Secrets from the Millionaire Teacher, Andrew Hallam

“Review or door stopper,” read the subject line of the email.

Now that is a book review request I enjoy. Make me laugh, and you have my attention.

But this is not going to be a book review. This article will give you actionable tips from inside the book. Suffice it to say, Millionaire Teacher is a comprehensive personal finance book for beginning or intermediate investors. And I recommend that you read it!

Take Action

Read this article and come away with actions to implement to become a Millionaire. Some of these may not be completely new and that is because there are tried and true strategies to grow your resources.

First come the Quick Tips; next is the in depth information and motivation.

Nine Rules of Wealth Checklist

1. Spend like a Millionaire, if you want to become rich. That means don’t spend too much. In general, millionaires live conservatively, not extravagantly.

2. Start investing early to allow your funds to compound and grow over time.

3. Invest in low-cost index funds to maximize your future wealth.

4. Learn about stock market history, greed, and fear, so you don’t become a victim of buy high and sell low.

5. Learn to build a complete stock and bond portfolio using index funds. You will beat most professional investors.

6. Use index accounts, no matter where you live.

7. Don’t fall for an advisors ”hard sell”.

8. Watch out for “too good to be true” scams that promise outsized results.

9. If you want to dabble in individual stocks, do so only with a small portion of your portfolio.

In Depth Advice for Wealth Building

More detail pilfered from Hallam, a high school English teacher who built a million dollar investment portfolio on a teachers salary.

Spend Like you Want to Grow Rich

You’ve heard it before, the millionaires are not the folks riding around in Cadillacs and Porches but are those living in the modest home driving an older car. Hallam’s path to millionaire status was peppered with a cheapskate lifestyle for many years. This guy rode his bike 70 miles per day to work through rain and sleet. He lived on clams salvaged from the beach accompanied with low cost pasta and potatoes. Free rent was the byproduct of house sitting gigs for those Canadians wintering in the south.

That’s how he can afford to live well today; travel, live in a condo with a pool and squash courts, and drive a classic Mercedes.

What’s the takeaway for you? I certainly don’t want to get my food from the beach or ride a bike to work. Yet there are other ways to live conservatively with an eye towards the future. Substitute low cost alternatives for life’s necessities. You need a place to stay, you don’t need a luxury apartment. Take in a roommate or two. You need food, but you can cook at home instead of eating out. Have a peanut butter sandwich (I have one at least three days a week) for lunch once in awhile and pasta for dinner.

The lesson is this, delay gratification for a while and understand that the wealthy “Look to the Future.” Spend responsibly, think creatively, save profusely, and you can become wealthy on a teacher’s salary.

Conquer the Enemy in the Mirror; Watch out for Fear and Greed

I tend to worry a lot, so anything to do with “mental money” strategies catches my interest. Hallam explained that mutual funds tout 10% average annual gain. Great, that means that all the investors in the fund earned 10% annually as well? Not quite.

Investors tend to be influenced by the bifurcated emotions of fear and greed. When the price of a mutual fund falls, many investors get scared and pull their funds out. Then after the fund goes up for awhile they get back in.

What just happened is that those investors missed the largest portion of the funds’ gains. Hallam underscores the importance of the classic statement;

It’s not timing the market, but time in the market, that leads to long term financial growth.

The stock market goes up and down. In the short term, these movements are completely random. In the long term the trend is upward. Jumping in and out of the market leads to buying high and selling low. Not a great way to make money!

Hallam disclosed that he put money into the stock market after 9/11, when the fearful were pulling out. He reasoned that businesses weren’t worth less because there had been a terrorist attack. And of course, taking advantage of bargains when fear is in the air is a wonderful method of buying low.

Fight the tendency to follow the crowd and your profits will grow.

In sum, for those just starting out, there are engrossing stories and time tested wealth building strategies showcased in Millionaire Teacher. There’s even a section on how to make money buying and selling your vehicle. It’s a fascinating approach that anyone can try.

Remember, live sensibly, spend smart, and invest regularly. You may not get rich overnight, but you will set yourself on a path to a wealthy future.

Can’t Get Enough Wealth Building?

