Savings Account Rates Going Up

While the fed may end up lowering rates in the near term, banks are beginning up the interest they will pay on savings vehicles. Why?

The collapse of the sub-prime market is having a dramatic impact on the mortgage market. In the past few years, banks and mortgage companies made money the follow way:
1. Provide the mortgage to the buyer;
2. Package the mortgage with others and sell it to other banks or as Mortgage backed securities.
3. By repeating this process over an over, the bank can make more loans over and over without having an increase in deposits.

With new mortgage backed securities basically unmarketable, the only way banks can make loans is to increase deposits.

In particular, companies like Countrywide Bank will be looking for deposits.

Interest Rate Risk and the Saver

For the saver, it is easy to misunderstand interest rate risk and its impact on our strategies. For the purposes of this discussion, I will focus on saving strategies designed to provide access to cash in an emergency and will ignore credit risk by focusing on insured accounts or government securities.

Bond prices are irrelevant to savers, but interest rate fluctuations are not.
• Because bond prices are inversely related to interest rates, bond prices will fluctuate as interest rates change.
• For savers, the bond prices are irrelevant because we can hold securities to maturity.
• BUT – we cannot escape interest rate risk. Although we will get 100% of the security value at maturity, we “lose” interest while our money is locked up.

Example: Bob buys a $10,000 CD from his bank with a 1 year maturity. Based upon current interest rates, Bob will receive 10,675 at maturity. Bob is happy.
• After 6 months, interest rates spike upward. Although Bob will still get his $10,675 back, he has “lost” money with his CD.
• Because Bob cannot reinvest his money at the higher rates for 6 months, Bob has become a victim of interest rate risk.
• Of course, Bob is a winner when interest rates fall (the Fed cut rates today) because he is getting more interest then the market is currently paying.

The Risk Premium: To compensate the saver, Banks and other borrowers must pay savers a premium for tying up their money in longer term interests (CD’s, T-Bills, Bonds)

Recommendations for Savers:

1. First in – the emergency fund should be invested in a high-yield “cash” investment with little or no investment risk. I have a two-tier strategy for this money. My one month emergency fund is in a high-yield savings account with ING Direct. Easily tied to my Electric Orange checking account, I can get to this money almost instantly if needed. Although ING doesn’t pay the best rates anymore, their service is first rate and the convenience/speed saves me the cost of having to keep any money on my credit cards (I pay in full each month). The second tier of my savings strategy is a high-yield money market mutual fund through Vanguard. In addition to the slightly higher rates, it takes 2-4 days to get the money out. This prevents me from spending my savings.

2. Time Money – After the emergency fund, I have a 2 year ladder of CD’s maturing at different times. This allows me to get paid the risk premium for tying up my money for 2 years at a time. By laddering the CD’s, I get paid the prevailing rate on new investments as the CD’s mature and get reinvested.

3. Treasure Bills – TreasuryDirect allows savers to structure a ladder of T-bills with no transaction costs. A good option; however, I prefer the convenience of CD’s.


Convenience Premium: Unless you are the Bank of New York, you are unlikely to have enough money in “cash” to make a huge difference in your finances. While the money is nice, one shouldn’t spend thousands of dollars of time chasing hundreds of dollars of interest. Find a good bank or banks, enjoy the interest, and your free time.

Market Falls – Increase 401k Contribution

With the market in troubled times, many people think the prudent strategy is to reduce their 401k contributions. At the very least, they want to put all their money in the Money Market Fund or the Stable Value funds.

Although counter-intuitive, the falling market is the perfect time to increase your 401k contribution.

1. As the market falls, you are buying more shares for each dollar you contribute.
2. When the market turns around, you are already invested in a way designed to maximize your upside.

I am increasing my contribution from 9% to 10%. With the company match (we don't have any pension), I am going to be saving 14.5% of my salary.

Engagement Rings – The Big Ripoff

The good news is it looks like I am going to be getting married next summer. The bad news, I had to buy a diamond engagement ring. Although my bride to be is quite understanding and laughed at my threat to get her a “Ziamond,” I did what American men have been conditioned to do. I bought a highly compressed and crystallized piece of coal.

