A Penny Saved

Jane at Boston Gal’s Open Wallet has an interesting post up about Certificates of Deposit as an Income stream. The example she uses is a one year Certificate at 5.51%.

Using Jane’s example, the income from this CD would be $470.92 per month. The one caveat is that that income includes the initial investment. In otherwords, as you pull the monthly income, you’re also pulling the original investment. In many cases, the institution that holds the CD would apply a penalty of some sort for withdrawing the investment early. That penalty usually ranges in the area of 3 months interest on the amount withdrawn. Without doing the math, I would venture to guess that the penalty for using a CD in such a way could be somewhat burdensome. Consider that the first three months worth of income would actually be at a loss or break even.

One way around that would be to only invest the initial amount minus the first three months of “income payments” and begin taking the money out in the fourth month. Doing so would eliminate the loss of the penalty while still gaining some interest. Of course it would greatly decrease the interest gained over the life of the CD.

A better way to do this would be to begin early and have the interest paid into a savings that you could pull at will without penalty. Of course, to do this would require a much larger initial investment in the range of $500,000 before the interest payment’s to the savings would be large enough to equal monthly payments of any significance.

If you’ve got the money to invest and sit on, using CD’s as an income stream is certainly a viable option. For most of us that are still working on debt repayment, though, it would not be a smart money move.

Thanks again to Jane for pointing out a viable option for long term income generation.

Technorati Tags: Certificate of deposit, CD, CD’s, income, income stream, retirement income

A new class of Mutual Fund called a Quantitative or Quant fund seems to do just that.  The funds are managed by computers.

Quant funds can come in different flavors. Those like the Vanguard Strategic Equity fund, which is closed to new investors and was up 5.9 percent this year through June, let the computer model make practically all the decisions, from which stocks to buy and sell to when to trade them. Other funds, like the Quant Foreign Value fund, up 11.1 percent, use quantitative analysis as a screen to narrow down a basket of stocks. The final investment decisions in this type of fund are then made by carbon-based life forms.

Quantitative techniques emerged in the early 1970’s and gave birth to the index fund in 1971, when Wells Fargo introduced a mutual fund that tracked 1,500 stocks on the New York Stock Exchange. As computer-processing power grew and more physicists and mathematicians left academia for Wall Street, money managers offered more robust services, and institutional investors began to embrace quantitative management for the advantages it offered.

The most obvious advantage is that quantitative models can examine a much larger universe of stocks than human analysts. Schwab Equity Rating, for example, analyzes about 3,000 stocks and assigns grades of A through F, based on four metrics: fundamentals, valuation, momentum and risk..

Would you trust your money to a computer?  They outperform their averages.  They don’t make silly mistakes like a human manager would.  Perhaps it’s time we look into Quant funds a little more?

Technorati Tags: quant, quantitative, quant funds, quantitative funds, mutual funds, mutual

This is the first of three short articles based upon the principles and plans in the book “The Automatic Millionaire by David Bach.  Read my full review of the book!

Everybody want’s to be a Millionaire right?  So, besides winning the lottery or having wealthy aunt Harriet die, how do we accomplish that?

David Bach has a few ideas in The Automatic Millionaire.  His simple plan can be broken down into three easy sections.  This is the first.

Find the Money.

You can’t be a Millionaire with out a million dollars. Sure you have to save money.  You have to make your money work for you too.  But where does the money come from?

David introduces the readers to “The Latte Factor” early on in the book.  “The Latte Factor” is a really, really simple premise.  There is something in your daily routine that you spend money on that can easily be cut out.  For some, it’s a morning Latte.  A normal Latte can cost upwards of $4 each.  If you buy one 5 days a week, that’s $20 a week.  $80 a month.  So, David says, if we merely cut the Latte out of the daily routine we free up $80 a month for investment.

It’s not just Lattes either.  If you don’t drink a Latte every day, maybe it’s a pack of cigarettes.  Or a donut.  No matter the vice, cutting it from your daily routine could get you on the right track to becoming an Automatic Millionaire.

What’s your “Latte Factor”?  How much is it costing you?  If you account for growth, $80 a month could add up to hundreds of thousands of dollars over 20+ years.  Is that Latte that important to you?

Come back Monday, July 10th 2006 for part 2: Make it Automatic.

Read my full review of the book, The Automatic Millionaire.  Pick a copy of it up at Amazon.

