Archives for May 2007

Will You Make More Money Than Your Parents? Does It Matter?

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Both the Wall Street Journal and CNN Money recently ran articles about a new study that concluded that American men in their 30s are earning less than their father’s generation after adjusting for inflation.

In 2004, the median income for a man in his 30s, a good predictor of his lifetime earnings, was $35,010, the study says, 12% less than for men in their 30s in 1974 — their fathers’ generation — adjusted for inflation. A decade ago, median income for men in their 30s was $32,901, 5% higher than 30 years earlier. Ms. Sawhill said she isn’t sure why men’s wages have stagnated. “It seems there’s been some slowdown in economic growth, it’s possible that the movement of women into the labor force has affected male earnings, and it’s possible that men are not working as hard as they used to.”

“The expectation that each generation will do better than their parents has become a fundamental part of what we call ‘The American Dream,'” said Morton. “But this new analysis suggests this bedrock belief may be shifting under our feet.”

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The problem with statistics like this are that they really don’t tell us anything. Maybe more men are staying at home to take care of the kids, or are otherwise choosing to earn less money to balance work and life. Maybe the government’s method of measuring inflation is inaccurate. Maybe it’s due partially to globalization. Maybe it’s simply supply and demand – families as a whole are making more to dual-income households. Maybe the blue-collar jobs don’t pay as well as they used to. Maybe a 30-year old these days is more likely to have spent an extra 5 years “finding themselves”. Don’t people get married a lot later these days versus 1974? Ten different people could read these articles and come up with ten different reasons for the income decrease based on their own personal beliefs and experiences.

As for me, I don’t really get why it even matters what my father earned? Poor, rich, whatever, all we can do is see what challenges exist now, and work to meet them head on. Even if we earned 50% more than our father’s generation, I don’t see how that would change my behavior. It just creates excuses and distractions. Am I missing something?

HSBC Direct Unveils Online Checking Account… Sort Of

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For a while now there have been rumors that HSBC planned to enter the online checking account arena, competing with the likes of Capital One 360’s Checking. Instead of using the apparently taboo words “checking account”, HSBC Direct announced today the Online Payment Account, which has the following major features:

  • $1 to open, no minimum balances
  • Yield of 2.50% APY
  • Three non-HSBC ATM fee rebates per calendar month
  • Link with unlimited external accounts
  • Online Billpay Service
  • Can send paper checks via BillPay, but no checkbooks
  • Instant transfers to/from HSBC Online Savings account available, but account not required

However, I also got an e-mail from them saying you can’t apply for it until May 31st, and there is no mention of it on their main page. Weird.

My initial impressions? If you use the HSBC Direct savings account already, I’d definitely sign up for this. Why not? You get more features, and there are no minimums. One possible use would be when you needed cash, you could just go to an ATM, move money over from Savings -> OnlinePayment account, and then withdraw to take advantage of the ATM rebates. For people who rarely receive or write paper checks, this could fill a void and allow them to go completely electronic.

But really, how awesome would it be if they just added Billpay and ATM rebates to the Online Savings account, or even better, just made this Payment account pay 5.05% interest?! How hard it is to merge them together instead of adding more complexity?

Personally, I still both write and receive enough paper checks each month to prefer my current Washington Mutual bank setup or even my old Presidential Bank setup over either ING’s or HSBC’s paperless checking accounts.

Apologies For Unrequested E-mails

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At the end of each of my posts, there is the option to subscribe to future comments. It’s not checked by default, but it provides an way to easily follow the conversation. Today, for some reason, some people who were already subscribed to certain posts received updates to unrelated discussions. Since I can’t actually see anyone’s e-mail addresses, I am posting here to apologize. It was not intentional. The whole process is automated, and I believe this event was caused by a bunch of comments being approved all at once after Memorial Day. For those familiar with WordPress, I am using this SubscribeToComments plugin. Please let me know if you have continued issues.

Cheap Admission To Nature’s Amusement Park

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Sorry for the relative silence recently, I had friends over for the weekend. A while I ago I wrote about choosing frugal hobbies, and one great thing about Portland is that the biggest draw, regardless of cost, is really the outdoors. You get crisp mountain air, gorgeous views, and the main price of admission is simply your willingness to walk. We hiked to the top of Multnomah Falls and Dog Mountain, where you can catch views of both Mt. Hood and Mt. St. Helens when it’s clear. Here are actual pictures we took, to me they almost look like postcards!

