Archives for October 2012

Top 529 Plans: SavingForCollege 5-Cap Ratings List 2012 is a popular privately-run site for researching and comparing 529 college savings plans. In June 2012, they updated their rating system which represents their “opinion of the overall usefulness of a state’s 529 plan based on many considerations.” The judgement criteria include:

  • Performance. They selected similar “apples-to-apples” portfolios with 7 different asset allocations from each plan and rated them based on historical performance. Rankings are updated each quarter.
  • Costs. Total average asset-based expense ratios among plans are compared, in addition to separately considering program manager fees, administrator fees, and annual account maintenance fees.
  • Features. This includes other factors that affect participants, including the ability of the plan change their investment options quickly if called for; creditor protection under the sponsoring state’s laws; availability of FDIC-insured options; minimum and maximum contribution restrictions.
  • Reliability. The appears to measure the likelihood of a good plan staying a good plan. Do they have experienced program managers? Does the plan have a good amount of assets? What is the quality of the documentation and reporting? How restrictive are the withdrawal and rollover processes?

Here is the full list of 5-Cap Ratings for each state, on a scale of 0 to 5 Caps. Note that there are separate ratings for in-state and out-of-state residents. Out of the 100+ different plans they rated, here are the 8 programs available directly to the public that attained the top 5-Cap Rating for out-of-state residents (alphabetical order):

  • California: The ScholarShare College Savings Plan
  • Maine NextGen College Investing Plan – Direct Plan
  • New York’s College Savings Program – Direct Plan
  • Ohio CollegeAdvantage 529 Savings Plan

The following plans received a 5-Cap Rating for in-state residents:

  • California: The ScholarShare College Savings Plan
  • Colorado: Direct Portfolio College Savings Plan
  • Colorado: Scholars Choice College Savings Program – Advisor Plan
  • Illinois: Bright Start College Savings Program – Direct Plan
  • Iowa: College Savings Iowa
  • Maine: NextGen College Investing Plan – Direct Plan
  • Maine: NextGen College Investing Plan – Advisor Plan
  • Michigan: Michigan Education Savings Program
  • Nebraska: Nebraska Education Savings Trust – Advisor Plan
  • Nebraska: Nebraska Education Savings Trust – Direct Plan
  • New York: New York’s College Savings Program – Direct Plan
  • Ohio: Ohio CollegeAdvantage 529 Savings Plan
  • Rhode Island: CollegeBoundfund – Direct Plan
  • South Carolina: Future Scholar 529 College Savings Plan – Advisor Plan
  • South Carolina: Future Scholar 529 College Savings Plan – Direct Plan
  • Utah: Utah Educational Savings Plan (USEP)
  • West Virginia: SMART529 WV Direct College Savings Plan
  • Wisconsin: Edvest

The SavingForCollege Top-rated 5-Cap plans are slightly different than the Morningstar Top-rated Gold plans. However, in general the top 20 or so plans are pretty much the same. Remember to consider your in-state plan first for potential tax advantages. Adds Free Foreclosure Listings

If you’ve ever tried to research buying a foreclosure or short sale online, you’ve probably found a lot of sites either plastered with ads or charging expensive subscription fees in order to access “exclusive” foreclosure listings. Well, the good news is that real estate site recently announced that it has added nearly 2 million free listings of “pre-market inventory” to its database. (Via Techcrunch.) This includes full addresses and details on pre-foreclosure, foreclosure, and bank-owned properties not included in the usual MLS databases.

You must register to see the foreclosure listings, but it’s free and all you need is an e-mail (name not required). I looked around my neighborhood and found several homes that are in the foreclosure process or already sold via auction, often complete with winning bid amounts. There’s a house down the street that is pretty nice and will be auctioned off live at the county courthouse next Friday; I might attend that auction for the experience. I’m told these are auctions where you need a cashier’s check for the full 6- or 7-figure sale price right on the spot.

Based on my limited understanding, if you want to buy a foreclosure it’s still helpful to work with an experienced real estate professional. Zillow makes their money if you ask them to refer you to a local “foreclosure specialist”. Sounds fair to me, if you don’t already have one in mind. I’ve had friends attempt to buy a bank-owned REO property which sounded like a good deal on paper, but required huge amounts of time and patience. Finding a good rental property always sounds nice in my mind, but I haven’t had much time to pursue it further.

Vanpooling: Save Money with Work Commute Alternatives

The following is a guest post contributed by reader Nathan, who recently started driving a vanpool in Chicago which saved him over $350 a month in addition to making a lower environmental impact. Thanks Nathan for sharing your experiences.