Technorati Tags: The automatic millionaire, save, retire rich, retirement, david bach, the latte factor, millionaire

Experiments in Finance received a question and has opened it up for group conversation on the myriad different ways that it could be answered. All the related posts will be posted on Experiments in Finance.

The Question:

I like to setup my finances on a “purpose” basis. I create a separate account for each specific saving target. I have 401ks or IRAs devoted to long-term savings. A checking account (and a small savings account at the same bank) to handle day-to-day expenses. Some CDs as a safety net in case I lose my job. A separate savings account for spur-of-the-moment spending.

This keeps things tidy and reduces the tempation for my spur-of-the-moment spending to hamper something important (like next weeks groceries).

This works great for short-term or long-term savings. But not so well for mid-term savings. Things that are maybe 3-7 years out. (Like buying a new car or saving for home remodelling.) I can’t figure out what the best vehicle is for carrying this out. I can take more risk (and want better return) than savings accounts and CDs, but it’s not so long that I want too much stock exposure.

It just doesn’t seem like there’s a good way to create a single account to handle this sort of time-horizon.

Maybe the answer is on your site somewhere and I haven’t been able to find it. Any suggestions?

My suggestions:

It sounds like you have your current accounts under pretty good control. Depending on the rates you are receiving from your bank, you may want to look into a high-yield savings account. These accounts are currently paying in excess of 5%. Doing so will increase your yield on your short-term savings and could become a part of your mid-term savings.

There probably is no “one account” solution to your mid-term question. If you’re comfortable with some risk, you could invest a portion of that money into the stock market. The downside to that is that there will most likely be fees and tax ramifications when you sell those stocks to use the money and there is risk. 3-7 years isn’t the best time frame for keeping the average gain in stocks. A nice mix of CD’s and high-yield savings could bring you into the 5-6% yield range pretty easily. The addition of some stocks and bonds could even bring that higher, but again there could be fees and tax problems upon selling.

ADDED: It might also be beneficial to look into treasury bonds(a.k.a Savings Bonds) which are currently paying in the 1.5 to 3.5% range.  Again, not as good as a high-yield savings, but higher than what your bank is probably paying you.

If you’re interested in high-yield savings accounts, be sure to check out HSBC.com, emigrantdirect.com, ingdirect.com and virtualbank.com as they seem to be the front runners at the moment. All currently have savings accounts in the 4.35% to 5.05% range.

Best of luck with your saving! You sound like you’re on the right track. Keep it up!

Technorati Tags: savings, high-yield, high-yield savings, cd, certificate of deposit, savings rates, rates

Ok, I’m fairly certain that even if there are #459382 mistakes that a person can make, this certainly wouldn’t be ranked that low.  This is more like mistake #2.  Right behind mistake #1 which is not participating if one is available.

So what is so big to only be outranked by the non-participation mistake?  It’s simple and yet I find myself on the slippery slope to making it a lot lately.  It is the mistake of forgetting the instant growth that you receive from your employer match.  In my case, I’ve been slipping because my portfolio performed rather poorly last month and brought my year to day return down to below 3%.  I found myself thinking that I could make nearly twice that somewhere else like ING or HSBC.  And that’s where I caught myself.  This time.  You see, my employer matches 20%.  That’s an instant return on my money of 20% plus it compounds because I then gain on that 20% bonus.

Taken into effect, if I get an instant 20% on my money plus it’s been returning about 3% so far this year, the math puts my return well over 20%.  That’s almost better than the interest rate on a couple of my credit cards.

Moral of this story is that if your employer matches your money into your 401(k), do your best to catch yourself when you start thinking that your return isn’t all that good because your employer is making it spectacular.

Technorati Tags: credit cards, 401(k), investment, retirement account, retire, return, roi

With all the talk of the Real Estate market and where it’s headed, it may be time to start looking for a new area to make your profits from. No, I’m not talking about forclosure auctions, although they could become quite popular soon. I’m talking about a different type of Real Estate. Internet Real Estate. Domains.

Just like the ever popular “house flippers” who buy a rundown house, remodel it, and then sell for a huge profit, domain flipping is becoming popular. Business 2.0 had a short article on the subject in this months issue. (unfortunately, there is no link up to the article just yet) Essentially, people are buying domain names that have potential, fleshing the site out and gaining traffic, then selling for decent profit.  They suggest sites like sitepoint and DNForum to begin looking at for potential flippable domains.

