August 31, 2010

Job Openings, Hiring, Turnover and Unemployment

The BLS has data on job openings.   They have a whole section dedicated to job openings and turnover.   They have stats on the number of jobs open, hirings, layoffs, and number of people who quit. 

Hiring and Separations vs Unemployment
If there are more layoffs then hirings then unemployment will go up and the opposite is true.  If you start with an unemployment rate of 10% and the hirings are 1% and separations 2% then you'll expect you'll end up with unemployment of 11%.  

Jobs vs Unemployment
Reasonably we should expect that if the job openings are higher then unemployment will be lower and vice versa.   But there are more details to it of course.   If job openings don't match the skills and experience of the people currently unemployed then the unemployment won't drop quickly.  e.g. if theres 1 million jobs open for engineers and 5 million unemployed carpenters then those job openings won't quickly be filled by the job seeking carpenters.   Of course the disparity between job openings and job seekers is never that stark.

I'm going to look at the figures as represented in a rate % similar to how unemployment % rate are given.  It makes a little more sense to look at a % since the total population generally increases over time.

First of all lets look back over 10 years.   Here are the trends in the jobs, hirings, turnover and unemployment rates from 2000 to June 2010:

You can clearly see how the jobs (dark blue) and the unemployment (cyan) show opposite trends.  When unemployment goes up, jobs goes down.   The trends between hirings and turnover are less obvious.   However we can see that when turnover is above hiring that the unemployment trends upwards and vice versa.   Look at the section from 2007 to 2009 and you can seed that turnovers are above hiring and that is when unemployment climbed.   Back from 2003 to 2005 the hiring is above turnover and unemployment was trending down.

Lets take a closer look at the more recent trends.   Here are the rates for the past 2 years from June 2008 to June 2010:

This view gives us a closer look at the trend for each of the rates.   See how from 2008 to mid 2009 the turnover was > hiring and the jobs rate was dropping.   That is the period during which unemployment really grew over time.   In spring of 2010 the hiring rate passed the separation rate and the job openings grew.   Those trends coincided with flat or slightly dropping unemployment.

I'm not going to make any predictions on the future.   Theres nothing in this data that tells us what direction any of the figures will go from here.   

August 30, 2010

Rental Investment Shopping - Took 1st Outside Look At Four Properties

This weekend my wife and I drove by four properties that are for sale in our city.   They are all foreclosures or short sales and relatively low cost units that might make good rental investment properties.   We did not call a realtor to schedule an official look but just drove to the homes and looked from the outside.

Four houses we drove by:

Property #1 :  Cost $130k, 3 bed / 1 bath, 1050 sq ft, foreclosure

Property #2 : Cost $120k, 3 bed / 1 bath, 1200 sq ft, short sale

Property #3 : Cost $150k, 3 bed/ 2 bath, 1080 sq ft, foreclosure

Property #4 : Cost $130k, 3 bed / 2 bath, 1100 sq ft, short sale

Property #1 :   The house is in our neighborhood only about 5-6 blocks form our home.   That would make it convenient to operate for us.   It is a foreclosure so its vacant.  The property looks like its in fairly good shape. It needs some landscaping work, new kitchen appliances and some misc. repairs.     Pros:  Good neighborhood.  Cons:  only 1 bath

Property #2:  This property is a short sale so we didn't get a good look at it.  We didn't want to disturb
the current residents.   From the street the property looked fine.   But the neighborhood is not very good and most of the houses in the area were not well kept.   Location matters a lot so we're crossing this one off the list.

Property #3:   This house was the most expensive at $150k.   It was a nice property with some good features like central AC.   It would need new carpets and a lot of landscaping work.   The location was pretty good, but the neighbors across the street were making a lot of noise when we were there.  Pros: 2 bath, Cons: Most expensive.

Property #4 : The last house we looked at was also a short sale so we didn't look much and just drove by.   The house looked OK from the street and the neighborhood was very good.   The other homes in the street were well kept and you could tell it was a mature neighborhood.   Pros : Nice neighborhood, 2 bath.  

Our next step will probably be to call our realtor and see if we can get into the #1, #3 and #4 homes to take a closer look at them.   We'll also want to talk to her about short sales and foreclosures to see what her advice and experience is with buying either.  

I'd much rather spend $130k than $150k for obvious reasons. But price isn't everything.   Overall we want to get a good property that will fetch a good rent.   We crossed the $120k property off the list since the neighborhood was not very good and it wouldn't fetch good rent or attract and keep good tenants.  

Right now I'm liking the #4 property the most but we haven't seen inside it yet and I'm not sure how much of a hassle a short sale might be.   The #1 and #3 properties are both doable.   #3 might be better since its a 2 bath and bit nicer, even though its more expensive.    But without taking closer look at the properties it is too early to narrow down the prospects. 

Are These homes really bargains?  Comparables & Zillow estimates

I think one of the key ways to succeed in real estate investing is to buy properties that are a discounted price and a bargain.   These properties seem like a bargain based on my general knowledge of my local housing market.  But it is important to use some real data to estimate the valuation of the properties.  

One key way to value real estate is to look at what comparable homes in the neighborhood have sold for.   If 10 other 3 bed / 1 bath, 1100 sq ft homes have sold for $160k in the same zip code within the past month then its a pretty good guess that another 3 bed / 1 bath, 1100 sq ft home is worth about $160k as well.   Redfin shows similar recent sales to the homes listed.   They also tell you the average cost / sq. ft. for the area.  

Property #1 : Range : $90k to $200k.   Average $147 / sq ft.   This home at $147 = $154k    Value - Cost = $23k.   85% of value
Property #3 : Range : $125k to $185k.   Average $158 / sq ft.   This home at $147 = $170k    Value - Cost = $20k.   88% of value
Property #4 : Range : $110k to $200k.   Average $128 / sq ft.   This home at $128 = $141k    Value - Cost = $11k.  92% of value

Zillow values:

Property #1:  Estimate : $179k,  range $145 to $186k.   Discount = 69% to 89% of value

Property #3:  Estimate : $175k,  range $141 to $178k.   Discount = 85% to 106% of value
Property #4:  Estimate : $177k,  range $145 to $184k.   Discount = 70% to 89% of value

Property #1 and #4 have very similar values in Zillow and are equal values based on Zillow estimate.   Zillow doesn't think too much about the #3 property in fact the bottom of their range is below the asking price.

Generally it looks like the homes are selling at about a 85% to 90% discount over comparable homes in the area.   

August 27, 2010

Best of blog posts for week of August 27th

Pop Economics has a great take on how some people are Betting on another Black Swan

Dough Roller has a good explanation for What Do Unemployment Numbers Really Mean?

