Wealth...Uncomplicated

Report Card for Wealth...Uncomplicated's 2009 Prognostications - 6.5 out of 7 isn't bad

Last year I laid out my prognostications for 2009 and all but half of one was correct.  Of course, this past year was a relatively easy one to see directionally what would happen working under a single assumption that the sky would not fall forever.  The result is that 6.5 out the 7 prognostications were on target.  What did I miss?  Read on.  The original text is listed and the follow up commentary is italicized.

• Economy - the economy will begin its recovery in the latter part of 2009 with this recession coming to an end before March 31, 2010.  The recovery is definitely underway, albeit at a pace that resembles a snail running a marathon.  CHECK!
• Interest Rates - the Federal Reserve will hold rates steady for the first part of the year, and as the economy shows signs of stabilizing, will begin to raise rates near the end of the year.  Rates were steadily near zero for the entire year, but there were no rate increases.  1/2 CHECK.
• Inflation - with the global recession in full swing, inflation will remain tame for the entire year with only mild spikes in commodities prices.  Inflation?  What inflation?  Consumer prices were nearly in a comatose state.  CHECK!
• Deflation - a month or two of declining prices may occur, and these numbers are more likely to produce sensationalized headlines in the media than cause real duress for the economy.  You might not have noticed, but we actually experienced deflation last January.  Fortunately it was very short-lived.  CHECK!
• Stock Market - equities will lead the major asset classes with positive returns in excess of 10% for the year.  The S&P 500 returned 26.46% in 2009, a little better than 10%.  CHECK!
• Fixed Income Market - corporate bonds will lead the way as bondholders realize many of these bonds have been unfairly beaten down in the marketplace and double digit returns are not out of the question.  This was my favorite part of the market last year.  The lower the credit quality of your bond portfolio, the greater your return.  Here are a few examples from lowest credit quality to highest credit quality.  Fidelity High Income (SPHIX) returned 51.46% with average credit quality of B (pure junk).  Vanguard Intermediate-Term Investment Grade Bond Fund (VFICX) returned 17.71% with A-credit.  Bond Fund of American (ABNDX) returned 14.91% with average credit of AA (high).  CHECK!
• Cash Equivalents - I bonds will continue to be the best place for cash equivalents with high yield FDIC insured bank accounts in second.  Even though I Savings Bonds yielded nothing for half of the year, they still managed to out pace high yield FDIC insured bank accounts.  Currently, you can grab a yield of 3.36%.  CHECK!

Last year was much easier to predict than this year, but I'll have my 2010 prognostications out there later this month.

If you'd like to read the original post, click here.

Wealth...Uncomplicated in 2010 - it's all about principles and processes

This year, I'm happy to announce that Wealth...Uncomplicated will be changing formats ever so slightly and focusing more on content that is centered on the principles and processes that lead to a more secure financial life.  Throughout 2010, you will find posts designed to illuminate the guiding principles of sound personal financial planning and management as well as some very practical processes to help you stay on target.  Of course, the big bonus is that once you have the right processes in place, it become incredibly simple to accumulate wealth...systematically.

Case Studies

While the blogosphere and financial media is littered with short articles that discuss various aspects of personal finance, there is little in the way of detailed case studies that allow readers to understand the full range of complexities involved with planning and managing money.  The case studies presented on Wealth..Uncomplicated will illustrate common situations and the best ways to work through them.  These situations will be varied, but primarily focus on issues faced by individuals and families between the ages of 18 and 45.

Technology

In analyzing these cases and examining possible courses of action, a variety of technologies will be used and recommended to help you address your individual situation.  Most of these tools are readily available to you at little or no cost, while a few of them are considerably more expensive and traditionally available only to financial professionals.  By exposing you to both consumer and professional driven technologies, you'll be able to see the full range of technologies that can be used to help you plan and manage your finances.

Processes that Work

While technology is useful in revealing the numbers of a situation, it is also incredibly useful in helping us establish processes that work.  This ranges from creating or examining your current financial position to developing workable investment strategies that can help you reach savings goals.  In addition, some emerging technologies can help you automate many of these processes, improving the likelihood of accomplishing your goals.

Timeless Principles

Underpinning all of this are a series of timeless principles that are literally as old as civilization.  While personal finances as we know them today are incredibly varied and complex, the cure for what ails us is usually something simple and easy to understand.  These timeless principles drive the financial planning and management process and without them, financial misery can result.

Final Notes

If you would like to be the subject in one of the upcoming case studies, please feel free to send an overview of your situation and your most pressing questions and concerns to me via email on the 'About' page.  All names and locations are changed to protect the identity of the subject and the case study is completed at no cost.

Getting the Most Out of Your Electronics - laptop, hdmi cable, hdtv, netflix and more

I am late to the HDTV party, but believe me when I say I made a serious entrance.  While many have taken the plunge and purchased some really nice HDTVs, maybe even purchased a Blue Ray player or an HD cable or satellite package, I've done nothing but buy an HDMI cable.  With this little piece of heaven, you can turn your television into a little electronics playground.

Our Setup

Here's a quick list of what we have and then I'll share with you what we can do with it and why it's hellacheap entertainment:

1. 37" LCD HDTV with HDMI inputs
2. HDMI cable
3. Computer speaker system with subwoofer
4. Laptop computer
5. Netflix subscription
6. Basic digital cable

What We Get from Our System

We get television programming from our cable provider that includes all of our local stations, all of the PBS channels in the region, On-Demand, and some others.  In other words, our version of cable sucks compared to most.  However, we also have a Netflix subscription so we can watch whatever they have - and that's a lot.  Not to mention that the HDMI allows us to hook into anything that our computer can download.

So here's a sampling of what we can put on the tube courtesy of the internet:

• Netflix
• Hulu
• YouTube
• ABC
• NBC
• CBS
• FOX
• WildTangent Games
• DVDs
• And the list goes on...
• And on...
• And on..

Anything you can view on your PC, we now have available on our television.  It might not seem like such a big deal, but let's count the cost compared to an HD package from a cable or satellite provider:

• Basic Digital Cable: $15/month
• Netflix Subscription:  $18/month
• Hulu, YouTube, ABC, etc.:  FREE

The total cost we pay each month is $33 compared to an HD package at nearly $100 per month.  The annual savings is $792 and we get a lot MORE than just cable.  With that $792, we could just as easily buy two new laptops each year or take a nice little weekend vacation or pay for our sons' college educations.

Of course, the value doesn't stop there.  We can also run household budget meetings through the television so it's easier for the entire family to see (by the way, if you're shielding your kids from money matters, stop it!).  Anything that you would want to see on a bigger screen or share with more than a pair, having a laptop and television that have HDMI ports is a major benefit.

Now, it's not perfect...yet.  That's why I'll be adding a wireless keyboard with mouse to the mix so that we can recline, watch the tube, and have a full blown web television experience.

By the way, a 37" HDTV can be had for around $350 and an HDMI cable is $40 on the low end.  If you buy them, you'll drop $390, but if you have even a classic cable package, you'll pay for this purchase within a year and after that...well...it's gravy.

The Federal Reserve's Tight Rope - balancing its dual mission

The Federal Reserve is many things to many people.  For some, it's an abomination, but for most of us (of the saner variety) it provides a much needed function in shaping our economy.  The Fed has a dual mission of keeping a lid on inflation and encouraging healthy economic growth.  The difficulty is that in times like today, it's like walking a tight rope about as thick and strong as dental floss.

On the one hand, the Fed needs to keep money loose to move the economy out of recession and back to healthy growth numbers.  On the other hand, if the Fed keeps rates low for too long, the ugly monster that is inflation will return with a vengeance.  The last, best example of a time like this was in Japan in the early part of its 'Lost Decade'.

Without going into too much detail, the outcome in Japan is something that we'd like to avoid - generally speaking, a 'Lost Decade' isn't good.  So what's the Fed to do?  Hellifiknow, but there's only two ways to fall off of the tight rope.

Raise Rates Too Soon, Double Dip Recession

If the Fed tightens the money supply too soon, it will choke off the recovery underway and we will land in a double dip recession.  This also means that we will have wasted a good chunk of the fiscal stimulus (government spending) because another recession could prompt ever more spending.  This would hurt the economy in the short run, but also in the long run as the country would be saddled with more debt.

Raise Rates Too Late, Inflation & Recession

Should the Fed raise rates too late, we'll find ourselves with a period of inflation - potentially stagflation - that will erode the purchasing power of consumers and businesses.  The last time we went through a period of high inflation, Paul Volker pursued a policy of ever increasing interest rates to reign in the beast.  The byproduct of this policy was an increase in unemployment, and....recession.  By the way, that recession wasn't a small one either.

An Unknown Margin for Error

The problem with our current state of affairs is an unknown margin for error.  Sometimes we'd all like to think that if you put enough really, really smart people in a room together that they'll be able to cure all that ails us.  Unfortunately, the world doesn't work that way.

While Ben Bernanke and the staff of the Federal Reserve have a great depth of knowledge, we can't depend on them to be perfect.  As a result, it's important to do what you can to address the uncertainties we face.  A low debt load, stout cash reserves, and a balanced portfolio will always serve you well.  

By the way, have you rebalanced your portfolio during the run up?  You might want to look into it.

Taking Out the Trash - the single best method to a great life

Years ago, I heard something that really made an impression on me.  It was, "the quality of your life is largely determined by what you take out of it, rather than what you put into it."  There's a great deal of truth in these words, and I'd wager that it's the single best method to a great life.

As an American, we're brought up to continually add things to our lives - a big house, a nice car, stylish clothes, etc. - to make it better.  Unfortunately, many of us have added far too much and it gets to the point where you have to start taking out the trash.

The kind of trash you've accumulated can come in a myriad of forms and it's not always so easy to pick out of the crowd.  Sometimes it's as simple as cutting an expense here or there, but other times, it's a toxic relationship or even a contentious work environment.  Regardless of what the 'trash' is in your life, taking it out will make you better off.

This weekend, take some time to make a list of the things that are keeping you from living a better life.  Dig deep with this list and consider not only the things you can readily see, but also the root causes of the issue.  For example, if you're staring at a checking account that's on life support, look at all of your expenses and figure out what is helping and what is hurting you.

After you've gathered up all of the trash on your list, start taking it out.  You needn't go nuts and take it all out at one time (you can only lift so much), but start laying plans to eliminate one or two items each week or month.  In just a few months, you should be on your way to living a great life.

Quick and Dirty Real Estate Investment Analysis Spreadsheet - calculates present value of annual and cumulative cash flows, present value of equity, and annual growth rates ignoring taxes

Below is a quick and dirty real estate investment analysis spreadsheet that I put together for a reader at FiveCentNickel.  While the spreadsheet is somewhat limited in scope compared to more sophisticated, professional level analysis tools, it does give some ballpark figures for present value and future value cash flows and equity as well as the annual rate of return while ignoring taxes and a few other data.  Using a spreadsheet like this is important for real estate investors because with so many moving parts, the real value of a property and it's annual rate of return can become clouded.

Anyone who has heard a fair amount of investment stories will typically be able to recall someone who 'doubled' their money on a property.  While doubling your money is a good thing, if it takes 30 years to do it, well...who cares?  What this spreadsheet is designed to do is put things into perspective of annual returns as well as present values of each component of the property's return components - equity and cash flows.

Of course, this is entitled 'Quick and Dirty' with good reason.  It ignores taxes including deduction, depreciation, depreciation recapture, and capital gains.  It also ignores the rate of return on free cash flows (assumes it matches inflation) so the returns characterized are understated overall.  Lucky for you, it's in Excel so you can customize it to your heart's desire.

Here it is:  Download Quick and Dirty Real Estate Investment Analysis

By the way, whether you're analyzing a particular investment or your retirement, it's important to put things into present value terms so that apples to apples comparisons can be made.  Beyond that, it makes it easier to understand.

We Could Learn from the Irish - how they're handling a tough economy and hefty deficits

Most of the world is experiencing tough times just like us, but not everyone is handling things the same way.  Take the Irish for example.  Instead of spending massive amounts of cash, their finance minister is doing everything he can to get the economy back to growth and reducing the budget deficit.  Us, on the other hand, we're spending big bucks in the hopes that a couple of trillion dollars will bring us out of recession faster and that productivity gains (the long term antidote to all economic problems) will sustain us.

There's merit to both approaches, and I would bet that our approach will end up accomplishing our short-term goals of moving back to healthy GDP growth, but there are a few things I really like that the Irish are doing and that we are not.  Namely, making deep cuts in public employees' compensation.

Rather than going on a firing rampage, they're simply cutting salaries.  How much?  For most employees, salaries have been reduced by 7% and for more highly compensated employees, the pay cuts are around 15%.  By cutting salaries, Ireland will be able to put a pretty good sized dent in their budget deficit which will ultimately lead to a healthier government and economy.

Our Congress' Salaries

Since our Senators are currently receiving about $174,000 each year, why not start with cutting their pay?  If you'll recall, our original representatives collected no salary and I'd argue they did a much better job than the folks on Capitol Hill today.  After all, they're supposed to be serving a 'higher' purpose by being in public service.

While the Senate continues to get their fat salaries and untold dollars through the connections and power they wield by being Senators, I think it's time to take a page out of the Irish play book by delivering a swift, deep cut in pay.  It's my belief that anyone should be able to build a pretty good life with an annual income equal to twice the median household income.  This can vary from state to state, region to region, but nationally it's just under $50,000.

This means I'd like to see most Senators and other highly compensated public servants have their salaries cut down to size.  In the Senate alone, we could shave $7.4 million off the federal deficit.  Oh, and how about the House of Representatives?  There's a lot more Representatives than Senators, right?  With 435 Representatives, we could save $32.2 million.

Tens of Billions Saved

Since Congress is big on what things cost over 10 years, we could immediately shave $322 million off of the budget deficit with a cut in pay that still leaves Congressmen earning twice the median household income.  If you take cuts like these and apply them throughout our government, I think we'll be looking at tens of billions of dollars saved.  Of course, that's not going to happen anytime soon.

More on Ireland's Deficit Response

Increasing Productivity with Skype - it's far more useful than you might think

So you've probably heard or it or maybe even seen it in action on Oprah, but how can Skype be used to increase productivity?  As communications technologies go, it's not the end all, be all, but it certainly has some very attractive features that can instantly increase your productivity.  Chief among its benefits is the ability to conduct voice and video calls without your eyes or hands leaving your computer.

It might seem like a small thing to not have to grab the phone and turn your attention away from your work for such a minimal amount of time, but trust me, it's kind of a big deal...depending on what you do for a living.  If you're an IT professional, Skype is almost a must.  If you're a server at a restaurant, maybe not so much.

