Networth Update

Another strong month, where, while I haven't reported it to the world, I have been sticking to a strict budget and I have found a workable budget where I save money and I can still have plenty of fun. I was able to find the funds to lower my liabilities while keeping my assets relatively stable compared to last month's update.

I had a positive 0.23% improvement in my goal toward $1 million.

My networth is now -$20,418.21 or a difference of $2,308.82. This makes me -2.04% on the way to my goal. I had a positive improvement due to a steady salary, but very little investment.

My investment front has been very annoying, with a tough time finding an appropriate Roth IRA broker. I will continue searching, but for now, that money is sitting around in a no-interest checking account.

Grill Purchases

Unlike my usual PF talk, I do not have any specialized knowledge of grills, so forgive me if I forget some features.

This year, I really needed to upgrade my old gas grill. It has been a trusty old friend for the last 6 years, but its become dilapidated. The grill is rusting in places, the two original wheels are long gone, and only one spare wheel has been found to replace both.

So I began my search, and quickly found myself with the usual purchasing quandary: form or function?

The grill that immediately got my attention was this beauty: The ultimate grill, 60,000 BTUs, 3 burners, a side burner, a refrigerator, and a small island with umbrella. List price? $4,999.00.

While certainly BTUs, the amount of heat generated, counts when you're BBQing, 60,000 is overkill. And what am I going to do with an on-board refrigerator?

I reluctantly moved on to the smaller, more affordable, and more importantly, closer to what I need, rather than what I want.

I settled upon a more reasonable CharBroil 40,000 BTU 4-burner grill, costing around $149.00.

It also comes with a side burner, but lacks the refrigerator and umbrella. Not real losses, but certainly decreases the cool factor.

While this was not the cheapest grill (see lower picture), I chose this one because it provided the functionality I needed, but still looked nice enough to be presentable at BBQs.

But I think this purchase helped me draft a more principled theory for purchases. There are always going to be multiple variations on a product we are looking to purchase. On one end, is the $49 stand-alone charcoal grill, which has all function and very little form. On the other end, is the $4,999 60K BTU BBQing monstrosity, which has a lot of form, and probably some function.

It's finding the middle that balances your budget and your desire to have both form and function that really suggests the perfect (or right) purchase you should make. In this case, the CharBroil 4-burner that for 3 times the cost of the cheapest product provided better form than the $49 grill while for 33 times less, provides all the functionality I need, with nothing I don't.

Roth IRA 2

Thank you all for your comments about which brokerage to go with for my Roth IRA. I have to agree that I don't like the monthly debit nor the fee structure that Sharebuilder has. Instead, I think I'm going to just save up $4,000 and open an account at Interactive Brokers. I've always wanted to use them because they have such low ($0.005 / share) transactions costs and I've really liked their web interface.

PS - Hope all of your had a great memorial day weekend. Tomorrow, I'm going to talk about the economics of purchasing a grill, if you haven't gotten one already.

Roth IRA

Trying to set up my Roth IRA continues to be a problem. I want to find a place that will accept just $1,000 as an initial deposit, have no monthly fees, provide the ability to trade options, and still have a decent web and as a plus, mobile web interface.

This remains elusive because places with nicer interfaces, such as Interactive Brokers, require a $4,000 initial deposit, while places such as TD Waterhouse accept $500, but require monthly deposits or the like.

I am still on my search, but since I promised to have my Roth IRA setup by the end of this month, I am still trying to meet that goal.

Market Thoughts

People have been really fretting about the market recently, namely about how we've been a winning (bullish) stretch for so long, that we're "due" for a crash. Yet, no one can provide any economic reasons for this.

Sure, it seems odd that day to day, we keep breaking market index records (such as the Dow and S&P500), but indexes are predictors of the market, they are historical reports of it.

For predictors, we should look to the jobless rate, inflation, and consumer spending numbers which indicate a positive environment for a bullish market.

Add to that international expansion and a rash of M&A deals going down, its tough to see where people are seeing crashes in the next few months.

Buying on Margin, Answering CT

This started as a reply to CT's comment in my last post, but it became very involved, so I made it the post for today.

To CT: While I certainly agree with the assertion that leverage is not inherently evil (and I talk about that often), I do always suggest considering the risk vs. rewards of leverage.

