Saturday, June 30, 2007

Announcing: 401K Week

In the coming week I will write a series of posts on the topic of 401K plans. Last week my company's 401K committee, of which I am a member, decided to migrate our 401K plan from ING to ADP. This decision followed a long period of research and internal discussions.

In the end, I am pretty confident that our new plan will be far superior to our existing one. Over the coming week, I will share the details of our new plan and some of the thinking that brought us to the decisions we are making. I will also discuss other interesting aspects of the 401K topic. Here is the posting schedule:

Monday - Our old ING 401K plan & why we chose ADP
Tuesday - Features of our much improved 401K plan
Wednesday - ROTH 401Ks
Thursday - 401K matching - the pitfalls
Friday - Why do we even need the 401K system?

Friday, June 29, 2007

This is What's Wrong with the Tax Code

A couple of days ago CNN published a story about a speech given by Warren Buffet at a recent campaign event for presidential hopeful, Senator Hilary Clinton. Here is a quote from the CNN article:

"Buffett said he makes $46 million a year in income and is only taxed at a 17.7 percent rate on his federal income taxes. By contrast, those who work for him, and make considerably less, pay on average about 32.9 percent in taxes - with the highest rate being 39.7 percent."

What kind of tax system allows such ridiculous outcomes to exist? Although I disagree with their arguments, I understand why some people support a flat tax rate. However, is there any rational person that can justify a system under which the rich pay a LOWER tax rate than the poor?

Buffet did not stop there. He actually offered a reward of $1 million to anyone who could demonstrate that any one of the nation's wealthiest individuals pays a higher tax rate than that person's secretary...

As far as I am concerned, this is proof positive that the entire tax code must be scrapped and rebuilt from the ground up. This is not something that you can address with a quick fix. Our tax system is full of loop holes, and is fundamentally flawed. Unfortunately, the reason that our tax code is broken is that Congress has sold itself to special interests of all flavors. It is now lobbyists that control policy, not our so-called elected officials.

Is there no hope for tax justice for the middle class? Sadly, I don't think there is. It appears that paying a lower tax rate is yet another reason to try to become rich...

Thursday, June 28, 2007

Life Style Inflation is a Good Thing

Many of us personal finance bloggers constantly warn against lifestyle inflation. Well, I am about to break rank with my colleagues. I am all for lifestyle inflation. Lifestyle inflation is a good thing.

For the uninitiated, let me take a step back and explain what the term lifestyle inflation means. Typically this term refers to the fact that people's spending habits increase to match their available income. For example, say you used to make $40K and got along great. Now you get a 25% raise and all of a sudden you are spending $50K without saving any more than you did previously.

So here is my take on the situation. The reason we strive to increase our income is so that we can improve our lifestyle, enjoy life, and get some of the luxuries that we desire. If you have more money to spend, why not do it? It means you are enjoying your hard earned income. What's the point of getting a raise if all it does is inflate the number at the bottom of your bank statement? Where is the fun in that?

I would like to introduce a new concept. Average long term lifestyle inflation. Lifestyle inflation is a good thing, so long as it is sustainable. The problem with lifestyle inflation as most personal finance bloggers refer to it, is that the increase in spending may not be sustainable. Sure, you got that raise and can afford to spend more now, but will you be able to maintain the same lifestyle in retirement? Would you be able to maintain the same lifestyle if you lost your job or had a medical emergency?

The problem is not that your lifestyle has inflated, but that your spending levels may not be sustainable in the long term. You may be setting yourself up for a fall if something goes wrong. However, if you are able to inflate your spending in a way that is sustainable throughout your life, that is the very definition of financial prosperity. This is exactly the objective of everyone who is interested in personal finance.

As a bottom line, here is the solution that I propose. If you find a way to sustainably increase your income, first ensure that you are financially able to weather any unexpected turbulence, such as job loss or disability. After you have addressed those critical needs, increase your spending. However, increase it in such a way that you will be able to sustain your new, higher level of spending even in retirement. If you follow this strategy, your lifestyle will continue to inflate sustainably throughout your life. Wouldn't it be great to know that things are likely to only get better? That's the power of financial planning.

Wednesday, June 27, 2007

Building Your Career Early Means More Cash in the Bank

A few days ago I read this post on Blueprint for Financial Prosperity, one of my favorite personal finance blogs. Jim makes the point that while he is young and unfettered, he is willing to trade more of his time for money, by working long hours and building his career. He expects that the balance will shift once he gets married and has kids. Once that happens his time will become more valuable to him.

Point well taken. It is interesting that Jim's argument works from a finance perspective as well, if you take into account the time value of money. A dollar that you earn today, is worth much more than a dollar you will earn in 20 years. For example, a dollar earned today, and invested in a money market account for 20 years at 5% per year, will be worth $2.52 before tax and inflation. That dollar you hope to earn two decades later is still just a dollar.

The point I am trying to make is that when you are younger and your family commitments are limited, not only do you have more time on your hands, but also the money you earn is worth much more over time. That is yet another incentive to aggressively invest in your career and financial security in your early years.

This argument is also closely related to the long term value of one's career. When you are just starting out, your career is a very valuable asset. It is a potential cash stream that you will tap over the following decades. That potential value of your career will gradually be converted into cold hard cash. Your career is like a big bank account - every time you get a pay check, you draw down the value of your career, converting potential income into actual income. As time passes and the potential value of your career gets drawn down, improvements and enhancements to your career are worth less and less. So, Jim's strategy works from that perspective as well. His early efforts to work hard and enhance his career, are worth much more to him than similar efforts he might be making in his later decades.

Tuesday, June 26, 2007

Real Estate Market is Far From Recovery

The National Association of Realtors published their monthly state of the market assessment yesterday, under the title: "Existing Home Sales Ease Slightly in May". According to the report median home prices were down 2.1% year over year, to $223,700. The report says:

"Total housing inventory rose 5.0 percent at the end of May to 4.43 million existing homes available for sale, which represents an 8.9-month supply at the current sales pace, up from an 8.4-month supply in April."

According to a CNN report this inventory of unsold houses is at a 15 year high. However this did not stop the Association's President from saying to CNN:

"Buyers who've been on the sidelines may want to take a closer look at current conditions in their area... If they wait for sales to rise, their choices and negotiating position won't be as good as they are now."

