Archives for February 2012

Reading List: Low-Risk Investing, Free Accounting Software, Limited Willpower, Flexible Withdrawal Rates

“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.”

I run across a lot of articles that may not merit an entire blog post but are worthy of sharing. Let me know if you like this format with short summaries or if you’d rather me just tweet links.

Playing It Safe as a Long-Term Strategy
For a while, Professor Zvi Bodie has written books and articles about low-risk investing and encouraging the purchase of Treasury Inflation-Protected Securities (TIPS) and I-bonds. If you bought them when he was first saying that, you’d have TIPS paying 3%+ real yield and doing quite well. But now you’re looking at 0% or negative real yield unless you go decades out to eek out 1%.

He still says that stocks are too risky regardless of time held and should not be bought unless you already have enough assets to cover the bare necessities. You won’t like the alternative options: spend less, save more; plan on retiring later; work a second job. He and Taqqu have a new book called Risk Less and Prosper.

Berkshire Hathaway Letter to Shareholders
Warren Buffett sent out his annual letter to shareholders over the weekend. As usual, the letter contains some of his insights and opinions on issues like the housing market recovery, investing in gold, and the current dangers of bonds. He also lays out his argument for why owning equities (at least BRK) is actually low-risk over a long time horizon.

There has never been a better time to be an individual investor
From the Abnormal Returns blog. I agree that there are better tools out there now at a lower cost, but with the death of pensions there will also be a lot more responsibility and pressure placed on individual investors. If they mess it up, it’s not going to be pretty. That makes it a stressful time to be an individual investor!

Wave Accounting: Free online accounting software for small businesses
The price is right at free, as they intend for it to be ad-supported. Includes free import of transactions from your bank account. I signed up but haven’t taken it for a test run yet. I currently use Intuit Quickbooks and haven’t had to upgrade for 5 years.

Your Mistaken Belief in Financial Willpower
I have come around to support the idea that willpower is more of a finite resource, or at least it has to be built up like a muscle. Don’t use it up when you don’t have to. Carl Richards of the NY Times points out ways that we can conserve our willpower for other things using automation for paying bills and savings.

Should Your Retirement-Portfolio Withdrawals Fluctuate With the Market?
What is the best way to withdraw from your portfolio in retirement in order to make sure it lasts? This Morningstar article looks at the research on ways to implement flexible withdrawal rates. I agree that numbers like 4% withdrawal rates should be a guideline and not a rigid rule.

How To Maximize Your Appraisal During A Mortgage Refinance

“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.”

During the housing boom, nobody worried about appraisals. If you put in a bid to purchase a house for $300,000, the appraisal was basically guaranteed to come out at $300,000 or above. Appraisers are hired by lenders, and back then lenders wanted to make the loan happened no matter what. Therefore, if you were an appraiser and you didn’t reliably provide the number that the lender wanted, then your phone might stop ringing. I was told directly that the intended purchase price itself was a “strong indicator of value”. Rather self-fulfilling, no?

Nowadays, banks are much more cautious, and thus so are appraisers. In addition, recent legislation created new Appraiser Independence Requirements for Fannie Mae and Freddie Mac loans. At the same time, mortgage rates are at lows and refinance requests are at highs. Your ability to refinance is often dependent on what the appraiser says your house is worth, as you will need to satisfy a certain loan-to-value ratio. So what can you do to maximize your appraisal?

Feel out the lender first. Appraisers still work for lenders, and a good mortgage broker should be able to give you an idea of your chances for an adequate appraisal given the current environment and your basic home details. Check recent sale prices in your neighborhood on sites such as and to get a realistic sense of what to expect.

Collect supporting documents. If you’ve made any improvements to the house, gather up any blueprints or housing permits to provide to the appraisal. You could also make a list of the best “comps”, or recent sales of comparable homes in the area. If you’ve gotten one recently, dig up your last appraisal, and see if there were any omissions or changes. A busy appraiser might simply copy stuff from the previous appraisal. You may even find that they just bring a copy of the old appraisal and mark off things as they go.

Prepare your house. The appraiser will call you to schedule a time to see the interior of your house. Some people have suggested that you should hire a landscaper and basically stage your house as if you were selling it. I don’t know about spending that much energy on things, but I would definitely keep things neat and tidy. Have the kids and pets playing elsewhere. You want the house to come off as well-maintained and cared for.

