Late Starters' Journey to Financial Freedom

How much income paid for rent?

2007-05-30T14:39:00.000-07:00

Intrigued by an MSNBC's article titled Americans becoming increasingly house poor, Golbguru recently write an post inquiring people's expense on housing. The MSNBC article only revealed that an average homeowner spends nearly 21% of their household income on housing, up from under 19% in 1999. Percentage-wise, Californian spend the most, 25.4% in 2005. The data includes many homeowners who bought their houses before the boom, thus, the 2 to 3% increase does not seem very dramatic. For more recent buyers, I do not know any friends who spend less than 25% (one couple bought earlier with 200K annual income) of their income on housing, most between 30 to 40%!

However, I did not find any percentage for renters. My further research found that the ratio really depends on the locality. In Golbguru's case, he was able to pay only 11% of his gross household income (mainly two graduate students' stipends) on rent, likely around $500 in a University subsidized apartment. Yes, an excellent job of Golbguru!

New York City is likely the other extreme, high rent and low vacancy. People not only need to get in line to rent an apartment, but also need to hire a professional broker for apartment hunt. According to New York City's Economic Snapshot July 2006, the average monthly contractor and increased by 25% after adjusting for inflation, from $767 in 1991 to $956 in 2005. From the following picture, we can see average rent as % of average renter's household income has also swelled from 34.4% in 1991 to 36.7% in 2005. It seems that not only the housing price soared, the rent was raised significantly too! I hope no one pay so much to stay in NYC. Of course, if you're earning more than average renter's household income and live under your means, you can beat those ratios.

I attended graduate school on the west coast, where rents are high. University housings are both cheaper and more convenient compared to local rental market. I was earning 23K annual stipend, but paid about 28% of my gross income for one room in a 2-bedroom university dorm. Despite the small annual raise of 1-3% of my stipends, when I finally graduated, I was paying 39% of my gross for the same room. A very good strategy to move out PhD students faster!

Right now, with 2 full-time job income, Jacqui and I are paying about 7% gross including cell phones and utilities, not much better than Golbguru, but way better than people in NYC and myself before. However, we’re looking for a reasonable upgrade in the next few months to have more space.

My family's story in Chinese stock market.

2007-05-30T12:48:00.000-07:00

Following our blog friend's post on Shanghai volume , I want to share with you my family's stories in China's stock market. My mom has been in the market since I was in the secondary school. She lost half of her capital after more than 10 year's investment. Up to two years ago, she was still struggling. However, since this year, every night when I talk to my mom, she will tell me how much more she could have earned if she had hold the stock longer, or had bought more. She put all our family savings into it now.

And one of our relatives, an 80 year old lady, frugal for her whole life, put all her money in the stock market too. She does not know how to use computer or internet. So she keeps calling my mom to help her excute the trade.

Yes, it is this scary! And I just can not persuade my mom to take the money out of the market. No way she will believe me when she sees the stock price going up so fast every day. Sometimes, I want to make up some emergency stories to ask her for moeny, because that's maybe the only way to ask her to get some of her money out of that market. But I will feel guilty if I lie. Very difficult situation :(

What is the gas mileage of your car?

2007-05-29T17:27:00.000-07:00

Just came about an article on hypermiling: wringing every last ounce of fuel efficiency out of a car. The story starts with Wayne Gerdes' going 2,254 miles driving a Honda Insight on a single 13.7-gallon tank of gas. When I bought my SUV, $600 a year on gas is maximum. Right now, I'm looking at north of $3000 a year (longer commute as well). This is indeed a large chunk of ongoing expense.

Here are the tips offered by the article:

Brake sparingly.

To idle is to sin.

Speed kills.

Avoid the big chill.

Beware of drag.

Lose the weight.

Pay attention to load.

Be not a hare.
Set up for success.

Using the tips, I got 28mpg out of a SUV rated at 24 mpg at an average speed of 65mph. How about you? If you want more hypermiling tips, visit GasSavers.org or Gerdes' own Web site, CleanMPG.com.

Who can contribute to an IRA?

2007-05-28T17:21:00.000-07:00

We are looking into the possibility of letting Jacqui stay at home as a housewife. However, we're concerned that if it will impact our plan to catch up on retirement savings. So I studied IRS Publication 590, Individual Retirement Arrangements and found the following excerpts:

Traditional IRA:
You (or, if you file a joint return, your spouse) received taxable compensation during the year, and

You were not age 701/2 by the end of the year.

Roth IRA:
Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than:
$160,000 ($166,000 for 2007) for married filing jointly or qualifying widow(er),

$10,000 for married filing separately and you lived with your spouse at any time during the year, and

$110,000 ($114,000 for 2007) for single, head of household, or married filing separately and you did not live with your spouse at any time during the year.

Besides the age restriction for traditional IRA and the income restriction for Roth IRA, a person need to have taxable compensation to contribute to an IRA. The taxable compensation includes salaries, tips, bonuses, commissions, self-employment income, alimony and separate maintenance, nontaxable combat pay but does not include passive income derived from property and investment (Table 1-1, Page 9). However, a non-working spouse (aka a housewife) can contribute to either IRA with the same maximums given the working spouse qualifies for the above criteria (Refer to spousal IRA in the above document).

So the good news is that if Jacqui stay at home, both of us will be able to contribute to IRA though it's not necessarily Roth.

How to better measure home prices?

2007-05-28T07:06:00.000-07:00

As shown in the previous post, the median price is far from an ideal measure of home prices. In this softened housing market, a change in the types of houses sold may give people a deceiving picture of increasing prices. Here is an article titled The Follies of Measuring Home Prices from Rich Toscano.

