Invest or Save

In today’s post, we’ll explore the important distinction between saving and investing — two terms that, though often erroneously used interchangeably, must be treated in distinctly different ways on your path toward a thriving life.

Be Prepared for the Unexpected

Saving ought to be done first — and for a specific purpose.  As we’ve discussed previously, one of the first milestones you need to hit as you pursue the thriving life is to save a full emergency fund of 3-6 months of expenses.  The emergency fund is not an investment; rather, it exists to protect you from the unexpected expenses that will most certainly come your way.

Damage car

Great places to keep an emergency fund include savings accounts and money market accounts (fnbodirect.com is a great place to get started).  Though the interest you’ll typically earn on such accounts is quite low, they provide a few important benefits that you need for emergency savings.  First, your principle is protected.  This means that your value won’t go down in times of economic recession.  This is important because oftentimes unexpected drains on your cash will come during times of economic hardship nationwide.  With your savings in an account at a bank or in a money market account, you can rest assured that the $10k that you put in will be there when you need it.

Make Your Money Make Money

On the other hand, an investment ought to involve significant growth.  While a savings account is earning less than one percent, a good investment should earn in the neighborhood of ten percent.  But here’s the catch: that 10% rarely comes linearly.  Unlike a savings account which will return 0.5% per year, every year, an investment may earn 5% one year, 30% the next, and -15% the year after that.  The returns are a function of the market you’re invested in (e.g., the stock market or the housing market), so you never know how the investment will do in a given year.  But, you can look at history to draw reasonable conclusions at what the investment should do long term.

Exhibit A

Take for example a mutual fund we’re quite fond of here at totalthriver.com:  Fidelity Contrafund.  This fund is primarily comprised of stocks of large U.S. companies such as Google, McDonald’s, and Coca-Cola.  The following chart shows the return for each of the last four years:

2008 2009 2010 2011
19.78 -37.16 29.23 16.93

As you can see, 2010 was a great year for this investment, and 2009 was a lousy one.  Of course if you knew that ahead of time you could make a killing!  But since none of us have such knowledge of the future, we must simply follow the averages.  This fund in particular has averaged 15% per year over the past 3 years, and 8% per year over the past 15 years.

Time Horizon is Important

Because even good investments like this one can fluctuate violently, most financial experts only recommend investing when you plan to leave the money alone for five years or more.  Generally, this is a long enough period to ride out the turbulent ups and downs of the market, and give yourself a high probability of making money with your investment.  For short-term savings (e.g. for a newer car or living room set), you’re usually better off to take the guaranteed 0.5% of your money market than risk losing 20% of your money should the market take a bad turn one year.

Make It Happen

In closing, it’s very important to recognize the difference between saving and investing.  As you make progress toward your financial goals, you’ll need to be very intentional with which of the two you’re doing.  Will you be using the money in the next two years?  Open a money market.  Will you be leaving the money alone for the next five years?  An account with scottrade.com or a visit to your local financial advisor (see the “investing ELP” section at DaveRamsey.com) are great places to start.  And as always, be sure to check back at TotalThriver for help along the way!

 

Mortals Only — Part II

Several weeks ago, we shared the shocking news that yes, even TotalThriver members will one day face their mortality.  Since death is one day closer today than it was yesterday, we highlighted the importance of getting good life insurance in place.

Today, we’ll explore another aspect of financial planning related to caring for your loved ones after you are gone:  estate planning.

I’ll get to it tomorrow…..

Though not always the most glamorous or delightful topic, getting a will in place is a vital part of any good financial plan.  Even though we all know that death will catch us some day, we seem to be in denial that that day is actually coming.  According to a recent survey conducted by findlaw.com, nearly 60% of American adults do not have a will (http://commonlaw.findlaw.com/2008/06/findlaw-survey.html)

Obviously, getting your will in order doesn’t benefit you–you’ve got to be dead to use it!  But it does provide great benefit to your family and other loved ones.  Some people think that drafting a will for themself is unnecessary, because, “of course, everyone knows that I’d want to leave everything to _______.”  The problem is that the one person who makes the call–the judge–doesn’t know you!  So, the only way to make sure that your antique rifle collection goes to your son and not your crazy old hunting buddy is to write down your wishes.  Otherwise, your son may have to spend thousands of dollars in court fighting for what’s rightfully his.

