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Many retirement programs and pensions have limited their choices when it comes to funds. Many 401ks and other programs only offer a select few mutual funds called target funds. These funds seem great at first, until you look at the high fees and the generalities surrounding them.

Target funds are usually sold by dates every five years. A target fund is sold as a date such as “2045” and will be invested in a style that will best fit someone who wants to retire by 2045. The underlying problem is that some people need high growth rates to retire at 2045, while others just need to earn a decent return. Target funds should not be taken as a promise that you will have sufficient funds to retire in 2045, but rather that the manager will allocate assets as best as he or she can to grow your wealth now, and protect your capital as you near retirement age.

Often these funds are just a “salad” of other funds. The managers place money in different mutual funds to reach a generally accepted asset allocation to protect your money and provide decent returns. Unfortunately, this means you also pay double fees as you will have to pay for the manager to manage your money and for the fees for the funds in which your money is invested. The target fund is merely the middle man for other funds.

These funds also rarely ever have your best interest in mind. The manager will likely take the target fund money and invest it only in funds offered by the same firm. It would be equivalent to a stockbroker only selling you investments that he holds, or selling you the highest rate fund he can find. Target date funds have a large amount of capital because of the overwhelming number of investors who are privy to getting ripped off.

If you can, try to avoid the target date funds altogether. For the most part, they are nothing but renamed index funds with double the fees.

The price of gold is something that is highly debated by economists from varying schools of thought. The Austrian school of thought says that the value of gold is inherent and never changes, but that the value of fiat currency changes, and thus the price of gold. Other schools of economic thought argue that gold prices can go through boom bust periods, just like any other commodities. In history, the Austrian school of economics seems to win out.

The price of gold has been going up rapidly. Just a few years ago in 2003, the value of an ounce of gold was right around $270 per ounce. Fast forward to 2008 and the price of gold has quickly risen to $1000 per ounce, now down to the low $900s. This flee from fiat currency to gold has some investors worried that the world’s markets are about to enter a meltdown.

In the history of fiat currency, not a single one has lasted the test of time. Romans introduced the fiat currency, but after a series of wars and other large expenses, a loss of appetite for a fiat currency eventually fell to inflation. The problem with a fiat currency, Austrian economists argue, is that currency can be rapidly devalued due to inflation. The Romans did that, over history they clipped coins and printed currency that was not backed by anything of value. Because of this, historians warn, the world’s great empire faltered.

Now that gold prices are reaching their peaks there comes a new worry that inflation is rapidly devaluing the worlds currencies. The dollar has been devalued by over 97% in spending power since 1913, the year the Federal Reserve was created. Due to a larger money supply the market corrects itself with higher prices for goods.

The US Dollar has gone through some very important moments in history. In 1944 as WWII came to an end, the US Dollar was said to be as good as gold, thus the world placed their reserves in dollars rather than metals. By 1971, Nixon knew that the amount of gold would never cover the amount of dollars in circulation, thus the US went full-fledged fiat currency, no longer backed by any amount of gold.

The value of gold seems to be in a boom period for just the last 5 years after more than tripling in value. The expansion of credit during the 1990s and 2000s with the real estate boom boosted money supply and drove down the value of the dollar. Now that the dollar is no longer pegged to a specific value of metals, the price of gold floats with the amount of money in circulation.

Just in the last 6 months, the value of gold has risen from $600 per ounce to $1000. This gives us early warning signs that the amount of credit in the system is far too high and people are afraid to hold onto dollars. The money supply grew similarly today to how it did during the last Great Depression by doubling from 1920-1929 then dropping greatly from 1929-1933. Could it happen again? Austrian economists say yes.

Online banking is something that no one could have predicted. Now you are able to access your accounts at any time, make payments and see your statements from home without going to the local banking branch. Online-only banks have also sprung up with no actual branches, just a virtual account that promises higher savings rates and a slew of conveniences. For the average person, it would be perfectly acceptable to have both an online banking account and a brick and mortar bank.

Online banks generally have the best rates as they strive to cut costs by hiring a limited amount of workers (no tellers needed) and avoiding the costs of buildings, atms etc. The downside is a limited access to money and the inability to go to the bank and talk to a person if you need to. Most online banks will allow you to pay bills online, however, they do not offer easy withdrawals like the thousands of offline brick and mortar banks.

Brick and mortar banks are best for people who demand customer service. From the availability of many banking options, fee-free ATMs open 24/7 and the candy at the corner of the banking desk; brick and mortars have it all. They also have many costs that cut into savings rates, and make their lines of credit and loans more expensive. Brick and mortars offer a high level of comfort to customers, ensuring them that their money is right around the corner when they need it, rather than just a digital number on a computer screen.