In short, the median house is really a moving target, and the "median price" does not account for the difference in these houses and is therefore subject to the following follies:

Changes in who's doing the buying

Changes in what buyers are getting for the money

Home improvements

Seller concessions

One of the best solutions lies in the Case-Shiller Home Price Index (HPI), which measures market price changes based on repeat sales of individual homes. Here is a graph featuring a comparison between Median Price and Case-Shiller HPI on San Diego's housing market.

Looking at the Median Price (the red bars), you may think that San Diego's Housing market hit the bottom b/w 09/2006 -11/2006 and rebounded back this year. However, CS HPI (the blue bars) shows a consistent decline throughout. Which one is correct? Correlating with sales volumn, we known the latter is the true picture.

For more metro areas and longer periods, you can plot graphs on the http://macromarkets.com.

To get individual home value and neighborhood demographics, I found http://www.cyberhomes.com/ very useful.

Housing Market Is On The Move In Southern California II

2007-05-26T13:24:00.000-07:00

Nice excerpt from Ben's Housing Bubble Blog:

The California realtors report on April sales. “Home sales decreased 27.8 percent in April in California compared with the same period a year ago, while the median price of an existing home increased 6.2 percent, CAR reported today. ‘April sales fell in part because of tighter credit standards and growing concerns about the impact of subprime loans on the market,’ said C.A.R. President Colleen Badagliacco. ‘Throughout the state inventory levels have increased to their highest levels in recent years, giving buyers more time to view a greater variety of homes and sellers who set realistic prices an edge in the market.’”

“‘Although the median price of a home in California continues to rise, this reflects the fall-off in sales in the lower-priced markets of the state where new home inventories and foreclosures are competing with the existing home market,’ said C.A.R. Chief Economist Leslie Appleton-Young. ‘Fewer sales from these regions coupled with modest gains in some of the stronger coastal markets are pushing the median price for the state up slightly.’”

This supports the analysis that this latest drop is worse for low-end markets suffered from the woes of sub-prime loans. A change in the mix of houses sold really skewed the median price data.

Housing Market Is On The Move In Southern California

2007-05-25T15:32:00.000-07:00

According to Union Tribune “DataQuick expects to report today that the six-county Southern California region saw defaults rise nearly 159 percent last month to more than 9,200, compared with 3,562 in April 2006, and that foreclosures skyrocketed from 311 to more than 2,800 over the same period. San Diego’s defaults rose from 554 to 1,346, and foreclosures increased from 85 to 525, April to April."

"But San Diego was painted as an area less vulnerable to any further major downturns, contingent on the health of the general economy. Reasons include relatively few unsold, newly built homes and new projects; steady if not improving job growth; and an earlier end to the housing boom than other markets where sales and prices are now in decline. ... Prices, which had peaked at $517,500 in November 2005 and lately dropped to as low as $472,000 in January, have recovered somewhat to stand at a median $490,000. But they remain 10 percent or more below where they stood a year ago in many neighborhoods".

As I remember, the housing market in San Diego headed south earlier than Los Angeles and San Francisco. The current slide was only from the drain of cheap money, which means that the market is vulnerable to further slides resulting from rising foreclosures and the weakening of local job market. Unfortunately, with depreciating housing value, foreclosures are rising really fast. With economy growth significantly slowed down, the job market is unlikely to absorb the loss in housing related jobs. So there are certainly more drops to come.

Tips on finding a competent real-estate agent

2007-05-18T07:04:00.000-07:00

With a burst of U.S. housing bubble, affordable housing may finally come in a few years. I started to learn some knowledge on real estate investment a while ago. From what I learn, a competent real-estate agent is invaluable. Here is one interesting article from MSN titled Find a superstar real-estate agent.

Besides referral, the article listed eight questions to ask your candidate agents:

May I see your resume? This is an interesting one. I have been interviewed by many people, and didn't expect that I can interview agents this way. I'll take this advice.

What's your commission? Only relevance to a seller?

What makes you special?

How often will I hear from you?

What's your plan for marketing my home? Seller only.

How many transactions did you complete last year?

What do you know about the neighborhoods where I want to live? I'm surprised that information on crime and school performance are not allowed to be disclosed by real estate agents. Again, asking for information sources such as Sperling's Best Places may come in handy.

Are you a solo agent or part of a team? This may impact how you evaluate the performance of this agent.

Now expensive U.S. Healthcare is also inefficient?

2007-05-17T13:00:00.000-07:00

Two days ago a report from Commonwealth Fund came out comparing healthcare in five developed countries: United States, Germany, Britain, Australia and Canada. And the conclusion: "The U.S. health care system ranks last compared with five other nations on measures of quality, access, efficiency, equity, and outcomes.”

It is well-known that we have the most expensive healthcare in the world. And many people are proud of the fact that the U.S. has the most vigilant and productive market for biomedical research and pharmaceutical companies. I even read about envious comments on U.S. healthcare industry from a British economist on The Economist. However, it is undeniable that the paid price might be too high: we have fast growing insurance premiums; about 1/6 of total population is uninsured mostly because of affordability; need to pay the most for prescription drugs compared with everywhere else in the world...

How much more do we pay for health care compared to other countries? "Per-capita health spending in the United States in 2004 was $6,102, twice that of Germany, which spent $3,005. Canada spent $3,165, New Zealand $2,083 and Australia $2,876, while Britain spent $2,546 per person." $6000 annual expense per-capita is a lot of money. For a family of four, that's $24,000 per year. Twice that of other rich countries is simply too much, not a good buy!

However, U.S. healthcare providers are usually very proud of themselves for being the best in the world. Medical students have been trained to give patients the best care possible regardless of the cost, and we also know very well that how long (months and years) patients need to wait inline to have a non-emergent medical procedure done in UK and Canada. We actually read some similar stories on HMO or Medicare patients in the U.S.