Get it done right

The best option for getting a will done properly is to consult with a local attorney who specializes in estate planning.  If you live in the Omaha area, I can personally recommend Lynne Timmerman Fees, an experienced professional with great qualifications.  Find out more about her practice here.

Although hiring a professional is the only way to be assured that your will is done properly, sometimes using generic forms can be a cheaper alternative.  Places like uslegalforms.com can be a good stepping-stone for recent grads or families struggling financially who need to get a will in place but can’t afford an attorney right now.  Of course, if this is you, just keep following us at TotalThriver and we’ll have you in a strong financial position in no time!

Demonstrate your love

In closing, although estate planning is not particularly glamorous, it is an essential part of your financial life.  To ignore the fact that you need a will is to do a disservice to your loved ones, and create legal battles for your money and property in the months and years following your death.  Won’t you take these steps today to love your family well?  The small investment of time and money you’ll make today will pay large dividends when they’re needed most.

But I’m special….

Ask five of your friends if it’s important to have money saved for an emergency, and you’ll likely get five affermative answers.  Now ask the same five friends if they have such an account, and you’ll probably get some resounding no’s.

Yeah, what do they know?!

We’ve all heard from financial experts over and over again how important it is to have an emergency fund.  “Three to six months expenses in a savings account or a money market account,” they say, and we think to ourselves, “yeah, that sounds like a good idea…”  But look at our accounts in a month or two and nothing has changed.  What’s the problem?

For one thing, saving for emergencies isn’t too exciting.  It’s much more fun to spend a few hundred dollers on a weekend getaway, new set of clothes, or a night out with friends that to put money into an account for “future unexpected expenses.”  Some of us also balk at the thought of earning a measley 1% interest in a money maket account when we could easily average 10% in the stock market.  Emergency funds aren’t slick, cool, or sophisticated, so we’re tempted to consider them optional.

The problem is, that unexpected things do tend to happen, and on a long enough timeline, they’ll happen to all of us.  Just think about this for a minute: do you know anyone who has been laid off from a job?  Or someone who’s gotten hurt or sick and required hospitalization?  Do you think that person expected those things to happen to them?

Knowledge gained vs. knowledge applied

Of course, we all know people in these situations, and we understand intellectually that having money saved is very important in such times.  The problem is, we just don’t connect it to our lives.  We assimilate the knowledge in our heads, but our hands never carry out any action to create change.  We delude ourselves into believing the lie, “that won’t ever happen to me,  I’m special!”

While every TotalThriver reader is special to me, you don’t have any unnatural abilities to avoid emergencies.  In the next several years, you’ll very likely encounter a layoff, sickness, injury, or family situation where a fully-funded savings account will be of great value.  Like our discussion regarding insurance, these financial foundations are often not appreciated until they’re needed.  And by that time, it’s too late to prepare.

A choice today affects life tomorrow

Those who succeed with life and money are those who understand the long-term consequences of decisions they make each day.  They realize that the decision they make today to forgo a trip to the beach to save money for an emergency will pay them dividends in the future when their house gets flooded and they have money to pay for a hotel room.

Will you apply these concepts to your life?  Will you commit to eliminating one fun thing from your expenditures this month, and put that money toward an emergency fund?  If you will set a goal that includes a total amount to be saved along with a timeline to meet that goal, you’re well on your way to financial security.  Not only that, but you’ll have put into practice the habit of acquiring knowledge and applying it toward long-term success, an ability that will bring prosperity and peace to many other aspects of your life as well.

Fitness and your Finances

This post is fourth in a series of six articles on how fitness benefits many other areas of your life.  So far, we’ve discussed how challenging fitness regimen can improve your productivity, disposition, and relationships.

Today, we’ll investigate the connection between your fitness and finances.  Although at first glance these two subjects may seem to be unrelated, in fact there are many aspects of these two areas that affect each other.

Money money money money

Your Premiums

The first and most obvious way that your fitness affects your finances relates to your medical care.  As we all have become clearly aware, medical costs have skyrocketed in this country in the last several years.  Medical insurance premiums climb and climb, and take a big chunk out of your paycheck when payday comes.  Oftentimes, we can feel powerless in this situation–but there are things you can do to improve this situation for yourself and your community.

