Sushi Money

This week’s Carnival of Money Stories #19 is being hosted at The Dough Roller.  The  host does a really funny “Presidential Debate Edition”…  a clever and fun way to include articles from many sites, with tons of great content on frugality, credit, debt and how we use our money.  Thanks for including Sushi Money!

     While reading the Sunday Paper today I found a few good ideas for manging money in college.  One article highlighted ways for saving money while emphasizing that many college-bound students (and parents) underestimate the spending  money necessary while attending college.  Rather than be surprised by these expenses, why not take a proactive approach and plan ahead?  Here are a few other money management tips to consider:

• Consider a “semester budget” and make a list of anticipated monthly expenses.  Try to estimate the expenses you’ll need, both fixed expenses like monthly utilities or residence hall costs, cell-phone bills, and discretionary expenses for items such as food, recreation and transportation.  You may not get it right the first month or two, but having a place to start is far better than simply spending money as you go along.   If you do it right and foster a disciplined approach, you’ll have money when you need it later for things you didn’t anticipate.
• Avoid spending money just because your friends are.  There are going to be tons of situations where you have the choice to spend money… or not.  Keep that in mind- it’s your choice.  You don’t need to spend money in many situations, but you may find you want to.  The choices we make in many present situations limit the choices we have at later times.  Try to anticipate how you will spend your money so you have more choices for things you really want to do later on.
• Keep track of spending.  Try to check and monitor your spending regularly, whether you do on-line banking, or have a pre-set spending limit on a debit card.  If you find yourself running out of money frequently, take a look back to see where your spending habits are taking place.  If you have a computer… try using Quicken or Microsoft Money.  It can help you form a picture of your spending, and provide a framework for your accounts that makes managing your money much simpler.
• Choose the free or low-cost option for recreation and entertainment.  There are many opportunities for entertainment, recreation and keeping busy on college campuses.  Everything from top-notch fitness facilities to a symphony performance or a play can be found on campus.  Join a club or other student organization that interests you.  So often we can be overwhelmed by everything going on that we just hang out in our ”own space” without really getting involved.  But getting involved is an integral aspect of the university experience… as long as you don’t forget why you’re there in the first place!
• Try to moderate the cell-phone use if you’re not on an “unlimited plan.”  Minutes can really sneak up on you, so try to use e-mail or IM for keeping in touch with friends.  Remember that calling home later at night is much cheaper, or even free depending on your cell phone plan.  If you don’t have a plan, consider a pre-paid service like Tracphone.
• Try not to eat out so often.  That’s a biggie for watching the money leave your pocket in a hurry.  If you’ve already paid for the food on a campus meal plan, try to use it for most of your meals.  
• Minimize credit card use.  Another biggie… if you have a credit card, the bill can be run up in a hurry to a point where keeping up with payments may become unmanageable.  If you don’t have a credit card, you’re going to be inundated with opportunities to get one.  Remember that you are building your credit rating. It may not seem like a big deal right now, but a few years down the road you may need a good credit rating to get that car you really want, or even the job you’ve applied for.  Many employers are now routinely screening credit records of potential employees… what we do in college can follow us for years if we’re not careful.
• Consider a part-time job to help with expenses and generate spending money.  Better yet, to generate savings!  There are many part-time job opportunities, and every college or university has a career or employment office to help you find one.  Sometimes, a part-time job can be the best balance to completing your studies and offer rewarding opportunities for professional growth and development.  You’ll meet people, learn more about the work force and gain valuable experience by getting that part-time job, and increase your bank account as well!

  There are a lot more strategies to save money while in college of course.  How do you manage it?  For too many students, just paying for college is the real challenge, and student loans are a must.  But try to keep the goal in mind… namely to complete your education and begin your career.  Money is a tool… use it wisely and it will work for you.  Peace of mind financially can make studying a lot easier along the way.  There will be many times when you can’t stand a professor or a living situation you find yourself dealing with.  But try to pace yourself… I had a professor once who gave me some great advice.  He said to remember that no matter where we are in life, we’re only there for a short while… in a few years we’ll be somwhere else doing something far different.  Try not to get too wrapped up in the present by making decisions you’ll later regret.  Just do your best, keep the big picture in mind and everything will fall into place along the way.

