Free Money Finance

Three Things I Think About When I Think About Bernie Madoff

The following is a guest post from Peter Passell, author of Where to Put Your Money NOW: How to Make Super-Safe Investments and Secure Your Future.

The greatest financial fraudster of all time has gone to the slammer, and isn't scheduled to be released until he reaches the age of 221. That's OK by me. Bernie Madoff, after all, was no Robin Hood. Sure, he stole from the rich (the struggling middle-class need not apply). But he stole from the poor, too, slurping up billions from the endowments of charities. And apparently the only beneficiaries of this vast involuntary transfer of wealth were family members struggling to maintain the lifestyles of the rich and infamous.

End of story? Not quite. While it's hard to imagine that anyone else is running a Ponzi scheme on this scale, I would argue the human weaknesses that made it possible for Madoff to keep the scam going for decades -- greed, gullibility, laziness, money-driven politics -- explain why most investors, most of the time get less than their money's worth. At very least, then, the Madoff fiasco should remind us all of some unhappy truths about investing in America.

Government regulation is no substitute for personal vigilance. If you rob a bank, the chances are excellent you'll be caught -- and quickly. Indeed, the clearance rate on bank heists is so high that only unshakably optimistic crooks even try. How, then, was it possible for Madoff to get away with so much bigger a crime and for so long? One important reason is that modern business depends more on cultural constraints (as in, "I'm not a thief") than on regulation (as in, "I'd never get away with the theft") to keep it honest. And, unfortunately, the investment business attracts lots of folks who aren't deterred by the injunctions they heard in Sunday school.

But surely, regulators will now be more vigilant. Don't bet on it. The sort of regulation that could reliably deter the bad guys on Wall Street would be immensely intrusive and costly. And when push comes to shove, it's not likely that either Congress, or regulators appointed with the tacit approval of big political campaign contributors, will have the stomach do what's necessary.

The bottom line: You don't always get what you pay for. If you want to invest in anything other than government-guaranteed CDs and bonds, you've got to stay on top of who's got your money and where.

If it's too good to be true, it isn't. Most investment scams are of the get-rich-quick variety -- as in "I'll double your money in three months." Madoff, by contrast, attracted big sums by offering something that seemed far more reasonable. No secret land deals in Wyoming for the former chairman of the NASDAQ stock exchange, no once-in-a-lifetime opportunities to profit from the coming boom in ruthenium (look it up, yourself . . . ). All he offered were 10-15 percent returns, year after year, regardless of the state of the stock market or the global economy.

You've got to give the devil his due here. The promise of low-double-digit profits without risk was just plausible enough to attract the sort of investment advisors who served clients by dressing well and mixing a terrific martini rather than by providing timely intelligence on matters financial. Meanwhile, Madoff was able to make the cash payouts needed to keep investors believing they were getting what they paid for as he was able to increase funds "under management" by a modest amount each year.

On closer look, though, the promise of a steady 10-15 percent was hardly more plausible than the promises of more conventional investment cons. For while plenty of investors do average annual returns in the low-double-digits, they only manage it by taking substantial risks. And the fact that Madoff never had a losing year should have been a dead giveaway.

How did he get away with it, then? Like all successful scammers, Madoff understood that almost everybody secretly feels entitled to something for nothing -- and many are ready to deny reality to get one. To paraphrase Groucho Marx: Who you gonna believe, me or your lying eyes?

The scandal isn't what's illegal, it's what's legal. Yes, I stole that line from the great pundit Michael Kinsley. And yes, what Madoff did was illegal. But his most excellent adventure should not be allowed to obscure the reality that the $50 billion or so that Madoff lost on behalf of clients over the last few decades was far less than the sums that the financial services industry takes from investors every year for nothing much in return!

How dare I, an economist and (within reason) a believer in free markets, make such an outrageous claim? Try this on for size: In 1997 the after-tax profits of financial services companies was roughly $100 billion (a record high to that date). Over the next ten years it averaged a bit more than $170 billion -- even after adjusting for inflation. So what did we get for the extra $70 billion annually? Wall Street sliced and diced a lot more "product," managing everything from a great wave of corporate mergers to the issuance of hundreds of trillions of dollars worth of old- and new-fangled financial derivatives.

But it's hard to see what extra investors got from the deal. And when you look closely, you can see what they didn't get. Corporations paid hefty fees for securities issues -- fees that never seem to go down in spite of what appears to be heavy competition for their business. Meanwhile fund investors paid humongous sums to shuffle assets in what economists call "zero-sum" games in which the gains of some came out of the pockets of others.

Bernie Madoff is gone, may he rest without peace. But the financial world that spawned Bernie is alive, and will soon be well enough to take your money with gusto.

Five Money Dilemmas and What I'd Do

CNN Money recently told what they would do when presented with five money dilemmas. I thought I'd let you know my responses to these compared to Money's thoughts, so here goes:

Problem #1: Your investments are in the tank, your annual bonus is a thing of the past, and you need to cut back on expenses. Problem is, tightening your budget can create pain for someone else.

My response: If you cut back as far as you can and you still have to make painful cuts (in this case a housekeeper versus a home for your dad versus classes for your kid), I'd start by protecting my family first. I'd cut the housekeeper (why have one in the first place?). Next would be the special class for the kid. She can always get another one, but the last thing I'd do is move my dad out of his home simply to save myself some money. I would offer to have him live with me, but if he didn't want to do that, I'd try all I could to accommodate his request above all the others.

Money's response: They agreed with me about the family part, but they preferred the class for your kid over dad keeping his home.

Problem #2: So how do you respond when your neighbor says that his sales commissions are down 40% and he has to postpone removing his dead tree that's threatening to fall on your garage? Or when your brother tells you that he can't pay his share of the 50th-anniversary party you're giving your parents? You know he's strapped, but you think he could chip in if he tried.

My response: I have little sympathy for those who have a tough time telling a need versus a want (for example, cable TV is NOT a need.) If I felt they could cut a bit and make their commitment, I'd hold them to it. If I felt they couldn't, I'd probably give my neighbor some time but ask that he handle it within a period of time. For my brother, I'd probably pick up the tab.

Money's response: They say that if someone is in real trouble, then you should pay for it and asked to be reimbursed. That's a lot easier said than done IMO.

Problem #3: You're a manager at a company that's struggling, and you have to decide which employees to lay off. Some are single. Some have families to support. Some are healthy, while others have medical problems. Meanwhile, your longtime assistant tells you that she could lose her home if she doesn't get a bonus. You could go to bat for her, but it would mean that much less will be available for others.

My response: I've been here before -- having to fire people at a bad time for the company. Here's what I (and the rest of the company did): 1. Looked at the needs of the firm. 2) Looked at who was performing well and who could fulfill the needs of the company to give it a chance to thrive. 3) Those remaining were let go. Personal circumstances were not considered. It sounds very cold, but if you don't do it this way IMO, you risk the whole company going down and EVERYONE losing their jobs. Better to save the many, if possible.

Money's response: They pretty much agree with me.

Problem #4: Your job is far from secure, and you are doing your best to scrimp and save. But good friends are making that difficult. The folks with whom you and your family vacation every summer, for example, are balking at the much less expensive cabin you have proposed this year. And your college roommate, who was the best man at your wedding, now wants you to be the best man at his -- which takes place in Rome.

My response: No problem here. Level with them and move on. Tell them you're in a tough place financially and just can't swing it. If they're upset at you after knowing this, they aren't very good friends IMO.

Money's response: They generally agree, but suggest you that you should try and do all you can to make the "commitments" you have.

Problem #5: Thanks to decades of prudence, you're financially sound. But others in your life can't say the same. Your spendthrift son has lost his well-paying job and says he'll lose his Porsche if you don't take over the payments. And your best friend needs a loan to help with his daughter's tuition -- a loan you're uncertain he can repay.

My response: To son: sell the Porsche (and the tons of other trinkets he probably has), downsize your life, and consider it a lesson well-learned early on in life. To friend: Sorry, I don't loan money to friends. I might GIVE him some money (a couple thousand or so -- loaning money can kill a friendship), but that's it.

Money's response: On the same page with me.

How about you? Would you have approached these issues differently?

The Difference Between Quicken Online and Quicken Desktop

I've been a Quicken user for years (almost 15 years as a matter of fact) and I love it. Simple, easy to use, and gives me the data I need. Plus, I now have a great history of financial information that I can use to create all sorts of charts and graphs and analyze my finances. I have to control myself or I get carried away, so I focus on three or four key charts and that's primarily it.

Quicken also now has Quicken Online, a free, web-based version of Quicken. Since I have Quicken set up like I like it AND I'm a bit leery about putting my personal finance info online, I'm not really interested in Quicken Online. And, in fact, I didn't even really understand what it was about. So when a Quicken rep contacted me, I asked her to explain the difference between the two.

She said that Quicken and Quicken Online are two personal finance options from Intuit, Inc. designed to meet a variety of wide personal finance needs and help people in different stages of their money lives. She noted that a good analogy is that Quicken desktop like a large nationwide home repair store that offers customers every possible tool for every possible job, whereas Quicken Online is like a specialty shop with employees ready to help you complete a specific task, like building a shed.

Quicken Online is a good match for customers seeking:

• a 100% free, all Web-based basic personal finance solution.
• a first start with managing money at a basic level (see balances, what's left between paychecks, manage cash flow).
• access to their balances across accounts plus get bill reminders, large expense transaction alerts, and more via email, text, iPhone or Blackberry.
• a similar experience to online banking, but including accounts from all of their financial institutions (right now customers can access more than 8,500 financial institutions).
• automatic refresh of account balances each night, allowing them to keep tabs on finances without tracking each expense manually.
• "what's left" between paychecks once bills are taken into account.

Quicken desktop is a good match for customers seeking:

• a desktop personal finance solution to meet a variety of specific money needs including bill pay, drill-down on investments, home and business financial management, and rental property management to name a few.
• in-depth investment tools.
• advanced reporting.
• detailed tax preparation and deduction maximizing tools.
• savings tracking against goals and optimized savings tools.
• an environment where you can really track finances on a daily basis.

Ok, so maybe I once would have been a potential user of Quicken Online. But now it looks a bit too simplistic for my needs. It appears to be more of a starter tool for financial management with the desktop version being for those who are a bit more sophisticated, want to do more analysis, and have a broader list of more complicated needs. Got it.

What's your take on these two products? Anyone out there use either Quicken Online or Quicken Desktop? What do you think of them?

Exit Strategies

The following is a guest post from The Strump. 

How many times in your life have you jumped into something without thinking, then tried getting out but it wasn't so easy? Getting into anything is pretty simple because it's so fresh and new at the start - like an investment or a relationship – but sooner or later the lustre wears off and you know you it’s time to move on.

Take a bad investment – you plop down your money on the latest stock or mutual fund and you're eager to watch it grow … but then it fizzles. What do you do? Keep your money invested and hope it goes up or cut your losses and invest in something newer and better?

What about a bad relationship? You've spent years living together building assets but then turn over one day and realize you're not living with the same person. It's funny how love can quickly turn into hate. Nothing is worse than a scorned lover who feels entitled to half of everything. What if there is a financial imbalance where one makes significantly more and the other stayed at home? That is a recipe for disaster, if you ask me.

Here are some examples of exit strategies:

• Relationships
– get a pre-nuptial agreement or cohabitation agreement. When the love is gone, you're money won't be because you've protected yourself at the outset and everyone knows what they're entitled to. A friend of a friend of mine didn't have a co-habitation agreement and ended up losing half his pension. Ouch!

• Investments – before you buy, you should of course, do your homework. But when you're ready to sell, do you know what you're investing in yet or are you simply panicking at some tidbit of news you read on some financial blog? Have another investment in mind before you sell or you'll just end up making the same mistake again.

• Work – with all the layoffs floating around these days, it's clear that the day of staying with a company for life are over. Always network when you don't need a job and keep your eyes open … and don't forget to keep your skills up to date. These will come in handy if you get that pink slip.

• Life
- for the ultimate exit strategy, get your estate in order and make sure you have the following – will, life insurance, etc.

Using a personal example, I had a job once and thought it was going well in the first three months, until I was summoned into my manager's office and promptly dismissed. Given that it was my probationary period, I didn't get any benefits or severance. I also had not kept up with my networking and didn't have any new opportunities readily available. That was a huge lesson learned. (I should have had an emergency fund, too!)

All good things come to an end. When I look around and think that life is going my way, I usually know there's some nasty surprise around the corner.

Having an exit strategy can ease the pain of these unexpected or rather inevitable events.

Amish Financial Principles

The following is a guest post from JD at A Penny Saved. I grew up in an area full of Amish people and can testify that they're on to something when it comes to the very basics of handling money.

I live in the heart of Amish country. The Amish are a religious group that forsakes some modern conveniences. They still use a horse and buggy, they do not use electricity, they dress plainly. For the most part, they are happy and prosperous. So, without becoming Amish, what can we learn from them regarding our financial life?

• They live simply. They don’t need the latest, well, anything! They have uncluttered their life, not just with things, but also their schedules.

• They work hard. You see them up and working at sunrise; you see them working at sunset. They put in a full day.

• They invest in what they know. For the most part, the Amish invest their working lives in dairy farming and wood crafting. The same occupations they have been doing for centuries. They know it, they do it well.

• They stick together. Family is important. And they help each other. Parents help the children get started in life (occupation, home, etc.), the children help the parents at the end of their life.

• They see money only as a tool, not the goal. Their lives are not focused on riches or accumulation of things. Their lives are focused on living a life well lived – with their friends, with their family, with their faith.

In a world that is in a hurry, complicated, and at times out of control, maybe the Amish have figured some things out that are worth copying!

Your Own Personal Money Stress Test

Here's an article that suggests we should each put ourselves (and our money) through a stress test similar to those many American banks just went through. The piece lists four factors that you should score yourself against to see how fit your finances are. The four factors are:

• Factor One: Disposable income ratio. This factor shows your ability to absorb a drop in income or an increase in expenses. To calculate: Subtract monthly expenses from monthly income to determine disposable income or shortfall. Then divide your disposable income by monthly net income to determine your disposable income ratio.

• Factor Two: Surviving on savings. This factor shows the amount of time you can survive on emergency savings without a job. To calculate: Divide your total emergency savings by monthly expenses to determine how many months you can get by without income.

• Factor Three: Total spend-down. This factor shows how many months you could live before becoming completely broke. To calculate: Add your emergency savings to the amount of home equity and your total retirement savings to determine your total assets, then divide by your monthly expenses.

• Factor Four: Debt-to-income ratio. This factor shows the ratio between your level of debt and your level of income. To calculate: Divide your total unsecured debt by yearly gross income.

I scored 100 which they rate as "Excellent health – You are well prepared to handle adversity." Actually, I was well above 100 since I was way over every top measure they offered, but who's counting? :-)

Seriously, a good score here is simply a result of what we talk about here on a day-in, day-out basis -- keep spending low, maximize income, save for emergencies, invest for the long-term, avoid debt, etc. If you do these things, and do them for a long time, you'll score well on this test and be prepared for most financial downturns. In addition, taking these few, simple steps will eventually make you rich.

So, how did you do on the test?

Three Steps to Choosing a Financial Adviser

The following is excerpted with permission from The 1-2-3 Money Plan: The Three Most Important Steps to Saving and Spending Smartby Gregory Karp.

Americans today are forced to make a dizzying array of financial decisions, including many we've talked about in this book: how to build a retirement nest egg, save for kids' college expenses, and deal with debt and insurance.

For help, you might consider hiring a personal financial adviser. That can be a great idea or a bad one. The main advice: Buyer beware.

Choosing a Financial Adviser, 1-2-3

1. Interview three fee-only planners.

2. Ask questions and listen to your gut

3. Never agree to an investment you don't understand.

The title "financial adviser" is not regulated. No government body dictates who can call themselves one. So, anybody can print up business cards and call himself or herself a financial adviser. It's up to you to weed out bad advisers from good. To do that, you'll need to know the insider secrets of the financial planning industry.

The first thing to know is that you shouldn't abdicate responsibility and turn over your financial life to someone else, no matter how good the adviser is. Hiring a financial adviser is not like hiring a lawn service to cut your grass. In that case, you're hiring the lawn service to perform a specific task so you don't have to. A financial adviser should be different. It's like asking a landscaper for advice on how best to cut your grass. He might pull-start the mower for you and walk alongside. But ultimately, you'll guide the mower and navigate around the yard. And you'll have to live with the result.

So, hiring an adviser should be a partnership or coaching relationship, rather than work-for-hire. A good adviser will help identify problems, set goals, suggest strategies, and provide objective opinions.

1. Interview Three Fee-Only Planners

The biggest problem with most financial advisers is they have divided loyalties. On one hand, they might truly want to help you achieve your goals and get you the best returns on investments. However, that can be in direct conflict with other goals, which are to keep their job, feed their own family, and provide themselves a good income. That brings us to this unfortunate fact:

Financial advisers make more money if they put you in bad investments.

Why? Because many get commissions—call them kickbacks, if you like—from the investment companies where they put your money. Sometimes, the worst investments offer the biggest kickbacks. Advisers at insurers and brokerages might be good and decent people, but their first and foremost job is to sell you financial products.

A similar conflict would be going to a doctor who doesn't charge for office visits but is paid by drug companies for selling you pills. Any chance his prescription pad would be a little busier, whether you really needed drugs or not?

The solution? Use a fee-only planner.

A fee-only planner is paid only by you, not financial companies. Beware that the term "fee-based" is entirely different. That means the adviser is compensated by both fees and commissions. Fee-only advisers often charge by the hour or by a percentage of your assets that the adviser manages. Ideally, you would pay for advice and implement the recommendations yourself. But if the adviser will manage your money, a management fee amounting to 1 percent of your assets is reasonable, while 2.5 percent is too much. Either way, be sure the planner is using the right tools—our good friends, no-load index funds.

Two good online sources for finding fee-only planners are NAPFA.org and GarrettPlanningNetwork.com. Each of these Web sites has a "find-a-planner" option to help you locate an adviser near you.

This is important: All that said, there are many good commission-based financial advisers that would do a fantastic job for you. I just think the built-in conflict of interest is too important to overlook. Conversely, just because an adviser is fee-only doesn't mean he or she is any good.

