I Bought What I Knew

First a personal story: back in 1988, I was working in the customer service department for a company that made electrical products.  One day the Vice President of Sales called a special meeting.  “We need to change the way we do business”, he said.  “We believe that one of our customers will grow exponentially in the coming years and we need to be ready for this growth.”  The customer he was talking about was Home Depot.  I went back to my desk and thought that if our 100 year-old company was going to change the way we do business for Home Depot, then they must really think this is an amazing company… so I bought some stock.
This turned out to be one of the best investments of my life.  I carefully watched their purchase orders float in every day, while they opened new stores at a groundbreaking pace… I was literally watching Home Depot burgeon every day from my desk at work.  Not only did I buy stock once, I signed up for their dividend reinvestment plan and direct stock purchase plan and continued to buy every month for years.

Now I don’t recommend you buy a company’s stock just because you like the company.  This is just a starting point to identify companies you want to investigate further.

Peter Lynch

Buying what you know is what made Peter Lynch one of the most successful mutual fund managers in history.  He ran Fidelity’s Magellan Fund from 1977 until his resignation in 1990, growing it from $18 million to $14 billion, using the buy what you know technique.

His wife and daughter shopped at The Limited before anyone on Wall Street even heard of it, allowing Lynch to make a killing.  He investigated Apple Computer because his kids owned one, and researched Pier One because his wife shopped there often.  Taco Bell appeared on his radar after he enjoyed a Burrito Supreme (hold the sour cream), and he found Volvo because his family and friends owned their cars and loved them.

The Book

After retiring from Fidelity, Lynch decided to share his investing techniques with the world through his first book One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. This was the first book on investing I ever bought, and in my opinion it is still the best.  Lynch focuses on the power of common knowledge and how to take advantage of what you already know.  He believes you don’t have to be a Wall Street analyst to uncover great investment opportunities, and in fact you may actually have an advantage because of it.  If you want a great book on investing, this is it.  Additionally, Lynch’s second book,  Beating the Street, is amazing as well.

If you want to be a successful investor, you need to own these books. And you need to start paying attention to where you shop, what you like and what you see.

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First comes love, then comes marriage, then comes… sharing finances.  It’s no longer MY money, it’s now OUR money.  You said “I do”, and now you need to share your dough.

When I got married, the idea of “shared” money was foreign to me.  I’ve never had to share with anyone before, and honestly it scared me.  The first few months my new bride and I decided to share money, we watched every penny the other one spent and it was driving us crazy, and driving us apart.

With a few changes, our financial life is in better shape than ever.  Below are the steps we took to get our shared financial life on course.  You may feel that the initial steps are a little much to do.  But after they are completed, things will be much easier.

The Secret

This whole process is based on one simple premise: shared money and separate money.  It’s the only way it will work.  Our shared money pays bills, covers dining out and groceries and other household necessities and sundries.  Some also goes to savings and to our vacation fund.  Whenever we want to buy something for ourselves we use our own money, and our spouse has no say.

Now link these credit cards to your joint checking account, so all payments come from the shared account.  This is the card you use when you go out for dim sum or buy those new throw pillows your wife couldn’t live without. And, when out to dinner with friends, you can pay with one card– and never have to be that couple who, after years of sharing floss and keys, still splits the dinner bill.

Individual Checking Accounts

Since you now have a joint checking account for your shared money, you should each have individual checking accounts for your separate money.  Most banks allow you to link the individual checking accounts to the joint account.  This makes moving money back and forth between accounts easier.  We’ll talk about that a little later.

Individual Credit Cards

You knew this was coming.  This is not mandatory.  But if you or your spouse need a credit card, you should each have your own.  You should be the sole owner of this card.  Your spouse should have nothing to do with it.  As with all credit cards, I would keep the maximum credit limit low.  Link your individual credit cards to the appropriate individual checking account.

Here’s a little chart to show the relationships between the accounts:

The Plan

On the first of every month we move some money from our joint checking account into our individual personal checking accounts.  This is our personal money, and It can be $100, $300, $500 or $1000 each; the amount will be different for each family.  This is your personal money and your spouse’s personal money for the month.   This is really important.  Though you are married, each of you now has some financial independence.  You each have a set amount to spend each month.  If you don’t spend it all, then it’s yours to keep.  We even have our own ING Direct Savings accounts.  Every month I move a little bit of my personal money to my personal ING account.  I want to buy a new iPod, so this is where it will come from.

If you need to spend more personal money than what you have in your personal account, that’s where the personal credit cards come in.  Perhaps one of you wants to buy a large ticket item and you don’t have the money in your personal checking account, then you can put this purchase on your personal card.  This becomes your responsibility to repay, not your partner’s.

This is just one example of a financial system for a married couple.  If you have another system I’d love to hear about it.  Please leave your comments below.

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But here’s the catch: you need to pay your bills on time, and in full. Credit card companies are giving you free money because they are banking on you not paying your bills on time. If you are late or delinquent with payments then you will pay a high interest rate on the balance. Then the credit card companies win, and your free money plan has actually cost you.

