Category Archives: money

why I will not live in the northeast forever

A constant topic of conversation I have with my wife Bubelah is where we want - or should - live. We live in a suburb of New York City (the only major city growing in the northeast). Our cost of living is horrific. We have a three-bedroom townhouse that cost just shy of half a million dollars in 2004, pre-boom. Our house would go for almost $600,000 today. I think this topic goes well with an ongoing debate at The Simple Dollar.

When we bought the house, we received an abatement. For those of you not familiar with New Jersey’s blood, er, property tax, municipal governments often give a break to new construction for a set number of years. The way it works is that our house is taxed at the same rate as any other house in our municipality, but the assessed value is reduced by a set percentage. So a house, having been assessed as being worth $400,000, will be taxed as if it had been assessed as $300,000. This tax treatment will continue for another 4 years.

However, once it ends, our property tax will leap upwards. How much depends on the rate at the time and the new assessment. This situation wouldn’t be so bad if not for the fact that we already pay almost $700 per month in property taxes, plus over $200 in association fees (road upkeep, lawn upkeep, snow shoveling, etc. - not a bad deal, actually).

In five years, therefore, we might be paying approximately $1200 per month in taxes and fees. This is before our mortgage of almost $2000 per month. This means that simply to keep the house my after-tax income must be $3200 just to pay for the house. Before paying the utilities, for food, for diapers, for anything else - $3200 after tax or the first $50,000 of my gross income per year goes to housing costs. If we ever paid off the mortgage, we’d still have $1200+ per month to pay for all eternity.

All of this might not be so bad if it wasn’t for the fact that the property tax goes to service municipal debt, a failing school system, broken roads and awful municipal services. We have only two municipal parks in a city of a half million, potholes litter the roads, and large areas of the city aren’t safe after dark. We have concluded that the public schools are not an option for Little Buddy.

My point is that we must really, really, really love living near New York to put up with all of that, right? There are other considerations - Bubelah’s extended family all live in New York, my parents are nearby, and we desperately hope for a continued gentrification of our city (and it is happening in fits and starts). But are we crazy?

Consolidating accounts

stack of credit cards
Creative Commons License photo credit: kalleboo

One of the best financial moves I made had very little actual net worth impact, but significantly improved my quality of life. After Bubelah and I got married, we did a quick inventory of our bank accounts, credit cards and brokerage accounts. I don’t remember the exact numbers, but between us we had at least four bank accounts, 20+ credit cards and approximately 12 brokerage accounts (and I’m including company 401(k) plans, IRAs and so forth). I had three direct-investment stock plans where the stock was held by the company, too.

We decided to consolidate to two banks, two brokerages and effectively to four credit cards. Why? Here are our reasons:

Banking

We chose our bank for our business and personal checking for two reasons: they have a large number of physical locations in the New York City metropolitan area and their account fees were reasonable (basically free checking). I could not think of any particular reasons to go with another bank, simply because we saw their branches everywhere, and in particular several convenient to our home. The fees were fine, because as long as we maintain some reasonable minimums (approximately $500 per account) we don’t pay anything. We don’t receive interest but we try to keep a bare minimum in these accounts.

We chose an online bank for our emergency fund and other savings. We could just as easily have used ING or Citibank, but at the time we decided to open an account HSBC was offering the best rates. As we have extra money in the checking account we transfer it into our online savings account. HSBC (similar to other online high yield banks) has a structure friendly to people with frugal natures. The account pays a very respectable interest rate, and it takes some small effort to withdraw funds, meaning spur-of-the-moment withdrawals are unlikely. We understand that the money in this account is not returning what our stock accounts are, but this is the conservative, worst-case scenario money so we don’t mind have a stable rate of return in exchange for very low risk. You can learn more about HSBC’s savings account here. I highly recommend it.

