Dual Income No Kids

Don't Fall for Advertising

2009-11-07T03:40:00.003-05:00

Hi Folks,

Regular readers may have wondered if I've fallen into a hole, or off the edge of the planet. Leaning towards the later, as I'm beyond the horizon, currently in Monrovia, Liberia. I've been busy working instead of blogging, but wanted to bring you some Saturday commentary.

So here in Liberia, my reading resources have gone dry. I under-calculated my reading needs and have run out of all reading material. This meant that I started scrounging around the work guesthouse to see what I could find.

I had been reading a 2003 National Geographic magazine, when this morning I noticed the back add.

It was from AIG. The ad claimed that it was the bank that you could invest in for your great, great, great, great, great, great, great grandchildren.

Of course, fast forward a couple of years, and this is clearly a bunch of baloney to those who lost both small and massive amounts of money in AIG.

Lesson of the Day: Don't get duped into falling for advertisements. They are probably worth less than it cost them to develop.

Have a great weekend!

Miel

Seven Ways to Save Money On Cigarettes

2009-11-06T10:25:00.008-05:00

Hi All,

One thing about living in a smaller building in DC is that you get to know your neighbors. Well, one of our neighbors has a boyfriend who is a long time smoker. We got to talking money and tobacco one evening while sharing drinks on our porch and specifically about how you can shave a few bucks off your expenses if you are a smoker.

So, here are eight ways to save money on cigarettes.

1) Quitting. If you stop smoking you'll save a ton. On average, people who enjoy tobacco smoke about 10 cigarettes per day. This translates into roughly 3 and a half packs per week. At around 7 bucks a pack, you're looking at roughly $100 a month. So if you quit the tobacco then you'd add a significant margin to your budget. Cost reasons aside, another good reason to quit is public opinion. Polite company views tobacco use as ill mannered and common. This means that smokers will have a harder time getting good jobs, romantic partners or advancing in their careers. In addition there are lots of health reason to quit, but this is well covered elsewhere.

2) Plan ahead. Buy cartons when they are on sale.

3) Switch to generic brands. High end premium brands like Camel or Marlboro cost more than generic or second tier tobacco products like Mustang or Quality light. Consider downgrading to save some money.

4) Ask for discounts. You might find that your vendor has cigarette packs that have been damaged or have brands that aren't selling well. They might be willing to let you have this tobacco for a discount if you ask.

5) Look for specialty stores. Look on the internet for stores in your area that specialize in cigarettes (also known as cigarette stores or tobacco shops). These places often have better prices, are more tuned into promotional offers, and in addition they don't look down on you for being a smoker.

6) Go online. There are several websites on-line that can provide you with discounted cigarettes. The only thing is that most of these places want to sell you smokes by the carton. That's fine if you're a long term smoker, but if you just want a pack or two this might not make sense for you. Also there are a couple of good websites that can hook you up with coupons for cigarettes. Try cigarettecoupons.org or marlboro.com.

7) Other ideas. This does not work for everyone, but you could consider visiting a local Indian reservation. Many reservations are off the beaten track, but you might consider going for a cigarette buying road trip. Beware, many people maintain that cigarettes sold on Native American reservations are exempt from Federal taxation, but the truth is its a legal grey area. So be careful if you are loading up on Native American tobacco, lest you run afoul of the tax man.

Happy Smoking!

Best,

James

The Great Big List Of 75 Budgeting Tools

2009-11-05T16:24:00.004-05:00

is over at Bible Money Matters. Check it out.

Doing Things Yourself vs. Paying Someone Else

2009-11-05T10:08:00.002-05:00

My senior year of college my roommates and I emerged from finals week and realized we had to get right on to moving out of our apartment. Because we lived in University-owned student housing, that meant a thorough cleaning which would be verified by a member of the housing staff. Any violations would result in a fine and we were staring a whole apartment worth of fines straight in the face. After surveying the considerable damage, one of my roommates and closest friends turns to me and with a completely straight face suggested we hire a maid service. I emphatically rejected this proposition based on the fact that a.) we had absolutely no money to pay a maid, certainly not enough to pay a maid to clean this disaster and b.) I swore I wouldn't pay someone to do a job I'm more than capable of doing myself. We ended up cleaning the apartment ourselves, much to the chagrin of my friend, who complained the whole time.

I was reminded of this story the other day when I realized I was overdue for a trip to Jiffy Lube to get my oil changed. I hate going to some place to get my oil changed for the same reason I didn't want to hire a maid to clean my senior year apartment. I may not be the most capable auto mechanic but given the right tools I can do the basic jobs: rotate tires, change the air filter, check the spark plugs, refill fluids, change the battery, replace fuses and lights and change the oil. Unfortunately my apartment complex does not allow me to make auto repairs, to the point where they have in the past indicated that they would fine people caught taking up space to perform auto maintenance. So, begrudgingly, I take my car to the local Jiffy Lube, sit in an uncomfortable chair in a smelly room for a half an hour until the job is done. But it makes me think about the cost comparison between doing it myself and going to Jiffy Lube (or some other similar place). To do it myself, I need the following equipment:

* Ratchet - $15

* Wrench for the Oil Filter - Wrench sets usually run around $25

* Oil Pan - $10

* Funnel - $2

* Oil Filter - $5 to $10

* Oil - Let's assume four quarts at about $5 a quart, so around $20 (just like oil filters, this can be cheaper if bought in bulk)

* Rag - Negligible

Of course those are all rough estimates for the sake of argument. That's a total cost of $77-$82, but only $25-$30 of that are recurring costs. Compared with around $35 for a oil change at Jiffy Lube, it would take about a year to make your money back, quicker if you already have the necessary tools.

That isn't a lot of savings, but over the lifetime of your car, you could save a decent amount of money. Either way, I'd still rather do the work myself, on my own time, but I can certainly understand why some would choose to let someone else do it and save the hassle. Ultimately with these types of services (housekeeping comes to mind as well), what you're really paying for is the time you save. For me, a guy who sits at a computer all day, it's kind of nice to do something productive with my hands, but the time and hassle you can (potentially) save by going to a service station would certainly be nice.

What about you readers? What services are you willing to pay for, and which would you rather do yourself and why?

