Archive for March, 2007
Here is brief roundup of the top rates for short-term cash accounts with moderate balances.
Online Savings Accounts, No Minimum Balance
HSBC Direct continues it’s 6.0% APY rate on new money until April 30th, and you can open with $1. The highest non-promo rate is from Amtrust Direct at 5.36% APY, although you must open with $1,000. Overall, rates seem to be stable as of late.
Nationwide Brick and Mortar Accounts, No Minimum Balance
Washington Mutual continues to top this area, with their WaMu 5.0% APY Saving Account. You have to open online, but after that it has all the advantages of a local branch savings account; You can transfer instantly to/from their Free Checking account, deposit directly into savings via ATMs or tellers, and take cash directly out via ATMs.
28-Day Treasury Bills Possibly Good Alternative
If you are subject to state income taxes and have cash reserves that you don’t need immediate access to, you should definitely look into Treasury Bills. Rates change weekly, with the most recent auction results showing a 5.267% investment rate. Using my 28-Day T-Bill APR-to-APY calculator with my new Tax Equivalent Yield Calculator, along with an assumed 25% federal/9% state tax bracket, that is the equivalent of a taxable interest rate of 6.12% APY. Treasury Bills are backed by the full faith of the government, and also come in 3-month and 6-month terms.
The downsides to T-Bills include the fact that you will give up some liquidity and they must be bought in $1,000 increments. For more information on how to buy them online and building a T-Bill ladder, please read the posts in my Treasury Bill category archives. Look for a new visual how-to guide coming soon.
Personally, I continue to purchase T-Bills with a portion of my cash balances as I live in Oregon with a 9% state rate. It is actually very easy to have to money transferred to and from your existing high-yield bank account. For example, if you have $30,000 sitting in a bank, you might commit $20,000 to Treasury Bills and keep the rest 100% liquid. It all depends on what you feel comfortable with.
Also see: Rate Chaser Calculator.
Posted in Banking, Treasury Bills and Bonds | 4 Comments »
It appears that you can sign up for up to 4 free years of one of these magazines via this Mags4Less link. Add the magazine your cart, select up to 4 years in length, scroll down and enter code “1free“, and checkout without registering. You shouldn’t need to even enter your real name or credit card number. I didn’t.
Options include Latina, Maxim, Working Mother, Shape, Stuff, Blender, Seed Magazine, Computer Shopper, Muscle & Fitness, Western Interiors, Ebony, Jane Magazine, Travel & Leisure Golf, and Jet.
I signed up for Travel and Leisure but didn’t notice it was Travel and Leisure Golf. Doh! Thanks J for the tip.
Posted in Deals & Offers | 18 Comments »
There are many investments out there that are exempt from certain taxes. For example, U.S. Savings Bonds and Treasury Bonds are exempt from state and local income taxes. In addition, there are money market funds available that are exempt from federal income tax and others that are even exempt from a specific state or city’s income taxes.
Therefore, it is desirable to know what the equivalent fully-taxable rate is for one of these investments. For example, is it more profitable to earn a federal tax-exempt interest rate of 3.8% or a fully taxable 5.0%? How about a Treasury Bill paying 4.8%? Several variables affect this rate, including your marginal tax brackets for each area, as well as if you itemize your state and local taxes on your federal tax return. I could not find a calculator that accurately captured all of this, so I made my own.
Example
Let’s say you live in California, and your marginal federal tax rate is 25%, your state rate is 9.3%, and you have no local income taxes. You do not itemize your taxes. You are trying to compare the taxable Vanguard Prime Money Market Fund (VMMXX, yielding 5.08%), the federally exempt Vanguard Tax-Exempt Money Market Fund (VMSXX, yielding 3.48%), and the state and federal tax-exempt Vanguard California Tax-Exempt Money Market Fund (VCTXX, yielding 3.38%).
With that profile, the tax equivalent 7-day yields would be 4.804% for VMSXX, and 5.145% for VCTXX, making the California Tax-Exempt Fund the best bet currently for this specific situation.
