The biggest strike against renting furniture is that it’s expensive. After doing some quick research online at Cort (it gave me the DC rates), you can rent a nice queen bedroom set for under $200 a month. A comparable bedroom set from a department store would be around $2,000. So you’re paying a significant premium when it comes to renting furniture. I don’t think anyone would dispute that the biggest strike against renting furniture is cost.

So why would I advocate renting furniture? Sometimes the situation requires it.

Short Term Living

If you aren’t going to be living long term in an area, renting furniture can reduce a lot of the hassle. Furniture rental stores will return you furniture for as little as 3 months (most quotes are for a 6 month rental). At three months, it’s a lot easier to rent a queen bedroom set for $600. You don’t want to buy a $2,000 set and try to sell it in 3-6 months because you probably won’t get $1,400 for it.

You Don’t Have To Move It

When you rent furniture, the rental company will deliver and pick up the furniture. If you’ve ever moved, the biggest pains (besides a million boxes of kitchen goods) in a move involve the furniture. It’s big, it’s bulky, you’re always afraid you’ll mash it up against a wall and damage it. When you rent, you take that headache out (for a price!) but sometimes it’s nice to avoid some of the headache especially if you’re crunched for time and have a lot of things to take care of.

Complete Your Needs

Finally, sometimes you just need one or two more items to satisfy your furniture needs and you don’t want to pay out the up front cost to get the items. Renting can solve your problems by getting you a few items, at a monthly rate, that you can return once you’re done with them. Perhaps you use this strategy to get the couches or the bed frames, spending the money on smaller, cheaper, items that are easier to move or store if you need to (like end tables and coffee tables).

Remember, it doesn’t have to be an all or nothing proposition. You can always buy some items and rent other items as you see fit.

What are your thoughts on renting furniture?

Rent Your Furniture from personal finance blog Bargaineering.com.

I figured it would be much higher and I thought of the article that appeared in my hometown newspaper that told the story of a city bus driver who was making $98,000. There are truck drivers and rig operators in North Dakota who are transporting oil for salaries starting at $100,000 with an almost endless amount of overtime and apparently those jobs are still plentiful. They can’t find enough workers to fill these jobs! Some of these sometimes called “roughnecks” are almost half way to the 1% club after bonuses.

Did you know that the 1% earned 17% of the nation’s income and paid 37% of all income tax in the United States, according to CNN? CNBC, in a recent on air report, said that in reality only 3% of the 1% club is actually in the financial industry, by the way.

According to Wall Street journalist Robert Frank, who released a new book, “High Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust”, rich people spend a lot of money and by spending large sums they keep a sizable amount of people in business.

Yacht and airplane builders, people who are building the 1%’s vacation homes, high end retailers like Tiffany, high end restaurants and caterers, and country clubs and those are just the direct effects. There are a whole host of companies that see indirect positive impact from the spending habits of the rich as well. If that’s true, it seems to at least in part refute the idea that rich are taking a lot and giving very little. If you’re looking for some interesting reading, pick up Frank’s book.

Still, I don’t think many are denying that the rich have a disproportionate amount of the nation’s wealth. The top quintile of income earners hold 80% of the nation’s wealth yet receive tax breaks that others do not. Billionaire investor Warren Buffett paid only 17% of his income in taxes while the middle class paid an average of 20.4% according to the CBO report issued in June of 2010 of demographics back to 2007.

I’m definitely on the side of Warren Buffett who believes that the rich should pay their fair share but I’m not as sympathetic to those people who believe that wealth should be evenly spread. I appreciate the idea that it should be more evenly spread but I don’t believe that capitalism is all about fairness. According to some macroeconomic theories, there is a reason for the income gaps and most don’t have much to do with what the protesters believe.

First, there is less demand for unskilled labor as more of those jobs go to other countries or become computerized. Next, the wealthy have the ability to invest in wealth producing products like real estate, stocks and bonds, and derivative products and yes, it’s true that a cut in the income tax for the wealthy had an effect as well. Is it realistic or reasonable to ask the rich to not take advantage of legal means of cutting their taxes? How many middle class households voluntarily give up tax deductions that they are legally entitled to?

Let me get to the point:  Maybe this controversy is best solved by meeting in the middle. There’s a lot of talk about the income gap but very little about the fact that wealth is built over time by doing the right things with our money and America, as a whole, is a country full of not bad, but awful household money managers. I feel comfortable in my belief that every household in America could cut expenses somehow or could have made better decisions in their past that would allow them to be in a better financial position today.

The millionaire next door is the millionaire who saved and invested all of their life and retired with seven figures. Maybe the rich can pay more taxes but the rest of us can get radical with how we spend and save. I’m not saying it will solve the problem but let’s be honest. We wouldn’t much care how the top 1% lived if unemployment were lower and wages higher. We’re a little tired of this economy and that’s ok.

Maybe it’s time to not worry so much about the rich and go after the people we have the power to change: Ourselves and our own financial habits. Call me too idealistic but I still believe that America is a place where anybody can be anything that want to be. Dave Ramsey believes that we just don’t get radical enough with how we take control of our finances and I completely agree.

