$aving to Invest

Why the fall in stock prices was good for your 401K

2008-05-15T14:03:00.002-04:00

I hope you didn't reduce your 401K or other retirement account contributions over the last four to six months as stock prices and markets tumbled. Even though the value of your current 401K or retirement plan probably fell over this time, in the long term the power of dollar cost averaging and recovering/rising markets would have ensured that your portfolio will be worth more than it would have been if you stopped your contributions when things got rocky. Here's a simple example that illustrates this concept

Joe had a 401K portfolio of $100,000. Assume each stock (or fund) unit was worth $1000 in September 2007. So he had 100 stock units. He used to buy 1 unit every month when he got paid, which cost him $1000. However with the fall in share prices, the unit price dropped to $50. So Joe's portfolio is now worth $50,000. Joe is not very happy but is a long term investor. So he keeps investing the same amount every month, but now gets 2 stock units for the same price. So by June 2008, 9 months later, he has 100 + 2x9= 118 units. With a recovering stock market (just like we are seeing now), the units are back to being worth $1000 again by year end. So Joe's 401K portfolio of 118 units are now worth $118,000. By the end of the next year (2009) with the economy growing again and optimism in the markets the units are now worth $1500. So Joe's 118 units are now worth $177,000. So in the medium term, even though the stock unit price fell, the investment turned out okay as the price recovered. But what if Joe had stopped investment when things got rocky and only started back again at the end of 2009?

If he stopped investing way back in Sep 07 when the stock market tumbled, he would only have the original 100 units and they would be worth $150,000 based on the final price in the example above. So, Joe's retirement portfolio is $18,000 worse off (less $9000 for the cost of the 18 units) by not keeping up his contributions. This example is very basic and is based on assumptions like the market recovering - which I would be very confident of given historical trends. Still you get the idea and power behind dollar cost averaging. You can get more bang for your buck when markets are down and magnify the gains when markets rise.

In conclusion

Unless other circumstances prevent you from maintaining your regular retirement account contributions, don't stop investing when things get rocky. To ensure a comfortable retirement aim to commit 10% to 15% of your salary in a 401K or other retirement account. Best of all your contributions will be tax free and most likely accompanied by a company match.

Is my stimulus payment taxable?

2008-05-15T09:21:00.004-04:00

The answer is No. According to the IRS website - "You will not owe tax on your payment when you file your 2008 federal income tax return. But you should keep a copy of the IRS letter you receive later this year listing the amount of your payment." That's a relief. I am still waiting for my check, but over the last few weeks the stimulus check has been a very hot topic with some stuff being said way off the mark. For accurate and verified information, go to the source - The IRS Economic Stimulus Payments Information Center - where you can get all the information and frequently asked questions on the stimulus you could ever need.

With that, and to find what else is the buzz, here are some of the recent blog carnivals and festivals my articles were featured in over the week. Great job by all the hosts.

Money under thirty hosted the Carnival of Personal Finance #152, which featued my article on starting to budget for $5 gas

Festival of Frugality #125 was hosted at the Quest For Four Pillars, and featured my article on frugal ways to keep your home safe. This was an editiors pick!

The 88th Festival of Stocks was hosted at the Stock Market Prognosticator, which included my article on Macau Play : Melco PBL (MPEL) - on the up and worth a gamble

The Money Hacks Carnival was hosted at Can I Get Rich on a Salary which had a greek gods theme and had my article on understanding Taxes and my Paycheck.

Top ten myths about buying a franchise - Part 2

2008-05-13T14:45:00.003-04:00

This is the second of my three part series looking at myths around buying, running and owning a franchise based on my own personal experience. Following some comments I received on the first article of this series, I just wanted to clarify that I am not anti-franchising. I think it can be a very profitable venture if done correctly and you go in with your eyes open. That is the aim of this series of articles - to set your expectations and to ensure you are armed with the knowledge (truth) to make the right business investment decision.

In the first article, I covered the first 3 of 10 myths of franchising which were:

Myth #1 - Buying into a brand
Myth #2 - One-sided contract
Myth #3 - Turn Key Operation

Here are the next three myths you need to be aware of:

Myth #4 – I will form a corporation to protect me – It is always a good idea to form a corporation to protect yourself from creditors if things go bad. In addition, corporate tax rates tend to be lower than personal income tax rates; therefore there are some savings involved with a incorporation. The problem is not with the corporation itself, but with specific creditors. The Small Business Administration (SBA) may back the bank loan you receive, but they are still going to require you to sign a personal guarantee. In addition, most landlords – especially those with sought after locations – will require a personal guarantee. Most commercial leases run – at a minimum – five years, therefore you are on the hook, personally, for five years worth of rent. When I sold my franchise for a massive loss to the new owner, the landlord required me to do two things:
> Agree to guarantee payment of the rent for the new owner for one year.
> Agree to pay all lawyers fees for the landlord and myself to transfer all the lease documents, etc.

This cost me about $7,000 in attorney's fees. It was well worth it, but hurt nonetheless, given the loss I took on the sale.

Myth #5 – Franchisor will guarantee me a good Location, Location, Location – Most franchisor's perform traffic/volume analysis on any location before you are allowed to begin negotiating the lease. This is supposedly for your benefit, but in reality, they are just statistics and do not guarantee a profitable volume. As Mark Twain said, "Lies, Damn Lies, and Statistics". You can "spin" data to fit your objective. A great location is probably the most important decision – period. And yet like finding a good boyfriend/girlfriend, there are only so many great ones out there. And the competition among all types of businesses is fierce for these coveted locations.