• 10 Rules for Building Wealth; CNN Money and Fortune
• How Young Adults Can Build Wealth; Young Adult Finances
• Side Businesses You Can Start Today; Wise Bread by Ashley Jacobs
• 12 Tips to Build Wealth for Early Retirement; Financial Mentor

Tried any of these strategies? What additional wealth building advice can you offer?

PRINT THIS ARTICLE OUT AND SAVE FOR REFERENCE

I started investing in my 20′s when I came into a small inheritance from a great aunt. My fear of the stock market and recollection of stories of the great stock market crash of 1929 led me to consider investing in bonds as a safer way to grow my money. Flash forward several decades, as I prepare the lectures for my university Investments class, I am struck by how easy it is to decide whether to invest in taxable or tax free (tax-exempt) bonds. Learn this quick and easy formula and you will never wonder again whether it is better to snatch up those state or city municipal bonds that are offered by your locale or stick with corporate bonds paying a higher yield.

What is a Bond?

First, a quick tutorial for those just getting started. A bond is a loan to a company, city, state, or federal government. In exchange for the loan, the borrower pays the lender a coupon or interest payment. When you purchase a corporate bond, you loan money to a company and pay tax on the interest income received. Corporate bond  taxable.

What are Tax Free Bonds?

A bond in which the income produced is free from federal, state and local taxes. Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. Investopedia

Purchase a bond issued by your state to improve the roads and the interest you receive is exempt from federal and state taxes. Sounds like a great deal doesn’t it? Since the bonds are tax- exempt, they usually sport lower coupon (interest) payments.

So how do you determine whether you are better off buying a 5 year municipal bond issued by your state and paying 2.5% or buying a 5 year corporate bond paying 3.5%?

Tax-free or Taxable Bonds?

There is an easy way to determine which bond offers a higher after tax return. Calculate the Tax Equivalent Yield of the tax exempt bond and compare it with the yield of the taxable bond. Then choose the one that offers the greatest after tax return.

Try it out

Let’s assume that your state and federal combined tax rate = 30%

You can purchase a 5 year taxable corporate bond with a yield = 3.5%

Or, you can purchase a 5 year tax-exempt municipal bond from your own state with a yield of 2.5%

Which is the better deal?

This simple formula will tell you in under a minute.

Tax Equivalent Yield

Compare which is higher:  municipal bond return/(1-combined tax bracket) = taxable return (or tax equivalent yield) 

Taxable return = 2.5%/(1-30%)=tax equivalent yield of 3.57%

A taxable bond must pay at least 3.57% in order to beat the 2.5% tax exempt return on the municipal bond.

Since the best return on a comparable taxable bond is 3.5%, the investor in the 30% tax bracket is better off purchasing a tax free bond paying 2.5% interest, as this yield is equivalent to a taxable yield of 3.57%.

With the Bush tax cuts expiring at the end of this year, it may be time to check out investing in tax free bonds.

Can’t Get Enough Tax Free Bond Info?

What are Muni Bonds and Should I Own Any? @ Oblivious Investor

7 Pillars of Investing in Tax-Free Bonds @ Kiplingers

Put on for my City; Tax-Free Bonds @ Young Adult Finances

Investing in Municipal Bonds @ About.com

Bond Investing-What are Tax Free Bonds? @YouTube-eHow Finance

Have you considered investing in tax free bonds? 

image credit; google images_scminvestment

Google Can Help You Out; For Free

When my world is organized and in control, I am happy. When things are in chaos, not so much. I just got caught in one of my periodic urges to create organization in my world. Read about my light bulb moment to create order out of chaos.

In reality, a sense of wealth has very little to do with money and everything to do with intangibles. No matter your stage in life, wealth is obtainable. For me, organization creates feelings of contentment and control. Actually, research has shown that feelings of control lead to greater life satisfaction.

I’m trying to create “systems” that simplify my life and keep me from going off on hours long trips into the mania of focus on the unimportant.

Have you ever found yourself sitting down for  a quick email check only to look up 2 hours later and wonder where the time has gone? That’s exactly what I am trying to avoid!

FREE AND EASY ORGANIZATION TIP

I’ve heard folks talk about evernote. I probably even have an account there. I also tried other online organization systems. At home, I have so many notebooks and scraps of paper floating around, I could wallpaper a room. Then of course there are the numerous folders, binders, stand up files, and stackable files. You would think that with all these cool tools, I would have the organization thing totally under control. Not really.

