Clone Awareness Month 2014 - Week 4 - Asset Allocation

Clone Awareness Month 2014

Assets allocation is an important topic that only becomes more important as time passes.  To determine your target asset allocation you need to take into account Return and Risk.

Return:

When you are just starting out with investing your overall return makes less of an impact than the amount of money that you are investing.  However, as your account balances grow, your investment return is more consequential than additional investments.  Because of this you want to make sure that you are not investing too conservatively.

Risk:

In general stocks are considered to be more risky than bonds, and bonds more risky than cash.  This generalization can actually be misleading.  Risk is not a single dimensional problem.  Stocks are more volatile in general which gives them there apparent risk.  However, bonds also posses risk.  Specifically, bonds relationship to interest rates.  When interest rates increase bond prices decrease.  So, if we were to transition from a period of low interest rates like we have now to much higher interest rates this will negatively impact bonds.  The main risk with cash is inflation risk.  There are essentially no places to invest cash that will return enough to outpace the rate of inflation.  So, leaving money in cash puts you at risk if inflation picks up much faster than the interest rates that you can get.

Your Allocation:

The factors going into everyone's asset allocation are different.  To begin with you should consider what return you need to get on your money.  There are retirement calculators online that will let you put in how much money you have saved, how much you will invest each year and what percent you expect to get from your investments.  These calculators will then tell you what this will give you at retirement.  The higher the rate of return that you need, the more you need to invest in stocks.

The general rule of thumbs for years to determine you allocation to stocks was to subtract your age from 100.  So, if you are 30, you should have 70% of your investments in stocks.  Over the years since people are living longer in retirement this rule of thumb has been adjusted with some people advocating subtracting your age from 120.  So, if you are 30, you should have 90% of your investments in stocks.

You should expect stocks to return around 6-9% in the long term.  So, if you are 30 and use a retirement calculator that determines you need an average return of 9% you will probably need to be at the high end of the range mentioned earlier.

After you have determined the amount you need in stocks you can then divvy up you other money between bonds, cash and commodities.  Your second largest allocation will be to bonds.  You will want some exposure to commodities, but most likely no more than 5-10%.  You could also have a small allocation to cash.  You cash position should remain small until you are close to retirement.

Your goal for this week:

Your goal this week is to get an idea of what you asset allocation should be and then match it to what your asset allocation actually is.  If your allocation doesn't match what you think it should be, make a plan to get it back to your target and plan to check it every six months to make sure it doesn't get off target by more than a couple of percent.  Remember that each year your allocation in stocks will most likely be decreasing by 1%, so take that into account.

Clone Awareness Month 2014 - Week 3 - Review Tax Return

Clone Awareness Month 2014

As we mentioned previously, the goal of this month is to figure out what your clone has been up to over the past year.  One way to do this is to review your tax return.

The main reason that Clone Awareness Month is in May is because tax day is in April.  Just last month you were thinking about a lot of financial topics as you prepared your taxes.  You most likely had some thoughts of what you could change for the next year.  Well, this week it is time to take action.

Here are some examples.

• Did you notice that you weren't getting the full child tax credit or child care deduction, but were close to the cut off?  If so, you can decide to put a little more money into a pre-tax savings vehicle such as a 401(k) or IRA.

• Did you end up with a large refund or owe a large amount to the IRS.  It is time to adjust your W-4.  You may have heard the questions before "why would you give Uncle Sam a tax free loan?"  With interest rates so low recently it probably doesn't seem as important to minimize your tax return because having money sitting with the IRS isn't much different than earning .1% in your savings account.  However, it makes it easier to plan a monthly budget when you have a better idea of what your tax home pay actually is.  In addition, if you are a more natural spender as opposed to a saver, it is much easier to justify spending a large chunk of your tax return on splurge of some sort than it is pulling that same amount of money out of your savings account, which is where it should have been anyway. 

• Were you close to the cut off between the standard deduction and itemized deductions.  If so, make sure that you are keeping track of all of the items that you can be deducting.  If you are going to be just short of being able to itemize you might want to double up you deductions every other year.  For instance, if you are making sizable charitable donations try to make some or all of next years donations this December if possible.

