Financial Answers "IN SIMPLE LANGUAGE"

Ever wonder how long it takes for your money to grow, say to double in value.  Or at what rate of interest should you try and get to get your money to double.  Well read on and see how easy it is to get a good approximate idea of what you need.

 The Rule of 72

 You just inherited a bunch of money or you won a pile of money at the casino and you want to invest it to pay for your child’s education.  But looking at the costs of college today, and nine years from now, when your nine year old will be eighteen and going off to college is pretty scary.

You have $25,000 to invest and you know that that will not be enough so you need to at least double that in the next nine years. This will give you the majority of money your child will need for their education.  This will be a state college rather than a private college so hopefully if you can double your money to $50,000 and your child works part time it should be enough to cover the four years of college at a state university.

 Using the Rule of 72 you know you have 9 years before you need to double the money and get to the $50,000 amount you feel you’ll need.  If you divide 72 by the 9 years you get an answer of 8.  This 8 represents the amount of interest you will need to get on the original $25,000 investment to turn it into the $50,000 you need. 

 That means that you should put the $25,000 into an investment that will pay 8% interest over the next 9 years. You will then reinvest all of the interest the investment has paid you.  You will then have your $50,000 thanks to the magic of compound interest (interest paying interest on interest).  The Rule of 72 is not an exact formula.  It is only to be used to “estimate” the interest rate needed or the number of years.  Please keep that in mind.  Work with a financial professional to get more exact information.

 The Rule of 114

 So you say that you need to triple your money in order to have enough to meet your financial goals.  The Rule of 114 works similar to the Rule of 72.  You divide the number of years in which you need the money by 114 and it gives you the interest rate you will need to triple your money.  I have $50,000 and I need $150,000 in 10 years to have a significant down payment on a larger, newer home.  I would divide 114 by 10 years and I would have to get an interest rate of 11.4 percent to triple my money.  Once again, these figures are only close estimates of want is really needed.

 The Rule of 144

 I need to quadruple my money.  How do I calculate how long I need to quadruple my money?  You would use the same methods as the two previous formulas but using the number 144.  So you would divide the interest rate of 5%, a conservative interest rate, into the number 144 and you would need to wait approximately 29 years for your money to quadruple or increase by 4 times. 

Again these formulas are only to be used to “estimate” the interest rate or the number of years your money will double, triple, or quadruple.  This is important for you to know so you can understand what type and how aggressive your investments need to be to reach your goals.

 An 8% or 11.4% interest rate today, 2009, would be hard to achieve without taking on some fairly aggressive investments.  This is good information to know beforehand so you can be realistic about your financial goals.

 If you read this far there may be something about this post that you are relating to.  There may be some financial related pain In Simple Language is talking about.  Tell us your story.  We really do want to know.

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I am going to venture to guess that most of the people that read In Simple Language own, have owned, or understand what a mutual fund is.  For those of you that don’t understand what a mutual fund is let me explain.

 Mutual Funds

 A mutual fund is an investment container, similar to a bucket, in which a professional portfolio manager holds various types of investments.  Usually these investments are different types of stocks and bonds.  Now you pay this portfolio manager to watch over these investments and buy and sell what they think will make the best return or provide the most protection from loss for you the mutual fund owner.

 Now we all know what has been going on with the financial markets worldwide and especially in the United States.  It has been a financial nightmare for most of us.  The stock market dropped almost 50% and devastated our financial accounts almost overnight.

 This has created additional problems because if you have been watching the stock market it has dropped from its high of 14,164 on October 9, 2007 to a low of 7,062 on February 27, 2009.  An approximate 50% drop.  As of this writing we are only in the low 9,000 range.  This has caused everyone to become very nervous and very conservative with putting our money back into the stock market.

 That has led to many professional mutual fund portfolio managers to sit on the sidelines with a lot of your cash to invest but reluctant to do so.  You may be thinking that that is a good thing.  Maybe?  It would depend if you had picked the right mutual fund(s) to get back into.  Many funds are up from 10% to 50% in some cases.

 The Problem

 All mutual funds have expenses and you pay for them.  One of those expenses is the fees you pay for the salaries and bonuses of the professional mutual fund managers.  Did you get a notice from any mutual fund company that the fees for the salaries of the mutual fund managers were being reduced?  Fund managers are paid to buy and sell investments and make money for you.  If they are going to sit on the sidelines with your money in cash and not invest it they can’t make money for you.

