How Young People Can Get Rich Slowly

This excerpt is from "If You Can: How Millennials Can Get Rich Slowly" by William Bernstein.

Flickr/Petra

Today's young people can retire comfortably with $1 million in the bank. All it takes is starting early, spending 15 minutes a year rebalancing their portfolio, and avoiding financial professionals who are mostly concerned with making themselves money.

At least that's the message of William Bernstein, cofounder of investment management firm Efficient Frontier Advisors, who recently published the short ebook "If You Can: How Millennials Can Get Rich Slowly."

It clearly resonates. The book, available for free on his website and for 99 cents on Amazon, is being snapped up by readers, and a New York Times story about Bernstein has spent the last several days at the top of the publication's most emailed list.

The popular interest seems to be a combination of older people sharing the text with their young family members and unspoken anxiety about saving for retirement, Bernstein tells Business Insider. "Of course, what I'd really like to believe," he says, "is that I've successfully stoked latent public outrage over a retirement system that expects the folks who teach our kids and flip our burgers to somehow, against all odds, manage their retirement portfolios."

So how can you get rich slowly? Here's some of Bernstein's advice, excerpted from the ebook with his permission:

***

Would you believe me if I told you that there's an investment strategy that a seven-year-old could understand and that will take you 15 minutes of work per year, outperform 90% of finance professionals in the long run, and make you a millionaire over time?

Well, it is true, and here it is: Start by saving 15% of your salary at age 25 into a 401(k) plan, an IRA, or a taxable account (or all three). Put equal amounts of that 15% into just three different mutual funds:

• A U.S. total stock market index fund
• An international total stock market index fund
• A U.S. total bond market index fund

Over time, the three funds will grow at different rates, so once per year you'll adjust their amounts so that they're again equal. (That's the 15 minutes per year, assuming you've enrolled in an automatic savings plan.)

That's it; if you can follow this simple recipe throughout your working career, you will almost certainly beat out most professional investors. More importantly, you'll likely accumulate enough savings to retire comfortably.

But You're Still Screwed

William J. Bernstein

Investment advisor William Bernstein

Most young people believe that Social Security won't be there for them when they retire, and that this is a major reason why their retirements will not be as comfortable as their parents. Rest assured that you will get Social Security; its imbalances are relatively minor and fixable, and even if nothing is done, which is highly unlikely in view of the program's popularity, you'll still get around three-quarters of your promised benefit.

The real reason why you're going to have a crummy retirement is that the conventional "defined benefit" pension plan of your parents' generation, which provided a steady and reliable stream of income for as long as they lived, has gone the way of disco. There's only one person who can repair the gap left by the disappearance of these plans, and you know who that is. Unless you act with purpose and vigor, your retirement options may well range between moving in with your kids and sleeping under a bridge in the rain.

Further, the most important word is the IF in the above "if you can follow this simple recipe," because, you see, it's a very, very big if .

At first blush, consistently saving 15% of your income into three index funds seems easy, but saying that you can become comfortably well-to-do and retire successfully by doing so is the same as saying that you'll get trim and fit by eating less and exercising more.

People get fat because they like pizza more than fresh fruit and vegetables and would rather watch Monday night football than go to the gym or jog a few miles. Dieting and investing are both simple, but neither is easy. (And I should know, since I've been much more successful at the latter than at the former.)

In your parents' day, the traditional pension plan took care of all the hard work and discipline of saving and investing, but in its absence, this responsibility falls on your shoulders. In effect, the traditional pension plan was an investing fat farm that involuntarily limited calorie intake and made participants run five miles per day. Too bad that, except for the luckiest workers, such as corporate executives and military personnel, these plans are disappearing.

Bad things almost inevitably happen to people who try to save and invest for retirement on their own, and if you're going to succeed, you're going to need to avoid them. To be precise, five bad things — hurdles, if you will — must be overcome if you are to succeed and retire successfully:

Hurdle number one

People spend too much money. They decide that they need the newest iPhone, the most fashionable clothes, the fanciest car, or a Cancun vacation. Say you're earning $50,000 per year, 15 % of which is $7,500, or $625 per month.

In this day and age, that's a painfully thin margin of saving, and it can be wiped out simply by stringing together several seemingly innocent expenditures, each of which might nick your savings by $100 or so per month: a latte per day, a too-rich cable package, an apartment that's a little too tony, a dress or pair of brand-name sneakers you really don't need, a few unnecessary restaurant meals and, yes, an excessive smart phone plan you could, if you had to, not only live without, but also function better without.

Life without these may seem spartan, but it doesn't compare to being old and poor, which is where you're headed if you can't save. You might even save the whole $625 in one fell swoop just by living with a roommate for a while longer, instead of renting your very own place. Again, as bad as having a roomie may be, it's not nearly as awful as living on cat food at age 70.

