January 29, 2011

Article Featuring Free By 50 on ThriftCultureNow

I was recently interviewed for an article by ThriftCultureNow.com.  

You can view the article on line at :
A Free By 50 Retirement Plan: Take Note of Jim's Personal Finance Advice & Money Saving Tips 

The article is part of a series they've been doing called Thrifty Blogger of the Week.  They have featured such interviews of a number of bloggers.   Be sure to check out the other articles in the series.   There are a lot of good bloggers out there and this is an easy way to get an introduction to some.

January 28, 2011

Best of blog posts for week of January 28th

Dough Roller tells us  What is IRS Tax Form 1040EZ?  plus they also wrote a Turbo Tax 2010 Review

This one is interesting enough to me that I figured I'd pass it on even though it has nothing to do with personal finances... The Altucher Confidential tells How I Screwed Yasser Arafat out of $2mm (and lost $100mm in the process)

The Simple Dollar gives us Seven Monthly Bills Most People Have, and Seven Ways to Reduce Each Bill

New Home Sales Are Currently a Meaningless Economic Indicator

I just saw a headline declaring that new home sales are the lowest they've been in 2000 years.  Or something like that, OK I'm exaggerating on the figure the actual article says New Home Sales in 2010 fall to Lowest in 47 years., but it may as well said 2000 years.      Then I turn around and I see an article saying that New Home sales hit eight-month high.

The first article "lowest in 47 years" gives us the "oh no!  the economy sucks" interpretation.

The second article "sales hit 8 month high" gives us the "yay! we're turning it around" interpretation.

We can see that the same set of data telling us completely contradictory things based on how its interpreted and presented.   Its the worst of times and the best of times?  

Generally I don't think the new home sales is really useful measure of the economy right now.   There are so many foreclosures out there nowadays and home prices are depressed to the point that new homes are not going to be a viable or good option for many people.    In many places you'd be crazy to buy a new home when you can buy a new home from just a few years ago for for 30-50% off.

My wife and I have been shopping around for homes a little bit.   We looked at some new homes.    They were over priced compared to the used homes on the market.    As an example one developer is selling a new house for $179 per sq ft.    In the same area theres a 10 year old foreclosure for  $118 per sq. foot or an 8 year old house for $138 per sq ft.  The new house in our area has a 30% price premium over the existing  house and 50% more than a foreclosure.   This is just our area and I'm sure that things differ quite widely in other cities and states.   But it serves as an example of how new homes aren't as compelling given the bargains out there.

I was actually surprised and doubted that the new home sales were at a 47 year low.  But Census data confirms it.   Dating back to 1963 the new home sales were never under 400k a year and in 2010 we dropped down to just 321k.   As recent as 2005 there were over 1.2 million new homes sold.

From the census site we can find that there are about 130 million housing units in the US and around 66% of us are homeowners.   That gives us approximately 85.8 million single family homes in the USA.    With a 1% growth rate in the population then we should have demand for approximately 850k more homes every year just due to population growth.  

Until the foreclosure rate drops and the housing market regains some of its former health I don't think new homes will really pick up in any meaningful way.    Watching the new homes sales rate is about as useful as watching the American auto manufacturer hiring rates.

January 27, 2011

What is a Good Credit Score?

FICO credit scores range from 300 to 850.   The higher the score the better.   You often hear of people talking about having "good credit" which generally means a high FICO score.   So what actually constitutes a "good" score?   Well oddly it seems that getting a solid answer on that is hard to find out.   I searched various sources...

The following is from an article via Yahoo.

Excellent credit = 720 and above
Good credit = 660 to 719
Fair credit = 620 to 659
Poor/bad credit = 619 and below

 An article from last fall on Moolanomy breaks it down this way:

760 to 849 = Excellent
700 to 759 = Great
660 to 699 = Good
620 to 659 = Average
580 to 619 = Poor
Below 579 = Very poor

The website Bad Credit Repair says:

Excellent or Very good = 700 or higher
Good = 680 to 699
OK = 629 to 679
Bad = Under 620

Ask three different people and get three different answers.    Those three sources give different answers for what "good" credit score would be.

Lets say your score is 700.   The three different sources say that your score is Good, Great or Excellent / Very Good.    None of them agree on where your score falls.

Lets look at it another way.  Consider how the credit score will actually matter when you're trying to get a loan.

FICO has a calculator that shows what loan rates you might qualify based on different FICO scores.

For a 30 year fixed mortgage the example interest rates are as follows:

FICO score APR
760-850 4.419%
700-759 4.641%
680-699 4.818%
660-679 5.032%
640-659 5.462%
620-639 6.008%

On the other hand for a 36 month new car loan the scores and interest rates look like this:

FICO score APR
720-850 4.886%
690-719 6.389%
660-689 8.308%
620-659 11.872%
590-619 17.693%
500-589 18.677%

Of course these are just examples of typical rates so don't expect you can run out and get these exact rates based on a given FICO score.

You can see that a 720 score will get you the best interest rates on the car loan but it won't get you the best rates on the home loan.   How good your score needs to be depends on what you want to do with it.  I'd assume that banks scrutinize home loans a lot more since they are loaning out a lot more money.   So it would make sense for them to demand the very best scores to get the best rates.

If your credit score is over 760 then you're in the top bracket.  Every source I found seems to agree with that. 

January 26, 2011

FREE Cell Phones For the Poor

I read about this in a recent Businessweek article Free Cell Phone Service for the Poor.   If you meet eligibility requirements you can get free cell phone service.  If you have existing cell or landline you may instead qualify for a subsidy for your phone service.

The free phones come via a government  program called Lifeline.  The program is funded by the telecom companies through a program setup by the US government.   The program has existed for quite a while but only recently have wireless phone companies set it up so users can get a fully free phone.  

General state to state information on Lifeline can be found at Lifelinesupport.org website.

Assurance Wireless from Virgin mobile is one of the providers.   They offer a free phone and 250 free minutes a month.
Safelink from Tracfone is another.  The amount of minutes they offer seems to depend on the state you live in.

But the lifeline program isn't limited to those companies.   There are other companies that operate in various states offering subsidized or free services.  

To qualify you must be low income and/or on certain government subsidies.   Safelink says: "Eligibility guidelines vary by state but in general individuals qualify if they participate in a public assistance program such as Food Stamps, Medicaid, Supplemental Security Income (SSI), Temporary Assistance for Needy Families (TANF), Low Income Home Energy Assistance Program (LIHEAP), National Free School Lunch, Federal Housing/Section 8 Assistance, or if they do not receive any of these public assistance programs, they may also qualify based on total household gross monthly income."

If you're low income and might qualify or if you know someone who is low income then this might get someone a free phone to keep in touch for emergencies or to call employers about jobs, etc.

January 25, 2011

Options for Underwater Rental Property

One of our rental properties is "underwater".    By that I mean that we owe more on the mortgage than the property is currently worth.  This is of course not a good situation to be in.   My wife and I are in good financial shape overall and most of our rental assets have significant equity.   So we plan to hang on to the property for the time being and 'ride it out'.  But that may not work best for everyone.   If we were losing a lot of money on the property or couldn't afford the liability then it might make better sense to just dump it now and take the loss.   Theres a few potential options for dealing with an underwater rental property.   Everyones situation is different so what will work best depends on the details.

