Archive for September, 2007
I’m probably way behind the times, but I’m impressed by how many full episodes of TV shows are free online now. I had completely missed the first episode of the new season of Beauty and the Geek (a horrible show that I’m ashamed to admit I watch, but I do 
), but then today I just stumbled upon it online. Sure there are commercials, but I can just switch windows and surf websites until they pass. Not all shows are available, but a lot of the ones I hear about most are:
CW - Beauty and the Geek, Gossip Girl
ABC - Grey’s Anatomy, Desperate Housewives, Lost
CBS - CSI, Survivor
NBC - Heroes, My Name Is Earl
TLC/Discovery/Animal Planet - LA Ink, Dirty Jobs
Posted in Frugal Living | 16 Comments »
Right now, if you visit the IFA.com home page you will see an offer for a free e-Book version [pdf] of the book Index Funds: The 12-Step Program for Active Investors if you fill out a ‘Risk Capacity Survey’.
This is actually a pretty good book; I’ve read it, own a copy, and consider it an important part of my personal investing library. It explains through a variety of studies, statistics, and examples why passive investing through index funds is a prudent decision. Check out my more in-depth book review here for more information. It’s not the most eloquent book on passive investing ever, and it’s very long (almost 400 pages), but I have found it very handy as a reference text. I’m happy to get the PDF version since I can now search for specific keywords and phrases.
I took both long and short risk surveys. The long one is kind of interesting, but if you are short on time or just want the e-book you can just pick the short 5-question version. (I ended up at the “85″ portfolio again, if you’re curious.) You will get the download link via e-mail immediately after completion. You don’t need to share any other data unless you want to.
Posted in Deals & Offers | 9 Comments »
It was announced today that one of the first online-only banks, NetBank, has officially failed and control has been taken over by the FDIC.
A worried reader just asked me about NetBank earlier this week, and I had pointed him to my post FDIC Insurance: What If My Bank Fails? Make Sure Your Money Is Covered, where I said:
- Banks still fail, and without warning.
- If your money is insured, it is unlikely any failure will interrupt access to your funds for long. Either another bank will take over (they all want more deposits), or the FDIC will pay out from their reserves.
- Never exceed FDIC insurance limits, because you may never see your uninsured money again.
I’m happy to say that I gave out correct information, otherwise I’d feel really bad. NetBank did fail without any prior notice to customers, although a diligent person would have known they were in trouble. Things haven’t been good at NetBank for a while, especially after a previously-announced takeover by Everbank recently fell through. They’ve been unprofitable since 2005, losing over $300 million dollars in the past two years.
Appropriately, online-only ING Direct is taking over the insured consumer deposits. Indeed, there will be very little interruption:
You will still be able to access your money the same way you have in the past, using your ATM card or Visa? check card, checks, online bill pay, wire transfers and standard deposits. Any automated features, such as bill payments or direct deposit, will continue as scheduled. Please Note: As of 5:00 PM EST Sunday, September 30, you will be able to resume all normal account activities via the NetBank website.
NetBank CDs will even stay locked in at their current rates! I just feel sorry for the people who exceeded their FDIC limits. $109 million in uninsured deposits! Why would you do that?! Laziness? Now those people can only expect half their money back 
Due to the projected sale of assets of the former bank, the FDIC is in the position to provide each uninsured depositor with an dividend equal to 50% of your uninsured amount.
Posted in Banking | 31 Comments »
Here’s a mild little rant to end the work week. It’s about people judging other’s spending habits. Let’s start off with those who think there are some who save too much. Take this comment received by MyTwoDollars:
You always talk about saving money and making sacrifices, don?t you ever spend any money? Don?t you have stuff you want or things you want to do? What good is money if you don?t spend it?
As it turns out, David likes to travel on vacation and eat organic food. Or this one found by The Simple Dollar:
What?s the point in making money if you?re going to live your life like a miserable miser. All this money that you?re ?saving?, what do you do with it? Take it to the grave?
Seriously, I can’t name a single blogger that is a “miserable miser”. Not even close. Does anybody out there really even know any bona fide miser at all? The only people I know that are miserable are the people who spent more than they had, and are now digging out of consumer debt. They’re stressed. My friends who are frugal - they all seem pretty happy!
I have my own theory about why people attack other people’s choices. It’s because they get defensive about their own spending habits. They take advice such as “How brown-bagging your lunch saves you money” and read it internally as “You dined out for lunch today? Ha! What a waste of money. What a stupid, uninformed decision.”
