Archives for January 2012

The Overnight Rule For Managing Your Portfolio

Recently, I came across an investment tip called the Overnight Rule from Carl Richards via the NYT Bucks Blog:

Imagine that all your investment holdings were sold overnight by accident.

You can’t undo the trades, and now all you have is cash.

Would you buy back everything you owned previously again at their current prices? If not, why are you holding them now?

I think this provides a fresh look at your portfolio, as many times we hold investments for irrational reasons. For example, there is the well-documented trait of loss aversion (even though readers of this blog may be immune), where investors really hate selling at a loss, even more than they love selling with a gain.

Perhaps you bought the stock at $20 a share, and it is now at $15 a share. You want to get rid of it “just as soon as it gets back to $20 a share”, so that so you can say you didn’t lose money on it. It’s better to admit the mistake and put your money in something better.

Then there is regret aversion. Perhaps you bought it at $50 a share and now it’s at $400 a share. You get to tell your friends how you bought Apple at $50 a share. You’re afraid it’s overpriced, but you don’t want to miss out if it rises some more. You sit on your gains and choose inaction instead of having to make a hard decision even though your money could be better deployed elsewhere.

Maybe it is company stock from your job, or shares that you inherited from a beloved family member. Whether is it some form of sentimental attachment, inertia, or plain laziness – you may want to consider your reasons for holding them.

There is a small exception to this rule if you are sitting on large capital gains in a taxable account and don’t want to realize them and get hit with the tax bill, especially if the alternative investment is also very similar (ex. mutual funds with similar holdings). However, even in this scenario you want to make sure that you’re not holding a poor investment just to put off a tax bill.

I did not come up with this myself, but read about this rule somewhere online within the last month. I’ve searched for the source but can’t find it, so please let me know if you do. Found it, thanks!

New Checking Account Promotions: Citibank, Chase, M&T Bank

Interest rates looks to remain tiny for a long time, so if you want to boost your interest earned while keeping your money safe in banks, taking advantage of sign-up bonuses is one way to do it. Earning 1% APY on $10,000 is just $100 a year, and it’s even hard to get 1% APY now! Why not double or triple that with some new accounts.

Citibank $50 bonus if you open a Citibank account with $1,000 and complete 1 direct deposit and 1 electronic bill payment for 2 consecutive months. New checking account customers only. There’s no monthly service fee if you maintain a $15,000 combined average monthly balance requirement in eligible products; otherwise $20.00 monthly service fee is applied. Eligible products are linked deposits, loans, mortgages, and investment accounts. $100 bonus available with Citigold account.

Chase Bank $150 bonus when you open a Chase Total Checking account and set up direct deposit (new Chase checking customers only). This account is free if you make a $500+ direct deposit each month, or have $1,500 minimum daily balance.

M&T Bank $100 bonus when you open a MyChoice checking account and set up direct deposit within 90 days. This account is free if you maintain a direct deposit each month or have $500 minimum daily balance. $125 and $150 bonuses also available with upgraded accounts (and higher requirements).

Capital One $100 bonus when you open a Interest Online Checking account by 1/31/2012 using offer code CHEC168DF and make a direct deposit of $250 or more within 90 days. No monthly service fee, and pays 0.75% APY on balances less than $100k.

Savings Bonds vs. Bank Savings Accounts

(In this post, I’m not going to provide all the background information on savings bonds that I normally do. For that, please read the older posts in my Savings Bonds category.)

When the Treasury announced the $10,000 purchase limit for 2012, a few readers asked if you should buy savings bonds in January, or wait until later in the year. Since then, a few things have happened. For one, the Federal Reserve has basically said that they will keep their target fed funds rates at zero until late 2014, while setting a target inflation rate at 2% annually. Translation: Interest rates on savings accounts and similar products will be remain crap while the things we buy get more expensive.