-Michael

Twitter: @michael_dink

Microcredit and Pre-Bankability

2009-11-04T08:12:00.000-05:00

In 2006 Muhammad Younus and the organization he founded, the Grameen Bank in Bangladesh was awarded the Nobel Peace Prize for their work in providing loans to the poor in an effort to provide a means of self-employment and a hopeful path out of poverty. As he tells in his book, "Banker To The Poor: Micro-Lending and the Battle Against World Poverty", the idea first came about when he loaned $27 of his own money to a group of stool makers in a tiny village. He famously talks in his book about how those individuals just needed a little bit of money to buy the basic materials necessary to start their business and eventually work their way out of poverty.

The essential idea of microloans is the extension of credit to those impoverished individuals with limited employment and credit history who lack the necessary collateral or other means to obtain a loan (sometimes referred to as "pre-bankable"). The loans provided to those people would be used to start a business, hopefully kick-starting an entrepreneurial enterprise that would not only benefit the individual acquiring the loan, but also other impoverished individuals as the business gets off the ground. Microcredit is considered more of a sociological initiative than a financial one, as it is viewed that helping small businesses in poor areas benefits everyone in the community. Most of the loans made are relatively small, or like in the case of organizations like Kiva, made up of a series of very small loans.

Despite the publicity and goodwill directed towards microcredit, it is not without its detractors. Some argue that external governments who provide microloan assistance become more likely to cut back on more direct-funding aid. Also, the argument has been made that issuing credit in these types of situations is no different than credit cards and consumer spending: the borrowing can be sucked into a cycle of lending that fails to improve their financial standing while making them more and more dependent on those loans. And of course there are instances of corruption. Kiva has been the target of a fair amount of criticism, mostly centering on the interest rates that are set for the loans, which can be relatively high. Kiva defends their rates by making the argument that those loans are extremely high risk, and are expensive to provide to those in under-developed nations. Additionally, Kiva has opened up microlending to the United States, a decision that was met with a sharp outcry. Kiva's critics argued that while the poor in the United States are certainly in need of assistance, they still have access to education, limited health care and government assistance, services not available to those in the developing world.

Microcredit is certainly not a perfect model for eradicating poverty world-wide. The Grameen Bank has provided great services to the poor in Bangladesh, but has also sparred with the World Bank, an organization with wide-spread influence in the fight against poverty. From a ideological standpoint, Younus has faced opposition from heads of government and skepticism from fellow economists (he once referred to credit as a "human right") but there's no question that despite the criticisms, microlending has made a significant impact in the fight against poverty. This type of aid (and although it is a loan, I would still consider it aid, due to the high risk involved and the individuals targeted) goes directly to the person most affected. Whether it is successful or not, it provides an individual the opportunity to improve their standing in life, and sometimes all that is needed is the opportunity.

If you want to learn more about the development of microlending, I suggest you read Younus' book - "Banker to the Poor" and check out websites like Kiva.

Michael
-Twitter: @michael_dink

Giveaway: The New Rules For Mortgages

2009-11-03T10:30:00.006-05:00

Hi All,

It's Tuesday on the east coast. If you are interested in learning more about the mortgage market, this is the posting for you. We are giving away a free copy of Dale Robyn Siegel's latest, The New Rules for Mortgages. Just leave a comment at the bottom of this post and we'll pick the winner at random on Friday.

Whats really valuable about this book is that its an up updated and comprehensive look at lending standards in the mortgage market. Because of the housing crash the lending market has changed considerably - gone are the days when you could get a fat loan without a job or a down payment. If you're shopping for a house or are looking to pick up an investment property, this book can provide you an updated and thorough sense of the lay of the land.

Best part of the book - its free!

Folks - don't forget, if you're interested leave a comment with a valid way to reach you. Once the winner is chosen on Friday the book will be sent to you via snail mail.

Best,

James

How Great American Fortunes Are Acheived

2009-11-02T09:33:00.009-05:00

Hello Folks,

In my spare time, I've been working through a copy of C.W. Mills The Power Elite. For those of you who haven't heard of the book, its a treatise from the 1950s by Colombia University sociologist C. Wright Mills. The work is a masterpiece and provides a convincing explaining how wealth and power are distributed in American society.

Here is what Mills has to say about how great fortunes are generated in the US. If you're interested in attaining a great fortune - and you probably are otherwise you wouldn't be reading this blog - here an excerpt from the book:

I. No man, to my knowledge has ever entered in the ranks of the great American fortunes merely by saving a surplus from his salary or wages. In one way or another, he has come into command of a strategic position which allows him the chance to appropriate big money, and usually he has to have available a considerable sum of money in order to parlay it into really big wealth. He may work and slowly accumulate up to this big jump, but at some point he must find himself in a position to take up the main chance for which he has been on the lookout. On a salary of two or three hundred thousand a year, even forgetting taxes, and living like a miser in a board shack, it has been mathematically impossible to save up a great American fortune.

II. Once he has made the big jump, once he has negotiated the main chance, the man who is rising gets involved in the accumulation of advantages, which is merely another way of saying that to him hath shall be given. To parlay considerable money into the truly big money he must be in a position to benefit from the accumulation of advantages. The more he has, and the more strategic his economic position, the greater and the surer are his chances to gain more. The more he has, the greater his credit - his opportunities to use other peoples money - and hence the less risk he need take in order to accumulate more. There comes a point in the accumulation of advantages, in fact, when the risk is no risk, but is as sure as the tax yield of the government itself.

Once you have a million, advantages will accumulate - even for a man in a coma.

I hope you'll excuse the archaic language, gender roles have become significantly more egalitarian since Mills wrote and its possible for the same processes to apply equally well to women in todays world, otherwise Mill's core insight remains relevant and important to understanding how true fortunes are built.

Enjoy,

James

Apartment Shopping? - Three Tips For Rent Negotiation

2009-11-01T10:26:00.010-05:00

Hi All,

For those of you who are renting, you'll find this posting of some interest.

Money Talks News is an underrated video series that focuses on consumer affairs and personal finance. This video is on how to negotiate your rent.

The video says three things are key for negotiating your rent:

1) Know the local rental market.

2) Having a clearly defined negotiation objective.

3) Prove you are a good tenant, bring your credit score and references.

