Guest Post

It is quite unfortunate that the majority of investors approach investing with the mind set that they need to find stocks that will provide the greatest return in the shortest possible time. The entire day trading industry is built upon this need for instant gratification. Brokers are all too happy to fill this need by offering low trading commissions and beautiful charting and trading tools. As is often the case, constant portfolio turnover and churn is where the real money is for the brokers. “Making it up in volume” may not work for Detroit any more, but it works very well for the discount brokerage industry.

Investors who get seduced by these tools and the hope of a quick profit, tend to significantly under perform the market. Step back for a moment and consider this: The total market return (for example an index such as S&P 500) is the sum of the returns of all the individual investors in that market, institutional investors such as funds, less the commissions and fees they pay out to their brokers.

The problem is that of the three main participants in the market, individual investors are the only ones who are completely dependent on good stock picking for their profits:

1. Brokers: They typically do not care about which stocks are up and which are going down. As long as their customers are buying and selling, they make money in form of commissions and the spread between bid and ask. The greater the trading activity, the better it is for them.
2. Funds (mutual funds, pensions, hedge funds, etc.): Fees and expense ratios are the main source of income. Hedge funds do have a part of their fees tied to performance, but they are also guaranteed a part of their income as a percentage of Assets Under Management (AUM). Performance plays a role in attracting new customers but it is unlikely that the fund company will operate under loss as long as it has a good size asset base.
3. Individual investors: Completely dependent on the returns of their investments for their profit.

The intermediaries provide a service and get paid for it. Nothing wrong with it, except that the goals of an individual investor and the brokers/fund companies are not necessarily aligned at all times. The stock market may or may not be efficient, but I can tell you this – the industry is extremely efficient at extracting every cent of profit from the investing public – that is, from YOUR investment returns.

Fortunately, Successful Long Term Investing is Not Complicated

Your investing success depends on you, and no one else. No one has the same incentives as you do. It is not complicated, but unless you have a well defined process and the discipline to stay with it, it is going to be very hard. It also requires a change in the way most of us think about investing and stocks. Stop thinking about rate of return and beating the market and start focusing on a solid investment plan and process and your returns will take care of themselves. Use the following principles and you will be on your way to create a good plan that works for you.

1. Invest in businesses, not stocks – A stock is just a way of gaining a part ownership in a business. Do not think of a stock as a bet. Only buy stock in a company that you will be happy to run yourself if you were to own it outright. So you will need to think about profits, customer loyalty, growth prospects and competition. You should really consider all aspects of the business before you invest in it. Spend more time choosing your investments than you would, for example, in choosing a new microwave oven.
2. Do not over pay – It is one thing to buy a company that is profitable and has a strong competitive position. It is another to buy it at a price that will ensure profits for you. If you pay a premium for your stock, that is when the stock is overvalued, the company may continue to rake in profits and cash flow for the next ten years and your stock may not move. This is because over time, all stock prices approximate the intrinsic value per share of the company. However, at any given instant of time, the stock prices may be out of whack with the value as it is more dependent on the investor sentiment and the demand/supply of the stock in the market. You may want to read my thoughts on how to buy stocks at a discount to understand better how this process works.
3. Ignore the market, turn the TV off, cancel CNBC – If you are following the two principles laid out above, you are more 80% there. However, if you are the kind that panics when the market does, you are likely to sell off your good stocks at the worst possible time. If the investment merit of the stock has not changed, there is no reason to sell it. It is just better to tune out the unnecessary noise.
4. A down market is an opportunity, a buoyant market is scary – When your barber starts giving you stock tips, it is most likely the time to sell. When the IPO market heats up, sell. When everyone sells their stocks and hides their cash under the mattress, buy. When the number of new investing blogs in a year exceed the number of new “frugal” blogs, sell. You get the idea. The trick is to buy low and sell high. The days after the Lehmann Bros collapse were some of the best days to scoop up sound and profitable companies such as American Express.
5. Do not, and I mean this, do not be afraid of cash – It is surprising how so many investors feel compelled to buy a stock, any stock, if they have cash sitting in their brokerage account. The only valid reason to invest in a stock is if you have researched the business and decided it has investment merit. When the market is overvalued and there is a paucity of good investment values, it is prudent to stay in cash. Buying an iffy stock that eventually loses money is neither macho, nor sexy.
6. Get in with the correct process – The correct process, and the mind set for successful investing, is not to buy stocks that will go up. The correct process is to buy ownership in a company that makes money for its owners without overpaying for the share. Sure there may be times when you judge wrong, and there may be times when you have to be patient for years to profit, but if you do this long enough, with good number of stocks, you will eventually win out over the market and the average unenlightened investor. If you do not use the correct process, just know that there are many businesses out there just waiting for you to hand them your hard earned money.

