Search Results for: High Interest Savings

Pay Off Mortgage Early vs. Save More For Retirement? Digging Deep Into The Details

Posted on March 14, 2013 // 31 Comments

In the world of personal finance, you can always generate a good debate if you talk about paying off your mortgage early. The argument usually boils down to something like this:

If your interest rate is 4%, then paying extra towards that mortgage will earn you 4%. If you think you can earn more than 4% elsewhere, then don’t pay off your mortgage.

However, when it comes down to if YOU should pay extra towards YOUR mortgage, the above statement is an oversimplication. As Einstein is credited with saying, “Make everything as simple as possible, but not simpler.”

Since I am faced with this decision myself, let’s address the implied assumptions in the sentence above and all the other little details that go into the decision.

Warning: This is a braindump post and thus rather long and detailed…

Assumption #1: Your mortgage interest is 100% tax-deductible.

[Read more…]

Filed Under: Investing, Real Estate //

My Money Blog Retirement Portfolio Update – January 2013

Posted on January 23, 2013 // 9 Comments

Here’s a belated 2012 year-end update of our investment portfolio, including employer 401(k) plans, self-employed retirement plans, Traditional and Roth IRAs, and taxable brokerage holdings. Cash reserves (emergency fund), college savings accounts, experimental portfolios, and day-to-day cash balances are excluded. This is the portfolio that we are depending on to create income and thus financial freedom.

Asset Allocation & Holdings

Here is my current actual asset allocation:

The overall target asset allocation remains the same:
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Filed Under: Goals, Investing, Retirement //

ING Direct’s New Name: Capital One 360

Posted on November 15, 2012 // 23 Comments

ING Direct announced to customers last week that they would soon change their name to Capital One 360, effective February 2013. Goodbye big orange ball, you were the first no-frills savings account that paid high interest by piggybacking on regular checking accounts (no branches, no ATM access, no checks) and it worked brilliantly, creating an entire new banking niche. But the financial crisis happened, ING Group got a big Euro-bailout, and as part of the restructuring terms they agreed to sell their ING Direct unit for $9 billion dollars.

It was a fun ride, ING Direct. For a while, you paid me nearly 5% APY interest as I borrowed money for free using 0% APR balance transfers. Your website was unapologetically simple, but everything worked as promised. You created handy sub-accounts for savers to stash their money for specific needs. Good times. Of course, I can’t forget that you also had a nervous brainfart and bullied my webhosting company into shutting down my entire website without any warning. In the end, your interest rates also started to fade a little from the top while staying somewhat competitive, and being a rate-chaser I moved my money elsewhere. No hard feelings?

As is always the case, the new company promises to keep everything you loved about the old company, while also making additional improvements. I still keep about $100 with ING Direct to keep them from closing my account, mostly out of nostalgia I suppose. I’ll continue to wait and see how they integrate the site with the other recently-improved Capital One products like their 1.5% cash back personal cards and 2% cash back business cards. CapOne wants to join the big boys Chase/Citi/AmEx as a broad financial services company.

What are you planning to do with your ING Direct account?

Filed Under: Banking //

Stable Value Funds Safe In Rising Rate Environment?

Posted on July 30, 2012 // 2 Comments

If you have a 401(k) or other tax-sheltered retirement plan, one of the investment options may be a stable value (SV) fund. In today’s low interest rate environment, stable value funds have been popular as they offer the stable price of a money market fund but with a higher yield. This is due to the fact that they are basically intermediate-term bond funds wrapped in an insurance contract that guarantees it maintains a “stable value”. This means the book value that you see can differ from the actual market value.

In my case, I invest some money in them because they offer a 3% yield on previous contributions (current contributions earn 1.25% on which I passed). Compare that with a money market fund earning 0.01%, or the Vanguard Intermediate Bond fund with a 6.4 year duration and only a 1.78% yield.

