November 30, 2009

30% off on gift cards today only

I got an email from advertising 30% off on gift cards today. The offer expires at midnight central time. There is a 'catch' though to get the full 30% off you have to share their deal via Facebook. If you don't share the deal via Facebook then its 15% off. The 30% off deal is pretty good.

I got a $50 gift card for $35 myself. It seems that its not an instant electronic gift though and the confirmation email I got said my order would ship in 5-7 days. Shipping was free and there aren't any obnoxious processing fees, so its a straight $35 cost for $50 gift card. has a ton of brand name mostly non-food grocery store items. You can buy Aquafresh toothpaste, Dial soap, Kleenex tissues, Glad trash bags, etc. They do have some food but mostly nonperishable stuff like tea or coffee. The prices are OK but not fabulous. But with 30% off it makes it a good deal. They also sell the Forever US postage stamps so this is a way to get 30% off postage stamps.

Note: only carries name brand items. You'll often get cheaper prices for purchases by buying store brand items or shopping sales. Buying through is a convenient way to get decent prices on name brands (with free shipping) but its probably not the cheapest way to buy stuff in general. So if you really want to save the most then buy store brands, shop sales and/or use coupons.

Suze Ormans Signs of a Bad Financial Advisor

A couple weeks ago I caught an episode of the Suze Orman show and she gave her top signs of a bad financial advisor.

Here is Suze Orman's list of the signs of a bad financial advisor:

1. They rush you
2. They don't tell you fees or commissions
3. Want you to put everything in one investment
4. Want to meet only you and don't want to meet your spouse
5. Does not ask about your needs

I'd generally agree with all these in most cases.

Rushing you is not good at all. Theres no reason you have to make a decision immediately. You should be able to think on things for a day or two without any worries and if they say otherwise then thats a bad sign.

They should definitely be explaining fees and their commissions. Be wary of anyone who doesn't go into that or share that info when asked.

I think there can be exceptions to #3 for sure. Say you've only got $50k to invest and they recommend you put it into a safe bank account cause you're saving for a house. Thats a good reason to put all your money in one place. Or maybe you're retiring and they suggest you put $100k into a fixed annuity. That isn't necessarily bad advice (depending on the terms of the annuity).

For #4, If you're married or have someone else with a stake in your finances then the advisor should want to talk to all the parties. If they don't then that is generally a problem. But I wouldn't be so hard fast on this one. If a husband or wife seeks some advice without their spouse then I don't think the advisor should necessarily demand to talk to the other spouse.

Lastly if an advisor doesn't ask you what you need then thats not a very good advisor. They can't meet your needs if they don't ask for your needs. Advice can be either good or bad depending on the situation. I wouldn't tell a 20 year old saving for retirement to put their money in a bank CD and I wouldn't tell a 70 year old on a fixed income to put their life savings in stock funds.

November 28, 2009

Which Makes Better Rentals: Single Family Homes or Plexes?

If you are planning to buy real estate as an investment then you can go two major ways with residential property. You can buy a single family home or you can buy a plex. A plex is a duplex, tri-plex, 4-plex or other larger multi-family property. There are pros and cons to doing single or multi family properties.

Reasons that Plexes are better

Rent Income is diversified - If you have a vacancy in a mult-family unit then you aren't losing 100% of your rent over it. If you own a 4-plex and there is a vacancy in one unit then you're still getting 75% of your rent from the other 3 units. Its not very likely you'll have multiple vacancies at the same time very often. This helps smooth out your cash flow better.

Generally better returns - It usually easier to make positive cash flow with a plex than a single family unit. If you look at rent / property cost, around here it seems I can get only 4-5% on a single family but could get 6-7% on a duplex. The profitability is a bit easier with mult-units.

Easier to watch over - With a mult-family unit you have easier access and better reason to be at the unit checking up on things. With a single family unit you have only one tenant. To go to the rental you really need an excuse or reason to be there. If you show up all the time it may be irritating to the renters and to gain entry you need permission or have to give them notice. Plus with a multi-unit the tenants will tend to watch over one another. If a tenant is causing problems then another tenant will likely complain to you and you'll find out much quicker than you might with a single family unit.

Reasons single family are better

Fewer tenants = less work - This is probably the biggest one. With more tenants you will generally have to do more work and have more potential hassle. A single family unit only has 1 tenant but a plex has more tenants.

More bills with multi units - With a single family unit you can usually have the tenant pay most if not all the utilities like water, garbage, sewer, etc. You'll often endup paying water and garbage on a plex and maybe some other bills. The landlord is often stuck paying some utilities since the service is not split up between the renters.

Easier financing, insurance or regulations on single family- It can be harder to get financing on a mult-family unit than on a single family home. Insurance companies may jack up the rates on multi-family units since you have more risk due to more occupants. Zoning rules may be more of a hassle or cost you more money in various ways with a multi-unit property.

Easier resale - A single family home has better demand and resale. There are plenty of people out there that want a home to live in but much fewer people who want to own a rental.

Potentially less upkeep - You can often have a tenant in a single family unit handle basic upkeep of the unit like mowing the lawn or raking leaves.

November 26, 2009

Happy Thanksgiving!

Enjoy your Thanksgiving.

November 25, 2009

Should I Buy Cancer Insurance?

What is cancer insurance? Basically cancer insurance is insurance that covers treatment costs related to having cancer. It only covers cancer and doesn't cover other forms of illness or injury.

Do you need it?


Why not? Cancer insurance would be basically redundant to normal health insurance. If you already have health insurance then you don't really need cancer insurance because your health insurance will cover cancer treatment. If you don't have health insurance then you should get it instead of and before you get ailment specific insurance like cancer insurance.

So the better solution is to get good health insurance.

The state of Wisconsin has a page on cancer insurance. One thing it points out is that 7 out of 10 Americans will never get cancer. Everyone needs health insurance. Most of us won't need cancer insurance. If you get health insurance you'll be covered either way and since you really do need health insurance you should get it.

November 23, 2009

My Black Friday Shopping Tactic - Find Unpopular Sales

I haven't always gone shopping on Black Friday but the past year or two I've gone with my wife.
What has worked for us in the past couple years has been going to sales that most people don't go to. Last year we went to a local discount store and there wasn't much of any line and we easily got the one item we wanted. This year we're planning on going to a used book store. I doubt that the book store will be too busy with most people at the large name retailers.

