The Finance Buff

How To Pay Cash Price For Gas And Still Get Credit Card Rewards

Harry Sit — Mon, 17 Jun 2013 12:23:00 +0000

The gas station I usually go to added a discount for cash. The prices posted high on the board are cash prices. Down at the street level, there is a small pavement board listing the prices for cash and for credit in two columns. For regular unleaded gas, the credit price is about 3% higher than the cash price.

The lower cash price also applies to debit. If you are not getting at least 3% rewards on gas from your credit card, you might as well use your debit card. The station actually gets less money if you use debit because its credit card processing fee is usually less than the 3% discount it offers straight up. It’s trying to wean people off the habit of using credit card for gas.

If you still want the credit card rewards, is there a way to pay the discounted cash price and still get the credit card rewards?

Call in the universal adaptor: gift card.

You buy a gift card inside the store. Then you use the gift card to pay for gas outside. Once the money is on the gift card, it doesn’t remember how it got there — cash or credit. You get the cash price if you pay with a gift card.

If it’s a station you always go to, buy a large gift card so you don’t have to come inside all the time. If you have a small amount left over on the card after using it a few times, you can either top it off or trade it in for a new gift card inside the store.

Note if your credit card gives a higher reward for gas than for other purchases, the higher reward percentage may not apply for purchases inside the store. Gas paid at the pump (“automated fuel dispensers”) and purchases inside the store fall under two different merchant categories. Some credit cards give the higher reward percentage to both categories; some only give it to gas paid at the pump. In the latter case you would still get the regular rewards for purchases inside the store. You just have to try it out to see how it works for your card and the gas station you go to.

Gift cards are not just for gifts. They are a very useful tool for getting lower prices.

[Photo credit: Flickr user Brian A. Sayrs]

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Friday Reading: Plutus Awards Categories

Harry Sit — Fri, 14 Jun 2013 12:33:00 +0000

Every year personal finance bloggers can compete for Plutus Awards. The organizers announced the categories for this year. I’m thinking of entering for Best-Kept Secret Personal Finance Blog. What do you think?

Among the articles I read this week, I found these interesting:

Variable Annuity with a 5.5% Guaranteed Growth Rate? by Mike Piper at Oblivious Investor

That would be nice but it matters what is guaranteed to grow.

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Why do so many investors ignore the evidence? by Larry Swedroe at CBS MoneyWatch

Maybe they didn’t know the evidence to begin with?

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Avoiding Taxes As A Retiree Isn’t So Easy by Rick Ferri at RickFerri.com

Maybe not so easy to completely avoid taxes but it would be easy to pay low taxes. It’ll be part of my "Asset Rich Income Poor" strategy.

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Is a $100,000 a Year Retirement Doable? by Roger Wohlner at The Chicago Financial Planner

Most definitely.

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An Involuntary Work of Fiction by Scott Burns at AssetBuilder

That’s the projected improvement in Medicare trust fund. I agree. Just fiction.

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Up next: Reissue of a 30-year TIPS on June 20, 2013 by David Enna at TIPS Watch

Interest rates finally went up. 30-year TIPS is still too long for me though.

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Are TIPS A Good Buy? by Mike at Long-Term Returns

I think they are a better buy, but not a good buy yet.

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Free VIN Check Trick, Free Vehicle History Report by Jonathan Ping at My Money Blog

Nice trick to check a car or truck’s history for free.

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Why Does Everyone Hate Jury Duty So Much? by Harry Campbell at Your Personal Finance Pro

I haven’t served jury duty yet. I’m curious what it’s like.

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PNC Bank Announces It Will End Free Checking Accounts by Ken Tumin at DepostAccounts.com

$500 minimum balance to waive the fee. No big deal.

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Ambiguous FINRA Financial Literacy Quiz Trips Up The Public

Harry Sit — Wed, 12 Jun 2013 12:29:00 +0000

FINRA stands for Financial Industry Regulatory Authority. It’s the self-regulatory body for brokerage firms and exchanges. Its educational arm FINRA Investor Education Foundation, together with Department of Treasury developed and conducted a National Financial Capability Study.