By shopping around, I did my best on getting the most bang for the buck; however, it is hard to shake the feeling that Americans have been duped by DeBeers.

Nevertheless, it is gorgeous and I hope to be looking at it for the rest of my life.

Spend More – Save Money

When we shop, we often face decisions related to different products that do the same thing. For one product, you might have a choice of store brand, value brand, or premium brands. What to do?

When to choose the cheap product:

1. If the product is disposable or a one-time product, don't pay for extra quality.
   
2. Know what brand products are identical to value products.
   
   1. Clorox Bleach is IDENTICAL to store brand bleach.
      
   2. Batteries
      
   3. Baking Soda
      

   
    

When to choose the premium brand:

1. If you need to use the product for years, it is likely to wear out, and it has a good warranty.
   
   1. I bought a very nice Fiskar clipper. After a few months of heavy use, it was not working properly. I called their customer service number. They sent me a new one. No questions asked.
      
   2. When I bought another garden tool with moving parts, I got a Fiskar.
      
2. You like the taste better.
   
   1. If you like taste of Green Giant beans over the store brand, buy the Green Giant
      
3. You like the feel better.
   
   1. If you like the feel of the good toilet paper, there is no reason for the rough stuff.
      

Sweat Equity

Sweat Equity Savings

Although I would love to sell my house, the rough market makes it impossible to get out from under my mortgage without taking a bath. Luckily, my interest rate is fixed for a few more years. Hopefully rates will fall and the market will come back. In the meantime, I have low rate and a roof over my head. Basically, I am blessed.

In the meantime, I am doing things to improve my home using sweat equity.

Lets say project X would cost $1,000 to hire someone to do the work. It will increase the value of your home by $750. Not a good investment (although it may be worth it if you get $250 of enjoyment out of it).

If you can buy the materials and rent the appropriate tools, you might be able to do the job for an out of pocket cost of $500. Now, you get $250 in equity in your home plus the enjoyment of the improvement.

One word of warning: Smaller Jobs are better projects for the DIY’er. Avoid larger/dangerous jobs.

Example Project: I had a strip of bad dirt at the front of my property caused by years of snowplow sand/salt. Basically, nothing grew. I got out the wheelbarrow, tore out the bad dirt a few inches below the grade, and planted new grass. I am happy to report my front lawn looks great. Having said that, I learned from the inevitable mistakes made:
1. I should have had a local place deliver bulk topsoil. It would have been faster and probably saved me a few bucks.
2. For small patches in lawn, sod is your friend. I had a few uneven spots in my back yard. I used the dirt to even it out and planted seed. While it eventually took, it took a “long” time to get it to germinate and fill in. Later, I patched a small strip with sod and it took in one week. Although the upfront cost was higher, it didn’t need fertilizer, water, and constant tending.

Credit Card Reward Engine?

How long will it be before someone creates a site that calculates the best rewards program for people? Although we can go to sites that document "good" rewards programs, the sheer number of programs makes picking the best card for our individual spending habits a hit and miss proposition.

My current cards: Because I do not carry a balance, I do not pay much attention to interest rates.

1. Primary Card: Amex Starwoods Card – Over the past few years, I have used the mileage for rooms at the NYC Sheratons during the Christmas season. I usually qualify for one free night per year at a savings of $500+ per night. Currently, I am saving for a trip to Europe. Since I can transfers my points to any carrier, this card is a big help.
   
2. Master Card: As the commercial says, some places do not take American Express. I have an American Airlines Miles card I use for this. While it is probably not the "best" card, I fly to Dallas often and American is the best way to get there from Connecticut.
   
3. Citgo Citi MasterCard: In my area, Citgo consistently has the lowest prices for gasoline. With 4% rebates, I am saving an additional 10-12 cents per gallon. I do not use it for other purchases.
   
4. LL Bean BOA Card: LL Bean has reasonably priced clothes for the money. With this card, I get free shipping. I do not use it for other purchases.
   
5. Discover Card: I am using this as a balance transfer experiment card. I took money from a 0% balance transfer with no transfer fees and have it in a high interest savings account. Although I am making money on the deal, I do not think the effort is worth the hassle and I am increasingly uncomfortable with the ethics of the transaction. I do not expect I will do this type of transaction again.
   