If you can play by the rules, and only buy what you can afford, then you will be rewarded. Many of the credit cards I’ve seen offer 1% back on most purchases, and 5% back on groceries, drug stores and gas… that can really add up. If you spend $1,000 a month on groceries, you would get back $600 a year! Another $200 a month in gas gives you $120 back. You can see how this could really add up.

If you rather not have the cash, then join a points program. You can use the points to buy that sought after flat screen TV or dream vacation to Tahiti. American Express probably has the most well-respected and trusted points program since the points never expire. My wife and I paid for most of our honeymoon using American Express points.

Here’s a little secret: many business credit cards give you back more money and more points than personal cards. If you have a business, even a home based one, you may want to apply for a business credit card and use it for personal charges. I won’t tell.

Here’s a few things I get paid for on a regular basis, just for using my credit cards:

• Groceries
• Dining
• Drugstore items
• Gas
• Doctor’s office
• Public Transportation
• All Online purchases
• Charity donations
• Netflix
• Cell Phone bill

Remember, don’t go crazy buying things you can’t afford just to get some cash back. But if you need to buy something, and you can afford it, why not get paid in the process? They say it’s better to give than receive, but tis the season to do a little bit of both.  If you need a new Cash-Back Credit Card, visit the Fiscal Sanity Credit Card search.

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Slow and steady wins the race, and Index Funds are indeed a slow and steady way to make money in the stock market. If you want a get rich quick scheme, read no further. Warren Buffett, the most successful investor in history, has said it over and over again: “The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time”. There are three key phrases here: “index fund”, “low-cost” and “buying regularly over time”.

What’s an Index Fund?

Before we dive into Index Funds, let’s discuss their counterpart: the Managed Fund. These are the original Mutual Funds. Typically you are paying a manager or managers to pick stocks for you. They do research, make phone calls and visit companies they want to invest in. This amount of work can cost you some bucks. Most managed funds charge at least 1% for this service, with some moving closer to 3%. So, for every $100 you invest you pay $1-$3 dollars, for every $1000 it would be $10-$30. This is not a small amount, and will add up over years of investing. It would be worth it if the returns were great, but usually they are not.

Index Funds are like regular mutual funds, except they follow a specific index. The most popular index is the S&P 500, which is an index of the 500 largest American stocks. As you probably guessed, there really isn’t a lot of work involved in determining this list. It’s pretty automated. The result is that you pay a reduced fee. S&P 500 Index funds typically charge less than .5%. The most popular of the group is Vanguard Funds which charges a fee of .15%; that’s only 15 cents for every $100 you invest!

A common mistake is that if you’re paying more, you must be getting more. Managed funds must perform better than index funds. The truth is that over 90% of managed funds UNDER perform their target benchmark over the long haul. And their target benchmark is usually an Index Fund.

Vanguard Funds founder, John C. Bogle, was really the guy to bring index funds to the masses. For his undergraduate thesis at Princeton, Bogle found that three out of four fund managers could not outperform a passively held basket of the 500 largest US stocks. They may end up picking specific stocks that do as well, but paying high expenses associated with their research and taxes incurred during active trading, just resulted in their funds under performing the S&P 500. Bogle is the king of index funds. He built the well respected Vanguard Funds on that philosophy and even wrote a great book about common sense investing which highlighted index funds.

Low-Cost is the key

The secret to successful index fund investing is low expense. Why pay more for a list of companies that require no research? Get the prospectus or visit Google Finance or Yahoo Finance for the fund you want to invest in and check the expense ratio. You should aim for .5% or less. Other things to look out for are the minimum investment and account service fee. For example, to get Vanguard’s low expense ratio of .15%, you need to make a minimum investment of $3,000 in the fund. An annual $20 fee is tacked on to your account if it’s less than $10,000, unless you sign up for e-delivery of statements and some other bells and whistles. So research the fund expenses before you send them any money.

Buy regularly over time, because you can’t time the market

Nobody can time the stock market. Warren Buffett has never called a market high or a market low, so seriously, what chance do you have? By buying regularly over time, you adhere to the old standby of dollar cost averaging, which works very well.

Image via Wikipedia

So, you still aren’t convinced that index funds are a great choice for you? Well, maybe this will convince you. Warren Buffet is so sure that the S&P 500 will outperform an actively managed fund over the long term that he bet over $300,000 that they would: “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” If I can’t convince you, hopefully Buffet can.

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With the holiday season approaching you may be tempted to buy a gift card for a friend or loved one.  However, you need to choose carefully when deciding from where to purchase.  This month Circuit City filed for bankruptcy and can decline to accept their own gift cards at any moment.

Back in February 19, 2008, gift card holders for Sharper Image got a wake up call. The company filed for bankruptcy and temporarily suspended acceptance of gift cards and merchandise certificates. Weeks later, they obtained court approval to resume taking cards and certificates under certain conditions. Then on May 30, all that ended when the retailer announced that it was closing its stores and selling its assets to a joint venture firm. Sharper Image wrote a press release and recommended that card and certificate holders file a proof of claim form with the bankruptcy court. Are they insane!?!