You can always trust the realtors to come up with a positive spin even on the most negative real estate news ("it's not cramped, it's cozy"). Truth is that the real estate market is in a deep freeze. With the realtor's own report showing the inventory of unsold homes at historical highs and prices continuing to fall, I would say that the real estate market is years away from recovery.

A few months ago I heard a lecture given by the prestigious UCLA Anderson Forecast, regarding the state of the California Economy. According to the lecture, the real estate market is not typically susceptible to dramatic price decreases. Instead, in a down real estate market, the volume of houses sold decreases sharply while prices stagnate, sometimes for years, as inflation brings the real price of the home back in line with historical trends. If you believe this analysis, which I do, the real estate market will take several years to return to even modest growth.

Monday, June 25, 2007

How Do I Make a Million Dollars in 12 Months?

One of the things I enjoy doing is looking at the search words people use to get to this website. Often I find interesting posts to write by looking at those key words. Well, a few days ago I noticed someone got to this blog by searching for the term in the headline: "How Do I Make a Million Dollars in 12 Months".

If I knew the answer to that question I wouldn't be writing a blog about personal finance, I would be too busy raking in the dough and choosing the color for the suede furniture on my yacht. Well, maybe not suede. I think leather might work better, but I digress.

Anyway, let me take a crack at that question. I have several answers, some serious, some not so much:

1. Win the California State Lottery - according to Wikipedia, your chances of winning are about 41,000,000 to 1, but somebody has got to win, right? Of course, I believe that lotteries and virtually all other forms of gambling are a form of tax on the financially challenged.

2. Have a Rich Uncle Die and Leave You a Bundle - unfortunately, unless you have a wealthy relative who is in poor health and that loves you like a son, banking on that is probably not a great strategy. There is also that tiny matter of homicide laws preventing you from helping nature along.

3. Go On American Idol - in which case you can build yourself a million dollar career by either doing very well or by being the weirdest guy around. If you are seriously searching the Internet for ways to make a million dollars in 12 months, you may actually have a shot at the latter.

OK, enough with the fun and games. Yes, there are some real world scenarios in which you could make a million dollars in 12 months. To do that, you have to either be extremely lucky, extremely knowledgeable, or more likely, a combination of both. If you are a professional at the top of your game, you might also be able to earn a cool million in one year. Some investment bankers, lawyers and doctors can make that much. Of course, if you are a member of the corporate elite, say the CEO of a Fortune 500, a million dollars is chump change for you. And if you are sitting on the next Apple iPod, YouTube or eBay, you might be able to pull off the $1M in 1 year trick.

There are many ways in which some individuals can make vast amounts of cash in a short amount of time. Those make for some excellent dinner party conversations. Sadly, for the vast majority of us middle class folks, riches are not easy to come by, and patience is the quickest road leading to financial security. If you were to ask me about saving a million dollars in 30 years, well that's a question worth discussing seriously.

If you are looking for quick ways to make a million bucks on the Internet, chances are you will run into something or someone that will offer you just what you are looking for. Chances are also that in the course of chasing down this imaginary pot of gold, you will lose much of your money to the scam artist which lured you into his trap.

Come to think of it, if you need to make a million dollars in 12 months, maybe your best bet is to become a online con man. It seems like there is a new client born every minute...

Saturday, June 23, 2007

Planning for Retirement in Your 20's

This is the fifth and final post in my Personal Finance in Your 20's series. It's all about making sure that when you are finally ready to quit your day job you are able to do so.

Most people in their 20's are not yet thinking about planning for retirement. That's a shame because the earlier you start saving, the less you need to invest in order to assure yourself a comfortable retirement. It's all about that famous magic of compound interest.

From my conversations with young employees in my company, and from what I remember about myself from just a few years ago, many people in their 20's don't save for retirement not because they can't or don't want to do so, but because they are either overwhelmed by the topic, are afraid of making a mistake or simply don't know where to start. In my opinion, not saving is the biggest mistake of all.

Below are five strategies that I would follow if I were in my 20's and starting to save for retirement today:

1. Figuring Our What You Will Need - if you research the topic of retirement planning online, you are bound to come across advice telling you to figure out what your financial needs will be in retirement and to build your plan accordingly. Trouble is, in your 20's there really is no way for you to know how much you will need forty years down the line. So I say, forget about figuring out your needs. Save as much as you can afford, and at least 10% of your gross pay. If at some point in the future you decide that you are saving too much, saving less is always possible. Going back in time to save more is a bit more tricky.

2. Invest in a ROTH IRA - the great thing about making a pittance is that your taxes are low... OK, there is nothing great about making a pittance, but the point I am trying to make is that it is likely that you are paying less tax now than you ever will in the future. That means, that if you invest your retirement money in a ROTH IRA, you will be paying very little tax now (because your tax bracket is lower) and you will be paying NO taxes when you withdraw the money. Not paying taxes rocks.

3. Invest Aggressively - if you are starting to save for retirement in your 20's your time horizon for your investment can be as long as forty years or more. With that vast amount of time, I would be quite aggressive in my investment strategy, investing close to 100% of my assets in the stock market. If you have enough time for your investments to recover from eventual bear markets, stocks tend to outperform other investment options.

4. Sign Up for Your Company's 401(k) & Get Matching Funds - Who said there is no such thing as a free lunch? If your company matches your 401(k) contributions, or even a part of them, you are getting free money. Take it. I am always amazed that about 20% of the employees in my company are not signed up for the 401(k) plan. These people are essentially refusing a gift of cold, hard cash.

5. Keep it Simple - If you are overwhelmed by all the investment options that you have, the best strategy for you is to keep things simple. If your company offers a target retirement fund in its 401(K), put all your money in the one fund that matches your planned retirement date. The asset mix in such funds shifts as you age, to reduce your level of risk. If you are investing in an IRA or other account that you manage yourself, put your money in a highly diversified stock equity fund, such as Vanguard's VTSMX. Over time you can improve your investment strategy and become more sophisticated. If you wait until you feel more confident in your investments, you may never get started, and that is the biggest investment mistake you can make.

Thursday, June 21, 2007

Buying a House vs. Renting in Your 20's

This is the fourth article in my personal finance in your 20's series. In the past few days, I have covered investing, career and insurance for people in their twenties. Today, I wanted to discuss the big real estate question: should you buy a house in your twenties?

