Okay, the title sounds gross but I assure you the explanation isn’t. Back when I was a child, my sister and I would usually start Trick or Treating relatively early (like right after dinner time, but when it was still light out) with a few of our friends. We would make it around our little block in a pretty short period of time, collecting about a bagful of candy, and then return home. On this first little excavation trip, we would collect enough unwanted candy (that is, candy that was good but we weren’t necessary a fan of) to supplement the small amount that my parents had purchased to give away from our house. Throughout the night we’d check in at home (mostly for safety’s sake, back then only Gordon Gecko had a cell phone), dumping our unwanted stash into the giveaway bin, until we were exhausted from the fun of Trick or Treating. This little strategy of ours worked out nicely for a variety of reasons:

1. we could save a little money by not buying a ton of candy,
2. candy we didn’t like wouldn’t go to waste since we picked out the undesirables, and,
3. give away as much as we wanted since there was no reason to try to keep any of it for ourselves.

Personally, I’m not a huge sweets type of person. When I do eat candy, I generally enjoy chocolate with some nut component involved (almonds, peanuts, etc). That means that all the sugar heavy candies were of little interest to me as a kid (candy necklaces = gross) and so I would usually take those and toss them into the giveaway pile. What if you’re the type of person who loves absolutely everything? Well maybe this idea isn’t for you.

I think we arrived at this process after a few years of “oh great, it’s November 1st and we have a ton of candy no one will eat.” After a couple years of having a ton leftover, you start to think about ways to reduce the waste and our little recycling process seemed to work out. Too bad I can’t go out Trick or Treating anymore, I’m probably a little too old now.

Anyone else have any good Halloween frugality tips? And do be safe out there tonight!

(Photo by nattydotorg)

I don’t understand why people have Netflix subscriptions.

I never rent movies and when I do, I usually turn to the $1 a night RedBox vending machine at my local Giant. For $1.05 (MD sales tax is 5%), I get a recent release that I happened to miss in the theaters (I enjoy going to the movie theater, paying $9, and watching a movie with my girl) and most of the time I can find a coupon online that gives me the rental for free. That being said, I don’t really understand why people sign up for a recurring rental service when something like a RedBox exists (unless it doesn’t in your area). And no, Redbox isn’t paying me. In fact, if you sign up for Netflix through that link above, Netflix is paying me a commission so enjoy my brutal honesty.

Let’s take a look at the cheapest Netflix plan, $4.99 for one movie out with a maximum of two movies a month. That makes it $2.50 a movie with the only advantage being that you can have that movie for as long as you want. How likely is it that you’ll be watching that movie more than once? I’d say the probability of that is exactly 0%, certainly 0% within a one month period. Netflix says they can send out a movie within a business day, and let’s say they’re right, that means the lag time between when you order a movie and when you get it will be at least one business day. So, if you wanted to watch a movie tonight, you wouldn’t be able to unless you already had it in your hand.

Like I said earlier, I’m not trying to validate the RedBox video rental model. What I’m actually trying to do is understand the psychology behind why someone would use Netflix because everything I read about American consumerism seems to point towards RedBox and not Netflix. For example, Americans are impulsive. That means we don’t, in general, plan what we will watch on Thursday the Tuesday beforehand. We plan what we watch on Thursday night at around Thursday afternoon. Another point, Americans love cheap. Redbox is $1.00+tax a night, I will only watch the movie for one night, so it’s cheaper than Netflix. Why pay more just so I can have it sit around on my coffee table?

So, for all those folks out there that use Netflix… why?