How about we meet in the middle. The rich can pay more taxes but we can do a better job of managing our own money. I don’t know about you but I’ve had a much easier time changing me than trying to change others.

What do you think?

Is it Time to Leave the Rich Alone? from personal finance blog Bargaineering.com.

Your Index Fund Could Have You Buying High

If your index fund is weighted according to market capitalization, it could mean that you are actually buying high, rather than buying low. When a company becomes more expensive, due to P/E ratios, the index fund needs to increase the holdings in that company — and sell off a cheaper company to do so. Plus, many indices take a long time to get rid of companies that are losing value. One example is General Motors. The company had a share price of $93 in 2000, and then declined steadily. The company wasn’t kicked off the Dow Jones Industrial Average until 2009 — when the share price had plummeted and GM was on the verge of bankruptcy.

Your investment in index funds could actually have you buying high and selling low, which, as you know, is a terrible investment strategy.

There’s Still Risk Involved

While index funds pushers love to tout their relative safety, it’s important to realize that there is still risk associated with index funds. This means that you could still lose out. If the stock market crashes just before you need your retirement account, stuffed full of index funds, you’re still out of luck. Sure, index funds are likely to be a good bet long term, but a sudden crash just prior to your golden years of retirement will harm you must as much as the next person, and you’ll have to wait for the market to recover before you see some positive movement in your portfolio.

Why Aren’t You Doing Research?

It seems terribly convenient to invest in index funds because you don’t have to do research. However, you should be research most of your investments. Even if you do invest in index funds, you should be researching them. There are different indices, and they have different holdings, as well as different options for your money. You should know what is on any index you invest in.

Plus, once you realize that research can benefit you, it might become more attractive to you to do some research. Finding individual value stocks at bargain prices can be a bonus, and you might discover that you like dividend stocks as well. A little research can go a long way toward helping you build your wealth through investing. Investing in index funds, though, is just an excuse to be lazy when you should be taking an active interest in your investment portfolio.

Don’t Invest in Index Funds from personal finance blog Bargaineering.com.

Almost.

In this post, I’ll argue why you shouldn’t save for retirement. That’s right. You should not put money into your 401(k), your Roth IRA, or any of the other alphabet soup account names.

Mini-Ponzi Scheme

A Ponzi scheme is an investment scheme where the fraudster secures investments from unsuspecting investors. He or she continues to get these investments, promising fantastic returns, but pays those returns with incoming money. They usually fall apart when the scammer mixes up paperwork (usually because it gets too big), experiences a run on investments (people wanting their money), and the game is over.

Let’s look at the stock market as a whole and it’s very much like a Ponzi scheme. The market is zero sum – you make money because someone, or several someones, loses money. The stocks themselves have no intrinsic value, they represent ownership but in reality they are just pieces of paper. They’re no more valuable than money, intrinsically, but you can at least spend money on the street (good luck trying to buy milk with shares of Apple).

With your retirement assets, you usually can’t touch them until you retire, or face stiff penalties. This means that you have a built in protection when it comes to the Ponzi scheme. Whereas someone invested in a Ponzi scheme could withdraw their funds in bad times, we’re taught to “weather” those bad times and keep our money where it is because we won’t need it until retirement. We have forty (or thirty, or twenty) years of future Ponzi scheme suckers to boost our values up.

Enjoy Life Now

I’m all for putting the minimum in a 401(k) to get a company match – free money is free money, even if I can’t touch it for a few years. As for putting more? Skip it, take that money and enjoy it while you can. As you work more, get raises, and move up the ladder, you’ll find that your income will rise as well. You will also find that the amount of time you have will diminish, especially if you start a family or take on a lot of work. Try to enjoy the fruits of your labor while you are young and have enough time to do it. Travel Europe when you’re in your twenties, don’t put it on a bucket list to tackle when you’re 60. You won’t move as easily then.

What do you think? Devil’s Advocate make a good point here?

Don’t Save for Retirement from personal finance blog Bargaineering.com.

The tenet is true, buying a good used car will save you money over buying a brand new car. There are, however, plenty of reasons why buying new might make more sense.

In this latest installment of the Devil’s Advocate series, where I argue the other side of classic personal finance advice, I’ll look at the reasons why buying a brand new car might not be so bad after all.

Car History

The biggest reason why buying new is better than buying used is that you know the history of the car. You don’t know if the former owner maintained it as well as they claimed to have maintained it. Did they make every oil change as scheduled? (unlikely) Did they get every checkup as scheduled? (unlikely) Even the most well intentioned owner misses checkups and oil changes by a few hundred, or a few thousand, miles.

For manual transmissions, you also don’t know if they were seasoned drivers or learned how to drive stick on that car. Did they completely ignore speed bumps and run right through pot holes? Even the most thorough inspection won’t be able to tell you those things with absolute certainty.

When you pay more for a new car, you are buying that certainty. You are writing that history.