My Money Blog alerts us to a New Marketing Trick: 3-Month FDIC-Insured Bank CDs With Really High Rates  Apparently some insurance salespeople are advertising a high CD % yield rate to trick you into sitting through their sales pitch.

Topsy Turvey Experiment : Update #2 - One Month In

About a month ago I stared a little experiment to test out the Topsy Turvey product.   We're growing tomatoes in our Topsy Turvey.   I'm trying to answer two questions for myself:   Is it a worthwhile product?   Is it a good investment of time and money?

In my second update on the experiment I showed the progress after one week.   The update summary then was 'so far so good'.   Now its been a full month since we started so I figured I'd give another quick update.

Todays Update:   So far so good.

The tomatoes are continuing to grow and there have been no problems with the Topsy Turvey.   The only additional work has been watering which takes my wife a few seconds a day.

You can see in the photo that our tomato plant now has 4 tomatoes growing on it.   The larger tomato is between the size of a golf ball and a tennis ball right now.   The other tomatoes are about 1" in diameter roughly.

Money and Time spent:
Day 1: Time spent 1 hour, cost $22
Week 1 : Time spent 1-2 minutes.
Week 2-4 : Time spent 3-6 minutes.

Did I mention they are Organic?

I guess I forgot to spell this out previously.   We are growing the tomatoes 'organically' which for us means we're not using any pesticides or herbicides on them and only using a natural fertilizer.  This shouldn't impact things a lot either way, but its a detail I figured I'd mention.  Eventually when I compare the return on investment I'll be comparing to the cost of buying organic tomatoes which are more expensive than non-organic.

August 26, 2010

PetPlan : FAST Customer Support. Looks like Good Pet Insurance.

I've looked at pet insurance before and decided it wasn't a very good value.   The problem seemed to be that the policies had maximum payouts for specific procedures that were lower than the actual costs.   But a recent comment on FreeMoneyFinance made me look again.  Someone recommended PetPlan insurance and pointed to a website with very positive reviews.   The site has many customer reviews and scores for different pet insurance providers.   PetPlan has the highest rating with a 9.3 out of 10 average score and many hundred reviews. 

First impression: FAST and Good Customer Support

While researching PetPlan I was looking for the 'fine print' details of their coverage but couldn't find it on their website.  So I decided to send them an email and ask for it.   ONE minute later I got a response with the document attached.   Usually when I write a company an email asking a support question I expect to get an automated response that tells me that they got my mail and will answer me as soon as possible.  And in the world of customer support that usually means I'll get a reply within a day... or two.   Then when you do that the reply half the time it seems like they didn't read your question or just copy/pasted a semi-related FAQ off their own website that I just looked at.   But right off the bat PetPlan has way exceeded my expectations for customer service  by giving me a useful and clear response almost instantly.  He answered my request with an attached document detailing the terms and conditions of the policy, filled in details on what they do and don't cover and gave me his phone # if I want to ask questions or sign up.  I mean seriously it was ONE minute later and heres' a screenshot of my email inbox showing my message at 2:20 and their reply at 2:21.

This definitely counts as a point in their favor.

Reasonably affordable

I checked out the PetPlan website and got a quote for coverage for my cat.   You can pick between Bronze, Silver and Gold coverage plans.   The Bronze plan has $8000 benefit max in a year while the Silver pays up to $12,000 and Gold max is $20,000.    You can also pick different deductibles of $50, $100 or $200 and reimbursement rates of 100%, 90% or 80%.   I figure the higher deductible Bronze plan with 80% reimbursement would be the best value.   Our cat is 9 years old and a 'Bronze' plan with 20% coinsurance and $200 deductible and annual maximum of $8,000 would run about $185 a year.  That seems like an OK price to me.      I got a quick quote for another pet insurance company and their rate was $189 a year for their 'basic' plan with $50 deductible but they have limits on payments for individual illnesses or injuries.   PetPlan does NOT have limits for individual illnesses or injuries.   Overall Petplan looks like a much better value and a reasonable price than the other pet insurance I've seen.

What does PetPlan insurance Pay?

If I got a plan with a $200 deductible then of course I'd have to pay any bills under $200.   THe coverage also doesn't cover routine care so I can't get insurance money for stuff like normal checkups.   The insurance should help kick in when you get high bills.   The PetPlan website has a 'claim calculator' that estimates your benefits.   I used that to see what I'd get for insurance payment on a $5000 vet bill with my example Bronze plan coverage with $200 deductible and 20% co-insurance.   They would pay $3800 of the bill.   I would have to pay $1200 which is the $200 deductible and 20% of the total bill. 

No 'catch' found.

I tried to find a 'catch' in the terms of the PetPlan policy but I don't see one.   You do have to meet the terms of their coverage and that means getting annual checkups and some misc. things like that.   They don't pay routine care which some people might assume they would.   You gotta read the policy contract so you understand how the insurance works and what they do and don't cover.   Whats in their terms doesn't strike me as unusual or odd and there no surprise fine print that I can see.   No I don't see a 'catch'.  

On a slightly humorous note, when I looked at my old article discussing pet insurance where I decided it wasn't worthwhile, the Google Adsense showed a banner ad from PetPlan right under my article.

Bottom Line:   PetPlan pet insurance has high customer ratings and their insurance does look like a decent value for pet insurance.   They have already impressed me with their fast and high quality customer service.

August 25, 2010

Considerations When Buying a Foreclosure

I mentioned the other day that I'm looking into buying a foreclosure or short sale property in my town to use as a rental.  My wife and I already have some rental properties and we think another rental would be a good investment especially with the state of the housing market.   I've never bought a foreclosure and I don't know anyone who has.   I don't know much of anything about buying a foreclosure so I figured I'd better do some research on the topic.    Today I'll talk about foreclosures specifically.   Short sales are a bit different so I may address those specifically in another article.

No Auctions or Pre-foreclosures

I'm not looking at preforecclosure or auctions.   That is where you buy a property in default from the owner before it actually goes into foreclosure or buy the propety at an auction.   With those purposes getting inspections and title isn't always possible and you may not be able to get a mortgage.   I'm looking at just "REO" or Real Estate Owned properties.    Consumer Affairs article Buying a Home in Foreclosure: What you Need to Know  says that for REO properties you can "Fully inspect, demand clear title and subject to getting a mortgage"  which is what we'd want.  

Money Central discusses The Safest ways to Buy Foreclosures   The article cautions that "You can buy foreclosures for as cheap as 30% or 40% below market, but most foreclosures sell for 5% below market," said John T. Reed, editor of Real Estate Investor's Monthly, a newsletter based in Alamo, Calif.   It also says: "Good buys are available, but they require research, preparation, patience and persistence."  and "Bank-owned properties offer the safest deal for inexperienced foreclosure buyers, Beitler says: "There's no risk. There are no taxes, no liens, no tenants to evict."