Those that would benefit most from Skype are those that (1) work a lot on the computer, (2) frequently need input from others to complete job functions, and (3) prefer to get things done as efficiently and quickly as possible.  On the third point, I recognize there are those that like to make a phone call and get away from the desk, but if you're an on-task individual, you'll love the focused work that Skype can deliver.

Some of the best fit professions and industries that I could think of include IT, accounting, telecommuting professionals, internal support personnel, and insurance agents among others.  With tax season approaching, I can see accountants across the country calling their clients for clarification, tax forms on screen, and keying in all of the necessary details.  All of this without moving away from the desktop.

If you haven't tried Skype, it's free if you are calling a fellow Skyper, but you'll need to pay $2.95/month if you want to make calls to folks on regular phones.  After spending a little time on Skype, I can tell you it's a really nice experience, as you can talk, instant message, and even send text messages from the comfort of your computer.  It's nice if you're working on a project to just pop in on Skype, get the answer you need, and fix the issue on the spot without ever breaking your focus.

By the way, the call quality on Skype is unbelievably good.  It's very close to my landline and a few cuts above my BlackBerry.  To learn more about Skype, follow this link.

The Three Black Holes of Budgeting - it's not even close to what you think

Somewhat amazingly to me, there are millions of people going about preparing their budgets and millions more complaining that there's too much month left at the end of the money.  There are fights between spouses and couples about buying this or that; disputes arise among roommates about whom should be paying what; and there is generally a whole lot of bickering, fighting, and foolishness surrounding making and living by a budget.  All the while, most are trying to solve this problem by 'spitting on a fire'.

It's NOT the Small Stuff

When it comes to budgeting, a $5 coffee won't break you.  Nor will a $50 mani-pedi.  I don't even think a $100 hair color treatment and styling will bust it.  Usually a budget is doomed before it ever gets to the day-to-day choices because of what financial geeks call fixed financial obligations.

What are these obligations?  Housing, transportation, insurance, utilities, and just about anything else that you have committed your paycheck to and have little ability to substantially reduce or eliminate without a major pain in the backside.  You can't go without a roof over your head.  Certainly we all need transportation of one form or another.  Living without insurance is kind pretty stupid, oh, and we need some of that thing called electricity too.  Like it or not, we've all made our beds and we're laying in them.

Unfortunately, not all beds are as nice as Tempurpedic or Select Comfort beds.  Many are about as comfortable as a gravel road with patches of mud and shards of glass mixed in.  Not good.

So how do we go about making our lives more comfortable through a budget that actually works?  Simple, get yourself a more comfortable bed.

Black Hole #1: Housing

The largest black hole in budgeting is housing.  It controls the largest portion of your after-tax income including (1) mortgage payment, (2) real estate taxes, (3) homeowners insurance, (4) furnishings, (5) repairs and maintenance, (6) electricity, (7) gas and/or heating oil, (8) water, and (9) lawn care.  If you add all of these expenses, many will find that more than half of their take-home pay is committed to housing.  The size of the home you purchase will greatly influence all of these costs.  A bigger home requires a bigger mortgage payment, higher real estate taxes, increased insurance premiums, more and better furnishings, greater maintenance, higher electricity consumption, increased heating costs, more water consumption, and more expensive lawn care.  Can you see the black hole now?

Black Hole #2: Transportation

With the elephant out of the room, it's time to deal with the rhinoceros.  Transportation can take many forms depending on where you live, but for most Americans, it's an automobile of some sort.  To pay for the great privilege of transportation, our budget takes hits from (1) auto loan or fleece...err...lease payments, (2) personal property taxes, (3) auto insurance, (4) registration fees, (5) repairs and maintenance, (6) gasoline, and (7) massive depreciation.  Here, it's not just the size of the vehicle, but also the age that dictates how large the black hole will become in your budget.

 

Black Hole #3: Debt Servicing Payments

Finally, we get to the problem of debt.  Many carry balances on credit cards, take out personal loans, obtain 'special' financing, and the like.  All of it increases your fixed financial obligations.  Of course, I'd argue that this one is simply a result of the aforementioned lifeblood sucking black holes, but I think it merits mention on this topic.  Think about it.  If you don't over-commit on housing and transportation, wouldn't you have plenty of cash to buy all the lattes, mani-pedis, and whatever else gets your rocks off?  Sure you would, and that's the point.

Keeping Black Holes Out of Your Universe

To keep these three massive budget-draining, black holes out of your life, there are some simple rules to follow that admittedly, will make you a weirdo in the mainstream.  Here they are:

1. Live in the Smallest House You Can Manage - If you have a family of three and won't be adding to the family, get a two bedroom home.  What's the third bedroom for anyway?  This is unused capacity that will kill your budget.  Don't forget, that 'extra' bedroom will make you pay extra in eight different ways.
2. Buy Used and Drive It Until It Dies - Think you should only buy new cars?  Wrong.  Buying used dramatically reduces the amount you pay in depreciation and lowers your cost of ownership in a total of five different ways.  Over the course of your working career, buying quality used cars and driving them into the ground will save you hundreds of thousands of dollars compared to buying new.
3. Get and Stay Out of Debt - Once you've made the changes in housing and transportation, it should be easier to get and stay out of debt.  With reduced commitments in 16 areas of your budget, getting out of debt should be a piece of cake.  Shortly thereafter, you'll want to make investing in 'you' your number one fixed financial obligation through saving and investing, education, or both.

Ultimately, a lower proportion of fixed financial obligations is the path to living within a budget and achieving lasting financial security.  Don't be fooled by the myriad budgeting books, articles, and software out there.  The reality of broken budgets has far more to do with your fixed financial obligations than with your day to day spending - so quit bickering over foolish little things.

Mutual Funds or ETFs - four screens to make a good decision

With the explosion in ETFs over the last decade and the continued reduction in trading costs over that time, it's important to know whether you should own mutual funds or ETFs.  To help you decide between them, there are four key criteria to examine.

#1:  Are You an Active Trader?

For active traders, ETFs are 100% the way to go.  Of course, you should take a harder look at your investment strategy as active traders typically lag well behind the markets and they get to pay higher transaction costs.  NOTE:  93% of millionaires surveyed in the book, The Millionaire Next Door, were long-term investors.

#2:  Do You Contribute?

If you are continuing to make regular contributions to your portfolio, mutual funds have inherent advantages over ETFs.  Generally speaking, mutual funds are better for investors who are continuing to add to their portfolios up to certain dollar amounts.  NOTE:  This largely depends on how much and how frequently you are contributing to your portfolio.  The lesser the frequency and/or the higher the dollar figure of the addition, the more ETFs will make sense.

#3:  How Much Will You Invest?

The smaller the amount of your investment portfolio, the more mutual funds will be favored over ETFs.  Even with ETF trading commissions coming down to around $4/trade, it's hard to justify a $50 trade that costs $4 or 8%.  You could do better even if you had to pay a load on a mutual fund.  To know what's better, use this formula:

        Total Commissions  /  Total Value of Trades  =  Percent Cost

By knowing the percent cost, you can compare the cost of ETFs directly with mutual funds.  If the percent cost of buying an ETF is greater than a mutual fund over your projected holding period, go with the mutual fund.

#4:  Are You Style Conscious?

For those that care about investment style (typically those that are on the outer areas of the risk spectrum - low or high), you will need to go with a mutual fund that has a philosophy that matches your needs.  While ETFs and mutual funds have value and growth index offerings, this doesn't always match up with each investor's needs.  If you really care about investment style, mutual funds are the only way to go.

To learn more about ETFs, click here.

My Black Friday - all 13 1/2 hours of it!

Okay, I'll confess, I spent 13 1/2 hours waiting outside of Best Buy in Lafayette, Indiana to purchase my new Sony Vaio laptop that I'm using right now and I swear I'm not crazy...okay maybe a little.  We had just finished Thanksgiving dinner at about 3:00 and I decided to go check out the line at Best Buy to see if I'd have a shot at getting a great deal on a new laptop.

Last year, we went to Best Buy at around 1:30 a.m. and the line was around the back of the building. This year, we wanted to be early to get the laptop we wanted, and when we saw only two others in line with more arriving by car, I made a snap decision to stick it out for the long haul. Our position in line - #3.

With a place in line guaranteed to secure a Sony Vaio with an Intel Core Duo processor, 4 GB of DDR2 RAM, 320 GB of hard disk space, and a price tag of only $399.95, I did some quick math and figured I'd be able to save between $250 and $400 by making this purchase, on this day.  Sooooooo, I sent my frugal wife to go grab some supplies including some chairs, drinks, cups, blankets, gloves, hat, scarf, and generally anything that would get us through the night.  To her credit, she hung tough with me throughout - although I think the blanket scoreboard read Her:All, Me:Zero.

Nevertheless, the group we had at the beginning of the line was great.  We had some bona fide pros ahead of us (still not sure how they were able to get hot homemade food out of their Camry...do they make microwaves for the car??), and as time passed, it started looking a lot more like Amateur Hour.  I'm not saying we're grizzled veterans yet, but this was our second multi-hour wait in the freezing cold and we definitely learned a few things from last year - chief among them is getting there early.

Around 4:45 p.m. on Thanksgiving, a couple came up to the door and asked us, "What time do they open?"  We replied, "Five o'clock."  They said, "Oh, just 15 minutes."  We said, "That's A.M."  The look on their faces was funny for us and also told us that we were officially part of the nut-job-crew that you read about and see on television.

The first few hours were filled with questions of, "Are you sure you want to do this?  Are we nuts?  Is it worth it?"  Once we got past that, it got really cold with stiff winds and temperatures near the freezing mark.  If you've ever been to Lafayette, you know that the land is flat as a pancake and the wind is none too fun in the winter.  But we persevered, and things clicked along until about 3 a.m.

That's when it was really cold.  After having been in the elements for nearly 12 hours, you get to the point where you're so cold, you can't even feel your legs.  Even when going to McDonald's to grab coffee, the warmth inside still felt cold.  So there we were, two hours to go, freezing, and any little tricks to stay warm had been used and were ineffective.

The three o'clock hour was rough, but the next hour was worse.  This was when the Best Buy team started arriving and they began handing out vouchers for the various door buster deals.  With voucher in hand, we could have left and come back by 9 a.m. to claim our hard-earned wares.  However, we opted to stay that last 45 minutes to get the computer and get out.

Seconds seemed like minutes, and minutes seemed like hours...seriously.  I recall it was 4:15 a.m. and I looked at my watch three times in the space of two minutes thinking that at least 15 minutes had passed each time I looked.  No such luck.

Finally, the magical five o'clock hour was upon us and the Best Buy team came out to welcome us and countdown to open.  It was fun and the group was very spirited in ushering us into the store after a very, very long wait.  I got the Sony Vaio I wanted at a price that simply couldn't be beat.

Was It Worth It?

In the end, everyone asks if it was worth it.  To them I say, "Hell yes it was worth it!"  Would I do it again?  I guess you can stop by next year...I'll be the Black Friday Pro wearing full blown winter gear grilling veggie burgers over an open fire (security guards permitting).

A Wallet Built for Financial Success - what a healthy wallet looks like

 Sometimes building wealth is as simple as stacking the deck in your favor.  There are few better places to do this than in your wallet.  Indeed, a wallet and its contents tell a good bit about you and how well you manage your money.  Some wallets are bursting with financial gluttony, while others are lean and mean, so what kind of wallet is built for financial success?

Top 10 Wallet Stuffers

1. Driver's License - if you're driving, you gotta have a license...period.
2. ICE Contact Info - if you have a serious accident, an In Case of Emergency (ICE) contact card can help emergency responders get in touch with loved ones and gather medical history on the fly.
3. Health Insurance Card - if you've got it, flaunt it.  Okay, maybe not so applicable to health insurance, but having this card with you can save you some time and if you find yourself incapacitated, doctors can get a great deal of information through your insurance card.
4. Auto Insurance Card - state laws require you keep auto insurance if you're driving and having this handy will not only save you a headache when dealing with a traffic stop, but also make cleaning up after an accident a much smoother process
5. Cash - good old greenbacks are a must have in any wallet.  While banks continue to push account holders towards plastic and their alleged convenience, carrying cash will save you 18% or more on your total out of pocket spending and keep you from lining the bank's pockets with overdraft fees.
6. Debit Card - these little pieces of plastic make spending easy, but overuse or misuse frequently results in massive headaches in the form of overdraft and ATM fees.  Banks collect billions of dollars annually in fees from debit card users that are 100% preventable.
7. Discount/Store Loyalty Cards - shopping without these puppies is likely to cost you anywhere from 5% to 20% more on your purchases.  From the grocery store to the gas station, having these cards in your wallet will save you big bucks.
8. Library Card - modern libraries have vast resources that go well beyond books and magazines.  Access to research databases and professional journals can save you hundreds or even thousands of dollars each year plus, if you're looking for market research, it's both easy to find and free.
9. Organ Donor Card - as unfortunate as it is to be dead, I'm betting you're body isn't going to care if you donate some of its parts to people who need them.  Organ donation is simple and carrying a donor card can improve the odds of effective transplants.
10. Family Attorney's Card - you never know when legal trouble may strike or when you simply need some advice.  From real estate transactions to auto accidents, family attorney's are a valuable resource and as your net worth increases, so too does the value of their advice.

What's Missing?

Major credit cards, store credit cards, and other wealth distractions are left out of this group.  As you should already know, credit cards are a bad idea for the majority of people and they offer little value or convenience above debit cards.  If you carry only forms of cash payment, you'll avoid interest charges and have a better shot at creating wealth.

By the way, I just took this photo of my wallet so you can see how I roll:

Of course, I was just kidding, and to be frank, walking around with this much cash is both uncomfortable and a bad idea.  Could you imagine trying to sit down with that thing in your back pocket?  Back pain, anyone?  How irritated would you be if you lost that much cash?  Besides, I just went Black Friday shopping yesterday, and my wallet is nearing the empty mark...gotta support the economy, right?  

Calculating When Your COBRA Subsidy Will End - from eHealthInsurance.com

    With millions of Americans out of work, COBRA is an acronym that all too many are familiar with.  While the cost of extending coverage is exorbitant, the federal government does allow for a subsidy to help families with keeping these costs within the realm of reason.  To aid individuals and families that are now using COBRA health insurance, eHealthInsurance.com has created a widget to help in calculating when your COBRA subsidy will end.  This calculator is provided below:

In the event that you are not affected by a layoff or using COBRA, let me give you an idea of what these individuals and families are facing.  This year, our health insurance provided by my wife's employer will cost us $4,020 in premiums out of our pockets.  In addition, her company contributes another $6,000 to subsidize our premiums for a grand total of $10,020 annually.  This doesn't include a deductible of $4,000 or co-insurance of 30% after the deductible is met.