Also, we have another month’s worth of Consumer Price Index (CPI) data which is how the inflation rate is defined for savings bonds. The next 6-month variable rate update will be based on the CPI-U change between September 2011 and March 2012. We are halfway there:

CPI-U
Sep 2011 226.889
Oct 2011 226.421
Nov 2011 226.230
Dec 2011 225.672
Jan 2012 ?
Feb 2012 ?
Mar 2012 ?

You can see that inflation is actually negative over these three months. However, user MoneyOCD of Bogleheads posted this informational chart showing that in recent years there have been many periods of negative inflation from September to December, only to be followed by periods of higher inflation from December to March.

Basically, making predictions now is premature. If you buy in January through April, you will get a fixed rate of 0%, and a variable rate of 3.06% for six months. Given the interest rate environment, this is pretty much one of the best options for “safe” money. If you wait all the way until May, you’ll get something new based on whatever happens to inflation the next few months along with a fixed rate that will most likely be zero again. The inflation rate resets every 6 months based on your purchase month.

In general, if you have the money and are looking to put it in shorter-term, low risk investments that are guaranteed not to lose money (in terms of face value), I would be maxing out my limit on savings bonds for 2012. Keep in mind that savings bonds can’t be cashed in for an entire year after purchase. My personal opinion on the short-term? I don’t see any benefit in waiting until May. If you have money to put aside now, buy Series I savings bonds now. If you don’t, just wait until you do. The rate is already higher than savings accounts or 1-year CDs, and by waiting around in a 0.75% savings account or 1-year CD you’ll be missing out in interest.

If you’re looking to buy in January, I’d put in your order today at TreasuryDirect. It’s better to buy near the end of the month, as you get credit for the entire month no matter if you buy at the beginning or the end.

Pay Your Kids To Fund Their Own Roth IRA?

You’re probably aware of the wonders of the Roth IRA and how it allows your money to grow completely free from taxes, even upon withdrawal. An added wrinkle is the lack of age restriction, so that even kids with earned income (wages, salaries, tips) can contribute to a Roth IRA up the lesser of their taxable income or $5,000.

Along those lines, I received a PR e-mail from a site called 1417power.com. The idea is that you pay them “tuition”, and in return they pay your kids official job income that makes them eligible to contribute to a Roth IRA. They claim to follow all applicable child labor laws for those aged 14 to 17 (thus the name). Your kids do thing like fill out marketing surveys, but you’re essentially buying them a job. Digging through their fee structure, roughly 50% of what you pay them is skimmed off to go to the site owners.

Naturally, my question was – why can’t I just do this myself? The idea of paying your kids to do things like babysitting, lawn care or landscaping work, or manual labor seems simple enough. However, this Fairmark article argues that paying your own kids for chores is usually not considered taxable income, so you can’t “switch it” to taxable income for Roth IRA purposes when it benefits you. I’m not completely convinced, but for the sake of argument let’s explore other options:

  • Have the teenager earn money via traditional jobs like grocery bagger, cashier, food delivery, waiting tables, etc.
  • The child earns income from other neighborhood families doing things like babysitting, lawn care, or painting. The pay rate would have to be at reasonable market rates. You could even work out a “I’ll pay your kid if you pay mine” agreement, if you find a like-minded parent.
  • If you run your own business, you could pay the child for more clerical or administrative-type duties such as proofreading, delivering documents, or office organization.
  • If the teenager is especially industrious, they could be doing more skilled work like graphic design or making iPhone apps.

There would still be some loss, as their gross income would be subject to payroll taxes like Social Security and Medicare, as well as a small amount of federal income taxes (less than 10%). But if your child has the discipline to not touch the money for decades, the tax-free growth could be enormous. You’d have to be comfortable with the fact that they could do whatever they wanted with the money at age 18 as they can withdraw the money after taxes and penalties.

The Parental IRA Match
Another move taken from this Forbes article for those that are already parents of teenagers with part-time jobs is to match their earned income. If little Jane earns $3,000 being a lifeguard, then let her spend her all or part of her take-home pay, but help her fund a Roth IRA to the full $3,000.

