Dual Income No Kids

Payday Loans Vs. Credit Cards, Which is Worse?

2009-07-17T14:02:00.001-05:00

A couple of weeks back, Miel and I met with J, a fellow personal finance blogger who runs a very good website called Budget Are Sexy. We were having coffee and ended up getting into a debate about the relative merits of credit cards vs. payday loans. That is, in a bind which would be worse to borrow from?

We ended up wrangling about it for a good 20 minutes, and in retrospect it looks to me like the bottom line is that if you really need to borrow and can only chose between credit cards or payday loans, the credit card is a far better way to go. Why?

Payday loans are a major rip off.

What? A rip off? Yep. Payday loans can charge effective interest rates (interest & fees) that are hugely expensive. For example, in Missouri, its legally permissible to charge annual interest rates of up to 1,955%. In Montana, you can get hit with rates up to 652% and in Virgina you'll be charged an effective rate of 610%. In most other states the maximum allowed interest rate is higher than 300%. In fact, the rates are so over the top that payday lending isn't legal in some states. Congress has capped the amount of fees and interest that payday lenders can charge military personnel and consumer advocacy groups like the Consumer Federation of America hate them with a passion (1).

Credit cards aren't great, but tend to be cheaper than payday loans.

Credit Cards are obviously not an optimal way to borrow money either. Don't believe me? Congress recently had to crack down on the credit card banksters (1). Even the normally lethargic FDIC is constantly penalizing some local banks for abusive credit card lending. The tricky business practices of the credit card industry are well known by now; arbitrary rate hikes, fee harvesting, etc. etc. In addition, some people actually think widespread use of cards has a detrimental impact on public health (1).

Even though some people are credit card addicts, their effect doesn't seem as bad as payday loans. The percentage rates on credit cards are usually less than 30%. With fees the effective rates can often be higher, up to 120% if your balance is small. However, even at 120%, the cost of carrying cards is usually nowhere near the 300% you'll see with payday loans. When you think about in terms of your cost to borrow, credit cards win hands down.

Bottom line: look for alternatives to both. If you do need to borrow money, its probably best that you look for a low cost alternative. Consider a person to person loan either in an on-line outfit like Prosper.com or LendingClub.com. If that doesn't work it might be possible to borrow directly from a friend or family member. There are ways to formally do this so the relationship doesn't get akward (here).

Here are some other articles on this topic.

Payday Loans vs. Credit Cards
Credit Card Cash Advances Vs. Payday Loans
Why a Payday Loan is Better Than a Credit Card

Best,

James

P.S. In the interests of disclosure, you'll note we do have two payday links on our website. This because we DINKs gotta eat and pay the mortgage, just like the rest of you.

Support Street Carts

2009-07-17T09:14:00.000-05:00

Depending on where you live/work, vendors selling food from street carts can be a great alternative on those days when you don't manage to pack a lunch.

DC is still kind of getting the hang of street vendors. Hot dog stands have been an institution for many years, but the nation's capitol is just starting to spread its wings and expand to other cuisines.

Today my colleagues and I enjoyed a lovely burrito in the park after picking up the huge wraps for $5 at a nearby stand. It was simply wonderful.

In fact, it was cute because when we showed up right at noon, with five of us, someone had noted that there must be something wrong if there isn't a line. By the time we left there were at least a dozen people in line behind us!

Close to our hearts, Portland, Oregon is one of the street cart capitals of the US. It has just about ever type of cuisine you could imagine within the downtown portion of the city.

Help support the little guy, get a fabulous lunch at a good price, and enjoy some time outdoors.

Readers: If you have any tips on your favorite vendors - anywhere in the world - we'd love to hear your thoughts.

Cheers,

Miel

Peer to Peer Lending Reccomendations

2009-07-16T10:24:00.009-05:00

Hi All,

If you want to get into peer to peer lending, an interesting bloomberg article just came out today on the subject.

To add come context, here are our recommendations regarding peer to peer lenders.

1) Prosper.com

AVOID. Prosper doesn't do as good a job managing their borrowers as other alternatives in the industry. We've lost a LOT of money on that website, mostly our fault, but prosper's screening and debt collection policies didn't help. Prosper has also recently made it harder to withdraw free cash from their accounts, which for us has a feeling of adding insult to injury. Bottom line: lots of deadbeats, management not customer centric.

2) LendingClub.com

INVESTIGATE. LendingClub has an interface thats not as user friendly as prosper.com. So, its harder to navigate around their webpage. This is a problem because you have to work at lending money relative to prosper. That said, LendingClub does a MUCH better job screening applicants for loans, so there are fewer deadbeats on their site. Since the ultimate goal is to make money via loans, this is of paramount importance.