If you consider the average household with $50,000 in earnings for a year, COBRA is great because you can get coverage, but the costs are outlandish.  Again, the government has setup a subsidy to help offset these costs, but keep in mind that even with the subsidy, many households still cannot afford it.    

To learn more about COBRA, click here.

To read more about the COBRA subsidy, click here.

I Bond Yield Update - November 2009 through April 2010

I Bonds are back into positive territory with the Consumer Price Index getting back to inflationary numbers from a slight decline in prices in the previous measurement period.  As a result, I Bonds now yield 3.36% through April 30, 2010 that is comprised of a fixed rate of 0.30% and a 3.06% rate for inflation.  This represents an increase in both the inflation and fixed components that make up the I Bond Yield.  (For more information on how the yield is calculated, click here.)

Back in May, I suggested that you wait to purchase any additional I Bonds until the new yields were announced because for the period May through October of this year, you would have received exactly zero yield as a result of a low fixed rate (0.10% from last period) and a brief period of deflation.  At this point, Treasury has increased the fixed rate modestly to 0.30% and inflation, though tame, is enough to put yields well above money market accounts and 'high yield' savings accounts.  As a result, if you are filling out an emergency fund or looking for a nice, safe place for cash reserves, I Bonds are back to being your number one option.

Quick Stats on I Bond Fixed Rate Component

• Average Fixed Rate:  1.74%
• Median Fixed Rate:  1.35%
• Standard Deviation:  0.01155
• Lowest Rate:  0.00% (May 1, 2008 to October 30, 2008)
• Highest Rate:  3.60% (May 1, 2000 to October 30, 2000)

To learn more about I Bonds or to start an account with Treasury Direct, click here.

LearnVest Launches Beta - checklist lovers UNITE!!

Previously I wrote about LearnVest as a terrific financial literacy solution.  Guess what?  I was wrong.  It's a helluvalot more than that!  If you're one of those checklist loving freaks like me, you will be spending a big chunk of your Thanksgiving weekend getting your financial life in order with the multitude of checklists available at LearnVest.

While I don't have a lot of time tonight to do the site justice, what I will say is that I am nothing short of ecstatic to see this site go live.  I'll post a more detailed review later.

Before I forget, you should sign up for The LearnVest Daily as well.  This is a terrific email newsletter/blog/give-it-a-name-it's-great-content.

Read the press release

Visit LearnVest

Part-time Income Opportunity at Solvate - become a timesmith

Alright, you've heard about all of these supposedly 'great' opportunities to work from home and earn $5,000 or $10,000 per month, but are they all they're cracked up to be?  Umm...no.  Not at all.  Be that as it may, there are a litany of part-time home-based jobs that are just a couple clicks away.  One of these jobs is to become a 'Timesmith' for Solvate - a personal services company that outsources tasks for those that don't have the time to complete them.

These jobs can be anything from concierge services to doing some art work to well...just about anything.  The way that it works is that a consumer will enter the job online and based on the type of work, an assigned hourly cost is assigned and can be broken down into five minute increments.  From here, Solvate will assign a timesmith or team of timesmiths to complete the task at a specified hourly rate.  The consumer gets the benefit of having someone else do the work, the timesmith gets paid for their work, and Solvate makes the spread between the wages.

While this might seem like a new concept, it isn't.  Virtual assistants have existed for many years, with a good number of them based in foreign countries like India or in Eastern Europe.  What has changed (and this is the great part) is the technology that supports this profession.  No longer is there a simple job board and email, but companies like Solvate also have the capacity to better track the actual time spent working on tasks.  This tracking ability leads to lower overall costs as well as a better way to assess productivity for each virtual assistant or in Solvate's case, Timesmith.

So how much does one pay for a Timesmith?  It starts at about $25/hour.  How much does a Timesmith make?  Anywhere from $15 to $75/hour.

Benefits Beyond the Wage

What I see beyond the paycheck that a Timesmith might earn are the many tax benefits that could be derived from spending just a few hours a week on a Solvate project.  For instance, since you'd be a contractor paid on a 1099 instead of a W-2, you'll be able to start deducting costs like internet, phone, office supplies, and even home office space and a prorated share of your utilities expenses.  This alone could make it worth spending a little time as a Timesmith.

Bottom Line:  Solvate is part of a burgeoning industry and becoming a Timesmith has a good number of benefits beyond the hourly wage.  If you're looking for a little more income without having to leave the home, this is a pretty nice way to do it.

P.S.  Special thanks to LearnVest for featuring Solvate in the LearnVest Daily.  If you don't yet subscribe to this superb email newsletter, get it by clicking here and entering your email address.

Wealth...Uncomplicated Moves from Feedblitz to Feedburner for Email Subscribers

Just a quick note that Wealth...Uncomplicated will no longer support Feedblitz email subscriptions and this will be moving over to Feedburner.  The primary reason is that Feedburner provides a higher quality email that has significantly better formatting than Feedblitz.  After doing a little testing, it's very clear that Feedburner is a superior provider for email feeds.

A Surefire Way to Increase Income - put 3% toward upgrading your knowledge and skills

A long time ago, I listened to a Brian Tracy audio program about self improvement.  One of the main points (possibly the only point) that I remembered was if you invest just 3% of your annual income into expanding your knowledge and skills through education, you would become an expert in your field in very short order.  Of course, becoming an expert also means you can expect a pay increase to follow.

The last time I looked at the median household income, it was just over $50,000.  With the Great Recession, I'm sure it's a little lower now.  But $50k is a nice, round number.  If you were an average household, 3% of that figure is $1,500.  So how much will $1,500 buy towards improving your knowledge and skills?  It depends on how you spend it.

College

You could invest the $1,500 into a college course or two - maybe.  With college courses being as expensive as they are, you might be able to learn one subject through a single course.  The odds of gaining a great depth of knowledge through this route aren't good.  As a result, your money is probably better spent elsewhere.

Seminars, Conferences, Boot Camps, etc.

Depending on your field, these options are considerably more informative and less expensive than college coursework.  If you're in a line of work where there are trade shows, regional seminars, boot camps, or whatever, these are typically going to be a relatively good way to invest your money.  Often, you can gain insights into the current market environment from people that are in the industry that can be a nice addition to your knowledge and skill base.

Periodicals

Let's say that you're in the fitness industry.  It's probably going to be a good idea to subscribe to a number of magazines and trade publications in the fitness world so you can stay on top of current developments.  This allows you to have more intelligent conversations about the industry as well as gaining greater awareness of important trends.  Plus, periodicals are really inexpensive because much of the costs are subsidized by advertising.

Books

Finally we get to the best bang for the buck.  Books deliver more information than any of the previous options at a fraction of the price.  If you read just 10 books in your field, you'd be a fairly knowledgeable person.  But if you invested 3% or $1,500, you could get 75 books.  If you're pretty smart at 10, you'd be crazy smart at 75.

Think about it.  Most people don't read more than 1 book each year in their field of work.  College graduates might read a dozen books in their field through their coursework, but most of these graduates won't continue their learning after they've entered the workforce.  Sure, they might subscribe to periodicals, go to trainings or seminars or conference, but do they keep reading books?  Not so much.

Go Read Some Books!

Obviously books are the most cost-effective way to gain knowledge and skills to help you improve your income.  If you just went a single year spending 3% of your income on books and actually reading them, you'd be head and shoulders above your peers.  Of course, reading takes time.  If you're like me and don't read quickly, grab the audio version instead.

To get started, click here to visit the Wealth...Uncomplicated store.

If you want an Audible.com subscription, click the banner below to receive a discounted introductory rate.

College Grads Beware - you're screwed

Watching Peter Orszag, the Director of Office Management and Budget, with Charlie Rose, there was a very interesting, but little discussed statistic.  On the program, he states that on average, for every 1% increase in unemployment, a college graduate can expect to earn about 6% less in annual income.  While 6% may not seem like a big difference, it is.

Immediate Impact

Considering unemployment was let's say 5% before the sky fell and will go up to 10% or more, that equates to a 30% difference in income for new college graduate.  This means that new grads will earn 30% less in starting wages than those who graduated during more normal economic times.  Of course, the 30% can be overcome, but on average, our latest edition of young professionals will be earning less than the overwhelming majority of their predecessors.

Compounding the Problem

Adding to this wage disparity is the fact that over time, the gap will be compounded.  The reason for this is that if you start with a lower wage, when you receive pay increases, your increase is based off of an artificially lower wage.  For example, let's say that Armand takes a job upon graduation at $25,000 that a couple of years ago was paying $35,000.  When Armand gets a promotion or changes jobs to have a higher salary, he and his prospective employer will be considering his salary increase based on the $25,000, NOT the $35,000.  

Net Present Value of the Problem

So what does this gap really cost?  The answers vary from one study to another, but it's about $100,000 in net present value.  If you consider that the average 401(k) balance at retirement is around $105,000, this tells us that college graduates today will be at a decided disadvantage both today and over the long run.

Takeaways

While this information is pretty bleak, it doesn't mean that an enterprising college graduate is doomed to earn less their entire career.  There will always be a group on the right side of the bell curve, so how do you overcome the averages?  You have to be smarter with your financial decisions to maximize your resources - income and assets.  Here are some things to do now:

1. Get Experience - unless you want to have the lowest of low entry level positions, or even be shutout of your field, it's important to get some experience in the industry you want to pursue.  This could be an internship, a co-op, working part-time, or whatever, just get some experience.
2. Be Smart with Debt - graduating college is a major accomplishment and one that only 36% of the population has experienced.  However, that 36% also can tell you all about their student loan debt.  It's important to try to accelerate your debt repayment even if the loans are at 'good' interest rates.  The less debt you carry, the more options you'll have, the better your life will be.
3. Don't Fear the Boomerang - there was a concern with Boomerang Kids (twenty-somethings that returned home to live with mom and dad), but today it's something that has a new name - cocooning.  Don't be afraid to move back in with mom and dad until you can get on top of your debt with a decent income.  Who knows, with the market crash and unemployment figures, mom and dad might need you as much as you need them.
4. Delay Major Purchases - rather than go out and get a new car as soon as your first paycheck arrives or trying to buy a house out of the gate, put off these purchases for at least a couple of years.  During that time period, act as if you had these payments going out and see how the budget holds up.  This should give you enough time to accumulate a decent emergency fund.
5. Start Saving for the Long-term - the reason that the average 401(k) balance is only $105,000 at retirement is because the older generation failed to start saving early.  It has never been easier to start saving for the long-term with the proliferation of employer based retirement plans and individual retirement accounts (IRAs).  Just putting in 5% will put you well ahead of the game.
6. Get Something on the Side - whatever your job might be after graduation, try to find something to do on the side that will make some money.  It needn't be a lot of money, but try to do something that will further your career.  As an example, if you're a public relations nut, try to do some work with smaller companies on your own.  It could be as simple as setting up press release accounts for businesses or connecting them with simple solutions to create a web presence.

Bottom Line:  The numbers say you're screwed, but it doesn't need to be true for you.

Healthcare Reform is NOT Optional - stats from NCHC report

With the debate on healthcare reform continuing and finally moving forward, it's important to remember that doing nothing is NOT an option.  Based on the information in a report from the National Coalition on Health Care, it is painfully apparent that reform is desperately needed.  The simple fact is that whether or not we have a public option, cover everyone, or keep the system as is, we are already on an unsustainable pace when it comes to the costs of healthcare.

Report Highlights

Here are some quick statistics from the report that are worth reviewing every time you think you might not want reform:

• General Inflation - up 28%
• Workers' Earnings - up 38%
• Health Care Costs - up 131%
• Employee's Share of Costs in 1999 - $1,543
• Employee's Share of Costs in 2009 - $3,515
• Up to $650 Billion Wasted on Healthcare Costs Compared to Other Countries Annually
• 62% of All Bankruptcies in 2007 were Caused by Medical Expenses
• 80% of These Filers had Health Insurance
• 1.5 Million Lose Homes to Foreclosures Annually Due to Medical Expenses
• Employers Spent an Average of $13,400 Annually to Provide Health Insurance to Families of Four

Umm, you might say that these numbers are alarming and you'd be right.  To drive this home, let's consider a couple of sides of the equation:  (1) the average family and (2) the average employer.

The Average Family

Based on information from the government, the median household income is floating around $50,000.  Assuming this number doesn't plummet, an employee's share of the cost at $3,515 represents 7.3% of their annual income.  Assuming that rates over the next decade hold to last decade, here's what we can expect by 2019:

• Median Household Income - $69,000
• Cost of Healthcare for a Family of Four - $33,033
• Employee's Burden - $8,120 or 11.8%

This also assumes that employers don't push more of the cost over to employees which we see happening more and more every year.

Now here are the key questions to ask yourself:

1. If you're not saving anything or very little today, when healthcare costs eat up 11.8% of your income or 4.3% more than today, what are you going to give up in exchange for healthcare?  Vacation?  Retirement savings?  College funding?
2. If you don't have health insurance today because you can't afford it, do you think you'll have it when it costs more than 50% more in a decade?
3. If less people have healthcare, is that going to put a drag on communities, families, and the social structure of the country?

The Employer

Beyond this, let's consider the employers' side of the debate.  Obviously they continue to push more costs over to employees, but even with this measure, they're still paying more money in health insurance costs each and every year.  Consider these questions if you were a small or mid-sized firm (the kinds of firms that provide the bulk of the jobs in the United States):

1. I need a full time employee at $30,000 annual salary, but the real cost to me is going to be closer to $43,000 because I provide health insurance.  Am I going to be quick to hire or will I delay this as long as I possibly can?
2. My employees had a miserable year health-wise and the insurance company increased our premium by 50%.  We can't afford that during the recession and still stay in business.  Should I (1) cancel health insurance, (2) terminate some employees, or (3) close my doors because I can't win this fight?

Status Quo = Serious Consequences

These are very real scenarios that are playing out all over the country and a scene that will progressively get worse the longer we continue to let costs run rampant.  It's not an easy debate and any solution will be far from perfect, but there is a very real, palpable need to reform our healthcare system and to do it as soon as humanly possible.

As the issue becomes more hotly debated and politicized, just remember that what we have right now is on track to be the undoing of our economy and lasting consequences will result.  This isn't a joke, and I'm definitely not being overly dramatic.  It is the greatest problem we face and if it isn't dealt with properly, we're all going to be up a creek without a paddle.