However, if interest rates were to rise quickly, this would lower the market value of those bonds (as interest rates go up, bond values go down) at the same time that there may be a rush of redemptions. Would the fund be able to cash people out at the higher book value as promised? A recent Vanguard research paper ran some scenarios based on historical periods of rising interest rates (1986-1990 and 2004-2008). They used Vanguard’s pooled fund, the Vanguard Retirement Savings Trust, with an average duration of underlying investments of ~2.6 years. Read the paper for details, but the overall conclusion was that the stable value funds would survive such scenarios:

Although stable value funds in general have performed well through past market cycles and crises, in the current environment of low interest rates both stable value investors and contract providers have been concerned about the effect rising interest rates would have on the funds and the ability of the funds to continue to perform well when further stressed by cash outflows.

[…] …in our simulations, the funds’ MV/BV ratios demonstrated resiliency, and crediting rates fluctuated within a band far narrower than that of market yields, even in extraordinary scenarios.

While the paper’s findings provide some reassurance, I’m reminded that lots of people “stress tested” mortgage-backed securities in 2007 as well. Based on the Vanguard analysis, here are some additional cautionary steps to take for potential investors in stable value funds:

  1. Remember the basics of stable value funds. SV funds are intermediate bonds wrapped in an insurance guarantee, so if the insurance fails then you’re just left with bonds. This isn’t the end of the world, but make sure you’re okay with that. See previous post on stable value funds risks and rewards for real-life examples.
  2. Understand your specific withdrawal restrictions. There are usually some form of liquidity restriction attached, but they can vary greatly. In some cases, you have to give a full 12- to 24-month notice to withdraw at book value (guaranteed principal). In my plan, I am not allowed to transfer into any other fixed income (bond) funds at all. I can transfer at any time into a stock fund, but then I have to wait 90 days until I can transfer again to another bond fund. This Reuters article reports that some providers have been cutting back on guarantees.
  3. Be aware of scenarios where your stable value fund will be under stress. Usually, this results from rapidly rising interest rates. For example, if the yield on money market funds rise, people will prefer those to stable value funds. Also, the market value of the underlying bonds will fluctuate, even though only the book value is reported on your statements. If the market-to-book ratio on your SV fund drops below 98% (see updated prospectus), people may panic and start to withdraw.
Filed Under: Investing, Retirement //

Which Fuel-Efficient Cars Are Worth The Extra Money?

Posted on June 21, 2012 // 28 Comments

Recently, the NY Times had an article about how many models of fuel-efficient cars may take years to justify the extra cost. Here’s a graphic from the article with data from TrueCar:

(I note that the NY Times compares the Prius with the Camry. I still think the Corolla is closer in size. You can see from this side-by-side comparison that in terms of length, width, interior passenger volume, shoulder room, and leg room, the Prius is closer to the Corolla than Camry. Also, does the Lincoln MKZ hybrid really only cost $1,400 more than the regular model and is 15+ mpg better??)

Consumer Reports also had a similar article which discussed how the ultra-efficient “40 mpg” models which were upgrades to the normal versions. The Ford Focus SFE, Honda Civic HF, and Chevrolet Cruze Eco all cost between $495 and $800 more, but the breakeven time when using real-life mpg varied widely between 3 and 38 years.
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Filed Under: Budgeting, Frugal Living //

Haggle To Lower Your Cable or Direct TV Satellite Bill

Posted on June 13, 2012 // 190 Comments

directv_newlogoI’ve written several times about the significant savings you can achieve if you haggle with your media providers like DirecTV, be it broadband internet, telephone, or cable/satellite TV. A simple phone call can save you hundreds of dollars per year. This is as true today as in past years, and below is a collection of all related tips as well as some new information.

Why does it work?
Media service is like banking. People tend to stick with who they have, and the companies make tons of money from it because they can raise prices and most people just accept it. As a result, competing companies have to offer rather juicy deals to make people switch. But since customer acquisition is so expensive, if you let your existing company know that you’re shopping around, they will gladly give you a temporary incentive to stay. Media is so profitable that they can give you a discount of $20-$40 a month and still make money.

Of course, they don’t offer this to everyone because your neighbor is probably paying full price without complaint. In behavioral finance terms, this is called price targeting.