According to the Bureau of Labor Statistics, transportation costs are the second largest U.S. household expenditure after housing costs. In fact, between 2010 and 2011, an 8% rise in transportation spending was the largest percentage increase among all major components, 3.1% above even healthcare. With fuel costs rising for the personal daily driver, and even public transportation costs increasing because of fuel costs and increased demand, I sought the impossible in looking for a way to remove transportation from my budget altogether. I found my answer with vanpooling.

Vanpooling is similar to carpooling. Employees that live and work near one another and share similar schedules can form a group that conveniently gets them between home and work. With a “VANpool”, however, a municipality, university, corporation or non-profit organization provides a van for a group of people to use so that nobody in the group has to actually own and operate a personal vehicle. Each rider typically pays a low monthly fare based on distance and number of participants, which covers all costs of the vanpool including fuel, maintenance, insurance, tolls, roadside assistance, and van washes (the actual cost of purchasing the vehicle is often subsidized). And in many cases – here’s where MMB readers might get excited – the driver doesn’t pay anything!

I started a vanpool in Chicagoland about two months ago. I drive my 2012 Dodge Caravan 50 miles roundtrip each day, leaving the downtown city center where I live for the suburbs where I work. I drive five riders, who each pay $114 each month to Pace (the regional suburban transit provider) for the privilege to ride, and $20 each month to me to pay for parking (I pay a discounted rate of $99/month for parking instead of the $250/month average, a whole other story). The riders end up paying less than they would have in fuel costs alone if they were still driving, and could even consider getting rid of their vehicle altogether.

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Calculating Portfolio Yield From Dividend and Interest Income

As I’m about 2/3rds of the way to having theoretically enough money to cover our living expenses, I wanted to take a closer look at the actual mechanics of living off of my investment portfolio.

I’m using a 3% withdrawal rate, which means that for each $100,000 I have, I’m expecting it to grow such that I can withdraw $3,000 a year, adjusted for inflation, for 40+ years (essentially forever). A conservative way to take withdrawals from an investment portfolio is to spend only the dividends and interest while leaving the principal untouched. This is assuming you don’t go reaching for yield by buying things like troubled, high-dividend stocks and high-yield junk bonds. As a baseline, I wanted to see how much income my passive portfolio would create with my current target asset allocation:

There are many different yield definitions to choose from, but I decided to go with trailing 12 month (TTM) yield as it’s based on a year of past distributions. Specifically, the Morningstar yield is found by dividing the sum of the fund’s income distributions for the past 12 months by the previous month’s NAV (net asset value). Only interest distributions from bond funds and dividends from stock funds are included.

Model Portfolio Yield Breakdown:

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Basics of ETF Tax Loss Harvesting

Tax-loss harvesting (TLH) is a technique used to minimize taxes on your taxable investments – without altering them significantly – by “harvesting” capital losses during market declines. There are many lengthy articles about TLH out there, but Wealthfront recently released a brief video about tax-loss harvesting that is a good intro to the subject:

Wealthfront is now including tax-loss harvesting in their 0.25% advisory fee for clients with taxable accounts of $100,000 or more. (Advisory fee is on top of ETF and/or mutual fund expense ratios.) I think it’s great that they are offering tax-loss harvesting at a reasonable price, but I don’t know about their contention that tax-loss harvesting is “traditionally only available to accounts in excess of $10 million”. Respectable portfolio managers, include low-cost passive portfolio managers, have been providing tax-loss harvesting to all their clients for a long time. It is true that other online portfolio managers like Betterment currently don’t offer this, however.

(I’m also skeptical about their finding that TLH boosted returns by a full percentage point, I’d be worried about data mining. I mean, sure, if you harvested losses perfectly during every little decline, maybe, but 1% is a lot.)

Indeed, if you’re a DIY investor with a portfolio of a 2-6 index ETFs, you can harvest losses on your own. Here’s an tax-loss harvesting example with ETFs from an old blog post. Wealthfront’s materials suggest that their own method is to sell a primary ETF (ex. Vanguard/VEA) when it’s down and buy the low-priced secondary ETF equivalent (ex. Schwab/SCHF) to replace it. Then, you sell the secondary ETF again after 30 days to get your Vanguard ETF back with a lower basis while avoiding IRS wash sale rules. They believe that their pairings satisfy the IRS requirement that the ETFs can’t be “substantially identical”. You’ll have to decide for yourself if you want to do those extra two trades to swap things back (and paying extra commisions) every time you TLH, or if you should just keep holding the secondary ETF until the next time you want to sell for whatever reason.

Update: I received the following message from Wealthfront:

I wanted to point out when reading your post is that we offer continuous tax-loss harvesting as opposed to year end tax-loss harvesting. We agree with you that the expected benefits on year end tax-loss harvesting is not 1% a year but rather that is for continuous tax-loss harvesting where you are continually harvesting throughout the year.

