Monthly Archives: January 2011

Turning Down Millions for a College Degree

Posted on by  at  10:00 am
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You have to admire the decision of Andrew Luck, starting quarterback at Stanford University. He had a big decision to make – leave college early for a #1 NFL draft selection and a sure multi-million dollar contract (as in $30-$40 million), or return to school, finish his degree, and chance hurting his draft status next year.

Luck chose to return to school to finish his degree in architecture, and pursue a championship. I hope it works out for him. Not sure I’d do the same given the same choice, but I admire his decision.

The Frugal Roundup

A Resolution Worth Keeping: Find a new or better job. With today’s job market in the tank, if you’ve resolved to find a new or better job, you’ll need a strong game plan. Here are some ideas.

Can You Retire Now? Stop asking yourself this question and get your answer by checking out what Wealth Pilgrim has to say.

I always enjoy reading others financial strategies, and this one is very comprehensive.

2011 IRA Contribution Limits for Traditional and Roth IRAs. It’s time to plan your retirement savings and the best time to start is now. Here’s information about how much you can contribute to Roth and Traditional IRAs, and how your income, filing status, and participation in your company’s retirement plan impact your ability to contribute.

Are low interest rates a good thing? I suppose they are good for borrowers, but I sure miss the days of the 5.05% APY on those online savings accounts.

Best of the Rest

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Your Money Ratios by investment adviser Charles Farrell aims to make the process of preparing for the golden years less complicated—and less anxiety provoking. Farrell developed a series of simple formulas to help readers understand what they need to be saving based on age and household income, while taking as much of the irrational emotion out of the equation as possible.

How to Make a Fortune by Ron Insana, an award-winning financial journalist and seventeen-year veteran of CNBC, helps readers restore their depleted portfolios by guiding investors through volatile times in the market.

Debt: The Good, the Bad, and the Ugly

Posted on by  at  1:35 pm
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I’m often asked if a particular kind of debt is a good debt or a bad debt. That question is usually followed up by questions like, “Should I pay off my debt or invest?”

Anyone in debt at one time or another has faced this same dilemma, but the answer is a difficult one because there are a number of factors in play, including a number of very personal factors.

  • What are you overall financial goals?
  • How MUCH of this particular debt to you have?
  • How long will it take to pay off this “bad” debt?
  • Are there emotional strings tied to the debt that are causing problems elsewhere?

Obviously, personal opinions on what is debt (good or bad) vary considerably, too. I personally consider student loan debt a relatively bad debt, but not nearly as bad as IRS debt or debt to payday lenders.

Others consider student loan debt an investment in their future earnings, which I also tend to agree with (to a point), which is why I’d rank student loan debt somewhere in the middle.

I’m sorry to say, I experienced nearly every kind of debt prior to my financial turnaround, so I had plenty of opportunity to develop my own personal debt ranking system. Feel free to use it to motivate you towards putting together your own get out of debt plan.

The Ugly

IRS debt. Of all the “uglies” to owe money, I can’t imagine any being more ugly than the IRS. They can garnish wages without a court order, and outright ignoring them can result in jail time. Not to be messed with.

Car title/payday loans. In my town, I’ve noticed that as the economy has worsened, more cars are in the sign-your-financial-life-away-for-$200-at-300%-interest establishment parking lots. Sad.

Personal loans with baggage. By baggage I mean loans attached to bad relationships, such as owing money on a car you shared with an ex-spouse, or a personal loan financed by your father-in-law, who like to remind you how much you owe him every time you see him.

The Bad

Credit cards. Credit cards, as a tool, can be quite useful. However, credit card debt is vile. When I was deep in debt, I felt like I was working for the bank. My paycheck came in, and just as quickly as it arrived, it disappeared in minimum payments which barely cut into the balances after interest charges accumulated. It kept me awake at night, caused anxiety throughout the day, and limited my opportunities. Bottom line – being in debt sucks.

Upside down car loans. Car loans are not necessarily evil, unless you have no money to put down, buy new and drive off the lot owing more than the car is worth. Getting out of an upside car loan is not easy, so if you do finance a car purchase, consider gently used and using a trade and/or down payment to preserve some equity in the deal.

Enormous student loans. I emphasized “enormous” here because borrowing some money to finish off a degree often yields a nice return, considering college graduates usually earn more over the course of a lifetime. However, I don’t think that is an excuse to rack up over $100,000 in student load debt for a degree program in a field with starting salaries around $45,000.

