Making Sense of Your Dollars and Cents with Budgeting Confusing spreadsheets and penny-pinching are just a few things that come to mind when we hear the word budget. Indeed, budgeting can be a tedious task that we tend to do only when absolutely necessary. Yet the value it can provide in helping us continue to meet our financial goals cannot be discounted. And while budgeting is a detailed task, it doesn’t have to be a painful one.

Why should I budget?
The economic downturn has forced many individuals, regardless of their net worth, to pay greater attention to their bottom line. Maybe you’ve experienced a life change and you’ve had to tighten your purse strings, or you need to save for a specific goal, or you simply want to know where your money goes each month—a budget can shed light on your financial situation.

How to create a budget:
If you work with a financial professional, you may already have access to a budget template. If not, you can easily track your budget in the way that works best for you. The following guidelines will help you get started:

1. Determine how you will track your expenses. You can use a software program, a worksheet, a spreadsheet, or even a notebook. How you format your budget will vary depending on how detailed you choose to be, but the following example may be a good start. Being consistent in your recordkeeping can save you time later when you go back to analyze your expenses.

Date/ Expense Name/ Expense Amount/ Essential? (Y/N)
2/1/2009 Coffee and muffin $3.19
2/1/2009 Meter $1
2/1/2009 Lunch out $12.50
2/1/2009 Groceries $48.12
2/2/2009 Car payment $419.35
2/2/2009 Insurance premium $287.32
2/2/2009 Move tickets and treat $20.25

2. Understand essential vs. nonessential spending. The example above allows you to indicate whether an expense is essential or nonessential, which makes it easier to analyze your spending. An essential expense is something that is a must-have, as opposed to a good-to-have. Examples are things like:

• Mortgage or lease payments
• Car payments
• Insurance premiums
• Utilities
• Groceries

Nonessentials include:
• Meals out at restaurants
• Entertainment expenses
• A new designer handbag
• Golf clubs

Whether an expense is essential or nonessential often depends on the individual. If you live in an urban area, for example, where you can access all you need via public transportation or on foot, a car payment may not be essential.

And when it comes to the nonessential items, this doesn’t mean that you cannot spend money on entertainment or things you love; the goal is to help you take an objective view of which expenses are necessary and which ones could be considered luxuries. This will come in handy when you start to look for areas where you can potentially save money and allocate funds toward other goals.

3. Plan to track your expenses for two to four weeks. To gain a true picture of your spending and all of your fixed expenses, it makes sense to track your spending for a full month. Another, shorter method is to simply log all of your fixed expenses for the month and then keep a two-week inventory of other variable items. The choice is yours.

4. Everything counts. Don’t forget about the quarters you put in the parking meter, or the soda you got from the vending machine. For your budget to be truly effective, you need to log even small incidental purchases. Also, if you know of quarterly expenses that you won’t capture in your regular tracking period, be sure to account for them on a prorated basis. So, if your satellite radio subscription is $45 every three months, allot $15 to this charge in your monthly budget.

5. Analyze. Once you’ve logged your expenses for the period, categorize items as essential and nonessential. Still coming up short for a specific goal? See if you can cut down on some of those items you deem essentials. Is your morning store-bought coffee on your personal essentials list? Consider making coffee at home for a fraction of the cost. Same goes for dining out—can you eat one, two, or three more meals at home each month to shave spending?

6. Don’t cut items that impact your future. It can be tough to do the right thing when trying to decide between splurging on that dream vacation or continuing to contribute to a retirement account or maintaining adequate insurance coverage. You may tell yourself that you’ll make a larger contribution down the road when you have more money (which is harder than it sounds), but consider the impact on your future and the future of your loved ones. Maybe it makes more sense to continue saving and to cut out the nonessential expense, rather than sacrifice your long-term financial health.

Benefits of budgeting
• Stress relief. Knowing exactly what you spend—and that you have enough to meet your essential expenses—is liberating. You’re less likely to toss and turn at night when you know your finances are in order.

• More cash to put toward other goals. By analyzing your spending habits, you may very well find additional cash to put toward other goals. It could be a vacation, a new wardrobe, or even more money for your investment accounts.

• More financially savvy kids. If you have children, one of the greatest gifts you can give them is a sense of financial responsibility. Many parents may dread having to refuse a child’s request for a new pair of sneakers or an iPhone, but showing them that you track spending so you can ensure that all of their needs are addressed through a solid plan—before you make any unnecessary purchases—will teach a life lesson.

It’s hard to say what personal and financial benefits you’ll derive from budgeting, but it is definitely worth an attempt to find out. If your budget reveals that you need extra assistance in saving toward goals, or inspires you to consider your overall financial plan, you should contact a financial professional to assist you.  12:51 PM •  0 Comments •

How Will the Change in Political Leadership Impact the Market? With the Presidential election over, speculation of how the electoral votes would add up has given way to debates on whether the multiple government-sponsored bailouts will be enough to rescue our faltering economy. The economic crisis will certainly be at the forefront of President Obama’s agenda as he begins his term; and it’s likely the pundits will persist with their predictions on how the new administration and a Democratic-controlled Congress will impact the market.

