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Monthly Archives: June 2007

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Opportunity versus Sacrifice

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Personal finance has a certain ebb and flow about it. Long-term v. short-term. Risk v. Security. Gains v. Losses. Opportunity v. sacrifice.

Rarely do we find situations where opportunity knocks and no sacrifice or risk is necessary. Even the lotto requires that you risk money on an unlikely chance for gains.

The question I am mulling around today is how much is one willing to sacrifice to make career or financial gains at the potential risk to personal and family relations. On the small scale we make choices of whether to stay late at the office or attend to prior commitments with family or friends. On the larger scale there are times such as my willingness to take the risks of work travel to a place as danger as the Democratic Republic of Congo. This was for the benefit of my career at the potential risk of very real security concerns.

Plenty of people make choices that result in career or financial gains against the will of their family. Note that making choices for further ones career does not necessarily result in financial gains or increased wealth. Most often family have opinions that want you to take on career choices that make more money than less, i.e. the parents who want their child to be doctor when their talents are as an artist.

I am considering some choices in my career, and am wondering what sacrifices our readers have made to pursue career opportunities. If you have any insights to share on what you think the balance is, I would love to hear.

Thanks,

Miel

Our Portfolio: Geared for Income and Growth

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Our last few posts have been about credit cards, but as you know having a strong personal financial situation involves more than just borrowing. It also means having a healthy level of assets. In order to amuse our readers, we wanted to show you what stocks we are holding as well as the performance of each of our securities.

In looking at these, we tried to balance our need for income with the prospect for growth that stocks can provide. So, some of the companies we bought for the dividends they pay. Others we bought because we thought the company’s shares would increase in price. For example, AAV, CNE, ERH, HTE, SLF and PCU we all bought for the dividends.

On the other had, some of our stocks, such as XOM, SSS, PRU and MAR we bought because we had an expectation that the stock’s price would increase. In the case of XOM, we’re up approximately 60%. MAR, SSS and PRU have also done pretty well, but not as well as Exxon.

There’s plenty of junk in our portfolio also. For example, we’ve got 1 share of Tootsie Roll Industries (TR). This was a dividend share I got a couple of years ago, but haven’t sold because the commission would eat up a third of the value. TR hasn’t really gone much of anywhere in years, but we’re holding because who knows what might happen in the future.

As a final point, the yield from our dividend stocks is giving us approximately $870 a month pre-tax. I did the math in an earlier post, but I think whats revealing about this is its possible to successfully balance both growth and income if you have a sufficiently sizable portfolio.

I hope that your investing career has been as rewarding as ours!

Best,

James

Just Say No To Credit Cards

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We evidently seem to be experiencing some controversy surrounding credit cards this week. My wife is generally in favor of having one. On the other hand, I am not. Since this is an issue in which reasonable people disagree, I wanted to make my thoughts plain.

Generally speaking, you should pay off your credit card debt, get rid of your cards and switch to using a pay as you go system with a check card. Why should you do this? There are four compelling reasons.

1) Industry Sleaze:

The credit card industry engages in some seriously sleazy business practices. Theses are well known, so I’ll just briefly recap them here: fraud, confusing contract wording, failure to fully disclose arbitrary fees, universal default, abusive fees, abusive and deceptive interest calculations, repeated and confusing changes in due dates. These are just a few, but the list is endless. What makes these worse is that the fees are generally not disclosed by the industry, this suggests they are intentionally designed to fleece borrowers. Fair lending means that both parties know ahead of time what the deal is. The credit card industry does not lend fairly and that is sleazy.

2) Perks That Aren’t:

A lot of smart people, my darling wife included, choose credit cards for the perks they offer. These perks include cash back, airline miles, discounts on gas, etc. However, what many people don’t realize is most of these perks come with strings attached. For example, if you have a rewards card, you’ll pay a higher annual fee or interest rate. If you don’t believe me check out the AP story. Basically, there’s no such thing as a free lunch.

