Sunday, August 31, 2008

Recommended Articles

I ran into a bunch of good personal finance articles this week, and here they are in random order... well, OK, not that random:

First up is this article from Smarter Money. It is very well written and is all about how much money people make, complete with statistics and charts. If you always wanted to benchmark your income against that of other folks, you can satisfy your curiosity with this article. Let's just say that after reading the article and comments, I feel that I have nothing to complain about.

Similar to my article from a couple of weeks ago, this article from Brunette on a Budget (very nicely designed blog, incidentally) asks the question "does money buy you happiness?" She thinks, yes. I am not so certain, but you know what they say: at least you can choose your own kind of misery...

Saving to Invest has a relatively new PF blog that is doing phenomenally well. In fact, he is putting me to shame after only a few months in publication, in terms of both traffic and subscriber growth. This is his take on what it takes to succeed as a PF blogger. I can't argue.

Finally, My Two Dollars has an article about how Comcast is about to start metering users' use of the Internet and kick out customers that use more than a certain amount of data per month (250 Gigabytes is the current monthly limit). As I commented on the article itself, I am of two minds about this. On the one hand this is a throwback to the dial-up, metered web surfing on the 90's... it's also guaranteed to slow down innovation and new services. Forget about downloading Netflix movies over the net, for example... On the other hand, because of my job I understand the ISPs' business very well, and I know that it is tough for ISPs to economically design and run networks with a small minority of bandwidth hoggers. The solution in my opinion is to throttle down the speeds to the biggest bandwidth hogs during peak times, but to let them run wild during times when there is spare network capacity.

Finally, this week I participated in two carnivals. The Carnival of Personal Finance was graciously hosted this week by Broke Grad Student and the Festival of Frugality was hosted by Fire Finance.

Wednesday, August 27, 2008

Recession is a Great Economic Opportunity

Tough economic times create a lot of stress for a lot of people, but if you are confident in your job prospects and have financial resources to do so, tough economic times can be a great opportunity to get great bargains. Here are a few examples:

The Stock Market - some view declining stock prices as the time to bail out. Some smart investors with a long investment horizon consider this a stock market sale, an excellent opportunity to buy more stock in anticipation of the inevitable bounce-back. Personally, I have been putting more money into stock on a monthly basis ever since the volatility and declines began last year. So far, it's been mostly down hill, but I am not worried: if it takes 10 years, I am confident in the long term plan.

The Housing Market - many folks found themselves still standing when the music stopped in a game of musical real estate chairs. The bottom fell out of this market, as was inevitable. Many who purchased at the peak. sold and are sitting by the sidelines licking their wounds. Smart investors are now tip-toeing back into the market and are snapping up properties for much discounted prices. My CEO is one of those people - he just bought a new house for $3 million. Yeah, that's a discount. Well... this IS the Bay Area and he IS rich. I am not in that category myself... we'll be renting for a while still...

Cars & Trucks - the other day I heard a story on NPR about how car companies can't move any new trucks off the lot because of high gas prices. If you are still in the market for a gas guzzler (say you need one for work so I don't despise you for polluting the planet), you can get one for a song. A gentleman featured in that NPR story got his new Toyota Tundra for $9,500 below MSRP (you can listen to the segment here). Sounds like a deal to me.

Any Major Purchase - tough economic times give you extra leverage in negotiating a deal for whatever it is you are buying. For one thing, the sales person may be more likely to believe you when you claim that the price is too high for you. For another, stores themselves may be struggling to find business and may be more prepared to offer a discount for your business.

Of course, the trick is being confident enough in your financial position to be willing to make a major purchase, but if you are so inclined, this may be a good time to get some bargains.

Monday, August 25, 2008

Career Insight: Patience Pays

Last week I spent a lot of time with a very close friend of mine, a man I respect and admire, but whose career has not progressed according to his expectations. Incidentally, this is the same person whose career concerns I previously blogged about here. At one point I asked my friend what lessons he takes away from his inablity to get his career moving in what he thinks is the right direction. Without hesitation my friend said "patience pays".

