Debit versus Credit

Revitalize Economy? Spend Says Obama

I was reading the financial news today at CNN Money when I ran across an article highlighting presidential candidate Barack Obama’s plan for revitalizing the shrinking U.S. economy. He says that he wants to spend billions of dollars on education, infrastructure, health and energy systems. Specifically (and this is to improve America’s competitiveness according to the article) he wants to spend “$10 billion on childhood education, $150 billion over 10 years developing alternative energy and $60 billion over 10 years to build 21st-century infrastructure. Where will the money come from to fund these spending plans? By ending the war in Iraq, reducing government waste, charging polluters for greenhouse gas emissions and ending the Bush tax cuts, but only for wealthy individuals.

Not A Bad Idea, But Will It Really Work?

Honestly I’m all for increasing spending where it’s important for the future of the country, and more importantly the future of the world. Education is a great place to spend money on (efficiently of course) and I’m definitely all for developing alternative energy. Overall the places which Mr. Obama has outlined as important to spending I agree with. However I’m not so sure how realistic it is to assume that the money to fund these plans will actually come. The war in Iraq is probably likely to end if Obama is elected (at least if he does what he is saying he will), but what does it really mean when someone says that they want to reduce government waste? Or charge polluters for greenhouse gas emissions? These are quite vague. I drive my car to work which means I emit greenhouse gases. Does that mean I’ll be taxed for these pollutions? Any ideas out there?

Globalization Is Inevitable

Another interesting part of this article was Barack Obama’s response when asked about protectionist trade policies designed to protect American jobs. He said, “it is impossible to turn back the tide of globalization.” Good man. I’m glad that someone in Washington is smart enough to at least realize the truth of this matter. We’re going global, whether we like it or not. If we prepare for it and stay competitive then we’ll survive in a global market. If we don’t and instead whine and complain and fight for protectionist trade policies and increased tariffs, etc. we’ll crash and burn as a global economic superpower. I’m actually a fan of his policies regarding this. I’m glad that he’s realized that we need to change and adapt, if we want to stay competitive. Now if we could only convince everyone else…

June 16, 2008
Weekend Reading: June 14th

Welcome to the first edition of Weekend Reading. A lot of blogs out there do this and I think it’s a fantastic idea. Most of the following links are from my blogroll, so I’d definitely recommend your taking the time to go through the blogs I link to occasionally. There’s some great information out there. This week there’s some great reading. Our topics include fuel prices, credit card companies and their targeting of college students, Warren Buffett’s advice to a novice investor, ways to save money when going out and advice on investing in dividend paying securities.

Ryan at The Better Credit Blog brings up a fantastic point regarding personal finance education (or the lack thereof) and how credit card companies specifically target college students because of their vulnerability. Check out How College Students are Taught Personal Finance by Credit Card Companies.

Tim Ferriss, author of The 4-Hour Workweek, recently attended the Berkshire Hathaway annual shareholders meeting and had the opportunity to ask Warren Buffett a question. He asked Mr. Buffett, “If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings?” Warren Buffet responded with a very unexpected answer. Check out Tim’s post about this experience: Picking Warren Buffett’s Brain.

Michael at Money Musings talks about everyones favorite current subject: gas prices. It’s actually a redux to a previous post by him about the stress caused by increasing fuel costs. It’s an interesting read and also has a link to a downloadable excel spreadsheet which can be used to calculate fuel costs if it were to cost a certain amount ($6 a gallon, anyone?). Check Out Gas Price Stress Redux.

With the increase in fuel costs it’s becoming more difficult to stay within a budget, especially for us twenty-somethings. Trent at The Simple Dollar gives some practical advice on how to have fun and go out while keeping your costs low. Check out Sixteen Ways to Go Out on the Town on the Cheap.

Blake at Youngdough.com shares with his readers his strategy for investing in SOLID dividend paying securities. Check out How I Invest in Solid Dividend-Paying Securities.

That should be enough to keep you busy this weekend. I’d love to hear your comments on this weeks weekend reading. We’ll do this again next weekend.