With the current economic crisis, many retailers are filing for bankruptcy or even worse, just going out of business. If you buy a gift certificate from one of these retailers and they close up after the holidays, those cards could be obsolete. There are even rumors that stores planning to close after Christmas are still selling the cards through the holidays even though the cards will be worthless January 1. Currently there is no law preventing them from doing this.

Keep in mind that just because a company is filing for bankruptcy doesn’t mean that your gift cards will be valueless. Though Federal Laws allow companies to stop taking gift cards after they file for Chapter 11 bankruptcy protection, not all businesses do so. Some companies may continue to accept cards while they reorganize, while others may temporarily suspend acceptance until a later date. However, better safe than sorry.

We recommend you buy gift cards from companies that are in a good position to weather this economic storm. Wal-Mart, Target and Amazon.com, aren’t going anywhere, and your loved ones could buy almost anything from those stores. Another option is the American Express gift card, which is accepted wherever American Express cards are though some restrictions do apply.

And, if you currently hold a gift card, use it! I’m on my way to Circuit City right now before it’s too late.

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Two companies are leading this field; Prosper and Lending Club. They are both marketplaces for credit that enable people to lend money to other people in a safe, efficient manner. They’re internet companies that are essentially a leap back to a time when people formed credit communities to help themselves live better lives and earn a fair return on their money.

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Both enable borrowers to request loans by posting listings indicating the amount they want to borrow and the maximum interest rate they wish to pay. Lenders, who are just everyday people like you and me, search for and select these listings based on the borrower’s credit history, debt profile, and other factors. Lenders bid on listings by indicating a minimum rate they are willing to accept. When a loan is matched between borrower and lender, Prosper and Lending Club handle all of the tasks needed for payment and collection of the loan.

You create an account, type in how much you want to borrow, and then have people bid on loaning you money. You can even invite your friends and family to bid on your loan.

So, if you borrow $5,000, you may end up having 100 different people loaning you $50 each. These companies handle all the bookkeeping, so you’re only paying back one loan, and they divide it up amongst your lenders.

This is not free money!  Both report all payment activity to credit reporting agencies, so this is an excellent way to establish or rebuild your credit score. But remember, delinquencies are also reported to credit reporting agencies, so bad performance will affect your credit score negatively.

UPDATE: Prosper is currently not accepting new applications, so Fiscal Sanity recommends using Lending Club.

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With a daughter on the way, my wife and I decided it was time to get life insurance.  If you have ever looked into life insurance, your head was probably spinning.  This is an industry with lots of choices, and lots of salespeople.  I will offer a cursory overview of all the different types of life insurance here.  And I will focus on Term Life Insurance and why I chose it for my family.

Why Life Insurance?

Life insurance should not be used to make your family inordinately wealthy in the case of your death.  It should be used to:

• finish paying your home mortgage or car loan.
• pay funeral costs or medical bills that might have incurred if you were sick.
• pay for child care so your spouse can continue to work.
• pay for your child’s education.

In a nutshell, Life Insurance should be used to protect your family in the event that you, your spouse, or both of you, pass on.

The Different Types of Life Insurance

I did a lot of research before settling on a term life insurance policy.  I asked a lot of questions, and met with a few financial advisers, to make sure I was doing the right thing for my family.  There are a number of different types of life insurance you can purchase: Term, Whole, Variable, Universal and Universal Variable… the choices can actually drive you insane.

But if you divide them into three groups, it makes it easier to understand:

Term life: is pure life insurance with no cash value account.  It is also the simplest and least expensive type because your premiums are the same for the life of the policy.  This type of policy only has one function: to pay a specific lump sum, to whomever you’ve designated, upon your death. The policy limit and death benefit are the same; a 20 year $500,000 policy pays a $500,000 death benefit for the next 20 years.  If the insured passes away one day after the policy is activated, or anytime within the length of that policy (eg 20 years for a 20 year policy), the death benefit is the same.

Whole Life: similar to term, but you purchase the policy to cover your “whole life” not just a set period, and your premiums also remain the same throughout the life of the policy.  However, unlike Term, this is not pure life insurance; the company will invest a portion of your premiums. Some of them share investment proceeds with you in the form of a dividend or will offer you a relatively low guaranteed rate of return.

Variable, Universal and Universal Variable: provide both a death benefit and a cash value account; that’s why they are sometimes called “cash value policies”. They are more expensive than Term Life, because they fund a savings account in addition to buying insurance.

Which should I choose?

Well, ultimately that is up to you.  Do your research, search the internet for more information and ask some questions.  But I will tell you what I chose for my family and why:

First I decided something important: I want to keep my insurance and investments separate. The other types of insurance all have an investment portion to the policy.  Once that decision was made my choice was clear: A 20 Year Term Life Insurance policy for me, and a 30 policy for my wife.

Here are my thoughts: I want to protect my family’s income until my retirement, and until my child becomes an adult.  I’m in my early 40’s, and my wife is in her early 30’s.  The policies we took out will protect our family until our early 60’s.  By then we will have built up other savings and investments preparing for our retirement.  These savings will be available to our family upon our death.  Even our IRA can be converted to an Inherited IRA, and become immediately available to our offspring if they wish.