My friend has gone through a series of sideways positions, and he is unsure of how to get his career moving up again. He told me how he recently caught up with two guys who worked with him as peers in two of his previous companies. One worked with my friend eight years and three companies ago and was a solid but not outstanding programmer. That person now manages the company's research and development. Another former colleague, who worked with my friend as a peer in his previous position, was recently able to transition from being a customer service engineer into being an application engineer and thereafter made the transition to R&D. My friend pointed out that the transition into application engineering is something he tried to achieve in his previous company, but failed.

Asked how they were able to make these transitions, my friend answers clearly and succinctly: "they were patient". They did not quit when they weren't given what they wanted, they stuck it out. They built relationships. They networked. They looked for the opportunity and when it showed up, they took it. My friend, on the other hand, asked to move to a different position and when he was turned down, left the company to seek opportunities elsewhere. He still performs the duties of a customer service engineer. The lesson my friend draws: "It may be a gamble - because you never know if the opportunity will materialize - but being patient and sticking it out with one company can generate very good results".

That's one on the things I love best about my friend. He never points a finger at anyone else. He accepts full and complete responsibility for his life. He is not afraid of admitting his mistakes, and when he thinks he made one, he makes an effort to learn from it.

As far as I am concerned, this is the mark of a mature and well balanced individual. I am hopeful that with this kind of healthy and introspective attitude, my friend's career will once again get moving in the direction he wants it to go.

Wednesday, August 20, 2008

Would Being Rich Change Your Life?

Seems like such a trivial question. How could being rich not change your life? Well, I have been doing some thinking lately, and it appears to me that if all of a sudden I became rich my life wouldn't change a whole lot.

So, first of all, how would I become rich? Not by playing the lottery, that's for sure. I never play since the chances of winning are astronomical, and the way that lotteries make money is by taking more money than they pay out. It's a sucker's bet. I am also not talking about the slow accumulation of wealth over a life time. Most people that gain wealth in this way don't gain enough to go crazy at retirement. The most likely way for me to hit it big - and the chances are not very big - is for my company, or one that I work for in the future to become a huge success and for my stock options to become extremely valuable. Here in Silicon Valley this is (not such) a remote possibility.

So back to my original line of thinking. Here's why I don't think that my life would change dramatically: my CEO (who is my direct boss) is a serial entrepreneur. Two of his previous companies went public and a third was acquired. The man is probably worth hundreds of millions of Dollars - and I am not exaggerating. Every day we work together closely at the office. His day is very similar to mine. I mean, if you are that rich, and you still spend most of your time working with the likes of me.... your life is not THAT different. You could say that he is an exception, but that just wouldn't be true. One of our Board members was a Fortune 500 CEO. He is extremely wealthy. He spends his days investing in start-ups and attending board meetings. Another was the CTO of a Fortune 500 and the President of another - he is also extremely wealthy. He too spends his days in much the same way. My good friend's brother recently sold his start-up to IBM for hundreds of millions of Dollars. His cut was several millions. He still goes to work every day. I have many other examples.

This is both encouraging and annoying simultaneously. On the one hand, you could say that I am living like the rich and famous (well, at least as work goes...) On the other hand, we all go to the office every day... I guess it's a personality thing. There are some people that just need to be in the center of things. They can't sit on the sidelines.

The one thing that would change, I suspect, is my level of anxiety. If I were truly financially independent, I wouldn't worry about the prospects of losing my job or of an economic downturn. Another thing that might change would be my vacations - I could and probably would take some extravagant vacations - although our vacations are not half bad as it is.

I guess this all makes you think. We are all so obsessed about amassing wealth that we don't very often stop and seriously think about how it would change our lives, if at all... and if not, is it really worth all the effort? Well, probably yes... :-)

But I am keeping an open mind.

