Search Results for: High Interest Savings

New Rules on Fiduciary Duty for Retirement Account Advice

Posted on April 6, 2016 // 7 Comments

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The Department of Labor has released their final rule on reducing conflicts of interest on retirement savings advice. As expected, the new rule now requires any person who provides investment advice on retirement accounts like 401(k) or IRAs to act as fiduciaries and put their client’s best interest first. The goals are to save investor money otherwise directed to hidden fees and commissions, while helping even the playing field for the financial advisors have been acting as fiduciaries all along.

Commentary. Lots of people have most of their retirement savings in 401k plans, which are often eventually rolled over into IRAs. There are entire firms of salespeople who try to capture this money and skim off huge commissions, and now they will have to act as fiduciaries.

While it can be touted as an overall “win” for consumers, there are still plenty of grey areas. The final rule requires firms to be compliant on several broader provisions by April 2017 and fully compliant by Jan. 1, 2018. Existing investments are grandfathered in. Small 401(k) plans are exempt from some of the rules. Firms can still technically sell you things like high fee variable and indexed annuities in IRAs and brokers can continue to recommend proprietary products, there just has to be a believable shred of reason behind it.

I’m going to be honest, I read about 20 articles on this subject and my head hurt with all the little details. This rule could have really blown up large parts of the industry, but you can tell they really tried not to disrupt anything significant. Try reading some for yourself:

Department of Labor Official Page
Department of Labor Press Release Fact Sheet
White House Fact Sheet [PDF]
NY Times 1, NY Times 2
WSJ 1, WSJ 2

In other words, the nastiest stuff with the highest hidden fees and commissions will probably go away. So it’s a win around the edges. For the savvy DIY investor or the person with their money with a trustworthy registered investment advisor (RIA) that was already a fiduciary, the effect will likely be small if anything.

Hopefully, if you decide to have someone help you manage your investments, they are already a fiduciary, have been for a while, and don’t need someone to tell them to act in your best interest.

Filed Under: Investing, Retirement //

Bill Fixers: Let Someone Else Haggle Your Cable and Phone Bills For You

Posted on April 5, 2016 // 19 Comments

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Successful haggle update, April 2016. Shortly after the NY Times profile of Bill Fixers came out, I submitted a request for them to help me lower my Time Warner cable bill. I had haggled with Time Warner in the recent past, but was currently back on regular pricing, so I figured I’d give them a shot. It took them about two months to get around to my request due to the flood of interest they got after the NYT article, but here were my real-world results:

  • $263.52 reduction of bills over the next 12 months, verified.
  • They gave me a 20% discount on their fee (half of first year savings) due to the delay, so I owed them $105.41.
  • One of the discounts they haggled for me ran for 24 months, which added up to another $83.26 in savings on which I owed no fee since they only charge for the first 12 months.
  • My total net savings: $241.37

The only work I did was to scan and upload a copy of my cable bill, and provide a personal security question and answer (not sure if it was right, or if they had to use it). I understand that some people may not feel comfortable with this, but I did not have to supply my bank account number, credit card information, Social Security number, or birthdate for this situation.

Original post:

I’ve written about haggling your cable or satellite TV bill for years, with hundreds of comments sharing both success and failures. I’ve certainly negotiated with a healthy share of customer service reps myself. But I don’t like doing it. I do it because unlike say the electrical company, who tells me “you pay based on how much power you use”, the cable company tells me “if you bother us, we’ll give you a discount, but if you are nice and quiet, you’ll pay double”. Big Data is tracking whether you compare prices or not, so it is in my best interest to announce that YES I COMPARE PRICES!

But what if you could just pay someone else to haggle for you? Deal with the long hold times, the “accidental” hang-ups, and the multiple transfers between supervisors? Enter brothers Julian and Ben Kurland of BillFixers.com, who will do just that. I came across them in this Businessweek article:

Despite all the various life-hacking sites that will teach you how to reduce your cable bill, a recent Consumer Reports survey found that fewer than half of people who attempted to do so were effective. Services such as BillCutterz have been offering some relief, but the Kurlands say their success rate—94 percent—is higher. It usually works out because they’re annoyingly persistent. Calls can last several hours as the brothers are passed among operators, managers, and various departments. The Kurlands often call companies multiple times, looking for different representatives who will cut a deal. “You’ll talk to three people who won’t offer anything, and the fourth one will magically have a discount that no one mentioned,” Ben says.

Which companies will they negotiate with? According to their website, they’ll take a shot at any recurring monthly bill you have. They don’t do things like credit cards and medical bills.

  • Television (Cable, Satellite, IP TV)
  • Internet (Cable, DSL, Other)
  • Landline
  • Cellular (AT&T cellular bills are one of the “easiest”. T-Mobile is one of the hardest.)
  • Satellite Radio

How much does BillFixers cost? They work on a contingency basis. If they don’t save you money, you pay nothing. If they do, they charge you 50% of the first year’s savings. You can pay via lump sum or in monthly payments (which in theory would match up with your monthly savings). Some stats from USA Today:

– Of the 650 clients, 94% receive savings
– The average reduction in bills is greater than $300 per customer
– About $155,000 has been saved for customers since 2014

I don’t doubt that someone with the right skills and motivation can be a good hired negotiator. I suppose the only concern would be giving out personal information like Social Security Number. However, if you give them the right information like account numbers, they shouldn’t need that kind of sensitive information.

