There is no evidence that front-end load funds perform better than lower fee funds. In fact, logic would tell you that smaller, less successful funds employ front-end loads because they have been unsuccessful attracting assets in other ways, implying their performance could be worse. Additionally, when you see your personalized performance it won’t be based off your $10k investment, it will be based off the amount you invested AFTER paying the sales commission. Performance numbers are always inflated because they don’t account for that fact you started down 5.75% from day 1 due to the front-end load. If you invest the same $10k, your statement will show $9,425 as your cost basis. Meaning, if the value rises to $9,700, your advisor will tell you are up 3%, when in reality, you are still $300 in the whole from the $10k you invested.

If you’ve made the choice to use mutual funds in your investment strategy, make sure your advisor knows that you do not want any front-end load funds. In fact, if your advisor is recommending front-end load funds, I think it’s time to find a new advisor. Many advisors have developed very effective methods to slip a few front-end funds into your account, convincing you of the relative value of said fund. In reality, there is no reason for an advisor to recommend a front-end fund other than wanting to earn the sales commission.

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Building a cash savings and making sure you get any company match in a 401-k is important, but today I want to write about the value of saving in taxable investment accounts. I think there are two key benefits to after-tax investments.

1. Liquidity – In a taxable brokerage account, you have access to the funds any time you need them. If you want to buy a house, need to pay a medical bill or simply like knowing you have access to funds if a need arises, money in a taxable account can provide flexibility and peace of mind. 401k and Traditional IRAs have tax consequences and steep penalties for withdrawals before you turn 59 ½. Some will argue that not having access to the funds will keep you from using the money frivolously before you need it. That is something to consider, but there is something to be said for access to cash and personal discipline.
2. No Future Tax Liability – Since you pay taxes on the money put into a taxable investment account and pay capital gains/dividend taxes annually, the money in a taxable account is 100% yours. You can withdraw money whenever you need, as much as you need and not generate taxable income. With a 401k or a Traditional IRA, every withdrawal creates taxable income, taxed at your marginal rate. That could be 25% or higher. For example, if you have $200k in a 401k plan, at a 25% marginal tax rate, you have a $50k future tax liability, so you really only have $150k.

I’m not suggesting people shouldn’t take advantage of the benefits of tax-deferred accounts. And if you are eligible for a Roth IRA, that is a great savings vehicle as well because you get the benefits of tax-deferred growth, don’t pay taxes on withdrawals and can always withdraw your contributions without penalty. However, there are income restrictions and you can only put $5k a year into a Roth. I’m suggesting after-tax investments should be part of your retirement savings plan.

The conventional wisdom says to maximize savings in tax-deferred investment accounts. I think there is a lot of value in that advice, but I also think the companies that provide 401k plans and IRAs benefit tremendously if you don’t have access to your funds. They are essentially guaranteed years of fee-income once you make a deposit, so their recommendation to focus your savings plan in those types of accounts might not always be in your best interest. You have to find the right balance for you personally, but hopefully I’ve helped you think about some of the benefits of after-tax investment savings.

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One inexpensive way to take advantage of the compounding power of dividends is through Dividend Reinvestment Programs offered directly from a company. After an initial investment of between $50-500, you can buy shares every month with a direct transfer from your bank account, generally with a $25 minimum. Computershare is one of the largest managers of these programs, but other financial institutions offer then as well.

The basic premise is similar to how you can slowly buy shares in a mutual fund, but this allows you to invest in a specific company. Once a month, a direct transfer goes from your bank account to the program administrator and shares are purchased. For example, if you invest $100 a month into a stock with a $50 share price, you will buy 2 shares that month. If the share price is $75, you will buy 1.33 shares.

When the company pays a dividend, the proceeds of the dividend will buy additional shares. When you first start out, the dividend will likely only buy a tiny fraction of a share, but as you keep investing, those additional shares add up and then pay you a better dividend in the future.

I personally participate in four separate DRIP programs – Procter & Gamble (PG), United Technologies (UTX), McDonalds (MCD) and Southern Company (SO). Procter & Gamble runs its program directly and has no fees. The other three are administered by Computershare and the fees vary by company, depending on how much the company subsidizes the program.

DRIP programs can be a great addition to your after tax savings program.

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I’m a big believer that the benefits of saving and investing is allowing money to provide financial freedom and while this type of extreme savings and minimalist living isn’t for everyone, it is an interesting new concept that more and more people are embracing. We can all learn a few things from these ideas.

Click Here to See the Full Article on CNBC.com

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The idea of being ‘house poor’ means you have as nice a house as you can afford, but because your mortgage payment is so large, you can’t afford to leave your house and do other enjoyable things. Banks and other lenders are not concerned about your disposable income and overall happiness level.  They are simply concerned with whether or not you can make your payment. My philosophy is exactly the opposite and asks not how much can I borrow, but how much do I want to borrow? It centers on the idea that low fixed costs and high disposable income reduces stress and allows you enjoy life to a much greater extent.

My general rule of thumb is to keep all fixed costs, including a mortgage, other debt, groceries and basic utilities to no more than 50% of your monthly take-home pay. That’s not 50% of your gross income; it’s half of what you receive in paychecks during the course of the month, after taxes have been withheld, 401-k contributions made, healthcare premiums paid, etc. If you can keep your true fixed costs to under 50% of your income, you should have plenty of money left over in the month to pay a cable bill, cell phone bill, eat out a few times or otherwise enjoy your disposable income however you see fit.

Realistically, this means you should target to keep your mortgage payment (including property taxes and homeowner’s insurance) to around 30% of your monthly take-home pay. This is significantly below what many ‘experts’ will tell you, but remember they are more focused on what is best for them and not what is best for you. For example, if your monthly take-home pay is $4,000, limiting your monthly mortgage payment to $1,200 will keep you from becoming ‘house poor.’  This isn’t a hard and fast rule, if you have no other debt (car payments, credit cards, etc) then you can probably afford a little more. Just remember, more disposable income reduces stress, increases your ability to save or spend on entertainment and overall leads to a happier, healthier life.

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