Also, LendingClub is much better about relationship management than prosper. LendingClub actually has people you can call and talk with, this doesn't hurt when you work with an online business. In contrast, Prosper has a nasty habit of censoring criticism on their company managed user forums. Bottom line: better borrowers, better customer service.

3) Kiva.org

INVESTIGATE. Kiva is an on-line microlending/development outfit. They basically make small loans to people in developing countries who don't have access to capital. We haven't done a lot of lending via Kiva, but the thing is, they do not pay interest, you only get your capital returned. Since the point of lending is to make money from charging other people to use your money, Kiva is disadvantaged. However, if you do believe that the best way to help others is by empowering them economically, then you will love Kiva. Kiva also interviews and trains their borrowers so one can be relative confident the borrowers will repay their funds. Bottom line: look into Kiva, but only for charity.

Here is the link to the Bloomberg article.

Best,

James

Fifty Ways to Love Your Money

2009-07-15T17:04:00.005-05:00

Hi All,

AARP has a great listing of 50 things to do to improve your financial situation. Most of them are nuts and bolts kinda stuff, but are still worth reviewing even if you aren't over 50.

Click here for the link.

Best,

James

Asset Allocation Basics

2009-07-15T08:39:00.006-05:00

Hi All,

We picked up a primer on asset allocation in Portland last weekend, so you should be hearing a lot more about this topic over the next few weeks. However, if you aren't familiar with buying stocks, asset allocation is an important topic. Persons interested in maximizing their wealth should have an adequate command of the basics.

Essentially, asset allocation is the process of deciding how to divvy up your investment dollars among various types of resources. More generally asset allocation is also an approach to investing which emphasizes diversification.

Asset allocation has four basic concepts:

1) A fundamental relationship between investment risk and return.
- The main idea here is you need to incur greater risk to yield a greater gain. Of course, the relationship between risk and return is far from perfect - that is - you won't automatically get more money if you incur higher risk. Also, each individual has what's called their own "efficiency frontier", which means in economic terms, that individuals each have their own optimal mix of risk and return.

2) Asset class selection - determining which investments are right for you.
- Asset classes are different types of investments. The main idea is that the different types of investments have different characteristics. Right, some are more tax efficient than others, some have higher creditworthiness, others provide protection from inflation, etc. etc.

3) Determining what mix of investments is right for you.
- In addition to finding out what assets you want, you need to find out what the best mix of them is. The statistical metric that is used to measure how well asset classes go together is called "correlation". It's an important concept because you want a mix of assets that are negatively correlated. This means that if one of your assets declines in value, then others may go up. For example, if you own stocks and gold; when stocks decline, gold may go up. The idea about mixing your resources is to reduce your risk by being sure you have some negative correlation in your portfolio.

4) Rebalancing your portfolio to keep it optimized.
- The real world is constantly fluctuating. Economic change causes some business to do better than others. You can't just set up your asset mix and call it good. The major issue is your assets will grow at different rates, thus causing your portfolio to drift away from its optimal configuration. In order to address this, you have to periodically buy and sell assets. This is known as "rebalancing" your wealth. Rebalancing can help your portfolio by causing you to buy low and sell high as well as by exploiting natural fluctuations in the stock market to get extra return.

So, those are the basics. Stay tuned for more or feel free to pick up a copy of Asset Allocation For Dummies. The book is available at the World's greatest bookstore. Powells, for $22.00. My advice, check out the google preview or get the e version, they're cheaper.

Best,

James

Tip Of The Day: Turn Off The News

2009-07-15T08:21:00.003-05:00

Hi All,

I realized after coming back from vacation last week, that when I read the financial news, my blood pressure starts to increase. So, here is today's tip: turn off the news.

Unless you are a portfolio manager or an active trader, keeping your eyes glued to the financial news will just stress you out. It might also distract you from your long term goals via information overload.

At most you might consider monitoring your stock investments once per month or once per quarter.

Thanks,

James

Cost of Travel Delays

2009-07-14T07:06:00.005-05:00

James & I are happily back in DC, if only a bit challenges by the fact that it is 5am West Coast time. Of course, as we left Oregon, we happened to run into a bit of a SNAFU. We ended up missing our flight due to delays, weather, and subsequent traffic backups.

In the end this cost us around $800 to buy ourselves out of the problem. A relatively expensive reminder of why you build even more time into potential delays. With all of my travel this is only the second time I've missed a flight due to issues on my side, but it is still quite a wake up call.

Last year a flight simply never took off out of Kabul - no real reason was given - and I believe this cost me around $1500 to deal with. At the time I wasn't in as good of a place in terms of cash flow, so it was pretty tight in terms of adjusting various budget items to make sure that I could pay off my credit card on time. As a result we ended up doing more to establish an emergency fund for such times.

