Sunday, August 21, 2011

4 Steps to Set Your Investment Goals

Some people just feel lost in investment especially when they start investing in stock or when they don’t make a lot of money out of their investments. They will start wondering, what the hell am I doing here? This is all because of they don’t set clear investment goals.

When you do not have investment goals, you basically do not have measure of success.. When you do not have the measure of success, you do not know whether you’re at the right track. When you do do know whether you’re at the right there, you do not take actions (e.g. sell your stocks or mutual funds) and lastly you are lost because you simply do not know what to do. So, I hope this makes sense to you that why you must have investment goals for each investment that you make.

Let’s look at the following 4 steps on how you can set your investment goal. Check it out…

Step 1: Identify Your Personal Inflation Rate – X%

Well, before you even start thinking about setting your investment goals, you must first understand one of the most important elements in investing is to protect yourself from inflation killer.  Thus, it is important to identify your personal inflation rate before you start investing. Let’s look at my previous article how you should get your own personal inflation rate rather than the reported inflation rate by your government:

You identify this as X% and don’t be surprise if your personal inflation rate is a lot higher than the reported national inflation rate especially if you’re a big spender. The chances this will happen is high too if you keep earning more and more every years. 

Step 2: Identify Your Safest & Highest ROI – Y%

Your safest ROI could be your saving, fixed deposit (i.e. FD), or your retirement saving fund such as EPF in Malaysia, CPF in Singapore or 401(K) plan in United State.  I don’t know what the rest of the countries call this. :) Usually the retirement saving fund (e.g. the EPF) has the highest ROI as compared to your FD or your savings. You identify this as Y%

Step 3: Identify Your Minimum Investment Goal – Z%

Once you have identified X% and Y%, your minimum investment goal that you set should be based on which one has the highest %. For example, if your Y% > X%,  you minimum investment goal should be Y%. Hopefully your X% is less than Y%. If that doesn’t happen, you may want consider to change your lifestyle. If you don’t want to, that’s fine too. Then your minimum investment goal should be Y%. In short, Z% = MAX(X%, Y%). Hope this is not too engineering for you… :)

Step 4: Set Your Investment Goals

This is the final step is to set your investment goal after you have identified Z%. Basically, there are 2 types of goals that you can set. One is normal and another one stretch investment goals. If you achieve your stretch investment goal, you have basically exceeded expectation. Sound something familiar like your focal? Hahaha…

Well, no hard rules how you want to set the investment goal as long as you make sure it is > Z% but this is what I think normal and stench investment goals should be:

Normal Investment Goal  = 2Z% (2 times of Z%)

Stretch Investments Goal = 3Z% (3 times of Z%)

Note: Z% is your mininimun investment goal.

Let’s take myself as an example. If my Z% = 6% (based on the latest EPF data in 2010) , my normal investment goal will be 12% ROI. If my actual ROI is 12%, I’m meeting my goal. However, what if my ROI is > 18%? I’m basically exceeding my investment goal because I”m achieving my stretch goal.  In order to meet these goals, I"m investing in mutual fund or unit trust, stock, gold, property and etc.

This is how my investment goals look like. So whatever I invest in mutual fund/unit trust, stock, gold, property and etc, my measure of success is based on 2Z% and 3Z%. What about you? If you don’t have any investment goal, probably you can start having one now…


What do you think of my formula? Sounds reasonable or unreasonable to you? If not, what do you think how one should set their investment goals? As mentioned before, setting investment goal is essential which as important as that you need to have clear financial goal. Without goals, you do not know your direction. In this article, I show you 4 simple steps how you can set your investment goals for both normal and stretch goals. Of course, you can define your own formula. Good luck!

P/S: Hope this is something useful to you guys. I”m going to take vacation off in 4 more days and will not be blogging for about 2 weeks. Yeah! Feel free to comment on this article and hopefully I can get back to you before my vacation. :)

Saturday, August 13, 2011

Refinancing Your Mortgage: What You Should Know Before You Do

Refinancing your mortgage may seem like a godsend at the moment, but before you jump in headfirst, there are some things you should know. For instance, are you prepared to shop around with at least three different lenders and three different title companies? Even though you might do less paperwork with your current lender, others might be able to offer you better rates, so it's definitely worth checking them out.

Here are some of the other things you should think about with a refinance.

There may be extra fees involved

All too often homeowners get caught up in that one little number – the interest rate. Sure, a drop of a half a percentage or more can save you big bucks on your monthly payment and on the total interest you'll pay for your home. However, you have to remember that refinancing comes with some of the same fees involved in buying a home originally, so the interest rate change may not end up saving you all that much after all.

Another thing to consider is something plaguing homeowners today: do you owe more on your home than it's worth? A high loan-to-value ratio these days can mean extra fees for your refinance, as the company doing your refinance has to protect itself, too. You might even end up paying private mortgage insurance, which can increase your monthly payment by $100 or more a month.

So, before you refinance, make sure you look at all the numbers and take everything into account. Unless you're getting significant interest rate savings, the refinance may not save you that much money after all.

You could tack more years onto your mortgage

Another thing to consider with a refinance is what loan term you'll use for the refinanced loan. Many homeowners who have been in their homes for five years or more take out another thirty year loan, not considering that it will be yet another five years before they pay off the house. Thirty-five years is a long time to be paying on one home!

In some cases, a longer-term mortgage may make sense, especially if the lower monthly payments mean keeping your home instead of going into foreclosure. In some cases, it may be in your best interest to pay extra on another thirty year mortgage, which will pay it off earlier and save you money. However, in many cases, it's better to take out a shorter-term loan – like a fifteen or twenty year – depending on how much you have left to pay off after the refinance.

Just keep in mind that by taking out another thirty year loan, it will take you some time to get traction in your mortgage and start paying off the principle significantly, so this is really only a good option if you plan to stay in your home for a while.

Find your break-even point

The best way to determine whether or not a particular mortgage deal is a good one for you is to find your break-even point. This is the point at which the extra costs of refinancing will break even for you. If you plan to be in your home through or well past your break-even point, then a refinance could be a good option for you. If not, though, it's probably better to hold off and just sell the house when you're ready.

There are plenty of great online calculators that will help you determine your break-even point with the best refinancing deal you can find.

Keep your credit score up during the refinance

Finally, just like when you're buying a house, when you're refinancing, you need to be sure that your credit score stays up the entire time – until your rates are actually locked in. Most lenders will quote you a rate at the outset of the refinancing process but will check your credit score again before locking in that rate.

One of the best ways to keep your credit score high during a refinance is to cut back on credit card usage. Use your cards responsibly, and pay off new balances every month. If you can, try to pay down your balances a little, too, so that your credit score is even a little higher at the end of the refinancing process than it was at the beginning!

This is a guest post by Katheryne Taylor.

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