Part of the study included a 5-question financial literacy quiz. The 25,000 participants in the study scored an average 2.88. State-by-state, Utah scored the highest at 3.23, Mississippi the lowest 2.53. I will call it a 3.

Before people jump up and down saying how poor the general public is in terms of financial literacy, we need to look at the questions first.

1. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?

A) More than $102
B) Exactly $102
C) Less than $102
D) Don’t know

This one is easy. If people answered wrong, it’s because they didn’t read the question carefully. It’s asking after five years, not after one year. The question is measuring whether people are paying attention, not whether they understand interest rate.

2. Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?

Fair question. Easy.

3. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?

This question doesn’t belong here. The finance types love this question but it has nothing to do with day-to-day financial life. You can be fully financial literate without knowing the answer. If we have to go there, the right answer must be "don’t know" because there isn’t enough information to answer the question. What interest rates rise? Student loan interest rates? What bond prices? My I Bonds?

4. True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.

Another ambiguous question. It doesn’t say anything about the interest rate or what the life of the loan is. A typical 5/1 ARM is a 30-year mortgage. Its interest rate is usually lower than a 15-year fixed. If you sell the home in 5 years — the life of the loan ends — the total interest over the life of the loan will be less on the 5/1 ARM. The right answer should be "false" because you only need one example to invalidate the statement.

5. True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.

OK. Easy enough.

Among five questions we have two ambiguous ones and one tricky question that can easily slip if you didn’t read the question carefully. The 25,000 participants scored an average 3. That’s pretty good. I would get a 3 if I answer the question truthfully rather than trying to answer what they want me to answer. Any conclusion drawn on these five questions isn’t that reliable. These are the best five questions for financial literacy smart people at FINRA came up with "in consultation with the U.S. Department of the Treasury, other federal agencies and President Obama’s Advisory Council on Financial Capability"? What a shame.

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Pound Foolish: Money Gurus Will Not Solve All Your Money Problems

Harry Sit — Mon, 10 Jun 2013 12:25:00 +0000

Every year many books on money and finance are published. Only few gain publicity. When you hear or see an author interviewed on radio and TV or read reviews in national newspapers or magazines, think about the terrific job done by the author’s and the publisher’s PR agents.

The book Pound Foolish by freelance writer Helaine Olen is one such example. Ms. Olen was interviewed on The Daily Show, CBS News, C-SPAN, and NPR. The book was reviewed in The Economist, Washington Post, New York Times, and US News & World Report. If you know anything about media placements, you must realize that’s a huge achievement by the PR firms. For the amount of publicity the author and the book received, however, the book itself came as a big disappointment.

Ms. Olen has a problem with stagnant wages and income inequality. She blames money gurus on TV and radio for their failure to address stagnant wages and income inequality. She exposes "the dark side" of Suze Orman, David Bach, Dave Ramsey, among others in the "self-help movement." She shows these money gurus are more about marketing themselves, their merchandise and their training programs than offering useful advice for the middle class.

The author summarized the book the best in her introduction:

"Pound Foolish will tell the story of how we were sold on a dream — a dream that personal finance had almost magical abilities, that it could compensate for stagnant salaries, income inequality, and a society that offered a shorter and thinner safety net with each passing year."

That, I must say, is a huge straw man argument.

I’m not a fan of Suze Orman, David Bach, or Dave Ramsey. I can’t believe that I’m coming to their defense, but who in their right mind are expecting Orman, Bach, or Ramsey to solve the problem of stagnant wages, income inequality, or weakened social safety net?

Suze Orman, David Bach, and Dave Ramsey are great communicators and marketers. They are able to package age-old ideas — live below your means, get out of debt — into something that resonate with their audience. They make good money off their entrepreneurial endeavor. The test for whether they are a net positive or a net negative to their followers/customers would be whether someone would be better off or worse off if he or she follows everything the guru says.

