Your Personal Stock Market Army - The Stop Loss!

Stop losses can bring you peace of mind, profit, and minimize your losses.  If you own stocks right now and don't know what a stop loss is, then I encourage you to sit a spell, grab some coffee or tea, and sip of this important information. If you own stocks right now and know what a stop loss is, I sure hope you're using them.  If not, then please stick around for a spell.

I had a friend many years ago that was complaining about his troubles investing in stocks.  He never seemed to make a decent profit on winners and he always seemed to collect a bunch of losers and never knew when to get rid of them.  I told him I'd listen to his troubles and offer advice where I could.  He had close to a million dollar portfolio invested in individual stocks.  Man was I envious of his assets!  But, not of his investing skills.  I asked him a simple question: "Do you have sell prices or sell ranges for all the stocks you own?".  His answer: "Not on a single one."  He allowed the market and his financial needs and emotions dictate when he would sell something.  After our couple hour discussion, of basically what you'll be hearing below, he vowed to have stop losses set on all of his stocks within the next week.  Note: at that time, there wasn't such a thing as trailing stop losses available on most online broker sites, so now days it's even easier!

I've heard his thanks many times since for introducing him to the power of the stop loss.  You definitely want to get educated on the stop loss as your most important weapon in the war of personal finance with respect to stock investing. Keep in mind this is stocks, not mutual funds. With mutual funds, you are diversified. With stocks you are putting all your eggs in one basket, as they say. This can be a very risky proposition and you need some protection. Sometimes you need protection from yourself, and your ability to rationalize and accept deeper and deeper losses. Here's where the stop loss comes to the rescue!

What is a stop loss? Here's a quick definition from wikipedia:

With a stop order, the customer does not have to actively monitor how a stock is performing. ...Once the stop price is reached, the stop order becomes a market order. ...A sell stop order (also stop loss order) is an instruction to sell at the best available price after the price goes below the stop price. ...This can limit the investor's losses (if the stop price is at or below the purchase price) or lock in some of the investor's profits.

There are 2 types of stop losses at many brokers and online brokers now:

1. Traditional Stop Loss
   Traditionally with the stop loss, you would select a price point at which you wanted to sell if the market price went below that price. If this is the only kind available at your broker or online broker, then please do use it. The use of the traditional stop loss might require a little extra maintenance on your part, as you monitor and decide to ratchet it up to lock in profits or limit losses.
   
2. Trailing Stop Loss
   The traditional stop loss requires regular maintenance if your stock price is on the move and you would like to efficiently lock in profits or further limit your losses. It's great that brokers have added the trailing stop loss as an option with brokers and online brokers. This allows you to set a stop loss margin that will follow an increasing price. You typically have the option of choosing a trailing stop loss by $Dollar Amount or by %Percentage. I love this, because you can choose to follow a rising stock price with a trailing stop loss of for example: 5%. That way, as a stock price continues to rise, you'll be locking in a profit that is 5% below it's high price. The 5% gives the stock enough room for volatility as well as ensure that your locked in profit continues to rise.
   

I propose that you should never own shares of stock without having a stop loss placed on them. Quite simply, it is human nature to keep accepting a lowering stock price without selling. You begin to rationalize at every new red flag in the lowering stock price: the news just isn't good, I know they'll be announcing a new product soon, people just don't know enough about them yet, stock prices generally go back up, I'll just wait till I get back to even and then sell, etc.

We should be quite the opposite with stock investing, we should not be emotional. We should think of stocks as a vehicle for our investments, and one stock is just like the next. There is nothing magical about the current stocks you own. If they are losers, then get rid of them, learn and improve your stock picking rationale and pick again. If you have winners, learn aspects for picking winners. Lock in profit for winners. Don't allow winners to become losers, because you got attached emotionally because it used to be a winner.

I encourage you to learn a method of picking and evaluating stocks that works for you. For me, it's CANSLIM. CANSLIM defines a method of evaluating and picking stocks and was created by William J. O'neil. I recommend you to look at these books in the library, bookstore, etc: How to Make Money In Stocks and The Successful Investor: What 80 Million People Need to Know to Invest Profitably and Avoid Big Losses.