By the way, it's a very, very tough task because the three elements that are needed to form a sound healthcare system don't exactly live in harmony:

1. Coverage for All - expensive
2. High Quality of Care - expensive
3. Affordable - oh, that part

How to Find a Private Health Insurance Policy through eHealthInsurance.com

In a post earlier this week, I threw out an option for those that are unhappy with their employer's health insurance plans.  Today, I started the shopping process so that when open enrollment begins, we'll be ready to compare what is available in the private market alongside what my wife's employer will be offering this year.  To make this easy, I've collected screenshots to deliver a nice step by step look at the process to find a policy.

Also, we'll be putting in an application this weekend as well so that we'll know if we're approved for the policy or not.  After speaking with one of eHealthInsurance.com's agents, the approval process can take anywhere from one to three weeks depending on how much digging they need to do to verify your application and medical history.  So here's the process (which was about 15 minutes):

Step 1:  Enter Your Zip Code

Since insurance is regulated by the states (this is a bad system...more on that another day), you need to enter your zip code so eHealthInsurance.com can find the policies that are available to you.

Step 2:  Enter Family Information, Select Coverage Type, and Enter County

This information is the first step in the underwriting of your policy.  Underwriting is the process through which insurance companies identify and quantify your risks based on innumerable data.

Step 3:  Best Sellers are the Default, Select 'Help Me Choose' Tab

This is a sales process, but rather than try to sift through dozens of policies, it's easier to use eHealthInsurance.com's 'Help Me Choose' function.

Step 4:  Help Me Choose Overview

This set of questions is designed to filter policies based on the criteria that you input.  What's really nice is that the monthly premium is listed for the least expensive option matching the criteria along with the number of policies available.

Step 5:  Ongoing or Temporary Insurance

Here you select whether you need a policy that is only temporary or more permanent.  Sometimes, if you are unemployed you might select temporary to obtain a policy to fill the gap in employment.  However, if you are looking to change over to a policy that can be renewed annually, select 'ongoing'.

Step 6:  Available Insurers

In this step, it's important to select all insurers so you have the most options available to you.  While you may hate a particular insurance company, I don't believe that you'll necessarily find a better experience elsewhere.  At this stage, try to keep an open mind.

Step 7:  Health Savings Account (HSA) Option

Here again, I wouldn't exclude any health plans based on the availability of health savings accounts.  In general, you want to keep as many options on the table as you can unless you feel very strongly one way or the other on this issue.

Step 8:  Basic or Comprehensive Coverage

This is largely a function of your pocketbook.  If you can afford comprehensive coverage, select it.  Even if you can't afford it, the price differences aren't necessarily astronomical as seen on this screenshot.  Ultimately, comprehensive is more expensive, but some policies can offer comprehensive care at a low premium up front, but you can expect higher deductibles or co-insurance rates.

Step 9:  The Dreaded Deductible

Your health insurance deductible is the amount you need to pay before insurance starts to pay out.  The general rule here is to select the options that you are able to afford based on (1) the amount of the deductible and (2) the amount of the premium.  Remember that you MUST be able to afford the premium and the deductibles are a secondary concern.

Step 10:  Co-Insurance Rates

Co-Insurance rates are usually 10%, 20%, 30%, etc. and this represents the percentage that you need to cover AFTER the deductible but before the annual out of pocket maximum.  For example, if you have a 20% co-insurance rate, a $2,000 deductible, and $5,000 annual out of pocket maximum, you would pay the first $2,000 on your own (that's the deductible), then the next $15,000 of medical expenses would be paid 80% by insurance ($12,000) and 20% by you ($3,000).  For us, we opted out of co-insurance because it annoys me.

Step 11:  Optional Coverages for Prescriptions and Maternity

If you want your plan to cover prescriptions or a pregnancy, you need to select this as a required coverage.  For us, we'll take the prescription coverage, but not maternity (this problem was fixed a while back).

Step 12:  Prescriptions Payment Options

We aren't into percentages, so a flat dollar co-pay works fine for us.  This is entirely up to you, but I definitely prefer a known dollar rather than an unknown percentage.

Step 13:  Click 'Show My Recommendations'

Step 14:  Review Recommended Plans, Search for Doctors

When you get to this stage, there should only be a small number of plans remaining.  You can review the plans, but more importantly, you need to search for your doctors to be sure they'll accept this kind of insurance.  If you find the doctors you want, continue on.

Step 15:  Compare Plans for Coverage

Always remember that insurance must (1) have the coverage you need and (2) be at a price you can afford.  In this step, it's important to carefully compare coverage offered which can be accomplished by clicking the check box next to 'Compare'.  This will put up to four policies side by side to make the comparison easier.  If you want the details, plan brochures are also available at the bottom of the comparison pages.

Step 16:  Analyze Costs

If the coverage you need is available, the final step is to compare costs.  To do this, open a spreadsheet or do your own by hand that will account for the monthly premium, annual premium, deductible, out of pocket maximum, and the total cost.  An example is below, and as you can see, we like the second option which is $2,100 less expensive than the first and $550 less than the third.  Of course, these are worst case numbers, but that's what we are protecting against - a financial calamity caused by medical costs.

From here, we will put in an application (in our case the electronic application is free).  Since each insurance company has a different application, this is where we'll end the process for the purposes of this post.  However, even if we are approved, we'll still be waiting to see what the policies look like from my wife's employer.

Smart Money - November Highlights

I.  Strength from Abroad - Want 10 percent yields?  Foreign bonds offer attractive returns and inflation protection.

This month's Bond Watch column discusses the benefits of investing in the much overlooked foreign bond space and suggests a couple of solid foreign bond funds (PFOAX and TPINX).  What has always amazed me about foreign bonds is how very few investors include them as a regular part of their portfolios.  Just like stocks, I typically suggest carrying at least a quarter of your total bond allocation in foreign bonds.  Plus, if you want high credit quality, go with a foreign bond fund that has a lot of government issues from countries like Australia or the U.K.

II.  Problems?  What Problems? - They might have issues, but annuities of all types remain hot sellers.  Should you resist?

As one might expect, when the market tanks, investors flock to annuities.  While variable annuity sales are down, equity indexed annuities are red hot.  Personally, I hate annuities, but for thin skinned investors, they make a lot of sense.  For example, even if you pay 1.1% in fees for a variable annuity and another 1% for the variable subaccounts, you will be around 2% behind a stock index fund.  However, if you want a guarantee that you won't lose, annuities are the only place to go.

One more note on this, equity indexed annuities are NOT a secure fill in for a stock allocation.  They are by definition a fixed annuity product meaning their returns will be far below the stock market over long periods of time.  Also, they are one of the most improperly sold financial instruments in the marketplace.  Check out this video (click 'launch' on the right side for Tricks of the Trade) to see what I mean.

III.  Target Practice - Retirement investors now have a new way to grade target-date funds.

Fund Insider columnist Janet Paskin discusses the new Morningstar report card for target date retirement funds.  While I love target-date retirement funds, they are far from perfect.  My chief complaint is they have been too aggressively allocated since inception.

You have to remember that target-date retirement funds were developed primarily for retirement plan participants (think 401k/403b), and most of this group fall outside of the 'savvy investor' category.  As a result, these funds should lean more conservatively to protect against massive declines.  Until these funds' allocations are shifted more into bonds and cash, investors should consider going 5 or even 10 years down on the target date compared to their expected retirement date.

IV.  Should You Still Buy Gold? - Investors could find the answer from a surprising source.

Gold is NOT an asset class - at least in my world.  I have never recommended holding gold unless you're a numismatist or just like to have some of the inert metal lying around to make you happy.  However, gold's run to ever higher levels does deserve some attention.

In this article, Elizabeth O'Brien does a fine job of presenting the facts surrounding gold's rise and the arguably overly inflated price.  We hold a small amount of gold, but these are more curiosity pieces as they're early 20th century quarter eagles (the only series with an incised design).  At any rate, I don't like gold, think it's overpriced, but even though it's not rational, it is a reality that people still believe it to be a hedge against inflation.

V.  "Buy and Hold" Lives On - How did a much-maligned investing philosophy fare during last year's market crash?  Much better than you'd expect.

It's always a good idea to continue to prove out that buy and hold is a sound investment strategy.  For those that are still building a nest egg, James Stewart points out that even during the worst market since the Great Depression, buy and hold still works just fine and if you bought, held, and kept buying, you're actually money ahead since the Lehman Brothers collapse.

VI.  Put Off Retirement?  NO WAY! - For millions of Americans, losing a hefty chunk of their savings has meant postponing the day they put away their commuting shoes.  But for those committed to retiring on time, here are a few key ways to stay on track.

Putting some positivity in the last couple of years of tumult, Kristen Bellstrom delivers a few ideas that can help those nearing retirement to find ways to preserve their planned retirement date.  Indeed, there are many ways to stay on target for your retirement, but some changes are needed to make it happen.  The bottom line here is that it's do-able.

VII.  The Accidental 401(k) Planner - The retirement plan manager at your workplace is more important than ever to your long-term financial security.  And chances are, he has absolutely no training for that role.

This was my favorite article out of the group.  Having been a 401k advisor in the past, I know how little the plan administrators that sat across from me actually knew about investing or even how to figure out if a plan was good or total crap.  If there was a must read in this month's issue, this is it.  You can look for a future post that will expand on this article in the near future.

Save on Smart Money magazine at BlueDolphin.com

Unhappy with Employer Options for Health Insurance? Start Looking for Private Insurance Now

Last year, we almost pulled the trigger on an individual health plan for our family because my wife's employer's options weren't great.  So we went on and priced out a plan on eHealthInsurance.com to see what was available to us on an individual basis.  To our surprise, there were some very competitive plans available, but we didn't start shopping early enough.

This weekend, we will begin our individual plan shopping prior to getting her open enrollment materials that will be coming in a couple of weeks.  Essentially, we want to have the plan picked out this weekend that we'll compare to the plans available through her employer.  What we are expecting are some insurance plans that will give us what we're looking for:

1. Lower monthly premiums - we're a generally healthy family of four with my wife and I in our 30s and our kids of 7 and 11 are also healthy.
2. Higher deductible - since we want lower premiums on a monthly basis, we are willing to have a higher deductible that could be as much as $5,000.  Because we are generally healthy, a couple of broken bones, some infections, etc. are about what we see on an annual basis.
3. Maximum out of pocket - this is the most important part of what we're looking for.  The maximum out of pocket expense is the most that we'll have to come up with in addition to our monthly premiums.
4. No coverage we don't need - since we're not planning to have any more children (this was fixed a couple of years back), we don't need coverage for pregnancy.  As a result, we can choose a plan that leaves this out and we'll in effect, be a lower risk for the insurer.

Beyond the basic costs, there are other considerations such as taxes and the like, but by shopping this weekend, we'll be better equipped to evaluate all of our alternatives.  When the employer programs come out later, we can enroll in the plan that best meets our needs.

I'll keep you updated on this in a post this weekend so you can see the gory details.  If you'd like to evaluate what's available through a private/individual plan, go to eHealthInsurance.com through the banner below.

From WSJ: Where to Hide if Bonds Fall

In this article from The Wall Street Journal on October 14th, Larry Light does a very good job of explaining where to take cover in the event that bond prices fall as a result of inflation.  The problem with inflation is that when it starts to get higher than the Fed likes, they will typically raise interest rates as high and as fast as they deem appropriate to choke off inflation.  With the money supply still incredibly loose and government spending on the greatest bender in half a century, this is a timely article.

Interest Rates Up, Bond Prices Down

There is a great illustration that has been used countless times to drive this fundamental relationship home to investors and professionals alike.  It is the old see-saw picture of interest rates, bond prices, and maturities and I've grabbed a copy for your enjoyment below:

 

As the picture so adequately demonstrates, when interest rates rise, there is an opposite effect on bond prices - they drop.  The amount that they drop is largely dependent upon the amount of time until the bond matures.  The further away from the center of the see-saw, the more sensitive a bond is to changes in interest rates.  Conversely, the closer to the center, the less sensitive a bond is to rates.

Historical Context

Now that we've mastered the fundamental relationship between bond prices, maturities, and rates, let's take a quick look at where we are with respect to interest rates.  This is a nice graph showing interest rates on 10 year Treasury notes:

 

As the graph very clearly points out, we are near the bottom of where interest rates have been historically, and my wicked good intuition tells me that rates will eventually move up.  When that will happen, I haven't a clue, but they will sometime sooner than later.

What to Do Now

At present, there is no evidence that would suggest that rates would increase significantly in the next three months.  This means that you can feel relatively safe holding intermediate to long maturity bonds without fear of getting crushed with an interest rate hike.  Until the economy shows that it is solidly out of recession (and this will happen even as unemployment increases), it is unlikely the Fed will be in a position to raise rates.

Side Note:  The Fed must first make sure the recovery will last before raising rates because if they raise rates too soon, too fast, or too much, we will have a double dip recession which is an untenable situation.  Think Japan's Lost Decade.

What to Do When Rates Rise

When rates rise, and this is the point of The Wall Street Journal article, there are three places to go that will shorten your maturities and thereby reduce your risk of getting crushed in your bond portfolio.  These are (1) short-term bond funds, (2) certificates of deposit, and (3) stable value/money market funds.  Any of these three will do, but it's usually a good idea to be around a three year average maturity or less.

Three More Places to Look

Beyond this, I'd also like to add three other places to go when interest rates flare up from inflation concerns.  The first are I Savings Bonds which currently yield 0%, but are tied to inflation rates.  If inflation does start to pick up, I Savings Bonds will pay the then current inflation rate plus a certain fixed percentage based on when the bond was issued.  I Savings Bonds purchased today will pay inflation plus 0.10% (the next rate posting is due next month).

The next place to go is into TIPS or Treasury Inflation Protected Securities.  These are very similar to I Savings Bonds, but instead of posting interest earned, TIPS price will increase based on the inflation readings.  These are typically the best place to go to find a true hedge against inflation as they are pegged to inflation anyway.

Finally, if inflation does spark higher interest rates, you can go to some of the newer commodities basket ETFs and mutual funds.  While accredited investors (really rich folks) can get access to more of these kinds of funds, owning some commodities isn't a bad idea to hedge against inflation.  After all, inflation is an increase in the cost of goods and commodities either are or are a part of the production of these goods.

Out of the six possible places to go, there isn't a one size fits all answer.  Usually a good mix of all of these will work to your advantage when rates are increasing.

By the way, one of the very interesting stats in the WSJ article is that for every 1% that the 10 year Treasury increases in yield, there is a corresponding loss of 8.5% in the price of the bond.

