Don't Be Fooled - It Ain't Over

Don't be fooled by today's early stock bounce-back. This is not over. Not by a long shot. Prepare for more turbulent times.

Nevertheless, seeing even a temporary bottom in the stock market should reduce some folks' fear level. The world is not coming to an end, and in the end the U.S. economy is bound to come out of this tail-spin stronger and better prepared for the future.

Still, those miserable folks at Congress are playing with fire by not taking decisive and quick action to stablize the situation. Hopefully, the nay sayers will see the light in short order. If not, they will have to answer to the public, who in due course will understand the magnitude of the problem and the failure of its representatives to act.

5 Reasons Not to Bail on the Stock Market

These days fear is king and folks are fleeing the market in droves. You would think that the world is coming to an end, and while I agree that the situation is extremely serious, and yes, even scary and possibly without precedent, I am holding firm to our stock positions. Here are my top five reasons:

1. I am no brilliant investor (and neither are you) - I simply recognize that I don't know enough about investing to make the right call about bolting or staying in the market. Making a gut decision to flee has no better chance of proving the correct way to go than making the decision to wait out the storm. Most people simply have no idea which direction the market will move next week, never mind about next year. I am one of them. However, I know that over the long haul, I am better off staying put.

2. It's expensive to run - if you have been investing systematically for a number of years, it is very possible that like me your stocks have made money, even with the large recent declines. Selling your positions will trigger a capital gains liability, so running has an immediate cost impact. I for one would rather not pay Uncle Sam any more than is absolutely necessary.

3. Long Term Plan - I am confident in our long term financial plan, and our asset allocation is such that I am psychologically willing and able to withstand the declines without changing my strategy. If you are feeling an irresistible pressure to change your investing strategy, you may have built a portfolio whose risk profile exceeds your tolerance for risk. That's actually a good reason to make some changes in your portfolio, but you may want to do that in calmer times, rather than in the middle of a financial storm.

4. Warren Buffett - Buffett has been quoted as saying:

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." 

In fact, he is as good as his word. Just as the turmoil in the financial markets appeared to reach new heights, Buffett stepped in with a $5 billion investment in Goldman-Sachs. That man sure knows how to buy on the cheap. That's not to say that he is guaranteed to make money on his investment, only that it's probably better to move in the opposite direction as the rest of the herd... 

5. What is Safe? - if anyone can show me which investments are safe these days, I would be much obliged. When even money market funds can lose money, and short term treasuries can offer zero returns is there a safe investment left? Oil declined by 30% in recent weeks, gold is swinging around without direction, and are you absolutely certain that your bond funds are not carrying any toxic credit default swaps that could mean big losses? To be honest with you, I am more worried about the stability of the Dollar with the massive new amounts of debt taken-on by our government. Essentially, with danger in all directions, where exactly am I to flee to?

The bottom line: I am sticking with our well diversified portfolio. We have a healthy balance of stocks, bonds, real-estate and cash. Our investment horizon is decades long and our short term cash needs are protected. 

Batten down the hatches, put on your fancy yellow storm jackets, and steady as she goes!

Recommended Articles

Here are some of the personal finance articles I found most interesting over the past week:

Money Smart Life has an article about how to use your last few days in an old job to improve your chances for success over the longhaul - solicit truthful feedback from your colleagues. This is an excellent idea and one that I will suggest to my wife as she gets ready to leave her current position (more about that in a future post).

Pinyo of Moolanomy fame offered a succinct and well written article explaining what short selling is, and why people do it. This topic is very timely given the turmoil in the financial markets and the recent restrictions that the SEC placed on short selling financial institutions' stock.

Jeremy of GenX finance posted about the risk of compounding your investment losses by investing less in a down market. He is right on the money, but my take is that if your losses are not allowing you to get a good night's sleep, investing more is probably not the right strategy for you. Always invest using a strategy you can live with, even in down times. BTW, Jeremy was also featured in Business Week's print edition this week, in an article titled "Where the Pros are Putting their Own Money". You know who else is featured in the same article? Prof. Jeremy Siegel of the Wharton School of Business and Prof. Harry Markowitz, a Nobel Laureate. You know you are doing something right when you are mentioned in the same list as those big guns. Good going dude!

Free from Broke boils down this whole personal finance thing into a single equation: spending > earning = debt (I think it should say "broke" instead). Somebody's got to put that on a t-shirt and give it to the American public at large... many people in this country still think the equation works like this: spending > earning = leverage + higher lifestyle. And it does, for a short amount of time, before the manure hits the rotating wind making machine...

Also, check out the Carnival of Financial Planning and the Carnival of Personal Finance, in both of which I participated this week.

Selecting the Right Credit Card

Picking the best credit card for your needs can be tough to do. I mean there are so many options available on the market these days (even with the current state of the economy). So here's an interesting concept, a website that sorts through all the available options and helps you choose the best credit cards.

This website gives you a vast range of options for finding the card that's right for you. For example, you can search for cards appropriate for your credit history, or cards that match your reward preferences. My regular readers know that I am big on cash back reward cards, so the first thing I did was to see which cards the site recommends in that category. The first card that appears on the list is Blue from American Express - which happens to be my favorite card. There are 6 other cards that are included in that list, but I couldn't tell what order these appear in. It would be useful if the site offered a method for sorting through the recommendations, by each one of the relevant parameters, but no such functionality is available. There are many other recommendation categories. For example, you can search for the cards with the longest grace periods or find the cards which are most suitable for users who take advantage of the cash advance feature (although personally I think that carrying a balance or taking a cash advance is a misguided and expensive way to manage your finances).