If you’ve been thinking about haggling but have been putting it off due to either dislike or procrastination, why not give them a shot?

I’m going to add BillFixers to the growing list of services that will help find you money for free (but if they find it, they may take a cut).

  • CoPatient: Negotiate your medical bills. They take a cut of any successful savings.
  • AutoSlash: Helps you track price drops on rental cards. They make money when you rebook at a lower price with them.
  • Paribus: Helps you automatically request price adjustments on all your online retail purchases. They take a cut of the price drop savings.
  • AirHelp, Refund.Me, AirTaxBack: Get fees refunded for certain cancelled or missed flights to/from Europe. They take a cut of the refund.
Filed Under: Deals & Offers, Frugal Living //

Consumers Credit Union Free Rewards Checking Review: Up to 4.09% APY on up to $10,000

Posted on February 9, 2016 // 10 Comments

ccu_logo_200Updated May 2020. Consumers Credit Union (CCU) has a Free Rewards Checking account that offers a high interest rate between 2.09% and 4.09% APY if you meet certain requirements. As with similar accounts elsewhere, the catch is if you don’t jump through all of the hoops, you effectively won’t earn any interest at all that month (0.01% APY).

Membership
To open a Rewards Checking account, you must be a member. However, CCU has a very open membership policy; basically anyone nationwide can join if they do the following:

  • Join the Consumers Cooperative Association with a one-time $5 fee.
  • Open and maintain a share savings account with a minimum $5 deposit.

Earn 2.09% APY on up to $10,000 + ATM Fee Refunds if you:

  • Make at least 12 debit card purchases each month. (Reduced to 6 during April and May 2020.) Don’t use your personal identification number [PIN]. In stores, select to run it as a “credit” purchase.
  • Direct deposits, mobile check deposits, or ACH credits totaling $500 or more monthly.
  • Receive e-Documents (enroll and accept the disclosure)

Earn 3.09% APY on up to $10,000 + ATM Fee Refunds if you:

  • Complete all of the tier requirements above, plus
  • Make $500 or more in CCU VISA Credit Card purchase transactions (no minimum number of transactions)

Earn 4.09% APY on up to $10,000 + ATM Fee Refunds if you:

  • Complete all of the tier requirements above, plus
  • Make $1,000 or more in CCU VISA Credit Card purchase transactions (no minimum number of transactions)

A nice feature is that their online interface has a progress tracker, updated daily, telling you number of debit card transaction and the total spend on your CCU credit card. Tracking is also available via their smartphone app (Apple/Android).

ccu_trackerapp

All tiers will also receive:

  • Unlimited reimbursement for any and all ATM fees + 30,000 surcharge-free ATMs nationwide.
  • No minimum balance. No monthly service fees.
  • Free online Bill Pay.
  • Mobile check deposit via smartphone app.

Qualifying Credit Cards
If you don’t have a CCU credit card, the best you can do is the 2.09% APY tier. Here is a list of their credit cards. It looks like the best one is their Visa Signature Rewards card, which offers a 3% cash rebate on up to $6,000 in “Grocery/Convenience Store” purchases annually, 2% cash rebate for “Gas” purchases, and 1% cash rebate for all other purchases. No annual fee.

Note that I would try to take advantage of the Grocery 3% and Gas 2% cash back categories in order to not miss out on the potential cash back from a 2% cash back card.

Cost/Benefit Analysis
Keep in mind that most checking accounts pay very little, leaving you to try maximizing your savings balance while avoid overdrafts. So you might not max out that savings account rate completely.

  • $10,000 times 2.09% APY would be $209 per year, or $17.40 per month in interest.
  • $10,000 times 3.09% APY would be $309 per year, or $25.75 per month in interest.
  • $10,000 times 4.09% APY would be $409 per year, or $34.08 per month in interest.

An extra $100 to $300 a year in interest sounds pretty good. Note that to qualify for the top two tiers, you’d also have to apply for a new credit card, which would entail a credit check. There is an opportunity cost here, as there are other new credit cards that offer close to $500 in sign-up incentives within a few months. You can apply for multiple new credit cards, but once you reach a certain number it will hurt your chances for getting the next one.

These types of checking accounts are not for everyone. Not only do you have to jump through hoops each month to get a reward (higher interest than no-hassle account), if you don’t you’ll actually get punished in a way (lower interest than a no-hassle account). Try to create a reliable system where you satisfy the requirements early on in the month, for example putting some automatic insurance, phone, or utility bills on the credit card. My favorite feature is their qualification tracking; I wish all rewards checking accounts had this feature. CCU has been running this rewards checking account now for well over 10 years (with several tweaks), so hopefully they have crunched the numbers and set the rates at sustainable levels.