From WSJ: Wall Street on Track to Award Record Pay

In this article that appeared in The Wall Street Journal on October 14th, it is clear that compensation at major financial services companies is on the rise, even on pace to top 2007's record pay.  With many still hurting from the financial collapse of 2008, it does beg the question as to whether or not this is a good thing.  On the one hand, these employees (past and current) did play a significant role in the collapse, but on the other hand, top talent demands top pay - whether it be from here in the U.S. or elsewhere.

Is There No Shame?

We all recall when people were picketing on Wall Street and the cries from Congress, the Oval Office, and throughout the country, but those days have largely passed by.  These 'overly' compensated employees obviously had no shame in taking such enormous paychecks in 2007 and some even during a tumultuous 2008.  Yet, after a one year hiatus, super-sized paychecks are back.

Pay for Profits

The bottom line with compensation is that at upper levels of responsibility, it should be determined based on profits.  If a company is profitable and delivering handsome returns to its stakeholders (mind you that's not just shareholders), pay employees whatever makes sense for the business.  When a company's profits are in the tank or losses are heavy, spread the pain as much as is reasonable.

Let Business be Business

Last time I checked, we still live in a capitalist economy (technically it's a mixed economy that leans towards capitalism, but I digress), so we should let businesses handle their business.  It's worked incredibly well over the last couple of hundred years so I don't think we need any major overhauls anytime soon.  Just in the last 50 years, we're still looking at huge gains in real income, productivity, and overall quality of life, so let's keep going.

Let Government be Government

Generally speaking, less government is a good thing for everyone involved.  There are fewer and lower taxes, more money goes into the economy, and each of us gets to stretch our own dollar instead of having the government do it for us.  With that said, government plays a critical role in regulating markets - particularly complex financial markets.

While it would be terrific if we were all smarter than investment bankers and financial engineers, we aren't.  For that reason, we have to depend on government to not only protect consumers from firms and firms from other firms, but to protect firms and consumers from themselves.  Often, one of the negative consequences of competition and free markets is the potential to have overly competitive situations where individuals and firms reach too far to create wealth and profits, respectively.

Consumers got greedy in the 1990s chasing tech stocks and in the first half of this decade with real estate.  Firms were crazy greedy in financing the real estate boom.  So where are we now?  Well, we have essentially the same rules as we did before.  Oh, I forgot we have a Compensation Czar.

Forget Czars, Give Us Some Real Regulation

This is where dumb government or more accurately, polically motivated government flunks the test.  The real problem was not compensation, but the rules of the game that create profits.  If you look back in business history, we find many fine examples where industry overstepped its bounds and the government stepped in to create regulations.  If you're having trouble, think anti-trust laws, environmental protection, insider trading rules, capital requirement for financial institutions, FDIC, FSLIC, FCUA, and the list goes on.

In this last mess, we had under-regulation (in many cases, no regulation) of the derivatives market.  The result was painful, and instead of some hefty new regulations, we get a compensation czar.  Are you kidding me?  Granted, more regulation is coming, but it's not been quick enough.  Then again, after the 1929 crash, it was four years later that Securities Act was created, five years until the Exchange Act, eleven years for the Investment Adviser Act, and twelve years for the Glass-Steagal Act.

Bottom Line

Let Wall Street maximize their profits and operate their businesses accordingly, but we absolutely need to set some clear and intelligent boundaries inside of which financial companies must operate.  Capitalism is an evolving experiment, but it's been a good one if we can simply update the regulatory environment in which business exists.  This is something that needs careful review as just like technology evolves, so too do the tools of finance.

How Much will an iPod Really Cost?

Okay, so we all know that a new iPod Touch is around $300, but that doesn't really tell any of us what it really costs.  Some time ago, I introduced the topic of opportunity cost, and revisiting this is always a good idea.  So how much would an iPod cost you?

Alternative Opportunity:  Additional Investment

Rather than buying your iPod Touch, you could invest the money at let's say 8% per annum.  This means that the opportunity cost of your iPod would be:

• 1 year - $324
• 5 year - $441
• 10 year - $648
• 30 year - $3,019

Alternative Opportunity:  Debt Reduction

If you're like many people, you could have used the money to payoff debt instead of buying one of the best things to happen to music.  The opportunity cost looks like this assuming a 30% interest rate:

• 1 year - $390
• 5 year - $750
• 10 year - $1,200
• 30 year - $3,000

Alternative Opportunity:  Fewer Hours Worked

Let's assume that you are working for an average wage of $20 per hour.  Reframing this discussion, we find that the cost of the iPod is not just 15 hours of labor ($300 / $20, but more like 18 to 20 if we include taxes), but it's a lot longer than this.  Instead, the opportunity cost could be 10 times this number or 150 hours of labor ($3,000 / $20) added to the back end of your career.

If you ever wanted to know what keeps pushing retirement further and further off, take a better look at the opportunity costs of everything that you buy.  The first two places to look are your home and your transportation.  It's no wonder that most millionaires from the book, The Millionaire Next Door, lived in relatively modest homes and drove very affordable cars.

Final Thoughts

I'm not saying you shouldn't buy an iPod, ever.  What I am saying is that you need to be aware of the opportunity cost involved.  For me, I have a Zen because it does everything I need for a fraction of the cost.  For my frugal wife, she's gotta have her iPod.  It's always at your discretion, but consider the alternatives because you just might shave some time off your career.

Mint and Intuit - a marriage made in heaven?

It's official, Mint has mopped the floor with Quicken's old, weathered arse, and as is the case with all situations where a well endowed #1 gets knocked off the top, the old adage of, "If you can't beat 'em, buy 'em" comes into full effect.  I was at TechCrunch50 (the same event that got Mint off the ground in 2007) when the news broke last week that Intuit had agreed to pay $170 million for Mint, and as a developer of a competing solution, I wasn't sure exactly how this would alter the competitive landscape.  After all, if you could plug Mint into Intuit's TurboTax and QuickBooks, that'd be one bang up personal finance solution.

If the companies are able to say their vows and have a happy marriage, I think they have what will become the best personal finance management software (or in this case, webware) on the planet.  Patzer is a crazy smart guy and Intuit has resources galore with an annual research and development budget of over $600 million.  The Mint team was able to knockout Quicken in less than two years with a team of only 33 employees, so the additional resources could produce a quantum leap in benefits to consumers.

Of course, not all marriages last, and in business, the numbers are even worse than that of our traditional human marriages.  But alas, they are off to a good start by putting Patzer in charge of the entire personal finance division, and if Intuit's top brass can simply stay out of his way, I feel pretty confident that this marriage will benefit their customers.  In addition, this will also force other solutions like Wesabe, Thrive, Geezeo, and others to look for cross-platform partnerships to keep up with this new beast in personal finance.

While there will be skeptics and naysayers, I for one, believe this is going to be a very good thing for all consumers.  Of course, many details will need to be ironed out and going from startup to being part of a large corporation is a difficult challenge to overcome, but Mint's good enough, smart enough, and dog gone it, people like them.

Dave Ramsey Followers are Successful, Here's Why

Think what you want about Dave Ramsey and his loyal followers, but they are head and shoulders above 'average' people when it comes to handling their money.  While he teaches sound principles and has a lot of charisma, the real reason that his followers have such great success is because they are ripe for change.  It is this combination of a firm, consistent message and an audience that is eager to listen that makes Dave and his followers so successful.

A Powerful Message

If you read either of Dave's major books, Financial Peace and The Total Money Makeover, you will find that he delivers a powerful message for people to get out of debt and start saving to alleviate existing financial pain and move towards a secure financial future.  In his words, he wants his listeners to "kick Murphy out, permanently".  Of course, the Murphy he refers to is that of Murphy's Laws that are along the lines of, "If anything can go wrong, it will go wrong".

He teaches the old school method of handling money which is to make a budget each and every month and then stick to it.  He shows people how to get out of debt, stockpile cash, and invest aggressively--none of which are unique lessons in personal finance.  Even with his methodology being far from original or unique, his listeners seem to handle their money better than most of us, even those of us that are doing quite well.  So what is the secret behind his and his listeners' success?

The Listeners

You might think it's because he's a financial genius or that his charisma can convince people to take action, but on both counts, you'd be wrong.  The reality with Dave and his listeners is that he is starting the conversation with them at a point where they are in financial peril.  By reaching folks when they are struggling with debt, he has found an audience that truly listens to his advice and are willing to put that advice into action--even if it's a massive pain in the backside.

The reason for this is simple.  The pain that those deep in debt are experiencing is far greater than the pain of making and sticking to a budget.  Ask someone off the street who isn't in debt and doesn't have any major financial pains to do a budget, and you're likely to get a dirty look.  Not so with Dave's people, they are ready, willing, and able to do as he teaches.

Why is this?  Well, if you haven't been through the debt grinder, just imagine that each month you're sinking further into debt.  This continues for some time until one day, you miss a payment on a credit card.  Then the collections calls begin at home and work.  Pretty soon, you miss another payment and suddenly you're well on your way into a tailspin that manages to suck the life out of you at work, creates marital discord at home, and eventually has you thinking there's no way out.

Do you think you'd be more receptive to making major changes in your life if you found yourself circling the drain, so to speak?  Of course you would.  And why wouldn't you?  Obviously if you find yourself in that kind of state, you'd be happy to hear anyone that had a message of hope backed by the experience and expertise needed to help you get out of the mess and into a better tomorrow.

Lasting Change

As Dave walks people through this process of getting out of the mess, he does it in a firm manner that basically says, "you need to do it this way...no exceptions, no shortcuts".  He teaches the long road to people who are really listening and as people take the long, hard road to get back to scratch, something fundamentally changes in the way they view themselves and the role that money plays in their lives.

While it's different for each person, I view this fundamental change as being similar to that of those who lived through The Great Depression.  In my career, I've had the great privilege of meeting and speaking with a good number of people who survived this turbulent economic era.  Without exception, everyone I encountered in this group was conservative with their money, lived well below their means, and perhaps most importantly, understood money's proper place in life.

With this group, money was more important as a security measure than as a means to enriching one's life.  This might sound counter-intuitive--particularly with all that we've learned from financial services marketing messages--but the reality is that the Depression Era survivors were closer to the truth of the matter.  Ultimately, the limited and often short-lived happiness derived from acquiring material possessions pales in comparison to the financial pain created by not having enough money.

It is this intense pain that has the power to create lasting change.

My Money's on Dave's People

Now you have my take on why Dave's followers are more successful with their finances than the average person off of the street.  Real pain opens the ears; Dave has a powerful message; and the lessons learned are lifelong.  If I was a betting man, I'd put my money on Dave's people every time.

TechCrunch50: LearnVest, a terrific financial literacy solution

Earlier this year, I featured a series on financial literacy and low and behold, TechCrunch50 debuted a terrific solution to the problem--LearnVest.  The site was initially designed around providing financial education to women, but I think all of us could benefit from spending some time on the site.  They are currently in a closed beta, so you'll have to click to get on the waitlist so to speak.

However, when the site launches, you can bet that learning about money will be a much simpler endeavor, as the creators have organized the content based on life events.  If you're drowning in debt, need to buy a car, or whatever the situation may be, LearnVest provides an excellent resource for learning about each subject.  In briefly reading some of the information, it was clear that the content was very well written--and with good reason.

LearnVest's material comes from experienced financial journalists who have been doing the job for a number of years.  Their experience shows, as even complicated topics were broken down into language that was both enjoyable to read and easy to understand.  When the site goes live in a wide release in the coming weeks or months, go ahead and hit the site now to be an early user at www.LearnVest.com.

TechCrunch50: LIFEmee, managing all aspects of your life

This was the site that had me the most excited at TechCrunch50.  If you could envision a website where you could manage every aspect of your life--from money to friends to business to whatever--this is what LIFEmee has the potential to offer.  In terms of our current lifestyles, we have more and more tools for each area of our life, but we have to go to so many different places to manage it all.  LIFEmee aims to take this problem out of the equation.

Although the site is still in its relative infancy, one feature that I really like is the daily journal that also tracks how you're feeling.  The idea of keeping up with your daily life and then having LIFEmee record it may sound scary to some, but after I'm dead, it's nice to know that I can have a digital diary of my life that will be released to my designated benefactors.  As this site continues to progress and build a truly robust offering, I'd definitely keep tabs on it.  Today you can sign up rather easily if you're already on Facebook.  Check it out at www.LIFEmee.com.

TechCrunch50: 7ages, your entire life in pictures

While we've all seen photo upload sites and others that will convert old paper pictures into digital files, 7ages has taken this to a little bit different level.  Rather than just upload pics with time stamps, you can put your entire life online through pictures.  The site delivers a timeline that allows users to upload pics to a specific time period in their lives and put in all of the details surrounding the picture.

The site also links into Facebook and other social networking sites and 7ages has some social features of its own.  I can see this kind of a solution being plugged into Facebook at sometime and it could be used as a really nice legacy feature for individuals and families.  If you wanted to construct a kind of digital memory book of someone's life like a parent or grandparent, this is perhaps the best way to do it.

Beyond the personal application, I could also see this being applied to businesses that are looking for an easy way to convey their corporate history for either internal or external parties.  For employees, or prospective employees, a timeline of how the company's internal culture has evolved can more easily be expressed in pictures than words.  Couple that with Animoto and those kind folks who organize company gathering could seriously reduce the time they spend putting together those not so awesome slideshows.

If you'd like to check out their solution, they have a very nice video that demos the site and the key pieces of their solution.  Check it out at www.7ages.com.

TechCrunch50: 360desktop, a very cool way to spruce up your desktop

This was probably one of the coolest things I've seen in managing your desktop.  If you can imagine that you're current, old school screen suddently wrapped around you at your desk, that's kind of what 360desktop can do for you.  Essentially, you can have your 'regular' desktop, but then you can create an entirely different landscape with the other 270 degrees around you.

The customization ability has so many implications that I can't fully list them out here, but suffice it to say that you could 'theorectically' have your work station up, but then rotate your desktop to more enjoyable pursuits.  What those other pursuits are, I'll leave up to you, but this seriously helps de-clutter a messy desktop.

For business, if you are engaged in multiple pursuits like me, you can have one section of your 360desktop for your regular work, one for side businesses, and one for pure entertainment.  This way you don't have all of the ridiculous clutter on your desktop when you sign in.  For me, I'll be installing this desktop and creating four sections for each of my major pursuits.

In addition to the 360 degree view, you can also cut and crop web pages that you frequent like Facebook, Yahoo! Finance, and others so you can have them already populated on your desktop outside of your web browser.  This little feature will save a great many keystrokes and give you all of the information that you need.