The press room section of the website is written blog style, and offers weekly articles on the topic of credit and credit cards, with some pretty interesting and useful information. There is also a section of the website that allows readers to ask specific credit related questions. All in all, this is a very good site, but it still requires some work. One area that requires improvement is the advanced search function. I searched for cards with the following parameters: country: USA; credit score: Excellent; Credit Card Type: Visa; and Customer Category: Consumer - pretty straight forward, but the site could not find any cards that matched the search parameters. I'm not sure why.

Anyway, if you're in the market for a new credit card or just want to figure out what's out there, the site is worth taking a look at.

The Presidential Debate

I gotta tell you: I like this John McCain guy. I like him a lot. I support many of his views and I respect him as a man. I would seriously consider voting for the man if he had chosen a reasonable running mate...

After the debate this evening I checked the actuarial tables at the Social Security Administration website that give the chance a person of a given age will die within the next year. John McCain was born in 1936, which means he will be about 72 when he takes office, if elected. According to my calculations he has a 16% chance of dying in the following 4 years (calculate for yourself).

If he does die during his putative presidency, his running mate who I find EXTREMELY unpalatable (and that is an understatement) would become President. That's a 1 in 6 chance of getting a Sarah Palin presidency. The same chance as rolling a "6" on an ordinary game die.

I, for one, would rather not roll the dice on that specific bet. I am voting for Obama.

Saving by Buying in Volume? Think Again...

Buying in quantity, so the thinking goes, is an excellent way to save money. Strangely enough, if you follow that thinking you often pay more on your purchases than you would if you bought smaller packages.

Case in point, the other day I was grocery shopping at Safeway, and my shopping list took me to the cereal aisle. I was shopping for some snap, crackle and pop. As do many cereal brands, Rice Krispies come in a number of sizes, and typically, larger boxes cost more but offer a lower price per ounce of product. Not that day - this time, the 12 oz box had a cost per oz of 20 cents, while the larger, 18 oz box cost 31 cent per ounce... about 50% more per unit of weight...

But wait - as they say on the infomercials - there's more. That particular week, Safeway was running an even more aggressive promotion. If you bought 5 small boxes, you got an extra $5 discount, or another $1 per box. Talk about saving money by buying small...

Why does this happen? Who knows? Maybe Safeway just got stuck with a surplus of small boxes. Maybe Kellogg's brand manager just bumped his or her

head on a hard surface. I have no idea. This certainly makes no sense from an economic perspective, but if there's one thing that I have learned over the years, it is that people (and especially companies) typically have an economic reason for what they do... Regardless, if I had gone after the large boxes assuming I am getting a better deal, I would have paid more for my purchase. So what's to be learned from this little experience? For one thing, if you are buying products that are offered in multiple sizes, don't get into the habit of buying one specific size. Check the prices each time.

Another lesson to be learned is that the price on the box itself is no indication of the relative price of the product you are buying. The different sizes of containers makes such a comparison difficult. If you really want to know what you are paying for your products, take a look at the price per ounce or the price per unit. That's the only meaningful, apples to apples comparison.

By the way, adding pictures to your blog is much easier when you are walking around with an iPhone. I love that machine.

Three Strategies for Dealing with a Bear Market

The other day I got into an interesting discussion with some colleagues at work, that showed me how diverse people's reactions to the stock bear market can be. First, was our CFO who has a cut and dried strategy: "don't buy on the way down". Our Director of Sales pursues a different course of action: he has taken 50% of his assets out of the market, and left 50% invested. Then there is me.

My philosophy is different. I invest every month - on the 15th of the month. If the stock market is closed on the 15th, I invest on the next business day. The amount of money I invest every month is identical, and does not change with market conditions. I invest our cash in a way that counteracts the volatility in the market, such that our asset allocation doesn't shift too much. For example, over the past year, as real estate stocks took a tumble, I have been putting more money into that sector to maintain about 8% of our investments in that asset class. So far, these new investments are under water, but I don't sweat it. This is not money that I need right now, so I really don't care what it does day to day. I only care what it will do over the next 25 years... Well, to be perfectly honest, that's not an accurate statement. I won't tell you that I am not nervous on days when the market takes a nose dive, but I sit tight, and don't let those swings interfere with my long term strategy.

My colleagues' strategies are faulty in my opinion. My CFO suggests that one should not buy stocks in a bear market. When I asked him how he knows when it is safe to dive back into the market, his reply was that he looks for something fundamental to change. The problem is, in my opinion, that by the time he thinks something fundamental has changed, he may have missed the biggest portion of the upward correction. His strategy seems guaranteed to insure that he only buys assets when they are fully priced or even over priced. Our sales guy, on the other hand, has taken a more rational strategy. It's not that he is not invested, he simply reduced his exposure to the market. Perhaps he is uncomfortable with large swings in his portfolio value. I understand his approach, but that too seems sub-optimal if you are thinking long term

In short, I strive to make investing as boring as possible. I don't try to game the system, forecast swings and changes in the market or get outsized returns. If my investments generate the market average returns I am very happy with that result. I am no Warren Buffet and neither are most other people... Time will tell how are differeing strategies will fare in the current crisis. 

