J.C.’s Money Blog

I noticed ING Direct quietly lowered their interest rate on savings accounts once again. About a month ago, I speculated that this would happen, because their rate was higher than the Fed’s discount rate. At 3.1% APY, they are just slightly above the Fed’s rate, so I imagine they will stay at this level for some time to come.

Its easier to deal with them slowly lowering your rate as a customer than getting hit by a big cut all at once. I believe they are slowly lowering their rates, so that the shock doesn’t motivate people to yank all the money out of their accounts.

My prediction is that the Fed will leave rates alone for a while and that the next move will actually be to raise them in order to fight off inflation and the weakening US Dollar.

This completes my three part book review of Wealth without Risk by Charles J. Givens. Here is Part I about personal finance strategies ,and here is Part II about cutting your tax bill.

Part III is about investing, and it starts off very optimistically with Chapter 26,”The secrets of powerful investing”, with three major investment objectives:

1. 15% safe investment return
2. No commissions
3. No taxes

Ok, Charles, you have my attention, although with a healthy dose of skepticism. Givens lists what he says are the ten best investments:

Investment		Strategy	Average Yearly Return
1	Asset Management Checking Account	Debit Card	8-14%
2	No-load mutual funds	Money Movement	15-20%
3	Mutual fund margain account	Leverage	25%
4	IRA/Keogh	Self-directed accounts	25%
5	Your own home	Leverage and personal use	20%
6	Employer’s retirement	Money Movement payroll deducted	15%
7	Self-directed annuities	Money Movement	25%
8	Discounted mortgages	Guaranteed interest tax deferral	30%
9	Liened property sales	High government-guaranteed interest and leverage	20%
10	Residentional real estate	Leverage and tax shelter	30%

And I was happy to get 3.5% from ING Direct on my savings account! Let’s read on to see if there is any substance to this chart.

Chapter 26 concludes without giving much concrete advice but gives some motivation on making your money work for you, or better yet, getting other people’s money to work for you.

Chapter 27 is about the ten biggest investment mistakes. Strategy #273 “KEEP YOUR MONEY OUT OF VACANT LAND” makes sense. If you buy vacant land, then you have to pay your interest on the loan and property taxes. Your asset has a negative cash-flow, so don’t do it.

Strategy #276 “STAY AWAY FROM INDIVIDUAL STOCKS AND BOND”, Givens says its too risky and you have to pay commissions, when you could instead buy no load mutual funds. I think this advice is a bit outdated, since brokerage fees have come way down, making buying stocks cheaper and therefore diversification through individual stocks much cheaper. Plus index funds are generally better than mutual funds, but index funds were either nonexistent or extremely obscure back when Givens wrote this book.

Strategy #278 “DON’T INVEST IN INFLATION HEDGES SUCH AS PRECIOUS METALS”. I hate the idea of investing in a chunk of metal and not using it to produce anything for humanity. Investing in a chunk of metal does nothing for anyone, but investing in companies creates products and services, as well as jobs.

Givens argues that one hundred years ago an ounce of gold bought a man’s suit, and now that same ounce of gold still is about as much as a man’s suit.

This is also the opposite advice than Robert Kiyosaki gives, so it must be good!

Strategy #280 hits close to home with me “NEVER USE A COMMISSIONED FINANCIAL SALESMAN AS A FINANCIAL ADVISER”. Right out of high school I used the savings from my summer job to buy $500 worth of shares in a mutual fund and also set up a monthly $25 share purchasing plan from the “financial adviser” at my local bank. I watched the price of my fund daily and noticed that the price of my mutual fund closely followed the major market indices. If the Dow Jones Industrial Average was up 1.5% on the day, my fund went up 1.3%. If the Dow was down 1.5%, my fund was down 1.8%. I realized early on that my financial adviser hadn’t pick a winner for me, she had picked a winner for herself. She knew exactly which fund to sell me as soon as I walked in the door, and I’m sure there was definitely some correlation between her commission and that choice, because there was certainly no correlation with past or future performance!

