Don’t Feed the Alligators

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

Archive for the 'Saving and Investing' Category

Shaw's Cards

photo figure credit: ScrapperMom

This past Sunday morning ScrapperMom was perusing the grocery store circular when this offer caught her eye (my emphasis added):

Choose your tax refund reward. Customers can purchase gift cards with their Shaw’s Rewards Card (for carded markets) at their local store’s Customer Service center.  No tax form or refund check is necessary.  Customers may purchase a grocery store gift card at $250 or $300.  Each gift card will be loaded with an additional $20 for a $250 purchase or $30 for a $300 purchase.  There is no limit for the amount of cards a customer can purchase. The additional bonus amount cannot be used for the purchase of alcohol, fuel, tobacco, lottery tickets, dairy products, prescription drugs or additional gift cards.  Offer is available March 13, 2009 through April 15, 2009.

Shaw’s is one of our local grocery stores (same company as Star Market), and it ran a similar 10% bonus during last year’s Economic Stimulus check mailings.  Apparently the response from customers and reward for Shaw’s was so great that they’ve decided to run this offer during tax season this year as well.  The limit before was whatever the size of your stimulus check was, and we took full advantage.  But I’m really psyched that there’s no limit on this offer.

Clearly this is a great deal no matter how you slice it.  The offer is for a store that we visit at least once per week, where we spend at least $250 per month, and that sells necessities, namely food.  The only real question is how much advantage we can take.  There are a few factors that limit how many of these cards we should buy:

  • How much cash we have available.
  • What the cost is to tie up this cash for whatever time it will take to use up all of the cards that we buy.
  • Whether this is really a no limit offer.

Because we don’t live paycheck to paycheck, we actually have somewhere between $10,000 and $15,000 available on hand in cash that we could use for this “investment” that is not technically part of our emergency fund.  It turns out that we also gave the government too big of an interest free loan last year, so we’re going to be getting a healthy refund which we can also roll into purchasing discount gift cards.

I ran some quick math to see how soon I would have to spend the gift card before we would have just been better off sticking the money in a CD.  I figured out that if I could earn 3.5%, tax free,  on a $300 investment today, it would take 34 months to earn 10% on the initial investment.  That means that as long as I can spend the gift card within the next 3 years (because with taxes it will take longer than 34 months to accrue 10%) I will be getting a better return by buying the gift card.

I asked myself if there were any down sides to this offer as well.  One that pops to mind is that we’ll be tying up lots of cash that we may need for other things.  The nice thing about these gift cards, however, is that we can easily trade them for cash, and if things ever get that bad, we’ll still have to eat, so having grocery cards is not such a bad thing.  Another thing we’ll need to be careful about is where and how we store the cards.  Having the equivalent of thousands of dollars in cash laying around has risks: fire, theft, loss, etc.  We’ll have to figure out a way to deal with that.  Lastly, what if the store goes out of business?  This is certainly something about which to be concerned, but this is a chain that has been around as long as I can remember, stores don’t usually just all of a sudden stop honoring gift cards, and as above we should be able to liquidate them quickly if it comes to that.

We still haven’t decided exactly how many of these cards we’ll buy in total.  We spent about $5,400 on groceries in 2008, so we can buy a lot of these cards and still come out ahead.  Yesterday ScrapperMom went to the Customer Service desk to buy 6 of them and was told that you can only buy 5 per customer per day.  So there is, apparently, a limit, but I still don’t think it should affect how many we want to buy (though if it did I would argue that the ad does say “no limit”).

What do you think?  Should we stock up on $10,000 worth of these cards (or the closest multiple of $300) and get an instant $1,000 back?  Is this a deal that interests you?  How many will you buy or would you buy if you could?  Are there downsides or risks that we’ve yet to consider? Leave a comment below!

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


Killington

Creative Commons License photo figure credit: Derek Purdy

This past Friday I used some comp time at work to take advantage of some non-weekend skiing at Killington Mountain in Vermont.  My host for the day was an old friend who sold a company during the Dot-Com boom and has been, for the most part, living off of the interest and dividends provided by his investment of the proceeds of the sale.  We talked about a lot of things while riding the ski lift, from parenting philosophy to Wall Street bailouts to the whereabouts of our mutual friends.