(Photo by brymo)

Whenever a company offers its services, it’s generally quick to note that it’s bonded, licensed, and insured (when it applies and if they are) but I was never certain what that actually meant. Until now, all I knew is that you should only hire someone if they’re bonded, licensed (if applicable) and insured. Often times someone who isn’t will be cheaper, but you will have to accept all of the responsibility if something bad happens and, as Murphy’s Law clearly states - if something bad can happen, it will. (Incidentally, that picture of the bail bonds company is only somewhat related to what it means to be bonded)

Bonded

Being bonded means that a bonding company has secured money that is available to the consumer in the event they file a claim against the company. The secured money is in the control of the state, a bond, and not under the control of the company. Let’s say that you hire a cleaning company and they end up stealing your Nintendo Wii. Well, you would file a claim against the company and, after an investigation, would be paid out by this bond.

This is slightly different but similar to what it means for an employee to be bonded. Being bonded in that case means that a bonding company has investigated your background and finds that you’re trustworthy and “good” enough to insure. In general, this is generally done when an employee has to handle large amounts of money or handle valuable property like jewelry or art. There is a very extensive and deep background check involved and what the employer gets is insurance that you won’t steal. If you do, then the bonding company pays out the amount of the theft. By being bonded, it shows that the employee is trustworthy enough for a bonding company to insure you up to a certain amount. Now, a company that is bonded means that a bonding company has funds

Licensed

For certain professions, a license is necessary to show that you’re competent and permitted to conduct business in the city, municipality, or state in which the license was issued. For example, home improvement contractors will have to be licensed to perform certain types of work and that license number will be printed on every advertisement they print. You can take that license number and look up their performance history in most states through the Better Business Bureau.

Insured

This is probably the most commonly understood of the three (second to being licensed) and this refers to what happens if someone gets hurt on the job. Let’s say a company is fixing your roof and a roofer falls off and hurts him or herself. If the company isn’t insured, then the claim gets filed against your homeowner’s insurance (bad). If the company is insured, then the claim gets filed against the roofing company’s insurance.

In summary, it’s important that anyone you work with is licensed, bonded, and insured. There’s no reason why you should have to work with someone who isn’t all three, unless being licensed doesn’t apply. Once you know that they are, research and confirm that they are being truthful. I can say that I’m bonded, but unless I provide the documentation and you can verify it, I’m not actually bonded.

(Photo by agilitynut)

When I was younger, I used to play Sid Meier’s Civilization all the time. One of the best parts of the game was trying to build one of the Seven Wonders of the Ancient World because it gave your civilization a distinct advantage in the world. My personal favorites were the Lighthouse (it gave your ships a farther range and they wouldn’t get lost) and the Hanging Gardens of Babylon (I believe each one of your cities now had a Granary), but fun part was being exposed to these wonder in the first place.

Since then, there have been more “Wonders of the World” like the Natural Wonders of the World, 7 Wonders of the Modern World, so why not create a Seven Wonders of the Personal Finance World? Hokey, I know, but it’s my opinion that, if you can, you should “visit” every single one of these wonders.

1. Roth IRA

Any list of the seven wonders that doesn’t start with an investment account that grows tax free and whose disbursements are tax free isn’t worth a darned thing. Another wrinkle that makes the Roth IRA is interesting, outside of the tax free elements (growth and disbursements), is that you are limited in how much you can contribute based on your income. While you’re young, it’s less likely that you’ll be restricted in your contributions and it’s more beneficial (because you’ll be taxed less now), so it creates a scarcity effect that almost spurs you to contribute while you still can. (Photo by scottwills)

2. 401K Employer Match

If you put $1 in this jar, I’ll put in 50 cents and you can keep it all. It’ll grow and grow as long as you pick the right jar and you can have it all in forty years, minus taxes. That’s sounds like magic right? Well, for some workers, it’s a reality and it’s called a 401(k) employer contribution match. At my former job, if you contributed 6% of your salary to your 401(k), the company would kick in 3% of your salary and that vested immediately. It’s like a 3% raise for something you should be doing anyway.

