Archives for October 2009

Chase Sapphire Card: Easy $100 Signup Bonus

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

The Chase Sapphire(SM) Card is a new rewards credit card that is offering 10,000 bonus points after you spend $500 in the first 3 months, which can be redeemed for $100 cash. No annual fee.

As a rewards card, it offers 2 points per dollar on dining and 1 point for every dollar in purchases (100 points = $1, or the usual 1% back). The nice part is that redemptions are easy – you can even redeem in $1 increments as long as above $25, so you could cash out $27 or $113 without anything left over. There are no earning caps, or points expiration dates.

In addition, you can get double points on airfare booked through their Ultimate Rewards website. It also promotes a “premium, dedicated service line that gives you access to a live person anytime, 24/7.” Fine print:

10,000 bonus points
You will qualify for and receive your bonus after you make $500 in purchases within the first three months of card ownership. Purchases includes balance transfers, or any checks that are used to access your account, and excludes cash advances. After qualifying, please allow 6 to 8 weeks for bonus points to post to your account. This one-time bonus offer is valid only for first-time cardmembers with new accounts.

529 Plan Promotion: Couples Get $150 Jumpstart to College Savings

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

This is a reminder that the Ohio CollegeAdvantage 529 Plan is offering some excellent incentives for those looking to start putting some money aside for college. Open to residents of any state, the best part is that this is one of the nation’s best 529 plans for those looking for low-cost investment options and a good customer experience. Here’s an example of how a couple can earn a free $150 jumpstart on their college fund. While I use the term “parent”, this would work for any two people – grandparents, aunts, brothers, friends, etc.

  • Parent #1 opens a new Ohio 529 account using a referral from an existing user (details below). They list the child’s name as beneficiary. Parent #1 earns $25 incentive.
  • Parent #2 open a new Ohio 529 account as well, using a referral from Person #1. This account can also list the child’s name as beneficiary. Parent #1 earns $50, and Parent #2 earns $25.
  • Both people also start a automatic savings plan with just a $25 minimum monthly deposit (details below). This earns another $25 each.
  • Add them all up, and that amounts to $150 in free money towards college. All the applications and deposits are done electronically quickly and with minimal hassle. Keep up the automatic deposits, and make saving for college easy.

Refer-A-Friend Bonus
If you open a new account and enter the referral code of an existing member, the new member will get a $25 bonus into their account. The referring member will get $50. My referral code is 2439350. This current promotion expires December 15, 2009. Many more details here.

$25 Systematic Savings Bonus
If you start a new recurring electronic funds transfer (EFT) from your bank account into your 529 account of at least $25 per month for 3 months, you will receive a separate bonus of $25. This recurring transfer must be started by January 31, 2010. Many more details here.

Sell Your Halloween Candy Back To Dentists

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Have you heard of this? A network of dentists will buy back your Halloween candy for $1 to $2 per pound at HalloweenCandyBuyBack.com. After a few zip code searches, there actually does seem to be a few dentists in many metro areas. They are then encouraged to donate the candy to be sent to troops overseas.

Seems like an idea with good intentions, but somehow seems funny to me. Candy is bought by my neighbors, which is given out free to kids in costume, which gets sold to dentists for cash, and then is finally donated?

As a kid, the best part was trading candy between friends afterward. (I’ll add that I was always made to brush regularly and have never had a cavity in my life.) What was your favorite Halloween candy? I still love Dum-Dum lollipops.

Reader Question: What If My 401k Has Horrible Investment Options?

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Here’s another good reader question about crappy 401k plans. Reader Robert saves enough to max out his 401k each year if he wanted to, in addition to maxing out his Roth IRA every year which he already does. However, his 401k plan is filled with expensive actively-managed mutual funds. He has no company match. Should he contribute to his 401k anyway, or invest outside in a taxable account?

