Weakening Dollar, Ahoi!

Have you guys traveled abroad recently? I am currently on an international business trip, visiting a place that I know very well and in which I have previously spent a great deal of time. With the Dollar depreciating against most major currencies international travel has become much more expensive - our Dollars buy a lot less abroad than they used to.

This is a consequence of the U.S. trade deficit and federal government budget deficit. It is also a consequence of expectations for increasing interest rates in the Euro zone and elsewhere, and of the booming global economy.

The fall in the dollar has been very good for investments denominated in foreign currencies and investments in companies which generate most of their income abroad. For example, Vanguard's Total International Stock Index (NASDAQ: VGTSX) has returned 19.9% in the past year.

While it may be tempting to bet against the dollar, I am sticking to my guns and am not changing my portfolio's exposure to international markets in the near term. In the longer run, I think we need to invest a slightly higher portion of our assets in international stocks, but I will make that change gradually, and without taking into account market fluctuations or my own hunches about where the markets are heading.

Feng Shui & Business

I recently had an interesting discussion with one of my colleagues regarding Feng Shui. She is a believer. She told me a story about a business located near Golden Gate Park in San Francisco. For years, businesses located on the spot failed one after the other, until one business owner invited a Feng Shui master to advise him. The master told the business owner that for the business to succeed, he must paint the walls of establishment a deep green. The business owner followed the advice and sure enough the business thrived in the same spot for the next 20 years.

When the owner finally retired, a new business went into the same location. The new owners repainted the walls a different color, and ever since then no business survived in that location for more than a few months. My colleague took the story as proof positive that Feng Shui works... I took the story as proof positive that people will believe anything.

It's not that I am saying that Feng Shui doesn't work, although I certainly don't believe that it does. What I am saying is that there is a serious problem with people drawing far reaching conclusions from anecdotal evidence or from urban myth and using those conclusions for making financial decisions. In this specific case the story was about Feng Shui, but it could just as easily have been about astrology, numerology or about financial tips from a semi-respectable business guru.

In addition, I have a problem in principal with people that are willing to believe that something like the color of their walls is a decisive factor in the success or failure of a business venture. After all, if all it takes to succeed in business is the right coat of paint, why work hard? Why come up with a business plan? Why hire the best employees? Why advertise or focus on customer service? All you need to do is get a brush and three gallons of paint, and voila, problem solved.

This line of thinking extends to personal finance. People invest their hard earned money based upon unproven theories, hot tips and wild speculation. Think I am wrong? Consider "technical stock analysts" - there is not a shred of scientific evidence to show that there is any real basis to this investment strategy, yet there are hoards of people that make buying and selling decisions based on it. Trusting in such fiction gives some people a sense of control in what is essentially a chaotic and unpredictable environment. Personally, I'll take those boring index funds, that have been repeatedly shown to beat a large majority of actively traded funds.

Fun and Games with TSA

Ladies and gentlemen, Shadox has left the country (at least temporarily)! I am currently on an international business trip, and thought I would share some travel adventures, even though they are not directly related to personal finance:

1. Fun with the TSA - you know how you are no longer supposed to fly any liquids or gels in containers larger than 3 oz.? When I left San Francisco yesterday, I had with me a tube of toothpaste that was labeled 3.7 oz. however, the tube was almost empty (and visibly so). Not good enough. TSA confiscated this dangerous substance and tossed it.

I had one connection on my flight. On the first leg I received a soda can, which I didn't drink. I put it in my carry-on so I could quench my thirst while waiting for my connection. You know me - a cheap bastard - why should I buy $3 airport soda when I have a perfectly good can of Diet Coke that I got for free. Unfortunately, I did not realize that my continuing flight left from another terminal. I had to go through security again. Diet Coke can - confiscated.

It's a good thing that no one has tried to board an airliner with explosive underwear yet... every time the government imposes a new ridiculous rule, we just take it lying down, all in the name of fake security.

2. Luggage Adventures - my luggage didn't make it. I don't know why I thought it would. I had a 2.5 hour connection and changed airlines. All I have now are the clothes on my back and whatever was in my carry-on (which did not include any thing you can wear). I guess tomorrow is a clothes shopping day.

3. Car Rental Adventures - after a really long flight, it took me "only" 90 minutes to get my rental car. The car rental office was operated from a permanently parked van... next time, I am only renting from Hertz, and I don't care which rental company my company has a corporate rate with.

With so many little annoyances, restrictions and delays, it is a wonder business people are still willing to travel. The travel industry has been working diligently to make itself despised by those very customers from which it gets most of its income. Not a very smart business strategy, but I guess their comeuppance will have to wait for another day. Rest assured, their uppance shall come.

So, what does a frustrated and extremely jet-lagged Shadox do? Write some blog entries, of-course.

Energy Star: Save Money & Reduce Emissions

A couple of days ago I ran a post about how driving a Hybrid vehicle is not the most cost effective way to help the environment. In honor of Earth Day which was celebrated earlier this week, this is another post about the interface between personal finance and the environment.

A very effective way to help reduce carbon emissions while also saving some money, is to purchase Energy Star rated appliances. The Energy Star program is a voluntary program run by the EPA, which awards the Energy Star certification to appliances and other products that meet certain EPA criteria for energy efficiency. Here is a quote taken directly from the Energy Star website:

"Americans, with the help of ENERGY STAR, saved enough energy in 2006 alone to avoid greenhouse gas emissions equivalent to those from 25 million cars — all while saving $14 billion on their utility bills."

Now that's what I call major environmental impact, with a healthy dose of "save yer money". To take advantage of this excellent program all you need to do is check the Energy Star website before you purchase your next appliance, renovate your home, or install a new traffic light... seriously, they have Energy Star certifications for those as well.

One more word of advice: when you do get that Energy Star rated appliance, be sure to use it at off peak hours (such as late evening). For one thing, some utility companies charge their customers variable rates for using electricity depending on the time of day when the power is used. However, if you want to help reduce carbon emissions, the real reason to use appliances at off-peak hours is that the energy you use is cleaner...

How can that be? Very simple. Newer, less polluting power sources are typically also cheaper to operate. At off-peak hours, those are typically enough to address all the demand for power. However, at peak demand those cleaner power sources are not sufficient, and more polluting and expensive power plants are brought online to supplement power production. This means that running your washing machine or air conditioner during peak demand hours causes more pollution than running them during off-peak times.

The Energy Star program gives consumers an excellent opportunity to do the right thing, while also making money. How can you go wrong?

Mini-Meme...

My good friend Frugal Zeitgeist called me out to play in this little meme game that's been going around, it's called Five Obsessions. Well, since I have been given a soap box, I might as well climb it and start preaching, right?

Here are my top five obsessions:

1. Family - family uber alles! I feel blessed and extremely lucky to have a wife I adore and three awesome boys. They are the centerpiece of my life. The rest of my family lives very far from us and not being able to share the daily lives of my parents and siblings is one of my big frustrations. My wife's family is all from the Bay Area, so if we were to move closer to my family, my wife would be away from hers. It's an unfortunate state of affairs, but such is life.