Many people consider owning a home the epitome of financial success and stability. I have a different point of view. Buying a house is not always a good idea and is frequently not a good investment. A house is a large, undiversified investment, it is not liquid and there are big opportunity costs for all the money you sink into brick and mortar. However, all of these points are not unique to individuals in their 20's.

In my opinion there are four factors that make buying a house less attractive specifically for people in their 20's:

1. A House Ties You Down - in your 20's, you want to keep yourself open to opportunity. You never know where life, career, love or family may take you. A house slows you down and ties you up.

2. Lower Tax Benefits - in your 20's your income is typically lower than it will be further on in your career. For people in higher tax brackets, the mortgage interest deduction can mean big savings, however if your federal tax rate is 10% or so, you are not really getting a big tax break.

3. You Will Need to Move Soon - if buying a house makes financial sense, it makes sense after several years of owning the same place. If are buying a house in your twenties, you are probably buying a house that will not be sufficient to meet your future needs. The house you buy as a bachelor or married couple without children is not the same house you would buy as a parent of two (or three...). If you have to move in only a few years, there is a good chance you will take a financial hit.

4. Do You Really Need More Debt? - many people in their 20's are fully loaded with student loans, credit card debt, car payments and so forth. Do you really need more debt to weigh you down? In my opinion, in your twenties you want to keep yourself as free of obligations as possible, so if the mood strikes you can head out on a three week tour of South Korea. Worrying about the mortgage does not improve your chances for such adventures.

Anyway, call me biased, but in my opinion, until you get married and decide to start a family, owning a house does not make a lot of sense, from either an economic perspective or from a lifestyle perspective.

Wednesday, June 20, 2007

Managing Your Career in Your 20's

Following close on the heels of my two previous posts titled Investing in Your Twenties & Buying Insurance in Your Twenties, today's post is all about managing your career in your 20's. Tomorrow's post will explore the pros and cons of buying a house while in your twenties.

In your twenties, your biggest asset is your career. Your career represents a large potential cash flow, that over decades you will be able to convert into hard cash. Like managing an investment portfolio, your career too must be managed and proper management will have a tremendous impact on the "cash value" of your career.

Below are a few principles for optimizing the"return on investment" that your career generates over the long term:

Focus on Your Next Job - the most important piece of advice I can offer is the following. Don't worry about your current job, worry about your next job. My reasoning is as follows: you already have your job, it's a done deal. Setting yourself up to get the next job is the trick. In your day to day work, always consider how the projects you take, the training you receive, the people you meet and so forth will impact your ability to get to the next step in your career. To the best of your ability, do only those things that will improve your chances for taking that next career step. Avoid like fire anything that is likely to damage your career.

Invest Prudently in Education - there are some professions that require a college degree. There are others where a degree is inferior to on the job experience. There are some career goals that are only attainable with advanced degrees, for other positions advanced degrees are useless. Everything else being equal, I always prefer to invest in education, but just like any other investment, always consider your ROI. What do you expect to get for your education?

My career goal is to eventually become a top marketing executive in a large publicly traded company. With that career goal in mind, getting an MBA made a lot of sense for me. Having those three letters on my resume is almost mandatory for this type of career objective.

Experiment - I subscribe to the notion that people generally excel at something that they love to do. I also believe that the opposite is true: if you excel at something you will tend to like it. With that in mind, don't be afraid to spend your twenties trying out a few types of jobs. Be sure you are finding the career path that is right for you. You may be spending decades in your career once you settle in, so be sure you are choosing well.

I followed my own advice. In my twenties I was in the military, I was a sales person, and I was a lawyer. I then decided to go to business school, after which I settled into my current career path of marketing (following a few other minor detours). It seems like a tortuous path to take, but it was completely worth it. In addition, my many past lives have given me a lot of interesting perspectives that most professionals in my field do not share. That is one of the unique values that I bring to the table.

Be Patient - experimentation is good, lack of patience is bad. A good friend of mine has been bouncing from one job to the next for the better part of a decade. He is simply impatient. Every time he has a boss that gets on his nerves, or a project that he doesn't like, he quits. With that kind of strategy your career cannot possibly go very far. My advice to you is: persevere. Keep your eye on the long term goal and ride out any short term turbulence. If you think that your current position is taking you to the next step in your career, hold out and keep focusing on your plan. In the case of my friend for example, had he waited just two months before quitting his most recent job because of a boss he disliked, the problem would have solved itself. The boss left of his own accord.

Have a Career Plan - Nothing good happens without a plan. OK, that's not strictly true. Some good things happen by chance, but bad things happen by chance as well. Your chances of getting where you want to go vastly improve if you take the time to articulate to yourself, perhaps even in writing, what your career objectives are. Don't make a federal case out of it, a simple statement will do. Once you have the ultimate goal in mind, work backwards. Where do you need to be just prior to achieving your goal? What is the step prior to that? What do you need to do to get you to each of those steps. If you don't know, find out. When you know what needs to be done, your chances of actually doing it improve dramatically.

Negotiate Your Salary Aggressively - OK. Here is where we are talking about cold hard cash. The better you negotiate the more prosperous you will be. For additional information about how to negotiate your compensation package, take a look at these two recent posts: What Is Your Market Value; and Negotiating a Job Offer.

Tuesday, June 19, 2007

Buying Insurance in Your Twenties

This is the second post in my series about personal finance in your twenties. Yesterday's post dealt with investing in your 20's, and tomorrow's will cover what I consider the most important personal finance topic of all: managing and developing your career in your 20's.

Last week I wrote a post about differentiating between good and bad insurance. To summarize a long post, the rule I suggested is a simple one: if you can afford to self insure, i.e. deal with the consequences of loss without suffering financial hardship, you are better off not buying insurance.

In your twenties, your biggest risks are probably health and disability. Health coverage is something everyone should have. Even if you are young and healthy, you never know what tomorrow may bring. A few years ago, a friend of mine in his early thirties, who did not have health insurance, felt some chest pain. Since he did not have coverage he decided to tough it out. He waited a few days, until finally his sister convinced him to go to the emergency room. At the emergency room doctors diagnosed him with a severe inflammation of the heart muscle and told him that if he had waited only a few more days, he would have died. Point is, my friend was a healthy young man without a history of health problems. As is, the cost of medical treatment was almost too much for him to handle. If you can't afford complete coverage, get catastrophic coverage, but make sure you get something.

