The 10% Rule for Investing

Everyone loves the idea of hitting a home run as an investor – buying the next Apple (APPL) when it’s at $10 a share and watching it climb to $100, then $200, then split, then climb to $300, $400, $500, etc.  That $10 investment can quickly become worth hundreds or even thousands of dollars. Unfortunately, for every home run you hit, you are just as likely to strike out. That is one of the inherent risks with investing. There are times when you can win big, and there are times when you can lose big.

But there are things you can do to mitigate your overall risk. For example, you can thoroughly research your investments. That won’t remove all of the risk, but it may help you reduce the number of clunkers in your portfolio. The other thing you can do is limit your exposure. And that is one of the greatest things you can do to ensure you don’t risk your retirement fund.

Playing with Mad Money – the 10% Rule for Investing

If you are the type of investor who wants to have a little fun and play your hunches, then don’t deny yourself the pleasure and the opportunity to make a nice return on your investment. But do it responsibly. Many studies have shown that a balance of index funds that mirror the major stock market indexes outperforms managed mutual funds over time. And of you go back and look at the greatest investors of all time, you will find that only a handful have been able to beat the markets for any sustainable measure. I know my investing skills aren’t as good as Wareen Buffet’s!

But even though I’m not Warren Buffet, I still want to try my hand at investing outside of the traditional index funds. For example, I would like to invest in day trading and Foreign Exchange (currency trading). I even opened a free demo account to learn more about Forex trading.

So if you feel like having fun or taking some risks with your investments, then consider maintaining a portfolio that is a balance of low cost mutual funds, bonds, and other “boring” investments that historically perform fairly well and are relatively hands off. But feel free to set aside around 10% of your portfolio as “Mad Money.” This is money you can use for whatever investments you feel like. The goal, is to limit your exposure to excessive risk and hurting your long term investment prospects. If you hit an investment home run, then your portfolio will grow and you can take some money off the table and place it in relatively safer investments. If you strike out on your investment, then you won’t lose too large a portion of your portfolio and you will be able to recover more easily than you would if you had staked a larger percentage of your portfolio.

It’s true that you may not earn as much money this way, but it is also true that you won’t lose as much either. And here is the kicker – you can use the 10% rule as a starting point. If you find that your Mad Money investments are paying off at a good clip, then you can consider letting the money ride in other investments, or adding a larger portion of your investments to your Mad Money portfolio. On the flip side, you might want to reconsider how much money you keep in your Mad Money section of your portfolio if you are consistently losing money on your investments.


New Rules for Bank Overdrafts- Did You “Opt-in”?

In the past, banks could automatically enroll their customers into overdraft protection plans for checking accounts.  The protection plans typically allowed checks and debit card transactions to go through even if you’ve spent all of the money in your bank account.  If you overdrew your account, you would simply be charged an additional $25 to $35 per item overdrawn.  As of August 15th, the Federal Reserve created new rules which require banking customers to “opt-in” (agree) to overdraft protection.  If you don’t opt-in for the protection, your debit card will be declined if you spend more than what’s available in your checking account.

Many customers have chosen to keep overdraft protection on their checking accounts, despite the hefty overdraft fees for each transaction that may go over their available balance.  For some, it happens so infrequently that the protection just saves them from a potentially embarrassing mistake where their card is declined in the store.  For others, they rely on the ability to overdraw their account just to make it through until the next payday and the $30 overdraft fee is well worth that convenience.

If you’ve declined overdraft protection, or you’ve chosen to keep it – you have options.  Here are some tips from a financial expert for not using overdraft protection and spending so much money in overdraft fees.

Connect Your Savings to Your Checking Account

Some banks will allow you to connect your savings account to your checking account.  If you accidentally write checks or swipe your debit card for more money than you have available, the bank can pull money to cover your transactions from your savings account instead of charging overdraft fees.

Most banks do charge for this service.  The average rate is around $10 each time the bank has to move money from your savings account to your checking account – but it is still less than paying overdraft fees.  Ideally, you’ll keep a close eye on your account balances though, and when you notice your checking account is getting close to being overdrawn, you can make a transfer from your savings account to your checking account yourself – without paying any fees.

