My friend sent out an article today about how Baltimore is predicted to see its housing prices fall 27.8% in the next five years. 27.8% over five years is approximately 5% each year for five years… that’s the prediction. I think predictions like that are worthless and why I generally ignore them.

Reason 1: Where Were You Four Years Ago?

If you can predict the future with absolute certainty, why couldn’t you predict we were going to enter a slowdown in 2006 back in 2003? The market’s been somewhat slow for over a year now, so why didn’t we get some advance warning? The reason why is because you can’t predict the future. You can make an educated guess about what will happen next year, maybe the year after, but five years? C’mon now.

Reason 2: Experts Say What Is Popular

Wouldn’t you like to get one TV? What about see your name in the newspaper or magazine? Of course you would and so do experts. That’s why they will look at the data and why a lot of them will come to the same conclusions. When the market’s hot, it’s blazing hot. When the market’s cold, it’s sub-zero. Experts are likely to say those things because that’s what will get them on television or into magazines and newspapers.

Reason 3: Experts Are Never Called Out

Do you have any idea who said the housing market was sizzling hot right before it tanked? Probably not, that’s because no one keeps track and no experts are ever called out when they’re wrong. When things go sour, some CEO gets canned. I bet they wished they had these experts tell them that subprime was going to go into the toilet and their SIV’s were going to get them axed (though they both received handsome paydays).

What do you think of all the housing doomsday experts? (the ones that do scare me are the experts talking about the dollar and the exchange rates, so I can’t claim total rationality, I mean the Canadian dollar is worth more than the US Dollar! Insanity!)

My fiancée and I play Scrabble all the time, in fact, our love for Scrabble has gotten to the point that we’ve actually moved on to Super Scrabble (think Scrabble, but much larger board and more tiles). So, when my fiancée suggested I have some fun with a Scrabble and Personal Finance post, I thought it’d be fun.

#1. Patience, Patience, Patience

To win at Scrabble, you have be more than just good with words. With Double and Triple Word Scores and Double and Triple Letter Scores, if you’re able to position words such that you land on these spots, your scores will be increased exponentially. This means that you need to be patient in when you use your tiles. In Personal Finance, it’s all about patience. Compounding is a powerful idea because it requires a tremendous amount of time. 11% annual gain on $100 is only $11 that first year. If you think you can play around, time the market, do all that mumbo jumbo, then you’re putting that at risk. If you’re patient enough to let that 11% accrue over 40 years, then you’re talking $6400 gain.

#2. Early Lead Means Nothing

Slow and steady wins the race right? It was true for the Tortoise and the Hare, it’s certainly true for a lot of other things, including Scrabble. You could build up an early lead with the bonus point spaces in the middle but as the game progresses and those Triple and Quadruple (if you’re playing Super Scrabble) word score squares get closer and closer, even a fifty or hundred point lead could evaporate in a single turn. This is true in real life, how many fantastically rich heirs or heiresses see their fortunes get blown on a series of bad decisions? How many fantastically rich individuals built it from the ground up in one generation? While having an “early lead” sure is nice, it’s neither an assurance or a guarantee that prosperity is in the cards for the future. Not having the lead early also doesn’t prevent or hinder you from success down the road. While your history does play a role in your success, you play a much bigger role.

#3. The Harder It Is, The More Valuable It Is

Q’s and Z’s are notoriously difficult to use in Scrabble but you are handsomely rewarded if you do use them. The same is true in personal finance on every single level. Tax preparation is not particularly difficult theoretically, it’s just complicated with a million rules and a million “gotchas.” However, if you understand it well enough, there are rewards to be taken. One very easy (almost too simplistic) example was the telephone excise tax refund that lots of deserving people just ignored because they didn’t know, didn’t think it applied, or just forgot. Now, take that same idea and extend it to something like investing. Investing in the stock market seems scary because it is. Think of the pictures of the NYSE trading floor, all the business, all the action, the thoughts of the Dow jumping 300 points or being slammed for 300, it’s a lot of activity and can be very scary. Deciding between “maybe I get 11% return this year” vs. “100% guaranteed 4% return from an online savings account or CD” might always have you picking the certain 4% instead of the maybe 11%, but taking the time to understand something like the stock market is important because 11% is a lot when you’re talking about decades. So, tackle the hard things.

