7 Saving Strategies Suggested by Jonathan Clements

Jonathan Clements is one of the personal finance writers that I most admire. ( Others on my top 10 list include Eric Tyson, Jereme Grantham, John Bogle and Burton Malkiel) He is now the Director of Financial Education at Citi Personal Wealth Management. On CitiGroup website (https://online.citibank.com/US/JRS/pandt/article.do?ID=JC6&cmp=emc-5025&publisher=CBOL&venue=citibank.com&placement=Seven%20Strategies%20Read%20More%20-%20Primary&adtype=null&product=5025_CBNA_2011_March_Customer_Updates_and_News&promotion=4634&blitz=null&Prospect_ID=FF408B1FDF9245BC8CBF3AB81DB707E2) He wrote a topic on saving strategies that make sense to me. Here is my take from his points:

If you're looking to amass a large nest egg, it is helpful to earn good investment returns. But what you really want are good savings habits. After all, for healthy investment returns to mean much in terms of dollars and cents, you need to have a decent sum invested.

Indeed, when you first start saving and investing, your nest egg's growth may seem discouragingly slow. But if you commit to saving 12% to 15% of your income every year for maybe 15 years, you should reach the point of critical mass. Suddenly, in many years, your investment gains may dwarf the amount you save and your portfolio could start growing by leaps and bounds.

The tough part: You need to persevere until you reach this tipping point. So how do you get yourself through the initial, less-rewarding years? Start by acknowledging two key issues:

1. Realize that spending is often disappointing. You buy the new shoes or the new stereo that you hankered after, only to find that your delight may quickly pass and you are soon lusting after something else.
2. Recognize that delaying gratification isn't easy, so you need to force yourself to save. Focus on saving first and then pushing yourself to live on whatever remains. As soon as you get paid, try to sock away a chunk of your salary. You will then be free to spend the remaining money as you wish, without worrying about some silly budget.

This "save first" approach might strike some as a little rough, but the sacrifice involved will likely be modest. Here are seven strategies that will help you save more.

• Sign up for payroll deduction into your employer's 401(k) plan, investing at least enough to get any matching employer contribution.
• Compel yourself to invest every month in mutual funds, by setting up automatic investment plans, where money is pulled out of your bank account and invested directly in the funds you choose. Some fund companies will waive their regular investment minimum if you commit to investing automatically. Be warned: A periodic investment plan, such as dollar-cost averaging, doesn't guarantee you'll make money.
• Next time you receive a pay raise, increase your 401(k) contribution and crank up your automatic monthly fund investments, so your pay raise doesn't end up entirely as extra spending.
  
  That won't just make your portfolio grow faster. It will also make it easier to retire, because you're used to a more frugal lifestyle.
  
  One rule of thumb suggests retirees need 75% or 80% of their pre-retirement income to maintain their standard of living. But if you are saving a big chunk of each paycheck, you are clearly accustomed to a more modest lifestyle—and you might be able to retire comfortably with just 50% or 60% of your pre-retirement income.

• Boost your monthly savings rate by making extra-principal payments on your mortgage. You likely write that mortgage check every month anyway, so it is no great bother to make the check a little larger.
• Turn loan payments into extra monthly savings. Just made the last $400 monthly payment on your car? Keeping writing that check every month—but instead send it off to one of your funds. You are used to living without the $400, so it shouldn't be any great sacrifice to save this money.
• Make it a rule that you will save all financial windfalls. These windfalls include things like overtime pay, tax refunds, money from a second job, medical-insurance reimbursements, inheritances and year-end bonuses. Such sums aren't part of your regular income, so they are a fairly painless source of extra savings.
• Mentally declare certain assets off limits. For instance, you might freely spend whatever is in your checking account, but you don't allow yourself to touch your savings account, stocks, retirement accounts and home equity.

Book review on Perpetual Euphoria By Pascal Bruckner

The followings is my excerpt from an excellent review by Thomas Meaney on the book French author Pascal Bruckner wrote in 2001, Perpetual Euphoria: ( the full review can be read by googling "

Be Not of Good Cheer" or click here: http://www.google.com/search?q=Be+Not+of+Good+Cheer&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a)

 

Are you happy right now? Statistically speaking, most Americans say they are. But how much should we trust their response? Whatever the inner reality, we often feel intense social pressure to pretend to a happiness or contentment that, in truth, eludes us completely.

In "Perpetual Euphoria," Pascal Bruckner, a French philosopher and social commentator, proposes to free us from this "pitiless idol of happiness." He subjects our culture's happiness-instructors and self-help gurus to such savage mockery that it's easy to overlook the seriousness of his argument. Reading "Perpetual Euphoria" feels like watching Friedrich Nietzsche give a close reading to the latest issue of Men's Health magazine.

Mr. Bruckner begins his book with an acerbic history of happiness. His version of the story goes something like this: Once upon a time in the West, the pursuit of happiness was not the chief end of life. Parents did not lose sleep over their children's prospects for self-fulfillment; instead they raised them to be burden- bearing members of their community. Christian doctrine stressed that human beings inhabited a fallen world in which satisfaction was postponed. Not only were pain and agony not to be avoided, they were, at times, opportunities to come closer to God. "It is not shameful to die in pain," wrote Pascal; "it is shameful to die in pleasure."