Bottom line. Consumers Credit Union (CCU) has a Free Rewards Checking account that offers a high interest rate if you meet certain requirements. This is a unique account, but CCU has been running it for nearly a decade now. It would work well if you want to one single high-interest checking account and your balance rarely exceeds $10,000.

Filed Under: Banking, Deals & Offers //

Got Annoying Monthly Subscriptions? Let Trim Cancel Them For You

Posted on February 2, 2016 // 3 Comments

trim_nologo2You’ve heard the financial media (and me) talk about the importance of automated savings. Things like recurring 401(k) contributions that don’t require flexing your willpower. Well, the other side of the coin is automated spending. Companies love love love it when you buy their stuff on auto-pilot.

A new start-up called Trim helps you identify your recurring charges automatically and cancel the unwanted ones for you, for free. That sounded like a great idea. You’ll have to provide them the login credentials to your credit card or bank account, or you can snail mail them your statements. (I’d say yes to credit card before bank account.) This is going to sound like a humblebrag, but I wanted to test the service out but don’t have any services that I want canceled. Instead, I had a quick e-mail exchange with Trim CEO, Thomas Smyth:

Me: Trim sounds very interesting. Instead of a phone call, do you mind me asking just how exactly do you cancel the service on behalf of customers? I can understand the algorithmic finding of recurring charges, but wouldn’t you need some detailed personal information in order to perform the cancellation? If so, what type of info would you ask people for?

Thomas Smyth, Trim CEO: Absolutely – it just depends on the biller. For some, like Hulu, we simply send a form email that has the user’s account info (email, name) and the most recent charge on the credit card. For others, like credit reports or gyms, we’ll ask the user for more info, like DOB and account number.

We never ask for confidential info like SSN or full credit card numbers — those are NOT safe to send via text message. Sometimes we do run into billers that require this info — for example, LifeLock. In those situations we can’t cancel it for you (sorry!) but we do send you detailed info on how to cancel it yourself.

So they will try, but it won’t work for every biller. In those cases, hopefully them pointing out your wasteful ways will nudge you towards action. The good news is that the NY Times profiled Trim recently and found it to work pretty well. They even broke down the recurring subscriptions with the highest overall cancellation rates by Trim. Here are just the top 10:

trimnyt

You could read this as the most overlooked services, or the hardest to cancel, or a combination. People tended to want to get rid of their credit monitoring services, gym membership, and Gogo Air the most. The vast majority of people kept their Netflix and Spotify. The New York Times itself gets canceled 10% of the time it is found, so I suppose it is rather brave of them to even point this service out!

Amazingly, they don’t have an app! Trim has an online web interface, but the original service works simply over text messages.

trimtext_400

Free identification and cancellation services are nice. But canceling will always be harder than signing up, so I try to avoid them in the first place. Automate your savings, not your spending.

Related: SubscriptMe is an app that identifies recurring subscriptions by scanning your phone. There are also haggling services like Bill Fixers which charge a finder’s fee based on how much money they save on your behalf.

Filed Under: Deals & Offers, Frugal Living //

Prosper Review for Investors: Understanding Risks and Returns

Posted on January 12, 2016 // 17 Comments

lcreview_logo200I lent out my first $25 to a stranger on Prosper nearly 8 years ago, in October 2007. Since then, the peer-to-peer (P2P) lending environment has undergone a variety of changes. I’ve made hundreds of P2P loans both hand-picked and algorithm-driven, sold them on the secondary market, and experienced the effect of defaults on my returns.

I’ve written several posts along the way, but here is my condensed (but still detailed) overview. Many of the other Prosper reviews tend to focus on the positives. While Prosper certainly has potential, I’d rather go deeper into the possible risks to an investor’s hard-earned money.

The attraction: Be the bank. Earn high interest rates. We’ve all seen the big banks charge mountains of interest, while us regular folks pay it. The average interest rate on credit card loans remains around 15% APR. The basic model for P2P loans is that anyone can become that bank and invest in loans to other individuals. Prosper will take a little cut for helping out, but the bulk of the interest (and risk) goes to the investor.

The reality: Higher net returns than other alternatives, but the risks hide in the details.

Detail #1: Significant loan defaults occur over time. The good news now that P2P loans have been around for a while is that you have more historical performance numbers to consider. Prosper lets you see this historical data in great detail, but you have to look carefully. Here’s a snapshot of what you’d see now at Prosper.com/Invest, labeled “Seasoned Returns*”.

lcreview_returns_10mo

Here’s what that asterisk means:

*Seasoned Return calculations represent historical performance data for the Borrower Payment Dependent Notes (“Notes”) issued and sold by Prosper since July 15, 2009. To be included in the calculations, Notes must be associated with a borrower loan originated more than 10 months ago; this calculation uses loans originated through May 31, 2012. Our research shows that Prosper Note returns historically have shown increased stability after they’ve reached ten months of age. For that reason, we provide “Seasoned Returns”, defined as the Return for Notes aged 10 months or more.