 According to the Bank of America Merrill Lynch Fund Manager Survey, 41% of mutual fund portfolio managers were playing in safe by staying in cash.  That’s a safe and conservative position to take when things seem to be falling apart all around you.  But that is not what you are paying them for… especially for any lengthy period of time.

 Some fund managers have stated that they needed the extra cash because so many investors were cashing out of their mutual funds.  That is probably true to a certain extent.  But again these are professional mutual fund managers with a wealth of information and resources available to them to make these types of tough decisions.  So why are they still sitting with hundreds of billions of dollars in cash if, supposedly, the economy and things are beginning to turn around?

 Granted some fund managers have jumped back into the stock market but there is still hesitation with many of them.  Okay I don’t want to appear like I am picking on professional mutual fund managers.  Let me get to the point.

 My point is that even the investing professionals don’t really have a comfortable feeling about this market yet.  Even with all their expertise and resources many are still sitting on the sidelines.  You need to exercise caution with your own investments when you decide to jump back into the market.  Nobody seems to have a crystal ball on what to do.

 What all of this comes down to is if you can sleep at night with what you have done with your investments than that is probably the right thing for you to do.

 If you read this far there may be something about this post that you are relating to.  There may be some financial related pain In Simple Language is talking about.  Tell us your story.  We really do want to know.

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Copyright © 2008-2009 “All Rights Reserved”

 

Looking for a financial speaker or financial writer?  Contact Rich today at rsowa@insimplelanguage.com or call Sowa Financial Media, LLC now at (502) 569-1714.

 Check out the “SERVICES” tab above the beginning of the post for all available services.

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In Simple Language was originally begun back in April 2008 to provide a source of easy to understand financial education topics.  Since that time many more good sites have developed.  Let’s talk about some of the other sites available that you would want to look at.

 AICPA

AICPA (American Institute of Certified Public Accountants) has done an admirable job of helping to educate the American public on financial matters.  A lot of state CPA societies have risen to the challenge of providing information on a wide variety of financial topics and in some cases beyond.

Many AICPA financial literacy committees throughout the United States have been helping to promote more financial literacy in such topics as fixing your delinquent mortgage, handling credit card debt, and even what to do when you lose your job.  This is critical information to a less than financial savvy American public.  Our public schools have failed us miserably with financial education and now various professional organizations are stepping up to the plate to help remedy the situation.

I applaud the AICPA for its efforts in creating the 360 Degrees program to help with financial literacy.  I recommend you go to their site at www.360financialliteracy.org and check out what they have to offer.  I think you will find a wealth of useful information that you will be able to use in your everyday financial life.

Feed the Pig

Around 2007, the AICPA launched a new website directed at people in the 24 to 35 year age range.  This site at www.feedthepig.org was set up to help direct this age group to take better control of their finances.  If you are in this 24 to 35 year age group you should check out this site.  There is a lot of useful information on the Internet to help you get a better understanding of your finances and improve your financial literacy.

I can’t be specific to each state because of space constraints but I do want to point out a handful of specific programs around the country.  One such program is put on by the California CPAs called, “Financial Smarts for Teachers” program.  CPA volunteers do four hour presentations to teachers.  They cover such topics as retirement, savings, home ownership, and investing.  These are critical topics that affect all of us on a daily basis.

More Good Stuff

Here’s another site with lots of useful information.  The Virginia Society of CPAs has set up a site located at www.financialfitness.org. They have discussed such diverse topics as bankruptcy, borrowing from company retirement plans, and even talking to your children when you lose your job. 

When the tragedy of 9-11 happened in New York City, about a year later a financial literacy program was set up to help local victims with their financial matters.  You can see this site at www.moneymattersnj.com.

Certified Public Accountants have stepped forward, many providing financial literacy services for free.  I applaud them for that.  Maybe you have a story of how a CPA helped you for free.  If you do let me know and we can tell the world how they helped you and give them the applause that they may deserve. 

As you can see there are many groups and organizations out there that are working hard to fix the financial literacy problem that our country is wrestling with.  I have heard a lot of talk over the years about addressing this problem.  I have not seen a lot of action taken to fix this problem by the powers that be, the public school system. 