If you have stayed with me so far, you are probably asking this obvious question: How do I find time and help to research the stocks and the businesses in the manner you are suggesting? In the old days, only investors with considerable assets, who could afford a full service broker and their custom advice, bought stocks. Today, technology and new financial products such as funds and etfs have brought in many new investors in the market and discount no frills brokers have thrived. The fact is, if you can’t afford good advice, you will have to make time to research your stocks. There is no way around this. Even if you have a good advisor, I recommend you do not buy any stock that you do not understand yourself. Then by all means take advantage of low commissions offered by discount brokers.

Shailesh Kumar, perhaps better known as Arohan, runs the popular value investing site Value Stock Guide where he doles out stock advice and recommends undervalued stocks to buy to new investors and stock market grey beards alike.

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Guest Post

Reaching a point when you can grow your money via investments is an exciting time. But there are many factors that affect investors’ decisions. These are normally guided by investment strategies, which are influenced by investment goals, risk tolerance, and your future needs for capital.

There are three basic types of investment strategies: growth investing, income investing and value investing, with the greatest thing separating them generally being the level of risk involved. Many younger investors have greater tolerance to risk as they can bank on having more time to make up losses, while investors closer to retirement may favour a conservative approach that’s protective towards their assets.

The basic investment strategies

Growth investors look for companies in markets that traditionally have high earnings and take risks buying stock from promising start-ups in the hope that the companies will grow into industry leaders. Value investors, by contrast, search for stocks that might have been overlooked by the market. Undervalued as opposed to low priced, these stocks represent a good deal to savvy investors. Income investing is a more conservative strategy that targets companies that consistently pay out high stock dividends.

Most investment strategies have risk guidelines that separate the risk averse from the moderately tolerant. Someone who is risk averse will prefer transactions with lower risk, even if it means losing out on higher rates of return. Research has indicated that investors who prefer this type of trading generally stick to index funds and government bonds.

Investment strategies aim to balance risk with reward through asset allocation, using an investor’s assets and unique risk tolerance profile to deliver returns. All assets – equities, fixed-income and cash and equivalents – represent different levels of risk and behave differently, hence the complexity of allocation.

Finding winning investments

Very rarely can investors pick stock market winners by intuition. Following set goals and guidelines has proven to be a far more successful method. Many investors choose to research companies within a certain industry or within certain financial criteria. Owing to the large amount of information that’s freely available today, it’s possible to find company information including financial data such as total and net assets, turnover, profit and stock information by using a business directory.

There is no one strategy that is fool proof. Developing investment strategies is as much about understanding the investor’s strengths and weaknesses as it is about understanding the market. For example, a person who is good at research and analysis will be good at finding opportunities in company accounts, and know when to buy and sell.

Becoming a good investor means not only developing an investment style but also learning how to process large amounts of company information. By first understanding asset allocation and risk guidelines, and second processing company data, you too can leverage the stock market to your benefit.

This article is brought to you by Duedil, the largest database of free company financials in the world.

By Kevin M

Have you ever noticed that some people who have little money seem to live very well—they almost seem to be…rich? Have you also noticed that many people who are rich in terms of money seem to struggle? There are definite reasons for that, and it’s mostly a matter of personal choice. It’s not that money isn’t important; it’s more that we should never measure wealth solely in terms of money.

When we do we can sink ourselves into a Catch-22 that we can never win. After all, how much money will ever be enough? Being rich is more about the quality of a person’s life than it is a certain salary or portfolio level, but only if we dare to consider the alternatives.

I’ve come up with a list of 10 forms of wealth—all of them non-monetary in nature—that can lead to a rich life and require very little emphasis on having or earning a lot of money.

1) Mobility

The ability to live where you want, to travel, and to do what you want to do in your life is a form of wealth. And it has more to do lifestyle than anything else, so even a person of modest means can have it. As an example, think of how young people are often in this position, even if they have little in the way of financial resources.

How do you achieve mobility if you’re already trapped in the “rat race”? Start viewing life in terms of experiences, rather than possessions–they usually cost a lot less than possessions. Begin gradually reducing the possessions you have, especially if they have debt attached to them. Mobility depends mostly on a willingness to travel light in life.

2) Ability to quit a bad job

This might be the most basic reason people feel poor, even if they really aren’t. You can’t quit a job if your budget is too tightly stretched. This can happen to someone making $300,000 a year just as easily as it can happen to someone making $30,000.

Having this ability—this form of wealth—starts with living well beneath your means. If you can live on less than your make, you can afford to leave your job to take one that pays less, or even to take some time off and get your head together for the next push.

3) Liquidity

How we feel about our financial situations has much to do with the sense of control we feel in regard to our money. If our money is tied up and/or if nearly all of the paycheck goes to paying bills, we won’t feel rich no matter how much money we have or earn.

Liquidity is a form of wealth. It’s having the ability, but not the obligation, to spend or to save and invest what we do have. If we have liquidity, we’re more likely to actually feel rich, even if we don’t have a lot of money. Spending less than you earn, having at least a small pile of cash, and being debt free are all it takes to get there.

