Archives For Investing

Contribution Limits

       The maximum amount you can contribute to a Traditional IRA depends on your age. These are the correct Traditional IRA contribution limits for 2009 and 2010. This limit can be split between a Traditional IRA or Roth IRA, but the combined total of your contributions to your Traditional and Roth IRAs cannot exceed this limit.

  • Under age 49 at the end of the year: $5,000

  • Age 50 or older by the end of the year: $6,000

Deadline for Contributions

       Contributions for a year can be made any time that year or until the due date of your tax return for that year. Contributions for 2009 must be made between January 1, 2009 and April 15, 2010. Contributions for 2010 must be made between January 1, 2010 and April 15, 2011. You can designate for which year (current or previous) you are making contributions if you contribute between January 1 and April 15.

Tax Deduction for Contributions

       How much of this contribution you can deduct on your tax return depends on your adjusted gross income and whether or not you are covered by an employer-sponsored retirement plan at work.

       You may also be eligible for the Retirement Savings Contribution Credit.

       In our last Investing Basics article, we talked about securities and what that term includes. The next few articles in this series will focus on the specific types of securities available. We’ll look at stocks, bonds, mutual funds, options, futures, and short-term savings options. Today, we’re going to talk about stocks.

What Is a Stock?

       As I explained in the post about securities, a stock represents ownership. Stocks are also referred to as equities, which simply means they represent an ongoing ownership interest in a business. Each share of a company’s stock represents a piece of ownership interest in that company. When you own a share of stock, you own a part of a company.

       The return you get from owning a stock comes in one of two ways: dividends or capital gains/losses. Dividends are payments the company makes to its shareholders (owners) from its earnings. If a company declares a dividend of $1.00 per share and you own 100 shares, you’ll get $100 in dividends.

       Capital gains or losses result from changes in the price of the stock. If the stock’s price goes up from where you bought it, you’ll have a capital gain when you sell it. If the stock’s price goes down, you’ll have a capital loss when you sell.

       Stocks are considered riskier investments than bonds because of what happens when a company liquidates or goes bankrupt. Stockholders are the last people to be paid when a company goes belly-up. Bondholders get paid before stockholders, so there’s less risk. If there’s no money left when it comes time to pay the stockholders, then they get absolutely nothing.

       Finally, there are two main types of stocks: common stock and preferred stock. The biggest difference between the two is in how dividends are paid out. Common stock comes with no dividend guarantees. Preferred stock comes with a stated dividend rate (either a specific dollar amount or a percentage of the stock’s par value – the face value). Also, preferred stocks have priority over common stocks when dividends are paid. That means that dividends owed to preferred stockholders must be paid out before common stockholders receive anything. They’re a little more complicated than that, but that’s the basic difference.

       In the next article, we’ll look at bonds. Make sure you sign up for free updates to Provident Planning if you want to learn more!

       Once you understand what an investment is, you can begin to learn about the different types of investments available. We’ll start by looking at the broadest types of investments first, and then later we’ll narrow it down by looking at more specific types of investments.

What Is a Security?

       There are two main types of investments – securities and property. We’re going to look at securities today.

       I’m sure you’ve read about the securities markets in the newspapers or heard about them on TV. But what does that mean exactly? A security is any kind of investment that represents debt, ownership, or the legal right to buy or sell a security.

       Bonds are an investment that represent debt. When you invest in a bond, you’re basically loaning money to the person who issued the bond.

       Stocks are investments that represent ownership. When you invest in a company’s stock, you are becoming an owner of that company.

       Finally, options are investments that represent a legal right to buy or sell a security. An option is basically a contract that you purchase to give you the right to buy or sell a certain amount of a security at a certain price for a certain amount of time (until the contract expires). The person who sells you the option is legally obligated to sell that security to you or buy that security from you at the specified price whenever you choose to use your rights.

       So when you hear someone talking about securities (or the securities market) they’re talking about stocks, bonds, and options. Securities would also include mutual funds, which are simply a portfolio (a collection) of securities. These are very basic things in the investment world, so it is important you understand what they mean.

       As I continue this series on investing basics, we’ll go into more depth about all of these types of investments so you’ll understand what they are and how they work. Make sure you sign up for free updates to Provident Planning if you want to learn more! You can also enter your email address below to get free updates in your email: (Don’t worry, I’ll never share nor sell your email address.)

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       I’m not posting today because I had a guest post published yesterday on Free Money Finance titled “Is It Possible to Beat the Market?“. Check it out if you want something to read!

       A fiduciary is a person in a position of trust who obligates himself to always act in the best interests of those who trust him. For example, the trustee of a trust is considered a fiduciary and must always act in the best interests of the trust’s beneficiaries. Fiduciaries are legally required to act in the best interests of those they’re serving, and they can never put their own interests first.

Why Does It Matter?

       So why should you care what (or who) a fiduciary is? In the financial world, there are two types of advisors:

  1. Those who are fiduciaries.

  3. Those who are not.

       If you understand what a fiduciary is, you’ll see that advisors who are fiduciaries are required to do what’s best for you. Advisors who are not fiduciaries are not held to such a standard. It’s perfectly legal for them to put their own interests first – to act in a way that might not provide the best benefits to you. Obviously, you want to use a fiduciary advisor whenever possible because of their legal responsibility to you.

       There are very clear guidelines on who is considered a fiduciary in the financial world and who is not. The following people are NOT considered fiduciaries:

  • Stock Brokers
  • Insurance Agents
  • Real Estate Agents acting on the other party’s behalf (This is common when you are buying, as most real estate agents are acting on behalf of the seller.)

       ”Advisors” in this group do not represent you. They represent themselves, their company, or someone else. They have no legal responsibility to act in your best interest. They are simply not permitted to commit fraud or provide you with “unsuitable” recommendations. But the “unsuitable” standard is very broad and difficult to impose.

