Retire At 30

Free AudioBooks on Investing!

2009-12-17T13:24:00.000-08:00

I just found out that I can download tons of investing books from my local library's website - from home.

I love audio books because I can listen to them with little effort when I'm doing otherwise mundane things - standing in line at the airport, waiting in a doctors office, riding the bus in the morning, diving, working in the yard.

Sure, you could read in many of those cases, but not all of them. And, I can listen a lot faster than I can read. It just takes less effort to listen than to read - perhaps I have dislexia, perhaps I have bad eyesight, or perhaps it is just more effort to read than to listen. For whatever reason I can get through ideas faster when spoken than when I have to do the optical processing myself.

Finding the link to download the audio books can be a bit of a task, but if you call they're usually quite helpful.

Good Insurance vs. Bad Insurance

2009-12-15T13:29:00.000-08:00

Here's the dirty secret of insurance - it is a loosing bet for the person purchasing it. Always*.

Insurance companies will usually have a loss ratio of 50 to 60%. The loss ratio is just another way of saying, how much they pay out in claims for every dollar they take in. They also have expense ratios in the 20 to 40% range (the cost to run the business- claims adjusters, salesmen, marketing, electricity, rent, etc) so don't think they're making out like bandits.

But from a consumer perspective the average insurance policy has about the same expected value as a lottery ticket - you can expect to get back about 50% of the money you put in.

But everyone in personal finance says you should make sure you are adequately insured.

There seems to be a tension between these two statements - 50% expected value, but still buy it? The resolution to this tension is the word "adequately."

Quite simply put, you should only buy insurance against those things you couldn't afford to bear the cost of yourself were they to happen.

Medical insurance - in the US today medical insurance is a hybrid of three things - prepaid consumption of health care, volume discounts for health care, and catastrophic medical expense insurance. Even if you are a healthy 25 year old male - with expected cost to see your personal doctor once a year of about $300 to $500 - it still would make sense to pay $400 a month for medical insurance because if you are in a car accident you could quickly rack up $50,000 or more in medical bills from the intensive care unit. Even though you expect to loose almost $4,000 a year on the wager, you can't afford the $50,000 if it were to happen. Thus you should buy it.

Car insurance - you pretty much have to have this to drive your car anywhere. But, what kind to get and how much should be dictated by the question "can I bear the cost if this were to happen." Chances are you can afford to pay $150 to a tow truck in the 1 in 10 years event that you get a flat tire and are stranded. So the $3 per month = $36 per year = $360 per ten years proposition of "roadside assistance" is a loosing bet, and one that you don't have to make.

Life insurance - Why do you need it? Could your family survive were you to die and not provide income? Chances are, the answer here is, probably not. What if you have a stay at home spouse? Should they not be insured because there would be no lost income? Not if you have kids. A stay at home parent is engaging in "invisible" productive activities - there is no money coming in for them, but there is usually a substantial savings in money that would otherwise have to be spent. So, what would the cost be to get childcare if that spouse were to die? That's how much life insurance the stay at home spouse needs. What about 10,000 coverage for babies? Unless you can't afford the basic costs of a funeral, stay away. Same for married dual income no kids, unless you have a mortgage that requires both incomes.

Cell phone insurance - You should insure yourself here. If you keep loosing your phone, either stop drinking so much, become more responsible, or learn how to google "Refurbished __your_phone_here___." You think of it as "it saves me from paying $200 for a new phone" but, they send you a $50 refurbished model - and charge you $3 per month to do so. This is one of the biggest wastes of money. Cell phone insurance is the WORST kind of insurance.

Disability insurance - This is going to cost you peanuts, and be happy every month that you're paying so little even while expecting to loose money. This means the chance of you becoming disabled is vanishingly small. Be happy about this fact, and by all means make sure you are covered.

Good insurance buys you security. Bad insurance is like buying a lottery ticket. Think about it so you make sure you know what kind you are getting.

* I said above insurance is always a loosing bet. I should restate - it is always a loosing bet if the insurance companie's actuarial tables are correct. That is, you can only profitably take on insurance if 1) you know something they don't about your risks, and they don't ask or 2) they've done their math wrong. Now, I know some guys who do math for insurance companies, I wouldn't bet against them.

Special proviso on "gimick" coverage. Sometimes insurance companies intentionally under price small elements of their coverage - i.e. laptop breakage. They do this because they know that having this gimick is going to make their insurance more desireable - it is a classic loss leader. They loose $10 on laptop insurance to make $100 on the homeowners policy. It is a sales cost for them, and you should by all means take it. But, if you can't do the math, you should always assume that gimick add ons are correctly priced because 9 times in 10 they are.

The Tao of Personal Finance

2009-12-12T12:51:00.000-08:00

From the Tao de Ching, I found a fantastic quote that summarizes at least half of responsible money management:

He who knows he has enough is rich.

That is satisficing! When you ask yourself "what do I need" vs "what do I want" it puts your spending into the right perspective.

When you buy fewer things, you don't have to pay as much attention to price. This frees up space in your brain for more productive, or more pleasureful things, like thinking about the next blog post you are going to write.

The first question you should ask when you are buying something is "do I need this." The second question is "can I afford it." If the answer is yes then no - you better be talking about food, basic clothing, or shelter - if you aren't you need to reconsider how you define need. If the answer is yes then yes - great, buy. If the answer is no then yes, it is an affordable luxury and you have to ask yourself the question - do I want this?

Shockingly, after a few years of "do I need this" you find yourself wanting fewer and fewer things, while being able to afford more. And every item you don't buy feels freeing - you aren't trapped by illusory desires, and you aren't wasting your resources.

But, be reasonable. We don't technically need cars, computers, the internet, or cell phones for basic survival. But, they are enabling devices - or, thought of another way - they are investments.

Why do I need a car? Because it saves me at least 40 hours a month in transportation time. Even at $5 an hour - that's $200. Most of my readers are going to be making substantially more than that per hour. I need a car because it is a good investment.

And good investments are one of the most critical needs in modern life.

What is an Investment

2009-12-01T15:07:00.000-08:00

Most people will answer this by saying "Saving money," or "Stocks, Bonds, and mutual funds." And, these are most certainly investments.

However, they represent only a small subset of the investing universe. No, I'm not going to talk about Hedge Funds, Futures, Options, Real Estate, etc. Those are also part of the same sub category of investment - they are financial investments.

What then is the essence of an investment? It is putting to action today something of value with the reasonable expectation that by doing so you will receive more value in the future.

It doesn't have to be money that you put to action, and it doesn't have to be money that you receive.

You can invest time in order to get more time back. Assume you spend two hours each week watering your lawn and garden. You think about this and realize that by setting up the sprinklers you already have in your garage you can cut that time in half. Say it takes you 3 hours to find and set up the sprinklers. You've invested 3 hours today, to save 1 hour per week in the future.

You can invest time and money to get more money back.

You can invest money to get time.

You can invest money to get security (i.e. insurance).

What is important is that you are getting more value out than you are putting in. If you are, you are making an investment.

Look around, what simple investments could you make? You might be surprised how many hours you can get back for each hour you invest in streamlining your life.

Business Plan Archive

2009-11-22T20:15:00.000-08:00

I just found out about a site that is trying to create a collection of old business plans. It is called (shockingly) businesplanarchive.org.

I have only just gotten a chance to read over a few of them, but this site is outstanding. For me the hardest part of writing business plans is just deciding what format to use. In the past, I have found reading over 10 or 20 samples to give me a much better grounding to start from. Now, as soon as I find my Million Dollar Idea, I've got a resource of failed companies to guide me. (irony?)

The other cool thing about this site is that it includes a plethora of complimentary material (powerpoint presentations, screenshots, news clippings, etc) that give the business plan context. The site is centered around the dot-com boom and bust.

If you're an entrepreneur, or want to be one some day, should be a good tool.

Fundamental value in the housing market

2008-10-14T18:20:00.000-07:00

An asset has no value absent three things: what people are willing to pay for it, what people can pay for it, and it's fundamental value (i.e. an NPV of all present and future dividends and costs)

With housing "ability to pay" is the only factor that matters - it either drives the rent price or the sales price. Rent is a fairly liquid market, so it is a good indicator of long term "ability to pay."

Here is how you can calculate the fundamental value of housing:
Start with income * percent allocated to housing = housing budget

Take housing budget, factor it by interest rates, percent loan and term and you have the maximum loan you can support.

Maximum loan + down payment = house price.

(in excel, use this formula to get maximum loan =pv(rate,years,yearly housing budget) )

Some notes:
- percent allocated to housing is complicated as it varies from person to person, but there are hard caps on what people will spend on housing - it is physically impossible to spend more than 100%, lenders usually won't allow you above 40%.
- down payment is complicated as well, since you have to assume the down payment was either saved or borrowed
- housing budget has two parts: investment + lost payments. Rent is 100% lost payments, mortgages start out mostly lost payments then switch over time to mostly investment. This helps explain why mortgages should be more expensive than rent for the same size place.
- since inflation increases salaries it should pass through to houses, so over the long term absent any increases in salary or other changes, housing prices will track inflation.
- amount you can afford doesn't respond to changes in supply and demand.
- what responds to supply and demand is the size of the space you can afford (so in NYC you pay more for square foot, and in places where there is lots of available land you get as much space as you can afford to build)

The only long term drivers of house prices are 1) inflation 2) increased wages and 3) increased demand without corresponding increases in supply.

Short term fluctuations can be caused by:
- Required down payments (or the converse, amount you can finance)
- Interest Rates
- Expectations and other noise

For many places in the US, housing prices have already equilibriated. But in Seattle (where I now live) they have not yet. Based on median income (I assume $63,856, and growth of 4% per year), long term average interest rates (7% for the past 15 or so years), and current house prices (~440 median price) - don't be surprised to see another 10 to 30% drop in Seattle prices -- no appreciation for 5 to 10 years -- or worse.

--
PS I know, I've been gone for a really long time. This deserves some explanation, but I'm not going to provide it right now.

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

2006-02-14T01:46:00.000-08:00

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.

Call for submissions, carnival of debt reduction

2006-02-11T10:06:00.000-08:00

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.

Go with ROTH

2006-02-08T15:01:00.000-08:00

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

2006-02-08T12:37:00.000-08:00

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

2006-02-08T08:08:00.000-08:00

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?

Real returns might not be what you’re expecting

2006-02-06T09:54:00.000-08:00

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.

Car Insurance: High coverage leads to low premiums?

2006-02-01T20:06:00.000-08:00

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:

Coverage	Limit (in 1,000 $s)	Premium w/ 25/50/25 prior	Premium w/ 100/300/100 prior
Liability: Bodily Injury and Property Damage	25 person/ 50 accident/ 25 property	$316	$247
Personal Injury (medical)		$35 for 10k	$40 for 35k
Underinsured Motorist	25 person/ 50 accident	$18	$15
Underinsured Motorist Property Damage	25 each accident	$21	$15
Comprehensive	$500 deductible	$72	$64
Collision	$500 deductible	$244	$182
	Totals	$706	$593

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.

Carnival is up

2006-01-30T12:59:00.000-08:00

The 7th edition of the carnival of inveting is now up at Canadian Capitalist's site.

Check it out here

Advertising isn't dead, but it is dying

2006-01-25T02:32:00.000-08:00

The new york times just ran this article entitled "Advertising Is Obsolete. Everyone Says So."

Advertising is dying because it is being replaced by better methods. The death of advertising is going to be a good thing.

First step: Why does advertising exist in the first place?

My theory: Advertising bridges a fundamental gap in human's ability to gather and process information. We can only gather and process a finite amount of information.

Why is this important? Because commerce at its most basic level is the fulfillment of our wants and needs. In the modern world hundreds or millions of people come together to create every good or service; there are hundreds of potential means to fulfill our needs; and, an almost infinite number of potential desires. With this many potential products to consume or use, we can't possibly consider the full set of possibilities before making our decisions.

In the pre-modern world, this was less of a problem because we had less choices. We had the natural world around us and our own work to fulfill our needs. In this situation we could reasonably understand most of the world around us. Further, we created very little surplus and therefore had very little wants to worry about.

Currently, I believe 2% of the US workforce is involved in producing food (and we are a net exporter) I don't know what percentage covers shelter and clothing, but I assume it is less than half. That covers pre-modern needs. Then you need to add in education, communication, and transportation to cover modern pre-requisites of participaiton. Once you have totaled up all of our pre-modern and modern needs, there is still an amazing amount of surplus that can either be consumed as leisure or that can go to fulfill our "wants." Long story short, there are a lot of things to consume and each of us has the ability to consume a lot of things.

What the hell does this have to do with advertising?

Near Infinite Amount of Things that can be Conssumed --> Near Infinite Amount of Information

Near Infinite Amount of Information + Limited Ability to process that information --> Information Overload.

We simply cannot process all of the potential information.

Enter advertising. In a world where all possible information cannot be processed, it is efficient to take some shortcuts.

Advertising is a shortcut. It is efficient for producers of products to advertise that these products exist to create either: the desire to use the product to fulfill their needs; or to consume the product as part of their leisure consumption.

(digression) The line between want and need isn't completely clear, and I think it is very possible that advertising can create the illusion of their product as fulfilling a need when it doesn't really. (end digression)

So, advertising is a solution to the problem of information overload, and it has been a decent solution but not one without problems. (to begin, see digression above) The most important reason why advertising is an incomplete solution is that it connects people to the products that producers want people to buy, not the products that are going to make people the happiest.

Thus, my elation at the impending death of advertising. It's not here yet, but it is on its way. The NYT story that sparked this diatribe mentions as one of the key new advertising tricks the impetus to try to get word of mouth advertising by creating "evangelizers." Put another way, they have to create noteworthy products that people like enough to tell their friends about. Put another way, they have to spend their 'advertising' dollars into making their customers happier.

But, that's only the beginning of the change. Word of mouth advertising is basically people saying "We're similar, we usually like similar things, I like this, you should check it out." Instead of the producers of products overcomming the information problem, people who like the product share the information with other people like them.

Word of mouth, however, is not a complete solution to the problem. The collection and processing of information is spread among more people, tens or hundreds instead of only one. This is progress, but not enough to analyze all potential possible information.

But, if you take a quick look at amazon.com, you'll see how computers, reviews, and a thing called collaborative filters (a.k.a. the find good things algorithm) is going to put the next and near final nail in the coffin. Computers take and process more information than humans ever could.

Collaborative filters and "find good things" for the uninitiated: Basically, it works like this. Imagine that there are two people - Jack and Susan. Jack likes things 1, 2, 3, and 5. Susan likes things 1, 2, 3, 4, and 6. Looking at the similar tastes Jack and Susan have for 1, 2, and 3; there is a good chance that a correctly programmed computer could recommend 4 and 6 to Jack and 5 to Susan. By looking at patterns of prefferences collaborative filters can find things people will love that they didn't know existed. In many ways, it is a huge system of "word of mouth" refferals aided by a computer.