What are the options?

The way I see it there are only a few options for a rental that is underwater.    In brief the list is :

1. Sell it at a loss.
2. Keep it.  
3. Improve the property to increase the value.
4. Lease option sale
5. Sell it as a short sale.
6. Let the bank have it.
7. Bankruptcy

Selling at a loss.    If you own a property that is underwater then you could sell it and take money out of your own pocket to pay the bank off in full.   For example say you own a rental worth $100k fair market value and your mortgage is $120k then you could sell the property for the $100k and then take another $20k out of your savings to pay the bank off in full.    If you don't want to be a landlord and never wanted to then this may be a preferable option for you.    Pros:  You get rid of property, no doubt or risk of further loss, credit isn't harmed.  Cons:  It costs you $20k.

Keep it.   If you own an underwater property you can simply keep it and continue to rent it.  Eventually the value of the property will exceed the debt and it will not be underwater.  How fast that will happen is anyones guess.  In some cases it may take as long as the term on the mortgage.   If the property is only underwater by a few thousand then it could have positive equity within a year or two.   If you bought the property with the intention of using it as an investment from the start then this may be your preferable option.   Pros:  Credit isn't harmed, not selling property for loss, potential future gains on property and rental income.   Cons:  Risks involved with renting property, tied to property.

Improve the property.   This option is not likely to work in most situations.    But its worth a look.   Simple improvements like a coat of paint or some basic landscaping may improve the resale value of a property.    Or if you're particularly handy yourself then you may be able to put a lot of labor into the property and cash in on your own hard work.   Pros:  lower loss/ risk.   Cons:  not often feasible, more work required.

Lease option sales.    If you find the right tenant / buyer you may be able to negotiate a lease option.    This deal is structured so that a tenant will rent the property for a given period of time and then they have the option to buy the property after the lease is over.    This can be a positive thing for a potential buyer since they may need some time to improve their credit or increase their savings.   The owner may benefit if they structure the deal to make sure that the sales price is an improvement on the current fair market value or if it at least gives you enough time to pay down the mortgage gradually to get out from underwater.   Generally I'm not fond of lease options as they seem structured to exploit the tenant/buyer.   But if you structure the deal in a way that its fair and positive for both parties then it could be a feasible alternative.   Pros:  reduces risk, ok for credit.  Cons:  option may fall through.

Short sale.   A short sale is when you sell a property for the market value and the bank takes a loss on the mortgage.   In order to do a short sale you have to get the bank to agree to it.   Banks may favor a short sale since it could be a little cheaper for them compared to dealing with foreclosing and selling the property themselves.   Short sale of a property will hurt your credit but may not be as bad on the credit as a foreclosure.   Pros:  Not as bad as foreclosure, no financial loss, gets rid of liability.  Cons:  Credit is damaged.

Foreclosure.   I think the last resort is to just let the bank have the property.    You should try a short sale before foreclosure, but if a bank doesn't want to do a short sale then a foreclosure may be the last option.   A foreclosure will trash your credit.   Its not a positive thing for you, the bank, or anyone involved.   You should avoid a foreclosure if at all possible.   But you have done everything else possible and a rental negative cash flow is dragging down your finances then allowing the bank to take the property may be the only thing left to do.   You do have to be careful if you have a assets though since the bank could come after you for the difference.   You may also have a tax liability on the unpaid portion of the mortgage.   Pros;   Get rid of property without financial loss.  Cons:  Credit is trashed, worse option in general.

Bankruptcy Depending on the situation it may make better sense for you to declare bankruptcy than to simply allow the property to go into foreclosure.   The bank will end up with the property either way.  If your finances are in really bad shape and you are letting the house go into foreclosure, then you may be a good candidate for bankruptcy.   Of course bankruptcy is something to avoid if at all possible.   Pros:   Finances wiped clean.   Cons:  Credit trashed.

January 24, 2011

Fixed a Technical Glitch

I realized this weekend that the Freeby50 website was not loading properly.    I found the problem and fixed it.    (plug in from Networthiq was hanging the whole page)   I'm not sure how long it was broken.   Sorry for any inconvenience.  

January 23, 2011

Do French Fries Really Cost You $55,449?

I enjoy McDonalds french fries.   I don't eat out at fast food places very much nowadays but if I do then McDonalds fries are one of my guilty pleasures.   Lets discuss a scenario where I buy an order of fries once a week.   An individual order of fries is not very expensive is it?   But if the large fries cost me $1.80 then I'm spending a total of $93.60 per year ($1.8 x 52) on the fries.   If I were to save that much money every year and put it into an investment that earned 10% return annually then the money would grow significantly over time.   If I did that my entire working life from age 22 to age 65 then I could save up $55,449 total.

One could make the argument that the large order of fries does not cost me $1.80 but it instead costs me $55,449 in lost retirement savings over my life.

In fact this kind of argument is made now and then in books, blogs or other articles when trying to show how little amounts of spending can add up to a large impact over time.    Its a fairly good way of demonstrating the impact of spending over long term.   You can also use it to demonstrate how saving a small amount of money regularly over time can add up to a large amount of savings at retirement.

I both like and dislike this kind of argument.    I like it cause it is useful lesson to demonstrate how frivolous spending on small amounts can add up over time and how easy it can be to accumulate a larger retirement savings.    Its a good motivator for some people so I really shouldn't whine about it or nitpick it.    To be honest, I dislike it cause honestly I just find the argument to be... well.. annoying.   French fries do not cost $55,449.   We all know that.   Anyone telling people that is just twisting things around to make a point.   You could do this with anything and everything.  Your cat costs you $118,480.   The better brand of tooth floss costs you $2,370.   Beer costs you  $432,453.    It gets a little silly.

Another reason I'm not fond of this kind of argument is that it bends the truth by ignoring some key details.   First of all you have to think about the impacts of inflation.   $55,449 is a lot of money but 43 years from now inflation will have eaten away a lot of the buying power of a dollar.   If inflation averages 3% a year then prices will be about 245% higher in 43 years.    That means that the $55,449 will have the buying power as just $16,022 in today's dollars.  Second there is the matter of taxes.   You can't assume that your money will grow over years and be tax free entirely.   Its realistic to assume that your after tax dollars would be 20% less.   So now the $55,449 would be more like $44,358.    If you add together the impact of inflation and cut off 20% for taxes then you're talking about having an amount of money that is more like $12,818 in todays dollars.   Lastly is the assumption that we used that the money would grow at 10% annually.   Generally people forecast that the stock market will gain 8-12% on average over the long term.  But there is certainly no guarantee of this and you're taking risk by putting your money in stocks.   What if your money did grow 10% a year and then on the very last year you hit a recession and lost 40% of it?   Now your $55,449 is worth $33,269 which would be only $26,615 after taxes and that would only have the buying power of $7,690 in todays dollars.   Between taxes, inflation and the risks of the stock market the amount of your savings over 40+ years would be significantly lower.   If an article declares your fries would add up to $55,449 then the real figure could be more like $12,818 or $7,690.

Of course $7,690 or $12,818 is still a lot of money.   But it is not nearly as much as $55,449.  

