Wipe out Telemarketing Efforts!

Sick of flipping away from a great conversation only to find that the person on call waiting is yet another telemarketer? These companies always call precisely when you're least inclined to listen -- just as you're about to open that special bottle for a dinner, or when you've finally dozed for a rare nap. I don't know one HMW who is interested in these unsolicited and bothersome interruptions, and thankfully, they're easy to stop!

Simply register your telephone number(s) online at the National "Do Not Call" Registry or call 1-888-382-1222. If you continue receiving calls, you can file a complaint. Or, I find that a firm reminder that "I'm on the 'Do Not Call Registry'" does the trick.

Credit card offers are another noxious pet peeve. They're endless, a waste of paper, and in many ways, they're worse than telemarketing calls: some HMW fall prey, figuring they might as well sign up "just in case", or worse yet, they're stuck in a cycle of transferring balances from card to card in search of a "better" rate (versus addressing the root of the problem which is too much credit card debt and no real plan to conquer it).

Just as you can opt out of telemarketing calls, you are henceforth empowered to end the credit card offers! Simply fill out this online form, making sure to choose "opt out" -- it defaults to "opt in" (sneaky, but not sneaky enough for a HMW). This will free you of credit card offers for five years, a rather good deal considering it takes about 50 seconds.

Now go out and celebrate with a nice box o' Chardonnay! Yes, you heard me right. I was recently judging at a wine competition and had the pleasure of trying a Black Box Chardonnay from a well, box. It's a slim cardboard package with a tetra-pack (think of a bladder in a Camelback) filled with four bottles of wine. It stays fresh weeks after opening (as if wine ever lasts weeks at my house). And for the environmentally inclined, produces less waste. Best of all, it's $20 for four bottles! Every night can't be a Burgundy night!

The B Word

You likely have to deal with the B word at work. Those of you in the for profit world are quite used to cutting, measuring and arguing for them at least annually. And those of you in the non-profit world are likely blaming Bush or some other "mean" Republican because you had "cuts" and will therefore, like every other business, have to pick your priorities.

Figured it out yet? Today's post is about BUDGETING! Are you pumped yet? I'd guess that somewhere around 80 to 90% of LMF4HMW readers don't have one. (And that's probably a conservative guess.)

Would you run a business without a budget? Of course not, that would be irresponsible! Then is there even one good reason to run your life without one? (Unacceptable excuses: "I don't feel like it." "I hate money talk/numbers/finance." "I'm suddenly coming down with the flu.")

I'm not suggesting that you spend an hour creating a budget, but I am pleading with you to give it 20 minutes of your time. Hell, you're the one producing the revenue. You should at least know where it's going! This can be done in a few simple steps:

1. Write down your monthly cash inflow --"revenue" from your job(s), etc. (Assuming this is net or after you've paid taxes, contributed to your 401k, etc.)

2. Write down your fixed monthly expenses -- rent/mortgage, car payment, school or other loans, car and renter's/homeowner's insurance and dues, utilities, etc.

3. Make a list of your other monthly cash outflows -- gym membership, cell phone, gas, groceries, maid services, beauty appointments, credit card payments, etc. (Being online with a recent bank account statement is helpful at this point.)

4. Record any other outflows you've forgotten -- think hard! There's always more. Restaurants/bars, trips, gifts, investments, etc. These are obviously dynamic expenses but a good estimate is better than nothing.

5. Add outflows from #s 2-5 to get your total monthly cash outflow.

6. Subtract your total monthly outflow from your inflow.

If you have a positive number, congrats! (You're still not done, but you can go open a bottle of Syrah -- I had an awesome one from Melville last night.) If you are staring at a negative number, the good news is that you're about to take your first step in turning this into a positive one. The reality (not calling it "bad news" because whining about it doesn't help) though, is that you have to make some hard changes. NOW.

The easiest place to start is the items you recorded in #4. I love dining out, but it's a very fast way to lose $100! (Your thing might be shopping or an expensive activity.) If you've cut all of that or you didn't have anything there to cut, move to #3. Do you really need two gym memberships? Maid service? Two facials a month? Get the final #6 positive.

The point is, you need to determine how much you can spend and stick to it. Everyone's number will be different. It's all about prioritizing.

In taking control of the situation, you gain power. (And likely better shut eye.)

PS - Be sure to revisit this at least annually -- a good time is when you have your work review and hopefully get a raise. Put it on your calendar. You owe it to yourself. Being in control of your pursestrings is hot!

Feelin' Shaky? Then Lay Off the Media and the Caffeine!

