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Discussion Starter #1 (Edited)
Someone recently posted a thread asking for some financial advice. Since I'm pretty knowledgeable in finance and I enjoy helping others learn about it, I wrote up a long reply to his thread. I figured I would expand on that information in a new thread also which hopefully will make a difference in at least someone's life and finances. I know not everyone is interested in saving for retirement, but hopefully I can convince some of you it is very important to start saving now. The younger you are the better. Since it seems there are a lot of young people at ClubFrontier (including myself), this will be especially beneficial to you, as the longer your money has to grow, the more power of compounding will help you. If this sounds like something that interests you, please keep reading. I will warn you the thread is very long, but I've done my best to summarize some good information for you guys. If you're not interested, click here to be returned to ClubFrontier!.

Rest assured there is no marketing with this thread. I have no ulterior motives; my only intent of this thread is to inform and help my friends here at ClubFrontier to learn about investing. This is very basic knowledge, and should only be used as a starting point in your research of investing and personal finance. A great website to check out for further information is Investing for Beginners by Joshua Kennon.

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It's true what they say: Youth is wasted on the young.

I'm not going to get all sentimental about how responsibilities are nil and possibilities are endless. No, the real waste is the time young folks have to compound their money.

The One-Year $1 Million Challenge

At a certain age, if you:

* Max out your 401(k) contributions for one year,
* Max out your IRA for that same year, and
* Merely meet the market's historical 10% annual returns

... you'll wind up a millionaire by the time you hit retirement.

That age? Twenty-six. In 41 years of compounding at 10% annually, $20,500 ($15,500 in a 401(k) and $5,000 in an IRA) will turn into $1 million. And you'll never have to contribute another dime. Of course, inflation between now and then means that $1 million won't buy nearly as much four decades in the future as it does today. Still, it's a remarkable feat of compounding.

In fact, that's how you win the $1 million one-year challenge: You make time your biggest ally in amassing phenomenal sums of wealth.
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The preceding paragraph was taken from an article entitled "The One-Year $1 Million Challenge" by The Motley Fool, a leading online investment website. I highly recommend everyone finishes reading the article here. It shows you the power of compounding and an easily attainable way for people at any age group to become a millionaire. The earlier you start the easier it will be (and the less you will have to contribute).

The following paragraph is my reply to the thread I referenced earlier. There is some good information in the post, but it's intent was a response to a question. To save me the time of rewriting it for this thread's purpose, I will simply cut and paste his question and my response:

Question: Well I know the point of this stimulus bill coming in June is to boost the U.S. economy by spending it on anything you can. So, being the good American that I try to be I want to do my part in stimulating the economy however I really want to put that money in savings. So my question is, would I be doing my part by just throwing it in my daughters savings, OR would it be better to get a savings bond, mutual fund, etc. I know this is probably a strange question but I figured there has definitely been stranger asked on this question. thanks guys.

My Answer: This is the perfect opportunity for you to start a nice retirement or college fund for your daughter. I'm not sure how much you plan to put into an account for her, but let's assume you put in $900 (the amount you'd get for yourself and your daughter; not sure if you'd be putting in the additional $600 from your fiance)...well, for simplicity sake, let's just round up to a one-time $1,000 investment starting today. Over the long term, the stock market on average earns about 12% per year. We'll round down to 10% to account for inflation. To determine the amount you would have after XX amount of years, you would use the formula: $1000 * 1.10^XX

so, let's say you invested $1000 today for 20 years and it earned 10% real return per year. After 20 years, when your daughter is 21, the account would be worth ($1000 * 1.1^20) = $6,727. A general rule of thumb is you will double your money every 7 years. However, let's say you put this $1000 in an IRA for your daughter which you can not withdraw (without penalty) until she is 59 1/2 yrs old..so let's do that formula again changing the numbers around a bit... $1000*1.1^58=$251,637 in the account when she is 59 yrs old.

Here is a chart that shows the real returns (inflation adjusted) of the stock market (shown by the red line) from 1900 - 2004..As you can see, if you invest just one dollar in 1900, that one dollar would have been worth $719 in 2004. If it were $1,000, it would have been worth $719,000. Keep in mind this takes into account the stock market crash of 1929 and all the other business cycles that cause short-term volatility in the stock market.