This morning I had a brainstorm.

What about GOOGLE DOCS?

Before you run away screaming, “I already have Google docs.” Check out the depth of functionality of this application.

According to the Google Docs page here are a few benefits ;

“Faster, real-time collaboration
Edit documents with others and see changes as they type.

Import from the desktop
Easily move documents between desktop applications and Google Docs.

Online word processing
Margins, indentations, tables, footnotes, comments and much more.”

This morning as I was trying to clean up the house, as usual I came upon a bunch of notes written on scraps of paper. The topics varied from blog building ideas, blog article ideas, names and phone numbers, and tips on how to refinish furniture. That’s when the light bulb went off! Create documents for each of the general types of information. I already had a “contacts” spreadsheet going in google docs, so I just input the names and phone numbers there. Next I started a doc for home repair and decorating projects for the furniture refinishing idea. The blog stuff was added to existing “blog building” and “blog post” ideas docs.

No, Google is not paying me for this article. In fact, I’m not even sure if Google likes me or not.

In addition to the documents feature, they offer spreadsheets, presentations, drawings and forms.

USE GOOGLE SPREADSHEETS FOR EASY ACCESS TO FINANCIAL RECORDS

I use the spreadsheets a lot. They are a bit tricky at first, especially if you are accustomed to Excel, but after awhile, they become easier to navigate. What I really like is collaborating with others and access from anywhere. I work everywhere these days; library, coffee shop, laptop on the patio, and even desktop (yea, I’m one of those dinosaurs).

Since I maintain my personal and corporate financial records on a secure desktop in my home office, it’s nice to upload non-sensitive financial spreadsheets to Google docs. For example, all of our personal investments as well as our family asset allocation are on Google spreadsheets. That way, if I want to complete a quick Morningstar analysis on a stock or fund, or view our asset allocation, I can do it from anywhere. I keep notes on my latest fund and stock research as well.

But I didn’t stop there. My list of google docs was getting long and unwieldy.  That’s when I figured they must have a way to categorize, kind of like a file cabinet for all of my varied information.

HOW TO SET UP A GOOGLE COLLECTION

Setting up a collection is Google-speak for organizing your information into files. Instead of writing my take on this organizing topic, I stole Google’s explanation verbatim;

 ”Create a collection

 Collections are a combination of the best features of labels and folders. A file can have multiple collections, much like the labels in Gmail. Collections can also be stored hierarchically, like folders on your desktop. In addition, collections can be shared.

Over the past several years, I’ve gradually moved my family portfolio and my corporate portfolio away from individual stocks and into Index Mutual Funds and Exchange Traded Funds (ETF’s). Although both portfolios have sported excellent recent double digit returns, not every holding was a winner. In the case of two stocks, I did not fare well.

First a bit of background, I have been investing for decades with excellent outcomes. Many years both the portfolios I manage have outperformed the S & P Index handily. I am not a frequent trader or market timer, but stick to a well thought out asset allocation in line with the goals of my family for our personal portfolio and the goals of the corporation for the professional portfolio.

As anyone in the investing field understands, no matter how many winners one holds in a portfolio, there are bound to be a few losers.

Over the years, I tired of the hours of research required to invest in individual stocks. On top of that, finance research convincingly supports the out-performance of index fund investing over that of stock picking. In fact, in a typical year, a majority of actively managed mutual funds do not beat the returns of their index fund benchmarks. And those managed funds that outperform one year, rarely repeat that performance year after year.

The takeaway is simple; it is quite difficult to beat the overall market consistently.

In spite of my resolve to transition to mutual funds and exchange traded funds (ETFs), I did not immediately sell all of our individual stocks.  I decided to get rid of them gradually, after analysis and determination that their growth prospects were fading.

In the case of Nokia (NOK) and Best Buy (BBY), I waited a bit too long to sell.

Best Buy and Nokia = Terrible Performance

Best Buy has been a remarkable growth story over the years with nationwide store expansion and offerings of any electronic one could want, either in the store or online. With the closure of Circuit City, I thought Best Buy would go through the roof and pick up all of their growth. Several years ago, when I purchased Best Buy, it’s future looked promising and its growth initiatives and store expansion foretold an expansive future for the company.