While I don't have my desktop setup yet, you can be that while I'm watching college football this weekend, I'll be enjoying my 360desktop.  I'll post the pics later as an add on.

In the meantime, if you want to checkout this really cool desktop ware, go to www.360desktop.com.

TechCrunch50: MoonIt, a fun way to rate relationships

This was one of the more entertaining solutions at TechCrunch50, and I can already see many hours of what was productive time at work being spent on MoonIt instead.  If you've ever been curious about how compatible you are with a business partners, lover, friend, or whomever, MoonIt can give you a pretty good idea.  The solution essentially rates compatibility by using a number of criteria and will pull information from social networking sites like Facebook to figure it out.

To get started, you simply enter your name, date of birth, and the type of relationship you want to have rated.  This will give you the quick initial assessment like that below:

In this case, I'm 'mooning' my wife and it's looking pretty good so far.  Well, here's what it looks like after you've signed up...and if I might add, MoonIt is spot on.

So if you have some time to burn or are looking for a little different take on relationships, check out www.moonit.com.  Besides, it's always fun to moon someone, right?

TechCrunch50: MeaninGo, a better way to shop online

If you've ever used Google shopping or some other shopping search, you know that the search results can be overwhelming and outside of what you're really looking for.  This is the fundamental problem that MeaninGo, a new shopping search engine, can help you avoid.  Essentially, MeaninGo plugs into preferred shopping sites like Amazon or Target to help its users find exactly what they're looking for.

To give you an example, if you're looking for a pair of Nine West heels that have straps, you can simply key in what you're looking for and the more details, the better.  Unlike traditional shopping searches, the results are listed by inventory rather than rankings based on page visits, page rank, etc.  Below is a screenshot of MeaninGo to show you what I'm talking about:

What I really like about this search engine is that it pulls only from a small number of web retailing sites and it lays out very cleanly to make finding what you're looking for much simpler.  Also, you can refine your searches by adding relevant keywords that are suggested with each search that you perform.  This makes finding exactly what you need a much less irritating and time consuming process.

As is true with all TechCrunch50 solutions, you can expect MeaninGo to get a lot better over time.  Currently, MeaninGo only pulls from a small number of retailers.  If you like the idea of this kind of shopping, visit their website at www.MeaninGo.com.

TodayForward Blog Launched Today

The official blog of TodayForward was launched today at http://www.todayforward.typepad.com.  As many of you know, I have been developing a personal finance website for more than a year and a half now, and we're getting very close to our public debut at TechCrunch50 on September 14th and 15th in San Franciso.

TechCrunch50 is the largest and most important event of the year for technology startups like ours.  As a semi-finalist in a pool that had over 1,000 companies from 40 countries, we beat the odds and will be in the DemoPit in just two short weeks.

While I will continue to write on topics of interest in personal finance here at Wealth...Uncomplicated, you can follow the progress of TodayForward through the new blog.  If you'd like to find out more about the project, please go to http://todayforward.typepad.com/todayforward/what.html to learn more about this new personal finance solution and sign up for site access in advance of our public release late this year.

Thank you,

Michael

P.S.  TodayForward.com will be online after we finish converting from our project site at DitoAdvisor.com

Dancing is Like Magic

Last night I watched the season finale of So You Think You Can Dance and was delighted to have my favorite dancer be crowned 'America's Favorite Dancer'.  About a month or so ago, I took notice of Jeanine Mason's talent and her continuing improvement on the show.  She certainly has talent and to be frank, I am a true believer that those that can dance at the level seen on the show are something awfully close to magic.

The reason I believe something as absurd as this is that it is far beyond my capabilities to dance in any way other than horribly.  In fact, I won't dance at all...at least not without a dozen or more cocktails in the bloodstream.  Ultimately, I enjoy and revere dance for the simple fact that it is an endeavor that I shall never master or even perform reasonably well for an average guy.

Beyond this, SYTYCD is an exercise not in one's ability to dance in one particular style, but to be able to perform at a high level across a wide swath of styles.  Ms. Mason demonstrated herself to be more than able to perform any task that was given to her.  For many, she was the Dark Horse that just kept coming until finally she won the title.

But was this really magic?  Is it natural born talent that some will be able to dance at this levels and others, like me, not so much?  Obviously the answer is no.

Often when I have met with clients, friends, or colleagues, they too believed that what I did was some sort of magic.  Sometimes it's walking someone throught the Alternative Minimum Tax (AMT) and reducing their tax burden by thousands, other times it's setting up an estate plan that would eliminate estate taxes, but in all cases, it's simply being able to do what others cannot.

The quiet truth is that we all admire when others can do something we believe important that we ourselves cannot.  For me, it's dance.  For my clients, it's financial planning.

Fortunately, you don't need an ounce of talent to become a master of your finances.  You need only what anyone needs to become a magician at what they do--time, work, and patience.

See, the back story with Jeanine Mason is that she wasn't born to dance.  In fact, she admits that there were many times when she wanted to quit dancing altogether, but her mother pushed her through.  She didn't start dancing last year, but as a child.  She put in thousands of hours at the dance studio, worked hard when she was there, and stayed with it until the ultimate payoff last night.

Often times, I'm amazed that we have financial planners today.  Really, money is as essential as language or mathematics, but somehow we ignore the study of it with many never truly understanding the major money issues, let alone the subtle nuances of our financial system.  It is this fact that we as a nation do not put in the time needed to study our finances; we don't work hard enough at maximizing our financial position; and we certainly don't have the patience to position ourselves responsibly.  In short, we seem to ignore financial education, hate working hard on our money (keep in mind, this is NOT the same as working to earn an income), and ultimately lack the patience to sustain the activities that lead to financial success.

So what do we end up with?  A lot of broken financial homes and the appearance that those who succeed somehow possess magic powers--otherwise, how could they possibly have become wealthy?

Let's face reality for a moment.  Most of us with our finances are just like me when it comes to dance--never have, never will.  With this reality in mind, what is one supposed to do?  I mean, we all want financial security at some level, but how do we put in the time, work, and patience to actually achieve this worthy goal?

Simple.  Technology.

Just as things like the microwave have made us better cooks than the average housewife of the 17th century, we are seeing new innovations in technology that can deliver the magic that we need at a fraction of the cost.

Think about it.  What would it cost to have a personal chef?  A lot, right?  What does it cost to use a microwave?  Not much.  In both cases, you can satisfy your hunger and while a personal chef is going to deliver a better meal, you don't need the best, you just need good enough.

This is where financial services technology is going--satisfying a need by delivering 'good enough'.  Most of us don't need, nor can we afford a $200 an hour financial planning wizard, but what if you could get that kind of advice delivered at say $10 a month?  Would you want to check it out?  Would it make your life better?  Of course it would.

Over the next five years, there will be more independent financial sites like Mint, Thrive, Wesabe, and Quicken that will be delivering more technology to make money mastery seem less like magic and more like a simple non-issue....the way it should be.  Ultimately, financial services technology aims to make you more productive with your time and smarter about the management of your money.

For now, most of these solutions focus on budgeting and cash management, but over time, they will evolve to be much broader solutions.  Five years from now, I fully expect this technology to blossom to the point that many out there will think, "Man, I love my finance website; it's like magic".  And let's face it.  Everyone loves magic.

26 Weeks Remaining - what have you done to move forward?

Half of the year is officially in the history books and it's a great time to ask yourself the all important question, "What have I done to move forward?"  There are many areas in your life where you can make meaningful progress to better your life and I'm not just thinking of personal finance.  There is a terrific book titled The Power of Focus that I have been using to setup and accomplish my personal goals for several years and I breakdown my life and goals by the following major areas:

1. Health
2. Education
3. Professional
4. Financial
5. Family
6. Personal
7. Contribution
8. Fun Time

While it's not important what order you put these in, it is important to address these areas so you can lead a balanced and more enjoyable life.  The focus I use is to always try to move forward towards my goals each and every week.  Some weeks are better than others, but over time, continually reminding myself of my goals has been a surefire way to lead a more fulfilling life.

So far this year, I've done the following:

Health - I'm on a treadmill, pavement, or golf course walking the equivalent of a marathon a week or more.  My diet has drastically changed just in the last month with a 90% reduction in meat intake or to put it another way, an 800% increase in plant food consumption.  I'm not a true vegetarian at this point, but getting awfully close in a short period of time.

Education - I've been taking courses regularly in pursuit of the end goal of holding a PhD in Economics that I might be able to obtain by the time I'm 39.  The only reason I want to do this is so I can teach in other countries after my kids leave home when I'm 44.  Having this level of education transfers well to other parts of the world and I can't think of anything more fun than experiencing other cultures by living within them.

Professional - I continue to write this blog and for CiN Weekly, and have moved our personal finance web application closer to launch.  We estimate that we could be ready for a full release somewhere between September 1 and November 1 of this year.  More on this when the time is right.

Financial- Our financial goals of living debt free and getting to a 20x net worth-to-expense multiple remain unchanged.  This year we've made some great strides thanks to my frugal and now corporate ladder climbing wife.  She received a promotion and as she puts it, "We're not participating in this recession."

Family - Having traveled in excess of 100 nights annually just a few years ago, I now enjoy being home with my kids everyday and see them more now than I ever have.  They're seven and ten so it's a very good age to be around.  Of course, this includes doing the homework, making them do their chores, etc., but that's a big part of what makes it fun.  Plus, I've gone out with the wife a lot more and our family dynamics are great.

Personal - I've played more golf this year than I have in the past five combined.  This has been very enjoyable on a personal level even if I get some grief for the expense of it.  Hey, I use coupons, but it still ain't cheap.

Contribution - While I haven't dropped off a big check to any charities of late, I do believe that the web application I'm working on will be a game changer for a lot of folks trying to figure out how to get ahead financially.  Contributions aren't always about writing checks or making donations, sometimes you can make a great contribution to your community through your work.

Fun Time - I've definitely had a lot of fun this year with friends and family.  We haven't gone on any swank vacations, but we have spent a lot of time together.  We are going camping with the family at the end of this month which should be a lot of fun with my boys and will go cabrewing in August with a pretty large group of friends.

Alright, I just put my little mid-year report out there for you to see, so what have you been doing this first half of the year?  Are you getting closer to your end goals?  If not, what's holding you back?  Regardless of your answers or your progress, we still have half the year left to go, so let's use it to move forward.

Are You Enjoying No Carcass Days?

 

I had dinner with an old friend last week and she very eloquently pointed out that most of us love 'shoving carcasses down our throats.'  She's a vegetarian and has been for a very long time, but her comment definitely struck a chord with me.  Last year, I did some research related to the global food crisis and found that for every pound of carcass we eat, it takes up to 16 pounds of plant food.  Just this one statistic is proof positive that we could very quickly and easily solve the food crisis if we simply eat less meat.

Now, I'm not ready to give up meat altogether, but it is definitely a worthy goal.  One of the key questions we all need to answer comes down to sustainability.  We consider this question in business, personal finance, the environment, and it certainly merits discussion in our diets as well.  If we add one No Carcass Day each week, we would reduce our overall meat consumption by 14% and this wouldn't even require much in the way of sacrifice.

For our household, I've instituted No Carcass Days on Tuesdays and Sundays where no meat will be served.  Of course, the only problem I have is that I don't have a clue as to how to cook vegetarian meals.  In fact, I don't recall having ever cooked a vegetarian meal in my lifetime (save for college when Ramen noodles were the de facto meal of choice).

That's why we have book stores and with me being an amateur, I went to Barnes & Noble to find a vegetarian cookbook with a lot of pictures.  To my delight, there were plenty of vegetarian cookbooks available on the shelves and I found one that had some great recipes.  The recipes appear easy enough and cooking vegetables really can't be too terribly difficult.  However, there are a number of herbs and spices that I am unfamiliar with and might require a visit to the local health foods store, but that's no big deal.

What is a big deal is the fact that having two No Carcass Days is something that improves sustainability of the global food supply plus my family and I get to enjoy a healthier diet.  While I'm not sure if this will actually save us money over the long haul, the intangible benefit of making a small change that will ultimately benefit others is a very good thing.  Besides, when you really think about where meat comes from, who wants carcasses anyway?

[Pictured Above:  Pork Packing in Cincinnati from the Cincinnati History Museum]

ByAllAccounts.com - account aggregation for advisors to the the well heeled

In the evolving account aggregation space, there are two major segments--retail and institutional.  The retail side is just now getting off the ground with sites like Mint, Wesabe, and Thrive leading the way, but the institutional side has been around for decades.  Advisors require a great deal of information in putting together financial plans and managing assets for clients and for those who cater to the high net worth crowd, sophisticated account aggregation and the layers of tools built on top of it are nothing short of vital.

The Value of Advisor Based Account Aggregation

While many low and mid-level advisors have been slow to adopt this technology, those working with highly affluent clients have recognized its value.  So what is the value proposition?  Really its three-fold for advisors.  First, the access to additional information provides more timely and accurate information that can be used to deliver better financial planning, investment management, and overall service to clients.  Second, the automation of a once painfully labor intensive process can save advisors anywhere from 70% to more than 90% in costs related to maintaining comprehensive account reports.  These savings are generally passed on to clients in the form of lower fees over time as well as better net personal financial results.  Finally, advisors who use this technology are able to manage a larger portion (often 100%) of an individual's assets.  This last part is something that significantly expands revenue for advisors and also reduces the number of clients they must service to meet revenue goals.

In short, account aggregation provides a better client experience, reduces administrative costs, and provides greater revenue to advisors.  While many might believe that more revenue to an advisor could be a negative, it truly is not.  Considering many low and mid-level advisors service hundreds of smaller accounts that correspond to more clients (perhaps customers would be a better word) than he or she would have time to properly assist, more revenue per client is a very good thing.  Fewer clients equals better service.

ByAllAccounts.com's Service Advantage

Now that the benefits of the technology are out there, what is ByAllAccounts.com's competitive advantage?  Based on what I've gathered about the company, it is their service and technical support.  The company is targeting advisors of high net worth clients which means that the advisors they are working with are already very successful in their field.  As a result, their target audience is seeking quality, not quantity.  Unlike Mint, Quicken, Albridge, or other aggregators on the retail or institutional side, ByAllAccounts.com is a smaller player that emphasizes quality of service and data.

As a former advisor who used a number of aggregation tools, I can tell you that service is the major differentiator.  If there is a problem with some of the mega-providers, it would typically be resolved in short order, but it would be nearly impossible to get someone on the phone to fix the issue.  This human touch is something that high net worth clients and advisors alike assign great value.