Brokerages

We went with two separate brokerages for our accounts. We ended up going with two brokerages for several reasons:

  1. I started moving my brokerage and IRAs before Bubelah did. I started this process because I was unhappy with my brick-and-mortar brokerage’s high commissions and awful online experience. The broker I chose, Ameritrade (now TDAmeritrade) had much lower commissions ($7.95/trade) and a much more pleasant online interaction. I am not a day trader anymore, so the commissions were not a critical factor, but I don’t rely on a broker to make trades for me and so I felt little need for expensive ‘actual person’ trading. Bubelah chose another low-cost online broker with similar commissions.
  2. We had to keep separate IRAs so we thought it would be simpler to keep one brokerage account and several IRAs linked without a lot of confusion over which account belonged to whom.

Both of us had a vague fear of putting all our investment assets in one basket. While I have no reason whatsoever to worry about either of these firms, we didn’t want to be in a position where everything we hoped to use for retirement was held by one (virtual) company.

Credit cards

Our consolidation of cards was a mixed success. The easy part was the store cards. We canceled all of them. We kept one card as our ‘main’ card. We had to keep a debit card associated with our bank account, and I had a flexible spending account card through my work. Other than that, we kept three more credit cards, for different reasons.

  1. A card for business purposes. Bubelah runs an online business so we decided we should keep any purchases necessary for the business on a separate card. We have a separate checking account at our bank, too.
  2. A ‘legacy’ card for Bubelah, because of the points. She had been using the same card for years and had accumulated a large number of points/miles on the card, and wasn’t willing to lose them all. Plus, it was in her name alone and we decided it made sense for us each to have our “own” card which would not be a joint account.
  3. One card in my name only, for the same reason - I wanted something in my name only, because other than this card every single thing we own is joint.

The biggest benefit to the whole process is saving time and increasing awareness of spending. When you get one huge bill each month and know you have to pay it off in full, it makes you think twice before spending. We always pay the entire balance each month, so it’s almost like spending cash. However, you get spreadsheet downloads showing when/where/what you bought, and you get points which we have used to save thousands on hotels, flights and so on. We have put almost all of our spending on the card, including automatic charges (cell phones, utilities, etc.). I think it helps to see all of your spending in one place, and it greatly simplifies bill-paying at the end of the month. We only write 1 physical check each month. All of our other spending is through automatic bill payment on our bank or through our main card. Even the mortgage is automatically withdrawn.

If you haven’t already considered consolidating your accounts, consider this: it will take a tremendous amount of time to track down all of your information, move your accounts (particularly investment accounts) and close unneeded ones, but the time savings on the other end of this process are tremendous. Where once we spent hours flipping through paper bills for our dozen credit cards and trying to figure out which account to pay it out of, we now just automatically pay our one credit card and get two statements for our investments. We have a clearer picture of our spending by seeing it summarized in one credit card per month. I believe anyone could benefit from making their finances simpler and reducing the time spent on them.

Landlines

I wonder how long it will be before I can get rid of my landline. It’s a source of constant irritation to me. It costs almost $60 per month for the cheapest flat rate program Verizon has. It includes unlimited long distance and local calling.telephone

This seemed like a good idea when we moved from New York to New Jersey. Since Bubelah’s family lives in New York and mine in Virginia, we made a fair number of long distance calls. However, with all of our families on Cingular, oops, AT&T, we get mobile-to-mobile minutes free.

“So why don’t you get rid of the land line and just use the mobile phones?” you may ask. Good question. First and foremost, the sound quality on the Samsung phones we have is really poor. They are little flip phones and you have to bellow to be heard. If we had better phones we might not have such terrible sounding connections. Then again, that may be wishful thinking and it may just be the service.

Second, we have a family plan with limited minutes. I use my cell occasionally for business, and we have five people on our plan using 500 minutes per month. I imagine we don’t use our landline that much during the day, but it still might strain our minutes.

Third, I remain distrustful of internet phone services. I really have to see one someday, but no-one I know uses this yet. If I saw it and used it and it worked I might be able to get it myself, but I’m afraid it will sound like Skype, the equivalent of using a walkie-talkie for a conversation.