Nokia a former technology darling seemed like a sure fire holding. With a market share topping 40% in 2008, how could the company falter? Here’s how, with the advent of the smart phone, Apple and the android, Nokia’s market share fell to its current 29%, with no rebound in sight. At present, the fortunes of this company are going in the wrong direction and suffered a $1.2 billion loss its most recent quarter.

Take a look at the five year performance of Best Buy and Nokia;

As the Yahoo Finance chart so graphically illustrates, both stocks have plummeted during the past five years.

When investing in individual stocks there are some key factors to consider;

• Accept that individual stock prices are random in the short run. Some will rise, others fall, and some prices won’t move much in either direction.
• Before purchasing an individual stock it is crucial that you study its growth prospects, competitive landscape, valuation, and financial statements.
• This type of analysis should be ongoing during the time you hold the stock.
• Before purchasing a stock, it’s important to write down the reasons to buy the holding and what would cause you to sell.

Investing Caution

 Can’t Get Enough Investing Information? Check out these websites;

a version of this article was originally published on March 24, 2010

“I never could have done what I have done without the habits of punctuality, order, and diligence, without the determination to concentrate myself on one subject at a time.”
Charles Dickens

Who can argue with such an accomplished man as Charles Dickens? Develop habits for wealth and greater contentment will follow.

How Many of These Habits Do You Practice?

It is widely believed that small changes, practiced regularly, lead to out-sized results. Many great accomplishments began with tiny actions, implemented again and again. There’s research supporting the financial and personal benefits of quite a few of these habits.

Remember, wealth in life goes beyond money.

PRINT OUT THESE WEALTH BUILDING HABITS

1. Get married
2. Stay married
3. Get a college education
4. Get to work early and stay late
5. Do more than is expected at work and get promoted
6. Have a side business
7. Take risks
8. Learn from your mistakes
9. Try something new
10. Contribute regularly to  a ROTH IRA
11. Contribute to a work retirement account
12. Be patient
13. Be disciplined
14. Eat out infrequently
15. Transfer money regularly into a savings account
16. Invest regularly
17. Order water only with meals out
18. Drink alcohol infrequently
19. Avoid extravagant and ostentatious people
20. Live in a low cost region
21. Buy a modest home
22. Keep your vehicle 10 years or more
23. Take the stairs
24. Exercise regularly
25. Bring lunch to work
26. Maintain your possessions
27. Spend more on needs-less on wants
28. Drink water
29. Eat more rice, beans, potatoes, and peanut butter
30. Buy fruits and vegetables in season, canned, & frozen
31. Trade walking for driving when you can
32. Pay your credit card bill off in full every month
33. Give your kids more time and less things
34. Don’t equate net worth with self worth
35. Use the library
36. Compare prices
37. Designate part of every paycheck to saving &/or investing
38. Do not pay to have a check cashed
39. Learn a new skill
40. Get an advanced degree
41. Give to charity
42. Write down what you appreciate and value in life
43. Enroll in a work retirement plan
44. Put all investing dollars into unmanaged, low cost, index funds
45. Start saving and investing NOW, no matter how old you are
46. Take up low cost recreation and hobbies
47. Want less
48. Ask for a raise
49. Eat less meat
50. Think less about money and more about living
51. Buy I Bonds and Treasury Inflation Protected Securities (TIPS)
52. Never compare yourself with those above you
53. Spend time with nature
54. Own a pet
55. Don’t pay full price
56. Set goals
57. Review your goals regularly
58. Make time for fun and relaxation

Action Steps:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it for all of your personal finance goals, thoughts, activities, and plans.

• List several “new” wealth habits from the list to try this week.
• Add some of your own “wealth habits.”

 Can’t Get Enough Wealth Habits? Read on;

Family Money Values writes Develop Healthy Wealth Habits

Get Rich Slowly hosts a guest post by Dough Roller in Understand the Seven Habits of Wealth

CNBC highlights The Highly Effective Habits of Millionaires

Eventual Millionaire offers insight into Millionaires Mind in the podcast

For WEALTH TIPS (click here) delivered occasionally to your inbox, sign up for my newsletter; and get a Free bonus Ebook, 20 Minute Guide to Investing. I promise, no spam.

