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May 31, 2006

ING Increases Savings Rate to 4.25% APY

INGDirect, the sponsor of the popular Orange Savings Account, raised their interest rate this morning to 4.25% APY. This follows Emigrant which raised just last week. One of the reasons given yesterday for the Stock Market's large decline was that investors were concerned that the Federal Reserve would continue to raise interest rates based on a strong economy. We are starting to become a little skeptical that rates are going to continue to rise, particularly with oil prices continuing to go up and obvious softness in the Real Estate market. Therefore, this is a good time for Online Bank investors to get a competitive yield with no risk to principal. See our Banking Center for a listing of all our Online Savings Account and CD providers.

May 30, 2006

Are Speculators to Blame for Rising Oil Prices?

With oil and gas prices rising to new highs and consumers feeling the pinch, recently some of the evening Talk Shows have suggested that "evil speculators" that are in cahoots with the Oil Companies are at fault. However, before laying blame on someone, a basic understanding of the Commodities Futures Markets is helpful.

In a discussion of physical commodity markets such as oil, natural gas, wheat, gold, etc., there are two main players involved in determining the market price. Generally speaking, you are either an actual Producer (or somehow involved in the actual product, such as a distributor), or a Speculator. An oil company, like Exxon that actually risks its' own capital to explore for oil, is an example of a Producer. A trader on the Futures Exchange or an investor at home wanting to make money somehow in the oil markets are Speculators. The two of these, combined with the Futures Exchanges, are integral to the functioning of our Financial Markets and are one of the main reasons our Capitalistic system works so well at allocating resources and determining fair market prices.

If you are a Producer of a product, the price of the particular product such as oil will usually be very different from when you actually started the exploration process versus when you are able to sell it. If the prices rise you stand to make a greater profit, but if the price drops you may actually lose money as you have already paid all of the upfront costs associated with production. This is a huge risk to the Producer and has been the cause of many companies going out of business. Wouldn't it be nice if a Producer could somehow "lock-in" their selling price so as to guarantee at least a minimum profit?

They can, and this is where Speculators and Exchanges come into play. A Commodity Exchange is where Producers and Speculators come together to "do business". Producers are interested in being able to sell their products at a particular price or range whereas Speculators just want to make money. A Producer can hedge their risk of a price fluctuation by "transferring" that risk to a Speculator. The process of transferring risk is known as buying or selling a Futures Contract.

For illustration purposes let's say that it costs Exxon $60 per barrel to get the oil out of the ground but they need a minimum selling price of $75 per barrel to show an adequate return for their shareholders. Exxon can sell a Futures Contract that allows the buyer, the Speculator, to buy the oil from them at $75, locking in Exxons' needed profit. A Speculator who feels that oil prices are going to continue to rise in the near term to say, $90, might find this an attractive investment opportunity. If the price does in fact rise, Exxon makes money, not as much as if they didn't hedge, but still at least a profit and the Speculator also makes money. If the price drops Exxon is protected on the downside and the Speculator losses money. Oh well, that is why they are called Speculators and the real ones understand the risks involved.

This is a simplistic explanation and there are numerous variations and nuances involved. However, the bottom line is that the Producers and Speculators need each other. It is a symbiotic relationship and neither can really prosper without the other. As consumers, we benefit because the Producers are able to stay in business and we get their product. The market, supply and demand, and the interaction between Producers and Speculators ultimately determines the end price.

May 26, 2006

Emigrant Increases Interest Rate to 4.65%

Emigrant Bank, sponsor of the popular EmigrantDirect American Dream Savings AccountTM raised their interest rate today to 4.65%.

Ben Bernanke, the new Chairman of the Federal Reserve, has raised interest rates at every meeting this year. The Federal Reserve is concerned that inflation will get out of control since the economy is performing so well. This is a good time for investors to keep a portion of their conservative money in online accounts like Emigrant as the rates are competitive, continuing to rise, and with the FDIC insurance there is no risk of loss.

