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March, 2010


One reason people offer for not being particularly good savers and investors is that these tasks seem too complicated. Certainly this was the case for me over most of my adult life. However, mastering personal finance can be boiled down to a few easy to remember rules. If one begins to use them early, in the more productive years, returns can be substantial in both peace of mind and nest egg growth. While there is nothing magical or written in stone about them, the following, for instance, have been useful guides for many along the road toward fiscal or budgetary independence:

Limit optional expenses to 20% or less of income. This means things like movies, new television sets, cable, dining out, happy hour, books, nonessential clothes, jewelry, vacations, fancier autos, gourmet groceries, and costly gifts. In these great recession times, there are plenty of online and book or magazine resources available to help the consumer be a more frugal shopper and spender. It can actually be fun figuring out how to cut one's discretionary outlays by a few percentage points, especially knowing that the extra dollars can go toward debt reduction or setting aside funds for the future.

Keep debts of all kinds low enough that their payments will not exceed 30% of income. Thus, the sum of gross mortgage outlays plus credit card payments (sufficient to regularly reduce the due amount), car loan payments, along with all other monthly debt expenditures, ought to be no more than $1200 a month for an individual earning $4000 a month, or $1800 for a couple together earning $6000 monthly.

Set aside 20% of income for more distant goals or eventualities such as a college education for one's kids, retirement, or the costs of a severe illness or of going back for more training if laid off. People who are married need to set aside, then, at least 40% of one of the partners' incomes. This may seem a severe bite out of a budget, but the results of the habit can come in rather handy, either when things do not go as hoped and expected or when the growing net asset value gives one such desirable options as changing careers, retiring early, paying off one's mortgage in advance, or helping with the care of an older dependent.

Reasonably Priced Blue Chips

BP (ADR)BP$58.15
Chevron Corp.CVX$74.67
Eli Lilly and Co.LLY$36.21
Total (ADR)TOT$58.87

With a few exceptions, it is best to allocate a significant percentage of net assets in carefully selected common stocks or stock mutual funds. The old rule was to simply subtract one's age from 100 to get the percentage one ought to invest in stocks. However, as national debt has increased (making for greater inflationary pressures ahead), health care costs have risen markedly and likely will continue to do so, and people on average are living longer, that formula needs to be adjusted in the direction of a larger stock holdings. So it is now suggested that the appropriate formula is 110 less one's age as the correct equity percentage.

This can be modified, though, by related considerations. If one is quite risk averse, a lower stock allocation may be necessary. On the other hand, if married to someone significantly older or younger, the percentage chosen for you as a couple would be the average of the formula results for each of you, which would then be higher than indicated just for the older partner. In addition, if one is receiving a pension, a retirement annuity, ongoing disability payments, or Social Security checks, this may be treated as income from the non-equities segment of the portfolio, so that the stocks portion of liquid assets can compensate by being greater.

Finally, if one's investing skill level is low or high, that can be factored into how little or much one holds in cautiously chosen equities. These days, the returns from money market funds or Certificates of Deposit (CDs) are low enough, and the risks of owning bonds or bond mutual funds once interest rates begin to head back up are substantial enough, that it pays to know enough about stocks to be able to have a bigger part of the financial pie in equities, especially since in general they tend to keep up with inflation far better than reserves or bond assets.

A useful strategy is to invest in reasonably safe type stocks when periodically they are low in price per share relative to their worth and then, after awhile, replace them with others that then are more attractively priced. Often these stocks also provide healthy and growing dividends, thus augmenting one's income supply. (See table for 5 that I think are good purchases at this time.)

One can also profitably buy shares in the very best companies, when available at a discount to their true value, and merely hold them long-term or even "forever." In this category might be companies such as Berkshire Hathaway, General Electric, MacDonald's, Harley-Davidson, Coco-Cola, and Hershey's.

One's retirement nest egg probably needs to be about 30 times the inflation-adjusted annual leisure years income one prefers, after subtracting any annual pensions, annuities, or Social Security income that will be received. So, if hoping to have $100,000 a year in retirement income, but anticipating that $50,000 is going to be paid yearly out of a retirement annuity or pension and that $25,000 will be arriving as annual Social Security checks, one's liquid nest egg would need to be about $750,000 (i.e. 30 times $25.000.) Do not forget that for couples the calculation needs to be made twice and the results added together. Even after taking out fixed income, the lump sum nest egg requirements can thus be substantial. Since the average family is not currently putting aside enough to assure desired retirement income, the importance of the above suggestions may become more apparent. The reasons for the high multiplier are that the principal will need to help offset future inflation (especially healthcare costs) and provide for monetary needs through hopefully longer lifespans for oneself and one's partner.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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