Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for the 'Saving and Investing' Category

ING Bus Advert

Creative Commons License photo figure credit: CarbonNYC

This week I received a letter from EverBank, which is where our checking, money market, and some CD accounts are held.  We’ve banked with EverBank for a while now and have been happy with its services.  Until now.  The letter that I received indicated that EverBank will now start charging $8.95 for BillPay, which used to be free.  The catch is that it’s free if our account balance (daily average) stays above $5,000 for the month.  The letter also indicated that an account maintenance fee of $8.95 will also apply to any money market accounts with daily average balances below $5,000.

I wrote previously about how bank fees are for poor people.  It seems that the definition of poor just broadened, at least according to my previous assessment.

We generally keep an average balance in our money market account of over $10,000, and previously we had been keeping a $1,500 balance or more in our checking account.  What this new fee means is that in order to keep BillPay free, we’ve got to forgo some increased interest rate on an additional $3,500 monthly.  Because of dismally low interest rates, the lost interest on that $3,500 amounts to just $1.87 per month.  But if when interest rates go back to where they were 2 years ago, this difference rises past $10 per month.

It looks to me like we have two options here: we can increase our balance in our checking account to meet the new minimum requirement — effectively costing us $1.87 per month at this point, or we can find a new bank to take care of our BillPay services.  I did some investigating for the latter option.  Rather than having to open a new bank account somewhere, I looked at banks where we are already customers.  The most appealing of these was our ING Electric Checking account.  By simply cancelling our BillPay service with EverBank, we will avoid the fee and be left with the ability to write checks on the account.  Our Electric Orange account will take care of paying all of our bills.  Since our EverBank accounts are already linked to our ING accounts, it will be trivial to switch our BillPay services over to ING.  All that will be required will be to replicate our Payee list and set up some automatic monthly transfers.

While $1.87 is not that much money, just over $22 per year, to me it represents a gradual erosion of my wallet.  We already pay so much money monthly for everything that we have.  If we simply accept EVERY $1.87 increase in cost for things, eventually it’s going to add up to a lot of money.  I’m inclined to stand on principle here and close our checking account with EverBank.  On the flip side, if I closed every account at a bank that irritated me somehow, all my money would be under my mattress (it’s not, by the way, so don’t look there…).

What do you think?  How far would you go to avoid a small fee?  What size fee is too big of a fee for you?

That's all that's left!

Creative Commons License photo figure credit: pfala

The May issue of Money Magazine has an article with poll results about how people have been changed by the current financial crisis.  The results seem to indicate that there will be many lasting effects of the crisis in much the same way that the Great Depression changed the relationship that almost all of its survivors had with money.  Savings rates are up, consumer spending is down, and people report that they value their families more and money less than they did before the crisis started.  If this is the case, maybe the crisis isn’t such a bad thing?

From the poll:

  • Nine of 10 respondents said they have changed the way they manage their money as a result of the economic crisis
  • Seven of 10 said their priorities are shiftng as well
  • A “whopping” 94% said the recession will have a lasting impact on the way they handle their finances

Naturally, I started to think about whether and how the crisis has affected how we deal with money.  I think that the basics of our money management system have not changed.  We still make monthly contributions to our Roth IRAs, put aside some money for charity, add to our emergency fund, and plug away at our car loan, business loan, and mortgage.  Because we are relatively young, we continue to invest most of our retirement money in stock market index funds (which have gained 30% in value over the last month, by the way…) diversified across a number of different global markets.  Our monthly contributions are taking advantage of dollar cost averaging.

After ScrapperMom’s layoff in October, however, I became far more concerned about how long we could get by with no income — i.e. the size of our emergency fund.  Currently all of the money that’s technically allocated for emergencies gives us a 3.75 month buffer (up by 1.45 months since August) and 4.9 months of savings if you count all of our cash on hand.  This is still a pretty nice cushion, but in a tough economy it could take a year to find a job to support our current lifestyle (see Avoiding Lifestyle Inflation to keep yourself out of this situation in the first place).  It took me 9 months to find work after the terrorist attacks of September 11, 2001.  Few places were hiring at the time simply because of uncertainty.

So, if anything has changed in the last 6 months in the way we deal with our money, it’s that we have been putting more of an emphasis on building a larger emergency fund and lowering our fixed monthly expenses.  Little by little we have been socking away more money to roll into our emergency fund CD ladder.  At the same time, we have been paying down the debts that require us to make monthly payments, such as our business and car loans.  Once these debts are paid off, then the “size” of our emergency fund will “grow” overnight by virtue of the fact that the same money will last longer should the need arise when we have fewer monthly obligations.

