Archive for February, 2009
Friday, February 27th, 2009
Some readers have noticed that I am no longer tracking the progress towards my long-term financial goal. That’s because I don’t have one! It used to be a million dollars by age 45, but I have dropped it since it doesn’t motivate me on a daily or even monthly basis.
I have come to realize that it is just stupid for me to plan out something 15 years ahead. Even looking back only five years, my life now is vastly different than I thought it would be. It’s an interesting exercise.
On February 27, 2004:
- I was 6 months out of graduate school, and in working at my first “real” job. Although I had held several jobs earlier including being a student researcher and teaching assistant, the corporate world was completely new to me. Even then, I knew I didn’t want to do this for four decades.
- My net worth was hovering around zero… I was just about done finally paying off my student loans from undergrad, but that was about as far as I was looking. Here’s an updated net worth history chart:
- I was single. Although I was engaged at the time, I had never lived with my fiancee and had no idea what it would be like to completely share a life together. It’s been quite an adventure.
- I didn’t have this blog. I don’t even know if I knew what a blog was. Who knew that it would provide a non-trivial chunk of our total income, and that I would continue to spend at least 20 hours a week of my time maintaining it, and often much more (although I’ve been working on better balance).
- I didn’t own a home. I was still living in the same cheap, run-down, graffiti-covered apartment that I lived in during college. I would end up renting five different apartments in the next 5 years, before finally buying a house.
I’m actually really happy with how things turned out, but looking ahead there is still so much more uncertainty. Kids? Jobs? Economy? So I’ll have to keep that in mind when crafting a measurable, specific, and inspiring long-term goal. Are you surprised at where you’re at now, compared to five years ago?
Posted in Goals | 36 Comments »
Thursday, February 26th, 2009
Still lots of questions about the $8,000 First-Time Home buyer Tax Credit. Here are some answers:
What is the definition of a first-time home buyer?
You are considered a first-time homebuyer if:
- You purchased your main home located in the United States after April 8, 2008, and before December 1, 2009.
- You (and your spouse if married) did not own any other main home during the 3-year period ending on the date of purchase.
Do I have to pay the homebuyer tax credit back? How much is the credit for? $7,500 or $8,000?
It depends. For homes purchased in 2008, the $7,500 credit (or 10% of purchase price, if less) operates much like an interest-free loan. You generally can repay it equal installments over a 15-year period unless you move out or sell the home earlier than that. The maximum credit is reduced to $3,750 for married individuals filing separately.
For homes purchased in 2009, you must repay the $8,000 credit (or 10% of purchase price, if less) only if the home ceases to be your main home within the 36-month period beginning on the purchase date. The maximum credit is reduced to $4,000 for married individuals filing separately.
What is the definition of main home? Does a condo count? How about an RV?
Your main home is the one you live in most of the time. It can be a house, houseboat, housetrailer, cooperative apartment, condominium, or other type of residence.
What if I don’t owe or pay any income taxes?
This is a refundable tax credit, which means that even if you don’t owe any taxes, you will receive the credit amount via check or other means. For example, if before this credit you had a tax liability of $5,000 and withheld $4,000, you would owe the IRS $1,000. If you qualify and claim a $8,000 tax credit, you would now receive $7,000.
What are the income restrictions?
The amount of the credit begins to gradually phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for joint filers. It is completely phased out when your AGI is $90,000, or $170,000 for joint filers.
Can I just buy a home from a relative and pocket the $8,000?
You don’t qualify for the tax credit if you bought the house from a “related person.” According to the IRS, a related person includes:
- Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.).
- A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock of the corporation.
- A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interest.
How do they determine the purchase date as applied to the cutoff dates?
If you bought an existing home, the date of purchase is your closing date, not the day that you sign a purchase contract or enter escrow. If you constructed a new home, you are treated as having purchased it on the date you first occupied it. (Seems like some wiggle-room here.)
What IRS Form Do I Have To Fill Out? Can I File For 2008 or 2009 Tax Years?
