Tuesday, July 28, 2009

Sit On Cash But Declutter Your Bank Accounts

Say goodbye to the gloom and doom. The sun is shining warmly, stocks are rising, Dow Jones crossed 9000 points and home price index is up for the 1st time in 3 years. Heck, President Obama might as well declare the recession is over.

Despite all the optimism, I am highly skeptical that this generational economic malaise has been swept away so quickly. I believe the stock market is in the throes of speculative fervour and we may yet see another drastic correction in the fall.

In this moment of exuberance, it is easy to get tempted by heady profits and join the herd. Fortunately, the cool wisdom of Warren Buffett comes in handy when our rationality is tested: "Be fearful when others are greedy and be greedy when others are fearful."

While investors are getting ahead of themselves and raking in the profits, my mantra remains that cash is king. The recession has transformed many Americans into squirrels (which is a good thing) and I hate to see our national resolve in saving money and eliminating debts washed away.

Sit On Cash But Declutter Your Bank Accounts
Saving money and bolstering our retirement nest is like tending a flower garden. You cannot be enthusiatic about the flowers for a few weeks and then neglecting them months later.

The flowers require vigilant care to survive, not to mention, thrive. There is so much to do consistently, from watering the plants, ensuring sufficient sunlight, getting rid of weeds and worms, etc. Our finances need similar attention to blossom and we will do well by sticking to the basics.

Declutter Your Bank Accounts

If you are like me, cash (or near cash items) will take up at least 50% of your portfolio. And with so much cash at stake, it is necessary to be orgainised.

The first step for easy organization and tracking of your cash is to evaluate your bank accounts. If you have multiple savings and checking accounts, money market fund, etc, you may find it easier and more manageable to consolidate these accounts.

In addition, there are cost savings if you combine accounts and reduce the fees charged by the banks. You can compare what fees each bank is charging and the benefits associated with having the account before you begin consolidating.

Before closing any account, make sure you have switched any automatic payments for bills to the accounts which you intend to keep, else you may be slapped with penalties for late payments.

You can further declutter your financial situation by setting up online automatic bill payments for recurring bills (except to mail checks to companies that don't accept online payments), and eliminating the need to receive bill statements in the mail.

When you go online, you reduce the need to use paper and stamps (which cost money), and you can balance your accounts easily too.

Taking the time to work out details and declutter our finances is a major step in keeping us on track for long term financial success. Lastly, whether the sun is shining outside or a storm is brewing, never forget to tend to our financial plan with the same discipline as a gardener.

Saturday, July 25, 2009

Start Early On Good Saving Habits

Start Early On Good Saving Habits
Time is our best friend when it comes to investing and saving money. To let saving money becomes almost second nature, it is good to start early in one's career or life.

These days, there are so much financial information and choices that one gets overwhelmed into inaction. Another extreme is when we get influenced by all the hubris and keep adjusting our financial strategy.

I prefer to employ a systematic procedure of saving money. And regardless of what the experts tell us, we can embark on a sound savings plan without consulting financial firms which charge onerous commissions and fees.

The first step towards good savings habit is to sign up for a 401(k) plan (most large companies offers one) because of the tax savings, convenience and other benefits. You should contribute at least enough to get the full employer match.

A decent starting point is to make sure your combined contribution from personal and company is at least 10% of your salary. If not, just kick in whatever it takes to hit that goal.

Besides contributing to your retirement savings, you should also build up an emergency fund of at least three months' worth of living expenses in a bank money-market account or savings account that pays competitive yields.

The idea isn't to earn big bucks, that's not going to happen in today's environment. Instead, the aim is to have a safe cash hoard to draw upon in the event of a financial setback or emergency, instead of taping on CDs or other retirement savings and incur taxes and penalties for early withdrawal.

Once you have built up an emergency fund, you can either divert the regular savings that was going to that fund to your 401(k), thus boosting the contribution rate there.

Or you can put the money into a Roth IRA that would complement the 401(k). By funding the Roth with low-cost mutual funds, you can avoid bloated fees that act as a drag on growth.

It is important to instill the habit of saving so that it becomes routine but don't set your goals too high or let money saving become an obsessive or punishing habit.

If you don't enjoy saving money and have a good time in the process, it is easy to give up halfway through. You must have heard of the failures of weight loss fanatics who go on unrealistic crash diets. It is unsustainable and dangerous.

