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Cash For Gold = Big Ripoff

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Hi All,

A couple of days ago, we got a flyer in the mail from a company advertising a gold and silver buying event in Maryland.

Given the recent bad press regarding cash4gold.com, I smelled a ripoff and decided to investigate. A quick check of the companies webpage, revealed a minimal setup in terms of the amount of information it presented. Another quick scan showed the page had only been registered for less than two months.

Following up, I called the number provided on the flyer. The gentlemen on the other end of the line quoted me a price of $7 for a pre 1965 silver dollar and 60 dollars for a 14 karat mens wedding band. Unfortunately, these prices offered were significantly less than the current market value of the underlying metal. For example, silver is currently trading at just over 14 dollars an ounce. This means that the market value of a 1965 silver dollar is something like 13 bucks, not $7. Now, my wedding band weighs about a half an ounce and its 60% gold, so the spot value of a men’s band at current prices is more like $277, not the $60 offered.

While its certainly not illegal to make really low offers for precious metal, please be skeptical if attending a buying event like the one these folks are putting on. Just based on my preliminary examination of this particular company, it looks like they are a fly by night outfit with rip off prices. Similar caution could be exercised when looking at this industry in general. In fact, any advertisements with the phrase “cash for gold” or “your cash for gold” should probably be a big red flag. You could be losing a significant portion of the wealth your gold represents if you sell it for less than it is worth.

Here is a snap of the flyer.

And here is the backside.

Best,

James

Tip Of The Day: Go Shopping Alone

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Hi All,

Here is a tip. Sometimes when you go shopping with kids or a spouse, they can try to talk you into buying things the household does not need. For example, I’m sure you’ve been in the grocery store and seen children try to get their parents to buy them candy. Similarly, when my wife Miel and I go shopping, I sometimes try to talk her into buying pot stickers – an expensive high fat food that is hard on our wallets. It’s hard to save money on groceries when you have all that pressure to buy things you otherwise wouldn’t.

Today’s tip: try going shopping alone, remember to bring a list.

-James

Cage Owes IRS $6.23 Million

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Hi All,

Well it looks like yet another celebrity is having problems with the tax man.

The State of Louisiana has slapped a Federal tax lien on a house owned by actor Nicolas Cage. The lien states that Cage owes $6,257,000 in unpaid income taxes.

Cage has a history problems with the IRS. In 2008, The Huffington Post reported the IRS has accused the actor – whose real name is Nicolas Coppola – of using a shell company to illegally deduct personal expenditures including limousine rides, meals and expenses related to his Gulfstream 1159A turbojet (1). Reportedly also, the actors jet has been grounded due to nonpayment of bills to the management company (1).

While its difficult to know the root of Cage’s problems, the thespian shows a predilection for big spending. Cage owns a number of houses in the U.S. and in Europe. These include luxury properties in several states and an English castle. Cage is also a connoisseur of high end sports cars – at one point paying over $490,000 for a Lamborghini P400 Miura SV J. So, probably whats going on is that Cage has a hard time controlling his spending – thus resulting in the periodic problems he’s had paying his bills. Cage is at the opposite end of the spectrum of those who are “extremely frugal.”

Here is the lien the state placed on Cage’s New Orleans property.

Should I Cash Out My 401k To Pay Debt?

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The short answer is: NO!!

There are a ton of fees involved in early distributions from retirement accounts. If you cash out your 401k to pay off a debt, you’ll get hit with up 35% tax on principal that you take out of the account. You’ll also get slammed with a 10% early withdrawal fee (if you are under 59 and 1/2). Finally, you may also have to pay a redemption fee to liquidate the securities held in your account. Finally, there is an opportunity cost as well. Even if you’re using the money to eliminate good debt, like a mortgage, you’re still denying yourself valuable opportunities to allow your money to compound.

There is some wiggle room. If you cash out the funds, you’ve got 60 days to put it back. There are also some exceptions to the 10% withdrawal penalty.

1. Purchase of a primary residence
2. To avoid foreclosure of, or eviction from, primary residence
3. Payment of secondary education expenses incurred in the last 12 months for the employee, his/her spouse, or dependent(s)
4. Medical expenses not covered by insurance for employee, their spouse, or dependent(s)
5. Funeral expenses for the employee’s deceased parent(s), spouse, child(ren), or dependent(s)
6. Home repairs due to a deductible casualty loss (as of December 31, 2005)

Even if you can organize one of these loopholes, you still get stuck with the income tax hit and miss out on chance to compound your money.

Bottom line: don’t cash out your 401k. Instead consider other possible aggressive debt reduction strategies or possibly taking a loan against your retirement accounts.

