Monthly Archives: September 2014

What the Heck is an Index Fund and WTF is an ETF?


Some of you may have heard the terms “Index Fund” or “Exchange Traded Fund (ETF)” used and always wondered what they were or how they were different.  I did…and it turns out I had them all wrong.  So this week’s post will help you 1) avoid any confusion of the two, 2) understand the benefits of both and 3) even wow your friends at parties.  So read on!  PS – One of those statements is less true than the other two.

Okie Dokie….first let me briefly explain an Index Fund.  It’s a mutual fund that was created to mimic a major Market Index (such as the Dow Jones, NASDAQ or S&P 500).  You can also find Index Funds that track bond markets, international markets, etc.  It was created because fund managers would claim that their mutual funds could beat the market, but the truth is many funds fall short of the market’s return.  So one day John Bogle of Vanguard said “if you can’t beat the markets, join ‘em!” and the Index Fund was born.  Index Funds are also an ideal mutual fund choice because once they’re created; they’re pretty low maintenance to manage which means lower fees for you.

Now on to an ETF.  They are really similar to an Index Fund in that they also track a major Market Index.  But an ETF isn’t a mutual fund, it’s a share of stock.  So with an ETF you own a share of stock that represents many other shares of stock.

Both are ideal if you want to watch the news each night and hear Brian Williams tell you how the Dow or NASDAQ or did, knowing that your investment did the exact same thing.  But they do have some differences you should know about:

Key Differences

Trading: Because an ETF is a stock, its price will fluctuate and can be traded throughout the day.  Index Funds, like all mutual funds, are priced and can only be traded once a day after the markets close.  So you have greater flexibility about when you can buy and sell your shares with the ETF.

Fees:  You pay low or no management fees with ETFs.  However, you do pay a commission per trade just like you would for any other stock purchase (some can be as low as $7 per trade).  If you are someone who would like to reinvest continually on a regular basis (say once a month), you would be better off with an Index Fund where you’re not paying a commission with each purchase.  But if you plan to make a large one time purchase, go with the ETF.  (Side note: If you do go with an Index Fund, you should still make sure you are choosing one with the lowest management fees possible.)

Dividends:  If you invest in an ETF, any dividends earned from that fund will be distributed directly to you and it is up to you to reinvest them (and pay an additional commission for that trade).  Index Funds automatically reinvest dividends back into the fund for you.

Taxes: ETFs have two advantages over Index Funds when it comes to capital gains tax due to the way Uncle Sam treats each investment.  With an Index Fund, assets within the fund are actively traded by a fund manager.  Each time they are sold for a profit, there is a capital gains tax which the investor must pay.  With an ETF, you only realize capital gains once when the entire ETF has been sold and not while you’re holding an ETF.  So, with an ETF you’ll probably pay less tax over the life of the investment and you pay those taxes less often.

So, which one is right for you?  It depends on how much you want to invest and how often.  But both are a great investment option that can help diversify your portfolio while keeping costs low.


Photo Credit: Mike Linksvayer


Making (and Not Breaking) Your Budget


Many people think that they don’t need (and don’t have time) to keep track of their spending through a budget.  But nothing could be further from the truth.  If businesses can’t survive without keeping a close eye on the comings and goings of their hard earned cash, what makes us think we can?  Even most millionaires use a budget.  But if your budget isn’t realistic, it won’t help you and you won’t be able to stick to it for long.  So read on if you want to make one that is built to last!

Step 1: Tracking Your Expenses

Every budget has to start somewhere, and for most people, tracking your expenses and getting your budget started is the painful part.  But there are great online resources out there to help you with this and will even save you a lot of time by importing everything automatically.  I am a big fan of, which is a free online budget tracking website.  You have to give them access to your accounts (banking, credit cards, investments, etc.), which at first I’ll admit I wasn’t comfortable with.  But is owned by Intuit, a personal finance and payroll software giant that owns Quicken and Turbotax.  So if you’re comfortable filing your taxes with Turbotax, rest assured that the same online security from Intuit is backing up their site as well.  But if you find it easier and safer to do it yourself, an excel spreadsheet is a free and easy place to start.  Here are some simple budget templates available from Microsoft for you to download.   J.Money’s blog “Budgets are Sexy” also has some free budget templates for you to use.   First, start by tracking your expenses.  You’ll want to break these into two categories: 1) fixed expenses – which are the amount you pay regularly each month (mortgage or rent, utilities, gym membership, phone and other bills) and 2) variable expenses – which are items that fluctuate each month and are more in your control (groceries, meals out, shopping, entertainment, hobbies and gas).   Try keeping track of these for at least a couple of months and create spending categories to better see where your money is consistently going.  I think this part of the process is fascinating.  Maybe you had no idea how much you spend on online shopping, lunches out or Starbucks every month.  This could be a big eye-opening moment for you and an opportunity to reach your financial goals just by being more aware of your spending.  Exciting!