How It Works (Warning: Math Ahead!)
The calculator computes the tax-equivalent rates by comparing after-tax returns. That is:
AfterTaxReturnEquivalentTaxableRate = AfterTaxReturnTaxAdvantagedRate
Using the California Tax-Exempt Fund example above:
EquivalentRate x (1 - FederalTaxes - StateTaxes) = 3.38%
EquivalentRate x (1 - 0.25 - 0.093) = 0.0338
EquivalentRate = 5.145%
So earning 3.38% free from federal and state taxes is the same as earning 5.145% in a fully taxable account.
Note that itemizing deductions means that you deduct your state income taxes from your federal taxable income. The effect is that your overall tax liability is reduced, which lowers the benefit of any tax-exemptions and thus the equivalent rates. That would change the previous equation to:
EquivalentRate x (1 - FederalTaxes - StateTaxes + (FederalTaxes x StateTaxes)) = 3.38%
EquivalentRate = 4.969%
The inclusion of this option may give different results from some of the other online calculators out there, but I believe it makes the results more complete. Another fully-worked-out example can be found here for savings bonds.
Finally, it may be handy to use this in conjunction with my Ultimate Interest Rate Chaser Calculator. Be sure to compare APRs to APRs and APYs to APYs.
Useful Resources
2007 Federal Tax Rates
State Income Tax Rates
Recent Treasury Bill Auction Results
Savings Bonds Rates
Posted in Banking, Savings Bonds, Tools & Calculators, Treasury Bills and Bonds | 18 Comments »
Here are some quickies:
It looks like there is a new Diehards forum in addition to the old one. I’m still not sure why they split, but both are great resources and I’m always impressed by their kindness and civility to new members.
Success From the Nest has “inspiration, tips, and advice for the home-based entrepreneur and those aspiring to be one - all served up with humor and cartoons.” It also gives me a glimpse of what it would be like to achieve my goal of being 50% self-employed/50% stay-at-home parent - check out The Myth of the Sleeping Baby and Other Fallacies for the Work at Home Parent. It doesn’t sound easy!
J.D. of GetRichSlowly shares his list of 25 best books about money. His list has a greater focus on high-level overviews of saving money and getting out of debt than my three favorite personal finance books, but we both like The Richest Man in Babylon.
If you’d rather stay online, there is literally a book’s worth of submissions at this week’s Carnival of Personal Finance.
Posted in General | 2 Comments »
A reader asked me if there was a difference between a FDIC-insured “savings” account and an FDIC-insured “money market” account. A bit of online searching and the venerable Wikipedia yielded the answer, plus some interesting facts about savings accounts.
First of all, why do savings account usually have higher interest rates than checking accounts? I think most of us know that banks make money by using our cash deposits and lending it out to others via mortgages, personal loans, or credit cards. However, we also expect that if we do want to withdraw our money, it will be there. To achieve this, each country sets its own reserve requirements, essentially how much cash the bank must physically keep in a vault somewhere to meet expected withdrawal demands.
As of 2006, the required reserve ratio in the United States was 10% on transaction deposits (checking accounts), and zero on time deposits (savings accounts). Due to fractional-reserve banking, having no reserve requirement allows the banks to lend out much more than their actual deposits.
Added: A quick explanation… At a reserve ratio of 10%, let’s say I put in $100. That means the bank can lend out $90. If whoever borrows that $90 put it in a bank, then the new bank can lend out 90% of that, or $81. This could repeat forever, leading to banks lending out 100+90+81+… = $1,000 for each $100 in deposits. This is just for a checking account. For a savings account, with zero required reserves, a bank could theoretically lend out an infinite amount of money (100+100+100+…). Aren’t you glad your money is insured now? 
