What Features Make Up The Ultimate Checking Account?

If you’re comparing checking accounts, what are the features that one should consider? It’s not all about the interest rate. In no particular order, I would want:

Low minimum balance requirement - This helps include more people, and there is less stress about low-balance or maintenance fees.

Consistently high interest rate - I would think that a history of competitive rates and also the ability to keep those rates high yet still be profitable is important. I would guess that this means either restricting the accounts to people comfortable with the internet and thus less likely to need too much hand-holding or human interaction, or having a strong mortgage division.

Easy to make withdrawals - This could mean a large ATM branch network or automatic ATM fee rebates. Free wire transfers and money orders would also be a plus.

Easy to make deposits - Depending on your preference and how often you need checks, here you would need either local ATMs, postage-paid deposit envelopes, or even the new system at a few banks where you can simply scan in your check deposits from home.

Easy to transfer money between banks - This means being able to initiate transfers to other bank accounts through your account with only the routing number and account number. Also, this means being able to access your account by third parties in the same way. On the other hand, maybe some people like this to be restricted for security reasons?

Online interface - Being able to see your account balances clearly at a glance, dependable online BillPay, and a good balance between security and accessibility. Don’t require my passwords to be 18 characters long and a retina scan to log in.

Customer Service - Even though I don’t call in very often, being able to reach a knowledgeable and helpful human when needed in is very important to me. A good online messaging systems is also good for creating a paper trail.

The Rest - Some other things that come to mind are free checks, low or no overdraft fees, overdraft protection, free notary services, extended branch hours, drive-up ATMs, Quicken or MS Money synchronization, return of canceled checks, and free candy at the teller windows

I feel like I’m still missing something…

Posted in Banking | 29 Comments »

Parallels Between Gambling And Investing

I’m writing this while at the airport on the way to Las Vegas, so please bear with me. The analogies might be a bit of a stretch, but here are some ways I think gambling is a lot like investing… Debate as you like.

Costs matter. If you believe that the stock markets are very efficient, like I do, then the market is already priced with all the information publicly available. Any market moves are in response to fresh news like unexpected earnings report results, which are unpredictable unless you have insider information. Thus, the best you can do is try to match the market. Any costs like expense ratios, fees paid to financial advisors, extra taxes from turnover, or commissions, simply cut into your returns.

Take the house edge in gambling games. Obviously, the best way to keep your money is to simply not gamble. (Or maybe play the nickel slots slowly, tip well, and end up getting drinks for $1 each…) If you do gamble, then you have the chance to win money, but also a chance to lose money in the short run. But over the long run, your chances of winning get very very slim due to that house edge. All you have to do is look around Vegas to see this.

The house edge is like your investment costs. With investing, you try to pick your own stocks or go with actively managed funds which try to beat the market, usually with a significantly higher cost. Over the short run, they might beat the market handily. But over the long run, the odds of your fund beating a similarly allocated lower-cost index fund are very very small. (Not impossible by any means, but small.)

Most people don’t really understand costs. What’s the most profitable game per square foot in Vegas? Slots. What’s the most common game in Vegas? Slots. You see a bank of slots under a sign that says “up to 99% payout!” You know what that means? One of those machines is set to a 99% payout, and the rest are at 80%.

Why does everyone play slots? Lots of reasons, but one big reason is that they are really simple. You don’t need to learn any rules. You mash a button repeatedly. That’s it. But the odds are the worst by far. In fact, you don’t even know the odds. I hate playing the slots (again, except as a tool for getting cheap beers).

Personally, this makes me worry a lot about the self-directed nature of many people’s 401k/403b/TSP plans. Do they really know that they are investing in? The 401k industry seems to rely on the fact that most people just go with the default choice given to them. Few people question their investment choices. I don’t have the article on me right now, but something like 80% of 401(k) holders have no idea what expenses they are being charged on their retirement accounts.