Myth #6 – I will make lots of money (while being my own boss) – Most franchisees make between 30K and 70K per year and work long hours. Sure there are a few stores that produce six-figure incomes for the owner, but this is not the norm. After all, if a franchisee is making 200K at his store at the intersection of X and Y, then the franchise company will put another location a few miles away to take advantage of that volume. Franchisors would rather have two stores making 100K each, than one store making 200K. It gives them better control. They don't like "powerful" franchisees; they are potential threats. The only way to make a lot of money with a franchise is to:

1) Buy a good franchise company - very few will be a runaway success;
2) Get in early;
3) Own multiple stores (four or more) in good locations

Look for the final edition, with Myths # 7 to 10, of this series on franchising in the next couple of weeks. As always do leave a comment and I will endeavor to get back to you as soon as possible. Thanks to Andy and Saving to Invest for publishing this series.

This was a guest post by Tony Parker, an experienced investor across various asset classes and a past franchise owner.

Here are three good books on franchising worth reading if you want more detail on buying a franchise and the pro's and con's of doing so:

1. Street Smart Franchising
2. Franchising For Dummies
3. Real Franchising Stories

Related articles and information links:
Top ten myths about buying a franchise - Part 1
Federal Trade Commission - Buying a Franchise
Small Business Association

Until the nation is broke, viva la credit card

2008-05-12T12:30:00.002-04:00

It was recently reported, by the Federal Reserve, that consumer borrowing surged again in March. Consumers increased their borrowing at an annual rate of 7.2%, compared with a 3.1% rate of increase in February. Here is a summary of the worrying borrowing and debt figures:

The increase in consumer debt totaled $15.3 billion at an annual rate in March, much bigger than the $6 billion increase that economists had been expecting. The bigger gain was seen as a sign that the weaker economy was forcing consumers to increase their borrowing to support spending. It reflected strong borrowing on credit cards and also in the category that includes auto loans.

Borrowing on credit cards was up at an annual rate of 7.9%, compared to a 5% gain in February, while borrowing in the category that includes auto loans jumped at a rate of 6.8%, compared to a 2% increase in February.

The overall growth in debt of 7.2% at an annual rate was the biggest gain since an increase of 8.25% last November. Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis.

It was the growth in credit card borrowing/debt that struck me the most. In a country where all forms of media have continually said that "Credit Card debt is BAD - because it is the most expensive form of debt", consumers still continue to charge it. If you pay off your credit card on time and don't carry a balance, then credit cards are fine - I use them like this for the reward points and cash back.

However, the rising figures on credit card usage and debt surely includes a majority of people who do not pay off their balance on time and continue to carry the high interest debt. You would think people would only turn to credit cards for borrowing as the last resort, when in financial distress, which may be part of the reason for growth in credit card debt growth as banks tighten up on other forms of lending. However, the growth in credit card debt cannot be solely attributed to those in financial distress (for whom it is probably hard to get credit cards anyway), so the rest of the population must still be actively using and piling on credit card debt. Have people not yet learned their lessons from all credit card horror stories in the media! I guess for some the following adage applies "To debt do us part".

Switching on my investor brain (this is an investing blog as well after all), one way you could just profit from this trend is by buying Visa (V) and MasterCard (MA) stock - companies who should profit from consumers continuing to buy things on credit. If you can't beat 'em, you might as well join them.

How people are (mis)spending their stimulus checks

2008-05-11T16:09:00.004-04:00

Here are interviews with various people on what they plan to do with their stimulus checks. With the government hoping people will spend a majority of the $100 billion dollars, they may be concerned with some of the sample responses where a number of folks are just going to save the stimulus payment ($600 per person). What I found interesting was how the various folks responded in line with the the stereotype for their gender, race and background.
Video running time : 4 minutes

From a personal standpoint, I think the stimulus is going to have a limited effect and it will most likely benefit corporate America the most as people spend on services, merchandise or just repay debts. Realistically $600 is not going to save people in financial distress or dramatically change someones life. It is almost like the government has said we don't know how to effectively spend taxpayers money to save the economy so let them decide for themselves. So I ask you, what is the need for those high paid decision makers?

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I bought into the market hype for Visa and got burnt!

2008-05-10T15:24:00.004-04:00

Over the last week or so Visa (V) stock has been on steady run up from about $60 to $90 – until the last 2 days of this week when it lost 7% of its value. I had bought some stock when it was $64 (just after the IPO) and was looking to buy some more based on how the stock performed. It off course performed very well and kept on going up. I kept on waiting for a pullback, but it never came. Finally I got tired of watching the relentless run-up and decided that the uptrend was going to continue – spurred by what I was reading and hearing in the media – and decided to buy some Sep $95 call options. This gives me the right to buy the stock at $95 before the options expire in September. I decided to buy options rather than the actual stock as they provided more upside potential for a smaller investment (each option gives you exposure to 100 shares) – but as I found out the converse is just as true.

I undertook the call options trade on Wednesday this week when the stock was about $90, and I thought that in about five months (the duration of the option) the stock should rise well above $100 thereby making some decent money on the options. But I felt like a true sucker when the share price proceeded to drop over then next two days from about $90 to $83. As I found out option prices magnify both the gains AND losses, so the call option contracts I bought at $8.20, fell to $6.30 – a loss of almost 25% in 2 days!

