the “money stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all stages of financial maturity. Today, Marissa (a.k.a. The Budgeting Wife) shares what she and her husband have decided to do after paying off $87,000 in debt.

Does life change after becoming debt-free? Yes! The freedom that you get from being debt-free is amazing, life-changing, and encouraging for the future.

But does your lifestyle have to change after becoming debt-free? Not necessarily. Here’s my story.

Our Debt-Free Journey

I met my husband Jacob while we were both attending the same private university. When we got married in July 2015 (right after graduation), you bet that we had a ton of student loan debt — $87,000 of debt to be exact.

Having this much debt in our early twenties, while we were just starting our careers, was overwhelming! There were times where I thought we’d never be debt-free. But thanks to some planned sacrifice and lifestyle changes, we were able to pay it all off in about two-and-a-half years.

To meet our goals, we kept our lifestyle very simple.

Jacob and Marissa Lyda

We took public transportation to our entry-level jobs because our employer paid for it. We shopped at the cheapest grocery stores that we could find. We meal-planned every week! Eating out was a maybe once a month luxury to Chipotle. Our one-bedroom apartment, 700-square-foot apartment had plenty of room for the two of us. We didn’t take vacations. Our date nights consisted of binge-watching a lot of Netflix.

For the last year of our debt-free journey, we even moved in with my parents. This allowed us to rent for less while really tackling our debt! Crazy, I know. We were twenty-somethings who had been married for one year… and moved back in with our parents! (Once we’d met our goals, we moved back out however.)

As difficult as those first few years were for us, it was completely worth it.

All of these sacrifices allowed us to put 70% of our income toward loans each month. We gave up a lot, but we gained even more. There’s truly no better feeling than being debt-free.

Our Debt-Free Lifestyle

We became debt-free last October. Since then, our lifestyle hasn’t changed a whole lot. But it has changed some.

Considering we were living at almost bare bones, we knew we wanted to increase our lifestyle a little bit. We celebrated becoming debt-free by going on a Caribbean cruise in October. That was an extravagance! And we officially moved out of my parents house and into our own modest apartment again in November. (We love our new place!)

But besides living in our own place again, our debt-free lifestyle hasn’t really changed. I’m still driving my 1998 Camry and my husband drives his 2001 Tacoma. We cook most of our dinners at home, and pack our lunch to work every single day. Our evenings still consist of Netflix marathons and date nights are about once a month with a gift card that someone has given us.

The neat thing about completing a debt-free journey is that you grow comfortable living with daily sacrifices. And then those sacrifices don’t seem that bad! For two-and-a-half years, we learned how to make life work with three-year-old clothing, twenty-year-old cars, and cooking our own meals. We learned that fun doesn’t have to mean spending money, but that it can be found with the people you spend time with.

Leveraging Our Lifestyle to Reach New Goals

By maintaining a frugal lifestyle while having no debt to eat up our income, we have so much room in our budget to accomplish our next financial goals.

Since repaying our student loans, we’ve turned our attention to saving for the future — to building what J.D. calls a wealth snowball. Because we’re no longer living with my parents (and we’ve relaxed our standards a little), we’re no longer saving 70% of our income. But we are saving almost half.

We’ve been contributing to our retirement savings. We’re also saving heavily for our emergency fund — first and foremost. It’s been so much fun to watch our savings account go up!

After we finish saving a full emergency fund, we’re going to start saving for a house. While we enjoy our time in our apartment, we can’t wait to have a house of our own! Buying a home will be the biggest purchase of our lives, so we want to make sure that we’re smart about it and can have a good down payment.

Oh, and those twenty-year-old cars we have? We’ll probably have to get new ones soon… So add that to the savings list!

Maintaining the Debt-Free Lifestyle

When I meet people who are recently debt-free (or about to be), I encourage them to maintain the same budget and lifestyle they had when they were paying off debt. The debt-free journey is hard at first, but once you’ve become accustomed to the lifestyle, it’s not so tough to maintain…if you make an effort.

When you maintain a simple lifestyle, every raise you receive has an immediate impact on your financial goals, which makes it that much easier for you to win with money!

If I could give people digging out of debt some advice, it would be to not stop once you’re debt free. Don’t change your habits. Keep the intensity. Stay focused on your next goal. Maintain the simple lifestyle that helped you succeed in the first place.

Reminder: This is a story from one of your fellow readers. Please be nice. After twenty years of blogging, I have a thick skin, but it can be scary to put your story out in public for the first time. Remember that this guest author isn’t a professional writer, and is just learning about money like you are. Unduly nasty comments on reader stories will be removed or edited.