May 15, 2006

Take the Emotion Out of Selling

Selling an investment can be an emotional decision, especially if the investment has experienced a loss. Many investors can’t stand the thought of selling at a loss, preferring to wait until the investment rebounds to the breakeven point. However, the investment may not rebound to that level or may take a very long time to do so. In the meantime, you could have been invested in other alternatives with better prospects.

Thus, you should try to take the emotion out of your sell decisions. To do that, set up criteria for selling before you purchase the investment. Write down your reasons for purchasing and what could cause you to sell. For instance, if one of your reasons for purchase was a company’s strong management team, that team’s departure might be a reason to sell. Reasons for selling can be subjective as well as objective. Subjective reasons could include changes in the company’s product line, competitive advantages, or management team. Objective reasons could include changes in sales, profits, or the stock’s price.

As part of this process, set high and low target stock prices that will trigger a review of the investment. You don’t have to sell when the investment reaches those targets, but you should review the investment to make sure you still want to own it. To limit losses, you might want to set rigid rules for selling when the price declines by a certain percentage of your purchase price, perhaps 7-10%. That way, you will be sure to sell before substantial losses are incurred.

May 14, 2006

Keeping Your Expectations in Line

When designing an investment program, your expected rate of return is a critical element in determining how much to invest to meet a future goal. Since no one can predict future returns, the expected rate of return is typically estimated based on an analysis of past returns for various investments.

For instance, from 1926 to 2004 (79 years), the average return for the stock market as measured by the Standard & Poor’s 500 (S&P 500) was 10.4%. Change that period to 1955 to 2004 (50 years) and the return changes to 10.9%, 13.5% from 1980 to 2004 (25 years), and 12.1% from 1995 to 2004 (10 years).*

It’s tempting to use the highest return possible, since that would result in the lowest savings amount. Instead, consider using a conservative estimate. If you save too much, you can always reduce savings in later years or spend more money in retirement. The alternatives are far less attractive if you don’t save enough. Consider the following points when deciding on an expected long-term rate of return:

Your investment time frame will probably encompass decades. Thus, consider using a historical rate of return covering a very long time frame, making adjustments from there.

Factor in inflation. Inflation, as measured by the consumer price index, averaged 3% since 1926 (Source: Bureau of Labor Statistics, 2005).

Watch your pattern of actual returns. Even if you get the average rate of return exactly right, your portfolio’s balance will depend on the pattern of actual returns during that period. Some years will experience higher than average returns, while other years will have lower or even negative returns. If you experience higher returns in the early years, your portfolio will be lower than if those returns occurred in the later years. If you encounter negative returns in the early years, you will have a higher balance than if those negative returns came in the later years. Assess your portfolio’s progress every year so you can make adjustments along the way.

What is a reasonable long-term rate of return to use for stock investments? Starting with the average return from 1926 to 2004 of 10.4% and subtracting 3% inflation would result in a return of 7.4%. You may even want to use a more conservative return if you feel the stock market may encounter an extended period of below-average returns. Sure, that means you’ll need to save more every year, but learning to live within your means and saving a significant portion of your income aren’t bad things.

* Source: Stocks, Bonds, Bills, and Inflation 2005 Yearbook, Ibbotson Associates. The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market. Investors cannot invest directly in an index. Past performance is not a guarantee of future results. Returns are presented for illustrative purposes only and are not intended to project the performance of a specific investment.

May 11, 2006

The Benefits of Dollar Cost Averaging

Dollar cost averaging involves investing a set amount of money in the same investment on a periodic basis. Since a fixed amount of money is being invested, more shares are purchased when prices are lower and fewer shares are purchased when prices are higher. Of course, whether dollar cost averaging produces a higher return than investing a lump sum immediately depends on whether the investment’s price rises, declines, or fluctuates over the investment period.

While some investors are concerned about how to invest a large sum, many investors use dollar cost averaging as a way to invest over time. For instance, participating in a 401(k) plan is a form of dollar cost averaging, since contributions are taken out of every paycheck and invested in predetermined investments.

For investors who are investing over a long time period, a dollar cost averaging strategy can provide several benefits:

• It requires the discipline to invest consistently, regardless of market fluctuations. Thus, it reinforces the habit of regularly setting money aside for investing.