This time around I'm happy to say that I was in even a better place. Despite the difficulty of sucking up a large chunk of change out of my bank account, I feel very thankful that the money is there. I didn't even have to dip into our emergency fund. In fact, I had to see how ironic it was that the last time I checked my account I did a quick calculation seeing that I had about $900 that I could think about where I wanted to invest this.

While obviously I'd much rather be investing this, at least I'm in a position to be able to deal with the hiccups of life. I believe this is the first step towards financial security.

Best,

Miel

The 12 Commandments of Stock Speculation

2009-07-13T10:29:00.002-05:00

From Carret (1930) the twelve commandments of stock speculation are:

1) Never hold fewer than 10 different stocks over 5 fields of business.

2) At least once every 6 months, reappraise every stock you own.

3) Keep at least half your portfolio in dividend paying stocks.

4) Consider dividend yield the least important factor in analyzing any stock.

5) Be quick to take losses and reluctant to take profits.

6) Never put more than 24% of your portfolio into securities about which detailed information is not readily and regularly available.

7) Avoid inside information as you would the plague.

8) Seek facts diligently, advice never.

9) Ignore mechanical formulas.

10) When stocks are high, interest rates rising and business prosperous, at least half a portfolio should be placed in short term bonds.

11) Borrow money sparing, and only when stocks are low, interest rates are low and falling and business depressed.

12) Set aside a moderate proportion of available funds for the purchase of long term options on stocks in promising companies when available.

The Pros and Cons of Buying Silver

2009-07-12T12:16:00.010-05:00

Hi All,

Its Sunday and we're both still in Eugene, Oregon. On Friday my brother and I drove over to one of the local coin dealers where we picked up a couple of ounces of silver. We ended up buying a 1 ounce silver eagle and another 1 ounce silver bullion coin.

So, the reason I'm bringing this up is one of our readers emailed and asked us to write a little more about the ins and outs of buying silver. Here are a few points that are relevant if you are thinking of investing in this asset.

Reasons to get into silver.

1) Limited Hedge Against inflation. Precious metals like gold and silver can hedge against inflation. However, the relationship between real returns on these assets and inflation isn't that great, at least according to the scientific articles I've read. For example, one article argued that silver hedged inflation only during the early 1930s and the late 1970s, other articles didn't show a relationship at all. So, what this indicates is that silver can hedge inflation, but its effectiveness has limitations.

2) Diversification. Most of the time when you hear about diversification, its in the context of the stock market. Typically you'll see something to the effect that you need to buy stocks in larger and smaller companies, and that you need to get positions in different industries, etc etc. Well, hard assets like gold and silver tend to have low correlations with other types of investments. So, if your 401k stocks are declining, the price of silver might increase.

3) Return. One great reason to invest in silver is the possibility of making some money. For example, my father in law bought a large batch of silver when the commodity was trading for less than 4 bucks an ounce. Recently the white metal has been trading for $12.65, which indicates a 200% return on my father in law's investment.
(Example of chart showing spot price of silver).

4) Low Cost. Silver usually costs less than $20 bucks per ounce. Even if you don't have a lot of money, you can often get some silver with what you've got in your pocket or by scraping up change lying around the house.

Here are some reasons NOT to do it.

1) Better alternatives. Silver and gold prices generally follow economic activity. So, when the economy is strong, these metals tend to do better. Like an inflation hedge, the relationship isn't all that great, but it does exist. However, when the economy is doing well, other assets - stocks in particular - also do well. Silver compares unfavorably with stocks for other reasons. For example, stocks pay dividends and can split. Splits and dividends can lead to compounding. If you buy actual physical silver bullion, you won't be able to take advantage of this. So, briefly put, stocks are often a better alternative to silver.

2) Hassles. Provided you are buying actual physical silver, taking possession and holding onto the metal can be a real pain. For example, if you have anything over oh, say, 100 ozs, you need someplace safe to store the stuff. This is usually a safe or a safety deposit box. The major problem here is that you need to incur the costs of the storage. Safes can be hundreds of dollars and deposit boxes can charge a healthy annual fee. Also, if you are buying the silver, you need to get in the car, or get on the subway, or whatever and actually go and make the transaction. Both storage and buying can be a hassle.

3) Freak Factor. The third reason not to buy silver is what I call the "freak factor". A lot of people who are really heavily into owning gold and silver are conspiracy theorists. They believe the government is going to confiscate their bullion, that the federal reserve is a Jewish cabal that is out to control the world, etc. etc. etc. Plus, a lot of bullion dealers are pretty crusty people. They tend to be a bit suspicious of anyone who isn't a 40 to 60 year old white Anglo-Saxon slightly overweight white guy. Do you really want to be associated with that crowd? I personally don't mind so much, but its a legitimate question.