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The Wise Use of Credit ~ Get Rich Slowly

This month is “back to basics” month at Get Rich Slowly. Over the past couple of weeks, we’ve explored several topics related to credit, including: your credit score (and why it matters), how to use credit cards wisely, and how to get out of debt (without gimmicks or games).

For this Saturday’s episode of GRS Theater, we’re going to look at another old video. This one’s called “The Wise Use of Credit”.

“To develop a better understanding of the wise use of credit, let’s spend a few minutes with a certain individual we’ll call Mr. Money,” begins the narrator. Over the next ten minutes, Mr. Money teaches two teenagers named Judy and John the ins and outs of credit.

To earn credit, first you have to develop your character. You have to be trustworthy. Second, you have to have capacity to pay your bills. And third, you need some capital in the form of savings (and other property). Scoring high on these three Cs is essential to earn a good credit rating.

This film was produced in 1960 with help from the National Consumer Finance Association (which is now American Financial Services Association). Watching “The Wise Use of Credit”, I can’t tell if it’s meant as an educational film, or as propaganda to encourage people to use credit. Maybe it’s both.

Mr. Money: Some people prefer to save to buy the things they want until they’ve saved enough money to pay cash for them. However, there are many people who are able to pay cash who prefer to buy things on credit, so as not to disturb their savings and investments.

Judy: But Mr. Money, doesn’t it cost more to buy things on credit?

Mr. Money: Oh yes, it does, Judy.

My understanding and appreciation of credit has evolved with time. When I came out of college, I used credit for many things, but I didn’t understand the dangers. The convenience was too much for me, and I charged tens of thousands of dollars.

Eventually, I understood the risks of credit use, but couldn’t see the benefits. I was anti-credit. As I began to take control of my finances, I canceled my credit accounts and stopped using it altogether.

Today, however, I’ve reached a point where I both understand and appreciate credit as a tool. I see that with wise use and careful planning, credit can actually provide certain benefits. It’s not for everyone, however. If you struggle with debt, credit is best limited (or avoided altogether) until you’ve obtained the knowledge and self-discipline required to make it work for you.

“The Wise Use of Credit” is a nice introduction to the concepts and considerations involved when borrowing money. It is, however, a product of its era. Beware the blatant sexism when Judy asks, “Gee, Mr. Money. Do girls have to learn all this about credit, too?” Remind yourself that we’ve come a long way in the past sixty years!

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Are More Tech Revolutions on the Way?

Historically technology advances at a snail’s pace. We invent the wheel and thousands of years later we invent iron. Those kinds of innovations always took many lifetimes to achieve.

It wasn’t until the last five hundred or so years that technological change accelerated. The golden age of the Renaissance ignited the spark for humanity. The age of reason brought advances in medicine, trade, science, and travel.

Then came the industrial revolution. Communication became near instantaneous. We were able to automate labor. And we could gap great distances with the steam engine.

The 20th century became the era of technology. Our prowess as an innovative species grew every decade, from the airplane to the internet. And progress in the latter half of the 20th century accelerated exponentially once the internet arrived.

But has technology hit a plateau? Where the heck are our flying cars and our Robbie the robots? Just hold your robotic horses for a split second, I’ve got some good news for you.

1. The Cryptocurrency Revolution is Well Under Way

The way we do money hasn’t changed much technologically speaking in hundreds of years. Yes, credit cards changed how we carry our money, but it didn’t fundamentally change how money worked.

Paper money used to be backed by gold. Now it’s back by faith in the government and the market. And these currencies have always been regulated by a central government of some kind.

I know I’m simplifying things (economists beware) but the technology known as blockchain is already upending the financial world. I can’t profess to know how blockchain works, but it has something to do with computers, equations, and immutable ledgers. That’s as far as I’ve ever gotten in trying to understand it before giving up.

It’s become such a buzzword around the tech world that even Mark Zuckerberg might get in the game. As it stands, he’s merely researching the various aspects of the underlying technology. But while it might not be wise to invest your dollars in this fledgling financial technology just yet (bubbles anybody?), it’s already made waves and soon it will be a technological tsunami.

2. Flying Cars Aren’t as Far Away as You Think

Tech revolutions are lined up like dominos. One right after the other will land and shake up the world.

The next revolution is transportation. We’ve heard about self-driving cars in the media, but what about flying cars?