2. Personal Finance - I think this is probably a clinical obsession with me. I manage our finances on a daily basis. I intimately know the details of our investment portfolio, bank accounts, 401k plans and credit cards. I am obsessive about planning my career, but you wouldn't know it from the number of strange turns my career has taken. I make it a point to start my day by reading a few personal finance blogs, as well as some economic headlines. AND I stay up well into the night writing these articles about personal finance that I post every morning. Clearly, I have an obsessive personality at least as far as personal finance is involved.

3. Science - Science defines me. It amazes me. It dazzles me. I voraciously devour anything science related, but I especially enjoy astronomy and physics. I find it simply incredible that humankind has come so far through its scientific reasoning and sheer will-power. I also find it hard to believe that while flying in planes, watching television and eating genetically engineered crops, there are some of us that still refuse to accept the underlying truth of science. Yes, yes, I know, that's why they call it an obsession.

4. Strategy & Adventure Games - Have you ever looked at the watch and realized that it's tomorrow? Happened to me more than a few times. If I get into a good computer game (think Civilizations III) I simply cease to notice the passage of time.

5. Being Right - Everyone that knows me, knows that I am obsessive about being right. I hate being wrong, and I like to argue. A deadly combination, but in a lovable sort of way... Or... that's what I tell myself... obsessively.

Extra Credit Obsession - 42 - About a year ago, I developed a little obsession with the number 42... Wanna know why? Check this out: 42.


So, now it's time to return the meme into its natural habitat of the blogosphere. I call Not Made of Money; 1st Million; and Mapgirl, to come out and play! I hope you enjoy playing the game as much as I enjoy reading your blogs.

Opt-Out 401k Plans - a Good Idea?

Regular readers of Money and Such know about my company's search for a new 401k provider. Well, the search continues, and the dilemma-du-jour is whether we should adopt provisions for automatic enrollment of new employees into the program.

There appears to be a philosophical disagreement between me and one of the other members of the 401k management team. Although I am very much against protecting people from the consequences of their own choices, I do believe that there are some exceptions to this rule, and retirement planning is one of those exceptions. Left to their own devices a certain percentage of the population would completely disregard the need to save for retirement, until it is too late. Some would rather spend the money now, others are simply too lazy or procrastinate for years before enrolling in their employer's retirement plan. Whatever their reason, because they fail to save some employees will not have enough for retirement.

Employers have certain moral obligations towards their work force. Ensuring that their employees are well prepared for retirement is one such crucial responsibility (on par with providing medical coverage). Since companies have all but eliminated traditional pension plans, they have a moral obligation to ensure that their employees are saving enough for their own retirement. As such, I am very much in favor of an automatic enrollment provision in our new 401k plan.

My colleague objects. He is firmly on the side of personal choice and responsibility. From his perspective, adults have the right and responsibility to care for their own needs. He feels that the employer's burden ends when it offers employees the option to invest in a 401k plan. He concedes that adequate training and education to the employees is also a major responsibility of the company. My colleague believes that by adopting automatic enrollment, we would be infringing upon employees freedom of choice in a way that could negatively impact their financial situation. He also worries that by adopting opt-out enrollment we could be opening ourselves up to law suits by disgruntled employees.

I agree with some of my colleague's arguments, however I think that an easily available and well communicated opt-out option allows those that do not want to participate in the plan to simply walk away, while offering the procrastinators a pain-free way of saving for retirement.

It appears that we have a philosophical disagreement on our hands. I believe that in the end my point of view will be accepted, but I will keep you posted on the developments.

One more interesting question: if we do indeed adopt an opt-out provision, where should the money be invested? I am leaning towards a target fund which invests employee contributions in a mixture of stocks and bonds. The mixture would change based upon each employee's age. The alternative, money market funds, is not appealing because returns may not even keep up with inflation and so we would be doing a disservice to our team members. Of course, target funds carry a certain level of investment risk and I am conflicted about whether we are justified in assuming that level of risk on behalf of employees. I think that the answer is probably "yes", but I am not yet convinced.

For additional reading on the subject, take a look at this interesting USA Today article.

If you have any advice or suggestions, please leave a comment. Would you want an opt-out provision in your 401k plan? Do you have one?

Your Check Book, Hybrid Cars and the Environment

In honor of Earth Day which was celebrated yesterday, I thought I would do a couple of posts this week regarding the economics of environmentalism and how they impact your personal finance.

Let me start by saying the I consider myself very much pro-environment. I am concerned, but not worried, about global warming and try to do my share to reduce emissions. With that in mind, I thought I would take a look at the economics of hybrid vehicles and find out if they make sense, both from an environmental perspective and from a personal finance perspective.

My research focused on the Honda Civic, since it offers both hybrid and regular versions that are easy to compare. I compared Civic's Hybrid version (50 MPG combined city / hwy) with two other Civic models, 4 door DX and 4 door EX (both 35 MPG combined city / hwy). According to Edmunds.com the Civic Hybrid has a 5 year true cost to own of $37,717, this compares to a true cost to own of $35,425 for the DX model and $38,018 for the EX model. These total costs of ownership include the cost of gasoline, repair, maintenance, depreciation and so forth. The conclusion according to Edmunds is that the Hybrid costs about $2300 more to own than the DX model over 5 years, but is about $300 cheaper to own than the EX model.

Of course, Edmunds is basing their estimates on many generalizations, including an average cost per gallon of gasoline, and an average number of miles driven per month. If you live in a state where the cost of gasoline is above average (such as California) or if you drive more than average, the calculation may not apply to you.

Let's for a minute accept these "averages" proposed by Edmunds. There is one important factor that Edmunds doesn't take into consideration: the environmental impact of vehicle emissions. Emissions have a real economic cost, however these costs are paid by society as a whole rather than by individual vehicle owners. Nevertheless, these costs should be taken into consideration.

According to the EPA, one gallon of gasoline produces about 8.8 kg (19.4 pounds) of CO2 when burned. So according to my calculations, a Civic Hybrid driven for 12,000 miles per year will produce approximately 905 kg (about 2,000 pounds) fewer CO2 emissions per year than a non-hybrid Civic. Wow! That's equal to a net reduction of about 5 tons of CO2 over a five year period.

Five tons of CO2 should be worth an extra $2,000 in total cost of ownership over five years. True? Not so fast. I continued my research by looking at the cost to off-set those carbon emissions by other means, and my research led me to the Carbon Fund. The Carbon Fund offers individuals a way to off-set their entire CO2 emissions, by investing in renewable energy projects. Now listen to this: according to that website, you can completely off-set the cost of driving a highly polluting SUV for a mere $49 per year! Off-setting the CO2 emissions of a regular Civic costs only $19.9 per year, or just under $100 over a 5 year period. This is a much cheaper solution than merely reducing your emissions by paying an extra $2,000 to own a hybrid.

There are many other organizations that offer Carbon off-setting projects. Here is a short list I came across.

Does that mean that you shouldn't drive a hybrid to save the environment? Hell, no. You should do anything within reason to reduce your carbon emissions. However, this does mean that driving a hybrid is probably NOT the most cost effective way to make an impact on the environment. As my regular readers know, I am a firm believer in the power of the markets, and the environment is no different. If you have a limited amount of resources, and you probably do, you should use them in the most cost-effective way to obtain the desired result. If you believe in the reality of carbon off-setting projects, those appear to be a better way to improve the environment than getting into that new hybrid Honda or Toyota. Might be less fun though.

