J.C.’s Money Blog

Here is my net worth update for January, 2008.

A 4% increase was a decent increase, considering the market tumbles. I was able to invest one last time in my old employer’s 401k program, but since I didn’t stay the minimum time for vesting, I lost about $9,000. Hopefully, I can make this loss up with future earnings, that I wouldn’t have been able to achieve while working full-time at a demanding job.

I started a new category for accounts receivable, since my advertising revenue will be delayed income. I will need to set up a bucket for tax liability to keep these expenses in mind in the future.

All-in-all, not a bad month. February should be brutal since I have considerable moving expenses and no job.

Here is my portfolio as of the end of January, 2008.

Thanks to a significant drop in the market, my portfolio has swung into the red. Oh well.

My portfolio is still boring, while I am working on other projects to increase from my income from just about $0. After I have established a decent income, I will begin investing in individual stocks. For now, I plan to increase my holdings in index fund(s), because they require nearly no time researching and provide good diversification for a very low price (SPY costs about 0.2% / year).

January is over, and I have no job, so I will have to rely solely on my business income. For January, income came in at $4.68, which isn’t too great. In fact it’s over 1,000 times lower than my old job income, so the growth better start picking up quick, or I am going to be broke quick.

My revenue amounts to $0.15 a day, compared with $0.09 per day in January. This represents 67% growth, which is pretty awesome, if it will hold. Last month’s growth was much higher, but in February I can concentrate full time on my web projects, now that I don’t have a job.

I was trying to explain why the interest rate on my savings account dropped the day after I opened my new online savings account, and how it was directly rated to the fact the Fed cut interest rates. Since I couldn’t offer a cohesive explanation of why, that means I don’t really understand it myself.

So I’ve started reading a bit about how the Fed works. I plan to write an article on exactly why my ING Direct interest rate dropped because of Bernanke’s announcement, and I’ve added it to my to do list, which I will be able to aggresively start attacking next week.

On a side note, this is my last working week, and its a 4 day work-week.  I can’t wait to be rid of the old ball and chain.

Right off the bat, Strategy #1 is already a good one. “IF YOU WANT TO LEARN ABOUT MONEY, LEARN FROM SOMEONE WHO HAS A LOT OF IT.” While this is really common sense, it is not always put to practice. People love to take stock tips from stock brokers… if the stock brokers really knew what stocks to pick, they wouldn’t bother with being salesmen. Wall Street is one of the only places where people drive to in their Mercedes to take advice from people taking the subway.

I would add a caveat to Strategy #1, not only should you learn about money from someone who has a lot of it, but only from those who have a self-made fortune. I never read anything from Donald Trump, since he inherited the base of his wealth. The first million is the toughest. Why pay attention to someone who got to skip this crucial step?

Part 1- Personal Finance Strategies

Chapter 3 dives right into insurance strategies, which may sound like a boring topic, but Givens does a good job of holding your interest. My favorite quote here: “Remember, all insurance is a bet, and with insurance you always lose something. The minimum you lose is your premiums.” You want to work to minimize your premiums to the point that you are insured enough to meet legal requirements and also cover that which you cannot afford to lose.

Also, another statement to think about, your premiums are determined by the maximum amount covered, but the insurance company doesn’t pay you that amount in case of loss. They only pay the damages. Be careful about over insuring… you may be paying premiums on money you couldn’t even possibly collect!

Strategy #9 - BEGIN WITH ENOUGH BODILY INJURY LIABILITY INSURANCE TO PROTECT YOUR NET ASSETS. Givens claims that juries rarely award damages higher than your net assets, so this level of protection is a good starting point for determining your minimum coverage. I don’t like the sound of this, because it means my insurance premiums will rise as my net worth rises, but its nice to have a guideline to work with.

Strategy #11 - CARRY A MAXIMUM OF $50,000 OF PROPERTY DAMAGE LIABILITY, OR A MINIMUM OF TWICE YOUR NET WORTH. Givens argues that you aren’t likely to do much more damage than $50,000 unless you happen to wreck into a Rolls Royce, which is pretty unlikely. Also, if your net worth is under $50,000 you should just go with your state’s minimum coverage, because you need to be building wealth with the money, not spending it on premiums.

