Archives for October 2007

Best Credit Card For College Students – 5% Back At Restaurants and Amazon.com

Posted on October 18, 2007 // 33 Comments

I ran across this article Best credit cards for college kids on CNN Money. I found it interesting that 75% of all college students have a credit card, when I see so much media attention to how credit card companies target students. Seems like students now are seen more as big kids instead of young adults (again, note the title of the article). Soon they’ll need lessons on how to feed and bathe themselves…

The article then goes on to list some good characteristics of a college credit card, which really didn’t seem any different than what anyone should look for in a credit card… Low APR? Less fees? Calling Captain Obvious! CNN did suggest out the best credit card for those select “responsible” students – the Citi mtvU Platinum Select Visa Card, which was interesting.

The goal of every rewards card is to give you just enough good stuff to have you use it for everything, and this card is smart. What were my two top expenses as a college student besides rent? Eating out and textbooks. So guess what, the card gives you 5 ThankYou Points for every dollar you spend at restaurants, bookstores, record stores, movie theaters and video rental stores. These points can be converted to up to 5% back in gift cards or 5% back in cash towards your student loans. Some may see this as sneaky way to prey on college “kids”, but I see it as another loss leader to take advantage of.

In addition, one big “loophole” is that everything you buy from Amazon.com gets 5% back as well, as it is categorized as a bookstore! They can’t tell if you bought books there, or went for 8 bags of groceries and an iPod Touch instead.

The only problem is that if you aren’t a student, some people report that they ask for verification. Some have gotten transcript requests, many others slip by. I know some people out there have this card; please report your experiences! Students can also earn 250-2000 points per semester for maintaining a good GPA, and 25 points each month for not exceeding your credit limit and paying on time.

Filed Under: Credit Cards, Deals & Offers //

Predicting the New I-Bond Rates For November 2007

Posted on October 18, 2007 // 6 Comments

It’s now six months since April, which means it’s time again to partially predict the new I-Bond savings bond rates before the formal announcement until November 1st. Just in case we want to buy some beforehand and lock in some rates.

The CPI-U in March 2007 was 205.352.
The CPI-U in September 2007 was 208.490.

208.490/205.352 = 1.015281, or a semi-annual increase of 1.5281%.

Total rate = Unknown fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)

If we assume a fixed rate of the current 1.3%, we get

Total rate = 0.013 + (2 x .015281) + (.013 x .015281) = 1.3% + 3.08%
Total rate = 4.38%

Overall, if you buy now in October and lock in your 1.3% fixed rate, you?ll get 3.74% for 6 months and then 4.38% for another 6 months. Not very appealing. Here to hoping the fixed rate jumps some…

Filed Under: Savings Bonds //

Mental Accounting: Is A Dollar Always A Dollar?

Posted on October 17, 2007 // 41 Comments

In economics, there is a concept called fungibility. A good is fungible if one example of the good is indistinguishable from another example of the same good. A common example is money. A dollar is a dollar, no matter where it came from, where it is located, or what you plan on buying with it. And so it should be treated as such… supposedly. The problem is humans do something called mental accounting, which violates this principle and leads to often-confusing decisions.

A popular example happens while gambling. Let’s say you go to Vegas. You hate the slots, but mindlessly drop a quarter into a slot machine while waiting for a friend and win $300 on your first pull. Are you more less likely to keep gambling? Most people are likely to keep on playing as long as they are playing with “house money”. Once they lose that $300, they’ll stop. But really, that quick $300 is no different than if you had to work 10 hours of overtime to get it. Why do people spend money more easily if it came without much effort? “Easy come, easy go”?

An academic paper by Dr. Thaler titled “Mental Accounting Matters” [pdf] explores this concept further and tries to categorize the types of mental accounting that we do. It was a very intriguing read; here are just a few examples:

Relative Value
Consider these two hypothetical scenarios:

  1. You are at Best Buy buying a new TV. It costs $860 there, but another store 15 minutes away has the same model for $850. Do you bother driving to the other store to get the savings?
  2. You are at Office Max buying a calculator. It cost $20 there, but another store 15 minutes away has it for half-off ($10). Do you drive to the other store now?