Factor #1: How Long Will You Keep Your Job?
Even if you have a bad 401k plan, remember that as soon as you leave that company, you can roll over those tax-advantaged funds into a Rollover IRA at the company of your choice! You may or may not have a good idea of how long you’ll stay there, but the fact is most of my friends have not worked at any company longer than 5 years or so.

(A few plans offer what is called in-service withdrawals, where you can roll over your 401k fund into a IRA without leaving your employer. These are rare, but it’s worth asking about.)

Factor #2: Can You Help Your HR Department Make A Change?
The reason why expensive 401k plans exist is because they tend to be cheap for the employer. Essentially, the administrative costs for running the plan are shifted to the employees. Big companies tend to have better plans because they offer enough assets for companies like Vanguard to jump in.

Still, you might be able to enact some change. Print out some material about how high plan expenses can really hurt performance and thus people’s retirements. Talk to your co-workers, and make it an worker attraction/retention issue. You may not need to switch providers, but perhaps they’ll at least offer a better option or two. I’ve even read about Congress considering a law requiring all 401k plan administrators offering at least one index fund option.

Factor #3: How Expensive Is It?
Unfortunately for Robert, he shared his available investment options along with their annual expense ratios, and they are the worst I’ve seen yet:

Blackrock Fundamental Growth C MCFGX 1.94%
Blackrock Global Allocation C MCLOX 1.88%
Blackrock Government Income Portfolio C1 BGIEX 1.53%
Blackrock International Value C MCIVX 2.60%
Blackrock Large Cap Core C MCLRX 1.97%
Blackrock Large Cap Value C MCLVX 2.00%
Blackrock Value Opportunities C MCSPX 2.34%
Davis New York Venture C NYVCX 1.71%
Evergreen Core Bond C ESBCX 1.45%
J P Morgan Dynamic Small Cap Growth C VSCCX 2.12%
Mfs Total Return C MTRCX 1.52%

It may be tempting to think “well, no matter how bad the plan is, it will still be better than a taxable account, right?” Wrong. Actually, given current tax rates, it can be better to keep your money in a taxable brokerage account than in a 401(k) plan if the options are expensive enough. Here are some quick and dirty examples.

Let’s say you put in $10,000 in a taxable account. You invest in an index fund with 0.20% expense ratio. The broad US stock market earns 8% per year. Since you get the gains minus expenses, you get 7.8% per year. You get a 15% tax hit at the end for long-term capital gains. Your final after-tax balance after 30 years is $80,906. (Yes, I’m ignoring the annual taxation of dividends for now.)

10,000 x 1.078^30 x 0.85 = $80,906

Let’s say you put in $10,000 of after-tax money in a Roth 401(k). You buy a Blackrock fund with 2% expense ratio. Again, on average, all mutual funds that invest in the broad US stock market will earn the market returns (8%) minus expenses (2%), giving you a 6% return per year. However, you have no tax hit at the end since it is a Roth. (You’d get the same result with pre-tax money in a Traditional 401k.) Your final after-tax balance is only $57,434.

10,000 x 1.06^30 = $57,434

The above is a very simplified comparison, but the point is that the gradual annual hit of a high expense ratio can overcome the tax break advantage. Usually this takes an expense ratio above 1% and a long time horizon.

Recap / WWMMBD
If you think that your current plan options will continue to be this bad for the next 10 years or more, and you don’t think you’ll leave your company before then, then it may indeed be better to just invest outside a 401k plan. (Keep up the IRA contributions!) However, I think that soon 401k plans will be more tightly regulated, and the trend is for plans to at least offer a few low-cost options. I know my plan seems to get a little better every year. If it were me, I’d probably suck it up and still tuck money away in the 401k in the hopes of a brighter future.

Swaptree Review: Barter Your Books, CDs, DVDs, and Video Games

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

I’ve spent the last few hours browsing on Swaptree, which is a website that allows you to swap your books, CDs, DVDs, and video games with other members. You just list the items that you want to trade and the items that you want, and Swaptree sets up trades for you. You can also view a big list of other things you could get in trade. If you see a swap you like, you just pay for shipping your items out, the site does not charge any fees. (It appears to be ad-supported.)

