Wednesday, July 30, 2014

Relatively Painless Ways To Start Saving

Since the 1980s, the amount of money people have been saving has been dropping. The savings rate, which is defined as how much money a person saves divided by how much money they earn after taxes, was 3.8% in March, 2014. This means people are basically living paycheck to paycheck and any unexpected event, such as an accident or job loss, could result in major hardships, possibly even bankruptcy.

A common excuse for not saving is people often think they can't save any money. If I can barely make ends meet now, they reason, how can I afford to start saving money? The truth is, you probably are spending way more than you need to and have lots of room to cut back. Do you really need that $5 Starbucks coffee every morning? Do you need to go out to lunch every day? There are dozens of ways you can save a buck or two here and there and it all adds up.

When you want to get serious about saving, you need to do one thing consistently - pay yourself first. That means as soon as you get your paycheck, pay yourself first by transferring some of that money to a savings account. Better yet, set up your direct deposit to put some of your paycheck directly into a savings account. You'll never see it, so you won't spend it.

Building An Emergency Fund

A good starting point is to save 10% of your take home pay each paycheck. That may sound like a lot, but it's really not. Get into the habit of immediately saving 10% of your pay the day you are paid. Do that consistently and pretty soon, you'll find you don't miss that extra money because you will adjust your spending. After a couple of months at 10%, increase that amount. Back when I started this, I went from 10% to 12%. That didn't really cause any hardship to me. A few months later, I upped it to 15%. At that point, I started to notice a bit of pain, so that's where I stopped

This is a good way to build up an emergency fund. Conventional wisdom is you should have savings equivalent to 6 months of expenses, just in case you lose your job or some other financial catastrophe hits. I think that's a tad excessive. I prefer a somewhat lower figure - 6 months of mortgage or rent payments, plus money for groceries. But if you go with this lower figure, do this with the understanding that, if you lost your job, you are going to drastically reduce your expenses by immediately cutting out all your other non-essential purchases - eating out at restaurants, cable TV, etc. Also, if you are part of a two income family, you may be able to get by with less savings due to the fact that it's unlikely both wage earners would get laid off at the same time. (Exception: if you both work for the same company, you both might find yourselves out of a job if the company goes bankrupt or has layoffs.)

Building Retirement Savings

If you are trying to build up a retirement nest egg, there's an even more painless way to save and increase your savings on a regular basis. In fact, if you do this, you won't feel like you are missing any money at all.

First, if your employer offers a 401(k) or 403(b) account, contribute! Furthermore, contribute enough to get the full employer match, if one is offered. The employer match is free money and you should get as much of it as you can. Then, each time you get a raise, increase your contribution. For example, if I get a 3% raise, I increase my 401(k) contribution by 1%, effective the date my raise is effective. By doing this, I still see a 2% increase in my take home pay AND I still increase my retirement savings. It's a win-win!

Wednesday, July 23, 2014

The Power Of Goals

Saving for anything can be difficult. It's hard to stay focused when all you can see of the goal is a hazy image months or years in the future that looks unattainable right now. interim goals. Sure, you have a long term goal, but to stay motivated, you should have many small goals on the way to that larger goal. If your goal is to save up enough money to buy a car in two years, it might be difficult to put away that money each month or each week. The ultimate finish line is so far off, there is a great temptation to cheat and not put away some money right now. But if you make smaller goals, say like saving a certain amount each month, or having a savings balance of x dollars in two months, you'll be more likely to succeed. Those intermediate goals provide you with the frequent sense of accomplishment you need to keep going.

I've got a degree in electrical engineering. I spent five years* being taught to analyze problems in a logical manner and come up with a path to a solution in discrete, small steps. I love checklists. I get a big sense of accomplishment working through a list and knocking out the items one by one.

*I took a tad longer to get my degree than normal - my first years in college were pretty fun.

So it makes sense that I also love goals. I'm finding I really love asset allocation as well.

I also love Fridays. It just so happens that my wife and I get our paychecks on alternate Fridays and because I'm the one that handles the finances in our household, that means every Friday I get to take a fresh batch of money and dole it out amongst our bills, savings, and investment accounts.

Oh, and I also like Fridays because they're the start of the weekend. But mainly that first thing.