Again, i propose that you should never own a share of stock without protecting it with stop loss. I'll break that down to 3 three powerful reasons for having a stop loss:

1. Limiting Loss
   When you own a stock, you should do some regular self assessment as to what is a reasonable loss you would accept for the stock. Whether you do this weekly, monthly, quarterly, just do it regularly. Once you set your stop loss, you have now protected your investment from a pre-determined loss. This is key, because human nature would have us complacent and rationalize a declining price at every turn with the hope that the price would soon recover. But, by thinking ahead of time, you take this emotional and fear based thinking out of the equation and treat an investment in a proper way, as a vehicle of investment. You take the time to think rationally about what amount of loss you are willing to accept if a stock moves against you. You limit the loss, because you take out the changing emotions that will occur as that stock becomes a loser and you would inherently start rationalizing the losses. I don't care if you're a long term investor or short term. If you're long term, then you'd just increase the margin of your trailing stop loss to not be triggered by normal volatility.
   
2. Locking in Profit
   When you are lucky enough to own a stock that is appreciating in value, you should be protecting that growing profit. I used to ratchet-up my stop loss on a weekly or monthly basis as stocks kept growing in value. Now days, they have an awesome new kind of stop loss, they call the trailing stop loss. This means you can set the stop loss to trail the rising price by a dollar amount or a % amount. This is an absolutely powerful feature!
   
3. Peace of Mind
   Probably the most important benefit of the stop loss is the peace of mind you'll enjoy. You'll sleep peacefully every night. You'll feel at ease throughout the week, without submitting to the need to check your stock prices hourly to see if you are ahead or moving behind. This is all because you put in place your hard working army of individual stop loss soldiers on each of your stocks.

I love free money with ESPP's. If you have an ESPP available at your employer, this is like free money and the stop loss can maximize your profits and limit your loss of profit. What I do, is every time my employer buys my ESPP stocks, I immediately (the day it becomes avail in my broker account), go in and set up a trailing stop loss of 3%. I encourage you to adjust your %percentage based on your stocks volatility. 3% for my employers stock works perfectly. If the stock keeps rising, then I keep locking in more and more profit. As soon as it turns around, it's sold for me automatically.

I also do this when I have lost confidence in a stocks upward momentum (can be due to market news, stock news, etc.) and it begins to move sideways. I'll reduce the % of trailing stop loss, to still gain from upward momentum and at the same time press the sell sooner than later.

If you didn't hear me before, I'll close with the same thought: I propose that you should never own a share of stock without protecting it with a stop loss. You'll benefit greatly from the peace of mind in your daily life, knowing that you put in the up front thought and made decisions on what loss you are willing to handle for each of your stocks. You'll feel at peace that you're profits are automatically being locked in as your trailing stops chase after a rising price.

Zen and The Art of Personal Finance in 4 Steps

We have web browsers that let us tab through 10 different websites in seconds. You can kick off your TPS reports processing, while you skim through your email. You can do all this as you listen to your favorite tunes on your cell phone, and driving down the highway, while your cellphone also hollers out GPS directions to that favorite restaurant and politely pauses while you receive a call! Ok, that would be a seriously dangerous driver, but I doubt it's far from the truth for some current road warriors.

Technology seems to encourage us and our children to multitask-everything. I've always experienced the greatest personal strides in life, when I've reduced the clutter and focused my thoughts and efforts. Kind of reminds me of my limited understanding of just a few of the principles of Zen. Perhaps the learning's from Zen can be applied towards personal finance. I've always been intrigued by the various Art of Zen books and haven't seen one on the topic of personal finance, yet. So, let's take a high level journey as to what one of these books 'might' cover. This isn't considered a how to of personal finance, as much as it is an exploration of some alternative methods of how we might learn about and practice our lessons in personal finance.

Step 1: Zen What?
Quite simply Zen is a flavor of Buddhism, where learning from experience is favored over that of any religious texts. In it's depth, Buddhist monks can spend a lifetime achieving the wisdom of it's highest teachings.