Get a Line of Credit

A line of credit is a revolving ‘loan’ attached to your checking account.  It’s similar to overdraft protection in that the bank will pull from your line of credit to cover any purchases you make that go over your available checking account balance, but there is no overdraft fee associated with each transaction that gets overdrawn.  Instead of overdraft fees, you’ll pay interest on the amount of money you borrow from your line of credit.

Create Your “Own” Line of Credit

If you aren’t eligible for a line of credit through your bank due to credit reasons or because your bank doesn’t offer it, you can always create your own “line of credit”.  Deposit extra money in your checking account, but don’t include it as part of your balance on your check register.  If you overdraw your account, the money will be there to cover it.  No interest charges and no overdraft fees!  Keeping about $200 extra in your account should cover most accidental overdrafts, but remember if you do end up dipping into this reserve, you’ll want to replace it so that it’s available for the next time.


Inheritance; Your Financial Options

Aside from the obvious grieving period, the aftermath of the passing of a friend or relative can be a stressful period for another reason – namely, the process of dealing with any inheritance and the pressure of what to do with it once it is obtained. However, used wisely an inheritance can make a substantially beneficial impact on your finances and your future. There are a few things you can do with an inheritance that will ensure you are on a stronger financial footing in later life.

Take Your Time

Quite frankly, the first thing you should do when dealing with an inheritance is not rush into anything. You and your family need a period to grieve and making rash decisions can impact you negatively if you’re not careful. Take the necessary time to deal with the person’s passing before moving on.

Do Your Research

If you have a family solicitor, they should be able to help you make the necessary arrangements to deal with the deceased’s estate. The Government is a good source of information on this, offering detailed guides on what to do in the event of a received inheritance.

Pay The Government

The Government will want a cut of the inheritance in the form of an estate tax. The IRS works out what the deceased’s total net worth was and requires a percentage of that, which is often more than the relatives have hanging around in their bank accounts. One of the best ways to pay for inheritance tax is to sell unwanted properties, with ‘does-what-it-says-on-the-tin’ sites proving a viable resource when selling unneeded houses. Sites like these will often sell houses no matter what the condition, so don’t feel like you need to pay for repairs before trying to sell.

Erase Your Debts

Receiving a large windfall at an unexpected time is the perfect opportunity to clear your debts and improve your credit rating. Pay off any outstanding balances on credit cards or perhaps even your entire mortgage. Sorting out your debts will put you in a much better position for the future.

Invest Your Money

Research various bank accounts, ISAs and bonds that have increased interest rates and put your money aside into these. However, you should keep an eye on these accounts as interest rates constantly change – just because a particular account is a strong performer one year does not necessarily mean it will be so the next, so be prepared to move your money around.

Give To Family Members

Spreading the wealth amongst family is not only a great way to help those nearest and dearest to you, but will also help keep the memory of your deceased loved one alive. Giving the money away as gifts early will also mean the Government will have a smaller claim on your own estate in the future.

Enjoy Your Windfall

Whether you spend your money on more education to improve your career prospects or use it to buy stocks in a strong-performing firm, make sure you enjoy it – your deceased loved one would want you to.

real estate and mortgages

Are You Planning a Move Over the Pond?

Life changes don’t come much bigger than moving to another country and as such the decision to move overseas is not one made lightly. If you are considering moving over the pond to the UK, whether because of marriage, divorce or because of business, it pays to be aware of the property market over there.  If you are buying in England and Wales, in particular you’ll need to be aware of the buying process so you can avoid the nasty practice of gazumping. Here’s a quick breakdown of how property purchase works in England and Wales:

1)      If your own home is sold in the US you can get the process moving fairly quickly. In the UK it can be hard to secure a property if you don’t have a buyer for your own because the process can become so drawn out. For this reason some people use the services of property buyers to speed it up.