I would recommend a basic index fund or mutual fund with NO-LOADS and low-fees. You want a fund with no-loads and annual fee of less than 1%. My funds are all no-load and fees of only 1/10th of a percent. One mistake people do while investing is focusing too much on the short-term. Stocks are very volatile in the short-term, but that's the way our economy works. There are business cycles (as you can see if the graph where the line goes up and down), but the overall trend is always up. Now is the best time to invest while the stock market is in a trough. In case you are wondering what the difference between mutual funds and index funds is, I will explain. A mutual fund is a professionally managed portfolio of different stocks. There are fund managers who choose which companies to invest in based on different strategies (aggressive growth, moderate, low-risk). You should have a mix of stocks and bonds..bonds are less risky than stock. Some funds invest 100% in stocks (these are known as aggressive growth funds), but some funds invest in a combination of stocks and bonds. A rule of thumb is to take 120- your age, and that is the % you should invest in stocks. For example, a 30 year old should invest in approximately (120-30)=90% stocks, and 10% bonds. This is because stocks are riskier and when you are 30, you have more time to make up for volatile losses. But a 60 year old who is close to retiring would want to invest much more in bonds than stocks, since they are much less risky. Stocks always have higher returns than bonds..More risk = more returns. The thing about mutual funds is the fund managers charge an annual fee to invest in their fund. Studies have shown than fund managers do not consistently beat the market, so it would make more sense to invest in index funds (which have very low annual fees), which automatically invest in whatever index you choose (ie. Dow Jones, NASDAQ, S&P500, etc). Investing in index funds will mimick the performance of that index it's following. A good technique is dollar-cost averaging..which reduces market risk..What I mean is instead of investing the full $1000 on one day, spread it out over months, this way your base cost is averaged over many months. For example, assume you invested $1,000 on May 1, 2008...the price of your mutual fund may be $100 per share on that day. You would get 10 shares. But let's say the value the next month went down to $92 per share. You account value would be less. The purpose of dollar cost averaging is spreading out your costs over time. This way, you invest $XXX each month, and the price may be higher or lower than $100 in the other months...You are averaging the amount of shares you get. This will usually make you get more shares. Hope I explained that ok. You can read more about that here.

You should also know there is risk involved in the stock market, you may lose money in the stock market, but if you stay in it for the long haul and have a balanced (diversified) portfolio, you have a better chance of success. Since you are new to investing, I would consult with a agent at a broker. I use Fidelity, and they have people you can chat with online. Be careful though, they will push you into investing in funds with loads (fee) and higher annual fees, so make sure to do your own research as well. Best of luck to you! A good starting point is:
Investing for Beginners by Joshua Kennon
If you have any questions after doing some research, feel free to send me a PM, and I'll be happy to try to help.
In case you're wondering my credentials, I will have my Masters degree in Business (took a lot of finance courses) in 27 days from now, and should have my CPA license (TX) in June assuming I pass the 4th exam next month.
(Red line would represent the stock market, blue and green lines are bonds and t-bills)

===End of Reply
 

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Discussion Starter #2 (Edited)
I couldn't fit everything on the first post, it said it was too long. lol

Here is the rest of my thread:

If you notice in the above chart, the market is volatile and goes up and down in the short-term quite a bit, but there is always a long-term growth trend. The following chart shows the business cycles which cause these short-term fluctutations:



These fluctuations are completely normal to business and our economy, and right now we are simply in a contraction phase. I certainly hope we have hit the trough, and are on the way back to expansion, but only time will tell. By the way, in case you guys don't know, the market is always bad during election year. Down times in the market are excellent buying opportunities!

One other point I want to add is be careful investing in your own company's stock. It is OK to invest in your company's stock, but do not let it take up a substantial portion of your portfolio. By working at the company, you are already exposing yourself to significant risk because your earnings are a result on the ongoing operations of the company. If your company were to go out of business (think Enron) and your entire (or a substantial portion) portfolio was made up of your company's stock, you have now lost your job and future earnings as well as your retirement account because the stock would be worthless.

I realize that some people may not be in a position to contribute the maximum allowed under the IRS, but the same principles can be used to contribute less over a longer period of time. All the broker firms have automatic contribution plans where you can automatically contribute whatever amount you want per month direct from your paycheck. It's never too late to start saving, and every bit you put in savings will make a difference, even if the amount is small.

Here are some statistics I found online:

The typical American household, headed by a 43-year-old, has retirement savings of $18,750.