Overall we've had better success going to smaller less popular sales than we've had going to the big name stores. Generally it seems to get the real good sales at the big name retailers you have to get up before dawn and stand in line for hours and even then you only have a chance of getting their early enough to get one of the limited items. SO you can spend a lot of time, lose some sleep and still not get what you wanted. Your chances of success are better at less popular sales. I doubt there will be much if any line waiting to get into the used book store and we're not facing a limited number of a handful of door-buster sales items.

So this is my tactic : Look for a sale with high value to you and low general interest.

In other words find a sale where there is stuff you want to buy for a good price but its not a very popular store or not somewhere that people are likely to go on Black Friday. The used book store is a good example. We can get books for 50% off so that is a high value for us. However most people aren't even going to think of a used book store on Black Friday given all the giant sales at Best Buy or Walmart.

Of course you'll have to judge for yourself where you'll get the best value. You might do better waiting in line 8 hours at Best Buy to save $250 on a TV than we'll do at the book store. We won't have to wait in line at the used book store but we won't save a ton of money there either. But the money we do save at the used book store is pretty guaranteed and easy money.

Limited posts this week

I'll be busy this week with the holiday and family in town. So there will be limited posts this week.

November 22, 2009

Current Roth IRA Dividend Yield

I added up the expected annual dividends on the holdings in my Roth IRA and based the current market value of the account the total dividend yield is about 3.6%. If I figure the current yield based on what I paid for the stocks is 5.8%.

The account has gone up about 31% in the past year. As the current market price of an equity goes up the yield % rate gets lower. If you buy a stock at $10 with a $1 dividend then its yielding 10%, but if that stock then goes up to $20 the yield is now only 5%. Of course on the other hand if the stock goes down then the dividend yield goes up.

November 20, 2009

Best of blog posts for week of November 20th

Darwin's Finance has a giant list of ETFs with : 787 ETFs Listed – Every Exchange Traded Fund Known to Man

Bad Money Advice explains how trading in foreign currencies (or Forex) isn't a good idea: Forex for Everybody?

Stop Wasting Money for Electricity on Unused Electronics

If I look around my house there are electronics plugged in everywhere. Off the top of my head we've got : 3 digital clocks, microwave oven, coffee maker, 4 phones and answering machine, toaster, 2-4 phone chargers, big screen TV, HD DVR, HD DVD player, Tivo, Wii, stereo amp, another stereo, 2 computers, 19" TV, DVD/VCR, internet modem, printer and a home security system. Some of those items are in pretty frequent use but others are only rarely used. Whether they are in use or not at any given time they are probably all using at least a small amount of power. Virtually all modern electronics have some power draw in standby mode. That standby mode power usage of your electronics is costing you money around the clock.

The exact usage of each device will vary. You'd have to actually measure your own devices or check their specifications for a standby power rating to find out exactly how much power your electronics are sucking while off. For reference a I found a Lawrence Berkeley National Laboratory page that has some data on standby power consumption of typical home electronics.

Here are a few example items with their standby power usage and the amount you'd spend on electricity if the item was plugged in but unused for a year:

Microwave oven = 3 W = $2.60
Game console = 1 W = $0.87
Desktop Computer = 2.8W = $2.45
Multi function inkjet printer = 5.26W = $4.61
Cable set top box = 17.5W = $15.33

Of course some of these you'd likely be using some of the time. But even if you used them 8 hours a day then you'd be off 2/3 of the time. So your cable set top box may be costing you $10 a year in electricity while its off.

Looking at the devices in my home that I don't need to be in standby at all I'd list them (with standby power in Watts): microwave oven (3W), 2-4 phone chargers, (4 x 0.26W) big screen TV (6W), HD DVD player (1.5W), Wii (1W), 2 stereo2 (2 x .27W), 2 computers (2x 2.8W), 19" TV (2.8W), DVD/VCR (5W), multi function printer (5.2W)

My Total use = 31.26W = $27.75 annual cost at 0% use or $18.50 at 33% use I'm wasting up to $18.50 a year in standby electricity power unnecessarily

What to do about it? Simple answer is to unplug stuff but there are other ways.

How To Keep Electronics From Using Standby Power

Unplug items when not in use - Simply unplug the item when they are not being used. This is pretty straight forward and will work just fine for many items. But it can be a bit of a hassle to unplug something everytime you turn it off and its likely you could forget to do so.

Use a power strip with on/off switch - If you have a computer setup with a computer, printer, speakers, etc. then you can plug all the items into a power strip and then power down the power strip. Rather than having to unplug each device individually you can just hit a single switch. This is easier than unplugging everything but you could still forget.

Use a Smart Power Strip - Over a year ago I talked about how I had bought a Smart Power Strip and figured I was saving about $18 a year with it. A Smart Power Strip will automatically turn off power to your accessory devices when you shut off a primary device. So for example you can set it up with your computer so that when you turn off your computer the strip will automatically also then power off your printer, speakers, etc. This one is a good solution since you can't forget to turn off your accessories since its automatic.

Bye Bye Standby Remote switch
- This is a combination of AC socket adapters and a remote control switch. You plug the AC adapter into the wall then plug your electronics into the adapter. You can then turn the AC outlet on/off via a remote. This is handy for items like your TV entertainment center or other items where you might want easy access to the on/off for the power. While its very convenient its not automatic so you might forget to turn off your devices.

November 19, 2009

Should You Enroll in an HSA Insurance Plan?

Most of us have the option of picking a High Deductible Health Plan (HDHP) insurance plan with a health savings account (HSA). But it can be difficult to decide if an HSA plan is the right choice. You're often faced with confusing jumble of deductibles, premiums, co-insurance rates and out of pocket maximums. One way to figure if an HDHP with HSA or a traditional premium health insurance is your better option is to compare the minimum and maximum annual costs.

Figure your minimum costs for both plans

Your minimum costs would be what you pay for the monthly premium plus any known costs you may have. If you have no existing health conditions then your minimums may be nothing more than the monthly premiums. But many of us have some sort of minor or major ongoing health condition which has some known ongoing costs.

