Slow Wealth

How to Get a Great Deal on a New Car

2012-01-05T16:14:00.004-05:00

Everyone knows that the price of a new car can vary depending on your bargaining ability. Some people (although I hope not many) likely pay sticker price. And a the dealer sometimes even takes a loss on a few cars -- just to move them off the lot to make room for the next model year. The majority of sales fall somewhere in the middle of the bell curve.

I want to take a few minutes to give you some tools to help you get as low as possible on the price of your next new car.

One nice thing about buying new is that all new cars are the same. If you look at a 2012 Toyota Camry LE at one dealership....it is exactly the same as the new 2012 Camry LE at another dealership (perhaps only differing in a few minor options). Because of this, it is very easy to get apples-to-apples prices. If you are shopping for used cars, this is impossible, because no 2 cars will be identical in milage, maintenance, and wear and tear.

So here are my steps to help you get the best deal:

1. First, decide on the make and model you want. Go to some local dealerships and do some test drives. This is not for buying -- this is just for deciding. Once you know which car you want, you are ready to begin.

2. Use edmunds.com to find the invoice price and the current incentives on the car. Invoice minus incentives will be our starting point. It is also important that you understand tax, tag, and title costs in your state. For my state, tax is 3% of the purchase price + about $140 for tag and title.

3. Next check o.co for the "Zag" price in your local area. Zag is a car buying service that serves as the back end for lots of car buying services like American Express, Overstock, and I believe even Costco. If the Zag price is lower than the price from step 2, that becomes your new starting point. Also check truecar.com to understand what people are actually paying for that car. (This is the price before tax and fees.) You'll want to target the price on the far left (hopefully even off of the grid).

3b. Check your banks and credit unions for the lowest car financing rate. For credit unions, this can currently be as low (as of Jan 2012) as 1.79%. Once they have approved you for a loan, they will send you a blank check valid up to a certain amount. (Sometimes dealerships will offer 0% incentives, but usually this is at the expense of giving up a rebate. It is almost always a better deal to take the cash rebate instead of the incentive offer.)

4. Use google maps or the auto manufacturer's site to find as many dealerships as you can in your local area. For my purchase, I used about 15, but you can use fewer. Remember, driving a few hours to get your car is a small price to pay to save thousands.

5. Go to each dealers website and either use their "chat now" function or email their internet department and ask for a quote on the car. Don't give your phone number. If the form asks for it, just fill in 999-9999 or something similar. When you ask for the price quote, insist on an "out the door" price. This is important to ensure that you are getting a real price, and that they can not add additional fees at the dealership.

5b. When you are at these sites, make a note of which ones have internet coupons that pop-up. Almost every dealer has these now. Sometimes they even go higher if you agree to make an appointment. These are typically anywhere from $100 to $500 off. Be sure to make a note of this, but don't register for any appointments yet.

6. These dealers will email you their starting price, which you should add to a spreadsheet or a table you draw on a piece of paper.

7. Once you have these bids, you can begin to email the dealers back, letting them know where the low bid is. This allows them to essentially bid against each other to earn your business.

8. As they say on shampoo bottles...now just rinse and repeat. Continue to email back and forth with dealers getting their lowest out the door price. As a courtesy to the dealers, it is best if you not reveal which dealership is offering you what deal. Keep that to yourself.

9. Once you have a deal you are comfortable with then go to their website and print the coupon and potentially sign up for a test drive if that increases the coupon value. Email the internet manager that you have the coupon printed and ask that he/she send you a new "out the door" quote with the coupon factored in.

10. Ensure again via email (so you have it in writing) that the car comes with all the features you have specified, including floor mats.

11. Go pick up your car. (The dealer may ask you to put down a deposit on your credit card to hold the car if you are driving from out of town or need to wait a few days.) Print out all of the emails from the dealership, so you have in writing the "out the door" price. Ensure that this is the price on the bottom of the sales form when you pickup the car.

12. Write a check using your credit union auto buying check.

The Real Cost of Time Shares

2011-01-17T08:19:00.006-05:00

My wife and I recently took a trip up to Williamsburg, VA (about a 3 hour drive from home) for a "free" 2 night stay in exchange for a timeshare presentation. We had been to one of these before (see my post from June 2008) and figured it was worth our time in exchange for free lodging + $75 visa gift card.

Overall, the place was reasonably nice -- although to call it a "resort" is a stretch. It was more like a 2 BR townhouse I would expect to see in a typical suburb. But it was a comfortable stay and didn't cost us anything.

Throughout the process, what bugged me most were the half-truths of the time share presentation. The salesman kept making his pitch saying that every year the vacations he takes only cost $140. My wife and I had agreed before hand that the way to get out of there the quickest was to just agree and let them keep going -- so we both had to bite our tongues several times.

I've done quite a bit of reading on timeshares -- and one of the best sources out there is a forum called tugbbs.com. So if you are looking to learn, that's a good source.

Timeshares aren't necessarily a bad thing, IF you know how and what to buy. I would only suggest only buying resale (not retail) since you can get most of them for free upfront for taking over the maintenance fees (as opposed to retail prices of $15,000-$30,000). So if you are considering it, here is the real cost breakdown per year.

Any amortized up-front expenses (If you buy resale, this should be near 0.)
+Yearly maintenace fees. ($500-$700)
+Points network dues. (~$150)
+Points network exchange fee. (~$150)
----
Total $800 -$1000/year.

If you know you will take a 1-week vacation every year, this may be a good fit for you. But you should also know that you can rent timeshares from current owners for almost exactly the same price as owning -- with all of the benefits -- and none of the downside. So to me, renting a timeshare is the way to go.

To find timeshare units for rent, check sites like http://tug2.com/timesharemarketplace/ or http://redweek.com.

Scams that make me laugh

2011-01-14T12:46:00.003-05:00

I'm always amused by the latest in low-budget tv commercials that are obvious scams.
I saw one today that made me laugh outloud. It claimed that the information about the benefits of Vitamin D are being suppressed (by the government?) and that we should "join together in one voice" by joining the "Vitamin D Health Initiative." And, the commercial says, you'll get free vitamin D for life.

The funny thing is that when you go to the website, they charge you $6.95 per month "shipping and handling" for your monthly supply of Vitamin D. (30 pills of 2000 IU). That made me laugh outloud. A quick search of walmart.com shows 2000 IU Vitamin D is $9.00 for 200 pills, or about $1.35 per month. And of course, if you didn't know it, Vitamin D comes from exposure to sunlight -- so you can get a healthy dose just by stepping outside!

I'm sure there are some unfortunate individuals out there picking up the phone and signing on to be part of the "initiative" -- but for the rest of us, it at least serves as entertainment.

Sell those unwanted games

2010-12-26T07:34:00.004-05:00

Like a lot of folks, we have some Wii games that don't get played as much as they used to. So I decided to see where I could sell some games and come out the furthest ahead. All of the 3 major sites for selling your stuff have different fees. So I decided to calculate the amount I would pocket if I sold a game for $25+$4 shipping on eBay, Half.com (also owned by ebay), and Amazon Marketplace.

How much would you get to sell at $25 item with $4 shipping? This of course assumes that each of these would find buyers willing to pay the same price. Surprisingly, I found that Amazon was the most expensive and Ebay was the cheapest!

Amazon Fees

Sale price of the item $25
Shipping credit $4
- Referral Fee of 6-25% of the sale price -15% for video games
- Variable Closing Fee
- $0.99 Fixed Closing Fee (waived for Pro Merchant Subscribers)
-------------------------------------
Total deposited to seller's account = $22.91

Ebay fees:
$25 + $4
No insertion on
-9% of sales price
-2.9% + .30 paypal fee
----
= Total deposited to seller's account = $25.73

Half.com fees
$25+$4
15% commission
+.60 shipping commission
----
= Total deposited to seller's account = $24.05

How much does it cost to have a baby without insurance?

2010-11-15T17:39:00.003-05:00

We had a difficult decision to make last year. I got hit by a layoff with my Fortune 500 employer but we knew it was our best opportunity to have a baby.

At the time, I called every hospital and doctor's office in the area to see if I could get an idea of price. My calculation was that it would have cost $8,000 out of pocket.

