It’s odd.  Every financial adviser I’ve ever encountered swears up and down that their actively managed fund will out perform index funds hands down.  However, statistics show otherwise.  Statistics show that index funds out perform managed funds 80% of the time.  On top of that, of the 20% of managed funds that do out perform the index funds, how is one supposed to know which managed funds, or more importantly, WHEN the managed funds will be in that top 20%.

Lets take a quick look at the differences between actively managed funds and index funds.

Actively Managed Funds

The name is pretty obvious with actively managed funds.  It simply means that there is an individual or group of individuals that watch your funds.  They buy and sell based on their professional expertise.  Expenses are typically much higher than index funds because someone is actually “watching” your money.  Fees can be 1.5% or even higher.

Index Funds

Index funds are simple.  Index funds have literally a spread of all stocks on the market.  A little of this, a little of that.  Index funds do not have anyone watching your money.  As the market fluctuates as a whole, so do these funds.  They are bench marked against some of the biggest indexes like the DOW, S&P 500, Nasdaq, and many more.  Fees for these funds can be as low as .02%.

After reading the difference of the two types of funds, you’re probably thinking you’ve got to be kidding me!  I can let this run on auto-pilot and do better than the professionals?  The short answer is yes, or at least 80% of the time.  Remember that even though 20% do out perform the index funds, it is nearly impossible to tell which funds will, and even more difficult, when they will.  Heck, even if you do win, the margin of difference is usually so low the fees eat up the rest of superior gains.

In a nutshell, stick to index funds for the long term.  These funds are available in any style, conservative, moderate, aggressive, you name it.  Keep in mind, you will be investing for 20, 30, or more years.  Stick with your plan.

Ok, ok.  So this is probably the most worn out topic ever.  However, based on recent survey data, only about a third of the workforce that is offered a 401k, are enrolled and contributing to it.  This is a ridiculous statistic considering the average company match is 4%.  Think of it this way, if your boss asked you if you would like a 4% raise, would you take it?  I sure hope so.  If not close this web page, there is no hope for you.  All kidding aside, take a look at the numbers below to see how much FREE money you are missing.

The calculation is easy.  Take your earnings, before tax (Gross) and multiply it by the employer match.

Ex.  Current salary is $36,000 per year with a 5% employer match.

$36,000 * .05 (The employer 5% match) = $1800.  The total contribution is simply the employer match * 2.  The other half is what you need to contribute.  Hence the employer “match.”  So for this example, the total is $3600 per year total contribution.  Remember, this is FREE money.  All you have to do is contribute your portion first.

What investments does my 401k use?

Most 401k plans consist of mutual funds that target different objectives.  Most plans offer a little something for everyone.  Some funds are more conservative while others are much more aggressive.  The mutual funds offered are typically stock funds, bond funds, target funds, index funds, real estate funds, and more.

Stay tuned for more on how you can determine your risk tolerance and other factors on determining what funds you should invest in.

The sooner you realize that any credit card debt is too much the better off you will be.  Most folks have to learn this the hard way.  Once you have acknowledged that you need to rid yourself of credit cards, start with these steps to get rid of them for good.

I have 8 credit cards.  Where do I start?

I have found that paying off the lowest balance card first makes the most sense.  You may have heard of something called the “Debt snowball.”  This was mentioned in one of Dave Ramsey’s books.  The idea is simple.  Start with the lowest balance first.  Apply the most you can to that card while making only the minimums on all the others.  This helps in many ways.  First, it helps you realize you ARE making progress.  Once one card is paid off you can see for yourself that you have accomplished something.  The bill stops coming and its one less thing to worry about.

Once the first card is paid off, take the money you were using to pay the first card with in addition to the money you were using for the minimum payment on the next lowest balance card.  Do this until all cards are paid off.  You will be shocked at how fast this can get things rolling.

But wait!  Some of my cards have much higher interest rates on them.  While you raise a excellent concern, people need constant motivation to stick to the plan at hand.  Unless all of your cards have similar balances, stick to paying off the smallest balances first.  If your cards have similar balances, then it would of course make sense to pay off the higher interest rate credit cards first.

And last but not least, once you are done paying off all these balances, cut up the cards and never use them again.  You can no longer use the excuse they are for emergencies.  If you have setup an emergency fund, you won’t need them.  Plain and simple.  Don’t fall back into the debt trap once your out.

This book was a real eye opener for me.  It describes the perception and the reality of millionaires and how they got their millionaire status.  The truth is, the average millionaire is not driving a $100,000 sports car, or even a new car for that matter.  The folks driving the $100,0000 sports cars are usually just as worse off financially as the person making $8/hour if not worse.  They make more they spend more.  The doctors and lawyers may be book smart, but according to the author, they are decades behind on financial literacy.

Check it out, this is a good, inexpensive read!  Enjoy!

Link to purchase book – Used copies starting at only $.50

Everyone needs some time to get away from it all and relax sometimes.  Take a look at some of these tips and save big on your next vacation.

