Our investment club just finished reevaluating our broker. We do this every couple years to make sure we’re getting the best service and the best rates. We decided to stay with Scottrade.

Scottrade Account Details

  • Account Minimum: None
  • Opening Account Minimum: $500
  • Account Fees: None
  • Trading Fees: $7 per trade (market or limit), which includes stock and ETF trades*. Options have an additional $1.25 per contract. Mutual funds are free or $17 per trade depending on the fund.
*Update: Scottrade just announced 15 new Morningstar exchange-traded funds (ETFs) for $0 trades.
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Scottrade Details

Local Office. This comes in handy for an investment club, since we switch officers yearly. We still make all our trades online though.

Multiple Checks. Scottrade accepts deposits from multiple club members, something that many other brokers don’t allow. It becomes a hassle when you need to deposit checks at the bank and transfer the money monthly.

Integration with Software. We use Bivio for our club software, which is compatible with Scottrade to download our transactions. It makes the treasurer’s job much more manageable.

Cheap Trades. $7 trades work out well; it’s not the cheapest, but it is still inexpensive. We researched some of the low-cost brokers, but they didn’t offer all the services above, which are important for an investment club.

Individual and IRA Accounts. I also use Scottrade for some of my personal accounts and my family members, and my only complaint was when I ran into their silly fees to change my name.

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Investment Clubs

I’ve been a member of our investment club since 2002. Here is more information about running an investment club:

Anyone who has invested any money can easily tell you what a stock market melt down is. We experienced one in 2008-2009 when the market plunged close to 50%. Then we experienced another around 2000 when the dot com bubble burst. But ask investors about a stock market melt up is and they might be scratching their heads.

stock market melt up

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What is a Stock Market Melt Up?

A stock market melt up is the opposite of a melt down. Let’s go back to the formation of the melt down in 2008. The root cause was a melt up of the housing market.

Everyone was bitten by the real estate bug. You could buy a house and sell it in 45 days and earn a $50,000 profit. Or you could buy a house, take out a credit line, upgrade everything, and a year later double your money.

No one thought prices could fall. And for a while, they were right. Prices were only going up. But then cracks began to appear and the next thing we knew, the housing market collapsed, along with economies around the globe.

This is what a stock market melt up would look like.

Since the beginning of 2018, it seems we were in a melt up. The market just continued to rise, each and every day. It wasn’t until early February when some investors got scared and sold, causing the market to drop 10% in a few short days. Since then it’s been somewhat volatile.

And during this time, when the market didn’t close lower by hundreds of points, there were wild daily swings. In the morning the market might have been up 400 points only to close down 300.

While this event was a correction and they happen all of the time, is it a sign of more things to come?

Let’s look at some facts about this stock market to come to a conclusion on this market being a melt up.

3 Things to Consider About the Stock Market Now

1. Near Record Long Bull Market

The bull market we are currently in has been going on since 2009, or roughly 9 years. This ranks second as the longest bull market in history. The longest one ever was from 1990 until 2000 which ended with the dot com bubble popping. That bull market run lasted 113 months.

But each bull market and for that matter, bear market, is unique in its own right. Some last a long time, like we are experiencing now. Others, like the one from 1966 to 1968 only last a short period of time.

What can you take away from this? Not much really. I say this because no one knows when the market will pull back and enter a bear market. It is bound to happen, but no one can predict when exactly this will be.

Of course, some people will get lucky and call it. Then they will be on magazine covers and write a book, acting like they can predict every future event for the stock market.

But don’t be fooled. They were simply lucky with their guess.

2. Inflation is a Killer

Just like inflation causes you pain from rising prices on the things you buy, rising inflation is a killer to a bull market too. This shouldn’t surprise anyone then that since the Great Recession inflation has been under control.

But now consumers are getting confident. They are beginning to spend more and companies are raising wages. Add in the tax cuts and higher inflation is looking more and more likely.

This was the main reason for the market correction in February. Investors saw higher inflation and higher interest rates as a result and became worried. They know that as inflation rises, corporate earnings and the economy begins to slow. And as a result, the stock market slows down too.

What can you take away from this? You need to pay attention to inflation. Luckily with interest rates still low, the Federal Reserve has lots of room to work with to help keep inflation in check.

But this doesn’t mean it can’t spike and surprise everyone. Keep an eye on increasing interest rates and mortgage interest rates.

3. Irrational Investors

The biggest worry for a stock market melt up is irrational investors. Just like we saw with the collapse of the housing market, many investors today think stocks only rise.

This causes them to jump into the stock market for fear of missing out. The result is ugly. Just like how it took years for housing prices to come back, when the stock market collapses, it will take years for it to come back too.

Most investors who invest at the high will run away licking their wounds, afraid to invest again.

What can you take away from this? Ideally, you should not be sitting on the sidelines afraid to invest right now. The economy is strong and corporate earnings are rising. The result is a stock market that will continue to rise over the long term. You don’t want to miss out on this.

But you have to be rational at the same time. Don’t put all of your money into high risk stocks. Build a diversified portfolio made up of high quality large cap stocks, small cap stocks, international stocks, and a good percent of bonds to match your risk tolerance.

And don’t forget about cash. There is nothing wrong with having a nice pile of cash sitting by. The last thing you should do is put everything you have into a couple stocks right now.

The next to last thing you should do is not invest at all. Take advantage of the rising market, but be smart about it. See 3 Ways to Safely Handle Stock Market Volatility.

Final Thoughts

We very well could be in a stock market melt up. But this doesn’t mean you shouldn’t invest in the market. You just have to pay attention and invest in a well-diversified portfolio.

Eventually, the stock market will tumble as it is cyclical after all and it rises and falls. You want to focus on the long term with a portfolio built for your risk tolerance.