We had a relatively uneventful birth with no complications. After tallying all the bills, it turns out that was a pretty accurate estimate. Here is what we were billed for. I hope this is helpful to some of you out there who are in the same boat.

Location: Raleigh/Durham, NC, USA

	Anest.	Hospital	Lab	OBGYN	Path	Specialist	Total Result
Sum - Retail	$1,404	$9,223	$237	$3,677	$80	$2,874	$17,495
Sum - Insurance Negotiated Rate	$1,123	$5,979	$92	$2,157	$60	$2,051	$11,463
Sum - Cash 50%	$702	$4,612	$119	$1,839	$40	$1,437	$8,748

2010-05-12T22:23:00.000-04:00

About once a month we get a marketing piece from Kohl's in the [snail] mail with a peelie on it that says you can either get an additional 15, 20, or 30% off your purchases.

Every single time until today I've always gotten 15%. Then I throw it in the garbage thinking -- why would I go get 15% off if there are 30% coupons out there. Today I finally got a 30% off and thought -- "ok, maybe I'll use this."

So my question to my wife (and now to you all) is whether the Kohl's promotion is good or bad for business. They've been using this same promotion for at least a few years. Are they just conditioning me to never buy anything unless I have a 30% (or even 15% off) coupon?

Same thing happened to Linens N Things. They totally conditioned me to never shop without a coupon. Because the coupons were everywhere! (And now look where they are!)

Bogle's 12 Pillars

2009-11-02T09:11:00.003-05:00

This morning I was doing a little reading on the fantastic Bogleheads forum and came across something I had not read in years -- Jack Bogle's 12 Pillars of Wisdom (as it applies to investing). This was written in 2001, but certainly this system has been the mantra of "Bogleheads" for the last few decades. What is amazing is that despite its simplicity and its incredible effectiveness, very few investors follow these 12 rules. For the complete list and commentary, visit Vanguard's site here: http://www.vanguard.com/bogle_site/april272001.html

Pillar 1. Investing Is Not Nearly as Difficult as It Looks.
Pillar 2. When All Else Fails, Fall Back on Simplicity.
Pillar 3. Time Marches On. (Compoud Interest)
Pillar 4. Nothing Ventured, Nothing Gained.
Pillar 5. Diversify, Diversify, Diversify.
Pillar 6. The Eternal Triangle. (Risk, Return, and Cost)
Pillar 7. The Powerful Magnetism of the Mean
Pillar 8. Do Not Overestimate Your Ability to Pick Superior Equity Mutual Funds, nor Underestimate Your Ability to Pick Superior Bond and Money Market Funds.
Pillar 9. You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both.
Pillar 10. Beware of "Fighting the Last War." (Making decisions based on recent history.)
Pillar 11. You Rarely, If Ever, Know Something The Market Does Not.
Pillar 12. Think Long-Term.

Similarly, the Bogleheads Wiki has boiled down the essential beliefs into 5 brief statements:
1. Save a lot
2. Asset Allocation (Holding Bonds) Is Essential
3. Buy Low Cost Index Funds Covering the Whole Stock Market
4. Tax Efficiency Matters
5. Stay the Course

Do you need an Umbrella Policy?

2009-10-14T10:14:00.002-04:00

I've been thinking recently about Personal Umbrella Policies (also known as PUPs). A PUP is an insurance policy that protects you against the potentially catastrophic impact of a liability suit. "What are the odds of that?" you may ask. Well, they are a long shot for sure. But that is precisely why the policies are so affordable.

Remember that when you assess a risk, you should ask yourself two questions. First, try to determine the likelihood that the incident occurs. Second, ask yourself the financial impact if that incident were to occur.

For example: the likelihood of my DVD player breaking is reasonably high. I'm sure it will probably happen within a few years. However, the impact is low -- less than $50. So I'm likely not going to buy insurance on my DVD player (although somehow BestBuy convinces millions of people they should....but that's another rant).

On the other hand, the possibility of you being sued for some sort of liability claim is relatively low, but the consequences could ruin you financially. And remember, we aren't just talking about the money you already have. Law suits can impact your wages for the future.

This is where a personal umbrella policy comes in. For likely less than $200/yr. (my GEICO policy is $144/yr.) you can buy $1 million worth of coverage. The coverage in an PUP is usually very broad and may even cover potential liabilities that your homeowners or auto policies do not. If the incident is covered by both policies, the PUP coverage is in addition to the coverage provided by your primary policy.

So is it worth it? Obviously there is no right or wrong answer because no one can see the future. But for less than $200/yr. -- it surely does let me sleep better at night knowing that if I'm at fault in a catastrophic car accident, I won't lose everything I've ever earned (or earn in the future).

Can a managed fund produce alpha?

2009-10-12T15:07:00.003-04:00

That question has provided plenty of room for debate over the last decade is whether or not a managed fund can really produce alpha for an investor. Of course, up until about 10 years ago, there wasn't much of an alternative to managed funds, but nowadays there are enough low-cost index funds and low-cost ETFs to make your head spin. So given the choice for a low-cost index fund or a managed fund, which direction should you go?

First of all, I do think it is possible to beat the market. Just look at the numbers. Plenty of fund managers cream the market every year -- especially in years like 2008 and 2009. But as I was thinking about this today, I kept coming back to 3 basic reasons I still gravitate toward the low costs index funds.

Challenge #1: Pre-identifying the Manager
Sure, everyone can look at Warren Buffet now and say, "If only I had put $1000 with him in the 60's!" But would you have? There are plenty of smart, young money managers just getting started that would love to take your money now. But it is impossible to know which 1 out of 10,000 is going to be the next Buffet.

Challenge #2: Performance Net of Fees
The next challenge is once you have found a manager that you believe can beat the market over time, you must then deduct fees. (If you check annualized numbers in a prospectus, they should already be net of fees.) If a manager can beat the market by 1-2% every year, but charges a total expense ratio of 1.5%, you really aren't getting ahead.

Challenge #3: Keeping Up Peformance, When the Money Rolls In
The third challenge is the kicker. Let's say that you accomplish numbers 1 and 2 and believe you have found a solid manager with reasonable fees who can beat the market over time. Chances are you aren't the only one who feels that way. For example, his fund may get a 5-star Morningstar rating which sends the cash pouring in. In a closed-fund environment, managers don't have to deal with the constant cash flows in and out of the fund. This means they have to constantly be pouring money into new investments, or if they have the patience to wait for a deal in the market, then their overall portfolio numbers may suffer because of an increased percentage of cash sitting on the sidelines. The flip-side of this coin is also true. When the market goes through a rough patch, and millions of investors panic and pull their money out of the fund, the manager may be forced to sell even if he doesn't want to. In both of these scenarios, the manager who may otherwise have stellar performance, sees his performance take a beating.

There are (at least) two potential answers to this problem.
The first is that you, the investor, become the money manager. Investing in the education, the technology, and time that it takes to be a solid money manager. For most people this is not doable -- as the time and education needed for this FAR outweighs any potential gains.

The second is that you can roll with the market. By building a diversified portfolio that covers both stocks and bonds, domestic and international, you can build a portfolio that suits your needs. If you don't feel comfortable doing this (as you probably shouldn't), finding a fee-only financial planner (check Napfa.org for a fee-only planner near you) who works on a per hour basis is well worth the money. A few hundred or a thousand dollars now for unbiased advice will save you stomach ulcers for years to come.

Thoughts? Leave feedback below.

Best Credit Card Deal? PenFed All The Way!

2009-08-26T10:00:00.003-04:00

A friend emailed me today and asked what credit card I would recommend for her. Of course, that depends, I told her -- on what she was looking for. Oddly enough, however, my pick for the best cash back card as well as my pick for the the best long term balance transfer card is the Pentagon Federal "Platinum Visa Cashback" card.

It offers 5% back on gas, 2% back on groceries, and 1.25% back on everything else. (And that's cash back, not some crazy points system.)

If you are looking to transfer a balance, there are several 0% deals out there for short periods. But if you are looking for a longer term transfer, the PenFed card currently offers a really good "2.99% for the life of the balance" promotion. Just don't use the same card for your daily purchases that you use for a balance transfer -- that is a recipe for disaster.

