Friday, July 27, 2007

Finances and Current Real Estate Markets

It still is amazing to me in this real estate market that things are still doing as well as they have been over the past few months (the last couple of down days in the market notwithstanding). Here's what I've been thinking about.

The problem, as I see it, with many people is that they bought more than they can afford. Surely, if you can barely afford your 'monthly nut' when it comes to your mortgage, it is going to be a bad scene for you when other expenses creep in like increased property taxes or an accident or a sudden layoff or medical emergency.

Regardless of the nature of the emergency, it is important to realize the importance of common sense when it comes to purchases.

Remembering that the nature of our capitalist economy (which I happen to like, thank you very much) is that people are going to be making money during every transaction. If they aren't, they won't last long.

When you buy a car, you get hit up by the sales guy for sales (commission) and then the financing guy for the loan (loan interest).
When you buy a house you get hit up by the real estate agent (commission) and the mortgage broker/bank (loan interest).
When you go to college, you get hit up by the college (profits) and by the financial aid office (commissions on loans? or perhaps perks) and the banks (interest on loans).

The bottom line is that all of these things which seem like "good things" to do end up costing you money. And if you aren't extremely vigilant, you will be sunk. I've been sunk before and it is not a pleasant feeling. Do yourself a favor by being extremely skeptical, reading everything, and asking people to explain all of the money that something will cost you before you sign or do any deals.

As for the current situation with housing, even if people were careful, they still might be stuck going forward. Here's why:

1. Housing is still down. Real estate in many areas is hard hit and people are having to reduce the price of their homes/condos, and in some cases take losses in order to sell.

2. Due to the increased inventory, as more people have problems like emergencies, job changes, etc and need to move, they have a harder time selling for "legitimate" sales that have nothing to do with financial hardship really. But in the end, carrying multiple house payments or trying to juggle finances for longer than anticipated (perhaps 12+ months) while trying to sell, but still not selling due to reason 1, they find themselves losing the house due to foreclosure.

3. Now due to #2, there's even more houses on the market. But now the economy is starting to slow down, and in some cases, unemployment has started to creep in and even more people default and face foreclosure.

4. As a result of foreclosures, prices have started to hit bottom and people with cash have started scooping up properties for prices as low as 75 or 70% of what the original value is.

5. Some time passes and the economy and housing market comes back. You rejoice. You're ready to finally sell because you think you can get what you need to get in order to sell. Unfortunately, the guy from #4 bought a place like yours for 70% of what you paid. Now he is looking to get 95% of what you paid and decides to sell, making a tidy 25% profit in under a year or two. You, unfortunately are stuck waiting until all those guys have discarded their properties.

Many people would have helped themselves quite a bit by understanding the fine print and true costs of the deals that they were getting into. I really hope it doesn't play out the way I've outlined above, but I don't really see how it doesn't.

Tuesday, July 24, 2007

Core Inflation results in Overinflated Ideas

One of my pet peeves lately is the idea that the economy is doing so great because of the low inflation rate. Core Inflation is hovering around 2.2 percent and that is being heralded as great news with regard to the overall economy.

The problem, as I see it though, is that the inflation that I feel in my monthly/yearly budget continues to increase at an alarming rate. As a simple exercise, I've been tracking all of my expenses for the past year and a half. My household food expenses were averaging somewhere around 200 dollars per month about 1.5 years ago. However, now, the average is often closer to 325 per month. This means that there is a significant increase in the price of food. This is about a 35% increase.

Thankfully, food is not the big expense in my budget, but it is getting to be that way. If it continues to creep up at this level, by the end of 2008 I will have a monthly food budget of about 440 dollars per month.

Unfortunately, I have not been tracking gas expenses, but those too have been creeping up. And my monthly commuter pass went up by 50 dollars per month as well. That is a 600 dollar per year increase.

The reason that these reports really burn my toast is that 2.2% is no where near the amount of real increase in regards to overall inflation. Property taxes and services all continue to increase in price as well. In the end, household monthly expenses are increasing at a rate of about 5% each year. As debt continues to be paid off, this is a manageable number, but once debt is completely paid and money can no longer be "saved" by paying off debt and eliminating interest payments, these increases will become problematic.

