Market Thoughts

Today was an interesting day in the market, as stocks started up, wavered around mid-day, and crashed in the afternoon. Most indicators suggest that people fear stocks have had a long positive run, and is due for a crash, causing people to begin taking profits. The irony of situation is that if enough people believe that, it could be become a self-fulfilling prophecy.

I pondered the situation today, and I think in the next few months, stocks will still be up. Consider that technology and oil companies, such as Microsoft (MSFT), Google (GOOG), and Exxon Mobile (XOM) recently reported record earnings. While the housing market is slumping, I think the worst is almost over, with subprime mortgage issues clearing and the possibility of a Federal rate cut on the horizon.

Again, while I believe in the efficient market hypothesis, EMH works over the long run, and there is plenty of opportunity for both erratic movements up and down before the market settles down. I think a few more days of negative stock returns would signal a great time to buy into companies such as Microsoft and Google, who are down 3.6% and 2.5% respectively from just a few days ago when earnings were announced.

Obsessive Thoughts

Stephanie at Poorer Than You tagged me for this obsessive thoughts meme. I was asked to list five of my obsessions.

First off, Stephanie, I apologize I haven't had time to respond to that until now. Second, I would have chosen the five you chose, but since I'm not allowed to, I've decided to chose five others. For those of you wondering, I had a difficult time coming up with an image for this post, and since this is better than some of the more X-rated images that popped up on Google, Obsession by CK is how I choose to "picture-ify" my rantings (for the less literate).

Money: While it may appear that I talk about and pursue money, its not the material aspects that intrigue me as much as the accumulation process. I just enjoy watching the digits in my bank account go up, while at the same time, spending for life's wants and needs. A wise friend said it best, "When all is said and done, your bank account will be the measuring stick." While I certainly don't believe money is valuable in itself, it is the ultimate means to an end, and having money to spend is always better than having no money at all. With that said...

New Perspectives: I want to clarify I'm no Scrooge. I very rarely penny-pinch, and I consistently blog against doing that. I also know it is very important to have friends and family around, for both the support and the different perspectives they have on life. After all, its no fun to have money when you have no one to spend it on.

"Why"s: On a day to day basis, work requires me to ask about the "why's" behind data. I have to delve into mathematical models, customer feedback, or the fixed income market to ascertain trends and prognosticate. But to me, this is fun, because I already spend so much of my life asking "Why". A classic example is that I spend an unnecessary amount of time analyzing bathroom scribblings. This isn't because I have to be there longer, but rather, it intrigues me that in a public bathroom, someone would take the time to write a 100-word thesis ranting against George Bush, and then someone else would later run the thesis through a manual spell-check and grammar check. I ask myself, "Why?" and I imagine to myself the scenarios that could cause someone to have so much time.

Movies: I spend a lot of time watching movies. I enjoy the chance to escape reality, but more importantly, it gives me a fodder for fostering new relationships and finding new perspectives.

Simpsons: There is no rational explanation for why I watch it. I find it the funniest thing in the world, and I have personally watched every episode at least 2 times (that number would be 3 if you didn't count this season's episodes).

Networth Update Coming...

Soon. Although my paycheck has hit the bank, my 401(k) hasn't been reflected, so I am still waiting on that to get a more accurate view of my networth. However, since this whole month was a big transition month for me, networth is more than likely to decrease.

Next month, my goal is to have it increase, by at least $1,000. Let's see if I can hold myself to it.

Housing Update

Checked out my buying power today. My calculation was right on. Turns out I might actually be able to afford an apartment around here. Please read here for my last comments about mortgages. One of the most interesting things I learned about today are 3/1 and 5/1 ARMs. ARMs are normal adjustable rate mortgages, changing as rates change. 3/1s and 5/1s are fixed mortgages for the first 3 or 5 years and then adjustable annually after that.

These are a great deal for me, and others like me, because more likely than not, I will be moving within 3-5 years. These loans tend to be lower rates, because companies have to worry less about the interest rate environment turning against them.

Student Loans

A lot of people, including my own mother, have approached me recently to lecture me about the debt I currently hold. Of course, a majority of my debt is in federal student loans. The whole student loan industry has been in the media spotlight recently, with allegations of impropriety and other scandals. Why the uproar? Federal student loans are essentially government-subsidized loans.