Here is their whitepaper on the subject, although I should note that the 1% alpha is based on the assumption that you are in the highest 35% tax bracket (while long-term gains are at 15% tax rate). The continuous algorithm deciding when to harvest is interesting, being based partially on “each ETF’s volatility parameter estimated over a rolling time window.”

The Amazing 99 Cent iPhone Case

In an effort to spiff up my now 2-year-old iPhone 4 so that at least it felt slimmer and newer to me, I wanted to switch to a thin and minimalist case. The official Apple-branded black bumper case at an Apple store looked nice but was priced at a shocking $29. So I jumped onto eBay and found what appeared to be the exact same case for 99 cents. Free shipping. No sales tax. Credit cards accepted via PayPal.

Just 99 cents? How was this possible? Here’s a cost breakdown:
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Target Debit Card – 5% Off, No Credit Check Required

If you shop regularly at Target, then you’ve been pitched the Target REDcard that gives you 5% off all your purchases at Target stores and However, you may be hesitant to sign up for yet another credit card with limited usefulness. I certainly wouldn’t waste a precious hard credit check on one, those are worth $300-$500 a pop. Or perhaps you just don’t like credit cards in general.

A better option for regular shoppers is the lesser-known Target Debit REDcard. It draws money directly from your existing bank account, you don’t have to open up a new Target bank account or line of credit. You simply provide a voided paper check and apply either in-store or their online REDcard application. They do still require SSN and reserve the right to check consumer reporting agencies, but according to online reports they don’t perform a credit check on any of the three major credit bureaus.

Update: A reader reports that Target checks with ID Analytics, another lesser-known consumer reporting agency. This won’t affect your 3 main credit scores, but it may come into play if another retailer or lender wishes to check your IDA report.

You get the same 5% off (discount taken at register) and other perks like free shipping online. You can even use Target as a free ATM and make a withdrawal at checkout. If you spend an average of $150 a month at Target, 5% off is $90 a year.

New Target Holiday Price Match Policy

Target recently announced a new “Holiday Price Match” policy that will let you price-match with select online stores between November 1st and December 16, 2012. Full details are to be released on October 22 at, but for now the qualifying retailers will include,, and Target is even offering free WiFi now in all stores to aid your price-matching activities. (Target press release)

Combine this with their REDcard credit/debit cards that offer 5% off everything at Target and, and things may actually end up cheaper at your brick-and-mortar Target than online. Sales taxes are another variable. (Does your state charge sales tax? Does Amazon charge sales tax in your state now?) Also consider if you want to provide your gift recipient the ability for easy in-store returns. An interesting stat taken from this WSJ article:

A recent survey by brokerage house William Blair & Co. found that on average Target’s prices were about 14% higher than Amazon’s, Best Buy’s were 16% higher and Wal-Mart’s prices were 9% higher. The comparison included shipping costs for Amazon, but not sales taxes.

This follows similar announcements by Best Buy and Toys R Us, although each have their fine print. I don’t think I’ve been inside either a Best Buy or TRU in years.

Amazon Mastercard Promotion: 15% Off Subscribe and Save and Mastercard are currently running a promotion that gets you an additional 10% off the first shipment of select “Subscribe & Save” items with promotional code MSTRCRD1. This is on top of the standard 5% off all Subscribe and Save items (including future shipments) and also the Amazon Mom 20% off discount on baby items. Must pay with Mastercard. Expires October 31st, 2012. Now extended through November 30, 2012.

Eligible items include food, baby, household, pharmacy, and nutritional supplements. If you only want it once, you can still just sign-up, get your 15% off, and then cancel the subscription with a few clicks after the order ships. Or, just wait and Amazon will e-mail you before the next shipment goes out. I forget the exact time period, but you get at least a day or two, enough that I usually just wait for the e-mail to cancel.

Things that I buy with S&S… Tasty Bite Punjab Eggplant and other hard-to-find ethnic foods (also cheaper than local), Diapers (appear to be excluded from this promo), Pamper’s Baby Wipes (net cost 1.8 cents each).

American Express Serve Opening Bonuses

Updated. American Express has a product called Serve – a combination of their prepaid credit card and a Paypal-like online payment service. No credit checks, no monthly fees, and one free ATM withdrawal per month (the ATM itself may charge a fee).

The current live promotion is a $25 account credit on any single $25+ load, valid through December 31st, 2012. Basically a free $25 if you’re new, you could just transfer it back into a bank account, use it to buy an Amazon gift card, or just do a split transaction on a larger purchase (put $50 on the Serve card, and the rest on another credit card).

You can load funds from a bank account for free, and Serve is also waiving credit card and debit card load fees until March 15, 2013 but it warns you that your card issuer may still classify it as a cash advance. Last I checked, the limits on credit card loading were $100 per day, up to a cumulative $250 to $500 per month. May be handy for meeting spending requirements on credit card bonuses, especially if you have access to a fee-free ATM. I used this tactic on my Chase Sapphire Preferred card earlier and it worked as a purchase.

