Followup On Online Savings Accounts

As a followup on my earlier posts on online savings accounts, it looks like my forecast on October 2 is still holding true--that online savings accounts from major banks had reached their intermediate-term peak when E-Loan came out their 5.5% account.  Recently, E-Loan lowered their rate to 5.38%.

I had planned on opening up an account there, but after reading on MyMoneyBlog about the many problems people have been having with their accounts at E-Loan, I've decided against it.  I'm still at ING Direct for now, but would really prefer another institution since ING doesn't let me link to my Fidelity brokerage account (via the United Missouri Bank account that serves as the cash account for Fidelity).  I do like ING Direct's system for being able to easily open subaccounts, though.  If there was another bank which allowed links to my Fidelity-affiliated account and easily let me set up subaccounts and had a competitive interest rate, I'd move there.  If you know of any, please let me know.

Wal-Mart Deserves the Nobel Peace Prize?

With $330 billion in annual sales, Wal-Mart certainly attracts a lot of shoppers--and unflattering attention. It's often blamed for paying workers poorly, driving small merchants out of business, buying from overseas sweatshops, and killing downtowns. When you read about them in the news, it's usually about how their latest proposed store is being opposed by local civic groups, right?

Well, in an article in the January 2007 edition of Kiplinger's, Jeremy Siegel writes about the flip side of Wal-Mart's impact. He notes that "for millions of people, Wal-Mart is a lifesaver that provides what they want at prices they can afford." He also pointed out that Wal-Mart pays more than $10 an hour, on average, and that when they opened a new store in Chicago, they had 25,000 applications for 325 jobs. Despite that, Chicago City Council had voted to hold have higher minimum wages requirements for Wal-Mart and other big box retailers. Though the bill was vetoed, Siegel noted that it sends the message to prospective employers, that "We will penalize you for being a large, efficiently run company that offers consumers the lowest prices. Would Chicago prefer less-efficient companies with higher prices and fewer jobs?"

Wal-Mart's huge size means that other competitors, such as grocery stores and other merchants, need to be more competitive in price. Siegel cites a study that found that Wal-Mart's growth from 1985-2004 resulted in food-at-home prices that were 9.1% lower and overall prices that were 3.1% lower than they would have otherwise have been. Don't ask me how they figured that out, but that means that if it hadn't been for Wal-Mart, we'd be paying higher prices on most things we buy.

Siegel also addressed the criticism that Wal-Mart encourages sweatshops in the developing world. Here, he cites an editorial by Brian Tierney of the New York Times. Tierney makes the argument that Wal-Mart is as deserving of the Nobel Peace Prize as is Muhammad Yunus, the 2006 prize winner, who founded Grameen Bank. Grameen Bank helped people in poor villages in developing countries through microloans. Tierney makes the point that Wal-Mart is actually responsible for the creation of far more jobs in the developing world than Grameen.

Well, nominating Wal-Mart for the Nobel Peace Prize may be a bit much to swallow, but Siegel's article does point out the positive side of Wal-Mart that is rarely mentioned in the press and gives some food for thought.  I'd be interested in what readers have to say.

The Pursuit of Happiness: Experts' Own Advice

Wow, it's been nearly a month since I last posted. Things had been very hectic at work, but hopefully it's slowing down now.

In today's Wall Street Journal, Jonathan Clements wrote about six academics in the field of "happiness research" who took some of their own advice and made changes for the better:

• Relish the day. The problem is that when we get a raise or promotion, we're thrilled at first, but quickly get used to it. UCSD professor David Schadke's advice is to celebrate the small things, not just save up the celebrations for big occasions. Also, take photos and buy souvenirs to help you to recall the good times long after a vacation or event is over. For example, when his undergrad school, the University of Texas, won the college football championship last year, he bought T-shirts to help him remember.


• Dodging traffic. Studies have shown that commuting is one of our least favorite activities and one of the main reasons is the lack of predictability. This lack of control is what induces the stress. Warwick University professor Andrew Oswald too his own advice and moved closer to his office, reducing his commute from 60 minutes to 20 minutes.


• Seeing friends. Chances are you enjoy seeing friends and family more than you enjoy spending extra time at the office. So why do we take the higher-paying job that leaves less time with our loved ones? Part of the answer is that we sometimes don't thing about how things will play out over time. We'll get used to the extra money fairly quickly, but we don't realize the long-term effects on our social lives. Professor Richard Easterlin from USC used to sacrifice family time for research time, but does that much less now and enjoys the extra time with his family.


• Buying memories. Alan Krueger from Princeton suggests that we may be able to boost our happiness by thinking carefully about how we spend our time. To that end, he suggests "buying memories." For example, he cites taking his dad to the 2001 Superbowl. Even though his Giants lost, he enjoyed the anticipation of the game and the event itself. He even framed his ticket to remind himself of the event.


• Limiting options. Clements writes about a study by Jane Ebert and Daniel Gilbert where participants were told that they can take home an art poster. Some were told they could exchange it if they didn't like it, others were told that their selection was final. Which participants were happier? The ones that didn't have the option to exchange it. Gilbert says "When options are open, the mind generates debate. When options are closed, the mind generates satisfaction." To that end, Gilbert took his own advice and proposed to his girlfriend, who is now his wife. He says that "sure enough, now that she's my wife, I'm happier."

Worse than a Coin Flip

I was recently reading about the possible end of Bill Miller's win streak against the S&P500 Index. His Legg Mason Value Fund has beaten the S&P500 for an impressive 15 years in a row. However, this year he's trailing the index by about 10% at this point. The manager with the next longest streak is Manu Daftary, who's Quaker Strategic Growth Fund has beaten the index for eight years in a row. However, he's also trailing the S&P500 by almost 9% this year. After him, there's a handful of funds with a seven year streak.

It got me wondering how many funds you would expect to beat the S&P500 if the results were represented entirely by chance: flip a coin, heads you beat the market that year, tails you lose. There are approximately 8,600 mutual funds out there, so if the results was entirely by chance, half (4,300) would beat the market after one year. If half of those beat the market the next year, then 2,150 would have beaten the market for two years and so on. After eight years, there would be 67 who beat the market for eight years in a row. Instead, in real life there are only two, Miller and Daftary.

True, beating the S&P500 each year isn't the only goal of all mutual fund managers, but it's still interesting nonetheless to note that only two out of thousands of mutual funds--with managers paid millions of dollars a year to beat the market--have managed to beat the market for even eight years in a row. A coin flip would have done much better.

Fundamental Indexation: The Next Generation of Indexing?

Underweight overvalued stocks and overweight undervalued stocks. Sounds like a simple recipe for beating the markets. Essentially, that's the idea behind what some have called the next step in the evolution of indexing.

The argument is that traditional capitalization-weighted indexes (such as the S&P 500) by their very nature will overweight stocks that are overvalued since the amount of stock that they hold in a particular company is based on the market value of that company in relation to the rest of the companies in the index. So, for example, during the tech bubble, stocks with huge market valuations, such as Cisco, dominated the index. Basically by definition, if a stock is overvalued, it is overweighted in a cap-weighted index.

The idea behind fundamental indexation is to weight the holdings by some fundamental measure, such as sales, income, book value, or even number of employees, instead of by the value that the market places on a stock. By doing so, you reduce the amount by which you are overweighting the overvalued stocks and avoiding their drag on your returns. Rob Arnott, who introduced the idea to the mainstream investing public a year or two ago, found that such an index outperformed the regular cap-weighted index by about 2% annually on average over the last 40 years or so.