The initial interest rate on your notes is only a theoretical maximum return. For example, for the last quarter of 2015, the average interest rate was 11.06% for 36-months 15.47% for 60-month loans. Every time a borrower defaults – and trust me, if you buy any meaningful amount of notes, some will default on you – your return will go down. With loans as little as 10 months old, their quoted “increased” stability is not the same as stability.

Here’s a chart from competitor LendingClub showing how net annualized return has decreased with loan age (for different vintages of past loans). Note that the net return numbers still keep going down after 10 months.

lcreview_returns_vint

If anything, I would prefer to use this alternative table provided by Prosper. These estimated net numbers are more realistic. The table also includes a daily snapshot of their current inventory, which may give you an idea of relative availability by rating. Note that there are much fewer of the highest-risk, highest-expected return loans available.

prreview_returns_available

Finally, don’t forget that not everyone gets the average. You can’t buy a “Prosper index fund”. You may be above average, but be prepared for below-average returns as well.

Detail #2: Liquidity concerns. When you buy traditional mutual fund that holds investment-grade bonds, with just a few clicks, you can sell that investment on any given trading day. You will get a fair market price, and you will find a buyer for all of your shares.

If you invest in a Prosper note and you need to cash out before maturity, you will have to sell on the secondary market. Now, if you have pristine loans with a perfect payment history, today you’ll probably be able to sell your notes at near or even slightly above face value. But here are the possible haircuts:

First, you will have to pay a transaction fee of 1% of face value on all sales. Second, if you have loans that have ever been late or has a borrower whose credit score has decreased since loan origination (they track that), you will have a harder time finding a buyer and the price will probably be lower than face value. Finally, for Prosper if your loan is currently late, you can’t sell it on the secondary market for any price. You can’t even offload it for a penny.

In my experience, I liquidated ~85% of my loans at about a 0% net haircut, ~10% were sold at a slight loss due to their imperfect history, and ~5% could not be sold at all. While this is certainly better than having no liquidity at all (like a lot of real-estate crowdfunded debt), it also takes a few hours of work at least to maximize your selling prices on 100 or 200 loans.

All of these haircuts taken together can take a significant hit against your total returns. Also, just because you have buyers today doesn’t mean there will be buyers tomorrow. Therefore, I would not invest if you don’t expect to hold the loan until maturity. Some people try to arbitrage things by buying notes and selling them quickly on the secondary market to residents of states that can only buy notes on the secondary market.

Detail #3. Diversification is critical. A defaulted loan wipes out both principal and interest, resulting in a big hit on your overall return. Therefore, your best bet is to never put any more than the $25 minimum into any one note. Remember this statistic: For Notes purchased since July 2009, every Prosper investor with 100 or more Notes has experienced positive returns. In other words, no investor has lost money overall if they held at least 100 notes! 100 times $25 = $2,500 which I think is the minimum you should invest with.

Detail #4. Taxes. P2P notes are a somewhat different animal, and at year-end you’ll receive some tax forms that will be unfamiliar to most people. These may include:

  • 1099-OID
  • 1099-B (Recoveries for Charge-offs)
  • 1099-B (Folio secondary market)
  • 1099-MISC

If you file your income taxes yourself, it is not impossible to figure out but it will take some extra research and effort. Here is my Prosper tax guide that offers some guidance. If you pay a tax professional, they may charge extra for the added complication.

For the most part, the interest you receive will be taxed as ordinary income, the same rate as interest from bank savings accounts. This can be quite high depending on your income, so you may want to consider holding your Prosper notes inside a tax-sheltered IRA. Looking back, I wish I put my Prosper notes inside an IRA.

Detail #5. Automatic investing. The days of hand-picking loans are pretty much over. I recommend using the Quick Invest feature that Prosper offers in order to automatically filter through and buy the notes that fit your criteria. Loan supply is often limited, and this way you can actually get those loans before someone else buys them.

You can let Prosper pick the loans for you, or you can spend your time looking for “better” filters. There are some free tools out there that help sift through the past performance data. There are even paid services out there that do this for you, but I am uncertain how the cost/benefit would shake out.

Detail #6. Past performance vs. future possibilities. Although past returns are great, another economic recession may have a severe impact on your future loan returns. In the end, these are unsecured loans like credit card debt. If people lose their jobs, they will stop paying. Just because nobody has lost money in the past with 100+ loans, that doesn’t guarantee that you won’t lose money in the future. Unlikely does not mean impossible.

Traditionally, high-quality bonds are a diversifier to stocks. But Prosper notes are more like low-quality bonds. If the economy tanks, defaults will rise and your returns will drop. But if the economy tanks, your stocks will drop too. Are you ready for both to suffer significant drops during times of financial stress?

Detail #7. What if Prosper goes bankrupt? As a company, Prosper Marketplace Inc. (PMI) has historically had a hard time actually making a steady profit themselves. In 2013, Prosper started structuring their notes so that they are held in a new legal entity called Prosper Funding LLC (PFL). This remote entity is designed to stand alone and be protected from any creditor claims in the event that Prosper Marketplace, Inc. goes bankrupt. PFL can keep on running and servicing loans. This is a good move in my opinion, but it is still unknown how well this legal strategy will work, or if future lawsuits can put the assets of PFL at risk.

