Your Long Commute May Cost You More Than Time and Money

Over the past ten years, we’ve experienced a number of up and down periods in the market. We saw some explosive growth as the 1990s closed out only to see the markets pull back sharply for a few years. Then, things recovered and we saw another four year period of growth, followed by the most recent six or seven months or so of another pullback.

Meg over at All Financial Matters wrote a piece that highlighted the fact that the past ten years the markets have not lived up to their expectations. Her data shows that the average annual return over the past ten years for the S&P 500 was just under 4%. This is quite a bit off of the 10-11% average that we usually talk about. And in fact, after taking into account inflation, it appears as if you would be just treading water. In the comments, I had a question regarding what influence the effect of making small systematic investments over time, or dollar-cost averaging, would have on this data over the same period. So, I decided to examine the data and see what I could find.

Investing in the S&P 500 With a Lump Sum 10 Years Ago

Looking at the lump-sum chart using Morningstar’s hypothetical builder, I made a $50,000 one-time investment in April 1998 in the Vanguard 500 Index (VFINX). As you can see, the data is straightforward. $50,000 had grown to almost $72,000, with the average annual return of 3.69%. Also, I wanted to show the cumulative return as well, which as defined by Morningstar as the total money-weighted return over the period. For the lump-sum, that was 43.64%.

There isn’t anything shocking here, and this looks like almost any 10-year chart for the S&P 500. So, with the benchmark out of the way, let’s take a look at what happens if you were to instead spread the $50,000 investment equally across the same period.

Investing in the S&P 500 With Equal Monthly Contributions

As you can tell, this chart looks much different. For this illustration, I ran the numbers so that in starting in April 1998, a monthly purchase of VFINX of $416.67 was made at the end of each month for the total of the past 10 years, or 120 months. This gives us the same $50,000 invested, but spread out equally. This is a far more accurate representation of what most investors would do.

The first thing you can notice is that the chart is much smoother. Instead of seeing the wild fluctuations that occur with the market, the first five years especially, look much better. When the market was dropping from 2000 through 2002, the market was down between 40-50%, which can be seen in the first chart. With this chart, you can see the same period was actually relatively flat, and even ended slightly higher. Of course, this is due to constantly adding more money at regular intervals.

As far as returns go, you can see that the ending balance is slightly lower than with the lump-sum investment. Here, we’re looking at only around $64,000 as opposed to nearly $72,000. This is because with all of the money immediately invested, it can begin working right away, which will increase (and decrease) faster. But is also  interesting are the average annual and cumulative returns, which are both higher in this scenario. Average annual returns are around 4.5% and a cumulative returns for the period are nearly 55%.

What Does This All Mean?

As it has been discussed before, the bottom line is that you want to put your money to work as soon as possible. If you have a large chunk of cash sitting around to be invested, you’re better off just moving forward and investing it. But, how many of us have tens of thousands of dollars sitting idle just waiting to go to work? That is why it also makes sense to invest as soon as possible even if you don’t have much money. In this scenario, we were only looking at a little over $400 a month, which gets you to $5,000 a year, which is also the IRA limit for 2008.

There is no sense in waiting to save up a large sum of money before putting it to work, as you can see that small regular investments in even the rocky past ten years we’ve had yields very strong absolute returns, and even somewhat better short-term returns and reduces some of the volatility.

Even so, it isn’t always about squeezing every penny out of your returns. Looking at the charts above, let’s assume you’re a relatively new investor who was just getting started in 1998. How likely would it be that you’re in 100% equities by the time 2003 rolls around after losing 40% of your money in a short amount of time with your lump-sum investment? On the other hand, a new investor who is slowly plugging away a little bit of money each month wouldn’t have noticed such a dramatic decline, and is probably more likely to stay true to their investment allocation instead of bailing out to something safe.

Of course, I know none of my readers would make drastic investment changes after experiencing a a bear market

Another week, and another set of links. I wish I had something exciting to talk about or some news to share, but I’m experiencing a bad case of writer’s block this week. In fact, I could use some time off, so if you are a blogger that talks about personal finance and would like to submit a guest post, you can contact me and see if there is something available. Otherwise, on with the links:

3 Tips for Budgeting Success - Creating a budget is the easy part, but sticking to it is hard. Learn a few of the traits needed to keep you and your budget on track.