All these make good sense. My wife Miel and I have had some limited experience with rental properties. Landlords are definitely looking for good tenants. If someone has is a good prospect owners are likely grant concessions like lower rent, a free month or a smaller deposit.

What is a good tenant? Of course, opinions are going to differ, but here are some criteria that might you might be measured against when you're applying for housing. I think that age discrimination might be illegal, but unfortunately law cannot change peoples subjective biases, as much as we'd like it to.

A) Those with good references
B) A job paying at least three times the monthly rent
C) Good credit
D) A stable rental history
E) Married
F) Older

Thanks,

James

Attitudes Towards Savings

2009-10-30T08:16:00.004-05:00

Opening a savings account is usually one of the first step towards achieving your financial goals. If you ask anyone about the steps you need to take in order to get a hold of your finances the first they usually suggest is to get a hold of your spending (by creating a budget) and the second step is usually to establish an emergency fund. That emergency fund is often in the form of a (hopefully) high interest savings account. It's just money you can put away, not touch and watch slowly grow. You're less worried about achieving the highest possible rate of return but instead it's more focused on having a stable supply of money you can draw upon in order to weather unpredictable financial storms. And although there are other conservative investment vehicles that achieve the same goals as savings accounts, the flexibility and ease of use make them especially attractive.

But savings accounts can serve purposes larger than just emergency funds. Right now I have three savings accounts set up. I have an emergency fund (which, thankfully, I've finally managed to fully fund), one for the money that I'm saving for a down payment on a house and finally, a longer-term savings account that I'm using to accumulate money for a loftier goal: opening a bar with a friend of mine some time in the future. While those goals are all different, they share a common thread: they all contain money that I'm not expecting to need anytime in the near future and I'm comfortable with having a modest return in exchange for the security of that money always being there.

And that is the beauty of savings accounts. I focus a lot of my energy on investing. Tinkering with my 401(k), IRAs and brokerage accounts in order to maximize my investment return. There is higher risk involved, but with those accounts, I'm comfortable with taking those risks and occasionally taking losses so that I can enjoy non-trivial returns. But those accounts could lose a lot of their value; even the most careful planning can become moot if there's another stock market crash or I make a significant mistake resulting in an unfortunate loss. With that in mind, it's comforting to know that I have caches of money that are far more stable, and if I get in a financial pinch, I can draw upon them and be ok. They are my financial security blanket.

The United States is the most consumer-driven economy in the world, and it represents up to 2/3rds of our total economy. With that being the case, historically the personal savings rate (as a percentage of disposable income) has been in a state of general decline since the early to mid 80s. Before that, starting from the late 1940s, the personal savings rate had generally remained flat with a slight upwards trend. The data for the years surrounding World War II are an interesting case study in an of themselves, as the country saw people save their money during the war years before post-war spending sharply cut that percentage. The year 2005 saw the personal savings rate dip below 0% for the first time since 1933. This was at the height of the run-up to the mortgage crisis that lead to the economic recession we're currently digging ourselves out of. Probably the most interesting information comes from the last three years, during the aforementioned recession. At the beginning of that period the savings rate continued to drop as the initial hit of the economic crisis was felt and budgets tightened. However, 2008 saw a (relatively) sharp increase in savings, from a declining trend bottoming out at just over 1% in the 1st Quarter of 2008 to a rate of over 3% in the 2nd Quarter of 2008. A year later, in the 2nd Quarter of 2009, the personal savings rate jumped to nearly 5%. Many economists have suggested that this correlates to people weathering the initial storm, then taking stock of their financial situation and subsequently deciding to save more money. What will really be interesting is how those rates change as the recession continues and then when we do start our recovery. Will personal savings rates return to pre-recession lows, or will people decide to hedge against future economic downturns by saving more? That, of course, remains to be seen, but I will be monitoring it closely.

My savings has been pretty steady since I started working, even when I saw my incredible APY of around 4% cut to barely over 1%. Despite those irritating cuts, I'm still comfortable savings as much as I can - while hoping those rates eventually return to somewhere near those great rates I once enjoyed!

All data regarding the personal savings rate obtain from the U.S. Department of Commerce.

-Michael
Twitter: @michael_dink

When $110 Million Isn't Enough

2009-10-29T08:40:00.003-05:00

"[Antoine Walker] will never have to worry about money again in his life." -former Boston Celtics president and head coach, Rick Pitino

I'm fairly obsessed with sports, but especially basketball. My Purdue Boilermakers (pre-season top 10!) and the Indiana Pacers keep me fully engrossed in the sport of basketball from late October to nearly the middle of the following summer. As such, I remember when Antoine Walker played for the Celtics just a few years ago and I detested him. He was equally capable of pounding the ball in from the blocks as he was hitting the long three with a hand in his face. Whenever I think of Antoine Walker, the first thing I always think of was his aggressiveness and (borderline) arrogance. That man never gave two thoughts to launching a 30 foot shot early the shot clock or taking on a double team instead of passing out of it like he should have. But apparently the basketball court wasn't the only place where Walker was aggressive.

I came across an article on Walker in the Boston Globe the other day ("For Walker, financial fouls mount") that is a must-read for anyone with a dual interest in sports and personal finance. The article goes on to talk about how Walker spent his considerable fortune that he made in his years as an NBA player. It is estimated that over his pro career (which, while not officially over, is probably done for after Memphis bought out his last NBA contract) Walker earned around $110 million. Even roughly accounting for taxes, $55 million is still a considerable amount of money to spend in such a short period of time to get to where he is now, essentially broke and indebted to various creditors (mostly gambling debts) for around $1.5 million.

How did he get to this point? Unfortunately, his story is not that unique amount professional athletes: lifestyle inflation, being overly generous to family and "friends", failed business endeavors and a gambling problem all contributed to his current financial state. It is because of people like Antoine Walker than many professional sports operations, such as the NFL and the NBA, feature symposiums aimed at teaching rookies how to handle their money, how to make a budget, where to go to get good financial advice, how to evaluate (and get help evaluating) the multitude of business ideas they get pitched and how to create an environment where their financial success will be able to benefit them and their families even after their career ends. Unfortunately, the message doesn't always sink in - the NBA Players Association recently released figures estimating that within 5 years of retirement, 60% of former NBA players were broke.