The typical pre-retiree household (age 55 and up) has a retirement savings of $60,000.

Baby boomers between the ages of 41 and 54 have typically a retirement savings of $30,000.

Baby boomers have median total household personal retirement savings of $35,000.

Baby boomers who save in a 401k have an average 401k account balance of $80,000.

According to a survey, 51 percent of workers age 55 and up have saved less than $50,000 in retirement savings (not including the value of a primary residence). And 39 percent of workers in the same age group have saved less than $25,000 in retirement savings.

Another survey estimates that one in five pre-retirees age 50 to 64 has less than $5,000 in retirement savings.

A recent survey found that almost 70 percent of Generation Y workers (those 18 to 25 years old) don’t bother to contribute to a 401k. If an 18 year old were to simply save $2,500 each year from age 18 to 26 and never contribute again, he would have $1 million dollars at retirement.

That's it for now..I will add more depending on the direction this thread goes. I realize this is a truck forum, but I figured I would share what I know and hopefully help some people along the way. As I said before, feel free to PM me any questions you may have, or post up questions on here. I'm sure there are many other financial people on the forum also, and we can help each other. For those of you who actually read the whole thread, thanks! I hope it helped you.
 

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Agititan,

You certainly have depth of knowledge on this topic. But you should be banned from this Board! It's all about the next mod on ClubFrontier. You cannot save and mod at the same time.

I am of course, being very sarcastic in my remarks. Savings is far more important than the mod. But the mod has value today. Savings,....well savings may only have benefits in the future.

Do you think we're at the bottom? George Soros doesn't and predicts a wider meltdown of the financial markets.
 

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Discussion Starter #4
Agititan,

You certainly have depth of knowledge on this topic. But you should be banned from this Board! It's all about the next mod on ClubFrontier. You cannot save and mod at the same time.

I am of course, being very sarcastic in my remarks. Savings is far more important than the mod. But the mod has value today. Savings,....well savings may only have benefits in the future.

Do you think we're at the bottom? George Soros doesn't and predicts a wider meltdown of the financial markets.
Well, obviously people should prioritize their spending based on their needs and also things they enjoy. There is no point in saving everything away if you're not enjoying your life in the meantime. You should budget your necessities and a limited amount of non-necessities (like modding your truck!) and then save the rest. Since everyone has different financial needs and salary level, it will be different for everyone. The best option is save the maximum amount allowed by the IRS, but only a select few people will be able to save that much...but if you can, do it..the tax benefits are very good.

I think things are starting to be more steady, but it will take a while to recover and start expanding again. Regardless, it's a minute issue, because in the overall long-term picture, the trend is always growth. This will not be the last bad time in the economy, it's all part of the business cycle. Next year should be better.
 

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"My funds are all no-load and fees of only 1/10th of a percent."

I'd like an example of a mutual fund with an expense ratio of only .10 please.
 

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Definitely a wise thing to do at a young age. I am 27 now, and been at my job for almost 4 years. Only had 2 jobs in my life, the one I had through High School and college and the current one, which I call my "real" job (or the one that required the degree to get). The difference in pay between the two was quite a bit, and from the first check, I have been putting 16% in. Company matches 6%, with a possibility of up to 3% more. It surprises me how fast the money I have put in has accumulated, but the way I did it worked the best for me because I have never know what my paycheck would look like without that money taken out. I might cut back a little (will always stay at or above company match, as that is free money) when we have kids, but I will cross that bridge when I get to it.
 

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Discussion Starter #8
"My funds are all no-load and fees of only 1/10th of a percent."

I'd like an example of a mutual fund with an expense ratio of only .10 please.
Here are two funds:
FSMKX: Summary for SPARTAN 500 INDEX FUND INVESTOR - Yahoo! Finance
FSEMX: Summary for SPARTAN EXTENDED MARKET INDEX F - Yahoo! Finance

They have expense ratios of 0.10% and 0.09%, respectively. Minimum investment is $10,000 each. I also invest in some target retirement mutual funds. These have a higher expense ratio, but they automatically rebalance your asset allocation as you get older to less risky investments. I use Fidelity Freedom funds. I believe the expense ratio on that account is around 0.80%.

In no way am I endorsing and recommending these stocks to anyone...After research, I chose those funds based on my investment objectives. Read the prospectus' before you decide to invest in any stock or fund.
 