Taking Risk More Seriously

With the current turmoil in the markets, I have decided to take some basic steps to reduce risk (without touching our investment portfolio or asset allocation). One of the important steps I am taking is to make sure that all FDIC insured accounts remain under the $100,000 maximum insurance limit per individual account. To achieve this I moved some money around from HSBC to ING. Even though ING is paying a lower rate, in this kind of environment, staying under the insurance cap is probably a good strategy.

Bail-Outs: Where's the Money Coming From?

A reader question from this weekend asked: "Where is the money for government bail-outs coming from?" Since this is a very timely question, I thought I'd take a few minutes to explain the answer: it comes from you, but the answer is a bit more complicated than that. Here's the long version.

The Federal Reserve has a unique power. It is the only entity that can create money out of nothing. In fact, regulating the amount of money in circulation is one of its main policy tools. If it finds that it needs to lend money to banks in trouble, in its capacity as lender of last resort, the central bank can simply lend money where none existed previously. All it needs to do is note in its books that there is now more money in existence...

So why doesn't the Federal Reserve simply wave its hands and make the economic crisis disappear? Well, it's not quite that simple. There is a price to pay for making money spontaneously appear. That price is inflation. The more money there is, the less each Dollar is actually worth. So, if you follow the logic, in reality it is not the Federal Reserve that is paying for the distressed bank loans, it is you and I. As the Fed creates more money, our savings and our earnings are worth that much less. Of course, the Fed can also work in reverse and make excess money disappear when it thinks that the economy is too hot. But I'm guessing that's not happening any time soon.

There's another form of government bail-out. The government can simply assume control of a moribound business. When nationalizing, the government becomes the owner of the business and also assumes the obligations and debts of that business. Where does the government get money to fund such takeovers? Obviously, it can use money from its budget, which we pay for with our taxes. However, the U.S. government is running a perpetual deficit (meaning it is spending more money than it is collecting in taxes). This means that to finance such acquisitions the government needs to borrow money. They do this by issuing bonds to a variety of interested parties, from ordinary citizens who purchase treasuries to foreign governments who do the same. Of course, bonds pay interest and this cost gets added to the spending which we as tax payers need to finance.

So, the bottom line: regardless of the mechanics of each bail-out at the end of the day, the tax-payer is the one that ends up paying the price. This does not mean that all bail-outs are bad, only that the person who is paying the bill is... you.

recommended articles

Once again it's time for a review of some good personal finance articles out there on the web.

First, a new PF blog that I stumbled across: The Smarter Wallet is focused on consumer tips and tools such as Tips for Buying a Used Car. Welcome to the neighborhood guys.

The PF bloggosphere this week was filled with calming advice in the midst of the financial hurricane that we are going through. Debt Difier at The Happy Rock, advised investors to not panic, reminding me of the famous line from the Hitchhiker's Guide to the Galaxy and managing to sound very calm and collected himself. While the Digerati Life had a post about how to protect your portfolio in market turbulence.

Million Dollar Journey wrote a post about a topic that many dual income professionals are deliberating when they have kids: find day-care for the little ones or step out of the work force. We went through the same thought process, and decided, like Frugal Trader, that the day care option was the right one for us. As I previously wrote, there is a substantial price to pay for becoming a stay at home parent, and this choice is not right for everyone. Frugal Trader's article is a response to a reader's comment basically accusing him of being a bad parent for contemplating day care. To be honest I found that specific comment to be offensive - I don't have a lot of respect for people who tell other others how they should live their lives. Along with religion, stupidity, greed and ignorance, telling other folks how to live their lives is one of the main causes of trouble in our world. Live and let live.

Fire Finance offered an inspiring account of a couple that was able to retire early and how they currently live their lives. Seriously... that post got me thinking.

Another couple of interesting articles coming from traditional news sources this week: Kiplinger published an article saying that Americans are under exposed to international equity. And the NY Times published a story saying that the worst is yet to come... I must say that I feel the same way myself.

Finally, my article about Free Software that saves money AND reduces CO2 emissions was included in this week's Festival of Frugality which was ably hosted by Living Almost Large. Good deal.

Financial Earthquake in Process

The crisis engulfing the financial markets in recent months is no ordinary bear market. It is not your average business cycle, either. This is a full-blown economic earthquake. After the Bear-Sterns failure came Lehman Brothers and Merryl-Lynch. Now there is talk of Morgan-Stanley merging with Wachovia. At this point, it would not surprise me if by the end of next week, both Morgan-Stanley and Goldman-Sachs get acquired, and thus will end the era of the large independent investment bank (at least for now).

The scary thing about what we are witnessing is that the bad news seems to get progressively worse with each passing day. The trouble is no longer confined to the investment banks. Bond insurers are also falling prey to the crisis. If AIG can go under, pretty much any financial institution can follow suit. Earlier this week even money market funds proved that there is no such thing as a safe haven in the midst of the financial hurricane - some of these traditionally ultra safe investments declined in value, and "broke the buck", and a few others have imposed a 7 day waiting period on withdrawals.