People see patterns where there are none. One brilliant invention of casinos is adding the marquee display to roulette that displays the last 10 numbers hit. If a person sees 6 reds come up in a row, they might think “Oh, it’s due for a black” or “Red’s on a streak”. In fact, it remains an equal chance for red or black. One of my hobbies is listening to people’s wacky betting systems at tables. If there were any such patterns, you can bet people would exploit it greatly for profit.

Of course, Vegas is just entertainment. But losing 1% or more of potential return every year by paying excess costs is huge. Now that I have spouted all this analytical reasoning, wish me luck in Vegas!

Posted in General, Investing | 19 Comments »

Vanguard Offers More ETF Equivalents To Their Index Mutual Funds

With Vanguard recently launching their new bond ETFs, I can almost reconstruct my entire portfolio of Vanguard mutual funds using their equivalent ETFs instead. While they won’t work well for everyone, I am glad that Vanguard is offering this option to the public. Here are some index mutual funds and their ETF counterparts:

The ETFs certainly have an advantage in expense ratio if you don’t have the $50,000 needed to buy the Admiral shares of each fund. On average, the savings is 10 basis points, or 0.10%. That’s $10 a year on a $10,000 account, or $100 a year on a $100,000 account. In addition, the ETFs allow you to get around the minimum initial investments, as well as avoid the $10 per-fund low-balance fees, $10 per-fund IRA fees, and the purchase/redemption fees of many of their mutual funds.

In the disadvantage department are possible premium/discounts to NAV, the bid/ask spread, and commission costs. Vanguard even offers a cost-comparison calculator that takes many of these things into account.

The only ETF missing for me is their International Value fund, but I could replace that with the WisdomTree International SmallCap Dividend Fund (DLS).

Free Trades + ETFs = Cost-Saving Opportunity?
Right now, Zecco.com offers free trades with an account value of $2,500, while Wells Fargo offers free trades with an account value of $25,000. (Bank of America’s offering stinks, so I’m ignoring it.) Buying these ETFs with free trades would take away much of the traditional advantage of mutual funds.

Before I would switch to ETFs, my concerns include whether these brokers can sustain giving out free trades, and how good the customer service is. If they fail, would I keep paying slightly higher commissions on ETFs, or sell them all and go back to mutual funds? Something to ponder.

(You know what? I just figured out that Zecco stood for Zero Cost Commissions. No, I’m not the sharpest tool in the shed.)

Posted in Investing | 27 Comments »

My Current Bank Account Setup To Maximize Interest

Over a year and a half ago I shared how I juggled my bank accounts to maximize interest. It was the best I could do then, although it was a bit annoying as transfers between banks still took a couple of days.

My current set up now involves fewer banks, but I feel it is also both more convenient and earns higher interest. However, whether or not it would work for others depends on their geographic location.

Washington Mutual - WaMu has a strong branch presence in my area, and there are also ATMs in the grocery stores. Since they started offering their Free Checking and 5% Savings account combo (must open online; you won’t find this advertised in any branch), I have started using it as my primary account due to the combination of convenience, decent interest, and lack of fees.

I can keep a minimal amount of money in the no-fee checking account for my daily cashflow needs, and then a larger chunk can be kept in the savings account to cover the larger monthly bills paid via scheduled online BillPay transfers. If I need to write a big check or send a wire transfer, I can just move money over from the savings account. Also, I still receive a lot of checks so I like the ability to deposit them directly into my savings account. Overall, this keeps a good chunk of my money instantly accessible yet earning decent interest.

For reference, see my WaMu Free Checking + 5% Savings review and how to fund them directly with existing WaMu accounts.

28-Day Treasury Bill Ladder - Again, this may not work for others because the main draw of T-Bills is that the interest paid is exempt from state and local income taxes, which increases their equivalent yield. For those without state income taxes, they have been yielding around 5.1%-5.3% APY. However, for those that do have such taxes, the equivalent yield is significantly higher. Mine is closer to 5.8%-5.9% APY. Thus, the money I can’t see myself needing in less than 28 days (most of it) is kept here.