I know getting the money for my Tesla is going to take years. I need to stay motivated (or motorvated, if you're into puns or motorin', if you're into Night Ranger). To that end, my computer wallpaper is the first image in the slide show on the home page of this blog. I routinely read websites and stories of Tesla owners to keep the fire burnin'. My monthly goal update posts provide another motivation. But I'm looking for one more motivation. Right now, I'm thinking of that Percent Of Goal number on my goal progress page. A good monthly goal would be to increase that by 1% each month.

I'm not sure about this though. First, that's a tough goal to reach. That would require saving over $1,000 a month, which would impact other things I am saving for. It also provides a quick way to determine how much longer I have to save - one percent equals one month. While this may be good later on, right now, at 95% remaining, it's somewhat depressing. That's almost 8 years. I'd like to reach my goal way before that. (Truthfully, I probably will, thanks to compound interest, but still...)

So I don't know what another good interim goal might be. Any suggestions?

Friday, July 18, 2014

Elon Musk Donates $1 Million To Build A Tesla Museum

I've written previously about the Oatmeal comic about Tesla. If you visit that page, you'd also find out that the creator of the comic (also a Tesla owner) has been trying to get a Tesla Museum built He raised enough money to buy the land where Nikola Tesla's former laboratory stood. Unfortunately, building an actual museum would cost a lot more than just the land (due to a lot of environmental cleanup work that needs to be done to the property), so he still needed to raise more funds - he estimated about $8 million. Elon Musk, who previously donated money to buy the land, has now donated $1 million to build the museum. He has also pledged to install a Superchager on the site. Awesome!

Wednesday, July 16, 2014

Money Saving Tips For Cruising

I recently got back from a week-long Alaskan cruise with my wife and daughter through the inside passage. We had a great time! Alaska is some amazingly beautiful country! This was our third cruise and I think we've got the hang of how to make things go smoothly now. I've also discovered some tips that can save you some money!

All these tips apply to Holland America cruise lines, which is the line we cruise with, but they may apply to other lines as well.

Look For Deals Giving Shipboard Credit

One of the reasons I like cruising is that all your meals are included - buying three meals a day for your whole family while on vacation can be a significant expense. (In fact, there's so much food available on cruises, you'll likely gain weight if you re not careful.) While that sounds good, what new cruisers may not realize is that the only drinks that are usually included with your cruise fare are water, coffee, hot and iced tea, and lemonade. Soft drinks are $1.95 per can plus a 15% gratuity that is automatically added. Wine is also sold by the glass and bottle. Mixed drinks range from $5.95 to $9.95 each and those have a 15% gratuity added as well. If you are a person that is addicted to soda (or alcohol), this can add up really fast. It's also difficult to keep track of your spending because your room card doubles as a charge card. Each time you order a drink, you present the server with your card. You'll get a receipt, but who looks at those? At the end of the cruise, you'll get a big bill with all your charges on it and when you see what all your drink charges add up to, you can be in for quite a shock.

Booking Deals

Many cruise lines offer booking specials that include shipboard credit. This credit will help offset any charges you make while on the cruise. When we purchased our tickets, we got a $125 shipboard credit with our package. The cruise lines run specials featuring shipboard credit all the time. For example, when we were on the ship, they were running a special where if you put a deposit down for your next cruise while on the ship, you would get a $600 shipboard credit on that future cruise.

It makes sense, then, to try to maximum your shipboard credits. Cruises are typically booked a year in advance, but once you book yours, keep watching the specials the cruise line offers. When we first booked our cruise, we got a promotion that included $100 a day per person for use on wine and cocktails. My wife and I aren't big wine drinkers, so we probably wouldn't have used all of that credit each day, but that was what was offered, so we took it. Several months later, I noticed a new promotion where you could get $125 shipboard credit plus a reduced fare for a third passenger (which was our daughter). So we called our travel agent and we were able to switch to that package. I continued to watch the prices and found the per-person cruise price kept dropping. Each time it dropped, my travel agent was able to get us the lower price and still keep the shipboard credit promo. All in all, the price of our cruise ended up dropping over $1,000 between the time we made the reservation and when we actually had to pay in full (about 2 months before departure).

Stockholder Deals

That's one way to get shipboard credit. I discovered another method that isn't often promoted. For certain companies, if you own at least 100 shares of the company stock, you are eligible for some credit. In my case, if you own 100 shares of Carnival Cruise Lines, which owns the Carnival, Princess, Holland America, Costa, Windstar, Seabourne, and Cunard cruise lines, you are eligible to receive either $100 or $250 in shipboard credit, depending on the length of your cruise. You just need to show proof of stock ownership to the cruise line. (Royal Carribean offers a similar program.)