Effect on College Financial Aid
From my quick research, it appears that retirement accounts like Roth IRA are not considered an asset by the generic FAFSA form, but individual universities may deem them as a student asset. This could make for example 25% of the IRA to counts toward the student’s expected contribution, which doesn’t seem too bad.

Here’s a question for the parents out there – have you done anything along these lines? What did you do and why (or why not)?

Clover Pay New User Bonus via Referral

Clover is a new person-to-person payment system for use between phone numbers. Simple fees (none for personal use), simple interface. If you sign-up via invite from a registered user, you’ll get up to $10 off your first purchase. The referrer gets $5 too. You don’t even need a credit card or bank account to start, just a phone number (landline numbers work, but it’s optimized for Android and iPhone/iPod Touch users).

Here’s my invite link which will get you that referral bonus. Thanks if you use it.

After you join, go ahead and leave your own referral link in the comments.

LivingSocial: $20 at The Body Shop for $10

LivingSocial is offering $20 to spend at The Body Shop for $10. Valid in-store only. Valid toward sale and promotional items. Over 65,000 purchased already. Psst guys… Valentine’s Day is less than 3 weeks away 😉

p.s. Groupon has $6 movie tickets to romantic comedy flick “One For The Money”

American Express New York City Promotion: $50 off $200

I’m a little late on this one, but check it out you live in the New York City metro area or will be there in February. American Express has another promotion where if you spend $200+ at 2 or more participating merchants on a registered AmEx from February 1–29, 2012 then you will get a $50 statement credit. Register at amexnetwork.com/getmore. In-store purchases only. Registration is limited!

For the best value, note that Costco is a participating merchant. Keep in mind, you’ll have to visit two of them, but given all they sell there (stamps, gift cards, toilet paper) you shouldn’t have a hard time saving $50 off on $200 of stuff you would have spent anyway. Screenshot:

Exploring the Connections Between Happiness, Stuff, and Money

The Daily Beast has an article Consumption Makes Us Sad? Science Says We Can Be Happy With Less by Barry Schwartz (author of The Paradox of Choice) that serves as a nice compilation of various psychological and behavioral economics findings about money and happiness.

The first main topic is hedonic adaption. When things are awesome, we eventually get used to it (celebrities, lottery winners). When things are really awful, we tend to get used to that as well (disabled persons). This is why it’s hard for people to achieve a constantly higher level of happiness. We get a nicer car/house/toy, we get used it, and then soon we want an even nicer car/house/toy, never getting anywhere as if we are walking on a treadmill.

Simply knowing that the good feeling from that purchase is only temporary may help you cut back on your spending. In addition, author Dan Ariely suggests you deal with the hedonic treadmill by pacing yourself when it comes to experiencing pleasure, and (when needed) making painful cuts all at once. For example, you might not buy a entire home theater setup all at once, but perhaps upgrade one component and wait until the shine completely wears off before buying a new couch. If you need to cut costs, it may be better to make a big spending cut by downsizing your house rather than cutting things you’ll miss repeatedly like your daily coffee or selling your stuff on eBay piece-by-piece.

The second main topic is how most of us get more pleasure out of doing stuff than out of having stuff. This especially applies to activities with other people and/or activities that we find important and worthwhile. A nice result form this is that those activities often cost very little or nothing. I think this concept is related to the research by Daniel Kahneman that found that happiness did not increase past earning $60,000 a year.

Below 60,000 dollars a year, people are unhappy, and they get progressively unhappier the poorer they get. Above that, we get an absolutely flat line. I mean I’ve rarely seen lines so flat. […] Clearly money does not buy you experiential happiness, but lack of money certainly buys you misery,” he said. But the real trick, Kahneman said, is to spend time with people you like.