In addition, I can link TreasuryDirect to my WaMu savings account, so there is no interest lost during transfers. The money is invested immediately into a Treasury Bill upon withdrawal, and upon maturity the money is immediately deposited back into my savings account.

For more information, please see my entries on converting Treasury Bill auction results to equivalent bank interest rates, and how to build a T-Bill ladder.

Posted in Banking, Treasury Bills and Bonds | 65 Comments »

April 17th Is Coming! How I Estimated My Tax Liability For Tax Extension Form 4868

Please don’t take the following as tax advice. It’s what I did, not necessarily what others should do.

I’m filing Form 4868 for an automatic extension of time to file my tax return. But that doesn’t give me any extra time to pay any taxes owed, so I must estimate my tax liability and send that in. Specifically, I must pay at least 90% of my 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. Either way, it’s good to overestimate a bit and make sure it’s all paid off. Here are my quick and dirty calculations:

Estimating total taxable income. I added up all the income from our W-2s, 1099-MISCs, 1099-INT, 1099-DIV, capital gains, and other gross business receipts to get our gross income. I took out our 401(k) contributions and a few of the larger business expenses that I have documentation for. Other may need to take into account other items that make up their adjusted gross income (AGI).

Instead of worrying about itemized deductions, I just subtracted out the personal exemption of $3,300 per taxpayer and the standard deduction ($5,150 for Single, $10,300 for Married Filing Joint) from my estimated AGI. This leaves me with my estimated taxable income.

Estimating tax liability. You can either use the tax tables starting page 66 of the 1040 instructions, or use the tax schedules shown here. They both give you the same numbers. This estimated tax liability goes into Line 4 of Form 4868.

Finding out what taxes you’ve already paid. For us, this consisted of the tax withheld from our W-2s and the estimated quarterly payments I made for the business. These payments go on Line 5 of Form 4868.

Finally, logically we end up with Taxes Still Owed = Tax Liability - Taxes Paid. You can then either:

1. Write a check for this amount payable to the “United States Treasury” and mail the form in at the cost of a stamp,
2. or sign up for an account at TaxAct and e-file Form 4868 for free. I chose this option as it lets me withdraw money electronically from my savings account. Also, this way I can get an e-file confirmation in a few days instead of hoping the Postal service doesn’t lose my check. You don’t have to do your taxes or anything else at TaxAct if you don’t want to.

If you don’t owe anything, you still should file the form. I just e-filed my extension. Woohoo! Now I can procrastinate for another 6 months…

Posted in Taxes | 13 Comments »

More Thoughts On Buying Vs. Renting Calculations

There were some great comments on the NY Times buy vs. rent article, and many of them echo my own sentiments. Buying versus renting a house is a very individual decision. I do agree that the point of the article is that due to people’s differing time horizons and job instability these days, buying could be a great idea, but is definitely not an no-brainer. Renting is not “throwing money away” when you are faced with a mortgage payment that’s triple the rent and a 6% commission upon selling in a few years.

As the calculator suggests, the financial reality depends heavily on the rent/buy ratios in your neighborhood and how long you intend to stay.

When doing these rent inputs, you should really compare apples to apples. If you’re comparing the rent on a 2-bedroom apartment and the mortgage on a 4-bedroom detached house, which is really where you want to be living? You can always buy a 2-bedroom condo or rent a 4-bedroom house.

Who cares if the “average” homeowner stays in their house for 5 years? It’s you that matters. Some people are in volatile fields, or are young and want to live in hip urban areas for a short while, or just expect to move soon. This might tilt you towards renting. Others, like me, are moving to a specific city explicitly to live near family. We plan to stay indefinitely, possibly in the same house forever. Our brothers and sisters have lived in their first houses for the last several years.

Another big factor is what you expect your future annual home price appreciation to be. Historically, it’s been about 5-6%. But since we’ve been seeing 10-20+% for the last few years, it would seem likely that the next several years would be below that 5-6% average.