Depreciation

A new car loses value when it drives off the lot but it’s not nearly as many people believe. I’ve heard numbers as high as 50%! Depending on which car you buy, the actual depreciation is much lower. According to Bankrate, a car loses 15% to 20% of its value each year with a steeper drop in the first year for a variety of reasons but much of it has to do with the other costs of buying new. For example, taxes and licensing are costs that the car “loses” immediately.

There are also a variety of promotions a dealer can offer that, should you not take advantage of them, reduce the price of the car. The key is to take advantage of those offers! While you won’t be able to prevent the car losing much of its value, you can cut into the big drop as much as possible with smart decisions.

Scams

It’s usually pretty hard to get scammed by a car dealership as long as you do your homework. When they pull one over on you, your eyes are wide open and they’re telling you exactly what you’re doing and what they’re doing. It’s usually not because they sold you a lemon or hid a defect from you. When you get ripped off by a car dealership on a new car, it’s usually because you overpaid or they upsold you on features or they did some chicanery with your loan. When you get ripped off on a used car sale, it has to do with a hidden defects, improper titles, and other things that prey on your trust. I know I painted with a pretty broad brush but I think those generalizations are fair.

Ownership Period

If you buy a car brand new, take care of it, and drive it a few hundred thousand miles, it won’t matter if you bought it new or used. That’s why a car’s longevity is so important. You may lose 15% to 20% of the car’s value each year but that only matters if you look to sell it. The car’s value is irrelevant if you drive it until its final miles.

As for that new car smell? It’s best not to inhale it too much, it’s just nasty chemicals.

Buy A Brand New Car from personal finance blog Bargaineering.com.

Not everyone can borrow from their 401(k) or 403(b), the plan administrator has to permit it, but this Devil’s Advocate post will discuss reasons why this may make sense for the limited number of employees who can borrow from their 401(k) plan.

You Have a Weak Credit Score

The number one reason why it would be a good idea to consider borrowing from your 401(k) is if you have a weak credit score. With loan standards at their highest in recent memory, borrowers with less than good credit may find themselves unable to secure a loan in the first place. If you’re buying a house or a car, lenders may require you to come up with a much larger down payment and you could bridge that gap with a loan from your 401(k).

When you request a loan, there is no credit check, which can weaken your score even more.

Better Interest Rates

By borrowing from your 401(k), you can guarantee yourself a loan and an interest rate that beats whatever you’d get out in the market. Even if you have a great credit score, a 401(k)’s interest rate will likely be lower than any rate you could get on a non-primary residence mortgage loan. You can call your plan administrator and find out what the prevailing interest rate is and compare it with quotes you get elsewhere to know for sure.

In general, the interest rate will be the prime rate plus 1%. The current WSJ Prime Rate is 3.25% so your standard 401(k) loan interest rate would be 4.25%. You can’t get a 30 year fixed rate loan for 4.25% right now even if you have a stellar credit score and put down 20%.

Regimented Repayment

When you borrow from your 401(k), you’ll need to repay the loan over the course of five years (longer if it’s for a home) and those payments are automatically deducted from your paycheck. There isn’t another bill to pay and there’s no way for you to “forget” to mail it in. The payment is deducted directly from your paycheck.

Lastly, borrowing from yourself is more convenient. There are no long application forms and no fears of rejection. You pay yourself interest, which is tax sheltered until you start taking reimbursements in retirement, and the payments themselves are automatically deducted. Many pundits make this issue seem like the worst of the worst in money ideas but in reality it’s not as tragic as they make it out to be.

There’s no question that borrowing from your 401(k) is not ideal. The opportunity costs are enormous. However, many families are going through very difficult financial times and this may be a viable option for them. A fat retirement account is meaningless when you’ve been out of work for months and you have mouths to feed.

Would you ever borrow from your 401(k) or 403(b)? Have you done so already? Any lessons or warnings?

Borrowing From Your 401(k) from personal finance blog Bargaineering.com.

It’s been a while since I wrote a Devil’s Advocate post but I felt that it was time. There’s been a huge backlash against credit and debt lately, in part because they were a cornerstone of the credit crisis, and I think that anger and fear is a bit unfounded. For every irresponsible borrower, there’s a responsible one taking full advantage of credit and using it in a way that enriches their life. Today, we’ll look at just a few of the reasons why you shouldn’t abandon credit.

Builds Credit

We live in a society where your FICO credit score is important to every day life. Whether you’re looking to rent an apartment, buy a car, or just borrow money, having a good credit score is important and the only way you can get a good score is by demonstrating good credit practices.

Unfortunately, you can’t demonstrate you’re responsible with a loan without getting a loan in the first place! It’s one of the cruel catch-22′s today and one of the main reasons why I think debt can be a good thing. You don’t need to carry a balance on your credit card to prove responsible credit use, you simply need a card that you use regularly and pay off regularly. You don’t get bonus points for carrying a balance or paying interest. By using credit responsibly, you prove you can be trusted and you can get more favorable rates.

Adds Flexibility

A while back I asked everyone to share their total unsecured credit limit and I was pleased to find out that many people had relatively high limits. In the year and a half since, I’m sure that number has been pared back a little as credit card companies look to reduce risk, but I think many folks still have access to a large line of unsecured credit.