What Company Should I Choose?

You don’t have to go to the local insurance company anymore.  The internet makes it easy for you to get quotes from companies around the country.  I would start with InsureMe.com and Netquote.com.  Get as many quotes as you can, find a financially stable company, and choose the one with the lowest rate.  Good Luck. As scary as it can be to think about all this, it’s scarier to ignore it.

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If there is one sure rule about Wall Street, it’s that they follow the herd. And it’s hard to make money when you’re just following other people’s investment path. And when the herd starts acting irrationally, driven by fear and not economic reality, it’s time to stand back and look at a contrarian strategy. Keep in mind that the market may not recover for another year. Use that information to your advantage by dollar cost averaging your way into any new positions over the span of 9 to 12 months (for e.g, if I wanted to buy $2400 of stock X, I would buy $200 per month over the next 12 months). This will help ensure that you buy at a good price if the market continues to fall.

The time to buy is now, when stocks are cheap and when the inevitable rebound in prices will accelerate your return. If you are dollar cost averaging, congratulations, you are buying more stocks per month today than before and this can only add to your return. But it might still be worth it to add to, or take new positions in, your portfolio to help boost your return.

When I look at the stock market right now, I see a fire sale. Everything has been marked down 50 to 80%. And while some stocks deserve this kind of correction in price, others do not. But where to find the gems in the rubble?

I see three strategies to picking winners.

1. Buy a cheap index fund. Don’t fool yourself. The stock market is going to rebound and make up all its losses. And historically, the bull run after a severe bear market shows steady returns annually until previous peaks have been reached. Buying an index fund is a safe way in investing in the overall market and participating in the recovery that is sure to come.
2. Follow what your favorite stock market guru is doing. For example, the great Warren Buffet just purchased Goldman Sachs and General Electric, investing more than 8 Billion dollars into these two companies. GE’s dividend right now is around 6% further boosting returns if you reinvest the dividends.
3. Invest more in your favorite fund riding your fund manager’s coattails to help guide you to higher returns. The best strategy in picking a mutual fund is to pick the manager running the mutual fund. In times like these, it makes sense to double down your monthly investment on your trusted mutual fund maven. (You did pick a fund because you trusted, liked and agreed with the investment strategy of the manager, right?)

Good luck and Many Happy Returns!

Disclaimer: Any stocks, funds or gurus mentioned in this article are not recommendations. They are opinions and are solely this author’s. Please use due caution and do your own research before investing your money. You are ultimately responsible for your own wealth.

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The truth is: the stock market goes up and down in cycles.  These cycles usually last 5-10 years.   Take a look at the chart below.

This is the 10 year chart for the Vanguard S&P 500 Index Fund (VFINX), which represents the 500 largest companies in the United States.  As you can see, the price in Oct 1998 is similar to the price in Oct 2008.

So, if you invested $1000 in Oct 1998, you saw your money grow substantially in 2000, then you saw it drop again in 2002, rise again in 2007, and then drop again in 2008.  What a roller coaster!

If you invested one time in Oct 1998 and just sat on the money for 10 years, you pretty much broke even over this span.  Not a very good return on your money.

But, if you have been investing in your retirement plan regularly, then you’ve been dollar cost averaging.  You bought shares at the lows in 1998 and 2002, and at the highs in 2000 and 2007, and everything in between. Depending on your timing, you may have even made some money.

Here’s the scoop:

1. If you’re nearing retirement you need to remember that you probably won’t need all your retirement money when you retire.  The best strategy is to slowly withdraw the money every month or quarter over your many years of retirement.  By that time the stock market should recover, because it usually fluctuates in 5-10 year cycles.
2. You may want to consider increasing your contributions to your 401k plan.  That’s right– increase!  The stock market is on sale, so why not take advantage?

Either way, just remember, you don’t lose your money until you sell.

I am interested to know what you’re doing with your retirement account.  Please leave a comment below.

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My wife and I recently found out we were pregnant with our first child.  After the initial shock and excitement eased a bit, I realized the new addition to the family came with new fiscal challenges. Perhaps the most pressing one given the rising cost of education: How are we going to afford college?  After some research we came up with a great plan that also offered us some “free” money for our child’s education.  The whole plan revolves around opening a 529 College Savings Plan.

What is a 529 College Savings Plan?

A 529 college savings plan is a state-sponsored, tax deferred savings plan used for your child’s education.  The important part here is tax deferred.  That means you never pay taxes on the money you put in the 529, and any interest you earn on it, as long as it’s used for your child’s college education.  The 529 helps pay for tuition, books, housing and more.

Your child does not have to be 18 to use this money.  If s/he decides to defer college, this money can be used whenever and wherever your child chooses, as long as it is for educational purposes.  You may leave the money in the account in the event that your child decides to attend college at a later date. You may also name another eligible family member as beneficiary (you must establish a new account and then transfer the funds) on the account and use the 529 assets to pay for that person’s education. If no eligible family members can be named beneficiary, then you may choose to close the account and earnings will be subject to federal income tax and an additional 10% federal income tax, as well as state and local income taxes.

