Archives for August 2009

Ask The Readers: Parents Losing Home To Foreclosure

Posted on August 31, 2009 // 70 Comments

I just got a rather difficult question in my inbox, and thought that it would be a good idea to get some perspective and advice from my thoughtful readers to help another reader. Be gentle! I think this could happen to many of us.

Jonathan – what would you do in my shoes:

Parents are in their late 50’s, bought a house they can’t really afford (@7% interest rate) and are going to be foreclosed on within the year.

If I co-sign/add my income to theirs, together we make enough for them to qualify for a refinance @4.5% 5/1 ARM. Possibly long enough for them to sell the house in the next 5 years and recover some of their lost equity (80% of their savings were tied up in the downpayment that has almost all evaporated).

However, I obviously take a credit hit and a significant risk if one of them can no longer make even the reduced payment. I am single, without kids, and in my late 20’s, working an average job (moderate job security).

Thanks for any suggestions – your blog has spared me the same fate as my parents.. so far.

First, I’m glad to hear that you are trying to help your parents, even though they made a significant financial mistake.

Do you live in a non-recourse state, where they can’t go after other assets if you default on a mortgage loan? Have you confirmed that you can get the new loan with the current loan-to-value ratio? Your income might be enough, but they still might reject or require another downpayment. If so, how much does lowering the interest from 7% to 4.5% lower the monthly payment? Would your parents be able to afford the new payment without assistance? How stable is their income?

In the end, I would say that if this requires large cash injections from you and not just your credit score and income verification, it is risky to bet that your home value will rebound in 5 years. It might, or it might not in such a short timeframe. If they live in a non-recourse state, I would at least explore the possibility of having your parents let the house go and get by with bad credit and the rest of their savings. Can they rent a place for a lot cheaper?

However, if they can swing the new payment with your co-signature only, perhaps it is worth a try. The hardest part is probably convincing your parents to downgrade their lifestyle and housing preference to something more realistic. It’s a tough situation. What would you do, readers?

Filed Under: Family, Real Estate //

Should You Keep Your Emergency Fund In Your 401k?

Posted on August 28, 2009 // 26 Comments

Before you jump to an answer or nasty comment, please give me a chance to elaborate. 🙂 Recently, I ran across an interesting article in the Bogleheads Wiki titled Placing Cash Needs in a Tax-Advantaged Account. Essentially, because of the way the U.S. tax code works it can often be better to keep certain asset classes like cash inside tax-advantaged accounts like IRAs and 401ks. Therefore, if your emergency fund is cash, why not put it inside as well?

I’ll use the example given. Let’s say you have a 401(k) with a balance of $10k and also taxable assets of $10k, for $20,000 total. You choose to have $10k in stocks, $5k in bonds, and $5k in cash for your emergency account. The “traditional” placement for an emergency fund is in your regular taxable account, perhaps in a bank savings account. The rest of the assets are distributed according to this tax-efficient placement chart.

However, in this scenario all your interest earned on your cash will be taxed at your marginal ordinary income tax rate, which can be as high as 35%. See table of 2009 Marginal Tax Rate Brackets. Meanwhile, your stocks will mostly give off dividends, which are taxed at a current maximum rate of 15%, and possibly quite less. So why not put the cash into the 401k?

Emergency!

You may wonder what happens if you do need access to that $5,000. You would simply sell $5,000 of the stocks in your taxable account, and simultaneously buy $5,000 of stocks in your 401k plan. This way, your final asset allocation will look exactly the same as if you just spent your cash from the traditional setup:

If you happen to sell your stocks at a loss, then you may be able to deduct a loss if you avoid a wash sale. You can do this by not purchasing a “substantially identical” security within 30 days, but you can buy something very similar. For example, you might buy the S&P 500 ETF (IVV) and sell the Russell 1000 ETF (IWB). They are very strongly correlated, as shown in this chart. This may or may not be worth the hassle depending on how big a loss you’re looking at.