Negotiating Tips
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Filed Under: Frugal Living //

Don’t Fall For These Common Mortgage Refinance Myths

Posted on May 29, 2012 // 23 Comments

Mortgage rates are still setting record lows! Qualification is still very difficult to refinance for those with little home equity, but there’s still many people out there that are eligible (maximize your appraisal). Don’t miss your opportunity to lower your interest costs and own your home faster by believing in one of these common mortgage refinance myths:

#1 I don’t want to pay the high closing costs again.

It’s true, when you refinance there will be additional costs. The mortgage broker has to eat! However, that doesn’t mean you actually need to pay anything extra.

First of all, you can get paid for negative points. Depending on the interest rate, the originator/lender will actually pay you a credit each 1 point = 1% of the loan principal. The lower the rate, the less points you’ll get. But if the credit is high enough, that may cover all your costs, making it a “no-cost” refi. Alternatively, they may simply advertise “no closing costs” which means they cover a certain list of fees.

When you apply for a refi, you’ll get a Good Faith Estimate (GFE) with a total closing costs amount listed at the bottom. However, you should separate the true costs from the stuff that you’d otherwise have to pay anyway, including:

  • Prepaid or partial month interest
  • Homeowner’s insurance to escrow
  • Property Taxes to escrow

The remaining amount (origination fees, doc fees, application fees, appraisal fees, title insurance, credit report fees, etc.) is what I would just call the true cost of refinancing. Some “no closing cost” lenders still make you pay the title insurance fee.

#2. I can’t refinance because it’s been too soon since my last financing.

[Read more…]

Filed Under: Real Estate //

No Fee 0% Balance Transfer For 12 Months – Discover More Card

Posted on February 24, 2012 // 58 Comments

Update 2/24/12: Confirmed that this offer will expire at the end of February. Last year it also started in January and ran until the end of February, and didn’t come back until the next January. So get your applications in now if interested!

Update 1/9/12: Reader CC writes in with her success story, which differs from some previous reports of a one Discover card at a time limit. Please let me know if you have a different experience. I forget to add before – if you apply for the card and don’t get the credit line you want, call them up and tell them you want to do a $X,XXX balance transfer and they may work to accomodate you.

A few updates- I called Discover and they changed the policies again

1) you can have more than 1 credit card
2) You have to open a new card to get the promo they won’t apply it to the old one.
3)If you call and speak to a rep and give them a balance to transfer they will recalculate the credit line
4) They will let you transfer the old credit line to the new one ie I had a $7.3K balance on the old one so they left it open with $500 and gave me a new card with a $7K balance. I was able to keep my 5 yrs of credit history with the 1st card active. I’ll probably transfer the line back to the original place in a yr.
5) I just saved a year of interest on my Citibank student loans for $6,550 with 15 minutes of work 🙂

Back for 2012! Limited-time only. Just in time for some New Year debt-busting action, Discover has brought back the Discover More Card with No Balance Transfer Fee, offering 0% intro APR on both balance transfers and purchases for 12 months. You can literally borrow money for free and pay it back in 12 months (keeping in mind you’ll still need to satisfy the minimum payment each month until then). Use this opportunity to lower your interest rates and make every cent you pay go towards shrinking that principal. There are different versions of this card, so please use specific application link. No annual fee.

When you see the application, be sure to scroll down to the “Important Information” and verify that you are getting 0% for 12 months and no balance transfer fee. You should see the following text at the top under “Interest Rates and Interest Charges”:

APR for Balance Transfers: 0% intro APR for 12 months from date of first transfer, for transfers under this offer that post to your account by July 10, 2012.

And then the following a bit lower under “Fees”:

Transaction Fees * Balance Transfer – Intro fee of $0 for transfers that post to your account by 8/10/2012 with the 0% intro APR balance transfer offer described above. After that, 3% of the amount of each transfer.

Application Quick Tips
In order to get the highest credit limit possible, be sure to maximize your reported income as much as you can legitimately. You can no longer include the income of other people living with you, but do include things like freelance income, overtime, rental income, interest and dividend income, alimony, child support, etc.