Every state sponsors a 529 plan, but some are better than others, so you need to do your research.  However, we recommend the New York State 529 plan for almost everyone, even if you don’t live in NY State.  The NY plan is very flexible and you can get some free money… yes, free money!  You can then link the NY State plan to Vanguard Mutual Funds, one of the most respected investment companies in the world, and a Fiscal Sanity favorite.  Your Vanguard fund can invest in mutual funds to earn you even more.  Additionally, if you are a NY State resident you will receive a tax break on the money you contribute.

Free money for your 529 Plan with Upromise

Upromise.com partners with hundreds of online retailers that will contribute money to your 529 plan every time you shop.  That’s right– the 529 plan is linked to your Upromise account and you can start receiving free money… yes, free.  Just shop at any participating online retailer and they will credit you back a percentage of your purchase.  Now we’re not talking second rate retailers.  Some of the largest online stores participate. Here is a short list of some websites with their percentages back at the time of this writing:

• Zappos: 5%
• Circuit City: 2%
• Barnes & Noble: 3%
• Hotels.com: 3%
• 1-800-Contacts: 3%
• Best Buy:2%
• Drugstore.com: 5%
• GNC.com 8%
• Home Depot: 2%
• Kmart: 2%
• Magazines.com: 25%
  • One of my favorites.  We buy our magazines here and get back 25%!!
• Office Depot: 2%
• Proflowers: 10%
• Sears: 2%
• Sports Authority: 4%
• The Body Shop: 4%
• Container Store: 3%
• Netflix: $12
• Vitamin World: 8%
• Walmart.com: 1%
• Zazzle: 8%

Buy flowers for your wife and receive 10% back from Proflowers!  Get healthy and buy vitamins from GNC or Vitamin World and get back 8%!  Sign up for Netflix and receive $12!

Getting started with Upromise

The earlier the better when saving for your child’s future.  Getting started with Upromise is easy and free.  You just sign up and register your credit cards:

1. Click here to sign up for Upromise – it’s absolutely free.
2. Register your credit cards so they are linked to your account.
3. Shop at participating retailers, restaurants and online stores.
4. If you sign up for the New York State 529 plan link it to your account and invest your money with Vanguard Mutual Funds.

In addition to the free money you receive from Upromise partners, you can (and should) contribute a set amount of money to your 529 plan.  Upromise makes it easy to set up automatic deductions from your checking account to your 529 plan.

Once you set up your Upromise account, please come back here and leave some comments.  We would love to know what you think about this service.

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Well, if you listen to the world’s greatest investor, Warren Buffett,  you would be buying.  The market is essentially on sale.  With stocks and funds plummeting, now is the time to buy.  Wouldn’t you rather run to your grocery store during a sale?

If you already have money in the market, now is probably not the best time to sell.  The secret to success in the stock market is buy low and sell high.  Selling now would be selling low.  But don’t fret.  The world  economy will grow.  It always does.  And so will your investments.

After the stock market crash of 1987, the market experienced a remarkable rebound.  As you can see from the chart below, by 1990, the Dow Jones Industrials was setting new highs.

So how do you get into the market the sane way?

Well, first let’s cover a very important point: You will never be able to time the market.  The chances of you buying at the lowest point and selling at the highest point are very, very low.  But you can buy “near” the low and sell “near” the high.

If you believe the market is near its low point then you should start dollar cost averaging your way into the market.  Take the amount of money you want to invest and divide it by six.  Then invest that about every months for six months.  For example, if you have $6000 to put into the market. Put $1000 in every month for six months.  If the market goes down, you’ll buy more shares for your $1000.  If it goes up, you’ll make more on your previous investments.

If you’re not sure what to buy, consider an S&P 500 Index Fund.  You will own shares of the 500 largest companies in the US.

Please use the comment form below to let us know what you think.

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Feel free to drop us a note if you have any questions or comments.

The Fiscal Sanity Team

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Most people deposit their paycheck into a local Savings or Checking Account. Whatever money is left over after paying bills, sits in the account and grows at a snails pace thanks to the low interest rate most banks provide. These accounts were opened at a local branch, because they thought it would be the most convenient way to do business with a bank. Well, the internet has changed all that.

Thanks to technology, internet savings accounts are opening up and providing you with interest rates that are double or even triple your local bank rates. Additionally, most of them don’t have the ridiculous minimums that so-called high-interest Money Market accounts or CD’s have. These banks are able to provide you with higher interest, because the internet has lowered their cost of doing business, and they’re passing that savings on to you. For these accounts there are no tellers to pay, no brick-and-mortar buildings, just quick and easy access to your internet saving account 24/7, and they’re FDIC insured.

So how does it work? It’s really quite simple. You open an account with one of these banks, and you electronically link your regular checking account to it. That’s it! When you want to transfer money between accounts, you visit the internet savings account site, and fill out an easy transfer form. Usually within five business days your money has been transfered.

Most of these banks even offer automatic savings plans. Here at Fiscal Sanity, we believe in paying yourself first, and these plans allow you to do that, automatically. Just go to the online transfer form and setup an automatic deposit of $100 a month to your new account. You’ll be surprised how fast it adds up.