Let me quickly explain that regardless of rather the loan is subsidized or unsubsidized (meaning interest is either paid by the government or accrued), the government is still providing a subsidy.

Consider the basics of a student loan. You are getting money to pay for an education that holds no value to the bank. Unlike an auto or house loan, if you default on the loan, the bank has nothing to repossess in order to get some of its money back. Typically, these loans are called personal loans, since the money has no particular use than for your own personal use.

Researching this type of loan online, the interest rate would be 13-14% if you had excellent credit. As a student, with little to no credit history, the rate could be much higher. Consider then that at the current 6.8%, you are getting at least a 6.2% discount on your loan(s).

You ask, "So what? The government gives me a better rate. Why shouldn't I pay it back anyway?"

Well consider this scenario:

You have $20K in cash. You owe $10K in student loans at 6.8%. You have no other liabilities. Let's also consider that you are considering buying a $20K car in the future.

Scenario 1:

You pay back the loans and borrow $10K for the car. Current auto loans are 6.9%. Simple interest a year is: $690

Scenario 2:

You keep the loans and use your cash for the car. Current student loans are 6.8%. Simple interest a year is $680.

Savings with the loans is $10 a year in interest alone. Now consider that this difference can be greater if (a) the loan amount is greater and (b) if the difference in interest rates were greater.

Finally, if you have bought everything you want, consider also there are investment opportunities for your cash. An average stock market return is about 8-10%, so keeping your student loan in place, you can make 8% in the market, pay the 6.8% on the student loans, and make 1.2% free!

"My" Friend Paul Redux

As I was considering my reply to the latest angry post by Paul, I was reminded that this very subject had been addressed previously, although this time, at least the poster was willing to put a first name down.

Paul wrote:

"You are missing the point. A $40k car is not a necessity. A place to live is."

I would like to address this in two ways. (1) Please read my post on my views on debt versus saving, which was posted previously to an anonymous comment along the same lines. (2) I would like to point out that by your logic, an apartment is also not a necessity as my parents are providing me a free place to live as it is.

So let me separate your concerns into 3 categories:

1. Critique of spending habits
2. Critique of goal progress
3. Critique of title "Personal Finance Blog"

Now (1) and (3) I have addressed already in my linked post. But I would also like to add that my spending habits and how I deal with my finances are not the typical "Save money!" and "Don't spend" as these are unrealistic mantras to hold. Instead, I present a glimpse into my life, as I deal with desires, and not necessarily needs.

And also, I would love to see your reaction when I ask, "Have you considered a $40K car is necessary in my line of work?" Just as much as a nice suit and tie and a clean-cut image, the car is another part of being in the finance world. So much of finance is about meeting new people and building relationships, and the best way to do that is to dress and act the part.

The interesting thing about finance is that a place to live is actually NOT a necessity, as most financial positions take between 10-16 hours of your life per day. Frankly, (finance) people would be more impressed that you slept in your office than that you slept in a castle.

Now on to my goals, I do acknowledge that my current networth is negative. But so what? I have allocated the next 7 years of my life to achieve my goal. Consider that with all the purchases I have made in the last month, my networth did not actually decrease. Perhaps I do know a little something about managing my finances?

Consider also that from this month on, only 1 big ticket item is left, and the rest will begin to accumulate in savings and investment accounts.

Now, if you haven't been able to glean any personal finance from my posts, I apologize. However, I believe in general, the posts I make describe the average person's decision-making process which is then backed up or refuted by financial analysis.

Also, while I appreciate your comments, and you are welcome to continue posting yours, this will be the last post to address your concerns.

Vegas Results

Vegas was a blast, but unfortunately, I still had to return to the grind of office life. Maybe next time, I can spin the wheel and get a $1 million, but until then, I'm still a tool of corporate America.

Now, upon returning home, I had an interesting comment from a poster, who wrote:

"Maybe you can live in your $40,000 car!

Sorry, but if you own a 40k BMW and still live with your parents, your priorities need readjusting..."

I wrote a quick reply, and I just wanted to reiterate, moving out is on the top of my priorities. However, buying/renting an apartment is a much harder choice than getting a car. Consider even though the car was $40K, an apartment is $250K.

With a 6 times price difference, a reasonable person would think it would require 6 times as much research and thinking. It took me 3 weeks to get a car. How long do you think it would take to properly research an apartment?