June 14, 2008
Choosing Your First Credit Card

It’s not always easy starting out on the road to great credit. In fact, there are plenty of things that can mess you (and your credit score) up along the way. Choosing a financial institution to do business with is important, but equally important is choosing a first credit card that’s going to be right for you. As I mentioned in my Credit Cards 101 post there are several things that you should look for when researching credit cards. If you choose the wrong one you may end up not getting any sort of cash-back or points rewards, or more importantly you may end up with an excruciatingly high interest rate which can be a difficult thing if you carry a balance. Naturally my recommendation is to never carry a balance, and only purchase things with your credit card that you can pay off within the month, but if an emergency ever arose that you are ill-prepared for you don’t want to be stuck paying it off with a 25% rate on your card.

Several Cards to Choose From

Anyway there are several options which you have when looking at different credit cards. Of course you have the more well-known card issuers such as Capital One, Citibank, Bank of America or Chase to choose from, but you shouldn’t discount your local Credit Union or any other local banks. These smaller institutions sometimes offer better rates and better service. A great place to compare cards is at BankRate.com or CreditCards.com but to save you the hassle I’ve done a little research of my own and I’m going to recommend a few cards that I think might be a good choice for a first credit card. I’ll list the cards which require some form of good credit already in place and then those which don’t require any credit at all to be approved.

No Credit? No Problem

If you don’t have much (or any) credit your choices will be limited, even as a student. My recommendation is to first drop by your local credit union and ask them if they offer any student credit cards. If you live in Phoenix I can recommend a good one, just shoot me an e-mail. Don’t apply right away unless you know real well about all of the credit card terms and you feel comfortable with the terms that your credit union might be offering. If you’re unsure, just bring it home and e-mail me… I’ll help you out! Anyway if your credit union doesn’t offer anything for students (basically this means for young adults with no credit) then you might also consider the Capital One Standard Platinum for Young Adults.

Good Credit Required Here

There were several cards which I saw online that are catered to young adults and also offer rewards, but of course these require at least decent credit in order to get an approval. Again I recommend checking out your local credit union to see if they can offer a great credit card, but if not then here are three cards to choose from: The Citi Dividend Platinum Select Card for College Students; The Citi mtvU Platinum Select Visa Card for College Students and the Discover Student Card. These three cards all offer great rewards and competitive rates and include a 0% introductory rate for at least six months. Not a bad deal. Good luck on your search and if you have any questions about cards definitely contact me!

June 11, 2008
I’m Going to Mexico

I’ll be taking off tomorrow morning from Phoenix Sky Harbor International Airport on my way to Monterrey, MX where I will be doing a very short study abroad session at Tecnologico de Monterrey (the number one business school in all of Latin America). I’ll be gone from June 7th until June 22nd and during the course of these two weeks I’ll be taking two classes: GLB 303 (Relationship Management) and GLB 494 (Doing Business in Mexico).

The campus at Tec de Monterrey is beautiful (as you can see from the picture to the left) and I’m really excited to meet the faculty at the University, as well as the people of Monterrey.

I’m a little bit nervous because I’ve never been anywhere in Mexico of any significance (Rocky Point doesn’t count) and also excited because I absolutely adore going to new places. Going to Belize in March was one of the most memorable experiences up to this point in my life and I’m hoping that this visit to Monterrey will rank up there as well.

As I mentioned I’ll be taking two classes and I will be taking complete advantage of the time I’ll have over the next two weeks to absorb as much information as I can. The course description for my Relationship Management class is below and sounds quite interesting.

Overviews types of relationships found in organizations, then trains students in the interpersonal skills necessary to effectively manage those relationships

That will definitely be interesting. I’m also quite excited for my Doing Business in Mexico course. We’ll be lectured by a professor at the Tec de Monterrey who also wrote a book with the same title as the course. Also we’ll be visiting five businesses in Monterrey and seeing how they function, which will definitely be interesting.

My posting might not be consistent over the next few weeks as I’m unsure as to the level of internet availability I’ll have, but you can definitely expect at the very least a few posts on what I’ll be learning over the course of this study abroad session. Until then, Adios.