I'm definitely only interested in a bank owned property since we'd want the assurance of clear title and an inspection and we'd need a mortgage.

Basics I Already Know

So right off theres a few things I know about buying a foreclosure (or at least think I know).   Foreclosures are owned by the bank.   At least the kind I'm looking at are.    The properties are going to be vacant and may have been damaged by the previous owner who may have been unhappy to lose their home.   A foreclosure will be sold "as is" without information on the state of the property or any guarantees.   Theres going to be higher need for repairs or improvements in the properties and less certainty about the home's history and state.   Because of all this you should be a bit more critical of the property and budget for more costs to get the home in a suitable shape to live in.

Title Insurance is particularly Important

I found a few references that stressed the need for title insurance.   If someone has a foreclosure on their home its also quite possible that they have other debts that may have placed a lien on the property.   You won't know about those liens unless a title search is done.   If you buy the home and there is a lien on it then you could be responsible for paying that lien even though it wasn't you who owed the debt in the first place.   There could even be a 2nd mortgage on the property that needs to be cleared before you buy it.   Title insurance is always important when buying a property but its especially important for a foreclosure.

Winterization and Decay Issues

A CNN article lists 9 tips for buying a foreclosed home

1. Budget carefully.
2. See the house for yourself.
3. Look at the neighborhood.
4. How long has the house been empty?
5. Was it winterized?
6. Look at the landscaping.
7. Contract for a private inspection.
8. Consider a HUD house.
9. Don't expect to profit from a quick sale.

Theres a lot of good points there and its a good reference.  

Items 4 & 5 raise important point to consider.   If the home has been vacant for some time then it may or may not have been "winterized".   If the home is winterized then this may mean that water is shut off and they might have added chemicals to the drains or done other measures to avoid pipes freezing.   If the home has not been winterized then it may have had damage to the pipes or other systems due to freezing in the winter.   You also run the risk that the home was improperly winterized which may have damaged the pipes or other systems.

In addition to possible winterization problems  a foreclosure home may be vacant and have other damage from the elements, vandals or other simple deterioration.  If a home is not lived in then it is much more likely to have some problems from lack of maintenance.  Its easier for things like mold to occur in a home if its not lived in.
Inspection is Important

Foreclosures are generally sold 'as is' and the bank does not know the history or real condition of the property.  If you buy from an individual they are legally required to tell you any known problems with a property.  But if you buy from a bank its "as is" and they don't know any problems.   This all makes it extra important for you to get an inspection on a foreclosure.   An inspection is not a guarantee they'll find everything but a good inspection should tell you a lot about the state of the property and find various things that could be wrong.  

Unknowns & Next Steps

I'm not really sure at this point how else buying a foreclosure might differ from buying a normal owner sold home.   I'm assuming I can deal with realtor's in the normal way and get a mortgage the same way.   I'm sure I'll be able to sort out other details about buying a foreclosure by talking to a realtor.  

Right now my wife and I are only in the discussion and research phase.   We have talked about looking at properties but haven't called any realtors yet.   Its not a given we'll even do that.  But we'll continue to look into it and discuss it more and then we'll see.

Bottom Line:  I plan on looking at buying a REO bank owned foreclosure and will make sure we get title insurance and an inspection and be more careful about assessing repairs needed and their costs.

Image By respres

August 24, 2010

Thinking Aboug Buying a Foreclosure as Investment

Recently I read in a local newspaper that foreclosures have increased in the suburbs in my area.   The foreclosure rate in my city has been below the national average but now it looks like some cities in our vicinity have seen the foreclosure rates go up lately .   This prompted me to go check out the real estate for sale listings to see what kind of prices the foreclosures might be selling for.   I found some pretty cheap foreclosure and short sale properties in our area that might make good rental investments.   Usually houses have been selling for $200k or more in my city for a basic 3 bedroom starter house.   However I found several bank owned and short sale listings for  sale in the $115k to $150k range.

A few years ago I wouldn't really have considered buying a single family home in my area as an investment because prices had gotten so high that they didn't work out financially as rentals.  But now that prices are down its looking like there are some buying opportunities particularly in the distressed properties.

But how do the numbers really work out?   I'll use the basics of the ideas from my older topic How to value rental property prices   and run some quick numbers to see if these properties are feasible investments.   I'll take a look at the more expensive house at the top end of that range  at $150,000 as a starting point for example.

Purchase and Financing Costs

I assume that we'd have to put down 20% to buy a place.

Purchase price : $150,000
Down payment : $30,000
Mortgage : $120,000

Loans for investment properties have higher interest because the owners are more likely to default in general.  When I searched for quotes as an investment property the rates were 0.5 to 1% higher than what you might see for a primary residence.   I found a range of rates based on different amount of points paid.  For a 4.75% loan we'd have to pay $3,413 in fees/points for total closing of about $4,700.

SO I figure we could probably get into a place with $30,000 down and closing of about $5,000.    That would mean about $35,000 out of pocket to buy the property.    Then we would probably have to put some money into it to get it in shape to rent.  That might take a few thousand more give or take depending on what needed done.  Lets figure a budget of $5000 for repairs and improvements.   All together that would be a total of $40,000 out of pocket to buy the property with 20% down, pay closing and fix it up to rent.

Total cost to buy and fix up property = About $40,000

The 4.75% loan for a mortgage of $120,000 would give us a monthly payment of $626
Taxes and insurance would run around $200 a month more.   If we have escrow then we'd be looking at a total payment of about $826 a month give or take.

Setting the Rent

Previously I discussed How to set rent rate for a rental.   I'll use those methods to roughly figure what we could expect to get for rent.   I used Rentometer and Craigslist to check out comparable rents in our area for 3 bedroom single family homes.   Rentometer said that 90% of 3 bedrooms are over $950 and 80% of them are over $995.   Looking on Craigslist there are very few single family homes under $1000 but theres a few out there.    I think that a rent in the $950 range would be about right.  It may be at the lower end but that would make it easier to attract and retain tenants.

Cash Flow

Rent = ~$950
Mortgage / taxes/insurance = ~$826

We would not pay for utilities and there should not be other ongoing regular costs.   That gives us about $124 monthly cash flow.   But with misc. repairs and expenses that would probably get eaten up.  We'd also have to figure in some level of vacancy, though I would hope we could keep it rented 100% but thats not possible forever.

Overall the monthly cash flow would be roughly neutral.   

Tax and Equity

There are other financial benefits though.   We would also have depreciation from the home that would help save us money on our taxes and portion of the mortgage would be paying ~$150 a month towards principal.  Between the tax break and the principal that would be in the ballpark of $3000 positive per year.   Thats not a bad annual return on $40,000.

