I am an avid reader of AllFinancialMatters because he is like the granddaddy of financial blogging and everything he writes is pretty golden. This week he has a great tip on updating your stock portfolio if you use Excel for your projections (you have to have Office 2003). Please check it out if you want an extremely easy way to update your portfolio standings. It takes me half the amount of time to calculate a return with this add-on, because the new stock price update itself automatically! So check it out. How to Insert Refreshable Stock Quotes Into Excel

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Let me just start off with an example.
You have five years of return data from your portfolio.

Years/Returns

• 1- 10%

• 2- 18%

• 3- 21%

• 4- -3%

• 5- 17%

The way most people calculate their returns is to add all of them up and divide by the amount of years. Your average annual return would be 12.6% ((10+18+21+ (-3) +17)/5) =12.6).

This seems like the correct answer right? Not really. Let me show you another example so you can see the flaw using this kind of equation.

You purchased a mutual or stock at $100.00 per unit and it does not pay any dividends. The first year it goes down to $50.00 per unit. The second year it doubles up to $100.00 per unit. You would assume that you didn�t make or lose any money right? Well wrong again. Using the same equation your annual return would be 25%!

Years/Returns

• 1- 50%

• 2- 100%

• (-50+100)/2= 25%

Now that you see why the conventional way of finding your return is flawed and delivers false returns, let’s view the real way to calculate your return.

1st. You have to change all your returns to decimals. After that use this equation to find your real return.

((1 + (1st yr. return)*

(1+ (2nd yr. return)*

(1+ (3rd yr return)*

(ect….)) ^ 1/ (number of years)-1

We will use the information from the first example.

((1+.10)*(1+.18)*(1+.21)*(1-.03)

*(1+.17)) ^ 1/5=.122 *100% = 12.2%

I know this equation involves a calculator and an extra one minute of work, but it shows you the real return on your investments which is crucial.

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Yeah, yeah I know what you’re thinking. Yes, I am not a huge fan of budgeting, but I would say more people like to be on a schedule. Everyone has their budgeting tricks, but here is a great Excel file that pretty much covers every single expense you can think of.

This is pretty conservative “set in stone” type of budgeting sheet. There are tons of items on this sheet that you might not even be thinking about. Try it out!

Get your Budget On!

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Today was a big day for me. After watching an episode of South Park “Make Love, Not Warcraft”, I decided it was time to uninstall all my money saving computer games. Even though I played World of Warcraft only once, I still decided it was time to move on. I’ve been a huge gamer since I was kid, and it did end up saving me a ton of money when I was in college. When all my friends wanted to go out and party, I sometimes decided to stay in and play video games (saved me from getting in debt and trouble). I know how nerdy that sounds, but I know that most guys have done that at least once in their lives.

The years of enjoyment had to end at some point, and the time for me to grow up was here. What will I do with such an open schedule? Well, I am going to dedicate more time writing, reading, and school work. It’s been a life changing day. It feels like a 500 pound weight has been taken off my back.

Coldplay can sum up how I feel in the song Fix You.

“When the tears come streaming down your face
When you lose something you can’t replace
When you love someone, but it goes to waste
Could it be worse?

Lights will guide you home
And ignite your bones
And I will try to fix you

High up above or down below
When you’re too in love to let it go
If you never try you’ll never know
Just what you’re worth”

R.I.P.

Warcraft 3
Frozen Throne
Company of Heroes
DOTA
Command and Conquer
Wolfenstein
Doom 3

You will be missed, but never forgotten. *This post had a lot of sarcasm, but trust me it was still a hard day for me*

Do you have anything that you have had to give up for the greater good? Come on don’t be shy.

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Let me tell you about my day. It was a beautiful morning in Georgia. It wasn’t too hot and it wasn’t too cold. There was sunshine gleaming through the trees in my front lawn, and the birds were singing a good tune. It was just perfect. But then…. I was getting ready to go to work and I noticed that my car had a flat tire!

(I inverted the colors so you can see that I did not have to pay for anything!)

Most people hate having flat tires, but I hate them even more. Want to know why? Well maybe it’s the fact that I have had over 12 flat tires in less than one year and eight months. Or maybe it’s the fact that I have had to get ten patches, and two tire replacement. It might also be the fact that I have had to spend over $400.00 on stupid patches! But luck was on my side. The general manager at Big 10 Tires, Bill, gave me a free patch because I am their best “patch-up” customer.