User Broker Travel Sites

Using vacation broker websites like Expedia, Orbitz, etc can save you tons.  I have the best luck with Expedia but I don’t travel too often.  Take a look at a few and see what you can find.  The idea for these sites is pretty simple, sell unsold seats and rooms for a discount.  Some money is better than no money.

With these broker sites, it is also easy to compare different travel times throughout the year.  If you are flexible on the days you leave and return, you can save a fortune.  I often go to Las Vegas and Sunday through Thursday seems to be the best bet most of the time.

Be sure to compare prices for extra days.  Last time we booked Vegas, we were only going to stay for 3 days.  Then we ran the price and realized it was literally the same price to stay for a fourth night.  They were running a promo for buy three nights, get the fourth free.  Even when that deal is not running, many times the extra night will only cost about $20.  Why not stay for the extra day?

Travel at Non Peak Times

Obviously, some destinations are more desirable at different times in the year.  However, if you are willing to go against the grain on this one, you can save a fortune.  I have literally seen half price vacations at non peak times.

Try to avoid Holidays and weekend, rates are almost always higher at those times.

Look for Discounts On Area Attractions

A quick google search can save you lots of money.  Before you take off for your destination, take a look at the areas attractions and activities.  Many times you can get discounts or deals when booking in advance.  Many attractions also post coupons on their websites or elsewhere online.  Again, a simple google search will help you find whats available.

Don’t Waste Money on Poor Attractions

The internet is your friend.  Looks for reviews of attractions you are thinking about.  Once you arrive at your destination, it can be much more difficult to find reviews on the attraction of choice.  Use this tip and stay away from the things that are not worth the price.

For Average Joe’s Automatic Investing is the Only Way to Go

When it comes to money and saving, us averages Joe’s tend to procrastinate more than with anything else.  The “I’ll start saving tomorrow” idea isn’t going to work.  Unless you are one of the fortunate ones that manages to do this without thinking about it, automatic investing is the way to go.

You can setup automatic investing for almost any type of account.  401K accounts are among the easiest, IRA accounts, regular savingss accounts, education 529 accounts, and so one.

401K accounts are the easiest.  You set them up with your employer and the money comes right out of your check.  If you start doing this immediately when you start your new job, its almost like the money wasn’t there to begin with so you don’t miss it or even realize it was ever there to begin with.

Roth IRAs, traditional IRAs, and brokerage accounts can be setup online with any major discount brokerage firm like Fidelity or eTrade.  You can set how often the money is transferred, it could be weekly, bi-weekly, or monthly.

Standard savings accounts, including online accounts (which typically have better rates than local branches) can also be setup for automatic saving.  You can have either the bank setup the automatic transfers from your checking to your savings accounts and in many cases you can even setup your direct deposit with your employer to automatically transfer a portion of your check to your new savings accounts.

Education 529 savings plans also usually offer a automatic investment option.  These work very similar to the IRAs and brokerage accounts.

Keep things simple.  Setup your automatic investing and savings.  Its one less thing to think about for your financial well being.

The simple answer is yes.  I don’t recommend doing this until all other debts are paid off because the rates on other loans, credit accounts, etc, are likely much higher than the interest rate on your mortgage.  However, once you have those paid off, any little bit extra you can pay towards your mortgage will save you a ton of money in the long run.  Since mortgages are front loaded in interest, the first third of your mortgage payments are almost all principal so you barely pay down the balance.  The bank doesn’t want you to know, but you can save a ton of money over the long run without spending a ton of extra money.

Lets take a look at my mortgage.  I ended up financing $125,600 after closing costs, everything said and done.  I locked in a fixed 30 year mortgage at 4.875%, this rate will be unheard of shortly.  I locked on almost to the day for this rate.

If I pay only the minimum on my mortgage, the payment is $665 per month.  This does not include taxes and insurance.  It will take me the full 30 year term to pay this off entirely and I will have paid over $113,600 on interest only.  Total payments would be about $239,200 over the life of the loan, or about twice what I paid for the house.

If I paid only an extra $50 per month on top of the minimum payment, I would have only paid $95,000 in interest and I would have paid the full loan off in 26 years instead of 30.

If I paid an extra $100 per month on top of the minimum payment, I would have only paid $81,900 in interest and I would have paid the full loan off in 23 years instead of 30.

If I paid an extra $200 per month on top of the minimum payment, I would have only paid $64,000 in interest and I would have paid the full loan off in 18 years instead of 30.

I don’t know about you, but saving 12 years of payments and $49,600 on interest payments sounds pretty good to me.

Check out the calculator here to input your data and see how much interest you are paying and how long it will take you to pay off your home loan.

Before you wed, it should be a top priority to discuss your financial goals, among other things.  Many times, one partner will spend much more frivolously than the other.  This can lead to long term problems when it comes to financial planning.  One partner may have long term goals such as when they want to retire, how they will finance their children’s education, and so on while the other partner can barely finance next week.

Merging your finances

When it comes to merging your finances after you wed, the thought should be whats mine is yours and whats yours is mine.  Keep in mind this can include both debt and savings.  Put yourself in the situation before you tie the knot.  Get a joint checking account for starters.  See if you can both manage to stay on track and keep the account in good standing.  Also, you should both be able to agree on where the money goes.  How much you should spend on things like entertainment and dining out as well as the usual bills should all be discussed.

