A few months ago I wrote an article entitled, 4 Reasons You’re Not Rich. Today I’m going to continue on this theme with 4 reasons that you’re not getting ahead.

1. Credit Cards

A good portion of the population has credit card debt. What’s even more unsettling is that many people consider at least some level of consumer debt to be “normal”. There’s already been plenty written about how to combat this problem, but even if you pay off your credit cards every month, they can still keep you from getting ahead. It’s incredibly easy to spend money with these cards. If you’re not careful, you’ll end up spending more than you would have otherwise. In this scenario, you’re losing money that you could have saved or invested instead. Just paying off your cards every month isn’t enough. You still need to watch how much you’re really spending.

2. Lack of Planning

Even when you have a budget and think that you’re monthly expenses are covered, you can still run into problems. Do you remember the insurance premiums that come due every six months, or does it always set you back a little. What about car inspections and registrations that occur once a year or so? It also wouldn’t be a bad idea to think about Christmas in July. For some reason, this yearly holiday seems to blindside people financially. You know it’s coming; plan for it.

3. The Save then Spend Mentality

This typically wouldn’t be considered something that would keep you from getting ahead. It’s good to save and not buy on credit, right? The problem arises when you save a decent sum and then go spend it all to buy a car or take a “much needed” vacation. This actually isn’t any different from spending everything you earn. If you’re continually spending all your savings, you won’t get ahead.

4. Impatience and Lack of Follow Through

When one begins to invest, the investors continued contributions are the main reason that the account balances go up. Investment gains tend to increase exponentially, and the investment returns don’t begin to trump the contributions for quite some time. Too often, people don’t see the immediate benefit of investing and they either stop contributing or withdraw everything all together. In order to get ahead, be patient and let the power of compounding work it’s magic.

If you haven’t heard, last week was one of the worst weeks for the market in years. The Dow dropped almost 600 points and the rest of the market generally followed suit. Many investors are still a little nervous as to the markets outlook, and it only rebounded a little today.

Instead of being nervous, sophisticated investors will see this downturn as a unique opportunity to pick up some stocks at what might be called, bargain prices. This doesn’t mean that you should just go out and buy anything that has dropped significantly in price. You should still look to buy quality investments.

For example, I saw this downturn as an opportunity to pick up shares of Citigroup Inc. (C). It’s a solid company with a history of solid earnings. They pay a nice dividend which at the current price yields around 4.6%. The best part is that after last week’s sell off, the stock is trading around its 52 week low. Obviously there’s no sure thing in the market, but it looked like a bargain to me.

I’m sure there are plenty of other opportunities out there after last week, it’ll just take a little effort on your part to find them.

There’s one other important thing to note. Most people see a market sell off, like the one last week, as a reason to panic, and they fear they’re going to lose money. We should consciously remind ourselves, however, to look at them as opportunities instead. It is a tough mindset to develop, but the earlier the better.

In previous posts I’ve written about market capitalization and the P/E ratio, and the basics of the stock market. Today I want to introduce another concept used to analyze a company to determine whether you’d like to invest in it.

Return On Equity (ROE) is a measure of a companies ability to profitably employ the money that shareholders have invested. This measure is calculated as follows:

ROE = Net Income / Shareholder’s Equity

A company’s net income may be obtained from the income statement while the shareholder’s equity is reported on the balance sheet. You don’t actually need to calculate this yourself, though, since many financial sites such as Morningstar will provide it for you.

So, now that you have this number, what does it mean for you? Like I stated earlier, it measures how profitably a company employs its investors money. It should be obvious that the higher this number the better; however, there’s a little more to it than that.

Say a company has an 18% return on equity (General Electric is one example). Let me be clear now; this does not mean that you will earn 18% on the money you invest. If you remember from an earlier post, when you buy a stock, you’re buying it on a secondary market, and it has no effect on the company’s financials. What you are doing is buying an ownership interest in the company that then entitles you to any FUTURE earnings and growth.

This is where the 18% ROE comes into play. Now that you own a few shares of a company, the company will hopefully post a profit from which you determine what’s called Earnings Per Share (EPS). These earnings belong to you as the shareholder. The company now has to make the choice of what to do with these earnings.

There are a few main options. The company may announce a dividend, in which case you will be paid out a portion of these earnings. The company may choose to buy back it’s own stock with these earnings (a topic for another day), or it may choose to reinvest the earnings back into the company which is what we call retained earnings.

It is this last option that we are interested in when we talk about Return On Equity. Based on our example of an 18% ROE, we can expect the company to earn an 18 percent return on this reinvested capital. It is this compounding year after year of profitably retained earnings that can make one wealthy.

There is an upfront cost to get into a stock because of the current market valuation. Looking back at the P/E ratio, if a company trades at 20 times earnings and has earnings of $2 a share, you can expect to pay about $40 per share. If you buy this stock, you can view the earnings as your return on your investment, in this case $2 / $40 = 5%. This doesn’t look like anything spectacular, but it’s the $2 in earning that will compound at the 18% Roe.

In the second year you could reasonably expect earnings increase to $2.36 (2 x 1.18 = 2.36). This then increases your return to 5.9% (2.36 / 40 = 5.9%). After 10 years of the earnings compounding, your $40 initial investment is now returning over 26%.