How did we escape this vale of tears? Instead of rehearsing the usual explanations about the rise of science and technology, Mr. Bruckner claims that the Christian attitude to pain contained the seeds of its own undoing. Many Christians naturally desired to hasten the coming of the Messiah, who would deliver them from their earthly torment. During the French Revolution, this urgent desire was secularized into utopian designs—as when idealists like Robespierre tried to eliminate the misery of the ancien regime and remake society in accordance with republican virtue. But for Mr. Bruckner, as much as for Edmund Burke, any attempt to usher in a reign of felicity will be marked by folly—and may well create new forms of misery. He notes that the more secular Western societies have become, the more sensitive they are to suffering that is no longer justifiable as part of a divine plan.

 

Mutual fund vs. ETF

Why I mostly choose to invest in mutual funds instead of exchange trade funds (ETF)? The main reason is a mutual fund is good for investing a set amount of fund at one time, meaning a fraction of a share in a mutual fund can be bought and sold any time with certain restrictions apply. Investing with ETF, I will have to trade in the multiple of shares, instead of a fractional share, in an ETF at a time.

The feature of mutual funds that can be traded in dollar amounts will benefit investors who like to make dollar cost average investments (i.e., a planned periodic investment with fixed amounts) and periodic portfolio rebalancing.

I have found in no other investment products to make pure dollar cost average investments than in mutual funds. By buying into mutual funds at a planned dollar amount periodically, an investor can dollar cost average his/her investments, buying more when the mutual fund share price is lower and purchasing less shares when the share price is higher.

Next I would like to talk about: What is the beauty of dollar cost average?

Barron’s release its 16th annual online-broker review

This week Barron’s release its 16th annual online-broker review (http://online.barrons.com/article/SB50001424052970203523604576188781715729822.html?mod=BOL_hpp_mag#articleTabs_panel_article%3D1), and it is without merit that Barron’s does not have any review on Wells Fargo Advisors as it did in previous years. However, I realize that reviewers at Barron’s are paying special attention to what they have to offer for wealthy, “active” traders like a Barron's reader.

The closest type of service to Wells Fargo online broker that I can find in the review is Merrill Edge (merrilledge.com) from Bank of America/Merrill Lynch. The review says Merrill Edge has four pricing tiers and they are confusing. The pros of MerrillEdge.com include 30 free equity trades per month with $25,000 or more in your Merrill Edge or Bank of America account.

If an investor simply trades stocks or ETFs only, I think Merrill Edge will do the trick at a very low cost unless the investor indulges in trading and uses up 30 free trades per month that come with his/her combined balance of over $25,000 in Bank of America/Merrill Lynch accounts.

To a frugal investor like me, I would like to keep my investment cost down, so Merrill Edge or Well Fargo brokerage services are for me to minimize the trading cost. I am an investor with a strategy mixing with buy/hold and periodic rebalance, so hardly I make more than 10 trades per month on average. In my nearly 2-year experience with Well Fargo online brokerage, I never use up the quotas of 100 free trade each year. In the same token, if I have accounts at Merrill Edge, the number of trades I place each month probably will not exceed 30. Therefore if I use both companies’ services, I will only use the free portion of the services.

Before I opened up accounts with Well Fargo in 2009, I made a comparison between Wells Fargo and Merrill Edge (It was called Bank of America online brokerage back then) B of A offer 30 free trade per month with combined balance of more than $25,000 and limited choice of no transaction fee mutual funds.

My choice on brokerage service

Here I don’t intend to promote or endorse any financial brokerage firm’s services, but I would recommend some of the services based on my own experience in using financial brokerage services over last 12 years.

As of today, Zecco Trade has discontinued its free online trades. And so far as I know, Wells Fargo and Bank of America are the only two full-fledging discount brokerage firms that offer free trades for their account holders with certain restrictions.

To meet my personal needs on managing my investment in retirement accounts, I have found that Wells Fargo provides the least costly IRA account service in my case.

If you own more than $25,000 in your combined asset in saving, checking, regular brokerage, and IRA accounts, you can consolidate under Wells Fargo’s banking and brokerage services and then you can have 100 free trades in each of your regular and IRA accounts each year.

Where to park your cash now in January 2011

On January 5, 2011 Wall Street Journal Online (WSJ.COM), it reports:

Allan Roth, founder of Wealth Logic LLC in Denver has helped in recent months several of his clients replace a part of their bond-fund investments with high-yielding five-year certificates of deposit. Mr. Roth says he likes the Ally Bank five-year CD, which has an annual percentage yield of 2.4% and a penalty of 60 days' interest for early withdrawal. An investor who holds this only for one year gets a 2% yield even after the penalty, says Mr. Roth. That's better than, say, the Vanguard Short-Term Bond Index fund, which is yielding just 1.2%. (Source: http://online.wsj.com/article/SB10001424052748703886904576031330950885752.html?mod=ITP_thejournalreport_0)

This is a great deal that you can find to park your cash. Small investors can hardly find a deal of greater than 2% yield for their short-term investment. Checking Ally Bank's website, I found that its 5-year CD offering and other types of CDs are not available for IRA account. So you can only stash cash in the taxable accounts at the bank and the yield may come down to 1.5% after the tax bite. Just be aware of that!

p.s. I know a lot of folks do not subscribe to paid edition of Wall Street Journal Online. Here is a little tip for you to read articles on Wall Street Journal online for free: just google the title of the WSJ.com article at google.com, and the article will show up in the search results. Click on it to get to the article on WSJ.com and read it for free, enjoy!

Caveat:  You may only enjoy five free articles from WSJ.com per day. Now Google is allowing publishers to opt into a First Click Free program, which should actually be called the First Five Clicks Are Free. A news site now can limit the number of free clicks from Google News for any individual to five a day. Read this article to get more information on the First Click Free program from Google: http://techcrunch.com/2009/12/01/google-news-concession-first-clicks-free/