Finally, and in some ways the most important but easiest to overcome problem, I remain worried about 911 calls. Landline 911 calls go right to, well, 911. I have the police emergency number programmed in my cell phone, but I have never ‘tested’ it and I remain concerned that in an emergency a mobile won’t be enough. I remember very well from my childhood and from 9/11 times when everything went out, but the phones stayed on. Electricity out because of snow/lightning/blackouts? The phone still works. All mobile phones dead because of swamped communications during 9/11? Landline still worked, and I lived in lower Manhattan, the heart of the storm.

I guess in this instance I’m just not thinking clearly. We plan to upgrade phones soon, primarily to get features that we need with a toddler around. “What does having a toddler have to do with your type of phone?” Well, try carrying a toddler around while talking on your flip phone. Try talking on your flip phone around a toddler who loves phones and yells if you don’t give it to him. We really want Bluetooth phones, or at least speakerphones, so we can go hands free easily in the car or while pushing his stroller or even while chasing him around the house.

So hopefully a new phone will have a better connection and interface and we’ll be able to finally kill off the landline and save that ridiculous $60 per month. I really wonder what the future is for landlines, because I don’t see what they can do faced with this.

in defense of Netflix

I have a subscription to Netflix. I realize this is not frugal. I realize I shouldn’t be watching TV. I do, however, have five points I can make in defense of Netflix.

  1. We don’t have any premium channels other than some Russian language channels. Bubelah really enjoys being able to watch TV in her native language, and I don’t really have a problem with it since otherwise she would hardly ever hear it other than from her family. We canceled all of our other premium channels after we got Netflix.
  2. It controls the quality of our movie viewing. I really liked Rush Hour II. I usually was pretty happy to see it come on TBS, or The Matrix. I thought watching it for the second or third time was no problem. However, when I saw Rush Hour II for the eighth time and watched Sweet Home Alabama for the second time - yes, you heard that right, I am not proud of it - I realized I was really wasting my time. Watching a movie twice is OK. A great movie like The Fountain, Snatch, or The Irony of Fate may be worth watching once a year. But no-one needs to see Blue Streak more than once. With Netflix, I generally ensure that I only watch movies once, although I may use it to see a classic that I haven’t seen in a long time. Right now on my queue I only have two such movies - Wall Street and Dr. Zhivago.
  3. We watch and return movies rapidly. With rare exceptions, we watch a single movie over two nights. After Little Buddy is asleep, the house is cleaned and we’re ready to relax, we’ll usually watch an hour of a movie before turning it off an hour before going to sleep. So we keep one movie two days, return it the next day, receive a new movie the next day. So if I receive a movie Monday, we generally have the next one in our hands Thursday night. Since we have two subscriptions, that means approximately 2-3 movies per week, or approximately 4-7 hours over a seven day period.
  4. I no longer watch any TV other than Netflix. I decided over a month ago to stop watching all TV. I don’t turn our satellite on, ever. Bubelah may watch a program in the evening, and I may watch it too, but for the most part I don’t watch anything except Netflix. If I didn’t have the new movies coming in for entertainment, I might break down and watch The Matrix for the 13th time, and yes, it’s that good.
  5. Netflix broadens your horizons. I have already seen a dozen movies on Netflix that never would have been shown on any channel on American TV. We’ve rented Israeli, Swedish, Russian, Italian and even obscure American films that we never would have seen otherwise. Many of them are good, and some have been uplifting. Some have been horrible, but that’s to be expected. Some have been deeply moving, and I am glad that I saw them.

I know Netflix is not a frugal choice or maybe the best use of time, but I like it and intend to keep it for the time being.

follow the Poor Dad sometimes

If you spend any time on personal finance sites, you’ll hear about Rich Dad, Poor Dad. Personally, I would credit it with a tremendous amount of influence on my life since I read it in late 2003. This book changed the way I think about money, about priorities and even about life in general. I plan to review it in the near future.An important distinction, however, is that not all of this change was good. One of the main tenants of Rich Dad is ‘maximizing cash flow’, or attempting to push expenditures as far into the future as possible. A very common way of maximizing cash flow would be to take a balloon mortgage, for example, where payments are low or interest-only for several years then escalate.