Much research has been done relating the effects of exercise on a person’s health.  It has been clearly demonstrated that regular exercise benefits the body in many ways, including improving heart health and reducing diabetes.  Insurance companies do a myriad of tests to see what kind of shape your body is in before issuing life or health insurance, since they know that your fitness and health have a strong impact on the amount of medial care you will need.

A Grassroots Solution

While our politicians argue about the best way to handle healthcare from a federal perspective, we can take steps now to improve our own health personally–helping to solve the problem from the ground up.  Over time, a nation of healthier people will require less medical care, and insurance companies will be able to charge smaller premiums while maintaining their margins.  As we’ve stated before, there’s no question of the link between exercise and good health–the problem is that so many just aren’t doing it!

Making Time

Often, when people are asked why they don’t exercise, even though the health benefits are so clear, they will answer, “I just don’t have time.”  While I’ll always contend that such an answer is always just a cop-out and should really be translated, “it’s not a high priority in my life,” it is certainly true that we Americans are busy.  It’s easy to fill our schedules with work, family, and play, and if we’re not careful, our week can full up and we’ve never made the time for a fitness regimen.

But by recongnizing the link between exercise today and health tomorrow, we can find the motivation to put on those gym clothes at 5 AM.  By further recognizing the connection to our health and our pocketbook, this motivation can become even stronger.  As we’ve discussed, the more of us who make fitness a priority and improve our health, the lower our healtch care cost as a nation can be.  And of course, insurance premiums aside, going to the doctor pulls directly from your account as well via co-pays and deductibles.

Get Wealthy and Fit

So, the next time your buddy gloats about the Carrabean cruise he’s going on that you can’t afford, think about the connection between your fitness, your health, and your pocketbook.  Use that understanding to motivate you to get in the gym and fuel a total commitment while you’re there.  As you know, the beauty of the ThriveFit program is that it’s a very short time commitment (most workouts take less than 10 minutes), but in order to reap the fitness benefits you want, your workout must be at full throttle.

Years later, when you invite your buddy out to your lake house for a summer vacation, you’ll not only have surpassed him financially, but will look better in your bathing suit too!

Planning for Unusual Expenses

Last week, we discussed the importance of including unusual but predictable expenses in your budget.  Items on this list include things like car repairs, home improvements, large gifts, or vacations.  By allocating a fixed amount each month, these big expenses don’t have to catch us off guard.  For example, my wife and I set aside $60 each month for car repairs, which has been plenty for the minor repairs and maintenance that our vehicles have required.

This brings up a small wrinkle in your budget, though, since you’ve allocated money to be spent on a certain day, but since you likely won’t have a $60 car repair this month, your account will be out of balance if you don’t correct for this.

Thankfully, this feature is built right into the ThriveWealthy advance cashflow planning program.  If you’ve not downloaded a copy yet, be sure to head over to the ThriveWealthy page and download the latest version.  Start budgeting next month’s income in the colored boxes, along with the dates your paychecks come.

Once you’ve entered your income and expenses in the appropriate categories, notice the orange box in the upper left part of the screen.  This section is called, “pending expenses” in the example tab, and is used to balance your budget with your current bank balance.  This section is also where you’ll keep track of your car repair fund, and any other “funds” for big items that you’re saving for.

Keeping with our example of $60 per month for car repairs, let’s say that we’ve reached the 15th of the month, which is the date we entered the car repair fund to be spent.  But, since we’ve not needed any repairs or maintenance this month, that $60 is still sitting in our account.  To ensure that the budget matches the actual bank balance (ascertained by logging into your bank’s website), we need to enter the $60 as a pending expense.  Next to the value of $60 that we enter in the orange box, we need to title the expense as, “car repair fund.”  The spreadsheet will automatically adjust the budgeted balance, and the “difference” value in cell C25 should drop to 0.

Next month, we’ll have the same thing happen, and assuming no car repairs are needed by the 15th of that month, we’ll follow the same procedure.  On the 15th, we’ll replace the $60 value in the orange box with a value of $120, and so on and so on, month after month.  Anytime money is spent at the auto repair shop, simply reduce the pending amount by the total amount spent.  So, if on the 18th of that second month, you spent $20 on wiper blades, simply reduce the pending amount from $120 to $100.

Following this plan will bring you such a sense of peace–bring ahead of these unusual expenses instead of getting knocked down by them.  Please enter any questions or clarifications you have in the comments section, and as always, remember that we’re here to help you thrive!