Monday, July 10, 2017

Countdown to Financial Fitness: Know Your Tolerance for Risk

Countdown to Financial Fitness: Know Your Tolerance for Risk: You've paid down debt, built an emergency fund, and now you've finally saved up some money to invest. But before you hand your hard...

Know Your Tolerance for Risk

You've paid down debt, built an emergency fund, and now you've finally saved up some money to invest. But before you hand your hard-earned dollars to a broker, determine your tolerance for risk.

You can find sample "risk tolerance" questionnaires on the internet. It's almost like a personality test. If you work with a financial planner or investment counselor, he or she will most likely have you take such a quiz, or at least ask you similar questions before setting you up with a suitable investment plan.

Besides your age, income, assets, expenses, and plans for your money, you will be asked questions like, "What percentage of your investment are you prepared to lose?" and "How important is it for you to keep up with inflation?" "Can you stomach putting some, or all, of your principal at risk?" Some quizzes ask you what synonym for "risk" comes to mind. Danger? Opportunity? Thrill? You might be given scenarios to choose from: an investment that would never go down more than 10% but would only gain a maximum of 5% versus an investment with the potential of returning 30% but could lose 30% or more. Or you might see a question like, would you prefer Door Number 1—$1000 as a sure thing—or Door Number 2, with a 25% chance to win $10,000?

It's important to understand how you react to risk before choosing an investment. If an investment constantly keeps you awake at night, it might not be appropriate for your portfolio. If you have to check your account balance hourly and rush to sell your stock the first time its price goes down, investing in the stock market might not be the right choice for you. The stock market goes up and down, and if you get euphoric and buy when it's up and panic-sell when it's down, you will lose money.

The younger you are, the more risk you can handle with long-term investments, such as a retirement fund, provided you have the courage to stay invested despite market fluctuations. Historically, the stock market has yielded better returns than bonds or cash equivalents. Downturns actually provide opportunity to grow your wealth by purchasing more shares of stock or a mutual fund at a discount—if you stick to a plan of investing regularly. (You can do this automatically by reinvesting dividends and capital gains, i.e., dollar-cost averaging.)

What some risk-averse investors don't realize is that, by not investing in stocks or more aggressive mutual funds, by keeping all their money in cash accounts where the principal is secure but growth is almost non-existent, their nest egg may not keep up with inflation. And despite their cautious approach, they still won't have enough money to live on in retirement. So they are accepting risk whether they like it or not.

The closer you get to retirement, to the time when you will begin living off your assets, the more conservative you'll want to become with your investment allocation. Like with your emergency fund, you'll no longer have time to weather a major downturn, and if you have to start withdrawing the money, you'll be locking in losses.

Risk and reward go hand in hand. Aggressive investors are willing to risk losing a chunk of money in exchange for the prospect of greater reward. Conservative investors prefer to preserve their principal, but in exchange for that security, they must accept more modest returns.

What kind of investor are you, and have your views changed over time? I'd love to hear your comments. 

Monday, June 12, 2017

Countdown to Financial Fitness: The Emotional Side of Spending

Countdown to Financial Fitness: The Emotional Side of Spending: Most people understand that overspending can wreak havoc with their financial goals. Spend less than you earn, don't take on unnecessar...

The Emotional Side of Spending

Most people understand that overspending can wreak havoc with their financial goals. Spend less than you earn, don't take on unnecessary debt. Our rational mind gets it.

But there are external forces at work, out to undermine our resolve. Advertising is notorious. Look at the beautiful, happy couple using this product. Translation: I, too, will become beautiful and happy if I buy this product. My life will be perfect, just like theirs.

My movie idol endorses that product. It must be good.

And we care too much what other people think. The old adage, "Keep up with the Joneses," comes into play. Everyone on my block drives a new car. What will the neighbors whisper to each other if I don't trade in my five-year-old Honda for the latest Lexus? I want them to know I'm doing just as well as they are—maybe even better.

Even if you don't care what others think, your children do. Your child needs designer sneakers. Do you want him bullied at school for wearing some uncool generic brand? What will his friends say about him—and about his parents—if he doesn't upgrade to the latest iPhone? And don't be surprised if he makes you park that five-year-old Honda down the street when you pick him up.

Some people equate love with how much money they spend on others. You buy the flashiest, most expensive bouquet so the recipient won't think you're cheap, or that you don't really love her. I once had a vacuum-cleaner salesman tell me I was jeopardizing my family's health, that I must not love them, because I wouldn't buy his over-priced product.

Guilt is another reason people overspend. You miss your child's game, so you make it up to her by buying her that fancy new toy she's been talking about. You fight with your wife and then try to make amends with a pair of diamond earrings. You lend your sister money you can't spare because she reminds you that you were always the favorite, the reason she could never catch a break. You invest in a cousin's ill-conceived start-up because he's family, and you don't want your refusal to help to be the reason his business fails.

We spend to treat ourselves, to celebrate a victory or other joyous event. We indulge in "retail therapy" when we're depressed.