This is good news, since I have passed the net worth of $25,000 mark. Following his advice, I don’t need to increase my damage liability as my net worth grows.

Strategy #13 - RAISE THE DEDUCTIBLES ON YOUR COMPREHENSIVE AND COLLISION COVERAGES TO $500 OR MORE. If you follow the advice of pretty much every personal finance adviser, you have an emergency fund set up. Use this to self-insure the deductible. Why not just call your insurance company, tell them you want to raise your deductible, find out the amount in premiums saved and redirect that payment monthly to your emergency fund.

Chapter 5 is all about home insurance, which isn’t so interesting to me, since I do not and have not owned a home. The basic premises about insurance apply here.

Chapter 6 is about life insurance. This is a topic I am also not really interested in, since I have always declined any life insurance offered by companies I have worked for, in exchange for a few extra bucks a month. Life insurance is betting a company that you will die, and hoping that they are right. It just doesn’t make much sense. That is, if you don’t have people depending on you. So far I have bet against my own death and have been right.

Strategy #47 IF YOU ARE SINGLE WITH NO DEPENDENTS, DON’T BUY LIFE INSURANCE. I agree, so I didn’t bother to read the rest of the chapter. Although, I would say this is surely an important topic for families. Based on the number of life-insurance salesmen, there must be some rotten deals out there.

Chapter 7 is about building a good credit score. I am not really sure what my credit score is, but I imagine its pretty good. Bank of America automatically increases my credit limit every now and then. I don’t have any blemishes, I have (for four more days at least) a steady job with a good income. I have paid off an installment loan for a car at a bank, and have had a few revolving credit accounts for the last 6 years or so. I don’t plan on buying a house soon, and I don’t have any debt. so my credit score doesn’t really interest me.

From what I know, your credit score is important for:

1. seeking a job, potential employers often check credit histories now
2. seeking credit, of course. Your credit score determines whether you are eligible and at what interest rate.

I am not interested in either, so I am skipping Chapters 7 and Chapter 8, which is about creative credit repair.

Chapter 9, Mortgage Control Strategies, is more interesting again. I love the idea of Strategy #87 - IF YOU ARE SINGLE, LIVE FREE BY CREATING YOUR OWN LUXURY ROOMING HOUSE.

Here givens claims that he lived rent free in relative luxury by getting three roommates and renting a large house. He claims the rent checks from his roommates went directly to the landlord, so he didn’t even have to pay taxes on this “income”. While I have trouble believing you could convince three friends to let you live with them in a big house rent free, having roommates is a good way to save money for single people.

Another option is to buy a house you can afford that is more than you need, and to rent out the extra space. This is a strategy I would like to look into some more. I have a friend who has done this for years and seems to enjoy it. Having friends around is more fun than sitting at home alone, especially if they are paying off your mortgage!

The first piece of advice that I see as a red flag is Strategy #93 - THE BIGGER YOUR MORTGAGE, THE BETTER YOUR INVESTMENT. Yikes!

Sure the bigger your mortgage, the bigger your leverage, but that kind of advice needs to be qualified. That is kind of the old school personal advice that noone seems to advocate anymore. The old mentality was that your home is your biggest investment, so you should buy the biggest home you can afford.

Well, that’s dangerous advice. A bigger home means bigger interest payments, bigger property taxes, bigger maintenance costs, higher utility costs, and higher insurance costs. Why not put that extra money in a tax shelterd retirement account?

You should buy the smallest house you feel comfortable in, not the most expensive house the bank will put you in!

Givens rounds out Part I with some more mortgage strategies, such as prepaying mortgages to save on interest, and also taking out the equity in the form of home equity loans to invest. He repackages prepayment in a few different ways which are the same basic concept in different manifestations.

His major contradiction is that he suggests prepayment is a good way to save on interest, and in the very same chapter says its a waste of money to let home equity build up, since it should be invested instead. It is very disappointing to see him take both sides of this controversial issue. But in the end, it is up to your risk tolerance, whether you want to try to pay off your house, or use it as a source of cheap debt to invest elsewhere.

Chapter 10 revolves around obvious ways to manage consumer credit, and Chapter 11 discusses ways to finance higher education, which is probably best treated by another entire book.