Once you have a short list of fee-only advisers, schedule an in-person interview, which should be free of charge. That might seem time consuming, but it's worthwhile. Come prepared with your financial information, such as how much income you have and all your investment balances.

As you set out to choose an adviser, think about what specific help you need. Do you feel helpless in choosing mutual funds? Don't know what to do with stock options you received at work? Are you worried you don't have the right insurances or financial documents, such as a will, living will, and medical power of attorney? Do you need advice on spending an inheritance? Do you want a comprehensive plan to cover all aspects of your money life?

Before setting up the interview, make sure the planner hasn't been in trouble. Find out about disciplinary actions by going to the U.S. Securities and Exchange Commission Web site at www.sec.gov or calling 1-800-SEC-0330. Look for a link like "Check Out Brokers & Advisers." You can also contact your state agency that oversees investment advisers. For advisers who sell investments, otherwise known as stockbrokers, you can conduct a BrokerCheck at the FINRA Web site, brokercheck.finra.org, or call 1-800-289-9999.

2. Ask Questions and Listen to Your Gut

Choosing the right adviser breaks down into three basic tasks: Assessing the adviser's technical competence, trustworthiness, and compatibility with you. Here are six questions that will help you judge an adviser, whether they are fee-only or not:

• How are you paid? This might be an uncomfortable question to ask. But it is fundamental and important. If you're using a fee-only planner, the answers should be straightforward. Ask the planner for his or her Form ADV, a document that describes the fee structure.

• What are your qualifications? Choose a planner who has been in the business for several years and has a certification, such as Certified Financial Planner or CFP. (See sidebar for other certifications.) Ask about work history.

• What is your financial planning philosophy? Here, you're fishing for a comfort level. The adviser should talk about his or her planning process and not about hot stocks or unusual investments. If a prospective financial adviser says he or she can beat the market and promises big investment returns, end the meeting. Nobody can predict market movements. The adviser is either a fool or a liar, and probably a cheat. A good financial adviser will make sure you're well-diversified, so you can limit risk and maximize returns.

• As the adviser explains his or her philosophy, ask yourself: Are you being coached or sold to? And get a feel for how rushed the adviser is. If he or she doesn't have time to attract you as a client, the adviser might not have time for you after you become one. Finally, note the words and tone the adviser uses. Is he or she speaking in financial jargon, knowing you won't understand? It actually takes greater skill and knowledge to explain things simply. Is the tone condescending or supportive?

• What services do you offer? If you need a broad spectrum of advice, make sure the planner can help with insurance, tax planning, investments, estate planning, and retirement planning. This is the time to ask whether the adviser will be the only person you deal with, or whether you'll be shuffled off to a junior associate. And ask about how the adviser will communicate, by e-mail or phone, for example. Will you receive regular reports and periodic reviews about your financial status?

• Tell me about your typical client. You want an adviser accustomed to working with people like you. If the adviser typically works with multimillionaires and you have total assets of $100,000, how much attention do you think you'll get? You should also ask for a sample financial plan for a client in similar circumstances to yours—with the client's name removed, of course.

• Can I contact referrals? Granted, an adviser is only going to refer you to his happy clients. Ask the client, "If you had to do it again, would you pick this planner?" and "What is the downside of working with this planner?"

You want to gather factual information, but trust your gut, too. That doesn't mean you should judge whether you like the adviser as a person or whether you hit it off in idle chitchat. That's irrelevant. This is a business relationship, not a personal one.

Although some people are more gullible than others, your gut should guide you, especially if you go into the meeting with a bit of skepticism. It will tell you if the adviser is being evasive or is snowing you.

3. Never Agree to an Investment You Don't Understand

If you can't explain it to your teenager or your elderly mother, don't do it.

This is a great rule because it can keep you out of harm's way. For example, there are few average Americans who can thoroughly and accurately explain what a variable annuity is. They're wildly complicated. And that works out fine. They're not good investments for most people anyway.

That's not to say you shouldn't endeavor to learn more about finance basics. You shouldn't shy away from stock mutual funds because you're not quite certain what they are.

There are many good resources for investing basics, including books and Web sites. One free resource is at the Los Angeles Times newspaper Web site. It has a "Money Library" with a host of finance topics, including investing. It's at www.latimes.com.

All this due diligence in hiring a financial planner might seem daunting, but don't let it deter you from getting the help you need. Starting on the right financial track, even using a mediocre but ethical planner, is better than doing nothing. And remember, you can always switch financial advisers later.

Money Lessons from Monopoly

I've told how I think the Game of Life teaches personal finance as well as told you about a game that's trying to replace the "king" of money-related games, so now I think it's time I offer my thoughts on the "king" himself -- Monopoly. But first, I thought it would be fun to share some facts about the game from Wikipedia:

According to Hasbro, since Charles Darrow patented the game in 1935, approximately 750 million people have played the game, making it "the most played (commercial) board game in the world."

The history of Monopoly can be traced back to 1904, when a Quaker woman named Elizabeth (Lizzie) J. Magie Phillips created a game through which she hoped to be able to explain the single tax theory of Henry George (it was supposed to illustrate the negative aspects of concentrating land in private monopolies). Her game, The Landlord's Game, was commercially published a few years later. Other interested game players redeveloped the game and some made their own sets. Lizzie herself patented a revised edition of the game in 1904, and similar games were published commercially. By the early 1930s, a board game named Monopoly was created much like the version of Monopoly sold by Parker Brothers and its parent companies throughout the rest of the 20th century and into the 21st. The Parker Brothers' version was created by Charles Darrow. Several people, mostly in the U.S. Midwest and near the U.S. East Coast, contributed to the game's design and evolution.

I used to play Monopoly quite often. My dad and I would play late into the early morning on my trips home from college. We'd play several games in an evening -- starting at 10 pm or so when my mom went to bed until 2 am, 3 am or even later (FYI, you can play several games in that time with two players as many games end early when one player establishes an unbeatable position.) But in the years since then, I haven't played much at all, if any. I got busy with work, a family (young kids aren't into Monopoly), and, of course, video games as an alternative form of gaming. But when my daughter got a Monopoly game at a garage sale and wanted to play, I couldn't refuse.

The game was a lot different than I remember it, and it's a lot different with four players than with two (mainly, it's much slower.) But the family had a fun evening playing it (or at least I did, since I won!) In addition, playing the game reminded me how much Monopoly teaches about handling and managing money. Namely, here's what I think it's good at teaching:

• There's a balance between risk and reward. Just like in real life, you need to balance risk and reward in Monopoly. If you're too cautious, you'll get left behind (dying a slow, painful death) and if you're too risky you'll lose it all. In our game, I was the first to "risk" it by building houses when I was cash-poor (though it was a calculated risk -- see point #2). I was rewarded for doing so, just like I would have been in real life with a comparable move.

• Strike while the iron is hot. We've talked a couple times about how you can make a big leap in income if you seize a huge opportunity presented to you. It's the same way in Monopoly. I decided to build my houses just as others were coming around the board and lining up to hit my squares. Sure, they all could have missed them and I would have been in trouble if I'd needed any decent amount of cash, but how likely was that? If you can strike when opportunity presents itself, you'll do well in both money matters and in Monopoly.

• Luck is a big part of the process. This is the thing that made me abandon Monopoly and take up chess. I HATE the luck element. It can take otherwise good decisions and make them horrendous. In personal finances, you can only do what you can do to be successful, and most will do well doing so, but luck (accident, bad boss, good break at work, etc.) can still alter your financial life in a big way. That said, the game certainly does teach you to be nimble and adjust to whatever "luck" throws your way.

• Cash flow is vital. Just like in real life, if you run out of cash in Monopoly, you're in a world of hurt. That's why you need to do all you can (make sure the gap between your income and spending is as large as possible, you establish an emergency fund, etc.) to make sure you never run out of cash.

• You can gain an advantage if you can negotiate. In Monopoly, if you negotiate, you can make significant gains (though my wife did have to reel me in since I was negotiating with the kids a bit too hard). In real life, simply asking for a discount can save you big money. In addition, there are many other ways the skill of negotiating will benefit your finances, such as in asking for a pay increase when one is deserved or when interviewing for a new job.

Those are my highlights, but I'm sure I missed some. What are the money lessons you think I missed from playing Monopoly?

Free eBook -- Everything You Ever Really Needed to Know About Personal Finance On Just One Page

Trent at The Simple Dollar has created a new ebook that he's giving away free. If you want a copy, simply go to the book's page on his site and download it. It's that simple.

The book is titled "Everything You Ever Really Needed to Know About Personal Finance On Just One Page" and it's just that -- and more. The first page is really "everything you need to know" and then there are 48 extra pages of details. Over the next few days/couple of weeks, I'll be sharing some of my favorite parts of the book with you all, and today we'll focus on the "one page." Here's a summary of it:

1. Spend less than you earn, making the gap between what you make and what you spend as big as possible.

2. You do this by earning as much as you can and living frugally.

3. You then need to manage your money by doing things such as paying off debt, creating an emergency fund, saving for retirement, saving for college, and investing.

4. Once those things are achieved, you're in a position to control your own destiny.

As you might imagine, I LOVE this advice. It matches my thoughts exactly as I've detailed in How to Have a High Net Worth and How to Get Rich in Three Easy Steps. Good, solid, simple yet effective advice. Even if you already have your finances together, I'd suggest you get a copy. Why not? It's FREE, after all. Besides, you can share it with those in your life that are financially challenged.

For those of you who want a bit more information on the topics above and my take on each of them, see these posts:

• My Best Financial Advice: Spend Less than You Earn

• Maximizing Your Greatest Asset: Why Your Career is So Important

• How to Make Money and Save Money

• Get Out of Debt

• How to Create an Emergency Fund

• How I Set My Retirement Number

• I Opened Up Two College Saving 529 Plans

• Why I Like Index Funds

• What Do You Splurge On?

BTW, the ebook contains some very nice thoughts on Free Money Finance as follows:

Free Money Finance succeeds for me because the author is very, very effective at combing through the mainstream media, finding the articles on personal money management that are really compelling, and commenting on them in a relatable fashion. The (slight) majority of the posts at FMF follow that general format and, for me, those are the ones that keep me coming back for more.

Given that endorsement, how could I not love the ebook? (Did I mention that it's FREE?) ;-)

The Myth of Financial Expertise: Why Professional Wine Tasters and Stock Pickers are Clueless -- and How You Can Beat Them

The following is an excerpt from "I Will Teach You To Be Rich." At the end of the piece, I offer my thoughts on what's being said here.

If I invited you to a blind taste test of a $12 wine versus a $1,200 wine, could you tell the difference? I bet you $20 you couldn’t. In 2001, Frederic Brochet, a researcher at the University of Bordeaux, ran a study that sent shock waves through the wine industry. Determined to understand how wine drinkers decided which wines they liked, he invited fifty-seven recognized experts to evaluate two wines: one red, one white.

After tasting the two wines, the experts described the red wine as intense, deep, and spicy—words commonly used to describe red wines. The white was described in equally standard terms: lively, fresh, and floral. But what none of these experts picked up on was that the two wines were exactly the same wine. Even more damning, the wines  were actually both white wine—the “red wine” had been colored with food coloring.

Think about that for a second. Fifty-seven wine experts couldn’t even tell they were drinking two identical wines.

There’s something we need to talk about when it comes to experts. Americans love experts. We feel comforted when we see a tall, uniformed pilot behind the controls of a plane. We trust our doctors to prescribe the right medications, we’re confident that our lawyers will steer us right through legal tangles, and we devour the words of the talking heads in the media. We’re taught that experts deserve to be compensated for their training and experience. After all, we wouldn’t hire someone off the street to build a house or remove our wisdom teeth, would we?

All our lives, we’ve been taught to defer to experts: teachers, doctors, and investment “professionals.” But ultimately, expertise is about results. You can have the fanciest degrees from the fanciest schools, but if you can’t perform what you were hired to do, your expertise is meaningless. In our culture of worshipping experts, what have the results been? When it comes to finances in America, they’re pretty dismal. We’ve earned failing grades in financial literacy—in 2008, high school seniors correctly answered a gloomy 48 percent of questions on the Jumpstart Coalition’s national financial literacy survey, while college seniors answered only 65 percent right. We think “investing” is about guessing the next best stock. Instead of enriching ourselves by saving and investing, most American households are in debt. And the wizards of Wall Street can’t even manage their own companes’ risk. Something’s not right here: Our financial experts are failing us.

When it comes to investing, it’s easy to get overwhelmed by all the options: small-, mid-, and large-cap stocks; REITS; bonds; growth, value, or blend funds—not to mention factoring in expense ratios, interest rates, allocation goals, and diversification. That’s why so many people say, “Can’t I just hire someone to do this for me?” This is a maddening question because, in fact, financial experts—in particular, fund managers and anyone who attempts to predict the market—are often no better than amateurs. They’re often worse. The vast majority of twentysomethings can earn more than the so-called “experts” by investing on their own. low-cost funds (which I’ll get to in the next chapter). So, for the average reasons for this that I’ll detail  below, but I urge you to think about how you treat the experts in your life. Do they deserve to be put on a pedestal? Do they deserve tens of thousands of your dollars in fees? If so, what kind of performance do you demand of them?

In truth, being rich is within your control, not some expert’s. How rich you are depends on the amount you’re able to save and on your investment plan. But acknowledging this fact takes guts, because it means admitting that there’s no one else to blame if you’re not rich—no advisers, no complicated investment strategy, no “market conditions.” But it also means that you control exactly what happens to you and your money over the long term.

You know what the most fun part of this book is for me? No, it’s disbelieving e-mails I’m going to get after people read this chapter. Whenever I point out how people waste their money by investing in below-market returns, I get e-mails that say, “You’re full of it.” Or they say, “There’s no way that’s true—just look at my investment returns,” not really understanding how much they’ve made after factoring in taxes and fees. But surely they must be making great returns because they wouldn’t continue investing if they weren’t making lots of money . . . right?

In this chapter, I’m going to show you how you can actually outperform the simplest approach to investing. It’s not easy to learn that reliance on so- called “experts” is largely ineffective, but stick with me. I’ve got the data to back it up, and I’ll show you a simple way to invest on your own.

More Examples of How “Experts” Can’t Time the Market

Pundits and television shows know exactly how to get our attention: with flashy graphics, loud talking heads, and bold predictions about the market that may or may not (in fact, probably not) come true. These may be entertaining, but let’s look at some actual data.

Recently, Helpburn Capital studied the performance of the S&P 500 from 1983 to 2003, during which time the annualized return of the stock market was 10.01 percent. They noted something amazing: During that twenty-year period, if you missed the best twenty days of investing (the days where the stock market gained the most points), your return would have dropped from 10.01 percent to 5.03 percent. And if you missed the best forty days of investing, your returns would equal only 1.6 percent— a pitiful payback on your money. Unfortunately, we can’t know the best investing days ahead of time. The only long-term solution is to invest regularly, putting as much money as possible into low-cost, diversified funds, even in an economic downturn.

USELESS NEWSLETTERS. A 1996 study by John Graham and Campbell Harvey investigated more than two hundred market-timing newsletters. The results were, shall we say, unimpressive. “We find that the newsletters fail to offer advice consistent with market timing,” the authors deadpanned as only academics can. Hilariously, by the end of the 12.5-year period they studied, 94.5 percent of the newsletters had gone out of business. Not only did these market-timing newsletters fail to accurately predict what would happen, but they couldn’t even keep their own doors open. Get a life, market timers.

I’ll end with a couple of more recent examples. In December 2007, Fortune published an article called “The Best Stocks for 2008,” which contained a special entry: Merrill Lynch. “Smart investors should buy this stock before everyone else comes to their senses,” they advised. They obviously weren’t counting on it being sold in a fire sale a few months later. And in April 2008, BusinessWeek advised us, “Don’t be leery of Lehman.” I’m not sure about you guys, but I’m leery of worthless risky advice couched in cute alliteration. I think I’ll ignore you from now on, pundits.

------------------------------------------------

My (random) thoughts:

1. Oh, boy! He's speaking my language now! Financial "experts" can take many forms -- from the TV personalities who don't know much about what they're talking about to the everyday financial planner who thinks he can manage your money better than you can.

2. Generally, I don't put much stock in financial "experts." In fact, one of my very first posts was about how I didn't really like them.

3. Here are a few of my selections on what I've said about financial planners:

• Shocker: Many Brokers Give Bad Advice

• Many Taxpayers Get Burned by Inept or Crooked Preparers

• Make Sure Your Financial Advisor is Not a Loser

• FMF Speaks: My Thoughts on Using Financial Planners (Or "Why I Don't Go to a Fat Doctor")

• Comments: FMF Speaks: My Thoughts on Using Financial Planners (Or "Why I Don't Go to a Fat Doctor")

• MND: How to Choose a Financial Advisor

• MND: Operate Your Household Like a Business when Hiring a Financial Advisor

• MND: Hiring the Wrong Financial Advisor is Bad for Your Net Worth

• Safeguard #1: Do Not Allow Your Advisor to Have Custody of Your Investments

4. It's very true that becoming wealthy is rather simple (but not easy, mind you.)

5. Just got this book in the mail: How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn Here's the Amazon summary of it:

Investing is simple, but never easy. We carry a lot of investment baggage—including hot tips from friends and the financial media and complicated financial recommendations from Wall Street salespeople and brokers. Yet the biggest obstacle we face by far is our ability to outsmart ourselves.

In order to overcome these obstacles, investors need to follow straightforward strategies that will consistently push their portfolios ahead of the pack by an additional three to four percent annually over most investors. Strategies that even a kid could understand. In How a Second Grader Beats Wall Street, readers will follow the story of Kevin Roth—an eight-year-old who was schooled in simple approaches to sound investing by his father and expert financial planner, Allan Roth—and discover exactly how simple it can be to successfully invest. Page by page, readers will learn how to create a portfolio that can move up their financial freedom by 10-15 years. And all this can be accomplished by using some simple, commonsense techniques. Kevin and his dad reveal fresh, new approaches to investing, along with some of the tried-and-true existing but rare approaches. Whether new or old, these techniques share something in common—they're so simple, an eight-year-old can understand them.