My friend challenged me in many ways, not the least of which was in trying to keep up with him on the slopes.  But as the memories of freshly groomed courderoy fade away, I’ve been chewing on a number of the things I learned or relearned in our ski lift discussions.  Please excuse the fact that some of these are broad, and some are narrow, but that’s how the conversation went.

  1. Citigroup is not going back to $45 - Throughout most of the 2000s, Citigroup’s stock price was in the $40 to $50 range.  It closed at $1.03 on Friday.  There are two important lessons here: A. You should not own individual stocks unless you own enough and varied stock to be able to weather problems in one particular market segment, like banking or energy — in other words you should be diversified enough to mitigate non-systemic losses.  B. Even if you believe that the market will bounce back, it will have to do so without Citigroup, GM, and any number of other well established, large companies whose stock is now all but worthless.  Money invested in Citi at $45 is gone.
  2. Koreans make bad pilots – There’s a book out now by Malcolm Gladwell called Outliers.  In it, there is a story about the problems that Korea Air had keeping their planes in the sky in the 80s and 90s.  Apparently the problem stemmed from a cultural requirement for co-pilots and other crew members to respect their elders by not questioning their authority and decisions in the cockpit.  It seems to me that a lot of the financial mess we’re in today stems from people not asking enough questions when they didn’t understand the terms of a deal, be it a mortgage or a credit default swap.
  3. This is not the first time the government has bailed out a “too big to fail” company – Do you remember a company called Long-Term Capital Management?  I didn’t either.  But I learned that this was a hedge fund that failed “spectacularly” in 1998 and was bailed out by a consortium of banks.  This fund was “too big to fail” in that its quick liquidation would have led to a collapse of financial markets.  You can’t sell large stock positions all at once since it causes the price to fall sharply, and you certainly can’t do so for many stocks all at once since it causes entire markets to fall sharply.  My ski buddy wonders why we put ourselves into a position again in which unregulated entities were allowed to become too big to fail.
  4. When you can’t find value in something that you need, you can always go for cheap – I was eyeing the sushi bar at lunch time, but a $15+ dollar lunch was not worth it to me.  Instead I went with a $4 hot dog.  This is similar to why I choose index funds instead of managed mutual funds.
  5. Giving up a little can be worth a lot – A season pass at Killington cost $999.  A season pass with 14 blackout days costs $650.  By giving up less than 10% of the available days during the ski season — which also happen to be the days with the longest lift lines — you save 35% on the pass.  This works the opposite way as well.  I’m reminded of the fact that most of the gains in the stock market happen on VERY few days.  If you had invested $10,000 in 1996 in an S&P 500 Index Fund, you’d have $17,280 in 2008.  If you had missed the 10 best days during that period, you would have just $10,748.  If you had missed the 20 best days, you’d have lost money and be left with just $7,360.  (Source)
  6. The government should not have let Lehman Brothers fail – It was distasteful to the American people that the government bailed out Bear Sterns, so it let Lehman Brothers fail to appease the taxpayer rather than do what was right with respect to fiscal policy.  In all likelyhood this has cost the taxpayers far more than it would have otherwise in the form of bailout after bailout.  The failure of Lehman Brothers began a downward spiral which seemingly has not yet found it’s floor.
  7. Don’t take the experts at their word without doing your due diligence – The weather.com “ski index” for Killington on Friday was a 1 out of 10, with 1 being the worst.  I decided to make the 3+ hour drive and see for myself.  At the very worst case it would be a long way to go for a couple of beers.  My friend says that he would have given the day a 4.5 overall (5 in the morning, 4 in the afternoon).  I would give it a 7, since my bias is towards smaller, less challenging mountains with generally worse conditions.  Check out this clip from The Daily Show which features a great quote from Jon Stewart: “If I’d only followed CNBC’s advice I’d have a million dollars today…provided I’d started with $100 million.” (Thanks to David at My Two Dollars for posting the link earlier this week.)