What about you?  Have you changed the way you deal with money since the beginning of this crisis?  Have you changed your investment strategy at all?  If so, how?  If not, why not?

Irrational Bins

Creative Commons License photo figure credit: “Irrational Bins” by MousyBoyWithGlasses

I finished up the preparation of our tax return today, and as you know, we are getting a sizable return.  In fact, I can’t ever remember having to write a check to cover any unpaid taxes for the year.  What bothers me, though, is that the government has been getting free use of my money all year.

I like to preach that people should strive to break even at the end of the year, or even owe a little bit rather than getting a refund.  In this way you’re not leaving your own money on the table in the form of bank interest or investment returns that you could be seeing — or better yet, having free use of some of the government’s money all year long.  This advice tends to fall on many deaf ears.  It seems, shockingly, that people like to get tax refunds and hate having to write a check to the government.

Many people have told me that a tax refund at the beginning of the year is a form of forced savings for them.  I tell them that they should adjust their withholding and then set up an automatic monthly or semi-monthly deposit to their high interest savings account of choice.  They tell me that they fear they just don’t have the discipline to keep up with something like this and will simply squander the money over the course of the year and have little or nothing to show for it.

Up until recently I thought this line of reasoning showed some kind of character weakness on the part of the tax-refund-as-forced-savings-plan (TRAFSP) crowd.  But as I get the same answer from so many people, I’m starting to re-think my judgement.  We’re all human, and we need all the help we can get when it comes to doing what’s best for ourselves the better part of the time.  I read the other day that when Warren Buffet wanted to lose weight, he bet his children that he could by giving them each an unsigned check for $10,000.  Buffett is “someone who understands his irrationality and builds systems to cope with it.”

So while TRAFSPs may be choosing the default option rather than building a system, they still understand this aspect of their irrationality and continue to choose a system that seems to work for them.  Personal finance is the confluence of a rational philosophy and irrational participants.  If it were all about math, most of us would be rich by now.  Instead, we all do irrational things when it comes to money at some point or another.  Those of us who understand our own irrationalities and build systems to overcome or circumvent them are the ones who will ultimately be successful at this game.  This might mean that we don’t always make decisions based on math, but rather on which option is more likely to be successful for us. TRAFSPs are one example.  Another recent example that comes to mind is J.D. Roth at Get Rich Slowly’s decision to go with a longer term mortgage than he could afford.  Lastly, a classic example of this is Dave Ramsey’s debt snowball.  These are all cases where the math says to do something different, but the math doesn’t mean a thing if the concept doesn’t ever succeed.

With all this being said, I’ve put off taking my own advice for many years.  The main reason for this is that we’ve had major lifestyle changes in each of the last 5+ years that have made our tax situation rather uncertain: we’ve changed jobs several times between us, sold a house, bought a house, started renting out a portion of our house, had kids, etc.  But 2008 and 2009 look like they will eventually shape up to be very similar from a tax perspective, so I have gone ahead and changed my withholding amounts with my payroll department.  I took home almost 10% more in my first paycheck because of this change.  I already have set up a monthly automatic transfer to sweep this extra 10% into a medium term savings account for one of our financial goals.

Risk Management

Creative Commons License photo figure credit: Cold Cut

A lot of Americans are mad right now.  They’re mad at bankers and CEOs for causing such a mess in the financial markets.  They’re mad at the government for seemingly throwing good money after bad in bailouts of all sorts.  Many are even mad at themselves for living large for so long on borrowed money or the equity in their homes.

I get that.

What’s been bugging me lately, however, is this notion that some of these large banks and financial institutions should be left to fail.  I’ve seen this idea repeated in newspapers, on TV news, on blogs.  I’ve heard it from my coworkers, on talk radio, and at the coffee shop.  Well, the truth of the matter is this: The banks in question here have failed.  They’ve failed spectacularly.  They’ve lost almost incomprehensible amounts of money. Their stock prices are worth next to nothing.

What they haven’t done, except for Lehman Brothers, is gone bankrupt.  We, the people, have been spending hundreds of billions of dollars to keep these institutions afloat.  And that’s a good thing.  Here’s why:

These institutions all have deposit accounts, brokerage accounts, and other types of custodial accounts.  They take your money, pool it together with other peoples’ money, and invest it in various vehicles according to your instructions.  People are always adding to the pool and taking away.  So normally the pool stays the same size or changes very slowly, and this keeps things on a pretty even keel.