So, what should you think about when buying silver?

Assuming you want to buy actual physical silver...

1) Get something standard. There are a lot of private companies that have produced silver rounds. These vary in the quality and amount of bullion included. Instead, of getting these, consider Canadian Maple Leaf or American Eagle coins. These are produced by the Canadian and US Federal governments, so they are standard and a bit more universally recognizable than the private options. More importantly, they also have higher resale value.

2) Know the market. Silver trades on exchanges just like stocks. The value of silver at any on point in time is called the spot price. Don't pay more than a couple of dollars over spot. A lot of dealers will try to jack you on price so know your market and shop around. Consider both local dealers and online sources like eBay.

If you want to get into silver, but don't want to buy the actual metal...

1) Buy an exchange traded fund. A couple of popular ones are: SLV, DBS and AGQ. The investments indicated by DBS and AGQ track the index price of silver and may be a bit cheaper over the long run due to lowered expense ratios.

2) Consider a mining company. A lot of mining companies haul silver out of ground as a by product of their operations. Or the alternative is that you can buy shares directly in a mining company that focuses on extracting and producing silver.

3) Other alternatives. There are a TON of ways to invest in silver other than physically buying the metal or getting it indirectly via an exchange traded fund or a mine. These other options include spread betting and derivatives. We know almost nothing about these alternatives, so its best to check Wikipedia.

Finally if you want a read about a really hardcore silver mine, check out the story of the Bolovian Potosi mine. The Potosi mine singled handedly funded Spain's ascension to world power in the 17th century and was responsible for the deaths of hundreds of thousands of indigenous persons. The mine is so deadly, it has an image of a devil like imp as its patron saint. Its very interesting story indeed.

Best,

James

The Pope On Taxes

2009-07-11T12:02:00.004-05:00

Not being Catholic, I don't usually pay a great deal of attention to the Pope. However, the Holy Pontiff is now advocating allowing individuals to decide how they want their tax money to be spent. Its an interesting idea, to be sure.

From his 2006 letter to the faithful.

One possible approach to development aid would be to apply effectively what is known as fiscal subsidiarity, allowing citizens to decide how to allocate a portion of the taxes they pay to the State. Provided it does not degenerate into the promotion of special interests, this can help to stimulate forms of welfare solidarity from below, with obvious benefits in the area of solidarity for development as well.

Heres the link to the letter.

Hat tip to the Tax Prof Blog.

Best,

James

DINKs Back in Oregon, Economy Not Doing So Good

2009-07-10T10:21:00.005-05:00

Hello All,

Miel and I are back in Eugene, Oregon for this weekend. Miel is attending the Oregon Country Fair and I'm visiting family in town. Being back in Oregon is wonderful. The mornings are quiet relative to the busy east coast and the air and water are much cleaner.

However, the economy is absolutely the pits out here. Unemployment locally is roughly 14%. And we've been seeing signs that times are tough. For example, my mom Gretchen is a unemployment claims judge and her office is getting hit with way more unemployment claims filings since last year.

She also volunteers as a legal aid lawyer for senior citizens in Eugene. Once or twice a month she heads to a local senior center and talks with retirees who are having legal problems. Many of these problems revolve around debt issues.

For example, she had one client, a senior who relies on Social Security. This gentleman earns about $1,100 per month but had to borrow for house repairs. He was making payments - they had been figured into his budget - but missed a month. It is unclear why. Bank of American then started a cascade of increased interest rates and minimum payments. This left this gentleman with with an effective interest rate of about 38% and a debt balance of over $20,000 - hugely more than the original amount. Because this person is on a fixed income, he will never be able to pay the debt off. With the high level of unemployment, its tough to get the kind of part time jobs that a senior could otherwise use to supplement his income. In short, this poor guy is just out of luck.

The take home message here is that the economic downturn locally, at least among some people, is being exacerbated by predatory lending.

Best,

James

Use Life Insurance Wisely

2009-07-09T13:30:00.000-05:00

On the topic of insurance this week, it is important to consider how one should utilize insurance in the event of a loved one passing away. The best way handle this is to invest the life insurance to preserve the initial capital and live off of the income generated from that investment. Also keep in mind that your investments need to be adjusted for inflation so that they will sustain you over the long term.

Please don’t just live off of the payout. Your loved one will be most honored by seeing you live out your life more securely.

I Can Pay Off My Debt Early, Should I Do It?

2009-07-08T10:00:00.002-05:00

Yes! It's good to pay off your debts early!