Doing this ensures you can withstand any falls that will come and stay invested. The end result will be better returns and less worry over the short term.

More on Investing

Market experts have been calling for the current bull run in the stock market to come to a screeching halt annually for 4 years now. Yet the market continues trending higher. And as it does so, more and more investors are getting nervous about investing at market highs.

Many feel that any day now, the market will begin to correct, looking at past price to earnings ratios showing that this market is overvalued based on historical norms.

So the question becomes, should you keep investing at market highs today knowing there is a possibility of a major pullback? You may be surprised at my answer, but it is yes, you should keep investing.

3 Tips For Investing at Market Highs

Below you will find 3 tips to help you navigate today’s investing climate.

investing at market highs

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#1. Don’t Be Scared

The first tip for investing at market highs is to not be scared. Will a pullback in the market come? Most definitely. But the key thing to remember is that you have no idea when it will come. I don’t know. The experts don’t know. No one knows.

It could happen tomorrow or not until next year or the year after that. I am still investing in this market for two reasons. First, corporate earnings are coming in well. Companies are growing and making money. When this is happening, the economy is growing and the market should continue to rise.

I understand that based on historical price to earnings, the market is overvalued. But it is justified as long as companies continue to grow and increase profits.

#2. Today’s High Is Tomorrow’s Low

The second reason I am still investing in this market is because today’s high is tomorrow’s low. What I mean by this is that the Dow Jones at 26,000 seems high. We’ve never been here before. But the long term trend of the stock market is to go higher. So in 5 years, odds are 26,000 will be low.

Who knows where the Dow Jones will be at. Maybe 28,000. Maybe even higher. The truth is, when the market rises on a regular basis, you are going to get many days or weeks where it regularly hits all time highs. This isn’t necessarily a bad thing.

#3. Keep Things In Perspective

The stock market consistently hitting new highs is a red flag when there isn’t data to back it up. Think back to the dot com bubble. Prices were out of control. The business models of IPO’s didn’t even show how the company was going to be making any money. And when you looked at company earnings, it didn’t make sense that the market kept rising.

It got to a point where investors became irrational and eventually the bottom fell out. The same idea would work today if corporate earnings weren’t coming in as good as they are.

This run in the market could be attributed to the hopes of tax reform. But the rally isn’t based on those hopes. It’s based on investors seeing companies reporting good earnings and wanting to own a piece of those companies.

How To Stay Calm

You’ve just seen why this market rally most likely won’t be coming to an end anytime soon. But when we are talking about money, it doesn’t matter how rational the argument is, emotions are still involved.

So what should you do? Your best option is to keep investing at market highs. But if it makes you feel better, keep some money in cash. Move it to a dedicated savings account that you will invest in the market when it does pull back.

If you do go this route, don’t make the mistake of putting too much money in cash. Just keep 5% or 10% in liquid cash. Any more and you are losing out to inflation and earning a higher return that the stock market provides.

When this pullback will be, I can’t tell you, but for many people doing this will help to ease some fears. To calm yourself further, refer back to your investment plan. Remind yourself of your long term goals and why you are investing in the manner in which you are.

Ask yourself has anything fundamentally changed with the investments you own? Or are you just scared because your emotions are fighting your reasoning? If it is purely emotional, then you need to turn off the television and ignore the market news. For if you are a long term investor who has a 10 year or longer time horizon, everything will be OK in the long run.

Final Thoughts

Investing at market highs can be tough emotionally. You question buying in at high prices and overlook the fact that the high today is most likely a low point in the future. Work to keep things in perspective. Write down your fears and concerns in your investment plan and document how things turn out.

This will only help you in the future when the stock market is hitting fresh highs and you get worried again. Remember, there are random days when the market jumps that makes up most of your gains. If you miss these days, your return is shot. Stay invested for the long term and everything will work out well in the end.

What does your investment plan look like?

More on Investing

This is an interesting time in the United States. We have a sitting president with no political experience leading the country in a time when our national debt is out of control, our infrastructure is crumbling, millions of people are not earning enough money and yet the stock market is at an all-time high. Oh, and did I mention the repeal of the Affordable Care Act and income tax reform are on the table as well? To put it bluntly, there is a lot of uncertainty surrounding the future of the United States.

Stock Market Uncertainty

There is also stock market uncertainty. Even though stocks are trading near all-time highs, there is concern. The post Great Recession rally is still going on even though the economy is not as healthy as it could be. Add in the rising interest rates happening this year and you have a lot of investors wondering what to do.

stock market uncertainty

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What to do in Times of Stock Market Uncertainty

If you follow the markets, you hear many so-called experts calling for a major pullback in the market. They talk about how stocks are overvalued and any day now the market will come crashing down.

On the one hand, they are correct. The market will fall. It always does. The stock market is cyclical after all. It rises for a period of time, then pulls back for a bit, then rises again. While we know it will decline, we don’t know by how much or how long it will last.

As an investor, what should you do? If you have a long time horizon, meaning you don’t need the money you have invested for a long time, say 10 years or more, it should be business as usual. Keep saving and investing. If you want, you could invest less now and keep more in cash so you can buy more when stocks do fall. But if you do this, remember to keep investing something now. Maybe put 50% of your usual investing contribution to work and put the other 50% into a savings account.

The reason you keep investing something is because we don’t know when the pullback will happen. Maybe it will happen tomorrow. Or maybe it won’t happen until next year. But maybe when they do fall, the price will be higher than it is today. The last thing you want to do is stop investing and miss out on more potential gains, so the best option is to keep investing all along the way.

What About the Uncertainty?

Stock market uncertainty will always be present. It never goes away. This is why you need to have a solid financial plan and diversify. This way you can invest with confidence, knowing you are doing what needs to be done to reach your goals without taking on too much risk.