     I grew up with the Boy Scout motto of “Be Prepared.”  Not that we can prepare for everything, but it’s usually in the back of my mind… this little voice whispering in my ear until I finally do something about it.  I won’t go into the other little voices I hear(!) but suffice it to say that I like taking care of little problems before they become bigger problems.  It doesn’t always work out that way however. 

Take last year for example.  We just moved into a new (for us) home in the country.  We live about an hour from a major metropolitan area, but definitely in the country… farm fields and forest to be seen for miles.  Winter in the midwest can get mighty cold, and one of my goals was to have a wood burning stove.  Not only do I enjoy the warmth of a wood stove, but I like the security it provides in terms of raw heat, whether you have electricity or not. So we purchased a nice wood burning insert for the fireplace, and I spent the Fall season cutting, stacking and procuring seasoned firewood. 

     It was not a little expense however… after installation the wood insert cost exceeded $3000.  I plunked it on the credit card before using a timely 12-month 0% balance transfer option for another card.  It took some rationalizing that buying the wood burning insert was something we needed… really it was something I always wanted.  And we enjoyed using it as winter grew colder.  Something we did need however was a good backup generator for the house. Power outages are not uncommon where we live, and we were fortunate to inherit an older Honda generator.  Being the practical “be prepared” kind of guy, I routinely started the generator once or twice a month to make sure it would be functional should we ever need it.  

     That day finally arrived with a monster ice storm last winter that coated roads, trees and powerlines with temperatures in the low teens and 20’s.  Ice and electric power lines do not mix well, and within 24 hours the entire metro region was in a series of outages that lasted almost a week.  Normally with power outages, we wait several hours to see if the power comes back on (as it usually does) before hooking up the generator.  That first day I filled up the trusty wood burning insert, and we stayed fairly toasty while burning wood with the residual heat inside the home.  As night came with the power still off, I resigned myself to starting the generator, but very glad we had it.  Out it came while I beamed with pride for my wisdom in making sure it was ready to run.  ”Time for some power!” I thought…  Or not.  After 30 minutes of yanking, pulling and a few colorful words, the dang thing simply would not start.  So it was going to be a dark night at the homefront!  

     That night I stoked that wood burning insert for all it was worth, and although much of the house was pretty chilly, we curled up in the living room and enjoyed the radiated warmth that only a wood fire and cast iron can bring.  There’s something very rewarding about fire in the midst of freezing weather.  Yes, we might have been able to pack up the car to drive for an hour and find a hotel somewhere, but that wasn’t a sure bet with all the power outages.  More importantly, the icy roads and snow coming down was a safety consideration.  With a family, animals and a house you’re concerned about, you try to stay around if possible.  There’s another motto that comes in handy… “Don’t make a bad situation worse.”  Driving was out of the question, but we actually enjoyed a comforable night with a toasty wood fire, albeit without the usual amenities of home.

     Fortunately, we awoke the next day to decent weather and improving roads.  I drove into a smaller town a half hour away to try and find some new spark plugs and starting fluid, and about midday arrived back at home. I finally got the generator started and we were off to the races.  But the thing about small portable generators is that it takes fuel for them to run… I had only stored a single days worth of fuel, not enough to run non-stop without multiple trips for fuel.  But it was enough… it lasted almost a day running what we needed in the house, while most of the house stayed warm enough with the wood stove. The power came back on briefly the second day… back off for another night, then back again “for good” on the third day.   No real crisis, but enough challenges to make us really appreciate the power company!

     As I get ready to pay off that credit card debt, I look back and consider how much it cost to purchase and install that stove.  And I’ve found it doesn’t really matter… what matters is the security we have in the form of something that serves as a “back up” to heat the home in winter.  Actually we use it almost everyday in winter to supplement heat and cut down the electricity bill.  (And it’s a clean burning wood insert with the highest EPA ratings for air cleanliness… you hardly see any smoke coming out the chimney as it reburns most of it).  I consider that stove one of the best “investments” I’ve ever made for the value it brings to our family.  And you know what?  I can see how an emergency fund serves a similar purpose.  It’s like having a “wood stove” or  “generator” in your bank account… ready in case you ever really need it.  Unlike a wood stove however, it shouldn’t be used regularly!  But it can supplement your financial needs when times get tough.   