Since those first bitter experiences, I have avoided “financial advisers” and mutual funds whenever I can, instead going with low cost index funds and individual stocks from a discount brokerage. Unfortunately my 401k is my biggest investment, and my dumb ex-employer chose a company that gives me a tiny selection of bad mutual funds to choose from. All of which have underperformed my SPY holdings, and all of which have much higher fees. Argh. Mutual funds. I despise them and commissioned financial advisers.

Just think about it. If the financial adviser really knew how to invest money, then they wouldn’t be talking to you now, would they? I’ll never make that mistake again.

An interesting idea that I have never heard before is Strategy #285 “STORE 20% OF ONE YEAR’S INCOME AS ATTITUDE MONEY.” Givens says to make this your first priority, even leaving bills unpaid until this 20% is built up, and then deciding not to ever touch the money, no matter what. Something about having the money available and not using it is suppose to positively impact your attitude.

Technically and mathematically this doesn’t make sense, but it goes along with what other modern financial gurus are saying, that you should build up an emergency fund before attacking your debt, or aggressively saving for retirement. I think this probably sound advice, since personal finance, especially in getting started, is about psychology more than anything else.

I can’t stand the feeling of living paycheck to paycheck, and I would certainly never have quit my job, had I not spent the 3 years prior saving about 30% of my income, building up closer to 90% attitude money.

Next Givens goes into his bold claims that anyone can average 20% a year returns with no risk by following his trademarked money movement strategy, which is essentially as follows:

There are two major conditions

1. The prime rate is below 9.5%
2. The prime rate is above 9.5%

If the prime rate is below 9.5%, you should invest in stocks (he says through mutual funds, now I’m sure he’d say low cost index funds).

Under situation two, you must be a bit more careful, you have to look at the direction that interest rates are going. If interest rates are falling, invest in bond funds, if interest rates are rising, invest in money market funds. Click on the thumbnail here to see a chart of what he is talking about.

It has been a long time since interest rates have been near 9.5%, which may be why I have never considered bonds or money market funds as serious investments. Givens says this 9.5% actually changes over time based on market conditions, and you can subscribe to his newsletter to be kept up to date on the current value this threshold. I’m very curious where he would set it today.

Givens finishes the book was topics about buying mortgages and properties with tax liens. These aren’t topics that really interest me, so I just skimmed through them.

I must say Givens book is worth reading. He puts 357 strategies in black and white. While many are somewhat redundant, they are never ambiguous. The advice that Givens gives seems generally solid, and it is always very concrete.

The only real problem with the book is that it is not very motivating to me. I don’t feel energized to change anything fundamental in my finances, but I will think much more carefully about auto insurance once I buy a car, and I will spend a lot more time on my taxes next year. I already find myself thinking about my expenses and whether I can deduct them, so in that regard this book has made an impact.

I give this book a 6/10, because it was a pretty dry read and the advice seems like it doesn’t always apply to current market conditions, yet it did have a positive impact overall.

You can buy it from Amazon here:

Or better yet, check it out from your local library!

Once again, I thought SPY couldn’t drop any lower, so I bought 12 more shares to pretty much spend the rest of my cash in my brokerage account. Now I have 112 shares of SPY, and I got the last 12 shares at $133.35 per share on March 3rd. Since then the price has dropped to $128.00, but I’m out of cash that I have available to invest, otherwise I would buy up some more.

The price to earnings multiple for the top 500 U.S. companies represented by SPY is now at about 13.7, which seems like a good value to me, because together they are returning 7.3% on equity, plus you benefit from any growth of these companies. So I expect at least a ten percent annualized return from SPY over the next couple of years.

I upped the ante in my index fund holdings quite a bit in February, buying 33 more shares of SPY. This gave me an even lot at the bargain price of $135.25 per share. In the mean time its an even better bargain, but as of the end of February, here’s how I stood:

Negative 500 bucks! Ouch! And things have only gotten worse in the last 10 days. They’ll get better though. Sometime.

Since I pretty well neglected my web sites in February, my traffic and ad revenue were also way down. In February I only generated $0.10 per day. I haven’t checked the price of Raman noodles, but it seems like a pack of it was the cheapest way you could feed yourself when I was in college. But now after inflation, I guess I couldn’t even afford one pack of this a day on my current revenue.

On a brighter note, I currently make about $1.50 per day from dividends and interest, so I am up to about a bottle of water a day in passive income.