The options still have a while to run and I do believe in the Visa story over the medium term, so rather than "panic" I will hold on for a bit longer before selling. One of the lessons from all this is not to buy into the market hype, especially using options. The more talked about a stock is in the media; the more chance it has reached its top and is about to have a pullback. Hopefully this story will have a happy ending with the stock getting back to a level where I can break even or even sell the options for a profit. Fingers crossed.

The Importance of Diversification

2008-05-09T11:20:00.000-04:00

In a recent post I talked about the 5 "buy" signs for a stock. However, your portfolio should never consist of just one stock, Exchange Traded Fund (ETF) or mutual fund in the long term because of the potential exposure to loss you will have. So to manage your risk, you must diversify your portfolio. A good rule to remember is that "The more diversified you are, the less pain your portfolio will feel in the long run"

Another reason to diversify is that it is possible to have too much of a good thing. That's especially true when strong performance in a particular market sector causes one part of your investment portfolio to bulge while other parts shrink or grow only modestly. In such situations, instinct may tell you to celebrate your good fortune and leave your portfolio as is—or even to load up on the investment that's doing well. But, in most cases a smarter approach is to take a close look at your long-term investment strategy and take steps to restore your portfolio's diversification.

Protect yourself by learning from the past

Many investors don't want to worry about diversification when they're enjoying a stock market run-up, such as the one we saw in the first half of 2007. But letting one part of your holdings swell disproportionately can be risky. This would have clearly been felt with the market downturn in 2008 where financial stocks, disproportionately large in a number of investment portfolios, meant that a lot of amateur and professional investors took big losses. Conversely, if you had a well diversified portfolio, you probably held up better than most.

A key investment lesson of the last decade is that no one type of investment should have too much—or too little—weight in your portfolio. For many investors, the harm caused by the collapse of technology, financial and telecommunication stocks was compounded by a lack of portfolio diversification.

Of course, investment diversification will never eliminate your risk of loss, nor will it guarantee a profit in a declining market. But it should reduce the chance that you'll suffer disproportionate losses if one particular high-flying sector suddenly descends to earth. And owning a portfolio with exposure to all key market components should give you at least some participation in whatever sectors are performing best at a given time.

Don't lose your balance

Once you've established a diversified portfolio, you'll have to make sure you don't lose the balance you've worked to create. That will mean periodic rebalancing—shifting money from one type of investment to another—to ensure that you continue to hold the mix of stock, bond, and short-term investments that you deem appropriate for yourself.

Rebalancing will result in taking some money away from the top performer of the moment. While that can be emotionally difficult, such investment discipline will help prevent you from becoming too heavily weighted in one area. Investors, of course, want to buy low and sell high, and that is what rebalancing can help you do.

I consider having a well diversified portfolio as an integral part of my investment strategy. To enable this I track my investment performance in a simple Excel spreadsheet, where I also track what percentage (%) of my total portfolio each stock, ETF or Mutual fund makes up. Every 3 months, I evaluate my portfolio and if a particular investment makes up more than 20%, I put a plan in place to reduce it (and hopefully take some profits) to between 10 - 15%. This also enables me to convert paper profits to real profits - a good habit for successful investors.

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Frugal ways to keep your home safe

2008-05-08T10:45:00.007-04:00

Recently there has been a spate of minor burglaries in my apartment complex, which prompted my wife and I to consider getting an alarm system for our apartment. We looked into this via various on-line sites and calls to security companies in our local area and found that the costs would be about $500 to install/wire the system, and then $60 dollars per month to have back to base monitoring. Total cost for the year would be around $1220. Ouch. Given the break-ins were relatively minor and as we had home insurance I got around to thinking that there must be cheaper (frugal) ways to protect ones home. Here is a list I came up with, and am already using some of these precautions. Best of all, the cost is significantly less than a full fledged alarm system. Feel free to suggest any more ideas or thoughts on this topic by leaving a comment.

- Buy Patio door bars. These simple security devices are available as a rod or bar lock. Very effective from both a cost (less than $20) and security perspective. I use a security bar lock for my patio door.

- Get Deadbolt locks for your front door - these are better than normal locks as they have a double locking system making them harder to pick than a regular lock. We already had this installed and it is almost impossible to break without heavy duty tools. (Cost = $50 - $100)

- Turn down the ringer on your phone when you are out. It is a clear sign that someone is away when the phone rings loudly multiple times and no one picks up. (Cost = $0)

- Beam 'em. Get a motion sensor light for your back or front yard so that anyone approaching gets "beamed". This will make your home a less likely target for nighttime break-ins. (Cost = $75 - $100)

- Join the neighborhood watch (or start one). This is absolutely free, and sometimes a neighborhood watch sign can be enough to convince a thief to go elsewhere. (Cost = $20 for the cookies and coffee at the meeting)

- Get a Timer Switch for a couple of lamps in your house, which allows you to set a specific time for lights to come on when you are away. This will give the impression that someone is home. Change the setting by an hour here and there every month to avoid predictability. This security tips is especially useful if you are away for an extended amount of time. (Cost = $20 - $50)