Westerners have westernized our perspective of Zen in various pieces of literature like: Zen in the Art of Archery, The Dharma Bums, Zen and the Birds of Appetite, and the bestselling Zen and the Art of Motorcycle Maintenance. Now, many Zen and the Art of ... topics follow this framework. Which is to subtlety introduce the Zen mentality to contemporary subjects. Even more simply the basic steps to performing any activity (i.e. Zen and the Art of Personal Finance).

Like Zen and Art of Motorcycle Maintenance, this post doesn't seek to enlighten on aspects of Zen Budhhism. As an excerpt from the book on wikipedia points out:

He explains that, despite its title, "it should in no way be associated with that great body of factual information relating to orthodox Zen Buddhist practice. It's not very factual on motorcycles, either."

So, the focus of Zen that I'll follow in this post is the subtle application of some of the principles of Zen to benefit our personal finance learning. Namely Zen's principles of understanding of oneself, kind thoughts, right action, and right effort.

Step 2: Zen of Your Finances
One of the principles of Zen is to understand oneself. Look into your self and see what methods have been best for you to learn new information in the past. Do you need repetition? Do you like analogies? Do you just like to digest the straight facts? Are you a logical person, and you must see the how and why before it becomes organic to you?

Never be to quick to make personal finance decisions. Sometimes taking some time to sleep on it is better advice than we realize. Allow yourself to meditate on new decisions, information, and problems. Zen is based on the ability for the practitioner to learn from their inward meditations on a problem. Some Tibetan monks even beleive that dreams are the key enlightenment. Great figures in history have practiced the art of lucid dreaming to unravel some of the greatest discoveries.

Albert Einstein claimed the inspiration for his Theory of Relativity came to him while in a dreamlike state, and Dmitri Mendeleyev, a 19th century Russian chemist, reportedly fell asleep at his desk and awoke after conceiving the Periodic Table of Elements in a dream.

Personally, I've discovered about myself, that I learn best when I chunk down the information into bite-sized pieces. I like to digest it so that it logically makes sense to me. Once that's done, I'll go further. This way it's organic in my way of thinking about that information I've learned. Now, this isn't saying that I've learned the right info or the best info, just that I've digested the information so that it makes sense to me.

Now, this is different then the way I learned information in college. In college, the pace was fast and I didn't digest or make things organic. I'm sure there are some folks that did and retained a higher percentage of the information. But, I wasn't that lucky. A new method of learning for me has been these blog posts. A recap of lessons I've learned and how my opinion and views change as I read some of the great personal finance blog posts and articles out there.

To recap, do a self assessment of how what methods have been best for you to educate yourself with new personal finance topics and information.

Step 3: Zen of the Kind Thought and Right Action
Two more of the principles of Zen are those of Right (or Kind) Thought and Right Action. I would translate these to personal finance education as to think and take action that is kind and just. Hopefully this will keep us away from the get rich quick scams and paths.

If we aim at educating ourselves with personal finance topics that opposed to ill will and are mindful of the rights of others, then we will be doing good in the world. This is obviously going to be a to each their own type of topic.

I'll take an example of a method of real estate transactions that I read in several different books. The methods talked about lease-option transactions for buying and selling. Some books and information addressed this topic rather coldly without a real regard for the well being of those that are in a financial bind. Whereas other books discussed how you can use these methods to help folks that would otherwise not be able to get a conventional loan right now (but, put them in a position to qualify in a year or two). This was revelation with lease options, that finally had me thinking of them as viable tools. Otherwise, I just wasn't seeing myself profiting by putting together any transaction I could.

To recap, look for the silver lining in a learning or piece of education. How can this be used in good way or a win win way. If it seems too good to be true and not considerate of all parties involved, then it probably isn't a very good tool or learning.

Step 4: Zen of Right Effort:
Another of the principles of Zen is that of Right Effort. Right Effort basically means once you've learned, you must put it into practice. At the ZenGuide, they put it this way:

Effort is the root of all achievement. If one wants to get to the top of a mountain, just sitting at the foot thinking about it will not bring one there. It is by making the effort of climbing up the mountain, step by step, that eventually the summit is reached.

This is by far my favorite principle. It puts everything together and can be practiced at any point in our personal finance lives to achieve goals. We're always learning new tactics and strategies. Let's face it, when someone tells you I have the secret to making 1 million dollars, we drool until we get the information. But, once they give us the book, or the url to the information, we get a little complacent. It's a basic instinct to feel at ease, because now we know where the information is when we feel like we want it.

