End Of November Financial Status

November 30, 2008

I hope everybody had a wonderful Thanksgiving vacation. I’m not too happy about having to go back to five day work weeks, but Christmas break is right around the corner. As for my end of November financial status, I have yet to make a mortgage payment so that hasn’t changed much. Also, I had to finally pay for the second half of my bedroom set. Without further ado, here’s my standard financial status summary.

endnovemberfsCash

As I’m sure is the case with everybody else, my cash was the only asset to increase over the past month. I’m pretty happy with the increase as I had a very substantial credit card payment this month as a result of the paying for the second half of my bedroom set. Also, I have yet to receive my November tutoring check. I’m hoping to be paid tomorrow and it has been a very busy tutoring month.

Stock Market

November was another bad month for the stock market. Once again I am fortunate to not hold a large amount of money in the stock market. I hope to be introducing a large sum in the next few months to take advantage of the discounted stock prices. I’m want to make some good money on the rebound.

Liabilities

My first mortgage payment is scheduled for December 15th. For this reason, my condo liability has not decreased. I made my 18th car payment to decrease my total liabilities by a very small 0.1%. I also have a few major purchases on 0% credit cards that will be paid in the next few months, however, I decided not to record them as liabilities as my laziness factor dominated correct accounting.

Net Worth

I am pleased to have once again increased my net worth in November by 1.6%. I am looking forward to reaching the $100,000 milestone in the upcoming months.

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Free FICO Score From Mint

November 26, 2008

Back in early October, I stumbled upon a free credit report that provided me with my FICO score courtesy of Equifax. Mint.com is offering a free FICO score for members. This deal expires Wednesday November 26th. Back in October my credit score was 723. My current FICO score is 759.

How Did My Score Increase?

Previously, the factors hurting my score were a lack of credit history, I had recently been looking for credit, and I had no activity on my revolving accounts. I can’t imagine an extra two months really increased the length of my credit history. Also, I’m still applying for credit. My credit score increase must be due to the correct reporting of my revolving credit history. I use my revolving credit accounts regularly in search of as much cash back on all of my purchases. I didn’t think I was lacking activity with my revolving accounts and the increased score must be a reflection of the correct reporting of my accounts.

What’s Holding My Score Back

My most recent FICO score mentioned the key factor affecting my score was that I recently opened a new credit account, which is true multiple times over. Since my last FICO score I have opened two new checking accounts, a new savings account and two credit cards. Additionally, I now have a mortgage. I suppose I can’t really complain about this knock on my credit score. Since I won’t need to worry about my credit score within a year, I’m not too worried about opening so many accounts.

Conclusion

It’s always good to know your credit score. Fluctuations are inevitable. It’s also important to know what factors affect your score, especially if you will be applying for a mortgage or a loan within the year.

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The Obama Presidency And Future Changes To Your Taxes And Personal Finances

November 21, 2008

I recently posted about how I thought Barack Obama’s presidency would affect your personal finances, especially regarding taxes. Today I read an article from Schwab’s November Investing Insights regarding Michael Townsend’s thoughts on the Obama presidency. The president and his policies can have a significant effect on your investing. I’ve been gathering as much information on the impending “change” to put myself in the best investing position possible for the next four years. Below are my thoughts on Townsend’s thoughts.

Obama’s Priorities and Another Economic Stimulus Package

Obama was elected on a campaign that promised “change”. His campaign called for many changes regarding the financial world including:

raising taxes on wealthier Americans, encouraging retirement savings, reshaping the financial regulatory system, supporting alternative energy sources and expanding health care.

Townsend correctly states that he must focus his attention on the economic crisis and stabilizing the financial sector. If Obama does not fix the economy, he will be a one-term president and will not have a chance to implement any of his other plans. This most likely means another economic stimulus, which might consist of the following:

increased unemployment benefits and food stamps, probably combined with a major infrastructure-spending program. … a moratorium on foreclosures and perhaps additional help for struggling homeowners, a temporary elimination of the penalties on individuals who take early withdrawals from their retirement savings plans due to financial hardship, an increase in the deduction for capital losses, aid for the automotive industry and states that have serious budget problems, and possibly rebate checks or a payroll-tax “holiday” for some Americans.

I don’t know how I feel about another economic stimulus package, but Obama will look to quickly make his mark on the economic crisis. A second stimulus package is a foregone conclusion.

Tax Increases

Obama campaigned on a policy of increasing taxes for the wealthy. As soon as Obama has made his mark on the economic crisis you should look for him to start increasing taxes. He will increase taxes on the wealthy first by increasing the top tier or two of the marginal tax rate, as well as, increasing the dividends and capital gains tax rates. If the economy recovers while he’s still in office, I look for him to increase taxes across the board to pay for some of his other changes.