Engaging and insightful, How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn takes investors through Kevin Roth's story, while driving home key strategies and tools investors can implement in their own portfolios.

6. It turns out that monkeys are also good financial experts.

7. So if second graders and monkeys are good at managing money, you think maybe you can be too (with a little effort) or do you need an "expert" to tell you what to do? ;-)

8. All this said, I do use experts in cases of extreme complexity -- like CPAs and lawyers. The key to using them: make sure you get a good one. Duh! ;-)

Five Financial Advisor Red Flags

Here's a guest post from Jeremy at 401k Rollover IRA info.

Should you drop you financial advisor? Five red flags to look out for.

1.) When is the last time you've talked to him?

Better yet, when is the last time he has called you? A good advisor should be keeping in touch with his clients at least once every six months to review the account, and if you have questions you should be able to reach him within a week. Talking to his assistant about making a withdrawal doesn't count.

2.) When you do talk to your advisor, does he always reccomend you change things or push you to invest in a certain product?

• More specifically, does he reccomend you sell stock but keep your mutual funds as is?

• Advisors make commissions on each stock trade you place, but they make money on mutual funds as long as you're in them due to commission trails. Part of the mutual fund internal expense goes to them, so it's in their best interest to keep you in them.

• Also, watch out for the advisor that pushes annuities. Advisors also make more selling annuities than most other products. If you advisor tells you to invest in an annuity, make sure you ask for a prospectus and do some research on the underlying expenses.

3.) Look at your investments.

• Are most of them proprietary products? This means products owned by the firm he is with. For example: if you have a financial advisor with XYZ firm and he sells you XYZ mutual funds or XYZ annuities, you may want to look elsewhere.

• The reason for this is that advisors usually get paid higher for selling proprietary products and their firm may even push them to sell these. For the most part, you can find a better performing investment than something owned by that firm.

• Check the internal fees on your investments compared to other products. If they are higher than most, he is probably making more money on them as well.

4.) Do a FINRA broker check on your advisor.

• FINRA is the regulatory body (formerly known as the NASD) that governs brokerage firms.

• Go to http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm to perform a broker check. The only information you need is his name. All written complaints filed by clients will show up here.

• One or two complaints shouldn't raise a lot of concern (especially if he's been in the industry for a number of years), but if you see a laundry list that should be your cue to leave.

5.) Does he dance around questions or try to control the conversation?

• If you're worried about why your account was down 37% last year then ask him straight up, and don't hang up until he provides you with a suitable answer. That is his job.

• If he doesn't know the answer or cannot provide you an answer you think is suitable, look elsewhere. There is nothing saying that you have to keep your money with this person.

Advisors are around to look out for their client's best interests. However, there are always people out there that look out for themselves first. If you see a lot of the red flags discussed here, it may be a good idea to get a second opinion.

Six Places to Spend More Money

The Wall Street Journal recognizes that people are trying to save more money in this economy, but they say there are six times -- even in tough times -- when you should spend more money. Their list:

1. Pay for expert advice.
2. Pay to bring down debt.
3. Pay yourself.
4. Pay for little indulgences.
5. Pay for some things you could do yourself.
6. Comparison shop.

Here's my take on each of these:

1. I agree in part. If it's a big, expensive decision where you have little or no expertise and can't get it quickly (or don't want to), then by all means pay an expert. An example of this: I use a CPA to do my taxes. Then again, you need to be sure you select your "expert" very carefully as the wrong "expert" can lead you down a path into greater trouble. In addition, most "experts" believe that the "average person" can't grasp much of the keys to personal finance. I disagree with this 100%. In fact, I think that most people can easily learn a few simple financial principles and dramatically improve their finances if they simply apply them. You don't need an expert to teach you how to create a budget, save money, build an emergency fund, pay down debt, etc.

2. Or better yet, don't have debt in the first place. Funny how the "you should always have debt" crowd has been quiet lately, isn't it?

3. Of course. Make your emergency fund a bit bigger. Tougher times call for more of a cushion than normal.

4. Yes, indulge, otherwise life can beat you down, but you also don't have to spend a fortune. Here's an example of something we do all the time: eat Moose Tracks ice cream at home versus getting a dessert while eating out. You'll end up getting more dessert and saving a fortune. Ice cream will run you $4 or so for 56 oz. and you'll be able to have many family desserts with that amount. The last place we went (a casual dining place) wanted $4.99 for one piece of cake! Yikes!

5. In many cases, paying for something can save you money. My current favorite is the Entertainment Book.

6. We always, always, always comparison shop. This is not just a "tough economy" tip for us!

Ask Quicken about Quicken

I recently received this question from a reader:

I use Quicken 2007 and am pretty much a beginner. My question is how do I categorize equity line of credit loans (transferred to accounts to cover bills, etc.)? They show up as income on my reports. So, my reports show my income almost quadrupled what it actually is. Is there some other category I should be using? HELP!

Guess what? She's in luck. Because Quicken has contacted me and agreed to answer your questions about their product. So if you have something you want to know about Quicken (like the reader above), simply leave your question in the comments below. I'll collect all the questions for a week or so, send them to Quicken, then run the answers that they send back to me. I'm sure they won't be able to answer every question, but what's the harm in trying? Ask away!

12 Ways to Thrive in This Economy

This is a guest post from J.D. Roth, who writes about smart personal finance at Get Rich Slowly.

The economy is down the tubes and things are looking bleak. The mood in the U.S. hasn't seemed this gloomy since the early 1980s. Three of my friends have been laid off recently, and several more fear for their jobs. Just yesterday my wife learned that her workplace will see layoffs, and she's worried.

Lately, conversations seem to revolve around three themes: controlling career, managing money, and selling stuff. People are getting serious about financial responsibility — but is it too late? I don't think so. Here are some effective ways to deal with each of these concerns.

Control Your Career

Your career is your greatest asset. Do what you can to protect it. If you don't have a job, you don't have income, and without income, you're fighting a losing battle. My friends — both employed and unemployed — offer the following suggestions:

• Ask for a raise (even in this economy). Good work deserves good pay. Obviously, you're not going to get very far if your company is hemorrhaging money. Timing is important. But if you're overperforming, if you're doing the work that nobody else wants to do, then it's fair to ask for more compensation. (Here's some great advice about how to demonstrate that you deserver a raise.)

• Take a second job. One of my readers recently wrote to tell me that she's thinking of taking a second job in order to increase her cash flow. She's worried about the ethics of the situation considering the economy. I don't think it's an issue. If she's qualified and the employer wants to hire her, that's great. Working a second job is a fantastic way to boost your income, allowing you to pay off debt, build savings, or meet other financial goals.

• Network. Networking gets a bad rap, and that's unfortunate. Sure, nobody likes the insincere gladhand. But legitimate networking — building business contacts for mutual benefit — can be a godsend, especially when things get rough. Don't network for the sake of networking, but absolutely strengthen the bonds you have. Just in case.

• Pursue personal development. Make yourself indispensable. Read books about your field. Take community college courses in the evenings and on weekends. Master skills that will help you further your career objectives, both now and in the (theoretically) rosy future.

Manage Your Money

When your finances are pinched, cash flow is important. If your expenses total more than you bring in every month, you simply fall further behind. But if you can find ways to free up even a little cash, it can make a huge difference to your peace of mind — and your ability to stay afloat. Here are four smart ways to manage your money during a crisis:

• Reduce recurring monthly expenses. When times are good, it's easy to make monthly commitments: deluxe cable television packages, magazine subscriptions, elaborate cell phone plans. One of the quickest ways to free up cash flow is to trim these recurring expenses. You don't necessarily have to cut them completely, but drop the level of service. (I cut from deluxe cable to basic cable, for example.)

• Get out of debt. Debt looms large, especially during a recession. It's important to focus on eliminating as much as possible, especially if you anticipate rough spots in the future. I realize that the debt snowball isn't the best mathematical choice, but if you can bump off even a couple of your smaller obligations, you an free up enough cash flow to make a difference if something bad does happen.

• Increase emergency savings. I'm shocked by how many of my friends have no emergency savings. An emergency fund can be a life-saver, especially if your job is in danger. But don't just stick your money in an account with an interest rate near zero. Many credit unions and small banks offer rewards checking accounts with rates as high as 6% — if you meet certain conditions. Otherwise, an online high-yield savings account is a great choice. Put your money to work, and hope you never need it.

• Choose the right asset allocation. I am shocked by how many people I know — many of whom should have known better — had their entire retirement savings in stock. And I'm even more shocked by how many are now moving entirely to cash. Choose an asset allocation that is appropriate for your age and circumstances, and rebalance your accounts regularly.

Sell Your Stuff

What happens if you find yourself overextended, with too much stuff and not enough money? It's time to sell some of the things you own. This is a last-ditch effort of course, but sometimes it's necessary. When I was digging my way out of $35,000 in debt, I was able to generate thousands of dollars by selling the stupid stuff I'd bought on credit.

• eBay. If you decide to sell your things, your first stop should be eBay. You can't sell everything here, but you can sell your best items, the ones that offer the largest potential return. Using eBay can generate some big cash quickly. (Here are my tips for profitable eBay auctions.)

• Amazon Marketplace. For smaller things, like books and DVDs, the Amazon Marketplace is a good outlet. I've had several readers report good results purging the stuff they no longer use. This can be a hassle at first, but once you develop a system, it's not that bad.

• Craigslist. For larger items, you'll need to use Craigslist or something similar. Craigslist allows you to connect directly with local residents interested in buying your stuff (or hiring your services). My wife and I have used Craigslist extensively to buy and sell. It's a great way to turn your junk into cash. (Here's my list of Craigslist tips.)

• Garage sales. The first three methods can yield huge results for minimal effort. Yard sales are a little different, but they have their place. We've been able to generate several hundred dollars a year by following some simple garage sale tips.

Final words

This recession is scary. Things look bleak. But if you're willing to act, you can take steps to protect yourself. There's no guarantee that you won't suffer financial hardship, of course, but remember: the best defense is a good offense. If you'd like more ideas, check out the Free Money Finance guide on how to make money and save money.

Read more from J.D. at Get Rich Slowly, or follow him on Twitter.

Personal Finance Success is Rather Simple, but Not Easy

Anyone ever read anything by Larry Winget? I've read at least one of his books and found him to be pretty funny (and in line with my thinking most of the time.) He certainly tells it like it is which is what I especially appreciate.

Here's a recent interview with Larry where he addresses how simple it is to succeed financially:

I really don't emphasize easy as much as simple, and I do think there is a difference. Everything in life comes down to simple things. If you want to lose weight, all you have to do is eat less and exercise more. If you want to have money, earn more and spend less. That's all it takes. I do sum up the book by saying what's easy to do is just as easy not to do. It's easy not to take action. I think people are attracted to hard solutions for one reason: If they don't make it, they have an excuse for failure. When you hit them over the head with the simple approach, you don't leave them a way out.

Good point -- there is a difference between "easy" and "simple." The basics of what it takes to succeed in personal finance are simple to understand for most people, but they aren't easy. Why? Here's an example: spending less than you earn is a very simple concept to understand -- you simply spend less than you earn. It's very, very basic. That said, it's not easy to spend less than you earn because to do so you need to have discipline, something that requires sacrifice, diligence, contentment and a whole host of other attributes that many Americans find difficult to develop. Issue after issue in personal finances is like this -- investing, planning for retirement, making more money, etc. -- simple, but not easy.

So maybe I should change the title of one of my top posts from How to Get Rich in Three Easy Steps to "How to Get Rich in Three Simple Steps", huh?

Safeguard #1: Do Not Allow Your Advisor to Have Custody of Your Investments

The following is a guest post from Marotta Asset Management. It's a little "salesy" at the end, but I thought it was a good reminder and worth running. Just another reason why you should become educated and manage your finances yourself.

I was recently asked if investors should trust their financial advisors. And my short answer, you may be surprised to hear, was no.

Given all the greed and deceit revealed last year in the world of financial services, this question of trust could not be more timely.

If your advisor is not a fiduciary, he or she has no legal obligation to act in your best interest. Only about 7% of those working in financial services are fiduciaries, so the odds are your advisor is probably not.

Simply put, the term "fiduciary" applies to those who have the legal responsibility to manage other people's money. Fiduciaries are required by law to act in the best interests of their clients, beneficiaries or retirement plan participants.

Both the National Association of Personal Financial Advisors and the Center for Fiduciary Studies require its members to sign and uphold a fiduciary oath. In contrast, brokers and agents are not fiduciaries and often must disclose the following in writing: "Your account is a brokerage account and not an advisory account." And "Our interests may not always be the same as yours."

Being a fiduciary is the bright white line that separates those who sit on your side of the table and legally must act in your best interests and those who sit on the other side of the table and have no such obligation.

In addition to the all-important fiduciary requirement are several other safeguards that you should insist on. Foremost among them is that your financial advisor should not also have custody of your investments.

Custody refers to the entity that is legally responsible for holding your investments and keeping them safe. In the old days, custody literally meant keeping the paper certificates secure. In contrast, a contemporary custodian offers a range of services that investors commonly take for granted.

When securities are bought or sold, the custodian delivers or receives ownership of the shares in exchange for the agreed amount of money. This process, called "settlement," usually takes one to three days after the purchase or sale.

At one time the physical certificates had to be transferred. But U.S. legislation in 1975 enabled markets to use the Depository Trust Company (DTC), a unified central securities depository. Holding securities electronically or in "street name" makes it easier to transfer and keep track of them. Now the certificates do not move physically. Instead they are transferred via book entry settlement between securities account holders called "members" or "participants."

While the securities are being held for you, your custodian provides asset services, which amounts to exercising rights and obligations on your behalf.

Custodians collect all the dividends and interest accrued by the investment. They relay any corporate information or actions that affect your investments and provide a standard and streamlined way for you to receive information, exercise rights or vote proxies.

Having a financial advisor who does not have custody of your assets gives you an extra layer of accountability and oversight. Fiduciaries review potential custodians to determine the best one to house their clients' assets. They analyze the fees and expenses charged in exchange for the services offered. Then fiduciaries keep an eye on the chosen custodian on behalf of their clients.

With a hedge fund or private equity, there is much less accountability. No one--except the individual investor--is watching to see if fees and expenses are reasonable. If the managers of a private equity pay themselves well, their salary is simply an added expense.

The safeguards and monitoring of advisor and custodian work mutually. The custodian sends its own set of statements, a way for you as the investor to double-check what your financial advisor is telling you. Being defrauded is much less likely when you are receiving independent statements.

The custodian also prices your investments, ensuring that everything is really worth what your advisor says it is. When advisors provide their own valuations, they might use the opportunity to manipulate client investments.

Imagine a hedge fund or private equity investment where contributions and redemptions must be requested ahead of time. If net investment flows are into the fund, illiquid assets can be priced high so that investors buy fewer shares. But when net investment flows withdraw money from the fund they can be priced lower, so investors receive less money. If management is also invested in the fund, they can do the exact opposite when moving their own contributions and withdrawals to maximize their profits and minimize that of other investors.

It is even more frustrating when your investments are unknowingly leveraged in nontransparent hedge funds or private equity. Much of your investment may be used as collateral against speculative investments in the hopes of a profit great enough to break high-water marks and justify bonus fees. You may or may not understand these investments. Nor may you understand if they are in your best interest or only in the best interest of your advisor. Using a reputable third-party custodian can help ensure that reporting about your investments is transparent.

Not having custody of your investments may limit some of your advisor's services. So be it. Your advisor can help you with the paperwork to transfer money in or out of your investments but should not handle the money itself. Always make the check out directly to the custodian, never to your advisor.

You can give your advisor limited power of attorney to makes trades on your behalf and take out a fee, but your custodian should both watch out for excessive fees and make withdrawals by your advisor impossible. Your advisor may be able to transfer money between your accounts but only between those you own completely.

Do not allow your advisor to pay bills on your behalf. If paying bills is required, use a third-party service and ask your advisor to make sure it is reputable and honest.

As fiduciaries, we put all of these safeguards into practice to help secure our clients' investments. We instigate these because part of being a fiduciary means avoiding conflicts of interest and implementing secure practices. By separating your custodian and your advisor, you'll have peace of mind, knowing that the fees you are paying are reasonable and your assets are secure.

Click here to read part 2 of this series.

20 Reasons You're Not Rich

Here's a list of 20 reasons you're not rich from Yahoo:

1. You care what your neighbors think.
2. You are not patient.
3. You have bad habits.
4. You don't have goals.
5. You aren't prepared.
6. You're trying to make a quick buck.
7. You rely on others to handle your money.
8. You invest in things you don't understand.
9. You are financially afraid.
10. You ignore your finances.
11. You care what your car looks like.
12. You feel entitlement.
13. You lack diversification.
14. You started too late.
15. You don't do what you enjoy.
16. You don't like to learn.
17. You buy things you don't use.
18. You don't understand value.
19. Your house is too big.
20. You fail to take advantage of opportunities.

Wow, too much to comment on here. But I'll pull out a few of these and add my own two cents:

1. If you want to be rich, you just need to take three simple steps.

2. As my neighbors can attest, I don't care what they think (though I do try and control what I wear out to get the mail.) ;-)

3. Ouch on #7, huh? Looks like Yahoo isn't pro-financial planner.

4. I used to invest in things I didn't really understand. Let's just say I didn't do well with that strategy. Since then, I've moved on to index funds -- something almost anyone can understand.

5. Unfortunately, I think the mass amount of people ignore their finances. They don't have a budget, they spend what they like, and really don't pay attention until they get into trouble. In addition, most don't have goals, so they end up not saving enough for college, retirement, etc.

6. Don't care what my car looks like. How can I -- I have kids? The outside is fine, but I'm still finding crackers from 1999 in my back seat cushions every once in awhile.

7. Entitlement? All of American feels entitled to an ever-growing laundry list of products and services. A few off the top of my head: cable TV, cell phones, computers. And it's spreading big-time into government. I think the year we shifted to an entitlement society was the same year we abandoned personal responsibility. Yikes! Let me move on to the next issue before I get myself in trouble.

8. Starting early (having enough time) is one of the keys to becoming rich. Wait too long before you save/invest and you are certainly doomed.

9. Guilty.

That's about all I can comment on at this point. Do you have any additional thoughts that stand out to you?