Let's assume you can save enough. You're not home free, not by a long shot. You've got four more barriers to get by.

Hurdle number two

You'll need an adequate understanding of what finance is all about. Trying to save and invest without a working knowledge of the theory and practice of finance is like learning to fly without grasping the basics of aerodynamics, engine systems, meteorology, and aeronautical risk management. It's possible, but I don't recommend it.

I'm not suggesting that you need to get an MBA or even read a big, dull finance textbook. The essence of scientific finance, in fact, is remarkably simple and can be acquired, if you know where to look, pretty easily. (And rest assured, I'll tell you exactly where to find it.)

Hurdle number three

Learning the basics of financial and market history . This is not quite the same as the above hurdle; if learning about the theory and practice of finance is akin to studying aeronautics, then studying investing history is akin to reading aircraft accident reports — something every conscientious pilot does.

The new investor is usually disoriented and confused by market turbulence and the economic crises that often cause it; this is because he or she does not realize that there's nothing really new under the investment sun.

A quote often misattributed to Mark Twain has it that " History doesn't repeat itself, but it does rhyme. " This fits finance to a tee. If you don't recognize the landscape, you will get lost. Contrariwise, there's nothing more reassuring than being able to say to yourself, " I've seen this movie before (or at least I've read the script), and I know how it ends."

Hurdle number four

Overcoming your biggest enemy — the face in the mirror — is a daunting task. Know thyself. Human beings are simply not designed to manage long-term risks. Over hundreds of thousands of years of human evolution, and over hundreds of millions of years of animal development, we've evolved to think about risk as a short-term phenomenon: the hiss of the snake, the flash of black and yellow stripes in the peripheral vision.

We were certainly not designed to think about financial risk over its proper time horizon, which is several decades. Know that from time to time you will lose large amounts of money in the stock market, but these are usually short-term events — the financial equivalent of the snake and the tiger. The real risk you face is that you'll be flattened by modern life's financial elephant: the failure to maintain strict long-term discipline in saving and investing.

Hurdle number five

As an investor, you must recognize the monsters that populate the financial industry. They're very talented chameleons; they don't look like monsters; rather, they appear in the guise of a cousin or an old college friend. They are also self-deluded monsters; most "finance professionals" don't even realize that they're moral cripples, since in order to function they've had to tell themselves a story about how they're really helping their customers. But even if they're able to fool others and often themselves as well, make sure they don't fool you.

10 Numbers That Can Change Your Life

By Paul Merriman


At some point, every investor who is planning to retire must confront his or her financial future. For most people, basic retirement planning can be distilled into 10 numbers.

As I worked with thousands of people over the years, and I saw over and over that when these numbers come into focus, the future starts looking clearer and less mysterious.

As you work to nail down these numbers, I suggest you regard the process as an exercise in discovery. Some items are easy to determine, while others may require some digging and careful thought. I think you will do a much better job if you use a competent financial adviser to help you get the right numbers and see what they mean for you.

One: Your current cost of living. This is the foundation of everything that follows. You could go into great detail on this, but a quick-and-dirty approach may be enough to get the process started: Identify your current gross income and subtract whatever you are saving for the future, including contributions to any IRA and employee retirement accounts. That's your cost of living, including taxes.

Two: The rate of future inflation. You will have to estimate this, of course. We all know that $100 isn't what it used to be, and inflation isn't likely to go away. Since 1926, inflation has been 3%. Over the years, that can do much more damage to your finances than you might think.

Three: The number of years before you will retire. This isn't as simple as it seems. We can't always control when we stop working. And baby boomers increasingly retire in stages. But getting a useful financial snapshot requires a number here. So for this exercise, choose a future date when you want to be financially ready to leave the workforce "cold turkey."

Four: Your inflation-adjusted cost of living in your first year of retirement. While you can crunch the number yourself with a financial calculator, this item can have lots of moving parts.

How will your taxes change? Will you spend more money on travel and hobbies? Less on commuting and clothes but more on health care? Will you move in search of lower housing costs, a better climate or to be closer to your kids? I suggest you use an adviser to help make sure you have not overlooked something important.
Five: The noninvestment retirement income you can count on. Probably this will include Social Security. It might also include a pension or rental income. Don't include interest, dividends and capital gains; they come into play next.

Six: The retirement income you will need from your portfolio. If you have the first five answers, this one requires only simple math. You know how much you'll need in that first year of retirement, and you know how much you can count on. The difference must come from somewhere else, most likely your portfolio.

Seven: The size of the portfolio you'll need when you retire. If your investments are properly balanced between well-diversified stock funds and low-cost bond funds, you should be able to withdraw 4% of your portfolio annually without much risk of running out of money.