If presented separately, significantly more people will go out of their way for the calculator than the TV. But both involve saving $10 with the same action. The only difference is that $10 is only ~1% of $860, but is 50% of $20.

The same thing happens at the movie theater. A medium drink costs $4, a large costs $4.50, and a Super Jumbo drink costs $4.75. You might as well go for the $4.75 drink, right?

Advance Purchases
Here’s a quiz from another study:
[Read more…]

Filed Under: Frugal Living, Investing //

What Percentage of My Income Should I Contribute To A 401k Plan?

Posted on October 15, 2007 // 56 Comments

Actually, a better question is what percentage of your income should you contribute to all types of retirement plans? But the 401(k) plan is one of those cases when you have to choose something to start out with, and many people just never get around to changing it again. Too much, and your cashflow will get tight and uncomfortable. Too little, and you’re not taking full advantage of the tax benefits.

Start With The Match
As everybody says, matching contributions from your employer will probably offer the best return-on-investment you’ll ever get. Most companies have a cap after which the match stops, and my guess is that most people contribute up to that cap and then forget about it. Certainly, this number provides a floor, but most of us will have to chip in some more to accumulate a happy nest egg. (I’ve never heard of a match above 6% of pay, although I’m sure some exist.)

Take Into Account Other Accounts Like Roth IRA
The reason people like Roth IRAs is that if you think your tax situation now will be about the same as in retirement, the Roth IRA has a lot of extra advantages like the ability to make early withdrawals for a variety of reasons, as well the ability to never make any withdrawals and leave it to your heirs still compounding away. However, if you have a Roth 401(k) the difference gets a lot slimmer, you may just go with which one offers you better investment choices. Either way, it’s good to consider the whole picture.

Mint.com allows you to compare different IRA accounts available online … if you want to see how your IRA stacks up against what’s available, you should check them out.

Taken all together, I would say 10% would be good place to start unless you have a pension or other sources of retirement income lined up. But that’s just me… what do you think?

Each 1% More Can Make A Big Difference
On top of that 10%, it’s interesting to see how much difference nudging it up another 1% can do. I used this Increase 401k Contribution Calculator from Wachovia and ran some numbers. Assuming you make $50,000 gross annually, you’re 35, you retire at 65, 8% annual return, and a 25% income tax bracket, here’s what happens if you increase your contribution percentage by 1% (unmatched):

altext
altext

Not too bad for giving up just $31 per month; if you’re younger the payoff is even better. (Almost good enough to bump up your contributions by 1% today?) Still, start taking enough $31s out and it’ll start to hurt.

Give Until It Hurts?
To find the nice balance, there are a couple of ways to do it:

  1. Analyze your finances, estimate a percentage, and just adjust from there. (More work.)
  2. Start at match %, and keep increasing the % until it starts to hurt.
  3. Start at a high amount (20%? 25%?), and keep decreasing it until your take-home pay is a manageable amount.

Each person probably has a different preference. But again, we go back to the real-life aspect – Will you remember to change your percentages later? Life gets busy, and each month you just keep forgetting and forgetting… In that case perhaps the third option is best, assuming you have some cushion to pay with.

Filed Under: Investing, Retirement //

DonorsChoose pfblogs.org Financial Literacy Challenge

Posted on October 14, 2007 // 7 Comments

DonorsChoose.org is another way the internet is making giving back more transparent and easy to do. (Learn about Kiva and ModestNeeds as well.) On the site, teachers submit project proposals for materials or experiences that they feel will benefit their students, and donors can choose which specific project to fund.

Proposals range from “Magical Math Centers” ($200) to “Big Book Bonanza” ($320), to “Cooking Across the Curriculum” ($1,100). Any individual can search such proposals by areas of interest, learn about classroom needs, and choose to fund the project(s) they find most compelling. In completing a project, donors receive a feedback package of student photos and thank-you notes, and a teacher impact letter.

In proper ‘finance geek’ fashion, blogger OneBigMortarBoard has formed a special Topical Challenge that focuses on projects that promote financial literacy amongst kids. Sounds like a good idea to me! I also like the idea of funding local schools, or even schools that you went to.

