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The Twenty-Minute-a-Week Budget: A Busy Couple’s Best Friend

February 15, 2012 by Average Joe 21 Comments

There are few times when I feel closer to Cheryl than when we’re talking about money.

I’m not talking about the stereotypical “You spent how much on coffee?” discussion, either. I’m talking about the heart-to-heart sit down where you walk through your dreams, goals and daily expenses.

It’s during these times that we both get excited because we’re moving in a unified direction toward concrete goals.

In theory, it should be easy. Talks about money should come naturally to two people who love each other and share much of their daily existence. You and I both know that it isn’t easy. You have to grind it out, because there are so many other, less important discussions that crowd out money talks. Things like “what are you laying out for dinner” and “what are we doing Saturday” get in the way of “what do we want to do with our money to successfully plan the rest of our lives?”

I tend to agree with David Chilton, author of the financial planning book The Wealthy Barber. Like him, when I read yet-another-blog-post about yet-another-budget-idea, I think “budgets are baloney.” Like him, I believe that people do what they have to do to make ends meet.

The problem is that we spend far more time planning the near end than the far end.

My personal story about why most budgets don’t work:

As a financial advisor, I’d work with people on their budget. We’d figure out how much the family should spend on dinners, travel and holidays. Everyone would leave the meeting happy, ready for the challenge. A couple weeks later when we’d meet again, I’d be disappointed that the budget hadn’t worked. The couple wasn’t able to stay within the confines of this well-laid roadmap.

At first, I blamed the couples I worked with. They weren’t trying hard enough. They were so focused on irrelevant stuff that they weren’t truly trying to make a difference in the one area of their life that could change literally everything about their existence: their daily spending, their children’s education and their retirement vision. Everything.

Then I realized that I wasn’t following the type of budget I was recommending, either.

Who was I fooling? Certainly not my wife and kids. Sure, we were saving some money for retirement and college, but we weren’t doing nearly as well as you’d think, based on the money we were making. We’d find a reason for another dinner out, a treat for the kids, maybe an expensive dessert. Just little things. Almost always forgettable.

It was depressing.

So, I searched for a better way. And, the good news, is that after lots of trial and error, I found a successful budget plan.

I use it. Many clients use it. It’s had an astounding success rate. I wish I’d kept track of the statistics. Sadly, I never thought about it in those terms at the time.

So, with the usual aplomb you expect here, this is my scientific assertion: “This budget works for tons of people, dude.”

The Premise

The real truth behind my budget plan is this: most couples don’t talk about money. That’s all that my budget tried to accomplish. Rather than writing down every penny or looking backward at expenses, this budget looks forward. We’re paying attention to last week’s expenses, but only so we don’t keep making horrible mistakes.

The truth in many families is that they operate like mine: one member of the team lives in a castle in fantasyland—while the other is focused on the bottom line. Often, it’s not even one person in fantasyland, but both partners are living only half of the truth. In my family it worked like this:

Daily expenses: Cheryl knows every penny and I’m in fantasyland

Investments and Planning: I know every penny and Cheryl is in fantasyland

At first, you may think, “This works for them! They’re delegating tasks that each of them are good at. This works.”

I don’t dispute that couples should delegate tasks. My budget allows for one member of the family to know the intricate details of their favorite area. The problem is that fights occur when the second partner has no clue what’s going on. I’m focused on our stock that tanked or the insurance application that’s been sitting on the table for four days (and Cheryl still hasn’t signed), while she can’t figure out why I’d go and fill the car up with gas when I work from home and never use it. We needed that money for other expenses this week, and now it’s spent and wasting away in the driveway.

So, all this budget does is accomplishes one single goal: it gets you talking about money.

You’ll be amazed by how transformative it is.

Early Budget Attempts

This is funny. Initially when I set out to design a “better budget,” I had this cerebral concept of a “family meeting”, but didn’t know how it would work. We chiseled this budget through trial and error. When you try my system—and I hope you try it–you’ll find areas that don’t work for you. Please write me about how you’ve adapted this budget to meet your own needs. I’m always happy to find another success story who’s taken this and melded it to their situation.

Cheryl and I decided to try out my meeting idea. We had lots of papers and stuff and we sat down on a Sunday afternoon.

Here’s a list of all the things that went wrong:

1) We felt like dorks. There was no agenda or plan, just a “meeting.” I realized nearly immediately that we’d actually need something to discuss during this time, or I’d just be staring at my lovely wife for an hour. I find that to be fun, but nothing gets done.

2) We meandered. Sometimes our budget talk became a “why is Nick not focusing on his math homework?” discussion. Not what we’re looking for.

3) Once we got rolling, the meeting ran really long and was sometimes contentious. I realized that it was awesome for a single meeting, but committing to that every week when we’re both driven and busy with daily tasks was impossible to ask.

4) We’d forget important papers. Sometimes we’d have the water bill and other times we’d have the 401k, but rarely did we have everything we needed to make informed decisions.

5) The meeting wagon often left without us. A month would go by without the meeting because life got in the way. Money disagreement weeds would crowd the nice budget tree we were growing.

Our Findings

1) The budget needed to include a data collection system. Chasing papers is frustrating and time consuming.

2) We needed a clear agenda so we didn’t just stare at each other.

3) It had to be a quick meeting. We set a goal of fifteen minutes. Usually we take twenty, but we’re still trying.