Multiply the result you obtained in the previous step by 25. That's how big your portfolio should be on Day 1 of retirement. If this number seems impossibly large, don't panic. There are lots of things you can do about it.

Eight: The current size of your portfolio, excluding real estate and other nonliquid assets. For most pre-retirees, this number will be less than what you will need when you retire. The next items will help you build it up.

Nine: The amount you're saving for retirement every year. You should already know this from the very first calculation. If your annual savings plus your present portfolio will equal the result from Item seven, then you're in fine shape. More likely, these savings alone won't be enough. That's why you need some growth in your portfolio.

Ten: The annual return you need from now until you retire. While you can make this computation with a financial calculator, I suggest you discuss this point with an adviser to make sure you have reached a reasonable result.

The point of this exercise is to get a snapshot of your retirement readiness. I found an online calculator that, while it doesn't cover all the information I have described, will give you a quick idea of whether or not you are on the right track.

Several times I have recommended using a financial adviser to help you through these calculations, and you can do that without establishing a long-term relationship. You can hire one by the hour to check your work and make sure you have an action plan to get you where you want to go.

If you do that, these 10 numbers can change your life.

Save your way to $1 million

By Donna Rosato 

(Money magazine) -- Research shows that people who practice so-called burst saving are far more likely to sock away enough money for a comfortable retirement than those who don't.
According to a study by the research firm Hearts & Wallets, 64% of burst savers were able to build a nest egg equal to at least 10 times their annual pay, a common benchmark for a financially secure retirement.

They were also likelier than non-power savers to hit that goal no matter what age they started their savings regimen.
Says Laura Varas, a principal at Hearts & Wallets: "Once you've got a base of assets that really matters, it puts a tail wind at your back."
Part of a special report on How to reach $1 million, this story explains how saving aggressively for a decade can help you reach millionaire status by the time you retire.
KEY MOVE: Aim to save at least 15% of your income for a period of ten years or more.
HOW TO GET THERE
Get the timing right. Burst savers most commonly funded a ramp-up in their savings rate with money they received from pay hikes and bonuses, according to the Hearts & Wallets study. That way you don't feel the pain of living on less; you still take home more money, just not quite as much.

Power savers also often timed bursts to periods when their expenses fell or their income spiked. For example, many substantially increased contributions to their 401(k) or other retirement accounts after their children left home or during periods when both spouses were working.
Rein in your biggest budget busters. While small expenses do add up, it's not really buying daily lattes or the latest tech toy that most undermines your ability to save at a double-digit rate.
It's the really big bills, the five- and six-figure expenses like your home, car, and your kids' college education that ultimately do you in, says Leah Ingram, founder of the blog SuddenlyFrugal.com. "Getting serious about super saving may mean making some hard choices," Ingram says.
Case in point: computer programmer Scott Moore, 54, who's managed to build a net worth of $735,000 on an annual salary of $83,000.

Moore says the secret to his success has been keeping his housing and transportation bills low.
He bought a four-bedroom fixer-upper in an estate sale for $63,000 in 1995 and did most of the repair work himself. He's since paid off the mortgage and estimates the 2,700-square-foot house in St. Louis is now worth about $250,000. He owns a 15-year-old Buick Riviera with 154,000 miles on it and saves on gas and maintenance by mostly taking a train or bus to work and driving only when absolutely necessary.
The payoff: Moore expects to hit millionaire status -- $1.2 million to be exact -- by the time he turns 60 in six years.
Create multiple streams of income. Your salary can stretch only so far and you can cut expenses only so much.
Another way to supersize your savings is to supplement your main income with side work, says Christine Fahlund, senior financial planner at T. Rowe Price.

0:00/1:33How to save up to be a millionaire

Deploy existing skills or focus on something you are passionate about, like fundraising, event planning, or launching a sideline catering or craft business.
"Turn your free time into cash doing something you enjoy and it won't seem like extra work," says Fahlund.
A bonus to this strategy: "The experience and skills you build up from consulting or project work now is an excellent way to transition to a flexible retirement career," Fahlund says. That way, you not only stay engaged as you age, but also get to keep adding to savings.
GETTING INTO GEAR
Set a target. Studies show that people who calculate how much money they need for retirement end up saving much more than those who don't. T.Rowe Price's retirement income calculator can help you access your number.
Develop new habits. Set a rule: Every time you get a bonus, tax refund, or other windfall, put half into savings. At irs.gov, you can elect to have your refund automatically directed into a savings account, IRA, or savings bonds.
Auto-escalate. Some 40% of employers allow you to automatically increase your savings rate each year, says Aon Hewitt. Raise contributions one point a year for five years, and you're twice as likely to save enough for retirement as those who don't.