4) A debt-free position

You can be debt free at just about any income level, but you have to decide that you hate debt more than you love the possessions it will buy. That may mean driving a $2000 car, rather than a $20,000 one, or buying your clothing at thrift shops rather than the mall. Yes, on the outside you may look “poor”, but your finances won’t be dominated by debt, and that’s most definitely a form of wealth. And an absence of debt will help bring about nearly every other form of wealth we’re discussing here.

5) Strong family ties and social connections

This is one of the most overlooked forms of wealth in the modern world, but it’s quickly being degraded by the rapid pace of life. Strong social connections can give us a sense of belonging—that feeling of validation that we might otherwise look to career and money to find. Family ties and social connections are also a part of building a life based on experiences, rather than on possessions. They can add tremendous value to your life but cost very little. Much of the money spent today on entertainment, home security and therapy is an attempt to offset the loss of social connection.

6) Good health

If you’ve never thought of good health as a form of wealth, close your eyes for a few seconds and imagine you don’t have it. No further analysis is necessary.

7) Freedom of thought

Debt, career obsession and complicated investments can and do impact how we think. At times their influence can be so severe that we can’t even perceive reality. Most of our ability to survive, to move forward and to seek happiness in life depends on our ability to think apart from our immediate circumstances. Can we do that when we’re working 70 hours a week, or struggling to service a mountain of debt? Freedom of thought may not be wealth in itself, but it is the launching pad from which all the other riches of life are possible.

8 ) Abundant free time

The whole concept of free time sounds almost frivolous, but on closer examination it’s anything but. Free time is time we spend with others, for maintaining our health, for self-improvement, for planning our next move, and for creating those experiences that make life worth living. The more of it we have, the richer we are.

That may mean spending less time earning a living, and you can start doing that by lowering your cost of living. It’s easy to forget that it isn’t standard of living that we need to chase, but quality of life. That should be the end game, but it requires free time to make it happen.

9) Relative lack of worry

There’s a Bible verse that sums this up perfectly, “The sleep of a laborer is sweet, whether he eats little or much, but the abundance of a rich man permits him no sleep.”–Ecclesiastes 5:12. Worry often comes from living a complicated life, and that’s what happens when you have too many obligations, too many expenses, or too much debt. It can even come from having too many assets–think of people who are over invested in stocks when the market crashes, or those who have exotic investments heavily reliant on certain big picture events breaking in the right direction.

We’ll never be completely worry free, but we can be relatively so if we have confidence in our ability to survive and earn a living, come what may. You don’t have to be rich to have that confidence.

10) Creativity

Creativity is often the very force that generates wealth because you’re using the skills and talents you’re best suited for. If you can be creative in your work—even if it never makes you wealthy—you’ll be tapping your best talents and doing the work you are “meant to do”. That kind of work doesn’t feel like work, which means your career will be more rewarding, less stressful and less of the grind that wears so many people out.

Unfortunately, being creative in your work doesn’t happen for most people—most employers hire you to do “Job X” and not to discover and nurture your hidden talents. You may need to find a new career or be self-employed, and while that comes with risks, it also has enormous rewards. If you can achieve it you will attain a level of “wealth” that most people never do.

 
True wealth is determined by the quality of your life and can’t always be measured or even achieved with money alone.

Can you think of other ways to be “rich” that have little to do with having a lot of money?

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Beyond Buy-and-Hold #62

By Rob Bennett

I often observe that Buy-and-Hold can never work. I get the feeling that a lot of people think I am exaggerating. No. I really mean that. This article sets forth nine reasons why it is so.

1) Buy-and-Holders don’t know when they are doing well or doing poorly.

The key to success in many types of life endeavor is learning from feedback. Because Buy-and-Holders don’t adjust their portfolio values to show the effect of valuations, the feedback they receive is often misleading.

I was warning people back in 2002 that going with a high stock allocation at the price levels that applied at the time was a terrible mistake. The usual response I received from Buy-and-Holders was “I’m doing just fine.” Huh? Buy-and-Hold was a disaster in the late 1990s. It took stock prices to the most insanely high levels ever seen in history. Yet Buy-and-Holders were not aware of the problem because they were viewing the numbers on their portfolio statements as legitimate.

2) Buy-and-Holders often go with wildly improper stock allocations.

The most important choice a stock investor makes is his choice of a stock allocation. It’s an easy one to get right for non-Buy-and-Holders. You look at the P/E10 level that applies. That tells you whether you should be going with a high stock allocation, a moderate stock allocation or a low stock allocation.

Buy-and-Holders get it wrong two-thirds of the time. They choose a stock allocation that makes sense for times when stocks are priced at moderate levels. So they go with wildly improper stock allocations both at times when valuations are low and at times when valuations are high.