You can list items you want to trade quickly by entering the UPC or ISBN code on the item. Everything is one-for-one. For example, one book is traded for one video game. The site tries to create more possibilities by figuring out 3-way and even 4-way trades between members. Trust is gained by an eBay-like rating system. There is also a postage-printing service that makes it easy to make postage labels and drop your package off without waiting in lines.

I kind of view Swaptree as the $3 store:

  1. You list all your old books/CDs/DVDs/games you don’t want and aren’t using. Good weekend project.
  2. You now have a store in which everything is essentially priced at $2-$3, the cost of shipping your stuff out. Just listing a few books can offer up hundreds of options.
  3. If you want something specific, list it on your Want list so others have a greater opportunity to create a working swap.
  4. Be quick though, as some of the good items get snapped up fast!

I know, this doesn’t take into account the value of your media, but I would say this is best for things that have been sitting around for a while. Why list a bunch of items that might be worth a few bucks on eBay and be subject to $1 in eBay/PayPal fees, not to mention paying listing fees for each item that doesn’t sell.

You are allowed to ship via Media Mail, which is based on weight (ex. $3.16 for a 3 lb. package). However, if you ship in a padded envelope and it is under 9 ounces, shipping via First Class is both cheaper and faster.

Piggy Bank That Helps You Save & Spend

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This might be cool for kids. The Spend Save Bank randomly deposits coins into either the ‘Save’ or ‘Spend’ section. It’d be even better if there was a option to set what percentages you want to split between spend and save, but I guess that would be a lot more complicated than a swiveling tray. Via Gizmodo via bookofjoe.

“Like a slot machine that never loses.” Ha! Here are some more funny piggy banks I’ve ran across.

Use Google Voice To Enhance Your Cell Phone Voicemail

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

You can now add the voicemail features of Google Voice to your existing cell phone service for free. Check out the Google Blog post and Engadget.

More specifically, if you sign up for Google Voice with your existing number, you’ll get:

* Online, searchable voicemail
* Free automated voicemail transcription

* Custom voicemail greetings for different callers
* Email and SMS notifications
* Low-priced international calling

If you already have a Google Voice account, go to Settings and look for a link by your cell phone number. If you want one, people have been getting their invite requests filled within a few days. Don’t forget all the ways you can save money with Google Voice.

It would be convenient to have voicemail-to-text sent automatically via SMS. However, currently it appears that Sprint does not support free call forwarding and charges 20 cents per minute, so I’m left out for now. A short explanatory video from Google is below:

[Read more…]

US Savings Bonds: Increasing Annual Purchase Limits With A Minor Account

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Got a reader question today about the purchase limits for savings bonds:

Can I get around the $20,000 annual buying limit by purchasing I-bonds in my child’s name?

After doing some research, it does appear that yes, you can exceed the usual purchase limits by buying more bonds in the names of your children. Currently, the annual purchase limit is now $5,000 in paper bonds and $5,000 in electronic bonds per series type (EE/I) and per Social Security Number. Thus, a couple could buy a total of $20,000 per year in I-Bonds.

From the TreasuryDirect Change in Annual Purchase Limit FAQ:

I’m buying bonds for myself and my children through my TreasuryDirect account. How does the limit apply to these purchases?

You can buy up to $5,000 each year of electronic Series EE and I bonds in TreasuryDirect on which you are the primary owner, plus up to the limit of each series in the name of each child for whom you’ve established a linked account in the child’s name as primary owner. Minor linked accounts are sub-accounts of your own master account, but do not provide you with ownership rights to securities held in the linked sub-accounts.