That would be the new revised version of IRS Form 5405 (where most of this information is from), which you fill out and attach to Form 1040. Any updated tax preparation software should be able to handle this. If you already bought your house in 2009, you can file either on your 2008 or 2009 tax returns. (Why not get it now?)
What if two unmarried people buy a house together?
If two or more unmarried individuals buy a main home, they can allocate the credit among the individual owners using any “reasonable” method. The total amount allocated cannot exceed the smaller of $7,500 ($8,000 if you purchased your home in 2009) or 10% of the purchase price. A “reasonable” method is any method that does not allocate all or a part of the credit to a co-owner who is not eligible to claim that part of the credit.
I am not a U.S. citizen. Can I still claim the tax credit?
If you are a resident alien according to IRS Pub 519 and satisfy all the other requirements, then yes you can claim the credit. Nonresident aliens are not eligible.
Posted in Real Estate, Taxes | 231 Comments »
Wednesday, February 25th, 2009
There are hundreds of books about how to invest like Warren Buffett. For whatever reason, I haven’t read any of them (yet). For one, if really wanted to invest like him, why not just invest with him and buy a share of Berkshire Hathaway? A Class B share recently traded at around $2,300, more than 50% off its high of $5,000. And if I bought a share, I could attend those annual shareholder meetings in Omaha, Nebraska* that I’ve heard so much about. (I have read some of the shareholder letters.) Buffett himself calls it the “Woodstock of Capitalism”.
What’s a Berkshire Hathaway Annual Meeting Like?
That’s the question behind the book Pilgrimage to Warren Buffett’s Omaha by hedge fund manager Jeff Matthews. He first went to the 2007 annual meeting and wrote about it on his blog. I guess people liked it, and so he went back in 2008 and weaved it all together into this book.
A very distinguishing trait of the annual meeting is that Chairman Warren Buffett and Vice-Chairman Charlie Munger not only want their shareholders to attend, but willingly sit down for a six-hour long Q&A session where you can ask any question, and they will answer it personally. Many of the famous quotes you’ve read elsewhere were first spoken in this format, and the best part of this book is probably reading about their thoughtful responses to all these questions.
Another feature I didn’t know about is that the meeting is also highly profitable for Berkshire. Shareholders are given special tours and discounts to subsidiaries like Nebraska Furniture Mart, Borsheim’s Jewelers, and so on. Estimates say that over $100 million is spent there.
What Else Is Inside The Book
A lot of the book is in informal “blog” format, with Matthews recounting his first-hand experiences down to grabbing lunch or renting a car. However, sprinkled throughout the book are also facts and tidbits about the company and Buffett, most of which I didn’t know very well but are things that I’d expect a die-hard fan to know already. It worked well for me and provided some helpful background.
For example, I learned that the businesses with Berkshire Hathaway tend to operate independently and without much oversight from Warren Buffett or Charlie Munger. And it’s a wide variety of stores – from GEICO insurance to See’s Candies to NetJets to Nebraska Furniture Mart. Berkshire also gets the chance to buy many profitable, well-run, private companies at a discount from the individuals and families that created them. Why? Because they are attached to these businesses, and want them to remain under a certain quality of stewardship.
But it’s not a total slurp-fest. Criticisms are brought up, like how Buffett has called derivatives “financial weapons of mass destruction”, but also bought millions worth anyway. Or when he talked up the values of executives for subsidiary General Re who later got convicted of securities fraud.
Summary
This book is well-written, easy to read, and a perfect companion for a cross-country airplane trip or nightstand. However, I don’t think I really learned much of anything practical from a financial perspective. I’d treat it mostly as entertainment.
To be clear, it is not a book on value investing. For that, stick to the classic The Intelligent Investor by Benjamin Graham. Nor is it a book about the personal life of Warren Buffett. For that, there is now The Snowball.
Actually, the book I most want to read next is Poor Charlie’s Almanack, which contains many quotes from Charlie Munger, who seems a bit abrasive but I have come to respect him as an independent thinker. The only problem is that the book doesn’t seem to be in print anymore and used copies are fifty bucks? Time to hit up the library.