French fries don't cost you $55,449.   Fries cost $1-2 generally.  But adding up the lost retirement savings over time from routine purchases is still an OK way to illustrate the power of gradual retirement savings and compound interest.   I just wish that such examples would be a little more realistic and count in inflation and taxes.

Photo of fries by toddwickersty

January 21, 2011

Best of blog posts for week of January 21st

Dough Roller asks  Show of Hands, Whose Heard of Covestor.com?

fivecentnickel talks about Preparing for a Baby

My Money Blog shares  Where I Keep My Emergency Fund Cash – January 2011
They seem to have a pretty good strategy for maximizing the interest return on their emergency fund in todays low interest rate environment.

Consumerism Commentary has The Best Prepaid Debit Cards, January 2011

USNews has a good list of 18 Common Work E-mail Mistakes
Not much to do with finances but as someone who sends and gets a lot of email at work I think this is a good list.

January 20, 2011

Rewards Cards Impact on Spending & Debt

A recent post in Consumerism Commentary pointed to an interesting study on the impact of rewards credit cards on card user spending and debt levels.  The study titled Why Do Banks Reward their Customers to Use their Credit Cards? is from the Chicago Federal Reserve.

This study was unique in that it didn't pile all credit card users into one large group and then average out their habits.  Instead it split card users into different categories based on whether or not they carried balances or if they use cards previously.

People who carry Debts

For people who carry debt month to month the study found that on average that group increased spending and increased their debts when using rewards cards.  The study says that debt goes up $134 average per month and spending increases $138 average per month in the first quarter for consumers  with debts.  The people who have existing debts end up with more debt and spending.   The rewards may be contributing to that because they rationalize some of their spending as OK since they will get the 1% rewards.  

Inactive or possibly New Users

 The other group of users are people who weren't previously  using a credit card before signing up for the rewards card.   That group didn't start with debts since they weren't using cards.   The report describes them as "inactive" users but that group would include any new consumers in general.   For the inactive group the average spending goes up $220 per month and the debt goes up $167 per month.  

My take on this is that these people are generally new card users who get lured into using a credit card by the promise of rewards.   They then typically end up in debt with the card.

People Like Me

The most interesting result of the study was for the card users who are like myself.  I use my rewards card for various purchases and then pay off the bill every month.   I don't carry any debt and I don't believe that the card "makes" me spend more than I would otherwise.

The study put people like me into the sub group they call "convenience users".   That would be the portion of people who do not carry debts and who were not previously inactive users.   For convenience users they found that :

"Those that do not carry debt do not increase their overall card balance as a result of participating in the cash back program." 
"The cash back impact on spending is not statistically significant for convenience users"

So what the study found was that people who pay their cards off every month and use reward cards do not end up with more spending nor more debt.    This is what I personally would have felt happens for people like myself.  

January 19, 2011

51% cash back on Magazines.com via Ebates

Today Ebates has a daily double promotion for 51% cash back at Magazines.com

Magazines.com has some pretty good prices to begin with and getting 51% cash back on top is a good deal.

I recently bought my wife a subscription of the Oprah magazine as a present and I paid a fairly good sale price of $13 on Amazon.  Now its $18.  Magazines also has it for $18.   With the 51% cash back that would make the net cost only about $9.  So some deals there are pretty good.

But be sure to shop around.  I have a subscription of Businessweek for $20 / year.   Magazines.com price is $50 and even with 51% cash back thats still about $5 more than I'm paying.

One detail to be aware of, I think by default that Magazines.com signs you up for automatic renewal of your subscriptions.   

Ebates Double Cash Deals for St. Valentines

Right now  Ebates has some double cash back deals for St. Valentines.

A selection of the double Cash back rates are :

drugstore.com = 12%
Blue Nile = 5%
FTD florist = 20%
teleflora.com = 20%
Godiva chocolate = 8%
Lancome = 14%

To get the cash back you have to sign up at Ebates  and then use a link from Ebates to visit the merchant before you purchase.

The only merchant on that list that I've ever used is drugstore.com.    12% back at drugstore.com seems like it has the potential for some pretty good bargains.  I'm not exactly sure what drugstore.com has to do with St. Valentines but I won't argue.  

Personally I've found the major florist services to be pretty pricey.   But if you use them then 20% back is certainly worth doing.

January 18, 2011

Dual Income vs Single Income Families

The Census has data showing what percent of married couples have two incomes or just one income.

First of all lets look at all married couples:

This shows a fairly large minority of 17% of couples where neither spouse works.    This data does not exclude retired individuals so I assume the majority of those 17% are senior citizens.  

Now lets look at married couples who have children :

Since these are couples with children we can assume that almost all of them are not of retirement age.

January 17, 2011

Charging My Cell Phone Costs about 1¢ per month.

In Dec. of 2010 I decided to run a little experiment to see how much electricity my  cell phone charger used when it was plugged in but not charging the phone.   My original plan was to find out how much of the fabled 'vampire electricity' my phone charger used.  I plugged in the charger into a kill-a-watt meter which measures electric usage.    I left the charger plugged in over night and it had used 0.00 kWh of power.  But then I had to charge my phone.   I ended up plugging the phone into the charger and measuring how much power it takes to charge my phone as well as keep the charger plugged in 24/7 when the phone is not charging.  I figured I'd just leave the meter plugged in and get a longer term measure of how much electricity my charger uses.

What I measured:   I know for a fact that I charged my own phone and its mic.    But my wife also used the same plug in a little.   Altogether things that I measured are : Charging my cell phone, charging my bluetooth ear mic, charging my wife's phone some of the time, electric use from the chargers when plugged in and not charging, and maybe a little usage of the paper shredder that is near the charger in question.

This is not very scientific.

I have two pictures that show the kill-a-watt meter in use.   The first picture is from Dec. 20th and the second is from Jan. 2nd.   However the chargers were removed for about 4 days around Christmas when we were visiting family.   In total this then measures about 8 days of usage.   The first picture shows 0.03 and the second shows 0.06 so the difference is 0.03.   In the first 8 days the usage was 0.03 kWh.

Note I had to brighten the pictures a little so you could see the read out.  There isn't good lighting in the location where the meter is plugged in.

Dec 20th showing 0.03 : 

Jan 2nd showing 0.06 usage:

On Jan 14 the meter was still plugged in and it read 0.12 kWh total.   So in another 12 days there was another 0.06 in usage.

In 20 days total the usage is 0.09 kWh.   So an average day uses 0.0045 kWh.   
At that rate over a year the usage would average about 1.6425 kWh. 

Electricity averages around 10-11¢ per kWh.   So the cost to charge 1 phone and have the phone charger plugged in all year round is in the ballpark of  16-18¢ for a year.   But there were other things plugged in some of the time like my wife's phone and possibly even the paper shredder.  

I'm going to make a ballpark estimate that it is costing me about 1¢ per month to charge my cell phone.

January 16, 2011

Law School Is A Bad Investment

The New York Times article Is Law School a Losing Game? carried by Yahoo talks about a recent law school grad who hasn't landed permanent job and can't pay his $250,000 in loans.    Thats just one example of a law grad facing problems.   Below I list a a few very solid reasons why law school may be a very bad choice financially.

(note: if your LSAT is over 170 then you can probably ignore this article)

Law school is very expensive.

