Thursday, April 16, 2015

Three Simple Strategies That Will Help You Build Substantive Wealth

These days, many individuals are interested in building substantive wealth for themselves. Whether you're attempting to accumulate wealth to pay off loans, put your child through college, or retire well, it's important to note that you can realize your vision. To get you started on the path to developing the type of economic freedom and power that will improve your quality of life, consider implementing the following three simple strategies:

1. Study Financially Successful People.

One great way for you to start building a strong financial future is to study financially successful people. This will help you in numerous ways. First, it will function as motivation as you see that everyone who is now rich did not start their life journey in a wealthy place. Additionally, studying the lives and ideas of wealthy people will empower you with knowledge regarding the systematic steps and strategies they took to start accruing assets and capital. Once you start the process of studying financially successful people, consider an individual such as Robert Rosenkranz. Rosenkranz is currently the CEO of Delphi Financial Group, and he has developed extensive financial wisdom that you can learn from to start building your own capital. Additionally, Rosenkranz is a successful photographer and is a member of the Visiting Committee for the Department of Photography at The Metropolitan Museum of Art.

2. Invest.

Another strategy that you can implement to start building financial wealth is investing. This method can prove very efficacious because it empowers you to develop a stream of passive income once you learn how to make prudent decisions in this venue. If you are unfamiliar with the world of investing, it can be helpful to take several classes and/or hire a professional financial adviser who can provide you with sound counsel regarding how to make economically prudent investment decisions.

3. Develop Multiple Streams Of Income.

One of the things that you may notice as you begin to study the lives of financially successful people is that they tend to develop multiple streams of income. This is an important and advantageous strategy because it empowers you to continue earning money from one venue even if another well dries up. There are infinitely many ways that you can develop an additional stream of income, including but not limited to investing, creating a blog, participating in money markets, and selling clothes on eBay.


If you're serious about building a strong financial future for yourself, you should know that there are numerous ways that you can turn your vision into a reality. By implementing some or all of the financial strategies outlined above, you will likely find that your money starts to grow
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Sunday, March 29, 2015

Self-directed IRA or SEP IRA for a Small Business Owner

Its often thought that one of the major disadvantages of being a small business owner is the lack of employer provided benefits. Along with health insurance, the biggest of these benefits is a retirement plan.

However, small business owners have excellent options on the retirement front. You can choose a self-directed IRA or a SEP IRA and cover the retirement side of your benefits quite nicely.

The Advantages of a Self-Directed IRA

With a traditional IRA, you can contribute up to $5,500 to the plan each year ($6,500 if youre age 50 or older), and invest it virtually any way that you want. Investment income earned on the plan is always tax-deferred. And as long as you have no employer-sponsored retirement plan, the full amount your contributions will be deductible from your income.

One limitation that may apply to a small business owner is if he or she has a spouse who is covered by an employer plan. If thats the case, there may be limits on the amount of the contribution that is tax-deductible.

Even if your spouse is covered, you can still take a full deduction up to a modified adjusted gross income (MAGI) of $183,000. You are also eligible to take a partial deduction up to a MAGI of $193,000, after which your contributions will no longer be deductible.

Whether or not your contributions will be deductible, here are some of the major advantages:

Simplicity. An IRA is virtually the easiest type of retirement plan to start and to maintain. You simply fill out some paperwork – often most of it done online – send in your contribution, and go from there. There are no significant paperwork filing requirements on your part, nor are there any involved reporting issues. You can virtually handle it like a bank account, except that its actually a retirement account.

Choice of trustee. Unlike an employer-sponsored retirement plan, where the trustee is a given, you can select any trustee that you want. This can be a bank, a brokerage firm, or even a mutual fund. And as such, you can choose the trustee that offers the lowest fees for the account.

Unlimited investment selection. This is where the term “self directed” enters the picture. Since you are free to choose the trustee that you want, you can choose one that offers any investment selection that you like. And with very few exceptions, you can invest in just about anything you want with a self-directed IRA.

Complete portability. Your IRA is your IRA, and wherever you go, it goes with you. You can move it from one trustee to another, or you can even roll it over into an employer-sponsored 401(k) plan (if that plan permits such a move) in the event that you decide to give up being a small business owner, and decide to take a regular job. 

The Advantages of a SEP IRA

If an IRA is an excellent retirement choice, a SEP IRA is even better - especially for a small business owner. We can think of the SEP IRA as a regular IRA on steroids. It has many of the same advantages, including tax deductibility of contributions and tax-deferred investment earnings. But in almost every other way, the SEP IRA is a superior retirement vehicle.

Here are the specific advantages of a SEP IRA:

Simplicity. SEP IRA is only a little bit more complicated to set up than a traditional IRA.

No limits on the tax deductibility of your contributions. Unlike a regular IRA, you will not lose the deductibility of your contributions even if your spouse is covered by employer-sponsored retirement plan. A SEP IRA is considered to be a retirement plan specifically attached to your business.