February was my first month without a job, and I found lots of ways to fill up my time without generating any revenue, so my net worth has taken quite a hit, due the 1-2 combo of virtually no income and major down stock market.

Account	Jan-08	Feb-08	Monthly Change	Monthly Change %
Accounts Receivable	$13.45	$16.14	$2.69	20%
Checking BoA	$290.04	$746.77	$456.73	157%
Checking VB	$2,804.51	$0.00	$-2,804.51	-100%
Savings BoA	$304.18	$308.25	$4.07	1%
Savings ING	$6,004.71	$5,685.35	$-319.36	-5%
Brokerage Cash	$6,053.93	$1,630.83	$-4,423.10	-73%
Brokerage Equities	$9,203.79	$13,278.00	$4,074.21	44%
401k	$33,603.24	$32,764.65	$-838.59	-2%
Total Assets	$58,277.85	$54,429.99	$-3,847.86	-7%
Credit Card 1	$0.00	$0.00	$0.00	N/A
Credit Card 2	$0.00	$0.00	$0.00	N/A
I need a car	$6,000.00	$6,000.00	$0.00	0%
Total Liabilities	$6,000.00	$6,000.00	$0.00	0%
Net Worth	$52,277.85	$48,429.99	$-3,847.86	-7%

Not much new here, I spent quite a bit on purchasing more index funds to lower my cash position. Also I’m already dipping into my money set aside for the car. Since I don’t want to drain this so quickly, I am working on getting a contract web developer job to get my cash flow back in the right direction, while simultaneously improving my web development skills.

I just finished my Net Worth HTML Table Generator project, which was a nice way to brush up on C#, a language I will be using some in my web projects.

A few weeks ago, I posted Part I my book review of More Wealth without Risk by Charles J. Givens. I hadn’t intended to wait so long to post Part II, but moving to another state, being sick with flu, etc. have slowed me down. Now that I’m feeling healthier again, lets get back to business…

Part II is about Tax-Reducing Strategies. Ugh.While many would revel at any opportunity to find a way to stick it to Uncle Sam, I hate tax reducing strategies, because it seems like tricking your way out of paying your fair share, but tax reducing strategies are probably the most effective way to build wealth. Since taxes make up one of the biggest expenses for nearly everyone, finding ways to reduce these recurring net worth killers is a critical tool in personal finance tool-chest. It’s time for me to start taking my medicine…Chapter 13 basically tries to motivate you to start paying attention to your taxes and realize that it is OK to want to reduce your tax bill as much as possible and puts to rest the fallibility that earning more money can put you into a higher tax bracket causing you to actually earn less after taxes.The reason why this can’t happen is that U.S. income tax works on a graduated scale, where the first x number of dollars is taxes at one rate, then the next y number of dollars is taxed at a higher rate. If you get a raise that puts you into a higher tax bracket, only the additional money will be taxed at the higher rate. It is not possible to earn more money but have a lower net pay because of tax brackets.Givens also makes the case that the money you pay in taxes only fractionally goes to the causes you want them to, such as education, welfare, or whatever issue you believe in supporting. The vast majority of the money you pay in taxes will go to things you couldn’t care less about. If you want to make a difference with your dollars, the best method is to reduce your tax bill and donate directly to the causes you believe in.Since reducing the cost of higher education to students is my highest priority, my best plan is to pocket any tax breaks I can find and donate those to a scholarship fund.Chapter 14 dives into tax return filing strategies. Strategy #116 is one I plan to implement next year: “USE THE LONG FORM - YOU CANNOT PAY MORE IN TAXES, ONLY LESS.”In the past I have always used some free online tax preparation tool, or had a tax professional prepare my taxes because of the complications of my expatriate assignment. Next year I would like to start putting in more effort to learn more about the tax system, so I can start actively and aggressively implementing tax savings strategies.Strategy #124 is interesting, although I am skeptical of its validity: “FILE YOUR RETURN LATER, NOT EARLIER”. Givens claims that the IRS’s software is setup so that a higher percentage of returns are audited in the beginning than at the end of the filing period. Givens claims that the IRS has a quota of how many returns to audit because of limited auditing capacity, and that once this quota is met, your chance of being audited drops dramatically.