Saving on Online Multi-Player Games

Massively multi-player online games are fun. For me they not only offer a way to kill a few hours and unwind, but also a way to keep in touch with close friends that live on the other side of the country (or the world).

The downside is that most of these games cost about $50 in the store, but to play the game online you must also pay a recurring monthly charge of $10 to $15 (depending on the game). Although this is a relatively low cost, I generally don't like recurring charges, so I have avoided most of these games, except for taking advantage of various free trial offers.

Happily, there is one winning alternative to the recurring monthly fee scheme. Enter Guild Wars. A very well crafted series of games, Guild Wars is similar in style to World of Warcraft & to Everquest. These games are gorgeous to look at and amazingly fun to play. The designers put a lot of thought into game design and storyline, and the large number of worldwide Guild Wars players means that the game supports a very vibrant community.

Best of all, Guild Wars does not have any monthly charges. Playing the game online is absolutely free once you purchase the software. Let me repeat that: no recurring fees. It's a personal finance blogger's dream... :-)

Each installment of Guild Wars is a self-contained game. While I own all three titles released to date, I am still playing the oldest title in the series which I purchased about two years ago and the game is still fun and exciting. That's what I call value for money.

An interesting factoid: those of you wondering about my Blog nickname, Shadox Memf is the name of one of my Guild Wars characters... you may be interested to know that Shadox's net worth is approximately 55 platinum pieces, and he is invested mostly in precious metals and jewelry. The return on his protfolio is fairly dismal given the shortage of index fund options in the game... if you play the Guild Wars, look me up online.

Do you know of any other free to play massively multi-player games? Please share the info by leaving a comment.

Stocks vs. Real Estate

A brief post this morning.

CNN yesterday ran this feature comparing stock and real estate investments across several dimensions, including diversification, leverage, return, tax treatment and more.

The overall clear winner: stocks.

Now that CNN has certified it, I guess it must be true... of course, the implication that one should invest in stocks rather than real-estate is completely inappropriate. A well diversified portoflio should contain assets from multiple asset classes. Even I, who have written extensively about the follies of the real-estate bubble and associated lending bubble, have real-estate investments as part of my portfolio. These currently account for about 8% of the total portfolio but I intend to increase the stake in this asset class to approximately 12% of the total over the next couple of years.

The bottom line is that investing is not an all or nothing game. Ruling out one or more asset classes is not a winning investment strategy.

An Experiment in Capitalism

Great news! Capitalism works and I've got proof. Better yet, the proof is in the pudding, or in this case, in the soda.

Until a few months ago, my company was one of the few in Silicon Valley that did not offer free snacks to its employees. We had some subsidized vending machines in the cafeteria, where 35 cents would buy you a soda or a snack. A few months ago, my company got generous and started offering free soft drinks and snacks. Here are my conclusions and observations regarding this natural experiment in market economics:

Observation: In the vending machine age, product shortages were very rare. In the age of the free for all cafeteria, shortages are a weekly phenomenon. The cafeteria is stocked every Monday, and by Thursday pretty much everything is gone. Friday is a good day to be on a diet. Vending machines were also stocked on Monday of each week, yet rarely ran out of stock.

Conclusion: Vending machines are the equivalent of capitalism. Goods (snacks) have a market rate and are allocated only to those customers who value them most and are willing to pay the appropriate price. Since the vendor has a financial incentive to maintain a stock of product to sell, if the machines run low, they are quickly re-stocked (although in practice, that was rarely necessary).

The free-for-all cafeteria is the equivalent of communism. Everyone collectively owns a fixed stock of goods (a ration). Even if you place little or no value on a product, there is no incentive for you to hold back. The worst case scenario for grabbing a snack is that you leave it uneaten on your desk. Goods are allocated on a first come, first served basis, which is an added incentive for over-consumption, waste and probably hoarding.

Observation: In the vending machine age, products were offered based on user demand. If a product did not sell, it was quickly removed and replaced by something more popular. In the free for all cafeteria no inventory management or product management of any type is performed. For example, the cafeteria offers several types of soda, Diet Coke being the most popular & Doctor Pepper being the Jiggly of the soda world. Even though all the Diet Coke is gone by Tuesday afternoon, and some Doctor Pepper cans still lingering until late Thursday, the same levels of stock are ordered on a weekly basis and user preferences are not considered.

Conclusion: Because there is no penalty for getting the wrong product mix, nor is there an incentive for actively managing supply, the program is allowed to run on auto-pilot, with little prospects for improvement. Once again, its all about financial incentives. It strikes me that our free-soda program is run as a cost center (and costs are managed down), while the vending machine was run as someones profit center (and profits are managed up). This is the root cause of the striking difference between the two programs.

The bottom line is that the switch to free sodas ended up as an expensive bargain, at least for me. Where before I could get a drink for 35 cents at any time of day or night, now I get my favorite drink on Monday and Tuesday for free, but have to drive to the supermarket to get $1 soda on Thursday and Friday, and settle for second best on Wednesday. If I happen to work late and want a drink late on a Thursday evening, I am often out of luck.

Did you really need proof? Capitalism works. Let's stick with it. In the large scheme of things, I think that our little natural experiment also shows that sometimes supposedly free benefits end up being more expensive for the very group that they are supposed to help. A real world example of this phenomenon that immediately comes to mind is rent control.

Your Credit Card Debt is Too High If...

This is the second weekly(ish) installment in the Funny Money series of posts. Money should never be taken too seriously, and neither should this series.

Your Credit Card Debt is Too High If...

1. Your name repeatedly comes up as a potential beneficiary in a U.N. discussion titled "Debt Relief for Developing Nations".

2. Your credit score is lower than your IQ

3. You accidentally walk into a Capital One shareholders meeting where you are received with a standing ovation, following which the crowd spontaneously erupts into the song "for he's a jolly good fellow..."

4. You recently tried to board a South-West flight with your credit card statement, but the flight attendant made you pay for an extra seat (using your credit card, of course).

5. Last night you woke up to a voice yelling: "feed me Seymour", coming from your wallet. You swear it was a dream, but in the morning you look a little pale and have strange pin-prick marks on your thumb and middle finger.

6. On rainy days there is a homeless person named Eugene who uses your credit card statement as temporary shelter.

7. Small birds that stray too close to your credit card statement are silently sucked into what is described by modern physics as a hole in space-time.

8. You practice writing teeny-tiny numbers so that you can fit your minimum payment amount onto one check.

9. Yeah, you've heard of the national debt. It doesn't sound THAT big.

10. You carry a balance on your credit card. Seriously, some people actually do that.

11. Suggested by Silverbax of Hard Working Cash - "The amount of paper used to print your credit card statement causes Greenpeace to demonstrate outside of your home."

Have any other good ones? Post a comment. If you are a blogger, I will post a link to your blog if you leave a suggestion. How's that for a deal?

Liked this post? You might also enjoy this one: It's Time to Drop Your Financial Advisor When...

401K - How Do People Really Invest?

Have you ever been curious to know how people invest their 401K funds? I know I have. Several months ago I was appointed to my company's 401k management committee and with that appointment, I received access to my company's information. Much of that information is extremely confidential, however, I was amazed to find out that a lot of it is actually available to the public through the company's various regulatory filings.

I found out about this when I invited some new 401k providers to bid on our plan. To my surprise, when they arrived they knew exactly what funds we offered to our employees, how those funds performed and how much money was invested where... yes. I was surprised too. Then they showed me the forms, and all the data was right there in black and white.