     There’s another analogy worth looking at… paying down debt.  In many ways, paying off debt is similar to cutting firewood.  There’s an old saying, “Wood heats you twice… once when you’re cutting it, and again when you burn it!”  Paying down debt can achieve similar results… you’re “paying yourself twice” by getting rid of the debt burden and financing costs, while making room to use cash for savings at a later time.  What about the generator that wouldn’t start?  Well, I look at that like not having an emergency fund.  We take so much for granted that we don’t think of the unexpected.  We work hard to stay prepared, and rationalize that we don’t need to save so much money.  But we may not be as quite as prepared as we think, especially if we don’t have a fairly liquid emergency fund ready to meet needs in times of crisis or challenge.  

     What did I learn from that ice storm last winter?  I learned that spending money, even using credit wisely, to ensure your safety, comfort and security can be a pretty good investment.   And  that  “being prepared” is a positive mindset… yet even when you think you are, the unexpected can always happen.  Having the security of a back-up plan, and an emergency fund in the bank is also a pretty darn good investment!

Ouch!

…July, 2007    

 Well that wasn’t pretty… what I call the Ouch! factor. But you knew it was coming, right?  Sooner or later all markets correct.  How much and for how long is the eternal question.  Today the Dow was down over 400 intraday and ending up minus 300 points.  I see the Dow’s 50 day moving average at about 13,585 and the 200 day moving average at about 12,700.  My gut tells me we’ll be heavily testing the 200 day moving average over the next six months, and back again with a lot of volatility. 

A lot depends on housing and credit issues, consumer spending and what the Fed does.  But keep the faith!  “Slow and steady wins the race… “  So the saying goes, but it doesn’t make it any more pleasant to see your stocks and funds go negative over the short term.  The way I look at it however, I’m not saving and investing for the short term.  I don’t trade stocks for a living, or even for fun anymore.  I trade, rather I invest, for long-term gains… retirement… someday “in the future”.  On rare occasions I will make short-term trades, but those are the exception, reserved for the times I think I’ve made a mistake or need the money for something else.  I will also execute trades to lock in long-term gains, especially if the greater fundamentals of a company or the market warrants it.  Yet that is a judgement call that can be prone to excessive costs, and losing out on returns and positive moves within stocks and sectors.  

My primary goal is to look for values… track a few companies I would like to own over time, and when the opportunity presents itself, invest in those companies for the long term.  How long?  At least 3-5 years or more.  Sooo… what companies?  I have no frigin’ idea!  Well, I do, but when the market moves this fast, it makes you wonder… is the time right?  Should I buy it now?  Umm… uh, ahem… well maybe I’ll wait a few days and see where the market ends up. 

But I’ve always liked McDonalds (MCD).  Good growth, a decent dividend (paid annually, not quarterly like many dividend payers), and decent forward valuation at about 16 times earnings right now, with a trailing P/E of 29.  Maybe this is the time… maybe not.  Does it matter, as long as I’m going to hold it a few years or more?  Probably not.  Still, I think I’ll wait a few days and see where the market heads.  Lots of questions, lots of doubts, and room to find conviction in between.  But that’s what investing is all about. 

Full Disclosure: No Ownership of MCD at time of writing.

     A wealth of information out there today.  The market is in a see-saw as investors digest earnings report and weigh the impact of subprime losses on the market and economy.  But the Bulls aren’t letting go easily.  In an article from Minyanville, “Professor” Greg Weldon takes a thorough look at the macro events taking place in the economy while making a bullish case for gold.  We’ve read a lot about the housing downturn and excess inventories, but the condo numbers in Miami, Florida are amazing: 

“…despite the inability of sellers to unload the existing inventory of 22,924 condos that are currently for sale in Miami-Dade County, builders are presently working on no less than 37 new high-rise condo buildings.  Subsequently, there will be an increase in the inventory of unsold units that exceeds 20,000 over the next few months (according to the Florida Association of Realtors).”