• It eliminates the need to decide when to invest. With a dollar cost averaging program, you just follow the plan and invest on a periodic basis, without trying to time the market.

• Since your investment is made over a period of time, it keeps you from investing all your money at a market high.

Dollar cost averaging, however, does not ensure a profit or protect against loss in declining markets. Before starting a dollar cost averaging program, you should consider your financial ability to continue purchases through periods of low price levels.

May 9, 2006

Use a Budget to Control Spending

First, keep this in mind, almost no one enjoys the process of analyzing and budgeting expenditures. But inefficient and wasted expenditures can be major impediments to accomplishing your financial goals. It is difficult to manage your money if you don’t know how much you have or where it is going. Consider these steps when developing your budget:

1. Identify how you are spending your income. You should review your spending on an annual basis so you can identify regular monthly expenses as well as irregular, periodic expenses, such as insurance premiums, tuition, and gifts. Much of the information you need can be found by examining your canceled checks, credit card receipts, and tax returns. Total your expenses in categories that make sense for your lifestyle. If you can’t account for more than 5% of your income, take a closer look at your cash purchases. Keep a journal to track every penny you spend for at least a month.

2. Evaluate your expenditures. If you’re having trouble finding money to save, critically review your expenditures. Consider these tips:

Find ways to save at least 10% of your income. Almost all expenditure categories offer potential for savings. With essential expenses having fixed amounts, such as your mortgage, taxes, and insurance, you may be able to refinance your mortgage, find strategies to help reduce taxes, or comparison shop your insurance to reduce premiums. Essential expenses that vary in amount, such as food, medical care, and utilities, can usually be reduced by altering your spending or living habits. Discretionary expenses, such as entertainment, dining out, clothing, travel, and charitable contributions, typically offer the most potential for spending reductions. Dining out four times a week? Reduce it to two, go to less expensive restaurants, and save the difference.

Limit the use of your credit cards, especially if you’re not paying the balance in full every month. Not only do credit card balances carry high interest charges, but credit cards tend to encourage impulse spending. Use cash or a debit card, which automatically deducts purchases from your bank account.

Resolve not to purchase impulse items or items over a certain dollar amount on your first shopping trip. Go home, think about "it" for a week, and then go back to purchase the item. Often, you’ll decide you don’t really need the "it".

Delay the purchase of large items. For example, instead of purchasing a new car every two or three years, keep your car for four or five years.

If you’re really serious about reducing expenses, consider moving to a less expensive home. Not only will you reduce your mortgage payment, but you will save on other costs, such as property taxes, insurance, and utilities.

3. Prepare a budget to guide future spending. You may want to begin by setting a budget for a couple of months and tracking your expenses closely over that time period. You can then fine-tune your budget for an annual period. Some tips to consider when preparing your budget include:

Don’t include income in your budget that is uncertain, such as year-end bonuses, tax refunds, or gains on investments. When you receive that money, just put it aside for saving.

Set up enough expenditure categories to give you a good feel for your spending patterns, but not so many that it becomes difficult and time-consuming to monitor your progress.

Make your budget flexible enough to handle unforeseen expenditures. Nothing goes exactly as planned, and your budget should be able to deal with emergencies. Be sure to include large, periodic expenditures, such as insurance premiums or tuition.

Don’t be so rigid that your family is afraid to spend any money. Everyone in the family should have a reasonable allowance that can be spent without accounting for it.

Find ways to make the savings component of your budget happen automatically. Get the money out of your bank account and into an investment account before you have a chance to spend it.

To assist you in your budgeting process you may want to consider using a budgeting process that uses an advanced Internet technology such as Mvelopes Personal.

May 6, 2006

Countrywide Bank Raises Interest Rate to 4.15% APY

Countrywide Bank has raised the interest rate on their Online Banking product to 4.15% APY. This follows INGDirect which also went to 4.15% APY a week ago. In addition to Online Savings, Countrywide also offers competitive Certificate of Deposit rates. If you are not taking advantage of the high interest rates available from the online banks you are really missing out. Most of the online rates are double what conventional banks are offering. In addition, the accounts "link" to your existing bank accounts making it easy to transfer funds between the two and they are also FDIC insured. You can see our complete selection in the ManagingMoney.com Banking Center.