Business debt. I’ve started and failed at a number of entrepreneurial efforts over the years. Fortunately, the one smart thing I did was not borrow a lot of money to finance these start-ups, so their failure didn’t haunt me for years to come. I recognize that many businesses need to borrow start-up capital to fund operations until revenues are flowing, but doing so puts the business (and employees) at enormous risk.

The (Slightly) Good

Mortgages. In a perfect world, people would be able to save up enough money to buy a home with cash. While that is certainly do-able, it isn’t practical for most of us. So, I concede that a reasonable amount of mortgage debt is not bad (and certainly not ugly).

However, as with student loan debt, the emphasis should be on reasonable. If your mortgage represents more then half your monthly income just because some “creative lender” allowed it, your home will not feel like a blessing. And you think getting out of an upside down car is tough, try an underwater mortgage.

When answering the question, “What is bad debt?” consider whether or not the money borrowed is for something that will appreciate over time. This may or may not be the case with real estate, making mortgage debt an acceptable debt in most cases.

Similarly, student loan debt is a somewhat acceptable form of debt (again, in small doses) as it often leads to higher earnings in the future.

Using that same logic, it’s easy to see why charging groceries to a credit card and not paying them off is bad debt. Three months later, the groceries are gone, but the debt is still around, accumulating interest and causing indigestion.

This post was included in the Festival of Frugality – Spend It Edition

Increase Investment Returns by Controlling Costs

Posted on by  at  5:00 am
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The following guest post is from Charles Rotblut, CFA. Charles is a vice president with the American Association of Individual Investors and the editor of the AAII Journal. His new book is Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio. Charles writes about stocks, funds and investing, proving both insight and education.

An easy way to increase your investment returns is to pay more attention to the expenses you are incurring. Even seemingly small savings can result in a notable increase in your long-term profits. More importantly, every dollar you save in expenses is a dollar increase in your net worth.

Keep in mind, however, that investing involves finding a balance between the potential for making money and the potential for losing money, and expenses are no different. This is why you should always compare the costs you incur against the value you are receiving.

In some circumstances, higher expenses may be warranted. In others, they are an unnecessary transfer of wealth out of your portfolio.

I recommend reviewing all of your investing expenses on an annual basis. There are five primary areas to look at: brokerage commissions, taxes, trading costs, fund fees and advisory/custodial fees.

Brokerage commissions – These are the fees you pay to buy or sell a security. In general, lower fees are better, though you should consider the other services provided by the brokerage firm. For example, it might be worth paying a few extra dollars per trade if the brokerage firm provides good research, access to useful online tools, or offers certain conveniences that you find to be of value.

Taxes – Capital gains and dividend taxes reduce the actual profit you realize. Though the new tax law extends low rates, taxes still lower your true return. Short-term capital gains are even more expensive. Whenever possible, hold your least tax efficient investments (e.g. dividend-paying stocks) in your IRA and your most tax efficient investments (e.g. municipal bonds) in your regular brokerage account.

Trading Costs – Also referred to as transaction costs, these are expenses incurred when a buy or sell order causes a security’s price to move. Trading costs are extremely low for an actively traded stock such as General Electric (GE) and are higher for a stock or bond that is not actively traded. In all cases, you should consider the average daily dollar volume (total number of shares times price per share) and how much money you are looking to invest.

It may be more profitable to place several small orders rather than one large order. You should also use limit orders to ensure your transaction is executed within the bid-ask spread (the price buyers are willing to pay and the price sellers are looking to receive).

Fund Fees – Both mutual funds and exchange-traded funds (ETFs) charge annual management fees. Mutual funds may also charge fees for buying (front load) or selling (back-end load) shares, as well as fees for marketing expenses. Since most mutual fund managers do not beat their benchmarks (e.g., the S&P 500), lower fees are preferable.

As far as ETFs are concerned, the free trading commissions offered by brokerage firms may not be justified if the annual expense is higher than a similar ETF that does not qualify for the waived commissions. Be sure to consider both the risk-adjusted performance and the diversification benefits a fund offers; a higher fee may be justified if a fund provides less volatility or allows you to invest in an asset class you are not already invested in.

Advisory/Custodial Fees – Some firms charge advisory, custodial or account maintenance fees. You may also pay separate expenses to consult with a financial advisor. These expenses can be justified if you are receiving quality advice, lower commissions, or provided access to other financial services. The more complicated your financial or tax situation is, the more you will need to spend on advisory fees. Furthermore, a good advisor is worth the expense if he can keep you on track to achieve your financial goals.