For much the same reasons, disability insurance is something that you should seriously consider. There is probably few things that are more financially devastating than long term disability if you do not have the insurance to help you cope with it. This is especially true if you are unmarried and are not able to rely upon your spouse to help carry you through the crisis.

A few years ago a colleague of mine went into a consumer electronics store, Fry's Electronics, to be more specific. As she was walking in, a store employee unintentionally rammed a line of shopping carts into her. My friend hurt her back and was unable to work for several months. She had no insurance and had no other financial resources to support herself. The only solution available to her was credit card debt. Again, my friend was a healthy young woman, who found herself in a tough financial spot because she had inadequate insurance coverage.

After discussing two of the most important types of insurance you need, let's discuss some of the insurance that I consider a big waste. Let's start at the top of the list, with life insurance. The purpose of life insurance is to make sure that your dependants are financially secure if you pass away. If you are unmarried, have no kids and no dependants, forget about life insurance. If you have dependants, life insurance is one of the most important types of insurance coverage you can get.

There are many other types of insurance that you most certainly do not need, including: extended warranties, cell phone loss insurance, collision insurance for a 20 year old used car and my personal favorite: vacation insurance. I mean, if you can't take that trip to Chattanooga, just spend the week at home. There's bound to be something good on TV.

Bottom line advice: you are not invincible. Do not underestimate the risks. Insure yourself against catastrophic loss and damage, but don't pay for useless insurance or to insure minor luxuries.

Monday, June 18, 2007

Asset Allocation in Your 20's

This is the first post in a new series titled Personal Finance in Your 20's that will be running throughout this week. The second post in the series will be published tomorrow and will cover the subject of insurance in your 20's.

When deciding how to invest your money in your 20's there are two main factors that you should carefully consider. Those two factors are: (i) your investment time horizon; and (ii) your tolerance for risk.

Let's talk about investment time horizon first. The amount of time for which you are investing your money will make a very big difference for the type of investment you should choose. For example, if you are saving up for a big vacation next summer, invest your money in safer, less volatile assets such as a CD or a high yield money market account. On the other hand, if you are saving for retirement, and have a time horizon of 40 years or more, you probably want to invest your assets much more aggressively. As a rule of thumb, the more time you have before you will need to withdraw your money, the more investment risk you should be willing to accept.

With respect to your tolerance for risk, only choose investments with which you are comfortable. If you can't sleep at night for fear you might lose your money, that investment is probably not for you. If you are not sure what your risk tolerance is, start by taking one of the many investor profile tests you can find online, to help you answer that question. This is one example of such a test.

For the rest of this post, let's assume that you are in your mid 20's and that you are saving for retirement. First of all, if that's the case, congratulate yourself. You are well on your way to financial security. Now, let's get serious. With 40 years of investing ahead of you, you can afford to invest aggressively and take some risks. I am now in my mid thirties, and my asset allocation currently looks like this. With your time horizon even longer than mine, you can afford to be even more aggressive.

If I were in my twenties and starting a portfolio, I would allocate my funds as follows:

25% large cap stocks
25% small and mid cap stocks
30% international stocks
10% real-estate
10% diversified bonds

In each case, I would choose a highly diversified index fund with low expense ratios (take a look at Vanguard which specializes in such funds). The impact of expenses on your portfolio over 40 years of investing is profound, and one way that will practically guarantee better returns on your investment is minimizing investment costs. With respect to the funds themselves, I would choose the same funds in which I am currently invested. In any case, be sure to keep your portfolio sufficiently diversified.

Finally, you may be interested to know how other people in their 20's are saving for their retirement. This document from EBRI provides a great deal of additional detail. However, in terms of asset allocation, the average 401(k) investor in his twenties has a portfolio that looks like this:

Equity Funds: 51.9%
Company Stock: 10.4%
Balanced Funds: 15.5%
Fixed Income Securities: 20.2%
The remaining 2% are not accounted for in the document.

So, how did I invest in my 20's? The sad answer is that I kept my money in "safe" CDs and money markets, thus missing the big bull market of the 90's. My tolerance for risk was way too low. You could say that I used to have a fear of investing. I got over my fear of investing just in time for the big DotCom bust... yeah, it was fun. BUT, whatever doesn't kill you makes you stronger. I now have a very good sense of my investment goals, and am comfortable with the risk profile of our portfolio.

For more information about some of the topics covered here, take a look at the following posts:

Diversifying into International Markets
How People in their 20's Invest for Retirement

Saturday, June 16, 2007

Frugality Wins Out - The Junk Car Stays... for Now...

I had a lot of trouble with my car lately. A couple of months ago my starter started causing some problems. For every five ignition attempts, one would be successful. A small crack in my windshield expanded like the national debt and is now a thin neat crack spanning about half of my windshield (it doesn't obstruct my view). Just to make things a bit more fun, the car started making some weird noises and the other day I got pulled over for having a brake light out (I got a "fix it" ticket - so no financial damage there).

My car is a 1997 Geo Prizm, which I bought for $8,000 from a used car dealer in 1999. It served me well for 8 years and 100,000 miles. I only use it to commute back and forth from work. Our other car is a 2005 Toyota Sienna, in which we transport the gang and use for all long distance driving. To tell the truth, I am sort of tired of the Prizm after all these years. So when all the annoying little problems started, I figured I might as well just donate it to public radio - to make up for all those years that I listen and never pay a membership fee. I didn't want to bother servicing the car, especially since I thought that the cost of making all those small repairs would probably approach the blue book value of the car ($2,950). I even started looking at some used cars on Hertz Car Sales where we previously got some great deals and some excellent vehicles.

And then the Mrs. stepped in and talked some sense into me. I mean, do I really need a new car to commute 5 miles a day each way? Yes, it would be nicer to drive something a little more fancy, and it certainly would be nice to have... power windows... or... hub caps... but do I really want to spend $15,000 or so on a late model used car? When I really think about it, I would rather invest the money in diversified index funds.

