February 2013 S&P 500 Forecast Results

Financial Place Online provided a market forecast back in December.  The forecast was for the S&P 500 index to be above 1400 by 1 February 2013.  The good news is that this forecast came to be true.  The great news is that the S&P 500 is currently at 1513!   The primary concern though, is that the upward run has come too fast.  Very little of the underlying U.S. economy has changed in the last year.  The job market has modestly improved, but this is more than offset by fiscal uncertainty that may result in disaster coupled with a monetary policy that maintains the suppression of interest rates.

The 52 Week low for the S&P 500 was 1266.  Also, the index is up 100 points in the last month.  The price to earnings ratio (P/E) is a little above 17.  It is worth noting that the P/E ratio correlation to the stock market is weak as earnings growth is another factor which weighs heavily on the price of the index.  Forecasts for 2013 earnings growth are estimated to be anywhere from flat to 3%, hardly anything worth writing home about.

What may really be the cause of the run to over 1500, is the present 2.07% dividend yield.  Those who were invested in bonds found the S&P 500 dividend rate to be attractive since bond yields are low and interest rate risk is increasing.

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Retirement planning using cash flows

The question comes up often as to what amount is needed to retire.  Money in the bank and diversified assets are indeed important, but the critical measurement of what gets you buy on a daily, monthly, and yearly basis is your income.  For most, a retirement will be short lived if you live off of only the cash that you have on hand.

Ideally, your retirement income will come from multiple robust sources.  This will act as a hedge against having your income collapse in the event of adverse conditions.  Social Security may play a part in this, however, if it plays a substantial part for your retirement planning, you are likely short of what you truly desire for income in retirement.  So, how much is needed?

The current median income in the top quintile is currently $111,000 a year.  This means that this income is higher than 90% of all American households since it is in the middle of the top quintile (80% to 100%).  If your income is $111,000, first of all congrats on the hard work.  Second, your current lifestyle in retirement can be sustained on less.  The amount required is about 50% as work related expenses, commuting costs, and taxes at the new 50% income will decrease.

Now the question becomes, how is a retirement had at $55,500 per year?  To answer this there is a simple formula that FPO has developed as a starting point as well as a personal goal to shoot for.  This amount can be met by accumulating nine buckets of $500 extra income per month as described in the four part FPO series (1, 2, 3, 4) on creating extra income.  At least seven of these buckets must come from income generators in the first three parts, with two being permitted to be from part 4.  More than 2 from part 4 is welcome, however the effort to create additional savings would not be beneficial at the expense of achieving that seventh bucket.

>>> When broken down like this, seven buckets seems achievable, right?  Of course it is, but it is never explained like this.  Many financial experts frame a funded retirement as something that only the most disciplined can achieve, and that it is some sort of lofty goal.  In reality, it is easier than advertised when broken into chunks.  However, expect that it won’t happen overnight.  But aim for creating one of the seven every five years and you’re set.  Start at 25 and retire at 60.

How to earn an extra $500 a month: Part 4

OLYMPUS DIGITAL CAMERAPart 4 wraps up the series on earning an extra $500 per month.  The focus this time is not increasing income, but instead decreasing expenses.  After exhausting all of the previous options, there always remains the option of cutting expenses.  Below are three examples designed to save an average of $500 per month.  It is unlikely that a specific example may fit you perfectly, so the best option is to pick from each example those options that do work for you.

Example #1  ($150+$80+$270)

  1. A newly created cost is the smartphone data plan.  With many 2 phone plans pushing past $200, perhaps a simpler approach is needed.  Here’s the action… drop the phone plans and get a prepaid plan and free internet at your local library.  The savings here can be as high as $150, which still leaves an allowance for going prepaid.
  2. Cut out the $20 per week for office lunches, coffee, etc.  Home cooked food gets better with time and experience.
  3. Downsize your car payment.  If you have a car payment, try trading it in for something older that will reduce of your payment.  A New $24000 car will have a payment of $450 per month with good credit.  Cutting down to a $10000 car will save $270 per month.