The first bank to do this was ING, with their INGdirect Plan However, there are plenty of banks offering this service. With a little effort you can be on your way to big savings!

Check out these banks:

• Captial One
• Citi Direct
• Emigrant Direct
• E*Trade
• FNBOdirect
• HSBCdirect
• INGdirect

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Over the years I’ve read many articles explaining the benefits of DSPP’s, but none of them mentioned the most important issue. The investors arch enemy: fees. Though buying stock direct from a company sounds like a great idea, if you’re not investing thousands of dollars per stock each month, the fees may kill your return.

There are however, many benefits to DSPP plans:

• Some plans, like Best Buy (BBY), let you buy your first share directly from them.
• You can build your ownership over time by Dollar Cost Averaging and automatically purchase shares every month.
• Reinvest your dividends automatically and take advantage of that compounding magic.

Insane Fee Plans

To illustrate how fees can hurt a DSPP, let’s use Borders Group (BGP) as an example. To join the plan, you need to have already bought at least one share from your broker or invest a minimum of $500 directly to the DSPP. To get around the $500 minimum, you can commit to sign up for an automatic investment plan of at least $50 a month. Let’s look at both DSPP options:

1. Buy $500 of stock: Fees for the Borders DSPP are an initial setup fee of $15, and a purchase processing fee of .03 per share. At the current price of $22, the total fees would be $15.68 ($15 setup + .68 in per share fees). That’s more then the $7 a discount broker like Scottrade charges.
2. Automatic investment plan of $50 for 10 months: You would pay the same setup fee and processing fee. Additionally, Borders will charge you $2.50 every time you buy stock, which in this case is every month. If the price stayed around $22 for the next 10 months you would pay 17.57 ($15 setup + .07 in per share fees + 2.50 per buy) for the first month, and $2.57 every month after. That means your $50 investment is only buying $47.43 worth of stock. Of course, you can invest $52.57 a month to make up for the fees, but that’s just more money out of your pocket. $2.57 on a $50 investment equals a 5% fee. That means your investment needs to grow 5% to break even!

Maybe you want to invest more than $50 a month in Borders. At $100 a month the fee is $2.82 or 2.82% (you’re paying .07 a share, $100 buys you 4.55 shares). This equates to more than double the average mutual fund, and your $100 is buying only $97.18 worth of stock. $150 a month costs you $2.98 or 1.98%, still more than a solid mutual fund. And a monthly investment of $200, will cost you $3.13 or 1.56%, which is still a high expense ratio.

No Fee Plans

Now, let’s take a look at a no fee plan like ExxonMobil (XOM). To join their DSPP, you need to have already bought at least one share from your broker, invest a minimum of $250 directly to the DSPP, or commit to an automatic monthly investment of $50 a month for at least 5 months. Let’s look at both of the DSPP options:

1. Buy $250 of XOM stock direct from the DSPP: There are no fees. At the current price of $81, you would buy 3.08 shares. You’re $250 buys $250 worth of stock.
2. Automatic investment plan of $50 for 5 months: Again, there are no fees. Your monthly contribution of $50 would buy .617 shares a month.

If XOM goes up 5%, then you made 5%. You don’t have to worry about making up for fees. Additionally, you can reinvest your dividends with no fees as well. Selling your shares will cost you .12 a share, which seems extremely fair since their are no purchase fees.

Low Fee Plans

If there’s a stock you like, but it doesn’t fall under the no-cost option, there is another alternative to the Insane Fee Plans; Low Fee Plans.

Sharebuilder.com is one example; they offer two low-cost investment plans:

1. $12 per month for 6 automatic investments per month ($2.00 per investment)
2. $20 per month for 20 automatic investments per month ($1.00 per investment)

Depending on the stock, the amount you invest and the number of trades per month, the Sharebuilder program could be a great alternative.

Building a Portfolio

No fee DSPP plans and Low Fee Plans like Sharebuilder allow you to build a portfolio by dollar cost averaging the sane way. By investing small amounts every month in a solid company like ExxonMobil and other high quality stocks, you will be on your way to building a solid portfolio.

To find companies with low or no-fee DSPP plans, check the following websites. They are the official transfer agents for the majority of companies offering DSPP plans. Make sure you read the company prospectus carefully to make sure there are no fees.

• Computershare
• Bank of New York
• Mellon Investor Services

If the plan charges you a fee, compare it to Sharebuilder, it might be the cheaper way to go.

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1. Don’t list your transfers on the initial application: If you list $6,000 worth of transfers and you only receive $5,000 in credit from the credit card, they will transfer the $5,000, charge you a fee, and you still have $1,000 left over. It’s better to list nothing, or if you have to, list a very small amount like $100. Once you get the card, call the company and request a credit line increase if you don’t have enough to cover your transfer. Don’t be afraid to do this more than once. Then request balance transfer checks. They work like personal checks except the debt is placed on your new credit card instead of your checking account. They allow you to control what gets transfered and ultimately control the fees. Use them sparingly, as we mention below.

