Here’s a look at our current retirement investment portfolio.  These numbers are current as of today.  This breakdown does not include my wife’s pension plan, nor does it include money invested for college education savings.  We use four accounts to save for retirement (in addition to my wife’s pension).  My 403(b), my Roth IRA, my wife’s Roth IRA, and a SEP IRA for business income investing.

Large Cap / Total US Market = 46%

Mid Cap / Small Cap = 34%

International = 17%

Cash / Bonds = 2%

The majority of the large cap / total US market stocks are held in Vanguard’s VTI ETF – which tracks the broader US market.  The majority of mid / small cap stocks are held in my 403(b) via a REIT.  All of the international stocks are held in a fund with my 403(b).  I recently made a change to my future contributions, so the amount held in cash / bonds should increase, as a percentage of the portfolio, over time.

One of my goals for 2009 is to fully-fund my 403(b) ($16,500).  I also hope to fully-fund my Roth IRA ($5,000) and my wife’s Roth IRA ($5,000).

This is my personal portfolio, constructed after doing my own research and according to my own risk tolerance. I may even change it in the future.  It is not a recommendation to purchase any specific securities.  I am not a financial professional or investment adviser, nor do I play one on the web.

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Current Retirement Asset Class Allocation

I have just gotten off of the phone after the better part of an hour.   I can’t be sure, but I think I’ve fixed a problem, that until today, I never knew existed.

The background -

I have a Roth IRA.  My wife has a Roth IRA.  One of my goals for 2009, is to fully-fund both Roth IRAs.  We have a joint checking account.  From time to time, I will send a payment (deposit) from our checking account to the brokerage where we have our Roth IRAs.  Clear enough?  Good.

The problem -

Last week, I logged in to my checking account, and initiated two payments (deposits), one for my Roth, one for my wife’s Roth.

Today, when checking on the status of said payments, I was shocked to find that the deposit intended for my wife’s Roth IRA was rejected.

Apparently, when my bank sends a payment to another company, the only name on the payment check is my name, even though the checking account is a joint account.  Well, when the brokerage received the payment, and noticed that my wife’s name was not on the check, they rejected the check, because they do not accept third-party payments.

The solution -

I called my brokerage, and they suggested that I send a copy of a recent bank statement, along with my wife’s name and account information, showing that she is, indeed, a joint holder of the checking account.  This sounded like a lot of work, and I’m just not in the mood for a lot of work.

I then called my bank, pressed zero fifty times, talked to a very nice CSR, and had him add my wife’s name to all future online bill payment checks.  Problem, hopefully, solved.

I also canceled the payment to the brokerage, the one for my wife’s Roth IRA.  Once the money, which has already been deducted from my checking account, is safely back in the account, I’ll initiate another payment.  Hopefully, this one will have my wife’s name on it, and all will go smoothly.

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Roth IRA Deposit Gone Awry

From a recent email -

I love your site!  (Thank you…)  I’ve been working on a basic plan for managing my finances.  Could you write a post about your current plan?  Or maybe a post about some of the things you’ve done to get where you are?  Thanks!

I love it when I get questions like these.  It makes me happy to see that folks are taking control of their own finances.  Bravo!  So, here are the basic steps I’ve taken (and plan to take), with links for further reading.

1.  I stopped using credit cards.

Before I could fill in the hole, I had to stop digging it deeper.  Putting my credit card in my wallet, and just leaving it there, taught me to live on the money that I actually make.  I do not like credit cards, and I am of the firm belief that most people would be better off without them.

2.  I started living on a budget.

This sounds very basic, I know, but living on a budget really works.  As a testimony, a brief examination of my own life.  I worked for 16 years, and had over $11,000 in debt and $500 in the bank.  10 months after giving up my credit cards and living on a budget, I was debt free.  Less than a year later, I had $20,000 in the bank.  Living on a budget works.

3.  I created a mini-emergency fund.

During my debt reduction period, I always maintained a cash reserve between $500 and $2000.  This cash reserve came in handy, and I was able to use it for “emergencies”, that in the past, would have required the use of a credit card.

4.  I systematically paid off my debts.

I used a plan like the one outlined in my free Debt Reduction E-Book.  The plan is simple.  It’s easy to follow.  It really does work.

5.  I fully-funded my emergency fund.

As soon as I paid off my last debt, I started to build an emergency fund equal to six months of my wages.

6.  I began to focus on retirement.

I use several accounts to save for retirement.  Here’s the breakdown.

Pre-Tax Accounts -

My 403(b) – 15% of our gross household income is contributed to my 403(b) account.