But at the same time, at the other end of the spectrum, sometimes the culture of anti-consumerism goes too far as well. For example, I often think twice about writing about some toy I want to buy, or the international trips I want to take, because inevitably there will be the comment asking “Why are you buying that crap if you’re trying to save money?”. Perhaps they take my writing to say “Why don’t you spend money on travel? What, are you too cheap to widen your horizons?”
I think what I mean to say is - Don’t misinterpret words to be at one of these extremes unless it really says that. Be comfortable in your own “financial skin”. As long as you are making your desired progress towards your financial goals, why feel guilty about how you spend any excess income. If you’re not, perhaps some changes are indeed in order.
Posted in Frugal Living | 58 Comments »
Looking for a weekend activity? How about checking out a museum for free?
Museum Day is a nationwide event taking place on Saturday, September 29, 2007 where participating museums and cultural institutions across the country offer free admission to Smithsonian readers and Smithsonian.com visitors, allowing for one day only, the free-admission policy of Smithsonian’s Washington, D.C.-based facilities to be emulated across the country.
You could be saving $10-$20 per person, which for a family really adds up. Find a participating museum here (if no results via search, click on the state-by-state map, there should be at least one in most metro areas), and be sure to print your admission card here.
Posted in Deals & Offers, Frugal Living | 7 Comments »
Lots of e-mails coming in from banks today…
HSBC Direct drops from 5.05% to 4.50% APY. Yeesh… not a good sign for online savings accounts in general!
FNBO Direct announces that the new rate after 9/28 is 5.05% APY. Ho-hum, about what I expected. They did also announce a 2% cash back credit card, but only for 12 months. Bye, FNBO, it was fun while it lasted. Currently, I am moving back to my local Washington Mutual checking/saving account. I’m undecided where to go next if I’m going to rate-chase.
Maybe one of these previously-discussed options, maybe Bank of Toledo, but that 10 debit card transaction requirement is a pain and I’m skeptical about how long the 6.01% will last.
ING Direct is still at 4.30% APY but is offering a $50 sign-up bonus, higher than the usual $25. Via reader Scott.
Pentagon Federal Credit Union is now offering 3, 4, and 5-year CDs at 6.0% APY. If you’re looking to lock up rates for this long (I’m not), these rates look pretty good. Early withdrawal penalty is 6-months of interest. Membership required, you can join the NMFA for $20 if you don’t qualify otherwise.
(Update) Emigrant Direct is now at 4.75% APY, down from 5.05%. Could have been worse, eh?
Posted in Banking | 82 Comments »
Yesterday, I posted about why I chose against investing in most actively-managed funds. I actually do hold one actively-managed fund right now, the Bridgeway Ultra-Small Company Market Fund (BRSIX). Why did I choose this fund? It turns out that many of the warnings against buying an actively-managed fund can be flipped to find the best mutual fund managers. Here are several things to look for, as well as some of the companies that many of these characteristics.
Do They Have A Clear, Consistent Investment Strategy?
In order to beat the market, by definition they have to have substantially different holdings from the market and stick to their guns. Also, is it clear enough that you really believe in their strategy? If not, you might bail out yourself during a rough patch and miss out on the fund’s long term returns.
Do They Charge Reasonable Fees
To start, one would hope to see no front-end or back-end loads. If they are “to discourage excess trading”, then any fees should be directed back into the fund shares, not into the manager’s pockets. Otherwise, look for below-average fees, and for those fees to decrease as the amount of money under management increases. For example, the Vanguard Windsor II fund is one of the largest mutual funds available with $52 billion in assets, and has an expense ratio of only 0.33%. That’s more than many sub-par Large-Cap index funds.
Do They Limit Asset Bloat?
Read the rest of this entry…
Posted in Investing | 18 Comments »
Alan Greenspan was a guest on The Daily Show with Jon Stewart recently, mainly to promote his new book The Age of Turbulence but conveniently after the recent rate cut. It was amusing seeing Greenspan in the hot seat. Via the Bogleheads.
Update: Having some problems with the embedded video, so here is the direct link to the clip.
Posted in Investing | 9 Comments »
As anyone can see, I like to invest my investment portfolio in passively-managed mutual funds. There are numerous reasons for this. For one, the average actively-managed fund underperforms the average passive fund. In addition, even if a fund does well up to a certain point in time, it does not necessarily to do well later. In other words, you can’t pick out the superstars ahead of time by looking at performance.