Tuesday, August 19, 2008

Don't Finance Consumer Spending

Financing consumer purchases - either through payments or credit card debt - is a bad habit that folks should learn to avoid. Here are some of the reasons:

1. It makes you think you can afford something, which in reality you may not.

2. It reduces your future standard of living to increase your current standard of living.

3. It teaches instant gratification and reduces self decipline.

4. It gives you the illusion of paying less for something expensive, so you spend more.

5. Interest payments and fees mean that you will pay much more for your purchase than you would if you paid in a lump sum.

By the way, I am not against financing, only against consumer spending financing. If you are going to buy a house for example, financing is definitely in order. Car? I guess that depends.

I will be experimenting with short format posts now and again. Please tell me if you like this new approach and if I am achieving my goal of providing bite sized useful information.

Monday, August 18, 2008

Practically Free Kids Furniture

My wife just sold our son's baby bed on Craig's List the other day. Actually this originally belonged to our older son and was handed down to one of our twins when they were born. So, after 6 years in service, the bed fetched $180, slightly less than half the price we paid for it six years ago.

If you think about it, this is very similar to a financing transaction - we didn't really buy the bed, we sort of leased it for a few years... Every year of use cost us less than 10% of the value of the bed with most of the depreciation probably occurring in the first year or so...

There is one more bed remaining to be sold. That one is being offered for $150, which is about the same price we bought it - on Craig's List - 3 years ago. If that deal goes through as planned, our cost for the bed will have been nothing more than the opportunity cost of not investing our original purchase price over the period the bed was used. That's what I call practically free furniture.

The same trick works for the buy side as well. Earlier in the week we bought a new race car shaped bed for the twins (we already had one from our older son) - and paid $40. A new bed would have cost $300.

You gotta love Craig's List. Of course, there is also a darker side to this website (as for any peer to peer market place), so always use common sense in dealing with folks you don't know.

Saturday, August 16, 2008

You Mean I CAN'T Be a Pediatrician?

Madam X from My Open Wallet just shattered my dreams. In one fell swoop she basically told me that I can't be a pediatrician, airline pilot OR nurse anesthetist! Seriously, what's left?

Are you sure you don't want me to fly your plane on your next cross country flight? I have been practicing on my PC flight simulator. Honest!

Friday, August 15, 2008

Talk About Tightwad Bankers...

NPR featured a report earlier this week about a bank located in Tightwad, Missouri... Quite predictably, but funny nonetheless, the bank is called Tightwad Bank. Being the skeptic that I am, I had to go and look up the bank myself and it appears that Tightwad Bank is a reality (or an elaborate hoax).

A quote from the bank's website:

"Tightwad, Missouri is a village in Henry County, Missouri, United States. The population was 63 at the 2000 census. The town was so named a century ago, allegedly over an incident involving a postman, a grocer and a disputed watermelon."

Hmmm... a disputed watermelon. Really?! I would love to know the background to that one...

Actually, the quote is pretty much the entire website. It looks like those guys are so miserly that they haven't even bothered with setting up a proper site yet. However, the NPR story claimed that the bank was a real one and even featured an interview with the bank manager. Amusing.

In other news, this week's Carnival of Personal Finance was hosted by No Debt Plan and includes my post titled: Every Meeting is a Job Interview.

Wednesday, August 13, 2008

Sneaky, Unfair Price Increases

CNN published an article about how Northwest has just announced an increase to the fuel surcharge it will be imposing on its passengers. I thought that this would be a good opportunity to discuss sneaky, unfair price increases - these so-called "fees" and "surcharges".

Why are companies levying such sneaky fees and surcharges instead of simply raising the price? I mean, at first airlines charged you for checking in luggage. They charge you for snacks that used to be free. Some have started charging you for pillows and blankets. Now, all the charges that I listed above are all fair game. After all, if a passenger doesn't use a pillow, why should he pay for one in the price of his ticket? Why should a passenger with a small carry-on be charged for the luggage sorting infrastructure? I am OK with the a-la-carte approach to services. This is a perfectly legitimate business and pricing strategy.

