Friday, August 31, 2007
Apparently, she paid our full balance off as we do every month. However, she paid the bill on the last day of the cycle at a few minutes after 9 PM PDT. Apparently, the billing cycle is calculated according to Eastern Time not to according to our local time zone. The good folks at Citibank, and by good I mean predatory, charged us a total of $82 in late fees and finance charges for supposedly paying our bill 7 minutes late. I think that if you were to calculate the APR on this supposed "7 minute loan" you would find that Citibank tried to charge us the equivalent of 4 million percent per year in interest. My wife, being the take-no-crap fighter that she is, called them up and gave them a good piece of her mind, at which point they relented and reversed this travesty.
Seriously, if you feel that the credit card companies are out to get you, it's probably because they are. Seems we are not alone in our battle against the evil credit card companies. Here is another post on the subject that I came across a few days ago. Jeff of Jethro's World simply escalated the fight until the credit card company (Chase in his case) cried "uncle".
It is good that some of us are fighting back against these predatory practices, but I have to wonder how many people are just paying these fees without a fight? Once again, where is Congress when you actually need them?
Thursday, August 30, 2007
Late last night I returned from a business trip to several mid-western cities. Accompanying me on this trip was a good friend and colleague. Our trip involved a lot of driving around and so we had a lot of time to chat. If you are going to spend much time with a personal finance blogger, the conversation will eventually work its way towards the topic of personal finance. It's the nature of the beast. During one of these long drives I was commenting to my friend about the extreme volatility we have been seeing in the market in recent days, I also commented on the fact that I think that the U.S. economy is headed towards a recession. My friend very calmly responded that he is not concerned about the stock market, because his entire portfolio is invested in cash. Then, completely disregarding my incredulous stare, he proceeded to encourage me to follow the same strategy. I think I will stick with a more sane asset allocation.
My colleague is about 15 years older than I am, in his very early fifties. He is a well compensated professional at the top of his career, however, he still has many years to go before retirement, which is why I was very puzzled by his investment strategy (or lack thereof). When I asked him about it he simply said that he is very risk averse, and following this ultra-conservative strategy allows him to sleep peacefully at night.
I have previously commented about the need to understand your true level of risk tolerance. Going above this level is a sure fire way to make stupid investment decisions, such as selling at the worst possible time. However, I think that my friend's complete lack of tolerance for risk is the riskiest strategy of all. With the meager returns you can generate in the money market or by buying CDs, you would need to be a truly copious saver to sock away enough money to allow for a comfortable retirement. I think my friend is suffering from a particularly nasty strain of the fear of investing disease.
As a final comment, I would like add that even though I think that we are on our way to a recession, I am holding on to our stock positions and will continue to do so. There are two main reasons for this. First, selling my stock portfolio would immediately trigger a massive capital gains tax liability. I may lose money by staying in the market, but I am guaranteed to lose money to greedy Uncle Sam if I bail. Second, while I think that we are headed for tough economic times, I do not have a crystal ball - let me tell you a secret, neither does anyone else. So while I trust my intuition and my training, I never try to out-guess the collective wisdom of hundreds of millions of investors. I may be smart, but I am not THAT smart. Very few people are.
Tuesday, August 28, 2007
Cheap Healthy Good has a comprehensive article about saving money AND eating healthy while traveling. I happen to be on a business trip as I am writing these lines and I can tell you that whenever I travel on business, my eating habits go down the drain. The combination of crappy and expensive airport food, dinners with clients and snacks I buy in hotel gift stores is a really horrible mix. I really should reform my ways in this category.
Million Dollar Journey is talking about how to find out if the charity you are contributing to is wasting your money on administrative expenses. This is a very important topic. There are a number of websites which help would be philanthropists to evaluate the various charity options available. These include: Charity Navigator and Give.org. As long as we are on the subject of charity, check out Heifer International. It is an innovative and impactful charity organization.
Cash Money Life is currently running a series about the process of deciding whether to pursue an MBA, and if so which school to choose. As someone who has already gotten his MBA, I find this series of posts interesting. I also put together a small website on the same topic. You can find it here.
Finally, Home Finance Freedom provides some interesting information about understanding the data contained in the Federal Reserve's Survey of Consumer Finances. This is the source for much cited numbers about what Americans' net worth actually is.
I will add additional article recommendations later this week.
Monday, August 27, 2007
I found the notion intriguing and played around with the numbers a little bit. Here is what I came up with: assuming we spend 80% of what we make (which is pretty close to the mark), achieve a return on our invested capital of 8% per year, inflation averages at a rate of 3% per year and we gain a pay increase of 4% per year, my wife and I will be achieving our cross over point in... wait for it... 12 years. Financial freedom, here we come! Or, maybe not so fast.
Here's the rub. While the crossover theory is sound in principle, it fails to take into account a number of parameters:
1. Inflation - say we were to get to our cross-over point and then stop working. At that point our income from investment would equal our expenses and we would no longer be adding to our savings, nor would we, in theory, be diminishing them. However, inflation is a nasty beast. Just because we stop saving and investing, doesn't mean that prices will remain fixed. In fact to the two eternal truths (death and taxes) we should probably add a third: inflation. With time inflation would erode the purchasing power of our investment income, and back to work we go (with very few hi-hoes).
2. Market Fluctuations - while our portfolio can reasonably be expected to return 8% annually over the long term, there are no guarantees that we will not be hitting any short term bear markets. Assume we stop working at our crossover point, and the very next year the market tanks and goes does 20%. If at that point we continue to draw down our investment income at the previous rate, the value of our portfolio will erode very quickly. Once again if you listen carefully, you can hear seven dwarves singing a much too cheerful song in the background.
3. Additional Expenses - if indeed we reach our crossover point in 12 years and choose to retire, we will be many years away from qualifying for medicare. Right now our medical insurance costs are largely covered by our employers, but if we need to pay for medical insurance ourselves, that crossover point is probably a little bit farther into the future. Will someone shut-up those darn dwarves already?