The estate tax is scheduled to be eliminated in 2010 along with Bush’s tax cuts. The estate tax refers to the tax imposed on the transfer of the taxable estate of deceased family members. Obama campaigned on a 45% estate tax rate. Townsend believes the following will occur:

Lawmakers will likely forge a compromise solution before the end of 2009 that sets the estate tax rate at 25% to 35%, perhaps as high as 40%, with an exemption amount of $3 million to $5 million.

Retirement Savings

I may not agree with all of Obama’s changes, however, promoting retirement saving is a great idea. Townsend believes Congress will focus on the areas of coverage, fees and advice. He believes Congress will try to increase retirement savings by setting up “automatic IRAs” for small businesses to allow for payroll deductions straight into an IRA. The point is to provide retirement options for employees of small businesses, without increasing the burden on the employers. This is a great idea. Although it should probably be coupled with an opt-out clause where the employee will be automatically enrolled, and would have to opt out of making contributions to a retirement account.

Fees and advice kind of go hand in hand. Townsend states that Congress has been working on making retirement fees more transparent to the employee, while possibly requiring a low-cost index fund in all retirement plans. Similarly, Congress might try to push through reform regarding the advice available to employees. Congress believes the advisers giving advice to employees might have a conflict of interest. Reform might be initiated to protect the employees from these conflicts of interest. As far as I’m concerned, requiring a low-cost index fund option in retirement plans, in addition to advisers that have the same interests as the advisers will only lead to individuals who are better positioned to take care of themselves in retirement.

Financial Regulation Reform

Since the collapse of the financial sector is at the heart of the economic crisis, reform of the financial sector regulatory system is inevitable. Townsend provides a few options:

One possibility is the creation of a “select committee” in the House, bringing together senior lawmakers from several committees that have jurisdiction. Such a panel would most likely try to create a reform package that could cover a wide swath of issues.

An alternative is to simply let the current committee structure consider a series of reform proposals and perhaps approve them in pieces, rather than in a comprehensive package.

Personally, I don’t like regulation in any form, although fear has definitely gripped the stock market and regulation might be the only way to release it’s stranglehold. I just hope the regulation is not permanent.

Conclusion

Townsend wrote a great article and I recommend everybody read it. The president has a huge effect on taxes and any type of reform. I recommend staying as well informed as possible and this article was a great start.

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Surviving The Economic Downturn With A Long-Term Outlook

November 19, 2008

The economic downturn that has dominated the headlines for the past few months has severely diminished the retirement savings of hardworking Americans. Not even President Elect Obama’s promise for change has prevented investors from fleeing the stock market. Government bailout plans have failed to jump start the economy. Unemployment rates are rising and at least one major retailer has filed for bankruptcy. Despite all of the doom and gloom, I’m still anxious to invest in the stock market (once my solo 401k is open). Even though the immediate future is bleak, a long-term outlook can do wonders for surviving the economic downturn.

Time Is On My Side

As a recent graduate, I am just beginning my investment journey. This is the first economic crisis that I have experienced as a member of the working class. I keep telling myself that I have to maintain a long-term outlook and not let the current state of affairs affect my investing plan. To keep pace with my long-term investment plan I will be attempting to max out my soon to be setup solo 401k and my Roth IRA for 2008. I am looking at this economic downturn as an opportunity to buy stock at bargain basement prices. The stock market and economy will rebound, they always have.

5 Year Rule

Due to my limited exposure, I have not lost a lot of money in the stock market. For this reason it’s easy for me to recommend staying the course and even buying more stocks. I am operating under the assumption that you do not have money invested in stocks that you will need within 5 years. It’s a general rule to keep assets that you will need within 5 years in safer funds like bonds, money market accounts or savings accounts. Use this economic downturn as a learning experience to invest only funds that you won’t need for more than 5 years, which requires a long-term outlook.

Time and Risk Relationship

With all of the negative news in the financial world, it might seem like an extremely risky proposition to invest in stocks, however, when you maintain a long-term outlook on investing, the risk is completely eliminated. The graph below shows how the range of annual returns diminishes when you invest over a longer period of time.

risk-vs-timeAs you can see from the graph, the longer you remain invested, the lower the chance you earn a negative annual return. 2008 will definitely fall closer to the bottom of the range for annual returns. Considering over five year periods, the annual return is very rarely negative, let alone severely negative, the stock market must rebound. This argument really only holds true when you diversify your investments (like an index fund), as you can always have negative returns with non-diversified investments.

Thinking Short-Term and Long-Term with Tax Loss Harvesting

Sometimes it is relevant to look at short-term and long-term investment objectives at the same time. An economic downturn provides a prime opportunity to sell losing investments for tax deductions that can be carried over to subsequent years to cancel out winning investments. Selling investments in a down market is a short-term action, however, if the investment has a promising long-term outlook, you can re-buy those investments after 30 days. This allows you to lock in losses for the short-term, yet regain your position for the long-term.