Some people argue that they can successfully pay off their balance every month and still get the rewards. To be entirely fair, some people can do this. However, MOST don’t. According to the 2004 Survey of Consumer Finance, 58% of households with cards DON’T pay them in full. Even those who are successful in paying off their balances may slip up on occasion. When they do, there are plenty of fees waiting for them.

3) Hype:

People seem to be under the impression that credit cards are needed for two things: 1) helping build your FICO score and, 2) getting hotel room or rental car. I hate to break it to our readers, but you don’t need a credit card for either of these.

In terms of building your credit, its true that responsible use of a card can improve your FICO score. But for that matter, so can paying your power or phone bill. As regards getting a hotel room or rental car, all you really need for these is one thing: money. The notion that you need a credit card is nonsense. If our readers can show me a law which requires this, then I will retract that statement. But otherwise, you’re buying into hype if you think you need a credit card to build your FICO or rent a car.

4) Paying Interest:

This is worst part about having a credit card. For people who do carry a balance, and this is most of us, real rates of interest put the mafia to shame. According to the supreme court, the real rate of interest includes both interest charges AND fees. Sometimes these can get super high.

For example, assume you have a $100 balance at 29%, and you apply a $39 late fee. The effective interest rate is therefore 68% ((100*.29)+39). Add another 50$ fee and you can easily drive the effective interest rate beyond 100%. Who need Tony Soprano when you’ve got Citigroup?

Lastly, its been my own personal experience that running up credit card debt is bad for your financial health. I’ve felt the bite and have seen colleagues in the same situation. Having given the matter some thought, I would conclude by advising our readers pay their credit card debt, get rid of their cards and start using a check card. The downsides to credit cards simply aren’t worth the hassle.

Best,

James

Credit Card Debate – The Other Side

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Well I’ve kept my mouth closed for long enough and figured that it was time to chime in. Initially when James started to discuss his opinions on credit cards I listened and figured it was best to let him rant and rave, even if I don’t entirely agree.

Now that the whole world has come back in favor of the almighty visa, I figured that it would be good to give my two cents worth.

1) Credit Cards to improve your FICO. On the one side I can see the argument that the system is flawed to encourage the use of credit cards, particularly for those with bad credit. That being said, life is all about figuring out how to play the game. Since using a credit card appropriately can improve your score, then I advocate you use this in your favor by charging wisely. Please note that this doesn’t necessarily mean that you need to charge your whole life on a card. Merely putting a bit on auto pay and then auto paying the bill will do the trick to help your rating. This is a good step for those just starting out or trying to improve their credit.

2) Credit Card Rewards. I’m afraid that this is definitely an area that James & I disagree. Particularly now that I get so many points from traveling for business, there are some real incentives to using a card to charge just about everything you can. I remind James of the fact that this is allowing us to pay for our next trip out to the west coast, which would have otherwise cost us around $800 and was instead a tenner for both of us. Even if there is a fluke once a year you are still better off with the incentives, particulary because I am earning interest on this money before my bill is due.

3) Credit Card v. Debit v. Cash. While I can understand the fact that there are certainly studies out there that demonstrate that people are likely to spend more money with plastic, I don’t believe that for your wise consumer (yes, those smart folks we are talking about) it makes that much of a difference if it is a debit versus credit card. If you know how to manage money, you won’t spend over what you have in the bank. If you can’t balance your finances then you are also going to run into issues with overdraft charges and late fees. Either way, poor financial habits will kill you.

I will say, there are a couple of things that folks who are learning how to use credit cards wisely should do:

1) Balance your accounts carefully, as you should anyway. While I’ve never been one to balance my physical checkbook (especially now that I have eChecks) I do check my accounts online frequently and pay attention to my balance and expenses.

2) Automate things. Put it on your calendar, set an auto-pay system where you know the money will come out with out issue or error, do whatever it takes to make it easy and flawless.

3) Watch your spending. As with all spending in life, don’t buy something simply because you get more miles from it. Just because something is on sale, doesn’t mean it looks good on you, or that you need it. I know that this principle applies in general, but I think it is important not to fall into the trap of spending more just to get the points.