However, a fuel surcharge is a different kind of animal. There is nothing about it that is fair or legitimate. Let's call it by name - a fuel or energy surcharge is nothing but an unfair price increase. The reason such charges are unfair is that they apply to all tickets. There is no way for you to avoid paying the fee - unlike in the case of luggage, pillow, snack or headphones, if you are on the plane, you are paying the "surcharge".

So, why is it that airlines and other businesses are adding "surcharges" instead of simply increasing the price? The reason is simple: businesses are consciously trying to mislead consumers. Businesses expect consumers to make their purchasing decisions on the basis of the advertised price, and not take into account additional fees that are often disclosed after the decision has already been made. It is their intention to mislead, to bait and switch, and this is why such practices are unfair.

Such practices should be banned. The dividing line should be this: if a consumer has a realistic way of avoiding the fee during the normal course of purchasing, the fee is legitimate. On the other hand, if a fee applies to virtually all customers who make a purchase, it should be illegal. That's not to say that the company will not be able to recover its increasing costs. It should simply be required to raise its prices, fair and square, and not be permitted to hide this increase from consumers.

This is not unlike the sneaky increase in the price of Yogurt which I wrote about a couple of weeks ago. If you let them, businesses will do everything in their power, fair or not, to get your penny.

Monday, August 11, 2008

Do Not Mail Registry - an Idea Whose Time Has Come

The other day I signed an online petition to Congress lobbying for a National Do-Not-Mail Registry. Much like the national Do Not Call Registry, the creation of this new registry would allow Americans to opt-out of getting the copious amounts of junk mail we all deal with these days.

Here is why I think that a Do-Not-Mail Registry is a good idea:

Environmental Reasons - over the past week I have received not one but two new, competing yellow pages books. I don't use the yellow pages, I prefer this lesser known invention called "the Internet", so the books went directly into the recycling bins. Daily we are inundated with credit card offers, coupon books and catalogues all of which end up the same way. Think of all the trees that are cut down, the energy that is wasted in printing, shipping and recycling of these products that no one really wants. CO2 emissions galore.

Business Reasons - think of all the wasted money that businesses spend trying to reach an audience like my wife and I, who are completely non-receptive to their message. If there was a simple way for them to screen against a list of folks who would just chuck away their message, they could save a great deal of money. It's not how many messages you send out - it's how many people actually hear you.

Privacy Reasons - I really dislike the idea of people trading my personal information back and forth without my having the right to say "no". 'Nuff said.

Laziness - OK, so call me lazy, but I really don't like dealing with all this sorting and recycling. Every day when I come home there is a pile of junk mail to sort through and toss. These days at least 95% of mail that we get falls under the category of junk mail. By sending me all this crap against my wishes, the senders are making me do a chore that I really dislike. I have better things to do with my time.

When I think about it, other than my magazines and Netflix movies that come through the mail there is really very little mail that I get these days that does not fall under the category of junk. Yes, there is the occasional online purchase delivery, the occasional financial statement or notice from the government that I get (jury summons, voter information), but pretty much everything else is junk. Pretty much everything that I care to receive I get through e-mail. If you think about it, the USPS these days is largely an organization devoted to the dissemination of real world physical... SPAM... it's time to stop this unceasing flow of unwanted crap.

Sign the petition and join the call.

Friday, August 08, 2008

CD IRAs - a Really Bad Idea

Last week I visited my local branch of Bank of America where I saw a large poster advertising "high rates" on CD IRAs - a high rate being an APY of 3.3%. On their website, BoA says that this product is for "People who want to take the guess work out of investing while enjoying the peace of mind of a steady high yield return." My take on the issue is that unless you are in your 60s and are approaching your retirement years, investing in a CD IRA strike me as a really bad idea. Even in such cases, investing your long term savings in a CD is a dangerous game.

