Author Archives: Money Reasons

About Money Reasons

A offbeat personal finance blogger that comes from the tech world.

Underestimating Your Returns

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When you are estimating your future value of investments, what kind of return do you plan for? Do you aim high, hoping that the optimism will somehow lift the rate of return on your investments?  Or do you try to find the market average and stick to that?  What if I told you that it is better to aim low and underestimate your returns on your investments?

401k History

401k Performance History

Why Your Expected Returns Matters

Even though I am still getting the hang of investing, I have done considerably more than most of my peers.  I am starting to speculate about my retirement age and have been forced to ask myself this same question.  I think this is an important question to ask because how I answer it will affect my finances.  Here’s why I think it matters.

If I estimate a high return, I can make one of two logical decisions:

  1. get really excited about my potential investments and invest more money.
  2. think that I will have enough money for retirement and fulfill my need to splurge a little (or a lot) on things I don’t necessarily need.

While a person’s response to their expectation may vary from person to person, it should be clear that regardless of the response, your expected return affects how you approach your finances and therefore important to consider carefully.

Why I Choose to Underestimate My Returns

When I realized why this question was important, I realized that I didn’t want to lean towards over-estimating my returns.  I think this can be a dangerous position to put yourself in.  You may over-anticipate a return and even if you go the route of investing more money, you could run the risk of investing too much money in something that won’t perform well at all.  This could put me and my family in a difficult position later in life and I don’t want to do that.

So, the question then goes to whether I want to go with the market average, or under-estimate my returns.  At first glance, the market average would seem to offer you the best route, right?  It would be the most accurate thing to gauge your expected return on your investment and therefore make you better informed for how much you need to invest.  There will be ups and downs, but sure the average is the best route to go, right?

Because I don’t choose individual stocks, I know that it will perform with the market average or close to it.  Yet, I choose to plan my retirement according to conservative figures for two reasons.  Underestimating my return leads me to invest more money.  While I could plan my retirement and figure how much I should invest each month/year on the market average, I choose to use a lower % in order to give myself some cushion.  I am a person that likes to play it safe.  The adage, “Better safe than sorry” echoes in my mind as I type this.  The second reason that I underestimate my earnings is because of the potential to win big.  If I plan on a modest 5-6% throughout my working years and end up making an average 8-9%, it will seem like I won the lottery when I go to retire.  A difference of a few percentage points could make a difference of hundreds of thousands of dollars over 30-40 years.

Overall, underestimating my returns forces me to be more frugal, invest more now, be prepared for a low return.  I would much rather be more aggressive in the amount that I am investing now and have financial security later, than to be forced to go back to work when I am 70+.

What kind of return do you plan for?

This was a guest post by Wayne at Young Family Finance. He writes about the every day financial challenges that young families face, like the cost of owning a dog or figuring out an appropriate tip.

Another Financially Tight Start of The New Year

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Turns out that I tried to save so much money last year that I’m down to my last $3,000 at the start of this new year!

Overspender

Always Broke

Oh sure, I have money saved, but it’s in my regular brokerage account, my Roth IRA, and my 401k Plan.  Turns out that I bumped up my contribution to my 401k so high that even though I have an extra $15,000 a year from paying off my house previously, that money got absorbed in investments.  While this is great, it also means that my liquidity is restricted somewhat.  So much so that I’m going to have to pay my yearly car insurance with money from cash sitting in my regular brokerage account.

Or course I don’t regret my financial tightness, but does make for some worrying about bouncing checks.  I think this coming year, instead of putting all my tax money in investments, I’ll instead try to build up my cash balance in my checking account to $15,000 (vs the regular $10,000 amount).  This should make for a less stressful Christmas time.

Just in case you are curious as to what I did, I’ve listed the financial decisions below:

  • Increased my 401k contribution (and I will probably increase it again this year too).
  • Contributed 10% of my salary into my employer’s ESSP.  (I made a cool 15% in my Employee Stock Purchase Plan, no regrets here).
  • Purchased a decent amount of dividend stocks  (I will continue this path in 2012, but not as much).
  • Increased my contribution amount to my HSA (I’m not sure if I will increase it next year, I’m happy with the balance as is).
  • Paid off my credit cards so that I didn’t carry a balance.  (This always hurts around the holidays).
  • Stuck with my car instead of buying a newer one.  (I wanted to, but I couldn’t bring myself to sell any of my stocks, or take out a loan for new used car).