But, advertising isn't dead yet and collaborative filters aren't quite ready to step in and sort our information and prefferences for us. As I see it, there are two barriers to getting to this better system:

Integration of more information. This is a three-part step. To be truly effective at finding hidden value for people, there needs to be 1) an integrated centralized system for all the information to be gathered in, 2) all potential products and services need to be agregated, and 3) a sufficent number of expressed prefferences for the algorithms to work.
Improvement of the algorithms.

Advertising as we know it is on its way out. Once an advanced integrated system of prefferences and refferences is developed (based on a collaborative filter) ads will no longer be efficient. Those annoying non-targeted ads that you get in the middle of your tv programs won't exist as they do now because they will no longer be the best solution to the problem.

I give it 5 to 10 years. Amazon has already made significant inroads and everyone loves their book suggestions. Claria (the people who brought you Gator and GAIN advertising systems - the height of annoyance, but the pinacle of effectiveness - Behavioral targeting is king) is working on a search engine based on this (although it could probably be gamed). And I am sure some company I've never heard of has already secured millions of dollars from venture capital firms to build just such a system.

The death of advertising is going to be good for consumers because it is going to be replaced by a system that will help us find things we actually want. The ability to force shoddy products onto people with cleaver advertising and brilliant marketing is going to dissapear, and the only way to move your product is going to be: create the most value for consumers.

Sure it's not going to evolve exactly like this. But expect the death of advertising as we know it. It is currently the best sollution to a problem of information, and a better solution is on its way.

Carnival of Investing #6 is up

2006-01-23T11:11:00.000-08:00

This week's carnival is being hosted by Jim at Blueprint for Financial Prosperity. There are twenty quality posts this week for your entertainment and procrastination pleasure.

Expected Value: the Lottery and Insurance

2006-01-22T12:29:00.000-08:00

At dinner the other night my little brother said that he was going to start buying one lottery ticket a week. I told him this was a bad idea, that he should put $1 into a sharebuilder account each week and once a year buy $48 worth of an emerging market index (china this year, india next, malasia in three, etc.).

I explained to him that emerging market stocks are psychologically very similar to the lottery - some weeks you're up double others you're down by half (extreme example, not how much they actually fluctuate on a regular basis), and that you have a reasonable expectation that your money is going to increase over time. More on this expectation and emerging markets in a future post.

I further explained that with the lottery, every ticket you buy has about a $.50 expected value for every dollar spent.

He looked at me like I was crazy and said "an what value?" I realized he had never been taught expected values, and without that information the chance of winning the lottery seemed good - or at least worth a shot.

Expected value is the sum of (the value of each possible outcome * the probability of getting that outcome). But that is likely not clear at first.

Expected value is best explained using an example:

If you and five buddies put $1 each into a pot and then draw straws to take home all of it, what is your expected value of this game?

The good outcome:
What is the probability you'll get the pot assuming the game is not fixed and completely random? Answer: 1 in 5
What will you get if you win the pot? Answer: $5

The bad outcome:
What is the probability you'll get nothing? Answer: 4 in 5
What will you get if you get nothing? Answer $0

The expected value is then: (.2 * $5) + (.8 * $0) = $1. You get $1 because nobody is taking a profit from this game.

With the lottery there are thousands of possible outcomes, but the approximate result is that you can expect on the average $.5 for every dollar spent.

If people are only getting $.5 back for every dollar spent, then they have to be getting something else as well for that dollar. You can then say that the fantasy of winning is worth at least $.5 to someone playing the lottery. And, in all likelyhood that fantasy is worth more than $.5. (this has to be true because people only trade $1 for something if they believe that they are getting at least $1 in value back) When I play the lottery (which I do to the tune of about $5 a year), I consider all of the money to be an entertainment expense. If I win, that's fun, but if not, oh well. That's why a lottery ticket almost always has a kind of a game as you scratch it.

With the lottery you are buying: Expected value + (Entertainment or a Fantasy) >= $1.

Then the conversation turned to the fact that I had bought an extended warrany on my new car. I explained that I was on the average going to loose money there as well. (I recognize that being a personal financial blogger, this is a sin unparrallell - I've entered into a transaction where I expect to loose money. Let me explain)

If an insurance company is offering you something, You are loosing money on the average. That's how insurance companies make money. If you haven't already, get your mind around that - it will help you accurately anylize insurance.

In spite of this fact, Insurance is often a very good deal!

Just like in the lottery, for every dollar you spend on insurance your expected value is less than $1. I don't know the numbers exactly, they could be computed easy enough, but I don't have the time right now. So let's say that the expected value of an insurance policy is $.75 per dollar spent.

If you're going to be loosing money on the average, how is insurance a good deal? Insurance companies act like risk brokers. They buy risk from you and millions of people like you for more than the actual cost of that risk. Put another way, they sell you security for more than the average cost that security is going to have for them.

With Insurance you are buying: Expected value + value of Security >= $1.

For the Insurance company: Expected value of risk < $1.

Thus on the average they will make money, and they are doing thousands or millions of these transactions a year so they enjoy the statistics of large numbers - namely regression towards the mean.

Back to my extended warranty. I had originally budgeted $62.5 a month to put into a "car repairs & maintainance" fund so that if something goes wrong I have a reserve. The cost of an 80,000 Mile, 5 year waranty ended up being $24 a month for the life of my loan (that is 80,000 miles and 5 years from today). I will still have maintainance like oil changes, tires, etc. But I don't have to worry about the cost of many other problems. I bought a Nissan and all I have to do if something that is warantied breaks is take it to a nissan dealer and they'll take care of the rest. That security is worth much more than $6 a month ($24 * .25 gap from expected value to the price I paid), the security alone is worth $24 a month to me.

I did, however, have a small victory when I was deciding to purchase the warranty. The salesman at the dealership was saying "If you use it once for something like the air conditioning, that's $2000 (on $1,200 total), and it pays for itself. It is a good investment." I looked him straight in the eye and said "No it's not. If the insurance company is selling it to me, it is a bad investment. I am going to loose money on the average if I buy this thing." He looked at me, blinking, as I continued "What I'm trying to decide is if the security is worth the cost." He then promptly calculated the cost and changed his sales tactic to "For only $24 a month you don't have to worry about any major repairs. That's not a lot of money for that assuredness." Car salesmen have an amazing ability to turn sales tactics on a dime.

Upshot: Realize that in the lottery and insurance you're going to be losing money on the average. Knowing that, ask yourself if the entertainment/fantasy in the lottery or security in insurance is worth the money you're going to lose.

Things I learned buying my car

2006-01-22T12:17:00.000-08:00

There are a couple of interesting things that I have learned after buying my car. Here they are in bullet point format:

There is a difference between revolving credit history and installment credit history. You need to build both. (see this post)
Dealerships will finance anybody. They don't always take a scalper's wage either (I got 6% vs. best possible at my credit union of 5.75%), especially if they finance you through a credit union.
Some credit unions consider new cars to be anything from the last 3 years.
If you're buying used, you should do so in a millitary town. Millitary people buy nice cars, treat them well, don't drive a lot (especially if they are overseas or on a ship), and then trade them in cheap. I almost don't want to share this tidbit, I don't want it getting out into common knowledge and raising the cost of my next used car - so please don't re-post this one on your blog.
If you finance a car, you have to carry Comprehensive and Collision insurance on your vehicle with a minimum of a $500 deductible. (this raised my insurance $100/month over my initial estimates - I just didn't know)

If I think of any others I'll add them. If you have any other knowledge learned from experience, please share it.

Bad debt leads to good credit?

2006-01-22T11:57:00.000-08:00

I have just finished buying my first car (used 2003, very low miles). In doing so, I followed my car salesman friend's advice and went to a credit union to get pre-approved for a loan. The conversation went something like this:

Me: I'd like to get a car loan for up to $20,000.
CU: OK, fill out this paperwork.

CU: My, you have the lowest debt-income ratio I've seen in a long time - 4%.*
Me: Yeah, I try to avoid taking on debt, I've had to recently because my job was only paying equity.
CU: That's a good reason.
CU: Ok, you've got a decent FICO score (650 from them, up to 750 other places - good to excellent if you don't know much about FICO scores), and you're asking for a loan that is less than what you can afford.
CU: Hmm... Do you have credit history.
Me: Yes, I've been building credit history for 5 years. My credit card limits have been increased steadily from $500 to $20,000 because I always pay on time.
CU: That's interesting, because it came back "denied due to lack of credit history"
Me: $20,000 in available credit is "lack of credit history" are you sure they aren't concerned with the amount of my un-secured credit lines?
CU: No, that's not a problem. Have you ever bought anything on installments? Do you have any installment payment history?
Me: No.
CU: That's the problem. There are two kinds of credit: Revolving and installment; you only have installment history. Thanks for comming in, perhaps you'll have better luck elsewhere or at a dealership.
Me: Thank you, goodbye.

* Debt/Income is calculated as: All Monthly Obligations (minimums on cc's)/Monthly Pre-Tax Income.

As I walked out of the credit union I kept pondering the fact that I could buy a car with the space on my credit card, but I couldn't get a secured loan for the same amount.

The upshot: Having, using and paying a credit card responsibly is not enough to build a good credit history! As you are building credit (i.e. as you are starting college), you should buy something on installments. Your computer, a digital camera, a mini-fridge, whatever. Something small that you can make monthly payments on easily to also build installment payment credit history.

The ideal situation would be that you could buy it cash, put that money into a high-yield savings account, and set up auto-payments each month. In effect you will have paid a little bit more for your camera, but far less than the high-risk premium you would otherwise end up paying to get a car loan once you graduate.

In the end, I got my financing through a dealership at 6% (a deal when you consider that t-bills are at 4.5% - that's the risk free rate; and when you consider that inflation is running at about 3%; thus the effective real interest rate on my car loan is only 3% and they think I warrent only a very low 1.5% risk premium). This is only .25% more than the best rate the Credit Union could have gotten me.

Radio Silence, where have I been?

2006-01-22T11:52:00.000-08:00

It has been about a week and a half since I have posted, and I'm going to put up a few short posts today and likely have another short period of radio silence before I can begin posting regularly again.

If anybody has been curious, or cares for that matter, the explanation is as follows:

I'm changing jobs,
moving cities (and countries for that matter),
taking an intensive pre-work course for my new job,
renting an apartment
buying a car, and
having a baby.

Other than that, i've had a lot of free time on my hands. I haven't left the blogosphere, just needed to spend a little bit more time down on earth for a few weeks.

Which path will lead to YOUR early retirement?

2006-01-15T21:41:00.000-08:00

Motley fool writer Rex Moore has just put up a piece on how to retire faster in three easy steps. I'm going to add two more, because I think execution is crucial.

Sit down. He suggests sitting down with family or friends to make it an easier and more pleasant activity.
Brainstorm ways to cut $100 in expenses.
Capture those methods and put them into an IRA.
R@T Addition: Write down your expected savings and goal. Put these in a place you will see every day. A written goal you see every day becomes a contract with yourself that is much more likely to be fulfilled.
R@T Addition: Check back at least every year to see how you did on your goal (this is going to be much easier if you automate tracking of your finances with Quicken)

Once you have done these things, it is absolutely essential that you CAPTURE the savings immediately. Use automated transfers to your advantage here, and set them up immediately after you have decided to make a spending change.

This is the cost-cutting approach to a faster retirement. Another approach, and the one I prefer, is to keep costs stable and grow income. Some ways to do this (and please share others if you can think of them):

If you are paid hourly, work a few more hours a week and put that money into your IRA.
Invest in education applicable to your current or future job (the education has to have a Return on investment, otherwise it isn't an investment in future income it is a leisure activity). Example: Getting an MBA vs. Taking a class on sushi cooking. Unless you're going to use your sushi skills to bring in money somehow, that's leisure not investment.
Start a side company or business. If you can't work more hours for more pay, you can always start a side business to generate extra income. If you start spending your leisure time becoming an expert in something, and studying how people make money there, and more importantly where arbitrage opportunities exist (If you study vintage clothing for long enough, chances are you could turn an hour into a thrift store and $30 into $100 on eBay).
Create more value for your boss, and the company you work for. Then, ask for a raise based on your increased importance to the company. At the end of the day you create $X in value at your job, you are paid $Y. $x - $Y = $P the amount of value you have created for the company after they have paid you your salary. If you increase $X, then there is more $P and $Y for you and the company to share. This, of course, doesn't always work. But even if you can't get a raise in your current job, this will put you in a better position to get a promotion or to get a better offer at a competitor. As a general rule, the more value you create, the more you get paid.
Next time you get a raise, forget you got it and put that money into your 401k, or IRA.

In the end, all four of these boil down to one thing - create more value.

Just like in spending less, when you are creating value to accelerate retirement: Capture is essential. You have to somehow make sure that you don't start thinking of this extra money as spending money. I like completely separate accounts, and tracking this money as either investment or property in Quicken (if it is cash flow, then there is a chance it is going to flow out again).

If you want to retire earlier, you have two options: Live more frugally, or create more value. Obviously these can be combined, but most people it seems focus more on one or the other. While I have now started watching my Lattes, I am unwilling to compromise my standard of living too much to meet my goals. Thus, I'm left with creating more value.

Which path are you taking to meet your goals?

Retire at 30 subscriptions top 50

2006-01-12T05:41:00.000-08:00

As of last night there are 50 people subscribed to the RSS feed from this site.

I know for a lot of personal finance and investment bloggers out there 50 is just a drop in the bucket, but for a newbie like myself, it's something to get quite exited about.

To everyone who reads my blog, thanks! Before starting this I never knew how enjoyable anonymously blathering on about personal finance and investment could be.

If anyone has any suggestions or criticisms about the blog, I would love to hear them. Post a comment if there is something you would like me to write about, anylize, do better, etc.

Whoo hoo!

The Stupidity Tax & Flesh Eating Bacteria

2006-01-11T17:07:00.000-08:00

I'm fully expecting click throughs from rss readers to skyrocket with this post.

The expected value of every dollar spent on the lottery is $.50 (or a 50% loss). If that isn't enough to convince people not to waste their time, Jeffery over at personal finance advice offers this tidbit:

"the odds of winning the lottery are 18 to 120 times less than dieing from flesh eating bacteria"

For more of Jeffery's take on the famed stupidity tax, see his full post here.

