Wednesday, November 30, 2016

Playing The Long Game


Many people blog to express themselves. Many others blog to make money. Truthfully, most bloggers do it for some combination of both reasons. Those that are trying to make a living by blogging usually go all out learning about branding and content and market share. They treat blogging as a job and they need to learn ways to find their voice and to distinguish themselves in their area of interest to be successful. They know that attracting readers doesn’t just happen magically. They need to work to deliver good, regularly published content, have a consistent brand or theme, and strive to make their blog the best they can.

Everyone Should Have Some Marketing Knowledge

But even those that blog for fun can benefit from such marketing tactics. Sure, your goal may not be to retire and live off your blog income, but if you do any advertising on your site, anything you do to increase readership can increase your income and I’ve never met anyone who complained about increased income. If you aren’t looking to live off revenue from your blog, you probably don’t need to immerse yourself neck deep in branding studies or Google Analytics reports. But you should still focus on one thing: content.

Write about what you know. Write with passion. Write to share your knowledge. Writing good content is playing the long game. You won't wake up the day after publishing a great post and see that your hit count has skyrocketed. That's OK. That's the short game, the live-in-the-moment-and-only-for-tomorrow game. It’s buying advertising on Monday and seeing an increase in hits on Tuesday.

That’s not what you want. Anyone can do that. Sure, people will respond to ads and visit your site, but it is your content that keeps them coming back. You want to make long term readers out of people. You want them to look forward to your latest post. Buying ads is paying people to visit your site. If the content isn’t good, then you need to keep buying ads to keep people coming back. Paying for readers is not the game you want to be in. Building for the long term is.

Play The Long Game

Building a stable, long term readership takes time. It takes effort. It takes working hard at creating content that people will find useful, funny, engaging, or educational. It doesn’t happen overnight. There are no shortcuts to get there. It’s called the long game for a reason. It takes a long time to build and set in motion.

Even better, the long game can pay off in unexpected ways.

A Surprise Benefit

Two days ago, I started a new job that comes with a whole bunch of improvements over my old job – better pay, shorter commute, better benefits, etc. I really wanted this job and even though the total time from my first interview to getting the job offer was only 2 weeks, it felt like months.

Do you remember being a kid two days before Christmas? Remember how you couldn’t stand waiting to open up all those presents and how it seemed time stood still and Santa was never, ever going to visit your house to deliver those amazing toys you were sure you were going to get?

Yeah. I felt like that for two weeks.

Then, the day before I got the offer, I was told I was one of two final candidates being considered for the position. The other finalist and I were fairly evenly matched and the employer was having a tough time making a decision. Those two days felt like years. When I finally found out I was the one to get the job, I was ecstatic. As I talked to the recruiter who placed me, I found out some more information.

The other candidate had more experience in one area than I did. What put me over the top was my professional blog. Although I was a little short in experience in one area, my new manager looked at my blog and saw that I could dig deep into the inner workings of SQL Server. I wasn’t afraid of learning new things. In fact, I welcomed it. I think my enthusiasm for the product showed. That was what put me over the top. They knew whatever I didn’t know, I would find out quickly and eagerly.

I have been writing that blog for six and a half years. Content is somewhat irregular, but (I think) is of high quality – I only post when I have something I feel is worth sharing. I have ads on the site, but I only earn a few pennies a month from them. I just blog there to put more information into the world, to share a little bit of my hard-earned knowledge in the hopes that I can help someone else. I’m playing the long game.

And it just paid off.

Wednesday, November 23, 2016

Two Reasons Why I Love Living With A Budget


In the past two weeks, I've had to have new spark plugs installed in my car and my wife decided we needed to get a couple oriental rugs cleaned before the holidays roll around. In short, two major expenses hit us within two weeks of each other.

Spark Plugs Ain't Easy To Find Anymore

I thought about changing the spark plugs myself. Remember when you could open the hood of your car and see something like this:

They don't make them like this anymore
Those spark plugs would sit right on top of the engine block, easily accessible at the end of those blue cables. Boy, things sure have changed! While investigating how to change the spark plugs on my car, I found this video and saw exactly how much of the engine compartment I'd have to take apart to do it today. That's waaaaaay outside my comfort zone. Additionally, I don't even have all the tools needed to do the job. So off to the dealer I went for this work. Total cost - about $300. (Reason #2,343,241 to get a Tesla - no spark plugs!)

Rugs Aren't Cheap Either

Getting the rugs cleaned was actually even pricier. I have a home warranty and the policy covers carpet cleaning. Unfortunately, it only covers wall to wall carpeting, not area rugs. However, they gave me the name of the contractor they use and I called them for a quote.

