Thursday, August 31, 2006

Get Music On The Cheap - Just In Time For Christmas

Here's a neat idea. If you are a bit low on cash for Christmas shopping, something that some family members might really enjoy is a mix cd of music. Here's the idea - if these friends and family are really into music, then it is likely that this will be something that they would enjoy.

Up until now, most music had to be purchased in the store on a CD or downloaded using a napster-like subscription-based service or a pay-per-song method like the ITunes website. SpiralFrog is changing all of that. It appears that all of the Universal Music catalog will be available for free, advertising-supported, download via their site starting in December of this year.

This would provide a great way to try-before-you-buy and perhaps even use the music to create gift CDs for friends and family in time for christmas. What a nice way to give something personal, but without spending money. And it is all done without stealing music through some shady website or peer-to-peer file trading system or ever even stepping foot inside a store!

As for how it works exactly, we will have to wait and see, but this looks like something to look forward to come December!

Tuesday, August 29, 2006

Get More Out Of Your Paycheck - Escape Your Expenses

Over the past several weeks I have been separating out my expenses into two categories: escapable v.s. inescapable. The concept that I had in my brain in the beginning was rather abstract. But after reading the book "Rich Dad, Poor Dad", the concept became much clearer.

My thinking is simple: in life there are expenses. There is no way around it. You have to eat. You need to have someplace to live. These are two examples of expenses that you will be incurring no matter what your lifestyle is. And you will be paying for some things until you die. Taxes are another expense like this. It never occurred to me how often people overlook this one. But, like the adage advises us, there's no escaping death or taxes.

So this train of thought brings me to the question. If I have to eat, live somewhere, and pay taxes, What are the other kinds of expenses? The escapable ones! So, after a bit of thought, I was able to make a list of escapable expenses:

Credit Card
Student Loans
Car Loan

I think of these as escapable expenses because my goal is to eventually escape them. That is, pay off the obligation and not incur it again. How do I do that? There is a strategy for each one:

Credit Card - Pay it off and use cash for purchases
Student Loans - Pay it off
Car Loan - Pay it off and make good deals to have much smaller loans (and pay them off faster) each time until I build enough "roll-forward" equity and savings so as to afford a car outright.
Mortgage - Pay off additional principal/Get PMI removed to pay off mortgage

I've listed them in order of how we will tackle these. And obviously, some of them are easier than others. But my goal is to free up cashflow. If we succeed in paying off these debts - even with no additional income or raises - about 75% of the household's net monthly income is freed up. Just imagine what we could do with that money.

The key of course is to ensure that no additional consumer debt is taken.

But even if we do not accelerate any plans to pay off our debt, we will be completed with our mortgage by the time I am 55 just by sticking with our standard 30-year mortgage. That is a huge achievement; and it's likely to get paid off sooner.

Thursday, August 24, 2006

Update on my Brother

If you follow my blog, you will know that I was expecting that there would be some kind of settlement in my father's divorce whereby I might become the custodian of some money to be set aside for my now four-year-old brother when he gets older.

It has been interesting so far in trying to determine what the next step is going to be if that money comes in. However, the point might be moot since it is unlikely that there is going to be any money that actually comes out of the divorce settlement for him anyways.

But, in my world, better safe than sorry when it comes to stuff like this so I went on the net and found out a couple of interesting things. One of the key items when it comes to managing money for a minor is the age of majority. This is different in every state, but in this case, in massachusetts, it seems to be eighteen from what I've read.

Assuming that this is the case, whatever I do with the money, whether it be invested or placed in another kind of account, it would become his on his eighteenth birthday. However, I am nervous about this kind of situation. Right now, it would seem that my brother may end up having some issues with money as he grows up since the financial situation of both his parents seems dire. The prospects of investing cash to give a big chunk of money to my brother at 18 makes me really nervous.

I personally would like to see the money set aside for some kind of retirement. It sounds a bit absurd, but at this point there is no knowing if he will ever go to college and he may not want or need to. And I think that his parents and family will likely help him with other small expenses (perhaps even helping him get his first car) as he gets older. So what is left?