I am sure there are many more professional organizations out there that are also doing an admirable job like the AICPA.  Let’s hear from you so we can applaud your organization also.

If you read this far there may be something about this post that you are relating to.  There may be some financial related pain In Simple Language is talking about.  Tell us your story.  We really do want to know.

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Copyright © 2008-2009 “All Rights Reserved”

Looking for a financial speaker or financial writer?  Contact Rich today at rsowa@insimplelanguage.com or call Sowa Financial Media, LLC now at (502) 569-1714.

 

Check out the “SERVICES” tab above the beginning of the post for all available services.

 

Member One Southern Indiana Chamber of Commerce

 

 

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With all of the government spending creating huge deficits and the unrelenting printing of money by the U.S. Treasury, you haven’t heard much from the government about the inflation monster that is lurking in our future.  So listen up.  Here is one thing you may want to consider.

 

Here’s one of those TIPS

 

Where does one go or what does one do when they are worried about inflation and less than attractive investment returns.  One of the solutions for this situation may be TIPS… short for Treasury Inflation-Protected Securities.

 

You say you are not familiar with this investment.  Is this something new?  TIPS became available in 1997 and are issued by the U. S. Treasury Department.  TIPS are bonds in which both the principal and coupon interest (interest rate) are adjusted for inflation.  This adjustment is based on the CPI (Consumer Price Index).

 

The CPI comes from the U. S. Department of Labor, Bureau of Labor Statistics.  The CPI is a price representation or index that measures the cost of a market basket of consumer goods and services.  These would be things that are used for day to day living needs. Did I give you a headache yet?

 

Let’s put this In Simple Language.  Here’s a short lesson in investing with the U. S. Government.  The U. S. Treasury sells what are called notes and bonds to you, to institutions, to foreign governments, to pensions, to whoever wants to buy this type of government debt. 

 

U. S. Treasury Notes are used by someone who doesn’t want to tie up their money for more than ten years but at least for one year.  So they have a maturity or due day from one to ten years.  They are sold in increments or amounts of $1,000 as the minimum purchase.

 

U. S. Treasury Bonds are also sold in increments or amounts of $1,000 but the difference is that their maturities are greater than ten years.  So the bonds are for long term investors.  Many retired people use these notes and bonds to provide income on a regular basis.  U. S. Treasury Notes and Bonds pay interest on a semiannual basis.  Retired people can sit back and relax and get a check every six months from their U. S. Treasury Bonds and Notes.  The interest rate is set or fixed so they know what they semiannual check is going to be.

 

Here’s the difference with these TIPS

 

While U.S. Treasury Bonds and Notes are a very secure investment they have one inherent problem.  They have a fixed interest rate that may or may not keep up with inflation.  Here we are in a potential inflationary period looming on the horizon and we need to protect ourselves.

TIPS may be part of the answer.  TIPS are identical to U. S. Treasury Bonds and Notes in every respect except for what’s called their inflation-adjustment feature.

 

TIPS interest rate is determined just like U. S. Treasury Bonds and Notes through an auction process.  However the value of the principal is adjusted according to what is happening with the CPI (Consumer Price Index) and is also adjusted according to what is happening with inflation.  This provides a hedge for you against your money losing its value because of the rise in prices from inflation.

 

It’s difficult to get into the various nuances of the investments that we have discussed In Simple Language…not enough space in a blog post.  You really need to understand these investments and their effect on your overall investment picture.  In Simple language is giving you an option to help you protect your hard earned money from the ravages of inflation that are heading our way.

 

Before you run off and move all of your hard earned money into TIPS check with your financial advisor and see if this is an appropriate investment for your goals.  Some of you may think that this is the perfect answer while others may think this is too conservative.  Do your homework first.  Remember, it is your money.

 

If you read this far there may be something about this post that you are relating to.  There may be some financial related pain In Simple Language is talking about.  Tell us your story.  We really do want to know.

 

·         Please ask your questions of In Simple Language and we will answer you as soon as possible in the comments section of the blog article you asked about.

 

·         Please give In Simple Language your comments and suggestions about this post and/or future topics of interest to you.

 

·         Like what you read?  Send it to a friend.  Click on “share this post” right above leave a comment below.

 

·         Did you remember to bookmark this blog?