Basic Rules for Getting Rich

By Carla Fried, Anne C. Lee, Elaine Pofeldt, Susie Poppick and Penelope Wang | Money –

Part of a special report on 101 ways to build wealth, readers and experts weigh in with advice that will help you lay a foundation for accumulating wealth.
1) Focus on what's most important

ThinkstockIn achieving wealth, how you invest isn't nearly as important as how much you save.

Say you're 40, have $200,000 saved, with 60% in stocks, and are putting away 10% of a $100,000 salary (including company match). You have a 52% chance of retiring with 70% of your pre-retirement income, according to T. Rowe Price.

Boost your stock stake to 80%, and your chances improve modestly, to 57%. But if you boost your savings to 15% instead, you get to 69%.

Message: Stretch to save the most you can.

2) Make a family decision

62% of couples don't agree on their expected retirement age.

The age at which each of you will retire determines how much money you'll need. If you're among the multitude of couples that the Fidelity survey (cited above) found were not on the same page, make some time to talk with your partner about when you'll quit and what you'd like your life to be like.

3) 3 ways to get out of debt
ThinkstockCredit cards are almost never "good" debt, yet professional and managerial workers -- who theoretically should know better -- still carry a median balance on plastic of $3,300, according to the Federal Reserve's most recent Survey of Consumer Finances. Even such a small amount can be deleterious, since you're paying around 15% in interest.

Three ways to get out of the red:

Just pay it off. Behavioral research finds, oddly, that people often save in cash while carrying credit debt. That's a -15% rate on credit vs. 0.13% on savings. See the problem? If you've got enough cash to cover the balance, use it.

Get a 0% card. Interest-free balance-transfer offers are back in a big way. If you think you'd be able to pay off your total debt within 15 months, get one of these cards, and bank what you would have paid in interest.
Break out the tools. Can't pay your debt in 15 months? Use the tools at creditcards.com/calculators to come up with an aggressive schedule to erase the debt. The sooner your IOU is wiped away, the sooner you're back on the wealth-building track.


4) Fill up your 401(k)

Only 12% of 401(k) investors stash away the maximum amount allowed -- $17,000 in 2012 for those under 50 -- reports Vanguard. In fact, the average investor puts in 7.1% of pay, basically just enough to get the employer match.

Need motivation to pump up your percentage?

The value of your retirement plan at 65, starting at 40 with $0 and saving 7.1% of $100,000 salary: $614,000. If you saved the max, the value of your plan at 65 and starting at 40 with $0, would be $1,300,000.

Notes: Assumes 3% annual raises, 7% annualized return, and the 2012 maximum of $17,000.

But also save outside it. Those earning higher wages may need to save more than a 401(k) allows. Next best vehicle: a Roth IRA. The money is saved after tax, so withdrawals in retirement are tax-free. Couples with adjusted gross income up to $173,000 can add $5,000 in 2012 (partial contributions allowed up to an AGI of $183,000). Save the max for 30 years, and you'll net $505,400, assuming 7% annualized returns.

Don't forget to play catch-up. Who says there are no benefits of aging? Folks 50 and up can stash an extra $5,500 in a 401(k) and $1,000 in an IRA per year. But only 32% of those eligible take advantage, according to a TD Ameritrade poll. Too bad, since if you play catch-up on both a 401(k) and IRA each year for a decade, you'll end up with about $96,000 more in your account at 60.

5) Get the mix right
Source: Portfolio SolutionsYes, in 2008-09, investments plunged en masse. But over time assets tend to perform differently. So a diversified mix -- like the to the left, from Rick Ferri of Portfolio Solutions -- reduces risk to keep you on track.

6) Get a pro to help with the plans

Participants in 401(k) plans who receive some form of guidance earn annual returns an average three percentage points higher than those who don't, according to Aon Hewitt and Financial Engines. You may be able to get financial advice for free; an increasing number of companies offer it as a benefit. Ask HR.

7) Know your number
ThinkstockPeople who have calculated the total amount they'll need to retire have more saved than those who haven't, the Employee Benefit Research Institute recently found.

Not among the 42% of workers who've run this math? It's easy enough to do: Plug your info into the "How much will you need for retirement" calculator.

Strategize, don't improvise. Go a step beyond simply knowing the target -- know how to hit it.

A study last year conducted at the University of California at Irvine found that people who had a specific plan for their savings amassed between 28% and 85% more than those who didn't. "A formal plan makes you a more disciplined saver," says Chicago financial planner Cicily Maton. The "What you need to save" tool can help you determine how much to put away.