Every once in a while some small startup will invent an overly expensive airplane with foldable wings. These inventions don’t line up with our expectations of what a flying car should be. And they typically require a runway of some sort which is highly impractical in urban spaces.

But the taxi business might be the first place we see flying cars. Drone technology has made it entirely possible for vertical take-off vehicles to enter the market at a tenth the cost of a small airplane.

Multiple companies already entered the race. Airbus, Uber, and even Volvo are hitting the clouds. Each hopes to be the first to bring air taxies to a major city near you.

And I can tell you, I’d have paid some nice dollars to avoid traffic in L.A. the last time I was there. Google, you put my life in danger too many times.

3. Wait…Where’s My Robot Maid?

According to Isaac Asimov, “Robots will neither be common nor very good in 2014, but they will be in existence.” They will be “capable of general picking-up, arranging, cleaning and manipulation of various appliances.”

Mr. Asimov wrote about robots of our decade back in 1964. And he was eerily accurate.

I bought a Roomba five years ago and it requires that I empty it and move it from room to room. At CES 2018, we saw robots that are supposed to be able to do a variety of household chores. But they don’t do those chores very well yet.

One robot decided to run away from its owner. Another flat refused to pick up the trash. And Aibo the robot puppy wouldn’t play fetch.

We’re in the awkward stage of robots. Machine learning is in its infancy and our current consumer robots aren’t the most dexterous. But soon we’ll have robots that can do things better than humans.

4. Machine Learning in Marketing

it’s difficult to see the future. But when something major rolls through the marketing world, it’s hard not to speculate.

Just the other day a machine learning algorithm beat humans at the Standford Question Answering Dataset reading comprehension test. Marketing just won’t be the same once we can employ robots in our service.

Already we employ robots for marketing. Google already uses machine learning in their search algorithms. But we’re due for a complete and utter revolution in marketing tech.

One day companies like Kocomojo,, TheAppBuilder, and others won’t be offering a way to DIY your app. They will instead offer to build it for you. But they won’t be the ones building it; their AIs will do that for them.

As machine learning improves, Google will be able to understand context perfectly. Machines will be able to read a blog in a nanosecond and make a decision about ranking faster than any current algorithm.

Supercomputers will become the norm in marketing one day. You will visit a website and the company will instantly know a billion things about you.

Get ready for the marketing tech revolution.

Be Patient, the World is About to Change

If you feel like technology is taking too long to progress, you probably grew up in the 80s and 90s. Over the last 30 year technology accelerated faster than it ever has in human history. And while tech innovation seems to have slowed, it’s really just a dormant volcano of potential.

If you want to stay on the cusp of the next revolution, just keep your ears and eyes open. The world is about to change.

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How what we own varies at different levels of net worth ~ Get Rich Slowly

Do people at different levels of wealth spend their money on different things? Of course they do.

Some of these differences are by necessity, of course. If you have a million dollars in net worth, for example, then even average spending on your weekly meals will make up a much smaller portion of your net worth than the same spending would for somebody who has a net worth of $10,000.

(To put it another way: If you have two families that both spend $100 per week on food, but one family has a net worth of $1,000,000 and the other family has a net worth of $10,000, then the wealthier family spends less than one-tenth of one percent of its wealth each week on food while the poorer family spends one percent of its wealth.)

To illustrate how people at different levels of wealth allocate their money differently, the folks at Visual Capitalist have collated data from the Federal Reserve’s 2016 Survey of Consumer Finances to create this chart. (Click image to open full-size version in new window. Or visit Visual Capitalist for more info.)

Assets based on net worth

The chart divides Americans into six groups based on net worth. For each group, it shows how much of this wealth is in various assets, such as cash, housing, and cars.

Most of the info here is unsurprising. At lower levels of wealth, certain assets make up a disproportionate amount of a person’s net worth. Basic housing, for instance, is by far the most important asset for folks with less than $1,000,000 in net worth.

There are, however, a couple of things that stood out.

  • First, look at the value of vehicles as a percentage of net worth. For folks under $100,000 in net worth, vehicles make up almost as much wealth as housing. Holy cats! This is insane — and in a bad way. Cars are a depreciating asset. In fact, they depreciate quickly. If you’re piling much of what you own into the value of a vehicle, you’re basically throwing money away. From my experience, the wealthiest people I know drive the least-valuable cars. Coincidence or cause? You make the call.
  • As net worth increases, business interests make up a greater percentage of wealth. I guess this makes sense, but it’s nothing I would have ever thought about. Not all of the wealthy people I know own businesses, but a greater percentage do than the folks I know who are poor. Not sure which is the chicken and which the egg in this scenario, though. Do people who own businesses build wealth? Or do people with wealth invest in businesses? Or both?