2)      Most UK homeowners fund house purchase through mortgages – these are usually approved in kind before offers are made, so that individuals know how much they are able to bid on a home. If you’ve sold a property in the US or have other savings than you’ll be able to skip this step and move on to the interesting bit!

3)      Choosing your new home and area is always the most exciting part of the buying process  – perhaps even more so in a new country. Seek the help of local experts to help guide you – family and friends and even forums. Also try looking at sites to help you find local agents and give you some guidance on prices you can expect to pay. They produce a monthly house price index that will give you an idea of the going rate across the nation.

4)      To secure the home of your dreams you’ll need to make sure you’ve got a good team in place – namely a solicitor and surveyor. Once you’ve had an offer accepted on a property you’ll need to move fast, because someone can still come in and make a higher offer right up until the day of completion.

5)      Once you’ve had a survey completed to make sure your property is structurally sound you should finalise a mortgage if you need one, if not move swiftly on!

6)      After contract exchange day it’s time to get everything rolling – that means having your goods shipped over from the States and/or shopping to fill your new home.

7)      Once the title deed is transferred into your possession on completion day and you’ve paid stamp duty and land registry fees paid, all you’ll need to do is move into your new home and pay any remaining legal fees.

Take your time to plan things out if you move to England or another country. Settling into a new area can be tricky and is even more difficult when you are in an entirely new country, so don’t put too much pressure on yourself to settle in straight away. Pursue your hobbies and interests through local groups and chat to colleagues and neighbors and hopefully you’ll feel at home in no time.


Jam Jar Accounts: Will They Set the Standard in Smart Banking?

Over the last few years, various people have been badly affected by the economic downturn. It has not been kind on many people’s finances, so a lot of people find themselves relying on overdrafts and credit cards to respond to rising living costs. However, a number of banks, as well as the British government, are now working on a new solution that could really help citizens avoid debt: jam jar accounts.

While the name may not ring any bells with a lot of people, jam jar accounts are an extremely clever way of working with money on a monthly basis, and ensure that all bases are covered – all the while working against the threat of debt. The “jam jar” element of these accounts is the way a single account is split into three distinct pots, dealing with personal spending, standing bills and savings. Limits on each one can be set by the bank or customer, depending on their circumstances.

The particularly clever thing about jam jar accounts is the automation involved between the three. A larger support framework keeps things balanced, so standing bills are always covered, prioritizing these above personal spending. Budgeting and bill payment behavior will be updated through low-balance alerts via text or email, notifying the account owner of automated fund transfers that are made between jam jars to avoid people going into the red.

On top of this, trained “money managers” are on standby at any time for people to speak to, and these experts give personalized budgeting advice as well as direct access to consumer services like the Citizens Advice Bureau, should further help be needed.

These accounts have received the backing and recognition of a number of organizations. Alongside ethical banking institutions – which naturally operate these offerings – the Fair Banking Foundation also promotes their usage. While trusted services such as local authorities are slow on the uptake, the issue is being brought up in parliament by MPs, with notable consumer rights champions.

Of course, this all comes at a small price, though not an excessive amount. Treasury-commissioned reports are currently pushing for prices of between £5 and £7 a month, which works out at an average of £1.50 a week. This effectively means that one snack or coffee a week is all a person would have to sacrifice for peace of mind.


Five Things to Look for When Opening a Savings Account

Are you considering opening a savings account? These tips can help you find the best savings account for your needs, regardless of whether you are a financial pro, or if you are just starting your path to savings.

For beginners

The savings account landscape – both in Australia and across the rest of the world – offers more choice than ever before. And it is doubly important to get your savings in order as the world deals with being in the grip of such severe financial upheaval. Australia has dodged the worst of this, of course, meaning that the interest rates of our savings accounts are not as grim as they might be.

So the rewards that can be had from a good savings account remain potentially very good. But with the sheer number of banks and other financial institutions on the market, anyone not familiar with the details and possibilities of a savings account can be overwhelmed with information, jargon, offers and options. Nowadays of course, the savings account market is largely dominated by online banking.