So basically: Minimum costs = Your monthly premiums + minimum known costs

Lets compare an example traditional plan and a HDHP/HSA plan.

Start with your monthly premiums. These should be stated in your plan literature.
Traditional plan = $450 a month premium = minimum cost = $5,400
HSA plan = $75 a month premium = maximum costs = $900

Then add any minimum known costs. Say for example that you take a prescription for an existing ailment which costs $50 per month. With the HSA this cost would be out of pocket but it for the traditional plan you may only pay a $10 co-pay. However for the HSA one detail is that the cost is coming out of pre-tax dollars so to figure your after tax rate you multiply by 1 - marginal tax rate. So in other words if you are in the 25% tax bracket then you would multiply your cost by 1 - .25 = .75. This is because you're really paying with pre-tax dollars so to compare that with after tax dollars you'd take out the tax equivalent amount.

Traditional plan = $10 x 12 = $120 after tax
HSA = $50 x 0.75 after tax rate x 12 = $450 after tax

Total minimum costs:
Traditional = premiums of $5,400 + prescriptions of $120 = $5,420
HSA = premiums of $900 + prescription of $450 = $1,350

Figuring Maximum Costs

The maximum costs could be more tricky to figure or might be pretty easy. If your plan documents a 'maximum out of pocket' cost then that is your maximum costs. Otherwise you can figure your maximum costs by adding your premiums, deductibles and any co-insurance up to its stated maximum.

Generally for maximum costs you'd have :
Maximum costs = Your monthly premiums + deductible + maximum co-insurance -OR - your stated maximum out of pocket costs.

Looking at the traditional plan you may have just : Traditional = premiums + deductible

Premiums of $450 a month = $5,400 plus a $900 annual deductible = $6,300

For the HSA it may have a documented 'maximum out of pocket' limit. That gives you a straight forward maximum cost for the plan. Again your HSA funds are pre tax dollars so you could figure your after tax rate by applying your marginal taxes to it.

HSA = stated maximum out of pocket = $6,000
Maximum of $6,000 pretax or x 0.75 = $4,500 after tax

Traditional maximum = $6,300 after tax
HSA maximum = $4,500 after tax

Look at both minimums & maximums

For the example plans here we have minimum and maximum costs of:

Minimums: Traditional = $5,420, HSA = $1,350
Maximums: Traditional = $6,300, HSA = $4,500

In this example the HSA is the cheaper option for both the minimum and maximum cases. Since the HSA wins in both cases its the better option.

November 18, 2009

How Does an HSA Actually Work?

It seems that this is the time of year that people do the open enrollments for health benefits at work. Health Savings Accounts (HSA) are fairly new and it seems more and more people are signing looking into up for them. I've been using an HSA for a couple years now and I think it is a great option. Whether or not it is your best choice depends on the other options and your own situation. I think one reason people may be hesitant to get an HSA is over confusion about how they work.

Since HSA's are new to people it may not be obvious how they work in comparison to traditional health insurance. My friend was looking at an HSA but he was unsure about who billed who or what he paid and when he paid it. I've been using an HSA for a while so I know from my own experience how it works. I figured it might be helpful to go through the process of billing and explain the actual logistics of paying with an HSA. I'm using example numbers below and your actual numbers will vary.

Where The HSA money Goes

For my HSA I get to decide how much money I want to put into the HSA. The money comes out of my pay check pre-taxes. That is an important detail since it means I'm not paying any taxes on the HSA money and it reduces my taxable income. The money goes straight into the HSA account right out of my paycheck.

The HSA account is very similar to an IRA account. I have control over the HSA money myself and I can write checks out of it or use a debit card to make withdrawals. The funds in your HSA do not expire at the end of the year and can be used later in life. The HSA funds are yours for good and can be transported to a new job or used in retirement.

Paying For Medical Service, before Deductible is met

This is generally how it works for me with my HSA.

The HSA has a $2400 deductible. Before you've paid that deductible all your costs are paid out of your HSA. So this is how a typical billing works:

1. I go to the doctor and get needed care.
2. I don't pay anything at the doctor office. They just bill me later.
3. I get a notice in the mail that the charge from the doctor was say $200 and that they've also billed my insurance. I don't pay yet, but instead I wait to hear what the insurance company says.
4. Next my health insurance company responds to the doctor and says the negotiated rate is $100. I then get an adjusted bill for the $100.
5. I pay the doctor $100 using my HSA funds.

It works like that until I hit the deductible. Before you meet the deductible you're responsible for paying all the costs. The insurance company tracks how much I've paid. You should also statements showing how much you've used and what you've paid.

After the deductible is met

Then after the deductible I pay just 10% of the costs. After the deductible is met the process basically works the same but I only pay 10% of the costs and the insurance pays the other 90%.

So for example after I have paid the deductible I get an ear infection and I go to the urgent care clinic. They treat me and send me home, I get a bill in the mail for $150. Then insurance responds and says they'll pay $100. Insurance pays $90 and then I'm told that I'm responsible for the other $10. I then use my HSA to pay the remaining $10 to the clinic.

What if you owe more on a bill than is in your HSA? You can pay the bill with your own money and then reimburse yourself later with the HSA.

Here is an example: Say its the start of the year and and you just signed up for an HSA this year and you've only had $250 pulled out of your paychecks. Then you appendicitis and need to go to the hospital. You end up with a hospital bill of $3000. You are required to pay the first $2400 of that to cover the deductible and then the next $60 which is 10% of the remaining $600. So you owe $2,460 today. However theres only $250 in your HSA. You can pay the $2460 out of pocket right now and then pay yourself back later using your HSA. So you use the $250 out of the HSA to drain it to $0, write a check out of your own cash for $2,210 today. Then 6 months later your HSA is back up to $2500 so you write yourself a check out of the HSA for the $2,210 to reimburse yourself.

What if you overpay?

With bills going back and forth its not hart to lose track and pay an incorrect amount. I've ran into situations where I over pay and then the insurance company refunds the money. We don't even always know if we've overpaid until a check from the insurance company shows up.

If you want more information on HSAs then check out the Treasury Departments page on HSAs. They have a ton of information thre with FAQs and guides.