- Put away ladders or tools. Don't leave ladders or tools in your yard or porch. This just helps burglars, by giving them the means and incentive to get into your house. I used to leave my ladder on my patio, but now lock it up. (Cost = $0)

- Tip your local groundskeeper or janitor $10 or so a month and ask him to keep a special eye on your place while doing his normal duties and to call you if anything suspicious is going on. This would only work if you have someone you can trust and live in an apartment or condo complex. (Cost = $10 per month)

- Replace old locks. Get locks for your windows and if you are in a rented place that has a history of break-ins replace any older locks as everyone who's lived in your house previously had an opportunity to make copies of the keys. If you are renting, you should ask the landlord to pay for replacing all the locks before you move in. (Cost = $100 - $200 for locks and services)

- Home for Lunch. Every other week, go home for lunch or just stop buy during the day once in a while. Normally burglars scope out a house for a week or so before breaking in and look for regular patterns. So by breaking up your normal pattern you may put-off would be intruders. (Cost = $0)

- Holidays. If you are going on a extended holiday, make sure you lock everything up, put your mail and newspaper delivery on hold. Also have your neighbors check-in on your place on a weekly basis. (Cost = $0)

- Close those windows. As summer is here, people tend to forget when they leave windows or patio doors open which provides easy access to would be intruders. So have a little sign on the back of your front door saying something like "Don't forget to check the windows and doors are closed", which will be a good reminder when you are rushing out of your apartment. (Cost = $0)

- Lastly, update your home and/or property insurance, especially if you have purchased a number of new things and have valuables at home. If something does happen, you want to make sure you get the money you deserve to replace everything. You should also keep a home inventory, with pictures, of your belongings to help prove what you had to your insurer in the advent of theft. There is software available to assist with this.

At the end of the day your family's security should be paramount. If you feel that the above or other frugal security measures are not sufficient by all means get a full fledged alarm system. A good nights sleep and less anxiety about your family or properties safety does has a high intangible value.

Photo courtesy quinn.anya

Start budgeting for $5 gas now!

2008-05-07T15:55:00.004-04:00

With global oil prices rising every other day and most projections forecasting the average national price of gas to rise to $4 (a gallon) by summer and to $5 the next year, it is time to accept the fact that high gas prices are here to stay. So stop complaining and start revising your budgeting to mitigate the impact from these higher prices down the road. Based on national averages, the average number of times a car is refuelled in a month is 1.86, which equates to twice a month for most people. The current average price of gas is $3.40 (regular) and a normal family car has a 15 gallon capacity. So if gas prices rise to $5 a gallon within the next year, the impact to your budget will be ($5-$3.40)x15 gallons x 2 times a month x12 months = $576 a year after tax. If you have a longer commute and deal with more traffic like most people in larger cities, you will probably need to refill more often and this number could approach $1200 on an annual basis - not small change for most of us. Will your budget be in a position to handle this $50 p/month or $100 p/month increase?

The numbers will most likely vary by location, car type and driving needs. But you get the point. The higher prices are significant and you need to start budgeting like you are paying those costs now, to avoid feeling the sting of higher gas prices to your future outgoings. Any savings from your gas/driving budget to actual spend should be added to your emergency fund or invested. You may want to adopt a similar approach to your grocery budget which will most likely be 10-20% higher in a years time given commodity related inflationary pressures. Given the aim is to avoid excessive debt and unforeseen financial surprises, it is better to over budget and under spend than the other way around.

Results from 2008 IT Salary Survey

2008-05-07T09:45:00.008-04:00

I work in the technology sector and so it was interesting to see the results of the 2008 US IT salary survey. Overall it looks like the median salaries for business technology professionals fell for the first time in 11 years. From 2007 to 2008, median base pay for IT staff fell to $73,000 from $74,000 and for managers it dropped from $97,000 to $96,000. This was probably due to the general economic slowdown which led to lower corporate spending and increased outsourcing thereby driving down internal labor costs. However, as the overall drops are not significant I don't think you can read too much into the numbers yet.

Some other points of note from the survey were:

1. There are still some jobs that are seeing an uptick in salary, particularly those with Web design and Enterprise wide type roles (average salary is $92,000). Help desk/IT support roles came in with the lowest pay at an average of $51,000, which is still well above the average American income.

2. Certain regions are continuing to grow their need for IT staff while others are contracting. The greater Washington DC metro area (which encompass surrounding areas in Maryland and Northern Virginia) is growing thanks to government driven IT spending and demand. Whereas New York and New Jersey are contracting due to hard hit financial institutions that are laying off large numbers of staff.

3. There is still a significant gender gap in pay. Male IT staff earn a median salary of $75,000 versus $68,000 for female staff - a 9% gap. It was 13% a year ago, so I guess there has been an improvement on a year-on-year basis.

4. 55% of respondents say that there are fewer IT jobs available now because of outsourcing. Though only 22% say that this has led to salary reductions for employees.

My salary has gone up at the rate of inflation over the last 2 years, though my bonuses have been in line with what I am due under my employment contract. So I guess I am ahead of the curve for now. I think next years survey results (for 2008 trends) will probably be worse as 2008 will likely be another bad year for job growth and salary increases due to the impending recession and cutback in corporate spending. If you work in the technology sector you should be very cautious when if comes to your job and make sure you are a valued employee. The IT department is normally one of the largest cost centers for companies and so is the first to experience lay-offs and cutbacks when the focus is on reducing costs. The full survey can be found at InformationWeek.