Here's an added bonus that we recently discovered when using our PenFed card overseas. PenFed only charges a 1% surcharge for international purchases -- and yes, you still earn rewards. So even on international purchases you still come out at least .25% ahead!

Kudos to PenFed for offering this card!!!

Swoopo: Bargain or Rip-off?

2008-12-05T08:58:00.009-05:00

I recently came across a site called Swoopo.com. At first glance, this site leads you to believe that items are selling on auction for a small fraction of retail. So what's the catch? Knowing that things that sound to good to be true, usually are, I dug a little deeper.

Here's the scoop. They charge you to bid -- $0.75 per bid. That doesn't sound too bad until you realize that bids are only in increments of $0.15 and done automatically by their system! That means that both the bidders who win the auction and those who do not are paying just for bidding. And before you ask -- no, you don't get your bid money back if you don't win the item!

This model is different, that's for sure. I'm not sure whether to be impressed by their ingenuity or disgusted by the fact that they are obviously getting (i.e. tricking) people to pay mountains of money either for products they "win" -- or even worse -- paying money for the right to bid on products that they don't win. Of course none of this is spelled out clearly. Only after reading through a few pages of the "terms and conditions" would a user be aware of this.

Let's create an example, let's say they put a laptop up for auction that sells for $499 at a normal store. They start the bidding at $.01.

After the first 6 bids, the bid stands at $.91 and the site has collected $4.50 (6x$.75) in bid fees. After 100 bids, the bid stands at $15.01 and the site has collected $75.00 in bid fees.
After 2000 bids, the bid stands at $300 (a seemingly good deal for this laptop), but users have paid the site $1500 for the privilege of bidding on the laptop!

In this case the winning bidder would be in for $300 + all of his bid costs (likely several hundred dollars). The losing bidders would have nothing to show for there efforts except empty pockets.

Are there deals to be found on this site? Maybe, but it is a gamble if there ever was one. In my estimation, you are much more likely to come out ahead in Vegas than on Swoopo.

Eating Healthy on a Budget

2008-09-22T11:13:00.008-04:00

Coupons are an interesting animal. On one hand, they are a great tool for saving money at the grocery store. But on the other hand, they are tools used my manufacturers to induce you into trying their latest packaged goods. Too often, these packaged goods are highly processed and far from being healthy. In fact, there have been many times my wife and I have decided not to use coupons that would have gotten items like free pizza rolls, just because we didn't want to eat that kind of food.

But thankfully, there are still ways you can save money with your grocery coupons, while managing to eat healthily.

1. Take advantage of sales, even without coupons - While it is true, you rarely see a coupon for fruit, berries, fresh veggies, or meat, deals can still be found plentifully. Remember to put your freezer to use when you spot "Buy One Get One Free" deals on meat, berries, and freezable fruit.

2. Look for coupons and other incentives on frozen veggies - While fresh vegetables may rarely be targeted by coupons, frozen vegetables are featured quite regularly. Just last week, a sale combined with a coupon on frozen Green Giant veggies, got us 20 boxes at only $0.30 per box. Not bad for healthy frozen vegetables.

3. Shop at farmer's markets - This is my favorite way to find fresh, local fruits and vegetables. You can buy just a few, or buy entire cases of vegetables you love and trade with others. (Trading 1/2 and 1/4 cases is a constant practice at my local farmer's market.)

4. Use coupons for household items - Saving money on these items likes cleaners, paper towels, toothpaste and others gives you some flexibility on your other purchases while still coming in under budget. During the last "Triple Coupons" weekend here in Raleigh, I scored 5 different brand name cleaners (Windex, 409, Fantastik, etc) for about $.25 each. All of these were on sale and had $.50 or $.75 coupons which were tripled.

In the end, the key with eating healthy on a budget is the similar to finding deals on many other things. Watch for sales (especially if you can combine with coupons) and make smart purchases. Remember to not buy more than you can eat (or freeze), and save money in other places to allow yourself a little extra money for healthy food. Remember, "You are what you eat!"

It's not the credit cards, It's the consumers!

2008-08-26T14:53:00.005-04:00

I recently saw a clip on Good Morning America (link to clip) about a family who they challenged to go without credit cards for one month. This family came back raving about how much money they had saved by not having credit cards. I think this is completely ludicrous!

In my opinion, these sort of stories (and there are plenty of them) completely miss the boat. What these stories glaze over is that it is not the credit cards, but rather the consumer behavior attached to those credit cards that gets people in trouble. I would bet money on the fact that I can save more by using credit cards than by using cash. Here's why:

1. With credit cards, you know where your money goes
It is astounding to me that this doesn't get mentioned more often. With credit cards, you have a monthly statement, and you can even get a yearly statement online. You can import your purchases into programs like Quicken, or add them to a spreadsheet. This allows you to dissect your expenditures, tweak your budget, and be accountable to yourself during and at the end of the month.

2. I can shop for things online and find a bargain without ever leaving my desk. That means I'm not burning gas and wasting time going from store to store, I have full information on product reviews, and can compare apples to apples identical products. By using "user ratings" on sites like Amazon, it is easy to find the truly better products, and not just the prettier boxes.

3. I get cash back on my charges. I know that some of you may roll your eyes, but if you have the right card (such as Pentagon Federal's Visa Platinum) you can earn real cash (not "points") that gets credited to your bill each month. For example, the Pentagon Federal card earns 5% on gas, 3% at the grocery store, and 1.25% on all other purchases. That means if I charge $1500 in a month, I'm getting roughly $20 back -- $240 per year. Not bad for doing nothing.

Of course all of this assumes you have the discipline to pay off your credit cards at the end of the month and not spend more than you have available. If you can't do that, then maybe you are better off with cash or debit.

Worst June since the Great Depression? Give me a break!!!!

2008-06-27T10:44:00.000-04:00

Allow me to rant for a second....

ABC and a few other news outlets are using the sound bite this morning of "This was the worst June since the Great Depression!" Claiming that the 9% fall this month compares to the fall 78 years ago.

This is utterly ridiculous! While it may be technically correct (there have been no other Junes when the Dow has taken a 9%+ plunge), the spirit of the statement is meant to invoke fear, and fails to consider that for 2008, including June, both the Dow and the S&P are only off by 12%...a mild market correction. Compare that to the near 80% fall between late 1930 and July 1932. To compare these two is blatant fear mongering. (It is also reminiscent of the "creative statistics" recently used by the Clinton campaign when claiming Hillary had the popular vote.)

The few people whom I have personally known who lived through the Great Depression (including my grandfather) told me stories of those days such as only adults having shoes and saving pennies to bake a cake. Compare that to the multi-car families with 3000 sq. ft. houses, $300 footware, and spending billions on entertainment. Even the thought of comparing those two worlds gets me hot under the collar.

Timeshare Tour Experience

2008-06-19T21:17:00.001-04:00

This weekend, my girlfriend and I met up with my parents in Myrtle Beach for a few days of relaxation. Coincidentally, my girlfriend and I had recently been talking about timeshares -- and saying that it might be fun to get some freebies for sitting through a presentation. So when we were approached at a local restaurant to take a timeshare tour for a $100 visa card and two "3 day / 2 night vacations" we decided to sign up. They wanted $20 to hold our spot -- which I was leery of -- but I agree from their perspective seems to make sense so they don't have 50% no-show rate. We did get our $20 back when we checked-in the next morning.

While I have never taken a timeshare tour, I'm very familiar with the concept, the points system, and the retail and resale rates. I suggest if you are going to take one of these tours, you spend an hour reading on different websites before you go on your tour. It will provide you with plenty of ammunition.

How does this tie to building wealth? Simply put, building wealth is as much about avoiding bad financial decisions as it is about making good ones. As a rule of thumb, you should never buy anything (even something inexpensive) under pressure from a salesperson, and definitely do not make a large purchase on the spur of the moment. We live in a time where a world's worth of information is searchable at the touch of a button. There's a reason why a sales person wants you to buy immediately...because if you have a few minutes to go off and think about it and do a little research, they'll never see you again.