My wife’s pension – 5% of my wife’s salary is contributed to my wife’s pension.

After-Tax Accounts -

My Roth IRA – I make maximum contributions to my Roth IRA.

My wife’s Roth IRA – My wife makes maximum contributions to her Roth IRA.

Side Note – asset allocation (what I invest in) – I buy index-based mutual funds and ETFs.  I am not a professional investor or adviser, and my investment choices are pretty boring.  If you ever take a peek at the Vanguard VTI ETF, you’ll have a pretty good idea about how the majority of my investments are doing.  I do, however, have a small portion of my portfolio invested in very aggressive small-cap and international funds, and I own one individual stock, CLX.  Why?  I like being clean, and I like Clorox.

7.  I began to focus on saving for my kids’ college expenses.

I have opened and continue to fund 3 Education Savings Accounts (ESAs), one for each of our children.  The maximum annual contribution to each account is $2,000.

8.  I save for future major purchases.

After funding retirement and education accounts, I then focus on saving for future major purchases.  Currently, I am saving for the purchase of a newer automobile, and the possible purchase of a new home.  The new car purchase should occur in the next five years, while the new home purchase should occur within the next decade.  (I hope to pay cash for the new home.  It’s a major goal, but one I’m hoping to achieve!)  You can read more hear, about how a few years ago, I paid cash for a new-to-me automobile.

9.  I try to maintain proper amounts of insurance.

I have health insurance, life insurance, renter’s insurance, long-term disability insurance, dental insurance, and automobile insurance.  Insurance coverage can be expensive, but it’s an important part of a well-rounded financial plan.  (We waited until we were out of debt, and then we purchased additional life and disability insurance, but we had a minimal amount of both, even while in debt.)  We also have wills and other end-of-life documents.

10.  I am always looking for ways to save more and spend less.

This step makes all of the other steps possible.  In fact, it could have been number 1.  I’m constantly evaluating my spending habits, and always looking for ways to save money.  At the same time, I’m also looking for ways to increase my income and maximize my earning potential.  By the way, here are some of the best tips for saving money, submitted by my favorite people, you, my awesome readers!

I like to keep things simple – very, very simple.  The outline above is easy-to-follow.  I tend to ignore most of the noise surrounding financial planning, and focus on the things I understand.  I’ll leave the high-risk maneuvers to those who can tolerate violent swings in the economy.  For me, I want to maintain an emergency fund, methodically fund my retirement accounts, plan for major future expenses, and spend the rest of my life… living my life!

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A 10 Step Outline Of Our Financial Plan

Inspired by a recent article by Nickel, over at Five Cent Nickel, about his current asset allocation, I thought it might be a good time to take a look at our current asset allocation.

Between us, my wife and I have five retirement accounts – two Roth IRAs, my 403(b), a SEP-IRA, and my wife’s pension. The calculations in this article are based on four of those accounts – and exclude my wife’s pension.

Our current asset allocation:

100% stocks, broken into the following -

Our allocation will shift over the coming months, as we continue to make contributions to my wife’s Roth IRA and my 403(b). Current plans are for future contributions to the 403(b) to be invested in an S&P 500 Index Fund and future contributions to my wife’s Roth IRA to be invested in a Total US Stock Market mutual fund.

Like my buddy, FMF, over at Free Money Finance, I prefer investing in Index Funds. I’m still working to refine my investing strategy, and it feels good to have a snap-shot of my current situation. Just like Nickel suggested, I have decided to treat all of my investments as ‘one big pot of money’ – and I’ll make adjustments to our allocation using my SEP-IRA contributions throughout 2008.

Edit:  After reading a comment left by Nickel, I wanted to make a note about the aggressive nature of our investments.  Instead of bonds or a bond fund, we have my wife’s pension, which grows at a guaranteed rate.  If we did not have her pension, we would change our asset allocation.

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Our Current Asset Allocation

I was watching CNBC and noticed a scrawl at the bottom of the television screen -

Altria, Honeywell removed from DJIA, Bank of America and Chevron added

The DJIA is the Dow Jones Industrial Average – a stock market index.

The DJIA tracks 30 of the largest and most widely held public companies in the United States.

Click here to read the Wikipedia entry for the DJIA.

From time to time, the makeup of the DJIA is changed.

According to CNBC and this article over at Trading Markets, Altria and Honeywell will be removed from the average, and Bank of America and Chevron will be added.

This is the first change to the makeup of the DJIA since April of 2004, when 3 stocks were dropped and 3 others were added.

While some might make a big deal about the Dow, I tend to follow the S&P 500 and Wilshire 5000, indices which allow me to track the broader moves of the stock market.