If a middle class person takes to heart everything Suze wrote in her latest book The Money Class and implements them to a T, would this person’s financial situation improve or deteriorate? If someone with a lot of debt spends $99 on attending Dave Ramsey’s Financial Peace University (FPU), would this person’s financial situation improve or deteriorate?

It’s going to improve. One can do better than just following everything in The Money Class or the FPU but it’s still going to improve. It will be worth the money paid for The Money Class or FPU.

So what’s the problem?

The book picked on some easy targets but left other advice givers alone: Jane Bryant Quinn, Liz Weston, Clark Howard. They don’t do anything about stagnant wages or weak social safety net either.

I place Pound Foolish in the same vein as Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead by Tamara Draut. It’s worse than Strapped because it’s knocking down things that actually help people. The implications are pretty bad: your 401k plan is rigged with high fees, so don’t contribute; saving 10% of your paycheck isn’t going to make you rich anyway because David Bach used rosy math, so don’t bother; Dave Ramsey is just selling his $99 FPU course, so don’t worry about the high balances on those credit cards.

Money gurus on TV or radio will not double your salary or strengthen the social safety net. Nobody expects them to. Knocking down money gurus won’t double your salary or strengthen the social safety net either.

My favorite financial writer Roger Lowenstein said it much better in his review on Bloomberg BusinessWeek. Understandably Ms. Olen didn’t link to that review on her publicity page.

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Friday Reading: No Windfall Yet

Harry Sit — Fri, 07 Jun 2013 12:27:00 +0000

"Bucket" Asset Allocation Strategies by Mike Piper at Oblivious Investor

Mike dispels the magic in bucket strategies.

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How to Handle a Windfall by Michael at Financial Ramblings

No windfall has come my way yet. If one comes, I will remember these.

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Predicting Future Interest Rates by Mike at Long-Term Returns

Mike went to Q&A format lately. I wish he would write more monologues one topic at a time.

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Book Review: How to Retire Happy by Jim Blankenship at Getting Your Financial Ducks In A Row

Sounds interesting. I placed a hold at the library.

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Roth 401(k) Double Jeopardy by Joe at Roth Mania

An interesting angle on fees in a Roth 401k versus in a regular taxable account. It’s another reason not to use a Roth 401k.

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The Universal Retirement Tool by Scott Burns at AssetBuilder

Low cost index funds and ETFs. They are great. Savings rate is still the key though.

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Ben Bernanke to Princeton Grads: The World Isn’t Fair (and You All Got Lucky) by Jordan Weissmann at The Atlantic

I agree the world isn’t fair. Try to place yourself in the lucky position.

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The Biggest Myth About the Gender Wage Gap by Derek Thompson at The Atlantic

The gender wage gap refers to women earning 1/4 less than men. It turns out they are talking about doing different jobs.

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2% Rewards Card After Priceline Visa Closed The Door

Harry Sit — Wed, 05 Jun 2013 12:25:00 +0000

If you thought about getting the Priceline Rewards Visa which gave 2% rewards on everything but you procrastinated, now it’s too late.

Back in April reader Charlie alerted me that my links were showing only 1% rewards. I found another link that still showed 2% rewards. Now posters on FatWallet reported that their applications using the 2% link were all declined. The reason given was that the 2% program is no longer offered to new applicants. They were invited to re-apply for the 1% card.

The bank hasn’t announced whether the rewards will be slashed for existing cardholders. I hope existing customers will be grandfathered forever but usually they are cut as well after some time.

This, and the previous experience with the Schwab Visa, show that 2% rewards on a Visa or MasterCard for every purchase with no special categories and no caps is a good deal that will not last. Next time you hear about one, jump on it right away. Use it while it lasts.