I thought I would share some of this publicly available information with my readers, as it might give you some insight as to the way people plan for retirement and invest their retirement assets.

The figures I share below include only current employees (which own only a small minority of plan assets). The rest of the plan assets are owned by former employees who have not rolled-over their 401k's (see my post: 6 Reasons to Roll-Over Your 401K)

General Characteristics:

% Participants: approx. 80% of employees
Average plan balance: $42,000
Median employee balance: $29,700
Standard deviation is: 41,000 (which tells you that we have both very high and very low balances)
Average number of funds per individual: 4.5

Asset Allocation:

Money Market: 0% (that is excellent! I was sure there would be a few poor investors in the bunch - but this figure reassures me that our employees are more sophisticated than I gave them credit for)
Bonds: 17.5%
Large Cap Stocks: 4.5%
Small Cap Stocks: 16.3%
Mid Cap Stocks: 8.3%
International Stocks: 7.6% (this number is probably too low, and when we select our new vendor, I will ensure that in an upcoming educational session our advisors cover the diversification benefits of investing in international stock markets)
Value Stocks: 6.3%
Contrafund: 6.3% (an actively managed equity fund that tries to make contrarian investments)
Balanced Equity Fund: 9.10%
Equity Growth Fund: 24.1% (all in a single fund. I have yet to examine if any performance chasing is involved, but this is by far the largest single fund in our 401k plan).

Overall, as an organization we have a fairly diversified portfolio. The individual story is different, alas, that information is confidential and I am not able to share it. Nevertheless, on the whole, this report paints a better picture than I was expecting.

Another very encouraging sign about our plan participation is that in recent days a number of employees approached me proactively to ask how our search for a new 401k provider was coming along, and to offer their ideas, suggestions and concerns. All of these are very welcome signs.

In the coming weeks I will continue to post stories about our search for a new 401k vendor and the various decisions that we make along the way. Stay tuned.

New Carnival and Recommended Articles

The new Carnival of Personal Finance is live on AllFinancialMatters. My recent article condemning a possible sub prime bail out tops the list of articles (oh, yeah!).

Other excellent articles in the Carnival include:

The BEST post I have seen this week comes to us from Finance Buff, who gives us an article comparing multiple money market funds from Vanguard and gives very salient advice on how to pick the right one for you. Hint: taxes are important. With posts of that quality, Finance Buff is now on my list of favorite PF bloggers.

Getting Green recommends 8 Tactics to Help You Win in Any Negotiation. It is a good article, but I disagree with Green's assertion that you should not be the first to name a price when negotiating. In fact, you should do your best to name a price first - assuming you are knowledgeable about the subject matter and will not completely expose yourself as ignorant by doing so. The reason: anchoring. It has been repeatedly shown that if you anchor your adversary's expectations high enough, it is harder for them to low ball you. For example, if you are hoping to be paid 500, and your adversary was only planning to offer 400, if you are the first to name your price, your adversary will have a tendency to raise his first offer such that it is closer to your own.

Canadian Dream gives us 10 Signs That Your Retirement Plan is Not Going to Work. To his list I would like to add: investing all your retirement assets in a money market fund (or a savings account), because you feel that this is the safest place for your money. You would not believe how many people I know that have that philosophy. In fact, some of my family members are like that. Luckily, in their case, the retirement plan is somehow adequately funded.

Finally, for the sake of amusement, check out this reproduction of the original 1040 tax form, from 1913... brought to you by Political Calculations. Man, I could have saved sooooo much money if I only lived a hundred years ago. Of course, that would have placed me 6 feet under at this point, so I guess I am happy to be paying my taxes.

A Sub Prime Bail Out? Hell, No!

CNN reported on Friday that an effort may be brewing to bail out consumers who are at risk of defaulting on their sub-prime mortgages. An excerpt from this story:

On Wednesday, Congressional Democrats led by Charles Schumer (D-N.Y.) advocated steering hundreds of millions of dollars into nonprofits to help the growing number of homeowners who are having trouble paying their mortgage. But economists and industry experts say the cost of a bailout would be significantly more than that.

Christopher Cagan, director of research at First American CoreLogic, says rising mortgage payments on adjustable rate loans will force 1.1 million homeowners into foreclosure over the next 6 years. He estimates the cost of paying off the debt for those borrowers would be $120 billion.

Quite frankly, I don't care if the cost of the proposed bail out is $1 or $120 billion, a bail-out of this nature is not only bad economic policy it is also morally bankrupt.

First the moral argument: a government bail-out of the sub-prime market is a form of regressive and oppressive tax. I don't own a home. I am a renter. There are millions of us around the country. Some rent by choice (myself included), but many rent because they cannot afford to buy a house. By bailing out the sub-prime lenders and borrowers, the government would be taking hard earned tax dollars paid by renters, and giving those assets to generally wealthier financial institutions and home owners.

Second, by bailing out sub-prime borrowers the government would be rewarding financial recklessness. For years people have been talking about a real-estate bubble, but sub-prime lenders and borrowers chose not to listen. They chose to try to ride the wave to real-estate riches. If they had succeeded, those of us who chose to remain fiscally prudent and not buy real estate beyond our means, would have gotten nothing. However, now that the reckless real-estate bet failed we must share in the financial burden? Why?

Now for the economic arguments: the government has no business interfering with the free markets unless the markets are inherently incapable of addressing the issue on their own. Predatory monopolists and price fixing are two examples of such market failure where government intervention is needed. In the case of sub prime loans there has been no market failure. Yes, there were a lot of people, both lenders and borrowers, who made horrible financial decisions. However, those decisions are theirs to make and the consequences are theirs to bear.

In fact, if the government decides on some sort of sub-prime bail out, it will be undermining the markets. Healthy markets are built on the idea of risk and return. If a certain asset is risky, fewer investors are willing to invest in it, and therefore the return on that investment goes up. Thus, for sub-prime mortgages lenders demand a higher return in the form of a higher interest rate. Now, assume that the government bails out sub-prime lenders and / or borrowers. Such a move would tell the market that sub-prime loans are far less risky than they previously thought, and so both borrowers and lenders would be more inclined to get into these risky transactions. When investors do not properly understand the risks that they are accepting or think that someone else will bear any negative consequences, they enter into transactions that they would not otherwise pursue. If the government does not let investors and consumers get burned, it is setting us up for the next big financial bubble. Investors will think that the government will be there to bail them out again if the market goes south, thus they will be willing to pay more for risky assets and yet another financial bubble will emerge.

My bottom line: the government should let the sub-prime market fail. They should let the people who knowingly accepted unreasonable risks bear the burden of their mistakes. In the long run, this will only strengthen the markets. For once, Washington should do something it has been doing phenomenally well for many years: NOTHING.

17 Critical Questions for Assessing Your Financial Well Being

Getting your financial life in order starts with asking yourself some basic questions and giving yourself some honest answers. Here is a collection of some of those questions, the answers are up to you:

[Late addition: in response to comments readers of this article posted on some other sites, I intend to start a series of posts that individually addresses each of the questions I outline in this post. The series will start later this week and will run for several weeks. I hope my readers find it useful.]