If you happen to sell your stocks at a long-term gain, then you’ll again only paid long-term capital gains taxes of at most 15%. If you sell at a short-term gain (held less than a year), then you’ll have to pay ordinary taxes on the gain. So it might be good to wait a year to institute this new setup.

The Catch
So there you have it, there is an argument for some people to put their emergency funds into their 401ks! However, for most people I don’t think this idea is very practical. For one, most people have relatively small emergency funds, so the difference in taxation scenarios won’t be very high. This is especially true in the current low-interest rate environment. The highest potential tax savings would go to those with large 401k balances and high income tax brackets.

Finally, besides a few stable value funds that I’ve seen, the yields on money market funds found inside retirement plans are rarely the best available. I can usually find much higher interest rates outside my 401k, usually by at least 2% APY or more.

Filed Under: Investing, Retirement, Taxes //

Zecco Promotion Code: 20 Free Trades w/ New Account

Posted on August 26, 2009 // 6 Comments

If you’ve been considering opening an account with Zecco Trading, they just e-mailed me a new promotion that offers 20 free trades for new customers. Use the promotion code “bonus1” in the application:

Offer expires 9/13/09, and the trades are available for 90 days. More details:

Get 20 free stock trades when you sign up with Zecco Trading!

Zecco Trading is offering 20 free stock trades — a $90 value — to all new brokerage customers who sign up by Sunday, September 13th 2009! Use promo code “bonus1” to qualify.

These free stock trades are special, because you have a whole 90 days to use them. Some other brokerages give you free equity trades to use within 30 days of signing up, so by the time you transfer money into your account, the free stock trades might have expired! With Zecco Trading, you have more time to use your free stock trades when it makes sense to trade. […]

Be sure to use the promotion code “bonus1” when signing up. Be sure to use all lowercase or the code won’t work. Special terms and conditions:

* New Zecco Trading accounts must be opened and approved by Sunday, September 13th, 2009.
* The 20 free stock trades will be granted on or before September 16th, 2009. The free trades will expire 90 days after the date they are granted.
* Offer not eligible to existing Zecco Trading customers.
* Limit one bonus per household.

Zecco Quick Overview

I’ve had a Zecco account for a couple years now, so here’s a quick snapshot. The standard commission cost is $4.50 per trade. There are no minimum balance requirements and no inactivity fees. They offer free online ACH cash transfers in/out. Idle cash can be put into a money market sweep that is usually not that bad (CSAXX), but right now all money market yields are pitiful. Online statements are free, but paper statements cost $2 per month.

However, if you maintain a total account equity of $25,000 or make 25 traders per month, then you get 10 free trades per month. Account equity isn’t just cash, it’s the total value of your holdings including stocks, so you might consider shifting some outside holdings to Zecco to qualify. As long as you hit the $25k mark once during the month, you’ll get 10 free trades that month. (This is in addition to the 20 free trades given out above.)

Filed Under: Deals & Offers, Investing //

Fidelity Offers Index Fund-Based Target Retirement Funds

Posted on August 25, 2009 // 14 Comments

Here’s some good news for the many 401(k) participants with Fidelity as their plan provider. Fidelity announced that they plan to launch a series of Fidelity Freedom Index Funds to complement their current Freedom Funds as soon as September. From this WSJ Article*:

Fidelity Investments, for example, plans to launch the Fidelity Freedom Index Funds, a series of target-date index funds in five-year increments, from 2000 to 2050, in September. Strategic Advisers Inc. will invest each of the target-date funds in a combination of Fidelity index funds. Fidelity wants to provide some of its group retirement plan customers with an index alternative to its Freedom Funds, a spokeswoman said.

Jonathan Kreider, a fiduciary research analyst at Lipper Inc., said, “Especially with the market downturn over the past year, expenses are really starting to be a selling point for a lot of investors.”

It’s good to see that mutual fund companies are feeling the pressure to provide low-cost fund options to the common investor. Costs matter! Fidelity would not have done this unless they felt they were losing significant market share to Vanguard.