The next question is do you have the ability to buy and sell the bonds? From the TreasuryDirect Establish an Account for a Minor page:

A Minor account is a custodial account you may establish for a child under the age of 18 if you are a parent, natural guardian, or person providing chief support. You may purchase, redeem, receive gift deliveries, and perform other transactions within the account on behalf of the minor. When the minor reaches age 18 and establishes his or her own Primary account, you may de-link the securities from the Minor account to move them to the newly established account.

Other considerations
Since these bonds will be bought in the name of a minor, they are the one that will receive the interest income when redeemed. This might actually be a good tax move, as a child can earn a certain amount of income ($1,900 in 2009) before it is subject to tax at the parent’s higher rate. See this IRS page for more info.

When the child turns 18, it is then in their control and you can no longer perform most transactions like selling the bonds. In addition, there is also the education exclusion which can allow bond owners to avoid paying tax on the interest when used for qualified higher education expenses. If you’re thinking of doing this, remember that the bond has to be in the parent’s name, not the child’s name. More details here.

Paradox Of Financial Choices: Maximizing vs. Satisficing

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In the book Paradox of Choice by Barry Schwartz, he talks about how there are two types of people, maximizers and satisficers (think satisfy + suffice). I will simply quote the excellent summary from the book’s Wikipedia page:

A maximizer is like a perfectionist, someone who needs to be assured that their every purchase or decision was the best that could be made. The way a maximizer knows for certain is to consider all the alternatives they can imagine. This creates a psychologically daunting task, which can become even more daunting as the number of options increases. The alternative to maximizing is to be a satisficer. A satisficer has criteria and standards, but a satisficer is not worried about the possibility that there might be something better. Ultimately, Schwartz agrees with Simon’s conclusion, that satisficing is, in fact, the maximizing strategy.

If you can’t tell already after 10 seconds of reading this site, I am a hardcore maximizer. I love collecting data, poring over alternatives, finding out secret exceptions, all so I can choose the “best” choice. I prefer the term “good enough-er” to satisficer. For some people, the second it reaches the “good enough” stage, they are done and move on.

A Pathetic Maximizer Story
This happened just last week. A friend of mine comes over, and brings some McDonald’s with him. After he leaves, I go to throw out the garbage but notice an unpeeled Monopoly game piece. I peel it out of curiosity, but I get no instant-win and two random streets (St. James Place and Atlantic Avenue). But wait… I vaguely know that one of the rules of the game is that if you collect all the streets of a neighborhood (same color), you win a cash prize. However, some streets are given out all the time, while others are very rare. What if I had one of the rare pieces?

Of course, I then had to fire up the computer and search for the rare pieces. Lo and behold, Wikipedia also has a list of all the rare pieces. For example, Ventnor Avenue is also yellow like Atlantic, but is always the “missing” piece and thus essentially worth $25,000 by itself. My pieces were of course worthless. But I still had to know.

Maximizing and Investing
I began to think about how this relates to personal finance. In investing, you’d obviously like to maximize your returns. However, it is very difficult to know in advance which stock or mutual fund will outperform the rest. You could read books, financial statements, interview executives, or watch CNBC all day. You could listen to Warren Buffett’s every bowel movement and dissect all his annual shareholder letters for hints and tips.

Or if you’re like me, you may decide that even though the market isn’t perfectly efficient, it is still very efficient especially when costs like mutual fund fees, trade commissions, and tax considerations are taken into account. I now invest passively, and agree to be “satisficed” with the returns of the world markets minus costs. But even here, I am trying to maximize my returns by minimizing costs by buying Vanguard index funds or similar ETFs so that my portfolio costs less than 0.20% of assets annually.

Better to Satisfice?
The things I could maximize financially go on and on. From bank interest rates to cell phone plans, credit card reward structures to auto insurance premiums. Would I be happier if I just picked something “good enough” and moved on? Perhaps it is you readers that are the smartest, letting us slightly kooky bloggers do all the research for you, and then just picking what is good enough for you! 😉

Where maximizing hurts most is when it stops you from taking action. It doesn’t matter if your interest rate is 1.8% vs. 1.85% when your money is still stuck in a 0% checking account at some megabank. It doesn’t matter if you get the optimal 401k asset allocation if you’re not even contributing the most you can to the plan. For me, I have been putting off fixing up my house and adding solar hot water for several months because I want to find the “best” contractor. Meanwhile, I’m still using too much electricity and the tax breaks may expire.