1. What are my goals in life and am I on the right track to achieving them?

2. Am I maximizing my earnings potential?

3. Am I saving enough money for my old age?

4. If I die tomorrow, will my family have enough to take care of their needs?

5. If I am disabled tomorrow, will I have enough to support both my dependants and myself?

6. Is my family financially and physically prepared to handle a natural or man-made disaster?

7. If I lose my job tomorrow, do I have enough liquid assets to support my family for several months?

8. Do I have enough medical insurance coverage to handle a catastrophic health problem for a member of my family?

9. Is my investment portfolio sufficiently diversified?

10. Is the asset allocation of my investment portfolio proper for my risk tolerance?


11. Am I getting a sufficiently high return on my investments, compared to the level of risk I am accepting?


12. Am I spending too much of my income?

13. Is there a way for me to reduce my spending?

14. Can I handle my current level of debt?

15. Do I need to be carrying any debt?

16. Is there a way for me to reduce the level of interest I am paying on my debt?

17. How do I rate my financial well being and the way I manage my finances?

Ask yourself these questions, and make sure you answer them truthfully. If you find that one or more of the answers you give yourself is not adequate, it's time to do something about it.

If it seems like there are too many things that you need to change, don't be overwhelmed. Pick one small task and take care of it tomorrow. When you are done with that one, move on to the next. You need to start somewhere and all you need to do is make sure that you are consistently moving in the right direction.

Recommended Post on Puny Money

The sole purpose of this post is to recommend an excellent post. The post, by Puny Money, is all about measuring your job status. It comes compelete with an interactive survey. I thought it was worth a special mention.

BTW, I scored 80 for my job evaluation, which sounds about right.

Another Prediction of Home Price Declines

Further to my post a couple of days ago regarding declining home prices, Bloomberg yesterday published this interview with Kenneth Heebner, co-founder of the top-performing real-estate fund over the past decade, Capital Growth Management. Heebner predicts that home prices may drop 20% nationwide due to the overhang from the sub-prime fiasco.

According to him, foreclosures on sub prime loans may reach 40% of outstanding mortgages (!) and if this happens the foreclosed properties will flood the market and exert downwards pressure on home prices.

I am no real estate genius, but I am telling you, this is going to be a tough one. Heebner is not forecasting a recession but I have the feeling that a recession is in the cards. I certainly hope I am wrong, but I think the first domino has already fallen and the rest is a matter of time.

What do you think?

Employee Stock Purchase Plans: Free Money, No Risk

Yesterday I wrote a post about the pros and cons of investing in your own company stock. My conclusion is that investing in your company stock is a serious financial mistake. However, this rule has at least one major exception: employee stock purchase plans (ESPP).

Many publicly traded companies offer their employees the chance to purchase company stock at a discount. The program typically requires that employees designate a percentage of their after-tax income, which is automatically deducted from their pay check. The money accumulates for a certain period of time, at the end of which it is used to purchase company stock.

Under the terms of my wife's ESPP (at her old company), an offering period would start and end twice a year: Feb 1 and Aug 1. The 15% discount would apply to either the price of the stock at the begining of the offering period or the end of the offering period, whichever was lower. For example, if the price on Feb 1, 2006 was $10 and the price at the actual purchase date on Aug 1, 2006 was $12, you would pay $8.5 per share: 15% below the Feb 1 price. You are guaranteed a 15% return on your money, you have absolutely no risk, and your upside is unlimited. What is there not to love about this program?

Readers who have read yesterday's post understand that I am very much against investing in your own company stock, and true to form the strategy we used with my wife's ESPP was to sell the stocks immediately upon purchase, take our minimum 15% gain and use the money to buy index funds.

Of course, to calculate your real profit you need to take into consideration the opportunity cost of having the cash locked up in the ESPP for three months on average, and factor in the short term capital gains tax which you have to pay on the profit from selling the shares. Even when these are taken into account there is still a large amount of free money involved. If anyone asks, I'll be glad to share the calculation in a comment to this post.

Another benefit of our ESPP strategy is that it is a forced, regular savings plan. The money is deducted directly from your salary, and if you start the program as soon as you join the company, the money never appears on your pay check, so you do not miss it. That money adds up pretty quickly, and twice a year you get a very nice, tidy sum deposited directly into your brokerage account.

In summary, if your company offers an ESPP that includes a discounted stock price, take advantage of it. My advice, however, is to not be tempted to hold on to the stock once it is purchased in the hope that it will appreciate further. Sure, the stock may go up. It can just as easily go down. Sell your discounted stock as soon as you can and use if for a more diversified investment.

Investing in Your Company Stock: Pros and Cons

My wife will be starting a new position next week, and her new company provides their 401k matching funds in the form of company stock. This is an unsavory practice that I hoped had passed from the world after the Enron scandal. Forgetting about that for minute, I thought I would take the opportunity to write about the pros and cons of investing in your own company stock:

Why You Should Invest in Your Company Stock

1. Understanding Your Investment - Warren Buffet is famous for saying that you should only invest in what you know and understand. One would think that the company you know the most about is the one you actually work for. You know if the company is well run, you know if morale is good, you know what the customers think about your company. In short, you have a lot of information which may allow you to make some intelligent investment decisions.

2. It Is a Company You Believe In - Otherwise why would you be working there?

3. It is Easy - sometimes all you have to do to invest in your company stock is to NOT act. Some companies award stock options or restricted stock to their employees. Others offer an employee stock purchase plan. Sometimes, unless you sell the stock you are awarded, you are automatically an investor.

4. Discounted Stock Offerings - many companies have an employee stock purchase plan (ESPP) which allows employees to purchase company stock at a discount, using a set portion of their salary. These purchases are typically done twice a year, and at the time of purchase you are guaranteed a 15% return on your investment, i.e. free money. Not taking advantage of such gifts is stupid. I intend to write a post about ESPP later this week.

5. You Don't Get a Choice - sometimes you are granted options or stock without having the right to sell them. It's a gift horse, no looking in the mouth please.


Why You Shouldn't Invest in Your Company Stock

1. The Double Whammy - if your company goes under, you lose your job AND your company stock is now worth zilch... can you say ENRON?

2. Restricted Trading - SEC regulations restrict company employees and other insiders from trading the stock at certain periods of the quarter. The blackout period lasts until your company releases its quarterly earnings statement each quarter. During this time your investment is completely illiquid by law. If your company will be releasing some bad news, you may be stuck holding a bad investment with no way to get out.

3. Bias - When I work for a company, I tend to think that my company is superior to the competition, whether this is true in reality or not. I have no proof of this, but I suspect that many people share the same positive biases towards the company they work for. A biased investor is a poor investor. If you can't keep a sober market outlook, you should probably not be investing in your company's industry sector at all.

4. Diversification - I recently read a post on My 1st Million at 33 (an excellent PF blog that I strongly recommend) in which Frugal explains that about 20% of his investment portfolio is invested in his company's stock. Frugal's appetite for risk is much higher than mine, and he is a sophisticated investor, but I don't care how much you love a company, or how great you think its prospects are, holding 20% in ANY one stock makes for a very undiversified portfolio. I shared my opinion with Frugal in a comment on his post (Hi, Frugal!)

Bottom line, there are definitely some advantages for investing in your company stock, and under some conditions it is the right thing to do. However, while the "common wisdom" is that you should have no more than 10% of your portfolio in your company stock, my opinion is that the risks far outweigh the benefits and the smart strategy is to sell, sell, sell.