One rug measures 8 feet by 11 feet and the other is 6 feet by 9 feet. The difference in prices between the two were substantial: $240 for the big one ($2.72/square foot) and $162 for the smaller ($3.00/square foot).

(At this point, I briefly considered just renting a carpet cleaning unit and cleaning them myself, but given that one of the rugs cost over $2,000, I opted to stick with professionals for cleaning.)

When talking to the contractor, he told me that his company actually does the area rug cleaning for most of the other rug cleaners in the vicinity. I just chalked this up to a sales pitch, but I called another company for a quote and was given exactly the same prices, so maybe he was telling me the truth. The second company also charged extra to come to my house to pick up the rugs. The first company included that in their price.

Because I don't like to leave money on the table, I called the first contractor back and asked if, because I was referred to them from my home warranty company, they could give me some sort of discount. I figured it was a long shot, but it never hurts to ask. To my surprise, the guy said yes and gave me a quote of $350 for both rugs, a $52 discount. He said he'd like to give me a bigger discount, but since the plant where they clean the rugs is in Tucson, about a 1.5 hour drive south of me, he couldn't really go any lower. I agreed to the price and they were able to get a truck out that day to pick them up.

Budgets Save The Day And My Piece Of Mind

So in a span of two weeks, I had to lay out $650 for expenses - and right before the big holiday shopping season starts. In the pre-budget days, that would have thrown my finances into a tailspin for at least two months, probably longer.

In these days of budgeted living, I didn't blink an eye. Two line items in my budget are Car Maintenance and Home Maintenance. I had money in both of those accounts to cover these bills. No stress. No pain. I charged both items to my credit card to earn the cash back reward (effectively giving myself another 1% discount) and transferred the money from my bank account to the credit card to pay for them before I accrued any interest charges. Easy peasy.

This, more than anything else, proves to me the value of budgeting! Have any of you had a similar experience?

Wednesday, November 16, 2016

Financial Knowledge Survey Results


Four weeks ago, I asked readers to take a financial quiz that I had to take on Amazon's Mechanical Turk. I was curious to see how other people scored.

The Results

The average Road To A Tesla reader taking the quiz got about 12 of 13 questions correct. For comparison, when I first took the quiz, I scored 13 of 13 correct. The person giving the original quiz on mTurk said the average score was 7 of 13 correct. Clearly, readers here have a better financial education than the typical person. That being said, there is still some room for improvement.

Correct answers are shown below in bold. Percentages after the answer show the percentage of responders who choose that option.

The Questions

Q: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, you would be able to buy:

  • More than today with the money in this account
  • Exactly the same as today with the money in this account
  • Less than today with the money in this account (100%)
  • Don't Know
Inflation measures how prices increases over time. Because prices are rising at the rate of 2% per year and you are only getting 1% per year, your purchasing power is decreasing by 1% per year. This means you will be able to buy less after 1 year than you could today.

Q: Do you think that the following statement is true of false?: "Bonds are normally riskier than stocks."

  • True (10%)
  • False (90%)
  • Don't Know

Bonds are promissory notes issued by companies. They are basically an IOU from the company to the bond purchaser that the company will pay you back the face value of the bond plus interest over a specified period of time. They are considered safer than stocks because they represent loans the company made and must pay back, whereas stocks are just shares of the company. Stock prices fluctuate based on how much other investors are willing to pay for the company at any given moment. Bonds, on the other hand, represent a well-defined, specific return.

Q: Considering a long time period (for example, 10 or 20 years), which asset described below normally gives the highest return?

  • Savings accounts
  • Stocks (90%)
  • Bonds
  • Don't Know (10%)

 The stock market has historically had the greatest return over a long time period.

Q: Normally, which asset described below displays the highest fluctuations over time?

  • Savings accounts
  • Stocks (75%)
  • Bonds
  • Don't know (25%)

As mentioned earlier, stock prices change based on how much investors think a company is worth at any given time. Because investors' sentiments can change both often and dramatically, stocks are the most volatile investment on a short term basis.

Q: When an investor spreads his money among different assets, does the risk of losing a lot of money:

  • Increase
  • Decrease (100%)
  • Stay the same
  • Don't know
Spreading money among different assets is called diversification and the purpose is to decrease the risk of losing money. The theory is that different assets won't move in the same directions at the same time. For example, if the stock market falls, the price of gold may rise. If an investor had put money into both stocks and gold, the loss in one area may be wholly or partially offset by gains in the other. You can also diversify within one asset class - splitting your money between transportation stocks and medical stocks, for instance.

Q: Do you think that the following statement is true or false?: "If you were to invest $1,000 in a stock mutual fund, it would be possible to have less than $1,000 when you withdraw your money."