Meet the appraiser. You’re dealing with a human, so be nice. Walk the appraiser around your house, answer any questions he or she may have, and point out any changes that you have made to the house. When I met my appraiser he was happy to see our official building permits that showed our legal additions. We also pointed out any remodeled areas and newly-installed hardwood flooring.

I don’t know if all appraisers would be open to debating about exactly what houses make good comps to yours or not, it might rub them the wrong way. But you could probably point out ways that your house is different than other potential comps (bigger yard, pool, view, etc.).

Read the appraisal report and follow-up if needed. Request a copy of the report and review it for any inaccuracies. The workload is high right now, and it could be that they mixed up details with another house or just copied stuff over from other sources. Point out any errors along with supporting evidence and you may be able to get the appraisal re-evaluated. On the extreme end, you might ask for another new appraisal at your cost.

Don’t worry about property taxes. While the local government might consider your house’s sales price history when figuring out your home’s tax assessment, they will not be notified of the value from an independent appraisal. In fact, they probably have a rather rigid formula to figure out your home’s assessed value (they do have to do this on a lot of houses) based on things like number of bedrooms, number of bathrooms, square footage, lot size, etc. If anything, you might volunteer data from the new appraisal to appeal your assessed value – assuming it’s lower of course!

In the end, by taking these steps we felt that we had done our best… and our refinance was a success, so good luck!

Credit Sesame’s New Interactive Mortgage Map

“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.”

Credit Sesame might be best known for offering people a free credit score every month, but they make their money by providing mortgage quotes. That makes sense given how sensitive mortgage interest rates are to credit scores. They just rolled out a new tool called the Mortgage Map that lets you visually compare various mortgage loan options. Here’s an example screenshot:

The vertical axis appears to be savings (refinance) or cost (new loan), and the horizontal axis appears to be interest rates. Different colors denote fixed-rate, variable-rate, and interest only loans. A little house icon appears for refinance quotes to indicate your existing loan. Mortgage rates are still reaching new historic lows, so it’s good to be aware of the options out there.

Of course, I played around with it using my own numbers, even though I already refinanced last year into a new 15-year fixed mortgage. Almost all of the loan options given were worse than my existing loan, which I suppose made me happy. However, a 7/1 ARM or 10/1 ARM would save still save me money if I paid it off during the fixed initial term (makes sense, although these are lesser-known flavors). I noticed that the default setting for refinancing a 30-year mortgage is that you will only keep it for 7 years, my guess is that’s how often the average person changes houses. But you’ll want to remember to change that to better reflect your own situation.

All of the quotes that I wanted to “learn more” about seemed to be offered by First Choice Bank, which I am guessing is a mortgage broker? As a result, I don’t really know how many different lenders are behind this map, and how it would compare to something like LendingTree.

No Fee 0% Balance Transfer For 12 Months – Discover More Card

“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.”

Update 2/24/12: Confirmed that this offer will expire at the end of February. Last year it also started in January and ran until the end of February, and didn’t come back until the next January. So get your applications in now if interested!

Update 1/9/12: Reader CC writes in with her success story, which differs from some previous reports of a one Discover card at a time limit. Please let me know if you have a different experience. I forget to add before – if you apply for the card and don’t get the credit line you want, call them up and tell them you want to do a $X,XXX balance transfer and they may work to accomodate you.

A few updates- I called Discover and they changed the policies again

1) you can have more than 1 credit card
2) You have to open a new card to get the promo they won’t apply it to the old one.
3)If you call and speak to a rep and give them a balance to transfer they will recalculate the credit line
4) They will let you transfer the old credit line to the new one ie I had a $7.3K balance on the old one so they left it open with $500 and gave me a new card with a $7K balance. I was able to keep my 5 yrs of credit history with the 1st card active. I’ll probably transfer the line back to the original place in a yr.
5) I just saved a year of interest on my Citibank student loans for $6,550 with 15 minutes of work 🙂

Back for 2012! Limited-time only. Just in time for some New Year debt-busting action, Discover has brought back the Discover More Card with No Balance Transfer Fee, offering 0% intro APR on both balance transfers and purchases for 12 months. You can literally borrow money for free and pay it back in 12 months (keeping in mind you’ll still need to satisfy the minimum payment each month until then). Use this opportunity to lower your interest rates and make every cent you pay go towards shrinking that principal. There are different versions of this card, so please use specific application link. No annual fee.

