Friday, August 28, 2009

Dollar-Cost Averaging

“Dollar-Cost Averaging” is one of the most commonly known and understood investing strategies. But everyone hears about it a first time, even you.

When I first heard about dollar-cost averaging I was attending a financial planning seminar in Killen, Texas. I was a young married Army Lieutenant with a mortgage but no children. The seminar was sponsored by Fidelity Investments.

A round wooden disk with the letters “TO IT” printed on one side in bold black letters was found on every chair when we arrived. After pitching the benefits of systematically making monthly purchases of the Fidelity Destiny mutual fund the presenter concluded the seminar by telling us that we had no excuse now that he had given us all “a round to it”. Then he scheduled home appointments with many of us, including me.

In the end, I signed up. For two and a half years a monthly allotment was automatically deducted from my Army paycheck and invested in the Fidelity Destiny fund. Because of the systematic dollar-cost averaging of my fund purchases and because I waited another two years before selling my shares this was my first, and for many years my only, successful investment. It was successful despite a 20% front end load which means 20% of every monthly purchase was skimmed off and given to the sales person (the seminar presenter) as a commission.

So what is this magic “dollar-cost averaging”? It is simply the fact that the price of your chosen investment instrument will fluctuate and if you make regular equal dollar amount investments in the same financial instrument you will sometimes pay a high price and sometimes you will pay a low price. When the price is high you buy fewer shares but when the price is low you buy more shares.

Because the average price you pay is always less than the highest price your investment risk is reduced. You will not inadvertently put all of your money into your investment at the highest price, nor will you get an accidental windfall by putting everything in at the lowest price.

For most people, like me then and now, dollar-cost averaging is not an intentional strategy. It is the result of a payday saving plan – like contributions to a 401k account.

However, if you happen to have a lump sum to invest, remember dollar-cost averaging and consider using it to put your lump sum into one or more investments using multiple purchases over an extended time period. Markets will fluctuate. What goes up must come down and what comes down is likely to go up. But don’t think you know what the market will do tomorrow. Sometimes you will be right. Sometimes you will be very wrong.

Thursday, August 20, 2009

Emergency Fund

“Save for a rainy day”. Everyone has heard it but few do it.

For many years my emergency fund was my credit card. When – not if – something bad happened I charged what was necessary on my plastic and then tried to pay for it over the next few months.

But when you spend pretty much what you make every month, paying off a credit card is difficult. Even making those pesky “minimum payments” takes a bite out of your “budget”. And consistently making minimum payments is a sure-fire way to stay in debt forever.

Worse, Mr Murphy invokes his infamous law and more financial emergencies (i.e. life) happen before you’ve paid off the first “emergency”. Your credit card bill grows and your ability to pay it off shrinks.

The best way out of this mess is to avoid it. Pay Mr Murphy before he invokes his law. Squeeze your budget for the “minimum payment” money before it must to be paid to the bank. If you pay Mr Murphy by putting that money in a savings account every payday then, when Murphy’s Law is invoked for you, the bill will already be paid. All you have to do is move the money from the savings account to the people who provide the products or services needed to correct the problem.

Note that it is now a “problem” not an “emergency”.

Financial planners recommend that you save enough money in an emergency fund to cover your expenses for three to six months. This is supposed to sustain you after a job loss until you land another job. That’s a good target although I think twelve months of expenses is an even better target. But whatever the target, don’t let the size of the number discourage you from starting.

Any positive amount is better than zero. Mr Murphy’s law covers a lot more than job losses. $500 in an emergency fund could go a long way toward repairing your car so you can get to work next week.

The key is to systematically put some amount away for Mr Murphy every payday. The more you accumulate the more you insulate yourself from the effects of Murphy’s Law.

Mr Murphy WILL BE PAID. Life happens! The only open questions are; (1) Will you live your life or will life happen to you? (2) Will the bank pay you or will you pay the bank?

You determine the answers by choosing – or not – to create and grow an emergency fund.

Friday, August 14, 2009

Airline Flight Vouchers

If you are flexible, you can occasionally pick up a windfall of several hundred dollars in the form of an airline flight voucher.

In July, while returning from a business trip, the flight I was booked on for the last leg of my trip home had to switch airplanes. Apparently, the originally scheduled airplane had a mechanical problem and the replacement airplane was equipped with fewer seats.

Consequently, the airline asked for volunteers to take a later flight. My traveling companions’ carry-on luggage was already stowed in the cargo compartment of the DeHaviland commuter plane so they could not volunteer. My bag was checked and I was pretty confident that even though it would arrive before I did that the airline would hold it for me. And, since I had no pressing schedule for that afternoon I raised my hand.

In exchange for waiting in the airport for two more hours I took home a $300 voucher good for any flight on that airline as long as I make the reservation within a year of the issue date.

My wife and I plan to use the voucher to reduce the cost of a future vacation trip.

Picking up a flight voucher is an uncommon event. But, there were about 50 people on that flight and most could not or would not volunteer. I could and did because I was flexible enough to adapt to the revised flight schedule.

Link to Other Topics in the Special Report: Cutting Expenses

Friday, August 7, 2009

Shell MasterCard

We buy gasoline for $0.12 a gallon less than the posted price at every fill-up.

Our local Shell station usually has the lowest price for regular un-leaded gas in our community. Occasionally though, the Sheetz station down the block beats their price. But whether our Shell station is slightly higher or slightly lower than Sheetz we still get the best prices in town buying gas from Shell.

Shell Oil has a partnership with MasterCard that benefits Linda and I with a 5% rebate on all gasoline purchases made at any Shell station. With the current $2.40 per gallon price for regular un-leaded we get a discount of $0.12 per gallon.

The posted price is charged to our card then the rebate is calculated and automatically applied to our statement the following month.

It works. It’s reliable. And, since we use the Shell MasterCard for nothing else; and since we use it for all gas purchases, it’s easy to track our expenses and rebates.

Buying gas using the Shell card is like getting $15 cash in the mail every month.

Link to Other Topics in the Special Report: Cutting Expenses