Conclusion

Even though there is nothing but negativity in the financial world, maintaining a long-term outlook towards investing will allow you to come out on top. The stock market always provides positive returns over longer periods of investing, which means the extreme losses will always be followed by extreme gains. Make sure you jump into (or hold strong) the stock market as extreme gains will surely follow this market downturn.

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Earn Cash Back While Shopping With Mr. Rebates

November 18, 2008

mr_rebates

Last week I wrote about Ebates as a way to earn cash back for online purchases that you were planning on making anyways. Mr. Rebates is a similar click-through website with a few key differences.

Signing Up

In order to sign up all you have to provide is an email address, a password and a referral email address (optional). Don’t be afraid to use my email address as the referrer (pfstartup@gmail.com). Also, Mr. Rebates offers a $5.00 sign-up bonus. Now it’s time to earn some extra cash back.

Earn Cash Back

Mr. Rebates works the same way as Ebates. You click on the desired store from the Mr. Rebates website and make purchases regularly. Your Mr. Rebates cash back will be credited to your account a few days after the purchase.

Getting Paid

Payments may be requested once $10.00 is available in your rebate account. Payment options are either via a check or PayPal.

Referrals

Referrals is the major way that Mr. Rebates differs from Ebates. People who sign up via your referrals earn 20% of the referred friend’s cash back. This 20% does not take away from your friend’s cash back.

Rebates and Coupons

Mr. Rebates offers special coupons at select stores to combine with your cash back. For example, Mr. Rebates is offering free shipping at any offer of $25 or more at Barnes & Noble. Mr. Rebates offers rebates up to 30% at over 1,000 different stores.

Holiday Promotion

Mr. Rebates is offering a holiday promotion that provides increased cash back at over 200 different stores. There is also a contest beginning on Black Friday to enter for a chance to win $10,000 cash.

Conclusion

As far as I’m concerned I would rather get extra cash back than not. Why not get some of your money back without any extra effort? Pay for your purchase with a cash back credit card for extra cash back.

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Book Review: Common Sense On Mutual Funds

November 17, 2008

bogleI began my personal finance education by reading Suze Orman’s “The Money Book for the Young, Fabulous & Broke” to get a good overview as I began my personal finance journey. I then read two books on investing in the stock market. William Bernstein’s “The Four Pillars of Investing” and Burton Malkiel’s “A Random Walk Down Wall Street” are great books that extensively describe all of the intricacies of investing. After reading those two books, I decided that investing in funds rather than individual stocks would be my preferred method of investing for my retirement money. I turned to John C. Bogle’s “Common Sense on Mutual Funds” to learn about fund investing. Who better to learn from low cost fund investing than by reading a book authored by the man who started Vanguard?

Investment Strategy

Bogle begins this section by detailing the importance of long term investing, which is critical for retirement investing. If this economic downturn doesn’t make you look at a long-term investment horizon, I don’t know what will. Bogle stresses investing early with a long-term horizon to decrease the volatility of your returns.

Another key aspect of investment strategy is asset allocation. Bogle recommends selecting an asset allocation based on each individuals optimal risk and reward.

The final key point of this section focuses on the engineers slogan of K.I.S.S. (keep it simple stupid). Bogle argues that the simple way to invest is by picking index funds instead of trying to pick the best active manager, selecting low cost funds, holding investments over time and limiting the number of funds you buy.

Investment Choices

This section is where Bogle begins to really hammer his main theme for the whole book, INVEST IN INDEX FUNDS. Bogle throws some fancy stats around that state index funds have achieved a 12.5% return compared to a 10.8% return for equity funds over a 30 year period. He attributes the disparity to fund costs. He then continues to argue that index funds are more tax-efficient and reduce risk.

Bogle discusses the relationship between cost and return for bonds. His argument is the same as with equities. As the cost drops, returns rise. Once again Bogle calls for minimizing costs in the bond arena.

I don’t know how I feel about Bogle’s position on global investing. He basically says that a large enough percent of net income from companies in the S&P 500 is derived outside of the US that additional foreign investing in unnecessary. I will be doing some reading into asset allocation in the near future, after which I will define my position on foreign investing.

Investment Performance

The investment performance section starts out with a very impressive mathematical defense of all funds eventually reverting to the mean. Bogle basically states that funds are allowed to significantly outperform the market for a few years, however, those years will be followed by years of under performing. He provides stats that prove his case for large cap and small cap stocks, US and international stocks, growth funds and value funds, and high grade stocks and low priced stocks. Bogle uses the reversion to the mean argument to support index fund investing by saying that high flying stocks will always revert to the mean, so you might as well invest in funds that have lower costs.