Same can be thought of when we actually learn these cool ideas we find no all the great personal finance blogs out here. I mean, geeze, did you know you can immediately get double-digit returns on your money? Yea, start paying off your credit cards that have double digit interest, wallah! Did you know that you have free money from your company and Uncle Sam every year to save for your retirement? Yea, just add to your companies 401k and you can see 50% returns in some cases when they match 25% or 50% immediately. Not to mention the extra 25% that Uncle Sam gives you in the way of tax deductions to retirement savings.

Now these and many more tips can save or earn us thousands, tens of thousands, or hundreds of thousands over a lifetime. BUT THEY WON'T, unless we decide to put them into action. Every day we procrastinate to start up our 401k, pay off our high interest credit cards with our savings, etc. is savings and money lost.

Quiz: Your Most Important Financial Asset. What is it?

If you're like me, you might not have thought of the right answer. This is also one of the reasons I love to browse through the articles over at Ric Edelmans financial planning site, I'm always sure to find a new bit of financial revelation! Ok, in case you're holding your breath I don't want you to pass out. You're most important, or as Ric put's it your largest financial asset is your ability to produce an income.

Ric's article talks about the importance of protecting this prized possession:

For almost everyone who is still working, your largest asset is your ability to produce an income. Thus, the most important type of insurance is disability income insurance (DI). You need it more than any other kind of insurance — more than life, health, homeowners, or auto insurance.

Now, that blew me away. It's never been the topic of financial discussion for me before. I always choose no, no, no, on those pesky credit card applications and phone calls to activate your cards. They try and tell you that for penny's a day you can have all your credit card payments taken care of if you're disabled.

Like everyone else, I just couldn't justify it in my head. Now that little credit card disability insurance is similar, but not exactly what we're talking about. We're talking about insurance that covers a percentage of your income, in the event you become disabled. Like many folks I felt it was adequate enough to opt into the insurance my employer provides. These typically pay about 60% of your income if you're disabled, and have a limited payout period. This just isn't enough.

He talks about 2 big reasons that folks usually don't bother thinking too much about it:

Reason#1: "It won't happen to me"

Reason#2: "It's too expensive"

After Ric hits you over the head with all the reasons why it's such an important financial decision, it really makes sense. I'm off to talk to my insurance agent this week and get me some disability insurance.

I'm going to focus on filling in the gaps from my employers insurance. This should help reduce costs. I have some I got through work a long time ago, but I don't think that quite gets to the point of protection that you really need. If you have availability of disability insurance through work, and never really thought about it, take a second look and get as much as you can. As discussed in another article about getting the most out of your company's benefits:

Life, disability and long-term care insurance. If your employer pays for these coverages, get as much as you can. But if you must pay for some or all of the cost, talk to a financial advisor or insurance agent to see if you can get lower-cost coverage elsewhere.

It's a serious expense that seriously pays off if you need it. Obviously I hope none of us need it, but like any other type of insurance (the case can be made that it's more important than other types!), you want to be prepared. Bottom line, if you earn a living, then you will benefit greatly from disability insurance and it deserves some serious thought and discussion.

Automatic Investing is Hot!

Automatic Investing ... Set it and Forget it Savings!  Sounds like an infomercial, right?  It's definitely an attractive concept.  You've probably been seeing more and more of this concept popping up all around you.  The latest hot book is David Bach's Automatic Millionaire.  The new trend in 401Ks and mutual funds is Lifestyle Funds.

It's hypnotic and alluring to think that you can build an automatic personal investment system to achieve your goals.  It seems like a silver bullet and in many aspects it is.  Once you've made the commitment to save, then actually follow through to save regularly, you just need the final ingredient to determine what to invest in.  It's simply not enough to build your retirement nest egg in a savings account.  But, it gets complicated when you have to think about all the investment options out there and which to use. 