Considering everything that is going on, I am amazed that the stock market has held up so well so far. By all rights we should be facing precipitous declines in asset prices at this point, but what we have seen so far is mild, considering that the financial sector is de-leveraging at alarming speeds.

Although some have been speaking against him, it is my opinion that Treasury Secretary Paulson (as well as Fed Chairman Bernanke) has executed impeccably and has taken all possible steps to restore stability and confidence to the market. Only time will tell if he is ultimately successful at averting the worst effects of the storm, but he is certainly doing a fine job trying. Until recently, I did not completely appreciate the full magnitude and scope of the problems we were facing, and even repeatedly wrote against sub-prime bail-outs on this blog. However, at some point, you have to stop thinking about economic policy and principles, and start making sure that the economy does not spiral out of control. I think this man knows exactly what he's doing. If bail-outs are necessary to prevent a complete melt-down, then so be it.

One final word. This post suggests that things are dire and that I expect further declines in the stock market and beyond. I think that's a likely scenario. However, as far as our investment strategy is concerned, I am maintaining strict discipline. This month, just like every other, on the 15th, I made our monthly investment in the stock market. Though the market was tanking sharply that day, I did not change our plan. Fear and greed are the two enemies of rational investors. Keep your head attached and continue to think long term. I have not sold any of our positions, nor do I intend to. This does not mean that I am comfortable with the economic craziness around us. I am as scared and as nervous as the next guy, but I don't intend to let my feelings govern my long term strategy.

Here's hoping for better economic times.

The Worst Case Scenario

I am sure you've heard the expression "worst case scenario", sometimes used in the context of "what's the worst that could happen? I lose $20 bucks?" Well, last week I found out what the real worst case scenario looks like and believe me, it's bad.

The story goes like this: a colleague's uncle was diagnosed with terminal cancer. Bad enough for you? Well, it's not even close to the end of the story. The uncle has been in treatment for a few years and has now maxed out on his lifetime medical insurance cap. As far as the insurance company is concerned, from this point forward he is on his own. Bad enough for you? Hold on, we're not quite done. To get medical care he now needs to go on Medicaid, but to do this, he basically needs to declare bankruptcy and exhaust all his savings.

So let's summarize. You have medical insurance. You are diagnosed with a terminal illness. You receive medical care until you reach your insurance lifetime cap, at which point you find yourself without health insurance. Your only prospect of receiving medical treatment (which has no hope of saving your life anyway, but which might extend it and relieve your suffering) is to declare bankruptcy, thus insuring that your spouse and kids are destitute once you have departed from this world.

Now that's what I call the worst case scenario. This is also something that I would refer to as a complete and utter failure of our society. How is it that we, as a nation, the richest country in the world, allow someone and his family to be so completely and utterly devastated by the tides of fate with absolutely nothing that he can do about it and with no fault of his own?

This is clearly an example of a major market failure. This is where Congress needs to step in and draw the line. Americans should, at the very least, have state sponsored catastrophic health care coverage that will prevent such things from happening. The current state of affairs is simply not acceptable. Health reform now!

Here is someone else who has a similar opinion.

Yes, You Are Getting Less for Your Money

Do you remember my post from a few weeks ago regarding how Safeway cut the size of their Lucerne Yogurt without reducing prices? Well, it turns out that Safeway is not the only one using this dirty trick. CNN Money ran this article about a whole lot of other companies that are taking the same under handed approach for stealth price increases.

Once again - this is clearly one of those times when regulation is needed to prevent such intentional misleading of the public. Companies should be required to state in bold letters on the packaging every time they make a change to the quantity of product sold. Where is the FTC when you need them?

Asking for a Raise? Consider Context

If you are going to ask for a raise, the context for your request is almost as important as the rationale you are going to use to justify your request. Here are a few important things to consider:

1. Don't Ambush - asking for a raise is not something that you should do casually and it's not something that you should surprise your boss with. If you plan to ask for a raise, make sure that your boss is aware that this is the intended topic of the conversation or bring up the issue during your periodic review, when your boss is probably anticipating such a request. If you ambush your boss, you risk out of hand rejection.

2. Find the Right Time - if everyone is racing against time to complete a project or working around the clock to meet a deadline, it is probably not the time to ask for a raise. Schedule your conversation in advance at a time you know is going to be less hectic. Give your boss the opportunity to listen to you calmly and at length.

3. Consider the Circumstances - if your company is struggling or times are tough in your industry, think twice about asking for a raise. An untimely request may be considered unrealistic or even position you as someone who simply doesn't get it. 

4. Consider the Boss - your chances for success are higher if your boss is in a receptive mood. If when the time for your salary discussion comes you notice that your boss is agitated, under pressure or otherwise distracted, consider asking that the meeting be postponed.

If you are interested in this topic, you may also be interested to learn how to NOT ask for a raise and how to ask for ANOTHER raise.

Recommended Articles

Below is a list of some of the personal finance articles I enjoyed this week, but before I get started, there is another article I want to recommend in connection with my decision to vote post from earlier this week.

The NY Times published an in-depth article about Sarah Palin. I strongly recommend reading it. The image of Palin that I got from the article is that of a very strong minded person, who is highly results oriented and that gets things done but who is also vindictive, secretive and who doesn't mind using her position of authority in favor of personal agendas and to reward old friends. I found this profile to be a very troubling. I may have to contribute some more cash to the Obama campaign.