So with taking care of your savings, and maximizing them if possible, such an imperative part of personal financial planning, here are some basic things to consider when confronted with the decision over which account and which bank to go with.

Interest rate

This will be the deciding factor for many. A good interest rate is essential for maximizing your savings, and should be the first thing you look for. At the present time, a reasonable rate in Australia would be between 5.2% and 5.5%, and a good one over 5.6% for a straightforward online savings account.

An additional, vital factor affecting interest is how often it is paid out on your account. Some institutions pay interest monthly, perhaps others daily. This will affect your broader savings strategy, and the timing of your deposits into your account.


Be sure to check on a bank’s history, reviews and financial standing before taking up one of their savings products  – particularly in the current financial climate.

Some of the bigger, more established banks may therefore be the safer option, such as UBank, NAB or the other major institutions.

Your situation

There are many reasons you could be saving money, such as for a home, car, big holiday, education or whatever. In these cases, a high-interest savings account would be a good option.

However, you may be a student or a first-time saver. If so, you are a major target for many banks. Students may need a good deal of flexibility in their savings account and preferably no costs or fees.  Students, as well as first-time savers, may well also be eligible for special offers, deals and indeed interest rates as first-time customers.


Many major banks offer good incentives for your savings. Be sure to keep an eye out for additional interest paid if you make regular deposits, or indeed waiving of certain fees if you place a certain sum in the account. You may also be eligible for higher interest rates once you reach a certain balance. Introductory rates are also a common option from banks, though always be aware how much lower the rate will be once the introductory period expires.


You must decide how easily available you want your savings to be. If your savings account features mobile or online banking, you can transfer your money straight over to your current account. The convenience of this may be an attractive proposition for some, though the temptation to access savings may make this an unwise option. An over-the-counter savings account or perhaps a term deposit might be worthwhile for those who do not want easy access to their savings.


Maximizing Your Savings Returns

Remember when you were ten years old and you started a savings account and had your very own pass book? You put your allowance or paper route money into the account and earned seven percent interest. You thought it was so cool that after a year your fifty dollars became $53.50. Of course, at that time your parents were paying eighteen to twenty percent on their mortgage, or more.

What to Consider in Choosing an Account

If your concern is maximizing your savings returns in today’s day and age of prime at 3.25 percent, you have to be studious and determine which type of account best suits your needs. You have to consider the following:

  • Rate of return
  • Liquid or fixed?
  • Minimum balances
  • Monthly fees
  • Federal regulations on type of account

Account Types and Their Characteristics

Most savings accounts pay interest in basis points instead of full percentages. There are minimum balances to consider, as well, and monthly fees that are far greater than the tiny interest they pay. Money Market accounts are similar to savings accounts but are designed for much larger sums of money. They usually pay between two and three times the interest of a straight savings account, depending on your principal. Smaller sums pay less interest. Savings accounts and Money Market accounts are liquid assets, which means you can access the money any time you want.

Regulation D, however, controls the number of transactions you can have on these types of accounts in a month. These are not Demand Deposit Accounts, or DDAs, where you have unlimited transactions. If you go over six transactions of certain types in a calendar month, your account could suffer consequences ranging from removal of interest to closure of the account.

You also have the option of certificates of deposit, or CDs. These are fixed, non-liquid assets where the money is tied up for a predetermined period of time. There are penalties for early withdrawal. CDs generally pay the same as Money Market accounts, and sometimes much more. You will never have the returns of a high risk mutual fund portfolio, but savings type accounts offer unparalleled safety. Peace of mind is worth a lot.

As a rate comparison, remember that savings accounts offer the least growth. Money Markets and CDs offer more interest, but come with different stipulations. Check around and you will find what you need.

real estate and mortgages

Should You Buy Private Mortgage Insurance?

Real estate prices are hovering at levels we haven’t seen since around 2006, or right before the real estate bubble. Many people are saying now may be a good time to buy a house, and for may people it is – provided they are prepared for it. The Wall Street Journal has a great resource for people who think they may be ready to move out on their own. Some of the tips include having a steady income, a down payment, and the security of knowing you will be living in the area for the next few years.

