In case anyone was wondering if the Wowio Free iPod Shuffle promotion was legit, FedEx just delivered this to my door:
Please don’t ask for referrals in the comments. It’s a free and useful service, bring it up tonight to your friends when you go out 
If you are waiting until the last second to fund your 2006 IRA, you’re probably not alone. Maybe you are still confused about choosing between a Roth or a Traditional IRA. Here’s an interesting fact: If you assume that your tax rates will be the same now as they are in retirement, the amount you end up with is the same whether you use a Traditional or Roth IRA. This is independent of time length and expected return
Let’s assume an annual investment rate of return of 8% for the next 30 years, and a marginal tax rate of 25% for all years. Let’s also say that you only have $1,500 of after-tax ($2,000 gross pre-tax) income to put away right now.
If you went with the Roth IRA, you pay your 25% tax on the $2,000 now ($500), but no taxes upon withdrawal:
If you went with the Traditional IRA, you don’t have to pay tax on the $2,000 right now, but you’ll be taxed upon withdrawal:
See how they are the same? The only difference is that you are able to put away “more” in a Roth IRA since the limits are $4,000 for either one. $4,000 post-tax in a Roth IRA is like putting away $5,333 in a Traditional IRA in this scenario. This ability to shield more money from taxes is why I chose to contribute to a Roth IRA. Now, if you change your assumptions about tax rates, that’s where you may start leaning more towards one or the other.
How good is the tax benefit?
Remember, either IRA saves you tax at least once. If you just kept it all in a regular taxable account, you would be subject to a tax on any dividends or realized capitals gains every year. Let’s see what happens to your $1,500 then. Taking the best case scenario of investing in stocks with only dividends being taxed and having no capital gains to deal with until you sell 30 years later, we’ll assume that the 8% annual return is broken down into 6% appreciation and 2% dividends. If the 2% in dividends are taxed at 15% each year, your after-tax return in 1.7%. If those dividends are reinvested:
At the end of 30 years, upon selling you’ll have a long-term capital gain of $13,885 - $1500 = $12,385. You pay tax of 15% on that: $1,858, leaving you with $13,885 - $1858, or $12,027.
With these simplified assumptions, using an IRA made you over 25% more money than if you didn’t use one. If you invested in any bonds, the difference would be even greater. 25% is huge! Imagine ending up with $500,000…. or $625,000. Which one would you rather have? This is why IRAs are a great opportunity to make your money go farther.
See here for some specific mutual fund ideas, part of my overall investing recommendations.
(This is not a comprehensive Roth vs. Traditional IRA post - There are just so many variables like the ability to take out principal without penalty, ability to use balances for a 1st home, required minimum distributions, and easy of inheritance to consider.)
Many times you hear people say “Owning your home is not an investment.” It may not be an investment, but it does involve spending money that could be better used elsewhere. Still, I do admit that there are intangible benefits that you can’t easily put a price on when you own your own home. Here are some advantages that come to mind:
It will be very rare that you will be kicked out of your home. As someone who has been unceremoniously given 30 days notice to leave a rental that they enjoy, I look forward to a day when I don’t have to worry about frantically searching for another rental or hiring a moving company. As long as I avoid any future freeway developments I should be able to find a home I can live in for as long as I want.
You can improve your home. I have zero desire to fix up my current rental. Why bother? Heck, I’ll probably just lose my deposit if I try. But in a place I own, I can start to make little customizations that make life just that much cozier. First thing, I would make my house totally energy-efficient, both saving me money and reducing consumption. Then, I could the flooring, split a big bedroom into two smaller ones, make a garden, whatever.
It’s hard to measure this, but I feel like such improvements would really improve my happiness level. Of course, I can also think of some disadvantages:
What if your neighbors are jerks? What if they hate my dogs, or worse, like to breed vicious pit bulls? (It’s happened. Dogs have died.) I’ve had my share of annoying neighbors. Selling a house definitely costs more than simply moving out of an apartment, even if you have to break the lease.