In other words, don’t put all your eggs in one basket. Due to #6 and #7, Prosper notes should only be a portion of your fixed income assets.

Summary. P2P loans are becoming a legitimate asset class, gathering billions of dollars from Wall Street and other institutional investors. Interest rates remain low, and thus the high yields and competitive past returns from these Prosper notes are still very attractive. Let’s face it, even a tempered expectation of 8% net annual return is hard to ignore! But before you make the jump, make sure you fully understand the risks and how to best mitigate them.

  • Understand that your final returns will be significantly less than your starting yield. Look at historical numbers for guidance.
  • Don’t invest money you will need before the loan ends (3-5 years).
  • Diversify across as many loans a possible (100+ notes).
  • P2P notes should only be a portion of your fixed income assets.
  • Expect to spend extra time to acquire notes and prepare taxes.
  • Consider holding notes inside a tax-sheltered IRA.

I hope that this information helps you decide whether investing in Prosper loans is right for you.

Filed Under: Investing //

Bank of America Credit Cards

Bank of America BT CardBankAmericard® Credit Card

  • 0% Introductory APR for 18 billing cycles for balance transfers made in the first 60 days, then 11.74% – 21.74% Variable APR
  • Balance transfer fee of either 3% of the amount of the transfer or $10 (whichever is greater) applies
  • No annual fee
  • Saves you more on interest when you transfer balances from higher rate credit cards
  • $0 Liability Guarantee, so you’re not responsible for any fraudulent charges made on your account
  • Access your FICO® Score for free within Online and Mobile Banking
  • If you apply for a card over the phone and are approved, our representatives can transfer your balance over the phone
  • See additional BankAmericard® Credit Card details

bofa_cashrewards191BankAmericard Cash Rewards™ Credit Card

  • No annual fee
  • $100 online cash rewards bonus after you spend at least $500 on purchases in the first 90 days of account opening
  • Earn 1% cash back on every purchase, 2% at grocery stores and wholesale clubs, and 3% on gas up to the first $2,500 in combined grocery/wholesale club/gas purchases each quarter
  • No changing categories and no expiration on rewards
  • 0% Introductory APR for 12 billing cycles for purchases AND for any balance transfers made in the first 60 days, then, 13.74% – 23.74% Variable APR. 3% fee (min $10) applies to balance transfers
  • Get a 10% customer bonus every time you redeem your cash back into a Bank of America® checking or savings account
  • If you’re a Preferred Rewards client, you can increase that bonus to 25% – 75%
  • See additional BankAmericard Cash Rewards™ Credit Card details

bofa_travelrewards191BankAmericard Travel Rewards® Credit Card

  • Earn unlimited 1.5 points per $1 spent on all purchases, with no annual fee and no foreign transaction fees and your points don’t expire
  • 20,000 online bonus points if you make at least $1,000 in purchases in the first 90 days — that can be a $200 statement credit toward travel purchases
  • Use your card to book your trip how and where you want — you’re not limited to specific websites with blackout dates or restrictions
  • Redeem points for a statement credit to pay for flights, hotels, vacation packages, cruises, rental cars, or baggage fees
  • Comes with chip technology for enhanced security and protection at chip-enabled terminals
  • 0% Introductory APR for 12 billing cycles for purchases, then 15.74% – 23.74% Variable APR
  • Get an additional 10% customer points bonus on every purchase when you have an active Bank of America® checking or savings account
  • If you’re a Preferred Rewards client, you can increase that bonus to 25% – 75%
  • See additional BankAmericard Travel Rewards® Credit Card details

Square IPO, Direct Deposit Loans, and Controlling Your Cashflow

Posted on November 23, 2015 // 4 Comments

squaredongleAs you’ve probably heard, the Square IPO was completed last week. For a while, I didn’t understand how a company could have a $4 billion valuation when they basically offer a simplified merchant account. They let small businesses accept credit cards, which means they skim a tiny bit off the 2.75% they charge while most of it goes straight to the networks. (Add in their other expenses, and Square has never made a profit.) Wouldn’t you rather own Visa or American Express directly?

Then I read this Bloomberg Businessweek article How Two Guys Lost God and Found $40 Million (And sold Wall Street on a shady new kind of finance). Although I try my best to avoid carrying any debt, I do try to keep up with the industry. With a normal credit card, you are waiting around for the borrower to pay you back your principal + interest. The borrower gets their paycheck, pays for rent and food and whatever else, and hopefully gets around to pay you some interest. Here’s a cashflow visual:

cashflow_classic

What these guys profiled in Businessweek did is give struggling small businesses a merchant account, and also lend them money. The key difference of their “merchant cash advance” service is that they would take the loan payments (including interest) directly from their gross credit card receipts! They were lending to horrible credit risks at sky-high rates (because nobody else would lend to them), but they knew they’d be fine because were first in line to snatch any incoming money before the business owner could even touch it. Here the modified cashflow visual:

cashflow_square

Hmmm… if Square can pull something like that off on a big scale, maybe they can be worth billions. It turns out that both Square and Paypal do this same sort of lending. They lend to small businesses and taking money out from the incoming transactions. From a WSJ article dated May 2015:

Paypal said it has doled out $500 million in loans in the first year-and-a-half since it introduced the lending program. And rival Square recently said it had extended more than $100 million in cash advances in the year since it started its own version. […] PayPal, like Square, deducts money from merchants’ accounts based on their receipts, so that they aren’t on the hook if business slows.