4) We’d have to focus not just on today’s meeting, but how we can improve the process. We’ve honed this process for over ten years now.

5) We acknowledge that we’ll fall off the wagon sometimes. It’s important to get right back on and keep moving.

The Budget

We use a basket like this near the door to collect all bills and investment statements.

1) Bills and investment statements go into a basket near the door. Cheryl likes to pay bills immediately when they arrive. Unfortunately, that didn’t work for our budget because the important part, talking about expenses, would be missed if she just paid it right away. We now pay bills weekly. Some of my clients that are paid monthly only pay bills once per month, but look at every bill weekly that’s arrived.

2) The meeting has a set time and day of the week. Ours is Sunday afternoon. This started when my kids were young enough that they’d nap, so we’d take care of the budget meeting during that time. Now we meet at that time out of habit. This has become one of my favorite times of the week.

3) Here’s the agenda:

Each person looks through every bill. Cheryl opens one and I open another. We look quickly through each bill and then pass it to the other person. In this way, each of us knows what every expense is that passes through the house! We’ve found so, so many mistakes on our bills that it’ll need to be a separate post. We’ve also discovered ways to lower our heating bills, water bills and cell phone packages, among others. Just because it’s right in front of us.
Each person looks through every investment and insurance statement. We ask questions about each one and either answer them or write them down.
We delegate responsibilities. Cheryl usually pays the bills (the part she likes to do) and I call the investment and insurance people. I also usually investigate changes to our cell plans or call about mistakes on the bill (the part I like to do).
We talk about big expenses coming up that week, month and year. The main reason for this part of the budget is that I can’t stand being surprised by major expenses like school clothing. Shopping bags at the entrance to our house have caused more fights in our marriage than any others.
We review the Mint expense summary (I’ve printed this off just before the meeting).

That’s it. Fifteen to twenty minutes per week and we’ve accomplished the following:

We both know what the bills are in our house and the investments.
We still focus on our areas of expertise and enjoyment
Major expenses all are discussed before they’re made

This budget has solved more fights among couples than any other system I’ve seen or created. It may be easy to rip holes in because it’s not very analytical or sophisticated, but it works. I think this is because it acknowledges that people are busy creatures, and if you have a career and family, any budget plan has to be flexible enough to keep up.

In the next few weeks I’ll begin digging into pieces of this plan. We’ll examine areas of the budget that we’ve been able to cut. We’ll talk about home improvements that can lower your expenses. We’ll talk about automating your household so that the twenty-minute-a-week budget is a reality.

Okay, that’s my story. Now it’s your turn: What problems do you run into with your budget? Are there tricks you use that successfully help you avoid “the money fight?”

When Charts & Graphs Lie

February 7, 2012 by Average Joe 13 Comments

Today is Part II of our discussion on charts and graphs. For Part One, you’ll want this link to:

Boner of the Week: Have You Been Lied To By Charts and Graphs

Sometimes, before jumping into an argument on how you feel about data presented in a graph or chart, it’s a good idea to focus on whether the data presented is actually showing you something truthful.

Our friend PK at dqydj.net (which is a fantastic blog on economics, politics and investing), helped us out with his wizard-ly chart skills and created a graph that hid four lies.

Here it is again:

There are FOUR lies PK is telling in this graph. Did you guess all four?

Okay, let’s reveal them:

Lie #1: Long Trend Line

Marketers are funny. They’ll draw some pretty long-range conclusions from very short term data. That’s true in this case. PK has taken the general line from October 2011 to December 2011 and—as if using a ruler—decided the next several months would follow similarly.

How does this apply to your financial picture?

– According to Bloomberg Businessweek, the stock market has had it’s best run in 23 years to begin a year. It’s a mistake to think that less than 40 days of good news will create 365 days of stock market bliss.

– Often, government statistics are revised. Basing any financial move on short-term and possibly short-lived data could wreak havoc on your financial life.

Lie #2: Small Sample Size

Check out PK’s graph again. He’s basing the entire graph on FOUR MONTHS of data before he gives you the equally tragic long trend line. In politics, where trends seem to change every three minutes, people often draw conclusions about an election many months into the future based on short term data:

– After Huffington Post (among others) reported on Rick Perry’s quick surge in the polls, articles such as this one that appeared in The New Republic—declaring that Rick Perry is going to be hard to beat—dominated editorial pages. There were only 15 days between the Huffington Post “surge” article and the “he’s probably gonna win” New Republic story. I wonder if any of these writers ever go back and read how reactive this seems several months later? Probably not, because using a small sample size to predict future results sells subscriptions.

– In the financial world, marketers of securities predict the bottom of an investment based on short-term data. It also holds with bloggers. Check out these predictions from the website Trading Authority. In the commentary, the “expert” uses short term data to predict an upswing in these stocks, predicting they “Could Jump 50 Percent”. Wow! Sounds like returns I’d love to have in my portfolio.

How did he do? Let’s look:

TradingAuthority Predictions on 6/3/2011

Ticker	Price 6/3/11	Price 2/5/12	Change	% Loss

SCHW	16.76	12.74	-4.02	-24%
WFR	9.64	5.39	-4.25	-44%
GHL	51.55	47.61	-3.39	-6%

Ouch.

These results weren’t graphed, but both the “Rick Perry is Uncatchable” and “These Stocks Are Going to the Moon” cases could easily have been presented to an unaware public in chart or graph form to make a bigger (untrue) statement.