Instead, think of saving money as part of a regular expense you must budget for. Living within our means and leading a financially responsible life is possible if you put your mind to it. Try it out today.

Wednesday, July 22, 2009

A Beautiful and Creative Way To Recycle Bottles

This is a beautiful and creative way to recycle used bottles and make great gifts or party centerpiece out of them.

All you need is an old bottle, beautiful paper and ribbon! No more expensive gifts, thus, you save money and the environment at the same time.

Check out the video.

Sunday, July 19, 2009

Managing Surplus Money In The Short Term

If you have been saving since the start of this recession and are relatively debt free, I believe you should have hit the target of amassing an emergency fund of at least three months and with spare cash available for investment too.

While a three-months emergency fund is barely enough if the economic recession worsens, I know a lot of people are already getting antsy about having so much of their savings lying stagnant, especially with all the talk of green shoots and the spectacular stock market rally since March.

Managing Surplus Money In The Short Term
To be sure, risk appetite has increased and people want to earn more but somehow I still feel the stock market run-up looks pretty suspect.

For those who are hell-bent on higher yields, there are actually many ways to go about it. For quick gains, small-cap emerging market stocks have the potential to be multi-baggers and are extremely attractive.

The more adventurous can open a margin account whereby the brokerage usually lend double your principal amount for investment. Besides trading in stocks, you can also wade into more complex highly "leveraged" ETFs which can magnify by about 2-3 times the movement of the underlying index which they track on a daily basis.

Needless to say, the above approaches are volatile and speculative. It is exciting to make lots of money with leverage but equally heart-wrenching when the market moves in the other direction.

But that is not to say that 100% cash is good for our retirement portfolio. Inflation will eat away our wealth. Since the creation of the Federal Reserve, our purchasing power in US dollars has been whittled down by 96%. How is that for wealth building?

And with all the quantitative easing implemented by the Federal Reserve, inflation may yet go into overdrive and set us back further from our retirement goals.

As risks and rewards are correlated, we should take on prudent risk and seek higher returns by investing in bonds and equities, provided our emergency fund is not compromised. A minimum of 2-3 year time frame is appropriate for our investments so you must not touch the money for living expenses or emergencies.

It will not serve much purpose to turnover our stocks constantly as transaction costs will render the investment meangingless. Just look at Warren Buffett, he does not build his wealth from trading. Instead, he chooses his battles carefully, and let time compound his wealth.

Currently, the false sense of security in the stock market may lull us into placing more money into equities than we can aford, thus if and when the stock market falls by more than 50%, a lot of people will get into severe financial difficulties again.

I know it feels terrible to have our savings earning a paltry 1% to 2% in a money-market account or short-term CD while our friends make huge killings in the stock market, but on the flip side, ask yourself if you can accept that your savings is wiped out by 30-50% because you bought investments that could not hold their value over the long run.

I definitely don't encourage people to invest all their idle cash in this current economic climate. For me, I still prefer the traditional savings vehicles like money-market funds, savings accounts and CDs.

What do you guys think?

Thursday, July 16, 2009

Henry Paulson Grilled In Congress For BofA Deal

Listen to how Henry Paulson defends his action in getting Bank of America to buy over Merrill Lynch and suffer immense losses in the process.

Of course, there are always taxpayers standing behind all these losses.

Now that big banks like Goldman Sachs and JP Morgan Chase have reported spectacular 2nd quarter profit, they are preparing to ramp up pay packages to top talent.

Good news for the fat cats on Wall Street but how about the ordinary Joes in the street? After extending a lifeline, are they going to share in the spoils?

Tuesday, July 14, 2009

Saving Money With Do It Yourself Projects

This summer, I intend to spruce up my home with a number of do-it-yourself projects. Although some home-improvement tasks do require professional help, nearly 80 percent of projects around the house can be do-it-yourself projects. From past experience, I can save lots of money by allocating some time and getting my hands dirty.

As the summer brings with it warmer temperatures and longer days, my family also likes to venture to the backyard to stare up at stars and make s'mores (snacks made from slightly melted marshmallows from the fire), Hershey's chocolate pieces and graham crackers at our firepit, something which I created two few years ago.

For my first home makeover project this summer, it is to upgrade the botany. Over the years, I have planted flowers and greenery around the house. It's something that is fairly easy and you feel confident in taking care of the shrubs and watching them bloom.