For condos: What if your homeowners association stinks? I’ve heard some horrors stories about egomaniac HOA presidents with their overpriced pet projects and expensive assessments. I don’t think anyone loves their HOA.
Improvements cost money. If some people consider having a mortgage to be a form of forced-saving, maybe renting is a form of forced-frugality? Most renters don’t have weekly trips to Home Depot or argue about what kind of tile to put in their kitchens. They just call the landlord when something breaks.
After writing this, it seems that a lot of my feelings center around permanency. For me, I don’t want to move to a bigger house in less than 5 years. I’m tired of moving every 12 months. I want a home. I just have to find one at the right price.
Homeowners: What are some intangibles that I missed?
While on Vanguard’s website I recently ran across a new and useful tool that help helps you calculate and compare costs for similar Vanguard ETFs and mutual funds. The tool takes into account trade commissions, the difference in expense ratio, redemptions fees, future purchases, and even the expected bid-ask spread.
For the unfamiliar, I’ll be very simplistic and say that exchange-traded funds, or ETFs, are mutual funds that can be traded like individual company stocks. Due to the way they are constructed, ETFs tend to have lower expense ratios than their mutual fund counterparts, but you will need to pay a commissions each time you trade. There is also a little bit of added loss due to the bid-ask spread.
For example, you could compare the Vanguard Total Stock Market Index Fund (VTSMX) with the Vanguard Total Market ETF (VTI). Both invest in the exact same set of companies, and holds over 1,000 companies that track closely the entire U.S. market. VTSMX charges an annual expense ratio of 0.19%, or $19 on a $10,000 investment. VTI has an expense ratio of only 0.07%, a mere $7 for each $10,000 invested.
I tried an example where I start with $10,000 of either VTSMX or VTI, and say that I will add another $1,200 each quarter for another 10 years. I assumed $5 trade commission and a 8% annual return. Here are the results:
(fixed the numbers :P) The cost edge goes to the ETF in this case, with a cost difference of $300. Really, I don’t see that as all that much over 10 years. But, as you get into larger amounts, the gap widens. If you continued the same example for another 20 years, the ETF’s cost advantage would be $7,000.
For this reason, I feel like it is only a matter of time before I start moving all of my current all-mutual fund portfolio into ETFs. In fact, the majority of my funds already have an identical ETF counterpart.
Anyhow, you can play with this calculator and change the variables to see your situation. Note that Admiral shares are an option once you reach $100,000 per fund. I’ve got a while before that…
But in terms of the big picture, both of these funds have very low costs and would serve as a great cornerstone to a retirement portfolio. If you are just starting out, I think you’ll see the difference is very small; I really wouldn’t stress too much about going either way.
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 wrote up a series of step-by-step posts on how I do this. Please check it out if you are curious.
About My Goals
I haven’t explained the goals in the progress bar on the top right of this page recently, either. First, I have a mid-term goal of $100,000 in net non-retirement funds (everything but IRAs/401ks). This is designed to help us save for a house downpayment. We’ll also need enough for any closing costs plus some for our emergency fund. Second, we have a long-term goal of one million dollars in total net worth by the age of 45. This is not our end goal, as we plan to keep working past 45, but it is something for us to work towards. 65 is just too far away, as are crazy numbers like $3,000,000
These goals were set more than two years ago, and while our situation has changed a lot since, I am still keeping them around. I may revise them later, especially if we buy a house near the end of this year.
Commentary
You can see all my previous net worth updates here. I’m getting excited about starting to look at houses, if only to keep an eye on the real estate prices.
Thanks to everyone who let me know about this. I just confirmed with Emigrant Direct that as of about a week ago, they are no longer allowing you to make transfers between their savings account and other external accounts other than the “official” linked checking accounts. Some people are reporting that this only applies to withdrawals, and not deposits. Supposedly, they will be sending out letters about this. Um, why not send them out beforehand?!