Bottom Line:  It looks like these properties might make acceptable rental investments.   They aren't super bargains by any measure but it would be possible to come out ahead with such a purchase if we find the right property for the right price.

August 23, 2010

Problem With Commodity ETFs

Businessweek recently ran an article about commodity ETFs.  They pointed out a problem with some ETFs that causes them to poorly track the underlying commodityy.   Their article which was creatively titled Amber Waves of Pain spells out how differences in future prices can eat away at ETF gains on commodities.  You can read the whole article for the specifics but the basic reason is that the ETFs lose take a loss every time they make certain futures trades on the market and these losses add up over the long run to greatly undercut the ETFs gains.  The Businessweek article concluded that you should not buy commodity ETFs at all because of this.  

We can compare the market price of the oil ETF versus the market price of crude oil.   For the ETF we'll use United States Oil Fund (USO) and the crude oil prices are online at the Dept. of Energy site.

Note: the cost of the crude oil doesn't include any of the carry costs of the oil.  If you owned actual crude oil then you would have to have facilities to store the oil and ship it and such which all costs money.  That could be a significant amount over time and would cut into any increases in the market prices.  

Lets say you decided to buy an oil ETF back in 2006.   If you bought USO when it first started trading in April 2006 you would have paid $68.82 on close of opening day.   Today USO is trading at $32.58.   Thats a loss of about 52.6% from your initial investment.   In the same timeframe the price of crude oil has actually gone up.  In April 2006 a barrel of crude was at about $62.99.    Today crude is trading at $76.77.   Thats an increase of about 21.8%.  

Change from April 2006 to August 2010
United States Oil ETF (USO) =  DOWN 52.6%
Crude Oil prices =  UP 21.8%

Yikes!   Thats horrible.   If you bought USO thinking that your investment would track the price of oil then its definitely not done so.

Lets look at the performance of raw crude oil prices versus the USO ETF since the start of 2009:

As you can see the raw crude prices went up around 80% and the ETF only went up about 20%.  

Not all ETFs are Equal

USO is only one of the ETFs that tracks oil.  Others include Powershares DB Oil (DBO) and iPath crude oil index (OIL).  Lets compare the 3 ETFs over time from the start of 2009.   I made the following chart on Yahoo finance:

Sorry if thats a little bit of an eye chart. The blue line is USO, red is DBO and OIL is in green.   In the time period shown, DBO is up about 15%, USO is down about 7% and OIL is down about 12%.   Thats a huge variation within just 1.5 year period between 3 ETFs that all track oil.

Depends on Structure of ETF

The USO ETF holds future contracts and is susceptible to the problem with trading futures.   Other ETFs may not have this kind of problem.   For example the SPDR Gold Shares (GLD) ETF trades in gold but does not use futures.  The GLD ETF actually buys and holds physical gold.  

Bottom Line:  If you're looking to buy a commodity via an ETF be aware that the ETF may not track the actual commodities gains very well.   Each ETF is different  and some may perform better than others.

August 22, 2010

Historical Self Employment Rates

The BLS document Self Employment In the United States : an update from 2004 has some data on self employment at that point.   They show some previous trends over the previous years.   I also found the current data from 2009 which shows the total # of self employed and total # of employed in Table 15 from which I figured the %'s by age group for that year.

Fairly flat for a few decades

Table 1 of the BLS document has data going back to 1948 showing the overall self employment rates.  I'm looking at just the non-agricultural industries.   Here is a graph of the historical trend:

From the '40's to the 60's the rate of self employment dropped off quite a bit.   It was 12% in 1948 and had hit 6.9% by 1970.   Since the 1970's the rate of self employment has been relatively flat around 7% within +/- 0.5%.   As of 2009 the rate was 6.5%.

Older are more likely Self Employed 

Self employed are usually older and younger workers are much less likely to be self employed.   That has been very consistent over the years.   Table 5 of the BLS document gives the unincorporated self employment for nonagricultural industries by age, sex and races from 1989 to 2003.    Table 6 in the document also lists the incorporated self employment rates.   I'm focusing on just the unincorporated self employment which is the larger group.   The graph below shows the %'s of self employed per each age group for 1989-2003 plus 2009.

Without variation people are more often self employed as they age.    One notable trend in that graph is among people 65 years or older from 1997 to 2003.   In 1997 the self employment rate for people 65 or older was 19.5% but it had declined to 15.3% by 2003.   Thats a significant drop in the rate of self employment for people in that age group over just a few years.    Other age groups also showed declines in self employment rate in that time period but they were not as severe.

August 20, 2010

Best of blog posts for week of August 20th

Bargaineering says you should   Avoid These Financial Products  I agree with the list in general.   One exception might be cell phone insurance but only if you're prone to damaging or losing your phone and its a pricy model.

My Money Blog discusses how Morningstar Admits Fund Expenses More Important Than Star Ratings

Free Money Finance brings us a list of  Great Places to Retire in the US

"Hindenburg Omen" is Nonsense

You may have seen some news lately about a "Hindenburg Omen" which is a complicated pattern of stock signals that experts say signals a market crash.    By "complicated pattern of stock signals" I really mean a bunch of random coincidences that are basically meaningless when put together and by "experts" I mean scare mongering idiots who somehow got people to listen to them.  

Think I'm being too harsh?  Just read this bit about the so called omen from a WSJ article on the topic:
"The Omen was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn. Market analysts said only about 25% of Omen appearances have led to stock-market declines that can be considered crashes."

OK lets parse that.  The Omen has happened "every market crash since 1987".   But also happened "many other times" without a crash.   Ok so right there its obviously not very dependable.   Then analysts say it precedes a crash "only about 25%" of the time.  So the Omen happens before "every" market crash except the "many" times that it doesn't and it is wrong 75% of the time.  

Wow.  Thats about the dumbest "omen" I've heard of.   If 75% of the time the market DOESN'T crash then isn't this Omen a more accurate prediction that there WON'T be a market crash???    75% > 25% last I checked.    I sure hope 25% correct is not taken by anyone as a 'good' rate.    25% correct gets you an F in middle school and it should get you an F in stock market analyst circles too.

Here's an example.   This article The Past Performance of the Hindenburg Omen Stock Market Crash Signals 1985 - 2005  was written on Oct. 2, 2005.  He says: "During the past two weeks, we have had six Hindenburg Omen signals".    Lets look at the stock market in the period from Sept 2005 to Oct 2006:

Source: Yahoo Finance

S&P 500 is in blue, Dow Jones in Red and NASDAQ in green.    Do you look at that chart and declare to yourself that it would have been a good idea to sell everything in October 2005?   I don't.   You can see that from September to October of 2005 the market did drop a few % points.   But by December it had recovered that loss and was up a few points.    Then 12 months after the Hindenburg Omen events occurred the market was up 5-10% points.     