Here's one excerpt from the article that stuck with me, relating to the now famous library book banning allegations:

"Witnesses and contemporary news accounts say Ms. Palin asked the librarian about removing books from the shelves. The McCain-Palin presidential campaign says Ms. Palin never advocated censorship.

But in 1995, Ms. Palin, then a city councilwoman, told colleagues that she had noticed the book “Daddy’s Roommate” on the shelves and that it did not belong there, according to Ms. Chase and Mr. Stein. Ms. Chase read the book, which helps children understand homosexuality, and said it was inoffensive; she suggested that Ms. Palin read it.

“Sarah said she didn’t need to read that stuff,” Ms. Chase said. “It was disturbing that someone would be willing to remove a book from the library and she didn’t even read it.”

“I’m still proud of Sarah,” she added, “but she scares the bejeebers out of me.”

OK. Now for the personal finance stories:

The Finance Professor - who is ACTUALLY a finance professor, gives some investing advice to his friends and family. In a nut shell: diversify, save, invest often. Trust him, he knows what he's talking about.

Check out this relatively new PF blog, called Spilling Buckets. I found it when they left a comment on one of my posts. These guys have a very clear financial plan and a very cleanly designed blog. Good going guys!

Ben of Money Smart Life posted an excellent article about quitting your job gracefully. This is very good advice. The way I see it, most industries are small. You are bound to run into the same people over and over again. Making enemies is not a productive thing to do. So rather than spilling your guts at the exit interview and talking about how your boss is horrible and your colleagues are in the bottom 5th percentile in the competence rankings, bow out gracefully and move on.

Money Ning posted about his friend who calls companies to complain about poor service, in the hopes of getting a discount, even when there is nothing wrong with the service. I think that this is wrong for three reasons: (i) it is possible someone suffers for her lies - e.g. a customer service agent who was supposed to make sure service was good; (ii) frivolous calls increase costs  or reduce profits for service providers, service providers then hike prices for the rest of us to make up the difference; (iii) if you want to negotiate prices, do so honestly.

Here's a good one: Sun of Sun's Financial Diary just bought 125 new shares of Washington Mutual. Yes, that's one of the banks that are suffering through massive losses. Sun is trying to be a contrarian in the hopes of reaping the rewards. I think that this REALLY bad strategy. If you want to be a contrarian, invest in the whole financial sector. Betting on a single institution may see your stock go to zero value if the company you are invested in goes bankrupt. Personally, I put some money into Vanugard's Financial Sector Index (VFH), hopefully making a similar bet to Sun's only with somewhat less risk.

Also, this week I participated in two blog carnivals, the Carnival of Personal Finance was hosted by Banker Girl; and the Festival of Frugality was hosted by Frugal Babe.

Personal Finance Questions: One Line Answers

The other day I was going through my Google Analytics page to see what kind of key words bring folks to Money and Such. Actually, there are some pretty interesting ones, so I thought I would put a whole bunch of them in one post and give a one line answer to each (OK, sometimes I may go a little longer than a line, but take it in the right spirit). Here goes:

"Is renting a waste of money?" - Absolutely not. Renting is often a more lucrative form of investment than owning a house.

"Does a hybrid [car] make sense?" - that depends. How much do you drive? You can use this calculator to figure it out for yourself.

"Wife makes more money" - good for you! Now you have more money to save, invest and spend. Enjoy!

"I make more money than my husband" - Are you the wife of the guy from the previous question?

"$10,000 and a year to invest, what to do?" - with a 12 month investment horizon, I would just go with a high yield money market account or CD.

"Am I going to make money in Fidelity mutual funds this year?" - let me gaze into the future for a sec... the spirits... they are saying... "MAYBE!"

"American express late payment, what to do?" - fight it, dude. Of course your chances of success depend on the exact circumstances of your case.

"Average cost to raise twins, calculator" - I don't have a calculator for you, but I do have twins, and all I can tell you is to get ready for some serious money drainage.

"Blowing off a headhunter" - why would you want to do that? Work with headhunters. If you don't want the job, suggest a different candidate. You never know when you would want to take advantage of their services.

"Can I leave a law firm job after one week and not cause damage to my career?" - Absolutely. In fact, if you just joined a new firm it is very much OK to leave, professionally, if you don't feel the position is working for you. In the long run, it will be good for you and will be good for your firm.

"Can I opt out of my company's 401k plan?" - yes you can. However, if you opt-out, make sure you have another plan for saving for retirement. If your employer matches 401k contributions, opting out is probably a very bad idea.

"Can you get a work out with Wii boxing?" - you better believe it!

"Cost to raise a child in the US" - I got data galore for you. Check it.

"Do we get taxed on work related expenses?" - no, we don't, thank god. In fact, if I am not mistaken you can deduct unreimbursed business expenses on your return.

"Does cashing in your 401k hurt your credit?" - nope, but it does hurt your chances of a decent retirement... don't cash in your 401k unless you absolutely have to or if you have actually retired. By the way, rolling over a 401k is not the same thing as cashing it.

"How can I put my IRA in a high yield CD?" - well, there are CD IRAs out there. They just happen to be the worst retirement vehicle ever invented, unless you are just about ready to retire - and even so, I seriously doubt this is a good strategy.