This sort of comment is both welcome, but also annoying because it is clear that someone is just angry at life and wanted to blow off some steam. While I have thick skin, all I ask is that anyone who wants to post should at least read the post that they comment in.

Rent vs. Buy

As I settle into my work schedule, I have to get off of the free ride I'm getting from my parents. Right now, I am living at home, and the free room and board is hard to find elsewhere.

But I know I need to get out of there. Not that its not great to have a warm meal waiting, or people to talk to after work, but rather I'm losing my independence and its terrible for my social life. However, finding a place to live isn't that easy.

Where work is, the average monthly cost of a 1 bedroom apartment is about $1600 / month. This is steep, and so I have been pondering buying instead of renting. This same amount per month equates to about $250,000 I could get through a mortgage loan.

Now if it was that easy, I wouldn't be blogging about it.

Unfortunately, $250K buying power assumes I have at least 10% to put down, which of course I don't have. In order to make up for the down payment, I can obtain either piggyback loans or private mortgage insurance, both of which add to the monthly payment amount, decreasing my buying power to about $220K.

That $30K is a big difference in the area I'm looking, so I'm have a tough choice between shelling out money for a place that's not mine, but which will be very nice, or something that is mine, but will require additional work to become very nice.

Stay tuned for updates.

Of course, no updates for the weekend, as I will be in Vegas. However, if I do a networth update on Monday, you'll know it went well for me :-)

Work and Life

The two has not been mixing well recently. Everything from dealing with bills to getting exercise has given way to work and recovering from work. This week has been especially annoying, as I realized earlier in the week that my Chase ATM card was not responding to my pin number.

This wouldn't be as annoying if I didn't have to have cash for both lunch and this weekend in Vegas. The cafeteria at work doesn't allow credit card charges of less than $5, and so there was a day that I tried to charge a Snapple and I had to put it back.

Anyway, I snuck out of work after another 3 hour meeting to get my pin number changed at the nearest Chase. They were closing up, and bank tellers can't do that for you so I had to wait for a more senior member of the staff to do it. In all, it took about 20 minutes from walk-in to walk-out, which wouldn't have been too bad, except that there were 3 tellers, 4 senior managers, and two people waiting in front of me. You would think that they could have worked faster?

Unfortunately, consumer banking isn't much better at Chase's rival Citibank. I went to them last weekend to get a cashier check to buy my car, and it took the teller about 20 minutes because she wasn't sure about the procedure. Mind you, that time, I was the only person in line, but by the time I walked out, the line stretched out the door.

Anyway, now I'm looking for a bank that tailors to my after business hour needs. Are there any?

Stock Market is back up...

The stock market was up today, helped by more private-equity deal news by Sallie Mae, the largest student loan corporation, and a nice first quarter earnings report from Citigroup, which excluding extraordinary items, beat out earnings estimates for first time in years.

But, with today's tragic news at Virginia Tech, the stock market may start down, with mixed investor reactions and a general sense of insecurity.

What would be a good buy tomorrow? I would still think oil and good will be up. There could still be residual gains for Citigroup, while Sallie Mae may see a drop, as the possibility of a credit rating downgrade after the buyout may make deal makers reconsider.

Bonus + Pay for Car Weekend

Every weekend has been a banner weekend recently, but this one pretty much has been the best and more likely than not, the most memorable one for a long time. First off, my paycheck was in the 5 digits, since I got my normal pay and my sign on bonus, which makes for a happy day in anyone's life.

Friday night, I knew I was going to get my car the next day, so I felt like a little kid on Christmas Eve. I contemplated drinking water to ensure I woke up early enough...

Anyway, Saturday came, we went to the dealership, and with very little difficulty, the 328i Coupe was mine! That night, I took it out for a test drive, and as always, I followed all posted signs, especially the ones marked speed limit.

I swear. ;-)

I would have loved to take it out for a spin today too, but the crazy weather in the Northeast did not allow that to happen. On the positive side, the rain could flood out the highways, perhaps canceling work.

What personal finance related issues can I talk about? Very little. I've worked out my monthly car payments ($690.81) and I know how much it costs to own my car ($0.74 / mile). Those are both values that fit into my budget, and if purchases fit into your budget, there is very little reason to not purchase.

BMW and Car Insurance

I'm two days away from being able to drive my 3 Series Coupe! I'm picking it up on Saturday. I finalized my insurance with Geico, which took a little time, but I got an OK rate of $750 for 6 months.