On a lighter note, you could classify bloggers (or more formally web site authors), as business technology professionals. I am pretty sure blogger salaries will not be appearing in national salary surveys anytime soon, but what do you think the average blogger earns? If I was to project my annualized income from blogging - it would be in the hundreds and not thousands of dollars. I imagine this would be the same for a majority of other bloggers out there, apart from the one to five percent who actually make a pretty decent living from their blog.

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Macau Play : Melco PBL (MPEL) - on the up and worth a gamble

2008-05-06T10:22:00.010-04:00

One of the stocks I own in my portfolio is Macau (in China) casino operator Melco PBL Entertainment (MPEL). In a previous post I lamented my losses on it but believed it still had some good upside in the medium to long term. Well it had a nice run up this week ahead of its first quarter earnings report, thanks a positive review in Barron's magazine which labelled the stock the "The Best Bet in Macau". Here some excerpts from the article and my comments on them.

"Crown Macau started slowly, but it's gaining share in a hotly contested arket. More recently, however, Melco's hand has improved. It's found ways to grab more customers, and has a huge new casino on tap. The Chinese government is now limiting new competition, aiding all the local houses. Meanwhile, shares of the Las Vegas Sands and Wynn are getting pounded by fears about a weak U.S. economy."

As MPEL is a pure play on the Macau casino sector it is benefiting from recent local restrictions on issuing new casino licences and lack of exposure to the fragile US economy. Longer term with the regions growth potential, this stock could double in price if earning projections are met and its new casino opening (City of Dreams in '09) meets expectations. The surrounding area and potential visitor pool for Macau is three billion people (China, India, Japan, Korea etc) and so even getting a few percentage points of market share can translate into huge revenues.

"Melco didn't get off to a fast start. It opened Crown Macau in a remote corner called Taipa Island, where it snagged just 1% of the market, unlike the stellar performances of the local Wynn or Sands resorts. But Ho (CEO of MPEL) quickly boosted his numbers by striking a controversial deal with A-Max Holdings, a company that represents 10 junket operators that are paid commissions to bring in high rollers, or VIPs. To qualify for VIP status, a gambler must plunk down at least HK$1 million ($128,000) at the tables per visit." Thanks to the A-Max deal, Crown Macau's market share is now 18%. The VIP segment "is still growing rapidly," says Ho. "There's a lot of wealth being created in China," he notes. For the newly wealthy, the first two travel destinations are Hong Kong and Macau. "The market won't grow 50% forever, because Macau and China will say it's too much. But 30% growth is more manageable," adds Ho.

What the Analysts are saying:

Bargain hunters have begun to take note with the shares up 30% in the last month). "This is a very interesting story, and one worth beginning to start revisiting," says Philip Ehrmann, an Asia specialist and long-term Macau skeptic at Jupiter Asset Management in London. Others say that Melco's stock, which has risen from a low of 8.2 to 13 recently, could top its recent high of $19, about a 50% gain, and even go well beyond that in the next few years.

"He's bringing new blood with a product strategy that's very different from Legacy Macau, including six-star properties with non-gaming amenities and plans for mass-market visitation," says Deutsche Bank analyst Bill Lerner. In the next few days, Melco PBL will report its first-quarter numbers. Ho won't discuss those, but does outline the investment case: "This is a play on Asia and specifically the Chinese consumer. We have minimal exposure to a U.S. recession. Will we continue to grow? Yes."

Joe Fath, the gaming analyst at T. Rowe Price, thinks that Melco will post Ebitda of $70 million for the first quarter, putting it well on its way to beating estimates of $100 million to $150 million for the full year. Analysts, on average, think Melco will earn 19 cents a share for '08, 65 cents in '09, and 95 cents in 2010. That puts the stock's valuation at a nosebleed 68 times earnings for the current year, but just 20 times '09. "In three years, you should get a double on this stock," says Fath. Not a bad bet.

The fundamentals of this stock could be better (Forward PE = 18, PEG = 6) but the potential looks very promising. If you want a good, albeit risky, play for the medium to long term then this is your stock.

The full article can be found at Barrons.

Which Personal Finance Blogging Platform is best (plus 3 tips)

2008-05-04T10:07:00.018-04:00

Having run this personal finance blog for a few months now on Google's blogger platform one question I ask myself as I become more serious about blogging, as a possible full time pursuit, is what is the best and most effective blogging platform to be on for the long term. To answer this I looked at a cross section of the top personal finance and investing blogs (based on various sources) out there. The table below presents a summary of my findings which I think represents a good cross section of the data I looked at.

Blog	Blogging Platform	Published Subscribers
http://getrichslowly.org/blog/	Wordpress	53962
http://www.thesimpledollar.com/	Wordpress	31617
http://www.mymoneyblog.com/	Wordpress	14031
http://www.consumerismcommentary.com/	Wordpress	9151
http://millionairemommynextdoor.blogspot.com/	Blogger	2985
http://www.thedigeratilife.com/blog/	Wordpress	2967
http://www.fivecentnickel.com/	Wordpress	N/A
http://www.moneysavingmom.com/	Blogger	N/A

You can see that from the list that Wordpress is clearly the blogging platform of choice for the biggest and best personal finance bloggers out there. There were a few instances of blogger, but not as many as I would have thought. Most people, like me, start on Blogger thanks to already having a Gmail account (both applications are owned by Google). It is also relatively easier to get started and run advertising on Blogger. Though long term it is clear that as blogs grow and bloggers go for their own hosting options, Wordpress is the preferred choice. From what I have seen, Wordpress seems to have much better templates, "widget" options and even better performance when compared to blogger hosted blogs. I have some serious thinking to do as to if and when I want to port this blog over to Wordpress.