I’m still wavering as to whether I want to attend this meeting. Would it be worth the hotel and airfare? Anyone planning on being in Omaha on May 2, 2009? 
* Actually, you don’t even need to be a shareholder to attend any more. Buffett got annoyed that people were scalping tickets on eBay for $100+, so every year he floods eBay with tickets for only $2.50.
Posted in Book Reviews | 18 Comments »
Tuesday, February 24th, 2009
Here a new time-waster: From the creators of LOLCats, GraphJam allows users to create charts that are funny and vote up the best ones. Two appropriate ones:
I guess this explanation is patronizing then? And after yesterday…
(Yes, the x- and y- axes should be reversed…)
I’m sure one of you all could think of something funnier…
Posted in Funny | 7 Comments »
Monday, February 23rd, 2009
Recently, I have been exploring the “safe” options inside various 529 plans. This would be a good choice for those who want to feel like they are making continuous gradual progress and avoid the swings of the stock market, similar to what is offered in pre-paid tuition plans in certain states like Florida. The problems with those plans are that they are usually limited to residents only, and your kid often has to go to one of the in-state schools to get the guaranteed tuition benefit. One unique pre-paid type of plan is the Independent 529 plan, but it is also restricted to certain schools (mostly private liberal arts colleges).
Next, there are plans with guaranteed-return funds backed by insurance companies, or certificates of deposit from banks. However, these types of investments are still subject to inflation risk. If a period of high inflation occurs, your returns could be squashed. Even with current deflation concerns, given current government policy I think high inflation in the future is still a potential concern.
So what’s left?
CollegeSure Tuition-Indexed CDs
Offered by the College Savings Bank, these are FDIC-insured certificates of deposit which offer an interest rate linked to college tuition levels. The CollegeSure CD earns an annual percentage yield (APY) over the life of the investment that is 3.00% less than the college inflation rate. (For a while, this margin was only 1.5%.) These are only available through either the Montana or Arizona 529 plans, but you can use the proceeds towards a school in any state.
The CDs are available in maturities ranging from 1 to 22 years, so you are basically pre-paying tuition at a fixed premium. Here’s an illustration from their site:
Changes in costs are tracked by the Independent College 500 Index (IC500), which is derived from the average tuition plus housing costs of 500 private colleges. Over the last 10 years, the college inflation rate has been 5.4% annualized, Over the last 20 years, it was 5.7% annualized. Of course, this is just an average and it both excludes public universities and ignores the average aid packages given out, but it seems to be a reasonable index.
Treasury Inflation-Protected Bonds
Treasury Inflation-Protected Securities (TIPS) are bonds that promise you a total return that adjusts with the CPI index for inflation. Very generally, it works like this: if the stated real yield is 2% and inflation ends up at 4%, your return would be 6%. TIPS are issued and backed by full faith of the U.S. government. Right now, they are only available in 529 plans in the form of mutual funds like the Vanguard Inflation Indexed Bond Fund. Some plans offer them as part of their age-based investment mixes, but a few offer them as standalone investment options. The Ohio 529 plan ($25 bonus) looks to offer the cheapest option, with an annual expense ratio of 0.32%.
The actual real yield you get varies, but here is some historical market data for a maturity of 10-years, which is close to the average mutual of the Vanguard fund:
To make a rough estimate, I’d say you average about 2% real before fees. After about 0.3% in fees, you’d end up with 1.7% + inflation.
Inflation is tracked here by the CPI-U (Consumer Price Index for All Urban Consumers), a number tracking the price of a wide basket of goods and services. From January 1999 to January 2009, the annualized inflation rate was about 2.5%. Over the last 20 years, it has been about 3.0%.
It does not focus on college tuition, or even include it explicitly as far as I know. However, there should be some correlation to college tuition.
So which is better?