From another WSJ article dated September 2015:

At both PayPal and Square, payments are taken as a portion of transaction volume, meaning merchants repay more when sales are high and don’t pay on days without sales. That allows for easier repayments, but makes it difficult to calculate an annual interest rate.

Wow. Ingenious or evil genius? It would be like lending to everyday people but being able to intercept their paychecks before they even landed in their bank accounts. You’d get the money before people could even have the chance to default (or pay for food). Some banks already have something called “direct deposit loans” allow them direct access to bank accounts, taking payments almost immediately after your paycheck arrives. It is possible for motivated people to switch off their direct deposit or move banks, but you’re giving the lenders a built-in advantage.

(A problem for Square is that competitor PayPal also does the free credit card swiper thing, but PayPal can avoid paying Visa and Mastercard whenever a user buys something with their existing PayPal balance. They just move some money around internally and pocket the savings.)

So what’s my point? For one, Square may have a growing profit source from these first-in-line loans to small businesses. Second, as a smart consumer, you should be careful to stay in control of your cashflow. I’d never give a lender permission to withdraw money at any time from my bank account. They should have to wait for me to pay them.

Filed Under: Banking, Credit Cards //

Charlie Munger: The First $100,000 Is The Most Difficult

Posted on November 12, 2015 // 15 Comments

There used to be a series of ING commercials where people would carry around their “Number”, which was usually over a million dollars. I think such large numbers actually discourage most savers, so what if we had an alternative goal that was both more achievable yet realistic?

I’m currently reading a new book called Charlie Munger: The Complete Investor by Tren Griffin because, well, I like to read anything about Charlie Munger. There is a lot of good stuff related to investing inside, but it didn’t mention one of my favorite personal finance quotes from Mr. Munger. I can’t seem to find an exact reference anymore, so here are two paraphrased sources…

First, here is an excerpt from the 2003 book Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe (my review):

Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth. Making the first million was the next big hurdle. To do that a person must consistently underspend his income. Getting wealthy, he explains, is like rolling a snowball. It helps to start on top of a long hill—start early and try to roll that snowball for a very long time. It helps to live a long life.

Second, here is another version of the quote credit to Munger, per Conservative Income Investor:

“The first $100,000 is a bitch, but you gotta do it. I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.”

$100,000 is certainly a nice, round number. But is it a worthy goal? Consider these points:

Most people will never achieve $100k in portfolio assets. Forget a million bucks. Consider this chart from the Quartz article America is full of high-earning poor people. On average, even a person earning close to six figures will struggle to reach $100k in financial assets by age 55.

The figure below plots financial assets held by the upper middle class (household income from $50,000 to $75,000, and $75,000 to $100,000) aged 40 to 55. Financial assets are any assets a household owns that isn’t a house, car, or business, which means it includes all retirement funds.

networth100k

If you reach $100k quickly, that means you have high earning power. Let’s say you start a successful small business or are in a well-paid professional field. Well, you have the saving potential to reach the millionaire level, you just have to keep it by not increasing your spending accordingly.

If you reach $100k gradually, that means you have built up a strong habit of spending less than you earn. Let’s say it takes you a decade of steady saving to reach $100k. That’s okay, as you’ve shown that have both consistent earning power and spending restraint. You’ll be able to save another $100k over the next decade for sure, meanwhile your first $100k is going to keep on growing.

At the $100,000 level, compound interest become significant. At 5% return, your $100,000 will grow by $5,000 in just one year. That’s $5,000 for doing nothing but waiting around for a year. The year after that, you won’t just have another $5,000. You’ll have $5,250 due to compound interest. At the end of five years, that $100k is already $127,628.

Add in the additional money from your continuing habit of saving, and things start to improve quickly. Your snowball is growing. I no longer automatically reinvest my dividends from my taxable mutual fund and ETF holdings because I love seeing the money show up in my cash account. A few clicks and I’ll reinvest them, but I like the feeling of “cashing my dividend checks” and knowing that one day I’ll be waiting for them to arrive instead of my paycheck.

Now, I still think savings rate is a better measuring stick than portfolio size, because someone who can earn $60k and spend $30k every year is going to be able to retire much sooner than someone who earns $180k and is stuck in a lifestyle spending $150k. But if you are in the phase of your life where you love watching your account balances grow every day, even by a few dollars (been there, done that), $100k is the biggest goal you need.