If you do have extra money and want to pay down debt, the thing to do is be sure that the extra funds go directly to the principal of the loan obligation. Sometimes loan companies will try to be tricky and apply your payments in advance towards your monthly fees. For example, back in 2003 I sent my student loan lender $2,000. Instead of applying it to the principle, the funds were added to my monthly payments. The company instead said I didn’t have to make payments for a year. This is obviously a problem because when companies do this, you don't get out of debt any faster.

So, the way around this is to contact your lender and be sure to understand how they apply extra payments. For example, you may have write on your check that the funds should be applied to the principle.

As a final caveat, when paying off your debt early, you need to sure you aren’t sacrificing your savings. Unemployment is really high right now. This means you’ll need a healthy emergency fund. In addition you need to be sure that you have enough money to pay your current bills, so if you aren’t that hot at budgeting, consider leaving a little extra in your savings.

James&Miel

Q & A with Bob Nichols, or How the Wealthy got that Way

2009-07-07T15:10:00.007-05:00

Hi All,

Its another brilliant day here in the states. For today's posting, we are pleased to bring you an interview with Robert Nichols, the Chief Executive Officer of Windward Capital, a Los Angeles based wealth management firm. We are featuring an interview with Robert for two reasons. First, his funds managed to come out of last years stock market bloodletting beating the averages - a rare feat. Second, Bob has worked with a lot of high net worth people and thus has a good sense of HOW one becomes wealthy. This is obviously an important question for those interested in financial security.

In his own words, here are Mr. Nichol's thoughts on wealth building and successful investment strategies.

ABOUT ROBERT.

My education has focused on business and finance. I am a graduate of the Claremont Graduate University with an MA in Management, an MBA in Business and, a Ph.D. from the Peter Drucker School of Business.

In 1971, I formed an asset management firm, RNC Capital Management Co. (RNC) and served as its President until 1992. During that time, the firm grew its assets under management from $500,000 to well over $1.3 billion, including large institutional clients such as the Arkansas Police and Fire, American Institute of Architects, GTE and the Territory of Guam. By the time I sold the firm to Bank Austria in 1992, we also managed 8 public traded mutual funds.

I created my current firm, Windward Capital Management Co., for the express purpose of implementing an investment strategy that we had been studying at RNC for a number of years. In addition, I was anxious to provide investment services to high-net-worth clients in the Los Angeles area to escape the travel burden I had been experiencing at RNC.

Our clients are now, generally, the Trusts of wealthy individuals and their families.

BUILDING WEALTH?

Building wealth normally takes time and patience, and because time is such an important element in the wealth building process, a certain amount of discipline is also necessary. One of the important rules is to “pay yourself first.” Let me explain. Most people like to spend everything they make, and that is a huge and, obvious, impediment to building wealth. It’s so easy to buy that more expensive car or take that nice vacation trip, but it’s a habit the wealthy have learned to break. If you “pay yourself first” you will set aside at least 15% of your paycheck as soon as it is cashed. A good rule is to save about 10% in a retirement account (that will also give you some tax-savings) and put 5% in a cash account for a rainy day. Don’t kid yourself, life is going to deal you a number of very difficult financial moments; have some cash on hand and prepare yourself for those difficult times. In the wealth-building arena, nothing is more important than financial discipline.

OUR CLIENTS' WEALTH-BUILDING EXPERIENCE?

Believe me when I tell you that 99% of our wealthy clients didn’t accumulate their wealth overnight. Most of them can tell stories of near-despair and more than one period of time in their lives when their financial outcome was uncertain. In almost every case, however, they have said that spending discipline brought them through the tough times. I have noticed, over the years, that the ability to build wealth is present in almost any occupation that becomes the PASSION of the worker. Passion soon transforms itself into PERSISTENCE and DETERMINATION that are key elements to wealth building. We have wealthy clients who are dairy cow brokers, plumbing supply owners, engineers and clients who participate passionately in a large number of other occupations. The key to their success is the love of their work. There is an old saying that says, “Love what you do and you will never work a day in your life.”

MARKET CONDITIONS?

There are many different factors to be used by an investor in allocating investment assets including age, debt, and other financial and family factors. It would be worthwhile to mention, however, that the single largest deterrent to making good investment decisions in all economic conditions has been investor EMOTION. The emotions of greed and fear are not equally distributed in the human mind, however. Fear trumps greed by a 2 to 1 ratio. Today, investors need to ask themselves, “Is the U.S. ever going to recover from this economic downturn?” If the answer is “ Yes” then investors should put their fears aside and begin to buy equities. Small investors can buy Exchange Traded Funds or mutual funds and gain the diversification they need to partially allay their fear of another stock market downturn. In my opinion, investors with long-term horizons (5-10 years) are being presented with a compelling investment opportunity.