8) Money magazine readers speak up

Get progress reports

"We keep track of our net worth using an Excel spreadsheet, and we put all our monthly updates in a binder so we can look back on how far we've come. This motivates us to keep saving and investing and to keep our expenses to a minimum." -- Lori Watts, Allen, Texas

Make your savings untouchable

"I keep a separate savings account that I'm not able to view with my ATM card. I can only see it online. Doing this ensures that I do not take money out of the account -- it's out of sight, out of mind." -- Jay Albino, Stony Point, N.Y.

9) Set goals, but not too many
ThinkstockPeople who set fewer, more integrated financial goals saved nearly five times as much as those who set many unrelated ones, a recent study from the University of Toronto found.

Reason: With too many things to save for, you spend more time weighing priorities and less time taking action.

Limit yourself to three main goals -- say, retirement, Junior's college, the emergency fund -- then articulate a theme that describes them, like "improving my family's financial security."

How much life insurance coverage to buy

If you're going to buy life insurance, make sure you've got enough.

There is no simple answer to how much coverage is enough.

Some financial planners say you need enough insurance to replace five to seven years of your salary. If you have young children or significant debt, you should bump up your coverage so you have enough to replace as much as 10 years of your salary, they say. That would mean a person making $50,000 a year should have anywhere from $250,000 to $500,000 worth of coverage or more.

Remember, the sole purpose of life insurance is to replace your income in case you die, so that your dependents can maintain their current lifestyle.

Factors to consider include whether the surviving partner will have child care expenses if one partner is out of the picture. Do you have other assets on which to draw? Will your children be out of the nest soon? These, and many other factors, influence the decision on how much coverage you need.

Buying a whole-life policy doesn't necessarily mean you are fully insured. Because of the investment component of whole life, the policies are much more expensive than term. Don't simply buy less coverage, as it defeats the purpose of buying insurance in the first place: to cover dependents.

Next, you've got to figure out how long you need the policy

source: cnnmoney

Controlling your personal debt

Learn how to control your personal debt and accomplish your financial goals, by making your personal debt work for you.

1.Americans are loaded with credit-card debt.
The average American household with at least one credit card has nearly $10,700 in credit-card debt, according to CardWeb.com, and the average interest rate runs in the mid- to high teens at any given time.

2. Some debt is good.

Borrowing for a home or college usually makes good sense. Just make sure you don't borrow more than you can afford to pay back, and shop around for the best rates.

3. Some debt is bad.

Don't use a credit card to pay for things you consume quickly, such as meals and vacations, if you can't afford to pay off your monthly bill in full in a month or two. There's no faster way to fall into debt. Instead, put aside some cash each month for these items so you can pay the bill in full. If there's something you really want, but it's expensive, save for it over a period of weeks or months before charging it so that you can pay the balance when it's due and avoid interest charges.

4. Get a handle on your spending.

Most people spend thousands of dollars without much thought to what they're buying. Write down everything you spend for a month, cut back on things you don't need, and start saving the money left over or use it to reduce your debt more quickly.

5. Pay off your highest-rate debts first.

The key to getting out of debt efficiently is first to pay down the balances of loans or credit cards that charge the most interest while paying at least the minimum due on all your other debt. Once the high-interest debt is paid down, tackle the next highest, and so on.

6. Don't fall into the minimum trap.

If you just pay the minimum due on credit-card bills, you'll barely cover the interest you owe, to say nothing of the principal. It will take you years to pay off your balance, and potentially you'll end up spending thousands of dollars more than the original amount you charged.

7. Watch where you borrow.

It may be convenient to borrow against your home or your 401(k) to pay off debt, but it can be dangerous. You could lose your home or fall short of your investing goals at retirement.

8. Expect the unexpected.

Build a cash cushion worth three months to six months of living expenses in case of an emergency. If you don't have an emergency fund, a broken furnace or damaged car can seriously upset your finances.

9. Don't be so quick to pay down your mortgage.

Don't pour all your cash into paying off a mortgage if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the first $1 million of a mortgage loan. (If your mortgage has a high rate and you want to lower your monthly payments, consider refinancing.)

10. Get help as soon as you need it.

If you have more debt than you can manage, get help before your debt breaks your back. There are reputable debt counseling agencies that may be able to consolidate your debt and assist you in better managing your finances. But there are also a lot of disreputable agencies out there.

source: cnn money

Explaining stocks and the stock market

Stocks are more than just a piece of paper (and sometimes not even that)

1. Stocks aren't just pieces of paper.

When you buy a share of stock, you are taking a share of ownership in a company. Collectively, the company is owned by all the shareholders, and each share represents a claim on assets and earnings.

2. There are many different kinds of stocks.

The most common ways to divide the market are by company size (measured by market capitalization), sector, and types of growth patterns. Investors may talk about large-cap vs. small-cap stocks, energy vs. technology stocks, or growth vs. value stocks, for example.

