There are a myriad of credit card offers in the marketplace, and it is important to choose which credit card is right for you. It goes without saying that you should never carry any kind of balance, and you should treat your credit cards like charge cards or debit cards, where the full balance is paid off every month. If you budget effectively and exercise some discipline, this should not be too hard. Also, I find very little reason to pay an annual fee. It's a cost benefit analysis, and I have found that the costs generally lose out. Which means that credit card choice often comes down to the rewards and incentives.
Many of my friends in the past few years have focused on getting credits cards with very particular rewards programs. The Starwood American Express is particularly popular, as is the Amtrak Guest Rewards Visa. Other friends have focused on particular airlines, and their linked credit cards. I generally think these are the wrong way to go.
Websites such as kayak.com have democratized the travel industry, and locking in loyalty at one hotel brand (Starwood), or one airline, provides a psychological block to other alternatives. It may make sense if you live in a place where there is only one real airline serving your metropolitan area, but in a place like Washington DC, where there is excellent service from Southwest, USAir, American, and United, it makes very little sense to be wed to just one of those. There are similar situations in most metropolitan areas, which are served well by larger carriers and smaller carriers. Additionally, focusing on airlines leaves you at the whim of black out dates, which at times seem arbitrary, and increasing levels of miles necessary for rewards. It can now require 60,000 for a round trip ticket on Delta, meaning you need 120,000 miles if you are not traveling alone. http://dmn.delta.com/skymiles/direct/charts/us49/. When was the last time you had 120,000 miles?
Instead, I focus primarily on getting cash back rewards, because I can then use the cash for whatever I want. To look at miles vs. cash, check out: http://www.creditcards.com/credit-card-news/cathleen-mccarthy-6-questions-cash-back-miles-1433.php. I like having the options. I personally carry the Chase Freedom Card, because I can get up to $300 in bonus cash back in any given year. https://creditcards.chase.com/credit-cards/chase-freedom.aspx The opt-in for the bonus categories is simple and easy, and most of the categories are in things I buy anyway, like gas and groceries. I also carry Blue Cash Everyday from American Express, because I get three percent back on groceries. http://www304.americanexpress.com/getthecard/side-by-side/bluecashever-bluecashpref/12006. If I drove a car regularly, I would probably carry the Bank of America Cash Back card because it offers 3% back on gas. https://www.bankofamerica.com/credit-cards/marketinglist.action?context_id=marketing_list&category_id=2012
The point here is that you want the ultimate flexibility in your rewards, and you want rewards which give you the most for what you spend the most. We only use the Amex for groceries because of its specialized benefit. We focus on using the Chase card on its bonus categories to maximize our cash back. At the end of the year, I have a few hundred extra dollars in my pocket to use at my discretion.
Disagree? Got a credit card you love that I should be using? Let me know. Thanks.
Thursday, February 23, 2012
Wednesday, February 15, 2012
Investing, a.k.a. You're Not Smart
With the stock market up around 8 or 9% recently, a number of friends of mine have gotten more active in trading. This is something which can end up losing you money unless you're careful. A few tips:
1) Ask yourself why you are investing. Is it to get a better return than a bank? That would be a good reason, because generally, the stock market has outperformed the interest rate you will get at banks. However, it may not be a good reason if you need money in the short term. The stock market is quite volatile, and many analysts tie recent volatility to the uptick in Exchange Traded Funds (ETFs). http://money.usnews.com/money/personal-finance/mutual-funds/articles/2011/09/08/are-etfs-to-blame-for-the-rise-in-volatility. You need to make sure you have the money you need, when you need it. In other words, don't invest money you need quite soon.
2) You're probably not that smart. You may think you know a lot, and have done your research, but then again, a lot of people felt that way right before the market crashed in 2008. And the tech market crashed in 2000. And in 1987. A strong way to invest money and rely less on your inflated sense of financial intelligence is to invest in low-cost index funds. http://www.ehow.com/list_5852407_list-low-cost-index-funds.html. Personally, I'm a fan of Vanguard, as the management fees for their investment funds are very small, and the cost to invest in most of their funds is 0 (meaning that you don't have to pay a service fee to invest). As you can see, Vanguard's expense ratio (how much they make off managing your money) is less than 20% of the industry average. https://personal.vanguard.com/us/funds. Take a look at their options, or those at other brokerages, and see what may work for you.
3) Use a discount brokerage. Most of the information you want to research on investing is available for free and online. Discount Brokerages like Charles Schwab, Fidelity, and Etrade Financial are all great bets because they charge less, meaning you keep more. Many of these brokerages also offer ETFs, which can be another way to get a diversified investment portfolio, so that your risk is spread across a broad spectrum of stocks as opposed to a single stock. UPDATE: I've been told to include TD Ameritrade and Sharebuilder from ING as well. Thanks for the tips...