Small portfolios of individual stocks should be built around a core group of large company equities. Stocks like Proctor & Gamble and Johnson & Johnson pay excellent dividends and, in my opinion, are good examples of such core long-term holdings. (Investors should seek the advice of their financial consultants before investing). The mistake most small investors make is in being too speculative. Remember, becoming wealthy is a long-term process, and there is nothing wrong with getting paid to wait by collecting dividends.

There is always a reason NOT to invest. Wealthy investors are contrarians, and they are always looking to swim against the tide of fear that keeps smaller less experienced investors on the sidelines.

(Bob and Teammember At Work)

THE WINDWARD STRATEGY?

The most important research we perform is research designed to identify two or more dominant economic themes. We buy equities for both our Growth and Value investment strategies that are participating in more than one such theme. In other words, we want the stocks we use to have more than one dependable source of revenue and, if possible, we would always prefer a company with a reliable, strong, free-cash flow. Our Growth portfolios are a little more volatile than our Value portfolios, but the two key issues with us are to contain the portfolio risk while continuing to produce exemplary investment returns.

As I said, we are very risk averse. Our growth strategy allows us to use value stocks to offset the inherent volatility of growth stocks, and our use of a limited number of growth stocks, in conjunction with a greater number of value stocks, is designed to enhance the performance of our Value portfolios.

LIFE CYCLE INVESTING?

Certainly, as an investor ages, or takes on more financial responsibility, he or she should consider the role that bonds might play in their portfolio. Bonds are not “bullet proof,” however, they do provide additional stability to a portfolio during a stock market downturn. Having said that, I would also say that it may prove to be very difficult to keep up with inflation with a fixed-income-only portfolio. There are a number of excellent balanced (some stocks and some bonds) mutual funds that can accomplish almost any tolerance for risk that an investor might have.

OUR WEBSITE?

Our website has a lot of information about our investment Philosophy, Portfolio Managers, Investment Process and Performance over our many years of investment management. If you do not find what you are looking for on our website, just give us a call and we will send you a complete brochure.

www.windwardcapital.com

Thanks for listening.

Robert W. Nichols, Ph.D.
CEO/Portfolio Manager
310-893-3000

How Much Life Insurance Should You Buy?

2009-07-07T13:35:00.000-05:00

If you are shopping for life insurance for your significant other or family, here is a quick rule of thumb: buy at least ten times what both of you together make. So if both of your earnings are $50,000, consider getting life insurance in the amount of $500,000. The ten times earnings metric is a good rule of thumb as it ensures enough time for your dependents to get on their feet while accounting for taxation and the fact that the grieving processes can take a long time. For a stay at home spouse, you might consider getting something in the range of $400,000 to $500,000. Don’t bother with getting life insurance for your minor children. If, heaven forbid, your kids do pass away, you might consider getting a rider to your policy that allows for some funding for burial expenses.

Keep in mind that the main purpose of life insurance is to enable your family or partner to maintain a similar level of lifestyle as they are accustomed to. For instance, in our case, I would want James to be able to stay in our current place and also to be able to finish his doctorate without having full employment. On the flip side, while I could manage our mortgage and finances on my income, I couldn’t do so while still fully funding my retirement and being able to save for additional goals.

Everyone’s situation is different, so think about what works from you and what is important to leave to care for your family.

Best,

Miel

H & R Block and Unlicensed Tax Preparation

2009-07-06T16:02:00.007-05:00

Hi All,

This posting came across my radar screen a couple of days ago. Its a posting by a tax blogger whose postings I read with some frequency. In it, he discusses the problems a couple of his clients had with a major tax preparation company - I think its H&R Block.

The posting is relevant I think because it illustrates a couple of things:

1) The importance of getting competent tax help. The more one gets involved in personal finance, the more complicated one's tax situation becomes. Its important to have either the right kind of education or help so you can make the right decisions regarding your money and its tax implications.

2) It also indicates that not all tax preparers are alike. In this case, H&R Block *probably* screwed up this couples taxes. This would be in following with this companies very poor track record.

With permission, I am reposting the TaxGuy's post.

--------------------------------------------------------------------

Bruce writes...

Friday I was interviewed and retained by a new client. This particular client has several issues that actually can fall in line with a great debate we have all been following.

First, a little background:

A young newly wedded (three years) couple has their tax return done by “pros” as they are not among those who follow the taxing world. We will call them Pat and Jody Taxpayer. Having just started their own Business they left HeRBert (the group who prepared their returns) for what to them was perceived as a tax professional. They retained a CPA to handle some general bookkeeping and complete tax returns.

Good choice?

Of course it is, “All but the militantly nefarious and hopelessly deluded concede that CPAs are experts at keeping books and records. There simply is no higher accounting designation.” then CPA.

The CPA (Certified Public Accountant) maintained records by gaining access to Pat & Jody’s bank account using the online statements. The first tax season for this CPA came around and she completed the 2007 tax return. Another year passed, and she completed the 2008 return.

