I love reading and my favorite genre is fantasy. I’ve enjoyed George R.R. Martin’s Game of Thrones books and am looking forward to seeing the books in their video incarnation produced by HBO. Since I do not have cable, or HBO, my options are to either purchase the first season on DVD/Blueray or pay $2.99 per episode on Amazon Instant Video. From a financial perspective, this small purchase contains a useful lesson on spending.

The retail price for the DVD is $59.99. Several stores have it in stock at the retail price and you can watch it as soon as you get home. Barnes and Noble sells it in their stores and, if you don’t mind waiting, it is also on their website, www.bn.com, for 44.99. Amazon currently offers it at a price of $33.99 with free shipping for Prime customers. Amazon also has venders already selling used copies as low as $22.99 plus shipping.

Although the cost is small, purchases like these add up and often cost more as they become part of our credit card balances. I remember when the Harry Potter videos were released. They started at retail with a few stores offering a discount. After a year, you could easily find them next to the magazines at your grocery store for $5. You can save a lot by waiting, even more by checking it out from the library!

When a product is hot and everybody wants it, the price is always high. In this example, it’s a difference of $20-$38 but the same logic applies to larger purchases. A two year old used car with low mileage is half the cost of the same model when it was new. Buying a flat screen HDTV is much lower now than when they first became available. As a matter of fact, they are almost low enough that I may finally buy one!

I’m looking forward to watching Game of Thrones, but I’m waiting for the library. I want to enjoy the show without playing a Game of Loans!

Thanks to Brad for finding this article in the Palm Beach Post, “Why are Americans avoiding stocks? Ask a Shrink”. Since the market drop in 1987, people have been focused on the market bottom instead of the top. In general, news focuses on the negative and the financial news of the past decade has lived down to expectations. But the reality of both short and long term market performance shows a different picture.

Since the fall of 2007 and 2008, the major market indices are up and dramatically. The two year returns for domestic large, mid, and small cap stocks, as tracked by the S&P 500, 400, and 600 returned between 20% and 31%. Emerging markets are up almost 10% and international stocks are modestly positive. The five year returns show emerging markets, mid and small cap domestic stocks up from 15-20% with large domestic stocks slightly negative and international stocks declining almost 30%. Twenty year returns for all indices are well into the double digits and that’s in a positive direction! But, focus on the news and your feelings are not likely to match the numbers.

I’ve worked with wealthy clients since the late eighties. They didn’t get there by shifting their investments constantly and they didn’t get there by focusing on their money. They got there by spending less than they earned, avoiding debt, and investing for the long term. If you want to become wealthy, here’s a simple suggestion.

Focus on your life, not your money. Invest regularly and don’t change strategy due to short term market news or gloomy forecasts.

image credit: Paul Puckett

I’ve always preferred to buy low mileage cars that are 2-5 years old because they often sell for less than 50-60% of their original sales price. I’ve financed a few of them and had car payments ranging from $151 to $275 per month. My Toyota Avalon passed 232,000 miles last month and began to have the minor problems that eventually lead to major repairs. Luckily, it sold quickly and I found a low mileage ten year old car at an affordable price.

Before finding that car, I stopped at a few dealerships to see what they had to offer. Wow, what happened to car prices over the past couple of decades?  In 2011, the average new car sold in the United States for over $33,000. Thanks to low interest rates and easy financing, many people are able to buy new cars but at a substantial cost to their long-term wealth. The higher your car payment, the less you have left to save and invest. Given the increase in sales prices, the average American is paying $350 or more per month!

I like well made cars and I enjoy driving. I would love to fly down the road in a BMW M3 convertible, but I’m not willing to sacrifice my future wealth for the privilege. Take a long hard look at what you really need for transportation. Consider the costs to your wallet now and to your wealth later.

Just $100 per month invested in a long term equity fund over a twenty year period may grow to $33,000 at a paltry 3% return or over $77,000 at a more historical rate of 10%!

Getting back to that Aetna advertisement. It is not your imagination, health insurance rates have risen much faster than other costs of living. The image above is courtesy of the Kaiser Family Foundation. It illustrates the cumulative changes in health insurance premiums, workers’ contribution to premiums, inflation, and workers’ earnings from 1999-2010. It is important to realize the data on this chart is purely from employer sponsored plans and does not include retirees or the self-employed.

The past decade had an overall inflation rate of 31%, or an average 3.1% per year. Earnings during the same time period increased by 42%, for those that kept their jobs throughout the decade! The rising costs of health insurance dramatically outpaced core inflation and wage increases with a 138% increase. Finally, in reaction to the increase in premiums, businesses passed this cost to the employees who saw the costs of their insurance rise by 159% in one decade.