Related: Munger: Work For Yourself An Hour Each Day and Munger on Parenting and Childhood.

Filed Under: Frugal Living, Investing, Retirement //

Early Retirement Portfolio Income Update, November 2015

Posted on November 9, 2015 // 5 Comments

monopoly_divI like the idea of living off dividend and interest income. Who doesn’t? The problem is that you can’t just buy stocks with the highest dividend yields and junk bonds with the highest interest rates without giving up something in return. There are many bad investments lurking out there for desperate retirees looking only at income. My goal is to generate reliable portfolio income by not reaching too far for yield.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 11/5/15) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)		 24% 1.92% 0.46%
US Small Value
WisdomTree SmallCap Dividend ETF (DES) 		3% 2.98% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX) 		24% 2.83% 0.66%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS) 		3% 3.44% 0.10%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX) 		6% 3.92% 0.24%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX) 		20% 2.99% 0.60%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX) 		20% 1.31% 0.26%
Totals 100% 2.41%

 

The total weighted 12-month yield was 2.41%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $24,100 in interest and dividends over the last 12 months. Now, that is significantly lower than the 4% withdrawal rate often quoted for 65-year-old retirees with 30-year spending horizons, and is even lower than the 3% withdrawal rate that I have previously used as a rough benchmark. I’ll note that the muni bond interest in my portfolio is exempt from federal income taxes.

Given the volatility of stock returns, the associated sequence of returns risk, and current high valuations, I still like the income yield measuring stick. I feel that the income yield number does a rough job of compensating for stock market valuations (valuations go up, probably dividend yield go down) as well as interest rates (low interest rates now, probably low bond returns in future). With 60% stocks, I am hoping that the dividends will at least keep up with inflation, and that I will never have to “touch the principal”. Over the last 15 years or so, the annual growth rate of the S&P 500 dividend averaged about 5%.

As noted previously, a simple benchmark for this portfolio is Vanguard LifeStrategy Moderate Growth Fund (VSMGX) which is an all-in-one fund that is also 60% stocks and 40% bonds. That fund has a trailing 12-month yield of 2.07%. Taken 11/9/2015.

So how am I doing? Staying invested throughout the last 10 years has been good to me. Using the 2.24% income yield, the combination of ongoing savings and recent market gains have us at 84% of the way to matching our annual household spending target. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. From that perspective, a 2% spending rate seems like a very conservative number. As such, we are currently redirecting a chunk of our monthly savings into a college savings account. We are doing well and we want to help pay for our children’s higher education, so might as well get that tax-deferral started now.

Filed Under: Goals, Investing, Retirement //

Early Retirement Portfolio Asset Allocation Update, November 2015

Posted on November 8, 2015 // 8 Comments

Here’s a (late) Q3 2015 update on my investment portfolio holdings for 2015. This includes tax-deferred accounts like 401(k)s and taxable brokerage holdings, but excludes things like real estate and cash reserves (emergency fund). The purpose of this portfolio is to create enough income to cover household expenses.

Target Asset Allocation

aa_updated2015

I try to pick asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. In addition, I have doubt that I would hold them through an extended period of underperformance (i.e. don’t buy what you don’t can’t stick with).

Our current target ratio is 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With a self-directed portfolio of low-cost funds and low turnover, we minimize management fees, commissions, and taxes.

Actual Asset Allocation and Holdings

1510_port_aa

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

What’s New? Commentary
Things are still sticking pretty close to my target asset allocation. Before the year ends, I would like to relocate my “spice it up” holdings of WisdomTree SmallCap Dividend ETF (DES) and WisdomTree Emerging Markets SmallCap Dividend ETF (DGS). Mostly because a big chunk of their dividends are unqualified and thus subject to higher income rates. I can also do a bit of tax loss harvesting. But where to move them? I could squeeze them in my Fidelity Solo 401k plan that lets me buy ETFs (displacing either TIPS or REITs), buy similar mutual funds in my Schwab 401k brokerage window (displacing TIPS), or even buy some similar DFA funds in a Utah 529 account and consider it part of my portfolio (smart?). Or I could just liquidate them and just stick with total stocks funds (boring).

As for bonds, I’m still underweight in TIPS mostly due to lack of tax-deferred space as I really don’t want to hold them in a taxable account. My taxable bonds are split roughly evenly between the three Vanguard muni funds. The average duration across all of them is roughly 4-5 years.

A simple benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund (VASGX) and Vanguard LifeStrategy Moderate Growth Fund (VSMGX), one is 60/40 and one is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have returned about 1.47% YTD for 2015 (as of 11/4/15). I haven’t bothered to calculate my exact portfolio return, but it should be close to this number.

I like tracking my dividend and interest income more than overall market movements. In a separate post, I will update the amount of income that I am deriving from this portfolio along with how that compares to my expenses.

Filed Under: Goals, Investing, Retirement //

myRA Starter Retirement Account Launches Nationwide

Posted on November 5, 2015 // 12 Comments

myra_logoThe U.S. Department of the Treasury announced the national launch of myRA (my Retirement Account), a new starter option for those who don’t have access to a retirement savings plan at work. There have been some improvements and tweaks since their initial pilot launch in late 2014.