But still, from time to time, I may take a second look at certain managed funds. One example is the sometimes-persuasive writings behind the Hussman Strategic Growth Fund (HSGFX). Or perhaps something not a mutual fund but similar like Berkshire Hathaway (BRKB). But I never buy them! Here’s why:
Higher Fees
The most obvious hurdle remains one of the largest. Actively managed funds have higher fees. The more the mutual fund makes, the less you make. They have so many ways of making money - fees when buying (front-end loads), fees while selling (back-end loads), fees while holding (management fees)… they even make you pay for their advertising costs (12b-1 marketing fees). Can the fund keep covering this and more?
What’s Their Secret?
In the beginning, most funds start off with their own unique plan to take advantage of some specific market inefficiency. If the fund manages to maintain a streak of good performance, word will soon spread. Others will start to scrutinize the manager and their trades in order to see what their methodology is. If they figure it out, whatever that market inefficiency was will soon disappear.
Asset Bloat
Read the rest of this entry…
Posted in Investing | 40 Comments »
Chase has added a new twist to their Chase Freedom Cash Visa Card. Before, it simply offered 3% cash back on the first $600 in monthly purchases made at grocery stores, gas stations, and ?quick service restaurants?, and 1% on everything else. Now, it adds more flexibility and offers 3% cash back on whatever your “Top 3 Everyday Spending Categories” are, and they can change each month. Here are the 15 available categories:
- grocery stores (no superstores or warehouse clubs)
- gas & convenience stores
- quick service payment/fast food restaurants
- telecommunications
- cable/satellite TV/Internet service providers
- video rentals
- department stores
- dry cleaners
- drugstores
- movie theatres
- commuting costs (including ferries, bridges, tolls, parking garages, taxis/limos)
- pet supply stores and veterinary services
- utilities
- beauty shops (salons and spas)
- gym/recreation memberships
You can get your rewards in points or cash (1 point = $0.01), but the points don’t really seem like a great deal (10,000 pts = $100 gift card). I’d stick with cash, because if you wait and redeem $200 at once, you will actually get a $50 bonus, for a total of $250. This makes the 3% top spending/1% everything else cash back turn into 3.75%/1.25% cash back. Taken alone, this makes the card look pretty good if you’re the type that likes to keep it simple and have just one rewards card for all your purchases.
However, if you’re like me and like to use multiple credit cards like Swiss Army knives, this card may be useful as well - leave your groceries, gas, and drugstore purchases to the Citibank Driver’s Edge Card for 6% back, and only use this Chase card to boost your rewards for other top spending categories. For me, this would normally be things utilities and cable/internet, although in some months it would be veterinary costs or department stores.
Finally, they are currently giving out a $50 sign-up bonus after your first purchase. Not the best one out there, but taken all together it can be a good deal if this card fits your spending patterns. No annual fee.
Posted in Credit Cards, Deals & Offers | 35 Comments »
Whenever you hear a stock market update on TV or even online, it’s usually related to the Dow Jones Industrial Average (DJIA)… “The Dow went up 100 points today.” “We are pushing back towards Dow 14,000!” I never really thought about this until reading in my current nightstand-book All About Index Funds that the Dow, started in 1896, has quite a number of flaws as compared to other newer indexes. These flaws are well described in this academic paper The Dow Jones Industrial Average: The Impact of Fixing Its Flaws. Here’s a quick summary:
#1 - The Dow only includes 30 somewhat-arbitrary stocks
In 1896, the DJIA had 12 stocks. In 1916, it grew to 20. In 1928, it increased again to 30. That’s it. It’s still just 30 stocks almost 80 years later. Not only that, but it’s not even clearly defined as the largest 30 companies or something like that. It’s simply 30 companies chosen by a committee to best represent the market out of the ~5,800 readily-priced publicly traded companies out there. Certain major sectors like transportation and utilities aren’t even covered.
#2 - The Dow is a price-weighted index
The DJIA is not weighted according to the relative value of the companies like the S&P 500 is. Instead, it’s weighted by price. So if GE’s share price of $41 goes up by $1 (market value change of ~$10 billion) , it can be negated by a $1 decrease in 3M share price of $92 (a market value change of ~$700 million). This skews the average towards the activity of higher-priced stocks.
#3 - The Dow doesn’t include dividends
This flaw is common to all of the other major stock indexes ? S&P 500, Nasdaq, Wilshire 5000. But given the relatively large amount of dividends that the companies in the Dow has historically paid out, this is important. The paper found that a total return index of the Dow companies including reinvested dividends would make the value of the index to be over 250,000 points today. Other indexes, like the Nasdaq, pay out a very small percentage in dividends in comparison.