Your Year 30 Financial Checkup

Here's a list of six financial milestones we all need to reach before we turn 30 (according to MSN Money.) Their list:

1. Scale back the credit cards.
2. Own a home -- or have a plan.
3. Develop a set of marketable skills.
4. Establish a regular charitable giving plan.
5. Get a firm grasp on your priorities.
6. Have strong advisers in your life.

It's been quite awhile since I was 30, but I can remember back that far (I'm not THAT old). Here's where I stood on each of these points when I was 30 as well as some comments I have on these suggestions:

1. I never had credit card debt. Never. I have always paid off my balance every month. I'm not sure why, but early on (I got my first card in college) having a credit card balance just didn't seem like something that was reasonable. I used credit for convenience, but I only charged what I knew I'd be able to pay back that month. Today, I am much more aggressive -- using my two-card strategy to maximize my cash back credit card rewards.

2. We owned two condos when we got married, then spent the next two years trying to sell them both. We finally did, got a home (I was 29, I believe), then promptly move a year later. It was in this new house where we first paid off our home fully and we haven't had a mortgage since.

3. By 30 I had gotten my MBA and my career was on fire. I was doing very well and had already seen dramatic growth in my income -- something that would lay the groundwork for my long-term salary growth.

4. We had started giving (tithing) by age 30, but not really giving beyond our tithes yet. It would take us a few years to grow into that.

5. Ha! I had a GENERAL feeling about what I wanted to do when I was 30, but as I got older and my desires shifted, everything changed. Not in an immediate way, mind you, but slowly through the years. I could never have guessed at 30 what my life would be like today. That said, my life is much better now than I would have thought it would be when I was 30.

6. I'd change this one to "learn about finances yourself." At 30 I was just in the initial stages of learning about personal finances and starting to apply the principles that I've now seen be successful over many years -- things like getting out of debt, spending less than you earn, growing your career, and so on, the sort of stuff I write about here at FMF.

So, that was me at 30. How about you? Where were you (or where are you planning to be) at 30?

A Billionaire Tells How to Get Rich

Mark Cuban certainly has an unorthodox style and reputation, but no one can argue with the fact that he knows how to make money. In a recent blog post, Cuban shared his thoughts on how to get rich. He lists three steps required -- here's the first:

Save your money. Save as much money as you possibly can. Every penny you can. Instead of coffee, drink water. Instead of going to McDonalds, eat Mac and Cheese. Cut up your credit cards. If you use a credit card, you don't want to be rich. The first step to getting rich, requires discipline.

If you can, you will quickly find that the greatest rate of return you will earn is on your own personal spending. Being a smart shopper is the first step to getting rich. Yeah you have to give things up and that doesn’t work for everyone, particularly if you have a family. That is reality. But whatever you can save, save it. As much as you possibly can. Then put it in 6 month CDs in the bank.

So you create a cash cushion. Then you start to educate yourself:

The 2nd rule for getting rich is getting smart. Investing your time in yourself and becoming knowledgeable about the business of something you really love to do.

This is not a short term project. We aren’t talking days. We aren’t talking months. We are talking years. Lots of years and maybe decades. I didn’t say this was a get rich quick scheme. This is a get rich path.

Finally, you wait for the right moment and you pounce:

Now you wait for times of uncertainty and change in your business. The time will come. It may  come quickly, it may take years and years. But it will come. The nature of our country’s business infrastructure  is that it is destined to be boom and bust. Booms are when the smart people sell. Busts are when rich people started on their path to wealth.

You will know when that time is here for you because you will know your business inside and out. You will be ready because you will have been saving up for this moment in time.

I know, it's a bit vague on details, but I think most of us can see where he's coming from, and it does make sense. Then again, if you simply do step #1 and keep doing it for a long, long time, you'll get rich as well -- and probably have a better chance of doing so. Interesting ideas for consideration, though.

His list is different than my three-step method of getting rich, but we do at least agree on the first step. ;-)

The Seven Steps of Financial Preparedness

The following is a guest post from Marotta Asset Management.

When a hurricane threatens, making a plan and gearing up for emergencies is imperative. Economic emergencies happen too, but it may be less obvious how to prepare. Here are seven steps you should take to weather any financial storm.

First, put $1,000 aside. It doesn't amount to a real emergency fund, but it will do until you get your finances in order. You can accumulate the $1,000 by allocating $10 a day for just over three months.

Most people go into debt because they live hand to mouth, spending 100% of their take-home pay. Then life happens: The car breaks down, the roof leaks or someone needs medical care. Without $1,000 in the bank, families spend the money anyway and go into debt. Having a mini-emergency fund can help you get out of debt and stay out of debt.

The second step to prepare for financial emergencies is to extricate yourself from credit card debt--forever. These first two steps are part of Dave Ramsey's financial peace course, offered in churches around the country. Ramsey suggests paying off your credit card by starting with the smallest balance in order to achieve small successes and then working to snowball your payments as you tackle the larger balances.

He also notes that the only way to get out of credit card debt is to adopt the intensity of a gazelle whose very life depends on outrunning the cheetah. If you are in debt, I highly recommend Ramsey's financial peace course.

These first two steps, having $1,000 and paying off debt, simply prevent you from facing a financial emergency by starting out wounded and bleeding. The third step is to improve your ability to handle fluctuating monthly expenses.

Set up a monthly budget so your day-to-day expenses are less than 65% of your take-home pay. No matter what your income, living off a smaller percentage of what you earn is the way to grow rich and be better prepared for financial emergencies. The difference between those growing rich and those remaining poor is not the salary they make. It is the salary they keep.

Relative to their income, the rich are frugal. They save and invest. They spend less than 65% of their take-home pay on day-to-day expenses. They save at least 10% in their retirement accounts and another 5% in taxable savings. They direct another 10% toward unknown big purchases. And they even live frugally enough to give another generous 10% to charities.

Setting aside 35% for unanticipated expenses is the minimum. When my wife and I first started our life together, we did not make very much. But we still lived off about half of our take-home pay. We were fresh out of college and did not have a very high lifestyle. After starting a family it becomes much more difficult, but not impossible, to save money. Remember that even if you don't earn very much, probably a family somewhere is living on half of what you make and doing just fine.

If you are well off, you can set your sights even higher. Think of learning to live frugally and still be content as part of the emotional training you need to weather a financial storm. That training starts with living within a budget even when financial conditions are good. Some productive families live off less than 15% of their take-home pay and still save, invest or donate generously with the other 85%.

Frugality is a skill needed to live a good life. It is a mindset best learned from parents, but even if yours were spendthrifts you can reeducate yourself and learn to view money differently. The poor buy things; their homes are cluttered with them. The middle class buys liabilities on which they have to make payments, such as second homes, luxury cars and boats. The rich buy investments that pay them money.

If you want to break your poor or middle-class mindset and learn how to be frugal, help is available. In addition to Ramsey's course, I recommend Dana Adams's blog "Frugal in Virginia" (www.frugalinvirginia.com), which describes where to find deals, both locally and on the Internet, that will stretch your family's budget. Not only will these suggestions save you money, but the mindset of frugality is contagious and will help you overcome any bad habits you may have learned growing up.

Once you've set your budget so money is left over after paying the bills each month, in step 4 you automate your cash flow to promote saving and investing.

Every month, have 10% transferred into your retirement account before you receive your paycheck. Then automate the transfer of 25% of your take-home pay into an investment account a day or two after your paycheck is deposited. Automating your savings makes savings a high priority and ensures that you pay yourself first. This investment account will grow over time, and you can use it to pay for big emergencies and charitable gifts.

Keep the balance in your checking account between two and three times your monthly expenses. If you are paid monthly, your bank account should cover two months of expenses the day before you are paid and three months the day after. You'll have both a generous cushion for your checking and money for unexpected repairs or big purchases. Whenever your checking account exceeds three months of take-home pay, consider moving some of it into a higher paying investment.

You need an emergency fund in case you are unemployed. The first three months of the fund are safe in your checking account. Now invest an additional three months in vehicles you could easily sell within 90 days. Your emergency fund investments should not be in a retirement account, but they do not need to be in a money market account. Many people use no-load, no-transaction-fee mutual funds. They should also be stable enough to guarantee three months' worth of expenses. Therefore if your emergency reserve funds are large enough, you can diversify them fully into investments that fluctuate more but pay a higher rate of return.

Step 5 is creating an asset allocation for your investments that's diversified for safety while being invested for appreciation. Diversification works, and it's never more obvious than in times of market turmoil.

Without diversification, portfolios can have a zero return over a decade. After being well diversified, the likelihood of no return over a decade drops significantly. Your asset allocation should be a guideline in times of trouble. Whenever you are worried or glad about what is happening in the markets, rebalance your portfolio back to your target asset allocation.

Rebalancing means buying stocks after they have gone down and selling stocks after they have gone up. This contrarian move is always wise. When stocks are hitting new highs, rebalance. When stocks are making new lows, rebalance. Studies suggest that the simple act of rebalancing annually earns about a percentage and a half more.

The sixth step toward emergency preparedness is using your taxable investment account properly. You are putting in 25% of your take-home pay each month: 5% is taxable savings and should start to accumulate real wealth, and 10% is for charitable gifting. Each month you buy investments, some will grow in value and become highly appreciated. Each year, find the investments that have appreciated the most, and use these for your charitable contributions.

Done properly, this method of annual charitable gifting plants the seeds for gifts that may not be realized until ten years later. Thus your charity can survive for ten years after you have stopped contributing on the front end.

The last 10% is for unknown large purchases. If your first response to this suggestion is to ask, "Like what?" the answer is "Exactly." Most people who run up credit card debit keep their regular spending within 100% of their take-home pay until some unexpected expense causes them to deficit spend. You can't anticipate unknown unknowns, so the best you can do is set aside some money to cover them when they arise.

Having the discipline to budget for small financial emergencies will help you be prepared when you encounter larger financial crises. When some unknown spending need strikes, take the money to cover the expense from your growing emergency fund. Then, determine if you have been budgeting for this level of unknown expenses adequately.

You should be able to budget for car repairs, medical bills and house repairs. If the expense truly swamps what you have been saving, you may need to increase the amount to better anticipate the level of emergencies.

The seventh and final step is mobilizing during an actual emergency.

In a real financial emergency you should have two to three months of spending in your checking account and another three months in your taxable savings. You should have a pile of money for large unknown purchases (that 10% of your pay) and another pile of taxable savings (that 5% of your pay you have never touched). Finally, you should have been planting seeds toward future charitable gifting that will last through the next decade.

Usually emergencies don't happen. So the money you have socked away makes more money. Keep an emergency fund for several years and it should double in value, giving you an additional emergency fund. Whether you need it or not, being prepared for a financial emergency means peace of mind, knowing that your lifestyle is sufficiently frugal so you won't be in trouble.

Six Financial Mistakes You'll Soon Regret

Dumb Little Man lists six financial mistakes you'll soon regret as follows:

• Subscription Nation -- This is more than magazines and cable TV. Consider gym memberships, website forum memberships, cell phone data plans, the Wifi card subscription you don't need at Starbucks anymore, etc.

• The Power Purchase -- I'd challenge you to consider your reasoning behind every purchase that you make over $50. At $50, you can catch a lot of mistakes. That's when a pair of jeans is no longer just a pair of jeans, it's a designer pair of jeans. $50 is when you're paying for the name on the shoes, not the shoes. If you need motivation to do this, create a goal or a savings account that you can send that $50 to. You may not get the jeans but you're $50 closer to being able to pay cash for that vacation, college tuition, etc.

• Procrastination -- If there is one thing you get out of this article it's this: Whatever you are saving, it's not enough. The key is to start NOW.

• Assumptions -- You have to plan your finances in a way that will all but guarantee your needs are met. If you do get a windfall or if Social Security exists in five years, you need to treat that as a bonus. You can NOT rely on anything that you don't personally control.

• Misguided Matrimony -- Getting married for the wrong reasons can and will cost you dearly. Treat your relationship with unprecedented respect. Consideration, compromise, trust, etc. You get the point - don't get married on a whim.

• Letting Schools Teach your Kids about Finance -- Parents, aunts, uncles, and anyone that cares, needs to teach kids about money.

My thoughts on each of these:

1.I've whittled my magazine subscriptions down to four (Money, Kiplinger's, Consumer Reports, and Family Handyman) from what was once about 10 to 12 subscriptions. For me it was just as much about saving time as money. As far as other subscriptions, we don't have cable, don't belong to any clubs, and have my cell phone paid by work. The only thing that's close to needing a cut is our landline phone. When we move, we're thinking of replacing it with a cell phone for my wife.

2. Good advice. If we all stopped and thought a minute each time we had a purchase over $50, we'd probably skip some $50 buys or at least make a change and spend less than $50. It wouldn't take much for these to add up to big bucks.

3. Save as much as you can as soon as you can. I wish I'd started earlier. I've made HUGE gains in the past decade or so, but the first five years of my working life were wasted as I saved very little. Those are precious years and can make the difference between retiring now or ten years from now.

4. I'm assuming that Social Security won't be around at all when I retire and I'm saving accordingly. If it does pay me anything, I'll consider that a bonus.

5. For many of us, the die is cast marriage-wise. Thankfully, I married well and don't have a worry in this area.

6. Yep. I'm in the process of developing a "class" on personal finances for our kids in addition to what we already teach them on a daily basis.

The Real Deal On Finding A Good Financial Adviser/Planner

The following piece is written by Free Money Finance reader BigBuddha. He and I had a discussion on my post titled How to Pick a Financial Planner and I offered him the chance to express his views on a post.

Let me say this right up front, I am a Financial Planner (FP), I own my business a FP business.  I have seen, heard and read a lot of things about how to find a good Financial Adviser/Planner (FP).  Generally most will rank these in this order of importance.

1. Fees - how much and how they are paid
2. Potential investment returns
3. Education and Experience Level

Although these factors are important they pale into comparison to what I think is the most important factor. STRUCTURING.  A really good FP will always look towards structuring your financial and personal situation first.

When you wish to engage an FP, the FP should always during the initial stages talk about how to structure your situation.  This is the core of things, can the planner take away most of the financial risks to your current and future estate through structuring your financial situation appropriately and regularly reviewing it.

Firstly Personal Insurance in all it's forms should be discussed, because if you are inadequately insured, what's the use of a wealth creation plan when you don't have the income or capacity to produce income any more due to ill health, injury or death.  Insurance is, at least in my eyes, the base platform, and Income Protection (IP) is crucial.  Look at it this way, if you had a machine that could produce money, would you insure it? Of course you would.  Well, you are that machine, you work, you earn income, you must protect your earning potential, it's that simple.  Other forms of insurance like Trauma, Death/TPD are also very important for crisis and estate planning issues.

The next stage, should be all about structuring your cashflows (hopefully increasing it) and taxable income payable (hopefully reducing it).  Before you start looking at any fancy investment strategies or products, you have got to look at your cashflows.  I like to make clients look at their cashflows and finance like they would a business.  Cashflow in should hopefully be greater than cashflow out, and if it's not, the FP should be able to make structural changes to balance the equation.  Some people say why wouldn't I look at my cashflows before the personal insurance,  look at my cash machine statement again I made earlier.

Unless you are already paying no tax, then there's room for potential improvement, now I'm not against paying your due income taxes, but I'm against giving the government a free ride with my hard earned cash.  Reducing your tax payable, through proper and legal structuring is ethical, financially sound and is what all business do, so you should to.

Finally, we come to the "sexy" part of FP work, investments and retirement accounts.  I know a lot of PF Blogs are pro-index funds and etfs.  As a qualified FP for the last 8 years, who must do at least 50 hours each year on investment, tax and insurance education, I whole heartedly agree. 

Index Funds/ETFs are a great tool and I would highly recommend them to form the "core" of your investment assets, other actively managed investments or managed/mutual/unit funds or trusts can be used as "satellites" to your core of funds to help smooth out returns over the medium to long run.

ASSET ALLOCATION is where most of your returns will come from, and buying at good value is as well (yes I'm a Ben Graham/Warren Buffet fanatic).  Trying to chase returns will get your caught out.  If the best investment minds in the world can't do it consistently, and that's all they do, then I'm thinking someone with a full time job and family commitments probably can't do it to successfully either over the long run.

If your potential FP stalks talking about investments straight away, just walk out the door friends, these people are just salespeople nothing more nothing less.  The proviso to this is if the adviser is just that, an INVESTMENT Adviser (IA)

I think there's a lot of confusion in the general public about the difference between an IA and an FP, they tend to think the two are interchangeable or the same.  An IA only looks at investments (think stock broker types), a true FP does all the things I discussed earlier and structures it properly.

Now let's touch on fees.  It is my greatest belief is that how a professional is paid is between the professional and the client.  They should agree upfront how much things are going to cost and how that cost should be born.  It shouldn't matter whether the fee is charged via upfront fees, charged on an hourly basis, or a flat fee for service or that most dirty of words, commission.  As long as both parties fully understand the cost and why's it's being charged, that should be adequate, end of story.

Education and experience, well education should always be a given when seeking advice from any professional, why even bother giving that as a TIP, if you’re someone who ignores someone’s education level on the field they say they are a professional in, then you deserve to lose out.

Experience well, each to there own on this issue, in my view, if the person is fully versed in the area I am looking for advice then that really trumps any so called "experience" that person has, I know people who say that they have 20+ years in an area of work, but don't really know squat, they have just stumbled there way through moving from company to company, leaving train wrecks behind them.

Well that's pretty much it from me, I would like thank FMF for allowing me to have my rant.

Financial Advisors Make Over $100k

In this list of six-figure jobs for ordinary people, I found this tidbit:

Career Spotlight: Personal Financial Advisors

Personal financial advisors work on a one-on-one basis with their clients, recommending investments and products for wealth management. In another career expected to see a lot of growth, about 72,000 jobs for personal financial advisors are projected to enter the field through 2016. About a third are self-employed, often working from home.

• Recommended Training: Bachelor's degrees in finance, business administration, accounting, statistics, or economics are recommended for personal financial advisors. Those looking to make six figures in their work may be encouraged to earn an MBA.

• Earn Six Figures: Mean annual wages across the occupation were $89,220 in 2007. Personal financial advisors working in New York earned $131,660, and those working nationwide in financial investment earned $101,890.