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Savings I Bonds September/October 2012 New Rate 1.76%

New inflation numbers were just released for September 2012, so here’s the usual semi-annual update.

New Inflation Rate
March 2012 CPI-U was 229.392. September 2012 CPI-U was 231.407, for a semi-annual increase of 0.88%. (CPI-U increased 2.0% over last 12 months.) Using the official formula, the variable interest rate for the next 6 months will be approximately 1.76%.

Purchase and Redemption Timing Tips
You can’t redeem savings bonds until after 12 months, and any redemptions within 5 years incur a interest penalty of the last 3 months of interest. A known “hack” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month. It’s best to give yourself a little buffer time though, as if you wait too long your effective purchase date will be bumped into the next month.

Buying in October
If you buy before the end of October, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed an variable interest rate of 2.20% for the next 6 months, for a total rate of 0 + 2.20 = 2.20%. For the 6 months after that, the total rate will be 0.0 + 1.76 = 1.76%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy at the end of October 2012 and sell at the beginning of October 2012, you’ll earn a 1.68% annualized return for an 11-month holding period, although you may want to hold it longer if the rates stay higher than that of other available safe investments. This is much better than any 1-year FDIC-insured bank CD available right now, keeping in mind the lack of early withdrawals and purchase limits.

Given the combination of current low rates and the fact that you lose the last 3 months of interest (again, for holding less than 5 years), it might be better to wait long enough to grab 12 full months of interest by holding for 15 months (14 month holding period if buying late). If you buy at the end of October and hold until January 1st, 2014, you’d achieve a annualized return of ~1.70% over 14 months. After that, you can see what the new inflation rates are and decide whether to keep holding them.

Buying in November
If you wait until November, you will get a new unknown fixed rate + ~1.76% for the first 6 months, and an unknown rate based on ongoing inflation after that. Based on the current market rates of Treasury Inflation-Protected Securities (TIPS), it is almost certain that the new fixed rate will remain zero. So you’ll get 1.75% for 6 months for certain. My personal opinion is that you might as well lock on the guaranteed above-market rates for 12 months by buying in October instead of buying in May. If rates spike, you’ll eventually get the benefit of any higher rates eventually in the future anyway.

Existing I-Bonds
If you have an existing I-Bond, the rates reset every 6 months (depending on your purchase month). Your bond rate = your specific fixed rate + variable rate. Even at a low or even zero fixed rate, your existing savings bonds are paying much more than current savings accounts and will continue to be hedged against inflation, so weigh carefully whether or not to redeem them.

Annual Purchase Limits
The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at, after making sure you’re okay with their security protocols and user-friendliness. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds. I’m keeping all of mine for the foreseeable future, due to their tax deferral possibilities and other unique advantages. Compare the rates on these savings bonds to what you’re earning on your FDIC-insured bank deposits or even your TIPS and bond mutual funds, and you may find them a good addition to your portfolio.

Market Timing Prediction + House Payoff Focus

As you probably know, I’m not an advocate of market timing. Jumping in and out of stocks is usually based on fear – either fear of missing out on hot returns or fear of more losses. However, if you’re going to do it, I figure you should announce your move beforehand, as opposed to making self-congratulatory pronouncements afterwards. “I sold all my stocks and my houses in 2007, right before the crisis hit as I knew something was fishy.” You never hear “I sold most of my stocks in 2009 and missed the potential doubling of my money since then.”

This is the predicament where I am today. I don’t think the stock market is very attractively priced. I don’t think locking up 2% yields for 10 years is a very good option either. Everything seems to be up, and our investments have swollen significantly. So while I’m not complaining, from what I can tell none of the things that were previously broken in the world have actually been fixed.

In addition to me being “meh” about the current investment outlook, having a new child has refocused us on shifting into part-time work as opposed to going all-out towards a full early retirement. Having the house paid off will free up our cashflow needs significantly, as our mortgage remains over 50% of our total spending. Once that is taken care of, it’ll be much easier to shift into part-time work as we want avoid using daycare as much as possible.

So for the rest of the year and probably into 2013, I am going to focus on putting new money towards paying down the mortgage. (Our 401ks and IRAs are maxed for 2012, and our current portfolio will stay invested.) This will effectively gain us a yield of 3.25% (our mortgage rate) for however long it takes to pay it off completely. Yes, we just refinanced this year, but we actually netted a thousand dollars from that refi due to negative points. Today, the S&P 500 Index is at about 1,435 and the 10-Year Treasury yield is 1.66%. Let’s see how wrong I can be. 🙂