If many people either want to put more money in or take their money out of the pool quickly, the pool is forced to buy or sell stock in large quantities, or to call in debt obligations from others.  Buying or selling in very large quantities is ultimately detrimental to customers because it causes the price of the underlying stock or mutual fund to rise or fall very quickly, meaning the you’re either overpaying when you buy in or not getting the full value when you cash out.

If a large financial institution is unable to meet its debt obligations and has to declare bankruptcy, the first thing that is going to happen is that most, if not all, of its customers are going to want to get their money back.  This will trigger a run on the money causing a massive drop in share prices for the underlying securities.  If this price drop is big enough, the rest of the market could react at the same time, causing the whole market to drop.  This is bad news for everyone who has money in the market, not just those who have money in the pool.

This is why it has been necessary for the government to step in to reassure customers of many troubled financial institutions that their money is secure.  By keeping the institutions solvent, the government is preventing a massive run on money that could have far reaching effects on the whole economy.  This is why some of the largest institutions are being called “too big to fail.”

While I certainly worry about what the long term implications will be with respect to taxes to pay for these bailouts, I don’t see any way around propping up these companies by partially or fully nationalizing them until things calm down for a while.  What I would like to see implemented immediately, however, is a plan to put regulations in place to:

  1. make sure that companies that are “too big to fail” are accountable for their business practices to be sure that they don’t fail
  2. make sure that companies going forward can never become “too big to fail”
  3. or some combination of these two.

What are your thoughts?  Are you angry about the bailouts?  Do you see them as necessary or a waste of taxpayer resources?  Do you think we need more or less regulation to prevent these circumstances in the future?

If you liked this article, you may be interested in seeing some related articles:


03.22.2009
Money

Creative Commons License photo figure credit: borman818

I have just about wrapped up our tax return for 2008 and it looks like we’re getting a pretty sizable refund. This poses two questions: What should we do with the refund?

and

Should we change our withholding to avoid getting such a large return next year?

This post is about the first question, and the second will be covered in Part II.

ScrapperMom and I talked for a while about what to do with the refund. Given the current economic climate and the fact that our emergency fund only has about 3 months worth of expenses in it, we considered simply saving the money. It would add about another 1.5 months to our e-fund. This would give us some extra security, but would not help us to reduce our monthly obligations at all.

The other option is to use the refund to pay down some of our other debts. We’ve got a mortgage, car loan, and low interest, fixed rate credit card. Throwing it at the mortgage would be decidedly unsatisfying for two reasons: one is that it represents about 1.5% of our balance, so I’m not sure it would even qualify as a dent. The other is that it locks up our cash, at least until we sell our house — and we have no short term plans to do that. The credit card debt is the result of a renovation that we made to our rental property, and represents a deductible business expense. The tax refund will pay about 2/3 of this debt. With the low interest rate and the tax-deductibility making the effective rate even lower, low monthly payments, and the inability of this payment to provide relief from our monthly minimum obligation, this is also an unattractive option.

The last option is the car loan, which has about the same balance as the credit card. This loan is through our credit union. We bought our van a few years back and stretched a bit for it. We did save a lot of money by buying lightly used, but we took a 6 year loan on it to keep the payments manageable. Since then we have been pre-paying by about 10% each payment, as well as throwing some extra money at it here and there. So far we have shaved over a year off the loan. An interesting thing about this loan that I have not noticed on other loans is that as we pre-pay, our next payment due date keeps getting pushed out. So according to our latest statement, our next payment isn’t due until next year. The nice thing about this is that if we find ourselves in a position where we can’t make the minimum payment on this loan, we can skip it for quite a while by pre-paying now. The same is not true for the mortgage or credit card: if we pre-pay, we’re still obligated to make the minimum payment EVERY month.

ScrapperMom and I have decided, therefore, that the best option for the bulk of our refund is to pay down our car loan. This will cut another year off of our loan, reduce the number of payments left at our present paydown rate to just over 6, and still preserve the security of knowing that, if we lose some or all of our income, the obligation to pay this loan is pushed back far enough to help keep us solvent while we find ways to replace that lost income.

What do you think? Is this the best of both worlds? Are you getting a refund? How will you spend or save your refund? Share your thoughts in the comments section below!