For long term savings, an online bank is the winner hands down. Savings rates at online banks are much higher and the fees are much lower. An online bank is perfect for an emergency fund, or other savings that you do not need on a day to day basis. A brick and mortar savings account will never become obsolete, it is far too convenient, even though the rates are traditionally much lower. Keep just enough in a brick and mortar account to utilize it conveniently, and keep the substantial savings at an online bank to earn more in interest. For most people, two accounts is now the necessity.

This is a very difficult question to answer for most people.  You have to factor in pension plans, future social security, and other streams of income before deciding how much you will need each month for expenses.  A good estimate is that you will need 80% of your current income to be generated by an interest rate of 4-5%.  For someone making $50,000 per year, you would need $1,000,000 in retirement funds to live comfortably.

Max out your benefits

You should first try to max out the amounts that employers will match in 401k plans.  Matching funds is free money given by your employer to coerce you into planning for retirement.  A common match is 50% up to 6% of your income, meaning that your employer will give you 3% of your income on top of the 6% that you saved through the year.  You simply cannot beat free money.

Asset allocation

Monthly contributions are best

The best way to invest is to start early and make monthly contributions to a retirement account.  Monthly contributions will help you ride out the ups and downs of the business cycle.  Focus first on maximizing retirement benefits then start applying money to other accounts such as IRAs and other retirement portfolios.  Employer matches are low hanging fruit–pick it first.

There is a substantial difference between APR and the mortgage loan rate, although most banks will be reluctant to tell you this.  The mortgage loan rate is simply the amount of interest charged on the loan with no other costs included.  For example, a loan with a rate of 6% would mean that you pay $6,000 in interest in the first year on a loan for $100,000.

The mortgage loan rate is just the simple interest charged to your balance, not including fees, adjustments, closing costs or any other cost of obtaining the loan.

Annual Percentage Rate

The APR is much more comprehensive than mortgage loan rate but is still easily manipulated.  The APR was created so that borrowers could easily compare rates from lender to lender, but flexibilities in calculation do not make it the best way to evaluate a loan.  There is no concrete way to calculate an APR figure so banks are free to do as they please when they publish their interest rates. 

Some basic things can be done by banks to make the APR look better to consumers, such as opting out of PMI and saving a large monthly payment.  The APR can also be manipulated by making loan terms longer.  Loans with high closing costs and upfront fees, a long term APR will be much shorter than the short term APR.  If you borrow for a 30 year term, but pay off the loan in 10, you’ll pay a much higher APR than you originally thought.  The APR figure should be a basis for comparison but calculation differences just make it another statistic.

How to compare

You should first consider the mortgage loan rate, then ask for the bank to itemize the upfront costs.  Compare each on a line by line basis, rate compared to rate, closing costs to closing costs.  This is the only true way to compare two mortgages.  Unfortunately for the consumer, we are led to believe that the APR is standard which could not be farther from the truth.

Tax time is here and in full swing, and if you’re like the average consumer, you likely paid thousands in interest and other charges due to high debts.  Now there is a way to consolidate your debts into one low interest monthly payment and still be able to deduct the interest.

Home equity lines of credit (HELOC) have become very popular over the last decade thanks to the real estate boom.  A HELOC is a line of credit against the amount of value you own in your own home.  Thankfully, the government sees this just like a mortgage and will allow you to deduct your interest expense on your tax return. 

A home equity line of credit works just like a credit card, although this form of payment usually comes with checks rather than plastic.  A HELOC can be used to pay for almost anything your credit line will allow.  Many people have used them to improve their homes, add a pool, take vacations or even to buy groceries and pay monthly bills.  A HELOC provides the flexibility of a credit card with the low rates of a home equity loan.

How it works

A home equity line of credit is backed with the equity in your own home.  For homeowners who have been in their home for a long time, a high credit line HELOC should be easy to obtain.  Generally you can borrow up to 80% of the equity in your home.

Unlike a home equity loan, a line of credit can be used whenever you want, for whatever you want.  Most home equity loans are only for even dollar amounts and come with high closing costs and fees and cannot be changed or used at the borrowers convenience.  With the simple stroke of a pen,  a borrower can fill out a check to pay for virtually anything which will then be charged against the HELOC account.

HELOCs usually have much lower interest than credit cards and have become popular for eliminating credit card debt.  Many consolidation programs tout the easy credit lying in your own home as a way to pay off credit card debt in small monthly payments.  Unlike HELOC interest, credit card interest is not tax deductible.

Anyone with any equity in their home should apply for a HELOC just to have in case of emergency, debt consolidation or future use.  To consolidate debts, all a borrower has to do is write out a check for the amount of the debt and send it to their creditor.  The credit card debt will be removed an added to the HELOC debt. 