A few things were interesting to me about these comments:

1. A personal financial advisor is listed as a job "for ordinary people", implying that almost any Jane or Joe can do it. Really? Is this true? And if it is true, do you really want to turn your finances over to such a person? Then again, if it's that easy, why can't you do it yourself? (which is something I always say, so maybe this is a job for ordinary people.)

2. Lots of job growth projected in the future. Not surprising.

3. Interesting they list education as "training" but not any sort of certification like a CFP degree.

4. Over $100k if you work in "financial investment." I wonder if this includes only planners or brokers, etc. Anyway, my guess is that these people make more than regular planners ($89k) because of the fees they charge on their recommended investments.

How to Pick a Financial Planner

For all the grief I give financial planners, I do realize that they are useful for many people (those that can't or won't learn about finances themselves, those who are dealing with complicated financial issues, etc.) But the problem is, how do you find a good one? How do you find a planner that thinks of you first -- not one who's simply a salesman trying to turn your money into his money? The new York Times gives us four areas you need to consider to pick a good financial planner as follows:

Experts pinpoint four critical topics — credentials, experience with clients whose situations are comparable to yours, personal chemistry and the payment method.

They then give some details on each of these four. Here are the highlights for the credentials area:

Financial advisers and planners are not regulated by any government agency, but the industry has developed two sets of commonly used qualifications, one for a certified financial planner, or C.F.P., and the other for a chartered financial analyst, or C.F.A., who in addition to giving financial advice manages investments. Both require passing tests administered by industry-run boards.

Financial advice might also come from trust or tax attorneys, certified public accountants or a qualified person with a finance degree from a business school. “The single most important thing is to have a core degree” related to finance, said Rich Kohan of PricewaterhouseCoopers’ private company services unit, which provides financial advice to clients with at least $2 million in assets.

Education is good -- you want to be sure they know what they're talking about. But to me, experience is even more important. Their thoughts:

Of course, education is only the beginning. Experience is also important — in particular, experience with people like you.

Exactly. That's why I favor a planner with some time under his/her belt.

The piece also gives what I consider the best advice in getting a planner -- get personal references:

One of the best ways to find a planner is through references from friends in similar situations.

The only things I'd add are to get references from someone who's doing well financially and who's used the planner for a decent amount of time. These two steps dramatically improve your chances of getting a good planner.

By the way, once you get a recommendation, I suggest you also ask the planner for five more references from clients like you -- then call them and ask what they do and don't like about the planner.

The piece goes on to say that you should interview a potential planner before you select him -- another step I agree with. Your main objective here is to see if you're a "fit" with your planner. In other words, do you get along? Can you work together? If you can, it will make the process a lot better/easier. If not, it's probably best to pass on this planner and find one suited to your working style/personality.

Finally, the piece says you need to find out how the planner is paid:

Another large issue is how the adviser is paid. Planners can charge a flat retainer, an hourly fee, a percentage of the assets under management or a commission based on the products the client uses.

Avoid commission-based planners like the plague. Commission-based is simply another term for "salesperson" and it's likely they'll focus more on selling you stuff they earn money on than steering you to the right decision. Most "experts" agree that a fee-only planner (one who charges by the hour and/or task) is the best option for most people. I tend to agree.

Anything I missed? Disagree with me on any of these thoughts?

Is Money Education is a Waste of Time?

We've talked about the value of money education in many different situations. For example, there's an obvious value in teaching kids about managing money. Furthermore, we've discussed the potential for teaching those on government assistance about handling money.

Well, here's a law professor who "specializes in financial products regulation" that says teaching people about money is the wrong thing to do. Her thoughts:

Teaching them is a waste of money. Studies show that sending people to either high school personal-finance classes or adult retirement seminars does not result in better financial behavior.

It may do the opposite. Financial literacy classes give people the illusion that they can successfully manage their finances. So rather than seek help, they end up making worse decisions.

So, what does she suggest we do instead? Here's her advice:

Stop trying to turn everyone into a financial planner. Instead, try to get everyone to understand that the people selling you financial products often don't have your best interests at heart.

What's more, politicians need to regulate financial products and make them into things that will benefit consumers, rather than expect education to be the cure-all it is not.

Ok, I agree that teaching people to be smart consumers (and realize that many financial planners are simply salespeople) could have some benefit. But I can't agree with the "more regulation" argument (though what suggestion would you expect from a law professor specializing in regulation). I'm in favor of calling in the government in the case of safety issues and the like, but when we enter the area of "helping people make smarter decisions" or "protecting them from themselves", I start to draw the line. After all, when does the bad decision-making protection end? It seems like it could be a very slippery slope and I for one prefer making mistakes and having my freedom over having Big Brother tell me what I can and can't do all the time.

Besides, we're not talking rocket science here. Learning just the basics (maybe 10 principles in all) of money management can make a HUGE difference in a person's life. In fact, if the average person would simply take THREE simple steps, they'd become rich.

And finally, I'm not willing to concede that we've had a great attempt at financial education. I got nothing at all in school related to personal finances and I've had many others comment that they've had similar experiences. Have we really given financial education a chance in this country?

What's your take? Is financial education a waste of time? Is government intervention the right solution?

Behavioral Finance: Patience Is Its Own Reward

Here's a guest post courtesy of Marotta Asset Management. To me, the key is the last paragraph, but I thought I'd include the whole piece for those of you who want more. ;-)

To process financial information, our minds often attempt unwise shortcuts. By understanding behavioral finance, we can limit the information we use and keep our decisions balanced and on track.

Financial information on the Internet is excessive and changes daily. This overload leads to excessive trading, which in turn results in lower returns. Studies suggest that analysts who depend on all this overwhelming advice make poorer decisions even though they feel more confident about them.

Another reaction to information overload is paralysis. When investors have one attractive option, they tend to invest. When they have two or more appealing choices, they may fail to act because they are afraid of making a wrong decision and looking stupid. This regret aversion motivates them to go with the status quo, which is often more costly than either of the promising alternatives.

Over the long term, the U.S. stock markets go up an average of 11% annually, beating inflation by about 6.5%. But to earn this great typical return, studies in behavioral finance indicate that we must be able to tolerate the year-to-year volatility.

In each of the last five years, the stock markets were up. The three years before that (2000 to 2002), the markets were down. Many people worry about the timing of getting into or out of the markets: Will 2008 be an up year? What about 2009?

I will give you the forecast for the next ten years in the U.S. markets: up, down, up, up, down, up, down, up, up, up. These predictions are not in chronological order. This year could be one of the "up" years or one of the "down" years. It is a gamble, but unlike most gambling, the odds are in your favor. About seven of every ten years are up years, and they are usually stronger than the down years.

If you are an investor, the odds are in your favor. But not everyone who buys and sells stocks is an investor. Some people play the markets looking for short-term gains and follow hot tips or quickly timed movements. These people are speculators, not investors.

Compare an investor with an orchard manager who goes to a nursery to buy some peach trees. He buys the trees because he understands about growing and selling fruit. He knows how to care for the trees, harvest the peaches, and deliver them to market. He understands what is involved across the whole spectrum of his business: from nurturing the natural juicy fruit to savoring it baked in a delicious peach cobbler.

Speculators buy some peach trees when they see the nursery's supplies are dwindling. Then they stand in the parking lot hoping to resell the trees at a profit. Speculators do not care what they are buying or selling so long as the price moves quickly. So they never really buy peach trees. Speculators purchase snow blowers when the blizzard is forecast or generators as the hurricane gathers strength, or whatever else they think might show a short-term spike in price.

If the blizzard misses or the hurricane fizzles, speculators lose money. The possibility of more demand raises prices appropriately. If the likelihood increases, prices go up even higher. If the likelihood decreases, so do prices.

As soon as it is feasible, speculators sell quickly because they believe the spike is short lived and temporary. This tendency led to the investment truism "Buy on rumor and sell on news."

In other words, even if speculators are right, their profits depend on being faster to buy and faster to sell. For the speculator, speed is everything. Not so for investors.

Investors, like farmers, substitute seasons of patient labor and care for speed and market timing. They make their money off the gradual growth in the value of their investments. In contrast, salespeople must keep their merchandise moving because their product isn't getting any more valuable. They make their money off commissions on the transaction itself. For them, what is important is the speed and number of transactions. Brokers and those who sell "loaded funds" are salespeople, not peach farmers. Their livelihood depends on the number and rate of trades in an account. These incentives for speed can lead to abuses.

Frequent trading in an account for the purpose of gaining commissions is called "churning," measured by the turnover rate in an investment portfolio. Turnover is the percentage of an investment account's asset that are bought or sold during a year. Churning can be defined as a turnover rate of over 300%, meaning the entire portfolio value is bought or sold every four months.

An important criteria we use for equity mutual fund selection is a turnover ratio of under 50%. We advise you to be patient and try to ignore the market's ups and downs.

Studies show that mutual funds with a lower turnover rate perform better. Short-term trading has a cost and usually reduces performance. To make money, speculators usually must guess the highs and lows in the stock market within six weeks.

This investment philosophy does not depend on what the markets did in the last four months or what they will do in the next four months. We can't imagine a peach tree that would look good to buy and hold for only four months. Investing is like planting a peach tree: You have to wait for the fruits of your labor.

So don't worry too much about the timing of getting in and out of the market. Focus instead on having a diversified enough portfolio to weather any market--up or down. Once you have a brilliant investment strategy, a successful investor's greatest virtue is patience. As scientist and mathematician Georges-Louis Leclerc said, "Patience is genius"--and it is often the best defense against short-term noise that can ruin your long-term results.

Becoming a Money Manager

The following is a guest post from Jeff at Minding My Own Business.

Handling your finances comes with myriad tasks.  You earn, you pay bills, you invest, you write checks, you plan, you, you, you....  I think you get the idea.  Handing the finances is a lot of work for you.

I view the tasks involved with handling finances as being divided into two distinct and different roles.  Just like at work you have worker bees/followers and managers/leaders.  I like to call these roles the Money Handler and the Money Manager.

The Roles

The Money Handler gets his hands dirty doing the bits and pieces necessary to keep your financial vehicle running.  He changes the oil, adds wiper fluid, puts air in the tires, replaces light bulbs etc.  To quote an English friend of mine, the Money Handler "works at the coalface."

From a personal finance perspective, Money Handler tasks include:

1. Paying bills - writing checks, stuffing envelopes and licking stamps.
2. Making investments - filling out paperwork, writing checks or making e-transfers.
3. Moving money - between accounts as necessary (e.g. on payday, etc.)
4. Reconciling accounts - balancing checking, savings, etc.

The Money Handler focuses on the details necessary to implement the financial plan.

In contrast, the Money Manager is responsible for seeing the forest rather than the trees.

He provides the strategic leadership for your financial vehicle.  Where are you going?  What route are you going to take in order to get there and when will you depart?  If the Money Handler “works at the coalface,” then the Money Manager is a chief executive officer.

From a personal finance perspective, Money Manger tasks include:

1. Setting Goals – deciding where to go financially.
2. Developing plans and strategy – necessary to achieve financial goals.
3. Monitoring earnings and expenses – focusing on creating and maintaining positive cash flow.
4. Guiding, monitoring and assessing the execution of financial plans.

Bottom line: the Money Manger develops a financial plan for the Money Handler to implement.

Both roles are necessary in order to properly handle your finances.  However, the Money Manger role is more important as it will determine your success.  I’ve often said that a “failure to plan is a sure fire plan for failure.”  If you’re not a Money Manager you need to become one sooner rather than later.

That means finding ways to accomplish Money Handler tasks without monopolizing your time.  If your spouse is willing to help, you can divide the responsibilities between the two of you.  If you’re single, you don’t get much of a choice in the matter, you’re stuck with both roles.

In today’s world of the Internet, e-commerce and e-banking there exists another viable option.  You can outsource the tedious tasks.  I don’t mean hire an employee to pay your bills, but rather take advantage of modern day conveniences to automate routine Money Handler tasks.  Doing so will enable you to spend your valuable time being a Money Manger instead.

Ways to Automate

• Sign up for direct deposit.  Your paycheck will be deposited automatically into the bank account of your choice.  I’d be surprised if your employer doesn’t offer this service and shocked if your bank couldn’t handle its receipt.

• Sign up for online access to all your banking and investment accounts.  One of best ways I’ve found to automate my Money Handler tasks has been to take advantage of on-line banking and investing.  It only takes a small leap of faith to begin dealing with your financial institutions via the Internet.  Security and convenience is important and they know it.  You’ll have a hard time finding any financial institution that doesn’t offer online access with both features.  Instant access to my accounts 24/7 means I can conduct my Money Manger tasks when it’s convenient for me.

• Set up automatic transfers, if required.  Each month I automatically transfer a certain amount of my paycheck from my primary bank account to higher interest bearing money market fund at a separate financial institution.  It’s the same amount, every pay period and it happens whether I remember to do it or not.

• Set up automatic bill payments.  Talk about convenience.  You never have to worry about being late or forgetting a bill.  No more stamps, no more checks and no more envelopes.  Save that for your Christmas card list.

• Set up automatic investments.  This is a great way to make regular investments and take advantage of dollar cost averaging.  For many years I enjoyed making investments manually (albeit electronically).  I liked the feeling of empowerment I had each time I invested in my future.  I’m disciplined, but I admit to being tempted at times to spend that money on some extravagance instead.  Putting your investments on autopilot removes the temptation and frees up valuable time.

• Use a credit card to pay for everything.  Your automatic bills can be on the credit card.  Your monthly expenses can be on the credit card.  What’s the advantage you ask?  No more check writing, no more cash carrying and no more tedious balancing of your checkbook.  I truly cannot remember the last time I wrote a check and I haven’t reconciled my checking account in a couple years.  By maximizing credit card use, you dramatically decrease the number of transactions in your traditional checking account, making reconciliation almost not necessary.  A quick glance online and I can usually spot anything that might be amiss.  At the end of the month you pay your credit card automatically and electronically as well to complete the circle.  One final advantage of adopting this method is the rapid accrual of credit card rewards.  Points, miles or cash back, the choice is yours.  I personally like cash back.

DISCLAIMER - You have to be responsible with the credit card technique.  I recommend taking advantage of it, but you need to be in the habit of paying off the balance each and every month.  Carry nothing over; otherwise you can get yourself in trouble fast.

There you have it, tips to automate and simplify your finances so you can focus on managing your money rather than handling it.  Becoming a Money Manager is vital to ensuring your long-term financial success.   

How do you handle your money?  Is it automatic?

Stupid Money Moves

MSN Money calls this a list of seven ways to stay poor, but I prefer the simpler "stupid money moves." Here's their list and my comments on each point:

Getting the big stuff wrong. A lot of "save money" advice focuses on the little stuff: how to cut back on lattes or trim your utility bill by a few bucks. But those who are chronically short of cash often overspend on the big stuff, especially shelter and transportation.

I think everything is important -- the big stuff and the small stuff. Of course you can lose a ton a lot faster on the big stuff (like severely over-paying for a car or buying a house you can not afford), but the small stuff is a lot sneakier and easy to miss, so a ton can be lost without you even knowing it (for details, see Even a Small Leak Can Empty Your Money Bucket Quickly and Keeping Small Spending Under Control.)

Confusing needs and wants. This is a biggie, and it's a problem for people at every economic level. But when you're broke, the consequences of deciding you need something that's actually a want can be devastating.

What do people really "need?" Food, clothing, and shelter (plus a few other basics, maybe.) But do people really "need" cable TV, high-speed internet (not for business, but I'm talking personal use here), a brand new car, a 4,000 square foot home, a big-screen TV, etc. Of course we all want some of these and this is the reason many of us work -- to afford the finer things in life.) But when we "need" them all and buy them whether or not we can afford them, there's bound to be financial trouble. And, unfortunately, many Americans can't differentiate between needs and wants, buy whatever their hearts desire, often on credit, and get themselves in deep financial trouble as a result.

Considering only the monthly payments. Whole businesses thrive on getting you to ignore the total cost of your purchase. Payday lenders, rent-to-own shops and car dealerships want you to focus on the short-term payments, not the long-term expense. Avoid the first two.

Focusing on the monthly payments is one of the tricks car companies use to get you to pay them more money than you want to. Don't do it! Pay attention to the total cost, not the monthly payment. And why should you even need a monthly payment, aren't you saving up and paying cash?

Failing to track where the money goes.

You must, must, must budget -- at least until you have a firm handle on your finances. Here's how I've budgeted through the years and a resource on how to budget for those of you who need suggestions.

Carrying credit card debt.

Do I really need to dignify this suggestion with a comment? If you're carrying credit card debt, you certainly have some big problems and you need to address them immediately.

Living close to the edge.

No matter how much you make, you need to spend less than you earn. Then save and invest that amount for a long time and you'll be rich. Spend MORE than you earn, no matter your income, and you'll go backwards financially.

Squandering what you have. Most workers contribute to some kind of retirement fund, typically a 401(k) account that they can take to their next job or roll over into an individual retirement account.

In other words, you make money mistakes. Instead, focus on making great money moves.

Your Planner May Be Charging More than You Think

Here's a piece from Money magazine that says your financial planner may be charging you more than you think. The highlights:

I've had many clients come to me saying they were paying their old adviser somewhere in the neighborhood of 1% a year. Arguably, that might be appropriate, especially if the adviser provided a valuable service. However, when I show them that they were paying 3% or more in total fees, they are usually stunned.

Think of it this way: If you're buying investments through an adviser, you're paying him or her a fee. But that's not all: Everything you buy may come with its own set of fees. You should know how much your adviser is collecting from you, but a more important question to ask is how much you're paying in total.

Fees are about as transparent as the alternative minimum tax and as easy to figure out as an episode of "Lost." So lob this ball back into your adviser's court and ask him or her to write down your total fees in these four categories:

• Adviser fees.
• Mutual fund annual expenses.
• Fund turnover.
• Insurance fees.

For one recent client, I had the sad task of estimating that he was paying 4.7% a year for an annuity, broken down as follows: 1.6% to his adviser, 1.6% on his funds and 1.5% in insurance costs that provided virtually no benefit.