Jeff Rose at Good Financial Cents inspired me to write on the Roth IRA movement.

I’m one of those dinosaurs that started her first IRA in her 20’s at the beginning of the IRA movement. At that time, there was no such thing as a Roth IRA, so I went with a traditional IRA. On top of that anomaly, I was the only 25 year old at a retirement seminar in a room full of 60 year olds.

Although my passion for saving and investing has stood me well over time, I am deeply concerned about the financial future of those who haven’t yet started to save and invest. Read on for some motivation to get started investing in a Roth IRA today.

A True Retirement Story

At 8:00 AM I receive a call from an older neighbor, just wanting to talk. She started off by recounting the details of her husband’s firing from his job. My neighbor, June, believes he got fired because of his hot temper. Strike one, keep your temper in check at work.

The saga continues as she tells me about the new blinds she is buying for the home. I casually mentioned, that she might postpone this purchase since HER HUSBAND, THE MAIN SOURCE OF FAMILY INCOME JUST LOST HIS JOB. June replies, that expense was already planned so she will get the new blinds. Strike two, don’t add more financial stress after a job loss.

To top it off, June continues her financial mismanagement by sharing how she paid a consultant $100.00 to explain Medicare coverage to she and her hubby. Unable to keep my big mouth shut, I said that Medicare will explain their system FOR FREE. Strike three, don’t pay for information readily available for free.

The final blow came when she mentioned she has NO ROTH IRA, NO TRADITIONAL IRA, and not much saved up for retirement.

She stated “We don’t need retirement savings, we’ll have social security soon.” 

What is she thinking?

Why You Must Start a Roth IRA Today

I understand that retirement seems a long long way off for those in their 20’s and 30’s. Yet, the earlier you start saving, the less total money you need to save, and the more you will have at retirement time.

There is uncertainty in the future of social security. At best, benefits will be smaller and start later than they do now. Long term employment with a singular employer is practically nonexistent. So, if you fail to take responsibility for your future, you face a scary life in old age. As we all live longer, we need more assets to ensure that we don’t outlast our money.

I beg you to explore the data so you don’t end up old and poor.

Check out the facts:

Joleen’s Story

At age 25, Joleen began investing $200.00 per month in a Roth IRA and her employer added another $100.00 per month bringing the total up to $300.00 per month.

She invested the monthly retirement money* this way:

• 40% ($120.00) in Vanguard Total Stock Market Index Fund (VTSMX)
• 30% ($90.00)  in Vanguard International Stock Index Fund (VTIAX)
• 30% ($90.00) in Vanguard Total Bond Market Index Fund (VTBLX)

She started investing at age 25 and stopped at age 65, for a total of 40 years.

At age 65, Joleen’s contributions plus her employers’ grew to $787,444.00*.

Jamar’s Story

Jamar, Joleen’s brother wanted to spend his earnings and didn’t think about the future. No retirement investing for Jamar, he was having too much fun; Jamar figured social security would take care of him.

At age 40, Jamar had a change of heart. He woke up one morning and realized that he had nothing invested for his future; and he was scared. He decided to start investing and chose the same investments as Joleen, but decided to try to catch up. Jamar invested $400.00 per month, twice as much as Jill’s $200.00.

Jamar’s employer matched his $400.00 per month with an additional $100.00, just like Jill’s. This brought his total monthly investment to $500.00.

*Assume: Portfolio average annual return of 7%

At age 65, Jamar’s contribution plus the employers’ grew to $405,036.00, while Jill’s lesser contributions grew to almost twice that amount at $787,444.00.

INVEST IN A ROTH IRA

The Takeaway

My friend June is living in denial. When social security comes, it won’t match her husband’s former income. As her savings are small and she didn’t plan for the future she faces major lifestyle cuts as she ages.

The alternative to old age is death. If you expect to get old, own up to reality, and invest through work or a discount broker in a Roth IRA and start contributing today. Even if Social Security continues, don’t expect it to pay for a comfortable retirement. You can choose not to invest for the future, but be aware that social security is uncertain, and you will be poor in your old age without investing in an IRA.