Columbia River Gorge Multnomah Falls Hike Wildflowers

The total cost per person including gas, tolls, and park fees was less than $5. Also, we simply packed our own picnic lunches to eat at the top. Hiking is definitely something I need to do more of, and would be a great summer counterpart to our more expensive hobby of skiing.

Who Needs Extreme Sports When You Can Be A 0% APR DareDevil?

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MSN Money recently wrote a new article titled 0% daredevils chase ‘free’ cash discussing the practice of borrowing cheap money from credit cards offering 0% APR interest and no fees, putting that money into an online savings account at 5-6%, and pocketing the difference as profit!

Now, I may be a tiny bit biased, but I think my series of step-by-step posts on how to make money with 0% APR balance transfers is a better. (I suspect she might have even read it before writing her article!) I even put my warnings in the very first post. 😉

My Attempts at Frugal Mattress Shopping

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It’s time for a new mattress. Our current one was found 10 years ago from a university mailing list for $75. It’s actually a nice mattress and the seller said it cost $400 new and was only a year old. I remember believing her because she lived in a luxury apartment complex and the top to her red Mazda Miata convertible was also in the apartment. Anyways, it served me very well for a decade, but now the bed is really starting to sag in the middle and I’ve been waking up with a sore back every morning.

In addition, we are having our relocation expenses reimbursed, so we figure buying now won’t cost us any more, and we can avoid paying sales tax while still in Oregon.

Keeping in mind the previous story was my only mattress-buying experience, we set out to find a new place to sleep. After seeing an ad for $99/piece at a local mattress store, and decided to check it out. I figured, if $200 is cheap, then $500 should buy us a decent set, right?

Would I like to try laying down on a pillowtop? Sure… $1,500!

How about a Tempurpedic foam mattress? Nice… $2,500?!

Wait, what about the $200 set? Here it is… Yikes, you can feel every spring! This is supposed to be a new mattress? It might work for a guest room, assuming you don’t like having visitors. Teaser mattresses… who knew.

After trying several beds with enormous price tags and being subjected to too many choices, we left. Next stop – trusty Costco! I was surprised to discover they even have their own Kirkland line of mattresses! But this one caught my eye – the NovaForm Queen Fresh Dreams Memory Foam Mattress on sale for $550.

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After reading a couple of online reviews, it seems like a solid bet. Older models had a certain smell to them, but the newer ones apparently don’t. Also, there have been scattered comments about the mattress not expanding properly into a perfect box shape. Since it doesn’t come with a platform, I know that I’ll have to make my own or just buy a piece of plywood to put on top of our current boxspring since foam mattresses need to be on a solid surface.

Either way, I’m not too worried because of Costco’s great return policy. I’ve read that they will even pick up the mattress again from you for free. I’ll have to confirm that, but this is looking tempting. Anyone out there with any experiences with this mattress? I’ve heard great things about memory foam mattresses in general, and from my test-drives I think I would like them.

Another idea was to simply buy a $100-$200 foam mattress topper, and add that to my current bed. But since my mattress was already sagging, I decided against it. Costco does sell a basic Serta queen mattress for $400. Madame X over at My Open Wallet also bought a new mattress recently.

Pay Your Mortgage On Credit Cards, Buyer’s Agent Rebates Are Not Taxable, Japan’s Real Estate Bubble

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Buyer’s Agent Rebates Are Not Taxable
It struck me that the buyer’s agent rebates I am seeking may be taxable income. That would stink. But it seems that Redfin, another company that does rebates in selected areas, received a private letter ruling from the IRS that states that such rebates are not considered income. 1099s are not submitted, and nothing is reported to the IRS.

Japan’s Real Estate Bubble
Got Bubble? I stumbled upon this article comparing the Japanese real estate bubble with the situation in the US. Did you know that residential real estate in Tokyo dropped for 17 straight years? Definitely will be reading more about this.

Pay Your Mortgage On Credit Cards
It had to happen one day. Although there are some hoops to jump through (you can’t be sub-prime) and it’s only available through specific lenders, American Express is letting people pay their mortgages with a credit card. There’s a $395 initial fee paid at closing, but the potential rewards might let you break even after only a few years.

Another Free $50 Credit From Sprint SERO

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Wow, this deal keeps getting better. If you recently got in on the Sprint SERO plan (review), it looks like you can get another $50 discount. Thanks goes out to Jason for the tip. Just e-mail Sprint online and type something like this:

Dear Sprint,

I recently activated a Sprint account and just received a $50 coupon code, “SAVE50.” Could you please apply this to my account? Thank you very much for your assistance.