Real Estate Prices to Fall

According to this CNN story that ran earlier today, The National Association of Realtors now expects the national median home price to drop by 0.7% in 2007. If this materializes, it will be the first time that the group has recorded a nationwide decline since it first started keeping records 40 years ago. Last month the group forecast a 1.2% increase in the price of homes this year.

I have a few of comments on this story:

First, remember that these numbers are coming from the National Association of Realtors - a group whose primary reason for existence is to talk up the prices of real-estate. If they are forecasting a decline, I think it is probably safe to assume the numbers will be even lower.

Second, note that the numbers are getting worse. Just last month the same group forecast a modest increase in home prices in 2007. The trend is clearly down at this point. Talk of a bottom in the real estate market appears much too early, and I think that the market is likely to get worse before it gets any better.

Finally, while the forecast decline appears small, the number does not take inflation into account. This means that if the forecast materializes, the real decline is likely to be 3% to 3.5%. That is a substantial decline and I don't think that it will be the last one during this real estate downturn. Time will tell.

401k Advice

PF101 left an excellent comment in response to my post titled Retirement Survey: The Results, that I thought was worth posting in its entirety. Hopefully this response can help other people trying to improve their company's 401K plans. It also offers further insight into the nature of people and the plans that they make for their future. Here is post:

"...I conduct benefits training with businesses of all types an sizes and it’s rare that even 25% of the participants know even the basics about their retirement plan options. Based on this experience I have a few suggestions for you:

1. Implement an automatic enrollment policy. This would require employees to opt-OUT of participation instead of opting-in. Their contributions would, unless they choose otherwise, go into the Target Retirement Fund that is appropriate for their age. This option is great for the people who just don’t know what to do or are just too lazy to sign up. Much of non-participation is fear or just laziness. I presented to a non-profit the other day and of the 15 people in that session, 10 hadn’t enrolled just because they kept forgetting. I made them go get their forms, explained the different funds and how to do asset allocation and we got them all enrolled right then. Make it as easy as possible and you’ll find that people won’t complain.

shadox response - great suggestion. We are implementing this.

2. Make sure you offer Target Retirement Funds. They’re great for people who don’t know and don’t want to know how to invest. This will by far be the biggest group of people so make it as easy as you can.

Shadox response - another great suggestion. One of the problems with our existing 401K is that we do not have any target retirement funds. The new plan we will implement will have that option and I think that many will choose to use it.

3. I think it’s good for some people that your company is including a self-directed brokerage option, but do your employees a favor and see about requiring some sort of “prove yourself” system before people can choose that option. This will protect the people who think they’re Warren Buffet but are closer to Jimmy Buffet in their stock picking capabilities.

Shadox response - we are still trying to figure out if something like this is possible. Regardless, in the self directed 401K option we will probably have the employees bear the cost of any trades, to discourage day trading or other kinds of excessive trading. I must say, I am concerned about people using the self directed 401K option without having adequate knowledge.

4. Conduct employee training. I would double check Vanguard’s education services. I used to work in their Institutional Services department (401ks) and when I was there they definitely offered on-site education services. That was several years ago so it may have changed but I would double check. If they don’t I would check into 3rd party training. You could hire someone like me who would come in and teach the people who really need to know.

Shadox response - I contacted Vanguard and they actually sent me to a local fee only broker who sells their solutions. Apparently they do not directly serve their customers. I was disappointed to find out that this is the case.

Like I said above, I present to all kinds of companies and 99% of the time the entire presentation is about WHY you should save for retirement, how the different types of accounts work, what compounding is, what different types of investments are, why you want free money, etc. It’s personal finance 101 (hence the name of my company!). I can guarantee you I’d be cheaper than Fidelity and I’d guess there’s someone in your area who could provide a similar service. "

New Carnival

Here are a few good posts from the Carnival of Personal Finance #95:

The Finance Buff has an interesting article about Who Pays for Credit Card Rewards. My answer: it's a combination of credit card customers who carry a balance, and the business at which you made the purchase. I disagree that businesses raise their prices to compensate for credit card fees - other forms of payment also carry a cost. Cash means going to the bank and handling large quantities of change (both of which cost money). Checks carry a risk of non-payment, and so forth. The rewards you receive from the credit card companies are a portion of the efficiencies created by the use of credit cards compared to these alternate methods of payment, as well as a "fine" paid by consumers who carry a balance.

Plonkee Money thinks that atheists should tithe, or more specifically that non-religious folks who consider themselves humanists have an obligation to try to make this world a better place by helping the less fortunate. As someone who considers himself a humanist, I completely agree.

Tight Fisted Miser is debating The Economics of Sunk Costs as they relate to his finishing his law degree. Stick with it buddy! Even a lawyer can has hope of redemption. I can personally testify to that fact... :-)

Finally, The Frugal Law Student lists 5 Things You Should Never Buy New. One of these things is books. Man, do I disagree. There is nothing greater than the smell of a brand new, unwrinkled book and money be damned!

Articles and Commentary

I thought I would share three excellent posts I found recently on other PF blogs.

First is the article titled The 10 Best Money Moves You Can Make on Free Money Finance. It's an old post, and there is nothing revolutionary about it, but it contains a lot of common sense advice. I must say that I disagree with Rule #5: Buy a House. it's not that I don't think people should buy houses, it's just that I don't think it is appropriate for every situation or for any state of the real estate market. It is certainly much shakier advice than "contribute to your 401K to get your employer's full match".

Yesterday My Money Blog had a post about Google's new real estate search tool. The article is aptly named: Google Now Lets You Search Real Estate Listings... I used this Google tool to search for houses within 20 miles of my Silicon Valley town. Nothing even remotely reasonable came in at under $850K, and these results strengthen my point with respect to the previous article: buying a home is not always the smart thing to do.

We pay a monthly rent of $2000 (i.e. $24,000 per year). If the house truly costs $850,000 our rent represents a return to the landlords of about 2.3% per year on the value of the house. This rate of return is approximately equal to the dividend yield on the S&P. Therefore, if the capital appreciation of the S&P is expected to be higher than the capital appreciation of the real estate market, it is better to invest your capital in the stock market rather than in real estate. I am aware that this argument is a gross over simplification, but I think it is in the right ball park. Until rents go up substantially, or real home values decline substantially, I don't think that it makes sense to buy - at least not in the Silicon Valley.

If this topic is of interest to you, you might also be interested in one of my previous posts on the topic: Your House Can be a Bad Investment.

Finally, Frugal Zeitgeist is on a roll. She has had a number of really good posts lately. I recommend checking out her blog. Her latest post the real cost of shopping at Wal-Mart, discusses the pros and cons of shopping at Wal-Mart. That company has received so much bad press in recent years, yet it is the world's largest retailer. I guess when you are that big (and pay your workers next to nothing and don't give them health insurance) you sort of carry a bulls eye on your back. In recent years, the company is definitely trying to change its image. Its push towards environmentally friendly stores and products is certainly welcome. In a few years it might even become a good corporate citizen. Who knows?

401K Expenses

Earlier this evening I read this excellent article on All Financial Matters. The post deals with the impact of 401K expenses on plan returns. It also cites this article from the WSJ that covers different aspects of the same story.