6. GM Card: Dormant.
   
7. Lowes: Dormant.

Buy a SUV – Reduce Gas Expenditures?

Two weeks ago, I got rid of my compact, 4 cylinder vehicle for a SUV. With my small car, I got excellent gas mileage. Although I worried about skyrocketing gas prices and devised strategies to reduce costs, I never really worried about where I drove.

Unfortunately, small car was not large enough for our needs and I needed an SUV. For the most part, my decision came down to: Was a small, 4 cyl SUV large enough for my needs? After considering the options, I went with the Toyota Highlander. While it doesn’t get great mileage, it is not a Explorer class gas guzzler.

One upside of the choice, I am more sensitive to unnecessary mileage. If I go out, I make sure I get more then one thing done each time. Hopefully, I can maintain the behavioral changes to keep gas use to a minimum.

Buy New Printer - Save Money!!

Once again, I found myself in need of replacement cartridges for my HP Inkjet color printer. Last time it happened, I had to pay $60 dollars for both the color and the black cartridges. While looking for the right ones, I noticed new inkjet printers available for less.

Using clearance pricing, I just purchased a new black/white laser printer for $99 on closeout. While spending money isn’t normally frugal behavior, I will explain why it is a good deal for me.

1. My current printer is a HP Deskjet with color printing. In order to work properly, it needs two cartridges, a black cartridge and a color cartridge. Together, they cost about $65 new. Near as I can tell from the specs, they should print approximately 790 pages at a cost of about 8 cents per page. Although I stretched it by using black in whenever possible, the cost of ink was a huge factor in total operating costs.
2. My new printer cost $99 (free shipping) and should print 2,000 pages at an approximate cost of 5 cents per page. Going forward, the replacement cartridges cost $65 and provide 2000 pages of ink. Approximate cost per page, 3cents!!!

I purchased my old printer 5 years ago because it was cheap and had good print quality (including color).

Today, I print more pages and realize that the printer cost is really irrelevant. The big mover in cost is price per page of print.

Note – I had to give up color printing, but it wasn’t a big loss to me. The only “color” printing I really “need” is photos. For those, I can have professionals do it for me.

Leaving Job - Protecting your MER Contribution

MER Money and Changing Jobs

Like many people, I had money deducted from my paycheck as part of a Medical Expense Reimbursement Account program. Every time I went to the doctor or filled a prescription, I would stick the receipt in an envelope. Each quarter I would send it in. For 2007, I elected $500.

In May, I changed companies and wondered what would happen to my money. Because my old company outsourced HR (I AM NOT JOKING), I ended up speaking with an idiot on the help desk after I left. According him, I was entitled to submit bills throughout the rest of the year for the ENTIRE amount. When I explained I had only contributed 4 months worth of money, he said it didn’t matter.

Of course, things did not go as expected. After I submitted bills for June, they denied them claiming I wasn’t part of the program anymore. After discussing the matter with the HR CSR, I was able to review the summary plan description and determine the following:

Basically, the correct answer is:
1. I could submit bills for the entire $500 amount; however, they must have been incurred before the end of May.
2. If you do not incur bills before the deadline, you lose the entire amount AND any unused contributions.
3. As long as I submitted the bills before 12/31, rules 1 and rule 2 would be unaffected.

How it works:
• Assuming I had contributed $200 by the time I left the company, incurring $100 before June1 and $100 after June, I would only be reimbursed $100.
• Assuming I had incurred $500 before June 1, I would have been reimbursed $500 even though I only contributed $200.

Bottom Line: If you leave a company, make sure you get your MER situation in order quickly. Our plan had a deadline of the last day of the month you leave the job.

Gas Savings Strategies.

Gas Savings Tips
In the age of $3 gallons of gas, we should do what we can to reduce the cost of buying product. These are the simple steps I use to reduce cost:
1. Buy on Wednesday. Statistically it has the lowest prices.
2. Know where the “cheap” stores in your area are. In my case, we have a range of $3.08 to $3.25 available. In my area, the Citgo on the way to the gym has the best prices. The Shell station near my house has the worst prices.
3. Use a gas card from your favorite “cheap” store. I save 4% on all purchases at Citgo for a savings of $0.12 per gallon.
4. Assuming I buy 20 gallons per week, I will save $1,100 per year because of the Citgo card. By consistently buying at the $3.08 station instead of the $3.25 station, I will save $1,200.