"How much do index funds overlap?" - that depends on what the underlying index is. If index funds track the same index they almost certainly overlap to a very large degree. Some index funds can be totally divergent since they track completely different indexes. Check each prospectus to be certain.

"How much should I pay my stay at home wife?" - dude, you have bigger problems than trying to figure out how much to "pay your wife". Your wife doesn't work for you.

"How to bail out financial institutions?" - boy, I hope that this question was not asked by Treasury Secretary Henry Paulson... well, actually, financial institutions fail (like other businesses) when their liquid assets are not sufficient to cover their immediate obligations. Bailing out a financial institution typically involves either giving it a nice cash infusion or taking control of some of its liabilities.

"How to find my 401k money?" - If you lost track of your old 401(k) money, a good place to start looking for it is to contact your old employer.

"How to make money as a pediatrician?" - hmmmm. Maybe you can take care of some sick kids and charge people for it?

"Labor unions - good or bad" - both, I guess. Good for protecting basic workers rights and ensuring people receive a decent wage for their work. Bad any time they do things that make life difficult for everyone else.

"Stupid advice" - I can see why you got to my blog. I am also mildly insulted.

"What not to waste money on?" - things you don't need. See the previous question.

A Simple Way to Save Money & Reduce CO2 Emissions

How would you like to do something about global warming, to save some money and to have some fun while doing it? Sounds too good to be true? Well, it isn't. A while back I stumbled across a piece of free software called Edison that allows you to do all of the above.

Edison offers a painless way to manage your computer's power consumption. If you are like me, your computer is always on drinking up power whether or not you are actually using it. Of course, the reason I leave my computer on is that it is a hassle to wait five minutes for thing to boot up every time I need to use it.  Enter Edison.

Once you install the program, you can schedule work and non-work time, and set different power saving options for each of those times. You can also set a different schedule for each day of the week. For example, I scheduled my "work week" to be 7 days a week, from 7 AM to 12:00 AM. During that time, I have instructed Edison to power off my screen after 5 minutes of non-use, to power off my hard drive after 5 minutes of non-use and to suspend the computer after it goes un-used for 1 hour.  When suspended the computer goes into sleep mode, from which it recovers within seconds. At night time, I set even more aggressive power saving rules.

Here is where the fun part starts: Edison calculates your annual money, electricity and CO2 emissions savings, based on the power saving rules you have selected. Edison tells me that my settings will result in savings of $56 annually and that my CO2 emissions will be reduced by 865 pounds a year!

Talk about an easy way to make an impact on the environment and on my bank account.

I highly recommend Edison. You can download it free of charge here.

I've Decided Who to Vote For...

After the conventions are over and the running mates have been picked, I have finally made my selection. I am a registered independent, and although I have strong political opinions on each specific issue, I am very much undecided between political parties in each given election cycle. This time, I have taken longer than is typical for me to make a decision. The reason is that both candidates were appealing to me for different reasons.

Before I let you know my decision, let me tell you something about my political views. Readers of this blog already know that I am a staunch free market capitalist. I am very much pro international-trade, I am against large government, I support lower taxes AND a balanced budget. I am very much against corporate and farm subsidies. My economic agenda pretty much matches that of the traditional Republican Party, before they decided that deficits were the way to go and that corporate welfare was a good thing.

However, I am very much a social liberal. I am for gay marriage. I am pro-choice. I am for reasonable gun control. I very much support social security and I am extremely pro-environment. Drilling for oil? Not if I can help it. Tax credits for clean energy? You betcha. You could say that my social agenda is pretty close to that of the Democratic Party, although I seriously dislike big labor. 

My rationale for both my social and economic positions is similar: I don't think that government should be interfering in people's lives. They shouldn't be picking economic winners and losers, and they shouldn't tell us who we can and cannot get married to. For that matter, I don't think they should be telling us what we should or shouldn't be smoking in the privacy of our homes. Basically, my philosophy is: live and let live, and I view good government as an impartial regulator that steps in to prevent an individual or a group from taking unfair advantage of another individual or group. It's as simple as that.

So you can see my dilemma. I don't completely agree or disagree with either the Democrats or the Republicans. If I vote for McCain, I get his right-wing religious fanatics stepping in to push their creationism and erode the separation of church and state. If I vote for Obama, I get to pay higher taxes and give more power to organizations like the teachers' union who will keep fighting against school reforms. Darn it.

BUT, I finally did make up my mind, AND it wasn't that tough either. I am voting for Obama. Here are my reasons:

1. Disgust -  I was driving back from work one evening during the Republican convention and I was listening on the radio to Rudy Guilliani speak at the GOP convention. A more vile, condescending and obnoxious speech I have not heard in recent years from a "main stream" American politician. Guilliani was actually belittling Obama for his previous work as a community organizer. Would he dare to do this if Obama worked as a teacher, fireman, sanitation worker or any other profession? How dare he stand up on the national stage and insult someone's honest day's labor? Well, that's just Guilliani, right? Nope. Instead of shouting the idiot down, the Republican establishment stood around, laughed, clapped and cheered.

When I got home and turned on the TV to watch Sarah Palin accept her nomination, the vile rhetoric continued to spew. Sheer arrogance is the message I got from the screen. After 8 years of a disastrous Republican presidency, I would think that more humility would be in order.