  • True (80%)
  • False (20%)
  • Don't know

This is, once again, due to the volatility of the stock market. Although a mutual find invests in more than one stock, the whole fund is still made up of individual stocks that can change value by the minute or second. As a result, the overall value of the mutual fund can also change that often. However, given the large number of stocks held in a typical mutual fund, the average price of the fund is typically less volatile then any one individual stock, as winners and loses within the fund will tend to moderate each other. Nevertheless, it is possible for the share price of a mutual fund to decrease, leaving you with less money than you originally invested.

Q: Do you think the following statement is true or false?: "A stock mutual fund combines the money of many investors to buy a variety of stocks."

  • True (90%)
  • False
  • Don't know (10%)

The definition of a mutual fund is a pool of money from multiple investors used to buy stocks of various companies. Sometimes the stocks the fund buys are limited to specific industries, such as healthcare, or to stocks making up certain indexes, such as the S&P 500. Others times there is no such restriction.

Q: Do you think that the following statement is true or false: "After age 70 1/2, you have to withdraw at least some money from your 401(k) plan or IRA."

  • True (75%)
  • False (12.5%)
  • Don't know (12.5%)
The government has rules that require you to start withdrawing money from tax deferred accounts such as 401(k)s and IRAs. In same cases you can start withdrawing money earlier, but as a rule, you must start withdrawing some money when you reach 70 1/2 years old.

Q: Do you think the following statement is true or false?: "A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less."

  • True (100%)
  • False
  • Don't know
A shorter term loan will result in less overall interest paid because you are borrowing money for a shorter amount of time. However, due to the shorter payback period, the amount of your payment that has to go towards repaying your principal (the amount you borrowed) will be higher. This results in higher total monthly payment, even though you are paying less interest. An amortization table for the loan tells you how much of each payment goes to interest and how much goes towards principal reduction.

Q: Suppose you have $100 in a savings account and the interest rate is 20% per year and you never withdraw money or interest payments. After 5 years, how much would you have in the account in total?

  • More than $200 (100%)
  • Exactly $200
  • Less than $200
  • Don't know
Because you never withdraw any money, your interest is compounded. That is, you get paid interest on interest you have already earned. In this example, after one year, you would earn $20 in interest on $100 of principal. In the second year, you would earn $24 on $120 of principal. Next next year, you would earn interest on $142 of principal, etc. As a result of this compound interest, after 5 years, you will earn more than just five times 20% of your initial savings.

Q: Which of the following statements is correct?

  • Once one invests in a mutual fund, one cannot withdraw the money in the first year
  • Mutual funds can invest in several assets, for example invest in both stocks and bonds (50%)
  • Mutual funds pay a guaranteed rate of return which depends on their past performance
  • None of the above (37.5%)
  • Don't know (12.5%)
The second statement is the only one that is correct. Some funds may charge a penalty fee if you withdraw money within a certain time period after the initial purchase, but you are always free to withdraw your money at any time. No mutual funds pay a guaranteed rate of return - if that is what you are looking for, you want a savings account or certificate of deposit (CD). And, as you always hear about the stock market, past performance is no guaranty of future results.

Q: Which of the following statements is correct? If somebody buys a bond of firm B:

  • He owns a part of firm B
  • He has lent money to firm B (100%)
  • He is liable for firm B's debts
  • None of the above
  • Don't know

Bonds are promissory notes to companies. The bond buyer is making a loan to the company. If you want to own part of the company, buy the company's stock.

Q: Suppose you owe $3,000 on your credit card. You pay a minimum payment of $30 each month. At an annual percentage rate of 12% (or 1% per month), how many years would it take to eliminate your credit card debt if you made no additional new charges?

  • Less than 5 years
  • Between 5 and 10 years (12.5%)
  • Between 10 and 15 years (12.5%)
  • Never (50%)
  • Don't know (12.5%)

Payments to credit cards are always first applied to accrued interest, then to any outstanding principal. Paying $30 per month on a $3,000 balance is paying 1% per month. Because that is the same amount of interest you are being charged each month, your entire payment goes towards paying the interest and nothing goes towards reducing your outstanding balance. As a result, you will never pay off your credit card. Typically, most credit cards set the minimum payment amount so that it includes at least 1% principal reduction, so the situation is usually never as bad as this scenario. However, it's not a whole lot better either.


How did you do on these questions?

Wednesday, November 9, 2016

Preparing For Death Requires A Lot of Paperwork!


Last week, I wrote about how my wife and I created an estate plan and living trust and the reasons behind that decision. Once the living trust has been created, you get a big folder with a lot of paperwork in it. The trust itself is still empty.

To receive the benefits and protections of a living trust, you have to actually move accounts into it. This is done by retitling your accounts out of your (and / or your spouse's) name into the name of the trust.