November 17, 2009

Why you SHOULD Invest in Real Estate

Yesterday I gave a bunch of reasons Why You Should NOT Invest in Real Estate. I was purposefully trying to scare away the weak of heart. But that was more of a worst case scenario and most of that stuff won't happen or at least won't turn out as bad as that. There are a lot of good sides to owning rental real estate. Today I'll be more optimistic and point out all the great reasons why you SHOULD invest in real estate.

Monthly income - If you get the right property with the rents higher then the expenses then you should see a positive cash flow. You can even do this with a relatively low initial investment and get a higher monthly return for your money than other investments. For example a $10,000 down payment on a duplex might give you a $2,000 annual income for a 20% return.

Long term appreciation - In the long run real estate appreciates. Even though we've seen the real estate market go down lately, in the long run real estate has grown over the years.

Renters pay off your mortgage - With a loan you can buy a property with just the down payment and then the rent will pay your mortgage. Then over the years the mortgage will gradually be paid off until 30 years later you own the property free and clear.

Inflation protection - Rents will generally go up with inflation so your rental income is tied to inflation. With other investments such as bonds or simple savings interest there is no inflation

Tax benefits - Everything you spend on the rental is a potential tax deduction. If you have a mortgage then the mortgage interest is a tax deduction. This helps offset rental income. Another big tax deduction is the depreciation. You can deduct about 1/27.5 of the value of the property as depreciation. Combining mortgage interest, other costs and depreciation it isn't hard to see a profit turn into a tax loss.

Tax deferral on gains - You generally don't have to pay taxes on your gains until you sell, even then you can potentially defer those gains. As your equity grows in a property you have no immediate tax bill due. You could potentially accumulate value in your rentals and never pay taxes if you don't sell them. Even if you do sell a unit and buy another rental you can use a 1031 exchange to defer the taxes.

Stable business - No matter what happens people will need a place to live. Demand for rental units may go up and down but the market will not die out due to some new technological innovation or things like off shoring. You can count on rentals being a viable business well into the future.

You are the Boss - When you own real estate you are in charge of the investment. This is good for a couple reasons. First you get to run things they way you want to. So you have the flexibility get to dictate how things work to suit your own preferences. Second you aren't dependent on someone else to do a good job. You don't have to rely on a the success of individual financial managers or hope that Wall Streets actions will fall in your best interests.

Emergency housing - Worst case if you lost your home for some reason you could move into your rental property. It could be a fall back housing option. You could also use your rental property as emergency housing for people you love. For example if your parent or sibling had extreme financial difficulty then you might be able to subsidize them by allowing them to live in your rental property either free of charge or for a reduced rent.

November 16, 2009

Why You Should NOT Invest in Real Estate

For about a month and a half now my wife and I have been pumping money into one of our rentals. The tenants moved out without notice and we're having to fix up a few things and a couple more things and then even more things. The bills seem to just keep adding up. This has been a unenjoyable reminder of how some of the negatives of owning rentals.

There are many good reasons to own rental real estate, but there are also many reasons why its not a fun investment and there are some substantial risks. For a worst case scenario of how bad a tenant can be you could watch the movie Pacific Heights. Of course thats just fictional drama but its not outside the realm of possibility. Unless you're the luckiest person in the world most landlords will run into some problems and you need to be prepared for them before they happen. Below I list some of the negative sides of owning rentals.

Mortgage obligations - If you have a mortgage on your property then you'll have to pay that mortgage. Generally your rent will cover that mortgage, but what if there is no rent? In a worst case scenario you may be in a situation where you have no rental income coming in but you'll still have to pay that mortgage.

Unexpected repairs and maintenance - You might luck out and have very low maintenance and repair bills. But you might have bad luck and your property might start falling apart soon after you buy it. Big bills can add up... What if the furnace breaks down? Thats $500 for repairs. What if termites infest the home? That will be $400 for exterminator. What if a hail storm damages the roof? Your $1000 insurance deductible comes out of your pocket. What if you're really unlucky and all 3 of these things happen in the first year? All the sudden you're paying a $1,900 loss. This isn't even a high bill. Electric problems, plumbing problems or a dead HVAC system could cost you $2000 or more pretty easy.

Difficult tenants - Most tenants are great but some are not. Some tenants can be a giant pain in your rear end. Tenants might break your lease terms and lie to you about it. You might smell cigarette smoke and hear a barking dog coming from their unit which you don't allow pets or smoking in but they'll insist that it isn't them. They might harass or annoy you over trivial things. You could get phone calls at 1am in the morning because they are drunk and locked themselves out of their home.

Tenants who do not pay rent - Most tenants pay rent on time but some don't. Inevitably you will have tenants who are unable to pay their rent for some reason or another. Usually they have a legitimate reason for not having the rent like loss of a job or other personal problems. But sometimes your tenants have no good excuse other than they 'blew' the money elsewhere. They might try and get you to let them owe you for a week and that week might turn into two weeks then a month. If you allow this then before you know it your renter is 2 months behind in their rent.

Having to evict a tenant - Actually having to physically evict a tenant is not very common assuming you do a decent job of selecting tenants in the first place. But for one reason or another you might eventually get one of those tenants who simply won't leave and tries to work the system in their favor. If you do have to evict a tenant then you might take a couple months or more figuring out the system, dealing with the lawyers, courts and eventually the sheriff who will normally physically remove the tenant in the end. The actual legal eviction process can be a giant hassle and expense for a landlord.

Criminals - No matter how well you screen tenants you might end up with a criminal. Criminal activity by tenants could cost you a significant amount. If tenants set up a meth lab in your rental property then having the property cleaned up could run several thousand dollars. (this is one of my dads major fears as a landlord) Or worse yet a renter could be violent and pose a physical safety risk to the other tenants or yourself.

Protracted vacancies - Just cause you have a home to rent doesn't mean anyone will want to rent it. Its not always easy to find good renters so its possible to have a unit sit vacant for a month or two. If an area is hit hard by some economic problems then people might move out of town and rentals might sit vacant for a long time.

Legal liability - One of the worst case scenarios is if a tenant suffers some sort of physical injury and sues you as the landlord for damages. Lawsuits aren't really as common as people seem to think but they do happen. You need to worry about legal liability and make sure you aren't legally negligent in any safety hazards on the property.