I've mentioned before a great study by 2 professors from Harvard and Dartmouth that points out the single most important ingredient to building wealth is to follow through with your personal commitment to save.  You can follow Automatic Millionaire, The Richest Man in Babylon, or any other investment advice.  The Richest Man in Babylon has been around for decades and has got to be the original automatic investment advocate.  You can kick off your automatic investing by automatic draws from your paycheck to savings, 401K, whatever vehicle you have available.

The next step is selecting options of investing the savings you're building.  Here's where things like Lifestyle Funds are a great new trend entering 401K funds and mutual fund arena.  The goal of these funds is to handle all the asset allocations for you in one fund.  You select the fund closest to your retirement date like Lifestyle 2020, Lifestyle 2040, etc.  The fund automatically handles the asset allocation as you get closer to your retirement date.  Being more aggressive when the date is further away and more conservative as your retirement date approaches.  Liz Pulliam Weston, in her MSN Money article, explains it this way:

This is Retirement Investing 101: You want a bigger chunk of your money in bonds and cash as you approach your last day of work, since you'll have less opportunity to make up any losses.

I'm a big believer and follower of the entire automatic investing approach.  I'll be looking more into these lifestyle funds as my retirement date approaches.  For now I'm following an aggressive stocks only approach and I do follow an automatic approach.

I hope to blog more about it in the future.  It follows an automatic strategy from the Armchair Millionaire.  I have my 401k investments go to 1/3 S&P 500, 1/3 Russell 2000, and 1/3 to International (EAFE) fund.  You can read more about this allocation mix and why it works so well here: Armchair Investing Strategy, from the book by Lewis Schiff Armchair Millionaire.  The key to it working so well is is the principle of non-correlating markets, which simply means that while large caps might do well, small caps might not.  Also, while US Markets may do well (S&P 500 & Russell 2000), international markets (EAFE Fund) may not.

PFSN - Not a contagious disease, but possibly a hot new trend in personal finance

PFSN, Nothing to check yourself for. Just a little abbreviation I made up for a possible new personal finance trend prediced to pop up. Saw a recent article on PFSNs (Personal Finance Social Networks) on Google news recently. The article from the Intl Herald Tribune talks about how online social networking is meeting personal finance. If the experts are right, then there could be 2 million of these savvy personal finance social network users by the end of 2008.

The author mentions 2 sites in particular geezeo.com and wesabe.com. It's an interesting concept that I look forward to learning more about over the coming months. It's like an online version of Microsoft Money (or Quicken) meets Facebook (or Weight Watchers). Jason Knight, chief executive of wesabe.com says:

"Social finance is a way for consumers to find out if there's real value where they're spending money."

The sites allow you to link to all of your online bank and credit card accounts. It can pool all this information and perform some data correlation and categorization based on what other users input already. This allows the sites to offer category suggestions and tips based on your specific expenses and entries in your financial data.

An online version of Money is a great idea, once people get past the privacy and security issues. Combine that with the encouraging support aspect of networking and sharing questions and advice with like minded members of your community could be a winner.

Etan Horowitz of The Orlando Sentinel wrote an article sharing his experience testing out three of these sites wesabe.com, expensr.com, and buxfer.com: Online Finance Help. He was impressed with the capabilities of the sites. He was especially impressed with wesabe.com:

The best of the bunch is wesabe.com, which uses your spending history and favorite merchants to generate money-saving tips from other users or "Wesabeans" who have similar habits. If you spend your money on groceries or magazines, you'll see tips about saving money on these items. One user filled me in about $5 movies at AMC theaters before noon on weekends and holidays.

It sounds like there's a bit of upfront work, as is usual in any kind of automation. But it get's a little easier, according to Etan:

Uploading and categorizing expenses takes a lot of time at first, so you may get frustrated. But if you have the patience and want more control over your finances, give one of these sites a try. Both Buxfer and Wesabe will start to automatically categorize your repeat expenses after you do it once, so that makes things easier.

The original Herald article mentions other flavors of social finance that you may already be familiar with. Finance blogs like this one where we can interact with folks of like-minded finance goal interests to share posts and comments about topics of interest. Also social finance sites like Prosper.com, Zopa.com, and LendingClub.com where networks of folks can join to lend and borrow money from fellow members.