We all need a certain amount of “stuff” (and thus money) to make us feel physically healthy and safe from harm. Past that, adding more stuff doesn’t seem to help. Schwartz suggests that at some point, one might even stop looking for a job that pays more, but instead go for a job that makes us feel valued and doing something important. Of course, more money can get you to early retirement faster if you’re into that sort of thing, so there is a balance to be made.

Best American Express Membership Reward Redemption: Cash Via Gap Gift Cards?

(Update: That was quick, looks like they are sold out. Perhaps they will replenish later.)

If you have some American Express Membership Rewards points lying around, perhaps from the American Express Platinum or the AmEx Rewards Premier Gold, then is for you. Reader David reports that right now you can get a $25 Gap gift card for 1,250 points when you redeem by January 29, 2012, which is 50% less than the normal exchange rate for gift cards ($25 = 2500 points). Supplies are limited.

Even if you don’t like Gap clothes, PlasticJungle.com and others from my gift card sellback website comparison will give you up to $83 for a $100 Gap gift card. That works out to a value of 1.66 cents per point (10,000 points = $166), which is much better than any other direct cash-out option, although some people may be able to get better value by redeeming airline miles for award flights.

Sprint Family Plan Discount Change, Cancel Without Penalty

If you are on a family plan with Sprint service and also have a student or employee cellular discount applied to it, this is a quick heads-up that Sprint is raising your bill. If you look carefully on your January statement, you should find this announcement:

Discount Policy Change Notice
Effective your February bill cycle, Family and Business Share monthly plan charges will be billed differently. Discounts will only apply to the monthly recurring charge of the primary line. Line 2 will be billed at the applicable Add-a-Phone rate and will not be discount eligible.

Previously, the discounts applied to first two lines, but now it only applies to the first line. (What if both users qualified for discounts?) SprintFeed has an earlier leaked memo with example. In addition, this SprintUsers post (by an actual Sprint employee) reports that this indeed constitutes a material change to the contract, and thus gives you the ability to cancel your contract before the end date without having to pay an early termination fee (ETF). However, you must actually end your contract, as opposed to simply switching to a month-to-month basis. You’ll probably have to escalate your call to the Sprint retention department, and they may offer you some sort of incentive to stay on your plan.

Visa & Hilton Honors Promotion: 1,000 Free HHonors Points

If you have a Hilton HHonors number, a cell phone that accepts text messages, and a Visa card, you can register at visa.com/hiltonhonors to receive promotion text messages and get 1,000 HHonor bonus points. You can earn another 4,000 points if you spend $100 on your linked Visa card at any Hilton-affiliated hotel by June 30, 2012. You can opt out from messages later on with a reply text of “STOP”.

By the way, if you have a smartphone you can also score additional free points from Hilton and other points programs by “checking in” using the Foursquare app (or Facebook, Twitter, and Instagram) when you register with TopGuest. You can get 50 Hilton points every day you check in at a Hilton hotel, for example. You only need to be within 10 miles of the hotel to check in the first time, and in future times I don’t think you need to be nearby at all.
[Read more…]

Credit Card Sign-Up Bonus Summary 2011: Over $2,500 in Free Money

Looking back, 2011 was a great year for credit card sign-up incentives. The major issuers rolled out some new cards and features and offered up big bonuses to get you to try them out. By picking up the tastiest offers, you could have reaped thousands of dollars in bonuses even with average incomes and without spending more than normal. If you have good to excellent credit, why not earn some money with it? Here’s what Mrs. MMB and I decided to jump on last year:

Chase Sapphire Preferred: $625 in travel
The Chase Sapphire Preferred® Card gives you 50,000 bonus points after you spend $4,000 in purchases within the first 3 months. With this new card, Chase is basically trying to make a premium card that competes with American Express, with their Ultimate Rewards rivaling Membership Rewards. (It’s metal and heavy, too!) For example, you can now transfer Ultimate Rewards points to Continental/United, Southwest, British Airways, Hyatt, and Marriott. This the same system the Chase Freedom card uses now as well.

