Saturday, March 31, 2007

Personal Finance 101 Posts of the Day 3/30/07

  • All Financial Matters show us why fees matter. Just one more reason to go with Vanguard and their $10/year/fund fee for low balances. I can't imagine paying $199/year on top of the Annual Expense Ratio, no matter what my balance.
  • Blueprint for Financial Prosperity asks: Do you buy online to avoid paying taxes? My personal answer is no. Taxes don't play a part in my decision (though they should since taxes in DC are high) price does and it's a fact that most times you can find things cheaper by spending a bit of time shopping around online. I will say that I'm looking forward to my upcominig move to Portland which has no sales tax. That will be a nice switch!

Personal Finance 101 posts of the day 3/31/07

10 Reasons You Aren’t Rich

From The Street, 10 Reasons You Aren't Rich covers some of the traps that people fall into that hold them back. (My comments in italics)

  1. You Care What Your Neighbors Think This is huge! One of the reasons I'm leaving Washington, DC is that so many people around this area care about things like what you drive, where you work, etc. It gets old and really, the people worth knowing aren't the ones who care about what kind of car you drive or what kind of shoes you wear. Live your life in a way that makes you happy and comfortable and who cares what others think!
  2. You Aren't Patient In today's world of easy credit and instant gratification it can be hard to wait to buy something until you have the cash. But, the advantages of waiting are: 1 - you save money in interest, 2 - you tend to appreciate things you have to work hard to get instead of those that come easily, 3 - waiting gives you time to decide if you *really* want something rather than just following your impulse, 4 - saving up gives you time to do your homework and find the best deal on whatever it is that you want.
  3. You Have Bad Habits This includes your "Latte Factor." The three hardest things to give up are: coffee, alcohol and cigarettes. It's not a coincidence that they're also the most expensive and the worst for your health. Cutting back on those vices not only saves you money today but also in the future on health care costs.
  4. You Have No Goals My Goal Setting 101 class is my least popular class but it's the one that I think people get the most from. The first question I ask is: "If you don't know where you're going, how will you know when you get there?" The answer to that question is: You don't. Without goals you're just floating along rather than moving forward with a purpose. IMO, goal setting is the most important part of financial planning but is also the most overlooked.
  5. You Haven't Prepared This is why you need an emergency fund. It's a fact of life: Stuff happens. No matter how prepared you are, you aren't prepared for everything. But, you can do your best. The easiest thing you can do is establish an emergency fund. This fund should be in a cash account (or equivalent) that can be accessed quickly and without penalty. You should aim to have at least 3 months worth of expenses in your account though some people like to keep much more. When you figure out how much you need, take an honest look at your life. Is your job steady? Do you have dependents? Do you own a house? Do you have adequate insurance? The answers to those questions will help you figure out how much (or how little) you need to have in your account to be secure.
  6. You Try to Make a Quick Buck When people approach me about the best way to turn $1,000 into $10,000 in a week I have 2 standard responses: 1 - go to Vegas. At least there you get free drinks while you gamble with your money. 2 - Re-read The Tortise and the Hare but this time, learn the lesson. When it comes to investing, the vast majority of the time slow and steady will win over the long run. Set your investment up, make it automatic and then forget about it except for when you re-balance twice a year.
  7. You Rely on Others to Take Care of Your Money I'm a huge proponent of DIY. It's why I started Personal Finance 101. I saw the aftereffects of too many people who had gotten screwed by investment advisors who sold them bad products. There is no reason why someone can't manage their own money, particularly now that Target Retirement Funds exist. If you're just starting out, there are 2 books I recommend that every newbie read. The biggest thing to keep in mind: You are the only person who cares about your money!
  8. You Invest in Things You Don't Understand I did this when I first started investing. I started buying stocks without knowing what I was doing. I just listened to what others were buying and followed the herd. Not only did I lose a *ton* of money to transaction fees, I lost a ton in the investment itself. Since then, I've sold off the losers, held on to the winners (I did get a couple right) and have stuck to funds. I have realized that not only do I not have the knowledge to pick stocks, I don't have the desire to learn the skill so funds are the way to go.
  9. You're Financially Afraid I see this all the time, especially in those who lost a lot of money in the dot bomb. So many people who lost money during that time are too scared to invest in stocks again. Every time I ask them about their experience, they were always almost 100% in tech stocks and freaked and sold when stocks went down. When I explain to them what would have happened had they A - been diversified and B - stuck to an investment plan instead of freaking out they start to calm down. For those who are worried about investing in anything risky I usually suggest starting with a balanced fund like the Vanguard STAR fund. That fund is 60/40 stocks/bonds so, while it earns more than bonds it's not as volatile as stocks. I then suggest they start adding small amounts into more agressive funds once they're used to being a bit more agressive. I also forbid them from checking their accounts more than once every 6 months. Frequent account reviews are the worst thing people who are risk averse can do. Any little dip will freak them out and trigger a panic reaction.
  10. You Ignore Your Finances I'm a big supporter of a hands-off money management style. But, that's very different from ignoring your money. To have a hands-off style, you first have to have a plan. Then, you can implement that plan, make it automatic and just check back a few times a year to make sure you're on track. Find the balance that works for you - somewhere between checking every day and checking once a year is good.