Great Finance Blog Post - How You Can Become Wealthy

Since I love reading finance blogs, I wanted to blog on some of my favorite posts that I find at each of these blogs I like to visit. I hope to keep this up as a series and point you in the direction of some great finance blogs out there that I enjoy regularly.

www.freemoneyfinance.com had this great post that was short, sweet and oh so true: How You Can Become Wealthy. The post discusses a great article on moneycentral. The article covered some findings by 2 professors from Dartmouth and Harvard, that did a study for the National Bureau of Economic Research, some years ago. The bottom line was this:

...the vast majority of the differences in wealth had nothing to do with income, chance events or investment choices.

So, there's scientific study that shows that the first step to saving is 'saving'!

What did explain most of the differences in wealth? Venti and Wise concluded it was this: How much the families chose to save. Those who made it a priority to save built wealth, regardless of their income level, individual circumstances or choice of investments.

I'm sure we each have experienced this. There's that one moment or period in our lives when we realize that we need to get our butts into gear and start saving.

It's funny, when I talk to friends/associates and the topic gets to money and I occasionally hear something like: "I haven't really been able to afford to kick off my 401K yet". I try to slowly encourage them to get into the habit. Now, I'm not talking at that moment, because I know it just isn't going to be taken well or digested. But, over lunches and through the course of time, I'll generally get back to the topic and offer a little encouragement. Maybe, I'm a pest, but I wish someone was a pest with me and got me on the right track sooner. I would have loved to start saving in my teens, wow would I be set for retirement already! I was glad though that I did run into someone that got me pointed in the right direction.

One final thought. Recently I bumped my fun-money savings ratio, just out of sheer annoyance and maybe some back-strain. I have this 5 gallon jar that I have saved coins in for a couple years. Just figured that I'd never spend coins and pop them in there and see how much it will add up to. When I finally filled it almost to the brim, I was going to vegas :-). With that puppy nearly filled I almost broke my back with 2 trips to the bank hauling change in my backpack to cash it in. I swear I must have looked like someone carrying plutonium or something! It was a hefty $1000+, that easily paid for some fun in Vegas! For those of you curious how much change you've amassed, Coinstar has a handy little trivia estimator on their site (example: 1 gallon of change is estimated to be worth $228.34) Cool :-).

So, after that I decided not to focus on the change and instead focus on $1 bills. Since then my savings rate for fun-money has tripled. Which tells me I'm having too much fun, or I need to tighten up the screws on my automatic withdrawal savings :-(.

The Richest Man in Babylon - Great Book! Even when I paid $250 for it :-)

Yea, that's right I paid $250.00 for The Richest Man in Babylon! I'm sure many of you have heard of this book before. The book's cover says "The success secrets of the ancients - the most inspiring book on wealth ever written". I believe this to be true. It's definitely the book that turned my financial compass north.

OK, back to how I paid $250.00 for this book :- ). This was back in the 90's. This was a time in my life where I was young and full of eagerness to explore all the wonderful ways to make money. You might say I had get rich quick fever! It was during my second venture into MLM (Multi Level Marketing). I'm sure I'll blog on the wisdom I've gained from MLM at some point, but for now let me say this about my opinion of MLM ... Although I was somewhat successful with 2 different MLM ventures, I felt I lost in the end by straining friendships in the process.

During this time my good friend (I'll call him Calvin) and I met a gentleman (I'll call him Jay). Jay was bringing us under his wing and teaching us more about MLM at first and about finances in the end. There's one great analogy he gave me that stuck and probably the single most reason I realized that MLM had to be in my history and not my future.

What Jay said was something like this:

... When you think about what MLM really is you can break it down into this: A group of individuals working to sell a product/service; A hierarchy of individuals managing the customer facing individuals; A group of individuals that started or fund the entire enterprise and make a small percentage of the overall profits. Now that's great if you're one of the founders or individuals that got in early in the game, you end up making lots of money. Otherwise you make less and less as it gets down to that customer facing final individual who's trying to build their own network. Wouldn't it be great to somehow pay one of the founders something to share in their profits?

Well, there's actually a really regulated system that exists today where you can do exactly this: The Stock Market! When you think of public companies, they have a very similar structure as MLMs, except all of the employees (sales and otherwise) are capped on what they earn. That means more profits rolling up to the top founders and managers and SHAREHOLDERS!