If you didn’t jump on it, Fidelity AmEx is the only one still available that gives 2% rewards on everything with no annual fee. All other 2% reward cards, including the Barclaycard Arrival World MasterCard, Capital One Venture, and BankAmericard Privileges with Travel Rewards, follow this setup:

An annual fee, waived in the first year
No foreign transaction fee
2% rewards or more redeemable against past travel purchases

The annual fee will make sure you will use it as the primary card to make the annual fee worth it. Limiting the highest redemption percentage against past travel purchases will make sure you charge those high-dollar travel purchases to this card. The merchant fee rate is about the highest in the travel categories. High dollars times high fee rate equals high profit. If someone isn’t patient enough to wait for a travel purchase, the rewards will be redeemed at a lower rate. All these factors make this setup more sustainable than straight 2% rewards.

Fidelity AmEx is able to keep the 2% rewards because (a) Fidelity’s marketing budget supports it; and (b) the American Express network charges a higher fee to the merchants.

Of these remaining 2% rewards cards, Barclaycard Arrival World MasterCard is the best. It offers 2.2% rewards and a much larger signup bonus ($400 vs $100) which effectively pays the annual fee for five more years after the first year.

[Photo credit: Flickr user Jason]

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Whole Life Insurance vs EE Bonds vs Munis

Harry Sit — Mon, 03 Jun 2013 12:26:00 +0000

In a low interest rate environment, the long forgotten EE bonds come back as appealing again, because they offer a guarantee to double the nominal value in 20 years. That comes out to a 3.5% compound annual return if you have the fortitude to hold them for 20 years.

After I wrote the previous post EE Bonds vs CDs and Bond Funds For Long-Term Investment, the government lowered the interest rate on EE bonds from 0.6% to 0.2%. The 20-year guarantee to double didn’t change. It just means the penalty is even larger now if you don’t hold for 20 years.

This reminds me of another beast: whole life insurance. Whole life insurance is shunned in general because it’s mixing insurance with investment. When you haven’t maxed out all your tax advantaged accounts yet, you should go invest there instead of in a whole life insurance policy. When you have the long investment horizon and the risk tolerance to invest in stocks, you should go invest in stocks for the higher expected return. At best, investing in a whole life policy will be a little better than investing in CDs and bonds on your own in a taxable account. If you must cash out early, you will get a poor return.

That’s almost exactly like investing in EE bonds, isn’t it?

I got a quote for a single premium whole life insurance policy from one of the "big four" mutual life insurance companies. The "big four" namely New York Life, Northwestern Mutual, MassMutual, and Guardian, are four largest life insurance companies owned by policyholders. They have the highest or nearly the highest ratings from all rating agencies. I asked for a single premium policy because it’s most comparable to investing a lump sum in EE bonds and holding it for 20 years.

This chart shows the guaranteed cash surrender value over the years:

Guaranteed means just that: the minimum value guaranteed by the insurance company, without any dividends, although the company has a good history of paying dividends in the past. After all, the company is owned by policyholders. If I only base on the guaranteed value, as an investment, this whole life policy isn’t as good as EE bonds but it’s close. The average annual return over 20 years is 3.2% versus 3.5% in EE bonds. If I were to believe the projected dividends, which aren’t guaranteed and may be too optimistic, the return on the whole life policy would be 4.1%. If I discount the projected dividends and take a mid-point between the guaranteed return and the projected return, the return on a whole life policy would be similar to the return from EE bonds.

I’m not counting the value of the life insurance in the calculation above. If I need life insurance anyway and I value the insurance as the best 20-year level-term policy I would otherwise buy, the return on the whole life policy over 20 years would be 3.5% guaranteed and 4.4% with projected dividends, and somewhere in between if the dividends aren’t as good as projected.

This one quote I received likely isn’t the best I can find if I shop around. I would say if you like EE bonds, a whole life insurance policy would be as good or better, for several reasons. EE bonds limit you to buying $10,000 per person per year; you can invest a lot more in a whole life policy. You must hold EE bonds exactly 20 years. As the chart shows, if you cash out early, but after 3 years, you will get a lot less than you get from a whole life policy. After 20 years, EE bonds revert back to earning 0.2%; whole life continues to earn the 3-4% return.