4. Asset Allocation - while we are young, both working and have no immediate need of our retirement assets, we can reasonably expect our investments to yield something like 8% a year on average. However, as the time comes for drawing down on those assets to support our living expenses, a more conservative investment strategy will probably be required, and the more conservative your investment the lower the average return you can expect. Once again, our crossover point just got a bit farther away.
So, is there no hope? On the contrary, there's big hope. As we close in on the cross-over point, we will have amassed a substantial asset base, and this asset base will be compounding at a pretty impressive rate. We may not be able to wave our bosses good-bye quite yet, but we will be well on our way and with just a few more years of hard work we will be able to kiss the corporate life good-bye.
Interestingly, I actually enjoy my work and as of today I am not in a rush to leave it behind me. Still, it would be nice to know that the option is there, if I choose to use it.
For a detailed discussion of the cross-over concept, be sure to visit The Simple Dollar.
Sunday, August 26, 2007
However, not all IPOs have a happy ending. In fact, a number of academic studies have shown that for the first 3 to 5 years after an IPO, shares of newly public companies tend to underperform the general market. See for example this article, and this excerpt. This is such a well known phenomenon that I first heard about it when I took my very first finance class in business school.
My friend did very well for himself, but I am not clamouring for a share of that pie. In fact, I am going to stick to my tried and true indexing strategy and not try to outperform the general market. While my friend seems to have beat the odds so far, on average he is playing a game that is stacked against him. Remember, some people also win money at the slot machines, at the roulette table or by playing their state lottery, but that doesn't mean that playing those games is a prudent investment strategy.
Thanks for the offer, but I'll take my equity investments slow, steady and well diversified.
Saturday, August 25, 2007
I would like to take the opportunity to thank my regular readers (as well as all the newbies) for putting up with my shenanigans and for coming back again and again to read my articles. Writing Money and Such for the past several months has turned into a fun part of my daily routine, and I have you to thank for it.
Here's to the future.
As with any other credit card, when the AmEx card arrives via mail it requires activation over the phone. When I called to activate my card I was asked to enter my card number at which point I got something similar to the following message: "Thank you for choosing American Express, while your card is being activated let us tell you about the following great offer..." This was followed by an approximately one minute inane commercial for the company's credit protection services. The thing that really gets my goat is that I know that this is an unnecessary delay - the actual activation of the card takes a second or two, if that. It is a simple database query. The use of the phrase "while your card is being activated" is contrived, and should be replaced by something like "While we are holding you hostage..."
I find this method of delivering a marketing message to be rude and obnoxious. I felt like AmEx was holding me hostage to their marketing message. Would my card be activated if I simply hung up the phone? After I made the call, I remembered that I ran into similar practices with Citibank when I activated my card with them. However, if I remember correctly, when I turned down Citibank's terrible offer (by pressing the appropriate key on my phone), I got something like "Are you sure that you want to decline this offer", followed by another 20 seconds of marketing drivel. At least AmEx did not sink to that low.
I don't care if those companies are advertising free money, whatever it is that they are selling, I am not buying. Companies must be made to understand that if they treat their customers like their property, try to force feed us their marketing messages or simply give us lousy service, we will retaliate against them by using our economic power.
In the course of the simple transaction of transitioning me from an expired card to a new one, AmEx has managed to turn me from a very happy long time customer, into an unhappy customer who writes blog entries about their unsatisfactory level of service. I am not sure that this is the outcome that they were going for.
Thursday, August 23, 2007
The number of people happy with their 401K plans surprised me. I was expecting a distinct majority of people that would vote against their employers' plans, especially among more engaged investors, a group which is probably over represented in the readership of this blog. Nevertheless, the poll results clearly show that a large minority of workers are unhappy with their employers' plans. Why is that?
As a member of my company's 401K committee, let me take a few educated guesses:
1. Limited Options - many people are unhappy with the type or selection of investment options made available to them in their employer's 401K plan. Whenever the topic of our retirement plan comes up in a discussion with my colleagues, the number one request I get is: "can you add XYZ fund?"
The truth is that employers are unable to accommodate all employee requests in this area. There is a substantial management cost associated with administering the plans, and these costs increase as the number of investment options in the plan goes up. If we were to add every investment option people are asking for, there would be hundreds of different funds in our plan.
In addition, we must also consider those employees that are less comfortable with investing. We find that when such employees are faced with too many choices they either make bad financial decisions, or decide to avoid the issue altogether by not contributing to the plan.
So how do we solve the problem? We offer people a self directed 401K option. You want more options, you got them.
2. Lack of Transparency - OK. Maybe this is just my own pet peeve, but it truly annoys me that even as a member of my company's 401K committee I cannot get a full grasp on the costs our plan participants are incurring. Sadly, the financial institutions that sell and administer these plans go out of their way to make things difficult to understand, and complex to follow. They figure that if you knew the true costs you are paying you may be less inclined to trust your money to them.
So how do we solve the problem? My company is trying to improve the situation by taking the long road towards switching 401K providers - so far, it has taken us eight months (and counting...)
3. Matching - many companies offer only token matching of employee contributions. I have previously worked for a company that did not offer any matching whatsoever. I would not repeat that mistake again today. The nice thing about the match (in addition to the fact that it is free money) is that it goes on top of the employee's $15,500 annual contribution cap. By the way, as far as I am concerned, this is not fair towards those employees whose companies do not offer a match. Why should the government care who is the entity putting the money into the account?
I have previously stated that as far as I am concerned, the 401K system is flawed and should be replaced. I stand by that statement.
Are you unhappy with your company's 401K plan? If so, why?
Wednesday, August 22, 2007
Contributing to the sharp decline of our portfolio were our international and real-estate holdings. Vanguard's Total International Index has declined over 11% from its peak earlier this year, while Vanguard's Total REIT Index has declined over 20% from its peak, putting them firmly in correction territory and bear territory, respectively.
