May ACap ReCap – Your Personal Finance Questions Answered
1. What is a dividend and why do companies pay dividends?
When a company earns income and has paid all of its expenses, they have to decide what to do with the left over money. The company can either keep and reinvest the net income into the business to help it grow, or it can distribute a portion of the net income to its shareholders in the form of a dividend. Dividend paying companies are usually mature companies that can no longer reinvest their net income into the business and earn a high enough return required by their shareholders. In such cases, shareholders would prefer to have the dividend paid out as cash to reinvest as they choose. For example, Coca Cola pays a dividend because it cannot reinvest all of its net income in growth oriented projects; conversely, Google does not pay a dividend because it uses all of its income to reinvest into research and development to grow the company.
2. Do I need a budget?
Yes! One of the top concerns I hear are “I make good money, but I can’t seem to save. I don’t know where my money goes.” It doesn’t matter how much money you make, if you spent more than you earn, you will come out behind every time – guaranteed! Regardless of your financial situation, you always need a budget. Multimillion dollar corporations rely on budgets to remain profitable so there is no reason why you too shouldn’t adhere to a budget. Without a budget, it’s nearly impossible to see where your money is spent. Budgets force you to keep a close eye on your expenses so that you don’t overspend. While it would be best if you use software such as Quicken or Mint to track your expenses, a household budget doesn’t have to be that detailed, especially if you don’t have the time to maintain the software. Your budget could be as simple as taking your total income, deducting 20 percent from the top for savings, and then subtract your total expenses. If adding up all your expenses exceeds your income after saving, then you have some cuts to make to your expenses. Don’t try to save after you’ve paid all your expenses because there is usually no money left by that time; it’s better to pay yourself first. Why do you think the IRS forces your employer to deduct your taxes before you get your paycheck? It’s because they don’t trust that you will save the money yourself to pay your taxes.
3. Should my spouse and I have joint or separate bank accounts?
This is a great question that’s not as simple to answer as what is an IRA. Some couples prefer to maintain separate bank accounts to deposit their paychecks and keep a joint account for shared household expenses while other couples pool all their accounts together for ease of management. Estate planning concerns aside, there is no wrong or right way for couples to maintain bank accounts. If one spouse is a saver while the other is a spender, separation of accounts helps to minimize marital stress. Sometimes one spouse receives an inheritance and wishes to keep it separate. I do not encourage clients to adopt one approach or the other because the decision is more emotional. If you have a method that works for you, then go with it. There is no wrong or right way. If you have a unique way of maintaining your household accounts, we’d like to hear about it.
4. Should I invest in bitcoin?
Bitcoins have become very popular since their recent introduction as an alternative to hard currencies because bitcoins are not issued by any government and because some people believe their governments are devaluing their currencies through their monetary policies. Investing in foreign currencies and foreign currency denominated assets are an important part of a well-diversified portfolio; however, at this point, I view bitcoins as highly speculative. Bitcoins are still in their infancy – they are only accepted by few retailers, the size of the bitcoin market is tiny (total size of the bitcoins market is $1.5 billion which is the equal to the GDP of the Kingdom of Bhutan), they are minted by a computer program and we all know computers can be hacked, and the infrastructure to transact with bitcoins on a day to day basis does not exist. If you are considering bitcoins as a potential investment, I recommend a very small (no more than 1 percent) allocation of your total portfolio.
Have a financial question? Contact ACap Asset Management at email@example.com or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com