#4. Plan Ahead

Remember when I said that an early lead in Scrabble doesn’t guarantee victory? Well, sometimes having too early of a lead, such as using up valuable pieces early, can be a detriment as the tiles get closer and closer to the valuable point multiplier spaces. That being said, it’s really important to plan ahead and figure out when you should throw out “ZOO” so you can land it on a triple word or triple letter score. Planning ahead is also one of the most important ideas in personal finance because it can save you a ton of money. Making a big purchase? Plan ahead by budgeting and saving some money so you can put down a bigger down payment and get a better interest rate. Retirement is all about planning, planning for forty years down the road when your brain is barely thinking a week away.

#5. Work With Others

My favorite letter in the whole game is “S” because it allows me to work off the words others have created to start a completely new chain. Not only that but I get the points of the original word (plus 1 for the S) as an added bonus. If I’m strapped for points and it’s getting to the end of the game, an “S” is a really cheesy way to try to catch up off words that might already be valuable on their own. Life, personal finance included, is all about relationships and working with others to achieve common goals. You read personal finance blogs because you want to learn more, I write personal finance blogs because I want to learn more (and am very thankful when everyone adds their thoughts, corrects my errors, etc.), and we all are better off than if we just kept to ourselves..

#6. Get Another Perspective

Sometimes it’s hard to figure out where you can play or what your tiles could potentially spell, so it’s helpful to just jumble up the letters or look at the board from a different angle. In finances, it’s hard to know where your holes are and so it’s helpful to talk it through with a trusted friend to see if there’s something you’re missing. If you’ve never heard of the Roth IRA, you wouldn’t realize the benefits or that you should have one. If you have misconceptions about a 401(k), unless you bring them up with someone, you’ll never clear them up because you don’t know that they’re misconceptions. You don’t necessarily have to find a financial planner, sometimes talking to a friend and getting their perspective can help a lot.

#7. Take A Break

Regular Scrabble can go pretty quickly but Super Scrabble, with so many more tiles and spaces, can sometimes take a while. We often take little breaks, to let our little brains take little naps, so we can go at it with a relatively more renewed spirit. If you then take this towards retirement planning (or any other problem, personal finance or otherwise), consider taking little breaks to help recharge your brain and re-energize your spirit. When I was breaking down my retirement account asset allocation, I took a little break between when I collected all my asset amounts and when I did the math. Why? I was tired of the copy and pasting and all the research it took, which was really all of thirty minutes, and I didn’t really feel like continuing. Had I kept plowing onward, maybe I would take some shortcuts that would bite me down the road? Ultimately, I feel that taking little breaks allows you to renew and go back at the problem 100%.

#8. Be Gracious In Victory

Some days you will win, some days you will lose, but ultimately you will always play again regardless – so be gracious. Be a good winner, be a good loser, because ultimately the game doesn’t really matter and it’s, back to #5, all about relationships. In life, sometimes you’ll win, sometimes you’ll lose, but ultimately you will play again so don’t burn your bridges because you might need to go back. So it didn’t work out with you and your accountant or you and a business partner, life moves on, so shake hands, part ways kindly because your paths may cross again and everyone remembers someone who slights them. Burning bridges helps no one.

There you have it! Eight, count them, eight personal finance lessons from the tiles that I think are crucial for both Scrabble and personal finance. I had a fun time coming up with them, I hope you had a fun time reading them. I’m by no means either a Scrabble master or a personal finance master, but I’m good at tying together seemingly unrelated things into something almost related and hopefully clever for you all to enjoy. I thought I was pretty good at Scrabble until I told my friend Mike, a teacher down in Florida, that I’ve gotten the 50 bonus points for using up all 7 tiles maybe two or three times ever and then he said he does that two or three times a game (it’s a little easier in Super Scrabble). Maybe that’s why he’s a teacher and I write code.