Follow a strategy that causes you to get the most important factor wrong two thirds of the time and you are not going to see good long-term results.

3) Buy-and-Holders are the most emotional investors.

Stock prices follow a pattern that takes about 35 years to play out. They start out low, rise for many years, eventually reach insanely high levels, crash, and then remain low for a good number of years. Every investor experiences every stage of the bull/bear cycle at some point in his investing lifetime.

The years that cause the most stress are the years in which there is a crash followed by a good number of years of super-low prices. All investors get worried about their financial futures during this time-period. But Buy-and-Holders get the most worried. Why? Because they are the most stubborn about admitting their mistake of going with too high a stock allocation at times of insanely high prices.

A bear market cannot come to an end until capitulation is achieved. For there to be capitulation, the Buy-and-Holders must sell. But the anxiety must reach truly scary levels before the Buy-and-Holders become willing to break their vows never, ever to sell no matter what.

4) Buy-and-Holders cannot plan their financial futures.

Stocks were priced at three times fair value at the top of the bull. That means that portfolios that showed a nominal value of $600,000 possessed a true and lasting value of $200,000. How can any middle-class person who is working with accumulated wealth numbers that are $400,000 off the mark have any hope of knowing whether he can afford to buy a new house or a new car or to go on a special vacation?

5) Buy-and-Holders suffer double and triple hits when stock prices crash.

Buy-and-Hold causes economic crises. There has never in U.S. history been a time when Buy-and-Hold strategies became popular and we did not see an economic collapse. Nor has there ever been a time when we saw an economic collapse that was not preceded by a time when Buy-and-Hold became popular.

Just at the time when Buy-and-Holders are seeing a huge loss of their accumulated wealth of a lifetime, they are also seeing a spike in unemployment and the prospect of a prolonged recession or even a depression, adding greatly to their stress.

6) Buy-and-Holders never know what to expect from the stock market.

Robert Shiller saw the economic crisis coming years before it hit. So did Arnott. So did Asness. So did Russell. So did Smithers. So did all Valuation-Informed Indexers.

Buy-and-Holders were shocked to see history repeat yet one more time.

7) Buy-and-Holders sell at precisely the worst time to do so.

In theory, Buy-and-Holders never sell. In reality, they sell at precisely the worst possible time for doing so. Stock prices rose to three times fair value at the top of the bull. They always fall to one-half of fair value by the end of the secular bear market that inevitably follows an out-of-control bull. That’s a loss for Buy-and-Holders of five-sixths of their accumulated wealth of a lifetime. How many do you think stick to their vows to never sell?

8 ) The losses suffered by Buy-and-Holders multiply over the years.

The nominal losses suffered by Buy-and-Holders grow much larger over the decades as the power of compounding returns causes those losses to multiply.

9) Bulls last long enough to cause Buy-and-Holders to up their spending in irresponsible ways.

I know many Buy-and-Holders who began early retirements at the top of the bull because they believed the books and articles and calculators telling them that stocks could continue producing positive returns even starting from such insanely high price levels. Millions of others let their temporarily inflated portfolio values persuade them to spend far more than they would have dared to spend had they known the true value of their portfolios. It’s too late now for them to make up for the years or decades of lost saving opportunities.

Rob Bennett writes about getting over your fear of money. His bio is here.

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Getting out of debt can be a big relief. But it’s not just the short-term effects of debt that can have an impact on your finances. Because of the impact on your credit rating, debt problems can affect your finances further down the line too, which means getting back on your feet once you’ve paid your debts off in full isn’t always as simple as you may have hoped.

Many approaches to dealing with debt problems – from debt management plans to bankruptcy – will affect your credit rating, and records will generally show up on your credit file for between three and six years. This could mean you have problems getting access to certain financial services, such as opening a bank account, or taking out further credit.

However, there are things that can help. Let’s look at some of the basic steps you could take to help you get back on your feet after being in debt.

Find a suitable bank account

Simply having a bank account is a great way to stay on top of your finances. When you’re applying for a bank account, though, banks and building societies could turn you down if you’ve had serious problems with debt in the past – for example, if you’ve been bankrupt.

However, many account providers also offer basic bank accounts, which offer many of the same services you’d get with a normal account – but are aimed at people who may have problems getting a standard current account.

Some basic bank accounts don’t require a credit check, and some could even help you to budget by separating the money you need for your essential living costs from your disposable income – which could give you peace of mind that you’re never spending more than you can safely afford.

On the other hand, basic bank accounts don’t tend to offer features like overdrafts or give much interest on your balance.

Everyone has different needs, so it’s important to take the time to compare what each basic bank account has to offer. You could start by looking on a site such as thinkbanking for some further information.

Plan a strict budget

Organising your finances so you can keep on top of the money you earn and manage how it’s all spent every month could really help you regain a solid financial foundation. Creating a carefully planned budget is one of the best ways of staying in control of your money – and avoiding further financial problems in the future.