Renter damage - When a tenant moves out you'll be lucky if they clean the place and leave it in the condition it was when they moved in. Often tenants won't bother to clean and its common that they'll have left some damage. Sometimes the amount of damage is more than the security deposit. If you don't think tentants could do much damage then think harder. Tenants might drag their car battery into your home and spill battery acid all over the carpet. You could rent to this guy who left a giant pile of trash in the apartment.

Most of the above is not stuff that you're likely to see. Most tenants are not criminals who will skip out on several months worth of rent leaving the apartment trashed. But there is a risk that anything above could happen. You might get unlucky as a landlord.

If you never want to take the risk of any of the above problems happening then you should probably not be a landlord. If you are a landlord or are considering buying a rental then you could avoid most of the problems above by being very careful and picky about who you rent to. Otherwise you can mitigate these risks for planning and budgeting for some problems in advance.

November 13, 2009

Best of blog posts for week of November 13th

Wise Bread discusses The Pros and Cons of Retail Health Clinics Such clinics seem like they might be a practical and cost effective idea for minor health issues.

Wisebread has some detail on How Foreclosure, Deed in Lieu, and Short Sale Affect Credit Scores

Investing in Oil Royalty Trusts

A while ago I talked about some potential investments that I was looking at buying. One of the investments was an oil trust. At the time I didn't go into much depth about how investing in an oil trust works or how you might go about picking such a trust to buy. Today I'll cover those topics.

But first, what is an oil trust?
Wikipedia has a page on oil trusts that discusses them at some length. Or you can refer to investopedia's definition. But in short: an oil trust is a financial company that owns the rights to oil or natural gas in the ground and then gets paid for oil produced from their property, the payments are then distributed to share holders in the trust. An oil trust is a good way for an individual to invest directly in oil or natural gas. Oil trusts may own oil and / or natural gas. Most of them own both oil and gas.

Why invest in an oil trust? The key benefits of an oil trust is that you get a high dividend payout and you can profit from an increase in the price of oil. Investing in an oil trust is a hedge against energy prices as well as a direct investment in energy commodity.

How do you value them? To determine which royalty trust is a 'good' buy you have to know how to value them. Determining what the value is of a royalty trust is very different than valuation of a normal stock. When you buy a normal company stock you buy a business that makes stuff or sells a service. So with a normal company you can look at their income and debt and growth and earnings all as indicators of the health of the company. Royalty trusts are very different, they don't have employees or debts and their production is almost pure profit. But they are a depleting asset which means they are selling something that will eventually run out. The return on a royalty trust will depend on two key things : 1) the market value of the asset and 2) the amount of asset they own. Therefore its my opinion that you should be able to value a royalty trust primarily based on the current market value of their assets. In otherwords if you figure out how much oil or gas they have and find its current market value then that is the value of the trust.

So lets look at a few trusts and compare them.

Here are the list of oil and natural gas royalty trusts that I found:

BP Prudhoe Bay Royalty Trust (BPT) - SEC filing
Cross Timbers Royalty Trust (CRT) - Web Site, 2008 annual report
Mesa Royalty Trust (MTR)
Hugoton Royalty Trust (HGT) - Website, 2008 Annual report
San Juan Basin Royalty Trust (SJT) - 2008 annual report

I gave links to their website and annual reports if I could find them.

For each of the trusts I found their current dividend yield, price, 5 year dividend average, market cap and I attempted to calculate the present cash value of their oil & gas reserves. To find the reserves I had to search through their annual reports so for these cases I'm looking at the reserves at the end of 2008 which is the most recent data. For the current market values I used the current oil price of $79 per barrel from Bloomberg and $4.46 per cfm for natural gas. Those are volatile numbers that go up and down every day. The yields are a current snap shot based on the most recent dividend. Yields for trusts bounce up and down based on market conditions. So if oil goes up then the yield goes up.

In the table below I give the stock symbol for each trust, its current dividend yield, the 5 year average yield and the right column is the cash value of proven reserves / market cap (R / M).

Yield 5y avg R / M
BPT 8.8% 11.20% 2.5
CRT 7.4% 9.60% 1.4
MTR 7.5% 8.30% ?
HGT 6.8% 10% 2.6
SJT 6.2% 8.30% 0.7

I couldn't find enough info on MTR so I may as well cross that off the list. It seems that the reserves of SJT are lower than their market cap. BPT and HGT are the two that stand out as the best overall. They both have high reserves relative to market cap and they both have double digit 5 year average yields. If I'm to pick a winner from this analysis then BPT would be my choice as they have highest yields and very large reserves.

I only reviewed a few royalty trusts here because these were the ones I was able to find first. The Wikipedia page has a longer list and I may do the research on all of those royalty trusts as well.

A couple more important points about oil trusts.

Taxes on royalty trusts could get pretty complicated. The dividends are taxed as normal income but they may be treated as a depleting resource so you get to deduct that. Normally you'd have to file a schedule E for the costs and depletion deductions and a schedule B for the dividend income.
This guide from CrossTimbers Royalty Trust discusses taxes and calculation of depletion. It might be a good idea to consult a tax professional and have them figure this if the dividends are taxable. If the royalty trust is in a retirement account then you don't have to do the paperwork.

It all depends on the price of oil & gas. This may go without saying but investment in an oil trust is completely dependent on the market price of oil & natural gas. If you buy an oil trust you're betting that oil or gas will at least retain its value or hopefully go up in the future. This seems like a safe bet to me.

Average Number of Credit Cards Per Person

Right now in my wallet I've got 4 credit cards. I have my Amex card via Costco that I use for most everything to get the rewards, I have a Citibank Mastercard that is my backup for places that don't take Amex, plus I also have another Mastercard and a Discovercard that I don't really use. I also have 3 different debit cards. Hmm, I carry too many cards don't I?

How many credit cards do we have?

This report on the Federal Reserve site from 2007 says that we had 4.6 credit cards per person. Almost 5 credit cards per person.

The statistics page on says that "In the fourth quarter of 2008 ... Overall, consumers had an average of 5.4 cards" and they cite Experian as the source.

From Census data in 2006 there were 1,488 million credit cards total in the country and the Census also said there were 114 million households in 2006. That works out to 13 credit cards per household. But that number also includes "Universal Air Travel Plan (UATP), phone cards, automobile rental, and miscellaneous cards" If you exclude those then you get a number of about 10.5 cards per household.