Retirement Accounts Across Borders - I worked a little bit with Frugal Trader to help compare and contrast the major differences between the U.S. and Canadian retirement accounts. It was a good learning experience for me since I had little knowledge about our Canadian counterparts.

Great Places to Earn and Save Money on Used Items - SVB highlights not only great ways to make money by selling your old stuff, but also provides some great resources on where to go if you’re looking to save money by buying used items.

7 Tips to Simplify Today - Is your life a bit hectic with so many things that need to get done? Well, brip blap has some tips that can help you simplify your life. I especially like number 1 as I love to cook, and we cook over 90% of our meals at home.

Chrysler’s Cheap Gas: Trick or Treat? - If you haven’t heard, Chrysler is running a promotion on some new car purchases that will basically lock you in at $2.99 a gallon gas. Seems pretty good considering we’re upwards of $4.00 now. But is it really a good incentive, or just marketing?

6 Steps to Secure Your Financial Future - One of the best things you can do is to plan ahead. Don’t wait for something to happen in your life that forces a change. You can prepare early so that you’ll be more than secure in the future.

Cut Your Health Care Costs by Understanding Your Coverage - There is nothing more confusing and frustrating than health care costs and insurance plans. Ben points out that by taking the time to understand your coverage, you can actually save money.

Save Money With These Gas Tips from Consumer Reports - Who doesn’t want to shave a few dollars off their next fill up? The Sun highlights some tips that can help you save at the pump, plus provides some information on gas reward credit cards.

The Homeowner’s Expenses Nobody Tells You About - Oh boy, do these creep up on you. We spent about $150 last weekend just to buy some retaining wall bricks, plants, mulch and the like for a tiny 10′x10′ area by our front porch. Bad news is, we’re still a few bricks and a couple bags of dirt short of completing the job.

Homemade Chinese Chicken/Turkey Meatballs Recipe - These sound delicious, and I do a lot of cooking at home, so I’m going to have to try these. It is always nice to add a new dish to my arsenal.

Surviving a Recession: What You Need to Do Now - If you’re worried about the economy like many people are, you might want to take some action now so that you’re prepared if we enter any sort of extended recessionary period. Gather Little by Little has some great suggestions.

If you aren’t familiar with George Soros, he is one of the greatest financial speculators, and one of the richest men in the world. He amassed a fortune with his hedge fund that began in the 1970s. Since, he has gone on to become a very controversial, yet respected individual in the financial world. He has also written a number of books, and his latest was just released. In the book The New Paradigm for Financial Markets, he talks about a new economy and the major changes that have been, and are currently taking place.

The book argues the subprime crisis has triggered the bursting of a “super-bubble” that has been building for 25 years. Prior crises, from the 1987 stock market crash to the emerging markets crisis of 1997 were merely “testing events.” Of course, in 1998 he also predicted a global market collapse that never happened, but what about this super-bubble that he’s talking about now?

In recent remarks to the Council on Foreign Relations, Mr. Soros said:

I personally think we have the acute phase of the financial crisis largely behind us. The authorities have as their mission to stop the system from falling apart and providing liquidity at all costs. They’ve done it and have passed several thresholds. That is a source of reassurance that the system is not going to fall apart. But the damage that has been done to the financial system has to affect the real economy, and that is only starting to be felt.

What do you think? Is George Soros right, and are we just now beginning to feel the effects of a looming long-term financial meltdown? Or is this all just hogwash?

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We’re cruising through spring, and in many locations, it feels as if summer is already here. Well, it won’t be long and summer will be upon us, but that doesn’t mean you should wait to take advantage of some money saving ideas. For those of us in colder climates, we tend to focus on saving money during the winter months, but you’d be surprised at the number of ways you can save money this summer as well. Here are a number of ideas that can help you save money in the coming months.

