Savvy Ladies Community

Are Your Bonds Safe?

By Manisha Thakor

 

"Last year I invested in a bond fund and now I've lost money. What happened? I thought bonds were supposed to be safe investments!"

 

Recently several people have asked me this same question. Given the turbulent economic times we're (hopefully!) coming out of, it's understandable that folks want to find a "safe investment" to hunker down in.

Alas, the phrase "safe investment" is an oxymoron. The whole point of investing is taking on some risk with the hope, but not the guarantee, of earning a higher return than you'd get from doing something risk free.

So how did bonds get the reputation of being "safe?" Well, at their core, bonds are loans. You lend money for a pre-determined period of time. In return you receive interest at specified intervals. When your loan (a.k.a. bond) matures you get back the money you originally loaned - if the entity hasn't gone bankrupt.

It is the return of that original investment that has caused people to view bonds as "safe" investments. Alas, there are always risks with any investments. The two classic ones for individual bonds are:

1. Credit Risk: This is the risk that the entity you lend to goes belly up and can't pay you back.
2. Interest Rate Risk: Bonds are like seesaws. When interest rates go up, the price of bonds go down. If you hold your bond until it matures, the impact is all on paper. But if you are forced to sell your bond before its maturity date and interest rates are higher than when you bought that bond, the price you'll receive will be less than you originally invested.

Another problem with individual bonds is you often need a pretty hefty chunk of change to buy them. This is where bond mutual funds come in. For example, if you had $10,000 to invest you might be able to buy one bond. But by pooling your money with other people's money, bond mutual funds enable you to take that $10,000 and spread it out over many different bonds. That helps you spread out your risk. 

However, when individual investors decide to take their money out of a bond fund, the portfolio manager may be forced to sell bonds at less than desirable prices to give them back their money. You could call this liquidity risk. Over the past year, as interest rates have inched up and there have been concerns about credit quality, the price of some bond funds has declined as these risks all reared their heads.

What does this mean for you? It means that like stock funds, bond funds also have some risk associated with them. They should not be thought of as "100% safe" substitutes for FDIC insured savings accounts. Rather, they are intended to be part of a well-balanced portfolio. Another way to keep your risk low is to invest in bond funds that have average maturities of 5 years or less because they seesaw around less violently as interest rates move.

 

What additional questions do you have about bonds or bond funds?

[This post originally appeared at ManishaThakor.com.] Want more financial love? You can follow Women's Financial Literacy Initiative founder, Manisha Thakor, on Twitter at @ManishaThakor, sign up to get her email updates delivered right to your inbox here, and enroll in her innovative new online personal finance course called “Money Rules.”  

The Rise Of The "Sugar Mamma"

By Manisha Thakor

 

Sug·ar Mam·ma  -noun

A woman who is in the financial driver's seat of her life

 

Watching the season finale of HBO's Boardwalk Empire last night, I was struck afresh by how far we women have come. This show depicts life in Atlantic City during the Prohibition Era. There is one scene in particular that I can't get out of my head. It's when the lovely young widow, Mrs. Margaret Schroeder, finds a mini "tattered rag" in her piece of holiday cake while her friend receives the toy "wedding ring." The tattered rag was a superstitious symbol that she would end up old and poor. Not long after Mrs. Schroeder chose to place herself in the arms of the corrupt, but rich and powerful, crime boss Nucky Thompson - the very man who had her husband killed to begin with (TV, sigh, it's complicated). What jumped out at me was the emotional pain with which this smart, ambitious mother of two concluded that in an era of limited work opportunities for women, the only way to keep her family afloat was to take up with a "Sugar Daddy."

 

By contrast, in modern America there have been a number of news stories of late highlighting the rise of the female breadwinner. It started with The Shriver Report pointing out that even though women still earn $0.77 on the dollar (big grumble), nearly 4 out of 10 working mothers are the primary breadwinners in their households. When you add in working mothers who are co-breadwinners the number tops 6 out of 10.  A New York Magazine article entitled Alpha Women, Beta Men colorfully describes some of the havoc wrought by this trend while a recent Reuters piece on The Female-Breadwinner Model focuses on how to make the most of it.

 

As more and more women find themselves by choice or life circumstances as the primary or co-breadwinner in their households, I've noticed a new trend. I'm calling it "The Rise Of The Sugar Mamma." I define the modern "Sugar Mamma" as a woman who wants to be in the financial driver's seat of her life. She views money as a tool that gives her a voice and increases her life choices. She likes earning an income because it gives her control and the freedom to create the life that makes her heart sing.  She may be single, married, a mother, or childless but the common denominator is a desire to learn how to live her life from a position of financial strength.