Eventually, the uncertainty around tax reform and healthcare will go away, but something else will creep up and take its place. It could be terrorism or debt or even immigration. The point is, there will always be some uncertainty.

Just like the stock market works in cycles, so too does uncertainty. It will always be there. As long as you take the steps to set yourself up to handle stock market cycles and uncertainty, you will be able to invest successfully for the long term.

Final Thoughts

With so many experts out there calling for a major pullback, stock market uncertainty is high on every investors mind. The key is to keep things in perspective. There will always be uncertainty in the world and in the stock market. Therefore, you have to take the necessary steps to make sure you are prepared for most of what can come your way.

Create and stick to an investment plan and tune out the noise. When you do this, you realize that the worst case scenario that everyone is talking about probably won’t happen and you are better off just focusing on your finances and saving as much as you can so that you can make your goals a reality.

More on Investing

Investment Advice for Recent College Graduates

Congratulations, you are a newly minted college graduate! Now that college is over and you are being pushed into the real world, it is time to think about your future.

In order to do so, you need to think about investing. I know, investing can be confusing and therefore overwhelming at times.

Investment Advice for Recent College Graduates

There is a lot of information out there on investment advice for recent college graduates and much of it contradicts itself. Below is a guide to helping you manage the investing portion of your life.

investment advice for recent college graduates

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Keep Living like You’re in College

You’ve probably heard this before, but I need to mention it before we get started. I know that the first paycheck you get will feel great. It did to me too. You’ll start thinking about all of the things you can buy with it. I did too. But you are better off living like a college student for as long as you can and saving all of the money you can.

You don’t need a new car. If your car is in good shape, keep driving it. A car is not a status symbol, it is transportation. I drove the car I had in college for about five years after I graduated. All of my friends were making $400 monthly payments on a car. I was saving $400 every month. Fast forward to 15 years after college and many of my friends are struggling with their finances, complaining about not having enough. Me on the other hand, I have enough money saved that if I were to lose my job, I could survive for a few years without worry.

This isn’t to toot my own horn. It’s to show you that the habits you start with after college will continue for your life. If you start spending everything you earn, odds are you always will and won’t get ahead. You will always struggle with money. You don’t want that and I don’t want that for you either.

Contribute to Your 401(k)

Now that you are living below your means, you will have excess money to save. The first thing you should do is start investing in your 401(k) plan at work. Start with 10% of your salary. If you do this from the beginning, you will learn to live on a smaller paycheck from the start. Trust me, you won’t even miss the money. If you are fortunate enough to be earning a high salary, feel free to invest more than 10%.

From there, make it a point to increase your contribution each year by at least 1%. You won’t notice the lower paycheck and you will be able to take advantage of your money compounding upon itself.

As for investments, we’ll get to that a little further down.

Start an Emergency Fund

Your next step is to create an emergency fund. You emergency fund should cover your monthly expenses for 8-10 months. Many will tell you to have 3-6 months saved in an emergency fund, but I am a little more conservative and like to have more money saved up in cash.

Create a Taxable Account (or Roth IRA if eligible)

Once you are saving for retirement through your employer’s 401(k) plan and you have an emergency fund, you can start investing in a taxable account. Don’t get too scared about the terminology. A taxable account is simply a non-retirement account. I suggest you start one because with a 401(k) and a Traditional IRA, you can’t access that money until you are 59 ½ years old or pay a penalty. With a taxable account, you can access that money any time, without penalty.

One caveat to this is a Roth IRA. You can invest in a Roth IRA and withdraw any of your contributions at any time, without penalty. If you withdraw any earnings on your money before you are 59 ½, you will have to pay a penalty. And yes, you can have a 401k and an IRA at the same time.

Regardless if you are investing this money in a Roth IRA or a taxable account, you will want to start saving money here too.

Where to Invest

The key to being a successful investor is:

  • Have a Plan
  • Stick to the Plan
  • Find Low Cost Investments

Have a Plan

To start, you need to have a plan. This doesn’t have to be super detailed, you just have to know what you want your money for. The more details you can provide the better. For example, maybe you want $1,000,000 by age 65 so you can retire to Florida. That is a perfect start to your plan and provides some detail.

Next, you have to figure out how you are going to get there. You need to know how comfortable you are with investing in the market and determine your asset allocation. One rule of thumb is to take 120 minus your age. This is the percent you should have in bonds. So, if you are 25, you should have most of your money in stocks.

But, you might not be comfortable with this amount of risk. If you want less risk, then you need to increase the amount of bonds you own. You will need to own stock if you ever plan to retire. Unfortunately, you won’t be able to earn a high enough return from just bonds alone to meet your retirement goals.

Stick to the Plan

Let’s say you are going with 90% of your money in stocks and 10% in bonds. The key now is to stick to this allocation, regardless of what the market is doing. You are investing for the long-term. What happens next Tuesday is irrelevant to your situation since you are going to be invested for another 40 years.

The stock market has cycles. It will go up and it will go down. That is the way it works. You are going to hear a lot of “noise” from the news and magazines. Remember that the goal is to get you emotionally involved. Once you act emotionally, you are bound to lose money in the stock market.

Wall Street earns money when you trade. The more you trade, the more the machine makes. But ignoring the noise allows you to keep emotions in check and this will allow you to be a better investor. The sooner you understand this, the better off you will be.

Find Low Cost Investments

While you won’t see a bill come in the mail for fees that you pay into the mutual funds you own, you do pay fees. They are just hidden in the return of the fund. You want to invest in funds that have the lowest expense ratio possible. You should never be paying more than 1% in expenses.

A 1% expense ratio is the equivalent to a $10 fee for every $1,000 you have invested. This may not sound like much now, but when you have hundreds of thousands of dollars invested in the stock market, the fee quickly adds up. It’s your money, don’t give it up so easily.