Recently I had been talking about depreciation schedules for cars as an aspect of networth. In previous posts, I talked about how a car's value declines as it gets older, and so the value is never the same as you paid.

However, before I describe the depreciation schedule, I first wandered about what value to start the depreciation at. Do I start at the price I paid for it, the MSRP, the Kelly Blue Book, or what?

Many online calculators start with the purchase price as the base value. Then it subtracts a first-year deprecation value to makeup for the "Drive off the lot" discount, followed by regular annual depreciation amounts.

I don't like this method for two reasons. One, it unfairly values your car higher/lower depending on negotiations. More likely than not, you may have paid more than you can actually get for the car. Second, it does not account for other aspects of the car, such as mileage, options, and etc.

I decided instead to use the Kelly Blue Book value as the starting point, and I assume the value includes the "driven off the lot" discount. KBB gives a value of $40,700 for the car, including all options.

Given that the typical depreciation is 11% a year, I'll estimate depreciation at 12% a year, or 1% a month. In essence, I'm saying after 100 months, the car will be worthless.

How will this affect my networth? First off, the value of the car will be added to my assets, while the debt will show up on my liabilities. Next, every month, the car value will be decreased by $407.

So as I pay off the debt, my networth will get worse, which is an accurate reflection that a car is a bad investment, but a necessary one.

401(k) Contribution

Recently I was thinking about my 401(k). Since this is my first job, this is the first time I have ever had to make this decision: How much should I contribute? How much can I contribute?

The answer to the first is tough. The answer to the second was a quick web search.

So alright, its a limit of $15,500, which is more than 20% of my annual income, and therefore obviously way too high to consider.

Doing a little research, I found that my employer will match up 2 for 1 ($2 for every $1 I contribute), up to 3% of my annual income, making that the very minimum that I should contribute, since an employer match is essentially a free and instant return on your investment.

Contributing above that has only a tax benefit, as 401(k) contributions are pre-tax. While this portion of income is taken out of taxable income this year, when retirement comes around, the money you take out is still taxed at your income tax bracket then.

For many, this makes sense, since by retirement they will be in a lower tax bracket than their working years. However, in my line of work, 60 is when I would reach the prime of my career, and so the reverse would be true for me. Therefor, paying taxes now is better than doing so later.

Thus, I have decided to contribute only enough to pick up the free money and leave it at that.

Of Blogging and Commenting

As I approach a two month anniversary of blogging, I wanted to take time to comment on my audience and a site that has really helped me grow.

First, to my audience, the ones who regularly read this, thanks! The ego boost helps me get through the rough days where I would rather eat bricks than to blog after work. To the detractors and critics, you guys helped provide a great way for me to refine my blogging technique, and also helped blossom some blog posts.

My audience has grown from just me and a few friends reading, to a good rotation of about 25-35 readers on a daily basis. While I no longer blog on a daily basis, this readership stays this level day to day, for which I am both astonished and grateful.

Along the way, one blogger specifically really helped me get off the ground: Stephanie at Poorer Than You. She was the first long-time PF blogger to read my site, and allow for a link exchange. Over the last two months, her interesting posts have led to many comments by me, which has also helped build an audience for me. For this, I am thankful to her, and I hope she continues to allow me to comment there.

Finally, a recent comment there is something I want to reference, because it is something that more people should think about. What is the best way to pay down debt? Click here for her post, and read down to see mine and many other's opinions.

2007 BMW 328i Coupe or How Quickly My Mind Changes

So for the past few posts, I had been promising to talk about the depreciation schedule of the 350Z. However, my sales agent at the Nissan dealership had really jerked me around for 3 weeks, and finally on Friday, I got him to admit he hadn't even ordered my car yet.

This really angered me, and it caused me to rethink the Z. Frankly, my parents and friends have been telling me to look at other cars in the same range, and consider both insurance premiums and resale value. Thus, I began to look at the Audi TT, Infiniti G35, and the BMW 3 Series Coupes.

After looking at the 3 cars, I realized that the Audi TT was a little out of my range with options, and the G35 reminded me too much of the Z. So I went to my Nissan dealership, took back my deposit, and started shopping for BMWs.

There was only one 3 series coupe on the lot, so I took it for a test drive. Thankfully, it was automatic and came with the premium package, heated seats, and some other niceties. I liked the feel, and the outside just looks amazing in the jet black color.