I’ve always said that borrowing from your 401(k) is a bad idea. However, the other day I was talking with my friend Miller when I erroneously told him that one of the reasons I thought it was a bad idea was because you paid back the loan with post-tax money even though you borrowed pre-tax money. You don’t pay back with post-tax money, you pay your loan back through payroll deductions so it’s with pre-tax money. If I was wrong on that point, I had to do more research to see if my opinion of borrowing from 401K’s was even right in the first place.

It turns out, thanks to reader Tom who confirmed this, that you pay back the loan with post-tax dollars, so my original understanding was correct. I still think 401K loans are a bad idea and the fact that you pay back with post-tax funds make it even worse.

A few things to note, while the law allows your employer to offer the 401K loan, it doesn’t require your employer too. While it’s estimated that most employers do offer it, not every single one of them does so check first before you start making plans. If your employer does, then you’ll generally be allowed to borrow up to 50% of your vested account balance up to $50,000 as long as you haven’t taken a loan in the last twelve months. If you have taken one in the last twelve months, then your max is deducted by that loan amount – basically each 12 months you can borrow up to 50% or $50k, whichever is smaller. There are a few other rules specific to your employer like the minimum loan amount (this is just to reduce the headache of paperwork) and any associated fees.

Here are the advantages of borrowing from your 401(k):

• It’s generally really easy, no applications, no credit checks, none of the annoyances with typical loan application processes.
• Decent interest rate, generally a point or two above the Prime rate, and that interest is paid to your own account anyway.

What are the disadvantages?

• That interest rate is usually less than what the account could earn on its own with the money, plus you’re paying it anyway so it’s not coming from the market.
• The loan payment taken from your paycheck might tempt you to reduce your contribution resulting in less in savings.
• If you leave your employer, for any reason, you have to pay back the loan immediately (or within 60 days). If you can’t, it’s considered a withdrawal and you’ll owe taxes and a penalty on it.
• The terms of the loan are set in stone and there might be some fees involved. You generally pay back the loan over 5 years, it’s more if you use it to purchase a primary residence (10-15 years).

So, should you borrow from a 401k? That depends!

I have to admit, I’m not a loyal shopper whatsoever. I’ll buy what I want from whatever store will sell it to me for the cheapest (I’ll give other considerations like warranty, return policy, etc.) and generally the loyalty plan means very little to me because I don’t want to be tied down to any one store. It doesn’t matter to me that a store will give me 1% of my purchases in store credit or they will give me a purse if I spent $500 (I think Target’s reward plan involves a 20% coupon for every $1,000 spent, that’s crap!), ultimately I will save more by going for the cheapest price than by using a loyalty program. That’s why I didn’t really find the first part of Trent’s post on how to maximize customer loyalty programs all that useful personally. However, at the end of the post, he talks about the loyalty program he uses and it piqued my interest because I never paid attention to many loyalty programs (and because he mentioned that Borders “neutered” their program).

The only loyalty program I’m a part of is the Southwest Rapid Rewards program. I joined because I could fly from Baltimore Washington International to Islip on Long Island for around $70 and get a free ticket, worth approximately $300 each, after four round trip flights (I fly when they offer double bonus points, which is pretty often since they were trying to grow both airports). For those doing the math at home, that’s a cash positive deal for me. That’s probably why I like it so much!

What’s your favorite customer loyalty program? And how good is it?

Ever hear someone mention that they don’t want to have kids only to hear, invariably, someone ask “why not?” The reason people ask is because having kids is the norm, actively not having kids is not the norm, and so in this DA post I tackle the reasons I think one would decide against having children. I think this particular post falls into the realm of personal opinion and desires, not “good” or “bad” advice, so it’s slightly different from other DA posts.

Kids Are Expensive and Time Consuming!