The value of having that kind of access is important because it offers flexibility and options. I have no need for a line of credit of several tens of thousands of dollars right now, but you never know when access to that amount of credit could be valuable to me. Let’s say there’s some sort of emergency where I needed access to that amount of cash. If I only carried a debit card, I know I’d be out of luck because I don’t have that kind of cash!

Credit Is More Efficient

While paying for something with cash may be satisfying from a psychological perspective, it’s inefficient. With credit card rewards, you could be earning points or cash back off your purchase. There are plenty of 0% balance transfer credit cards that can give you a 12 month loan for free, which you can pay off with the cash you would’ve spent. Using credit to buy something makes your buying fractionally more efficient than using cash and you’ll need to decide for yourself whether that’s worth it.

Credit and debt are tools, very valuable tools, but like anything else it can be abused. We learned this during the credit crisis when lenders let buyers purchase more house than they could afford (plenty of people defaulted on loans without ever making a single mortgage payment!). We don’t teach people how to properly use a hammer and credit is just as dangerous, but they both have their purposes and are great at their jobs.

Credit & Debt Are Good For You (In Moderation) from personal finance blog Bargaineering.com.

With the government looking at additional regulation on the for-profit colleges, I started to wonder again whether college is “worth it.” In general, it is. However, recently with all these for-profit schools, a lot of people are going to college unnecessarily. They’re being promised things that the schools can’t deliver. They’re being sold something they don’t need, depending on what they want to do, and they’re only buying it because we’ve put “college” on a pedestal. In this Devil’s Advocate post, I explain why you might want to skip college.

Most Colleges Don’t Teach Skill Trades

Colleges are good at teaching things best learned in a classroom or a laboratory. Philosophy, chemistry, physics, mathematics, psychology, and such. They are not as good at teaching skill trades like being a mechanic or a welder or a fisherman. For skill trades, you are better off going the route of an apprenticeship or a vocational school that specializes in that skill trade.

If you go to college and get a degree in business only to graduate and become a fisherman, you’re wasting your money. That’s not to say a degree in business is bad for someone who is a car mechanic, but you don’t need to spend all that money and four years in a classroom when all the skills you need to learn are best learned hands on in a shop. A fisherman should, if he or she chooses to, go back to school for a business degree if it makes sense. But he or she should not go simply because everyone says he or she should go.

Not Everyone Finishes College

This entire post was inspired by this article in the New York Times that is advocating that some people skip college. One of the scariest bits of information they shared was a projection from the Department of Education. “Perhaps no more than half of those who began a four-year bachelor’s degree program in the fall of 2006 will get that degree within six years…”

Let’s say 50% of people complete the program within 6 years, that means 50% of people don’t finish and are paying for something that they won’t ever receive. That also means that a percentage of the people who do finish will be overpaying, since it will take them longer than the stated four years. What’s amazing about that statistic is that it screams one pivotal idea – not everyone is suited for college.

The problem is you can’t expect kids to know this because they haven’t been to college. They haven’t charted out their futures. That’s why you really need to rely on an honest and capable high school guidance counselor to help you decide what you should actually do.

Opportunity Cost of 4 Years

The average cost of college in 2009-2010 is $26,273 a year for a private college, $7,020 for a public college according to College Board. That means over four years you’ll have spent over $100,000 at a private school and $28,000 at a public school. When you consider the opportunity cost of not working for four years, coupled with the $100k/$28k actual cost, a college graduate is very much deep in the financial hole.

According to data from U.S. Census Bureau, the average high school graduate makes $30,400 a year. The average bachelor’s degree makes $52,200. How long does it take for the college graduate to catch up considering they’ve paid $100,000+ and haven’t been pulling a salary for four years (totaling $121,200). It takes a long time.

You Can’t Afford It

Student loan debt figures are at all time highs. Why is it socially acceptable to tell people “you can’t afford that Maserati” or “you can’t buy a 10 bedroom home” when they can’t, but not OK to say the same about college? Why is credit card debt so bad when student loan debt is good? People are graduating with a hundred thousand dollar student loan debts, which can’t be discharged in bankruptcy, and saddling themselves with multi-hundred dollar loan payments.

You should not go to college if you cannot afford it. This would be different if we weren’t surrounded by horror stories of student loan debt. These are stories of graduates who can’t find jobs and must meet a small mortgage payment each month. You hear about a philosophy major with $50,000 in debt and no job prospects. The reality is that they shouldn’t have gone to that school to pursue that major… it wasn’t worth it and they couldn’t afford it.

You Don’t Want To

Remember when you were a kid and your parents told you to eat your vegetables? You probably fought them but you eventually ate them. You did it because your parents knew what was good for you and you, as a kid, didn’t. Perhaps they’re doing the same thing with college, telling you to go because it’s the right thing to do. They want you to go to college because it does, in many cases, give you an advantage in the workforce. They want you to go because they can tell their friends that you are going to college. But you should only go if you feel like that’s the best option for you.