3. Stock prices track earnings.

Over the short term, the behavior of the market is based on enthusiasm, fear, rumors and news. Over the long term, though, it is mainly company earnings that determine whether a stock's price will go up, down or sideways.

4. Stocks are your best shot for getting a return over and above the pace of inflation.

Since the end of World War II, through many ups and downs, the average large stock has returned close to 10% a year -- well ahead of inflation, and the return of bonds, real estate and other savings vehicles. As a result, stocks are the best way to save money for long-term goals like retirement.

5. Individual stocks are not the market.

A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

6. A great track record does not guarantee strong performance in the future.

Stock prices are based on projections of future earnings. A strong track record bodes well, but even the best companies can slip.

7. You can't tell how expensive a stock is by looking only at its price.

Because a stock's value depends on earnings, a $100 stock can be cheap if the company's earnings prospects are high enough, while a $2 stock can be expensive if earnings potential is dim.

8. Investors compare stock prices to other factors to assess value.

To get a sense of whether a stock is over- or undervalued, investors compare its price to revenue, earnings, cash flow, and other fundamental criteria. Comparing a company's performance expectations to those of its industry is also common -- firms operating in slow-growth industries are judged differently than those whose sectors are more robust.

9. A smart portfolio positioned for long-term growth includes strong stocks from different industries.

As a general rule, it's best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on.

10. It's smarter to buy and hold good stocks than to engage in rapid-fire trading.

The cost of trading has dropped dramatically -- it's easy to find commissions for less than $10 a trade. But there are other costs to trading -- including mark-ups by brokers and higher taxes for short-term trades -- that stack the odds against traders. What's more, active trading requires paying close attention to stock-price fluctuations. That's not so easy to do if you've got a full-time job elsewhere. And it's especially difficult if you are a risk-averse person, in which case the shock of quickly losing a substantial amount of your own money may prove extremely nerve-wracking.

At some point, just about every company needs to raise money, whether to open up a West Coast sales office, build a factory, or hire a crop of engineers.

In each case, they have two choices: 1) Borrow the money, or 2) raise it from investors by selling them a stake (issuing shares of stock) in the company.

When you own a share of stock, you are a part owner in the company with a claim (however small it may be) on every asset and every penny in earnings.

Individual stock buyers rarely think like owners, and it's not as if they actually have a say in how things are done.

Nevertheless, it's that ownership structure that gives a stock its value. If stockowners didn't have a claim on earnings, then stock certificates would be worth no more than the paper they're printed on. As a company's earnings improve, investors are willing to pay more for the stock.

Over time, stocks in general have been solid investments. That is, as the economy has grown, so too have corporate earnings, and so have stock prices.

Since 1926, the average large stock has returned close to 10% a year. If you're saving for retirement, that's a pretty good deal -- much better than U.S. savings bonds, or stashing cash under your mattress.

Of course, "over time" is a relative term. As any stock investor knows, prolonged bear markets can decimate a portfolio.

Since World War II, Wall Street has endured several bear markets -- defined as a sustained decline of more than 20% in the value of the Dow Jones Industrial Average.

Bull markets eventually follow these downturns, but again, the term "eventually" offers small sustenance in the midst of the downdraft.

The point to consider, then, is that investing must be considered a long-term endeavor if it is to be successful. In order to endure the pain of a bear market, you need to have a stake in the game when the tables turn positive.

source: cnnmoney

Choosing the right life insurance

What you need to know about life insurance, including types of insurance policies and deciding on how much coverage you need.

1. All policies fall into one of two camps.
There are term policies, or pure insurance coverage. And there are the many variants of whole life, which combine an investment product with pure term insurance and build cash value.
2. Insurance is sold, not bought.
Agents sell the vast majority of life policies written in the U.S. because the life insurance industry has a vested interest in pushing high-commission (and high-profit) whole-life policies.
3. Whole life is expensive.
Policies with an investment component cost many times more than term policies. As a result, many people who buy whole life often can't afford an adequate face value, leaving themselves underinsured.
4. Whole-life policies are built on assumptions.
The returns quoted by the agent are simply guesses - not reality. And some companies keep these guesses of future returns on the high side to attract more buyers.
5. Keep your investing and insurance strictly separate.
There are better places to invest - and without the high commissions of whole-life policies.
6. Buy enough term coverage to fill your needs.
Life insurance is no place to skimp, especially with rates at historic lows.
7. Match the term of the policy to your needs.
You want the policy to last as long as it takes for your dependents to leave the nest - or for your retirement income to kick in.
8. Buy when you're healthy.
Older people and those not in the best of health pay steeply higher rates for life insurance - so buy as early as you can, but don't buy until you have dependents.
9. Tell the truth.
There's no sense in shading the facts on your application to get a lower rate. Be assured that if a large claim is made, the insurance company will investigate before paying.
10. Use the Web to shop.
Buying life insurance has never been easier, thanks to the Internet. You can get tons of quotes - and avoid the pushy salespeople.