Glblguy at Gather Little by Little had the following comment on this topic when I asked him about it a while ago "Well, I've never been on blogger, but Wordpress provides pretty much unlimited options. You can customize however you want, and there are literally thousands of plugins to do just about anything you want. If you notice around the blogosphere most if not all the big blogs are on Wordpress with their hosting. I think that in and of itself tells you something. If you are planning to move, the sooner the better. It makes the transition easier and you won't loose any Page Rank you've earned.

Also, here are three quick tips from what I observed at the more established blogs while doing the research for this article. Hopefully these will help you along the way if you are starting your own finance related blog.

Tip #1 : Get your own domain name

What ever platform you choose or site design you go with, the main thing to do is get your own domain name. When you set up a free blog with Wordpress or Blogger, you get a domain name with "blogspot" or "wordpress" in it. This is because you are a sub domain under their main one. This can limit the growth (in terms of ranking) of your site and advertisers (assuming you want to build a commercial blog) are reluctant to use these sub domain type blogs. The sooner you get your own domain the better. I used the well established GoDaddy to get my own domain name (comes with a free custom email) for less than ten dollars. You can still use the wordpress or blogging platforms to host the blog (like I do here), its just that people will now see your custom domain name.

Tip #2 - Avoid temptation to have too many ads and flashing banners

Most personal finance blogs have some form of advertising (which equals passive income and is a fundamental rule of good investing). The thing that sets the pros apart from the rest of us is how they use and layout advertising on their blogs. This is a post in itself, but suffice to say their advertising is well placed, relatively low key and/or nicely blended into articles they write. Also, they tend to have a lot more direct banner advertising (125x125 sidebar ads were the most common) as opposed to relying only on Google Adsense and they almost always keep the focus on their content and not the ads.

Tip #3 - Submit to related personal finance & investing blog carnivals

Just this week I submitted and was published at the following well known finance blog carnivals:

Carnival of Personal Finance, which was hosted this week by Lazy Man and Money and had my article about shopping effectively and save $29 in minutes.

Festival of Stocks which was hosted this week by Investing adventures and had my article on How to buy shares - Two simple steps

Carnival of Debt Reduction hosted by Broke Grad Student and included my post on the Rental Squeeze

Sound Money Matters hosted the Festival of Frugality which contained my article on the rise in food costs.

I noticed a significant jump in visitors (some who became subscribers) thanks to the referral from the sites where these carnivals were hosted. Getting published at these carnivals definitely increases the exposure of your blog and something you should look to do as you grow your blog.

Finally, on top all the above, the number one thing that the best personal finance and investing bloggers had was relevant and well written content. I guess this is the key for success for any blogging endeavour. Feel free to share your comments and thoughts on the above.

Forget Quicken & MS Money - My Free Personal Budgeting Software

2008-05-02T14:18:00.000-04:00

This is an edited guest post from PV - a "techie" friend of mine who believes in free and open source software. When I discussed this blog with him he was kind enough to provide an article on the budgeting software he uses. It is a great little tool, good reports and best of all it is FREE. Here is review and I am going to experiment with it this month for my budgeting.
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You are probably familiar with the old management saying:

“You can’t manage what you can’t measure”.

We earn; we spend; we save and we invest; but in the midst of all this activity; it would be nice to manage, monitor and measure our assets and liabilities. The best way for this would be to have a tool that allows you to look at and analyze the details of our everyday spending or saving, to then quickly rocket out and look at a 10,000 ft view of your equity and financial health.

There is an ever growing list of software tools out there that promise to help you manage your finances which can be broadly divided into the following groups:

Commercial software you pay for: MS Money, Quicken (both desktop based and web based) etc. These are heavily marketed and most commonly used.

Free software: open source desktop based tools (GnuCash, Grisbi, KmyMoney etc) and Web based (Mint, Wesabe, etc). There is also Microsoft Excel, but that is a manual spreadsheet tool that everyone customizes to their own needs so not as portable as a stand-alone tool or system.

Since the best way to save is not to spend; let’s talk about free tools. These free finance and budgeting tools are available in the form of both web based apps and desktop tools. There is a sea of information for those wishing to evaluate and identify the one tool that will perform the job for them, some of these resources are listed in the references at the end of the post

Since I am not yet comfortable uploading my financial details to third party sites on the web, I personally use an open source, free software tool that I can download to my desktop. The remainder of this article will list out some of the features of the tool I use - GnuCash. This does not mean that this tool is the best choice for everyone. Every software tool out there provides a wide range of features, you should certainly review some of them before choosing one.

Some of the nice features of Gnucash, installed on my Windows XP machine, that I find useful are:

Installation: portable (unzip into a folder).

Easy install and configuration: a simple wizard will run you through the process of getting set up (handy templates available).

Global currencies

Double-entry booking

Import existing financial data from other tools in QIF / OFX files.

Scheduled transactions

Reporting capability

Consolidating or account reconciliation

Ability for receivable and payable systems, tax table construction – if you have business use of this tool.