For comparison, check out how many funds are in their Fidelity Freedom 2040 Fund (FFFFX) below (with percentages). I just looks messy and unfocused to me, with a high probability of style overlap. The expense ratio ends up at 0.79%.

Fidelity Disciplined Equity 12.09%
Fidelity Series Large Cap Value 10.86%
Fidelity Growth Company 10.1%
Fidelity Equity-Income 10.05%
Fidelity Series All-Sector Equity 9.43%
Fidelity Series 100 Index 8.07%
Fidelity Diversified International 5.72%
Fidelity Overseas 5.7%
Fidelity High Income 4.64%
Fidelity Capital & Income 4.63%
Fidelity Series Investment Grade Bond 4.14%
Fidelity Blue Chip Growth 3.03%
Fidelity Europe 3.01%
Fidelity Small Cap Opportunities 1.69%
Fidelity Strategic Real Return 1.29%
Fidelity Series Emerging Markets 1.19%
Fidelity Total Bond 1.16%
Fidelity Small Cap Growth 1.01%
Fidelity Small Cap Value 1.01%
Fidelity Japan 0.94%
Fidelity Southeast Asia 0.25%

(I laughed at the name Fidelity Disciplined Equity. There’s Value vs. Growth, Large vs. Small, but who’d invest in Fidelity Undisciplined Equity?)

This is only an educated guess based on their new 529 portfolios, but their Fidelity Freedom Index 2040 Fund holdings might look like this, with a combined expense ratio of ~0.14%:

Fidelity Spartan Total Market Index Fund 67%
Fidelity Spartan International Index Fund 17%
Fidelity US Bond Index Fund 16%

Fidelity 529 Plan Also Add Indexed Age-Based Portfolios
The reason I found out about this change was actually via my Fidelity 529 Plan (California). Previously, they had an age-based actively managed portfolio for a total annual expense ratio of 0.50%. However, sometime in the last year or so they added an extra age-based portfolio using index funds. This is good, but I never heard it publicized (my fault probably for missing out on some fine print) and this gave them the ability to jack up the price on the actively-managed portfolio to over twice the original amount, with me paying 1.07% in fees annually. Check your statements!

* WSJ requires a paid subscription to view certain articles, but you can usually view them for free if you come from Google. If you’re not seeing the entire article, bisit this link and click on the appropriate article title.

Filed Under: Investing, Retirement //

Free $5 in Amazon MP3 Downloads

Posted on August 24, 2009 // 17 Comments

Amazon.com is offering $5 in free MP3 downloads if you buy a qualifying video game. However, currently the game Big Kahuna Reef both qualifies and is also free itself. Connect the dots. 😉

  1. Go to the Big Kahuna Reef page and click on “Get the game FREE”.
  2. You may need to enter some credit card information, but upon checkout you should confirm that it is free. Complete checkout.
  3. You don’t need to download it, unless you want to. Check your e-mail for one with a title of “Your Amazon.com Promotional Credit”. You will NOT receive a special code, but it should indicate that you have a $5 credit towards Amazon MP3s that will automatically be applied to your next purchase.
  4. Go to the MP3 section and try to buy something you like. The first $5 should be free.

I just did this and am listening to my free music right now in hassle-free .mp3 format. Credit to FW. Note: It will ask you to install the AmazonMP3 Downloader software, but you can go to “skip” this for individual songs. Entire album purchases may require installation.

Filed Under: Deals & Offers //

Chase / WaMu $20 Debit Card Promotion

Posted on August 24, 2009 // 8 Comments

Chase/WaMu is offering certain customers up to $20 for using their debit cards for automatic utility bill payments. You get $10 for setting up one bill and $20 for two. Visit chase.com/get20 and click on “Enroll Now” to see if you qualify. Thanks to reader Randy for the tip.