Step 2: Setting Goals

Now that you know where your money is going and which categories you may be willing to cut back on, you’re ready to ask yourself: “What are your financial goals?”  Are you trying to quickly pay down credit card debt, create an emergency fund like I discussed in a previous post, or saving a down payment to buy a house?  And how are you going to meet those goals?  Are you going to give up your gym membership (listed under fixed expenses) that you never use or try to limit some of your variable expenses?  Still not sure?  LearnVest recommends a 50/20/30 approach as a place to start.  They say 50% of your take home income should go to fixed expenses, 20% should go to your financial goals (including what you contribute to retirement accounts), and 30% should go to variable expenses.  They recommend using this as a guide and then tweak it to your personal situation.   Others recommend saving 10% of your gross pay as a benchmark and to pay yourself first (i.e. – putting 10% of your earnings into a savings account as soon as you receive it, then paying your bills and variable expenses with whatever is left).

Step 3: Keeping Yourself in Check

It’s important to stay on top of your budget each month to see where you’re at and how you can make adjustments to ensure that both your budget and goals are realistic with your lifestyle.  Budgeting is just like dieting, if you go too hard core right away, you’ll feel deprived and be tempted to splurge too much down the road.  If you come up with realistic guidelines for your budget that you and your family can live with, you’re more likely to succeed at sticking to it.  And don’t forget that your goals may change month to month.  Maybe you don’t save as much for the month of December because you needed extra spending cash for presents.  Maybe in the spring you start to tighten the belt on variable expenses so you can afford a summer vacation.  Whatever you do, make sure it’s working for you!

Step 4: Smile…Budgets are Fun

Try not to take this budgeting stuff too seriously and have fun with it if you can.  For example, don’t beat yourself up when you go over budget.  Just identify what happened that month and decide what tweaks you need to make in order to have a more “livable” budget for the next month.  And when you do stay within your budget or meet a small savings goals each month, set up some kind of reward for yourself like a pedicure, movie date, etc. so that you have something to look forward to.  What is important is that you stay motivated.  A great way to do this is to tell your friends and family about your goals of getting out of debt or saving for a home so they can be there to support you.  Or read blogs about budgeting and savings.  Knowing that other people are going through the same thing as you and getting good advice about how to continue is very reassuring that you’re on the right track.  Budgets are Sexy (which I mentioned before) and Our Freaking Budget are two of my favorites.  Real people with real savings goals sharing their stories and keeping it light.  Love it!



Photo Credit:

Finding Zen with the Dow

Zen Yoga

While no one can truly predict when the stock market will rise or fall, the one thing that can be predicted is that it will rise and it will fall, much like the career of Ms. Britney Spears.  And over the last 10 years, there have been many ups and downs for Britney and the stock market.  And coincidentally, right now both are doing quite well (can we say Vegas?!  Get it girl!).  But while I find watching the ups and downs of Britney’s career and personal life incredibly fascinating, the ups and downs of the stock market usually leaves me with quite a bit more anxiety.

So how do we cope with the emotional roller coaster that is stock market volatility?  Grab your yoga mat ladies and prepare to take some deep restorative breaths.  Because the market WILL rise and fall, and then hopefully rise again even higher.  And over a period of 10 or 20 years this can handsomely reward you with financial gains that will help you meet your long term financial goals.  But the key is to Buy and Hold your investments.  The theory is that by “buying and holding”, you’ll earn decent rates of returns on your stock investments despite the volatility or declines in the market.  But you have to resist the urge to sell when the going gets tough and just meditate on through it.

And I understand that to watch what happens to your investment along the way can be difficult and stressful.  Checking the balance of one of your mutual funds when the market is down is more cringe worthy than watching a Miley Cyrus video.  So when that happens, it’s best to go to your happy place and repeat to yourself “this too shall pass”.  Then give yourself a pat on the back – because keeping your emotions out of your investments is the real key to winning the stock market game.

Photo Credit: elidr