Higher Contribution Limits. This is probably the biggest advantage of a SEP over a traditional IRA. Where a traditional IRA is limited to $5,500 per year, you can contribute up to $53,000 with a SEP. You can contribute as much as 25% of your net income (effectively 20%, since your contribution must be based on 25% of your income, reduced by the amount of your SEP contribution). But thats nearly 10 times higher than what it is for a traditional IRA.

Choice of trustees. Like a traditional IRA, you can open up a SEP plan with the trustee of your choice.

Unlimited investment selection. Same as with an IRA, you can invest in just about anything that you want, or that is available through the trustee that you choose the whole the account.

Can extend the plan to cover employees. This is probably the second biggest advantage that a SEP has over traditional IRA. If you have employees, or plan to hire some, you can include them in your SEP plan. Each employee will be required to open up an individual SEP account. This will allow you to begin extending retirement benefits to your employees, which could be an important advantage when it comes to hiring the right people.

Whether you choose a traditional IRA or a SEP IRA, you will not be able to begin making withdrawals from either account until you reach the age of 59 ½. If you do so sooner, the amount of the withdrawals will be subject to ordinary income tax, plus a 10% early withdrawal penalty tax by the IRS.

You will also be required to begin making Required Minimum Distributions (RMDs) from either plan no later than age 70 ½.  But this requirement is one that is imposed on nearly all tax-sheltered retirement plans.

Other than the fact that you will be able to make much larger contributions to a SEP IRA than to a traditional IRA, you cant go wrong with either plan. If you are a small business owner, the only mistake that you can make is to not participate in a retirement plan of some sort. And either of these will be an excellent choice - with the nod going to the SEP.

Author Bio

Donny Gamble Jr. is an online entrepreneur that runs a financial blog called He also is a frequent contributor to SmallBizTrends, Huffington Post, and many other personal finance blogs. Follow him on Twitter @donnygamblejr

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Friday, February 27, 2015

Financial Markets: Functions and Types

Financial Markets, their functions and their classifications
Financial marketsA Financial market is a market for creation and exchange of financial assets. Financial markets act as a forum to facilitate financial transactions through the creation, sale and transfer of financial securities. If you buy or sell financial assets, you will participate in financial markets in some way or the other.

Financial markets play a key role in the economy by stimulating growth influencing economic performance of the actors, affecting economic welfare. This is achieved by financial infrastructure, in which entities with funds allocate those funds to those who have potentially more productive ways to invest those funds. A financial system makes it possible a more efficient transfer of funds.

Functions of Financial Markets:
Financial markets play a pivotal role in allocating resources in an economy by performing three important functions.

1) Financial Markets facilitate Price Discovery:
The continual interaction among numerous buyers and sellers who throng financial markets helps in establishing the prices of financial assets. Well organized financial markets seem to be remarkably efficient in price discovery. That is why economists say: “If you want to know what the value of a financial asset is, simply look at its price in the financial market”.

2) Financial Markets provide liquidity to financial assets:
Investors can readily sell their financial assets through the mechanism of financial markets. In the absence of financial markets which provide such liquidity, the motivation of investors to hold financial assets will be considerably diminished. Thanks to negotiability and transferability of securities through the financial markets, it is possible for companies and other entities to raise long term funds from investors with short term and medium term horizons.  While one investor is substituted by another when a security is transacted, the company is assured of long term availability of funds.

3) Financial Markets considerably reduce the cost of transacting:
The two major costs associated with transacting are search costs and information costs. Search costs comprise explicit costs such as the expenses incurred on advertising when one wants to buy or sell an asset and implicit costs such as the effort and time one has to put in to locate a customer. Information costs refer to costs incurred in evaluating the investment merits of financial assets.

Classification of Financial Markets:
There are different ways of classifying financial markets. One way is to classify financial markets by the type of financial claim.
The Debt market is the financial market for fixed claims of debt instruments and the Equity market is the financial market for residual claims or equity instruments.

A second way is to classify financial markets by the maturity if claims. The market for short-term financial claims is referred to as Money Market and the market for long-term financial claims is called as Capital market. Traditionally, the cutoff between short-term and long-term financial claims has been one year – though the dividing line is arbitrary, it is widely accepted. Since short-term financial claims are invariably debt claims, the money market is the market for short-term debt instruments. The capital market is the market for long-term instruments and equity instruments.

A third way to classify financial markets is based on whether the claims represent new issues or outstanding issues. The market where issuers sell new claims is referred to as the Primary market and the market where investors trade outstanding securities is called the Secondary market.

A fourth way to classify financial markets is by the timing of delivery. A Cash or Spot market is one where the delivery occurs immediately and a Forward or Futures market is one where the delivery occurs at a pre-determined time in future.

A fifth way to classify financial markets is by the nature of its organizational structure. An Exchange-traded market is characterized by a centralized organization with standard procedures. An Over-the counter market is a decentralized market with customized procedures. 

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Saturday, February 7, 2015

Return on Investment or ROI

Return on Investment or ROI

All investors want to make a positive return or profit on the money they commit to their investments. In a nutshell, this is the basis behind the term “Return on Investment”, also known as ROI. ROI is mathematically defined as (gains-cost)/cost, and is usually expressed as a percentage. 