Tuition for law school can easily run $30,000 to $40,000 a year.   Plus you have living expenses on top of that.    The average amount borrowed is over $90,000 according to the ABA.    You also have to keep in mind that the government doesn't throw much if any 'free' grant money at people getting law degrees.   If there are any scholarships for lawyers then they are likely to be highly competitive.   I would expect to pay most of the bill for law school out of your own pocket.

There are too many new law grads for the jobs available.  

The NYT article says that "About 43,000 J.D.'s were handed out in 2009".  The ABA has similar data dating back a few years showing over 40,000 grads for each of the most recent 5 years.   Thats a lot of new grads coming out of law school each  year.    O*net says that there will be a projected 240,400 job openings in the field from 2008 to 2018.   Thats about 24,000 jobs per year on average.    Notice a big problem?    Theres 43,000 new grads in a year and projection of 24,000 job openings per year.    Thats almost twice as many new law grads looking for work as the number of job openings.

Many Lawyer Jobs don't Pay big Bucks

I'm sure we all know that lawyers make big bucks right?   We see them on TV all the time and they all drive luxury sports cars and wear expensive clothes.    Many lawyers do make very high wages.    The BLS says that  "In May 2008, the median annual wages of all wage-and-salaried lawyers were $110,590." and that "The middle half of the occupation earned between $74,980 and $163,320."     So half of the experienced lawyers make under $110k and 1/4 of experienced lawyers make under $75k.    New lawyers hired out of law school make less of course.   The median wage for new lawyers 9 months after graduation was $68,500 and for the new lawyers working in government they made $50,000 median.

If you add that all up then :   You work hard in school for 3 years and pile up $100,000 in debt.   Then you graduate and find a job market with only enough jobs for 50% of the grads.   You then end up with a one in 4 chance of making under $75k.    Doesn't sound very good to me.

Bottom Line:   A career in law is not a lucrative money ticket and you should seriously think twice before you pursue the field or you may end up underemployed with a giant student loan debt.

January 14, 2011

Best of blog posts for week of January 14th

Doughroller writes a Scottrade Review – Online Discount Broker
they also give us Six Great Ways To Introduce Kids to Stock Investing

Wisebread suggests the idea of : Nanny Sharing: Lowering the Cost of Personal Childcare

Plus some interesting items from outside personal blogs:

Top 15 Oddball Job Interview Questions off Business Journal

This article on Jim Cramer from someone who has worked with him 10 Things I Learned Working With Jim Cramer

An interesting 'what if' scenario if Apple had joined the Dow in stead of Cisco : CSCO vs. AAPL = 1,000 DJIA Points

Should I Cash in Airline Miles Sonner or Save Them?

I currently have a little over 47,000 miles with Alaska Airlines right now.    A few years ago you could get a roundtrip ticket on Alaska for 20,000 miles but they have since increased the cost to 25,000 miles.   I should have probably used my miles sooner than now.  I figured I should decide on a plan to use the miles rather than hang on to them forever.

Theres a few options I've though of for using the miles:

1) I could use 20,000 of those miles to get $200 off of a reservation to some place like Las Vegas.   Thats about 1¢ return per mile. 

2) If I save up a few thousand more miles and hit the 50,000 level then I can get 2 round trip tickets to a destination in the continental US.   Tickets to visit my wife's family in the midwest would cost us $300 to $400 each.   That would be $600 to $800 total for 50,000 miles.   Thats 1.2¢  to 1.6¢ per mile return.t

3) We could go to Hawaii for 45,000 each ticket or 90,000 total.    Roundtrip to Hawaii is about $420 a ticket.   Two tickets is $840 so for 90,000 miles that would be just 0.93¢ per mile.

4) We could save up even more and get tickets to Europe.   Europe is 65,000 per ticket round trip so that would be 130,000 total for my wife and I.   Using Farecompare maps I can see that I could get tickets to Europe for as low as  $600.   Two tickets would cost us around $1200 so for 130,000 miles that would be a rate of 0.92¢ per mile.

With current costs the #3 and #4 options of going to Hawaii or Europe would not  be beneficial.   I'd have to save up a ton more miles and then the value per mile would be lower.

#1 and #2 options are the preferable choices.   If we save up a few thousand more miles then we could potentially get 1.2-1.6¢ per mile total.  

Option #1 is an easy way to get guaranteed value out of the miles and not have to wait longer to accumulate more miles.   However option #1 only has a 1¢ per mile return.    Option #2 would give a better return on my miles depending on choice of destination and the cost of tickets.

I could also buy 3 thousand more miles for a cost of about $83.    Then if I found a flight we wanted to take we could get 2 tickets using 50,000 miles.    This would be worth it if the price of the tickets were more than $553.   That would give us a return of over 1¢ per mile on the 47,000 miles we've got now.   Simply flying to Vegas would cost us over $500 so that wouldn't be too hard to do.

Bottom Line:  It would be best for me to cash in the points for a domestic flight of some sort.   Waiting for a expensive trip to Europe or Hawaii wouldn't pay off.

January 13, 2011

The Performance of Businessweek Stock Picks for 2010

At the start of the year Businessweek picked 16 stocks for 2010.   The list is here : Top Stock Picks for 2010

The 16 picks were :
Orion Marine (ORN)
Computer Sciences (CSC)
Verizon (VZ)
Royal Caribbean Cruises (RCL)
Varian Medical Systems (VAR)
Discovery Communications (DISCA)
Waste Management (WM)
Blackstone Group (BX)
Teva Pharmaceuticals (TEVA)
Kohl's (KSS)
Urban Outfitters (URBN)
BorgWarner (BWA)
Priceline.com (PCLN)

HEre is how the list performed in 2010 

start end gain
ORN  $   21.51  $   11.68 -46%
CSC  $   57.74  $   51.91 -10%
VZ  $   33.28  $   35.92 8%
HES  $   63.16  $   77.99 23%
BBT  $   25.81  $   26.44 2%
RCL  $   25.80  $   47.96 86%
VAR  $   47.17  $   68.67 46%
DISCA0  $   31.00  $   39.82 28%
WM  $   34.16  $   36.82 8%
FMC  $   56.82  $   80.58 42%
BX  $   13.71  $   14.79 8%
TEVA  $   57.88  $   52.63 -9%
KSS  $   53.98  $   54.27 1%
URBN  $   34.91  $   35.45 2%
BWA  $   33.78  $   73.37 117%
PCLN  $ 223.96  $ 415.99 86%

Overall if you'd invested $10,000 equally in the 16 stocks then at the end of 2010 you'd have ended up with about $12,446 including about $123 in dividends for a total gain of about +24.5% for the year.

The S&P 500 was up about 13% for the year.   The Businessweek list easily outperformed the market.

This just represents one year.  I don't know how well Businessweek might have done in other years or how well they'll do if they pick stocks for 2011.

January 12, 2011

2% Payroll Tax Cut vs Making Work Pay Expiration : Who Comes Out Ahead?