I suppose the only takeaway lesson from this is that everyone can make poor financial decisions, and there's no such thing as having enough money that you no longer have to worry about how it's been spent. In many ways I sympathize with many professional athletes who go broke after their career has ended. Maybe they weren't given the financial tools to handle their situation, or maybe they have family and friends back home who see them as a paycheck, and have abused their relationship with the athlete for their own financial gain. Whatever the specifics of the situation may be, it is still shocking to read articles like the one I read about Antoine Walker and his financial demise.

-Michael
Twitter: @michael_dink

Free Finance Education

2009-10-28T14:00:00.001-05:00

Hi All,

If you're thinking about starting a small business or are interested in getting into entrepreneurship, here is a great collection of links to free online courses and lectures.

Handy if you're looking to pick up some free education.

Best,

James

Six Common Investing Mistakes And How to Avoid Them

2009-10-28T11:00:00.005-05:00

Hi All,

Its Wednesday, so that means its time to avoid making money mistakes. Here is a listing of some of the top 6 mistakes people make with their cash as well as pointers on what can be done to avoid these errors.

1) Racking Up Junk Debt: Credit card offers are ubiquitous in American society. They're easy to use because most stores accept plastic, so a lot of people have ended up racking up debt on the plastic crack. According to the Survey of Consumer finances in 2007 something like 44% of American households carry a balance on their plastic (1). This is a problem as credit card debt can be very expensive, with some cards charging upwards of 20%. Solution to this? Get a debit card.

2) Not investing soon enough: Its trite and tired advice, but its true. The more time you have to invest, the more money you can generally make. Time is important for two reasons. First, if you have more time, you can recover from mistakes before retirement. Second, if you have more time you can take advantage of compounding to build wealth. A good way to do this is by purchasing stock in a company with a moderately high dividend payout and good long term business prospects in a boring established industry - utility stocks are good for this. Then just sit back and let the dividends compound.

3) Investing to conservatively: The idea behind this is that long term cash is more likely to grow rapidly when invested in stocks or directly in small businesses. Its important that you take this advice with a grain of salt. Last years stock market declines and the nations deep recession have obliterated billions of dollars of US wealth. In addition, this principle is based on the historical performance of US equity markets and tends to ignore historical trends internationally. So, there is no guarantee that riskier assets will yield a higher return, they just tend do do so. Consider instead a mix of safe and risky assets, you'll have the best of both worlds.

4) Under or overdiversifying: Conventional wisdom suggests that if you spread your money around, you'll be better off. This economic principle is based on the doctoral dissertation of a guy called Harry Markowitz back in the 1950s. Markowtiz's theory and ideas were adopted and were subsequently refined into modern portfolio theory by later economists. Its currently become fetishized and is a main pillar of wall street dogma.

Iconoclasts like the somewhat blustery David Kiyosaki argue that diversification is essentially a class based idea. They say that diversification is basically for middle class investors who don't have the resources, time or inclination to develop a business or speculate intelligently. In this case, the numbers back up thinkers like Kiyosaki. Really wealthy people tend to have concentrated stock or business holdings. However, for most people its probably better not to put all your eggs in one basket, its just that if you want to get really rich. you need to think critically about this.

5) Investing in what you don't understand: The world is growing exponentially more complex. Thus, its often hard to evaluate the amount of risk associated with some kinds of investments. For example, the recent stock market downturn was driven by heavy bets on derivatives. The only problem was that these products were too new for banks to reliably calculate the risks associated with owning them. The end result of this - as everyone knows - was epic losses with attendant titanic social and political repercussions. Another example is the stock market boom back in 2001. Small investors crowded into internet stocks at inflated prices, when in fact most of these investors had no way of accurately judging what the underling prospects of those business were. The outcome of boom of 2001 is also well known and bears no repeating here.

6) Relying on the advice of others: Classical sociological theory argues that information and advice are transmitted via social networks. That is, most people make decisions based on what members of their social networks are doing. For example, they buy stocks because the guy in the cubicle next door bought some. Or they buy a product because their mom or sister in law thought it was a good idea. This is dumb. You'll only go as far as your peers if you follow this pattern. Instead, it makes sense to model your behavior on the advice of people who have demonstrated extraordinary success in achieving financial security. Also, its preferable that the person you model your behavior on be dead - live gurus are unreliable because their future track record is unknown. For example, Suze Orman is good, but she could give bad advice, get sued, become corrupt, etc etc. Model your behavior on rich dead people, not your friends.

All - if you have any additional thoughts, we'd love to hear them so feel free to leave a comment on this posting.

Best,

James

DINKs Featured on Man Vs. Debt

2009-10-27T10:42:00.004-05:00

Hi Everybody!

Adam over at Man Vs. Debt is having guest post week and today (Tuesday, October 27th) he's featuring a post I wrote for him about the parallels between training for a marathon and managing finances. Adam is one of my favorite personal finance bloggers (and not just because we're both from Indiana) so if you're not familiar with his work, I suggest you head over there and check out his blog. Thanks!

Guest Post on Man Vs. Debt

-Michael
Twitter: @michael_dink

Bank Stress Tests

2009-10-27T08:55:00.002-05:00

The Wall Street Journal has an excellent article online about the health the 19 largest financial institutions. The article, entitled "Banks Need At Least $65 Billion in Capital" can be found here, and it features a cool interactive graph. The most interesting fact I learned from that article is that Bank of America has a capital gap of about $34 Billion, over twice as much as the institution with the second highest need, Wells Fargo with a $15 Billion gap. Bank of America also took the 2nd most in TARP money with $45 Billion, only $5 Billion less than the leader, Citigroup, whose capital gap is only $6 Billion (who thought we'd be using "only" and "$6 Billion" in the same sentence?).

While the graph is mostly depressing, one bright spot out of the bailed-out banks is Goldman Sachs, who took $10 Billion in TARP funds but has paid it back (plus interest) and do not have a capital gap. It remains to be seen whether others will follow suite, but it is an encouraging sign. I hope the WSJ comes out with the same graph 6 months or a year from now, so we can see our progress.

Will the Rich Evolve Into A Separate Species?