However, the last time I checked, the U.S. stock market has also been beating it’s 10% historical returns over the last few years. Does that mean we should assume lower returns the next few years? Some investors certainly think so, but the research shows that even professional money managers are horrible at such market timing.

In the end, I can try and make some predictions, but I don’t want to make a big bet on them being right. My opinion is that I just want the damage to be small if I’m wrong. For example, let’s look at an example graph from the calculator for a $500,000 house:

Ignoring my specific inputs, let’s just focus on the fact that the break-even time shown is about 6 years. This 6 year number is the result of about 10 different guesses. Still, there is a period of +/- 2 years where the difference between renting and buying is not horrendous. A person’s feelings about such intangibles like a love or hate of doing home improvements could sway them in either direction.

As for us? The plan remains to buy a home towards the end of this year. I haven’t shared the neighborhood, so nobody can tell us if it’s a good or bad decision yet

Posted in Real Estate | 13 Comments »

Where Are All My 1099 Forms?

Here I am, trying to start on my taxes but wondering why only half of my clients sent me a 1099-MISC this year! It turns out that businesses do not have to send a 1099-MISC to corporations no matter how much money they paid them. My business is an S-Corporation, so instead of having nice printed forms that clearly show how much they paid me in 2006, I get… nothing. I still have my own accounting books, but I have found in the past that my records and my client’s records aren’t always in sync.

For example, I might do a job in November, send the invoice in December, their check is written in late December but I don’t receive and deposit it until early January. Is this income for 2006 or 2007? Since I am on a cash basis, I would usually say 2007. But they may say December. If they give me a 1099 saying it counts for December 2006, I would just put it down for 2006 to avoid any conflicts and potential IRS red flags.

Upon reading up on this is some tax forums, I actually found that many people see this as a good thing for corporations. Because a 1099 isn’t generated, there is less of a paper trail to disprove whatever one decides to put down on their tax returns. Generating a 1099 when one isn’t required is almost akin to tattling. Still, I miss being able to cross-check my records.

Time to file a tax extension!

Posted in Taxes | 8 Comments »

New York Times Weighs In On Buying Vs. Renting A Home

I am still “away from the office”, but here is a very interesting New York Times article about buying versus renting a house I wanted to share - A Word of Advice During a Housing Slump: Rent. I’ll add more commentary after I fly back tomorrow, because we actually have been looking at some houses and neighborhoods in between family events while we are down here.

In particular, I enjoyed playing with this interactive Buy vs. Rent Calculator, because it shows you how sensitive these calculations are to your assumptions. A 1% difference in expected home price appreciation can make your expected “break-even” time vary by 5 years or more! (I am very skeptical that I or anyone else can predict the home appreciation rate in any specific area within 1% for the next several years.)

Posted in Real Estate | 14 Comments »

Free Phone Numbers That Should Be In Every Cell Phone

Here are some free and useful phone numbers that I am always glad are in my cell phone.

1-800-FREE-411 - Free 411 Directory assistance. Why pay 99 cents a call? They can even text message you the phone number of the business you’re looking for, so you don’t need to scramble for a pen. Details here.

1-800-GOOG-411 - Free 411 Directory assistance from Google. Uses voice recognition, and connects you for free.

1-888-DO-FRUCALL - Wondering if the price you see in a store is fair? Just call FruCall and type in the UPC bar code number, and it will tell you the best price online. Details here.

1-800-555-TELL - Looking for local movie showtimes? Sports news? Driving directions? Stock quotes? Try TellMe. I use this a lot to kill time when waiting around for friends.

Store them in your cell phones now, or you’ll be sorry. Please add your own in the comments!

Posted in Frugal Living | 26 Comments »

Better Alternatives To Dividend Reinvestment Plans (DRIPs)

Dividend Reinvestment Plans, or DRIPs, are programs that allow individuals to buy stock directly from the company, with dividends from the stock being automatically reinvested into more shares. Here are some popular companies that have DRIPs and also see the Wikipedia entry on DRIPS here.

