What Do You Want To Read About?

I’d like to know what topics that you’d like to read about here. Got a burning question in mind? Simply leave a comment below. Keep in mind, the more specific the better.

As usual, I can’t make any promises, but I will take each suggestion into consideration. Thanks!

How Prestigious Is Your Job?

US News has an article on The Most (and Least) Prestigious Careers using data from a Harris Interactive poll:

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The article notes that the least prestigious jobs tend to be higher paying than many of the more prestigious jobs. I did find it amusing that “real estate agent” was on the bottom of the list, even below “actor” and “accountant”. Are people grouchy about their house value dropping or what?

Personally I don’t really place prestige very high on my list of important factors in choosing a job… I usually just tell most people I do “stuff with computers” and they just nod and move onto something else. But here’s a good time give a shout-out to my friend Tom who just graduated from Fire(fighter) Academy!

How To Organize Your Credit Cards and Gift Cards Using Baseball Card Holders

As is apparent by now, I have a lot of cards. Credit cards, ATM debit cards, frequent flier membership cards, gift cards, the list goes on and on. I used to just keep them in a big stack tied with a rubber band. Then, one day when visiting my parents and going through my baseball cards, I thought – why not keep them in these plastic pages instead?

If you’re not familiar with them, people often store collectible cards in plastic pages that hold 9 cards to a sheet, are designed to fit inside 3-ring binders. Here’s what they look like:

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There are lot of benefits of doing this:

  • It keeps all the cards easily accessible, with both front and back visible without removal.
  • You can reduce clutter and organize them by type, issuer, name, etc.
  • Slide then into a binder, and they blend in discreetly on a bookshelf.
  • Place them up on a wall or corkboard, and it helps you remember to use all your gift cards!
  • For security, you can also use the pages to make backup copies of all your card information in case they get lost or stolen.

If you’re an old collector like me, they’ll even be free (and you’re recycling!). Otherwise, you can pick them up for only about 10 cents each.

ShareBuilder Bonuses: $70/$90 From Costco, $50 From SunTrust

While flipping through my Costco coupon book tonight, I noticed that ShareBuilder is running another promotion with Costco:

You can get a $70 or $90 Costco Cash card (depending on your membership level) after opening a new account and making one trade. They seem to be buckling down against people opening multiple accounts for bonuses, as it is now “one per unique account holder”. If you don’t have a Costco membership, there is also a similar bonus offering a $50 account credit.

Note: I just noticed in the fine print that you shouldn’t open the Costco-related account until 9/4, as that is when the promotion starts. How annoying, just like these post-dated Costco coupons…

Now, unless you really want to use Sharebuilder as your broker (and I don’t especially recommend it with free stock trades available now), there are two options to get your bonus, as selling stock there costs $15.

  1. Instant Gratification:Open with $5. Buy $1 of stock and pay $4* for commission. Wait for your bonus and cash out if applicable. Let the $1 in stock just languish there.
  2. Delayed Gratification: Open with $50. Buy $46 of a stock or ETF you like and pay $4 for commission. Get the $50 (or more), and treat it like you just got free stock. Let the dividends reinvest automatically, and just sit back for a decade or two while it grows.

I took the latter route. I bought partial shares of EEM for $42, and they are now worth $69. I also bought $46 of BRK.B, now worth $61. I love owning my 0.0153 shares of Berkshire Hathaway B. Ah, to be amused by simple things… 😉

*There may also be a free trial available, where you can sign up for the flat monthly plan, make a free trade, and then switch back to the Basic $4-per-trade plan before being charged the monthly fee. This way you don’t have to pay any trade commissions at all.

Can Having Too Many Credit Cards Hurt Your Credit Score?

I got three e-mails with this same question yesterday! Mostly, people want to either participate in balance transfer arbitrage or grab a few new rewards cards.

To start off, we must realize that all credit scores are based on secret formulas, supposedly generated by supercomputers and mountains of data to accurately predict our creditworthiness. This results in companies like FICO never truly revealing the ingredients to the secret sauce, otherwise we could just do it ourselves and they’d have nothing to sell.

fico data turned into fico scores

In other words, nobody truly knows the answer. Now, I have never read anything official that specifically listed “number of credit cards” as a negative factor in scoring. We can only examine what they have revealed and try to read between the lines. For example, FICO has previously released this breakdown:

image altered from original in wikipedia: http://en.wikipedia.org/wiki/Credit_score

Some of these aren’t related at all to the number of credit cards you have, such as “on-time payments” and “mix of credit used”.

