This is the third installment of a series of blog posts about investing….the hows and whys. I originally posted  this series, with a few minor changes, at Daily Money Shot as a guest blogger.

As promised today’s post is about the S&P 500, the Dow Jones Industrial Average, and the NASDAQ.  It is important to know the difference between the three and also what they represent.

The S&P 500 is an index of the top 500 publicly traded companies.  “The index does include a handful (15 as of May 8, 2012) of non-U.S. companies.”

There is a committee that selects which companies are allowed into the 500.  The S&P 500 is “representative of the industries in the United States economy.”   This is very simplistic. There are weightings of the different industries, but for our purposes we just need simplistic.

One of the things you may hear about or read about is an S&P 500 Index fund.  What that means is that a mutual fund  was created to attempt to mimic the returns of the S&P by having the same stocks in their portfolio.  There are a lot of brokerage firms that offer an S&P index fund.

The Dow Jones Industrial Average or the Dow is quoted all the time in regards to the market.   “It is an index that shows how 30 large publicly-owned companies based in the United States have traded during a standard trading session in the stock market.”

The Dow Jones Industrial Average has very little resemblance to the Industrial in its name.  It was originally founded to measure the performance of heavy industry in America.  Now it is the go-to index to gauge how the stock market is doing even though it only follows 30 stocks, albeit large companies in their industries.

When I want to know how the market is REALLY doing I check the  S&P 500 ticker.  The DJIA ticker is a good indicator of the stock market movements but 30 companies do not make a market, in my humble opinion.

The NASDAQ is also an index like the S&P and the Dow.  Like both of them, the NASDAQ “is a statistical measure of a portion of the market.”

As with the S&P, you can have a mutual fund that tracks the NASDAQ.

I know this is very confusing to most people.  I have found one of the best places for no-nonsense definitions is located on About.com ‘s Budget and Personal Finance page.

I inserted a lot of links this time, but I wanted to give credit to the websites for the definitions I used, plus I am not as eloquent as a writer in defining the indexes.  I don’t want to give you the wrong information.

And besides, why re-invent the wheel?

I hope this brings a little more clarity to some more of those mysterious acronyms and words you hear bandied about.

Part 4 will bring some insight into Investment Style and what that means.

This is the second installment of a series of blog posts about investing….the hows and whys. I originally posted  this series, with a few minor changes, at Daily Money Shot as a guest blogger.

I briefly touched on mutual funds in my last post, but let me put it in layman’s terms:

A mutual fund is a professionally managed portfolio of different equities, such as stocks, bonds and cash, designed to give a small investor the opportunity to invest in those equities with a small amount of cash. 

The mutual fund manager takes the money you give him/her and decides the best way to allocate those funds.

If you are in a bond fund, then the majority of your dollars will be allocated to bonds.

If you are in a large cap mutual fund, then the majority of your dollars will be allocated to large cap stocks ie. McDonald’s, Kimberly Clark, Caterpillar, etc.  (We will discuss “large cap” at a later time.)

Also, remember the manager will not be fully invested. They will keep some money aside in cash for various reasons…sometimes because they sold off a position and just haven’t re-invested the cash elsewhere yet.

Different investment vehicles

When I was recommending mutual funds to former clients some of them would get so confused that an IRA they were invested in was actually a mutual fund just dressed up into a retirement vehicle.  Are you confused by that too?  Well, let’s see if we can remedy that.

*Note: for the more advanced girlfriend out there, I do know there are retirement vehicles that aren’t mutual funds, but for my purposes I am sticking with this view. 

You can purchase a “regular” mutual fund.  There are tax implications with a “regular” mutual fund.  When the funds you invested gain in value, which is the goal hopefully, then you will pay taxes on that gain when you remove the dollars from the fund.

Also, you will receive a 1099-DIV from your brokerage firm if your mutual fund invested in any companies that paid out a dividend that year.  You probably didn’t receive a check for the dividend payout because more times than not someone advised you to check the box “reinvest dividends.”  It is a very common practice unless you need the dividend income to live on.  It’s also a great way to increase your portfolio value.

Now here is the confusing part, I think.  Your “regular” mutual fund is great for some medium-term goals, but if you have long-term goals, as most of us do, your advisor has probably suggested an IRA.  That is an Individual Retirement Account.  The money you put into that account is intended to stay there until you are 59 ½.  The IRS will penalize you if you remove it prior to that age, unless you qualify for one of their exceptions.  There are 2 types of IRAs, the Traditional and the Roth.

• The Traditional IRA lets you deduct your contribution off your taxes which means this type of IRA is “tax-deferred.”  Since you didn’t pay taxes on your contribution you will pay them later along with paying taxes on all the earnings on said money.
• A Roth IRA, on the other hand, is not deducted off your tax return.  All the money you put into the IRA and all it earns are tax-free.  The penalty applies to both the Traditional and the Roth if you take the money out prior to age 59 ½.