Whole-life policies, a type of permanent insurance, combine life coverage with an investment fund. Here, you're buying a policy that pays a stated, fixed amount on your death, and part of your premium goes toward building cash value from investments made by the insurance company.
Cash value builds tax-deferred each year that you keep the policy, and you can borrow against the cash accumulation fund without being taxed. The amount you pay usually doesn't change throughout the life of the policy.
Universal life is a type of permanent insurance policy that combines term insurance with a money market-type investment that pays a market rate of return. To get a higher return, these policies generally don't guarantee a certain rate.
Variable life and variable universal life are permanent policies with an investment fund tied to a stock or bond mutual-fund investment. Returns are not guaranteed.
The other type of coverage is term insurance, which has no investment component. You're buying life coverage that lasts for a set period of time provided you pay the monthly premium. Annual-renewable term is purchased year-by-year, although you don't have to requalify by showing evidence of good health each year.
When you're young, premiums for annual-renewable term insurance are dirt cheap - as low as a few hundred dollars per year for $250,000 worth of coverage.
As you get older, premiums steadily increase. Level-premium term has somewhat higher - but fixed - premiums for longer periods, anywhere from five to 30 years.


 source: CNN money

You’ve probably heard the phrase, "living within your means." But what does it really mean? Simply put, if you’re living within your means, you can pay for the things you need without getting trapped in more debt than you can handle. However, many of us believe that the only way to have nice things is to go into debt to get them. While that may be true for some large purchases such as a house or car, it doesn't have to apply to the other things we need in life. For example, when you buy a house, you take out a mortgage, and you may be in debt for as long as 30 years. That’s a long time, but this type of debt comes with benefits. The interest you pay on the loan may be deducted from your taxable income, and the equity—or money you have in the home—may be used for future loans. Making regular mortgage payments also helps you build a strong credit rating. However, buying food, clothes, toys, furniture and other items on credit is different. By doing this, you may be going into debt to buy nonessential things. Plus, the interest charged is not tax-deductible, so by the time you’ve paid for the item and all the interest, the cost is much higher than the original price. Simply put, you're robbing yourself—and your future. Instead of funding your dreams and the life you deserve to live, your hard-earned money fills the lender’s pockets. Wouldn’t it be better if the money you pay in interest could go into a savings account to help you reach your goals? Paying for everyday items by going into debt limits your choices because you’re constantly caught paying for yesterday instead of moving toward tomorrow. It can be challenging at first, but try to live within your means. Even better, try to live below your means.  source: managemymoney

Cut taxes without itemizing

By Kay Bell | Bankrate.com –

Taxes » Tax Deductions » Cut Taxes Without Itemizing

What do teachers, divorcees and people paying off student loans have in common? They can cut taxes, without itemizing.

These filers, along with other taxpayers who fit into special categories, might be able to claim at least one of the dozen-plus deductions found directly on Form 1040 without hassling with Schedule A.
Taxpayers who file Form 1040A can claim a few of these tax deductions on that shorter form, too.