This is an exclusive offer and is by invitation only. You must enroll your Chase or WaMu Debit Card by September 30, 2009 in order to qualify for this promotion. After enrolling your debit card you will earn $10 (up to $20) for each new automatic bill payment that is set up in the following service provider categories: Phone, Cable/Satellite TV, Insurance and Utilities. Utility categories include electric, water/sewage, trash service and gas. Automatic bill payments of $25 or more each must be deducted from your checking account by October 31, 2009.

Filed Under: Deals & Offers //

P2P Lending Update: LendingClub Loan Performance

Posted on August 21, 2009 // 27 Comments

Here’s an update for my person-to-person (P2P) lending activity, which for me are unsecured loans between U.S. residents. It could be for credit card debt consolidation, car financing, business financing, or even buying a house. You can think of it as taking out the bank middleman, which pays tiny interest on checking account balances and then charges high interest to borrowers.

LendingClub Portfolio
I do my P2P Lending at LendingClub, where you can loan as little as $25. You can read more background in my previous update. Although they do have a service to pick for you, I tend to pick my own loans to try and find both a combination of good risk profile and also a person who I want to help out. It’s kind of a hobby of mine.

I now have a total of 49 active loans with $1,548.42 in outstanding principal. Most are A grade, with a decent spattering of Bs. Keep in mind that a borrower has to have a 660 credit score as well as other additional requirements just to make their lowest G grade. (Only about 10% of loan applications are accepted.) Here is a screenshot from my account page:

Performance & Commentary
According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 9.06%. The bad news is that I now have two late loans in my portfolio. One has negotiated a temporary reduced payment plan, while the other seems to be dodging phone calls. Also, one loan was paid off early. But I suppose this is par for the course, you get late payments and defaults. If your interest rate is high enough and you have enough diversification in loans, you’ll still end up ahead. We’ll see what happens, even with a default my rate of return so far is still higher than what I’d have gotten with an online savings account. But the risk is still certainly there for more downside.

What really baffles me is that both of my late loans are A-rated. According to the LC stats page, out of all the A loans issued so far, there are only 12 late loans out of 943 still active. That’s a tiny 1.3% late rate with zero defaults for LendingClub in general, and yet I managed to invest in 2 out of the 12 late ones. So either I’m very unlucky or I stink at picking loans, or… both. 😛

$25 New Lender Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Send in your information, and see what interest rate they offer you. Compare it with your credit card or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.

Filed Under: Investing //

Microlending Update: Kiva and MicroPlace Loan Performance

Posted on August 21, 2009 // 7 Comments

I saw some ads for Microplace today (probably targeted due to my internet browsing habits) and decided to check on my Microlending portfolio. If you’re not familiar, microlending tries to alleviate global poverty by offering small loans to entrepreneurs in developing countries who would otherwise not have access to credit.

MicroPlace
Microplace is actually a for-profit site owned by eBay that packages microloans into investments with varying risks, focuses, and returns. Some people think that “for-profit” equates to evil, but I don’t agree. Here’s a link to a recent newscast done by CBS News.

I currently have $1,200 invested there, ranging from a 100% liquid note paying 1.75% interest to a 3-year note paying 5% interest. Payments are made quarterly, and I haven’t gotten my first interest payment yet. You can even fund using your credit card via PayPal.

Here are my previous posts on Microplace.

Kiva
Kiva is a non-profit site where you can match up your contributions to a specific individual, starting with as little as $25. The entrepreneur is still charged a certain interest rate, but you don’t get any interest. I have lent out $350 to 14 loans, and all have paid back my principal so far except for one which paid back 92% total. Still, my overall default rate is only 1.32%.

Here are my previous posts on Kiva.

I am still very intrigued by the idea of setting up a pseudo-“foundation” to which I can contribute money and have it perpetually reinvest the principal and any interest earned into future microloans. It would be really cool to have something like $100,000 constantly being lent out to entrepreneurs around the globe.