Final Thoughts

As I mentioned earlier, the concept of investing sounds intimidating with so much information out there. But it really isn’t that complicated at all. You just have to be smart about a few things. If you can make it a point to keep your expenses low so that you have more money to invest, you are going to be in good financial shape. When you begin to invest, pick low cost investments and stay invested. Remember that the market will drop and will be volatile over the short-term, but the long-term trend is up. If you can ignore this noise, you will be a successful investor.

More for New Graduates

Do you have any money mistakes that you regret? We all have made mistakes. We buy something we regret. We invest in a hot stock tip and lose everything. We get caught up in the moment and overspend.

The goal is to limit these money mistakes as much as possible since we can’t eliminate them completely.

How do we limit them? By learning about the mistakes first. Use the following examples of money mistakes to help you avoid a similar mistake.

money mistakes

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5 Money Mistakes to Avoid

We all make mistakes with our money. The key is to learn from these mistakes and the money mistakes others make so we can reach our financial goals.

  1. Saving What is Left

    Most people decide to save what is left at the end of the month. The problem is that they usually spend everything and therefore save nothing. They say next month will be different, but 5 years later and it’s the same sad story.

    To overcome this mistake, you need to save first. Set up a transfer when you get paid to move money over to your savings account. To make things easier, set up an automatic transfer so you never have to remember to save. Once you save, you can happily spend everything that is left in your checking account and still get ahead financially.

  2. Trying to Time the Stock Market

    This is one of the investing mistakes so many people make. They think they are smarter than the market and try to time it. But what happens is they buy in and then ride the market as it crashes. They finally sell and run. Then they wait until after most of the gains have been made and then decide to invest again. Sadly, the market tanks and they lose money.

    To solve this problem, you need to have a long term view when investing. Know that the market rises and falls. In order to be successful, you need to ride out this volatility. Get control of your emotions and don’t panic and sell.

    You can’t time the market. You are better off riding out the ups and downs and tuning out the media. Turn off the television. Stop reading the news about the market. The more you can do this, the better your finances will be.

  3. Not Paying Off Credit Card Debt

    Another mistake people make is treating their credit card like an IOU. They buy things and they worry later how they are going to pay for them. They quickly find themselves in credit card debt and have a hard time breaking the cycle.

    When you buy on credit, you need to have the money for the item so you can pay the statement in full when it comes. If you have a hard time doing this, you have two options.

    First, switch to all cash. Learn to control your spending that way. In time, you might want to test things out with credit cards, but you don’t have to. You are free to stick with cash.

    Second, cut out all spending on your credit card except for one thing. When I got out of credit card debt and was learning to use credit wisely I only charged groceries. I budgeted for food each month, so I knew I had the money to pay the bill in full.

  4. Avoiding Communication About Money

    One of the biggest reasons why people get divorced money. You buy your things, your spouse buys his or her things. Then the bills come and you have a heart attack. Then you fight over this and nothing gets solved.

    To overcome this, you need to have conversations about your finances. The more open you are about money, the better things will be.

    For us, we have a meeting once a month. I handle the finances, but talk things through with my wife so she knows where we stand. If things happen and we are overspending or need to rework the budget because of an issue, we have a conversation before the typical monthly meeting.

    Now, some of you might tell me that your spouse has zero interest in the finances. I don’t care. You still have to talk things over. There are many reasons for this. First, what happens when your spouse is ready to retire and you financially cannot afford for her to do so. She is going to be upset. If you had kept her updated along the way, it wouldn’t be an issue.

    Second, what happens if you pass away suddenly? Your spouse is clueless about the bills, investments and savings. Keep them clued in to your financial lives and life will be easier.

  5. Going Without an Emergency Fund

    When you don’t have an emergency fund, your finances blow up in your face when life happens. And we all know life happens. You end up putting things on your credit card and then are a slave to monthly payments and interest charges.

    To overcome this problem, you need to build up an emergency fund. It should be around 9 months’ worth of your living expenses. This can be a large amount to some, but trust me when I say it is worth it. You will be so thankful when something happens and you have the cash to pay for it.

    To help you save, break the savings into smaller steps. Looking at a full 9 months’ worth of expenses to try and save is overwhelming. Looking at 1 month might even scare you. So try to save $500. Then try to get to $1,000. Make it a game and you will enjoy the ride.

Final Thoughts

These are only a handful of the money mistakes we make. I’m guilty of some of them as I am sure some of you reading this are guilty too. That is OK. The goal here is to learn from others mistakes so that we don’t repeat them.

The smarter we can be with our money, the greater the chance we have to reaching our financial goals and not having the stress of money weigh us down.

More on Money Mistakes

We know that if you want to grow your money for the long term, investing in the stock market makes the most sense. While there is risk involved, taking on little to no risk with bank savings accounts will not allow our money to grow at the rate we need in order to reach certain financial milestones.

But there is another benefit to investing that many investors overlook. This benefit is saving on taxes. Yes, there are tax benefits from investing.

tax benefits from investing

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5 Tax Benefits from Investing

I am going to walk you through 5 such tax benefits from investing. You will see how investing will not only grow your money long term, but will also shelter some of it from Uncle Sam. And the more money you keep invested, the more it can compound and grow into larger sums of wealth. So what are these tax benefits from investing? Let’s get started and take a look.

  1. Lower Income Taxes

    When you contribute to your 401k plan at work, the contribution is made pre-tax. This means that the money is invested in your retirement account before Uncle Sam gets his hands on it. Let’s say you are single and earn $40,000 a year. This puts you in the 25% tax bracket. You’d pay $5771 in taxes (not $10,000 because of how tax brackets work).

    However, if you were to contribute $3,000 to your 401k plan, your taxable income would drop to $37,000. You would save $750 in taxes at the 25% tax bracket.