The idea has enough merit behind it that individuals such as Jeremy Siegel (my old Wharton professor and author of "Stocks for the Long Run") have gotten behind the idea. He has joined Wisdom Tree, a startup investment company that offers a number of ETFs based on fundamental indexing using dividends as the weighting critieria. In addition to Wisdom Tree's offerings, there are also offerings based on the Research Affiliates Fundamental 1000 Index, an index based on Arnott's research that is weighted by a composite of several fundamental criteria.

Even William Bernstein has called fundamental indexing a promising technique, though he cautions that the advantage over cap-weighted indexing is small and could be overwhelmed in practice by fees and transactional costs.

Though it's still a new idea, it's definitely one that merits further exploration, particularly as the offerings from Wisdom Tree and those affiliated with Research Affiliates develop a real-world track record that one can examine for the effects of fees and the costs of trading.

Your Disease Risk

Your health can definitely have an impact on your finances.  For example, I recently wrote about how losing 10 pounds can save you thousands of dollars on your life insurance.  So, even though it's not directly about personal finance, I recommend taking a look at Your Disease Risk, a site developed by the Harvard Center for Cancer Prevention.  It was mentioned in an article today in the Wall Street Journal.

After answering a handful of basic questions (such as your weight, height, about your diet, exercise, smoking, etc.), it assesses your risk of developing diseases such as heart disease, diabetes, stroke, osteoperosis, and various types of cancer. The good thing is that the site doesn't leave you hanging after reporting that your at high risk of developing one of these diseases.  It also makes some general recommendations on how to decrease your risk.

Investor Returns Trail "Regular" Returns

Earlier this month, Morningstar announced that it is going to begin reporting what they call "Morningstar Investor Return" in addition to the traditional time-weighted returns of mutual funds. Time-weighted returns are the returns that you usually read about. They are the return that you would have received on your investment had you put it in at the beginning of the the period, left it alone and reinvested the dividends along the way.

This contrasts with the Morningstar Investor Return, which is their term for dollar-weighted return. This measures what investors have actually achieved in the fund. The returns are weighted by the amount of money in the fund at the time. So, if a fund did really well when it had lower assets, attracted a lot of new money, and then didn't do so hot, its dollar-weighted return would be lower than its time-weighted return.

If investors are good at timing their moves into and out of funds (piling in money before a period of good performance and bailing out before a period of bad performance), the dollar-weighted return would exceed the time-weighted return.

So, what does the evidence show?

According to an interview by Mark Hulbert of Morningstar's managing director Don Phillips:

Phillips provided the following telling statistics, which were based on dividing all mutual funds in Morningstar's database into four groups according to the volatilities of their returns relative to comparable funds. Consider first the quartile of funds with the greatest relative volatilities: On average, their dollar-weighted returns were just 62% of their time-weighted returns.

In contrast, the quartile of funds with the lowest relative volatilities exhibited dollar-weighted returns that, on average, were 98% of their time-weighted returns.

So, the lowest-performing group had dollar-weighted returns 38% below time-weighted returns. The lowest volatility funds were only 2% below their time-weighted returns.

Interestingly, in a table accompanying the article, Hulbert looked at the top 25 funds in terms of assets and picked out the ones where the dollar-weighted returns trailed the time-weighted returns by more than 1% annually. What was notable to me is that two of these eight funds were index funds from Vanguard. This suggests that despite the buy-and-hold philosphy that often accompanies index investing, many people also try to move in and out according to when they think a particular index is overvalued or undervalued. As the numbers show, investors haven't been very succesful when they try to time the market.

Need Help Choosing Online Savings Account

I've been with ING Direct for years. One of the things I like about them is the ability to easily set up subaccounts--for example, one for saving for a car, one for home repair, etc. Also, it's easy to buy CD's from the main account, without having to setup a whole new account and going through the whole setup and verification process again. One problem has been that they lag in rates (4.4% compared to 5.05% at HSBC Direct or 5.5% at E-Loan). More of a problem for me is that they've apparently changed their linking policy over the last couple of years and won't link to my Fidelity account (which is actually a United Missouri Bank account that is swept into/out of by Fidelity each day). So when I went to add a link to my main savings account at Fidelity, they rejected it.

I had written a few weeks ago that I felt that interest rates on such accounts were topping out and the 5.5% at E-Loan was likely to be the top for a while. So, I was all set to move to E-Loan. The problem there is that you have to setup a whole new account for each "subaccount" you'd like and for each CD you want to purchase. You have to go through the whole procedure of setup and verification all over again each time. Also, there's a $5,000 minimum so I can't setup that car account yet since I don't have that much saved up for it.

Any suggestions? I'd like a place where I can (in order of importance) 1.) link to my Fidelity account, 2.)easily create subaccounts or extra accounts, 3.) setup monthly transfers from a linked account to the savings account, 4.) get a decent rate, and 5.) easily buy CD's. I know I can't get that all in one place, so I'd settle for getting the first three or four.

Scorecard: Index v. Active

How are active managers doing compared to indexes this year? As cited in Sunday's New York Times article by Paul Lim, so far through September 30th of this year, only 28.5% of actively managed large cap mutual funds were beating the S&P 500 index according to a new study by Standard and Poors. When looking at the most recent quarter alone, only 20% beat the S&P 500.

One reason why the percentage has been low lately is that it tends to be more difficult to beat the index when market leadership changes. Energy and small cap stocks have been outperforming for years, but that changed lately and active managers haven't kept pace. However, it's not just over the short-term that the index has been outperforming actively managed funds, however. Over the last five years, only 29.1% of large-cap funds have managed to beat the S&P 500.

What I found a little surprising was that even a smaller percentage (19.5%) of actively managed small-cap funds managed to beat their benchmark, the S&P 600 (an index of small-cap stocks, not the S&P 500 plus the next 100 stocks). This goes against the argument that it's easier to outperform the market in small-caps due to less competition and less institutional research coverage of smaller cap stocks.

Getting back to large-cap stocks, Lim writes that even though the S&P 500 index surged in popularity in the late 90's (when mega-cap stocks like Microsoft and Cisco were driving impressive gains of more than 20% a year) indexing advocates like John Bogle (founder of Vanguard) point out that indexing is even more valuable when returns are more modest. During a period in which returns average 6-7% a year, for example, transaction fees, taxes, and investment management fees of actively managed funds will eat up a proportionately larger share of the returns.

Judging by the numbers, it's hard to make a case for actively managed funds either in the short or long term.

Percent of Actively Managed Large-Cap Funds that Beat the S&P 500

Staples' Not So Easy $250 Rebate

I don't want to make this blog an outlet for consumer complaints, but I recently had a problem with Staples.

The other day I saw that HP had a 50% off rebate on a LaserJet 3055 All-In-One.  The rebate was for $250.  Being a fan of Staples, and having just tried out their EasyRebate online submission for the first time for another purchase the other day, I figured I'd buy the printer from Staples so I wouldn't have to go through the usual hassles of sending in barcodes, forms, and hoping they'd pay the rebate, especially since it was going to be for $250.