Would you rather have:
Overall Inflation plus 1.7% or College Inflation minus 3%
If we use the average numbers from the last 10 years, the CollegeSure CD would have earned roughly 2.4% annually and the TIPS fund would have earned roughly 4.2% annually. This would seem to tilt in favor of TIPS, but there are two problems:
- Unlike with the CollegeSure CD, you can’t match the maturity of the TIPS fund with your goals. It’s more or less fixed at 10 years forever. For example, if you only have 2 years left until college, you might want to start moving money out because you can still lose principal in the short-term due to interest rate fluctations.
- If the rate of college tuition rises significantly higher than overall inflation by greater than 4.7% a year, then the TIPS fund would fall short.
One could always split money between the two as well, but for not I’m just investing in the TIPS. College inflation may continue to outpace overall inflation (or it may not), but I doubt it will do so by more than 4.7% a year for an extended period. Also, I believe that investment options in 529s will only improve with time. One day, I expect to be able to buy individual TIPS to more closely match maturities with our time horizon.
This is not to say I’ll necessarily be 100% TIPS – I’ll most likely throw a bit of stocks in there – but I think it’ll be a big component of our plan.
Posted in Family, Investing | 8 Comments »
Saturday, February 21st, 2009
Interest rates on savings accounts are dropping left and right. With the Fed Funds rate at near 0%, I don’t see any hikes soon. The question is… how low can they go? ING Direct hit a new low since it started in 2000!
Liquid Savings Accounts
- If you’re a rate chaser, Broadway Federal is offering a pretty amazing 4.08% APY with a minimum opening deposit of $1,000. However, there is no guarantee this rate will last very long at all, and reports indicate a hard credit check. To see if it’s worth it, don’t forget my handy Rate Chaser Calculator.
- The Everbank Yield Pledge Money Market Account is offering 3.51% for 3 months guaranteed for new accounts, and after that it goes down to the regular rate of 2.43% APY. (Balances up to $50,000.) See my review of the application process here.3.51% APY for 3 months remains better than any other banks’ top 3-month CD rate, while still allowing withdrawals.
- DollarSavingsDirect has made a few drops, currently down to 2.65% APY now. If you are moving money out, remember that you need to maintain a minimum average daily balance of $1,000.00 during the entire month to keep the high rate for that period. For those with lower balances, it may be better to withdraw after you see your last month’s interest credited. See my quickie review here.
- FNBO Direct is now at 2.60% APY. See my account review here. Their CD rates have dropped significantly.
- If you have money committed to the (now expired) WT Direct $250 bonus promo like I do, just a note that they are at 2.16% APY for $10,000+ balances. We have to hold until end of February, and they promised the bonus the 2nd week of March.
- The “Original” ING Direct is now down to 1.85% APY, but new savers can still get their $25 opening bonus. According to my data, this is the first time ING has ever dropped below 2%.
- E-Trade Savings (useful if you trade stocks there) is at 2.15% APY. HSBC Direct is at 2.25% APY.
Certificates of Deposit
It may not be worth locking in these low rates for a long time, but if you have a CD ladder going you might be interested:
- Pentagon Federal Credit Union is offering 3-year CD at 3.89%, 4-year CD at 4.15%, and 5-year CDs at 4.39% APY. If you aren’t a member and don’t otherwise qualify, you can join the NMFA for a one-time fee of $20.
Posted in Banking | 48 Comments »
Friday, February 20th, 2009
By now, most of us have some sort of idea of what caused the current financial crisis. Some notable attempts at a simplified explanation include these Powerpoint slides with stick figures, this British comedy routine, and the “Giant Pool of Money” NPR audio broadcast. Even the New York Times had a go.
Well, here’s one more by Jonathan Jarvis, which also happens to be excellent. If anything, it surely has the best animation and graphics of them all. Also available in high-definition (but it’s big). Via Bogleheads.
Posted in Real Estate | 30 Comments »
Thursday, February 19th, 2009
The Ohio CollegeAdvantage 529 Savings Plan is again offering a $25 refer-a-friend bonus if you open an account and deposit at least $25 by May 31, 2009. You can be a resident of any state, and there are no application or annual fees.