    Note that I am just keeping this basic here for you to follow along and ignoring exemptions, dependents, etc. There are many other factors that end up determining your tax bill, but this example will give you an idea of how investing in your 401k plan saves you money on taxes.

  2. Health Savings Account

    If you are covered by a high deductible insurance plan at work, you most likely have a health savings account. This is an account you put money into to cover you for medical bills. The great thing about a health savings account is that like a 401k plan contribution, a contribution to your health savings account is also made at the pre-tax level.

    If you contribute to both your 401k plan and your health savings account, you can really reduce your taxable income. But the tax benefit for health savings accounts doesn’t end there.

    In addition to being pre-tax, you can avoid taxes altogether on the money you put in the account. When you use the money on qualified medical expenses, you don’t have to pay any taxes on the money. It is completely tax free!

    Another benefit to a health savings account is that you can invest a portion of this money as well. The benefit of doing this is that first, you contribute pre-tax to avoid any taxes. Second, your investments grow tax free, meaning you won’t pay taxes on any dividends or capital gains, and third, if you use the money from your investment health savings account for qualified medical expenses, you can avoid taxes here too. The money is completely free from tax!

    This is why many people are using their health savings account as a hybrid Roth IRA. They save and invest the money now and plan to use the money for qualified medical expenses in the future.

  3. Write Off Losses

    Another one of the tax benefits from investing is the ability to write off losses. Let’s say you invested in a stock and you lost $1,000 when you sold. In the same year you invested in another stock and made $500 when you sold it. During this tax year you don’t owe any tax on the gain of $500. This is because you are able to write off the gain against the loss you took. Even better, if you don’t have any other gains, you can use the remaining $500 to write off against your earned income

    As exciting as this sounds, there are some limitations. You first have to match short term losses with short term gains to get a net short term gain or loss. Then you have to do the same thing with long term gains and losses. After that, you can use short term losses to offset long term gains and vice versa.

    From there, any unused loss that you have can be applied to earned income, up to $3,000 per year. In the event you have more than $3,000 in losses, you can carry forward the loss to future years and use the write off then. For example, let’s say in 2016 you had losses of $5,000 and no gains to offset. You can take $3,000 and offset it against earned income and carry forward the remaining $2,000 into 2017. If you have any gains in 2017 you use the $2,000 to offset them and if any loss remains, use it against earned income.

    It sounds tricky, but once you get the hang of it, it is actually fairly straightforward. For more see 3 Benefits of Tax Loss Harvesting and Tax Loss Harvesting.

  4. Invest In Tax Exempt Bonds

    Bonds are a great way to lower the risk in a stock portfolio and still earn a decent return. The problem with bonds lies with the interest you earn. The IRS considers bond interest to be ordinary income. This means it gets taxed at your earned income tax rate and not a lower investment tax rate.

    To overcome this, many investors put bond holdings in their retirement accounts. Since income, dividends and capital gains in retirement accounts such as a traditional IRA or a 401k plan are tax deferred, you don’t have to worry about paying any taxes on bond interest. The same holds true for a Roth IRA, the only difference being is that you won’t pay any tax at all.

    Still, sometimes investors want bond exposure in their taxable accounts. What are your options? The best option is to look at tax exempt bond funds. Most times you can invest in treasury bonds and avoid taxes at the federal level. However, many states will still tax the interest income on these bonds.

    Another option is to invest in municipal bonds from the state you reside in. Doing so will avoid state income taxes on the interest income, but in some rare cases, you will owe tax at the federal level.

    Also note that the discussion only applies to taxing the income from a bond. When you sell a bond, you could owe capital gains taxes even though the bond is tax exempt.

    The bottom line is that owning bonds in a taxable account while trying to limit taxes is tricky. Talking it over with your investment advisor or tax accountant is a good first step.

  5. Savers Credit

    The last of the tax benefits from investing is the savers credit. If you are a low to moderate income taxpayer, the savers credit can help you avoid paying some taxes. All you have to do is contribute money to a retirement plan.

    The credit is worth 50%, 20% or 10% depending on your adjusted gross income and is limited to the first $2,000 you contribute to a retirement account.

    Doing the math, this means a $1,000, $400 or $200 tax credit just for putting $2,000 into your retirement account.

    And the best part about the savers credit is that it works in addition to the tax savings by making a contribution in the first place that we outlined in the first point. So really you are double dipping here.

Final Thoughts

There you have 5 tax benefits from investing your money. The easiest one to take advantage of is saving for retirement, followed by the heath savings account contribution if you are covered by a high deductible health plan. And of course, if your income is low enough, just saving for retirement could shield an additional $1,000 from taxes.

At the end of the day, the more money you keep for yourself and invest, the more it can grow over time and improve your financial picture. Don’t pay tax when you can legally get around it. These options are simple to use and can save you a significant amount of money on your taxes.

Tax Filing Online

You can file your tax return online with TurboTax.

More Tax Topics

Welcome to 2017! Many of us take the time to create resolutions in the new year. Some want to lose weight and get into shape. Others want to make this the year they find the love of their life. And others vow to have better finances and get their financial lives in order.

Unfortunately for many, we give up on our goals by the end of January and go back to living life the way we were before. But this year is different. At least when it comes to your finances. I am going to walk you through 12 months of goals. Each month, you will have a different task to do in order to improve your finances.

The great thing about this list is most of the things are easy. You won’t have to fight urges every day of the week. In fact, for many of these goals, all you have to do is take 15 minutes one time a month. I know it sounds too good to be true, but hear me out.

Follow along and your finances will be in better shape in 2018 than they are now. Let’s get started.

better finances

(Photo Credit: stevepb)

12 Months of Goals For Better Finances

January: Increase 401k Contribution

Your goal for January is simple. Increase your 401k contribution. The amount you increase it is up to you but I would encourage you to stretch yourself and contribute a little more than you think you can. If you are thinking 1%, then bump it up to 2%. If you were thinking 5%, increase it 6%.