If you wish to get cash directly from this balance transfer offer without it being classified as a “cash advance”, one tip is to request money to be transferred to other non-Discover credit cards that you have. This will create a negative balance, after which you request a refund check be sent to you. Citibank and American Express are recommended for this because they have automatic features on their websites to request a credit balance refund.

Arbitrage Opportunities?
Don’t have higher interest debt you wish to refinance? Really, the only thing I could see buying with this 0% money would be a US Savings I Bond that will earn you 3.06% for the first six months, and then a different rate based on inflation for the next 6 months. You can buy $5,000 in electronic bonds per person per year, and another $5,000 in paper bonds if you use your tax refund ($20k total for a couple).

Offer Comparison
Now, the Chase Slate® currently has a similar offer going, also 0% introductory APR for 15 months with $0 balance transfer fee. The good thing about Discover is that you can transfer balances on a Chase card to Discover, while you can’t transfer existing Chase balances to another Chase card. Other than that, why not take advantage of both? 🙂

“Disclaimer: This content is not provided or commissioned by the issuer. Opinions expressed here are author’s alone, not those of the issuer, and have not been reviewed, approved or otherwise endorsed by the issuer. This site may be compensated through the issuer’s Affiliate Program.”

Filed Under: Credit Cards, Deals & Offers //

Payroll Tax Cut Extended For 2012: Increase 401k Contributions?

Posted on February 20, 2012 // 9 Comments

Congress has just passed a bill which the President has promised to sign that includes an extension of the 2% payroll tax cut for the rest of 2012. Specifically, the employee portion of the Social Security tax is reduced to 4.2% in 2012 instead of the standard 6.2%. The employer portion remains unchanged at 6.2%. The Medicare tax remains unchanged at 1.45% each for employers and employees. This tax cut has already been in effect since the beginning of 2011 and was scheduled to end at the end of February 2012 before this most recent extension.

For example, someone earning $50,000 annually will see increased take-home pay of $1,000 spread out evenly over a year of paychecks. The limits on wages subject to Social Security tax is $110,100 for 2012, so the maximum savings per person is $2,202. You can verify this tax cut for yourself by checking your most recent paycheck stub. Divide the Social Security tax line by your Gross Pay line. It should be either equal or less than 0.042, or 4.2%. (It might be less than 4.2% due to items that are exempt from SS tax like flexible spending account contributions.)

Spend it, or save it?

The idea behind this tax break is to provide a small, steady increase in income that you’ll hopefully spend quickly and thus stimulate the economy. Even though $1,000 sounds like a lot, when it comes to you as $40 every bi-weekly paycheck, you tend not to notice it. Surveys confirm that the majority of people don’t even know this tax cut exists after enjoying the benefits for a year.

However, if you’re happy with how you’ve already stimulated the economy and would like to put something away to invest and spend later, this might be a good time to increase your savings rate instead. Remember that your savings rate is the most important factor in whether you’ll be able to retire early (or perhaps ever).

Since this tax break comes automatically every paycheck, it makes sense to “pay yourself first” by putting it aside immediately via automatic savings. Instead of mindlessly spending like they want you to, mindlessly save it instead. 😉 If you have a 401(k) or similar employer-sponsored retirement plan, why not increase your contribution rate by 2%, and see if you notice it for the rest of the year? Of course, if you have high-interest debt and some extra willpower, perhaps you should put it aside each paycheck and pay that off instead. You can also use direct deposit or automatic transfers to send money over every paycheck to an online savings account.

Sources: Philadelphia Inquirer, Associated Press

Filed Under: Retirement, Taxes //

Cashing in on the American Dream: How To Retire at 35 by Paul Terhorst (Book Review)

Posted on December 5, 2011 // 23 Comments

One of classic books on many early-retirement reading lists is Cashing in on the American Dream: How To Retire at 35 by Paul Terhorst. However, this book was published in 1988 and has been out-of-print for a while. Luckily, I noticed that there were several used copies available on Amazon for $0.01 + 3.99 shipping (or $4 with free shipping) and grabbed one.