You shouldn’t go to college because your parents want you to, or because your guidance counselor wants you to, or because your best friend is going and you want to be with him or her. You should go, and put yourself on the hook for tens or hundreds of thousands of dollars, if it’s the right decision for you.

(Photo: walkadog)

5 Reasons to Skip College from personal finance blog Bargaineering.com.

If you think of yourself as a business, you have two ways of generating a profit. You can increase your income or you can decrease your expenses. When you focus entirely on being frugal, you only look at half of the equation. That’s foolish.

Know The Value of Your Time

It’s very important that you know how much an hour of your time is worth because all of your decisions should start with that number. The point of knowing has less to do with actual dollar amounts and more to put those decisions into context.

Consider this – let’s say you’ve estimated that one of your hours is worth $100. Would you spent an hour making laundry detergent that you can buy for $10 or would you instead be focusing on finding more ways to earn money? Now what if your hour was worth $50… would you rather be spending that hour making detergent or finding more hours to work? While you might not be able to add more hours, I argue that your hour is better spent trying to find more worth instead of making detergent.

The point of my example wasn’t to pick on making detergent, or any household supplies, but the main reason for doing it shouldn’t be financial. We line dry clothes because it’s more environmentally friendly. We also save money on electricity but the main reason is environmental.

Frugality Offers Diminishing Returns

The second biggest reason why focusing on frugality is foolish has to do with limitations. There is no limit to how much income you can earn in your lifetime. You may impose limits on yourself, based on your environment and your decisions, but there is no immutable law that says you can only earn a certain amount. There is, however, a limit to how much you can save. If you spend $500 a month on groceries, the most you could ever save per month on groceries, with all the tricks in the world, is $500.

Not only is there a limit with frugality, but the biggest gains are usually discovered in the beginning. When you start making laundry detergent for yourself, the biggest savings will be in making it yourself. As you find cheaper ingredients or buy in bulk, you will continue to increase your savings over the store bought detergent but each step will be smaller.

The opposite is true when you focus on increasing your income. As you develop your skills, add to your list of certifications or education, you become a more valuable asset and income increases will become larger with each step.

The bottom line is that while frugality can be an excellent exercise in creativity, it’s usually never worth your time.

Being Frugal is Foolish from personal finance blog Bargaineering.com.

For today’s Devil’s Advocate post, we’re going to break down the stock market and show why we really are just little guppies hoping not to get eaten by the sharks.

You Have No Advantage

In the stock market, the average investor has absolutely no competitive advantage over other investors. I’ve always said that you need an advantage to succeed and most of us don’t have one in the stock market. The traders on the floor have the advantage of seeing up to the second activity. The traders on Wall Street, even if they aren’t on the floor, may have a network of contacts in the media, may know other analysts in other brokers (or their own), or have good relationships with company employees so they can get a slight edge in information. Whatever the case, they have an edge you and I don’t.

Is it a make or break edge? Sometimes, yes. Most of the time, no. I liken it to playing a sport without knowing how much time is left on the clock. It won’t make or break you but in the long run, but occasionally the clock will run out on you or you’ll shoot too early. Either way, it’ll hurt and the stock market is a long run type of game.

Buy & Hold is not a Complete Strategy

If you’ve done any reading of stock market investing, you’ll know that all the introductory texts talk about the idea of buy and hold. They warn against trading and they suggest that you diversify. The basic stuff is pretty straightforward and it’s appealing to follow and write because it’s simple. However, buy and hold only gives you one direction to win and stocks move in two directions.

The point of this reason isn’t to slam the buy and hold idea, I think it’s valid as long as you have a long time to hold. The reason I bring it up is because all too often we stop here and thing we’ve accomplished the mission. Stock market investing is very involved and if you stop at buy and hold, you leave yourself open to a lot of risks.

If in the last two years you had a trailing stop loss and you were nearing retirement (or whenever you’d need the money), you could’ve saved yourself some money by selling. Buy and hold until the bitter end may seem honorable but the only person benefiting is the guy shorting your shares.

Actively Managed Funds Suck

It’s a well known fact that the majority of actively managed funds don’t beat their benchmarks but many of us are forced into actively managed funds in our retirement accounts. Why? Brokers don’t make much off index funds! Both of my former 401(k)s offered a mix of actively managed mutual funds with fairly reasonable expense ratios (they were all under the industry average). Neither, to my knowledge, offered index funds, the cheapest mutual fund options available.

Saving for your retirement is important and it’s great that vehicles such as 401(k)s and IRAs exist, but ever wonder why, in most cases, you can only invest in the stock market?

Insufficient Analysis

Finally, most of us don’t do nearly enough analysis of a stock or a mutual fund before we buy it. It’s because it’s not our passion. Do you really want to pore through income statements and discounting cash flows based on your expected return? What about calculating the return on equity for the last five years and using that to project a price target in X years given the current P/E ratio? While those were mouthfuls of sentences, they are actually quite basic calculations to do. Now imagine doing that for all the stocks you were considering investing in (after whatever filters you applied using stock screeners) as just a starting point to know how much to pay for a share.