William Bernstein, financial theorist and author of The Four Pillars of Investing, said it best in a CNN Money website article, "Calming Words for Troubled Times":

"Get out of the market? Of course not, silly. If you think about it logically, you are rewarded for owning stocks precisely because they are risky; the dicier things look, the more money you can expect to make in the long run...History bears this out: The lowest returns were earned by buying high when there was a lot of blue sky - think 1928, 1969, 1999. And the best returns were earned by buying low in 1932, 1942 and 1982, when it looked like the whole world was going to hell. One more thing: Stop watching CNBC. It will make you stupid and poor. If you must watch, turn off the sound. It becomes an excellent substitute for Animal Planet."

A LMF4HMW reader surely doesn't lose the irony between his "calming words" and the title of the piece still promoting the idea of "troubled times". The main point of my article today is to calm your fears. The sky is not falling. We do not need more government intervention. And volatile markets are normal.

Let's face it -- the sensationalism addicted media is bored right now. Calm, positive news just doesn't sell stories. We've had to put up with political coverage for the 2008 election since about 2006, so even the talking heads are getting sick of it. There is some success in Iraq given the troop surge (although you won't hear much about it given the agenda), and there haven't been any lacrosse "scandals" (the real scandal was the media's biased treatment of the issue) of late. So when you've got to sell ad space -- i.e.: FREAK OUT about something, it might as well be the economy!

In one of my first posts, I talked about putting together a long-term financial plan. Successful investing is not about derailing your efforts because you heard some bad news or have an icky "feeling". Just as a rock hard body is crafted by shunning impromptu scoops of Rocky Road in favor of your training plan, a strong portfolio is made by adhering to your strategy.

So instead of being glued to the tube or "news"paper in awe of all the ills of the financial markets, take some advice from mother, who always knows best: "Turn off that television! Go play outside!"

A Letter to my Econ Prof. Just in Time for Tax Season

Dear Professor XYZ,

I have something I need to confess: I didn't really understand what you were talking about ten years ago when I sat in your Macroeconomics class and you said, "One dollar today is worth more than one dollar tomorrow." And worse yet, I didn't give a hoot about economics -- a friend told me you were a great prof, that it was good material, and that she'd help me (thanks, Liz!) so I signed up.

Of course, now I wish I'd been able to fully grasp the course content. I tried -- you had a photographic memory and would've noticed if I'd skipped class even one class. I studied hard, too. I think I received a B (you'd surely remember), but the material just didn't completely click. The main problem was that I had no real world experience with which to compare the concepts you presented. So I had to go and spend $40k to get an MBA with a finance concentration and literally force feed finance into my brain.

Now that I know more, I really appreciate what you were trying to do. All those graphs and charts with supply and demand make sense now; I get it! The only problem is, most people walking around (and voting... grr) don't, but I digress.

Please find below my blog on Time Value of Money, which is dedicated to you. (Just sorry I can't remember your name, especially since I know you'd remember mine.)

Yours,
LMF4HMW blogger

***********************
Perhaps you've heard it to: "One dollar today is worth more than a dollar tomorrow." OK, sounds reasonable -- I'd rather have a buck today than tomorrow. I'd rather get paid today than tomorrow. (I'd rather buy the Brunello today... oops, not really, that would put me in the hole $100 :) Do you really understand the concept? And more importantly, why you should care?

The concept, Time Value of Money, is a basic premise of modern finance. In asserting that today's dollar is worth more than tomorrow's, we're making a valid estimate that by having the money today, we could accrue interest until tomorrow, next year, etc. It is an important concept because it affects the way you operate financially. We all know we want to pay lower interest rates on loans, and that we'd prefer a savings account or investment with a higher interest rate. This is also due to Time Value of Money.

In honor of tax season, let's examine a hypothetical duo of Janes and their differing approaches to paying taxes as an example:

Note: Jane is a single woman.

Jane Doe - like many of us, she wrote "1" (self) on her withholding form some time ago. She received a $2000 tax refund and is happy about it! Thrilled, actually, as Ms. Doe figures she would've "spent it anyway" and is glad to use it to pay down $1500 in credit card debt and treat herself with the rest.

Jane Duh - Ms. Duh set her exemptions appropriately when she started her job a few years back and knows she'll need to adjust them when she buys a condo in the next few months given the mortgage interest rate deduction. She's only expecting a minimal refund check, and is also thrilled.

Which Jane should be feeling thrilled right now? Hint: "Ms. Duh" ain't no dummy.

Confused? What's wrong with getting a fat refund?!! It's like finding $20 in your pocket, but better, right? NO. Why? Time Value of Money: Ms. Doe unknowingly gave Uncle Sam a $2000 interest-free loan in 2007. If she'd invested it like Ms. Duh in a money market account offering 5% interest, she'd have $2100 right now. The object of the game is not to overpay.