Check Your Air Conditioner Filter

It doesn’t matter if you have a small window unit, or a central cooling system, but now is the time to check your filter. Just like you always hear about checking your filter in the winter, you need to make sure you’re ready to go this summer as well. Clogged filters restrict airflow and make your air conditoiner less efficient. Since these machines aren’t very energy efficient to begin with, the last thing you want to do is make it run any longer than it has to.  Not only will it ensure smooth operation, but it will help keep the air inside your house clean, which leads to healthier residents, and lower medical bills.

Let Some of Your Laundry Dry Outside

Obviously, not everyone has the luxury of having space available to dry clothes outside, but if you do, this can be a great way to save some money. Clothes dryers are energy hogs, whether gas or electric. You don’t need to go so far as hanging every load out to dry, but for items like towels, t-shirts, and the like, they do very well with air-drying. Just letting a couple loads dry outside per month can easily shave a few bucks a month from your electric or gas bill.

Cook Outside

Cooking outside has two positive benefits: it doesn’t require the use of electricity (and in some cases, even gas), and cooking inside on the stove or in the oven can raise the temperatures in the house, making the air conditioner run even more.  Why come home to a hot house only to make it hotter by slaving over the stove or make the AC run an extra hour to keep the heat down when you can take the cooking outside?

Sure, there are some costs to grilling, such as charcoal or propane, but in many cases, these costs are lower than the direct and indirect costs would be needed to constantly cook indoors during the summer months. Moreover, it provides an excellent excuse to get outside. If you spend all day in an office, why come home just to spend another hour in the kitchen preparing the meal if it is gorgeous outside? Grab a cold drink, some food to throw on the grill, and spend some time relaxing in the fresh air. That alone is probably worth more than any money you might save.

Windows Are Your Friend

While this is common sense, there are a few things you can do each day to help keep your home as comfortable as possible with the least amount of AC intervention. You have windows, so use them. In the evening, as temperatures begin to fall, open the windows and let mother nature cool down the house.  If you can, leave the windows open at night when it is expected to drop down to the 60s. This will gradually cool your home throughout the night.

Don’t stop at only using your windows when it is cool outside, especially if you have a two-story house. As you know, hot air rises. Not only that, but the sun beats down on your roof, typically making the second story much hotter than the first. If you have central air, this isn’t as much of an issue, but for those of you who have a window unit and only cool the main floor, this can be a big help. Open your second story window. Since hot air rises, and it is probably hotter upstairs than the temperature outside, you’ll begin to feed the hot air outside.  It is even better if you have a box fan you can put into the window and actually have the air blowing outside. This will help feed the hot air out of the house like an attic fan.

This works even better in the cool evenings. Even if you don’t use your second story, you want to have both a first story and second story window open. This allows cool air to enter on the lower floor and circulate up through the house and out the second story window. Instead of trapping heat, you’re allowing it to efficiently flow through the entire house and maximize cooling.

Pay Attention to the Weather

For those of you that garden or have lawns or landscape to water, it can pay to listen to the weather forecast. Knowing when you have the chance of rain can help you keep your watering to a minimum. Why spend a half hour watering your garden or lawn today when they are calling for a rain the next two days? I see this happen a lot as I’m driving to and from work. Sometimes I see someone’s irrigation system going in the morning after we just received an inch of rain that night, or I see someone standing out in their garden watering their plants in the evening when the forecast is calling for rain.

You want your plants to survive, but just taking 2 minutes each day to stay up with the latest forecast can save you time you’d take out of your day to water, and more importantly, save water. If you have city water, you know that this translates into money, but even if you don’t, maximizing what mother nature provides so that you don’t have to use as much water is just a good thing to do.

It Isn’t Always About the Money

Sure, doing any one of these things won’t instantly cut your utility bills in half this summer, but being conscious of where you can take advantage of the summer weather will begin to add up. Save a few bucks here, 10 bucks there, and 5 bucks somewhere else, and before you know it, you’re putting $50 in your pocket each month. Even so, it isn’t always about the money. Using this time of year to break free from the indoors often comes without a price. Whether it is sharing some laughs with neighbors over the BBQ, or just getting some fresh air in the house, it is something most of us could use more of.