I ended up buying it through staples.com and received the printer the next day.  Then, when I went to submit the "EasyRebate" online, it said that I'd need the product's serial number and to come back when I had it.  Even though I had it already, there was no way to continue and put in the serial number.  I waited a couple of more days and tried again.  Still no luck.  After contacting rebate support through an online form, I received an email saying to try it again and if it still doesn't work, to call the number on the rebate form.  Well, it still didn't work, and since there isn't a rebate form for EasyRebates, I didn't have the number, either.  After digging up one up through the website, going through the interactive phone maze, reaching a live person, getting transferred, and then waiting on hold for about 5 minutes, they then played a message that they were sorry and weren't able to take the call at this time, and hung up.

After calling through the maze again, I reached someone who basically said they think the problem was because the printer was sent from a different warehouse so the item number they use is coded differently.  My only solution would be to call another 800 number, this time at HP to find out how to submit a rebate to them directly, since they're the ones that ultimately handle the rebate (well, I guess more correctly, they're the ones that hire the company to process the rebates) or to Google "HP rebate" to see if I could find a form.  I tried the latter and finally found the form and will end up submitting it the old fashioned way.  That's OK with me, but my frustration was that it took a half an hour of my time for them to tell me, we can't help you, Google it yourself.  This was made more frustrating by the way they promote EasyRebates as an easier alternative to regular rebates.  If it was for a $10 rebate, it definitely wouldn't have been worth my time and I would have given up.  Since it's $250, I'll stick it through and have to hope that the rebate doesn't get rejected for some reason.  I'll report back what happens.

My New Credit Card

Thanks to Jonathan at MyMoneyBlog, I finally decided to switch my main rewards credit card (used for business purchases) to the Starwoods Preferred Guest Business American Express Card (the personal version of the card basically has the same features). I had been using a United MileagePlus Visa Card, which gave me 1 mile/dollar spent.  There are a few advantages of the SPG Amex card:

1. I can use the Starwood points (earned at 1 point/dollar spending other than at Starwood properties (you'll get a bonus there)) to transfer to a number of different airlines, most at 1:1 (United is a notable exception at 2 points:1 mile).


2. You get a bonus 5,000 miles when you transfer 20,000 points, so you really get 1.25 miles/point.


3. You could instead use the Starpoints for their original intended purpose, staying at a Starwood hotel (like Sheraton, West, St. Regis, Four Points by Sheraton, or W Hotel).  There's 6 different categories, which require different amounts of Starpoints.  The nice thing is there are no blackout dates, so if they have a room available, you can book it using your Starpoints.  Since hotel rates have been rising, so has the value of a Starpoint.


4. The card has no fee for the first year and just $30 annually after that.

Also, there's a 10,000 point bonus after your first purchase.  I'm not signed up as an affiliate or anything so I don't get anything if you apply for the card, I just think it is one of the better travel reward cards out there and definitely better than my old United MileagePlus Visa card.  If you do apply, you might as well do so through MyMoneyBlog's post since I assume he gets a referral fee, or you can do directly through Amex here.  One caveat is that the points expire after a year of inactivity (you don't have to redeem them with a hotel stay, just have some activity, such as earning points through purchases on the card).

Two Money Tricks

Most of the time we know what we have to do to save money. The problem is lack of knowledge, it's lack of discipline. When the money's in our checking account, we spend it. That's what it's there for, isn't it? Sometimes we just have to trick ourselves into saving.

Kiplinger.com recently posted an article on Ten Financial Tricks and Treats. Here's two of them that I've either found helpful or plan to try:

1. Use cash for all your expenses. Right now, I try to minimize the amount of cash I use and use a credit card for most expenses. I reason that it's easier to track since I can download my credit card transactions right into Quicken and I also get a 1% rebate from my credit card company. The problem is that it makes it harder to stick to a set amount each month. Next month I plan on taking out the amount of cash I need for the month (not including things I'd normally pay by check or online such as cell phone bills, utility bills, etc.) and not using my credit card. I'm sure it will help me make my spending more conscious. Right now, it's too easy to just put it on the card and not realize how much it adds up until I get the monthly statement.

2. Save regularly for recurring expenses, too. I do a pretty good job of "paying myself first" by having my paycheck broken up into two direct deposits, one for savings at my brokerage account, the other for monthly spending in my checking account. The problem is when I receive bills like my semi-annual car insurance bills. I sometimes have to cheat a little bit by "borrowing" from savings. The problem is that I don't always get around to paying myself back (good thing I don't report myself to a credit bureau). To avoid this, I'm going to add up such expenses for a year, divide it by 12 and set aside that amount in a separate account each month. I'm also setting aside a set amount each month in a separate account for our next car purchase in about 4 years. Otherwise, I'll find it's too easy to blow any savings from scrimping by going over budget on that next trim level.

None of these steps are really necessary if you can just set a budget and stick to it. For those of us who can't commit to that 100%, at least there's tricks that can help us overcome our shortfalls and help us on our way.

Will Hybrids Solve Our Oil Problems?

The EPA and DOE yesterday released the 2007 Top Fuel Economy List which featured the Toyota Prius hybrid as the car with the best fuel economy at 60 mpg city/51 mpg highway (at least based on current official EPA reported mileage, which is higher than real world mileage according to most tests). This brought to mind a recent report I received from AllianceBernstein entitled Ending Oil’s Stranglehold on Transportation and the Economy: The Emergence of Hybrid Vehicles, which makes the case that hybrids will greatly reduce our dependency on oil in the coming decades.

Today, transportation accounts for about 50% of oil demand. Of that, 45% is accounted for by light-duty vehicles (cars, SUV's, minivans, and light trucks). AllianceBernstein figures that light-duty vehicles will use less oil by 2030 than they do today. After reaching 21.5 million barrels a day in 2010, close to what the International Energy Agency projects, they figure demand will fall to 16.1 million barrels a day (half of what the IEA predicts). This is despite the increase in number of vehicles. The difference: better fuel economy due primarily to hybrids.

Hybrids are predicted to gain mass acceptance not only due to lower costs due to fuel efficiency gains, but also due to superior features, including faster acceleration and lower emissions. They also don't face some of the hurdles that alternative fuel (such as ethanol) vehicles do--you can use them just like you use a "regular" car now, you don't need a new infrastructure to deliver an alternative fuel. Their main drawback right now is the price premium, which is expected to drop rapidly since a large component of the cost is electronics and batteries.

The next step beyond our current hybrids is plug-ins. While today's production hybrids cannot use electrical power alone for significant distances, that changes once higher capacity batteries (which will be charged by plugging in, rather than solely through regenerative braking and the gas engine) become more affordable. According to AllianceBernstein, 40% of Americans travel 20 miles or less a day and 60% travel 30 miles or less. If a plug-in hybrid could go just 20-30 miles on a charge, many people would never have to use gas for routine driving, but still have it available anytime they needed it for longer trips. You can see how that would greatly increase MPG. There are already some people who have modified their Prius' in this way (albeit at a high cost).
The report considers the implications:

If most consumers recharge the batteries in their plug-in vehicles from the electrical grid, the fuel ultimately powering their vehicle is likely to be coal, natural gas or uranium, rather than oil...This could reshape the foreign policies of such oil-importing countries and regions as the US, Japan, Western Europe, China and India. The economic and political implications for the few oil-rich exporting nations, by contrast, are likely to be grim. Indeed, the transition to hybrid power could change the world!

That would be great news for us. I'm wondering, though, if there's a self-limiting mechanism in this march towards hybrids. As the recent volatility in gas prices have shown, we seem to worry only when the prices are high and quickly forget about the long-term when prices are low and oil is plentiful. If hybrids do help to keep a cap on gas prices by lowering demand, that would make hybrids themselves less attractive, slowing the development of economies of scale.

