Recently I got hired as a regular employee from a contract position which among many other things meant that I get to contribute to 401(k) with my company matching it. The company gives me the flexibility to choose from 15 mutual funds spread across various categories. Here is what I did to figure out my portfolio allocation.

1. Decided between how much I want between Stocks and Bonds. I use the following rule to figure this out: Stocks Allocation = (100 - My Current Age); rest in Bonds. Let’s assume my Stock allocation came out to be 70%; Bonds 30%.
2. Decided on how I wanted my stocks allocation to be diversified since we all know that diversification is important.
3. Large Cap: 30%
4. Mid Cap: 20%
5. Small Cap: 20%

I also further broke my high level categories between Growth and Value, but overall at a high level I usually stick to the percentages which I mentioned above. I also signed up for automatic rebalancing of my account so that my portfolio holds true to my allocation. 

Let the savings begin!

I often get asked about my mindset regarding my financial life. I am a big proponent of keeping things simple and my financial life is no different. My financial life structure revolves around key 5 principles and I do tend to revisit them from time to time, especially #2.

1. Don’t spend more than you earn. It is very important to know how much money is coming in and going out each month. Having this knowledge in the back of your mind will force you to make informed financial decisions in life. Use free online money management software such as Mint or Adaptu to achieve this goal.
2. Keep your financial life simple. Try to limit the number of credit cards, checking/saving accounts and other store cards. Setup auto debit for all your bills which will remove the risk of missing a payment. Having a simple financial life will help you focus on enjoying the other aspects of life.
3. Have a savings/retirement plan. Any type of savings such as 401k, IRA or cash savings is better than not having one. It is never too late to start one.
4. Work very hard to keep a good credit score. A good credit score often leads to lower interest rates which equals more money in your pocket. Before making any financial action, ask yourself if that action would help your credit score or not?
5. Take time to enjoy your wealth. What’s the use of working hard and making money if you cannot enjoy it? It is important to have savings for future but don’t completely sacrifice “living in the now” for future.

What personal finance principles do you live by?

Currently there are lot of people who are in debt. Historically, people especially in US have always been in debt but this challenge has been made worse due to high unemployment and salary cuts which people had to take in order to keep their jobs. The current tough economic climate has made people realize the value of being debt free and more and more people want to change their current situation. But people are not sure where to start when it comes to reducing their debt. Here are 5 things one can do as a starting point.

1. Make a commitment to be debt free. Your lifestyle should reinforce your commitment and also understand that it a long-term process. You will not be able to see changes overnight.
2. Understand how much are you making and how much you are spending. This is very important. Most people don’t even know the answer to this.
3. Reduce your spending so that you are saving something at the end of each month even if it is $50. Every penny counts.
4. Consolidate your credit cards so that you have a maximum of 2 credit cards. The more you have the more urge you have to spend money. It is true that in some cases your credit score might go down because of this but the goal is to be debt free. Small ups and downs in credit score is acceptable at this point.
5. Pay off balances with the highest interest rates first. These are usually the credit cards and try to negotiate for a lower interest rates with your lenders. Try to pay in full so that you don’t incur more interest charges.

Pay special attention to steps 1-3 and keep on revisiting them often. Read, Understand & Repeat :-). It will be hard at first but if you keep your commitment you will see the results soon enough. Talk to your friends and family and see if they want to do this with you as well. There is no substitute for support from friends and family. 

A lot of people ask me about stock market investment strategies. Some of the questions I get asked are:

1. How much money will I make money?
2. Which stock should I invest in? Google? Apple?
3. How much money should I invest?
4. How much money can I lose?

All of these are good questions and indicative of someone who is thinking about investing in the stock market but is not sure of the way to approach a very scary proposition. Imagine putting your hard earned money in the “cloud” and hoping to strike rich. These days when you buy stocks or bonds you are unable to see them, feel them or smell them. These are some of the most important characteristics that us human beings want to experience while purchasing something. But in this case we are unable to do any of these and end up paying thousands of dollars for some online charts and graphs which try to give us a sense of security. Scary indeed!

I got into stock market investment in my early 20’s and fortunately have become quite comfortable with the uncertainties of it, but at the same time I realize the potential of smart investment. To answer the questions above I  usually tell them the following answers. Keep in mind that these people are in their late 20’s early 30’s. They can afford to take a higher risk at this point in their life. Your situation might be different which will require a different strategy. Let’s look at the answers to the above questions.

1. You should be really happy if on average you  make anywhere from 8% - 10% per year on your investment. There will be times when you will lose money and at the same time there will be situations when you will make 20% - 30% return. In contrast a top savings account is currently giving 1.5% per year in interest.
2. I recommend investing in index funds rather than individual stocks. It is all about diversification! I will cover Index Funds in a separate blog post.
3. The initial investment should be at least $2,000 - $5,000. With the initial trading fees you need a decent amount to start and see some kind of significant results.
4. Technically there is a risk of losing everything. But you can minimize your losses and make money if you follow the right investment strategy.

It is really important to set your expectations when it comes to investing in the stock market. I recommend that you only invest if you already have some savings set aside and can afford to lose some money in the short-term. Do not depend on the investment in the stock market as your primary savings. Remember investing in the stock market is like a marathon and not a 100m dash. It does not matter how you start; what matters is how you finish.

Once you are ready to take the plunge, the next step is to figure out a sound investment strategy. Stay tuned!