Asleep yet? That’s because most people don’t care enough and if you don’t care, you can’t succeed. Most of us would rather pursue our hobbies or spend time with loved ones, so we put it into actively managed mutual funds that suck. Or we go into index funds (my choice) because then we get the benchmark. Either way, we don’t do even the most rudimentary analysis required so we shouldn’t be in the game at all.

I’d love to hear your thoughts on this as the stock market is one of those very polarizing topics. Many fortunes have been made and many retirements have been secured through the stock market, but I think people are thinking differently after the economy punched the market in the gut (or lower!) last year.

Please let me know what you think!

Don’t Invest In The Stock Market from personal finance blog Bargaineering.com.

I get it and I love automation too, but there’s something you should know… automating your finances can lead to bad habits, bad habits can lead to tragic losses and big mistakes. In this Devil’s Advocate post, I explain why automating all of your finances can be an expensive mistake.

Automation Makes You Lazy

Every working adult who contributes to an employer defined contribution plan, like a 401(k), has automation in their life. You pick a percentage of your salary to contribute towards your retirement and then you let it do its work. You focus on doing a great job, landing the next promotion, and securing clients while computers make sure you contribute each month towards the future.

It makes you lazy because that’s where many people’s involvement with their 401(k) ends. They don’t rebalance, they don’t review their investments with their goals, and only react when something crazy happens – like the start of the recession last year. Near retirees discover their allocations are far too heavy in stocks and now they can’t retire on time. Young professionals panic as their balances crumble, not realizing that they are 40 years away from touching the money, that the drop in the stock market actually helps them in the long run because they can buy stocks on the cheap.

Automation has the potential of making you lazy and you may reaction emotionally, rather than strategically.

Out of Sight, Out of Mind

The idea of regularly contributing to your 401(k) is very powerful because in that case, laziness is in your best interest. If you forget that you are contributing to your 401(k) each month, there’s very little downside. If, however, you setup automatic transfers from your bank account to a high yield savings account, there can be consequences.

Let’s say you regularly transfer $100 each month from your checking account to an ING Direct savings account. The $100 goes to a savings account earmarked for your first home. It’s a great idea and I fully support it. You also learn that this year you’ll be getting a $200 bonus… hooray! That’s great news, congratulations! So you log into your checking account and see that you have $500 in there, so you setup a transfer of $400 figuring the extra was just accumulated savings over the last few months. Then the automatic transfer happens, your balance is now $0. Then you get dinged for minimum balance fees or maybe you use your debit card… Zing! Insufficient funds.

Automating your savings is a good idea… but you have to stay diligent and remember you’re doing it, or you could shoot yourself in the foot.

Risks of Autopay

More and more companies are now offering auto-pay, where your bill is automatically paid in full with a credit card or bank account. In theory, it’s a great feature because you would certainly be paying many of these bills in full (electrical, cable, water, etc.) but there are several huge risks to be aware of:

• You forget. The whole argument of “out of sight, out of mind” from above holds true again. You forget that you made a big purchase this month on your credit card, you intended to transfer money out of savings, but the autopay was early and you got dinged.
• Once you pay, your ability to dispute fraud is diminished. Earlier this year I read a story about a retiree who became the victim of credit card fraud. Normally this isn’t a news story, since your liability for credit card fraud is limited to $50 by federal law and most companies offer $0 fraud liability. The wrinkle in his case was that he auto-paid the bill, without reviewing it beforehand, and so he implicitly agreed to all the charges. I don’t know the end result of that story but it certainly involved headache.
• Unexpectedly large charges, fraud or otherwise, really mess up your week. There’s the risk that you forget about the autopay, which is kind of your fault, and then there’s the risk that an error or fraud starts a cascading series of fees. Maybe your energy bill spikes up because your water heater fails or there’s a billing error on your cell phone that racks up a $10,000 bill. If you autopay, you may be out a lot of money for a long time while various companies “investigate.”

Summary

Automating your finances can be great if you’re able to keep on top of it. If you’re doing it to unload some of the work, such as not having to review your statement or log in to click “schedule payment,” you might want to do yourself a favor and keep some of those tasks on the manual list. Automation works great for things that have no dependencies, such as 401(k) contributions, but for everything else, consider doing it manually (especially if doing it requires only a few mouse clicks!).

What are your thoughts on automation? Where does it make sense and where could it introduce headaches? Are there things you do to mitigate the risks of automation in some aspects of your personal finances?

(Photo: genewolf)

Automating Your Finances is an Expensive Mistake from personal finance blog Bargaineering.com.

Then the housing market stalled. ARMs reset. People were in rough shape. Those who overextended learned something the prudent have always understood, as much as your home is a great place, it’s not an investment.

Value of Homes Appreciate with Inflation Rate

There’s a great analysis of home appreciation versus inflation that concludes that home prices don’t appreciate faster than inflation. Michael Bluejay takes a look at historical data provided by the U.S. Census, the NAR, and the Case-Schiller index, so it’s not a guess… it’s based on hard data.