I've gone on websites that talk about investing for the long term and how small amounts of money can add up to hundreds of thousands of dollars if left for periods of 40, 50, or 60 years in the market with an average annual compounding interest rate of 10%. So that was really what I was hoping to setup.

The Fly In The Ointment

One major issue with this plan is that this money needs to be earned income in order to go into a retirement account. In general, it is taxed at the parent's marginal tax rate. However, it seems rather silly to have him earning money at age 4.

A Possible Solution

One idea that I've had that I need to find out about is the idea that the money could be put into a trust that has my brother as the trustee, but myself as the person who is in charge of it. And the trust could be setup such that he has no control over the money except for small increments as he grows older, and perhaps when/if I die, the full control goes to him. But for this type of arrangement, I would have to consult a lawyer.

A Plan for Now

While I wait for this to get sorted out, one option that I've become involved in recently is the idea of Upromise. I created an account and have sent links to my friends and family members that do not have kids etc. The account will generate money in a tax free account for educational expenses. Since it is free money, I think that it is likely that this money will go to my brother's college, since I hope he goes. But if not, I could use it to take courses or give it to a niece or nephew. The bottom line for me here is, its free money! It doesn't really matter so much who uses it, as long as someone gets some benefit!

Friday, August 18, 2006

Inflation and Why the Rich Don't Worry About It

If you follow financial news, you are noticing that there is tremendous focus lately on inflation and the potential impact on our economy. The fact is, with gas prices increasing and other items' prices increasing, real inflation is higher now than it has been in recent years. And (almost) everyone is starting to feel the pinch.

What many people are not considering with regard to inflation is the fact that the rich are not getting hurt by it nearly as much as the average person. Most of us have under 500K in total assets. People with fewer assets are accumulating less wealth than the people who have more substantial sums.

In simple terms, rich people can afford the inflation. If inflation increases from 3% to 4%, the power of the assets that are accumulated by everyone does decreases. However, the rich don't worry about it. If they have 1 million dollars, each year, if it were invested in the stock market, these people have approximately 100k in income. This 1% increase means that the 100K of income can only buy 1k less of the stuff that it would have been able to purchase otherwise.

For the average person working to live and unable to live without working, the 1% increase might be more like taking 500 dollars of purchasing power away from someone who makes 50000 per year. On the surface it might not sound like much, but generally, people who have to work for a living in order to cover bills are people who are either in a negative-net-worth position or are in a situation where they are barely positive.

This means that the people who are able to live without working, might only lose twice as much as the person who has to work hard every day, but that person who works is working usually because they need that money to pay for expenses. The person is running on the hamster wheel just to stay in place. Obviously, this can be painful.

And in a good situation, when a person is able to pay extra on their debts, this inflation will reduce the amount of money that is available for such paydowns, keeping the person in debt longer, and paying more interest, and making asset accumulation even harder.

The rich on the other hand, do not need to work. Their money will continue to grow, and with compound interest working in their favor, the rich are able to continue their lifestyle, mostly without interruption.

What to Do?

That is the natural question right? What should I do if the situation is better for the rich? Get rich! If you are in the situation with many other people who are stuck in large piles of debt, there are some good resources available for you if you are willing to look at them and make some changes to improve your life. Nothing will come quickly, but slowly but surely, you will see a change, and that change can be an amazing thing as years go by. You too, may not care about inflation someday. I know that is what I'm hoping for.

Tuesday, August 15, 2006

Don't Fight Your Mind

Almost everyone wishes at one point or another that they could get more done, or feels that there is not enough time in the day. Perhaps this is more of a sentiment in the Northeast part of the US or closer to major cities, but I think that it is still a topic worthy of consideration.

Write It Down

One of the major items that I have started doing over the past year is not procrastinating about developing my ideas. In some ways, I often find that my brain is somewhat of a wanderer. That is, when I am trying to work on a particular project, my brain will often consider other ideas. It is this "creative" energy and thought that is often the inspiration for most of my great work.

The problem, for me at least, is that my left brain wants to stay on task. So, instead of taking that energy and capturing it and the ideas with it, I often lost it by staying focused on the task at hand.