Penny Stock Spam Performance

2006-01-11T09:55:00.000-08:00

Just read an article on Kiplinger's about the performance of penny stocks that you get spam email about http://www.kiplinger.com/personalfinance/magazine/archives/2006/01/pennystocks.html.

In the article they claim that Joshua Cyr tracked their performance over about a 6 month period. Net result: Down 52% during which time the Russell 2K was up 12%.

This begs the question, why are people spamming these stocks if they are going to plummet? Spammers aren't usually malicious people, they are usually people trying to make a quick buck - so my bet is that stock spamming is a pump and dump tactic.

So, the expected performance is:
Pre spam price = x
Post spam price = y
6 month price = z

Thus, knowing that they are spamming, it is rational that x < y. But it doesn't make sense to me why z would be less than x. It makes sense that z < y because the price change is driven by an artificial increase in demand and not improving fundamentals.

Great article, but i am left wanting more. I think I will just have to set up my own spamfolio to track the stocks I get spammed about and see what the results are.

If there is a definite discernable negative pattern to the performance of these stocks, then hot stock spam tips might just be the best contra-indicator you can find. I don't know much about short selling, but if 60% negative over 6 months is a generalizable phenomenon, I would kiss the idiots buying the stocks and the assholes sending this spam. Looks like I have two new projects for my to-do list.

If anybody who reads this is familiar with this topic, please post a comment with your knowledge. I know nothing about this beyond what I just read.

Carnivals for week of 1/9/06

2006-01-11T07:04:00.000-08:00

Carnivals are up.

The Carnival of Investing is hosted by Free Money Finance, and contains my post Value Investing Ideas Site
The Carnival of Personal Finance is hosted by All Things Financial, and contains my post Budgeting Made Easy 2 - Buy Quicken
The Carnival of Debt Reduction is hosted by Personal Finance Advice, and although I didn't submit it, Jeffery was kind enough to include my post Budgeting Made Easy 2 - Buy Quicken
The Festival of Frugality is hosted by Okdork.com
The Carnival of the Capitalists is hosted by The Social Customer Manifesto

A flaw in Quicken - How to make QIF files work with post 2005 software

2006-01-11T06:29:00.000-08:00

I love quicken. It is an amazing program that helps me immeasurably, but I was quite dismayed to learn recently that they have handicapped data interchange using older formats. How did they do this? By disabling the ability to import older .qif files.

Example: I was trying to download transactions from my paypal money market account. I signed on, downloaded the .qif file with all of my information, and then tried to import it into my quicken account. But, I can't download for checking, savings, credit card, 401k, or brokerage accounts.

WTF? Why hamper your users like that? Sure QFX is a more powerful standard, but backward capability HAD TO BE DISABLED when they brought out their 2005 version of the software. They don't want you to use it, so they don't let you. And to make matters worse, they obfuscate that they charge a fee for banks to use the .qfx standard and try to sell this as an improvement (it's not a bug it's a feature). I'm going to stop complaining now and tell you how to work around this.

The Solution
So, what is a user supposed to do? In this case, paypal only supports .qif downloads. The solution to the problem is simple, Use a cash account type instead of a checking/savings/money market account. Then you can import QIF transactions into that account.

If you have a 401(k) or other brokerage, I am not sure how to help you. However, chances are you aren't moving as much volume through those so you should not have as onerous a burden to transfer by hand. If you are trading all the time, and your institution doesn't support QFX, I don't know how to help you other than say 1) stop trading so much, 2) change institutions, or 3) don't buy quicken. Their return on investment tracking is horrible anyways.

Value Investing Site

2006-01-04T06:01:00.000-08:00

A friend tipped me off to this site last night: www.valuedog.com. Run by a prof at the U. Michigan Business School, it runs a number of value investing screens and makes the results public.

As she said "good place to find ideas."

Budgeting Made Easy 2 of 4: Buy Quicken

2006-01-03T22:12:00.000-08:00

The second step to an easy budget is: Buy Quicken (or MS Money). Either one works. Then auto-download your bank statements and categorize your spending.

Now that you are using electronic transfers as was covered in part 1 of this series, it is time to centralize and streamline your budgeting and money management.

I know many people who are concerned with budgeting and personal finance are skidish about forking over $60 for a piece of software. I'm not going to pretend like $60 is a drop in the bucket for everybody, for many people that's a fair chunk of change. But, you need to look at Personal Finance software as an investment.

You can justify this by looking at the opportunity cost of maintaining a budget by hand, or you can look at the productivity gains, etc. I'm not going to make these arguments, even though I agree with them.

I'm going to justify this expense a different way. Buying personal finance software will help you cut your frivolous spending in other areas.

You are your own worst enemy when it comes to financial planning. Those $3.95 lattes that I can't live without, the $60 treat for doing something well, the $45 cheer me up that you buy when you are depressed, the "oh, it's only $XX a month for 24 months, I can afford that" thinking, and the simple words "charge it:" These are the things that are going to keep you from reaching financial prosperity.

You can be a millionaire on $40K a year, all you have to do is live below your means (don't belive me, read Eight Steps to Seven Figures, The Automatic Millionaire, and/or Richest Man in Babylon). What kills many of us is that we spend beyond our means and we don't realize just how bad our spending habits are until we're declaring bankruptcy (my parents made $200k a year and declared bankruptcy last year - not because they weren't making enough that's for sure).

In business, a common saying is "you get what you measure." If you measure people on revenue, you get more revenue. If you measure people on profit margin, you get higher profit margins. If you measure the time it takes to fulfill an order, chances are you're going to get shorter order fulfillment times.

The first step in fixing a problem is knowing that you have a problem. It wasn't until I realized I was spending north of $500 a year on Lattes that I sat down and thought, hmm... perhaps I would be better off cutting off that Latte and saving the money instead. I didn't cut myself of entirely, but I now only have 1 or 2 a week. What was a commodity is now a luxury that I enjoy even more. Drip coffee gets me through most of the week, and now a Latte is a treat. (i'd love to go into the psychology of this, but this post is already way to long already)

If you record and categorize your spending, you're likely going to be shocked and appaled at how much you spend on things that you previously never noticed. $20 here, $15 there, $25 another time can add up very quickly to overtake some of your major expenses.

This doesn't just have to be for scrimping and saving. Once you know how much you spend on each item, you can ask yourself if you could get more enjoyment by shifting your spending a little. Eating 1 really nice dinner a week vs. 3 trips to Denny's? You'd be surprised what kind of "luxury" items you can afford if you avoid spending your money on mindless things every day.

Bottom line: You have to know what your spending money on to make a budget work. Quicken and MS Money are easy to use, fast, and can download and categorize your spending in about 30 minutes a month (setup should take a few hours, and analysis will likely take another 30 minutes). You can see changes in spending habits over time, and spot problems before they pull you under. But most of all, once you know what you are spending your money on you can, in a reflective state every month, figure out if what you're doing with your money is really creating the most value for you.

Budgeting Made Easy Series:
Budgeting Made Easy Overview
Budgeting Made Easy 1 - Electronically Pay Yourself First
Budgeting made Easy 2 - Buy Quicken

I love Jack Welch

2006-01-03T16:17:00.000-08:00

I just finished listening to Jack Welch's autobiography Jack: Straight from the Gut (audio), and I love the way this man thinks.

The book chronicles his ascent to the top job at General Electric (GE) and the things he did during his 20 years running the company as Chariman and CEO. There aren't a ton of take-aways that I could see - for me they were: strive for excellence, always keep learning and challenging yourself, I want to work for GE, and I want to own GE stock. More than anything else, the value of this book is in the role model/motivational aspect of the story. Jack Welch's love of excellence is infectious and you can't help but want to match his enthusiasm with enthusiasm yourself.

I suppose now I owe it to myself to investigate the counter arguments, to look into all of the people who are critical of Welch. But, first, I'm going to finish listening to his new book Winning (audio). I'm an hour in and this book already promisses many more kernels of wisdom and advice than his autobiography. The books are a great 1-2 punch: what I did and then how I did it and what you can do.

Carnivals for week of 1/2/2006

2006-01-03T10:15:00.000-08:00

Since I've been away, I didn't submit any articles this week to the carnivals. But here they are.

The Carnival of Investing is at Consumerism Commentary
The Carnival of Personal Finance is at The Real Returns
The Carnival of Debt Reduction is at Frugal Duchess
The Festival of Frugality is at Frugal For Life
The Carnival of the Capitalists is at Chocolate and Gold Coins

Lots of good reading. Enjoy!

Happy New Year!

2006-01-03T10:09:00.000-08:00

Happy New Year!

You may have noticed I haven't been posting much this past week. I've been away with friends and won't really be back into the swing of things until next week.

Here's to a happy and prosperous 2006.

Million Dollar Idea #1 - Pixels for Sale

2005-12-30T15:09:00.000-08:00

This is post #1 in the series Million Dollar Ideas. The structure of this post is explained here.

Idea:Sell pixels on your website
Example: www.milliondollarhomepage.com
Value of Idea: $1,000,000 - 5 years hosting (likely free) - Taxes (likely around 30%) = $700,000
Time to Million: 6 Months
Replicable: Not really, but it has been tried dozens of times. Replication potential in Niche content areas, other geographic regions, and especially other major languages (spanish and chinese come to mind).
Sustainable: Yes and no. You can pull this stunt once, but after that it is hard to create another million dollar page. It is a one-time stunt.
Passive: Yes.
Extendible: No.

Why it Works:
This is a fascinating example of how one person can create $1,000,000 in wealth for themselves by creating value for other people in a new and previously un-recognized manner.

This site serves as a coordinator for two groups: 1) people looking for something on the internet and 2) sites trying to get traffic.

What the creator of this site has done is solve a connection problem. There are millions of poeple who are just surfing the net looking for some form of interesting stimulation without caring what it is. There are also countless millions of sites out there providing entertaing or somehow valueable products that these people would like. They connect procrastinators with websites.

Users: If there were a random button that people could push to get an interesting site, many would. This website functions as a novel approach to creating a random button.

Advertisers: On the other side of the coin, the internet is largely a numbers game. The more people who visit your site, the more people who are likely to find your content interesting and do something that will make you money (buy a product, join a community, further click on your ads). In the physical world the addage "Location Location Location" came from this fact: the more people who walk past your storefront --> more people comming in --> more people buying things.

This site's value derives from the fact that they connect people who are just looking for something to do with sites that just want traffic.

The major obstacle to implementation here is a coordination problem. If there are enough random sights, then people will come. If there are enough sites, then sites will advertise.

I am not 100% clear on how this site overcame that problem, but somehow they did. Once they reached critical mass on one side, they then got critical mass on the other and the site became self perpetuating.

Congratulations to the owner of this site. You became a millionaire by having a great idea that nobody else before you saw.

It is a rare mind indeed that can render the hitherto non-existent blindingly obvious. The cry 'I could have thought of that' is a very popular and misleading one, for the fact is that they didn't, and a very significant and revealing fact it is too.
Douglas Adams

Million Dollar Ideas - Structure Explained

2005-12-30T14:54:00.000-08:00

This is going to be the structure of my posts in my Million Dollar Ideas series.

I'm going to be evaluating these ideas and structuring the posts as such:

Idea - brief synopsis of what the person has done.
Value of Idea - brief calculation of what the net increase in wealth of the idea was. Roughly speaking this is their profit = revenue - costs.
Time to Million - how long did it take this idea to make its first million. The faster the idea makes it to a million, the more effective it was.
Replicable - Can you take this idea and use it for your own? If so, in what instances? For example, a patented product can't be replicated. A service in a narrow geographic area can be replicated in another area.
Sustainable - Will this idea continue to produce money and value into the future? Or, is it a flash in the pan that is going to wither away? Put another way, this section answers two questions: Will the idea be able to be maintained? And, will the idea continue to throw off profit into the future?
Passive - Does this idea require a large amount of continued maintainance once it gets off the ground? Patenting and licensing something is passive. Creating a company you maintain is not. This section measures how much of your time, capital, and energy would be required to continue opperating this idea (if it is sustainable)
Extendible - Can you use this idea as a jumping off point to launch other ideas? Basically, once you create a brand around this idea can you extend that brand to other related products? Put another way, will implementing this idea make implementing other profitable ideas in the future easier?

Why it works - This is where I analyze the idea. The forces that lead to its profitability, the needs it fulfilles, who it creates value for, etc. This section will cover economics of the idea, strategic implementation, etc.

Furthermore, these ideas are measured in impact to the individual. If 2 guys make $2 million from an idea, that counts. If 20 people make $1,000,000 jointly, that doesn't. There will be a focus on ideas that one person can implement and less on ideas that require an extensive business to create (more books and patents. less google and ebay).

Why it's called $.02 worth

2005-12-28T15:07:00.000-08:00

Have you ever wondered why it is called $.02 worth? When somebody says "it's only my 2 cents worth but..." why do they start off like that?

There are some histories out there that claim that this goes back to when pitching in $.02 was the ante for poker. Well, they are wrong.

$.02 worth comes from the fact that most people who publish opinion blogs on the internet and use google adsense get approximately $.02 per day. (I have yet to reach this threshold on this humble blog. I am currently grossing a mindblowing $.01. On a good day.)

Some general principles of economics state that people are paid in direct accord with the value of their contribution to society. I tend to agree with this statement. Therefore, thanks to google adsense, I can tell that I have added $.02 in value to society today. (today has been a banner day)

And my ex girlfriends called me worthless. Ha - now i can prove them wrong.

Assuming no growth in income or readership, and a 4% decrease in the value of money due to time and assuming 3% inflation (yielding an 7% discount rate), I can further tell that as it stands today my opinions on this blog will be worth $104.28 for all of eternity. And those are real dollars.

$.02 * 365 = $7.3
$7.3 / .07 = $104.28571428571428571428571428571 (round that down to .28, carry the four, I'm worth a hundred bucks!)

Now, all I have to do is live for eternity and I'll realize that.

So, what this definitively shows is that my opinions are not worthless. They have scant value, yes. But a complete lack of value, no. Well maybe the blog in general has value, I can't say that this post has a whole hell of a lot of merit. Significantly less than $.02 at any rate.

Carnivals for week of 12/25/2005

2005-12-28T12:59:00.000-08:00

Since it has been a long Christmas weekend I have not been blogging much, nor have I submitted as many articles as I normally would tothe carnivals. But none-the-less, they have continued on their merry way and most of them are up now:

Finance and Investing:

The Carnival of Investing #2 - received 19 submissions, a very gratifying second week for a carnival that was started right here at Retireat30. Thanks to JLP of All Things Financial for hosting.
Carnival of Personal Finance
Carnival of Debt Reduction
Festival of Frugality
Carnival of the Capitalists

Errata:

End of year stock-cleaning - could this method avoid the wash-sale rule?