Firstly, work out all the money you receive in your account on a regular monthly basis: including your salary and any benefits you receive. Secondly, work out all your essential outgoings every month – such as your rent/mortgage, food and utilities, as well as anything else your household regularly spends money on.

Then, if you subtract everything you spend from everything you earn, you’ll be left with your ‘discretionary’ income – in other words, spending money – some of which could be put into savings, if you wish. As long as you keep all your spending within this monthly amount, you should greatly reduce the likelihood of future money problems.

This post is provided by thinkbanking.

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Credit vs. Debit Cards – A Different Take

Guest Post

Many frugal experts will shy readers away from using credit cards because it can be easy to overspend. But credit card rewards can actually help you save.

Here are ten ways to use credit card rewards to benefit you:

1) Statement credits: Some cards, like the American Express Blue Sky card, allow you to use your points as a statement credit toward qualified travel purchases, including any flights, hotels, or car rentals. If you do any traveling at all, this is a useful reward that is basically like cash toward your statement.

2) Gas rebates: A straightforward reward for something you always use, gas rebates can be an easy way to make sure you are using your points for something you will use.

3) Fund your IRA: Some cards will deposit your cash rewards directly into an investment account or 529 college fund. For example, the Fidelity Rewards American Express Card will make a $50 deposit for every $2,500 in purchases.

4) Hotel stays: If your card offers travel rewards, consider skipping the rewards tickets and using your points to pay for the hotel, instead. Hotel stays are often cheaper than flights, so can be purchased with fewer miles.

5) Travel insurance: Travel rewards cards often offer great travel protection, making their annual fee cheaper than the purchase of comparable insurance. For example, the American Express aeroplan card includes automatic coverage of up to $250,000 in travel accident insurance.

6) Cash back rewards: More than half of credit-card users choose to get their rewards as cash. Look for a card that maximizes the percent back on the items you actually buy the most. One nice straightforward option is Capital One’s No Hassle Cash Rewards Card, which pays 2% cash back on gas and groceries and 1% back on everything else.

7) Retail shopping: If you do much of your shopping in one place, you might find that the big benefits of merchant rewards pay off for you. Merchant rewards points can be worth almost twice the dollar value of travel reward points. Chase’s Amazon.com Rewards Visa offers triple points on Amazon purchases, which can add up fast, and a $40 Amazon credit for signing up.

8 ) Catalog products: Many rewards cards offer a catalog of home items and electronics. Generally, these items can be purchased much more cheaply with cash at an online retailer than with points. But, if you have points that are about to expire, these purchases can use a small number of miles and don’t require any additional expenditure.

9) Gift cards: Much like catalog products, they can be purchased with a small number of points, making them a great way to use points that would otherwise expire. And unlike catalog products, they can be used to buy a huge variety of products in the future.

10) Frequent Flyer Miles: Rewards cards are most known for their frequent flyer programs. If you tend to travel on one airline, choose a card for that airline. Otherwise, consider a flexible card like Capital One’s VentureOne Rewards Visa, which lets you spend accumulated points on travel with any airline or hotel.

When signing up for a rewards card, be careful that the annual fee doesn’t exceed the card’s benefit for you. And read the fine print for exceptions. For example, even one late payment on the American Express Blue Sky card can cost you all your rewards points for that billing cycle.

With a little caution and research, credit card rewards can be a great perk for purchases you are already making!

Image Source: CreditCards.com

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By Kevin M

In previous posts I’ve suggested that frugality can be counter productive if it keeps you hyper-focused on saving money at the expense of increasing your income. There is a very definite “siege mentality” that is inherent in frugality, and if taken too far it can lead to a process in which you’re constantly working to lower your cost of living but never moving forward in any real way.

Today I’d like to look at the flip side of this thinking. In this post I’d like to examine an area where properly channeled frugality can create business opportunities.

Last week I had lunch with my friend Jay and we got to talking about the possibility of a connection between self-employment and being frugal. Jay himself was the inspiration for the question—and for this post. In addition to having a very successful business, one he quite literally built from the ground up, Jay has never held a job. His entire career has been a process of moving from one entrepreneurial venture to another and sometimes juggling two or more at the same time. Oh, and yes, Jay is also very frugal. I don’t mean cheapskate frugal, but more along the line that frugality is a part of who he is.

Have you ever known anyone like this? I’ve known several. Make that many! That’s what leads me to believe that there might be a connection between self-employment and frugality. I’m not sure whether frugality sets the stage for self-employment, or if being self-employed makes one frugal out of necessity. But I’m willing to guess that there are certain characteristics of the frugal that make it easier for them to be self-employed.

What are those characteristics?