Easily record and track your Stock/Mutual Fund Portfolios

A complete review of the software and its various features is certainly beyond the scope of a single article on this blog, so I will conclude this article with a few screenshots that will get you interested in evaluating some of this and other open source free software applications for yourself.

Figure 1 (below): A Wizard runs you through some templates to get your initial setup configured

Figure 2: Extensive Reporting and charting capability

Figure 3: Schedule, split transactions; Reconcile and manage accounts through online services

There is certainly much more that can be discussed; and perhaps it can be in another post; if there is interest. Feel free to share your comments on this product or any other ones you have discovered.

Reference and Related Posts:

Personal Budget Spreadsheet - how to make it work for you
http://en.wikipedia.org/wiki/Gnucash
http://en.wikipedia.org/wiki/Comparison_of_accounting_software

Editors Note - As this is a free tool I am not making any money from this article or links in it. It is purely to provide some useful information to my readers.

Tech Stocks Booming - Buying them through XLK options

2008-05-01T20:14:00.000-04:00

Looks like Technology stocks are back in vogue, after rallying nicely over the last two days. I think the "long commodities/short dollar" trade, which has been the primary trade for the past three months is clearly reaching the end of its profit potential. This trade relied on the falling dollar to make money as commodities are priced in US dollars. With the economy looking like it may have reached a bottom and interest rate cuts at historic lows traders are starting to get back into growth stocks - and the technology sector has the best growth stocks.

Seeing as I am no technology stock picking expert and have limited funds (Budget = $2000) I have decided to play this trend by buying the Technology Select Sector SPDR (XLK). This exchange traded fund (ETF) typically invests at least 95% of assets in companies of the technology sector and per the screen shot here it contains most of the leading stocks in this sector (I already own some Google stock). So I think it is an efficient and safe way to play this trend - my upside may be limited by the diversification in the ETF, but down side is also limited by the same premise. My only decision is to decide whether to buy the actual ETF or to buy the underlying call options which will allow me to use the power of leveraging (1 option contract gives me exposure to 100 shares) to maximize my returns. However if the ETF stock price does not rise above the call option strike price (plus the cost of the option) I lose my entire investment.

I have got this trade on my watch list and will look to buy in the next few days. Let me know your thoughts on this investment.

Who does the finances in your household?

2008-04-30T11:49:00.003-04:00

I do in my household. For me doing the household finances are something I don't mind, apart from seeing all the bills which means money going out the door. I also do the budgeting, taxes and investments. I have a natural affinity for all things finance, a reason I write this blog, and my wife thinks all this finance "stuff" is extremely boring. She has a good job, deals with numbers in her job, but when it comes to household finances, she is more than happy to leave it to me. I used to be fine with this, but once we had a child I started realizing that should something happen to me, she should be aware of our finances. Also, when it comes to investing and saving, 2 heads are always better than one.

The Newyork times recently had a piece on finances and women in which the line I liked best was " THE No. 1 financial complaint I hear from women, delivered in tones that range from exhausted to ashamed to defiant, is this: "I hate dealing with money, so my __ (fill in the blank) takes care of everything" . That role is often filled by a spouse or partner, although fathers and accountants are also candidates when a woman hands over the reins to her money.

Many couples try to strike a balance when dividing household chores, financial and otherwise. But when women pass the buck, it leaves them far too vulnerable. While some research suggests a shift is occurring, and younger women are more inclined to control their own finances, the aversion of many women to money tasks is still surprisingly common — and so is the risk they assume, says Tahira K. Hira, professor of consumer economics at Iowa State University at Ames.

In a study, "Gender Differences in Investment Behavior," Professor Hira and her co-author Cäzilia Loibl, assistant professor of consumer sciences at Ohio State University, studied more than 900 randomly selected households with incomes of $75,000 or higher. The authors found that while "men were more engaged in their personal finances, generally speaking, women tend to do more of the day-to-day tasks," Professor Hira said. They tended to abdicate their financial roles when it came to planning for the future, saving and investing. "The majority of women found investing to be stressful, difficult and time-consuming," she said.

PROFESSOR HIRA believes a lack of confidence causes some women not to take a more commanding role. Traditionally men are expected to be competent financially, whether it's their bent or not. "For women," she said, "the expectation is often that somebody wonderful will be there to do it." She points to a Catch-22: Many women have low confidence because they haven't done a lot of planning or investing. And because they find it difficult and stressful — or they aren't expected to deal with it — they don't get the experience that would boost their confidence.

A lot of good personal finance blogs I read are authored by women and so I definitely think the trend is changing. However, I am worried that if my wife starts doing the finances, she will expect me to take over other chores which she currently does (like household cooking, which I am terrible at), so for now the status quo suits me. However, I am going to ensure she is informed and aware of all the financial decisions we make going forward.

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This article was selected in the 151st edition of the carnival of personal finance hosted at Alpha consumer. If you liked it, consider subscribing by clicking here.

Taxes and my Paycheck

2008-04-30T03:01:00.000-04:00

When I moved here one of the financial mysteries for me were the taxes on my paycheck, what would be deducted and more importantly how much should I withhold to meet my tax obligations. I learnt the importance of understanding this the hard way with a hefty tax bill, due to not withholding enough taxes during the year. Luckily I had sufficient funds to pay the tax liability and there was no fine as this was the first year I owed taxes. If I owe taxes again next year, there will be a $300+ fine. With this in mind, I thought I would summarize my learning experiences around the taxes in ones paycheck and how they are calculated. I work in large Fortune 100 corporation, which outsources it paycheck process to a national payroll company, so I imagine it contains most of the common elements present in paychecks.