June 6, 2008
Regulation D Is Outdated

I understand the purpose of a savings account completely: they are to be used to put money into and to keep it there. However it would be an insane idea to think that one would not have the ability to access that money with any level of ease. The Federal Reserve however seems to think otherwise; convenience to them is not something that we as consumers should be allowed to have when it comes to accessing our money. Let me explain.

Last month I switched to a new brokerage account and transferred money from my savings to the brokerage account several times. I also payed off a large credit card bill with money from my savings. I also miscalculated the amount that I could transfer to my savings from my checking without leaving myself short on cash in the checking account. I messed up, just a little bit. I had to transfer money back from my savings to my checking to cover some basic expenses. Pretty simple mistake to make really… I’m sure just about everyone out there has done that at some point in their life.

The point is that I made several transfers from my savings to my checking account throughout the month of May, as well as a few ACH transfers from my savings to my new brokerage account. The problem with this is – as some of you may be aware – that the Federal Reserve board has set limitations on the number of transfers you can do OUT of your savings accounts in any given month. The limit? Six. Oops… I went WAY over that. So at the end of the month I notice a fee in my account for excessive transfers. There goes my interest for the last five months. Naturally I called my bank (USAA) to ask them to reverse the fee. After I asked they offered to reverse half of it, which I gladly accepted.

I decided to do some research after this fiasco to learn more about the Federal Regulation that has caused me so much grief. It’s called Regulation D and it can be found at the Fed’s Reg D site but so as to alleviate the pain that you would encounter trying to read such legal mumbo-jumbo I will paraphrase the relevant parts of Reg D…. right after I quote directly from it.

the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle . . . to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order, or instruction, and no more than three of the six such transfers may be made by check, draft, debit card, or similar order made by the depositor and payable to third parties

That part is pretty straightforward. You (as the depositor) are not authorized to take money out of your savings account more than six times a month (either by withdrawal or transfer) unless you do so at an ATM or at one of your banks branches.

Ok. I understand the reasoning for the limits on taking money out of a savings account – after all it should not be used like a checking account (in that you take money out of it on a daily basis). There should not be any reason, however, to limit a person to six or less convenient withdrawals or transfers from their savings account.

We are in a new age today. We’re more technology savvy than any previous generation has ever been. We demand convenience. In the age of internet banking where I can literally do all of my banking without ever leaving my house there should be no reason to limit transfers from a savings account to six. I understand the limit (a savings after all is not a transaction account), but six is just… not enough. These limits were set in the 1980s when Reg D was first enacted. If you ask me it’s more than just a little outdated. When this was created the internet was hardly even known to be in existence, let alone internet banking. If you ask me it’s time for a revision.

What do you think?

June 5, 2008
The Housing Crisis is Not Over

I came across an interesting article the other day on the Wall Street Journal Online. Cyril Moulle-Berteaux of Traxis Partners LP (a hedge fund based in New York) wrote an article entitled “The Housing Crisis is Over.” He brought up some very interesting points, which I’d like to highlight for you and also provide some commentary as well as my own personal opinion on the points that he’s made.

Mr. Moulle-Berteaux begins his article by mentioning that headlines in the financial as well as the popular press are intensifying. Yet even with all of these cries of doom and gloom he predicts that “April 2008 will mark the bottom of the U.S. housing market.” This article, although posted almost a month ago, caught my eye because of the significance of this statement. What would Mr. Moulle-Berteaux use to back up this statement? How could he possibly claim that we’re at the bottom and won’t go down any more when it seems so obvious that this is quite untrue? Isn’t it?

What the “Bottom” Means

The author reminds us that “a bottom does not mean that prices are about to return to the heady days of 2005. It just means that the trend is no longer getting worse, which is the critical factor.” All things considered this makes his profound statement seem less impossible and even somewhat likely. After all we have been in this housing bust for several years now, shouldn’t it be about time for us to be at the bottom of the bust? It is definitely a possibility, but is it an actuality?