All I can say is "yikes" and offer you two posts: How Fees Eat Your Lunch -- It Still Adds Up To Dollars and Costs Matter If You Want to Maximize Investment Returns. Read these and then consider all the ways you might be paying fees (to an advisor, to a mutual fund, etc.). If you think about them, there are probably ways you can rid yourself of a good portion of the fees without hurting performance of your investments, the quality of your advice, and so on.

How to Find a Good, Young Financial Planner

Here are some suggestions from a reader in the financial industry on how to find a good, young financial planner. He submitted them in response to my comments on financial planners where I said, “a younger planner simply wouldn't have had the time to get the experience I felt was needed to advise me.” His thoughts:

Here is how I would advise finding good young financial planners:

1. Works at a reputable fee-only – meaning he does not take commissions etc, and got a good job.  Does not count if a relative is a partner at the firm.

2. Has a CFA or CFP (takes some effort and smarts to complete these by a young age)

3. Has direct investment experience (i.e. worked at an investment manager before becoming a planner/advisor)

4. Ask test questions – When you ask things that the planner could not possibly know the correct answer to, make sure he tells you that he doesn’t know the answer and either needs more info from you or needs to seek expert advise.  For example, ask a complex tax or legal question, or ask him whether a particular investment is “right for you” without giving him enough detail about your finances for him to truly know the answer.

5. More test questions – Ask him what his portfolio is invested in, and why.  His reasons are more important than his allocations.  For example, good answers would include “I’m about 50% cash because I am about to make a downpayment on a house, and the other 50% is spread across 15 individual stocks in my IRA” or “I’m 100% invested in the vanguard total stock market index fund, because it’s the only equity index fund in my 401k, and I get a great company match and should be 100% equity due to my high risk tolerance and young age.”

Ok, but why not find an older planner who could fit the bill AND have a proven track record and good experience? Of course the question for me is, why use a planner at all? ;-)

Suze Orman on Picking a Financial Advisor

As a follow-up to our discussion yesterday on financial planners, here's Suze Orman's suggestion for finding a financial advisor you can trust:

The best ones tell you right up front how they make their money, and they'll ask you something besides "How much do you have to invest?" Want to find a good adviser? Go into his office and tell him you have $25,000 in credit-card debt. See how he responds. A good one will say, "Let's set up a plan to get you out of debt and only then, when you're out of debt, will we put you into some good investments." That's how you'll know if they want to help you or only make money off you.

Thoughts on Financial Planners

In Get Advice from People Who Are Where You Want to Be, I again stated my bi-monthly rant on financial planners who have lots of "head knowledge" but aren't doing well in their personal finances. A reader (who is a financial planner and also blogs at Swim Upstream to Wealth) left the following comment that I found insightful:

This is good advice although as a financial planner who is younger and doesn't have a multi-million dollar portfolio I think you need to do more than look at a financial statement. I know lots of older planners who have made a lot of money by pushing product.

One time I attended a Financial Planning Association meeting where a planner (really a broker) who made a million dollars a year was speaking. Trying to model myself after him, I asked how he did it. I figured someone who made that kind of coin must be a great planner who provides strategies that really builds his clients' wealth.

He said, "I recommend whatever fund offers the highest commission or best trip." So his clients weren't getting the best investment portfolio. Rather, they got what paid him the most regardless of the fund's performance. And, as you can imagine, the poorer performing funds tend to pay higher commissions because they can't stand on their own merits. And, most folks don't know that insurance and mutual fund companies give trips, merchandise, and even cars to salesmen who sell the most product.

So I agree that you need to learn from experienced people. Just don't assume that a fat wallet means they really match your vision or principles.

This comment left me with several thoughts:

1. How does one decide whether a younger financial planner is good or not using my criteria since the planner hasn't had time to do well financially? I'm not sure of the answer, but I know what I'd do -- I'd probably avoid them simply because of their lack of experience. If I was to seek financial advice from a planner, I'd want a good combination of knowledge and experience (like I would with a doctor, gardener, and almost any other service person I'd pay), and a younger planner simply wouldn't have had the time to get the experience I felt was needed to advise me. So I'd opt for someone who had been a planner for some time, and also look at her personal finances (or at least inquire about them) to see if she was successful at applying her own advice and doing well as a result.

2. Good point on the "top" financial planners -- many got that way simply by recommending high-priced options that weren't really the best options for their clients. I have two thoughts on this:

• Always remember that many financial advisors are salesmen first and advisors second. Forgetting this could cost you a fortune.

• This is another reason you need enough financial knowledge yourself to determine what is and isn't a good investment.

3. "Just don't assume that a fat wallet means they really match your vision or principles." Well said. And since it's often hard to sort through all the variables, this makes picking a good financial planner even more difficult. As a result, I prefer my method -- learn financial principles yourself and manage your own money.

The Automatic Millionaire

Here's a summary of chapter three from 50 Prosperity Classics: Attract It, Create It, Manage It, Share It (50 Classics). This chapter is written by David Bach, author of The Automatic Millionaire.

Key Quotes

"In order to become an Automatic Millionaire, you've got to accept the idea that regardless of the size of your salary, you probably already earn enough money to become rich. I can't stress enough the importance of believing this -- not just with your mind but with your heart as well. It's an 'Aha!' moment that can truly change your life financially."

"Please trust me on this. Nothing will help you achieve wealth until you decide to Pay Yourself First. Nothing. You can read every book, listen to every tape program, order every motivational product, subscribe to every newsletter there is, and none of it will get you anywhere if you let the government and everyone else have first crack at your salary before you get to it. The foundation of wealth building is Pay Yourself First."

Summary of the Chapter

There is no easier or surer way of attaining wealth than through the habit of paying yourself first through automatic deductions.

My Thoughts on This Subject

1. I loved the book The Automatic Millionaire and named it one of my best financial books ever. The simple concept of setting up your accounts to automatically save and invest has made a great deal of impact on my finances over time.

2. I know many people will disagree with the statement that "regardless of the size of your salary, you probably already earn enough money to become rich", but I agree with it. That's why spending less than you earn is a key to growing your net worth -- it frees up money to save and invest regardless of your income level. Of course it's also a good idea to do all you can to make as much money as you can.

3. By "pay yourself before the government takes any" he's suggesting you invest in a 401k or like program as it's money that gets set aside before taxes are taken out (in his way of thinking at least.) I agree that investing/saving in a 401k is a good idea -- especially when it's matched by your employer.

4. Personally, I like David Bach. I especially like his take on giving (you can find additional information at More on Giving from David Bach.)

5. Bach takes a beating for his "latte factor" idea -- the suggestion that cutting out small spending can add up to significant savings -- but it's true that pennies can eventually add up to millions. That said, your net worth isn't ruined if you want to kick back a little and spend some money on something you enjoy.

6. I have automatic transactions all over the place: I make automatic donations to my 401k and HSA each month, my work check goes into my checking account automatically each month, a portion of my checking account automatically gets moved to Vanguard each month, and I make various investment buys each month automatically from both taxable and IRA accounts. I simply "set them and then forget them." ;-)

I'm Letting My Kiplinger's Subscription Expire

I've been a subscriber to Kiplinger's Personal Finance magazine for a long time (several years.) It's one of the magazines that I kept around even as I purged my subscription list to less than half of what it once was. But when I get my June issue, that will be the last one for me. I thought I'd detail for you the reasons I've decided to let it lapse in no particular order:

1. Not enough time to read. I've been REALLY focusing on freeing up my time and reading magazines is one area I've cut back over the past year. I've cut subscriptions to Forbes, Fortune, Business Week, This Old House, Sports Illustrated and my rose magazine (can't remember the title) from the American Rose Society. Letting Kiplinger's expire is just a continuation of this effort. (BTW, I only get Money, Family Handyman, and Bicycling at this point, and I'll be letting Bicycling expire when it's up -- it's not really giving me any new information.)

2. The content is free online. About 75% of Kiplinger's content and 90% of the content I like is now put online. I have my RSS reader set to show me almost everything they have for free, so why pay for it?

3. Helps the environment. Less paper needed. 'Nuff said.

4. Not much new information. I'm not getting much new information from Kiplinger's -- they run the same sort of pieces I see all over the web. Money still has some unique articles/facts that are unlike others I've seen and that aren't usually put on their website.

5. Cost. It's a minor consideration, but given the factors above, a Kiplinger's subscription just isn't worth the cost. Why spend another $15 (or whatever it is) for nothing?

So it's so long to Kiplinger's for me. I really have enjoyed the magazine but it's just come to a time and place that it doesn't work for me.

How about you? What money-related magazines do you read? What other magazines in general do you like/subscribe to?

Inheritances and Life Insurance: Tax Issues at Death

The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.

QUESTION: I have a simple question. I am very ill. I have one child, a son who’s 44. I have some stocks that I bought many years ago for $20,000. They are now worth $120,000. This is the only asset of any value that I’ve ever had. After I die, my son will be selling the stocks to get cash. Will my son pay less to the IRS in taxes if I give the stocks to him before I die?

No. Because the total value of all of your assets is below the federal gift-tax and federal death-tax exclusion amounts, there would be no federal gift tax or death tax whether your son received the stocks now or after your death. But if your son received the stocks from you now as a gift (rather than inheriting them from you later), he would pay more in federal income tax on the sale of the stocks after your passing. That’s because the income tax basis is different with gifts and inheritances.

In some cases, last-minute gifts will save on taxes. Whether gifts or inheritances will save taxes depends on a number of factors. See pages 181-191 for more information.

QUESTION: I am a widow with two adult children. My assets total $2 million. I’m about to buy a life insurance policy that will pay $1 million to my two children upon my death. I’ve heard that there is no death tax on life insurance. Is that true?

Whether life insurance will be subject to death tax depends on four main factors: (1) whether you own on control the life insurance policy, (2) the total value of your taxable estate, (3) the year you pass away and (4) state death-tax laws in your state.

Owning or controlling life insurance

If you own and/or control life insurance, it is counted in calculating your taxable estate for federal death-tax purposes. See below for ways to keep life insurance from being counted as a taxable asset. But even if insurance is part of your taxable estate, no federal death tax may be due. Whether your estate will owe federal death tax depends on when you pass away.

Federal death-tax exclusion amount

Under federal law, the amount excluded from death tax changes over time. There is a federal death tax exclusion of $2 million for deaths that occur in 2008, $3.5 million for 2009 deaths, an unlimited amount for deaths in 2010 and $1 million for deaths that occur in 2011 or later.

If you pass away in 2008, the exclusion would be $2 million but you’d have $3 million in assets (if you owned or controlled the $1 million life insurance policy). The $1 million above the exclusion would generate $450,000 in federal death tax
($1 million times the 45% death tax rate). 

So, instead of your two children being the only beneficiaries of the life insurance policy, your children would share the proceeds with their “Uncle Sam”—the government.

State death-tax laws

Finally, state law may not be the same as federal law. There could be state death tax whether or not there’s federal death tax.

HINT: There are two ways to keep the insurance proceeds from being taxable for federal death-tax purposes: (1) have an irrevocable life insurance trust (i.e., a trust that cannot be changed) or (2) have your adult children own, apply for and pay for the policy.

(By the way, a life insurance trust is not the same as a living trust.)

Recession Proof Career: Financial Advisor

Here's a piece I had to chuckle at. It says that one recession proof career is that of financial advisor. The details:

A lot of jobs are in trouble in today's tough climate, but doom and gloom are the bread and butter of a personal financial planner.

Combine an economy on the edge of recession, brewing inflation and an aging boomer population, and you have a growing market for someone who can find a safe place to put your money.

The demand for personal finance planners is expect to soar, as baby boomers who want to safeguard their financial future look for help in getting through retirement. The Bureau of Labor Statistics projects that jobs in this category, which includes certified planners and other financial advisers, will surge 41% between 2006 and 2016, adding 72,000 jobs for a total of 248,000. The wage is competitive, according to the BLS, which estimates median earnings at more than $66,000.

And the current economic climate is fueling further demand.

I personally don't have anything against financial planners. No, really, I don't. I just think it's a better option for people to become educated on finances themselves and manage the majority of their money affairs personally. Then they can get expert/professional advice on more complicated matters. This is what I do myself. I manage almost all of my finances, but call in people like CPAs (taxes), lawyers (estate plan), and insurance agents (life and disability insurance) when I need help in a particular area that's a bit over my head.

Furthermore, I have a bias towards people who have the CFP designation and are fee-based (versus commission based). They appear (at least to me) to be less likely to be the type of "financial advisor" who's more interested in taking your money -- and they seem more likely to be qualified individuals that truly have your best interests at heart. That said, I wouldn't hire one that I didn't get some pretty solid references on from someone I knew well and I knew was at least semi money savvy.

The Courage To Build Wealth

The following is a guest post from The Shark Investor.

Just imagine you had no mortgage or rent, no debts and bills to pay, health care was free and food was cheap.

How would this change the financial decisions you take? Would you build your wealth better if you had no fear?

"If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability." - Henry Ford used to say.

I live in a country which survived a hyperinflation in 1997. I was still just 18 but I had already saved an amount of money which most of my friends couldn't imagine.

The hyperinflation nuked my savings. Simply erased them all to zero. But I am thankful for that. It didn't nuke my self-discipline, knowledge or talents. It just gave me a lesson.

Making mistakes is not scary. Losing money is not scary. But we are all taught the opposite - don't take risks, get a safe job, invest wisely in a retirement fund and you may eventually get wealthy at 65. Uh.

The fear of losing money is your main enemy, and it's a strong enemy. It's the fear of getting broke. The fear of having to leave your home and move to a smaller one. The fear of changing your job. The fear of asking for salary raise. The fear of starting a business. The fear of your friends reaction when they realize you are in bad financial situation.

If you can fight this fear, you will be able to get rational investment decisions. You will be able to work on exciting projects, to try starting a business or playing aggressively at the stock market.

To beat this fear you need to go through several steps.

Step One: Evaluate your current financial situation

Many people rate their monetary situation as "OK". If you are like them, that's probably because most people around you are in similar situation. Chances are if you think your financial situation is OK, it's actually mediocre. If you are just one salary away from a financial trouble, then your situation is not OK. It is horrible.

Your real wealth is measured by the time you can live without having to work. How long is that? One month? Three months? You are almost broke - right now.

Step Two: "There is no spoon"

Like in the Matrix you must realize the problem isn't really a problem. It is not nice to be broke, unemployed or overworked because you've made a bad investment or financial decision. But after passing Step One you'll most probably realize there is not much to lose. If you are almost broke like most people from the middle class are, you have almost nothing to lose.

Wouldn't you prefer to risk almost nothing hunting for a real, fulfilling and wealthy life? Or, like most do, you would prefer mediocre life because of a false financial security?

Your money, your home and your job aren't your real assets. Even if you lose them, you will still be the same person with same knowledge, talents, self-discipline and courage. So is it really wise to waste your talents, knowledge and skills on unfulfilling job just to save your home and money?

Step Three: Start little actions

The courage to build wealth will not come suddenly and in a day. If this article raise some awareness in you, then great, but I don't expect you to sell your home and start a business or invest in forex tomorrow.

Build your financial courage step by step. Define the things that scary you the least and try to do them first. Don't worry about the exact outcome. Losing small amounts will be useful to build more awareness. Then grow further by taking more risky steps and trying with biger projects and bigger changes to your financial life.

Times of recession are best for training your financial courage. In such moment it is much easier to see how fake the ordinary assets are and that the only real value is in your internal resources. It's much easier to risk now rather than at times good for the economy - when just placing your money in mutual funds would bring you sweet income.

Don't let your dreams die because you have a mortgage to pay. If you have a business idea start working on it. If you want to make a high risk investment, evaluate and jump. The only sure way to never build your wealth is to never take action.

The 10 Habits of the Prosperous

The following is an excerpt from the book DoesYour Bag Have Holes. Chapter 20 of the book organizes the principles followed by the wealthy into “The 10 Habits of the Prosperous.” Below is a brief description of each of the habits which are discussed in depth with examples in the book.

1.  Clear Monitored Financial Goals -- Charles Coonradt, author of The Game of Work wrote, “If you put one hundred people in a room and ask them how many would like to be financially independent, all the hands will go up. If you then ask them how many have a personal financial statement detailing assets, liabilities, and net worth that is current in the last ninety days . . . ninety of those hundred people will not raise their hands. If you ask those remaining ten people how many have that financial statement laid out in a pro forma goals format for one, three, five, ten and twenty year periods, nine of the people will sit down. The one still standing will be a millionaire”

2.  Delay Gratification -- The prosperous have learned to resist the temptation to lose what matters most long-term for the short-term pleasure of something now.

3.  Value Financial Independence -- The prosperous enjoy the security and independence of owning their possessions more than social praise and status.

4.  Live Below Income -- For every $10 the prosperous make they spend $7. For every $10 dollars the poor make, they spend $13.

5.  Save Money for Tomorrow -- Many spend tomorrow’s resources for today’s pleasures. The financially independent save and invest today’s money for tomorrow.

6.  Earn Interest -- Interest is a very powerful tool that either builds or diminishes wealth. Those who understand interest earn it and those who don’t understand interest pay it.

7.  Pay Themselves First -- You can become financially independent simply by paying 10 percent of your income to savings and investments first, and then living on the rest.

8.  Buy Wholesale -- You can greatly decrease your expenses by learning how to buy items at wholesale and by always asking for a discount.

9.  Create Gold-Laying Goose -- The prosperous create a gold-egg-laying goose (assets with passive income) and then live on the eggs. Those who have reached the ranks of prosperity have learned that money is of a prolific generating nature.

10. Master of Money -- A 17th Century Proverb states, “If money be not thy servant, it will be thy master.” The prosperous have their money work for them, while the poor work for money.

Parting Words of Wisdom from Jonathan Clements

Popular Wall Street Journal personal finance writer Jonathan Clements is leaving the publication to begin a new job at Citigroup. He'll be the director of financial education for a new unit created to advise the "emerging affluent," investors with less than $500,000 in assets. Jonathan has always been one of my favorite personal finance writers. His advice was practical and basic, and as a result was very, very effective.

Clements recently did an interview with NPR and said a couple of things I wanted to highlight. Here's the first:

NPR: Why do you think issues of personal finance are so difficult for many of us to grasp?