My wife volunteered to take some of the hassle out of the equation and she is the one that took my car to a AAA recommended independent repair shop. The total cost of the repairs was $689 including taxes. Not that bad. So, for now, the beast is staying. I don't like that car, but I like it better than writing a big fat check to some used car dealer. As long as the wheels stay on, me and blue Prizm will maintain a cordial relationship.

Friday, June 15, 2007

100th Post Anniversary

Money and Such has been in existence for just over three months. My first post was published on February 27, and explained why stock picking is a bad idea. Since then I have written posts on everything from credit cards, to real estate, to my favorite financial topic, retirement planning.

I am taking this opportunity to pause for a minute and to give myself a self congratulatory pat on the back. When I started this project, I did it as an experiment. I published a few websites in the past, but none had a regular posting schedule, and none required daily attention. I didn't know whether I could write a blog, and I wanted to find out.

At this point I have proven to myself that Money and Such is a project I can sustain and enjoy for the long term. I post about six times a week, unless I am traveling on business, in which case my posting schedule is a bit more erratic.

I have developed a small but loyal group of readers - about 30 in all - of which I am very proud, and recently I noticed that about 30% of my blog visitors get here through Google, when searching for financial information. I guess it's true - if you build it they will come. One of the ways I measure the success of Money and Such is by the number of the people that subscribe to my RSS feed, and by the end of the year I hope to reach the 100 subscriber mark. Help me out and subscribe, hint, hint.

So, what's in store for the future? I am going to strive to do even better. I will try to maintain a high standard of original and thoughtful content. Occasionally, I will try my hand at humor (hopefully the pain will be minimal). I will continue to write in favor of free trade; against most government intervention in the free markets; against stock picking; and very much in favor of long term financial planning. Most of all I will continue to really enjoy getting on my own personal soap box every day.

Starting next week, I will also periodically run theme weeks - an entire week of posts dedicated to a single theme. I noticed that many of my readers get to this blog looking for information about how to deal with financial challenges in their 20's, so that will be the theme for all my posts for next week, starting on Monday. Although I am now in my mid-thirties, my posts next week will discuss some of the financial decisions and mistakes that I made in my 20's. I will publish posts about:

1. Asset allocation in your 20's
2. Insurance in your 20's
3. Developing your career in your 20's
4. Buying vs. renting a house in your 20's; and finally
5. Planning for retirement in your 20's

I think it's going to be an interesting series.

Thank you for sticking with me for the first 100 posts. Hopefully, you'll continue to come back for more.

Fraud Alert from Citibank

Earlier this week we received a fraud alert letter from Citibank. The letter explained that the company's fraud detection system found a strange pattern of activity on our card and that we should contact them urgently.

I found it a bit strange that an urgent fraud alert would come to us via the U.S. postal service which, while very reliable, is not known as the most expedient method of communication in the 21st century.

Regardless, I picked up the phone and called the number that was given. As you pretty much expect when calling any corporate service center in America these days, I was greeted by an automatic system that asked me to say my account number aloud. The system recognized my spoken words without any trouble and connected me to an agent without any delay. Of course, the first question the agent asked me was to repeat my account number. There's gotta be a law against that.

Generally speaking, the agent was polite and professional, she even waited while I took a business call on my cell phone. I thought that keeping a customer service representative on hold for once was a deliciously ironic turn of events. She took it in good spirits though.

At the end of the day, the "fraud alert" was easily cleared up. It turns out that the automated system spotted what it thought was a double payment to my son's day care center, and wanted to clear that transaction with us. Unfortunately, this was not a double payment, it's called parents paying for summer camp.

All in all, this was a very good experience. Kudos to Citibank for being both vigilant and courteous in their service.

Thursday, June 14, 2007

Last Comic Standing & Taxes on the Financially Challenged

If you read my post from this morning, you know that it was prompted by last night's Last Comic Standing's use of text messaging joke scheme. If I had any doubts that this scheme was a money maker for the show, it's gone now...

After publishing my post this morning, fully one third of my blog's visitors who got to this website through Google, got here because they were searching for some variation on the theme of "Last Comic Standing text jokes"... If so many people are looking for the answers to these horrible jokes online, I bet that there is a substantial portion of the population that spent their money on text messages to do the same thing.

Taxes on the Financially Challenged

Last night I was watching an episode of Last Comic Standing. I don't know, I had nothing better to do, I guess. Watching television is a great thing to do if you want to learn about the latest and greatest in scams, schemes and useless innovations. Last Comic Standing introduced me to a brand new one. Just before each commercial break a slide appeared on the screen with the first part of a joke. Viewers were then asked to send a text message to a specific number to receive the punch line for that joke. Naturally, those text messages are subject to standard text messaging rates.

One example of a joke: "What's orange and sounds like a parrot?". If you are curious, the answer is "carrot". I Googled it. I am sure that at this point you are on the floor laughing.

First of all, what kind of a lame, 2nd grade joke is that? I could understand if the show was being aired at 8PM and was aimed at grade-schoolers, but the show ended at 11PM. I am pretty sure that anyone who would find that joke funny was already tucked away safely in bed with their teddy bear.

Second, isn't it weird that there are people who would spend a dime on a text message to get that horrible punch line? I am guessing that the show is making several thousand dollars or more on each of these five second spots. You find a large enough audience and there is always someone who will fork over some cash, regardless of what you are selling. My thinking is that this is one of many "taxes" levied on the financially challenged.

Here is a list of five other "taxes" that are levied on the financially inept:

1. The Lottery - according to Wikipedia, the odds of winning the California State Lottery jackpot are 41,416,353 to 1. Compare that to your chances of getting hit by lightning that are about 700,000 to 1, depending on who you believe.

2. Extended Warranty - this one is clearly a tax on the uninitiated. Extended warranties are often a company's biggest money maker. In many cases vendors make more on the warranty than they do on the product itself...

3. Credit Card Balances - I am not talking about those PF bloggers taking advantage of 0% teaser rates on new cards. I am talking about the folks who pay 18% APR to finance the new garden gnomes they just have to buy.

4. Time Shares - This one is a classic. My friend's father once purchased two, count them, two time share units. He bought the first for the family vacations, and the second... as an investment. Several years later, when he figured out that the time share units were costing him more money than they were saving him, he sold them both. Naturally, he lost money on the sale.