Now why is U.S. healthcare also inefficient? Let's take a look at the primary measures: infant mortality and healthy lives at age 60. Given the high prevalence of obesity and diabetes, I can understand why the U.S. did not do well in the later measure. However this is hardly the responsibility of the healthcare system alone, given the powerful commercials from fast food chains targeting our young children. Another convenience measure is also understandably low for the U.S. healthcare system: emergency room waiting time. If you have 1/6 uninsured people who on average need more serious interventions and only get medical care in various emergency departments of hospitals, how fast can you expect patients turned around there?

"The area where the U.S. health care system performs best is preventive care, an area that has been monitored closely for over a decade by managed care plans,” I am rather surprised by this measure. Vaccines in U.S. are usually expensive and not covered by health insurance. In fact, there are many such examples that private insurance companies put their short-term profitability above long-term societal values, which in the end, leads to higher medical cost for everyone.

In the end, I think that we are indeed paying too much for healthcare. Ethically and economically speaking, we should have a national program to cover uninsured 45 million people and free ERs from providing the care though expensive, but usually very late. Educating people to have a healthy life-style is at least as important as medical technology to reverse the increasing prevalence of chronic disease such as obesity, diabetes and heart disease.

How much do we need for healthcare after retirement?

2007-05-15T08:30:00.000-07:00

Healthy fully-employed young professionals may not pay much attention to healthcare cost. However, that will be an expensive part of retirement savings. Fidelity Investments have released its annual study for retiree healthcare cost for seven years. It is reported that "a 65-year-old couple retiring this year needing about $215,000 to cover medical costs after they stop working". I remember some young people were arguing if 1 million dollars are enough in 30 years for retirement. This report certainly shed a light on the answer: you will need $521,861.43 in 30 years assuming healthcare cost increases at a historical annual inflation rate of 3%; $1,270,281.51 in 30 years if healthcare cost increases at an average of 6.1% annual rate as in the last seven years.

And the scary part is the conservative assumptions of Fidelity's estimate. It's not all healthcare cost.
1. It doesn't include over-the-counter medications, most dental services and long-term care;
2. It assumes retirees have no employer-provided health care coverage;
3. It projects life expectancies of 82 for men and 85 for women.

People may wonder if we can get employer-provided health care coverage after retirement in 30 years. Let's look at this trend identified by the same study: "between 1988 and 2006, the share of large employers offering retiree health benefits declined to 35 percent from 66 percent. Employers also have shifted more of the costs to retirees through higher premium contributions and higher cost-sharing requirements." It does not look like that most of us can get it!

Fidelity actually has a breakdown of annual medical expenses.

Type of Expense	Annual Cost	Monthly Cost
Medicare A Premium	$0	$0
Medicare A Deductible	$231	$19
Medicare A Co-Pay	$51	$4
Medicare A Skilled Care	$77	$6
Medicare B Premium	$1062	$89
Medicare B Deductible	$83	$7
Medicare B Co-Pay	$902	$75
Other misc.	$293	$24
Dental/Vision/Hearing	$388	$32
Medicare Supplement (Medigap) F²	$2,244	$187
Prescriptions (Medicare Part D)³	$1,300	$108
Total:	$6,631	$551

Are you ready?

A whole new market for anti-depressant producers?

2007-04-26T19:11:00.000-07:00

Since there has been so many bad news for pharmaceutical companies for a while, I feel that there stocks may come to some historical low now. I started watching the news from this industry closely to look for a bargain time.

Today I got this news sent to my email: Lilly Receives FDA Approval For Antidepressant For Dogs.

My glasses literally fell down off my nose. I know that dogs get sick too, I know that dogs sometimes look sad too, but I do not know that they are "depressed" too. How do they diagnose a dog to be "depressed"? I guess some dogs become "suicidal" too? Where do dogs get prescription? From a psychiatrist, or from a veterinarian?

This is a great new market for anti-depressant producers. If dogs can be depressed, so can cats, birds... any pets. How many pets do we have in this country?

Maybe time to buy these stocks?

How much premium are you willing to pay for top university education?

2007-04-15T20:50:00.000-07:00

Since our last discussion about PhD's career choice, I came across an interesting discussion about paying for education in a forum.

"Case study: please see quick summary for more details.
A 17 yr old got into one of the top 5 schools (the $48k a yr type) and her parents make about $250k so she cannot get fin aid. She can get a free ride to a state school that actually has a lot of national merit scholarship finalists going there, so it's not a dump.
I turned the problem around countless times (mostly at around 3 am).
What would you wise fatwallers do? Right now I try to convince her that free undergrad is better than $200k top school, especially if she wants to go to grad school right after undergrad. Am I wrong to ask her that?
Personal experiences and/or any other advice are greatly appreciated.
Thanks a lot!

Edit: MIT vs. Ariz State honors college; her goal is med school.

Ok guys, thanks. More replies than I expected. I really appreciate this. Her parents are old friends of mine and they asked me for input.

I am glad to see that my main thinking gets somehow confirmed:
-want to go into engineering and work directly after undergrad: MIT no-brainer
-want to go to med school: ASU might not be a bad choice

Her parents are in their low 40s but they'd really like to semi-retire early (before 50). They have about $400k in assets. They came here I believe about 8 or 9 yrs ago and they started earning in the $200k range 2 yrs ago. They live frugally, no bmw, lexus, etc. Perhaps their only extravagance is some international travel. However, their thinking is that they can pay for med school, no questions asked. They also are afraid that her going to MIT might entice her to stop after undergrad and scrap the medical school plans. I also believe that the MD job security is better than life in a cube, even at GS or GOOG.
Right now she is depressed, she thinks that her dreams are being shattered by not going to a top school."