The reply:

Thank you for contacting Sprint. I will be happy to assist you regarding the credit. I understand that you received a $50.00 coupon. Therefore, I have applied this to the account. This service credit will reflect on your next invoice.

Sweet! To recap:

  • 500 Anytime Minutes + 7pm Nights/Weekends + Unlimited Web for $30/month
  • $100 Motorola Q Phone (which rocks by the way) – now $80
  • Possible 10% corporate discount (still waiting)
  • Free unlimited text messages
  • $25 prepaid credit card for getting a referral
  • $50 with this coupon.

Will Future Long-Term Stock Returns Be Less Than 8%?

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While reading The Little Book of Common Sense Investing by Vanguard founder Jack Bogle, I found one of the chapters on predicting future stock returns especially interesting. Here’s my attempt at summarizing it.

What are we buying when we buy a share of a company? Essentially, we are buying a stream of future money. That money is returned to us the form of earnings growth (which increases the share price) and dividends (which goes straight to us as cash).

As an example, let’s take a fictional company and call it Bob’s Taco Shack. The taco stand has earnings of $20,000 a year. It has 1,000 shares, so it’s earning $20 per share (EPS). Bob gives out $10 of that $20 as a dividend to shareholders, and reinvests the remaining $10 back into the company. Currently, the share price is $200, which gives us a price/earnings ratio of 10 and a dividend yield of 5%. Now, let me pose some statements, which I hope make sense.

  1. If earnings stay constant, then one would expect the share price to stay constant as well. The stream of money coming is the same, so the price should be the same.
  2. If earnings stay constant, and dividends are 5% year, then your return should be just that 5% a year. From the example, you just get that $10 in dividends (5% of $200).
  3. If earnings grow by 5% a year, and there are no dividends, then your return would again be 5% a year. You are paying 10 times earnings. If the earnings go up by 5% to $21 per share, then the share price should go up to $210. You earned the same amount as the earnings grew.

This leads to the formula for what Bogle terms the “fundamental” return:

Fundamental Return = Earnings Growth + Dividend Yield

Now, if Bob announces that he plans to expand into fancy shrimp tacos and fish tacos, then maybe people will expect higher future profits and be willing to pay more per share, raising the P/E ratio. But this is based on speculation. Bob hasn’t actually done anything yet. So now we have speculative return:

Speculative Return = P/E Ratio Changes

Over long periods of time, if you take the entire stock market, you would expect the speculative return to be very negligible. This makes a lot of sense, right? In the end, you’ve got to show me the money! And history agrees. Over the last 100 years, the total annualized return for the total U.S. market was 9.6%, and all but 0.1% of that was explained by earning growth and dividends. (See graph below.)

What about the future?
Great, right? As long as corporate earnings growth keeps chugging along and we keep getting some dividends, we should be good to go. Over the past 25 years, the U.S. stock market has had earnings growth of 6.4% and an overall dividend yield of 3.4%. Nice! But wait – there was also a speculative return of 2.7% due to the overall P/E ratio expanding from about 9 to 18!

Total Return = Fundamental Return + Speculative Return

As you can see below, that gave us really strong annual returns of 12.5% since ~1980. The problem is, this isn’t likely to continue. For one, dividend yields continue to drop, and are now about 2%. As Bogle states, even if you assume a continued corporate earnings growth rate of 6%, now you have a total of 2 + 6 = 8%. But the P/E ratio is not likely to get any bigger. If anything, history says it should shrink back a bit. If it goes back to 16, that alone will subtract 1% from expected returns.

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Data taken from Little Book of Common Sense Investing, Exhibit 7.1

(If you don’t agree with the 7% number, make up your own based on your expected dividend rate, earnings growth, and future P/E expansions or shrinkage.)

As you can see, this shows that it is unlikely that in the next 25 years we will earn much more than 8% annually from stocks alone, and chances are it will be more in the range of 7%. Add in those bonds as you get older, and that return decreases even further. Food for thought…

My comment was – Will earnings growth rates increase, as companies are presumably re-investing money not paid as dividends in themselves? I sure hope so, but it seems like a lot to ask.