Here is our asset allocation as of August 21:
The past couple of months have not been a fun time to be in the stock market, but they have also not been that terrible for long term investors such as myself. Generally speaking, I am happy with our current portfolio strategy and feel that it is working well. For example, during the rough periods, our small bond position has been able to slightly dampen the volatility of our portfolio, as it was intended to do. In addition, while it is true that our real estate and international investments have taken a big hit recently, these sectors have also dramatically outperformed the U.S. stock market in recent years, so we have nothing to complain about. Essentially, our diversification strategy is performing as expected.
We will wait a little bit longer before jumping into the market with more money. When we do, we will increase our positions in both the real estate and the international asset classes to bring them more in-line with our long term asset allocation plan. As I previously mentioned, I try to re-balance our asset allocation by buying more of asset classes that have been under-performing, rather than by selling asset classes that have seen larger returns. This allows me to maintain the needed allocation, without triggering any tax consequences. You can read more about this strategy in one of my previous posts.
Tuesday, August 21, 2007
My favorite article in this week's Carnival is the one offered by Money and Values, covering the issue of mutual fund proxy voting records. As large shareholders mutual funds can have a big impact on corporate policy, but how do they actually vote on shareholder resolutions? Check out the article.
FiveCentNickel has a short and sweet post about how it's OK to Spend Money. Us PF blogger types sometimes forget that money is for spending. Yes, you need to spend prudently and make sure you save for what you really need, but when you come right down to it, denying yourself all pleasure just for the sake of hoarding cash is no way to live your life. The answer, as always, has everything to do with moderation.
Gather Little by Little offers a post about how to make your money greener, that is more environmentally friendly. I am afraid I can't claim to follow any of the advice in the article. Time for some re-thinking?
Finally, Art Dinkin offers his take on the question of whether one should roll-over his retirement savings when leaving his employer. My take on the issue is: absolutely. Here are 6 reasons to roll-over your 401K.
My article regarding the new robot I purchased for frequent flyer miles was included in this week's Carnival of Money Stories. Another interesting article that was included in the carnival was offered by My Wealth Builder and discusses signs that indicate that you are being considered for a promotion. Also note the Carnival of Debt Management which was published this week by Debt Consolidation Lowdown
Monday, August 20, 2007
There are few things more disappointing or discouraging from a professional perspective than asking for a raise and getting a "No" for your troubles. How do you take that "No" and move forward?
1. Don't Lash Out - the worst thing you can possibly do is react to a "no" by lashing out at your boss or acting out. You are always being evaluated, and your reaction to the bad news is one of those times. Express your disappointment in no uncertain terms, but do it in a dignified and professional manner.
2. Seek Feedback - your best chance of reversing the decision is to understand why it was made in the first place. Is your company having budgetary issues? Are your superiors unhappy with your performance? Did you not achieve certain goals you were expected to attain? The first step to getting what you need, is to understand why you did not get it to begin with. Negative feedback can be a bitch to take, but it is probably the most important type of feedback you can get. Once you know the reason you did not receive the raise, you can plan your next moves.
3. Build a Plan - After you understand the reason you were turned down, you can move to the next step. Act on the information you gained and build a plan to reverse the decision. Speak with your boss candidly and offer a specific set of actions you will take to improve your performance and attain the goals you need to meet. Make sure you include a deadline by which you will meet each of the goals. When you speak with your boss, try to get him or her to commit to supporting your request for a raise if you achieve the targets you laid-out. After you speak with your boss, put your plan in writing and send it to him or her via e-mail. It is amazing how much written documents get taken more seriously than mere conversations.
4. Find a New Place in the Company - it is possible that your current position in the company will not allow you to advance your career or receive the raise you want. If you truly feel that this is the case, and if your organization is large enough to allow such a move, look for a new position within the company. Sometimes all it takes is a new boss or a new set of responsibilities to allow you to take that next step.
5. Find a New Job - moving to a new job is always a risky proposition. For one thing, nothing guarantees that your new company will work out any better than your last one. However, sometimes the only way you will get your dues is by making a move.
Saturday, August 18, 2007
Yesterday my wife received her new card in the mail, and since I did not receive mine I called American Express to find out what the reason might be. Well, according to the American Express representative the card was mailed to a different address. Since we have been living in our current house for the past four years, alarm bells in my head went off immediately. Could this be the beginning of a nasty identity theft case?
The first thing I did was to ask the representative what address my new card was sent to. He responded that due to security concerns he was not allowed to disclose that information to me. However, he said he could send me a new card immediately to the correct address. I then proceeded to point out the idiocy of his position - he would not give me the current address the card was sent to because he was, quote "not able to positively identify me", but if I wanted to get a new card all I needed to do was simply give him an address at which to send me one!
I realize that the representative was just following company policy, but what kind of moronic policy is that? If you have concerns about my identity, why would you let me make transactions with the card, or worse, send me a new card to a random address I give you?
I tried a different tactic. I asked him if he could tell me when the address was changed. He said yes, and gave me a date in 2003. The date he gave was the date we moved to our current address. The one at which we have been receiving our statements all these years, and at which my wife just received her new card. I put two and two together, and asked him if he could confirm that the address they had mailed the card to is our old address. He confirmed that this was the case. So it appears that my new card was sent to an address from which I moved 4 years ago.
At this point I had only one question left: if somebody changes the address on his account, does American Express send some sort of notification of the address change transaction to the old address? His answer was: "no".
OK, identity thieves of the world. It appears that American Express is really trying to help you out. By corporate policy it seems that everyone who has the account number can call and change the address on the account, and the company will not even bother to inform the card owner of the change. In addition, if the card owner calls to find out where his information is being sent, the company will not share this information because of... security concerns.
Riddle me this: how can the same company produce a great product like the Blue card, while simultaneously producing the most screwed up and idiotic security policy ever devised. Seriously, American Express, buy a clue.