Many people joined the discussion, including graudates from state colleges, graudates from MIT, Princeton, Stanford, Johns Hopkins, and recruiting faculty at graduate schools or medical school. Many people faced similar difficult choice.

The thread originator concluded

"I am glad to see that my main thinking gets somehow confirmed:
-want to go into engineering and work directly after undergrad: MIT no-brainer
-want to go to med school: ASU might not be a bad choice"

I disagree, not just on his/her main thinking, but also on his/her summarization of the discussion. As I read through all the replies, I feel that the majority of the people do not regret what they chose--Ivy League or state college. Those who chose to go to top universities do not regret being in a school with "unusual culture where hacking and tinkering with things and figuring out how much bend there is in the rules are all valued" even though they came out of school with $10K debt, Those who chose state college felt happy that they left college without any debt, and went to good graduate school afterwards. These people emphasize that only the rank of the graduate school counts.

Yannick and I discussed this during the dinner time. We came for PhD program, which normally offers full fellowship or assistantship, so going to a top university was a no-brainer for us. If our kids someday face this choice, what shall we do?

At first, I was inclined to recommend the 17 year old girl to attend a state university. I was a TA for a class with more than 900 students in an Ivy League University. We had to divide the class into small TA review sessions. I was TAing two honor sessions, each with about 22 students. While I did see some very smart and hard-working students, I do not think that they got much attention from the professor. Some later came to me for recommendation letters, because the professor is not very accessible. Those famous professors in top universities are famous because they do research, they publish papers. They get recognition only by the number of papers they publish, or the level of the journal their papers get published. To publish papers, they had to squeeze their teaching effort. Pretty much every professor I know consider teachinga a burden. What's the point of paying $200K to a school where the professors never see you anyway, and do not pay much attention to teaching?

However, after the discussion with Yannick, I started to change my mind. I transferred from an Ivy League university to another top private university, so I do not really know much about public schools. I started TAing graduate course after my transfer, so I really do not know the undergraduate life well either. Yannick has been to both public and private universities, and his experience tells him that the course qualities at the private school are better than the public school he stayed even when they are ranked similarly ( I guess public school professors pay even less attention to teaching?) And more importantly, you see many more smart people in a top university, and you will learn and benefit from them.

Moreover, as I read through the discussion, I saw surviving bias in the replies from those state college graduates. It looks like that everyone is happy with their decision. However, most of the state college graduates who do not regret are people that survived well in the public schools. Most of them got admission to the medical school, or went to top universities for PhD programs later. I do not see many replies from people who chose public state universities and went to work afterwards. Where are they? Does that mean that anyone who face this choice will survive well out of the public school? I doubt it.

My hypothesis is: given a group of people who faced similar choice as described and who chose to go to public school, those survived well out of public schools tend to reply to the thread more than those who did not. 17 is a very young age, anything can happen. What if she decides not to go to graduate school? What if she gets to know people whom she should not know?

Only satisfied people responded. So we have to take some discount on these replies. There are people who dropped out from top universities, like Bill Gates, we can be sure that he does not regret. There must be a lot people who dropped out from public schools too, but we do not see them very often in the news.

Yannick and I do not belittle public schools. But I am very risk-averse. If our kids face the same decision, I think that we will let them choose MIT. After all, I know that they have a much higher probability of making good friends at MIT than at ASU, and with that, I will have some peace in mind. And if we have a daughter, I will sent her to MIT or Stanford, no question asked! She can bring back a very good husband, maybe better than Yannick (I have not found one yet, and will not :). $200K is a lot of money, but our peace of mind and our children's happiness are worth more than $200K, right?

Better start saving for our children now, and prepared to rent for a long, long time. I believe that the investment in education will give higher return than investment in real estate or stock market.

Where to put my savings, house, IRA, 401K or regular trading accounts?

2007-04-12T17:01:00.000-07:00

When I finally earned more than what I spent, I asked myself this question. Due to the time I already squandered, there are so many places need my money badly:
Emergency fund and cash savings
Individual retirement accounts (IRA) such as Roth and traditional IRA
Employer sponsored retirement accounts 401k, 403b (non-profit organization and education institutions)
A house
A regular brokerage account to invest in the stock market

My order is the following:
1. Roth IRA
You may be surprised that I put to Roth before emergency fund. The reason was not only that Roth is one of the best places for young professionals and graduate students’ money, but also that you can withdraw your contributions (the money you put into such an account) any time without incurring any penalty or taxes. So your contributions can serve as your EF. It is so nice that no wonder you can only contribute $4000 a year.

2. 401k or 403b and a lull with employer matching
Many people have this on the top of their lists. The argument was simple, you can get free money. Many people contributed to their 401K and got those employer matchings. However, because they do not have enough liquid asset (contributions in Roth or emergency fund), they were forced to get the money out in case of urgent financial needs, which leads to taxes and penalty.

3. Emergency Fund
The contributions in Roth is not a perfect emergency fund, because you will not be able to put contributions back after withdraws, which leads to the loss of opportunity for tax-free earning growth. I have shared my experience in a recent post. The good news is that you do not need to constantly put new money there. After you find out how much to put in, and fund it, then you are mostly done. Also as Moomin Valley commented, after you accumulate more assets, you can get away without a real emergency fund since it’s very likely you’ll have very liquid assets because of asset diversification.

4. 401k or 403b remaining portion
You can decide for a self how much you want to put into your retirement account, because this portion is not liquid-able. However, if you want to invest in the stock market, the advantage of text deferment cannot be understated. As two late-starters, Jacqui and I are maximizing this part. Another late starter moom shared his experience.

5. Savings as in savings account, CD or regular brokerage:
You do want to enjoy your life before retirement also, right? However, I do not over-save for this part as I think my future income is good enough to cover my future expenses.