(By the way, finding this site wasn’t hard. I just performed a Bing search for “Upturn in Stock That Failed” and clicked on the first link that matched what I was looking for.)

The point? Don’t take short-term results and use them to predict long-term trends.

Lie #3: X Axis Compression

If you want to take fairly small results and turn them into “Wow!” returns, just compress the graph. Look at how thin PK has made this graph by squeezing months together across the X (bottom) axis. That “black diamond super difficult ski hill” drop would look more like a “bunny hill” if he’d stretched the graph across the page. Since your eye is drawn to the slope, a skilled marketer will change the degree of descent to reiterate whatever point she’s making.

Lie #4: Y Axis Stretch

Similar to lie #3 above, marketers will stretch data across the Y Axis (up/down) further to prove that there is far more movement than there truly should be.

– Beware people showing a stock “bouncing around” and then showing a chart which stretches the distance between prices.

– Remember, the inverse is also true: If a marketer wants to show a position as safe, they’ll compress the numbers to reduce the perceived volatility.

Here’s the Actual Chart PK Started From

The actual Bureau of Labor Statistics-derived chart has little in common with the “trend” chart we displayed above. But because PK wanted to show you quickly declining unemployment, he was able to manipulate this (true) graph to create a very, very wicked lie.

Want more on avoiding manipulative charts and graphs? Try this book: How to Lie With Statistics.

Okay, that’s my story, now it’s your turn. Have you had to create graphs you knew were “untrue” in your work? Have you been presented with graphs that weren’t completely accurate? How many of PK’s tricks were you able to find before reading today’s post?

(I’d like to again thank http://www.dqydj.netfor his help on this two-part series. I wish I had his ability to show timely and accurate charts like he and his partners have at dqydj.net. For more great charts, graphs, politics, economics and investment discussions, visit his website.)

Emergency Fund or Roth IRA?

February 1, 2012 by Average Joe 13 Comments

If you’re teetering on the edge of a trip down investing lane–but aren’t sure that you’re ready to begin locking money away–a Roth IRA just might be like two tickets to paradise. Pack your bags, we’ll leave tonight.

I just made that up. I know it sounds familiar. Deal with it.

Unlike its nasty cousin, the “For Retirement Only With a Couple Exceptions” Traditional IRA, a Roth has some attractive properties for people who need money in a safe place but are thinking “I’d like to start slipping some cash into a retirement account.” Two tickets to paradise.

Of course, this paradise has some weeds, but what do you want? I never promised you a rose garden.

Just made that up, too. I know…it’s a gift. Thank you.

Paradise Ticket #1: Emergency Fund

While it still makes absolute sense to have “need it right now” money outside of a Roth IRA, here’s the magical property that makes this shelter a fine second tier cash reserve emergency fund: you’re allowed to take principal back out whenever you want. If you remove funds contributed during the current year, it’s as if you’d never made a contribution in the first place. If it’s beyond the first year, you may take out up to the amount you’ve contributed.

That’s awesomesaucewithacherryontop because if you need money quickly, there’s no reason why you can’t access the cash you contributed.

Before you fight me on this, let’s work through it logically:

– When you make a Roth IRA contribution, do you receive any immediate tax benefit? No.

– How can the government penalize you for something that you received no benefit from? They can’t.

You want proof? Okay, here’s the IRS applicable document, Publication 590, Individual Retirement Arrangements. Check out the chart on page 63 and then the ordering rules on page 64.

More proof? At the bottom of the page I’ve included links to two less well written articles than mine. No charge.

When will you get into trouble? If you try and take any interest the account has earned, you’ll pay penalties to receive this interest unless it’s been in the account for five years and you’re 59 1/2 (whichever is later) OR qualify for one of the few exceptions to the penalty (you’ll still pay tax on the money when you withdraw it).

Paradise Ticket #2: Retirement

If you don’t end up needing the money, because your car didn’t break down, junior didn’t need to be bailed out of jail (again), and the dog stayed out of your neighbor’s trash bins for a change, this money can be used for retirement. At some point, once you’ve completely secured the reserve, you can switch these funds into more appropriate investments for retirement.

Ultimately, of course, this is what a Roth IRA should be used for: retirement savings. By easing into the Roth IRA plan, you’ll build the account early so there’s plenty of money available when you’re ready to begin in earnest.

Like Steve McQueen you’ll have a fast Roth IRA machine and they’ll never catch you tonight.

The Downside

Oh, yeah, you weren’t thinking about having a Roth IRA as your only emergency fund, were you? A Roth IRA is, to put it bluntly, an absolutely rotten place for a first tier reserve.

Here’s just a sample of our problem:

– Remember when I said you can get money in a hurry? It’s not like the payday loan shop down the street or Louie on the corner. If your money is at an institution close by (like a neighborhood bank), you can probably take out funds now. If not, you’ll either have to wait for money to be transferred to a non-IRA account or until they can mail you a check. That’s not instant money. It’s “we’re going on an emergency trip to visit ailing Grandma in her cottage in the woods, and I paid for it with my credit card but don’t want to pay interest on the charge” money.

– If you take out all of your principal, you’ll only have some interest in the account. This money MUST stay in a Roth IRA for five years or until 59 1/2, which ever is later (as mentioned above). To take it out early, you’ll pay an IRS penalty. Although this may be a negligible amount on a small interest amount, it’ll make your tax return more complicated.