If you are considering taking a timeshare tour to get the freebies, here's what you should expect:

We arrived and the first thing that I noticed was that the group of people in the lobby didn't look like they could afford a $35k timeshare. When our salesperson came out, he greeted us and took us into a room with lots of tables, chairs, and balloons. He sat us down and began with the questions about where we were from, how we met, blah, blah, blah. He actually mentioned that he had only been on the job for 3 weeks. My guess is that the average tenure is not much longer than that.

Knowing that the next round of presentations wasn't until 12, my girlfriend and I figured we probably had 2 1/2 hours to sit through and we were right. After the fake chit-chat, we opened the "workbook" where he began to ask us questions about our ideal vacations. Knowing the cons of timeshares, we purposefully stated things that we knew timeshares couldn't fulfil. Such as we enjoy traveling spur of the moment, going to off-the-beaten-path destinations, and the flexibility of choosing from a wide array of accommodations. I got a kick out of the fact that he only wrote down the ones that he wanted and that he had a good comeback for. I actually stopped him and made him go back and write down the others.

When he saw the pros and cons list wasn't really working out, he went on to the next page, which was "rent vs. own." I got a kick out of this as well, because they try their best to equate timeshare ownership to home ownership. Of course the two are completely different, but they play on the fact that "everyone wants to own." We continued to come up with good reasons why "renting" on vacation was optimal, so he brought over his manager for a little chit chat and convincing. We played along.

Next they did a little "cost analysis". He asked us what we spent on vacations, and we stated about $800 a year. So he said over 30 years, we'd be spending $28,000. "Did we really want to waste all that money?" Of course, when I pointed out that the fees on a timeshare (maintenance, points network, etc) are fairly comparable, they tried to glaze over that fact by saying that "as long as you refer 20 people a year, you don't pay maintenance fees!" Wow. They also tried to convince us that the $28,000 would be more like $75,000 because of inflation. It is amusing to me that they don't do the flip side and calculate the $30k sales price, 30 years of maintenance fees and network fees, and the cumulative interest from the sky high interest rate.

Next we got around to the portion where they show us the website. We both laughed when one of the "benefits" was "discounts at restaurants" and the domain in the browser clearly showed entertainment.com. I stated I already bought an entertainment book for $15 from work, so I already had access to those discounts.

Finally, we got to the portion where we took the tour. We got in the salesperson's humongous diesel truck and drove a few miles down the road. The ride was the most interesting part to me, because I got the guy a little off his script. I told him that my side business was a website about saving money (savvydollar.org) and gave him a card. We then drove past the "Bass Pro Shop" where he said that he was approached for a timeshare demo just a month earlier. He then showed us his drivers license picture where he had long hair and a scruffy beard and told us how they told him he needed to shave and come back in a tie. He also told us that things were going well in his first 3 weeks, and that he had even sold 2 timeshares in the same day and had been salesperson of the week for selling the "gold" package to a football player the week before. (This is where I felt a little sorry for this guy. He sounded like an honest Joe...working for a living...trying to move up in the world. I really don't believe he understands what he is selling....or what he bought himself. ) He also had a New Testament bible in the console between the seats. My gf and I wondered later if that was part of the show.

When we arrived at the "resort," my gf and I were really surprised at how dingy it was. Seriously, you'd at least think they would show you the good stuff, but this was seriously in need of a good cleaning. It certainly didn't have the "luxury" feel.

We tried to hold in our chuckles as we looked out over the balcony and the sales person let out a "Ahh..." at the beauty of the beach. We laughed later because it was obviously overcrowded and dirty.

On the drive back, I told him that I might consider timeshare ownership, but only on a resale. I said that I would never buy something full price that I could buy at a 90% discount on craigslist or eBay. (This is where my gf says that she saw the confusion on his face -- that perhaps he was unaware of that and was wondering whether he had made a wise purchase himself.) When we got back, he was ready to get rid of us, but still put on a fake "so are you ready to buy?" He gave us a $25k price tag for a 12,000 point package, and we just smiled and said no. He brought over his closer, who honestly didn't try very hard, but he did give us the "teacher's discount" with some other lines about "we'll pay this and that" the first year. I would love to know what other creative "discounts" they make up on the spot.

We finally got out of there...after 2 1/2 hours...and got our $100 gift card. The "2 night vacations" weren't worth the paper they were printed on (full of "notification in writing" clauses) so we tossed them in the garbage. I called the automated visa number to ensure there was $100 on the card.

In the end, it was sort of fun if you go in knowing enough about timeshares, resale, points systems (RCI), etc. After an hour of reading online, you'll likely know more than your sales person. We figured the return on our time was pretty low ($20/hr each), but it was sort of a fun experience, paid for our gas down to Myrtle Beach, and gave us plenty to laugh about on the 3 hour drive home that evening.

So, what should you do if you fall for their sales pitch? Well, there's still hope. If you signed the contract in the last few days, you may be able to wiggle out of it thanks to your "right of rescission." This means that you typically have 3-7 days (depending on the state you live in) to cancel the contract you signed.

Looking for a 529 savings plan? Let's look at options...

2008-06-03T16:42:00.011-04:00

If you are a parent, grandparent, or even planning to go back to school yourself in a few years, a 529 savings plan is worth considering. A 529 gives you a way to save for college and pay no tax on the earnings in the account. Considering that 4 years of college is now pushing $100k and is only going up from here, taking advantage of government-sponsored programs is more important than ever.

Here are some of the advantages of a 529 plan:

1. Anyone can contribute to a fund -- This means that parents, grandparents, friends, and even the child can contribute to the fund.
2. Tax Savings -- The earnings are tax free, and that's a lot of savings when compounded over 18 years.
3. Easily Change Beneficiary - If the original recipient does not attend college, the beneficiary can easily be changed to be another family member.
4. No Harsh Withdrawal Penalty -- If the original designated person receives a scholarship, (or meets a few other conditions such as going to a military academy) the only withdrawal penalty is to pay the tax you would have paid anyway on the earnings. Now that's what I call a no lose proposition. (If you withdraw the money for a non-qualified reason, there is a 10% additional tax on the earnings, but not the principal.)

Now that I have you convinced that a 529 is worth thinking about, you should know that each state offers a different plan, and you are eligible to pick almost any of the state plans you desire (not just the state that you live in). However, if you (or whoever will be making the contributions) are an NC resident, and plan to stay in NC, the North Carolina 529 is an attractive option. If you are not a resident of NC, or plan on moving sometime soon, your best option is the Utah plan. Let's take a quick look at both.

There are three facets that distinguish between plans and that quickly take large groups out of the running. Those three items are total fees, tax benefits, and fund options.

The North Carolina plan offers low administrative fees, the option to invest in diversified Vanguard funds (low fees, stellar reputation), and offers a tax break to residents. (The $2500 allowed deduction for a single person and $5000 per couple results in tax savings of approximately $175 and $350 per year, respectively.) The fees for the NC plan are 0.25% of the average balance throughout the year, and are in addition to the fees (also about 0.25%) charged by Vanguard. While you also have an option for Seligman funds, their fees are significantly higher. You can find out more at the official website at www.cfnc.org/site/nc529/main/overview.jsp.

If you (or the person making the contributions) will not be a NC resident for the long term, Utah offers a very good alternative. You will not get tax credit if you are not a resident of Utah, however, their "maintenance" fee is capped at $20 per year and the funds charge a set 0.25% administrative fee. Utah also offers Vanguard funds, so it is easy to compare apples to apples when comparing with North Carolina's plan. You can find out more at the official website at www.uesp.org.

So as you can see, the only real difference is with fees and tax deductions. As a NC resident, the tax break seals the deal, but you really can't go wrong either way. The only real mistake you can make here is not opening an account.

-----------
Dan Griffin holds a Master's Degree in Business from the University of North Carolina, and is founder of SavvyDollar.org.

Kids and Money - Are we preparing our children?

2008-05-08T09:45:00.002-04:00

I don't yet have any children, but I thought this was a good article. It questions the type of mentality that is becoming pervasive. Unfortunately, generations x and y grew up with a "want it, get it" mentality, and that is now being reflected in our current American savings and debt numbers. Let's make sure that we break that cycle of spending with our kids.

http://www.crosswalk.com/finances/11574509/

$4 gasoline? Sounds cheap to me!