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makes since. im going to try to stick to this goal

$2,500 each year from age 18 to 26 and never contribute again, he would have $1 million dollars at retirement.

Should i wait and put in all (20,500) in an IRA and 401K at age 26, or make yearly payments of 2,500 up until 26. how should i split the payments.
 

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Discussion Starter #10 (Edited)
makes since. im going to try to stick to this goal

$2,500 each year from age 18 to 26 and never contribute again, he would have $1 million dollars at retirement.

Should i wait and put in all (20,500) in an IRA and 401K at age 26, or make yearly payments of 2,500 up until 26. how should i split the payments.
I would split it up into monthly payments. $210 a month from 18 to 26 would add to $20,500 contributions, but would use the technique of dollar-cost average. And assuming the 10% growth, should put you at or above $1million when you retire. Read this article here on the benefits of doing this:
Dollar Cost Averaging
 

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Discussion Starter #12 (Edited)
Oh, and here is some food for thought...$2,500 per year...if you think that is not possible to save that much...think again. $2,500 divided by 365 days in a year equates to only $6.85 per day. Just reduce your daily spending by $6.85 per day, and that will equate to $2,500 savings per year. Put that savings in your investment account from age 18-26, and you could easily never contribute any more again and still have $1 million at retirement. Of course, once you're used to saving money every month, you would likely want to continue saving, and then you'll have even more at retirement.
 

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Everyone should keep in mind that inflation will eat away at the $1 Mil. In 40 years, it will be worth $0.5 Mil. This equates to an endless stream of $2,000 per month in 2008 dollars. Still not bad.

I am going to add to Agititan's fine treatise. To underscore how important it is to start early, if a person wanted to save to $1 Mil but started at age 50, he would have to put in a lump sum of $240k. This is the amount when compounded at 10% yields $1 Mil.

To add more fire to this brimstone; within the next ten years, Congress will get off their duff and fix Social Security. You know what is going to happen. Something will be taken out of your pocket, either in more taxes or lower benefits.
 

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Great posts! Financial ignorance seems to be the norm; sometimes I think people don't want to know the truth because it might interfere with the joy they find in high living.

It used to be that people's spending was limited by what they earned, but now it's limited by what they can borrow and the amount often seems infinite. We live in a nation that rewards consumerism of big houses, new vehicles, cutting-edge electronics and exotic vacation destinations and it's all made possible by spending more than is earned. The average American household has $9,000 in credit card debt alone. Even the Federal government can't contain itself, having amassed a debt of $9 Trillion. That's $30,000 for each person in the U.S., and the debt and spending grow larger each year because Congress wants to help us with our problems. Go figure.

Live simply, save and don't worry with what the neighbors think.
 

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Discussion Starter #15 (Edited)
One thing I forgot to mention...don't even bother investing in the stock market if you have credit cards with outstanding balances. You won't find any stock or mutual fund that will yield you the amounts you will pay in interest on your credit cards. You will be far better off paying off credit cards first to get rid of the very high interest charges. Don't get me wrong..credit cards are a great thing...but you have to use them wisely. I've had credit cards since I was 18...I use them as cash..in fact, I rarely have cash on me...I charge everything....BUT I pay everything off as it comes due. I've never paid a dime in finance charges. Credit cards are basically an interest-free 30-day loan...Use it, but pay it off every month or those finance charges will eat away your investment earnings.
 

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. I've never paid a dime in finance charges. Credit cards are basically an interest-free 30-day loan...Use it, but pay it off every month or those finance charges will eat away your investment earnings.
I do that too and link it to a bank account and schedule it for auto pay so the cost is truly zero.
 

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thanks for the post, I'm 23 i have a roth IRA i invest in, I cant really afford the 4k per year. so i never really used my company 401k ( what i shame i work for a huge company ) i'm going to start it up very soon.

what do you guys think is better a roth ira or more $ in 401 k.
 

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Discussion Starter #20
thanks for the post, I'm 23 i have a roth IRA i invest in, I cant really afford the 4k per year. so i never really used my company 401k ( what i shame i work for a huge company ) i'm going to start it up very soon.

what do you guys think is better a roth ira or more $ in 401 k.
For someone under 40 or so, I would rank them like this:

1)Roth 401k
2)Regular 401k
3)Roth IRA
4)Regular IRA
 
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