When investing for retirement, many folks worry about taking excessive risk. They are concerned that their investments will tank and that they will lose their retirement savings at a time when they are unable to work. However, reality is that with a long investment horizon, the biggest investment risk one can take is to invest in a way that will not allow your investments to outpace inflation.

While in recent years inflation has been relatively benign, there have been a number of periods historically where the U.S. has seen considerably faster price increases. Check out this chart on Wikipedia. But forget historical inflationary break-outs, at 3.3% APY the yield BoA is offering does not even keep pace with the current pace of expected inflation. This means that while you are thinking you are saving for retirement by contributing to this so-called high-yield CD IRA, the money you are putting aside purchases less and less every year.

Although it may be counter-intuitive for some, if you are planning to save for retirement (or for another long term goal, for that matter), investing in a well balanced portfolio of index funds, which includes both stocks and bonds, is a much safer way to go. Inflation is the quiet killer of low yield "safe" portfolios. Don't be fooled.

I have written in the past about how to build a portfolio, if you are interested take a look at this topic in more detail (or simply select the "investing" category in the left column on this page).

Thursday, August 07, 2008

The Typical Stock Investor Loses Money?

Check out this post on The Digerati Life, analyzing a recent report on the success of the typical stock investor - an average return of just 3.9% over the 20 year period between 1986 and 2005 and that's for an equity mutual fund investor (not the crazy day-trader next door)! If the report is correct, most people would do better to stick their money into a bond fund and possibly even a CD and forget about it.

I must say, the results surprise me, even though I have long known that most active investors underperform the market. Hey, that's what I keep telling you folks: (i) diversify; (ii) invest in index funds; (iii) minimize your costs (e.g. fund expense ratios); and (iv) don't trade.

Is it going to take an act of god to teach people that they are not Warren Buffett and that their chances of beating the market are just not that good?!

Incidentally, check out the latest Carnival of Personal Finance on the Squawkfox where my angry post on the recent housing bill is also included.

Wednesday, August 06, 2008

A Stronger Dollar and Your Portfolio

The Economist magazine published its annual Big Mac index in its July 24 issue. The Big Mac index lists the price of a McDonald's Big Mac in numerous countries around the world, in Dollar terms. Since the ingredients in a Big Mac are supposedly identical in all geographies, the index tells you something about the cost of living AND about the strength of the local currency. Theoretically, if each foreign currency is valued "correctly", the purchasing power of a Dollar - when taking into account the exchage rate - should be the same wherever you go. This theory is known as Purchasing Power Parity.

Without wasting more time discussing the economic theory - which I am not qualified to do anyway - The Economist came to some interesting conclusions regarding the strength of the Dollar based on this most recent edition of the Index: the Euro is over valued by about 50% (with a Big Mac costing $5.34 compared to $3.57 in the U.S.); the British Pound, Canadian Dollar and Swiss Frank are also over valued. However, the Japanese Yen is under valued by about 27% ($2.62 for one of them healthy burgers), and although The Economist gives some caveats with respect to the Chinese currency, that too may be substantially under valued. The Argentinian and Australian currencies appear to be about fairly valued according to this measure.

If you accept the Big Mac Index as a valid piece of economic data, there are some interesting implications for your optimal investment strategy. As the Euro soared in recent years, returns on investments in European companies were helped by the swing in exchange rates towards the Euro. However, if the Euro really is this over valued, this trend may reverse sharply in the future. For the opposite reason, investments in Japan and China might not be a bad idea.

The Economist also points out that while Turkey and Brazil offer high interest rates to investors (16.75% and 13%, respectively) the Big Mac Index suggests that such high interest rates are not sufficient to off-set the exchange rate risk of these potentially over valued currencies.

Me? I just enjoy talking about these things and reading about world economics. I don't intend to make any adjustments to our portfolio strategy. However, given the recent declines in U.S. markets, I will be investing in U.S. stocks for the next few months to put our portfolio back into balance. If exchange rates play in our favor, all the better.