So after reading Part I of More Wealth without Risk, my opinion is that the book is mostly filled with good ideas, but somewhat short in the motivation factor. Although I don’t feel particularly motivated to conquer the world, I am glad to have the food for thought on the insurance issues.

Ahh, the world markets are tumbling on subprime mortgage crisis fears. Excellent.

I just opened a savings account at ING Direct, and I was planning on setting up my emergency and car fund there, but I decided to send half the money to Scottrade, so I can snatch up some more shares of America’s top 500 businesses, while they are on sale.

Be fearful when others are greedy. Be greedy when others are fearful. Its time to be greedy.

…

On another note, my procrastination cost me $36, as I left $11,000 in accounts generating between 0 to 0.2% interest, when I could have just as easily opened my ING Direct savings account one month ago.

In a previous post, I mentioned that a liquid net worth of $1 million represents financial freedom to me, because you can earn as much as the average American purely from interest. Unfortunately, due to the effects of inflation, your $1 million won’t be enough to keep you afloat forever, if you want to keep your money in a boring, risk free place.

Let’s say you decide you do want to sit idly for the rest of your life, and that you want to pass on a fortune that will allow your next of kin to sit idly the rest of their life living work-free, risk-free, and stress-free.

First, we need to make some assumptions. We need to determine what rate of return we can get risk free. For the sake of simplicity, I choose 5%, which corresponds roughly to what you can get from an online high yield savings account.

Now we need to determine a rate of inflation. Let’s say 3%, which is roughly the historical inflation rate of the United States.

The key is to live off the difference between these numbers. That margin gives you the amount you can spend without ever having to worry about running out of money. If your money were in the stock market generating 11%, you could spend 8%, but in our example we can only spend 2%.

Now we need to determine how much money we want to spend in our idle lives, spent sipping margaritas and watching Jerry Springer all day. Let’s say we want to live in a $200,000 house with a mortgage. Our monthly budget will look something like this:

For the sake of simplicity once again, lets say you pay 25% in taxes, so you really need to bring in $61,333 a year to have your $46,000 left after taxes.

Ok, now we simply divide $61,333 by 2% (the difference between our interest rate and inflation) and we get $3,066,666. There is your minimum investment for financial freedom, so you can kick back and live the good life. As long as your spending only increases at the inflation rate of 3%, you will never run out of money.

Lets say you are a bit more risk tolerant and assume you can get a return of 11%. Well, then you only need $766,666 invested, and again, you will never run out of money.

So yeah, $1,000,000 is enough to retire on, no matter what your age is, as long as you can stick to a normal standard of life and don’t mind watching your balance fluctuate now and then.

My lifelong goal is to save up $100 million. This may seem ridiculous, but it’s not really. I am about to turn 30, and I want to achieve my goal by the time I turn 75. That gives me 45 years of compounding to make it happen.

Because I quit just my job this year, my goal for 2008 is to not lose any money, so lets say on my 31st birthday I still have $50,000 in net assets. That still leaves me with 44 years for the magic of compounding to help me reach my goal of $100,000,000.

All I need to do is grow my net worth by 19% per year for 44 years starting next year and I will have surpassed my goal.

Yes 19% is an unrealistic target for investment returns, but for net worth growth, its fine. In year 1, I only need to grow my net worth by $9,500, which has traditionally only taken me less than 5 months to do, so I am currently way ahead of schedule. The key will be to stay ahead of schedule through thrifty living and finding ways to significantly outperform the stock market.

The market took a big dip yesterday, so I put in a market order for another 7 shares of SPY. Got in at $134.20, and the market has been going down since. Oh well. I still think the I’m in at a good price.

This brings my holdings in SPY to 67 shares.

Earlier, I wrote about my impeccable market timing but now the price of SPY has dropped well below where I last bought. Hopefully, my market timing is even more impeccable this time!

I just set up my Microsoft Money file to tally up my spending for the month. Ouch! I estimated I could live on about $500 this month, but after only 12 days, I have already managed to spend over $500. I had some unexpected expenses to the tune of about $150, and I also blew about another $100 on things I wanted now instead of waiting for some of my personal effects to be delivered.