Inspired by this, I tried to create my own bar graph in Microsoft Excel. I failed. I did, however, make a “doughnut chart” using the same color scheme as the Visual Capitalist chart.

My Net Worth (% of Assets)

I was surprised to see that my asset distribution — representing a net worth of roughly $1.6 million — is very similar to the asset distribution for the millionaires in the chart above.

Where there are differences (the average millionaire has more non-residence real estate than I do), it’s because of the way I’ve classified things. A huge chunk of my retirement mone is in REITs, for instance, which are like mutual funds for real estate. In other words, I do have about the same amount of money in real estate as the average millionaire but I didn’t call it out that way.

Another point of interest: My net worth contains less liquid cash than other folks at a similar level of wealth. And believe me, I feel it. It sucks. The older I get, the more I understand why it’s important to keep at least some cash readily available in bank accounts so you don’t always have to be selling mutual funds to generate working capital.

I’m not sure there’s anything actionable to be gained from this info, but it’s interesting to look at.

[What Assets Make Up Wealth? at Visual Capitalist, via the always-awesome Reformed Broker]

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How Employee Advocacy Will Continue to Dominate in 2018

Have you ever heard of the phrase employee advocacy? If not, you definitely have seen it in action, and it may have even enticed you to purchase a product or join a service online. The concept of employee advocacy is simple. It’s simply the business model of having employees or staff within a company discuss the business or its products online or through social media, thus increasing brand awareness and bringing in new customers to the business.

Employee advocacy happens in a number of ways when you start to look at the internet and affiliate marketing or referral-based marketing comes into play. A perfect example of this would be on this blog and how a simple recommendation can instantly add thousands of social followers to new entrepreneurs, industry leaders or brands online. At the same time, this also works extremely well in social media, where employees are continually talking about the latest advancements in their company or how they might be attending an upcoming internet marketing conference. Social media is key in the world of employee advocacy, as it’s easy to quickly start following individuals and not only learn more about them and their business, but also gaining trust in them as well.

Just think about how many people or brands you’ve followed online, then met them in real life at a conference. You likely had an immediate connection offline, from your online experience.

To further stress the importance of employee advocacy and how it’s being used by many brands around the world today, we can simply look at some of the latest marketing and business stats making the rounds on the internet today. Smarp, a leading app for employee communications and engagement, focus heavily on the business of employee advocacy and had the following data points to share on their site.

  • Fact: according to our data, one employee share generates about 4 clicks on Facebook on average. – Smarp
  • “An average employee advocate is 2x more trusted than a company CEO” – Edelman Trust Barometer
  • “12% increase in brand advocacy generates a 2x increase in revenue growth” – Reichheld
  • “Referred employees are faster to hire, perform better, and stay longer in the company.” – Global Recruiting Trends 2017, LinkedIn Talent Solutions

So what does this mean for businesses and brands of all sizes? Simple… for any business that is already hiring employees and has any type of internet or social media management and communications in place, it should be a requirement to not only teach the value of employee advocacy but to also have them participate as well.

Granted, this all sounds easier than it actually is. Not everyone wants to go sharing information about their company on their personal social media accounts, or just strike up a conversation on why their business can help others out of nowhere… so what’s the better option here?

Invest in ‘Inbound Content Marketing’ of course!

At the heart of every effective branding and employee advocacy campaign, there is a great content creation and marketing plan. Why? Simply because it’s much easier for a business to focus their efforts on creating individual pieces of content that provide a lot of value, versus trying to get everyone on their team to do something different. The benefit here is that such content pieces can be completed, then handed off to their employees, HR, and social media marketing team to share with the world.

Still need a few more examples? Don’t worry… we have you covered!

Branded content

If you are going to create content, you might as well make sure it’s pretty damn amazing. Focus more time and effort on creating less content, but making sure it’s the best out there. While going through this process, make sure your content is loaded up with case studies, examples, citations, and branded images that will continually represent and promote your brand. Don’t think about just the immediate impact of your content, but instead the lifetime potential ROI it may offer in terms of branding, reach, and recognition.

To spice up your content and marketing efforts even further, see if you might be able to partner up with another big name brand. This can be done to help with resources, finances, user-reach, or even in rev-share opportunities. You can see a few examples here, of some of the best co-branded content campaigns that took place during 2017.