You may have heard that in 2011 we are getting a temporary 2% reduction in the payroll tax.   This is part of the e Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.    That means that your take home pay should be 2% more than normal due to the lower payroll tax.   Usually your portion of the payroll tax for social security is 6.2% but in 2011 they reduced it to 4.2%.    (Note that this 2% reduction does not change how much your social security benefits at retirement are calculated)

A 2% tax cut is nothing to sneeze at.    News reports kindly point out that it is "worth as much as $2,136 for a worker or $4,272 for a working couple."   That sounds great and for many people it is great.    BUT... at the same time the 'making work pay' tax credit is expiring so people will see their IRS withholding go down a little compared to last year.

The 'making work pay' credit was $400 for a single person and $800 for a married couple.    2% of your pay from the payroll tax cut may or may not be as much as you're losing from the expired 'making work pay' credit.   Some low income people will see lower take home pay after income tax withholding and the payroll taxes in 2011 compared to 2010.

For 2% to be more than $400 you would have to make over $20,000 a year.   (400/.02 = 20000)
For 2% to be worth more than $800 for a married couple you would have to have household income of $40,000 or more

The break even point is $20,000 for single or $40,000 for married.   The more you make over those amounts then the more the 2% payroll cut will put you ahead this year versus the making work pay credit from last year.  

Another detail is that if you make over $75,000 for a single person or $150,000 as a married couple then the making work pay credit in 2010 started to phase out.  Every dollar of wages over the threshold cut 2¢ off the making work pay credit.  The credit was completely phased out if you made over $95,000 for a single filer or $190,000 as married.

Lets put it all together and see how the two benefits compare for different wages.  For a single person here is how the making work pay credit in 2010 would compare to the 2% payroll tax cut for 2011: 

Making Work Pay 2% Payroll
$7,250 $400 $145
$20,000 $400 $400
$40,000 $400 $800
$75,000 $400 $1,500
$80,000 $300 $1,600
$100,000 $0 $2,000
$106,800 $0 $2,136

 Social security withholding caps off at the $106,800 for a single payer so the benefit of the 2% payroll cut would max out at $2,136 for an individual.

Lower income individuals and families will have less take home this year than last year.    Most people however will come out ahead this year.

January 11, 2011

Americans do NOT spend 6 Billion Hours on their Taxes

A recent CNN article states that Americans Spend 6.1 Billion Hours on Their Taxes.    Sounds awful.   It would be awful if I thought it were true.   I just can't believe that people spend that much time filling in their tax forms and preparing their tax records.

The 6.1 billion hours number is what I believe to be an example of a "numerical fiction".    A "numerical fiction" is a term that Frank from Bad Money Advice came up with when he created Curmudgeon’s Law of Numerical Fiction.   In short the Curmudgeon's law of Numerical Fiction says that a fake number is numerical fiction if it meets 3 criteria which are :
1. The number reinforces previously held beliefs.
2. The number is remarkably extreme, but not ridiculous.
3. There is no organized [and credible] group that opposes the number.

I think that claiming it takes us 6.1 billion hours to do taxes annually as a nation fits all those items.  Everybody believes that taxes are difficult to do.  The number is extreme but not so high that people obviously know its bogus.   There is nobody out there I can think of who would really be arguing against such a number.    I think this fits the description of "numerical fiction" to the tee.

Why I suspected it isn't true.  

I just have a 'feeling' that this is a bogus number like other numerical fiction numbers. Someone throws out a giant figure and has nothing at all to back it up then it gets reported all around the news media.   Its like if I said that French people own 18 million ducks.   That sure sounds like a lot.   Probably too many.  Where did the number come from?  Who knows.   But who's to say its wrong?   People just accept it cause they don't have any real reason to think its invalid.

Once I am suspicious of the number I then turn to my own math to try and figure out how many hours we as a nation would spend on taxes.  No matter how I add it up I can't seem to come close to 6.1 billion hours.   One of the most straight forwards ways is to look at how many accountants we have in the nation if it doesn't pass that common sense check then I'm really doubtful of the legitimacy of the figure.

All the accountants in the nation...
Lets pretend that all the accountants in the entire country do nothing but fill out tax forms all year round.  There are 1.3 million accountants in the entire country.   If those accountants all spend 2000 hours a year working then that is a total of 2.6 billion hours.   Obviously accountants do many other things than simply handle taxes.  The amount of time that accountants spend on taxes is less than the 2.6 billion total.  

I honestly don't see any way that the nation really spends 6.1 billion hours when all the accountants in the entire country don't work half that long.   

Time spent per tax form
According to the IRS in 2008 there were a bit over 142 million individual tax returns filed   Lets round that up to 143M.   If we spent 6.1 billion hours each then that would be about 42.6 hours per form.   Now I know that taxes can take many people a while but I don't know anyone who spends a solid week filing their taxes or sorting their receipts.   I have a pretty complex tax return which includes state taxes for two states, rental income for multiple properties in different states, sales of stock and stock options, health savings account and itemized deductions.  Even with our multiple pages of forms I know for a fact that my CPA spends much less than 42 hours on it given how we can give her our stuff one day and get back the finished return within a day or two.  

Where do they get the number?
The article says that the figure comes from  someone named Nina Olson who is the current Taxpayer Advocate.  It took a bit of digging but I was finally able to find some data on the IRS site that says what they are counting for individual tax payer time requirements.    You can see the table titled Estimated Average Taxpayer Burden for Individuals by Activity   They estimate the total time per tax payer at 18 hours.   Sounds like a lot to me.   If you look at the table closer you can see that they break it into time required to fill out the form, keep records, submit the form, plan and 'all other'.   I don't know why it would take everyone 1 hour to submit their taxes.   If you're doing it online then don't you just hit the 'submit' button and it is then sent electronically?  If you are filling the forms out by hand don't you just put them in an envelope then mail them?   Do people filling out 1040EZ really need 2 hours for record keeping?  That form covers virtually very little except W2 wages and interest income.    Does it take 2 hours to manage those 2 things?   I highly doubt it does.    All these numbers seem grossly inflated.

Lots of people have easy forms

Over 20 million forms filed by individuals are the 1040EZ form which is 1 page long and could be done in an hour or two.   35 million forms are the 1040A which is a little more complex than the EZ but still not an all day long ordeal.

Out of curiosity on how long it would take me to do a 1040EZ form myself I filled one out using pretend figures.   I printed out the form which required putting new paper in the printer since it was out of paper.  I then looked up my W2 at my employers website and logged into my ING account to look up the interest paid on my savings.  I filled out the entire 1040EZ form including doing all the math, doing the 'making work pay credit' worksheet and calculating the tax refund.  Its really not that complex.   The main 1040EZ form has 4 arithmetic operations.   The form really is easy.  If you can follow simple instructions and add and subtract then using a calculator you can fill out 1040EZ   I then put the form in an envelope, addressed the envelope and pretend to put a stamp on it (I don't want to waste a real stamp.)   I started at 04 minutes after the hour and finished it at 17 minutes so in total it took me only 13 minutes to do the 1040EZ.    If you take 4 times as long as I do then you should be able to do a 1040EZ form within an hour.   Yet the IRS says it takes 2 hours to fill in this 1 page form.

Most people electronically file.

The majority of income tax forms are now filed via computer.   95 million of the 2008 forms were electronic.  Thats about 2/3 of the total.    One of the major benefits of computerized tax filing is that the computer program makes it 'easy' for you by guiding you through the process with simple questions on your filing.