4) Get in it for the long haul. Try to find a group of funds, stocks, and ETFs which work for you and invest what you can each month. Trying to game the market may means you miss the highs and instead, catch a disproportionate amount of the lows. Continually putting money into your accounts and reinvesting the dividends will likely yield a stronger return. http://money.cnn.com/2010/01/05/pf/funds/market_timing.moneymag/index.htm
5) Ask lots of questions. Ask your friends who work in finance, or the financial advisers at the brokerage you use. They are there to help, and a lot of their information is free of charge. Take the free workshops they offer. Find out how you should analyze a stock on your own. But ask lots of questions. Far better than losing lots of money.
1) Ask yourself why you are investing. Is it to get a better return than a bank? That would be a good reason, because generally, the stock market has outperformed the interest rate you will get at banks. However, it may not be a good reason if you need money in the short term. The stock market is quite volatile, and many analysts tie recent volatility to the uptick in Exchange Traded Funds (ETFs). http://money.usnews.com/money/personal-finance/mutual-funds/articles/2011/09/08/are-etfs-to-blame-for-the-rise-in-volatility. You need to make sure you have the money you need, when you need it. In other words, don't invest money you need quite soon.
2) You're probably not that smart. You may think you know a lot, and have done your research, but then again, a lot of people felt that way right before the market crashed in 2008. And the tech market crashed in 2000. And in 1987. A strong way to invest money and rely less on your inflated sense of financial intelligence is to invest in low-cost index funds. http://www.ehow.com/list_5852407_list-low-cost-index-funds.html. Personally, I'm a fan of Vanguard, as the management fees for their investment funds are very small, and the cost to invest in most of their funds is 0 (meaning that you don't have to pay a service fee to invest). As you can see, Vanguard's expense ratio (how much they make off managing your money) is less than 20% of the industry average. https://personal.vanguard.com/us/funds. Take a look at their options, or those at other brokerages, and see what may work for you.
3) Use a discount brokerage. Most of the information you want to research on investing is available for free and online. Discount Brokerages like Charles Schwab, Fidelity, and Etrade Financial are all great bets because they charge less, meaning you keep more. Many of these brokerages also offer ETFs, which can be another way to get a diversified investment portfolio, so that your risk is spread across a broad spectrum of stocks as opposed to a single stock. UPDATE: I've been told to include TD Ameritrade and Sharebuilder from ING as well. Thanks for the tips...
4) Get in it for the long haul. Try to find a group of funds, stocks, and ETFs which work for you and invest what you can each month. Trying to game the market may means you miss the highs and instead, catch a disproportionate amount of the lows. Continually putting money into your accounts and reinvesting the dividends will likely yield a stronger return. http://money.cnn.com/2010/01/05/pf/funds/market_timing.moneymag/index.htm
5) Ask lots of questions. Ask your friends who work in finance, or the financial advisers at the brokerage you use. They are there to help, and a lot of their information is free of charge. Take the free workshops they offer. Find out how you should analyze a stock on your own. But ask lots of questions. Far better than losing lots of money.
Tuesday, February 7, 2012
Buying a Home
I bought a home two years ago, and it was a great experience. I learned a lot, both about the home buying process, and about what levels of frustration and confusion it can cause. Through the process, and watching a number of my close friends buy homes, here's a couple of ideas for what to think about when buying a home.
1. Forget what you think you want. Price Per Square Foot (PPSF) is what is important. My friend recently showed me some homes he was looking at on Redfin http://www.redfin.com. I asked him why he cared about having two full bathrooms when he would be living there alone with his wife, why he wanted two parking spots when he had only one car, or why he would want to live far away from his friends, public transportation, or where he or his wife work. He was thinking of amenities to the homes, but not the bottom line. What is most important is PPSF, along with location. If you buy at a higher PPSF than other comparable homes in your neighborhood, then you have done the seller a favor. It may be ok to have a higher PPSF than your neighbors, but you better be able to rationalize it with big ticket items, like modern kitchens or bathrooms, new HVAC systems, or other amenities which clearly set your home apart.
2. Location. It takes me six minutes to bike to work in the morning. It takes my wife 11 minutes. So, we get to spend a whole lot of extra time with our son. If there is an emergency, like the freak earthquake that occurred in DC, we can be home very quickly. We love our location, and are a little puzzled by our friends who moved out to the suburbs. It's ok for those people who work out in the exurbs, or people that moved for the school districts. But location is crucial. Location quality can be determined by a number of factors. Use these as they apply to you: Supermarket, School District, Public Transportation, Public Park, Crime Statistics, Travel Time to Work/School, Major Thoroughfares, Public Library. If you don't live close to these location factors which you want/need, or the crime statistics aren't good, you should pay less for where you live.