Several months ago, the IRS notified the Taxpayers that the 2007 return was under investigation. Seven lines on two different Schedule Cs were in Question.

Considering a CPA had prepared this return there should be no worries.

So how did I get this return?

When the time came for the audit with the “Tax Compliance Officer”, the CPA, had manufactured information to provide the IRS to validate two of the seven lines in question and did not show up to guide the Taxpayers through the 3 ½ hour long ordeal. Needless to say, the IRS found no substantial proof or validation for seven lines in question. P & J now are holding a bill from the IRS for over $10,000.00.

Rest of the posting here.

Steamed Buns

2009-07-05T13:48:00.004-05:00

As we head off to San Francisco Chinatown we are on a mission to see where we can find the best cheap, hole in the wall place for steamed buns. Adventures in finding fun dive places to go can often be more fun than going out to some fancy restaurant.

As a tip for the summer, make it a game around family/friends to see who can find the best cheap eats deals. You might be surprised at what great stuff you'll find at much less than you might otherwise spend.

Off to find cheap steamed buns!

Cheers,

Miel&James

What Kind of Insurance Should I Buy?

2009-07-05T13:21:00.004-05:00

Generally speaking, I’m skeptical about the need for insurance. I think a lot of personal finance gurus - and lots of bloggers – tend to buy into the notion that you’ve got to have insurance. Also, I tend to have a low opinion of many insurance companies – they tend to have incentives to deny even legitimate claims or to hold up payment to maximize their own profits.

That said, here are some types of policies you might want to consider.

1) Health Insurance. If you don’t have it through your employer it’s possible to buy insurance through a high deductible insurance that also allows you to open a Health Savings Account (HAS) to be prepared for health expenses. This will protect you against catastrophic risk.

2) Auto Insurance. A lot of state laws require this. Plus accidents can totally ruin your car. When I was younger and more reckless I ended up getting in a couple of fender benders. One time I got hit (I wasn’t at fault), and the insurance covered the payment. One time my wife Miel got blindsided by an uninsured and unlicensed driver, the damage left her car much less valuable.

3) Life Insurance. Get term insurance. Whole life insurance has a savings portion, but it’s often not worth it – usually you only get 2 or 3% on that portion of the policy.

4) Disability Insurance. Guru’s like Dave Ramsay argue that you should have disability insurance – but I’m less optimistic about this. Probably this is the lowest priority of all the types of insurance and is especially low priority if you have a desk job and don’t really engage in risky sports.

5) Homeowners or renters Insurance. The rationale behind getting homeowners or rental insurance is that you’ll want to cover your place in case of a catastrophe. For example if your apartment gets burned out you’ll want to at least get some money to fix the place or get some of your stuff back. Due to the housing bubble and subsequent bust a lot of insurance companies are changing their reimbursement schemes. Be sure your information is up to date when you’re researching these options.

6) Long Term Care Insurance. If you are over 60, this might make sense to look at. Many elderly people lose their ability to perform regular activities of daily living – like going shopping or cleaning the house, etc. A long term care insurance policy covers some of the expenses of having to hire help.

Also keep in mind that one of the first steps before adding additional insurance is to look carefully at what you have through your employer. Chances are, unless you are paying very close attention, you likely don’t know exactly what you already have. Check it out and see where your gaps are.

Happy Insurance Shopping!

HAPPY INDEPENDENCE DAY!!!

2009-07-04T13:37:00.002-05:00

Hi All,

Nearly forgot. Happy independence day to all of you out there on the internet.

Our Latest Business Idea

2009-07-02T23:51:00.005-05:00

Hi All,

Just a quick posting. I've been inspired by some of the other bloggers I've read to try and focus more on getting passive income. So, my latest experiment is that I bought content for 150 websites on ebay. There was something like 10 articles per site, so for 1550 article I paid like $10 bucks.

The idea will be host the sites, spruce them up and bit, change some of the content around, add a copyright and then get the sites set up. Hopefully we'll get more from google's adsense then was invested in getting the websites set up.

I'll let you all know how it turns out.

Best,

James

DINKs Buying Silver & Bonds

2009-07-02T07:54:00.012-05:00

Hi All,

Its Thursday morning. This week has been flying right by. That said, I wanted to take a minute to update you all on my own personal finance moves over the past couple of months. For the past couple of weeks I've been focusing on silver and bonds.

I've been buying small amounts of silver, mostly American Eagles. My goal for the next few weeks is buy another 10 Ozs and fill up this tube I have, then I'll switch over and focus more on our other goals. Ideally the long term idea is to have a couple of thousand ounces of silver to pass on to our children when the time is right.

(my desk, with silver and cat).