One thing to remember, an IRA is either yours or your spouses’ (if that fits), hence the term INDIVIDUAL.  Even if you don’t have gainful employment outside the home, but your spouse does, you are eligible to contribute to one. I mention this because a lot of my girlfriends tell me that they have their husband’s IRA. Not so. You may be the beneficiary, but you are NOT the owner.

If you happen to be lucky to work for a company that offers a 401(k), good for you and even better if they “match.”   A 401(k) is another retirement investment vehicle.  You contribute to your company’s plan. The dollars you put in are considered a salary reduction.  In other words, you don’t pay taxes on that part of your salary.  This is another tax-deferred plan.

The last retirement vehicle to discuss is the 403(b). I inadvertently called it a 503(b) in my last post.  I’m sorry about that.  Acronyms and numbers trip me up too.  A 403(b) is structured very similarly to a 401(k) but it is offered to certain employees of public  schools, tax-exempt organizations and ministers.

All of the plans have benefits and you can have more than one of them at a time.  They do have different contribution limitations though.  If you exceed the limits, you will be penalized so consult your advisor, the IRS, or shoot me a note and I can discuss this with you.

There are even retirement plans for the self-employed, but the above 4 investment vehicles cover most of the population and their options.

To summarize:  3 of the plans I discussed are tax-deferred because you get to deduct the contributions from either your salary or your taxes and 1 of the plans is tax-free because you don’t deduct the contributions.

The next installment will discuss the differences between the S&P, Dow Jones, & the Nasdaq…stay tuned!

This is the beginning of a series of blog posts about investing….the hows and whys. I originally posted  this series, with a few minor changes, at Daily Money Shot as a guest blogger.

Like some of you, I didn’t know the first thing about investing.  All I knew was that my future husband went down to our local bank and opened an IRA (Individual Retirement Account) and I thought I should probably do that too.

The banker gave me some investment choices and I made my decisions based on those “stars.”  I even invested in the multi-national company that I worked for at the time.  They took $10 out of my paycheck every week to start my journey toward owning stocks.

Things changed for me, however, when I was finishing up my degree in business and I took a finance class.  I fell in the love with the concept of compounding interest…earning money on the interest earned.

The Birth of a Business

So let’s start at the very beginning of what I call the investing cycle…the birth of a business.  Most businesses don’t start out as large conglomerates.  Think Bill Gates and his garage here.  You (just as an example), and maybe a friend or 2, have an idea and decide to offer your product or service to those around you.  The idea takes off and more people want what you are offering.  You need a little more cash to either buy more supplies or to lease office space so you hit up Mom & Dad, your aunts and uncles, friends, neighbors, etc.  You ask them to loan you some money with the intent of paying it back with interest (more money than what you borrowed.)

Now the idea is really going and you know you need more cash for updated computer systems, maybe a truck, new tools, etc.  You get the idea.  You head to ABC bank.  They give you a loan (well, maybe not in this economy) and off you go to grow your business.

You are really cookin’ now!  And you need more money to hire salespeople, office staff, truck drivers, computer help, etc, but the bank isn’t interested in giving you more money.

So you reach out to what are called Venture Capitalists.  These are people or groups of people who are in love with your business.  They want to give you money.  Great!  The catch is that they want a “piece” of your business.  Let’s say they give you $200,000 to invest in the business but they want 25% of the profits.  So your business grosses (before taxes) $500,000 for 6 months, the Venture Capitalist takes their $125,000 in profits.

Make sense so far?

Your vision has changed and you want to go national with your idea, maybe even international.  Good for you and your success!

You decide you want to take your business “public” to raise even more money.  The Venture Capitalists aren’t going to be the only investors in your business any longer.  Large mutual funds will buy shares, as well as Mom and Pop.  You reach out to an investment bank to get your IPO (initial public offering) out to the public.  Once you are launched anyone can purchase a piece of your company.

And this is where “investing in the stock market” comes in for most of us.

We like a company or a product and we want to own a piece of it.  Most of us purchase what we think are pieces of companies through mutual funds.  Those mutual funds are dressed up into vehicles called IRAs or 401(k)s.  There are managers of those funds who decide which companies they want to invest in and what percentage of your money will go to each company.

Another example:  You give Ms. Money Manager of XYZ Fund $100 of your money.  Ms. Manager then invests in 10 different companies for you.   Now you “own” a piece of ten different companies THROUGH the mutual fund.  You don’t physically own the shares or the company.  Ms. Manager’s fund purchases pieces of the companies on everyone’s behalf and you purchase shares of the XYZ fund.  If you purchased some shares of your favorite soft drink company directly then YOU own the shares.