At the height of the housing boom we bought our current house. Fervently embracing the concept of maximizing our cash flow, we attempted to get an interest-only monthly floating rate mortgage, which would (at the time) have resulted in sub-$1000 per month payments on our half-million dollar home. After 5 years, the payments would shoot up, but we were convinced we could easily refinance or move or somehow avoid that situation.

Fortunately for us, the neighborhood we were moving into did not meet the lender’s criteria for “aggressive” mortgages. It was too new, and there was not enough payment history for the neighborhood for them to measure the risk of default. Our mortgage application was rejected, and we proceeded to obtain a 30 year mortgage at 5.6%. This meant our payments were almost double what we had hoped, and we were not happy.

Three and a half years after being turned down for the adjustable rate mortgage, we still have regular payments. With the increase in interest rates we would be paying almost the same amount on the ARM that we are paying on our traditional mortgage, but it would all be interest. The balloon payment would be looming, and our cash flow would be no better than it is now.

So in retrospect we were saved from ourselves. Despite the fact that we think we are fairly savvy people about finance (she has a degree in finance and I have an advanced degree in accounting) we lucked out by being turned down for the ARM. I doubt we would have done much with the ‘maximized cash flow’ since our first thought would probably have been to invest in more real estate, again using ARMs. Doing so would have compounded our error, and now we would be facing a mounting avalanche of debt.

I think the moral I take away from this is that even when you follow a particular philosophy or guru, you should always consider a worst-case scenario. Sure, the traditional mortgage has cut into my income and made it difficult to consider vacations and larger purchases. That pales in comparison to the ARM worst-case scenario: being forced out of the house.

As a postscript, I still think that Rich Dad, Poor Dad is a critical read for anyone who lives in America. Kiyosaki makes excellent points about working for income versus investing, and made clear to me for the first time that what I wanted to be able to buy was time, not things. Financial freedom is the goal, although I had never heard it put so plainly. So please don’t read this as an indictment of his book. I highly recommend it, but as with anything else in this life you have to be cautious and conservative when dealing with your home, your family or your health. Without these three things all of the cash in the world will be useless.

Other reading:

Rich Dad, Poor Dad:  What the Rich Teach Their Kids About Money-That the Poor and Middle Class Do Not!

teaching risk tolerance

Pay down debt or invest


There’s a debate you read often on personal finance blogs: if you have a large sum of money, should you use it to pay down debt or invest? The answer is usually dependent on the person’s risk tolerance, but I think it also depends on the nature of the debt.

Debt is a bad thing in most cases. Something you “own” like a house is actually not owned by you. The house is owned by a bank. The bank is just letting you use it. Why? Fail to pay for a month or two, depending on the mortgage terms, and the bank will take back the house. The bank can’t just take 1/360th of the house back for each month you miss, so they will repossess the whole thing and the law will be on their side. To me, this means the bank owns the house.

However, there are better kinds of debt; take a student loan. If you pay for your education with a loan, it can’t be taken away later. You will have that diploma and although you can have your credit rating wrecked or your wages garnisheed by failing to pay that debt, you’ll always have that education. That’s quite different from using debt to own things.

Now if you have credit card debt, pay it down before you spend a dime on almost anything else in your life except maybe health insurance. Any debt where you pay 18%+ in interest is bad debt.

In comparing debt to investing, no investment in anything, ever, is guaranteed. We could plunge into a 20-year depression in October of this year. Unlikely, but the US has a number of unfavorable situations that could cause this to happen, so it is not impossible. If that happens, all of my index funds and money markets won’t be worth much. Investing has no guaranteed rate of return, and in fact can have a negative rate of return quite easily. If you bought Enron stock, your net return was -100%. If you have a stock paying 2% dividends per year with a stagnant price per share, you are not doing as well as you could parking that money in a high-yield savings account.

However, if you can pay down debt you have a guaranteed rate of return. If I have a 5.6% mortgage (I do, lucky me), then every bit of principal paid early is a reduction in the amount of interest I’ll eventually owe. Once that payment’s in, that interest is gone. This makes wonderful sense for something you want to ‘own’, like a house. However, if you look at my student loan example, what’s the advantage of paying early? Nothing, really. I already fully “own” the asset (my knowledge and diploma).