If you are looking for another direction for your charitable money, definitely check it out.

Filed Under: Giving Back //

Roth IRA Contribution vs. Emergency Fund Savings

Posted on October 12, 2007 // 47 Comments
altext

Earlier this week I explored how the performance of money invested in a 401(k) should compare to a regular brokerage account. This brought to mind a different debate:

If you had to choose between contributing $4,000 to a Roth IRA or keeping/putting it towards your Emergency Fund, which would should you choose? We’re assuming you don’t have the funds to do both. Many people put Emergency Fund near the top of their priority lists, just below taking advantage of any “free money” 401(k) match, but above all other retirement accounts. This is because you don’t want to have to dip into retirement accounts and face stiff penalties, or otherwise be faced with other forms of high interest debt like credit cards or personal loans if you need money urgently.

However, the annual $4,000 Roth IRA contribution limit is a “use it or lose it” proposition. You can’t put nothing in this year, and then $8,000 the next. Once April 15th rolls around, you’ve missed out on potential tax advantages that may extend several decades (even to your heirs). This may be mitigated somewhat if you also have a Roth 401(k) or other similar account available.

I used to be in the Emergency Fund First camp, but now I think I’ve changed my mind, mainly thanks to commenter Jbo. Here’s my reasoning. Let’s say you go ahead an contribute $4,000 to a Roth IRA but leave it invested in something safe like a money market fund. Many banks also allow you to open IRA accounts holding certificates of deposit. Now, there are basically two possible resulting scenarios after you do this:

You end up needing the money
No problem, you can always withdraw your Roth IRA contributions without any penalty. Just take out what you need (up to $4,000), and leave the rest in the account. Since it’s in a safe investment it won’t have decreased in value due to stock market volatility. You’ll still lose the tax advantages on any withdrawals, but you’d have missed out anyways.

You don’t need the money
More likely than not, you won’t need all the money, and hopefully within a year or so your emergency fund will be replenished from other sources. Now, you can start really taking advantage of the Roth IRA’s tax benefits and move to riskier investments.

Using the same assumptions as before, a $4,000 post-tax Roth IRA contribution would theoretically end up being worth $40,251 after 30 years. If the $4,000 was placed in a taxable account, you’d only end up with $32,834. Even if you assume inflation will run 3% a year, that’s still $3,000 more in today’s dollars that you made on your initial contribution of only $4,000 by putting it in a Roth.

Am I missing anything? It would seem like putting money in the Roth IRA is a pretty safe bet. The downside is very small, and the upside is very high. One key thing to remember is to keep the Roth IRA money in a safe investment while you are treating it as a emergency fund, as stocks have been known to drop as much as 40% in one year. You don’t want to be having to sell your stocks to get cash after that happens!

  • Make sure your current IRA is charging you as little in fees as possible.  Visit Mint.com and their IRA wizard for a quick look into the best discount brokers offering IRA’s.
Filed Under: Retirement //

Framework For Thinking Through Personal Finance

Posted on October 11, 2007 // 30 Comments

(Warning: The following post is very stream-of-consciousness and written on very little sleep.)

While doodling today (I doodle a lot) I started thinking about money and how it such an overwhelming issue at times. I read so much advice from so many different directions, my head starts to spin. I ended up drawing this:

altext

Basically, the idea is that if you want more money, you should focus in on one of these three areas:

Spend Less
Either through buying less goods and services, or by finding a lower price for the same goods and services, one can spend less money each month. Much of this is psychological, as most of what we buy are “wants” and not “needs”. Long-time habits and deeply ingrained notions may need to be broken. Priorities need to be consciously decided. However, there comes a point where it is simply not possible to spend any less.

Invest Better
With the money that is saved, one would want to make it grow as much as possible. Here, I am focusing more on passive investments like stocks, mutual funds, bonds, or gold. There are many competing theories as to whether skill is a factor in picking stocks. Personally, I believe that the markets are mainly efficient, and that “beating the market” is exceedingly unlikely. All that can be done is to maximize your risk/reward ratio. Therefore, there is also a maximum value on how “well” we can invest.