When you see the application, be sure to scroll down to the “Important Information” and verify that you are getting 0% for 12 months and no balance transfer fee. You should see the following text at the top under “Interest Rates and Interest Charges”:

APR for Balance Transfers: 0% intro APR for 12 months from date of first transfer, for transfers under this offer that post to your account by July 10, 2012.

And then the following a bit lower under “Fees”:

Transaction Fees * Balance Transfer – Intro fee of $0 for transfers that post to your account by 8/10/2012 with the 0% intro APR balance transfer offer described above. After that, 3% of the amount of each transfer.

Application Quick Tips
In order to get the highest credit limit possible, be sure to maximize your reported income as much as you can legitimately. You can no longer include the income of other people living with you, but do include things like freelance income, overtime, rental income, interest and dividend income, alimony, child support, etc.

If you wish to get cash directly from this balance transfer offer without it being classified as a “cash advance”, one tip is to request money to be transferred to other non-Discover credit cards that you have. This will create a negative balance, after which you request a refund check be sent to you. Citibank and American Express are recommended for this because they have automatic features on their websites to request a credit balance refund.

Arbitrage Opportunities?
Don’t have higher interest debt you wish to refinance? Really, the only thing I could see buying with this 0% money would be a US Savings I Bond that will earn you 3.06% for the first six months, and then a different rate based on inflation for the next 6 months. You can buy $5,000 in electronic bonds per person per year, and another $5,000 in paper bonds if you use your tax refund ($20k total for a couple).

Offer Comparison
Now, the Chase Slate® currently has a similar offer going, also 0% introductory APR for 15 months with $0 balance transfer fee. The good thing about Discover is that you can transfer balances on a Chase card to Discover, while you can’t transfer existing Chase balances to another Chase card. Other than that, why not take advantage of both? 🙂

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Continental OnePass Plus Card: Free 30,000 Miles, Free Checked Bag, Primary Rental Car Insurance

“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.”

Continental Airlines OnePass Plus Card

(Update 2/23/12: The Continental/United Airlines merger is almost complete, and the last official Continental flight taking off on March 2nd. The new company will be called United, so this Continental Airlines OnePass Plus Card will no longer be available as of the end of February (March 1st). This is your last chance to grab the 30,000 mile sign-up bonus if you’ve never had a Continental card before. “This one-time bonus offer is valid only for first-time Continental Airlines personal cardmembers with new accounts. Previous and existing Continental Airlines personal cardmembers/accounts are not eligible for this bonus offer.”

Note that the application for the United Explorer Card says that “United MileagePlus Explorer cardmembers will only receive one 25,000 bonus miles award if they apply for both the United Explorer Card and the Continental OnePass Plus Card after 7/19/2011.” This isn’t mentioned on the Continental application. If you only have the older United non-Explorer card, you should still be able to get the Continental bonus.)

The new Continental Airlines OnePass Plus Card from Chase has improved their sign-up incentive to include 30,000 free miles and a pretty nice mix of perks for travelers.

Sign-Up Bonus: Free Flight

  • 25,000 Bonus Miles after first purchase (no minimum amount) for first-time Continental Airlines personal Cardmembers. That’s enough already for one free roundtrip airfare within the continental US.
  • 5,000 More Bonus Miles for adding an authorized user to your account. This is another easy one to get. Remember, just because you add someone doesn’t mean you have to give them the card. 😉
  • No annual fee the first year. The regular annual fee is $95, but is waived the first year.
  • If you spend $25,000 on the card annually, you’ll get another 10,000 bonus miles. Since you earn 1 miles per $1 spent as well, this works out to 1.4 miles/dollar when you reach that mark.

Travel Perks

  • Free checked bag. If you fly on Continental, you and a companion will each get your first checked bag for free. That’s a savings of $50 roundtrip, per person.
  • Primary rental car insurance. Almost all personal credit cards only offer secondary rental car insurance, which means you have to file a claim with your own auto insurance first, which means you have to pay the deductible and possibly face higher future premiums. With primary collision damage waiver (CDW) even for personal use, you get coverage for damage or theft without having to make a claim.
  • Additional travel insurance that isn’t on all cards, like trip cancellation insurance up to $1500 for a illness with doctor’s note , delayed baggage coverage up to $300 if you have baggage delayed more than 18 hours and need to buy items to get by.
  • If you decide to keep this card past the first year, you’ll get two free passes to their First-Class airport lounge.