3. Pensions (and Social Security)

I lump these in together because they exist and will likely stop existing in the near future so get your looks in now. In both cases, you’re contributing (with a pension, you’re contributing by virtue of having a slightly lower salary than if there was no pension; with social security, it’s deducted straight out of your pay) to a pot that is supposed to grow over time, without you having to deal with it. The problem with pensions is that it requires your company to remain in business, not a guarantee. The problem with Social Security is that it requires the government not to pilfer the lockbox, which it already has. In both cases, they look like great plans because you don’t really contribute and you get a benefit in retirement, which make them wonders, but they’re also both probably on their way out, which makes them ancient wonders. (Photo by Barack Obama, yeah really!)

4. ETFs

These babies have the flexibility of a stock with the diversification of a mutual fund. Before ETFs, you traded mutual funds on their net asset value calculated at the end of each day. Now, with ETFs, you can do everything with it than you can with any stock, such as short it, and you can do it all day as its price is determined much like a stock is. Want to invest in diamonds? Find a Diamond ETF. Want to track the S&P? There are a ton of S&P ETFs. I’m sure if enough people wanted a Personal Finance Blog ETF, someone would sell those too.

5. Credit Cards

Like many things in life, credit cards are a double edged sword. It’s easy unsecured credit that can get you out of a jam or just give you some extra time to float a purchase. It’s easy, unsecured credit that can get you into a jam if you lose control, overspend, and find yourself unable to pay the bill after the grace period. To say that it’s not a wonder would be wrong, but to say that it’s a wonder with just an upside would be wrong as well. With one plastic card, you can bring to bear the power of thousands of dollars of purchasing; it’s enough to carry you through the difficult times and it’s enough to sink you through the prosperous times. With great power comes great responsibility. (Photo by Martin Q)

6. Insurance

Automobile, homeowners, renters, term life, medical, dental, disability, … etc etc etc. If something bad can happen to you, someone is willing to sell you insurance against it. If you’re willing to pay enough, you can insure parts of your body! However, the fact that this exists is a wonder because there is absolutely no reason why someone has to sell you protection against an unknown future. The reason they do is because they can make money, but that doesn’t necessarily mean that they’re making money off you or that you shouldn’t get insurance because you’re “losing.” Insurance buys you peace of mind, sometimes at a premium, but the fact that you can even buy peace of mind is a wonder in and of itself. Look at your situation, look at the various coverages, do you have enough insurance?

7. Personal Finance Blogs

That’s right, I’m calling personal finance blogs a Wonder of the Personal Finance World and you all probably think I’m having a swell time patting myself and my “colleagues” on the back right? There are excellent reasons why personal finance deserve to be mentioned:

• Where else can you read about regular people pulling themselves out of thousands of dollars in credit card debt? (Tricia, NCN)
• Where else can you read about the personal finance trials and tribulations of LGBT individuals? (QueerCents)
• How about the issues swirling around in someone’s head after they’ve just lost their job? (Lazy Man: lost job, his first day off, his wife’s thoughts, an update, and how he handles “how’s work” questions)

Personal finance blogs are open, honest, and they’re not written by Suze Orman, Robert Kiyosaki, or other “experts,” they’re written by regular people for regular people who are dealing with regular problems. That’s why it’s a Wonder. (Photo by nina_pope)

There you have it, the seven Wonders of the Personal Finance World; what do you think?

Last week, reader AJ sent me an email asking for ideas on where he should be putting his savings once he’s maxed out the contributions to both his 401(k) and Roth IRA. He’s 23, employed in real estate, and has fully funded his emergency fund and was wonder where he should go next.

Question: I’ve been sold on the wisdom of buying index funds and I would like to take a portion of that savings account and buy at least 3 different index funds (total stock fund, total bond fund, and a total international fund.) Reason being, I do not want to be wholly in stocks, be it domestic or internation, or bonds. However, the minimum investment is $3000 per fund at Vanguard. So at the very minimum I would have to spend $9000 to begin which is not the problem. However, if I stopped there, my allocation would be all out of whack. I’d be 33% in domestic, 33% in foreign, and 33% in bonds.