4) Watch the fees. Since most credit card offers will give you a good incentive to start with, and then want to charge you a fee after a year, make sure to avoid the fee. Mark you calendar to call them up eleven months later to either get them to waive the fee for staying with them (tell them you’ve got another offer), or cancel the card and start another with a better offer. You credit score only notes how many checks you’ve had in a year, so one or two won’t make a negative difference. Keep in mind that you can often keep the same miles program but switch cards to get the introductory offer. That way I can keep the majority of my miles with United, but not get charged an annual fee. Please note that this means you are still keeping one credit card for history sake over time, but you have one that rotates. For those of you who want the points but don’t want to use a credit card, you can look into offers that are linked to your debit card (I think I’ll find one of these for James…)

I guess that’s about all for my tired brain tonight. Thanks to all of our reader’s comments. I appreciate any comments with further suggestions on how to use cards wisely, if I’ve missed any good tips.

Cheers,

Miel

Why Smart People Still Use Credit Cards

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Okay, this posting is a bit of a rant. In some our previous posts we’ve outlined problems with abuses in the credit card industry. So sometimes I’m mystified why smart people use credit cards even though they know they shouldn’t.

Nearly all finance professionals will tell you to dispense with your credit card debt. Everyone recommends this; David Bach, Eric Tyson, Loral Langemeier. Pretty much most of the credible personal finance writers will tell you to pay off your credit card debt. Heck, even Warren Buffet says you should pay off the balance on your cards. Since pretty much everyone agrees on this point, getting rid of your credit cards should be a “no-brainer”.

But, millions of people still use credit cards, despite the obvious good sense in avoiding them. I’ve been putting some thought into this. While I’m not an expert in psychology, the following reasons might explain why people continue to use their cards:

1) Overconfidence: People seem to feel its okay to use their cards if they pay off their balance every month. But, how many people actually do this? According to the 2004 Survey of Consumer Finance, approximately 58% of families with credit cards carry a balance. This suggest most people with credit cards DON’T pay them off in full.

2) Known Quantities: Perhaps one reason why people use their cards is because they’re familiar with them, they know how they work, where to make payments, etc. As seems apparent from behavioral finance, the status quo is inherently attractive for some people and the prospect of change seems risky for other. This is a shame because using debit cards can give you all the convenience of a credit card without the fees or interest.

3) Mental Accounting: People value electronic money less highly than paper money. For example, if you’re shopping and all you’ve got is cash in your wallet, you’re often less apt to buy as much. So the bright idea here is people sometimes don’t think credit card transactions are real money, and therefore are more apt to use their cards or run up their bills.

Given all the negative headlines about credit card abuses, the recent congressional investigations and all the horror stories about people running up huge consumer credit bills, I just want to bang my head against a wall when I see that people are still using cards.

People – don’t be overconfident. Get a clue, pay off your cards and get rid of them.

Best,

James

Five Guys

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There is a new burger joint in our hood. You can call me late in the game, as this is the first time I’ve heard of Five Guys. As it turns out, Five Guys Famous Burgers & Fries seems to be all the rage up and down the Eastern corridor.

James & I checked it out last night, since I had been impressed with their prices and quality. It was the perfect answer for a meal on a hot and sticky night with nothing in the fridge and we didn’t want to pay an arm and a leg for your average DC restaurant.

Aside from the great burger, for the rock bottom price of $3.09 plus tax, the best part was meeting one of the part owners. We were checking out an article on the wall about Five Guys when the manager asked if there was anything else we needed. We got the scoop from him on how they select locations and where they have been most profitable. Another interesting component was that the franchise uses a model where the line crew are eligible for bonuses for good customer service.

The story about Five Guys is the best part. Five Guys is a family owned business that thrived in their neighborhood with multiple locations. Named after the five brothers, when they came of age their father gave each of them the option to take the money he had saved for their education and go to college, or to invest that into the business to have their own part of it. While the father pointed out that college would be a lot easier, all five brothers opted to buy into the family business. They also had an interest in seeing the business grow. While originally the father didn’t ever intend to franchise the business, he was swayed by the enthusiasm of his sons.