Now, I don't really want to own stock in a cruise company. That's not a sector I wish invest to in. Furthermore, when I first found out about this program, it was about 1 week before Carnival Cruise lines was going to release their quarterly earnings, a period which typically features volatile short term stock price fluctuations. So I came up with a method to get my $100 credit for owning stock with minimum risk on my part. I bought 100 shares and the next day, took a screenshot of my account showing I owned the stock. My trading commission is $7, so to buy and sell the stock, it would cost me $14 total. Right after I took my screen shot, I put in a limit order to sell the stock when it went up $0.14 over the price I bought it for. That would cover my commissions and I would break-even on the trades. At the time, the stock was trading in a range of about 50 to 75 cents, so my sell order had no problem getting executed. I sent the screen shot to Holland America and they gave me my $100 shipboard credit. So I basically got $100 for free! (Actually, I forgot to account for the SEC fees charged when you sell a stock, so I really paid about $0.07 for $100 in shipboard credit - still a good deal!)

Look For Unused Drink Cards

There is one more trick I have heard about, but did not actually work for me. On the ship, you can also purchase drink cards. These allow you to buy drinks, including soft drinks, at a reduced price. The catch is that you have to go to a bar to use them  - you can't give them to a waiter. Sometimes people do not use all the credit on their cards and, because they are non-refundable, at the end of the cruise, they are not useful to the purchaser any more. What some people do is stick the card in the bible that is the drawer in their stateroom. This way, the next person getting that room can use it. The bible in my room didn't have one, but it's worth taking a look when you board.

Getting Improved Service

Most cruise lines now include a daily "hotel fee" on their cruises. This fee, which amounted to $15 per day on my cruise, is another forced gratuity and is split between the people that service your room, the wait staff in the restaurants and bars, and any other people you would normally tip for service. This means even if you don't spend a dime on the ship, you're still going to be hit with a bill at the end of the cruise. So again, it pays to try to maximize your shipboard credit.

The Two Dollar Bill Trick

I will say that the service, at least on the cruises I have been on, has been very good, and I have no problem paying the hotel fee. But you can always tip more and one of the best tricks I have seen is this: tip using two dollar bills. I did that this trip and the effect was amazing!

First off, $2 bills are rare. This means whenever you hand one out, you are likely to make an impression. The point of tipping is to get better service, so you want to be remembered. Also, it's not a huge amount of money, so you can be fairly generous in handing them out. Within hours of boarding the ship, I had given one to the attendant who serviced my room. (They bring your bags to your room and introduce themselves when you board.) The service I received from that guy for the rest of the trip was amazing - even better than the already good service I've received from the room attendants on my previous two cruises. At the end of the cruise, I gave him several more for his work.

I should note that the use of two dollar bills seems to be a somewhat controversial practice. If you read some cruising message boards, a few people claim the workers have a hard time spending or exchanging the bills in foreign countries because some people think they are fake. I've also seen reports that people think two dollar bills are unlucky - but I've also seen people claim they were lucky, so who knows. Personally, I feel there are enough American people working on the ship that getting rid of them shouldn't be an issue. I believe the front desk on the ship even offers a currency exchange service and the folks running that should definitely know they aren't fake. And the last two cruises I went on originated from or stopped in American ports, so spending them off ship shouldn't be an issue.

There you have it. I know cruising isn't for every one, but if it's for you, use these tips to save yourself money!

Now it's time for some gratuitous vacation photos.

We started our trip in Vancouver, Canada and saw this Tesla charging at a public charging station at Stanley Park.

Here's our ship.

Lots of mountains and glaciers!

Wednesday, July 9, 2014

Goal Progress: End of June 2014

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last update: End of June, 2014
Current value: $6,159
Change from last month: + $409
Percent of Goal:  5.66%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month: About half of my gains this month came from more sales of some limited edition books on eBay. A little bit came from some cash I got for Father's Day. Not much else of note happened in June.

Tuesday, July 8, 2014

Buy A Triplex, Get A Tesla

If you're in the market for a $6 million triplex in Brooklyn and also likes Teslas, this guy has a deal for you. Get a free Model S when you buy his triplex!

Wednesday, July 2, 2014

The Hidden Cost Of Mutual Funds

I want to talk a bit today about a little noticed figure in mutual fund reports that most people don't pay attention to but that can affect your return in a large way, especially over time. That figure is what is known as the Expense Ratio and it comes in two varieties - the Gross Expense Ratio and the Net Expense Ratio.