Most surprisingly, the paper also concludes that #1 and #2 haven’t actually made that that much difference when comparing long-term returns with the other major indexes. Add in all that tradition, and I guess we’ll be seeing the Dow stick around for a long time to come.
Posted in Investing | 11 Comments »
With all this talk about the Fed Funds rate drop, a lot of people are wondering what it means for consumer rates like savings accounts, credit card APRs, and mortgage rates. Here, I wanted to explore the savings account relationship. First, some quick definitions:
What is the Fed Funds Rate?
With our current system of fractional-reserve banking, US banks only have to keep a certain amount of money reserved at all times - Currently, it’s only 10% of checking account deposits and nothing (!) on time deposits like savings accounts. Banks usually try to keep as close to this minimum as possible, so that they can lend out the rest at higher interest rates and make that juicy profit.
In order to stay as close as possible, banks often lend money to each other overnight as needed. One bank may have extra in reserves, while another may temporarily not have enough, and this way it’s win-win. The target interest rate for this is the Fed Funds Rate (FFR).
What is the Fed Discount Rate?
This is the exact interest rate at which banks can directly borrow from the Federal Reserve. This is usually a last resort, as such loans are an indication of financial weakness and subject to audit.
What is the relationship between the Fed Funds Rate and interest rates on high-yield savings accounts?
This is just my own speculation, but I would imagine that banks would not want to offer significantly more than the Fed Funds rate. Why would you pay 6% interest out to individuals when you could just pay 5% to another bank? Still, I doubt that banks can borrow an unlimited amount of money via other other banks, so they may be willing to pay a bit more than the FFR if they have the ability to make a profit. Finally, they may just be operating at a temporary loss in order to grab some deposits that hopefully will stay later from branding or just convenience (*cough* FNBO Direct *cough*).
Here is a historical chart of the Fed Funds Rate versus the APY paid by online banks ING Direct and Emigrant Direct. I chose these two because they have (1) been around longer than others, and (2) are online and as such should be operating with the thinnest margins. The data points for ING should be close, but not perfectly accurate, as I used Archive.org at 2-month intervals for rate info not available in my own archives.
You can definitely see some correlation, but it’s not perfect. It looks like ING was more aggressive in 2002-2004, and then gradually become satisfied with fatter margins. Emigrant seems to be following the curve closely, which would indicate an interest rate drop soon. So if you want to predict the interest rate of your own bank, not only do you want to look at the FFR, but also the bank’s historical margins and whether they are looking to gain (or simply defend) market-share.
A little birdie told me to expect an FNBO Direct rate definitely under 5% after 9/28. I’m just writing this here to see if it turns out to be correct.
Posted in Banking | 23 Comments »
She grew up in a working-class household near Detroit, with divorced parents who argued about unpaid bills. At 14 years old, she had to ask her mom to buy an $8 domain name for her. Today, at 17, she owns her own 2-story house and is head of a company that earned over $1 million in revenue in 2006, with even more projected for 2007.
Who is she? Ashley Qualls, owner of WhateverLife.com, a MySpace-related website that get over 7 million unique visitors each month. That’s more than Oprah.com and CBS.com. She’s had a multi-page profile done in Fast Company magazine and has been written up in other local publications. I actually saw her story highlighted briefly while watching CNN.
This piqued my interest - I mean, she seems like a good web designer with decent graphic design skills. But good designers are everywhere now, she had to do something special in making her millions. What was it?
She piggy-backed onto the next big thing
Without MySpace, this whole thing might not have happened. I mean, I still do not understand the appeal of MySpace. It’s cluttered. Music plays automatically when you visit someone’s page. The blogging platform is confusing. Who wants to read 100 people saying “Thanks for the add!” or linking to the same 10 blinking images over and over?
She took the initiative with her hobby, and let it grow
The whole thing just started out when she made a few custom MySpace layouts for her friends, and exploded from there. But she could have easily have said “Nah, I’m bored. Let’s go to the mall.” after making one or two. But instead she made layouts for everyone in her high school, and then she took it online.
She knows exactly what her target audience wants. It’s like the movie Big with Tom Hanks, when the 12-year old kid becomes vice-president of a toy company.
She took a risk and went full-time
She actually dropped out of high school during her sophomore year, instead going the GED route and attending community college now.
She’s still thinking big
She’s not just stuck making MySpace layouts forever, either. For one, her templates are compatible with many other social-networking sites besides MySpace. Recently, she hired developers to create an application that lets her users build their own stylized websites. She has an online magazine up and running. Next up, she plans on selling cell-phone wallpapers at $1.99 a pop, so people can extend their custom themes to their phones. She’s the Teen Martha Stewart.