Moving accounts into the trust can be a simple or complex process, depending on the institution. My credit union, Charles Schwab, and USAA and have incredibly simple processes. They basically consisted of filling out a couple forms, providing copies of key pages from our trust documents, and that was it! My account numbers did not change.

Other institutions were not so easy. Scottrade, for example, could not simply convert an existing individual account to a trust account. We had to open a new trust account, then transfer funds and securities from the individual account to the trust account. This also meant we ended up with new account numbers.

Tips

If you decide to go through this process, here are some suggestions, based on my experiences:

  • Make sure your institution supports trust accounts. I found some do not.
  • If you want to open a brokerage account with margin privileges in the name of your trust, some companies (such as Schwab) require that your trust documents specify that the trustees are allowed to open margin accounts. If this is something you require, be sure you have this documented in your trust paperwork.
  • Identify the features you absolutely have to have. Do you have to have electronic statements? How about electronic transfers to / from outside accounts (ACH transfers)?  Some companies do not allow these with trust accounts.

Some Companies Have Trust Issues

Here are some of the major institutions I have contacted and their policies for trust accounts, as of the time of my writing:

Charles Schwab – Individual accounts can be converted to a trust account easily. Paperless statements are available for trust accounts. ACH transfers are available for trust accounts. They offer brokerage, checking, and savings accounts for trusts (the latter two being offered through Schwab Bank). A brokerage account comes with a free checking account. Both the checking and savings accounts have no monthly fees, no minimum balance, and don’t even have to be funded at all. So you can open a checking or savings account and not put any money in it until you need to. I ended up moving accounts from several other institutions to Schwab just because they offered all of the features I wanted.

Scottrade  - You cannot convert an existing individual account into a trust account. You need to open a new account and transfer assets to it, which means you get a new account number. Additionally, you cannot electronically transfer money into the account like a normal brokerage account. The rep I spoke with said the workaround is to use their mobile app, write yourself a check, and take a picture of it with the app to deposit it. Technically, I suppose that is an electronic deposit, but I move money into accounts on a weekly basis for my budget, so this is not a viable solution for me. I did not ask about paperless statements for trust accounts because the previous restriction ruled Scottrade out for me.

Capital One Investing (formerly ShareBuilder) – They are no longer opening new trust accounts. Furthermore, they take a ridiculously long 30 days to transfer your account to a new brokerage:

Did you catch that second sentence? "...our transfer process is a manual one..." Ranked by asset size, Capital One Investing is the ninth largest brokerage house in the U.S. with over $241 million in assets, but they still have to manually process account transfers. Something is wrong there. (For comparison, Scottrade transferred my account to a new brokerage electronically in about 1.5 weeks.) I also wasn't a fan because their electronic statements are not available in PDF format. I'm glad to be leaving them.

Capital One 360 – They do not offer trust accounts. (Not surprising, since they have the same parent company as Capital One Investing.)

Ally Bank – They offer trust accounts, but they cannot enroll in paperless statements. They do allow ACH transfers.

Synchrony Bank – They do offer trust accounts and ACH transfers within trust accounts, however, they do not offer paperless statements for trusts.  Additionally, only the primary Trustee (first person listed in the trust) has the ability to make ACH transfers using their online login. (Out of curiosity, I asked the rep I was speaking with if there was a reason why paperless statements were not permitted, given that other companies allow them. She told me it was just a bank policy. There is no federal regulation prohibiting it. She said other people had mentioned this, so perhaps the policy will change in the future.) Update: After being told trust accounts cannot get paperless statements, once I actually opened my accounts, I discovered this was not true. I have received electronic statements for my trust accounts.

Where I Ended Up

Given all these facts, I ended up moving several of my accounts to Schwab and I moved two of them to Synchrony. I was initially going to skip Synchrony altogether because they don’t provide paperless statements, but I changed my mind because of their high interest rates.

A savings account at Schwab Bank currently pays 0.1% interest. At Synchrony, it pays 1.05%. That’s ten times higher!

The accounts I am dealing with I use for saving for big ticket items, so they have a balance of around $4,000 right now. The difference in interest rates means the difference between getting $4 a year at Schwab Bank versus $40 a year at Synchrony. Even so, my impulse was to still go with Schwab because I had quite a few other accounts with them. However, by rephrasing the problem, I came to a different conclusion:

By going with Schwab, I would be earning $36 less a year. Was I willing to, in effect, pay $3 per month for paperless statements? My answer is no. Winner: Synchrony Bank.

(Update: It turns out, I can get estatements at Synchrony after all, so it all worked out for the best)

Moving assets into a trust is time consuming and paperwork-intensive. However, it is something that only needs to be done once and you end up with some nice legal protections for your heirs. You’ve already gone through the effort of creating the trust. It’s worth the extra effort to actually move assets into it.