2005-12-22T20:54:00.000-08:00

There is only one week left to make stock-trades that will effect your 2005 taxes (although oddly there are still months to make 2005 contributions to IRAs), so this means that it might be a good time to start selling off a few loosers to offset capital gains.

But what to do if you have a stock that is loosing for the year, but that you really like and think is being overly punished by the market? Whatever you do, don't sell to take the tax-loss and then buy within 30 days - that type of transaction is called a wash sale and will negate any tax-losses you take. Also, if you re-establish a substantially similar position (buy a call option, sell a deep-in-the-money put option), you'll also trigger a wash sale (according to this article).

But what if you write an at-the money put? Would that still trigger the wash-sale rule? Take Avaya (AV) for instance. It is currently trading at $10.7, down from around $16 earlier this year (52 week high, 17.74 on Jan 5, 200). You could sell a $10 strike february 05 put for around $.25. To do this you would tie up $1,000 per contract for two months for each $25 you get in options premium so in many cases this needs to be a volume strategy.

Now,there are a few potential outcomes from this, but basically you have - option expires worthless, option gets exercised. Either way, you don't care. You like the stock, but sold it for tax reasons which means you are both willing to own it and willing to sell it.

If it expires worthless, you've just realized a gain on capital at risk of 2.5% for 2 months - about 15-16% anualized return. I'd take that.

If you get excercised into the option you now have a basis in the stock of $9.75, lower than the $10.7 you sold it for today. This is a stock you liked at $10.7, so chances are you'll like it even more 2 months from now for $9.75.

The red-herring is fees. That $25 you get could be more than eaten away if you only sold 1 contract - at my brokerage about $15 to write the contract leaving you with only $10 on $1,000 or 1% (8% or so anually). And, if you get exercised into the stock you'll likely have another $20 or so in fees thereby bringing your basis up to at least $10.05. Still less than $10.7, and still possibly getting you past the wash-sale rule. This math changes substantially in more volitile stocks (where the options are going to command a higher premium), or if you are selling more than 1 contract (with etrade each additional contract costs $3).

This shouldn't be illegal, and it shouldn't be a wash sale becasue you are closing a long position and opening a short position. But, I'm no investment tax expert. If you are, can you lend anyinsight into if this is legal or not?

Donations vs. Advertising - is clicking in our own self interest?

2005-12-21T13:47:00.000-08:00

Many of you have already likely heard that Wikipedia is asking for $500,000 in donations in its year end fund drive. They have already raised $74,000 and are bringing in about $12,500 a day. No doubt contributors are thinking "I love this service, of course i'll donate, plus it's tax deductable." But why are people so willing to donate to wikipedia? And, on the flip-side of the content coin, why are so many people opposed to adds?

I have a sneaking suspiccion that a large part of the reason people donate so much to wikipedia is that they don't have advertising. Why is that? Why do we have good feelings towards sites that don't show us adds? Why do we have negative feelings towards sights showing adds, even when it is done tastefully and we really like what the add is selling?

People are willing to Donate their own money to wikipedia at a rate of about $.40 CPM (or $.004 per page view)* but they get offended by publishers saying, essentially, "click on this, it will cost you nothing but a few minutes and it is likely something you are already interested in and may want to buy" by putting up advertising.

We're willing to part with our own money to support a site we like via donations, but get offended at the proposal of taking money from advertisers and giving it to publishers when we see advertising.

I suppose that the optimal plea on a website would be something like a left column which says: "Like our site? Donate to us" and a paypal donate button followed by "Or, support us by visiting a sponsor if you see something that interests you." Based on the social norm of reciprocity, and what can be seen happening over at wikipedia, I think this would lead to an increadible increase in clickthroughs (if you haven't listened to The Power of Persuasion yet, you should - what I learned from that $2.95 and 1 hour will add a cool $3 or 4 million to my earnings in my life). Would this be against the adsense terms of service?

This also suggests an interesting self-interested action on websites we like. If it is a site whose content you value, and which doesn't throw offensive adds in your face, then it is in your best interest to briefly glance at the adds and click if there is something you find interesting. This is the exact opposite of what most experienced web readers do. We look past adds, parse them out, avoid them like the plague. Why? If we like the site, we can 'donate' for free by visiting a few sponsors. We can be "adsense patrons" of any site we like, and it doesn't cost us a dime.

NOTE: I am not asking you to click on my ads. I am only proposing, for discussion, that instead of parsing out ads, we should make an effort to look for them on sites we enjoy. Hypothetical argument, please don't throw me out of adsense. I couldn't live without that $.03 a day ($.04 on a good day).

* Wikipedia figures assume 1 million visits per day, 5 page views per visit, and $12,500 a day in donations. Stats from alexa.com, wikipedia.org, and metricsmarket.com.

Million Dollar Ideas - A new series

2005-12-21T10:16:00.000-08:00

I have decided to start a new series on this site that I am calling Million Dollar Ideas. This series is going to highlight a number of ideas which people turned into businesses or patents which then grossed about a million dollars or more.

Premises from which I will be working:

You get money in this world by creating value. The more value you create, the more money you make. Therefore, these ideas all created at least $1 Million in value for other people.
You often get money in this world by solving problems (another way of saying almost the same thing). Therefore, many of these ideas solved large problems resulting in at least a $1 Million increase in value for other people.
You get money in this world by turning ideas into reality. All successful businesses were once ideas, all patents were once ideas, all music started as an idea. Many of us have $1 Million ideas but fail to act on them. The idea is a necessary but not a sufficient condition. You've got to implement the idea for it to actually be worth something.

Why am I writing this series? I wish I could say it was altruistic, but I am doing it mostly for my own benefit. I want to analyze ideas that have been successfully turned into $1 Million or more. Because I'm going to follow in these people's footsteps eventually, and studying what they did will likely yield some nuggets of wisdom which will help me turn a few of my ideas into $1.43 Million (read about the goal, and the plan). Slaving and saving away won't get me there in the timeframe I want to get there (though it works for people following David Bach's approach) so the only means I have left is to turn some of my ideas into $1.43 million realities.

Beyond just studying what these people have done, I am writing these posts for two more reasons. The first is again self-centered; writing about a topic forces me to clarify my thinking and to perform more stringent analysis. Secondly, I think that what I learn will also be valuable to others. The upshot is that I understand more and hopefully create some interesting content to read.

If you run across any Million Dollar Ideas you would like me to include in the series, just leave a comment below to let me know.

Update: I cover the structure of these posts here.

Million Dollar Idea #1 - Pixels for Sale.

---warning, self analysis and planning below ---

I won't be sharing many of my ideas in public just yet, unless I am looking for a partner (like in this post, sadly nobody has responded yet). I keep a journal of ideas I have. Most of them are ideas for products or businesses that I would like to see started. I notice a problem that I think could be solved profitably a 3 or 4 times a week. Of those, I'd say I 2 or 3 ideas are good enough and stay with me long enough make the journal every month. Of the ideas in the journal, I have acted on 4 of them and made preliminary inroads to act on 2 others.

Saying I have 16 ideas a month, 2 of which are good enough to write down - that gives 24 potential ideas a year. I make preliminary inroads on maybe 3 or 4 of those a year, and follow through to complete and establish 1 or 2 of those ideas. Thus far, however, the majority of this work was done during my days at University and therefore I have no profitable businesses to show for it, but there are a number of ongoing organizations from my days at school.

On average, 1 in 10 businesses fails. Now that I'm out in the real world, if I can put 1 or 2 ideas into action each year - call it an average of 1.5. And I make the 10% success bogey, then it will take 10 $1 million ideas for me to read my goal of $1.43 Million at age thirty. (1.5 * 7 *.1 = 1.05 successful ideas). But, given my current rate of idea success and these assumptions, to get that 1 success is going to require 1,344 sparks of thought (at 16 per month).

This Week's Carnivals

2005-12-21T09:14:00.000-08:00

It's now Wednesday, and that means that the blog carnivals I watch and contribute to have now all posted.

Monday's Carnivals:

Carnival of Investing #1 - includes my post on getting a Free Investing Education
Carnival of Personal Finance #27 - includes my post on Using Real (inflation adjusted) Terms
Carnival of Debt Reduction #14 - doesn't include a post of mine.
Carnival of The Capitalists - doesn't include a post of mine, just an announcement of the Carnival of Investing.
Bonfire of the Vanities #129 - includes a post of mine but I won't directly admit to that.

Tuesday's Carnivals:

Festival of Frugality # 2 - includes my post on Getting Free Books

Wednesday's Carnivals:

Carnival of the Vanities #170 - includes my post on getting a Free Investing Education, which I am quite proud of.

Thanks to: Political Calculations, MightyBargainHunter, Coyote Blog, You Need A Budget, Ravenwood, and Red Guy in a Blue State for hosting this weeks carnivals.

Carnival of Investing - Issue #1

2005-12-19T07:42:00.000-08:00

Ladies and Gentlemen, welcome to the first-ever Carnival of Investing. We had some great submissions from across the blogosphere offering advice and insight into a wide breadth of investing topics. The purpose of this carnival is to gather the best the web has to offer on investing and to hopefully expose you to some bloggers you didn't already know about. Without further ado, let the carnival begin:

We had 4 entries about getting started in investing:

Abnormal Returns writes about why "I don't know" are Three powerful Words for any investor, especially beginners.
All Things Financial asks the question: What the heck is Asset Allocation?
Free Money Finance offers this tip for Stress Free Investing (part 1 of 4) - Think Long Term. He references this article by Kiplinger's.
Retire at 30 (aka me) lists resources where you can get learn the basics of investing at no cost in A Free Investing Education.

Asset Allocation:

Investing Guide's Loi Tran discusses the Standard deviations of different asset classes.
All Things Financial asks the question: What the heck is Asset Allocation?

Index Funds:

Dan Melson atSearchlight Crusade argues in Debunking the Fallacy of Index Funds that Index Funds aren't as fabulous as their backers would have you believe.
Trader Mike on the other hand argues that you can Beat the S&P 500 by Investing in the S&P 500 by investing in an equally weighted option instead of the regular market weighted index.

Bonds:

Jonathan at My Money Blog discusses how he has created a 4 week T-Bill Ladder for his emergency fund, effectively getting him a 4.5% APY.
Jeffery Strain at Personal Financial Advice discusses why now might not be the best time to purchase I-Bonds.

Decisions:

Early Riser ponders what to do with a pile of cash he is sitting on after exercising his employee stock options. He weights Municipal Bonds vs. Working Interest in an oil or gas well.

Economic Indicators:

Tom Hanna gives us a list of the economic indicators being released this week.

In terms of Levity:

TripleWitchingFriday (not sure what that means) brings us what are alleged to be cameraphone pictures of the Melee that broke out after a typo on a trade lost Mizuho $335 Million. Somehow, the last frame makes me think these might be false... but humorous none the less.

Thanks to everyone who submitted articles for the inaugural edition. Next week will be hosted by AllThingsFinancial. You can find the submit form here and guidelines are always available here.

Cut your spending on books - Get them for free

2005-12-18T21:00:00.000-08:00

Between amazon.com and audible.com, I spend more than I would like to publicly admit on books each month. I can rationalize to myself that they are investments and not expenses, but the return of most of them (career books aside) is usually intangible at best. With the internet and the blogosphere I can satiate a large amount of my addiction to new information each month for free, but finding a real book (few hundred pages, professionally edited, etc.) for free on the internet has proven quite hard up until now.

But that's all in the process of changing. Two new services are looking to partially surplant Amazon and Audible (at lesat for books in the public domain), and they are doing so for free.

Project Gutenberg has a library of 17,000 ebooks, most of which are classics such as T.S. Elliot, and Shakespeare which can be downloaded for free. They even have a decent selection of human read and computer read audio books.

LibriVox is a newcomer with an ever expanding library of audiobooks. Their selection is still less extensive than Project Gutenberg's, but their site design and ability to download via podcasts makes them a bit easier to use. They are new and growing and I'm looking at them to eventually dominate the free public domain audiobook space.

These two services have their limitations (mainly that they are limited to public domain books), but 17,000 books at Project Gutenberg is more than enough to provide a small library of entertainment. And you can't beat the price - 100% free.

A free investing education

2005-12-14T22:16:00.000-08:00

I have two words that I wish I could hear every day "free education." Aren't those two words just musical? At once they say "won't cost a thing today" and "will help you earn more/be more fulfilled tomorrow." Couple the words "free education" with "investing" and I'm so happy I don't know what to do (other than take a few deep breaths and stop dancing on the chair because it might break).

Well, in a brilliant move, the morningstar company has decided to make my day. They have an incredibly comprehensive and well designed investing classroom that is not only free, but in which you can earn points to more free stuff (like a premium membership = free stock and mutual fund research valued at $100 a year). This is better than free education, it is "paid to learn."

All you have to do is go to the Morningstar Investing Classroom and start taking their bite-sized courses. No previous experience or knowledge of investing is required.

If you're more interested in getting more meal-sized advice, head over to Pathtoinvesting.org for a comprehensive well written investing education by some of the leading professors and practitioners in the field.

Another excellent learn to invest website is Investopedia.com which has articles targeted at beginners, experienced investors, active traders, and retirement. In comparison to MorningStar's curriculum, this is more of an 'a la carte' menu where you can choose individual articles on a topic as opposed to full courses. They also have one of the best investing glossaries i've found anywhere. (Thanks to Loi Tran of Investing Guide for pointing out a glaring omission).

Once you've completed a few sections on the Morningstar and PathtoInvesting sites, you'll be ready to head over to thestreet.com's Apprenticed Investor for beginning investing advice that has more attitude (and less coherence).

MSN Money also has a number of good articles on basic investing and money management, but they are organized in such a convoluted fashion that they are more of a (poorly organized) magazine while these are more textbooks.

An open question to end this post: Where did you first begin to get your investing education, and what were some early mistakes you wish you had avoided? Post your answers in the comments below.

Let's Get Real

2005-12-14T21:23:00.000-08:00

I have a few very odd pet peeves (the word "pet peeves" being the largest), and one of them is articles that either confuse or fail to distinguish between real and nominal terms. Skip to the end of this post, or skip it entirely if you already understand real vs. nominal.

What does real and nominal mean? Well, it is simple but a bit complicated to explain, so I'll use a few examples.