But my favorite features are the cash options and the 20% bonus towards travel. 10,000 points = $100 cash = $120 towards travel at no markup (same price as Expedia, Travelocity, etc). You can mix points and cash however you like, which means 40k points = $500 towards any airfare or hotel nights. No annual fee the first year, $95 after that.

Ink Bold Business Charge Card: $500 cash or $625 in travel
The small business version of the Chase Sapphire, this card also offers a huge sign-up bonus. The Ink Bold® Business Charge Card from Chase gives you 50,000 Ultimate Rewards points – after spending $5,000 in the first 3 months your account is open. For more details, please see my Chase Ink Bold review post, including details on what constitutes a small business.

Citi ThankYou Premier: $500 in gift card or $665 in airfare
The Citi ThankYou Premier Card is another travel-oriented premium credit card gives you 50,000 ThankYou points after spending $2,500 within 3 months of account opening. The special feature here is that it offers you a 33% premium on when used towards travel. That means those 50,000 ThankYou points can be redeemed for $665 in airfare. They also have their own airfare portal with the same prices as Expedia, and you can also mix and match cash and points if you don’t have enough points to pay for the entire amount. For more details, please see my Citi ThankYou Premier review post. (Now expired)

Gold Delta SkyMiles Credit Card from American Express: 30,000 miles
The Gold Delta SkyMiles® Credit Card from American Express is not a great deal for everyone, but it works out very well for us. (It’s actually our second card, I had one previously.) My wife and I both fly cross-country together to a city primarily served by Delta at least once a year to visit the parents. The sign-up incentive is pretty good – 30,000 Skymiles after just $1,000 in purchases within your first 3 months.

More importantly, the card comes with a buy-one-get-one-for-$99 companion voucher (now expired) that saved us $250+ this year since it’s usually during a holiday. We’ve used this voucher before, and the prices are comparable to online travel engines, but you do get stuck with the taxes of $50 or so. The annual fee is free the first year, and $95 after that. You also get a free checked bag on every flight for you and up to 8 travel companions (so one card gets us two free bags as a couple, a $50 value per person each roundtrip). The total one-year value of this card is at least $600 if value a mile at a penny.

Grand total: $625 + $625 + $665 + $600 = $2,515
That’s just for four cards from three different issuers, which is far less than the most cards I’ve applied for in a year on my own. This means a couple could make over $5,000, which is 10% of the 2009 US median household income of $50,221 per US Census. As for us, we plan on making good use of this money to cover future airfare and hotel expenses. This total also does not include any earnings from cash-back rewards credit cards.

If we include the Ink Bold Business Charge Card, the required spending total was $11,000. Exclude the Ink Bold, and it goes down to $6,000, which if you use time-shifting techniques like pre-paying bills such as insurance/utilities or buying gift cards for groceries/gas, works out to a reasonable $500 per month. That’s well within our normal spending anyway.

Honorable mentions go out to three other cards:

  • The Chase British Airways 100,000 miles offer came back in 2012, but both my wife and I already jumped on it previously and have already used it for a luxurious business-class trip around Europe.
  • The Southwest Airlines card offered up 50,000 points (expired) which was good for over $800 in Wanna Get Away airfare after just one purchase of any amount. The current offer is 25,000 points for a still-respectable $416 in airfare. We don’t fly Southwest all that often, so we passed on this card this year.
  • The Hyatt Card offers two free nights at any Hyatt in the world after any first purchase, which includes some rather swank hotels. There is a $75 annual fee. My sister got this card and we were pretty close to applying, but we wanted to hold off until we had firm travel plans since I believe you have a certain time to redeem.

My psychic powers tell me that some of you are wondering about this ;), so here’s the answer: How Opening and Closing Credit Card Accounts Affects Your Credit Score.

Chase Sapphire Preferred Banner 50000

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