And if something is billed as a bargain, we can't resist, because we want everyone to know we are savvy shoppers. Save 75%! Buy a pair of $400 shoes for only $100! Hurry, before the deal disappears! Of course, if you didn't plan to buy those shoes in the first place, you could save 100%, and use that $100 for something you really need.

My husband and I used to drive past a furniture store that had a "Going out of Business Sale" sign up every week. A year later, they were still having a "Going out of Business" sale. We joked that they must have made enough money from the "Going out of Business" sales to stay in business.

Product placement is also designed to lure us into forsaking our budgets. Necessities like milk are located at the back of the grocery store. Impulse indulgences—a mouth-watering candy bar you've seen advertised, a magazine with a salacious story about the latest celebrity romance, lottery tickets promising you instant wealth—are right by the register, so the cashier can ring them up before you've had time to decide you really don't need them.

One of the lessons I learned in Weight Watchers is, before taking a bite, ask yourself why you are eating. If the reason is emotional and not hunger, stop. Visualize your future slim, healthy self. Think again about what you must do to get there. This lesson can be applied to spending as well.

What tips can you share about controlling spending? I'd love to hear your comments.

Friday, June 2, 2017

Countdown to Financial Fitness: Navigating Cuban Currency

Countdown to Financial Fitness: Navigating Cuban Currency: I returned last week from a cruise to Cuba, and I wish I had done more research on that country's currency system before I left. I ...

Navigating Cuban Currency

I returned last week from a cruise to Cuba, and I wish I had done more research on that country's currency system before I left.

I knew businesses in Cuba don't accept credit cards drawn on U.S. banks. And certainly not American Express. So I was prepared to pay in cash for anything I bought. Because we were visiting the country on a cruise ship, taking excursions organized by the cruise line, I didn't expect to have to buy much. Maybe just a few beverages and a souvenir or two.

And tips. Cubans expect tips for everything. Including using their bathrooms. Once we got on board, the cruise line provided us with a wallet-sized tipping guide.

Friends who had visited Cuba reported that dollars were widely accepted. Yes, at the currency exchange.

Although the cruise line told us we must exchange our money because Cubans are not allowed to accept foreign currency—even for tips—I'm not sure this was entirely accurate. Plenty of cab drivers and vendors approached us and offered their services in exchange for U.S. dollars. But I imagine the cruise line, calling on Cuban ports at the permission of the government, was obligated to communicate official policy.

Cuba has a dual currency system, and neither currency is traded internationally. That means you can't buy Cuban pesos until you arrive in the country, and you can't get rid of them when you get home—or on board the cruise ship. (Technically, you're not even supposed to transport Cuban pesos out of the country.)

The Cuban Convertible Peso (CUC), with a 1:1 exchange rate pegged to the U.S. dollar, is the legal tender given to tourists at banks and currency exchange kiosks. A passport is required to exchange money. The CUC is approximately 25 times more valuable than the Cuban Peso (CUP), the currency used by locals at ration stores. Most state shops, especially those catering to tourists, post prices in both currencies.

There is a 3% service charge on foreign currency exchange. Plus, there is a 10% surcharge/penalty on U.S. dollars. So for my $60 cash, I received only 52 CUCs. My husband flies to Europe frequently and always has euros; too bad we didn't know to bring them with us to Cuba, as we could have exchanged those and avoided the 10% penalty.

We were warned about a common tourist scam where a vendor will accept payment in CUCs and then when returning change, will substitute lower-value CUPs for CUCs. An easy way to distinguish between the two currencies is that CUPs have faces of people on the bills, and CUCs have pictures of monuments. Fortunately, no one we talked to had fallen victim to this scam.

The closest we came was when we were heading back to the ship in our last port, having spent our last CUC, and a young man greeted us. "I'm a teacher," he said. "And I'm trying to meet tourists." He asked us our names and where we were from. "I have a gift for you," he said, and presented me with one CUP. "A souvenir from my country." I thanked him and started to walk away. "Wait," he called. "You can give me a CUC for that." When we told him we didn't have any more CUCs, he wanted his "gift" back.

To summarize, here are my suggestions if you plan to visit Cuba:
·        Bring adequate cash, as you won't be able to rely on credit cards or ATMs.
·        If you have euros, Canadian dollars, British pounds, or most any currency besides USD, exchange that instead, in order to avoid the 10% fee.
·        Exchange as you go, and get only as much local currency as you think you'll need. (But plan for gratuities.) Our ship ended up skipping one of our planned ports, and many passengers had to wait in line for hours to exchange their Cuban money back into dollars, paying another 3% service charge.
·        Learn to distinguish between CUCs and CUPs, and watch your change.
What tips do you have about exchanging currency abroad? I'd love to hear your comments.

Friday, May 5, 2017

Countdown to Financial Fitness: Remembering my Frugal Mother

Countdown to Financial Fitness: Remembering my Frugal Mother: My mother liked to be acknowledged on Mother's Day, but she bristled at the thought of money being spent on her. No gifts, a card was f...