My wife used to use software to do her forms so I asked her how long it took.   I asked her how many hours it took and she responded with "hours?"   She guessed it was "about 40 minutes" for her to do her 1040 form with computer software.   According to Turbotax "The average time to prepare a return using TurboTax is about 2 hours,"    Yes Turbotax obviously a biased source since they're trying to convince you to buy TurboTax software.   But honestly that 2 hour figure seems realistic and reasonable to me.  Even if you double it thats still less than 400 million hours spent by the electronic filers.

I think that the real number is closer to 1-2 billion

Lets say that 2/3 of the filers use electronic forms and spend 2 hours doing the form.   The other 1/3 spend an agonizing 8 hours to do their forms.   Combined that would be about 800 million hours to file forms.  If everyone spent 8 hours to sort out their shoe box of receipts then that would be another 1.1 billion hours.   I doubt most people spend half this amount of time.  Added up that would be 1.9 billion hours that people would spend.    If you add in 2.6 billion hours to account for time that accountants spend doing business tax forms then thats a total of 4.5 billion hours between individual and business taxes.   I still think this number is much higher than it probably would be in reality and its still only 3/4 of the 6.1 billion.  Of course this is just my rough estimation work. 

I think that 6 billion figure is numerical fiction.

How long does it take you to do your taxes?

January 10, 2011

FREE - online copy of "In the Trenches - Financial Survival During Times of Hardship"

In The Trenches: Financial Survival During Times of HardshipIn The Trenches is offering a free online copy of their book  "In The Trenches - Financial Survival During Times of Hardship".

You can follow the link to their blog to get to the free online version: 
Free Copy of In The Trenches - Financial Survival During Times Of Hardship

No strings attached, they have it posted on Goggle docs.

I have not read the book myself, just passing along a freebie.

Minimum Wage Rose in 7 States

 The article Minimum Wage Earners in 7 States Getting Raises  points out that Arizona, Colorado, Montana, Ohio, Oregon, Vermont and Washington all have minimum wages that are indexed to inflation and above the federal minimum.   Since they are indexed to inflation it is normal to get an annual raise to coincide with the inflation rate.   Florida, Missouri and Nevada also have rules about increasing their minimum wage based on inflation but those states are not getting increases this year.

 The article also says that about 647,000 people in those 7 states will get raises due to the increase in the minimum wage.   That sounds like a ton of people but given the employment figures for those states adds up to about 14.7M people it actually works out to around 4.5% of the population is earning the minimum in the 7 states.  That is a higher level than other states which makes sense.   Nationally about 3% of the population earns the minimum wage.   But if a higher minimum wage then it will cover a larger group of the lower income earners.

The new minimum wages for the states with increases are as follows:

Washington state will have the highest minimum wage at $8.67 an hour.

Oregon is $8.50
Arizona $7.35
Colorado $7.36
Montana $7.35
Vermont $8.15

Most states are fixed at the federal rate of $7.25

But the following states have rates higher than the federal but not indexed to inflation.  

Alaska $7.75
California $8
Connecticut $8.25
D.C. $8.25
Illinois $8.25
Maine $7.50
Massachusetts $8
Michigan $7.40
Nevada $8.25
New Mexico $7.50
Ohio $7.40
Rhode Island $7.40

January 9, 2011

10 Reasons Small Businesses Fail

An article from the New York Times carried by Yahoo titled Top 10 Reasons Small Businesses Fail
gives this list of 10 reasons:

1. The math just doesn't work.
2. Owners who cannot get out of their own way.
3. Out-of-control growth.
4. Poor accounting.
5. Lack of a cash cushion.
6. Operational mediocrity.
7. Operational inefficiencies.
8. Dysfunctional management.
9. The lack of a succession plan.
10. A declining market. 

The article goes into more depth on each point and elaborates on their meaning.   Its quite a good list if you ask me.  If you're thinking of starting a business or if you are already running one then I think it would be good to make sure you're not vulnerable to any of the items.

Here's my thoughts on them.

1 and 5 are basically business plan items.   You need to make sure you have a product people will buy and that your capital will last.   This kind of failure may start from day one and could be insurmountable no matter how much of a genius you are at handling customers or other facets of running the business.  

2,4,6,7,8  all seem like items that are basically flaws or weaknesses of the business operators themselves.   If you don't do a good job running the business then it may fail.   Some are more understandable like #7 "operational inefficiencies" which any business has to keep an eye on.  But others like #8 "dysfunctional management" really translate into failure by the people running the show.

#3 is a sign of your own success.   If you grow too fast you can fail.  You do a perfectly good job managing a small retail shop with 5 employees.  But if you then decide to expand to a regional empire with 25 locations and 125 employees you may realize you're not capable of handling that kind of thing and it may all collapse. 

9, 10 are items that seem more like things that even good businesses may be vulnerable.    You might do a wonderful job running a business for many decades and then end up failing due to one of these.   Small businesses in particular are often ran primarily by a single person.  When that person retires or otherwise leaves then thats a key transition.   A very successful business may fail eventually simply because the world changes.  Just look at the New York Times themselves.   They and other print newspapers are on the path to failure if current trends continue.  They need to adapt to the new media or they will fail.

I don't run a small business myself unless you want to count our rental properties as a business which it is in a way.

January 7, 2011

Best of blog posts for week of January 7th

Get Rich Slowly has a nice, long, detailed article on How to Take Control of Your Finances in 2011

DoughRoller answers What is IRS Tax Form 1099?

DoughRoller also informs us about  Dish Network and Your Credit Score–What You Should Know

And a third article from DoughRoller is Shouldn’t Life Insurance Companies All Be Bankrupt?

3 articles in a week from Dough Roller they were on a roll this week.  (sorry)

Pop Economics discusses their view on 2011′s job market: The separation of the haves and have nots

Double Your Money

Most people are eligible for a 401k plan at work.    Most 401k plans offer some sort of employer match to your contribution.   That 410k employer match is FREE money from your employer.    Employer matches often match 100% of your contribution up to a fixed limit.   That employer match is effectively doubling your money.  You won't find another guaranteed 50-100% return out there so the 401k employer match should be your #1 priority for retirement savings.  Unfortunately far too many people don't contribute to their 401k plan and miss out on this free employer matching money.

401k Participation Rates 

Overall roughly 2/3 of people with 401k plans participate in the plan.  The exact participation rates vary and go up and down over the years.     USA Today reported:   "Overall participation rates in 401(k) plans fell from 65% in 2009 to 60% this year,"   The participation rate numbers are a bit higher for people with employer matches but still not nearly 100%.

I found an older study  How Workers Use 401k Plans but it mostly has data from the 1990's. 

The study says that "For all workers, participation rates are higher when there is an employer match, 67 percent versus 60 percent."   So that means that from their data they found that there were 33% of people who did not participate in their 401k plan even though there was an employer match.
 A survey from Schwab found a bit higher participation rates.   They say: "Plan participation increases to 76 percent of all eligible employees when a 401(k) match is offered compared to 70 percent when no employer contribution is available,"    From their figures the 76% participation rate would mean 24% of people with a 401k match don't contribute.   A Fidelity report says that they found in 2007 that "The average employee participation rate for companies that offer a match is 63 percent. At companies that do not offer a match it is 57 percent."   That would mean 37% of people don't take advantage of a match offered.    Thats three different sources citing figures of 63%, 67% and 76% for the participation rate with employer match plans.  This tells us that there are anywhere from 24% to 37% of people eligible for employer matching 401k funds who are NOT participating in the 401k plan at all.