2009-10-26T10:09:00.007-05:00

Hey All,

You gotta love wild predictions about the future. According to American futurologist Paul Saffo the wealthy will eventually evolve into a separate species due to their increased access to medical and robotic technology.

From the Telegraph.co.uk:

Mr Saffo, from San Francisco, says in the future people will be able to grow their own replacement organs, take specially tailored drugs, and use genetic research tools to alert them from any possible hereditary health dangers. He adds that tomorrow's world will be a fusion of biology and technology, where robots do the chores, cars drive themselves and artificial limbs are better than real ones.

Mr Saffo's comments reflect claims by American scientist Ray Kurzweil who only a few months ago said immortality was only 20 years away due to the speed of advancements in nanotechnology.

Click here for the story.

Best,

James

Spending Money on New Hobbies

2009-10-26T08:23:00.001-05:00

This past May I got so sick of being horribly out of shape that I decided I would start running. I was an ok runner in High School (lower-level varsity on the Cross Country team), and although I can't say I necessarily enjoy it, there is a certain feeling of accomplishment that comes from being able to run that is just enough to keep me coming back. But I hadn't run in quite some time, so I needed some new gear.

I don't typically spend a lot of money on random things for myself, so I was ok with making a few purchases to get this new activity going. And you'd think that running would be a low-cost hobby, but as I look back on the last 4+ months, I've spent a decent amount of money. Here's what I'm bought and how much I've spent on each item:

* Two pairs of running shoes, ~$80 each - I put between 300 and 350 miles on my first pair so I was definitely overdue for some new shoes.

* 1 pair running shorts, $25 - I had some athletic shorts but they were too loose to run in; thankfully the days of above-the-knee running shorts are behind me (no one needs to see that) but I needed a pair that would stay up while running.

* 3 running shirts, ~$30 each - Regular cotton t-shirts are fine for most runs, but they become a real burden during runs that are longer than 10 miles (they get really heavy when drenched with sweat). This includes two shirts my wife bought as a surprise gift.

* Camelbak, $50 - When you run for longer than 10 miles, hydration becomes an issue. Camelbaks are a great way to stay hydrated.

* Gu Electrolyte Mix, $10 - I mix this with my water for runs longer than 10 miles; it's a bit of an enhancement over regular water.

* Gu Energy Gels, ~$15 total - Conventional Wisdom says take one of these per hour of running.

* Race Fees, $115 total - I participated in two runs: a 5k in September and the Marine Corps Marathon on October 26th. Registration fees (especially for the marathon) can be pricey!

* Running Socks, $10 total - Regular cotton socks can cause nasty blisters during the longer runs, as I found out the hard way.

* Shoe Inserts, $10 - A foot injury that I suffered about 3 weeks ago rendered these absolutely necessary.

That's a total of $485. $485! It was all necessary for the most part, but still, nearly $500 spent on running in four months...there are more expensive hobbies out there and it's easy to get carried away with spending money on the new hobby. The most important thing is to determine what is essential, and what could possibly be attributed to getting caught up in the excitement of a new hobby. Readers: how have you reconciled your budget with the price of new hobbies?

-Michael
Twitter: @michael_dink

Should You Borrow From Family?

2009-10-24T09:29:00.005-05:00

With banks tightening their lending terms, more and more American are likely to consider turning to family for loans. While this might be the right solution for you, it is good to consider whether or not it makes sense for your situation.

First, can the lender afford to do so? If the answer is no, move on. It doesn't make any sense to have one family member put themselves out there to support another if it means making their own situation more precarious.

Second, consider existing relations with this family member, or perhaps friend. If you've faced any conflicts in the past then adding money to the mix is only likely to make things worse and bring up old issues. At the same time, if you've had excellent relations with someone, now is not the time to start, and money can often be a difficult area to navigate.

Next, it must be made absolutely clear what the terms are. Just saying that it will be returned at some point puts everyone in a weak position. Spell it all out and put it in writing. In fact there are several good websites which allow you to generate loan agreements - check out Virgin Money for one example.

Keep in mind as well the reduced likelihood of being paid back. 14% of loans default when they are generated by family members, whereas only 3% default with standard consumer loans.

If you've both thought it through and it seems to make the most sense for you, then we wish you well in handling the process smoothly.

Readers: We'd love to hear if you have any experience with family loans.

Cheers,

Miel

Growth of Emerging Markets

2009-10-23T05:47:00.000-05:00

Emerging markets are arguably a force to be reckoned with and something to pay attention to if you are interested in diversifying your risk and potential gains.

The biggies out there are the BRIC; aka Brazil, Russia, India and China. Together they comprise over 40% of the global population and have experienced rapid economic growth in recent years.
As infrastructures are developed and consumer spending increases, emerging economies often expand faster than already developed nations. For example, in 2008 GDP of China and Brazil grew more than 7% compared with only 1.1% in the US.

Given the steep gains to be had in emerging markets, impressive stock returns have driven stocks up 36% between January and mid-June 2009. Given what we know has been the reality here in the domestic market, this is certainly stark contrast. However, previous to that, in 2008, investors fled the market and it tanked by more than 54%.

Of course with great potential gains come the flip side of potential risks. The main volatility comes from countries having less stable political, legal and financial systems, low liquidity, and currency swings.

For what its worth, we've been putting more of our money into companies that have exposure to emerging markets. For example, last week we picked up an additional 500 shares of the Finnish Cell Phone giant Nokia. The company has been taking a beating, but is better placed to sell mobile devices in the developing world that its US rivals.

Readers: What is your take on emerging markets and whether or not you are invested or interested in doing so.

Miel

Technical Analysis

2009-10-22T08:53:00.004-05:00

In a post earlier this week I talked about Fundamental Analysis and some of its basic tools. The counter to Fundamental Analysis is Technical Analysis.

Technical Analysis involves finding patterns and trends in market data, and using those trends to build an investment strategy. Technical Analysts believe that all relevant information regarding a security is contained within the current price of that security, so their focus is primarily on the internals of the price, rather than external factors such as company announcements or activity in the greater market. This is the primary reason why Fundamental Analysis and Technical Analysis are so different; from a Technical Analysis point of view, Fundamental Analysis is pointless because the effect of those fundamental indicators that I described in my Fundamental Analysis post has already been taken into account with the current price of the stock. Believing this, a Technical Analyst can then focus solely on the price of the security, and study how it has trended over time.