Real dollars: Lets say a bottle of coke costed $.10 in 1920 and a the same size bottle of coke cost $1.00 in 2005. Thus, the (nominal) price of a coke went up 10 fold in 85 years. Adjusted for inflation that can of coke cost $.97 2005 dollars in 1920 and $1.00 2005 dollars in 2005. That is to say, in this example over 85 years the price of coke has risen only 3 cents. Thus we can get to the definition of real dollars as "dollars adjusted for the change in purchasing power due to inflation," or perhaps more easily understood "the prices that would be if there were no inflation." ( inflation numbers from this table)
Real interest: In one year your bank deposits are earning 10% interest. The government conducts an agressive anti-inflation campaign and a few years later you're only getting 5%. In which period were you better off? The answer depends on if the rates I have given are real (adjusted for inflation) or nominal (in units of that year). Lets say that the rates are nominal and that inflation in the first year was 7% and in the second it was 2%. What then is your real rate of interest? It turns out, it was 3% both times because Real interest rate = nominal interest rate - inflation rate.

Any time you are talking about "inflation adjusted" prices or interest rates you are by definition talking about "real" prices. Non-inflation adjusted prices are nominal prices (which means nothing more than "prices in name").

If you are going to take only one thing away from a basic economics course, an understanding of real and nominal rates comes second only to supply and demand. Think about this, understand it, love it. It is one of those concepts that will completely change the way you view the world once you have mastered it (and it will allow you to read through the bullshit of half the news articles you read).

What has me thinking about this is a set of "the sky is falling" articles I have been reading recently about how our generation is "the most indebted" generation. In all of these articles I am seeing nominal numbers used to 'prove' that we are worse off than our parents.

Now, don't get me wrong, student loan debt isn't pretty. But, I can't help but think that the situation might not be as bad as everyone (the, sky, is, falling!) is saying it is. So, consider this a primer for a post I'll be putting up this weekend where I'm going to run the numbers and see if we're worse off than our parents. I'll admit that my initial hunch is that all of this "the most indebted generation" talk is a bunch of bullshit, but we'll see what the numbers tell me once I've run them. But then again, I do have a bit of skin in the game in us being called the "I want now" generation.

Free money for opening online savings accounts

2005-12-14T11:27:00.000-08:00

There are a number of banks out there who will give you money just for opening an account with them, and this fact has made its way all across cyberspace. Most of the ones I know of (ING Direct and Virtual Bank) are "refer a friend and they get $xx, you get $yy" deals.

Why do they do this? Because it costs them advertising money to get new customers, and by paying you and a friend to do the advertising for them they only have to pay when a new account is created.

It is amazing how so many "anonymous" bloggers will fall hand over foot to tell you their identity for a $10 referral bonus. Well, not me. I have accounts at ING and Virtual Bank, but I'm sure as hell not telling you my name. That's private information.

But, in case you would like to get a $25 sign up bonus from ING Direct, or a $20 bonus from Virtual Bank, or even a $10 "unofficial" bonus from Emigrant Direct, here are links to other bloggers who will willingly send you the links to sign up:

ING Direct - Get $25 (they get $10) when you fund your account with the $250 minimum. Currently Yielding 3.75%:

Virtual Bank eMoney Market - Get $20 (they get $20) when you fund your acocunt with the $100 minimum. Not sure how long you have to maintain that balance. Currently yielding 3.55%.

No bonus, but I'll get a commission (yeah, i know, nobody is going to click on it, but it is worth a try)
My Money Blog
Couldn't find anybody else offering this one, even though they get another $20 for referrals. Strange

Emigrant Direct - unofficial $10 Bonus (of his $20 commission) is offered by (that's right, you guessed it) My Money Blog with an insanely low minimum of $1. Currently yielding 4%

rumored - HSBC Direct - $25 when you sign up with the code Start. I tried this, but missed the place to put the code in so I don't know if this works or not. Also currently yielding 4%

If you are also selling your soul...err... Referring people and I have left you off the list email me at _NOSPAM_retireat30@gmail.com

Step right up, 5 steps for Financial Success

2005-12-12T21:24:00.000-08:00

I just read an article on thestreet.com that outlined John Templeton's 5 steps for financial success (billionaire mutual fund magnate, eccentric - wikipedia entry). We can't all expatriate to the Bahamas to avoid taxes like he did (although from what I hear Thailand is still an option), but in these general rules taken from his life there was some sound advice.

To paraphrase:

Take calculated risks.
Save now, spend later.
Be a patient value investor.
Take a free market fundamentals view of value.
Minimize your taxes.

I don't know much about this guy, but I like the simple elegance of these five rules. I'm not adding much original analysis here, so if you want to read them in more depth check out the thestreet.com article, or this other one (written by the same author)

Want your own Hedge Funds? New company shows you how... Scary

2005-12-12T21:10:00.000-08:00

That just appeared on my feedburner in gmail. It has gotten to the point where someone is offering an internet "how to" on starting a hedge fund. The scariest thing is not that this service exists, it is that they are advertising using google adwords. I mean, how wide of a net do you want to cast with a service like this?

If this isn't the last straw in getting hedge funds regulated by the SEC, it will be when one of their clients with absolutely no experience in investing loses about 500 million of dollars.

I almost think this is a joke.

Check it out: http://www.turnkeyhedgefunds.com/

The Carnival of Investing

2005-12-11T22:23:00.000-08:00

Now that there are Carnivals for Capitalists, Personal Finance, Debt Reduction, and Frugal Living; I was thinking to myself today that if there were two more out there Investing and Money, I would be happy as a clam.

Therefore, I am announcing The Carnival of Investing (think booming announcer voice). Stocks, bonds, mutual funds, money markets, options, alternative investments: predictions, strategies, scams, stories, starting out, books, a little bit of levity, and more. Erudite analysis and a minimum of pedantic blather. All this, centered around the topic of Investing.

Submission Guidelines:
Submissions are due Sunday at 4pm Eastern Time. You may submit one self written article and one article from the web each week.

For Blog Entries:
Simply write as you normally would and then either use a submit form (at conservative cat or blogcarnivals.com) or send the following information to investingcarnival NOSPAM (at) gmail.com.

Please include the following:

Your name or pen name
The name of your blog
The title of your post
The topic of your post - whatever categories you like so long as they are about investing
The permanent link to your post
A brief summary of the article you have written

As always a link back to that week's carnival is appreciated.

For articles on the web:
If you find a worthwhile article on the net. You can submit it to the carnival regardless of whether you have written a post about it. Any article you submit must be open to the public (no WSJ premium content). To do so please include the following:

Your name or pen name
The title of the article you are referencing
The topic of the article - whatever categories you like so long as they are about investing
A link to the article
A brief summary of the article
If you have written a post about it, include your analysis.

Hosting Guidelines:
As is common practice, anyone who participates in the carnival is eligible to host. If you would like to host, write to retireat30_NOSPAM_@gmail.com with the subject line "Hosting Carnival of Investing." Once you are on the list you have to wait until the date of your hosting to sign up again (so that others can have a chance to sign up). PLEASE include the most recent carnival you submitted to so I can verify your eligibility to host without searching through the archives.

The carnival should be posted by 9am Eastern Time on Mondays so that we can get a full weeks worth of procrastination out of the posts. Hosts are asked to put blog articles above web articles and to clearly differentiate between the two. Of course, a link back here is always appreciated.

We'll see how having both blog posts and web articles in a carnival goes. If it isn't working out, then they will be removed. I have the domain investingcarnival.com reserved and if this catches any momentum all things pertaining to the Carnival of Investing will be moved over there.

Schedule:

Date	Host Blog	Carnival Link
Dec. 19th, 2005	Retire at 30	Carnival #1
Dec. 27th, 2005	AllThingsFinancial	Carnival #2
Jan. 3rd, 2005	ConsumerismCommentary	Carnival #3
Jan. 9th, 2006	Free Money Finance	Carnival #4
Jan. 16th, 2006	The Real Returns	Carnival #5
Jan. 23rd, 2006	Blueprint for Financial Prosperity	Carnival #6
Jan. 30th, 2006	Canadian Capitalist	Carnival #7
Feb. 6th, 2006	Wealth Junkie	Carnival #8
Feb. 13th, 2006	Trader Mike	Carnival #9
Feb. 20th, 2006	MyMoneyBlog	Carnival #10
Feb. 27th, 2006	Retire at 30	Carnival #11
Mar. 6th, 2006	Personal Finance Advice	Carnival #12
Mar. 13th, 2006	InvestorGeeks	Carnival #13
Mar. 20th, 2006	Neo's Nest Egg	Carnival #14
Mar. 27th, 2006	Fat Pitch Financials	Carnival #15
April 3rd, 2006	Free Money Finance	Carnival #16
April 10th, 2006	A Financial Revolution	Carnival #17
April 17th, 2006	Blueprint for Financial Prosperity	Carnival #18
April 24th, 2006	Kirby on Finance	Carnival #19
May 1st, 2006	Canadian Capitalist	Carnival #20
May 8th, 2006	Retire at 30	Carnival #21
May 15th, 2006	InvestorGeeks	Carnival #22
May 22nd, 2006	Mighty Bargain Hunter	Carnival #23
May 29th, 2006	Finamdom	Carnival #24
June 5th, 2006		Carnival #25
Future dates	as yet undetermined

Archiving:
To ensure that these don't get lost, as soon as a new carnival is up the old carnival post will be copied into an archive that I will maintain here and then eventually on the carnivalofinvesting.com site.

New Blog Carnival - Festival of Frugality

2005-12-11T14:04:00.000-08:00

Jim over at Blueprint for Financial Prosperity has just launched a new blog carnival that focuses on frugality and frugal living.

He says:

There is a wealth of information out there in the realm of frugality and I’m surprised that no one had thought to start running a weekly Carnival (in this case, a Festival because we can all enjoy a bit of alliteration) to spotlight the excellent ideas that are floating around out there to help squeeze a few extra pennies, nickels, dimes, or quarters out of every dollar. There are a couple of money-related Carnivals out there but none that focus on figuring out how to get that little extra out of life.

Well said and I couldn't agree more. I'm looking forward to seeing what kind of advice makes its way out of this new weekly event.

(A Blog Carnival is a collection of blog posts about a certain subject that is usually collected and posted weekly. The Frugality Carnival collects posts about Frugal Living, the Personal Finance Carnival collects posts about Personal Finance, etc. An attempt to have a list of all carnivals can be found at http://www.blogcarnival.com. Thanks to Shad for setting a new record for shortest wait for a comment on this blog - about 2 minutes.)

The Richest Man in Babylon – Outstanding Book

2005-12-10T09:31:00.001-08:00

I just finished reading (err… listening to) Richest Man in Babylon (audio download, audio cd) and it is an incredibly worthwhile piece of media (I learned a lot + I was entertained, and it was the perfect length - see this post). The book is written mostly as a narrative fable with the financial advice brilliantly, seamlessly, and entertainingly woven into the narrative. As for the audio version, the narrator was perfect with a low and somewhat husky voice that evoked auditory images of ancient Babylonia. This is the best financial book I think I have ever read – informative, interesting, entertaining, useful, all in all great.

Some highlights (I’m paraphrasing since I listened to it):

Babylonian advice for becoming wealthy: Save 1/10 of all you earn. As is repeated ad nauseam in the book “1/10 of all you earn is yours to keep.” Live on the other 9/10.
Apparently, without knowing it, I have been proposing a Babylonian scheme for debt repayment (see this post): Save 1/10 of all you earn. Use 2/10 of all you earn to repay your debt. Live on the other 7/10.
Babylonian advice about housing: If you can realistically turn one of your expenses into an investment – do it.
Babylonian advice about work: Work is your greatest friend and ally in building wealth, don’t be afraid of it. Also, doing work well is good for the soul.

There are only two places where I felt the book fell short.

Its investment advice (remember this book was written in the 1930s). While the advice was sound, I think it was a bit too conservative for modern long term investors.
It highlighted savings, time, hard work, and planning as great creators of wealth, but fell short of any analysis of the degree to which people working for you create wealth for you.

The book briefly discussed whether everyone could be wealthy, but I found the response to be unfulfilling. I am left pondering whether it is possible for everyone to be wealthy or if wealth as opposed to an objective standard of living is a relative distinction where only a certain number of people are ever able to be wealthy

End thought: This is an amazing book. I can recommend it to anyone without reservation; it is a well told story with rock solid financial advice.

or audio version

Christmas gift advice?

2005-12-09T14:48:00.000-08:00

Does anybody know of a good place where I can buy financially solvent christmas gifts? I'm looking for a service to buy a few shares or fractional of stock to give as gifts. I hate stuff, and I would not wish getting a present of stuff on anyone who I love.

I know that oneshare.com does this, but (using kenneth cole as an example) the $27 share of stock (trading at 26.49 as of close today) plus frame and transfer fee adds up to $110. That's not a great deal, and certainly no way to help my loved ones build wealth.

So, any ideas?

Budgeting Made Easy 1 of 4: Electronically Pay Yourself First

2005-12-08T22:14:00.000-08:00

This is the first of a 4 part follow-up to my post on Budgeting Made Easy. In these four posts I'm going to explain the four steps in more depth, and explain the rational behind each of them.

Ok, here we go. Step 1: Electronically Pay Yourself First.

Pay yourself first is one of the most common mantras out there in the world of personal finance. It says make sure that saving is the first thing you do each time you get a paycheck. I think it works so well because our spending habits are like goldfish, they expand to fit the size of any wallet. If we have money we spend it, if we pay ourselves first we don't have the money to spend.

Back in my parent's day this meant that the first check you write each month went to their IRA (or at least it was supposed to). But now, through the miracle of modern banking, you can set up automatic savings to come out either directly from your paycheck or directly out of your checking account as soon as the check is deposited.

This is perhaps the greatest tool for building financial wealth I can imagine. At once you save time, remove the temptation to overspend, and increase your investment portfolio.

Following that, automatically pay your other bills too. It will end up paying you back over the long run when you don't miss a payment triggering late fees and hurting your credit score.

If you take this a step further and establish a separate account for food, gas, and other essentials then you know that whatever money is left is fun money (the reverse also works: set up a fun money account and only pay for entertaining, entertainment, and fun with that money).

Automatic Transfers/Payments are a great tool for automatically organizing your finances. There is no limit to the number of automatic transfers you can set up (unless your bank is stingier than mine) and most banks will do them for free (it is cheaper for them to send an electronic signal than to process a check).

I know this post isn't rocket science, but think about how long it would take to set up autopay for all of your bills and yourself. Then think about how much time it takes to pay bills: write checks, buy stamps, worry about getting it done on time... The only way someone as scatter brained as me is able to get their finances in control is by automating them. I'd rather spend those two hours a month doing something else.

Step 1 summarized: Pay yourself first. Invest that money. Auto Pay Your Bills. Have fun with the rest.

Budgeting Made Easy Series:
Budgeting Made Easy Overview
Budgeting Made Easy 1 - Electronically Pay Yourself First
Budgeting made Easy 2 - Buy Quicken

We're the "I want now" generation... and proud too?

