I haven't really taken the time to put together a well thought-out post this weekend, but I have some random thoughts that have been bouncing around in my head about personal finances. This has been on my mind because our church is doing a finance class on Wednesday nights, but I haven't been able to attend it due to my schedule at KU. I'll probably start going after this week.
I think about ninety-five percent of personal financial issues are relatively easy to understand, and the problems that most people have comprehending them are due to a lack of interest (no pun intended) or due to intimidation more than anything else. I've been told that rich people are smart, lucky, and old. I think "moderately observant" could replace "smart" in that list rather well. How hard is it to understand that you should spend less than you make or that compound interest can work exponentially for or against you? We're not talking about rocket science here.
Think investments are difficult? Just invest in ETFs indexed to a broad market (like the S&P 500) or a broad-based international ETF (like BRICs, which invest in Brazil, Russia, India, and China) and forget about it. Really, you are generally better off doing this than trying to pick winners in the market, even if you know what you're doing, anyway. All you need to understand is what an ETF is, and that you shouldn't waste effort trying to time the market.
The one thing that I find annoying about finances is the wide array of completely arbitrary rules. Many lenders have found ways of squeezing extra money out of borrowers through mechanisms that few people really understand. Apparently one that was mentioned at the last Wednesday night class is a Rule of 78s loan, which is a type of loan that allows the lender to charge the same interest from the borrower regardless as to whether extra principle has already been paid. There is very little reason why consumer finance rules should be this complex.
Going along this same train of thought, I came across this SNL skit online recently. It does describe pretty well why a lot of people are in dire straights, though I have already noted that it would be unfair to classify everyone with debt problems this way.
* In the interest of proper disclosure, Golden and I currently own shares of two ETFs. One is based on the S&P 500 (SPY:AMEX) and one invests specifically in companies based in Taiwan (EWT:NYSE). I wouldn't recommend investing in one specific country as I have done, though, unless you are very confident in what you are doing.
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3 comments:
I don't understand what ETF's are???
ETFs are like mutual funds that operate more like stocks. For example, investing in an S&P 500 ETF is the same as if you invested a little bit in every company in the S&P 500. An S&P 500 ETF will generally move up and down in synch with the market.
An index ETF and an index mutual fund are both typically tied to an index (like the S&P 500) and have low expense ratios (how much the company managing the fund takes out for running it). An actively managed ETF or mutual fund (meaning that a human picks the investments for the fund) typically has a much higher expense ratio that is not typically worth the extra expense.
There are two big differences between ETFs and mutual funds. A mutual fund's price changes only once a day, and an ETF fluctuates with the market throughout the day. Also, the way that mutual funds are set up, you can end up paying capital gains taxes on them even in years where the fund's value went down. With ETFs you don't have to pay capital gains taxes until you sell the ETF. Note that in a 401(k) or 403(b) these tax concerns are unimportant, since there are no capital gains taxes on those types of accounts.
I didn't really know what an ETF was either. I'm glad that you take care of that stuff. I know I should care about it because I have a business degree. It's just boring.
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