That same article also says: "Our research noted that plunges can occur as soon as the next day, or as far into the future as four months."   I don't really find it too useful for someone to say that the stock market might go down sometime in the next 4 months.  In fact I think its a fairly good bet that will happen.   The stock market is down 5% in about 1/8 months.    Over the past 80 years if you took any random month and said that in the next four months the market would drop 5% then you'd be right about 33% of the time just randomly.

You can call a string of coincidences an Omen but it doesn't mean anything.  It isn't necessarily anything more than a string of coincidences stringing out into the past.   If I slap my knee and then flip a coin and it comes up heads that doesn't mean anything.  If I do it 3 times in a row it still doesn't mean anything.  I could call it the "knee slap omen" if I want but its still meaningless coincidence.  If I slap my knee and then flip a coin a 4th time then the chances it will come up heads are 50/50.

 Bottom Line:  The Hindenburg Omen has preceded a crash only 25% of the time.   Seriously folks this so called Hindenburg Omen is total nonsense.    

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At Kodak right now you can get 20% off on : Photo calendars, Photo cards, photo collages and professional prints.

Plus you get 10% cash back from Ebates.

Between the 20% sale and the 10% cash back thats a 30% discount.  Pretty good.

August 19, 2010

Save Money With Energy Star Televisions

Big screen TVs can suck a lot of power.  If you've looked at big screen TV's lately you may have noticed that some of them have the Energy Star label.  Buying an energy efficient model can save a lot of money over the life of the unit.   It definitely makes sense to look for an Energy Star TV, but not all Energy Star TVs are equal.  You should look past the Energy Star label and find out the actual power usage of the TVs.

Difference In Energy Star Models

Lets do a quick comparison of two models:

Samsung 55" LCD model LN55C630K1F on sale for $1709.99 at Bestbuy
Sony 55" LCD model KDL-55EX500 also on sale for $1,709.99 also at Bestbuy

The TV's are both 55", they're both LCD technology and they are both on sale for $1,709.99.   Both of the TV's carry the Energy Star certification.   You would expect that they would use similar amounts of electricity, but they don't.

The EnergyStar site has data on the individual model TV's.

According to the Energy Star site the Samsung LN55C630K1F model is supposed to use 187.54 kWh a year in electricity.   At 11¢ per kWh that would be $20.63 /year.
The Energy Star page for the Sony KDL-55EX500 says it uses 267.84 kWh.   $29.46 a year at 11¢ /kWh

The Sony model uses 80.30 more kWh in electricity per year.   Thats 43% more than the Samsung TV's electricity use.

Electricity Use Can Matter a LOT

If you don't think that the electricity use of your big TV is a big deal than think again.   The models mentioned above are efficient 55" TVs that use just $20 or $29 of electricity.   What about less efficient TVs that don't even qualify for Energy Star?   

This CNet article gives Watt usage of various TVs  Check out the values for the TVs in their default settings.  If you scroll down you'll find some plasma TVs  that use 400 to 500 Watts.   One 50" Panasonic model uses 535 Watts with default settings.   That model uses $117 in electricity a year.    That 50" Panasonic model costs over $96 / year more to operate than the 55" Samsung LCD model.

The efficient Energy Star TV can save you up to $96 or more on electricity in a year.   If your TV lasts 10 years then thats $960 over its lifetime.  

Bottom Line:  Energy Star TV's can definitely save you a lot on your electricity bill.   Research the Energy Star site in advance to find the most efficient models.

August 18, 2010

Income Versus Age

I thought it would be interesting to see what kind of income levels people have at various age groups.

The data is from the U.S. Census Bureau, 2008 American Community Survey.   I got the data by using the filters through the American Factfinder site from the US Census.

First of all lets look at the data in table form:

Under 25 Years: 25 to 44 years: 45 to 64 years: 65 years and over:
Less than $10,000 1,019,069 2,257,994 2,656,969 2,215,525
$10,000 to $14,999 477,356 1,451,826 1,691,596 2,520,269
$15,000 to $19,999 462,364 1,602,673 1,603,069 2,204,020
$20,000 to $24,999 459,794 1,921,244 1,794,719 2,001,240
$25,000 to $29,999 396,128 1,881,292 1,741,235 1,710,394
$30,000 to $34,999 392,408 2,158,380 1,913,734 1,524,636
$35,000 to $39,999 321,790 2,026,182 1,823,900 1,338,708
$40,000 to $44,999 294,946 2,121,549 1,953,569 1,196,639
$45,000 to $49,999 228,001 1,897,282 1,796,768 1,029,575
$50,000 to $59,999 371,996 3,683,259 3,599,049 1,717,431
$60,000 to $74,999 359,679 4,900,686 4,790,921 1,828,674
$75,000 to $99,999 255,610 5,797,667 6,182,749 1,779,189
$100,000 to $124,999 92,486 3,536,565 4,367,227 969,451
$125,000 to $149,999 37,225 1,800,822 2,580,735 536,609
$150,000 to $199,999 23,578 1,710,688 2,710,499 509,678
$200,000 or more 13,839 1,510,613 2,762,886 584,675

Here's a graph showing the percentage breakdown of each income level (x-axis) per age group. 

So for example you can see that there are a lot more people in the 45-64 age range (yellowish segment) in the higher income levels than there are people under 25 years (violet).

Heres another chart showing the data a little differently :

 Here we can see a plot of each age group in different color lines with data points for the number of individuals in each income group.    For example if you look at the yellow line that is for people age 45 to 64 years old so theres around 1-2 million people in each of the income levels from $10k up to about $45k but after $45k we see a bump of higher numbers of people and then after $125k the numbers drop down again.

One last graphical view of the data:

This one is a bar graph for each age group with the individual columns of different color for each age group. 

August 17, 2010

Retiring In Luxury Overseas For Cheap - Bargain or Bogus?

Every so often you'll see an article or hear someone talking about how you can retire in Panama, Costa Rica, Belize, Mexico or some other country and live like a king off some small sum of money.   It has always seemed to be a little "too good to be true" if you ask me.  These stories often paint a picture of the 3rd world as some sort of tropical paradise where you can live in a mansion, hire a maid for 50¢ a day and eat caviar every meal all while supporting yourself on half your social security check.   One such article recently went out by Yahoo titled How to Retire for Under $1,500 a Month.

Luxury or Barebones?

The article from Yahoo is specifically talking about living for under $1,500 a month.  But what are you spending and what are you getting??    They describe a couple living an apparently luxury lifestyle in Belize.  