The consensus seems to be that we're in for a rough ride for some time to come.
My conclusion is pretty much aligned with that of Ben Stein: invest in indexes and ignore the ups and downs of the market. Still, while I will continue to hold onto my existing investments indefinitely, I will not be putting any new money into the market (expect my 401K contributions) until some measure of calmness returns to the markets.
A couple of years ago many of the airlines started offering merchandise for miles. Those programs started out with some really low quality stuff, but in recent months the products offered have become much more interesting. Stuff that you would actually want to buy yourself.
Anyway, last week I went on the United frequent flyer shop and ordered a Roomba - a high tech vacuuming robot - for the price of 37,500 miles. Let's say that the average domestic flight on United costs $300, with advance purchase. The number of miles that I spent could have bought me a trip and a half to anywhere in the country, so essentially I bought the Roomba for about $450.
You can buy the Roomba model that I purchased for $279 directly from the manufacturer. Given those numbers it looks like I made a really bad deal, by paying about 60% more for the robot than I needed to. However, what good are my miles if can't spend them? As far as I am concerned, unspent miles are useless, and real dollars left unspent are worth their weight in... pennies.
Regardless, I am excited at the prospect of getting this new robot. For one thing, I am a gadget freak. If it's robot, I want it. Second, the prospect of leaving home in the morning and returning to a freshly vacuumed house without having to do anything about it is... appealing. With three small kids who get food all over the floor, every day, that's one fewer annoying chores we need to worry about.
Thursday, August 16, 2007
Unless you have been under a rock these past few weeks, you are sure to have heard the term "credit crunch". Let's take a minute and explain what it is, and why everyone is talking about it these days.
Credit is the fuel that makes the financial system go. Just as individuals borrow money, whether through mortgages, credit cards or student loans, so do companies. Like individuals, companies use the loans that they take to finance their operations and growth plans. In recent years, financing was pretty easy to come by. Interest rates were low and borrowing was inexpensive - you know this yourself from all the refinancing SPAM you have no doubt been receiving. However, all of a sudden the financial climate has changed and lenders are much less eager to part with their cash.
Why is this happening? Enter our good friends from the sub-prime mortgage market. When money was cheap to borrow and house prices were booming, lenders made all sorts of questionable loans to people who are now unable to repay them. Many banks and other financial institutions that owned large portfolios of such questionable loans all of a sudden found themselves holding the bag, and the bag is sort of... empty of cash.
So what happens next? As we all remember, financial markets tend to over react. All of a sudden lenders become more cautious. Where before they would throw money at anything that moved, now they may be reluctant to give out loans even to well qualified borrowers and to solid companies. When there are fewer lenders willing to hand out the dough, the price of taking out a loan goes way up. This is because interest rates, like every other commodity in a free market, are subject to the law of supply and demand.
All of a sudden even people with good credit find it harder or more expensive to borrow money, and even companies with solid plans cannot find money to finance their growth. This is known as a credit crunch. When that happens, less money gets invested in the economy, companies hire fewer people because they are not growing, and the economy itself may sink into recession. So even though you may not be a sub-prime borrower yourself, the sub-prime crisis may impact you directly. It may be tougher to find a job, more expensive to buy a house, and much more difficult to start a business. Fun times may be ahead.
So, are we there yet? Has the economy slipped into recession? The experts say that no. Me, I think that we are headed in that direction and we are in for some tough times ahead. For now, people are expecting this to be a short, temporary bump in an otherwise solid economy. I don't believe that is the case. Humans have a tendency towards optimism. This sort of downturn has a nasty habit of starting out small and picking up steam on the way down. It's been a while since our last recession, seems like we may be due for one right about now.
Wednesday, August 15, 2007
Shows you what I know. Apparently there are several other sites that offer free appraisal tools for your house. I tried a couple and none were as simple to use or offered as many features as Zillow, but interestingly, they all offered different appraisals for our house.
Anyway, check out those sites and be sure to check out The Dough Roller while you are at it. It's a good blog.
Last week I wrote a post about How to Ask for (Another) Raise, which explored my strategy for increasing my compensation and my discussions about the topic with my boss. Today's article is a mirror image of that other post. It's about one of my team members asking me for a raise. This article may seem a little heartless to some of my readers, but I assure you, what I describe below is the way that the vast majority of managers think about the topic of salary discussions with their team members.
Here are some of the things that you should never do when asking your boss for a raise. Believe it or not, the team member that I am referring to has made every one of these errors:
1. Don't Give Me Ultimatums - making statements like "it's now or never", give your boss an incentive to say: "OK, never". Do you seriously think that threatening me is going to increase the chances that I will fight for your raise? If you want to leave, leave. Don't tell me you are going to do so.
2. Don't Bug Me - do you think that you are helping your case by bringing up the topic of a pay increase every time you get me alone for 3 seconds? Instead of making your case, you are simply antagonizing me. There is a time and a place for everything, and compulsively raising the issue twice a week is not the way to go.
3. Your Financial Issues are Not My Concern - a manager's job is to manage his team. One of his responsibilities is making sure that his team members are well compensated, in accordance with their performance. Notice I didn't say in accordance with their financial challenges or personal needs. Happily, we are living in a capitalist society, not a communist one. The fact that you decided to buy a house, are thinking of buying a new car or are planning to have another child, are completely irrelevant to me when we are discussing your compensation. I don't hand out raises to those that most need them, I award raises to those on my team who perform best and that I most want to retain.
4. Do Your Homework - before you ask me for a raise do your homework and figure out your market value. Seriously, have you heard of salary.com? Also, before we talk turkey, do you have a good sense of what I think of your performance? Are you considered a star performer or are you scraping by? If you are asking for higher than average market pay for your level of responsibility and performance, all I see is someone who has an inflated and unrealistic self image.