This post struck a cord with me for a number of reasons. First, as a member of my company's 401K management committee, I can testify first hand to the fact that 401K plan fees are not transparent. They are not even transparent to the people who manage the plans and that have full access to all the information. Plan providers have all sorts of obscure fees, which are hidden in a variety of places and written in extra fine print. It is only now that I am truly starting to understand what it is costing our employees (myself included) to participate in this plan.

Second, outside of our 401K's all of our assets are invested in low cost index funds. When I joined my company's 401K management committee, I immediately started advocating for us to move to a lower cost provider. We interviewed several plan providers, including Fidelity, ADP, Vanguard and our existing provider ING. However, with the exception of Vanguard, whose representative left some doubt in my mind as to the level of service that they can provide, it appears practically impossible to get a well balanced porfolio of low cost funds that we can offer our team. It seems that the best we can do at this point is get an average expense ratio of approximately 1.2%. We have $8 million dollars to invest and we are being charged 1.2%? How is that possible? My own comparatively tiny personal investments bear expense ratios of about 0.5% on average.

Yes, I recognize that running a 401K plan is more complex, and I recognize that providers of 401K plans are subject to much more stringent regulations. I also realize that there are costs associated with running a plan of this type that a private investor does not incurr. But seriously, $8 million for 1.2% per year? Something is clearly wrong with the system.

I will keep you posted as I try to help my company navigate through this mess and find a better retirement savings option for my colleagues (and for myself). In the mean time, if anyone can offer any advice, I would much appreciate it.

Bubbles and Investor Behavior

Now that the real estate boom is so clearly a thing of the past, I wanted to share a little bubble related story and put it into context.

Two years ago, someone I know moved from Southern California to Northern California. That person owned a home in San Diego, and when he moved up here, he decided to keep his existing home and buy another one in Silicon Valley. His thinking was that the San Diego real estate market was too good to miss out on.

Buying a house in Silicon Valley is a tad on the expensive side, and this gentleman could not afford to own two expensive houses while maintaining his existing lifestyle. Unlike others who may be inclined to get into debt to finance their consumption, my acquaintance wisely decided to tighten his budget. He cut his cable service, started eating more home cooked meals, etc. He also decided to cut his expenses further by terminating his life insurance policy.

Unfortunately, what happened next could have been taken directly from a showtime movie. About a year ago, this gentleman was diagnosed with Cancer. He is fighting hard, he is optimistic, and has every intention of beating the disease, but in retrospect he understands the potentially disastrous consequences of the financial decision he made.

This is an extreme case of investor error escalating into a really bad situation. It amazes me that no matter how many bubbles we go through, there are always people willing to put their financial well being on the line and bet they can beat the market.

The one lesson I think everyone can take away from this story is that even if you decide to go for some risky investments you should never mess around with your financial safety net. Life insurance, health insurance, emergency savings fund and so forth are that safety net. Play with those and you may find yourself in some serious trouble.

To Buy or Not to Buy, That Is the Question...

Based on the request of a regular reader of Money and Such, this post will be dedicated to the age old question: Should you buy a new vehicle or lease one? If you have topics you would like me to cover in future posts, please let me know and I will do my best to oblige.

Let's start with the premise. I think that buying (or leasing) a new car is a bad use of money. Simply put, a car is a depreciating asset, it is NOT an investment. As such, I don't like spending money on my car and I have been driving my 1997 Geo Prism since 1999. Unfortunately, it is pretty much at the end of its useful life, and I too will have to buy a new chariot in the near future. So my first piece of advice is: don't buy (or lease) a new car.

Of course, other people treat their cars differently. Some consider their car a hobby. Others treat it as a status symbol. Some spend so much time commuting that driving in a decrepit old vehicle like mine is simply unacceptable. Whatever the reason, if you have your mind set on a new car, should you buy it or lease it?

The answer to that question is grounded in pure economics: consider all the costs of owning, consider all the costs of leasing, and choose the lowest cost option. This Excel template will help you to consolidate all the different factors and perform the calculation for you.

Exact calculations aside, I would expect leasing to be the more expensive alternative as a rule of thumb. First, leasing is a less transparent deal than an outright sale, and more complicated deals have more places to hide nasty little surprises and fees. Second, for the dealer leasing is probably a much more complex undertaking, and as such I would expect the dealer to demand higher margins to cover his costs. Third, and most important, when leasing you "own" the vehicle at the most expensive point in the cost curve. During the first couple of years in a vehicle's life it depreciates at the fastest pace. By leasing a new vehicle every two years you are dooming yourself to repeatedly owning the most expensive part of the depreciation curve, and let someone else enjoy the milder portion of the curve. That doesn't sound like a very good deal to me.

As a final thought, I would like to propose that instead of buying a new car, you should consider buying a certified, "pre-owned" vehicle. Alternatively, I would consider buying a used car from Hertz car-sales. Hertz sells the top cars from their fleet - vehicles that typically have under 20,000 miles and are approximately one year old. The vehicles are very well maintained, and come with both a manufacturers warranty and Hertz's own short term warranty. The cars sell for a substantially lower price than an equivalent car at the used car dealership, and best of all: it's a no haggle transaction. The price quoted is the final price.

About 3 years ago my wife and I bought a nine month old Honda Accord from Hertz, and I have nothing but great things to say both about the car and about the transaction. The car even had an (almost) "new car smell".

It's Time to Drop Your Financial Advisor When...

I am starting a new series of posts titled "Funny Money". The goal is to have a little fun with the often too serious topic of personal finance.

Here is the first post in the series.

It's Time to Dump Your Financial Advisor When...

1. You swear you can hear an evil theme song and the roll of thunder every time he speaks.
2. He bursts into hysterical laughter whenever the topic of expense ratios comes up in a conversation.
3. He recommends investing in past commodities, since the futures commodities market hasn't happened yet and no-one is quite sure when it is expected to occur.
4. He is not quite certain but he thinks that sub-prime loans have something to do with borrowing a rib sandwich offered by a national sandwich chain. He also suggests the same company should introduce a sub-wings sandwich with chips and a soda.
5. When you ask him whether to sell a losing stock, he excuses himself and briefly turns away to consult his magic eight-ball.
6. When you visit his office he excitedly tells you that his new computer now allows him check stock quotes almost in real time. He also swears that he will soon have enough saved to afford that new fax machine thingy.
7. You find out the name stated on his birth certificate was Alfred E. Newman.
8. When you ask him about hedging he explains that since he hired his new gardener, he no longer has to do any of that sort of stuff himself.
9. When you inquire about the best way to fund your account, he suggests small, unmarked, non-sequential bills, preferably delivered in a brown briefcase.
10. He suggests with a straight face that you should invest in actively managed stock funds. No, really.

If you can think of any other excellent reasons to drop your financial advisor like a hot potato, be sure to leave a comment with your suggestion.

Also be sure to check back here next week for the next installment in the Funny Money series, I think this will be fun.

45% of Mail-in Rebates Go Unclaimed in 2006

According to a CNN piece I saw earlier today, 45% of mail-in rebates went unclaimed in 2006. That is a staggering number if you think about it, and it is exactly why rebates are offered in the first place.