At this rate, I am set to spend $1,200 in January, which is well over twice the amount I had anticipated…

Tracking all the expenses was pretty easy, setting up all the accounts and adding in all the expenses for 2 weeks took about an hour and a half.

I have a Bank of America Keep the Change savings accont. If you don’t know about it, it works as following: You need a checking account and a savings account with Bank of America. When you enroll in the program, every time you make a purchase with your debit/ATM card, the amount charged is rounded up to the nearest dollar. The extra change is then deposited into your savings account. Hence the cool name “Keep the Change”, only you yourself keep the change, not the vendor you might have told that to, if you were paying cash.

Bank of America markets this as a way to get started in saving money a little bit each day, and they make the deal enticing with the introductory offer: They match the savings contributions for the first three months, up to $250. You also have to wait a year to be credited with the matching contributions (meaning keep the account open and stay enrolled in the program).

After the introductory period is over, the match is 5% of the rounded-up change.

I enrolled to take advantage of the $250 intro offer shortly after the program was introduced, but haven’t closed the account, since I have been living out of the country and was waiting for my matching funds.

Well, now I am back and have received my matching contributions of $65 for my first year of enrollment. $65 is a pretty good deal, since I kept my account balance right at the minimum balance on the account of $300.

However, there is one major drawback to this program, the interest paid is a paltry 0.2% APY.

I am losing money by having this account. Since the interest rate is so bad, I need to figure out the opportunity cost of this bank account. Lets calculate:

Assumptions:

1. Account balance is reset to $300 each month.
2. An average of 1 debit card transaction daily, average amount of change kept, $0.50

Results:

1. $0.05 interest earned on average balance of $307.61.
2. $0.75 earned on matching contributions.
3. Total of $0.80 earned from $315 of my money.

This yields about 3% altogether, which is much better than 0.2% interest rate alone. However, as the account balance increases, this yield decreases, effectively penalizing you for saving in this account.

Even with all the matching funds, I would be better off closing the account and opening a high yield savings account from E-Trade or ING.

Assuming an APY of 5%, I would make about $1.25 a month on the $315 in a high yield savings account.

Bank of America, I am losing $.45 per month to keep your Keep the Change account (this is opportunity cost, but its just as real and important as actual costs!) .

It looks like you are not going to Keep my Business.

Note: This is a great deal for Bank of America. They earn a transaction fee everytime you use your debit card, which easily covers the 5% match in most cases, plus they hope to have growing savings account balances, on which they pay next to no interest.

Also, you need a checking and a savings account with them, so that you get used to online banking with them, which entices you to go ahead and consolidate and get a credit card with them too. And while you’re at, why not a mortgage….

Whoever at Bank of America came up with this promotion deserves a raise!

I turned in my resignation from my job last week but have offered to help out for a bit longer than usual, so that I can tie up some loose ends, and so that my employer has a chance to find a replacement for me. As the news has spread to my colleagues, it is interesting to see their reactions. Everyone congratulates me, but they seemed concerned when I tell them I don’t plan on getting another job.

But what is the worst that could happen to me?

I am starting a web business and will get valuable experience in a field I know I enjoy more than the field I am working in now. In the worst case, I won’t make the advertising revenue I need to survive and will have to come up with new ideas or get another job.  I know my websites will be technically topnotch, its just a question of whether I can attract the traffic it will take to keep me on track financially.

And if I can’t? Well, I’ll just use my websites as a reference for the work I can do. I can always get another job, and this time in a field that suits me better.

One of the valid concerns my colleagues express is my loss of benefits. Benefits I am giving up by resigning are:

• Retirement
• Health
• Dental
• Vision
• Life Insurance

Life insurance doesn’t matter because I don’t have any dependents. This is something I don’t take from my employer anyway and they pay me an extra couple bucks a year extra for that.

Vision insurance is something I don’t need either, because I had Lasik and have 20/20 vision now.

Retirement is one that really hurts, but I have written about losing my 401k match already.

What I haven’t thought about too much is health and dental insurance. I know I can get Cobra coverage for a few months after quitting my job, then I’ll have find a health insurance provider. I need to do some serious research on this topic.

But all-in-all I am not too concerned. Right now I think my situation is almost already worst case scenario. I have a job I don’t like in a location I don’t like.

I am young and its time to take some risks.