"The pair lives very comfortably, without wants or financial worries. They've had no trouble making friends in their new community because the folks in Belize speak English. They eat out three or four times a week. They barbecue lobster and filet mignon at home. They have reliable Internet to keep them connected to the outside world. By choice, they do not have a television. "I used to think that the news was important," Jason explains. "But not anymore." The retired couple has a maid and a gardener, each of whom visit once a week."

Wow that sounds awesome.    Lobster and maid service plus reliable internet??   Sign me up!

The article then goes on to give a sample budget after noting that everyone's spending habits are different

--Rent: $300
--Utilities, telephone, and Internet: $500 (Your biggest expense in this country.)
--Groceries: $150
--Health insurance: $50
--Entertainment: $100
--Car expenses: $300

Hmmm.   Wait a second.  I don't see anything in that sample budget about lobster or maid service.  

I was a little doubtful about that budget so I decided to check around for other quotes.  I did a quick search on Google for "cost of living belize" and came up with this article What Things Cost in Belize.   I skimmed through the costs for groceries and entertainment and they don't seem significantly cheaper than what you can pay here in the U.S.A.   Hmm.  Further down on that page they list some sample budgets.

Affluent couple = $4,833
Middle-Class couple = $2,472
Barebones = $859 (single person using public transportation and govt health system)

Ok so now we've got different budgets for different lifestyles.   Did the article from Yahoo say anything about "barebones"?    No, as I read it they were implying you could go out to dinner for lobster and have a maid for under $1,500 a month.  Yet the $1,500 a month is closer to the "barebones" level described by the other page.    But that level of lifestyle is riding a bus and using government healthcare.     

That gives me the Yahoo article and the source above from giving contradictory pictures of the cost of living in Belize.   I figured a 3rd source would be should help clear the picture.   This Cost of Living in Belize article
gives examples of various prices.   They seem to be closer to US prices than not and hardly a super cheap bargain.  They also say that "Retirees interested in simple living can budget about US$1,500 or less per month" and I think the keywords thare are "simple living" which doesn't usually include maid service and lobster.

You can live a "barebones" lifestyle in Belize for cheap, but can't you do that in the USA too?     If you want a "middle class" lifestyle in Belize then it will cost you quite a bit more than $1,500 a month.

Paradise or Not?

The picture of a country like Belize as a sun soaked tropical paradise does forget a few important details.   They go on at length for a paragraph about how "Belize is a beautiful little country."    They say " It's a peaceful, eco-tourist retreat" and a "fisherman's and diver's paradise."  

Here are some facts about Belize
The Homicide rate in Belize is the 9th worst in the world at about 33 per 100,000.   Thats 6 times the rate of the USA.

Several items gleaned from the CIA world factbook:

80% of the roads are unpaved
33% of the nation lives in poverty
While English is the official language it seems it is the 4th most spoken : Spanish 46%, Creole 32.9%, Mayan dialects 8.9%, English 3.9% (official)

Natural hazards  are :  frequent, devastating hurricanes (June to November) and coastal flooding (especially in south)
Environmental issues : deforestation; water pollution from sewage, industrial effluents, agricultural runoff; solid and sewage waste disposal

It may be sunny but Belize doesn't exactly sound like paradise if you look at some basic things like paved roads and proper sewer disposal that we take for granted in America.

Do You Really Need to Move Overseas?

If you live frugally during retirement by doing things like riding public transportation and depending on government health care system then you can do that in the United States.   There are a lot of places in the USA with very cheap housing and most of them have paved roads.   Most Americans wouldn't consider moving to the inner city ghetto when retiring but people seem to think that moving to Latin America with equally high crime rates and worse infrastructure is a good idea.   If you want to live cheap then ride the bus, eat out less and maybe move to a lower cost of living, rural or urban area in the USA.  

Note : Nothing against Belize

I don't mean to 'pick on' Belize specifically.   I've never been there and I don't have any real reason to think its a bad place.   I'm talking about Belize because the Yahoo article did.    I had to hunt through a lot of pretty pictures of pristine beaches and beautiful sunsets from Belize to find the run down house pictured above.

For another perspective on living in Belize as an ex-pat American see The Rules are Different in Belize.

Photos by anoldent and vår resa

August 16, 2010

Wash Your Clothes With Cold Water

For as long as I can remember I've been washing my clothes with cold water.  People seem to think that you "have to" wash your clothes with warm/hot water in order to get them clean.   I'm here to tell you that is not the case.   I've never had a problem getting the clothes clean with cold water.   If you disagree with me then try it out yourself.   Go ahead, I dare ya.

The reason to use cold water is that it saves energy.  About 90% of the energy used when washing clothes in a top load washer is to heat the hot water.   So if you wash your clothes in cold water you can cut your energy use by up to 90%.

The Seventh Generation company has a calculator thingy that will let you estimate how much you can save if you wash with cold versus hot/warm.    For me and my wife we only do 3 loads a week in our washer and we have electric hot water.  Their estimator says we save about $34.89 a year in electricity by washing our clothes in cold water.    A large family that does 10 loads a week could save $116 a year.    Of course the exact savings depends on the washer in question, the cost of your electricity and how often you wash clothes.

August 15, 2010

Effective Tax Rates 1934 to 2009

The other day I published a graph showing the effective tax rates from 1979 to 2007.  That was from a CBO report.   I tried to find effective tax rates dating back before 1979 but didn't find any good resources.  SO I decided to just figure it out on my own. 

Effective tax rate = taxes / income
The effective tax rate is simply the taxes paid / income for a given year.     If you pay $5,000 in taxes and you made $50,000 then your effective tax rate is 10%.    So we can do that calculation for the nation as a whole by dividing total personal income tax receipts / total personal income.

I got income tax receipts going back to 1934 from the Budget info table 2.1.    I got the personal income totals per year going back to 1929 from the BEA.  Report I used.     Or make your own report starting from table 2.1  Using the budget info and the BEA info I got the total personal income taxes and total personal income for each year from 1934 to 2009.

Here is my graph showing the average effective income tax rates from 1934 to 2009:

Pre-WWII versus Post-WWII

As you can see, before World War II the effective personal income tax rate wasn't very high at all.   From 1934 to 1941 the effective personal tax rate was under 2%.    However during WWII taxes increased to the point that the effective personal income tax rate hit 11.9% by 1944.    From 1945 onward the tax rate fluctuated up and down over time mostly sticking in the 9-11% range.   Only 12 times in 64 years from 1945 to 2009 did the tax rate exceed 11% or drop below 9%.