While taking loans for mortgages and education both have future value and are necessities, buying stocks/options are not.

Consider then how you can win using margin.

At the usual 10% APY interest, we're talking daily interest rates of 0.028% a day, or about 3 bps.

For now, lets just consider stocks. Obviously, you want stock that is rising at a relatively good clip. If the stock doesn't appreciate on average at least as much as you accrue in interest, you're losing money. But say it gains 11% in the next year. After paying interest, you have 1% left over from the part you borrowed money for, of which you hope you can pay the transactions fees and maybe make some money.

Now consider what happens if the stock doesn't do so well. Say it gains 10% in the next year. After paying interest, you still owe money for transaction fees associated with selling the stock. You would end up down for the part you borrowed money for.

Next, consider that you can be faced with the issues of margin calls. The Federal Reserve mandates that margin can only be used to finance up to 50% of a purchase, and must then be maintained at at least 25% of the purchase. Say suddenly that the market drops from under you. Not only will your investment began to lose money, but when the amount falls below the required amounts, your brokerage can sell your stock for you, at most likely an even lower price, since it would most likely be a period of panicked selling. When this happens, you will lose not only your initial investment, but you can owe the amount you borrowed and the interest accumulated.

And that's only with you leveraged 2:1. When you apply margin buying to options, you can be leveraged up to 8:1 or more, meaning you have the potential to lose up to 7 times your investment.

This is a type of risk I would classify as excessive. The upside to buying on margin is low, while the downside is greater than your initial investment.

If you compared this to a mortgage, if your property suddenly dropped dramatically in value, rather than forking over the difference to the mortgage company, you can just default on your loans and hand the deed of the property to them, without paying any more than your initial down payment. If you lose on margin, you can lose your investment, plus any other assets you still have.

I would never suggest an investment strategy where you can lose more than you put in. This is one of those that you should not try.

Buying on Margin

Today's WSJ article, "Keep the Debt Monkey Off Your Back", one section of the article caught my eye, buying stocks on margin. I was surprised that there are over $200 billion in margin loans given out for buying stocks. (Click here for a Wikipedia article about margin buying) Briefly, buying stocks on margin is the borrowing of money to finance the purchase of stocks, betting on a certain direction, which can significantly compound the gains OR losses associated with the stock.

This situation reminds me often about the general disconnect people have between going to the casino and going to wall street. Somehow, people enter a casino KNOWING they will lose money, but people go to wall street THINKING they will never lose money. I just don't understand this disconnect.

In a casino, people know the risks and rewards of any game. Casinos are required to tell you the rules of the game, and provide you a list of payouts. On wall street, the rules don't even have to be read. And yet, people think there is less risk of losing money on wall street. This is simply not the case.

Yet, with this increased risk, people are still borrowing money to bet on the stock market. If more people considered that the stock market was just like going to a casino, they would step back and realize, "If they are offering me this option, maybe its not because I can win money, but because they can" This is the situation with margin buying.

Brokerages are not altruistic entities. Don't believe for a second that margin buying is more beneficial to you than to them.

Flip-Flop-Flap...

Man, I have never flip-flopped between ideas like this, but I just can't decide between renting and buying.

This week made me realize that with a job taking between 10-12 hours a day on average, it would be pretty difficult to deal with say, a broken toilet, or get a cheap place that required a lot of fixing up.

What I really needed was some place that would cater to a) my social needs as a young single professional, b) my living needs that include have a place I didn't have to worry about and c) my health needs that had fitness facilities in the building.

Right now, apartments considered "luxury" fall under this category. Some of these places can be pretty expensive, but a few 1 bedrooms actually fall into my price range. I am looking at places for the next week, and my June, I think I will have decided on a place.

Renting Revisited

In my last post, I talked about the wonders of Craigslist. Now, I would like to say the opposite. Clearly, I had forgotten the rule that you get what you pay for. The much cheaper apartments had a few general issues:

1. Very old
2. In a bad neighborhood
3. No parking for my car

Those 3 are pretty much deal breakers on their own, but together, they formed the ultimate trifecta for saying no.

I am now refocused at looking at more expensive rents, and also back to buying a condo.

Renting

Today, while I was pondering how I can afford buying an apartment as summer approaches (I expect housing prices to increase with demand from graduating college students), I thought about going back to renting.