The combined $2,300 per year will go a long way towards my budget. I wish I could say I drive a fuel efficient Civic/Hybrid, but I needed a mid-size SUV for other things. While it gets decent mileage, it doesn’t push the 30mpg the vehicle it replaced had.

We use my GF's Corolla whenever possible to save gas.

Do you need a landline/telephone?

For professional and personal reasons, I must have a cellular phone. In addition to the business use, it allows friends and family to track me down. Rarely home by the phone, people who want to speak with me must call me where I am. In addition, I use my cell for ALL long distance calls.

Thirty years ago, a landline telephone was a necessity. Now, I think it is optional. When I lived in a NYC apartment, I didn’t bother to have one hooked up and never missed it. In my Connecticut house, I have a landline; however, I am considering dropping it. My only concern is emergencies.

ETF's and the IRA

My old employer offered Mutual Funds for sale to the general public. As one would expect, their “house” funds were the only option in our 401k. Although they had high expense ratios, they waived the load and the funds did perform quite well. Nevertheless, I felt I could do better on my own.

Broker: Fidelity – because they held my old 401k, the rollover was easy. With zero commissions available, I went with an ETF centered portfolio allocated as follows:
Vanguard Total Market ETF 60 % .07 % Expense Ratio
Fidelity Spartan International Index 25 % .10 % Expense Ratio
Vanguard REIT ETF 5 % .12 % Expense Ratio
Vanguard Energy EFT 10 % .25 % Expense Ratio

The Weighted Average of the Expense Ratio is .10 %

In two and a half months, the account is up 3.34% just like the market.

Charging Everything

Like many PF bloggers, I have adopted strategies to maximize the power of my credit card spending. Basically, I charge everything from groceries to a Big Gulp at 7-11 on my Credit card.
Strategies I use to maximize the power of my credit card:
1. Gas Card gives me the largest discount on gasoline purchases.
2. Amex Starwoods gives me the option of converting points to airmiles or using them for hotel room stays. This is my primary card.
3. CitiBank AA Card – I use this card at places that don’t take American Express.
4. As you can see, I end up with three credit card bills each month.
a. All bills are paid using online banking services provided by ING Direct.
b. When the bill comes in, I transfer the cash from my primary checking account to the ING Direct account and set up online bill pay. With this strategy, I earn interest on the float and ensure the bill is paid on time.
5. By charging everything possible, I have reduced the number of bills I pay to the following.
a. Mortgage
b. Student Loans
c. 3 credit cards
d. Electricity
e. Telephone
f. Oil (in the winter)
6. All my cards (except the Citibank card) download to Quicken using the Update feature. Each week, I download the transactions. Since I tend to frequent the same places, most transactions automatically get categorized correctly. With very little “cash” going out the door, I am able to easily, quickly, and accurately track my spending against my budget.
Credit Card Arbitrage: Discover Card
• As an experiment, I tried to replicate the credit card strategies used by other bloggers. I took $5,000 in 0% interest from Discover in a free balance transfer. Ultimately, I deposited the money in an ING Direct Savings Account.
• Evaluation: I probably won’t repeat the transaction.
1. Discover tried to hit me with a Balance Transfer fee. It seems they took so long to process my application (about 2 weeks), the actual transfers took place after the eliminated the “Free Balance Transfers” promotion. Luckily, I had the screenprints from my online application and they corrected the mistake.
2. I don’t know if the money earned is worth the effort.
 Getting the transfers set up was a hassle.
 Tracking another credit card is annoying.
 Finally, I have to make sure I pay it off before the deadline.

3. I don’t feel comfortable with the ethics of this type of transaction.

Gas Card Savings Strategy

Years ago, I tore up my Texaco card and started using my Amex Starwoods card for all gas purchases. Why pay an extra bill and why give up the bonus?

A few months ago, I noticed the local Citgo consistently had the best gas prices in my area. While filling the tank, I notice an offer for a Citgo card with a 4% cash back on gas purchases. Over the course of a year, I expect to save approximately $100.