An inclination to find the best deals

What ever it is that a frugal person needs he’ll almost always pay less for it than others will. In that process he develops a sense to be able to almost sniff out the best deals on nearly every product or service he buys. A truly frugal person almost never buys “off the shelf”. He hones something of a horse trader’s instinct that he’s able to summon anytime he’s about to buy something. Think of it as buying wholesale, a skill that any self-employed person needs to develop.

”By Low, Sell High”

The inclination to find the best deals is rooted in a deep sense of value. The frugal person knows that what it is he buys is purchased at a lower cost than what most others are willing to pay. This sets the stage to sell what he buys for a profit. The primary “secret” of having a successful business is the ability to buy on the cheap and sell what you buy at a higher price. It’s easy to see how this would help in running a business.

Getting the most out of scarce resources

The frugal not only know how to buy for less, but they also have an uncanny ability to use what they have to the fullest. That may involve using a product past the point where most others would discard it, the willingness to fix or otherwise enhance it to get more life out of it or, failing all else, to find cheaper alternatives.

This is exactly what you’re doing when you’re self-employed. There are business plans, but as anyone who’s ever run a business knows, improvising quickly becomes the order of the day. Since income is never unlimited, the ability to make do with less becomes the critical “other half” of business success.

Managing cash flow

Since a frugal minded person is always aware of expenses and the need to control them, his ability to successfully manage cash flow tends to be better than that of the average person. We can see how this is a benefit in managing personal finances, but it works just as well in running a business budget. By keeping expenses low, and buying only what’s absolutely necessary, the frugal person also maximizes net income.

Staying out of debt

Frugal people are keenly aware that debt and the interest it carries raise the cost of everything it’s used to buy. For this reason, the frugal avoid debt and that works very well if you run a small business. Debt can be the mortal enemy of a business entity, reducing options and cash flow during downturns. By staying out of debt, a business is in a better position to weather economic troubles. The frugal tend to be naturally better at making this happen.

Investment and business asset growth

One of the hallmarks of the frugal is a healthy savings account balance—a natural result of buying on the cheap, keeping expenses low and staying out of debt. This is also a benefit to a business owner since it keeps cash available for future investment. This can be either investment in personal financial assets or investment in the business itself.

Where ever it’s done, when a business owner is able to invest without borrowing he improves the likelihood of both the survival and increased prosperity of his business.

Getting back to the question in the title: Self-Employment and Being Frugal – Is there a Connection? In my opinion, most definitely.

What do you think? Is there a connection between the two? Does frugality benefit a business owner? Can you think of ways it might work against being self-employed?

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Guest Post by Mike Brains

When choosing a credit card, many people will go for the cards that offer the best rewards. One of the most common rewards offered by credit card providers is air miles. This can help you save money when booking holidays or business travel.

Ever time you make a purchase using an air miles credit card, you will accumulate points. These can be used to book flights for free. Also, many credit card providers offer a large amount of air miles for taking the card, before you even make any purchases.

Saving money with an air miles credit card

If you are a frequent flyer, miles can save you a lot of money. If you do not travel a lot, you can let the miles add up and use them to book a dream holiday. By using a credit card to collect frequent flyer miles, you can save a huge amount of money and fly to exotic destinations you may not have imagined going to before.

Most airlines provide a credit card that rewards you with air miles. To make sure you can book a flight where you want to go, you should look at where the airline flies, as well as the amount of miles they offer. For example, there is no reason for collecting frequent flyer miles with an airline that only does short haul flights if you want a cheap trip to Australia.

Instead, you should pick a card with one of the major airlines that fly all over the world. That will allow you to use your collected miles to travel further.

While air miles credit cards often charge a higher rate of interest than card that do not offer these rewards, you can save a lot by using them. The amount you save on travel using frequent flyer miles will often more offset the larger amount you will be charged through interest and other fees.

The air miles credit card payoff

If you can accumulate a sufficient number of air mile rewards, you’re buying yourself free flights, and that means more freedom to travel. You can take that trip to an exotic destination that you’ve only dreamed about in the past. And that will mean adventures and experiences that will last a lifetime. If there’s even one destination in the world you’d like to travel to, but never imagined you’d be able to afford to go, having a card that will help get you there for free will be well worth having.

But beyond the dream travel destination, there’s also the promise of more to come in the future. And after you’ve taken that “once in a lifetime” trip, you’ll be more than motivated to do it again. And again! With the right program through the right card issuer, you’ll have that chance. See it as the opportunity it truly is!

Have you had much success with air miles credit cards?

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By Kevin M

Do you ever find yourself wondering—perhaps when you look at your paycheck or even your W2–I make a good living, why don’t I have more money saved up?

You might look at your income and your regular expenses and think that you should be saving more, but somehow it all seems to just disappear, almost as if there are termites gnawing away at both your wallet and your checking account. And perhaps there are a few termites infesting your finances. Call them “stealth expenses”—stealth because we usually underestimate them—if we even notice them–expenses because that’s just what they are.