Employee branding content

Not all content needs to be created just for consumers, it can also be done on the business side as well. This type of ‘employer branded content’ could work extremely well for any businesses that are focused on a B2B model.

Since most employees and staff within a company would likely already be using the product or service they promote, individual stories and case studies from employees can prove quite useful to other businesses who could potentially be in need of your service. Just to give you a few working examples, Zappos, Starbucks, and Sprint are doing quite well with their employee branded content efforts.

At the same time, it’s also much easier and more effective to ask employees to share content with their friends, family, and social audience when they are featured within it. Everyone loves to show off their expertise and take in a little vanity here and there.

Industry insights and thought leadership content

Something we have seen all over the place lately is ‘expert roundups’. The process and concept here are quite simple. Come up with one common question and ask a bunch of industry experts for their opinion. Once you have enough answers, you can then compile all of the data and go live with one big mega post.

The benefits here are three-fold.

  1. The site owner (or brand) gets a lot of great content from industry experts.
  2. Each expert gets free exposure and promoted as an industry leader.
  3. Site readers benefit from all of the content and value offered.

From a branding and employee advocacy play, these types of content articles can work wonders for audience reach and to bring in new customers — especially when the experts and leaders share the content with their audiences as well. Imagine the potential here when comparing actual advertising costs to get some of these experts to share or retweet your content, versus actually just featuring them within your content, and getting the social promotion for free.

How to Make the Most of Employee Advocacy in 2018

As you can see, the business of employee advocacy is huge — even if you’ve never heard of the phrase before. As highlighted earlier, it’s also one of the major influences behind the success of many big name brands you are likely using and buying from on a daily basis.

With the internet, social media, and mobile devices making it so easy for everyone to create content and connect with audiences around the world, start thinking about how you can use branded content creation and employee advocacy to grow your business or brand in 2018.

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When to buy cheap airline tickets ~ Get Rich Slowly

Although I fly several times per year, I’m not a sophisticated traveler. Many of my friends are top-notch travel hackers, but I’m just a beginner. Still, I’m getting better.

On my recent trip to Florida, for instance, I booked both my initial hotel and my rental car using travel miles. That’s a big step for me! And it saved me from using actual cash, which is in short supply around these parts lately.

I didn’t do such a good job with my airfare. I booked my flight for January 4th on December 5th. I paid cash. Luckily, thirty days in advance turns out to be in the sweet spot for finding cheap airline tickets, so I got an okay deal — even if I didn’t book the trip with points or miles.

When to Buy Cheap Airline Tickets

According to flight-booking site (about which I knew nothing until today), airfares tend to fluctuate in predictable patterns so that they fall into five “booking zones”. Here’s an infographic from their site:

When to buy cheap airline tickets

The five booking zones are:

  • The “first dibs” zone (about 178-321 days before the flight). When you book early, you get the advantage of choosing your flight and your seat exactly as you want them. The trade-off is that you pay a premium — about 15% more than the cheapest possible airline ticket.
  • The “peace of mind” zone (between 106-177 days in advance). By waiting until three to six months before your flight, you get cheaper prices (about 5-10% more than the eventual bottom) while still enjoying plenty of flight options.
  • The “prime booking window” (between 21-105 days in advance). The cheapest fares — usually within 5% of the lowest possible price — tend to be found between one and three months before your trip. Sometimes big price swings are possbile, but generally this is the sweet spot for buying a cheap airline ticket.
  • The “pushing your luck” zone (about 14 to 20 days in advance). The closer you get to the flight, the fewer seats are available — and the higher prices rise. If a flight isn’t filling, fares might remain low, but basically you’re gambling at this point.
  • The “hail Mary” zone (less than 14 days before your flight). Last-minute flights generally cost more — sometimes much more. The absolute worst day to purchase a plane ticket is the day before the flight, when prices soar to nearly twice their lowest point (and seating options are limited).

The CheapAir article notes that the statistical best time to buy cheap airline tickets varies by season. In spring and summer, the lowest point averages about 75 days before the trip. In winter, it’s 54 days. And in fall, it’s 47 days.

The Best Day of the Week to Fly

The company also notes there are some misconceptions about the cheapest day of the week to buy an airline ticket. Their analysis reveals their isn’t a best day to buy. However, there is a best day (or days) to fly. “Flying on a Tuesday or Wednesday will save you an average of $73 per ticket,” CheapAir writes. And flying on Sunday is most expensive.

CheapAir cautions that these are just average numbers based on their database of nearly 3,000,000 flights. The actual best time to book any individual flight can vary widely.

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