Clements: The investment problem is not difficult. You save regularly, you buy a diversified portfolio, you repeat as necessary. 30 years later, you retire with more money than you could possibly imagine. And yet people cannot do it. We know that people make all kinds of behavioral mistakes: they're too short-sighted, they struggle with self-control, they don't save nearly enough and I think a lot of it has to do with evolutionary psychology. We are the great, great, great, great grandchildren of cavemen and women who were able to survive and reproduce because they focused relentlessly on the short-term. They weren't thinking about retiring 30 years hence; they were thinking about how they were going to survive until tomorrow.

Boy, did he hit this nail on the head! My thoughts exactly.

In fact, I've talked about these issues before -- that getting rich is easy in concept but that many people lack the discipline to make it happen. For reference, see these posts:

• How to Get Rich in Three Easy Steps

• Free Money Finance Top 10 Most Hated Posts/Themes: #6 The Need for Discipline

NPR: You wrote 1,009 columns. Were there any trends in personal finance that surprised you either when they came along or when they went away?

Clements: One of the things that I tell people is there are basically only 20 personal finance stories, which means that I've written each of those stories 50 times each and this, of course, is one of the reasons why I thought it was time to give it up. I mean, eventually readers were bound to notice. In terms of trends, what constitutes prudent investment advice has not changed over the past 13 and a half years. What you should have done in 1994 is the same thing you should be doing today in 2008. It's just that the market's changed. Something gets hot, everybody gets overly enthusiastic about it. This year it's commodities. A couple of years ago, it was real estate. We get this continuous new scenario thrown up by the financial markets and we all get all hot and bothered about it, but what you should be doing stays the same. You should be saving regularly, putting money into that 401(k). The answers don't change; it's just the scenarios that we're dealing with.

Again -- exactly!!!!! You can see why I love this guy!!!

The basics of personal finance are pretty simple and there aren't really that many of them -- as you can see from my thoughts in How to Get Rich in Three Easy Steps. This advice is tried and true and doesn't change with the "new" and "hot" new ideas that regularly come out. In the end, the new/hot ideas always fade away and we're all left with the simple facts once again. Apply them, and your net worth will be sure to grow.

Goodbye, Jonathan. I sure enjoyed the ride.

Real-Life Example of Why You Need an Emergency Fund

Today the Money Blog Network members are doing a group writing project on emergency funds. As such, it seems perfect for me to highlight this CNN story a reader recently emailed to me. It tells of a woman who was making $70k per year, was fired, and within two months, she had to go to a food bank for assistance. The highlights:

When she was laid off in February, Patricia Guerrero was making $70,000 a year. Weeks later, with bills piling up and in need of food for her family, this middle-class mother did something she never thought she would do: She went to a food bank.

I'm saving commentary until later, but here are a few more facts that show why she's having financial trouble:

• Guerrero is estranged from her husband. We don't know the circumstances, but we do know that the breaking up of a marriage can be financially devastating.

• Altadena, California. Expensive place to live. Here's what Sperling's Best Places says about the city:

• Compared to the rest of the country, Altadena's cost of living is 44.99% higher than the U.S. average.
• The income per capita is $33,527, which includes all adults and children. The median household income is $70,673.

Points to be made here:

• If she moves she could probably save a ton of money.
• She was earning a decent amount -- right in the mid-range of all households.

• She has had to take extreme measures to pay for her interest-only mortgage of $2,500 a month. Here we go now, some cold, hard facts. "Interest-only mortgage" screams "bought a house she can't really afford."

• She used her tax refund to help pay many of her bills for the first two months, but now that money's gone. First, she got a refund. Probably a good thing for her since she would have blown the money anyway, but for those who can control themselves, getting a tax refund isn't a good idea. Second, if she wouldn't have had the refund, she would have been in trouble well before two months were passed.

Here's the comment the reader emailed me:

This is a story that fails to get the pity out of me, but it’s a good hard lesson on why savings of at least 6 months should be accessible.

My thoughts:

1. True. You MUST HAVE an emergency fund. Otherwise, you are left to chance if (when?) financial trouble like a job loss comes along.

2. People need to learn to spend less than they earn. Doing this gives an even bigger cushion when financial trouble hits. Seems like this lady was spending exactly what she earned (maybe more -- we don't know what her credit cards look like.)

3. Stories like this will become more and more common as people stretched financially lose their jobs, have mortgage rates re-set, and so on. All the more reason to have a good buffer between what you make and what you spend.

4. I feel sorry for anyone caught in this situation, but she didn't really do herself any favors in the way she managed her money prior to the job loss. Besides, as one reader recently commented here:

I don't mean to be dogmatic, but I just wanted to offer some reminders: 3 billion people on the planet live under $2 a day (grinding poverty) including 1 billion living under $1 a day (verge of starvation) and every day 30,000 children die from starvation and preventable diseases There's poor and then there's poor.

This lady may be down on her luck, but there are billions of people who would trade places with her in a heartbeat.

Introducing the (Financial) Archetypes

The following is excerpted with permission of the publisher HarperCollins from It's Not About the Money: Unlock Your Money Type to Achieve Spiritual and Financial Abundance. Copyright © 2008 by Brent Kessel. It gives a good overview of what this book is about.

No matter who you are, you come to your financial life with remarkably unique life experiences, all of which have conditioned you to respond to money in particular and sometimes peculiar ways.  Your life experiences caused you to develop certain financial beliefs and habits and to avoid others.  The good news is that you are not alone!  In my professional work with people from all financial walks of life, I have noticed that although the details of people’s behaviors and problems are unique, there are great similarities among certain groups of people.  Drawing on the work of various teachers, mentors, and philosophers, as well as my own observations, I’ve created some broad definitions of these groups, or archetypes, so that people can learn from others who have gone through similar experiences.

In my opinion, the optimal human being would be balanced among all eight of these archetypes.  Who wouldn’t want to be the person whose financial life was experienced as secure and abundant, pleasure-filled and joyous, powerful and creative, self-sufficient, significant and worthy, relaxed, generous, and compassionate? Chances are you’ll find yourself and your behavior when it comes to money in at least one of these archetypes:

• THE GUARDIAN is always alert and careful.
• THE PLEASURE SEEKER prioritizes pleasure and enjoyment in the here and now.
• THE IDEALIST places the greatest value on creativity, compassion, social justice, or spiritual growth.
• THE SAVER seeks security and abundance by accumulating more financial assets.
• THE STAR spends, invests, or gives money away to be recognized, feel hip or classy, and increase self-esteem.
• THE INNOCENT avoids putting significant attention on money and believes or hopes that life will work out for the best.
• THE CARETAKER gives and lends money to express compassion and generosity.
• THE EMPIRE BUILDER thrives on power and innovation to create something of enduring value.

Learning about these archetypal energies and patterns gives you the insight and power to change.  This is not intended as a system to objectify, diagnose, or limit yourself or others.  It’s not so important that you peg yourself as one or two of these archetypes—you may recognize parts of yourself and other people in all eight.  For instance, we all worry to some extent when it comes to money, so we all have some Guardian in us.  We all experience the pleasure of buying things, so all of us are familiar with the Pleasure Seeker.

In real life, however, we usually lean too much in one direction.  We fixate on one set of beliefs and strategies—one archetype—in response to our particular life experiences.  It is most often the people who find themselves firmly rooted in just one or two archetypes who feel the least freedom to choose and create the financial lives they want.

In addition, people are imbalanced to varying degrees within each archetype.  Even though behaviors may manifest in imbalanced ways in our adult lives, there is something very intelligent at the source of each archetype’s coping strategy.  For example, a dysfunctional Saver might be penny-pinching or saving much more than he or she needs to, but at heart this person is focused on financial self-sufficiency, which is a reasonable goal.  What follows is a list for each archetype with a few words describing its lower-functioning attributes, or pitfalls, as well as its higher-functioning attributes, or gifts:

• The Guardian -- Pitfalls: Worry, anxiety; Gifts: Alertness, prudence
• The Pleasure Seeker -- Pitfalls: Hedonism, impulsiveness; Gifts: Enjoyment, pleasure
• The Idealist -- Pitfalls: Distrust, aversion; Gifts: Vision, compassion
• The Saver -- Pitfalls: Hoarding, penny-pinching; Gifts: Self-sufficiency, abundance
• The Star -- Pitfalls: Pretentiousness, self-importance; Gifts: Leadership, style
• The Innocent -- Pitfalls: Avoidance, helplessness; Gifts: Hope, adaptability
• The Caretaker -- Pitfalls: Enabling, self-abandoning; Gifts: Empathy, generosity
• The Empire Builder -- Pitfalls: Greed, domination; Gifts: Innovation, decisiveness

We generally understand and appreciate the way our own archetype behaves, and feel like people who exhibit other behaviors are from a different planet.  We may become quite exasperated while reading about the pitfalls of our own archetype, clinging firmly to the belief that ours is the only sensible approach to money.  Some other archetypes may be completely repulsive to us.  This can be because a parent or lover who caused us great emotional pain exhibited the attributes of that archetype, so we reject their financial values, throwing the baby out with the bathwater.

The archetypes are presented not as a categorization system to be fixed in stone, but so you can tease out what might be affecting your financial life on an unconscious level.  It is important to note that at different times we have thoughts, beliefs, and behaviors arising out of different archetypes.  To use my own life as an example, I would say that in late adolescence I was clearly a Saver. I recall as a teenager slowly accumulating the three hundred dollars needed to buy my first ten-speed bike, and a few years later fantasizing about one day having enough so I wouldn’t need to work for money.  As I entered my working life, I became more of an Empire Builder, dreaming of the day when I would have enough wealth to truly not worry and to make a positive impact on the world.  In my early thirties, when my business was struggling, the Guardian kicked in.  I recall many sleepless nights and early mornings when I played doomsday scenarios over and over in my head and felt paralyzed by fear.  Then, as the business became more successful, my Pleasure Seeker began to emerge, as we used our newfound abundance to remodel out home, travel to Europe and Hawaii, and go out to gourmet restaurants and great concerts.  Interestingly, this increase in spending did not come at the expense of the Saver; throughout this time, I still saved at least 20 percent of my income each year.

Identifying the archetypes that are most active within us is an important step toward creating true financial freedom.  By bringing conscious awareness to what is unconscious, we can attain balance and a sense of control over our financial destiny.

Broker: They're Broker than You Are

Here are some thoughts from Robert Kiyosaki's new book Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money on what he thinks about brokers:

"Broker" is another word for "salesperson." In the world of money there are brokers for stocks, bonds, real estate, mortgages, insurance, businesses, etc. One of the problems today is that most people are getting financial advice from salespeople, not rich people.

Warren Buffett once observed, "Wall Street is the place people drive to in their Rolls Royce to take advice from people who ride the subway."

Rich dad said, "The reason they are called brokers is because they are broker than you."

One of the problems of not having much money is that good brokers, brokers who know what they are doing, often do not have time for you. They are busy working with their higher net worth clients.

I think you all know where I stand on the issue of financial advisors (including brokers) as a whole. Sure, there are many good ones and I use some for certain financial needs. But in today's environment where someone can label himself a "broker", "financial planner" or whatever with little to no experience or knowledge, you need to be very, very careful in selecting a good one. Otherwise, you'll simply find someone who's main interest is turning your money into their money.

The Seven Financial Predators

Here's a thought from Robert Kiyosaki's new book Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money where he lists his thoughts on what financial predators (as he calls them) exist and how to protect your money from them. The predators:

• The Government -- Taxes are our single largest expense. There's a big difference in taxes paid on earned income versus portfolio income versus passive income. Know these and plan accordingly to minimize taxes.

• Bankers -- Banks take your money, charge you tons of fees for various financial transactions, and then work to lend you money at a much higher interest rate than you receive.

• Brokers -- This includes all sorts of brokers -- brokers for stocks, bonds, real estate, mortgages, insurance, businesses, etc. Another word for "broker" is "salesperson." Do you really want to get your financial advice from a salesperson?

• Businesses -- One of the reasons so many people struggle financially is they buy products that make them poorer and then make themselves even poorer by paying for that product for years with high-interest credit cards.

• Spouses -- Marry wisely and get a prenuptial agreement.

• Family -- Plan your estate properly or your wealth could go to someone you don't want to get it.

• Lawyers -- These people are just waiting to sue you, so you should keep nothing of value in your name, buy personal liability insurance, and hold assets of value in legal entities.

Here's my take on these:

1. Yep, taxes are a killer expense. I don't mind paying my fair share, but I'm certainly going to work to pay no more than that. I wouldn't even mind contributing a bit extra to the public good if I felt that the government was spending my taxes wisely but I think they're wasting a boatload of all the money we give them.

2. I personally don't keep much money in banks. I have a checking account and that's it. I NEVER use my ATM card (it's locked in my safe.) Most of my assets are with Vanguard.

3. Yes, Vanguard is a broker, but they're about the cheapest one going. As far as other brokers go, I try to minimize my contact with them. I think you all know how I feel about this lot.

4. He's preaching to the choir here. I agree that people often can't control themselves and buy things they can't afford -- then make it worse by keeping it revolving on credit cards. Have you ever been in a building of some of those credit card companies? I have, and they're pretty nice. Yep, they're making money hand over fist.

5. The keys regarding marriage are to marry the right person and then stay married.

6. You need a will. If for no other reason, you need to name guardians for your kids.

7. Two words: umbrella insurance.

The Five Financial IQs

Here's a thought from Robert Kiyosaki's new book Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money. Today we'll summarize what the book is all about -- the five financial IQs. He lists them as follows:

• #1: Making more money.
• #2: Protecting your money.
• #3: Budgeting your money.
• #4: Leveraging your money.
• #5: Improving your financial information.

And here's what he means by each of these:

• Making more money -- Pretty straight-forward. The more you make, the higher your IQ in this area.

• Protecting your money -- Keeping financial predators from taking your money. The biggest predator: the government/taxes.

• Budgeting your money -- Having a financial plan. His key here is budgeting for a surplus which we'll cover later. It's an interesting concept that I may use in our own budget.

• Leveraging your money -- Using debt to increase your net worth.

• Improving your financial information -- Learning how to manage your money.

A few thoughts on these:

1. I'm pretty much in agreement with all of these except #4 (#5 is a key reason I maintain this blog.) I'm not a big fan of messing with debt to make money, though I understand what he's saying, of course.

2. For similar lists, see my five financial principles as well as the Richest Man in Babylon's seven cures for a lean purse.

3. I'll be covering these five IQs (what they mean, what I agree with and what I don't, etc.) over the next couple weeks, so stay tuned, there's more to come. 

Great Suggestions on How to Handle Your Finances for College Graduates and the Rest of Us Too

The following is a guest post from Marotta Asset Management.

Last time we discussed the many ways you can save money as you learn to live on your own. Our suggestions included sharing housing costs, buying a previously owned car with cash, preparing meals instead of eating out, and eliminating the frills from services that are deducted automatically each month from your checking account. Here we offer some sound advice on how to put that money you've saved to work for you.

First, look carefully at your company's benefits plan. Disability insurance is probably the most neglected insurance. Consider signing up through a work plan. More employers are implementing health savings accounts, which allow you to pay for your medical expenses with pretax dollars. They are coupled with a high-deductible health insurance plan. If you are young and healthy, these provide you with disaster insurance as well as health-care insurance savings. If your employer has one, put the maximum away annually, and invest it if possible.

All the pundits say, "Save as much as you can," which is fine advice but not specific enough. You need to take a substantial chunk of change out of your discretionary money each month, some before it even makes it to your checking account and most of it after you deposit it. The amount, about half your take-home pay, may seem excessive at first, but remember, you are trying to grow rich, not live rich.

As your first priority, get the benefit from your company's 401(k), which usually amounts to contributing 5% of your salary while your employer matches with another 4%. This is the portion we mentioned that's deducted before you ever see a paycheck. If your employer has a health savings account, the money you contribute will also come out before your collect your paycheck.

After these deductions, you probably have the remainder of your paycheck deposited automatically into your checking account. You should then automate a transfer out of your checking account into an investment account to meet many of your long-term financial goals. Money in your investment account will appreciate. Always keep your goals in mind and stay on track.

For example, make a list of all the big-ticket items you will need to pay for over the next several years. You need to pay your car insurance. Transfer the appropriate monthly amount to your investment account. You should be saving for your next car. Transfer the appropriate monthly amount to your investment account. All of these significant purchases may comprise around 10% of your take-home pay.

You should be fully funding your Roth IRA while you are young and in a relatively low tax bracket. For 2008, to meet the $5,000 limit for your Roth IRA, you need to save $416 a month. Put this money into your investment account and then transfer it once a year to a Roth IRA account.

Save 5% of your take-home pay in a taxable account allocated for your retirement. This is after fully funding your 401(k) match and your Roth IRA. There are times in life when you will need taxable savings, and you should be saving and investing 5% of your take-home pay.

Save and invest 10% of your take-home pay for charitable giving. As your investments earn money for you, you will give appreciated assets to the charity and replace the same dollar amount from your take-home pay. Donating appreciated assets provides an additional 15% tax savings.

Finally, as a margin of safety, save and invest 10% of your take-home pay to help cover the cost of unknown unknowns. If your first response to this suggestion is to ask, "Like what?" the answer is "Exactly." Most people who run up credit card debit keep their regular spending within 100% of their take-home pay until some unexpected expense causes them to deficit spend. You can't anticipate unknown unknowns, so the best you can do is set aside some money to cover them when they arise

All of these expenses can easily comprise half of your take-home pay. Even if you've landed a good paying job straight out of school, don't spend over half of your take-home pay on daily expenses. Transfer half of your pay directly to an investment account and let it start growing. Cash in the bank is the best financial security. Cash doubling in an investment account is the best financial future. By the time you need money from your investment account for some of those long-range purchases, ideally it will have already started earning a nice return.

Saving and investing should be automatic. You won't miss what you don’t see. Have half your take-home pay transferred out of your checking account and into an investment account each month.

Live simply. Avoid buying items you have to store, repair and maintain. Produce twice what you consume. Be generous. Avoid liabilities you have to pay each month. Invest in assets that pay you instead. Do these things and you will have a peace of mind that your contemporaries may never find.

How The Game of Life Teaches Personal Finance

My daughter loves The Game of Life (I'll just call it "Life" from here on out), so when our family has an extra, oh, THREE HOURS or so we play it (ok, it's not that bad, but it is a long game.) Fortunately, I get to be the banker, so I'm not bored all the way through. But I digress.