5. Don't Gossip - if another manager comes to me and tells me that you have been speaking to him about your salary negotiations, you are not going on my list of "people to help". If my boss tells me that you have been going directly to her to ask about your compensation, you are not winning me as an ally. In case you missed it, the previous sentence was an understatement.
Here is the bottom line. Finding, recruiting and training a new employee to replace a perfectly good team member is a huge headache for a manager. If your manager has come to rely on your expertise and advice, he will do everything he can to keep you on his team. That means he is very likely to fight for the raise that you are requesting. Moreover, your manager may have a personal stake in getting you the highest raise possible. If my team is well compensated, I am likely to be even better compensated. I have some skin in that game.
Simultaneously, employees should recognize that managers never have enough budget for everything they want to accomplish or for all the pay increase requests they receive. As such, managers need to make some hard choices. When given the choice between giving a raise to a star-performer, who has made a good case for his salary increase; and giving a raise to a complaining, threatening employee who goes above your head or gossips with other managers, who do you think will be getting that increase?
Tuesday, August 14, 2007
Let's start with this week's Festival of Frugality, hosted by Frugal for Life. Check this out, Dawn has my post about The Real Price of Cheap Books categorized under the section of the Festival titled Blogs I Have Never Seen Before, which is cool with me except for the fact that FoF was on Frugal for Life last week too, and I had a post in that one as well. No biggy.
Anyway, here are my picks from this week's Festival:
The Happy Rock posted this excellent article about the best times on the calendar to buy certain products. The source for the information is Consumer Reports. According to the article, the best day of the week to buy a flight ticket is Wednesday, since that is when unsold tickets for the next week go on sale. Then again, if you are like me you buy your business trip tickets at the last minute (because you don't have a choice), and if you are going on vacation you buy your tickets waaaay in advance, so the Wednesday rule doesn't help me much.
FitBuff has an article about not buying bottled water any more. He figures that this move will save him $60 a month. I think the bottled water industry is nothing but a sham. The water in this country is safe. In addition, from an environmental perspective, bottling and trucking all those millions of gallons of water per day, means a lot more CO2 in the atmosphere. Bottled water is not only a bad idea financially, it is also bad for the environment.
Money and Values offers an article about a zero cost star gazing adventure. As an amateur star gazer, I think Penny's idea is an excellent one. I would also like to add a couple of suggestions of my own. A decent pair of binoculars really enhance a star-gazing experience. If you want an even more interesting experience, in pretty much every region of the country you can find an amateur astronomy club. Most of these hold public star-parties in which the public is invited to participate free of charge. Many of these clubs also allow members to borrow some pretty impressive telescopes, and joining a club in my expensive area of the country costs something like $20 per year. Finally, if you are going to venture out at night, take a star map with you. Here is a link to a really good one.
This week's Carnival of Personal Finance is hosted by My Open Wallet, and my article titled Asking for (Another) Raise was selected Editor's Pick #4. I am honored. Anyway, I must admit that many of the entries in this week's Carnival just seemed repetitive to me. How many articles about growing your savings or credit card arbitrage can you read before you get bored? Given the option, I always read the original articles and skip the rest. Here are a few pieces I found original and fresh:
Sid from The Money Well gives excellent advice about how to decide whether to do something yourself or hire somebody else to do the job. Ask yourself the following question: as an unbiased third party, would you hire yourself to do the job? Very well put. In my case, that's exactly the reason I let an accountant do my taxes, let a mechanic change my oil and let a professional clean our carpets (my laziness is also a strong component of that last decision).
Breaking the Shackles comes out against the buy and hold strategy of investing. I am strongly on the opposite side on this one. A host of academic studies show that the average trader has a lower return than an investor who buys and holds an index fund. In addition, other studies have shown that the more you trade the LOWER your return - trading less is one of the reasons that women investors tend to show higher returns than their male counterparts. Here is one of my previous articles, arguing for a long term buy and hold strategy based on index funds. In fact, this was the first post I ever wrote...
Finally, Financial Reference has this great article titled simply Causation. This is my favorite article of the week. It's short and to the point. It also shows you how much garbage financial advice you can find out there.
Also, the Carnival of Home Owners posted this morning. It includes my article How Much is Your House Worth?
Sunday, August 12, 2007
The first, is a story I wrote last week, titled How Much is Your House Worth? The article discusses a website called Zillow, which I just discovered last week but that apparently has been around for a while. The site purports to provide free estimates of real-estate values, however one of the things that I was concerned about was the accuracy of the data on the site. Well, it turns out that the Wall Street Journal went and took a sample of data from Zillow and tested it against some real world sales. The verdict? In most cases Zillow is pretty darn accurate, however there is the occasional spectacular flame-out. It's an interesting article and worth a quick read.
The second story on which I want to follow-up is one that I wrote last month titled A Payday Loan Dilemma. The company that originally contacted me and asked to advertise on my blog contacted me again last week. This time they actually left a comment in response to my original article. Here is the full text of the comment:
"It is true that cash advances and payday loans are high risk loans – for both the borrower and the lender. However, sometimes, these types of payday loans are unavoidable. Some people are unable to set up there [Sic] own emergency fund, and while responsible and making decent money, find themselves in a real bind from time to time. If these types of loans are understood and used for their intended purpose, they can be helpful and can give a person a “shot in the arm” financially to help keep up. Of course there are risks involved, which is why any borrower should always read through the site and loan agreement before taking the loan. Always ask questions. Additionally, if they do get the loan, it is best to pay it off in full or in as few payments as possible because of the interest rates."
As I mentioned in my original post, I agree that Payday loan companies do fill some sort of necessary economic niche, but 968% per year? Come on! I am sure that they could make do with a modest interest rate in the low 200s. I don't expect capitalists to be altruists. A company is in business to make money and does not really need to justify the price it is charging for its services, so long as it is facing real competition and its customers are willing to pay the price. However, I dislike companies that try to dress up their own economic interest in the guise of a public service. I also dislike companies that pretend to tell consumers to not buy their goods and services. Those always remind me of the tobacco industry. Seriously, if you don't want people to buy your product... don't sell it. Don't like this solution? I didn't think so.