I had a great time skiing, and a great time chatting on Friday.  I like to think they were both somehow good for my soul.  I like to hear your opinion on any of these points.  Leave a Comment below.

Spinning Top

Creative Commons License photo figure credit: chefranden

We are all probably familiar, to one degree or another, with the concept of inertia:

“an object will always continue moving at its current speed and in its current direction until some force causes its speed or direction to change. This would include an object that is not in motion (speed = zero), which will remain at rest until some force causes it to move.”

A similar concept is frequently observed in human behavior: It is often difficult to start doing something that you should or want to do, and it is often difficult to stop doing things that you shouldn’t or don’t want to do.  Many people, for example, are not enrolled in their company retirement plans, or are under invested in them, simply because they never filled out the paperwork to do anything different.

Many businesses try to take advantage of this “behavioral inertia”.  Most people have been asked to sign up for a free 30 day trial of something — which still requires a credit card — and after 30 days have forgotten to cancel, as well as 60, 90 and 180 days later.  Many of us have also fallen victim to the gym membership where the cost is automatically deducted from your checking account even though you never go.

It is with this concept in mind that I recently had the opportunity to break my behavioral inertia, if warranted, by reassessing how much I pay for various services.

Two weeks ago I received my auto insurance renewal and was surprised to see that the cost for another year was similar to that of the previous year.  Last year my state changed the way that it oversees the setting of auto insurance rates.  This was supposed to make insurance cheaper for the lowest risk drivers and more expensive for the highest risk drivers.  Since ScrapperMom and I both have the best driver ratings, I expected to see a big drop in our premiums, but this was not the case.

I immediately went to a few websites of competing insurance companies and filled in the information needed to obtain a quote for insurance.  The first site quoted me a price than was 65% that of the quote I got from my current insurer.  The other sites indicated that someone would get back to me, but no one ever did.  I also called my current insurer to find out if the quote was correct and if there weren’t any other discounts that might apply.  The customer service representative said that the quote was correct, and that it was $200 less than the year before.  She was right, I had incorrectly remembered the cost of insurance from the year before.  She also cautioned me about the other quote that I had received.

The new quote that I had received was just for 6 months, and had simply doubled it to get the annual price.  It turns out, however, that a lot of “budget” insurers will quote a low price for the first 6 months and then raise the price in the next 6 months — banking on your behavioral inertia — so that it ends up being equal to or more than an annual quote from another insurer.  I could not get a full year quote from the new insurance company, which made me suspect something was not as it should be.

In the end, I decided to stay with our current insurer, who I have been with for many years.  But I feel good that I at least shopped around to make sure that I was getting the best price, and I also put them on notice, to a certain degree anyway, that I’m not just going to take whatever price they give me without doing my due diligence on the matter.

I performed this same exercise to determine if I’m paying as little as necessary for our TV and internet service.  After looking around, all of the other options were within a few percent, plus or minus, of what we pay now for the same service.  It doesn’t make sense in this case to change providers, but at least I know that I’m not overpaying for the equivalent service.

There are a number of other services that I use that I can reassess as well. I plan to reassess the cost of my cell phone and rental movie service, among others. I’m also going to look to be sure that I’m getting the best deal I can on the interest that gets paid to me on cash investments such as our money market account and CDs — one of which matures in the next month.

Have you been the victim of behavioral inertia or do you have an example of overcoming it?  Share your story in the comments section below.

Money Market Accounts

Author: ScrapperMom
02.25.2009
Money Markets

Creative Commons License photo figure credit: pfala

A reader asks, “MITBeta often talks about money market accounts, can you tell me more?”

The simple answer is that a money market account offers you the flexibility to be able to write checks or make transfers, while having the benefit of earning interest like a savings account. All banks are different, but some things that make all money market accounts similar are as follows:

  • There is usually a limit to the amount of checks and/or transfers you can make. MITBeta pointed out that, with our accounts, you can only write three checks per month, but can make six transactions. So three of those can be checks, but you can also have all six be electronic if need be. Depending on the bank, this transaction limit can range from 3-6 per month.
  • The account is interest bearing, usually a higher yield than a regular savings account.
  • It typically has a higher balance requirement (typically $1000-$2500). 
  • Depending on your typical balance, your interest rate may increase.