The main difference between checking and savings accounts are their transaction limitations, as outlined by Regulation D. You can only transfer funds out of your savings account up to six times per month by any pre-authorized method like online or telephone transfers, even to a checking account within the same bank. A max of three of these can be via check or debit card. You can still make unlimited withdrawals in person via a teller or ATM.
This is why it can be difficult to use your online savings account (at over 5% interest) as your sole account for paying bills and such instead of your checking account (often at 0%). Bank often charge fees for breaking this rule, and must close accounts where this transaction limit is repeatedly exceeded.
Back to the initial question - Is there a difference between a FDIC-insured “savings” account and an FDIC-insured “money market” account? From what I could find, no. They are both time deposit accounts, just with different naming conventions. Traditionally, money market accounts have a higher minimum balance requirement, and are more likely to offer checkwriting or a debit card (subject to the limits above). These both remain different from money market mutual funds, which are usually not FDIC-insured and are instead a collection of short-term debt instruments.
Posted in Banking | 20 Comments »
Do you see the data supporting index funds, yet still have the urge to try out some other theories? One way that financial folks try to resolve this conflict is with the concept of “Core and Explore” investing. I have no idea who came up with the name first, but essentially you split up your portfolio into two parts: a Core portion made up of low-cost index funds, and a Explore portion with which you can do whatever you want. This way, you can still watch CNBC, talk stocks around the water cooler, and try to decipher Cramer’s squealing. You get the rush of working to beat the market, but in the worst case you won’t fall too far behind.
Core Ideas (80-95% of total portfolio)
100% Target Retirement Fund, or
33% Total US Stock Market Index, 33% Total International Index, 33% Total Bond Index, or
Something based on one of these model asset allocation portfolios.
This part should be rebalanced regularly according to your pre-set asset allocation.
Explore Ideas (5-20% of total portfolio)
Individual Stocks
Actively Managed Mutual Funds
Options and Futures
Sector bets (Healthcare, Energy)
Currency Exchange, Gold, Commodities
Country bets (China, Russia, Japan, Brazil, India)
Market Timing (i.e. switching to 100% cash when bearish)
Many people mix index and non-index funds, but not necessarily consciously like this. I did have a “play money” account that I put a flat $5,000 towards before (as opposed to a percentage of my portfolio), but then I got busy/bored/disillusioned and liquidated it six months ago. I keep planning to revive it, but it just hasn’t made it up the priority list yet.
Posted in Investing | 13 Comments »
Although I should be paying more attention to the mortgage market, I’ve only gotten a chance to catch up this weekend. Above is the stock chart for New Century Financial (NEW), the second-largest subprime lender in the country. It basically dropped from $30 to $3 a share in a month, and is no longer taking any new loan applications. From this AP article:
“New Century, already the target of shareholder lawsuits, alarmed investors Thursday when it announced one of its financial backers had turned off the funding spigot. The company said last month it had failed to keep tabs on how frequently borrowers missed payments.“
What? As a subprime lender, how is this fathomable? It looks like their fellow lenders haven’t been doing so hot either:
- Countrywide Financial Corp. (CFC), the largest U.S. mortgage lender, recently told its brokers to stop offering borrowers the option of no-money-down home loans.
- WMC Mortgage, part of General Electric (GE), recently laid off 20% of its workers and is no longer taking no-down-payment loans.
- Washington Mutual is no longer making no-down-payment loans.
- Fremont General Corp. recently shut its doors completely, and is seeking a buyer for its subprime operations after getting a cease-and-desist order from the Federal Deposit Insurance Corp.
- More than 20 other subprime lenders have stopped lending or gone bankrupt in the past year due to increasing defaults.
The New York Times just published this article titled “Crisis Looms in Mortgages“. Some excerpts:
“What’s happening is the front end of this wave of teaser-rate loans that are coming into full pricing,” Federal Reserve Governor Susan Bies said on Friday. “So what we’re seeing in this narrow segment is the beginning of the wave. This is not the end, this is the beginning.”
?I guess we are a bit surprised at how fast this has unraveled,? said Tom Zimmerman, head of asset-backed securities research at UBS, in a recent conference call with investors.
Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud. In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how hard to value these opaque securities are and how easy their values are to prop up.
It is too early to tell how significant a role mortgage fraud played in the rocketing delinquency rates ? 12.6 percent among subprime borrowers… Some 35 percent of all mortgage securities issued last year were [subprime], up from 13 percent in 2003.
I can’t help but predict repercussions from this fallout to the rest of the mortgage world. Bad loans » Stricter lending standards » People qualifying for smaller loans and thus less buying power » Lower housing prices?
Of course this starts just when I am starting to browse the MLS listings again. Let’s see how badly I can mistime this thing…
Posted in Real Estate | 32 Comments »
Here’s an interesting entrepreneurial story from this month’s SmartMoney magazine. Imagine that you work at LensCrafters making eyeglasses. You see the extremely large profit margins. You go home, buy the same equipment, and install it in your condo. You train some technicians to do most of the work. You call it EyeGlassDirect.com and start selling basic glasses with frame for $28. All while still working at LensCrafters!
I’ve been wearing glasses for over a decade, and I’ve never even thought about buying them online. The store seems to be legit, it has a 30-day unconditional exchange policy and a relatively clean Better Business Bureau report. The glasses include add-ons like UV and anti-scratch coatings that sometimes cost extra.
$28 seems like a great price for those without insurance or just looking for a basic set of glasses. I’ve always felt LensCrafters was mainly for those that had vision insurance. My current insurance only covers either contacts or glasses, so I choose to pay out-of-pocket for glasses every couple of years (and add it to my flexible spending account). I have high-index lenses, so I’ll have to dig up my old Costco receipt to see if I should try these guys next time. Anyone use them before?
Added: You can find reviews for this and other online shops at GlassyEyes. I hate it when magazines mention bloggers but don’t give out their websites.
Posted in Entrepreneurial, Frugal Living | 18 Comments »
After looking at how other people and mutual fund companies choose their asset allocation, I’m a little conflicted. Both the Vanguard and T. Rowe Price mutual funds recommend holding nearly 80% in stocks at age 50. That’s pretty aggressive in my book. To see why, let’s look at some historical numbers.
Coincidentally, a commenter left me a link to a recent FundAdvice article about fine-tuning your asset allocation. I’m actually going to ignore the specific components of his portfolio and focus on the general trends instead. Let’s just say it’s well-diversified.
The article provides historical numbers (1970-2006) that compares risk versus return for portfolios ranging from 0% stocks to 100% stocks. Risk is represented by standard deviation, a measure of volatility.
Risk vs. Return For Varying Stock Percentages
This is pretty consistent with a lot of other similar charts I’ve seen. You’ll notice that the slope of the curve decreases as you move towards holding more stocks. Accordingly, if you compare the differences between successive dots, there risk gap grows larger and the return jump decreases. In other words, you are generally getting less return for each unit of risk as you keep adding more stocks.
Here is another risk-reward chart for increasingly aggressive portfolios.
Still, this chart really doesn’t help too much either. Why not just go for the 100%? Instead of averages, let’s focus on how bad it can get over the same time period (returns not annualized):
This second chart is more important than the first one, because you won’t get any of the returns listed above unless you can “stay the course” through periods such as these.
It’s really easy to say “Oh, 30% drop, no problem”, but that’s not the whole picture. Not only will stocks be dropping, but bonds may be skyrocketing. Imagine if bonds are returning 15% a year at the same time stocks are going down 15%. You will have what appears to be a way out! Personal finance magazines will be shouting “Bonds are back!” Cutting down on your stock exposure will become the “prudent” decision.
Going back to the 80% stocks at 50 years old… Can you imagine losing 35% of your portfolio in one year at 50 years old? I would freak out. This is why age matters, it’s so much easier to shrug off losses when you know you won’t need the money for another 30+ years.