Specifically, while the comment above suggests that users of payday loans should use them for their "intended purpose" and pay them off as quickly as possible. However, the company in question, like all others in this industry, profits when people do not take this sort of advice. So why the pretense?
Friday, August 10, 2007
1. Thank the Boss - as someone who runs a team, I know that if I make an effort for one of my team members, it is personally important to me that the employee acknowledge my efforts on his behalf. Even though I did not get everything I was asking for, it is clear to me that my boss went to bat for me, pushed for my interests and essentially put her credibility behind my request. Therefore, when my boss officially told me of the amount of the raise and gave me the paperwork (about a week after I received the actual raise in my paycheck), I thanked her warmly and shook her hand. I candidly told her that I appreciated her hard work on my behalf and thanked her for what she was able to obtain for me. Bosses are humans too and like every other person on the planet, they appreciate it when their work is recognized.
2. Do Not Immediately Ask for Another Raise - I strongly feel that it is not appropriate to express outright dissatisfaction with a raise you just received when speaking with your boss. That would send the wrong message. Even worse, it would be counter-productive since your boss would get the feeling that you do not appreciate his or her efforts on your behalf. Why try do to more for you if all they get is a sour face?
3. Setting Expectations is OK - although it is not a good idea to ask for another increase as you are receiving news of your raise, it is very much OK to set the correct expectations, as long as you do so professionally, courteously and in a positive manner. When my boss gave me the raise document, I thanked her for her efforts, and commented that I am very happy with my raise and did not expect that we would be able to get to my market compensation level all at once. By doing that, I believe that I both created good will with my boss and set the expectation that I do not consider my new compensation level to be satisfactory in the long run. In asking for an increase, you want your boss as an ally, not an adversary.
4. Support Your Claims - providing detailed documentation as to your market value makes salary negotiations a whole lot easier. If you provided such documentation prior to being told about your raise, you can always use those materials later down the road to support your new bid for a raise. Every professional should develop an understanding of his true market value, whether or not he is re-negotiating his compensation package. To find out more information about how to achieve this, take a look at my previous post on the subject.
Since I provided a written raise request to my boss, and supported it with extensive market salary data that I carefully obtained over several months, nobody will be surprised when I bring up the issue of compensation again.
5. Make a Plan - it is a generally correct statement that the act of making a plan substantially increases your chances for achieving your goal. Salary negotiations are no exception. I strongly recommend making a plan for where you think your compensation should be, what process you will follow to achieve this goal and when you would like to achieve it. My goal is to obtain another 15% raise within the next 12 months, and my plan? You've just read it.
Stay tuned. The next battle in the compensation war is scheduled for December, and reports from the battlefield will be broadcast on this station, with the briefest of delays.
In my next post, I will look at compensation negotiations from the other side. One of my employees has been re-negotiating his compensation package with me. I'll tell you about some of the errors I think he is making and how to avoid them when negotiating your own compensation.
Thursday, August 09, 2007
GigZig is essentially a crystal ball that allows you to gaze into your career future. To use the tool you are asked for your current job title, and in return the system gives you a list of titles that you may find yourself holding five years down the road. The titles are ranked from most likely to least likely. The website also tells you the average salary that comes with each of your possible titles. So here are a couple of interesting examples of likely career tracks according GigZig:
A Hotel Waiter (avg. salary $27,400) is likely to be an Administrative Assistant (avg. salary $30,000);
An Auto Service Technician (avg. salary $39,540) is likely to be an Auto Service Manager (avg. salary $53,000);
A Marketing Manager (avg. salary $60,000) is likely to be a Marketing Director (avg. salary $87,000);
My personal favorite: an Actor (avg. salary of $41,000) is likely to be a... Receptionist (avg. salary of $24,000) or an Art Teacher (avg. salary $40,000);
GigZig is a fun tool to play around with and it may be an interesting tool to use if you are just starting your career, considering a move to a new industry, or are just trying to figure out what your salary prospects look like. If you try GigZig and get an interesting result, leave a comment and let me know.
Wednesday, August 08, 2007
Anyway, on with the story. I live on the Peninsula in the San Francisco Bay Area. In my town there are several independently owned bookstores, all within walking distance from each other. On weekends I often find myself spending a couple of hours in one of these stores, leafing through magazines, browsing the book shelves and generally enjoying the atmosphere. Periodically, I buy something, but more often than not, if I find a book I like I write down its name and later purchase it on Amazon.
A couple of years ago, completely out of the blue, the largest and most established of these independent book stores suddenly announced that it was closing down after 50 years in business. This took the whole community by surprise, since the store is known throughout the area. The reason that was given for the shut down was that owners could simply not make ends meet. Pressed by the large book sellers - such as Barnes and Noble and Borders - on the one hand; discounters such as Wal-Mart, Target and Costco on the other; and of course facing a massive number of customers defecting to Internet book stores such as Amazon, it turns out that there was just not enough business to make things work for an independent book seller.
Getting a book online or at Costco may be substantially cheaper than buying it at your neighborhood independent book store, but I realized that by enjoying my visits to my local store while giving my business to lower cost competitors, I was essentially free-riding. I was enjoying the experience of the independent book store, but not paying for it. When you buy a book at a small neighborhood store there are essentially two elements to the price you are paying. One of them is the cost of the book - that is the price you would pay at Wal-Mart or at Amazon. The other component is the price you pay for the "book store experience". That experience comes at a cost to your neighborhood store, and since the discounters don't offer you that pleasure they can afford to reduce the price of the book.