We all have fixed expenses that we know only too well—house payments, car payments, student loan and credit card payments. There are also day-to-day survival expenses, like groceries and gas. We’re very familiar with all of these, but it’s those others, the variables, that slowly suck the life out of a budget. Those are the stealth expenses, the ones that aren’t always so easy to measure or even to prepare for.

”Where does all my money go?”

Stealth expenses are “soft” expenses that hit us in small chunks, but they’re substantial when taken together. Worse, because of the variables related to each, you can’t know with any degree of certainty what they’ll cost you in any given year. The prime suspects:

Insurance. This category is complicated by the fact that it usually has several components–home, auto, life, health, etc, that add up to many thousands of dollars each year. Often they’re paid in ways we don’t notice, such as payroll deductions for health insurance and the little corner carved out in the monthly house payment that includes homeowner’s coverage. Then there are some policies that have annual, semi-annual or quarterly payments that can escape yearly budget projections. They all add up to less savings in the bank at the end of the year.

Co-payments, deductibles and co-insurance provisions. Uncovered health expenses–deductibles, co-pays, co-insurance (the percentage of first dollar medical expenses you’re required to pay past the deductible—nearly every health insurance plan has this provision!) and costs for procedures that aren’t covered—also fully qualify as blind-side expenses, and they have an uncanny knack for hitting at the worst possible times. In any given year there’s no way to know what they can be, but they can torpedo a budget in short order.

Utilities. Utilities might the biggest of the stealth expenses. They can easily amount to hundreds of dollars per month but we don’t notice because it’s usually split between several bills (electric, water, garbage, gas, cable, internet, etc). A major complication is weather, which can increase payments even if you’re on a budget plan. Another is unexpected and often steep rate increases. Many utilities are virtual monopolies and if they’re approved for fee hikes you’re stuck.

Entertainment. The stealthiest of all stealth expenses, perhaps because we don’t like to think about budgets and saving money when we’re planning on having a good time. Like dominos, one fun activity usually leads to another, like dinner and a movie. Then there’s the gray zone factor—is eating our part of your food budget or is it really entertainment? What about cable TV? And how to you establish an entertainment budget—and live within it—when you don’t know exactly what your needs will be? Entertainment is, after all, driven more by emotional factors than logic.

Car repairs. Probably the most unpredictable of all stealth expenses, you can budget for this but you can easily miss by thousands of dollars. The reason is the wide variation in repairs costs. Replace a battery at $150—piece of cake—replace the transmission at $2,500–now we’re talking real money. Multiple major repairs could mean that all budgetary bets are off. This is a category where you can get off easy with $500 one year, then get clobbered by $5,000 the next. The older the car or the more vehicles you have, the less predictable the expense will be.

Holidays—especially Christmas. There’s often a tendency to think that this expense can be blended into a budget with little extra effort, a notion that usually breaks down quickly when the January credit card blizzard hits. Christmas in particular is difficult on a budget in part because of its sheer size. It sits astride the “holiday season”, sandwiched between Thanksgiving and New Year’s, and that season often facilitates a breakdown in budgetary order. Not only is there shopping for gifts, but there are dinners out “on the fly” because there’s no time to cook. Then there are decorations and often travel. A blessed holiday for sure, but a hard one on the finances.

If you think about if for a bit, you’ll come up with even more categories that qualify as stealth expenses, but the more important issue is taking control of them. Because stealth expenses have multiple sources, there need to be multiple plans on how to deal with them.

Keep close tabs on ALL spending

Stealth expenses like entertainment get out of control precisely because they escape close scrutiny. Tracking them will show the reality of what you’re spending, highlight substantial increases in spending trends and give you a chance to make cuts where necessary.

Controlling fixed expenses is more important than we think

Stealth expenses usually eat up a bigger chunk of your budget than you think. The wide variety of them can make it hard to establish a workable budget. An alternative is to lower fixed expenses, like housing and car expense. Not only are there fewer fixed expenses, but they’re usually larger so cutting will have a far greater impact.

And here’s a bonus: the lower your fixed expenses are, the lower your stealth expenses will be. For example, the size of your home will affect your utility expenses, while the cost and type of car you drive will have a huge impact on both car repairs and insurance costs.

Set up a dedicated savings account for predictable but irregular expenses

Set up a third savings category—somewhere in between an emergency fund and long term investments—that will cover the loosely expected and vaguely predictable nature of stealth expenses.

Emergency funds are typically based on predictable monthly living expenses, which include regular insurance and utility payments. However, car repairs and health insurance deductibles and co-insurance provisions are close to impossible to predict with any certainty—all we know is that they can happen, and will at some point in the future. How do you save for that?

One way is to average how much you’ve spent on these over the past few years. It’s far from scientific since car repairs can increase as your vehicles age, and healthcare is always an X factor. You could use a worst case scenario on healthcare, for example, by adding up the deductible and co-insurance provision that you would have to pay for a large medical expense for one person, then add in an average amount paid for car repairs. You could also begin loading up the account as the holiday season approaches, or you have a wedding or graduation to attend when entertainment expenses will increase.