To see the impact of this increase, let’s take a look at a hypothetical worker who was making $30,000 in April of 1999. Based on this data, by April of 2010, they were making $42,600. According to the Kaiser Family Foundation, the average health insurance premium in an employer sponsored plan was $5,791 in 1999 with the employer covering $1,543 and the worker paying the remaining $4,247. By 2009, the employer was paying $3,515 and the employee a whopping $9,860 for a total premium of $13,375.

Using the hypothetical worker, in 1999 their health insurance premiums represented 14.1% of their earnings. In 2010, these premiums represented 23.1% of their earnings!

We have very little control over the rising costs of health insurance, so I’m not suggesting you can, or should, reduce your expenses for insurance. My point is that we are often told our generation is less responsible, particularly financially, than previous generations. As a result, we may have feelings of guilt that we just don’t handle our money as well as our parents and grandparents. But, the reality is that we have costs our ancestors never experienced. As these costs eat up more and more of our income, we must focus more intensively on our spending.

But, we can only address the spending we can control. And our controllable expenses are rapidly being replaced by uncontrollable expenses like insurance premiums.

Funny, that’s the same problem congress is experiencing. In 1965, the Federal Government spent $1.8 Billion, or 1.5% of the Federal Budget, on health care. In 2010, the Federal Government spent 4820.7 Billion or 23.7% of the Federal Budget.

Isn’t it odd that the costs of health care has risen even with the Federal Government pouring so much money into it? Or, is the Federal Government actually a major cause of the rapid rise in health insurance premiums and health care costs?

Anthem Healthcare sent me an advertisement for their health insurance and priced it on a daily basis. “Now just $1.58 per day!” Naturally, that rate didn’t apply to me but to a hypothetical 35 year old “healthy” male. Surely their comprehensive database could have sent the quote for me as a 50 year old. In any case, you don’t pay insurance daily. That $1.58 day rate is paid at $47.40 per month or almost $600 per year, which for health insurance is pretty inexpensive. I called and my daily rate would be $5.04 per day or $151 per month or $1,840 per year. Still sounds good but did I mention this is for a plan with a $10,000 deductible?

The Anthem offer happened to arrive as I was reviewing my bills and expenses for 2012 and looking at the costs of my lifestyle on an annual basis. Quoting a daily price makes an expense seem lower. If you’re making $40,000 per year, $10 per day is chump change and far less than 1% of your earnings. Annualize this expense and it doesn’t seem so cheap. $10 per day is $3,650 per year or 9.125% of earnings!

The bill that got me thinking was my cable bill. The TV portion was $87.77 monthly or $1,053.24 per year! You do not have to be a mathematician, or need a calculator, to see the impact that can have on your retirement savings. With so many options available for streaming, particularly Amazon’s new offer to Prime Members of free TV shows and movies, and the availability of free digital broadcasts of local stations, we have decided to drop cable TV. You should know we only watch TV an average of 1-2 hours per day, so this isn’t as drastic a lifestyle change as it may sound.

Many of the expenses we take for granted are bills our parents never had to pay. Cell phones, cable, and internet were not available 50 years ago. All of these expenses combine to make it very difficult for our generation to save and invest. They are one of the sources of debt, particularly if you experience any periods of unemployment.

Over the next month, I’ll be sharing more expenses and how they impact our ability to save and invest for retirement. If you notice any in your own bills, please let me know.

According to the American Marketing Association, the definition of marketing is “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.” Basically, the purpose of marketing is to let you know about the products and services companies offer that have value for you. The first problem with marketing is that the catch phrases are often misleading and may cause you to buy inappropriate and expensive products. The second problem is the marketing message may blind you to the reality that no product is, in itself, a solution.

Investment products are typically positioned and marketed based on one of the following qualities; safety, growth, or some combination. Safety is the avoidance of risks.

Risks are perils, hazards, or other bad things that could happen to your money. Marketing in the financial services industry is very competitive and the temptation to use catchy yet misleading phrases is rampant. A recent case illustrates this very well.

Almost every major financial media outlet has discovered a new risk to investors. Evidently there is a risk you will live too long. Terrifying, isn’t it.  Google this risk and you will find articles and videos all over the web and from major respected media companies.

If living too long is a risk, you should also be concerned about the risks of winning the lottery, becoming a CEO, or discovering Richard Branson is actually your dad! There is no substance behind the risk of living too long. It’s just the marketing twist on the real risk facing investors, particularly retirees. The real risk is running out of money.

