Step3 Prophet

October Update

Once again I've let the blog go on too long without a post. This is getting to be like my gym membership! J/K, my gym membership is free, so I don't feel guilty about not going to the gym for monetary reasons. However, I should still exercise more, and I should still post more as well. To be fair I've been out at sea for about half the time since I moved to Japan, but typepad has an email post feature that I'm going to try and take advantage of in the future.

So where am I know now in terms of finance? Not surprisingly I've been doing well since coming to Japan. While I pay more for housing and life's necessities like food and transportation, I'm also being compensated more for the cost of living difference. The networthIQ badge shows almost steady growth (baring a few stock market ups and downs).

Recently I've also taken care of a few personal finance basics. I picked up a money magazine at the airport during some of my recent travels, and while most of the financial advice it gave was stuff I already knew, sometimes you have to be reminded. That's why I just got my credit report from www.annualcreditreport.com. My credit situation hasn't changed much, but you should check for errors every 4 months or so and It's been about 9 months since I last checked.

Along those same lines I finally signed up for creditkarma.com. It's a web site that will check your credit with one of the bureuas and give you a free fico score. I've heard good things about it, but hadn't tried it until now. I found the site was pretty easy to use, and gave some good advise and tips about how to manage you credit limit. The only piece of advice I didn't agree with is the sugestion that you should open lots of credit accounts to improve your score. While this will increase you lower you credit to debt ratio, I think having many accounts exposes you to more risk. Another interesting thing it does is track fico history. I'll log in again in a couple of months to see if it has an update.

The magic of fractions

I've seen several articles online recently about how slightly improving the gas efficiency of an inefficient car would be a bigger environmental(and monetary) boost than a seemingly larger improvement in an already efficient car. For example, going improving you gas mileage from 14 MPG to 19 MPG is better than going from 33 MPG to 44 MPG. At first glance, this may not be obvious, but you have to consider that what people are concerned about is gallons of gasoline. To find out the number saved, you have to take the inverse of MPG and take the difference between the two. To make it easier, I'll multiply everything by 100 miles to get a gallons to gallon comparison.

	14 MPG	19 MPG	Difference in Gallons
x100 miles	7.14	5.26	1.88
	33 MPG	44 MPG	Difference in Gallons
x100 miles	3.03	2.27	0.76

As you can see, the mild improvement in the inefficient vehicle saves more money and gas than a larger improvement in an already efficient vehicle over the course of 100 miles. Check out the MPG illusion here.

However, that still does not change the fact that going from 14 MPG to 33 or 44 MPG is even better.

You can see the same type of math in miles per hour. Going from 55 to 60 MPH on the freeway will be a bigger time savings that 70 to 75 MPH

Even better still is to use less. In the July issue of Money magazine there is a little table on page 28 that shows how driving less could affect your budget versus a more efficient car. It looks something like this:

	Prius	Camry	Camry driven efficiently
MPG	46	25	28
Miles per year	15000	15000	13500
Gas consumed	326	600	482
Fuel Cost	$1,300	$2,400	$1,930

So driving a little more efficiently could save you almost $500 over the course of year. Not as much savings a the Prius, but less up front cost as well.

Of course, the most effective way to reduce your cost of gas is to minimize driving. The morning commute is usually your number one waste of gas. I made a decision to live close to where I work, so I save time and money by walking into work every day instead of driving. This means I fill up about once a month or less. I realize this isn't practical in some places, but for your next move you should consider it carefully.

What if question

I was cruising the finance blog buzz on pfbuzz.com when I came across this question from BudgetsAreSexy:

“Would you rather have $500k now (no taxes, fees, etc) OR would you rather get 1 million ten years from now (no fees again)?”

I knew almost immediately what my answer would be. Mel was sitting/knitting next to me and had some thoughts on the subject as well.

Step3: "I would take the $500K now."