At my age, those allocations do not make sense. (Bonds and foreign, I think are too high of a percentage.)

Any suggestions - short of buying enough of each to make the proper allocations?

I told AJ that his situation and my situation are very similar, I’m not 100% sure what to do with the excess funds (not a bad problem to have!) and right now my solution is to have it in a target retirement fund at Vanguard. Now, that puts a heavy skew on stocks vs. bonds, which isn’t necessarily a bad thing. For example, VTIVX (TR 2045) is 88.27% stocks, 9.76% bonds, and it has an expense ratio of 0.21%. VTSMX, the total stock market index fund of Vanguard, has an expense ratio of 0.19%, a difference of 0.02%. The target retirement funds basically aggregate the fees of its constituents without adding anything onto them, which is great.

In terms of domestic and international exposure, you can only get at that if you look at the components of the retirement fund. The top ten holdings are: (from Google Finance)
Vanguard Total Stock Mkt Idx: 69.83%
Vanguard European Stock Index: 10.52%
Vanguard Total Bond Market Index: 10.04%
Vanguard Pacific Stock Index: 4.73%
Vanguard Emerging Mkts Stock Idx: 2.88%
Vanguard Total Stock Market ETF: 1.99%

So you’re talking essentially 82% domestic, 10.5% european, 5% asia, and 3% everything else (you’ll have to dig deeper into each fund to know for sure). Either way, a TR fund might be the easiest route to go.

However, if you want greater control and flexibility, i think your approach of selecting a basket of funds from vanguard’s offering is a good one. You’re essentially doing what these TR funds are doing, except manually, and you aren’t going to be charged more or less in either scenario.

One main reason I chose TR funds was because it was easy.

To which AJ responded with:

Ah, the target retirement fund. What an invention! All my contributions to my Roth IRA are invested in VFIFX, the TR 2050.
I could just put all my excess money ALSO into VFIFX, but for some reason I shied away from doing that. But, it seems, now that I think about it further, that I didn’t/don’t have a good reason for that aversion….

In addition to the fact that it’s comprised of index funds (diversification element #1), it also invests in different TYPES of index funds: stock (domestic and foreign), bond, among others (diversification element #2). Which would solve my problem of having to invest over $20k in order to get the same diversification in picking individual funds…

Hmm… maybe my hesitancy was based on “not putting all my eggs in one basket?” Which really doesn’t apply here because of the above, right? Complicated.

I told him that I had the same reaction when I decided to invest some of my Roth into the TR2045 too, I just felt odd putting so much into one fund but the fund is diversified. I guess it’s just a reaction to the idea that it’s one stock ticker, not so much the underlying factors. I think the eggs in one basket doesn’t apply but I think the reaction is very natural (mostly since I reacted that way too!).

It’s hard to decide what to do because there isn’t much guidance out there and the guidance out there isn’t necessarily right for everyone. Once you get past 401k and Roth, it’s pretty much wide open because very few people have the ability to save beyond 20k a year strictly for retirement (if you subscribe to the idea you should contribute your 401k to the max). Plus, there are so many people within the min max/Roth max bucket that catering to those outside of it doesn’t seem to pay for mainstream media.

That being said, I think a target retirement fund is a good idea but that’s because it’s easy. You might want to consider other assets other than stocks and bonds, perhaps investing into other things like gold, jewelry, real estate or art (I know nothing about it, just throwing out some of the more non-standard investment instruments) might be worth investigating. It all depends on how much time and interest you’re willing to spend, plus how much you’re willing to risk.

What do you all think? What would you recommend for AJ?

The other day I was talking with someone about rolling over their 401(k) into a Rollover IRA and they asked how they should mail the check. They were debating whether it was “worth it” to mail the check by regular mail or if they really absolutely had to mail it via certified mail. I told them that when I did it, I mailed it by certified mail because I really didn’t want to deal with the headache of getting another check if the first one was lost. It makes sense to use regular mail for some things and certified for others, conserve when it makes sense and don’t when it doesn’t make sense.