One of the tires that I replaced was purchased at Big 10. I bought hazard insurance because you know luck will strike again in the future (But then again. My luck shined and decided it wouldn’t be on the tire I have insurance on!). Get hazard insurance on all your tires, because the road is your enemy and it wants to send pieces of sharp metal right into your tire. I wish I could get it on all my tires, but that will have to wait till I get new ones on all my wheels, which according to my calculations should be in three months.

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You need a few ways to repair or build your credit? Liz Pulliam Weston from MSN Money shows you some simple ways to get your credit “report card” from an F to an A+.

1. Check your credit report

2. Establish checking and savings accounts

3. Understand the basics of credit scoring

4. Piggyback on someone else’s good credit

5. Apply for credit while you’re a college student

6. Apply for a secured credit card

7. Get a finance company card

8. Get an installment loan

9. Use revolving accounts lightly but regularly

If you want some other ways to go get your credit score above the 700 level, check out my previous post A Quick FICO Minute.

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Great websites that provide excellent information on specific topics

Personal Finance

Clark Howard
Young Money
Sound Money Tips
Personal Finance Advice

Financial News, Advice, and Stocks

Investopedia
Yahoo Finance
MSN Money
Fox Finance

Political News

Glenn Beck
Sean Hannity
Fresh Child Project

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I received this really great question about IRA’s: “What kind of IRA should I get? Do you think I should just put my money in a fixed IRA?”

Even though I think this is a very easy question to answer many people do not really know what to do with their IRA. First, single individuals with modified adjusted gross income (MAGI) of $95,000 or less should contribute to a Roth IRA. There are so many benefits to the Roth IRA such as tax-free earnings, borrowing from the plan (I do not recommend this), and there are no minimum distributions during your lifetime.

The second part of the question can be answered using this calculator. Let’s say you save the maximum annual contribution of $4000.00 a year which is ~$333.0 a month (in this example assume the contribution rate stays the same).

Fixed plan with the highest paying APR of 5.12% (according to Bankrate):
In 30 years you will have a total amount of $284,583.00 with total paying interest of $164,702.00. This is still pretty good return because all you invested was $119,880.00

Growth plan using the S&P average return of 11% over 80 years of data:
You will have a total amount of $942,466 with a total paying interest of $822,285.00
While still putting in a total of $119,880.00

It seems incredibly self explanatory doesn’t it? Well unfortunately, I know more people in a fixed IRA then a mutual fund IRA. So if you are in a fixed get out of it! Open one up using an online brokerage firm like INGDirect, Fidelity, and Vanguard.

Recommended Books for This Topic

The Four Pillars of Investing

The Money Book for the Young, Fabulous & Broke

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1.Use direct deposit

2.Get overdraft protection

3.Put your bills on automatic

4.Use personal finance software

5.Set up reminder

6.Consolidate your credit cards

7.Consolidate your accounts

8.Set up a filing system that works

According to financial columnist, Liz Pulliam Weston, these easy banking tips will make your financial life much easier. Another great tip is to become friends with one of the bankers at your nearest branch. They can really help you in time of need, and will usually provide better service for someone they know and like.

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Most people invest a certain amount of money each week or month into an investment plan such as a Roth IRA, or traditional IRA. This investment strategy is called dollar cost averaging (DCA). Here is a formal definition explained by Investopedia “The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.” This system can make you a ton of money if share prices are low when you buy and high when you retire and sell your shares. Here is a model that shows how DCA can sometimes be a negative.The best approach by far is value-cost averaging (VCA). Investment-FAQ explains it as “a strategy in which a person adjusts the amount invested, up or down, to meet a prescribed target.” You will end up killing two birds with one stone with this approach. You will balance your portfolio, buy more shares when prices are low, and buy fewer shares when prices are high.

Example:
You want to contribute $100 per month in a mutual fund.(1^st month)

You contributed $100 End of month balance $70
(Share price decrease)
(2^nd month) You contributed $130 End of month balance $240
(Share price increase)
(3^rd month) You contributed $60 End of month balance $310
(Share price increase)
(4^th month) You contributed $90 End of month balance $400
(Share price has no change)

You contributed $380 but your mutual fund balance is $400. Nicely done!

Even though value-cost averaging requires you to spend ten minutes a month looking at the performance of your stocks or mutual funds it is still more efficient approach than dollar cost averaging. Being a little more proactive can make you a lot more money. But whether you choose DCA or VCA the most important thing is that you are contributing to your nest egg. So give yourself a pat on the back and picture the mansion you will buy later on.

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