Many people are finding that banks aren’t offering as many loans as they were just a few years ago, and while that is true to a certain degree, most of the loans they are declining are the type they never should have offered a few years ago – including the so-called liars loans, sub-prime mortgages, and those that stretch borrower’s limits financially. If you have a good credit score, a low debt to income ratio, and are buying a home you can afford, you should be able to get a mortgage fairly easily.

Once you find a house you want to purchase, you will need to consider a few other factors, including how much of a down payment you can afford, the interest rate, and whether or not you want to get a 15 or 30 year mortgage. The down payment is an important factor because most lenders want you to have at least a 20% down payment, otherwise they may require you to purchase Private Mortgage Insurance (PMI) which insures them against buyers defaulting on the payments.

Should you buy Private Mortgage Insurance?

There are several important things to know about PMI:

It doesn’t protect you – it protects the lender. Lenders may try to sugar coat it, but PMI only exists for their benefit, not yours. If you default on your loan,

Private Mortgage Insurance is expensive – and it’s not tax deductible. The cost of PMI is usually about one-half of 1 percent of the loan, divided into monthly payments. For example, if you buy a $200,000 home and only make a 10% down payment, you would have a $180,000 loan. One half of 1% of that loan would be $900, which would be the annual cost of your PMI, or $75 per month. To top it off, you cannot deduct this expense on your taxes.

Lenders probably won’t tell you when you have paid down 20% of your loan. Lenders like collecting your PMI – it adds up to hundreds, or even thousands of dollars per year (and potentially millions across all of their loans). They are happy to continue collecting until you challenge them on it by paying off 20% of your loan or by getting an appraisal proving your equity is above 20%. If you don’t challenge the lender on your PMI, they are required by federal law to stop collecting once your equity reaches 20%. But that still gives them a couple months of additional PMI payments unless you notify them first.

You can avoid PMI. Many lenders won’t tell you up front that there are ways to avoid PMI. Some of them include special mortgages backed by the government, such as a VA loan, or other programs for first time home buyers. You can also avoid PMI buy purchasing a home with an 80-10-10 loan, which is a primary mortgage of 80% of the purchase price, a second mortgage at 10% of the purchase price, and a 10% down payment. The second mortgage typically has a higher interest rate, but that can often be less than the cost of PMI.

In the end, Private Mortgage Insurance can be avoidable in some cases, and it’s usually best to do so if you can. It will save you thousands of dollars over the course of your loan.


Who Needs Life Insurance?

Do you need life insurance if you don’t have dependents?

This seems like easy questions to  answer, but each situation is actually specific to the person asking it. The first thing we need to do is explain that life insurance exists for the benefit of your survivors. Does that mean you shouldn’t buy life insurance if you are single, healthy, and don’t have anyone who relies on your income? Not exactly. Let’s first explain the two most common types of life insurance (term and whole life), then explain who they are best for. Then we can walk through some situations and explain who needs life insurance, and why.

Term and Whole Life Insurance – Who Benefits?

The two most common types of life insurance are term and whole life insurance. Term life is generally less expensive per month, and last for a set duration of time – often good for 10, 20, and 30 year policies. During this time, your premiums will never increase. At the end of the policy, you can often renew it, though probably for higher rates, since you will be older at the end of the next term. Whole life insurance is a lifetime policy, but it usually comes with more expensive monthly premiums.

First, let’s simplify this discussion and eliminate whole life insurance from the options. For most people without financial dependents, term life insurance is going to be the best option. Whole life insurance may be a good option for people with complex estate plans or who want to establish a trust with their life insurance policy, but if you don’t have dependents, you probably don’t have those issues. The second thing to remember is that life insurance is there to protect a source of income, not act as an investment. According to this article on HuffingtonPost, Life Insurance 101, you should keep your insurance and investments separate.

Now that we are on the same page, let’s look deeper at this topic.