Posted in Investing, Retirement | 14 Comments »
One of the basic ways to adjust the risk and return characteristics of your investment portfolio is to decide what percentage to hold in stocks and bonds. This is another one of those hard questions for which there is no single best answer for everyone. You must take into account risk acceptance and time horizon amongst other factors.
An old rule of thumb is that your stock allocation percentage should be 100 minus your age. That is, a 30-year old should have 70% stocks/30% bonds, and a 70-year old should have 30% stocks/70% bonds. This was not just taken out of thin air, and has a basis from historical returns. As you near retirement, you want to have more bonds as that reduces overall volatility. More recently, others have altered this to a more aggressive “110-age” or even “120-age”.
Members of the Diehards investment forum recently performed a informal survey of member’s asset allocations versus their age, and here are the results:
As you can see, there is definitely a lot of scatter in the data. However, if you made a linear fit, it roughly corresponds to a formula of stock percentage = 112.5 - age.
This made me curious - what about all those Target Retirement Funds? Their job is to decide an asset allocation that works for as many people as possible based on their retirement date. If I assume that people retire at 65 years old, here is what the asset allocation versus age looks like for three of the more popular fund families: Vanguard, Fidelity, and T. Rowe Price:
As you can see, the funds are actually pretty aggressive. (I covered previously how T. Rowe Price is more aggressive than Vanguard.) If one did force linear fits for all three fund families, it would correspond roughly to stock percentage of 119 - age. However, they don’t really adjust linearly with time. If I use a 2nd order curve fit instead, I can make a little tool that estimates their stock percentages for any age:
None of this is investment advice, it’s just an observation of what’s out there. Next, I’ll try to find some historical return and standard deviation numbers for another view of how to answer this question. What do you think of all this?
Posted in Investing, Retirement, Tools & Calculators | 22 Comments »
If April 17th seems like it is approaching faster than ever this year, perhaps it is time to consider filing an extension. I myself am still waiting on several 1099 forms, some of which had to be corrected. Here’s what I dug up for us procrastinators
What exactly does filing an extension get me and how do I do it?
Sending in IRS Form 4868 by April 17th will land you an automatic six-month extension until October 15, 2007 to file your tax return. You can either mail in the paper form or use a tax software package. If you are eligible for Free File, you may be able to e-file for free as well. However, it is important to note that filing the form does not change the due date for when you have to pay any owed taxes.
How much do I need to pay to avoid late-payment penalties?
You must still pay at least 90% of your total tax due by April 17th in order to avoid penalties for late payment. However, you will still be liable for any interest accrued on any balance due when you file your return. Therefore, it’s a good idea to overestimate your taxes owed initially, and then plan on receiving a small refund when you officially file.
What I intend to do is just run a quick online tax return that pads my income a bit and also neglects any itemized deductions or business expenses. If you stop before actually filing, you can get a quick and dirty number without having to pay anything.
If it looks like you are getting a refund already, then you don’t need to do anything more. Otherwise, any tax owed can be paid via regular employer withholding, estimated tax payments, or you can simply attach a check along with Form 4868. If you e-file, you can also pay via an electronic withdrawal from your bank account or with a credit card (subject to an additional fee).
Don’t forget to also file an extension for your state taxes!
Every state has their own rules and forms, but generally they give you same deal: you can easily get a extension to file, but any taxes owed are still due by April 17th.
Posted in Taxes | 7 Comments »
About My Credit Card Debt
Newer readers may be alarmed by my high levels of credit card debt. In short, I’m borrowing money for free and keeping it in safe investments while earning me 5-6% interest. Along with other things, this helps me earn extra side income of thousands of dollars a year. Recently I put up a series of step-by-step posts on how I do this. Please check it out first if you have any questions.
Commentary
- The stock market stalled a bit this month, as should be expected given its healthy run for the last two years.
- The big drop in cash reserves and credit card debt is due to the ending of one of my 0% balance transfer cards in February (Discover Miles Card). Everything went smoothly and it was paid off without a hitch.