Obviously there are assumptions being made such as a sustainable ROE and earnings growth and the like, but it’s the concept that I want you to understand. It’s another tool to put in your financial toolbox. Hopefully, this has provided some insight into the investment world and will help you in the future.

I’m reading a book right now entitled Buffettology written by Mary Buffett, Warren Buffett’s former daughter in law. There is a chapter titled The Myth of Diversifications Versus the Concentrated Portfolio. It portrays a very different perspective on investing that what is generally purported.

“Warren believes that diversification is something people do to protect themselves from their own stupidity. They lack the intelligence and expertise to make large investments in just a few businesses, so they must hedge against the folly of ignorance by having their capital spread out among many different investments.”

While I don’t much care for the tone of this quote, I do happen to agree with it. Most people don’t want to spend any more time than necessary on choosing their investments. All you have to do is look at the very lucrative mutual fund industry to see that this is the case. And when I say “very lucrative”, I’m not talking about the individual investor, but instead, the fund managers.

It’s also interesting to note that the bulk of the gains in these funds usually come from a few well performing investments. Proponents of diversification will say that you need to own many investments because you don’t know which one’s will be the outstanding performers. Those like Warren Buffett will say that you should learn the basics and then some of investing and do sufficient research. This way you will only invest in very secure and highly profitable businesses.

You can choose the style that you feel most comfortable with, but it is certainly food for thought. Why is it that we’ll spend hours upon hours researching all the features and specifications for the new LCD TV we want, and we’re content to just deposit our money into a fund where we most likely don’t even know what it’s invested in. No matter what style you choose, it can’t hurt to learn more about how to choose good investments.

Just about two years ago I got a summer internship and moved to St. Louis for the summer. After I graduated a year later, I took a full time position with the same company and relocated here. While I was doing this internship, the real world finally hit me. It finally dawned on me that the academic world wasn’t all there was and that I could actually be financially sound.

During those couple of months, I was being paid more than I had ever gotten before (partly because never really worked a full 40 hours consistently during school), and I took an increasingly greater interest in my personal finances. I’ve always been pretty independent, but I was now applying it to my financial situation.

I went to the library quite often and checked out many different books on personal finance and investing. I began reading Yahoo! Finance, MSN Money and CNN Money. By the end of the summer I knew all about 401k plans, Traditional and Roth IRAs, the basics of stocks, bonds, and mutual funds.

What I’m getting at is that I made a concerted effort to learn all I could about how money finances work. I wanted to find out the best ways to put my money to work. I’m still learning more and more everyday, but I encourage you (if you haven’t already) to also make it a priority to learn how to save and invest. Make a trip to your local library. I didn’t read everything in every book; if a chapter wasn’t interesting, I’d move on and read the sections that I wanted. The point is the make the effort. You may surprise yourself at how you can change your financial outlook just by educating yourself with the basics of money and personal finance.

If you work for a company, no matter what size, it’s worth finding out whether or not the company offers a 401k plan. Most larger corporations will offer one of these plans and many smaller companies are also beginning to offer them. In order to find out, all you need to do is contact your companies Human Resources department. If your company has a benefits website, you’ll also be able to find more information there. If you don’t like either of these options, just try asking a co-worker. Some how you’ll be able to find out not only whether a 401k is available to you but how it works and what the specific terms are.

Once you find out that you have the option available, there are a few key things you’ll want to know about it. First of all, does your employer match any portion of your contributions? When you elect to contribute to a 401k, you decide what percentage of your salary you will contribute. The company will, at its discretion, match your contributions up to a certain percentage. They might not match you dollar for dollar; sometimes the match is something like 50 cents for every dollar. Whatever the match is, it’s a guaranteed instantaneous return on your money. This is why you’ll always here financial gurus recommending that you always contribute at least the amount that it takes to get the full company match.

You’ll also want to know what investment options are available to you in the plan. Most commonly, you’ll have the choice between a select number of mutual funds and your own companies’ stock. If it seems too complicated or a little intimidating, you shouldn’t let this part deter you from enrolling in the plan to begin with. There is usually a simple money market fund or other stable investment option that you can put your money until you decide how you’d ultimately like to invest your funds.

The most important thing here is to actually make the move and begin your 401k. You don’t have to begin by contributing a lot at first, but start contributing something, especially if your employer is willing to match any portion of your funds. Don’t worry if you don’t think you’ll be with your employer for much longer. You can take the funds with you when you leave. Whatever the hold up is, there’s no better time than now to research and start your 401k plan.

I read a good article over at Get Rich Slowly that talks about investing in broader terms than what is usually thought of as investing. Whenever someone talks about investing, most people invariably think of the stock market, bond market, or mutual funds. However important these types of investments are, they aren’t the only way to make money on your money.

Many personal finance gurus make assumptions about how much money you can accumulate if you invest X number of dollars a year for so many years and earn, say, a 10% annual return. The obvious question that many then ask is where can I earn 10% consistently?

It may come as news to a lot of people, but stocks and bonds are not the only way to earn such returns. As I’ve mentioned before and this article points out, there are many other ways or opportunities through which we can earn great returns. You’ve got to keep your eyes open and think creatively sometimes, but it can be done.

If you’ve taken advantage of a unique opportunity that you’d like to share we’d love to hear about it. Tell us about your experiences in the comments.