After all, there is no technology that is perfect (could IE8 be any more annoying) and we occasionally need to speak with someone to clear something up.  It is by having a person on the other end of the phone that makes the greatest difference.

Bottom Line

In the end, if you are an advisor with a successful HNW practice and don't currently use account aggregation, you're behind the curve.  Fortunately, the technology is incredibly easy to use and you can get caught up in very short order.

Mundane Cutback #5: Eliminate ATM Fees

One of the things my frugal wife refuses to do is pay ATM fees.  I haven't been quite as good at this because I'll typically use another bank's ATM about twice a month which costs us $6 each month.  While this isn't a huge amount of money, it is another mundane expense that I really shouldn't have.

The problem with ATM fees is that you're paying for convenience and if you're not at your bank's machine, you have to pay the piper.  As you know, we're an all cash couple and we don't use credit cards.  A couple of weeks ago, I even stopped using a debit card (with rare exceptions).  To assist in the transition, I bought a cheap money clip/ID holder and carry it instead of my traditional bi-fold wallet.

The great thing about a money clip is that the amount of cash you're carrying is always visible.  So the question becomes, what little trick can I use to make sure I never pay an ATM fee again?  The answer was pretty easy--become your own ATM.

Since I'm only using another bank's machine about every other week, keeping a couple of weeks worth of cash at home effectively turns my home into an ATM (even if it's not as well supplied as the bank's).  Yesterday, I was pressed for time and had to get to a wedding.  Rather than stopping at an ATM, I just grabbed my week's supply of cash out of our home ATM, a.k.a. our envelope of cash we keep at home, and went to the wedding without incurring a $3 fee.

While this is very simple problem and solution, it is another step in cutting out mundane expenses from our lives.  Over the course of a year, it'll save us $72 or the equivalent of three rounds of golf.  Obviously, the golf course is a much better place to spend $72 than the bank.

Mundane Cutback #5 Savings:  $72

Total Mundane Cutback Savings to Date:  $1,578

This was idea number 91 from 100 Easy Ways to Save Money written by Jim Wang of Bargaineering. If you'd like to get a copy of this book, just sign up for Bargaineering's email newsletter. He has a great blog and his book has already given us $1,578 in savings!

Net Worth-to-Expenses - the only metric that matters

In a comment at Bargaineering, someone raised the question of what financial metrics were the most important.  While the ones that typically come to mind are debt-to-income or loan-to-value, the only metric that really matters in the long run is net worth-to-expenses.  This multiple is the single most important metric for individuals and families to use on their path to financial security.

What is It?

In essence, net worth-to-expenses is your total net worth divided by your annual after tax expenses.  As an example, a family with a $100,000 net worth and $50,000 in annual after tax expenses would have a net worth-to-expenses multiple of 2x.  The formula is very simple as follows:

    Net Worth  /  Annual After Tax Expenses  =  Net Worth-to-Expenses Multiple

Why is It Important?

The reason this metric is so important is that it answers the most important questions of personal finance:  (1) Am I financially secure? and (2) How long can I sustain myself without an income?  In our example, this family isn't financially secure, but could sustain their lifestyle for two years (2x multiple) on their assets alone.

Levels of Financial Independence

The idea of financial independence has been out there for a long time.  While it is strictly defined as having sufficient assets to sustain one's lifestyle indefinitely, there are a few levels of financial independent that are worth highlighting.

The first level is reaching 1x which means you have enough assets to survive one year without a paycheck.  This is a meaningful milestone, as a one year layoff is about as long as one will experience during their early years of wealth accumulation.  Most don't experience a layoff of more than one year until the tail end of their careers.

The second level is at 2x.  While this doesn't seem like much of an accomplishment, having two years' worth of assets affords an individual or family the ability to do a little more.  Often this amount of money allows individuals and families to rearrange their personal and/or professional lives.  The most common manifestation of this is going through re-education or starting a business to ultimately move into a different profession.  If you don't love what you're doing, reaching 2x will afford you the opportunity to explore what you'd rather be doing with your life.

The next major milestone is 10x.  This is where a 10% return on investment would provide an annual income that would support one's lifestyle.  While it's not feasible to count on a 10% rate of return each and every year, if you suffer a layoff or other financial hardship, at this level, it feels much more like a bump in the road rather than a major detour.

The final milestone varies for each person, but it comes somewhere between 20x and 33x.  This is largely a function of how many years they will need to draw off of their portfolio for income purposes--20x for those with less than 30 years, 33x for those with more than 50 years.  This is the final stage of financial independence and it allows those who achieve this net worth-to-expenses multiple the ability to retire comfortably and never work again.

Your Metrics, Not the Bank's

The sad thing about this metric is that not many people have heard about it.  That's because most are stuck knowing only what banks and other lenders want them to know--debt-to-income, loan-to-value, FICO score, etc.  The fact is that if you move beyond these other metrics and live your life in pursuit of a healthy net worth-to-expenses multiple, you'll be far better off.  After all, the bank isn't interested in you achieving financial independence; they won't be able to lend you money.

Takeaways

• Net Worth-to-Expenses is calculated by taking your net worth and dividing it by your total annual expenses.
• There are four major milestones on the road to financial independence at 1x, 2x, 10x, and between 20x and 33x.  At each of these levels, a greater level of independence and thereby, security is gained.
• The bank's metrics are irrelevant to your pursuit of financial independence and security.  Rise above their ratios and get to your best net worth-to-expenses multiple.
• Though other financial metrics will be important on your path to financial security, always measure your progress through net worth-to-expenses.

2009 Entertainment Book Free Online

Right now, 2009 Entertainment Books are free online at Entertainment.com.  All you need to do is pay shipping and handling that starts around five dollars.  You will need to register online and pre-order the 2010 edition, but considering the amount of savings involved in these books, the price really is irrelevant.  On average, our family will save $300 or more throughout the year by using the discounts that are in the book and online.

Our savings typically come from a small group of coupons:

• Oil changes ~ $10/month
• Golf ~ $50/year
• Movie tickets ~ $25/year
• Restaurants ~ $10/month
• Miscellaneous retail ~ $25/year

If you live in one of the metro areas covered by Entertainment, you'll do well to sign up for a free 2009 book and pre-register for the 2010 edition.  The 2009 edition runs through the end of October, giving you just shy of five months of savings for free.

Manufacturing, The Auto Industry, and GM

Over the last few decades, we have moved from a manufacturing to a services economy and with GM's bankruptcy finally having come to pass, the U.S. auto industry can officially be written off as just another part of the whole.  Sure, the industry continues to supply thousands of jobs, but that's really no different than any other industry.  What is important to understand is that manufacturing, particularly anything outside of high end manufacturing (think aerospace, defense, medical devices, etc.), is dead in this country.

The reason that lower end manufacturing cannot survive in a highly developed globalized economy is there are better options to have the work completed elsewhere in the world.  Many will immediately point to cheap wages as the driver for sending manufacturing jobs overseas, but it's a lot more than that.  In fact, sending a manufacturing job (particularly on the lower end), makes an awful lot of people better off.

The short list of beneficiaries to off-shoring lower end manufacturing jobs are:

1. Domestic Consumers - by having goods produced at a lower price, consumers can use spread their dollars across more goods and services.
2. Domestic Businesses - businesses that offshore manufacturing jobs are able to more effectively compete in their respective industries meaning greater profitability is more likely with a lower cost of goods sold.
3. Foreign Businesses - in developing countries, these manufacturing jobs have an enormous positive impact on their economies and their workers.
4. Foreign Consumers - while the influx of more jobs at higher wages can spark inflation, it also means that more consumers have the money to buy goods and services.
5. Global Economy - when it comes to economics, globalization is more or less a means of efficiently utilizing resources.  Efficiency helps all participants in the long run.

Obviously there is a great deal of benefit to off-shoring and that's why we see it happen time and time again.  But what about the domestic workers whose jobs were off-shored?  Don't they get hurt?  Yes or no.  That's right, yes OR no.

It really depends on the individual.  In the very near term, just about all of those whose jobs were off-shored will lose, but over time, it's up to the individual.  A 40-something worker isn't just going to sit at home the rest of his or her life.  They will have the opportunity to move into another job.  What that job pays will depend on their actions.

If they decide to go back to school, get more training and knowledge, they will likely come out better off than before.  If they do nothing, then the odds are stacked against them.  The reason is simple:  we reward skills and the more sought after the skill, the greater the reward.

So it really is an OR proposition.

Getting back to the bigger picture, low end manufacturing jobs simply won't exist in our country over the long run because to move forward economically, we simply cannot afford to pay the high wages and benefits that are demanded by American workers.  The only exceptions to this are for industries that are considered important to our national defense infrastructure.  We will never have highly classified nuclear arms components made by foreigners.

This doesn't mean that manufacturing will be completely dead either.  As we continue to move forward technologically, there will be a consistent influx of high end manufacturing jobs available.  Some areas where this will be available are alternative energy, nano technology, biological agents (yes, algae could become an alt-energy source), cutting edge composits, and the list goes on.  The important point is that the names of these manufacturing job creating industries will continue to change.  As new tech becomes old tech, jobs will be off-shored.  However, there will always be new tech and new manufacturing jobs but they will require workers to re-tool themselves and continually increase their skills.

That's why the auto industry will never be what it once was and it's also why alternative energy looks like it could be the next major evolution in manufacturing.  The demand for energy will continue to grow globally.  If we are at the lead in producing cost-effective energy solutions, we will have plenty of high paying jobs for those displaced from old line manufacturing industries.

While it's somewhat sad to see a big name company like General Motors move into bankruptcy, it doesn't mean that manufacturing will ever completely go away.  Besides, it's already been proven that great autos can be made in America--ever heard of Toyota or Honda?  The difference is that the successful manufacturers don't have a ball and chain attached to their ankles like GM, Ford, and Chrysler.  But that's a story for another day.

Inflation on the Horizon, Stagnant Market through 2015+

If you take a step back and look at the long-view big picture, you find some pretty interesting events that will ultimately lead to a stagnant market through 2015 or later.  First, we entered a stagnant market back in 1999/2000 and since then we've seen a couple of deep troughs that put us where we are today.  In an effort to stimulate the economy, monetary policy (the money supply controlled by the Fed largely through interest rates) is incredibly loose and fiscal policy is on one hell of a spending binge.

Add to this the fact that we are likely in a long U shaped recession if not an L shaped depression and you get a market that won't be able to move significantly higher for several years yet.  There is a kind of zig zag pattern that emerges when we have a serious recession and it's something that is both easy to predict and incredibly difficult to time properly.

To walk you through this, let's consider the history of how we got here today.  The market growth of this decade was largely fueled by the housing and financial sectors along with mergers and acquisitions activity that reached a fever pitch in 2007.  Of course, since then the financial sector has for all intents and purposes failed.  Housing collapsed and mergers and acquisitions have slowed considerably.

Putting this together, we find ourselves in the worst recession since the Great Depression and the cure for what ails us--consumer spending--has basically disappeared.  In a typical knee jerk reaction, personal savings rates jumped from negative numbers not so long ago to what will likely be 7% by the time this recession is over.  If the consumer isn't spending, the Fed will usually drop interest rates to try to stimulate spending, but this time around, interest rates are as low as they can be and consumers still aren't spending.

This leads us to fiscal policy (government spending) as the sole mechanism of spending to stimulate the economy.  While Obama's administration is pumping a couple of trillion dollars into the economy through various means, it still takes time before fiscal policy can really make the economy move.  That is where we are today.  The economy is stabilizing, but not yet into growth figures.

The problem with monetary and fiscal stimulus on the level that we're seeing today is that when we do turn the corner and the economy starts to grow again, we have a very high risk of seeing rampant inflation.  Once inflation gets into the high single digits or even low double digits, there will be a response from the Fed.  That response will be to raise interest rates.

The effect of raising interest rates will be to increase unemployment so consumers and businesses will slow down their spending.  This will then lead to another recession of some sort and we'll not be back to a controlled economic environment for a few years.

In addition, with the government having spent an incredible amount of money, taxes will also be increased, further choking off spending.  Again, this won't happen until the economy gets back to growth, but it is likely to happen in the future.

So let's recap for a moment.  First, we're in this deep recession.  Eventually (Q4 2009/Q1 2010) we get back to a small amount of growth.  Next, consumers start spending again and the economy heats up (around 2011/2012) as interest rates remain low and money supply is loose.  In response to the increased economic growth, government can finally raise taxes and interest rates (2013/2014).  Finally we have inflation that is rising at an alarming rate.  To combat this, the Fed raises rates to control inflation and also puts us back into a recession (2015/2016).  Finally, we can see some sustainable growth which will wind up being as early as 2015 or as late as 2017.

While this is just one possible scenario, it would appear that we're on our way there assuming we avert going Japan.  Regardless, if you believe in this potential future, here is what you would prefer with your investments:

• Short-term bonds are favored over long-term bonds
• Inflation protected securities such as I Bonds or TIPS are favored over traditional bonds
• Stock allocation will need to be monitored and rebalanced in response to market swings
• Emergency funds/cash reserves will remain valuable as we work through a choppy time economically
• Real estate should be financed with fixed rate mortgages only
• Commodities prices will vary based on the economy and as soon as things turn around, expect higher prices

Mundane Cutback #4: Camping Old School

In our continuing weekend efforts to cutback on expenses that don't add any real value over time, we're going to take our family for a weekend escape to one of our state parks.  Now that our boys are 7 and 10, they're old enough to where I know they won't get lost or do something horribly stupid while we're experiencing the great outdoors.  To get our adventure started I booked online using our state's parks website.

The reservation system is actually powered by ReserveAmerica which collects a nice little fee of $7.50 for processing the reservation.  For two nights over a weekend on a primitive site (if you're not on a primitive site, you're not really camping), the total cost was just $28 or $14 each night.  The total cost of the reservation was $35.50 or about one-third the cost of a mid-range hotel.

Of course, there's some additional equipment that we'll need to buy to get us through the weekend that includes a two person tent and a couple of sleeping bags.  The total cost on this is will be less than $60 as we'll shop just before going on our camping trip in August--by this time camping supplies are usually on sale.

Aside from the tent and sleeping bags, we don't really need anything else other than the usual suspects--food, wood, and bait.  I haven't decided yet if we're going to do an eat what you catch type trip, but we'll have plenty of hot dogs, marshmallows, baked beans, etc.  The idea of eating what we catch is very appealing, but I'll have to see what my anti-fish wife thinks of this.