Who needs life insurance

Buying a term life insurance policy when you are young may be a good idea. The benefits to buying a term life policy when you are young is that you can usually lock in lower rates because life insurance rates take many factors into consideration, including age, health, etc. Buying life insurance, as well as disability or long term care insurance, while you are young means you are probably the healthiest you will be in the next 30 years. And the best, and least expensive time to buy insurance is when you aren’t as likely to need it right away.

You should buy life insurance when:

  • People rely on your income (spouse, children, parents, other dependents, etc.)
  • You have debt (mortgage, business loan, consumer loans, etc.)
  • Your estate is complex
  • You are a business owner with a partner or other vested parties
  • Any of these items may apply to you in the future

Who can skip life insurance

Life insurance is actually good for virtually everyone, even if they don’t meet the criteria listed above. Even if no one is relying on your income now and you don’t have any dependents, that could change in the future. You could, for example, get married and have children, have to offer financial assistance to your parents, or open a joint business venture.

One of the main benefits of buying life insurance now is that you are buying into a life insurance policy while you are young, healthy, and able to do so. Locking into a policy now ensures you are insurable and that you have a policy should you need one in the future. It is possible to become ill or have some other health problem that makes you uninsurable, or causes your premiums to be prohibitively expensive. I know you think it might not happen to you, but don’t take my word for it. The folks at GenWorth have put together these life insurance stats to help you get a better idea of why you need life insurance.

So the answer to who can skip life insurance is anyone who wants to gamble on their family’s financial future.

real estate and mortgages

Ready, steady, BUY! Things to Consider Before Buying a Home

Buying a home is a balancing act. In addition to location, school districts, and size, you’ll have to throw the all-important money question into the mix. “How much house can I afford?” But what many homeowners don’t stop to consider is that when you buy can be just as important as how much you buy. Are you ready to take that big leap into home ownership? Here are a few hints to help you answer that question.

Is the market ready?

Buying a new home (or your first home) can depend largely on what kind of housing market you are working with. In the face of the financial hardships that many homeowners began to face just a few years ago, many of them are desperate to sell. This may seem like a report of gloom and doom, but it can actually be good news for you because it means that housing prices are lower than they would normally be.

Mortgage companies like Freddie Mac made news earlier this year when it seemed that the bottom fell out from underneath its interest rates. This was a good indicator for many potential home buyers that now is a good time to move. Magazines like Forbes were also reporting that these were the best mortgage rates the market had seen, both fixed and adjustable, in half a century. If you’re an opportunist, you may also see this as a sign to buy now because as the economy gets stronger, these rates are bound to increase again.

Are you ready?

More important than the climate of the market, however, is the state of your finances. A good deal on a home isn’t really a good deal if you can’t afford to buy it in the first place. This is where a bit of caution can go a long way for consumers, especially considering that many lending companies have relaxed their restrictions on who can take out a mortgage. Remember, the housing crisis was caused by the same kind of behaviors.

That is not to say that financially stable consumers shouldn’t be considering buying a home. But they should do the math first. The traditional argument for most homeowners has been that owning a home means that you are paying into an investment, rather than providing income for a landlord the way renters do. While this is solid logic, you should also consider the fact that owning a home can be almost twice as expensive (in terms of monthly expenses) as renting. You may begin with a fixed mortgage payment, but you should also calculate the costs of home owner’s insurance, maintenance, and property tax.

In addition to your monthly budget, you should also consider your long-term budget and credit history. One of the primary factors that can influence whether you’re ready to buy a home is your credit rating. Good credit makes you eligible for the lowest interest rates available on home loans, so whether you have put time and effort into boosting your score can make or break your decision to buy.

Another advantage for prepared home buyers is having enough saved up for a 20 percent down payment. Though current lenders are easing restrictions and letting people buy homes with less money down, paying off at least a fifth of the cost of your home upfront can drastically reduce the amount of interest that you’ll end up paying on your mortgage by thousands of dollars. Use a mortgage calculator to play with the numbers and see how much you can save by paying more upfront.

Now that you have a “cheat sheet,” deciding when to buy a home will be easier. Just remember to go at our own pace, not the market’s.