First Impressions
My own account with them has been open for a few months, and so far I am quite impressed with the Ohio plan. The website itself is functional and fast, there are a variety of investment choices (cash, index funds, active funds), they are upfront with the fees, and the expenses are very competitive – either the lowest or near the lowest in the nation. The only bad thing I can think of is that every time I make a purchase I get a snail-mail confirmation with no paperless option, which seems wasteful. A more detailed review is upcoming.
I have gotten the $25 bonuses plus several referrals, with no complaints from the people I referred. I have also started an auto-debit from my checking account for $50 a month. Right now, half of my 529 is in the Vanguard inflation-protected bond fund. This is an investment option that is unavailable in most state plans. I feel that since college is only at most 18 years away with a big lump-sum payment, I would prefer less volatility while marching towards that goal. This is in contrast to saving for retirement, where I currently have 35 years until I turn 65, and hopefully another 20 years after that as well.
Referral Bonus Instructions
Both the referred and referree get $25, and I’d love for you to help fund my kid’s college dreams. 
Here’s how:
- You can enroll online or via mail. The online process was quick and easy, and I didn’t have to mail in anything.
- The first step is to input your personal info and choose a login/password. Next, you’ll verify your e-mail and complete the application.
- After that, you’ll choose your funding amount and select an investment fund. Your initial deposit must be a least $25, and is funded using the account/routing numbers of your bank account. At the bottom, you will need to enter a referral code to get the bonus. Enter *.
- In 1-3 days, your initial deposit will be sucked out, and in 5-7 business days you will get your $25 bonus. The $25 will be deposited directly into the 529 account, and will be invested in the same thing as your initial deposit.
I opened the account back in November and got my $25 bonus successfully and as promised:
* Javascript is required. If you can’t see any numbers, please use 2439350.
Posted in Deals & Offers, Family, Investing | 18 Comments »
Wednesday, February 18th, 2009
One of my biggest financial pet peeves is when people refuse to realize the connection between return and risk. Whenever you see an investment that offers a “guaranteed safe” or “insured” return that is significantly above what an FDIC-insured bank can offer, it’s safe to assume that your risk has gone up.
The latest example is the Stanford Investment Group, which the SEC accuses of massive investment fraud:
SIB has sold approximately $8 billion of so-called “certificates of deposit” to investors by promising improbable and unsubstantiated high interest rates. These rates were supposedly earned through SIB’s unique investment strategy, which purportedly allowed the bank to achieve double-digit returns on its investments for the past 15 years.
Do the math, people! Double-digit returns + a bank based offshore in Antigua + no FDIC-insurance = Either fraud or risk to principal. And remember, in schemes like these the interest is always very reliable, coming every single month like clockwork…. until one day it doesn’t. Been that way since the real Ponzi.
And there are plenty more to replace SIG, just Google “high yield CD”. Back in 2005, there was American Business Financial Services, which imploded. Now there is Millennium Bank (based in St. Vincent), Zannett Notes, and CPS Notes. All offer well over 8% interest.
Now, I am not accusing any of these companies of fraud. There is a difference between fraud and plain old credit risk. In both bases, you might manage to cash out before things fall apart, but there’s also a real chance you might never see your money again.
But especially in times of low interest rates, people start to look for just a bit more yield. Even SmartMoney magazine has gotten caught up in the act. Check out their cover this month.
A sure 7%? What, from buying shares of stocks with temporarily jacked-up yields like Altria or Vodafone? How about a highly speculative 7%? Bank of America had a really nice dividend yield as well once upon a time… before it got cut to a penny. Dow Chemical just cut its dividend for the first time in 100 years. Add in the fact that your share price could drop as well, and I’d keep your emergency fund far away from these stocks.
Posted in Banking, Investing | 18 Comments »
Wednesday, February 18th, 2009
Via Calculated Risk, Doug Short has a series of charts comparing the movements of various bear markets. The one below compares the Dow starting in 1929 (Great Depression), the S&P 500 in 1973 (Oil Crisis), S&P in 2000 (Tech Crash), and the current bear market starting in 2007 (do we have a moniker yet?).