2. Environment - global warming is the biggest challenge facing human kind today. Hearing the cries of "Drill, baby, drill" coming from the Republican convention, I am now sure Republicans simply don't get it. They may pay lip service to the problem, but they will drag their feet until it's too late. Economy and Environment are my two main issues this year, and the Republicans clearly fail this one.

3. Economy - from my perspective this one would typically be an easy one in favor of the Republicans. I think that it still is, marginally. However, after having mis-managed the economy for the past eight years, even if they win a few points in my book compared to the Democrats, their record is simply not good enough to tilt the balance in their favor.

4. Hope - as jaded and cynical as I am about the American political system, I have to say that I find Obama inspiring. Listening to his speech at the Democratic convention, I heard something that I haven't heard from a politician in a long time: vision. This makes me want to bet on him. 

4. Sarah Palin - I like McCain. Until he chose Palin as his running mate there was a decent shot that he would get my vote. No more. I have no problem with Palin's lack of experience. OK, I have some issue with this, just like I have some issue with Obama's relatively short record. My real problem, however, are her positions on the issues (as far as these have already been revealed). This is someone who supports abstinence-only sex education - after the utter failure of this approach has been demonstrated by her own teenage daughter's pregnancy. I don't question her personal decisions, I simply refuse to let these misguided opinions be applied to my kids. Palin is someone who truly believes in creationism - even if, to her limited credit, she hasn't tried to push this superstitious and ignorant position as Governor of Alaska. Perhaps worst of all, she doesn't believe that global warming is man made...

It was after Palin concluded her speech that I made up my mind. I like McCain. I like him a lot. If he had chosen a centrist running mate, such as Lieberman, chances are that McCain would have gotten my vote. However, with his party so full of hubris after eight years of failure, and his horrible choice of running mate my choice seems simple enough. In fact, it's not even close.

I went to Obama's website and made my campaign contribution. This is the very first time I have ever contributed financially to a political campaign. I truly hope he gets the job. 

Recommended Articles

There were a whole lot of very good articles published on the personal finance blogosphere this week. Here are some of the really good ones:

Moolanomi had an excellent post on the topic of asset allocation, complete with a bunch of charts, methods and tools.  A really good free tool that he points to in the article is Morning Star's free portfolio x-ray tool. You can use this to understand the inner workings of your portfolio, including any asset overlaps in mutual funds, your exposure to different asset classes and sectors and so forth. As I said, this is a really useful post.

Jim from Blueprint for Financial Prosperity makes a point that I agree with 100%: don't invest in what you know, because you only think you have a clue... even the professionals can't seem to beat the market long term. What makes you think that you can? 

Tough Money Love looks at the sad state of retirement savings in this country. He also has some good advice on how to avoid getting to retirement in a dismal state yourself.

Another post I really liked this week was The Simple Dollar's article about creation vs. consumption. His common sense advice is to focus on improving your skills rather than on buying the best tools around. He gives the example of improving your writing skills rather than using the fanciest notebook around. This one really resonated with me.

Fabulously Broke in the City wrote an article about how now that she is a consultant and gets paid by the hour, she doesn't mind being asked by her clients to sit around and do nothing, since the clock just keeps on ticking. I understand the feeling, but I tend to invent things to do when I don't have any active projects. I get bored really easily.

Here's a way to save money: buy used things. Not everything needs to be new to be useful. American Consumer News rightly points out that certain things work just as well used and gives the examples of books, DVDs and computer games. Right on. Personally, I like using half.com for my used purchases -but in all honesty, I don't make too many of those.

Finally, this week I participated in two carnivals: the venerable Carnival of Personal Finance and the illustrious Festival of Frugality. Check them out.

Over Contributing to Your 401(k)

A company 401(k) is the basis for many people's retirement planning strategy, and for this reason investing your 401(k) assets wisely is something you should take the time to plan and execute. However, today's post is not about investing your 401(k) money more efficiently, it's about making sure that you don't over contribute to your plan. In 2008, the contribution limit is $15,500 per individual, and if you are over 50 you are entitled to make catch-up contributions of an additional $5,000. Contribute more than this limit and you find yourself in a little bit of a bureaucratic nightmare.

First up, how can one even over contribute? Plan administrators typically ensure that employees cannot over contribute, by stopping all excessive contributions. However, they can only do this if they are aware that you are over contributing. If, for example, you switched jobs mid-year, there is no way for administrators to know the amount that you already contributed to your 401(k) before you joined your new employer. In fact, my wife and I each ran into an over contribution situation in exactly this way.

So, how do you avoid this over contribution situation?

(i) Calculate Your Limit - if you contributed to more than one plan during the year, deduct your earlier contributions from the maximum allowed contribution to determine how much you can still contribute. Once you have this number, divide it by the number of pay-checks remaining in the year and make sure that your contributions do not exceed this number.

(ii) Mind Income Changes - if your contributions are set as a percentage of your income, and you receive a raise before the end of the year, be sure to adjust your contributions to account for this increase to avoid over-contribution.

(iii) Pay Attention to Bonuses - if you are lucky enough to receive an unscheduled bonus, be sure to check if 401(k) contributions have been deducted from your bonus, and adjust your contributions accordingly.