Mel: "I would have to agree there.  I mean, would the million dollars that you get in 10 years be equivalent to the million dollars of today?  Probably not.  And, according to a geezer who sits next to me at work, if you were to take a 20 year old and have them invest from the time they were 20 till they were 30 years old (and then stopped investing entirely), they would make a much bigger wad by retirement than someone who started investing from 30-40 years old.  Let's say they retire at 65... The dude who invested from 20-30 would have had his cash sitting longer in investments and accrued more interest than the 30-40 year old investor.  But, ya know, this is just one geezer's opinion.  Eh, but he's a geezer engineer, and they seem pretty on the ball.  Anyway... yes... I'm stealing Step3's limelight..."

Step3: "Wow, that's quite a response.... My line of thinking was a little bit simpler. What I really want from this whole finance thing is the freedom to do whatever I want. The $500K is no chump change, and having control of it now would be better in my opinion than getting a million 10 years from now. Mel brings up some good points, but her example is really an oranges to apples comparison. That adage is used to coax the young and poor to set aside money early."

Mel: "Agreed. And, I should have elaborated on my first statement earlier that "a million dollars 10 years from now does not equal a million dollars today".  I am pretty sure everyone got the inference regarding inflation, yadda yadda... And yes, the work geezers do their best to scare us whippersnappers into putting away cash... the thing I am scared of is: I was around for my coworker's daughter's birth.  I don't want to be around when she gets married! :) (Well, at work, anyway).  And yes, I also agree with the notion that having cash now to control as you see fit is "a fun thing to do"."

Step3: "From a purely investment perspective, and disregarding inflation, you would need to earn about an 8% annual return on the $500,000, which is very reasonable considering the stock markets average rate of return. But it is also more risky. Plus taxes on capitol gains if you were to take all of the money out at the 10 year point would be steep."

Mel: "This was interesting - I watched him do a simple calculation on interest earned over 10 years.  Averaging it out as 8% a year,  if you took the $500k now, you would end up at roughly $999,500...$500 off the mark of the $1M.  Ah, he is grasping for the keyboard..."

Step3: " I ran the inflation adjusted scenario. Interstingly enough, after 10 years, assuming 4% inflation and 8% rate of return, your final real value is almost exactly the same. Taxes would make the difference on your capitol gains. However, I'd still take the 500K now for the reasons stated above. Maybe it's just nerves about my upcoming change of job three years from now."

Mel:  "Word. Didn't you say you were going to mooch off of my emasculatingly larger salary? ;)"

Step3: "Step 1: Respond to ad on craiglist. Step 2: Marry Sugar Momma.
Step 3: Profit. "

Bank of New York Mellon Data Loss

Yesterday I got a letter in the mail from BNY mellon stating that my personal information was involved in a loss of data that occurred in February 27th, 2008. This was a surprise to me, since I do no business directly with BNY Mellon. From their website is this statement:

    "In late February, one of ten boxes of back-up data storage tapes was discovered missing from a third-party archiving vendor responsible for transporting the tapes to an off-site storage facility from BNY Mellon Shareowner Services' facility in New Jersey. BNY Mellon Shareowner Services serves as a stock transfer agent and stock plan administrator for public companies. The tapes included shareowner and plan participant account information, such as name, mailing address, Social Security number, and transaction activity."

At first I thought this might be a scam of some sort, but digging around on the internet allowed me to pretty much confirm that this is a real bank and a data loss did occur. Trying to find my connection to it is a little more tricky. My investment accounts are:

Zecco, who goes through Penson Worldwide.
TSP, who goes through Barclays Global Investors
Vanguard, I don't think they have any intermediaries
Sharebuilder, who now has ING, but may have had an affiliation at the time. But I can't really find any connections between BNY Mellon and sharebuilder with google searches or their website.

The BNY Mellon website goes on to state: "The forensic investigation initially identified approximately 270,000 individuals and 409 institutions with data on the tapes. The Company worked closely with its institutional clients to notify these individuals, which was completed by early April. The continuing forensic investigation also identified approximately four million additional individuals and 293 additional institutions with data on the tapes."

Four million people affected. Thats > 1% of the United States population. To see the full info go to the website here.