As you may have heard, Continental and United are merging, and the resulting airline is supposed to have the name United. Here’s a chance to rack up some miles that will eventually merge together.

Not good enough? Currently, there are also other ways to rack up $500+ in credit card bonuses

Costco $10 Bonus For Auto-Paying Wireless Bill with American Express

“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.”

Costco and American Express have a promotion where you can earn a $10 Costco Cash Card when you enroll on their page and then sign up to pay your wireless phone bill automatically with any American Express card. All wireless providers distributed by Costco are eligible: AT&T, T-Mobile, Verizon Wireless, Sprint and Alaska Digitel.

To receive a $10 Costco Cash Card, enroll any eligible American Express Card by filling out the information below. Then, sign up to pay your eligible wireless bill automatically on the same American Express Card – it’s as simple as that. Automatic bill payment is a convenient solution that helps ensure that your bills get paid on time every time. Plus, you can earn rewards if your Card is enrolled in a rewards program. Offer good from now until March 31, 2012.

I remember seeing this promotion in the past before, but you had to use the Costco AmEx card, whereas this promotion works for all AmEx cards.

Thoughts on Paying Extra Towards Mortgage Principal

“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.”

I’ve been thinking more about whether I should commit some additional funds to pay down the principal on my mortgage and reduce my interest paid.

There is already a good deal of discussion on this topic in my posts Why Paying Down Your Mortgage Early Can Be A Smart Investment and 10 Reasons You Should Never Pay Off Your Mortgage, but I’ve tried to summarize and update all the pertinent points into something more coherent below.

Other Higher Priorities?
I don’t think paying extra towards a mortgage should be the highest priority. If you have no emergency fund, high-interest credit card debt, proper insurance, or don’t have your IRAs/401ks maxed out, then you probably should focus on those things before worry about paying extra towards your mortgage.

What is your tax situation?
Next is the topic of tax-deductibility of mortgage interest. Everyone already gets the standard deduction, which in 2012 is $5,950 for singles, and $11,900 for married filing jointly. Only the amount that your itemized deductions exceed this amount actually saves you money. If you have a $200,000 mortgage at 4%, your interest is only $8,000 the first year (and decreasing in subsequent years). If that’s your only deduction as a married couple, you’re not getting any real tax benefit at all.

However, some people have a big cushion of deductions, like high property taxes, state income taxes, charitable contributions, etc. Some don’t. Some people are in high marginal tax brackets, where saving 35% sounds really nice. Some are in the 15% or lower tax brackets. As for us, we are in a high marginal tax brackets, and pay a good deal of state income tax, so the deductibility is definitely in effect.

Paying 4% mortgage interest fully-deductible would be perfectly counteracted with a bond earning 4% interest fully-taxable.

Comparing with other investment options
One major argument against paying extra towards a mortgage is that you can earn a better return elsewhere. Who cares about saving 4% interest annually when your money could be earning 8% somewhere else? As we’ve seen recently, stock market returns are not guaranteed, and also not without lots of heartburn. Do you really want to invest in stocks using borrowed money? If anything, you should compare your mortgage interest with a high-quality bond or bank account interest.

Another argument against paying extra is that it is hard to access the equity in your house. You may not get a home equity line of credit, or it may be frozen later. However, if your alternative investments are in IRAs or 401k’s, then those aren’t exactly liquid either. Also, if you have an adequate cash cushion (as we do) and proper insurance, then liquidity will become a lesser concern. I don’t need to have access to every penny of my portfolio at all times.

Inflation hedge
A nice thing about mortgage payments is that if you have a fixed mortgage, the payment stays the same each month. Meanwhile, rents will increase with inflation. If inflation starts to rise significantly, you’ll be very happy to have a loan at 4-5%. But we also may stay in an era of prolonged low interest rates.

A possible strategy?
After all that, my idea is to simply look at the current yield of a comparable U.S. Treasury bond and compare it to my mortgage interest rate. If my mortgage interest rate is a lot higher than the bond rate, then I should pay extra towards the mortgage. Otherwise, if the Treasury rate is higher, then I should invest in bonds or bank accounts directly instead. If it’s close, stick with liquidity.