For people with large families full of drivers, this strategy could really pay off.

Hybrid Evaluation and Two Car Families

With gas prices in excess of $3.00 gallon, fuel economy should be a relevant factor in any car purchase.

For me, I have decided to purchase a mid-sized SUV. The focus of my attention is the Toyota Highlander. With a hybrid available, I decided to do some simple math to determine the cost effectiveness of the hybrid v. the traditional models.

Basically, it is no-brainer against the hybrid. Assuming 12,000 miles driving in mixed hwy/city driving, the normal vehicles will burn approximately $1,700 in fuel. They hybrid would burn $1,250. Depending on options, the Hybrid version costs $4-7 thousand more then the I-4 and V6 models.

Bottom line – the hybrid Highlander is not a good financial option for most people.

Commentary: While Toyota (and Honda) deserve a lot of credit for pushing the hybrid technology, they deserve some criticism for their execution of hybrid technology.
1. Instead of optimizing the vehicles for MPG, they optimize the vehicles to make them faster. As a result, they don’t get the most MPG improvement possible.
2. To maximize profits, many hybrids are loaded with lots of options increasing the price.

Two Car Strategy: When my sister got married, they had a two car strategy. One car was a Honda Civic Coupe. Taking advantage of its low operating costs, they drove it until it died. The other car was a Camry. As their family grew, the Camry became a minivan. In the age of carseats (often more then one), bigger cars become a necessity.

In my case, my GF and I both have very small, fuel efficient vehicles 28mpg and 30+mpg. To save money, I am doing the landscaping on my house. Unfortunately, neither vehicle has the trunk space or towing capacity I need. By getting the Highlander, I can store most loads inside the cargo area or tow a small trailer. Since my commute is short, I should be able to keep the fuel costs under control. We are going to use her car for all long trips.

Rule #1: Don’t Get Hosed

If you are a millionaire or a struggling college student, anyone with any money is at risk of getting hosed. Anytime you are forced to pay more for the same thing, you have been victimized by circumstances. Happily, you can often avoid the circumstance that caused the problem.

Important Concepts:
1. Everyone should strive to get the most amount of utility for the least amount of money;
2. When you have money, you have leverage and can make businesses do what you want;
3. When you need money, they have leverage and can make you do what they want.

Example:
Giant Credit Card Company hits two people with a $50 charge for paying their bill one day late. In addition, they attempt to raise the interest rate from 10% to 30%.
A. Bob has $5,000 in his savings account and $1,000 on his credit card. The late payment occurred when he went out of town on business and sent the check a few days later then normal. He charges $1,000 per month and pays it in full.
B. Brian has $500 in his savings account and $1,000 on his credit card. He has been paying the minimum payment to pay off his repairs to his car.
What will happen?
A. Bob will call the bank. Explain the error and ask them to waive the service fee and reduce the interest rate to 10%. The bank will say yes or lose his business. If the customer service rep balks, Bob will remind them he is a frequent customer (they make money). If necessary, Bob will threaten to pay the entire amount and close the account.
• For credit card companies, the cost of acquiring a new customer can be quite large. Within reason, they will do what the MUST to keep customers with options happy.

B. In all likelihood, Bob will be stuck paying the $50 fee and the higher rate. Once the bank realizes he has few options, they will be reluctant to give up revenue.

Bottom Line: Assuming they spent the money on the same purchase Brian is getting hosed. He is paying significantly more money for his purchase.

Later, we will discuss ways to make sure you are not Brian.

Attorneys and Math

A few years ago, I decided to stop practicing law to attend business school. As any MBA knows, the number one agenda for students is finding a job. Although I had graduated from college with honors in Finance, my pursuit of a job on Wall Street was hampered by prejudice.

Eventually, I had the opportunity to work on Wall Street; however, I turned down the opportunity to pursue a career in business. Although I sometimes wonder what an I-banking paycheck would be like, money cannot buy happiness.

Nevertheless, not having money can lead to unhappiness. This blog is about my ideas about personal finance. I will cover savings, investing, and spending. Occasionally, I will comment on legal issues impacting personal finance.