Here are the key items and related tax details that you should be aware of:

1.The paycheck should have all your correct personnel details listed near the top - especially your location and tax marital status (married or single). If incorrect, you need to contact your HR or Payroll department to fix these as soon as possible because they can affect your taxes. Per the tax tables at the end of this post tax rates and thresholds vary greatly by marital status.

2.The next section to look at is your Federal and State Exemptions (or Allowances). These are very important and suffice to say, could make the difference whether you pay taxes or get a refund at the end of the year. The exemptions you take will affect how much tax is withheld (deducted) from your paycheck to meet your annual expected tax liability. Generally the more exemptions you take the less tax is withheld during the year. The details behind this is separate post in itself, but the Internal Revenue Service (IRS) has detailed guide book and calculator to help you determine the appropriate number of allowances (or additional tax withholding) for your situation. It is long, but take the time to read it. When in doubt take zero exemptions.Talking to others I found that if you are renting or taking the standard deductions in your tax return, selecting no exemptions is the safest option. However this will vary for everyone based on their own individual situation.

3.The rest of your paycheck should contain your income details and various taxable and non-taxable deductions (like health insurance or 401K contributions you have elected to make). Remember your federal and state taxes are calculated on your Adjusted Gross Income. Next, look for a section that breaks down your withheld taxes and you should see the following four items :

- Fed Withholding - This is the amount of federal taxes you are having withheld. America has a PAYG (pay as you go) progressive taxation system where taxes are set aside or withheld from your paycheck during the year rather than having one massive tax bill at the end of the year. Think of this as the taxes you are paying in advance. You can choose to have less tax withheld in each paycheck by increasing the number of exemptions/allowances you select in step 2. Alternatively you can choose to have more tax withheld if you feel that the standard withholding is not sufficient. The IRS guide book referenced above can help with this as can the W4 form you use for submitting your exemption requests. See the tables at the end of the post for the 2008/9 tax tables to get a rough idea of what your annual tax liability will be. For example, on a $50,000 adjusted gross income your tax federal tax would be about $16,981 (25% single tax bracket) that works out to $653 per biweekly pay period. If this amount is not being withheld from your paycheck you could be liable for taxes at the end of the year.

- Fed MED/EE - is the Federal Medicare tax. This should be 1.45% of your gross salary.

- Fed OASDI/D - Federal Old Age Survivors Disability tax, which is also known as the Social Security tax. The idea is that this will be paid back to you as a pension when you retire. It is debatable whether this will be the case given government spending, but that is the subject of another post. The Social security tax rate for wages paid in 2008 is 6.2% of gross salary (to a limit of $102,000, after which it is fixed at $6,324). Your employer contributes a matching amount on your behalf.

- [State] Withholding - As with your federal withholding you withhold taxes for your state income tax liability. Each state has a different tax rate so withholding amounts will be different by location. Click here for a listing of state income tax rates.

Hopefully this article should help you get started on understanding your paycheck and taxes in it a little bit better. It is also a good guide to review your current paycheck. Take the time to ensure that the correct taxes are being withheld so that you don't have a large tax bill at the end of year. On the flip side, you also don't want too withhold too much and have a big refund in the subsequent year. This is because you are giving up money you rightfully should have and could have invested, as opposed to a free annual loan to the federal and state tax departments. Using last years returns and references in this article should help you determine the right of amount of taxes to withhold. If you have any feedback on the above or additional tips, do leave a comment.

Supplementary information

Your paycheck will probably contain a lot of other information not mentioned here. So here are three good samples I found online with descriptions for all sections normally in a paycheck. Click the following links to view them: Example 1 and Example 2 and Example 3

US Tax Schedule 2008/2009 and Rates for Single Filing Status

10% on income between $0 and $8,025
15% on the income between $8,025 and $32,550; plus $802.50
25% on the income between $32,550 and $78,850; plus $4,481.25
28% on the income between $78,850 and $164,550; plus $16,056.25
33% on the income between $164,550 and $357,700; plus $40,052.25
35% on the income over $357,700; plus $103,791.75

US Tax Schedule and Rates 2008/2009 for Married Filing Jointly

10% on the income between $0 and $16,050
15% on the income between $16,050 and $65,100; plus $1,605.00
25% on the income between $65,100 and $131,450; plus $8,962.50
28% on the income between $131,450 and $200,300; plus $25,550.00
33% on the income between $200,300 and $357,700; plus $44,828.00
35% on the income over $357,700; plus $96,770.00

Definitions in your paycheck to know from a taxation perspective:

Gross Salary is the amount your employer pays you before any deductions, i.e., John gets paid $50/hour as an electrical engineer. His annual gross salary is $50/hour x 2,000 hours/year = $100,000/year.

W-2 Wages = Gross Salary less (contributions to employer retirement plan) less (contributions to employer health plan) less (contributions to some other employer plans)

Adjusted Gross Income (AGI) is Total Income (Gross Salary, bonuses and other income) less some specific allowed deductions (such as; alimony, home or student loan interest etc)