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The Dow Jones Industrial Average Drops Altria And Honeywell Adds Bank Of America And Chevron

It’s always amazing what I find as I read through my favorite personal finance blogs.

Recently, I’ve been thinking about dividends – what they are, how they work, how they are calculated, etc. Well, I fired up my newsreader today, and my good friend JLP from All Financial Matters has an excellent article about dividends and the Dow 30.

As I move forward in 2008, one of my goals is learn more about investing. Right now, I invest mainly in index-based ETFs, but I’m always on the look-out for easy-to-understand investment articles.

Sasha over at Consumerism Commentary recently cashed in some Savings Bonds. My kids have couple of bonds that they were given a few years ago, and I’ve been thinking about cashing them in and investing the money in mutual funds.

If you want to cash in a savings bond, all you have to do is go to your local bank and they’ll give you cash for it. If the bond is your child’s, most likely, it’ll have the child’s name and your name on it.

If you want to find the value of your bond, or if you need a replacement for a bond you’ve lost, checkout Treasury Direct, the securities division of the United States Treasury.

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Learning A Little Bit More About Dividends And Bonds

I logged into my TradeKing account, where my wife and I have our Roth IRAs, and I noticed that one of the ETFs (Exchange Traded Funds) that I own paid a dividend last month.  But, instead of being automatically reinvested, the dividend was simply deposited into my money market fund.

In the future, I want the dividend to be automatically reinvested in the ETF.  I used the “live chat” feature and asked a representative to fix the situation.  Within a few minutes, the representative clicked a few buttons and I have been assured that, from now on, all dividends will be automatically reinvested.

If you have investments, you might want to check your statements, just to be sure that dividends are being invested the way you want them to be invested.  MOST brokerages offer FREE dividend reinvestment.

As a side note: I have sent a check for my 2008 contribution to my Roth IRA to TradeKing, and I’m thinking about how to invest it.  I’ll probably stick with VTI, my ‘go to’ ETF.  (I do not, in any way, recommend that you follow my investing strategy.  Do your own research and make your own decisions!  THAT is why it’s called PERSONAL finance!)

This post does NOT include affiliate links.

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Dividend Reinvestment – Take A Look At Your Tradeking Account

Click here to read all of the 33 Days And 33 Ways To Save Money And Reduce Debt posts.

Day 28: Find Out How Bad (Or Good) Your Situation Really Is

Do you know how much you owe on your house?  Do you know how much money you have in your checking account?  How much would you need to payoff your automobile loan?  Have you checked your credit report lately?  As you begin to get out of debt and save money – you really need to know “where you are today”.

Create a list of your credit accounts – something like this:

Credit Card 1 – $4000

Credit Card 2 – $5214

Mortgage – $124,400

Hospital – $1300

Automobile – $16,000

If you don’t know how much you owe, then you really can’t begin to create a plan to get out of debt.  So, go online (or call) and find out exactly how much you owe on each of your credit cards.  Call your bank and find out the “payoff” amount for your automobiles.  Call your mortgage company and find out the “payoff” or “remaining balance” on your mortgage.  You need to know how tall the mountain is before you decide how to climb it.

Create a list of your savings / investment accounts – something like this:

Online Savings – $400

401K – $11,000

Pension Plan – $12,000 or X years of contributions

Social Security – Regular report from the Social Security Administration

Most retirement plans now offer online account management.  Log-in to your account and find your balance.  While your logged in, you might want to take a good look at the types of funds you are investing in.  If you are a beginner, you might find that all of your retirement funds are going to one fund, one fund type, or they might be just sitting in a money market account, waiting for you to tell them what to do.  If you have a pension plan or social security, keep up with the regular updates you should be receiving in the mail or from your employer (pension plan).  While the numbers besides these accounts might be “estimate” – it’s still good to know “where you stand”.

If you haven’t checked your credit report lately, click here to read my article about how to get 3 (or 6) annual credit reports – for free!

You should also consider a list of insurance policies and any other accounts that could effect your long-term financial situation.

Have you recently “run the numbers” and added up how much you actually owe?  Are you doing better (or worse) than you originally thought?  Leave a comment and let us know.

Click here to read all of the 33 Days And 33 Ways To Save Money And Reduce Debt posts.

Observant readers will note that this series has taken much longer than 33 days. I can assure you, I am blogging as often as life permits.