What if there were cheaper places to rent, but only the expensive places had their own websites? Do I really want to subsidize flashy websites by paying high rents?

So I thought about how people can post information for free, and still sell things reliably. Then it came to me: Craigslist!

At the risk of losing out on some of the places I'm looking at, there are some great apartments listed on Craigslist, with some almost 25% off the fancy websites.

Mother's Day

I heard an interesting theory about Mother's Day / Valentine's Day gift-giving recently. In a discussion about the proper amount to consider minimum / maximum for these gifts, my co-worker informed me that the significant female influences of his life are well aware that no flowers/chocolates/gifts will be given on these days.

His reasoning? Does buying such items at 2-4 times their normal price really show any kind of affection? Instead, he believes in buying a small card or token item, and then giving them a similar gift one or two days after.

How does he present the item days after? He sells it as a special day for that person because no other person is being showered with gifts that day.

That really got me thinking.

One: I could follow his idea and it could be met with mixed results.

Two: I could use the basic principles that are suggested, which is the time-shifting of gift buying. If you can just remember to get the gifts a few days/weeks prior to the big day, you can really save yourself a bundle while showing the same thoughtfulness.

ALSO: HAPPY MOTHER'S DAY!

"Free" Credit Reports

Recently I had a hour-long conversation with my credit card company getting rid of a charge from "MNI Credit Report Services". They charged me $9.95 for would I could only deduce as credit reporting services, but I didn't remember ever asking for that kind of service.

I did a quick Google search for this business, and found this site, along with many others that discussed the woes of other people who had been charged for the same service. As it turns out, "MNI Credit Report Services" is the name for the website www.freecreditreport.com. This website is pulling a fast scam on everyone.

They ask for your credit card to "verify your identity" and in small font somewhere (they claim), they also tell you that you are signing up for credit monitoring services.

Many people end up getting charged four or five times before they notice it. Thankfully I caught it before the end of the billing cycle, so my credit card company immediately reversed the charges.

So instead of falling for any of these credit report scams, make sure to start from this website, provided by the government that will link you to www.annualcreditpreport.com that is the only sanctioned free credit report website provider.

Investment Scams

Last night, I was channel surfing and stopped on an interesting infomercial. They were offering an "unique", "simple and easy", and "guaranteed" investment system. Well, when it comes to new investment "systems" I would definitely like one that is "simple and easy" as well as "guaranteed".

The infomercial advertised for a trading seminar that was taught by someone who had been "trading for 25 years". There was no mention of his track record, work history, or even any degrees or certifications he had. The biggest selling point? "It's easy, guaranteed and look at all these people who have made money!!"

These shows always annoy me because they spread the notion that somehow, there is a some secret formula or rain dance that you need to follow, and investment riches comes to you like water.

This simply isn't true. People on Wall Street would not be paid between $100K-$20 Million because they know some secret rain dance. When it comes to it, investment is hard work, and not everyone is cut out to analyze stock or be an i-banker.

Think of it another way. The stock market is a zero-sum game. At most, you can make all the money that is currently invested in the stock market, nothing more. So in order for you to win, someone has to lose. Well, if there was such an easy system out there, who is doing the losing?

In general, the losers tend to always be amateur investors or people following a "plan" or "secret" formula. Be wary of these systems, and consider that financial advisers do actually provide a valuable service.

Personal Finance's Biggest Ally: The Shredder

You really need a good one.

I currently average about 1 average-sized plastic bag full of shredded personally identifiable information a month, and the speed at which the bag is filling up is increasing still.

Why all this craziness? Financial institutions from your local credit union to big names like Chase and Citibank are really increasing their mailings to boost their profits, and to entice people to borrow in what is a relatively low interest rate environment.

The downside? Your personal financial information is flowing to your door faster than ever, and identity thieves are having a ball digging through your trash for all the information they need. Forget the high-tech hacking of government databases, one easy trash diving session later, they could be you.

Make sure you get a shredder that not only shreds at least 5 pages at a time, but can also shred credit cards. Not only will it help you get more financially responsible as you wean yourself off credit cards, but it can help you get rid of unwanted ones.

