Tuesday, February 14, 2006

Free $5 and a cool new payment system - Textpayme.com

I just read over at wired that somebody has created a payment system that uses text messages to send money - much like what paypal should be doing. The service is currently only available via SMS messaging, but I would be shocked if they don't offer a paypal esque system in the future.

If you sign up now, you get a free $5 signup bonus. Check it out here.

Full disclosure, if 36 people sign up using that link by the end of february, I get an xbox 360. I'm not much of a gamer, but I do like xbox 360s. So, help a guy out - sign up with that link.

Saturday, February 11, 2006

Call for submissions, carnival of debt reduction

I will be hosting the carnival of debt reduction this week. If you have posts you would like included, please email them to retireat30 ... at ... gmail ... dot ... com. Or, easier yet, use the submit form at conservative cat.

While you're at it, remember that Trader Mike is hosting the 9th carnival of investing. As always, you can submit articles to investingcarnival ... at ... gmail ... dot ... com.

Wednesday, February 08, 2006

Go with ROTH

With your retirement accounts, if you can max them out or come close, you should go with a ROTH account.

The reason for this is simple: $15,000 after tax dollars is more than $15,000 pre-tax dollars (ditto for $4000 after tax dollars vs. $4000 pre-tax dollars).

Assuming the money is going to double & 10% taxes (for simplicity):
Post Taxed: ($15,000 * 2) * .9 = $27,000
Pre Taxed: ($15,000 *.9) * 2 = $27,000

In terms of after tax value put in:
Traditional: $15,000 * .9 = $13,500 after tax contribution
ROTH: ($16,666 * .9) = $15,000 after tax contribution

The more you make, the greater the difference is. Someone maxing out contributions in the 10% bracket only takes a 10% hit by going with a traditional program over a ROTH. Someone in the 38.6% bracket looses more than 1/3 of the potential value by contributing to a traditional IRA vs a Roth.

In the case of an IRA, you can only contribute to a ROTH account up to a certain level of income. In the case of a 401(k), you can only contribute to a ROTH account if your company offers it, but there is no income limit.

High income earners, welcome back to ROTH territory.

Info about:
401(k)s - IRS, Investopedia
ROTH 401(k) - IRS, Roth401k.com, Smartmoney
IRAs - IRS, Investopedia
ROTH IRAs - IRS, Rothira.com, Investopedia

Spend as much on crap as you can afford

Just don't spend more. Shocking as it may seem, you can be financially responsible and splurge on stupid things.

The $50 doggy vest, the $200 night out, even the $1,000 ski vacation are all acceptable and even healthy expenses IF they come from your disposable income. If they go on your credit card, you're living beyond your means.

Disposable income is the money you have left after you save for emergencies and long term goals and after you pay for your necessities. (income - necessities - savings = disposable income)

The future growth of our economy depends on people buying more unnecessary crap (and/or working less). As an economy, we covered our necessities (food, clothing, shelter) at least 100 years ago. You need look no further than the fact that only 1% of the US GDP is agriculture (and we are a net-exporter of food) to see that we're covering our necessities just fine (source: CIA World Factbook). We're still having some difficulty with the advanced social necessities of healthcare and education, but on the basics of living we're doing fine (with some unfortunate exceptions).

The biggest challenge is figuring out just how much of the money in each paycheck is disposable income. The easiest way to do this is the 60% solution: Keep fixed expenses to 60% of your income, put 10% to retirement, 10% long term savings (house, car, college) 10% to short term savings (health care deductibles, car maintenance, home maintenance), 10% to fun money. If you're going to do this, I would highly suggest setting up individual accounts for each of these (e.g. 60% for fixed in your checking, 10% to your IRA and 401(k) for your retirement, 10% to a brokerage account for long term savings, 10% to a high yield savings account like ING Direct, and 10% to a 2nd checking account and only use the debit card so you can't spend more than you have). By separating your money at the beginning of the month, you know just how much you can spend on crap that month.

The worst thing you can do is adopt an "It'll all work out in the end, so I'll just do nothing" mentality.

I don't follow the 60% method because I have a more detailed budget that I update at the end of every month (see my series Budgeting Made Easy) and I have a much more granular breakdown of my money (I have separate ING accounts for car maintenance, medical expenses, car insurance, etc. - separate post on that later). But I am anal retentive when it comes to most matters of money and I enjoy knowing where my money goes to the last cent.

Bottom line: Spending money on crap is not the problem. Spending too much money on crap is the problem. Limit your spending to your disposable income and it doesn't matter if you buy diamond encrusted trash-bags.