What to do if you over contribute? Contact your payroll representative as soon you discover the error. Your 401(k) plan will issue you a refund check, which will be taxed at your normal income level. In some cases, if you discover the error after the end of the tax year for which contributions were made, you may also receive income that will be attributable to the following tax year. It's a hassle best avoided. Trust me. Last year, after switching jobs in the middle of the year, my wife unintentionally over-contributed to her 401(k). We only discovered the error in February when doing our taxes, the error took until early April to correct, and the changes will also impact our 2008 tax return. As I said, best avoid this hassle if you can.

By the way, if you are interested in improving your company's 401(k) plan, you may also be interested in this previous post.

Credit Card Rewards: Cash Back or Airline Miles?

Last month we received our annual cash back reward from our AmEx Blue card. The loot this year came to a total of $853. Not bad at all for a tax free bonus. Later that week I had a conversation with one of my colleagues and the topic of reward cards came up. My colleague uses an AmEx card that gives airline miles, usable on all airlines. So which is better? Cash back cards or airline miles cards? I vote for cash back cards, for two main reasons:

1. Cash is King - Cliche, but true. The biggest problem with cards that give you airline miles is that... you get airline miles. This is a very specific benefit that can only be used for one thing: going somewhere. Cash back cards, on the other hand give you an open ended benefit. Last time I checked cash was usable for buying airline tickets (as well as a few other items). Get your cash, buy your ticket or buy diapers, if you are so inclined.

2. I Got Enough Miles - I travel a lot on business, and I have plenty of miles. Over 300,000 on United and over 150,000 on Continental... I never, ever get a chance to use them. Well, actually, I do use my miles for magazine subscriptions and I did use some miles last year to buy that nifty robot of ours. BUT - I got so many miles already, what would I do with more?

My colleague on the other hand, says that he ran the numbers and cash back or airline miles were basically a wash from a total value perspective. He says that the fact he gets miles forces him to take a vacation with his family - one that is free of charge. To quote him: "if we got cash, we would use it to pay for our groceries. Since we get airline miles we feel good about taking a vacation".

I say: to each his own. Personally, I don't need to play mind games with myself and I prefer the flexibility of having more money in my bank account. If we want to take a vacation, we'll take it. We don't really need an extra incentive.

Consumer Alert: Fraudulent Medical Bills

In its September 8 issue, published this week(?!), Business Week had an amazing article about over-billing by medical professionals. I recommend that you read the full article for yourself, but the gist of it is that medical professionals are over billing patients through a practice called "balance billing".

Here is how the article defines balance billing:

"As health-care costs continue to soar, millions of confused consumers are paying medical bills they don't actually owe. Typically this occurs when an insurance plan covers less than what a doctor, hospital, or lab service wants to be paid. The health-care provider demands the balance from the patient. Uncertain and fearing the calls of a debt collector, the patient pays up."

According to the article, this practice is illegal in 45 states... including in California, in which we happen to live. And check out this quote:

"National statistics aren't available, but there's little doubt that many consumers unwittingly fall victim to balance billing. The California Association of Health Plans, a trade group in Sacramento, estimates that 1.76 million policyholders in that state received such bills in the past two years, totaling $528 million. The group found that 56% paid the bills. "Patients think they owe this money, and it causes tremendous stress and anxiety for people," says Cindy Ehnes, director of the California Managed Health Care Dept."

Wow. I bet we're in that category - 1.76 million folks in California alone! I can think of at least one suspicious incident in which we received a large bill for an emergency room visit with one of our sons. This bills was sent to us after the insurance company already paid it's share. Talk about ignorance. I didn't even know that this was an issue. We simply paid our medical bills when we got them in the mail, assuming that this was simply the thing to do. It appears that we may have been taken for a ride, at least on some of these bills... we will have to go back and check.

So, what should you do if you get one of these bills in the mail? To be honest, I am not quite sure, however it seems that a good place to start might be to contact your insurer when you get demands for payments from medical service providers and try to obtain more information. Clearly, some of these bills are justified, such in cases where the insurance clearly states that it will only cover a portion of the bill. However, knowing which demand is legitimate and when you are being shaken down for cash seems to be the challenge.

Also check out this video segment by CBS on the same topic. for more advice.

A Tip of the Hat

It's been a while since I acknowledged the folks who send readers over to Money and Such, so I figured I'd take a few minutes on this Labor Day afternoon to give the nod to those five blogs who send the most visitors my way. Not surprisingly, these five also happen to be on my favorite PF blog list.

1. Frugal Zeitgeist - one of my oldest neighbors, Frugal started her blog about the same time I started Money and Such. She is a smart professional who recently finished paying off her mortgage. She writes with intelligence, humor and style. Definitely worth a read.

2. The Finance Buff - is an excellent read for smart and sophisticated articles. He is a fellow MBA and likes... finance. I'm a regular on his site.

3. The Div Guy - invests in dividend bearing stocks and has been on my blog roll forever. He's also been known to comment on Money and Such, when there's something worth saying. We differ in our investment styles, but he's got good things to say.

4. The Digerati Life - definitely one of my favorites, not least because we both live in Silicon Valley. I am a regular reader and peanut gallery commenter on this one. In fact, I actually made his top commenter list for August.

5. Cash Money Life - another of my favorites, who has been on my blog roll for a long time. Patrick is very consistent, producing a new, high quality post virtually every day. Pretty impressive.

Thank you all for being good neighbors and for producing such great content.