November 12, 2009

40% off Levi's jeans & free shipping Today only

Levis online is having a sale of 40% off their 'favorite' jeans online prices. Plus you also get free shipping. But the sale is for today only!

Link to Mens
Link to Womens

My preferred style of Levi's jeans are $21 onsale with free shipping and they normally run $30-$50 retail.

Details of the sale are below:

Exclusive 40% off our Favorite Jeans
Exclusive 40% off our favorite jeans. 1 Day Only! Ends at 11/12/09 at 11:59 am EST.

I heard about this one on Fatwallet.

Heat Energy Use in Early November

This summer we got our home insulation improved. I've been anxious to find out how much this is going to save us on our energy bills. When we got the October bill it seemed we where saving up to 50% on our heat costs. But that was just one month and I had low confidence in that estimate so I want to watch the electric usage through the winter to get a better idea of what the savings are.

The other day I checked the electric meter on our house to see how much energy we'd used so far in November. The reading was 1982 kW. When we got the October electric bill the reading was at 1331 kW. So for the first 12 days of Nov. we had used 651 kW. That comes out to about 54.25 kW per day. Last year in November 2008 we used 66 kW / day average over the month. So thus far in Nov. 2009 we've used about 12 kW less per day. Our average basic electric usage is about 24 kW. So in Nov. 2009 we're using about 30 kW /day for heat and in Nov. 2008 we used about 42 kW /day for heat. That is about a 28% decrease in electricity use for heat so far in November compared to last year.

Of course temperature or our electric usage could change the bills. But I don't think either of those are significantly different this year compared to last year. Looking at the average temperatures in Nov. so far this year we're a little bit colder than the average temperatures in Nov. for 2008. So if anything this year is a little colder and so our heat bill should be even higher this year compared to last. As far as I can see our electric usage has been not changed. So in other words we haven't raised or lowered the temperature and our other electricity usage is the same pattern as last year.

I'll continue to watch the usage and look at each monthly bill then see how it compares to last years use. Hopefully this trend of saving 25-50% level continues through the winter.

Image by Velo Steve

November 11, 2009

Bills I Pay Too Much For

Looking through my monthly expenses I see a few bills that seem very high. For each of these bills I've looked at ways to cut them including disconecting them entirely. But after considering ways to cut them I have not taken action. Honestly a large part of the reason we don't cut or get rid of these bills altogether is simply that we choose to keep paying because we value the services. But I could reduce some of the bills by selectively reducing services or otherwise, so in some cases I simply haven't taken action due to pure laziness on my part or preference for status quo. So we have reasons for not cutting these bills. I'm not saying they're great reasons but its the logic behind it. I should also state that if our financial situation were different then I'd take quick action to slash this kind of spending substantially. I outlined that kind of thing in my Backup Financial Plan in Case of Job Loss.

So here is a breakdown of the expensive bills and why I haven't reduced them...

Home Security $40/month

We have a contract with a home security company. Getting the system with the contract was a choice that we wouldn't make again. But right now we're locked into the contract. If I were to do it again I'd shop around and try and find a service without a contract. We could disconnect our current service entirely and save the $40 a month but we'd just be billed the remaining months on the contract so it doesn't save us anything.

Ways to save:
None readily apparent

Comcast cable $114 / month

My wife and I enjoy watching certain NBA and college football programs that are ONLY available on paid TV. My wife and I also like HBO. We could probably live without HBO but enjoy having it. So part of the reason our cable is high is a conscious choice on our part to pay more for something we enjoy. But I am pretty sure if I called Comcast and tried to negotiate a discount that I could get some money knocked off at least temporarily.

Ways to save & reasons we don't:
Disconnect cable altogether($114) : we like cable for programs and entertainment
Drop HBO ($15) : preference for HBO and status quo
Negotiate lower rate ($ ? ) : laziness

Internet & Phone bill of $87 a month

Our home landline phone bill is $87 a month. About half of that is for our high speed internet and the other half is for our home phone. I could potentially drop that internet down to a slower DSL speed and save maybe $10-20 a month. But my wife has a home based business and she wants the higher speed. So convincing her that we should downgrade our service isn't going to work since she has business income dependent on the internet connection. We could possibly disconnect the home phone altogether and live with just cell phones. But we have our home security system tied to the phone and our cell phones signals aren't very reliable at our home. Our home has low reception for cell phones which I've seen across multiple carrier companies.

Ways to save & reasons we don't:
Drop from fiber optic to DSL ($10-20) : don't because wife uses net for home business
Change long distance carrier ($5) : laziness & status quo preference
Disconnect home phone ($40) : preference for landline & low cell phone reliability

Cell Phone Service $90 / month

My wife and I share a cell phone plan with 2 phones on a family plan. We both use our phones a fair amount to call each other. We also use our phones for all our long distance calling. Between the two of us we probably make about 500 minutes of long distance calls a month. My wife also has a smart phone with a data plan that costs about $25 just for the data plan. We could also potentially drop our cell phones entirely and get cheapo pay as you go plan where we only use the cell phones for occasional or emergency needs and then use the home phone for long distance.

Ways to save & reasons we don't:
Cut service entirely ($90) : we prefer having service
Drop wifes data plan ($25) : her phone requires data plan for data access & she likes it
Get pay as you go & use home phone for long distance ($60) : we prefer convenience of cell phones

Auto Insurance about $110 a month

Our auto insurance is with Amica. When we shopped around last about 18 months ago we found that we could get auto insurance with another company for about $100 less per year. However my wife has been with Amica for years and she's been very happy with the service. So we choose to stay with Amica and pay a little more for the better service. We also pay a bit more for more than the minimum liability requirements. Our state only requires something like $50k liability coverage but we get the max $100/$300k level. We pay a little more for that extra liability since we feel its worthwhile insurance. We also have two cars covered and we could potentially live with one car shared between us and cut the bill roughly in half.