To illustrate the application of Technical Analysis, I'm going to look at Google's (GOOG) chart over the past year, using Yahoo! Finance's tools.

As you can see from the chart, I have the original price data, with a number of overlays and indicators. I will explain each of them and why I chose to use them, but it should be noted that they represent just a subset of the indicators and chart overlays that can be used, and the parameters can and should be adjusted. The analysis is for example purposes only.

My dataset is the two year price chart for Google (GOOG). With that price chart I have included two overlays:

Moving Average - Moving Averages are a commonly used tool in statistical analysis, particularly in the analysis of time-series data (i.e. a dataset that contains data at a sequence of time intervals, which are often uniform), so it is a perfect fit for stock price analysis. Moving Averages are used to smooth out the data, meaning short-term fluctuations are minimized so that the long-term trends can be more easily identified.

Exponential Moving Average - EMAs are a modification of the standard Moving Average. It introduces the idea of "weights", in this case, meaning that older data points have a smaller impact on the average value than more recent data points. EMAs have the same purpose as standard Moving Averages, except that by weighting the data points based on time, they hopefully do a better job of illuminating trends and eliminating noise.

In addition to the two overlays, I have included the following four indicators:

MACD - MACD stands for "Moving Average Convergence/Divergence"; it is used to identify trend changes by generating three types of signals: when the MACD line crosses the signal (i.e. price) line, when MACD crosses zero and the divergence between the MACD line and the stock price line. MACD is a lagging indicator, and many Technical Analysts use more modern, computer-based, computational analysis tools. However, it still has use as a price movement monitoring tool.

ROC - ROC stands for Rate of Change, and all it does is show the percentage difference between the current price of a security and the price of the same security a certain number of periods ago. ROC is most commonly used as a way of indicating momentum.

RSI - RSI stands for Relative Strength Indicator, and it compares up and down close to close movements in an attempt to measure how fast a security's price is moving either up and down and at what magnitude it is doing so, in other words, the momentum of the stock's price.

Fast Stoch - Fast Stoch refers to the Fast Stochastics indicator, which is used to find the relation between a stock's current price and its highest and lowest point over a period of time. Fast Stoch's tend to be very sensitive to price changes, an as such, the Slow Stochastic indicator has been introduced, and it uses Moving Averages to smooth out the Fast Stochastic values.

As I mentioned, those are just a number of the different analysis tools that you can use (others include MFI, Slow Stoch, and a variety of Volume analysis tools). I am not much of a Technical Analyst; I see value in it but right now I only use it to give me a little more information and some perspective on stocks that I'm interested in (although I'd certainly like to learn more). So if any readers have any books they'd like to suggest, I'd love to hear about them. The book I've used is entitled "Select Winning Stocks Using Technical Analysis" by Clifford Pistolese. From a technical standpoint, it doesn't have a lot of the details that some might be interested in, but it has an excellent overview of a variety of topics and I've found it very useful. Let me know what you use and what you think of Technical Analysis in general!

-Michael
Twitter: @Michael_Dink

Paying Off $123,000 in Debt in Less Than 5 Years

2009-10-21T08:06:00.004-05:00

CNN.com had a video today about a family with $123,000 worth of debt and how they managed to wipe it out in about four and a half years. The video can be found here. This family had just let their spending get out of control, and found themselves staring at six figures worth of debt and decided to do the best they could to pay it off. And they were successful.

How did they do it? A couple points stuck out to me:

* First and foremost, they took responsibility for the situation they had put themselves in and they were determined to correct it. They talked about giving it their best shot and going for it. The husband mentioned the shame he felt in letting his debt get to that point. That shame and embarrassment motivated him to do what it took to get the job done.

* They cut down on their budget. It can be easy to dismiss cutting out the little things, such as name-brand food and entertainment expenses because their unit price is often low, so mentally, the impact of eliminating them feels small. But they can certainly add up. This family was able to save a lot of money each month by savings a little bit of money in a lot of different places.

* They worked with an accredited credit counseling service. They had 11 credit cards at one point in time. Managing those accounts is in and of itself a lot of work, so they turned to an organization that would help them manage their debt. If you're in over your head, it's not a bad idea to seek advice from professionals. Just be wary of shady businesses.

* The husband got a second job. Working full time (as a chemist, no less) is tough enough as it is. But to then take on an additional part time job? The husband spoke of being so tired that he didn't know if he was going to be able to make it, but he knew he had to give it his best shot. He did what he had to do to achieve his family's goal.

Obviously they made huge sacrifices, and I have no doubt that it was a very stressful time for the whole family (especially with three kids) but they were able to achieve their goals. And in the process, it seems like they grew closer as a family (the wife talked about family dinners and how much they enjoy eating as a family now). I thought this was a very inspiring story. It's nice to hear of people facing incredible challenges and making it through successfully.

-Michael
Twitter: @michael_dink

Is It Ethical To Market To The Poor?

2009-10-20T08:36:00.004-05:00

I was recently listening to The Kojo Nnamdi Show and he had a segment on menthol cigarettes and the urban poor, and it got me thinking. We all know that companies target certain demographics, and part of that targeting is designing their products and tailoring their marketing to appeal to specific groups of people. For example, boxing's heir apparent, Mixed Martial Arts, features unapologetic violence, visually appealing women and aggressive personalities, obviously targeting as their main audience young males. And it has worked; UFC Pay-Per-View events have recently drawn well over a half of a million buys in addition to packed arenas. A more long-standing example is that of food advertising directed at children. Ronald McDonald isn't going to convince me to get a Big Mac, but a happy, playful clown offering a meal and a toy might get a young, non-coulrophobic kid to talk to Mommy and Daddy about picking up some fast food for dinner.

Additionally, there has been a precedent set for marketing limitations, most prominently with alcohol and tobacco products. The Federal Trade Commission (FTC) in the U.S. has set a variety of standards for limiting the advertisement of alcoholic beverages. While beer is less heavily regulated (tune in to any sporting event and you'll see that is in fact the case), spirits have sharp limitations. The current standard is that at least approximately 70% of the individuals potentially viewing the ad must be of legal drinking age, and ads are monitored to ensure that they don't encourage or glorify risky behavior. Also, you may notice that in the liquor ads you do see (and the beer ads, from what I've been able to tell), you won't see the actors actually consuming the alcohol.