May 3, 2006

Check Your Personal Financial Ratios

When reviewing the financial health of a company, it’s common to look at financial ratios, such as: EPS (Earnings Per Share), P/E Ratios (Price/Earnings Ratios), Book Value, and Total Return. The reason financial ratios are so popular is they give you a means of evaluating financial information, while allowing you to track changes in a company’s performance over time. Consider using the same concept to assess and track your personal financial situation.

At least annually, you should prepare a personal net worth statement and then calculate various financial ratios. By comparing those ratios over time it will help you assess whether or not you are making progress toward your financial goals.

Start by preparing a net worth statement, which lists all your assets and liabilities, with the excess representing your net worth. All assets should be listed, including vested balances in retirement plans and 401(k) plans, personal property, jewelry, and household items. Assets should be valued at the price you would obtain if you sold them now, not the amount you paid for them. You’ll also want to list your annual income, for ease in calculating some of the ratios.

The next step is to ask yourself the following questions about your finances and calculate these financial ratios:

Has your net worth grown by more than the inflation rate? Calculate the percentage growth in your net worth over the past year and compare that to the inflation rate. To make progress toward achieving your financial goals, your net worth should increase by more than the inflation rate. If your net worth is not growing, determine the reasons.

What is your ratio of assets to liabilities? A ratio of less than 1 indicates you have more liabilities than assets — a negative net worth. If that is the case, take active steps to reduce your liabilities. This ratio should increase over time, which would indicate you are reducing debt.

What is the trend in your liabilities? Review the amounts and types of debt outstanding. Mortgages are typically used to purchase a house or other items that appreciate in value, so they are considered “good” debt. Credit card balances and auto loans are used to finance items that typically don’t appreciate in value and should be kept to a minimum.

What percentages of your assets are liquid and nonliquid? Nonliquid assets include items like your home, other real estate, jewelry, and works of art. Although they may increase in value over time, they can be difficult to sell quickly at full market value. Liquid assets, such as bank accounts and stocks, are more easily converted to cash. You want sufficient liquid assets to cover financial emergencies.

What is your savings to income ratio? For this ratio, your savings equal all assets designated to help fund your retirement. It typically won’t include your home, since you will probably live there after retirement. First, you need to decide what this ratio should equal at retirement. It is basically the amount of savings you want at retirement age, preferably determined after a careful analysis of all appropriate factors, divided by your annual income. For instance, if you want retirement assets equal to $2,000,000 when you retire and you currently earn $100,000, you would need a savings to income ratio of 20 when you retire. You might then develop benchmarks over your working years to help you gauge whether you are on track to achieving that goal.

What is your savings rate? Calculate what percentage of your income you are saving on an annual basis. Typically, you’ll want to save a minimum of 10% a year. This would include 401(k) contributions and Individual Retirement Account contributions. If your employer matches your 401(k) contributions, you can include those contributions as part of your annual savings.

How have your investments performed? Now may also be a good time to thoroughly analyze your portfolio’s performance over the past year. Measure the performance of each investment, comparing it to an appropriate benchmark. This can help you identify portions of your portfolio that may need to be changed. Also calculate your overall rate of return and compare it to your targeted return. If your actual return is lower than the return you targeted when designing your investment program, you may need to increase your savings, select investments with higher return potential, or settle for less money in the future.

May 1, 2006

ING Raises Interest Rate to 4.15%

ING Direct, the sponsor of the popular Orange Savings Account raised their interest rate yesterday to 4.15% APY. This is good news for investors looking for safety and a competitive yield on their savings. All year interest rates have been inching up as the economy continues to perform well. ING is consistently one of the leaders with their rates. Online accounts like the Orange Savings are meant to complement an investors existing bank account rather than replace it. Investors "attach" their Orange Savings Account to one or more other traditional accounts and can then "sweep" extra funds from their low interest accounts into the higher-yielding ING account. Be sure to check out our Banking Center where you can compare rates on over 16 of the more popular National online bank accounts.


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