6. House:
We do not own a house yet and are saving for a down payment. Normally, it should be listed as 5. However, the more I learn about the housing market and the unprecedented housing boom, the more I realized that how over-valued the current housing market is. I guess it will be number 6 for the next two years at least.

What's your list like?

Emergency fund comes before investment?!

2007-04-11T10:55:00.000-07:00

I shared my view on emergency fund in general earlier. At the end that post, I said that EF was a necessary step to start retirement savings and investments, without explaining it. This may seem to be a naïve question. However, I struggled with it when I got started and would like to share my experience here.

Emergency fund gives you a peace of mind which enables you to make better investment decisions. When I started to invest, I got several individual stocks, whose prices vary a lot. I intended to buy-and-hold, which was only possible when you are able to leave the money untouched even in emergency. It was quite tempting to use the emergency fund to buy more stocks. However, without an emergency fund, I realized that I might be forced to sell the stocks at the wrong time. So I need my emergency fund to take that risky investing strategy with individual stocks.

It became clear to me that it’s very important to separate your long-term investment and your cash reserve. When I first worked on my investment strategy, I had so many things in my mind, emergency cash, down-payment for the first house, regular investment, and retirement reinvestment. All these goals have different timeline, thus have different risk tolerance. Without separating them explicitly, I was really making the task much more difficult and even intractable. The good thing was that I was not paralyzed by the complexity, I started anyway; the bad thing was that I got a messy strategy which was not optimal and I had trouble sticking to it. In the end, I ended up selling all my holdings and reshuffled my portfolio in less than two years. I was lucky that I was a graduate student, thus, was not hurt that much in tax.

Lower tax with Qualified Dividends and Capital Gain Worksheet

2007-04-10T17:26:00.000-07:00

Today I was about to mail out my state tax return and saw a blank space in my schedule D line 22. It asked if I had any qualified dividend, which we did have. I was surprised Taxcut didn’t fill in this blank for me. So I decided to follow the instruction and take a look at the worksheet myself.

Dividends are usually taxed at the marginal tax rate of your ordinary income. However, take a look at the form 1099-DIV and you may find some of them are qualified dividends, which are taxed at the tax rate of long-term capital gain (15%).

Now the good news is that some people may qualify for an even lower tax rate at 5%. Please take a look at the following to see if you qualify:
1. If you have qualified dividends or long-term capital gains;
AND
2. If your adjusted gross income (AGI) is
less than $30,650 if single or married filing separately;
or less than$61,300 if married filing jointly or qualifying widow(er);
or less than $41,050 if head of household
Then you could lower your tax with the Qualified Dividends and Capital Gain Worksheet (Page 38 of 1040 instructions) on line 44 of Federal tax form 1040.

I believe many graduate students and young fellows with lower income qualify for this. I used to be quite skeptical about usefulness of all kinds of the worksheets in 1040. This time, it really saved us hundreds of dollars in tax!

Gone are the good days for credit card balance transfer arbitrage?

2007-04-10T14:40:00.000-07:00

Although I have known credit card arbitrage for quite a while, I did not really engage in it actively till last year. In my eyes, the gain of several hundred dollars a year is not enough to compensate for the potential damage to my credit score. So, I am not a big fan of this AOR thing either.

However, last month, I got a credit card invitation that I can not resist--it was from the alumni association of the second university I studied in. I have a card from my first university. I do not use it, but keep it as a souvenir. I want to have one for the second university too.

So I got the card, issued by Bank of America, MBNA card. It came with 0% APR till 03/2008. Given that I am not using it for purchases, I am tempted to do the credit card balance transfer arbitrage.

Lucky for me, I found this website. My return will be a mere $159 due to the BT fees, and minus the taxes, it will be tiny...

Definitely not worth it. And for anyone who is still looking for credit card arbitrage opportunities, please be careful with the BOA world points cards. IMO, it is not worth it.

The best credit card deal I got was in 2003. I applied for a AT&T universal card, with 300 cash back points. And at that time, I-bond could be purchased using credit cards. So I bought $30K I-bond with 1.6% fixed rate and got $300 cash back in 3 month. In fact, at that time, I was not that financially "savvy" -- I purchased the I-bonds only to get the $300 cash back. I did not do any research to find out whether I-bond was a good investment or not. I was thinking of redeeming them after the 6 month limit and put them back to savings account.

Last year, I got some free time and started to review my portfolio. If I recall correctly, the APY for the I-bond was around 7% for 6 month last year. Plus the initial $300 cash back, it was a decent, low-risk investment for 3 years!

I cashed all my I-bonds once the rates went back to something around 2.5%. I was thinking of getting new ones since the fixed rate got a little up. But now, we can not buy I-bond with credit cards, and the BT fees are not capped any more, the overall return is decreased dramatically. I guess that the good days for credit card BT arbitrage are gone... Dear PF bloggers, we need some "financial innovation"!

Salary survey for H1B -- Are you getting there?

2007-04-09T14:54:00.000-07:00

Yannick and I are struggling with Green Card application. We (mainly Yannick) were (was) so lazy and did not bother to work on our immigration stuff and now we had to pay a little cost -- Yannick may now have to decline a job offer because of the H1-B. The H1B quota was used up on the very first day!

I am worried, but can't really push him too much on things he does not like to do. Besides, he has picked up things that I do not like to do -- tax, asset allocation... So, it is my turn now.

I can apply for green card through PERM with my company's sponsorship now. For perm, salary is a key factor--you have to have a salary higher than the average salary in your area to get your visa. So, I found this H1B salary survey.