5. Keeping Large Balances in a Checking Account - talk about giving away money... why would people keep large positive balances in their checking acounts when they could be making about 5% in a high-yield money market account, with very little risk and complete liquidity?

Know about any other taxes on the financially challenged? Add them to the list.

Wednesday, June 13, 2007

Can Money Buy You Happiness?

A couple of days ago I read this article on Blue Print for Financial Prosperity. The title says it all: can money buy you happiness? I have three answers to this question. Two are smart-alecky and one is serious:

1. They say that money can't buy you happiness, but at least you can choose your own kind of misery. I can't remember exactly who said this, but I agree.

2. My uncle used to say: "it is better to be rich and healthy, than to be poor and sick". Can't argue with that one. Unfortunately, my uncle passed away last year. Guess he knew what he was talking about.

3. Personally, I subscribe to the following notion: money buys you freedom. Freedom is happiness. Well, at least to me it is. I agree that there are a few things that money cannot buy you, and without those it is often very hard to be happy. Health and family are two examples that come to mind. However, even for these two your prospects are much better if you have money. Just ask any one of the 46 million or so Americans without health insurance.

One of the things that I enjoy most in life is travel. Surprisingly, travel costs much less than most people think, especially if you are willing to rough it and spend your nights in a youth-hostel or even camping in someone's back yard. I spent two separate six month periods traveling around the world in this manner, and those were the happiest days of my life. The true cost of travel is the opportunity cost: money unearned, career opportunities missed and so forth. If and when I have enough money to bear these costs indefinitely without financial pain, from my perspective I will have achieved freedom, and will be well on my way to happiness.

So my answer is: no, money can't buy you happiness, but it can buy you freedom. For me, freedom to do what I love is the road to happiness.

Tuesday, June 12, 2007

Asset Allocation for June 2007

This weekend I spent some time tweaking our portfolio a little bit, to factor in money rolled-over from my wife's old 401(k) to her IRA (see this previous post for several reasons to roll-over an old 401(k) fund).

Here is our currect asset allocation:

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After the re-balancing, we are pretty close to our target allocation for the near term. Note that we are currently below our target exposure to the real estate market. We establish our exposure to this asset class through Vanguard's Total REIT Index fund (VGSIX). Our REIT investments have seen several years of double digit price appreciation and I think they are probably due for a substantial correction. In addition, I am still not comfortable that the real estate market has returned to sanity, so while I did not sell any of our current VGSIX holdings, I did not put any more money into that fund. In the longer term, probably within the next 24 months, it is my intention to raise our exposure to the real estate market segment to approximately 10% of our portfolio.

I am also considering creating a direct exposure of approximately 5% of the portfolio to a basket of diversified commodities (including precious metals, oil & gas, and agricultural commodities). I will only do so if I come to the conclusion that this will create some diversification benefit, i.e. I need to understand if and how commodity prices are correlated with the value of some of our other asset classes. If I decide to pursue this investment option it will be as a long term risk reduction strategy, not as a speculative move.

Any insights on the subject will be appreciated.

Monday, June 11, 2007

Attention: Frequent Flyer Miles Expiring...

Recently I received a letter from United Airlines - that's on top of the seven credit card offers I get from them every week. This specific message notified me that United was changing its frequent flier program such that unused miles expire after 18 months of inactivity in the account. That is, if you have not earned or redeemed miles during any 18 month period, kiss you miles good-bye.

For me this is not a big deal since I fly United for most of my business trips, and I travel frequently. My wife's account is not at risk, since she receives miles for our supermarket purchases at Safeway. However my son's miles are in danger of expiring, since we only fly with him rarely.

This morning I read this article from Money Changes Things, according to which American Airlines is following suit and having miles expire after 18 months of inactivity, instead of 36 months previously. Hey, if you can screw your customers why the hell not, right? I checked American's website, and sure enough the few miles that I have will expire at the end of this year. I very rarely fly on American, so I only have a few thousand miles there. I figured that if they are going away, I might as well spend them, so I signed up for a two year subscription to Business Week at a cost of 2,300 miles.

Just to be on the safe side, I also checked my miles over at Continental. Lo and behold, there is one righteous company among the wicked. Continental miles do not expire (!) although the company reserves the right to add an expiration date to its miles at any time. Strange. I bet this won't last and Continental too will follow its evil brethren.

Anyone knows what other airlines are doing with their frequent flier programs?

Sunday, June 10, 2007

Why Your Next Car Shouldn't be an "American" Car

A slightly off-topic post today.

It's no secret that American car manufacturers have been struggling for years, and have been losing ground to imported brands. Personally, I think that many foreign vehicles are a better value than American cars, particularly Japanese brands. Every car we have ever had, with one exception, has been either a Toyota or a Honda, and we have never had cause for complaint.

However, what I am writing about today is a (not so) new reason to avoid buying a car made by the so called "Big Three" U.S. car manufacturers. Big Three management and labor alike have been fighting an ongoing battle to prevent Congress from enacting new Corporate Average Fuel Economy ("CAFE") standards. The proposed rules will require automakers to improve gas mileage for the vehicles they sell, but apparently the Big Three couldn't care less about global warming or about the true cost of America's reliance on fossil fuels from questionable regimes. All they care about is selling more of their gas guzzling behemoths, and damn the rest of us.

Rick Wagoner, Chairman and CEO of GM testified recently before the House Energy and Commerce Committee. Here is a link to his full testimony, in which, while paying lip service to the environment, he makes it abundantly clear that GM is very much against the whole idea of CAFE standards. Instead he offers up such grand visions as bio fuel, hydrogen cars and electric vehicles. All visions that will take decades to become truly viable commercial products. Anything to prevent us from thinking about what can be done to reduce emissions today.

Another brilliant gentlemen, representing the United Auto Workers, the union representing... errr, auto workers... testified before the Senate Committee on Commerce, Science and Transportation. He went as far as to say:

"... because of the foregoing structural problems in the pending CAFE bills, the UAW urges the committee to reject these bills..."

This testimony too is filled with platitudes and suggestions for building a better system to control emissions, but the real intention is clear. The American auto industry is doing its best to reject environmental standards in any way they can.