Ways to save & reasons we don't:
Switch to another company ($8) : We prefer Amica
Lower coverage ( ? ) : we prefer security of better liability coverage
Get rid of one car ($50-$60) : we want the convenience of two cars

November 9, 2009

Defined Contribution versus Defined Benefit Pension Trends

Most people nowadays have a 401k at work and no traditional pension. Before 401k's and IRAs existed back in the early or mid 20th century the traditional defined benefit pension was the norm. But gradually over the decades the defined benefit pension has been gradually dying out and defined contribution pensions (like 401k's) have become the norm.

The chart below shows the % of the workforce that is was covered by both kinds of private pension plans from the 1980's till 2000's.

As you can clearly see here that the trend is up for the defined contribution plans like 401k's and is down for the traditional defined benefit plans.

You might notice that the other day I said that 20% of the country is covered by defined benefit pension but the above chart shows 14% covered as of 2005. The data above showing 14% is for private pension plans but the total 20% number was also including pension plans.

I got the data from census documents with historical pension data and data on the Labor force.

November 8, 2009

20% of workers in USA covered by Pensions

Did you realize that 20% of the workforce in the US is covered by a traditional defined pension plan? Its true. Well at least as of 2007 when the latest data was published at the Census site.

When I say a traditional defined pension I mean the kind of pension where you work X years and then retire you'll then get Y dollars a month. This is different than a 401k or IRA where your retirement funds are based how much money you contribute and how your investments perform.

I believe the data includes government workers who probably represent a large portion of the people with pensions. I'd assume that many if not most of the people under traditional pensions have government jobs.

More Union workers have pensions. 67% of union workers have a pension but only 15% of non-union workers do. People in service industries or part time jobs are much less likely to have a traditional pension. Only 7% of service industry and 9% of part time workers have them.

November 6, 2009

Best of blog posts for week of November 6th

FreeMoneyFinance discusses some Car Care Maintenance Myths. Knowing the truth can save you some money on several of them.

FMF also tells us How to Buy a New Furnace and Air Conditioner They used very similar steps that my wife and I used when we got our homes insulation improved.

I got a chuckle out of My Money Blog's post Should I Buy This Gadget? Here’s a Helpful Flowchart


The other day I mentioned that the Vanguard REIT index (VNQ) is one of the investments on my own 'watch list'. That lead me to look for other potential REIT ETFs that one could purchase.

I found this list of REIT ETF choices from the site REIT Wrecks. They have a variety of ETFs for buying REITs. Some are for REITs in specific geographic areas like Asia or North America. Other ETFs are for specific REIT index like the Dow Jones REIT Index.

REITs are a pretty good way to invest in real estate without doing any of the work that direct ownership of property entails. Buying REITs in an ETF index are a good way to be in REITs in an easily diversified manner so all your real estate eggs aren't in one basket.

November 5, 2009

Updown Performance : +14% YTD

Practice invest

My Updown account is currently up about 14% for the year so far. The S&P 500 is up around 15.8% for the year.

Overall I'm down about -1.4% since I started.
The S&P is down -21.4% since I started in Updown.

I sold off some CBL and SHO and bought some MSW and UMH. I looked at MSW & UHM when I was researching a good REIT to buy for real in my own Roth IRA account. I passed on those two and instead bought some NRF. But I figued I'd buy them in Updown since its play money.

November 4, 2009

Stocks & ETFs on my Watch List

Warning: I'm not a financial professional. The below article should not be taken as investment advice. I'm simply discussing my own personal investment methodology.

Here are a number of individual stocks and funds that I'm looking at potentially buying for my Roth IRA:

Individual stocks:

EI DuPont de Nemours & Co. (DD)
Pfizer Inc. (PFE)
BP plc (BP)
Verizon Communications Inc. (VZ)

ETFs / trusts:
BP Prudhoe Bay Royalty Trust (BPT)
iShares iBoxx $ High Yield Corporate Bd (HYG)
Vanguard REIT Index ETF (VNQ)

Generally these fall into two main groups: Large cap stocks with relatively high dividends and diversified non-stock investments with relatively high yields.

Why are these stocks/ ETFs on my watch list?

Once in a while I'll do some research on potential investments and then throw them into my watch list. I found each of these by running a stock screen and looking for stocks with relatively high dividend yields. I also then screened for stocks with healthy financial stats like a relatively low P/E and positive earnings. The ETFs might be a little more unique and I looked for those kinds of investments specifically. So I looked for REIT ETFs and high yield bond ETFs and found the two on my list.

Lets look a little more at each of the items I'm watching...

Dupont (DD)

Dupont is a Dow component. They have a very solid dividend history, though we know thats not guarantee as we've seen with GE. Duponts earnings and profit are pretty solid. They are trading for about $32 a share right now but before the recession they were in the high $40's for several years. Currently their dividend of $0.41 / quarter is yielding about 5.0%.

Pfizer (PFE)

Pfizer is also a Dow component. Their stock traded in the $20's for years until the recession hit. Currently they are at about $17. Their dividend was cut in half in 2009 down to $0.64 a year giving them a current yield of about 3.7%. Their PE is around 14. They have a giant pile of money with about $49B in cash.

BP plc (BP)

BP aka British Petroleum is one of the major producers of oil. They have truly massive revenues of over $367B in 2008 and significant profits of over $20B. They are currently trading over $57 and their P/E is about 20. Their dividends are paying $3.36 a year or 5.8% annual yield.

Verizon (VZ)
Verizon is a major telecommunications provider in the USA. Their stock is at about $29 and they pay $1.90 a year dividends which is about 6.5% yield. Verizon had sales of $97B and profits over $6B in 2008.

BP Prudhoe Bay Royalty Trust (BPT)

This is a trust that directly owns a royalty stake in oil reserves in the Prudhoe bay oil field in Alaska's North slope. The trust basically owns oil in the ground and gets revenue when the oil is pumped and sold. At the end of 2008 they had about 55M barrels of oil in the ground. Oil is currently about $80 a barrel so thats around $4.4B in oil they own. As the oil is sold the royalties the trust gets are then paid out in dividends. So the dividend fluctuates with the price of oil. Recent quarterly dividend was $1.73 which equates to an annual yield of about 8.8%.

iShares iBoxx $ High Yield Corporate Bd (HYG)

This is an ETF that invests in bonds that have lower credit ratings (C to BBB range) and pay a higher yield. A common term for such bonds is "junk bonds". Bonds with lower credit ratings are deemed more risky due to the financial state of the company issuing the bonds. So there is more risk of default for such bonds. In order to get people to lend them money, companies with poor credit ratings have to pay higher interest. The yield bounces up and down a bit based on the bonds they hold at any given time. Latest dividends have been about $0.70 a month giving a roughly 9% annual yield rate. The expense ratio is 0.5%.