Is this accurate?
Now my method for figuring this is pretty crude, so I expect theres some margin of error here.   I compared my results to the CBO report numbers and my figures for 1979 to 2009 are within the numbers they had +/- 1%. Thats not horribly inaccurate or anything, but its not perfect by any means.  I don't know why my figures differ from what the CBO reported but I am guessing that the total personal income includes some things outside of normal taxable individual income.

August 13, 2010

Best of blog posts for week of August 13th

Pop Economics makes an argument for Why you should ask for a raise now

The large paychecks in this TV Guide article on how much TV stars make are a little surprising to me but they really shouldn't be.

Darwin's Finance cautions against For-Profit College Scams – Really Think Before Enrolling

WiseBread asks Is Pet Health Insurance Worth it?   He spent $14 a month for 18 months.  Then they had a $545 vet bill but the insurance benefit was only $135.  When I asked the same question : Is Pet Insurance Worth Buying?   I decided it wasn't.  The major down side to pet insurance that I've found is the maximum  amounts they payout rarely cover the actual cost.

Budgeting in the Fun Stuff sees an expensive gas station getting customers and asks  Why Buy WAY More Expensive Gas?!

Effective Tax Rates 1979 to 2007

The Congressional Budget Office has data on distribution of federal taxes.  They plot the effective tax rates from 1979 to 2007.

I took the data from the CBO and plotted the graph below:

*Source CBO.

Looks mostly flat doesn't it?    Note there is a pretty good drop in the effective federal income tax rates from 2000 to 2003 when it went from 11.8% to 8.4%.    Thats about a 28% income tax decline for the average filer.  

This is just the average effective rate for all tax payers.   The effective rates for different income levels are going to be different. 

August 12, 2010

Hospitalization Rates by Age

This one is not really directly related to personal finance.   But its a bit of data I think is useful to know cause it relates to picking health insurance.

 Lets say you're considering a purchase of health insurance.   You can get a policy with a deductible of $6,000 for $300 a month or a policy with a $1000 deductible for $600 a month.   That high deductible policy is cheaper unless you have a serious medical expense.   As an individual its hard to know how likely a major medical expense is.   But you can approximate the likelihood of a very high medical bill by looking at how frequently people of different ages are in the hospital.    I figured it would be useful to figure out the rate at which people are hospitalized.   If you know what percentage of people in your age are in the hospital in a given year then that can give you a rough indication of the likelihood of you being hospitalized yourself.

This is just a very rough calculation only meant for ballpark estimation purposes.   Plus of course every individual is different and a healthy 60 year old may have cheaper bills than a reckless 20 year old.

The CDC has data on hospitalization rates.   That information is from 2006 but its close enough for approximation purposes.

The percent of hospitalizations per age group:

Under age 15 = 7% of patients
15 to 44 years = 31%
45 to 64 = 25%
>65 = 38%

That report said that there were 34.9 million patients discharged from non federal short stay hospitals in the year, excluding new born babies. 

You can find a distribution of the population based on age at this page for the year 2000.  Again I think that 2000 is a little old but close enough for ballpark approximation.

Percent of Population by age :
Under age 15 = 21% of the population
15 to 44 years = 44%
45 to 64 = 22%
>65 = 12%

We can combined the two pieces of information above to find out what % of a given age is hospitalized in a year (roughly).   There were 281M people in 2006.   21% of those people were under age 15.  SO there were about 59M people under the age of 15.   There were 34.9 patients in the hospital and 7% of those were under age 15.  So there were about 2.4 million people under age 15 in the hospital.   Therefore if 2.4 million people under age 15 were in the hospital and 59M people total are under age 15 then about 4% or one in 25 people under age 15 were in the hospital in 2006.   Applying that kind of math to each age group results int eh following:

% of population hospitalized in given year by age groups
Under age 15 = 4.1%
15 to 44 years = 5.3%   (8.7%  including childbirth)*
45 to 64 = 14.1%
>65 =38%

Likelihood of hospitalization

Under age 15 = 1 in 24.7
15 to 44 years =  1 in 18.8  ( 1 in 11.5 including births)*
45 to 64 =  1 in 7.1
>65 = 1 in 2.6

[edit : I originally figured this without considering the impact from women giving birth to children.  However a large % of the women in the hospital for ages 15-44 are the to give birth to children and that threw the numbers off a lot so I adjusted it to remove hospitalization due to childbirth.]

Again this is VERY rough calculation and is not taking into account things like individuals having multiple hospital stays.   Its meant as a very rough ballpark estimate of how often people in various age groups go to the hospital.   Also note that theres probably a significant difference within the large groups so a 16 year old person is probably much different than a 43 year old person.   Men and women are hospitalized at different rates and part of that is due to giving birth.

Ballpark I'd say that about 1 in 10 adults are hospitalized in a given year and about 1 in 3 senior citizens goes to the hospital.

August 11, 2010

Energy Star Fridges Worth Buying

Almost two years ago I wrote an article Should you replace an old refrigerator to save money on energy? that discussed whether or not buying an Energy Star fridge was worth while.   I originally decided that paying extra to get an Energy Star fridge wasn't worth it, but now I think it is.    It appears things have changed enough in the past two years to make that no longer true.   

Today it looks like Energy Star fridges are certainly worth buying.

When I wrote that original article I compared buying an Energy Star fridge versus a standard non- Energy star fridge.  The Energy Star model as $701 and used $41 electricity a year and the cheaper model was $449 and used $48 electricity a year.   Given that choice I decided it wasn't worth paying $250 extra to save $7 a year.   That made sense to me then.  

But today it seems that most fridges are Energy Star and there isn't much of a cost difference between the Energy Star models and the less efficient models. Looking at Sears or Home Depot it seems 2/3 of the fridges on the market are Energy Star and there doesn't seem to be a significant premium for Energy Star.

Energy Star versus Non-Energy Star

The very cheapest fridge at Home Depot is an Americana model for $400.    That is not an Energy Star fridge and it uses $41 per year of electricity.   The cheapest Energy Star fridge is a Hotpoint fridge for $450 which uses $38 a year of electricity. 

The Hotpoint Energy Star qualified model is $50 more and uses $3 less electricity.  Alone that amount isn't really too great of a deal.   If your fridge lasts over 17 years you would recover your cost but that isn't counting other uses of your money and you may need or want to replace the fridge before then.   Spending $50 more for $3 back a year isn't a great payback on your money.   But it should be expected to pay for itself in the life of the fridge.   

On the other hand if I look at Sears I find a non-Energy Star Frigidaire model for $384 on sale.   That model uses $47 electricity a year.   They also have a Frigidaire model which is Energy Star that uses just $38 a year.   The Frigidaire models are just $16 difference in cost but  $9 different in annual electricity costs.   Spending $16 initially to save $9 per year is a very good buy.   Your payback period is 2 years.