Stay liquid!

Liquidity is vastly underrated as a budgetary tool. The lack of it is a primary reason people go into debt. Don’t overload investment or retirement savings at the expense of near term needs. You’ll pay for these one way or another, and it’s always best to do so without using credit.

A “stealth expense” is any expense that we would be likely to underestimate or to even exclude from our budgets; can you think of other examples?

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Beyond Buy-and-Hold #54

By Rob Bennett

It’s Sunshine Rob here again to bring you more happy face news on the wonders of Buy-and-Hold. The topic of today’s sermon is: Your Retirement Plan Is In More Trouble Than You Realize.

Everyone knows that we have experienced a Lost 12 Years in the stock market. Stock prices are today close to where they were at the top of the bubble. Investors have earned a small gain from the receipt of dividends but most of that has been eaten up by inflation. We have essentially been standing still.

All acknowledge that that’s bad news. But few realize how bad.

Twelve years doesn’t sound like all that long a time. Most of us have life expectancies of perhaps 80 years. We certainly never wanted to go 12 years without seeing the numbers on our retirement portfolios increase, but into every life some rain must fall. My sense is that the general feeling is that this too will pass.

We are underestimating the damage a 12 year freeze is causing

Few of us start saving before age 25 and most of us hope to retire by age 65. So we only have 40 years in which to accumulate the million dollars or more in wealth needed to support a decent middle-class retirement. A good number of us graduate with large student loans. Members of that group might not be able to begin saving in a serious way until age 35. Those people have only 30 years to accumulate the million dollars.

To lose 12 years when you only have 40 to do the job is to lose something close to 30 percent of the time available to you to finance your retirement. To lose 12 years when you only have 30 to do the job is to lose close to half of the time available to you to finance your retirement. We are sinking fast. This is serious stuff.

I know what some of you reading these words are thinking. “Yes, we’ve had some bad years, but a string of bad years is likely to be followed by a strong of good years.” Am I close?

No dice.

Once the bad years go on long enough that stock valuations are far below fair value, this will be so. It really is true that bad years eventually put in place the circumstances needed to see good years. But guess what?…

Stocks are at scary high valuations even today!

Stocks were so insanely overpriced in the late 1990s that even 12 years of zero returns has not been enough to pull valuations back to where they must go for the stock market to generate good returns on a going forward basis. We are today at the valuation levels that in ordinary circumstances would be causing informed investors to start preparing for a crash.

If you think that the hit you have taken over the past 12 years has been tough to bear, you ain’t seen nothing yet! Stocks don’t become a good investment class again until we see capitulation. You don’t hear people saying good things about Buy-and-Hold when they are preparing to capitulate. There are still lots of Buy-and-Holders around today. We are nowhere close to capitulation yet.

Others are thinking that these losses are not so bad given how many good years the stock market dished out from the early 1980s through the late 1990s. Fair enough. But most of us were using calculators that assumed annual returns of 6.5 percent real per year in all years when checking whether our retirement plans were on track in those days. How many have gone back to the calculators and checked what numbers they produce when realistic assumptions are entered?

The damage done by compounding of returns in REVERSE

You have heard about the power of compounding returns? It is often described as the eighth wonder of the world. There aren’t too many of us who would be able to retire before age 90 if it were not for the compounding returns phenomenon.

When we lose 12 years of returns, we lose all the compounding that would have applied on those higher portfolio numbers too. We are today experiencing the power of compounding in reverse.

Our retirement hopes are not fading a little bit with each additional year of zero returns, they are fading a lot. It’s happening in a soft, gradual way, so we don’t necessarily get alarmed to see it play out. But compounding is a powerful force both when it applies in the regular way and when it applies in reverse and the power of this force is not diluted for those who do not notice what is happening to them.

I’m some fun guy, huh?

You might not like the message, but don’t shoot the messenger

If things are bad, you need to know. Not knowing that your retirement plan is going to fail is like not knowing that you are headed down the road to a heart attack. Your real friends want you to know so that you can do something about the situation before the odds are stacked too heavily against you. Time lost as a result of living in denial can never be won back.

There are lots of things we can all do to save our retirement plans. I’d like to tell you about them. But the reality is that there are not too many who are willing to join in the conversations we need to have today because they are still living in denial about the dangers of Buy-and-Hold.

Following Buy-and-Hold clogs up your financial arteries big time, okay? Only your true friends will tell you that.

We need to talk. I hope that I’ve scared you enough to cause you to give the idea some serious thought. There’s still time to save that retirement ticker of yours!

But not so much that you can afford to be wasteful of any of that which remains.

Rob Bennett reports that sex is overrated or at least so his wife often observes. Rob’s bio is here.

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