Focus on What's Interesting

Since my mind was clearly more interested in the creative idea I was having, I stopped fighting it. I encourage it. When I have these thoughts, even if it is something as mundane as needing to do laundry, I write it down. If I don't have a pad and pen handy, I will type it into a simple notepad file.

This technique forces me to purge all of the ideas and interest in the topic from my mind. This causes me to focus on the topic for as long as it is interesting to me. Usually this is a longer time in the beginning of practicing this technique, but I have gotten much better at it and it now only takes a few minutes until I am back on track.

Reaping the Benefits

At the end of a typical day, week, or whenever I have downtime, I review the notes on this pad of paper. In my mind, I think of this as my "money pad". The ideas I think up are often ways to improve a process, get more done, make money or do some other improvement. These inevitably will result in money or some other benefit. Even if it is not profit or money, it may be experience and learning.

Separate the Wheat from the Chaff

Sometimes, the idea turns out to be a dud or not interesting once I've written about it and considered it in my head a day or two later. However, the process is important; not just because I am getting these ideas written down, but because it keeps me on task better than any other technique I've been able to figure out. And getting back on task quickly is a key to productivity. It is this type of mental wandering or phasing out, along with socializing, that removes more than 2 hours of productivity from the average 8 hour work day.

Using Your Ipod

Music and soothing sounds I find are actually quite helpful for me in terms of this process. And it means that I love listening to different music on my Ipod. When I hear fast music or no music at all, I find that I get through monotonous, mindless tasks faster. The bottom line is, that your brain works best when considering only one idea or perhaps two at a time. It can dedicate all of its energy and synapses toward that single issue. When you daydream and are creative, you are sapping energy away from the other things you might be doing.

Driving Your Productivity

Listening to music in the car can be a huge help also. However, you may or may not be able to safely drive and write any notes down while in the car. So, for me, I find that memorizing short phrases in the car when I think of an idea is the best method. Another option you might try is a cheap, but reliable voice-activated recorder. Just speak into the voice-activated microphone while driving and your idea is recorded for future use. These devices are quite cheap now at most chain electronics stores.

Getting Results

There are tons of other productivity tips that I've learned as well, but this one seems somewhat basic, but also quite unique. This concept really takes the To-Do list to the next level, because each item is not necessarily 'actionable' the way each todo is. But, in the end, some of the ideas may really improve your life either by enriching your time or generating or saving money. And who doesn't want that? As with any technique, the key is to practice.

Friday, August 11, 2006

Drastic Minimum Wage Increases and Why They Matter To Everyone

Minimum wages were recently increased in Massachusetts. The increase was passed by a democratic majority legislature. And yet again, in my opinion, this will decrease the amounts of money available for the middle class but not actually help the poor.

Read the article from the Boston Globe about it here

Often times, people think that more money is the solution. In fact, there is even a federal movement linking a reduction in Estate Tax to minimum wage increases. Linda Basch writes an interesting opinion article on this topic for those interested.

But since this is my blog, I am worried about myself first. And what I can see is the following:

As those with a lower wage get a hike of anywhere from 15-20% over the next two years, I will likely only get a total of about 6%. Granted, my salary is not close to minimum wage, but the strict size of the increase isn't all that worries me. It is the impact on prices.

Prices are already in sky-high. Some say this is due to oil prices. And some of it is. Some say it is due to price gouging. And some of it is. But, more than anything, it is the standard supply-demand system at work. There is not an infinite supply of resources and as a result, when demand is constant and in some cases increasing while supply is also constant and/or shrinking, prices will naturally rise. However, I don't think that it will be a slow or easy adjustment. That is why people who are struggling to live on minimum wage jobs are outraged and demanding wage increases. However, there is a real problem with that solution.

Inflation is also going to rear its ugly head. The reason is, nothing has changed in the fundamental way in which prices are determined. All that you have done by raising the minimum wage is effectively printed more money, albeit indirectly. Higher minimum wages mean that companies need to make even more money to stay in business and return good returns for their shareholders. In turn, there are usually layoffs and/or increased prices in order to accommodate that need for increased profits. These increased prices trickle throughout the economy (sometimes ahead of the real need) and in the end, we all end up paying even more than the genuine justified pay increase. And this increase hurts everyone, including me.