You still with me?

I think this is enough for you to chew on for now.

Not all businesses follow this exact trajectory, but it is safe to say a lot do.  I just wanted to give you an idea of the general process.

Next we will cover IRAs, 401(k)s, 503(b)s.  They sound scarier than they are.

As I always tell my girlfriends, you ARE smarter than you think.

I have girlfriends who are spenders and some who are savers.  The ones that are married tend to be married to their opposites.

Can you spell c-h-a-l-l-e-n-g-i-n-g?

So what do you do when your spouse or significant other doesn’t share your views on finances?

I think there are a couple of things:

1. Don’t nag. Seriously. This never works. It might even entice your partner to become spiteful.
2. Communicate your concerns. If you are the saver and would like to save more, suggest a visit to a financial planner/counselor. If that doesn’t work, let your partner know you are going to be putting “x” number of dollars aside into a savings or investment account. (you never want to have secret accounts)
3. Try to find a compromise. This doesn’t have to be an all-or-nothing proposition. If your spouse/significant other thinks putting $500 per month into savings is too much (i.e. not in the budget) then see if they will agree to half.

I have counseled many couples who do not see eye-to-eye on finances.

The Man and I certainly did not when we got together.

One incident in particular comes to mind.

We had a small farmhouse butcher block table when we married. I was wanting something larger.

We aren’t “traditional” dining room table people and all I wanted was a table that could accommodate a guest or 2.

I found one and fell in love.

The Man was on his first deployment at the time.

When he came home he was not happy that I had spent $1200 on a table.

He made snide comments about it for months. The straw that broke the camel’s back, so to speak, was a comment he made when his brother and sister-in-law were visiting.

I exploded.

• I was working full-time outside the home and making a considerable salary.
• We had money in the bank.
• We had food on the table.
• The bills were paid.

It wasn’t a Maserati for goodness sake. I probably said a few colorful words, knowing me.

When we discuss finances and our differences, that incident is our go-to reminder that sometimes we need to adjust our way of thinking, especially when you are married.

There are 2 sets of emotions that have to be considered at all times.

I still “worry” that I am making a decision The Man might consider foolish. He, on the other hand, has become so lax in his concern about money it is scary. I might have created a monster HA!

Not being on the same sheet of music financially is a leading cause of divorce in America.

Talk to your spouse.

And above all, remember why you fell in love in the first place.

I receive email from Retirement Security Brief on a regular basis.

Here is a link to a recent article that caught my attention Younger Generations Lag Parents in Wealth-Building.

A few things have led me to comment.

The first person interviewed in the article has a bachelor’s and a master’s degree, but brings home only $1,800 per month. Wow! I am thinking those degrees are NOT worth the paper they are printed on. I wonder what she majored in.

Plus, she is paying $400 per month for student loans on an education that isn’t paying her.

And don’t forget the $500 in credit card debt. I hope that is more than the minimum on her balances.

I wonder if she has a fancy smart phone too?

Brings me back to my never-ending argument of college not doing the job it is suppose to. Remember the days of “go to college and get a job.” Sadly, those days are gone. Even a master’s degree isn’t enough.

The second person interviewed holds a master’s in economics, has $40,000 in student loan debt, and works in a restaurant.

Another Wow! Might be time to think about moving to where the jobs are for your degree.

The thing that struck me with the second person is that his father thinks he will work until he dies.

Why is that such a bad thing?

If you love what you do why wouldn’t you want to continue doing it?

What WILL you be doing if not working?

Yeah, I know some of you will protest and say that you will play golf or watch tv, but I know enough elderly folks now that need a tad more mental stimulation than that. They choose to stay in the work force or go back to work so they have purpose.

Maybe what we need in this country is a huge mind shift.

I am not advocating that we don’t save for “retirement,” but I am thinking that retirement and what we do in “it” should be looked at differently.

I think having money saved for the future is a fantastic idea because it gives us options. Maybe you hate teaching or pushing papers but you love making microbrews. Well, having money saved could mean you open your own microbrewery and you continue working until you die doing something you love.

“It’s a little bit of a tipping-point moment,” said Signe-Mary McKernan, an author of the study from the Urban Institute, a nonprofit Washington research institution. “If we don’t address it today, they might never catch up.”

I’m lost…catch up to what? Since when was wealth a guarantee in this country.

This is a storm “we” created as a country by allowing so much debt to be accumulated by every individual.

You need to resolve to not allow your children to acquire college loan debt for degrees they will probably never use in their field quite frankly.

Radical idea? Sure is, but the true wealth in our country is acquired by people who don’t have debt.

Would it kill us to have a child who doesn’t graduate from college?

Or how about one who works a job that you haven’t groomed them for, but they enjoy? Trust me, I live this and I am still alive to write this blog.