EE bonds can be tax free if you use them for qualified higher education expenses and your income level at that time qualifies for that benefit, but the tax benefits for higher education expenses are better addressed with a 529 plan.

For whole life to work as a good investment, if you don’t need life insurance any more, you have to be young and healthy. Otherwise the cost of insurance would be too much a drag. It’s not an issue if you need life insurance for the next 20 years because you would have to buy a term policy based on your age and health status anyway.

Although whole life can be as good as or better than EE bonds, the question remains whether you have to like EE bonds to begin with. Is that bar too low?

With the recent rise in interest rates, EE bonds’ edge over a regular 20-year Treasury bond already diminished somewhat. As of May 31, 2013, the yield on a regular 20-year Treasury was 2.95%, up from 2.44% on May 1, versus 3.5% on EE bonds held for 20 years. If it continues to move up like this, in another few weeks or months we won’t be talking about EE bonds any more.

For investors who maxed out all tax advantaged accounts and who already invested enough in stocks, munis are the go-to investment. According to Bloomberg, the latest yield on 30-year AAA munis was 3.29% and that’s tax free. 20-year munis would compare favorably against EE bonds.

I decided to stick with munis in taxable accounts and not bother with either whole life or EE bonds.

[Photo credit: Flickr user Keoni Cabral]

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Friday Reading: Old Economy Steven

Harry Sit — Fri, 31 May 2013 12:28:00 +0000

Old Economy Steve: The Official Meme For Embittered Millennials by Jordan Weissmann at The Atlantic

Have you seen Old Economy Steven? They are quite interesting. However, I wouldn’t dwell on how the previous generation got it easy. You only win a world war and dominate the world once. Now you have to compete with the world. So step up.

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Don’t Squander The Power of Adaptation by Jonathan Ping at My Money Blog

I completely agree. People adapt. Just ask any immigrant.

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Competition Has Eliminated Brokerage Commissions by Scott Burns at AssetBuilder

Well not really, at least not everywhere, but paying a small commission is not a big deal either, especially after they pay you to hold your money.

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Washington ‘Spends’ More on Tax Breaks Than on Medicare, Defense, or Social Security by Derek Thompson at The Atlantic

I agree tax spending isn’t very effective. It rewards things most people would otherwise do anyway. The amount of money spent on influencing the marginal behavior is too high.

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A Calculator to Compare Closing Cost Options by Ann Carrns at New York Times Bucks Blog

It’s a little too late as mortgage rates shot up quite a bit in the last few weeks. If the rates ever come down again, it’ll be a good tool to have. I linked to two calculators I use in my previous post Mortgage Refinance: Tradeoff Between Rate and Closing Cost.

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Where are the benefits of international diversification? by Larry Swedroe at CBS MoneyWatch

I have them.

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Are We Still Using the LifeStrategy Growth Fund? by Mike Piper at Oblivious Investor

LifeStrategy funds are great one-stop shops.

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30-Year TIPS Real Yield Near 0.9% by Mike at Long-Term Returns

It practically doubled in a month. Keep going at this rate and TIPS will be a good deal again!

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Could There Be A “Good” VUL Policy? by Jim at The White Coat Investor

Yes there could. One that offers a fixed account with a guaranteed minimum 4% interest rate and no surrender charge.

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Friday Reading: How Many Bank Accounts?

Harry Sit — Fri, 24 May 2013 12:32:00 +0000

Does Having Multiple Bank Accounts Encourage Overspending? by Matthew Amster-Burton at MintLife

Matthew and his wife have 15 checking and savings accounts, not counting CDs, retirement accounts, or college savings plans. I have 14. That’s after I closed 2 accounts in the last two months. Banks offer the best deals these days. For example where else do you get 5% return with no risk for 3 years? If that means having another 3 accounts with a bank, so be it.

How many bank accounts do you have?