As of 2012, my mortgage rate is now slightly under 4%. I expect to pay off my mortgage in under 10 years, ideally closer to 5-7 years. This means that I’ll effectively be earning 4% a year for 10 years, whereas the Treasury rate for a 10-year bond is only 2%. If rates do rise, then I’ll stop paying extra toward the mortgage. In the meantime, since I already have bonds in my asset allocation, I’d much rather earn 4% by paying down the mortgage than 2% in the market. (Remember, I’m already maxing out both IRAs and 401ks for the year.)

I really don’t like the idea of staying in debt longer just for the possibility of investing for higher return elsewhere, especially as the difference for such a short time is minimal. I have plenty of money in stocks and if they go up 8% a year over the next 5-7 years, then I’ll still be fine.

(Posted originally in 2009, but I have updated the numbers for 2012.)

Impact of Inflation on Stocks, Bonds, Housing, and Gold (1900-2011)

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The Credit Suisse Global Investment Returns Yearbook 2012 (pdf) provides an analysis of returns from 19 major developed countries from 1900-2011. An article inside called The Real Value of Money by Elroy Dimson, Paul Marsh, and Mike Staunton of the London Business School explores how different asset classes respond to various levels of inflation and deflation.

The table below taken from the article summarizes the long-run performance and inflation sensitivity of those assets for which there is a full 112-year return history available. Note that real returns, or returns in excess of inflation, are used instead of nominal returns.

Equities. Represented by a US dollar-denominated world index, equities had the highest annualized real return of 5.4% but also the highest standard deviation. Stocks were moderately affected by inflation overall, but did not do well in periods of extremely high inflation.

Bonds and bills. Represented by US bonds and Treasury bills. But in every country studied, local equities outperformed local government bonds. Treasury bills are closer to cash, with higher credit quality and shorter duration. Bonds provided much lower real returns and lower standard deviation. Bonds were heavily effected by inflation, and did worse than stocks in periods of high inflation. Bonds are the best protection against deflation.

Gold. Long-term real returns are quite low, around 1%, on par with Treasury bills but with higher standard deviation. The bright spot is that they provided the most protection against inflation.

Housing. This refers to average prices of residential real estate across many cities. Long-term real returns are about 1%. However, you get to live in your house so there is a consumption benefit. Housing is less impacted by inflation than everything except gold, but the price risk of owning a single home is probably higher than the average home price data.

Portfolio Asset Allocation & Holdings Update – February 2012

“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.”

I took some time this weekend to check on my investment portfolio, including employer 401(k) plans, self-employed plans, IRAs, and taxable brokerage holdings.

Asset Allocation & Holdings

You can view my target asset allocation here, along with links to other model asset allocations. Despite the headlines, I still like to buy, hold, and rebalance primary in low-cost index funds. Here is my current asset allocation:

I continue to rebalance continuously with new cashflow. Everything looks okay; stocks have been on a pretty good run recently for whatever reason and bond yields are still kept low by central bank policy. My personal outlook for the world economy is still uneasy. My current ratio is about 75% stocks and 25% bonds, but my goal is to get closer to a 60% stocks and 40% bonds setup, the classic balanced fund ratio within the next 5-7 years.

The main change since last time is that I dropped the stock funds in my 401k plan and moved them all to my taxable accounts for tax-efficiency reasons. I needed for space for bonds. I also stopped buying shares of the stable value fund in my 401k because new purchases only earn 1.25% interest. Instead, I am buying the only other bond option which is the behemoth PIMCO Total Return (PTTRX) which has a relatively low 0.46% expense ratio due to it being an institutional share class. This fund is actively managed and includes various types of bonds, but since the portion is so low, I’m still classifying it under my short-term nominal bond asset class.

Stock Holdings
Vanguard Total Stock Market ETF (VTI)
Vanguard Small-Cap Value Index Fund (VISVX)
Vanguard FTSE All-World ex-US ETF (VEU)
Vanguard MSCI Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VGSIX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX)
PIMCO Total Return Institutional* (PTTRX)
Stable Value Fund* (3% & 1.8% yield on existing balances, no longer contributing)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities

* Denotes 401k holdings due to limited choice.

The overall expense ratio for this portfolio is in the neighborhood of .20% annually, or 20 basis points, which is much lower hurdle to overcome than the average mutual fund expense ratio of over 1% annually. This is all self-directed inside accounts held at Vanguard (IRAs, taxable), Fidelity (401k, Solo 401k), and a small retirement plan provider. I have some “play money” assets at other discount brokers that is invested in individual stocks, but the total is less than 2% of our net worth and not included here.