Finding A Home Buyer’s Agent: Commission Rebates, Interview Questions

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We know that it is important to find a good buyer’s agent that listens to our needs, will help us negotiate with sellers, and basically guide us through the entire buying process. On the other hand, we are very comfortable sifting through the MLS listings online, have lived in the area already for many years, and can do much of the research ourselves.

So what was our next move? Tired of working of word-of-mouth, we decided to narrow things down a bit another way. Typically a buyer’s agent gets 3% of the sales price of the home, paid by the seller. But in 40 states, it is legal and increasingly common for the buyer’s agent to rebate you back a portion of this commission. In a slowing market, there can be a glut of agents thirsty for your business. Some say agents that are willing to rebate aren’t as good as full-price agents, which may be true on average, but I don’t see how paying full-price guarantees a good agent either.

Instead of haggling with them directly, I decided to try a site called HungryAgents, which is almost like a reverse-auction for buyer’s agents. Here’s the process if you’re a buyer:

  1. You fill in your desired neighborhood, type of property, price range, and expected time of purchase.
  2. Agents will send you the percentage of their commission they are willing to rebate you, as well as possibly a short bio. You might just get to see their years of experience, which isn’t too helpful. However, they do not get your e-mail or phone number so they can’t harass you.
  3. You get to look at the offers, and then choose who you allow to contact you. You are not bound by anything at all. You can interview the agents you like, and go with one of them or just walk away completely.

Here are the results we got after only 24 hours. Up to 58% off – a discount of 1.74% of the sale price. This would amount to $8,700 on a $500,000 home… not too shabby. We’re going to contact the three people who agreed to 50% off and interview each of them one at a time.

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Another site is BuySide Realty, which rebates 75% of the commission it receives as the buyer?s agent. However, they only provide the bare minimum of services for their 25%. A BuySide agent will not show you houses or send you pertinent listings. I can’t tell if someone will even be present at closing, it looks like everything is done remotely. This is too DIY for me, but might work for an experienced buyer.

Now I ask for your suggestions: What kind of questions should I ask the Realtors to see which one to go with?

* Rebates are not allowed in Alaska, Iowa, Kansas, Louisiana, Mississippi, Missouri, New Jersey, Oklahoma, and Oregon.

Get A Refund On Airfare Price Drops With Yapta

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I just saw a blurb on TV about a new site called Yapta, or Your Amazing Personal Travel Assistant. On the surface, it’s just another airfare price tracker that can be found on sites like Travelocity.

But, if you’ve already purchased your ticket, you can enter your confirmation code and Yapta will then track prices on that flight and alert you if the price drops. Why is this good?

Did you know you could get a refund or travel credit when prices drop after you.ve bought a ticket? Most people don’t. The airlines offer this policy only if you buy on the airline website (and they want you to have the confidence to buy early). Yapta alerts people when prices drop so they can get these refunds and credits from the airlines.

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This is a good reminder not to buy on sites like Orbitz unless they truly have the best price after fees. It’s usually cheaper or the same price to buy directly on the airline website, and you might even get this price drop protection.

I think the refund is often in the form of a voucher good on a future flight on the same airline, but it’s still worth a shot. Currently, it works on Alaska, America West, American, Continental, Delta, Northwest, Southwest, and US Airways.

Tools For Evaluating Index ETF vs. Mutual Fund Purchases

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Even though the expense ratio for an ETF may be slightly lower than a mutual fund, that doesn’t necessarily completely explain the cost differential between them. In addition to any commission costs, there are also the issues of bid/ask spreads and deviation from NAV. These are explained briefly below along with some useful tools to evaluate their impact.

Historical Bid/Ask Spread Values
Since ETFs are by definition traded on an open exchange, there can be differences between what people are currently willing to pay (the “bid” price), and what people are willing to sell at (the “ask” price). Even if you assume the ETF is priced correctly at it’s inherent value, this bid/ask spread means you will be overpaying a bit when you buy, and losing a bit when you sell. It can be thought of as slight purchase fee and redemption fee. (This also holds true when you trade individual stocks!) Mutual funds, on the other and, always trade at net asset value.

Some people try to avoid getting a “bad fill” for their trade by doing a limit order between the bid and ask instead of a market order, but limit orders carry the risk of non-execution. If the share price goes up, you’ve missed out and must submit another order anyways.

Many of the low-cost ETFs I am interested in are from Vanguard, and thankfully they have compiled a list of the average bid/ask spreads over the last 30 days for their entire ETF line-up. Here’s a sampling:

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