The number one reason why having kids is a bad idea is that they are expensive and they require a lot of time (time is money!). Given the cost of a hospital stay, which is almost unavoidable, your upcoming kid is already costing you a lot of money and they haven’t even been introduced to the world yet (Read Connie’s story about how much it costs to have a baby). Afterwards, this little tyke is going to eat a ton, run through clothes like it’s the Running of the Brides at Filene’s Basement’s Bridal Gown Sale, and they’re going to have ridiculously expensive hobbies. That’s before they leave elementary school! As the years go on, they get more and more expensive, culminating in college. College, while not required (see this DA post on why you don’t need college to succeed), is basically the minimum of education demanded by society if you want to make something of yourself (or at least that’s the public perception of what society demands).

Tremendous Responsibility

Once you get the past the money, there is a tremendous amount of responsibility when you’re raising another human being. Not only will they be expensive, but you’ll also feel compelled to spend that money because you want your child to succeed. Marketers will bombard you with advertisements about how your child needs to have the latest learning gadget, or how they need to be in this plan or that plan, or how you can’t buy thing particular product because it’s not as good for you as their product. You’ll have to make these decisions, try to make them independent of cost, and still try to provide what you need for your kid to succeed? It’s like when people say they won’t go to the cheapest person for Lasik even if they’re certified and have done thousands of them, they don’t want something that important to be dependent on price; well, are you going to buy the cheaper cereal or do you not want what your child eats to be dependent on price? What’s more important, your child’s health or your eyes? Do you want to be making those decisions?

Your Life Is On Hold

I can’t imagine having children in my early twenties, but that was the norm many many years ago. Heck, I can’t even imagine having a child now, at the age of 27, when my parents had me. With so many young professionals focused on their careers, it’s very difficult to for someone to put it on hold, if only for a little while. Certainly there are plenty who find it more important to raise a family than it is to generate income but many young professionals want to work, advance in their organizations, and make the big dollars so they can, maybe, relax in their older years. Women are no longer looking to become housewives and I think they shouldn’t have to be compelled to feel that way, just like men don’t often look to becoming stay-at-home dads. So, asking anyone to put their career on hold might be a little unreasonable.

I think those are the main reasons why people wouldn’t want to have kids but to be perfectly honest I don’t know (we want children) for certain because I’ve never broached the subject with anyone. If you’re on the “No kids” side of the argument (or at least “no kids for a few more years”), please do share your thoughts. If you’re on the side, I’d love to hear your opinion about these reasons.

To be entirely honest, when I was requested to take a look at Russell Bailyn’s Navigating the Financial Blogosphere: How to Benefit from Free Information on the Internet, I was a little surprised a book like this was going to be published… let alone by John Wiley & Sons, a reputable publisher. I accepted it because I really wanted to see if Blueprint for Financial Prosperity would be in it (it is!) and because I wanted to see what exactly Russell Bailyn would be saying about “my industry.” I didn’t know who Russell Bailyn was until I received the book’s information and he is a wealth manager with Premier Financial Advisors, a financial planning firm. He’s a big contributor at Seeking Alpha and Trading Markets, both of which have feeds that go right into Yahoo! Finance.

The main thrust of the book is that there is a tremendous amount of free information in the Internet in the form of forums, blogs, and other consumer generated media; and that information is made more valuable by virtue of all the contributors adding more to the discussion. That is, because people can post to a forum, because people can leave comments on a blog, that collective intellect is just as valuable as whatever an “expert” says. I wholeheartedly agree and listed that as one of the seven wonders of personal finance last week.

The book really is a resource about the resource that is personal finance websites and blogs. It covers many personal finance topics from a relatively high level (such as describing what a financial adviser is and does), sprinkling in some blogs or sites worth mentioning. It was definitely a vanity play for me to see a lot of sites I read be listed (including Blueprint for Financial Prosperity) but I find it difficult to recommend this book to anyone who is reading this review because you already know about personal finance blogs. You’re probably pretty web savvy and you don’t need a book to tell you that blogs are valuable (they are!).