Also, I've been letting the dividends from our various stock investments build up in my schwab account. The main idea is that when we get enough to make it worth our while we'll transfer the funds to my wife Miel's schwab account. At this point, we are planning on getting $5,000 worth of bonds and $7,000 worth of stocks in the second half of this year to round out our portfolio. At this point we are way long on real estate and while we have a lot of money committed to 401ks and Roth IRAs, these are relatively less flexible, so we're planning on putting these more liquid funds into assets that can be moved around quickly in case a good opportunity comes up.

So, in terms of bonds, I'm planning on talking my wife Miel into buying the bonds from a selection of those listed on internotes.com.
The reason is that bonds listed on internotes are arranged in a manner such that the company issuing the notes agree to compensate the brokers. This is interesting because most of the time brokers pass higher commissions onto their customers via built in charges. Plus, the notes are issued at face value of $1,000 each, so you don't have to deal with calculating interest payments. I'm not entirely sure about these products at the minute, but right now they look like a better deal for small investors.

Thanks,

James

How Maths Killed Lehman Brothers

2009-07-01T09:28:00.003-05:00

Hi All,

A good friend sent us this story. Its a great piece on the Lehman Brothers bankruptcy. It explains the mechanics of credit default swaps and how the complexity associated with these financial instruments ultimately contributed to last years collapse of the firm.

For what its worth, I don't understand CDO. My wife and I also try to keep our own personal finance simple. For example, we don't trade stock short and don't mess around with reverse convertible bonds or other exotic products. Its all about saving and investing, as simply and as directly as possible.

Link to the story here.

Hat tip to the indefatigable Miles MG.

Best,

James

Are Americans Still Overspending?

2009-07-01T07:08:00.009-05:00

The answer appears to be...yes.

A recent examination of consumer debts as a percentage of median income shows that American consumers may still be overspending, despite making recent gains in personal savings and consumer debt reduction. According to Forbes magazine, consumers in 20 key metropolitan areas owe a significant portion of their annual income to credit card issuers, leading a growing number of them to seek out help with credit card debt from credit card debt settlement services, debt consolidation programs, credit counseling, and other debt relief options.

The survey, which compared average household credit card debt to median income, showed that residents of these 20 cities owed between 13.6% and 22.6% of the median household income to credit card issuers. Miami residents, with a median income of $43,333, owed an average of $9,797 to credit card issuers, suggesting that even as some American consumers are paying down debts and increasing personal savings, residents in some areas aren't weaning themselves from credit card spending and will likely continue to find themselves in need of relief.

Certain cities that made the list also have significant problems with foreclosures and job loss. According to RealtyTrac, Las Vegas is experiencing more foreclosures than any other metropolitan area in the country, with one out of every 56 homes receiving a foreclosure notice in April 2009. In addition, airlines report taking 12% fewer passengers to Las Vegas in March 2009 compared to March 2008. During the same time period, the cost of a hotel room in Las Vegas dropped by nearly one-third, and convention attendance there has decreased by 30%.

Perhaps in part due to the clear downturn in the city's fortunes, Las Vegas landed at number nine on Forbes' list of overspent locales. The city has a median income of $56,975 and an average household credit card debt of more than $8,600, meaning that the average resident of Las Vegas owes more than 15% of his or her annual median income to credit card issuers.

The authors of the Forbes study don't offer suggestions on how to reduce credit card debt but say that the results indicate that some Americans haven't yet reformed their spending habits. And as a steadily increasing stream of consumers veer toward bankruptcy, foreclosure, and programs that offer promises of debt relief, it's clear that many Americans are still struggling with debt management and significant amounts of credit card debt.

Click here for the Forbes study.

- Jeff Lawson

California may Issue IOUs

2009-06-30T12:06:00.000-05:00

Hi All,

This just in. California may begin issuing IOUs to companies doing business with the state (LATimes).

This is bad news. It means the state government doesn't have any cash.

If you are considering buying state issued California bonds, I'd think twice about it. They may not have the money to pay you.

Best,

James

Buy an Oil Well?

2009-06-30T11:36:00.000-05:00

Hi All,

I was reading Loral Langemier a couple of weeks back. She's a big advocate of direct investing in business opportunities like self storage, rental real estate and oil wells.

The well idea got me intrigued. So I started looking around on-line. Some small wells can be had for around $150,000 to $200,000. This type of business works based on how much oil/natural gas, etc. you can get out of the ground. The sizzle is that wells can be extremely profitable, especially when gas prices are high.

Since we don't have $150,000 to $200,000 in cash lying around, this is probably going to be a project for 5 to 10 years down the road, but we're definitely interested.

Most wells appear to be sold by brokers, so if you want to cruise some of the listings check them out here.

Best,

James