DRIPs often charge no commissions, so if you set up a DRIP for General Electric (GE) and committed $50 per month, every penny of that would go towards buying $50 of GE, even if it meant buying a partial share. Dividends also get reinvested for free. The main startup costs involve buying one share through a broker and then transferring ownership to your name. This all made them a good alternative to using a broker and paying for every trade.

Do it yourself? Start with less than $100? No commissions? Sounds like something I’d go for. In fact, I don’t participate in any DRIPs. The main reason is that I’m really not interested in buying any individual company stock right now. DRIPS are meant as a very long term commitment, and I just don’t trust any one company to perform well for the next 30 years. On top of that, the accounting required to keep track of the cost-basis for all your shares sounds like a nightmare. Besides, I think there are better alternatives out there:

With just $50 a month, these days you can go through a company like T. Rowe Price or TIAA-CREF and invest in a low cost mutual fund that is diversified across hundreds of companies. It’s so easy a caveman could do it.

If you have at least a few thousand dollars, there are now brokers that offer free trades like Zecco and Wells Fargo. I bet there will be even more to come in the future.

Posted in Investing | 9 Comments »

Are You Moving Forward?

I’m going to my very first funeral today. It’s actually a very strange experience for me. I’m still too young to have much wisdom, but one thing I realize more and more is that life is a marathon and not a sprint. There is so much you can accomplish in a lifetime without having to be some sort of superstar. As long as you live each day with a purpose in mind, one day you’ll look back and be amazed at all the things you have accomplished. The key is simply to keep moving forward.

So I ask you: Are you moving forward? Are you closer to your goals this month than last month? If not, why not?

Currently, my main goal is to achieve our dream future. We are definitely closer this month than last, but not as much as I could have. I need to start setting monthly entrepreneurial goals again.

Posted in General | 16 Comments »

April 2007 Investment Portfolio Snapshot

It’s time for another bi-monthly update on my investment portfolio.

Thoughts
Not much going on, I have been contributing a $500 a month to my Solo 401k while trying to build up my cash hoard for a house downpayment. I still plan on tweaking my asset allocation, but I’ve just been distracted by other things and kind of want to wait a full year before making any changes.

All of our Vanguard funds are held at Vanguard.com, where there are no commissions for trading their mutual funds. Currently, everything there is in Roth IRAs, one each for my wife and I. Even though Roth IRAs rock, we haven’t contributed to one this year yet because we might be over the income limits for 2007.

The Fidelity fund is also held in-house at Fidelity, where I have my Self-Employed 401k. Funds are also no transaction fee (NTF) there. It’s a bit annoying that both their Spartan Total US and International funds have high $10,000 minimums, but the 0.10% expense ratio is nice. I could also trade ETFs, but at $20 a trade it’s a bit expensive.

You can see some older posts on how this portfolio came to be here, as well as my previous portfolio snapshots here.

Posted in Investing, Retirement | 18 Comments »

Emigrant Direct Signup Bonus Update - February Payouts

Payouts for my Emigrant Direct Referral Bonus went out over the last two weeks for those that either sent me their Form #2’s or Claim Form A’s in February. Please let me know if there are any questions.

Emigrant Direct offers an online savings account paying 5.05% APY with no minimum balance. They allow online transfers to and from up to 4 external checking accounts if you send them a voided check, but not other 3rd party transfers. It only takes $1 to open, and you can make another $10-20 just for signing up through me.