The letter offered 24 months of free credit monitoring by Experian through there Triple Alert program, as well as $25,000 fraud protection insurance. I could write more about that, but I've Been Mugged did a good review of the service looking from the outside in. I agree with him on most of the points he makes. Interestingly, One of his commentators is in the same boat I am and did sign up for the offer. I made a comment as well.

Free credit monitoring would be nice, but at the same time I'm not sure I'm even getting my moneys worth then because of hassles the Triple Alert program may entail. I'm consider one of the more advance credit monitoring services, especially since I'm becoming more involved with credit cards and debt. Identity theft can be a scary thing.

Married Finances

I'm not married yet, so this post is mostly writing out my @#$, but here is the way I envision married finances ( luckily my SO agrees, in theory). When you set-up house and share everything, there is also a tendency to merge the finances. I think it is a bad idea to do a 100% merge. The ideal setup would be 3 accounts, 1 for each person and 1 joint account for shared expenses like housing, bills, groceries etc.

The individual accounts allow each person to retain control over discretionary purchases without getting in their SO's way. For instance, if you want to buy her flowers for a special occasion, you can make the purchase without her being tipped off, and without worrying that she wrote a check or made a debit against that account and didn't tell you ( or him. This blog is non-discriminatory against queers).  This method involves trust in your partner ( which hopefully you have), and while it complicates the overall financial picture, it simplifies each person's small discretionary purchases. If you're both earning income, your paychecks would go to your own accounts and then you would set up an automatic transfer to the joint account.

The joint account, as mentioned above, holds your joint expenses. How much money should you transfer to the joint account? The sum of your monthly bills and maybe a little extra for unexpected situations. How much should each person transfer? Assuming you both earn income, it should be a fair percentage of the total expenses. For example, if you make $4000 a month, and she makes $2000 a month, and your expenses are $2000 total then expenses are 1/3 of your total income, therefore, you each contribute 1/3 of your salary. He transfers $1330 to the joint account, and she transfers $670, so that your total is $2000 and all your expenses are covered. To be fair, the women could totally emasculate you by making the larger income.

If one person doesn't earn income, it's a little more complex. The non-earner should still have some discretionary income available to them, so if you don't mind getting an "allowance" then the system still works. 

Some other advantages of separate accounts: if something happens to one of your accounts ( like my little unplanned expense a few months ago) you have 2 other back ups. Also, if you happen to get divorced, you can more easily separate your finances. I'm sure there are others, but I don't have time right now. I'm interested to hear from the married readers out there on what they think.

May Net Worth Update

Once again it's the first of the month and I update my networth. As you can see, the networthIQ sidebar image shows another bend in the graph. Thankfully the trend is once again upward, but the slope of the line has decreased from last months update. Click on the graph to see the category details.

This month saw me pay off my car loan(sort of). I payed it down quite a bit, but I financed the last $2500 on a 0%APR credit card. This will save me ~$40 in interest. I wish I'd thought of it sooner. I'm also moving money around on credit cards to take even more advantage of the 0% APR offer, but that isn't apparent yet in the categories totals. That will show next month.

This month I also established an account with Prosper. Prosper vs. Lending Club is no small comparison. Both companies have elements that the other could learn from.Given a choice, I'd prefer to stick with lending club, but until they open back up to lender I'll take what I can get.

I'm also trying out revolution money exchange. So far the've given me $45 for free, and I'll actually use them to transfer money between friends and family. It makes it easier when the people you have to transfer money to are across the country, or you are transferring large amounts. I'm still not convinced of it's practicality as a way to do online business.

Hmm, I'll have to update my savings goal graph in a couple days. My new total is 5342 (44%)

Free Credit Report

Today I went and got one of my three free credit reports from annualcreditreport.com This is the real free site, not that freecreditreport.com you see advertised on TV. The TV advertisements want you to sign up for a service to get your "free" credit report. This time I went and got my Transunion report. As expected, it showed a clean credit history with no late payments. There still was a number of advertisements for additional services that transunion was dying to provide for me, but I kept clicking through to get to the actual report. It's a good idea to get 1 report every 4 months so you are checking on your credit though out the year. One of the things they like to offer is a credit score calculation for $5-$10. Read the fine print. I didn't last year and ended up buying a score calculation that was not a FICO score but a "score advantage". Everybody still uses FICO scores for things like mortgage and loan interest rates, so don't buy something you don't need.