Thursday, March 29, 2007

Personal Finance 101 Posts of the Day 3/29/07

Why I hate Sharebuilder as a Broker

Dual Income No Kids just posted about their plan to use Sharebuilder for a $75 purchase. I probably overstepped my bounds but I REALLY hate Sharebuilder so I had to respond. My response is below:


Just a quick comment about Sharebuilder. I started investing through them and I kick myself every single time I see the statements because I lost so much to fees and selling is so expensive. I'm really not a fan of this brokerage for several reasons. The biggest reason is that the price sounds good, but really it's not. You're paying almost 5% commission on that $75 transaction which is not even close to being a good deal even though $4 sounds great. That doesn't even take into account the sales fee which is about $15. The rule of thumb that I teach my students is that if your transaction expenses are more than what you would pay annually for a good fund (less than .5%) then you don't have enough money to invest in individual stocks. You'll get eaten up by fees and it's a fact that high fees are one of the things that can most damage your investment returns.

On top of that, you aren't diversified because you're only buying one stock at a time and you have zero control over when you buy.

A much better idea would be to invest in a no-load fund through Vanguard or Fidelity. Or, if you don't have enough for the minimum to start an account with those brokerages, T-Rowe Price has a program where you can start a Roth with as little as $50 if you sign up for automatic contributions.

The benefits of this would be 1 - you wouldn't be wasting money on transaction fees (who wants to have a 5% guaranteed loss the second you purchase the stock?!), 2 - you would be diversified instead of risking your money on just a couple stocks.

If you really insist on using Sharebuilder I'd consider buying an ETF instead of an individual stock. You'll still be losing a big chunk to transaction costs but at least you'll be diversified. Personally I love DVY and since Sharebuilder allows free DRIP it's good for that brokerage.

So, sorry for butting in but I hate to see people spending more than is necessary.

Good luck and if you have any questions don’t hesitate to ask.


Wednesday, March 28, 2007

Personal Finance 101 Posts of the Day 3/28/07

Would you use a coupon on a first date?

John at Queercents wants to know.

It's an great question that I've never really thought of before. Dating is amazingly expensive in the beginning which makes me really uncomfortable. I'm not a fan of tradional dates, particularly not for first dates. I almost always have a first date at a coffee shop. There are a couple reasons for this:

  1. It's quick and easy and low pressure. This means I'm not stuck having dinner for 2 hours with someone I don't like after the first 5 minutes.
  2. It's cheap and easier to avoid that whole "who pays" question.
  3. If things go well, there's always the option of extending the date to dinner or another activity.
If coffee isn't an option (for whatever reason) there are lots of other alternatives that are cheap/free so why not try to keep things on the cheap for both of your sakes? Try a museum, art exhibit, walk around town or a browse through a book store. Not only will you save money but you'll also have a built in conversation as you'll be able to talk about what you're seeing.

I recently had a first meeting in a book shop and we had a great time browsing and looking at all sorts of books before moving on and getting a drink. That's my idea of a great date.

Show me your creativity instead of your money and I'm much more likely to agree to date #2.

Credit Cards vs. Debit Cards

Smart Money has an article about how Credit Cards Offer Better Protection Than Debit Cards.