For these two reasons, I wouldn’t start a Roth IRA as your main emergency fund. Instead, only use it as second tier money.

What Type of Investment Should I Use, Joe?

It’s your cash reserve, silly. We don’t want to use anything that fluctuates at all. I know interest rates are poor, but if you’re only beginning, you’ll need the highest paying account the bank will allow while still keeping your money safe.

Don’t lock up the funds in a CD or you won’t be able to access the money, ruining why you used this strategy in the first place. It has to be a liquid account, like a savings account.

Once you have enough, transfer your money to a higher paying money market. Often this is between $500 and $2,000.

As soon as your cash reserve emergency fund is full, begin saving money into real retirement accounts that match your long term goals. Use a 401k for tax advantages today. Open a 529 plan for your children’s college.

Before long you’ll have so much cash they’ll be lining down the block just to watch what you’ve got.

So delicious.

How to Get Money In There Without Stealing It

The only way you’ll successfully save money is if you leave it outside of those pockets of yours. You know the ones. The I-can’t-hold-cash-for-longer-than-a-couple-minutes-without-spending-it pockets. Instead, make saving a bill.

Better yet, make it an automatic payment bill.

By setting up an automatic payment into your account you won’t have to remember to fund your account. Instead, money will flow directly from a checking or savings account into the Roth IRA, building it while you focus on other areas.

If possible, set up a separate direct deposit into your first tier reserve at your bank and then an automatic payment from the first tier reserve directly into the Roth IRA reserve account. That way, you’ll never have the money in your hot little hands.

If you want money in your hands AND to make Roth IRA contributions systematically, it’s going to be much harder, and there’s a good chance you’ll fail.

You can’t always get what you want. But if you set up an automatic payment plan you just might get what you need.

A Good Strategy

Once you’ve achieved your first tier reserve ($1,000 fast if you’re a fan of the bald dude on the radio, or other similar “quick cash” amount), split your automatic investment between your first tier reserve and a Roth IRA. This will help you ease into the investment world without the fear that the money is untouchable.

I’ve used this plan with nervous beginners to help calm them into rolling toward doing the right move: investing in their 401k where the money IS untouchable. It’s a good way to ease your mind.

…and before you know it you’ll be on your way to a million dollars. Then you could buy yourself a green dress.

But not a real green dress; that’s cruel.

No, I can’t stop.

Other Documents That Totally Agree With Me:

The Motley Fool: All About IRAs

My Money Blog: Can I Really Withdraw My Roth IRA Contributions at Any Time Without Tax or Penalty?

Holiday Travel – Wins and Losses

November 28, 2011 by Average Joe 1 Comment

****note: our Boner of the Week! post won’t appear this week because I was so incredibly focused on consuming pumpkin pie that I neglected to scour the internet for that just-perfect financial misstep. We’ll have some …um….stiff competition for next week’s prize, I’m sure.

I’ve finally returned from the big Thanksgiving trip, 2011 edition. Although I’m always good for a few blunders–like spilling ketchup on my sweater within five minutes of reaching the restaurant—financial missteps aren’t usually AverageJoe’s style. For your viewing pleasure, I thought it’d be fun to lay out the list of savings from my trip. And, just so you don’t think I’d a total prude, let’s detail the areas where I really stepped in it, money-wise. I list of these savings as “potential” because I don’t know if, faced with full retail, I would have really followed through with the purchase. There are so many ways to find a good deal, I’m becoming a curmudgeon when it comes to full-price.

Okay, here we go:

Got it right:

1) Hotel—I scored gigantic deals, thank you. First, I tapped the letters “Hotwire” into Bing (which doles out Rewards if I use it to search) in order to secure an $85 hotel room for $52 while on the road. The hotel had free breakfast, including waffles–mandatory on an AverageJoe holiday–so we avoided the cost of breakfast for me and two hungry teenagers. While in “holiday town” we also had our choice between my in-law’s basement or a hotel. Thinking quickly, chose the basement, but Mrs. AverageJoe overrode my decision. That’s when I remembered that I’m lucky enough to have a relative who works for a big, expensive hotel chain. He was able to put us up for four days at $56 each at an Embassy Suites. The normal rate is $115 per day. Cha-ching! Potential savings: $21 breakfast + $33 on-the-road hotel = $54, plus four days at Embassy Suites totaled another $236 in hotel savings + free breakfast savings of $84, giving us a whopping total of $374 in potential savings over what I normally would have spent.

2) Auto—We drove our most fuel efficient car rather than the most comfortable one. My Trailblazer, although completely paid off, is apparently the 2005 GasSucker model (never heard of it? Stop by sometime and I’ll give you a test drive. It’s fun to watch the gas gauge lower in real time as we tool around the neighborhood). In prior trips, we’d usually shell out $450 in gasoline expenses alone. This time, we opted for the 2011 Equinox, and only spent $212. What an incredible difference. Potential savings: $338.

3) Black Friday—This year I had a list of items I already needed or that my children wanted for the holidays. I also knew my brother in law would love DVDs. Best Buy had XBox games half off, a Toshiba portable hard drive I was going to purchase anyway for a third off, and some good DVDs for $.99 and $2.99. Potential savings: $215.