Note that it's unrealistic to assume that you'll net out at zero. Ms. Duh's "perfect score" of owing nothing and receiving nothing is for illustrative purposes only. What's important is that you examine your withholdings to get them to the point where you will either receive a minimal refund or even owe Uncle Sam a few bucks. Better him giving you an interest-free loan, right?

PS - what goes better than milk with Uncle Sam cake? Prosecco! It's affordable, light, sparkles and can handle a bit of sweetness.

Index Funds! Love em!

As I wrote in my last post, index funds are my favorite thing finance. I just love em! Almost as much as I love newfer puppies!!! Why do I have such amorous feelings about something that's neither cute, nor fuzzy? Well, for one, index funds don't slobber. And two, they're relatively cheap (unlike $2000-$3000 newf pups).

Index funds are, in general, super investments. They are low cost mutual funds that track an index. What does this mean? Well, let's take my favorite, since today's post is all about faves: MSCI EAFE. This is an index created over 30 years ago by Morgan Stanley that provides broad international stock exposure -- it tracks major stocks in Europe, Australia and the Southeast Asia. (Remember, the US comprises less than 50% of the world's equities, so getting international exposure is crucial. Think BMW, Diageo, Loreal, Barclays, etc.)

Instead of having to buy a few shares of stock for each of these companies in the index, which would be incredibly time consuming and expensive, you buy the index. This means you're diversified at a lower cost. So you don't have to worry about trading or following the individual equities -- HMW are way too busy for this, and you don't pay high fees. Vanguard, I-shares,and other investment companies offer index funds that track EFA, and because there isn't a big research fee given that they're just buying the index, the cost savings is passed on to you in the form of a lower management fee. Expect to pay somewhere around 0.25% total expense ratio, which is a great deal considering that a lot of international funds charge over 1%! Each tenth of a percentage point you save in fees is therefore allowed to grow as the investment, which means more money in your pocket.

Look for index funds in your 401k -- companies are starting to offer them. And if they're not available, put in a call to your benefits department and request that they be added next time the plan is reviewed. If you have an IRA or taxable account, you'll be able to buy them there.

So that's it! Pretty quick post. Enjoy!

P.S.: The one "downside" to index funds is that you'll never beat the market. You'll just track it net of the (low) expense ratio. Know that the vast majority of folks don't ever beat the market, and in fact trail it given HMW sins like excessive trading, letting emotion dictate strategy, etc. I'd be very suspect of a broker or hot-shot who tries to steer you away from index funds! Unless of course it's Warren Buffett calling. In short, index funds are fabulous -- they're cheap, diverse and guaranteed to track the market. All you have to do is buy them!

Coming Back from "Vaca" with a Fee Rant

Well, it was sort of like a vaca -- in the last four weeks, I've managed to buy a house, form an LLC, and drive all night with two pets to my new (much more efficient and less expensive) home state of Washington!

I certainly don't want to offend all of my California-based friends, so I won't rant about the insane taxes there. Let's just say that forming an LLC will set you back $800 in the Golden State and run you $195 a couple of states north, and leave it at that. I'm already saving money, and you know how much that pleases a LMF4HMW! And yes, one of the major deciding factors in our move, other than my fiance's company so generously paying for all of our related expenses and packing, was the lifestyle change -- i.e., lower cost of living and opportunity to own a home. (More on that later -- those mortgage deductions are pretty fab.)

How does the above diatribe help other LMF4HMW readers? Well, it doesn't. It's a lame excuse for why I haven't written in a month :)

Let's get down to business. Today's post is all about fund fees. (These are the funds you pick in your 401k.) 401k fees are typically two-fold: 1) particular mutual fund's management fee or more generally, expense ratio; and 2) administrative fee for the plan. Unfortunately, there's not much you can do about the latter -- it's either take it and revel in the many benefits of a 401k (tax, growth, auto-pilot, etc.) or be very silly and not invest. Unless you're involved in the benefits department and can therefore rightly search for a lower cost plan for your company!

So we'll tackle the fee over which you do have some control, the expense ratio! The expense ratio is the percentage of money invested in the fund that goes to running it. Typical annual expenses include research, taxes, office costs, etc. and of course the monies paid to the fund manager (people in the business aren't prone to staying at Best Western and eating at Denny's). They typically range from a very low less than 0.25% for domestic index funds up to 2+% for emerging markets funds. Some funds market themselves as "low fee"; others as "high return" (usually higher fee). How they're contrived is not an exact science. (Sounding a bit like calculating the AMT, right?) Actually nowhere near as confusing, as again, you hold the reins here!

The fund manager's job is to make money. Your job is to choose an appropriate funds with relatively low expenses. While you'll only have a slightly greater chance of success calling the Vanguard or Dodge and Cox manager and asking him to lower the fee than say, getting customer service from a cell phone company, you do have the option to choose which funds in which you invest. And fees are a major consideration! The more dough lost to fees, the less your money will grow.