There are many ways to own mutual funds, but probably the way most Americans own shares is through their 401(k) or 403(b) retirement plans offered by their employer. These plans usually offer a limited number of mutual fund choices to invest in and you as an investor are stuck choosing from those options offered to you. The choices may or may not be to your liking, but given that investing in a retirement plan is more or less a requirement in order to have some semblance of financial security in your elder years, you might as well try to pick the best of what may be a bad lot.

When comparing mutual funds, many people look at the funds' past returns, although, as the legal warning goes, past performance is no guarantee of future results. Companies like Morningstar and Lipper also offer mutual fund ratings and analysis services. By now, almost everyone knows that fees of any sort are bad. As such, most mutual funds have eliminated them and are technically "no fee" funds. Here's an example of some of the funds offered by my company's 401(k):

No fees sounds awesome! There must not be any costs to me if I invest in these funds! Whoa there, Tex. Not so fast. If we scroll over further in that chart, we come to the last column:

These funds may not charge fees, but they do have expenses. Mutual funds are required by law to disclose the gross expense ratio to you. There is another expense ratio, the net expense ratio, that they are not required to disclose. Of course, the one that is not required to be disclosed has a more direct impact on you.

What's The Difference?

From the Motley Fool Wikipedia: "The gross expense ratio of a mutual fund represents the cost of running a fund as compared to the profit earned by the fund. Gross expense ratio figures consider all of the expenses of a fund, including administrative and accounting costs and fees associated with investments made by the fund."

Net expense ratio is "the gross expense ratio of a mutual fund minus acquired fee funds and any fee waivers or expense reimbursements made to investors by the fund. Acquired fund fees constitute the costs, such as the expense ratio, of mutual funds or similar securities and commodities in which your mutual fund invests."

So the net expense ratio is typically less than the gross expense ratio because many mutual fund companies waive or reimburse the fund for some of their expenses in order to keep the expense ratio low. This is because funds with high expense ratios won't attract many investors. If you look at reports on mutual funds, you'll often see these figures reported. For example, here's a section from a mutual fund report by Lipper:

You can see that the net expense ratio is less than the gross expense ratio. This tells you that the mutual fund company is waiving some of their fees. In fact, you can see they have a contractual expense waiver in place until 3/31/15, when it expires. It may or may not be renewed. We don't know. So, potentially,on April 1, 2015, investors in this fund may suddenly start being charged more.

Now compare this to a mutual fund that mimics the S&P 500:

Index funds, or mutual funds that seek to mimic a particular index, in this case, the S&P 500, are typically cheaper than actively managed funds. This is because there's no research involved. The fund just buys stocks that make up whatever index it is emulating in the same percentage they occur in the index. You can see the expense ratio is almost a full percentage point less than the earlier actively managed fund. There is no 12b-1 fee, which is a fee charged by the fund to advertise the fund and to pay commissions to brokers who sell shares of the fund.

So What Does This Mean To Me?

You pay the expenses for a fund when you invest in it. If you have Fund A that has a 5% return and a 1% net expense ratio, your return on the fund is 4%, because the fund takes 1% for operating costs. Note that these operating costs are charged even if the fund loses money. If Fund A dropped 5% last year, your investment actually dropped 6% because the fund still took it's cut for expenses.

You can clearly see there is a direct connection between the expenses of a fund and your return. If you are not careful and only look at a fund's return figure, you're not getting the whole story. In reviewing the funds offered by my company's 401(k), I found the expense ratios ranged from a low of 0.50 percent to a high of 1.7%. That's a 1.2% difference. Not that much, you say? You're forgetting about the value of compounding over time.

Let's look at a $50,000 investment in two funds over a period of 25 years. One fund returns 5% and after 25 years in that fund, that investment would be worth $169,318. Another fund returns 3.8%, or 1.2% less than the first fund. After 25 years, that investment is worth $127,029. That extra 1.2% that you don't pay in expenses add up to an extra $42,289. To put it another way, you'd get an additional 84% of your original investment amount by choosing the lower cost fund!

It's worth your while to take a look at your current 401(k) or 403(b) investment options now and see what sort of expense ratios you may be paying.

By the way, there is an awesome mutual fund comparison tool at the Financial Industry Regulatory Authority's website at Select up to three mutual funds, an investment amount, return rate, and time frame and the site will show you the difference in costs and values of the funds.