2. Limit the amount of transfers: For each transfer, you will be charged a fee. Nowadays, most banks have a 3% transfer fee, and cap it at around $75. If your card doesn’t have a cap, cancel it and get another one. Let’s say you want to transfer $6,000 to your new card, from two old cards with a balance of $3,000 each. Two transfers with the above mentioned fee’s will cost you $150 ($75 cap x 2). If you could combine this debt into one account and make only one transfer of $6,000, you would only pay $75. So, how do you combine all your debt into one account so you can limit the fees? It’s not easy, but here are some suggestions. Be careful. These ideas can cost you more in other fees if you’re not careful and quick, but here they are:

• Use Existing Cards: Sometimes credit card companies will do transfers for free, for existing customers. If one of your existing credit cards will do this for you, and you won’t exceed your credit limit, you may want to temporarily combine your debt to an exisiting card before moving it to a new one.
• Get a Personal Loan: Do you have a friend or relative that would loan you some money for a short period of time? You can pay off the existing credit cards, get a balance transfer check from your new card and write a one check to the lender.
• Get a Personal Loan from Strangers: Prosper.com and Lending Club enable people to lend money to other people in a safe, efficient manner. You create an account, type in how much you want to borrow to temporarily payoff your old credit cards, and then have people bid on loaning you money. You can even invite your friends and family to bid on your loan.
• Home Equity Line of Credit: If you have a line of credit, use it to temporarily pay off your credit cards, and then pay it back by writing a check from your new balance transfer credit card.

If you need a new credit card with low-balance transfer fees, check out the Fiscal Sanity credit card search.

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1. Managers are on the side of shareholders. When Markel has had a bad year, management has been very honest about where the problem is and how it will be fixed rather than gloss over it.
2. It’s in the insurance business. Granted, it’s a different insurance business than Berkshire Hathaway, but, it is a business that produces a large cash flow which is then re-invested.
3. It does not offer earnings guidance to Wall Street avoiding the “beat the numbers” farce every quarter.
4. Markel’s investment portfolio is value based and the man in charge of Markel’s investment portfolio, Thomas Gayner, is a value investor (with stellar results since he took over, averaging 17% since 1990).
5. Mr. Gayner looks for companies with four characteristics that are very similar to the characteristics Warren Buffet uses. They are:

• profitability
• management integrity and smarts
• ability to re-invest return on capital
• a fair price

6. Executive compensation. The top three executives made around $600,000 each. There are no golden parachutes and no contracts or agreements that compensate executives for tax gross-ups.
7. Empower employees to get wealthy not by offering stock options but by offering low-interest loans so employees can buy Markel stock. This helps build an ownership mentality rather than a culture of “cash in my options and get out”.

Markel looks like a mini-Berkshire Hathaway and as long as they continue to do what they have been doing, may be a great long-term investment!

Here are some free articles about Markel:
1. Motley Fool: Markel Sees Opportunities in Stock Market

2. Gurufocus: New Guru Added: Tom Gayner of Markel Corp

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The idea behind dollar cost averaging is to repeatedly invest a set amount of money regardless if your investment goes up or down. If your investment decreases in value, you will be buying more shares at a cheaper price; if it goes up you’ll be making money on your existing investment. This is only recommended for long-term investors, so buying solid mutual funds (index funds are recommended) or large-cap stocks is suggested. Let’s take a look at an example:

In January 2006 you decide that you want to get into the “market”, and decide to invest in Vanguard’s S&P 500 Index Fund (VFINX). You have $10,000 saved and you want to invest it all. You have two choices:

1. Go to the Vanguard website, print the forms, and mail them a check for $10,000.
2. Go to the Vanguard website, print the forms, and mail them a check for $3,000 (their minimum for new accounts), and dollar cost average the other $7,000 at $1,000 a month for 7 months.

Let’s take a look at option #2:

• 2/1/06: Your check for $3,000 gets cashed, and you buy 25.38 shares of VFINX at $118.19 a share. With mutual funds you don’t have to buy shares in whole units, you can buy fractional shares (that’s the .19 part)
• 3/1/06: You’ve set up an automatic investment plan with Vanguard, so they pull $1,000 from your checking account and you buy another 8.38 shares at $119.27. The fund has gone up (from $118.19 to $119.27), so your initial investment made money, but you paid more for this month’s shares.
• 4/3/06: The fund goes up again, to $119.52. Your $1,000 now buys you only 8.36 shares. Fewer shares than last month, but you’re making money on your past investments.
• 5/1/06: You’re a stock market genius! Your mutual fund is up to $120.33 a share. However, your $1,000 is now only buying 8.31 shares.
• 6/1/06: What’s going on? Your fund dropped to $118.78! You just lost money! Actually, you didn’t lose anything, unless you sold it. Markets go up and down. That’s why averaging works. Your $1,000 now buys 8.41 shares
• 7/3/06: Again, your fund drops. This time to $117.93! You’re asking yourself, “What did I do to deserve this?” Your $1,000 buys you 8.47 shares. You are able to acquire more shares, as the price drops.
• 8/1/06: Now I’m getting worried! The fund drops again. This time to $117.17 a share! The good news is that your $1,000 is now buying 8.53 shares vs 8.47 last month.
• 9/1/06: You’re a stock market genius again! The fund jumps to $121.15 a share! You’re making some serious money on your past contributions to the fund, but your $1,000 only buys 8.25 shares.