Capacity used – This simply means how much of your available credit you are using, sometimes referred to as utilization ratio. If you’re maxed out on all your cards, obviously that’s not a good sign. If anything, having more credit cards would mean more available credit would lower this your utilization ratio and be a good thing. Now, individual creditors might balk at someone having too much available credit, but it doesn’t appear to factor into the FICO score.

Length of credit history and past credit applications – To be specific, not the only length of your oldest line, but also the average age of all your accounts matters. Continuously opening new credit lines will hurt your credit score. At the same time, having a lot of old cards can “anchor” your average account age as well. For example, if I already have 20 cards averaging 7 years old, adding another new credit card won’t make that average budge hardly at all. Again, we see that if anything, having a lot of cards might actually be helpful. (This is why I also don’t cancel credit cards unless it’s profitable to do so.) However, opening a bunch of cards all at once is also an indicator of desperation, so I limit myself to about 3-5 credit cards per rolling 6-month period (for profit and more profit).

Another source of information is the FICO Score Estimator from myFICO. Here, how many credit cards you have is the first question asked! Uh-oh. But again, I think the first two questions mainly help determine your average account age. It’s also a filter as you need at least one card that is 6 months old for the estimator to work. If you look at all 10 questions you’ll see many parallels with the pie chart factors.

Finally, there is personal experience. I have over 20 credit cards (average is ~10 per consumer) and have seen no indication that having too many credit cards makes my score any lower. When not in 0% debt, my score is excellent. Therefore, if you ask me, having too many credit cards may give people too much temptation or too much clutter, but based on the evidence available I don’t believe that having too many cards by itself lowers one’s credit scores.

A Comparison Of Home Flipping Shows: Flip This House, Flip That House, and The Property Ladder

Ever since starting the house search and finding some real dumps with potential, I’ve been really into those home-flipping shows on TV. I’m not interested in any quick buy-fix-sells nor do I have illusions of making $50,000 in a month, but I do like to see the ways people can improve a neglected house and how much it roughly costs. I’m not sure if I’m alone here with my secret obsession, but after two months of having my TiVo packed full of episodes, here is my personal summary of the differences between three popular shows:

Flip This House on the A&E Channel focuses on the real estate flips of experienced investor teams. They pretty much know that they are doing, so I almost just sit back and take notes. My favorite team by far is Trademark Properties, with leader Richard Davis and trusty sidekick Ginger. They always seem very smart and professional in all their dealings. Apparently, Davis has a lawsuit against A&E over alleged non-payment, and so has moved to a new show on the TLC channel called The Real Estate Pros. I’ll definitely follow them there.

Then there are the temperamental Montelongo brothers. I thought they were entertaining in the earlier episodes, but in the recent ones they just seem to be faking drama (and doing it poorly). They wouldn’t be the first ones, as apparently another Flip This House team was accused of faking episodes and stealing money from other investors, resulting in all episodes involving them being pulled off the air.

Creative name, huh? TLC’s Flip That House usually has episodes involving more novice flippers, often first-timers. Surprisingly, most of the flippers seem to stay on track, and although there are some stumbles here and there, they usually come out only a bit behind schedule with the house looking beautiful. What I don’t like about this show is they always show “projected profit”, as if the flippers always get their full asking price for their house. Overall, I like this show, but it does seems to try a little too hard to make the flippers look good.

Are you tired of seeing all these greedy flippers? Do you want to see some people crash and burn? Then The Property Ladder (TLC) is the show for you! Composed almost completely of first-time flippers, this show isn’t afraid to reveal the ugly side of flipping. Hideous remodels, poorly-managed contractors, going insanely over-budget, fighting between partners, you name it. They give you status updates like “The house sat on the market for 10 weeks with not a single bid. Bob is now looking for renters.” Think of it as a show about what not do to.

There you have it, from stories of seasoned pros to the completely clueless.

Why Paying Down Your Mortgage Early Can Be A Smart Investment

Still no house yet. But I have been reading about mortgages, and one common debate amongst mortgage holders is whether to send in extra money towards the principal in addition to the required monthly payments. Usually, the argument evolves into these two opposing views:

No, you shouldn’t pay extra because:

If you put that money in stocks instead, you would most likely get a higher return on your money in the long term. Mathematically, paying down a mortgage is like leaving money on the table.

