I always get a kick out of these ‘for Dummies’ book titles. If they used another derogatory term instead of ‘dummies ‘do you think they’d sell any books? Some alternative titles might read ‘Investing for complete idiots’ or ‘Investing for the mildly retarded…please stop drooling on the book and pay for it’. Like or hate the title of this book Investing for Dummies it is actually pretty good.

Main Themes & Topics
Mutual Funds
Stock & Bond Investing
Money Market accounts V.S. FDIC insured savings accounts
Real Estate
Entrepreneurial Start-up businesses
T-Bills and Municipal Bonds
Tax Considerations

Surprises
One thing Eric spends a good deal of time on is starting your own business. Most investment books don’t include this as an option. As an entrepreneur at heart I really enjoyed this part of the book. He provides a checklist of 10 characteristic an entrepreneur must have to be successful. While starting your own business is an exciting investment opportunity I think Micheal Gerber’s points on entrepreneurial start-ups should be considered. Investing for Dummies treats all businesses as the same and they just aren’t. You’ll need to read Micheal Gerber’s eMyth Manager book to understand what I’m saying.

Summary
This book is very good at giving a birds-eye-view on the world of investing and doesn’t go into too much depth. This is the book’s strength as well as the book’s weakness. It doesn’t teach you all the terms you’ll need to know in each of the subject. Instead it defines the key concepts and strategic considerations. It gives a rookie investor an idea of what to expect with different investment vehicles. If you’ve saved up some money to invest but don’t know where to start, this is the book for you!

Buy Investing for Dummies on Amazon

This might be old news for some but for others it might be new. You can get a free credit report from each of the three credit reporting bureaus each year. Every twelve months Experian, Equifax, and TransUnion will give you a free credit report. The only downside is that you don’t get your actual score. You only get the report. The report will show you all your open accounts, payment history, and much more. The only thing it won’t tell you is the actual number of your credit score. Beyond using it for bragging rights or knowing where you are on on the credit score scale the number isn’t all that useful.

If you want to monitor your credit you can spread out each report and pull one every four months. By spreading out the time you pull the reports you can see any changes that are out of place. So, in January you’ll get your report from Experian. In May you’ll get it from Equifax. In September you’ll get it from TransUnion. When January comes around again your year waiting period will have passed with Experian and you can apply again. If you want email reminders sent to you try LetterMeLater.com. They will send you emails in the future so you won’t forget.

Please visit www.annualcreditreport.com to get started.

While monthly interest costs is a simple calculation it is nice to know what your debt is costing each month. Lately I’ve been obsessed with automatic monthly income or expenses. Trying to cut back on every monthly expense and trying to increase monthly residual income is a challenge. What if I paid an extra $1,000 on my credit card? How much would that increase my net monthly income?

While $10 a month doesn’t sound like much savings it all adds up quick. If you have $10,000 in credit card debt you’d be paying $100 a month just in interest fees. Fighting to get back $10 a month in residual income is well worth it.

Cost of $1,000 debt every month

5% APR costs $4.17 per month
6% APR costs $5.00 per month
7% APR costs $5.83 per month
8% APR costs $6.67 per month
9% APR costs $7.50 per month
10% APR costs $8.33 per month
11% APR costs $9.17 per month
12% APR costs $10.00 per month
13% APR costs $10.83 per month
14% APR costs $11.67 per month
15% APR costs $12.50 per month
16% APR costs $13.33 per month
17% APR costs $14.17 per month
18% APR costs $15.00 per month
19% APR costs $15.83 per month
20% APR costs $16.67 per month
21% APR costs $17.50 per month
22% APR costs $18.33 per month

Debt = Risk
The economy for the last 20 years has grown almost entirely on debt. Real wages haven’t increased but consumption has double and tippled. We live in bigger homes, drive newer cars, and have more expensive technology than our parents did. The recent boom in housing has dumped billions of dollars of new home equity and home sales money into the economy. This money was created through new loans and new debt. Consumers have maxed out there credit cards, home equity loans, and are struggling to make ends meet as gas and food prices increase.