We tend to doubt ourselves. In the long run, we won’t notice that money not in our paycheck. Go a little higher than you think you can.

In order to increase your contribution, reach out to your human resources department. They will either email you a form to fill out or send you to the website where you can make the change yourself. In either case, doing this will take 5 minutes. Once you submit the form, your goal is reached and you are done for the month!

If by chance you don’t contribute to a 401k plan, then make your goal to start contributing.

February: Build a Cushion Automatically

No, we aren’t building a sofa here. We are making sure we have an emergency fund. In order to complete this goal, we want to set up an automatic transfer to our savings account. To do this, figure out when you get paid and then set up a transfer with your bank each time for a set amount.

As with the first goal, you decide the amount to save. Try for at least $20 per paycheck. If you have trouble setting up your transfer, reach out to human resources at work. In many cases, you can split your direct deposit between accounts.

Just update your instructions to have a small amount of your paycheck transferred into your savings account.

Setting up your transfer will take 10 minutes max. And once you do, you are done! It’s an easy way to build your emergency fund.

March: Challenge Yourself

This month, we are changing things up a bit. Instead of doing something that will take a few minutes to complete, you need to do something all month long. I want you to go on a spending challenge. Take a category that you spend money on and eliminate it from your budget for the month. Skip These Expenses to Cut Your Spending.

For example, let’s use dining out. For the month of March, try to go the entire month without dining out. You might struggle a little but this builds confidence. It also helps you to find ways to use the food you have in your pantry too. To get started see Frugal Foodie: 6 Alternatives to Dining Out.

Obviously you can’t pick to not pay your mortgage or rent, so it has to be something that you decide to spend money on each month.

What are you to do with the “extra” money you have from not spending? Transfer it over to your savings account.

April: Declutter

For April, we are going to follow in the footsteps of March and have you work a little for this goal. I want you to go around your house and find things that you no longer use, want or need. We are going to get rid of them. Turn Your Spring Cleaning into Extra Cash!

For now, just collect them all and pile them up somewhere. When you are done, take a minute to look at everything. The idea is to realize how you spend money foolishly sometimes. Once you do this, you are to separate the pile into 3 smaller piles – donate, sell, and trash.

Take the trash pile and throw the stuff away. Take the donate pile to your local charity. Make sure you get a receipt and keep it in case you itemize your deductions.

For the sell pile, take some pictures and post the items on Craigslist. When you sell some things, put the money into your savings account. If after awhile the item doesn’t sell, you can either donate or trash it.

May: Stop And Think

This month, we are building off of the goal for April. Remember the feeling you had when you looked at the pile of stuff you spent money on and don’t use? You want to take that with you into May. Whenever you are about to buy something, I want you to stop for a minute and think.

Ask yourself if you really need this item. How will it help you and your family? What is the benefit of it? If someone was standing in front of you and in one hand he had the item and in his other hand he had the amount of money it costs in cash, which would you choose?

The goal here is to not buy things on a whim. We do this a lot and end up regretting purchases. By stopping for a minute and thinking things through we avoid many of the regrettable purchases and keep more money in our wallet. Also see How to Figure Out Whether Or Not You Can Afford It.

June: Brainstorm

For June, we are switching gears. I want you to take some time and think about the things you enjoy doing. You can spend a weekend thinking or take a little bit of time each day to think about this. The goal here is to find ways you might be able to turn a passion or hobby into a small income stream.

For example, if you read resumes all day long and enjoy it, you might be able to make some money on the side helping people out with improving their resumes. Or if you enjoy playing guitar, maybe you can give a few lessons.

Your goal isn’t to start making money this month, it is just to come up with some ideas and see if they make sense for you to try to earn some extra income from. If you find something, then by all means start making money now. But don’t feel like you failed if you aren’t making any money come the end of the month.

July: Make More Money

This month, the goal is to turn that passion or hobby into an income. Don’t get caught up with how much or little you might make. Any money is helpful. See 14 Ways to Make Extra Money.

I remember when I started to run my website on the side. I was working a full time job that paid my bills and allowed me to save some money. When I began making some extra money on the side with my sites it was incredible.

I put that money into savings and quickly watched my savings balloon in value. It was a great way to get ahead and in the long run, it opened up a lot of doors for me.

August: Review Your Finances

We are over half way through the year and it is time to look over our finances. Take a couple of hours and see where your checking and savings account balances stand. How much debt are you in? Are your investments allocated to match your risk tolerance?

By looking over these things, we can make sure our finances are in order and there are no surprises. Once you look things over, I want you to then create a net worth statement.

Divide a piece of paper in half. On one side list out your assets and on the other side list out your liabilities. Total them each up and subtract your liabilities from your assets. The goal is to have a positive number. This means you have more money than you owe.

If your net worth is negative, then aim for reducing your debt and getting it into positive territory.

September: Reduce Debt

Speaking of debt, we are going to start to tackle it this month. For all debts you have, I want you to round up. Whatever your statement says you owe this month, I want you to round it up. For example, if it says you owe $354.95, I want you to round up and pay $360. If you really want out of debt, round up to $375.

By paying a little more each month, you get out of debt faster and you save on interest charges.

October: Prepare For Winter

With winter coming, we need to take a little time now to make sure our house is ready for the cold so we can save some money.

First, we want to tackle the easy things. Check your doors for air leaks. With the door closed, run your hand around the edge of the door and see if you can feel and cold drafts. Alternatively, you can have someone shine a flashlight around the edge from outside while you look to see if you can see any light from inside. If you can, you need to replace the foam insulation around the door.

Next, check your windows. Again, run your hand along the trim and see if you can feel any drafts. If so, get a caulk gun and close the gaps.