Goal Progress

Due to our goals to achieve financial independence early, I use a 3% theoretical safe withdrawal rate on my portfolio for the purposes of my tracking. This means that I expect every $100,000 that I save will provide me an inflation-adjusted $3,000 in expenses forever. However, in reality we will probably adjust our withdrawals based on our personal inflation, continuing income, and market returns.

With portfolio increases and additional contributions, at a 3% withdrawal rate our current portfolio would now cover 50% of our expected non-mortgage expenses. If you recall, I also plan to have the house paid off, and I will be making a lump sum payment shortly to bring our home equity past 50% as well. Hopefully as we cross the 50% hump, things will accelerate as portfolio growth will benefit from compounding returns and our mortgage balance will shrink faster from the opposite effect as more of our monthly payment goes towards principal as opposed to interest!

Payroll Tax Cut Extended For 2012: Increase 401k Contributions?

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Congress has just passed a bill which the President has promised to sign that includes an extension of the 2% payroll tax cut for the rest of 2012. Specifically, the employee portion of the Social Security tax is reduced to 4.2% in 2012 instead of the standard 6.2%. The employer portion remains unchanged at 6.2%. The Medicare tax remains unchanged at 1.45% each for employers and employees. This tax cut has already been in effect since the beginning of 2011 and was scheduled to end at the end of February 2012 before this most recent extension.

For example, someone earning $50,000 annually will see increased take-home pay of $1,000 spread out evenly over a year of paychecks. The limits on wages subject to Social Security tax is $110,100 for 2012, so the maximum savings per person is $2,202. You can verify this tax cut for yourself by checking your most recent paycheck stub. Divide the Social Security tax line by your Gross Pay line. It should be either equal or less than 0.042, or 4.2%. (It might be less than 4.2% due to items that are exempt from SS tax like flexible spending account contributions.)

Spend it, or save it?

The idea behind this tax break is to provide a small, steady increase in income that you’ll hopefully spend quickly and thus stimulate the economy. Even though $1,000 sounds like a lot, when it comes to you as $40 every bi-weekly paycheck, you tend not to notice it. Surveys confirm that the majority of people don’t even know this tax cut exists after enjoying the benefits for a year.

However, if you’re happy with how you’ve already stimulated the economy and would like to put something away to invest and spend later, this might be a good time to increase your savings rate instead. Remember that your savings rate is the most important factor in whether you’ll be able to retire early (or perhaps ever).

Since this tax break comes automatically every paycheck, it makes sense to “pay yourself first” by putting it aside immediately via automatic savings. Instead of mindlessly spending like they want you to, mindlessly save it instead. 😉 If you have a 401(k) or similar employer-sponsored retirement plan, why not increase your contribution rate by 2%, and see if you notice it for the rest of the year? Of course, if you have high-interest debt and some extra willpower, perhaps you should put it aside each paycheck and pay that off instead. You can also use direct deposit or automatic transfers to send money over every paycheck to an online savings account.

Sources: Philadelphia Inquirer, Associated Press

Prosper Borrower Promotion: 2nd Payment Waived Up To $300

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Offer is back! Person-to-person loan site is having a another one-day promotion for borrowers who submit their loan listing on Friday, February 17th where they will actually make your entire 2nd loan payment (principal and interest) for you, up to $300.

* To be eligible for the offer, you (i) must post a loan listing on between 12:00 am PT and 11:59 pm PT on February 17, 2012; (ii) have to reach Verification Stage 3 within 1 week of posting the loan listing; (iii) cannot have posted a loan listing on within the past 30 days; and (iv) may not withdraw your loan listing. If you meet these criteria, Prosper will credit your second required loan payment up to $300. The credit will be posted to your account within 30 days of Prosper receiving your first payment. This promotion cannot be combined with any other promotional offer from Prosper.

Getting a rate quote is free, as their “soft pull” will not affect your credit score. If your loan does not find enough lenders to fund, then you can walk away with no obligation. If you do end up taking out a loan, then it will show up on your credit report. There are several ways you can use this offer.