So for my family, it’s an other year of living Tax Refund to Tax Refund once again.  Hopefully this year I’ll be able to have a large enough buffer that I won’t notice it!

Here is to a big 2012 year!

MR

Are We Financially Spoiled?

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I’ve talked about the how I’m not in favor of the “Occupy” Protesters, and lately I am starting to wonder if we are Financially Spoiled in the United States?

Rich Kid

Green with Envy, but Already Rich?

Why I think We Are Financially Spoiled:

First, let’s start with a poster that I recently saw associated with the Occupy Protests, it was titled, “Shut Down the Corporations“.  It showed a bunch of happy people in the poster riding a bike, one with a cane or golf club, another with a teddy bear, and finally a soccer player kicking over the block representation of corporations.  Such statements are incredible short sighted and really kind of naive.

What’s naive is that the bike, cane, teddy bear and the soccer apparel, that the people in the poster had or were wearing all are likely produced by corporations!  In fact, without corporations those representations of the people wouldn’t have most if any of that stuff!  You see, corporation make things (like bikes, teddy bears, and loans) that the average people can afford.  Without corporations mass producing things (yes even loans are made for mass consumption) only the rich and very rich would have those things.  What is also incredible naive is that the web host of the websites that display this or similar posters (or sign, pdf, etc) are corporations.  Again this reminds me of the person trying to get rid of a tree branch, but is sitting on the wrong side of the branch while they are sawing.  It’s much like protesting Starbucks or bottled water companies while drinking them out in the protester groups.  How’s that for irony?

As someone from below the “making over $100,000 a year” middle class, I know and understand the value of the services and products that corporations provide.  It’s too fairytale-like to believe that corporations are the bad guys when in reality, they are a huge part of what makes American great.  Don’t believe me?  Then why have former communist countries converted over to either a capitalist or a hybrid-capitalist (look at China) society?  What country has it better than us?  Certainly not Cuba or North Korea… Why do you think Russia and China changed their economic model?

I hate to say this, but I think the protesters are only looking one move ahead or looking at the trees instead of the forest.  I think if they mentally looked right and left to see how it all works, that they would agree with me.  If they would mentally think out all of possible results of their actions, it’s obvious than any other societal model is not a desired economic or socially beneficial one.  If that’s not enough, go out and interview some business owners, or better yet start a business yourself.  Nothing is preventing you from doing so, and the experience would be incredible educational.

So compared to most people in other countries of the world, we, the people in America, are very financially spoiled, at least in my opinion.  If you don’t agree, try this link: https://www.globalrichlist.com/ and enter your info, or your parents (if you are in college).  Here is my spoiler to the globalrichlist.com link, if you make at or over $50,000, you are in the top 1% vs all the other incomes in the world.  Welcome to the 1%!

We (those in the US) have it very good financially?  Really, we do!

MR

Starting A New Lifestyle By Taking a Month To Prepare

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In the past I use to make resolutions, then after the first week when I didn’t hop into those new resolutions instantly, I would give up on them thinking that I already violated those goals so why even try.  Obviously, this wasn’t the best way to accomplish such goals.

white egg

This year, I’ve learned my lesson!  From this point on, January of each new year will be my transition month into the new year.  So instead of jumping into a new lifestyle head first, I’m going to the shallow end of the pool and easing myself into my new mindset and lifestyle.  No more “cold turkey” dumping the old and jumping to the new for me.

Some of you can jump right in with the new year.  You planned your strategy in December and jump in head first on day 1 of January.  If that works for you, then great!  I just find that December is too busy for me to adequately plan my strategy.

So you might be wondering how I’m going to start my preparation for my lifestyle change…  Well tonight I’m going to hard boil eggs!  Not very exciting huh…  Then the next day I’m going to eat two eggs for breakfast as part of my weight loss program.  After eating my eggs in the morning, I’m going to start developing the dietary path for my weight loss portion of my New Year resolutions, and let the strategies for those resolutions develop from that point.

Oftentimes, the hardest part of change is the first step, so for me the first step is boiling eggs.  Not sexy, but a start!

So I start my lifestyle change be using a simple task to ignite the process.  I would like to say that this is the first time I’ve used such techniques, but it’s not.  I use similar tasks and tricks to help me write the assembler and operating system software back during my college days.  So in a way, instead of waiting for perfect inspiration or betting everything on day 1 of the New Year, instead I’m going to trick myself and do whatever it takes to change my lifestyle.

And now I’m off to boil eggs…

MR