Planning for Retirement
The idea that real, average-joe inflation is 2.2% is a bunch of hot air if you ask me. So I have no intention of using that figure. Instead I reworking my plans towards planning on 4 to 5% of real average-joe inflation because 2.2 or even 3% is dramatically under estimating it, in my opinion. And although it doesn't seem like that much, toward the end of a 20 year retirement, those 1 or 1.5% differences will make a big difference. I worry about people that think they can get away with a 2 or 3% increase. I think that is overly optimistic.

Wednesday, July 18, 2007

HD Share buyback?

Since I am relatively new to investing in plain stocks (my investing before this has been exclusively in mutual funds via my 401k retirement account), I have never encountered anything like this before:

Today I received an email offering a purchase of my shares in HD. Granted, I don't own many shares of it so I have no intention of taking up this offer, but I still find it quite interesting that I've never really heard of this before.Here is a partial copy of the email I received.


Below is information regarding a tender offer for your holdings in "HD".  This offer expires on 8/16/2007. THE HOME DEPOT, INC., A DELAWARE CORPORATION (THE "COMPANY," OR  "HOME DEPOT"), IS OFFERING TO PURCHASE AT A PRICE NOT GREATER THAN $44.00 PER SHARE NOR LESS THAN $39.00 PER SHARE, NET TO THE SELLER IN CASH, WITHOUT INTEREST (IN INCREMENTS  OF $0.25).

The rest of the email is information explaining how to take up this offer if I should choose to sell my shares. I was familiar with the concept of share buybacks. But I wasn't familiar with the actual process of how it worked.

Wikipedia has a great article explaining dutch auction share buybacks. Now I'm curious to see how the stock price changes over the longer term with this buyback going on.

Thursday, July 12, 2007

This Tax Change Sounds Dangerous

I read...
this story
this morning about how the big shots in Washington are looking to change the way that taxes are handled for the managers of large hedge funds. I find it to be pretty interesting when you start thinking about it.

Certainly it is tempting to simply say that since these people are rich, and they can afford it, lets tax the heck out of them. However, I think that this kind of thinking is a mistake. I studied Economics in college and found it fascinating since the beginning of my studies. But when I read this story, some major red flags popped out for me.

If you take the tax break away, you certainly will be getting more income in the short term. However, my gut tells me that there will be a long period of lost money in the long run because less people will want to continue doing business since it is not as lucrative. This will ultimately result in less revenue. Furthermore, many of the ultra smart, ultra rich people will have smarter experts that will still find ways around these laws and shield their money. So, I don't think it is really worth making a change like this.

I generally don't like the idea of punishing the rich. I don't think it usually works. Rich people know how to protect their money. And furthermore, I hope to continue to amass more and more wealth. Sure, I'm not a hedge fund manager, but when you start getting tempted by the money that these people are generating, its only a matter of time until people lower down on the "Rich" cycle are going to get hit up.

Wednesday, July 11, 2007

Understand Your Interests

One of the interesting things that I've "figured out" over the past few months with regard to my debt repayment is the importance of paying early on daily compounded balances. I've been doing this myself over the past year and it really makes a difference.

The first question for all of your debts should be "how is the interest compounded?" For many debts, the interest is calculated each month on a monthly basis. For others, it is calculated up front for the life of the loan and then factored into your payments. Prepaying effectively does nothing to save you money on interest.

If however, you have credit cards, it is likely that you have a type of interest calculation that is called the average daily balance or two-cycle average daily balance method. If this is the case, paying off your balance earlier in the month can save you money.

This tip is not about paying extra principal per se, although you obviously should do that. Instead, the tip is about how you handle your cash flow. Let's say, for example, you normally pay your bills two or three times per month, lets say on the 10th, 20th, and 30th. And in this example, your monthly credit card bill is usually paid on the 30th of each month. If you pay it on the 20th of each month, you are saving yourself ten days worth of interest.

In a month situation where you carry a 5000 balance at 14% compounded daily and plan to pay down 500 dollars of principal, here's how that would help you:

If you wait the full month between payments, your interest will be 1/12 of the 14% of 5000, which is 58.33
Instead, if you wait only twenty days, your interest will only be about 1/18 of the 14% of 5000, which is 38.89.