Mr. Moulle-Berteaux’s Argument

The author argued that the same thing that caused this bust is likely to pull us out of it: affordability. According to him during the 90’s and early 2000’s it took 19% of average monthly income to “service a conforming mortgage on the average home purchased.” For first time buyers he claims that it took 29% of monthly income to purchase a home. These numbers jumped for non-first-time home buyers and first-time buyers, respectively, to 25% and 37% of monthly income by the year 2006. Over the past two years (since the previous mentioned point in 2006) Moulle-Berteaux argues that home prices have fallen 10-15% and mortgage rates have come down 70 basis points from their high (a basis point is equal to 1/100th of a percent). This reduction in home prices has brought the monthly income/mortgage payment ratio back in line at 19% of monthly income for the average home buyer and 31% for the first-time home buyer. In other words, he claims, “homes on average are back to being as affordable as during the best of times in the 1990s.”

Essentially Moulle-Bertreaux is arguing that although inventories are at their highest levels ever and that home values are dropping like flies, we have reached a bottom. He claims that inventories are increasing, but at decreasingly smaller levels and that prices – although they will continue to drop until sometime in 2009 – will not drop at the level that they have heretofore been dropping at. It’s an interesting argument, and it does make sense but does not seem to be the reality of the situation – at least not yet.

The Market in My Neighborhood

I did a little bit of research for the median home price in Phoenix, AZ as well as the median and average household incomes. I then used these figures to calculate a percentage of an average mortgage payment (based on a rate of 6.31% APY and the median home price of $210,000 with no down payment) and the 2006 greater-Phoenix median household income of $51,862 dollars. With these figures I calculated that the average home buyer (based on their income equaling the median income) in the Phoenix area buying a home that’s valued at the median price would have a mortgage payment to monthly income ratio of 38% which is well above the authors claimed percentages of 19% and 31% for the average home buyer and the first-time buyer.

The market in my neighborhood is – based on the authors facts and figures – far above the affordability index that he has created. So for the Phoenix area at least it seems that the housing crisis is not over… not yet.

How is the market in your neck of the woods? Does it fall in line with these “averages” that Mr. Moulle-Berteaux has stated?

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June 2, 2008
Mutual Funds 101

I was talking to a friend of mine the other day about investing. She just recently received her tax refund and had yet to “spend it” as she said. Naturally I suggested that she invest it. We got to talking about what she might invest her money in and since she has absolutely no investing experience I suggested that she might consider a mutual fund. She had heard of mutual funds before, but wasn’t exactly sure what they are. Of course I told her she should read my blog post about mutual funds, when suddenly I realized I didn’t have one. Thinking that it was really quite irresponsible of me to not have covered this topic as of yet, I am now going to right this wrong. Welcome to Mutual Funds 101.

What is a Mutual Fund?

A Mutual Fund is a diversified portfolio of investments… essentially a ready-made, specifically focused, investment portfolio. A Mutual Fund is a large pool of money which is used to invest in stocks, bonds or other securities. Mutual Funds are attractive to a large number of people because it is easy to purchase shares and they are great for investors who do not have the time or the desire to create their own diversified investment portfolio. Mutual Funds are usually geared towards one of three different goals: income, growth or a mixture of the two. An income fund invest mainly in – you guessed it – income investments such as bonds, preferred stock and income-oriented common stock (stocks that pay a high dividend). A growth fund invests mainly in high-growth (often small or mid-cap stocks) stocks and other types of growth investments. And finally the growth/income fund would invest in a mixture of these types of investments so as to provide a stream of income to the investor as well as potential for future growth.

How do I purchase a Mutual Fund?

To invest in a Mutual Fund is similar to investing in the stock of a company. Mutual Funds are sold by the share, just as stocks are. The Net Asset Value (NAV) of a Mutual Fund refers to the value of just one share of a Mutual Fund. This NAV is updated daily. Investors have two choices when it comes to investing in a mutual fund. They can purchase shares of the fund from the fund company directly or purchase shares through a brokerage account.

If you already have a brokerage account you might consider purchasing shares of funds directly through your brokerage, so as to keep all of your investments in one “place.” One thing to keep in mind is that some brokerages charge a flat fee to invest in a fund. This fee might make it more practical to purchase directly from the mutual fund company.

Some brokerages include E*Trade, Scottrade and Zecco Trading. Some great Mutual Fund companies include Vanguard and T Rowe Price.

Update: A great place to do research on mutual funds is over at Morningstar.com

May 29, 2008