       On the other hand, people in these groups are considered fiduciaries:

  • Registered Investment Advisers (RIAs) or Investment Adviser Representatives (IARs)
  • Insurance Brokers
  • Real Estate Agents acting on your behalf
  • CPAs
  • Attorneys

       Advisors in this group are legally required to act and advise you only for your benefit and interests. They can never act in a way that is contrary to what is best for you. They must act with undivided loyalty to you. If they fail to do so, you are entitled to legal action against them. It’s not enough for them to just provide “suitable” recommendations. They must try their hardest to provide you with the best advice possible.

       Let’s use a simple example. If you go to a stock broker, the broker can recommend you invest in Fund A (as long as it’s “suitable”) even though Fund B is better for you. Why would he do this? Probably because Fund A will give him a higher commission.

       Now let’s say you go to a Registered Investment Adviser (or an Investment Advisor Representative – someone who works for an RIA). Because RIAs have a fiduciary duty to their clients, they’ll always be required to recommend you invest in Fund B since it’s your best option. RIAs can’t receive commissions or do anything that’s not in their client’s best interests. So who do you want to get your advice from? The stock broker or the RIA?

       It’s quite clear that fiduciaries are held to a much higher standard than non-fiduciaries. Whenever possible, you should seek to obtain advice from people who are held to a fiduciary standard. Ask your advisors if they are fiduciaries. Ask them if they are required to always act in your best interests. They are required to answer truthfully, and you should be wary of those who cannot answer with a confident and resounding “yes”.

       Have you ever heard of the term “fiduciary” before? Is there any aspect of the fiduciary duty/standard you’re not clear on? Let me know in the comments, and I’ll do my best to answer your questions!

       Because I spent four years in college studying personal finance, most of the basic questions don’t occur to me any more. It’s called familiarity blindness. I’m just so used to this stuff that I no longer realize what other people might not know. That’s not to say they’re stupid. They just haven’t spent as much time studying these things.

       Part of my purpose for writing on Provident Planning is to educate people. I want to teach people enough to make good financial decisions on their own. So it’s with that mindset that I’m approaching several topics from here on out by focusing on the basics. I’m planning on looking at the basics of investing, insurance, taxes, retirement planning, and estate planning. These will start off very basic (like today’s post), and I’ll look at more complex issues as time goes on. So let’s get on to today’s post.

What Is an Investment?

       If you’re new to the idea of investing, a great place to start is to define what an investment is. An investment is simply anything you put money in with the expectation (or hope) that it will generate income and/or increase in value. An investment return is the reward you get from investing – basically current income or increased value.

       For example, money in a savings account provides income in the form of interest payments. A share of stock is expected to increase in value over time while possibly providing income in the form of dividends. A rental home could be considered an investment because you expect to generate rental income while the property value increases over time. You can even consider education to be an investment because you expect it will help you earn more income or increase your value to employers. While that’s true, this series is going to look more at things like stocks, bonds, options, mutual funds, real estate, and other such traditional investments.

       So that’s a basic definition of an investment – something that is purchased with the hope that it will provide income or go up in value. But be sure you don’t get “investing” and “speculating” confused. Investing involves the creation of wealth through legitimate means. Speculating is often a zero-sum game, where someone else has to lose so you can win. No wealth is created in speculating – it simply changes hands.

       If you spend much time reading personal finance advice for Christians (either on Provident Planning or somewhere else), you’ll probably start to realize that it’s not all that different from other personal finance advice. Most of the good advice for Christians applies equally to non-Christians as well. Stick to a budget, spend less than you earn, avoid excessive debt, keep an emergency fund, minimize your taxes, don’t buy insurance you don’t need, save for the future – none of those things are particularly Christian in nature.

       There may be some points in which Christian personal finance and secular personal finance will differ, but, generally speaking, good personal finance advice is the same regardless of your religion. The difference – and this is a major difference – is in the ultimate purpose, the final goal, of following that good advice.

       As far as the world is concerned, it makes sense to make smart personal finance decisions because that’s what is best for you. Good money management will help you meet your goals, maximize your wealth, and get the most out of the money you’ve earned. And according to the world, that’s what you should do with your money. Use it for the things you want. Use it to meet your goals and fulfill your dreams.

       But for Christians, making smart decisions in our finances is not important just so we can maximize our wealth and meet all our desires. Our purpose is not to find fulfillment in this world and the things it offers. Our purpose is to honor and glorify God – to serve Him with our entire being in everything we do. Our goal is to do His will. And part of God’s will for us is to share His love by caring for those in need through generous giving. We don’t try to maximize our wealth for our own use. We try to maximize our wealth for God’s use.

       I want you to remember this as you read the articles I write. Many times there won’t be a Bible verse in a post. Personal finance in the Bible is more about the principles that should govern our decisions – not specific applications (like how to get out of debt). But it’s very important that we remember the purpose of seeking and following good financial advice.

       When I talk about spending less, it’s so we’ll have more to give. When I talk about earning more money, it’s so we’ll have more to give. When I talk about making smart financial choices, it’s so we’ll have more to give. It all comes back to giving – giving motivated by love that flows out of our response to God’s Gift to us.

       Yes, making good financial decisions will have benefits for you personally. But our focus as Christians is on the benefits those decisions will have for the Kingdom. In our efforts to follow good financial advice, let’s keep our eyes focused on Christ and our minds focused on how we can serve Him fully.

       The advice we follow may not be all that different from non-Christians. But the motivation, goals, and results should be very, very different. And that difference will serve as a witness for the power of God’s love working in our lives.

       What do you think makes Christian personal finance different? Let me know in the comments!