In the past, I am not known for having green fingers but through patience, trial and error and reading up on gardening books, I am proud to say my tender, loving care has translated into a very nice landscape area.

Another easy project is plumbing repair and I intend to change a couple of leaky faucets in the kitchen. I picked up plumbing skill accidentally when a pipe leaked in my basement years ago and I gave up dealing with an unreliable handyman.

Basic plumbing repair is not dificult. If you don't know how to do it, just get employees to demonstrate how to fix and install the faucets when you buy them from the store.

Saving Money With Do It Yourself Projects
There are more options for a DIY enthusiast on a budget. If you're up to the challenge, try these DIY home improvements which will not break the bank.

1. Enhance Your Outdoor Deck

A worn-out outdoor deck can be "rejuvenated" with a good cleaning or staining. You can choose an appropriate stain from a variety of colors, and spray-on products that kill mold.

2. Repair a faulty door

One of the most defects around the house is a faulty door. Getting a handyman is expensive because any DIY beginner can tackle a door that won't close right. All you need is a belt sander, a palm sander, carbon paper, a paint brush and varnish to match the original finish. There is a concise step-by-step instructions here.

3. Install a paver patio

A paver patio is a more advanced DIY project but it also allows you to show off your creativity and handiwork. Try to be unique by laying a foundation of pavers, or decorative square and rectangle stones.

4. Create a wall-mounted clothes rack

If there is enough space in your house, then do away with the clothes dryer. Electric dryers usually require a dedicated outlet with a 240 V current for operation. Depending on your electrical rates and laundry load, the bills will eat into your family budget.

A more energy efficient approach is to install a clothes rack. I prefer one that folds out from the wall and allows you to hang clothes on dowels. Here's what you need: Sandpaper, 1/2-inch dowels, a metal chain, wood glue and paint, among other tools and items.

5. Create Gathering Places For The Family

As a result of this recession, many people are looking for entertaining evenings at home in an effort to save money.

Besides the usual stuff of huddling around the television or a game night of bridge or mahjong, why not take advantage of your natural surroundings like creating a firepit in the backyard?

This can be accomplished by constructing a small firepit on the lawn or by purchasing an inexpensive portable one. You can even take the opportunity to inculcate in your kids some money lessons during these cosy outdoor evenings.

Thursday, July 9, 2009

Can We Save Money By Leasing Cars?

This is a common dilemma: to lease or buy a car. The former involves the use of a vehicle while the other involves the purchase of a vehicle and each has its benefits and drawbacks.

When you buy, you pay for the entire cost of a vehicle, regardless of mileage. You typically make a down payment, pay sales taxes or roll them into your loan, and then pay an interest rate based on your credit history. Later, you may decide to sell or trade the vehicle for its depreciated resale value.

When you lease, you pay only part of the car's cost which you "use up" during the lease period. Usually no down payment is needed, only a sales tax and a financial rate, similar to a loan interest. There could be other fees and maybe a security deposit. At lease-end, you either return the vehicle, or purchase it for its depreciated resale value.

Can We Save Money By Leasing Cars?
For example, if you lease a $30,000 car with an estimated resale value of $20,000 after 24 months, you need only fork out the $10000 difference (depreciation), plus finance charges and fees. If you buy, then you have to pay the entire $30,000 plus charges.

Advantages of Leasing

Buying or leasing depends on individual needs. You can't say one is better than the other without making financial comparisons and evaluating your personal priorities.

Ask yourself the following questions? Does driving a new vehicle every few years with little repair risks appeal to you? Or are long term cost savings more important than lower monthly payments? Maybe you prefer ownership in a car than low up-front costs and no down payment?

With leasing, you can channel your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value. In fact, many financial experts encourage this practice as a benefit of leasing. Some people may also use the money they save from leasing to pay their mortgage or buying groceries.

Buying a car is like putting money into a declining-value savings account — you never get out as much as you put in. A portion of monthly payment is lost to depreciation and finance charges. When you pay off the loan fully, you own a car which is worth substantially lesser than your vested money.

It doesn't make financial sense but then cars are not usually purchased as investments, are they? It is more for convenience and a symbol of prestige.

Leasing takes away the equity which makes for significantly lower monthly payments. You only pay for what you use. In other words, you have nothing to show for all your paid up money at lease end. However, since a car's value depreciates the same amount whether it is leased or purchased, that money is lost forever, regardless of your option.