Debt is marketed vigorously to young, old, and everyone in between. Debt is sold as the end-all solution for any of life’s problems. Sometimes debt is sold as a tool to ‘leverage’ other people’s money to your own ends. This very popular in the get-rich-quick real estate programs. While there is power in leveraging it can work in the opposite direction, and frequently does. Remember the Great Depression? It was made many times worse by the use of borrowing on margin accounts. Margin accounts are used to borrow from a broker to buy stock. When the market went up everybody made money. When the market started to slide downward everyone panicked. The margin accounts left many people over-leveraged and debt quickly turned against them. The longterm results will disprove the theory of leveraging and using excess debt to build wealth.

No matter which way you slice it debt equals risk. Companies and individuals with a lot of debt are not considered financially healthy. Investors and lenders won’t tolerate the high-risk lifestyle and penalize those companies and individuals with very high lending rates. Debt is a guaranteed loser and those that claim debt as a valuable tool can look at the longterm record of all the failed companies and individuals as proof. Longterm prosperity can’t be built out of excessive debt.

Surely, some debt can be good. It wouldn’t be right to say debt is good, but justified. Debt is justified when these criteria are met: It can consistently make more than the cost of debt. The asset doesn’t depreciate or stagnate. The asset appreciates with time.

(positive growth of asset) - (cost of interest on debt) = Asset(+) or a Liability(-)

Most justified debt include education and homes. Debts that are not justified are: consumer debt, automobiles, and vacations. Those things aren’t bad per say but should be bought with cash, not debt.

Saving money and time is a big part of frugal living. These free phone services will save both time and money. Regular 411 calls are now $1.00 to $2.00 a pop. And calling a friend to find a phone number can be a pain. Take some time and program these numbers into your phone. These services will help you with directory assistance, information retrieval (stock quotes, directions, game score, etc), help you find your phone, bid on auctions on ebay, write to-do lists, give yourself a reminder in the future, and much more.

1-800-GOOG-411 - Voice Activated 411 Service
If you never got into texting this is a fast way to get the answers you need. Not only will this service look up the name and phone number for free it will also automatically call the person. This is is increadibly easy to use. Watch a video on how it works here.
*Note: This works on every kind of phone, not just cell phones.

Text GOOGLE - Text Information Retrieval
GOOGLE SMS (Text: 466453) - This text service will give you a wide array of information. Directions, weather, stock quotes, show times, and everything in between. Because it is tied to Google’s database of knowledge there is almost nothing you can’t ask.

1-800-2CHACHA - Voice Activated 411 Service
This is much like GOOG411 but it only works on cell phones. The service is nice but it’s hard to beat Google’s service.

Text CHA CHA - Text Information Retrieval
Cha Cha (Text: 242 242) - This service is much like GOOGLE. If you’re feeling a little crazy and want something different give these guys a try.

Voice to Text Organizer Service
Jott - Write down reminders, appointments, or make a list using Jott. This free service converts the things you’re saying into text for later reference. Simply call Jott and it will do all the work for you. This is very handy for the A.D.D. people out there who think about things that need to be done while they’re running around.

Lost Cellphone
WheresMyCellPhone.com - For those times you need to find your phone but don’t have another phone handy. Enter your phone number in and this free service will call your phone. Hopefully you can find it. This will also work for portable phones at your house. Any number will work.

Emergency Service
112 - Out of range, keypad locked, or traveling internationally won’t stop you from getting emergency medical assistance. Just dial 112 and you’ll be connected to the nearest emergency service provider.

Bid on eBay Auctions
UnwiredBuyer.com - Bid on ‘watched items’ in your eBay account from your cell phone. They offer additional auction updates and allow you to practice bidding. That way you won’t freeze up when the real deal comes your way.

Unlimited incoming minutes with T-Mobile
Grandcentral.com - Sign up for Grandcentral.com and a T-Mobile 5 Fav plan. When you give out your number use the Grandcentral number. Make the incoming Grandcentral number one of your Favs with T Mobile and you get free incoming minutes.