Posted in Banking, Deals & Offers | 2 Comments »

Google Now Lets You Search Real Estate Listings

You can now use the search engine to find homes for sale, rent, or even those in foreclosure. To try it yourself, just type in “Portland real estate” or “Home for sale in Chicago” into Google. You’ll see something like this:

Which then leads to you the results:

From the Google Blog announcement:

When you want more information on a particular home, you can click straight through to the source of the listing?no detail pages or sign-up forms get in the way. And when Google gets the same listing from multiple sources, we show links to all the data providers and websites, ranked according to many factors including, but not limited to, the quality and comprehensiveness of the data…. We don’t sell houses, deal with agents’ compensation, or charge for leads. Our business is helping people find the information they’re looking for?when you have it, we send them directly to you.

I just tried it, and I while it’s not revolutionary, I did find a few houses that weren’t on the MLS and on some smaller For Sale By Owner websites that would be otherwise hard to find. I also like being able to see the locations on Google Maps. I wonder if this will help push the MLS to be more open, which would be helpful for potential homebuyers.

Posted in Real Estate | 13 Comments »

Six Key Principles of Saving for Retirement

Ben Stein has an good read on Yahoo Finance about what he terms the Six Key Principles of Saving for Retirement. Although I agree with all six main ideas, I question some of the specific numbers. Here are some excerpts and my comments:

1. How much you save.
Simply put, if you’re a typical American (who happens to save close to zero right now), you have to save more. When you’re young, 10 percent of your income will get you there. If you don’t start saving until middle age, aim closer to 15 or 20 percent. If you don’t start until later than middle age, save every penny you can.

Interesting. Is 10% really enough? If so, maybe I really am saving too much for retirement. To what degree of certainty is that true?

2. How long you give your savings to compound.
A thousand dollars socked away when you’re 20 and growing at 10 percent per year will be almost $73,000 when you’re 65. The same sum saved when you’re 50 will grow to $4,200 at age 65. That’s a stunning truth that should compel any young person to start saving early — and the rest of us to start right now.

As for timing your retirement, Ray advises that if you can push it back by even five years you’ll allow your money to grow and have fewer years to need it.

Compound interest is truly powerful. A dollar saved now is worth more than a dollar saved later.

Although it hasn’t been helping me control my spending as much as I’d like either, I did make the horribly unpopular true cost of frivolous shopping calculator.

3. How you allocate your assets.
Typically, for those who start early, stocks are the answer. Over long periods, a diversified basket of common stocks wildly outperforms bonds, cash, and real estate. The differences are breathtaking.

But, as we’ve seen lately, there’s also a lot of volatility in stocks. As you age, you’ll want more of your money in bonds and money market accounts. These have lower returns than stocks, but they also have far lower volatility.

Phil DeMuth recommends that, as a basic portfolio, you have half of your savings in the broadest possible common stock index such as the Vanguard Total Stock Market Index (VTSMX) and half in the Vanguard Total Bond Market Index (VBMFX)… To me, that’s a bit conservative if you’re young. I would have more in stocks and also a good chunk in international markets.

Here is a compilation of various model asset allocations from other respected sources. Pretty pie charts included!

4. How much your investment returns annually.

Now, this is largely unknown from year to year. But over long periods, stocks return close to 6.5 percent after inflation, and about 10 percent before inflation.

Can we expect 6.5% real returns in the future? Lots of conflicting opinions out there on this, but I really want to look into this more.

5. How low you keep your fees and costs.

This principle is largely about using index funds and no-load mutual funds, which makes perfect sense.

Costs matter, whether you go actively or passively managed. I’ve seen some really expensive index funds. Always look up the expense ratios and any commissions you have to pay either when you buy or when you sell for all the investments you own.

6. How closely you keep an eye on taxes.
Finally, Ray advises maxing out your tax-protected accounts like IRAs and 401(k)s; keeping high-dividend stocks in accounts that are tax-deferred; and, when retiring, carefully considering what bracket you’ll be in and drawing out your funds to remain in the lowest possible one.

Ah, taxes. Here is a discussion on where you should place investments for maximum tax-efficiency.

J.D. of Get Rich Slowly also shared his thoughts on these six points, and believes the most important factor in retirement savings is psychological.

Posted in Investing, Retirement | 10 Comments »