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How commodities can help a portfolio by Larry Swedroe at CBS MoneyWatch

Commodities didn’t do well lately. After climbing out of a low in 2009, commodities had poor returns in 2011, 2012 and so far in 2013 while the stock market keeps reaching new highs. If you invested in commodities, is the poor performance testing your conviction? If you didn’t invest in commodities, maybe now it’s time to add commodities?

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The adoption of a great idea by Joe Davis and Andy Clarke at Vanguard Blog

They are talking about low cost indexing as a revolutionary great idea as electricity and refrigeration. I think it’s great.

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Are Bond Funds Unusually Risky Right Now? by Mike Piper at Oblivious Investor

Unusually risky? Probably not. Usually risky is risky enough if you can get the same or better return without the risk.

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A Reason To Own Bonds by Rick Ferri at RickFerri.com

Despite the title, it’s actually a reason to own fixed income, not just bonds.

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Few Boomers Catch Up on 401(k) Saving at Squared Away Blog

I’m not surprised. People must have other plans for their money.

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Yes or no on the May 23 10-year TIPS reissue? by David Enna at TIPS Watch

David bought the 10-year TIPS. I didn’t. Buying $25k per year in I Bonds is enough for me ($10k per person plus $5k from tax refund).

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Ask A Banker: Capital, Capital! by Matt Levine at NPR Planet Money

A great article about how banks work. Also check out the previous articles in the Ask A Banker series.

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Lifetime Economic Acceleration Process (LEAP) – A Review at The White Coat Investor

It turns out LEAP just means “All Roads Lead To Whole Life.” Pretty funny.

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Adaptive Asset Allocation by Mike at Long-Term Returns

Mike isn’t so hot on Adaptive Asset Allocation. He probably meant something else than Adaptive Asset Allocation Policies by Nobel laureate William Sharpe.

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HSAs: The pros and cons of health savings accounts by Brent Hunsberger at The Oregonian

The biggest con is that you must use a high deductible plan. At some employers the premium savings is very minimal. Also read Brent’s other article HSAs: For your financial health, examine your health savings account.

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Dow Jones To Hit 20,000 by Mike at Long-Term Returns

Yay! I will retire when it hits 36,000.

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Stock market bubble: Red flag warning by Allan Roth at CBS MoneyWatch

Uh oh. Scratch that. I can’t retire just yet.

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401k Plan: From Bundled Fee To Explicit Fee

Harry Sit — Wed, 22 May 2013 13:25:45 +0000

I received a notice from my employer about our 401k plan. The plan will soon start charging an administrative fee to employees’ accounts, estimated to be about $20 per quarter.

Until now our plan didn’t charge any administrative fee explicitly. I was able to confirm that on my 401k plan statement. See previous post Find Out How Much You Paid Admin Fees In Your 401k Or 403b.

Does charging an administrative fee mean that the employer will now transfer the cost to the employees? No. Employees have always paid the fee. The fee was bundled in the investment options.

Our 401k plan has hundreds of millions in assets, but some investment options are still the retail mutual fund shares that any investor can buy with $1,000. The 401k plan could buy institutional shares at a lower cost but it’s getting part of the difference in cost rebated back from the mutual fund company as revenue sharing to pay for administrative costs.

For example the expense ratio on the retail share class of one fund is 0.85%. The expense ratio on the institutional share class of the same fund is 0.50%. The plan was getting a part or all of the difference — 0.35% — back from the mutual fund company. That money pays for the administrative cost.

With this change, the plan will switch to the institutional share class and save 0.35% for the participants. The administrative cost will be allocated as a flat fee to every participant.

That’s the way it should be. As the plan grows in assets, the administrative cost doesn’t grow proportionately. A large part of the administrative cost should be relatively fixed. The rest has more to do with the number of accounts than the dollars in those accounts. Paying an explicit fee is much better than having a percentage deducted from the investments. Allocating the cost per head is fair.

[Photo credit: Flickr user Patrick Q]

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