Frank's Financial Primer

Over the past year, I have spent a considerable amount of time learning about personal financial planning. In fact, I would say that after Megs, the Gophers, DanceKast, and my family, reading about personal finance has been my biggest hobby of the year.

I can’t exactly pinpoint why the subject has prompted my interest. Maybe it’s because it seems like a prudent time to be figuring this stuff out, maybe I’m just getting to be a greedy business school grad. Either way, I want to take this opportunity to share some of my insights from the past year.

The financial world is a crazy world and is made confusing by two factors: Wall street’s deliberate attempts to confuse people and the general awe people grant the subject of personal finance. People are constantly beset by questions like: should I use a financial planner? Which mutual funds perform best? How do I even begin investing? Should I buy individual stocks? WHAT THE HELL IS GOING ON HERE?!?!?!?

I’m no certified financial planner, but based on my year of study, I am willing to offer these few juicy morsels to get people started right on the year:

1. Read Up. Yahoo Finance has new updated articles every day by some of the best financial writers around; some of their better writers are Ben Stein, Laura Rowley, and David Bach. This content is free and, quite frankly, all you need to know to get started in the world of investing.
2. Stick to Indexes. Yes, every once and awhile a fund manager while beat the S&P 500, but almost none do consistently and absolutely none do by a margin that would offset a managed mutual fund’s higher expense ratio. Do yourself a favor and stick to index mutual funds.
3. Diversify. Quite frankly, it’s the only “free lunch” in investing. It makes sense that spreading your funds around several investments is a safer bet; what is less intuitive is that you can actually increase your return by this spreading. Read this article for a few great options.
4. Open a Roth IRA. If you make less than the restricted amount, open a Roth IRA and contribute your $4,000.00 for 2006. You have until April 15. Go on. Get started.
5. Account Structure. Near as I can tell, you want to have 3 types of accounts: a checking account (for everyday transactions – preferably at a credit union), a high interest online savings account (ING, Emigrant Direct, or GMAC Bank), and a brokerage account to manage your Roth IRA or other securities (Vanguard, Fidelity). All these accounts can be linked to transfer funds electronically to each other, making it easy to get paid, move money to savings, and then move money to longer term investments.

Investing can be as complicated as you want, but it doesn’t have to be. Education these days is free, so make sure you read up. Remember – knowledge is power.

If nothing else, follow the PYF (pay-yourself-first) formula and put 10% of your paycheck in savings.

This article was the inspiration for this column.

Franky J