The risk of living too long is easily offset by smoking, eating lots of fats and sugar, avoiding all forms of exercise, or, if none of that works, a quick call to Dr Kevorkian the day before you run out of money. It’s quite simple to be “safe” from living too long. The risk of running of money is not so easily addressed.

To be safe from running out of money is only possible by addressing this issue early and consistently. If you want to be safe from the risk of running out of money, you must spend less than you earn, save, invest, and avoid non-mortgage related debt. You also must be willing to take some investment risk by putting some of your money in the stock market. And, if all that wasn’t difficult enough, you must have the patience to remain committed to all of these things regardless of market conditions.

Do not use investment firms marketing lingo as a source for your investment knowledge. The most difficult issue for investors is ignoring the garbage and focusing on time-tested, proven, approaches to managing your finances.

Photo Credit

Anyone who knows me, also knows how often I can be found at Starbucks.  Several locations fix an Iced Quad-Shot Espresso when they see me pull into the parking lot.  That is, after all, my preferred drink and has been for several years now.  Originally, my drink was a Grande nonfat, with whip, Mocha.  After several years, I chose a Grande Iced Coffee.  Then, my doctor suggested espresso since it has less caffeine and much less acid than brewed coffee. (I know it doesn’t sound right, but see references below). Even though it has a stronger flavor, espresso is lower in caffeine and acidity.

The other day, someone in line commented on my paying for my order without ever saying what I wanted.  It made me think about choices and how we make them.

We hear a lot about making choices.  Sometimes it is frustrating because we may feel we did not actually make a choice.  When I say, “Fear is a choice”, a common response is “I don’t remember choosing it!”.

Maybe, that’s because you didn’t choose fear today.  You may not have even chosen it recently. You may have it today because of a choice you made a long time ago.  Until you announce your new choice, people will assume nothing has changed.

We also hear that change is a constant.  While there is plenty of evidence to prove this true, most people rarely change.  Common sense phrases demonstrate this very well.

“You can’t teach an old dog new tricks.”

“Don’t mind him, he’s set in his ways.”

“You can lead a horse to water, but you can’t make him drink.”

We often have difficulty with relatively small changes that affect us.  Today, Sirius Radio changed their channel line-up. Bloomberg Radio has always been Channel 131 but is now found on Channel 113. Since most channels changed, most listeners will have to reset their favorite stations.  I bet many will think of the work and inconvenience this caused today. “Why did they have to mess up my day?” will be a common thought.

Given the many things we do each day, it is very understandable that change can be irritating particularly when someone made the choice for us. It may seem even harder to decide to make a new choice ourselves. But, we are always free to make a new choice.

You cannot change the past. The only power you have is now. Make a new choice, one that reflects who you are now. And keep making that choice until it becomes a habit. Fear really is a choice, why not choose something better?

Reference: Caffeine, Acidity

Photo Credit: Paul E. Puckett, Jr. 2011

(This post originally appeared on my blog, Whole Investor, with the title “Choices” in April of 2011)

Here are a few thoughts to consider as we begin 2012.

The majority of the money and investing related news for the past week are either focused on the past or the future. Every media outlet will have reviews of 2011 and predictions for 2012. This news trend will continue for the rest of January.

While it is helpful to look back at the past, don’t spend too much of your time looking in the rear view mirror. As you know, you may learn from the past but you cannot change it. Congratulate yourself for your successes and good decisions. Take note and learn from your mistakes.

Now is a good time to review your investment plan to make sure it is still consistent with your future needs and wants.
It is also good to look into the future. The past is certain and unchangeable. The future is uncertain and constantly changing. As you read and hear the predictions, remember there is no crystal ball. Nobody knows what will happen. This isn’t anything new. The future has never been certain, and it never will be.

But the past and the future have something in common. You have no control of either the past or the future and no power to act anytime but in the present.

My advice for 2012 is the same as it was at the beginning of 2011, or any other time. When you face an uncertain future, diversification and commitment are the keys to success.

Review your 401K and investment portfolio with a focus on your investments.

Here are a few questions you may want to consider.

• Are your investments appropriate for you?
• Do you have exposure to equities?
• Do you own large, middle, and small cap funds?
• Do you have exposure to international and emerging markets?
• If your time horizon is less than 15 years, do you own bonds or bond funds?
• Most important, do you have an emergency fund?
• Finally, if you have debt do you have a plan to reduce and eliminate it?

Numerous websites are available to help you analyze your investments. Personally, I like Morningstar’s website for investors which you can find at www.morningstar.com. Once you’ve confirmed your investment choices and your investment plan commit to it and stick to it.