The two fridges at Home Depot are a borderline case.   The example of Energy Star versus less efficient models from Sears is clearly in favor of the Energy Star.   I believe with a little informed shopping around you should be able to find a good purchase where Energy Star model makes sense and is worth the price.

Replacing an Old Fridge

I'll look at replacing my own fridge with an Energy Star model.   My current fridge is a basic 14-15 cu foot, top freezer, model from 11-12 years ago that uses $69 electricity a year.

I did a quick search on and and found Energy Star fridges for $400 and $450.  Sears had a Frigidaire model on sale for $400 and Home Depot had a Hotpoint for $450.   (I'm not considering delivery costs just for simplicity.)

Both fridges are Energy Star and about 14 cu. ft. with top freezer.   They are basic models in white color.  
The Frigidaire model from Sears uses $38 a year and the Hotpoint model from Home Depot uses $35 a year.   My fridge uses $69 a year.   So we'd be saving $31 or $34 a year.
 Plus both of the models would qualify me for $100 cash back through the electric utility and a state rebate.   So the actual cost would be $300 or $350 out of pocket.   What rebates that you might qualify would depend on your state and utility company.
I could also sell the old fridge pretty easily on Craigslist for $50 or more.

Here is how the two fridges compare:

Frigidaire Hotpoint
Cost  $400 $450
Rebates ($100) ($100)
Sell old fridge ($50) ($50)
Total cost $250 $300
Energy saving /yr $31 $34
Payback 8.1 8.8
ROI 12.4% 11.3%

The payback is in terms of years and the ROI is simple figure of the savings per year / total cost.  

Either of these would be a pretty good buy to replace my current fridge which is similar in size and features to these models.   Given the energy improvements in the past couple years, replacing a 10-15 year old fridge with a newer more efficient model may be well worth it.

Rebates available in some areas make Energy Star appliances well worth while. Many (if not most) states and utilities offer tax credits or rebates for the purchase of Energy Star appliances.   If your state or local utility offers any kind of incentive then getting the Energy Star model may be a no brainer.


August 10, 2010

Six Stages of Financial Freedom

A while back I reviewed a book called The Complete Idiots Guide to Getting Rich   One of the ideas in the book that I really liked was what they called the 5 stages of wealth.   (see my review for details on their 5 stages)    Their idea got me thinking about the different stages of financial freedom.    Wealth and financial freedom are pretty similar but I have a little different take on the idea of financial freedom and I think theres some different milestones.   So I decided to start with their idea and give it my own twist and interpretation to create 6 stages of financial freedom.

This is what I came up with:

6 Stages of Financial Freedom

Stage 1 : Spend less than you earn.
Stage 2 : Pay off consumer debts
Stage 3 : Build a solid cash reserve
Stage 4 : Assets generate income to pay basic living expenses
Stage 5 : Assets generate income for comfortable living standard
Stage 6 : Assets generate income for comfortable living plus luxuries and some left over

Stage 1 : Spend less than you earn.   

This is the first step towards achieving any kind of financial success.  If you're spending more than you earn then you'll just be digging your debt hole deeper and you'll never get financial freedom.   Once your spending is under control you've got the ship pointed in the right direction.

Stage 2 : Paying off consumer debts

Paying off your credit cards and other consumer debts is a good step towards financial freedom.   Freeing yourself from credit card debt is a major milestone in financial freedom.   Lacking obligations to debts is part of being financially free.   You could include your student loan debts in this step as well especially if the debt is at a higher % rate.  I do not include mortgages in this stage since they are based on the homes equity.

Stage 3 : Build a solid cash reserve

A solid cash reserve will give you financial freedom so that you can get through a short term economic hardship such as job loss or unexpected major expenses.  Having a large pile of cash gives you a lot of financial freedom.  If you don't have cash on hand then you may feel tied to a job you hate or stuck in a situation that is not a positive one.   A decent amount of cash will give you the money to do things that you wouldn't have the option to do otherwise.    Your emergency fund can be some of your cash reserve but this stage is more than having a basic emergency fund.

Stage 4 : Generate income to pay basic living expenses

The next step is to build assets or investments that will start to generate income for you.   The style of investment is up to you.  You might have dividend paying stocks, rental properties that generate rent or simply bonds that pay a yield.    Your goal for stage 4 is to get enough investments so that they can generate enough cash flow to pay your basic living expenses.    By 'basic living expenses' I mean your utilities, food, clothing and some minimal amount of discretionary income.   This is a lower standard of living than most of us would choose for ourselves but enough money to live off of if you had to do so.   Once you've accomplished this stage your financial freedom will increase because you won't be solely dependant on working for an employer or the state of the economy around you.   If you get laid off abruptly then you can fall back on the cash flow generated by your assets.  Your own assets will give you a safe financial base you can fall back on if you ever need to or want to.

Stage 5 : Generate income for comfortable living standard

The next stage of financial freedom is where your assets are generating enough money that you could comfortably live off the cash flow.  At this stage you have a reasonably comfortable standard of living which goes past the basic 'pay the bills' level of stage 4.   The comfortable living standard pays the basic bills like stage 4 but also gives you extra money for some entertainment, travel, gifts  and a bit of a margin for safety.   At stage 5 your assets generate enough that you can safely quit working your 'day job' if you choose to do so.  This is the stage that I consider to be real 'financial freedom'.  Your assets now generate enough money that you are really financially free from work.  

Stage 6 : Generate income for comfortable living plus luxuries and some left over

The final stage of financial freedom is where you have more than enough money to live off of.   This means you have the income for the comfortable living standard of stage 5 plus more money on top of that.   Basically you have more money coming in than you spend by a decent margin.  You can spend all the money you want to (within reason) and still have money left over.    While its certainly nice to have the financial freedom of stage 5 its even nicer to have the amount of money at stage 6.   Stage 6 financial freedom really gives you true freedom from financial worries.

You need to decide on the dollar amounts

You'll notice that I don't cite specific dollar amounts for stages 3 to 6.   The exact amount will depend on your situation, your spending habits and the cost of living in your area.   You should figure out your expenses and then decide the amounts for yourself.   Maybe you'll be able to cover your basic expenses for stage 4 with $10,000 a year or maybe you'll need $25,000.   The amount you'll be satisfied with for stage 5 and 6 really depends on your own goals.  

Should you pay off mortgage?

You might be wondering why I don't have paying off your mortgage as one of the steps.  I do think that for many people that owning their home free and clear is a major stage of financial freedom.   It is the next goal that my wife and I have.   However paying of a mortgage may or may not make sense for you and I don't think its necessarily a universal goal.   If you want, you can add it as a step in the system around stage 4.

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