If, however, you do have a blog, maybe you want this book because then you can say your blog is in a book.

I wonder if this is a good or a bad thing. Tuesday night there was an magnitude 5.6 earthquake in Alum Rock, CA near San Jose near midnight EST. I learned about it at around 12:05. You might be wondering if I sit by my computer hoping to catch the first news of the day, well I don’t. I found out someone on XBox Live, who lived in San Jose, in the middle of a game of Halo 3 said “Oh crap, what was that? I think we’re having an earthquake.” Amazingly, he never lost power and kept on trucking.

In somewhat unrelated news and totally off the topic of personal finance but totally on the topic of video games, I can’t wait until Call of Duty 4: Modern Warfare comes out on November 5th. I tried to get into the stupid beta but their site was all manner of jacked up so I never got in. I loved the video-gamey COD3 and played that all the time so this version is probably going to get me all addicted (as if Halo3 wasn’t enough).

(Click to continue reading…)

As I wrote this morning, I opted for the Maryland 529 College Investment Plan (CIP) over the Maryland 529 Prepaid College Trust (PCT) when I enrolled and I did so for a variety of reasons. First off, the Prepaid College Trust is like prepaying and locking in the rates of a Maryland educational institution today but for use sometime in the future (at least three years in the future).

Can Only Enroll Beneficiary After Birth

This made the PCT impossible for me because we don’t have any children yet. The CIP lets me name myself as the beneficiary and then roll that over to my child when he or she is born.

However, let’s say I have a child and the PCT was an option, would I still do the CIP? Yes, here’s why.

1. PCT’s “Legislative Guarantee”

With the CIP, my after-tax assets are put into various funds that grow tax-deferred (tax-free if spent on educational expenses). The PCT, it’s like Social Security, I pay into a system that will put it in a group of investments that will guarantee I can get a payout when my child enters college. If there is a shortfall, then the Legislative Guarantee says:

… the Governor to submit a request for the Prepaid College Trust in his/her annual budget if the Prepaid College Trust experiences a shortfall in any given year. As with the entire State budget, this request would require General Assembly approval.

What happens if they don’t approve it? What if there is a huge shortfall and no way to fund it? Those are questions that I don’t see answers for and one of the fundamental problems I have with these sorts of guarantees (like Social Security). I’d much rather prefer to have an account with funds in it that I know is there and isn’t spent elsewhere.

2. CIP: Potentially Higher Returns

With the CIP, I’m banking on market returns on my funds that may be outpaced by the increasing costs in education. According to their math, the University of Maryland’s tuition and mandatory fees increased 90% in 10 years, or 6.6% each year. Johns Hopkins University increased 63% in 10 years, or 5.0% each year. Now, if your think the market will return 11% on average, you’ll want the CIP.

3. Flexibility Over Price

If you’re certain that a Maryland college is where your child will be going (and the Legislative Guarantee placates your concerns over future fundability), then the PCT is probably your best bet because it guarantees the cost. If you’re not so sure, the PCT’s value for a college outside of Maryland is limited to the “Weighted Average Tuitions” of four year colleges. The increase in how much they’d pay per year for a public college outside of Maryland was a paltry 1.6%; that isn’t that impressive considering they spent the first half of the PCT FAQ telling us about the 90% in ten year increase in UMD’s prices.

Ultimately, the guarantee part was what concerned me but the Flexibility over Price issue was a close number 2. The potentially higher returns part wasn’t as big a factor as the other two but I felt is deserved some mention because ROI should always be on your mind when making investment decisions. Talk to a professional because you make any decisions, these are my opinions and I have little experience in this arena.

For those Marylanders (or outside Marylanders who are enrolled in either program) in 529 programs, how did you pick which plan to go with? For those who are thinking about it, what are the issues on your mind?