When dealing with non-indexed funds, Bogle states that it is crucial to evaluate the fund asset size. Investors are attracted to high return funds. The problem arises when these fund managers are not able to invest in the same manner that provided the high returns when the asset size greatly increases. Index funds do not share the same problem.

Bogle argues that taxes severely reduce your investment performance. Portfolio turnover is trending upward, which turns more of your gains into short-term capital gains, which are taxed at a higher rate. Bogle suggests index funds as a good solution to the portfolio turnover problem, however, he says tax-managed funds are the best solution. These funds emphasize growth stocks that provide low dividend yields, offset gains by harvesting losses, replace funds sold for harvesting after 30 days, emphasize long-term investing by charging early redemption fees, and minimize costs similar to index funds.

The final chapter about investment performance focuses on time. This one is pretty self-explanatory as the first thing you learn about investing is about the magic of compounding. Bogle uses this section to hammer home the importance of reducing costs by displaying how much your additional costs end up reducing your nest egg.

Fund Management

Bogle uses this entire section to vent about how mutual funds do not focus on providing returns for shareholders the same way that individual companies focus on providing returns for shareholders. I can almost see him writing this section with a case of Coors Light, “venting”.

He explains how expense ratios have increased without a corresponding increase in value to the shareholder. Similarly, a large amount of the increasing fees are going towards marketing to bring in more assets that generate more fees for the management team, which is detrimental to the shareholder due to the increased asset size.

Bogle raises an interesting argument regarding the impact of technology on fund management. Technology has made transactions easier, increased the information availability and brought about new financial instruments. Bogle argues that investors are not using the increased availability of information to make smarter decisions, just more decisions. Technology has aided in the increase in portfolio turnover and helped people chase returns only to diminish them.

Two chapters are spent detailing the structure and management of funds and how it is not benefiting the shareholder, but I found it extremely boring, so I’m going to just move on.

Spirit

The final section details his adventures with starting Vanguard, which is actually pretty interesting, but it doesn’t really have a place in my personal finance blog, and I’m getting really tired at the moment.

Conclusion

Overall, I enjoyed this book. Bogle relies heavily on numbers and stats to make his arguments. If numbers and stats are not your cup of tea, then this book is not for you. I really enjoyed reading his arguments for index investing. After reading this book, I am more convinced that index investing is the correct route for my retirement investing. If you’re looking to be beat over the head with index investing then you should read this book. Also, the last section on the rise of Vanguard was pretty interesting. I do feel as though I learned a good deal more in the previous books that I have read.

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Cash Back For Online Purchases From Ebates

November 14, 2008

The holiday season is quickly approaching, which means there will be lots of holiday shopping. One great way to avoid the stress of crowds and lines is to shop online. Ebates provides a great way to earn cash back for purchases that you would make anyways. I just bought my Dad racing singlets from Eastbay, through Ebates. I received 5% cash back for being redirected to Eastbay through Ebates, which combined with my credit card rewards is a great deal.

Signing up for Ebates

Signing up for Ebates is as simple as it gets. All you need is an e-mail address and a password. That’s it. If you’d like to sign up for Ebates follow this LINK and we both get a bonus!

How Ebates Works

Ebates receives a bonus for referring customers who make purchases. Your cash back is a piece of that referral bonus. It’s as simple as that. This business model allows Ebates to make money, offer you cash back and never require you to pay them any money. It’s a win-win situation for everybody, as long as you stick to making purchases that you would have made anyways. Do not use Ebates cash back as an excuse to buy something just because you get cash back.

Getting Paid

Ebates sends out checks or credits PayPal accounts every three months as long as you have at least $5.01 in your account. If your account is below $5.01, your balance is carried over to the next 3-month period. You also have the option of donating your cash back to charity.

Double Cash Back Savings

Ebates is doing a holiday promotion where a few stores provide twice the amount of cash back. The following stores have double the cash back savings: Borders, North Face, Home Depot, Macy’s, Dell, Walmart, Barnes & Noble, Disney, Victoria’s Secret, Sears, Overstock and Nordstrom.

Gift Cards

Even if you don’t want to buy your products online, you can still take advantage of Ebates. First, you buy gift cards and receive cash back. Second, you go to the store and buy what you were planning on buying.

Coupons and Discounts

Ebates also offers special coupons and discounts that are exclusive to Ebates.

Conclusion

I will be using Ebates every chance that I can. I can’t think of a better deal than combining the coupons, discounts and cash back from Ebates with credit card rewards. As long as you are making purchases that you were already planning on making, what’s the downside with buying through Ebates and getting a few dollars back? If you’re wealthy enough that you don’t need a few extra dollars, feel free to send some of those extra dollars my direction.

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