Thats a lot of people who are losing out on a lot of money.   We're talking tens of billions of dollars lost across the country.   For an individual family the difference can be like a 3-5% pay raise.    Typical employer match rates are in the 3% range.  The exact nature of the match varies but according to Fidelity about 35% of plans offer 100% match on the first 3% and another 14% offer 50% match on the first 6%.  

About 20-30% of Americans are leaving +3% of free income on the table by not utilizing their 401k employer match.

"But I NEED the money"
I'm assuming that many if not most people who don't participate in their 401k are not contributing because they feel they need that money to live on and pay the bills.  I understand if you are struggling and living paycheck to paycheck that it can feel impossible to save money for retirement.    But missing out on 50-100% return on your money is simply throwing out money.     You need money right?   Do you know a better way to turn $100 into $150 or $200 instantly?   Unless you've got a magical investment secret nobody else knows about then you should jump at a chance to have your employer match your funds.    This is the best way to save for retirement.   You have to somehow find a way to put something into your 401k to get that matching free money.   Even if you start with a very small amount its a start.   $20 a month today could grow to $50  a month next year and $100 a month the year after that.   I know its sometimes easier said than done and sometimes people are in a real tight spot.  If thats honestly you you then you have to do what is right to put food on the table.   But for most of us we can find a way to squeeze a few bucks out of our budget by simply giving up some luxuries, being more frugal or otherwise tracking and controlling our spending.

Plus keep in mind that the money you put in your 401k will often help reduce your tax bill.   If you're a single person making $45,000 with a standard deduction then you're paying 25% on every additional dollar in taxes.    That means that if you put $100 into your 401k then its only $75 less out of your paycheck.   Of course if you're in a lower 10-15% tax bracket then the tax impact is less.   But in any case the bite you feel out of your paycheck is less due to the tax benefits.

Even if you have to cash out the 401k later and pay the 10% early penalty you'll still come out ahead if you get a 50-100% match. 

Here's an example of that: Lets say you make $20,000 and get a 100% match on the first 3% of your pay.   If you put 3% of your pay into your 401k then your employer with match it with another 3%.   3% of $20,000 would be $600 so your $600 will be matched with $600 from your employer to give you $1200 total.   Now lets say you pull that $1200 early cause you are unemployed for an extended period.  You'll have to pay a 10% penalty on the withdrawal.   10% penalty on $1200 is $120.   Initially you put in $600 and you get $1,080 out after the penalty.  I'm not figuring taxes but that would be a wash since you'll either have to pay them now or later.

Roth IRA's aren't better

People LOVE Roth IRA's.   Thats understandable.   The Roth IRA is a great retirement vehicle. However Roth IRA's do not guarantee you free money like a 401k employer match.    Would you rather have $100 in a Roth IRA or $150 or $200 in a 401k? 

Now you might think that taxes make the Roth IRA win.   It is feasible that taxes could make a Roth IRA better.  However that is a very unusual scenario that would be based on paying virtually no taxes today and a fairly high tax rate tomorrow.   You'd have to go from pauper in your working years to a prince in retirement.  If your tax rate is 0% today then its almost a given that you won't be in a very high tax bracket in your retirement years.  If you're the exception to that then send me an email, I'd love to hear your story.   For the other 99.99% of us the Roth IRA is not going to come out ahead even with wacky up side down tax implications.

Think of it this way:  We can't tell what the future will bring but I'd rather have $200 in retirement today than $100.  A bird in the hand is better than 2 in the bush.   $200 today versus $100 is kinda like 2 birds in the hand versus one in the bush. 2 birds in the hand should be 4 times better than 1 in the bush.    Ok so if thats getting to smartsy clever then how about I just end with this :

$200 > $100   

Bottom Line:  If you are eligible for a 401k employer match then you should contribute to your 401k up to the point of the match.  If you don't then you're losing out on free money.

January 6, 2011

$5 Gas is Coming... Eventually....

Lately I seem to be noticing several mentions of "$5 gas" coming in our future.   This is one of the topics that has been batted around the personal finance blogosphere a little bit in the past week or two.

One article on FoxNews discusses the topic :   Former Oil Exec Predicts $5 a gallon Gas by 2012 Energy Shortages by Decades end  In the article the former exec of Shell oil John Hofmeister predicts that gas will cost $5 "in two years" and that we'll see gas stations run out of gas by 2018 or 2020 due to supply/demand being out of whack.   It seems all this talk of $5 gas comes from what John Hofmeister has said.  

Here's a Youtube video from 3 years ago in 2007 where the same executive saying that there "is plenty of oil and [natural] gas out there".    But then he follows that with : "if we had public policy to support" getting it.   He talks about how the policy only allows for exploration of oil in 15% of the "outer continental shelf".  Now a few years later the same guy is scaring us all with predictions of $5 gasoline.   And sure enough the news article also talks about the topic of deep water drilling.  Basically what I'm seeing is oil executives telling us that $5 gas is coming and then using that as a reason to argue for more offshore drilling.   Maybe I'm just a little cynical about what oil executives tell me.   Coincidentally John Hofmeister also has a book Why We Hate the Oil Companies which I'm sure covers more of his views and details of how/why gas might hit $5 and other interesting insights on the industry.   I wonder if its coming out in paperback soon?    Now that I've been all cynical and raised doubts about the motivations of a oil exec. I should say that I really have no reason to doubt what John says.  As far as I know he's giving perfectly honest and accurate opinions about the future of oil given his experiences and now that he is not employed by Shell I have less reason to question his motives.  (other than maybe promoting his book, but ya can't blame a guy for that)  

In any case I think that $5 gas is coming sooner or later.   If we have gas at $3 today and it goes up 5% a year then it will be just about $5 around 10 years from now.    So $5 gas is pretty likely within a decade.   Could it hit $5 within 1-2 years?   Sure it could.   It was well over $4 just a couple years ago.   It really shouldn't surprise anyone that gas might hit $5.   But you know what it could also drop to $2 a gallon or lower.    Just in case you have a short memory here's a graph from Gasbuddy.com showing gas over the past few years and note how it dropped from over $4 to under $2 in less than 6 months back in 2008.

Predictions of $5 gas are not new.   $5 gas by Labor day was written 2.5 years ago.     In 2005 they thought that hurricane Rita might cause gas to hit $5.  In some places it wasn't very hard to 'predict' $5 gas back in 2007 because people were being charged $5 a gallon.   Of course that was for premium gas and only at one over priced station as far as I can tell.   I forget did anyone say if we're talking about regular or premium and did they explicitly say national average price?   I'm sure they are just talking national averages for regular gas. Maybe.