Maybe an increase in gas taxes would help? I'm sure that would be politically impossible right now but perhaps concerns about security in the Middle East will be enough to tip the balance in the near future.

Retraction: Costco Doesn't Save Me Money

I've only been blogging for about a month, but it looks like I'll have to retract something I posted recently. In my post on 25 Ways I Save Money, one of the ways I mentioned was using Costco. It looks like I'll have to retract, or at least amend, that statement. The problem is that when shopping for stuff like eggs and milk (which are usually a great deal cheaper at Costco than our regular grocery store), I end up being tempted by the big screen flat panel TVs, the books, the tools, and all the other stuff that I didn't go there intending to buy.

The problem isn't that these things aren't a good deal at Costco. They usually are. I think Costco almost always offers a great value and I love their selection. The problem is that I didn't really need these things to begin with. I'm not saying that I've bought a flat panel TV from there on impulse, just that everytime I go in there, I think "Hmm, that's a great deal on that TV, maybe we should get a new one since the price is so good." Or, I end up picking up a cool flashlight or a book or a software package, just because it's a good deal.

It happened yesterday when I went there to get some groceries and ended up buying a two pack of those windup flashlights with built-in radios. I wiped out any savings from the eggs, milk, and groceries that we bought by buying those flashlights. I reasoned that Costco always has good prices and that I could leave these flashlights in the cars without having to worry about the batteries running out. Still, if I hadn't of seen them there, I wouldn't have gone out of my way to buy them and I would have been $23 richer.

Do you ever encounter the same "problem" at Costco?

A Free House Can Be Too Expensive

A recent post at PFAdvice on 10 Hidden Costs People Fail to Consider reminded me of the dangers of determining affordability of a home by just focusing on the mortgage payments which have been faciliated by easy credit, low interest rates, and "innovations" like interest-only mortgages. Even if a house is affordable--that is, the bank says it will lend you the money--doesn't mean that it's not too expensive for you. In addition to costs like maintenance, there's also the cost of furnishing, upkeep, etc. which tend to go up with the price of the home. Often overlooked, there's also the additional cost of ratcheting up our lifestyle.

An extreme example of this is a family who won a gigantic, well-equipped, house, plus $250,000 and a big SUV, in the HGTV Dream Home Sweepstakes. An article in Money magazine describes the 6,000 square foot house:

Each feature seemed more fantastic than the one before: the massive great room with its 30-foot ceilings and six-foot-wide fireplace; the master bedroom suite--in effect, a separate cottage connected to the main house by a breezeway, replete with a hot tub; the indoor elevator and the outdoor pool and fireplace; the guest house by the lake...The house is really three structures: a main building, a separate master bedroom suite and a lakefront guest cottage. Some 550 tons of limestone went into the construction of the main house, much of it used to build the 30-foot fireplace in the great room. Ten cedar trees were used to support the beamed ceiling, the trunks shaved down to square posts around the perimeter. Six sets of glass french doors let in sweeping views of the yard and lake.

You get the picture. The problem is that even though they were given the house and $250,000, they still can't afford it.

Upkeep is $2,900 a month. Homeowners insurance runs $7,000 annually. The insurance and gas bill on the Cruz fleet (they own seven vehicles, including the SUV they won in the contest) costs $1,000 a month...Then there are the incidentals. Fixing up the family boat, which got little use in Illinois, cost $11,000. A dog run for their three dogs was $6,000. Between family and friends eager to see the Dream Home, the Cruzes have company nearly every weekend. The tab: about $1,000 a pop. They've donated $40,000 to charity. And then there have been the splurges--$5,000 on Christmas presents; $2,000 for scuba lessons; an $1,800 go-kart.

So now, after a year in the big house, they're down to $36,000 and have put the home on the market. This example may be extreme, but it does remind us that we also have to factor in the associated costs (like upkeep, maintenance, etc.) AND the other costs that are rarely factored into the equation: lifestyle costs. Call it the "keeping up with the Jones'" factor.

We tend to judge our standard of living in comparison with our peers (such as our neighbors). If we move into a neighborhood that we can barely afford we're going to subconsciously feel the need to spend even more to have the same type of vacations as our neighbors or drive the same types of cars. The end result: we're either less happy or have less money, or both. If we don't factor in all of these costs, even a free house can be too expensive.

Clements' Nine Tips for Investing in Happiness

Jonathan Clements at the Wall Street Journal on Sunday pointed out that academic studies suggest that having more stuff doesn't equate to a permanent increase in happiness (while we may get a temporary boost from acquiring something new, the boost generally doesn't last). Based on his review of some studies, he suggests the following nine tips for investing in happiness:

1. Make time for friends. According to a 2006 report by the Pew Research Center in Washington, 43% of married people say they are "very happy," versus 24% for those who aren't. Seeing good friends regularly can also increase happiness.


2. Foget the pay raise. "Soon enough, you are taking the extra money for granted and you're feeling dissatisfied again. Experts refer to this as 'hedonic adaptation' or the 'hedonic treadmill.'" Now, I don't think he means that you should turn down any pay raises you're offered, just that you shouldn't focus on the extra money as a source of happiness.


3. Don't trade up. If you move to a neighborhood where those around you are wealthier than you, you'll be reminded of your relative financial standing. Being around those who have more makes us less happy with what we have.


4. Keep your commute short. In addition to being unpleasureable, a long commute can also be unpredictable, making it harder to adapt to the hardship. It also gives us less time for leisure.


5. Count your blessings. "Instead of obsessing over your neighbors' riches, try focusing on the riches you have -- and that will likely make you feel happier."


6. Enjoy a good meal. Eating a good meal is one of those activities that brings us pleasure.


7. Challenge yourself. Be more active, maybe starting an exercise routine, instead of vegging in front of the TV.


8. Volunteer. Not only does volunteering make you feel good, it also helps to be around others who do good.


9. Give it time. Surveys have shown that we tend to get unhappier as we approach our 40's but then rebound from there.

I think these tips for investing in happiness can have just as much of an impact on whether we have enough than tips on investing in stocks, bonds, etc. Since in some sense what we really want out of money is the happiness it gives us, by being happier without spending more, we increase our wealth.

Carnival of Personal Finance #69

The latest edition of the Carnival of Personal Finance is up at Carnival of Personal Finance.
My favorite posts include:

• The Benefits of Living Like a College Student by 2Million.


• Financial Checklist for Disaster Preparedness at Experiements in Finance.

I hope you'll also take the time to look at my post on my prediction for interest rates on online savings accounts.

Investing Advice from the Best Performer Among Endowments, Pensions, and Foundations

David Swensen has been investment manager of Yale's endowment for 21 years. Over that time he's averaged a 16% annual return, better than any other endowment, pension, or foundation over that time period. Yale's $18 billion endowment is noted for including investments in many alternative areas, such as private equity, venture capital, timber, and oil and gas. So, it's worth noting that his advice to us as individual investors in his book Unconventional Success is . . . to buy index funds.

The article accompanying his recent NPR interview lays out his basic advice:

• Beware of the Mutual Fund Myth. Swensen is especially critical of actively managed mutual funds run by for profit companies. He points out that they have an inherent conflict of interest. Basically they make money by charging us fees which take away from our profits. Most mutual funds are also far too big and own too many stocks. When you add in commissions and the effect of market impact from all the trading to the fees and taxes incurred, he figures you only have a 1 in 100 chance of beating the market with an actively managed mutual fund.