Example #2 ($300+$100+$25+$75)

  1. Refinance that car.  Extend the term if needed.  It will be good to free up the cash flow, and car debt for those with good credit it is not that expensive.  If you had three years left and a balance of $24000 at 5%, refinancing to five years at 2%, would save $300 per month.
  2. Cut the cable TV.  With good quality programming on Netflix and Amazon Prime, cutting the high end cable and movie packages will save upwards of $100 per month.
  3. Ask for a reduction in rent.  This applies to good tenants who pay on time.  A vacancy costs a landlord a good amount of money.  On top of that, they are paying 10% management fees and taxes on top of every gain.  Asking for a modest $25 per month (or hopefully more) off of your month should be reasonable to many landlords who wish to keep a good tenant.
  4. Make sure not to buy more insurance than needed.  Insurance is mainly designed to protect personal assets.  If you don’t have much in the assets category, cutting insurance and raising deductibles can free up some cash.  $75 per month alone on health insurance is achievable.

Example #3 ($260+$40+$200)

  1. Carpool, walk, or take public transportation.  This really applies to your second car.  Get rid of that $15000 new car you just bought on a 5 year loan and save $260 per month.
  2. Ditch the home phone.  The home phone and long distance is now becoming more expensive than a prepaid cell phone with unlimited talk.  Since most have the cell phone, this will save about $40 per month.
  3. Refinance the house.  There are many options for no-cost refinancing.  Refinancing a house that you bought three years ago for $165,000 at 5% can now be refinanced at 3.25% for 30 years, freeing up $200 per month.

The FPO series on earning an extra $500 per month has provided multiple methods for achieving that goal of bringing in some extra income.  Combine that with some of the savings methods above, and the result should be a complete transformation of your personal finances.

How to earn an extra $500 a month: Part 3

Office chair and notebookPart 2 of this series explored methods of creating $500 a month additional income by investment opportunities requiring less upfront funds than would be otherwise possible, since the bank’s money is being used as leverage to raise the effective rate of return.  For part 3, FPO will provide guidance on increasing your income by $500 per month through your current job or expanding into various side jobs.

For your current job, there are several options.  Volunteering for overtime is the surest option, however many companies are cutting this back or eliminating it outright.  If its an option, and it fits your schedule…take it.  However, overtime is not right for everybody.  Asking for a raise is another common option, though frequently approached incorrectly.  Instead of asking, think of negotiating for that raise.  By asking, your thought process is centered around entitlement.  How many times has the phrase “I deserve this raise”, or “I’m overdue for a raise” come up?  By negotiating, you can have more power over the conversation.  Just like a supplier to your company would, convince your boss that your value to the company has gone up, and as such so have your rates.  There is no harm in coming up with a number first, as long as its high enough to meet your needs, in this case $500 per month.

Sometimes the raise may not work.  It may be their way, or the highway.  That’s where the side job comes in.  Everyone should have a “Plan B”, something that not only creates some additional income, but also something that can be expanded if your main source of income dries up.

Here’s a list of ideas and what it would take to get that $500 per month goal:

  • Ebay: sellers get 50 free listings per month and fees total around 11% of sales.  If you have an eye for value locally, there is a ready market on Ebay ready to bid up the price.  50 items at $11.11 profit per item before fees gets the $500 needed.
  • Etsy:  Etsy defines the online market for handmade goods.  If you have arts and craft skills, this is the place to do business.
  • Amazon:  Excellent for opening your online store.  Amazon provides all of the code to set up your own store
  • Virtual assistant:  Make money by providing products and services over the Internet.  Fiverr and Odesk are networks through which virtual services can be supplied.  The nominal price on Fiverr for a service is $5.  Do 100 of these and your month is covered.
  • Yard Work: Keeping a dozen medium sized lawns mowed a month should net $500.
  • Logging:  There are places with too many trees and places where firewood permits are allowed.  $10-$15 per cord buys a permit.  Keep costs low and expect to get over $100 per cord depending on locale.
  • Instructor:  Skilled at Kung Fu, MMA, Skiing, Skydiving, Scuba diving, Art, or Dancing?  Leasing space can be split based on time and many community colleges allow for such classes to be taught.
  • A Second Job:  This one may not be agreeable with your current employer, and there’s likely to be schedule conflicts.  Proceed with caution.
  • Trade Shows and Conventions:  These events run the range from antique shows to car shows, sporting events, vending opportunities, and of course holiday bazaars.

There’s no shortage of opportunities.  Find something you enjoy, and good luck!

-The FPO Team

P.S. –> Part 4 is centered around getting that extra $500 per month by reducing your bills.

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