Tip of the day for all you frequent mailers, there’s no point putting something into a Priority Mail package unless you really just want to use that package because it isn’t treated any differently. Since there is no guarantee, unlike Second Day or Next Day, the package travels just as quickly as your typical First Class package; except you’re paying more for no reason. The only way you can win by using Priority Mail is if you use the Flat Rate boxes, then you can potentially save yourself some cash.

(read full article…)

Representative Charles Rangel (D-NY), Chairman of the House’s Ways and Means Committee, unveiled a huge $1 trillion tax cut bill. It’s a bill designed to get everyone talking about it, rather than skirting the issues, though anyone thinking the House will pass it is likely misguided. I read CNN’s overview of it and wanted to share some of my thoughts with you all (and hope you do the same with all of us).

Decrease: Action! Action! AMT Repealed!

The bill would repeal the alternative minimum tax, rather than patch it for another year, and this is the marquee headline of the bill. I personally think a full repeal is foolish, why not adjust it and then index the dollar amounts with inflation? The idea was to stop the wealthy from taking unfair tax breaks, which is something I think should still happen, so why repeal it entirely when you can help the middle class while still keeping with the spirit of AMT?

Ultimately the goal of the bill seems to be to get discussion going on the AMT, so what better way than to just axe it? Most experts believe that another one-year patch will be put on the AMT to help the estimate 800 billion people likely to be affected by it (yes, 800 billion is a totally made up figure, but that number doesn’t actually matter unless you’re one of them!). It’s like putting a band-aid on an infected cut; it’s nice that you’re doing something, but let’s fix it instead of putting it off.

Decrease: Higher Standard Deduction

An increase in the standard deduction of $850 for joint filers and $425 for single filers, which, in theory, actually helps the affluent more than it helps the middle and lower classes. In theory, if you are in a higher tax bracket, you’re taxed at a higher rate. Thus, by increasing the standard deduction, you actually decrease the tax on a higher income earning person. Now, in practice this idea will help the lower income folks because they are more likely to take the standard deduction. As the standard deduction increases, the idea that buying a home is better, for the tax benefits, will become less and less clear.

Decrease: Easier Child Tax Credits

Without getting into the muck of this particular proposal, I think anything that allows more tax credits for families with children is a good thing. With the rising cost of college, two income families, and other children related items, I think we need to be fostering an environment in which children of all economic classes are able to flourish. Now, this puts the onus on the parents to actually spend that money on the children, which may or may not happen.

Increase: 4% Surcharge, $200k+ incomes

And the warm fuzzies end as we get into the part where the reform talks about paying for the first three tax decreases… The idea with this particular piece is that married with $200k+ in AGI and singles with $150k+ in AGI would have a 4% surcharge on the sum above that limit added onto their taxes. For those over half a million, it’s a 4.6% surcharge. This, in combination with a repeal of the AMT, would theoretically result in lower taxes for those making less than half a million.

Everything Else

That ends the provisions that most directly affects most of us, the rest include additional taxes on fund managers and businesses that will impact us indirectly. Anytime you tax businesses, it has the potential to stifle growth (duh! less money on investment) but I think that’s in part fueled by how people, businesses included, don’t like to be taxed more. However, if you look at the tax cuts, they’re really just closing loopholes like accounting magic (valuation of inventories would be affected), corporate tax break loopholes, and empower the IRS to penalize companies dabbling in chicanery. In fact, the bill actually proposes to reduce the top corporate tax rate from 35% to 30.5%.

Summary

Other than the AMT, this bill doesn’t really do much for me from the perspective of real change. So you tweak a few things here, tweak a few things there, why not just clean up the whole million page IRS code and make things easier on everyone? I think every time I see one of these “mother of all tax reform” announcements, I think about how simple life would be if we had a flat ax or consumption based tax.

What are you thoughts? Fire away!

Photo by dnarotski.