Yes, you should pay it down because:

Stock market returns aren’t guaranteed, whereas paying down the mortgage is guaranteed savings. Debt is a burden, and it’s hard to put a price tag on the psychological benefit of owning your house free and clear.

Now, I understand both of these views, and in the big picture, I really think if this is what you’re worrying about then you’re already ahead of the game. You might even think you already know which view I personally lean towards. But what if there was another perspective that satisfied both sides?

What happens when you pay extra towards your mortgage?
With a mortgage, your monthly payments are amortized, which means each one includes a portion that goes to pay interest and a portion to pay down your remaining loan balance, or the principal. If you make an extra payment towards principal, then this in turn directly decreases the amount of interest you’ll be paying in the future.

So if you pay $1,000 towards your mortgage with an interest rate of 6%, then you’re saving $60 of interest that you would have otherwise had to pay every single year for the rest of your mortgage term.

Put differently, it’s like you’re earning an after-tax return of 6% every year on your money.

But wait, what about the tax benefits of mortgage interest?
Yes, mortgage interest is tax-deductible, but you have to temper this with a few realizations:

  1. Everyone already gets the standard deduction, which in 2007 is $5,350 for singles, and $10,700 for married folks. Only the amount that your itemized deductions exceed this amount actually saves you money.
  2. The amount of interest you pay on your mortgage decreases every year, so your tax benefit will decrease as well over time.

For example, let’s say you are a married couple with a $250,000 mortgage loan balance for 30 years at a fixed 6% rate, and in the 25% income tax bracket. $250,000 x 6% is only about $15,000 of interest paid in the first year. Subtract out the standard deduction of $10,700, and your additional deduction is only $4,300. So you’re only saving 25% of $4,300 and not the whole $15,000. This means your 6% interest rate only goes down to the equivalent of about 5.6%. In addition, according to the standard amortization schedule your annual interest paid will go down to less than $11,000 in year 15. So after 10-15 years, your mortgage deduction will be less than the standard deduction, leaving you with possibly no benefit at all.

Now, if you have a large mortgage or have lots of other itemized deductions, then your tax benefits may be much more significant. In this case, your equivalent interest rate may be extraordinarily low. But for many homeowners, it’s not as large as they might think. (If you have a ton of other itemized deductions, also be wary of the AMT.)

For this example, you could be conservative and say that paying extra towards your mortgage is only earns about a 5.5% annual after-tax return for the rest of the scheduled term of the loan.

A fixed rate of return, every year, for a long time. Hmmm… that sounds like a bond! In comparison the 30-year Treasury bond is currently yielding only 4.88%. After a 25% federal tax, that return is only 3.66%! I choose Treasury bonds because they also contain essentially zero risk of default.

In other words, paying down your mortgage can very similar to holding an attractively-priced long-term bond. (If you have a rock-bottom rate, it could also be an unattractive bond.) So maybe that’s how we should treat it. Just like you don’t compare stocks directly to bonds because they have different risk/reward relationships, perhaps we shouldn’t compare paying down a mortgage to stocks either.

Right now, I currently hold about 10% bonds in my retirement investment portfolio. My prospective interest rate is around 6% if I get a mortgage. I could simply decrease my position in bond mutual funds and put that money instead towards paying extra towards a mortgage. When looking solely at my mutual fund accounts, this would result in my percentage of stocks increasing. This way, I can potentially get the best of both worlds:

  • I’m improving my overall investment portfolio. I am essentially buying a bond that brings me a return higher than what is otherwise available, perhaps by up to 1-2 percentage points. I do lose some liquidity as I can’t get my money out without taking a home equity line of credit and paying additional fees. But as long as it’s not my whole bond allocation, I can still rebalance as needed. My intended bond allocation will only increase as I get older, in any case.
  • I also pay my house off earlier, complete with all the happy fuzzy feelings attached. 😀

What if you don’t own any bonds? Well, if you’re the type of person who’s 100% stocks, then you’re probably so confident in the markets that you wouldn’t want to pay down your mortgage early anyhow. If you do want to pay it down, then consider it a small allocation to bonds that will lower the overall volatility of your portfolio.

Now, this doesn’t mean that paying down a mortgage should be a higher priority than things like maxing out your IRA, paying down higher-interest debt, or even an emergency fund. But it does provide me a way to pay down my future mortgage without having to worry that I am losing money somewhere else.