My thoughts on budgeting

Creating a budget is usually one of the first steps people are advised to take when trying to get a handle on their finances. Write down your bills, allocate amounts, throw in some "fun money" and soon you'll be on your way to financial bliss. If you can't tell by now, I'm not a believer in budgets. Here are some of my problems with them.

1) You have to be precise with your planning and cover all contingencies. Some expenses are easy to predict(rent/mortgage, car payments, insurance, telephone and cable bills). Others can vary widely from month to month( gas, dining out, medical, clothes, gifts given). Plus you have to plan for the unexpected( car repairs, broken household goods, travel expenses etc.). Laying this all out in a workable monthly plan is a difficult task. In quicken I have 21 major categories of spending and probably twice that many subcategories, not to mention 15 other accounts that I transfer money between for various reasons. Making an accurate monthly budget that takes all this into account is a daunting task, especially if you haven't been keeping track of your spending habits. You may think you only spend $100 a month on fast food and sit down restaurants, when in reality it's $399.44 a month ( my average over the last 12 months).

2) If you overspend and bust your budget, how will you handle it? Financially there may not be room for breaking your budget. You may chaff at a low daily spending limit on luxuries like coffee or snacks.  Psychologically, this can demoralize you and cause you to give upon the whole thing. What do you do with any excess cash you have in a category?

So how do you control your finances with out a detailed budget? I believe that financially, people are like gold fish. Just as gold fish grow to the size of their pond, people's spending grows to the size of their paycheck. To live within your means, you must make sure you take care of necessary expenses first. Make sure you have money set aside for fixed expenses like housing and insurance. Necessary expenses include saving some of your income each month for retirement and emergency funds. If you get paid on a regular schedule, you can setup automatic withdrawals for savings and retirement on pay days. It must be on payday(or the day after) so that your necessary expenses are taken out before you can think about using them for other things. Whatever is left is your discretionary income to do with as you please. Trying to make a budget and save whatever is left at the end of the month usually means you save nothing. When you see a true picture of how much money you have at your discretion, you will tailor your spending habit accordingly. It should be fairly obvious that you cannot afford a new toy when you still have a gas and groceries to pay for to make to the end of the month(or maybe you can).

A critical part of this is tracking your spending so that you have a real time view of your financial status. I prefer to use Quicken to track my expenses, but you could use excel for free, or Mint for free as well. if you want to be modern and online about it. This allows you to account for thinks like rent checks that haven't cleared your bank yet or automatic withdrawals you know are coming. When I had my little Zecco snafu I was able to quickly see that my uncleared rent check would cause me to overdraft my checking account unless I moved more cash in quickly. This helps avoid bank charges as well.

Viewing your checking and credit card balances online frequently is also a crucial part of keeping yourself informed about how much money you have at your discretion. If your credit card balance is creeping higher than your available cash you know you need to cut back on spending. If easy credit is to much of a problem for you, do go without the credit cards.

You can start by making small changes to your account. For instance, setup a $50 automatic monthly withdrawal to a savings account. Once you see you can live with that, increase the amount. I'm doing something similar for my retirement program at work. I originally was contributing only about 6% of my salary toward retirement through work. I'm nowhere near maxing  out my contribution and I've got money to spare, so every other month I'm raising the percentage a little bit and seeing how that affects my take home pay. Eventually I'll be able to max out my retirement and have that money grow tax free( and lower my taxes as well)

By making saving a part of your spending habit, you'll grow into a smaller spending mentality more easily.