2008-05-05T18:05:00.005-04:00

I'm so tired of the constant media coverage of "high" gas prices. Yes, it feels expensive because it was cheap for so long, but according to CNN Money, out of 155 developed countries, 110 of them have more expensive gas than we do in the US. (Source)

We should be thankful that we had a free-ride for such a long time. The price of gas has gone up slowly...too slowly in fact. In 1918, the price of gas was about $.25 per gallon. Inflation adjusted, that brings it to $3.50 in today's dollars. Pretty much where prices stand now. Source

In the last 90 years, supply surged faster than demand and the price decreased (I'm over simplifying a bit here, but for the most part this is correct). Now, with India and China growing at staggering rates, the demand is catching back up with supply. I ran some quick calculations based on the oil consumption data from the CIA factbook.

Oil consumption per day
US: 20.8 million barrels/day
India: 2.438 million barrels/day
China: 6.93 million barrels/day

Population
US: 304 million
India: 1.13 billion
China: 1.32 billion

Oil consumption per person per year:
US: 24.97 barrels per person per year
India: 0.78 barrels per person per year
China: 1.91 barrels per person per year

So as you see in the numbers above, we are consuming roughly 10-20 times the amount of oil per person than our counterparts in India and China. So just imagine what happens when China and India catch up to us! How expensive do you think gasoline will be?

We better start looking for better and more viable fuel sources quick...or $4 gasoline will be just a fond memory we tell our children!

Credit Cards vs. the "Envelope Method"

2008-03-03T14:01:00.000-05:00

While I realize there are quite a few anti-credit card folks out there, I can't help but point out a few downsides of the envelope method and stand-up for credit cards (who always seem to get a bad rap).

1. Using cash doesn't offer any protection that credit cards provide. If you have a "situation" with a product or a store, your credit card company can be your best advocate.

2. If you carry lots of cash, you can lose lots of cash. If I lose a credit card or it "falls" out of my pocket thanks to the help of a quick-handed thief, it's easy to cancel. Even better, credit card companies limit your liability on fraudulent purchases. Usually with $0 deductible. Try getting back your envelope full of money!

3. The envelope method encourages overspending. I know that sounds counter-intuitive, but if you have $50 in this week's "restaurant" envelope, you are more likely to spend it. Perhaps you decide to order the dessert or a glass of wine that you wouldn't ordinarily have purchased just to use up the money in the envelope.

4. Credit cards allow you to hold onto your money longer. Having one bill at the end of the month allows me to hold onto my money longer, and earn interest longer.

5. Credit cards offer rewards. My current credit card offers 1% cash back on every purchase and 3% on gas. That money is automatically credited to my bill each month. So by paying cash, I'd be paying 1% more for most everything.

6. Paying with cash is a pain in the neck. I can't stand paying for something that costs $13.27 and getting back tons of coins. Or how about going to a sit-down restaurant where your bill including tip is $18.50. What a pain to have to try to make change.

I know it is popular to tout of the evils of credit cards (Dave Ramsey). Just remember, like every other business, credit cards are in business to make money. But you can play on your terms. Treat your spending like real money and pay it off every month. If you do, you'll come out ahead.

Should you switch to Compact Flourescent bulbs?

2008-02-09T08:22:00.002-05:00

It's good news that the industry is phasing out the standard incandescent lightbulbs....you know, the kind we've used for years. They are replacing them with the Compact Fluorescent bulbs which you've no doubt seen gracing the aisles of your home improvement store, and have even slowly made their way into drug stores and grocery stores.

The good news is that not only are they better for the environment (by using less energy), but they also are a good deal for you....the person paying the energy bill. On average, you will recoup the money you spent on the new bulbs in about 6 months.

If you are replacing a 60 watt bulb with a 13 watt CF bulb, you save 47 watts per hour. Let's say that you burn a bulb on average 4 hours a day. That means you save (47x4) 188 watt hours per day. Multiply that by 365 days = 68,620 watt hours....also known as 68.6 kilowatt hours.

In my home market of Raleigh, NC, 1 kilowatt hour costs $0.095. (To find out how much 1 kilowatt hour costs you, just check your energy bill.)

Therefore assuming 4 hours per day for a year, you'd save (68.6 x .095) $6.51 per year per bulb replaced. Considering the bulbs cost only $2-$3 these days...you get your payback in just a few months.

Here's a quick spreadsheet to help you figure your payback.

Avoid Coupon Burnout by "Playing the Game"

2008-02-05T13:37:00.001-05:00

I read an article this morning on "Avoiding Frugality Burnout." One of the pieces of advice that the author gives is to treat your "couponing" like a game. I couldn't agree more. Treating it like a game makes it much more doable. Have fun with it...laugh at yourself.

Does saving $30 on groceries this week really make that much difference in the grand scheme of things? Not really. But by treating it like a game and enjoying the "thrill of the hunt," the savings begin to add up ...and up....and up.

One of the more enjoyable aspects of couponing is having others to compare to. Even if my girlfriend "wins" this week -- because I save 68%, and she saves 70%....we just had fun and saved tons of money. It beats spending $8.50 per ticket to go to the movies!

So don't fret if you had a bad spending week. Just play the game again this week and vow to win this time. If you had a great week last week, try to beat your best "score." It's a win/win.

Should I buy a Hybrid car?

2008-01-13T02:15:00.000-05:00

I've been thinking lately about hybrid cars. There are several of them already on the market, and more and more coming each year. With the price of gas over $3.00 a gallon, the allure is easy to see. However, it is easy to fall into the trap of "I'll save so much money on gas!" without realizing the other costs associated with buying a new car (sales taxes, registration, more loan interest, and higher yearly depreciation).

So, as I do with most things, I wanted to put this to the spreadsheet test. My current car is a 2000 BMW 323i, worth about $8k.

I will compare this to the 2008 Nissan Altima Hybrid and the 2008 Honda Civic Hybrid -- two hybrids I have considered. Both which qualify for $2k and $1k, respectively, for federal tax credits.

First, let's calculate what our gas savings would be with two new hybrids vs. my BMW.

Since I only drive about 10,000 miles per year, my savings would only be in the $700/year range (depending on the hybrid car).

Next, we need to figure out several calculations to answer the following questions:

Does the hybrid have a federal tax credit?
What is the expected depreciation?
What is the expected maintenance?
What registration and taxes are involved in buying the new hybrid?
What is the cost of the loan?
Are there any incentives from the hybrid manufacturer?

I have plugged the answers to these questions into the pasted spreadsheet.
As you can see from my calculations, keeping the BMW or going for the hybrid produce roughly the same 3 year projected cost.

So as you can see, based on my calculations and assumptions for unpredictable costs (maintenance, depreciation, etc), the Altima should have roughly the same total 3 year cost of around $10,200-$10,400. The Civic Hybrid however, will have a slightly higher 3-year cost at a little over $11,000. All of these, however, are in the same ballpark and within a margin of error on my estimates.

Conclusion: In my particular situation, both of these Hybrids will have roughly the same cost over the next 3 years as my current car.
The upside would be driving a new car and feeling a little better about my carbon output.
The downside is, with all due respect, that neither a Civic nor an Altima compare to the handling or the fun of a Beemer. So for now, the BMW is staying put.

You can try this spreadsheet for yourself below:

5 reasons Gift Cards make a lousy gift

2008-01-07T11:12:00.001-05:00

Every Christmas, it seems that gift cards become more and more popular. People give them, people receive them, and the stores market them like crazy.

Here are five reasons why I CAN'T STAND them:

1. They have less value than actual money.
I know some will argue that a $20 gift card is worth $20, I say it is worth much less. The reason is because a $20 dollar bill, has no terms and conditions. I can spend it anywhere, anytime. I can save it and use it later. I don't have to spend it all in one place. I can't do any of those things with a gift card.

2. The fees.
Some gift card companies have the audacity to charge fees! Inactivity fees, activation fees, and even a fee for checking the balance! That's outrageous.