 

Now, if this sounds like I'm stuck in the 1960s, spend a few moments reading a few of the 122 Amazon reviews of one of my all time favorite books, Leslie Bennett's The Feminine Mistake. The hardcover version came out in March 2007... before all economic heck broke lose. Women either adored - or hated - the book's premise, that by ignoring the economic consequences of lifestyle choices, we women are putting ourselves in long-term financial danger. I can't help but wonder what the naysayers would say today in the face of all the painful upheaval brought about by the economic downturn.

 

In response to the increase in women who are primary or co-breadwinners, I am renaming my blog "The Sugar Mamma Chronicles," and will focus on providing personal finance information (and inspiration!) to working women who want to put themselves in the financial drivers seat of their lives.  My first tip for aspiring Sugar Mammas... read Leslie's wonderful book!

 

 

Want more financial love? You can follow Manisha on Twitter at @ManishaThakor, sign up to receive her weekly blog posts here, and/or enroll in her innovative online personal finance course called "Money Rules."  Founder of the Women's Financial Literacy Initiative, Manisha can be reached via her website: www.ManishaThakor.com. 

Can’t Do It All? Your Top 5 Financial Priorities

I can’t sleep at night, complained a savvy lady over breakfast last week. Seeing the dark circles under her eyes, I didn’t doubt it was true. A venti caramel macchiato later, she explained that at age thirty-six, she had only recently started to look into personal finance. Now, she felt so bombarded with should-haves that she had no idea where to start.

She has a good point. Even during slow, quiet periods of our lives, it can be difficult to keep up with everything financial. And when things turn crazy, like they do from time to time, it can be near impossible. Fortunately, there’s relief. See below for a list of your top five financial priorities – in order.

1. Pay your bills – preferably on time. Make sure they are no larger than your income, and if they are, make it your very first priority to cut your spending and/or boost your income. When your accounts payables and accounts receivables match and you are no longer struggling to make ends meet, take a breather and give yourself a pat on the shoulder.
2. Create a financial cushion for yourself. Even as little as a few hundred bucks can have a dramatic impact on your shut-eye. Even better – you will save a bundle on late fees, financing charges, bounced check fees, etc.
3. Start saving for retirement, even if the amount you can spare is so tiny, you can’t see how on Earth it’s supposed to make a difference. You see, not only do the dollars you set aside first matter the most as they have the longest time to grow, but you get yourself into the habit of saving – which is, as MasterCard likes to put it, priceless.
4. Pay off your worst kinds of debt, such as high-interest balances and debt where the lender can change the loan terms easily.
5. Look into long-term disability insurance. This is may not be the rosiest of topics, but life is dangerous and you need to make sure that even if you do lose your ability to work, you’ll have food on the table.

Now, take a break. Really, you have taken the five most important steps toward financial success.

 

Stacy Francis, Savvy Ladies

www.savvyladies.com

GEN X & GEN Y – DIALING FINANCIAL 911

By Manisha Thakor

 

Six Reasons Why Gen X & Gen Y Need Some Serious Financial TLC  

• They’re scared: They’ve entered their adult years during a gut-wrenching economic and job market.  With unemployment over 9.5%, they’ve seen their parents struggle.  Over 7 out of 10 Americans are now living paycheck-to-paycheck.
• They are making poor decisions: As a result of that fear they are not making the best long-term decisions for their futures. A recent ICI study shows only 34% of investors under age 35 are willing to take substantial risk with their retirement money – the exact time in their lives when they should take that risk.
• Something as “simple” as a 20-year head start can give you 5x more money: Let’s take 2 people.  Jane starts saving $5,000 a year at age 25 for her retirement every year until age 65 and gets an average return of 7%.  Jane has a $1 million nest egg by retirement. Joe starts saving $5,000 a year at age 45 for retirement every year until age 65 and also gets an average return of 7%. Joe has $200,000 in his next egg. That 20-year head start gave Jane 5x more money. That’s why learning the basics of personal finance – how to budget, get out of debt, and save so you can get that retirement fund funded in the key early years is so vital.
• Young adults consume information differently so there’s a delivery challenge when it comes to education: Studies shows that young adults want their financial education delivered in a 21st Century way. They want it web-based with robust, interactive tools. And unlike their “I’ll do it myself” parents, these emerging adults want help and guidance.
• Nearly half of Gen Y has below average financial fluency: A study by The National Foundation for Credit Counseling showed that nearly half of this generation did not understand how to save and budget and that 45% of them have no savings!
• The financial world is geometrically more complex: Part of the reason for the above statistic is due to the fact that financial literacy is not taught in schools as a core life skill.  Young adults often rely on parents who were brought up in “financially simpler” times and aren’t equipped to help. They are also bombarded by so many more unrealistic media images about what “normal” lives are like.

