Recently in Finance Category

I'm not sure any of can say that we feel warm and fuzzy inside when we see our paychecks and see how much has been taken out in taxes every pay period. In fact, if I stop and think about it makes me sick to think of how much of my money slimeball politicians are spending. I don't want to pay for a bridge to nowhere. I don't want to subsidize illegal immigration. I don't want to pay for all this crap that they are signing me up for.

Recently I received a bonus of about $1300.00. Of that bonus I received just about $750! That's insane, nearly 42% or $550 of a bonus lost to taxes. I don't know about you but I think I know how to spend my money better than congress does and I'm tired of giving them so much. That's why I support the fair tax. It's an alternative tax system that is revenue neutral (meaning that no current programs will have to be cut) but promotes simplicty, and transparency over the current tax code. It also promises many economic benefits and the great hope that congress might be forced to lower taxes as a result of greater transparency. Now that's something I can get behind and would actually spend my money on to promote, so I signed up to support them financially... I really want to get the word out about this, you can read more on the website at http://www.fairtax.org/ and I have included the official short description below.

Here's the official description:

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue replacement, and, through companion legislation, the repeal of the 16th Amendment. This nonpartisan legislation (HR 25/S 1025) abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax -- administered primarily by existing state sales tax authorities. The IRS is disbanded and defunded. The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

I feel like I've been exposed to ownership a fair bit by owning my own home and car. I know the benefits and draw backs of it all. What drives me crazy is when sales people equate owning to always being better than renting... yes, renting will never build you any equity; but depending on how much it will cost to purchase the item you wish to rent vs the costs of renting there are many instances when renting can be better than owning.

A friend of mine won a trip to San Diego, all he had to do was go to a timeshare presentation and he got a free trip for him and 1 guest. We went to the timeshare presentation tonight and I must admit they do a good job of selling it. They make it sound like you are going to be saving all this money and get to stay at all these really cool resorts (they always corrected me when I called them hotels). It's a very high pressure type of deal, you have to decide on the spot, no time to think about the offer that they are making you. It has to be because if you ever went and ran the numbers you would never go for the deal.

The presentation was by a company called Windmark which appears to be pretty much an outlet for Wyndham to sell their resorts to. They own 62 properties around the country and a few foreign locations and give you the option to buy additional days at discounted prices. They also have an "out of network" plan where you pay a base fee and give up some of your nights at "in network" hotels to stay at other hotels that are not owned by Windmark. It basically boils down to a room that sleeps 2 (1 bed) is available for about 14 days at a cost of $30,000.00 up front (they offer financing over 10 years at 14.4%) and $75.00/mo in maintenance fees. The number of nights you have available depends on where you want to go and when but this seems to be the average. During the sales pitch they are continually pressuring you that for smart money the only way to go is through their time shares. They were doing a good job selling it too because I kept finding myself thinking, "maybe I would like to do something like this." I continually had to tell myself anyone who wants you to make a decision immediately and is using the types of sales tactics that they were is hiding something. So I resisted the temptation and turned down their one-time offer.

When I got home, out of curiosity I decided to run the numbers and see if it was a better deal. So I took the $408/month for 10 years plus the $75.00/month maintenance fee and invested the money at a hypothetical interest rate of 10.4% (the market average over the last 75 years). I then subtracted out 14 nights of hotel costs at a rate of $200.00 a night. I increased both the hotel rental and maintenance fees annually by 3% to keep up with inflation. Basically if after 45 years (when I turn 70) the value in the account is 0 dollars either decision would have been equally financially advantageous, if the account has money in it the time share was a bad deal, if it has negative dollars in the account then the time share was a good deal.... what do you think the final value of the account was after 45 years of vacations? If you said positive in the extreme you would have been right, by not going with the time share option and investing the money instead you would have accumulated 1.6 MILLION dollars in addition to paying for 14 days of hotels every year for the last 45 years. That's a lot of money to be throwing away.

The long and short of it is that in no way is owning a timeshare at those rates better than renting a hotel room. It doesn't matter that you own it forever, what do you think that your kids would rather be inheriting a timeshare, or 1.6 million dollars of cold, hard cash?

I wish I would have had those numbers available to show the sales guy. I wonder what he would have said?