3. Balances go unused.
It's pretty common that when I receive a gift card, I have a hard time finding something within that store that I actually want. I don't want to get ripped off, just because it is a gift card, so I'm not just going to waste it on random things. So what happens is that a fraction of the original never goes used. Apparently I'm not the only one.
Freakonomics authors Dubner and Levitt report in the NY Times that 10% of the gift card balances never get used. That's $8 billion dollars that goes unused every year!

4. I may not want something at whatever store it is that you think I should want something.
While I don't want to be unappreciative, it happens quite often that I get a gift card for a store or restaurant that I have no interest in going to. The good news is that ebay and gift card trading sites like CardAvenue have made it easier to get rid of these and trade for something you'd rather have.

5. Giving me a gift card may actually COST me money.
Again, I hate to be unappreciative, but giving me a $20 gift card to a restaurant is basically the same as handing me a bill. There aren't many places where a couple can dine for $20, so unquestionably, I'll have to add to the gift card balance with my own funds.

Getting rid of cable/satellite

2007-12-17T23:05:00.000-05:00

I admit it....I like TV. I like it a lot. I use it to relax late at night, to start my mornings with a cup of coffee and the news, and to stay current on the latest hit shows like The Office. But it kills me to pay over $50 a month for this privilege.

This week, I've been thinking about how I could reduce my expenditure on TV programming, while still having enough channels to scratch my TV itch. One caveat: I won't even consider a solution that doesn't include a DVR.

Here's what I have now:
Dish Network "America's Top 100" with Locals
HD enabled w/ DVR
Total monthly cost: $55.

After exploring several options, here is what I have decided to go with:

Samsung SIR-T150 (HD tuner/receiver) - bought for $35 (including shipping) on ebay

Silver Surfer HD Antenna - Included as part of the ebay deal, but these can be found for about $10 on amazon.

DVR subscription - $6.95/month. ReplayTV 5040. (The normal monthly rate is $12.95, but I get a discount since I also still have an [inactive] Panasonic showstopper 2020 on my account qualifying me for the multiple unit discount.)

This solution will allow me to receive 6 channels in HD (for watching live) or to record them in Standard Definition (via my DVR).

My Total Savings: $48/month

If you are not a gadget geek like me, and don't have a couple of DVRs sitting in the closet, I saw plenty of Tivo Series 2 machines on Ebay/Craiglist in the $50 range. Those will require a $12.95/month service charge.

Had I started from scratch, it would have been:
$35 ebay for tuner and antenna.
$50 ebay/craigslist for Tivo
$12.95 monthly for Tivo

Curious as to whether you could receive HD channels over the air? Check out your address at antennaweb.org and find out.

Using a credit card for purchases less than $1

2007-12-11T09:53:00.000-05:00

It seems that I'm always given weird looks by store clerks and friends when I pay for an inexpensive item (something less than a dollar or so) with a credit card. I understand, of course, that the store owner may have to pay a flat fee + % on the transaction, but I doubt the clerk knows or cares about that.
To me, using a card on these types of small transactions makes perfect sense from the consumers' perspective. Here are some advantages:

I don't have to get back a handful of coins.
It slightly reduces the purchase price (via cash back bonuses).
I don't have to go to the ATM constantly. ($100 in cash can last me months!)
Keeping all of my daily purchases on the same card can help answer the question, "Where did all of my money go?"

That being said, this only makes sense if you are paying off your "daily spending" card at the end of every month. If you aren't doing that, you're probably better off paying cash.

6 ways to save $3900 per year on your family's groceries

2007-11-30T12:12:00.000-05:00

When Benjamin Franklin said "A penny saved is a penny earned" he was right. But that's because good ol' Ben lived before the 16th amendment to the constitution was passed in 1913 -- the amendment that gave our federal government the power of Income Taxes. So these days, if you are in a 30% tax bracket, a penny saved is worth about 1.43 pennies earned. So if you or I can save $1000 a year, it is the equivalent of earning an extra $1428!

Which brings me to my point. Coupons.
To be specific, let's talk about grocery coupons. I realize some consider them to be archaic in our internet-connect world, but they are a powerful tool for reducing your expenditures (effectively increasing your income).

Consider this. In a typical month, I purchase about $150-$200 worth of groceries for just myself, a single individual. These are groceries I have to buy regardless of whether I have coupons or not. However, by just clipping the coupons from my Sunday paper I can easily save $75 or so from that bill. That's $900 a year in savings, and I'm just a single person. And to my point earlier about income taxes, saving $900 is equivalent to earning nearly $1300.

For a family, the savings are magnified even further. If a typical family of 4 is buying $150/week ($7800/year) of groceries, a savvy couponer could cut that in half. Saving $3900 a year! Remember, in a 30% tax bracket, that's like earning an extra $5570!

Think I'm exaggerating? I'm not. Here are tips to help you take a bite out of your grocery bill.

1. Purchase a Sunday paper and clip coupons for items you already need to buy. Don't fall into the trap of buying stuff you don't need and won't use just because it is inexpensive.
2. Go to stores that double or triple coupons. It's a great feeling to turn a $.75 coupon into a $2.25 coupon just by walking into the door. Stores typically post their coupon policies at the customer service desk, but don't be afraid to ask.
3. Match your coupons with weekly store sales. If an item is on sale for 50% off, matching that sale with a coupon will often make the product nearly free! See below for sites to help you find these deals.
4. Don't be too brand loyal. If you have a coupon for a different brand of Ketchup which makes it 1/3 of the price of your normal brand, give it a try.
5. If you find a good coupon, get extras! There are plenty of ways to do this. The easiest way is to use a service like "thecouponclippers.com" which allows you to order as many specific coupons as you like. Also, if you find lots of valuable coupons in a certain week's paper, you can always go buy another paper. Definitely worth your $1.50.
6. Print grocery coupons for free online. There are lots of online coupon sites that allow you to print grocery coupons. However, almost all of them pull from the two major sites:
www.coupons.com and www.smartsource.com
You can also find some good coupons for Pillsbury products on www.pillsbury.com

Websites to help you along the way:

hotcouponworld.com - Find a forum specific to your local grocery chains and share weekly deals with other users.

couponmom.com - Check the "Grocery Deals by State" section for a list of the best weekly grocery deals from your local stores.

thecouponclippers.com - Coupon clipping service that will mail you any coupons you need for a moderate fee.

OR join a yahoo group of like minded savers:

http://finance.groups.yahoo.com/group/smartspending/

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

2007-10-09T22:26:00.000-04:00

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.

How to calculate: Municipal bonds vs. Federal bonds

2007-10-02T22:13:00.001-04:00

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.

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

2007-10-01T22:37:00.000-04:00

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!

The Rule of 72. How long will it take to double my money?

2007-09-30T09:48:00.000-04:00

There is a simple mathematical rule that I learned as a kid that I have never forgotten -- the "Rule of 72." This is a very simple way to find out how long it will take to double your money at a certain interest rate.

Here's how the rule works.

Suppose you want to know how long it will take to double your money at 10% interest. 72 divided by 10 is 7.2. Therefore it will take 7.2 years to double your money if you are earning 10%. If you are earning 7%, it will take a little over 10 years. (Because 72 divided by 7 is roughly 10.) There is no need to figure the exact calculation, because this rule is only for estimating -- but what a powerful little rule it is.

Thanks to several readers who pointed out that this rule is mathematically derived from the "natural log" of 2 which is 0.69. So, it could technically be the "Rule of 69," although 70 or 72 seems easier for quick estimating.

Previous Performance is not an indicator of Future Results

2007-09-14T10:32:00.000-04:00

Have you ever noticed in small print at the end of every mutual fund commercial or magazine layout they say "Previous performance is not an indicator of future results."? Ever wonder why? While they may be legally bound to do so, there is also quite a bit of mathematical truth to that statement. Let's take one of my favorite examples, offered in Larry Swedroe's "Rational Investing in Irrational Times" book. (A great read, by the way.)