 

Thank you for taking the time to visit In Simple Language.  J 

  

Copyright © 2008-2009 “All Rights Reserved”

 

Looking for a financial speaker or financial writer?  Contact Rich today at rsowa@insimplelanguage.com or call Sowa Financial Media, LLC now at (502) 569-1714.

 

Check out the “SERVICES” tab above the beginning of the post for all available services.

 

Member One Southern Indiana Chamber of Commerce

 

 

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There’s still not a lot of good news for anyone to report.  We are muddling our way through this financial mess the best that we can.  Or so it seems.  I haven’t met anyone who hasn’t been impacted in some way by what has been going on in the economy.  We need some good news.

 

Our Banks

 

I think we all feel we need some good news for a change but the reality of the situation is that there isn’t a whole lot of good news out there yet.  The latest news on the state of our banks is not very good.  This reminds me of the mess from the Savings and Loan meltdown some years ago.

 

It seems that the list of problem banks in the United States continues to grow.  The last report for the second quarter of this year said we now have 416 banks listed on the problem bank watch list.  This may be a conservative figure for right now because we still haven’t seen the full fury of the commercial real estate mess the United States is in.

 

These 416 problem banks have combined assets of just under $300 billion.  This is up from the first quarter which reported 305 problem banks with assets of approximately $220 billion.

 

Most of the depositors in these problem banks will most likely be covered, in full, by FDIC (Federal Deposit Insurance Corporation) insurance.  This insurance was raised from $100,000 to $250,000 in coverage per account so most people will be okay.

 

The FDIC covers some 8,100 financial institutions and has upwards of $10.4 billion in its insurance coverage fund.  This is a far cry from what is needed if more and more banks go under.

However, the FDIC does have a $500 billion line of credit with the U. S. Government it can draw on which would add to the deficit.

 

Commercial Real Estate

 

As I had briefly mentioned above, the commercial real estate mess that we are in-and is not being mentioned-scares me because of its impact on banks and so many other parts of the economy.  If you look around you see a lot of empty store fronts and office space.  How are the owners and landlords of these premises and buildings paying their commercial loan payments to the banks?

 

We have already seen large shopping malls in trouble and many closing. We have seen the likes of major retailers like Circuit City disappear.  When a major retailer goes out of business can the owner of the leased property continue to make their payments to the bank?  This is a major concern for many of the smaller banks that may have been part of the commercial loan that was made to the owner of the commercial property.

 

Every time another property is vacated, for whatever reason, the owner of the building still has to continue to pay the loan or lose the property to the bank.  The bank doesn’t want to be in the commercial real estate business they just want their loan money back.

 

So you can see how the banks are in trouble and will be in trouble for some time to come.  The United States Government must continue to monitor the banks closely and help in any and every way possible to minimize any more bank failures.

 

The FDIC was created specifically to help protect you and me from losing our life savings in the event of a bank failure.  And this is a good thing.  But when the FDIC reports that more than one

in four U. S. banks was unprofitable between April and June 2009, I don’t know about you but that doesn’t make me feel very comfortable with our banking system.

 

Yes, the “big” banks are making a profit and it was reported that the U.S. Government made a profit of $4 billion from the bailout money repayments from the “big” banks.  That is good news.  However, there are a lot of “small” banks out there they are in trouble or about to get into deeper trouble because of this commercial real estate mess.

 

Stay tuned folks and let’s hope that I am totally wrong about all this bank and commercial real estate mess rolling towards you and me.

 

If you read this far there may be something about this post that you are relating to.  There may be some financial related pain In Simple Language is talking about.  Tell us your story.  We really do want to know.

 

·         Please ask your questions of In Simple Language and we will answer you as soon as possible in the comments section of the blog article you asked about.

 

·         Please give In Simple Language your comments and suggestions about this post and/or future topics of interest to you.

 

·         Like what you read?  Send it to a friend.  Click on “share this post” right above leave a comment below.

 

·         Did you remember to bookmark this blog?

 

Thank you for taking the time to visit In Simple Language.  J 

  

Copyright © 2008-2009 “All Rights Reserved”

 

Looking for a financial speaker or financial writer?  Contact Rich today at rsowa@insimplelanguage.com or call Sowa Financial Media, LLC now at (502) 569-1714.

 

Check out the “SERVICES” tab above the beginning of the post for all available services.

 

Member One Southern Indiana Chamber of Commerce

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