They will (and are) telling you that better fuel economy will compromise safety. They will tell you that "the playing field" is tilted against U.S. car manufacturers and in favor of foreign manufacturers. They will tell you that the American auto industry will collapse. They will say anything that comes to mind, but all I hear is "we are dinosaurs and we will continue to object to any emissions standards".

If Toyota and Honda can produce more fuel efficient vehicles, its time those relics in Detroit wake up and smell the diesel. Until they do, I have no intention of buying a single car that they make. If you care about the environment, you should consider the same strategy.

Friday, June 08, 2007

Good and Bad Insurance

Yesterday I recommended this article from Plus 6. The article lists 5 types of insurance that you probably should not buy. I would like to propose a much simpler test to determine whether an insurance policy is worth buying. Ask yourself the following question: "could I afford to replace the insured item myself if I do not have insurance?" if your answer is positive, you don't need to buy insurance.

My philosophy is that insurance is designed to protect you from catastrophic damage that you cannot afford to bear on your own. It is a method of spreading an unacceptable but rare risk over the entire insured population. For example, most people should probably buy flood insurance or home owners insurance, simply because in the event of catastrophic damage to their home, they would not be able to buy a new home or repair their severely damaged house without the proceeds from their insurance. However, an extremely rich individual, say Warren Buffet for example, should not buy home owner's insurance. If disaster strikes, he can simply buy a new house without financial hardship.

The thing you need to understand about insurance companies is that they are sophisticated. They have an army of statisticians and actuaries working for them and they have a much better understanding of the risk that you are facing than you do. Another funny thing about insurance companies is that they are not in business to lose money, and for the most part they are for-profit organizations.

Combine these two insights and you will understand the following: if you buy insurance your insurance premium will, on average, be higher than your insurance pay-outs. The insurance company, using its superior access to information, knows what the real risk is and is able to compute the likelihood that they will have to pay a claim against the insurance. They also know the average magnitude of that claim. When they understand the expected pay-out for claims, they add a certain profit margin and quote you a price for the policy you are asking for.

Follow this logic: the very fact that a for profit corporation gives you an insurance quote means that they have a profit margin built into the deal. It also means that your expected damage or potential claim is lower than the price you are quoted. On average, you will pay more for insurance than you will get in claims. The difference is the insurance company's profit.

In conclusion, insurance is an important financial instrument. However, you should only insure risks that you cannot afford to self insure against . In my opinion, insurance is best used to hedge against really catastrophic events that you cannot deal with yourself. Examples of good insurance: life, health, disability, homeowner's, professional liability etc. Examples of bad insurance: extended warranty, vacation insurance, and other types of insurance covered in Plus 6's article.

I am guessing this article will create a little debate. I have certainly had many arguments with people over the years regarding this approach. Let's see what the blogosphere thinks.

Thursday, June 07, 2007

Recommended Articles & Recent Carnivals

Festival of Frugality #77 and Carnival of Personal Finance #103 are both up and running. A couple of good entries this week:

Plus 6 has an excellent article about all types of insurance you don't need. This is a great topic, which I will cover myself in the next few days. My philosophy: if you can afford to replace the insured item yourself, you are wasting money on insurance.

Accumulating Money wrote a superb piece about stock splits. It is a simple, straight forward explanation that is as good as anything I learned in business school. In essence, a stock split creates two (or more shares) where there was only one before. However, the price of the share is also split in the same way. Essentially, the value of your investment does not change with a stock split, however, stocks often increase in value after a stock split, for reasons covered in the article. Check it out for yourself.

Ask Mr. Credit Card brings up a question I have asked myself a number of times: how much money do you need before you consider yourself rich? I think the number for us is $5 million. This may be within reach for us, but will take us another 30 years to achieve...

Finally, Grad Money Matters is trying to figure out whether spending money on maid service is a waste of money. I am trying to figure out the same thing, but I think I am going to come down on the side of spending the money. We are both working hard enough with full time jobs and three kids to raise, we might as well outsource this little fun activity.

Wednesday, June 06, 2007

Where Does Your Gas Money Go?

There has been much talk in the blogosphere lately about boycotting gas companies, as a strategy for fighting high gas prices. Others have intelligently pointed out that delaying an inevitable gas purchase by a couple of days will do nothing to reduce overall demand, and therefore will not help to reduce prices. I have previously written that in my opinion, if anything, gas prices are too low...

Regardless of your position on the issue, I thought you might be interested to know where your gas money goes after you fork it over at the pump. On the way home last night I heard an intreresting news story on NPR that provided exactly that information. Briefly, the money is split as follows:

50% is the cost of crude oil
28% is the refining cost
14% pays for taxes
8% pays for distribution and marketing

If you are worried about your local gas station owner ripping you off and making a killing, you probably won't continue to think that way after you read that story. Turns out that your local gas station makes a rasor thin margin on the gas it sells and relies heavily on the sale of other items for its main source of profit.

Price gauging, if it exists, and I don't believe that it does, can only exist in the refining portion of the value chain. The retail gas business is highly price competitive. I mean, can you think of one other business that advertises its prices in foot high letters that you can read as you are driving down the freeway at 65 miles an hour? With such easily available information price competition is virtually inevitable.

If you have concerns about the high cost of gasoline, and want to place blame for that fact, look no further than the immutable law of supply and demand. When demand exceeds available supply the price rises until supply and demand come back into balance.

Of course, populist politicians on Capitol Hill and elsewhere don't care about market economics or about the truth. It is always easier to play to the masses and start pointless investigations about price gauging. If you think about it, it is pretty surprising in a country that prides itself on its capitalist system.

Tuesday, June 05, 2007

Investing in Emerging Markets

A good friend recently told me that he has decided to place a substantial portion of his portfolio in index funds that specialize in the Chinese market, as well as two other funds that specialize in other emerging markets. When I pointed out that the Chinese stock market has seen dramatic returns recently and that there is serious talk of a bubble (see this excellent post by 1st Million), my friend pointed out that in previous discussions I said that timing the market is a bad idea. He got me there. I did say it, and I believe it.

So how do I reconcile my position against market timing with my belief that my friend's investment carries a substantial amount of unnecessary risk? Well, I don't think that there is really a conflict. In opinion, market timing is not a viable strategy. You shouldn't sit on the fence and wait for a crash before you invest, because you never really know whether a crash is coming. However, taking a sudden and large position in a market that has seen outsized returns for years is probably not advisable either. Regardless of what you tell yourself, such a move probably contains some element of performance chasing. Ask yourself, would I really make the same move if the market lost 20% in the past year?