Oops:

1) Gasoline—I could have saved even more money in auto expenses had I used one of the gazillion apps available to find the lowest price gas stations. On two occasions I was stuck paying over $3.15 per gallon when only a few miles later (or earlier) I flew by stations charging as little as $2.97 (but usually around $3.03). Potential overpayment: $6.80.

2) Black Friday—I missed some specials only because of poor planning. By the team we reached Bed Bath and Beyond, my coupon had expired. I also decided not to wait in an ugly hour-long line to check out at KMart. By the way…I haven’t been in a KMart in forever. Does anyone else think it’s a total hole? It might have been just the Black Friday chaos, but the racks were a mess, there was no festive music playing and they seemed ill-prepared for the long check out lines. Hey, KMart, if you’re going to make us wait forever to pay you money, wouldn’t it make sense to make the wait bearable? I ended up buying my KMart purchase at Radio Shack, but I spent $14 more on a comparable item. Potential overpayment: $17.60.

3) Restaurants—I always check for specials before dining at home. In my rush to leave town, I totally forgot to research deals while out of town. That’s frustrating, because I ended up eating out a ton and paid full price for every meal. I have no idea how to calculate my potential overpayment, but based on 20 percent off, it was easily more than $50.

Final analysis: Man was my 2011 holiday travel was a blast! But it was also expensive, as are most vacations. All in all, my “potential” savings of $927 minus overpayments of roughly $74.40 totaled $852.60.

In the final analysis, considering that I stayed in comfort, drove a reliable automobile, and had the opportunity to beat my mother-in-law at Scrabble, I’ll take it!

How did you do during last week’s Thanksgiving holiday festivities?

Evaluate a Mutual Fund in 10 Minutes

November 9, 2011 by Average Joe 7 Comments

Part II of our thrilling series, Evaluating Mutual Funds (or How to Cure Insomnia)

I think whatever intern created yesterday’s headline inferring that my mutual fund post would put you to sleep REALLY messed up. Both of our other readers told me it was scintillating discourse. Mom especially liked it. Looks like an intern’s head is going to roll at Average Joe, Inc.

MOST ways to evaluate mutual funds are snorers AND take too much time. THIS method (using Morningstar) is like have a hamburger for dinner and then your spouse surprises the whole family with ice cream for dessert. All in 10 minutes. This saves you time for a beer and pizza. It’s exciting and time-saving without the Tums.

If you haven’t read yesterday’s post, I’ll implore you to start there, because iin that magical discussion I showed you how to get to the page we’re going to explore today. If you don’t want to read yesterday’s piece, just click this link to open a Mutual Shares page on Morningstar.com and follow along.

This lesson will be oh-so-awesome with that little bit ‘o background.

So….when we last left our hero, he’d pulled up ING Franklin Mutual Shares, Portfolio I and was staring at the page. You should be doing the same now. Today I’m going to show you my secret 5 point program to quickly decide if this fund is worthy of your money or not. Before we start, I’ll remind you, this isn’t the place to start! You should be already hunting for a specific type of fund based on your financial plan. Once you know what you’re shopping for, Morningstar will help weed out ugly ducklings. In investing the ugly ones don’t turn out to be pretty swans. They just become ugly ducks.

1) Purchase Info.

I don’t like to go into the store until I’m ready to buy. It’s the same concept here. We don’t want to waste our time evaluating a fund if we can’t buy it. Click the tab that says “Purchase” just below the name of the fund.

– First’, we’ll find out the minimum investment. Across the left column are statistics about how much it’ll take to buy this fund. Thankfully, it’s zero. I can afford that.

– Second, let’s make sure it’s open to new investors. The last two lines of this same column tell me that, no, it isn’t closed. Bonus.

– Third, I’ll see if it’s available where I have my money. I’m in luck. I do all of my investing through Matrix Financial Solutions. If I had used a bigger, more well-known firm like E*Trade, TDAmeritrade or another, I wouldn’t be able to use this fund. (No, this isn’t an advertisement for Matrix, and no, my funds really aren’t there….sometimes my readers are so very literal….).

So what, Joe? – We probably can’t buy this fund. That saves us a ton of work. We’re going to keep going for the sake of comparison, but there’s a reason I started here. Over the years I’ve wasted a ton of time evaluating funds that I can’t invest in….only to find out a half-hour into the exercise. There is good news if you like Mutual Shares. This fund has other classes available for purchase if you have money and like it. Search “Mutual Shares” and you’ll find several other versions of this same fund with a different cost structure.

…which brings us to the last point. Costs. The Morningstar front page on this fund listed the costs as “below average.” Click the “expenses” page to get a better idea. Expenses are such a big deal, that we’ll do a more in-depth look another day.

2) Management

I don’t want to evaluate a fund and find out there’s a new captain at the helm. So, quickly, we’ll click on the Management tab and take a look. Yup, all three managers have been there from the beginning. I may do more in-depth research on these people later, but for now, I’m satisfied.

3) Category

To compare a fund against it’s true competitors, let’s begin by verifying exactly what type of fund this is. To the right of NAV (the share price), you’ll find the header “Category”. It lists this fund as a “large value” fund. Further right, the header “Investment Style” shows a graphic Morningstar calls a “style box.” This box, which resembles a Rubic’s Cube, represents nine possible types of investment (This particular box is for stock-based funds. Bond based funds have a different style box.).