Now there are over a hundred locations up and down the East coast, more popping up all the time. According to the article on the wall of the restaurant, the business was worth $50 Million in 2005 and the Future 50 projected them making it to their first $100 Million by this year. Not bad for a burger joint.

The great lesson in all of this is how interest in a family business can really make a difference.

Miel

The Case For Wealth

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At last count, there were over 71 million blogs. Many of these are devoted to topics like real estate, personal finance and investing. That is, there are hundreds of thousands if not more people writing about, money, wealth and everything that has to do with it. This leads one to ask: Why should one put time and energy into obtaining money? Aside from needing currency to pay for basic things like housing and food, there some compelling intangible reasons to acquire wealth.

Power: For all its advantages, America is inherently an unequal place. Some people live in better neighborhoods than others; some people have better jobs than others. Some have arrest powers; some have positions which allow them to make laws. Others are disproportionately subject to those laws. Power is inherently unequal in America. Acquiring wealth allows one to obtain power. For example, if you are wrongly arrested or cheated by a company, you have the option to sue for redress if you can afford it. The main point here is that having money gives you power. Power in the sense that one is less subjected to the whims of unequal economic, racial and political arrangements.

Options. Having money generally increases the amount of options available to you. For example, let’s say you need to sell your house, but there is a problem with the roof. If you have enough money, you could fix the roof, thus commanding a higher price for your home. If you don’t have the money you’d be forced to borrow or accept a lesser price for your house. Similarly, if your kids aren’t doing well in school, you could hire a tutor to help them. If you don’t have the cash, your kid is out of luck. In both these cases, without wealth your options are far more limited.

Benchmarking. Many people find this idea somewhat distasteful, but society often judges one based on how much money one has. Think about popular board games like Monopoly@, Life@, or TV shows like “Who wants to be a millionaire” or “Lifestyles of the rich and famous” and the national obsession with getting a bigger house or better automobile. People inherently judge you based on how much wealth you have. And like it or not, you’ll be subjected to the consequences of their judgement. This is why many people don’t talk about money and many people act like they have it.

Finally, if you want a degree of security, a reasonable set of life options and the positive regard of your peers, it pays to put some time into making money.

Best,

James

More Free and Legal Movies

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Hi All,

A while back we blogged about a couple of websites that have free on-line streaming movies. Well, as part of our mission to provide our readers with the best in free and legal on-line entertainment, we found another site that also provides free and legal movies.

The site is called Like Television…only better.

According to them, the movies are licensed to be streamed by the general public. The only problem is that most of the films are pretty old. That said, just because something is old, doesn’t mean its not good. For example, films like the World War II flick “A Walk In the Sun” and the Kurosawa classic “Yojimbo” are well worth watching.

The best part about it, you don’t have to sign up for a thing, just grab some popcorn and select the movie you want!

Best,

James

Successful Couples Discuss Money

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Hello All,

We DINKs are back from our trip to California. It was really an interesting visit, California is a huge prosperous and picturesque state. We spent most of the time visiting family and touring some of the more scenic parts of the state.

Since we’re big into finance, we ended up discussing our blog and money a fair amount with our families. One thing I noticed on the trip was that in terms of our relatives, our more economically successful family members generally communicate more openly about money.

For example, my aunt and uncle control nearly a million dollars worth of real estate. They have a house in Marin County (if you don’t know the Bay Area in California, Marin is pretty swanky), as well as shared interests in real estate in Washington state and Mexico. Also, over the past 4 years, they’ve managed to nearly quadruple their income, from $40,000 to $140,000. In addition, they’ve got a fair amount in stocks and mutual funds. But what’s more important is that they frequently discuss money management issues.

Similarly, my moms Sarah and Gretchen are millionaires. Over the past 30 years or so, they’ve managed to acquire more than a million dollars worth of stocks and home equity. What’s also important is that my moms talk openly about money. When I was younger, they would often sit me down and help me deal with budgeting or cash management issues. Also, they have a rental property and often discussed it openly around the dinner table when we were growing up.

The main point of this that at least as far as we’re concerned economically successful couples tend to openly discuss money.

Best,

James

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