Filed Under: Giving Back //

Personal Finance Education, Delayed Gratification, and Marshmallows

Posted on August 20, 2009 // 17 Comments

Many people agree that there should be more personal finance education in school. This is supposed to be one of the keys to making the average person save more money, have less credit card debt, and invest wisely. You know, teach a high schooler the wonder of compound interest and the related trap of credit card minimum payments.

But I’ve perhaps the problem is even more basic than that. I recently ran across something called the Marshmallow Experiment by Walter Mischel. Check out this video (hat tip to Rob Garcia of LendingClub):

Here’s a quick summary of the original 1960s study. A group of four-year olds were put in a room with just a chair and a table. The kids could pick either a marshmallow, a cookie, or a pretzel stick. The child was then given an option. They could either eat one marshmallow right away, or if they waited until the researcher left and came back, they could have two marshmallows. How long could they wait? The researchers continued tracking them and found that those with the ability to wait were better adjusted, had less behavioral problems, and scored an average of 210 points higher on the Scholastic Aptitude Test.

Teaching Delayed Gratification
Along the same lines, I think a core requirement of good personal finance “education” is teaching people delayed gratification. Imagine how many adults wouldn’t be able to wait a year to get $500 versus getting $250 today. If you can exercise such self-control, then you won’t buy things on credit cards because you “gotta have it now”. You’ll be able to save money towards a retirement that may be decades away. It will be easy to spend less than you earn.

How do you teach delayed gratification? Since it would require years of practice, you’d want to start early and the responsibility would fall heavily on the parents. From an interview with Mischel in a related New Yorker article:

“This is where your parents are important,” Mischel says. “Have they established rituals that force you to delay on a daily basis? Do they encourage you to wait? And do they make waiting worthwhile?” According to Mischel, even the most mundane routines of childhood—such as not snacking before dinner, or saving up your allowance, or holding out until Christmas morning—are really sly exercises in cognitive training: we’re teaching ourselves how to think so that we can outsmart our desires.

But of course, not all parents will do that. So the problem is then how do we systematically teach children this skill in school, which is what researchers are working on now. In my opinion, that would be the ultimate in personal finance education. Because if you don’t have the ability to defer gratification, then learning about index funds isn’t going to help very much.

Filed Under: Family, Frugal Living, Retirement //

Free Sample of Nature Valley Trail Mix and Granola

Posted on August 19, 2009 // 4 Comments

Nature Valley is giving out a free sample of their Trail Chewy Trail Mix Bar and a pouch of Granola Nut Clusters when you sign up for their Eat Better America newsletter, which includes expert healthy meal ideas (sample newsletter). I just bought a case of these trail mix bars from Costco for about 20 cents each, not bad for a snack.

Filed Under: Deals & Offers //

Finding The Actual Hotel Name On Hotwire.com Before Purchase

Posted on August 18, 2009 // 33 Comments

This is a follow-up to my 5-Step Guide to Finding The Lowest Rate For Hotel Rooms, which includes tips on using “opaque” sites like Hotwire.com and Priceline.com to save on hotel rooms.

Specifically, I’ll show you how to greatly improve your guess as to which hotel you’re actually bidding on Hotwire.com before pulling out your credit card. This was initially inspired by a helpful comment by reader Nasty N8, but I expanded and altered his advice a bit.

Finding The Hidden Hotel

When you run a search for hotels on Hotwire, you only get the price, star rating, and the general neighborhood. For example, here’s a search result for hotels near the Orlando airport (MCO) on 12/20/09.

Hotwire Participating Hotels
I see that I can get a 4-star hotel near MCO for $56+taxes. But which one? How do I know if it is any good? Using the Hotwire Hotel List for Florida at BetterBidding.com, I scroll down to the Orlando MCO section and see two listings: Hyatt Regency Orlando Airport and Renaissance Orlando Hotel Airport (Marriott). Again, this list is not 100% accurate, but it does provide a shortcut possibility and also another data point for later (see scenic route).