So look at the fund's prospectus (it'll be online) and search through the several pages of "blah, blah, blah" until you see "total expense ratio". This is the metric with which to compare the funds up for grabs in your 401k. Note: some of them will have a whole host of other fees like 12b, etc. You focus on the TOTAL expense ratio.

Ideally, you want a fund that's beating its benchmark -- the index to which it compares itself, net of fees. This means that the return from investing in the fund is better than the benchmark index even considering the monies paid out for expenses. If none in the group do so, choose the closest options.

Do I seem like a stickler? I am! There's just no reason to invest in a fund that isn't beating its benchmark net of fees. Why? Because a lot of you are lucky enough to have index funds, my absolute favorite thing finance. And the topic of my next post!

P.S. - do not be surprised if none of the funds available beat their index benchmarks. One of my most interesting reads in a Portfolio Management class was a research article hypothesizing about whether it's 40, 70 or 90 percent of actively managed funds that do not! Let's just say the finding was on the high end and open a bottle of Chateau Neuf du Pape, a blend of up to 13 different grapes that hails from the Southern Rhone in France, in honor of this weekend's Rhone Ranger's festival in San Francisco!

AMT - The Assinine Mother of all Taxes

In the great words of my high school cross country coach, "I'm so mad I could fry eggs on my head!!!" Why such "negative karmic energy" on a sunny Monday? The Alternative Minimum Tax, one of the most egregious problems with the US Tax Code.

Interestingly, a look on Investopedia, normally one of my preferred finance sites, only tells you that AMT is a "tax calculation that adds certain tax preference items back into adjusted gross income... designed to prevent taxpayers from escaping their fair share of tax liability by using certain tax breaks." Hmm, that's pretty benign for a tax that was enacted in 1970 that has NEVER been indexed for inflation nor tax cuts!!! Live in San Francisco, Los Angeles, New York or any other ridiculously expensive city? Doesn't matter. We all know $75,000 is San Francisco is much different than $75,000 in Topeka, but the lawmakers just can find the time between MLB steroid investigations, holding babies, and flying around in their not-so-carbon-neutral jets (emulating Al Gore) encouraging everyone to vote for "change" (them).

I digress. The AMT is a separate tax code that was created to prevent tax payers from escaping their "fair share" (note: I get really prickly anytime the words "government" and "fair" are in the same sentence) by disallowing the majority of deductions. It is, quite literally, an alternative set of rules for the minimum amount you'll be paying the federal government. When it was enacted some forty years ago, it affected 19,000 people. Now millions are paying it. If you normally owe $47,000 and your AMT calculates to $57,000, you'll pay the $47,000 plus the additional $10,000.

The rates vary between 26-28% as opposed to the regular 10-35%. The main issue is that most deductions are lost under the AMT, including property tax, state and local taxes (enormous in states like CA and NY), unreimbursed business expenses, etc. (You do "get" to keep mortgage interest and charitable deductions, but this doesn't help those of us living in areas where you need $800k for a 1200 square foot flat with no parking.)

Confused yet? Don't feel bad -- I can't help you with the sick feeling, but I can tell you you're not alone: most politicians couldn't explain it to you either (shocker). Another big issue is how complicated it is for you, me, and your accountant. There's no magic number to say, "sorry, you're getting screwed by AMT this year," only "triggers" like having dependents, deductions, etc. With $75,000 income, you begin to be a prime target. And if you're married making $100,000 together (really not that hard to do, especially in bigger cities), you're definitely getting screwed. Since I'm tying the knot in May, I'll be paying even more AMT -- funny, I didn't put that on my registry?!!

If you'd like to read more, here's an informative article... I just threw up in my mouth so I need to stop soon.

On a brighter note, here are some things you can do to better your situation:
1. Contribute the max $15,500 ($20,000 if you're over 50) to your 401k as it minimizes your taxable income.

2. Be sure to write off any charitable donations. Tell your accountant to give you an estimate of your AMT and perhaps choose to donate more to avoid being hit.

3. Consider buying property versus renting. While this isn't for everyone, it does help.

4. Ask you boss for a huge raise! If you make over $500,000 single or married, you're no longer subject to AMT.

5. If you're the political type, consider writing your Congressmen and Senators and encouraging them to reform AMT or better yet, ditch it all together and get on the Steve Forbes flat tax wagon. (I'm in SF and I'm pretty sure Nancy Pelosi, Barbara Boxer and Diane Feintstein -- my three least favorite women, have blocked my mail. Another shocker: given their situations/ incomes, none of these b*tches pay the AMT.)