2005-12-07T15:11:00.000-08:00

Flexo over at Consumerism Commentary has just put up a post entitled "Getting Rich is Simple" where he links to this MSN article explaining how you can turn Discipline + Time into $1 Million.

The line that struck me was the same one flexo centered on:

If you count yourself a member of the “I want it now” generation, the idea of waiting 20 or 30 years to get rich probably sounds like a dumb idea.

The value of $1 Million in 30 years aside (as flexo points out its around $500,000 after inflation), what really struck me is that my generation is the "I want now" generation. This got me thinking, if my generation is fueled by the credo "I want now," is my investment plan "I want now" as well? I mean, $1.43 Million in 7 years is only about 2,500 days different from overnight, right?

Of course I want $1 Million tomorrow, but I think the insidious nature of the "I want now" generation is not our lack of patience but in our general lack of planning. If out of impatience we are taking more risks starting internet companies investing in the most volitile parts of the stock market and staying up nights working on building our net worth, then I think that a little impatience is good. According to Adam Smith, intelligent laziness is the driver of innovation; innovation is the driver of productivity; and productivity is the driver of prosperity.

But, what is really dangerous is not that we are impatient and lazy, but that many among us are not intelligently lazy or are lazy in the wrong way. Everybody would like $1 Million tomorrow, but how many people look at the world around them and ask what problems they could fix to create $1 Million in value? Instead many of us in our 20s are going out running up $200 bar bills (guilty myself on occasion) and racking up huge credit card debts. We have developed as a generation a convenient approach to financial planning: dont. We don't plan because we're going to get a great job, a killer raise, our stock options are going to be worth $1,000,000 alone, the $1,000 a year we do manage to save is going to return 35% a year like it did in the late 90's, we'll be the next brad pit, we're going to write the great american novel, our blog is going to bring in 6 figures a year (laughing). We don't have to work for it, no. It is our birthright.

Our generation has the oddest combination of unbridled optimism plus a complete lack of direction in how we're going to achieve our birthright of greatness and wealth. The problem is not our optimism, it is our lack of a plan or any active forward motion.

There are two kinds of lazy people in this world: The dumb lazy, and the intelligent lazy. The dumb lazy are too lazy to even figure out how they could be even lazier in the future. They get by doing the minimum amount of work to get by. The smart lazy look at hard work as the greatest producer of the ability to be lazy that exists. What the smart lazy have figured out is that by working hard now they can be lazy latter, and that over their lifetime they are going to have to do less work as a result.

The problem as I see it is not that people are being lazy, but that they aren't fully committed to being lazy. If they were, they would work hard.

If you are reading this blog, chances are you are already financially quite savvy or on your way to becoming so. So I present an open question to my readers: How do you encourage people who aren't already working on a plan to do so?

Christmas up 6.1%

2005-12-07T14:34:00.000-08:00

According to PNC's CPI calculations for 2005 (That is, Christmas Price Index), this is on track to be the most expensive christmas in the past 21 years by 6.1%. The cost of purchasing the 78 items listed in the song "The Twelve Days of Christmas" rose this year to $18,348 fueled by increases in the price of Geese, Swans, Gold, and Pear Trees. Analysts have commented that scarcity wrought by the avian flu as well as high energy cost in transporting the birds are the fundamental drivers of the increase.

More information on this can be found at PNC's website: http://www.pncchristmaspriceindex.com/

Thanks to Neo for tipping me off to this underwatched but crutial economic indicator.

Start saving before paying off debt

2005-12-06T17:33:00.000-08:00

Ready for more contrarian debt advice? The first thing you should do when you are trying to get debt free is save money in a retirement account. I know this is antithetical to common advice in this area, but hear me out.

As soon as you pay off $1,000 on your high rate credit card, you can re-charge that $1,000 fairly easily. But if on the other hand you had put that $1,000 in an IRA your credit card would still be maxed, but you would have a stable increase in your net worth that you couldn't blow at the mall (at least until you are 59 1/2). The good thing about being maxed on your credit cards is you can't spend any more money with them.
If you end up declaring bankruptcy in a few years, assets in 401(k) and IRA plans are generally protected from your creditors. (source)
Growing your assets becomes addictive. As soon as you have some assets growing, making them grow more is a very addictive hobby. I have $4k in my Roth IRA right now which I contributed in the past few months. Over that period of time I have been carrying a $5K credit card debt. Personally speaking, having $4k in my retirement account motivates me to be frugal more than only having $1k in credit card debt would. If I only had $1k on my cc I'd likely go out and "reward" myself for doing such a good job paying it down.
The most important step in growing your net worth to $1,000,000 is to start investing now. Read Eight Steps to Seven Figures: The Investment Strategies of Everyday Millionaires and How You Can Become Wealthy Too (audio) if you don't believe me.

I think it is a fairly safe bet that most people whose stated goal is "get out of debt" aren't stating their full goal. "Get out of debt" is just one step in what I imagine is the real goal - financial independence. Get out of debt pretty generally means 1) Get out of Debt 2) Stay out of debt and 3) be financially well off. So, if there is a three part goal, why only focus on one part? Especially if focusing on other parts of the goal will likely help you reach your end goal faster (if increase your rate of achieving your proximate goal of being debt free).

The best analogy I can give for this is weight loss. If you start a weight loss plan by cutting calories your chances for success are low. But, if you start trying to get into shape by learning a new and fun sport - for me it is skiing - then your chances of then eating right and ending up both fitter and skinnier is much greater. The same with debt reduction. If you only go about the boring, long, monotonous part of financial independence the temptation to splurge to reward yourself for your good behavior and ruin the whole plan is quite high. But if you find something rewarding which also helps you to repay your debt, then I know I at least would have a higher probability of success.

If you were the kind of person who could myopically attack debt day in and day out without a shred of additional motivation, then I think it is highly unlikely that you would have much debt to get out of in the first place.

The first step in winning the battle with debt is understanding yourself. If you know there is a likelihood you will run up the credit card again in a few months, then your first step to financial independence should be to save, not to repay.

UPDATE: After reading Richest Man in Babylon (audio download, auido cd) I wrote this post, and the plan I'm setting forth here is very similar to the get out of debt proposed in the book: Save 1/10 of all you earn, then use 2/10 of all you earn to repay your debts. Live off the rest.

December 2005 Update - ($13,728 +n/a)

2005-12-05T23:17:00.000-08:00

Here we go, first public update of my personal financial situation. There are no changes to discuss since this is the baseline period.

My net worth is either $13,728 or -11,771 depending on if my stock in Company 1 is valued at face value or worthless. Preffered stock consists of money that I have contributed to the company as well as deffered salary for the work I have done. I also own a number of shares of the common stock, but still don't feel confortable giving them a value at this point.

As you can see from my credit card debt and student loans, I am about typical in terms of debt load for a recent college graduate.

Credit Card balance is largely because I have been working for a deffered salary for the past 6 months.

I have borrowed the formatting style of MM at PFblog.com. Thanks for creating such an easy to read display.

Carnivals for week of 12/5/2005

2005-12-05T11:02:00.000-08:00

It's monday, and you know what that means. Blog Carnivals! Or at least the ones that focus on responsible money and investing. The new blog carnivals I follow or contributed to for this week are:

Carnival of the Capitalists hosted by Techronization (hope I got that right)
Carnival of Personal Finance #25 hosted by Frugal Underground
Carnival of Debt Reduction hosted by Free Money Finance
Showcase Carnival hosted by Dave's Not Here

Ah, the endless procrastination that can be found on blog carnivals in cyberspace.

Get Audible - Turn dead time into productive time

2005-12-05T10:31:00.000-08:00

I love Audible. Why? Because Audible + iPod+ Transit Time = more time to learn new things. With Audible, I turn all of my dead time into either productive or leisure time. With audible, it is like I have a 26 hour day.

I first subscribed to Audible in my senior year of college. I was hunting for jobs and reading the Wallstreet Journal every day. Then I found out that you could have the Wallstreet Journal audio version delivered to your Ipod every morning at 5am. I bought an Ipod and signed up for audible. Back then, between walking to and from class, catching the odd meal alone, and going to and from activities I spent about 1.5 to 2 hours a day in transit - read bored. With audible, suddenly I was spending 1.5 to 2 hours a day educating myself about business without sacrificing one iota of time from a very busy schedule.

Now, I am addicted. I listen to the news as I walk to work. I read up on brain chemistry or investing strategies while I am at the supermarket. And I listen to executive briefings from the Stanford channel (60 minutes each) on my lunch hour. I would sooner give up my cell phone than my premium listener subscription to audible. (although coffee still beats audible)

I subscribe to their premium listener service. I get two books and one periodical each month for $20. Many of the books would cost me $20 alone to purchase on Amazon (Ben Graham's Intelligent Investor for example). Perhaps a better example is that I often get the audio version of the Harvard Business Review each month as part of the subscription (printed version costs more than $20).

So with audible I get both 1) more time in my week to read/listen to books and 2) the same books for less than it would cost me at the bookstore. We're living in a world where knowledge is king, where knowledge work is becoming the rule rather than the exception. In such a world, those who succeed are those who can take in and process the most information in the shortest period of time. I am a slow reader, so Audible.com is an essential part of my strategy for success.

If you are interested in trying it out for free, click here or on the image below

Disclosure: If you sign up for audible by clicking on that link, then I may get a commission.
Further Disclosure: Audible has not requested or endorsed this post. I would recommend their products just as highly if I didn't get a cent. If you don't believe me, try them and see. It is the only product i have ever used that gave me a 26 hour day.

Don't Repay Your Student Loans

2005-12-04T15:10:00.000-08:00

Or rather, take as long as humanly possible to repay them. The government gives huge subsidies to most student loans and you can use the difference between the rate paid to student loans and the rate of return available in the market to your advantage.

I have about $15,000 in student loans that I am paying a 3.43% interest rate on (thats a little more than inflation). I have elected to use the graduated repayment plan so I can accelerate contributions to my ROTH IRA. This means that my monthly payments are $75 instead of $105 (rounded). I then have an auto transfer for the other $70 directly into my IRA for a total of $840 a year. Using this method, I only have to come up with $3,260 to max out my yearly contributions.

If I am able to get greater than a 3.43% return on that money, I will be money ahead at the end of repaying my loans. Although this plan will take me 5 more years to repay my loans, I will still pay the same monthly amount and quite likely end up with a few thousand dollars at the end.

This holds true even if i put the extra money into a taxed account and use the accumulated money to pay the last 5 years of my debts. For instance, at 30% taxes with 50% portfolio turnover each year and a return rate of 5% and withdrawing the money to repay the student loans in years 10-15, you would have $639.75 in additional money at the end of the 15 years while having the exact same monthly decrease in available cash (Paycheck - Student Loan - Money put into brokerage account). If you earned the historical average 10% by investing in stocks and moved the money into more conservative investments yielding 5% in years 10 to 15 you would have $2,900 at the end of the time.

Still assuming a taxed account, if you forgot about that money and didn't use it to pay the monthly amounts in years 11-15 but still didn't put any more into the account in years 11 to 15 and got 10% yearly returns, then you would end up with $15,272 at the end of 15 years. In an untaxed account that amount would be $17,861.

However you cut it - $639.75 for almost no risk; $2,900 for market matching returns; or $17,861 if you keep paying loans out of your paycheck - if you are self disciplined enough to set up an automatic payment then you are better off taking as long as possible to repay your student loans. It all goes back to opportunity cost, and the government has quite nicely given us all a subsidized opportunity in this case.

You can run these calculations for yourself by downloading the excel file I have created here. Be honest with yourself, however. If you aren't self disciplined enough to transfer the money every month, then you aren't necessarily going to be money ahead using this strategy.

Theory of Media Worth & Blog Quality

2005-12-02T19:08:00.000-08:00

This is my humble theory of media value:

Amount Learned + Amount of Entertained
--------------------------------------------------------- = Worth Index
Time Spent

Put another way this is just Utility/Time = Worth. But in media, I think there are two distinct factors of utility - learning and entertainment. I make no claim to be the first person to notice or pontificate about this relationship. I am sure that someone has already demonstrated and done more to prove the theorem than I could.

I think that this equation applies to all kinds of media from television to movies to blogs to classes in school.

For instance: The piece of media I have consumed recently with the highest worth index is an audio briefing from The Stanford Channel on The Power of Persuasion. The briefing took 60 minutes and covered in scientific and entertaining detail those factors social, and psychological which will get people to say yes to a request. It was grounded in scientific research, it was applicable to my life, and it was very entertaining and witty.

Perhaps someone out there has better programming skills than I do and could help create a vote counter for blogs. It would be a small applet you put in the bottom of a blog post that asks four questions:

How long was this blog entry: 1) Too long, 2) Just Right 3) Too Short
How entertaining was this entry: 1) Incredibly 2) Very 3) Somewhat 2) Not Very 1) Not At All
How informative/educational was this entry: 1) Incredibly 2) Very 3) Somewhat 2) Not Very 1) Not At All
Were there factual errors in this post: 1) Yes 2) No (if yes, ask them to explain)

Then the votes would be tallied and shown on the blog post, as well as tracked on a central website where you could go to to find which blogs in the blogosphere are the most entertaining or useful.

Somebody? Anybody? email me at retireat30@gmail.com.

Work Redefined

2005-11-30T08:49:00.000-08:00

I was listening to an Audible program this morning about "Creating you and Company" by The Stanford Channel on my way to work. As I walked the author went on about how Jobs are going to become a thing of the past, and that we're all going to be esentially freelances. Unfortunately, I didn't make it through the full hour, but it got me to thinking about "work" and how I don't think the traditional definition is applicable any longer.

That definition being "work" as "something you do that you get paid for." I think we need to re-define work as "any activity you do which creates value." This can be value for yourself or for someone else. Furthermore, for the same of my argument, let's define Efficiency as unit of work per unit of time. If you do more work in a unit of time, or you take less time to do the same work then you are working efficiently.

Why the change from "that you are paid" to "which creates value?" Because it makes your time at your job comparable to your time at home. If you wash your clothes, you have done work. If you cook dinner, you have done work. And by this definition, if you are watching you are doing work.

I don't think that this definition gives you license to watch more TV in the name of working. Far from it, thinking about your time at your job and at home in comparable units will force you to consider just how much value you are creating for yourself by sitting down and watching TV. Answer for most people, not much. People tend to be least satisfied and engaged when they are watching television. Don't believe me? Read Flow: The Psychology of Optimal Experience by Mihaly Csikszentmihal (chick sent me high). But I digress.

All time has an opportunity cost, and all work has a level of efficiency (how much value you create per unit of time). When you are evaluating tasks you do in your life, you should evaluate both the opportunity cost and the efficiency of the work you are doing at that point. Instead of watching TV what could you be doing with your time? How efficiently is TV creating value for you?