Certainly, domain flipping isn’t for everybody, and some related experience with web programming and domain hosting is probably suggested.  I have some limited experience with my research for articles at Thatedeguy and at SuperGeekBlog, but still will have to take a much closer look before I try domain flipping for the first time.

Technorati Tags: domain flipping, business 2.0, domain, internet, flipping, real estate

There has been a lot of talk lately about the stock market and the correction/crash that it’s currently experiencing.  I’ll be honest.  I just don’t care.

Why don’t I care?  I’m only 26.  I’m not invested heavily enough that the dividends from the stocks that I own make up any serious part of my income.  I contribute regularly to my 401(k).  That means that I can take any losses in value that may occur.  That also means that while everyone is worried about the drop in value for their stock, I’m rejoicing.  I’m buying stock at a discount!

History shows that the stock market will rebound from anything that gets thrown at it and will eventually be all that much better for it.  And in the immortal words of the Rolling Stones, “Tiiiiiiimmmmee… is on my side.  Yesss it isss!”  (just be glad you only had to read that and not listen to me sing it.)  I’ve got just under 40 years left before I really need to worry about what the stock market is doing.

Technorati Tags: invest, stock market, stock market correction, retirement, 401(k), retire, IRA

There’s only 21 days left.  Where’s your squawk box portfolio challenge portfolio at?  I managed to lose a little ground over the last few days.  I screwed up actually.  I’m fairly heavily invested into Google.  I bought in at about $404 and ignored the desire to sell when it hit nearly $425 last week.  Well, chalk it up for a lesson learned.  GOOG is now down below $394 and doesn’t appear to be going back up anytime soon.  There goes about $30,000 in portfolio value.

On a brighter note, I’ve managed to keep my portfolio above the 1 million mark almost the entire time. It’s currently sitting at 1,013,378.00.  Not great, but good enough to be in the top 40% of the contest.  My feeling on that is that there were a few people who lost big right away and abandoned their portfolio and that there are a few who signed up and never bought anything so they sit at 1 million still.  At this point, the leader of the game is well over 2 million and I’ve given up hope of winning the Mazerati, but I’m gonna stick with it and see if I can’t keep growing the portfolio a little.  Maybe I’ll buy more Google.

Technorati Tags: squawk box portfolio challenge, update, portfolio challenge, investment, contest, mazerati, google

Ramit at I will teach you to be rich has reposted a post entitled “All about Mutual Funds” that is definetely worth a read.  In it he explains quite a bit about mutual funds and different reasons to invest and not invest.

The dirty secret of mutual funds
Earlier I told you how most adults in America have mutual funds. Now let me explain why they are pretty stupid. Ok, you are paying for expert advice and a Very Smart Person to invest your money.

Stay with me. Remember when I told you that The Market returns about 11% per year?

Now, with all your Smart Money Manager’s tools and resources, you’d of course expect him to beat that. But…

Over 85% of mutual funds fail to beat the market.

Interesting.  Of course some of us have no choice but to invest in Mutuals as our 401(k)’s have us locked into them.  The rest of our investing money is free to do with what we choose…  Where is yours?

Technorati Tags: mutual funds, investing, invest, return, ROI

As the Squawk Box portfolio challenge ends it’s second week and heads into it’s third week, I find myself pleasantly surprised with my ranking. My portfolio is currently +$10,087.50 which puts me in the top 37%.  Not horrible.  I have no delusions of winning the thing and looking at the leaderboard, that isn’t going to happen.  The top person right now is sitting at just over +750,000.00, while the 50th person is sitting at just over +$400,000.00.  I’ve got a lot of lucky picks to make if I even have any plans of getting that far.  The latest market surge seems to have helped me out a little, and I see it is continuing a little bit so far today.  I have a small portion of my portfolio in GOOG, which is up 5.56 at the moment so that could help a my standings tomorrow as long as some of the people above me do not also hold GOOG.

I also jumped into Lucent(LU) at about 2.97 and it’s sitting at about 3 and I grabbed up a sizable bit of cablevision on hopes that it would continue to rise, but it seems to be fairly steady now. I’ve made a few other changes, both selling and buying some of the smaller holdings that should help me out over the next couple of weeks, but we’ll see.

Technorati Tags: squawk box, portfolio, challenge, contest, mazerati