• Are you managing your taxable investment gains well.  Try to minimize your taxes by offsetting any profits that you take with loses from other positions.

Taking some time now thinking about last year's tax return should give you a head start on next year's tax return and hopefully it will improve the health of you Clone.

Clone Awareness Month 2014 - Week 2 - The B Word

Clone Awareness Month 2014

As we mentioned last week, the goal of this month is to figure out what your clone has been up to over the past year.  There is no better way to see what your money has been up to than to see where the money is going day to day, month to month.

As you guessed this week we are going to discuss budgeting.  What B Word did you think we were going to discuss?

Budgeting is not a very popular or exciting topic.  That is because it can take so long to make a budget and to track your progress and there is very little immediate impact from creating it or monitoring it.  Also, because of basic human psychology the upside of staying on your budget isn't as high as the downside of missing your budget is low.

If you currently have a budget and are successfully implementing it, you get the week off.

If you don't currently have a budget you will be happy to read that the goal for you is not to create a detailed budget.  The goal for this week is to create a savings budget.  So, instead of planning how much you are going to spend in each and every category imaginable, you should instead plan how much you are going to save.  Just complete the three steps below.

1. Determine an amount that you can realistically siphon off of your paycheck.  You want this amount to be somewhat of a stretch, but you don't want to set yourself up for failure.

2. Automate the savings process.

• Clone Level 1 or 4 (Emergency Savings):  See if your employer will direct deposit your paycheck split across two accounts; your main account and your emergency fund account.  If not, set up an automatic transfer from you main account to your emergency fund account scheduled to take place when your paycheck is deposited.

• Clone Level 2, 5 or 7 (Retirement Savings): If you are using a retirement account through work these contributions should already be automated.  If you are using an IRA try automating the amount you want to save each month.

• Clone Level 3 (Credit Card Debt): Instead of just paying extra with your regularly scheduled payment try send additional payments once your paycheck comes in.  Minimize the time that money is in your account.  You have to think of this money as not your money, but the credit card companies money.  The less time it is in your account the less time you get to look at an account balance that is higher than it actually is.

• Clone Level 6 (College Savings): Similar to emergency savings, your goal should be to automate this as much as possible.  Try to set up a transfer from you main (non-emergency) savings account to your child's savings account.

3. Set a reminder for a month or two from now to try to up your savings amount*.

*If you are finding yourself hitting a plateau then you might need to start a standard spending budget to find out where you could squeeze some more money out.

Clone Awareness Month 2014 - Week 1 - Credit Reports

Welcome to Clone Awareness Month 2014

The goal of this month is to figure out what your clone has been up to over the past year.  It is a chance to see how things are going, how they may have changed since last year, and to plan and set in motion actions to improve things for next year.

Your mission for week 1 of clone awareness month is to review one or all of your credit reports.  This is actually a pretty easy process.  The three main credit bureaus have set up a website where you get to request one free copy of each report each year.  The website is www.annualcreditreport.com.  There are other sites that advertise on T.V., radio and the Web that offer free credit reports, but they are doing so by getting you to sign up for a trial of some service.  With www.annualcreditreport.com there is nothing that you need to sign up for.

One thing to note is that these credit reports DON"T contain your credit score.  Unless you are trying to get approved for a loan now your credit score isn't as important as making sure there are no errors in your credit reports.

When you go to request your credit reports on the website you will have the option of selecting which of the three you want.  As the site suggests you will probably want to get all three now if you are planning on applying for a loan soon.  Otherwise, you could decide to space each report out so that you are getting a report from a different agency every 4 months.  This might help you catch issues sooner that waiting to do all three once a year.

If you prefer to request your credit reports over the phone or by mail you can do so.  Check out the "Contact us" section of the web page.

After you receive your report(s) you should either save them as a PDF or print them for future reference.  It will make it much easier to review your report next year if you keep this years.  To review the report you will want to confirm that everything looks correct in general and make sure that accounts that you have closed in the past show that they are closed.