Surprisingly, Washington has the highest median annual salary of $76K. The average annual salary is usually close to the median value. New York has a very high average of $74k compared to a median value of 55k. I suppose that's because many were
earning well above 100k. In any case, the good message is that my salary is higher than the median or average in my state. At least, I have met one important condition in getting PERM approved.

The data is a little old, but it tells more than just H1B salary. The most interesting thing to PF bloggers is average household income and house value. California has the highest average house value, but its average household income is actually lower than NJ and CT, or even Maryland!

The average household income in CA is 30% higher than that in Texas, the rent is 40% higher that that in Texas, but the average house value in California is 157% higher than that in Texas! MA is comparable to CA in this respect. So, if someday Yannick and I have to work in CA or MA, I will have a rational plan in head-- rent, rent, rent, till we retire in TX and Florida!

BTW, I found it interesting that the average H1B's salary in New York state is $74K, higher than the average household income ($69K). NYC is really single man's paradise.

My Credit Card is in the T.J.Maxx hijacked list, and I want to "settle down"!

2007-04-06T10:48:00.000-07:00

I was checking my credit card activities this morning, and strangely, none of my transactions I made this month showed up. Then I noticed an account alert and a number to call.

The CSR asked me whether I have received a new card with a new number. I told her no. And I asked her why I had to get a new number.
She then told me that my credit card was on the list of those credit cards that got hijacked at T.J.Maxx. So they decided to issue me a new card.

I got worried. From my research on credit scoring, it is a good practice to keep your credit card with long history. The longer your credit history, the better. Last time, I accidentally closed my eldest credit card when an Indian CSR consolidated my cards instead of consolidating my "credit lines". They could not reverse it. I do not want my credit score to get hurt again. Though the CSR promised that this would not affect my credit score this time, I was not very convinced.

And the second thing I have to worry about is my billing address. In order to keep a nice credit history, I never changed my billing address. Everything is still mailed to our old address, and then forwarded to us by friends. The card must have been sent to the old address if it was sent. I have to wait for a while. I can still use my current card, but the activity goes to the other card, strange, and not convenient.

Now and again, I am nagging Yannick about "settling down". I can't even have a permanent address! This affects everything--finance, shopping, and security...I asked him to read Degeratilife's feeling about her spouse going for a Start up , the uncertainty, the feeling of insecure, blah blah…

In the end, I know that he will still win. He is going to do whatever he wants to do, and I will be supportive -- it is inefficient to be unsupportive within a family, it is just that simple. My mom is already on his side, can you believe that? So, what else can I do other than a supporter?

Michael Milken -- A Medical Research Innovator?

2007-03-31T18:59:00.001-07:00

Ever since I read Den of Thieves two years ago, I thought that people like Mike Milken would be despised everywhere, by Wall Street, by the media, by the general public -- He traded on insider information, he accumulated enough market power to inflate the junk bond prices, and many middle class who followed were left with worthless papers; he fostered corporate raids and destroyed many business. How can the public tolerate such a person?

I was so naive! My first surprise came from Liar's Poker: Rising Through the Wreckage on Wall Street. Obviously, Michael Lewis did not think Milken as a criminal when he wrote "Liar's Poker". And in some sense, Michael Lewis thought that Milken spotted a good financial innovation opportunity (junk bond) that Solomon Brothers missed.

My second surprise came when I was listening to the radio. The radio broadcasted an ad for Wharton economic summit , where Milken is listed as the number one keynote speaker, even ahead of the finance professor Jeremy Siegel. I can't help to look for the ads and see how they advertise the "junk bond king". And to my surprise again, now he is "The Man Who Changed Medicine"! And obviously, his name is what attracts people to come to the summit.

Obviously, he has many followers, particularly from Wall Street. Everyone can have his/her own take on Milken's past. I am fine with that. But from what time he has become a Medical Research Innovator ? By giving some money to some medical research center to get tax deduction? This will be an interesting path to be a medical research innovator :)

And what's more interesting is that he will team up with Professor Jeremy Siegel, the author of The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New. He "is a buy-and-hold kind of guy who predicts that an unprecedented wave of discovery and innovation will fuel economic growth in the U.S. and provide superior returns for investors who are patient." What is his take on Milken's junk bonds?

Should be an interesting speech (at least to me). But $499 a ticket, plus travel expense... no way for a deal hunter like me.

A Fresh PhD's Career Decision Tree

2007-03-30T14:54:00.000-07:00

Given that Yannick and I stayed in graduate school for such a long time, we made many friends who got PhD's in various fields--economics, business, engineering, science… Some went for academic career and are already titled professors; some are still struggling for their tenure; some went to industry and become millionaires from IPOs; some got laid off and came back to school. And those fresh ones, seeing footsteps from their senior fellows, feel confused. They seek help, from advisors and professors, from fellow PhD students, from friends, from families. And the truth is: the more people they ask, the more information they gather, the more difficult the decision becomes.

After our discussion with mOOm about the value of a graduate degree and seeing the struggle many of our friends are facing, I decided to draw a decision tree to help people go through the process. This is, by no means, a replacement for advice from an academic advisor, or your career development help center. This is just my little game to find out whether what I learned in textbook can really find some use in real life.

I am not an engineering and science major, but I find PhDs in engineering and science often face a more complicated choices. They can choose to do a post-doctoral fellowship, just like residency for MD. People from economics or business school normally do not have to go through this. So I decided to draw a decision tree for Sisi, a fresh PhD from science and engineering.

Sisi got her PhD in applied math from a top school. As a fresh PhD, Sisi does have some options, and that’s exactly what she and her family are struggling with.
(1) She can get an assistant professor position in a 2nd or 3rd tier university right now, which pays about $60-80k.
(2) She can work in the industry, which pays six figures right away.
(3) She can wait for another year or two as a post-doc fellow, and shoot for a faculty position in a1st tier university.