Monday, August 04, 2008

Career Strategy: Every Meeting is Job Interview

One of the best ways to improve your long term career potential is to become known as a top notch professional in your industry and beyond. One of the best ways to develop such a reputation is to treat every professional meeting you attend as a job interview - in a way it is. Someone that you meet today may be your future boss, colleague or reference. Here are a few tips on how to make a good impression:

1. Be Prepared - when you go to a business meeting, be it with a customer, with a vendor, or with a service provider be prepared. Know what the meeting is about and what you are trying to achieve. Spend a few minutes before the meeting to get your bearings. Understand what you are trying to achieve and what the other party is expecting, and try to meet those expectations. If you are well prepared for the meeting and appear professional, your counterpart will notice.

2. Be Professional - remember the last time you went to a meeting and the other party was late, condescending, arrogant or simply wasted your time? Well, try not to do that to others. Here's a great tip: sales people prefer a fast "no" to a long, drawn-out and pointless engagement. Being frank, honest and to the point is the way to go.

3. Dress the Part - sorry to break it to you, but there really is no such thing as "casual Friday". If you are going to work, always dress the part. It's not a bad idea to be just slightly over dressed. I don't suggest that you wear a suit if everyone else in your office is wearing jeans, but wearing slacks and polo shirt wouldn't be a bad idea.

Even though I work for a high-tech start-up in Silicon Valley and most folks in my office wear jeans to work, I always dress on the high-end of business casual. You never know when you will unexpectedly run into an important visitor, an executive or customer, in the office or while you are out to lunch. I cannot tell you how many times I have been pulled into an important meeting on days when I was expecting no business meetings to happen. Similarly, I couldn't tell you how many times some of my fellow executives, wearing less than appropriate attire were unexpectedly called into a meeting with a potential investor, board member or customer. My point is: you just never know and folks notice and remember.

A simple rule of thumb I suggest: dress like your manager's manager. You get the idea.

4. Follow Up - Have you ever been to a business meeting where you agreed to do something for your counterpart but never actually got around to doing it? Did it ever happen to you? Last week I had an important business meeting and my counterpart promised to send me some follow-up materials. He never did, even after I sent him an reminder e-mail. Here's the right way to do it: during your meeting take a list of action items. When you are done... follow up. You want to establish a reputation? Always do what you say you will do, and do it fast. As always, the key to success is surpassing expectations.

5. Stay in Touch - always carry your business cards with you. On your way to the movies? There is always room for a couple of cards in your wallet. Just recently, I ran into a potential business contact at a family wedding. The more people get your card, the more people know about you, the better the chances that opportunity will find you. After you meet someone, send them a brief e-mail noting your contact information for future reference.

For a related topic, see my previous post titled Your Colleagues, Your Assets. You might also want to check out my recent post about Getting Noticed by Employers. Another excellent post on the subject was written by Brandt of Wealth and Wisdom - check it out.

Friday, August 01, 2008

Got my Raise Plus More

As I was happy to report last month, I was recently promoted to Vice President in my company, and true to his word my CEO last week discussed my compensation with the Board of Directors. The Board gave me a 13% raise - which is substantial given that my responsibilities haven't really changed with the new title and that I have only been with the company for less than 5 months.

Even more important than the cash compensation, the Board has decided to double my equity stake in the company, so if the company is successful and goes public or is acquired, my stock options will be worth a substantial amount of money.

If you recall, I joined this start-up back in March on the hopes of taking an aggressive forward step in my career. So far, the bet seems to be paying off nicely. I am regularly meeting with some of the most prominent executives and investors in my industry. I have developed a very good relationship with the CEO - who has recently called me his "right hand man" - and I have been given a great deal of responsibility and influence. We have many formidable challenges ahead of us, but if my company is able to raise enough money to execute on its long term business plan we will be very successful and if so, I will have taken a very big step forward in my career.