I’ve talked in the past about the Maryland 529 plan and today I pulled the trigger and enrolled. In Maryland, you get up to a $2,500 deduction each year on your state income taxes (if you contribute $2,500 to the plan) if you are a Maryland resident. It’s not a tremendous amount of money back in our pocket considering it’s a 4.75% tax ($118.75 rebate) but since I’ll be spending money on education in the future anyway, $118.75 for something I should be doing anyway makes it just icing on the cake. Plus ultimately it’s a hundred bucks and that’s not trivial, it’s just seems small percentage-wise.

In Maryland there are two programs, the Maryland Prepaid College Trust and the Maryland College Investment Plan, the latter of which is managed by T. Rowe Price. I’m doing the Maryland College Investment Plan because it gives you more flexibility in terms of where the money can be spent and I figure my kids are all going to be little geniuses and going to the most expensive private school that’s located the farthest away from where we’re living at the time. Whether or not they’re going to be geniuses probably has nothing to do with the expense or distance factor, but I can still dream and Murphy’s Law says the second half of that statement is an absolute certainty.

Signing up for the plan was trivial and took a maximum of ten minutes. I went to College Savings Plan of Maryland, located the Enrollment form for the Maryland College Investment Plan, and was signed up in about five minutes. You simply need to decide on a username, pick a six digit pin, then open up an account. I’ll be naming myself as both the Account Holder and the Beneficiary, as I don’t actually have any kids yet. You can always rollover the account to another beneficiary without tax penalty if the recipient and the original beneficiary are in the same family. If they aren’t, there are some tax penalties.

After setting up an account comes the time to fund it. Simply mail a check or money order of at least $250 and the account is up in a jiffy. You’ll have to specify which funds to put it in but that was pretty simple.

Fee-wise, Maryland was pretty good and they’re getting close to the next tier of assets, $2B, when the fees fall even farther. I was pretty surprised to learn that the fees are related to the assets in its control, something you never see with mutual funds or things like that. In fact, because they had so many accounts and over $1B in assets that they took away the application fee ($75) and lowered a few other fees.

If you’re thinking about a Maryland 529, I’d read over this Disclosure Statement and FAQ. It’s pretty comprehensive and written in easy to understand language so you won’t have to wade through lawyer-speak.

(Photo: lednew)

A recent article on Wall Street Journal talks about how some people are glad they rented instead of bought because of the recent housing slowdown. What I want to know is why timing the housing market is okay, but timing the stock market is the greatest sin in all of personal finance (it’s not, but sometimes people make it seem that way). The argument against market timing in the stock market is that the market is random, that it trends upward, and your horizon should be far enough away to handle any hiccups. The idea is that with it being random, trying to sell at peaks, buy at valleys, and all that mumbo jumbo is a losing proposition, especially after fees.

Real Estate Timing!

So why is timing in the real estate market any different? The prices aren’t random and don’t move quite so much, but they’re difficult to predict. Here in my neighborhood, five houses have sold in the last twelve months (of the six listed) and each sold within a week to two weeks of being listed. Each sold for about 7%-10% than what I bought my house for two years ago, which shows some year over year growth (not the crazy growth of a few years ago, but healthy reasonable growth). The lone house that sat wanted a good 20% more, which was clearly over-priced. If you waited to buy a house in this neighborhood, it wouldn’t have mattered.

However, in the city, where newly renovated rowhomes and brand new condos were being build and listed with ridiculous prices; those prices sank like a rock. Homes that were once listed around $500k are now at $400k. The only difference was that those homes were newer, being purchased by people with more money than ability to recognize value, but the same geographic area (Baltimore, MD). So, why did those fall more than other areas? Who knows. It’s difficult to predict when supply will outpace demand.

I’d Probably Be Renting

That being said, I hate unyielding adherence to conventional wisdom (which says you should always buy and not rent because rent is throwing away money). Conventional wisdom works if you’re conventional, except most people aren’t conventional and even if they are conventional, they’re usually not in a conventional environment. If I didn’t own a house, I’d probably be renting right now only because I don’t like putting myself into long term relationships (mortgage) in an uncertain environment (housing).

What about you? Renter? Buyer? Glad you did either? What are your future plans?