We sat down for negotiations which initially involved me storming out of the dealership because the manager came over and tried to smooth talk and then belittle my understanding of how buying a BMW works. He made it sound as if paying sticker price was normal, and getting any discount was outrageous.

Anyway, 2 hours later, we called back and the real theatrics started. They started with the price they quoted me at the dealership and I countered with a number I was willing to pay cash for. They then bargained a bit, and after about 4 hours, my parents and I got a great bargain.

The MSRP on the vehicle was $42,000, and the first price they quoted me was $39,000 pre-tax. At the end of the day, we got an out the door price of $41,300 or a pre-tax and fees price of about $38,300 or a savings of $700. Thinking back, I laugh at the dealership manager's suggestion that I didn't know how to buy a BMW.

Anyway, so now on the bigger story: how to pay and rationalize this purchase?

1) Payment is through a partial payment by me and a generous loan from my parents

2) Rationalization
a) Re-sale value: Looking up a few figures, I can estimate from comparable BMW 3 Series modes that the annual depreciation with be about 11%.
b) Insurance: About $25 / month cheaper than the Z due to 4-seater and lower HP.

3) Monthly payments are only about $100 more, but the insurance and re-sale value more than offset that difference

Networth Update

Today was my mom's birthday, so I had little time to do extensive research on the depreciation schedule on a 350Z. However, since I will not be paying for the 350Z for another month, I figured it was a good time to do a networth update.

Again, I'm still doing a little worse (about 0.05% worse) than when I updated my networth last month.

In following the format of other PF bloggers, I have decided to give you a snapshot of my Excel sheet. However, I have removed the names of my credit card companies so that no identity theft can occur.

Of note is of course my new networth of -$29,942.23 or a difference of $432.71. This makes be -2.99% to my goal. However, consider that this is actually pretty good, since the month to month change is only about $100 more than last month, but I spent a lot of money this month buying clothing and other work related expenses.

My next update you can expect my bank account to be higher, as 2 paychecks plus by sign-on bonus will hit. Also, my Roth IRA and 401(k) values will be reflected, as well as my car and its related loan.

My hope? Next after all the craziness, I might be able to see my total goal percentage reverse toward positive, although I don't expect to be above zero for the next 5 months.

350Z discounted $100

Its been two days since I posted last, and not for a lack of things to post. Plenty of financial issues (mostly car-related) have been decided recently. I just haven't been posting because a combination of long hours at work, and sheer tiredness has prevented it. (See post where I discussed I wouldn't blog while tired, or with cold meds, again.)

Well, since my last post about getting my 350Z, I still haven't gotten my car. My sales guy said that the car I wanted kept getting sold immediately after coming off the truck, so I gave up and told him to factory order it. Of course, in order to ensure this wasn't his plan the whole time, I made him give me a $100 discount. He stubbornly agreed, and so it's going to be another 30 days until I get my car.

At least I'm building some sort of equity into my car...

In the mean time, I have to come up with a way to accurately reflect my car into my networth. While I know the price I paid, that will only be reflected accurately on the liability side. On the asset side, I have to consider resale value and/or depreciation/amortization schedules.

ie. Once it's off the lot, its immediately worth 10% less. How much does it continue to devalue after that, and for how long?

I'll try to make this answer the topic of my next post.

Buy Gas Now

Sometimes, the most basic of purchases is like buying stocks and playing Wall Street. Consider for example gasoline. As anyone following current news would know, the Iran-British Navy scandal has been wrecking havoc for crude oil. While this sharp increase in price has begun to "show up at the pump", the high prices are not yet fully reflected in gasoline prices.

With the possibility of crude oil hitting $70 a barrel not far away (it's currently at $66), you can expect prices of $2.80-$3.00 a gallon. Consider the average now is around $2.60. One of the best ways to save yourself some money, and buy something you need, is to go out and buy some gas now, before it starts costing you more!

And why does this make sense? Because the Iran scandal is a temporary affect on prices, and a few weeks from now, oil would be back to its previous $60-$62 a barrel. In effect, by buying ahead of time, you can hedge your risk by buying now.

Consider the savings. On about 20 gallons x 20-40 cents, you're saving about $4.00-$8.00. It's a small amount, but considering how much gas already costs, it feels good to be one person at the gasoline pump with something to smile about.