Do You Worry About Your Parents’ Readiness For Retirement?

Up until recently, I never really thought about my parents’ financial situation. While growing up, they did a really good job of shielding us from their financial worries and setbacks. Looking back, I’m sure there were some tough times.

As my mom and dad start to near retirement age, they’ve become more open with their finances. They assure me that they are on track for retirement. They know all about the “catch-up” IRA contributions allowed for people over 50 and are taking advantage of them. They’ve even asked me to look at some of their accounts, like the TIAA-CREF retirement annuity.

As long as they stay healthy, I’m actually pretty confident they will be fine. This is mainly due to the fact that my father loves what he does and plans to work until 70 if not longer. While he does take more vacation time now, I don’t think the words “early retirement” are in his vocabulary. Any financial planner will tell you, even delaying retirement for a few years can make a big difference. You delay taking withdrawals so your nest egg gets more time to grow, and your expected withdrawal period is shorter.

But what if they do run into issues, for whatever reason? I know that I’d step in to help for sure. For one, I know that my parents regularly give my grandparents money. I don’t know how much or how often, it could be just spending money, but I know they do send something. I guess this is what some people call the “sandwich” problem. Young families have their own retirement worries on one side, their kid’s education in the middle, and their parents’ needs on the other side.

Do you worry about your parents’ retirement plans? Should a child ask their parents about such details or get involved? How does one incorporate this into their own financial plan? Just my Saturday morning musings…

MagicJack VoIP Review: Equipment + 1 Year of Phone Service For Only $40?

Since my SunRocket service went bankrupt, I’ve been living with just a cell phone. It’s actually been fine so far, but I’m just not ready to give up on traditional phones just yet. I like having multiple headsets around the house and not having to worry about minutes (all those hold times for customer reps add up). My initial idea was to get a real phone number with Skype (~$60+/year) and getting a $50 D-Link USB Phone adapter that replicates a phone jack, but the reviews were hit and miss.

Then I ran across something similar by a start-up called MagicJack. It only cost $40 and includes one year of unlimited incoming/outgoing calls with free long distance. You can also call to the US from international locations, but you can’t call to international countries at all. At first, I was skeptical, but then a reader e-mailed me last week and said it works great. I figured, for $40, why not try it out? There’s even a 30-day return policy. Here are my experiences:

Ordering and Shipping
I found a coupon code ‘SUNROCKET’ that knocked off the $3.95 shipping, so I spent $39.95 total. I received prompt order and shipping confirmations via e-mail, and it arrived just 4 days later. It was shipped in a small padded envelope via First Class mail for $1.81 – very economical! See below for a picture of the unopened product.

First Impressions and Installation
This thing really is tiny! It’s the size of a Zippo lighter. One end is USB (and thoughtfully comes with a 1 ft. USB extension cord), and the other end is a phone jack. It only supports Windows XP and Vista, so Mac folks are out of luck for now.

When I first plugged it in, nothing happened. The 1-page manual said “Take it out, and try another USB port.” I did that, and a small blue light on the MajicJack turned on, and it started to self-install on my computer. No CDs required. It proceed to make sure my firewall was configured correctly, and then asked me some personal address info for 911 service and also to pick my phone number.

A catch is revealed! Here, I was disappointed to discover that you can only get phone number in selected area codes of selected states. Currently they are CO, DC, MD, MI, MN, NV, TN, VA, and WA (see screenshot below). Supposedly they are still adding more states and as they come along you can do a one-time switch to a new number. This should be more clearly listed on the website. 🙁 (e911 still works based on the address you supply.)

One partial workaround is to combine a GrandCentral number with this service. Grandcentral has a lot more area codes, but also doesn’t cover the entire country.

Still, in about 5 minutes I had a phone number assigned to me and was all set up. I plugged in my phone and amazingly enough, there was a dial tone. I called out… worked fine. I called in… and my phone rang. Nice! The voice quality was okay, not awesome and not awful, but that may be because I was doing this all via a wireless broadband connection. You can even switch it to work via computer headset, a la Skype.

Of course, there are negatives. You will need the computer to be on whenever you want your phone to work, so that may be annoying to some people. I also found that when I do reboot my computer, sometimes it takes a few tries to get it to start working again. You get voicemails sent to your e-mail address as .wav files, but there aren’t all of the different forwarding options and different rings that you might have gotten with SunRocket or other VoIP providers. I was also really hoping that my fax machine would work with MagicJack, but I haven’t had any successful transmissions yet.