One big insight that I think many other analyses miss is the increase in the average size of a home. When you look strictly at census data, new homes increased in value an average of 5.4% a year, compared to 4.4% annual inflation over that same period (1963-2008). However, when you consider that the size of a home increased from 983 square feet to 2349 square feet, you’ll see that we’re simply buying bigger sized houses!

An investment has to beat inflation, not match it, because otherwise you’re taking a risk for no reason.

No Improvement Is Profitable

Every year, Remodeling magazine does a survey on the best home value renovations. No matter which year you look at, there is never a remodeling job that ends up being profitable. In 2007 and 2008, the best home value renovation was adding a deck and that topped out at 85.4% and 81.8%, respectively.

So as your home ages and needs major repair work, you’re immediately taking a loss on that “investment.” Our home was 25 years old when we bought it, in the last three years we’ve replaced all the windows and replaced the roof at a total cost of $12,000.

Carrying Costs

When people talk about how they bought their house for X dollars and sold it for Y dollars, they rarely talk about the interest and property taxes they’ve paid as they owned the house. It’s very exciting to hear about a home that has double or even tripled in value (or more!), but property taxes and interest are annual expenses that often get ignored when looking at the headline numbers.

Even when you account for the tax benefits, the costs can be substantial. The national average effective property tax rate (2000 census data) was 1.1127% and the national average value of a home is $158,934, so you could expect to pay $1,768 a year in property taxes. Slice off 25% for income taxes and it’s still $1,326 a year. It’s not an inconsequential amount to pay each and every year.

Transaction Fees

If you want an investment, buy a stock. You can get into and out of a stock for free at Zecco, for $2.95 at OptionsHouse, and for $4.95 at TradeKing. Want to buy or sell a house? Be prepared to fork over 4-6% of the sales price as a commission to the real estate agents involved. Can you imagine paying 4-6% of each stock transaction? No one would ever do it.

Not only are the transaction fees high, the market is illiquid. Buying or selling a home can take a long time. With a stock, you can expect it to be gone within minutes in a marketplace that has many participants. You sold it at the best price possible the moment you sold it. With a home, you can’t be sure. If you have only one buyer or you are the only buyer, you don’t know if you have good price because it was determined in an open marketplace.

Summary

There are many benefits to owning a home and I’m a huge fan of it, but don’t justify buying a home by thinking its home is an investment. It’s not.

It is, however, a place to live, a place to make your own, and a place to make yours. It’s a place to put down roots, a place to raise a family, and a place to grow old in. It’s a place to call your own, it’s just not an investment. It’s a home.

(Photo: orvaratli)

Your Home Is Not An Investment from personal finance blog Bargaineering.com.

Credit Karma is 100% free and they give you a TransUnion credit score using TransUnion data. It’s not technically a FICO score but it’s free and good enough for the reasons I give for monitoring your score all the time. You will have to provide sensitive personal information, since they will be accessing your actual TransUnion credit report, but you’ll never need to pull out your credit card.

MyFICO is run by Fair Isaac Corporation, the creator of the FICO score, and it costs money, about $9 a month. You get an Equifax FICO score every week, among other services. I don’t think it’s important to get an official FICO score all the time if you can get a credit score from one of the three credit bureaus (Experian, Equifax, TransUnion).

This is part one of a two part Devil’s Advocate, Angel’s Advocate article in which I argue both sides of an issue. This is the Devil’s Advocate post, here is the Angel’s Advocate post arguing why monitoring your credit score all the time is a bad idea.

Faux Identity Theft Protection

The number one reason to monitor your credit score all the time is that it will alert you to any changes in your credit report, because it will impact your score. If someone opens a new line of credit in your name, your score will go down. Since you’re familiar with what you are doing, changes in your score will alert you and you know to immediately investigate the cause of the change.

Learn Good Behaviors

Much like how biofeedback can be harness in the medical field, this is credit-feedback. We all know that applying for lines of credit will reduce your credit score because of hard inquiries, but until we become accustomed to seeing our score on a regular basis and watching it change, that cause and effect rule doesn’t stick out in our mind.

It’s also positive reinforcement of good behaviors, such as paying down or paying off your credit cards and being responsible with our management of credit. Your score will improve as you continue to manage your credit wisely and seeing that reflected in a score on a regular basis can be very empowernig.

Overchecking Beats Underchecking

Having an interest in your credit score and your financial fitness is always better than having little or no interest. As long as your checking doesn’t border on obsessive-compulsive, which turns it into a totally different issue, I think that checking all the time doesn’t hurt you one bit. Any inquiry you make won’t ever count against you with respect to your score so check away.

As you would expect, since this is a Devil’s Advocate post, I don’t check our credit scores “all the time.” I check once a month to look for anything unusual and then don’t worry about it.

Monitor Your Credit Score All The Time from personal finance blog Bargaineering.com.

It’s not like that in life. In life, you don’t always have to be the best. In this Devil’s Advocate post, I talk about how in personal finance, you don’t have to always get the best offer, sometimes good enough is good enough.