That means that you are saving about 19.34 in interest by paying 10 days early. Of course, keeping that interest down makes sure that the next payment reduces the principal even further. Therefore, if you have money in your account, and plan on paying that credit card in a week or so anyway, just pay it now. You will really help yourself out with interest over the long haul.

The one caveat here is that you want to make sure that your payment is not TOO early. If it is too early, it will be considered a double payment. For example, if your payment due date is the 30th and you try to pay on the 5th, be careful. Depending on how your billing cycle runs, the payment may arrive so early that it is considered a second payment on the previous month. Then you may have to pay again in that month. And if you thought you paid, but you didn't, you will then be late and they will really get you with late fees and high interest default rates.

As always, I am not a financial adviser. If you have questions about your interest and payments you should contact your creditors and read your agreements in order to make sure you understand how this strategy might help you.

Tuesday, July 10, 2007

Coffee or Freedom?

I'm back off Dunkins. Well, sort of. Since things were going so well lately in terms of finances, I found myself getting a little bit too comfortable with my morning coffee routine. If you add it up, its about an extra 10-12 dollars per week that I was spending on my morning cuppa. Then in the afternoons, I might run down and get a starbucks as well. Another 6-8 bucks per week. All told, I was spending close to 20 dollars per week just on coffee or tea! This seemed ridiculous to me even without any of the latte factor hype.

In the end, I've decided that I will try to switch back to my old ways of making coffee at work. I use the coffee-single "tea-bag" type coffee. Its not as good as Dunkins, that is for sure. But, I think that in the long run I will be happier knowing that I didn't waste 20 dollars a week on something that I really didn't need to have every day.

I think that once I get rid of all my non-mortgage debt, I will be more relaxed about these things, but for me, getting out of debt is something that makes me much happier than a cup of coffee.

Monday, July 09, 2007

Back On The Horse: Gardening and Exercise

This weekend was quite nice for me. I was able to wrap up several projects and get some plans made for new ideas that I am working on. My goal is to generate enough extra income to get my loan (see my NCN chart on the right) down enough to be paid off around tax return time 2008.

I reread Rich Dad last week and again, I found it inspiring. I think it is a great book for people who are looking for inspiration to be entrepreneurial. I'm not particularly fond of the real estate ideas in the book, though. But I think that is more of a personal preference than a statement about the ideas themselves.

I started exercising again and I am happy to be able to return to that. If I can avoid straining any muscles like that ever again, I will be happy. The upside of not exercising was that I was able to catch up on my reading and I've been tearing through the Harry Potter books in anticipation of the movies. I am curious to see how they try to capture so much detail and action into a short movie, once it comes out.

As for gardening, things are going well and my lettuce is growing best of all of my vegetables and will be ready for harvesting in about two more weeks. With any luck, that will give more space for my pepper plants which are in the same pot, to grow more and still have time to yield some peppers before the end of the season. Like anything, I've learned quite a bit this year with planting vegetables and I am looking forward to an amazing garden next year, now that I've learned so much.

Friday, July 06, 2007

How Much I Ate

Recently, I was totally shocked at the fact that the price of milk in my local supermarket went up over 4 dollars per gallon. Granted, it was a brand, not the generic (which still hung dangerously close around 3.80), but still this seemed crazy. And recently, I was calculating my budget and it appears that I was spending on average about 50 dollars per week on food. This seemed a little nuts. And this doesn't really even include the coffees and food that I buy outside of the office or home.

This brought me to think about how much (in terms of cost), that I was eating. So, I have recounted all of the food I ate during a day in the not too distant past to give you an idea of what I am dealing with here. And I really have to confess that I don't eat as well as I should, all the time. But frankly, who can afford to eat right if 60 bucks a week barely gets me this...?

 .33 corn
1.29 1/2 pesto sauce mix
 .60 pasta
 .20 olive oil
 .50 milk
1.50 cereal
 .05 filtered water
 .35 plum
 .35 ice cream sandwich
1.79 dunkin donuts coffee
4.29 leftover calzone

Grand Total: 11.30
Even without the take out type food, it is still over 5 bucks...and I didn't even eat that much that day!