Money market accounts are not for everyone, but if you typically have $1000+ in your checking account you might want to consider having a money market account. Our money market account is the main catchall for all our income. All monies get deposited into the money market (direct deposit of pay checks, our rental income, etc) and then MITBeta makes a couple of transfers per month to fund our regular checking account, which pays all the bills.

Money market accounts seem to be, in my opinion, a good stepping stone before opening a CD. The difference is, with a certificate of deposit (CD) your money is tied up for a certain term (6mos - 5 yrs typically) and the rate is based on the length of the term. Longer term = Higher rates.  There is also a penalty for early withdrawal. In order to make good use of the high rates available with a CD you can start a CD ladder.

Money market accounts can generate more interest for you, if you feel up to the challenge of limiting the transactions that come out of the account and also if you can carry a high enough balance. Take a look at what your current bank offers for rates and let us know. Do you think it would be a good idea to open a money market account and take advantage of higher interest rates? For more information on money market accounts you can visit “How Stuff Works.”

Loose Ends

Creative Commons License photo figure credit: Andres Rueda

After last week’s post about Falling Back into Old Habits, I jumped right in and made a bunch of small, but important changes or updates to our automated finances:

  • I made our initial contributions to Roth IRAs for 2009.  As I said last time, it’s already February and we hadn’t contributed anything to our retirement accounts for the year.  I logged into our Vanguard accounts and contributed for January and February on both of our accounts in one shot.
  • I also set up automatic deposits for Roth IRAs for the rest of the year.  Now I won’t have to worry that I missed a payment or scramble at the end of the year to come up with enough money to fully fund the IRAs.  This is an example of one of the basic tenets of personal finance: Pay Yourself First.
  • I finally got around to rolling over my old 401k from the company I left over 4 years ago to a traditional IRA.  I wrote about how to do this back in October, but somewhat ironically had not gotten around to doing it myself.  Do as I say, not as I do?
  • I set up a low balance banking alert for my checking account.  I logged into my account last week and saw that I had a negative balance.  A series of bills got paid and I had not yet transferred the money from our Money Market account.  Luckily, the bills were in process and the balance was not “real” yet.  So I immediately transferred enough to cover the bills and then some to bring the account back into the black.  It didn’t occur to me at the time, but several days later I thought there must be a way to avoid this situation in the future.  A few minutes of poking around at the options on the website led me to the Alerts setup page.  Here I could set up all kinds of different alerts.  I chose to be notified by email whenever my balance drops below $1,000.
  • I adjusted the automatic transfers that occur a couple of times a month between our Money Market and Checking accounts to be sure that a situation, like the one described above, does not happen again.
  • I have been managing an escrow account of sorts for all of our annual expenses, such as life insurance, car insurance, umbrella insurance, our Christmas fund, etc.  So far, this money has been mixed in with our general slush fund — by which I mean money that sits in our bank account, but is otherwise presently unallocated — and tracked using a spreadsheet.  This has become cumbersome, and I have decide instead to stash the money that we put aside each month for all of these annual expenses into a new ING Direct account.  So I opened a “sub” account at ING, and then set up an automatic withdrawal from our checking account to occur once per month for 1/12 of the total amount that we have committed to each of these spending plan categories.
  • Lastly, but certainly not least, I created a new spending plan, as discussed in my last post.  This was not nearly as painful as I expected it to be.  My last spending plan, back in November, took a worst case scenario.  This scenario, fortunately, never developed, and we actually have a lot more money coming in right now than I thought.  Because I had buried my head in the sand on this, I have been worrying too much over something that wasn’t as much of a problem as I made it out to be in my head.  I hope I have learned my lesson.

So that’s it.  Each of the above items took only a few minutes, and I took care of most of them in one night.  I like that I am still able to accomplish so many personal finance improvements in one shot like this.  ”Installing” “hacks” like this in our personal finances is very satisfying, and should lead us to financial independence one of these days.