Overworked? Try too productive

Many Americans say that they are just too stressed, too overworked, and don't have enough time for themselves. It makes for great heart-wrenching human interest stories, but according to a new study highlighted in this week's Economist (Subscribe) we have more leisure time today than we did 30 years ago. (today 2/8 at&t is giving away a free day pass for watching a 30 second commercial if you aren't a regular subscriber, working paper available here)

We have more leisure time, but feel more overworked. The article poses two possible reasons: 1) we have a higher opportunity cost for our time, thus a walk in the park is more expensive than it was 30 years ago; and 2) since we are more efficient, we are able to do more in a day, and we over-commit (I am guilty of this one).

I've been very skeptical of the "overworked Americans" cry for years. If we're so overworked and underpaid how come there are ipods, tivos, satellite tv, new cars, etc. in every neighborhood? Granted, credit cards finance some of this purchasing, but credit card financing only lasts for so long and from what I can tell the trend towards more stuff has been going steadily for the past 20 years.

Now that we have higher opportunity costs for our time, how come so many people waste it watching reality tv?

Monday, February 06, 2006

Real returns might not be what you’re expecting

Today’s Wall Street Journal’s Money & Investing section had an excellent article by E.S. Browning on measuring investments by real-world returns. He quotes this research by Thornburg Investment Management. (The Journal article quoted numbers through 2005, I could only find the 2004 Thornburg article so I’m using 2004 numbers to avoid confusion)

The example discussed in the article is the S&P 500 since 1926.It is common knowledge that the S&P has returned about 10% per year since then. Put another way one dollar invested in the index in the start of 1926 would have appreciated to $2,531.44 at the end of December 2004. This annualizes out to a rate of 10.43%.

Thornburg after running the numbers net of inflation, taxes, and fees and found a starkly different story. That same $1 in real (post tax, fees, and inflation) terms would only be worth $44.80. Which only annualizes out to a rate of only 4.96%. They assumed fees of .2% of assets yearly, inflation of 3.04%, and then you can work out that they assume taxes to average out to 2.23% of assets per year. Since we’re talking about annual rates, we can use simple arithmetic to calculate the effects on returns so long as all percentages are in terms of assets per year. APY is implicitly a percentage of assets.

In an IRA, things fare quite a bit better since you get to add back in some or all of the value lost to taxes.

With a Roth IRA, since you’ve paid taxes on the money already, you get to add back all of those taxes and you get a historical return of 7.19%.

With a traditional IRA or 401(k) things are a bit more complicated. You have to deflate the real value of your money by the tax-rate when it is withdrawn. You get to compound at 7.19% yearly, but you have to take out taxes on the back end, and the amount of taxes you’ll take out depends on 1) the amount of income and 2) the tax rate at that time (for me, that’s about 42 years from now).

I ran the numbers simplistically, assuming a 33% tax on withdrawals and a withdrawing everything at the end of 20, 30, and 40 years. This Resulted in effective rates of 5.06%, 5.77%, and 6.12% respectively. Bear in mind, that this is a simplification and because you’re only withdrawing a small amount per year.

Wednesday, February 01, 2006

Car Insurance: High coverage leads to low premiums?

I am in the process of getting car insurance for myself, and I after about two weeks of getting quotes intermittently I have stumbled upon a very odd thing - the more coverage I currently have, the lower my future premiums are.

How I found this out.

I have been getting quotes from GEICO, Progressive, and a number of other companies (Allstate, 21st century, and using online engines to run searches across many companies). I am currently covered under my parent's policy, but I didn't know what my coverage currently was, so I have just assumed that I had the lowest liability coverage - $25/50/25 (basics of car insurance, numbers in thousands).

When I was assuming that, my best quote was from Drive Insurance at $706 for 6 months. This beat the roughly $820 that GEICO and Progressive were quoting me.

However, when I found out today that my parents had me covered for 100/300/100 the premium went to $593 (this is for $25/50/25 with 25/50/25 for underinsured motorists).

Finding this out, I promptly raised all of the quotes to 100/300/100 and my premium went to $691.

I was curious to find that with higher previous coverage, I get lower current rates so I looked into the quotes a little bit more. Here are the detailed premiums:

CoverageLimit (in 1,000 $s) Premium w/ 25/50/25 prior Premium w/ 100/300/100 prior


Bodily Injury and Property Damage

25 person/ 50 accident/ 25 property

Personal Injury (medical)
$35 for 10k$40 for 35k
Underinsured Motorist25 person/ 50 accident $18$15
Underinsured Motorist Property Damage 25 each accident $21$15
Comprehensive$500 deductible $72$64
Collision$500 deductible $244$182

What was most interesting is that going from 25/50/25 to the same cost MORE than going from 100/300/100.

It appears that the higher your coverage, the lower the amount of risk you present to the insurance company. The lower the risk you present, the lower your premiums.

Now I've definitely got to get my hands on some actuarial tables. This stuff is just too weird.