From there, we want to check electrical outlets. You only need to check the ones on exterior walls. Take the face plate off and see if you feel cold air. If you do, buy some of the outlet insulation covers and put them behind the faceplate to stop the draft. If the outlet isn’t used, you can also buy the plug cover as well.

Finally, consider adjusting your thermostat. Try to set it for 1 or 2 degrees lower than you currently have it set for. If will feel colder in the house for a few days until you get used to the temperature but after a week, you won’t notice it any longer. And if you aren’t using a programmable thermostat, start using one! It’s a simple way to save money and leads to better finances. Check out our Nest Thermostat Review of Savings.

November: Focus On Your Career

Around this time of year, most people have their annual review. It is when you find out if you are getting a raise or not. If you find out you are not getting a raise or if you aren’t getting as large of a raise as you hoped, it is time to take action.

First, sit down with your manager and find out why. Maybe it was a tough year and no raises are being given. Or maybe you weren’t as productive as you could have been. Once you figure this out, you have some options.

First, you could work harder. Find ways to become invaluable. Talk to your boss about things you can do that are above your job description. Also review How to Ask for a Raise.

If you decide that staying at your current employer is not the best long term fit, take the time to polish your resume. Make sure it is updated and then start creating multiple versions. You do this so you can more easily tailor it to a potential job when you find one.

December: Plan Ahead

For December, you want to start planning for 2018. Look at what you spent on gifts this year. Did you go into debt to buy them? If so, make it a point to save more next year so you can pay for the gifts and not end up in debt.

Additionally, are there any big events coming in the new year that you need to save for? The sooner you start, the better off you will be.

Review your net worth again. Look how far you have come this year and use it as motivation to push yourself further ahead financially in 2018.

The more we plan for things and have goals and objectives, the better off we will be in the long run.

Final Thoughts

You now have a full year of goals to better finances. Some you can complete in less than an hour. Others will take you all month to do. But if you complete each of them, you will see your finances improve over the course of the year. You will be saving more, paying off more debt and be a smarter person with your money.

You can then take all of these lessons with you into the new year and beyond to help you achieve your financial goals.

More on Your Financial Goals

How often to you make a decision because of a recent event? For example, how likely are you to buy snow shovels and salt after a blizzard? Not because you ran out and need these things, but because the last blizzard influenced your decision? The answer is most likely more often than you are aware or would like to admit.

Short Term Reactions

As humans we tend to focus on the short term and let recent events shape our views. This happens with everything. From snowstorms to terror attacks, even when it comes to investing. Remember Brexit?

For example, how long did it take before you jumped back into the market after the crash in 2007-2008? For many, they are still standing on the sidelines, fearful of the next crash. While sitting out they missed out the tremendous gains over the last seven years. And before you think all those gains are worthless when the next crash hits, think again. As long as you are investing for your time horizon and risk tolerance, you can ride out any turbulent market.

short term outlook

(Photo Credit: stevepb)

But getting back to focusing in on the short term when investing, what are some signs we are acting in an irrational way based on recent events and how can we overcome this?

Signs You Are Focusing Too Much on the Short Term

There are many signs I can point out to show you that you are focusing in on the short term. Here are a few of the more common ones:

  • Too scared to invest: the market dropped and you won’t invest at all or are putting all of your money into bonds since they are safe investments
  • Thinking the market will never drop: the market has been on a tear upwards and you are convinced that stock prices will never come down
  • Having an urge to pull out: stocks have been doing well, but you know bad times are coming and you just can’t shake the urge to start selling
  • Bad quarterly reports: you see a couple companies miss earnings and think that your holdings will do the same

These are just a few of the more common signs of having a bias towards the short term. I’m sure we all can relate to these examples, myself included. The question becomes how do we overcome the bias of the short term and look at the long term?

How to Stay Invested for the Long Term

The answer is simple in theory, harder in practice. It is to simply have an investment plan. When you have a thorough investment plan created, you know why you are investing the way that you are, why you have the specific investments you have, what your goals are and what your risk tolerance is.

When the market does drop and you get scared, you can refer back to your plan to see why you are doing what you are doing and can feel a sense of relief that you are doing the right thing for you and your goals.

The key though is after making the investment plan, you must follow it. You can’t just put it into a drawer and let it collect dust. You have to refer to it and even update it as life changes. If you can do this, you will be better positioned to overcome the short term bias we all deal with and be a successful long term investor.

But it is hard. The news and media like to hype up the bad and this gets our emotions involved and we make bad decisions based off those emotions. This is why it is good practice to add some notes into your investment plan for your future self. Try to predict some bad times that may happen and while you are in a positive frame of mind, give reasons why if scared, in the moment you should ride out the volatility and not sell and run.

While you won’t be able to predict all potentially bad scenarios, you can do yourself a lot of good by adding this section into your investment plan. It will provide further proof (and a level headed approach) to dealing with tough turbulent times.

Final Thoughts

It’s easy to focus in on the short term since it is in our DNA. But there are steps we can take to overcome this flaw. By creating and maintaining an investment plan, you put the odds in your favor that you won’t react poorly in the short term, which will lead to potential greater success in the long term.

More on Investing

When it comes to your investments, do you know what your return is? Many people rely on the annual return of the mutual fund itself, assuming this is their return as well. But this is not the case. Your individual return varies based on when you bought the investment as well as if you have added any new money or removed any money. So how can you estimate your portfolio performance quickly and easily?

I am going to show you how to do this. Yes, there is math involved but it is basic math and there are only a few steps so it shouldn’t be too much trouble to estimate your portfolio performance. Having a calculator handy will make the math a breeze. Let’s get started.

estimate your portfolio performance

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Estimate Your Portfolio Performance: No New Additions

This is the easiest option and can be done rather quickly. It assumes you invested a set amount of money during the time you’ve held the investment and have not added any more money or removed any money. All you need to know is the amount you invested and the value of your investment today. Simply take your ending value and divide it by the beginning amount. From there, you subtract by 1 and then multiple by 100 and add a percentage sign.