If only about one half of mail-in rebates are claimed, a company that offers a $10 rebate, will only need to pay $5 in discounts on average. About half of customers will get a $10 discount, and about half will get $0 - but even those customers that do not claim their rebates make their purchasing decision based upon a discount they will never receive. This leads me to my main point: mail-in rebates are a form of discrimination against lazy people. Such financially lazy people use the rebate as a way to fool themselves into thinking that they are buying something for a lower cost than they do in reality.

Discrimination against lazy people is actually a very common practice in modern society. It does not end with rebates. For example: AOL used to offer free Internet service for a month. To get it you had to sign up for service, but could terminate at any time. Of course, many people are too darn lazy to remember to terminate on time, and then KA-CHING. The same is true for a vast range of services - from "free" credit reports to various "book of the month clubs".

A millionaire that I know made his fortune by selling travel packages to affinity groups (alumni associations, churches etc.), in the days before the Internet introduced us to the likes of Expedia. In one of our conversations, this gentleman told me that soon after he started his business, he discovered that one of the most profitable things he could sell was travel insurance. To sell more of it, he moved from an opt-in system - where he offered people the option to buy travel insurance, to an opt-out system - where he automatically quoted travel insurance as part of the package and gave people the option to NOT buy it. According to him, this minor change made all the difference and his profits soared. His lesson to me was simple: because people are lazy, they tend to allow decisions to be made for them by accepting a default position that is offered to them.

Lazy people let financial decisions happen to them. They make a decision, by not making a decision and thus hand control over their financial life to a someone else who may not have their best interests in mind. It is true for mail-in rebates, but it's just as true for many other other things in life. If you can't be bothered to get off your mental couch, expect people to reach into your pocket and help themselves to some of your hard earned cash.

Carnival of Personal Finance #94 & Festival of Frugality #68

It is live, but personally, I hate the format... it's just a bunch of links. But let me tell you what I really think... :-)

My recent post on Vegas, Gambling and Your Investment Strategy, was placed under the Motivation, Planning and Goals section. Not clear on why.

I also found this interesting article about What Do To with Large Capital Gains on the Laws of Finance. The article deals with what to do with an asset that will be subject to large amounts of capital gains tax upon sale, but which is not expected to perform well. From my perspective, this is yet another advantage of index funds - since by definition they are expected to perform as well as their market benchmark.

Another good one is Ben Stein’s Basic Rules of Retirement on Wealth Building Lessons. One of my favorites is: "Get and stay married to a sensible person". Another one that I don't think is a good rule of thumb, also it obviously applies in many cases is: "Buy your home".

A spectacular post that is not part of the carnival is The 20 Dumbest Personal Finance Questions of All Time from Punny Money. It is simply hilarious and highly recommended. Who says personal finance must always be a serious matter?

Festival of Frugality #68 is up. It includes my post on using credit cards to get out of debt. Also included in the Festival is this article from Money Smart Life about saving money on magazines. One of the tips - pick up magazines from the recycling bin. Dude. If you're that strung out, I will send you my own magazines. I will only go THAT far to save money.

Renting vs. Owning - Is the Balance Shifting?

A few days ago I found a site called Rentometer on Get Rich Slowly, one of my favorite personal finance blogs. The site lets you compare your rent to the prevailing rent in your area for comparable houses. Using this site, I found that our rent of $2,000 for a 3 bedroom townhouse in the heart of Silicon Valley was on the very low end of the rent scale.

Living in Silicon Valley, it has long been my opinion that owning a house is tough to justify economically. I even wrote a post about it recently ("Why Your House May Be a Bad Investment"). Even though my wife and I can afford to buy a house in this ridiculously expensive area, the house we can afford would not be a very nice one, and would consume an obscene portion of our portfolio.

However, I am starting to get the feeling that the economics may be changing. For one thing, real estate prices are flat and trending down, making a purchase more attractive. My thinking is that nominal prices will likely continue to decline slightly for the next two to three years, while inflation reduces the real prices more significantly. At the same time, my hunch is that rents will be increasing in the next few years. While interests rates were low and financing easy to obtain (even with a so-so credit score), many people opted to buy. Now buying may be more difficult for many, and those will be forced to rent. This means more demand for rental properties and a likely increase in price.

While the cost of owning a home is likely to decrease in the next couple of years, the cost of renting is likely to increase. This may be especially true for renters who are paying less than market rates, such as my wife and I (apparently). We will see how this whole thing plays out, but it may be that owning will be the financially sound decision of the next few years.

How to Negotiate a New Job Offer

In my post from two days ago I wrote that my wife accepted a job offer from a new Silicon Valley tech company. The new salary she was offered was literally twice her current compensation, however that was after she negotiated an increase from the company's first offer. Here are some of the principles we used in renegotiating the offer:

1. Never Take the First Offer - as someone who has both hired people and who has received an offer or two in his life, I can tell you with a high degree of confidence that the first offer you receive from a company is never the best you can get. Hiring managers expect you to negotiate, and for that very reason leave some room for concessions. My wife was worried that if she tried to negotiate she would lose an offer she was really interested in. If you follow the strategy proposed below, losing your offer is a very remote possibility.

2. Negotiate Only if You Intend to Accept the Offer - always negotiate in good faith. If you have no intention of accepting the offer anyway, don't waste everyone's time by making demands. Say "no" and move on. Negotiating without intent to accept is unfair to the hiring company who gave you an honest offer.

3. Be Honest - Do not lie. If you don't have another offer, don't pretend that you do. If you have multiple offers, don't over-sell them. The last thing you need is to start with a new employer on the wrong foot.

4. Ask for What You Want to Get - don't sell yourself short. Ask for what you think is going to make you happy, not what you think the new company will agree to. I would even say that if the company immediately agrees to what you are asking for, you are probably asking for too little. Of course, don't be ridiculous in your demands. In our case, the new company immediately agreed to my wife's request for an extra $10K in salary, which basically tells me that we should have asked for more. Nevertheless, my wife is very happy, and that is the MOST important thing.

Keep in mind that getting a better offer before you join the company is much easier than getting a raise once you have already joined the company. Before you accept the offer, you have all the power and the company is courting you. After you accept the offer and start working, the company knows that switching jobs is not a simple task, and therefore will be less inclined to agree to your requests. How easy do you think it would have been for my wife to get a $10K increase to her salary within six months of her start date? Extremely hard is the right answer. Getting that "raise" before starting to work was a breeze.

6. Be Matter of Fact - when asking for the improved offer, be matter of fact. Don't threaten, don't plead, explain what you want and then shut up. For example, consider something like: "Thank you for the offer. I currently have two offers to choose from. I prefer your company over the other one I am talking to, and will accept your offer if you increase the salary package by $3,000". Don't over-explain your request. Give the company a "carrot" by making it clear that you will accept the offer if your requests are met.

7. Don't Paint Yourself into a Corner - Don't say that you will walk away from the offer if your demands are unmet, unless you really intend to reject the offer in that case. Regardless, doubt is a much more effective tool than an ultimatum. Rather than saying you intend to walk away unless you get what you want, consider saying that getting what you want will simply make the decision much easier for you.

It took some convincing, but after my wife agreed to my suggestion that she should negotiate her offer, she not only got the $10K increase she wanted, she also got an increase in her expected bonus. Since her compensation package stipulates a 10% bonus, the increase in base salary will also translate into an extra $1K per year in expected bonus payments. An outstanding return for a 15 minute phone conversation.