As you can see, the stock style box has nine sections. The top row of boxes represent large company investments, while the bottom depicts small companies. Guess what the middle is? You’re so smart! You’re right. It’s mid-sized investments. You’ll see that Mutual Shares is a large company fund. It invests in large firms.

The three columns represent value investing on the left, considered more conservative by many investors, a blend in the middle, and growth-oriented funds on the right. This fund trades in the value column.

Put these two criteria together and you’ll find that Mutual Shares is a fund which invests in large, value oriented stocks.

So what, Joe? – There’s a BIG “so what” here. Funds sometimes drift from what they say they’re going to do. Some analysts call it “cheating.” If I’m starting with my goal in mind and I think that a large, value oriented fund is the way to go, I may look toward Mutual Shares. But what if I looked at the style box and it showed up in the blend or growth column? – or the fund really bought more mid-sized companies? It might be a good fund, but not right for my goals.

4) Risk

Evaluating risk is something I love to do, especially since we had that fireworks fight in 6th grade and I nearly had my eye blown out. Long story….but let’s just say two things: I’ve never been particularly excited about looking like a pirate and I’ve become passionate about weighing risk before participating in any activity.

To find out how risky this fund is, let’s maneuver over to the “Risk” tab and click to that page.

You’ve seen how “those damned kids” know all the right buttons to press with their video games and whatnot. (That was a poor imitation of my dad, btw.) If you’re going to play the mutual fund game, it’s important to know the right buttons to press. These risk statistics look difficult, but it’s important to gain a basic understanding if you’re going to be a skilled investor.

A note to financial gurus reading this page….remember our audience. This is the 101 version. I won’t be covering all the stats and I’m probably going to do a quick fly-over only. Put your protractors away and let’s begin.

The area we’re going to focus on is the MPT statistics box in the center of the page. It isn’t important for our discussion what MPT means (although, to fill you with the soothing knowledge that your teacher has mad fly skillz, I’ll tell you that it’s Modern Portfolio Theory. Happy?)

Notice that you can tab between 3-year, 5-year and 10-year statistics. That should be the first clue that it’s impossible to know what risks the fund is going to take tomorrow. We can only evaluate the historical track record over time. There are two basic measures: against the S&P 500 and against the “best fit” index. Without getting into another diatribe, we don’t care about the S&P 500 here. We want to know how this fund compares with others it competes against in the “Large Value” sector we identified above.

On the 3-year record, you’ll see that Mutual Shares has a beta of 0.87 and an alpha of – 2.68. What the heck do these numbers mean?

It isn’t easy, and I didn’t learn it in a day, so you won’t either. But here’s the training-wheels version:

A beta below 1.0 means the fund has had a history of producing less volatility than the index it’s compared against. A fund above 1.0 takes more risk. So, if funds have betas of .5, .8, 1.1 and 1.6, the one with a beta of 1.6 is the hot tamale while the one with a .5 takes the least risk. A beta of 1.0, by the way, would mean that the fund takes the same amount of risk as the comparison index. Got it? So, with a beta of .87, this fund has taken less risk than it’s competitors.

So what, Joe? – If you’re looking for a large company value fund that takes big risks, this ain’t it.

The alpha number rates the manager of the fund. If the fund has a positive alpha, that means that the manager’s picks have added value to the fund. If the alpha is negative, the manager is taking away value. With a low beta, I’d expect this manager to also have a negative alpha when compared to the index. Why? A fund that’s geared to take less risk is going to make more conservative plays, resulting usually in correspondingly low results.

…and what do you know? The alpha IS negative….

So what, Joe? – We’re finding that this management team takes less risk and provides less value than some competitors. A fund with a low beta and high alpha (obviously) is my favorite type of fund. You’ll find those, unicorns and four leaf clovers in the same place.

5) Performance

Left of the Ratings & Risk tab, you’ll find the “Performance” tab. Click that.

This page opens onto a chart which shows the growth of $10,000 over time. Let’s look at the data below the chart. I want to focus on one line: “% Rank in Category.” This measurement tells us how well the fund has performed competitively against others during that year. in 2008, it’s rank was 61, meaning that 61 percent of all funds in it’s class beat it’s performance. It wasn’t much better in later years. Although in 2009 the fund was in the top 30 percent, it declined to be only top 72 percent in ‘10.

Let’s play a little Sherlock Holmes here. I’d bet that in 2009 the market was lower and in ‘08 and ‘10 the market was a little better. Why? This fund, according to the beta we evaluated above, should hold onto money better during poor years. True in this case?

Not at all.

Surprisingly, the fund actually beat the market in 2009 and was trounced in 2008 when the market was horrible and in 2010 when the market had a pretty average year.

So what, Joe? – You can see what we’re getting at here. This fund has been a mixed bag in terms of results, but on a daily basis takes less risk. This means there is still more for me to know. This fund is apparently doing something else with money to keep the beta low. It seems to be a fund that walks to it’s own drum. This could be good or bad. All it really means is that I need to know more. The good news? I know roughly what I’m looking for.

In 10 Money-Making Minutes we’ve learned:

– The costs of the fund are low, and I can only get it at one firm.

– The current management is responsible for the results I’m evaluating.

– Mutual Shares bills itself as a Large Value fund and it’s investment style reflects the same.

– The fund takes less risk and produces lower results than the average fund it competes against.