• Invest in Non-Profit Index Funds. Since you're unlikely to beat the market in an actively managed fund, he suggests investing in low-cost index funds from a non-profit company. I guess Vanguard's the one that comes to mind. I don't know of any other non-profit mutual fund companies. There are other index funds and ETFs that also have very low costs, so those might be appropriate as well, although I don't know if Swensen has reasons for recommending a non-profit other than cost.


• Pick the Right Investment Mix and Keep Your Money There. Don't try to to time the market and increase your bets on bonds, for example, at the expense of U.S. stocks. In doing so, you're effectively saying that you're going to beat the professionals who manage billions of dollars. As noted in the NPR interview, "Swensen has a team of 20 analysts -- and a small army of boutique investment houses -- working long hours to predict which way certain market segments or individual stocks will move. Who do you think is going to buy and sell at the right time? Remember: If somebody buys low and sells high, somebody else is buying high from them. You don't want to be that person."


• Rebalance Your Portfolio Regularly. This means selling funds that have done well and buying ones that haven't to bring them back to your initial allocation. In doing so, you'll have bought more shares of the ones that had been down and can take advantage of that as they come back.

Of course, each individual's situation is different so it's impossible to define an appropriate asset allocation for everyone, but Swensen at least makes a suggestion that would be appropriate for many long term investors. He suggests (along with a Vanguard suggestion for the each allocation):

• 30% in Domestic Equity.  Vanguard Total Stock Market Index Fund (VTSMX).


• 5% in Emerging Markets Equity.  Vanguard Emerging Markets Stock Index Fund (VEIEX).


• 15% in Foreign Developed Equity.  Vanguard Total International Stock Index Fund (VGTSX).


• 20% in REITs.  Vanguard REIT Index Fund (VGSIX).


• 15% in U.S. Treasury Notes and Bonds.  Vanguard Short-Term Treasury Fund (VFISX), Vanguard Intermediate-Term Treasury Fund (VFITX), and Vanguard Long-Term Treasury Fund (VUSTX)


• 15% in U.S. Treasury Inflation-Protection Securities (TIPS). Vanguard Inflation-Protected Securities Fund (VIPSX)

That's it.  In 6-8 funds, he lays out a low-cost portfolio that he expects would beat the vast majority of portfolios out there, whether professionally managed or not.  I think it's a great starting point.  If you're not already well diversified across the above categories, it's definitely worth taking a look at this as a basis for a sound portfolio.

Will We Treat Future Generations Fairly?

That's the subtitle of Fed Chairman Ben Bernanke's speech at the Washington Economic Club on Wednesday this week. In it he discusses the implications of the aging of the baby boomers and the ongoing increases in life expectancy. Economically, it's not a pretty picture, but it'll only get worse if we keep putting off doing anything about it.

...the broader perspective shows clearly that adequate preparation for the coming demographic transition may well involve significant adjustments in our patterns of consumption, work effort, and saving. Ultimately, the extent of these adjustments depends on how we choose--either explicitly or implicitly--to distribute the economic burdens of the aging of our population across generations. Inherent in that choice are questions of intergenerational equity and economic efficiency, questions that are difficult to answer definitively but are nevertheless among the most critical that we face as a nation...the fiscal consequences of these trends are large and unavoidable. As the population ages, the nation will have to choose among higher taxes, less non-entitlement spending, a reduction in outlays for entitlement programs, a sharply higher budget deficit, or some combination thereof.

He points out that if we tried to finance projected entitlement spending (Social Security and Medicare) entirely by revenue increases, our tax burden would have to go up by one-third over the next 25 years. If we tried to address it by cutting non-entitlement spending, we would have to cut the federal budget by $700 billion in today's terms. If we increase the federal budget deficit to pay for it, we shift the burden of paying for government spending to future generations.

In addition, Bernanke points out that the aging of the population is likely to lead to lower average living standards, all other things being equal. As the population ages, the share of working age (and employed) population decreases. Basically, this implies that the level of output per person must be lower since each worker's output will have to be shared among more people.

Bernanke argues that one way to mitigate these affects would be to increase our national savings rate, which could be used to increase our nation's capital stock which would make future workers more productive. The problem is that saving more now means that we need to consume less or work more. The tradeoff: "We can mitigate the adverse effect of the aging population on future generations but only by foregoing consumption or leisure today."

Citing a stylized model (i.e. a model that's not realistic, but illustrates the implications of changing saving and consumption now versus later) that the Fed has created (see the speech itself for more details), he points out

...the decisions that we make over the next few decades will matter greatly for the living standards of our children and grandchildren. If we don’t begin soon to provide for the coming demographic transition, the relative burden on future generations may be significantly greater than it otherwise could have been. At the heart of the choices our elected representatives will have to make regarding the distribution of these costs across generations will be an issue of fairness: What responsibility do we, who are alive today, have to future generations? What will constitute ethical and fair treatment of those generations, who are not present today to speak for themselves?

I think Bernanke brings up some important points. By not doing anything to address these issues now, we're really putting the issue on future generations by default. As the father of three young children, that would be like me saying I'm going to keep spending and not worry about the bill because I'll make them pay for it when they grow up. We really owe it to our children to educate ourselves about the hard choices that we'll collectively have to make and to push our elected officials to look beyond their next election. Since our children (or our future children) don't have any voice, we'll have to speak for them.

Dow Hits Record High. Uh, What is the Dow?

You may have heard in yesterday's news that the Dow closed at a record high, but what is the Dow really?

When people refer to the Dow, they are talking about the Dow Jones Industrial Average (DJIA). It is an index of just 30 U.S. stocks, picked by the editors of the Wall Street Journal. Despite the word Industrial in the name, it actually can include any company except for transportation companies and utilities. It's currently made up of:

3M
Alcoa
Altria Group
American Express
American International Group
AT&T
Boeing
Caterpillar
Citigroup
Coca-Cola
E.I. DuPont
Exxon Mobil
General Electric
General Motors
Hewlett-Packard
Home Depot
Honeywell International
Intel
International Business Machines
Johnson & Johnson
JPMorgan CHase
McDonald's
Merck & Co.
Microsoft
Pfizer
Procter & Gamble
United Technologies
Verizon Communications
Wal-Mart Stores
Walt Disney

A unique feature of the Dow is that it is a price-weighted index. Basically, when it was first started in 1896, they took the prices of the original 12 stocks, added them up, and divided by 12 to get the average. Since then, they have changed the divisor so that things like stock splits don't change the average, but it is still price weighted. So a $1 movement in a $20 stock has the same impact as a $1 in a $80 stock, even though the percentage change in the $20 stock is much higher. This is one of the main criticisms of the index. Most popular indexes, such as the S&P 500, are capitalization weighted, which means that the weight of the components in the index are determined by the market cap (you can think of it as the number of shares x the price).

So what's the significance of the Dow hitting a high? Not much, really. Since it's only 30 stocks, it's not necessarily representative of the market as a whole, especially smaller cap and international stocks. Since it's price-weighted, it's not even necessarily representative of the fortunes of the 30 stocks in the index as a whole. Really the main reason that it is mentioned so often in the media is force of habit. It's the oldest U.S. stock index and has been quoted for over a century. So, the next time you hear that it's hit a record high, take note of it for trivia's sake, but don't change your investing plans.