Here is how this would look. Let’s say you invested $5,000 and it is now worth $8,000. You would take $8,000 divided by $5,000 to get 1.6. You would then subtract the one, arriving at 0.6. Now we multiply by 100 and add a percent sign to get 60%.

But what happens if you invested $5,000 and it is now worth $4,700? You would still take the ending number ($4,700) and divide by $5,000 to get 0.94. Then subtract one which gets you to a negative 0.06. Multiply by 100 and add a percent sign and you will see you lost 6%.

See, that math wasn’t so bad. But what if you added money to your investment or took money out? That takes us to the second way to estimate your portfolio performance.

Estimate Your Portfolio Performance: With Additions or Withdrawals

Let’s say you ended up investing some more money into your fund during the year. If you use the calculation I presented above, you are going to get an answer but it will be wrong. It will overestimate a return if you added money. This is because it will assume your investment earned the difference between the starting balance and ending balance. It is not taking into account that you actually put more money into the investment. So how do we account for this?

In this case, the math is still basic, but it is a tad more involved. First you take the ending value and subtract out half of your additional investments. Next, divide that answer from the beginning value plus half of the additional investments. Subtract one from the answer, multiply by 100 and add a percent sign to get your return. Let’s look at an example do make this more clear.

We originally invested $5,000 and during the year made two more investments of $300 and $200. At the end of the year, our investment is worth $6,100.

We first take the ending amount, $6,100 and subtract out half of the additional investments. Our total investments were $500 so we take half of this number. So $6,100 minus $250 gets us $5,850. Next we take our beginning balance ($5,000) and add half of the additional investments, $250 which ends up being $5,250. We then take $5,850 and divide by $5,250 to end up with 1.114. Subtract the one (0.114) and multiply by 100 and add the percent sign. Our return was 11.4%.

If you have a handful of additional investments over the course of the year, it might be wise to first total all of these up and then divide in half to get the number you will add and subtract to your beginning and ending balances. This will help you to not get lost in the math as you are trying to perform the calculation.

If you have taken money out of your portfolio during the year, the process is the same as outlined above. The only difference is that your ending number could end up as a negative return given how the market performed for the year even if your ending value is higher than your beginning value.

Caveats To These Calculations

There are two notes that need to be understood about using these calculations. First, you have to remember that they are just estimates. They are not going to be 100% right. While they are technically wrong, they are in the ballpark of what your return is, so they are a great, fast way to get a general idea of how well your portfolio is performing.

The second caveat is just as important to understand. These calculations are only good for one year periods. If you want to know what you performance has been for the last 5 or 10 years, you can’t use this calculation because it not taking into account other factors at play. While you can still use the calculation for a 2 year holding period, your estimate will be a large variance and this variance will grow as you estimate longer time periods.

Your best option to estimate your portfolio performance over longer periods of time is to find an online tool like Morningstar or to use a software program like Quicken. These programs can do the more complex math that is involved when trying to calculate your performance over time. Plus these programs won’t estimate your return, the return they do give you will be accurate.

Final Thoughts

When it comes to figuring out your portfolio performance, you can do a quick and easy estimate using the calculations above. They will give you a good idea of how well (or poor) your investments are doing over the short term. But for understanding how you are performing over the long term, your best option is to use a piece of software that can take into account all of the additional factors that determine what your investments earned.

More Calculations

Do you want to be a successful investor? Do you want to know how to earn a decent return and grow your money? We all want this but many of us have a hard time investing successfully. How do we do this? Is there a secret that we are missing? The truth is that investing is simple. We tend to make it more complex than it needs to be and as a result, we make bad decisions and as a result suffer with bad decisions and poor returns.

investing successfully

(Photo Credit: graur razvan ionut)

Here are the 3 things you need to understand in order to start investing successfully and see the results you want.

3 Tips for Successful Investing

  1. Understand that risk and reward are related.
    I know you want your $10 to turn into $1 million by the weekend. But it is not going to happen. Let me repeat that: it is not going to happen. Sure you can win the lottery to accomplish this, but when it comes to investing, it will not happen.

    Risk and reward are related. The more risk you take on, the greater the reward. But this also means the greater the chance that you lose money too. So stop trying to hit home runs all of the time. Focus on hitting some singles and driving in runs that way.

    For non-baseball readers, this means to just invest in high quality companies and add to them over time. This takes us to the second tip.

  2. Have a long term mindset.
    If you want to be investing successfully, you need to invest for the long term. What exactly is the long term? It is 10 years or more. This doesn’t mean you just buy and sell various investments over the course of 10 years and have your money grow.

    It means you pick some high quality investments and hold these same investments during this time. In both good and bad times, you stick with them and keep adding more money over time.

    Too many times in the instant gratification society we live in we do not allow our investments to grow. If our money doesn’t double over night, we sell and pick another investment. You need to stop this and stick with your investments for the long term.

  3. Ignore the experts.
    You turn on the television and there is some guy yelling at you telling you that ABC stock is a buy and you need to get in this thing. You need to ignore him and stick with the investments you chose. The reason for this is because the expert in television knows nothing about you, your finances, your goals or your risk tolerance. So how in the world can they tell you that a certain investment is right for you?

    They can’t. So you need to start ignoring them and trusting in the investments you picked and add to them over time.

Final Thoughts

If you can follow the 3 tips I lay out above, you can start investing successfully. The catch is you will see this success over time. It won’t show itself overnight or in two weeks. It will show up in time. When it does, you will look back, thankful that you followed the tips and be proud that you were able to grow your money over time to its current value.

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