Best,

James

Where to Get Into Stocks For No Money

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Well, not no money at all, but you can get in with minimums around $250. Check out these two websites:

1) www.amstock.com

2) www.computershare.com

The great thing about these business is they are geared for smaller DRIP investors so you can buy shares without feeling like a poor chump who has only got $250. Some of the DRIP plans these sites can hook you up are going for very reasonable minimums, some for $100. The Xerox corporation is even offering a minimum of $10.

As always, watch out for fees. They can snatch away the wealth you build up.

Best,

James

P.s. Are these sites better than Sharebuilder? – Yes, my personal experience is they are cheaper and significantly better geared for DRIP investors.

Savings Vs. Investing

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Okay, so there are a ton of different kinds of financial products out there: certificates of deposit, savings bonds, mutual funds, money market funds, stocks, etc. etc.

How do you determine what is saving and what is investing?

Its seems like a silly question, but its important because different financial products are better geared for saving and others for investing. Savings should allow you to keep and hold the value of your wealth, while investing should help you build and create wealth.

A quick rule of thumb is that if you don’t need the money for more than 5 years, invest it. If you need the money in the next five years, save it

Advertisers eye spendy DINK couples

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Hey All,

A reader turned us onto this NPR piece on Dual Income No Kids families. Evidently DINKs are becoming increasingly attractive for marketers due to their high level of disposable income. They are hoping to get these DINKs to spend their cash instead of living frugally and saving their excess cash.

From NPR’s webpage:

The DINK (Dual Income, No Kids) lifestyle is helping thousands of people beat the recession. Working couples without the high cost of childcare are left with lots of extra cash, and advertisers are starting to take notice. Jeremy Hobson reports.

Hat Tip to Dave R.

Best,

James

Topic Du Jour: Structured Notes

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Hi All,

You may see the term structured note floating around the personal finance literature.

A structured note is essentially a bond that is organized so that it gives the holder (e.g. the buyer) a return that matches a particular index such as the S&P 500. Usually structured notes have some minimum return associated with them. Sometimes they have exotic structuring such as providing an inverse return relative to an index. Sometimes they provide a return linked to baskets of currencies – there are lots of combinations.

Best,

James

The Minefield of Mutual Fund Fees

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Hi All,

Mutual funds are a favored type of investment for Joe and Jane average. They have a number of advantages including professional management, exposure to diversification and the ability to efficiently tailor investing products to individual needs. However, one major drawback of mutual funds is fees.

There are several fees you might be obligated to pay, depending on the fund’s policies:

1) Front end loads. This is essentially a sales charge that goes to the brokers who sold you your shares. The fee is often based on the amount invested and is deducted from each investment. These generally decrease as the amount of the fund you buy increases.

2) Back end sales charges. Basically, this is a fee you pay to sell your shares. Generally the longer the shares are held, the more this charge declines. This fee usually goes to the broker who sells your shares.

3) You might get charged a straight purchase fee to buy shares. This yet another fee, but instead this one goes to the fund, not the broker. Similarly, if you want to unload your shares you’ll have to pay a fee to the fund called a redemption fee.

4) Some funds charge an exchange or transfer fee. For this one, if you try to transfer your shares out of your account, the broker will hit you with a transfer fee.

5) A lot of funds will hit you up with an annual account fee. This is just like an annual fee with a credit card, its simply a charge to maintain your account.

6) 12b-1 Fees: This is a charge for the costs of marketing and distribution. Since funds are business that often need to advertise, you can sometimes get stuck ponying up for the marketing and selling of the fund.

7) Other expenses. If annual account fees, loads, 12b-1 fees and transfer fees are not enough, you might get hit with a bill for custodial, accounting, transfer agent expenses or other administrative costs.

Fees should absolutely be minimized for two reasons.

First, fees depress return. The average mutual fund in the US charges about 1.4%. However, if you buy a fund with fees totalling even 1.4%, then your manager has to work that much harder to give you a return that makes up for the sales costs. Bottom line: fees depress your return and prohibit you from maximizing your wealth.

Second, fees create a conflict of interest. All things being equal, any sales person will attempt to push a product with a load on it. This is natural – sales people have to eat just like you and me and want to be compensated by selling you fee laden products. The problem with this is that fees rob you of the chance to get good objective advice because of this built in conflict of interest.

Just as an aside note, when my wife Miel and I were in Oregon a few years back, we got approached to buy a mutual fund with a 6% charge – nearly 4 times the average – at a Washington Mutual branch in Eugene. We fortunately declined that “opportunity”.

Best,

James

Carl Sagan on Information Resources

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“Finding the occasional straw of truth awash in an ocean of confusion and bamboozle requires intelligence vigilance, dedication, and courage. But, if we don’t practice these though habits of thought, we cannot hope to solve the truly serious problems that face us — and we risk becoming a nation of suckers, up for grabs by the next charlatan who comes along.”

Carl Sagan

The moral of the story here is: be careful what investing information you read.

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