The idea makes sense, but I still find it hard to believe. Plus, the IRS has plenty of data to know statistically when people will file, so it would be an easy bug fix in the software, if this is or were at one time true.

Chapter 15 is about what to do in a tax audit. This chapter may be a good reference if you’re ever audited, but there isn’t much advice here on how to prepare in advance or avoid an audit.

Family Ties- Chapter 16 introduces a fascinating idea to me, Strategy #138 “SELL YOUR HOME TO YOUR CHILDREN”. The idea is as follows, as you approach retirement age, you likely have a large portion of your net worth tied up in your home. There are other solutions to this problem, such as a reverse mortgage, where the bank buys your house back from you and pays you a monthly check, so that hopefully you die with no equity left in your house, but having the benefit of living there for free and receiving a monthly check to cover your expenses.

Givens has a different take on the same idea, but instead of the bank buying the house, one of kids buys your house. You unlock all of your equity and pay rent to your kid. Your kid receives a nice investment opportunity, because you pay your kid 80% of market rental value, but you also act as a live-in property manager. Your kid gets a nice tax saving incentive in the depreciation of the property. This seems to be a win-win situation that I had never heard of, and I ran the idea by my parents, but they were not all receptive. Oh well. Maybe once I have some established income to pay the mortgage, we can run the numbers…

The best strategy of the chapter is Strategy #148 “2 DEDUCT THE COST OF MORE WEALTH WITHOUT RISK AND FINANCIAL SELF-DEFENCE“.

Givens argues that his own books are deductible tax preparation aids. Since his books teach you how to save on taxes, you can deduct even more from your taxes by deducting them. That’s funny to me.

Chapter 17 is entitled “Whom do you trust”, and it’s all about setting up your finances and legal documents to minimize taxes when you die. Since I won’t die (I am still young and invincible), I just skimmed through this chapter. You should read this and act on the advice if you are mortal and/or have kin to pass on an estate to. Otherwise Uncle Sam would be grabbing more than his fair share and your surviving family will be burdened by your lack of foresight. But hey, I don’t want to face up to that fact that I won’t be around forever, either.

Chapter 18 is about maximizing the benefits of your employer’s retirement plans. This issue is the number one piece of advice of nearly evey personal finance guru, and Givens follows right in line. Maximize your contributions, and do it now.

Back when I had a job, I had the tax free maximum of $15,500 taken out of my check each year. Sometimes I thought it was too much to be saving now for a  retirement so far away, but when I looked at how much difference it made in my pay check after taxes, it didn’t seem worth reducing. Putting money in your 401k reduces your taxable income, so the highest taxed dollars enter your account tax free. The lowest taxed dollars go into your pocket. I have to echo the advice of everyone else, put every dollar you can possibly afford into your tax-deferred retirement plan and don’t touch the money!

One funny quote from the book, “You are no longer required to stick your money in a low-paying, fixed interest, 7% or 8% guaranteed-return investment. If you were your money, you wouldn’t even consider working that cheaply!”

Anyone with a programming background knows not to hard-code numbers… these things change and need to be updated over time… I would kill for a guaranteed return of 7% right now!

This book was first published back in 1988, when interest rates and inflation were much higher, so the numerical examples must be looked at carefully, as they don’t necessarily apply to current laws and market conditions.

Chapter 19 explores some ways to make travel tax deductible. Right off the bat, Strategy #181 is eye-catching: “USE JOB INTERVIEWS TO MAKE VACATIONS DEDUCTIBLE”. Givens says if you spend two hours a day on your vacation looking for a job, you can deduct the expense of the vacation. Another idea is to travel to a foreign country with an empty suitcase and return with items to sell to your friends. You can deduct the travel expenses as you are now an import company.

Chapter 20 is about interest that is tax deductible. Everyone knows that mortgage interest is tax deductible, but what other ideas does Givens have:

Strategy #188 “BORROW MONEY FOR YOUR IRA”. I need to do some more research on this one, but that could be a very smart way to do things. Givens gives a complicated example, so I’ll make up my own.