Tobacco companies have harsher restrictions. Whereas cigarettes were a stable of 1950's and 60's television ads, restrictions have been put into place over the last 3 decades to severely reduce the number of ads you see. In 1970, Congress passed the Public Health Cigarette Smoking Act, which banned the cigarette companies from advertising their products on television or radio, beginning January 1st, 1971. Smokeless tobacco ads were banned in 1986, and later, all tobacco products were required to display a health warning from the Surgeon General on all print ads. Furthermore, in 2003 tobacco companies and magazine publishers agreed to cease advertising cigarettes and other tobacco products in magazines that have a high appeal to children, such as Sports Illustrated.

With that being the case, a precedent has been set for limiting advertisements for ethical reasons. Marketing to the poor is obviously a different idea, but it shares many of the same properties of the above examples. Large corporations spend an extremely large sum of money for customer analysis and targeted marketing. If their customer analysis yields data suggesting that the vast majority of their customer base consists of consumers living below the poverty line (or who are otherwise struggling financially), is it morally right for them to use that data to specifically target that group? Are there really no morals in business, and if so, does the government have the right to impose advertising restrictions, much in the same way that they've restricted the tobacco advertisements that may be appealing towards children? I certainly hesitate to impose any sort of a moral code on anyone, but it's an interesting question.

Turn in to any late-night television show and you'll see ads for title loans, payday loans, etc... While those types of loans have their own storied past and I could probably devote a whole series of posts to them, they have their own role in the marketing to the poor topic. They are clearly targeted to those who have fallen on hard times, and at first glance, they may appear to be a good idea for those people who need money in a pinch. However, a closer look will reveal a much different reality than what is portrayed in the commercials. Governments on the state and federal level have already been working to corral the business practices of those institutions. But should they also limit advertising?

Advertising affects everyone. Even if you claim to be independent from their influence, you're not (unless you don't watch TV, don't listen to the radio, don't read magazines or the newspaper, don't browse the internet...); if you ingest it, it does affect you (to what degree is a different issue). With that being the case, to what extent should ethics in advertising be enforced?

-Michael
Twitter: @michael_dink

Funny Check To Verizon

2009-10-19T14:39:00.002-05:00

Hello Folks,

All you personal finance and math fans may find this amusing...

Fundamentals Analysis

2009-10-18T23:36:00.003-05:00

The New York Stock exchange contains over 2,750 listings. NASDAQ has over 3,800. If you're interested in investing in purchasing a share in an individual company, as opposed to a mutual fund or index fund, that's a lot of stocks to sift through to find the handful of ones worth investing in. And that's even ignoring the other major stock exchanges in the U.S. and abroad. So we're presented with a problem: how are we to find, in the midst of all of these companies, the stocks that are going to perform how we want them to?

Ignoring the "but I have a good feeling about this one" approach (not a good one, in my experience by the way), we need to have a way of analytically evaluating companies. Doing so will hopefully eliminate companies that won't give us what we want, and will identify red flags. We're also looking for a way to better quantify our risk/reward ratio. The more we know, the better we're (hopefully) off.

There are two main approaches that most people take when evaluating a stock: Fundamental Analysis and Technical Analysis. Technical Analysis is based on the principle that all relevant information regarding a security is reflected by the current price of that security. Technical Analysis ignores attempts to place a value on a stock; rather, trends are the main attraction.

Fundamental Analysis on the other hand is predicated on the idea that markets by nature misprice a certain subset of securities, but eventually the market will correct itself and a security will be offered at the correct price. Adhering to Fundamental Analysis principles means attempting to recognize undervalued companies and investing in them before the market corrects its mistake.

Finding bargain securities is more than just finding ones that are cheap. You have to analyze the current state of the economy, the current state of the industry within which the security you're interested in is contained, and then finally, you have to analyze that company's financial profile.

The above picture is from Google Finance's page for Google. From it, you can see basic information about Google's fundamentals, including the price per share, EPS, P/E and Volume, along with other popular indicators. It's been my personal experience that Google Finance and Yahoo! Finance are the two best (free) sources of information on companies. If you're looking to incorporate more Fundamental Analysis principles in your investing, here are some indicators to look for:

Assests

Assets are anything that has value or can be converted to or sold for cash. This includes investments, manufacturing equipment, copyrights and the like. When examining a company's assets, you're looking to see if they have increased their assets since the last year, and if they haven't if it's because they've written off an asset (like banks have done with these mortgage-backed securities) or sold a previously held asset.

Liabilities

Liabilities include anything that the company owes to another organization. This includes both long-term and short-term debt. A red flag when examining a company's liabilities would be, for example, if the growth rate of a company's liabilities is outpacing that of their assets. Recently, more companies have gotten to the point where they're more willing to accept debt in exchange for potential growth. When the bottom fell out of the economy, these companies were left with crippling debt and stagnant asset growth. While it's true that you have to spend money to make money, it has to be manageable. When I invest, the first thing I look at is a company's total liability.

Equity

Equity is essentially the net worth of a company. It's what's left over when you subtract a company's liabilities from their assets. What you're looking for here is steady equity growth of 5-15%.

Sales

It's pretty clear what sales are referring to, and obviously, sales are the lifeblood of a company, and a strong indicator of future growth. Again, you're looking for a number here of around 10% increase in sales per year. Sharp increases in sales can garner a lot of attention, but probably aren't sustainable, and single-digit increases don't instill a lot of confidence in the future of a company, with regards to overall growth.

Earnings

Earnings are the bottom line; the buck stops at earnings when looking at a company's income statement. Earnings can be sliced many different ways (Overall Earnings, Earnings from Operations, etc...) but at the end of the day, is the company increasing their earnings from year to year? An answer of "no" to that question is a strong indicator that you need to look elsewhere.

Expenses

Expenses can be thought of as the operating cost of running that specific company. What you're looking for here is stability; expense growth that keeps reasonable pace with the growth of the company overall. Unusual expenses or spikes in expenses are red flags. If a company is too large and bloated, you'll see huge expenses cutting into their profits (Profit = Sales - Expenses).