If you have consumer debt on credit cards you qualify for this “opportunity”. Your credit debt and interest payments work against any positive interest you might be accruing. Lets say you’re earning 12% a year in the stock market. After taxes you’re only getting 9% unless you’re protected by a ROTH IRA. A 9% return is the average stock market return over thirty years (minus taxes). If you have an equal amount of money in consumer credit card debt and your paying 18% a year in payments you are still down. You are actually losing -9% a year with your current investment strategy.

Risk is a considerable factor as well. If the market is down you could be earning nothing or have negative returns in the short term. This would decrease your -9% to -18% in a hurry. If you tack on inflation you’re investment strategy is negative over -20 percent!

Paying off credit cards isn’t very exciting. It doesn’t feel the same as making new money. When you add up all the positive returns you are making and subtract your negative interest it only makes sense to stop the bleeding. Once you’ve got your debt under control start making positive investments.

You might consider different debt consolidation options, selling stuff, or drive a different car. All of which will help you in your investment goals.

The idea is simple. Compound interest is interest that becomes principle. When the earned interest becomes principle it starts earning interest on itself. To help illustrate, lets contrast Simple Interest with Compound Interest.

Key to Different Types of Interest
In the following example the icons that look like squares can earn interest. The squares are ‘money makers’. The hexagons can’t create money. They are paid out as interest.

Simple interest keeps the earned interest and the principle separate. In other words, the interest never becomes principle. Simple Interest growth would look like this:

When Compound Interest grows it makes smaller pieces of principle which also earn interest. One of these new pieces of earned money changes from interest to principle when the account compounds. Investments can compound yearly, biannually, quarterly, monthly, and even sooner in some cases. The more something compounds the sooner you can make new money off earned interest.

The above illustration shows the interest making new amounts of interest from themselves. These new sums of principle will grow independently of the first sum of principle.

This graph shows the nature of compound interest. This is known as exponential growth. In order for you to see big results you need two ingredients: Time and Rate of Return.

What you need for Compound Interest to work well: Time and Growth Rate.

If you had 40 years to let your money grow you would be much better off than someone who only had 30, 20, or 10. Those last few years are critical to make the big returns. The sooner you pull your money out the sooner you stop all the compounding growth.

MoneyChimp Compound Interest Calculator

When you contrast simple growth with compound growth you can see the longterm difference between the two. Notice how similar the compound interest line and the simple interest line are in the beginning. The more time you give compound interest the more it will beat simple interest. The less time you give to compound interest the less it can perform.

Rule of 72

The rule of 72 helps you estimate how soon your money will double given a constant growth rate with compound interest. To use the rule of seventy-two take the growth rate and divide it into 72. The outcome will equal how many years it will take to double your money. This assumes a constant growth rate and that your investment is compounding.

72 / (growth rate) = Years to Double Investment

For example with a growth rate = 10%

72 / 10 = 7.2 Years

Answer: It will take 7.2 years to double your money with 10% return on your investment.

The rule of 72 isn’t an absolute but it will get you in the ball park. Another downside is that if your growth rate fluctuates too much the rule of 72 doesn’t work.

Summary
As you understand how compound interest works you can better plan your future. Compound interest is what makes retirement possible despite rising costs of living, inflation, and other costs. If you have any more to add please leave a comment.

There are two major factors that affect your return and make you lose money; inflation and taxes. For every dollar of interest you make each year Uncle Sam takes 30%. The government treats your interest as income and taxes you on it. You just lost $1 of the $3 you earned in interest. Your year-end gain is now $2 on your hundred-dollar investment.

The next negative force affecting your investment is inflation. Inflation in the United States has been 3% to 4% every year historically. You can expect to have your money worth 3 to 4 percent less year-after-year because the Federal Reserve keeps pumping money into the economy. This means the $102 balance in your savings account can only buy $99 worth of goods and services this year. Your hundred dollars is now worth less than when you started a year ago.