Here is a very Simplified version of a pseudo-decision-tree.

Two main reasons make this tree "pseudo". First, Sisi is struggling with assigning probabilities to each branch. What’s the probability of getting unemployed in 2 years? Sisi had a friend who joined a very big and profitable company 2 years ago, and come back to school now due to company re-structure. What's probability of building a successful business of her own? Go to any bar in Silicon valley any day, Sisi will find 1/2 of people there dreaming of building another google, or at least a youtube. But we had only one Google, one youtube. Sisi believes that she has a technical edge to build his own business, but how can she assign a probability on this?

Second, Sisi puts only monetary value in stead of utility on each node. What makes this decision even more complicated is that Sisi and her family assign different utility to each outcome. Sisi’s husband wants her to go to a 2nd -3rd tier schools, so she can has less pressure and get a baby soon. He also puts higher utility on going to industry, since he has the same dream as a valley girl and wants Sisi to join him.

However, as a female who window-shops designer clothing from time to time, Sisi puts higher utility on "brand names". Practically speaking, option-3 is the least ‘economical one. Doing a post-doc costs another 2-3 years with minimum pay. After that, if she gets to a 1st tier university, the pay is generally lower than 2nd tier university. Top universities always have higher bargaining power, in accepting students, in recruiting faculty. However, how many 1st tier universities can you find? Supply and demand determine the price. If Sisi wants to get the brand equity of 1st tier universities, Sisi has to pay the premium. Sisi is ready to pay for it, her husband is still hesitating.

And as a female, Sisi puts higher utility on security (on this part, Sisi is not alone ). Getting tenure in whatever university will give Sisi's family low but guaranteed income and legal status. As immigrants without a green card, Sisi’s first priority is: Security! Security!! Security!!!

Still, the problem of assigning probability remains. I know that many fresh PhDs are facing Sisi's decision tree. In fact, many friends of ours are on the same boat right now. Assigning these probabilities requires experience, across time, across people. I hope that senior readers who have experienced all these can help Sisi fill in the probability in the tree. If we can get a large sample, the law of large number will work for us.

TIA!

Emergency fund? How much?

2007-03-29T14:45:00.000-07:00

Moom started his Asset Allocation Series. So I guess it is not surprising for him to write about Emergency Fund (EF), and introduced us to English Major Money's (EMM) post. This was also our first time to participate in Carnival with a post on getting more tax returns for international students. I happened to find a controversial post by "Broke Now, Rick Later" (BNRL) in the Carnival. So I will share my thoughts here.

First, no emergency fund needed? I have to say that I admire BNRL's courage. For a single-income household with 2 kids and a mortgage to pay, he has extremely low liquidity of $282. And he was advocating NO emergency fund needed. Make no mistake, he is stacking away 20% of his income in retirement savings, which is unlikely to be ready available for emergency. So he is trading his emergency fund as extra investments in retirement account. Before reading his post, I thought there were few people as described in moom's comment. Now I think that there might be quite a few.

BNRL has 50% income to cover monthly necessities and 20% for retirement account. Considering tax withholdings and other expenses, the remaining 30% is unlikely to have any significant portion left. BNRL argued that you can always count on 0% APR installment payment combined with a delay in payment to pull the cash you need from either your salary or disability income. However, he maybe forgot that sometimes, "when it rains, it pours". What if there were two or three unexpected on his list on going at the same time?

Second, how much emergency fund do you need? I stand by the standard recommendation of 3-6 month expense and suggest everyone to look at his/her own situation like EMM did. The amount will depend on both your needs and your risk attitude.
Needs (expenses): take a look at the monthly necessary expense. For renters like Jacqui and I, ours is less than 20% of our gross income. Two months' salary gets us covered for a year.
Risk attitude (or personal preference): remember, everyone get unlucky some day in life. That's why we're paying for health and car insurance. I am very conservative, thus, may want to insure for situations of very small probability, say three or four unfortunate incidents happening at the same time; you may be more optimistic and want to just insure up to two. However, you really do not want to have no or poor preparations for them as they do happen.

Last, I think having an EF is one necessary step for anyone to get started on investment and retirement savings. I will share my experience later.

Cooking skills and personal finance.

2007-03-28T18:17:00.000-07:00

Just read my money blog (MMB) expenses. As a housewife, the first thing I noticed is grocery spending. MMB's budget for grocery is $300, dining out is $250. Last year, our budget for grocery was a poor $250. I hit budget several times, which made me very unhappy. I consider myself a deal shopper, which is one of the attributes of a "good" housewife (my definition). When MS Money showed that I always hit budget for grocery shopping, I felt… hurt!!!

So I negotiated with Yannick to increase the grocery budget to $300 this year. I know this is a little like "cheating", but at that time, psychologically, I really need it.

Now, reading MMB, I just found a new solution to solve the budget problem. Our dining out expense is almost zero! I am attributing this to my successful grocery shopping --- I do not just shop for deals, I shop for deals of good quality products. I feed Yannick with premium food from organic food store, so he does not want to dine out any more!

I presented this argument to Yannick immediately, and got an instant budget re-allocation approval-- we will allocate $100 out of our $150 dining out budget to my grocery shopping! Now, I will always spend below budget. "Exceed expectation", that's the review I want to get for my work!

My next mission--improve my cooking skills. I heard that many famous chefs actually used very common ingredients -- such as Heinz ketchup, Morton salt…Why can't I? Someday, I want to hear Yannick saying: "I would rather have Jacqui's cabbage soup than Arby's roasted beef burger" (he sometimes indicates that he wants to go to Wendy's, but dismissed by me for "health" reasons. :-)

Improving cooking is one of the most rewarding investments a housewife can make: it keeps the family stay at home, it keeps the family healthy, it keeps the family money in the investment account grow... it keeps the whole family happy!