 

So, what’s the solution?

If you or someone you love is a Gen X or Gen Y-er… encourage them to self-educate.  Here are five of my favorite personal finance sites – all of which I’ve either written for or read regularly myself:

• For everyone:  GetCurrency.com & SmartAboutMoney.org
• For women:  LearnVest.com and DailyWorth.com
• For men: IWillTeachYouToBeRich.com

What about you – any additional resources to recommend to Gen X & Gen Y?

 

 

Want more financial love? You can follow Manisha on Twitter at @ManishaThakor and sign up for her email updates here. Starting in Fall 2010, Manisha will teach an innovative online course on "Financial Literacy 101" for women though www.Sympoz.com. Manisha Thakor, personal finance expert for women, can be reached via her website, www.ManishaThakor.com.

Shocking Statistics on Women & Retirement

By Manisha Thakor

 

 

Do you ever worry about ending up old and poor?

 

For many women, becoming the proverbial "bag lady under the bridge" is one of their worst nightmares. Myself included. I literally sit down with my husband and our financial planner twice a year to re-confirm that we are doing everything we can to make sure we do not outlive our retirement savings!

 Unfortunately, this fear of ending up old and poor is actually a very rational one for a high percentage of women. 

Recently, I had the chance to hear Karen Wimbish, Head of Wells Fargo Retail Retirement Group, and personal finance guru Jean Chatzky present powerful data collected in a Harris Interactive poll in conjunction with the launch of a new website to help women prepare for retirement, Beyond Today. I'm always looking for useful resources to direct women to, and I think this site can help a lot of folks.

First up, the data: (Put your seatbelts on. The numbers are stark.)                

• Nearly 1/3 of women between the ages of 40 and 69 are “can’t estimate” how much money they can withdraw annually from their retirement accounts and about 32% of women in their 40s and 50s estimate they will withdraw between 11% – 30% of their savings annually.   These are unrealistically high annual withdrawal rates - leaving them vulnerable to outliving their savings.
• While both men and women are under saved for their retirements, the women polled had saved less than men - with a median retirement savings accumulated to date of $20,000 for women surveyed versus $25,000 for men.
• Worse still, despite longer expected life spans, when asked how much they were aiming for in retirement savings women aimed lower with a median goal of $200,000 versus $400,000 for men.

    A savvy, 30-year industry veteran, Karen was kind enough to speak with me about some of the factors driving this dreary data - and what women can do to improve the odds that their golden years really will be golden. 

    A couple of key themes kept coming up during out chart. First, while many women are absolutely at the table on a day-to-day basis for bill payment and major household expenditures, when it comes to financial planning or investing – women are more likely to report ourselves as a “joint decision maker” than are married men who are asked this question.  Men are more likely to see themselves as “the primary“ decision maker in financial matters – so there is a disconnect between men and women in terms of the role they see themselves playing.  The survey data also showed women to have less confidence in the stock market as a long-term tool for retirement planning.

What does all this potentially mind-numbing data mean for your life? 

• If you are in your 20s and 30s: The best action step is to max out your tax advantaged retirement plans (401k type plans and IRAs). Karen points out a great way to do this is to commit to saving a set percentage of your income, rather than a fixed dollar amount, so as your income rises, so too do your contributions.
• If you are in your 40s: That data shows that this group, which I'm a part of, are the most stressed-out set, sandwiched between entering our peak earnings years while trying to juggle family and elder care responsibilities. In this life stage, the key action step is not to put our heads in the financial sands.
• If you are in your 50s, and 60s: You are heading into the "red zone" the critical years leading up to retirement where small shifts in how much you save and what you invest in can make the difference. Understanding the gravity of this period is key.

 

The key takeaway:  At all three stages making sure you are actively engaged with your finances and seeking to self-educate yourself is key. Reading blogs, visiting websites like Beyond Today, and engaging the services of a trusted financial advisor to meet with you on an annual or semi-annual basis can go a VERY long way towards increasing your financial confidence, sense of optimism for the future, and even household harmony.  Just as with your health, no one will ever care about your financial fitness as much as you do.

 

What steps are you taking right now to plan for your retirement?  

 

[This post originally appeared at ManishaThakor.com.] Want more financial love? You can follow Women's Financial Literacy Initiative founder, Manisha Thakor, on Twitter at @ManishaThakor, sign up to get her email updates delivered right to your inbox here, and enroll in her innovative new online personal finance course called “Money Rules.”