Imagine giving a room full of 1000 kids (or adults for that matter) a coin and telling them to flip it and try to get heads. Half of them would get it right. Taking the remaining 500, 250 could repeat their performance -- getting heads twice in a row. Continuing down this path, half of the kids would flip heads each time taking our winners down to 125, 62, 31, 16, 8, 4, 2 and eventually the final winner on the 10th flip. So did the kid who flipped heads 10 times in a row demonstrate skill at flipping heads? No, his odds of flipping heads on his next flip are still 50/50, just like everyone else. He just illustrated a statistical fact. That random acts produce a bell shaped curve. A very small percentage of kids flipped almost all tails, and a very small percentage flipped almost all heads, but the vast majority were somewhere in the middle. The problem is that at the beginning of the game, there would have been no way to identify the "genius" with the head-flipping "talent."

So while I agree that some investors have more skill and prowess than others, scores of academic studies have shown that chasing the "hot hand" on Wall Street is an unwinnable game for multiple reasons, but here are the two biggest:

1. Previous performance was enhanced by chance, and not purely a result of skill.

2. As more money flows in due to success, the manager must find more and more opportunities. The more money the fund manages, the less likely they will be to beat their benchmark.

All of that to say that you really should pay attention to the mutual funds when they say "Previous performance is not an indicator of future results." It's quite true.

5 Questions to Consider When Choosing a Mutual Fund

2007-09-13T13:58:00.000-04:00

1. What are the goals of the fund?
Before you select a mutual fund, you first ought to know what your goals are and make sure you select a fund with similar goals. Obviously, every fund's goal is to make a profit for the investors, but how much risk you are willing to take and what industries you want to invest in are up to you. There are many fund families that now offer "target retirement" or "life strategy" funds which change with you as you get older. This is a great way to simplify your diversification if you don't feel comfortable doing that yourself.

2. How much are the fees?
Every mutual fund is required by law to disclose their fees to you in the prospectus (that booklet you are supposed to read before you invest). Typically funds come in two flavors, "loaded," and "no-load". A "loaded" fund will typically charge a fee either when you buy ("front-end loaded") or sell ("back-end loaded") the fund. This comes out of the money you invest. Typically these fees are about 5%.
The second type of fee is the yearly fee the fund charges to be a member of the fund. These fees can range from 0.05% up to 3%. There have been several academic studies to show that the only accurate predictor of which funds will produce better returns for their investors, are the ones with the lowest fees. Makes sense, right? If all managers basically perform the same over time, you, as an investor, will do better with the one that charges you less fees.
The third, and often overlooked source of fees comes in the form of transaction fees. While in a sense these are transparent to the investor, the effects are felt nonetheless. As the fund managers buy and sell the stocks in the portfolio, they create expenses both in the form of trading costs as well as taxes. So funds with a higher turnover percentage (for example, 50% would mean they turn over half of their portfolio every year, holding an average stock 2 years) would generate more of those fees, and create more drag on your total return as an investor than a fund with a 10% turnover.

3. Is previous performance an indicator of future results?
The short answer is, no, they are not an indicator of future results. And even though every fund is required by law to remind you of that, people pour billions of dollars every year into the latest "hot" fund. Again, the only proven indicator of better future results in the future is lower fees. Interestingly enough, the one rule that does seem to hold true is that poor performance over several years does seem to be an indicator of poor performance in the future.

4. How does this fit with the rest of my portfolio?
This is a crucial decision. When I was a younger, less experienced investor, I thought I was diversifying my portfolio because I had 4 or 5 mutual funds. However, I had no idea how those funds fit together, and how it affected the overall picture known as my "portfolio." Each fund will list in their prospectus the percentage they invest in each type of stock and bond, and you should track the percentage of each in your overall portfolio. Furthermore, you should have targets for Domestic and Foreign equities, Small/Mid/Large caps, and Bonds. There are various guides for helping you decide your allocations, but mostly it is an individual decision based on your beliefs about the market and your financial picture (such as when you will need to begin withdrawing money).

5. Would I be better off in an ETF?
ETFs (Exchange Traded Funds) have come on the scene in the last few years and made quite an impression. Although they act much like a mutual fund (holding baskets of stocks), they trade on the stock exchange like a stock. The good news is that for most small and medium investors, their is very little difference between a mutual fund and an ETF. ETFs generally track a certain index, although as time has gone on, those indicies have gotten more and more non-traditional. Because they are generally not "managed" funds (following an index instead of active management), the fees are typically lower than a managed fund, and about the same as an indexed mutual fund. Be careful, however. Just because it is an ETF, doesn't mean it is well diversified -- some can be quite narrowly focused.

31 Ways to Save More Money

2007-09-11T21:48:00.000-04:00

It’s been said that a penny saved is a penny earned. Thanks to income taxes, a penny saved is actually worth about 1.3 pennies earned.

Here are 31 ways to save a few pennies (and dollars):