Are there some things where you maximize, and others where you satisfice?

American Express 15,000 Membership Rewards Points Bonus

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

American Express has a new card called the American Express Premier Rewards Gold Card, which offers these primary perks:

  • Earn 10,000 Membership Rewards bonus points when you spend $1,000 in your first 3 months of Card membership. MR points are very versatile, and can be converted to 15,000 frequent flier miles in a number of programs (or 10 Southwest credits), or you can simply get $150 in gift cards at several stores like Home Depot, Crate & Barrel, or Macy’s. I think you can also get cash equivalents at a reduced ratio.
  • Offers 3X points on airfare, 2X points on gas and groceries, and 1X points on everything else.
  • Earn 15,000 Membership Rewards bonus points when you spend $30,000 per calendar year.
  • No annual fee for your first year. After that it is $175.

There are two ways to maximize this offer. The easy way is to simply sign-up, grab the 15,000 MR points bonus, and then cancel anytime within the first year, that’s a quick $150+ bonus which is rare these days.  The only other scenario is that you are a big spender and purchase a lot of airfare, because triple MR points is pretty rare and you’ll have to reach that $30,000 spending target to offset the $175 annual fee after the first year.

American Express Mandated Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author’s alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

Interview: A Couple Spends A Year In Asia For $9/Day Each

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

This is a interview/guest post with blog reader Ariel Hoffman, who recently spent a year traveling around Asia with his girlfriend Michal with a combined budget of only $10,000 – and managed to come back with $3,500 of it! I love to read nonfiction travel essays, so not only are there some great frugal travel tips below, it was also very exciting to read about their adventures. Thanks again for sharing, Ariel!

What was your inspiration to go on this adventure?
In Israel, it is mandatory to serve in the armed forces for at least 3 years. After that you just want to get away, and Asia is the perfect destination for someone who’s just saved up 3 years worth of the army’s 100$-a-month salary. Also, Israel’s a pretty small country, so there isn’t much domestic travel to be had like there is in the US.

The itinerary my girlfriend (Michal) and I came up with was mostly about avoiding the rainy season, and minimizing air travel. Air travel is expensive and boring, and you try to avoid it if you have a lot of time to spend.

How did you come up with your budget? Did it end up costing more or less than you thought?
We sat down and did some serious homework, mostly on websites like lonelyplanet.com and their forums. The budget they offered sounded ridiculously low, so we nearly doubled everything we read about, and came up with a rough estimate of about 10,000$ for the two of us, for the entire year.

What we realized, however, is that not only were the estimates online pretty accurate, but also that two people don’t spend exactly twice as much as one – lots of things are shared (such as meals, transportation, hotel rooms etc.) and so it’s more like budgeting for a person and a half rather than two.
We were very pleasantly surprised when we came back home to count our remaining traveler’s cheques and see we still have about 3,500$ left over for next time!

How did you fund it? Did you save up the cash upfront, borrow some money, work while on the trip, or some other combination?
In preparation for our trip, we both took on extra work and saved up every Shekel we made. It took us about 5 months. Once we reached our goal of 10,000$, we exchanged all our cash into traveler’s cheques – a great way to keep your money both liquid and safe when abroad. Luckily for us, the exchange rates were in our favor the whole time, which gave our savings an extra 2%-5% throughout the journey.