Earn More
This is done via work, either through being an employee, or starting your own business and becoming the employer. Ways to advance in your career include more education, better interpersonal skills, or otherwise achieving positive results and getting promoted. Other more individual ventures include real estate investing, building a business with employees, or creative works that produce “passive income”. These come with additional risk of losing money, but also offer added upside.

Priorities and Diminishing Returns
I feel that the first two, Spending Less, and Investing Better, should be the first to be addressed. If very little attention has been paid to these two areas, a lot of progress can be made. Of course, it can probably be a lifelong process to make sure these things continue to be taken care of. Lots of energy can be spent trying to optimize both (!). However, at some point, I think there will be diminishing returns. When you start considering about whether you should flush the toilet every time you use it in order to save water, perhaps it’s time to focus on other things. 😀 Similarly, there is only so much I can make from maximizing bank interest and picking a optimum asset allocation. Of course, if you reach a happy place already, you don’t even need to Earn More.

In a way, I think Spending Less and Investing Better are appropriately located at the base of the triangle. After building a good foundation, you can start taking some risks in the Earning More area. I think for most people this is the hardest part. It can be very hard to increase one’s salary if they feel they are stuck in their current career. Maybe they are comfortable already. Taking classes, switching jobs, it can be very stressful. On the other hand, it is also the one with limitless boundaries.

I know I already discuss these things on a daily basis, but I think it can also be good to methodically examine one’s progress in each of these areas every so often.

Filed Under: Career, Frugal Living, Investing //

Update: My Bank Account Setup To Maximize Interest

Posted on October 10, 2007 // 52 Comments

Back in April I shared my personal bank account setup which I felt offered the best balance of convenience, liquidity, and interest paid out for my geographic location and tax situation:

previous bank setup

Basically, I used my Washington Mutual Free Checking / 5% APY Savings (see review) account combo as my core account, but kept most of my money in T-Bills for the higher yield and state income tax exemption. Since then, a couple of things have changed…

First, the rates on 28-day Treasury Bills started to drop significantly, making their tax-equivalent return unattractive. They remain so today, as even the 6-month T-Bill rates are unexciting. In May, FNBO Direct (review) came on the scene and offered 6% APY until 9/28. So as my T-Bills matured I gradually moved them into FNBO.

Then 3 weeks ago, the Fed Funds rate was cut for the first time in years, which caused many banks to adjust the interest rates paid out on high-yield savings accounts. FNBO dropped their rate to 0.85% APY. I have been waiting for the dust to finally settle since, and I think it has since the speculation is now about what will happen during the next Fed meeting at the end of October.

Through all this, the WaMu (online-only) savings account has stayed constant at 5% APY. I’m surprised! I must say though, I’ve been enjoying this sort of “Core and Explore” setup for bank accounts. Most of my day-to-day activities like online billpay, checkwriting, deposits, ATM withdrawals, even getting money orders – they can stay stable and familiar with WaMu. I can also keep a nice chunk of money within quick reach, but still earning 5%. Then I get to rate-chase online with the rest of my temporary $100,000 cash hoard. 🙂 So I think I’ll keep this way as long as I can:

current bank setup

So what is the Bank du Jour? Well I just mailed in my check and signature form for Everbank’s FreeNet checking account last week, but it hasn’t been cashed yet. I like that the 6.01% APY is guaranteed for 3 months, and my Rate Chaser Calculator says the move should clear me at least another $100 over those few months. It may not be as lucrative for smaller balances, but to each their own.

Filed Under: Banking //

Morningstar’s Stewardship Rating: Better Than Those Annoying Stars!

Posted on October 9, 2007 // 8 Comments

A couple weeks ago I wrote about characteristics of good actively managed mutual funds, which talked about finding managers who have most aligned their interests with their investors.

I just discovered that there is also something similar called the Morningstar Stewardship Rating, which grades funds on “intangibles like corporate culture, board quality, manager incentives, fees and regulatory history.” In fact, many of the themes are almost identical. Here are more details of each component, taken from press releases and the official methodology:

Corporate Culture. Is the fund company focused on investing or gathering assets? Does the fund company foster a thoughtful, repeatable investment process?