Before we delve into some of the nuances of ROI, lets look at a simple example. You have $1000 you wish to invest on a promising stock. You research your idea and decide to buy $1000 worth of shares. Time goes by and your idea is working out: the stock rises in price and you sell your shares, receiving $1500 from the sale. Your initial investment was $1000, and your profit (before taxes and commissions) was $500. In the example cited, your return on investment, therefore, was 1500 + 1000/1000, for a return of 0.5, or 50%, on your investment.

ROI is used not only for stocks but for all kinds of investments and business endeavors. It is applied to investments in real estate, oil wells, collectibles, bonds, precious metals and any other form of investment.

As is often the case in the financial arena, there can be a number of factors to consider when calculating ROI, making some calculation more complicated than the simple example cited above. In the area of stocks and bonds, one would want to factor in dividends and interest received when calculating ROI. In the world of real estate, ROI calculations can become quite complex. The real estate investor must factor in rental income, appreciation, amortization, insurance and property upkeep.

Even collectibles, such as rare coins, paintings, and the like may have substantial maintenance costs, which need to be factored into ROI.

In some industries, Return of Capital Invested, or ROCI, is used instead of ROI. In the oil and gas industry for example, exploration and development expenditures are extremely high, and payoffs on investments may not be realized for many years. Hence ROCI is often used in businesses such as these instead of ROI.

Another metric related to ROI is Compound Annual Growth Rate, or CAGR. This is a calculation made to approximate the annual return on an investment that pays out over a number of years and at a variable rate. It is not a Return on Investment, but rather an attempt to show how an investment would grow over time if it grows at a steady rate.

A final nuance to consider is the role of leverage in investments. Many people buy stock on margin (a form of leverage) and most business finance their investments by borrowing (potentially another form of leverage). The effect of leverage should be incorporated in ROI calculations.

In summary, ROI is a very useful concept to keep in mind. It enables the investor to calculate how well an investment has performed. Consideration of likely outcomes for any investment can be viewed through the lens of the ROI calculation to help in the assessment of potential investments going forward.

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Sunday, February 1, 2015

401k Contribution Limits for 2015

401k Contribution Limits for 2015

401k contribution limits for 2015

A 401(k) plan is a tax qualified retirement savings plan that is contributed to by your employer. Employees can save and invest a portion of their paycheck into the 401(k) account before taxes are taken out. This serves two beneficial purposes: to potentially bump them down a tax bracket and to provide their savings compounding interest for many years with delayed taxation. The earnings from investing in a 401(k) are also tax deferred. 

A benefit of the 401(k) is that the investor is allowed control of how their money is invested. Most 401(k) plans offer a selection of mutual funds comprised of securities such as bonds, stocks and other assets. However, the most common option are Target-Date Funds. Target-Date Funds address some date in the future, usually retirement in order maximize investment returns. It is structured to gradually become more and more conservative as the investor reaches retirement.

The 401(k) plan is full of restrictions. For the most part, investors must work for their employer for a certain amount of time before they can gain access to their employer’s contributions. Usually employers match 3% of their employees’ salary for their 401(k) contributions. The best plan is to at least invest enough to get the full amount that the company matches. Other restrictions include early withdrawal penalties (usually 10%) which penalize for withdrawing money before retirement. 

However, there are a few emergency withdrawal options:
• Hardship withdrawals
• Loans
• 72(t) withdrawals

Generally speaking, there are only these three emergency withdrawal options. Hardship withdrawals are allowed for certain qualified hardships. Unfortunately there is usually still a withdrawal penalty and taxes owed on these withdrawals. Loans against the 401(k) are usually allowed as long as the loan is repaid with interest. 72(t) withdrawals are withdrawals that are usually allowed based on an individual’s life expectancy. These withdrawals eliminate the 10% early withdrawal penalty and require that withdrawals must be taken for at least 5 years or until the age 59 and a half has been reached. Taxes still must be paid on the amount withdrawn, however. 

There are two 401(k) options offered, the traditional and the Roth. The main difference being that the Roth 401(k) is comprised of contributions that have already been taxed and thus no taxes are paid upon withdrawal. The Roth also usually has more flexibility in accessing money invested.

In October of 2014, the IRS announced that adjustments to retirement plans that affected the dollar limitations had been made. 
The adjustments for the 401(k) plan are as follows:

• Elective deferral contribution limit was raised from $17,500 to $18,000
• Employees aged 50 or older can contribute a total of $24,000
• The total contribution limit to a 401(k) by both the employer and employee was raised to $53,000
• The total contribution limit to a 401(k) by both the employer and employee aged 50 or older was raised to $59,000
• The total employee compensation that can be considered for calculation contributions was increased from $260,000 to $265,000
• The highly compensated employee definition was raised from $115,000 to $120,000

Overall, contribution to a 401(k) is a great investment option for anyone who is concerned about having enough money once retired. Always remember to try to make the maximum contribution to the 401(k) each year and to at least contribute enough to get the full amount that the company matches. 

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