Conventional wisdom holds that D.C. gridlock – a Democratic President and Republican-controlled Congress or vice versa – is best for markets. The idea there is that neither party has the power to make the sweeping policy changes that can cause significant market gyrations. However, according to data compiled by the research firm Bespoke Investment Group in Harrison, N.Y., in the seven periods when Democrats had complete control of U.S. political power, the S&P 500 rose 14.7% on average while in the eight times a Republican served as President and Democrats controlled Congress, the benchmark index rose 7.4%. So much for conventional wisdom.

Interestingly, with the industry’s constant disclaimer that history cannot predict future performance as a backdrop, there are numerous recent studies that attempt to do just that and predict how the new administration and Congress will fare in dealing with our nation’s newly-declared recession and record budget deficit.

In his opinion piece, “Divided Government Is Best for the Market,” published in the Wall Street Journal on September 12, Donald l. Luskin begins his analysis of whether the economy historically has done better under Democrats or Republicans by stating, “There is no shortage of exaggerated claims on both sides.”

When the chief investment officer at Trend Macrolytics LLC ran the numbers, he found since 1948, the Standard & Poor's 500 total return (capital gains plus dividends) has averaged 15.6% when a Democrat was in the White House and only 11.1% when a Republican was in the White House. In terms of real gross domestic product, he found under Democratic presidents, the average since 1948 has been 4.2%. Under Republican presidents it has been only 2.8%.

However, moving beyond political labels, Luskin notes that not all Democrats act like Democrats, and not all Republicans act like Republicans. He writes, “John F. Kennedy, for example, was an enthusiastic supply-side tax cutter and George H.W. Bush raised taxes. Bill Clinton promoted free trade and Richard Nixon imposed wage and price controls.”

With that in mind, Luskin assigns those four presidents to the opposite party and finds numbers completely reverse themselves. That is, stocks average 14.7% under Republicans and only 10.5% under Democrats going back to 1948. In fact, he points out that just one switch – making Richard Nixon into a Democrat – is enough to reverse the numbers and have stocks averaging 14% under Republicans and only 12.1% under Democrats. Writes Luskin, “This fact discredits this whole study more than it does Republicans or even Richard Nixon himself. Any analysis that can be undone by omitting or changing a single data point isn't very robust.”

Of course, the President alone cannot determine the direction of the stock market or enact new taxes. Congress makes the laws. And, you guessed it, there are plenty of studies that look at market performance based on who’s in control on Capitol Hill. According to Luskin, under Republican Congresses, stocks have averaged a 19% return, while under Democratic Congresses only 11.9%.

Party politics aside, there’s ample analysis on how the market reacts when Americans go to the polls and when a new President takes office. For example, in the last 20 election years, not including 2008, there have been only two years where the S&P 500 Index had a negative return. In 1940, when Roosevelt faced Willkie, the S&P lost 9.8% and in the 2000 contest when Bush ran against Dukakis, the S&P lost 9.1%.

Further, Marshall D. Nickles’ “Presidential Elections and Stock Market Cycles” finds an initial post-inaugural slide is followed by strong performance. Investigating presidential election cycles from 1941 through 2000, he discovered stock market lows occurred surprisingly close to mid-year congressional elections or approximately two years before presidential elections.

Another study, “Mapping the Presidential Election Cycle in U.S. Stock Markets” by Wing-Keung Wong, National University of Singapore, and Michael McAleer, University of Western Australia, shows that in the almost four decades from January 1965 through December 2003, U.S. stock prices closely followed the four-year Presidential election cycle. Specifically, stock prices fell during the first half of a Presidency, reached a trough in the second year, rose during the second half of a Presidency, and reached a peak in the third or fourth year. In fact, the researchers showed this cyclical trend holds true for the greater part of the last ten administrations, from President Lyndon Johnson to President George W. Bush, particularly when the incumbent is a Republican.

Obviously, the large number of studies conducted on presidential cycles and the market’s fate under various parties proves the American public has an appetite for this kind of historical analysis. However, experts in the field of behavioral finance identify the harmful tendency to identify patterns and project them into the future as “oversimplification.” In fact, investors’ desire for control often leads them to identify patterns in purely random events. This ensuing false sense of reality more often than not leads them to embrace the false conclusion that they know which way the market is going. Bottom line? Sure, the studies and statistics are interesting, but the data should not impact your investment decisions.

Source: online.wsj.com

Source: moneyover55.about.com

Source: gbr.pepperdine.edu  8:06 AM •  0 Comments •