Interest deduction

Any debt can be put into a HELOC for interest deduction.  Credit card debt and personal loan debt is the best for consolidation because it is usually high interest and not tax deductible.  HELOCs have rates that are usually 8-10% lower than most credit cards, making them a bargain right from the start.  With a HELOC rate of 8%, the effective rate is dropped to 6% when you consider the tax breaks.   Anyone with high balances and high interest accounts should apply for a HELOC for instant debt consolidation.

The stock market is in a frenzy over the possibility of a US Recession and a slowdown in economic activity.  To understand all of this data, we must first know the definition of a recession.

By definition, a recession is three consecutive quarters of negative GDP growth.  GDP is the consumption + gross investment + government spending + net imports of the entire country.  When GDP goes down, it is said to be a fall in economic activity but this is not entirely true.

GDP isn’t a real indication of growth

As you can see, the GDP can be easily manipulated by the government spending and gross investment inputs.  When the Federal Reserve acts by issuing more credit, as they have done for a total of $180 Billion in the last few months, they can tamper with the data and improve economic indicators.

Because a recession is defined as a drop in GDP, inflating the money supply and increasing government spending is a surefire way to make the economy look better, at least on paper.  GDP does not account for the change in the value of currency over time and can only be compared against dollars, not foreign currencies.

If the Federal Reserve were to issue credit worth half of the current GDP, all economic indicators would show that the economy is growing at a breakneck pace of 50% per year.  Inflation is not accounted in the GDP statistics, so inflating the money supply has become the method of choice to prop up the economy.  The Federal Reserve is in frenzy to issue more credit and cancel out the losses by mortgage companies and investment bankers alike.

The Great Depression

History tells us that the Great Depression was caused by a reduction in the amount of credit by the Federal Reserve.  The Federal Reserve had let the money supply shrink by 33% over the course of the Great Depression, causing the markets to crash and billions to be lost.

Today we face the same crisis.  Billions of dollars has been lost so far due to the real estate bubble.  An overextension of credit coming from low interest rates and high amounts of credit have caused a bubble that’s ready to burst.  Unless the Federal Reserve continues to inflate the money supply at a monstrous pace, the market is ready to correct in a big way.

There is approximately $1Trillion in US legal tender, paper currency that is.  Unfortunately there is also $10 Trillion in credit, debt and bank accounts that has been created out of thin air; money that has been leveraged through the system so that everyone has a bigger and bigger piece of the pie.  If the Federal Reserve were to stop printing money, and the credit system were left to collapse, the stock market would be worth just one tenth of what it is today. 

Recession is already upon us because of the slowdown in credit growth.  The Federal Reserve will have to continue to issue credit in order to keep up the GDP statistics and hold the markets together.  Once investors get wind that the GDP has been manipulated, we’ll see the sell off of the century. 

Shopping around for the best interest rate can be a tedious task.  Minimum investments, investment periods and thousands of banks make shopping for a CD a difficult process. 

Stay away from corporate banking

Local for profit banks are generally the last place to look.  These banks are heavily taxed, unlike credit unions, and are out to profit, not benefit the members.  For profit banks usually have lower rates on CDs because they would rather borrow from the Reserve than from individuals.  For profit banks are also known for having significant fees for early withdrawal, and less options than credit unions.

Credit unions

Credit unions are the best place to check when considering in town banking and CD rates.  Credit unions are not for profit and look to serve members before making a profit.  Credit unions usually have favorable withdrawal policies and a plurality of plans spanning from monthly interest payments to compounding CDs.  If you want the high rates from someone in-town, a quick run to a local credit union is a great place to start.

Look online

For those willing to take the plunge with online banking, you will find the best CD rates from low-cost for-profit online banks.  These banks cut overhead by operating online and pass the savings to their customers and investors.  Online banks often use CD rates as a marketing tool and offer very high promotional and non-promotional rates designed to pull in new customers.  You might be able to find rates up to a full percentage point higher than off line banks. With this in mind you will incur some drawbacks such as overall convenience and limited access to your money.

Resources for finding the best rate

Websites such as Bankrate.com give a list of CD rates offered around the country.  The tech age has brought unforeseen competition in CD rates that has undoubtedly benefited the consumer.  The top yielding banks are ever changing, utilizing tactics such as adding .1% here and there to be listed as the #1 yielding bank. 

It’s amazing how saving a few extra bucks a day can pay off huge in the long run. The No Credit Needed blog has given us a nice little example of how $10 a day can add up to over 3/4 of a million dollars just in time for retirement and that’s with only a 5% return on investment. I think we can all do better than that

If I contribute $1 per day ($360 per year) for 50 years, at 5%, I’ll have more than $79,000!

If I contribute $10 per day ($3600 per year) for 50 years at 5%, I’ll have more than $790,000!

SO put down the soft drinks and chips. Both your body and wallet will thank you in the long run!