Author Background
Terhorst earned his money as an accountant, making partner at a major accounting firm in his early 30s. He retired in 1984 at age 35 with a nest egg of around $400,000. He and his wife Vicki (no children) refer to themselves now as “perpetual travelers”. He wrote this book in a era before the internet became popular – imagine how hard it would be to gather information on this topic back then, limited to early BBS chat boards or snail-mail newsletters. Sometimes I take for granted how easily we can share and discuss information today.

Paul and Vicki used to have a Geocities page that is now defunct, but they still occasionally write travel articles and it looks they have a small internet presence here.

Implementation: Managing Expenses
The basic retirement plan in the book is to spend no more than $50 a day = $18,000 a year (1988). Adjusting with the Consumer Price Index, this would be around $33,000 a year in 2010 dollars. However, personal inflation does not necessarily match the CPI, and they reportedly still manage on $50 a day as recently as 2003.

A major part of lowering your expenses is to avoid living somewhere expensive. Realize that the most expensive cities in the US are up there with the most expensive cities in the entire world! When you’re retired, you can live anywhere. The book includes several example of smaller cities in the southern US with temperate climates, lots of things to do, and a proximity to a major city and airport. They also support living close to the center of these smaller cities, using public transportation, and not owning a car – another big source of savings.

In addition, the author is a strong proponent of spending a good chunk of your time in foreign countries where a dollar goes a lot further. Latin America (Argentina) and Southeast Asia (Thailand) are places where they have lived. The key is to “live like a native, not like a tourist”. Don’t stay in hotels or live in gated communities made for expats. If the natives live on $10,000 a year, you should be very comfortable at $20,000 a year.

They pay for health care with cash in the same foreign countries, which offer quality care at much lower prices than in the US. The rest of the frugal-living advice is pretty standard. Prioritize your spending, cut out the excess consumerism, etc.

Implementation: Creating Investment Income
Investment advice is often referred to as the weakest part of this book. You have to realize that the 1980s were a completely different financial environment. With high inflation, you could buy FDIC-insured CDs paying 8% interest annually. Thus, he recommended liquidating all your assets to cash, including selling your home, and then build a CD ladder creating 8% income. Obviously, this is not an option today. But if you take a step back, you’ll see that the basic premise is that you should never take on any more risk than you need.

It’s hard to find any updated investment advice from Terhorst, but it appears like they are still happily retired and don’t worry about money much. If they needed money, you’d think they’d republish their book. 🙂 I did find this 2003 Kiplinger’s Personal Finance article which provided some insight:

…they began to move their money into stocks – mostly low-cost index funds – when interest rates declined in 1992. Now they have 40% of their portfolio in large- and small-cap stocks, 40% in natural resources companies (oil, gold, platinum), and the rest in money market accounts. […] Their assets now total more than $1 million

These days, I pose that a more realistic early retirement portfolio might be 50% dividend stocks and 50% investment-grade bonds paying out a 3% yield that will keep up with inflation overall. However, creating $33,000 a year would require $1,100,000. Creating $18,000 a year ($50/day) would require $600,000.

Implementation: Saving Up That Nest Egg
I think this area is actually the weakest part of the book. The advice is essentially work hard at your career and be a good company man. Do all the right things to get promotions and work your way up the ranks to management and upper management… until the day you bail out. This is what Terhorst did, and he doesn’t really explore any other options like starting your own business. I suppose the truth is that this method will work for many, but it’s not very satisfying.

Takeaways
The main lesson that I got from reading this book is that the concept of “early retirement” for everyday middle-class folks has been around and available for decades. However, most people today don’t seem to even know it’s an option. I guess it takes a special disposition to be unsatisfied enough with the normal 9-5 grind to do what it takes to get out of it. I’ve also realized that many people – good people! – are quite happy with working 40+ hours a week for 40+ weeks a year for 40+ years of their life. There are so many different ways to balance work, investment income, and spending to retire partially or retire early.. but first you just have realize that you have that option!

