Are you ready to begin investing?

Many of my friends and colleagues at work, whether young or old, often ask for help investing, which normally means which fund to pick for the 401(k). Before you even get to the point of picking stocks and funds you need to make sure you are really ready. At least ask the following basic questions:

• What is my outstanding debt?
• What is the interest rate on my debt?
• Do I have an emergency savings fund that is sufficiently funded?
• Do I have any big purchases or expenses in the next 5 years?
• How much am I contributing to my 401k or IRA fund?

Mathematically speaking, if you have outstanding debt with an interest rate that, after taxes, is greater than the expected return on your investments, then you should not begin investing. The one exception to that rule is you should still try to fund your 401(k) to the maximum employer matching amount. This is free money that you can never make back. In general, most mortgage rates and car loans are low enough that it make sense to carry them and invest, however, most credit card rates are not. Remember most school loans and mortgages are tax deductible so the effective rate will be less than the actual interest rate (interest rate X (1 - tax rate) gives after tax rate).

An emergency fund equal to your living expenses for at least 6 months should be in a high yielding savings or money market account, like INGdirect or the many similar. This can be built up while paying off debt, but should be in place before you begin to put money at risk.

If you plan to make a large purchase such as a house or car, make sure you are saving down payment money in a high yielding money market at a sufficient rate to get you there by the purchase date.

If you have all that covered and have money left to invest, now is when you have to decide why you are investing. As that will guide you to which is the best vehicle to use, 401(k), IRA, 529 plan, taxable account, etc. My opinion is that first priority is to make sure you will have enough money in retirement. This can be covered in many ways such as pensions, Social Security, or inheritance, to name a few. If it is not already covered, then you should try to max out (or contribute enough to meet your retirement goals) your 401(k), 403(b), IRA, or similar plan before investing for a child's college or investing in a taxable account. The reasoning is that money compounding tax free for retirement is a powerful thing. If you put it off or don't fully fund it your are missing out on many years of growth. Also, you can always get a loan or use a number of methods to pay for college, but you can't get a loan for retirement (Ok, maybe you could do a reverse mortgage, but still not the best plan).

So if you are executing a realistic retirement strategy, next on the priority list would be to invest for your children's education, if applicable. There are a number of tools online to calculate how much you will need and this is a huge topic on its own. I prefer using 529 plans and recommend dumping as much as you can into it early on, up to your tax limits ($60,000 per person for the first 5 years). Again this gives it a chance to grow tax free. The online tools can also estimate how much you need to contribute monthly.

Finally, if you have all the above taken care of, then you would consider investing in taxable accounts. Asset allocation and a range of other topics will follow. I'll get into how I chose to invest in these accounts and hopefully discuss with you your ideas.

Steroids and HGH likely a bigger problem in Hollywood

This post goes under the etc. category, but I couldn't help but comment. I've been saying to my friends for a while now that probably everyone in Hollywood and every male model probably uses or has used HGH and/or steroids. Considering all the competition to look great, how could they not be using something that keeps them lean and fit and employed? It has been pretty obvious for a while now, where it seems like everywhere you look there is some new buff B-list celebrity or model. It's not like they are ever going to drug test entertainers. Eight months ago Sylvester Stallone was busted with HGH in Australia and maybe Japan. Now a report out that many musicians are linked to it. I don't really think the average musician has the time or discipline to be sculpting the perfect body, but yet there is a disproportionate number of them in music videos. Now it seems even some women musicians like Mary J. Blige are in on it. Eventually it is going to become a big scandal in the entertainment world, but one with far less impact and consequences than in sports.

Bob Brinker MoneyTalk Commentary 1/5/08-1/6/08

Bob spoke a lot about real estate this weekend. I think one interesting discussion point worth mentioning here is how to evaluate investing in rental properties vs. investing in mutual funds (or any other investment).

Bob said he likes to use cash on cash to calculate return. He didn't quite go into all the details and seemed to assume the property was payed off. Your total return is calculated by first estimating the starting value and final value of the equity in the property. Second, determine the yearly cash flow of the property, income - all expenses (mortgage, maintenance, insurance, taxes, etc.).

The return on equity for the year would simply be (final equity - starting equity)/(starting equity)=x
Note that the final equity would be a factor of appreciation and repayment of principle

The return on income would be (income - expenses)/(starting equity)=y

Total return = x + y

You can now compare the return to an investment in a mutual fund. This may seem pretty obvious, but the trap people often fall into when evaluating, is that they'll use their initial down payment on the property as a reference point. Since the purchase was highly leveraged, they'll look at the return on that down payment. In actuality, they should assume they would be swapping the cash value of the house (equity) for a mutual fund and comparing the return on that. Quite often one will find that the equity appreciation has outpaced the rental income and you can actually do much better cashing out and reinvesting in something else, especially if you factor in the management time involved with being a landlord.