Yes. I did indeed receive one from Citi Mortgage recently out of the blue. While I appreciate that they could trust me with $13,000 in credit, I don't appreciate having my credit checked and a card issued to me for no reason.

So keep a lookout for those overzealous credit card issuers, and shred everything with your financial data on it that you don't need to save for your recordkeeping.

Investment Ideas for the Young

So at work today, we had an interesting ad-hoc discussion about 401(k)s and long-term investing. A strategy that one of my finance professors had talked to me about surfaced from one of my coworkers. He (and my professor) suggested that for young investors looking to invest long-term, the best way is to put 100% into something that you really believe in and ride it out.

The idea is that for most large companies and volatile companies, the general trend is upward, but day to day you can expect huge swings, that does not match any stock index.

Take for instance the S&P 500 historical returns. Looking at the returns, here are the breakdowns by length of investment and simple annual return on investment (ROI):

1 Month: 4.33%, 51.96% ROI
3 Month: 3.07%, 12.28% ROI
6 Month: 7.58%, 15.16% ROI
1 Year: 13.11%, 13.11% ROI
5 Years: 37.65%, 3.77% ROI
10 Years: 84.99%, 8.50% ROI

As the investment length increases, the APY levels out to about 6.3%, which implies decreased riskiness but this level of return is also very low.

Now consider a big company like Exxon (XOM), which is constantly in the public eye, and hence has huge short-term volatility (adjusted for dividends) with ROI:

1 Month: 4.31%, 51.72% ROI
3 Month: 10.45%, 41.80% ROI
6 Month: 12.61%, 25.22% ROI
1 Year: 28.18%, 28.18% ROI
5 Years: 122.39%, 24.48% ROI
10 Years: 246.30%, 24.63% ROI

While the APYs are a bit misleading in the past 3 months due to earnings reports, you can see that the overall 10 year returns with simplified ROI show that the one investment is better than the stock index, effectively representing diversification.

This is something to consider for younger folks, but those that don't have AT LEAST 10 years to invest should definitely not try this.

Payday Loans

Recently, National PayDay approached me to write a sponsored post about their company, and their industry as a whole. While the monetary compensation is small ($30, which I am donating to charity), it did provide an interesting glimpse into the lives of people dealing with the polar opposite fiduciary situation that I am.

Consider that the average FICO(a common measure of credit worthiness) is around 725. While at my FICO score of 780, lenders are breaking down my door to offer me incredible deals on loans, typical users of payday loans are probably at FICO scores of 500 and below, where a loan from any bank or credit card is unlikely. I would think people at scores of 500 have similar, if not greater, needs for cash flow compared to the average American consumer. However, since they are essentially, to borrow from the health care industry, un-lendable, a payday loan seems like an intriguing and sole last resort.

Payday loans, also known as a cash advance, in general are short-term loans ranging from $100-$500 that charge around 380-700% APR that require no credit checks. When you apply, you can get the loan the next day, but you have to pay it back, with interest and/or fees (depending on the lender's terminology) when you receive your next paycheck.

There are many critics of the payday loan industry who consider payday loans predatory, portraying the industry as preying on both the uneducated and the poor. While there is intuitive merit to this argument, the Federal Reserve recently released a report indicating it does not believe the industry can be called "predatory" because more often than not, people are managing to pay off their loans, indicating most use the loans as an emergency fund rather than a biweekly income boost.

For those with bad credit, and in desperate need of a cash infusion, payday loans can be a godsend. But if you begin to depend on them, you will fall in a debt death spiral, that would be difficult, if not impossible, to get out of.

Networth Update

I have some very happy news to report! After one month of work, getting my sign-on bonus, and starting to pay into the company 401(k), my networth is showing significant improvement from last month's update.

There has been a positive improvement of 0.72% toward my goal of $1 million.

My new networth is -$22,727.03 or a difference of $7,215.20. This makes me -2.27% of the way to my goal. Although a great improvement, it will be difficult to continue at this pace next month, as a majority of the improvement stems from my sign-on bonus.

Two new assets have been added on to my networth sheet, my car and my 401(k). The car was depreciated by $407 this month and my 401(k) started with a balance of $58.32. I know I promised to have a Roth IRA going this month, but I have yet the time to setup a Roth IRA account.

No question, by next month, the account will be ready to go.