So, as an exercise, you might consider estimating the costs of what you are eating. It is interesting to consider not only how much of the food was healthy, but also how much money you spent on home food versus food bought away from home.

Thursday, July 05, 2007

Net Worth Update for End of June

Net Worth

June has marked a serious improvement for net worth. Largely due to some unexpected income, It was possible to make a serious dent in a student loan. The remainder of this loan is sitting on a zero percent credit card for a few more months and large payments are now going to be directed at it in an attempt to pay it off before the end of the year. That may or may not be a reasonable goal, but I expect that it is.

Business investments continue to do well. I'm satisfied with my paypal interest rate as well as the amount of savings that is now accumulated. I'm also happy with Prosper, of late. The total savings means that given a job loss that there is easily 6 months of expenses saved. This is a huge milestone in terms of emergency fund planning. Of course this will continue to go up and down, but knowing that there is a real cash cushion is something that everyone should be striving for in my opinion.

New Thinking

I'm rereading Rich Dad for the third time this year and I am struck by the simple notion that fear and greed are the emotions that trap us when it comes to our money. I find that this is absolutely true for me. Last year I felt afraid and had no control over my financial situation. Now, I feel empowered. I have educated myself and continue to do so. I am continuously working to realize my dreams -- and accumulating the wealth necessary for them.

This has resulted in watching the following Finance Metrics like a hawk:

1. Total Net Worth
2. Total Free Cash Flow (monthly - budgetting)
3. Savings Rate (savings to income ratio)
4. Retirement Projections (contributions and how much you plan to have when you retire - monthly income)
5. Goal Progress (debt reduction)

As a result of tracking all of these metrics, it becomes much easier to find holes in the financial situation. If you are not sure where your holes are in your budget, I'd ask if you are tracking these figures. I feel that tracking these over time gives me real data that tells me if I am moving down the correct path with personal finances AND if I am making enough progress.

The real issue for many is that they aren't moving fast enough and are doing nothing to pick up the pace. Time is a huge factor when you consider compound interest. Once I really understood that, it has made me ravenous in terms of finding additional income and other ways to accelerate my progress.

Net Worth News

In major news, Bill Gates is no longer the richest man in the world. He has been ousted by Carlos Slim. If you're curious who the richest people in tech are, check out the link:

Tuesday, July 03, 2007

Exercise and Finding More Income

Well, I've hopefully given myself enough time off so that my body can heal. I started yesterday with extremely light exercise and I am planning on working my way back up. It has taken a huge amount of self-control to not do something for these past 10 days. I feel like I am missing out somehow by not doing anything really active.

Today I am able to get out a little bit early and I plan to meet some friends this afternoon, but I will be using the time until then to work on some pet projects that have been brushed aside lately with the hope that they will eventually yield me some additional income.

My consulting work has been rather slow, of late. And the my situation with side work may well be drawing to a close so it is critical for me to find additional sources of income in the near future so that I can continue my debt repayment. Again, this is not money needed for expenses, but only to continue accelerating my plan of getting out of debt fast.

Additional Income Pain

Originally I had hoped that elance and other sites would be a good way to get additional jobs but I am finding that the difficulty I experience when browsing those sites is not terribly unique. I personally have a hard time when I have to compete with people who can afford to work doing technical or design jobs for 5 or 10 dollars an hour. That just isn't worth it for me. Apparently, this is a similar issue for other people who use these services. I'm looking for quick hit jobs that can generate income, but not tie me up for months or years into the future unless I choose to be. I like the freedom that comes with doing this kind of work on the side. But I wouldn't want to be stuck doing these side projects for main income.

Doing What Works

My personal experience is that getting clients really requires referrals (which I've had success with) and also doing high-quality work that serves as a reference. This is also doable, but can be frustrating depending on your clients. The advantage of price is simply over. There are way too many people in Asia or Eastern Europe who will do the same work for pennies on the dollar. I don't begrudge these people for doing the work; its great if they can do it. I simply need to focus on doing things that will grow my opportunities for side income rather than repeating the same cycles which lead to low levels of reward.