Start now, you won’t miss the money and you’ll appreciate the financial security later.

You do need IRA, Social Security won’t be enough to support your retirement.

Have you started your retirement investing yet? If not, what are you waiting for?

Three Ways to Benefit from the Low Interest Rate Environment

In part 1 of What do Low Interest Rates Mean?, I talked about the cyclical nature of interest rates and the economics behind the interest rate trends. Today is advice day where you get some tips about how to benefit from the current interest rate environment.

It is a certainty that economic environments change. The low interest rate environment will not last forever. At the outside, you have less than two years before interest rates will rise. After reading Part 1of this article you understand a bit about the economic and monetary policy behind the interest rate environment. Next learn how you can profit. After all, I can’t write an article without giving strategies for wealth building.

Time to buy a home?

3 Strategies to Grow Your Wealth in Spite of Low Interest Rates

1. In How to Get a Decent Return on Your Cash, I wrote about options for savers. The best savings option right now for cash you won’t need for a year or more are Government I (Inflation) Savings bonds. The I bonds pay 3.06% until April 30^th when they will reset for their six month adjustment and reflect the current rate of inflation.  The return on these investments has two parts; a fixed rate of interest which does not change and an adjustable rate of interest that moves along with the inflation rate. The beauty of I Bonds is that there is no chance of default and your investment is guaranteed to keep up with the pace of inflation. In other words, the purchasing power of your investment is protected.

Buy these risk free investments on line at Treasury Direct. You can purchase up to $10,000.00 worth of these bonds annually in increments of $25.00.I bonds are even available for purchase with your tax refund. Except for paying off debt, there is probably no better use for your tax refund.

2. For lenders, I recommend peer to peer lending. This type of loan is about lending money directly to folks who need it. The peer to peer lending investment cuts out the bank and directly matches lenders and borrowers. I am loaning money to other borrowers through a peer to peer lending site and so far am earning 10.69% Returns With Prosper. 

I started investing in October, 2011 with Prosper.com. You can read about my initial experience in this article; My Experience with Peer to Peer Lending. In contrast with government bonds, please realize that this is a risky investment. Borrowers might default on a loan in which case, you would lose your total investment in that particular loan. For that reason, I only invest $50.00 in each loan that I fund. There is also the option to invest $25.00 per loan, further reducing the default risk of the loans. Although I currently have over one hundred loans, our total invested capital in peer to peer lending is only a very small portion of our investable assets.

I only recommend this for folks that can afford to take a loss on their investments in the expectation of receiving out sized gains. The Social Lending Network is a blog devoted to peer to peer lending. If you’re interested in the topic, it is a great place to learn more. If you do decide to loan through peer to peer lending, make sure that you only invest a small portion of your investment funds in this type of opportunity.

3. Take advantage of the historically low interest rates and borrow. Don’t borrow on your credit cards as those rates are way too high (and probably always will be). But if you are considering buying a home or refinancing your current abode, now is the time to do so. Home prices have sunk across the country and mortgage rates are at all time lows. There are even FHA loans with low down payments available for those that lack enough saved up for a 20% down payment. The FHA website has a handy calculator to help figure out if you qualify for a low down payment FHA loan.

For those looking to lock in a low interest rate loan or refinance their current mortgage, according to Bankrate.com, a 30 year fixed mortgage can be had for about 4.0% and a 15 year fixed mortgage for 3.27%. In many parts of the country, your house payment would equal or be less than a comparable rental.

Although we just bought our condo seven months ago, we are refinancing with a low interest rate 15 year mortgage. Our thinking is that when retirement rolls around, it will be a bonus not to have a mortgage to worry about. So even though our new interest rate will be lower than that on our current 30 year mortgage, the payment on the 15 year loan will be  a bit more. The monthly increase is worth it to us to save over $100,000.00  in interest payments over the life of the loan and pay it off in half the time.

Don’t forget to check out the first article in this series, What do Low Interest Rates Mean?