Back in 1998 the Economist published the article The Next Shock? which predicted "We may be heading for $5" ... oh wait, oops they were talking about the price of a barrel of oil.   Back then oil had fallen to just over $10 a barrel and the experts were predicting how it could go even lower.  One of those experts was from Shell : "The chairman of Royal Dutch/Shell, Mark Moody-Stuart, three months ago unveiled a five-year plan that assumed a price of $14 a barrel."    They weren't just predicting it they were making plans for it.  But Mark wasn't very close.   Oil quickly shot up and doubled within a couple years and didn't go under $20 in any time during that 5 year period.  But I'm sure if they keep making guesses they'll eventually get it right.   A broken clock is right at least twice a day.

$5 gas will come sooner or later.  When that will happen is anyone's guess.

January 5, 2011

Securities Investor Protection Corporation, SIPC

The Securities Investor Protection Corporation, or SIPC, is an insurance program for investment accounts.  The SIPC is kinda similar to the FDIC in that it is created by the government in order to help protect individual peoples finances.   The SIPC is however very different than the FDIC in how it functions.   The SIPC insures investment accounts like stock brokerage accounts but theres lots of limitations and details about the insurance..   It doesn't guarantee the performance of your investments, but it just protects your ownership of your investments in case the brokerage firm that holds them goes under.

SIPC covers cash and securities held in a brokerage firm.   If a brokerage firm were to fail financially then SIPC will step in to help salvage the assets and ensure that individual investors don't lose their assets.
 The SIPC insures up to $500,000 in assets including $250,000 in cash per individual.    

The SIPC helps recover missing assets.    If a brokerage fails and during its bankruptcy some of the assets are lost or otherwise missing then that is what the SIPC helps recover.

What the SIPC doesn't do
It does NOT protect your stocks or other investments from loss of value due to market losses.  So for example if you bought Blockbuster stock before they went bankrupt then that is your problem and the SIPC won't help.  The SIPC does NOT protect you if you are sold worthless investments.  SIPC does NOT protect futures contracts, currency,  investments in limited partnership or unregistered annuities.    When they say they don't cover currency I believe that means people who are dealing in trading foreign currencies.

SIPC doesn't really protect you from fraud in general.  If you buy 10,000 shares in SuperGoodStock company from TonySoprano Brokerage, LLC firm and then find out when you try to sell your shares that SuperGoodStock is fictional and not worth the paper its written on and TonySoprano Brokerage's phone # is disconnected and their offices are vacant with a for lease sign then I don't think the SIPC can help you there.  

How it works

First if a brokerage fails the SIPC will step in to help sort things out.    You will get back ALL the equity assets that are registered in your name.   After that the brokerage firms remaining assets are pooled and then divided up to pay off all customer claims.  If there is a short fall of the assets then the SIPC will help make sure you get at least $500,000 of your assets including up to $250,000 of cash assets.

The $500,000 limit does not mean that you automatically lose anything over $500,000 that you have in a brokerage.   For example if you have $2 million in assets that are all in mutual funds registered in your name then you should get all $2m in those assets back since they are legally registered in your name.  If you have $2 million in cash then you may only get $250,000 back since that is the limit of cash the SIPC insures.   Cash is cash so it might get 'lost' during  the bankruptcy of a brokerage.

Making sure a brokerage is insured

You definitely want to only work with brokerage firms that are covered by SIPC.    You can look up members of SIPC at the SIPC website via their member database.

Disclaimer:  I'm not an expert on this stuff and I'm only interpreting what I read on SIPC.org and other websites.  If your brokerage firm goes bankrupt then you're best off contacting SIPC to file a claim and find out exactly what you may or may not be covered for.

January 4, 2011

Updown Performance : 2010 Year End Summary

Practice invest

I play with stocks using an Updown account.   Its part learning tool, part practice arena and mostly just a game.   This is my annual summary of my results in Updown for the year 2010.

As I discussed in my recent December summary for Updown, in 2010 my Updown portfolio was up about 20%. 
The S&P 500 was up about 13% for the year.   In 2010 I beat the index by about 7%.

The previous year in 2009 the S&P beat my UPDown results.   I was up 22% in update and the S&P was up 26% in 2009.   So the S&P 500 beat me by 4% for the year of 2009.   In the two year combined period covering 2009 and 2010 I'm up about 4% more than the S&P 500.    I started Updown in March 2008 and since then I'm up 24.9% while the S&P 500 is still down -4.3%.

Here is the summary of my performance in Updown versus the S&P 500 for various periods:

Updown S&P 500
2009 22% 26%
2010 20% 13%
2 year 46% 42%
Most of 2008 -15% -33%
Life 24.9% -4.3%

When I say "most of 2008" above that is the period from March 2008 to Jan 1, 2009 covering the period of 2008 after I first started Updown.    The "Life" period is from March 2008 to Jan  1,  2011

Here is the yearly performances shown graphically.   2008 year is just the 9 months at the end of 2008 post March.

And this is what the dollar balance would look like over time starting with the initial $1,000,000 of pretend money you get in Updown :

Updown S&P 500
Jan-11  $     1,249,000  $        957,000
Jan-10  $     1,040,833  $        846,903
Jan-09  $        853,142  $        672,145
Mar-08  $     1,000,000  $     1,000,000

And then graphically this is how $1,000,000 would have performed in my Updown portfolio versus the S&P 500 over time from March 2008 onward:

For the last two years I'm doing OK but not great.   I am ahead of the S&P overall but they beat me one year and I beat them one year.   I'm only ahead by a few % points over the past two years.    Given the work and risk involved I don't think its worth it to beat an index by 4% over two years when the market is up over 40% in that time.   But I did a lot better than the index in 2008 and my overall returns are much better off because of it.  I'd certainly rather have $1.2M than $950k so in that respect I'm clearly beating the index.

Dividends Yielded ~3.7%

Dividends contributed about $39,582 to the portfolio for the year.  That is about a 3.7% yield on my portfolio for the year as a whole.  

Remember that this is not real money so it shouldn't be thought of as equivalent to a real portfolio.   There are many reasons that my results in Updown differ from what I'd expect to see in real life. 

Updown is pretend money and I treat it that way.   I am not very careful with my investments in Updown.   Since theres no real risk with the money I don't worry or take too much care to make the right investments.   This is not to say I don't try to make money with Updown.   I do try to make money for nothing more than the fun of having a higher 'high score' in the game.   But if I'm going to gamble with pretend money my risk tolerance and attention to detail when performing analysis is not the same as if I were investing real money.   This factor may both hold me back and improve my results.  On one hand since its a game I might make purchases on a whim that aren't that thought out and then not worry about them too much.  You might expect that to lead to poorer results than if I was more careful, diligent and serious in my investments like I would be if I had invested real money.   On the other hand since its a game I'm not too worried about taking higher risks and generally if you take higher risks and bet right then your returns will be higher.   So if I'm less risk tolerant and make some good choices then I could make a lot more money in Updown based on being more aggressive with the investments there.

I use Updown to try out strategies.   This is part of the reason I'm using Updown in the first place.   Updown is a game and a tool for me.   As a tool I use it to try out an investment strategy and see how it might work.  Some of these strategies are flops. 

Lots of unused cash.  My Updown portfolio right now has over $500k in cash and only around $700k in investments.   That is a lot of cash that is sitting idle and not making a return.  If I had closer to 100% of my Updown assets invested in equities then I might have achieved a return closer to 30-40% rather than the 20% rate for the year.

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