The quick loan for profit. If you have an excellent credit score, you can get the AA loan rate of 5.65% for 1 year. Even if you don’t need it, take out a loan for about $3,500, and you would end up with a monthly payment of around $300. Your closing fee would be 0.5%, or $17.50. Your interest for a month at 5.65% would be less than $20. There is no pre-payment penalty, and your second payment is covered at $300. Just pay back the money they lent you after two months, and you’d be looking at over $250 in profit. You don’t need to risk any capital, just pay back the money they lend you and keep the profit. Decide quickly! Get your own rate quote at Prosper here.

Investor opportunity. As a result of the math above, there will be a mysterious surge in listings from AA borrowers for $3,500 loans today. If you like, you can invest in these notes today and tomorrow and earn some decent 4-5% interest for at least a couple months. Yes, there is still risk involved but my view is that people with AA credit scores are unlikely to default over only $3,500. I did this last time around, but didn’t have much money in my Prosper account. Sadly, still true this time. Just don’t be surprised if all your loans end up being paid off early!

Lowering your effective interest rate. If you don’t have an AA loan rating, you can use the free payment to lower your effective interest rate, especially if you pay off the loan early. For a $3,500 loan I got an A rating which meant either a 1-year loan at 6.08% or a 3-year loan at 9.99%. Your closing fee is 3.95% for A & B loans, which for a $3,500 loan that’s $138.25. So the free 2nd payment of up to $300 can knock that out completely and you can use the rest of the money to cover most of the first year’s interest.

(I went ahead and also got a free rate quote from LendingClub – their main competitor – but there all loans from $1,000 to $11,975 are only available with a 3-year term. With the loan rebate, I think Prosper would have had been the best 1-year rate anyway. However, my rate for the 3-year loan was only 6.78% APR (their highest A1 grade), which is much less than the Prosper APR. So it can pay to shop around.)

Bonus credit score. After getting the free rate quote, I was actually sent my credit score of 776 based on my Experian credit report. Prosper uses the Experian ScoreX Plus credit score, which has a range of 300 to 900. FICO range is 300 to 850. I assume this is due to new consumer laws that require them to send me my score if I’m not given the absolute best rate available. Not a bad side perk.

Consumer Reports Discount Brokerage Ratings 2012

“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.”

I recently started subscribing to Consumer Reports magazine again, and the February 2012 issue included an article about the major financial brokerage companies (subscription required, press release). The first part was an investigation about the big firms (ex. Citibank, Fidelity, Schwab, T. Rowe Price) and their pre-packaged investment plan advice, and the second part was a survey on the quality of service from discount brokerage firms (ex. E-Trade, Ameritrade, Scottrade).

Consumer Reports is always unique because they don’t take any advertisement money at all, and so they sent in their own staffers anonymously (by this I mean they didn’t disclose they were writing this article) and then had the resulting advice analyzed by independent financial planners. Here were my takeaway notes:

  • Many firms will offer some level of “free advice” if you have a certain level of assets with them, usually $100,000+.
  • Good news: In general, the free advice is okay, but not surprisingly it tends to be boilerplate stuff.
  • Bad news: Most people you talk to won’t provide you fiduciary duty. Most of them avoided disclosing how they were paid, and one researcher got pitched a complicated variable annuity after just a brief initial consultation.

I think fiduciary duty is a big deal, as I see no point in paying even a penny for financial advice if they won’t even promise it is in your best interest. Just seems like common sense to me. I don’t think I would bother to take them up on this free advice unless they were fiduciaries.

Self-Service Brokerage Firm Reviews

The Consumer Reports survey revealed that readers were “very satisfied” with 10 of 13 major brokerages, but it also left out a lot of the cheaper guys like OptionsHouse ($3.95) and TradeKing ($4.95). They seem to run this survey every few years, so here are the publicly-available May 2009 ratings:

One new change was that they separated out the “full-service” brokerage firms like Ameriprise, Edward Jones, and Morgan Stanley. In comparing the remaining “discount/online” brokerage firms, it’s noteworthy that the top 4 stayed the same for both 2009 and 2012, although the order changed slightly:

  • USAA Brokerage – $8.95 trades at basic tier. Also offer banking and insurance products, although insurance is limited to the military-affiliated. Good all-in-one choice for military-affiliated.
  • Scottrade – $7 trades, limited free ETF trade list. Large physical branch network. Has more active-trader tools than others on this list.
  • Vanguard Brokerage – $7 trades at basic tier, all Vanguard ETFs trade free. Best known for low-cost index mutual funds.
  • Schwab – $8.95 trades, limited free ETF trade list. One of the original “discount” brokers, also expanding into banking.