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The Beginning of the End . . . of Rate Hikes on Online Savings Accounts

Last week, I mentioned that E-Loan just came out with its version of the online savings account, offering 5.50% APY. At the end of the week, Emigrant Direct LOWERED its rate to 5.05%, matching HSBC Direct's current rate. It's the first time in recent memory that a major online savings bank lowered its rate. Based on the this--plus the fact that the Fed maintained its target for the federal funds rate at 5.25% for the last two open market committee meetings--may mean that we are near the top of the rates for online savings accounts for a while.

In fact, I'll go out on a limb and say that we won't see anything higher than E-Loan's 5.50% at another major online bank for at least a couple of years. Fortunately, if I'm wrong, you can always switch accounts since doing so wouldn't cost you money like it would if rates went up and you sold a bond.

I'm sure ING Direct is glad to hear this. Since they were the ones who started this niche and probably have the largest base of deposits, it was hard for them to keep up with newer entrants, since newers entrants didn't have as many deposits on which to pay a higher rate.

I'm planning on switching over to E-Loan from ING Direct, since I think they'll be leading the pack for a while (partly since they're the newest) and I don't think anyone will surpass them for a while. I hadn't switched to Emigrant Direct or HSBC Direct in the past, mainly because I kept thinking that someone would always come along and outdo each other for the highest rates.

25 Ways I Save Money

Dawn over at Frugal for Life started a great discussion on 25 Ways I Save Money. Here's my list (including a few that I could do a better job at):

1. Pay myself first (have my savings direct deposited from my paycheck into a bank other where my checking account is located).


2. Invest through low-cost index funds.


3. Live close to work to reduce my commute.


4. Use a Health Savings Account combined with a high deductible health insurance policy.


5. Use Peerflix for DVD's instead of Netflix or going out to the movies. (I just posted about Peerflix the other day). Edit: Lately, I've been finding that Peerflix hasn't been that useful.


6. Eat a homemade lunch instead of eating out during the work week.


7. Drink the free office coffee instead of Starbucks. Check here for a post on how much this could save you over 10 years.


8. Buy in bulk at Costco. Retraction: read this post for why I don't really save by shopping at Costco.


9. Use the dishwasher instead of washing dishes under running water.


10. Review my insurance policies periodically.


11. Buy sodas from the supermarket when they're on sale instead of from the office vending machine (I need to do better on this one).


12. Check bankrate.com for good CD rates (although I don't like to open up accounts all over the place, so won't automatically open a new account for a slightly better rate).


13. Get rid of extra features (like Caller ID and Call Waiting) from phone service.


14. Ask for a better rate (I recently wrote about my experience with this when I contacted my cable company about my broadband service earlier this week).


15. Read books and magazines from the library rather than buy them.


16. Shop very carefully when getting a mortgage and refinancing. I plan on writing more about this soon since I think it's very common to pay a lot more than is necessary. Check out mtgprofessor.com for some great precautions.


17. Keep cars for a long time (we usually keep them 8-9 years, I know I could do better on this one).


18. Buy used toys and books from consignment sales (like ones run by MOPS or sponsored by local churches).


19. Contribute to IRA's.


20. Use 529 Savings Accounts for my children's college savings.


21. Carefully review medical bills and compare to my medical insurance's statements of benefits. I've found that errors are quite common.


22. Pay bills online.


23. Avoid carrying a balance on credit cards.


24. Buy generic or store brand products instead of brand name.


25. Establish long-term savings goals, but break it down into goals that be achieved more often/readily in order to stay motivated. In terms of long-term savings goals, take a look at my post on Googling Your Retirement Number for a quick start at establishing a long-term goal.

Peerflix For Savings Over Netflix

I used to be (twice, in fact) a member of Netflix. I really liked it and I thought the service level was very good. My main problem was that I didn't really watch DVD's often enough to justify it. I'd end up getting a DVD and keeping it for weeks before finally giving up and sending it back unwatched.

About six months ago, I tried a relatively new offering called Peerflix. Basically, you create a list of DVD's that you have (just type in the UPC codes) and create a list of DVD's that you want. When someone wants one of your DVD's, you just print out their PeerMailer (basically two sheets of paper into which you insert your DVD, fold over, and tape to create your own envelope--it even has postage pre-printed on it) and drop it in the mail. It gets mailed straight to the "peer" who requested it, rather than to a central distribution center. Then you'll get PeerBucks (which vary depending on the popularity of your DVD) which you can use to get DVD's off of your want list. In addition to the PeerBucks, you pay $0.99 + postage for each DVD that you receive.

What I like about it is that there's no monthly fee and the disks that you receive are yours to keep for as long as you like. So, I can have a few unwatched DVD's on hand for when I finally get a moment to watch one.

Compared to Netflix, the biggest downside is the availability of DVD's. It can vary a lot and newer, more popular DVD's will likely have a long wait. The way they describe the availability status is also pretty confusing to me. However, in my case, I don't get to watch often enough to be "caught up" anyway, so it's less of a problem.

Edit 9-24-07:  I find that the utility of Peerflix has really gone down and don't recommend it anymore.

It's Worth Asking

I recently was reminded that sometimes you can get a better rate just by asking. On Get Rich Slowly, a recent post on that tip prompted me to give it a try today.
I currently pay $42.95 for broadband internet access through my cable company. Recently, Verizon installed fiber (they call their service FiOS) throughout the neighborhood and has been offering comparable service for $34.99. I've thought about switching but I'm a little hesitant because it also converts my phone to a digital service that I'm not sure is as reliable as my good old analog phone service. I called my cable company and they agreed to match that price for the next 6 months. I may switch later, but at least in the meantime, I'll be saving a little.

E-Loan Offers 5.5% APY Online Savings Account

E-Loan started offering high-yield online savings accounts today. They're offering 5.5% APY on savings ($5,000 minimum) and 5.7% on 1 year CD's ($10,000 minimum). In comparison, today Emigrant Direct is offering 5.15% APY on savings (no minimum) and ING Direct is offering only 4.4% with no minimum.

I've had an ING Direct account for years, but for a 1.1% difference, it looks like it might finally be time to leave. By the way, Nick over at Punny Money has a nice writeup on opening an account at E-Loan.

Archives

Carnivals This Week

Getting To Enough participated in the Carnival of Investing this week, hosted by Free Money Finance. Take a look at the post No Guts, No Glory as well as a lot of other great posts.

Also check out this week's Carnival of Personal Finance, hosted by Canadian Capitalist, where I've submitted Would you lose 10 pounds if someone paid you $2,000, based on my recent life insurance shopping experience.

Starbucks Raising Prices, Time to Kick the Habit?

Starbucks announced that they're raising prices for the first time in two years, by 5 cents a drink. Doesn't really sound like too much, but maybe it's a good time to evaluate how much your Starbucks habit is really costing you.

The average price of a Starbucks Tall Latte is now $2.80, going to be $2.85. Plugging those numbers into the "Benefit of Spending Less" calculator at dinkytown.net (assuming you buy one every work day each month, you'll spend about $63/month), the real cost of that habit is $11,725.00 over 10 years, assuming you had saved and invested the amount instead. Here's the output cut-and-pasted from dinkytown.net:

You could save $11,725 in 10 years.

By spending $63 less per month and investing that amount at 8.50% you could save $11,725 before taxes in 10 years. If you pay taxes on your savings, this amount would be reduced to $9,997 with a combined state and federal marginal tax rate of 35.0%.