Click on image for larger version.
I wouldn’t read too much into them, although I do have a thing for pretty charts. 
If anything, I suppose we should be prepared for at least another year of fun:
Reinhart and Rogoff mention a three-and-a-half-year average peak to trough decline in equities for past financial crises. As of today, the market peak of October 9, 2007 was about 16 months ago — which would put us well shy of the half-way mark for the average crisis.
Posted in Investing | 10 Comments »
Monday, February 16th, 2009
There are many forms of capital. Besides the usual definition of business capital (money), there is physical capital (a car, house, or other useful tool), human capital (your skills and education), and also social capital. According to Wikipedia, this describes the value held within our relationships with other individuals and larger social networks.
One of the books I am currently reading is Simple Prosperity by David Wann (co-author of Affluenza). Inside, there is a nice quote about social capital:
It is inevitable that our society will once again give higher priority to belonging and lower priority to belongings.
Look at the results of a study by the National Science Foundation, which found that one-fourth of all Americans say that they have no one that they can discuss personal problems with. Not one person. This number has doubled since 1985. One in 32 people is either in prison or on parole. If our ultimate goal is to be happy and fulfilled, then this can’t be a good trend.
Sociologist Robert Putnam believes the following are indicators of social capital:
- How many of your neighbor’s first names do you know?
- How often do you attend parades or festivals?
- Do you volunteer at your kid’s school? Or help out senior citizens?
- Do you trust your local police?
- Do you know who your U.S. senators are?
- Do you attend religious services? Or go to the theater?
- Do you sign petitions? Or attend neighborhood meetings?
- Do you think the people running your community care about you?
- Can you make a difference?
- How often do you visit with friends or family?
It has been argued that growing social capital can keep you healthy, make schools more productive, reduce crime, and even raise home prices in a neighborhood. Perhaps the best thing about social capital is that “the more you spend, the more you have”.
Posted in General | 20 Comments »
Friday, February 13th, 2009
I am the President and CEO of a uni-national corporation. A one-person S-corporation, to be exact. I chose this over an LLC for a variety of reasons (most of which I don’t remember anymore), but one of them was – what else? – to save some money. I wrote a relatively wordy post a few years back on Forming An S-Corporation To Reduce Self-Employment Taxes. But I just read this e-mail from MyCorporation* that has a concise example with a nifty graphic thrown in:
In an S-Corporation, only earnings paid to an owner as salary is subject to payroll taxes. Any money left in the business for reinvestment or distributed to the shareholder as a dividend is not subject to self-employment tax.
Maria is a sole proprietor bringing in sales of $90,000. After she pays her costs & expenses, her profit is $60,000. As a sole proprietor, she is required to pay self- employment tax of 15.3% on this entire $60K of profit, which equates to $9,180.
Now, let’s assume Maria formed an S-Corporation for her business, and chooses to pay herself $35K for the year in salary, and take the remaining $25K of profit through a distribution. She still earns the same $60K in profit. But, let’s look at the tax situation. Because corporations only pay Social Security & Medicare taxes on salaries, she’s only liable for $5,355, saving over $3,800 in taxes!
If you have a single-person LLC, the tax situation is usually very similar to that of a sole-proprietorship. (I should add that in some states you can also choose to have the LLC taxed as an S-Corporation. I would consult a local attorney for more details on this.) Now, the salary has to be “reasonable” based on the compensation of similar work elsewhere, so don’t get too crazy with this.
The catch? As an employer, the S-Corporation has to pay unemployment taxes. The exact rate varies from state to state, but the federal minimum is about $450 per year if your annual income is at least $7,000. However, as both the employer and employee, it is very difficult for me to actually “lay myself off” and claim unemployment benefits. So this fact cuts slightly into potential tax savings.
* I actually used LegalZoom to file my incorporation papers, which is their main competitor. I don’t really remember any big differences between them, but was happy with my Legalzoom experience.
Posted in Self-Employment, Taxes | 158 Comments »