I enjoy investing, but I hate paying trade commissions. For a number of years I used Ameritrade as my primary broker; but a little over a year ago I switched to Firstrade. They had cheaper commissions at 6.95 a trade and free mutual fund investing for all funds they offered. Ameritrade had a better trading platform but Firstrade was passable and they were about half the price.

Firstrade has been an interesting experience. They are a small brokerage and you can often tell as they are not very good about doing exactly what they say. For example they advertise a flat fee of 6.95 for unlimited shares. This seems pretty straight-forward, right? But, it's not what it seems because if you read the fine print you'll see that when they say unlimited they actually mean up-to 5,000 shares. They're website isn't great either. I've seen far worse but for the most part it comes up pretty mediocre. Navigation is simple but there are still too many tasks that require you to send in a paper form like automatic transfers, periodic mutual fund investment, etc. Recently, Firstrade has decided to get rid of their free mutual fund investing program and they have decided to charge 9.95 per transaction for No-load fund that are not on their no transaction fee list. The list is pretty limited so even though Firstrade still offers some of the lowest commissions in the industry there are other options that may be better.

I am a firm believer in investing for the long term--it makes sense. I've been investing for nearly 6 years now with my first foray into the adventure in early 2001, not the greatest time to be getting into the market. I had been watching the markets soar for the last 5 years and listening to the general wisdom that investing was a good way to build wealth, and boy did I want to build wealth. Problem was that although I understood the stock market could be a good avenue for building wealth I did not understand exactly how that happened. So, I enetered into the world of investing with $2,000.00 (I was pretty fortunate in college to have a decent job and a bit of a savings) and opened an account with Ameritrade. I can't remember exactly why I chose them; but I think at the time I pretty much only knew about E*Trade and Ameritrade. Ameritrade was cheaper so I went with them. After filling out all the forms and mailing them back the signed contract I was ready to go, all I needed to do was decide what to invest in. That was my first problem. I barely knew anything about investing so I simply chose some companies that seemed good. Just like now I was fascinated by technology then so I decided to buy 10 shares of IBM at about $100. To round things off I'd heard good things about Wal-Mart and Home Depot so I bought 10 shares of each of those as well. I can remember checking what the price of each stock was on a daily basis and wondering when a good time to sell was. For the moment I was pretty happy as the value of my shares was going up and things seemed to be going well. After IBM hit $115 I'm not sure why but I figured that was a pretty good price and decided to sell taking my $100.00 and pretty happy. When you think about it, it wasn't all that bad 10% in about 3 months time! I also decided to sell my shares of Home Depot for about the same price I bought them at. After trading fees I ended up slightly down. And I was now back on the market looking for ways to increase my returns. Mind you I had now idea exactly how that might happen.

Recently I feceived an offer in the mail from Discover Card for a 0% APR on balance transfers for the life of the loan.  Now it's not unusual that a I get one or two offers in the mail for some new credit card or what not.  Usually those offers go straight into the trash but hey, 0% for the life of the transfer sounds pretty darn good.  At this point I'm thinking to myself, "WOW! That sounds pretty good, I wonder what the catch is?"  It turns out the catch is you have to make 2 purchases a month after March 2007 to keep the 0% rate.  That doesn't seem so bad until you relize that their payment allocation policy applies payments to the special rates first then normal charges.  That means you will have a growing balance at the 10.99% APR while you pay down the balance transfer, in short this could be a very expensive offer.  But it's only bad if the balance accruing interest is high so I got to thinking what if I transfered $25,000.00 of my mortgage to this offer?  That would take 10 years off of my mortgage and save me about $60,000.00 in interest payments over the term of the mortgage.  If I were to invest the extra dollars that will have to go toward the monthly payments I would end up with $40,000.00 assuming an average annual return of 10.1% where as my total savings with this method would be somewhere around $80,000.00.  That's a lot of money, but there's still that pesky problem of how do I keep the balance on the card that accrues interest low enough to make it worth while.  So I went to the grocery store and trolled for items that were less than $1.00.  I found lots of things, but the most compelling item was definately carrots.  I can get a carrot for about $0.17 which would satisfy the monthly transaction limits and keep the balance low enough that the offer would still be worthwhile.  Now I just need to apply for the card and get approved for the largest credit line possible.

Thanks for the free money Discover Card!