Lots of people think of inflation as hurting people with large sums of money who are trying to live off them. And it does, a little. But the people who really get whacked when inflation is too high are poor people - the very people who are getting the wage increase in the first place. Doesn't make sense does it? Let me explain:

If you take as fact that the price of a good will go up when the cost of the production of the good goes up (increased minimum wages), then it makes sense that the amount of money needed for other things will increase as well. Big ticket items like cars, homes, and appliances and electronics will also increase. However, for the average person making minimum wage, a 5% increase to the price of buying their first home hurts a lot more than increasing their minimum wage by 5% will help.

I'm not a professional economist. But I did take several classes in Economics. And I know that there are lots of invisible hand type forces at play. But inflation happens naturally. Please note, I am FOR increasing the minimum wage - increasing minimum wages slowly, over time, makes sense. Small changes are best because it gives the economy time to play them out without throwing things off balance. But doing drastic increases over periods of less than two years does nothing but artificially manipulate the economy. And manipulations like this ultimately hurt people because prices are often higher than they need to be in certain cases as a result, and this means that the optimum distribution of goods for the cheapest possible price is not met. The end result, more people will become unhappy than if you had done nothing.

Wednesday, August 09, 2006

Why that Tax-Deductible Student Loan Interest is Wasting Money!

You might love the debt you have on your student loans. Financial Planners generally like it too. It's for a good cause. It's cheap. And it's usually tax deductible. Now here's the kicker: many students don't actually get to deduct their student loan interest. Now you are probably screaming at the computer! What am I talking about? When many people file taxes, they are not actually taking advantage of the student loan interest deduction.

What do I mean? Well in many cases, people pay their student loans on-time frequently and are not able to deduct them as part of their taxes. This is because when deductions are calculated for tax purposes, many people (especially young, recent graduates) do not itemize their deductions. And this is smart; here's why:

In general, each year there is a generic amount of money as a standard set by the government in order to make life easier on taxpayers. So, instead of tracking deductible expenses throughout the year, most people simply choose to take the standard deduction. Sometimes, even people who track expenses end up taking the standard deduction because it works out better for them. H+R Block tends to allow you to do a nice comparison between the standard and itemized deductions.

People who do not have enough deductible expenses often do not have any of the common expenses that can be deducted on taxes like a home mortgage, a deductible set of moving expenses, business expenses, a child etc. And therefore, the standard deduction is best. In fact, in the case of people who are not able to deduct these additional expenses, the standard deduction is usually higher than the only deduction they have: their student loan interest.

What this means, is that for calculation purposes, often-times, unless you really itemize your deductions at tax-time, you must consider that student loan interest to be no different than other interest in terms of evaluating how and when to pay it off. Therefore, much like a mortgage or other debt with 'tax-deductible' interest. When deciding which debt matters more in terms of paying-it-off first, don't be too quick to rule out your student loan. If you aren't getting a genuine benefit from the tax-deductible interest, it might actually be worth considering it for early and/or additional payments, just like any other debt you might have.

Monday, August 07, 2006

Making Good Choices: Understanding the choice/wealth cycle

It seems pretty basic, but I'm surprised at how few people really think about it. In fact when I was in college, these ideas were not real to me at all. My grandfather tried to teach me the concept, but I never really grasped it. He said, "life is about managing risks." But I don't think that quite captures it. (Sorry, Papa.) Rather it isn't really just risk, its choices. Choices and wealth are directly and constantly related.