– The fund doesn’t seem to uniformly win in an up or down market.

– It might pay to dig into the management philosophy more so I’ll have a better idea of what to expect.

Clients used to pay me to show them how to quickly evaluate a fund. Today you got the same treatment for free. Yes, I am a heck of a guy.

– Joe

Okay, minions. Here’s a question for us to play with: What other criteria make your “10 Minute Fund Evaluation” list?

Researching Mutual Funds (or How to Cure Insomnia)

November 8, 2011 by Average Joe 6 Comments

Part I – Introduction to an Investment Analysis Tool: Morningstar

I’ve become a tool deviant. I feel like Tool Man Tim when I walk into Home Depot. My wife had to nudge me to stop grunting in the paint aisle last week; Cheryl is convinced I’m thinking about leaving her for a Wagner Paint Sprayer.

Unfair, unfounded and not true. I just grunted. It could happen to anybody.

My tool obsession began with financial planning tools. The good news is, if you like to carry a tax table in your pocket and wear tape around your glasses like I do, financial calculators are every bit as hot as any U joint in aisle 7 at Lowes. Financial geeks like me drool over an HP 12-C calculating 30 year mortgage payments at six percent interest.

Morningstar

In one of my favorite recurring dreams, I’m on a deserted island with an investment analysis web tool called Morningstar. This website, found at www.morningstar.com, is the single best place to find third-party mutual fund advice. Period. There aren’t any others nearly as robust available to the general public for free.

That doesn’t mean Morningstar is perfect, but I’ll show you what to avoid.

Morningstar is to mutual funds what Consumer Reports is to toasters. If you’re pretty anal about your toaster (and really, who isn’t?), Consumer Reports will point you to the absolutely best model at the lowest cost. Similarly, Morningstar divides funds into categories and then ranks competing funds against each other. Each fund has it’s own pages, displaying the inner-workings and past performance of the product.

In financial geek circles, it’s awesome.

Different than Consumer Reports, Morningstar can’t predict the future of the fund. This is an important distinction. People think a fund that’s highly rated is going to perform in the future. Don’t make this mistake. It’s become a cliché in the money management industry, but it’s true: past performance is no indicator of future results. Where your highly-rated toaster should rock-n-roll all over your bagels, a top-rated mutual fund could lose significant money tomorrow.

Using the Site: Front Page

Before you reach the front page, you’ll be presented with an advertisement. You may click “direct to Morningstar.com” to leave the ad at any time. This is the price you pay for solid advice. Morningstar is littered with advertising and not every link will work (some force you to sign up and others are only for paying members). Although you don’t need to ever register to use Morningstar, significant benefits are available for people who choose the free membership option. As a recovering money manager, I’ll recommend that you avoid the premium sections. These are generally sections that give you Morningstar’s feelings and advice about investments (there are some nifty tools also, but none that you can’t live without). I’d rather you learned how to evaluate funds on your own before paying for someone’s advice.

Morningstar’s front page covers many types of investments. The Chicago-based company has expanded over the years to also deliver ratings and advice on stocks, bonds, exchange traded funds, and closed-end funds. Although I’ll use this site as a secondary place to review my investments in these other areas, there are many competitors who offer similar services. In my opinion, Morningstar still shines brightest in the area where they began: mutual fund research.

From the front page, click on the “funds” tab to see the mutual fund front page. You’ll notice top stories in the middle, analysis tools on the left, and Morningstar favorites on the right. Only paid members can access most of the buttons on the right and several on the left.

Using the Site: Search Function

If you know the name or ticker symbol of the fund you’re hoping to evaluate, there is no reason to click the mutual fund tab. Nearly every page of the site allows you to type either the name or ticker symbol into the “Search” box at the top of the page. Find your fund on a drop-down menu that appears. Click on the link to bring up a page about your fund.

About Star Rankings

On the fund page, next to the fund’s name is most user’s favorite tool: the Morningstar star ranking. Morningstar ranks funds the way Zagat’s categorizes top restaurants. They use a five star system with five stars being the highest rank and one star being a near-sure sign to stay away.

A word of warning: don’t pick a fund based solely on the star ranking. Do you often disagree with movie critics? You’ll find that, much as critics pick top films based on criteria different from your own, it’s better to know how to review the fund on your own. Choose a fund for your money based on goals and evaluation of the fund management. A fund with a five-star ranking is likely to become bloated with lots of cash over the near future because dollars rush in when funds achieve a high score ranking. A fund managing lots of cash often has trouble investing it all, creating mediocre returns.

Tomorrow we’ll continue the tour of Morningstar. For our purposes, we’ll evaluate ticker symbol IFMIX, ING Franklin Mutual Shares Portfolio I. If you want to practice, find this fund page for tomorrow’s exercise.

I’d love to stay and chat longer, but I’m headed out to oogle alternative minimum tax criteria. Sexy!

How to Date Your Bank

November 1, 2011 by Average Joe 4 Comments

Before I begin my joyous rant, I must comment that I’m sure there’s no correlation between the massive amount of chocolate I consumed last night and the sleepies I’m feeling today.

None at all.

But, even a bad case of sugar-low can’t stop me from doin’ my monkey dance after I saw the news that Bank of America is dropping their $5 debit card fee. Much like Netflix recently was forced to step back from plans to split their service, Bank of America miraculously realized that screwing their customers might not be in their best interest.