Carnival of Personal Finance

2007-03-26T19:59:00.000-07:00

Check out this week's Carnival of Personal Finance, where you'll find a collection of articles from variouis PF blogs. Some interesting ones are:

Living Almost Large: A New Retirement Plan

Broke Now, Rich Later: You Don't Need an Emergency Fund

Frugal Zeitgeist: Early Payoff: The Great Mortgage Debate

My Open Wallet: Rule 16: Who Do You Think You are?

Clever Dude: 5 Ways Balding Gracefully Can Save You Time, Money and More

Visit the Carnival's homepage you are surely to be benefited "financialy".

What investments to hold in your IRA?

2007-03-25T16:31:00.000-07:00

I wrote a post to recommend Roth IRA earlier. Another article The Best Investments for Your IRA let me recall a class I took.

I took a PhD level tax class cross-listed in the finance department two years ago. I've forgotten most things learned in the class, since it's pretty theoretical. However, sometimes the professor discussed some very practical questions at the request of the students. Think finance or economics PhD students are all financially savvy? Some students didn't know what IRA was and asked this question to the professor.

There is no absolute answer. The common wisdom is to hold bonds and CDs in tax sheltered account since dividends and interests are usually not deferrable and taxed as ordinary income's higher marginal rate. On the other hand, a buy-and-hold strategy for stock investments could defer the capital gain from price appreciation almost forever, which is much more tax efficient (same effect as a 401K type of tax deferment without employer matching). As a famous example, Warren Buffet argues that dividend is much worse to a shareholder than stock price appreciation, thus Berkshire Hathaway does not distribute any dividends despite being one the most profitable companies in the world.

However, some people argue that stocks should be kept in tax sheltered account because the expected annualized return for stocks is much higher than savings and bonds over the long term (>20 years). Given same contributions, stocks grow much faster. Therefore, this strategy gives more assets the tax benefit. This strategy makes even better sense for Roth IRA, since its future earning is tax-free, not tax deferred.

Assuming you have a portfolio of $10,000 bonds and $10,000 stocks, with a marginal tax bracket of 33% (including both Federal and state income tax). The long term annualized return of bonds and stocks are 6% and 9% respectively. Compare strategy 1 of holding bonds in Roth, and stocks in regular account, and strategy 2 the opposite, what's the outcome in 30 years? To simplify, let's assume a passive stock investment using a highly tax-efficient ETF on market index, with 0.5% taxed on capital gain and dividends annually. Capital gains and dividends are reinvested.

Strategy 1 = 10000*1.06^30+10000*((1.085^30-1)*0.67+1) = 57.4K+80.7K=138.1K
Strategy 2 = 10000*1.09^30+10000*1.04^30 = 132.6K+32.4K = 165.1K

So keeping stocks in Roth IRA will win (Strategy 2). There are a few caveats on this conclusion:
This conclusion relies upon the 3% difference in annualized return between stocks and bonds. If as some authors have argued in their books that the future rates of return of stocks and bonds are about the same at 6-7%, you should hold bonds in Roth, and use a buy-and-hold strategy to defer taxes on capital gains from stock price appreciations.
The stock investment strategy is also critical. If we assume that the difference in the rates of return of the two are not that large, however, if you really trade your stocks frequently, then it's still advantageous to keep your stocks in Roth.
I also learned both in class and from my experience how tax policy exerted distortion in your trading decision. I had hold stocks just to get the long-term capital-gain tax rate even though the market condition for that stock had turned south. If you want pure undistorted trading decision for yourself, hold stocks in Roth. On the other hand, you lose the leverage on claiming loss on your trades as well.

I hold stocks in my Roth and have done some trading. I really love the tax-free capital gains. Roth IRA is really a very powerful tool for us to catch up.

I only discussed bonds versus stocks. People have used IRA holding to buy futures, options, land contracts etc., which enable them to have larger leverage and gain larger tax-free earnings. However, if you are old enough to believe no free lunch, you will probably want to think about the risk carefully before shooting for the "big gain"?.

Any questions and comments?

Win a free 2006 TaxCut Premium with e-file by sharing your tax filing experience

2007-03-23T10:50:00.000-07:00

Our dear readers:

Thank you for visiting our blog. Yannick and I shared our tax filing experience on various topics such as filing as a non-resident alien or resident alien, claiming tax treaty benefits after becoming a resident alien for international students, an unpleasant experience with encrypted pdf tax forms, contributing to a 2006 Roth IRA and most recently how to deal with incomes from two states as a double-income couple.

Now here is the fun part. Someone from TaxCut came across my last post and thought my sharing was good. He has kindly given me a free coupon code to download a copy of TaxCut Premium (Federal + State + efile) , retail value of $64.99. I have no use of it and will give it away to one lucky reader through a lottery.

Here is how to enter the lottery:
You can either
1. Comment on this post and leave your email and nickname to enter the lottery for one chance to win,
or better yet, 2. share your tax filing method (manual, TaxCut, Turbo Tax, Turbo Tax+Quicken, or TaxCut+MS Money like us) to double your chance to win,
or the best, 3. share with us your experience briefly on how well the approach works for three times your chance to win.
You can enter the lottery before Noon Sunday (03/25) PT and the winner will be announced by Sunday night.

How to decide the winner:
Each entry will be assigned to 1, 2 or 3 unique numbers sequentially starting from 0. I will use a random number generator to generate a winner from the above numbers.

We were really satisfied with the TaxCut interview process and how seamless it generated 1040, Schedule A, B, Ds after pulling data out of MS Money. We are curious about how well the other approaches work.

Questions and comments? Good luck!!!