This is a conversation I've had several times and it's just one of the reasons that credit cards are better than debit cards in my opinion. Aside from the fraud protection, credit cards offer other benefits like:

  1. Rewards on purchases. I make about $400/year on rewards from purchases. This is free money and anyone who has taken one of my classes knows I'm all about free money.
  2. Interest earned on delayed payment. Debit cards take that money out of your account immediately which means you get no benefit from it. By using a credit card, you get a few weeks to hold on to that money and earn some more interest from it. With high yield savings accounts like HSBC, Emigrant and others offering rates over 5% and ING's new 4% checking interest rate, this is a chance to make a little extra cash.
So basically, I'm a big fan of credit cards. As long as you can pay off your balance in full each month, I don't see any reason to use a debit card over a credit card.

Tuesday, March 27, 2007

Personal Finance 101 Posts of the Day 3/27/07

Reader question: How do I open an IRA?

Hi Mandy,

How are you? A quick question..I plan to contribute 4000 to IRA this year (I believe this is the max)...Can I contribute anything additional to Roth IRA?

Would you suggest that I put in Roth IRA or traditional IRA?

Also what is the yield I get out of this account?

I am planning to open it with Citibank, since it is close by




You can only contribute $4k total to both accounts. Since I believe you have a 401k at your job, odds are very good that you cannot deduct your traditional IRA contribution so I'd strongly suggest you do the Roth instead. And even if you can deduct it, typically a Roth is a much better investment in the long run. See my article: What's so great about a Roth IRA?

Also, you should never invest through a bank. They are the worst places for investments since they typically offer loaded funds that have high annual expenses and underperform. Instead you should open your account with Vanguard or Fidelity.

As for what kind of yield you can expect, that is completely dependent upon what you invest in. IRAs are only accounts within which you buy an investment. You can choose almost any investment. Considering your age, you should be as aggressive as you are comfortable with. Since your balance in this account will only be $4k to start (assuming you don't have an existing IRA that you could add to) you probably don't want to invest in more than one fund (to minimize fees). If you're ok being very aggressive, or it's balanced out with your other investments, you could choose a total stock market index fund as it will give you great diversification and be 100% stock. If you prefer to be a bit more conservative and/or you just don't want to think about it again besides to put more money in, you should consider a Target Retirement Fund.

Target Retirement Funds are funds that hold a basket of funds that ensure that you are completely diversified and have an appropriate asset allocation based on your expected retirement date. They are a one-stop investment and you can put your money in and never think about it again because it automatically gets more conservative as you get older.

Final thing, assuming you didn't make a contribution in 2006 (otherwise you'd just add to it right?) when you open this account you should identify this money as 2006 money. You have until tax day to do this. Then you still have all of 2007 to contribute another $4k.

Let me know if you have any questions and unless I hear differently from you I'm going to post this (with your name removed) onto the meetin forums since it's a great question that lots of people probably have.

Have a great day!


thanks Mandy,

I was planning on Citibank since some of my friends have opened accounts there...they don't charge any fees too.

Does Vanguard charge any fees?

However the trick is to find the mutual funds that I should be investing in.

I do not mind being aggressive...but i need to know how and what to look for in mutual funds...Any pointers on links, details that i should look for?

and no, I do not have a 401K account, since my company does not contribute...



Ok. Well, since your company offers a 401k and you just choose not to participate you still may not be able to take the deduction. Check your tax form and see if there's a mark on it that indicates you're covered by a retirement plan. If that box is checked then you can't take the deduction.

Even if you can take the deduction you should still probably consider the Roth. The advantages are much better with a Roth than a Traditional IRA.

Regarding Citibank, they may not charge fees up front, but odds are great that the products they offer are loaded funds (means you have to pay a sales charge to buy them) and have high annual expenses (anything over .5% is too high unless it's a very specialized fund).

Vanguard charges $10/year/fund for investments under $10k which is why you only want to do one fund at a time. $10 may sound like a lot compared to Citibank's $0, but when you take into account that a load is typically 5%, that means on a $4k investment you're paying $200 just to buy the fund. That doesn't even include the difference that a .25% expense ratio will make over one that's 1%.

The main things you should look for in a fund are: Load (never pay a sales load. They're a waste of money), ER (stands for annual expense ratio) and should definitely be below 1% and ideally below .5%. You also want to look at what the fund is invested in. Funds can invest in almost anything so you want to make sure that whatever it is invested in meets your needs.

As a younger person you want your investment to be much more heavily weighed towards stocks than bonds. You also want to make sure that you have a little bit of everything (small, mid, large-cap and international) which will keep you diversified and boost returns and lower risk.

