Secure Investments

Savings Bonds are being offered to "investors" right now at rates ranging from 1.75% to 5% and at the same clip the rising prices charge per unit have just risen to 2.2% from 2%. I understand that the people most attracted to nest egg chemical bonds are those who are hazard adverse. But phone call me crazy, I don't see how person who is a self-described financially hazard harmful investor can warrant guaranteeing themselves a negative tax return on their money - because that is exactly what they are doing at such as low rates.

My experience managing investings states me that there are some people who are literally petrified of losing money. And who really desires to anyways? But if you inquire any fiscal adviser what the existent
after-tax charge per unit of taxation tax return on your money is, they will state you that you are in fact losing money if you put at these low rates – particularly if the money is held outside a taxation sheltered environment such as as an RRSP or RRIF.

If you see an investing at 2.45% for a twelvemonth when you are in a 38% edge tax bracket (depending on where you dwell this rate is for people who gain approximately $31,000 to $62,000 per year), and rising prices is 2.2%, your return is really -0.67%. That agency that on a $10,000 investing your one-year return is $9,933 – you lost $67. If your $10,000 investing were taxation sheltered it would really be deserving $10,024.46. You would have got really made $24.46 – not the $245 you thought you made!

The intent of investment is to acquire your money workings for you, not the other manner around. I can't assist but wonderment if people who are so hazard harmful that they always set their money in particularly "safe" investings simply aren't aware they are really guaranteeing they lose money. The study released with the launch of Canada Savings Bonds establish that security of nest egg ranked as the figure 1 precedence for 68% of those surveyed – ahead of possible charge per unit of return. But edifice in a negative tax return looks like we really necessitate is to be more than informed about where we're putting our money – not "safer investments".

My conjecture is that the norm individual still sees nest egg chemical bonds to be investments, when really they should be treated like their name states – as savings. Savings and investings are different. Investments are for long term growing of working capital and nest egg are for short-term needs. Sometimes we necessitate a topographic point to "park" some money for a specific intent such as as economy for a home, exigency funds, vacation money, etc. This is what nest egg are for. But, if we are so concerned about having adequate working capital for hereafter needs, that we are afraid to "lose" any money, then nest egg is not the topographic point for this type of money.

The logical manner to continue is to acquire educated on how to best do certain future demands are met and to work with person who can offer some simple tips to cut down the personal effects of taxations and inflation. Here are a few you can inquire about when you ran into with your advisors:

Interest is fully taxable. Are there a more than taxation efficient manner to put in involvement bearing securities – i.e., would it be better to throw them inside an RRSP or RRIF and have got your equity common finances outside the registered plan? Capital additions and dividends have got preferred taxation treatment and offering the possible for taxation planning. Find out how this mightiness affect your ain personal situation.

Interest is "deemed" to have got got been earned in the twelvemonth it was credited to your account, so if you put in compounded investments, where involvement isn't actually received physically into your custody until maturity, retrieve you must still pay taxation on the money you earned but haven't received
yet – therefore you are out of pocket the taxation owing with no hard cash received yet. If you have got involvement at the end of the twelvemonth you will be paying taxation on those net income in April of the adjacent year; however, if you have involvement at the beginning of the year, you don't pay taxation until the followers April – therefore you throw on to the full amount of your net income longer until you have to pay the taxman.

And finally, there are a batch of different types of investing hazard – rising prices and taxations are only two. The 1 most people really fear is stock marketplace risk, because this is the 1 that is most frequently discussed. But if you see this simplified illustration below you might understand why variegation – not just safety of principal, is really the ONLY manner to cut down investing risk. Below shows how two investors, each with $100,000 invested for a 25-year period.

Mr. & Mrs. Conservative invested $100 000 into 8% Government Bonds which accumulated $685 000 over 25 years.

While Mr. & Mrs. Investor invested the same $100 000 into multiple streams.

Invested $20 000 into gaming in penny pillory causing a 100% loss and a $0 value over 25 years.

Hid $20 000 under their mattress with 0% involvement creating a $20 000 tax return over 25 years.

Invested $20 000 in Treasury Bills at 5% interest. After 25 old age yielded $67 000

Invested $20 000 in Corporate Bonds at 10% interest, yielding $216 000 after 25 years.

Invested $20 000 in Blue Bit Pillory at 15% interest, yielding $658 000 after 25 years.

Investors Total:$961,000

Difference: $276,000 more than than the Conservatives

Maybe you don't have got got got $100,000, or maybe that's all you have and you're happy to still have your principal intact, but over clip the eroding of buying powerfulness from taxations and rising prices is a consideration that everyone necessitates to see and every small spot counts. Find out how you can avoid unneeded loss.

Debt and Financial Freedom Don't Mix

One of my least favorite subjects in the financial freedom arena is debt reduction. People use all kinds of reasons to justify their debt and it becomes a very emotional struggle to eliminate it. I am pleased that I have adopted the "Not So Easy" approach to financial freedom. That way I don't have to come up with any psychological approaches to achieving financial independence. Why pretend that something is easy - when it's not….

My article "Debt Reduction: The Weed-Out Course on the Road to Financial Freedom" generated quite a bit of discussion a few months back. In the article, I challenged Dave Ramsey's psychological approach to debt reduction and took some heat for it. An article last week, reminded me on that article and also why debt crushes dreams. Here are few paragraphs.