Either way, our food costs will be a pittance compared to taking a family of four out to eat somewhere for lunch and dinner each day.  We estimate that the per meal, per person cost of food will be around $1.50 or a total of just $36 for the entire weekend.  Compared to a traditional vacation with one fast food meal and one sit down meal each day, we should save about $84 on food alone.

If we total up our costs for the primitive site, sleeping bags, tent, and food, we're looking at $131.50.  Compared to the cost of staying in a hotel and eating out (not to mention entertainment costs), we are likely to save about $304 on the weekend.

Overall, camping is something that I believe is a basic skill that everyone should be able to do.  Building a fire, fishing for food, or just whittling a piece of wood, camping is something that is fun and educational.  Plus, hanging out with my boys in an environment where just about anything goes is going to be a treat.

Mundane Cutback #4 Savings:  $304

Total Mundane Cutback Savings to Date:  $1,506

This was idea number 89 from 100 Easy Ways to Save Money written by Jim Wang of Bargaineering. If you'd like to get a copy of this book, just sign up for Bargaineering's email newsletter. He has a great blog and his book has already given us $1,506 savings!

Diversification is Dead

Wow, that title is just funny to me.  I've seen an increasing number of articles declaring that diversification is dead--an argument that is both ridiculous and myopic.  In the latest article on this topic, I couldn't help but laugh at the analysis that was used to declare the death of diversification. The author uses a poor diversification model to make his point, and perhaps this is where the morticians of diversification are going wrong.

In his words:

"From the 2007 highs to the March 2009 lows, the S&P 500 lost 55.19%. How did a diversified portfolio fare over the same period of time? A portfolio with equal exposure to the Vanguard Total Stock Market ETF (NYSEArca: VTI - News), iShares Barclays Aggregate Bond ETF (NYSEArca: AGG - News), iShares Dow Jones US Real Estate ETF (NYSEArca: IYR - News), iShares MSCI EAFE (NYSEArca: EFA - News), iShares MSCI Emerging Markets ETF (NYSEArca: EEM - News), and iShares S&P GSCI Commodity ETF (NYSEArca: GSG - News) would have lost 48.12%.

Admittedly, 48.12% is better than 55.19% but either way investors lost about half of their money. That is simply not acceptable."

Let's take a closer look at this so-called diversified portfolio.  First off, the Total Stock Market ETF, Dow Jones US Real Estate ETF, MSCI EAFE ETF, and MSCI Emerging Markets ETF all fit under the broader asset class of equities or stocks.  To put this more simply, four out of the six investments or two-thirds are of the same asset class.

The other two fit into other asset classes that serve to give real diversification to the portfolio, but I don't know of many investors that use commodities as an asset class.  In fact, I'd say that this should be thrown out of the portfolio altogether on the grounds that commodities are inherently speculative in nature and are outside of the big three asset classes--stocks, bonds, and cash.

Now, let's use the author's equal weighting and apply it more appropriately over the same time period.  Assuming we started with a portfolio at the peak in 2007 that had one-third each in stocks, bonds, and cash, we find that there is a significantly different result.  Here are the numbers:

• Stocks (VTI) - Loss of 56.65%
• Bonds (AGG) - Gain of 0.57% excluding yield
• Cash (Avg. Bank Rates) - Gain of 2.25%

In total, the portfolio would have lost a total of just 17.94% which is a far cry from the 48.12% loss the author posits.  The fundamental difference is that stocks, bonds, and cash is a better diversified portfolio than stocks, bonds, stocks, stocks, stocks, and commodities.  See the difference?

The problem isn't that diversification is dead, rather the problem lies in the lack of diversification among meaningfully different asset classes.  Stocks are still stocks and it doesn't matter all that much if they're small, medium, large, domestic, or foreign.  It matters a little bit, but not nearly as much as the differences between stocks, bonds, and cash.

Bottom Line:  Diversification is alive and well.

Takeaways

• Diversification starts with allocations in stocks, bonds, and cash
• Secondary diversification within asset classes is necessary, but won't be nearly as effective as allocations among the three major asset classes

The Not So Curious Case of Missing Millionaires

In an article yesterday from The Wall Street Journal, it was revealed that Maryland's attempt to increase taxes on the rich (those with million dollar incomes) failed miserably.  In their moronic attempt to increase tax revenue and have much of it paid for by ultra-high income earners, they found that nearly one-third of their targeted taxpayers were no longer on the books in the state.  The reason?  A good number of them simply left the state.

While federal attempts to soak the rich can be somewhat effective, state attempts to do this simply can't and don't work.  See, when you move from one state to another, you still live in the United States--meaning that federal tax increases stick whereas state tax increases are a mere nuisance.  If your current state of tax residence raises your rates, you can choose not to participate by changing your tax residence.

Since million dollar income earners have a great deal of financial resources, they typically can move to a new home or simply move to their other home.  Many in this group own multiple houses and they are usually not in the same state as their primary residence.  As a result, state attempts to grab more cash from this small, wealthy group are futile.

Here are the numbers as reported by The Wall Street Journal:

• 2008 Taxpayers with $1 million incomes:  3,000
• 2009 Taxpayers with $1 million incomes:  2,000
• Reduction in taxes collected from 2008 to 2009:  $100,000,000
• Amount of taxes to be raised to cover the gap from those not making $1 million annually:  $100,000,000

Obviously Maryland's cash grab didn't work out so well.  There's an old story about taxes, beer, and people that really captures the essence of Maryland's story and it goes something like this:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this: 

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.”

Drinks for the ten now cost just $80

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ 

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay! And so…

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now paid $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. 

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”

“That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!” The nine men surrounded the tenth and beat him up. 

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill! 

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia

I guess you could say that the 10th guy stopped showing up in Maryland.

Eliminate Distractions, Better Your Finances

The bulk of what I do for a living involves writing. At present, I have three writing projects that are ongoing including this blog, a personal finance web application, and a finance column for CiN Weekly. While the blog and finance column are relatively easy, the web app is something that requires a great deal of concentration and demands that distractions be kept to a minimum.

To help me in focusing, I have employed a number of common techniques including turning the phone off and closing unnecessary applications. This has all worked out fairly well. However, I read an article at LifeOptimizer.org that prompted me to download some new software called JDarkRoom, a very basic but effective writing tool.

Essentially, JDarkRoom utilizes a full screen with a black background that eliminates distractions from my desktop (email notifications are annoying) and allows me to focus on the task at hand. It saves all documents as .txt files which can easily be shared with others. What I like best about it is there are no bells and whistles attached to it, no bold, italics, font, color, etc. It's as stripped down as humanly possible...and I love it!  Here is what it looks like:

In taking this little gem of a productivity idea from LifeOptimizer.org, I couldn't help but consider what someone could achieve in a short period of time in handling their finances if only there were no distractions. It is this idea of distractions that I believe is at the core of our problems in planning our finances.

Think about it, if you Google 'how much life insurance do I need', you'll get back thousands of results--each of which has a different method of calculating needs and what type of life insurance is best. This creates a jungle of distraction that ultimately leads to more confusion that clarity. Shoot, even so-called financial experts can't agree on an answer to a question as simple as, "Should I pay off my mortgage early?" (you definitely should, by the way)

This problem of distraction is a tough deal in personal finance. There are far too many outlets of conflicting information and without spending many hours educating yourself, it often feels like you're rolling the dice.

If you're feeling like this while trying to take care of your finances, there is a solution--good old fashioned work. It's your responsibility to take care of your finances and while it might be nice to think the government will save you, we all know this just won't happen.

Bottom Line: you're going to have to put in some sweat equity

The way you accomplish this sweat equity, however, is largely up to you. Most people spend some time each week logged into their financial institutions' websites to pay bills, view balances, or perform other basic transactions. Instead of doing this, take an hour or two each week to handle one big financial question in your life and automate the other stuff (set your bills to auto-pay monthly, sign up for Mint/Thrive/Wesabe to get your balances sent automatically, and quit wasting time on trivial stuff).

Go to a quiet place outside of your normal environment and designate this time to only work on a single item. For many, it might be building a plan to payoff debt or figuring out how to allocate retirement investments. Whatever the question, set aside up to two hours each week and commit to bringing the question to resolution by the end of your allotted time.

As a financial planner, the average new client had anywhere from twelve to twenty-two problem areas--many of which the client was completely oblivious to. This leads me to one of Murphy's Laws that goes something like, "Before you can do something, you have to do something else first." Instead of just dealing with issues that you know about, seek out a comprehensive financial planner who can do an initial assessment of your problem areas.  

Many planners will offer this type of service for free or at a significantly discounted rate as an enticement to use their services. You might decide to enlist the planner's services or you can simply walk away with a list of issues that you know need to be addressed.

After you have your initial list of issues to address, start tackling them one by one until you've decided on a course of action for each. This isn't something that happens overnight, and any financial planner will tell you that personal finance is a process not a product. With this in mind, after you've done your homework, made your decisions, and taken steps to implement solutions, you should continually monitor your financial situation with at least quarterly reviews.

But, but, but, but, but, but I don't have time. Tough. If you want to someday be financially secure, rich, wealthy, have an FU fund, give it a name, it takes a little bit of time and energy to make it happen. Any chump making good money can be a pauper if they don't take the time to translate that income into a financial portfolio that properly addresses risk, savings, investing, and the eventual distribution of their assets.

As a colleague of mine once told me, the only difference between a CEO and his assistant is the number of zeroes after their paycheck and their expenses. See, many high income earners make terrible wealth accumulators because they don't do the work. If you don't believe that, check out The Millionaire Next Door; it's pretty clear that high income does not necessarily equate to wealth.

In the end, cutting out the low value tedious tasks in personal finance and replacing them with high focus, high reward tasks will lead you to better results.  Get rid of the distractions and noise and you'll be better for it.

Investing 099 - Investment, defined

An investment is anything that you put money into and expect to receive something more in return over a period of time.  There are all kinds of different investments and each has a different expected return along with an associated level of risk.  When we make decisions with regard to investments there will always be a risk/return trade off that you'll need to assess in terms of your personal financial situation and the broader financial landscape.

This assessment of risk/return, little picture/big picture is where many go wrong with their investments and is the leading cause of poor investment returns over time.  To walk through an example, let's look at the average investor in the late 1990s.  Many were new to the stock market, but with new highs coming with regularity, it was almost impossible not to get caught up in the hype.  

When a new investor began combing through stocks and stock mutual funds, they initially looked for the highest return.  Unfortunately, what they didn't realize is that the shares were seriously overpriced and carried a much greater amount of risk than the same stocks or mutual funds did a decade earlier.  With the allure of high returns many investors got hammered in 2000 through 2002 when the internet bubble burst.  

The mistake here was a poor assessment of the risk/return, little picture/big picture.  With respect to risk, growth stocks were trading at price-to-earnings ratios that were considerably higher than at other points in history.  In other words, for each dollar of earnings in a company, investors had to pay considerably more (twice as much as the average or more in many cases).  The long-term average p/e of the S&P 500 is closer to 15 whereas many growth stock funds had p/e ratios in the 30s.

As for return, new investors believed that stock prices could continue to go higher and that a New World of investing was coming to life before their very eyes.  Wrong.  Companies still have to make profits and most of the internet companies simply hadn't profited a dime.  Without earnings in the underlying companies that the stocks represented, there could be no long-term investment returns.

The little picture analysis for many in the latter part of the 1990s was to determine how much cash they could scrape together to throw it into the stock market that was returning 20% or more.  Many ignored keeping a healthy emergency fund, some borrowed on margin (like getting a mortgage on your stock portfolio), and of course, there were those that took out home equity loans to get into the market.  This left their personal finances exposed to an inordinate amount of risk.

What's interesting to note is that by any big picture analysis at the time, it was apparent that the market was trading well above its historic average and even above its historic range as measured by p/e ratios.  Of course, investors were in love with the market and blinded by the double digit returns offered annually.  Making matters worse were the pundits on CNBC that were declaring that earnings no longer mattered and revenues were what stock values should be based on.  Umm...no.  Anyone who runs a business knows that if you don't make a profit, it doesn't matter how much you sell because you're losing money.  Again if your underlying investment is losing money, you will lose money too.

Does this sound anything like what happened in real estate?  Great returns attract money; risk is perceived to be much lower than reality; individuals put themselves at greater risk to 'get in the game'; the big picture reveals that the market is way out of whack and prices cannot be sustained; investors get crushed.  Yep, that's about right.

Takeaways

• Investments have an inherent risk/return trade off
• Creating and managing your investment portfolio must include a risk/return, little picture/big picture analysis or you will have a poor investment experience

Kiva - Zemanta's Blogging for a Cause Campaign

I've written about my favorite charity, Kiva, previously, but I wanted to help them in securing some money that Zemanta is offering in its Blogging for a Cause contest.  The reason I like Kiva more than other charities is that they have developed a way to move more people out of poverty by providing an economic stimulus to developing countries.

Unlike the United States where businesses can find funding through grants, government and bank loans, and venture capital, developing countries have significantly fewer opportunities to find money to get businesses going.  What Kiva does is provide an avenue for small businesses to start and expand--creating jobs in the local economies where the businesses operate.  With job creation comes a reduction in poverty.

While we endure a tough recession where unemployment should crest somewhere north of 10%, many developing countries experience 10% unemployment even during good times.  This is where Kiva helps by expanding business and employment opportunities.  Sometimes it's a corner grocery store or a small restaurant or a clothing store, but every time, Kiva screens out current and prospective business owners to ensure that the loans they make are repaid.

In fact, Kiva's repayment percentage is better than that of U.S. consumer loans.  The last time I checked, they still have a default rate of less than 3%.  This speaks to the intense desire of these business owners and their employees to continue to grow their ventures and provide employment opportunities.

The reason Kiva is a better option in developing countries is they make loans available at significantly reduced interest rates compared to the local loan markets--markets largely controlled by 'banks' that are little better than loan sharks.

Adding to this is the ability to leverage healthier currencies such as the U.S. Dollar or E.U. Euro against the weaker currencies held in developing countries.  By having strong currencies directed to weaker areas, the aid provided can be levered at a ratio of 3:1 or more.  This allows a relatively small amount of money ($25 is the minimum to get started with a Kiva loan portfolio) to go a lot further in developing countries.

Another unique feature of Kiva is that you can commit your money only as long as your loans are outstanding and eventually cash out of the system altogether.  Instead of a traditional charity that simply takes the money, uses it, then it's gone for good, Kiva allows you to commit money to a loan or portfolio of loans that, once repaid, can be taken back out of the program in cash.

If you'd like to learn more about Kiva, click here.

This blog post is part of Zemanta's "Blogging For a Cause" campaign to raise awareness and funds for worthy causes that bloggers care about.