I'm sure I'll blog more on this topic later. Bottom line, investing in stocks (whether individual or through mutual funds) is one of the best way to have the efforts of many working for you!

Calvin and I continued to visit Jay and his family and learn more and more about finance and investing. This was the early days of the web and there weren't a lot of investment sites you could learn or research on. He had a couple of different online investment accounts. He'd try and show us how he made money day trading. He tried to show us about options. For our level of learning options was a far fancier endeavor than we wanted to get involved with. We could understand the leverage advantages, but were leery of the ultimate possibility of losing all of that options investment if it expires on you.

To shorten a long story a bit, Jay showed Calvin and I how he was making money day trading and his neighbors would drop over periodically asking advice and sometimes investing with him and letting Jay run their trades and then give them their profits. Ultimately Jay asked us if we wanted to let him invest any money for us. Calvin and I discussed this on our own and came to the conclusion that we'd invest only a small amount as we were a bit skeptical of the whole situation, but were grateful for all the time Jay spent teaching us about investing. We each gave Jay $250.00. That day we did that, Jay gave us each a copy of the book The Richest Man in Babylon and said we should read this because it was very insightful and had many lessons on building wealth.

So, exactly what happened to our $250.00? Not much, we continued to learn about investing on our own. We read The Richest Man in Babylon and both agreed that it was an amazing revelation and a milestone in each of our personal finance educations. In the end we stopped talking to Jay as it seemed that he never had any new news on our investments and finally after confronting him he said that it looks like he made a mistake and allowed our options to expire without action. Calvin and I considered ourselves fortunate that we only gave Jay $250. To this day we laugh at how much we paid for our wonderful copies of The Richest Man in Babylon. We still think it was worth it :- ) !!!

I truly say that, from that point on I had a thirst for learning new things about finance and investing and each new spoonful of wisdom started with that great book.

Shawshank Redemption - great personal finance lesson...

Shawshank Redemption has been called one of the greatest films in history. Not only a great film, but a pretty darn good personal finance lesson too. Compare the journey of Andy Dufresne's (Tim Robbins) to your own personal finance journey. Basically, Andy dug his way out of prison with a rock hammer (tiny little hammer that fits in the palm of your hand) and about 20 years of perseverance. A great illustration of moving a mountain with a spoon (it takes a long time, but it can be done)! If you haven't seen the film, here's a great summary from Wikipedia. Andy obviously had some hardships in his life that led him to prison. While he was in prison he had even more hardships with the life in prison and he devised and enacted a plan.

Similarly, many of us have found ourselves, to varying degrees, stuck in a financial prison and taking the hard knocks that life’s lessons can dish out. At some point we've realized that we need to dig our way out. I believe all of us can track our memories back to a point when we had an epiphany in our financial education. Some point when we finally realized we need to have a plan to attain some kind of financial goal in life.

Throughout our financial education we've realized even more epiphanies where more and more aspects of personal finance become ever clearer. These are great moments in our lives that lead to a new level of prosperity. Like realizing that not investing in a 401K is like giving money away to Uncle Sam and your employer. Realizing that having a mortgage vs. renting can allow you to save money, build for retirement, and build equity. Learning how your fico score affects getting a great mortgage. Learning how to invest that 401K money in index funds. Learning how to attack credit card and other debt. The lessons are endless and multi-faceted depending on each of our individual situations.

One of my great epiphanies was learning that I have the best chance of achieving my goals, by breaking my action plan down into manageable tasks. Before that, I would shotgun attack the problems at every angle. We can all probably feel the similar realization of our goals when we've made strides in our own personal finance education. The strides were likely made when you implemented little lessons one at a time in bite size fashion. This serves several purposes. First, we avoid being overpowered by the problem. Second, it allows us to realize progress and be encouraged to continue the journey.

Whenever I realize I need to learn something or grow in a particular area, I'll research online and in the bookstore to learn more. Then I'd look for a good place to take that first step. There are many little teaspoons of wisdom that I've tasted over the years that have helped me realize my financial and life goals. I hope to blog on each of these in more detail soon.