This definitely hurts the flexibility of this account, but puts it in line with some other banks like E-Loan. Of course, the stated issue is “security”. But why can I still do these transfers with my other checking and savings accounts from huge banks like Bank of America, Washington Mutual, and Citibank? Anyways, please be warned if you have any transfers like Treasury Bill ladders scheduled.
Due to the increasing needs of this site, I have been upgrading to a new server over the weekend. It has been taking longer than expected. Because of the way the internet works, there are currently two copies of my site on the internet right now - one on the old server and one on the new server. Depending on where you are located, you will be seeing one or the other.
The side effects of this are that you may leave a comment on the “old” server, and it will disappear when you eventually get redirected to the new servers. Posts also might appear and disappear. The dust should all settle within the next 24 hours. I have been monitoring the e-mails on both my old and new servers, so everything should be okay in that respect. Thanks for your patience.
I have never been a very neat person. Having a bigger house is not a good thing for me. I swear the amount of junk we have has doubled since we started living in a house with a basement!! Given that we are also doing an inter-state move in less than 4 months, I really need to get rid of this junk. Because of this, I’ve been noticing a lot of other articles that related to simplifying your life:
The Zero Inbox - Here, the idea is to have nothing in your e-mail Inbox. Nothing! The second you get the e-mail you either answer it, delete it, or file it away appropriately. 43 Folders has a whole series about this method. I think I have over 1,000 messages in my blog e-mail Inbox alone. 
Buy Nothing For A Year - A group of people, called The Compact (see their blog and Yahoo Group, are pledging not to buy any new products of any kind (from stores, web sites, etc.) for all of 2007. They wish to “counteract the negative global environmental and socioeconomic impacts of U.S. consumer culture.” and simplify their lives. Instead, they borrow, barter, or buy used. (I think food and medicine are okay.)
Having Zero Impact - What if you went further, and led a life with the goal of having zero impact on the environment? For the couple interviewed in this New York Times article “The Year Without Toilet Paper”, it means “eating only food (organically) grown within a 250-mile radius of Manhattan; (mostly) no shopping for anything except said food; producing no trash (except compost); using no paper; and, most intriguingly, using no carbon-fueled transportation.” This means no cars, no subway, no toilet paper, and barely any electricity. I’m sorry, but I need my Charmin, dude…
While I don’t necessarily want to go to any of these extremes, I do feel I need to consciously choose to live a more simple life and let go of my pack-rat tendencies. I’ve felt this way before, though, so I know it won’t be easy.
Wowio is a website that lets you download eBooks from their library for free. They are in Adobe Acrobat format, so don’t need any special software to read them. There’s also no annoying DRM, so you can move them between computers and PDAs with ease.
What’s the catch? Well, the titles are limited, so you’re not going to get the current New York Times bestseller. But they do have a wide selection, from classics to comic books (I mean, graphic novels!). Here are the titles I downloaded today (you get five each day):
Basically, check it out, and if nothing catches your eye, don’t join. Can’t beat free. I think they also make money by putting ads in the books, but they must be spaced pretty far apart. I’m about 50 pages into Slaughter-House Five and haven’t seen one yet.
To join, you must verify your identity. It’s relatively painless, you only need one of the following:
Right now, they are also having a promotion that if you refer 10 of your friends, they will send you a free iPod shuffle. This is actually a pretty easy deal, as it’s absolutely free to join and you don’t even need a credit card number. When you sign up, at the end they will ask you for the e-mail of the person who referred you.
Please don’t use my e-mail, I already have enough referrals. Below is a script that will return a random e-mail that you should use as your referrer in order help a fellow reader out. Then, I will ask them who used their e-mails as a referral, so you’ll have a chance to be listed.
I’ll make it an image scramble it to avoid spam, but you can also let me know if you don’t want me to put your e-mail up. Thanks!