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Day 28 of 33 Days And 33 Ways To Save Money And Reduce Debt: Find Out How Bad (Or Good) Your Situation Really Is

I was recently looking through the list of investing blogs over at pfblogs.org and I clicked on The Dividend Guy Blog. I was very interested in what I found, and I contacted “the dividend guy” – and asked him if he would write a guest post for No Credit Needed. While I know a good bit about debt reduction and saving money, I am brand-new to investing. I wanted a post that would describe dividends, what they are, and why they matter. I want to thank The Dividend Guy Blog for the following informative guest post and I encourage you to check out his site. As always, information provided here at No Credit Needed is for entertainment purposes only and you should not consider the following to be financial advice, professional or otherwise. Do your own research and consult a financial professional before making any investment choices.

Dividend Investing 101

This article will provide some of the basics of dividend investing.

What is a Dividend and the Dividend Yield?

In the stock market, money can be made in one of three ways:

1. Share price growth – you buy shares in a company at one price and then sell it at a later date for a higher price (hopefully).
2. Interest on bonds or other fixed income assets – you can collect interest from a bond that is essentially you lending money to a bank or company. Interest payments are typically guaranteed payments you can receive on your invested money for a set period of time. At the end of that fixed time, you get all your principle back.
3. Dividends – the topic of today’s discussion!

The technical definition of a dividend is a distribution or payment in the form of cash on some portion of a company’s earnings to the shareholders.

In more simple terms, a dividend is money a company gives you for each share of stock you own in that company. It is cash the company pays you for being a shareholder.

Dividends are often quoted as either the dividend per share (DPS) or dividend yield. The DPS is simply the dollar amount, per share of stock that you hold, that will be paid to you depending on the number of shares you hold. For example, if you own 100 shares of Coca-Cola and the dividend is $1.36 per share, you as an investor can expect to receive dividend payments from the company of $136 per year (note: when you read a stock quote and look at the dividend section, the amount quoted is the yearly amount in dividends the company pays per share, unless otherwise noted).

The more common way dividends are quoted is through the dividend yield of the company. The dividend yield shows how much a company pays out in dividends as a percentage of its share price. The formula to calculate the dividend yield is not complicated. You can do it yourself, however most investor websites where you get your stock quotes will have dividend yield calculated for you:

Dividend Yield = Annual Dividends Per Share (DPS) / Price Per Share

The way I look at dividend yield, is that is is the return on investment an investor will receive from a stock if they buy it at a particular price. Lets look at an example using our Coca-Cola example:

Share Price: $56.40

DPS: $1.36

Dividend Yield: 2.4% ($56.40 / $1.36)

If an investor bought Coca-Cola at this price and this DPS, then every year they hold the stock they will see a return on their investment of 2.4% from the dividends alone.

Compounding: Putting Your Dividends to Work

Now that we have a good understanding of what dividends are and how to calculate the dividend yield, we need to talk about what an investor can do with the dividend payments they receive. There are two choices:

1. Take the dividends out of your brokerage account and spend them on what ever you want
2. Use the dividends to buy more shares of a company

The first choice is not ideal if you are trying to build up your investment portfolio. It may be for you if you are living off your dividend income, but for the purposes of this article we will assume that you are at the asset accumulation phase in your investing career and trying to grow your portfolio.

The second choice is called compounding – income from dividends is reinvested into more assets that provide more income. Each time an investor receives a dividend payment from a company, that income is reinvested into more shares of that company or another company. As this continue to happen year after year, you will find that the dividend income you receive from your portfolio will increase allowing you to reinvest it into more and more assets. It is a wonderful circle of cause and effect. To highlight the power of compounding, I will once again go back to our Coca-Cola example. Let us assume that you as an investor bought $10,000 worth of Coca-Cola stock and you reinvested all the dividends you received back into more shares of Coca-Cola. Here is what your investment would look like in 20 years,

This chart does not even take into account the change in share price that Coca-Cola would see over that time period. The key thing to note is that if Coca-Cola’s share price stayed exactly the same as the day you bought the stock and you reinvested the dividends into more Coca-Cola stock, your $10,000 would grow to $16,069 in 20 years based on the dividends alone. We all know that stocks also see their share prices grow so in 20 years, an investor would expect to see the gain from an increased share price as well.

Looking for Dividend Growth

One last thing I would like to cover before we finish here is an important consideration for dividend investors. It is the first thing that I look for when deciding to buy a stock or not. It is called dividend growth – when a company raises the dividend per share paid to investors on an annual basis. This is an important factor because if actually provides more power to the compounding machine we spoke about above. Going back to the compounding example above, if Coca-Cola increases its dividend per share ever year, then ever year you are receiving more dividends. This provides you with more income to buy more shares. It happens over and over again and will further compound your returns in that investment.

