Tuesday, October 9, 2007

No time for another degree? Free online Berkeley and Stanford classes

Every now and then, I'll find something online that I've seen before, but forgotten all about. That happened this week when I rediscovered the massive webcast directory offered free from the good folks at University of California Berkeley. This directory offers all of us the opportunity to take a class from one of the top-rated schools in the country from the comfort of where ever your internet connection finds you, without paying a dime.

There is a similar offering from Stanford (though only audio from Stanford, no video that I can find) available for free download from iTunes.

While there don't seem to be many related to finances or business, I'm spending an hour right now watching an "Intro to Astronomy" lecture (one of my all-time favorite college courses).

Hundreds of webcasts and podcasts from Berkeley available here.

Free podcasts from Stanford via iTunes.

Audio and Video classes from MIT.

Tuesday, October 2, 2007

How to calculate: Municipal bonds vs. Federal bonds

Municipal Bonds (or Muni Bonds as they are often called) are bonds issued by a city or county to finance the local budget, usually denoted for specific projects like new schools. Muni bonds are extremely low risk for the investor, since cities can always raise taxes to raise money. (However, there was a famous defaulting of muni bonds in California in 1994.)

The great thing about municipal bonds is that if you purchase them from the state in which you live and pay taxes, they are state tax free most of the time . (Be sure to check the individual bond you are buying.)

Like other bonds, your profit on a bond is determined by two pieces: the stated coupon rate (the interest rate they pay you), and the price you paid for the bond relative to the par value (usually $100). This is usually calculated for you and stated as the Yield to Maturity, or YTM.

Should you buy Muni bonds or Federal bonds? Here's how to figure it out:

First you need to know your federal and state tax brackets. Pull your tax return from last year (you should keep those somewhere safe and organized) and find your taxable income. Then consult the "tax schedule" for the Federal and State taxes. (I've linked the federal schedule. You'll have to google a term like "North Carolina tax schedule 2007" to find for your specific state.)

For example, if you live in NC and had $50,000 of taxable income in 2006, that puts you in the 25% federal bracket. That also puts you in the 7% NC state tax bracket. That's a total tax bracket of 32%. To compare the return on a federal govt. bond to the return on a muni bond, simply plug in the following formula.
Muni rate / (1- tax bracket)
So if you have a choice between a muni bond paying 3.5% and a federal govt. bond paying 5.4%, which should you choose?
The Muni bond is equal to a taxable bond paying .035/(1-.32) = .035/.68 = 5.14%
Therefore the federal bond is better for you.

However, if you were in the 40% total tax bracket:
The Muni bond is equal to a taxable bond paying .035/(1-.40) = .035/.6 = 5.83%
Since 5.83% is better than the 5.4% you could get from a federal bond, the muni would be better for your situation.

NOTE: This assumes you are thinking of holding federal or muni bonds in a taxable account. If you are considering purchasing bonds for a non-taxable account such as a Roth IRA, you should not consider munis, because interest payments on all types of bonds are tax free.

Monday, October 1, 2007

Teachers: Use a "Summer Savings" Account and save $34,000!

A friend who is a elementary teacher in our local public school system recently told me that most teachers opt to receive their salary in 12 equal payments. However, they could opt to receive it as 10 equal payments, and then receive nothing over the summer.

I ran the calculations, and found that for a teacher earning 34k/year, it would save $144 to take the 10 payments instead of 12 and set aside 1/6th of their salary each month into a "summer savings" account earning 5%. Assuming a 3% salary raise each year, at the end of 30 years, that slight change will have saved $14,000! That's not chump change!

If you rolled the yearly savings into a Roth IRA, at the end of 30 years (assuming 10% interest), you'd have $34,000, tax free!

To make it even easier, most banks and credit unions will do this monthly deduction into a sub-account for free!