Results Summary Monthly savings (from spending less) $63 Total savings before taxes (or tax deferred) $11,725 Total savings after taxes $9,997

Your input values

Input Summary
Monthly savings	$63	Years to save	10
Rate of return	8.50%	Total contributions over 10 years	$7,560
Federal tax rate	25.0%	State tax rate	10.0%

Making the Most of Your Charitable Donations

You probably already know that you usually get a tax deduction for most charitable donations if you itemize your deductions. What you may not have considered is the additional advantage of donating appreciated securities (like a stock that you've had for years but haven't sold because of the capital gains taxes) to charity through a donor advised fund (DAF).

By donating appreciated securities (that you've held for longer than one year), you can avoid the capital gains taxes that you would have paid if you had instead sold the stock and donated the cash proceeds. For example, say you have $10,000 of Google stock that you originally bought for $5,000. Based on this example from the Fidelity Charitable Gift Fund's Calculator, if you donate the stock, your designated charities will end up receiving the full $10,000 and you'll get a tax savings of $2,500 ($10,000 x 25%). If you had instead sold the stock and donated the proceeds, you'd pay capital gains tax of $750 ($5,000 capital gains x 15% (the long term capital gains rate for those in the 25% tax bracket)), so your charities would only get $9,250 and your net tax savings would only be $1,562.50. By donating the stock, you reduce your taxes by an extra $937.50 and the charity receives an additional $750.00.

	Contribute Securities to the Gift Fund	Sell Securities and Donate Proceeds
Fair Market Value of Securities	$10,000.00	$10,000.00
Capital Gains Tax Paid*	$0	$750.00
Charitable Contribution/ Your Charitable Deduction	$10,000.00	$9,250.00
Total Donor Tax Savings†	$2,500.00	$1,562.50

The above would apply even if you're not donating through a DAF but instead donated your stock directly to a charity. So why would you bother going through a DAF rather than give to the charity directly? One reason is the ease with which you can donate appreciated securities. Sure, you could give your stock to your church or other charity directly, but many smaller organizations may not be very well setup to receive such stock and may not have the guidelines in place to be able to properly manage the stock. Do you really want your church or local charity to have to decide when is the best time to sell your Google stock?

A DAF is classified as a charity so you get the tax deduction when you make the donation, but it is really just a holding place or a conduit. Their function is to distribute your donations to "real charities" that you "recommend." Technically, you only "advise" them on whom to ultimately receive your largesse, but in practice, they'll honor your wishes to practically any charity that the IRS would have given you a deduction if you had donated to the charity directly. In the meantime, they usually have several investment options so that your donations will hopefully grow in the meantime.
Since most of the major online brokerages (like Schwab, Vanguard, and Fidelity) have affiliated DAF's, you can usually just donate your stock with a few clicks. You get the deduction for this year and have the luxury of being able to take a little time to decide how to distribute it and can divide it up among different recipients or break it up and distribute it over time.

I'm not a tax advisor so double check with yours before going through with it, but consider this route the next time before you sell a stock with a large long-term gain.

New Website for this Blog

I've moved Getting To Enough to www.gettingtoenough.com. Please visit me there. I'll only be publishing there from now on.

Would you lose 10 pounds if someone paid you $2,000?

In a way, that's the situation I face. I was recently shopping for term life insurance. For me, on a 20-year term life insurance policy the difference between the Preferred1 (cheapest rate) and Preferred2 rates was $100 a year. When I clicked on the underwriting guidelines for the policy, it spelled out their criteria for the different rating groups. Among things like cholesterol, family health history, and smoking, it listed the weight guidelines. It turns out if I lose about 10 pounds I would move from Preferred2 to Preferred1 and save $100/year over the 20 years. Hopefully that will be the extra incentive needed to do what I know I should be doing anyway.

By the way, if you have term insurance and haven't checked rates in the past couple of years, it's worth checking again. Even though you're older than when you first got your policy, it still might be cheaper to get a new one since rates have dropped significantly lately. Sites like insure.com can give you an idea of the rates, though you'll actually need to go through the full application process to get exact rates.

Amaranth Fades or How to Lose $5 Billion in a Week

While hedge funds have been in the news a lot lately as one of the "hot" investment choices, Amaranth hedge funds' recent meltdown serves as a reminder that there's no such thing as a sure bet--even among the "smart money" which had invested over $9 billion as of the beginning of September. It seems that Amaranth placed bad bets on natural gas futures, which dropped sharply in early September.

According to the Wall Street Journal,

At the end of August, trading natural gas, he was up approximately $2 billion for the year. Then [energy trader] Mr. Hunter lost roughly $5 billion, in about a week. His losses savaged returns for Amaranth, dragging its assets under management down to $4.5 billion from $9 billion at the start of September.

Ouch! In checking out their website, I found it more than a little ironic that they had a page on "Our Name" (which in the last day or so is no longer linkable from their home page but is still viewable here). Amaranth apparently comes from the Greek word amarantos, which means "unfading." Hmmm. Looks like a name change might be in order.

Carnival of Personal Finance

Check out this week's Carnival of Personal Finance at FreeMoneyFinance.com.  I especially enjoyed the posts on:

• How to Get Paid to Go to College - A free college education. Sounds great, right? Not if you compare it to the college education I received. You see, I got paid to go to college. I mean, a lot of money. Like, five figures over four years.

• Teaching a Six Year Old to Save - We’ve developed a fairly effective allowance system for our kids. Not only has this system been good math practice for them, but it also gives them a bit of pocket change, and it’s worked wonders when it comes to keeping them form begging for stuff when we’re at the store.

No Guts, No Glory

That's the title of the first chapter in William Bernstein's great book, The Four Pillars of Investing. Here, he begins with establishing the relationship between risk and reward based on a historical review beginning as early as the establishment of the first credit markets more than 5,000 years ago. The relationship between risk and reward, of course, still holds true today. In his chapter summary, Bernstein writes:

1. The history of the stock and bond markets shows that risk and reward are inextricably intertwined. Do not expect high returns without high risk. Do not expect safety without correspondingly low returns. Further, when the political and economic outlook is the brightest, returns are the lowest. And it is when things look the darkest that returns are the highest.

Sounds logical, but a lot of times we don't invest that way. We look for the investment that promises high return without much risk. In fact, Bernstein writes, "the best way to spot investment fraud is the promise of safety and very high returns. If someone offers you this, turn 180 degrees and do not walk--run."

2. The longer a risky asset is held, the less the chance of a loss.

This is one reason why it is recommended that stocks are best viewed as a long term investment. Over time, their return has been above that of bonds (they are riskier, after all), but in the short-term, the risk is even higher than over the long term. I cringe when people ask what stock they should buy with money they don't need for a couple of years (say if they're saving up for a down payment on a home). There's a big risk that even the "safest" stock (even if it's a good long-term investment) could be down over the next couple of years so a money market account, CD, or short-term bond is really the safest bet for such an investment.

3. Be especially wary of data demonstrating the superior long-term performance of U.S. stocks. For most of its history, the U.S. was a very risky place to invest, and its high investment returns reflect that. Now that the U.S. seems to be more of a "sure thing," prices have risen, and future investment returns will necessarily be lower.

Don't forget that 100 years ago the U.S. was considered an emerging market. As our economy continues to mature and become a relatively more stable place to invest, its investment returns should reflect that. Also, as much as we'd like to think that the U.S. economy will continue to lead the world forever, history tells us to expect otherwise. A great place to start with international investing is a broadly diversified foreign fund, like Vanguard's Total International Stock Index Fund (VGTSX). This fund invests in Vanguard's European, Pacific, and Emerging Markets Indexes in rough proportion to their overall contribution to international markets and will change weights over time. A good starting point for many people is to have 20-30% of their stock allocation invested in a diversified international index.