I think that, as Americans, we’ve become conditioned to try to be the best, try to get the best returns on our investments, and try to get the best deal on something. There’s nothing wrong with wanting and trying to get the best you can, in fact you’re doing yourself a disservice if you don’t at least try. However, you shouldn’t let your pursuit of the best investment prevent you from acting. You must avoid paralysis because you’ll be left behind.

The Best Investment Returns

The funny thing about making money is that the truly successful people ignore the glitz and the glamor and focus on the fundamentals. The proverb about the tortoise and the hare rings true. Think about the recent explosion in popularity with poker. People fall in love with the idea of working on their own, on living in casinos where you can get free drinks and flashy lights, on making tons of money sitting around player cards. What people don’t see is how much of a grind it is. You might hit a payday or two in your life but poker is strictly about probabilities and pot odds, to be successful you have to do a lot of math and make smart bets.

Investing for most people is the same way. It’s about doing a lot of analysis and picking your spots, you won’t get rich over night and it’s better if you don’t try to get the best investment returns possible. You don’t need rock star returns on your investments, you simply need pretty good returns year in and year out. Over the course of decades, your investments will grow and grow.

The Second-Best Deal

I recently bought Frontline for our new beagle Toby and opted to buy the slightly more expensive 6-month package, instead of the 12 month package. The price difference? Only a few dollars. I didn’t get the best possible deal because I didn’t want to have to store an extra six months of a drug that I knew I wouldn’t be using for six months! The premium I paid to avoid the storage was a few dollars I could’ve saved but I knew I wasn’t going to use that Frontline for a long period of time. I didn’t get the best deal I could’ve because who knows what I could’ve done with the Frontline while I stored it somewhere. I could’ve lost it, I could’ve stepped on it and broke the package, I could’ve done a lot of things in six months.

Pursuit of Perfection

Finally, you don’t have to be the best at something, or even good at something, to start doing it. The great achievements in life are the ones where we must work the hardest. Very few people can just up and run a marathon, that’s why it’s considered a tremendous achievement. Some achievements are never mastered, like golf, and the joy is in constantly trying to improve your performance. And some skills can’t be measured quantitatively and there is never a “best,” like playing an instrument.

In life, it’s about the pursuit of perfection, not about perfection itself.

You Don’t Have To Be The Best from personal finance blog Bargaineering.com.

The laws of supply and demand are in your favor because no one else is buying, which means the people who are will be getting incredible deals if they are willing to negotiate and put in the time. No one is spending their money, they’re saving… which means banks won’t be giving you great interest rates because they don’t have to, they have too much money! That’s only the beginning…

Negotiate Deals

The time to buy is when others are panicking. When you have the benefit of time, you control all the power in periods of economic uncertainty. I’m not talking about the stock market, I’m talking about everything. If you wanted a house, now is the time to buy because interest rates are low and home prices are low. If you wanted to make improvements to your house, start talking to contractors because business is slow and they will be willing to cut deals just to stay in business. If you wanted a car, dealerships will offer great incentives because they need to boost their sales numbers. Even if it’s something as simple as an appliance, you can negotiate the price down and get an energy savings tax credit! Don’t buy things you don’t need because they’re a deal, that’s reckless, buy things you need and negotiate it down to the bone.

Interest Rates Are Low

The federal funds target rate “range” is 0.00% to 0.25%, which means the government doesn’t want you to save, they want you to spend! The federal funds target rate is the target rate the Fed wants banks to lend to other banks on an overnight basis (to meet capital requirements). They achieve this rate by expanding or restricting the amount of money available. If a bank can borrow money from another bank for 0% – 0.25%, what incentive do they have to pay you anything for your savings? Almost none. The end result is that you get almost no interest from your savings. In other words, the government doesn’t want you to save your money, they want you to spend it and help boost the economy! And let’s be honest, unless you start spending, the government will only get worse in how it pumps more money into the system.

Spectre of Inflation

The government is pretty savvy, they know you’ll get upset if they raise the taxes without giving you a very very good reason. Fortunately they have another weapon, printing presses. When the government pumps more money into the money supply, the value of your dollars decreases. The government has made trillions of dollars in promises to financial institutions, automakers, and many other smaller profile parties through its actions the last few months and it will have to fund them somehow. Part of it will be funded by borrowing, but some of it will come through increasing the supply of money. Inflation won’t be an issue while we’re in a recession, but it’ll be a beast of a problem whenever we’re no longer scared of the recession.

Reward Entrepreneurs

The United States was built on the shoulders of entrepreneurs, reward them by giving them your business. Don’t overpay for things because you feel badly about their financial situation, that’s not necessary, but spend your money at the places you like and the business you enjoy dealing with. They won’t close a sale unless it makes financial sense to them but they do need sales. Giving them business will give them additional capital to work with and, if they’re doing well in the downturn, expand and add more available jobs to the system. I firmly believe, Devil’s Advocate or not, that the way out of this mess is through business growth spurred on by something, whether its consumer confidence and increased spending or a stimulus package that improves our infrastructure, it will be led by businesses and entrepreneurs.

Don’t Save Your Money from personal finance blog Bargaineering.com.