Zecco problem update

I called Zecco on Friday morning about the extra draft on my checking account. Fauna from customer service told me that both transactions were authorized by me on two different days, which I'm fairly sure is not the case since I blogged about it on the 28th. At any rate, normally it would take 5 days to for the transaction to settle before I could initiate a transfer back to my checking account per Zecco's trading FAQ's. I understand that this is to protect them from scammers trying to pull money transfer games, but that would mean over 10 days till I got my money back. I persisted in asking(nicely) if there was anything that could be done and she said if I could prove that I wasn't overdrawn on my checking account then they would authorize the transfer. I sent in a screen shot of my balance and was able to initiate the transfer on Friday. It will still take 3 or so business days, but that is much better than 10+ days. I sent the Zecco customer service rep a follow on email asking for some more detail on the initial transactions, but I haven't heard back yet. The only thing I think could reasonably have happened(if it truly was my fault) is that I made the transfer at 9pm local time, which is midnight east coast time, and if I hit the back button or hit send twice, then it might have shown up as two different transactions on two different days.

April 08 End of Month Finance Update

  I updated my financial progress on NetworthIQ today. I was pleased to note that my overall change was greater than my take home pay. Probably half of that is due to a stock market uptick today. I updated my cash cushion goal progress as well. This month I've been splitting all my extra money 50/50 between growing my cash cushion and paying down my car loan. This is referred to in personal finance circles as "snow flaking." Any extra money you make, no matter how small, goes to a specific goal such as paying down debt. For example, sell something on craigslist for $15, deposit that money, and add it to your student loan payment. Small snowflake payments add up quickly and your debt shrinks rapidly. Since I've been using things like maturing CD's, it's been more like a snow avalanche. That $600 government rebate check is coming this month, so I expect to put an extra $300 in savings and $300 towards my loan principle.

My lending club assets grew by $79 this past month. Since lending club has temporarily stopped taking new money from lenders, this is pretty much all interest. NetworthIQ says thats a 0.98% monthly change, which means my yearly return is 11.76%. Now thats something to get excited about. Maintaining a 14% average loan interest rate, and with a 1% Lending Club fee, that maximum obtainable interest rate would be 12.8%. I'm not getting the maximum rate of return because 1) inefficiencies from my relativly small sum of money invested 2) I can't reinvest anything at the moment. I expect that until Lending Club starts allowing new investments again, my monthly rate of return will drop.

I completed the transfer of money from Sharebuilder to Zecco, and setup a limit order so that when my ETF falls below $54.00 it will buy back those shares I sold. The sell price was 54.33, so that will make up for my loss in the transfer. I think if I buy back the same security within 30 days it doesn't count as a capitol loss, even if I actually did lose money. That assume the stock falls below $54. Todays market uptick gave me a moments despair at the thought that I would have to buy it back at a higher price. There is always the possibility that the ETF value will not fall below $54 per share, but I hope normal market fluctuations will see me through.

On the down side of things, Zecco took an extra money transfer from my checking account for the same amount as the Sharebuilder transfer. Since this was several thousand dollars, this was not very convenient for me. Luckily I was just paid so my checking account wasn't totally depleted, but I'm not in the habit of keeping large quantities of money there very long. Thankfully, I always keep a minimum $1000 reserve in my linked savings account. This serves as overdraft protection (in case I'm not keeping up with quicken), and for cases like today when I need a large cash infusion quickly. The reserve gives me some time to initiate a cash transfer from my emergency fund account, which takes about 3 days. In this case, I expect to just transfer the money back from Zecco, but that will also take 3 days. I plan to call Zecco in the morning with an irate complaint. I understand though that sometimes these things happen (Zecco isn't the first to make this mistake). Since I have the back up savings to take care of pending expenses. I'm not really all that irate.

I switched enough cash to checking so that If my rent check posts while the money is being transferred back to my account, it will be covered. Also, my vanguard IRA contribution will post tomorrow. That alone would have caused an overdraft. That $1000 savings is not something I consider part of my cash cushion, it is my C.M.A. fund for times like today. Although, now that I think about it, what if the transaction had posted a 3rd time? Would overdraft protection have left me with nothing in both accounts? I'll have to look into that.

I'm curious though about my blog readers situations. If you had an unexpected $2000 draft on your checking account, how would you handle it? Post a reply in the comments section.