Life is centered around financial principles -- some good and some bad -- and I thought I'd highlight these and detail how my wife and I use the game to teach principles of personal finance. Let's start with the good things Life teaches about personal finance:

• Net worth is how you keep score. The goal of Life is to accumulate the most money (assets minus liabilities) during the game. In other words, you win the game by having the highest net worth at the end. By using this measure, Life hits the nail on the head as far as I'm concerned -- it's what you keep that is the key measurement to financial success. Key lesson: In financial terms, net worth is the main measurement you want to focus on and grow.

• It pays to get a college education/the career you pick has a big impact on your life. Going to college costs you $100,000 in Life (you take out loans to do this) and you have to pay back $125,000 (interest, you know -- another thing the game teaches), but it's almost always a good deal. Why? Because you can become a doctor, accountant, veterinarian, etc. -- professions that make a good amount of money (doctor - $100k, lawyer $90k, vet - $80k, etc.). This comes in quite handy as there are "pay day" squares all over the board, so you earn your $125k back pretty quickly. If you skip school, it's likely you'll get a low-paying job (like a hair stylist at $30k per year or a sales person at $20k) and suffer throughout the game. Key lesson: Going to college to get a good career is almost always worth the cost.

• College doesn't always make a difference in your pay. Of course, you can choose to go to college and then get the income shaft. You have to blindly draw your occupation from the college career cards, and if you're unlucky enough, you'll be a computer designer ($50k per year) or a teacher ($40k per year). These jobs pay as much as (or even less than) a couple non-college jobs that you don't have to fork over $125k to get. Key lesson: Make sure the career you're going into justifies the high price of a college education.

• Lose your job and you take a big financial hit. Here's the real kicker -- you can pay the $125k for a college education, get a high-paying job, then lose that job (there are nasty "lose your job" spots on the board) and end up making a fraction of what you once did. And, yes, you still have the $125k debt from college. It's a bit of a stretch -- after all, who really goes from being a doctor to a hair stylist -- but the key point of how important your career is gets made. Key lesson: Your career is your greatest financial asset so be sure to protect it.

• The more you make, the more you're taxed. Each career card comes with a tax rate for the profession and just like in the real world, the more you make, the more you're taxed. Welcome to the real world, kids. Key lesson: More income = more taxes.

• Kids are costly. Throughout the game you have the chance to "have" kids (you can choose a kid path or non-kid path.) My daughter always takes the kid path because she likes to fill up her car (the token you move around the board) with pink (girl) and blue (boy) pins. Me? I always go the non-kid path. Why? Because kids are expensive in the game. Quite often, you'll land on a space that will charge you so much per kid for this or that. If you have a carload of kids, you end up paying a boatload of money. Yeah, the game also has some financial benefits of having kids (for example, they can all get presents in cash), but not as many as the expenses they rack up. Key lesson: Kids are expensive.

• Don't get sued. Just like the real world, you can get sued in Life. And if you do, get ready to fork over $100k (ouch!). That is, unless you have a card that lets you get out of a lawsuit. In that case, you simply get to laugh at the person who sued you. ;-) Key lesson: Don't get sued. And just in case you might get sued, get umbrella insurance or a good lawyer (the no-sue card) to cover yourself.

• Don't get into debt. The last game we played, my wife got sued. Then sued again. Then sued again. By the time it was over, she had to borrow $200,000 to pay off her debts (and had to pay an extra $5,000 for every $20,000 borrowed.) Though she had lots of income the rest of the game, she got killed when she had to pay it back. Key lesson: Stay/get out of debt -- it's a financial killer.

• It pays to invest. At the start of the game, you can buy an investment. You pay $10k for a number on the spinner (1 thru 10) and every time someone spins that number, you get $5k from the bank. It's a good deal that has always paid off for every person investing. (If your number hits only twice you're at break even -- and most numbers will hit many more than two times.) Key lesson: Investing is a great way to make your money grow.

• Luck has a role in how well you do. Just like in the real world, luck plays a big part in how you do in Life. What numbers you roll, what cards you get, what spaces you land on, what decisions others make that impact you, etc. can impact your financial future. Of course, you can do all you can to position yourself for success, but luck can then take you one way or the other. Key lesson: Luck plays a role in your finances.

• Consumer spending can kill you. This game is so ironic. I, the biggest saver in the world, ALWAYS seem to land on the consumer spending squares and am forced to buy a big screen TV, a vacation home, or something similar. These can suck significant amounts of cash out of your pocket and at the end of the game they count as nothing when tallying up your net worth. Key lesson: Control your spending, especially on expensive items that don't have any long-term value.

For the reasons above, I think Life is a great way to teach your kids about how money works in the real world. That said, the game does reinforce some money-related ideas that simply aren't true and we often take time to point these out to our kids. In particular:

• The price of housing can't go down. In Life you have to buy a house (you have the choice of various prices). Each one you buy has a price as well as the amount you'll get for it when you sell it. In every case, the selling amount is either higher (most cases) or the same (a couple) as the buying price, implying that housing prices can't go down. Well, that might be true in Life, but if you've been breathing the past couple years in the real world, you know this isn't the case outside the game. Discussion point: Owning your home is a good thing and real estate generally goes up over the long-term, but it doesn't always increase in the short term.

• The lottery is a good deal. Every once in awhile, someone lands on a "spin" square. In these cases, each player gets to bet money on one of the ten spinner numbers. You can bet any amount you like on any one number. However, if you have a "spin to win" card, you get to place bets on four numbers (thus giving you a 40% chance of winning.) If your number comes up, you receive 10 times the amount you bet. Given these odds, your expected payout with one square is break even (you have a 10% chance of winning 10 times your money) and your expected payout is very positive if you have four numbers to bet on. In our last game, my daughter won the spin (lottery) twice -- netting her about $500,000. She thought that was a pretty good deal. We explained that real life is a lot different. Discussion point: The lottery is a loser's game.

• Get a job based only on the salary. Because the winner of Life is the one with the most money, all of your decisions come down to economics. But as we all know, picking a job isn't all about money. There's enjoyment of your occupation (what you like to do), satisfaction, quality-of-life issues, and the like to consider before picking a career. In addition, not everyone has the ability to do every job (for example, not everyone can be a doctor.) As we all know, picking a career rarely comes down to an economics-only decision. Discussion point: What you earn is one consideration when picking a career, but you also have to consider other factors like what you like doing, what you're able to do, and so on.

• Getting the most money is the most important thing in life. Contrary to the belief of some, life (real life, not the game) isn't all about money this and money that. Certainly it takes money to survive and live a particular lifestyle, but there's more to life than earning and accumulating money (that's why I have a category titled More Important than Money -- to regularly remind us all that money isn't the end all.) Discussion point: Making and accumulating a lot of money is fine, just don't let it be the whole focus of your life.

Given all of the various learnings (both favorable and unfavorable) in the game of Life, my wife and I spend much of the game talking our kids through the various money issues we're confronted with. We're careful not to be over-bearing (it's a game after all -- we're trying to have fun), so we comment here and there on how the game is and isn't like real life. Our daughter, in particular, seems very interested in these sorts of issues, and often asks additional questions which we discuss after the game. As such, we've seen that Life can be a great way to teach kids (or anyone else) about personal finance issues.

Free Financial Planning Advice Today

Got this press release from Kiplinger's and thought some of you might want to receive some free financial planning advice:

Crumbling housing prices and mounting credit woes sapped the U.S. economy in 2007—and consumers counting on real estate for a retirement nest egg may not receive the profits they anticipated. What better way to kick off 2008 than with a financial check-up.

During two special days this month, consumers can get free, personalized answers to financial questions by picking up the phone or logging on to a computer. For the seventh time, Kiplinger’s Personal Finance magazine and the National Association of Personal Financial Advisors (NAPFA) are partnering to sponsor Jump-Start Your Retirement Plan Days.

On Tuesday, January 15th and Friday, January 25th from 9 a.m. to 6 p.m. Eastern Time, NAPFA advisors across the country will be standing by to answer your financial questions. Normally these Fee-Only planners, well versed in investments, taxes, insurance, estate planning, and saving for college and retirement, charge clients $100 to $300 an hour. But, during Jump-Start Days, their expertise is free. Just dial toll-free 888-919-2345 or log on to participate in an online discussion with an advisor.

2007 in Review

The following is provided courtesy of Marotta Asset Management:

A valuable exercise this time of year is to review your investment returns to analyze what occurred in the broader asset classes. First, check to see if your specific investments are capturing a majority of the potential market return of their asset class. Second, evaluate whether your asset allocation is optimized to balance risk and return.

The fourth quarter took away many of the gains in the U.S. markets. The S&P 500 broke a record on October 9 and then fell about 7% to end the year up 5.49%. The Dow and NASDAQ showed similar trends.

The S&P 500 ended the year up 5.49% and the Lehman Aggregate Bond Index up 6.97%. U.S. bonds beat U.S. stocks. Average investors often have a majority of their assets in U.S. large-cap stocks such as the S&P 500 with a small helping of U.S. bonds, even though these categories represent only two of the six asset classes they should be using.

Evaluate your specific investment choices against the index returns. For example, the Vanguard 500 Index Fund (VFINX) had a return of 5.39%, losing only 0.10% of potential market return, even though it has an expense ratio of 0.18%. An even better selection was the iShares S&P 500 Index Fund (IVV), which had a return of 5.43%, losing only 0.06% of the potential market return even though it has an expense ratio of 0.09%. Both of these funds performed slightly better than the S&P 500 Index before expenses and slightly worse than the index after expenses.

Compare the return of each of your funds with the return of an appropriate asset class index to see how much market return you lost to poor fund choices and how much you lost to high expense ratios. Every fraction of a percentage does make a difference.

Then evaluate your asset allocation against the entire domain of potential asset classes. Asset allocation is the most significant investment decision you will make. It is even more important than selecting the best managed funds within an asset class.

Steady returns are an essential part of meeting your financial goals. Imagine two investment choices. Choice A returns 30% the first year and nothing the second year, for a total return of 30% over two years. Choice B returns nothing the first year and 30% the second year for the same 30% over two years. It seems as though no static asset allocation can do better than 30% over two years. But this isn't true.

• Investment A Returns -- Year 1: 30%, Year 2: 0%, Total Return: 30%
• Investment B Returns -- Year 1: 0%, Year 2: 30%, Total Return: 30%
• Investment A + B Returns -- Year 1: 15%, Year 2: 15%, Total Return: 32.5%

If you split your investment evenly between A and B, you will earn 15% the first year and 15% the second year. By compounding 15% the first year with 15% the second year, you will have a total gain of 32.5% over two years. You'll profit from the magic of compounding when you rebalance your investments after the first year and take some of the profit from A and move it to B. An even asset allocation between these two choices not only smooths returns, it actually boosts them. Particularly in volatile markets, periodic rebalancing can help.

The S&P 500 5.49% and the Lehman Aggregate Bond Index at 6.97% did not appear to provide much difference in potential returns in 2007. Most investors' asset allocation is built from these two categories, but they represent only one and a half of the six asset classes we recommend.

Economists are wary about a U.S. recession, and thus it makes sense not to invest exclusively in the market of a single country. But predicted recessions often fail to materialize. It is unwise to get out of the markets entirely. The markets are inherently risky, and unless you can time them within six weeks of a top or bottom, it is usually better to stay fully invested. But staying invested does not mean staying invested exclusively in U.S. large-cap stocks.

Including a healthy allocation to foreign stocks would easily have boosted your returns in 2007. The international EAFE index gained 11.17%. Freed from Japan's 4.23% loss, the 10 countries with the most economic freedom soared 19.97% for the year. And emerging markets produced a 39.39% return.

Investing in the S&P 500 index primarily represents large-cap growth stocks in the industries that did well last year. Broader indexes include more mid- and small-cap stocks.

Stocks with a smaller capitalization typically have better returns than large-cap stocks. Large-cap stocks have a capitalization greater than $8.5B. Small-cap stocks have a capitalization under $1.4B. Mid-cap stocks fall in between.

Small cap and value usually have better returns, but they didn't last year when small and value fared worse than large and growth, with small-cap value losing 8.15% compared with the 12.34% appreciation of large-cap growth. But over the past five years small-cap value is still ahead, averaging 16.43% annually versus large-cap growth's 10%.

We recommend leaning toward small and value even though large and growth did better this past year. Generally speaking, large and growth outperform small and value at the end of a bull market. Coupled with a slowing U.S. economy, this is another warning of a possible recession. Value stocks on the whole do better during market downturns, so we recommend staying invested in them.

Although U.S. bonds did well, foreign bonds did better as the value of the U.S. dollar continued to diminish. Having at least half of your assets outside the reach of a falling dollar protects you against currency devaluation. Unhedged foreign bonds, foreign stocks and hard asset stocks offer you some protection against a falling dollar.

Finally, hard asset stocks continued their growth, gaining 4.64% in the fourth quarter alone. The GSSI Natural Resources Index ended the year up 34.44%. Energy funds were up 38.77%, and industrial materials funds, which include precious metal mining companies, were up 40.94%.

Hard assets are not highly correlated to U.S. large-cap stocks as a whole, a distinct advantage. The correlation between the Goldman Sachs Natural Resources Index and the S&P 500 Index is only 0.38. Importantly, the correlation between the Goldman Sachs Natural Resources Index and the Lehman Aggregate Bond Index is even lower at -0.21. A negative correlation means that bonds and natural resources, as separate asset classes, are often moving in opposite directions. Balancing a bond portfolio with hard asset stocks can help hedge the risk that inflation poses to a bond portfolio.

Investments with low correlation mean lower volatility and better compounded returns. Your asset allocation should use all six asset classes: three for stability (money market, U.S. bonds and foreign bonds) and three for appreciation (U.S. stocks, foreign stocks and hard asset stocks). Then make sure to select the best specific investments in each class, those with low expense ratios that capture the majority of the return of their asset class.

You owe it to meeting your financial goals to review these aspects of your investments at least once a year.

People are Irrational When It Comes to Money

Here's a piece from the LA Times that says people believe weird things about money. One example:

Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same.

Surprisingly -- stunningly, in fact -- research shows that the majority of people select the first option; they would rather make twice as much as others even if that meant earning half as much as they could otherwise have. How irrational is that?

Here's another one:

A is waiting in line at a movie theater. When he gets to the ticket window, he is told that as he is the 100,000th customer of the theater, he has just won $100.

B is waiting in line at a different theater. The man in front of him wins $1,000 for being the 1-millionth customer of the theater. Mr. B wins $150.

Amazingly, most people said that they would prefer to be A. In other words, they would rather forgo $50 in order to alleviate the feeling of regret that comes with not winning the thousand bucks. Essentially, they were willing to pay $50 for regret therapy.

This is why I sometimes recommend taking steps in handling money that seem to be less beneficial financially -- such as paying off your mortgage before investing. If you run the numbers, in almost all cases you can make a strong case that keeping a low-rate mortgage and investing the difference will be a better financial move. But then, it's not that easy. People's thoughts, emotions, behaviors and the like start to enter the picture and the "best" financial move becomes impractical, difficult to implement, etc. Thus, there becomes a difference in what's the best option logically versus the best option practically. I like to challenge people to take the logical approach where I think most can make it, but if it's a matter of practicality, I'll lean that direction.

Why do you think we're often irrational when it comes to money?

Two Money Mistakes that Could Cost You $1,000,000

Consumer Reports' piece on 12 money mistakes that could cost you $1,000,000 (February issue) should really be called 2 money mistakes that could cost you $1,000,000, a couple others that are expensive, and eight additional ideas thrown in just to round out the article and make it look "big."

We'll take these in groups -- here are the two that could cost you $1,000,000 and what CR says you can do about them:

• Investing too conservatively during retirement. Cost: $360,000 to $750,000. What you can do: Weight your asset mix as heavily toward stocks as your comfort level allows. If all-stock gives you the willies, consider, for example, an 80/20 or 70/30 stock/bond mix.

• Retiring before you need to. Cost: $237,000 to $309,000. What you can do: If you're in good health and have a choice about when to retire, try to wait until full retirement age.

Yes, retirement isn't what it used to be. Gone are the days where you had 5 years of bliss, living off a small savings and the income generated from it. Now if you make it to retirement age it's likely you'll live at least a decade longer, probably more. As such, you need to save more, invest more aggressively, and work as long as you can. Mess any of these up and it could cost you in a big way.

Related Free Money Finance posts to check out:

• Can't Afford Retirement? Move to Mexico

• 401k Match Trumps Debt Repayment

• How to Retire Early

Next, here are CR's two items that are pretty expensive:

• Launching a divorce war. Cost: $49,000 to $188,000. What to do: Work more toward diplomacy than war, which will increase the viability of the low-cost mediation option.

• Underinsuring your home. Cost: $16,000 to $194,000. What to do: Ask your insurer to reassess your home's replacement cost and adjust coverage accordingly. Buy an inflation-guard endorsement. Make sure your policy would pay to rebuild to the current housing code where you live.

No doubt about it -- divorce is expensive. If you can get along enough to divide things in a civil manner, you'll save a ton of money. On the insurance front, a simple call to your agent is all you need to make to confirm proper coverage:

Related Free Money Finance posts to check out:

• Solve Marriage Spending Differences by Having a Personal Account

• The Relationship Between Money and Sex

• Unhappy Couples Staying Married Because of Money

• Big Money Blunders to Avoid: Getting Divorced

• 12 Ways to Save on Insurance

And here are the "other eight" to round out the piece. I'm just going to list the items and their costs since most of the "what to do's" are rather common sense:

• Overpaying for your mortgage. Cost: $27,000
• Carrying a credit card balance. Cost: $5,000 to $23,000
• Maintaining an unhealthy lifestyle. Cost: $4,600 to $42,000
• Ignoring Roth accounts. Cost: $9,000 to $26,000
• Cashing out your 401k. Cost: $6,000 to $17,000
• Underfunding your 401k. Cost: $36,000
• Paying needless fund fees. Cost: $4,000
• Falling for a scam. Cost: $100 to You-name-it.

Like I said, avoiding these are pretty easy (for the most part.)