Please add your strategies to capitalize on the current low interest rates.

image credit; Madison short sale.com

Don’t forget to check out Part 2 and find out How to Profit from Low Interest Rates

In the university course I’m teaching, the  Investments text was published in 2010. The examples in the book use 12% as an expected return on stock investments and Treasury bill rates are projected at upwards of 5%. Compare those returns  with the recent 1.24% 5 year average return on the Vanguard Total Stock Market Index Fund (VTSMX) and the 3.55%  iShares Barclays 1-3 Year Treasury Bond Exchange Traded Fund (SHY) annualized 5 year yield.

Why are interest rates so low?

The students in my class complained about the unrealistic examples in the text book. They have no experience with actually receiving a few percent interest on their bank savings accounts and 5% CD rates.

What is Going on with Low Interest Rates?

In economic terms, the Federal Reserve Bank which decides monetary policy is trying to pull our economy out of a recession and jump start growth.  As part of this effort, the low interest rates are designed to promote spending by consumers and corporations. Firms fund growth through expansion and frequently take on debt to finance that growth. With low interest rates, corporate borrowing costs are rock bottom. This allows those corporations to expand at a cheaper cost than in a high interest rate environment.

Consumers make decisions whether to spend or save based on many factors. Included in that decision making are returns on saving. With low interest rates on savings, the government would like to see consumers spending in lieu of saving in order to help grow the economy. Actually, consumer spending is about 70% of Gross Domestic Product, the main metric to gauge the economic health of the country.

Savers and Retirees are Hurt by Low Interest Rates

The consequences for savers, especially retirees are difficult. Today, retirees are panicked as their CD income is nonexistent. My relatives with only cash investments have gone from high returns on their savings to retirement cash nibbled up by inflation. For the population past their earning years, hoping to supplement their social security income with interest from bank Certificates of Deposit, it is a dire financial time.

Ben Bernanke, the Chairman of the Federal Reserve Bank and one of the most powerful people in the U.S., pledged to keep interest rates low until 2014. That’s almost two more years. It is rare to have that type of clarity on the future of interest rates. In fact, I’ve never heard an official make such a public comment about upcoming monetary policy. Usually the Fed’s actions are hush hush and a complete surprise.

In the next article in this series, you’ll get some ideas about how to profit from the current interest rate environment. It is certain that it won’t last forever, yet instead of waiting for rates to rise and interest payments to grow, there are some tactics to boost your returns now.

In the Part 2, learn Three Ways to Profit in the Current Interest Rate Environment.

Related Reading for Those Who Can’t Get Enough

How Bonds are Valued and React to Interest Rate Changes at Moolanomy

Investing to Beat Inflation at Money is the Root

Low Savings Interest Rates; Good or Bad? Consumerism Commentary

Is the Fed Putting Your Retirement Savings at Risk? A guest article by Nerdwallet.com at One Money Design

How have the low interest rates affected your behavior?

My Inflation Panic During a Trip to Target

I made the deliberate decision to get a Target credit card because they automatically give you a 5% discount on everything you purchase in the store. Add that to the fact that I like the trendy Target merchandise and the grocery items. Sounds like a great plan, right? Target isn’t known as a high end retailer, so why did I have a panic upon visiting Target this week?

Prices are Skyrocketing on Many Consumer Products

I pride myself in being an economically savvy consumer. I know the shopping tricks; buy in season fruits and veggies, check out the per unit cost, buy in bulk, shop with a list, and avoid impulse purchases. But when I got to the bathroom cleaner and saw the $3.49 price on an item I am certain recently cost $2.50 recently, panic began to emerge. Then I went to the grocery section and couldn’t find a box of cereal for less than $4.00. Yikes, what happened to the $2.99 generic brands? And the price shock continued from section to section.

I am certain price inflation is here. I lived through periods last century of tremendous inflation and remember the effect. It’s like you are getting a salary cut.

Gas Prices and Inflation

As an economics major in college and a finance professional, I have my finger on the economic pulse of our country and the global marketplace as well. But you don’t even need to be very smart to figure out that goods are transported to their destination by air and land. And fuel powers the vehicles. With oil prices sky rocketing, it is virtually impossible to avoid inflation. One cannot expect the corporations to absorb the increased fuel and transportation costs. The consumer must pay more.