What to about debt?

Whether you like it or not, once you’re married, your spouse’s debt can become your debt.  Once again, both of you, together, should figure out a way to tackle the problem and make a decision before getting married.  Many times, couples will not see eye to eye on this.  The debt free partner will say, I have accumulated any debt so I’m not paying yours off.  If you are planning to be together for the rest of your life, this is an issue that needs addressing.  The debt doesn’t go away when you marry.  When you discuss this, don’t take the position “Your debt will ruin us.”  If that is the approach you take, it most certainly will.

Check Your Spending

So your soon to be wife is constantly nagging about your wild spending and then comes home with a $400 purse.

If this sounds familiar, your right.  This is the second most common reasons couples fight.  Most of the time, one of the partners get labeled the spender and the other the saver even though they actually spend about the same, they just spend differently.  The amount of small purchases by one partner may seem negligible, since they carry a low dollar amount while the other partner may spend much left often but on larger items like TVs or computers.  At the end of the day, they usually spend about the same.  Perception needs to be put aside.  Check the reality, the bank statements.  Most purchases should be budgeted for and agreed on by both partners.  Make sure you keep it fair though, one partner shouldn’t always decline what the other wants.  The fellas out there are never going to want a $400 purse and the ladies are never going to want a 65 inch TV to watch the football game.  Well, at least most of the time.

Hidden Money

Couples should not keep financial secrets.  They can come back to bite you in the backside.  Again, this goes for both sides of the equation.  No one wants to find out you have been racking up a credit card bill without the other partner knowing.  The other side of the coin, no one wants to find out you have $50,000 in savings the other didn’t know about.  While an extra $50,000 sure is nice to find out about, but what was the reason for concealing it?

An emergency fund is a very important tool in your quest to be debt free, staying debt free, and your overall financial fitness.  It shows that you CAN find money to save and it also prevents you from going back into, or further into, debt.

Start small, save one months expenses before making any more than the minimum payments on all bills.

The emergency fund should only be used for true emergencies.  Examples would be furnace needs repair, car needs repair, etc.  This should not be used for new toys for yourself or even for gifts for others when you come up short.  Those types of items should be budgeted for in your monthly budget.

The best thing that saving a months pay will do for you is protect you from either going back into debt, or putting you further into debt when trying to get out.  This will give you some protection to help aid in your quest to becoming debt free.

Ideally, your emergency fund should eventually be at least 6 months pay.  After saving your first months pay, pay off all other debt besides your mortgage and then start building you emergency fun.  The monthly expenses to calculate the 6 months expenses should include everything from your mortgage to your cable TV bill.  Anything that you are not willing to cut should be included.  Obviously if times do get tough enough, canceling cable TV would be a wise idea!  Basically take a look at your budget.  Everything listed there should be included in calculating your emergency fund.

Lets take a look at how I think the average Joe’s budget should look like.  Budgets are only useful if you have enough discipline to stick with them.  You will hear me repeat the following constantly throughout my blogging.  99% of success is taking action.  Hold yourself accountable for sticking to your plans.  The old saying goes, if you fail to plan, you plan to fail.

Every payday, every dollar I have coming, is budgeted before the cash even hits my account.  I have found it much easier to pay bills, etc. when all (well, lets be realistic, most) expense are budgeted for.  Here is a sample budget (Which is actually mine to the dollar) to get the juices flowing on what items should be planned for.  Almost all expense fall into this category.  Seriously, when is the last time you didn’t get an electric bill?  So why isn’t it in your budget?  Ask yourself the same question for all categories listed below.

All dollar amounts are per pay period (Every two weeks).

Mortgage – $500
Car Payment – $180
Insurance – $100
Savings – $253
Cell Phone – $53
Comcast Cable/Internet – $29
Electric/Gas – $100
Grocery – $100
Trash Service – $15
Car Maintenance – $25
Home Maintenance – $45
Vacation Fund – $25
Water/Sewer – $30
Clothing – $35
Gifts – $50
Long term entertainment purchases – $40
529 Plan – $13

Cash withdrawn every pay period for other expenses/fun $400.  This includes gas expenses for driving to work, etc.

Most of these are pretty self explanatory.  However, some are not.  I’m an eletronics junky.  I like computers and giant TVs so I have budgeted a small amount of my total pay to the “Long term entertainment” account.  The 529 plan is a educational savings plan for if and when I have kids and they opt to go to college.  Yes, you read that right, I save for college expenses for non-existent children.

You may be looking at these numbers thinking “This is impossible.  I don’t have that kind of money.”  I didn’t always have this money either.  The truth is, if you are living within your means, you should be able to budget for any of these things.  If you are stretched to the max between rent and groceries, you may need to consider getting a smaller place or looking for ways to increase cash flow.  We’ll get to that later.

Think your situation is impossible?  Shoot me an email with your example.  I will create a budget for you and post for all to see.