Let’s say I want to fund my Roth IRA for 2007 with $4,000. Since the market is down, now is a great time to invest, and I am confident that I will be able to make a 15% return on my money for the year. Also, my credit score is good, so I can go to Prosper.com and take out a personal loan for 8%. According to the loan schedule, I would pay $275 in interest the first year, but this interest is tax deductible, so it would really only cost about $200, assuming I am in the 25% tax bracket. My $4,000, however, earns $600 over the year.

Since stocks tend to go up over time at a rate of 11% per year, using this strategy of borrowing the money at any rate under 11% will statistically work in your favor. Add to that the tax advantage, and that’s a great strategy! Thanks Mr. Givens. I hope this tax deduction checks out.

Chapter 21 is called “Give yourself a tax-free raise”, and its full of boring advice such as how to adjust your W-4 withholding to make sure you don’t prepay too much in taxes, or get stuck in April with too much to pay.

Chapter 22 is “Working for tax deductions”, and it lists ways to deduct expenses related to your job. Also boring, but here are some ideas. Strategy #208 is something I hadn’t thought about before: “DEDUCT EVERY DOLLAR YOU SPEND THAT IS RELATED TO YOUR JOB”. Givens claims that if you spend money for job-related items that aren’t reimbursed by your employer, you can deduct these expenses. I’ve certainly spent my own money in the past on work related things that I wasn’t reimbursed for, but never thought to keep records of the these to deduct. Also expenses related to finding a job, or relocating for a job can be deducted as well.

Maybe a stretch, but Givens suggests paying your family to help you with work and deducting the expense in Strategy #210 “PAY YOUR SPOUSE OR KIDS TO ASSIST YOU WITH YOUR JOB”. Is this a way to get a tax break on your kids’ allowance?

Strategy #216 is probably even more relevant today than it was in the 1980’s: “DEDUCT A HOME-BASED OFFICE WHEN USED FOR YOUR EMPLOYER”. If you can convince your employer to let you work from home, not only could you save time and money by not commuting, but you could also lower your tax bill.

Chapter 23 is entitled “Turn your home into a tax haven” and is just a few pages long. Givens explains that you can deduct home improvements, but not home repairs, unless they are made within 90 days of selling the house.

Chapter 24 is about how to make your boat, plane or RV tax deductible. You guessed, use them in your business to make them tax deductible. Also, a boat or RV can be declared as a second home, so that you can deduct interest paid.

“Getting Down to Business” - Chapter 25 is all about turning a small business into a tax shelter. Strategy #232 “BEGIN YOUR BUSINESS AS A SOLE PROPRIETORSHIP INSTEAD OF A CORPORATION.” Givens argues that the benefits of forming a corporation are not worth the hassle of the paperwork initially. The main benefit of a corporation is the protection of your personal assets, but Givens argues that a business liability insurance policy is an adequate alternative. As a sole proprietor, you are your business, so you can deduct all losses from your day job and investment income.

Of course to perpetually claim your deductions, you must be a legitimate business, and you must show a profit three out of five years.

The rest of the chapter is filled with the same concepts repackaged in several different embodiments, but Strategy #268 “USE ONLY A SELF-DIRECTED SMALL BUSINESS RETIREMENT PLAN” is very exciting to me. As an employee I had very little control over my main investment account, my 401k. As a small business, I will have the chance to decide exactly which investments are available to me in my tax-advantaged accounts.

Phew, the pain of reading about taxes is finally over. Now I have some ideas for saving on my biggest expense in life. Next year I will take Givens’ advice and do the long form of taxes and see what I can learn about keeping as much of my money as possible (so I can give it away later, of course!).

A little over a week ago, I started experimenting with Adgridwork.com’s service of free advertising in a sort of automated link exchange. I just removed these ads today after about a week and a half, as they have generated almost no traffic, and the quality of sites I was advertising for was not very good.

So these ads have been removed, and I deem the experiment a miserable failure!

I just treated myself to another episode of the Suze Orman show, and she took an email question from a viewer, but I have to disagree with her answer…

Joseph, 32, owns his own house cleaning business and has saved up $1.2 million. He owns his house and two cars outright and has a wife and two kids, 6 & 7. He is wondering if he has enough saved or if he should continue to stick it out. He says he can save $20,000 a month, but is sick of it after 14 years.

Suze says since he will live another 50 or 60 years, $1.2 million is not enough, and that he should stick it out as long as he is able, so that he can retire with $12 or $15 million. At 5% he would only make 50,000 a year from interest.