Let's take this example one step further. Do you know how everybody is complaining that there is no longer such a thing as customer service in America? For example, when you go to Best Buy to buy a computer or a television and ask for advice, typically you get a know-nothing sales person that can barely read the product description from the sticker next to the product. If you need more information, tough luck for you. Well, it turns out that we have only ourselves to blame for this lack of service. Since we always choose the lowest cost product, and choose to not give our business to those retailers that invest in service, those high-service retailers are going the way of the Dodo. Hooray for us, we've saved a couple of more Dollars. Welcome to the desert of no-service. Think about that next time you are on the phone holding for some call center in India for 30 minutes while hearing a recording saying that "your service is very important to us".
Thankfully, in this specific case, there is a happy ending. When the book store announced it was shutting down, the whole community came to help. Private donors and investors quickly stepped-in, and after only a couple of weeks out of business, the store came back from the dead. It is still open and now appears to be doing brisk business. As for me, I have decided to not try to save any more money on my books. I enjoy my Sunday afternoon visits to this store, and am very willing to pay for the pleasure I am getting. I still buy the occasional book on Amazon, but I no longer look for books in the store only to buy them online. You could say that I realized the error of my ways, and have decided to jump off that free ride to no-service land.
This post was inspired by an article I read on MoneyNing yesterday, and although MoneyNing was basically recommending the lowest cost places to get books, I don't hold that againt them... soon they too shall see the light... :-) Seriously, check out MoneyNing, it's a really cool blog.
Tuesday, August 07, 2007
First up, this week's Carnival of Personal Finance is hosted by the Frugal Law Student, the carnival includes my post about the Allure of Lifestyle Funds. Here are some of the other articles in the carnival that caught my eye:
Don't Mess with Taxes pays tribute to the Simpsons with an article about the D'OH moments of personal finance. The article makes some good points, but for me it's all about the Simpsons. Cowabanga Dude!
Everyday Finance has a post about the easiest $1,000 tax-free he makes every year. It's all about those cash back credit cards. I am a big advocate of reward cards, for those of us that do not carry a balance and do not miss their credit card payments, that is. In fact, late last week I got a $344 cash-back reward from American Express on my Blue card. That's serious cash, right there.
Financial Dominance offers an excellent article about teaching your kids the value of money. The oldest of my three boys has just turned five, and my wife and I have started to teach him some financial concepts. He is a smart kid and gets most of what we talk about but the concept of saving is easier to understand when you are sitting at home than when you see something you want in the store. Teaching financial responsibility to kids is a long term proposition, but it is a very important subject that is better taught by parents than by the credit card companies, if you know what I mean.
The Festival of Frugality this week is hosted by Frugal for Life. It contains my article about Things I Don't Skimp On. Here are the articles I found most interesting:
Fire Finance has an article about a new way to sell your old cell phones. That's a great idea. Selling my old cell phones has never crossed my mind. I give my old cell phones to my kids, which enjoy them like no other toy on the planet. They walk around the house pretending to talk, just like they see daddy do.
Money Ning is a PF blog that I only recently found and that I really enjoy. The article they contributed is about the best places to find cheaper books and magazines. I used to buy all my books online, since this truly is a lower cost way of buying books. However, recently our local book store was shut down because they could not make ends meet. The community all came together and contributed to get this store back on its feet, and since it re-opened I began buying all my books there. I will probably write about this subject later this week, it's an interesting topic.
Finally, the Happy Rock has an article about a topic I have never heard of before: Hypermilling. Supposedly there is a whole bunch of people trying to drag a few more miles per gallon from their cars by doing some pretty ludicrous things. Does that stuff even work?
You should also check out the Carnival of Money Stories, right here.
Monday, August 06, 2007
How accurate is the information on Zillow? Well, I am not sure, but I checked the one house I know best of all, my own. The general information, such as number of rooms, baths, and square footage, was all correct. Now for the interesting part. Zillow estimates the price of our home to be a jaw-dropping $914,000. The amazing thing is that our house is not even a house. It is a town house, built in 1972, with 3 bedrooms. Granted, we live in a very expensive part of the Bay Area in California, but still, that price is ridiculous.
Regular readers of this blog know that we don't own our home, we rent. Now get this: our monthly rent is $2,000. Granted, according to Rentometer our rent is low for our area, but still, the return our landlord is generating on equity (if all the numbers are correct) is 2.6% per year. To be honest, I think the value of the property is probably exaggerated, but even if our rent was $2,500 per month and the property is worth only $750,000 the ROE is only 4% per year, and that's before expenses, such as property taxes, association fees, insurance and many others.
To me it seems obvious that buying in the Bay Area does not make economic sense at this point. We will continue to stick with renting, at least until rental prices go up dramatically or real estate prices decline.
If you get a chance, check out Zillow and tell me if you think that the information it offers is accurate. At the very least you'll burn an hour trying to figure out how much your neighbors paid for their houses...
Sunday, August 05, 2007
Have the good people at Netflix switched from being ardent capitalists to firm believers in socialism? Not really. Market economics is at work once again. Netflix is facing mounting competition from Blockbuster, who is leveraging its retail stores to offer plans that allow consumers to rent via mail or through its stores for the same price. This increasing pressure has evidently convinced Netflix executives that a price cut is in order.
Nevertheless both Netflix and Blockbuster are firm believers in bilking their customers whenever they can. I haven't forgotten that just a few years ago Netflix arrogantly raised the price of its 3 DVD plan to about $22. They only dropped it back once their customers rebelled and they started to lose subscribers to the competition. Blockbuster on the other hand was, for years, content to rip-off hoards of consumers by charging ridiculous rental and late-return fees. They too only succumbed once free market competition emerged, in the form of Netflix.
What does all this tell you about capitalism? To me it says two things. First, capitalism clearly works. If you take the video rental market as an example, prices for video rentals have come down dramatically over the past several years. Second, free market capitalism can only work if there is indeed a free market. Netflix and Blockbuster would each immediately revert back to their predatory selves if they felt that competition was no longer a barrier to raising prices. By the way, I am not singling out these two companies. I could make the very same argument for pretty much any other business on the face of the planet.