Where to Find Potential Dividend Investments that Increase Their Dividends

There are two potential sources of dividend growth stock ideas that an investor can look at to generate ideas for further research. They are called the Dividend Achievers and the Dividend Aristocrats.

Dividend Achievers: Stocks that have increased their dividends for at least 10 years

Dividend Aristocrats: Stocks that have increased their dividends for at least 25 years
These lists are not meant to be buying recommendations. I use this list to look for companies that I want to invest in, and then do further research on them by looking at such things as earnings, revenue, and cash flow. Only then do I buy shares in that company.

About The Dividend Guy

The Dividend Guy runs an investment blog focused on investing in high dividend stocks and dividend growth stocks. His vision for the site is to share his passion for investing in high dividend stocks that consistently grow their dividends to ensure a steady stream of dividend cash flow building up to his retirement.

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Learning A Little Bit About Dividends

I work for a tax-exempt organization so, instead of having a 401k, I have a 403(b). My retirement contributions are sent by my employer to the company that operates the 403(b), but the responsibility for allocating those contributions rests with me. I’m rather new to the “investing game” and I’m taking the time to research the various mutual funds available to me inside my 403(b) plan.

My 403(b) offers two different fund categories.

Category 1: Select Funds: These are basic mutual funds. By selecting among the various “select funds” I can create a completely customized “portfolio”.

According to the Securities and Exchange Commission, “A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities.”

According to Wikipedia, “In finance, a portfolio is a collection of investments held by an institution or a private individual.”

So, when I invest in a select fund (mutual fund) my money is pooled with the money of other investors and used to purchase stocks, bonds, etc. The combination of all of my select funds (mutual funds) equals the total value of my investment portfolio.

Types of Select Funds available in my 403(b):

Money Market
Low-Duration Bond
Medium-Duration Bond
Extended-Duration Bond
Equity Index
Real Estate Securities
Value Equity
Growth Equity
Small Cap Equity
International Equity

Let’s assume that I have $1000 in my 403(b) account. I can choose to allocate that $1000 in any manner that I wish. I can put 50% in the International Equity fund and 50% in the Equity Index Fund, or I could allocate 5% to Small Cap, 10% to Real Estate Securities, and 85% to the Medium-Duration Bond fund. The choice is completely up to me, as long as the allocations for my funds add up to 100%.

I’ve created the following graphic to illustrate how a 403(b) retirement account would work if my entire portfolio was invested in Select Funds (Mutual Funds):

–

Category 2: Blended Funds: These funds invest in the various Select Funds. In other words, these are funds-of-funds.

Types of Blended Funds available in my 403(b):

Flexible Income
Growth and Income
Capital Opportunities
Global Equity

These funds provide inherent diversification and are listed by their assumed risk/return ratios. In other words, those looking for a higher return (and who also have a higher tolerance for risk) might choose to invest 100% of their contributions in the Global Equity fund. I can purchase one Blended Fund and still diversify my investments. Going further, I could also purchase multiple Blended Funds, but doing so might defeat the purpose of purchasing a Blended Fund. Blended Funds, by definition, are already diversified and categorized by risk/return assumptions.

–

My 403b provider offers Select Funds (which are mutual funds) and Blended Funds (which are funds that invest in the various Select Funds). I am free to decide how to allocate my investments.

1. I can choose to purchase only Select Funds (or just one Select Fund).

2. I can choose to purchase only Blended Funds (or just one Blended Fund).

3. I can choose to purchase Select Funds AND Blended Funds.

Confused? Most people are. I will confess, it takes a lot of effort to understand retirement funding and the various allocation options that are available. There are so many terms to understand, so many different opinions about what to invest in, and so many people trying to make a dollar “giving advice”. It’s amazing that something so important, so vital, is shrouded in difficult to understand terminology. Hopefully, as I move forward, I’ll gather more information and understand more and more about investing.

So, how have I chosen to allocate my money? I went the easy route and put 100% of my money in the Select Fund – Equity Index. This fund is an index fund, it invests in the stocks of the S&P 500, and it has a very low expense ratio. I like to keep things simple – very, very simple!

(One note: My 403b provider describes their funds-of-funds as Blended Funds. Certain mutual fund providers also offer regular mutual funds labeled “Blended Fund”. If you run into this term, be sure that you understand the difference.)

Please note: I am not a financial professional and I do not give investing advice. Take the time to educate yourself about investing.

Resource: For additional information about the 403(b), checkout 403b wise.

Resources: If you are looking for a great book about investing, may I suggest the following two? I really like them both.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Book Big Profits)

The Bogleheads’ Guide to Investing

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Learning More About My 403(b) Plan