Walk us through a typical day on your Year in Asia trip.
Most days would begin with trying to find breakfast – not always an easy task. Most Asian countries do not serve what we would consider breakfast, especially my vegetarian Michal. Although chicken porridge and spicy rice is very nice, it’s not everyone’s idea of the right way to start your day. After eating some novel type of cookie in spiced tea, we would set off to whatever National Monument/UNESCO World Heritage Site/Giant Temple/Yearly Festival was in the town on that day. After a day’s tour of the attraction we would start hunting for a suitable lunch, which meant looking around for a street stall with a good crowd, or a local restaurant with a queue. Nothing says fresh like a long line of customers, and Asian vendors normally close their stalls every day when they’ve exhausted all their stock, so food is never kept overnight and doesn’t have time to spoil. Another plus is that the food is not made of pre-cut ingredients, which makes preparation slower, but at least you see exactly what you’re getting so there are no surprises.

Evening was normally a time for sitting on the beach, going to some performance or sitting in some tea-shop with friends. For a while we had a small kitchen in our room, so I would cook dinner for us while Michal practiced yoga. In China we bought a Wii, and at night we’d plug it in and invite friends over for kart racing – it’s OK to enjoy modern fun even when on the road!
We spent a lot of time on trains and buses, getting from A to B. Sometimes as long as 27 hours! Israel’s longest train ride is only 4 hours long.

What are some basic money-saving tips you might offer us readers?
[Read more…]

Learning About Bonds: Interest Rate Risk, Time Horizons, and Duration

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

For a long time, the my knowledge of bonds could be summed up in one sentence: Bonds are an IOU where you lend money to someone and they pay you interest plus your principal back eventually. There are many risks with bonds, and just two of them are credit risk and interest rate risk. Credit risk is the possibility that you won’t be paid back. Interest rate risk is the fact that once you’ve bought a bond, the value of that bond varies with prevailing interest rates.

Why Bond Values Change With Interest Rates
Let’s say you bought a bond from the US Treasury for $1,000 at pays 4% annual interest once a year ($40). What if the next day, market conditions change and now the US Treasury offers $1,000 bonds paying 5% interest ($50). Nobody would buy your bond for $1,000 anymore, they’d only pay $800 for it, since $40 is 5% of $800. This is why you may have read that bond prices tend to move in the opposite direction of interest rates.

So what’s the next level of understanding? I think this recent Vanguard Blog article on bonds expands on things nicely. The primary point is that the impact of rising or falling rates on bond returns varies depending on time horizons and the duration of your bonds.

Maturity vs. Duration
When you look at the stats for a bond mutual fund, you’ll see both average maturity and average duration. While a bond’s maturity is how long before your principal is repaid, the fact that most bonds pay out regular interest payments (coupons) changes the actual sensitivity to interest rates. This is where average duration comes in – it takes into account the relative discounted cash flows to accurately measure price sensitivity with respect to interest rate. Short version: Look at duration, not just maturity.

Time Horizons
The table taken from the article shows how the impact of interest rates changes with time horizon. In this scenario, you have a bond fund with a duration of 5.8 years and an initial yield to maturity of 4%. Then we see what happens if rates either stay the same, rise to 6%, or drop to 2%. (Rates are assumed to change evenly over two years). As with most bond funds, the interest income is continuously reinvested into new bonds.

If your time horizon is a lot shorter than your duration, then we see that the major risk is rising interest rates. Rising rates can crush your returns, while falling rates can boost them. However, if your time horizon is a lot longer than your duration, then the larger risk is lower interest rates, because as you re-invest your interest payments into new bonds (with lower interest rates), those lower rates will hurt your return in the long run.

Another interest thing to notice is that if you held for the exact length of the duration, 5.8 years in this case, then your annualized return would be very close to your initial yield of 4%, regardless of whether rates rose or fell.

In general, if you’re saving for a short-term goal, it may be wise to pick a duration that is also short enough so that interest rate swings won’t wipe you out. If your time horizon is for a retirement that is decades away, then picking a duration for a bond fund is more about other factors than just predicting upcoming interest rates. Remember, future higher interest rates can actually help your long-term returns. For example, consider the balance between the increased volatility of long-term bonds with their higher long-term historical returns.