Fairly staggering numbers, and that doesn’t even mention the ovesupply of single-family homes in Florida… or the U.S. as a whole.  To leverage Greg’s article, here’s a chart with a little more clarity going back 40 years:

      I’d like to compare that chart with some demographic numbers, but it’s pretty amazing. There are a ton of homes for sale across the nation right now, and builders keep building!  I know in my county, new home building has slowed with incredible incentives being offered by the builders. Yet they keep building… with many half-empty developments and subdivisions among the more recent homes.  We bought in a subdivision in 2003, as one of the last homes being offered… a strategy that worked well when we sold in 2005.  Our buyer was concerned about a half-completed neighborhood.  Something to think about if you’re in the market for a new home, and yet those half-empty neighborhoods may offer pretty good deals over the next year.  Or more…  Countrywide (CFC) CEO  Angelo Mozilo doesn’t see a U.S. mortgage rebound until 2009. 

     As if the current mortgage default problems weren’t enough, CNN/Money reports that “the subprime mortgage meltdown has begun to spread to prime loans as even credit-worthy borrowers have started to fall behind on payments.”  Their data comes from Countrywide’s quarterly financial report where a spike in delinquencies was attributed to prime borrowers.  Existing home sales continue to drop off also, falling to a 5 year low with a 12% decrease in sales from June ‘06 to June ‘07.  Housing and mortgage-related issues will certainly be under the microscope over the next year and beyond.  Potential home-buyers should have the market of their dreams over the next couple of years- just make sure it’s really what you want.  Sellers will have a tougher time… but can do many things to get that home sold.   Most of us will be sitting tight and enjoying the homes we live in… as long as we can afford to live in them!

Wow… Not everyone has had a tough day- the Dow tanks over 200 points and Amazon (AMZN) is skyrocketing after hours!  Amazon quarterly profit tripled on strong U.S. sales and analysts went nuts.   Awesome for those who hold the stock, but I can’t imagine being a buyer with a PE earlier today of 116… maybe closer to 90 when all is said and done.  Still too high as far as I’m concerned.  Should have been a buyer at last year’s lows- that was a key opportunity.  But I’m happy to contribute to Amazon’s profits by shopping there.  Good luck to those who are buying (or covering…the after hours price is up $14.35 while I write this… going up another $2 in the past 20 minutes… yikes!).

Bill Gross of PIMCO has written a tough, satirically colorful piece on the subprime loan problems the economy faces.  In Looking for Contagion in All the Wrong Places, he pretty much nails the issues and states his views that the U.S. housing markets will continue to be hit hard, affecting growth across the economy and especially for short-term yields.  Very good read… somewhat unnerving as he is adamant about escalating subprime defaults.  A good time to look at where your money is in the mortgage-backed securities arena.  Think I’ll stay out of that mess for now.  Treasuries anyone? 

I was wondering how I could really get folks to read a post….   I know!   I need a really catchy title or something.  What if my title for the post was Five Reasons to Sell, Sell, Sell?   Oh… that sounds kind of alarming doesn’t it?  Maybe a little too much?  But wait!  Someone beat me to it… no less than Business Week wrote a short article with the same title (I guess they really wanted people to read it).   As alarming as it sounds however, the author does raise some excellent points for contrasting how well the market has done lately with consideration for threats to the downside.  The primary issues they cite are:  Company Earnings, Consumer Spending, Inflation, Subprime and Housing and “Shiny Happy Investors.”  That’s a pretty succinct list, and covers the major themes for the market and economy right now.  I would probably add global macroeconomic and international market issues to the list.  They describe “Shiny Happy Investors” as those having too much optimism, and excessive market euphoria for continued good times.  Bottom line, if too many retail investors are buying stocks, then the big money is probably selling.  Many of us have been finding similar themes for a couple of months now, but I’m glad to see more skepticism in the media.  I’ll never argue with a market that does well, but I want to balance the potential downside as well.  We’ve got a few historically challenging months ahead for the market.  And I’m going to need to work on my titles… I’m obviously not grabbing enough attention!