Vanguard REIT Index ETF (VNQ)

This is an ETF made up of REITs. Vanguard manages a fund of REITs. The REITs themselves are invested in real estate and pay out high dividends rates. Having a fund of REITs diversifies the investments and averages out the gains as well as reduces risk of individual REIT failure. The Vanguard fund is trading at about $40 and the yield is currently around 4-5%.

I may or may not buy some of these

When it comes time to pick some more investments for my Roth IRA I'll do some more research. At that time some of these stocks or funds may look less appealing. I'll do more stock screens and compare these choices to other similar investments. But right now these are some of the items I'm watching and they are potential purchases, nothing more.

November 3, 2009

Estimating Savings From Our Home Insulation Improvements

We got our home air sealed and added insulation back in August. My hope at the time was that it would could our home energy costs by 20-30% and give us a good return on the expense. But I really had no way to know how much it would save us until we did it. Unfortunately I couldn't find or think of any good way to accurately predict the energy savings based on proposed insulation improvements before hand.

I'll watch my electric bills for the rest of the winter and then compare them to last year to see how much the insulation has saved us.

We've had our heat on since the start of October and so we're starting into the winter heating season. I just got the electric bill that covers the month of October.

October 2009 : $113.77
October 2008 : $149.30

So it seems we might have saved about $35 in electric heat this year. If we assume that our base electric bill is $80 then our heat costs went from $69.30 last year to $33.77 this year. Thats a 52% drop! But before I get too excited about my savings we need to look at why our bill might vary from one year to the other.

Was Oct. of 2009 warmer or colder than Oct. 2008?

Its quite possible that we used less heat this past Oct. as compared to Oct. 2008 simply because it wasn't as cold this year as last year. One way to measure the relative coldness for a time period is called a degree day. The degree day is found by taking the average temperature for a day and subtracting from a fixed figure, usually 60 or 65 F. You can find the degree days for a month by adding all the daily figures. So for example if the average daily temperature is 45F every day of the month then the degree days for a given day might be 65F - 45F = 20F and the degree day total for the month would be 30 days x 20 degrees = 600 degree days.

I used WeatherUnderground to find the average daily tempatures and then calculated the degree days myself. For my area the degree days for Oct. of this year and last were:

October 2009 : 362 Degree Days
October 2008 : 374 Degree Days

Thats only about 3% difference between the two years. So I'd say that Oct. 2009 wasn't significantly warmer than Oct. 2008.

Did other electric usage differ much?

Part of our electric bill is for other things besides heat. I don't have any way to know exactly how much our other electric usage might have changed from Oct. 2008 to Oct. 2009. Its possible that we had our lights on more, watched the TV more, ran our washer/dryer more, ran the stove more, etc in 2008 than we did in 2009.

I could guesstimate the variation in non heat electric usage from month to month by looking at the usage variation in the summer months. The heat is off in the summer months so our electric bill for those months is entirely from non heating usage. From June to Sept. of 2009 our electric bill ranged from $73 up to $80. Looking back at 2008 our summer months bills varied from $70 to $81. So, at most our summer months electric bills vary up to $11. I think we can use this figure as a margin of error based on non-heat electric usage of up to +/-$11.

Did our heat usage differ from 2008 to 2009?

Its possible we didn't have the heater on as much in Oct. 2009 as we did in Oct. 2008. I had the heat furnace turned on the full month. But we might have been away from home more in 2009 or otherwise not had the heat up as much. Looking at 2008 and going from month to month I can see that the kWh used per degree day varied pretty drastically. In some months it was as low as 2.2 kWh / degreeday and in other months it was as high as 3.6 kWh/degreeday. That is a 39% difference from high to low. So worst case scenario we might see up to 39% difference between months based on heat usage. However Oct. 2008 was the minimum usage last year. So I think its pretty unlikely that we'll see Oct. 2009 be 39% lower than Oct. 2008 due to usage.

So lets add it all up and find the range of % differences that the insulation probably had...

We start with a 52% difference from Oct. 2008 to Oct. 2009

Lets add in the variation in our basic non-energy related electric usage ranging from $70 to $80:

Oct 2008
Total bill = $113.77
Non-heat usage = $70-$80
Energy usage = $33.77 to $43.77

Oct 2009
Total bill = $149.30
Non-heat usage = $70-$80
Energy usage = $69.30 to $79.30

Now we see the range is up to 37% to 58% improvement.

If we add in the fact that bills could vary as much as 40% from month to month then that would expand the widest possible range to -4% to 70% improvement.

Its pretty likely that the bills will fluctuate $5-10 from month to month based on non heat electric usage. But its not very likely that the bill from Oct. 2008 would be as much as 40% different than the bill in Oct. 2009 due to heat usage differences. We keep the heat at set values with a programmable thermostat and our activity really hasn't changed much. I would think up to a 20% difference in heat usage might be more feasible.

If we assume a $5-$10 monthly fluctuation in electric use and as much as 20% difference in heat usage levels month to month then our Oct. 2009 bill is 26% to 67% reduction from our Oct. 2008 bill.

That seems fairly realistic to me. If this is true then we've got at least a 26% reduction in our home heating costs due to the insulation.

This is just one months data so I'll have to watch it going forward and see what our bills are like for the rest of the winter. Hopefully we'll continue to see similar cheaper bills for the rest of the winter.

November 2, 2009

Net Worth Update : October 2009 = Down $11,632

I track my net worth monthly on NetworthIQ.

In September 2009 our Net Worth is $627,342 which is down $11,632 from September.

This is the first time in 10 months that our net worth has dropped.

Much of the drop was due to spending for repairs and maintenance on a vacant rental property as well as the lost rent in the mean time. I haven't added up the exact cost but its around $4,000 or $5,000 in spending as well as $1,000 in lost rent. Otherwise my retirement accounts were down about $2,000 and our real estate values dropped about $2,000 too.

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