It has been a while since my last financial advice post, so I thought now would be a good time for the second installment of how to plan for financial security.  In the first article we talked about simple budgetting and knowing where your money is going.  That is always a good thing, after we have that down it's time to start planning for the inopportune events in life which are bound to affect us all at one time or another.  When the unthinkable happens it's good to have some cashed stashed away to pay for it.  Generally this types of funds are called emergency savings.  Just like budgeting this is a fairly wide spread concept so most personal finance books will cover the idea in great detail if you are interested.  In general the idea is to have enough money accessible to pay for disasters should they arise.  Depending on who you talk to they will tell you different stories when it comes to how much you should actually stash away.  In the end a lot of it comes down to personal decision of how much you need to feel comfortable.  A good rule of thumb is anywhere from 3 to 12 months of after tax income should suffice as your emergency savings.  I maintain about 6 months of after income in a tiered savings structure.  Three months of that income is in a high-yield internet money market account which currently yields about 4.6% APR.  These funds are accessible whenever I want them and earn a relatively high interest rate for such liquidity.  The remaining 3 months of savings I keep in a laddered 12-month CD porfolio.  What that means is that I have 12 CD's that are staggered such that one matures for each month of the year.  This allows me to maintain a higher interest rate while still keeping the money partially liquid.  No matter how you do it emergency funds are a good thing to have and since most people don't have 30 or 40K laying around for emergency funds now is a good time to start budgetting a monthly amount to put into savings to try to reach your savings goal.

The other day Ben Bernanke, the chairman of the Federal Reserve, testified before congress and stressed the need for our society to become financially literate.  As a nation we have a negative savings rate and federal programs meant to suppliment retirement income are in serous financial trouble if things keep going the way they are.

I enjoy finance quite a bit and think it is a key element to being a good steward.  Fortuantely it's not all that hard either, even though it may seem overwhelming at first.  Lately, some of my friends have asked me about good financial practices so I decided to write up a few articles on the subject.  I doubt I will say anything new or particularly ground breaking; but, I figure if the goal is to raise the financial know how of the country the more sources of information the better.

So that brings me to step 1 in any good financial plan: a budget.  Knowing how much money you have and where it is going is critical in planning your future financial success.  If you take a stroll your local Barnes & Noble and browse the financial section almost all of them will have a section on good budgeting practices.  The way I see it there are 3 steps to a successful budget:

1. Creating the plan (knowing how much you expect to make and how much you epect to spend)
2. Executing the plan
3. And finally, reviewing the plan.

The first step is pretty straight forward.  Figure out how much money you have available to you and how much you need to spend.  I would suggest only budgetting for items which are required, such as mortgage, electric & gas bills, etc.  Other items that are not necessary but nice to have like cable T.V., dining out, etc. can come out of discretionary spending.  It's important not to overcategorize things or it will be much more difficult to keep the budget.  A typical Budget May look like the following:

Monthly Budget 

Income: $5.000
Expenditures:

• $1,000.00 Federal and State Taxes
• $1,000.00 Mortgage and associated fees
• $100 Electric
• $50 Gas
• $50 Water
• $400 Food
• $50 Clothes

As you can see only the essential items are budgeted leaving the rest for discretionary purposes.  Not too hard, right?  The next step is to actually put the budget in practice.  Set aside dollars for the budgeted items first and then use the rest for discretionary purposes.  You may also want to make a discrtionary budget that is separate from your main budget.  This allows you to set hard rules that the main budget cannot be broken but the discretionary is only a guidline.

After you have tried the budget out for a month, you are ready for the final step--review.  I believe this is one of the most important components of a successful budget but seems to get the least amount of page time.  At the end of the month figure out exactly where you did end up spending your money and make sure you actually met your budget.  If you didn't figure out what went wrong and adjust appropriately.  The key part is that the budget balances to 0 or greater, not less.  This is also a good time to take a look at how much you are actually spending on certain things.  For example maybe you get a $5.00 mocha every day, that's $150.00 a month which you may not think is necessary.  By dropping the mocha you make room for other things that you may find more valuable.

So far we haven't talked about any kind of savings or investing which I will hopefully get to at some future date but for now I'd say we would all be pretty successful if we had a firm grasp on where we were spending our money and allocating the dollars in a more efficient way than before.