Better late than never.

Choosing a bank is a little like choosing a spouse. It’s a tough decision. You don’t just walk in one day and say, “Hey, bank, wanna tie the knot?” You’re going to be together in some capacity nearly every day, so it might be better to date for awhile.

My favorite banks are much like my spouse: intelligent and low maintenance.

But you don’t know that at first. I used to be a Bank of America customer. Bank of America was the pretty girlfriend who said all the right things until I found the cap off the toothpaste. Then she became the wicked Bank of the West. When I wanted to talk about the toothpaste, she disappeared behind a phone bank of polite service people who “didn’t do it.”

To get the best bank possible, you have to date. Play the field a little. Sew your wild oats. Introduce a few of your friends over to see how the New Bank acts around the family.

Here are a few of the qualities I look for when deciding on the perfect bank:

1) Fees. Banks have, among others, checkwriting fees, teller fees, debit card fees, wire transfer fees and overdraft fees. I want a complete fee schedule before deciding on a bank.

2) Convenience. Is it easy to deposit and withdraw money? How responsive is the bank if I have questions? I mentioned that Fidelity will allow me to use my smart phone to deposit checks. How much more sexy can it get than that?

3) Range of services. I want to know what online tools are available. I love online banking, so I’m going to wine and dine these features before settling on a mate. Budget tools are also important to me. I need to be able to easily track my expenses. Banks with robust budget tools are going to get a second look from me.

4) Statements. This might not be important to you. My spouse doesn’t care for online banking, and wants a statement mailed to us. It must be easy to read. I know what you’re thinking. We also have an abacus at home to help the children with their math homework. Call us the Flintstones.

5) Interest rates. Is there a fairly high interest rate money market? I don’t use CDs often, but are their rates competitive? Use resources such as www.bankrate.com to decide if this bank is in the ballpark.

Those are the four most important areas to me. Maybe you have others. Much like dating, to some degree the mix of qualities one looks for in a bank boils down to personal preference. But also like finding a mate, it’s vitally important to become comfortable with the wide range of online and local banks to see what’s available. It’s better to be surprised about how lovely your bank still is many years later, holding your hand at age 80, rather than finding out too late that she’s been in your wallet again, stealing your cash or your breath mints.

Or leaving the cap off the toothpaste. I’m looking at you, Bank of America.

Ripped from the Headlines: Bad Holiday Economic Mood

October 26, 2011 by The Other Guy Leave a Comment

Oh, look! I can overspend! Awesome!

Hey, if it works for Law and Order, “ripped from the headlines” should work for something more awesome like financial planning, right?

The headline on my local paper today reads BAD ECONOMIC MOOD ARRIVES FOR THE HOLIDAYS. That’s nothing earthshattering.

I’d like to focus on the subhead. It reads, “ECONOMISTS SAY LACK OF CONSUMER CONFIDENCE DOESN’T ALWAYS MEAN LESS SPENDING.”

It should.

It doesn’t take a rocket scientist to understand the severity of the spending problem in America. We’re addicted to buying stuff.

It’s time to break the cycle.

Here’s three signs you’re headed for no-good this holiday season:

1) You head to the store without a budget. Stores spend all year waiting for the holiday season. With military precision, they lay out displays and aisle end-caps to claw money from your pockets. Need proof? How about this: Walmart has already announced that they’ll meet any price, even if you’ve already purchased the item! That’s how serious companies are about you. You need to be equally serious when you hit the mall to buy gifts.

2) You sign up for the department store credit card. I’m inundated each holiday season by “10 percent off today’s purchase if I sign up for the Kohl’s Visa!” …and other garbage promotions. 10 percent off is better than chocolate covered peanuts, but the gi-normous interest rate these store cards charge is where companies earn a monster profit.

3) You buy the holiday season on credit. This next line may sound silly. Ready? Here goes: If you can’t afford it, don’t buy it. The shame you’ll feel in January when the card statements arrive isn’t worth the fun of picking out that special remote control airplane for your favorite financial blogger and charging it. Almost, but not quite.

I know, not rocket science, but most financial planning concepts are simple. It isn’t that you haven’t heard of a concept, it’s that you don’t practice it.

So, to prep for holiday season, here’s your homework:

a) Determine your budget. How much are you going to spend on gifts? On parties? On ornaments and decorations?

Don’t stop there. We aren’t done with the budget yet. Check it twice, they say in the song. Can you afford these numbers and also your long term goals? Are you spending money on presents that should be placed into your retirement fund? ….that you should be spending on health insurance?

b) Place the credit cards “on ice.” I had a client who put her credit cards in a tupperware bowl, filled the bowl with water, and stuck it in the freezer. That way, she had a credit card, but had to think long and hard before de-thawing her funds (talk about frozen assets! Oh, stop, I’m killin’ it!).

c) Create a separate “holiday fund.” When it’s empty, holiday spending is done. Kaput. Finished.

If you want to get hardcore about it (and I know my readers are hard-core savers, aren’t you?), place the holiday fund at a separate bank with a separate ATM card. Set up direct contributions to the account each month from your primary checking account. This way, you’re filling the tank 11 months of the year and draining it one month.

You have choices around the holidays. The worst choice would be to let retailers control your spending habits. By heading into the mall with a plan and sticking to your guns, you control the economy that’s most important to you:

your own.

– joe