Does this mean you shouldn’t have any money in a high interest online savings account? No. The alternative is far worse. If you kept your money in a checking account, regular bank savings account, or stuffed your money in a mattress the scenario would be three to four times worse. Instead of losing $1 you could lose $3 to $4 every year. Your money is better in a high yield savings account than not.

The point here is not to get too excited with online savings accounts returns. They will help you ‘tread water’ but you won’t build your wealth. You might consider a non-FDIC-Insured money market account for slightly higher yields but money there shouldn’t be considered ‘investments’ either. In the end you want most of your money in real investments like stocks, mutual funds, real estate, and/or bonds.

Please leave a comment if you have any further recommendations on this subject.

Warren Buffett - Net Worth: $52 Billion

By far the greatest investor of our time. Called the Oracle of Omaha he has a knack for generating billions of dollars for his investors.

Up until 2006 he drove a 5 year old 2001 Lincoln Towncar. The license plate read “THRIFTY”.

Ingvar Kamprad - Net Worth: $33 Billion

Ingvar Kamprad, Ikea founder.

He drives a Volvo which is more than 15 years old.

Sam Walton - If alive today his Net Worth would be: $63.3 Billion

Known for being fiscal and practical in all his dealings. His heirs collectively have $63.3 Billion.

Sam drove a 1979 F-150 even after he made billions with Wal-Mart.

MoneyChimp ‘Simple’ Calulator

The MoneyChimp Calculator is simple and offers a quick snapshot of what your annual retirement income might look like. This is one of my preferred calculators for a rough ballpark figure on where your finances should be. It doesn’t go into depth about social security, vacations, and other more specific items. Overall it’s a great simple to use tool. Visit MoneyChimp.com

MSN’s Calculator is my favorite. It automatically updates every time you enter new information. The numbers change in the results box and the graph redraws itself. It tells you whether you’ll leave your heirs with an inheritance or a load of debt. It also informs you when you’ll run out of money. Because of the flexibility of the tool you can enter a lot of “What if?” questions and have the results instantly. One of the weaknesses of this calculator is that it doesn’t take into account inflation or yearly salary growth. Besides those weaknesses this is a very cool calculator.Visit MSN to try it out

Bloomberg Retirement Calculator

Bloomberg offers a Java based calculator which is very nice if you can get it to work. It never did work on one of my computers but worked flawlessly on another. If you have a temperamental computer this calculator might not work for you. Besides that issue this calculator takes into account inflation and salary growth which is important for your final numbers. Visit Bloomberg

Things that are missing in all the calculators
None of the calculators mention ‘real dollar equivalent’, ‘relative value’, or ‘inflation adjusted’ annual income. $100,000K a year sounds pretty good right now but in the future it might be worth less, a lot less. For example, $100,000 today was only worth $20,000 in 1972 in relative value. If you planned to take home $100,000/year when you retired in 2007 it would only be worth $20,000 in 1972 relatively.

What this means is $100,000 isn’t a $100,000 in the future. 35 years from now what you know as a $100,000 might only buy $20,000 of goods and services in 2043. In other words, 1 dollar in the future might only be worth 0.20 cents in relative terms in the future. So don’t get too excited about a retirement income of $100,000 annually. There’s a good chance it might only be worth $20,000 in the future.

What does this mean for your retirement goals? It means you’ll need more than you think (especially if inflation increases like it has for the last 30 years). The way to find out how much more you’ll need is by using this tool at measuringworth.com. Take the number for your annual or monthly income from the calculators above and enter it into the ‘Initial Amount’ field. Type ‘2007′ into the ‘Initial Year’ box. Now subtract how many years you have until retirement from the current year and use that in the ‘desired year’ box. Now click ‘calculate’ and see what your money might be worth in 2043. This method isn’t a perfect prediction but it will give you an idea of what a dollar will buy 30 years from now. Visit Measuringworth.com

Wow. That was depressing. But with compound interest on your side you have a solid chance at reaching your goals. All this means is that you’ll need to start today and invest more than the minimum.

If you have any additional input on retirement calculators please leave a comment.