Decorate your home with pictures you have taken. Why pay big money for framed “stock” pictures. Sort through your personal collection and hang them around your house. If you’re not a photographer, there are plenty of professional looking photos on online picture sites that are high-resolution for printing and royalty free for personal use.
Get a library card…and use it. Why spend money on books? Some libraries now have online interfaces that make it a cinch to request a book. They will sometimes even request a book from another library in their network if they don’t have it.
Get a “lite” internet package. I’m too internet dependent to advocate getting rid of your home internet connection all together, but most people don’t use the bandwidth they are paying for. Call your provider and ask for their “lite” plan. Often they will have a lower-bandwidth option that is unadvertised.
Get a deep freezer. This is one of my personal favorites. Inevitably, my local grocery stores will have a fantastic deal on one or two items each week. With a deep freezer in my garage, I’m free to buy 10 pounds of meat, or a cart full of frozen veggies. Not only do I get at least ½ off retail, but I have them when I need them.
Don’t be an early adopter. Being an early adopter of technology is expensive. Its no secret that a new gadget is more expensive when it first hits the market, but some folks just HAVE to have it. You’ve gone this long without it. Save yourself some serious dough, and wait a few more months.
Join a credit union. Credit Unions, unlike regular banks, are not trying to make a profit. Their goal is to make money for their shareholders, which conveniently enough are the members. That means they are almost always a better deal than a normal bank. If you are eligible for a credit union, it’s a good idea to join. They often offer the same features as a bank, but with better rates and fewer fees.
Purchase the loss leaders. Most grocery stores put out a weekly flyer with their specials. Usually on the first page, they list what are known as loss leaders. These are items the stores sell for less than they paid for them. It sounds crazy, but realize that they are willing to take a few dollar loss to get you inside the store where you will buy a cart full of groceries. Maximize your buying power by buying the loss leaders and stopping there. When used in conjunction with the deep freezer, you can stock up on meats and frozen items on the cheap.
Opt for generic prescriptions and over-the-counter medications. Prescriptions and medications are one area where the “store-brand” is absolutely as good as the branded product. Both products contain exactly the same medicinal ingredients, but one is a fraction of the cost.
Never pay retail. When shopping online, it is easy to find exactly the same products sold for different prices at different stores. Spending a few minutes searching almost always pays for itself. And with Google, online e-coupons are just a click away.
Grow your own herbs. A pack of 99 cent seeds will provide enough basil, rosemary, sage, and others to keep your food seasoned all year long. Put extras in a freezer bag for use during the winter.
Get a high-yield savings account. If you have money sitting in a savings account, there is no reason why you shouldn’t be earning as much interest as possible. Several online banks (and perhaps credit unions) pay over 5% (at the time of this writing) on savings accounts, and your money is insured by the government, just like if it were at the bank down the street.
Get rid of cable or satellite. You can likely get most of the networks in pure HD over the air.
Lower your credit card interest rate. If you are carrying credit card balances at a high (more than 6%) interest rate, consolidate them to a lower interest card. There are plenty of 0% cards for consolidating balances. If you can’t pay it off by the time the promotional period ends, roll the balance to another 0% card.
Make coffee at home. Why spend $3 for coffee when you can make it at home for 5 cents. Even if you buy the good coffee, it is still no more than 20 cents a cup.
Cook at home. Restaurants can be fun and a great place to socialize with friends, but the bills add up. A home made meal usually only costs $1-$3. Try finding that deal at a restaurant. When you do go out, use restaurant coupons and take ½ of your entree home for lunch the next day.
Pack your lunch. Going out for lunch, even at $5-$7 a pop, adds up over the month or year. Packing a lunch and bringing it to work usually costs only a dollar or two.
Never buy a brand new car. Most cars depreciate 30% of their value in the first 2 years. Buying a good pre-owned car with a few miles will save you thousands over buying a brand new one.
Use index funds. With all of the money you are saving, it is a good idea to begin investing. But too often, new investors get sucked in by “advisers” who put them in funds with outrageous fees. Sometimes as high as 5% of the amount invested. On the contrary, index funds and ETFs usually charge only a fraction of 1% and over the long-haul have beaten most managed funds.
Install energy saving CF bulbs. Now that the price of compact fluorescent bulbs have come down to about $2-$3 per bulb (if you buy a 5 pack at a chain hardware store) it is definitely worth your money to install them. They last for several years and typically use 1/3 of the energy of a normal bulb. In a house with 40 bulbs, that’s about $300 in savings per year. (40 75-watt bulbs replaced with 23-watt bulbs, average use 5 hrs per day at $0.09 /kWh.)
Install a programmable thermostat. Programmable thermostats only cost about $30 at a hardware store and can save you hundreds of dollars per year. During the summer, program the thermostat to allow the temp to rise a few degrees while you are at work, and begin cooling before you return. In the winter, do the opposite. Most of these thermostats even have weekday and weekend settings.
Make purchases with a credit card with cash rewards. (Steer away from ambiguous “points” systems.) Many credit cards offer rewards, but most these days have moved to ambiguous points systems where it is nearly impossible to ever cash in on your rewards. However, there are cards out there that pay cash rewards every month. Getting 1% back on all your purchases should be your minimum goal. (Of course, always pay off your purchases at the end of the month.)
Don’t purchase alcohol at a restaurant or a bar. I love a good beer as much as the next guy, but paying $6 for a beer that I can buy at the grocery store for $6 for a 6-pack just doesn’t make sense.
Sell some unneeded clutter on ebay. Everyone has books, CDs, clothing, and whatnot that are just taking up space. Cash in on those things by selling them on ebay. You’ll likely get more than you think (and the buyer pays shipping).
Clip coupons and use them wisely. Coupons can save a ton of money on groceries and other items (and many grocery stores double or triple face values). But don’t purchase something just because you have a coupon, and make sure that the final price after coupon is worth paying. Sometimes its not a good deal even with a discount.
Try store-branded items. Many store-brands are just as good as their branded counterparts. The only difference is advertising. Companies have to pay for the advertising overhead by charging more for their product. At least try the store brand. If you don’t like it, don’t buy it again.
Resist the urge to spend on impulse, no matter how small the cost. Get out of the habit of purchasing on impulse. A newspaper here, a pack of gum there, a magazine – they add up to big numbers by the end of the month. If you don’t believe me, keep a log of all of your purchases for a few weeks. Another way to avoid buying on impulse is to always go to the store with a shopping list, and only get those items.
Use the lowest octane gasoline recommended for your car. There is usually absolutely no benefit to buying the “premium” gasoline for your car. If you don’t believe me, read your owners manual.
Get a space heater. If you are a single person or couple living in a house, don’t waste money heating the entire house all night. Place a safe, thermostat-controlled space heater in your bedroom to keep you warm and save on energy bills. Also, buy an extra blanket or two.
Don’t burn the pilot light in a gas fireplace during warm months. If you read the small print on your gas log fireplace, it will tell you how many therms of energy it uses while it is not being used. It can add up to $5-$10 per month depending on gas prices.
Reduce your text messaging. Most text messaging is unneeded, and at $0.15 a message, text message conversations can add up to many dollars at the end of the month.
Drink tap or filtered water instead of sodas. Most bottled water is no better than tap water, and sometimes even worse because of the lack of fluoride. Get used to drinking water instead of sodas. It’s better for you and will save a bundle. If you are uncomfortable with tap, get a filtered pitcher.

For more ideas, check out a similar posting I ran across on the fivecentnickel.

Rule #1: Spend Less than You Make

2007-06-08T16:17:00.000-04:00

Plan the Work. Work the Plan.

Before builders break ground on a new home, what do they do? They study the blueprints and make a plan for how to move forward. They don't just start building walls wherever seems like a good place! The same applies to our finances. Before you can start getting out of debt, saving, investing, and preparing for your future, you have to have a blueprint -- a plan of how you are going to get where you want to go. At the heart of this plan, there is one simple, but critical thing that must happen. It is so simple that a 3^rd graders understand it, yet adults of all ages seem to forget. That rule is this:

Spend less than you make.

It is that simple. Spend less than you make.

Now I know you may think that advice is ridiculously simple and far below your intellectual level. But consider this…the average American has $9,000 of credit card debt, and that number gets higher every year. How does that happen? It happens by them spending more than they make. In other words, they have more money going out than they have coming in. Those may have been big purchases, or they may have just been lots of little ones, but it adds up just the same.

It is often so easy to forget how fast small purchases can add up. A cup of coffee, a dinner out, a trip to the movies -- none of these by themselves are big expenses. But put them together and they add up quickly. I'm sure any of us who use a credit card have experienced the feeling of looking a string of small charges and thinking "Those charges can't possibly add up to this balance!" Even I have been guilty of breaking out a calculator (ok, I admit it is more likely a spreadsheet) and double checking the figures. Over a month, small charges can add up to one giant number!

So how can we handle this situation? We have to make a plan, and we have to stick to it. Then at the end of the week or month, we can compare how our spending compares to our plan, and make adjustments as necessary.

Before you can take control of your financial life, you first need to know where you are. Think of this as a doctor examining the patient before prescribing a method of treatment. So before we can get started with a plan, we first need to do an examination.
We will start our examination with three basic questions. They are:
1. How much money do you have coming in?
2. How much money do you have going out?
3. Where is that money going?

Dan's Bio

2007-06-07T18:09:00.001-04:00

Dan's Bio
Dan holds an MBA from UNC-Chapel Hill and a Bachelor's in Computer Information Systems. Professionally, Dan is a Product Marketing Manager for a Fortune 100 company.

Don't Be Afraid....You Can Do This

2007-06-07T17:03:00.000-04:00

Not too long ago I had a conversation with a friend in her mid-20s about her finances. Like a lot of people, she knew that she was not making the best financial choices. She knew that she was in debt and had no plan for how to get out. Why? Because she was afraid. I don't say that as an insult, I say it because I think a lot of you reading this can relate. She was afraid -- just like someone who would rather suffer in sickness than go to the doctor.

I understand why she, and perhaps you, are afraid of your finances. To take responsibility for your financial life takes courage. And the deeper you are in debt, the more courage it is going to take. But if you make the decision that you are going to take control, then you will. Imagine if you had a close friend who was 100 pounds overweight. It is likely that from your perspective the solution to their problem would be simple. If you could write them out a plan, it would likely say something like "eat less and exercise more." But to that person who is so overweight, the solution is not nearly as simple. To them, the problem seems insurmountable. They may outwardly say their weight doesn't bother them, but inside, they feel trapped. And sometimes their coping mechanism is to eat more. They know they should do something about their weight, but instead, they put it out of their mind, deciding it is just not something they can deal with. A few years down the road, it is likely that the friend will have gained even more weight, because ignoring the problem only allowed that problem to consume them further.

Maybe you are in debt. Maybe you are just lost in all of the financial lingo flying around, or maybe the whole thing just seems like a burden you would rather not deal with. Unfortunately, just like that obese person, putting the issue out of your mind does not make it go away. In fact, in many cases, ignoring the problem allows it to grow and grow -- until one day you are hundreds of thousands of dollars in debt, or in your 40s, 50s, or 60s without a penny to your name.

Just like you could have helped the severely overweight friend by encouraging him or her to exercise more and eat healthily, I'm here to tell you that taking control of your finances can be just as simple. But like the overweight friend, you have to decide that today is the day. Today is the day that you take control of your finances, instead of letting your money control you. Today is the day that you decide to be courageous, decide that you are smart enough, and decide take back control. Just like losing weight, the road to taking control of your finances will not be easy. There will be times you have to delay buying that thing you really want. You may have to make some significant changes that affect how much money you have coming in and going out. But you can do it. Make that decision right now. You can do it.