Leasing also offers GAP coverage or insurance which pays the difference between what you owe on your loan/lease and the market value if your vehicle is stolen or destroyed. Most loans do not include such a feature.

Gap coverage is important because modern exotic financing often leave many people owing more on their loan/lease than the car is actually worth. This means you'll still owe money (hundreds or thousands of dollars) to the finance company even after your insurance has paid off a car that has been stolen.

You're better protected with a lease which is usually tied with gap insurance whereas a loan requires you to purchase the gap insurance separately at extra cost.

While leasing offers superior savings in the short term, it is important to understand that the financial details are more complicated; with residuals, money factors, and should be properly evaluated.

Some folks may also prefer lease-to-buy plans which is to buy the vehicles at the end of the lease, or before the end of the lease. This is nearly always more expensive than simply buying outright. You can use this tactic but be aware that it costs you more in the long term.

Monday, July 6, 2009

Downfall of American Automotive Industry: To Lease or Buy?

Downfall of American Automotive Industry: To Lease or Buy?
I really feel sad for the automotive industry. Once it was the pride of American manufacturing but today it is dealing with an unprecedented upheaval which could decide if America even retain a tiny share of car sales around the world.

Detriot's Big Three is already whittled down to Ford, while Chrysler and General Motors are in the midst of bankruptcy proceedings and have been ordered to sell off their assets.

A lot of Americans (workers, dealers, suppliers and investors) are left on the ropes when these well-paid top management fail to recognize shifting winds in consumer trends.

The era of cheap fuel is over and Americans are facing a double whammy of lower income and credit crunch, yet the Big Three continue to build big gas guzzlers like Hummers. Just imagine the energy inefficiency when such heavy vehicles travel thousands of miles with only one passenger in tow.

As sprawling manufacturing plants spring up everywhere, the demand-supply equation became so skewed that General Motors and Chrysler can no longer sustain their business model and have to depend on taxpayers' money since last year. There were also unsustainable wages and benefits (health insurance and pension contributions) which compounded the crisis.

Not surprisingly, change has to come, and the Obama administration deserves credit for refusing to bail out an uncompetitive industry. Taxpayers cannot fund the operating expenses indefinitely and foreign car makers from Japan, Korea and China (especially the ultra cheap made-in-China "Cherry" automobiles) are chipping aggressively in the domestic market.

During this consolidation period, cars will keep getting cheaper in order to entice consumers to absorb the oversupply. Is it a good time to buy a new car or to lease one? Which approach can actually help us to save more money?

I will discuss this issue in a later post.

Friday, July 3, 2009

No Mercy From Predatory Credit Card Companies

Predatory Credit Card Companies
The ink has barely dried on the credit card bill which President Obama signed in May and credit card companies are running amok with their predatory actions again.

It seems like they are going all out to squeeze water out of a rock, lest their profits are diminished from the changes which go into effect in the middle of 2010. And they have yet to devise ways or loopholes to circumvent the new rules or shift the goalposts. Thus, the anxiety of credit card companies is understandable.

Suze Orman pointed out correctly that credit card companies have an entire year to have their way with you. And nobody will hear you scream.

Ya right, we can't really expect Obama to amend the bill again especially when he already has so much on his platter, from taxes, financial reforms, war, health care, economy, etc.

The USA Today reports that "Most issuers have raised rates or fees for certain borrowers. In the latest round, Bank of America and Chase have increased, or are increasing, their maximum balance-transfer fees, from 3% to 4% and 5%, respectively."

"Chase is also expanding the definition of who could get hit with a penalty interest rate. Meanwhile, InfiBank is establishing a higher minimum APR -- the greater of 15.99% or 11.99% plus the prime rate -- on many cards. And Capital One and Citigroup continue to raise card rates for certain borrowers."

If you continue to roll over your credit card debts, it is time to exercise discipline and get your finances in order by whittling down the debts. The credit card companies are not known for being charitable and will pile on your misery at the moment when you need them most.

But in fairness, the blame cannot be placed soley at the doorstep of credit card companies. They're just doing their job, which happens to be screwing us for maximum profit so that they can take home fat bonuses.

We have to take some responsiblity for falling prey to their temptations. Our elected officials are also to blame. Instead of working towards the good of American voters, they are protecting these for-profit organizations every step of the way.

What do you guys think?