     How are money market and savings yields in your local region?  It’s not hard to see that most smaller and regional banks offer very poor (low) rates to consumers on their money market and savings accounts as compared to what you can find nationally.  And many of those same local banks require much higher minium deposits than their national counterparts.  Sure, they are trying to make money too… but why do consumers settle for 1.00% or 2.0% yields on local money market or savings accounts when they can get closer to, or better than 5.0 % nationally through companies such as UFB Direct, GMAC Bank, HSBC Direct, CitiBank Direct, ING Direct, etc?   Sometimes I wonder if convenience prevents us from achieving financial success in many areas of our lives.  Sure, many people have a local branch where they feel more comfortable ”keeping” their money… which obviously means where they “keep” their paperwork and relationships.  But we can do so much better!  Let’s use an example of Mr. Johnny and Mrs. Debbie:

     Mr. Johnny has $10,000 in  “Low-Rate Bank’s” money market account, earning 1.5%, compounded monthly.  He likes the bank… it’s local, and they have nice people.  He always knows who to talk to, and feels secure “keeping” his money there.  After one year, Johnny should have earned $151 for a total of $10,151 and change. Hypothetically, Johnny leaves his money in that account for many years- let’s say 10 years.  Money market account interest rates fluctuate greatly over time, but let’s assume Johnny earns an average of that 1.5% at “Low-Rate Bank” over the course of 10 years.   His total earnings over that time would be $1,617  for a grand total of $11,167. 

     Now Mrs. Debbie also has $10,000, but she keeps her money in “High-Rate Bank’s” money market account, earning 5.0%, compounded monthly.  Debbie’s bank is an internet bank based somewhere she doesn’t even know, but it is a reputable, large institution that provides the same security for her money as the local banks.  Debbie also has a local branch bank account, but at 1.5% she thinks their money market or savings rates are too low, so she keeps most of her funds at High-Rate Bank.  After one year, Debbie checks her earnings at High-Rate Bank  and sees that she earned $511 for a total of $10,511!  She’s happy with that, and knows she earned $360 more than her local bank would have paid her at 1.5%.  Debbie decides to leave her money in that account over time.  She knows interest rates on her account may not always be at 5.0%, and in fact Debbie achieves an average of 3.7% on her money over 10 years.  If she kept her original $10,000 there, her total earnings over that time would be $4,469,  for a grand total of $14,469 in her money market account.  That’s $3300 more than she could have had at 1.5% with her local bank!  Wow… all because she kept her money somewhere that earned more interest!

     Just an illustration… realistically, if Johnny or Debbie had $10,000 to set aside for 10 years or more, and didn’t need the money, they should have been in the market invested in a low-cost, diversified stock or index mutual fund.  The S&P 500 Index alone has achieved better than a 7% average total return over the last 10 years. So that same $10,000 invested in a good low-cost fund such as the Vanguard 500 Index Fund (VFINX), with a 7% average total return would have doubled your money!  Unless you wanted to withdraw it at about the 5 year point… in which case it’s value would have been pretty close to the original $10,000.  Which brings up a key point:  If you need the money in the next 3-5 years, then you need a more conservative investment vehicle, maybe even a savings or money market account.  You’re taking on a lot of risk if you put money you need for something (down payment on a home, emergency funds, etc) in the market for a short period of time.  But for long-term investment returns, few things can compete with the returns found in the stock market.

     One other point… interest you earn from taxable savings and money market accounts may be taxed at the highest rates for your tax bracket as ordinary income… but since 2001 dividends and capital gains (from stocks and mutual funds) are taxed much more favorably, at least for now. Keeping your money in a low-cost mutual fund for long periods of time can save you money on taxes as well!

     A little here, a little there… earning higher rates, compounding over time.  Whatever we can do to save more of our money, earn more interest and dividends on our money, and keep more of our money is a good thing. The saving and keeping part is the challenge… but interest and compounding works its magic by itself, we just have to find a higher magic number!