TripAdvisor Clues
I click on the red box “Continue” to see the total with taxes per night ($69.45), and also learn more details about the actual hotel. If I scroll down I see some information from TripAdvisor.com:

With this information, I can usually reverse engineer the specific hotel from the TripAdvisor (TA) site. There are three points of interest here:

  1. Tripadvisor Traveler Rating (Out of 5). Based on customer reviews, this is an average rating of quality. Sometimes they won’t match up perfectly (i.e. TA will show 3.5, but Hotwire will round up to 4), but most of the time they will.
  2. Number of reviews. This will not be exact, but instead be rounded off to the nearest 20. So if TA has 35 reviews, then Hotwire will say 20+. If TA has 41, then Hotwire will show 40+.
  3. Date of last review. Simply look at the date of the first review you see on TA, and compare with this date.

Mix-n-Match
Let’s go back to the initial hotel list. Here are the Tripadvisor pages for the Hyatt Regency (4.5 dots, 163 reviews, last on Aug 2009) and the Renaissance Hotel (4 dots, 57 reviews, last on Aug 2009). Remember, 57 is the same as 40+.

We see here that the most likely hotel is the Renaissance Orlando Hotel, with all factors matching. At Expedia.com, this hotel would have cost $112 per night with taxes on the exact same day. By doing a little legwork, you could secure a savings of over $42 per night (38%).

The Scenic Route
If you did not find a match, then the hotel may not be updated on the list yet. Here, you’ll have to run a search on Tripadvisor. Use the “Hotels” tab and act as if you want to book a hotel, using your travel dates and everything. Do not just use the search box. Now, the left sidebar will have a ton of options to narrow down your search results. Again, use your region, your Tripadvisor rating, and also the star class rating. (Note: The hotel class “star” rating by Tripadvisor will sometimes vary from the ratings from Hotwire, so you might allow one star difference either way.)

Here is a nice screenshot that shows how I narrowed it down to 6 hotels. As you can see, the only hotel left that matches the Tripadvisor stats is… again the Renaissance Orlando Hotel!

You can also do this down the line with all the different Hotwire search results. Now that you can figure out the actual hotels, you might feel that $50 a night at a 3-star Holiday Inn is better than $100 at at 4-star Hyatt. Happy hotel hunting!

Filed Under: Frugal Living, Travel //

Setting Up Automatic Credit Card & Bank Activity Alerts

Posted on August 17, 2009 // 23 Comments

I still love getting my bills via snail mail. I avoid online statements because I get over a hundred e-mails a day and it is very easy for me to put it off temporarily and never remember to read the e-mail again. A paper bill will stay on my desk until pay it and I file it away.

However, I essentially got paid $50 to sign up for paperless statements when signing up for the Citi Forward® Card (see my review), so of course I did it. This month, I barely got my payment in on time, and was only 2 days away from being dinged a $30 late fee.

As a result, I’ve been gradually visiting all my financial provider websites and signing up for online alerts, which e-mail or text you when certain criteria are met. For example, with Citibank I can get alerts for:

Credit Cards

  • Current Balance (you choose frequency, up to daily updates)
  • Within $XXX of credit limit
  • Balance exceeds $XXX
  • Payment notification: A payment posted on [xx/xx/xxxx]
  • Minimum payment due on [xx/xx/xxxx]

Banking

  • Balance Alerts (too high or too low… avoid overdrafts!)
  • Deposit Notices alert you whenever funds are credited
  • Bill Payment Alerts inform you when there are insufficient funds in checking
  • Check Alerts notify you whenever checks are presented for payment
  • CD Alerts notify when your CD is about to mature.

For the credit cards, the option is under the “Account Profile” menu as opposed to under “Tools” where I thought it would be. See screenshot.

Some sites like American Express also have an alert that triggers when it is X days before the bill is due, but they still haven’t received payment, which find most useful. Another alternative would be to just set up auto-pay on the card while it was on e-statements. But if you’re like me, I just switched my Forward card back to paper statements after I got my 5,000 ThankYou points. Sorry, trees!

Filed Under: Banking, Credit Cards //
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