This isn't to say that you shouldn't have leisure time, far from it. This is to say that you should spend your leisure time efficiently creating value for yourself.

This also is to say that you should look for ways to streamline the non-paid non-leisure tasks that you need to perform. Depending on the person these include cooking, cleaning, personal finances, fixing things, doing your taxes, etc. If you have read The Millionaire Mind (audio), you already know that the major secrets are: live below your means, and outsource those things someone else could do more efficiently than you. In the case of the MillionaireMind, they reffer specifically to accounting and legal work. But you should also think about things like cooking and cleaning.

If bring home $50,000 a year working 60 hours a week (or $34K for 40 hours) with two weeks vacation, then you are making $17 for each hour you work. If you have a side business this rate could be far higher. But now, you know the opportunity cost of your time, $17/hour (assuming that you can increase your salary by working overtime, or taking on additional projects). If you can hire someone to clean at $20 an hour, who will do the job more efficiently than you, then you are likely to be money ahead. If you are watching TV, it is costing you $17/hour to get dumber.

Somebody actually read my blog

2005-11-29T20:18:00.000-08:00

For a few days there, I thought that the only people reading my blog were vehament critics of Kiyosaki. But, alas, there are people out there who, like me, are trying to manage their money right and retire early. I got my first positive comment and link to the blog from Conservative Conservationist today.

Check out Conservative Conservationist's blog Financial Freedom For All. I particularly liked his posting about setting goals which opened with this quote: "If you do not know where you are going, every road will get you nowhere." That's exactly the kind of thinking that will get you places in life. Like to retirement before middle age.

He's trying to get to retirement in 10 years, i'm trying to do it in 7. I'd be happy to meet his goal, but I think i'm going to stick to mine. I'll definitely be keeping my eye on him to see how it goes.

Vodcasts: The a la carte cable battle - fighting Polecats when Lions are at the door

2005-11-29T18:37:00.000-08:00

If you haven't been following the a la carte cable discussion, basically congress is debating whether they should require cable & satelite companies to allow users to pick and choose which cable channels they want. Some are even asking for this in the name of decency and making sure that parents can prevent their children from seeing unwanted materials. Others take a consumer rights approach. For whatever reason they support this, they are making a nice argument that would have been pertinent 10 or 15 years ago.

My guess is that members of congress are far more responsible than I am and spend less time watching The Daily Show clips online. If they were to spend a little more time procrastinating, then they would see that A La Carte cable almost already exists.

Comedy Central Motherload + Video Ipod + WiMax + TiVO Mobile + Vonage = A La Carte Cable, or almost. What I am talking about is TVIP, Television Over Internet Protocol. Moore's law is a fascinating thing that almost everyone in the world has come to expect and accept, with the exception of the entertainment industry. Computers Double, Hard Drives Double, Bandwidth Doubles. Traditional distribution systems of information are being suplemented and in many cases surplanted by electronic distribution.

In the not so distant future, cable companies are going to be like bus companies. They will transport information to and fro, but the decision as to what gets moved from place to place will lie largely in the hands of the consumer (I don't have to tell you that, you're reading a blog).

All economics is driven by two efficiencies: 1) efficiency of work & production - how fast you can get a given unit of work done and 2) efficiency of transportation - how fast you can move a person, product, or idea from place to place. TVIP presents a more efficient means of transporting video as compared to fixed broadcast cable and satellite. Therefore, TVIP will win out. There will be a longtail of television.

Whether this is a net gain, or will present us with a paradox of choice which will lower our overall well being I am not sure. But, we're soon going to see a day when the timing of this debate had a tragic comic element of irony to it. They're debating the rules of dinner when the world is going to end after lunch - it just doesn't make sense.

Maybe then there will be a Retire At 30 IVcast (internet video cast) or VODCast if you have to use the 'correct' name for it.

Carnival of Personal Finance #24 and Carnival of the Capitalists Nov 28 Edition

2005-11-28T20:34:00.000-08:00

My posts have been published in The Carnival of Personal Finance #24, and The Carnival of the Capitalists Nov. 28, 2005. Welcome to everyone who has found my site from those sources.

Plan Revisited

2005-11-27T19:17:00.000-08:00

Ok, in my last post about my plan for financial independence at age 30 I offered what would be necessary in terms of asset growth to meet my goals. But, I didn't offer any solutions to meet those milestones beyond the first year.

So, first I thought "I didn't include yearly contributions, that's got to lower the rate of return necessary to meet my goals." So, I re-built my model - updated version available here (make sure you look at sheet 2, it has the yearly contribution model).

I put in 7 years, $1.43 million, $4,000 annual contribution growing at 15% a year for the goal, and keeping everything else the same put in $700,000 and $2.4 million for my minimum and stretch goals.

Results:

Plan: Stock Market - Nope
Not quite as insane as the first time around, but definitely not the 10% yearly return that the S&P might give if it keeps its historical return. Only about four times the returns of small caps on average.

107% compounded annually is not possible in the stock market.

Plan: Save more each year - Not likely
Even with a leveraged options based strategy, the most I can get for the risk I am willing to take would be around 22% a year pre tax- I'll go into that strategy at a later date. So, at what rate would I have to increase my contributions at 22% to make my goals? To answer this I used the Excel function Goal Seek (Tools > Goal Seek).

To meet my goal, I would have to increase my contributions at 104% a year ending at $583,000 in year 7 (Minimum 79% & $233,000, Stretch Goal 123% & 1.1 Million).

If I keep my living expenses completely flat, and my salary increases at 17% a year (starting from $55K, yeah I got a plum job out of college) and I save every penny then I could meet my minimum target if I can get 22% a year returns. Unless I can wind up CEO of a Fortune 500 company in 7 years, it is not likely that I will meet my goal by saving more.

Plan: Sell Drugs - Absolutely not
I refuse to engage in illegal activity (what good is $1,000,00 if you're in jail for 20 years even if you get the money when you get out), so I can't get these kinds of returns there. Some people might be able to, but I certainly am not going to.

Plan: ?
Right about now, it might seem that I have an insane plan that nobody could accomplish. But, this kind of return has been achieved before.

Plan: Real Estate - Perhaps
In Rich Dad Poor Dad (buy, my review), Kiyosaki says he turned $5,000 into $1,000,000 producing $5K a month in 6 years using rental properties (Ch. 10, p. 254). Assuming he stayed true to his definitions of assets and liabilities, then this is money in his pocket after paying the mortgage and expense. $5K a month is twice what I estimate I need on a monthly basis to consider myself financially independent (i.e. retired). So, it could be done in real estate.

Plan: Start a business - Probably
According to thisarticle in Forbes, the record ascent to billionaire is 18 months by Garry Winnick of Global Crossing (followed by bankruptcy, but who's counting). The Google guys did it in 7 years, Amazon was 4 years, Ebay only took 3.

I don't think I'll be able to come up with an internationally known internet brand any time soon (although the idea of a retire at 30 blog IPO is quite humorous). But, if they were able to go 0 to a billion in the time that I'm trying to do 0 to a million, then there is hope.

When you look at the Young Entrepreneurs Network, and see that their minimum standard for membership is a company with $1 million in annual sales. Then you think that the price-sales ratio of venture backed company ranges from .25 to 1 (see ventureline analysis of small business valuation techniques), and you start to think, this might be possible.

Plan: Wage slave - Never
Moral of the story: You are never going to reach financial independence at 30 if you stay as a wage slave. If you spend your spare time working on side businesses (such as real estate), then there is a fighting chance.

My Plan: Real Estate + Small Businesses + Stock Market + Work Hard + Frugal Living.
I am not going to go into the details of what my businesses are exactly. In college I ran a few, and had quite good success - they were all non-profits so I didn't keep a dime of the profits I generated, but I did learn enough about running organizations, finances, working on teams, etc. to have a lot of confidence in my ability to do this.

One of the things that I will be sharing in this blog, are the tips and tricks I come across as to how to be successful at running organizations (read businesses).

Tip 1: In college and after, do things that are going to force you to learn about running organizations not just about the esoteric substance of your major. Take over as treasurer of an organization and you will probably hate the experience, but learn more real world financial planning tricks and techniques than you could anywhere else.

Tip 2: In the same vein: what you do with your free time is up to you. You can choose to spend it becoming a more savvy investor, researching businesses, and creating a plan for financial success. Or, you can watch TV. Your choice.

I have a TV in my bedroom. I have turned it on once in the past 6 months. I am going to retire at 30.

Rational Assumptions for Personal Financial Freedom

2005-11-26T22:11:00.000-08:00

I want to grow my assets to financial independence at age 30. That goal aside, this blog is about personal finance and how to manage money. A lot of "what should i do with my money" depends on what you assume about the future. Most "how much do i need to retire" calculators ask you to assume a rate of return on your investments, a rate of inflation, and a yearly amount you need to live in retirement.

Those are all well and good, but those are some of the least interesting and least important assumptions that need to be made because they are assumptions that don't materially impact the way you invest your finances. How you manage your finances leads to those assumptions (bonds, assume 5% return; stocks 9 or 10%), not the other way around. The following are what I think constitute a set of rational assumptions that should be drivers of personal finance:

I have no job security. My job could be outsized (outsourced or downsized or otherwise eliminated) at any time.
I will never recieve a penny from social security.
I will pay 35% taxes on my income, and that number will go up over my lifetime.
My company's pension plan will fail.
My children will not recieve one cent from financial aid.

(the post got deleted in transit here, so I'm retyping the general gist)

These are harsh assumptions, but once you come to terms with them they are quite liberating. It is antithetical to say that you are "financially independent" if you are dependent on someone else for your paychecks, retirement, or for your children's college. If these assumptions don't come true and I do end up getting something from one of these programs, great - found money. But if not, there will be nobody to blame but myself.

Financial freedom is being free regardless of what happens, so I think it is only rational in personal finance to plan for worst case scenarios.

E*Trade - Why I love and Hate it

2005-11-25T21:28:00.000-08:00

I love Etrade. I hate Etrade. Both statements are true.

Why I love Etrade:

Beautiful Site Design
Simple Intuitive Navigation
No fee IRA
Painless and elegant funds transfers
They just approved me for options trading
Quick and attentive email customer service
Fee refunds for ATM fees if you use ETrade Bank

Why I hate Etrade:

Their mutual fund information is often wrong:
- HENLX, wrongly told me the IRA minimum was $2000 (it really was $250). Wrote them, the fixed it.
- FLSCX, wrongly told me the IRA minimum was $250 (it really is $10,000).
- SEMKX, wrongly told me that it was a no-load no-transaction fee fund. They don't even offer it.
After them telling me that these funds are open, I then did the research and decided to put money into them (5 to 10 hours per fund). That's a lot of wasted time.
Not buy and hold friendly for small investors. I paid about $250 over 3 years (on an account with a value at times as low as $500) to hold my account. I started with $1k, ended with $500. This was over the crash in '01 but my biggest losses weren't because of the market but because of their $40 quarterly inactivity fee.

If you're opening an IRA, E*Trade is great. If you're a small investor looking for a brokerage account - I'd say you're better off at Scottrade - $7 trades and no account or inactivity fees. Sharebuilder is interesting, but make sure you read the fine-print of their fees. Those $4 trades are cheap, but their other fees are ghastly. I have no opinion of Ameritrade.

This has been a precursory and non-scientific comparison. I use Etrade. I am happy with my IRA account, and I will be canceling my brokerage account January 1 (when I can then transfer more funds into my IRA). I'll let you know how my search for another non-retirement brokerage goes in a few years once I have enough funds to actually open a non-retirement brokerage account.

Personal Finance, Pensions, and Politics - a simple fix

2005-11-24T12:26:00.000-08:00

My father worked for an airline. He was a pilot for 32 years, and he was forced into retirement at age 60 by an archaic FAA regulation (although wished to keep working). Now, about 2 years later, the airline he worked for has declared bankruptcy and is trying to jettison their pension obligations. He hasn't received a penny in months and likely wont for a good long while still.

There is a pension crisis in this country, a pension guarantee corporation that is going to be running at a severe deficit, social security is in the same boat. This is largely why I operate my life with the assumption that I am not going to get one penny from social security, from financial aid for my children, or from an employer pension. These are scary if you are planning on them to be your retirement and then spending your whole paycheck; but once you accept that they aren’t going to be there for you it is liberating (if you are young).

But, I digress. The topic of this post is a way to fix the under funded pension crisis in the United States. It is a simple, market based approach: make pension and payroll obligations the most senior kind of debt that a company has (that is, the first people they have to pay if they go bankrupt and there isn’t enough money to pay everyone).

What would this do, in effect? Currently the obligation to ensure that pensions are funded is held by the company and the obligation to pay in the case of default is held by the government (read taxpayers). Under this plan you would still keep the pension guarantee corporation for complete catastrophes, but it would be needed less often. Why? Because the pain of default would be held by the owners of the company’s bonds, which are mostly sophisticated investors and other Wallstreet organizations. If a company was running a pension deficit, it would have more difficulty raising money and thereby force the company to fund their pensions.

I am not going to make the moral case for this system, too many people are already making the case that a company has a moral obligation to repay money promised to workers.

The case I am going to make is an economic and power asymmetries case. Markets work, but they are imperfect. Joe Stiglitz has done some great work to prove that asymmetries of information exist in the market and that this can be detrimental to workers. You need look no further than the difference between airline executive pensions (locked in impenetrable trusts) versus employee pensions (which only get paid after bonds, and are jettisoned to the government at a reduced rate) to find evidence of this. Executives who understand the financial markets and the likelihood of a bankruptcy protect their interests, yet the pilots, mechanics, and flight attendant’s unions didn’t. Part of this discrepancy can be attributed to differences in power (the executives largely set compensation), and part can be attributed to asymmetries in information (the powerful unions didn’t know to negotiate more solid pensions until it was too late).

Regardless of which effect was strongest, or if you even believe that information had any part in the result, the solution to the problem (if you’ll grant me that it is a problem) is the same. Make pension obligations the most senior form of debt at a company. If the company goes bankrupt and shuts down because they have excessive obligations, so be it – another more efficient company will take its place. But at least the people who are largely powerless don’t have contracts broken with them.

This is a crisis for many people, and a particularly emotional one. This means that congress is likely going to respond and pass some laws. They could create more government red tape, government guarantee programs, and decrease the efficiency of the market. OR, they could do what they are supposed to do and create a system of rules whereby their intervention is not necessary.