Add the rising oil prices to the certainty that during the next several years, interest rates will rise. Rising oil prices and interest rates will create a perfect climate for inflation to continue to rise. After all, when interest rates rise, it costs corporations more to borrow money to finance their operations. The increase in interest costs are subsequently passed on to the consumer in the form of higher prices.

Now that I’ve sufficiently shared my anxiety with you, let’s look at some coping strategies for dealing with inflation.

How to Handle the Coming Inflation

Fortunately, since inflation is a common occurrence, there are reliable coping strategies. Following are some of my inflation busting strategies, for consumers and investors, as well as tips from across the web.

Shopping Tips

• Recession
• Mortgage Meltdown 
• Sub Prime Lending Crisis
• European Debt Crisis
• 911
• Wars in the middle east
• Growth of China as a major world competitor

There are always outside forces that play on our economy and investment returns. These forces are called systematic or market risk. This risk is unavoidable and plagues all market participants. No matter how diverisifed your portfolio is, you cannot avoid systematic risk.

What is an investor to do?

In reviewing the stock market returns from 1928 to 2011 one could assume that rates went smoothly upward at 9.28% per year. Actually, that average hides a bumpy road. Returns on stocks over that time period ranged from annual double digit losses to annual double digit gains. Growth in investing is fraught with ups and downs. Not unlike life itself.

Is There a Pattern to Economic Growth and What Does it Mean for You?

Economic growth typically follows a path that looks a bit like a roller coaster, with gradual increases, leading to a high point of strong economic growth, followed by slowing GDP and usually a recession. This type of growth is certain, where the mystery comes in is the “when”. Cyclical growth is a given; but when the trend changes is unknown. 

 ECONOMIC GROWTH CYCLE

 This pattern means several things to investors. Investing is a long term endeavor. Don’t even think about investing any money you will need within the next 5 years in the stock markets. Stock market returns are way too volatile for short term investing. Knowledge of market behavior will help you stay the course during market fluctuations. Once you understand that the ups and downs in economic and investment returns are normal occurrences, you can learn not to be  surprised when the market tanks for a year or so. In fact expect that every few years, there will be a year with negative stock and/or bond returns.

Accept Ups and Downs in the Market as a Reality and Profit

As an investor here is a simple plan to stay the course.

1. Choose an asset allocation you can live with.

2. Select diversified low cost index funds from a range of asset classes for your investment portfolio.

3. Contribute regularly to your investment account during market ups and downs. In fact, contributing assets in a declining market yields the greatest rewards.

4. Look at how much money you can amass over a few decades of regular investing. Invest $4,000 per year from ages 25 to 65 in a diversified stock index fund with an average annual return of 7.5% and retire with close to $1,000,000.00. Regular investing over time yields great rewards. 

5. You must download my free eBook; 20 MINUTE GUIDE TO INVESTING to learn investing basics and receive a bonus subscription to the Wealth Tips Newsletter.

Following are some of my recent investing articles across the blogosphere;

• The Digerati Life, Buying Bond? The Effect of Interest Rates on Bond Value versus Yield
• Free Money Finance. Dividend Investing is Not the Perfect Solution for Yield
• Consumerism Commentary, I’m consulted about Buying a House with Cash

Women’s Money Week

I’m participating in Women’s Money Week next week. Women have historically been laggards when it comes to finances. This week is about encouraging women to speak up about money, take control of our finances, and reshape our financial future. Women’s Money Week will run from March 5th-11th, 2012 on WomensMoneyWeek.com — coinciding with International Women’s Day.

Following are a few of the participating blogs in Women’s Money Week (I’ll include a few more each day)

Moneylicious
Monroe on a Budget
Moola Saving Mom
Mortgage Free By 30
Mother Miser
Mrs. Nespy’s World
Ms. Money Savvy
Mummy Deals
Musing of an Abstract Aucklander
Musings of a Midlife Mom
My 1/2 Dozen Daily
My Broken Coin
My Dollar Plan
My Journey to Eliminate Debt
My Money and My Life
My Open Wallet
My Pretty Pennies
My Year Without Wasting Money
ND Chic’s Cents
Newlyweds on a Budget
Next Stage, The: Women and Retirement
No More Sheeple
No More Spending
Northern Cheapskate
Northern Living Allowance
Not a Coupon Queen
Not Made of Money
November Sunflower