Price-to-Earnings Ratio (P/E)

I could write an entire blog post on P/E alone. P/E is one of the most widely regarded and used ratios in Fundamental Analysis. This ratio is important because it describes the relationship between the company's earnings and the share price (The value can be found by dividing the current stock price by the EPS). But using P/E is all about context. That's why it's important to look at both the Trailing P/E (evaluated over the last 12 months) and the Forward P/E (evaluated using projections over the next 12 months). Low P/E's are desirable, but again, it's all about context. You need to compare a company's P/E to both the industry and the general market, and then determine why the ratio is what it is. Is the P/E high because investors anticipate higher earnings in the future, or because earnings have plummeted? Is the P/E low because earnings have increased, or is the share price unreasonably inflated? If a company doesn't have a P/E, that's bad. That indicates that the company has no earnings, and outside of speculating (a.k.a gambling), it's usually not a great idea to invest in a company with no earnings.

Price-to-Sales Ratio (PSR)

PSR is the company's stock price divided by its sales. PSR doesn't give the complete picture, but it can help grant more perspective on a company. Company's are also notorious for manipulating their financials to cover up bad news, but sales are much harder to manipulate than earnings, which gives PSR some value. Generally speaking, a stock that has a PSR of less than one is considered a potential bargain.

Book Value

Book Value is a way of looking at a company from a purely accounting standpoint in an attempt to compare its market value to its intrinsic value. If a company has a market value that is more than its book value, that could indicate that the stock is overpriced, and should be avoided. Again, Book Value is a useful tool, but should just be considered part of the overall picture.

Of course, all of those indicators should be viewed in relation to both that company's market sector and the overall economy. For example (purely hypothetical) if a company has, over the last 5 years, a yearly sales growth rate of 20%, that might look really good. But if the sector average is 30% per year, then that number doesn't look so great. Also, like in these recent economic times, a company might only eek out a equity growth rate that's barely in the black. But compared to the rest of the economy, that's really good for right now.

Those are just some of the main indicators used; obviously there's a ton of information, and countless other ratios and indicators used, such as Profitability, Return on Assets/Equity, Total Cash, PEG Ratio and others. If interested, there are a ton of books out there on fundamental analysis and even more free resources available online.

http://www.google.com/finance
http://finance.yahoo.com/

-Michael
Twitter: @michael_DINK

Book Review: How to Get Rich

2009-10-18T09:40:00.005-05:00

Hi All,

In a sea of cruddy personal finance books, Felix Dennis' How to Get Rich is a remarkable standout. The author Dennis is a multimillionaire and owner of Dennis Publishing, Inc. He's known most famously in the U.S. for being the owner of Stuff and Maxim Magazines - young men's publications famous for scantily clad models and electronic gadgets. More importantly for you, Dennis is really, really wealthy and he's written about how he made his dough.

Over the past couple of months, we've worked through How To Get Rich and am happy to recommend it to you. Dennis has the authority of authorship of a self made millionaire with the quality of writing of a poet and magazine editor. Its an engrossing, pleasant and informative read.

What makes How to Get Rich different and better than most of the junk on building wealth out there, Dennis spends a lot of time trying to talk people out of getting rich. In reading his book, he makes several points that most other authors don't. None of them are particularly pleasant.

First, its hard to get rich. Dennis writes about the UK and notes that only .000016 of 60 million British citizens are substantially rich. That means one's chances of obtaining real wealth are something like 1 in a million. The odds are tremendously stacked against you.

Second, Dennis argues that the reality of wealth is less peachy that most people think. Having larger amounts of wealth means that tendencies to misbehave can be magnified. For example, rich people purchase big houses, servants, and spend excessive amounts of money frivolously on parties and interior decorating. Some wealthy people also fall victim to illicit substance abuse and use of sex workers. According to Dennis other downsides to becoming wealthy are the fact that its difficult to trust people, the wealthy have to worry about theft, and maintaining old friendships requires a surprising amount of work.

Third, Dennis' method of getting rich requires time and effort. Felix is known primarily for owning and running publishing companies. This method requires a fair amount of work which not everyone has the skills or desire for this. Second, the process of generating wealth often means that family and friends get neglected. Also, Dennis argues there aren't any quick fixes to building wealth - you can't just cut back to on your expenses and save a little money at to become rich. Instead you'll have to be starting and selling companies.

If you really want to get rich, and are willing to put in the effort, How to Get Rich argues there are 8 things you need to do:

1. Analyze your need. Desire is insufficient. Compulsion is mandatory.

2. Cut loose from negative influences. Never give in. Stay the course.

3. Ignore "great ideas". Concentrate on great execution.

4. Focus. Keep your eye on the ball marked "The Money is Here".

5. Hire talent smarter than you. Delegate. Share the annual pie.

6. Ownership is the real "secret". Hold onto every percentage point you can.

7. Sell before you need to, or when bored. Empty your mind when negotiating.

8. Fear nothing and no one. Get rich. Remember to give it all away.

Dennis is somewhat controversial - at one point he admitted killing someone. Dennis is also a self reported cocaine user, but the book is worth reading regardless. How To Get Rich can be found online for 13 bucks. Click here to give it a read.

Thanks,

James

Should You Borrow From Family?

2009-10-16T12:22:00.000-05:00

With banks tightening their lending terms, more and more American are likely to consider turning to family for loans. While this might be the right solution for you, it is good to consider whether or not it makes sense for your situation.

First, can the lender afford to do so? If the answer is no, move on. It doesn't make any sense to have one family member put themselves out there to support another if it means making their own situation more precarious.

Second, consider existing relations with this family member, or perhaps friend. If you've faced any conflicts in the past then adding money to the mix is only likely to make things worse and bring up old issues. At the same time, if you've had excellent relations with someone, now is not the time to start, and money can often be a difficult area to navigate.

Next, it must be made absolutely clear what the terms are. Just saying that it will be returned at some point puts everyone in a weak position. Spell it all out and put it in writing.

Keep in mind as well the reduced likelihood of being paid back. 14% of loans default when they are generated by family members, whereas only 3% default with standard consumer loans.

If you've both thought it through and it seems to make the most sense for you, then we wish you well in handling the process smoothly.

Readers: We'd love to hear if you have any experience with family loans.

Cheers,

Miel