Since you're just learning how to pick funds, I would definitely recommend the Target Retirement fund. I would choose the 2050 fund which is the most agressive. I would do this just to get the account set up and then you can spend some time learning more about how to choose funds. After learning more you may decide to just stick to the target fund (they are great investments) or take a more active hand in your investment choices.

On my book recommendation page I list 2 books which I think are must reads for everyone. The first is The Automatic Millionaire and the second is Investing for Dummies. I'd recommend reading both since they'll give you a great educational foundation to get you started.


Monday, March 26, 2007

Personal Finance 101 Posts of the Day 3/26/07

Thursday, March 22, 2007

Personal Finance 101 Posts of the Day 3/22/07

  • Broke Now, Rich Later has an interesting post about emergency funds. I'm not a huge fan of large emergency funds unless you're high risk. I think they're kind of a waste because there are other things you could do with your money that's more productive. I think that if you have decent credit lines that are empty you might be better served by putting your money into a balanced fund. They're more agressive than cash but not ultra volatile so odds are against you taking a huge loss at the wrong time. I particularly think that having an emergency fund while you are carrying credit card debt is a waste of money.

Monday, March 19, 2007

Monday, March 12, 2007

Saturday, March 10, 2007

Thursday, March 8, 2007

Wednesday, March 7, 2007

Personal Finance 101 posts of the day 3/7/07

Save money AND have fun? Sure!

The Simple Dollar has a great post on 10 frugal activities to do with friends and how to suggest them.

Since it can be hard to both have a social life and be financially responsible, it's important to come up with ideas of things to do that don't cost a lot of money. Trent makes several good suggestions including: book clubs, old movies and (my personal favorite) camping.

Lucky I live in a city with lots of free activities but I bet your city has some great things going on too. If you need suggestions, head to a book store and look in the local interest section. There may be a book or two that will tell you about things you never even knew existed. Look in the local paper for festivals, art openings, etc. Search online for clubs and social groups. Be creative and if you don't start pre-existing activities start some of your own.

Good luck!

Monday, March 5, 2007

Personal Finance 101 Posts of the Day 3/5/07

Thursday, March 1, 2007

Personal Finance 101 Posts of the Day 3/1/07

20 Small Ways to Save Big

Kiplinger's posted a great article about 20 easy ways to save money. How many do you do?

  1. Give yourself a raise and bank it. Don’t lend Uncle Sam free loans. Adjust your tax withholding rate and get yourself a bigger take-home check.
  2. Open a 401(k). If your employee offers 401(k) with company match and you decide not to participate, you simply let the free money slip away.
  3. Raise your car insurance deductible. Higher deductible means lower premium. Go with $1,000 instead of $250. You might as well drive more carefully.
  4. Pay off your credit card. What’s the chance you can earn a 18% return? Paying off the 18% APR credit debt will give you just that.
  5. Go green. Buy a programmable thermostat and save on your energy bill.
  6. Bundle up. Buy a bundle (phone, Internet and cable from one provider), save a bundle.
  7. Use your employer’s FSA. One dollar saved on taxes is one dollar net income. That’s why you should contribute pre-tax dollars to flexible spending account.
  8. Get a credit card with rewards. Why refuse the cashback for the money you have to spend anyway?
  9. Kick the habit. Smoking can burn a hole on your wallet and your lung.
  10. Brown bag it. Instead of spending $8 on takeout every day at work, bring a home-cooked meal with you.
  11. Negotiate your rate. Got a good credit? Then call your lender for a more favorable rate.
  12. Travel on the cheap. Forget about Travelocity, Expedia and Orbitz. Go to or to find a better travel deal.
  13. Insure yourself. Use a high-deductible medical policy together with a health savings account can save your money on premiums now and medical bills in the future.
  14. Make media free. Why buy DVDs and books when you can get them from your library for free?
  15. Change your calling plan. If you use your cell phone for less than 200 minutes a month, you may be better off with a prepaid plan instead of a subscription-based plan.
  16. Park your car. With gas price again on the rise, why not use public transit or carpooling (if possible) to save money on gas?
  17. Ditch your gym. Check out your community centers first. Or better yet, put on the running shoes and hit the road because you don’t have to pay to stay in shape.
  18. Reshop your auto insurance. It pays to shop for everything and auto insurance is no exception.
  19. Learn to cook. Cooking at home is good for your body and your wealth.
  20. Keep track of your money. How can you cut your spending if you have no idea where your money went?