I was a bit shocked that she turned him down outright, because I think that’s plenty of money. Also, he could probably sell his business for another half million, and live off of $75,000. With his house and cars paid off and great income purely from bank interest, he could easily live the idle lifestyle he’s been slaving away for for 14 years.

 If his story is true, I say the guy has worked hard enough and should throw in the towel for a while and enjoy some time with his kids. What do you think?

I found an interesting site today while playing around: adgridwork.com. When you sign up for the site, it allows you to place ads on your page, much like Google’s adsense, but the difference is that you don’t get paid with revenue, but rather with traffic back to your site.

If you look at the bottom of my main page, you will see ads like this:

Any time such an ad is clicked on, my “karma” to the service goes up, and the service is more likely to display one of my ads on some other participant’s site.

Since I am working solely on web pages now, I am always interested in unique / cheap ways to generate traffic, and the price is about right with this one.

Upsides

1. The service is free. Well, sort of - You have to figure that advertising space could be used for ads that pay you in real money; so any clicks there would be lost revenue from ad services that actually pay you for clicks.
2. The interface on the adgridwork.com is really easy to use, and the stats update almost immediately.
3. Ad-Click-Happy traffic sent your way? I almost never click on ads while viewing web pages, so I always envision a small minority of people that just click on everything they see, which make up for the majority of people who don’t click on ads. If people come to your site because they clicked on ad, aren’t they more likely to click on an ad on your site?

Downsides

1. I have only been using the service for a few hours, but the quality of sites I am advertising on my page is pretty low. Mostly site’s for Foreign Exchange stuff or pretty unrelated pages. Their algorithm doesn’t seem as good as Google’s for figuring out the topic of your web page.

I’ll try this out for a while and see how it turns out…

Earlier I mentioned that I don’t understand exactly how the Fed works, so I have started reading up. This link has a very good explanation for those who want the long winded version, for those less patient, I’ll sum it up here:

The Federal Reserve is made up of independent banks and receives no budget appropriations from Congress. These banks are essentially “bankers’ banks” and make their money in the following ways:

1. Interest from holding U.S. Treasury notes
2. Interest from loans to depository financial institutions
3. Fees from services to these institutions, like Automated Clearing House transfers (ACH).

The shareholders of these banks are payed a fixed 6% dividend, and any additional revenue is given back to the U.S. Treasury.

The Federal Reserve is tasked with maintaining a balancing act between recession and inflation, for keeping the economy in an optimal position. The tools at their disposal are the following:

1. Purchase and sale of U.S. Treasury - This affects the amount of money and credit available to the economy.
2. Reserve requirements - The fed can change the percentage of reserves at banks, which also affects the amount of money and credit available, but this is rarely done.
3. Set the discount rate - The discount rate is the interest rate set by the Fed for short term loans to other banks.

So now armed with a better understanding of the Fed, I wanted to understand how the Fed’s decision to lower the discount rate resulted in a lower rate at my ING Direct account.

In late December, the Fed’s discount rate was 4.25%, whereas my ING Direct account’s rate was 4.1%. It makes sense that ING’s rate would be slightly lower than the Fed’s, because why would ING bother borrowing money from me, if they could get it cheaper from the Fed?.

Now the Fed’s discount rate is 3.0%, but my ING account is still yielding 3.4%, which is now higher than the Fed’s discount rate, which doesn’t make sense to me. Is this an arbitrage situation?

If a bank can borrow money from the Fed at 3.0% and put it into an ING Direct savings account at 3.4%, then they can make risk-free money doing nothing. Economic theory says an arbitrage situation like this can’t last long…

Is this just temporary, as ING wants to keep the shock of the falling interest rates low? Are they afraid of losing deposits by cutting their rates too quickly?

I bought some more of my favorite index fund today, since the market was slipping. I am now the proud owner of 33 shiny new shares of SPY, bringing my holdings to an even lot of 100 shares.

My purchase price was  $135.25, and the price continues to drop. Oh well.

SPY has about a 2% yield, and I can expect dividends of about $270 this year from these funds. That $270 is the biggest amount of income I can count on this year, which is a bit scary!