I have sooooo many girlfriends with degrees from prestigious universities that are not working in the fields of study from which they graduated. Many are not working for that matter.

Does college make us better people? Sure. It opened my eyes to concepts and thoughts I would have never known about, so I can say I benefited. But I am not using my degree in my current line of work and I am not sure I will.

Just because Suzy jumps off the bridge doesn’t mean you have to.

I came home from my jaunt across the pond to a couple of surprises.  One was unpleasant and unwelcome. I wasn’t feeling well. Truth be told I needed antibiotics and a few nights of 12 hours of sleep.

The other surprise came in our mailbox from our mortgage company. We received a refund from our escrow account. It was a nice chunk of change that sure came in handy.

Has this every happened to you?

Our First House

When we purchased our 1st house in 2000, we got a very unpleasant surprise after a year. The bank neglected to have us pay more into our escrow account from the start so we showed an arrears.

As kind as the bank was, they let us pay extra every month instead of asking for the difference up front.

I can’t even explain the terror I felt when I opened that piece of mail. I prided myself on paying our bills on time. Now this piece of paper was telling me that we were behind. Egads!

I called the bank right away to find out what was going on. I discovered this happens more times than not with a new mortgage because most everything is “estimated” during the closing.

What I’m wondering

What would you do with the sudden windfall?  The bank gives me the option to apply it back to my mortgage in several fashions.  That doesn’t interest me.

Would you treat it as “found” money and go shopping? Out to dinner a few more times? A weekend getaway? Pay off some bills?

A girlfriend recently found herself in an unfortunate situation.  She was laid off from her job after she had just taken a loan against her 401(k).  She had a few questions for me:

• What happens to the loan now?
• Does she have to pay it back in full immediately?
• Will they take the money out of the balance?
• Are there penalties?

What we discovered after some research is that she doesn’t have to come out of pocket for the loan money because the outstanding balance will be deducted from her 401(k) balance.  We, also, discovered that she will be taxed on the loan as if it was a withdrawal. The loan amount is taxed at her tax level plus a 10% penalty will be assessed for early withdrawal from a retirement account. This was disconcerting to her because she felt like she was penalized for an event that was out of her control.

Taking a loan against your 401(k) should always be a last option for the reasons that were just cited above.  Afterall, you will need this money is for your retirement someday.

A “girlfriend” posted on my Facebook page the other day lamenting that her husband was accusing her of being miserly. That got me to thinking, when does our savings cross the line from thriftiness to “Ebenezer Scrooge?”

A couple of questions to ask

• Ask yourself what you are saving for?
• Do you have an emergency savings goal that you are trying to reach?
• Are you saving for a vacation?
• Christmas gifts?
• A new car?

And then the follow up questions 

• Have you reached that goal?
• Are you using the money for the intended purpose?  This is an important question because if you aren’t using the emergency savings money for the broken down car, dishwasher, dryer, etc. then you have probably crossed the line, in my humble opinion.

I say this from experience.  I have been guilty of miserly behavior.  I have also been accused of being a hoarder of money.

I am not saying saving money is wrong, quite the contrary. What I am saying is that you need to use that savings for its intended purpose, especially if you have a spouse who knows what the original goal amount and purpose was for.

Finances are one of the TOP issues that couples argue about.  A way to alleviate some of that strife is to honor the goals that are set.

Setting the goal

1. Figure out what you want to save toward…emergency savings, vacation, Christmas gifts, whatever.
2. What’s your timeline?  Do you want to reach that goal in 3 months, 6 months, a year?
3. Review your budget.  What will it take to reach that goal within the allotted time you set.  For example, you would like to save $5,000 in your emergency savings within the year.  Divide $5,000 by 12 months and you will need to save approximately $417/mo.
4. Is your goal reasonable?  Some people will find $417/mo easy enough to save and others will be robbing Peter to pay Paul.  The worst that will happen is that you will get discouraged and throw up your hands.  Please DON’T do that.  Just change your goal amount or your time period.  Every goal is attainable if you really want it.
5. Once your goal and dollar amount are established, determine where you will stash the cash.  Do you have a savings account already?  Do  you need a separate one?  This is all personal preference.

Why do we behave this way?

I attribute my miserly/hoarding behavior to my humble beginnings.  I am not interested in heading back in that direction so the more I can save the safer I will feel.  Except that is not the case at all.  Now I have even more fear…what if it somehow disappears??  I know, deep psychological issues to contend with.  I am working on them.  I bought and KEPT, most importantly, my new MacBook Pro.  It was all I could do though not to return it. I even tried to justify not spending the extra money on Microsoft Office.

So if you are saving for a car and you hit the goal number, then buy the car.  If  you are saving for a cruise and your goal number arrives, take your cruise.

As my husband always says You can’t take it with you.