3. Down Payment. Many many friends of mine have put down less than 5% on their homes. While this may be beneficial for tax purposes (it means you pay more in interest, which you can deduct on your federal return), it generally increases your monthly burden. If you keep money in a rainy day fund, and your mortgage is high, you will be limited in case an emergency comes up or you need enhanced cash flow. Personal Finance Personality Dave Ramsey recommends a 20% down payment http://www.daveramsey.com/article/how-much-house-can-you-afford/100362/, and some bills in Congress will penalize you on your interest rate for putting less than 20% down. http://www.washingtonpost.com/business/economy/housing-regulators-propose-20percent-down-payment-for-best-rates/2011/03/29/AFIRw5vB_story.html. Save your cash, and make a strong down payment. Remember, you can tap your IRA for up to 10k in earnings to buttress your down payment if it is your first home. Failing make a strong down payment could leave you in a potentially dangerous situation.
4. Do Your Research. Find out about the neighborhood. This is likely the biggest purchase of your life and you should make sure you're not getting into anything unexpected. Redfin can show you prices, and local blogs or websites can give you a neighborhood feel. Discount your first impression at your first open house because part of what you're feeling is pure excitement. Don't go live in a neighborhood which doesn't suit your interests or passions, because you will be spending an inordinate amount of time there, and why would you want to spend that time disappointed.
Buying a home should not be something which occurs in a state of passion. It is a very serious, analytical decision, which requires years of preparation and research, personal reflection and analysis, and questioning the knowledge you think you have gleaned. If for one second you question your own knowledge on the subject, seek out a friend who has bought before, and find out what they did and what they hate about their current home so you can add it to your checklist of what you are looking for in yours. Talk to your parents about what they would change as well. Through careful research, saving, and investigation, you'll be able to find a home you love and save a ton of time and money.
1. Forget what you think you want. Price Per Square Foot (PPSF) is what is important. My friend recently showed me some homes he was looking at on Redfin http://www.redfin.com. I asked him why he cared about having two full bathrooms when he would be living there alone with his wife, why he wanted two parking spots when he had only one car, or why he would want to live far away from his friends, public transportation, or where he or his wife work. He was thinking of amenities to the homes, but not the bottom line. What is most important is PPSF, along with location. If you buy at a higher PPSF than other comparable homes in your neighborhood, then you have done the seller a favor. It may be ok to have a higher PPSF than your neighbors, but you better be able to rationalize it with big ticket items, like modern kitchens or bathrooms, new HVAC systems, or other amenities which clearly set your home apart.
2. Location. It takes me six minutes to bike to work in the morning. It takes my wife 11 minutes. So, we get to spend a whole lot of extra time with our son. If there is an emergency, like the freak earthquake that occurred in DC, we can be home very quickly. We love our location, and are a little puzzled by our friends who moved out to the suburbs. It's ok for those people who work out in the exurbs, or people that moved for the school districts. But location is crucial. Location quality can be determined by a number of factors. Use these as they apply to you: Supermarket, School District, Public Transportation, Public Park, Crime Statistics, Travel Time to Work/School, Major Thoroughfares, Public Library. If you don't live close to these location factors which you want/need, or the crime statistics aren't good, you should pay less for where you live.
3. Down Payment. Many many friends of mine have put down less than 5% on their homes. While this may be beneficial for tax purposes (it means you pay more in interest, which you can deduct on your federal return), it generally increases your monthly burden. If you keep money in a rainy day fund, and your mortgage is high, you will be limited in case an emergency comes up or you need enhanced cash flow. Personal Finance Personality Dave Ramsey recommends a 20% down payment http://www.daveramsey.com/article/how-much-house-can-you-afford/100362/, and some bills in Congress will penalize you on your interest rate for putting less than 20% down. http://www.washingtonpost.com/business/economy/housing-regulators-propose-20percent-down-payment-for-best-rates/2011/03/29/AFIRw5vB_story.html. Save your cash, and make a strong down payment. Remember, you can tap your IRA for up to 10k in earnings to buttress your down payment if it is your first home. Failing make a strong down payment could leave you in a potentially dangerous situation.
4. Do Your Research. Find out about the neighborhood. This is likely the biggest purchase of your life and you should make sure you're not getting into anything unexpected. Redfin can show you prices, and local blogs or websites can give you a neighborhood feel. Discount your first impression at your first open house because part of what you're feeling is pure excitement. Don't go live in a neighborhood which doesn't suit your interests or passions, because you will be spending an inordinate amount of time there, and why would you want to spend that time disappointed.
Buying a home should not be something which occurs in a state of passion. It is a very serious, analytical decision, which requires years of preparation and research, personal reflection and analysis, and questioning the knowledge you think you have gleaned. If for one second you question your own knowledge on the subject, seek out a friend who has bought before, and find out what they did and what they hate about their current home so you can add it to your checklist of what you are looking for in yours. Talk to your parents about what they would change as well. Through careful research, saving, and investigation, you'll be able to find a home you love and save a ton of time and money.
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