As far as I am concerned, the bottom line in all this is self evident: the role of government is to ensure that the free market is operating correctly. It needs to ensure that every business in the country feels a healthy competitive pressure. From that point forward the market will make things right. This is true of health care, it is true of power utilities, it is true of airlines, it is true of agriculture, it is true of telecommunications, it is basically true of every single industry out there. I did not pick the above industries by co-incidence, these are some of the biggest industries which enjoy government protectionism, waivers from anti-trust laws, and subsidies. We would all be better off if the government created a truly free market and at that point acted simply as a neutral referee rather than as a protector of special interests.
Saturday, August 04, 2007
I joined my company a little over 2 years ago and my current 401K balance is approximately $41,000. According to the EBRI report, my 401K balance is higher than about 65% of plan balances out there. This is where I pause, and pat myself on the back. Now it's time to get a bit more detailed, and compare my balance with that of my peer group.
I am in my mid thirties. Of people in my age group, 29% have less than $10,000 in their 401K accounts; 27% have between $40,000 and $50,000 and 11% have over $100,000. Interestingly, about 0.5% of employees in their 20s have 401K balances in excess of $100,000. Good for them. On the flip side, about 6% of employees in their 60s have account balances under $10,000. I guess some people are simply aching to become Wal-Mart greeters in their golden years.
Of people that have a tenure of 2 to 5 years with their employers, the group into which I fall, about 26% have account balances below $10,000; 15% have balances between $40,000 and $50,000; and about 4% have account balances above $100,000. Folks with 2 to 5 years of tenure who have over $100,000 must have either rolled over an old 401K plan into their current employer's plan; have been contributing aggressively for 4 or 5 years; or have been investing in something on steroids. In any case, good for them. Once again, it is interesting to note that about 8% of employees who have been with their employer for over 20 years still have less than $10,000 in their 401K plans. Repeat after me: "Welcome Wal-Mart Shoppers!".
Finally, according to the report, people in their 30s, who have been with their employers 2 to 5 years have on average $22,368 in their 401K plans. This is my specific peer group, and compared to this group, my 401K is doing spectacularly well. Steady as she goes, then.
To compare your own performance to that of the correct peer group, go to the EBRI report and take a look at figure 13 (page 18).
Thursday, August 02, 2007
One of the points that come through very clearly in this new report is that more and more employees are opting for lifestyle or other balanced funds. According to the report (figure 33 and figure 34), depending on age group, about 45% - 47% of newly hired employees hold such funds. In addition, in 2006, of those employees that held balanced funds, a large minority (about 40%) held more than 90% of their assets in these funds.
For those of you that are not familiar with the concept of lifestyle funds, these are funds that have a pre-determined allocation of stocks and bonds. This allocation shifts and becomes more conservative as the investor ages.
What is the draw of balanced funds? The greatest asset of lifestyle funds and other balanced funds is that they are simple. They are easy to understand. They are not scary. I mean, let's face it, the vast majority of American workers are not personal finance bloggers, and investing is not a mandatory class in high-school or even college. Many people are scared of investing. They don't know anything about it, and they don't know where to get the information. The promise of the lifestyle fund is the allure of simplicity, and if there is anything people like it's ease of use.
Lifestyle funds, offer investors an easy way to achieve diversification and a reasonable ratio of risk and reward, without requiring them to become master investors. This is a great example of the direction 401K plans should take. While offering more sophisticated options for those us who feel comfortable investing our own money, 401K plans should strive to simplify investing for the average worker. The less scary those plans seem to the novice investor, and especially to young employees, the more people will invest for their retirement and the better off we will be as a society.
So, kudos to whoever invented the lifestyle fund. You are hereby awarded the Shadox Prize of Personal Finance (the "Shpefi"). The Shpefi is slightly more prestigious than the Nobel Prize, however it does not involve any monetary compensation, medals or meetings with royalty. I am working on those aspects of the program, and will keep you posted.
Wednesday, August 01, 2007
You may be wondering why I took a lower paying job to begin with. You readers always ask such great questions. I took the job because it allowed me to switch to a new industry which I really wanted to break into. In addition, my company is a major player in its field, and by taking my position I was able to join this company in a very influential role. Bottom line, I thought it was a good long term career move.
When negotiating my offer, I made a conscious decision not to negotiate my compensation and instead very aggressively bargained for my title and responsibilities. I gambled that this would pay off later down the line. This gamble seems to have worked, and if I play my cards right my title and position in this specific company could be highly marketable when hunting for my next job at some point in the future. I was also gambling that I would be able improve my pay in relatively short order. Well, it has taken me over two years to achieve this pay increase, but I think that I have made the right decision.
Before I end this post there is one more lesson that I would like to share. This lesson is all about how to avoid snatching defeat from the jaws of victory:
This salary increase has been in the works for a couple of months now. My boss has previously hinted at this, asked me what I thought my fair compensation level should be and even told me that I would be getting a raise. However, she did not tell me when the raise would come through, nor did she tell me the exact magnitude of this raise. Well, like any red blooded human, curiosity got the better of me and I tried to find out more information about this impending raise. To do so, I consulted with our VP of Finance. A few days ago he told me that my raise was approved and that I would be receiving 100% of what I had asked for.
It turns out that he had the wrong information. My actual raise was lower than what I had asked for. Since my company did not give me formal notice of my raise and its magnitude, I found out the specifics only when I opened my pay-check yesterday. Even after opening the pay-check I had to manually calculate my new salary based on my pay stub. And here is the punchline: I was actually disappointed that I got a 16.6% raise. What should have been a big happy moment for my relationship with my company turned out to be a little disappointing, because the company did not set my expectations in advance and because I obtained some erroneous information from a source that turned out to be unreliable.
The lesson of the day is this: if you are going to give someone a raise, set their expectations in advance. Surprises are highly over-rated, especially when they... don't come as a surprise. I think that this is a life lesson that goes well beyond salaries and personal finance.