Warren Buffet's Advice

Warren Buffet is one of the most successful investors of our time. So, what is his advice to us non-billionaires? In one of his famous annual letters to investors, he wrote:

Most investors, both institutional and invidividual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

Who's to argue with Warren? For a look at his other letters to investors from other years, click here.

About

This personal finance blog is about what it means to have enough money and the best way to get there.

Although having “enough money” means something different to each person, there are really only two ways of Getting To Enough faster:
1. Decreasing what “enough” means to you.
2. Increasing what you have through saving and smart investing.

Most effort is usually expended on the second item, but the first item can have an even bigger impact on your ability to Get To Enough. This blog will explore traditional areas such as retirement planning, saving, and investing, but will also comment on topics such as behavioral finance and “happiness” research.

What's Enough?

There's definitely more than one way to define what it means to have enough money. One basic way is to define it as "having enough money so that you can maintain your current standard of living without having to work for money."

So how much is that? There are a number of calculators on the web that let you put in a number of different assumptions and come up with some number that represents enough. It's worth trying a few to see how much the answer varies. Just Google "retirement calculator" to try a few.

Here's another quick and dirty way to come up with an approximation in one line using Google. The simplest way to illustrate it is with an example. We'll assume the following for our example:

1. Your household income is $60,000/year.
2. You'll want to retire in 20 years.
   
3. You'll be able to maintain your current standard of living on 85% of your current salary (it's assumed that once you retire, you'll save on things like commuting costs, work clothes, etc.).
4. Your savings will be invested in a typical allocation of approximately 60% stocks/40% bonds.
5. You'll be able to withdraw 4% of your savings the first year of retirement and increase that by the rate of inflation each year thereafter.
   

Using Google's built-in calculator, just type the following in to a Google search box and hit enter:
(1.035^20)*60000*.85/.04

The answer: $2,536,980.80

This represents how much you would need to have saved up 20 years from now in order to be able to "live off your savings." If you're already there, great! If not, having a goal in mind can help with Getting to Enough.

So what did the gibberish that you typed into Google mean? Let's break it down:

(1.035^20) This represents the compounding effect of inflation of 3.5% inflation over the next 20 years before retirement
*60000 This represents our assumed current salary (and assumes that this represents our current standard of living)
*.85 This is assuming we will be able to live off the equivalent of 85% of our current standard of living at retirement
/.04 This represents being able to take out 4% your savings for the first retirement year's expenses

Replace the numbers in our assumption with your own numbers (especially your salary and the number of years to retirement) to come up with your personal approximation of "enough." A warning, though: Don't be too optimistic about how much you can take out that first year (don't go much above 4%) and don't be too optimistic about inflation (don't go much below 3.5%) in an effort to lower the amount you feel you need.

Of course, one line in a calculator or Google can't give you a definitive answer as to how much money is "enough," but at least it will give you a starting point. The answer will also vary according to the assumptions we made and I'll explore how I came up with these assumptions and how they might change in your own case in future posts.

Googling Your Retirement Number

There's definitely more than one way to define what it means to have enough money. One basic way is to define it as "having enough money so that you can maintain your current standard of living without having to work for money."

So how much is that? Here's a quick and dirty way to come up with an approximation in one line using Google. The simplest way to illustrate it is with an example. We'll assume the following for our example:

1. Your household income is $60,000/year.


2. You'll want to retire in 20 years.


3. You'll be able to maintain your current standard of living on 85% of your current salary (it's assumed that once you retire, you'll save on things like commuting costs, work clothes, etc.).


4. Your savings will be invested in a typical allocation of approximately 60% stocks/40% bonds.


5. You'll be able to withdraw 4% of your savings the first year of retirement and increase that by the rate of inflation each year thereafter.


6. Inflation is 3.5%/year.

Using Google's built-in calculator, just type the following in to a Google search box and hit enter:
(1.035^20)*60000*85%/4%

The answer: $2,536,980.80

This represents how much you would need to have saved up 20 years from now in order to be able to "live off your savings." If you're already there, great! If not, having a goal in mind can help with Getting to Enough.

So what did the gibberish that you typed into Google mean? Let's break it down:

(1.035^20) This represents the compounding effect of inflation of 3.5% inflation over the next 20 years before retirement
*60000 This represents our assumed current salary (and assumes that this represents our current standard of living)
85% This is assuming we will be able to live off the equivalent of 85% of our current standard of living at retirement
4% This represents being able to take out 4% your savings for the first retirement year's expenses

Replace the numbers in our assumption with your own numbers (especially your salary and the number of years to retirement) to come up with your personal approximation of "enough." A warning, though: Don't be too optimistic about how much you can take out that first year (don't go much above 4%) and don't be too optimistic about inflation (don't go much below 3.5%) in an effort to lower the amount you feel you need.

Of course, one line in a calculator or Google can't give you a definitive answer as to how much money is "enough," but at least it will give you a starting point. The answer will also vary according to the assumptions we made and I'll explore how I came up with these assumptions and how they might change in your own case in future posts.

Income Irony

One thing I'm struck by is that making more doesn't necessarily mean you're Getting To Enough more quickly. The problem is that as we make more, we spend more and quickly get used to that new level of spending. This increasingly raises the amount that we "need" in order to support our lifestyle, which raises the amount that we need to have saved up in order to support that lifestyle when we no longer have our main source of income (usually our salary). In this case, compounding works against us.

Jean Chatzky comments on this in her Money Tip of the Day. Her suggestions on how to keep spending in check are to monitor it (by using something like Quicken) and to have goals. As she puts it, "the easiest way to say no to that new pair of shoes is to know that you need the money for next month's vacation in Florida or next year's tuition bills."

Income Irony

One thing I'm struck by is that making more doesn't necessarily mean you're Getting To Enough more quickly. The problem is that as we make more, we spend more and quickly get used to that new level of spending. This increasingly raises the amount that we "need" in order to support our lifestyle, which raises the amount that we need to have saved up in order to support that lifestyle when we no longer have our main source of income (usually our salary). In this case, compounding works against us.

Jean Chatzky comments on this in her Money Tip of the Day. Her suggestions on how to keep spending in check are to monitor it (by using something like Quicken) and to have goals. As she puts it, "the easiest way to say no to that new pair of shoes is to know that you need the money for next month's vacation in Florida or next year's tuition bills."

Getting To Enough

This personal finance blog is about what it means to have enough money and the best way to get there.

Although having "enough money" means something different to each person, there are really only two ways of Getting To Enough faster:
1. Decreasing what "enough" means to you.
2. Increasing what you have through saving and smart investing.

Most effort is usually expended on the second item, but the first item can have an even bigger impact on your ability to Get To Enough. This blog will explore traditional areas such as retirement planning, saving, and investing, but will also comment on topics such as behavioral finance and "happiness" research.

Getting To Enough

This personal finance blog is about what it means to have enough money and the best way to get there.

Although having "enough money" means something different to each person, there are really only two ways of Getting To Enough faster:
1. Decreasing what "enough" means to you.
2. Increasing what you have through saving and smart investing.

Most effort is usually expended on the second item, but the first item can have an even bigger impact on your ability to get to enough. This blog will explore traditional areas such as retirement planning, saving, and investing, but will also comment on topics such as behavioral finance and "happiness" research.