Board Quality. Does the board consistently act in shareholders? best interest? Do the independent directors have meaningful investments in the fund? Is the board led by an independent chairman, and are 75% of the directors independent?

Fees. Morningstar now assesses funds solely on their current expense ratios and how those fees compare to their peers, and no longer considers the trend in fees.

Manager Incentives. Does the manager have a significant investment in the fund(s) he or she oversees? Do the compensation plans reward long-term performance or simply emphasize asset growth?

Regulatory Issues. Funds do not receive points toward their overall Stewardship Grade for simply following the law, and firms with poor regulatory histories will lose points.

Unfortunately, to actually get the exact grades of any specific fund, you have to subscribe to the Morningstar site at over $100 a year. Blah. But here is one useful tidbit:

Management companies with one or more funds at the top of the class include, in alphabetical order, Clipper, Columbia Acorn, Davis, Diamond Hill, Dodge & Cox, FPA Paramount, Longleaf Partners, Oakmark, Pennsylvania Mutual, Royce, Selected American, T. Rowe Price and the Vanguard Group.

I would much rather use this Stewardship rating to help assess active funds than the more popular (and separate) Morningstar “Star” Ratings, as that system continues to overweight recent past performance and offers questionable predictive abilities.

Filed Under: Investing //

Discover More Card Limited 5% Cashback

Posted on October 8, 2007 // 24 Comments

The Discover® More® Card has been on my list of top 0% APR offers for a while now.

5% Cashback Bonus “Get More” Program
As an overall cashback rewards card, this card is actually subpar. You need to reach total annual purchases of $3,000 just to get to the standard 1% cashback tier… yawn. What you have to do is take specific advantage of is the 5% cashback on certain broad categories that change each quarter – like travel, home improvement, gas, and restaurants. Here are the categories for 2012:

  • January – March: Gas and Entertainment
  • April – June: Restaurants and Movies
  • July – September: Gas and Summer Fun
  • October – December: Holiday Shopping

 

 

Filed Under: Credit Cards, Deals & Offers //

How Much Better Is Your 401k Than A Regular Taxable Brokerage Account?

Posted on October 7, 2007 // 37 Comments

Everybody loves 401k plans for their tax advantages. But exactly how good are they, really? What if your 401k only offers limited, more expensive options than you can find from a regular brokerage account? I wanted to explore this using some estimated numbers, just to see how it works out. I know my assumptions won’t fit everyone, but people can adjust them to be closer to their own situation.

Assumptions

  1. Start with a $10,000 pre-tax contribution for each
  2. Both plans have the same imaginary investments for 30 years
  3. Annual return on those investments is 8%, broken down into 6% from capital gains, and 2% in qualified dividends. This is to approximate the amount of dividends currently being paid on stocks in general.
  4. 28% ordinary tax bracket both now and upon withdrawal in retirement
  5. 15% tax bracket for long-term capital gains and qualified dividends
  6. Any company matching is ignored, as everyone should contribute up to the match. 🙂

401k Calculations
The calculations for the final value of the 401(k) are relatively simple. You start with $10,000, it grows at 8% annually without any tax consequences for 30 years, and then upon withdrawal it is taxed at ordinary income tax rates. With our assumptions, the math would look like this:
[Read more…]

Filed Under: Investing, Retirement //

Treating Marriage As A Business Relationship

Posted on October 5, 2007 // 80 Comments

Since it’s Friday, here’s another lighter post on relationships and money. Below is a highly amusing posting on Craigslist that I found via the Bogleheads Forum. Be sure to read it along with the accompanying reply below.

Advice for woman seeking $500k+ earning man

What am I doing wrong?

Okay, I’m tired of beating around the bush. I’m a beautiful (spectacularly beautiful) 25 year old girl. I’m articulate and classy. I’m not from New York. I’m looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don’t think I’m overreaching at all.

Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a business man who makes average around 200 – 250. But that’s where I seem to hit a roadblock. 250,000 won’t get me to central park west. I know a woman in my yoga class who was married to an investment banker and lives in Tribeca, and she’s not as pretty as I am, nor is she a great genius. So what is she doing right? How do I get to her level?

Here are my questions specifically:

[Read more…]

Filed Under: Funny //
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