No monthly or annual fees. No minimum contribution requirement. No minimum balance requirement. Contribute as little as a dollar every paycheck if you like.

Fund via automatic paycheck deduction, automatic bank transfers, or federal tax refund. Automatic paycheck deductions work through your employer’s direct deposit system.

myra_calc

No risk of loss. Your money is backed by the US government, just like US Treasury bonds and FDIC-insured bank accounts. You earn the same interest rate as the Government Securities fund available to Federal employees, known as the G Fund. The good news is that it earns the higher interest of longer-maturity bonds while maintaining zero principal risk like a bank account. Interest is compounded daily.

The G Fund 1-year historical return for 2014 was 2.31%. Taken from TSPFolio, here is the interest rate history. The current annualized rate for November 2015 is 2.125%.

myra_grate

What does “starter account” mean? There are no stocks or other riskier options here. You can roll over your myRA into a private-sector Roth IRA once you’ve either reached the max balance of $15,000 or the max time period of 30 years.

What do you mean it’s a Roth IRA? I mean just that; it is a Roth IRA. The same rules apply:

  • Tax-fee and penalty-free withdrawal of contributions at any time, if needed.
  • If you make a qualified withdrawal, you’ll pay no taxes on both contributions and earnings.
  • For 2015, the contribution limit per person is $5,500 a year, or $6,500 if you are at least 50 years old by the end of the year.
  • The income limit is based on modified adjusted gross income (MAGI). The 2015 phase-out range for singles is $116,000 to $131,000. For married filing jointly is $183,000 to $193,000.

Although you may not be the target audience, you can still use myRA if you have a 401k or previous IRAs. Again, myRA is a Roth IRA so you’d have to direct part or all of your annual contribution to this Roth IRA instead. The G Fund is something that I would invest in if it was an option for me, but it is somewhat inconvenient to open another account just for one investment option. For example, if you are 90% stocks and 10% bonds, a $5,000 total contribution would only direct $500 towards a myRA.

Commentary. As I noted when it first came out, myRA is kind of a Frankenstein cobbled together from the parts bin. Existing Roth IRA vehicle. Existing Thrift Savings Plan G Fund. Comerica Bank quietly manages the backend (they’ve done previous work for the Treasury). It’s a bit clunky as you have to tell your employer to direct deposit some of your paycheck into your myRA, which a is basically a Comerica bank savings account and routing number (111925074). If you employer can’t handle split direct deposits, you must contribute via bank transfer or tax refund.

Will this combo convince someone who’s not saving today, to start? My guess is that the popularity will be relatively low. While I personally wouldn’t mind having the G Fund as an investment option, but I don’t know that someone who’s not saving now will be enticed by a 2% interest rate. (Maybe if rates rise.) But hopefully I’m wrong and the opportunity to have a “retirement plan of your own” is enough.

To me, what’s missing is super-easy auto-enrollment (auto opt-in, voluntary opt-out). So the best case scenario is if small businesses without 401(k) plans actively encourage their employees to sign up for myRA, as we’ve seen that automatic deductions are a good trick to save more for retirement. For more information, visit the myRA.gov employer FAQ.

Filed Under: Investing, Retirement //

Your Employer Took Your Money, Invested For Retirement, and You Liked It

Posted on November 1, 2015 // Leave a Comment

Below is a chart taken from this WSJ article about employer-run 401(k) retirement plans and how the default settings have changed over the last decade:

wsj_vg_savings_full

The trend: Employers are making you save more initially by default, making you save a little more every year by default, and putting it in a pre-mixed target-date fund of stocks and bonds. Employees can opt out of any of these things at any time. But they aren’t.

Credit Suisse braced for complaints last year when it upped its initial automatic savings rate for new employees to 9% from 6%. It did so after years of experiencing lackluster interest from the firm’s roughly 8,500 employees—specifically younger workers—in the U.S. when meeting to discuss increasing retirement savings, said Joseph Huber, chairman of the bank’s pension-investment committee.

But Mr. Huber said the bank heard concerns from only two people, who weren’t previously putting any money into their 401(k) plans. Credit Suisse also decided to automatically increase the default rate by 1% a year until an employee reaches 15%. It doesn’t match contributions up to the highest rate, although it contributes $3,000 to $10,000 for each employee annually.

“It’s companies’ biggest fear and it was radio silence,” he said.

Well, perhaps I shouldn’t be pointing this out because the current inaction may be a good thing. The only problem is that nearly half of US workers don’t have an company-sponsored retirement plan. The bigger your company, the more likely you have one as an option.

wsj_vg_bw

The takeaway? Try using this behavioral psychology trick on yourself. Commit to saving more through automatic, recurring transfers. Use a savings account or an IRA if you don’t have a 401(k) match. Set the amount such that it hurts a bit. You can always change it back later (but hopefully you won’t need to).

Filed Under: Behavioral Economics, Retirement //
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