Quite frankly, I trust Goldman Sachs, Morgan Stanley, PIMCO, and Moudy’s (the rating and acting institutions who I’ll largely call the market in this case) to adequately judge the credit worthiness of companies pensions over the US Government’s Pension Guarantee Corporation. We need a system in which the market handles as much as possible, and the way to create that is to make Pension and Payroll obligations the most senior debt of a company as opposed to the least. Do that and all those wall street institutions I just mentioned will force companies to fully fund any pension obligations a lot more effectively than more laws and red tape ever could.

This is in everyone’s best interest. It is in the taxpayer’s interest because it will shift the burden of pensions back to where they theoretically should be – on the companies. And if a company is insolvent, the taxpayers shouldn’t have to pay the pensions while the bond holders are repaid. That is tantamount to the taxpayers repaying the bond holders. If you invest in a company who can’t pay their debts, then you as the bondholder or stockholder should bear the burden of your poor investment. This burden should not be born by the taxpayer, much less the poor sap who trusted the company to actually comply with the retirement contract they had.

Budgeting Made Easy

2005-11-23T12:52:00.000-08:00

1. Pay yourself First. Set up automatic transfers from your paycheck into your savings accounts. It is very hard to frivolously spend the money you don't have. Set up auto payment for everything else you can too.
2. Buy Quicken or MS Money (having used them both I preffer Quicken).
3. Don't use cash. Use your debit or credit card and then automatically transfer your transactions into quicken to have an instant recall of what you spent your money on.
4. Read these two articles on MSN Money: The 60% Solution, Your First Budget.

I'll go into depth on these later. But for now: 4 steps to get your money under controll. Auto Transfers + Quicken + Transaction Download = financial planning in 30 minutes a month.

Budgeting Made Easy Series:
Budgeting Made Easy Overview
Budgeting Made Easy 1 - Electronically Pay Yourself First
Budgeting made Easy 2 - Buy Quicken

Portfolio Rebalancing and Asset Allocation

2005-11-18T13:12:00.000-08:00

I just came accross an article on The Motley Fool titled "Get Smart about Asset Allocation" that is a very nice followup to my post yesterday about dollar cost averaging. They quote an AllianceBernstein survey which estimates that if people re-balanced their portfolios correctly they would add an additional 1.64% per year to their returns. Over the past 30 years that would be an additional 68% return. Not bad for just moving money around in funds/stocks that you already own. This is of course predicated upon a solid initial allocation that you are re-balancing.

Why would this work? Well, assuming that there are non-rational periods of stocks being over valued and under-valued, this is a way of taking money from your assets that are overvalued and buying those that are undervalued. Problem is, there is no way to know when your investments are over-valued and under valued. But, by re-balancing you have a pretty good chance of moving your money from a sector that is over valued to one that is undervalued. 1.64%, and missing market slumps. Not bad.

What is infrequently mentioned is that Proper Allocation Strategywill depend in very large part on 1) if you are investing in a tax advantaged account, and 2) transaction fees. Those damned taxes and transaction fees that always mess up our assumptions of a perfect, frictionless financial market. And unfortunately are usually glossed over by most personal finance articles on the subject (granted taxes less so). If you are a small investor who pays transaction fees to sell stocks or funds and to re-invest then you will likely be better off waiting longer than larger investors to rebalance.

Consider the following example.

You invest $1,000 each in stocks ABC and XYZ in 2005. In 2007 ABC has trippled in value over the time while XYZ has largely stayed flat. In 2007 you still like both ABC and XYZ, but your assets are largely out of balance. You have $3,000 in ABC and only $1,000 in XYZ but you would like to have equal amounts in both. To rebalance you would sell $1,000 worth of ABC to buy $1,000 worth of XYZ. In doing so you're likely to trigger $30 in transaction costs (assuming you pay $15 per transaction - I pay $12.99 with e*trade). Or, you'll be paying .75% of your portfolio in the transaction costs. Assuming you will make the 1.68% gain by rebalancing, then you're still .93% ahead this year and further next year.

Now, this is where tax advantaged (read IRAs) vs. normal brokerage accounts are going to make the biggest difference. To sell $1,000 ABC you'd have a long term capital gain of $666 for the sale making you liable for up to $100 in taxes (at 15% long term gains tax rate - cap gains calculator, intro article, another intro to cap gains) in addition to the $30 in transaction costs. That takes the cost of rebalancing up to 3.25% just about two years worth of rebalancing gains.

However, if you were adding to your investments steadily over time (dollar cost averaging ideally, even better if you use a payroll or automatic withdrawl to force yourself to pay yourself first) you could decrease the cost of rebalancing by practicing a strategy I call "looser gets attention." This means that you quarterly contribute a set amount of money to either A) the part of your portfolio that has performed the worst over the past quarter - "looser gets attention" or B) the part of your portfolio that is most under represented because it has not performed as well as the others - "total looser gets attention." Say you are contributing $1,000 a quarter to your fund - this would still keep the cost of a stock transaction at $30 to bring your portfolio into balance if you did it over two quarters, or $15 if you did it over one quarter. Saving you the $100 in taxes, plus you would have to pay those transaction costs to buy any other stock so your stock opportunity cost is actually 0.

This works even better if you invest in no-load, no-transaction fee funds. Aside from the 3 month minimum holding to avoid a 2% charge that most funds use to discourage market timing you won't be paying any transaction fees. You may, however, still trigger capital gains if the investments aren't in a tax advantaged account.

Thus a few simple rules:
When you can, rebalance with additional investments. Especially if it is a taxable account.
Rebalance in your IRA as much as possible.
Don't do it too frequently - there can be taxes, fees, and you could sell rising stocks to quickly.

When you are rebalancing it is helpfull to ask the following questions:
What will my tax liabilities be if I do this?
What will the transaction costs be?
Can I rebalance in a tax advantaged account instead?

Dollar Cost Averaging

2005-11-17T19:07:00.000-08:00

I was investigating an emerging market bond fund tonight and I came across a great article on the Scudder Funds website about Dollar Cost Averaging. If you are new to investing and have heard that dollar cost averaging is advantageous but haven't really gotten your mind around the topic I highly suggest taking a look at this article. They assume no previous experience and present the topic very clearly. Take a look, it is worth it.

Scudder Funds Article on Dollar Cost Averaging

Oh, I'm also very excited about the fund of theirs that I was evaluating. Scudder Emerging Markets Income morningstar snapshot. Their mean return over the past 3 years was 19% annually with a standard deviation of only 9% (if you're not a stats person this article explains why standard deviation is important for investing). Granted a number of other funds in the emerging market bond category beat this one, but I've only got $500 to put into emerging market bonds in my IRA. Compared to the rest of the funds that I can invest in this with those constraings, fund is a superstar. It is even offered transaction free by my brokerage (E*Trade).

Rich Dad Poor Dad - mixed feelings but overall a very solid book

2005-11-16T19:29:00.000-08:00

I jut finished re-reading Rich Dad Poor Dad. I had read it two years ago over a school vacation but couldn't for the life of me remember if I had even finished it. Upon finishing it a second time, I remembered I had finished it the first time. I have a memory like swiss cheese.

Anyways, the book on whole is very good. If you read with a healthy bit of skepticism and a grain of salt, it is a very valuable action plan for successful financial management. In particular I am very taken by the books simple, unique definition of assets as something that passively creates income. The definition of a liability on the other hand is something that creates expenses. The traditional definitions are: asset - anything owned that has cash value; and a liability more or less as a debt.

I think that for someone who is trying to build wealth at an accelerating rate Rich Dad's definition of assets is more useful. If you, like me, want to amass a sizeable net worth in a relatively short period of time then the most traditional asset, a house, is not really going to help you that much. A house is going to obligate you to pay taxes, interest on the mortgage, and maintenance creating a very small amount of net worth each month as a percentage of the payment. This doesn't say don't buy a house, but recognize it as both an asset (in the traditional sense) and a liability (in more ways than just the mortgage). The genius of Rich Dad Poor Dad is the simplicity in which this concept is conveyed using common sense diagrams.

This is just a small fraction of the things in the book that I wish my parents had taught me. But the book does have cons as well. The macroeconomic commentary is painfully oversimplified and in some cases completely wrong - inflation is caused by the quantity of money in an economy not by doctors and lawyers raising their rates.

If you're looking to become financially savvy, it is a great place to start. I bought a third copy and sent it to my little brother. If you're already fairly savvy it is an interesting not altogether traditional take on personal finance and building wealth. It is an easy read far disproportionate to how much you will learn from reading it.

UPDATE: I at first didn't think this warning was necessary, but after reading this, i feel it is pertinent to say: Take Kiyosaki's advice with a grain of salt. He has some great points, but (if it wasn't obvious from his writing style) John Reed provides more than sufficient evidence that Kiyosaki can be a pedantic blowhard.

Rules

2005-11-15T23:54:00.000-08:00

Rules for reaching my Goal:

Inherited money does not count. Not that I expect to get too much, but in case I do, that does not count towards my goal.
Lotteries and other games of chance do not count. I am not going to pay the stupidity tax to begin with, so there isn't even a chance that I would win a regular lottery. If I am the 1,000,000th shopper, that doesn't count either.
I must provide monthly updates.
I have until December 31 of the year I turn 30 to meet my goal. I'm doing this so that the Retire at 30 fiscal year matches the calendar year. It gives me about 1 extra month to meet my goal.

Rules for the blog in general:

When I talk about a product and when feasible, I will add a link to that product.
Product reviews must be done to add value for readers and will always contain my honest opinions. If I am asked by a product owner to review their product (should this blog ever reach that level of popularity) then I will do so under full disclosure (being paid, how much). I repeat, I will not bias my opinions or plug products that I think are junk.

As I go along and find other points that need clarification, I may add to this post.

Plan

2005-11-14T22:09:00.000-08:00

This is my current plan for reaching my goal:

I created an excel file to run these kinds of calculations. You can download this file here. Once you download the file you can enter Goal, Years to Goal (could also be months, up to 100), Starting Amount, and Starting Year. The file then calculates the amount needed each year to meet your goal, and the anualized rate of return needed to meet the goal without additional contributions.

For my goal of $1.43 Million in 7 years (plus the minimum and stretch goals), this is what I came up with:

Year:	Min	Goal	Stretch
1	$ 8,400	$ 9,300	$ 10,000
2	17,500	21,500	24,900
3	36,600	49,700	62,000
4	76,500	115,100	154,700
5	160,000	266,600	385,900
6	334,700	617,400	962,300
7	700,000	1,430,000	2,400,000

To meet my goal I need to increase net worth by 130% a year; to meet my minimum goal I need to increase my net worth by 110% a year; to meet my stretch goal I need a 150% increase in net worth each year.

The first year will not be difficult to meet. I already have a little over $4,000 in my IRA and other accounts and I can contribute an additional $4,000 next year. That puts me just at the goal for the year, minus any bonus or employee match for my 401k contributions. But after that, I don't know exactly how I'm going to meet the goal.

My first balance sheet update is comming on December 1.

Goal

2005-11-14T21:19:00.000-08:00

So, I want to retire to financial independence at the age of 30.

How much will I need to meet that goal? Using Bankrate's Retirement Calculator, and assuming I don't mind living out of the country (yearly income of $15,000 to live comfortably in south america). I would need $700,000 at age 30 to retire and live to 100. But, that's not my definition of retirement. I like south america, but I don't want to have to live there full time.

Assuming a modest upper middle class lifestyle in the US ($50,000 a year, which is much more modest if you have kids) I would need $2.4 Million at age 30 to retire and not work again.

But that isn't very much fun. I don't want to not work again, I want to have financial independence. I like working, and would get pretty bored living at home all day. So $700K isn't enough and $2.4 million, while not being too much, is a stretch goal.

To get $30,000 yearly for 70 years I would need $1.43 Million. I like that, it is a nice non round, not $1,000,000 number.

Thus: my goal is $1.43 million in net worth in 7 years. My Minimum acceptable limit is $.7 Million, and my stretch goal is $2.4 Million.

If anybody has any ideas as to how I can accomplish this, I'd love to hear them. retireat30@gmail.com

Next time: A plan to meet that goal.

Topics I'll Cover

2005-11-13T23:36:00.000-08:00

I still can't sleep, so what more will I be talking about. In addition to talking about making financial decisions, I love to make excel models, and so I will be posting a number of these which I have used to make decisions in my own personal finances. If you have any other topics you would like discussed, please feel free to email me at retureat30@gmail.com.

Forthcomming Topics:

The goal: how much do I need to retire at 30?
Updates: each month i will update you with my progress towards financial independence.
Assupmtions and rational ground rules.
Resources - where to get more information, how to stay up to date.
The Me Inc. Theory of personal finance.
Buy Quicken.
Build a budget - it's easier than you think.
Don't spend cash.
Setting up a ROTH IRA.
The Economics of Retirement savigns and IRA contributions - will post excel file.
Student Loans - consolitation
Student Loans - which repayment option should you choose - will post excel file.
Loser gets attention - strategy for getting the most out of your long term investments.
Buy an older car.
Who am I?
College for our children - man that's going to cost a lot.
Podcasts I like

Topics I am going to cover:

Investing
Budgeting
Planning for retirement
Taxes & Government Incentives
Cars & Insurance
Housing - renting, buying, etc.

I will retire at 30

2005-11-12T22:28:00.000-08:00

I am turning 23 this month. I would like to retire in 7 years, and this blog is created to chronicle that effort.

First, a bit about the goal of retiring at 30. I don't mean I want to stop working at 30, I plan on doing that some time closer to 80. Rather, I want to have financial independence at 30. That is, on my 30th birthday I want to be able to do what I want in the world without having to worry about the financial implications. If I want to travel, golf, ski, or start companies; and I can do so without worrying about the financial implications of my actions; then I will declare myself retired.

Do I think I can make this goal? Not completely, not unless I get extremely lucky. Then why start a blog that says I will? Because this blog is about working towards the goal of financial independence. I would like to be well on my way to financial independence at the age of 30, and I'm setting out to learn as much about businesses, financial markets, budgeting, investing, and the like on my way to that goal.

I just graduated college in June of this year, and as I am finally starting to be a productive member of society there is a lot I don't know. Like any good ivy-league graduate, not knowing anything about a topic that is likely to impact me heavily, I've started researching the topics of personal finance. I've found many of the topics (IRAs and anything else the IRS touches) to be nearly impenetrable at the beginning and painfully simple once you realize what they are trying to say. I've started this blog to put as much processed information into the blogosphere as possible in the hopes that it might be useful to someone.

I was never very good at sports, can't dance to save my life, have no musical talent, and am very bad at a large number of other things (still trying to bowl above 100); but I do understand economics almost intuitively. So if anybody out there is interested in trading dance lessons for personal financial advice, I would gladly accept the exchange. Oh, and another weakness: I can't spell. Apologies in advance for that.