Here’s another MagicJack review at DSLReports.

More Pictures

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Summary

Pros
» Cheap! $40 a year for unlimited domestic calling!
» Simple setup
» …Did I mention it was cheap?
Cons
» Limited number availabilty
» Must keep computer on at all times
» Faxing may not work
» Long-term viability is questionable
» Few bells and whistles

MagicJack essentially makes any traditional phone a USB plug-n-play phone. If you are willing to deal with the issues inherent in VoIP phones, this is a compelling product. If I had a local telephone number, this would be a slam dunk. It’s cheap enough that I’m willing to wait it out.

Another big issue is whether this sort of business model is sustainable. I mean, right now they are selling additional years of service for only $20! Can you smell another SunRocket meltdown? Do you really care if you break even after only two months? 🙂

More Roth vs. Traditional 401k/IRA Data: Historical Marginal Tax Rates vs. Median Income

In my Roth or Traditional 401k decision process, I chose the Roth for the rest of this year. This essentially means that I’d rather pay up to 28% of tax right now on my contribution rather than pay whatever the going rate will be 30+ years from now. But why? I’m have relatively high income right now – Shouldn’t my income in retirement be less if I really want to be a beach bum? Probably, but here’s why I think 28% is still a pretty good deal based on history…

Having to guess what tax rates will be 40 years into the future is a daunting task! So let’s start by looking 40 years in the past. From 1967 to 2005, I found the both the median household income and the 95th percentile income from the U.S. Census Bureau. I chose these to roughly represent “middle” and “high” income levels.

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As you can see, both grow with time. (Yes, the gap between them is increasing. Let’s sidestep that hot potato right now.)

Next, I found the corresponding marginal tax rates that such incomes would have paid each year. Since we are looking at households, I used the tax information for the Married Filing Jointly status as an approximation. I ignored things like standard or itemized tax deductions across the board to keep it simple. With this information, we can roughly see how the marginal tax rates have changed over time, while still adjusting for the gradual increase in incomes:

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Results and Conclusions
We are currently experiencing some of the lowest marginal tax rates in recent history. The average marginal tax rate for a median, or “middle income”, household from 1967 to 2005 was 33%. The average marginal tax rate for a “high income” household was 44%. Today, we are only at at 15% and 28%, respectively. Assuming that today’s tax rates will continue on for the next 20, 30, 40 years may not be the best idea.

Will they get even lower? Or even flatten out? I don’t think so. Considering the historical rates we say above, and combining that with our continuing government deficits and the prospect of a nationalized health care system, I personally find it unlikely that in 2047 my marginal tax rate will be lower than 28%, even at median income levels. What do you think?

To be sure, this is a very simplified analysis. I am not even looking at total tax rates, just marginal ones for the express purpose of directing my IRA and 401k contributions. If you know of a better study done elsewhere that I missed, please do share.

Signup Bonuses: $25/$75 from E-Trade, $200 For Chase Bank

$25 bonus for opening E-Trade savings account with just $1, no minimums and no fees. I still dislike E-Trade from my own bad customer service experiences, but I don’t mind people grabbing some bonuses from them. 😉 Thanks S.E. for the tip. There is also a $75 bonus for opening a checking account, but there are more hoops to jump through like high minimum balances. No hard credit pull when I did this.

$200 sign-up bonus for a Chase Business Checking account. They may require business license for business accounts, depending on state. There are high minimum balance requirements to waive monthly fees, but you could just pay them for a month or two and still make some money. You need to print it a coupon and physically go to a branch, though, and Chase has a somewhat limited coverage area. Thanks to J.D. for the tip.

Financial Festivals and Carnivals

Here are some blog festivals and carnivals I participated in recently:

The Carnival of Personal Finance included my profit calculation tool for making money from credit cards.

My pick from this Carnival was Top 10 Wealth Building Ways Of Ordinary People by Digerati Life. The post covered a lot of ground and reminded me of the many different comments from real people on my post exploring who’s earning six figure salaries.

The Festival of Frugality included my post on how we pre-plan our food shopping at Costco.

Here I liked the review of Restaurant.com savings certificates by Living Almost Large that basically mirror my feelings on the subject. 95% of the restaurants on this list are either overpriced, serve mediocre food, or both. Coupons at restaurants are usually not a good sign.