As stated above, you should review your investment expenses annually to determine whether you are receiving adequate value for them. In my book, Better Good than Lucky, I recommend keeping a trading journal that lists the reasons you bought and would consider selling the stocks, bonds and funds you hold in your portfolio. It is also a good idea to include a list of your investment fees and the reasons you think they are valid. Doing so will provide a checklist that can assist with your annual review. It’s simple, but very effective.

Gas Prices Going Up: How to Lower Your Fuel Consumption

Posted on by  at  5:00 am
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A recent interview with the former president of Shell Oil is enough to make a grown man cry. The hair-raising predictions of $5-per-gallon gasoline, fuel shortages and rationing in the near future have been echoed by other oil industry experts. With this depressing prospect of high gas prices in mind, it’s high time to consider implementing fuel economy measures on a personal level to reduce fuel consumption.

While most people agree that reducing dependence on foreign oil, limiting pollution, and minimizing environmental damage are worthy but somewhat abstract goals, the specter of $5-gallon gas represents a direct, personal attack on the wallet.

Obviously, one of the best ways to lower your gasoline consumption is to purchase the most fuel-efficient car on the market. But since not everyone can dash right out to the dealership and pick up the newest hybrid, it’s good to have a Plan B. For most of us, Plan B is to maximize the efficiency of the car we already own.

Tune Up and Save

Aging spark plugs, a dirty air filter, and over- or under-inflated tires can all dramatically affect your gas mileage—by as much as 25%. Stay on top of these simple maintenance issues to get the best fuel economy out of your car.

Run Gas Charges Through a Gas Rebate Card

I’m considering a switch to the Discover Open Road card. The card offers a $10 cash rebate on your first five fill-ups, a 0% intro purchase and balance transfer APR for the first 12 months, and has no annual fee.

Drive Smarter

Everyone has seen drivers who floor it when the light turns green, race to the next light, and then slam on the brakes. More than just annoying, these drivers are also wasteful. Driving at a steady pace (try cruise control on the highway) will optimize gas mileage.

Many people wonder which takes more gas: letting the car idle for a few minutes, or turning off and restarting the car. According to the California Energy Commission’s Consumer Energy Center, it’s better to kill the motor if you will be idling more than 30 seconds. So when you are in the drive-through or lined up to pick the kids up from school, it’s more energy-efficient to turn off the car.

Another simple way to chip away at your bill when gas prices increase is to unload the trunk. Many of us haul heavy things around such as tools, old car parts, or heavy work files that may not be strictly necessary. Unload all non-essential items from your trunk to get better gas mileage.

If you have more than one vehicle, compare fuel economy using the calculator found on The U.S. Department of Energy’s website www.fueleconomy.gov. A 10 mpg difference can add up to hundred of dollars over the course of the year. If you have a truly inefficient car, crunch the numbers and consider a trade-in for a more fuel-efficient model.

Drive Less

The easiest way to save money on gas is simply to drive less. Almost everyone can find a way to pare miles off the weekly mileage total. Ask your boss if you can telecommute one day a week, or work four ten-hour days instead of five eight-hour days.

If you can’t reduce your number of days on the road, try to reduce your commute time, by altering your starting and quitting time to beat the traffic. Fuel (and life force) wasted in rush-hour traffic really add up.

Many of us have become accustomed to hopping into the car to buy a coffee, drop off a video, or pick up one or two things from the grocery store. A better idea is to think like the old country farmer, who went to town once a week and did everything he needed at once. Reduce or eliminate frivolous trips and consolidate essential errands as much as possible.

One way to observe the effects of these changes real time is to install a gas mileage meter. Some newer cars and trucks offer real-time mileage calculations as part of an electronic vehicle messaging center, but those of us with older models may be interested in an after-market MPG meter.

Gas Station Tips

Don’t drive across town to buy gas for a few cents less per gallon. The gas you burn getting there will usually exceed the savings.

Would you believe dollar-cost averaging applies to buying gas? It seems that gas prices over an extended period will tend to be lowest on Wednesdays–so gas up on hump-day whenever you can.

Don’t let your gas go into thin air. An incompletely closed gas cap can allow your gas—and your money—to literally evaporate. Always close the cap properly.

These and many other gas-saving tips are available on the personal finance website GetRichSlowly.com and on ConsumerReports.org (video). Implementing fuel-efficiency practices is a smart move given current gas prices, and an even smarter move if prices start to soar towards $5 per gallon.