Overall, I would say the best lesson to take from Ashley’s story is that she caught the MySpace wave early and ran with it. I would have totally missed it. Anyone want to tell me what the next big thing will be?
Posted in Entrepreneurial | 26 Comments »
Recently, I have been toying more seriously with the idea of selling one of our used cars to buy another cheap one with a manual transmission. I’ll be honest, it’s entirely for entertainment purposes. I want to get better at driving a stick, and I also want to have fun with it before, well, we have kids and need to buy something more practical 
I’m looking for something under $5,000, and I expect to sell it again in about 3 years. I live in an area with nice weather, and I don’t drive very much otherwise so rock-bottom fuel economy isn’t critical. Repair costs are a concern. Here are a few models that I’m considering:
1989-1995 Toyota Pickup
Estimated cost: $2,000
Pros: Reliable model. Cheap. Truck bed could be useful for home improvement projects.
Cons: Not as fun, 4-cylinder version is a bit weak.
1987-1995 YJ Jeep Wrangler
Estimated cost: $4,000-5,000
Pros: Fun, Sunshine, Can maybe take it off-road occasionally.
Cons: Reliability ratings aren’t great. High theft rate.
1989?1997 Mazda Miata Convertible
Estimated cost: $4,000-5,000
Pros: Fun, Sunshine, Nimble, Easy to park. Pretty reliable.
Cons: Might feel small for my body frame. Not sure about crash safety.
Images from their respective Wikipedia pages.
Posted in Frugal Living | 85 Comments »
I hear the term ‘passive income’ thrown around a lot. But what does it really mean? Is anything that you earn outside your day job considered passive income? Let’s look at some popular things that are associated with the term.
Dividend Income From Stocks
First, one must come up with money to buy a share of a dividend-yielding stock. That probably took some work. But what’s so special about a dividend? There are two components of return from stocks - share appreciation and dividends. All other things held equal, when a stock gives off a dividend, the share price drops commensurately. For example, if the share price was $100 and it gave off a $1 dividend, the share price would then be $99. So it’s not like the $1 came out of thin air.
If you had 100 shares of a $1 stock, you could simply sell $1 and get $1 of cash and $99 of stock as well. In fact, sometime dividends are simply paid in the form of more shares of stock. The way I see it, if you think dividends are passive income, then you should treat any increase in share price as passive income as well. Coupon payments from bonds and interest from savings accounts would be in the same group.
I personally prefer to simply call all these things investment income and keep it separate, as learning about investments is more of a requirement nowadays, as opposed to an optional entrepreneurial venture like the other activities below.
Creative Works - Songs, Books, Patents
Let’s say you compose a song, or write a book. Every time someone plays your song, or buys your book, you will get a small fee. But what if you spent 1,000 hours writing that book, and you only earn a $100 each year from royalties? Is that really passive? Sounds like a lot of research and hard work to me. On the other hand, the Beatles will be making millions for their great-great-great grandchildren. When does it cross over to becoming passive?
Take blogging for example. You spend hours writing, reading, commenting, dealing with spam. Divide your advertising revenue by the hours spent, and if you’re really lucky, you’ll be above minimum wage. And then there still ain’t anything passive about it!
Real Estate Rental Property, Vending Machines, Car Washes
Another group with similar characteristics… You put up a relatively large sum of money upfront to pay for the rental property, vending machines, or car wash property and equipment, and after that you make money from rent, selling soda/snacks, and water/soap, respectively. But there is still work to be done. If you don’t manage your properties, restock your supplies, or maintain your equipment, things start falling apart fast. Even if you do all these things, there will always be the occasional breakdown or emergency to give you headaches.
My Alternative Definition For Passive Income
Now, I don’t doubt that many people make a ton of money with things like rental properties and writing books, with a relatively small amount of ongoing work. I’m still definitely interested in pursuing such activities! It should be obvious that I love making extra money on the side as much as anybody. But I don’t call anything I do passive income. I can’t really think of anything truly passive, besides maybe winning the lottery. So I suppose “passive” really just means “less work than other stuff”.
Accordingly, here’s my two requirements for me to consider labeling an activity as “passive income”:
If you only satisfy the top one, then it’s just a really well-paying job. If only satisfy the bottom one, you wouldn’t be using your time efficiently, which wouldn’t make it very passive at all. Would you agree?
Posted in Entrepreneurial | 45 Comments »