I guess I should re-state my concern about my friend's investment strategy: it's not that I have a problem with emerging market investments at this specific point in time for fear of a bubble (although the market looks overly ebullient to me). Rather, I am concerned about the speed and magnitude of the move. If my friend took a gradual, dollar-cost-averaging approach to entering this risky investment, I would consider it a much better strategy.

So here is my personal opinion on investing in emerging markets:

1. Investing in emerging markets is a good thing, when done as a part of a broader, adequately diversified investment strategy. Emerging markets have a large potential for growth over the long run, and over such periods their stock markets are also likely to do well. In fact, I would bet that over the really long run, say 20 to 30 years, most emerging market equity markets will outperform U.S. equity markets.

2. Investing in emerging markets is extremely risky. If you are going to invest in emerging markets, make sure that you have the stomach to hold on to your investments even if you lose 50% or more in a single year. Remember the crises in Russia, Thailand and Argentina in the late 90's? Will you be able to hold onto your investments through declines of that magnitude? If you can't weather the down markets, find a less risky investment.

3. Investing in emerging markets is a long term proposition. If you plan to withdraw and spend your money in only a few years, this type of investment is not for you. If your investment horizon is not sufficient and you happen to be hit by one of the massive bear markets that emerging markets are notorious for, you might not be able to recover your losses.

4. Because of the risk profile I outlined above, move into the market slowly. There is nothing nastier than putting a large chunk of change in the market only to see much of it go up in smoke within a few days. If you want to get into the market, set a target time line of a year or so to complete your move, and complete it over a number of trades spaced a few months apart. That will give you some protection against sudden downwards shifts in the market.

Monday, June 04, 2007

Protecting Your Portfolio From a Falling Dollar

The Dollar has been declining against some major currencies for some time. The reasons for this are many, and I certainly don't pretend to understand all of them, however the causes include the U.S. trade deficit; the federal budget deficit; and the expectation that the Fed will begin lowering interest rates soon vs. rising interest rates elsewhere in the world.

Since your income and spending are both in U.S. Dollars, should you care about a falling Dollar? Absolutely. For one thing, while you pay for your purchases in Dollars, much of what you buy is produced abroad and is imported to this country. With a falling Dollar, the price of those imports will increase and you will pay more at the store. For another, if you travel abroad like I recently did, you will immediately notice that things are more expensive since your Dollars buy less local currency. However, the thing that I am most vigilant about is the impact of a falling Dollar on our investment portfolio.

It is no secret that investors from around the world put their money into U.S. securities and assets. Stocks, bonds, and real estate all depend to some extent on foreign money. If the Dollar continues to fall, foreign investors will see their U.S. investments decline when denominated in their own currencies. If they no longer get the returns that they expect, these investors could flee the market, and in so doing cause asset prices to decline. On the flip side, companies that are publicly traded in the U.S. and that derive a substantial portion of their income abroad, are actually likely to benefit from a decline in the Dollar. Goods and services exported from the U.S. will appear to be cheaper to foreign buyers who will be paying for them in their own local currencies. Hence, U.S. exporters are likely to sell more and earn more, possibly causing their stock prices to appreciate.

So, what am I doing to protect us from a further decline in the value of the Dollar. In a word: nothing. I already did everything that I think needs to be done and I am sticking to my strategy. This strategy is a simple one: (i) diversify internationally; (ii) diversify locally. Currently, close to 25% of our portfolio is invested in highly diversified international index funds. I believe that a decline in the Dollar is a net positive for these assets. A highly diversified portfolio of U.S. companies is also some hedge against a falling Dollar, since many of those companies derive a substantial portion of their revenue from exports, and a falling Dollar will improve the fortunes of exporting companies.

I must admit that our bond portfolio is not internationally diversified, however, bonds only account for 12% of our portfolio so the impact of diversification is unlikely to be a be a dramatic one, especially in relatively stable assets as bonds.

Finally, if you are planning a sizable purchase in foreign currency, you may want to consider hedging yourself against exchange rate fluctuations by buying the currency in which your obligation is denominated. For example, if you are planning a big trip to Europe this summer, it might not be a bad idea to buy your Euros right now.

Saturday, June 02, 2007

Free Personal Finance Planning Tools

Microsoft is the company many love to hate. However, what you may not know is that Microsoft offers a wealth of free personal finance tools and templates for Excel. Here is a list of five good ones, but many, many more are available for free download on the Microsoft Office home page:

1. Savings Estimator Budget for a Specific Period - are you saving for a specific goal? This template will tell you how much you need to save during each period to meet your goal.

2. Retirement Budget - how much do you need for retirement? This template will help you to estimate if your planned income will be sufficient to meet your anticipated expenses.

3. Personal Monthly Budget - you need to build a budget but don't know where to start? This template would be a good initial step.

4. Wedding Budget - if you are planning your wedding you know that there are many expenses to keep track of - and boy do they pile-up quickly. This tool can help you plan your wedding and stick to that budget.

5. Personal Net Worth Calculator - want to figure out your net worth? This simple and elegant tool might come in handy.

Friday, June 01, 2007

A High Class Dude

One of my regular readers and commenters, Plonkee of Plonkee Money fame who hails from the great land of England, posted a link on his blog to a NY Times tool that purports to tell you which social class you belong to based on your occupation, your education, your income and your net worth.

Well, you will all be pleased to know that you are in the presence of a high class dude. From now on I shall only answer to the name Sir Shadox!

So, what makes me a member of the nobility you ask? Well, apparently my graduate degree puts me at the 97% percentile of the population. Like anyone gives a damn. On the other hand, my noble profession in marketing management only puts me in the 63% percentile in terms of prestige. Apparently, I get no respect. To which I can only say, thank god I am not a telemarketer which would have barely got me to the 21% percentile. For privacy reasons I will leave out my income and net worth evaluations, but over all I just made it into the top quintile of the population. Hence, Sir Shadox. If I seem somewhat haughty from now on, you know why.

This is an amusing tool. Give it a shot. Don't forget to check out the other tabs available on the tool that explore interesting aspects of income mobility, across countries and across generations.