- Our combined incomes continue to far exceed our spending, which is great. I still need to finish tallying up last month’s budget results.
- We still haven’t done our taxes, as I am still waiting on some corrected 1099s and trying to organize my business records. I have a feeling we might have to file an extension this year.
- I know this is poor form, but I have mentioned previously that I keep forgetting to include a $2,000 taxable investment I made in a micro-cap mutual fund (BRSIX) several months ago. If it doesn’t show up in Yodlee, it’s almost like it isn’t there Anyhow, I’ve finally accounted for it and it’s helped the numbers a bit.
- We are now at $48,167 in net cash and $57,288 in total non-retirement assets. That’s 57% of our mid-term goal, and 96% of our (much easier) May goals regarding saving up for a house down payment. I remain completely confused about housing prices…
You can see all my previous net worth updates here.
Posted in Goals | 24 Comments »
TD Ameritrade is offering $100 bonus for opening a non-retirement brokerage account funded by 12 monthly consecutive automatic electronic deposits of $50 or more. First $50 must be deposited within 30 days of opening account. This is called the “Save Yourself Plan” in Suze Orman’s new book Women & Money. The offer code is 701. New accounts only. Trades are $9.99.
TradeKing is offering $100 bonus (expired) for opening a non-retirement account with $1,000 minimum and making one trade within 30 days. A minimum balance of $100 is required in the account for the first six months. The offer codes is ACCESS100 expired!. One offer per household. Trades are $4.95.
Posted in Deals & Offers | 23 Comments »
Now and then, I get asked if I recommend any specific stock newsletters. I usually assume these people haven’t read much of my blog I’m often given specific examples, like one that touts a 145% supposed return last year, or another one run by a group of Harvard MBA graduates. My reply is always the same: I don’t recommend any stock newsletters. There are a couple of reasons why:
First of all, the ones that you can go back and check on reliably haven’t done so hot. The Hulbert Financial Digest has been tracking the recommendations of investment newsletters for over 25 years. It’s research shows that 80% of these professional stock pickers can’t beat the market indexes.
According to this FundAdvice article, chasing last year’s hot newsletter is a very bad idea. From 1981-2002, if every year an investor put his or her money into the prior year?s top performing newsletter, the result would have been an annualized loss of 31.4 percent a year. That?s the same as starting with $10,000 and ending up 21 years later with $2.32. Ironically, most people that subscribe to Hulbert’s are looking to buy a stock newsletter!
Don’t forget the Motley Fool’s 100% failure rate for their 2006 predictions. Better luck this year, Fools!
As for the rest, how do you know if they are lying? Recently, FundAlarm caught one of these newsletters in the act of changing their historical trade data after a dismal year:
Using the market-timing system from Intelli-Timer, my return for the year came in at less than 2%, and I wondered how Intelli-Timer was going to update its Web site, and continue selling its system, after such a dismal performance. Now we have the answer: My year never happened. With no explanation, the Intelli-Timer Web site has completely revised its historical performance information… Faced with a system that was failing, it looks like Intelli-Timer has simply backtested a new system that produces dramatically better — and totally fictitious — results.
Nothing like making up crap when all else fails. Since there is essentially nobody policing these newsletters and websites, why not? Link via Diehards Forum.
I’ll say it again - commentary from stock analysts always sounds great and logical. They can throw out nice figures like rising margins, economic statistics, or fancy PQI ratios. If they are right, the can toot their own horn. If they aren’t, they can either ignore it or even lie! I really think most of you don’t need to hear all this, but it’s always good to have some links to help convince others.
Posted in Investing | 13 Comments »
Payouts for my Emigrant Direct Referral Bonus went out this week for those that sent me their final form in January.
Emigrant Direct offers an online savings account paying 5.05% APY with no minimum balance. It only takes $1 to open, and you can make another $10-20 just for signing up through me.
Posted in Banking, Deals & Offers | 7 Comments »