Your investment increased in value when it went up, and you were able to buy more shares when it went down. Dollar cost averaging allowed you to buy at an “average” cost over time. After you finish investing your $10,000, you may want to add $100 a month to the fund to increase your position. Again, dollar cost averaging your investment.

Even though dollar cost averaging reduces risk, there is still some risk involved. As you can see from the chart below, if you started the above scenario in February 2000, and continued with your $100 monthly investments, you would have been buying shares in a fund that consistently dropped in price for about 30 months. The shares you would have purchased on 2/1/2000 would not have broken even until December 2007. However, all those shares you bought on the way down would have recovered earlier. For example, shares purchased in January 2002 would have started to turn profitable in early 2004 and then again in early 2005. Overall, your “average” cost would be lower than making one purchase in February 2000, so your overall portfolio value would be higher.

Dollar Value Averaging

Though there are lots of supporters of Dollar Cost Averaging, there are also many critics. Some critics have come up with an alternative called: Dollar Value Averaging (DVA).

In DCA you invest the same amount through a series of recurring purchases, regardless of the price. With DVA you set a dollar target for your portfolio balance to increase regardless of market fluctuations.

Using the previous example, let’s say you want the value of your VFINX mutual fund to increase by $1,000 every month:

• 2/1/06: Your check for $3,000 gets cashed, and you buy 25.38 shares of VFINX at $118.19 a share, as before. Your fund starts out at $3,000.
• 3/1/06: The target value for your fund this month is $4,000 (a $1,000 increase from last month). The fund price increased from $118.19 to $119.27. So your balance is now worth $3,027 (25.38 shares x $119.27). You’ve made $27. Since you want the value to increase by $1,000 each month you only need to invest $973 ($1,000-$27). You’ve just added 8.15 shares ($973/$119.27), for a total of 33.53 shares.
• 4/1/06: This month’s target value is $5,000. Let’s assume the fund drops to $118.50 this month. The value of your fund is now $3,973. You need to invest $1,027 to keep the value of your fund at the target $5,000.

Value averaging is more work than dollar-cost averaging. “It makes you do some math every month,” says John Markese, president of the American Association of Individual Investors. The advantage to dollar cost averaging is that you can set up an automatic payment plan from your checking account and forget about it.

Dollar Cost Averaging with Stocks

Most mutual funds were designed for dollar cost averaging. They make it easy for you and don’t charge a transaction fee for each purchase.

If you try dollar cost averaging stocks by buying them the traditional way, through brokers, you’ll be losing money before you start. If you invest $100 in a stock, and pay your broker $9.95 in commission, the stock needs to rise 10% before you break even!

Sharebuilder.com resolved this by offering two low-cost investment plans:

1. $12 per month for 6 automatic investments per month ($2.00 per investment)
2. $20 per month for 20 automatic investments per month ($1.00 per investment)

These plans work well if you want to invest $100 or more per month, per investment. For option A, a $2 charge for $100 a month would be a 2% transaction fee. For option B, it would be 1%. An investment in option A lower than $100 would increase your transaction fee to higher than 2% and not be worth the hassle. Most solid mutual funds have expenses set at 1.25% or lower. One of the lowest fees around, the Vanguard S&P index fund we used as an example above, is set at .18%.To make this work you would need to invest at least $100 a month per investment; in option A that’s $600 a month (6 stocks), in option B $2,000 (20 stocks) a month.

Another option is buying stocks direct, without a broker. Yes, you can buy stocks like Bank of America (BAC), ExxonMobil (XOM), and Pfizer (PFE) direct from the company with no fees.  For more detailed information read our article; Buying Stocks Without A Broker; The Sane Way.

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Partners of Tweedy Browne, either past or present, have worked closely with some of the legends of value investing.

Tom Knapp, who was a partner at Tweedy Browne until the 1980s, both studied under Ben Graham and worked for Ben’s investment firm, The Graham-Newman Corporation. Warren Buffett is quoted as saying Benjamin Graham’s book, The Intelligent Investor, is “By far the best book on investing ever written.”

Walter Schloss, another alumnus of Graham-Newman, has made his office at Tweedy Browne since he set up his private investment partnership in 1955. From 1956 – 1996, the Walter Schloss partnership average return was 17% a year.

Christopher Browne, a managing partner of the firm is the author of the highly successful “The Little Book of Value Investing“.

And as we mentioned earlier, Tweedy Browne was the primary broker for Warren during his purchase of stock in Berkshire Hathaway.

Yet, we regret that we cannot recommend purchasing the Tweedy, Browne Value Fund.

As you can see from the chart below, which was taken from the Tweedy Browne website, the returns for the last 1, 5, and 10 years have not been great. In fact, you would have done better in many years had you invested in an S&P 500 Index Fund.