Some fake examples relating choices to wealth

1. Parents choose to spend large amounts of money on their kid's education. As a result, the kid, Jeff, takes better classes and lands a better job and makes more money than would have been made otherwise. [Good Choice = more wealth]

2. While the Jeff is at college, he decided to skip out of some key activities and therefore had less exposure to important ideas from his classes. This lost knowledge kept him behind a co-worker (Jane) and he did not get a promotion and raise as fast as his co-worker. [Bad choice = less wealth]

3. Since Jeff did not get a promotion, during a recent trip to the store, there was less money available to buy a new television set for the new apartment and he had to settle for something inferior. [Less wealth = fewer choices]

4. After just a few months with the television, a bonus 2000 dollar comes in for Jeff. Even though his new television still works great, Jeff really wanted the nicer one to begin with. So, Jeff decides to buy a new television of the more expensive model that he wanted to begin with. [Bad choice = less wealth]

5. Since Jane took the same bonus and invested it in her retirement account and let it sit for 30 years at 10% average annual interest and has 35000 extra in her account at retirement and is able to take 5 more vacations than Jeff. [more wealth = more choices later]

All of these examples are easy to understand and follow and the concept is simple. Each choice you make has an impact on your wealth. And the more wealth you have, the more choices you get to make. As you can also see, some choices are more expensive or 'risky' than others.

Each choice has a cost and a risk associated with it. I like to think that I really understand this cycle now and I am making better choices with my money than I was, even 2 years ago. All of this is not about risk. Note, there's nothing wrong with buying things you like or want. But curbing those impulses, especially the need for "the latest and greatest" might significantly improve available cashflow for investments.

But what about the little things?

There's very little risk in buying or not buying my morning coffee. Instead, its a choice: a choice to go without a small luxury now, with the understanding that I will enjoy either better or just more luxuries later. The risk of course is that if you invest the money, it could be lost, or you could die before you get to use it. Neither of those really bother me that much. If I die, it will go to people I love. I'm ok with that. And if I choose my investments carefully, I will likely not lose much if any of it and there's a much bigger chance that I will gain significant wealth.

More choices is Better

So, for me, more choices is usually better. I live a pretty good life now. But by putting off certain expenses for a few years now, I hope to give myself decades of excellent living later - in a relaxed, enjoyable environment without pressure, when I know that my body will be tired and may not have the energy that it has today.

This is a concept that I've always liked and I think it might make more sense as I evaluate my past and future choices in later posts. Especially as the retirement age grows and grows. I can't speak for everyone, but I don't think that I will want to work 40 or 50 hours a week once I am 65. And the thought of having to do that in order to pay my medical expenses makes me very comfortable about making small choices to sacrifice now.

Most choices have an economic impact

I've bought in to this concept: choices have consequences. And these consequences are often related to your wealth and therefore the next choices that you can make in life. It's a cycle. It is a simple concept, but once you acknowledge it, it becomes easier to consider the impacts before the next choice. I like the idea, but like anything, practicing it is the tough part.

Tuesday, August 01, 2006

Changing my habits to save hundreds of dollars

Not too long ago, I realized that the strategy was fairly simple for getting a handle on saving and cashflow. While earning extra income is not always easy, I realized that lowering my debt was the easier of the two to do. So, the key is to lower my standard of living and become accustomed to it. I've changed the following and it has made a big difference:

- I eat at home more frequently.
- I use my TiVo to record as much T.V. as I want to watch.
- I bring lunch to work more. (Lean Cuisines at 3-3.50 each is about 1/2 the price of a take-out lunch at most places.)
- I drive less and take public transit more. This has really cut down on gas costs.
- I spend less on throwaway entertainment (trips to amusement parks, movies) and opt for permanent, reusable entertainment options (computer games, dvds, an Ipod, a TiVo (subscription paid up-front)) and healthy activities (like tennis or walking outside).
- I buy a morning coffee far less, opting to make coffee at work. Instant coffee is awful, so instead I've opted for Folgers Coffee Singles. Its not the candy that is Dunkin' Donuts or Starbucks, but it is still pretty good, especially when considering that it costs only about 12 cents per cup.

I still go out to eat, I still go to see a movie occasionally if I am dying to see it. The difference is that I think about it, and I try to do these things with other people as a social event not just something because I am alone and bored.

The money saved goes toward paying off debt and no new purchases are done using credit cards. New items are bought with saved money. There's still got a long way to go - but this is definitely a step in the right direction.