"What has happened in the past six years is extraordinary. The debt that has been accumulated will be with most of the borrowers for the rest of their lives. They have become debt slaves to the banks and tax slaves to our government. There are those in our society that will remain in perpetual debt. A debt that is almost impossible to pay off. Their debt game is how our society is being controlled and destroyed. Our children are bombarded on TV with ads or situations where the credit card is the preferred mode of payment. Upon entering college students are deluged with credit card offers. By the time they graduate they have $20,000 in card debt and $30,000 in studying loan debt. This debt in many cases stays with these graduates for life. The banks want you in debt from cradle to grave. They do not want consumers who regularly pay off their debt. They can't make any money off them.

These conditions make the bank the boss. This perpetual debt makes the consumer subservient, not just because his credit rating may be used against him, but it shades his political perspective as well. The debt is a privilege meted out by the all powerful bank whether it is your home or your credit card or your vehicles. You should bow down to MasterCard, Visa and America Express, because they are doing you a priceless favor."

http://news.goldseek.com/InternationalForecaster/1174499046.php

"Perpetual debt makes the consumer subservient" that statement alone is enough to inspire me to stay out of debt. I don't need Ramsey's or anyone else's gimmicks. Getting your debt under control is one of many "mind-shifts" necessary for anyone seriously considering walking the path to financial freedom.

Make it Easy - Your Financial Plan, Part 2

Let's review the 5 steps to a solid financial plan that were discussed in Part 1 of this article. The 5 steps in order are:

1) Eliminate all credit card debt


2) Contribute to a 401 K plan if possible up to the limit of the match


3) Save some money


4) Build an emergency fund


5) Invest in a one Stock Index Fund and one Bond Fund

Now, let's explore these 5 steps in a little more detail:


(1) Eliminate all credit card debt – Average credit card debt costs for interest are over 13 % for a standard credit card. If you pay off this debt, you essentially guarantee yourself on average a return on 13 %. Guaranteed! I would gladly accept this guaranteed rate of return on my investments. I think a certain peace of mind will also be obtained.

(2) Contribute to a 401 K plan if possible up to the limit of the match – If you are fortunate to get a match on your 401K, this is a great deal. Many companies will match something such as half on the first 6 % that you put in from your paycheck. This match equates to a 50 % return right off the bat. Most likely, you may also make your paycheck contribution as a pre tax deduction and saves some taxes also. If this option is not available to you, skip to the next step.

(3) Save some money - If you want a solid financial plan, you have to find a way to save some money. Those savings can be the 401K Plan discussed above. Or it can be a number of other things such as a Christmas Club, an automatic mutual fund monthly deduction or hiding money in the mattress (not my preference but if it works for you and you save, it is far better than no savings). Many articles are available of how to save and ways to save. But the message is – find a way to save.

(4) Build an Emergency Fund – This step goes hand in hand with items 2 and 3. It would be good if the emergency fund could be separate from the 401K. But if that is not practical, the 401 K could serve as the emergency fund. Note that you will pay a tax penalty for a withdrawal from a 401 K plan if your are less that 59 ½ years old. The emergency fund would cover about 6 months expenses and be in something like short term Certificate of Deposits (CDs) or a money market fund that can be readily turned into cash in your pocket. Many money market funds are available that are currently paying over 5 % interest.

(5) Invest in a one Stock Index Fund and one Bond Fund – If you have made it this far, you are now ready for an investment in a stock and bond mutual fund. I think that you can do very well with just 2 funds (one stock and one bond fund). For the stock fund, I would recommend a no load, low cost mutual fund that tracks the total stock market index or Wilshire 5000 Index. The cost annually is only about 0.25% (that is right, about ¼ of 1 percent). This cost equates annually to $2.50 (yes, two dollars and 50 cents) for every one thousand dollars invested. This Index fund will essentially give you the same return as the stock market in any given year with miniscule effort and cost on your part. A good no load bond fund will give you a smaller return on average than the stock fund but with less ups and downs (known as volatility). Now, there are lots of investment choices (probably too many) but all your really need are these two investments. Now many people spend their career attempting to beat the market and some do. However, in any given year, about 70 % of mutual funds fail to beat the stock market average return. Now if you love to study the stock market and companies and are willing to study for many hours, you can be more complicated with no guarantee of a better result. However, in terms of the return on your investment for the amount of time invested it is hard to beat a stock index fund and a simple bond fund. For the large majority of investors, this approach is clearly superior in my mind and allows you to minimize costs thus keeping more in your pocket or account. This approach does require patience to just put the money in the fund and leave it there. While Ibbotson Associates tells us that stocks have returned about 11% on average over the past 80 years, we also know that the majority of investors are unable to achieve this level of performance. Why is that? Because they trade far too often, moving in and out of the market in reaction to all kinds of news, rumors and emotions.

A simple way to determine the percentage to put in each fund is to subtract your age from 110 and put that amount in the stock fund. For example, if you are 40 years old, then put 70% (110-40) into the stock index fund and the remaining 30% in the bond fund. I particularly like the Vanguard family of funds. Now many experts may disagree with my approach but think about their motives. Many of these experts are making commissions off your investing activity and there is nothing for them to gain in my approach.

The steps are easy. The discipline may be harder. But with one step at a time, you can build a solid yet simple financial plan for now and for your future. There is no time like the present, why not start today? If not now, then when?