To sum these examples up, what really matters is ownership. If you can pay down debt to own something, I think that will beat investing any day. Sure, the investment might return 11% per year for 15 years. However, it might not, and many, many students of the market have been burned trying to beat it – better students than I. So I think the goal is to look at whether paying down debt increases your “true” assets or just stifles your cash flow by hurrying up payments for something you already own.

So that’s my opinion in the debt vs. investing debate. It does depend on the individual, but I think I would rather be debt-free and investment-poor than highly leveraged with a huge portfolio. If that was a smart idea, people would be using their home equity loans to invest in the stock market, right?

Random thoughts on investing

I have a lot of thoughts on money, which in my case center not so much around how to spend it as how to save it. I rely heavily on my own prejudices, which are heavily influenced by my cynicism as an auditor who sees crooked finance and operations people every day at big multinational oligarchic companies. And I was heavily influenced by Rich Dad, Poor Dad (although some of my earlier infatuation with Kiyosaki has lessened as I thought more about his advice – more on that later).

Saying there is nothing urgent about saving money for the future is, to put it mildly, famous last words. Better to deal with things when you can do it in a calm and relaxed manner rather than needing to scramble when you’re 65.

…

I am a believer in the US market primarily because there is no real alternative for a corporate employee who has to put most of his savings in a tax-advantaged 401(k) that only really allows cash (money market-type holdings), bond funds and mutual funds as investments.

I have held individual stocks for most of my investing life, but no more. Why? Here’s an example. I was holding Wal-Mart stock. I got it when it was selling at 6. It split 4 or 5 times, went up to 50, and then stagnated for years, paying an awful 3% in dividends which were reinvested.

I took a look at Cigna, a major holding of my very elderly grandparents, recently. I personally think it is utterly crazy for retirees in their eighties to have so much money in a single stock. Cigna right now has a .04/share yield, which considering the $163/share price is effectively $0 yield per year: therefore they are losing 5.25% on 100,000 per year, or 5250. So if there was a capital gains tax hit of 15%, it would take 3 years to get in the black (and that’s simplified since I’m not considering taxes on interest). From a risk perspective, I think an insured money market would be far safer and significantly more liquid. The instant liquidity of cash principal may be important soon, and if they were forced to sell Cigna when it WASN’T selling at near its 52-week high, they could take a huge (imaginary, since it never really existed as a “gain”, only on paper) loss. Cash will not go down (except via inflation, blah blah blah, but that can be effectively hedged with a TIP or a money market, since inflation is not running at 17% – yet). CDs, barring some economic meltdown, are safe and insured.

However, it will take 3-4 years to be in “profit” mode selling off a huge stock holding like that, so it might not be worth it from that perspective. But in the long run at 5-6% in a CD/online savings account they could squeeze out another $5000 or so of cash a year.

The general fragility of the US economic system is a big bugaboo for Bubelah (my wife, at least what I’ll call her on this blog) and me. We have spent some time trying to figure out how to legally open a Euro bank account to start shifting our money out of the US. People put a great deal of reliance, for example, on the Chinese not calling their 500 billion in loans to the US. And I got really spooked by our stock-concentrated savings a couple of years ago - actually maybe a year and a half ago - watching a documentary about Enron. They were issuing “buy” recommendations on that while unbeknownst to the analysts, regulators, etc. Jeff Skilling was dancing around drunk telling his staff to make up fake invoices inflating sales. Is any other company out there as bad as Enron? Beats me. Could be. Maybe not. Maybe so. Probably so, in fact – human nature being what it is there’s always a guy out there who thinks he can game the system.

My thinking with finances has therefore been that rather than trying to think I can outsmart the thieves, the traders, the investment banks with their Crays making 8.2 million trades per second, better to plow everything into high-return cash and mutual funds that mimic the market, and then forget about it. If the US crashes, we’re in a bad spot, but if 5 of the Fortune 500 turned into Enrons tomorrow it would only be 1% of our portfolio. If someone holds a half dozen stocks, it’s 15% of theirs.

It’s tricky. Obviously I’m not retired and living off my investment income in Bermuda so it’s not like I know it all.

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