Filed Under: Book Reviews, Frugal Living //

Why Emergency Funds Can Provide The Best Return On Investment

Posted on September 28, 2011 // 21 Comments

Many recent articles and surveys have illustrated how many American are basically living paycheck-to-paycheck, with no significant savings cushion:

  • Most Americans can’t afford a $1,000 emergency expense – “A majority, or 64%, of Americans don’t have enough cash on hand to handle a $1,000 emergency expense, according to a survey by the National Foundation for Credit Counseling.”
  • Many don’t have $2,000 for a rainy day – “A new study by the National Bureau of Economic Research shows 50% of Americans would struggle to come up with $2,000 in a pinch.”
  • CareerBuilder.com Survey – “Forty-two percent of workers in the survey of more than 5,200 workers say they usually or always live paycheck to paycheck”

Along the same lines, a reader introduced me to an interactive poverty “game” called Spent, in which you try to make it through one month as an unemployed worker looking for a job and housing with their last $1,000. Try it out, and you’ll have to make some touch choices.

In just one month, I managed to get sick, need dental work, receive an undeserved traffic ticket, my best friend gets married and I can’t go, my mom needs money for medicine, my landlord raises the rent illegally, and my child refuses to eat the government-subsidized lunch. Seems a bit unlikely, yes. But a combination of a streak of bad luck and lack of support is exactly how you might end up in such a scenario.

In addition to the societal issues this brings up, from an individual point-of-view, I found that this simulator shows how living close to the edge is often significantly more expensive than someone with a cash cushion. Being poor can cost more than being rich. Consider the following:

  • If you don’t have enough money for a security deposit, you’ll have a hard time renting an affordable apartment. Many renters are thus forced into long-term motels that actually charge more on a monthly basis.
  • If you can’t afford a car repair, you can’t make it to work and face the prospect of losing your job.
  • If you don’t pay for preventative medicine, you can end up needing more expensive treatment later.
  • If you have a low balance on your bank account and overdraft by just $10, you’ll get hit with a $35 overdraft charge.
  • If you just don’t pay the bill, you’ll get a late fee charge.
  • If you don’t pay the bill for consecutive months, you’ll get your gas/electricity service shut off and be subject to an additional $250 deposit to get it back on.
  • If you charge any of this on a credit card and don’t pay off the balance each month, you’ll owe 15-25% interest. That’s if you have the credit history to get a credit card. If you go with a payday loan instead, you’ll owe more than 100% annualized interest.

For this reason, one of the first financial steps a person should take is to save up a cash cushion. That emergency fund can easily save you more money than a 20% increase in the stock market. I would tell my own child to forget saving for retirement until you have a least a couple months of expenses saved up. Luxuries like smartphones, alcohol, cable TV, and dining out should be off-limits until then as well.

One should expect “unexpected” expenses. Even though I have a relatively high income, I place great value on my emergency fund.

Filed Under: Frugal Living, Investing //

Ally Bank 5-Year CD Rate (Drop) History

Posted on September 2, 2011 // 10 Comments

As part keeping the interest rate on my emergency fund as high as possible, I’ve shared my like of rewards checking, savings bonds, and the Ally Bank 5-Year CD. Ally CDs have a small 60-day interest withdrawal penalty, so the liquidity is still quite good. As long as you hold it for 6 months, you’ll be earning more interest than the highest rate from an online savings account even after the penalty is factored in. After that, the effective rate just keeps getting better until you reach maturity at the full rate.

With no minimum balance requirements, you can also buy them in whatever size chunks you want. And I have. But I checked the rates again today, and was sad to see they’ve been dropping quite fast recently. The current Ally Bank 5-year CD rate is 1.60% APY (as of 10/25/13). I decided to compile the rate history from as far back as I’ve been tracking them.

There have been a few small rate hikes, but for the most part the rate has been gradually dropping due to market conditions. If you’ve been thinking about buying, I would buy now before rates drop even farther. When opening a CD, remember they have a “10 Day Best Rate Guarantee” in which you get the best rate they offer within 10 days of opening. You can now also find slightly better rates elsewhere, for example Alliant Credit Union has their 5-year certificate at 2.35% APY (2.45% for $25k+), but with a larger 6-month interest penalty. I’ll probably still buy a little more at 2.17%, but if the rate drops below 2% then I’m looking elsewhere.

Filed Under: Banking //
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