Adjustments, not deductions

Officially, these breaks are identified as adjustments to your income. But they are popularly referred to as above-the-line deductions because you subtract them on Page 1 of your Form 1040 or Form 1040A, just above each form's last line where you enter your adjusted gross income, or AGI.
Taking these deductions will reduce your AGI, which in most cases, directly cuts your overall tax bill because figuring your AGI is the first step in arriving at your final taxable income amount. The less taxable income, the less you'll owe the Internal Revenue Service.
While these deductions mean that Form 1040 filers don't have to hassle with Schedule A, a few above-the-line tax breaks do require you to fill out another IRS form or work sheet. Still, that's a relatively small time commitment to shave some dollars off your tax bill.
Listed below, in the order in which they appear on lines 23 through 36 of Form 1040, are the current above-the-line deductions.
1. Educator expenses. With the educators' expenses deduction, teachers and other public and private school system employees can subtract up to $250 they spent on classroom supplies.
2. Certain business expenses. Unreimbursed business expenses also appear on Schedule A as a miscellaneous deduction. But some taxpayers can claim work-related costs directly on line 24 without worrying about a percentage threshold. You do, however, have to fill out Form 2106 or 2106-EZ.
The special taxpayers who qualify for this adjustment are military reservists, performing artists and fee-basis government officials. Although this collection sounds more like the cast of an avant-garde foreign language film than related taxpayers, lawmakers have deemed that anyone who falls into one of these categories deserves special tax treatment. If you are in one of these three fields, check the Form 2106 instruction book for filing details.
3. Health savings account deduction. A health savings account, or HSA, is a medical coverage plan that works much like an IRA. Eligible participants put money into an HSA where it grows tax-free and withdrawals can be made to pay medical, dental and vision-care costs not covered under a corresponding high-deductible health care policy.
4. Moving expenses. If you relocated for job reasons, some of your expenses can be deducted on line 26. You will, however, also have to fill out Form 3903.
5. Self-employment tax. If you're self-employed, you have to pay Social Security and Medicare taxes -- the amount collected from you as an employee and you as an employer. But you get to deduct half of those payments on line 27.
6. Self-employed retirement plans. If you have a self-employment pension plan, such as a Keogh or a SEP-IRA, deduct any contribution amounts on line 28.
7. Self-employed health insurance. As an entrepreneur, you now can deduct 100 percent of health insurance premiums you paid for yourself, your spouse and dependents. Don't forget to count what you paid toward long-term care policies. You get a partial break here, too. Enter the amount on line 29.
8. Penalty on early withdrawal of savings. On line 30, the IRS gives you a break when someone else slaps your hand. If you cashed in a certificate of deposit and paid an early withdrawal penalty, you'll find the amount on the 1099-INT or 1099-OID that the account manager sent you. The IRS lets you subtract that charge from your income.
9. Alimony paid. Divorced filers get a chance to recoup alimony payments on line 31. Be sure to include the Social Security number of your ex-spouse, so the IRS can make sure he or she reports the payments as income. Without the recipient's tax ID number on your return, the deduction could be disallowed.
10. IRA deduction. If you contribute to a traditional IRA, you might be able to deduct at least a portion of your contribution from your income. Precisely how much you can claim on line 32 of Form 1040 depends not only on your contribution amount, but also on your adjusted gross income and whether you or your spouse participate in a company-sponsored retirement plan. It requires some calculation, but run the numbers. This above-the-line deduction could help lower your taxable income.
11. Student loan interest. Up to $2,500 of the interest you paid on a qualified student loan can be subtracted on line 33. The loan can be for you, your spouse or a dependent. Note that there are income limits and married taxpayers who file separate returns cannot claim this adjustment.
12. Tuition and fees. The higher-education tuition and fees adjustment could reduce your taxable income by as much as $4,000. You'll need to complete Form 8917 and then enter the amount of tuition and fees deduction calculated there on line 34.
13. Domestic production activities. This above-the-line deduction was created to encourage "made in the U.S.A." manufacturing efforts. U.S.-based businesses that manufacture products domestically instead of sending the work overseas might be able to deduct up to 9 percent of the money earned or 50 percent of the wages paid in connection with the production effort, whichever is less. This tax break applies not only to such expected occupations as construction or farming, but also is available to certain creators of software, films or recordings.
You'll need Form 8903 to figure the exact credit that goes on line 35 of your Form 1040.
We're out of designated adjustment lines as we reach the bottom of Page 1, so that's the end of the nonitemizing tax breaks, right? Wrong.

Some specialty adjustments

Although line 36 simply instructs you to total your entries on all the previous adjustment lines, curious taxpayers who take a closer look at Form 1040 instructions will find even more possible ways to whittle away some of their taxable incomes.
Sure, several of these adjustments, such as reforestation amortization or repayment of specific supplemental unemployment benefits or court costs for certain unlawful discrimination cases, are for relatively limited tax situations. But a couple of the adjustments affect quite a few taxpayers.
Line 36 is where you enter any pay you got for serving on a jury, but then turned it over to your boss because you got your regular pay while at the courthouse.
Contributions to special medical savings accounts offered by some small businesses also are accounted for here. You'll need to fill out Form 8853 to determine the amount to enter on this catchall line.
So take a moment to check out all these other possible above-the-line deductions. Details are in the Form 1040 instruction book. If you're one of the select group of taxpayers to whom these apply, claim the amount and add the special notation spelled out in the instructions to line 36. The extra adjustments could really pay off.
Now it's time to add all these specially annotated line 36 amounts to the deductions claimed on the preceding 13 income adjustment lines. This final number goes on line 37. Once entered there, it's subtracted from the total income amount you entered on line 22. The result: your adjusted gross income.

A few also on 1040A

What if you don't want to or need to use the long Form 1040? You still get a chance to reduce your income if you file Form 1040A instead.
Four of these above-the-line adjustments -- educator expenses, IRA contributions, student loan interest and tuition and fees -- also can be deducted on lines 16 through 19 of that slightly shorter tax return.