Money is not your life so for the rest of the year, focus on your life and have fun!

Photo Credit

Let’s have a little fun and begin with an exercise. Begin by taking a break and go sit anywhere outside. Once your comfortable, take your hand and hold it about a foot in front of your eyes. It’s probably been a while since you really looked at your hands so focus for at least a minute on every detail. Study your nails or the lines in your skin for at least a minute.
This next step may be challenging but it is critical that you keep your focus on your hand without allowing your eyes to refocus. Now while focusing on your hand, glance past it at something in the distance. You will probably discover, if you keep your eyes focused on your hand, everything in the distance seems blurry.

If you do this for too long, you may get a slight headache because you are forcing your eyes to focus on something up close while looking at something in the distance.

When you think of the past, present, and future, you will realize that the only place you can take an action is in the present. You cannot change the past and you will never live in the future because when you get to the future it will be your present. Basically, you and I always live now and now is the only time we have power.

Since you can’t change the past, it doesn’t make sense to dwell on it. It is equally irrational to attempt to live in the future because it is only possible to live in the present. Living in the present, now, is a critical part of enjoying a fulfilling life. But, if you focus on the present, you may have a few challenges.

You are likely to bump into things, when you are walking or driving, if you focus only on where you are at any given moment. As children, we are constantly reminded to “look where you’re going”. It helps us avoid banging our knees, hitting our head, or wrecking our car. We learn to avoid pain by looking ahead.

I would suggest you consider this from an investment perspective. Investors can only act now. You cannot invest in the past and the future isn’t here yet. Investing is, like everything else, an activity that must be done in the present. But investors who focus on the present may slam into obstacles in their future. They may also spend the majority of their time reacting to short-term news by continuously changing their investments.

Successful investing requires a balance of your ability to act only in the present with the necessity of preparing and planning for your future. When you act in the present while focusing on your future you will discover the patience needed to stick to your investing plan. You will also free up time to actually live your life! Money is the means to provide for the lifestyle you want, but, money is not your life.

Act now based on what you would like to have in the future. Ignore the short-term and focus on your long-term strategy. Live now but look at the path ahead. Life is a journey not a destination. Live now and make sure to have fun!

Photo Credit: Paul Puckett 2011

I love to cook! A few years ago, I decided to try to bake the often dreaded souffle. NPR had a feature on The Science of the Perfect Souffle that made me crave the delicate and light texture of the aerated eggs for a nice brunch. There are a few challenges if you want a perfect souffle and NPR’s Joe Palca turned to Jeffrey Buben, owner and head chef at Vidalia, a restaurant in Washington, D.C, for the perfect souffle.

The really neat thing about souffles is they can be a main dish when the eggs are mixed with herbs or cheese or they can be an elegant dessert when fruit or chocolate are included. Either way, the texture and flavor of a souffle is well worth the effort, but, as the chef you must make sure to avoid two common errors or you will end up with a collapsed pile of eggs.

The first problem with a souffle is that it can be difficult to get the eggs to hold the air needed to keep the dish’s texture. The egg yolks must be removed before beating the raw eggs. Once you beat the air into the egg whites, you still have the risk of the souffle collapsing if you open the oven door or take it out of the oven too quickly. If you beat the air in and patiently allow the souffle to “set” before opening the oven door, you will be rewarded with a delicate dish worthy of the time and effort that are required.

Fortunately, my own experience with baking souffles has been successful. The process is similar to designing and maintaining an investment portfolio and the problems you may encounter are also similar.

There are two basic requirements that are critical to a well-designed and successful investment portfolio. The first is choosing the right ingredients and mixing them properly. This requires time and work prior to actually buying any single investment. You need to know the type of portfolio you want? Do you need income currently or is the purpose of the portfolio to grow and provide for your retirement many years from now? Without knowing your objectives, it will not be possible to select the right ingredients. Once you have chosen your objective, you must mix the different ingredients together to form an investment portfolio.

Many investors forget to take the advance time needed to determine their objective and choose their ingredients prior to buying the individual investments and mixing them together. This is a critical step and necessary if you don’t want your portfolio to collapse.

The second  requirement for a successful investment portfolio is patience. Opening the oven too look at a souffle can cause it to collapse. Looking at your investment portfolio too often may have the same effect. You also must have the patience to allow the portfolio to stay in the market until it is ready. If you take your portfolio out of the market, it may collapse and you end up with a disappointment far worse than the collapse of your breakfast souffle!

Photo Credit Flickr, some rights reserved, by David Turner